My point here is that human nature is a complex thing. There is a selfish streak, but there are also other considerations, like truth, justice, solidarity. Human values/morals are not axiom systems.
It follows that many of the concepts in economics are ideological rather than "scientific". That's not necessarily a bad thing. Our understanding always progresses by simplifying and making assumptions. But it's always prudent to consider alternative systems, with different assumptions, especially as they relate to human nature.
To illustrate, let's take the case of Pareto efficiency. That's a specific type of economic efficiency. Basically it says that if everyone is no worse off, but someone is better off, then it's a Pareto improvement. And if no further improvements can be made, it's Pareto optimal.
Markets are intimately connected with Pareto optimal solutions.
Now, that's a highly ideological notion. There's nothing holy about it. And in fact, these caveats can be found throughout the development of neoclassical economics.
To take a simple but far from obvious case. Consider a owner and a slave. The slave labours and the owner looks over him, maybe directing him to do this and that. They make a profit. And then the owner takes 90% and gives the slave 10%. That's a Pareto optimal solution. Is it acceptable?
To make this interesting, let's consider analogous scenarios.
a) Replace the slave with a beast of burden. Now what?
b) Replace the slave with a wage slave, namely a worker. Now what?
It's clear that the other cases (as well as the original one) are far from clear. It very largely depends upon our view. Should animals be treated like human beings? If not, how different?
It's clear that "culture" or "justice" or things like "solidarity" play a very important role. These things, though hard to quantify, are deeply rooted in human behaviour.
The task of social movements, past and present, is to change this view. Intellectual discussions are important, but won't solve the root problem. The way of changing the view is through education and awareness, at least.
For instance, let's look at slavery. Slave owners were giving many plausible arguments. Do you take better care of your car when you own it, or rent it? Therefore, we should own the slaves. Not rent them, like labour bonded to capital.
This argument was abolished only when the people decided that people ought not to be owned. That's a value judgement. It's extremely hard. It was not done by arguing about the merits of private property.
18 comments:
This involves a misunderstanding of how Pareto is meant to be used, which I will elaborate on when I have the time. Discussing why slavery was abolished requires a great deal of knowledge of British, American, Spanish and Portuguese history. Your account is not very representative of what actually happened, and again, if I have time sometime in the next few days, I will explain why.
But first, I have a straightforward question for you. We've been talking about agriculture, education and the like. Now I'd like to turn the discussion to a reform that could be implemented very quickly from an economist's standpoint: privatization of state-owned enterprises. My proposition: The following enterprises need to privatized as soon as possible:
Banks:
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab National Bank
Punjab and Sind Bank
Syndicate Bank
State Bank of Bikaner and Jaipur
State Bank of Hyderabad
State Bank of Mysore
State Bank of India (CAN BE RETAINED AS A PSU)
State Bank of Saurashtra
State Bank of Travancore
UCO Bank
Union Bank of India
United Bank of India
United India Insurance Company Limited
Vijaya Bank
Cement:
Cement Corporation of India
Fertilizers:
Fertilizer Corporation of India Ltd
Fertilizers and Chemicals Travancore Ltd
Gujarat State Fertilizers and Chemicals Ltd
NFL
Pharma:
Bengal Chemicals and Pharmaceuticals Ltd
Orissa Drugs and Chemicals Ltd
Rajasthan Drugs and Pharmaceuticals Ltd
U.P. Drugs and Pharmaceuticals Ltd
Coal:
CIL (and all its 8 subsidiaries)
Gas:
GAIL
Oil:
HPCL
Indian Oil
ONGC (CAN BE RETAINED AS A PSU)
Oil India
Iron and Steel:
SAIL
RINL
MIDHANI
NMDC
KIOC
Sponge Iron India Ltd
Other:
Bharat Earth Movers Ltd
Bharat Heavy Electricals Ltd
NALCO
Telecom:
BSNL (CAN BE RETAINED AS A PSU)
MTNL
Notice how many public sector banks there are. Notice also how PSUs still dominate in coal, gas, oil and mining. Now, my question: Do you support privatizing these companies? If so, when?
