15 December 2008

Will oil boil again?

Just a link to my article in the Business Standard newspaper last month, which discussed Hamilton's paper on oil prices – With crude forecasts moving from $200 to $25 in just a few months, the main point of my piece was : 'swings in crude oil prices will continue, as they are reflective of a market for exhaustible resources, a market which is near capacity and under stress. However, with such oscillations, there are no clear signals for investment in technology change, nor do they induce a search for alternatives to reduce dependence on fossil fuels. This compounds the problem in the long run. This is why a fall in the oil price should not lull people into complacency. This is why understanding crude oil prices is important.'

22 November 2008

The recent evolution of the exchange rate in Brazil: a Minsky moment

by Paulo Gala
The current crisis has quite clearly shown the so-called dual nature of the exchange rate: on the one hand, the relative price between tradables and non-tradables, and, on the other hand, the price of a financial asset. It also becomes increasingly clear that the determination of the exchange rate has essentially a financial dynamics, especially in a context of open capital accounts. From the perspective of prices of tradables and non-tradables, the country was getting into a problematic situation, as the real exchange rate appreciation was making it increasingly difficult to insert domestic production in the world economy. Brazilian prices, once converted to dollars, reached surprisingly high levels, thus eliminating the competitiveness of our industries, even the most efficient ones. This can be observed in the reversal of the manufacturing trade balance, with an explosion of imports and a stagnation of exports. Our trade surplus was more and more dependent on high commodity prices, in a bubble that now seems to have burst. The recent path of the current account showed clearly that the Brazilian currency was becoming misaligned towards overvaluation. The explosive increase in the dollar price of Brazilian non-tradables certainly did not result from an increase in productivity and wages, as we would like it to be. Numerous papers showed that the Brazilian currency was relatively overvalued, whether in terms of measures of PPP (Purchasing power parity) deviations, or in measures such as BEER (Behavioural Equilibrium Exchange Rates). How then to explain the appreciation path that put the exchange rate increasingly “out of place”? Now comes the financial nature of the exchange rate. As the country received the investment grade and investors showed a strong appetite for investments in emerging countries, there was a flood of capital to Brazil. Last year only the capital account accumulated a surplus in excess of US$90 billion. Investments in the stock market, securities, and derivatives caused an increasing appreciation of the Brazilian currency, which seemed more and more undervalued in the eyes of financial market. The period of relative stillness in the world markets during the last few years stimulated the "Minskyan" spirits of the financial agents that were increasingly betting on uncertain positions in emerging markets. In Brazil, the exchange rate continued to appreciate as long as these operations were highly profitable. Domestic companies betting on derivatives related to the appreciation of the Brazilian real, as well as capital flows to the stock market and securities, caused one of the highest exchange rate appreciations in the emerging world in the last years. And now the “Minsky moment” comes, in which deleveraging and deflation of assets predominate. The appreciation movement built during 2 years is undone in 2 weeks. In a troubled way, to say the least, the exchange rate returns to a more reasonable position in terms of prices of tradables and non-tradables. For those who have been studying Keynes and Minsky, there is nothing new in this type of financial dynamics. It is worth mentioning, however, the negative consequences of the type of arrangement we are living in today. As the relative price between tradables and non-tradables, the exchange rate strongly affects the country's technological dynamics, as long as it impacts decisions regarding investment, production, and innovation. The level of the real exchange rate plays a fundamental role in macroeconomic dynamics from a long-term perspective. By influencing the determination of sector specialization, particularly regarding incentives to industry, the impact of the exchange rate level on the dynamics of productivity is high. Exchange rate overvaluations are particularly harmful to processes of economic development, since they substantially reduce the profitability of production and investment in manufacturing tradable sectors. By reallocating resources to non-manufacturing sectors, especially to the production of commodities (with decreasing returns to scale), and to non-tradable sectors, exchange rate overvaluations eventually affect the economy's whole technological dynamics. To conclude, it is worth mentioning the impacts of exchange rate volatility in the economy's performance. In an open capital account setting, the exchange rate is financially determined and depends on the traditional Minskyan “boom” and “bust” dynamics. The relative price between tradables and non-tradables is now determined in the financial market, with very complex dynamics. That is to say, the profitability of manufacturing production, which it is essential to long-term economic development, begins to depend on the whims of financial markets.
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Paulo Gala received Master and PhD degrees in Economics from the Sao Paulo School of Economics, Getulio Vargas Foundation. He is the author of several papers, articles and book chapters on the following subjects: Macroeconomics, Development Economics and Economic Methodology. Currently, he is a professor at the Sao Paulo School of Economics, Getulio Vargas Foundation. pgala3@gmail.com

18 November 2008

Debating a new order

There’s a bunch of articles in the Guardian, starting last month with Jeffrey Sachs ‘Amid the rubble of global finance, a blueprint for Bretton Woods II’, Ha-Joon Chang replies to this article adding on many more points on trade and development that have been missed by Sachs – a strengthened IMF without reform of its missions and governance structure is likely to make matters worse, MDGs are important but development needs upgrading a country’s productive capabilities etc. Check out the whole series at Comment is Free

16 October 2008

Changing times!

by Sumita Kale
The times.. they are a changing…breaking news that the US surrenders power to appoint World Bank President. It would be interesting to get readers’ opinions on why this change is happening at this particular point in time. One angle comes from an article written last year, Who rules the World Bank ,that gave the link between Wall Street and the rationale for US control: ‘Selection of the Bank’s President is based on an unwritten “gentlemen's agreement” reached when the Bank and Fund were created at the 1944 Bretton Woods conference: the US chooses the head of the World Bank while western European countries name the head of the IMF. “This prerogative was initially granted not only because the United States was the Bank’s largest shareholder but also because it was the key guarantor and principal capital market for Bank bonds,” Catherine Gwin notes. US control, it was reasoned, would instill confidence on Wall Street to invest in Bank securities – a principal source of Bank funds. However, capital markets have long since gone global and the Bank has diversified its portfolio. The Wall Street rationale for US control of the Bank’s top seat no longer exists.’ With the turbulence in the financial markets and talk of the end of the American Empire, the events at the World Bank are significant....could this be a sign of the changing power equation in the world? Or does it just signify the end of relevance of the World Bank?
Readers’ comments welcome!!

