Government Spending Is No Free Lunch

Now the Democrats are peddling voodoo economics.

By ROBERT J. BARRO

Source: http://online.wsj.com/article/SB123258618204604599.html

Back in the 1980s, many commentators ridiculed as voodoo economics the extreme supply-side view that across-the-board cuts in income-tax rates might raise overall tax revenues. Now we have the extreme demand-side view that the so-called "multiplier" effect of government spending on economic output is greater than one -- Team Obama is reportedly using a number around 1.5.

To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy's total output expands by enough to create the airplane or bridge without requiring a cut in anyone's consumption or investment.

The explanation for this magic is that idle resources -- unemployed labor and capital -- are put to work to produce the added goods and services.

If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.

What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall. So, something deeper must be involved -- but economists have not come up with explanations, such as incomplete information, for multipliers above one.

A much more plausible starting point is a multiplier of zero. In this case, the GDP is given, and a rise in government purchases requires an equal fall in the total of other parts of GDP -- consumption, investment and net exports. In other words, the social cost of one unit of additional government purchases is one.

This approach is the one usually applied to cost-benefit analyses of public projects. In particular, the value of the project (counting, say, the whole flow of future benefits from a bridge or a road) has to justify the social cost. I think this perspective, not the supposed macroeconomic benefits from fiscal stimulus, is the right one to apply to the many new and expanded government programs that we are likely to see this year and next.

What do the data show about multipliers? Because it is not easy to separate movements in government purchases from overall business fluctuations, the best evidence comes from large changes in military purchases that are driven by shifts in war and peace. A particularly good experiment is the massive expansion of U.S. defense expenditures during World War II. The usual Keynesian view is that the World War II fiscal expansion provided the stimulus that finally got us out of the Great Depression. Thus, I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists.

I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.

We can consider similarly three other U.S. wartime experiences -- World War I, the Korean War, and the Vietnam War -- although the magnitudes of the added defense expenditures were much smaller in comparison to GDP. Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 -- the same value as before. (These estimates were published last year in my book, "Macroeconomics, a Modern Approach.")

There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.

As we all know, we are in the middle of what will likely be the worst U.S. economic contraction since the 1930s. In this context and from the history of the Great Depression, I can understand various attempts to prop up the financial system. These efforts, akin to avoiding bank runs in prior periods, recognize that the social consequences of credit-market decisions extend well beyond the individuals and businesses making the decisions.

But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936.

Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.

Mr. Barro is an economics professor at Harvard University and a senior fellow at Stanford University's Hoover Institution.

Economists, ideology, and stimulus

By Paul Krugman

Source: http://krugman.blogs.nytimes.com/2009/01/19/economists-ideology-and-stimulus/

Mark Thoma and Brad DeLong are both, in slightly different ways, perturbed by the state of debate over fiscal stimulus. So am I. This has not been one of the profession’s finest hours.
There are certainly legitimate arguments against spending-based fiscal stimulus. You can worry about the burden of debt; you can argue that the government will spend money so badly that the jobs created are not worth having; and I’m sure there are other arguments worth taking seriously.

What’s been disturbing, however, is the parade of first-rate economists making totally non-serious arguments against fiscal expansion. You’ve got John Taylor arguing for permanent tax cuts as a response to temporary shocks, apparently oblivious to the logical problems. You’ve got John Cochrane going all Andrew-Mellon-liquidationist on us. You’ve got Eugene Fama reinventing the long-discredited Treasury View. You’ve got Gary Becker apparently unaware that monetary policy has hit the zero lower bound. And you’ve got Greg Mankiw — well, I don’t know what Greg actually believes, he just seems to be approvingly linking to anyone opposed to stimulus, regardless of the quality of their argument.

Needless to say, everyone I’ve mentioned is politically conservative. That’s their right: economists are citizens too. But it’s hard to avoid the conclusion that all of them have decided on political grounds that they don’t want a spending-based fiscal stimulus — and that these political considerations have led them to drop their usual quality-control standards when it comes to economic analysis.

Has there been any comparable outbreak of mass bad economics from good liberal economists? I can’t think of one, although maybe that’s my own politics showing. In any case, what’s happening now is pretty disturbing.

Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?

By John H. Cochrane
Myron S. Scholes Professor of Finance
University of Chicago Booth School of Business
john.cochrane@chicagobooth.edu

Source: http://faculty.chicagogsb.edu/john.cochrane/research/Papers/fiscal2.htm

“Fiscal stimulus” is the proposition that by borrowing money and spending it, the government can raise the overall state of the economy, raising output and lowering unemployment. Can it work? Do the arguments for it make any sense? If so, does the economy suffer from the ailments that fiscal stimulus can cure?

One form of “fiscal stimulus” clearly can increase aggregate demand. If the government prints up money and drops it from helicopters, this action counts as fiscal stimulus, since the money counts as a transfer payment. In practice, our Treasury would borrow the money, and use it for tax rebates, subsidies, bailouts, or any of the many ways that our government sends people checks. Then the Federal Reserve would buy up the debt with newly created money. The result is the same: A trillion dollars more money in private hands, just as if it had been printed and dropped by helicopters. People naturally don’t want to sit on a trillion dollars of extra cash. They spend it, first creating demand for goods and services, and ultimately inflation.

This is perhaps the only prediction that it utterly uncontroversial among economists. It is a standard last-resort economic prescription to avoid a deflation.

Conventional monetary policy just exchanges treasury debt for money, without increasing the overall supply of money and debt. Whatever arguments there are that this action might affect overall demand for goods and services vanish when interest rates are near zero as they are now. Now, Treasury debt and money are nearly perfect substitutes. To inflate, the government needs to increase the overall quantity of government debt, not alter its composition.

To inflate, the government also has to make it clear that it will not pay back new debt. If we expect that debt or money will be retired with future taxes, then there is no great incentive to go out and spend to get rid of either. Only if it’s clear the debt or money will soon be inflated away does it make sense for people to try to get rid of money or debt now, and go out and buy.

Is that the “fiscal stimulus” that the Obama economic team is arguing for? It’s quite possible. The Obama economic team has not announced a clear schedule of future spending controls or tax increases that can pay off the new debt, and the Federal Reserve has already more than doubled the money supply and is widely announcing its intention to do much more. (We don’t need to see higher tax rates, we need to see higher revenues or lower spending. A plan for higher rates can choke off growth implying lower revenues.) On the other hand, they have not announced the opposite, a determined intention to inflate rather than pay off the debt, which would give the maximum inflationary demand punch.

In any case, let us hope this is not the plan. Just because a little demand goose followed by inflation is possible doesn’t mean it’s a good idea. The inflation that will result from a trillion dollars of money permanently dropped on the economy, and the real economic dislocation of such a major inflation, is frightful to contemplate.

So let’s ask the harder question. Let’s think of a “fiscal stimulus” in which the government borrows money and spends it, but with the clear plan that the debt will eventually be repaid with future taxes, not just by printing money. Can this kind of stimulus work, and if so how?

Three fallacies

Most fiscal stimulus arguments suffer from three basic fallacies.

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both1 . This is just accounting, and does not need a complex argument about “crowding out.”

Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.

Third, people must ignore the fact that the government will raise future taxes to pay back the debt. If you know your taxes will go up in the future, the right thing to do with a stimulus check is to buy government bonds so you can pay those higher taxes. Now the net effect of fiscal stimulus is exactly zero, except to raise future tax distortions. The classic arguments for fiscal stimulus presume that the government can systematically fool people.

The central question is whether fiscal stimulus can do anything to raise the level of output. The question is not whether the “multiplier” exceeds one – whether deficit spending raises output by more than the value of that spending. The baseline question is whether the multiplier exceeds zero.2

A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in force us all to borrow and spend more. This diagnosis is tragically comic once said aloud.

Credit markets

A much more plausible diagnosis of our current troubles is staring us in the face: credit markets. The institutions that channel your and my savings into consumer and business borrowing are not working. Banks are in trouble, and more importantly the much larger markets for securitized debt seem really broken. New issues of securitized debt have dropped to next to nothing, unless they are guaranteed by the Federal Government. Savings is going to low-interest Treasuries and guaranteed agency debt, yet consumers and businesses who need credit face a small supply at very high prices.3

Imagine by analogy that several major refineries had blown up. There would be tankers full of oil sitting in the harbor, and oil prices would be low, yet there little gasoline would be available and high gas prices would be high. Stimulating people to drive around would not revive gas sales. Borrowing gasoline and using it on infrastructure projects would be worse. The right policy action would obviously be to run whatever government or military refineries could be cobbled together on short notice at full speed, and focus on rebuilding the private ones.

The former step is exactly what the Federal Reserve’s many charmingly acronymed facilities are doing, to the tune of over a trillion and a half dollars. Together, the Treasury and Fed issuing huge amounts of Government debt, and they are turning around and lending the proceeds to consumers and businesses. This basic idea makes sense, though there is plenty to worry about in the details.

An unconventional potential defense of fiscal stimulus lurks in this story. If the Treasury borrows and the Government uses the proceeds for investment, then the government is in some sense acting as the missing intermediary. The focus on investment spending in the Obama plan reflects some of this thinking, though investment is an anathema to the traditional Keynesian insistence that stimulus be channeled to consumption spending. However, this is a poor argument, since stimulus “investment” spending is on much different projects than the private sector would have funded. Fiscal stimulus investments make fuel oil, not gasoline. Moreover, the extra issues of Treasury debt will largely come from the few dollars that are flowing from savings to private investment, just what the “credit crunch” does not need. To “intermediate,” additional government borrowing would have to come out of consumption. People would have to be attracted to postponing a trillion dollars of consumption by slightly higher treasury yields.

A monetary argument for fiscal stimulus, logically consistent but unpersuasive

My first fallacy was “where does the money come from?” Well, suppose the Government could borrow money from people or banks who are pathologically sitting on cash, but are willing to take Treasury debt instead. Suppose the government could direct that money to people who are willing to keep spending it on consumption or lend it to companies who will spend it on investment goods. Then overall demand for goods and services could increase, as overall demand for money decreases. This is the argument for fiscal stimulus because “the banks are sitting on reserves and won’t lend them out” or “liquidity trap.”

In this analysis, fiscal stimulus a roundabout way of avoiding monetary policy. If money demand increases dramatically but money supply does not, we get a recession and deflation. If we want to hold two months of purchases as money rather than one months’s worth, and if the government does not increase the money supply, then the price of goods and services must fall until the money we do have covers two months of expenditure. People try to get more money by spending less on goods and services, so until prices fall, we get a recession. This is a common and sensible analysis of the early stages of the great depression. Demand for money skyrocketed, but the Fed was unwilling or, under the Gold standard, unable, to increase supply.

This is not a convincing analysis of the present situation however. We may have the high money demand, but we do not face any constraints on supply. Yes, money holdings have jumped spectacularly. Bank excess reserves in particular (essentially checking accounts that banks hold at the Federal Reserve) have increased from $2 billion in August to $847 billion in January. However, our Federal Reserve can create as much more money as anyone might desire and more. There is about $10 Trillion of Treasury debt still outstanding. The Fed can buy it. There are trillions more of high quality agency, private debt, and foreign debt outstanding. The Fed can buy that too. We do not need to send a blank check to, say, Illinois’ beloved Governor Blagojevich to spend on “shovel-ready” projects, in an attempt to reduce overall money demand. If money demand-induced deflation is the problem, money supply is the answer.

Some people say “you can’t run monetary policy with interest rates near zero.” This is false. The fact of low interest rates does not stop the Fed from simply buying trillions of debt and thereby introducing trillions of cash dollars into the economy. Our Federal Reserve understands this fact with crystal clarity. It calls this step “quantitative easing.” If Fed ignorance of this possibility was the problem in 1932, that problem does not face us now.

A demand for all Treasury debt—a convincing diagnosis, but is fiscal stimulus the answer?

This monetary story also does not ring true. Yes, banks are racking up huge reserves. But do they really care at all whether they hold reserves, which now earn interest, or whether they hold short-term and highly liquid treasury bills, earning almost exactly the same interest rate? More deeply, is the central source of our current economic slump that we – people, banks, etc.—want to hold a lot more money and a lot less Treasury debt, that we are unhappy with the split in our holdings of government securities between short-term Treasury debt and money?

No. People and institutions clearly want to hold lots more US government debt overall, and money and treasury bills are nearly perfect substitutes at near-zero interest rates. People are trying to shift their portfolios out of stocks and especially out of anything with a whiff of credit risk, and into cash or Treasuries. We see this desire in the dramatically high interest rates, and correspondingly low prices, for any debt – jumbo mortgages, corporate bonds, municipal bonds, securitized debt -- that has even a small chance of default and no government guarantee, and the low interest rates and very high prices for government bonds and government-guaranteed debt. People are also trying (finally) to save more, but they want to do so in the form of safe, government debt or government guaranteed debt.

To an economist, it seems that the private sector has become much more averse to holding risks. When risk aversion rises there is a “flight to quality” in portfolios and an “increase in precautionary savings” in spending decisions. A good part of this increased risk aversion is simply in the way people feel – after large losses, people naturally retrench. Part of this change also comes from the failures of many of the institutions that help the economy to spread risk optimally, the “broken refinery” in the credit markets I alluded to earlier. People might be willing psychologically to hold more risks, but you can’t ask them to suddenly hold directly rather complex securities that they are used to holding through intermediaries, so those securities will languish just as if people were simply risk averse.4

If you read carefully, this is the consensus diagnosis of the second main cause of the current recession. Keynesians say that “consumption demand” has fallen, and “investment demand” has fallen, therefore “aggregate demand” has fallen and must be made up by “government demand.” Superficially, this analysis sounds incoherent, because you can’t demand less consumption unless you demand more investment, and vice versa – you have to spend income on something. The statement seems to violate arithmetic (a “budget constraint” to economists). But in fact you can, with given income, consume less and invest less, if you hold more government debt including money. “Aggregate demand” is nothing more than the flip side of “demand for government debt and money.” And while a “decline in consumption or investment demand” seems to come out of the blue as “animal spirits,” I think we can sense a good reason why we are all trying to hold more government debt and money.

This second ingredient is important to understanding our recession. If we just had a credit crunch, we would expect to see stagflation – lower quantities sold, but upward pressure on prices. A credit crunch, like a broken refinery is a “supply shock.” Since we are seeing lower quantities sold and easing inflation, we must also be seeing a “demand shock,” and we need to understand its source.

The bottom line, then, is that people want to hold more of both money and government debt – and don’t particularly care which. Trying to get it, we are trying to buy less of both consumption and investment goods. Again, this is a deflationary pressure. If the government does nothing, deflationary pressure will remain until goods are so cheap that we have the desired real value of nominal government debt. Until deflation happens, output falls.

What do to? In this analysis, monetary policy is impotent, but not for the usual reason that interest rates are nearly zero. The Fed can arbitrarily exchange Treasury debt for money, and increase the money supply as much as we like. But nobody cares if it does so, since the “flight to liquidity” is equally towards all forms of Government debt. If we want more fruit and less cheese, putting more apples and less oranges in the fruit basket won’t help.

Looking at it this way gives us a logical reason that fiscal stimulus might work. It leaves the private sector with a trillion more dollars of government debt in their pockets. But the Fed’s many facilities also issue government debt and money, which helps to satisfy the demand for government debt. Which is the better path?

