Bill Mitchell-en Advanced nations must increase their foreign aid
(http://bilbo.economicoutlook.net/blog/?p=47236)
(i) Hasiera gisa
(http://bilbo.economicoutlook.net/blog/?p=47236)
(i) Hasiera gisa
… I have been following the disaster unfolding in Timor-Leste over the last few days as I continue to compile research material as part of the development of a plan to increase the resilience of the Island state. We know that accumulating new public infrastructure is a key to the growth process. It crowds-in private investment, which leverages off the capacity provided by such infrastructure. A lack of essential public infrastructure is a major aspect of poverty and exclusion. While natural disasters impact on all nations when afflicted, the problem for Small Island Developing States (SIDS) like Timor-Leste is that they regularly face major capital destruction as a result of natural disasters and do not have the capacity to defend themselves and reduce the consequences of the events. Climate change is rendering this problem more severe. This is where the creation of a new multilateral agency to replace the corrupt IMF is necessary.
(ii) Timor-Leste: garapen arazoa
Timor-Leste – the development challenge
Like most nations, Timor-Leste is now fighting the coronavirus.
The last thing that it needed was for a natural disaster to necessitate the crowding in of people in emergency shelters where any sense of social distancing was near impossible.
But as we know, that is exactly what happened.
The pictures coming out of the nation have been devastating.
While flooding is not uncommon during the wet season in the region, what happened in the last week has been of another scale.
The floods and mud torrents have wiped out houses, bridges and roads in the island state. And the accumulation of rubble has meant assessing the full-scale of the crisis has been difficult, including gaining access to survivors, especially, in the regional areas outside of Dili.
With so much water around, the next problem is the waterborne diseases such as typhoid, cholera, etc.
There are economists who think that natural disasters have a beneficial effect on less advanced nations – the so-called ‘blessings in disguise’ idea.
The notion draws on Joseph Schumpeter’s concept of – Creative Destruction – which posits that out of industrial turmoil, the economic structure of a nation is revolutionised with the strong squeezing out the weak firms.
As a result, the conjecture is that the economy becomes more efficient (lower cost of production) and grows more strongly.
Schumpeter, got the idea from Marx and Engels, who in – The Communist Manifest – of 1848, wrote that (p.17):
Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule. It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.
I have always loved that characterisation of economic crises driven by a shortfall in overall spending. Marx knew about macroeconomics long before Keynes articulated the same idea about effective demand.
Marx refined this idea of the destructive characteristics of economic crises in Chapter 17, Volume II of the epic – Theories of Surplus Value – published in 1863 where he wrote (p.496):
the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use-values. What one loses, the other gains. Values used as capital are prevented from acting again as capital in the hands of the same person. The old capitalists go bankrupt. If the value of the commodities from whose sale a capitalist reproduces his capital was equal to £ 12,000, of which say £ 2,000 were profit, and their price falls to £ 6,000, then the capitalist can neither meet his contracted obligations nor, even if he had none, could he, with the £ 6,000 restart his business on the former scale, for the commodity prices have risen once more to the level of their cost-prices. In this way, £ 6,000 has been destroyed, although the buyer of these commodities, because he has acquired them at half their cost-price, can go ahead very well once business livens up again, and may even have made a profit. A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction. This is also the period during which moneyed interest enriches itself at the cost of industrial interest.
Marx did not fully anticipate the rise of monopoly capitalism, where concentrated sectors dominated by large firms, have greater capacity to withstand crises and maintain their nominal capital intact.
Schumpeter built on Marx’s views but instead of seeing crises as the manifestation of the inherent contradictory, self-destruction of Capitalism (Marx), he rather saw the process of capital being destroyed and recreated as a creative, beneficial process.
Development economists who call on this idea of creative destruction – claiming that such crises provide opportunities to purge inefficient sectors and to add resilience and efficiency – however somewhat miss the boat when it comes to the type of disasters that less-advanced nations in the Pacific region face on a regular basis.
The ‘blessings in disguise’ approach is inherent in mainstream neoclassical growth theory, which posits that natural disasters do not impact negatively on the rate of technological progressin the long-run.
Marx and Engels were talking about the capital that owners of the material means of production hold. The aim of Capitalism is to convert nominal capital (money) into productive capital (machinery etc) to produce surplus value, which can be realised as profits and return a larger stock of money capital the so-called M-C-M’ cycle that typifies Marx’s approach to capital accumulation.
