Capitalism and the poor

Certainly Stiglitz became an idiot not worth bothering with the minute his hands-on experience turned him against the ruling dogma. Next! You’re history, Stiglitz!

The big successes of third world development so far are Taiwan, S. Korea, Hong Kong, and Singapore, with Japan an antecedent, and with India and China coming up on the horizon. Have any of those nations followed the World Bank model?

All of the successive countries you list, John, consume considerable quantities of tea. Has they’re yet been a case of succesful economic development by a non-European country which consumes significant quantities of fermented milk? Oh, and what do you think about Cassavetes? I really need to know.

Mishkin is particularly worried about the Ukraine, where he fears a serious reversal of the process of building sound institutions.

(misprint corrected)

“an entrenched elite that writes the rules of capitalism to secure its own position”

Isn’t that how it always works?

“That is, above all, because to successfully open up to international financial markets, a country has to develop the right domestic institutions, including rule of law, central banks and good governance.”

So opening up to international capital markets is good because in order to open up to international capital markets you need important prerequisites to sustainable economic growth?

Is the book this stupid or did something get lost in your write up?

The discussion of Latin America reminded me of what Gary Becker recently said about crony capatalism in the region:

One legitimate reason for the opposition to capitalism in Latin America is that it frequently has been “crony capitalism” as opposed to the competitive capitalism that produces desirable social outcomes. Crony capitalism is a system where companies with close connections to the government gain economic power not by competing better, but by using the government to get favored and protected positions. These favors include monopolies over telecommunications, exclusive licenses to import different goods, and other sizeable economic advantages. Some cronyism is found in all countries, but Mexico and other Latin countries have often taken the influence of political connections to extremes.

I also found this comment interesting:

http://www.becker-posner-blog.com/archives/2006/05/moving_left_in.html#c081554

“So opening up to international capital markets is good because in order to open up to international capital markets you need important prerequisites to sustainable economic growth?”

Why not? Much the same has been said about the Euro. In order to join you need certain macro situations like a sustainable public debt, not too large a budget deficit and so on, all things which one would presume are good things in themselves. Indeed, many argue that the major benefit of the euro is that they force governments to do these intrinsically valuable things which they don’t actually have the domestic political power or desire to do without such external stimulus.

(Whether they are in fact intrinsically valuable is an entirely different point.)

I dug up these for my own sake, might as well share them.

Says that De Soto’s prescrptions
http://www.slate.com/id/2112792/
Yglesias comment thread
http://yglesias.typepad.com/matthew/2005/02/the_trouble_wit_1.html
Says that the de soto inspired reform didn’t pan out in Peru:
http://www.samefacts.com/archives/_/2004/05/what_ive_learned_so_far_at_the_law_society_meetings.php

Reasonable defenses are made, but it’s no miracle cure at least, and unlikely to be implemented properly or do much good in the short term.

I want to commend crookedtimber for introducing a humor column.

Congratulations on the “unrepentant marxist” gimmick, louis — always cracks me up.

For a fascinating (and evidence-based) view of the relationship between health and capitalism, go to http://www.ted.com/tedtalks/tedtalksplayer.cfm?key=hans_rosling&flashEnabled=1 and see what Hans Rosling, professor of international health at the Karolinska Institute, has to say.

Matt B: if the loser, Lopez Obrador, succeeds through public protests in overturning the result, that would deal a death blow to the election commission, the establishment of which was a huge step forward for institution building in Mexico

Amlo and the people who voted for him are not seeking to “overturn the result” but to secure a full recount, which is the only way in which the results will be respected.

Approving and conducting a full recount would also hugely improve the population’s trust in the electoral commission. Institution building doesn’t mean squat if the people don’t trust the institutions, and Mexico’s history gives them precious little reason to do so.

Or, as the candidate himself says in yesterday’s NYT op-ed: Without a crystal-clear recount, Mexico will have a president who lacks the moral authority to govern.

http://www.economist.com/books/displaystory.cfm?story_id=E1_TTGVDJG

well, that was entertaining. i havent had such a hearty laugh in a while. thanks Mr Bishop.

best comment goes to Mr Proyect :)

Put me in the anti-Stiglitz camp. I bought G+iD when it first came out and opened it with some enthusiasm – expecting to be enlightened. But I was very disappointed. It is incredibly egotistical — lots of it about Prof S — and, instead of bothering to explain to the reader what was actually wrong with the policies of institution X, it often simply informed him or her merely that said institution acted as if Stiglitz’s own research hadn’t existed. This may very well be true and even deplorable, but S never really makes the effort to explain his ideas properly to the lay reader.

“Granted: as a popular science writer, Stiglitz ain’t Krugman”

Science writer?

That is, above all, because to successfully open up to international financial markets, a country has to develop the right domestic institutions, including rule of law, central banks and good governance.

Once they have all these good things, why would they then want to destroy them all by inviting predators, the economic hitmen? Something’s wrong here.

