Last night I was reading up Japan’s road to industrialization. Specifically, I was learning how it went from a backwards set of earthquake prone islands in 1868 to one of the most powerful economies on the planet.
In 1900, the average Japanese person could expect to live to be about 44 years old, which is almost the same as a Malawian, both in 1900 and in 2013. However, a Japanese person in 2013 can expect to live to be more than 80 years old.
How did it do this? Ignoring the complexities and numerous details, Japan developed because it recognized early on that it had to develop its business sector. Development can’t occur without livelihoods and livelihoods come from cash producing jobs.
For example, following the Meiji restoration, Japan developed a system of land taxation, took the funds and invested them into buying second hand sewing machines from Europe. Rather than aiming for labor saving technologies, Japan aimed for labor intensive, individual sewing machines so that it could leverage as many people as possible. What it lacked in economic resources, it made up for in hands. Japan in the 1920′s then became a major exporter of textiles to Europe.
Japan didn’t stop there. Out of its land taxation system, it also made sure that capital was available for merchants wishing to diversify their businesses and encouraged farmers to convert their crops into products. A soy farmer can process his output into tofu and soy sauce. Similarly, a rice farmer can manufacture sake and sell it.
I am looking at the UN’s Millennium Development Goals:
Eradicating extreme poverty and hunger
Achieving universal primary education
Promoting gender equality and empowering women
Reducing child mortality rates
Improving maternal health
Combating HIV/AIDS, malaria, and other diseases
Ensuring environmental sustainability
Developing a global partnership for development
Out of eight goals, not a single one focuses on private sector development and entrepreneurship, which is arguably, if the cases of Japan and Korea are to be applicable to the African context, the key to consistent economic growth.
Where is the ninth goal? Where is the goal which calls for increased access to capital for small and mid level entrepreneurs? Where is the goal that calls for an elimination of onerous export taxes and corruption which kills the ability for businesses to competitively sell their products to the rest of the world? Why is there no call for proper systems of taxation which allow domestic investment?
The goal of sustainable business development is fundamental to the success of at least each of the other eight goals. I suspect that suspicion and cynicism toward the private sector is the culprit. No doubt, this ambivalence toward business killed the Affordable Medicines Facility – malaria, a supply side subsidy intended to increase access to anti-malarial medications in small private drug shops.
Even in public health, which is supposedly focused on holistic solutions to public health problems, the issue of private sector development and the relationship of economics to human health hardly appears.
People in my field seem to be happy to stick with models of pharmaceutical solutions to health problems, delivered through publicly funded health systems. What they fail to address is how to support those public clinics and hospitals though other means than donations from first world countries.
The evidence that Africans will flourish when given appropriate amounts of capital under reasonable terms (not microfinance as it currently exists) is out there. A strategy to give money to the poor, without strings or promise to repay, conditional on a reasonable business plan found that African households will invest in tools or technology to provide them income in the long term. They find that households which enlarge their business through an influx of capital keep their kids in school longer than households which do not.
I did a small survey of business on Lake Victoria, Kenya and found that businesses’ second most common stumbling block (the first was security) was a lack of access to capital. They need money to expand. Microfinance schemes, with their very high interest rates, are not a viable option to most, though loans at more favorable terms to the right people might make a huge difference.
True development will require a dramatic shift in focus for the development world. We will have to face the reality that business is good for human health, that the negatives of entering the cash economy are small compared with the negatives of trying to fruitlessly maintain a pre-colonial lifestyle in a post-colonial world and that Africans themselves are willing to step up to the plate.
Clearly, if American politics are any indication, no one knows.
Not being a political philosopher myself, much of philosophical the debate on justice, markets and freedom is foreign to me, though I’ve long been interested in the work of John Rawls and his monumental 1971 work “A Theory of Justice.”
Rawls explored the limits of distributive justice, that is, how goods, services and rights can be equitably pass around in a society to maximize benefits to both individuals and society. In a Rawlsian society, each individual has equal access to the same rights and opportunities as all others. Moreover, inequalities (assumed to be inevitable) are arranged such that they benefit the weakest members of society.
Nozick, penned the 1974 book “Anarchy, State and Utopia” (which I have not read) in response to Rawls’ work. He argued that goods and services can only be justly distributed through pure free exchange. The state then serves merely to facilitate exchange by protecting the rights of property.
