A Critical Review on the documentary “Poverty, Inc.”

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The documentary “Poverty, Inc.” has become so influential that it is now part of many courses at the university level. The good news is that at universities we apply critical thinking to the information we receive (or we are supposed to). As a development economist, I share here my views on this famous documentary.

On the positive side, the documentary does a good job in making some points for an audience unfamiliar with economic theory, such as the idea that dependency does not end poverty, or that current foreign aid (money flows between governments) has “unintended consequences that do more harm than good.” However, both ideas are not new in development studies. The much quoted “teach a human to fish” is an idea associated with many philosophers, including Maimonides (about 850 years ago). This criticism of the structure of current foreign aid is a relatively old idea in the development literature. Perhaps the best point made by the documentary is the argument that Non-governmental Organizations (NGOs) can do a better job if they base their strategies on effective communications with local entities, although this idea is not new either.

What are, then, the problems with this documentary? Many. Firstly, the development literature has two main perspectives; namely, the conservative and the progressive. A documentary that omits a whole branch of argumentation is not responsible and carries “unintended consequences,” such as misinforming that unfamiliar audience. Besides mentioning supranational entities, the documentary did not expose crucial structural problems: there is no serious analysis on geopolitics, global power relations, or class issues, among others. A class analysis would not, for instance, focus on stressing that “NGOs need the poor to exist” but that “the rich need the poor to exist”.Read More »

A Soft Law Mechanism for Sovereign Debt Restructuring

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By Martin Guzman and Joseph E. Stiglitz

The ultimate goal of sovereign debt restructuring is to restore the sustainability of public debt with high probability[1]. But this is not happening. Since 1970, more than half of the restructuring episodes with private creditors were followed by another restructuring or default within five years[2] — evidence inconsistent with any sensible definition of “restoration of sustainability of public debt with a high probability.” This evidence suggests that relief for distressed debtors is often insufficient for achieving the main goal of a restructuring, delaying the recovery from recessions or depressions, with large negative social consequences.[3]

The lack of a statutory regime for dealing with distressed sovereign debt makes sovereign debt crises resolution a complex process — marked by inefficiencies and inequities that take multiple forms[4]. The current non-system is characterized by bargaining based on decentralized and non-binding market-based instruments centered on collective action clauses and competing codes of conduct. The IMF often plays the role of the facilitator in this process of bargaining between a distressed debtor and its creditors.[5] But it has not always been successful in ensuring that restructuring needs are addressed in a timely way — indeed, it has often failed; and as we have already noted, even when restructuring processes have ultimately been carried out, they have often not been deep enough.[6]Read More »

Emerging Market Downgrades: Panic at the Disco?

When it rains, it pours. For emerging markets, the downpour has come in the form of credit rating downgrades by the big three global ratings companies. Fitch, Moody’s, and S&P took a record 1,971 negative rating actions on emerging market sovereign and government-related entities in 2016. Emerging economies are right to be concerned. With a ‘good’ credit rating (AAA), a sovereign state can borrow at very low rates of interest from investors. A poor rating could force states to pay significantly higher borrowing costs. Rating downgrades could have negative ripple effects throughout the affected economies, raising the cost of borrowing for banks and firms, and, in turn, consumers.

Infrastructure projects, business ideas, and consumer credit extensions, become unprofitable due to the higher cost of credit to banks, businesses, consumers, and governments. If a country is downgraded to ‘junk status’ (more formally known as ‘non-investment-grade’ or ‘speculative-grade’), it risks the mass exodus of investors from its bond markets. As the cost of borrowing for governments increases, this can lead to a dangerous downward spiral as borrowing and spending dries up business and consumer activity declines.

Getting back on course
So what is the best set of policies for emerging markets to recover their credit ratings? On one side are economists who argue for ‘austerity’. In their view, recovering from a ratings downgrade requires sharp reductions in state spending, even if this results in poor conditions in the short term. The benefits are twofold: It can reduce inflation and prices, thereby helping restore a country’s price competitiveness in international markets; and it can enhance the credibility of a government when it comes to containing profligate spending.

Former British Prime Minister David Cameron called this philosophy ‘expansionary austerity’. The problem is that there is not much evidence to support this idea. The EU enforced austerity among its member states in response to the 2007 financial crisis, until it helped propel a ‘double dip’ recession in 2011/12. Following this largely unsuccessful adventure with austerity, the EU turned towards more pro-growth policies, which supported expansions in infrastructure and fixed-capital investment, with notable success.Read More »

The BRICS and a Changing World

This July and August, I led an international group of experts in preparing an Economic Report on the role of the BRICS countries (Brazil, China, India, Russia and South Africa) in the world economy and international development.  The Report was commissioned as an input to the Summit of BRICS countries that took place in early September 2017 in Xiamen, China.