18 September 2008

Fear, hope, and great transformations

By LaDawn Haglund Look just about anywhere in the U.S. economy today, and you will find bad news. Emergency after emergency strikes the financial system, resulting in multi-billion dollar taxpayer bailouts of Bear Stearns, Freddie Mac, and Fannie Mae, and now the collapse of Lehman Brothers. The housing market is in free-fall, with foreclosures at record highs. Unemployment is at its highest level since 2003, while underemployment continues to plague the working poor. The “misery index”, that is, the sum of the unemployment rate and the inflation rate, is rising faster than it has in nearly 30 years. Meanwhile, increasingly intense hurricanes fueled by global warming wreck costal cities as we fumble around, hopelessly inadequate to the task of reducing our dependence on fossil fuels, the main culprit behind the acceleration of greenhouse gases. It is at moments like these that I can’t help but remember Karl Polanyi. In his 1944 book, The Great Transformation, Polanyi referred to land, labor, and money as “fictitious commodities.” Applying excessive market rationality to these realms, he argued, distorts the substantive relationship between the economy and society in ways that create insecurity and threaten the social fabric. What we are experiencing is the predictable result of a societal restructuring that made market exchange the key organizing principle in places it doesn’t belong. Eventually something has got to give: business-as-usual is likely to lead to a breakdown in our financial, ecological, and/or human systems. Back here in Arizona, I am living a mild version of this narrative. A steadily increasing cost of living and a stubbornly fixed salary (due to spending cutbacks in education) has made it difficult for me to make my mortgage payments. Expensive gasoline adds to the woes, and not even my Prius can save me (though I am grateful to the Japanese for developing such a nice hybrid vehicle). Recently, when I was really feeling a pinch, I tried to refinance my house. But alas, in this economy—with a burst housing bubble, imploding mortgages, and foreclosures aplenty—my sorry case was met with a kindly “thanks, but no thanks.” So I find myself struggling to make ends meet like millions of other Americans. But what does this admittedly sad but ultimately manageable problem have to do with development economics? After all, at least I have a job, a car, and a house. I am certainly not poor. I have access to credit. And if worse came to worst, I would have numerous options: Look for a better job. Sell the house. Take the bus. These basic possibilities are not available to millions of the world’s poor. But bear with me, dear reader. I will explain. You see, over the last several decades, the United States has been experiencing a rich-country version of the market fundamentalism that was thrust upon the developing world by Washington in the 1980s and 1990s. This fundamentalism led to deregulation of the financial system, the removal of safeguards against speculation and greed, the dismantling of social safety nets, the easing of environmental regulations, and increasingly, the privatization of risk . The exception, of course, is the fiscal austerity policies that forced developing countries to limit deficit spending—the Bush Administration has not held itself to those same pesky standards, especially when it comes to spending on warfare. Given the terrible consequences for humans and the earth, it is particularly perplexing that market fundamentalism has gone so far for so long. As I argue in my manuscript, Limiting Resources: Market-Led Development and the Transformation of Public Goods, it is not just an ideological project spearheaded by political elites. It is at the core of economic thinking. In contrast to popular understandings of “public goods”—where education, health care, water, and infrastructure are ensured by government, with an implicit social agreement to promote well-being and justice for the people—economists are trained to evaluate public goods devoid of social content. “The public” (you and I) is reduced to prisoners’ dilemmas and collective action problems, while state intervention is incorporated mainly as a last resort to remedy market “failure.” One result of this thin understanding of the full social significance of public goods has been a turn to markets wherever possible, via unbundling, contracting, granting concessions, and privatization. At the same time, taxes have been reduced to levels that cannot sustain robust social programs. The resulting excessive reliance on markets has virtually depleted the pool of resources considered “public” and precluded important non-market alternatives, in developed and developing countries alike. The effects of “free” markets in money, land, and human beings (Polanyi’s “fictitious commodities”) in the United States illustrate the danger: Money. The abstraction “money” has only a tenuous connection with the real economy, as any trader will tell you. Regulation is imperative for checking usury and speculative finance, i.e., not allowing money to be just another commodity. The Asian and subsequent financial crises are a stinging reminder that money cannot fill an empty stomach. The current meltdown on Wall Street was preceded by decades of deregulation and the growth of a “shadow banking system” that now reaches far beyond our fair shores. The looming crisis is likely to be equally far-reaching. At this late stage, we can only hope that the severe dislocations resulting from efforts to institute a “self-regulating market system” in the 19th century—World Wars and a Great Depression—do not make a return in the 21st. Land. Despite unequivocal evidence that human-induced global warming is threatening not only stronger storms but also “heat waves, new wind patterns, worsening drought in some regions, heavier precipitation in others, melting glaciers and Arctic ice, and rising global average sea levels,” the Bush Administration has been unwilling to intervene in order to reduce emissions of greenhouse gases, cooperate with other countries on climate change, or invest adequately in alternatives. Though there were some meager incentive programs, these were all designed to not “rock the boat” of traditional market activity and adhered to the twisted logic that growth would ultimately protect the earth and lead to sustainability. Unfortunately, the magnitude of the climate crisis calls for visionary leadership at the highest levels—something that is clearly not going to come from this administration. Human life. Our abysmal, market-based health care system in the United State speaks volumes regarding how well markets protect human life. The United States ranks lower than every OECD country in infant mortality except Turkey and Mexico, and lower in life expectancy than all except Eastern Europe and Mexico. Even countries with much more modest resources, like Cuba and Costa Rica, do better because of public investment, according to a recent World Health Organization report. A litany of horror stories supports the conclusion that a for-profit medical system is inhumane and relatively ineffective in delivering “goods” essential to human life. In terms of labor, we see rising productivity levels being matched with stagnating wages, making it harder and harder for working people to make ends meet. According to Polanyi, society survives the disruption caused by attempts to institute a self-regulating market system through intervention and re-introducing non-economic norms and values to economic activity. This process often entails harnessing the state to ameliorate negative externalities and achieve positive ones. For example, regulation can limit the pursuit of money for money’s sake, as speculators look to “flip that house” (and reap huge profits) or Wall Street brokers demand greater and greater returns. Meanwhile, state-led development and investment in alternative technologies are going to be essential for finding ways to stop abusing the earth—sucking oil from its bowels through a pipeline while suffocating it with stinging pollutants through a tailpipe. Alternative energy is the future, and we need state action to get us there. Finally, state investment in strong social safety nets can help us care for one another where markets do not, and cannot. Rather than leaving us to fend for ourselves in some warped Social Darwinist experiment, we can create institutionalized safeguards to protect our frail bodies and fragile lives from the worst suffering and threats to our well-being. With a U.S. presidential election less than two months away, it is becoming increasingly clear what is at stake. “More of the same” market fundamentalism of John McCain’s party could be very bad for the sound and just management of money, land, and labor. But are Americans ready for the real changes needed to turn this ship around? After all, we are the poster children of over-consumption, and we tend to vote for political leaders with a willful disregard of the catastrophic consequences of our addictions: cheap oil, cheap food, and cheap goods. Let’s hope that the magnitude of the current crisis will awaken us to the issues that really matter. LaDawn Haglund received her Ph.D. in Sociology from New York University in 2005. She is Assistant Professor in the School for Justice and Social Inquiry in the Arizona State University, USA.

22 August 2008

OECD vs Industrial Policy: Will South Africa be impressed?

by Nicolas Pons-Vignon Click here to see the OECD Policy Brief Economic Assessment of South Africa, 2008. When it comes to appraising economic strategies, some organisations display a remarkable level of consistency. The OECD, faithful to its neoliberal stronghold reputation, has just released a superbly ideological appraisal of South African economic policies. Beyond stating the obvious - that SA has an enduring unemployment problem and is marred with world-record inequality - the Paris-based organisation praises the "prudent" macro policies carried out since 1994 and claims that SA has benefited from trade liberalisation. And how should SA tackle unemployment, according to the OECD? Any idea? Yes, you have guessed right: it should make its labour markets more flexible. Economists in South Africa are growing tired of showing that the country's labour market is in fact way too flexible, allowing for a continuation of extremely harsh working conditions that many consider to be one of apartheid's worst legacies. As anywhere else, the only way to address structural unemployment is to... create employment. This is what some are trying to do in South Africa, through an ambitious, albeit still emerging, industrial policy. Unsurprisingly, the OECD is extremely worried about this and warns that "the emphasis on industrial policies risks preserving the apartheid-era pattern of protected national champions insulated from foreign competition and enjoying high mark-ups. This runs counter to the acknowledged need to enhance the level of competition in the economy. Also, the emphasis on government programmes and initiatives is at odds with the recognition of failures of government planning, coordination, and administrative capacity as one of the constraints to achieving faster and more widely shared growth." The OECD does not say if its reluctance to see Governments intervene is limited to Africa or if it considers that all countries that developed thanks to such intervention (namely, all now-developed countries) should not be taken as a serious examples for late developers. Let's hope that South Africans do not take this ideological, poorly documented and researched advice too seriously. As far as I'm concerned, I see it as a sign that something promising is happening with industrial policy in SA. For a reflection on what SA should do with the OECD's advice (i.e., not much), read Seeraj Mohamed's editorial.
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Nicolas Pons-Vignon is a senior researcher at the Corporate Strategy and Industrial Development (CSID) research programme at Wits University, South Africa. He was a doctoral researcher at the French Institute of South Africa (IFAS) until December 2007; in his PhD research, he analyses the impact of the outsourcing of forestry operations in South Africa, focusing on the link between corporate restructuring and rural poverty. He holds an MA in Public Administration from Sciences-Po (Paris) and an MSc in Development Studies from the School of Oriental and African Studies (London). Nicolas is the initiator and course director of the African Programme on Rethinking Development Economics. He worked as a consultant at the Paris-based OECD Development centre, where he researched violent conflicts in developing countries. Prior to this he was a project officer in London, Paris and Rabat for PlaNet Finance, an NGO which supports micro finance institutions.nicopv@gmail.com