For example, splitting CIL up into its subsidiaries, privatizing them and deregulating the industry would resolve our coal shortages within a relatively short time frame. More importantly, breaking their de facto monopoly (CIL controls 390 mines) and links to government patronage would mean that they would no longer be able to extract economic rents from other businesses. This should have been done years ago. When do you propose to do it? Now? Five years from now? Twenty years from now, after we become the world's biggest coal importer (despite having a quarter of the world's coal reserves)? Fifty years from now? Never? And what about all those useless public sector bank clerks and peons? Do you support continuing to siphon off money to pay these shiftless morons (whether wages or VRS payments) instead of just showing them the door with pink slips, American-style?
I don't know a lot about privatization of PSUs and in particular about CIL, so I don't feel qualified to comment.
As regarding banks, I do notice a lot of public sector banks. As far as I understand, the govt. however has been cutting down very sharply on rural banks which has resulted in a credit crisis.
Can you tell me how would privatization help? How are some of the other privatized industries doing?
The standard article on PSUs is "Government Ownership of Banks" (2002) by Rafael la Porta, Florencio Lopez-De-Silanes and Andrei Shleifer, in the Journal of Finance; you can access it at Shleifer's Harvard website: http://post.economics.harvard.edu/faculty/shleifer/papers/GovtOwnershipBanks.pdf
The conclusion: "Higher government ownership of banks is associated with slower subsequent financial development and lower growth in per capita income and productivity."
On privatization more generally, a good survey article is Andrei Shleifer's "State versus Private Ownership" (1998) in the Journal of Economic Perspectives (the same journal where Richard Thaler's landmark "anomalies" articles appeared). You can read it here: http://post.economics.harvard.edu/faculty/shleifer/papers/state_vs_private.pdf. Shleifer also briefly reviews the case for school vouchers. There are zillions more journal articles on the benefits of privatization, but these are a good starting point.
The Coulson book is available on Google Books, so you can read at least parts of it online for free; see what you think of his comparison of educational systems in Athens and Sparta in the first chapter, for example.
As far as how privatized industries in India are doing, I think the general consensus is that liberalizing telecom and domestic aviation (i.e., opening them up to private players, who then proceeded to rapidly dominate and marginalize the public sector players) has been a tremendous success. (Frankly, there's now very little point in maintaining MTNL's existence, for example, so thoroughly has it been marginalized by the private players.) Private sector players are also far more efficient than public sector ones in the steel and oil industry already (compare Tata Steel and SAIL, or Reliance and ONGC), although wrongheaded government policies have killed Reliance's petrol pumps (Reliance had planned to open 6000, but stopped at 1300 when it started to lose money because of a combination of government price fizing and discriminatory subsidies for public sector companies) and forced them to export more than 70% of their refinery's production; as Businessworld puts it: "That is because the government subsidizes its refineries’ sales of kerosene and liquefied petroleum gas. It gives those subsidies only to the refineries it owns; so if Reliance tried to sell those products in competition with them, it would make a loss." You can read about that and other dirty tricks used to maintain the PSU cartel in distribution here: http://www.businessworld.in/content/view/1748/1809/. International aviation and metro airports are also in the process of being transformed by the private sector. Now I just pray we find the political will to privatize energy and banking.
Thanks Karan.
One of the first concerns though, Andrei Shleifer seems to be heavily involved in the Russian privatization. It's worth keeping in mind. Also worth keeping in mind is what happenned after the privatization and "shock therapy" on the ordinary population.
I'll read more and give more comments.
Incidentally, in case you're wondering about Shleifer's credentials, he was, according to ESI (Essential Science Indicators), the single most cited living economist in 2003, 2004, 2005 and 2006. :) He has received to date 3,421 citations -- 1400 more than the next economist. (Only 14 economists worldwide have notched up over 1000 citations.)
He is one of the top half dozen or so financial economists in the world, founder of the new comparative economics, and winner of the 1999 John Bates Clark medal, an award presented every two years to the leading economist under 40. He is also the editor of the Journal of Economic Perspectives, the American Economic Association's flagship organ for general-interest explication of the latest research.
