The Growth of Nations

Martin Wolf is The Financial Times chief economics commentator. He recently wrote a review of"How Rich Countries Got Rich...and Why Poor Countries Stay Poor" by Erik S. Reinert and also "Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World"by Ha-Joon Chang. It was a passionate (but controlled)"rave review". If you have any interest in the subject - one that was a very lively interest of every Irish person until about 10 years ago - then I would urge you to read it in full.

Here are some extracts:

..The broad question is the one Erik Reinert states in his title: How Rich Countries Got Rich... and Why Poor Countries Stay Poor. Reinert is a Norwegian professor who now teaches at Tallinn, Estonia. Ha-Joon Chang, a well-known Korean development economist, teaches at Cambridge. But both give strikingly similar answers to this question.

Both state that the priority in development is rapid and sustained growth. Only industrialisation can deliver such growth, because industry is the only sector in which rapid and sustained rises in productivity are feasible. Furthermore, to industrialise, countries must upgrade their technological and managerial capabilities, which can be achieved only if they are able to nurture infant sectors. That requires protection, they both argue, as has been the case in every successful economy of the past half-millennium.

Tragically, they argue, the “neo-liberal hegemony” - the broad consensus on liberal trade and freer markets of the past quarter century - has deprived countries of these valuable tools. The result has been a development disaster, particularly in Latin America and Africa, where the International Monetary Fund and the World Bank have run amuck. The World Trade Organisation and a host of one-sided so-called free trade agreements further constrain the ability of developing countries to adopt sensible policies. ....

[Reinert]... points to the success of protection against imports since the Renaissance. Reinert argues that, for poor countries, specialisation in line with comparative advantage means specialising in poverty. ... free trade is suitable only for countries at the same level of development.

So, in respect of Africa - surely the most important and urgent case for treatment - Reinert recommends internal free trade and external barriers to trade, in place of what he condemns as the mere “palliative economics” of millennium development goals, bed-nets and ever more aid....

... I agree with both authors that ....some policies that now affect developing countries are dangerous: restrictions on easy access to intellectual property are perhaps the most important....

South Korea and Taiwan were exceptional cases. The argument that success will follow the overthrow of the neo-liberal consensus and the return of protection is nonsense. But the authors are right that those who argued that free trade alone is the answer were wrong. There are no magic potions for development. Developmental states can work. Many fail. But some may succeed.

Above all, developing countries should be allowed to try, and so learn from their own mistakes. Countries should be warned of the difficulties of following South Korea’s example, but allowed to do so if they wish....

Chang is right that some of the constraints imposed upon developing countries, notably on intellectual property, are unconscionable. Most should enjoy the benefit of open markets from the rich, but be allowed to pursue their own paths, from laissez-faire to its opposite. They will make many mistakes. So be it. That is what sovereignty means.

The comments of Dani Rodrik, my favourite on-line economist at present, on the review are interesting, too, as all of his contributions, especially on this subject, are.

Why the PDs Did So Badly ? Some Facts to Remember

In another characteristically great piece of analysis which he has titled "Fun, Fun, Fun ‘Til Her Daddy Takes Her Calculator Away", Michael Taft shows again how the groups who chiefly benefit from the State schemes most vulnerable to PD propaganda are the same ones who tended to vote PD. (The PD spin is mine, not Michael's).

Here are some extracts from a long piece:

We can all have fun in Household Budget Survey land....

Where else can you find that in the bottom 40% income groups, no one buys limes ? Or that the poorest 10% spend a higher proportion of their income on church contributions than anyone else? Or that the richest 10% spent nothing on funeral expenses (the rich must ‘die harder’)?

...I’d like to try my hand at a small set of figures: the extent to which higher income groups’ spending patterns attract higher state subsidies. For instance, if the state subsidises house-purchasing more than it does rent, we can get an idea of where that public expenditure is going by analysing the spending patterns of the different decline groups. Similarly with VHI relief or a whole group of other categories. ...

Public subsidies are heavily skewered to house purchase as opposed to tenants. ...[and]Nearly ¾ of mortgage interest relief goes to the upper-half of the adult population (the top four deciles of households equals 50% of all adults).

Relief for health insurance is only slightly less regressive though this may be an under-estimate as a number of low and even middle income households may not get the full tax relief if they are not fully in the tax net (these figures only relate to expenditure and not to the actual distribution of tax relief).

Taken together, these two reliefs cost the Exchequer (that is, the taxpayer – which is everyone; from the richest to the poorest) over €500 per year (that’s before the Government increased mortgage interest relief in the last budget – therefore, it’s [now]higher). It is questionable whether the vast majority of people are getting ‘value for money’ here.

It has long been established that pension contributions are highly regressive. The CSO gives us an update...While the top 25% of income earners account for nearly 70% of private pension expenditure – the distribution of tax relief would probably be even more regressive as those on the top rate get 41% relief while those on standard rate only get 20%. And this means a lot of money – employees and self-employed pension relief costs in the order of €1 billion a year (and that’s not counting the pension funds’ full tax exemption).

So the distribution of over €1.5 billion in public expenditure is skewered to the highest income groups. By contrast let’s take a look at one particular tax – refuse charges.

Charges for this absolute necessity of domestic life are skewered in favour of high income groups. This extremely regressive tax (or levy or charge) has such an impact that many low income households pay less in income tax or PRSI than they do refuse charges. In any event, the lowest income group pays five times more than the highest income groups as a % of gross income, even though they have nearly 18 times less income.

Please bear that last point in mind the next time you are tempted to get "sniffy" with those who object to being charged under the "polluter pays" principle, as I confess that I often am (despite the baby brother's repeated correctives).

I recommend going to Michael's website/RSS feed to read the full thing, if only to see the graphics which tell the stories even more clearly.

Let's Have More Poverty !

The proposed new law on immigration currently under consideration by the U.S. Congress is really throwing up some interesting discussions, so much so that it is difficult to select the best for you.

Economist Arnold Kling - I hope that he will forgive me, but I cannot help thinking of him as a relative of Klinger, the cross-dresser in M.A.S.H. - has a good oneto start you on:

...we ought to try to double the U.S. poverty rate in the next decade.

The way everyone else looks at it, if a Mexican comes here legally and earns $350 a week, poverty has increased, regardless of whether he is earning 10 times as much as he was before.

I think we ought to try to find a humanitarian way to "increase" this type of poverty.

This is just as applicable to, say, Romanians coming to Ireland, so, shall we all say

"Bring 'em in !- Make Romanian Poverty History!"?