The World Trade Organization's Doha Round mistakenly attempted to fix global food challenges by liberalizing agricultural markets. Poorer producers have been left without government support and developing countries have grown increasingly dependent on imported food. Even given the enormity of the financial crisis, the U.S. government continues to perpetuate failed solutions for Africa. More must be done to protect the poor. Fair, not free trade must be adapted immediately as a part of creating a new global economic system.
The food crisis is largely overshadowed by the financial crisis and ensuing global recession. At times, development policy becomes one dimensional!
Meanwhile, the Kerala model (state-sponsored land reform, education, infrastructure, and social services initiatives), which is largely insulated from the current financial crisis.
The southern state of Kerala boasts nearly universal literacy — 91% as opposed to the Indian national average of 65%. It's also one of the fastest growing states in India, second only to the tourism-rich state of Goa…In addition to its tremendous literacy rate, Kerala boasts one of the nation's finest healthcare systems, even for those who can't afford to pay user fees and therefore depend on government hospitals. Kerala's infant mortality rate is about 16 deaths per 1,000 births, or half the national average of 32 deaths per 1,000 births.
Aside from the social development indicators, Kerala's growth rate is nothing to sneeze at. In the last few years it averaged between 6-10%, not only keeping pace with the national average but at times ranking among the fastest growing states in the country. The sectors that are doing well are largely those that are thriving across India — IT, services, and tourism — but agricultural production and small-scale manufacturing are also succeeding.
the state had a matrilineal and even a matriarchal society, with a line of forward-looking queens that still ruled much of Kerala in the early days of the British Empire…A single party, the Communist Party of India (Marxist) or CPI(M), has ruled Kerala for much of the past 50 years. The CPI(M) successfully pushed for three major reforms in the 1960s and 1970s. The first and most important was land reform.
the CPI(M) deliberately and methodically invested in education, setting goals so popular with the electorate that even when the Communists lost power, new governments did not dare modify education policies.
Kerala invested heavily in government-financed healthcare. The state now boasts 160 patient beds per 100,000 people, the highest rate in the country.
…With the end of this ideology, Kerala represents a real alternative. Investing in people — whether through breaking the oligarchy of big landlords (or perhaps investment bankers) or providing social services including universal education — will ultimately lead to the development of a meaningful middle class.
Bedeviled by rising losses and slacking competitiveness on export sector and hence its direct negative impact on the growth rate, the government had been mulling over establishing SEZs for the past several years. This is supposed to enclave the export-oriented industries from labor disputes, complex tax issues, and other exogenous problems related to supply of energy and labor.
Finally, the government has ratified establishment and implementation of SEZs act in the country. Under the WTO, low income country like Nepal are allowed to take initiatives to prop up their flagging export sector, which basically supports the manufacturing sector and high wage jobs apart from the agricultural sector. I argued for more incentives for export-based industries in past opinion pieces here and here.
Nepal has been doing very bad in the export sector recently (see the figure below), thus affecting the growth rate. The end of MAF in early 2005 has proved to be detrimental to the Nepali textile and garment industry, the main component of export portfolio. Read this opinion piece for more stuff.
Fig1: Exports as a % of GDP. Notice steep decline in exports after 1997, a shock probably emanating from the declining competitiveness of garment and textile industries and a series of phase out of quotas under the MFA.
The Act allows workers to unite and practice collective bargaining, but prohibits them from undertaking activities that affect production and normal operations of industries…
Terms of recruitment, facilities and lay off will be governed by the agreement the worker and management will sign while accepting the job. Initially, the draft had incorporated the ´hire and fire´ provision as demanded by entrepreneurs…SEZ Authority and the SEZ regulations will determine the extent of workers pay scale, medical and insurance facilities, among others…
In order to lure investors in SEZ, the Act has provided them with facilities such as duty-free import of raw materials, exemption of value added tax (VAT) and free them from excise duty and other local taxes. The industries in SEZ have been provided with income tax holiday for five years…After five years also, they will continue to enjoy 50 percent discount on income tax…In order to ensure investors, the Act says industries already into operation would continue to enjoy all the facilities, even if later amendments changed the structure and extent of facilities.
Going by the Act, only export-oriented industries can be set up in SEZ. Nevertheless, the government has allowed them to make domestic sales not exceeding 15 percent of their transactions. Interested investors now can acquire land in the zone in lease for 30 years from the SEZ Authority, which will be led by an independent expert. Also, they will receive 50 percent, 40 percent and 25 percent discounts respectively on the lease rent for the first three years of investment. After 30 years, lease agreement can be renewed in every 5 years.
Way to go before the crippling export-based sector revives its previous position as the driving force of growth!
Education quality and economic growth: rather than just increase in school attainment and enrolment, higher cognitive skills matter for economic growth.