(40% of the Clark medal winners have gone on to receive Nobel Prizes two decades later, including Samuelson, Friedman, Arrow (who, incidentally, was the real pioneer in studying asymmetric information), Solow, Becker, Stiglitz, McFadden and Heckman.)
I'm not concerned about his credentials. I'm sure he's one of the top economists in the world.
My point was that we should be mindful of his background. As regards privatization, we can predict that "he would say that, wouldn't he".
Theory and practice can be two different things. Like Milton Friedman always said, he should be judged as a theoretical economist and a public intellectual separately.
I'm quite sure that Washington Consensus policies were also prepared by many good economists. That they were an unmitigated disaster for most of Central and Latin America is also something to keep in mind, to the point where IMF is almost finished in Latin America (I think it's something like 1% of IMF's lending, down from like 80%).
As regards Russia, what's your opinion of the privatization there? My understanding is that it was pretty awful, with incomes plummeting and poverty shooting up.
Incidentally if Henry Kissinger can win a Nobel Peace prize, I'm not quite sure how much to trust a Nobel prize winner.
I'll read more and give more comments.
Actually, my (implicit) point was that ad hominem considerations are irrelevant in a discipline like economics (just like in, say, physics), and so the fact that Shleifer was associated with Russian privatization (he was one of several Harvard employees who were employed by USAID as consultants in Russia) has little to no bearing on the efficacy of his data, models, reasoning, etc; which may or may not be convincing in their own right. As far as practice goes, I would only say one thing: the best recommendations can have harmful results if deliberately implemented incompletely or improperly, as has happened in many Third World countries that have been reluctant reformers.
No comment on Kissinger. :) But I will say that "Peace," like "Literature," is not an academic discipline, and the awards are bound to be capricious -- whereas the greatness of most Nobel awardees in Economics is generally undisputed.
As far as the Russian privatization goes, it was a terribly flawed process. The biggest problem as far as privatization goes (there were many other macroeconomic mistakes, such as on currency, that had little to do with the privatization issue per se) was that the process was not transparent, and was not done via open auctions. Open auctions would have been best for the public exchequer, as they would actually have resulted in the firms being overvalued, rather than undervalued. (As to why this should be so, you can read Max Bazerman, William Samuelson and Richard Thaler on the so-called "winner's curse" phenomenon.) Instead, the auctions were rigged to benefit Yeltsin supporters and other insiders (through the loans-for-shares schemes, for example), thus creating the Oligarchs. Because foreign firms were usually disqualified, the winning bids severely undervalued the companies being sold, resulting in windfall profits for the buyers once the economy stabilized a few years later. On the other hand, because Russia did not have much of a private sector beforehand, there were no indigeneous capitalists with deep enough pockets to buy the enterprises at fair value. The Russians preferred the distortions attendant on rigged sales to the humiliation of allowing most state assets to be bought up by foreigners. (I shrug my shoulders here:) Their choice. Shleifer himself, incidentally, was disapproving of the choices that were made. Keep in mind that this peculiar problem of transition does not apply to India; we have a thriving private sector that can pay market prices for public sector firms.
Keep in mind also that Russia did not have functioning equities markets; efficient securities markets usually ensure fairly accurate valuation. In India, such markets do exist, and privatization could be accomplished via IPOs (this is how Thatcher privatized British Airways and British Telecom), or, in the case of listed entities such as SAIL, stake sales on these markets at prevailing market prices. These sales could be accomplished over time (by selling equal or price-weighted quantities everyday over, say, nine or twelve months) so as to get the benefits of dollar-cost averaging and so minimize the impact of market risk (i.e., changes in valuation which result from overall market movements, as opposed to unique risk, i.e. changes in valuation which result from factors unique to the company or the industry in which it operates) on capital gains. The government would in fact gain a privatization premium by doing this, especially if it clearly announced its intentions in advance, as selling majority control of a public sector firm (as opposed to a minority stake) usually buoys the stock price; a gradual sale would allow the market time to fully price in the benefits of the change of ownership, thus maximizing the government's capital gains. (This relates to the phenomenon of post-announcement drift, explored by Bernard and Thomas; Fama; Barberis, Shleifer and Vishny; Daniel, Hirshleifer and Subrahmanyam; and Warner, Kothari and Lewellen.)
