Cause Effect Paradigm 005

Economic Development Policy

G: You were to give more illustrations of how the triplets, Cause-Effect Paradigm, Obsession Syndrome and Inverse play out in the area of economic policies.
S: Yes. Please note that the natural process does not begin with just economic development policy making. It starts much before to lay the foundation of the birth of institutions that will take up economic policy making.
G: You are using Cause-Effect Inverse now.
S: Yes. Economic development policy making in period T must cause the existence of policy makers with powers to make policy on behalf of an authority that has the responsibility and power to manage an economy. This in turn must cause the prior creation of Nation State with a Ruler that takes up the responsibility of economic development in the State.
G: You are saying that economic development policy is influenced by the theory or ideology that a Nation happens to believe in and tries to practice.
S: Exactly. Economic development need not be national issue for all Nations and the State or the Government need not be given the power or responsibility to ensure economic development.
G: In the absence of a State authority or Government, how can economic development be pursued?
S: History does not show that in all ages and in all States economic development was ushered in by State power.
G: But nowadays most countries pursue economic development through the aegis of the State.
S: Maybe in most poor countries but not all countries. What are the economic development efforts taken by the US and UK governments?
G: They are already rich countries and they largely depend on private enterprise and competitive market system for economic growth.
S: So, a Nation must be relatively poor and/ or believe in non-capitalist, non-market systems to bring the State to play the role of economic developer. It is an ideology based belief system that generates its own special beneficiaries among people who can get connected to the exercise of the powers of the State.
G: But that is only scientific way that poor countries can develop.
S: I cannot agree with you on this. Many of the rich countries of the last and this century were poor countries a few centuries back. And, these countries did not achieve economic development through non-market, non-capitalist systems with the State playing the role of economic developer.
G: But in the modern day world, poor countries need non-market, non-capitalist systems with State as the prime economic developer.
S: That is not a scientific truth. It is a belief and faith that is born out of Cause-Effect Obsession Syndrome among different sections of educated people in the poor countries and some sympathizers in the developed countries. Some of them do not like rich capitalist countries because of their behaviour of the educated elite of those countries. Some of them did attempt to migrate to rich countries, but did not adjust to the competitive environment. Some of them were simply jealous of the rich businessmen in India. Some of them failed to prove their competence in any field other than capturing the powers of the State. A variety of mental complexes and personal ambitions led them to suffer from Cause-Effect Obsession Syndrome. This was only a natural process and the belief in State as economic developer was not an independent rational choice for them. It is just like Indian nationals choosing to support Argentina or Brazil in World Cup Soccer.
G: But we have seen in the last century, the rapid economic growth of former Soviet Russia under centrally planned communist dictatorship.
S: Yes, but that did not last for even a century. To sustain growth and restore human dignity and freedom, the system collapsed from which the disintegrated parts are yet to revive.
G: We have seen the Japanese miracle that was brought about by a network of institutions and business houses/ families commandeered by the Government.
S: And, sustained and significant US Aid and support. But that miracle also did not last beyond five decades. Ultimately, people had to be given back their freedom however reluctantly as the hidden inefficiencies of Govt. dominated economic system started surfacing.
G: What about Germany, France and other countries where the State exert considerable influence on the economic development?
S: Yes, these countries failed to sustain strong economic growth over long periods and lost out to the US in terms of competitiveness.
G: What about the UK?
S: First, Thacherism had to come to rescue the British economy from doldrums through privatization and liberalization. Next, Blair had to give another thrust to private enterprise and initiative.
G: What about Singapore, Taiwan and South Korea?
S: They did well and are doing well. But the over the years the State is becoming only a symbol attached to what their private enterprises do.
G: What about Latin America?
S: They remain Latin America and where they were: relatively poor countries facing crises from time to time.
G: But by 2040, the BRICS countries, Brazil, Russia, India and China are going to be major economies of the World.
S: By that time, the nature of the State in these countries will also dramatically change. And, even at that time, in terms of per capita income, these countries will not be close to the top economies in terms of per capita income.
G: Do you mean to say that the State does not have a role in economic development?