16 July 2008

Of Jobs Lost and Wages Depressed in the Philippines

By Melisa R. Serrano

The “jobs claims-higher wages” model is often used by supporters of free trade to argue for deeper integration and greater openness in trade and financial markets. In fact, neoliberal economists in cahoots with major organisations such as the World Trade Organization, the World Bank and the International Monetary Fund are inclined to push or impose a one-size-fits all deregulated export-led growth and development strategy. Developing countries often have to swallow the bitter pill of full liberalization in exchange for loans from the Word Bank and the IMF and for getting more market access in developed countries.

Trade liberalization is believed to lead to higher wages via price transmission. Free trade economists argue that a reduction of the after-tax or tariff price of imports lowers the prices of imported goods and import substitutes which in turn lead to increase in real incomes. And since a tariff reduction lowers the marginal cost of production (through a reduced cost of imported materials), this is expected to encourage and expand production. This purportedly increases the demand for labor.

But does a regime of free trade always create good jobs and increase wages in relative and real terms? The sad and sorry (and arguably continuing) state of stagnation in the Philippine economy in the heyday of liberalization – 1980 to 2000 – helps to debunk the causal link between trade and financial liberalization and job generating-high wages economic growth. For the Philippines’ dismal economic performance during the heyday of liberalization only brought stagnation, unemployment and declining real wages.

The lost decades in the heyday of liberalization

The period 1980-2000 has been alluded to as the era of rapid globalization when most of the developing world, including the Philippines, opened up further to world trade as part of structural adjustment efforts prescribed by the IMF-WB within the framework of the Washington Consensus. Total trade increase between 1980 and 1999 (49%) – touted as the more globalized decades - was higher than the period between 1960 and 1980 (31%). The dramatic rise of manufactured exports in the Philippines beginning 1981 also indicates the deepening of a free trade regime in the country.

From 1981 to 1985, a tariff reform program was adopted in the Philippines that narrowed down tariff rate structures. At the same time, an import liberalization program was launched which did away with non-tariff import measures. Beginning 1991, tariffs were gradually lowered over a five-year period until 1995. Overall, average tariff rates went down by a whooping 65% from 1994 to 2000.

Between 1993 and 1996, trade liberalization was vigorously pursued by locking in the country to international trade regulation and deeper integration through the ASEAN Free Trade Area (AFTA) in 1993, the World Trade Organization (WTO) in 1995, the Asia Pacific Economic Cooperation (APEC), and various bilateral trade agreements. A high degree of capital account liberalization was achieved in 1993 after being initiated in 1991 through the passage of the Foreign Investments Act. These reforms eased the entry and exit of foreign capital, largely in the form of short-term debts and portfolio investments (unhedged dollar borrowings or “hot money” used to finance real estate, construction, speculative and manufacturing activities), setting the stage for the country’s participation in the Asian financial crisis.

This regime of openness was marked by increasing frequency and depth of bust-recovery cycles pointing to a more volatile movement and a seemingly shorter cycle length compared to previous periods (Lim and Bautista, 2002). As a corollary, the country’s dependence on imports and unsustainable (private and short-term) foreign capital flows (or “hot money”) had been attributed to more frequent and shorter growth and recession cycles and the lack of macroeconomic development.

The result was devastating. It was only in the period 1980-2000 – the “lost decades”, a term coined by Bill Easterly in 2001 to refer to the growth performance of developing countries in the 80s and 90s - that the Philippines experienced negative growth. From a 66% rise of real per capita GDP (in 1985 US$) in the period 1960 to 1980, the country plummeted to -1% in the period 1980-2000 (Weisbrot et al 2001). The forgone increase in per capita GDP during the “lost decades” was estimated at 68%.

Does free trade create jobs? Challenging the “jobs claims” model

There is an abundance of economic literature pointing to the positive impact of trade liberalization on employment and wages. Neoliberal economists argue that although tariff reductions do have a negative impact on wages and levels of employment, any adverse effect can be wiped out by a tariff reduction’s effect on reducing domestic prices. However, as Akyuz (2005) points out, simulations done by the World Bank highlighting the benefits that developing countries could reap from further liberalization under the Doha Round are bereft of reality. These studies use “general equilibrium models” that assume automatic market clearing, rapid redeployment of resources and full or equal employment after liberalization. However, factors of production, including labor, capital and land are often sector or product specific and thus immobile. Expansion in sectors benefiting from liberalization requires investment in skills and equipment, rather than simply reshuffling and redeploying existing labor and equipment. Thus, like the case of the Philippines, the overall impact of rapid trade liberalization could be unemployment, deindustrialization and growing external deficits despite a significant increase in export growth.

The Philippines’ export participation in high-technology manufactures through international production networks (IPNs) involves mere assembly of components that adds little value and utilizes labor, the most abundant and least mobile factor. The bulk of Philipino exports are import-intensive, particularly electronics and garments. The high import intensity of these two sectors implies that they add very little value and have a moderate employment impact. In 2000, these sectors generated a meager 6.9% of total gross value added and 5.7% of total employment. A declining trend is similarly observed in employment growth rates between 1980 and 2000. Between 2000 and 2002, it is estimated that the annual layoff rate in the electronics sector was between five and 10 percent as a number of establishments have either closed down or reduced their workforce.

Does free trade lead to higher wages?

Between 1980 and 2000, increased frequency and depth of bust-recovery cycles brought about by the uncertainties of a trade and financial liberalization regime wreaked havoc on wage patterns, resulting in wage stagnation since the late 1980s. On average, the real wage rate in the Philippines in 2002 was around three quarters of what it was in the early 1980s. Felipe and Sipin (2004) note a clear downward trend of labor share at 0.6 percentage points per year during the period 1980-2002. The authors conclude that labor in the Philippines has lost at least 10 percentage points of its share in value-added during the last two decades. Although export performance was generally robust during the period, “strong increases in the manufacturing exports of developing countries – particularly those participating in IPNs – may have taken place without commensurate increases in incomes and value added” (UN 2006:75).

The argument that, in a deregulated export-led growth, job loss in the “restructuring” process results in greater efficiencies and new jobs with higher wages will replace old ones is flawed according to Ranney and Naiman (1997). This assumption is based on a situation of full employment. The market is seldom able to replace lost employment with comparable jobs. Even if new jobs were created, people who lose jobs often do not get the new ones. Moreover, many of the replacement jobs are of inferior quality. It should also be noted that higher wages in the export sector could be due to high unionization, labor shortages in specific occupations, or higher productivity. Moreover, imports can depress wages in certain industries and occupations.

