There is no time like the future. The past is littered with missed opportunities, while the present is excruciatingly analyzed to derive storylines based on every single new data point. Short-termism at its best.
Unemployment is down by two decimal points? The recession is on the rearview mirror. GDP has been revised to show that it grew less than previously estimated? It means that there is a conspiracy to improve the government’s approval. Here I want to talk about the future of emerging markets. And not the short-term future, but the long-term, when we are all going to be dead. The goal is to design actions (not necessarily policies) for emerging markets to jump from mostly a lower middle income reality to a better environment – in all its forms, not merely economic.
Brazil and other Latin American countries, alongside many other emerging markets, are in serious need of a new social contract and development agenda. This is because we live in a middle-income trap. Many countries have moved from poverty to middle-income status, but very few have continued to climb. The leitmotif of this blog is to develop a concrete agenda to foster a sustainable long term development for emerging markets. I give a special focus to Brazil, just because I know more about the country than other Latin American and emerging market countries.
Keywords are: dynamic concrete agenda. It is very easy to analyze all the shortcomings of government policies and highlight how weak institutions are in emerging markets. It is hard to provide a path that leads somewhere. Good news is that we have a much better understanding of how to achieve something in the realm of development economics than om the past. We know why nations fail, how to fight poverty, the relevance of institutions, that sustainability matters, measures to improve education, and many other kinds of knowledge that were unavailable to economists, sociologists and other -ists just a few years ago. Why the word dynamic? Because nobody has all the answers, and this is an evolving project – policies and proposed actions should change to reflect new relevant structural studies, changing viewpoints, or simply because I have made a mistake. And because development paths might differ across countries, given their individual current positions and social, economic and other characteristics, which alter the individual dynamic path at which these countries converge to some improved steady-state.
The agenda is supposed to be pragmatic and logically consistent. It follows a well-defined path: antecedents, axioms, and then proposals. Antecedents are simply some supposedly self-evident truths about economics, and the basic blocks of the rational exploration of proposals for economic and social development. Axioms are the fundamental way that allows us to make value judgments. It would be naive to view a project like this as a pure rational exercise. People are moved by their values, and even countries have different beliefs on some fundamental issues. Our axioms define how we measure costs and benefits from different actions and should allow readers to evaluate and tweak proposals to integrate it with their own value systems. This is a rational agenda because I want to deal with tractable problems through evidence-based analysis. An engineering approach to economics. I would like to be as ideologically free of preconceptions as possible, but the axioms are a way to put forward any biases so policies and actions can be judged logically and rationally. Empathy through policies, as we shall see.
Empathy through Policies – an Evidence-Based Approach.
On to the axioms that form the basis for our proposed actions to emerging markets’ long-term development.
1 – The needs of many. Every economy is full of special interest groups (SIG). Game theory easily shows how incentives are geared towards SIG fighting to keep their privileges, regardless of the effect to society. Any good action plan should choose the needs of many over the needs of few, and we need to minimize, as much as possible, the impact on SIG.
Corollary 1: at some point most people are going to strongly disagree with some proposed action. It is almost inevitable, as we are all parts of different SIG.
Corollary 2: labels are completely irrelevant. We need to solve pressing issues. Left or right, conservative or liberal, reactionary or revolutionary, capitalist or socialist, developmentalist or neoliberal. All useless.
Corollary 3: extreme views are particularly obnoxious, both the revolutionaries that want to smash the reactionary bourgeois, and the objectivists that preach that every modicum of success is due to individual will, without taking into account the role of institutions or the socio-economic environment.
Corollary 4: let’s debate rationally. The end goal is to improve society, not to serve my ego (it will be fine, I assure you). If proven wrong, actions and proposals should and will be changed.
2 – First-best solutions. Always. We need to at least define the first-best solution, even if it is politically untenable.
Corollary 1: Problems need to be as well defined as we can. Precision is important so we can determine the best course of action.
Corollary 2: We don’t need to concentrate on politics at first. Let’s find the best possible solutions and then worry about what is feasible. Laws can be changed (Fiscal Responsibility Law in Brazil) or ignored (The Maastricht Treaty by Germany in the 1990’s).
Corollary 3: The whole agenda is evidence-based. Most economic and social issues are tractable and yield explicit trade-offs. Experiments can result in relevant innovations (Progresa in Mexico or Bolsa Família in Brazil), but they should be categorized as such: experiments to foster future policies, not main hard core economic or social policies.
Corollary 4: Unintended consequences can drown the best of intentions. Be careful and avoid them.
Corollary 5: I am an aggregator – most of the evidence follows the advice of really good researchers.
3 – Markets are more efficient than governments, but they are far away from being perfect. Emerging-market policies tend to be too interventionist, creating all sorts of distortions. There are plenty of market failures, but also tons of government failures. It does not mean that free-market capitalism is the solution to long term economic development, especially in emerging economies. Like every single other decision, we need to measure costs and benefits of government intervention in each and every proposal for action. For instance, we know development banks are relevant in the case of incomplete and inefficient financial markets, even if they can be subject to inefficiencies or even cronyism. It may be that in the long run development banks can be replaced by liquid long term financial markets, but it surely is not going to happen anytime soon in many countries.
