Bad economic advice causing our persistent poverty

Bad economic advice causing our persistent poverty

Wednesday, April 23, 2014

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IN the modern age mankind has come to believe that all of its problems can be solved by the application of science; and for those not yet solved, it is only a matter of time.

The exponential progress of technology has given credence to this state of mind, in which the concept of science has been stretched to include such disciplines as economics, with the implication that all economic problems can be solved.

But we know that poverty is certainly an economic problem which has not yet been solved. If poverty exists, then it is a failure of economics and economic policy as formulated and dispensed by economists. Mr William Easterly (formerly of the World Bank) in his just-published book The Tyranny of Experts blames poverty and underdevelopment on bad economic advice.

There are two possible explanations for this bad advice:

First, the economists deliberately give harmful advice, as was the case when British economists maintained that the tropical countries could not and should not even try to industrialise. The bad advice was intended to justify the mercantilist colonial division of labour, in which Britain exported manufactured goods to its colonial empire and imported raw material and agricultural products such as sugar and bananas. This is what Sir Arthur Lewis challenged in his 1949 article on industrialisation in the West Indies.

More recent manifestations are when experts from international institutions and bilateral donor agencies give advice that are more beneficial to others than those governments receiving the policy prescriptions, as chronicled in Mr John Perkins' book Confessions of an Economic Hitman. Jamaica has suffered from this.

Second, the economists inadvertently give advice which is wrong or turns out to be harmful. In some cases, the economic advice might balance the books but increase poverty in the short run, without producing economic growth in the medium or long term. Some argue that the International Monetary Fund (IMF) is a prime example of this. Again, Jamaica has been a victim.

There are cases in which local economists are not as guilty as the foreign experts, but they cannot be exonerated because they have devised some of the most harmful and simply impractical policies, such as the Production Plan of the socialist 1970s, but also the costly liberalisation of imports which only seems plausible in the rarified atmosphere of the neoclassical economics textbook. Nobel economist Joseph Stiglitz has campaigned against this type of pseudo-science masquerading as economics. Jamaica has suffered from this.

In defence of the economists, there is the case where sound economic advice has been given but ignored or not implemented by politicians. Jamaica has been plagued by poor implementation and poor management of the budget deficit, tax reform and in limiting government borrowing. Jamaica has suffered from this.

In the circumstances, Dr Peter Phillips, the finance minister, and indeed all of us, would do well to ask ourselves: Are we getting the best economic advice from the experts at the IMF?

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