Capitalism and the poor

by Matt_Bishop on August 11, 2006

The best recent books about capitalism and the circumstances in which it helps poorer people escape their poverty are Hernando de Soto’s “Mystery of Capital” and Rajan and Zingales’ “Saving Capitalism from the Capitalists”. I met with Fred Mishkin yesterday, who has convinced me that his new book – ” The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich”
will be a worthy complement to these two.

Certainly, I suspect it will be a lot more insightful than the other globalisation book about to appear, Joseph Stiglitz’s “Making globalisation work”, the follow up to his anti-World Bank rant, “Globalisation and its Discontents”.

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. The great strength of “Saving Capitalism from the Capitalists” – a book that deserves to be much more widely read – is its focus on the problems that flow from the existence of an entrenched elite that writes the rules of capitalism to secure its own position, rather than to allow the bulk of the population to participate fully.

Mishkin, who says he will not be allowed to give interviews about his book under impressively strict conflict of interest rules once he becomes a governor of the Federal Reserve in a few weeks, takes the story one step further, arguing that opening a country up to international capital markets in the right way is crucial to growth. As he notes, so many countries have botched the process of joining the world financial system that many are tempted to conclude it is better not to try – Argentina being a recent example. But, says Mishkin, rightly I think, doing so sentences them to remaining a poor, low growth economy.

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.

Mishkin is particularly worried about Latin America, where he fears a serious reversal of the process of building sound institutions. The outcome of the current Mexican stand-off may be particularly important – not because Calderon, the declared winner of the Presidential contest, is necessarily the better candidate (his closeness to powerful business interests may limit his capacity to be a reformer) but because 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, a country not hitherto known for its strong independent institutions. Here’s hoping the election commission stands firm.

{ 64 comments }

1

John Emerson 08.11.06 at 6:46 pm

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?

2

Ajax 08.11.06 at 7:00 pm

All the successful countries you list, John, have their own access to the sea. Has their yet been a case of succesful economic development by a non-European country which is landlocked?

3

AA 08.11.06 at 8:18 pm

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)

4

yabonn 08.11.06 at 8:18 pm

bzzbbzzbzz capitalism and the circumstances in which it helps poorer people escape their poverty bzzbzzbzz the follow up to his anti-World Bank rant,

At this point of this fascinating liturgy, i feel compelled to write that I, for one, sincerely think the Economist is annoying.

Too much negativity, for sure. Let’s all get back to hoping – for the good reasons! – that the guy who happens to be right wing wins in Mexico.

5

will u. 08.11.06 at 8:29 pm

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

Isn’t that how it always works?

6

Seth Edenbaum 08.11.06 at 9:14 pm

“How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich”

wow

7

Daniel Nexon 08.11.06 at 9:17 pm

“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?

8

Louis Proyect 08.11.06 at 10:18 pm

I want to commend crookedtimber for introducing a humor column.

9

LuegoExisto 08.11.06 at 11:09 pm

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

10

albert 08.12.06 at 1:58 am

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.

Someone should have reminded Becker that the US generally isn’t considered part of Latin America before he made this statement.

11

Tim Worstall 08.12.06 at 5:25 am

“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.)

12

John Emerson 08.12.06 at 6:07 am

There are those, or course, such as the ludicrous and incompetent Stiglitz (who like Michael Moore is fat), that say that opening up to international capital is in fact not intrinsically a good thing.

13

David Weman 08.12.06 at 6:18 am

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.

14

David Weman 08.12.06 at 6:20 am

Crap, I shouldn’t have just pasted urls. Sorry.

15

tebbitt 08.12.06 at 6:43 am

I want to commend crookedtimber for introducing a humor column.

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

16

Steven Poole 08.12.06 at 8:07 am

Having myself read Stiglitz’s Globalization and its Discontents, I cannot see that it is a “rant”. Indeed, Stiglitz cheerfully points out that “Opening up to international trade has helped many countries grow far more quickly than they would otherwise have done” – of which one would have thought the poster would approve, were he not apparently so offended by Stiglitz’s empirical criticisms of the outcomes of some institutions’ policies.