Srinivasen rightly indicates that most large democracies are decidedly Rawlsian in construction, but that ideologies, particularly in the United States, are swinging toward Nozick (though people might argue that we are becoming more Randian than Nozickian).
Rawls and Nozick represent the two poles of mainstream Western political discourse: welfare liberalism and laissez-faire liberalism, respectively. (It’s hardly a wide ideological spectrum, but that’s the mainstream for you.) On the whole, Western societies are still more Rawlsian than Nozickian: they tend to have social welfare systems and redistribute wealth through taxation. But since the 1970s, they have become steadily more Nozickian. Such creeping changes as the erosion of the welfare state, the privatization of the public sphere and increased protections for corporations go along with a moral worldview according to which the free market is the embodiment of justice. This rise in Nozickian thinking coincides with a dramatic increase in economic inequality in the United States over the past five decades — the top 1 percent of Americans saw their income multiply by 275 percent in the period from 1979 and 2007, while the middle 60 percent of Americans saw only a 40 percent increase.
Nozick’s libertarian position (like Rand), however, leads to some inevitable moral quandries. Is pure “free trade” always fair? Is the exploitation of workers facing few other employment options, and the resultant maximization of profit fair to society?
The problems with Nozick’s position is a problem inherent in neo-classical assumptions that supply and demand markets are based on perfect information between buyers and sellers. It is assumed that buyers know all prices and can make informed choices on purchases.
We know this not to be the case, which is exactly why health markets in the United States are so inefficient and prices so vastly inflated. If one is unconscious from a heart attack, does one really have time to shop around for the best deal possible? Our market approach to health care in the United States has created a system that is neither fair nor efficient.
But the issue here is one of morals. Is it acceptable that we allow for example, loan sharks to exploit the desperate conditions of poverty, or that we allow the poor to sell their organs (or even their daughters), or that we allow the Wal Marts of the world to pay absurdly low wages and offer few benefits, simply because they operate in unemployment-endemic areas of the country?
to concede that there is more to freedom than consent, that there is such a thing as nonviolent exploitation, that people shouldn’t be rewarded and punished for accidents of birth, that we have moral obligations that extend beyond those we contractually incur — this is to concede that the entire Nozickian edifice is structurally unsound. The proponent of free market morality has lost his foundations.
Clearly, there is no happy medium between equality and freedom. What one might call freedom, for example, from exploitation, will be seen as an imposition of the other to realize his or her economic dreams.
OK, gotta go.
“A telling example is “microcredit”, the programme of small bank loans to poor women in the global south. Cast as an empowering, bottom-up alternative to the top-down, bureaucratic red tape of state projects, microcredit is touted as the feminist antidote for women’s poverty and subjection. What has been missed, however, is a disturbing coincidence: microcredit has burgeoned just as states have abandoned macro-structural efforts to fight poverty, efforts that small-scale lending cannot possibly replace.”
I have long been skeptical of microcredit (or its sibling, microfinance, I will use the terms interchangeably). Microcredit claims to offer a seemingly simple solution to the problem of female disenfranchisement. It allows poor women access to seed funds with which they can start tiny, income generating businesses. In the past, women has entered microcredit schemes and started cel phone rental business, small shops, textile based businesses and handicraft manufacture. Borrowers are able to then return the money from profits generated from the business. Borrowers return the money with interest.
The problem with microcredit is what’s normally touted as its strength. Microcredit aims to raise the economic profile of women, by empowering them to start small self-proprietorships selling phone time, manufacturing small handicrafts or textile products, or tiny corner stores (dukas).
Anyone who has ever visited Africa knows that once a business idea shows promise, multitudes of people will show up doing the exact same thing. Lines of women selling the exact same tomatoes for the exact same price in the exact same place to the exact same market are not uncommon.
Hypercompetition, though, causes prices to drop and margins to plummet so that no one makes any money. Profits are so low, that the recipients of microcredit wind up doing nothing more than paying back the loan prinicipal and interest so that the only entity that makes money is the lender.
Worse yet, medium sized businesses which might introduce efficiencies and provide reasonable wages and benefits are bumped out of the market, opportunities for employment and diversification of products are missed and the entire economy stagnates. Microcredit’s bottom up strategy directly encourages this phenomenon.
The emphasis on economically empowering individuals, of course, comes straight out of neo-classical economics. “The invisible hand” will turn the tide of developing economies through the hard work of a collection of individuals. The cynic could even evoke a Randian ideal: the lady with the best fruit stand will win.