The way forward

Clearly, the IMF-WB sponsored market liberalization prescriptions and the country’s obedience to such diktats, proved to be devastating as the Philippines went from being a poster girl of the WB-IMF to the basket case in the East Asian region. Unlike its more successful neighbors where liberalization took place gradually and cautiously over the past two decades after a period of successful industrialization and development, the Philippines pursued big bang liberalization as a way of getting out of its debt and development crisis without the necessary industrial or manufacturing base.

What is now certain is that the stagnation of developing countries during the “lost decades” was a major blow to the optimism surrounding the Washington Consensus. In fact, the IMF had already conceded in 2003 that, at least for many developing countries, capital market liberalization did not lead to more growth but to more instability. Unfortunately, this acknowledgment came after the dreadful effects of capital markets liberalization in many developing countries.

There are crucial factors for an economy to be able to reap economic benefits from external trade and financial liberalization. The major ones are: (1) producing export products with high technological content (high value added) located in growing global markets; (2) creating domestic linkages for these exports; (3) capacity to capture a share of value added in international production networks; (4) attracting greenfield FDI that is anchored in the domestic economy; (5) coherent industrial or production sector strategies that promote industrialization and/or support structural transformation of economies (macroeconomic policies, investments in physical infrastructure, incentives and support for innovation, protection of infant industries, selective policies targeting specific sectors or firms); and (6) timing and speed of liberalization (gradual integration is preferable to a big bang or premature approach). Unfortunately, these factors are still missing in the Philippines’ economic constellation.

Bibliography

Akyüz, Yilmaz. 2005. “Trade, Growth and Industrialization: Issues, Experience and Policy Challenges,” in www.twnside.org.sg/title2/t&d/tnd28.pdf

Felipe, Jesus and Grace C. Sipin. 2004. Competitiveness, Income Distribution, and Growth in the Philippines: What Does the Long-run Evidence Show? ERD Working Paper No. 53, Manila: Asian Development Bank, June.

Lim, Joseph Y. and Carlos C. Bautista. 2002. “External Liberalization, Growth and Distribution in the Philippines,” Paper presented for the international conference on “External Liberalization, Growth, Development and Social Policy,” January 18-20, 2002, Melia Hotel, Hanoi, Vietnam.

Ranney, David C. and Robert R. Naiman. 1997. Does `Free Trade’ Create Good Jobs? A Rebuttal to the Clinton Administration’s Claims. Chicago: The Great Cities Institute, January.

United Nations. (2006). World Economic and Social Survey 2006Diverging Growth and Development. Geneva: United Nations Economic and Social Affairs.

Weisbrot, Mark, Dean Baker, Egor Kraev and Judy Chen. 2001. “The Scorecard on Globalization 1980-2000: Twenty Years of Diminished Progress,” Center for Economy and Policy Research (CEPR), July 11, in www.cepr.net/publications/globalization_2001_07.htm.

Melisa R. Serrano is University Extension Specialist/Researcher in the School of Labor and Industrial Relations, University of the Philippines (U.P. SOLAIR). The article is part of a paper she presented at the International Conference on “Labour and the Challenges of Development”, 1-3 April 2007, University of the Witwatersrand, Johannesburg, South Africa, convened by the Global Labour University. Melisa holds two Masters degrees, one in Labour Policies and Globalization (from the Global Labour University, University of Kassel and Berlin School of Economics) and another in Industrial Relations (from U.P. SOLAIR). Melisa’s present research is on agrarian reform and labor and alternative development.

28 June 2008

Oil, Food and Economics - Sumita Kale

If the subprime crisis wasn’t bad enough, the oil price spike has unnerved the world this year. And with food and fuel prices soaring in all countries, the policy prescriptions are back to the standard myopic solutions of interest rate hikes, duty cuts, export curbs etc. But if we step back and try to see the larger picture to decipher what these prices are signalling, what do we find? One theory that has finally got the prominence it has deserved is the Peak Oil Theory. In fact, for Matt Simmons, energy investment banker and ‘Peak Oil’ theorist, the signs that crude was entering danger zones have been clear since 1989, but it was only post 2002 when China kick started its explosive growth that the situation became bleak. For most of the world though, peak oil has become a keyword only recently because of the rapid rise in the oil price this year. According to Simmons, it was the unplanned for growth from developing countries that has taken up 99 percent of spare capacity and which has continued despite a ten fold rise in prices. Of course, to a large extent consumers are insulated from international oil prices : Price increases from about the $60 level have not been passed on to consumers, especially in the developing countries. State revenues are being sacrificed and/or consumers are being insulated by subsidies. To begin with, the true extent of oil reserves in the world remains an unknown; the rising share of state-owned oil companies has led to secrecy on reserves data. Spare supply capacity is fuzzy and this explains the frenzied rise in prices currently as there is a paranoia that is gripping the market. In short, supply constraints are more than likely to stay, than disappear. There are also various industry issues such as aging oil wells, rising costs of extraction, chronic rig and skilled manpower shortages etc. – the list is long. 80% of oil infrastructure needs to be rebuilt; the fresh demand for steel will in turn impact inflation. Simmons who has been anticipating this for long now says that the world has to go on a ‘war footing’ now and force a change in consumption pattern – the current trend is just not sustainable. What about food prices? At a symposium convened in March by the Banque de France, Martin Redrado, Governor of the Central Bank of Argentina, was spot on when he said that the rising inflation is to a large extent due to the ‘convergence’ of consumption levels – the developing countries are catching up in consumption patterns (growth in auto demand etc.) and change in dietary habits at a time when there is a delicate balance between production and demand. Two unanticipated impacts on the already delicate balance between supply and demand have had an impact on prices. The first is climate change reducing global grain output (droughts in Australia and Ukraine etc.); and the second is the impact of high crude prices in diverting grain for bio-fuel production that has triggered off the rising prices in corn, soya, wheat etc. Since food contributes a significant portion of consumer budgets in emerging economies, this will show up in forthcoming wage revisions, putting more pressure on prices. Higher energy and food prices will impact growth via higher interest rates that are being forced upwards in an attempt to curb the price rises. Redrado’s paper has interesting policy implications as it throws a spotlight on the social and political tensions that will arise as countries are forced into a period of lower growth and higher inflation. Per capita consumption of food and crude oil is much lower in China and India, than in the US- to bet on a slowdown in these economies, therefore, has social ramifications as well. On the other side, high oil prices are causing prosperity in oil-rich countries, the recent debate over sovereign wealth funds is just one instance of the political implications of this growing wealth. Prices may settle this year or the next, already there is relief coming in on the wheat front with better output forecast in Australia this year. Relief on the oil front though at this point seems doubtful. But all these problems hitting the world today highlight one important signal : you ignore the environment and natural resources at your peril. Would this have been the case if economics didn’t try so hard to distance itself from geography, sociology and other ‘soft’ disciplines? Trying to go deeper into this, I came across this interesting piece on Ecological Economics by Robert Constanza from the University of Vermont. “Ecological economics is a transdisciplinary effort to link the natural and social sciences broadly, and especially ecology and economics (Costanza 1991). The goal is to develop a deeper scientific understanding of the complex linkages between human and natural systems, and to use that understanding to develop effective policies that will lead to a world which is ecologically sustainable, has a fair distribution of resources (both between groups and generations of humans and between humans and other species), and efficiently allocates scarce resources including “natural” and “social” capital. This requires new approaches that are comprehensive, adaptive, integrative, multiscale, pluralistic, evolutionary and which acknowledge the huge uncertainties involved. For example, if one's goals include ecological sustainability then one cannot rely on the principle of "consumer sovereignty" on which most conventional economic solutions are based, but must allow for co-evolving preferences, technology, and ecosystems (Norton et al. 1998). One of the basic organizing principles of ecological economics is thus a focus on this complex interrelationship between ecological sustainability (including system carrying capacity and resilience), social sustainability (including distribution of wealth and rights, social capital, and coevolving preferences) and economic sustainability (including allocative efficiency in the presence of highly incomplete and imperfect markets).” Sounds familiar to my previous post on Mukherjee’s ideas on what Economics should include. Clearly the need of the hour for us economists! Looking forward to a debate on this one! ********************** PS: This post includes valuable inputs from Suyodh Rao, (an economist based in Hyderabad, India)- thanks Suyodh, for all your mails about oil, food and water!