The end game

It matters tremendously which path we choose. At some point the crisis will pass, and demand for Treasury debt and money will revert to normal levels. Sooner or later, investors and banks will decide they’re sick of holding $850 billion of reserves and 2% Treasuries when high-rated corporate bonds are going for 9% and tax-free municipal debt is going for 6%. Sooner or later banks will figure out that borrowing deposits at 4% and holding reserves that pay 0.75% is not a good long-term business model. If the resources are not there to unwind our current operations, to quickly retire at least two trillion dollars of newly created debt, a large inflation will result as people dump government debt. If history is any guide, this outcome will unleash economic dislocations on a scale to make our current troubles look like a pleasant memory.

I would be happiest if the Fed and Treasury5 satisfied the large demand for government debt and money by transparently buying or lending against high quality corporate and securitized debt, at market prices. I am happiest of all when they buy newly-issued commercial paper and securitized debt, acting as the missing intermediaries to help address the “credit crunch,” as well as supplying government debt. These actions are easiest to unwind. When investors get sick of holding so much money or government debt, the Government can, in effect, take back in government debt in exchange for this private debt, and probably make a good profit.

Alas, the Fed and Treasury’s current actions are not so clear. The Fed and Treasury are essentially running the world’s largest hedge fund: short treasuries and long a lot of obscure6 credit risk, in Wall Street parlance. Many of the Fed’s assets are inherited from various bailouts. When it’s time to unwind, will these assets be worth anything? It will be worse if the Government overpays. I still hear troublesome talk from the Fed of buying “troubled” assets. Buying $700 billion or so of worthless mortgage securities at inflated prices will not stir a magic liquidity pot to make $10 trillion of them more valuable, but will leave a several-hundred-billion dollar hole in the accounts. “Troubled asset” purchases from banks at above-market values can make those banks look better, but these are simple subsidies to banks shareholders and debt holders at the expense of future taxpayers or inflation. The government is also guaranteeing trillions of dollars of lot of credit. This is no different than writing the “credit default swaps” which made some hedge funds and AIG look good for a while and ultimately collapse. If the government has to make good on any of these guarantees, there will be even less available to unwind all our new credit.

Another potential defense of fiscal stimulus lies in this analysis. If, rather than send out checks, the government invests the money in truly valuable infrastructure, if that infrastructure truly does expand output, and if that expanded output generates additional tax revenues for the government, then Investors will be happy to hold a larger quantity of government debt permanently, because that debt is a claim to a worthwhile stream of future taxes. There is a lot of “if” here.

In sum, the US needs to keep its fiscal powder dry. The Government’s borrowing and taxing ability is limited. When the crisis fades, we will need fiscal resources to unwind a massive increase in government debt. If the debt corresponds to good quality assets, that’s easy. If the debt corresponds to government investments yielding a stream of tax revenue, that’s ok. If the new debt was spent or given away, we’re in more trouble. If the debt will be paid off by higher future tax rates, the economy can be set up for a decade or more of high-tax and low-growth stagnation. If the Fed’s kitty and the Treasury’s taxing power or spending-reduction ability are gone, then we are set up for inflation; essentially a default on the debt. Needless to say, no amount of monetary or interest rate policy – fooling with the split of government debt between money and treasury bills – would stop that inflation. Trading money for debt will do no good when people want to dump both equally.

Some say, “we’re in a crisis, we can’t worry about the long run or inflation.” However, the inflation can happen much sooner than you might expect, and it can happen long before the economy recovers. We are in a credit crisis as well as a fall in aggregate demand. Even with perfectly managed aggregate demand, output will be lower while we rebuild credit markets, and there will be unemployment as people move from building houses to other jobs. We can easily have stagflation of monstrous performance, and it can happen very soon after stimulus spending gets going.

A bit more carefully, the liquidity demand for government debt

Since I’m writing about “fallacies,” I need to spell out this argument more carefully, especially to my fellow economists and “fiscal theorists” in particular.

We seem to see declining “aggregate demand,” meaning that demand for and value of government debt are rising. Why? The value of government debt, including money, is equal to the present value of the primary7 surpluses that the government will run in order to pay off the debt. Nominal debt is stock in the government, a claim to its taxing power. Now, investors have surely not just decided that the US government is going to run huge surpluses any time soon – that the “earnings” of this “stock” are more valuable. Rather, the “flight to quality” surely means that investors are happy with much lower returns, that a “liquidity premium” has lowered the discount rate applied to government debt, and made the same hoped-for surpluses more valuable in current terms.

This refinement is important for my analysis of the Fed and Treasury’s operations. In normal times, if the Government buys a private bond for $100 and issues a Treasury bond worth $100, we should expect no effect on total demand. There is one more treasury bond, but the government has exactly the resources to redeem it with no claim on future taxes. Government debt is no more nor less attractive, so there is no change in “aggregate demand” as people try to hold more or less of it. The same holds for my slight defense of fiscal stimulus: In normal times, borrowing money to invest in a project which will just pay for itself in future tax revenues has no aggregate demand effect since the revenues just pay off the bonds. In normal times, the only way to increase aggregate demand really is to print debt or money the government really does not intend to pay back. For debt purchases to have some effect on aggregate demand, Treasury debt must be in some sense artificially scarce. It must satisfy a need that the corporate bond does not satisfy. I think we’re in that situation: the Government has a unique ability to avoid explicit default, and investors especially value debt with this unique feature. This means that a swap of government for private debt will help to alleviate the decline in “aggregate demand,” even though people understand the debt will not be inflated away.

Taxes, tax rates, and incentives

How can one logically oppose stimulus spending and support stimulus tax breaks? If borrowing and spending doesn’t work, borrowing and lowering taxes shouldn’t work either.

There is one argument for tax reduction. Good economists distinguish taxes from tax rates. Borrowing to “put money in people’s pockets,” say by tax rebates, is exactly as pointless (or inflationary) as borrowing and spending. But lowering the distortions caused by high tax rates can do a lot of good. However, to really do any good, tax rates have to be low and predictable for a long time. Little short term special deals don’t do any good in encouraging people to work, save, and invest. Alas, many of the Republican-inspired tax reductions in the Obama plan are rebates for past activities, which give cash with no change in incentives. Others are means-tested and phase out with higher incomes. From a macroeconomic perspective, these manage the worst of both worlds: They raise the marginal rates that lower incentives to work, save and invest while lowering tax revenues.

Even if we borrow to lower tax rates, we have to raise tax rates in the future to pay back the debt, so any borrowing-financed tax reduction can’t be permanent and thus can’t really have the desired incentive effects. The only real fiscal “stimulus” is to lower tax rates, broadening the base, while at the same time attacking the structural deficits that everyone knows otherwise mean higher tax rates in the future.

The economic “consensus”

This is not fancy economics. Most of my arguments come from simply asking where the money is going to come from, simple arithmetic. Why are so many economists said to support fiscal stimulus? Am I some sort of radical? No, in fact economics, as written in professional journals, taught to graduate students and summarized in their textbooks, abandoned fiscal stimulus long ago.

Keynesians gave up by the 1970s. They saw that fiscal programs took too long to implement. They especially disparaged temporary measures, which would not stimulate the consumption that classic Keynesians thought was important to stimulus. Every undergraduate text has repeated these conclusions for at least 40 years. I learned this view from Dornbusch and Fisher’s undergraduate text, taught by Bob Solow, in the 1970s. Even the optimistic projections by the Obama economic team say that fiscal stimulus will not really kick in for two years, validating the durability of this view.

The equilibrium tradition which took over professional academic economics in the mid-1970s has even less room for fiscal stimulus. Some “equilibrium” analyses do say fiscal stimulus can increase output – but by making us feel poorer, work harder at lower wages, and consume less.8 That’s not what advocates have in mind! A large fiscal program can affect prices, wages, and interest rates with all sorts of interesting general-equilibrium implications, but these analyses haven’t really converged on anything solid, much less the large “multipliers” necessary to make traditional fiscal stimulus attractive.

More deeply, macroeconomics was revolutionized starting in the 1950s, by the realization that what people think about the future is crucial to understanding how policies work today. Milton Friedman started this, pointing out that consumption does not depend statically on today’s income, but on what people expect of the future. People who learn that their jobs are on the line will consume less and save more, even though today’s income may still be good. As I have emphasized, the effects fiscal stimulus will have now depends crucially on whether people expect the new spending to be paid back by future taxes or whether they expect it to be quickly monetized. Classic Keynesian analysis analyzed policies and each time point in isolation. We do not have to agree if expectations are formed “rationally,” all we have to agree is that expectations of the future matter crucially for how people behave today, and the classic Keynesian analysis of fiscal stimulus falls apart.

In textbooks and graduate curriculums across the country, stimulus is presented at best as quaint “history of thought” with no coherent defense that one should believe it in the context of modern economics. (For example, David Romer’s classic graduate text Advanced Macroeconomics) At worst, it is presented as a classic fallacy. (My view of the treatment in Tom Sargent’s,Dynamic Macroeconomic Theory and Sargent and Ljungqvist’s Recursive Macroeconomic Theory).

“New-Keynesian” thought is devoted to defending the importance of monetary policy, and incorporating specific frictions in the equilibrium tradition, not to rescuing the ancient view that fiscal stimulus is important and abandoning that tradition. Mike Woodford’s Magisterial New-Keynesian Opus Interest and Prices has no mention at all of fiscal stimulus. More deeply, new-Keynesian economics is completely devoted to the proposition that expectations of the future matter centrally for how the economy behaves today. Its central thesis is that central bankers must manage expectations, not manage “demand.” It has no room at all for the sort of analysis in which one adds up “consumption” “investment” and “government” demands, without considering alternatives for those demands or expectations of the future, to determine output.

There has been no grand empirical reevaluation either. Empirical work is hard, since governments try fiscal stimulus in bad times. If you bleed to rebalance the humors when you have a cold, empirical work might say that those cured you. Empirical work has to find fiscal stimulus events that were applied randomly, without regard to the state of the economy. Harder still, it has to find stimulus spending that people expected to be paid off rather than inflated away. Most current empirical work does not make this distinction, and therefore is in danger of measuring the slope of the Phillips curve rather than the fiscal multiplier . Finally, empirical work without a plausible mechanism is hard to believe. Even so, doing the best to surmount these problems, nothing in recent empirical work has revised a gloomy opinion of fiscal stimulus.9

Some economists tell me, “Yes, all our models, data, and analysis for the last 40 years say fiscal stimulus doesn’t work, but don’t you really believe it anyway?” This is an astonishing attitude. How can a scientist “believe” something different than what he or she spends a career writing and teaching? At a minimum policy-makers shouldn’t put much weight on such “beliefs,” since they explicitly don’t represent expert scientific inquiry.

Others say that we should have a fiscal stimulus to “give people confidence,” even if we have neither theory nor evidence that it will work. This astonishingly paternalistic argument was tried once with the TARP. Nobody could say how it would work in any way that made sense, but it was supposed to be important do to something grand to give people “confidence.” You see how that worked out. Public prayer would work better and cost a lot less. Seriously, as social scientists, economists don’t have any special expertise to prescribe what intrinsically meaningless gestures will and will not give “confidence,” so there is no reason for anyone to listen to our opinions on that score.

One of the most important things that scholars can do is to explain ignorance. I often say “I don’t know, but I do know with great precision why nobody else knows either.” Medical analogies are all the rage. “The patient is desperately sick, we must do something.” Well, 21st century economics is in many ways still like 18th century medicine. If all the “experts” want to bleed the patient to stimulate the balance of humours, it is valuable to say “that won’t work,” even if you don’t have an instant cure at hand. 90% of good economic policy is, “first, do no harm.”

The bottom line

In sum, there is a plausible diagnosis and a logically consistent argument under which fiscal stimulus could help: We are experiencing a strong portfolio and precautionary demand for government debt, along with a credit crunch. People want to hold less private debt and they want to save, and they want to hold Treasuries, money, or government-guaranteed debt. However, this demand can be satisfied in far greater quantity, much more quickly, much more reversibly, and without the danger of a fiscal collapse and inflation down the road, if the Fed and Treasury were simply to expand their operations of issuing treasury debt and money in exchange for high-quality private debt and especially new securitized debt.

Even this policy is not easy. We do not want the Federal Government to run credit markets forever. The main focus for policy must be on rebuilding the private credit markets. How? The first step is to stop chaotic interventions. Who would buy bank stock, lend long-term, or buy securitized debt, knowing that the government might rewrite the rules at any point? Second, the government must focus on the policy issue, which is making sure new savings can flow to new borrowing, not who takes the hit for old bad loans. Alas, many of our chaotic bailout proposals break both rules. Needless to say, the phones are ringing off the hook in Washington from people who don’t want to take a bath on poor past investments.

Then we can get to the hard work of building a much more transparent, simple and trustworthy credit system. This too is not a simple task, but one that takes a separate analysis.

Fiscal stimulus can be great politics, at least in the short run. The beneficiaries of government largesse know who wrote them a check. The businesses and consumers who end up getting less credit, and the businesses that can’t sell them products, can only blame “the crisis,” and call up their congressmen to get their own stimulus. Roosevelt understood this, and his biggest stimulus came as political support was flagging.10 But President Obama has such widespread support, he doesn’t have to buy votes any time soon.

My analysis is macroeconomic, and does not imply anything about the specific virtues or faults of the Obama team’s spending programs. If it’s a good idea to build roads, build roads. (Keep in mind the many roads to nowhere.) If it’s a good idea for the government to subsidize green technology investment, do it. (Keep in mind that the internet did not spring from industrial policy to improve the Post Office, the word processor did not come from a public-private consortium to rescue the typewriter industry, and that a huge carbon tax is much more likely to spur useful green ideas, and the only way to spur conservation.) The government should borrow to finance worthy projects, whose rate of return is greater than projects the private sector would undertake with the same money, spreading the taxes that pay for them over many years, after making sure its existing spending meets the same cost-benefit tradeoff. Just don’t call it “stimulus,” don’t claim it will solve our current credit problems, “create jobs” on net, or do anything to help the economy in the short run.


Footnotes

1. Gene Fama’s analysis of fiscal stimulus focuses on this point. http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.html
2. Robert Barro also thinks zero is the right baseline: http://online.wsj.com/article/SB123258618204604599.html.
3. The difference between true and intermediary-induced risk aversion is most important to pure free-marketers. If people are just more risk averse, it’s hard to argue that the government should force them to take risks through their taxes that they are not willing to take directly. If something’s broken, it’s easier to argue for policy response. Most economists however are willing to be paternalistic about high risk aversion and call it a “problem” needing government response.

