Monday, November 25, 2002

Straight Thinking 101, part 7

Economics and Sustainability of Development Initiatives


kairos focus web:

In Acts 27:10, Paul warned: “I can see that our voyage is going to be disastrous and bring great loss to the ship and cargo, and to our own lives also.” Thus, he brought into focus, not only the risk to life implicit in the proposed voyage down the coast from Fair havens, but also its economic consequences.

This set of linked concerns highlights one of the key factors in sound thinking about sustainability: biophysical, socio-cultural and economic factors interact in complex ways, and so the chains of interaction should be borne in mind in decision-making. In particular, since decisions often affect us through economic consequences, we need to understand and respect the implications of economics for sustainability of development.

Several basic points about economics are therefore relevant:

(1) Economics, as a discipline, is about the allocation of finite – often, scarce – resources among competing uses. That is, the issue is not whether one use or another is desirable, but that the finiteness of resources may force us to trade off more of one for less of another: more capital investment now means less consumption for now, but may so promote growth and development that, later, we will have more to consume than if we do not “band we belly” and save some resources for investment. (Let us think about whether we have often implicitly chosen to consume now, sacrificing options to consume later; personally and as nations in the region.)

(2) Similarly, there is often a tradeoff between rates of economic growth and provision of welfare transfers to the less well off, and impacts on the bio-physical environment. So, Caribbean societies need to consider the alternatives, and choose how best to balance growth, consumption, welfare and impacts on the environment. (Suffice to say, the East Asian countries that have broken through to “Newly Industrialised” status over the past two decades copied development ideas of the Caribbean’s Nobel-prize winning Economist, Sir Arthur Lewis, and have had quite high rates of savings and investment for a long time. That is, the East Asian Miracle . . . was not by magic. As Genesis put it: “By the sweat of your brow, shall you eat bread.”)

(3) Economist John Hicks was fond of observing, “Investment is a flighty bird.” For, launching and developing a business enterprise is a voyage into the unknown future, with all the risks and uncertainties implied. Thus, if there is a perception that the ratio of risks to returns is not good enough, investment will go elsewhere. So will jobs and prospects for economic growth – thus, a brighter future. (We hardly need to call specific Caribbean countries that exemplify this by name. Not least, if farmers have little prospect of owning their land, they have little reason to put in the effort and investment to develop and care for it. Similarly, businessmen who fear robbery on the street or face hostile Government ministers who claim that “capitalists are the enemy of the people” and threaten to expropriate businesses for ideological reasons will be only likely to invest if their business is something that has the returns to risk of say Ganja or Cocaine. Oops – is that why those businesses are booming across the region?)

(4) This brings us to the supply side of the economy. Basically, if the cake is not made, we cannot slice it up. Therefore, there needs to be a balance of factors in enterprises and the economy as a whole, that promotes productivity and sustains competitive advantages so that Caribbean industries – agricultural, manufacturing, tourism, other services, the hi tech sector, etc – are able to create the wealth that we need if we are to provide a decent standard of living for the people, provide relief and hope to the poor, and look after our environment properly.

Pardon the bit of Math below, as it will help us focus the efforts we need to put in place:

Productivity per worker (Y/L) in the economy is based on:

(1) Level of innovative/productive technology in the economy (A) – aka “total factor productivity”;

(2) times a function – f -- of:

(a) financial and physical capital per worker (F/L, K/L)

(b) average level of training and experience – human capital -- per worker (H/L)

(c) natural resources used per worker (N/L)

Symbolically: Y/L = A . f ( F/L, K/L, H/L, N/L)

Citing from Professor Skaggs, of U of IL:

“The growth equation separates the factors affecting growth into two categories: Ideas and Things . . . Ideas can be used simultaneously by many people. An idea is like a recipe. Many different bakers can use the same recipe at the same time, even though they cannot all use the same material inputs or ovens. Ideas can be shared. Because of this, good ideas can produce large effects on output per worker. Huge numbers of workers can benefit from the same good idea. Things can be put to only one use at any given time. An oven is extremely important to cake production, but adding a single oven will have a limited effect on the well-being of all bakers in the economy. Since things cannot be used by everyone at once, they have smaller effects on Y/L. (See Paul M. Romer, "Theory, History, and the Origins of Modern Economic Growth," AEA Papers and Proceedings, May 1996: 202-06.)”

He continues, referring to the work of Nobel Prize-winner Robert Solow, Adam Smith and Joseph Schumpeter:

Investment in things: Physical and natural resources capital and human capital development feeds productivity -- Solovian growth

Ideas and improved production process and product technology can also feed growth, especially as they make large-scale, highly efficient and innovative production possible.

In light of these factors, it seems the Caribbean has too often discouraged investment and innovation, and so is frequently forced to rely on natural resources-intensive production and products, in an age where much of the value in products and services is in the technology and sophisticated industrial transformation that turns sand into PC microprocessors and bauxite into jumbo jets. Further, too often, people in our region do not value education and training enough to exert the effort to get enough of a good enough quality that it makes a difference in actual production -- hint: learning enough to chat about it is not enough.

Unsurprisingly, we have lagged the world over the past two decades.

How can we make a change?

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