Episode 52 of the Podcast Missão Desenvolvimento with Paulo Gala and Eduardo Crespo discussing the possible new Pink Tide in Latin America (in Portuguese).
Showing posts with label Economic Development. Show all posts
Showing posts with label Economic Development. Show all posts
Wednesday, April 20, 2022
Monday, December 9, 2019
Central Banks, Development and the Argentinean Economy
Monday, November 4, 2019
Contradictions and Challenges for Growth in Latin America
Friday, October 25, 2019
Challenges for Economic Development in Latin America at the Universidad del Litoral
For those around that want to register go here.
Thursday, October 24, 2019
Who really wants the (Brazilian) economy to grow?
Franklin Serrano and Vivian Garrido (Guest bloggers)
When the Brazilian economy was growing with low unemployment rates and reducing income inequality, it was said that “businessmen have never made so much money” and, at the same time, the business community’s discontent with the government was increasing. On the other hand, in the current situation of semi-stagnation that followed from a deep recession, the entrepreneurs of both real and financial sectors declare their unrestricted support to the current government, despite the daily mess and shame of various government members and the bad economic conditions. We believe that, in order to understand both this apparent paradox and the very tendency of the Brazilian economy to stagnate, it is useful to clarify some basic theoretical relationships between investment, growth of demand and profitability.[1]
What matters to entrepreneurs?Entrepreneurs want "profitability". Profitability is not simply about selling more (total profit volume), but about the amount of profit compared to the size of the invested capital. Of course, as the economy grows, the volume or mass of profits invariably increases in absolute terms. But, as Garegnani said, companies do not care about the mass of absolute profits, but about the rate of profit, that is, the amount of profit relative to the capital invested; this variable may simply be called “profitability”. However, in the short run, the capital stock already installed is given; it’s a result of past investments. Then, in this short run, the rate of profit on this capital stock will depend only on the amount of profit and this, by its turn, depends on two factors: how much is produced and sold (the level of output) and the share of the product (and income) that goes to profits. Let us clarify in more detail these two factors.
In order to do so, let's imagine a scenario (let's call it “scenario 1”) in which real wages rise more than the trend of growth of labor productivity. This tends to reduce the rate of profits as the share of profits on sales (the second factor above) falls. It is true that, since in aggregate level these increases in wage share tend to increase the demand for consumption (because the share of wage income spent on consumption is naturally higher than that of profit income), aggregate consumption and production increase, which means that, in the short run, the degree of utilization of already installed capital increases and firms as a whole, partially offset lower margins with higher sales (i.e., the first factor above). Lower margins tend to decrease the rate of profit, but higher sales, on the other hand, tend to increase the rate of profit on this already installed capital stock. But one thing does not fully offset the other. This offset, however, besides being of a short term nature, is also only partial, as any increase in the payroll increases company costs and only part of this increase comes back as additional demand and revenue for them. This is because part of the amount of these additional wages will be spent directly on imported consumer goods (and indirectly on imported inputs of consumer goods produced in the country). Another part of the payroll increase goes either to pay direct taxes or is captured by indirect taxes paid by consumers and embedded in the price of retail goods. And also because part of the payroll is saved or used to pay workers's debts with the financial sector (whose owners tend not to spend these revenues).
So, is this profit rate that matters to entrepreneurs?Not really; or rather, although this is the actual rate of profits realized on the existing capital stock, it is not the rate of profit that determines the expected profitability of entrepreneurs in their new investments. In the latter case, companies are going to invest an adequate amount for the production capacity to adjust to the new expected total demand (which, in the present case, has grown) at a planned or normal degree of utilization, that, in its turn, is calculated to meet the expected fluctuations in demand, which implies that now (beyond the short term), the volume of capital invested will increase. Therefore, because of the rise on real wages, the expected rate of profit on new investments will fall as much as the share of profits will fall, without any partial compensation (as in the previous case), and gradually the profit rate related to the capital that is being installed goes falling as much as the expected rate of profit. And this rate of profit, that is, the rate of profit on the productive capacity planned to be used at the normal level, is the one that matters, because it determines the expected profitability. This longer run profit rate is called the “normal” or “expected” rate of profit.
But why do companies focus on the expected rather than on the actually realized profit rate?Well… due to competitive pressure, firms do not want either to overestimate the expansion of the market (in order to avoid loss), nor underestimate this expansion, otherwise they will lose market shares to rival companies and/or new entrants in their sectors. Hence, any individual entrepreneur who refuses to invest just because he is not content with a lower profitability (i.e., a lower normal rate of profit) while demand is expanding will simply be losing market share to another one. The idea of planning the production capacity to be used at the so-called “normal” level contemplates the possibility of fully meeting the average demand over the life of the equipment while maintaining a slack to meet temporary or seasonal demand peaks, thus avoiding losing market share to competitors during these peaks. And because the productive capacity is planned to operate at the normal level based on the expected demand, then it is the expected not the realized rate of profits that becomes decisive.
Does this mean that, although “upset”, entrepreneurs still invest knowing that their expected profit rate will fall?
Exactly.
So, profitability matters to entrepreneurs but it doesn't matter to the investment decision? What do you mean?
This is where we would like to separate and clarify the confusion between the expected profit rate and the investment decision. The total amount of investment depends only on the expected demand and not on the expected profit rate! This leads us to two opposite but not antagonistic conclusions. First, that the business community generally does not like reductions in the share of profits in income through real wage increases above the rising trend in labor productivity. That is, as we said above, the business community struggle for their profitability, because this is what matters to them. But second, when this scenario of a rise in the wage share actually happens and markets expand, the combination between competition and the lack of a better alternative, cause entrepreneurs to expand their investments, even if expected and realized profit rates are falling, unless they fall below their opportunity cost, given by the interest rate, which is its lower bound. With profit rates still above this lower limit and if demand is expanding, investment continues to grow. A central implication of these propositions is that the reaction of the business community to a downward trend in profitability will not be, therefore, an implausible "investment strike." As Kalecki said: "capitalists do many things as a class, but they certainly do not invest as a class". If and when there is a capitalist reaction, it will consist of doing something like political pressure for the State to change the economic policy regime, in order to reverse the situation in the direction of their own interests.
To illustrate, let us now suppose a second scenario (let's call it “scenario 2”), where we observe such a class reaction that succeeds and, through austerity policies, the government manages to generate stagnation with mass unemployment and this then reverses the trend of rapid growth in real wages. In this second scenario, if demand is no longer expanding and even more if there is unwanted idle capacity in the already installed capital stock, companies have no incentive to invest, no matter how much real wages and other costs or taxes and corporate contributions fall, due to labor reforms or social security or due to tax exemptions to firms in general. As much as the business community can and will be satisfied with this high level of profitability, there is no incentive for additional investment, since it would only create unnecessary productive capacity. Probably some entrepreneurs will invest in innovations to steal market share from other companies. But if the innovators succeed, those other companies that have lost market tend to reduce their own investments in the same magnitude. Unfortunately, without growth of final demand, an aggregate expansion of investment will not be sustained for too long.