17

Mike Maltz 08.12.06 at 8:14 am

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.

18

Daniel Nexon 08.12.06 at 8:58 am

Tim Worstall:

“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.”

I think you might want to consider, Tim, the differences between a treaty that obligates member states to meet fiscal targets and an argument that international capital markets are a good idea because if states want to reap the benefits of joining them they need to make fundamental changes in their domestic institutions. The latter is the worst sort of economists functionalist argument. 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. But, no, then he wouldn’t be defending deregulation of capital markets.

Economists love to dismiss political economists, but at least political economists look at this sort of argument and recognize that all of the heavy and difficult lifting comes in getting institutional change.

19

Nell 08.12.06 at 9:13 am

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.

20

engels 08.12.06 at 10:58 am

Speaking of idiotic rants, this is probably as good a place as any to draw attention to the fatuous review Stiglitz’ book received in The Economist. Summary of the economic arguments

i) It has a bad title as it’s mainly about the IMF.
ii) The dedication – to Stiglitz’ parents – irritates the reviewer.
iii) Stanley Fischer is a Good Guy.
iv) The IMF made mistakes but surely nobody else could have done any better because the IMF is Not Stupid.

21

engels 08.12.06 at 10:58 am

22

John Emerson 08.12.06 at 11:09 am

The general attitude of economists and “The Economist” toward their past failures and disasters seems to be the usual “Let’s move on and not dwell on the past. Let’s look forward, and not look back. Let’s avoid fingerp[ointing and the blame game.”

Try this link

23

almostinfamous 08.12.06 at 11:25 am

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

best comment goes to Mr Proyect :)

24

Declan 08.12.06 at 2:16 pm

Huh, I figured Engels was exaggerating about the review in the Economist, but apparently not. Stiglitz must have realy touched a nerve to provoke such a silly, knee-jerk response.

At any rate, even if we were to change the meaning of the word ‘rant’ so that Stiglitz’s ‘Globalization and its Discontents’ qualifies, surely it was a rant against the IMF, not the World Bank.

25

Chris Bertram 08.12.06 at 3:00 pm

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.

26

engels 08.12.06 at 3:30 pm

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. But oddly enough The Economist doesn’t think much of Krugman’s recent output either (and gives similarly flippant reasons). I’m not sure whether they are apostates or just self-hating economists. It doesn’t seem to matter much to Economist types: there’s plenty more where they came from.

27

Seth Edenbaum 08.12.06 at 3:39 pm

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

Science writer?

28

engels 08.12.06 at 4:26 pm

Science writer?

Yeah, like Richard Dawkins. (Red rag… Bull… Takes cover…) To be clear: Stiglitz isn’t; Krugman is. But that doesn’t mean Stiglitz’ book is just a “rant”. As John implies at #1 it’s an account of Stiglitz’ experiences. And I don’t think Chris will want to argue that interesting books can not be egotistical.

29

abb1 08.12.06 at 4:28 pm

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.

30

Colin Danby 08.12.06 at 4:37 pm

This does set a CT record for hack cliches (“escape poverty,” “entrenched elite,” “death blow”) used without irony. But it’s revealing in another way.

Look at the first sentence: capitalism is imagined as an historical agent, a powerful thing that can help poor people. Drop down two paragraphs, and there’s “an entrenched elite that writes the rules of capitalism” — suddenly capitalism is something whose rules can be recast by whoever holds political power. Once you have these two opposed notions you can explain *anything*: (a) capitalism represents the promise of prosperity for all, and (b) capitalism is a poor abused thing that never gets a proper chance, because somebody has always gotten an institution wrong.

Really, “capitalism” appears to mean very little more here than business and commerce in general. Once you read back through substituting “business and commerce” for capitalism the post’s vacuity becomes evident.

Yes, being able to start and build enterprises is a good and useful thing! Yes, growth and capital investment are often associated with use of foreign financial resources! Yes, financial systems can be fragile, and there are interesting policy questions about financial regulation and policy in cases like Mexico and Argentina. And with a little work you can find some linkages between the policy and institution questions and the questions about what makes life easy or hard for small businesses, though doing that properly requires more regional expertise than I think Professor Mishkin possesses.

