Rethinking the Law and Economics Paradigm

November 23, 2016November 28, 2016 mohamedobaidy3 Comments

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‘As a step toward that ideal it seems to me that every lawyer ought to seek an understanding of economics. The present divorce between the schools of political economy and law seems to me an evidence of how much progress in philosophical study still remains to be made. In the present state of political economy indeed, we come again upon history on a larger scale, but there we are called on to consider and weight the ends of legislation, the means of attaining them, and the cost.’ (Oliver Wendell Holmes; 1897) [1]

The World Bank’s policy focus shifted in the 1990s from a market-oriented paradigm to other issues such as social justice, poverty reduction and “market failures”, where institutions had to play a greater role [2]. Known as the Post-Washington Consensus or the Third Moment in Law and Development, this new paradigm emphasizes the importance of “good governance”, the implementation of property rights for economic growth, and makes the following proposition: well-defined and formalized property rights lead to market efficiency, economic growth and development. Hence, since then the establishment of the “rule of law” has become the new goal to reach for developing countries.

However, this Law and Economics paradigm relies on a narrow set of theoretical assumptions and is heavily influenced by neoclassical views of the state, the market and overall competition. But this framework raises some questions: (a) are these assumptions empirically valid, namely is the implementation of property rights a necessary condition for economic growth and development? And (b) are “perfect competition” and “market failures” reliable concepts one should start from to cope with development – if by such term we mean a social and economic process that will ultimately increase human well being?Read More »

Using Minsky to Better Understand Economic Development – Part 1

November 20, 2016December 5, 2016 Vitor Mello3 Comments

This year the global system has seen two major shocks: Brexit, and Trump. What these events have in common is their populist rhetoric that promised to bring back jobs, while also making xenophobic statements. These elections have tapped into growing anxiety over job security, which has not been addressed by most governments and has given room for demagogues to tap into the anger of the people. They reflect a problem that transcends the boundaries of any single nation: the global economy has been in a slump for almost a decade. Governments need to create jobs, and public fiscal stimulus is the way to do so. To allow it, we must rethink that system.

To understand why we have to consider the international system in which nation states currently operate in. Its current characteristics present challenges for developed and developing economies alike. There are two important features to consider: first, the system creates a deflationary bias by requiring recessionary adjustments and hoarding of the international mean of payment (i.e. dollars). Second, it lacks mechanisms to offset the chronic surpluses and deficits between nations, thus breeding financial instability. In a nutshell, it leads to poor creation and distribution of demand that is managed through capital flows. Instead of propping up demand, the global economic system props up debt.

This post will be split into two parts. This first part will employ the theories of Hyman Minsky to explain the features of our current global economy. Next week, we will follow up to discuss an alternative system that would allow for a better distribution of demand among countries and would support emerging economies’ development by freeing them from the swings of international markets.

Philanthropy in Development: Undermining Democracy?

October 16, 2016 Ingrid Harvold Kvangraven6 Comments

The word philanthropy dates back to the Greek word φιλανθρωπία, which means the love of humanity. Today the OECD defines private philanthropy as non-official development assistance (ODA) to developing countries. Such assistance can be through large philanthropic foundations such as the Rockefeller or Clinton Foundation, or through ‘direct giving’ platforms such as Global Giving or Kiva. But does what we call philanthropy today deserve its name? Rather than focusing on the actions of specific philanthropic organizations, this piece will assess the impact the rise of philanthropy has on global governance and democracy.

Figure 1: Grants by private agencies and NGOs Screen Shot 2016-10-16 at 17.03.14.png
Source: OECD data

The Trouble with Sub-Saharan African Debt

October 11, 2016October 11, 2016 Ingrid Harvold Kvangraven2 Comments

By Aleksandr V. Gevorkyan and Ingrid Harvold Kvangraven

Over the past decade, the Sub-Saharan African countries’ ability to draw on new debt in international capital markets has become a central characteristic of their development experience. Yet, the determinants of their borrowing costs are driven by external factors where investor perception plays a key role. This raises concerns over the sustainability of the current development model.

In the mid-2000s, 30 African countries received substantial debt reduction through the International Monetary Fund (IMF) and World Bank’s Heavily-Indebted Poor Country (HIPC) Initiative. Only a decade later, many of the same countries are again facing debt distress. The African Development Bank recently warned its members of the dangers of rising debt obligations, while the IMF has called for an “urgent need to reset” the region’s growth policies.