Professors Farrant and McPhail analyze Hayek’s ‘inevitability’ thesis (“each step away from the market system and towards social reform of the welfare state is inevitably a journey that must end in a totalitarian state”) and argue that the confusion surrounding this thesis is attributable to Hayek himself, despite Hayek’s strong disagreement with the way Samuelson explained this topic in his textbook Economics (11th edition).
...Much of the apparent confusion over the inevitability thesis, we suggest, is largely attributable to Hayek himself (with the water muddied further by the secondary literature on the Hayek–Samuelson exchange), with Samuelson having ready cause to read Hayek as making an ‘inevitability’ claim about the situational logic supposedly inherent to the mixed economy since Hayek often suggested that the logic of the mixed economy and redistributive welfare state ultimately and inevitably resulted in a totalitarian polity.
...Hayek repeatedly appears to consider the mixed economy and welfare state practices to have their own inherent logic, which, once set into play by government policy to redistribute income and attain social justice, apparently necessitates ever-further government intervention, the government perhaps ultimately finding itself inexorably “driven to establish an essentially totalitarian system” (Hayek, 1978, p. 301). Again, the above illustrates the immense importance Hayek placed on his oft-repeated statement that “if you don’t mend your principles you will go to the devil”’(1978, p. 105).
...we note that Hayek repeatedly suggests that attempts to achieve social justice ultimately tend towards full-blown command planning and a totalitarian polity....Samuelson correctly understands Hayek to oppose any welfare state practices that involve income redistribution because they apparently lead, in Hayek’s view, to political serfdom...Many are called as prophets. . . few are chosen as seers by the scorekeeping historian. . . [f]orty years after Friedrich Hayek wrote down his nightmare of the welfare state leading remorselessly to the totalitarian murder of freedom, Scandinavians enjoy freedom second to none that the world has ever seen (Samuelson, 1983b, p. 59).
The journal also has an essay by Samuelson, who argues that he stands by his initial assessment of The Road to Serfdom and the ‘inevitability’ thesis. Samuelson tries to formally settle the unresolved intellectual bicker he and Hayek had back in the 70s and 80s.
...Hayek over-praised the optimality of individualistic spontaneity. Charles Darwin’s genius long earlier had eclectically enumerated both the pluses and minuses of individualistic natural selection...Having spent a lifetime near libertarians, I can confirm that they are an individualistic idiosyncratic bunch. For example, my conservative mentor Gottfried Haberler was defined by Mises to be “communist.” The number of Mt. Pelerin resignations never quite reached the number of its new members.)..Anthropological experts in “content analysis,” focusing their microscopes on the Hayek text (1944),might score its impact to be traceable to both (1) its version of history and (2) its projection of the future.
…If Hayek believes that the spending of newly printed currency on employment and consumption will worsen our current terrible depression, then Hayek is a nut. Alas, one fatal error eclipses a few elementary true truths รก la Mises and Hayek: Easy money now often does entail tighter money later which will come as a surprise to uncompleted projects and new contingent contemplated investment projects.
...Two-thirds of a century after the book got written, hindsight confirms how inaccurate its innuendo about the future turned out to be. Consider only Sweden’s fig-leaf middle way. As I write in 2007, Sweden and other Scandivanian places have somewhat lowered the fraction of GDP they use to devote through government. But still they are the most “socialistic” by Hayek’s crude definition. Where are their horror camps? Have the vilest elements risen there to absolute power? When reports are compiled on “measurable unhappiness,” do places like Sweden, Denmark, Finland and Norway best epitomize serfdoms?
...No good deeds go unpunished! Never then, or before, or later did I have reason to think or to say: Yes, I have misunderstood you. Yes, I have incorrectly quoted from you. Mea culpa. Exactly what I have written above evaluating The Road to Serfdom is precisely what I believed about it in the 1940s and continued to believe about it up to the present 2007.
Consider this by Hayek (Foreword to the 1956 American paperback edition of The Road to Serfdom, pp44 in the definitive edition of The Road to Serfdom):
The hodgepodge of ill-assembled and often inconsistent ideals which under the name of the Welfare State has largely replaced socialism as the goal of the reformers needs very careful sorting out of its results are not to be very similar to those of full-fledged socialism. This is not to say that some of its aims are not both practicable and laudable. But there are many ways in which we can work toward the same goal, and in the present state of opinion there is some danger that our impatience for quick results may lead us to choose instruments which, though perhaps more efficient for achieving the particular ends, are not compatible with the preservation of a free society. The increasing tendency to rely on administrative coercion and discrimination where a modification of the general rules of law might, perhaps more slowly, achieve the same object, and to resort to direct state controls or to the creation of monopolistic institutions where judicious use of financial inducements might evoke spontaneous efforts, is still a powerful legacy of the socialist period which is likely to influence policy for a long time to come.
