nm0969: accent on growth our interest in the agriculture sector somewhere lagging behind where the other ideas about agriculture it's shiny shiny shiny er big capital investments in machinery irrigation and the like er the attraction the siren call of large scale farming and the siren call of easily transferable technology okay all of that trucks ahead from the fifties and sixties through to the early nineteen-seventies and in the early nineteen- seventies we get an accumulation of doubts about whether development is really again about economic growth alone and last week we'd just got to those doubts and what were the doubts rising inequality and the massive differential between the favelas of the hillsides of Rio and the luxury apartments down in Ipanema Leblon Barra da Tijuca and the enormous disparities you would see in Mexico City between the swanky houses at the western end of town and the slums up to the north of Mexico City political disappointments were there and particularly in what had happened in the newly independent states of Africa and the recently independent states of Asia where dictatorship reign er disappointments about the lack of urban jobs about the degree of informality of petty enterprise that people were undertaking in the cities the idea of Arthur Lewis that there was this ability to transfer from the traditional to the modern sector that this would soak up unemployment and create higher marginal productivity of labour did not seem to be working and that seemed to be owing to the inappropriate transfer of capital intensive agriculture industry and anything else from the north to the south okay those are are all the doubts now you need to know a little bit of history to understand how doubt crystallizes into action if you'd opened up books on development in the early nineteen- seventies you would have seen an awful lot of influential books really arguing that development was not just a game in economic growth look here's here's an influential book R-W Gee nineteen-seventy-five Redistribution with Growth published on behalf of the World Bank in nineteen-seventy-five this was a series of essays by some of the foremost development economists of the time and it argued the following that there was no trade-off between distributional objectives and economic growth in other words if you wanted the fastest and best return on capital put it into small scale industry put it into artisan industry put it into the urban informal sector and put it into small scale farming R-W Gee argued that that would give you faster rates of growth than investing in large scale formal enterprise be it urban or rural now this was wonderful news to have academics argue this because it was two for the price of one bet on the smallest and you not only get equity but you also get faster economic growth but the real spur i suppose to the changes of the nineteen-seventies come from the events of nineteen-seventy-three now nineteen-seventy-three is one of the more interesting years of the last century er nineteen-seventy-three is the height of a world economic boom now remember what we saw last week the world economy grew steadily er betw-, in the nineteen-fifties and nineteen- sixties at rates that we don't think we've seen sustained before or since in the recorded history of humanity and those rates steamed on ahead into the early nineteen-seventies and culminated in a huge boom period which lasted seventy-two seventy-four just about every country in the world had a boom period seventy-two seventy-four if you like the macroeconomic shorthand world economies economies throughout the world overheated during seventy-two seventy- four and that overheating pushed up the price of all commodities of all primary commodities they all went up now one that everybody knows about is the one that went up in October seventy-three the world commodity whose price quadrupled in October seventy- three what commodity was that sm0970: oil sm0971: oil nm0969: oil it was the first time that the Organization of Petroleum Exporting Countries had flexed its muscles and said let's see what we can do and led by Saudi Arabia those oil exporting countries in OPEC said what happens if we unilaterally raise the price of oil by four times and they tried it and it stuck and the world oil price rocketed upwards now that's the one that attracted all the attention well most of the attention except in seventy-three the world wheat price and all other cereals was dragged up by more than double by more than double i think it's triple may even be more than three times the world wheat price spiked now that world wheat price spiked was caused in part and probably largely by a harvest failure in the Soviet Union and as the Soviet Union's harvest failed the Soviet Union imported about twenty-five-million tons extra of cereals in seventy-three that was a very large rise indeed er and it blasted the price of of wheat now wheat was also dragged upwards by the general inflation of the time but the effect of the rise in the wheat pr-, c-, er wheat price was dramatic on people interested in food policy and the the the real story that we've got there was an American commentator writing in Time magazine he said you have seen what Americans are doing on the forecourts this year wait till they're in a bread queue now what's the amre-, reference to the American forecourts when the world oil price went up by four times something happened in the oil supply chain and for a brief period Americans had undersupply of gas and it led to queuing on American forecourts and Americans with large gas guzzling cars found themselves queuing for fuel and inevitably in a very large country there were one or two well publicized incidents yeah some drunken redneck in some place got out of his large car having queued for forty minutes picked up a shotgun and said right you fill this one up right now mate or that's it yeah one or two incidents like that you you can imagine and this gripped the imagination of American policy makers if Americans behave like this when they have to queue a little while for gas what happens when they have to queue for bread yeah why queue for bread well the wheat price had gone up now you also have to understand that during the sixties world population growth rates had risen the grates had risen so not only was world population going up but it was going up exponentially and the rate was increasing at that rate you reach infinite population fairly quickly fairly quickly what nobody knew then is what we all know now and that was the arrow that looked like that but none of you can see this er let's let's do the job properly er where are we see if you looked at world population growth rates during the twentieth century and that's nineteen-fifties so and we're talking now about nineteen-seventy you've got a pattern that looks something like this yeah and people looked at that and they said wow you know any number you like by the end of the twentieth century unimaginable numbers by twenty-twenty-five yeah any projection that took the c-, the the the trends at that time reached an Olympic amount of of population very quickly people said look if that's what's happened to population growth rates and if agricultural growth is good but not spectacular what's going to happen so we got the th-, the old favourite geometrical growth of population versus something looking like arithmetic growth of farm output equals famine yeah equals Thomas Malthus bunch of guys published a book in the late sixties called Famine nineteen-seventy-five was it Famine nineteen-seventy-five i think so they were actually right about Famine nineteen-seventy-five what they didn't realize was where it'd be and what the extent of it was be but you see when people looked at that and then they looked at this wheat price nm0969: is it this is the first stage of the food crisis apocalypse and so in seventy-three or seventy-four we have something called the World Food Congress convened by the Food and Agriculture Organization of Rome and it meets to deal with the world food crisis which c-, surely has come to rest with the world that is a huge spur to changing development ideas the idea that the food is now in aggregate short supply and we've got a supply-side crunch in food a supply-side crunch now what do you need to know you need to know that history makes fools of us all that graph there it doesn't carry on like that what happens to it is it starts going like this yeah something like that there's been a very considerable fall in population growth rates since nineteen-seventy world population growth rates of nineteen-seventy were what over two per cent maybe as much as two-and-a-half per cent per year world population growth rates are below two per cent per day er t-, er two per cent a year two per cent a day strewth two per cent a year they're somewhere i'll be about one-point-seven per cent one-point-eight per cent i'm guessing somewhere between one-and-a-half and two per cent they've come down and so we're looking at this and people can now reasonably say that by the time we get to the year what twenty-thirty twenty-forty world population growth will be very slow indeed we'll be getting pretty close to what we think may be the maximum population in this stage of human