Halfway There

I think that the movement toward econonomic and political liberalism is halfway there, and moving in the right direction. I think that eBay is a fine example of how matters such as cross-border trade and income tax must be reorganised. Now that the advent of new technology does what ideas can't - defeat vested interests once they've been granted - there is a greater transparency for economic reform.

But we're not there yet. A typical conversation about the NHS:

Question: What do you think of the NHS?
Answer: Terrible. Badly run, poor value for money.
Question: What's the solution?
Answer: More money.

err. No. It's nice to know that people realise that education, healthcare, transport are in a mess. But they still think that more money, more central control and more interference is the solution. We're halfway there.

Another example regards trade barriers. Consider Jim and Paul's conversation at Our Word is Our Weapon:

Paul: (ii) What developing nation's industry or service do you think should be protected from competition?

Jim: My point is that these are not questions for me to try to answer, but for people in the countries concerned to answer

Paul:   Your answer to (ii) is a real cop-out.

Jim: No, it isn't a cop-out. I'm not the one advocating a universalist, one-size-fits-all policy prescription. You are, and consistently fail to base your argument on anything but rhetoric....Are you asking me to pick out particular products in particular countries that should be protected now? My whole point is that I can't make this decision, because you need to take into account the situation in the country itself - in particular, the patterns of poverty, the likely impacts on consumption and employment (which many free-traders seem to simply ignore), the value added in the particular industries, the linkages to other parts of the economy, the costs of inputs, access to markets and so on. I don't have access to that information, but (and here's the important bit) neither do you. Your argument is predicated on your false assumption of omniscience (free trade must be the best policy everywhere at all times), while mine is based on my awareness that I don't have all the answers.

Now, I have to say I don't really disagree with either person. But in Jim's last statement he seems to get halfway there. He admits that he doesn't have enough information to suggest the right policy. Ok, we're all agreed. neither Jim nor Paul know enough. But I think the logical conclusion is that no one can know enough - but Jim's logic switches, and he rests on the assumption that someone, somewhere, armed with enough theory and data does have the omniscience required to "manage" an economy.

I advocate a "one size fits all" policy because one size does fit all. I advocate liberal trade barriers because they work in theory and in practice. I also advocate a policy that women should be allowed to vote, another "one size fits all" policy. I don't think we should go to each country, and decide suffrage on a case-by-case basis. In theory, and in practice women should vote. Boom. "One size fits all" is not a dirty word. (Feltch is).

Consider Joseph Stiglitz's criticism of the World Bank in Globalization and it's Discontents. I read the whole book nodding in agreement as he charts the abysmal record of how governments try unsuccessfully to manage development, and stimulate growth. (By the way, the World Bank and IMF are government organizations and whilst their policy is largely pro-market, they are the voice of politics not economics). But what's Stiglitz's conclusion? That the system is wrong, and we should act with more humility? No, his conclusion is that if people had listened to him then it would have worked. He was halfway there.

I completely agree with the vast bulk of what Jim and Joe have said. There are real problems: a bad system, and information complexity. But instead of building bigger computers, and hiring smarter ministers - throwing more resources at the problem with a mystical faith that somehow it'll start to work - we need to change our strategy.

I'm not saying we should do nothing and nations will prosper. There are very clear policy prescriptions that we should all be pressing our governments to impliment: the rule of law, strength of contracts, freedom to create etc. And I think that by and large Jim would agree with me on these reforms that need to be made.

Comments

[rjw]

I agree with your general defense of free trade and all that, but I think there is an important difference between the developed and developing economies.

Developed economies have (much) richer populations and better developed social security systems, and so in general there is much more "insurance" against the sectoral shocks from trade liberalisation.

In developing economies, people are often living on subsistence, social insurance largely inadequate or non-existent, and loss of livelihood has consequences that are much, much more severe.

So I can see a good a priori case for allowing more discretion to developing nations, to limit sectoral shocks and their localised consequences.

The problem is, that there is no reason to believe that progressive market opening will be well managed in developing countries. One might expect the process to be captured by vested interests - as is obviously the case in developed economies.

It's a tough one.

[Jim]

Hi Anthony, I've replied here (http://blog.ctrlbreak.co.uk/archives/000311.html) as follows:

The NHS got better when more money was invested in it. Countries with higher public investment in health and education tend to have better outcomes. These are not coincidences. Spending more money is not always the solution, but sometimes it is.

I don't assume omniscience on the part of governments in poor countries, I just assume they know more about what's going on there than I do - doesn't seem that crazy to me. Governments don't have to be omniscient to make a positive difference - the bureacrats of Korea and Taiwan weren't, and they seemed to get the job done.

One size may fit all when it comes to ethical questions of universal rights, but not when it comes to the details of trade policy. For one thing, poor countries are structurally quite different from rich ones. Secondly, succesfully developing countries of the past and the present have been and contine to use quite diverse and unorthodox policies. Dani Rodrik has a good paper on this (http://ksghome.harvard.edu/~drodrik/Luca_d_Agliano_Lecture_Oct_2004.pdf). He says that protection of property rights, contract enforcement, macroeconomic stability, integration into the world economy, and so on are important but can be achieved in a number of different ways. For example, "China and Vietnam have managed to provide their investors with enough of a sense of security to have elicited inordinate amounts of private investment and entrepreneurship despite the absence of a private property rights regime. Macroeoconomic stability is compatible with any number of exchange-rate regimes and operating rules for the central bank. Integration into the world economy can be achieved with low tariffs and high tariffs (as India and China have both spectacularly demonstrated)".

[Stomach Fat Exercises]

Really i like this point very much... "I advocate a "one size fits all" policy because one size does fit all. I advocate liberal trade barriers because they work in theory and in practice. I also advocate a policy that women should be allowed to vote, another "one size fits all" policy. I don't think we should go to each country, and decide suffrage on a case-by-case basis. In theory, and in practice women should vote. Boom. "One size fits all" is not a dirty word. (Feltch is)."