4. Even this much is not completely obvious; Bank lending has not in fact declined – anecdotes do not add up to data, as Chari et al (2008) point out, and the declining supply and increase in interest rates for risky debt may simply reflect greater risk aversion of investors, discussed below, (a leftward shift in supply), rather than dysfunction in the intermediary markets (a wedge between supply and demand). For example, Wirtz (2009) doesn’t find as much “credit rationing” as you might expect. But this diagnosis is at least a bit more worth pursuing than the last one, and most people buy it, so it’s worth tracing through “what should policy do if there is a credit crunch,” meaning a wedge between supply and demand of risky debt.
Chari, V.V., Lawrence J. Christiano, and Patrick Kehoe, 2008, “Facts and Myths about the Financial Crisis of 2008,” Federal Reserve Bank of Minneapolis working paper 666 http://www.minneapolisfed.org/research/wp/wp666.pdf. (Did you guys pay someone for that number?)
Wirtz, Roland A., “Raising the Credit Bar or Getting Clubbed by it?” Fedgazette Federal Reserve Bank of Minneapolis, January 2009 21 (10) 1-7, http://www.minneapolisfed.org/pubs/fedgaz/09-01/cover.pdf
5. Federal Reserve H3 report, January 15 2009, http://www.federalreserve.gov/releases/h3/Current/
6. This analysis is explained in greater depth in the “fiscal theory of the price level,” see for example the articles in http://faculty.chicagogsb.edu/john.cochrane/research/Papers/#Fiscal.

I say “Fed and Treasury” because they’re in this together. The current facilities are structured as special-purpose-vehicles. The Treasury owns the equity tranche, using TARP money (the one good use of TARP money I can think of), and the Fed “lends” to the special purpose vehicle, consistent with its legal authority to lend rather than buy securities. While the Fed is proud that this limits its credit risk, from the point of view of policy and taxpayers, the Fed and Treasury together have simply bought securities by issuing Government debt. Other facilities consist of Fed lending money long term, using private debt as collateral. Some of this lending is done as “repurchase agreement” in which the Fed literally does buy the private debt, but the borrower agrees to buy it back. Functionally, these are all very closely related: the private sector gets more Treasury debt and money, the Government gets more private debt and credit risk. And you thought structured finance was dead.

7. Primary surpluses exclude debt payments. Governments dig out of a hole just like we do if and only if they are making payments that exceed the interest charges.

8. No, I’m not making this up. Two examples:
Baxter, Marianne and Robert G. King, 1993, “Fiscal Policy in General Equilibrium,” American Economic Review 83, 315-34;
Edelberg, Wendy, Martin Eichenbaum, and Jonas D. Fischer, “Understanding the Effects of a Shock to Government Purchases,” Review of Economic Dynamics, 2 166-206.
9. A good survey, from Greg Mankiw, who advocates Keynesian thinking as a good rough guide to how “real” models work, but is nonetheless unimpressed: http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html See also Barro’s WSJ oped cited above.
10. See Amity Shlaes’ wonderful The Forgotten Man: A new History of the Great Depression

Animal Spirits Depend on Trust - Robert J. Shiller

The proposed stimulus isn't big enough to restore confidence.

By ROBERT J. SHILLER

Source:http://online.wsj.com/article/SB123302080925418107.html

President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen.

The term "animal spirits," popularized by John Maynard Keynes in his 1936 book "The General Theory of Employment, Interest and Money," is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

Fiscal policy adjustments are what almost all the pundits and the economic policy advisers have in mind when they say now is the time to pursue Keynesian policies. Especially now, when conventional monetary policy is ineffective, since short-term interest rates on safe assets are close to zero, Keynesian theory would argue that the government should have a fiscal target. If spending would otherwise be less than full employment GDP, the government should put more money into people's pockets.

But lost in the economics textbooks, and all but lost in the thousands of pages of the technical economics literature, is this other message of Keynes regarding why the economy fluctuates as much as it does. Animal spirits offer an explanation for why we get into recessions in the first place -- for why the economy fluctuates as it does. It also gives some hints regarding what we need to do now to get out of the current crisis.

A critical aspect of animal spirits is trust, an emotional state that dismisses doubts about others. In talking about animal spirits, Keynes sought to convey the message that swings in confidence are not always logical. The business cycle is in good part driven by animal spirits. There are good times when people have substantial trust and associated feelings that contribute to an environment of confidence. They make decisions spontaneously. They believe instinctively that they will be successful, and they suspend their suspicions. As long as large groups of people remain trusting, people's somewhat rash, impulsive decision-making is not discovered.

Unfortunately, we have just passed through a period in which confidence was blind. It was not based on rational evidence. The trust in our mortgage and housing markets that drove real-estate prices to unsustainable heights is one of the most dramatic examples of unbridled animal spirits we have ever seen.

Furthermore, while animal spirits have been high over a very long period of time, a whole new system for the granting of credit had been generated. Some 30 or 40 years ago there was much less intermediation in financial markets. But then along came financial innovation and a new financial system, not just in mortgages and housing but throughout the credit system, with complicated strategies of securitization and use of derivatives. The more complex the transaction the more trust is needed to sustain the transaction.

Then too, over the past several decades a vast "shadow" banking sector developed that engaged in the purchase and sale of such securities. To a great extent these traders borrowed short term at low interest rates against collateral of asset-backed securities, of which residential mortgage-backed securities would be just one example. What enabled them to do that? It was the animal spirits. Those who loaned short to the shadow banking sector were confident. They thought they would be repaid. (They also thought they could insure against loss by the purchase of derivatives). They were trusting. But as soon as these lenders lost their confidence they were no longer trusting. It was like a classic bank run, but this time not on the formal banking sector but on those who borrowed short, and loaned long -- on the shadow banking sector. Lenders to the shadow banking sector wanted to be the first not to renew their loans.

The trust in the innovative lending practices was excessive; now that trust is replaced by deep mistrust. The wreckage of formerly towering financial institutions is all around us. Evidence of our overconfidence repeatedly appears in media stories, and thus we are constantly reminded that we were foolish to have been so trusting.

The danger at this point is that if the actions we take are not aggressive enough to have a substantial, visible impact on the economy, then confidence will continue to plummet. The Obama administration estimated its initial $775 billion stimulus package would shave about 1.8% off the unemployment rate from what it would otherwise be. Even so, by the time any package takes full effect the unemployment rate may be substantially higher than it is today.

So what must we do to revive our animal spirits and economic growth? We must be certain that programs to solve the current financial and economic crisis are large enough, and targeted broadly enough, to impact public confidence. Not only do we need a fiscal stimulus significantly greater than the proposal that is currently on the table, government action is also needed to take the place of the credit markets that seemingly worked so well when animal spirits were high. The Treasury and the Federal Reserve not only need a fiscal target, they also need a credit target. This should not be a dollar number, but rather a target for how the credit markets should behave. The goal should be that those who would normally receive credit in times of full employment can once again find it easy to do so, at rates with realistic risk premiums.

There are three ways to restore these credit markets. The Treasury and the Federal Reserve have been inventive in applying all three methods. The first is the extension of rediscounting. The Fed has invented many different special loan facilities. They have even invented ingenious ways to combine Treasury money to make very large-scale loans while still within the legal requirement that the Fed can only lend against safe collateral when using TARP funds for the Term Asset-Backed Securities Loan Facility, which will support consumer, student and small-business loans. But so far the total amount of such rediscounting has been small relative to the size of the credit markets. They need to be much larger.

Second, so far more than $250 billion of government money has been used to recapitalize banks. But just making the banks solvent is not enough. The banks, whose managers are suffering from the same flagging animal spirits as the rest of the economy, will not expand their credit much just because they are more solvent. The banks will only expand if they see profitable opportunities to grant loans and if their fear of failure is diminished. It will take much more than keeping the banks solvent to make them take on the disappeared credit flows.

And, finally, especially in considerably expanding the powers to support the lending of Fannie Mae and Freddie Mac, government-sponsored enterprises have replaced a significant portion of the mortgage markets. But the government should do much more here as well. For example, failed banks might be kept alive longer as bridge banks under government supervision with the purpose of making credit freely available.

The interventions so far have been in the right direction. Federal Reserve Chairman Ben Bernanke has been especially inventive and aggressive. But the theory of animal spirits and the loss of confidence tell us that a great deal more still needs to be done. Now is not a time for the timid. To meet our needed fiscal-policy target, the Obama administration's fiscal stimulus should be much greater. And to meet our credit target, the expansion of special loan facilities, recapitalization of banks, and use of government institutions to grant credit where it has dried up must be on a scale great enough to overwhelm further doubts about the economy.

In due course our animal spirits will once again turn positive, but we would rather that happen this year or the next rather than five or 10 years from now. There is only one way to speed this process: greatly expand governmental support of credit markets and pass a much larger fiscal stimulus plan than is now proposed.

Mr. Shiller is professor of economics at Yale University and chief economist at MacroMarkets LLC. His new book, with George Akerlof, "Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism," will be published by Princeton next month.

Let the people, not the government, do the spending

By Hafiz Noor Shams

Source:http://www.themalaysianinsider.com/index.php/opinion/hafiznoorshams/16992-let-the-people-not-the-government-do-the-spending-

JAN 28 – While the economic outlook around the world gets gloomier by the day, the second fiscal stimulus package seems imminent even as the federal government struggles to spend RM7 billion allocated under the first package.

Even though there is widespread belief that the extra adrenalin jab is urgently needed, reports suggest that the outline of the second stimulus has not yet been written. The evidence? The Finance Minister is asking the public for ideas on how to spend lots of money. If that is so, then this is an opportune time to argue why, for Stimulus Version 2.0, a regime of tax cuts is a better solution than government spending. If the purpose of an economic stimulus is to reduce the impact of an economic downturn, then the package has to satisfy at least two criteria.

First, the lag between the administration, the execution and the effect of the stimulus has to be short. This is to ensure that the stimulus comes at the times when it is most beneficial. That is when the economy is deep in crisis and not when it is already nearing reasonable levels of recovery. Any later, a stimulus will be useless.

Secondly, it has to be widely distributed to the participants of the local economy. An unevenly distributed stimulus will be meaningless in terms of alleviating the sufferings of individuals adversely affected by the downturn. While the economy could, theoretically, show signs of recovery even with an uneven stimulus, it may do little to improve key figures like, for instance, the unemployment rate.

The previous RM5 billion injection by the government into ValueCap – a fund management company active in the equity market – is a case in point where the stimulus is extraordinarily focused.

While the massive injection into ValueCap may save the fund managers, investors and shareholders, it does nothing for the real economy.

The very nature of government spending is such that it is unlikely to achieve both criteria at the same time simply because there is a trade-off between the two.

For a stimulus to act fast, it has to be simply administered on small items without complex distribution methods. Any effort to distribute the spending and, hence, the money, widely will necessarily bog down the execution of the stimulus. A distributed stimulus has to be planned for policymakers have to know where to spend. This information, unfortunately, does not come quickly. Any investigation requires time and an investigation of countrywide magnitude demands a reasonable amount of time for it to be completed.

It is possible that efforts by the Finance Minister to harness the wisdom of the masses is partly to cut short the process of information gathering.

Independent of the quality of information is the question of execution. A widely distributed stimulus, by definition, requires a considerable number of transactions at various levels in the government as well as the economy.

Each transaction itself takes time, especially so when transparent processes, which include open tenders, are applied.

While government spending suffers from the trade-off, tax cuts do not. Tax cuts can be done relatively quicker and are, by nature, more distributed than government spending.

Cuts, especially on transactional taxes on consumer goods like sales tax, can be administered quickly simply because the information required is not a massive as the data required for government spending.

The government could simply announce that sales tax has been reduced to a certain level in a matter of weeks, if not days.

Secondly, a tax cut, especially on sales tax, is more distributed in its effects than any practical government spending. Just imagine how many times a week do each of us make a transaction with sales tax appended to it? How many people do you know pay sales tax on goods and services they consume? Compare that to the number of people you know who may immediately benefit financially from government spending on, say, highways or schools?

The reduction or even total – albeit temporary – removal of sales tax could increase the quantity of goods bought and sold, simply because these become cheaper. There are other taxes that could be cut, like corporate and personal income taxes but these will not take effect as quickly as a sales tax cut. The fastest way to use such cuts is to implement a backdated cut and return the money paid as taxes in 2008 within the next several few weeks or months. This puts the money in the taxpayers’ pockets.

Announcing future cut on those taxes soon is likely to be a game of expectation management. Any reduction of non-transactional taxes on consumer goods must be directed at the lower and middle classes. It has been demonstrated time and again that these groups are the ones most likely to spend instead of save the extra cash they receive.

A large tax cut will, of course, hurt government revenue in times when revenue from petroleum and its by-products may fall short of projections made last year.

This will increase the fiscal deficit. Concerns about deficit, however, are immaterial if the alternative is greater government spending. Whether government revenue shrinks or its expenditure grows, the end result will likely be the same in direction if not in magnitude.

Besides, while RM7 billion pales in comparison with the size of the drop in Malaysian exports of late and is therefore unlikely to counter the full effect of weakened external demand, the path of government spending has been explored.

The first stimulus attacked the demand curve in its first wave. Perhaps it is wise to attack the supply side in its first wave now. Thus, when the first and the second stimuli are combined, a more holistic view is taken.

Finally, for Barisan Nasional, tax cuts would be better for public relations than government spending. The BN-led federal government has been accused of cronyism with government contracts circulating mostly among BN party members. Even in a system that favours the Malays, the general feeling is that only Umno members are benefiting from it while other Malays are left out.

Consider government spending as fiscal stimulus: with its requirement to be executed fast, large spending is likely to bypass many transparent processes, if there is any at all. With an already bad reputation for corruption and waste, the haste of commissioning various stimulus-conscious projects is likely to encourage the public and political rivals of BN to question the methods of awarding contracts and the beneficiaries.

With tax cuts, especially on sales tax on consumer goods, there is no basis for any accusation of cronyism or corruption since the action benefits all consumers.

A Weightless Economy

A weightless economy
Danny T. Quah, London School of Economics
Source: http://www.unesco.org/courier/1998_12/uk/dossier/txt11.htm

Information and communications technology is transforming the world and producing ‘knowledge products’ to which traditional economic principles do not apply

The importance of the weightless economy can be assessed at three levels. We can look at individuals, firms and entire economies.

First people. In 1997, three of the world’s twenty wealthiest individuals were Americans who made their money almost entirely from software. Their total wealth was almost ten times as much that of the three wealthiest Britons involved in more tangible production (real estate, steel, and food). In October 1998, the world’s wealthiest individual (in software) was more than twice as wealthy as the runner-up, who was not in software.

Next turn to firms. As the historical volatility of stock markets powerfully shows, gauging the economic success or failure of individual firms is difficult in general. However, averaging stock market performance over longer time periods and across individual firms in sectors of interest can give a more reliable picture. The five major information and communications technology (ICT) firms that an interested observer would be likely to name are Microsoft, Intel, Compaq, Dell, and Cisco. Between them, these firms had market capitalization of $12 billion in 1987. By 1997, their combined capitalization amounted to $600 billion—a fifty-fold increase over less than ten years or annual growth of 45 per cent. Such rapid growth, sustained for such a long stretch of time, is remarkable by comparison with any other economic quantity.

