Thursday, December 10, 2009

The End of Poverty How we can make it happen in our Lifetime

Penguin Books Ltd
Jeffrey Sachs

On Economic Growth of countries
In the past 200 years, he notes that the key to growth was consistency. The fact that US maintained an income growth of 1.7% pa consistently.

Why there are different rates of growth in different regions?
He disputes the zero-sum view that the rich countries became that way by transfer of income form the poor countries through force or otherwise, because of the evidence of a overall growth in the world income, at a different rate in different regions.

His program for migrating an unstabilised economy to a market economy – 5 pillars:-
1. Stabilization – ending high inflation and establishing a stable convertible currency (even thru the setting up of a world supported fund to back the currency)
2. Liberalization – allowing markets to function by legalizing private economic activity, ending price controls and establishing where necessary commercial law
3. Privatization - identifying private owners for assets currently held by states – can be done entire enterprises or piecemeal.
4. Social safety net – pensions, health care and or benefits for the elderly, poor to help cushion the transition
5. Institutional harmonization – gradual adoption of economic laws, procedures and institutions of western Europe?

But most importantly, must establish a broad-based goal or purpose or guiding principle for the economic transformation. Eg for Bolivia it was establishing democracy, ending hyperinflation and reinvention of the country. For Poland, it was a return to Europe.

Each country will be different – he calls it clinical economics – differential diagnosis.

He says that for a country that needs help –
Poor countries need a leg up because they don’t have enough even for subsistence, what more growth and investment and the only way to provide this is by official development assistance by donors. The idea is to increase the income per capita for the country (as opposed to increasing GDP)
• Public sector should concentrate on 5 kinds of investments-
o Human capital
o Infrastructure
o Natural capital
o Public institutions
o Parts of knowledge capital involving r&d for health , energy, climate
• Private sector (funded by private savings ), would be responsible for investments in-
o Businesses (agriculture, industry or services
o Knowledge capital
o As well as for household contributions to health, education and nutrition

5 reasons why he says government should finance the public sector investments –
1. Many infrastructure characterized by increasing returns to scale. If done privately, it can only be afforded by monopolies which would overcharge, and then result in too little utilization by public
2. Nonrival goods – goods when used by 1 person is not diminished by others eg scientific discovery of DNA
3. They exhibit strong spillovers or externalities to their effects. Ie I want you to be healthy so you don’t transmit disease to me.
4. As a matter of right and justice, everybody should have an adequate level of access to key goods and services eg health care, education , safe drinking water
5. To help poorest of the poor to get them started in productive activities

He talks abut the poverty reduction strategies of poor countries, and compare them to the Millenium Development Goals. He says, the problem is that there are missing practical lingkages between the PRS and the MDG – usually, underfunded too.

He says that a true MDG-based poverty reduction strategy should have 5 parts-
• Differential diagnosis
• Investment plan – shows the size, timing and costs of required investments
• Financial plan – how to fund it , and calculate funding gap that need donors
• Donor plan – get a multilayer donor commitment to fill the MDG gap
• Public management plan – outlines the mechanism and governance and public administration needed to implement the expanded public investment strategy

He says that cash transfers alone are not an attractive way to deliver ODA, because they only tend to fill the consumption gap. To end poverty trap he says the ODA must be used for investments in infrastructure and human capital and thereby empowering the poor to be more productive on their own account, and putting the poor countries on the path to self sustaining growth.
(he made a reference to Hernando de Soto’s book The Mystery of Capital, which analysed a single factor – ie the lack of property rights ie titles and deeds – for the poor’s single handed failure in development) Sachs says, there are more than just 1 factor.”

At pg 327-
“Despite the fact that much of the free-market economic theory has championed this vision, economists from Adam Smith onward have recognized that competition and struggle are but one side of economic life, and that trust, cooperation, and collective action in the provision of public goods are the obverse side. Just as the communist attempt to banish competition from the economic via state ownership failed miserably, so too would an attempt to manage a modern economy on the basis of market forces alone. All successful economies are mixed economies, relying on both the public sector and the private sector for economic development.”

“The linkage to democracy has a strong economic dimension, however, because research has shown repeatedly that the probability of a country’s being democratic rises significantly with its per capital income level.” (p 333)