And what matters to workers?Naturally, workers generally are interested in more jobs, and in increase in real wages. Both factors are directly connected with higher economic growth because growth tends to generate more jobs. In fact, politically and historically, it is through decreasing unemployment and underemployment that the bargaining power of workers rises (and has risen) and facilitates the achievement of higher real wages and better working conditions. Increases in real wages above labour productivity growth is even better for workers, because, in this case, in addition to the initial increase in wage purchasing power, there is an increase in the economy’s aggregate marginal propensity to consume (share of total income that is spent on consumption) and thus, an additional increase in aggregate demand and employment as a result of this wage increase itself.
In our view, due to a number of structural characteristics of the economy, Brazil was, until 2010, close to the previous situation described above, which is equivalent to our scenario 1. These characteristics had included elements such as: the demographic transition _ reducing the growth of labor supply _ and the low labour productivity growth _ due to a more than proportional expansion of the services sector, what generated more employment than the expansion led by other sectors. In addition, several aspects of the growth pattern adopted, based on a strong rise in the minimum wage, an elevation of job formalization, and an expansion of the welfare state (giving the poor the opportunity to survive or study without working in precarious conditions) contributed to increase the bargaining power of workers, especially the low-skilled ones, which has grown substantially and unexpectedly during the boom of the Brazilian economy since 2004. Nevertheless, since 2011 the government, pressured by the discontentment of the capitalist class with this trend, has taken a number of palliative measures to restore the corporate profitability (especially tax exemptions) and seemed to have been surprised with the lack of positive impact of such measures on private investment, in a context where government had helped to decrease markedly the growth of demand. Then, in 2015, the government decided to assume the austerity policies and the gradual weakening of the welfare state with the reduction of social rights. The capitalist class and its external allies, counting also on the support of the workers with higher salaries (the latter particularly outraged by basic wages increase and progressive measures such as the 2013’s housekeepers PEC[2]) and seeing that they had nothing to fear from a government without any firmness, set out to attack. And, through a succession of coups, the transition to something close to our scenario 2, against the workers' interests,was completed, and here we are now. Profitability conditions improve by each measure taken by the government, helped by the low bargaining power of the workers in this stagnant and mass unemployment economic situation.
In short ...
… With this note, we came up with a scenario that now, we hope, seems less paradoxical, and it is: a) interesting for entrepreneurs; b) uninteresting for workers; c) with an upward trend in the profit rate and d) with low investment growth.
Due to the weak growth of demand that largely resulted from austerity policies, investment and the economy are barely growing and there is a huge and successful effort to focus the political debate on anything but the state of the economy and social rights, in order to prevent the loss of legitimacy and maybe electoral failure of forces supporting the government. Promoting economic growth is not and has never been a priority for big businessmen and, as has been clearly acknowledge, neither growth is a government priority. But who really needs growth are not the entrepreneurs in general _ apart from some small entrepreneurs, for whom and whose family the company generates jobs _ but the workers.
REFERENCES
SERRANO, F. & SUMMA, R. F. (2018) Conflito distributivo e o fim da “breve era de ouro” da economia brasileira. Novos Estudos CEBRAP, v. 37, p. 175.
NOTES:
[1] For more details see Serrano and Summa (2018)
[2] PEC is a brazilian instrument created to facilitate changes in small parts of the Federal Constitution. In the case refered in the text, it was a particular formalization of housekeeper’s jobs.
When the Brazilian economy was growing with low unemployment rates and reducing income inequality, it was said that “businessmen have never made so much money” and, at the same time, the business community’s discontent with the government was increasing. On the other hand, in the current situation of semi-stagnation that followed from a deep recession, the entrepreneurs of both real and financial sectors declare their unrestricted support to the current government, despite the daily mess and shame of various government members and the bad economic conditions. We believe that, in order to understand both this apparent paradox and the very tendency of the Brazilian economy to stagnate, it is useful to clarify some basic theoretical relationships between investment, growth of demand and profitability.[1]
What matters to entrepreneurs?Entrepreneurs want "profitability". Profitability is not simply about selling more (total profit volume), but about the amount of profit compared to the size of the invested capital. Of course, as the economy grows, the volume or mass of profits invariably increases in absolute terms. But, as Garegnani said, companies do not care about the mass of absolute profits, but about the rate of profit, that is, the amount of profit relative to the capital invested; this variable may simply be called “profitability”. However, in the short run, the capital stock already installed is given; it’s a result of past investments. Then, in this short run, the rate of profit on this capital stock will depend only on the amount of profit and this, by its turn, depends on two factors: how much is produced and sold (the level of output) and the share of the product (and income) that goes to profits. Let us clarify in more detail these two factors.
In order to do so, let's imagine a scenario (let's call it “scenario 1”) in which real wages rise more than the trend of growth of labor productivity. This tends to reduce the rate of profits as the share of profits on sales (the second factor above) falls. It is true that, since in aggregate level these increases in wage share tend to increase the demand for consumption (because the share of wage income spent on consumption is naturally higher than that of profit income), aggregate consumption and production increase, which means that, in the short run, the degree of utilization of already installed capital increases and firms as a whole, partially offset lower margins with higher sales (i.e., the first factor above). Lower margins tend to decrease the rate of profit, but higher sales, on the other hand, tend to increase the rate of profit on this already installed capital stock. But one thing does not fully offset the other. This offset, however, besides being of a short term nature, is also only partial, as any increase in the payroll increases company costs and only part of this increase comes back as additional demand and revenue for them. This is because part of the amount of these additional wages will be spent directly on imported consumer goods (and indirectly on imported inputs of consumer goods produced in the country). Another part of the payroll increase goes either to pay direct taxes or is captured by indirect taxes paid by consumers and embedded in the price of retail goods. And also because part of the payroll is saved or used to pay workers's debts with the financial sector (whose owners tend not to spend these revenues).
So, is this profit rate that matters to entrepreneurs?Not really; or rather, although this is the actual rate of profits realized on the existing capital stock, it is not the rate of profit that determines the expected profitability of entrepreneurs in their new investments. In the latter case, companies are going to invest an adequate amount for the production capacity to adjust to the new expected total demand (which, in the present case, has grown) at a planned or normal degree of utilization, that, in its turn, is calculated to meet the expected fluctuations in demand, which implies that now (beyond the short term), the volume of capital invested will increase. Therefore, because of the rise on real wages, the expected rate of profit on new investments will fall as much as the share of profits will fall, without any partial compensation (as in the previous case), and gradually the profit rate related to the capital that is being installed goes falling as much as the expected rate of profit. And this rate of profit, that is, the rate of profit on the productive capacity planned to be used at the normal level, is the one that matters, because it determines the expected profitability. This longer run profit rate is called the “normal” or “expected” rate of profit.
But why do companies focus on the expected rather than on the actually realized profit rate?Well… due to competitive pressure, firms do not want either to overestimate the expansion of the market (in order to avoid loss), nor underestimate this expansion, otherwise they will lose market shares to rival companies and/or new entrants in their sectors. Hence, any individual entrepreneur who refuses to invest just because he is not content with a lower profitability (i.e., a lower normal rate of profit) while demand is expanding will simply be losing market share to another one. The idea of planning the production capacity to be used at the so-called “normal” level contemplates the possibility of fully meeting the average demand over the life of the equipment while maintaining a slack to meet temporary or seasonal demand peaks, thus avoiding losing market share to competitors during these peaks. And because the productive capacity is planned to operate at the normal level based on the expected demand, then it is the expected not the realized rate of profits that becomes decisive.
