By Keffyalew Gebremedhin – The Ethiopia Observatory (TEO)
Since the 2007/08 financial crisis, economists have encouragingly become bolder in self-critically examining the failure of their wizardry. While abandoning unwanted habits and practices takes efforts and time, nonetheless, the confessionals have become customary mainly via international/regional seminars/conferences and individual publications.
Such encounters take place with faster frequencies in this or that part of the world. The shamans are seen doggedly trying to correct their ignorance or unfiltered mistakes – in no less measure aggravated by unaccountable government policies and actions. The hope is that these conclaves are valuable and that they help expanding and facilitate deeper knowledge and understanding of growth and development, as well as charting saner courses of action for the future.
Graced by high quality speakers and presenters and eager participants, the United Nations World Institute for Development Economics Research (UN-WIDER) also celebrated its 30th anniversary from September 17-19, 2015, in which I had the great pleasure and privilege of participating.
“[T]he fate of our societies lies in equity” was the sentiment uttered by Nobel Laureate, international personality and former President of Finland Martti Ahtisaari – an indication of the importance he attached to WIDER’s research work. He addressed this specifically to younger researchers and participants – a thing that has weaved well with the conference’s official objective, i.e., mapping the future of development economics.
WIDER intimated that the conference is aimed at ‘identifying and debating’ the changes that have been happening in the world since its founding in 1985 and how thinking in the developing world has evolved since. The organizers have sought the conference’s objective to be REFLECTION. It is a challenge thrown especially to experts to help see and show younger researchers what lies ahead before the world community, more particularly in the study of global development and in identifying newer challenges.
A clarion call in this regard is made by a number of speakers and participants, including the Deliverer of WIDER Annual Lecture 19 – the avuncular Nobel Laureate Prof Amartya Sen. He appealed to economic researchers to look forward with science and ethics. At the age of 82, he looked frail, and yet witty and mentally as sharp as ever.
Prof. Sen acknowledged how fast time has fleeted, some progress registered and the role played by WIDER research work having made enormous contributions; among others, this included the recognition today of hunger and deprivation as legitimate issues.
He drew all his energies to emphasize the point that this is no time to declare victory. It has come to me as his recognition that progress on the ground and around the world is still slow. This, however, has not deterred him from praising WIDER’s 30 years of contributions, especially in creating global awareness, because of which many of the issues have today become part of policy discourses and actions in national life in a number of fields.
In anecdotally explaining past difficulties regarding issues and policy measures, he related his experience following publication of his book Poverty and Famine in 1981. Prof. Sen said it received “a rough ride”, seemingly casually. What happened is that, among others, the director of FAO would not touch it with ten-ft pole. In a BBC exchange, the director of a principal United Nations office dismissed it as “the worst book he had read in his life.”
With amusement, Sen said he asked him “if he meant the worst book on the subject?” The director retorted, “No! This is the worst book I have read in my life on any subject!”
Unfazed by this, the Nobel Laureate said he told them that he accepted the criticism “as a distinguished position to occupy!”
He brought this to show that WIDER research, whose integral part Amartya Sen had been from the start has overcome numerous challenges and contributed to the present we are now. The Institution also had to work in changing the social convention of the world and families.
Sen observed that families and individuals were proud of practicing in gender discrimination because of ignorance; not surprisingly, he added, even at some point WHO had included household work in its published work to foster measures for intensity of work, simply as sedentary and non-strenuous, as if mothers and women in general that handle a lot had no significant contributions.
WIDER, he said, has helped facilitate entitlement and the “definition of human capability based approaches” as part of any policy measures. By so doing, the professor recalled – keep agriculture in mind, for example – as WIDER’s early work that has made it possible to ensure recognition of the need to bridge the distance between food production and food entitlement. This the professor underlined is one further step in the direction of tackling an aspect of deprivation.
In terms of today’s realities and speaking of the 2007/08 crisis, no one nation can escape the good and bad of whatever happens in the United States. In one form or another, it affects the rest of the world. For instance, for the rest of the world to take actions within their respective nations, say, to improve the performance of their economies, they would be obliged to first consider what is happening in the US economy, probably a couple more other places too. This is consistent with what political scientists have always posited that great powers are listened to in self-interest.
Growth and development has also enabled China to acquire growing economic power and influence. We saw what happened in the latest mild currency shocks that suddenly came one early August morning in 2015. This came in the wake of the cut by China’s central bank of its daily reference rate by 1.9 percent. The ripple effects instantly ricocheted through the global economy.
In brief, the policies that bode population of the world well or ill in the global economy are made in far fewer capitals. These decisions find especially developing countries on the receiving end of the ‘Good, the Bad and the Ugly’ – with neither an input of their own or insurance by the other side for any damages! In a more privileged sort of sense, they call it integration within the world economy!