history we also know that the world wheat price which spiked in seventy-three within a year or two it was back down to its normal levels now for those of you who don't know this story if we plotted the world wheat price from round about here if this is the world wheat price in nineteen-fifty or so what we're going to see is a story that looks something like this that's the world wheat price over the last fifty years more or less there's the spike in the early nineteen-seventies that's the nineteen-ninety-six spike by the way which lasted all of what six months twelve months at most but the general picture of the real world wheat price is down down down er so the world food crisis was a short-lived event in the early seventies but it contributed to the big change in development thinking and what we find in the early nineteen-seventies is we find developmental specialists coming up with the following signpost to development now redistribution with growth is one of those let's have attention to equit-, equity so development now is not just economic growth but it's economic growth with equity with decent distribution of the benefits now here's another of the T-L-As that you perhaps need to know or don't need to know basic human needs the I-L-O the International Labour Organization said let's plan for development on the basis of meeting everybody's basic human needs let's let's not just go for maximum economic growth or industrial growth or iron and steel production what we should aim to do is satisfy everybody's basic human needs and those basic human needs nutrition shelter and housing clean water basic education health services clothing right satisfy those basic human needs of everybody more or less equivalent to alleviating poverty and the same organization I-L-O also came up with a similar message in a different set of clothes when it talked about employment first policies developing development plans producing development plans where the maximum goal was to create jobs and they sent missions famously to Sri Lanka Kenya and Colombia of very eminent development specialists who produced indicative development plans aiming to maximize the creation of jobs and here's another touchstone of this period appropriate technology lack of jobs in the south urban unemployment casualization of labour well went the argument that's because we've brought the wrong technology it uses capital and saves labour do remember of course that the technology developed in the west in the fifties and sixties was technology from America from Germany from the U-K from France all of those countries were short of labour in the fifties and sixties never forget that all of those countries invited large numbers of guest workers and immigrants to make up the labour deficiency hard to believe in these days of s-, tightening immigration controls and concerns about international migration but in the fifties and sixties all of those countries wanted people to come in they were short of labour so all of their technology was labour saving well the appropriate technology movement said look what we want is technology that can be maintained locally uses local materials and above all saves on capital and uses labour responds to the factor proportions available in the developing world now armed with these ideas one by one all of the major development agencies the World Bank Britain's O-D-A America's U-S-AID er the I-L-O you name it they all signed up for variants on development with equity and the most famous moment in this was a speech in nineteen-seventy-three in Nairobi Kenya by the then President of the World Bank Robert McNamara in which he committed the World Bank to shifting its resources to development projects which stressed redistribution with growth now what did that mean in terms of concrete development policy well what it did mean was it meant that you went for targeting the poorest you looked actively for the poor for the small scale for the meek and the humble and you tried to target those as the focus of your development efforts and where this went sectorially was all of a sudden agriculture was king agriculture was king and it was king because that's where most of the poor were it was king because that was where so so many small scale entrepreneurs were smallholders and it was king because of the perceived world food crisis so agriculture was the win win win bet small scale agriculture you'd help the poor you'd drive forward economic growth and you'd solve the world food crisis so agriculture got prime attention in this now here's another idea out of the seventies I-R-D integrated rural development and this was the idea that when you worked in rural areas with the poor with the small scale and so on what you tried to do is to deliver a package of assistance across sectors on the grounds this would give you synergy now just to give you a fairly exaggerated example but if you're trying to get people to plant new varieties of rice and use fertilizer to increase their rice yields which you hope is a scale neutral technology that can be used by smallholders then why not at the same time er combat malaria inoculate people against diseases and clean up the water supply because all of those will give you better health which is a good thing in itself but of course healthier farmers can work harder in the fields and so that complements the agricultural measures and while we're at it we're going to build some access roads because that will improve price relatives at the farm gate reduce isolation and while we're at it we'll run a an adult literacy campaign because literate farmers can read the labels on the fertilizer packet and so on and so forth so there was the idea that you should try and do things in development in an integrated fashion across all sectors because you get synergy and you get more than the sum of the parts going on now integrated rural development was very very exciting to work in er very exciting to work in you got all kinds of things to have a go at er and you've got quite a lot of resources to play with but these resources were limited compared to needs so what happened with integrated rural development was within any country what you did is you took a country and a country might just look like that and might have its capital there and you take a country that looks like that and you do integrated rural development and you do it there there there there there oh and there right and yes that is to scale yes that is to scale in other words you get these little e- , enclaves of very small areas where donors are putting in resources and everything is done now that country there some of you will have have have sussed er despite its wobbly outline is Kenya and in the early nineteen- seventies Kenya had six small integrated rural development programmes which were very well documented and some contemporary very influential thinkers about development worked on those projects in the early nineteen- seventies but look how tiny they are compared to the mass of Kenya that really is to scale these things were in very small areas indeed why because although you could target resources for a small area you couldn't have the whole country running the kinds of programmes that were run there so because you did everything in a integrated rural development you could only do it on a small scale concentrated in particular areas and because you were trying to do everything donors very often ran very special administrative structures quite different to normal government operations to c-, make these things work now those six small experiences i think were all successes they were all successes but i think with the benefit of hindsight we have to say they were unrepeatable and institutionally unsustainable when the donors got bored and the funds ran out and the foreign experts' contracts ended and the Landrovers began to rust these projects essentially stopped indeed i arrived in this part of Kenya in nineteen-seventy-nine which had been the administrative headquarters including that area there and there were two or three filing cabinets chock-a with files in my room and i i left them there for a while and then one day i thought what on earth er and i went through these filing cabinets and it was all the stuff on sort of four or five years ten years earlier of the implementation of this minutes plans documents contracts budgets semi-annual reports monthly reports all kinds of stuff and i looked at this and i said my goodness this is a vital bit of development history here [laugh] but it's clogging up my office [laugh] so it all went in a skip [laugh] there's never en-, never enough historians around to document these experiences and that's the sort of way and as i threw them in the skip i thought there you go good idea at the time good people working on it quite a success but not sustainable now one thing that you need to understand about these efforts of agriculture first targeting the poor is basic human needs integrated rural development is one element of the development equation hasn't changed in all this and that is this is a game about the state and the state's agencies nobody is seriously questioning that if you're going to do integrated rural development it will be the Ministry of Agriculture and the Department of Health