Does this mean that, although “upset”, entrepreneurs still invest knowing that their expected profit rate will fall?
Exactly.
So, profitability matters to entrepreneurs but it doesn't matter to the investment decision? What do you mean?
This is where we would like to separate and clarify the confusion between the expected profit rate and the investment decision. The total amount of investment depends only on the expected demand and not on the expected profit rate! This leads us to two opposite but not antagonistic conclusions. First, that the business community generally does not like reductions in the share of profits in income through real wage increases above the rising trend in labor productivity. That is, as we said above, the business community struggle for their profitability, because this is what matters to them. But second, when this scenario of a rise in the wage share actually happens and markets expand, the combination between competition and the lack of a better alternative, cause entrepreneurs to expand their investments, even if expected and realized profit rates are falling, unless they fall below their opportunity cost, given by the interest rate, which is its lower bound. With profit rates still above this lower limit and if demand is expanding, investment continues to grow. A central implication of these propositions is that the reaction of the business community to a downward trend in profitability will not be, therefore, an implausible "investment strike." As Kalecki said: "capitalists do many things as a class, but they certainly do not invest as a class". If and when there is a capitalist reaction, it will consist of doing something like political pressure for the State to change the economic policy regime, in order to reverse the situation in the direction of their own interests.
To illustrate, let us now suppose a second scenario (let's call it “scenario 2”), where we observe such a class reaction that succeeds and, through austerity policies, the government manages to generate stagnation with mass unemployment and this then reverses the trend of rapid growth in real wages. In this second scenario, if demand is no longer expanding and even more if there is unwanted idle capacity in the already installed capital stock, companies have no incentive to invest, no matter how much real wages and other costs or taxes and corporate contributions fall, due to labor reforms or social security or due to tax exemptions to firms in general. As much as the business community can and will be satisfied with this high level of profitability, there is no incentive for additional investment, since it would only create unnecessary productive capacity. Probably some entrepreneurs will invest in innovations to steal market share from other companies. But if the innovators succeed, those other companies that have lost market tend to reduce their own investments in the same magnitude. Unfortunately, without growth of final demand, an aggregate expansion of investment will not be sustained for too long.
And what matters to workers?Naturally, workers generally are interested in more jobs, and in increase in real wages. Both factors are directly connected with higher economic growth because growth tends to generate more jobs. In fact, politically and historically, it is through decreasing unemployment and underemployment that the bargaining power of workers rises (and has risen) and facilitates the achievement of higher real wages and better working conditions. Increases in real wages above labour productivity growth is even better for workers, because, in this case, in addition to the initial increase in wage purchasing power, there is an increase in the economy’s aggregate marginal propensity to consume (share of total income that is spent on consumption) and thus, an additional increase in aggregate demand and employment as a result of this wage increase itself.
In our view, due to a number of structural characteristics of the economy, Brazil was, until 2010, close to the previous situation described above, which is equivalent to our scenario 1. These characteristics had included elements such as: the demographic transition _ reducing the growth of labor supply _ and the low labour productivity growth _ due to a more than proportional expansion of the services sector, what generated more employment than the expansion led by other sectors. In addition, several aspects of the growth pattern adopted, based on a strong rise in the minimum wage, an elevation of job formalization, and an expansion of the welfare state (giving the poor the opportunity to survive or study without working in precarious conditions) contributed to increase the bargaining power of workers, especially the low-skilled ones, which has grown substantially and unexpectedly during the boom of the Brazilian economy since 2004. Nevertheless, since 2011 the government, pressured by the discontentment of the capitalist class with this trend, has taken a number of palliative measures to restore the corporate profitability (especially tax exemptions) and seemed to have been surprised with the lack of positive impact of such measures on private investment, in a context where government had helped to decrease markedly the growth of demand. Then, in 2015, the government decided to assume the austerity policies and the gradual weakening of the welfare state with the reduction of social rights. The capitalist class and its external allies, counting also on the support of the workers with higher salaries (the latter particularly outraged by basic wages increase and progressive measures such as the 2013’s housekeepers PEC[2]) and seeing that they had nothing to fear from a government without any firmness, set out to attack. And, through a succession of coups, the transition to something close to our scenario 2, against the workers' interests,was completed, and here we are now. Profitability conditions improve by each measure taken by the government, helped by the low bargaining power of the workers in this stagnant and mass unemployment economic situation.
In short ...
… With this note, we came up with a scenario that now, we hope, seems less paradoxical, and it is: a) interesting for entrepreneurs; b) uninteresting for workers; c) with an upward trend in the profit rate and d) with low investment growth.
Due to the weak growth of demand that largely resulted from austerity policies, investment and the economy are barely growing and there is a huge and successful effort to focus the political debate on anything but the state of the economy and social rights, in order to prevent the loss of legitimacy and maybe electoral failure of forces supporting the government. Promoting economic growth is not and has never been a priority for big businessmen and, as has been clearly acknowledge, neither growth is a government priority. But who really needs growth are not the entrepreneurs in general _ apart from some small entrepreneurs, for whom and whose family the company generates jobs _ but the workers.
REFERENCES
SERRANO, F. & SUMMA, R. F. (2018) Conflito distributivo e o fim da “breve era de ouro” da economia brasileira. Novos Estudos CEBRAP, v. 37, p. 175.
NOTES:
[1] For more details see Serrano and Summa (2018)
[2] PEC is a brazilian instrument created to facilitate changes in small parts of the Federal Constitution. In the case refered in the text, it was a particular formalization of housekeeper’s jobs.
Thursday, October 10, 2019
MMT in Developing Countries at the Real News Network
Monday, September 23, 2019
Official Reforms and India’s Real Economy
By Sunanda Sen
(Former Professor, Jawaharlal Nehru University; Guest Blogger)
That the Indian economy is currently experiencing a slowdown is more than evident, both with the deliberations in different private circles and with official statements signalling a series of remedial measures , mostly focused on the ailing financial sector! However, as we point out, the ailing Indian economy has concerns that go beyond flagging GDP growth and the ailing financial sector.
Downturn in the economy
As for the downturn, the country’s GDP growth rate has plunged into a low of 5% in the first quarter of the current financial year 2019-20 .The drop has been accompanied by a sharp deceleration in the manufacturing output and a sluggish growth of output in agriculture. Matching both, ‘consumption growth’ has also been weak.
A fact which remains less highlighted in current official concerns includes unemployment, at 7.1% of the labour force during September-December 2018 as reported in the Labour Force Periodic Review. Unemployment has been even higher for urban youth during the period, at 23.4%. Information as is available indicates on-going spread of job cuts in different manufacturing units and wide-ranging distress in rural areas with farmer suicides, which causes added concern.
There also are recent reports of a shrinkage in labour force participation ratio (the proportion of people who are willing to work), indicating tendencies of withdrawal syndromes on part of the unemployed – which have been largely in response to the grim employment prospects. Distress is further manifested in the large numbers of poverty stricken people - both in rural and urban areas –ranging from 22 % to 29% of aggregate population according to different estimates.