Consequently, it is no surprise that the thought of economists caucusing for their confessionals should often bring to memory the event of October 23, 2008. This is day of the unexpected drama that revealed itself in the humbling of Federal Reserve Chairman Alan Greenspan in the United States Congress. On that date, the god-like Greenspan – also dubbed the ‘Maestro’ – was confronted by the daring and briefest question: “Were you wrong?”
There is no doubt that any sensible person would agree that the question was apt, right and justifiable. I mean, it is exactly right, given what has happened to the economy, the subsequent joblessness and hopelessness, the countless bankrupted firms, city governments and disordered lives across the globe.
Chairman Greenspan reluctantly responded: “Partially”, as The New York Times reported at the time.
In further statement, however, he explained “that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.”
Don’t be surprised! Responsibility for damages ended there, since the huge global responsibility he has shouldered has not been burdened by Pavlovian stimulus-response relationships, at least, as far as Congress is concerned!
True, hindsight – as they say – is god-like with 20/20 vision. And yet, to this day, I could not get my head around, at least, how and why his own 1998 caution known as ‘irrational exuberance‘ did not elicit in him similar reaction regarding the excesses of the housing and the mortgage industry. His arrational exuberance, issued in 1998 in a public speech, relates to the signal the Chairman hinted a decade earlier regarding the escalation of asset values and the consequent onset of the dot.com bubble.
Nevertheless, some try to explain his extraordinary failure in his devotion to or being follower of Ayn Rand’s philosophy of Objectivism. Of course, the philosophy of Objectivism, as he even described it in his book is commitment to championing “laissez-faire capitalism as the ideal form of social organization.”
While its power had not come out for rescue of the global economy in 2007/08, in his autobiography, Alan Greenspan: The Age of Turbulence – Adventures in a New World (2007), he concedes that Rand – who had nicknamed him ‘The Undertaker’ – had
[P]ersuaded me to look at human beings, their values, how they work, what they do and why they do it, and how they think and why they think. This broadened my horizon far beyond the models of economics I had learned.
And yet from the point of his trade, it is still unclear especially when already in 1936 Maynard Keynes had scribbled caution to one and all that how it escaped the Maestro. Keyens explicitly wrote his caution in The General Theory of Employment, Interest and Money, stating:
Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.
Keynote Speaker at the UN-WIDER Conference, Nobel Laureate Prof Joseph Stiglitz, underlined “the 2008 crisis showed that markets on their own were neither efficient nor stable.” By this, he alluded to the huge losses incurred from inadequate regulation that resulted in massive government intervention to save the economy. Even there, the irony to the professor is past attempts to reduce the role of government in the economy ended up in increasing it, received with it its “major deficiencies in governance, even in the US.”
In his presentation, Prof. Stiglitz argues, economic advice to developing countries was aimed at making them move towards “The standard macroeconomic model that preoccupied much of the economics profession in the decades before the crisis”, which ‘was based on extreme simplifications — the perfect market model.’
This was his stepping stone to officially endorsing in such a conference the developmental state. One may not wonder and give not hoot to this; or others may not equally wonder and not be able to claiming even that a few weeks ago Pope Francis has condemned capitalism as “the dung of the devil.”
For some nations, that is not the issue. To be more specific, for instance, The real difference is that in the case of Ethiopia, which had made mention of in his presentation, as he did in the past, his association, endorsement and the resultant misguided support and the mere fact of lending his name has gone to encouraging TPLF’s repression. This has made Joseph Stiglitz anathema to Ethiopian elites, including this writer. However, this does not mean that the professor did not have reasonable point regarding the role of the state and the danger of reforms especially in the financial sector.
In his presentation at the WIDER Conference, I have come across some qualifications, including emphasis on the need for redefined checks and balances. This comes out of lessons and experience that the balance and checks within the state has not worked adequately, as has not the rule of law, even in the developed countries.
This time, I have heard him emplacing emphasis on the importance for reforming the state and the need to strengthen the role especially of civil society, the media, think tanks, transparency and the institution of strong right-to-know laws, fighting corruption, etc., the very thing the TPLF developmental has vowed to stamp out and shown in gruesome practices. For Stiglitz, implicit in taking such position, the starting point, he says, is whether the state fulfils its leadership responsibilities and meets it obligations in providing the public goods.
As far as Africa is concerned, even before the echo of The Economist‘s ‘Africa Rising‘ tune has died down, the concern the Nobel Laureate brought says, “More recently, there has been a race between population and poverty reduction: the percentage in poverty has gone down, but the absolute numbers of impoverished have increased.”
This has already given rise to some serious concerns by both other speakers in the conference and outside for some time now that I have come across. In fact in confirming this, for instance, in the case of Ethiopia – an enigmatic nation associated with faster growth and still confusing for investors hungry to reap profits – has also needed to be closely eyed by the United Nations and others, especially those that have need to rely on early warning systems.