Finally, consider countries. In the United States, the information technology (IT) share of nominal gross domestic product (GDP) has grown from 4.9 per cent in 1985 to 8.2 per cent in 1997. At the same time, IT prices have fallen dramatically: the real price of computing has, by some measures, been declining by 30 per cent a year for the last two decades. The real price of communications has, similarly, been decreasing at 8 per cent a year for the last seventy years, a halving every eight to nine years. And disk storage capacity has been increasing at 60 per cent a year since 1991, while its nominal price has fallen a hundred-fold. Thus, without even taking into account the potential spillover effects from its increasing the productivity of other industries, the IT sector’s direct contribution to real value produced has been substantial for the world’s leading economy.It may not be surprising that this is happening in the technologically advanced world. However, IT contributes greatly to growth in some of the world’s least developed economies as well. In India, per capita annual income in 1995 was $340: the majority of the population of 900 million lived on less than one dollar a day. At the same time, India hosts a major offshore software centre for the rest of the world. Software production in 1997 was a $2 billion industry, employing 260,000 people. The industry’s revenues have been growing by 50 per cent a year for the last five years, with over 60 per cent generated as export earnings.

The Internet is an important part of the weightless economy. Narrowly, it might be regarded as nothing more than one specific concrete manifestation of progress in information and communications technology. One might then simply say that it is the result of rapid and dramatic technical progress. But Internet technology could well have emerged without a specific application developed for it. Historical examples abound where one side of a market—supply—comes on strong while the other—demand—languishes, with the result that no ongoing development occurs. The fact that an Industrial Revolution did not occur in fourteenth-century China, despite its technological advances—superior to those in the West—attests tragically to that.

A dramatic reduction in transaction costs

But the Internet is not such an example. Radio, a relatively simple, undemanding technology, took forty years to achieve fifty million regular users. The Internet took four. This happened partly because the Internet makes it easier to deliver what participants in the economy have always needed: cheaper and easier exchange, faster dissemination of information, reduced inventories, greater outreach in both supply chain and distribution channels.

But perhaps more telling, this extraordinary growth arises from the fact that the Internet makes possible what previously was impossible. While tangible goods can be sold over the Internet, their actual delivery to the consumer will always be slow and will always eat up transportation costs. By contrast, the Internet can deliver directly weightless-economy goods and services. Health care counseling and education (two large expensive sectors in most advanced economies, where historically productivity growth has been famously low), news, software, music, advertising, video entertainment, securities, banking and other financial services, database access and consulting services can all be provided over the Internet—unlike haircuts and janitorial services. The result will be a dramatic reduction in transaction costs. Productivity will rise in precisely those areas that, traditionally, have seen poor productivity performance.

In the US, the fastest growth in jobs is found precisely in sectors associated with the weightless economy. From 1996 through 2006, the industry with top employment growth is projected to be computer and data-processing services, at 108 per cent. The next fastest-growing industry is expected to be health services, at 68 per cent. The Bureau of Labor Statistics forecasts that the occupations with fastest employment growth will be database administration, computer services, and computer scientists (118 per cent); computer engineers (109 per cent); systems engineers (103 per cent); and then personal and home care aides (85 per cent). Wages earned in these industries and occupations are also high. In 1997, the average worker in the IT industry earned twice the national average across the private sector.

New rules and logic

All components of the weightless economy can be represented, without loss, as “bitstrings”—sequences of 1s and 0s. (This doesn’t mean they are digital in the sense used in relation to computers. An advertising image is a bitstring, but it is not insightfully viewed as part of computers and computer networks.) Since ideas and knowledge can also be represented in this manner, it is an easy step to identify them with the rest of the weightless economy. To minimize confusion I will call the bitstring pieces of the weightless economy knowledge-products. This emphasizes their symbolic similarity to knowledge but, at the same time, maintains their distinctness. There are three points to bear in mind. First, like knowledge, knowledge-products show infinite expansibility (a term due originally to Thomas Jefferson). They do not get used up, physically. The usefulness of computer software is not reduced the more users run it. Advertising imagery does not diminish in impact the more people view it; indeed, the opposite holds.The same terminology is apt for how a knowledge-product—unlike, say, a typical durable good—disrespects geographical distance. A knowledge-product behaves as if it expands to fill all available space. I can, in London, use a piece of software located on some satellite server encircling the earth while someone else in Stanford, California, does exactly the same, with the identical piece of software. This holds true for any intellectual property or libraries and databases. It does not apply for, say, a chocolate-chip cookie. When someone eats a cookie, it is no more.Second, like knowledge, knowledge-products show superstar dynamics. To understand this, consider first the wheel. Society does not reward reinvention of the wheel, but multiple implementations of (the idea of) a wheel do get properly compensated. However, those multiple instances are fashioned out of hard physical material which the buyer pays for.

Knowledge-products, by contrast, are the idea and implementation rolled in one—multiple implementations require no physical material. For example, the fastest way to appreciate an idea in computer software is to see that software running; the only way to value the contents of a computer database is to access the database itself; the only way to understand a gene sequence is to see it expressed in a lifeform. In short, we cannot distinguish between the product and the idea behind it.

In this context, reproductions of an original knowledge-product should fetch zero price in a well-functioning market. Superstar dynamics refers to this first-(or winner)-takes all characteristic shared by both knowledge and knowledge-products.However, this zero-price property does not say that knowledge-products are valueless: water is essential to human welfare, but its price in modern societies is, for all practical purposes, zero. Bundling water with something else—adding carbonation to water, extracting it from certain distinguished springs, associating it with a powerful advertising image—can, of course, be a rewarding enterprise. Businesses can and do add value, similarly to many knowledge-products in the weightless economy. For example, the value that the Nike shoe company generates is not the raw material in its shoes, but the culture associated with them. The value that the consultancy firm JP Morgan generates by giving away its raw data is not in the data itself but in the bundling of that information with a particular financial perspective—and who better to continue to develop that perspective than JP Morgan itself. For many software companies, rewards don’t lie in the software itself, but the services provided and the organizing of a community of users.

Labs for producing intellectual property

Third, like knowledge, knowledge-products have a chain of production that is irrecoverably intricate and uncertain. Applying more factor inputs in an effort to increase output can be self-defeating. Just as making nine men pregnant for a month fails to produce a new-born baby, throwing more programmers at a software project does not typically make a complete piece of software faster, better, or more reliable. Similarly, financial consulting, a musical composition, or devising the central image in an advertising campaign calls not for many hands, but few. The same dynamic applies with scientific discoveries; many researchers work on the same problem to reach the same discovery simultaneously. These three properties imply that the way businesses operate should change and that appropriate government policies will need to acknowledge those changes. As a first step, one might think of economies comprised entirely of knowledge-products—weightless economies—as being like large laboratories for producing intellectual property broadly defined. The problem is that the systems of intellectual property for organizing patents and copyrights are based on principles and conceptions which no longer apply in the weightless economy. The question is not whether a new set of market rules has emerged, but the ways in which people, governments and firms can respond to them.

How Professors spend their time

Source: http://www.phdcomics.com/comics/archive.php?comicid=1060

The Scientific Method vs The Actual Method

Source: http://www.phdcomics.com/newspapers/samples.html

Corrected Impact Factor

Measuring Your Worth (Academics Only)
Source: http://gregmankiw.blogspot.com/2008/12/measuring-your-worth.html

Has Malaysia really eradicated poverty?

Has Malaysia really eradicated poverty?
Unrealistically low poverty line results in rosier statistics

Source: http://www.aliran.com/oldsite/monthly/2004a/2j.html

by Jeyakumar Devaraj Aliran Monthly 2004:2

In its article titled “The Mahathir Mystique”, Newsweek, (23 November 2003) terms Malaysia as an Asian success story where “the percentage of Malaysian households that fall below the poverty line has plunged from nearly 50 per cent to an estimated 6 per cent in 2000.” The figures quoted by Newsweek are lifted from Mahathir’s 2004 budget speech in Parliament on 12 September 2003. From the horses’ mouth as they say — but unfortunately some horses have learnt to bluff! The poverty line Generally speaking, the poverty rate can be lowered by two methods. The first is by raising the income of the poorer families to above the poverty line. The second method, and undoubtedly the easier option, is to lower the poverty line itself!

Malaysian household income distribution as quoted in the Eighth Malaysia Plan is pictured in Table 1 — with 75 per cent of Malaysian households earning below RM3,000 per month and 25 per cent of households earning below RM1,000 monthly. The same document (8MP) also specifies the poverty line for Semenanjung Malaysia as RM540 per month for a family of five individuals. Is this a realistic figure? A living wage?

Table 1 - Household Income (RM/month)
More than RM5,000: 9.8%
RM4,001 - RM5,000: 5.5%
RM3,001 - RM4,000: 9.6%
RM2,001 - RM3,000: 17.4%
RM1,001 - RM2,000: 32.7%
RM501 - RM1,001: 20.0%
Less than RM500: 5.0%
Source: Eighth Malaysia Plan.

Can a family of five survive on an income of RM550 per month, given the cost of living in Malaysia today? Where would they live? And can their children go to school? Yet given the government’s definition, they would not be classified as being poor. At a meeting with 60 factory workers in Sg Siput recently, we asked them to suggest a reasonable household budget, and the outcome of that exercise is summarized in Table 2. The participants felt that the cost of buying a house and a small allocation for savings must be part of a balanced family budget. In their opinion, any family with a household budget of below RM1,750 would be facing economic hardship;

A realistic poverty line

Table 2 - Household Expenditure (per month)
House Loan : 400
Marketing: 300
Groceries: 300
School expenses: 200
Motorbike: 150
Medical/Clothes: 100
Festivals/Trips: 100
Light/Water/Phone: 100
Insurance/savings: 100
Total: RM1,750

In Britain and in several other countries in the European Union, the poverty line is defined as one half the average household income. In Malaysia, the average household income is RM3,200 per month. Half this figure would be RM1,600. In other words if we used the definition used in Britain, households earning less than RM1,600 per month would be considered as poor! If RM1,600 per month is taken as the realistic poverty line, then around 50 per cent of Malaysians are poor — see the Income Pyramid overleaf — and this is the level of poverty as quoted by Mahathir for 1970! No one is denying that there has been significant growth in the national economy. Per capita income (Per capita income = total income of the nation for that year divided by the population) has soared from RM1,132 in 1970 to RM13,683 presently! (Incidently, this would work out to an average household income of RM5,534 per month.) However as the income distribution pyramid depicts, the distribution of income in Malaysia is skewed towards the rich, and there is still significant poverty in Malaysia. Perhaps the most incredulous aspect of Malaysia’s poverty statistics is that it hasn’t been challenged by the mainstream media nor by the academicians. Big Brother’s doublespeak (term used by Orwell in his book 1984) apparently rules supreme in Malaysia today!

Propaganda

Source: http://palestinian.ning.com/video/propaganda-promised-land

Gaza Seen From Paris - Three Simple Proposals

By JEAN BRICMONT and DIANA JOHNSTONE

January 8, 2009

Source: http://www.counterpunch.org/bricmont01082009.html

There are surely millions of us, invisible to each other, enraged and powerless as we watch the massacre of Gaza and listen to our media describe it as a "retaliation against terrorism", "Israel’s right to defend itself". We have reached a point where answering the Zionist arguments is both useless and unworthy of humanity. So long as it is recognized that the shells landing on Ashkelon are likely to have been fired by descendants of the inhabitants of that region who were driven out by the Zionists in 1948, talk of peace is a smoke screen for continued Israeli assault on the survivors of that great injustice.

What then is to be done? Yet another dialogue between "moderate" Arabs and "progressive" Israelis? An umpteenth "peace plan" to be ignored? A solemn declaration from the European Union?

All such mainstream gestures are mere distractions from the ongoing strangling of the Palestinian people. But more radical demands are just as futile. The call to create an international tribunal to judge Israeli war criminals, or for an effective intervention by the United Nations or the European Union will accomplish nothing. The real existing international tribunals reflect the relationship of forces in the world, and will never be used against the cherished allies of the United States. It is the relationship of forces itself that must be changed, and this can be done only gradually. It is true that Gaza is a dire emergency, but it is also true that nothing really effective can be done today to stop it, precisely because the patient political work that should have been done before still remains to be undertaken.

On the three modest proposals that follow, two are ideological and one is practical.

1. Get rid of the illusion that Israel is "useful" to the West.

Many people, especially on the left, persist in thinking that Israel is only a pawn in an American capitalist or imperialist strategy to control the Middle East. Nothing could be farther from the truth. Israel is of no use to anybody or anything but its own fantasies of domination. There is no petroleum in Israel, or Lebanon, or Golan, or Gaza. The so-called wars for oil, in 1991 and 2003, were waged by the United States, with no help from Israel, and in 1991 with the explicit demand from the United States that Israel stay out (because Israel’s participation would have undermined Washington’s Arab coalition). For the pro-Western petro-monarchies and the "moderate" Arab regimes, Israel’s ongoing occupation of Palestinian lands is a nightmare, which radicalizes much of their populations and threatens their rule. It is Israel, by its absurd policies, that provoked the creation of both Hezbollah and Hamas and that is indirectly responsible for much of the recent growth of "radical Islam".

Moreover, the plain fact is that capitalists as a whole make more money in peace than in war. It is enough to compare the profits made by Western capitalists in China or Vietnam since making peace with those countries, compared to the past, when "Red China" was isolated and the US waged war against Vietnam. The majority of capitalists could not care less which "people" must have Jerusalem as its "eternal capital", and if peace were achieved, they would hasten into the West Bank and Gaza to exploit a qualified work force with few other opportunities.

Finally, any American citizen concerned with the influence of his or her country in the world can see quite clearly that making enemies of a billion Muslims in order to satisfy every murderous whim of Israel is scarcely a rational investment in the future.

Those who consider themselves Marxists are among the first to see in Israel a simple emanation of such general phenomena as capitalism or imperialism (Marx himself was much more cautious on the matter of economic reductionism). But it does no service to the Palestinian people to maintain such fictions – in reality, like it or not, the capitalist system is far too robust to stake its survival on the Jewish occupation of the West Bank, and capitalism has been doing just fine in South Africa since the end of Apartheid.

2. Allow non-Jews to speak their mind about Israel

If support for Israel is not based on economic or strategic interests, why do the political class and the media passively accept whatever Israel does? Many ordinary people may feel unconcerned by what happens in a faraway country. But this does not apply to the West’s leading opinion makers, who never cease criticizing what is wrong with the policies of Venezuela, Cuba, Sudan, Iran, Hezbollah, Hamas, Syria, Islam, Serbia, Russia or China. Even unproved rumors and gross exaggerations are repeated with insistence. Only Israel must be treated with kid gloves.

One explanation offered for this special treatment is Western "guilt" for past anti-Semitic persecutions, in particular the horrors inflicted on Jews during the Second World War. It is sometimes pointed out that the Palestinians are in no way responsible for those horrors and should not have to pay the price for crimes committed by others. That is true, but what is almost never said and which is obvious nevertheless, is that the overwhelming majority of French people, Germans or Catholic priests today are just as innocent of what happened during the war as the Palestinians, for the simple reason that they were either born after the war or were children at the time. The notion of collective guilt was already very questionable in 1945, but the idea of transmitting that collective guilt to subsequent generations is quite simply a religious notion. Even if it is said that the Holocaust should not justify Israeli policy, it is striking that the populations who are supposed to feel guilty for what happened (the Germans, the French and the Catholics) are most reticent to speak out.

