0.1 Economic development is about all of economics  (Page 14/14)

We will also see that totally new forms of financial institutions have arisen. An example in developed nations is the giant firm BlackRock, the largest investor in the world ($4 trillion in directly controlled assets and $11 trillion under management). But some of these new forms of financial institutions first emerged in emerging nations, and they are not at all large. The most prominent of these are institutions for micro-finance, which focus strongly upon lending to the poor. Microfinance originated in Bangladesh in the late 60s and spread to India, much of tropical Africa, Latin America and, by 2005, even the United States.

9) The Importance of Fluid Markets in Agriculture, Industry and Services

Markets heavily fettered by regulation and price controls reduce prospects for economic growth. The need is for fluidity in markets. Nevertheless, since the reign of the Roman Emperor Diocletian, nearly 2,000 years ago, governments have imposed price controls in the belief that some important economic, social or political objective might thereby be served (i.e. control of inflation, protection of the poor etc.). In Diocletian’s time, the stated punishment for evasion of price controls by merchants was execution. Moderate governments have not resorted to this sanction (with some exception in the Soviet Union in the 1930s and China in the 1950s).

In 2014, the most notable examples of severe price control regimes were Venezuela and Argentina. Venezuela imposed very stifling price controls on food and other products with zero impact on inflation, which reached 40% in 2014. The resulting drastic shrinkage of the agricultural sector yielded bad results for Venezuelan farmers (and consumers) but very good results for US. exporters of food grains, especially rice.

A definitive lesson emerging from more than 2000 years of history is that, except in wartime , price controls not only ultimately fail to secure the objectives sought, but have highly corrosive effects throughout an economy.

Price controls on agricultural products have had especially pernicious results in poor countries, in reducing rural incomes and undermining urban nutrition . Especially during the 60s, 70s and 80s, tropical African nations resorted frequently to use of price controls for agricultural products, in the mistaken belief that the interests of poor consumers would be served. In the disastrous Indian famines before 1950, people starved NOT because of a shortage of food, but by restrictions on the rice market (price controls). See Amartya Sen (1981), Poverty and Famines: An Essay on Entitlement and Deprivation , Oxford, UK: Oxford Clarendon Press.

Fluidity in markets essentially requires a degree of shortage economic freedom in markets. This in turn relates to Module 9 (Institutions) covered in Econ 450 again – read p.1-8 of today’s textbook. We now have ranking of economic freedom. In the 2010 International Index of economic freedom you find that the freest 20% of economies (31 nations from Hong Kong to Spain) have doubled the per capita income compared to those in the second quintile of economic freedom. The U.S. was #10 in ranking in 2012 and fell to #12 in 2013. A more telling comparison: the 20% freest economies have per capita income five times that of the lowest quintile in per capita income.

10) The Role of Foreign Investment and Foreign Aid in Promoting Economic Development

Foreign aid comes in two basic forms: official (government) and unofficial (private). Official foreign aid includes economic and military aid. It includes also aid for recovery from disasters, whether due to war, storms or earthquakes. Foreign aid is clearly appropriate and is usually effective in disaster recovery efforts, as in Europe under the Marshall Plan in the 1940s or as in relief for the Asia tsunami in December 2004. Even in 2014, Haiti is largely dependent on foreign aid, a decade after disastrous earth quakes there.

The principal stated purpose of other types of foreign aid has been to increase rates of economic growth in recipient nations. Judged by this standard, official foreign aid has been at best only mildly successful; in a very small number of cases and at worst a failure generally. The record over the past half-century is fairly clear: the one quarter of poor nations that have been most heavily dependent on foreign aid have also been those that have grown most slowly. The one-quarter of nations that have been least dependent on foreign aid, have, by far, superior records of economic growth. Indeed, there is evidence that aid inflows have systematic adverse effects on the growth of labor intensive and export sectors in recipient nations. Other than for disaster recovery aid, foreign aid has generally supported “top-down” development, rather than the type of bottom-up development evident in such successful approaches as microfinance.

Reliance on foreign aid to support the top-down approach has meant that a sizable group of nations, especially in tropical Africa, has developed long-term dependence upon aid to (a) feed their populations and (b) deliver basic government services and, finally, (c) support corrupt bureaucracies. Given the poor governance of the nations that have historically been most dependent on aid, it should not be surprising that the most widely accepted worldwide indices of government corruption have such aid-dependent nations at or near the very bottom of their lists.

The overall conclusion: official . foreign economic aid is broken. But it should be mended, not ended. New, innovative bottom-up foreign aid is beginning to yield good results, as we will see in Module 7.

These, then, are the basic lessons the author considers the most significant from the past half-century. We should not be at all surprised to learn that, going forward another fifty years, these lessons will remain germane, even while new ones will surely emerge.