The grim facts relating to unemployment and poverty in the real economy of India make it evident that a drop in GDP growth is not just a matter concerning the dampened financial markets and their volatility. Downturns also speak of the real sector – of the dearth of sustainable jobs and the related poverty.
Looking at the prevailing concerns in India for the stagnating economy, analysts often ruminate on the steep drop in stock prices in India’s secondary market which started with the end of the temporary euphoria at end of the national election in May 2019 . One may recall the shooting up of the Sensex beyond 40,000 on June 4, 2019, far surpassing 37,000 on May 13. The index, slumping back to a low of 36,855 on August 30, has , at the time of writing, abruptly shot up, nearing 39,000 , which is a response to the magic wand of the tax bonanza announced on September 20. Causes cited for the earlier downfall include the volatile net flows of Foreign Portfolio Investments (FPI) - recording outflows of Rs 3,700 crore or above in a single month of July 2019. Above went along with the simultaneous drop on India’s foreign exchange reserves by nearly $1 billion between July 20 and July 26, 2019.
Policy measures announced
Concerns relating to the stagnating GDP growth and financial markets in the country has prompted the government to announce a series of measures since the recent official announcements started on August 23, 2019 . The measures included a scrapping of the surcharges on long and short term capital gains as were earlier proposed in the last budget; in a bid to help inflows of foreign portfolio investments. A few stimulant measures as suggested include an investment package of Rs 100 lakh crores on infrastructure, a Rs 70th crore liquidity injection to recapitalize banks and cheaper loans to facilitate property market and auto sector, along with a promise of additional purchases by government departments in auto market . Corporations have also been assured of a no- penalty clause if they fail to comply with the corporate social responsibility(CSR) clause, originally designed to help the underprivileged. Included in the package are also additional roll-backs, of taxes on the ‘super rich’- as introduced in the last budget - in income slabs over Rs 2 crore and beyond Rs 5 crore.
Government announcements on August 30, in the next round, relaxed several rules on single-brand retail, contract manufacturing, coal mining and digital media for FDIs. Another important measure has been the dilution of the current 30% domestic sourcing norms for single brand retail trading in the country.
Official announcements on August 30 also related to the mergers of public sector banks , by combining the ‘bad’ ones with the stronger ones, thus reducing the total number of PSBs to 12. The move is supposed to coordinate with the promised recapitalization plan of Rs 70 th crores, as announced at end of the previous week.
Finally, a big tax bonanza, with rates cut from 30% to 22% has been mentioned on September 30. Above, according to a credit rating agency, Crisil, amounts to a tax savings of Rs 37,000 crores for the 1000 listed corporations. By the same estimates, the expected aggregate tax loss for the government amounts to Rs 1.45 crore; which, incidentally, exactly matches the sum received by the government from the Reserve Bank of India. Remedial official measures, addressed to mend the on-going regressive impact of the Goods and Services (GST) tax on the economy, are also on the cards, with several cuts in this indirect tax on specific items.
How effective to revive the economy?
Sops as above as tax relief - to portfolio as well as corporate investors within and outside the country – while effective in temporarily stimulating the secondary stock market, may not work to reverse the tendencies for the stagnation, even in the financial sector and let alone in the real economy. Contrary to what was expected, the initial response of the stock market continued to be rather non-committal over nearly a month between August 23 and September 20th when the big tax bonanza package was announced. It is possibly too early( and nearly impossible) to project the stock market movements in future. Still more doubtful is an expected positive impact of all above policy moves on capacity creation via the market for initial primary offers (IPOs) - short of which there can be no expansion in the real economy of output, investment and employment.
The stark realities relating to the contrasts between the real and the financial economy reflect itself in the low value of the initial Primary Offers (IPOs). As is well known, the latter indicate new physical investments rather than financial transfers alone as in the transactions of shares in the secondary stock market. A revival of the stagnating real economy demands additional investments in physical terms with related expansions in jobs. Little of those are likely to be fulfilled by a boom in the secondary market of stocks and the related gains on speculative and short term investments. Also in terms of simple national accounts, capital gains or losses relating to the portfolio investors in the secondary stock markets are always treated as ‘transfers’ between parties, and as such not even considered in calculating the GDP in their first round. Possibilities, however, remain of net injections/withdrawals of real sector demand by agents who face capital gains/losses , which deviates from their underlying inclinations to further speculate in the market. However, while the proposed tax benefits will further widen the inequalities within the country, little of those may finally be channeled beyond the speculative zone of stock markets and real estates.
Additions to corporate savings, if generated, will not generate real investments unless demand for the latter is forthcoming in the market. This comes as the home truth that Keynes spelt out more than 80 years back in the context of the Great Depression of 1929-30! Sops to speculation in the market and the lenient tax breaks for super rich as well as corporations may only help to invigorate the current spate of speculation, in stock markets (or even on real estates and commodities) further.
Official concerns as such for the public sector banks sound more than deserving, given the issues with the near bankrupt NDFCs (or shadow banks ) with their easy access to the formal banking sector which generated a large part of the on-going NPAs. In our judgement, the vacuum created with shrinking banking facilities and branches and the total absence of development banks will continue to provide space to the NBFCs and their malfunctioning.
Research, as available indicates how the corporations have made use of credit from banks to meet their liabilities ( as interest payments on past debt as well as payments of dividends to share-holders), replicating a typical Ponzi strategy. Simultaneously investments by corporations have switched from the real to the financial sector with offers of better earnings on financial securities. Corporations, in the process, also have often taken recourse to bankruptcy while adding further to NPAs held by banks. Finally, NPAs also resulted from the absconding and corrupt clients of banks who could run-away with their liabilities. One wonders if the change in governance as suggested by the recent mergers which aim to combine the weak banks with the stronger ones (in terms of current performance ), will help in lifting the PSBs from the current mess.
Incidentally, the soft-pedaling by the RBI with four consecutive cuts in the repo rates, while signalling a nod to expansionary monetary policies, will work to lower the lending rates of banks only if there will be a pick-up of credit demand from the public. And that in turn demands more of investment/consumption demand, especially from the real (rather than the financial) sector. This is because the growth of credit supply is determined by credit demand and not the other-way round! This does not rule out possibilities of additional borrowings at the lower rates to finance speculation in financial markets, which will not help revival of the real economy.
Pattern of stagnation in India’s real economy
As already emphasized in the preceding sections of this commentary, a country’s GDP growth alone hardly indicates the country’s level of development, which include employment, social security and absence of poverty. Recognizing above is important in the context of the ailing Indian economy that is currently subject to concerns more pressing than the plunging financial sector.
Mention can be made here of the structural changes in the Indian economy , with changing relative contributions of its three major sectors.Those include the share for services moving up to 50% and above since the early 1990s and the respective industry and agriculture shares stalling around 25% and 19% or less since then.
The employment situation as currently prevail in the Indian economy include 90% or more people struggling to eke out a survival in the informal sector while the organized formal sectors within industry and services offer 10% or less of jobs, thus pushing the majority of the working population to the dark terrains of the unorganized and informal jobs.