and the Directorate of Transport and so on it will be state agencies leading the charge and if the state agencies lack resources they'll get money from governments in other countries so it's a government first approach nobody's really challenging the supreme role of the state as an organizer and an investor in development now look these ideas are publicized in the early nineteen-seventies one by one in the early nineteen- seventies all the major aid donors sign up to this new agenda and it's a very different agenda to the one that's prevailed for the previous twenty years one by one the agencies published documents saying this is what we're going to do now Britain had a world had a a world had a White Paper on development in nineteen-ninety-seven the previous one was all the way back in nineteen-seventy- five so the white the last White Paper er so recent was the first one in nearly a quarter of a century er the nineteen-seventy-five White Paper er was called More Aid to the Poorest and it was at the height of enthusiasm for these ideas More Aid to the Poorest what is the nineteen-ninety- seven one called forgotten what the nineteen ninety-seven one was called but what's it about it's about reducing poverty by half in other words every time Britain has a White Paper on development it's heavily focused on poverty so Britain signed up to this in in in nineteen-seventy-five as did just about every other aid agency now what you have to understand about history is that if people write things down on documents in nineteen-seventy-three seventy-four seventy-five about we are going to do this how long does it take to make the plans for the new investments and the new direction of money one two three years at least before you redirect the flows of money create the new agencies the new plans the programmes so these I-R-Ds not many were in operation before the mid-nineteen-seventies and how long before you think it's fair to say what is the experience of things well when you're working in rural development anything less than five years is the short term er difficult to do things in agriculture and rural areas in less than five years so in other words as we come to the end of the seventies it's very early days with this new agenda it's barely started to be implemented in any great seriousness and the results are not entirely clear before we reach that the whole thing is flipped the whole cooking pot is turned upside down the pancake is turned and we're into the nineteen-eighties and by the time we're into the nineteen-eighties the entire focus of development has jumped radically from where it was in the early seventies now it's quite a long story to explain why development ideas in the nineteen- eighties were so radically different you've got them spelled out in your notes in some considerable detail let me try and summarize that experience what you have to understand is that from the early seventies onwards there was this primary boom and there was inflation beginning to come into the world economy in nineteen-seventy-one America left the gold standard the dollar which had been anchored against gold and had been the bulwark of the world economy for twenty-five years or so after the Second World War was suddenly cut free from gold it was effectively devalued remember in nineteen-seventy the American economy made up about one-third of the total product of the world economy today it's about twenty-five per cent or less at that time America was just mega on the scene and its currency was underwritten by the strength of America and it was pegged to gold and we had fixed exchange rates from nineteen-seventy-one America devalued the dollar and the exchange rates floated and from that moment onwards the major industrial economies which in the fifties and sixties had had inflation rates of one two three per cent per year suddenly found themselves with inflation rates running at ten per cent fifteen per cent twenty per cent none of you in this room these days will probably believe me when i tell you that in nineteen-seventy-nine Britain's rate of inflation was twenty- five per cent yes i can hardly believe that as the words come out of my mouth and i can remember the year very c-, very distinctly think about it during a year prices go up by a quarter it's unimaginable back then now and it was unimaginable in the sixties but in the seventies world inflation inflation in every country moved up a gear and it moved to double digit or more now the effect of the rise in oil prices was tremendous on the world economy what happened basically was that every country importing oil suddenly paid an awful lot of money to countries that exported oil and that huge transfer of resources meant that some of the oil exporters many of them small countries with limited investment possibilities at home how much money can you spend in Kuwait you can build a new airport a desalination plant you can build all kinds of luxury items as well as new hospitals and so on and you still haven't used up these hundreds of millions of dollars which are flowing in as oil rents so a lot of that oil money was put back into western banks in Zurich London Frankfurt New York Miami and so on and the money was then lent back to people who needed money now the people who needed money were countries that suddenly faced a higher oil import bill and had to cover the cost of that and those countries in the developing world who'd seen such incredibly fast growth in the late sixties early seventies that they honestly believed with very good justification that there was no way that they couldn't pay back any amount of debt that they could possibly get now the classic country for this is this country Brazil nineteen Brazil in the early nineteen-seventies wish we had a Tardis a time machine to take you to Brazil in the early nineteen-seventies boy would you enjoy it this was a country which was so self-confident i'd never seen anything like it i've never seen a country so full of its own self-confidence about what it was up to and what the future was there in n-, in the early seventies Brazil had been growing for many years at seven or eight per cent per annum it was one of the world's fastest growing economies probably the world's fastest growing economy it had a mega-city which promised to be the world's biggest and most important city by the end of the twentieth century and that was São Paulo it also had unimaginable natural resources or appeared to have most of Brazil's population and economic developments concentrated in a small area coastal strip and above all Southern Brazil all the Amazonian forests were out there barely touched and those seemed to be a limitless supply of natural resources for agriculture and hu-, who knew in the early seventies what mineral resources there weren't somewhere in the Amazon there's Brazil second or third largest country in territory in the world with apparently unimaginable riches and already growing as quickly as possible and of course culturally Brazil knew it was the greatest country in the world because the finest football team ever seen to date had just won the World Cup in nineteen-seventy er legendary team of nineteen-seventy with Pele Jairzinho and so on er Brazilians just believed they'd got it made now the Brazilian government that was a military dictatorship run by technocrats said look we'll borrow to build the world's largest hydroelectric dam on the Parana river here we'll borrow money to drive roads four-thousand kilometres across the Aramazon from east to west from north to south we'll borrow money for hydroelectric dams on the São Francisco river we'll borrow money for this we'll borrow money for that and nobody lending the money thought they could ever lose lending to Brazil Brazil was a sovereign state it could always pay back the money it was large it was growing quickly whatever you lent Brazil in twenty years time that would be really small change that Brazil would just pay back very very easily in-, indeed and indeed the interest rates weren't that high world interest rates in the nineteen-seventies were no more nominal than about fifteen per cent and yet world inflation dollar inflation was frequently getting up to fifteen per cent in several years in the nineteen-seventies world interest rates in real terms were negative right so all you had to do was take the money you were lent put it into real estate gold or anything that kept its value and you were getting a free gift from the banks so everywhere you looked at it borrowing borrowing borrowing made a lot of sense Brazil borrowed a bundle Argentina did so did Chile so did all the Latin American countries so did the Philippines er and so did Mexico and Mexico borrowed a bundle and Mexico was an oil exporter as well at a time that the oil price was going up nobody could ever lose anything lending to Mexico there was no way that Mexico could overborrow it had huge oil reserves and oil price was going up and Mexico was also growing as quickly as Brazil er you couldn't lose lending to Mexico now that was what happened during the nineteen-seventies now towards the end of the nineteen- seventies the world economy began to hit a rocky patch and that rocky patch is marked by the phenomenon of stagflation now the old Keynesian truths were