It is strange that at the very time the Catholic Church renounced the notion of Jews as the people who killed Christ, the notion of the almost universal guilt for killing the Jews began to take over. The discourse on universal guilt for the Holocaust is like religious discourse in general in the way it legitimizes hypocrisy, by shifting responsibility from the real to the imaginary (on the model of "original sin" itself). We are all supposed to feel guilty for crimes committed in the past about which, by definition, we can do nothing. But we need not feel guilty or responsible for crimes being committed right before our eyes by our Israeli or American allies, whom we can hope to influence.

The fact that we are not all guilty of the crimes of the Third Reich is simple and obvious, but needs to be driven home to allow non-Jews to speak up freely about Palestine. As it is, non-Jews who often feel they must leave it to Jews, as the only people who have the "right" to criticize Israel, to defend the Palestinians. But given the relationship of forces between the Jewish critics of Israel, and the influential Zionist organizations claiming to speak for the Jewish people, there is no realistic hope that Jewish voices alone can save the Palestinians.

However, the main reason for the silence is surely not guilt precisely because it is so artificial, but rather fear. Fear of "what will they think", fear of slander and even of being taken to court for "anti-Semitism". If you are not convinced, take a journalist, a politician or a publisher to some spot where nobody is listening and there is no hidden camera or microphone, and ask whether he or she says in public all he or she thinks of Israel in private. And if not, why? Fear of hurting the interests of capitalism? Fear of weakening American imperialism? Fear of interrupting oil deliveries? Or, on the contrary, fear of Zionist organizations and their relentless campaigns?

We have little doubt, after dozens of discussions with such people that the last answer given above is the correct one. People do not say what they think of what calls itself the "Jewish State" for fear of being called anti-Jewish and being identified with the anti-Semites of the past. This sentiment is all the stronger inasmuch as most people who are shocked by Israeli policy are genuinely horrified by what was done to the Jews during the Second World War and are sincerely outraged by anti-Semitism. If one stops to think about it, it is clear that if there existed today, as was the case before 1940, openly anti-Semitic political movements, they would not be so intimidated. But today, not even the French National Front says it is anti-Semitic and whoever criticizes Israel usually starts by denying being anti-Semitic. The fear of being accused of anti-Semitism is deeper than fear of the Zionist lobby, it is fear of losing the respectability that goes with condemnation of anti-Semitism and the Holocaust as the highest contemporary moral value.

It is imperative to free criticism of Israel from the fear of being falsely accused of "anti-Semitism". The threat of this accusation is an insidious form of moral blackmail that perhaps constitutes the only real potential source of a widespread revival of anti-Jewish resentment.

3. The practical initiatives are summed up in three letters : BDS- Boycott, disinvestment, sanctions

The demand for sanctions is taken up by most pro-Palestinian organizations, but since such measures are the prerogative of states, it is clear that this will not happen soon. Disinvestment measures can be taken by trade unions and churches, on the decision of their members. Other enterprises that collaborate closely with Israel will not change their policy unless they are under public pressure, that is, boycotts. This brings us to the controversial issue of boycotts, not only of Israeli products but also of Israel’s cultural and academic institutions.

This tactic was used against apartheid in South Africa in a very similar situation. Both apartheid and the dispossession of the Palestinians are a late heritage of European colonialism, whose practitioners have a hard time realizing that such forms of domination are no longer acceptable to the world in general and even to public opinion in the West. The racist ideologies underlying both projects are an outrage to the majority of humanity and gives rise to endless hatreds and conflicts. One might even say that Israel is another South Africa, plus exploitation of "the Holocaust" as an excuse.

Any boycott is apt to have innocent victims. In particular, it is said that boycotting Israeli academic institutions would unjustly punish intellectuals who are for peace. Perhaps, but Israel itself readily admits that there are innocent victims in Gaza, whose innocence in no way prevents them from being killed. We do not propose killing anyone. A boycott is a perfectly non-violent act by citizens. It is comparable to conscientious objection or civil disobedience in the face of unjust power. Israel flouts all UN resolutions and our own governments, far from taking measures to oblige Israel to comply, merely reinforce their ties with Israel. We have the right, as citizens, to demand that our own governments respect international law.

What is important about sanctions, especially on the cultural level, is their symbolic value. It is a way of telling our governments that we do not accept their policy of collaboration with a state that has chosen to become an international outlaw.

Some object to a boycott on the grounds that it is opposed by both some progressive Israelis and a certain number of "moderate" Palestinians (but not Palestinian civil society as a whole). But the main question for us is not what they say, but what foreign policy we want for our own countries. The Israeli-Arab conflict is far from being a mere local quarrel and has attained a worldwide significance. It involves the basic issue of respect for international law. A boycott should be defended as a means to protest to our governments in order to force them to change their policy. We have the right to want to be able to travel without shame in the rest of the world. That is reason enough to encourage a boycott.

(A french version of this text is in preparation).

Jean Bricmont teaches physics in Belgium and is a member of the Brussels Tribunal. His book, Humanitarian Imperialism, is published by Monthly Review Press. He can be reached at Jean.mailto:Jean.Bricmont@uclouvain.be.

Diana Johnstone is the author of Fools' Crusade: Yugoslavia, Nato, and Western Delusions published by Monthly Review Press. She can be reached at: diana.josto@yahoo.fr

Survey: Higher Education - The Economist

The brains business
Sep 8th 2005From The Economist print edition

Mass higher education is forcing universities to become more diverse, more global and much more competitive, says Adrian Wooldridge

Source: http://www.economist.com/specialreports/displayStory.cfm?story_id=4339960

FOR those of a certain age and educational background, it is hard to think of higher education without thinking of ancient institutions. Some universities are of a venerable age—the University of Bologna was founded in 1088, the University of Oxford in 1096—and many of them have a strong sense of tradition. The truly old ones make the most of their pedigrees, and those of a more recent vintage work hard to create an aura of antiquity.

And yet these tradition-loving (or -creating) institutions are currently enduring a thunderstorm of changes so fundamental that some say the very idea of the university is being challenged. Universities are experimenting with new ways of funding (most notably through student fees), forging partnerships with private companies and engaging in mergers and acquisitions. Such changes are tugging at the ivy's roots.

This is happening for four reasons. The first is the democratisation of higher education—“massification”, in the language of the educational profession. In the rich world, massification has been going on for some time. The proportion of adults with higher educational qualifications in the OECD countries almost doubled between 1975 and 2000, from 22% to 41%. But most of the rich countries are still struggling to digest this huge growth in numbers. And now massification is spreading to the developing world. China doubled its student population in the late 1990s, and India is trying to follow suit.

The second reason is the rise of the knowledge economy. The world is in the grips of a “soft revolution” in which knowledge is replacing physical resources as the main driver of economic growth. The OECD calculates that between 1985 and 1997 the contribution of knowledge-based industries to total value added increased from 51% to 59% in Germany and from 45% to 51% in Britain. The best companies are now devoting at least a third of their investment to knowledge-intensive intangibles such as R&D, licensing and marketing. Universities are among the most important engines of the knowledge economy. Not only do they produce the brain workers who man it, they also provide much of its backbone, from laboratories to libraries to computer networks.

The third factor is globalisation. The death of distance is transforming academia just as radically as it is transforming business. The number of people from OECD countries studying abroad has doubled over the past 20 years, to 1.9m; universities are opening campuses all around the world; and a growing number of countries are trying to turn higher education into an export industry.

The fourth is competition. Traditional universities are being forced to compete for students and research grants, and private companies are trying to break into a sector which they regard as “the new health care”. The World Bank calculates that global spending on higher education amounts to $300 billion a year, or 1% of global economic output. There are more than 80m students worldwide, and 3.5m people are employed to teach them or look after them.

Enemies of promise

All this sounds as though a golden age for universities has arrived. But inside academia, particularly in Europe, it does not feel like it. Academics complain about “the decline of the donnish dominion” (the title of a book by A.H. Halsey, a sociologist), and administrators are locked in bad-tempered exchanges with the politicians who fund them. What has gone wrong?
The biggest problem is the role of the state. If more and more governments are embracing massification, few of them are willing to draw the appropriate conclusion from their enthusiasm: that they should either provide the requisite funds (as the Scandinavian countries do) or allow universities to charge realistic fees. Many governments have tried to square the circle through tighter management, but management cannot make up for lack of resources.

So in all too much of the academic world, the writer Kingsley Amis's famous dictum that more means worse is coming to pass. Academic salaries are declining when measured against similar jobs elsewhere, and buildings and libraries are deteriorating. In mega-institutions such as the University of Rome (180,000 students), the National University of Mexico (200,000-plus), and Turkey's Anadolu University (530,000), individual attention to students is bound to take a back seat.

The innate conservatism of the academic profession does not help. The modern university was born in a very different world from the current one, a world where only a tiny minority of the population went into higher education, yet many academics have been reluctant to make any allowances for massification. Italian universities, for instance, still insist that all students undergo a viva voce examination by a full professor, lasting an average of about five minutes.

What, if anything, can be done? Techno-utopians believe that higher education is ripe for revolution. The university, they say, is a hopelessly antiquated institution, wedded to outdated practices such as tenure and lectures, and incapable of serving a new world of mass audiences and just-in-time information. “Thirty years from now the big university campuses will be relics,” says Peter Drucker, a veteran management guru. “I consider the American research university of the past 40 years to be a failure.” Fortunately, in his view, help is on the way in the form of internet tuition and for-profit universities.

Cultural conservatives, on the other hand, believe that the best way forward is backward. The two ruling principles of modern higher-education policy—democracy and utility—are “degradations of the academic dogma”, to borrow a phrase from the late Robert Nisbet, another sociologist. They think it is foolish to waste higher education on people who would rather study “Seinfeld” than Socrates, and disingenuous to confuse the pursuit of truth with the pursuit of profit.

The conservative argument falls at the first hurdle: practicality. Higher education is rapidly going the way of secondary education: it is becoming a universal aspiration. The techno-utopian position is superficially more attractive. The internet will surely influence teaching, and for-profit companies are bound to shake up a moribund marketplace. But there are limits.

A few years ago a report by Coopers & Lybrand crowed that online education could eliminate the two biggest costs from higher education: “The first is the need for bricks and mortar; traditional campuses are not necessary. The second is full-time faculty. [Online] learning involves only a small number of professors, but has the potential to reach a huge market of students.” That is nonsense. The human touch is much more vital to higher education than is high technology. Education is not just about transmitting a body of facts, which the internet does pretty well. It is about learning to argue and reason, which is best done in a community of scholars.

This survey will argue that the most significant development in higher education is the emergence of a super-league of global universities. This is revolutionary in the sense that these institutions regard the whole world as their stage, but also evolutionary in that they are still wedded to the ideal of a community of scholars who combine teaching with research.

The problem for policymakers is how to create a system of higher education that balances the twin demands of excellence and mass access, that makes room for global elite universities while also catering for large numbers of average students, that exploits the opportunities provided by new technology while also recognising that education requires a human touch.

As it happens, we already possess a successful model of how to organise higher education: America's. That country has almost a monopoly on the world's best universities (see table 1), but also provides access to higher education for the bulk of those who deserve it. The success of American higher education is not just a result of money (though that helps); it is the result of organisation. American universities are much less dependent on the state than are their competitors abroad. They derive their income from a wide variety of sources, from fee-paying students to nostalgic alumni, from hard-headed businessmen to generous philanthropists. And they come in a wide variety of shapes and sizes, from Princeton and Yale to Kalamazoo community college.

This survey will offer two pieces of advice for countries that are trying to create successful higher-education systems, be they newcomers such as India and China or failed old hands such as Germany and Italy. First: diversify your sources of income. The bargain with the state has turned out to be a pact with the devil. Second: let a thousand academic flowers bloom. Universities, including for-profit ones, should have to compete for customers. A sophisticated economy needs a wide variety of universities pursuing a wide variety of missions. These two principles reinforce each other: the more that the state's role contracts, the more educational variety will flourish.

Gaza

Pictures that say a thousand words....

Living on Borrowed Time in a Stolen Land

Source:http://www.informationclearinghouse.info/article21635.htm

By Gilad AtzmonJanuary 04, 2009 "Information Clearinghouse" --

Communicating with Israelis may leave one bewildered. Even now when the Israeli Air Force is practicing murder in broad daylight of hundreds of civilians, elderly persons, women and children, the Israeli people manage to convince themselves that they are the real victims in this violent saga.

Those who are familiar intimately with Israeli people realise that they are completely uninformed about the roots of the conflict that dominates their lives. Rather often Israelis manage to come up with some bizarre arguments that may make a lot of sense within the Israeli discourse, yet make no sense whatsoever outside of the Jewish street. Such an argument goes as follows: ‘those Palestinians, why do they insist upon living on our land (Israel), why can’t they just settle in Egypt, Syria, Lebanon or any other Arab country?’ Another Hebraic pearl of wisdom sounds like this: ‘what is wrong with these Palestinians? We gave them water, electricity, education and all they do is try to throw us to the sea’.

Astonishingly enough, the Israelis even within the so-called ‘left’ and even the educated ‘left’ fail to understand who the Palestinians are, where they come from and what they stand for. They fail to grasp that for the Palestinians, Palestine is home. Miraculously, the Israelis manage to fail to grasp that Israel had been erected at the expense of the Palestinian people, on Palestinian land, on Palestinian villages, towns, fields and orchards. The Israelis do not realise that Palestinians in Gaza and in refugee camps in the region are actually dispossessed people from Ber Shive, Yafo, Tel Kabir, Shekh Munis, Lod, Haifa, Jerusalem and many more towns and villages. If you wonder how come the Israelis don’t know their history, the answer is pretty simple, they have never been told. The circumstances that led to the Israeli Palestinian conflict are well hidden within their culture. Traces of pre-1948 Palestinian civilisation on the land had been wiped out. Not only the Nakba, the 1948 ethnic cleansing of the indigenous Palestinians, is not part of the Israeli curriculum, it is not even mentioned or discussed in any Israeli official or academic forum.

In the very centre of almost every Israeli town one can a find a 1948 memorial statue displaying a very bizarre, almost abstract, pipe work. The plumbing feature is called Davidka and it is actually a 1948 Israeli mortar cannon. Interestingly enough, the Davidka was an extremely ineffective weapon. Its shells wouldn’t reach more than 300 meters and would cause very limited damage. Though the Davidika would cause just minimal harm, it produced a lot of noise. According to the Israeli official historical narrative, the Arabs i.e., Palestinians, simply ran away for their lives once they heard the Davidka from afar. According to the Israeli narrative, the Jews i.e., ‘new Israelis’ did a bit of fireworks and the ‘Arab cowards’ just ran off like idiots. In the Israeli official narrative there is no mention of the many orchestrated massacres conducted by the young IDF and the paramilitary units that preceded it. There is no mention also of the racist laws that stop Palestinians[1][1] from returning to their homes and lands.

The meaning of the above is pretty simple. Israelis are totally unfamiliar with the Palestinian cause. Hence, they can only interpret the Palestinian struggle as a murderous irrational lunacy. Within the Israeli Judeo- centric solipsistic universe, the Israeli is an innocent victim and the Palestinian is no less than a savage murderer.