As for the sectoral pattern of employment, agriculture has remained the largest provider, at 48.9% of aggregate employment in the economy during 2011-12. Almost all of above are purely in an informal capacity , thus fetching little of the benefits which are usual when labour is formally recruited. As for jobs available in the industrial sector, the organized sector (dealing with the registered factories employing 10 or more workers ) provides less than 11% of aggregate employment in the country. Of above more than four-fifths are employed on a purely contractual or temporary basis with none of the benefits that normally accompany formal jobs. A recent estimate points at the low employment elasticity of aggregate output at 0.08%, which today is even lower than 0.18% during 2009-11. Much of the above is due to the lower absorption of labour in the production process due to the use of capital-intensive technology. In addition, growth rates are found to be higher in the capital as well as the skill intensive products - as compared to the average growth for industry as a whole.
The service sector, currently providing more than one-half of the GDP, has only a marginal contribution in employment. Data available from the Labour Bureau indicate that of an aggregate 140-150 million jobs in the services sector during 2015, only 26 million were with the organized sector. The remaining jobs, mostly in petty production units and self-employment, include, in our view, large numbers with disguised unemployment in the informal sector.
Services in the organized sector also include the ‘sun-rise sector’ , comprising of the Information Technology-Business Processing Organizations ( IT-BPO). Their contribution to jobs has been rather minimal , as can be expected in terms of their use of capital and skill intensive technology. Growth in India’s services sector is concentrated in activities related to finance, real estate and business services (FINREBS). It needs to be noticed that the FINREBS has a rising share, both in relation to the service sector itself , as well as relating to the GDP. In fact shares of the FINREBS not only have escalated over time but have continued to rise, even with declining GDP growth rates. Thus the growth of the service sector including the FINREBS, as can be expected, while contributing to GDP growth, have failed to contribute much in terms of employment or real activity, an aspect which helps to understand the underlying paradox of high GDP growth with unemployment.
The sectoral contributions as above brings home an explanation of the slow growth in jobs and related poverty– and that too for the majority of the labour force employed in the informal sector who are denied of sustainable wages and benefits as well as job security.
Need for an expansionary policy
While there is an urgent need for public expenditure as investments as well as social sector outlays, the Indian government abides by its self-imposed limits on fiscal deficit to GDP ratios, which restrains additional public expenditure. The dictum is provided by the Fiscal Restraint and Budget Management Act (FRBMA) of 2003 which was voluntarily enacted by the ruling government, largely to attract foreign investments.. Given that the theory of ‘austerity’ as a measure of investment revival by controlling inflation is much discredited at levels of analysis and policies, we find no reason why the country should continue to stick to such measures .
It needs to be recognized that official expenditure remains a per-requisite to stimulation of private spending, especially in the current context of a demand deficient domestic economy as in India. A departure, if effected, from the ineffective policy prescriptions of the mainstream economic theories of fiscal restraint can be expected to generate a climate of expansion within the country.
Considering the gravity of the situation, this is the moment for a call to the state to act and not just protect finance capital which include the speculators who operate in stock markets, the super-rich who are disgruntled and pose the threat to move offshore to avoid the newly imposed surcharges on higher income slabs, to provide relief to the bankers misallocating funds in search of quick and illegitimate gains, or even to protect and incentivize the corporate sector, the former for a negligence to the much too small a benevolence they were subject to in terms of their obligations to fulfill the CSR, and the latter as investment inducements.
We can conclude that it will be a limited exercise on part of the officialdom to view the financial market performance as a true gauge of performance of the economy as a whole.
Indeed, the Indian economy is in dire need for an alternate course of action. The state must focus and restore the real economy with channels to revive investment, employment and other social goals for the majority.
_________________________
An earlier version of the paper was published in Economic and Political Weekly on September 1, 2019
(Former Professor, Jawaharlal Nehru University; Guest Blogger)
That the Indian economy is currently experiencing a slowdown is more than evident, both with the deliberations in different private circles and with official statements signalling a series of remedial measures , mostly focused on the ailing financial sector! However, as we point out, the ailing Indian economy has concerns that go beyond flagging GDP growth and the ailing financial sector.
Downturn in the economy
As for the downturn, the country’s GDP growth rate has plunged into a low of 5% in the first quarter of the current financial year 2019-20 .The drop has been accompanied by a sharp deceleration in the manufacturing output and a sluggish growth of output in agriculture. Matching both, ‘consumption growth’ has also been weak.
A fact which remains less highlighted in current official concerns includes unemployment, at 7.1% of the labour force during September-December 2018 as reported in the Labour Force Periodic Review. Unemployment has been even higher for urban youth during the period, at 23.4%. Information as is available indicates on-going spread of job cuts in different manufacturing units and wide-ranging distress in rural areas with farmer suicides, which causes added concern.
There also are recent reports of a shrinkage in labour force participation ratio (the proportion of people who are willing to work), indicating tendencies of withdrawal syndromes on part of the unemployed – which have been largely in response to the grim employment prospects. Distress is further manifested in the large numbers of poverty stricken people - both in rural and urban areas –ranging from 22 % to 29% of aggregate population according to different estimates.
The grim facts relating to unemployment and poverty in the real economy of India make it evident that a drop in GDP growth is not just a matter concerning the dampened financial markets and their volatility. Downturns also speak of the real sector – of the dearth of sustainable jobs and the related poverty.
Looking at the prevailing concerns in India for the stagnating economy, analysts often ruminate on the steep drop in stock prices in India’s secondary market which started with the end of the temporary euphoria at end of the national election in May 2019 . One may recall the shooting up of the Sensex beyond 40,000 on June 4, 2019, far surpassing 37,000 on May 13. The index, slumping back to a low of 36,855 on August 30, has , at the time of writing, abruptly shot up, nearing 39,000 , which is a response to the magic wand of the tax bonanza announced on September 20. Causes cited for the earlier downfall include the volatile net flows of Foreign Portfolio Investments (FPI) - recording outflows of Rs 3,700 crore or above in a single month of July 2019. Above went along with the simultaneous drop on India’s foreign exchange reserves by nearly $1 billion between July 20 and July 26, 2019.
Policy measures announced
Concerns relating to the stagnating GDP growth and financial markets in the country has prompted the government to announce a series of measures since the recent official announcements started on August 23, 2019 . The measures included a scrapping of the surcharges on long and short term capital gains as were earlier proposed in the last budget; in a bid to help inflows of foreign portfolio investments. A few stimulant measures as suggested include an investment package of Rs 100 lakh crores on infrastructure, a Rs 70th crore liquidity injection to recapitalize banks and cheaper loans to facilitate property market and auto sector, along with a promise of additional purchases by government departments in auto market . Corporations have also been assured of a no- penalty clause if they fail to comply with the corporate social responsibility(CSR) clause, originally designed to help the underprivileged. Included in the package are also additional roll-backs, of taxes on the ‘super rich’- as introduced in the last budget - in income slabs over Rs 2 crore and beyond Rs 5 crore.
Government announcements on August 30, in the next round, relaxed several rules on single-brand retail, contract manufacturing, coal mining and digital media for FDIs. Another important measure has been the dilution of the current 30% domestic sourcing norms for single brand retail trading in the country.