rather simple you could boost aggregate demand in your economy get the economy to grow bring down unemployment but you were always going to risk pushing up the inflation rate or in the Keynesian model reduce aggregate demand take away the inflationary force and accept slower growth and fewer jobs but in the late seventies country after country in the industrialized world began to experience the worst of both worlds rising rates of unemployment hesitant economic growth and high rates of inflation Mrs Thatcher went into the nineteen-seventy-nine election in this country with an election poster that was very famous called Britain isn't working picking up on the figure that for the first time since the war Britain had got a million people unemployed in the late seventies that was a shocking statistic in the sixties very very few people were unemployed few hundred-thousand now we'd got a million unemployed and inflation was high as well and on the basis of this quite trenchant critique of the facts of a er of the Labour administration of the late nineteen-seventies Mrs Thatcher won her election victory now unlike other Conservative regimes after the Second World War Mrs Thatcher came to power with a very different set of economic advisers to those that had accompanied people like Edward Heath er in the early nineteen- seventies her advisers were not Keynesian macroeconomists they were monetarists and they said the main aim of economic policy is not Keynesian demand management it's a stable money supply get inflation down and you know how monetarists do this you do it by cranking the big lever of well come on sorry this is just a rampant monologue er how do you how do you stop infla-, how do you stop inflation for a monetarist sm0972: interest rates nm0969: interest rates yeah you control the money supply and you do it by raising interest rates er so Britain got a monetarist Chancellor of the Exchequer who will who pushed up the interest rates like crazy by nineteen- eighty-three Britain's inflation that was twenty-five per cent in nineteen- seventy-nine was three per cent something like that it worked it worked magnificently well as a way of getting inflation out of the British economy but Mrs Thatcher came to power in seventy-nine with a million people unemployed how many people were unemployed in Britain by nineteen-eighty-three just about peaked in nineteen-eighty-three unemployment in this country she should have lost the eighty-four election or was it eighty-three by a mile given what had happened to unemployment it was a million when she came to power by eighty- three how many was it anybody know four million i think it was over four-million in other words there was a huge increase in unemployment the British economy which had been growing slowly to nineteen-seventy-nine grew hardly at all during those four years and in some years it was backwards lots of industries closed down lots of lots of companies shut their doors faced by these cripplingly high interest rates and by the massive reduction of aggregate demand caused by the rise in interest rates it was a great way to stop inflation but it also did terrific er well had a terrific impact on economic growth and employment now that's what happened in this country similar things happened in other countries an abandonment of Keyensian demand management with mac-, with full time er employment full employment as the main objective and the assumption of the monetarist objectives of staple money low inflation and then let the rest of the economy take care of itself by market forces now in nineteen-eighty the American presidential election was won by President Reagan and Reagan also had monetarist er economic advisers now there was one significant difference between Reagan's administration and the British administration President Reagan and Mrs Thatcher were very much fellow soulmates politically they agreed on so many things but there was one crucial difference in their in in their policy prescriptions and that was that whilst Thatcher and Reagan were both extremely hostile to the Soviet Union which in nineteen-seventy-nine had sent its troops into Afghanistan and believed that the West had to take a very s-, hard line against the Soviet Union what happened under Reagan was America began to spend huge amounts of money on new defence equipment believing that the Soviet Union was a menace er now that money was spent by an American government which did not believe in raising taxes indeed President Reagan had told the American people i will not raise your taxes now there was a bit of a problem there because the American government was already spending more than it got on tax revenues in nineteen-eighty and here was a guy spending more on defence and promising not to tax the American people the fiscal deficit in America grew hugely hugely under Reagan and it was financed not by taxes not by the creation of money but it was financed by deficit borrowing and that's by issuing U-S Treasury bonds now for people to put their money into U-S Treasury bonds you had to offer an attractive rate of interest and what this led to was the U-S putting onto the world market treasury bonds at increasingly high rates of interest this happened at precisely the same moment that world intr-, er world inflation rates were coming down under the impact of monetary policy and the combined effect was that real interest rates which had been negative in some years in the nineteen-seventies and were consistently under five per cent real during the seventies suddenly in nineteen-eighty-one those interest rates leapt to ten per cent real or more there was a huge increase now you'll see in your notes the example of Mexico which in nineteen-eighty-one had a debt of roundabout ninety-billion dollars an awful lot of money owed by Mexico before nineteen-eighty-one Mexico was paying what what is it in your notes about three per cent on on that debt and had therefore to pay debt servicing somewhere between two and three-billions dollars a year on a trade balance which generated what about fifteen-billion dollars worth of exports in the Mexican economy in the early eighties now debt servicing you've you're spending less than three-billions dollars out of fifteen-billion dollars coming in sure it hurts you but you've still got a large import capacity yeah still a lot of money left to buy the other goods and services you want to import nineteen-eighty-one comes and Mexico's average interest rate goes from the low rates before to around about ten per cent and instead of paying under three-billion dollars a year the Mexican government now has to pay nine-billion a year and its total export earnings are fifteen so you can see what's happened to the residual import capacity it's gone from about twelve-billion dollars to about six- billion dollars this is a massive shock to the Mexican economy and it is simply unsustainable Mexico limps on for the best part of a year desperately trying to pay off its debt according to the schedule but in August nineteen-eighty-two the Mexican finance minister on a Friday evening sits down with his closest advisers looks at the data and says that's it on Monday morning we have to pay another two-hundred-million dollars of debt and we simply don't have two- hundred-million dollars stop worrying stop everything stop paying we can't do anything now there's only one decision press notice the Mexican government is now suspending debt repayments until further notice faced by current positions that press c-, communiqué went out that the Mexican government was suspending debt repayments and the world financial system at that moment was on the verge of collapse all of the world's major banks were massively overexposed on sovereign debt to the developing world if you looked at the balance sheets provisions for bad debt against this lending zero bank reserves bank capital figure X exposure to third world debt figure Y Y is larger than X if all governments had stopped repaying at that moment the world's major banks would have gone bankrupt the effect on the world's financial system would have been simply catastrophic now what happened as a result of that well the cavalry was bou-, brought in and the cavalry was the I-M-F and the I-M-F galloped over the hill and said look we'll produce a fix and the I-M-F fix went like this they took the banks and said to the banks and these are all private banks largely they said you must make it easier for the third world governments to repay the debt you must extend the periods of repayment give them grace periods do anything you can to make it softer and easier for them to repay well the banks of course didn't like that because it was going to hit their earnings and profits but the I-M-F had got a smoking gun against the temples and said fine if you don't play ball you can go bankrupt er you'll be the first ones to suffer in the world financial crisis that will ensue so you either play ba-, ball with us or you go bankrupt and the banks kicking and screaming said okay we'll play ball and the wo-, and the I-M-F said look if you do that we'll stitch up the other side of it with the governments in the developing world and what we'll do is we'll make sure that they carry on paying as much as they reasonably can er we'll head