S: That is beside the point, Sir. Even thousand of years ago, there were rich kingdoms and poor kingdoms. The standard of living and wealth of those kingdoms obviously depended on the nature of the kings and the royal dynasties. The oppressive kingdoms did not sustain economic growth for long, even in the individual kings might have enjoyed their lives. On the other hand, kingdoms in which the royalty was less oppressive, the businessmen had freedom to do business and the environment encouraged competition and rewarded talent, innovation, hard work, dexterity and creativity prospered. The King could stall economic development and distort economic development in many ways like economic oppression, forced labour, high taxation, favouritism, nepotism, unfair systems of justice, corruption in administration, poor governance , poor law and order, inefficient enforcement of contracts, inefficient system of dispute resolution, neglect of the weak and the poor, discrimination among subjects, restriction on trade and commerce, going into wars frequently, forcing people to change religion, keeping sections of the people away from education and poor civic infrastructure. The fundamental role of the King was not to do such things. If the King had been doing the opposite things well, the people would have delivered economic development: the farmers, the artisans, the traders and the businessmen. The Kings cannot deliver economic development in any manner: whether by contributing to vision or planning or implementing manufacturing or trading projects or by creating economic ministries to coordinate and guide the countrymen.
G: But many Kings did not do what they should have done.
S: And, many democratic and socialist governments still do not do what the societies are used to expect of them: providing good governance. Rather, they try to do what they are not required to do: plan and implement economic development. The results are just the opposite of what was desired. You get short periods of economic growth at great cost to and oppression of the people. Rules of terror, fear, corruption, delayed justice, poor education and heath, etc, continue even now in socialist or democratic or communist countries as much they did throughout the political history of different countries, except brief periods under capable and yet benevolent rulers.
G: Why does this happen?
S: That is the process of creation and maintenance of creation. It is the Natural Law or the Destiny Principle in operation. Nature produces diversity: not merely knowledge and application of science. Cleverness and foolishness, missionary zeal and indifference, cold calculations and emotions- all sorts of opposites combine in different proportions at different points of time and space. Man does not have any control over this. Man can only witness whatever happens and does only what Man is forced by Nature to do.
G: Let us assume for the moment that what you are saying is correct and proceed further.
S: Good. We come back to current times. Man is in search of just and fair rule. Which men really search? Clearly, philosophers and thinkers take up this job. They search for and try to design ideal social structures and systems that will deliver the most fair and just system. They thought of the principles of liberty, freedom and equality. They designed systems of democracy, republics, socialism and communism. But these concepts and models did not solve problems of economic growth and economic development. No one has yet been able to solve the problems. Meanwhile, the people who want to become leaders of nations or countries experimented with different concepts and models evolved by the thinkers to the extent they understood them in practical terms. Basically, there are two models being tried out. One where economic growth results largely from individual and private group initiative and enterprise but the State ensures income transfers and support to the weak through taxes and subsidies/ grants. The second is the dominant model under which the State has the right to take all steps that the State feels necessary to ensure economic growth and development.
G: If I may say so, the first model is the free enterprise, capitalist market economy system. The dominant model is one of socialism, communism and State planning and control over economic activities. The first model failed to deliver. As a result the second model developed.
S: You are broadly right in identifying the basic models. But I do not think the second model has so far delivered as well as the first one. The failure of capitalism, free enterprise and market mechanism is in no way any greater than that of socialism or State economic planning and control.
G: Why do you say so? We have the examples of Soviet Russia and China, besides a host of Asian countries.
S: Examples do help understand things easily. But they do not constitute proof from scientific, theoretical or empirical point of view. Soviet Russia did not survive for long in its original form and we do know about the economic sufferings of Russian people who had guaranteed jobs but not guaranteed food supply. China suffered great famines. Both Russia and China are now on their path to economic liberalization, free enterprise and market mechanism, though the State-centric approach to economic growth and development still continues to remain largely in tact. India is no different even now.
G: Why do many nations adopt such State-centric economic growth and continue to cling to it?
S: This is because of Cause-Effect Obsession Syndrome. You have some economic theory which says economic growth depends on national savings rate, investment rate, value added (national income) per unit of capital, labour productivity, rate of growth of consumption of goods and services by the nation,, rate and nature of technical/ technological progress, efficient allocation of capital and natural resources among alternative uses, risk taking ability, entrepreneurial talents, international trading opportunities, state of infrastructure for dispute settlement and contract enforcement, financial services, transport, goods trans-shipment and handling facility, power generation and distribution, education, health and availability of natural resources, etc. The issue is who will organize to ensure that an economy has the best possible situation in respect of all these factors.
G: Is there some one who can ensure all this? Or, can Man create such a institution or mechanism that will ensure all this?