03 June 2008

Putting Short Term Stability Before Long Term Growth: Fifty Years Is Enough

by Ben Fine

This article has been published as a Policy Brief (No. 12) by the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development (G24). Blog authors are grateful to the G24 for allowing it to reproduce it; copyright remains with the G24.

It is fifty years since Jean-Jacques Polak published his classic article “Monetary Analysis of Income Formation and Payments Problems” in the IMF Staff Papers. This paper provided the theoretical basis for the IMF’s financial programming, and continues to do so today. This is remarkable in and of itself. The world economy has gone through major changes over this period, as have corresponding fashions within economic theory as triumphant Keynesianism gave way to varieties of monetarism in the wake of the collapse of the post-war boom.

We also have had fifty years of development economics, during which there have also been shifting and competing perspectives from modernization through the Washington consensus and beyond, to notions of the developmental state, as attempts have been made to understand why the success of East Asian NICs should contrast so much with achievement elsewhere. Is it credible that across this material and intellectual ferment, the “Polak Model” should remain sacrosanct?

To his credit, Polak’s initial contribution was extraordinarily modest and qualified in its aims. He made it crystal clear that the main problem addressed is a temporary balance of payments deficit in a developing country, this gap usually the result of excessive domestic credit to fill the gap arising out of a fiscal deficit. He presumed that the only reliable data available are those concerning monetary variables, and that the only corresponding policy variable is control of the domestic money supply.

The model only seeks to determine the level of nominal income, with its distribution between the output level and the price level to be determined by some other means. In this respect, in principle, the model is not monetarist since it must violate one or other of the assumptions that prices are fixed (at the world level) or that output is fixed (at full employment). In practice, not without justification, financial programming is heavily associated with the ideology of monetarism because of the pessimistic stance taken on productive potential.

It has targeted balance of payments and/or fiscal deficits with shifting instruments across countries and over time as fixed exchange rates have given way to floating exchange rates, and control of inflation and liberalization of money markets have been emphasized more or less to suit. Today, for example, the IMF is more likely to advise appreciation of the exchange rate to bring down inflation in middle-income countries than to address foreign or fiscal deficits, although these remain a priority for low-income countries, especially in Africa.

One criticism of Polak is his making virtue out of necessity. Even if monetary variables are the only ones that can be measured and controlled, they are not necessarily best for remedial action. A patient with a broken leg is not best treated with a thermometer to take temperature and aspirin to bring it down, even if these are all that is available in the hospital. This apart, Polak can be judged to have appropriately sought, but failed, to constrain the use of his model for purposes for which it was not designed.

He did, for example, refine the model, in a joint article in 1971, by adding extra variables and equations. But, as was explicitly recognized within this contribution, this was nothing more than an elaboration of the Hicksian IS-LM-BP model, standard across every undergraduate textbook.

This prompts three observations. First and foremost, such a model was constructed in the context of developed countries, raising doubts over applicability to developing countries. Second, as has remained the case throughout the life of financial programming, the model cannot address issues of development as its scope is confined to the so-called short run, over which everything to do with development is taken as fixed. Third, it is ironic that the Polak model began to embrace Keynesianism explicitly just as the approach was falling into disrepute with the stagflation of the 1970s.

Significantly, in the second half of the 1980s, the IMF did seek theoretically to reconcile growth or development objectives with short-run macroeconomic adjustment in proposing a marriage between its Polak model and the World Bank’s growth model. Three further observations follow.

First, the model was fundamentally flawed, bound by export pessimism (as if the world economy did not grow) and leading to declining levels of productivity increase over time. In other words, it remained heavily bound to the short run, and essentially to zero per capita growth in the long run. Second, ironically, this was when new growth theory had begun to flourish, suggesting how productivity increase could be generated over time, but the marriage model was bound to old growth theory in which productivity increase is exogenously determined. And, third, Polak reacted strongly against any attempt to forge a marriage between financial programming (confined and only appropriate to the short run) and growth theory. Indeed, in a personal communication commenting on the marriage model, Polak suggests:

My view is that it is not a worthwhile project, and each subject should be approached on its own, provided the practitioners are fully aware of any recommended policies on the other objective (which to be sure has not always been the case between the Fund and the Bank). A possible simile, somewhat limping of course: the jobs of a schoolteacher and a paediatrician are both to do good to a child, and each should be aware of the other … but the professions should remain specialised for greatest efficiency in each field.

This is well and good as far as it goes, but it neatly sidesteps what has been a major criticism of the stabilization policies of the IMF and the structural adjustment policies of the World Bank, the negative impact of what is adopted in the short run on longer run performance. The latter is better seen as attached to an evolving economy over time, rather than as some given equilibrium around which appropriate policies are targeted. Polak, and his model, simply do not address this issue as he is only too aware.

The recent turn to poverty reduction has intensified the failure to observe the reservations that Polak has expressed over the use of his model. The first, and, for some time, the only model underpinning PRSPs uses financial programming as its organizing framework. It does so while assuming that there is a single labour market and full employment, thereby, for the convenience of the model, abolishing the major sources of poverty – unemployment and low wages -- in one stroke. This is even justified on the grounds that the model is universally and conveniently applicable across all countries.

It is certainly not the case that the Polak model for financial programming determines IMF policy. Indeed, it allows for considerable discretion. But it does set a framework within which policy is discussed, one which prioritizes the short term over the long run, and financial functioning and targets over the traditional concerns of development. It is time for a fundamental rethink and a new framework – one both recognizing, rather than subordinating itself to, increasing financial volatility, and genuinely engaging adjustment with developmental goals, with poverty alleviation and growth as starting points, rather than add-ons.

For a fuller discussion, see Ben Fine, "Financial Programming and the IMF", in B. Fine and K.S. Jomo (eds), The New Development Economics: After the Washington Consensus, Dehli: Tulika and London: Zed Press

Ben Fine is Professor of Economics at the School of Oriental and African Studies, University of London, and Director of the Centre for Economic Policy for Southern Africa at SOAS. Recent books include “Social Capital versus Social Theory: Political Economy and Social Science at the Turn of the Millennium” (2001); “Development Policy in the Twenty-First Century: Beyond the Post-Washington Consensus” (2001); “The World of Consumption: The Material and Cultural Revisited” (2002); “Marx's Capital” fourth edition (2004); and “The New Development Economics: A Critical Introduction” (2006). His research interests include "economic imperialism" or the relationship between economics and other social sciences, especially social capital; the material and cultural determinants of consumption, particularly food; privatisation and industrial policy; and development theory and policy.