And this is where I have the greatest problems. Keywords like “empowerment of women” are fine. We should, of course, encourage women to be independent both socially and economically. However, there is nowhere in the world where development has occurred simply by lending women a few dollars at exorbitant interest rates.
Microcredit doesn’t live in a bubble. In fact, it’s part of a number of strategies which are largely doomed to fail, and will do nothing but allow a significant percentage of Africa’s poor to stay right where they are. Strategies aimed at small scale agriculture risk throwing the entire sector backward by impeding the development of medium scale farms which consolidate costs and risks (some writers have even referred to the “primitivisation” of the African agricultural sector).
By far, the worse effect of microlending (and the greater neo-classical, bottom up strategy) is that it lets African governments off the hook. Rather than encouraging governments to standardize and enforce taxation, develop standards of business and production, and create systems which offer medium scale businesses access to credit, microcredit does the opposite.
It idealistically assumes that the “invisible hand” of the individual will correct for any structural problems which may already exist (which should sound like something from the American Republican Party). Microcredit undermines the ability and agency of governments to improve the economic profile of their states.
Yes, the elites worldwide are making more money than ever before, while incomes among their less well-to-do countrymen stagnate. As an American, I see this everyday, especially on payday. That this is occurring even in poor countries is hardly a surprise, as the richest in every country are linked to the same global system which disproportionately rewards them.
Developing countries have it worse off, though, as they often don’t have systems in place to effectively tax the wealthiest and reinvest the money to reinvest into the economy. Poor countries are hobbled by bad policy which allows the wealthy to accumulate more and more wealth, which they spend and store abroad. Moreover, poor countries don’t proactively expand access to capital for small and upcoming entrepreneurs and they don’t effectively invest in infrastructure that might help support new ventures.
To me, it’s not the system of global capitalism that’s at fault here, but rather the lack of checks on rent seeking behavior of political elites in developing countries that has allowed this to happen.
But I digress.
The graph on the left is from an excellent report from the Conference Board of Canada, which takes on this specific question: Is inequality becoming better or worse globally. In the report they specifically ask whether inequality between countries is becoming better or worse.
The Gini coefficient is a measure of inequality within groups. It ranges from 0 to 1, 0 being complete equity and 1 being the case where a single person owns all the resources of the area of interest. Among developed countries, equitable Sweden has a Gini of .25, while unequal America has a Gini of .45. Many of the most unequal countries on the earth are in Africa. Angola’s Gini is .58.
The graph above tracks the Gini, or the measure of inequality of Gross Domestic Product between countries, over time. You can see that GDPs around the world were consistently unequal (or at least as unequal as incomes in the United States) until approximately 1982, at which time many of the wealthiest countries of the world started to take off. The Gini starts to come down a bit around 2000, and has been dropping consistently since then.
From 1960 to approximately 2000, economies in Africa were mostly stagnant. I suspect that the decrease in the Gini post 2000 represents some of the growth that we’ve seem throughout Africa since then, along with the rise of India and Brazil.
The world GDP Gini is now approximately .52, or a little more unequal than incomes in the United States or as unequal as incomes in Paraguay, Swaziland or Chile. While I’m encouraged that the number is going down, we clearly still have a lot of work to do.
Some inequality is unavoidable. Some countries simply have more resources available to them, are better are certain industries than others and aren’t mired in intractable social, political or public health problems. However, at present global inequality is at a level that does no one any favors at all. At present rate, we will probably never get back to where we were in 1960, though as GDPs increase overall, life might just end of better for everyone anyway. A high level of inequality, however, means that some states will have disproportionately high political power and some none at all.
SO, Question: Is global inequality getting better or worse? Answer: better, but after years of getting worse.
I really have no idea what to write about…… but I’ll ramble about worldwide economic inequality for a while
If I don’t do this regularly, my lackluster skills become even more lackluster.
The NYT today (is it even useful for me to talk about the NYT when people can just read it themselves?) featured an op-ed from Economist Joe Stiglitz. Stiglitz, one might remember, wrote an excellent book on the 2008 financial crash. In it, he detailed point by point all the events that led to the worst economic crisis the US had seen since the Depression. “Freefall” is like “Inside Job” for people who read books.
