Wednesday, July 12, 2017

Inevitability of the need for economic growth—the nth time.

Today, I got into a bit of a Twitter spat with Kate Raworth who suggested in a talk to OECD top brass that their statement of objectives (defined, I guess, in the 1950s or 1960s) which emphasizes the achievement of high growth rates should be modified to create “redistributive and regenerative economies..whether or not they grow”.  I have to confess not to have read Kate’s very successful “Doughnut economics” yet but hope to make up for that very soon. But I have read some reviews and my reaction to the suggested change in the OECD mission statement was thoroughly negative. De-emphasizing growth is not desirable, and perhaps more importantly, is utterly unrealizable in societies like our modern societies. Because I am convinced of the latter, perhaps I should refrain from criticizing her position—since I believe that nothing will ever come of it.

But let me still explain under several headings why I think so. (Surely, the OECD statement may be changed for PR reasons, but this is immaterial.)

Economic growth is key for reducing global poverty (and even global inequality). This is an easy point and I am sure Kate would agree that countries in Africa need more growth than what they have now. The same argument applies to many other parts of the world: South Asia, Latin America, most of Eastern Europe, many OECD members: Greece, Turkey, Mexico, Chile. (And even the richer ones do not seem particularly happy with the recent period of zero growth: they would not be complaining of the Global Recession otherwise.) Growth is (with better redistribution) the only way to get out of poverty. Even growth that is to some extent going roughshod over environmental and other concerns is better than no growth—and this is one of the reasons why I am so supportive of the new Chinese investment Bank and generally of China’s investment in Africa (I wrote on that here).

Commodification of today’s societies. But the really important counter-argument to Kate is that her proposal fails to acknowledge the nature of today’s capitalist economies. They are built on two “fundaments”: (a) at the individual level, greed and the insatiable desire for more, and (b) on the collective level, competition as a means to achieve more. These are not necessarily most attractive ethical characteristics for either individuals or collectives but they are indispensable for capitalism to function—they provide the engine that pushes it ever further.

Such characteristics have then become fully internalized by the majority of the population. They have led to the progressive expansion of commodification of things that were never commodified before. It is of course well-known since Marx, Polanyi and Gramsci that capitalism commodified factors of production (labor, land, capital.) (For a nice discussion of the early commodification and how it led to growth, see my review of Bas van Bevel's wonderful new book “The invisible hand?”).

Commodification has continued unabated since. Art, entertainment, knowledge have become fully commodified.  Nowadays, we are witnessing encroachments of commodification in the areas we never dreamed of. Gig economy is from today’s perspective an extreme commodification (but from tomorrow’s perspective may be just a new normal). My free time has become a commodity: rather then drinking beer with friends, I do taxi service.  My apartment when I am not there has become a commodity to sell. Even my “free” drinking-beer time has become a commodity: I use it to “network”. Thus even the free time needs to be justified in terms of leading to greater income. People attend speeches of famous economists (who, by the way, have commodified their speeches) not because they expect to learn much, but because they expect to find there others with whom they can “network” (meaning, create future lucrative connections during a time ostensibly spent “learning”). I could go on.

This extreme commodification is obviously linked with insatiability of our needs  and our desire to climb up in hierarchical rankings. Since today’s uber-capitalism accepts only one ranking criterion, money  (and since all other possible ranking criteria can be, through commodification, converted into the money-metric), the desire for higher societal rank is almost entirely identified with the desire for higher income.

And if everybody wants to have higher income, how can we then argue they our society should cease to place a premium on economic growth and that growth should become a “response variable” (as Kate argues)?  Being a “response variable” means “yes, I do not argue for zero growth like the Club of Rome in the 1960s, but I am fine with whatever growth rate turns out to be”. But if what I see as the “fundaments” around which all modern societies are organized, are correct then the only rate of growth that can really “turn out” will be a maximum rate of growth.

The Italian example. Let me then, as a way of illustration, introduce the Italian example.

I think that it could be reasonably argued that no group of people in the history of the world has lived as pleasant lives as today’s Italians. The advantage are well-known:  lots of wealth, peace, moderate working hours, strong family and friendship bonds, nice weather, beautiful historical and natural sights, excellent and healthy food. Who then needs to grow? And Italy did not. It has by now stagnated for a generation and while in 1999, its GDP per capita was 3.5 times the world average, it is today 2.5 times. One could say, “it does not matter if people are happy”. But the problem is that, while superficially people may be happy this Summer as they congregate on the beaches and drink aperol, there is a deep malaise induced precisely by the absence of growth. The young are not happy because of lack of opportunities, the middle-aged people are not happy by non-challenging jobs, the old are not happy because their pensions are stagnant. So even if you have achieved a stagnant Arcadia, you cannot be happy and stop running because others are overtaking you and the fundamental features of capitalism, in Italy and elsewhere, are as I have described them above.

