Carbonate Surprises

Suvrat Kher, geologist, interviewed on the Reef Times
One excerpt:

Tell me about some of the “water crises” you’ve blogged on (like India) and why they are happening. 
India is facing a multitude of water problems. First there is the problem of water quality. Environmental regulation is new to India and is weakly implemented and that means that almost all the major rivers and lakes are polluted to unacceptable levels. Wetlands are disappearing through uncontrolled and unplanned development. Even an iconic wetland like the famous Bharatpur Bird Sanctuary is threatened.
Second is the impact of climate change on surficial water. If trends observed in the decline of Himalayan glaciers hold over the next couple of decades it would affect the summer runoff of Himalayan rivers that are a lifeline to hundreds of millions of people in northern India.
Finally there is the crisis facing groundwater. Unregulated extraction of this resource has lead to aquifer overdraft in many regions. This is a catastrophe in the making since groundwater irrigates over two thirds of arable land in India.

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.

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’

Rethinking Development – opening post, by Nicolas Pons-Vignon

There is something reassuring in the knowledge that, despite the growing homogenization of the world, and the enthusiasm or despair it generates, new forms of art, of individuality cum resistance are emerging. Mondovino , the brilliant documentary on the world of wine by Jonathan Nossiter, not only praises but epitomises this critical dynamism – it feels unique, but promises more subtle, respectful yet uncompromising works. And yes, this inspiring way of looking at the world requires an acute political awareness – whether one is talking about wine or about anything else. In the face of a phenomenon which many of the forthcoming contributors to this new blog will certainly discuss in insightful, often disagreeing terms – namely globalization, neither blind optimism nor hopeless pessimism can be good guides. As John Sender wrote in 1999, in an article which questioned the prevalent “Afro-pessimism”, “Thinking about development in Africa requires holding at least two sets of ideas in one's head at the same time. It is not sufficient to stress the ubiquity of failure, malnutrition, disease, predatory states and war, or to become overwhelmed by revulsion in the face of the misery still experienced by so many Africans. In addition, it must also be recognized that some important aspects of the lives of millions of ordinary people have been transformed over the last five decades. It is on the basis of a clear perception of the complexity and unevenness of all these processes, as well as a critical analysis of the consequences of economic policies in the past, that politically realistic development strategies can be formulated.” The last sentence of this quote could, in my view, provide a good motto – or mission statement, to borrow from the colourful vocabulary of ex-MBA students – for the Rethinking Development blog. A number of economists, of all ages and origins, have agreed to contribute regular editorials; they come from different perspectives, but are all critical of mainstream neoclassical economics and of its political corollary – neoliberalism. Far from being a fad, constructive opposition to the academic dominance of neoclassical economics (in economics as well as in other social sciences) and to the political influence of neoliberalism, is highly needed and soundly inspiring. It is also, in our case, guided by the desire to provide credible policy alternatives. While the mainstream is remarkably uninterested in debating with its critics, and while this attitude is only possible because mainstream economics is actually dominant, we must not forget that it is far from having taken over every mind. In fact, the quality of the opposition can induce some enthusiasm, as soon as one can glance at its diversity and its geographical spread. Such a feeling of inspiring strength and potential surely overwhelmed me when I attended the African Programme on Rethinking Development Economics (APORDE, the African brainchild of CAPORDE) in May 2007 and the Annual Conference on Development and Change (ACDC) last December. Even if many battles remain national or regional, few can be won alone – and Ben Fine was quite right when he told me that the reason why many Marxists prefer arguing with each other, rather than engaging with what they all agree to be nonsense, is that people tend only to fight battles they think they can win. It is a fact that heterodox economists have to behave in an inclusive way if they hope to influence debates and policy. Yielding to the temptation of factionalism is a left-wing disease which was harmful in a past where capitalism could seem doomed; nowadays it is as good as a capitulation, so powerful has capitalism become, in all parts of the world and in so many parts of our lives. Capitalism has certainly been very positive in many of its effects – in Europe, America, Asia, and even in Africa, as Sender argues in his article. It has allowed more people to live, rather than die as infants, and has enabled a diffusion of well-being enhancing technology. Not all technology developed under