Stiglitz has long been concerned about the growing divide between rich and poor in the US, so much so, that he wrote another great book “The Price of Inequality.,” mostly focusing on domestic issues. Policies which encourage loose markets disproportionately favor the wealthy, creating economic imbalances which marginalize the poor even further. While free market advocates claim that loosening markets liberates the citizenry from government, in fact, by freeing markets, politics shape the market itself, to the advantage of those who hold power. The market, then, becomes as tyrannical as all of those bed time baddies American right wingers keep warning us about. It’s worth noting that in the US, we allowed investment bankers to write banking policy for much of the run up to the crash.
We know that inequality is on the rise in the United States, but Stiglitz argues that America, as a global financial powerhouse, has encouraged a worldwide trend toward financial loosening, exacerbating economic disparities in other countries as well.
…widening income and wealth inequality in America is part of a trend seen across the Western world. A 2011 study by the Organization for Economic Cooperation and Development found that income inequality first started to rise in the late ’70s and early ’80s in America and Britain (and also in Israel). The trend became more widespread starting in the late ’80s. Within the last decade, income inequality grew even in traditionally egalitarian countries like Germany, Sweden and Denmark. With a few exceptions — France, Japan, Spain — the top 10 percent of earners in most advanced economies raced ahead, while the bottom 10 percent fell further behind.
I took issue with his listing Japan as an exception. Though Japan’s widening divide between rich and poor may not be as dramatic as in the US, Japanese people on the bottom rungs have watched their incomes fall over time. A slow down of the economy and the deflation era has disproportionately impacted low wage earners there.
Excessive financialization — which helps explain Britain’s dubious status as the second-most-unequal country, after the United States, among the world’s most advanced economies — also helps explain the soaring inequality. In many countries, weak corporate governance and eroding social cohesion have led to increasing gaps between the pay of chief executives and that of ordinary workers — not yet approaching the 500-to-1 level for America’s biggest companies (as estimated by the International Labor Organization) but still greater than pre-recession levels. (Japan, which has curbed executive pay, is a notable exception.) American innovations in rent-seeking — enriching oneself not by making the size of the economic pie bigger but by manipulating the system to seize a larger slice — have gone global.
He is entirely correct here. Just about every facet of life has been morphed into a commodifiable good worthy of investment and trade on financial markets. This has long impacted agricultural products and created a trend of increasing prices and violent price swings that do little to raise the lives of the international poor.
African countries, lacking the stabilizing effect of steady manufacturing sectors like those in Asia, depend almost entirely on the resource market. Though they experience significant growth when worldwide prices go up (as has been the case for the past decade), a sudden drop in the price of commodities can quickly wipe out last year’s gains. This is similar to the situation of very poor households in the US. One might have plenty of work this week, but be fired the next. Planning for the future is impossible one isn’t sure whether one will have the cash to eat next week.
I’d like to see a comparison of worldwide trends of inequality. Though it is true that African economies were left in the dust until the early 2000′s, and the continent is in a period of excellent growth at the moment, I’m wondering whether the pace of growth is slower than what it would be without loose international commodity markets and financialization.
Of course, one might also argue the the loosening of markets around 2000 is what caused the current trend in growth.
OK, I wrote something. Thanks.
I took serious issue with the statement, tried to make my case, but was unable to convince the participants that Africa’s poor economic performance cannot exclusively be blamed on western exploitation. I consider the statement to be completely uncontroversial. Someone even suggested that I might be a racist (!) after I insisted the point.
So, I make part of my case here, with the caveat that I am going to talk about Africa. It’s debatable whether all “developing countries” can be generalized through Africa, but it’s not debatable that there are a lot of developing countries within Africa.
Going that route, we have to subject any conversation about Africa to a bit of skepticism. Africa’s diversity rivals that of even diverse Europe or Asia. Home to thousands of languages, one of the most diverse ecologies on the planet, a large landmass with a non-uniform distribution of resources, a multitude of governmental systems, histories and peoples, Africa is probably the most difficult to generalize area of the planet.
Not unlike Asia, what the countries and peoples of Africa do share, is a history of warfare, political upheavals and colonization. In contrast to Asia, the economy of the continent as a whole has fared poorly for much of the past 50 years.
I will not develop a deep history of the continent and its economic woes. I will, however, in three posts,
1) dispel the common myth that Western exploitation is exclusively to blame for Africa’s generally poor progress using Botswana as a test case,
2) show that growth in East Asia in the past decades has not resulted in a depressive effect on developed economies, showing that the West does not lose when others gain,
3) finally, argue that the west loses more from a poor Africa than it gains.
