There are few original thinkers. They do not necessarily follow the current fashions and what they write sometimes appears incredible, outrageous, brilliant or even thoughtless. Agree with them or not, they have to be heard and read. Deepak Lal is one such person. To all and sundry, take a day or two off, turn off your cell phone and have fun, book in hand and mind guided by Mr Lal to wander across centuries and countries.
We have forgotten in India that an author can be anti-welfare and still have a soft heart towards the underprivileged; he can be critical of foreign aid and still be pro-globalisation; he can be critical of overuse of statistics and yet be highly quantitative in his approach to analysis. The leftists will find much here to criticise economic-liberals; the nationalists will find many arguments against interacting with the western world; and those on the right wing will find much that is wrong with the left and left-of-centre approach to development. And if you are none of the above, even better: Mr Lal will show you many interesting ways to look at the world.
Chapter 1 introduces and shares data on GDP for the past 2,000 years. More interesting is the brief history of the world, birth of capitalism and how countries achieved the turning point. The chapter is an interesting take on how and when various growth surges occurred and, interlinked with that, poverty reduction across the globe. He borrows data extensively from other sources to make a simple yet powerful point. Globally, poverty in terms of the number of poor has fallen more in an era in which there has been greater economic liberalism than when the government was meddling.
Chapter 2 brings in life expectancy, mortality, nutrition and literacy as other measures of well-being and shows that all have been improving consistently. This is obvious; if poverty is falling, other correlates should be improving. And since stuff like education is an input into better incomes, it should obviously improve faster than poverty. It would have been worth writing about if these indicators had worsened, but thankfully that’s not the case. There was no reason for this chapter, but in this day of Millennium Development Goals even original thinkers have to pay service to World Bank-type indicators. Or … is it the soft heart peeping through Mr Lal’s hard-headed discourse? I wonder.
In Chapter 3, he shows that poverty has three components: structural, which is best addressed by growth; destitution, which is fairly limited; and conjunctural. I looked up Wikipedia and conjunctural means circumstantial — famine and suchlike. Mr Lal’s conjecture is that conjunctural poverty can only be addressed by income transfers that could flow from private efforts, such as charity or intra-family transfers; and that these have been replaced by public transfers in western societies.
This is a very important distinction, and policy makers frequently lose sight of it. Welfare can be the result of co-operative action both through the state and also without significant state involvement, and the latter can have insurance-like characteristics. The recommendations for welfare by the state are even more instigative than the preceding analysis: first option — do nothing; second — fund but don’t provide directly; third — involve private agents with superior <i> local <p> knowledge. And, finally, in the same vein, “ …foreign aid … is an idea whose time has gone”.
Chapter 4 ventures into the political economy space. Institutions and cultural arguments of developments are examined from a historical perspective. Mr Lal looks at how institutions and norms arise as a result of economic and geographic conditions and how they, in turn, impact long-term development outcomes. A structured model clearly exists in the author’s mind and he goes to some lengths to define its contours. The subject, however, is too diverse and the expanse of Mr Lal’s vision too wide for justice to be done in a few pages (17 to be precise). The claim that globalisation and liberal economic policies are the preferred route irrespective of the political economy comes as something of an anti-climax.
Chapter 5 replays the arguments that, internationally, as in India, there appears to be a vested interest in overplaying the extent of poverty. The underlying issue is that there is no perfect normative way of defining poverty. Also, as aggregate living standards improve, our notion of who is poor and who is not also changes.
But the more serious problem arises when the development sector, which includes but is not limited to the World Bank, indulges in poor-quality data work to bring out estimates that consistently show significantly higher levels of poverty. Mr Lal is not the first to claim this. Surjit Bhalla is another member of a small group of economists that is finding such inconsistencies when it looks under the woodwork.
Chapter 6 looks at a range of other misuses of quantitative techniques by economists. Mr Lal describes, quite convincingly, a host of conditions in which methods that appear “scientific” and objective fall flat when seen in the context of the underlying economic conditions. The point is that economics is a social “science” and economic conditions deal with human interactions and not physical phenomena.
