Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

World Economy

Uganda-gate: Debunking two myths about sub-Saharan Africa

Earlier in the week, news broke that some of Irish overseas development assistance to Uganda had been misappropriated by the Prime Minister’s office. In a Father Ted-style development, it seems that up to €4m of Irish aid ended up in the Prime Minister’s account. A poll taken the next day on had, depressingly, almost half of those voting no to the question “Should Ireland distribute foreign aid while it is in a bailout?”

What was particularly depressing to those who believe that the return on taxpayers’ money when spent on things like malaria nets and primary schooling in sub-Saharan Africa is huge was the nature of the discussion that followed under the poll. Here are some choice comments [if it looks like a typo, there’s an implied (sic.)!]:

  • “I going to be blunt here… Not a single euro more should we give. It is disgraceful pumping money into these warlord run countries when we are in a bailout program.”
  • “But the current situation is simply unsustainable. We are borrowing billions of euro, at a five per cent interest rate, just to hand it over to corrupt foreign heads of state. Madness.”
  • “Do we want to be seen giving money to people who are clearly living in the stone age??I don’t want my money going to these people. I want it going to my people, Irish people, for health,education, job creation and infrastructure!!!”
  • “Africa is mineral rich but kept in poor by foreign bankers and Corporations who suck each country dry and prop up evil corrupt regimes.”

I used to work in Irish Aid, as it happens, although only briefly, so I won’t go into the ins and outs of something I’m not current on. However, there are a number of misconceptions about sub-Saharan Africa revealed in these comments that I think would be useful and relatively straightforward to dispel.

I’ll take two: the belief that the continent is beyond fixing (aka that Western so-called aid is keeping these countries poor); and that the political system in sub-Saharan African is corrupt and/or authoritarian.

Myth #1: Africa’s rulers are corrupt war-mongering dictators

Sub-Saharan Africa is home to forty-plus countries (the birth of Namibia, Eritrea and South Sudan, among others, mean the number is not constant). Thanks to the Polity Project, which quantitatively assesses the democratic/authoritarian nature of every government from 1800 on, it is possible to see whether Africa remains home to dictators or instead whether it is a hotbed of democracy.

The Polity score ranks every country from -10 (full-blow dictatorship) to +10 (full-blown democracy), with special indicators for where government has collapsed (due to foreign occupation or civil war). The graph below shows for 1975, 1995 and 2011, the percentage of countries in Africa that were autocratic (a score of -6 or less), autocratic-leaning (-1 to -5), democratic-leaning (zero to 5) and democratic (+6 or more), as well as the worst off, those without a government.

Proportion of sub-Saharan countries by regime type, 1975-2011

What’s pretty clear is that the trend is a positive one. In 1975, six out of every seven countries in sub-Saharan Africa was a dictatorship. Now, there are only two autocratic countries on the continent, Swaziland and Eritrea.

In 1975, there were only two islands of democracy, literally in the case of Mauritius, 500 miles off the coast of Madagascar (the other being Botswana). Now there are 19 democracies and 11 other countries that could be described as democratic-leaning.

No-one is for a minute arguing that the political system in Africa is perfect – democracies can be just as corrupt as autocracies in certain circumstances – but the idea that there is some sort of warlord class of dictator still ruling over the world’s second most populous continent is ridiculously uninformed.

Myth #2: The African economy is a basket case with no hope

The other clear implication that one gets from reading comments such as those on’s poll is that Africa is an economic no-hoper, as poor today as it has ever been. This is a tough one for NGOs and Governments to counteract. Make the case too strongly that there have been returns on the investment of aid and people start to question whether it is needed anymore.

But I think those involved in the aid industry do have a case to answer for in not showing the progress that has been made. The graph below shows average growth rates and also income per head in Africa at the end of each five-year period (population-weighted). The source is the IMF World Economic Outlook, the primary repository of comparable international statistics over time.

Average income and economic growth (% annual) in sub-Saharan Africa, 1980-2017

Average annual income in Africa has risen from less than $900 in 1980 to $2,500 now and is set to increase to over $3,100 in the next five years. Even with growth slowing to about 5% per annum, by the late 2020s, the average increase in an African’s income in three years will be greater than their entire income was in the late 1970s.