But the problem facing these island nations goes beyond the damage that natural disasters cause to the profitability and the private capital accumulation process.
The process of growth for any nation requires the accumulation of both productive and social capital, such as public infrastructure (roads, bridges, transport systems, telecommunications, water supply, power, etc).
Usually, it is the latter that crowds in the former as private sector investors take advantage of the growing stock of public capital and leverate profit-seeking opportunities.
For advanced nations with large capital stocks – both private and public – a natural disaster can interrupt the accumulation process but usually not derail it.
In the last 2 years, Australia, for example, has had widespread bushfire trauma and then the recent floods (which are still abating).
These events are disruptive but the capacity of the nation to quickly restore opportunities is large and the disruption is short-lived, which is not to say, the problems do not cause considerable trauma for those impacted the most.
But less-advanced nations lack this capacity to defend themselves against natural disasters and minimise the negative consequence of them
There is nothing creative or a ‘blessing’ about having a large proportion of a nation’s public infrastructure wiped out regularly by major weather events.
In ordinary times, the so-called Small Island Developing States (SIDS) face the prospect of losing a considerable proportion of their capital stock when a major weather event occurs.
The SIDS face multiple developmental challenges at the best of times – isolation, fragmented islands making up the nation, remoteness from major shipping routes (which increases the difficulty of creating export opportunities), dependence on imports for food, energy etc.
But then to have to regularly deal with the destruction of essential infrastructure makes the challenge that much harder.
And now, climate change has meant that these events are no longer just ordinary capital depletion disasters.
The intensity and frequency of these events are increasing and the capacity of the nations to rebuild their capital to get the process of development restarted is now reduced.
When Hurricane Irma struct the Caribbean in September 2017, 1.7 million people were displaced and Barbuda lost 90 per cent of its infrastructure (Source).
50 per cent of its population became homeless.
The current chaos and destruction in Timor-Leste will be similarly detrimental.
What the advanced nations need to do is recognise that they have currency sovereignty which means their foreign aid allocations can increase dramatically to help the SIDS deal with the regularity of capital destruction and to provide buffers to deal with climate change.
The IMF needs to be dissolved and a new multilateral body created to funnel capital into these vulnerable nations from the advanced nations without the sort of neoliberal conditionality that essentially makes it impossible for these nations to develop in any coherent way.
I am working on a plan for Timor-Leste which requires it to spend more of its oil revenue immediately and abandon the dollarisation.
More on that another day.
(…)
joseba says:
Some thoughts on a five-year development plan for Timor-Leste
(http://bilbo.economicoutlook.net/blog/?p=49139)
Some years ago, I did some work for the Asian Development Bank on Pakistan and Central Asia. It was a really interesting experience because it taught me a lot about the challenges facing poorer regions who have dependencies on imported energy and food and limited export opportunities. Since then I have been studying a number of countries and am convinced that development strategies have to fundamentally change if the poorer nations are to achieve any hope of sustainable development. At present, I am working on the development of such a framework, which will incorporate the best-practices proposed by scholars who similarly reject the traditional IMF/World Bank development model. Specifically, I am focusing on Timor-Leste, which is about to stage a presidential election (March 19, 2022). Xanana Gusmão’s party – National Congress for Timorese Reconstruction (CNRT) – has backed former president Jose Ramos-Horta against the incumbent Fretilin President, Francisco Guterres and the third candidate Martinho Gusmão (United Party for Development and Democracy – PUDD). It appears that if Jose Ramos-Horta is elected, there will be a dissolution of parliament and early elections will be held after a period of political turbulence following the 2017 election. Early indications are that Ramos-Horta is well placed after the conduct of Guterres in recent years. The new government must consider a new development strategy and so I am working to provide some structure to that goal from a Modern Monetary Theory (MMT) perspective.
Setting the scene
Timor-Leste – first gained independence on November 28, 1975 from the Portuguese.
But we know that soon after (9 days), it was illegally invaded by Indonesia and a harsh occupied ensued that would last for 24 years and ended in Indonesian military troops devastating the infrastructure of the little nation as it was forced to leave under a UN-sponsored act of self determination.
It became a new state in its own right on May 20, 2022, nearly 20 years ago.
As an Australian I have borne the shame that our Labor government brought on us when it was complicit in the Indonesian invasion and the murder of investigative journalists at Balibo.
The Australian government has also been shameful in its territorial disputes with the new nation – as it tried to deprive TL of oil reserves. Australia also spied on the Timor-Leste during these negotiations (Source).