In our new paper entitled “Assessing Recent Determinants of Borrowing Costs in Sub-Saharan Africa” in the November 2016 issue of the Review of Development Economics, we trace the latest round of borrowing back to 2006 with Seychelles as the first sub-Saharan African (SSA) country to issue a sovereign bond, with the exception of South Africa, in 30 years. Since then, DR Congo, Gabon, Ghana, Côte d’Ivoire, Senegal, Angola, Nigeria, Tanzania, Namibia, Rwanda, Kenya, Ethiopia and Zambia have all followed suit, accumulating over $25 billion worth of bonds, with a principal amount of more than $35 billion (see Figure 1 for totals by country).Read More »

The New Secretary-General, and the Next: Reforming International Appointments

October 9, 2016February 5, 2017 Developing EconomicsLeave a comment

The UN selected António Guterres as its new Secretary-General this week. Economics Professor Sanjay Reddy offers his thoughts on the deficiencies in the selection process, reform possibilities, and the future trajectory of a UN led by Guterres. Drawing on his experience as a member of the UN Economic and Social Council’s Independent Team of Advisers, Reddy argues that the UN system needs much more than the ‘fine tuning’ that Guterres has in mind.

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The announcement that the new Secretary-General of the United Nations will be Antonio Guterres of Portugal brings to an end a process of making this important appointment which has been more transparent than ever (as it included such innovations as a public debate between declared candidates). However, despite the credentials of the new Secretary-General and his laudable intentions for the organisation, the process has highlighted the continued deficiencies in the selection process, including but not confined to lack of full transparency, in particular on the basis of the final decision.

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Critical Development Economics Resources

October 5, 2016February 5, 2017 Developing Economics5 Comments

Where do critical development economists publish their articles and blog posts? Where can you read critical research on development economics? What kind of textbooks do critical development economists teach from? Here is a preliminary list of journals, blogs, and textbooks (but please send any additions you might have!).

The Market or the State: Why Polanyi Still Matters

September 30, 2016September 30, 2016 mohamedobaidy5 Comments

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During the 1990s, although the market paradigm was dominant in economics and public policy, a new literature stressing the importance of the role of the state in industrialization rose to fame. We can mention Alice Amsden’s Asia Next Giant (1989), Robert Wade’s Governing the Market (1990) or Peter Evans’ Embedded Autonomy (1995). This literature dwelled on the East Asian miraculous industrialization and showed with empirical and historical evidence how the state apparatus was necessary to spark the economic take off. More recently, these academic attempts multiplied (for instance in the developmental state literature with Ha-Joon Chang’s Kicking away the Ladder, 2002) and gained new interest after the 2008 financial crisis. Yet, this literature is not novel and draws its inspiration from previous economists and social scientists, who for a long time warned us of the danger of disintegrating the state from the economic sphere. On the other hand, mainstream theorists tend to undermine, if not ignore, state intervention and consider it as an exogenous variable to economic growth (see for example Bela Balassa, Lord P. T. Bauer, Anne Krueger and Deepak Lal). The post-1980s era had provoked academic debates around the role of the market versus the role of the state for developing countries: the claim made by mainstream economists and politicians was that countries which pursued a state-led industrial policy failed greatly and that the Latin-American debt crises was an illustration of this (see for example the 1983 World Development Report). On the contrary, it was observed that the East Asian newly industrialized countries (the so-called ‘four tigers’) ‘miraculously’ developed by pursuing market-oriented policies (see for example the World Bank). As heterodox economists, such as Amsden, Wade, and Evans, retaliated by stating the exact opposite, the extent to which the state could be an industrial actor or not become a new agora for both camps.

However, what if the terms of the debate were problematic at the conceptual level from the beginning? Is the dichotomy “state vs. market” as evident as it appears to be in policy debates? A theoretical detour going back to Karl Polanyi might help us shed some light on this issue.

Africa: Why Western Economists Get It Wrong

September 23, 2016September 23, 2016 grievechelwa2 Comments

2-3-_unpacking_african_numbers_10070552376 Morten Jerven, image via Wikimedia

Development economics as a field of study was formally launched in the 1950s by the Afro-Caribbean economist Arthur Lewis who, out of necessity, wanted to understand how his own country, Saint Lucia, could transform from an agro-based economy into a modern industrial state (later, in 1979, Lewis was awarded the Nobel Memorial Prize in Economics for this work, the only black person to have won the prize to date). For Lewis, the key to providing a satisfactory answer to the problem of underdevelopment lay in studying those societies as they were and not in comparing them to some mythical ideal. Saint Lucia, like all developing countries, had a lot of underemployed labor in its agricultural sector. The question was how best to marshal this valuable resource into driving industrialization.

Sadly, development economics has moved away from Lewis’ pioneering contribution of studying poor countries on their own terms. For example, today’s development economists explain Tanzania’s lack of development as stemming from its inability to be more like Sweden. This way of studying development, termed the “subtraction approach”, has led us down a dark alleyway where there is more confusion than elucidation. That, at least, is the charge leveled by economic historian Morten Jerven in his book Africa: Why Economists Get It Wrong published in 2015, but still circulating and prompting debate in academia and amongst practitioners.