Comments
In the world where technology is rapidly changing, it is very important that people who are going to use the technology are knowledgeable. If people were not educated, then the available technology would be useless. The idea that education can give better paying jobs is a good incentive. However, if there are unavailable jobs to accommodate the skilled populace and if the country is corrupt, then education will have little or no effect to economic progress.
During 1960 until 1990, education expansion was pushed by international organizations. Primary education had been universalized and enrollment increased dramatically. Nonetheless, after several years of supporting education, it is apparent that most countries are still economically poor. Studies revealed that education does not lead to an increase in economic growth. Despite the increase in human capital, economic growth fell during the same period that education expanded. According to researches, GDP is not associated with the increase of human capital. In fact, the difference in economic growth is not associated with the changes in human capital. Furthermore, education could not be the reason for the rapid growth of an economy because wages increase as job experiences increase in almost every sector of the economy.
In a report made by George Mankiw, he elucidates that saving both human capital and physical capital is instrumental to the economic growth according to the Solow model. The human capital saving, in Mankiws report, is determined by the ratio between the students enrolled in high school programs. By including human capital to the equation, the diminishing returns from physical capital were reduced. Mankiw also explained that countries with high savings of physical and human capital tend to grow richer. Mankiw assumed that high human capital could attract investments because the rate of returns from technologies and devices are high. However, Mankiw only focused on secondary education, which is not universal as primary education. Only those with enough money to continue high school education would be enrolled. Thus, the study merely overstated the differences on education.
Moreover, if skilled workers could drive economic growth, then the less the workers are the greater they should earn. The high wage should attract skilled workers from other countries. However, brain drain among developing countries usually occurs. This means that skilled workers are moving out of their countries and work on developed countries because of higher earnings.
The reason why education failed is influenced by how people use such skills. The government should focus on creating incentives for future growth, without this student, teachers, and parents would not perform at their best. The government should create educational policies and create incentives for the high skilled labors.
Chapter 5
If the population increases, the amount of resources available would decrease. This is the basis of the claim that population growth should be controlled if the nation wants to grow economically. Thomas Malthus mentioned that famines could result if the population would continue to increase. Paul Erlich who argued that death rates would increase because of famines and epidemics among Third World countries supported this claim. Nevertheless, none of the predictions came true. While population continuous to grow, food production also had increased. Moreover, there are lower death rates and lower birth rates. Despite these, Lester Brown still insists that the demand for basic commodities is increasing while the resources are decreasing. Thus, the current trend marks the decrease of economic growth and an increase on social and environmental problems. Brown further elaborated that the number of unemployed would also increase. If these assumptions were true, it would only be practical that population growth should be controlled. Therefore, family planning such as the use of condoms should be encouraged. This is accompanied by an increase demand on the funds for family planning.
However, the capitalist market should have been enough to provide the need for family planning if there is indeed a high demand. Purchasing a condom is far cheaper than raising a child. Thus, there was no sufficient reason for International organizations to extend help to promote and provide family planning contraceptives like condoms. In a study made from Lant Princhett, he found out that mothers in countries with high number of births prefer to have more children. Thus, the demand for contraceptive in high birth countries is low.
If overpopulation could really lead to famines, then the growth per capita of GDP in countries with fast population increase should decrease. Nonetheless, studies revealed that there is no correlation between the two. In fact, a long-run analysis showed that both economy and population grow together. Moreover, a survey of different nations would reflect the absence of pattern regarding the two variables. An increase in population is also not related to the increase in unemployment, since an increase in population is a potential worker that could even raise productivity.
Thus, population growth could benefit the society according to the genius principle by Simon Kuznets and Julian Simon, because there are more people that could benefit from a single idea. Therefore, ideas are more beneficial if population is high. Moreover, Esther Boserup argued that an increase in population push the people to think better regarding innovations and technological advances that could resolve scarcity problems.
Population control contraceptives should not be subsidized because the decision to have more children is not affected by the price or availability of contraceptives. In addition, the cost and benefits of population growth are vague since there is no consensus among economists regarding the matter. Population control is something that a country should independently decide.