Perhaps the largest problem is that anyone still takes “globalization” seriously as a subject. Like this journalist’s notion of capitalism, it’s a term that’s elastic enough to fit almost any argument, polysyllabic enough to give banality the gloss of insight.

31

John Emerson 08.12.06 at 4:57 pm

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.

32

radek 08.12.06 at 5:22 pm

Or you’re trolling the wrong website. It’s no fun when everyone agrees with you.

33

nick s 08.12.06 at 5:39 pm

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?’

34

Lopakhin 08.12.06 at 5:59 pm

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

Well for what it’s worth, I thought your references to the body size of prominent critics of free-market capitalism verged on the gratuitous. But that’s all the argument you’re going to get today.

Nick S – well, as far as I can see, De Soto’s basically in favour of the Western model of property rights being extended to everyone, so I guess he wouldn’t have too much time for other models of ownership, ‘customary’ or otherwise. Do correct me if I’m wrong though.

On his work, my main problem with it, on top of the suggestions that attempts to put it into practice have had rather mixed results, was his proposition that there is a huge economic potential in the poor areas of less developed countries, and that the only thing holding it back is the absence of governmental enforcement of property rights. 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? If there’s such potential economic activity, there would be profits to be made. Private companies could offer insurance policies offset against future earnings which slum dwellers might expect to make from the effective recognition of their property rights. Or some similar mechanism could be found. Oh well, that’s my 2p’s worth.

35

John Emerson 08.12.06 at 6:03 pm

Radek, this has never happened here before.

36

Seth Edenbaum 08.12.06 at 6:08 pm

Eng,
Since when is economics a science?
(economists opinions of themselves don’t count.)

37

Lopakhin 08.12.06 at 6:09 pm

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.

38

engels 08.12.06 at 6:17 pm

Since when is economics a science?

1849

39

Seth Edenbaum 08.12.06 at 6:41 pm

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!

40

engels 08.12.06 at 7:01 pm

Seriously, whatever your opinion of economics, like evolutionary biology and unlike fashion design, it’s a subject which depends on highly technical concepts and arguments expressed in mathematical language, and Krugman does an excellent job, in English, of bringing these to the lay reader. He doesn’t just tell you what economists think, he helps you, as far as possible, to think like an economist. That’s what I think the best popular science writers do.

Stiglitz doesn’t do this, as Chris says, but I think his book is worth reading for other reasons.

41

a different chris 08.12.06 at 8:16 pm

>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

42

SqueakyRat 08.12.06 at 11:20 pm

Stiglitz’s target is the IMF rather than the World Bank. Obviously you haven’t even glanced at the book.

43

radek 08.12.06 at 11:32 pm

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.

44

Seth Edenbaum 08.12.06 at 11:36 pm

Engels, you’re getting close to intelligent design [original intent?]

“like evolutionary biology… a subject which depends on highly technical concepts and arguments expressed in mathematical language”

If economics were a science, its rules would apply to Italy as they do in Sweden, and even my arch enemy, the evil J. Bradford DeLong says that ain’t the case. The social sciences use mathematical models but are defined more by what is put into those mdels than by mathematics itself. Evolutionary biology may be a science but evolutionary psychology is not.
And the stock market is closer to poker than blackjack.

You were great on Hitchens. But I’d apply the same to most economists: the lack of self-awareness. And in economics, unlike mathematics, that can weaken an argument.

45

Tim Worstall 08.13.06 at 1:49 am

“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.

46

abb1 08.13.06 at 9:32 am

Radek, isn’t it just the common sense that capital liberalization tends to erode the ‘good institutions’: labor, environmental, free press, democratic institutions, etc? Seems to me you can emphasise the benefits of the ‘good institutions’ OR benefits of neoliberalization, but not both together.

A government can’t serve two masters at the same time; it’s either capital or social harmony.

Of course normally it’s a trade-off of some sort, but in a sensible tradeoff unconditional “open up to international financial markets” just gotta be out of the question; it’s gotta be ajar at most.