Privatization in Russia also needed to be accompanied by liberalization and deregulation (to allow free access to new players and thus prevent public sector monopolies from simply being replaced by private sector ones), and reforms of property and tax laws. One other major reason that the Russian privatization process was far from optimized was the looming election of 1996 and the threat of the Communists returning to power. Yeltsin's political bargains with the oligarchs (and the resulting problems) have to be viewed in that context. Shleifer himself discusses this in his co-authored paper "The New Comparative Economics," available at:
http://post.economics.harvard.edu/faculty/shleifer/papers/nce_07_07_03WORD.pdf
Particularly interesting is the emphasis in the latter paper on the role of institutions in long-term economic development, which draws on Acemoglu's pioneering work (which, I would argue, was in turn influenced by de Soto's work on the importance of functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded). This is particularly worth contrasting with the findings of his later co-authored paper, "Do Institutions Cause Growth?", which adopts a more Beckerian emphasis on human capital.
I'll just quickly respond to your point about Economics more akin to Physics, rather than, say history.
I don't agree with that. My whole point in the post here was that many things in Economics are themselves ideological constructions. The post was part of my effort to understand Economics better, so it's not the final, fixed conclusion. But it's my tentative view right now.
As far as mathematical analysis of things, Economics can be seen to be more objective. But when normative conclusions are drawn, we must be careful. That has a lot of scope for ideology.
I had firsthand experience with this when I was reading some of the work on Indian poverty. The ones I'd read were by
a) Angus Deaton and Jean Dreze
b) Utsa Patnaik
c) Surjit Bhalla
d) Himanshu and Sen
among many others, and I realized how much scope there was for interpretation and judgement. A very simple example is the calorie levels.
Bringing this back to Andrei Shleifer, the point is that his background is relevant. I am not going to read in detail his mathematical contributions (I'm not competent, neither do I have the time). Nobody functions in a vacuum. Being in a particular environment will necessarily shape one's values.
Now, necessarily the works of Shleifer I read will have normative conclusions - partly because they're pitched to a more informal audience. In this, it's vital to take stock of his past.
I've been reading a bit on Milton Friedman and will shortly post.
Have you any opinion on Chile's privatization under Pinochet and after?
But surely it's not possible to make such judgements without carefully going through the models, etc? :) I'm not familiar with the quality of the research on Indian poverty, frankly, because it doesn't interest me as much as other things. My field of interest is financial economics, which is particularly data and model driven. And people in the field don't tend to have ideological disagreements -- paradigm-shifts are driven by new data (such as Thaler's discoveries of anomalies, or Maurice Kendall's analyses of time series of equity and commodity prices which produced the random walk hypothesis) and new techniques (the use of the simple volatility-based specification test has, for example, undermined the random walk hypothesis).
On Chile: I'm quite satisfied with how Pinochet went about with privatization, with one exception: the currency peg instituted in 1979, which was the main cause of the 1982-1984 recession and eventually had to be abandoned. The peg was against Milton Friedman's advice; he had advocated a free-floating currency. I quote from Wikipedia:
"Some analysts divide the neoliberal economic experiments of Chile in two distinct phases: the "First Miracle" (1973- 82), that ended when the fixed exchange rate policy failed and led to the depression of 1982, and the "Second Miracle" (1985-89), which occurred after the devaluation initiated an export-led boom which brought an end to the depression.
"Led by young, free-market policy makers, Pinochet's government privatized almost every nationalized industry, from mines to factories to the pension system. He welcomed foreign investment and eliminated protectionist trade barriers, forcing Chilean businesses to compete with imports on an equal footing, or else go out of business.
"The reforms were coherent and drastic. They also effectively wiped out the entrenched right wing industrial oligarchy, which depended on strict trade protections and subsidies in order to maintain their economic (and therefore political) power. Since the free trade reforms were implemented in the mid 1970s, the economy has averaged 7-percent annual growth, raising per capita income for Chile's 16-million citizens to more than $13,000 in PPP terms -- making them the most prosperous people in South America -- and creating a thriving middle class. Today only 13.3 percent of the population lives below the poverty line, compared, for example, with 31 percent in Brazil and 62 percent in Bolivia.
