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Optimism in economic development

There is much discussion about global poverty and the billions of people living with almost nothing. Why is it that governments, development banks, think-tanks, academics, NGOs, and many others can’t just fix the problem? Why is it that seemingly obvious reforms never happen? Why are prosperity and equity so elusive?

Economic development is not easy. Good ideas and good intentions have usually crashed against a wall of vested interests, incapable institutions, and chronic corruption. And the recent backlash against globalization will only make matters worse—if rich countries shut their doors to the movement of goods, capital, people, and ideas, the world’s poor will suffer disproportionately.

Yet, behind and beyond the headlines, politics and technology are coming together to make economic development more likely for more countries than ever before. How come?

First, the way governments function, and for whom they function, is changing fast. It is in fact probable that, one day, governments will work for us. Why the hope? Think of four “Ds”: democracy, decentralization, devices, and debt. The more our leaders feel that others are vying for the top job—that is, leadership becomes “contestable”—the more they will care for what voters want. This is true for presidents and prime ministers, but it is even truer for governors and mayors. As the responsibility for public schools, hospitals, and roads is further “decentralized” towards local authorities, it gets easier to demand accountability—closer physical proximity between policy-makers and policy-takers is “welfare-enhancing.” Moreover, we now have “devices” that let us name and shame public officials in real time. With your smart phone, you can set off and organize a massive protest from the comfort of your Twitter feed or Facebook account. For us citizens, the marginal cost of “collective action” is approaching zero. And then, there are bondholders, those investors who buy national debt and expect to be repaid. They trade their bonds 24/7, and sell them off in a blink if our government messes with the economy. This instantaneously raises the country’s “spread”—the difference in interest rates it has to pay to borrow, compared to the US government. Everyone sees this information, both at home and abroad, and soon enough political pressure mounts to correct course. Call it “accountability by spreads.”

“It is in fact probable that, one day, governments will work for us.”

Politics and technology are also changing our understanding of economic management. It starts with the industrial process, which has become a cobweb of “global value chains”. This is the idea that most of the products that consumers buy—say, cars—are made up of parts and designs produced in different countries and shipped across borders to a final assembly site. The “well-paying jobs” that politicians talk so much about are now inside those value chains. But you can’t be part of a chain, let alone climb it, if you can’t keep up with it. Imagine if your country manufactures car tires but, because of weak quality controls, changes in tax rules, or poor port maintenance, you can’t be trusted to deliver the tires according to specifications, at the cheapest possible price, and on time. Everyone else’s effort along the chain would be wasted. How long before they cut you off? Why would you be invited in the first place? You see, value chains force countries to rise up to a more-or-less common standard of economic management: fiscal prudence, independent central banks, low public debt, open trade, smart regulation, adequate infrastructure, capable workers, and fair treatment of investors. Without these, you cannot offer the predictability that modern, globalized industry needs, and the jobs that people want.

Finally, we have new weapons in the war on poverty. Technology has made it possible for policy-makers to know the poor by name, individually, one by one. As India has shown, you can biometrically identify almost a billion people in about seven years, at a cost of less than four dollars per head. Once you ID the person, it is almost costless to transfer cash directly to her or his debit card or cellphone. So more than seventy developing countries do just that. Some attach conditions to the transfer—like keeping your kids in school—and others don’t. This individualized approach to social policy is not just politically popular, it is also incredibly effective. It allows you to react faster, and send more cash to those in need, when an economic crisis breaks out. It helps you promote desirable social behaviors—from breast-feeding to vaccination. It sheds light on the aberration of subsidizing the rich—as many governments do when they sell things like gasoline or electricity at below-cost prices. And, one day, it may be used to turn citizens into shareholders who directly receive dividends from the oil, gas, or minerals that their countries export. Picture that for Africa.

All this optimism about economic development is not without risks. In the short-term, one worries about protectionism in the United States, stability in the European Union, and slower growth in China—just to name a few. Even more difficult problems loom in the horizon, like climate change, cyber-security, and chronic conflict. These global challenges call for international coordination, something at which the world is not very good.

But, overall, never before did the profession of economic development have the alignment of technical tools and political incentives that it has today. Yes, we will still see countries zig-zagging along the path of common-sense policy, and a few stubbornly going backwards. For most, however, the chance at a better life has never be greater.

Featured image credit: “dollar” by geralt. CC0 Public Domain via Pixabay.

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