This grave situation that leaves the Israeli in the dark regarding his past demolishes any possibility of future reconciliation. Since the Israeli lacks the minimal comprehension of the conflict, he cannot contemplate any possible resolution except extermination or cleansing of the ‘enemy’. All the Israeli is entitled to know are various phantasmic narratives of Jewish suffering. Palestinian pain is completely foreign to his ears. ‘Palestinian right of return’ sounds to him like an amusing idea. Even the most advanced ‘Israeli humanists’ are not ready to share the land with its indigenous inhabitants. This doesn’t leave the Palestinians with many options but to liberate themselves against all odds. Clearly, there is no partner for peace on the Israel side.

This week we all learned more about the ballistic capability of Hamas. Evidently, Hamas was rather restrained with Israel for more than a long while. It refrained from escalating the conflict to the whole of southern Israel. It occurred to me that the barrages of Qassams that have been landing sporadically on Sderot and Ashkelon were actually nothing but a message from the imprisoned Palestinians. First it was a message to the stolen land, homes fields and orchards: ‘Our beloved soil, we didn’t forget, we are still here fighting for you, sooner rather than later, we will come back, we will start again where we had stopped’. But it was also a clear message to the Israelis. ‘You out there, in Sderot, Beer Sheva, Ashkelon, Ashdod, Tel Aviv and Haifa, whether you realise it or not, you are actually living on our stolen land. You better start to pack because your time is running out, you have exhausted our patience. We, the Palestinian people, have nothing to lose anymore’.

Let’s face it, realistically the situation in Israel is rather grave. Two years ago it was Hezbollah rockets that pounded northern Israel. This week the Hamas proved beyond doubt that it is capable of serving the South of Israel with some cocktail of ballistic vengeance. Both in the case of the Hezbollah and the case of the Hamas, Israel was left with no military answer. It can no doubt kill civilians but it fails to stop the rocket barrage. The IDF lacks the means of protecting Israel unless covering Israel with a solid concrete roof is a viable solution. At the end of the day, they might be planning just that (link).

But this is far from the end of the story. In fact it is just the beginning. Every Middle East expert knows that Hamas can seize control of the West Bank within hours. In fact, PA and Fatah control in the West Bank is maintained by the IDF. Once Hamas takes the West Bank, the biggest Israeli population centre will be left to the mercy of Hamas. For those who fail to see, this would be the end of Jewish Israel. It may happen later today, it may happen in three months or in five years, it isn’t matter of ‘if’ but rather matter of ‘when’. By that time, the whole of Israel will be within firing range of Hamas and Hezbollah, Israeli society will collapse, its economy will be ruined. The price of a detached villa in Northern Tel Aviv would equal a shed in Kiryat Shmone or Sderot. By the time a single rocket hits Tel Aviv, the Zionist dream will be over.

The IDF generals know it, the Israeli leaders know it. This is why they stepped up the war against the Palestinian into extermination. The Israelis do not plan upon invading Gaza. They have lost nothing there. All they want is to finish the Nakba. They drop bombs on Palestinians in order to wipe them out. They want the Palestinians out of the region. It is obviously not going to work, Palestinians will stay. Not only they will they stay, their day of return to their land is coming closer as Israel has been exploiting its deadliest tactics.

This is exactly where Israeli escapism comes into play. Israel has passed the ‘point of no return’. Its doomed fate is deeply engraved in each bomb it drops on Palestinian civilians. There is nothing Israel can do to save itself. There is no exit strategy. It can’t negotiate its way out because neither the Israelis nor their leadership understand the elementary parameters involved in the conflict. Israel lacks the military power to conclude the battle. It may manage to kill Palestinian grassroots leaders, it has been doing it for years, yet Palestinian resistance and persistence is growing fierce rather than weakening. As an IDF intelligence general predicted already at the first Intifada. ‘In order to win, all Palestinians have to do is to survive’. They survive and they are indeed winning.

Israeli leaders understand it all. Israel has already tried everything, unilateral withdrawal, starvation and now extermination. It thought to evade the demographic danger by shrinking into an intimate cosy Jewish ghetto. Nothing worked. It is Palestinian persistence in the shape of Hamas politics that defines the future of the region.

All that is left to Israelis is to cling to their blindness and escapism to evade their devastating grave fate that has become immanent already. All along their way down, the Israelis will sing their familiar various victim anthems. Being imbued in a self-centred supremacist reality, they will be utterly involved in their own pain yet completely blind to the pain they inflict on others. Uniquely enough, the Israelis are operating as a unified collective when dropping bombs on others, yet, once being slightly hurt, they all manage to become monads of vulnerable innocence. It is this discrepancy between the self-image and the way they are seen by the rest of us which turns the Israeli into a monstrous exterminator. It is this discrepancy that stops Israelis from grasping their own history, it is that discrepancy that stops them from comprehending the repeated numerous attempts to destroy their State. It is that discrepancy that stops Israelis from understanding the meaning of the Shoah so can they prevent the next one. It is this discrepancy that stops Israelis from being part of humanity.

Once again Jews will have to wander into an unknown fate. To a certain extent, I myself have started my journey a while ago.

[1][1] Jews only law of return- http://www.mfa.gov.il/MFA/MFAArchive/1950_1959/Law of Return 5710-1950

read more- http://www.australiansforpalestine.com/press_room/briefing/papers/BriefingPaperNo35_17Aug07_TheLawofReturncopy.pdf

Rumah

Rumah ini telah tiada. Namun gambarnya, alhamdulillah, masih ada. Gambar rumah ini mengingatkan aku seribu satu kenangan....

Brilliant young economists

Emerging economists
International bright young things
Dec 30th 2008

From The Economist print edition

The next generation of economists do their best work somewhere between the field clinic and the dissection room

Illustration by Otto Dettmer

TWENTY years ago The Economist wrote about eight young economists who were making a big splash in their discipline and beyond. One of them, Paul Krugman, recently won the Nobel prize for his models of international trade and economic geography. Ten years later we tried to repeat the trick, identifying another eight young stars, many of whom were taking their discipline far off-piste. One has since achieved even greater fame than anticipated. Steven Levitt of the University of Chicago became a household name as co-author of “Freakonomics”, a bestselling book published in 2005.

“Freakonomics” owed its origins to a profile of Mr Levitt in the New York Times magazine in 2003. Its success has won a new readership for economists, beyond the business section and the opinion columns, in the glossier pages of the weekend supplements. The best young economists, as a consequence, have already attracted plenty of attention. That leaves us in a bit of a quandary. We feel like lonely prospectors, who, returning to a favourite stream, find it overtaken by a gold rush.

Undeterred, we have given the prospecting pan another shake. We asked leading authorities in the discipline to name the best young economists in the world. Between them, they proposed over 50 researchers, but several names recurred on many lists. We have sifted the 50 down to eight, all of whom received their PhDs in the past ten years.

The family tree

Several of the scholars in this year’s batch trace their intellectual ancestry back to those we picked ten years ago. For example, Jesse Shapiro of the University of Chicago and Roland Fryer of Harvard are recognisably the intellectual heirs of Mr Levitt. They share the same knack for finding ingenious ways to answer unlikely questions, often by plundering forgotten troves of data.

At just 29, Mr Shapiro can already boast a collection of eye-catching findings worthy of a sequel to “Freakonomics”. He has shown that some judgments are best made without too much information: people are better at predicting the winner of American gubernatorial elections when they watch the candidates with the sound turned off. Harsher jail conditions do nothing to deter prisoners from reoffending. If anything they encourage recidivism. Preschoolers who watch television do better academically than children who don’t, especially if their parents have little education or poor English.

Mr Fryer’s ambition is to unravel the causes of black underachievement in America, especially in education. His search for explanations extends beyond racism and poverty to contemplate the role of a self-defeating culture. He calculates that a black student who earns straight A grades will have 1.5 fewer friends from his ethnic group than an equally swotty white student.

Michael Kremer, another of those we cited ten years ago, can also claim an intellectual relative in this year’s cohort. Esther Duflo of the Massachusetts Institute of Technology (MIT) received more recommendations than any other economist. Some who didn’t nominate her thought she was too established to count as “new”.

With her colleague, Abhijit Banerjee, Ms Duflo and Mr Kremer have remade development economics, nudging it away from its concern with policies, towards a preoccupation with projects. They study economic development as seen from the field, clinic or school, rather than the finance ministry. They might be called the “peace corps” of economists, bringing the blessing of their investigative technique to the neglected villages of India or the denuded farms of western Kenya.

Ms Duflo has made her name carrying out randomised trials of development projects, such as fertiliser subsidies and school recruitment. In these trials, people are randomly assigned to a “treatment” group, which benefits from the project, and a “control” group, which does not. By comparing the average outcome of each group, she can establish whether the project worked and precisely how well.

In one study, Ms Duflo and her colleagues showed that mothers in the Indian state of Rajasthan are three times as likely to have their children vaccinated if they are rewarded with a kilogram of daal (lentils) at the immunisation camp. The result is useful to aid workers, but puzzling to economists: why should such a modest incentive (worth less than 50 cents) make such a big difference? Immunisation can save a child’s life; a bag of lentils should not sway the mother’s decision either way.

Randomised trials “give you the chance to be surprised”, Ms Duflo says. Had they arrived at this result using some other method, she and her colleagues would have assumed they had made a mistake. But randomisation removes such doubts, showing that it was indeed the lentils that made the difference. The result cannot be dismissed; it must be explained.

The approach has its critics. A randomised trial can prove that a remedy works, without necessarily showing why. It may not do much to illuminate the mechanism between the lever the experimenters pull and the results they measure. This makes it harder to predict how other people would respond to the remedy or how the same people would respond to an alternative. And even if the trial works on average, that does not mean it will work for any particular individual.

The randomistas, as Ms Duflo and her comrades are called, liken their studies to the clinical trials that prove the efficacy of new drugs. But the ultimate ambition of economics is for something more akin to anatomy. Researchers hope to dissect the underlying physiology of an economic problem, revealing how the leg bone is connected to the thigh bone. With a full anatomy of behaviour—what economists call a structural model—they can determine if a policy or project will work even before it has been attempted.

The early anatomists of the human body suffered from a shortage of fresh cadavers to work on. Medical students would trek long distances to watch a dissection performed. Economists often find themselves in a similar predicament. Short of good empirical meat, they have to rely on elaborate theory and guesswork to fill in what they cannot observe.

Amy Finkelstein, also of MIT, the fourth of our young stars, has anatomised the market for annuities in Britain. The industry suffers from “asymmetric information”: customers may know more than the provider about their chances of dying. Unfortunately, this private information is as hidden from economists as it is from the annuity company. Ms Finkelstein and a colleague, James Poterba, have shown how to infer the cost of this unseen problem from what can be observed, namely the kind of annuities people choose and the length of their life after retirement.

Like Ms Finkelstein, Raj Chetty, recently hired by Harvard from the University of California, Berkeley, is a promising young “public economist”: a student of tax and spend. He has great respect for structural models. But in a recent paper he makes the case for judicious short cuts. Often you don’t need to dissect a whole body; a few choice incisions are enough.

For example, he wanted to know whether policymakers should raise unemployment benefits. To answer this question, a structural model would need to specify how much a dollar is worth to a person on the dole, as compared with someone in work. It would also need to quantify the burden a job hunt imposes. This isn’t easy to find out. But Mr Chetty argues it is unnecessary.

He gleans all the information he needs by looking at the time it takes unemployed people to find a new job. Unsurprisingly, they take longer when their benefits are more generous. This is usually attributed to “moral hazard”—people take less care to escape a danger, such as joblessness, if they are insured against it. But Mr Chetty shows that skewed incentives account for only 40% of the delay.

The rest is due to what he calls a “liquidity effect”. The unemployed typically have few liquid assets to fall back on and little chance of a loan from the bank. This forces them to rush their job search. If they had savings to dip into or credit to tap, they might search with greater deliberation. This kind of dallying is, in a sense, optimal. The unemployed decide that an unhurried job search is worth the extra cost of depleted savings or heavier loan repayments.
Higher benefits ease this liquidity problem. Raising benefits by $1 a week would do as much social good as raising American GDP by $290m, Mr Chetty calculates, although government loans to the unemployed might do better still.

Twenty years ago macroeconomists dominated our list of the best young thinkers, but they are under-represented in this year’s batch. We found plenty of agreement about the three or four young macro thinkers most likely to succeed, but surprisingly little confidence that they would. One leader in the field suspected their work represented a moment of beauty, not truth. Another complained that the youngsters lacked the “vision thing” that distinguished the greats of the past.

Ramsey revisited

If so, perhaps they can blame the times that produced them. They came of age during the Great Moderation, a period of macroeconomic tranquillity and intellectual consensus. They are in thrall not to John Maynard Keynes, sage of the Depression, but to his Cambridge contemporary, Frank Ramsey, a precocious polymath who made his contributions in the prelapsarian 1920s. Ramsey was interested in how much of its income a nation should save so as to maximise its prosperity now and in the future. His work underpins much of modern macroeconomics, in which agents act today with an eye on tomorrow. But the framework is best suited to analysing steady accumulation, not violent cycles of speculation and liquidation. So it is not the obvious place to start to explain the world economy’s present predicament.

The macroeconomist nominated most often for our list was Iván Werning of MIT. Mr Werning is an economist’s economist; an elegant theorist, whose early contributions provided streamlined proofs that other thinkers could make use of. One of Mr Werning’s ambitions is to unite Ramsey’s work with that of another elegant theorist, Sir James Mirrlees. Sir James won the Nobel prize in 1996 for exploring how best to set taxes when people can disguise their true worth from the revenue collector. Mr Werning asks the same question, but in the forward-looking, macroeconomic setting provided by Ramsey.

Mr Werning and his co-authors have so far derived at least two theoretical results of note. The first is to show that the unemployed have sufficient incentive to find work, even if they receive unemployment benefits indefinitely. The second is that bequests from one generation to the next should be subsidised by the government, with smaller inheritances receiving higher rates of subsidy. Mr Werning and his co-author, Emmanuel Farhi (a young Harvard macroeconomist), point out that the biggest roll of the dice in life is the family you are born into. Their system of subsidies would take the edge off this uncertainty.

Two of the economists we highlighted ten years ago—David Laibson of Harvard and Matthew Rabin of Berkeley—were exponents of “behavioural economics”, incorporating the insights of psychology into the dismal science. The sub-discipline has continued to flourish in the decade since, seeping so far into the mainstream that its disciples no longer constitute a self-contained school. The randomistas, for example, often invoke behavioural explanations for their experimental results.

Xavier Gabaix of New York University, our seventh pick, is another example of someone who is au fait with behavioural economics but not defined by it. He has written papers with Mr Laibson, including one that explains why hotels can get away with overpricing the mini-bar. But his interests extend beyond the behavioural.

He has, for example, shown a fascination with “power laws”: tantalising statistical patterns that seem to crop up wherever you look hard enough. The size of cities, the pay of executives and the performance of the stockmarket all seem to follow such laws. For cities, the law can be crudely expressed as the “rank-size rule”. The second-biggest city will have roughly half the population of the biggest; the population of the third-ranked city will be one-third of the first’s, and so on. The relationship between executive pay and company size also obeys a power law: companies twice the size tend to pay their chief executives roughly 25% more.

These curious regularities have more than numerological appeal. They give clues about what can and cannot explain the size and growth of the things they describe. For example, the rank-size rule could not hold if small cities grew systematically faster than big ones, or vice versa. The power law of executive pay also requires a particular kind of economics to explain it. Mr Gabaix thinks the “economics of superstars”, invented by Sherwin Rosen, fits the bill.