"Only one of the free market recommendations of El Ladrillo was not implemented: A free-floating currency. Minister of Finance Sergio de Castro, departing from Friedman's well-known support for flexible exchange rates, decided to fix the rate at 39 pesos per dollar in June 1979, under the rationale of bringing Chile's rampant inflation to heel. The result, however, was that a serious balance-of-trade problem arose. Since the Chilean peso's inflation outpaced the U.S. dollar's inflation, every year the Chilean foreign goods buying power increased, all fueled by foreign loans in dollars. When the bubble finally burst in late 1982, Chile slid into a severe recession that lasted more than two years.
"Though many claim to have been opposed to the policy from its inception, the public record does not bear this out. Indeed, up until the very end of the bubble, the fixed exchange rate policy was very popular within Chile, since it allowed consumers to go into debt in dollars and thus purchase foreign goods at discounted prices relative to the Chilean peso. When it became clear that the fixed exchange rate could not be maintained indefinitely, the peso was finally allowed to float in mid 1982. However, this devaluation was done so incompetently and belatedly —- and at the exact moment that the United States, Chile's major creditor and trading partner, was going into a major recession —- that it led to a fall in Chile's GDP of 20% during 1982 and 1983, resulting in widespread unemployment and the collapse of the financial sector. Unemployment spiked to 30 percent. Around 50 percent of the population fell below the poverty line. Extreme poverty affected 30 percent of the population. In his Memoirs ("Two Lucky People", 1998), Milton Friedman strongly criticized De Castro for this monumental mistake, making clear that it was contrary to the free market model.
"Remarkably, following the 1983 implosion, the Pinochet dictatorship did not abandon the free-market reforms of El Ladrillo. Though the recession had huge social and political costs to the junta, during 1983 and 1984, the government maintained a free-market, hands-off approach to the economy, refusing to reinstate tariffs or other trade barriers, and allowing major Chilean industries to fail, rather than proping them up artificially by means of subsidies or other preferential treatment."
My comments on Shleifer's "State vs Private ownership".
I would say that it's more of a "defense of a view" rather than "objective analysis" of state vs private ownership. The point throughout is that "capitalism" is superior to "socialism" or "communism".
The correct way of going about the process would be to take various aspects and compare the two (broadly) forms of industry. This, they do to an extent, but a lot is missing (details below).
The honest way of going about it would be to look at both economic and social indicators. We also have to look at the political structure for making a judgement.
The basic method of introducing ideology is by the framework of the discussion.
a) There is no mention throughout the document about things like poverty, healthcare, inequality, labour unions (except dismissively), social indicators like infant mortality, safety nets.
b) The almost universal assumption throughout is "incentives", mostly specific types of incentives like financial rewards. Is that the dominant motivation for all human activity?
c) I didn't have the time to go through all of the references listed. So I checked a couple, which I was interested in. Here's my experience.
First is Brad De Long Slouching Toward Utopia. This is as part of the communist-bashing tone of the paper.
The comment is:
...during the 20th century, communist govts. killed over 100 million of their own people...
Ok, an interesting statement. I would not deny it. But let's ask a simple question. In a study about the state vs private, would we not do a similar evaluation of atrocities by capitalist states/corporations? East India Company should resonate with Indians, no?
Let's look further at the source. The source lists 20 major criminals in world history. Let's go through the list.
At no. 9 comes Vietnam, 1.8m killed by Communists! That's some serious stuff. The US wasn't attacking Vietnam, it was defending the Vietnamese!
At no. 20 comes Suharto. 600,000 is a pretty conservative figure, especially if you include his adventures in East Timor (murdering 200,000 - 25% of the whole population). No mention of the fact that 90% of his arms were provided by the US. Obviously, that's irrelevant.
That gives an idea of that source.