off the possibility of a mass default and what the I-M-F then did is it went all over the developing world and said the priority now is to get your macroeconomy in a state that you have a better macroeconomy better chances of growth and that you can keep paying the debt servicing and what they did was they went round the world and they signed with government after government structural adjustment agreements so as we come into the eighties we're into a world of structural adjustment now structural adjustment is a big topic so let's take ten minutes for a coffee break and then we'll have a look at what this world of the eighties was and nm0969: on at slightly less blistering pace than so far those of you who are actually trying to follow it in the hand-, er handout where are we up to we're about page nine now page nine or so student sf0973: which one nm0969: well of the many ones handed out last week this is history of history of ideas about development and we've reached round about page nine well look what we've got in the early nineteen-eighties onwards is structural adjustment being more or less forced upon the developing world some countries took a stronger objection to the I-M-F than oth-, than than others some countries consistently for many years like Tanzania held out against I-M-F orthodox advice on macroeconomic management but eventually they were basically forced to signed structural adjustment agreements and why was that well from nineteen- eighty-two onwards from the debt crisis in August eighty-two there was no money anywhere in the world system for a poor country in the developing world to finance any trade deficit so if you were Tanzania and you'd got problems with your trade balance and we'll see in a moment why you would have had problems with your trade balance if you were Tanzania in the in the early eighties with a with a with a trade balance deficit and you needed to finance it who would give you money none of the commercial banks gave any money to the developing world for the best part of ten years after the eighty-two debt crisis they got such a bad fright by the debt crisis they more or less ceased lending into the developing world so the only people who were lending money to governments in the developing world from eighty-two onwards were other governments other aid agencies and other multilateral agencies like the I-M-F and the World Bank and remarkably in the early nineteen-eighties there was an intellectual consensus which applied to all of the major aid donors called the Washington Consensus and the only aid donors who weren't fully signed up to the Washington Consensus were the Scandinavian aid donors and the Dutch and then your only other possible source of money anywhere in the world was the Soviet Union but the Soviet Union was in such trouble itself with its economy in the nineteen-eighties that there were really only about two or three countries in the world that the Soviet Union could could s-, give significant amounts of aid to one of course was Cuba the other was Nicaragua so if you were Tanzania in the early eighties you basically had to do a deal with the western aid donors and you wouldn't get money from the British the Germans the French or anybody else for that matter unless you could tell the aid mission yes we are in agreement with the I-M-F if you asked for money from the British for example the British would say well where do you stand on your negotiations with the I-M-F and if the I-M-F hadn't give Tanzania a clean bill of health don't even think about it sort yourself out with the I-M-F then we'll see what we can do for you so the I-M-F had got tremendous power in the nineteen-eighties country after country had to go to the I-M-F and we may say well why have these countries got a trade trade deficit well let's give you three reasons for severe macroeconomic problems in the developing world in the early eighties but Tanzania would be a an excellent example of this problem number one oil prices which had gone up nineteen- seventy-three were also hiked up in nineteen-seventy-nine now that price spike on oil prices didn't last long by about eighty-five oil prices were moving back down and moving back down rather quickly but for a few years in the early eighties anybody who imported oil your oil bill had just gone once again through the roof and that had pushed you into deficit reason number two primary commodity prices which peaked in the early nineteen-seventies were on their way down throughout the nineteen-eighties now we've got this on a graph somewhere if we can find it er where is it it's in your notes at least i think it's in your notes i don't seem to have an overhead of it er is it in those notes no it isn't yes it is there you go real commodity prices and if you look at those real commodity prices they peak in the early seventies er by the en-, by the nineteen-eighty they've shuffled back down and you can see that from eighty to eighty-eight they're on their way down down down so you've got countries in the developing world which have seen the price of their main exported commodities moving downwards er and so you've got for any unit volume of exports you've got a reduced export earnings and then you've got the effects of stagnation depression and deflation in the industrialized countries these countries are all using monetarist policies they're growing rather slowly their import capacity has been reduced or is not growing as it did demand for imported primaries is going down and this is pushing down the primary price and at the same time there are politicians in these countries saying well we have to protect our domestic industries so you take a country like Bangladesh which in the earl-, in the eighties is developing its cotton industry and it finds its possibilities of exploiting cheap labour in cotton to for textile exports to Europe or the U-S-A is heavily circumscribed by the multifibre agreement which is a bit of trade protectionism which makes it very difficult for Bangladesh to export more than a certain quota of cotton textiles to the industrialized world so protectionism and reduced demand or or s-, or slowly growing demand in the north is making it ever more difficult to export from the developing world so you've got the trade deficit the falling commodity prices and difficulties of protection on the world trade scene hence most countries in the developing world well most countries many countries in the developing world have got severe trade deficits in the early eighties they're also running high rates of inflation and they're also many of them are running high rates of fiscal deficit in other words the government is spending a lot more money than it brings in in tax revenue and when we look at structural adjustment and you'll see it's set out on page ten we've got a package of measures which can conveniently be divided into demand side and supply side measures or perhaps more accurately divided into stabilization measures and supply side measures now your stabilization methods improve the balance of trade and do that by devaluing the currency reduce fiscal deficits and the main weapon to do that is just cut government spending and reduce inflation and for any monetarists that means controlling the money supply and above all that means allowing interest rates to rise to market clearing levels so macroeconomic stabilization is one demand side of structural adjustment the second side is an attempt to improve the conditions for growth and that is to be done through the efficient use of resources and there you have two elements of it take out price distortions er and you remove price distortions by getting rid of the distortion on the exchange rate by devaluing get rid of excessive subsidies and get rid of any partic-, particularly onerous taxes now many developing countries for various social and political reasons have subsidies on things like food electricity urban transport sometimes the price of fuel in the agricultural sector fertilizers pesticides irrigation water the message from the I-M-F was all of those subsidies distort prices and lead to inefficient allocation of resources in the economy as well as costing the government a lot of money get rid of them get efficiency into the system cut onerous taxes where would you have found onerous taxes does anyone know this it isn't is it where would you have found peculiarly high rates of taxation in a country like Tanzania or in any other developing country in the early eighties there were people paying tax rates of forty fifty per cent who any idea counts as interesting sm0974: would it be multinationals nm0969: some multinationals might have got a banging off the tax systems on corporate taxes there certainly in the nineteen-seventies some countries had tax regimes and investment controls that that that that tried to restrict the activities of multinationals they might have but there's another significant group who were getting banged by the taxes the answer is small farmers small farmers you might say well small farmers paid no taxes well if you check out effective tax rates er on anybody exporting cocoa coffee palm oil cotton and so on there were various things going on in many developing countries that meant that export taxes on cash crops the main exports