The Idea of Clinical Economics

We’ve seen how modern economic growth diffused through the world. It started in England. It spread out [COUGH] like the ripples of waves on a lake surface. But, why did it go to particular places? Geography matters a lot, proximity to already rich markets matters. The conditions of the natural environment, the government policies all matter. I’d like to take a deeper dive today into this question. What happens within individual countries that determine whether that country gets on a path of rapid economic growth and development, or whether it remains mired in poverty.

There are lots of reasons that, or good explanations for why some countries advance and others get stuck. But what’s true is that those good reasons don’t all apply to all places. The real art of economic development is to make good judgement what’s happening in this particular place. Not on average, but if there’s a country that is facing an economic crisis, if your country is stuck in poverty, Or stuck in instability. What needs to be done here and now. How do we make a diagnosis? Well, I, I was lucky, in, in, my own work and thinking about this because I got to watch close up a wonderful diagnostician. Do her work. Thats my wife. Shes a clinical pediatrician, and when she sees a young child with a fever, she doesn’t say oh that’s it I know what that is all fevers are the same. Of course she does something completely different. Her training and knowledge and experience shows her as a trained medical doctor that there could be a thousand reasons for that fever. And in order to give a good prescription there has to be a good diagnosis. And what the doctors call it is differential diagnosis. Well I’ve come to the view that in economic development, and in sustainable development more generally, we also need to have a clinical approach. In my book The End of Poverty, I called it clinical economics[1]. And I said the world of a  good practicing clinical economist is to make a differential diagnosis just like a good medical doctor. And the fact of the matter is that as medical doctors go through their checklist what could be the cause of that fever. Is that an infection, is it something more serious. And they look at the evidence, they look at the lab results, they do the interviews, they try to understand from the parents and from the child, what’s happening. And then they draw a rich diagnosis. So to we as. The practitioners of sustainable development need to make such a differential diagnosis. On my checklist, as I presented it in the end of poverty, I suggested seven items on that checklist. Each with many categories to work through. What could cause a country to be stuck in poverty or stuck without economic growth? Let me mention the seven. First, could be what I call a poverty trap. Second, it could be bad economic policies, governments just making terrible mistakes. Choosing the wrong kind of strategy, closing the borders when international trade would make more sense, going for central planning under communism when a market system would be much more propitious for economic development. A third it could be that the government is broken in some manner, and most often, it’s bankrupt. Many governments around the world, and throughout history, have gotten into a fiscal mess. They’ve spent too much, they’ve taxed too little, they’ve got into wars that they shouldn’t have done and couldn’t afford, and ended up with a massive fiscal crisis. A fourth is physical geography. Maybe the country is stuck. Because it’s landlocked, high in the mountains, facing a terrible disease burden. Malaria for example. You might say, well if it’s geography, what can you do about it? You can’t change your geography. But the fact of the matter is you can change the consequences of your geography. If a country is landlocked, it needs to think about transport, and the kinds of industries that it’s promoting. If it has a heavy disease burden like malaria because of its tropical environment, it has to think about specific disease control. So while geography might not change, the results of geography are often subject to the human resolution. A fifth kind of failure could be ru, the lack of rule of law, massive corruption. That corruption[2], when it gets out of hand, can completely frustrate the normal processes of governance and therefore of economic development. A sixth. Problem could be cultural barriers. In fact, it’s very often said, if a country isn’t performing well, something’s wrong with the culturee. More often than not, I think that’s glib and simplistic, but sometimes cultural factors can really make a difference. And last. It’s geopolitics. By geopolitics, I mean a country’s relations with it’s neighbors, with it’s foes, with it’s allies. Because countries can suffer geopolitically. Of course, countries that fell under imperial domination in the middle of the 19th century and were under colonial rule for a century or more. Our powerful examples of what geopolitics can do to frustrate economic development. Clearly these seven factors and the many sub-factors that would fall under each of these categories does not necessarily apply in any particular condition. It’s a checklist for a diagnosis to ask what in particular counts in this particular place from the point of view of the strategy of economic development or of sustainable development more generally. In my own experience of more than 25 years of working with countries all over the world, It’s really struck me how different parts of the world in different counties in different times have extremely