27 May 2008

Jobless growth, a new impediment to development


by Codrina Rada
Following the lost decades of the 1970s and 1980s, during which many developing economies recorded extended periods of output decline, the economic profession has seen a renewed interest in the debate about what drives economic growth. Much of the mainstream academic work on the issue has been focused on those classic factors that foster capital accumulation and productivity growth -- savings, human capital or technological change. Nothing surprising here since the theoretical basis had already been well-established by the Solow model of growth, versatile enough to accommodate the sustainable take off of yet a few more academic careers. Unfortunately, there wasn’t much sustainability for development and therefore for many in poverty in the policy prescriptions derived from such models. 

Empirical evidence shows that strong labor productivity growth is not anymore sufficient to solve problems of acute poverty or underdevelopment. For the last decade or so many developing economies have claimed good economic performance but oddly enough growth has not led to a substantial decline in the underutilized labor force. In fact the informal sector in most of the developing countries has been on the rise. Global Employment Trends, a 2004/5 report from the International Labor Organization and Key Indicators from the Asian Development Bank’s 2005 report on Asian economies show that “out of a total labor force of 1.7 billion in the DMCs[1], around 500 million are underutilized in terms of being either unemployed or underemployed…” (ADB 2005)[2]; “during the 1990s, own-account and family workers[3] represented nearly two-thirds of the total non-agricultural labor force in Africa, half in South Asia, a third in Middle East…”; “In Latin America the urban informal economy was the primary job generator during the 1990s....urban informal employment in Africa was estimated to absorb about 60 per cent of the urban labour force and generate more than 93 per cent of all new jobs in the region in the 1990s” (ILO 2005).

 The problem with the jobless growth phenomenon in the developing countries is two-fold. First, efforts to fight wide-spread poverty levels are destined to fail unless jobs are created for the many unemployed and poor. As Fields (2004) points out “poor are poor because they earn little from the work they do”[4]. And if growth does not produce high-productivity, high-pay jobs, its purpose to foster development and alleviate poverty, will eventually be defeated. Secondly, economic history suggests that sustainable growth is associated with structural changes towards secondary and tertiary sectors, shifts in sectoral employment from low to high-productivity sectors and changing patterns of specialization towards higher value-added products (UN 2006). For economists and policy makers alike these recent trends pose a significant challenge: strong productivity growth generates unwanted social and economic outcomes i.e. under and unemployment.

This is not to say that productivity growth is unwelcome. On the contrary, it remains the essential ingredient for long-run growth. But it will fail to produce development unless outcomes, such as the jobless growth and lack of structural change, are addressed by policy. Generally speaking the solution to this dilemma is a matter of successful implementation of both pro-growth as well as socially relevant economic policies.

While there are many dimensions policies should address I want to refer here to few which I think are essential. Strategies can be thought of based on their target: vulnerable groups, distributive issues, inadequate demand and anemic structural changes. First of all, households in the informal sector are especially vulnerable because they lack a steady income flow and often fall outside the social safety net system. In the short-run an economic shock or natural disaster reinforces development and poverty traps as resources are usually insufficient to distribute to all those in need. In the long run consequences for development are substantial as these groups lack adequate access to education, health care and consequently economic opportunities. Finally, economic insecurity for extended periods of time is conducive to political instability which is likely to put a check on investment and therefore economic growth. Institutional changes and policies which target the most vulnerable groups in a society become essential (see 2008 World Economic and Social Survey, UN, DESA).

 Second, there is the issue of how to distribute the gains from economic expansion. This is a delicate matter from both a socio-political and an economic perspective. On the social and political side, redistributive measures are often resisted by those in the formal sector who are asked to give up part of their income. In fact a large informal sector may make it impossible for the government to implement any redistributive measures without strangling expansion in the formal sector or facing serious political opposition from the affluent part of the society. From an economic point of view, redistribution has to take into account how different economic classes behave in terms of their consumption and investment patterns, otherwise growth may be adversely affected. Overall, redistribution is effective in the long-run only if it encourages the creation new productive activities.

 Third, strong productivity growth generates job loss when aggregate demand is insufficient. The 2006 World Economic and Social Survey suggests that the structural transformation from primary to secondary and finally tertiary sectors in the rapidly growing East Asian economies throughout the last few decades was supported a great deal by fixed investment. The core strategy is a classic example of Keynesianism and it calls for either an increase in domestic expenditures, investment or government expenditures, or for measures that would stimulate external demand, such as a competitive exchange rate policy. Either one should ultimately target the absorption of underutilized labor force.

 Finally, when structural change is anemic or in other words economic growth does not lead to changes in the basic configuration of the economy, policy should look to establish forward and backward linkages between different sectors of the economy, including the informal sector.


 Source: United Nations, World Economic and Social Survey 2006, UN, New York. Asian Development Bank, Key Indicators 2005: Labor Markets in Asia: Promoting Full, Productive, and Decent Employment International Labour Organization (2004), Employment Trends, ILO Geneva. [1] Developing Member Countries (DMC) of the Asian Development Bank [2] Where Asia’s labor force of 1.7 billion accounts for about 57.3% of the world’s total labor force (ADB 2005) [3] The two categories account for a broad definition of underemployment. ILO 2005 [4] The quotation by Fields (2004) is from the ADB (2005) report. Codrina Rada is Assistant Professor at the Department of Economics, University of Utah. Education: 2007, Ph.D. in Economics, New School for Social Research; 2005, M.Phil in Economics, New School University; 2000 MA in Sociology, University of Massachusetts, Boston, BA in Economics. Current research interests: ‘Jobless growth: A New Tale for the Global World’, ‘The Macroeconomics of Pensions’ and ‘Developing and Transition Economies in the Late 20th Century: Diverging Growth Rates, Economic Structures, and Sources of Demand’