So here we go. Though I feel that I will gloss over a lot of points (for space), I also recognize that this can get really long and windy, so forgive me.
Rather than focus on Africa’s failures, which, on the surface, seem entirely deterministic in nature, let’s for a moment focus on its successes. This approach will make sense, since we can learn a lot about failures from the things that people get right.I want to take us to Botswana. Bostwana was born facing some serious challenges:
1) it’s landlocked so it has trouble trading goods
2) it’s mostly desert so it can’t really grow anything
3) it has hardly any people so it can’t draw on large amounts of human resources.
Botswana was formerly colonized by the Brits, gained independence in 1966 and, at the time, held the dubious distinction as one of the poorest countries on the planet and even Africa (per capita GDP of $70 (current)). At independence, it was in the bottom ten of all economies in the world, had only 12 km of paved roads, and a nearly 80% illiteracy rate.
Worse yet for Botswana, is that is cursed with ample reserves of diamonds and other minerals. But where other resource rich countries such as Angola descended into warfare and economic chaos, Botswana claims consistent growth since the time of independence and is now an upper middle income country with a per capita GDP of nearly $16,800 in 2012, 6000km of paved roads, and a nearly 90% literacy rate. Bostwana’s Gini index is still quite high and it’s been hit hard by HIV, but despite the negatives that every country has, it can still claim to be one of the most successful countries on just about every indicator in all of Africa.
How did Botswana maintain consistent economic growth while (almost) every other country in Africa has approximately the same GDP in 2013 as it did in 1960?
A *really, really* simple list:
1) It reinvested its money. Bostwana leveraged its diamond resources to develop infrastructure and human resources all across the country.
2) It created systems which fortified property rights among its citizens, reducing the likelihood of conflict.
3) It maintained a policy of saving of surpluses to hedge against inherent volatilities in commodity prices.
4) It actively encouraged the development of other sectors, making the assumption that one day, the diamonds will run out.
5) It managed its banking sector to benefit its population. The Bostwanan central bank lends considerable amounts of money at favorable terms to encourage various sectors. It can do this because of 2) (collateral) and 3) (money to lend and decreased risk to the state’s finances) and which supports 4) (diversification of the economy).
Note that all of these are policy decisions. Even if Botswana were receiving unfavorable terms from mining companies, Botswana, with its policies of transparent banking, government reinvestment and the maintenance of savings would still have allowed it to maintain consistent growth over time. Remember, Botswana started from the bottom. ANY gain, even at the most exploitive level of terms, would have been an improvement and would have led to consistent growth.
It’s worth also noting, that, since the Botswanan government is more effective, that it can also leverage better terms with potential investors. It’s also important to note that Botswana’s resource boom didn’t come until the 80′s, when it signed a contract with South African diamond mining giant De Beers. It had more than 14 years before its diamond boom to get it right, and it did.
The moral here?
1) African countries are not doomed to poverty.
2) Pro-development government policies are possible, even in economies which rely on resources.
3) Most salient, even if De Beers had offered the most awful and exploitive of terms, Botswana’s economy would still have grown consistently over the past five decades due to Botswana’s pro-development government.
4) Assuming the successes of Botswana can be extrapolated to the failures of other resource rich countries (like Angola and the DRC), resource exploitation is not the reason African countries’ economies have been (mostly) stagnant for past decades.
I’m convinced that metal is associated with economic growth (you need electricity to have metal) and Botswana has it.
Recently, I got the pleasure of seeing a lecture by Morten Jerven, a faculty member at Simon Fraser University’s School for International Studies. He has written a wonderful book, “Poor Numbers” which asks some very important questions.
Measure of the gross domestic product (GDP) of a country are important to understanding one country’s economic health as compared to another. We use these measure all the time to track relative differences between economies, and to figure out if countries’ economies are improving and degrading from year to year.
The measure is, of course, not without its problems. Gross Domestic product usually measures the sum total of the value of all market goods within a country at a particular time. For developed countries with established systems of taxation, this is not a difficult measure to produce.
Developing countries, however, particularly in Africa are quite bad at collecting taxes from their citizens, they often have opaque informal business sectors which dominate their economies and weak governments which don’t fund their census and statistical offices very well.
This is, of course, exactly the question that Jerven explores in his book. Given the rudimentary infrastructure of data collection and recording in developing countries, how do we know what we think we know about developing world economies?