Second source I looked at was World Bank (Bureaucrats in Business). Many issues with that. Again, the major assumption throughout (with some attempted justification) was that state ownership is evil, they're inefficient and so on. The whole report is trying to a make a point.
More issues. It look at one country in South America as an example - Chile. Well, I guess that's the best they could do, since South America is the site of the worst excesses of the IMF/World Bank. Country after country devastated and so on.
But, let's take Chile. A longer post is coming soon (as part of my Milton Friedman post). But, again, no mention of poverty, unemployment, healthcare, safety nets, inequality, pollution. Things like that are irrelevant. Because, all that matters is efficiency and productivity. The answers to the above issues are not hard to find.
c) Education. It's instructive, there's not a single piece of evidence from say teacher's unions (they're just there to be bashed). A honest analysis would look at that seriously and come up with issues.
In short, I find the essay to be quite non-technical and very ideological. Just the two sources I checked doesn't make me very confident on the validity of the rest of the sources.
I should add, in addition, that the East Asian economies, like Japan, Taiwan etc. are not analysed well. Japan, from what I recall had a very strong linkage with their MITI (Ministry of Trade and Industry) and massive intervention by the state in the economy.
Sorry, I just saw this. As I mentioned, "State vs. Private Ownership" is a survey article, not a technical one. I suspect that Chile is taken as an example because it's the only country in Latin America that comprehensively reformed its policies and institutions, as opposed to partial reform. What about the article on "Government Ownership of Banks"? That is a technical article. And "The New Comparative Economics" and "Do Institutions Cause Growth?" include social and political dimensions.
Actually, the idea that MITI was a key factor (which owes a lot to the 1982 book, MITI and the Japanese Miracle, by political scientist Chalmers Johnson) has long been dismissed by Japanese and American researchers alike. Let me give you just two examples of how MITI in fact got in the way:
1. Early in the fifties, a small consumer-electronics company in Japan asked the Japanese government for permission to buy transistor-manufacturing rights from Western Electric. Permission was necessary because at the time foreign exchange was controlled by the tax and trade ministries. The Ministry of International Trade and Industry (MITI) refused, arguing that the technology wasn't impressive enough to justify the expenditure. Fortunately, two years later, after a lot of pleading, the company persuaded MITI to reverse its decision and went on to fame and fortune with the transistor radio. The company's name: Sony. MITI's role in this affair was not what I would call positive.
2. In the mid-fifties MITI exhorted a Japanese industry to develop a prototype "people's" model of its product so MITI could designate the winning firm as the single producer. In the 1960s MITI tried to force this industry's many firms to merge into just a few. Both times the companies rebuffed MITI, maintained competitive dynamics, and today this industry is one of Japan's finest. Its product: cars. Not a great credit to MITI, huh? :)
The most thorough study of the causes of Japan's twenty-year postwar growth spurt is a Brookings Institution study by Edward F. Denison and William K. Chung. They found that four factors contributed about two percentage points each to the 8.77 percent annual growth rate of national income between 1953 and 1971. The four, in order of importance, were: increases in capital (2.10 percentage points); advances in knowledge and factors not elsewhere classified (1.97); economies of scale (1.94); and increases in labor (1.85). Most of the remaining growth was accounted for by reallocation of resources away from the inefficient agricultural sector.
The major cause of Japan's large increase in capital was its large increases in investment. Gross private investment, which had been a healthy 17.2 percent of GNP from 1952 to 1954, increased almost continuously throughout the fifties and sixties. By 1970 and 1971 it was a whopping 30.5 percent of GNP. In other words, almost one out of every three yen of Japanese production in 1970 and 1971 was invested in capital. This private investment, in turn, was financed largely by Japanese saving. Gross private saving, half of which was by corporations and half by households, rose steadily from 16.5 percent of GNP between 1952 and 1954 and reached 31.9 percent of GNP in 1970 and 1971. In the United States between 1961 and 1971, by contrast, private saving averaged only 15.8 percent of GNP.
Economist Fumiyo Hayashi of the University of Pennsylvania cautions that comparisons between Japanese and U.S. savings rates are tricky because of the different ways that savings are measured in each country. Measuring savings the same way, he shows, reduces the gap between U.S. and Japanese savings rates. But a large gap still remains.
