As the Jamaicans say: “Long road draw sweat. Shortcut draw blood”
By Philip Cross: 2007 financial crisis and ensuing recession were a turning point for the international economic order. With much of the developed world plunged into recession and still struggling to recover, for the first time emerging markets have taken the lead in driving global economic growth. Peter Blair Henry’s latest book, Turnaround , reviews the lessons First World nations can learn from the Third World’s growthTroymedia
Henry brings a unique and pragmatic perspective to the study of international economic growth, having been raised in Jamaica before moving to the united States, where he is now dean of New York university’s Stern School of Business.
He starts by reviewing the Third World’s disastrous embrace in the 1960s and 1970s of theories of economic growth that emphasized Marxist rhetoric, government controls, import substitution, and debt to escape the rigour of markets. In his native Jamaica, Henry witnessed then-Prime Minister Michael Manley declare that “Jamaica has no room for millionaires,” adding that for those who want to be rich “we have five flights a day to Miami.” This aptly summarized how many countries felt the pursuit of individual wealth would undermine national economic development.
The anti-business agenda reached its zenith in 1974 when a special session of the UN General Assembly endorsed the New International Economic Order, which asserted the right of developing countries to expropriate multinationals operating in their countries. However, as Nelson Rockefeller observed, “capital likes to go where it is loved,” and investment flows to developing countries quickly collapsed. This loss was papered over by high commodity prices and heavy government borrowing until 1982, when prices tanked in response to a severe global recession, triggering the Latin America debt crisis. Out of the ashes of that debacle emerged the Washington consensus, which laid out the broad thrust of market-friendly policies that formed the basis for the spread of economic growth in subsequent decades from China to Latin America, Eastern Europe , India and on to Africa today.
He joins Dambisa Moyo (author of Dead Aid) in rejecting debt relief for the poorest countries; debt relief is the favoured tool of rock stars and celebrities whose knowledge of economics stops at fleecing their fan base. This is because what these nations lack the most is “a functional economic system that provides the necessary incentives for investment and growth.”
Capital inflows to these nations largely come through some form of aid, mostly to the public sector. These nations do not suffer from a debt overhang, since private capital flows are scared away by insufficient legal protection and property rights. And in practice, nations that grant debt relief usually pay for it by cutting back on foreign aid.
Summing up the lessons from Third World growth for today’s First World, Henry says that discipline is fundamental in maintaining a commitment to long-term prosperity: “Just as an individual’s ability to delay gratification at a young age is a good predictor of future academic and professional achievement,” the discipline “to adopt and maintain market-friendly reforms can deliver ongoing improvements to the material well-being of their people.” The optimal mix of policies varies from place to place, but includes focusing on lower inflation, liberalizing trade and capital flows, privatization and fiscal temperance. Ideology has to be discarded in favour of market-friendly policies, preferably implemented over time to demonstrate an ongoing commitment to jittery investors.
Finally, he finds that stock market prices in these countries are the best measure of the effectiveness of the policies being implemented.
A lesson for all countries comes from the maxim in his native Jamaica that “Long road draw sweat, Shortcut draw blood.” This applies particularly well to the European Union. He blames the crisis in the EU on its members ignoring or bending the standards set out for inflation and government debt, which would have required members to demonstrate they possessed the necessary discipline for the euro to function.
When the euro was implemented, 11 of the 12 countries did not meet the target ratio for government debt-to-GDP. Once admitted to the euro, nations routinely violated the agreement not to run budget deficits over 3 per cent of GDP, notably France and Germany. With this brazen example set by the adults in the EU, it was no surprise that junior nations “pursued the path of profligacy with a sense of impunity.” The return to punitive taxation of the rich in countries like France has proven as injurious as Manley’s taunting of Jamaica’s millionaires.
There are no shortcuts to any type of growth in life, from economic to personal.
Philip Cross is the Research Coordinator at the Macdonald-Laurier Institute and former Chief Economic Analyst at Statistics Canada. This column originally ran in the Financial Post.