13 May 2008

Bush, Rice and the Global Food Crisis

by Ashwini Deshpande George Bush and Condoleezza Rice recently suggested that the global food crisis is in large part due to the rising prosperity and the consequent increase in the demand for food by the Indian and Chinese middle classes. Coming from Bush, the likelihood of any statement being a smokescreen is extremely high (the world is still reeling from the devastating consequences of the WMD lie and its aftermath). In this case too, their argument is a smokescreen for some of the factors that the US leaders would prefer to not have under public scrutiny. One wonders why, though, since the US leaders and their policies have shown precious little regard, if any, to any international public opinion. In contrast to the ‘prosperity and rising food demand’ theory, consider this. The 1996 World Food Summit resolved to reduce the number of hungry people in the world by half by the end of 2015. By 2006, there were more hungry people in the developing world (820 m) than in 1996. According the FAO, instead of decreasing, the number of hungry people in the world is increasing at the rate of 4 million a year. Keeping the 1996 pledge would require decreasing the number of undernourished by 31 million every year, which would mean increasing the food consumption of the hungry. The World Bank has estimated that approximately 100 million people have fallen into poverty in the last two years due to rising food prices and that this trend is unlikely to be reversed any time soon. Food prices are expected to remain high through 2015. High prices threaten to increase malnutrition, already a cause of premature death of children in many countries. The worst-hit are the countries of sub-Saharan Africa, as they collectively import 45% of their wheat needs and 84% of their rice. But according to Bush and Rice, the food shortage in the world is being caused by the fact that two large developing economies are eating more and more. How true is this? According to the FAO, of the projected 582 million undernourished in 2015, 203 would be in South Asia alone, i.e. close to 35 percent. So, for every Indian who, by eating more, is supposedly pushing up food prices, there are hundreds who remain undernourished. Mr. Bush and Ms. Rice, just imagine the horror that would unleash if their hunger was either reduced or eradicated altogether! Indians and Chinese are not merely consumers of food grains, they produce them too. Take rice. India is the second largest rice grower in the world behind China. Rice being the staple of over 65% of the Indian population, much of the production is consumed domestically. Rice prices in India have been rising and due to the low purchasing power of the poor, even a small increase can cause a decline in their real incomes. The fact is that agricultural growth has not kept pace with overall rate of growth and it is believed that there might be other factors such as overuse of fertilisers and so forth that might put a question mark on the sustainability of rice production. Thus, while a section of the Indian population might be prospering (but not necessarily consuming more rice), it is certainly true that large sections of the poor would join the ranks of the malnourished due to increasing rice prices, especially, if current levels of rice production are unsustainable. Now let’s look at the other side of the picture that Bush and Rice are completely silent about. Rising oil prices and fears of climate change have led to a massive increase in the production of bio-fuels. The World Bank, by no means radical or left-wing, provides figures that establish how the encouragement of production and use of bio-fuels has led to increased demand for raw materials such as maize, wheat, soy and palm oil and increased competition for cropland. Almost all the increase in global maize production from 2004-07 (the period in which prices have been rising) went for bio-fuels production in the US. From 2004 to 2007, global maize production increased 51 million tons, bio fuel use in the US increased 50 million tons and global consumption for all other uses increased 33 million tons, which caused global stocks to decline by 30 million tons. Finally, when prices rise, just as many are hurt, some benefit. The World Bank has divided countries into large and moderate gainers (and conversely, losers) in terms of the impact of the food price increase on their trade balance. Large gainers would be those countries whose trade balance would improve by more than 1 percent of their 2005 GDP as a result of rising prices. Moderate gainers would be those countries whose trade balance would improve by less than 1 percent of their 2005 GDP. It turns out the largest losers are going to be several African countries. India and China are among the moderate losers. The USA, incidentally, would be moderate gainer. Of course, the distributional impact of high food prices can be serious even in countries where the balance of payments has not been adversely affected. A study for eight countries indicates that an increase in food prices between 2005 and 2008 has increased poverty by 3 percentage points. For several countries where the progress in poverty reduction has been slow, the increase in food prices threatens to wipe out gains in poverty reduction made in the last 5-10 years. Thus, the overall picture of the food crisis is a far cry from the “prosperous Indians and Chinese eating more” theory. Weather related shocks (drought in Australia) and rising oil prices have contributed to the rise in prices. But in large part, the crisis is due to the needs of the energy intensive US economy that Bush is committed to protect – even if millions have to go hungry in the rest of the world in order to sustain those needs.
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Ashwini Deshpande is Professor of Economics at the Delhi School of Economics, University of Delhi, India.

ashwini.desh@gmail.com

05 May 2008

In Argentina, the Rich are Taking to the Streets

by Leandro Serino Some Argentineans have reverted to one of the country's favorite sports: reclaiming the streets. This time, however, streets and roads are not occupied by the unemployed or by civil servants or workers from declining industries. Instead, the protests come from agricultural producers and a selective group of Argentina's urban middle and upper classes; paradoxically, some of the groups who benefited most from the recent economic recovery.

The protests started when the government modified the export tax regime on March 11th. To understand their causes, it is useful to look at the recent history of the application of a tax to Argentina’s exports of meat, soybeans, maize, wheat and related products. Export taxes were re-established in Argentina during the last economic crisis, in 2002. At the time, the rationale for the policy was simple. Argentina is an exporter of wage goods whose prices, like those of many other commodities, are determined in international markets. This means that, all other things being equal, the 200% nominal devaluation that took place in 2002 would have caused domestic food prices to skyrocket. In a context of massive unemployment and record poverty levels, it was necessary to truncate the link between international prices and domestic ones. And this is what export taxes actually do and did, for they establish a wedge between these two prices, thereby inciting local producers to sell to the domestic market.

(To have an idea of the problem this policy was trying to address, imagine -if you can- today's food price inflation, raising the concerns of international organizations such as the IMF, the World Bank and various Central Banks in both developed and developing countries, and multiply it by a three digit factor.)

The system had remained in place since then, with export taxes occasionally increasing. The second justification for this policy, even after the economic recovery, was not very different from the first one. The stable and competitive exchange rate policy implemented in Argentina (to counteract the de-industrialization experienced in the 1990s and promote new competitive sectors) is only politically sustainable in a wage-good exporter country if prices do not jump with a devalued exchange rate. Hence, until productivity and wages rise, export taxes have a role to play.

By the end of 2007, a third reason for the tax arose as increases in international food prices accelerated, fuelled by Asian giants’ economic growth, substitution of certain crops to produce fashionable biofuels, and even by speculation. The recent change to the export tax regime intends to address this new phenomenon, linking domestic prices to developments in international markets. (See ‘Mad, bad taxes on food’, The Economist, March 29th-April 4th, 2008)

This time, however, the change in export taxes is different from previous increases, for it establishes a scheme of moving export taxes. In the new regime, export taxes are not fixed but follow changes in international primary commodity prices, increasing when international prices rise and decreasing if international prices fall. In the current scenario of booming international prices, where the price of certain crops has almost (or more than) doubled in less than six months, modifications to the export tax system and the design of alternative policies (involving not only export taxes but also long-term policies for small agricultural producers and particular products, as well as countercyclical macroeconomic policies) were certainly necessary.

Protests started after the government announced the first type of policies (the change to the tax system). They emerged as a response to the lack of long-term policies for the agricultural sector, but also because, in a context of high international prices and expectations of further increases, flexible export taxes imply lower (extraordinary) benefits for the most profitable sector in the Argentine economy. The large amounts of present and future income at stake, taken for granted by some producers as a fair reward to their productive efficiency, thus represent the fundamental important reason behind the recent protests – which are likely to continue.

The dispute over extraordinary benefits, however, in no way justifies three weeks' of lock-out and piquetes affecting the entire Argentine population and especially its most deprived section. While it is fair to say that these benefits are in part a consequence of technical change and of the extension of the land frontier, they are also linked to a particular exchange rate regime and international context.

The conflict is still unresolved and open, and is transforming the distribution of ‘abundance’ as one of the fundamental political economy disputes of the 21st century.

Note

Argentina’s newspapers cover this issue daily. See Pagina12, Clarin or La Nacion (in Spanish) and Buenos Aires Herald (in English).

Leandro Serino is a PhD Candidate at the Institute of Social Studies (ISS) in The Hague, where he also completed a Masters in Development Economics in 2003. In recent years, Serino devoted most of his time to his PhD research, which focuses on the question of structural change in countries with abundant natural resource endowments, like his own country Argentina. During his ‘free’ time, Serino participated in different projects in the fields of development economics and applied macroeconomics, at the University of General Sarmiento, the ISS, ECLAC Buenos Aires and the Ministry of Economy and Production of Argentina.