Which brings us on to growth. GDP growth in sub-Saharan Africa averaged 2.5% in the twenty years to 2000, barely enough to cover population growth. Since then, population growth has slowed while economic growth has accelerated. The average rate of growth in the period 2000-2017 is expected to be 6% – with the final few years actually slightly slower than the period 2000-2012.

So again, no-one is arguing that Africa is perfect or even that there are no chronic situations in Africa. But those who assert that money put into Africa is money wasted, because ‘clearly the continent is a basket case (possibly under the thumb of the West)’ again make their case devoid of all evidence.

Indeed, what’s ironic is that those who believe these countries are in the Stone Age are the ones themselves who have rather archaic opinions of what is and is not happening in Africa.

Parsing free comment to see its value – Charles Eisenstein in the dock

In The Guardian’s “Comment is free” section, Charles Eisenstein writes about a number of “big ticket” items, including economic growth, the use of monetary policy to solve the current economic crisis and fractional reserve banking. I think it’s worth going through the piece bit by bit, to parse the good ideas from the less well thought out ones. He starts:

Federal Reserve chairman Ben Bernanke’s pledge at Jackson Hole last Friday to “promote a stronger economic recovery” through “additional policy accommodation” has drawn criticism from economists, liberal and conservative, who question whether the Fed has the wherewithal to stimulate economic growth. What we actually need is more spending, say the liberals. No, less spending, say the conservatives. But underneath these disagreements lies an unexamined agreement, a common assumption that no mainstream economist or policy-maker ever questions: that the purpose of economic policy is to stimulate growth.

So far, so good – since probably the 1700s and certainly the 1800s, people have come to expect progress, i.e. that the quality of life that their children enjoy is better than theirs. Economic policy is all about growth because no-one has ever won an election telling the voters he would actively prevent their children from having a better standard of living.

So ubiquitous is the equation of growth with prosperity that few people ever pause to consider it. What does economic growth actually mean? It means more consumption – and consumption of a specific kind: more consumption of goods and services that are exchanged for money. That means that if people stop caring for their own children and instead pay for childcare, the economy grows. The same if people stop cooking for themselves and purchase restaurant takeaways instead.

These are not insights. This is, to put it mildly, very basic economics – a discussion of what GDP does and does not include constituted a good chunk of the very first topic for my first-year undergraduates this year. There is general unease among economists about using GDP per capita to measure the true level of welfare. Including the value of the various “imputed services” we get, from looking after our own children to walking in the park, is very important, especially for the allocation of public resources. Having said that, economists probably also acknowledge implicitly that the main impact of such an inclusion would be a one-off shift in the calculation of welfare. The level may be off but the trend is probably not.

Economists say this is a good thing. After all, you wouldn’t pay for childcare or takeaway food if it weren’t of benefit to you, right? So, the more things people are paying for, the more benefits are being had. Besides, it is more efficient for one daycare centre to handle 30 children than for each family to do it themselves. That’s why we are all so much richer, happier and less busy than we were a generation ago. Right?

No modern economist would argue that richer axiomatically means happier, although I’m open to correction. What economists, politicians and voters do seem to agree on, however, is that greater material prosperity is associated with greater life satisfaction. From freedom from an ever greater array of diseases and medical conditions to the capacity to fulfil one’s potential in jobs that didn’t exist 10 or 100 years ago, voters want growth.

Obviously, it isn’t true that the more we buy, the happier we are. Endless growth means endlessly increasing production and endlessly increasing consumption. Social critics have for a long time pointed out the resulting hollowness carried by that thesis. Furthermore, it is becoming increasingly apparent that infinite growth is impossible on a finite planet. Why, then, are liberals and conservatives alike so fervent in their pursuit of growth?