We have short memories. The Timorese incurred massive costs during the Second World War from the Japanese occupation, while helping to shield Australian soldiers who were fighting there.
I have written about Timor-Leste before:
1. Advanced nations must increase their foreign aid (April 7, 2021).
2. Labour force trends in Timor-Leste continue to point to a need for a Job Guarantee (October 15, 2019).
3. Timor-Leste – challenges for the new government – Part 3 (May 24, 2018).
4. Timor-Leste – challenges for the new government – Part 2 (May 16, 2018).
5. Timor-Leste – challenges for the new government – Part 1 (May 15, 2018).
6. Timor-Leste – beyond the IMF/World Bank yoke (November 20, 2012).
7. Why didn’t they build better houses! (December 30, 2004).
Now, after 20 years of nationhood, the next several years will be crucial for the nation’s future.
The first 20 years has seen a lot of progress funded by the oil revenue that they have enjoyed.
The problem now is to diversify the economy and deal with the on-going problems of food security with a reliance on imported products, inadequate water reticulation and flood control, unstable incomes, particularly in the rural areas, which compromise export quality and more.
Most farming activity remains at the subsistence level.
The Asian Development Bank provides – Poverty Data – for Timor-Leste and in 2014, the poverty rate was 42.8 per cent.
Their data shows that 30.9 per cent of people sufference from undernourishment (2019), 51.7 per cent of children under five years suffer stunted growth from lack of food and 9.9 per cent suffer wasting (malnutrition).
In March 2021, Timor-Leste endured massive flooding after a period of extreme rainfall. The floods caused substantial damage to the infrastructure – wiping out bridges, roads and several deaths. Dili endured massive damage.
The problem is that flooding on the island is not a once-off event.
The regular incidence of flooding is the result of a lack of planning and investment in water management systems as well as poor farming methods.
Up until now, the government response has been palliative rather than going to the nub of the problem.
The floods recur because the mountainous farming areas have not cared for the land over the decades, which has created low permeability in the soil, so when it rains, the water just gushes down the rivers to the coast and the capital.
The UN Office for Disaster Risk Reduction media release (January 29, 2022) – Timor-Leste floods teach costly lessons – reports that:
The floods … the worst the country has seen in 50 years, affected 13 municipalities and 30,322 households, destroyed 4,212 houses, and took 34 lives … Roads, buildings, and public infrastructure sustained damage. Agricultural areas covering 2,163 hectares were impacted and irrigation systems were wrecked.
Nearly a year later, roads remain impassable and other infrastructure is yet to be repaired as a result of delays in getting international aid.
The UNDRR also note that “Obstructed waterways – which are dry most of the year and only fill up when it rains – was named the biggest culprit in the catastrophe. As Dili grapples with the rising demand for shelter because of in-migration, people erect houses along waterways.”
Think about this – in the first two decades of nationhood, the – Timor-Leste Petroleum Fund – had accumulated $US17.7 billion by 2019 (Source), but recent discussions with those on the ground tell me that it is now $US19 billion,
In the blog posts cited at the outset, I have discussed the petroleum economy issue in detail.
In 2019, it earned $US2.101 billion and transferred only $US969 billion to the ‘State Budget’.
Its portfolio as at 2019 was distributed according to the following graph.
Why they are investing in low-yield US government debt instruments is one issue, which I will deal with another day as I work on this project more over time.
There is always a tension in these situations between saving for the future and investing now to make sure there is a future.
That is where the problem lies and in developing a 5-year plan to take the country to the next level after the elections will have to deal with that issue.
The other issue that the nation has to deal with is their use of the US dollar. I indicated to relevant parties in a meeting the other day that Timor-Leste cannot be sovereign and independent until it has its own currency.
And to achieve that desirable aim requires a carefully thought out transition plan to be developed to ensure the new currency is a positive step rather than becomes the target for destructive speculation by the financial markets.
I will write more about what a blueprint might look like in that regard somewhat later when things become clearer in the political circles.
Towards a sustainable growth path
My work on Pakistan and the so-called CAREC nations of Central Asia some years ago emphasised that at the outset policy makers had to achieve an understanding of the functioning of the monetary systems of sovereign nations.
Such an understanding of the options available to a nation operating with a sovereign currency must be developed first in order to appreciate the policy space that is available.
This allows for a strategy for development that is feasible while exploiting as much of the policy space available, consistent with the goals of policy-makers.
Policy-makers might choose to use less space than is available, but they should at the very least understand which policies are feasible.