Official announcements on August 30 also related to the mergers of public sector banks , by combining the ‘bad’ ones with the stronger ones, thus reducing the total number of PSBs to 12. The move is supposed to coordinate with the promised recapitalization plan of Rs 70 th crores, as announced at end of the previous week.
Finally, a big tax bonanza, with rates cut from 30% to 22% has been mentioned on September 30. Above, according to a credit rating agency, Crisil, amounts to a tax savings of Rs 37,000 crores for the 1000 listed corporations. By the same estimates, the expected aggregate tax loss for the government amounts to Rs 1.45 crore; which, incidentally, exactly matches the sum received by the government from the Reserve Bank of India. Remedial official measures, addressed to mend the on-going regressive impact of the Goods and Services (GST) tax on the economy, are also on the cards, with several cuts in this indirect tax on specific items.
How effective to revive the economy?
Sops as above as tax relief - to portfolio as well as corporate investors within and outside the country – while effective in temporarily stimulating the secondary stock market, may not work to reverse the tendencies for the stagnation, even in the financial sector and let alone in the real economy. Contrary to what was expected, the initial response of the stock market continued to be rather non-committal over nearly a month between August 23 and September 20th when the big tax bonanza package was announced. It is possibly too early( and nearly impossible) to project the stock market movements in future. Still more doubtful is an expected positive impact of all above policy moves on capacity creation via the market for initial primary offers (IPOs) - short of which there can be no expansion in the real economy of output, investment and employment.
The stark realities relating to the contrasts between the real and the financial economy reflect itself in the low value of the initial Primary Offers (IPOs). As is well known, the latter indicate new physical investments rather than financial transfers alone as in the transactions of shares in the secondary stock market. A revival of the stagnating real economy demands additional investments in physical terms with related expansions in jobs. Little of those are likely to be fulfilled by a boom in the secondary market of stocks and the related gains on speculative and short term investments. Also in terms of simple national accounts, capital gains or losses relating to the portfolio investors in the secondary stock markets are always treated as ‘transfers’ between parties, and as such not even considered in calculating the GDP in their first round. Possibilities, however, remain of net injections/withdrawals of real sector demand by agents who face capital gains/losses , which deviates from their underlying inclinations to further speculate in the market. However, while the proposed tax benefits will further widen the inequalities within the country, little of those may finally be channeled beyond the speculative zone of stock markets and real estates.
Additions to corporate savings, if generated, will not generate real investments unless demand for the latter is forthcoming in the market. This comes as the home truth that Keynes spelt out more than 80 years back in the context of the Great Depression of 1929-30! Sops to speculation in the market and the lenient tax breaks for super rich as well as corporations may only help to invigorate the current spate of speculation, in stock markets (or even on real estates and commodities) further.
Official concerns as such for the public sector banks sound more than deserving, given the issues with the near bankrupt NDFCs (or shadow banks ) with their easy access to the formal banking sector which generated a large part of the on-going NPAs. In our judgement, the vacuum created with shrinking banking facilities and branches and the total absence of development banks will continue to provide space to the NBFCs and their malfunctioning.
Research, as available indicates how the corporations have made use of credit from banks to meet their liabilities ( as interest payments on past debt as well as payments of dividends to share-holders), replicating a typical Ponzi strategy. Simultaneously investments by corporations have switched from the real to the financial sector with offers of better earnings on financial securities. Corporations, in the process, also have often taken recourse to bankruptcy while adding further to NPAs held by banks. Finally, NPAs also resulted from the absconding and corrupt clients of banks who could run-away with their liabilities. One wonders if the change in governance as suggested by the recent mergers which aim to combine the weak banks with the stronger ones (in terms of current performance ), will help in lifting the PSBs from the current mess.
Incidentally, the soft-pedaling by the RBI with four consecutive cuts in the repo rates, while signalling a nod to expansionary monetary policies, will work to lower the lending rates of banks only if there will be a pick-up of credit demand from the public. And that in turn demands more of investment/consumption demand, especially from the real (rather than the financial) sector. This is because the growth of credit supply is determined by credit demand and not the other-way round! This does not rule out possibilities of additional borrowings at the lower rates to finance speculation in financial markets, which will not help revival of the real economy.
Pattern of stagnation in India’s real economy
As already emphasized in the preceding sections of this commentary, a country’s GDP growth alone hardly indicates the country’s level of development, which include employment, social security and absence of poverty. Recognizing above is important in the context of the ailing Indian economy that is currently subject to concerns more pressing than the plunging financial sector.
Mention can be made here of the structural changes in the Indian economy , with changing relative contributions of its three major sectors.Those include the share for services moving up to 50% and above since the early 1990s and the respective industry and agriculture shares stalling around 25% and 19% or less since then.
The employment situation as currently prevail in the Indian economy include 90% or more people struggling to eke out a survival in the informal sector while the organized formal sectors within industry and services offer 10% or less of jobs, thus pushing the majority of the working population to the dark terrains of the unorganized and informal jobs.
As for the sectoral pattern of employment, agriculture has remained the largest provider, at 48.9% of aggregate employment in the economy during 2011-12. Almost all of above are purely in an informal capacity , thus fetching little of the benefits which are usual when labour is formally recruited. As for jobs available in the industrial sector, the organized sector (dealing with the registered factories employing 10 or more workers ) provides less than 11% of aggregate employment in the country. Of above more than four-fifths are employed on a purely contractual or temporary basis with none of the benefits that normally accompany formal jobs. A recent estimate points at the low employment elasticity of aggregate output at 0.08%, which today is even lower than 0.18% during 2009-11. Much of the above is due to the lower absorption of labour in the production process due to the use of capital-intensive technology. In addition, growth rates are found to be higher in the capital as well as the skill intensive products - as compared to the average growth for industry as a whole.
The service sector, currently providing more than one-half of the GDP, has only a marginal contribution in employment. Data available from the Labour Bureau indicate that of an aggregate 140-150 million jobs in the services sector during 2015, only 26 million were with the organized sector. The remaining jobs, mostly in petty production units and self-employment, include, in our view, large numbers with disguised unemployment in the informal sector.
Services in the organized sector also include the ‘sun-rise sector’ , comprising of the Information Technology-Business Processing Organizations ( IT-BPO). Their contribution to jobs has been rather minimal , as can be expected in terms of their use of capital and skill intensive technology. Growth in India’s services sector is concentrated in activities related to finance, real estate and business services (FINREBS). It needs to be noticed that the FINREBS has a rising share, both in relation to the service sector itself , as well as relating to the GDP. In fact shares of the FINREBS not only have escalated over time but have continued to rise, even with declining GDP growth rates. Thus the growth of the service sector including the FINREBS, as can be expected, while contributing to GDP growth, have failed to contribute much in terms of employment or real activity, an aspect which helps to understand the underlying paradox of high GDP growth with unemployment.
The sectoral contributions as above brings home an explanation of the slow growth in jobs and related poverty– and that too for the majority of the labour force employed in the informal sector who are denied of sustainable wages and benefits as well as job security.