To the question at the end of the paragraph first, it’s because that’s what people (i.e. voters) want! The key point in this paragraph, however, is the point about infinite growth on a finite planet. Almost all those making this point currently are right but for the wrong reasons. That is because they talk in terms of consuming resources without understanding the huge economic transformation that has occurred in the last fifty years. They are wrong because increasingly our standard of living is determined by services, which are experiential , and not merchandise, which are resource-intensive. Services now account for four-fifths of all economic activity and this share is growing decade after decade.

Because experiences do not need resources per se, it’s certainly possible to consider a world economy two or three centuries from now where the standard of living is a multiple of ours today. It is estimated that, accounting for inflation, per-capita income has increased ten-fold in the last two centuries. This could easily happen again over the next two centuries. But it can’t go on for ever. At some point, maybe in the year 3,000 A.D., or 30,000 A.D., or 300,000 A.D., the trend is going to slow to zero, as the standard of living is high enough to be, from this distance, close enough to infinity.

The reason is that our present money system can only function in a growing economy. Money is created as interest-bearing debt: it only comes into being when someone promises to pay back even more of it. Therefore, there is always more debt than there is money. In a growth economy that is not a problem, because new money (and new debt) is constantly lent into existence so that existing debt can be repaid. But when growth slows, good lending opportunities become scarce. Indebtedness rises faster than income, debt service becomes more difficult, bankruptcies and layoffs rise.

I’m not sure if anyone truly understands the money system but it seems clear to me that Charles definitely doesn’t. Money is a form of wealth, in particular it is wealth turned liquid, so that it can be used as a medium of exchange. It does not exist separate to wealth. People lend because they have excess resources, based on what they consume today versus in the future. Others borrow because they need to invest to create more income and wealth for themselves in the future. The arguments about debt and money made above seem, to me, to be effectively saying that there is a limit to the wealth we can create. Which takes us back to the experience-economy and the year 30,000 A.D.!

Central banks used to have a solution for that. When growth slowed, they would simply buy securities (usually government bonds) on the open market, driving down interest rates. Investors who wouldn’t lend into the economy if they could get 8% on a risk-free bond might change their minds if the rate were only 5%, or 2%. Rates that low would stimulate a flood of credit, jumpstarting the economy. Today that tool isn’t working, but central banks are still trying it nonetheless. With risk-free interest rates near zero, they continue creating money through the same means as before, now calling it “quantitative easing”. The thinking seems to be: “If you have more money than you know what to do with and are afraid to lend it, how about giving you even more money?” It is like giving a miser an extra bag of gold in hopes that he’ll start sharing it.

Most commentators interpret Bernanke’s remarks as signalling the possibility of a new round of quantitative easing. If so, the results will likely be the same as before – a brief churning of equities and commodities markets, but little leakage of the new money into the real economy. In all fairness, we cannot blame the banks for their reluctance to lend. Why would they lend to maxed-out borrowers in the face of economic stagnation? It would be convenient to blame banker greed; unfortunately, the problem goes much deeper than that.

There is the nub of a point here, but again one that is well-known to economists and to policymakers, i.e. the liquidity trap. This comes back to what money is. What I taught my first-year undergrads was that money was effectively the currency of confidence. Generally, some want to save while others want to borrow. If times get bad, though, and confidence is low, everyone wants to save while no-one wants to borrow. Not only that, there may be a few out there who do want to borrow but confidence is low enough that banks don’t think they’ll get their money back. The reason this is a trap is because you can’t manufacture confidence. You can use your standard toolkit but ultimately it may not work.

The problem that we are seemingly unable to countenance is the end of growth. Today’s system is predicated on the progressive conversion of nature into products, people into consumers, cultures into markets and time into money. We could perhaps extend that growth for a few more years by fracking, deep-sea oil drilling, deforestation, land grabs from indigenous people and so on, but only at a higher and higher cost to future generations. Sooner or later – hopefully sooner – we will have to transition towards a steady-state or degrowth economy.

There is a massive leap of logic here (the term logic used loosely): “Monetary policy is currently ineffectual because confidence is low… thus economic growth will have to stop.” The only connection between the two is the rather flimsy argument that money and debt are out of sync. Throwing in emotive terms like fracking, deforestation and land grabs from indigenous people is not only a cheap rhetorical device – it also shows Eisenstein’s equation of prosperity with resources. This is increasingly not the case. (Compare the natural resources Zuckerburg has bespoiled with those of his 19th century equivalents.)