capitalism has arguably enhanced well-being, and technological diffusion has certainly been remarkably uneven. But, as Robert Parker, the über-wine critic, says of the impact of his “naïve American” approach to the wine industry, it has brought about a form of democracy. New wine drinkers (the upper end of the new, growing world middle-class) want to enjoy their wine now and do not care about the elitist, “old world”, notions of patience and terroir. Yet, as another character in the film notes, Parker is promoting wines that can be (and are often) made in California and Bordeaux, or anywhere else – though increasingly by Californians and Bordelais. This encapsulates the very ambiguous nature of capitalist ideology – it certainly knows how to appeal to the new generation produced by capitalism – but it is levelling the playing field in a certain way, in the interest of those who are forging this ideology. And who are devoting large amounts of money, effort and talent (ever wondered why the cleverest people in business work as spin doctor?) to convince us that what is good for them is good for everyone. It is up to us to contest the battlefield for ideas and to draw interest in and support for progressive alternatives which would benefit the majority rather than sharpen inequality. In her remarkable new book, Escape from Empire. The Developing World’s Journey Through Heaven and Hell, Alice Amsden suggests that American influence on developing countries was rather positive – by imperial standards – until the 1970s, when the US allowed (and sometimes supported) non-communist developing countries to do it their way, i.e. to choose and pursue their own economic policies. This behaviour was motivated by the belief that success over Soviet Russia required a spill over of the benefits of capitalist development. Then, because inter alia of the trauma of the Vietnam debacle, Americans reverted to an older, rigid form of laissez-faire: do it our way. Needless to say, the impact of the free-market ideology in the developing world has been horrific, destroying recently-formed state apparatuses, slowing investment and precluding the emergence of large, domestic capitalist firms. Foreign investment predictably failed to generate the growth in output and employment that could have lifted out of poverty those countries whose economy was still fragile at the time of Empire shift. Amsden acknowledges that her distinction between the two American empires may not be an entirely accurate characterization – but she rightly stresses that the shrinking of space for experimentation and free thinking about the most appropriate strategies dealt a severe blow to the development dynamic of the post-war era in many countries. There is no doubt that we are facing a strong, adapting and influential opposition; the staged demise of the “Washington Consensus” in the 1990s is a sign of this strength. The refining of the dominant paradigm thanks to the crucial contribution of New Institutional Economics, which allowed for the selective inclusion of some of the more shallow criticism of the Old Consensus, has been remarkably cosmetic when one looks at the real world. Contributors to this blog will surely touch on this, as well as engage theoretically with the flaws of the Post-Washington Consensus. The latter is the same wine, except that it is matured in new-oak barrels which give it a palatable taste at first. A taste so palatable in fact that it has appealed to populist critics of neoliberalism, who have concluded numerous alliances with its new avatar in the name of big, ill-defined words – think fair-trade, MDGs, or even democracy. In a 2005 paper, Mushtaq Khan shows how crude the thinking behind the “democracy is good for development” argument is; he then brilliantly demonstrates that a political economy approach can provide a robust basis for a realistic (vs. populist) development policy. Far from offering an alternative, the neopopulists have been incorporated into the mainstream – and we will make sure we engage them as well, for pipedreams are the worst form of drunkenness the poor can experience. Thanks to the articles that will flesh it out in the future, I hope this blog will come to be regarded as a reliable source of imaginative, critical and relevant analyses of development issues. That it will help inspire and connect those who feel that something is wrong with the current status quo with those who research, think of and fight for credible, progressive alternatives. To borrow one last line from probably the most endearing character in Mondovino, Hubert de Montille, who highlights the humility and scepticism which have always guided the freethinkers (libre-penseurs): “My son is more mainstream; he likes order. I like order, but I like disorder, too. Why not?” Cheers!

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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

References Alice Amsden (2007), Escape from Empire. The Developing World's Journey through Heaven and Hell, MIT Press Mushtaq Khan (2005), “Markets, States and Democracy: Patron-Client Networks and the Case for Democracy in Developing Countries”, Democratization Vol. 12, No. 5 John Sender (1999), “Africa's Economic Performance: Limitations of the Current Consensus”, The Journal of Economic Perspectives, Vol. 13, No. 3