Need for an expansionary policy
While there is an urgent need for public expenditure as investments as well as social sector outlays, the Indian government abides by its self-imposed limits on fiscal deficit to GDP ratios, which restrains additional public expenditure. The dictum is provided by the Fiscal Restraint and Budget Management Act (FRBMA) of 2003 which was voluntarily enacted by the ruling government, largely to attract foreign investments.. Given that the theory of ‘austerity’ as a measure of investment revival by controlling inflation is much discredited at levels of analysis and policies, we find no reason why the country should continue to stick to such measures .
It needs to be recognized that official expenditure remains a per-requisite to stimulation of private spending, especially in the current context of a demand deficient domestic economy as in India. A departure, if effected, from the ineffective policy prescriptions of the mainstream economic theories of fiscal restraint can be expected to generate a climate of expansion within the country.
Considering the gravity of the situation, this is the moment for a call to the state to act and not just protect finance capital which include the speculators who operate in stock markets, the super-rich who are disgruntled and pose the threat to move offshore to avoid the newly imposed surcharges on higher income slabs, to provide relief to the bankers misallocating funds in search of quick and illegitimate gains, or even to protect and incentivize the corporate sector, the former for a negligence to the much too small a benevolence they were subject to in terms of their obligations to fulfill the CSR, and the latter as investment inducements.
We can conclude that it will be a limited exercise on part of the officialdom to view the financial market performance as a true gauge of performance of the economy as a whole.
Indeed, the Indian economy is in dire need for an alternate course of action. The state must focus and restore the real economy with channels to revive investment, employment and other social goals for the majority.
_________________________
An earlier version of the paper was published in Economic and Political Weekly on September 1, 2019
Thursday, October 4, 2018
Kicking away the ladder too: On central banks and development
Monday, August 27, 2018
Economic Development in the XXIst century Webinar Series
This seminar series focuses on the analysis of Economic Development in the XXIst century. The notions of distribution, industrial policy and balance of payments constraints will be profoundly analyzed during these four sessions. As there is much disagreement about what drives economic development - and at the same time it is a central objective for developing economies - this question merits deep reflection. Through these seminars there will be a particular focus on the external constraints that developing economies face that make economic development challenging. Although the seminars will deal with small open economies, given that the balance of payment constraint will be part of the discussion, scholars working on the Eurozone may also find the discussion on interesting for their work.
Webinar 1 (Wednesday 09/12): Value and Distribution in a small open economy
By Guido Ianni, Ph.D. candidate at the University of Buenos Aires.
Guido will discuss what determines income distribution in these economies, and how the alternative "closures" can lead to different economic productive structures.
Webinar 2 (Friday 09/21): Income distribution and the balance of payments - Some Latin American structuralist contributions
By Ariel Dvoskin and Germán Feldman. Ariel Dvoskin is Professor of Microeconomics at the National University of Buenos Aires and Germán Feldman is Professor of Macroeconomics at the National University of San Martín.
Drawing on Latin American structuralist analysis, Dvoskin and Feldman will explain not only Value and Distribution, but also their relationship with the Balance of Payments. In this lecture, notions related to balance of payments constraints will appear so it could be interesting for those working on or worried about the Eurozone.
Webinar 3 (Thursday 09/27): Industrial policies and growth in the XXIst century
By Margarita Olivera, Federal University of Rio de Janeiro
This webinar will deal with the role of industrial policies in development in the current age. Margarita is studying the impact of international institutions, such as the WTO and free trade agreements, on the possibilities of economic development.
Webinar 4 (Wednesday 10/03): The role of Central Banks in Economic Development.
By Matías Vernengo, is full professor of economics at Bucknell University. He is co-editor of the Review of Keynesian Economics and co-editor in chief of the New Palgrave Dictionary of Economics.
This webinar will deal with the role of industrial policies in development in the current age. Margarita is studying the impact of international institutions, such as the WTO and free trade agreements, on the possibilities of economic development.
Webinar 4 (Wednesday 10/03): The role of Central Banks in Economic Development.
By Matías Vernengo, is full professor of economics at Bucknell University. He is co-editor of the Review of Keynesian Economics and co-editor in chief of the New Palgrave Dictionary of Economics.
The final webinar will be focus on the relationship between Central banks, inflation and growth from an historical perspective. Were Central banks instruments of the state to promote economic development once? When did everything change? Matías will try to answer some of this questions under an economic development long-run perspective.
Timetable:
Timetable:
11.00 US East Coast (gmt-4)
12.00 ARG/BRA (gmt-3)
16.00 UK bst (gmt+1)
17.00 ITA cet (gmt+2)
Register to attend: Here.
Questions can be directed to webinar-organiser, Santiago J. Gahn, YSI Economic Development Working Group sjgahn@gmail.com
12.00 ARG/BRA (gmt-3)
16.00 UK bst (gmt+1)
17.00 ITA cet (gmt+2)
Register to attend: Here.
Questions can be directed to webinar-organiser, Santiago J. Gahn, YSI Economic Development Working Group sjgahn@gmail.com
Monday, October 16, 2017
Why Latin American Nations Fail
Book has finally been published. I just got my copies. And yes it is a critique of New Institutionalist views and the title a play with Acemoglu and Robinson's book title. From the back cover.
"The question of development is a major topic in courses across the social sciences and history, particularly those focused on Latin America. Many scholars and instructors have tried to pinpoint, explain, and define the problem of underdevelopment in the region. With new ideas have come new strategies that by and large have failed to explain or reduce income disparity and relieve poverty in the region. Why Latin American Nations Fail brings together leading Latin Americanists from several disciplines to address the topic of how and why contemporary development strategies have failed to curb rampant poverty and underdevelopment throughout the region. Given the dramatic political turns in contemporary Latin America, this book offers a much-needed explanation and analysis of the factors that are key to making sense of development today."
You can get it here.
Wednesday, October 4, 2017
Masters & Sindicalists: Growth, Investment and Productivity in Argentina, from Perón to Kirchner
New paper published in Ensaios FEE. In all fairness, this was the paper that should have been published in 2013 in the volume organized by Ricardo Bielschowky and available here. But the revisions took longer than expected. It is in Portuguese, however. Below the English abstract.
This paper analyzes the three phases of Argentine economic development since the end of the 19th century, namely: the commodity export model, the period of state-led industrialization and the neoliberal reforms initiated in the 1970s, and complemented in the 1990s. The main argument is that the commodity export model had run its course, given the geopolitical changes in the world, and that the abandonment of the industrialization project had less to do with its own limitations, and more to do with the political implications of the model. In particular, the higher wages needed for mass consumption led to recurrent balance of payments problems, and a political backlash that made it ultimately unsustainable. The limits of the abandonment of the neoliberal project during the last commodity boom are briefly discussed.
Saturday, June 10, 2017
On dependency theory
New ebook downloadable for free, titled Dialogues on Development, that was co-edited by Ingrid Kvangraven of the Developing Economics blog, has been published (h/t David Fields of URPE blog). These are interviews on dependency theory with Samir Amin, Patrick Bond, Miguel Angel Centeno, Peter Evans, Ramón Grosfoguel, among many others.
My interview, that starts in page 86, begins with this question:
To start with the most basic question, what is dependency theory?