The problem facing many poorer countries is that the IMF and the World Bank consultants have told the goverments that their policy space is close to zero and can only be expanded by austerity measures in the domestic economy while transforming the subsistence agricultural sector into a debt-laden, export sector producing cash crops (to pay off the debt).
When world prices for crops fall, the IMF and World Bank, just extend more loans with harsher conditionality, and the nations get nowhere.
A sustainable development strategy requires that:
1. Material living standards rise.
2. Internationally recognised human rights are advanced.
3. Economic sustainability is achieved – the nation cannot be at the mercy of export markets.
4. Environmental sustainability is achieved – farming and urban systems (water, electricity, etc) have to evolve.
When I have been working in these types of nations, the predominant theme is that if the government pursues a domestic policy of full employment (with the introduction of a Job Guarantee being a central innovation to eliminate chronic joblessness), the balance of payments problems will become worse.
The idea is that if income levels rise as more people have employment security, then imports will rise and current account constraints on growth will impinge.
In general, under fixed exchange rates, the so-called stop-go constraints on growth were always a problem facing an economy with high unemployment.
Contractionary policies were required because the current account influenced central bank reserves and made domestic expansion dependent on the defence of the external parity.
Under floating exchange rates the constraint is not binding and domestic policy can pursue full employment targets leaving the exchange rate to absorb any adjustment.
But it is clear that a further source of cost pressure could come via the exchange rate for small trading economies with flexible exchange rates.
First, the higher imports (which is not an inevitability) may promote exchange rate depreciation. Second, depending on export and import price elasticities, net exports may increase their contribution to local employment and demand.
This becomes the obsession of policy makers and militates against pursuing sustainable domestic policies.
For example, when I was working on Pakistan’s development options during the GFC, the Economist magazine published two inflammatory articles.
1. The Last Resort (October 25, 2008).
2. Pakistan’s wounded sovereignty (October 29, 2008).
Quotes include:
– “Pakistan faces economic meltdown … The economy is close to freefall. The country needs at least $3 billion in short order, and a further $10 billion over the next two years to plug a balance-of-payments gap. Without it, default abroad might well coincide with political anarchy at home.”
– “Without foreign help, Pakistan won’t be able to afford its imports, repay its debts, or quell the insurgents encamped within its borders.”
– “Pakistan is running out of hard currency. It spent $3.6 billion on imports in September, including a $1.5 billion petrol bill that was 180% higher than a year earlier but earned only $1.9 billion from its exports.”
I will tell an interesting story about my Pakistan work at a later date – which will reveal IMF bullying of a major international development institution and the government. It was a fun time.
But the point is that it is the Balance of Payments issues that become the focus for nations that import much more than they export.
For Pakistan, the government clearly needed time to deal with the burgeoning balance of payments deficits and the unsustainable loss of foreign exchange reserves.
The mainstream economists advocated harsh austerity as the solution.
My recommendation was quite different.
The financial problems facing nations like this should not be seen in isolation from the real problems – the constrained supply and the persistently high rates of labor underutilisation.
If such nations just concentrate on the financial issues they narrow the range and scope of policy options and, ultimately, limit the capacity of the economy to redress the real problems.
A viable policy framework must seek to solve both sets of problems and provide a sustainable development path.
In the case of Timor-Leste – we recognise that a robust growth outcome will tend to generate a current account deficit because of nature of its dependence on imports.
The following graph shows the current account balance from 2000 to 2021 as a percent of GDP.
The reality is that I would expect that to grow as oil revenues decline.
The IMF approach that imposes austerity, reduces capacity utilisation and suppresses domestic demand, does not provide a sustainable development path. It tends to create a vicious circle with further balance-of-payments problems.
Timor-Leste’s challenge is to create more domestic policy space to pursue an alternative, sustainable growth path. It can do that in two stages.
First, within the current dollarised monetary regime using its massive Petroleum fund holdings as if they are a currency issuer. Clearly, that cannot be the indefinite future strategy though given the fund only has $US19 billion in it.
Second, introduce their own currency, float it on international markets, run their own interest rate policy and only issue debt in local currency.
Then they have to deal with the exchange rate issue.
In the medium-term, it can make use of the considerable policy space it has (see below) to pursue economic growth and rising living standards, even if this means expansion of the current account deficit and depreciation of the currency, which is possible once it abandons the US dollar.
Of course, continuous currency depreciation cannot be sustainable.