You know, as a troll I really expect someone to take issue with what I say.

I guess the revolution is over and we won. Or maybe the vast majority of right-thinking people have gone on strike.

What I most like about de Soto’s work is its emphasis on the legal system, and the importance of it being accessible to the poor and supportive of their de facto property rights.

There are many pointed critiques of de Soto, but I think his arguments are interesting in a situation like that of Israel/Palestine, where a western model of title-based property ownership was dumped on top of a local model of customary ownership. It’s somewhat reminiscent of Eddie Izzard’s take on colonialism: ‘do you have a flag?’

Radek, this has never happened here before.

Actually, having thought more about that, I can see roughly where you’re coming from on the Israel/Palestine issue. Thinking of the sale of land by large landowners to the Zionist pioneers, etc. My guess is that De Soto’s argument with regard to this would be not that the rights of landowners to sell their land should be restricted in some way – that would be very much against the spirit of his economic approach – but that maybe land reform would have been a good idea, so that Palestinian peasants had more rights over the land on which they worked and lived. Not too sure where he stands on land reform though so I’ll leave that one be. Btw, maybe it’s worth mentioning that the model of land ownership in Israel is quite a socialised one, an overhang from the socialist outlook of the state’s early governments. Much of the land is either state-owned or in the hands of something called the Jewish Agency.

Eng, you’re having too much sex. Give me one of those girls and take some time off.
If every literary critic gets to pick one field for elevation, I choose
Fashion design: The real gay science!

>they force governments to do these intrinsically valuable things which they don’t actually have the domestic political power or desire to do

Ahem. Nice phrase, “domestic political power”.

Let’s all quietly think about what constitutes “domestic political power” in a democracy and what shutting off its influence really is in practice.

Hint: not a democracy

Well, I thought the Economist review was spot on, and I like Stiglitz a lot (for reasons other than the book).

I do think DeSoto oversells his idea to a point where he makes it look like a panacea for all of developing countries ills. I think there are modest gains to be had on average, and perhaps even substantial gains for the poor but giving property rights to the property rightsless isn’t going to turn Bolivia into Australia. But getting an economy growing involves getting a lot of little things right and every bit helps so his ideas shouldn’t be dismissed either.

It’s, um, intriquing, how many people above blithly dismissed Matt’s arguments (or those of the authors) with nothing more than a snicker. The very idea that open capital markets MIGHT provide some benefit seems to be an amusing sort of heresy to many here. You want an example of a country that benefitted tremendously from international capital flows? Argentina. Yes, I’m serious – if you’re guffawing then you have no business in this discussion.

These days however I’m more in the “good institutions first” camp. Crappy institutions + free capital flows = too much risk. Obviously I’m not convinced by Mishkin’s argument since I haven’t read it, but I don’t see a necessary connection between free capital flows and improvements in institutional infrastructure. Yes, yes, I know the markets are supposed to “discipline” the government to do the right thing, but unlike with the Euro there’s no obvious channel for enforcing reform and in the end all you might get is a lot of Suharto style “blame the foreigners” cries when something goes wrong. In any case, in principle it’s a testable propositions: do countries financial and other institutions improve after a capital account liberalization? Of course in practice both quality of financial institutions and even the concept of “openess to international capital flows” is very very tricky to define or measure, other econometric issues and details aside.

There are some restrictions on capital flows however which are just plain bad/stupid and which it has been shown put a significant drag on an economy’s growth. Restrictions on the trade in foreign currency for example. Only plausible explanation for these, aside from sheer incompetence is corruption. So as far as that goes, yes, liberalizing certain aspects of the capital market would improve teh institutes.

“Perhaps Mishkin might simply have argued that states should adopt central banks, the rule of law, and good governance because one of the positive externalities of doing so is more capital investment from abroad.”

Sure. My entirely trivial point was that governments sometimes like to take useful and even necessary actions while stating that they are doing so only under outside pressure. Rather like management calling in the consultants, telling them what to say and then waving the consultant’s report at the workforce to prove that certain actions are necessary.

“My understanding of the libertarian tradition in economics – to which, as far as I can see, he belongs – is that it holds that, if the state absents itself from a certain aspect of life, market forces will and should step in and do as good a job or better. In which case, why doesn’t the private sector step in here?”

Depends what you mean by libertarianism. If you mean Lew Rockwell’s stormtroopers, perhaps. If you mean the modern day version of Classical Liberalism (which is rather what I take it to be) then the delineation and enforcement of property rights is one of the things that we actually have the State for: it’s one of the primal duties, along with such things as defense and a criminal legal system.

Seth – I’m afraid you should probably be having this argument with someone else. I don’t think economics is a science in the sense that physics is and I more or less agree with your second para.

Initially, the idea that the Election Commission could validate itself by blessing a stolen election…stuck in my craw.