The best way to control the population would be to promote development. On one hand, the parents who have high economic status tend to have fewer children because they spend most of their time working. Moreover, rich families invest on their children by improving their education, health, and skills. On the other hand, poor families tend to have more children because they have more time to take care of their child and less time to work. This is especially true if the work has low incentives. The only way to counteract these self-preserving conditions is to encourage development because this will increase the amount of time parents spend working.
Chapter 6
Whenever there is a shortage in budget, people tend to borrow or ask for aids from other people. People with money would lend only if the borrower has enough capacity to pay back the loan. This same scenario happens to countries that do not have enough budgets to sustain growth. International organizations and donors would finance aids that ought to help the country prosper. The lending and donating of aids happen especially when the country is in crisis. However, if not use properly, the borrower may not be able to pay back the loan or the aids would be spent without generating any economic progress. Moreover, if the borrower cannot pay the lender, the country may not be able to apply for new loans that could be use to pay for the old ones.
As a result, lenders created the adjustment lending condition. Under this condition, the borrower or aid beneficiary must be able to reform their policies towards economic growth promotion. Nonetheless, the adjustment with growth did not yield its expected result. On the contrary, money was loaned and aids were given but the economy of the recipients did not grow. This is largely because lenders and borrowers were not given the proper incentives for growth. For example, despite the high inflation rates in some countries they continue to receive loans and grants. Furthermore, countries who had shifted from communist regime to capitalist market such as Russia received aids and loans when inflation was already too high to control.
The country with an official exchange rate lower than the black market exchange rate should not receive loans under the conditions of adjustment loans. Countries with high levels of budget deficits resemble bad governance and should not receive loans and aids because it creates an atmosphere unsuitable for investments. Furthermore, a country that has negative rates of interest should not be given loans or assistance because the financial system of the country would not function well. The most important condition would be the presence of uncorrupted government. However, most donors and lenders often neglect the importance of these conditions. Moreover, the borrower country could pretend to have adjustment policies to receive the loans or aids but would not actually enforce or adjust their policy to create incentives for economic growth. One way of doing this is by cutting spending this year to limit the budget deficits, which would attract lenders. This could be effective, nonetheless it creates future problems like an even higher deficit or spending in the future.
Although the adjustment policies are not met, lenders and recipients would still enjoy a positive incentive. Lenders would receive interests and other incentives for lending. The recipient would receive more loans and donations, even if they do not follow the conditions set by the lenders and donors. In addition, donors would continue to donate because they want to help the poor countries. Thus, the recipient would create the necessary adjustments to acquire the loan. Afterwards, they would go back to the old ways so new loans would cease. They would re-adjust again to meet the requirements for new loans. The same process would repeat continuously unless policies are actually changed towards economic growth.
Lender should give loans only if the conditions are met. The loans should not be based on projected policy changes but the actual policy changes that had been enforced in the past. The countries that create effective policy adjustments that raise economic growth should be given more loans, not the other way around.
Chapter 7
Another panacea that international organizations have thought of to help alleviates poverty in third world countries is debt forgiveness. This means that the debt would be cancelled out, partially or completely. By doing so, the country could allow more of its budget to subsidizing growth inducing projects rather than paying for debt and its interests. This method had been around for centuries. As a matter of fact, the Greek states did the same thing 2400 years ago. It is therefore, not a new concept or methodology of helping poor countries. Prior the year 2000, several campaign were made that advocates total cancellation of debts for all poor countries. This campaign was known as Jubilee 2000. In 1999, the G7 meeting concluded that the debt relief for Highly Indebted Poor Countries (HIPC) should be more rapid and increase in amount. This is in relation with the HIPC Initiative that agreed to provide partial debt forgiveness to the HIPC. Nonetheless, the World Bank and other lenders practiced debt forgiveness since 1970s. The result is unpromising because most of the poor countries remained poor until now. In the 1987 Venice accords, the G7 started the partial forgiveness program. At the same time, the World Bank introduced the SPA (Special Program Assistance) while the IMF created the ESAF (Enhanced Structural Adjustment Facility), which are designed to make rapid, higher, and more concessional forms of relief assistance. In 1988 Toronto accords, the G7 decided to decrease the rates of interest and extend the date of maturities. In 1994 Naples accords, the Paris Club agreed to increase debt relief for qualified countries. When the IMF and the World Bank created the HIPC Debt Initiative, the Paris Club granted the 80 reduction of debts. Moreover, by the year 2000, several non-concessional debts were substituted with concessional debts.