Does that sound scary? Today it is: degrowth means recession, with its unemployment, inequality and desperation. But it need not be that way. Unemployment could translate into greater leisure for all. Lower consumption could translate into reclaiming life from money, reskilling, reconnecting, sharing.

This is unbelievably naïve. Unemployment is probably the single biggest destroyer of personal life satisfaction there is (maybe some behavioural economists can back me up here). The reason that a society like France looks like it’s creaking under the strain is not because everyone is working too much – it is because the young do not have enough work. I do believe personally that the US has got the balance between work and leisure wrong. I value my leisure time quite highly as ultimately time is our true finite currency (not money). But that is not for a minute to say that I think we could somehow cut the standard of living and divvy up the jobs so that everyone works 25 hours a week.

Central banks could play a role in this transition. For example, what if quantitative easing were combined with debt forgiveness? The banks get bailout after bailout – what about the rest of us? The Fed could purchase student loans, mortgages or consumer debt and, by fiat, reduce interest rates on those loans to zero, or even reduce principal. That would liberate millions from the debt chase, while freeing up purchasing power for those who are truly underconsuming.

Again, this seems to miss a key point: banks are not massive cash hoarders in and of themselves. They are intermediaries between savers and borrowers. “The banks get bailout after bailout” is not accurate: it is savers that are getting the bailouts (bailouts here meaning they get paid back in full). Debt forgiveness is not some low-hanging fruit out there, pleading to be plucked. It is a transfer from savers (typically the old) to borrowers (typically the young). We can certainly do this if we want but we should be under no illusions that this represents some sort of painless victory.

More radically, central banks should be allowed to breach the “zero lower bound” that has rendered monetary policy impotent today. If investors are unwilling to lend even when risk-free return on investment is 0%, why not reduce that to -2%, even -5%? Implemented as a liquidity tax on bank reserves, it would allow credit to circulate in the absence of economic growth, forming the monetary foundation of a steady-state economy where leisure and ecological health grow instead of consumption.

Some central banks have done this but it is likely that any concerted effort by major central banks to introduce negative interest rates would see a flood of money to other financial institutions, even if they were just offering zero. “Under the mattress” is one such institution.

One thing is clear: we are at the end of an era. No one seriously believes that we will grow ourselves out of debt again. There is an alternative. It is time to begin the transition to a steady-state economy.

This appear to be either taken from a different article completely or else meant to blind the reader with statements so big they’ll overlook the relatively ordinary analysis that preceded them!

There are plenty of problems with modern economic policy that Charles could have chosen to focus on. It is certainly possible that the days of 2% trend growth are over. But we’ll need far better analysis than this to show us the way!

The price of freedom, the power of narratives – thoughts on the Parnell Summer School

Earlier in the week, I posted an overview of my talk at this year’s Parnell Summer School, where the theme is Sovereignty & Society, in recognition of the 100th anniversary of the Home Rule Bill. I mentioned towards the end that following my address, there was a panel discussion on Ireland’s economic sovereignty, involving Richard Boyd Barrett (the People Before Profit TD), Paul Murphy (the Socialist Party MEP), Brendan Butler (of IBEC) and Pascal Donoghue (of Fine Gael).

The discussion was in reality four rather separate speeches, each of about 25 minutes in length, followed by audience Q&A. Given their backgrounds, however, the speeches by Boyd Barrett and by Murphy were quite similar in nature. When listening to both, it struck me that – whatever about TV debates, particularly when it comes to elections – there is no sense in trying to engage on particular points. If you disagree, it has to be a disagreement at a fundamental level, the level of the entire narrative. This is not a criticism of either contributor – they are both excellent speakers. In fact, it is a testament to the completeness of their narrative that really means the only fruitful engagement will come from going all the way back to basics.