Global funding agencies and governments make billion dollar decisions based on the recorded GDP of a particular country. Yet, it’s astounding that few of these agencies or anyone else who uses these measures often never asks whether the numbers are valid.
Three years ago, Ghana’s GDP doubled in one day, due to a change in the way that the GDP was calculated. Ghana went from being a developing country, to a low middle income country in one day. This year, Nigeria is also going to revise how it calculates its GDP. We expect that Nigeria’s GDP will rise considerably over night.
These measures matter. The World Bank considers concessionary loans on the basis of the GDP. If a country has too much money, it no long qualifies for special lending terms. This is a serious issue for countries that want to embark on development projects, or, in the case of resource economies (which most developing countries are), weather rapid fluctuations in market prices.
Jerven pointed out in his book that the rankings of countries by GDP do not agree between the three measures, outside that the Democratic Republic of Congo is the poorest country in the world. Liberia is the second poorest country in the world according to Penn, number seven according to Maddison and number 22 by the World Bank.
Though ranking is interesting, I was interested to see if the measure agreed with one another over time. If we were to measure economic growth of, say, Liberia over time, even if the basic dollar measures did not agree, the change from year to year might. For math people, the intercept might differ between two lines, but the slope might be the same.
Lacking time, I could only download two of the tables, the World Bank’s and Maddison’s. I wrote a script that would extract all of the GDP measure for each country from 1960 until 2012. I then compared the two measures by calculating the correlation coefficient for each country’s series.
I found that most of the country’s series agreed, with correlation coefficients in the .85 to .99 range. However, there were some glaring exceptions. The map to the right shows correlations coefficients for each country, colored by level. Tanzania stick out prominently, as does Namibia, the Central Africa Republic and Sierre Leone. Some of them are even in the negatives.
The political mess that is the CAR does not surprise me at all. Tanzania with its mostly righteous government and wealthy Namibia do surprise me very much.
I will have to explore this further, but until then, the take home message is that not all measures are created equal.
Policy makers in the US and Europe seized on the paper as proof that cutting stimulus and social programs was a good idea, and proceeded to do so with abandon. Of course, right wingers wanted to cut money to social programs anyway, and would have done so regardless, but the paper was held out as scientific proof that it was a solid plan of action.
I won’t comment on how strange it was that Republicans were interested in science at all, given recent efforts to politicize the NSF and micromanage the grant decision process.
The trouble was that the results presented in RR were shown to be based on the selective use of data. Thomas Herndon, a 28-year-old graduate student, obtained the dataset from RR themselves and couldn’t reproduce the results.
In fact, he found that the only way to accurately reproduce the results in RR’s paper that showed that high debt restrained economic growth was to exclude important cases. When including the missing data, high debt was associated with consistently positive growth, though modestly slowed.
Originally, I took the view that this was a case of sloppy science. RR had a dataset, got some results which fit the narrative they were pushing and didn’t pursue the matter any further. Reading Herndon’s paper, however, I changed my mind.Herdon took the data and did what any analyst would do when starting exploratory analysis, he plotted it (see figure on the right). Debt to GDP ratios and growth are both continuous measures. We can do a simple scatterplot and see if there’s any evidence that would suggest that the two things are related.
To me, this is a pretty fuzzy result. Though the loess curve (an interpolation method to illustrate trend) suggest that there is *some* decline in growth overall, I’d still ding any intro stats student for trying to suggest that there’s any relationship at all. There is no way that RR, both trained PhD’s and likely having the help of a paid research assistant, didn’t produce such a plot.
Noting that the loess curve drops past approximately 120%, I calculated the median growth for each country represented. Only 7 countries have had debt to GDP ratios greater than 120% in the past 60+ years: Australia, Belgium, Canada, Japan, New Zealand, the UK and the United States. Out of these only two had (median) negative growth: Belgium (-.69%, effectively zero) and the United States (-10.94%), which has only had a debt to GDP greater than 120% one time. All other countries has positive growth under high debt, even beleaguered Japan. New Zealand can even claim a strong 9.8% growth under high debt. The US, then, is a major outlier, possibly bringing the entire curve down.
As this doesn’t fit their story, RR’s solution was to categorize debt to GDP ratios into five rough classifications, and calculate the mean growth within each group. This is a common trick to extract results from bad data. It’s highly tempting for researchers (and epidemiologists do it far too often), but a bad idea to present it without all the caveats and warnings that should go with it.
