Thursday, 27 March 2008

Not comparing like for like - Why the Boston Globe is Wrong

While looking at the Arts and Letters daily I came across an article that was looking at the growth of authoritarian states as innovative entrepreneurs. The article is a novel attempt to understand what the author sees as an isolated phenomenon but is clearly missing the wood for the trees:

  • The author assumed that innovation in entrepreneurship and rapid growth only comes form Dictatorial (or less Democratic countries) - Turkey, Brazil, Argentina and India will be very disappointed to hear these news (and Pakistan might be chuffed). The problem of the article is that it is trying to combine two different subjects: the rapid rates of growth of some countries that are not very democratic but are part of the developing world that is catching up to western levels of development and the growth of sovereign wealth funds.
  • As for the rapid growth rates - its is partially a hoax - it is true that China is growing very fast: but it is much an story of "technological Catch up with improved social capabilities" Ala Abramovitz caused partly by the technological changes that allowed the globalisation of manufacturing ala Krugman and due to improved institutional set up ala North. I am not just trying to cram as many eminent economists in a senescence. I am trying to prove that sentences are misinformed.

One striking recent study by the American Enterprise Institute, a conservative Washington think tank, shows that the economies of politically unfree nations have grown faster than those of politically free nations over the past decade, often through forceful use of business and financial power. A recent report by the global monitoring organization Freedom House found that "a group of market-oriented autocracies" were an important force in an overall decline in world freedom.

It just so happens that poorer countries are catching up to richer ones who are growing because they are further in the technology tree + the $100 Dollar price tag of oil. So no Boston Globe… it is not the lack of democracy that is making these countries grow – its other factors.

· The second big error of the article is about sovereign funds- The article does not even discuss that far from being an article of growth they are an article of control that could even stifle growth for a less developed country such as China. Several investor theories argue that the rate of return of investing in a less developed country is higher than in a developed country. In addition in investing in your country you can create a multiplier effect, whereby the investment will circulated around the economy and provide and even larger increase of GDP. Although both theories are considered too simplistic they still hold partly true. Part of the Sovereign funds job is to provide greater control and sacrifice growth: these funds are getting relatively low rates of return but such returns come back to the direct control of the state. The alternative would be for the state to invest in project within their own countries rather than buy up companies: its not like Russia or China has run out of investment opportunities. But doing so would perhaps lead to both a higher growth or a democratisation of such growth – the government will not have direct control over the receipts despite the fact that such receipts will probably bee bigger and more beneficial to the economy if invested within the country. The sovereign funds are a way of maintaining control of the state by hogging a share of the enlarged pie – and not a reason for the growth of the pie per se.

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