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Newsletter: February 2009 from Professor Henry Bruton:

Dear Alumni, We are having a cold and snowy winter in Williamstown. I am ready for April, but April is a long way off. I can do nothing about it, except complain and that doesn't help much--but I do it anyway. I want to tal a bit about !hina this time. I don't now much in detail about !hina, but several things stand out about its recent development that may be of relevance and of interest to !D" alumni. #o I will try a few things out on you and see what you thin . $et me now if you thin I am wrong or that I am missing out on some important part of the !hina story that is of particular relevance to your country. "veryone nows that !hina has achieved a remar able rate of growth of %D& in recent years, perhaps an average of ten per cent per year over the last twenty years or so, a truly outstanding record. 'he industrial production index is even higher, maybe as high as () per cent in many years. Its exports were booming and its current account still is in good shape, and it has a huge amount of foreign exchange reserves. Inflation seems under control. 'he big indexes all seem in very good order. *aybe you now of &resident Deng's alleged remar +it doesn't matter about the color of the cat, so long as it catches mice.+ !ertainly this statement would not have been made in the days of *ao, and, even if apocryphal, suggests that the !hinese are doing a little searching and learning. And we all now that searching and learning is the real source, the really real source of development. #o isn't !hina ,ust a plain beautiful success story- I want as I noted above to raise some .uestions for you to reflect on, and to consider with respect to your own country's development. /irst of all loo at the most important statistic, employment. 0fficial unemployment figures show around (1 percent of the labor force to be unemployed, but everyone recogni2es that figure to be much too low. 3nemployment is especially evident in urban areas where people have migrated in search of ,obs that do not exist. 4ust earlier this wee news stories told of 51 million migrant wor ers who were now unemployed. Agriculture has been neglected and so creates few ,obs at very low levels of productivity. Agriculture creates about 51 per cent of %D& but about one half the labor force is said to be in agriculture, indicating the very low level of productivity in this sector. 'he large scale unemployment means that the growth of %D& that is ta ing place in !hina is very lopsided with the conse.uence that ine.uality of income distribution has increased, along with unemployment, as well as geographical ine.uality. 'his lopsided pattern not only causes ine.uality, but creates social unrest and lac of faith in the government. 'his picture is reflected in the fact that private consumption as

a percentage of %D& in !hina is much lower than in most other countries, and indeed has fallen in recent years. Another important aspect of !hinese development is the ma,or role of foreign direct investment. 'his important role is one of the reasons for the lopsidedness of the development, but it has other effects as well. 'he most important of such effects is that on learning, especially of new technical and administrative nowledge. 6ou all now the crucial role of new nowledge in development, and we now that some must be imported. 7ut all must be adapted and fitted to our particular factor supplies, s ills, values, and norms. $arge amounts of foreign direct investment ma e this difficult to do. It is a fine line and an ambiguous line between too much foreign investment and too little. $ocal learning, indigenous technology, accepting and ta ing into account local conditions in developing new nowledge is surely a necessary condition for sustained growth. And heavy reliance on foreign investment does not permit this. 'o put this point a bit differently8 very rapid growth, fueled by /DI, is almost sure to dampen, maybe eliminate completely, local learning. 0ne more point and we stop. 'he great traditions, the very impressive value systems that have prevailed in !hina over the centuries seem to be withering away. 'here is no apparent underlying value system, no strong belief system that holds people together and gives meaning to lives and society. 'he strong hold that !onfucianism and other ancient doctrines once had has been undermined, not only by the !ommunists themselves, but, perhaps more importantly, by the form and content of the rapid development. 0ne might ris a stronger statement8 the !hinese have chosen a rapid growth process that is inconsistent with its traditional values and beliefs. 'hat inconsistency imposes a high cost on the society. And it might be unraveling 8 much of the growth of recent years has been based on exports and investment in export industries. !learly this strategy can produce rapid growth when other countries consumers are spending, but when this spending slows, those producing for this mar et suffers. Declines of 5)9 in !hinese electricity output in recent months suggest that the suffering could become intense. We want growth of %D&--more and better food, better housing, good health care, good schools, and all the rest for all our people, but growth can impose a very high cost on us, especially can rapid growth be costly, in terms of things not done :e.g. creating good ,obs; and things done we don't li e :e.g., destroying revered traditions;. When you thin of growth and how nice very rapid growth would be, be sure to ta e full account of costs. %D& growth is never free. 'here is more to be said about !hina and rapid growth, and maybe, if you are interested, I'll have another letter on the sub,ect. $et me now. In the meantime, eep at it. 6our friend, <enry 7ruton

Newsletter: March 2009 from Professor Henry Bruton:


Dear Alumni, 'he letter about !hina and its difficulties elicited some doubts and disagreements, which is very healthy. In this letter I want to elaborate a little, and try to help us thin more and more clearly about the issues involved. 6ou may still hold to your views, and that is o ay of course, but we may all see the good sides and the bad sides more clearly. #o here goes. In the previous letter I mentioned three things that were a bit disturbing8 unemployment :especially urban unemployment; and very une.ual income distribution effects, direct foreign investment, and the damage done to traditional values, morality, and institutions. As several of you noted, I could and :should; have mentioned pollution and the environmental effects in general, doubtful use of the world's raw materials, and some economic policies :mainly exchange rate policy; that had unfavorable effects on other countries. Are these effects necessarily the conse.uence of very rapid growth of %D&Why can't we have rapid %D& growth and still avoid these problems- #ome aspects of our societies can change only very slowly. 'hus traditions and values change slowly as the society learns and experiences new life styles and new opportunities, and new ideas. In a way this is good because such things are the very heart of our social and personal lives, and we need to reflect deeply when change begins to occur. &ollution control imposes a cost that will slow down growth because we don't include clean air in our measure of %D&. And rapid growth of %D&, especially that generated by foreign investment, can do great damage to the environment, and create ma,or costs for the community to bear later. =apid growth almost always generates ine.uality. If it were .uic ly eliminated, that would certainly help, but we now that once entrenched it is difficult and slow to alter. We need therefore to consider distribution right

from the start of our story. *ore e.ual income distribution almost always means attention to the rural sectors, where poverty is most rampant. %rowth in the rural sectors will also almost surely be more costly than urban growth, and hence slow down overall %D& growth. =ural growth will also slow the movement of labor to the cities, and hence help with the urban unemployment problem. >ote that slow %D& growth may not mean slower growth of well being for the society. Improved air .uality is a great source of well being, as is growth of the rural sectors. And wouldn't you rather live in a country where poverty was being eliminated than a country where ine.uality was rampant. As we said, rapid growth of %D& may be very expensive. #o maybe we need a measure of Well-7eing that captures these, and other effects, as our indicator of growth. I write this not to trash %D&. We certainly want more things--food, housing, education, transportation, etc.--but we want other things not now included in %D&--clean air, great traditions and values, thriving rural sectors, etc. I urge that all of you thin about it, thin hard about it, and wor out you own position. $et me now how you come out. 6our friend, <enry 7ruton &#. I have ,ust read in the >ew 6or 'imes that some Indian firm is coming out with a small car that runs well and appears to be very durable. It is also very cheap, around ?5,111. It is, says the 'imes article, also a great polluter, generating all inds of poison in the air. #o a .uestion. A small, good, cheap car would be great to have and its production would enter the %D& accounts. 'he pollution it generates would be extremely harmful and the cost of this pollution would not enter the %D& accounts. Would you, if you were the relevant minister, in India approve of the production of this car-

<7

Newsletter: Bruton:
Dear /riends,

October

2009

from

Professor

Henry

!lasses at !D" have started again, and the cool winds have replaced summer heat and humidity. I have concluded from this that it is time for another newsletter. I hope that you all have had a good brea and are ready to ,ump into the fray again. I have two things to call up for your attention. 'he first is the resurgence of @eynesian economics, and the second is why is low end poverty in our countries so hard to eliminate. 'here have several boo s recently on the return of @eynesian economics to respectability, both in academia and in policy ma ing. 'his is due partly to the recession that has plagued the world for the past few years, but I thin not entirely. 'he part of @eynes most relevant to the current situation is the stimulate notion in several countries, and, more fundamentally, @eynes's ideas on uncertainty. @eynes put much emphasis on uncertainty, much of which was ignored by his followers, even though it is fundamental to his theory. Attention to uncertainty seems to be coming bac . I thin it fair to say that economists have not made much headway in formulating a policy relevant theory or a way of thin ing about it. !ertainly we haven't found an effective way to reduce it or prepare for it. Insurance schemes don't seem to wor very well. 3ncertainty is often the ma,or obstacle to starting up investment pro,ects, especially small ones.

@eynes of course was also concerned with aggregate demand. With the rise of monetary theory and policy, attention shifted from fiscal policy, as in @eynes, to interest rates. 'his was always a mista e in my opinion. I have never believed interest rate policy very strong in the developing world, but other people did. Along with the shift to monetary policy was an increased fear of inflation. I thin this fear has been over done. 0ur countries need strong demand to induce investment and innovation. 'here is a problem however. In your own country thin about the extent to which the !entral 7an has such control of inflation sources that fiscal policy can be pushed hard. #trong demand plus rising marginal costs is a good incentive for searching for ways to increase productivity. 'his is a ey issue now and worth anybody's attention. 'hin about these two @eynesian ideas--uncertainty and aggregate demandAinflation--in the context of the present state of your economy. I would love to hear your thin ing on them. 'he other issue I want to mention is that of the continued existence of large numbers of people living in severe poverty, even where total %D& is rising reasonably well. 'his is an old problem of course, but is still attracting attention. 'here are about one billion people in the world who exist on less than two dollars per day. 'he world's population, you remember, is about seven billion. #o the +7ottom 7illion+ as they are sometimes called, constitute a si2eable proportion of the world's population. 'he .uestion of course is why should this be. Are our policies all to blame- Did you learn anything at !D" that would help you explain why, and derive a policy to change this situation- &aul !ollier has a boo , called the 7ottom 7illion :I thin ;, that would help one's thin ing on all this. I thin that this issue and the unemployment problem are closely lin ed. With a strong demand for labor--all inds of labor--this low end poverty might disappear or at least be mar edly reduced. And a strong demand for labor lin s closely to the aggregate demand arguments of @eynes. <ere is some home wor or a topic to tal about at lunch with a colleague. !hec the unemployment rate in your country. A recent issue of the "conomist is convenient place to loo . 6ou will find it too high. 'hen chec a handy inflation index and try to find some estimate of the number of people in low end poverty in your country. 'hen remember @eynes, and as yourself could we attac both unemployment and severe poverty by increased public spending--by fiscal policy, and not bring about a level of inflation that would defeat the effort. <ave a good lunch. =egards to all, <enry 7ruton