Despite the several acts of debt-forgiveness over the last decades, several poor countries did not make progress at all. The problem lies on the irresponsible type of governance. More particularly, debt forgiveness only encourages governments to incur new debts. This has a lot to do with government that does not care about sustainable development. Such irresponsible government would trade the nations assets for current needs without thinking about future generations. As evidence, the countries that received the highest amount of debt relief were also the ones that engaged in new borrowing. Trading assets includes privatizations and selling of natural resources. As a result, the decrease of assets would lead to a decreasing per capita income and economic depression. Furthermore, an irresponsible government subsidizes supporters without consideration of future needs and keeps the rate of exchange low for imports. HIPC could not have suffered bad luck because not all the HIPC suffered war or higher import prices. Aside from the negligent borrowers, lenders are also acting negligently. The lenders are giving more debt reliefs to countries that already have overvaluation of currency and high budget discrepancy, which does not attract investors at all. The World Bank and the IMF were giving more financial support to HIPC than less developed countries.
The countries that keep on receiving debt forgiveness are those that had wasted the chance to improve economic growth through aid. Thus, debt forgiveness would not yield its desired effect if the government would not be responsible. The policies should changed and the negative behavior should not be restored. Prior to giving aid, the lender should first assess if the country has a responsible government and had good performance in several years. The financial gap should not be filled through debt because it encourage to irresponsible government to borrow more. Debt forgiveness should only be done once, if this is done repeatedly, HIPC or recipient countries would merely wait for their debts to be forgiven.
Chapter 8
The textile industry in the United States is protected by tariffs and quotas, therefore imports could not evade the US market. This protects the textile exports and the economy. Thus, importers would try to any ingenious way to get their products in the market through other means. One of the importers, Daewoo Corporation from South Korea had invested in Bangladesh Desh Garments Ltd. Owned by Noorul Quader. In 1979 Daewoo trained 130 workers from Bangladesh under the condition that Desh would pay 8 of its sales to Daewoo. Unexpectedly, Desh workers learned rapidly. As a result, Quader decided to put an end on the agreement with Daewoo. Thus, in a span of seven years, the amount of production increased from 55,050 to 2 billion.
The process that transpired reflected the story about increasing returns. As could be observed, the increase in capital yields increasing returns. In the scenario, knowledge leaked. This means that a single investor does not manipulate knowledge it is distributed to others and was later used by others for their own benefit. The knowledge contains low-cost high yield method of production that makes the knower wealthy. Unlike machines, more people utilize knowledge. Moreover, people could subjectively use knowledge towards their personal goals. It is inevitable for knowledge to leak because people would simply mimic what wealthy people are already doing. Ordinary people would try to find out and learn whatever knowledge the wealthy people possess. Another reason for the leakage of knowledge is about complementing past knowledge present in the society. Fresh ideas are warmly welcomed if they are correspond or in connection with the previous knowledge. These fresh ideas could benefit the production process increasing the return to capital and encouraging further investments. Without knowledge leaks, the increasing return would only apply to the knower. However, there will be no returns to the society.
When knowledge is leaked, it would lead to an increase in investment, new knowledge would be formed. This knowledge would again leaks and the whole cycle continuous indefinitely. This is known as the virtuous cycle. Its opposite, the vicious cycle happens when the society started with small amount of knowledge and there are no incentives to invest in knowledge. If this is the case, people will not invest in knowledge. Thus, it could be expected that knowledge will remain the same, if not deteriorate, in the future. This cycle is a trap that poor people could not get away. The formation and accumulation of traps are also determined by expectations. Good expectations create higher investment that could boost knowledge and jumpstart the journey of the society to a wealthier state.
The cycles greatly depend on the action of the government because it could change the luck of a business anytime.
A product is produced after a series of task done by different individuals. The production must be at pristine condition to avoid any negligent mistakes. A single mistake would jeopardize the quality of the product. This shows that the production capacity of the workers is dependent on the skill of their co-employees. As a result, there exists a complementary relationship between workers. The skilled worker should match up or have the skill that would complement the skills of other workers so that there will be a high return to acquire skills.