But the comic potential of the first paragraph triumphed- imagine a cartoon book illustrating how capitalism “helps poorer people escape their poverty”- no end of laughs in those pages!

Even that, however, is eventually eclipsed by John Emerson’s feeling that, as a troll, he expects someone to take him seriously.

John, there’s something about the concept of ‘troll’ that you just don’t understand.

Rather like management calling in the consultants

So, Tim, are you saying that capital account liberalisation is wasteful and expensive, involves obscene amounts of money being paid to a bunch of unproductive idiots, is defended by the most egregious, incomprehensible bullshit and inevitably results in lost jobs? I always had you down as a kind of neoliberal…

“Argentina being a recent example. But, says Mishkin, rightly I think, doing so sentences them to remaining a poor, low growth economy.”

Argentina, annual growth since 2003: 8.8% 9.0% 9.2% 7.3% 4.0%

Well above the regional average every year since they became a recent example, conclusion: they’re doomed, doomed I tell you.

abb1 – “Good institutions” here pretty much mean “institutions” which have been found to promote economic growth; rule of law, low level of corruption, government transparancy, political stability (democracy don’t seem to matter much).

Labor laws, environmental laws, unions and “other democratic institutions” (? – those have nothing necessarily to do with democracy) while they may be “good institutions” for other reasons (one can argue…) generally don’t do much for economic growth (and honestly, I don’t think they by themselves do much to hinder it – only when they’re tied up with corruption, for example when the only union in a country is basically an arm of the government)

Also it’s not the case – believe it or not – that opening up to foreign capital necessarily leads to an erosion of the institutions you mention. I think there’s a lot of ad hoc-ing fallac-ing going on here. It may be the case that foreign capital locates itself where there are few labor and environmental regulations. But usually these places had few labor and environmental regulations before foreign capital put its first dirty toe on them.

Oh, and from a different angle – it’s interesting how those East Asian economies performing noeliberal miracles under authoritarian regimes turned into a bust just as democratic institutions developed there. Could be a coincidence of course, but I don’t think so.

abb1 – I think you’re stretching things quite a bit in order to have “authoritarian right wing regime = neoliberal economic policy”. Park’s Korea and Pinochet’s Chile work, but Franco’s Spain didn’t liberalize till 1960 or so, which makes for twenty years of being closed to international capital. The Argentinian junta, like Peron before them, were also pretty autarkic. On the other side of the counter example you have Ireland, Hong hKong, post-Pinochet Chile and Botswana. This isn’t to mention the obvious ones like US, Europe and Australia (yes, 19th century US did have the tariff but both capital and labor flowed freely).
So no, I don’t think Mr. Mishkin has in mind Pinochet and Park when speaking of good institutions. You’re trying to sneak in a false association here.
As far as East Asian economies and democracy go, no, wrong again. The crisis hit democratic Korea and Taiwan as well as autocratic Malaysia and Indonesia. The reason why Korean and Taiwanese growth has slowed down is simply that they’ve already gotten quite rich and you just don’t see rich countries growing faster than a couple percentage points per year. Diminishing returns and all that.

—

buermann – “But they’re great for recovering from open ones?”. Obviously the point is that Argentina would be growing regardless of whether it had open capital markets – there’s a lot of slack in the economy.
However, in the midst of a crisis capital controls can buy you time, which can be of the essence. They also might hurt you later on so it’s a cost benefit calculation. Malaysia seems to be doing alright though. The thing is once the worst is over (as in Argentina) it probably doesn’t matter much as most foreign capital has already fled and no new capital wants to come in. What causes the problems in the first place is when you have open capital markets, fixed exchange rates and you try to monkey around with your interest rates at the same time. Sooner or later (sooner) you’ll get in trouble (Argentina). Even if you don’t mess with your interest rates, fixed ER + free capital can get you into trouble just because investors might get suspicious that you’re doing some monetary monkeying around (Korea and Taiwan). This is way simplified but it’s pretty much how it works. So if you want capital flows you gotta dollarize, yeninize, dukatize or float, or otherwise lock up that printing press.

Note also the usual ambiguity as to what capital flows are. Abb1 is mostly talkin’ foreign direct investment, buermann portfolio investment. There might be good reasons to sometimes restrict the latter. The problem with the former, from point of view of poor countries, is that there’s not enough of it, not that there’s too much.

Catowner, I was expecting someone to defend the original post. Not necessarily respond to me. But seemingly almost no one except Worstall wanted to do that before Radek showed up.

The word “troll” was used ironically. I was objecting to the dismissal of Stiglitz, which I’ve seen elsewhere and seems to represent another instance of economics’ unwillingness to learn anything from outside economics.

I don’t see any contradiction here, tebbitt.

I’m saying that if you (a poor third-world country) want to be both neoliberal and successful then you should also be authoritarian. What happens to authoritarian + protectionist is irrelevant to this hypothesis.