Moreover, FAO in May 2015 in The State of Food Insecurity in the World has revealed that, before the onset of the current drought and hunger, the scope of which the regime has been supressing, 32 percent of Ethiopians are undernourished. I do not think anyone would persuade me this is not a serious obstacle for a nation in a competitive world and for that matter that does not have quality education.
Furthermore, thanks to Mr. Ahtisaari for drawing the Conference’s attention by testifying how much Prof. Amartya Sen’s May 12, 2011 article, littered with data: Quality of Life: India vs. China on The New York Review of Books. The former president said that piece had influenced his thought like no other.
I could not wait until the conference was over and got my hand on it. I read it and it has blown me off now to even believe more that the prospect of a nation with hungry people or suffering nutrition moving up in the ladder in competition with other nations is out of the question. That seals the fate any nation.
One thing visible in Prof. Stiglitz is his burning desire to see more openness and systemic reforms, mostly focussing on “our understanding of the balance between the market and state in promoting development.”
In summing up where things have gone wrong, he expressed his concerns about the harms done by many economic theories, weak or non-existent rule of law, institution problems, among others. In that regard, given the level of knowledge and experience so far acquired – and the last crisis at the back of our mind – he seeks the next task to be reexamination of the role of the state, involving “broadening of objectives and instruments.”
Lesson has been acquired from past mistakes, he opines, where “standard theory saw preferences, beliefs and technology as fixed, while they are changeable and many of the interventions that can help change these have relatively little costs.”
Most importantly, he emphasized the relevance of metrics, since what is measured affects the subsequent action to be taken. To avoid any such problems, he recommends the use, among others, of “dashboard of indicators”, consistent with the state of a country and its realities.
Further, while acknowledging that in divided societies checks and balances may not work, Joseph Stiglitz suggests their use by ensuring that they are designed well. Also he indicated that in societies marked by high inequality, democracy may not function in preventing government failure and capture.
In recent years, especially after the 2007/08 financial crisis my own thinking is that we are now living in a world where the production of goods and services has assumed second place, precedence given to finance economy. The winners in this system are predetermined – those with capital and fat inheritances.
All said and done, even after Fed Chairman Ben Bernanke’s 2004 speech in which he characterized the time, growth and economic stability as Great Moderation was subdued, the policies adopted having made sure that the super rich continued to get richer. The Great Moderation refers to the reduction in the volatility of the business cycle since the mid-1980s – Reagan and Thatcher era, which was said to have characterized “a New Era of economic stability” (2004 speech)
In a similar tone, only last April as incomes go and families suffer, billionaire Warren Buffett repeated same optimism pointing out that he does not see any weakness in the US economy, except the temporary business cycles and that the recovery since 2009 is great tribute to the US policy-makers, although such claim does not sit well with Fed Chairman Janet Yellen. Already on March 27, 2015, she expressed the view “if the economy had truly returned to normal, the economy should be booming”.
The interesting picture of the global economy as we see it at present, no matter what happens in the rest of the world, for the super rich the climbing higher up is simply a ‘cakewalk.’ Mr. Buffett reminded CNNMoney that in 1982 the total aggregate wealth of the super rich was $92 billion. In 2015, it has reached $2.3 trillion – 25 fold increase increase.
Surely, the problem is not the rich getting richer, but the growing gap and the perpetual inequality it has spawned. This endangers freedom, democracy, peace and stability everyone seems to want, hold tight and die to attain. There is no certainty that the appropriate lesson has been taken, including by those that are responsible for the crisis.
The former World Bank Vice-President and National School of Development of Peking University is coming to address that problem from the prespective of New Structural Economics Prof Justin Yifu Lin. His starting point is that since World War II growth and development has bypassed the majority of developing countries.
The main reason for this is that developing countries are, as he put it, “trapped in low-income or middle-income status”. This to a point reinforces the the above concerns. His view is that this same situation would continue as before, unless developing countries change their approaches.
The reason for that is largely due to the global system being sucker of capital from developing nations, which economists describe as the Lucas Paradox. As a result, the evidence he says since the end of WWII among nearly 200 developing economies shows:
(i) Only two have moved from low-income to high income stage. China may be the third one by 2020;
(ii) Only thirteen have moved from middle-income to high-income status.
This blog had an article on New Structural Economics titled Economist Justin Yifu Lin on state-led economic growth, dated November 18, 2012, which is available for perusal.
In sum, the former Finnish president Martti Ahtisaari was upfront in calling for action, which is cheered by participants:
We must challenge the view that GDP always increases the wellbeing of people or that stronger democracy would automatically ensure that economic growth benefits all.
(to be continued)