Saturday, 23 February 2008

The Age of Milton Friedman

Andrei Shleifer opens this latest paper with the passage,
The last quarter century has witnessed remarkable progress of mankind. The world's per capita inflation-adjusted income rose from $5400 in 1980 to $8500 in 2005. Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just as fast. Compared to 1980, many more countries in the world are democratic today.

The last quarter century also saw wide acceptance of free market policies in both rich and poor countries: from private ownership, to free trade, to responsible budgets, to lower taxes. Three important events mark the beginning of this period. In 1979, Deng Xiao Ping started market reforms in China, which over the quarter century lifted hundreds of millions of people out of poverty. In the same year, Margaret Thatcher was elected Prime Minister in Britain, and initiated her radical reforms and a long period of growth. A year later, Ronald Reagan was elected President of the United States, and also embraced free market policies. All three of these leaders professed inspiration from the work of Milton Friedman. It is natural, then, to refer to the last quarter century as the Age of Milton Friedman.
The paper is a review of two books which have two very different views of the Age of Milton Friedman.

The first book is a collection of papers edited by Leszek Balcerowicz and Stanley Fischer which basically endorses free market policies, the second, a volume by Joseph Stiglitz, Jose Antonio Ocampo, Shari Spiegel, Richardo FFrench-Davis, and Deepak Nayyar which rejects them.

Shleifer begins his discussion by quickly summarizing the salient facts about the world economy and society over the last quarter century. He concludes that,
In the Age of Milton Friedman, the world economy expanded greatly, the quality of life improved sharply for billions of people, and dire poverty was substantially scaled back. All this while the world embraced free market reforms. Is this a coincidence? Two recent books disagree on the answer.
The Balcerowicz and Fischer edited book is a collection of articles presented at a conference devoted to convergence among economies which took place in Poland. The contributions to this volume are in the most part country studies of economic reforms and their consequences. These include studies of China, Chile, Spain, Portugal, Greece, Ireland, as well as the Former Soviet Union. Shleifer notes that the conclusion of the book is summarized by the editors as:
reliance on market forces within an open economy in a stable macroeconomic environment, with assured property rights, are the keys to rapid economic growth.
He then adds,
Milton Friedman would have put it better, but with the same idea.
Perhaps the best lesson for New Zealand comes from Shleifer's comment on the two chapters that deal with a another small open economy, Ireland.
The collection also includes a pair of essays – one by O’Connell and Smyth and one by Bradley -- on Ireland, the miracle of Western Europe. As much as any other country in the world, Ireland embraced the prescriptions of Milton Friedman: trade openness, low taxes, low regulations, and balanced budgets. "The main lesson from the Irish experience is that there are certain key prerequisites necessary to sustain high growth – namely, sound macroeconomic policies, a strong commitment to free trade, a lightly regulated competitive microeconomic environment, and a well-educated and flexible labor force (p. 285)." Starting as one of Western Europe’s laggards, Ireland became the richest country of the region in the span of one generation.
The current New Zealand government would do well to take note.

Shleifer goes on to note that
The world is a much gloomier place in the volume "Stability with Growth" by Stiglitz, Ocampo, Spiegel, FFrench-Davis, and Nayyar (hereafter Stiglitz et al.). The book is an extended critique of free-market policies and their advocates, and a proposal for alternative policies. This volume does not deal with all the policies Stiglitz has embraced, such as state ownership and extensive regulation. It merely emphasizes the virtues of inflation and capital controls.
Shleifer's veiw of this book is perhaps best captured by the following comment,
One way to give the readers of this review an overall sense of this book is with an example. On p. 70, Stiglitz et al. chastise conservatives for objecting to fiscal deficits by making "arguments based on the hard- to-verify notion of confidence." "Despite how frequently conservatives invoke the confidence argument, there is remarkably little empirical research on the matter (including research by the IMF which seems to rely on the confidence argument heavily)." Then, on p. 148, Stiglitz et al. attack George Bush's budget deficits, equally severely. "What will happen, not just to the United States, but to the stability of the global financial system if foreigners lose confidence (emphasis added) in the strength of the dollar, if they worry that it will depreciate in value in the current years?" A reader might lose confidence in the rest of the book.
Shleifer concludes his essay by pointing out,
On strategy, economics got the right answer: free market policies, supported but not encumbered by the government, deliver growth and prosperity. And while a lot has been accomplished in the last quarter century, a lot remains to be done. Most countries have embraced responsible fiscal policies, but it is far from clear that such policies can survive the volatility in the world's economy. World trade has a long way to go to become truly open. Many developing countries, especially in South Asia, Latin America, and Sub-Saharan Africa, urgently need government much less hostile to business. Many countries desperately need improvements in their legal systems, including bankruptcy systems, to secure property rights. Indeed, many Sub-Saharan African countries are rethinking their development strategies, after several state-centered false starts. It is far from a foregone conclusion that their governments will make good choices. We have a long haul ahead of us.
(HT: Greg Mankiw)
  • Balcerowicz, Leszek and Stanley Fischer, eds., 2006, Living Standards and the Wealth of Nations: Successes and Failures in Real Convergence. Cambridge, MA: The MITPress.
  • Stiglitz, Joseph E., Jose Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis, and Deepak Nayyar, 2006, Stability with Growth. Oxford: Oxford University Press.

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