Human beings organise and react to each other in different ways that do not neatly fit into the preconditions required for many of the quantitative techniques that even well-trained economists use. The result is that claims to statistically significant results out of objective scientific econometric analysis often turn out to be nothing but mumbo jumbo. A better and more difficult approach is analytical econometric history that involves placing all the available evidence and finding a plausible story that best fits the facts.
There were two takeaways for me. First, analyses of what policies work and what don’t – and which ones are desirable and which are not – cannot be determined by a simple regression analysis; they require a deep understanding of the historical antecedents and underlying conditions that are generating the data (the institutions and so on). And good analysis would first look into these aspects. Second – this is a rather strong statement to make and suggests that economists need to be far more humble than we are – what we can do at best is make educated guesses given the availability of limited evidence. Or did I get this part wrong? Mr Lal does not stop there.
Chapter 7 continues with the blitzkrieg . Many issues are taken up with one common thread: policy recommendations that call for greater state intervention in the economy. In each case, Mr Lal shows how bad economic judgement, deliberate misuse of data or poor quantitative analysis are used to show what is not necessarily correct. Hence, the Taiwan and South Korea manufacturing success was not necessarily because of state intervention (which may, in fact, have harmed them). Or the co-ordination failure and poverty trap arguments used to aid African countries were flawed and consequently did not help the receiver countries. This is the most technical of all chapters and perhaps the only one in which Deepak Lal the economist dominates Deepak Lal the rational commentator.
Chapter 8 studies microeconomic issues such as project appraisal, experimentation or randomised controlled trials (for which he has some disrespect); delves into the question of why surveys show the poor to be happier than we would otherwise believe, and take actions unlike those we would expect; and finally discusses the informal sector and microfinance. This is a “fun” chapter. Many uncommon insights, titbits, facts and factoids come together in a range of day-to-day economic policy.
Chapter 9 is about Africa and is rather dated, because many parts of Africa appear to have spontaneously shifted out of the low-growth, dictatorial-exploitation trap. And despite the new-found interest by the western and now eastern world (China), it is evident that Africa is no longer as helpless as was being made out in the past. Mr Lal, however, cautions: if you care about Africa, stay away from giving it aid. In other words, trade with it, don’t aid it.
Chapter 10 is the last chapter – though a concluding note follows it – and it focuses on global warming. Knowing Mr Lal’s penchant, I was expecting the obvious criticism of the Intergovernmental Panel on Climate Change (IPCC) type of work. And, boy, he does not disappoint! But first, the perspective. One, a large part of the CO2 and other so-called greenhouse gases will be from India and China, and eventually this will be far more than the developed countries, given their much larger populations.
So, policies curtailing their emission will adversely impact their growth. Two, he accepts that there is warming and there are greater greenhouse gases such as CO2 floating around (though he shows data that reveal some cooling in the 2000s). Three, he does not accept the correlation between CO2 and global warming. Instead, he argues that it may be the warming that is causing the rise in CO2 levels! It is possible, of course. After all, the Himalayan glacier story was faked by the IPCC and the veracity of the hockey stick graph showing rising temperatures has also been questioned. Agree or not, questioning what goes as gospel truth comes naturally to Mr Lal, and he forces you into this exciting and irreverent world.
Deepak Lal dislikes too much government. He dislikes even more quantitative work that is either inherently biased or not thought through well enough. He studies such work and shows you how to think through such flaws. He does not mince his words, hides nothing, and writes in a clear, unambiguous manner. For each of these reasons, the book is a good read. I will strongly encourage those interested in economic policy and, most important of all, students of economics to read this, and political entities across the economic spectrum and libraries to stock it.
The reviewer is director, Indicus Analytics.
Poverty and Progress: Realities and Myths about Global Poverty
Deepak Lal
250 pages; $24.95
Cato Institute
The reviewer is director, Indicus Analytics