Top executives may differ only slightly in their talents, just as sports champions differ only slightly from runners-up. But the better managers nonetheless get hired by the bigger firms, just as the best entertainers sing to the largest audience. This means an executive’s small edge in managerial skill is amplified, because his talents go to work on a bigger canvas. Mr Gabaix made a splash in 2006 when he concluded that the “excessive” pay of chief executives was not necessarily excessive. Compensation may have grown sixfold from 1980 to 2003 not because managers were six times greedier, but because the firms they ran were six times bigger.

If the size of firms obeys a power law, economies will comprise some very big firms and a long tail of small ones. The fortunes of the biggest companies might then stir the whole economy, Mr Gabaix conjectures. The $24 billion dividend paid by Microsoft in December 2004, for example, added 3% to America’s personal income that month. Mr Gabaix calls for a more “granular” approach to macroeconomics, which would weigh the contribution of big firms to national aggregates.

This granular view is already taking hold in studies of international trade. Countries, after all, do not trade with each other; companies do. A few firms usually account for the lion’s share of a country’s exports: in America, the top 10% of exporters account for 96% of the country’s foreign sales, and only 4% of firms export at all.

These observations (drawn from work by Andrew Bernard of Dartmouth College among others) demand a theory to explain them. That gap has been filled by Marc Melitz, a trade economist at Princeton University and our final new star.

Mr Melitz is a pioneer of the “new, new trade theory”, which succeeds the “new” trade theory propounded by Mr Krugman almost 30 years ago. The source of its novelty is its recognition that firms differ, and only the best firms export. In America, for example, exporting factories are more than twice as big as plants that do not sell beyond their shores, and they squeeze 14% more out of their workers.

In Mr Melitz’s theory firms first prove themselves at home, discovering their own limits and abilities. Only the best then venture overseas. Entering a foreign market is an expensive endeavour, he points out, even before firms encounter the tariffs or transport costs that preoccupy most trade models. An exporter must find and introduce itself to distant customers, comply with alien regulations and set up distribution channels abroad. One study found that it cost Colombian chemical factories over $1m to enter a foreign market.

The gains from trade also differ in Mr Melitz’s model. In the new trade theory that preceded it, international commerce raises the productivity of firms by enlarging their market, allowing them to reap economies of scale. In Mr Melitz’s model, trade raises the productivity of industries, not by allowing firms to grow bigger, but by giving the better firms a bigger share of the market. Foreign competition sifts and sorts firms, winnowing out the weakest firms and leaving a greater share of the market to their stronger rivals.

Just as Mr Krugman found a clean way to account for economies of scale, Mr Melitz handles the heterogeneity of firms without spoiling the lines of his model. It now serves as a pliant workhorse for lots of “granular” thinking in the field.

Bodice rippers

Over 60 years ago Paul Samuelson laid down “the foundations of economic analysis” in his seminal work of that name. In the introduction, he describes his dawning realisation of the underlying unity of the subject. As he laboured in each field—consumer behaviour, public finance, international trade, business cycles—he encountered similar problems, which yielded to the same set of mathematical techniques. Mr Samuelson’s book squeezed a shapeless body of economic knowledge into a tight corset.

In the decades since, the laces have been unpicked. It is not just that economists are nosing into new fields of social behaviour. They have been doing that at least since Gary Becker of the University of Chicago wrote about crime and the family in the 1960s and 1970s. But today’s economists show no great attachment to the rational model of behaviour that guided Mr Becker. Economic theory has become so eclectic that ingenious researchers can usually cook up a plausible model to explain whatever empirical results they find interesting. Economics is now defined neither by its subject matter nor by its method.

What, then, unites these eight young stars and the discipline they may come to dominate? Economists still share a taste for the Greek alphabet: they like to provide formal, algebraic accounts of the behaviour they explain. And they pride themselves on the sophistication of their investigative methods. They are usually better at teasing confessions out of data than their rivals in other social sciences. What defines economics? Economics is what economists do—the best of them, anyway.

Source: http://www.economist.com/displaystory.cfm?story_id=12851150

The Meaning of Economic Development

“From Seers to Sen: The Meaning of Economic Development”

E. Wayne Nafziger

How has the meaning of economic development changed during the twenty years of WIDER’s existence? Two markers are Dudley Seers, “The Meaning of Development” (1967, 1979), for the earlier period and Amartya Sen, Development as Freedom (1999), for the later. Here the meaning of development also encompasses measures and strategies of development and approaches to its study. Moreover, I examine works beyond these markers to provide more detail of the two men’s views.

Both men were critical of the development literature of their times. For Seers, neoclassical economics had a flawed paradigm and dependency theory a lack of policy realism. After the fall of state socialism in 1989-1991, the ideological struggles among economists diminished. Neoclassicism’s Washington Consensus of the World Bank, IMF, and the U.S. government reigned (Williamson 1993, pp. 1329-1336; 1994, pp. 26-28). Sen did not focus on ideological issues but, according to the Nobel prize committee, “restored an ethical dimension to the discussion of economic problems” such as development.

According to Seers (1979) the purpose of development is to reduce poverty, inequality, and unemployment. For Sen (1999), development involves reducing deprivation or broadening choice. Deprivation represents a multidimensional view of poverty that includes hunger, illiteracy, illness and poor health, powerlessness, voicelessness, insecurity, humiliation, and a lack of access to basic infrastructure (Narayan et al. 2000, pp. 4-5).

Read the rest of the article here:

http://www.rrojasdatabank.info/widerconf/Nafziger.pdf

The Meaning of Development

The meaning of development: the example of Mafia Island

Lecture given by Professor Pat Caplan, Goldsmiths College, University of London
At the New Lizu Hotel, Kilindoni, Mafia Island, 11th August 1994
For CHAMAMA (Changio cha Maendeleo ya Mafia)


Introduction

It is a great honour to be asked to address such a distinguished gathering of Mafia people and I thank you in advance for coming to listen to me tonight. I feel very diffident about speaking to you on the subject of Mafia's development since I am not a Tanzanian. However, many people in Mafia have been kind enough to call me 'mwenyeji', and to treat me as an honorary Mafian, and for my part, I do feel that Mafia is my second home, which contains my adopted mothers and fathers, brothers and sisters and children, and now grandchildren. In the 28 years I have been coming to Mafia, since I first arrived in 1965, I have learned many things, and people here have been glad to teach me. But there are still many things I do not know, so you will forgive any shortcomings in what I have to say tonight. Also my experience had been mainly in the north of the island - I have spent much less time in the south.

What is the meaning of development?

I do not think that we can measure development by the number of big hotels, by how many bottles of Coca Cola and Pepsi-Cola are consumed, or how many cars are owned by rich people. Development, real progress, means the following:

• Health and well being of all
• Education for all
• Fair rewards for labour
• Improvement not only of the standard of living but the quality of life.

How do we achieve development?

• we need to take account of local conditions, we cannot assume that what is right in one place will work somewhere else
• we need to respect and use local knowledge - people who live in an area are the real experts on that place.
• we need to listen to what local people say and what they think their needs are.

In short, development begins from below, it cannot be imposed from above. That is not to say that we cannot use outside help, expertise, technology. Of course we can. But we must not adopt it blindly, we must think carefully about what will work, what is right in this place, at this time, for these people.

Who is development for?

In some countries of the south of the Third World, development is said to be taking place. There you can see big buildings in the cities - banks, factories, hotels. (India would be a good example here.) Yet the people in the countryside mostly remain poor. The ones who grow the food do not have enough to eat themselves. That is not real development, it is development for some and not for others.

Since independence Tanzania has tried to avoid such mistakes, and I hope that it will continue to try and do so. Otherwise it will end up as a country of two nations - a small number of rich people and a large number of poor people. One of the most important things to note about Tanzania is that since independence, it has enjoyed peace and stability which is rare in Africa today. There is no religious conflict, there is no tribalism, there has been no civil war, or war with neighbours. When we look at the rest of Africa we can see that this is a great blessing: Somalia, Angola, Mozambique, Liberia, Sudan, Burundi and now the terrible events in Rwanda should make us all aware that peace is a great blessing.

Development: Improvements over last 30 years

Each time that I come to Mafia, people ask me what changes I see and what developments, if
any, have taken place. Many say "there has been no development since independence". That is not true. I want to begin on a positive note, so let me first of all say what improvements I have noticed between the 1960s and the 1990s:

a) Education:

When I came in 1965, there were very few primary schools on the island, and they usually had only 4 standards. The very few children who went on to standards 5 and beyond had to go to the mainland. Furthermore, not all children went to school, and of those who did, it was mostly the boys.

Over the next decade, there was a big improvement; by the time of my next visit in 1976 virtually all children were in school, including girls. There were more primary schools, and some had expanded beyond standard 4. (In Kanga village , for example, there was by this time a 6 standard school for Kanga and Bweni). But even by 1985, when I returned for the third time, hardly any children were getting to secondary school, and again, for those who passed, there was the necessity to leave the island. On this fourth visit, I am very happy to find not only more primary schools (for example, Kanga and Bweni now each have their own school), but also Mafia's very first secondary school, and I want to congratulate all those whose hard work made this possible.

b) Health

At the time of my first visit in 1965, there were a few village dispensaries and a small hospital in Kilindoni. The village dispensers had only minimal training. By 1976, midwives had begun to be sent to the villages, and by 1985, MCH clinics had been set up along Rural Medical centres. Today, the number of rural medical centres has increased - Bweni, for example, will soon open its own, instead of Bweni people having to come 5 miles to Kanga for treatment. Furthermore, the staff are better trained: in Kanga today, the paramedic even knows dental extraction. There are also more staff: Kanga centre now has 4 people: paramedic, nurse, midwife and a mama afya.

Virtually all children now get immunized against tuberculosis, polio, measles, diphtheria, whooping cough and tetanus. The growth of children is monitored with cards. pregnant women get immunised and receive iron and folic acid tablets. They can have their babies in the health centres and receive skilled help. All of these are important improvements in the health of everyone, including small children and pregnant women.

c) Water

When I came in 1965, Mafia was in the middle of one of its periodic droughts. In Kanga village, water was very scarce - people often had to go long distances for water. I can even remember carrying water from Kirongwe by Land Rover on one occasion. The wells were in a poor state - unlined and not deep enough. Since that time, the water supply has improved, with better wells. This is very important for two reasons: clean water is vital to health and the availability of a nearby water supply helps lessen women's work load.

The limitations of these developments

No one will want to claim that the situation with regard to education and health is now perfect; the schools are often under-equipped, they may not have enough teachers, books desks or other facilities. Furthermore, although having a secondary school on the island is very good, it is expensive for parents to send their children there, especially if they are living far away and the children have to rent accommodation, pay for their food etc. So not all children who pass the entrance examination will succeed in going to the secondary school.

As far a health is concerned, there are problems in the implementation of the programme: the drug supply is insufficient, the immunization programme sometimes has to stop because of lack of vaccines, or kerosene for the fridge in which it is necessary to keep them. Not everyone is near to a Rural Medical Centre, and people sometimes have to walk long distances to get there. Staff have to leave their work each month in order to go and collect their wages from the District Capital.

Some of these factors are difficult to control locally: the supply of drugs depends for example on what is sent by the government, so does the supply of teachers, school books and equipment. But as has been shown by he opening of the secondary school, citizens can make the government at various levels aware of their needs by pressing for them, and also seek ways in which problems can be solved, perhaps by raising some of the cost themselves.

Problems of development in Mafia and beyond

In other respects, however, it is true that there has been little development on Mafia. Indeed in many ways people are poorer now than they were in the 1960s. Why is this the case? In order to understand this situation, we need to look at different levels:

- the world economy
- the national economy
- the district and region
- the village
- the household

I will look at each of these in turn, but it must be clearly understood that they are inter-related very closely - what happens at one level affects the others.

a) The world economy

Tanzania, even Mafia Island, is part of the world economy. Tanzania imports goods from abroad and exports goods such as tea, coffee, sisal, coconut oil and so on. But the world economy at the moment is in recession. Even in the developed countries, the economies are in poor shape and there is very high unemployment. Nonetheless, the way in which the world economy is organised means that the powerful developed nations, such as the USA, the European countries and Japan, can set the terms of trade with the developing countries of the Asia, Latin America and Africa. This means two things: they can set the prices which they will pay for commodities which Tanzania exports and they also set prices for their own goods. Over the last 20 or so years, the price of goods which Tanzania imports - oil, spare parts, machinery - has been increasing, while the price which Tanzania receives for its exports has been declining. In other words, even to purchase one tractor in the 1990s, Tanzania may need to export twice or three times as much coffee or tea as it did in the 1980s. Furthermore, the developed countries of the North may set tariff barriers on goods coming from the South, which makes exporting even more difficult.

b) The Tanzanian economy

As a result of these and other factors, Tanzania has been forced into a situation where it has had to borrow large amounts of money, especially from the International Monetary Fund. Such money has to be repaid, and it also carries interest. Tanzania is not alone in this: most sub-Saharan African countries now have heavy debts and are paying each year more in interest payments than they are receiving in either loans or aid. Such a heavy load of debt seriously blocks development. Furthermore Tanzania has had conditions imposed upon its loan by the IMF:

- devaluation of currency (making imports more expensive)
- wage freeze (in spite of inflation) lowering the standard of living for workers.
- abolition of price controls (which has meant prices have risen a great deal)
- increase in interest rates (making local loans more expensive)
- removal of import controls (allowing more goods to be brought in from outside)
- cuts in government expenditure (which means less money for social services such as health and education)

c) The District Economy

What has been the effect of this at the District level, that is, for the Island of Mafia?

- more goods are available now, but they are very expensive- wages, for those who have paid jobs, have not increased in line with inflation.
- food prices have gone up a lot
- health and education budgets have neither kept pace with increasing population nor with local needs, indeed, in real terms they have been cut.
- people are having to pay fees to send their children to school, and soon they will be asked to pay for medical services and drugs.

The majority of people on Mafia are small farmers and they depend upon two things: their own subsistence cultivation to grow rice, cassava, sweet potatoes etc. - and cash crops particularly coconuts and, in the south, cashewnuts. If the price paid to producers of cash crops increases in line with inflation then they will not find price increases of goods they need to purchase so difficult. But the reality, at least as far as coconuts is concerned, is that prices have not only failed to increase, they have actually halved in the Dar es Salaam markets since last year. Currently, those exporting coconuts from the island to Dar, by the time they have paid their transport expenses, barely cover their costs; they do not get any profit. But there are other local factors which inhibit the development of the economy on Mafia. Some of these at the village and household level l will discus in a moment but let us first look at the District as a whole.

i) infrastructure

The infrastructure is very poor - there are only two main roads, and both of these are in an appalling condition. As a result, transport is a major problem, vehicles quickly deteriorate, passengers are left stranded. Furthermore, transport to the mainland is not easy. People travel by mashua, which is not only risky, but uncomfortable and dependent upon tides and winds.