different conditions that they need to confront to get out of the rut, and the idea of always prescribing the same medicine, for a doctor it would be a disaster, the same is true. A foreign economy. I worked in Bolivia in the middle of the 1980s. That country had a hyperinflation. Prices were rising thousands of percent per year. When you did the differential diagnosis you could see that the government was broke. The government was printing money to pay its bills. And therefore what was required most of all was to get the budget under control in short order so that this fever of hyperinflation could be broken. That involved in part cancelling some of the debts that Bolivia’s government owed to international banks. That was part of the solution. Maybe in other countries, that wouldn’t have been necessary but in Bolivia’s case, it was. 1989, when Poland was in the transition from communism to a market economy, the great challenge was to allow supply and demand, markets and trade to work once again. Because the central planning mechanism had collapsed. When I began working in Africa, in the middle of the 1990s, the conditions obviously were completely different, from those of Poland, or Bolivia earlier, indeed other parts of the world. Africa was in the midst of a massive AIDS pandemic. It was in the midst of a massive resurgence of Malaria. Many places were so poor, that the most basic infrastructure, grows. Power, water, and sanitation did not even exist. I’ve found some. Economic officials from international institutions prescribing exactly the same medicine that, that they had said was needed in Poland or in other places. And it amazed me. Do a differential diagnosis and you see the problems in Tanzania or Ghana or Mali are completely different. From those in Poland. Do expect that these conditions will differ across history within a country, and certainly at any time across countries of the world. Now, one of those possible diagnoses is a poverty trap. Since we want to focus on the poorest of the poor to help. The poorest places get out of poverty. It’s important for us to focus on this particular case. It does not apply to most parts of the world. The idea of a poverty trap is rather straightforward, even if it’s sometimes overlooked. The idea is that any. Economy in the 21st century needs certain basics in order to be able to achieve economic development. It needs the basics of roads, of ports for trade, of electricity. Of safe water and sanitation for the people of access to basic health care so that the population is not burdened massively by disease and of education for children. Pretty basic list, and most of the world is able to secure that. But the poorest of the poor countries often cannot. Because the amount of finance that’s needed just for those very basic goods could be out of reach of the government. Let me give you an example. Suppose that you look at the basic cost not of, of fancy systems for health and education, roads and power. But of a very rudimentary system to help a poor country get started in economic development. Say that the cost of that, when you add it up, is $200 per person per year. Consider a poor country, say, $500 per capita as we’ve seen in the case of Malawi, for example. The budget for Malawi might collect 20% of the national income for public provision of goods and services and investment in infrastructure. Well, 20% of $500 per capita means that the government would be collection $100 per person per year. But we just said that the minimum needs are $200.00 per person per year. So the government of Malawi may be staffed with wonderful people and they know just what to do, they’ve made a great differential diagnosis, they even have plans on the shelf for schools, for clinics, for roads, for power, for water and sanitation. But how are they going to pay for it? They are trapped in poverty. Because they know what to do, they know the investments that need to be made, but they don’t have the money for it. There are two ways to break the poverty trap. One way is to borrow that extra money, and then have the economic growth that results. Help to pay off in the future. If global capital markets worked well, that would be a remedy. But private markets and public lenders say, well, that’s a poor country. That’s too much of a credit risk. We can’t lend to it, even if our loans would trigger the development that would allow them to repay. So the capital market solution doesn’t work all that well. The alternative is to get a boost of help. A short term boost, sometimes called aid or sometimes called official development assistance. So that a country like Malawi can fight Malaria, or build the classrooms for it’s kids. This is a pretty proven method and it really works. During the last dozen years or so as the world has been organized to help countries in extreme poverty fight extreme poverty. There have been special institutions set up like the Global Fund to fight AIDS, TB, and Malaria. And when money is put into that fight, you get tremendous results. Alas, even though the evidence is strong that it’s possible to break a poverty trap by that kind of target investment, and there are some positive results along the way. We haven’t quite succeeded yet in the world accomplishing that, in part because the concepts of what’s needed, the diagnostics of how to do it, and then the institutions to offer the finance are not fully in place. This remains one of the great challenges of sustainable development.

[1] http://en.wikipedia.org/wiki/The_End_of_Poverty

[2] http://www.transparency.org/cpi2013/results/