November 10, 2005, [MD]
I had the good fortune to listen to Sachs speak at the biannual CIDA conference in Ottawa last year. Although I had read things about him before the meeting describing him as some sort of “economic hitman”, I was impressed by his presentation. Now I just finished reading his book End of Poverty, Economic Possibilities for Our Times; a sort of global manifesto for reaching the Millenium Development Goals, and eradicating extreme poverty in the world by 2025.
It is important to note that Sachs talks about eradicating extreme poverty, not all poverty. He is not talking about how we can make all countries as wealthy as Norway or Canada - although that might be a long term goal - but how we can provide everyone with basic access to food, shelter, education and medical care. Less ambitious perhaps, but considering the proportions of people affected by extreme poverty today, certainly a very worth undertaking.
He starts off by chronicling the history of global economic growth (with the industrial revolution in England, etc), and clearly subscribes to the modernization theory of development, in hoping that all developing countries could get on the path to growth as well; and describing free trade as the most important way to achieve this. He then tries to asses why so many countries have not grown as rapidly as the Western ones.
He starts off by discussing growth in capital stock. Basically, an agricultural family’s income per capita can increase in the following ways: Saving (eating less of the corn grown, and selling it for money - using the money to invest in more livestock or capital equipment); Trade (specializing in a cash crop, using the money to buy more of the produce they used to produce); Technology (green revolution?); Resource boom (government controlling malaria enables household to move to higher yielding area). However, the same factors can lead to a decrease in household income: Lack of saving (leading to capital depreciation, lower yields in agriculture); Absence of trade (high opportunity cost of lack in communication, infrastructure (for taking produce to market), regulation, etc); Technological reversal (mother and father died by AIDS, orphans without technical farming knowledge produce less than the whole family could before); Natural resource decline (environmental decline - depreciation in nature?); Adverse productivity shock (natural disaster, etc); Population growth (more mouths to feed, but same amount of land).
The idea he harps over and over is that countries need to invest to grow (according to our class in political economy, you typically need to invest 5% of GDP to get a 1% increase in GDP - but that increase is beneficial every year, not just the year you achieve it). He mentions eight cateogries that can cause an economy to stagnate or decline: The poverty trap (people are so poor that no saving is viable, and it just gets worse); Physical geography (see below); Fiscal trap (no government money for infrastructure, health, education etc. Especially because of debt servicing); Governance Failures, Cultural barriers (traditional cultures? but also impediments to women working, caste systems, minorities disadvantaged etc. Failure to exploit full potential of population); Geopolitics (trade barriers by foreign countries); Lack of innovation (not enough local R&D, foreign R&D might not be appropriate. No funding, lack of IP legislation, etc); The demographic trap (population growth).
Those are many categories, but he does not by any means think that they are equally important. He talks a lot about geographical trade barriers - especially for land-locked countries (of which Africa has 15 - by far the most of any continent), or mountainous countries with little access to rivers etc. It is not strange, he says, that most booming centers of commerce are near major waterways. Or that Eastern China, close to the rest of Asia, or Europe/North America by ship, is doing well, while Western China, close to the steppes of Central Asia, and Afghanistan, are less prosperous. This does not mean that all is lost, but it needs to be taken into consideration.
He further discusses the problems of disease, especially in the African context. He makes reference to the excellent book Guns, Germs and Steel in stating that all continents were not born equal in terms of climate, domesticable animals or diseases. There is clearly something extra difficult within the African context, and it’s multitude of diseases is slowing down development. In fact Sachs was one of the first to suggest that it was economically profitable for a developing country to invest in public health (and he has been much criticized for this in the public health movement, for turning lives into numbers - but in a sense; if that is what it takes to raise investment, then maybe it is necessary). He came up with the idea for the Global AIDS, TB and Malaria fund, and believes that this is crucial to further Africa’s chances of development.
But finally, he thinks the most important aspect is simply the poverty trap. He debunks the myth of consistent huge transfers of funding to the poorest countries; in fact, most of it went to middle-income countries, and if you remove the percentage that was cancelling debts (nice, but those debts weren’t being serviced anyway, so the countries did not gain any extra income), paying for foreign experts (mostly wasted, but even the useful part did not help in adding to the investment stock of a country), you see that the real amounts were tiny. If you remove the money paid for debt servicing, the net flow was often negative.
He talks about clinical economics, as a parellell to clinical medicine; one needs to take symptoms, rule out different problems, and understand the whole system holistically. (I know critics of modern medicine who would not subscribe to this idealization of clinical medicine, but let’s roll with it). He criticizes the World Bank for employing very simplistic rules of thumb about growth and inflation, applied by economists that have very little local understanding of the regions they are dealing with. He is also skeptical to the thesis that the problem with Africa is governance, he posits that all countries in the world have governance problems, and that there is a certain relationship with the level of problems and the lack of resources. Fundamentally, Africa needs huge amounts of foreign aid, and when this is turned into investment and growth, the countries will become less corrupt. This does not mean that one should not try to counteract corruption, but one should not use this as an excuse for not investing in them.
He spends extensive time talking about his own role in stabilizing Bolivia and Poland, and in failing to do so with Russia; very interesting chapters, which I will not discuss here.
Five structural differences between China and Russia (partly explaining the former’s success and the latter’s lack of such): Soviets and Eastern Europe had massive foreign debts, China didn’t; China had a large coast-line that promoted export-led growth; China had the benefit of overseas Chinese promoting investment with cultural understanding; Soviet Union was experiencing drastic decline in oil production at outset of reforms, China wasn’t; Soviet Union had gone down further in the path of industrialization using technologies incompatible with Western standards, China hadn’t.
He gives an extensive example of the poverty trap and how to invest yourself out of it, positing that a family that makes 300\$ a year can barely survive on it, and cannot save anything. Because of depreciation, it will only become poorer. However, through raising the income to 600, theycansav*e*300 and invest this; which means that after that their income will be able to grow steadily. (I am simplifying enormously). Fundamentally he is making a case for why development aid would enable people to live autonomously (after a number of years); this is not the case of committing to eternal charity and social service.
I could go on, and on. The book is quite amazing in that it is simultaneously packed with information, models for understanding development and concrete ideas, but also personal anecdotes (from a very interesting life) written in a very legible style. I highly recommend this book to anyone who wants to understand global economic development, and receive a little bit of optimism. After all, if development is impossible, we might as well give up. If it is possible, but we are not doing it; then we need to hold our governments responsible. I don’t agree with all that he says, but I found myself agreeing to a surprising amount.
Stian
Stian Håklev November 10, 2005 Toronto, Canada comments powered by Disqus