Private sector and economic development

Failures of development programs for Africa led to the opinion that tens of billions of dollars are just wasted. This belief is very comfortable to the small-government types. The evidences seemingly prove something about ineffective governments. The favorite ideological conclusion predicts that the private sector would eradicate poverty if foreign governments reduced their involvement in Africa.

But the private sector was there for the last 10,000 years. It didn’t succeed at all. And there’s no reason to expect anything else. The history of economic development is the history of governments building suitable conditions for the private sector to work. In fact, we have stories of economic growth without private sector (the Soviet Union’s output more than quadrupled in 1917–1991) and no stories of growth under small government.

The private sector is necessary but not sufficient for improving Africa’s performance. Free markets degenerate into monopolies once some market participant gets ready to capture political power. Monopolists select the government. This clientelist government serves the interest of the few, and under some mutations appear as single-party dictatorships or oligarchies. Latin America’s past is full of these examples.

The worst enemy of the private enterprise is businesspeople who say that they’d be better off without the government. Maybe some of them will, but at the expense of private businesses in general. Kinda class enemy within.

Economic development consists of building constructive state capacity that ensures sustainable competition and certain public goods, such as education. And here billions spent on Africa by international donors make sense. International programs improved over the last fifty years. They also helped understand development at large. Very few now agree that buying lots of machinery is enough to create sustainable growth.

This expertise is valuable, but societies need more of it. This is why foreign aid to developing regions should be larger, not smaller. Many efforts are more effective there, than in Western Europe or North America. Providing right medications in Africa can save a human life at the cost of a movie ticket in California. In these cases, the best idea is not to reduce development efforts, but to make them more responsive to new evidences.

Real Limits to Growth

 

The Limits to Growth predicted the demise of economic growth back in 1972. Though the book received much criticism since then, Graham Turner recently confirmed that current development follows the patterns predicted by the book.

But there’s one problem, which is well-known to economists in growth economics. The resource ceiling ignores technology as the capacity to switch between limited resources. The confirmatory evidences Turner found belong to the upcoming trend. Indeed, the world economy consumes more oil and food. It’s okay. Bad things are supposed to happen when the economy per capita will be unable to consume more goods and services.

And the model hasn’t yet confirmed these bad expectations. It’s unlikely to. When some resource becomes scarcer, its price increases, and humans demand more efficient technologies, like energy-saving appliances and fuel-efficient cars. The world had an oil price shock already in the 1970s. It made better air conditioning and small cars popular even in the US.

The limit of growth comes not from too little oil, but from too much oil. Everyone invests in oil technologies for more than a century because no one sees a cheaper and more abundant resource. These investments made fossil fuels very efficient and attractive. Alternative energy can hardly compete with them.

Fossil fuels impose indirect costs, affect the environment, and crowd out investments into alternative energy. They are difficult to deal with. And their prices go down, thanks to fracking and other extraction methods.

Technologies may save the world from running out of oil, but they’re themselves powerful enough to slow down development. Nuclear weapon is making troubles around for more than 60 years. Hitler nearly obtained the atomic bomb. And Germany would get it not by surprise, like a terrorist organization, but because it was one of the most developed societies in the world before the 30s. Technologies aren’t safe in the hands of most advanced and democratic countries.

So, the limits to growth are trickier than the finiteness of certain resources. And these limits are less predictable.