21 April 2008

Brazil's Development Conundrum

by Paulo Gala Currently in Brazil heterodox economists form the majority in President Lula's government. This is a very different situation compared to Lula's first term. Brazilian Keynesians and development economists are now in key positions in the Brazilian Development Bank (BNDES), Finance Ministry, research institutes, at the World Bank and even the IMF. To name a few, Guido Mantega has been historically connected to developmentalism and so have economists in his team such as Nelson Barbosa. BNDES' president: Luciano Coutinho is one of the country's leading industrial policy specialists. Marcio Pochman, Joao Sicsu and a number of others are now the leading thinkers at IPEA: one of the most important government institutes for long term planning and research in the country. The Brazilian representative at the IMF, Paulo Nogueira Batista, is a long time critic of the Central Bank and neoliberal policies in Brazil. The President's small circle of influential advisors are also composed of hetorodox economists. Delfim Netto is a former USP (University of Sao Paulo) professor and was "czar" of the economy during the Brazilian miracle in the seventies. Luiz Gonzaga Belluzo is a former UNICAMP's (Universirty of Campinas) professor and long time critic of neoliberalism in Brazil. Conceicao Tavares is a former UFRJ's (Federal University of Rio) professor and has been advising the President since his first term. But the overwhelming presence of heterodox economists in these influential positions does not mean that developmentalist policies are comprehensively adopted. This is particularly because the central bank remains orthodox with total control over monetary and exchange rate policies. Though quantitatively in the minority these economists remain very powerful because of their close connection to the President and the fears of inflation that still haunt him. As some say, the Central Bank is the bunker of orthodox economists in Brazil today, the ones that survived from Lula's first term. Backed by the Bank's President Henrique Meirelles, these economists have been dictating key pillars of economic policy for a long time now. One cannot find a single economist close to a developmentalist viewpoint on the board of directors of the Central Bank. With a fully orthodox team, the central bank's main objective is to keep inflation under control. The result of this ambiguous composition of government is a twofold economic policy, as some have observed. Dialogue between the Finance Ministry and the Central Bank is harsh, to the extent that it exists at all. Policies adopted by the Ministry usually run in the opposite direction to what economists in Bank are doing. This has reached the stage where in a recent interview Guido Mantega mentioned that for every basis point of interest rate increase by the Bank, the Ministry levies taxes of the same amount on capital inflows to avoid exchange rate appreciation. This tax (the IOF) has been raised to 1,5% this year. It goes without saying that the economists in the Bank couldn't disagree more with these measures. The same phenomenon can be observed with respcet to fiscal policy. Through the new "Plano de Aceleração do Crescimento" (PAC) the central government has been increasing public investment in infrastructure, thus stimulating demand and growth. The Central Bank fears overheating of the economy and has been arguing for budget cuts, particularly with respect to government consumption. Actually, this is where most Brazilian economists seem to be in agreement. A cut in government consumption expenditure (as opposed to investment expenditure) would help manage aggregate demand. It would avoid the negative consequences of further interest rate hikes in the form of exchange rate appreciation and disincentives to investment in tradable sectors of the economy. President Lula doesn't seem to like this kind of reasoning, though. On April 16th, the Brazilian Central Bank decided again on the level of interest rates. There is a wide consensus among economists in the financial sector that the rate should be raised by at least 0.25 bps. According to some, inflation might be going out of control again. There is a chance that the target of 4.5% per year imposed by our inflation targeting system will not be met. According to the economists in the Finance Ministry there is no need to increase short term rates now because capital accumulation is growing strongly in the country (15% per annum). Installed capacity will increase in the near future which is the main guarantee for keeping inflation rates under control in the long term. But once again, the Central Bank and development economists don't agree on this. In conclusion, it seems fair to say that economic policy in Brazil has been split by the president into two often contradictory parts. The developmentalists in the Finance Ministry manage fiscal policy and the orthodox economists in the Central Bank manage monetary and exchange rate policies. The outcome of this arrangement will be neither developmentalist nor monetarist. Rather it will result in moderate growth and moderate inflation.
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Paulo Gala received Master and PhD degrees in Economics from the Sao Paulo School of Economics, Getulio Vargas Foundation. He is the author of several papers, articles and book chapters on the following subjects: Macroeconomics, Development Economics and Economic Methodology. Currently, he is a professor at the Sao Paulo School of Economics, Getulio Vargas Foundation.pgala3@gmail.com

02 April 2008

Economics and development choices

By Sumita Kale “It is true that the economic man is dead, but his funeral rites still remain to be properly celebrated by his legitimate heir, the behaviouristic man, who has emerged from the laboratories of the psychologist but has not yet taken his rightful position in the centre of economics.” No, this is not a quote from a modern behavioural economist, it was written eighty years ago, in 1925. This post is a tribute to a man who got the essence of economics right – Prof. Radhakamal Mukherjee, considered a leading sociologist and environmentalist but forgotten by economists. Reading Mukherjee is baffling, one wonders why the simple propositions were not taken seriously and were actually discarded, leaving economics to be a truly dismal discipline, bound in narrow confines by its graphs and equations. Thankfully some of his books are available online – Borderlands of Economics, Principles of Comparative Economics, Foundations of Indian Economics etc. Mukerjee’s take on economics is quite different from the way it is taught today- he blended it with geography, sociology and psychology, he brought in elements of biology and philosophy. This is an economics that makes a lot of sense. For instance, he divides the economic environment into three parts – Ecologic - comprising the climate and topography, land resources, mineral and water resources, plants, animals and man’s inter-relationships with the physical environment as indirectly affecting economic life Mechanical or technic - tools, weapons, capital and technology, systems of production, mechanisms of exchange, banking, instruments of credit etc. and Institutional - State, social groups, law, tradition, standards of social values and ideologies, private property, custom or competition etc. Economics should concern itself with all three, and not merely the second i.e. the price-cost economics. He went on to distinguish between laws, norms and ideals. The ecological environment is governed by laws, which have the same certainty as the laws in physical sciences. The mechanical or price and cost economics yields the norms of consistent action, an abstraction which can be justified only on the basis of statistical generalisations of past experiences or of a necessary law in ecological economics which produces it. The third gives rise to the ideals and policies of what men ought to do in concrete economic situations. He also brought in the aspect of time as being crucial since ‘laws, ‘norms’ and ‘ideals’ of economic activities are reached by a process extended over time. Without a clear understanding of these three categories, he said, economic analysis and prescription would be confused and divorced from reality. And this is actually what has happened, economics today is open to the charge of being an autistic discipline (check out the Post-Autistic Economics Network). It was in the divide between the village and the city that Mukherjee lost the debate on the path to follow for development – most modern planners wanted India to grow through cities, the Western model, while he saw this model as one that would lead to a breakdown in social stability. He decried the idea that villages are the source of energy and labour and the cities, the hub of growth. Rather than let villages be subservient to cities, he wanted them to live a life of their own, be vibrant with skills and knowledge, he wanted to bring industry to villages, to let villages grow into cities. For him the solution lay in setting up cooperatives, not just for providing credit, as is popular, but also to give the necessary support for farm inputs, marketing the produce etc. Revitalising agriculture was one step, the next was to enable diversification of economic activity in the village, away from agriculture – this was the opposite of the migration model that pushed people to the cities. Some of Mukherjee’s prescriptions were anathema to modern thinking – he saw the caste system as a source of social cohesion in India society, for instance. But what we have seen now is that somewhere in the quest for industrialisation and growth, the balance has been lost. The rural-urban divide continues to grow, a direct fallout of an imperfect understanding of the socio-economic reality. In 1916 Mukherjee wrote, “ How to bring life and progress to our villages is one of the most serious economic problems of the day.” Unfortunately, this remains a grave problem in the world today. Last year marked the milestone where the world became more urban than rural, but this is not quite an occasion to celebrate. To quote Prof.Wimberly, “So far, cities are getting whatever resource needs that can be had from rural areas. But given global rural impoverishment, the rural-urban question for the future is not just what rural people and places can do for the world’s new urban majority. Rather, what can the urban majority do for poor rural people and the resources upon which cities depend for existence? The sustainable future of the new urban world may well depend upon the answer.” One can argue that a large part of the world’s current concerns on poverty, environment etc. could have been avoided if a more holistic view on development had been taken by economists and policy makers. Of course there will always be opponents to this view, but for them the counter argument would be : ‘unless you think outside your box, how would you know you are in the right box?”