S: There is as yet no scientific theoretical or empirical proof of the existence of any person, body, institution or mechanism that is fully competent and capable of doing all this. Moreover, the desire is not merely of economic growth and progressively higher standards of living for the citizens. Simultaneously, Man wants that economic growth is rapid, stable and sustainable with ecological and environmental protection and equality of income, wealth and opportunities among citizens.
G: You need a very powerful group of people and institutions or mechanisms to deliver all that you desire.
S: Unfortunately, we do not as yet have such a powerful entity or the scientific proof that we can create such a one.
G: Then what do we do?
S: Only option is to believe that we can design such an entity and have faith in such an entity.
G: Do all people believe in creating such an entity?
S: No. Some just tried to find out if there are natural forces or mechanisms that operate to perform this job efficiently and competently.
G: What have they found?
S: They have found some natural forces do part of the job competently and efficiently and that too only under certain circumstances. One such force is called Invisible Hand of markets. Based on this some designed market mechanisms the use of which can deliver economic efficiency so necessary to step up growth. They found concepts of market equilibrium and steady state economic growth under certain conditions. But the real world seldom, if ever approximates the conceptual frameworks and conditions. So, they recommend regulation over markets to protect against the possibility of market failures, monetary policy to control inflation, and use of State policy to promote education, protect the weak, smoothen fluctuations in economic activity levels, provide incentives for R& D, innovation, entrepreneurship as well as direct legal and fiscal efforts at promoting income equality, equality of economic opportunities, environmental and ecological protection.
G: So, it is a mixture of individual enterprise, free markets, market regulation and State intervention.
S: Yes. But this mix is based only partly on scientific knowledge and largely on faith and belief that you can sometimes rely on the institution called the State or Government. This far it is based on Cause-Effect Paradigm. Beyond this, people start believing that the State is really powerful to ever fail and therefore they move away from use of free market mechanism and independent self-regulation or regulation to complete determination by the State and its progressively expanding and complex machinery. This is when the cause-Effect Paradigm that recognizes the limitations of market mechanism turns into a Cause-Effect Obsession Syndrome. The ideology that develops from such Obsession is that that the State knows what is the correct thing to do, has no deficiency and really achieves the goals of maximum rate of economic growth with economic stability and sustainability and reduction of economic disparities. The opposition political parties may often criticize the Government of the day on the latter’s economic development policy. But if the opposition party gets into power tomorrow, they will follow a similar, if not the same economic development policy.
G: So in this alternative model there is no role for markets, equilibrium and entrepreneurship. The State does everything.
S: You are right. The State decides what rate at which the economy should grow, how much it should save, invest and consume, what the country should produce, how these will be produced by what technology and in which factories, where the factories should be located and should be owned by whom, what it will import and export, what the nation will consume, what they will not consume, what the prices of different commodities and services will be, what the distribution of intermediate goods, raw materials and goods in short supply should be among different sections of the citizens, among different regions of the country and among different alternative uses, and so on.
G: It is like God wills and God gets. Whatever the State decides, it happens.
S: Unfortunately, the State has the power to decide and no power to ensure that it gets what it decides. It is like God wills and seldom gets. Countrymen were urged to give all powers to the State and the Government to plan and implement all economic activities and fix the values of all economic variables including industrial location, technology, production capacity, actual production, prices, sales to different classes of consumers as well as the allocation of financial resources for both public and private sectors. The Indian experiment of socialist economic planning and State controlled economic structure since Independence is only one of many examples. The Government has failed miserably in delivering they promised year after year, budget after budget and plan after plan till they put the country into bankruptcy in 1990. The elitist native rulers of India developed the concept of private sector promoters in the name of mixed economy and the whole development banking business and bank nationalization was ushered in to dole out money to favored and loyal, even if weak and incompetent businessmen. The nurturing and breeding pet criminals under the fold of different political parties was preceded by State patronage of weak, corrupt businessmen and Industrial was introduced to protect the favoured and loyal business houses from competition. The private sector in India had been nothing but an ancillary of the public sector. People without money or experience or competence were encouraged to access private savings of households through the mechanism of developmental and commercial banking. India did not produce a many great industrialists after Independence. One cannot breed a great successful industrialist or corporate leader in an environment of reservation and patronage for loyal businessmen.
G: Even if what you say is correct, India would not have grown economically, politically and militarily as much as she has done during 1947- 87.
