Development Scheme, Accounting Standards and the Iraq War

William Easterly, Professor in NYU, wrote in WSJ,

There is a sad law I have noticed in my economics career: the poorer the country, the poorer the economic analysis applied to it. Sub-Saharan Africa, which this month marks the 50th anniversary of its first nation to gain independence, Ghana, bears this out.There has been progress in many areas over the last 50 years -- ... yet the same poor economics on sale to Ghana in 1957 are still there today. Economists involved in Africa then and now undervalued free markets, instead coming up with one of the worst ideas ever: state direction by the states least able to direct.African governments are not the only ones that are bad, but they have ranked low for decades on most international comparisons of corruption, state failure, red tape, lawlessness and dictatorship. Nor is recognizing such bad government "racist"... Instead, corrupt and mismanaged governments ... reflect the unhappy way in which colonizers artificially created most nations, often combining antagonistic ethnicities. Anyway, the results of statist economics by bad states was a near-zero rise in GDP per capita for Ghana, and the same for the average African nation, over the last 50 years.Why was state intervention considered crucial in 1957? Africa was thought to be in a "poverty trap," since the poor could not save enough to finance investment necessary to growth. Free markets could not get you out of poverty. The response was state-led, aid-financed investment. Alas, these ideas had already failed the laugh test... The U.S. in 1776 was at the same level as Africa today, yet it escaped the poverty trap. The same was also true for the history of Western Europe, Australia, Japan, New Zealand and Latin America. All of these escapes from poverty happened without a state-led, aid-financed "Big Push." In the ensuing 50 years, there have been plenty more examples of poor countries which grew rapidly without much aid -- China and India (who each receive around half a percent of income in foreign aid) being the most famous recent examples. Meanwhile, aid amounted to 14% of total income year in and year out in the average African country since independence. Despite these reality checks, blockbuster reports over the last two years by the U.N. Millennium Project (led by Jeffrey Sachs), Mr. Sachs again in his book "The End of Poverty," the U.N. Development Program (UNDP), the Tony Blair Commission for Africa, and the U.N. Conference on Trade and Development (Unctad) have all reached what the UNDP called "a consensus on development": Today Africa needs another Big Push. Do they really think nobody is paying attention?Africa's poverty trap is well covered in the media, since it features such economists as Angelina Jolie, Madonna, Bono and Brad Pitt. But even Bill Gates ... expressed indifference to Africa's stagnant GDP, since "you can't eat GDP." Mr. Gates apparently missed the economics class that listed the components of GDP, such as food. The World Bank and the International Monetary Fund have good economists who have criticized state intervention. Under the pressure of anti-market activists, alas, they have soft-pedaled these views lately in favor of ... U.N.-led Millennium Development Goals...The cowed IMF and the World Bank never mention the words "free market" in thousands of pages devoted to ending poverty. ... World Bank economists are so scared of offending anyone on Africa that they recite tautologies. The press release describing the findings of the 2006 World Bank report "Challenges of African Growth" announces: the "single most important reason" for Africa's "lagging position in eradicating poverty" ... is "Africa's slow and erratic growth." The next World Bank report may reveal that half a dozen beers has been identified as the single most important reason for a six-pack.Today Unctad (in its 2006 "Big Push" report) still offers to make possible government "infant-industry policies" for "small, fragmented economies" by setting up a regional market, presumably so Burkina Faso and Niger can help absorb the potential output of the Togolese automobile industry. Unctad lacks everything but chutzpah: All aid to Africa, it said, should be moved into a new U.N. Development Fund for Africa, to which Unctad helpfully offered its "in-house experience"... Unctad will thus permit the economics of Africa to at last "escape from ideological biases," so we can finally understand "why economic activity should not be left entirely to market forces." The free market is no overnight panacea; it is just the gradual engine that ends poverty. African entrepreneurs have shown what they are capable of. They have, for example, launched the world's fastest growing cell phone industry to replace the moribund state landlines. What a tragedy, therefore, that aid agencies have foisted the poorest economics in the world on the poorest people in the world for 50 years. The hopeful sign is that many independent Africans themselves are increasingly learning the economics of how to get rich, rather than of how to stay poor.

For years, economists have been focussing on (deriving and implementing) grand schemes, like what MIT Economist Banerjee recently terms, 'the Economic Machine'. Grand schemes are doubtless convenient and, if valid, easy to implement. Afterall, most of the countries in the world need advice for development. Professionally trained economists or development experts are not that many. If there is a panacea for development, every local government, despite their probable incompetence, can just adopt the universal solution and poverty can be eliminated in less than a decade. That is probably what a lot of economists have in minds. From Harrod-Domar Model, to Solow Model, to the more recent Endogenous Growth Model. Economists have said investments, savings, technological advance and education respectively were the panacea of the day. And here we are today, the poor countries are not less poor, if not poorer, than ever before.