they got at the margin were very high indeed and the I-M-F and the World Bank looked at those and said well get those taxes down because they're a major disincentive to exporting of course there were countries in which the macroeconomic malaise was phenomenal where exchange rates were so overvalued that the domestic price of an exported good was barely worth sticking it in a handcart classic example is Ghana in the early nineteen-eighties when the cedi was overvalued by more than ten times hugely overvalued cedi what that meant was that if you were growing cocoa in southern Ghana which at that time was one of the world's biggest cocoa exporters when the cocoa was sold and it was sold at a dollar price and the dollar price was translated back into cedis because the cedi was so strong against the dollar you got very very few cedis in your hand and cocoa growers looked at it and said is that all i'm getting for a ton of cocoa hardly worth me growing the stuff hardly worth cutting it off the trees except of course for those Ghanaian farmers who did cut the cocoa off their trees but most certainly did not export it through Ghana suddenly in the early eighties there were very large increases in cocoa exports from the Cote d'Ivoire to the to the west and from er Togo to the east of Ghana and that was nothing to do with the farmers in those two other countries there was an awful lot of Ghanaian cocoa that walked across the border er so those kinds of distortions on the exchange rate and pricing systems get rid of those go for efficient prices for best resource allocation and big message here allow the markets to function during the nineteen-sixties and s-, nineteen-seventies many developing countries had governments that were very distrustful of market forces and you can understand that distrust in market forces remember in nineteen-se in the early seventies people were very worried about the unequalizing effects of rapid economic growth and people feared that free markets would lead to inequities and sought to control the markets in various ways by the early nineteen-eighties the Washington Consensus argued that the cost of controlling markets was very high er that markets might not be perfect but they were much preferable to government control and so the argument there was liberalize your markets allow people to trade to move government to move er goods and services around the economy to er access foreign exchange to access credit to set up business to reduce regulations and so on so as to allow maximum market enterprise within the economy and the final element of structural adjustment is institutional reform reform your economic institutions er two elements in here privatization many developing governments world governments had large parts of their eco-, economy in state hands operated by state corporations that often had many remits besides making a profit Tanzania was in dreadful trouble in the early nineteen- eighties one reason that Tanzania was in dreadful trouble in the nineteen- eighties was that all formal sector cereals marketing processing distribution was in the hands of a very large parastatal called the National Milling Corporation now the National Milling Corporation was told by the Tanzanian government collect maize down in the bottom left hand corner right hand corner anywhere in Tanzania at the same price as you collect that maize in places much closer to Dar es Salaam everywhere they had to buy up the maize at the same price everywhere i think they also were were forced to distribute fertilizer to maize growers at the same price what that meant was that places close to Dar es Salaam found that the prices they got were not that great for maize so they didn't deliver to the National Milling Corporation places at the far end of the country which previously had got a very poor price for maize because of their isolation and transport costs suddenly were offered a price for maize that more or less ignored the transport costs so they grew a lot more delivered it to the N-M-C and then the N-M-C had got eight- hundred kilometres of trucking this maize to the main consumption points not surprisingly the N-M-C began to run big deficits now as a public sector c-, er corporation entrusted with a key element in Tanzanian food security it could not go bust it had to continue operating the N-M-C had an account at the Central Bank in Tanzania and the account was in the red and they just ran bigger and bigger overdrafts now if you have a huge parastatal in your economy running up a very large overdraft on the Central Bank account what happens to your money supply public sector overdrafts at the Central Bank what's happening to your money supply what does it do to your money supply any idea well it expands it yeah this is money for free all that the Central Bank is saying is carry on writing cheques so the N-M-C is writing cheques creating shilingis in the Tanzanian economy the money supply is way out of control money supply's out of control so inflation is being pushed up nominal rate of the Tanzanian shilingi is pegged and if your inflation is faster than world inflation and your nominal exchange rate is pegged what happens to your real exchange rate goes up your real exchange rate is going up shilingi is getting stronger against the dollar year in year out the degree of overvaluation gets greater so what does that then mean for a Tanzanian grower of cotton or a Tanzanian grower of coffee what it means is in an inflated economy you're getting the same number of shilingis for your cocoa for your for your coffee and your cotton this year as you did two three years ago inflation has eroded the value of those shilingis the real price to you in shilingis of your coffee and your cotton is going down right same things are happening in Ghana in the early nineteen-eighties so the operation of your large parastatal is snookering the whole economy there's a whole series of vicious effects here which push you into a bigger and bigger mess not surprisingly the I-M-F and the World Bank looked at this kind of thing and said for heaven's sake privatize these state enterprises er they're doing you no good at all er they're probably inefficient er well it's not obvious that they were all inefficient but the general feeling was that government was inefficient and they're messing up your economy in all kinds of ways they also wanted key economic institutions reforming and those included the tax system where the basic message was broaden your tax base and lower the tax rates er if you have a wider tax capture you can bring down the rates which was regarded as a stimulus to in-, in-, investment and also reform your financial sectors get yourself an efficient competitive financial sector very ve-, often meant privatizing banks and reducing state control of the banking system yeah which was the first Third World country to go for a fully liberalized banking system anybody know there was one country which ten years before this went for a big experiment in all of these policies and liberalized its bank system before almost any other country in the developing world did any idea Chile Pinochet's coup of nineteen-seventy-three brought to power in in Chile not just a dictatorship but a supply side monetarist set of economic advisers known as the Chicago Boys all ex-pupils from the University of Chicago where they'd been taught monetarism and free market economics implemented in Chile from seventy-three onwards ten years before it was done in the rest of the developing world fully liberalized financial sector in Chile from the mid-seventies onwards has anybody ever heard of what happened to the Chilean financial system in about nineteen-eighty-one collapsed massive bank failures huge bailout problems er totally liberalized bank sectors are a disaster nobody in this room will probably have any knowledge of what happened in the Midwest of the U-S-A in n-, in in during the first Reagan administration where the savings and loans trusts things a bit like the British bo-, building societies were deregulated by the Federal Reserve Bank and just told to do finance any way they like with the result that the losses in the savings and loans institutions were colossal i think we're talking trillions of dollars on losses in the savings and loans scandals of the nineteen-eighties fully liberalized financial systems are very very dangerous er so there are one or two experiences that pushed that too far but the general idea was to dereguli-, regulate and get more efficient financial institutions now those are the elements of structural adjustment what you'll find on the next couple of pages of your handout 'cause you'll find some of the problems involved in structural adjustment we're not going to go through all of the problems involved in structural adjustment it's a very big topic but let me give you three elements of structural adjustment which are really big problems the first is that when you look at the macroeconomic stabilization measures such as raising interest rates and cutting government spending these are severely deflationary measures they will reduce aggregate demand in the economy they will lead to business failures they will lead to unemployment they will lead to less business activity and those deflationary