If one really believed in, and wanted to argue for the incidental nature of economic growth (“whether or not the economies grow”), then he or she should start by trying to change the bases on which our (global capitalist) civilization has been built, namely insatiability of needs and commodification. But these features have become so strongly ingrained that I cannot see how they can be changed in any foreseeable future.  All the rest is romanticism.

Tuesday, July 11, 2017

Why foreign aid cannot be regressive?

There are many arguments against foreign aid. Angus Deaton has forcefully argued that foreign aid, by providing resources to the governments  outside  normal taxation, breaks the link of reciprocity which exists between the tax payers and the state. It thus weakens national institutions, and insulates the rulers from the population. Dambisa Mayo believes that aid fosters corruption. Bill Easterly has attacked aid because it goes to the governments and not to the private sector. Many of these recent critiques are reminiscent of the arguments made decades ago by Peter Bauer (“Dissent on development”), and even earlier by Ludwig von Mises.

Now, when the European Union seems to be considering a significant increase in aid for Africa—led this time not by humanitarian concerns but by the well understood self-interest as reduction of migration is hard to imagine without a substantial convergence in incomes between Africa and Europe—it is worth pointing out that one argument against aid cannot hold. This is the argument made sometime in popular press (and at times, in academe too), that aid to the poor countries is just a transfer of resources from the poor people in rich countries to the rich people in poor countries. This is what is in economics called a “regressive transfer”. (“Progressive” transfer is what we desire to achieve: tax a richer person and transfer the money to a poorer.)

The data on global income distribution clearly show that this particular argument against aid (“regressiveness”) has no validity. (I have already written about this in greater detail here.)

To see this consider as an illustrative example incomes along the entire income distributions of the Netherlands and Mali. The graph below shows annual per capita income levels (in 2011 PPP dollars) at different percentiles of Dutch and Malian income distributions. As can be readily seen, even the poorest percentiles in the Netherlands are richer than all Malian percentiles, including the top 1%. In other words, the two distributions do not overlap: the Dutch distribution starts at an income levels where the distribution on Mali had already ended. (The dashed line is drawn at the income level of the poorest Dutch percentile.)

Now, this fact alone would sufficiently indicate that if one taxes a Dutch person and transfers that money to a person in Mali, it is very unlikely that he would make a regressive transfer. But the probability of a regressive transfer is even much smaller than this first impression implies. One has to ask: from whom in the Netherlands would the expected tax euro (that is used for aid) come? In other words, imagine a big bowl where all Dutch income taxes are collected with, on each euro received, written down the income level (or percentile position) of the person who paid it. If the Dutch system were based on a poll-tax, everybody would contribute the same amount, and the expected percentile position of the taxpayer whose euro goes to Mali would be exactly at the Dutch median income. If the Dutch system were such that the tax rate is the same regardless of income level (the so-called “flat tax” system), the expected euro would come from the person at the Dutch mean income level. (Formally, t=αy where t=taxes paid by an individual, α is the tax rate, and y=pre-tax income. Then, the random tax euro is received from the person with income:  E(y(t/T)=E(αy2/T)=α(E(y))2/αE(y)=E(y) where T=total taxes.) The person with the mean income in the Netherlands is located at the 63rd  percentile of the Dutch income distribution.

But this is not all. The Dutch system of direct taxation is progressive, meaning that the tax rate increases with income level. Now, richer people will contribute not only more euros absolutely, but also more euros proportionally. Using LIS-provided micro income distribution data, we can calculate the average tax rate by percentile of the Dutch distribution (shown in Figure below)  and also calculate that a random euro that would go for aid in Africa would come from the person who is at the 73rd percentile of the Dutch distribution. (This is the other way of saying that ½ of Dutch taxes are paid by the top 27% of recipients.)


We can now go back to the first graph and look at how likely it is that the beneficiary of the Dutch aid to Mali will be richer than the person at the 73rd  percentile of the Dutch income distribution. Since even the Malian top 1% has an income that is vastly inferior (it is about one-fourth) than the income at the Dutch 73rd percentile, that likelihood must be quasi nil. In other words, even if we assume, rather extravagantly, that the only beneficiaries of Dutch aid to Mali are the local top 1%, the transfer would be still progressive. It could be of course argued that if we were to slice the Malian distribution in ever smaller pieces, there may be eventually such a small slice, say the richest five or ten persons in Mali, who would be better-off than the Dutch 73rd percentile. But this is simply saying that—working behind the veil of ignorance of who the beneficiaries of aid are—the likelihood of a regressive transfer is somewhere in the vicinity of one-hundreds of one percent. The onus is therefore on those who argue that foreign aid can be regressive to show that the beneficiaries of aid are people who are probably part of the top Malian millesime or so. This, based on whatever we know on the effects of aid, seems utterly unlikely.

To conclude: aid is not a panacea, it could be even detrimental to the recipient country, but it surely does not (in most cases that we normally have to deal with) represent a transfer of purchasing power from a poor person in a rich country to  a rich person in a poor country. This shibboleth needs to be laid to rest.