The plane service is too expensive for most people and is often delayed or cancelled. In any case, there are rarely enough seats for all those who want to go. I am told that there was a steamer service running for some time but that this is no longer the case. So Mafia is in many ways cut off from the mainland, and the difficulties faced by other parts of Tanzania are exacerbated by the fact of Mafia being an island. Communication with the rest of Tanzania is difficult, and slow. Even within the island, the main means of transport is by walking. Vehicles frequently break down and getting spares is difficult, slow and expensive. Government officials and workers find it difficult to travel round the island and keep in touch with people.

ii) Power

There is no form of power supply - except in Kilindoni and Utende. The main source of power is human labour, about which I will talk more in a moment. Even machinery which is operated without engines - bicycles for example - are in short supply and too expensive for most, and machinery to assist in cultivation is rarely available, whether this be complex machinery such as tractors, or simple machinery such as wheelbarrows, carts, handbills.

iii) Technology

The Ievel of technology for cultivation is very low, with the main tools being the small handhoe (jembe) and the mundu and the panga. Most agriculture is thus very labour-intensive, that is, it requires hours of backbreaking work for quite small returns. Little use is made of fertiliser or irrigation, and there is a heavy dependence upon rainfall. Since records began to be kept earlier this century Mafia has not been self-sufficient in food.

iv) Markets

The market for the main cash crops is far away: people have to export their nuts to DSM, which is done on a more or less individual basis.

Adaptation and survival techniques on Mafia

Yet people manage somehow to survive. They are prepared to walk long distances, whether to see their relatives, attend ceremonies (mashughuli), go to court, to government offices, to the District hospital and so on. They use ngalawa, mashua and majahazi to get to the mainland. Some villages have collectively purchased vehicles, even tractors. Many people work hard, using their own strength, to grow both food and cash crops. Indeed, as I shall go on to discuss in a moment, some of them work far too hard.

People look for new opportunities to make an income: for example in the northern villages, some of the young men are now fishing for lobster which is exported to Dar and beyond, and which fetches a better price than fish. So people are not unwilling to adapt, they do not lack initiative, they do look for new opportunities although few of these present themselves. When we look at how we can develop, it is easy to dream dreams. We could draw up a list and say, if we get these things, they will make us happy, they will mean development on Mafia:

- new roads
- more vehicles to transport people and goods around
- electricity in all viIIages
- telephones and postal services throughout the island.

Yet we all know these things are not all going to happen tomorrow, or even the day after. Many of them require large amounts of money which neither the District Council nor the government have available. So we have to think about how we can use what we have got to make small but significant changes and improvements in people's lives here on this island. We have land, we have sea. We have subsistence food crops, we have cash crops.

Towards the end of my speech, I shall be outlining some of the ways in which possibly we might think about using these resources more. We have considered so far the levels of world economy, national economy, and the district. I want to say more about the district economy and its possibilities towards the end of my talk, but first let us consider the village and the household.

d) The village economy

The village is a unit for administrative purposes: schools, clinics, local government. Villagers may cooperate on particular projects: buying a lorry for example, or helping build a clinic. But villages are not isolated economic units, they are linked to the rest of the island and beyond, and villagers themselves have networks of kinship all over the island and the rest of the coast including Zanzibar and Pemba.

Nonetheless, there are differences between villages: in the north, the villages have always been nucleated, each one surrounded by its belt of bushland. In the south, on the other hand most of the land is planted with coconuts and there is less scope for subsistence cultivation. Some villages are nearer to the sea and people engage in fishing, others are inland. Some are nearer to the administrative centre, Killindoni, others are far away, and communication without either a good transport network, postal or telephone system, is difficult. So each village has its own specific conditions.

It is primarily at the village level that any development must take place, for that is where people live. If people themselves are to be involved in development - and that is the only real and lasting form of development - then this must be at village level, with the different conditions and needs of each village being taken into account. No government official, no expert on agriculture, fishing or animal husbandry knows as much about any village as the people who live in it. So development has to use local knowledge together with new knowledge and expertise coming from outside. Development has to come from below, as well as from above. But new ideas, techniques must also be brought in and new information disseminated to villagers through meetings, seminars and courses.

e) The household economy

The household is the major unit for both production - growing food and cash crops – and reproductIon - having children and bringing them up, looking after household members. In theory a household should be a mutually beneficial unit: parents cooperate to grow food and provide cash needs, care for children, who in turn care for them when they are old. All household members should share the fruits of labour. But is this what actually happens? Not always. Some members of the household do better than others. Let us look more closely at the factors involved here:

i) work loads and the sexual division of labour

This means that men and women do different work. Men do most of the work involved in clearing bush fields in the north of the island. They cut down the bush, set fire to it when it is dried, and build fences around the fields to keep out pests such as wild pigs. Women do most of the work of planting rice, weeding it, guarding the crop and harvesting. Either men or women may grow cassava and sweet potatoes. If we look at food production in terms of hours or days of labour, we find that on average, women spend a lot more time in the fields than do men. Men do most of the work connected with the cultivation of coconuts, since they own more trees than do women. This is partly because of the inheritance laws, partly because men are more likely than women to plant trees themselves or pay for others to do so. They arrange for nuts to be feIled and husked, and for the transportation of nuts to the coast and to DSM for sale. So men may work hard, but only for short period, while women's work is continuous.

Furthermore, because men control most of the household cash, they are the one who can decide how to spend it - whether to buy food and which kind, clothes, cigarettes and who gets what. Men are also the ones to receive most of the cash income, since they not only own most of the coconut trees, but also engage in other income-generating activities, such as fishing, casual labour in the village, migrant labour to the city. Women have few sources of cash: they may own a few trees (but are dependent on men to market the nuts), otherwise their main source of cash income is from making the beautiful mats for which Mafia is famous. However, a woman is unlikely with all her other work to be able to make more than 6-8 mats per annum, and she sells each at l,000/- to a local (male) trader, who in turns sells them for 2,OOO/- in DSM.

Islamic law states that men should take care of the cash needs of the household: food, clothes, school fees, daily items like kerosene, tea, sugar, while women perform most of the domestic labour: processing food (threshing, winnowing, pounding, cooking, going for firewood, going for water, washing vessels). Looking after children (breast feeding, bathing, cleaning). The reality is that most women are involved in the production of food for the household, and many of them are also having to find cash for household needs when the husband, if they have one,is unwilling or unable to provide sufficiently. So we often find that women's work load is as follows:

- cultivation of food crops
- domestic Iabour including food processing
- seeking some cash income e.g. mat making

In the studies that l have done in the last few years, the time budgets of men and women are strikingly different. Many women work all day in the fields at busy times, men rarely work a full day. Women do almost all of the domestic Iabour, perhaps aided by older children or other female relatives. This can involve fetching several buckets of water each day, sometimes from distant wells, fetching firewood, pounding rice (a very tiring job as I know when I have done it), cooking in a smoky kitchen. Domestic work has to be done every single day throughout the year.

ii) fertility and its effects on production

In addition to all of these tasks, women are the ones who become pregnant and bear children, whom they breastfeed for two years. The fertility rate in Tanzania is very high: the average number of live births per woman is seven and there are many women on Mafia who have had many more pregnancies than that. Many women begin bearing after an early marriage at the age of around 17 and continue to be either pregnant or lactating for most of their reproductive lives.

What is the effect of this workload on women and on their households?
- many women have ill-health, especially anaemia
- they may well give birth to small babies, who are more vulnerable to early death.

Women who are in an advanced stage of pregnancy or have just given birth, cannot cultivate to the same extent. Thus each year that a birth falls in the peak agricultural season, the likelihood is that the household will cultivate less that year, and thus grow less food of its own. As a result it has either to purchase more food, or to eat less. In other words, levels of production, especially of food crops, are affected by reproduction. Reproduction in turn is affected by production: if women work too had in pregnancy they may have miscarriages or small-for-dates babies who may die.

iii) The division of food in the household

This brings me to another issue, at the level of the household, and that is the way in which food is divided up, and the household's resources are shared out. In my research, I often found that when women serve up food they give more food and better food to men. Why?

- Our husbands will be angry if they do not get nice food.
- We are afraid of the men if we do not feed them properly
- Men need more food than women - the work they do is more important
- women can withstand hunger better than men - that is how God made them.

Yet the amount of food a person needs depends on several factors:

- their weight and height
- the amount of work they do - those who work more physically should get more
- their age
- their condition - thus women who are pregnant or lactating need more food than those who are not.

Much of the food in households on Mafia is purchased - few households grow enough to feed themselves for a whole year, so they buy food in shops, such as maize meal (unga ya dona). Furthermore, the kitoweo– such as fish, occasionally chicken or meat, beans – also has to be bought. This is the main source of protein and thus its distribution is very important, especially for growing children, to enable them to build both their bodies and their brains. One of the problems here, (and we find this problem elsewhere in the world), is that whenever the government or experts talk about ‘better food’ (chakula bora), especially for children, they say that women need to be educated. But often women are well aware of what food is needed, they just lack the power and resources to purchase it. Men, on the other hand, may well have both the power and resources, but they often lack the knowledge about the importance of good food for growing children and pregnant or lactating women.

Furthermore men may not see how much work women do - they may take it for granted that this is the way things are. Or they may devalue women's work to being of less importance than the work which they do. Thus it becomes 'invisible' work which is not rewarded either in terms of money or food. So what can be done to improve things at the household level?

Changes needed at household level

i) Decreasing women’s workloads

One way is to decrease women's work-load, especially during pregnancy or lactating. How can this be done? They could receive more help from other members of the household, including men. There is nothing wrong with a man helping in household work, what is wrong is for one human being to sit in idleness watching another wear herself out with too much work.
Another is to share the resources of the household more equally, including food.

ii) Reduction in fertility

Another is to reduce the frequency of births, so that women have a chance to rest between bearing each child. This is important for her body to get back its strength, and it is also important that each child should have two years of breast-feeding, which confers immunities and supplies with protein. So women should not get pregnant again for at least two years after having a baby, preferably three, which would mean 3-4 year age gaps between children.
Nor should very young women or older women over 35 bear children. Young girls have not yet reached their full strength and they may bear babies with difficulty, while older women may not only already be tired from many pregnancies but also there is a greater danger of having handicapped children. If women do not start having babies until their twenties, this would also give them more chance to get educated and an educated mother means and educated family, one who can plan her life, her work, the well being of her children better. If there is a 3-4 year gap between pregnancies, and a shorter period of child-bearing, this would also decrease the overall fertility rate. For each household, there would not only be fewer mouths to fees, but also more resources for each child. Such children would be more likely to survive into adulthood because they would be better cared for.

iii) increase household food production and cash income

This will also have an effect on national and local development, for at present the national resources cannot possibly keep up with the population increase. In the three decades in which I have been working here, the three decades since independence, the population of Tanzania has more than doubled. Some will argue that Tanzania is a big country, and there is plenty of space. They argue that the main resource of the country is its people. But each child born needs the following:

- food
- immunisation
- growth monitoring
- schooling
- clothes
- job
- healthcare

This is expensive for each household, for each district, for the country as a whole. Again, in my own research I found that often women say that they would like to space their children more, to have a rest from childbearing, but their husbands may not agree. So again this is an issue about which men have to think carefully.

Conclusion and some suggestions

Earlier in my talk I said that when we think about development we have to ask certain questions:

- What do we want?
- What resources have we got with which to achieve our goals?
- What effect will development have? Will it benefit everyone or only a few?

I also said that Mafia is not without resources:

- its people and their local knowledge and intelligence
- a well organised local administration
- land much of which is fertile
- sea

With some small changes we could see great improvements. Here are some suggestions:

i) Improve Food Production

If most people could grow enough food to feed themselves, they could spend their cash income on other things: better clothes, education, consumer goods like radios and bicycles. How do we achieve this?

- Those who are not contributing much agricultural labour now could do so.
- Improved agricultural techniques should be taught to all farmers, including women who are responsible for most of the food production.
- Grow more vegetables and a wider variety of them. This is already beginning to happen and this is the first trip in which I have seen tomatoes available and plentiful. Some people also grow ladies fingers. But there is scarcely any vegetable which does not grow easily on Mafia with proper care, including green leafy vegetables which are an important source of iron.
- Keep poultry which provides eggs for children.

ii) Improve Technology

Appropriate intermediate technology could improve agriculture efficiency and lessen work loads:

Hand mills could husk rice.

- Ox-carts, wheelbarrows, water carts, could be used for carrying goods and water.
- Improved tools such as sickles for harvesting instead of shells
- Improved storage so that less of the grain is lost
- Greater yields could mean that some of the crop is set aside as a reserve
- More use of millet as a crop. This used to be the staple in the north of the island, but it is hardly grown now. it is a hardy crop, and very nutritious, more so than cassava and also a better food than unga ya dona.

iii) Improve Animal Husbandry

This could mean more meat and milk, more animals for ploughing and traction (eg carts), more dung for fertilizer. It might even be possible to think of generating biogas which could be
used for lighting. This could be done through a revival of the ‘better cattle’ (ng'ombe bora) scheme, and more help for farmers with medicine for dipping. This should lead to greater milk
yield, thus making milk available to everyone at a reasonable price. Greater use should also be made of goats for milk and meat. Goats are hardy animals which can eat almost anything, require little care, and produce milk which is more suitable for children than cows milk.

iv) Improve Cash Crops

I am told that there are many ways in which the coconut yield could be improved here and also land on which coconuts are grown could be used more intensively. Inter-planting of coconut treess with other crops like cocoa, peppers, papaya, bananas and vegetables would mean greater overall yields per acre.

v) Find Alternative Markets for Coconuts

At present the DSM markets are flooded with coconuts and the price has gone down. Alternative markets need to be sought. If Mafia Coconuts Ltd, now that it is under new management, takes off, it could not only process its own nuts but also buy nuts from small growers on the island, (as used to happen in the past), and process them for coconut oil, cattle feed, coir, charcoal and many other products.

vi) Investigate new sources of cash income

- -seaweed farming
- poultry production (which would also improve diet)
- beekeeping (which also improves pollination of coconuts)

vii) Fishing

More intensive fishing while also preserving fish stocks. Loans for fishermen wishing to purchase capital equipment such as boats or nets. This could give both cash income and also improve protein intake.

viii) Forming cooperatives in each village for mat production.

This would help in the cost of buying dyes, which is now considerable, and also in marketing. Consideration might be given to marketing directly through an NGO such as Oxfam, which would give producers a much better price.

ix) Establishing creches in each village

Creches are needed to care for children aged between two and seven, when they go to primary school. At present, such children are either left alone for long periods during the day, or mothers have to take them to the fields. Often such children are not fed from early morning until evening. A creche would not only mean that some adults, both older people and younger unmarried people keep an eye on them, it could also ensure that they get fed, thus improving their health.

In order to achieve all or any of the above, there are however, two important capital investments which have to be made. One is to improve communications both on the island via roads, the other with the mainland via the steamer. The first of these I am told I finally going to happen this year. The second is also possible, given that it used to run.

These are only suggestions - some may be possible, some may not. But if we could improve the food of each person, we could improve their health, their resistance to disease, and the quality of their lives. If we could improve cash incomes, we would enable people to have more goods, better clothes and houses. In short a better life.

I thank you for your patience and listening to me for so long.

Source: http://mafia-island-tanzania.gold.ac.uk/economy/the-meaning-of-development.pdf