Tuesday, May 13, 2008

Hayekian Insights on Economic Development

There is an interesting video (March 18, 2008) where Bill Easterly discusses about Hayekian insights on economic development and Arvind Subramanian disagrees with some of the Hayekian perspectives that are stretched a bit too far by Easterly. Weird that there is no embed link for the video. So, watch the video here.

Here are some interesting stuffs that I managed to note down:

Bill Easterly:

  • Miracles don't last: stars of 60s and 70s were Brazil and Cote d'Iviore; the 8 Asian miracles were South Korea, Taiwan, Singapore, Hong Kong, Japan, Thailand, Malaysia, and Indonesia but their development success could not be replicated elsewhere
  • Hayek predicted the unpredictability for both countries and policies. Why? Because who would have predicted India, with skilled labor shortages, would be the leading authority in IT outsourcing, Ghana would excel in pineapple production...similarly, Bangladesh in garments, Egypt in bathroom ceramics (90% going to Italy), the Philippines in electronic circuit...these results were completely unpredictable...so, there is no secret for economic growth
  • Government can't pick success...predicting who, when, where are all unpredictable! Why? because through the free market mechanism entrepreneurs become searchers who tap in unexpected opportunities...spontaneous order comes into play
  • Aid can't have had more than a trivial role...total aid in the past five decades amounted to $100 billion but total income earning of citizens from poor countries amounted to $24,798 billion a year...Aid is not an answer to massive decline in poverty...it is a home grown success...Unexpected inventions from free individuals helped fuel escape from poverty...it is not due to government policies...
  • Hayek's secret: There is no secret to economic development
    1. There never has been a secret to development
    2. There is not now a secret to development
    3. There never will be a secret to development
  • More economic and political freedom are associated with more economic growth
  • No one can put "democratic capitalism" in practice...freely grown institutions emerge spontaneously when there is freedom...it is growth of the undesigned...
  • Freedom is not a secret to economic growth; it is recognizition that there is no secret to economic growth...it emerges through the bottom-up process
  • How can poor countries be helped?
    1. Use the power of ideas to spread the ideas of individual freedom
    2. Oppose ideas of expert-led growth
    3. Discover specific breakthroughs (be entrepreneurial)

Well, this is synopsis of what Easterly had to say about Hayek's secret to economic growth. As always he blasted Jeff Sachs (and his new book "Common Wealth"), MDGs, and the development aid agencies in general. I find it hard to believe how Easterly could argue that the growth in the East Asian countries was a result of economic and individual freedom, which, he says, essentially gave rise to creative entrepreneurs. He used this example to discredit the state's and policymaker's role in creating conducive environment for entrepreneurship to take place. The success in South Korea, Malaysia, Taiwan, Japan, etc. were not entirely the result of economic and political freedom (which were obviously comparatively low as per today's standard) but because of careful planning, that did not temper individual and market incentives, by the state.

He also went on to say that the TVEs in China is not the state's invention but a creation of a dynamic social system (he says it happened in a chaotic way). How can he say that this system just propped up from no where when there is overwhelming evidence that household responsibility system and TVEs were deliberate policy interventions as a part of land reform and as a part of an economic program to free up surplus labor from the agricultural sector to the industrial sector. Bill was too clumsy in explaining this and was feebly trying to relate this with the economic and freedom arguments, which obviously were very restricted in China. Too hard to believe Easterly on this! Also, is there a confusion about economic growth and economic development? Easterly was using this synonymously.

Arvind Subramanian:

Rather than extolling the magic of markets and excessively putting over emphasis on economic and political freedom- while recognizing that these are essential components of growth and development- Subramanian was more cautious and argued that the state has a role to play in spurring economic growth; it has to make choices and decision based on given constraints and there have been a number of success choices as well. He argued that the state can play a crucial role in directing private entrepreneurship and in creating a suitable space for their ideas to flourish.

  • Easterly is right on the fatal conceit of outsiders....his own research at the IMF showed that countries that received more aid grew slow
  • However, he disagrees with Easterly's arguments (and for that matter, Hayek's) on economic decentralization...Hayek and Easterly are only half right or their arguments are based on incomplete evidence...
  • China, India, and Vietnam were slow reformers and had/have messed-up political freedom, yet they have achieved astounding growth rates...there is heavy state intervention, little privatization, public-sector dominated banking system, fairly closed trade policies, overly regulated labor policies...
  • Botswana and Mauritius have sustained and uninterrupted democracy, leading to impressive economic growth...somewhat closer to Hayek's views (but this argument belies the role of state in creating conducive environment for the private sector to flourish...Botswana's growth is credited to strong institutions of property rights and Mauritius's growth is credited to the state's role in establishing SEZs, among others...see AJR's paper and Rodrik's book for more discussion)
  • The data and evidences so far contradict Hayek's and Easterly's overemphasis on economic and political freedom
  • IT-based skills in India was created by the state's deliberate intervention in establishing elite education institutions (a number of IITs)...similarly, China's growth is credited to the state's role in enhancing education, healthcare, and entrepreneurship)...just economic decentralization is not an answer...
  • 2 uncertainties: (1) Uncertainty on retrospective understanding of "capabilities", and (2) Uncertainty on prospective policy action/policy agenda for building capabilities.
  • Governments can provide rents for stimulation of citizen entrepreneurship and it can somehow figure out (internally) the factors that would lead to economic growth...

Watch the full video. For Eastely's paper on bottom-up approach to institutions, read this. AJR's paper is here. See Rodrik's book as well. Also, check out Stern's this book by Nicholas Stern. For those who are wondering who Hayek is, check his popular book here, his 1945 famous paper here, and a short video here. Here is his profile.

Update: Finally, the talk is on Youtube!

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