I’m not surprised that ideologues such as RR would be so keen to produce the result they did. After all, they published the popular economics work “This Time Is Different: Eight Centuries of Financial Folly” where they try to suggest that budget policy of the US in 2013 should somehow be informed by the economy of 14th century Spain.
I am, however, surprised that reviewers let this pass. If I would have been a reviewer, I would have:
1) pointed out the problems of categorization, where data doesn’t require it
2) noted that categorizing the data (or even plotting it) tears out temporal correlation. For example, one data point from 2008 (stimulus) may be put in the high debt category, but another from 2007 (crash) in the low debt category. While budgets of one year may have little to do with the budget of another, the economy of one year is likely related to the economy of the previous year.
3) questioned the causal mechanisms behind debt and growth. This is obviously a deep question for economists (and not epidemiologists), but of particular import. When does the economy start to react to debt? I’m pretty sure that there is a lag effect as spending bills tend to space disbursements over the course of the fiscal year.
The RR debacle should be a lesson, not only to economists, but to all scientists. While we may always be under pressure to produce results and hope that those results fit and support whatever position we take, shoddy methods don’t get us off the hook. In RR’s case, I would call this fabrication. A good many studies are merely guilty of wishful thinking, but the chance always exists that someone will come out of the woodwork and expose our flaws. After all, that’s what science is all about.
I was just checking out an article by Mark Buchanan on Bloomberg about the need to abandon the idea of economic markets as being inherently stable.
For several decades, academics have assumed that the economy is in a stable equilibrium. Distilled into a few elegant lines of mathematics by the economists Kenneth Arrow and Gerard Debreu back in the 1950s, the assumption has driven most thinking about business cycles and financial markets ever since. It informs the idea, still prevalent on Wall Street, that markets are efficient — that the greedy efforts of millions of individuals will inevitably push prices toward some true fundamental value.
Problem is, all efforts to show that a realistic economy might actually reach something like the Arrow-Debreu equilibrium have met with failure. Theorists haven’t been able to prove that even trivial, childlike models of economies with only a few commodities have stable equilibria. There is no reason to think that the equilibrium so prized by economists is anything more than a curiosity.
It’s as if mathematical meteorologists found beautiful equations for a glorious atmospheric state with no clouds or winds, no annoying rain or fog, just peaceful sunshine everywhere. In principle, such an atmospheric state might exist, but it tells us nothing about the reality we care about: our own weather.
This is true. Markets are inherently unstable beasts,as was proven by the crashes of 2000 and 2007/8. Personally, I am an advocate of free markets. The trouble is that no one can agree on what a free market is.
I recently watched a compelling lecture by development economist Ha Joon Chang, where he pointed out (rightly) that “free markets” are truly in the eye of the beholder, pointing out that even the most ardent of free market supporters in 2013 wouldn’t support the free marketers and libertarians who complained of the implementation of child labor laws in the early 20th century.
I should say, then, that I’m an advocate of the “freeest markets within reason” or “the freest markets as will support the moral ideals I hold to be important.” That is, the freeest markets as will support the protection of individual rights to freedom of expression and political thought, the preservation of equal opportunity through education and health, access to capital and social mobility.
Mr. Buchanan points put that where other sciences have accepted that there is no such thing as stability in the rest of the universe, desperate economists and their politically backward fans stick to the idea that, despite evidence of the irrationality of humans in every other space, markets are “self stabilizing.” That humans are rational (they are not) and customers can democratically select optimal prices vs. availability (untrue).
First, I am drawn to the incredible volatility of prices in areas that have the least power to influence them (developing countries).
If there were ever an example of the undemocratic nature of unbridled markets, food in developing countries would be it. Buyers and sellers are legion, yet bodies across the sea set prices with little regard to the demands of the many. In Sub Saharan Africa, stability is a fantastical dream.
Second, I am thinking of the work being done on complex systems in finance, specifically that coming out of Princeton at the moment.
SOME people aren’t waiting around with their heads in the sand, but rather are working to describe the phenomena of finance volatility, noting the increased complexity of financial markets in 2013. It would seem that deeper linkages between financial systems, though necessary, induce the very real problem of volatility. Ignoring it or pretending it doesn’t exist won’t make it go away.
Blaming government regulation and calling for a return to 19th century finance doesn’t work well either.
But that’s enough….