elements the creation of unemployment loss of demand in the economy and reduced economic er activity are major elements there which led people to criticize er structural adjustment as a set of measures that would increase poverty in the developing world now the I-M-F said okay there are deflationary sides side to it but there are supply side measures in there which will get your economy growing and any pain that there is in structural adjustment will be strictly temporary now that leads us to the second problem big problem of structural adjustment and that is that structural adjustment is usually not sequenced ideally now in a variant on how many economists does it take to change a light bulb er how many people does it t-, take to devalue the currency of a country apologies to those of you who've heard this at least twice before er how many people does it take to devalue you've got nominal exchange rates have i done this even with the undergrads now you're smiling as though yo-, i did it last week i m-, might have done it last week okay look if you have nominal exchange rates i mean these days most countries have now got free exchange rates but in the days that you announced the exchange rate how many people does it take and how long does it take to devalue a country's currency any idea no no idea who would have to make the decision you're in Ghana in the early nineteen-eighties and you've decided the cedi is w-, w-, way overvalued it's ten cedis to the dollar and it should be a hundred cedis to the dollar fine who's going to take that decision who do you need to take a decision like that no okay the answer is you you probably need your Minister of Finance your Chancellor of the Exchequer you probably need the Governor of the Central Bank and you'll probably have to consult senior cabinet colleagues or the President of the country so that's what two or three high ranking decision makers and a typist right how long does it take to devalue about five minutes yes as long as you've reached agreement that you're going to do takes five minutes that's all the time it takes to to to write out the press announcement that says as from today the government of Ghana redefines the cedi from ten cedis to the dollar to a hundred cedis to the dollar or whatever it is yeah takes five minutes and takes about three people to make the decision similarly if you want to cut the government budget you know how quickly can you do that how many people are involved well it's maybe a couple of dozen technicians in the Ministry of Finance go through the government budget with a red pencil reduce the budgets takes one week at most yeah how long on the other hand does it take to privatize a big state enterprise yeah er those of you who lived through the British privatizations of the nineteen-eighties privatizations of British Gas British Telecom and so on even in this country took an army of people to do advertizing tendering recruiting shareholders producing documents deciding the form of privatization deciding what price you should try and sell things off it's a huge business you need an army of civil servants for this Nicaragua in nineteen-eighty decided to privatize the major state enterprises Nicaragua's a very small country when it drew up a list of state enterprises there were three-hundred-and-fifty to be privatized yes now think of all the legal documentation and all of the technical work in privatizing those three- hundred-and-fifty enterprises it's years and years of work it took Mrs Thatcher a decade to privatize what the dozen or so biggest public sector utilities in this country and that took huge resources so for a developing country to privatize it's i-, it's a mountain of work similarly if you're trying to liberalize parts of your market economy where you previously had lots of regulations and where you don't want to just rip away everything overnight er there's a lot of technical work there now the point i'm making is that the stabilization measures you can do them very quickly you can cut governments ra-, you can cut government spending rather quickly you can raise interest rates rather quickly the supply side liberalization measures the reforms of banking tax systems privatizations these take years to do so you've got a lag between those things that tend to deflate your economy and those things that give a stimulus to your economy and that lag can be quite a long lag it can be five years or more so it's no surprise to see that devaluation what the I-M-F claimed would be very short term pain has proved to be at least medium term if not long term pain and indeed for many countries you'd say where is the e-, where is the light at the end of the tunnel and here's a third problem with with structural adjustment nm0969: now you go to Tanzania and you say that and you go to Uganda and say that and then you say the same thing in the Cote d'Ivoire and you say the same thing in Colombia and in Costa Rica and El Salvador and Guatemala and Indonesia and so on yeah now it makes an awful lot of sense for an El Salvador or a Kenya to export more coffee earn more foreign exchange er and balance its trade but what happens if all countries producing coffee all produce more coffee at the same time well against a demand schedule which is not that elastic the price will go down now that diagram that was in the notes of falling primary commodity prices one of the elements behind that fall in commodity prices were the efforts of countries under structural adjustment to increase the volumes of primary exports so an argument that makes perfect sense for one country isn't necessarily a good argument for all countries at the same time now that argum-, that that problem with the argument is known as the fallacy of composition composition agg-, added all together in aggregate it isn't good advice for any given country at any one moment it is good advice but then all countries were given the same advice at the same time now look on page nine you've got a little box called the Washington Consensus and this was an intellectual consensus built up in the early nineteen-eighties about what development policy should be and it's called the Washington Consensus because Washington is where you'll find the World Bank the International Monetary Fund er and you'll also find the Inter-American Development Bank and you'll also s-, find the U-S government now all of the well not all but many of the people defining policy in Washington in the early eighties very powerful people came to the same conclusions about what good policy would be in the developing world and there it is listed point by point let's have a look what we've got there a balanced fiscal budget government spends only as much as it takes in tight government spending controls broad based tax with low marginal tax rates reform your prices to market based prices make real interest rates positive get yourself a stable exchange rate er trade liberalization and encouragement of foreign direct foreign investment foreign direct investment there's terrific change in fashions from the early seventies to the early eighties regarding multinational companies and foreign direct investment in the early nineteen-seventies people were very wary of the big multinational corporations believing that they were exploitative and through transfer pricing mechanisms were taking out bigger profits from the developing world than they should have been transfer pricing is where you have a local subsidiary of a major multinational and what you do with this is you the transfer prices as you transfer goods between elements of the same corporation you set the prices internally to your company so that you only make profits in countries which have low tax regimes yes now if you set this up well you can have a global corporation that makes very little profit in countries like Germany and Japan or Sweden and suddenly makes a fortune in the Cayman Islands yeah tiny part of the company makes a fortune in the Cayman Islands well it was never that naked but what you got your tax lawyers to do it was alleged was to make sure that you rack up your profits where the tax rates are specially low yeah so you pay very little tax in Sweden and then on your big profits in the places where you've got a lot of profit then you pay very little tax on that and we know how there i mean that game with taxes exploiting the possibilities of realizing your profits in low tax havens is why everybody today knows that some of the richest people in the world pay no tax now is that true that it's commonly alleged that the richest people in the world pay next to no tax yes they live in strange places they can't spend too much time in any one one of the major cities of the world er they have unusual nationalities unusual residences and pay next to no tax on phenomenally high earnings this is what we're told well in back in nineteen-seventy th-, this was a big fear and many governments put a lot of control on multinational organizations er by the time you get to the nineteen-eighties those ideas have been blown away because what people are saying by the nineteen-eighties is they're saying hey if you want to have something happen in a country maybe you can do it by a government parastatal but maybe that government parastatal will