S: There is no scientific proof of your statement. Nor can one prove that India could not have grown much faster had India not introduced socialist economic planning with commanding heights for the public sector.
G: These are not laboratories of physical sciences or mathematical issues where we can prove these.
S: But to claim something as true without valid proof or evidence is simply unscientific and inconsistent with Cause-Effect Paradigm. It is a kind of faith and belief close to educated superstition. That is Cause-Effect Obsession Syndrome.
G: At the time of Independence, Indian capitalists did not have sufficient resources to fund Indian economic growth.
S: It is surprising that we believed in this insufficiency of private capital
argument. Did we have enough public capital at that time? All capital that
had gone into public sector in the planning era was the transfer of wealth
of private individuals expropriated by the State in various forms and
foreign capital brought under Govt. channel. The State did not ever
accumulate capital during 1947- 87; it only wasted and consumed
capital. We know how big and long the budget and fiscal deficits ran and what has been the net return on capital from investments in the public sector or Departmental enterprises of the Central and State Governments.
G: But World Bank economic growth models also supported use of multilateral loans for economic development.
S: That foreign capital can accelerate economic growth is known for long. But the foreign capital recipient country need not have to be one that is socialist, centrally planned and controlled. Foreign capital inflow through World Bank to any country only increased the World Bank’s business necessary to justify its existence and we paid for the costs associated with economist developmental bureaucracy of the World Bank and ours.
G: Let us assume that there is no proof that State planned, directed, led and controlled economy will deliver rapid, stable and sustainable economic growth with progress in equality in income, income opportunities and wealth and ecological and environmental protection. Let us assume also that if people continued to believe in such a cause- effect relation between State and economic growth despite lack of valid scientific proof, that is nothing but a faith reflecting Cause-Effect Obsession Syndrome. What happens next? The economic liberalization and economic reforms needs to be explained.
S: The natural process of Cause-Effect Inverse also starts operating at some point. The concepts of the State and Government have inherent weaknesses or deficiencies. In fact, the State has more deficiencies than the deficiencies of market mechanism and free enterprise. This helps a slow but steady reversal of dependence on the State sooner or later. That is how economic liberalization and economic reforms began in many countries during the 1980s and 1990s.
G: But did just one day India changed its mind and started this process of privatization, liberalization and globalisation? The State’s role suddenly changed?
S: Not exactly the way you say. But Cause-Effect Obsession Syndrome leads you to do unnatural, unscientific and unsustainable things. By 1990 it was clear that India was a slow-growing largely closed economy that delivered very little economic growth on sustainable basis and very little on economic equality and yet she had become bankrupt. There was no way that the State could have admitted to the abject failure of socialist and state controlled economic system. But it had to do something for its own survival. So, it hesitatingly and reluctantly started economic reforms, hoping to unwind them at an opportune time that never came. But it took control of the process of reforms. If you have a long period of economic reforms, you can justify the State’s role in economic development. People can continue to believe that the State is delivering; while the fact is economic growth is delivered largely outside the State’s sphere of activity.
Economic growth has spurted because the State’s role has been dramatically curtailed. But the State seems prominent because it announces economic reforms. Actual economic growth is now delivered by the absence of the State in many areas.
G: You mean to say that Cause-Effect Inverse has developed.
S: Exactly. People are being led to believe that the State and its organs like the Planning Commission are delivering higher economic growth, while actually they are still constraining economic growth, though not as much as they did during 1947- 87. People are led to believe that economic reforms are the instruments with which the State is delivering economic growth. Actually however economic reforms are essentially moving the State out of the major part of economic activities. It is now more the market forces and the people of India and the foreigners who want to trade with and invest in India by their separate decisions that determines the rate at which the economy grows, the economy’s rates of saving, investment and consumption, the basket of production, the technology deployed in factories, the location of factories, the ownership of factories, the pattern of exports and imports, the prices of goods and services, the allocation of resources among different uses and so on. The State makes it own decision as a producer or consumer or investor only in the market. It is no more the State it was for forty years.
G: Then why not the Indians call their system a capitalist, market economy?
S: Cause-Effect Paradigm does not win all the time. The Obsession Syndrome that State is the Cause and Economic development is the Effect continues in an Inverse way. The State is active in dismantling its sphere of its influence on the economic decisions the country takes. This activity of the State paradoxically is advertised as the Cause.
G: Better we end this long session here.