What accounts for the large Japanese savings rates? Economists are not agreed, but two factors are probably important. The first is low taxes. As Brookings economist Joseph Pechman wrote in 1976, "The fact that the tax burden is unusually low by the standards of other developed countries may alone be a significant factor in the explanation of the high rate of private saving and investment in Japan." From 1951 to 1970, while Japan's real GNP was growing at an average of 9 percent per year, total national and local taxes (excluding social security) fell from 22.4 percent of national income to 18.9 percent. This left more money for people to save and invest. Compare Japan's situation with the United States, where the proportion rose from 28.5 percent to 31.3 percent. Interestingly, Japan's two decades of greatest postwar growth were also its decades of lowest taxes. During the seventies, as Japan's taxes rose to 22.8 percent of national income in 1980, real GNP growth declined to only 4.8 percent. Higher taxes weren't the only reason for this deteriorating performance, of course; oil price increases also contributed.
The second probable cause of high Japanese saving is the incentive that Japan's tax code gives to savers. Since the early fifties, savers in Japan have been allowed to exempt large amounts of interest income from taxation. Employees who saved part of their wages in an employer-run savings plan paid no taxes on interest on the first x dollars of savings. In 1981, for example, x was $22,600. Interest on postal savings—in Japan the post office offers a limited range of financial services—is treated similarly. In 1981, for example, interest on the first $13,600 was tax free. Those without qualms about lawbreaking could theoretically hold one such account at each post office—there are more than twenty thousand—because postal savings officials tolerate multiple accounts. At one point, according to a study by the Hudson Institute, Japan had twice as many postal savings accounts as people. Also, capital gains from the sale of securities were untaxed and Japan's government also allowed banks to own stock, which was prohibited in the U.S. by the Glass-Steagall Act. Because Japanese banks owned stock and because many bank officers sat on company boards, they could discipline managers, and, by taking equity positions in companies, act as a source of venture capital. Banks were more willing to back companies during crises because of their equity positions, as in the case of Toyo Kogyo, the Japanese company that made Mazda autos. When the 1974 oil price increase made its fuel-inefficient Wankel engine uncompetitive, Toyo Kogyo almost went under. Sumitomo Bank, a large stockholder, assured Toyo Kogyo's creditors and suppliers that it stood behind the firm. Had the U.S. law prevailed in Japan, Sumitomo would have had much less to gain from lending to Toyo Kogyo.
Also note that government spending as a percentage of GNP was lower in Japan during this period than any other industrialized country.
As far as Taiwan, Korea, Singapore and the rest go, Paul Krugman (who is about as far left as it is currently possible for a respected professional economist in the U.S. to be) has decisively demonstrated in a series of articles that their growth derived from unsustainable increases in factor inputs rather than productivity, which is why they hit a ceiling in the late 90s. You can read a simple summary here: http://web.mit.edu/krugman/www/myth.html.
On Korea, I quote from a 1998 report: "Korea's accomplishments were built on massive levels of debt and central government control of business decisions. The Seoul government subsidized sprawling business groups, known as chaebols, and simultaneously protected them from foreign competition by shielding domestic markets from foreign investment and imports. Eventually, Korea's $500 billion economy became far too complex for economic bureaucrats to control effectively. Bad business decisions proliferated, and this led in turn to over capacity in core industries and inadequate demand in both domestic and international markets. Korea's combined domestic and foreign currency debt [in 1998] is estimated to be as high as $730 billion--almost twice the size of its 1997 gross national product. This crushing financial burden brought the Korean economy to its knees late last year, and the previous Korean administration turned to the International Monetary Fund (IMF) for aid. The result was a $57 billion IMF bailout package."
Korea (under Kim Dae Jung), Taiwan and Singapore have in fact enacted far-reaching reforms since 1998, which have helped them to make huge strides in productivity. In 2005, for example, manufacturing output per hour increased 8.5% in Korea and 7.1% in Taiwan.