Indeed, any of the panaceas above can help development. But as usual, devil is in the details --- investments can be wasteful, encouraging savings need trustworthy banks/financial institutions, technological advance is hard to achieve without basic infrastruture, and education policy needs a lot more scrutiny than simply putting in sufficient money. These policies not only need micro-foundation, they need micro-managament. You know that, if anything can go wrong, it will.

William Easterly, as I am now reading his book and know from it, probably will disagree with Jeffrey Sachs's view that rich countries should provide developing countries with aid continuously (in fact, William disagrees so much that he wrote a whole book about it). But one common thing I found in both of their books was they did notice the difference between developing countries were huge, while William emphasized on tailored-made solution based on markets and granting the right incentive, Jeffrey suggested development schemes should be adjusted to the geographical, economic, political, social and cultural differences across countries.

Nonetheless, an efficient, tailored-made solution can only be possible if economists/development experts really walk around countries and cooperate with local people. This, in a sense, is even more difficult than the quest for a panacea. As quoted from a former member of International Accounting Standard Board (IASB), a body responsible for setting accounting standards for both developed and developing countries,

'We seek the truth for a more efficient capital market. That is what the IASB is doing and not trying to be democratic......And what really is the contribution of developing countries? We know what is best and we can help the rest of the world with our standards...'

As demomstrated perfectly in the Iraq War, the 'we-know-what-is-best-for-you' (or arrogant in short) attitude really, really does no help. But it is almost always the case in international affairs involving countries from both the North and South. And poverty elimination/economic development, unfortuantely, is one of them.

Darwinism of Moral Values and Social Norms

A good point raised by Kester, my tutemate in Command and Transtion Economies, when we were talking about social constructivsm today.

Do moral values and social norms evolve to the best interest of the human race? Interesting question, Kester believed so, my initial thought is some yes and some no. Probably I will add opinion in more depth later.

The Defintion of Definition

Quote from one of my favourite blogs, Beat The Press,

'As I have pointed out endlessly, NAFTA did not free all trade -- Mexican professionals still face substantial obstacles to working in the United States, so the deal did not free trade in professional services. It also increased protectionism in the form of copyright and patent protection. So, let's save space and trees -- just refer to a "trade" agenda.'

Right, North America Free Trade Agreement (NAFTA) is not a free trade agreement in a sense that not all trades in North America are completely free. BUT by saying that a million times it is a free trade agreement, the general public will believe that they have free trade within North America, or at least believe that the terms as stated in the agreement can already be regarded as free trade.

This is a social phenomenon called, 'social constructivism'. Many terms often used are not objectively defined. Unlike physical objects like, a pen, or paper, most of the terms used in social sciences cannot easily be defined. What is accounting? What is jounalism? Everybody might think they know what these terms mean. However, their definitions can be hijacked by interested parties to re-create a society and influence people behaviour, espeically when the public thinks those terms are objectively defined and act accordingly.

For example, accounting equation suggests 'revenue - expense = profit and profit the bigger, the better'. Because accounting, in the broadest sense, means tracing responsibility for individual behaviour, a good project proven by the accounting equation will unavoidably become a project regareded as responsibility being already fully traced (i.e. accounted for). Nonetheless, this is only the case if 1) private revenue and expenses are the sole consideration and 2) environmetal and social impacts of the business on the society value nothing --- an entirely capitalism idea. As such underlying assumptions are never explained, followers of such accounting equation are turned into capitalists without themselves knowing that. Such equation (or any other principles), after used by many in the society, eventually turns itself into a social norm and the society converts itself into a capitalist societly unconsicously (and maybe unwillingly).

Thus, by simply defining social terms, norms can be created to benefit certain social groups. In the 'free trade' case, professionals whose jobs are protected by NAFTA and politicians who gain their support are benefited as long as the general public believes trade is free within North America and never challenged that notion.

Think again when you think you really know what a social term means.

No Re-distribution to Heaven/Hell

This blog, in fact, will not be updated as much as I would like to because of the time I will have to spend to rigorously discuss serious issues. Nonetheless, I feel obliged to clarify one of the concepts of mine (even I don't think I have built up an audience yet. As I said in Preface, this blog is never intended for readers) that why nobody should have sacrificed their lives for anything. It is, surprisingly, a strictly economic concept.

To start with, the fundamental concept of Pareto Improvement has to be explained.

A) Imagine a situation of two people A and B, trading with each other. IF

The trade can result in a position that both A and B are better-off (or feel happier),

Then the trade results in a Pareto Improvement. This is the simplest situation.