Corollary 1: we need to establish priorities, not false dichotomies. It is not a question of growth vs. sustainability, low salaries vs. public debt, unemployment vs. inflation. This is not short-run macroeconomics management, but long-run institutional building.
4 – Most long term economic issues are related to efficiency and productivity. Most actions that enhance either are welcome.
Corollary 1: It is not usually a question of resources. Most countries have the budget to take on the most pressing issues, but they fail. Management is lacking.
5 – There is no meritocracy without equal opportunities. Ayn Rand is nice as fiction, but equal opportunities first and then meritocracy.
Corollary 1: we need to widen opportunities for the disfranchised. Affirmative action does that well in the US, as do Bolsa Família in Brazil. We need more social policies like that, with an expiring clock for when opportunities are equal (or minimally unequal).
6 – There is no noble poverty. Poor people are neither lazy nor stupid. Society should care about poverty.
Corollary 1: Poverty is usually not a conscious choice. It is about constrained choices or, as Amartya Sen beautifully put it, a capability set that allows people to lead different types of life. People on welfare usually don’t like being on welfare. We need to improve the marginal revenue of poor people so welfare is a less attractive choice. But if somebody chooses to be poor, so be it.
Corollary 2: We need to reduce the genetic privilege – the advantage that many people have just because they are born into a certain class (white privilege in the US, caste system in India).
Corollary 4: Work is not noble in itself. Economics 101: work implies a disutility and leisure brings positive utility, is a nobler goal. We are paid for the disutility of working. We should respect and embrace the decision by many people that consider work to be boring and unattractive. It does not mean that society should provide a leisurely life for people who want to avoid work.
8 – We should respect people’s choices as much as possible.
Corollary 1: If nobody is affected by a person’s choices, let it be. A good example is same-sex marriage. It is good for society because it expands choices without leaving anybody worse-off. A no brainer, really.
Corollary 2: Most economic and social choices are interconnected, so it is hard to respect people’s choices all the time. Actions will impact people through SIG.
9 – Policies and actions for young people are more beneficial to society than those geared towards older people. In the long run, a society is as good as their future generations. We are going to be dead, remember?
Corollary 1: This axiom should be self-evident, but older people vote, and young people do not. Older people are a very powerful SIG.
10 – Accountability is a keyword, usually avoided like the plague in emerging markets. There are no bogeymen, no American conspiracy to prevent Argentina’s development, external crises that explain every economic downturn, or a neoliberal agenda that forces countries to putrid policies. Local governments should be held accountable for their choices. As should people.
Corollary 1: Exceptionalism doesn’t exist. American exceptionalism is a myth, as is French exceptionalism, or any hint that a country is special. China is not the all-important middle kingdom, or Brazil the most beautiful place in the world.
Corollary 2: We should copy good examples from other countries. Steal ideas. Develop similar sensible policies.
Corollary 3: Never ascribe to malice what can be explained by incompetence.
11 – Expectations and stability matter. Many mistakes are made because of the micromanagement of macroeconomic variables and ever changing supposedly “structural” policies. Short-termism is rampart in government actions in emerging markets, with some notable exceptions, like China.
Corollary 1: Greed is a great social motivator, and is a social good. Greed is best served by a stable environment, on expectations of future income.
Corollary 2: There is no long-run growth without innovation. And innovation is also best served by stable environments.
12 – The environment is important.
Corollary 1: It is really important. It should be included in most trade-off in determining solid plans of action.
Corollary 2: But so is growth. There is a fine line in balancing the needs of people and the needs of the Earth. We need to explicit all trade-offs related to this important dichotomy so we can act accordingly.
13 – There is a broad consensus that long-term development is based on strong institutions: well defined property rights, rule of law, efficient public departments, stable business environment and social safety net rules.
Corollary 1: We need to establish the level of social safety nets compatible with long-term tax revenue. In many emerging markets there is a clamor for the mythical Scandinavian social safety net model, but income inequality results in few individuals heavily subsidizing the State, and lower taxes cannot support such a model.
What is the result of these 13 “axioms”? A new Social Contract. In this contract we need to include the disfranchised, expand opportunities and choices (or capability sets), decrease the role of the government in many markets, expand on others, improve the doing business environment, allocate economic and social capital more effectively, determine precise measures of social safety nets that are sustainable in the long run, look for evidence-based policies, and take care of the environment. All while minimizing costs of structural actions and policies and the impact on SIG.
A new Social Contract won’t cause overnight changes, but would yield results in the long run. The alternative leads directly to the middle-income trap. As it is, most emerging markets are closer to degenerating than becoming new success stories, like South Korea.
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 Paraphrasing Keynes, surprisingly readable even after roughly 80 years.
 I highly recommend James Robinson and Daron Acemoğlu book with the same title. There are plenty of really interesting readings to accompany this blog, and we will get to them in the future.
 For an extreme case, a simple search for China+pollution or climate+change will show that we cannot preclude from integrating sustainability into any working model of development.
 You can watch Milton Friedman briefly discuss greed here, or get some quotes from Capitalism and Freedom (1962) here. Friedman is one of the greatest economists of the 20th century and an advocate of free market capitalism. His ideas are too extreme to be pragmatic, but are still surprisingly readable.