Incidentally, the biggest failure in Latin America has been inadequate investment in higher education. The biggest success of South Korea, Singapore and especially Taiwan (where over 50% of each cohort receives post-secondary education) has been expansion of higher education. As I've said before, more public funding for college students is a form of redistribution I'd support, especially if it were given to students directly to spend on institutions of their choice rather than being given to the institutions themselves. But this would only work if higher education is deregulated by abolishing the UGC, AICTE, etc, and ensuring that both central and state authorities do not interfere in the setting up of private institutions.
I foresee a great many Indian billionaire tycoons being willing to invest handsomely in creating new endowment-funded private universities, providing they are able to shape them in accordance with their own vision rather than that of a bunch of politicians and government regulators (as John D. Rockefeller created UChicago, Ezra Cornell created Cornell, Leland Stanford created Stanford, Washington Duke and James B. Duke created Duke, Andrew Carnegie created what became Carnegie Mellon, etc etc etc...). Vedanta University is one step in this direction, as is the corporate-funded Indian School of Business, which, without a doubt, has superior faculty and curricula to even the IIMs, although the IIMs still (temporarily) attract most of the best students because of the halo effect and their longstanding recruitment and placement networks (which will change as the ISB continues to grow and mature as an institution, unless the IIMs are allowed to rid themselves of their silly government-capped payscales, etc). True liberalization of the sector would produce many, many more such examples.
Thanks for your comments. A few points.
a) I have no problems with a non-technical study (indeed, that's the best, because I have very little knowledge of formal economics). My concerns were as noted.
The study was overwhelmingly biased in favour of measures like efficiency, productivity, GDP growth. It's not that they're not important, but those are not the only things.
As mentioned, there's virtually no mention of poverty, inequality, unemployment, labour rights, pollution, health care and things like that. For a very good reason. Because the picture there isn't as rosy as claimed.
b) Regarding Chile, I'm really confused. Both the proponents of "free trade and the opponents claim it as supporting their view. Do you have a good study?
For example, let's consider growth. You mention that the pegging of the peso to the dollar was bad. What was the situation before 1981-2?
See these articles.
When you take both the recession and recovery into account, Chile actually had the second worst rate of growth in Latin America between 1975 and 1980. (James Petras and Fernando Ignacio Leiva with Henry Veltmeyer, Democracy and Poverty in Chile: The Limits to Electoral Politics)
We can take other measures like median income, poverty levels, unemployment, healthcare and other things. On this, Chile fared poorly. Even in the so-called "boom" years (which many contend were only recoveries from recession) - and afterwards.
From the beginning of the reforms of the Chicago Boys in 1973 through 1986, there was no economic growth. Real mean salaries, adjusted for inflation, have declined by 10% since 1986 and by 18% from what they were during the Allende years. Median salaries have fared even worse, declining by 30% over the same period
There are also other issues. You mention that Chile was one of the few countries that did follow the free-market principles to a very significant extent. But what about the countries who didn't follow it to the letter? Should it be all or nothing? That sounds very ominous to me, because any time the govt. tries to implement some social programs it would be accused to being "populist" and denounced. And the "failures" of the economy would be put on the shoulders of the govt. That raises issues of independence and accountability. Any deviation from the accepted doctrines wouldn't be tolerated. That doesn't seem a very pleasant prospect. What kind of freedom is this?
Is it really so surprising that the neoliberal reforms could take hold most in the worst political climate? Where formal democratic institutions have been blown to bits? Because no departure from the party line is tolerated.
Indeed, the issues I'm raising are hardly new and have been articulated in various forms throughout the "neoliberal" reforms.
c) If we study some phenomenon, we have to get a representative sample. Taking Chile (and only concentrating on growth within some time period - with no mention of other issues) is not representative of Latin America, where the neoliberal policies were most intensively applied.
d) Regarding Japan. You point out a couple of examples. I would need to check them further. But the state intervention was hardly just the MITI. See this article "Kicking away the ladder" by Ha-Joon Chang - includes a section on Japan.
I tend to agree with the nonsensical character of pareto optimality in particular and neoclassical economics in general.
More here.
http://alexmthomas.wordpress.com/category/neoclassical-economics/
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