It surveys the BRICS countries’ sizable contribution to global growth, trade and investment, evaluates the prospects for this to continue in the future, and explores the possible role that these countries can play in bolstering the global economy, in reshaping international economic arrangements and in contributing to the Sustainable Development Goals and to international development generally. An important conclusion in the report is that continued BRICS growth as well as policy initiatives can substantially benefit other developing countries (the report uses the IMF category of Emerging Market and Developing Countries, or EMDCs) – and developed countries too.  I will  be pleased if the report will be circulated widely, and welcome all reactions.Read More »

The Power of the Market

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“The ‘market’ is a bad master, but can be a good servant.”
S. Chakravarty (1993: 420)

In the world today, more and more interpersonal interactions are replaced by market transactions. The market system is both an economic and a cultural phenomenon, yet we seem to be hardly aware of the values that are bound up in it. This phenomenon is manifest at many levels: from the family, through the neighbourhood and the enterprise, to the nation and the globe. If there is such a thing as global ethics, I suggest, then they are – like it or not – the ethics of the market. My purpose here is to elaborate this claim, and to assess its implications. I shall distinguish between the market as a theoretical construct in economics, and the market as a social institution.

My main hypothesis can be briefly stated as follows: the most convincing ethical argument currently being made in favour of the market is its neutrality. Whether the market is in fact neutral may be disputed. But if one accepts this claim, it implies that the market is amoral, rather than immoral, and there remain, I suggest, two objections to allowing the market ethic to prevail. The first is that this is an abrogation of moral responsibility. It implies delegating decisions of major social and material significance to powers which are beyond our control, and whose outcome is uncertain. Second, the neutrality of the market comes at a cost in social and human terms; social relations between persons are replaced by contractual relations between economic agents.Read More »

Poor Behavior, Good Behavioral Policies? Double Standards for the North and South

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Behavioral approaches to development economics and policy have gained momentum in recent years. A growing number of papers studying behavior of people in poor countries have been published in top journals, accompanied by the rise of randomized controlled trials (RCTs). In 2015, the World Development Report was dedicated to behavioral and cognitive research and policy. Papers studying how to nudge farmers to use fertilizers or increase savings have become classics in the field. Lots of hope has been placed into social experiments and behavioral policies to fight global poverty.

Behavioral policies are of course not reserved for policy-making in poor countries. In fact, nudges became famous with a US-American savings plan. Many behavioral instruments have been discussed and tested in and for rich countries. But there has been an important difference as compared to the debates in development economics: when debating behavioral policies in rich countries, scholars have also devoted lots of time to consider normative and ethical concerns. For example, following Thaler and Sunstein’s exposition of Libertarian Paternalism (see also here), a debate unfolded on whether nudges could be anti-libertarian (here, here, here, or here). Implications of the use of nudges as a new form of government policy have been analyzed, for example, from a Foucauldian perspective, or with a focus on institutional change. Books have been written about ethical concerns. The debate has reached a great level of differentiation, e.g. when authors argue that so-called social nudges (these are nudges that seek to stimulate voluntary cooperation in social dilemma situations) may be justified for different reasons than those targeting individual welfare. Overall, the debate has become really sophisticated, and the autonomy, welfare, and dignity of citizens in rich countries as well as consequences of the use of behavioral policies for these countries’ modes of government have received lots of careful scrutiny (recently again here).Read More »

The long run evolution of the rich in India 1937-2012

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Inequality in India may be returning to levels last seen during British Rule. To understand this, it is necessary to put India’s elite at the center of macro-history.

One of the central questions in political economy is how wealth evolves, particularly at the top. In Europe and the USA, we now accept that progression of wealth inequality followed a “U” shape or what has been called the “Inverted Kuznets Curve.” Briefly put, on the eve of World War I, the richest few percentiles dominated Western society with their massive wealth holdings. Fast forward to a decade after World War II and we see that their wealth declined substantially, but then started rising again in the late 1970s. Much has been written on this since (and due to) the publication of Piketty’s (2014) Capital in the 21st Century. My new and revised paper (Kumar, 2017b) puts the rich at the center of India’s economic history over the last eight decades. The main question I want to ask is the following: Is the state of contemporary wealth concentration in India a continuation or a break from its history?Read More »

Caveat emptor: the Graduation Approach, electronic payments and the potential pitfalls of financial inclusion

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By Paulo L dos Santos and Ingrid Harvold Kvangraven

The Graduation Approach to poverty reduction is inextricably bound up with programmes promoting financial inclusion. Proponents for the approach see it guiding a series of interventions that encourage poor households to ‘graduate’ into ‘mainstream development programmes’ which are centred on the provision of credit and other financial services (BRAC 2014). Indeed, the approach has been presented as a way to address the needs of those “too poor for microfinance services” (UNHCR 2014). The presumption is that the development and poverty reduction needs of ‘graduates’ will be well served by financial inclusion initiatives.Read More »