The Socialist Narrative

I will do my best to sum up the Boyd Barrett-Murphy argument: they believe that the economic crisis that started in 2007 is being used as an opportunity by a global elite in control, who share a common ideology, to embed that ideology permanently and beyond the reach of citizens, i.e. anti-democratically. To them, the global elite’s “neoliberal” ideology is summed up by capitalism, privatisation, deregulation and the market. (By the by, I’ve never understood what was precisely so ominous about being a latter day liberal, other than the tone in which it is used by those who have set themselves against neo-liberals!)

According to the narrative, this elite that is in commanding control is pro-market, pro-1% (i.e. themselves presumably) and anti-worker, hence they are trying to reduce minimum work standards and similar, and impose austerity so that the “ordinary man” pays the cost of them enjoying greater wealth. In that context, the EU’s new fiscal “six-pack” is interpreted easily – as a way for the elite to put their ideology irreversibly beyond democratic control.

Paul Murphy, who spoke second of the two, explain in more detail that the root problem is profit. When the profit motive is king, it tramples on people, according to him – why else would EU companies be sitting on €3,000 billion of cash reserves while there are tens of millions unemployed across the EU?

A complete story is not necessarily a true one…

Listening to both men speak, they are compelling public speakers and likely to tap into public anger. They are likely in the next election to have success with those who believe that it is banks, not deficits, that are the bulk of what’s wrong with Ireland’s problems right now. If you try and tackle one point that they make, their answer will most likely be something that is entirely consistent within their narrative – and leaves the questioner having to go one step further back.

Ultimately, the 21st century’s socialists view of the world, if Boyd-Barrett and Murphy are representative, comes down to control. Socialist or not, we all have to answer the question: why are there so many things wrong in the world right now? From first-world problems like falling birth rates, pension shortfalls and youth unemployment to more pernicious issues ravaging developing countries, the world is not as any of us would like – and any account of the world has to incorporate the economic crisis of the last five years. And it comes down to whether you believe in incompetence or malevolence.

Evil? Or just incompetent?

The root difference between my world-view and and the socialist one is that they believe the world is like it is by design – malevolent forces (the “global neoliberal elite”, the 1%) have crafted a world exactly as they would like it. To me – and I think to very many others – the world is like it is due to the incompetence of those in charge, not because this is their masterplan. Socialists seem furious that the economics of Keynes gave way to the economics of Friedman, oblivious to the fact that the dominant model in economics, the one that has dictated the rules for monetary and fiscal policy for the few decades, is New Keynesian! Keynes believed that output could be controlled by policymakers to dampen business cycles – and mainstream economics has clung dearly to that belief, refining it so that it is the interest rate that is used to do this.

If we step back for a minute, if there is a global elite working against our interests in confident control of the world economy, why is it the case that the typical person is so much better off now than fifty years ago (looking at figures such as inflation-adjusted mean and median incomes)? Why is labour’s share of income so high if capital is in control? Why is the standard of living in the 2010s going to be better than any decade that has gone previously? More fundamentally, why are they allowing democracy to spread? Why are they allowing people’s education levels to get higher and higher? After all, surely, at some point if we keep getting more educated, we’ll eventually cotton on to their plan? And why do they allow mobility between “us” and “them”?

This is not to say for a minute that there are no issues to sort out. But even in those issues, the narrative starts to crumble. Why are so many genuine capitalists (i.e. those who earn money through capital, rather than labour) and “right-wingers” so vehemently against bank bailouts? Well, presumably because a system where some people cannot lose no matter what (bank bondholders, say) is a  subversion of an economy built on risk-taking. Risk means the potential to lose.

Politics and academia also don’t sit easily with the narrative. In the US, for example, the typical lower income household has seen their real income at best static over the last generation and even longer. But in terms of economic policy, this is one of the hottest issues on the campaign trail – if the US elite were truly in control of everything, this is the last thing they would want! In terms of economic theory, static incomes of lower-income households is one of the most active areas of research (at least in the US) – the two candidates for causing this are trade and technology, not – I guess it should be pointed out – a global elite in control of our lives.