* * * * *

B) Now, imagine A is doing some damge to B (e.g. A kicks B's ass). IF

1) B has the legal right to have his ass unkicked AND,
2) A by paying B some money (or other kinds of economic benefit, like a kiss, or a one-night-stand) can get B to agree that A can kick B's ass AND,
3) A is willing to make such an offer so as to kick B's ass,

Then there will be a Pareto Improvement when A makes an offer to kick B's ass and that B voluntarily agrees to the offer. Because everyone will be happier.

* * * * *

C) Now, imagine A is still kicking B's ass, IF

1) government knows perfectly what A and B want (economically, their marginal valuations),
2) government orders A to compensate B for kicking B's ass,

Because government knows everything, so the ultimate result will be exactly the same as B) and everyone is still happier. So it is still a Pareto Improvement.

Therefore, we come to a rather unconvential and unpopular economic conclusion: as long as party A can compensate party B in a way that party B will agree, party A can do anything on party B and it will still result in a Pareto Improvement (i.e. everyone is happier than before). And by anything, I strictly include anything, like kicking ass, slapping, molesting or even raping EXCEPT (by now) killing the other party.

(This kind of conclusion partly explains why economics is not a subject that can be understood by all --- it gives inhumane, immoral conclusion. BUT to clarify, the analysis is strictly and only based on economics AND it is not suggested that we should not consider anything else before applying such conlusion, no economist would have made such a claim that only economic principles should be followed while making decisions)

Simple and sensible, it is just not possible to compensate the other party satisfactorily if the other party is dead.

On the other hand, government can (economically) also order anyone to do anything (that derives a benefit) if at the end of the day the derived benefit can be re-distributed in a way that everyone is happier since there will still exist a Pareto Improvement.

But again when anyone is dead, there is no way to re-distribute anyting to him/her anymore and not strictly everyone will be happier and it will not be a Pareto Improvement.

There is, however, one empirically rare exception. It is when party A values party C's benefit so much that, even by re-distributing the derived benefit to party C, party A would have felt happier (well... in heaven/hell) even suffering the loss of life. Such a case only happens when someone voluntarily sacrifices his/her life for someone else's life (Titanic, maybe?). But the emotional impact from the Titanic movie somehow sends us a message that this REALLY does not happen so often, if at all.

Thus, it comes to a conclusion that

I) nobody should have sacrificed their lives for anything (but economically acceptable if stricly voluntary),

II) no government should have ordered their citizens to sacrifice themselves for anything because re-distribution is close to impossible as the exceptional case proves to be really rare empirically.

( conclusion II should be more strictly followed than conclusion I, because in I, individual makes his/her own decision and it can be comfortably presumed that any result is voluntary, not so much in case II)

So war for high-moral-ground values, slower poverty reduction (which kills) to preserve cultural heritage? No way as long as the Titanic kind of movie can still touch everybody's heart.

Preface

This is the second blog that I have (the first one being www.xanga.com/holikhang). I normally talk about my daily life or interesting experience in the first blog, not so much about what I think primarliy because the audience involved seems to be not so much interested. Also I very often perceive myself as a person who doesn't take sides on any issue as long as I can understand the reasons behind the scene. But more and more so, I take sides, even I can understand perfectly the reasoning of the side I don't agree on. And I want people to listen to what I say because I sincerely believe that my opinion will help make the world a better place. As is every other outspoken person I guess.

And my interests primarily include any and every important economic, social and political issues, among all, poverty reduction is my main concern. I genuinely (and perhaps naively) believe that in a world with so advanced technology and so much wealth, no one should have died because of starvation, no one should have died because they are too poor to stay alive (while more than 8 million of people do every year --- The End of Poverty, by Jeffrey Sachs ). I believe that nobody should have sacrificed their lives for anything, by anything I broadly include wealth, love, religious belief, moral values, cultural heritage and so forth and so on because there is no way the extra benefit derived can be re-distributed to the people who lost their lives. The only condition that sacrifices may become acceptable is if more lives can be saved. Life, in my point of view, is the most important asset, among all, one can have and the least that one should be deprived.

A friend recently told me that he was described to have a passion about development issues similar to his passion about chocalate. My concern about poverty, or development issues in general, on the other hand, is fuelled mainly by my anger about the unreasonable and nonsense ways that many life-at-stake issues are being dealt with. Yet I believe that this anger will not affect my judgement. It will only push me to pay more attention on and eventually drive me to contribute to the developing world (when I become qualified).

That explains my purpose of having an additional blog, to express my thought, my view and my opinion on things that I do not feel right or more often I feel angry about. As simple as that.