While there is no strict balance-of-payments growth constraint in a flexible exchange economy in the same way that one exists in a fixed exchange rate world, the external balance still has implications for foreign reserve holdings via the level of external debt held by the public and private sector.
Moreover, the evidence shows that, in the long-run, no country can grow faster than the rate consistent with balance on the current account.
Sooner or later the market penalises the country and attracting capital inflows from abroad becomes very difficult.
I have a detailed paper coming out on this topic which I will make available when ready.
So part of the development strategy for Timor-Leste has to be in preparing its domestic policy space to deliver short-run gains on the road to sustainability, while getting the nation ready for the introduction of its own currency.
That strategy must include policy initiatives that reduce its dependence on imports.
In a 2008 paper – Second-best Institutions – Dani Rodrik emphasised that development strategies must recognise the contextual nature of policy solutions and to tailor the policies in a trial and error manner.
This is in contradistinction to the IMF/World Bank approach that imposes a one-size-fits-all, Washington Consensus model onto all nations.
Strategies that just create growth are also inadequate and in early stages of development rarely address the structural problems that need to be overcome.
Indeed, barring calamity (GFC, floods, pandemic), Timor-Leste has demonstrated robust growth capacity.
As noted above, poverty is high, food security is compromised, basic infrastructure is insecure and joblessness is high (especially in the informal sector).
In the short-term, the Timor-Leste government has substantial financial resources available to it to fast track an alternative development strategy away from an export-petrol economy dependence.
I consider the essential components of this alternative strategy to be:
1. Introduce a national Job Guarantee to provide income security – this will be especially beneficial in the rural, farming areas where crop quality is often compromised because the workers don’t have enough income and try to harvest too early to pursue export markets.
I am working on the parameters that might define such a policy as more data comes in.
A $US100 per month wage would, for example, improve the circumstances for the nation substantially. More about this another day.
The Job Guarantee program can be designed to increase export capacity which can help mitigate any rise of imports caused by rising consumption by participants in the program.
But the program can also be designed to reduce import dependency on food etc.
2. Reorient emphasis toward employment-creating policies and away from growth-for-its-own-sake policies. Growth must be placed within the context of achieving full employment with price stability.
3. Reformulate tax and transfer policy: (i) replace regressive taxes with progressive direct taxes to reduce the burden on low-income and low-wealth households; (ii) switch from price subsidies to income subsidies with clear targeting mechanisms for poor households; (iii) protect vital social and economic services when poverty is increasing; (iv) allot funds to address the power and water shortages; and (v) eliminate subsidies to rent-seeking sectors.
4. Diversify the country’s export basket with a view to promoting those sectors that will lead to sustainable economic development in the long-run.
The aim of this development strategy is not to direct domestic resources toward production for external consumers (instead of using them to produce for domestic consumption).
The objective of this program is to reduce import reliance and to diversify and upgrade the country’s export structure to develop niche exports.
5. Reject the conventional agricultural development strategies currently in vogue – the so-called ‘modernisation’ approach, whereby the nation adopts the practices of industrial agribusiness and chemical-input based agriculture.
This approach involves dislocation for local communities and technologically backward small land holders.
Within the current government of Timor-Leste is the view that the nation should transition out of agriculture, develop the land for industrial purposes and create a consumer society that relies on food imports.
Neither approach will succeed.
The alternative which should be part of a five-year plan involves so-called agro-ecology which is otherwise known as permaculture techniques.
There is now sufficient evidence from practices in India and some Latin American nations that this approach is scalable and provides a firm and sustainable platform for increasing food security and protecting land resources, while at the same time, reducing the need for imported food.
In the case of Timor-Leste a development strategy that invests heavily in sustainable permaculture will also help mediate the water problems because the land will improve its water retention capacity etc.
This strategy also allows the employment creation policies to reinforce the farming policies.
6. Develop water security policies.
7. Develop eco-tourism based on small-scale opportunities rather than the big resort-style, hotel investments that are common in poorer nations and which just worsen the energy and food import issues.
Conclusion
I will write more specifically about all this as I accumulate more data over the coming weeks.
The goals for Timor-Leste are to use its human resources more fully and more productively while at the same time ensuring it deals with the environmental issues (flooding) and the food security issues.
It must aim to increase the value-added nature of its non-oil exports – by investing in processing and improving quality control.
That will happen, in part, if income security is increased.
And that will happen, if the government ensures everyone who wants to work can.
The agricultural sector will be vital in the next five years and a permaculture transformation is essential.