Apparently, Hayek overstretched his warnings and considered that economic planning and reforms would lead to (ultimately result in) a totalitarian state. For the sake of justifying freedom, he blinded himself to the possibility of having a managed mixed-economy. See the success of the Nordic countries. Also, it is hard to believe that the US (and other Western countries) would end up being totalitarian states, especially after the financial crisis (with all those bail-out interventions and activist government policies).
I remember having these discussions in Professor McPhail’s senior seminar class (History of Economic Thought) in Fall 2007. The original scanned letters between Hayek and Samuelson were pretty interesting! Btw, the first economics book I purchased (while I was doing A levels economics) was written by Samuelson and Nordhaus. Their book is probably the best introductory textbook in economics. Also, every time I read Hayek’s pieces (apart from The Use of Knowledge in Society), I find it hard to believe him (realistically speaking) despite the persuasive arguments he presents.
Here is a popular video about the road to serfdom.
The marginal propensity to consume (MPC) of poor people is high. Similarly, the marginal propensity to invest of a small scale enterprise with good prospects of future return is relatively high. Fiscal stimulus geared towards propping up these two measures would be more effective than tax cuts to the rich, argues Stiglitz. Moreover, investment in infrastructure, education and technology also helps stimulate the economy. In short, follow Keynesianism!
Tax breaks for business may prove to be a sink-hole as bad as the troubled assets relief programme.
Some of the spending in the stimulus serves multiple ends. Increased unemployment benefits have the largest multiplier effects – cash-strapped families spend every cent given – and meet vital social needs. It is imperative to provide health insurance to the unemployed: without that, a single serious incident can push a family into bankruptcy. Helping the unemployed meet house payments reduces foreclosures, addressing one of the underlying causes of the crisis. There are thus triple benefits.
We are in uncharted territory in this crisis. But household tax cuts, except for possibly the poorest, should have no place in the stimulus. Nor should business tax breaks, except when closely linked with additional investment. The one tax cut that should be included is a temporary incremental investment tax credit; it provides a big bang for the buck, encouraging companies to invest now when the economy needs the spending. Increased investments in infrastructure, education and technology, relief to states, and help to the unemployed need pride of place.
However, it is possible to look at the question of regulation empirically rather than theoretically. One useful area is cross-country analysis, whereby economists look at how countries with bigger governments and higher taxes fare. In recent years, Peter H. Lindert, a leading economic historian from the University of California, Davis, has comprehensively analyzed the literature. One argument against government is that public spending is unproductive and crowds out private spending. But, time and again, he found that studies claiming that high taxes reduce economic growth simply did not hold up.
Lindert’s exhaustive statistical analyses were based on eighteen countries over ninety years. No matter how he juggled the data, he found no relationship between the growth of GDP per capita and productivity and the level of taxes or the extent of social spending. There is a dramatic “conflict between intuition and evidence,” he writes. “It is well-known that higher taxes and social transfers reduce productivity. Well-known—but unsupported by statistics and history.” And he goes on: “Neither simple raw correlations nor a careful weighing of the apparent sources of growth shows any clearly negative net effect of all that redistribution.”
These days we all know how easily statistical analyses can be rigged. But if the case against big government were open and shut, then there would not even be a debate among economists. As Lindert notes, if a dollar of social spending reduces GDP by, say, sixty cents, then why are so many European nations doing well? They spend 25 to 35 percent of their national income on the poor, the elderly, the sick, and the unemployed, which therefore means, according to anti-government economists, they must have reduced their GDP by 15 to 20 percent. In other words, if they simply eliminated this spending, they would all be as rich or much richer than the United States, even as their people work many fewer hours.
Very interesting article. Read the full article to get some Kurgman and Stiglitz flavor!! Madrick is the author of a new book The Case for Big Government
On a similar note, here is what 2009 looks like for international development:
Markets and the State are already being rebalanced to fit these new times. It is time to say exactly who governs what, why, when and how. This will not be easy, but those who have been clamouring for more state involvement in development will also have to deliver better state involvement. This will be a big debate in 2009 with questions around (a) the appropriate balance of regulation, stimulus, and the provision of missing goods and markets, (b) how the balance is identified and (c) how the activity will be paid for. These debates must yield concrete actions very quickly.
...2009 will see: new ways of thinking about how the state and market can work together to encourage sustainable behaviour; new ideas influenced by the idea of wellbeing and what constitutes ‘consumption’; new ways of coordinating donor financing to generate new technologies; fresh perspectives on justice and accountability; novel ways of listening and reconciling ideas from around the world; and a more serious effort to understand everyday attitudes to international development.
