Uncommon Sense

politics and society are, unfortunately, much the same thing

IMF study: Government spending doesn’t make poor countries rich

August 12, 2014 by James Pethokoukis

New research from the International Monetary Fund undercuts the idea that “big push” infrastructure and other public investment projects can create accelerating economic growth and higher productivity in low-income countries:

This paper has examined whether major public investment drives in the past have served to promote or accelerate national economic growth. It is not about whether in theory public investment drives could accelerate growth, but rather whether in practice, with real governments deciding how to spend the funds and implementing investments, they have in fact accelerated growth.

The answer appears to be “probably very little”. This conclusion pertains to the drives – the big increases in public capital  spending – not necessarily to routine levels of public investment. And furthermore the evidence here  is not about whether public capital can promote growth by averting the emergence of bottlenecks. Major public investment campaigns continue to be advocated in several countries as a major trigger for economic growth, and on this issue, whether they have in fact triggered growth, the evidence for a positive effect of public capital on GDP or GDP growth is weak. … It is difficult to find a clear-cut example that fits the oft-repeated narrative of a public investment boom followed by acceleration in GDP growth. If anything the cases of clear-cut booms illustrate the opposite – major drives in the past have been followed by slumps rather than booms.

The FT’s Matthew Klein has an excellent write-up of the report. But as it so happens, the FT also features a commentary by Deirdre McCloskey outlining a different path to prosperity:

“Making men and women all equal. That I take to be the gist of our political theory.” This rejoinder to rightwingers who delight in rank and privilege is spoken by Lady Glencora Palliser, the free-spirited Liberal heroine of Anthony Trollope’s Phineas Finn. It encapsulates the cardinal error of much of the left.

Joshua Monk, one of the novel’s Radicals, sees through it. “Equality is an ugly word . . . and frightens,” he says. The aim of the true Liberal should not be equality but “lifting up those below him”. It is to be achieved not by redistribution but by free trade, compulsory education and women’s rights.

And so it came to pass. In the UK since 1800, or Italy since 1900, or Hong Kong since 1950, real income per head has increased by a factor of anywhere from 15 to 100, depending on how one allows for the improved quality of steel girders and plate glass, medicine and economics. …

All the foreign aid to Africa or South and Central America, for example, is dwarfed by the amount that nations in these areas would gain if the rich world abandoned tariffs and other protections for their agriculture industries. There are ways to help the poor – let the Great Enrichment proceed, as it has in China and India – but charity or expropriation are not the ways.

The Great Enrichment came from innovation, not from accumulating capital or exploiting the working classes or lording it over the colonies. Capital had little to do with it, despite the unhappy fact that we call the system “capitalism”. Capital is necessary. But so are water, labour, oxygen and pencils. The path to prosperity involves betterment, not piling brick on brick.

original article: IMF study: Government spending doesn’t make poor countries rich

bureaucracy, capitalism, charity, economics, fairness doctrine, foreign affairs, freedom, funding, government, liberalism, marxism, nanny state, philosophy, politics, poverty, public policy, socialism, spending, study, unintended consequences, welfare

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Filed under: bureaucracy, capitalism, charity, economics, fairness doctrine, foreign affairs, freedom, funding, government, liberalism, marxism, nanny state, philosophy, politics, poverty, public policy, socialism, spending, study, unintended consequences, welfare

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