be inefficient and if it makes losses it'll borrow from the Central Bank expand the money supply and create problems for you on the other hand if you will give it this out as a franchise to some multinational company they can only er they can only operate if they make profits they have to be efficient and if they make profits this isn't going to cost your country anything and instead of getting debt from overseas to put into state investments that might go bad how about foreign direct investment because when one of the big corporations comes to invest in your country you don't have debt there's no reason to pay back the investment capital sure you'll have repatriated profits but that's only if the investment's successful if something goes wrong well the corporation loses not the country so by the early eighties you got a f-, you got a set of arguments saying foreign investment is a very good thing encouraging get rid of get rid of debt bring in foreign investment what else have we got in there in the Washington Consensus er a consensus in favour of privatizing state enterprise er get the state out of it on the grounds that states are likely to be inefficient and on the grounds that state enterprises are likely to be managed for as many political objectives as economic objectives deregulate your markets including the labour market er this is back to the nineteen-thirties if there's a problem of unemployment let the wages go down to a market clearing level er sound macroeconomic policy in command and some rudimentary social safety nets if there are problems of poverty during adjustment throw a bit of money at the problem the World Bank also argued at the same time for investments in human capital for reasons that we will see in a few moments er and in timing stabilize before you create the conditions for growth now that's the Washington Consensus it's about macroeconomic stability and it's about trying to get a supply side market based miracle for economic growth now what do we need to say for the nineteen-eighties about agriculture this is really a story in the nineteen-eighties the big stories are about macroeconomic phenomena it's extraordinary how quickly the ideas of the early nineteen-seventies stressing equity stressing reaching the poorest had put agriculture top of the bill in less than ten years agriculture has been wiped out from the policy agenda in favour of macroeconomic concerns of the early nineteen-eighties and agriculture is now seen as nothing special to any other sector if anything's going to happen in agriculture base it on the market base it on efficiency but when people looked at agriculture they saw one major problem that was going on and that was this the problem of okay the problem of negative protection and this is a very very simple argument what was argued was that you there's your agricultural supply curve quantity and price then in far too many developing countries what you got was negative protection and whereas that would be a market price delivering an output of O-A what you got in many countries was prices artificially depressed by government policy to a point here with a corresponding reduction in output now you look at that and you say well what government in their right mind would reduce agricultural prices and thereby suppress production that can't be a good thing but think about it any country that was worried for example about the price of urban food you might try and control the froo-, the food price on behalf of urban workers in the desire to keep down wages for your industrialization process you might be taxing your export crops very heavily because that's the only government revenue you've got in the country is is is to tax the the agricultural export taxing your exports effectively brings down the price now those things were fairly obvious to most governments what was less obvious to most governments was the impact of an overvalued exchange rate and if you overvalue your exchange rate you hurt your agriculture in two directions first any export crops you've got earn less than they would if you've got a free market exchange rate you end up with less local currency per dollar earned in your hand than you otherwise would and you put downward pressure on the prices of any export crops but you also put downward pressure on any food crops any domestic crops why because imports get cheap under an overvalued exchange rate a lot er a little of the local currency will buy plenty of dollars and it makes imported food cheap and brings down your overall price level so indirectly through things like the exchange rate you're bringing down the price and because you're bringing down the price you're taking away the incentive from agriculture faced by this analysis the World Bank spent most of the nineteen-eighties telling people looking at agriculture policy get the negative protection out of agriculture and you will deliver a major incentive to producers which will largely correct problems you've got of insufficient food production insufficient export crop production whatever so that was the particular message above all else that was given for the agriculture sector get negative protection out there it's a market based measure about the peculiarly [cough] effects or price discrimination upon agriculture okay nineteen-eighties er what have we got during the nineteen-nineties well ideas haven't changed a lot between the eighties and the nineties and current day er the Washington Consensus is still largely intact during the nineteen-nineties changing ideas about development were much influenced by an examination of the historical record for one part for the world and that is during the nineties people looked to what had happened in the developing world over the previous decade and said structural adjustment in the nineteen-eighties were a lot of misery in Africa Africa's per caput G-D-P earnings went down for most countries during the nineteen- eighties quite badly down for some some groups of people Latin America stood still or went backwards but one part of the world saw incredibly fast growth rates and as we mentioned last week that was East Asia er south China Hong Kong Singapore Korea but increasingly Indonesia Thailand Malaysia all of these countries grew very quickly indeed and they grew they were the fastest growing part of the world economy the British economy the American economy the German economy didn't do that well in the nineteen- eighties it was hesitate hesitant growth East Asia on the other hand was growing very quickly indeed and that led people in the in the nineteen-nineties to sort of say well what did these guys get so very right what was what was the wonder element that allowed these countries to grow very quickly when other parts weren't and a lot of time was spent in the nineteen- nineties trying to interpret the so-called East Asian miracle there are big disputes about the extent to which the East Asian miracle shows that market liberaliza-, liberalism works particularly when you realize that one of these countries is China with a highly controlled economy indeed the Japanese have never run a purely free market economy neither have the Koreans on the other hand Singapore Hong Kong were swashbuckling free market capitalism so there were debates about the extent to which state intervention in the free market pushed forward the East Asian miracle but nobody disagreed about one element of the East Asian miracle and that was investment in people country after country in East Asia it was argued had undertaken reasonably equitable investments in health care education and training of people in those countries and it was argued that this was a major stimulus to industrialization in this area that you could always hire a lot of people at low labour rates but who were in reasonably good health who were literate and had reasonable skills and that that was a difference between East Asia for example and Africa and Latin America or a difference for that matter between East Asia and South Asia India for example has concentrated its educational spending on elite facilities with the result that India has more PhDs than any country on Earth far more than the Chinese er it was argued in China on the other hand the distribution of education had been much broader with the result that this large set of people who'd been in the Chinese countryside with relatively low marginal products as i said last week this is the Lewis argument had moved into export processing zones and con-, and and and er manufacturing industry in Shanghai Canton Fujian the coastal area of South China and were highly employable er in ways that you couldn't do quite the same out of rural India so there was a lot of interest there in in in human capital and the advantages of investing in people now there's plenty more we can say about the ni-, the nineties and there are parts of this story which we still need to revisit and then there's all of the rest of the stuff that i hoped we might have had a a go at today er what we're going to have to do is er put the whole sequence of these talks backwards once next week we'll be continuing with this because we'll need at least another session to get through it er before we get to the land talks so next week we'll carry on with this one