African Development for the Completely Bloody Ignorant

Jeffrey Sachs’ book The End of Poverty is not only a blueprint for a new world free of poverty. It’s also an autobiography. And having introduced his approach to economics, he takes a lengthy detour to review his (accidental) career in development economics. Fortunately, he packs some useful wisdom in along the way.

Sachs’ involvement with development economics began with a request from some young Bolivian politicians to advise them on remedying the country’s inflation crisis. He emphasises how, without this accidental connection, he might never have properly considered the needs of poor countries. “Development economics was a fringe topic in US PhD programs,” he recalls. “I had seen extreme poverty up close in India, but my early academic work was very much about the US and European economies.” (p90) It’s a theme he returns to: that mainstream economics isn’t taught or structured as an industry with proper consideration to development.

Sachs single-handedly - at least according to his own description - fixes Bolivia’s inflation crisis and manages the liberalisation of its state-dominated economy. Indeed, such transitions are really where Sachs made his name. Although he’s been characterised by many mainstream economists as left-wing, he’s clear in his faith in markets and dismissive of substantial state intervention in the economy.¹

In the process, he learns lessons that come up again and again in his future work. First, the importance of geography. Landlocked, mountainous Bolivia faced obstacles to development other poor countries didn’t have to contend with.

The mountain vistas added immeasurably to Bolivia’s charm, the high altitude to my chronic shortness of breath in La Paz, and the landlocked status to Bolivia’s lingering suspicions concerning Chile, which had stripped away its coastal territory in 1884. Yet I had not reflected on how these conditions were key geographical factors, perhaps the overriding factors, in Bolivia’s chronic poverty. In all my training, the ideas of physical geography and the spatial distribution of economic activity had not even been mentioned… [but] countries are shaped profoundly by their location, neighbourhood, topography, and resource base. (p105)

Second, straightforward economic tools alone can’t solve any countries’ problems. Once hyperinflation had been tackled, Bolivia needed to undergo a wide-ranging program of economic and political reform, from tax to public services, before it could function properly. Neither can poor countries usually pull themselves out of poverty alone. Even with the right policies, countries need assistance from abroad - in finance and in expertise - to free themselves from poverty. In Bolivia’s case, it needed relief from debt service and World Bank support for an emergency social fund.

Unfortunately - and this is Sach’s next big discovery - the institutions of international economics, and particularly the IMF, can’t be relied upon to act in poor countries’ best interests. Sachs is taken aback when the IMF rejects his proposal that Bolivia receive debt relief, declaring that not only would its board not accept the proposal, but neither would the senior executive for Latin America at Citibank, the major investment bank.

Here was the IMF mission chief, in a broken country with hungry people, closed mines, hyperinflation and disarray, saying that Citibank would have a veto over an IMF policy on debt cancellation… Poor countries must demand their due. Bolivia would have suffered years of further anguish from external debt had we not pushed relentlessly for a cancellation of Bolivia’s debts. The IMF, certainly, was not coming to Bolivia’s rescue. (p106)

Sach’s next ports of call are Poland and Russia. In both countries, he’s called in by post-communist governments to assist with the dismantling of socialism. These interventions, particularly in Russia, represent the most controversial period of Sachs’ career. Russia’s rapid transition to a fairly cut-throat version of capitalism, known as “shock therapy”, has been blamed for an increase in poverty in the former USSR in the first few years after the fall of communism. Sachs, needless to say, rejects much of the criticism, arguing that in fact it was not the speed of reform that was to blame, but the lack of aid and external currency support to back it up. Sachs is damning about the US’ lack of interest in supporting Russia, going so far as to allege that Dick Cheney and Paul Wolfowitz (then Secretary and Undersecretary of Defense, now US Vice-President and President of the World Bank respectively) deliberately undermined attempts to ease Russia’s transition because they saw it as a potential strategic threat.

What’s most important for our purposes is to see the clues about Sachs’ economic approach that we can glean from his experiences. His initial plan for Poland has a lot in common with his proposals for poor countries now, and contain elements that put him at odds with many mainstream economists. It’s a five-point plan:

1. Stabilise the currency
2. Liberalise markets and remove price controls
3. Privatise state assets
4. Cushion transition through pensions, health care and other benefits

The fifth step is to harmonise the country’s institutions and policies with those of the European Union, to move towards membership.

Traditional mainstream economists tend to emphasise steps 1-3 for poor countries and neglect 4. Left-wingers and some development economists - as well as many poor country leaders over the last fifty years - have tended to dismiss points 1-3 and focus on 4 (privatisation is particularly contentious). Sach’s combination of all four is striking, and chimes with my sense of his centre-left politics: he’s clear in his faith in markets, but also aware of their limitations and the need for state action in certain areas to supplement them. We’ll look at some of these issues more in future.

Sachs also reiterates here one of the lessons he learned in Bolivia. First, the importance - and morality of - debt relief. He’s scathing about the contradictions between the treatment of bankrupt countries in comparison to bankrupt companies.

Russia and R.H. Macy & Co, the department store, suspended debt servicing around the same day in February 1992. Macy’s, however, had the benefit of US bankruptcy laws, which allowed it to obtain legal protection against its creditors… these protections kept Macy’s intact and allowed it to regain its footing, thereby benefiting the creditors… Russia received none of these privileges… both Russia and its creditors suffered as a result. (pp140-1)

There’s a lot of detail in these chapters, and I’m not going to try to summarise the rest of it, because it’s not strictly relevant. Although Sachs had now seen several countries as they attempted to rebuild their economies, he was yet to properly engage with a developing country with low levels of development and widespread extreme poverty like those in Africa we’re concerned with. Next, though, Sachs turns his attention to the worlds biggest developing countries, between them accounting for over a third of the world’s population: China & India.

Here’s an article I just found offering another perspective on the chapters discussed above.

1. He’s much more enthusiastic about a state role in public services. In domestic politics terms, I suppose you could say he’s basically New Labour.