47

engels 08.13.06 at 10:11 am

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.

48

Seth Edenbaum 08.13.06 at 10:19 am

eng,
no problems
peace,
s.

49

serial catowner 08.13.06 at 11:13 am

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.

50

Jane Galt 08.13.06 at 11:37 am

Radek, isn’t it just the common sense that capital liberalization tends to erode the ‘good institutions’: labor, environmental, free press, democratic institutions, etc? Seems to me you can emphasise the benefits of the ‘good institutions’ OR benefits of neoliberalization, but not both together.

Huh? Where are all these places that had a free press and democratic institutions until they opened themselves up to international capital flows, or privatised their state-owned oil companies? Or for that matter, great labour and environmental protections? As far as I know, the process generally works in reverse: when countries get rich, they get more freedom, more environmental protections, better working conditions, and so forth. What examples are you thinking of?

51

engels 08.13.06 at 12:01 pm

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…

52

abb1 08.13.06 at 12:20 pm

Jane, Radek’s comment (as well as the quote or paraphrase in the post) suggests developing the institutions first and then opening up.

We can argue about the ways good institutions have been created historically or how they can be developed, but that’s beside the point.

I’m only saying that if the institutions have already been developed somehow, then ‘opening up’ is likely do damage or destroy them, that’s just the way international capital works. It doesn’t like local labor regulations, environmental laws, unions, other democratic institutions. With all things equal, international capital will always prefer strong, stable pro-capital authoritarian system, a-la Singapore or something. Or maybe this is what they mean by ‘good institutions’, I don’t know.

53

buermann 08.13.06 at 2:02 pm

“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.

54

radek 08.13.06 at 3:28 pm

buermann – come on, they’re recovering from a freakin’ crisis, reversion to the mean, employment of unutilized capacity and all that. Once they get back to their 1999 level it’s gonna peter out (provided…). The point is: closed capital markets = ON AVERAGE low growth.

55

radek 08.13.06 at 3:41 pm

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.

56

abb1 08.13.06 at 4:30 pm

Radek, fair enough; this could be a description of Park’s Korea, Pinochet’s Chile or Franco’s Spain – all associated with neoliberal economic miracles. That’ll work. But if this is what Mr. Mishkin and others have in mind, they should make it clear. When people read about “right domestic institutions”, “good governance” and so on, they probably imagine something slightly different. Or at least I did.

57

abb1 08.13.06 at 4:47 pm

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.

58

buermann 08.13.06 at 4:51 pm

“Once they get back to their 1999 level it’s gonna peter out”

Whatever I was snarking at it wasn’t “becoming a poor, low growth economy” but “remaining”.

But ok, looks to me like they’ve recovered just fine, the poverty rate is back down to or below pre-crisis levels which is still disturbingly high, unemployment is the lowest in over a decade, yadda.

“closed capital markets = ON AVERAGE low growth”

But they’re great for recovering from open ones?

:P

59

radek 08.14.06 at 12:49 am

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.

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abb1 08.14.06 at 1:48 am

Radek, I’m not saying that “authoritarian right wing regime = neoliberal economic policy”; of course one can be authoritarian right wing and non-neoliberal.

I’m only saying that for a third-world country to become a neoliberal success story, it’s the best if it’s authoritarian and right wing.

Do you mean Ireland in the 90s? It could’ve had something to do with EU subsidies, no?

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John Emerson 08.14.06 at 1:13 pm

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.

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tebbitt 08.14.06 at 2:05 pm

I’m only saying that for a third-world country to become a neoliberal success story, it’s the best if it’s authoritarian and right wing.

How do you come to that conclusion? As I understand it, many of the East Asian economic success stories were authoritarian and protectionist.

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abb1 08.14.06 at 2:50 pm

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.

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RETARDO 08.15.06 at 1:52 pm

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, a country not hitherto known for its strong independent institutions.

If it got the election wrong, what good is the commission? Oh, it would then be a corrupt institution giving self-determination of the people a well deserved thumb in the eye — which is never not a good thing for Globalistas.

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