Follow the trillions…

For me, the point about three trillion in the bank neatly encapsulates the shortcomings of the 21st-century socialist world-view. When making that point, there is the implicit assumption that if lots of money is left in the bank, it does nothing – a shockingly poor level of understanding of fractional reserve banking! One man’s savings is another’s borrowings. Moreover, there is the explicit accusation that these multinationals are leaving money in the bank instead of hiring unemployed people. As if business people would rather sit on what are assumed to be useless piles of cash than make more money by investing it.

The currency of the world is confidence. It dictates the value of money, the value of wealth, even the business cycle. It is not something that can be managed – either by benign policymakers or malevolent elites. If some businesses are “sitting on hoards of cash”, it is because they are nervous about the future. But at least they are depositing that cash with banks, who can then lend it out to other businesses. If those banks are “sitting on hoards of cash”, it is because they are nervous about the future.

Ultimately, no-one is in control. I’m not sure if that makes the world a scarier place than one in which at least someone, albeit a malevolent elite, is in control. But it’s a reality we need to accept if we are react as best we can to what’s going on around us.

Undoubtedly, any socialist worth their salt will have answers to some or all of these points that restore the cohesive whole of their narrative. I would like to point out that I posted the above at least for myself as for anyone else, as I wanted to crystallize – so soon after hearing the guts of an hour of modern socialist thinking – that world-view and my thoughts on it. As always, I mean to engage (and certainly not caricature or mock). I am currently reading Michael Sandel’s “What Money Can’t Buy – The Moral Limits of Markets” as a way to delve more fully into this topic. When I’m finished the book, I will post a review on the blog. It’s early days in the book and I would already love to write my own book in reply!

Nine million jobs – the cost of inaction on the global debt crisis

The Nobel Prize in Economics, awarded yesterday, highlighted the important role of expectations. The IMF’s World Economic Outlook has given the world an important barometer of expectations about the economic climate and how they change over time. This post uses IMF figures to estimate how many jobs will be lost over the period 2011-2015 in the Eurozone, the USA and in the rest of the developed world, due to politicians’ inaction on the debt crisis over the last twelve months alone. Read more

Can the eurozone survive? Insights from the dollar-zone

With its future and survival increasingly topics of discussion, this post looks at the eurozone and two key questions. Firstly, are the eurozone’s member states too different to share a currency? Secondly, if the euro is to survive, will it need tax harmonisation and a big increase in federal spending? It answers these questions by comparing the eurozone and its members to the U.S. economy and its States. Read more

A lot done, more to do – prices in the eurozone and Ireland’s competitive adjustment

The EU has released its latest consumer price survey, which found prices in Ireland are about 18% above the EU average – although that varies by sector, with clothes and footwear below average and food (and alcohol) significantly more expensive. This post tracks European countries’ changing competitiveness over time, with Ireland’s readjustment sizeable but not yet complete. Indeed a contrast with Iceland and the UK highlights the stark difference between countries that are forced to devalue and those than cannot. Read more

The tuition fees debate: a debt-for-equity suggestion

The tuition fees debate in England and Wales shows no signs of cooling down. Opponents of the new scheme ignore the unfairness of the current system, while proponents ignore debt aversion on the part of students. Drawing on an innovative Colombian social enterprise that offers human capital contracts, this post makes the case for a type of “debt-for-equity” swap, where instead of debt, the UK government should take an equity stake in its graduates. Read more

The balance of economic power in 2050 – spot the odd ones out

With talk of a change in the global economic pecking order, particularly around the new IMF chief, this post takes a long look at the world economy. It contrasts the current shares of world output with those of five hundred and two thousand years ago. The lessons of history – and the weight of maths – hold valuable lessons for Europe, as it seeks to find a new role in the world economy. Read more

Back to basics: can Europe trade its way out of trouble?

This post reviews the most recent IMF World Economic Outlook, the benchmark outlook on the global economy. A three-tier world economy is emerging, with China and India leading the way, and advanced economies bringing up the rear. For countries with high debt and shrinking and ageing populations, export growth is the key. Looking at the last few and next few years in Europe, a gap has emerged between leading exporters, such as Germany & Ireland, and straggling exporters, predominantly in the Mediterranean. Read more