There is no straightforward answer to this question, Vernengo notes. Although there are many studies that try to split the dependency tradition into specific schools, Vernengo tends not to regard these theoretical traditions as actual schools of thought. He prefers to broadly split them into Marxists and structuralists, and he believes that these traditions could be further split into four or five different approaches. However, Vernengo argues that also this categorisation is insufficient because even structuralists have roots in classical political economy, including Marx.For Vernengo, dependency means understanding historical elements of development in the developing world. In his case, the object of study is Latin American economies, but he argues that the theory could as easily be applied to Asia or Africa. Vernengo admits that he might think of dependency in a slightly different way than most - as he works within a Sraffian theoretical framework. Vernengo praises the Italian economist for reviving classical political economy in a way that is both consistent and logical. To Vernengo, Sraffian economics includes the surplus approach, as well as effective demand in the long run. Within this framework, one can introduce elements of dependency in an analysis without necessarily being classified as a dependency scholar.Thinking of himself as a Sraffian, Vernengo believes he is a classical economist with a touch of radical Keynesianism. One could say that the discussion of dependency tends to be missing among many Sraffians, but it is still perfectly compatible with the ideas of a surplus approach. Classical economics is a good starting point for understanding dependency because distribution is at the centre of the approach. Moreover, it allows for the recognition that there are extra-economic elements that impact the economy.
Read full interview here.
Wednesday, February 15, 2017
Microfinance, Financial Inclusion,and the Rhetoric of Reaction
This paper was published by Latin American Policy last year, co-authored by my ex-student Carlos Schönerwald Silva. From the abstract:
Several political and academic circles have considered microfinance to be an important tool to promote economic development and the reduction of poverty. It became a worldwide phenomenon, and the practice disseminated in many developing countries such as Brazil. Even as many authors sing the praises of microfinance—in particular the success in developing countries—the actual experience has fallen short. The goal in this article is to provide a critical analysis of the recent practices of microfinance in Brazil. The article also presents the general characteristics of microcredit in Brazil within the context of the broader development strategy pursued, in particular since stabilization and the inception of neoliberal policies in the mid-1990s. It is argued that microfinance plays an insidious role, making market-friendly solutions for social problems more acceptable.Read full paper here.
Tuesday, November 8, 2016
Reading Keynes in Buenos Aires
Paper with Esteban Pérez published in the print (it was online since last year) edition of the Cambridge Journal of Economics. Abstract:
Keynes had a profound influence on Prebisch in terms of the diagnosis about the main failures of market economies and the need to pursue pro-active and anti-cyclical policies. However, Prebisch was critical of some aspects of Keynes’s General Theory of Employment, Interest and Money, in particular on the theory of interest and the multiplier. His attitude can be explained by a difference in the object and method of analysis. Prebisch’s interests focussed on dynamics and the cycle, themes that were peripheral to Keynes’s central message. Prebisch’s Keynesian influence and his rejection of some aspects of Keynes’s magnum opus explains why at the same time that Prebisch is often described as the Latin American Keynes, he is portrayed as concerned mainly with the long-run development problem of Latin America and without proper consideration to demand factors as fundamental determinants of output and employment.Paper behind the wall, I'm sorry to say, here.
Monday, November 7, 2016
Latin America at a Crossroads
New paper by Carlos Medeiros, with Nicholas Trebat, at the Centro Sraffa (h/t Alejandro Fiorito, and Revista Circus). From the abstract:
This paper discusses the connections established in recent non–neoclassical literature between growth, structural change and income distribution in large developing economies. We argue that though many analyses have the merit of reintroducing income distribution as a factor in economic growth, they rely almost exclusively on macroeconomic theory, and thus ignore the structural changes that have taken place in recent decades and the ways in which structural aspects of an economy (such as resource availability, market size and geopolitical factors) affect policy options and growth. We argue that Latin American countries today face the same challenge that has constrained their development trajectory historically: to diversify their economic structure through new technological capabilities and greater equality and social progress.Download paper here.
Tuesday, August 23, 2016
Class activity
Teaching Latin American Economic Development. Asked students to match the list of countries below with the graph representing GDP per capita in 2016 (source here). List of countries: Argentina, Brazil, Chile, China, Congo, India, Mexico, Norway, Saudi Arabia, and the US.
The point I always try to make is that Latin American economies are (most of them) middle income countries, all the ones in the sample with higher GDP per capita than China. That's often a surprise for many students, which think that China is an advanced economy (yep, grows fast, less now, but it's still a middle income economy, and will probably remain so in the foreseeable future). Also, Saudi Arabia has a very high level of GDP per capita, but it's not really a developed economy. An advanced economy produces more than commodities (oil in this case). So what the economy produces and exports matters.
PS: Solution in the comments section.
PS: Solution in the comments section.
Monday, April 18, 2016
Prebisch's dynamic theory
New paper with Esteban Pérez published in ECLAC Review; for now only the Spanish version is available, but soon there will be an English version (they always release it later).
Saturday, September 12, 2015
Not sustainable: India’s trade and current account deficits
New paper by Suranjana Nabar-Bhaduri published by PERI. From the abstract:
India’s trade balance and current account have shown persistent deficits for a major part of its post-independence period. Since the mid-2000s, trade deficits have increased perilously, with a sharp rise in both oil and non-oil imports. This has increased the magnitude of the current account deficit, as net earnings from services and remittances have been insufficient to offset the trade deficits. India has relied on remittances, services exports and capital inflows to finance these deficits. This paper argues that all three sources entail elements of fragility. The recent global economic slowdown, economic recession in Europe, slow economic recovery and low growth forecasts for the US and Europe, and the potential Dutch disease effects of remittances raise questions on whether services exports and remittances can continue to generate sufficient earnings to sustain these deficits, especially if they continue to increase. Relying on remittances and capital inflows for financing ever-rising trade deficits also carry risks of financial fragility, especially with short-term capital inflows becoming more prominent in the Indian economy. Policy efforts aimed at improving the competitiveness of merchandise exports to reduce the magnitude and persistence of these deficits seem to be the need of the hour.Read rest here.
Tuesday, September 8, 2015
Jayati Ghosh on the Poverty-turn in Development Economics
Particularly important in this shift is that:
"Macroeconomic processes are entirely ignored: patterns of trade and economic activity that determine levels of employment and its distribution and the viability of particular activities, or fiscal policies that determine the extent to which essential public services like sanitation, health and education will be provided, or investment policies that determine the kind of physical infrastructure available and therefore the backwardness of a particular region, or financial policies that create boom and bust volatility in various markets. No link is even hinted at between the enrichment of some and the impoverishment of others, as if the rich and the poor somehow inhabit different social worlds with no economic interdependence at all, and that the rich do not rely upon the labour of the poor. This shuttered vision is particularly evident in the neglect of the international dimension in such analyses, and of the way in which global economic processes and rules impinge on the ability of states in less developed countries to even attempt economic diversification and fulfillment of the social and economic rights of their citizens."The notion that development, and that meant industrialization, is central for elimination of poverty has vanished. But the mainstream has adopted a pro-poor stance. And who is really against reducing poverty?
Tuesday, March 3, 2015
Internet access and development
PS: The Wall Street Journal is really about Facebook trying to expand in places with low internet access.
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