Milton Friedman, 1912–2006
Milton Friedman is best known as the founding father and leading exponent of the monetarist school of macroeconomic thought, and for championing the case for the efficacy of free markets in a wide variety of contexts. Without doubt, Friedman’s ideas have influenced the research agenda of a whole generation of economists as well as those who influence public policy throughout the world. Friedman’s extraordinary gifts of communicating complicated ideas allowed him to become one of the very few economists who are well known outside the economics profession. As well as his many scientific contributions, Friedman sought to communicate his views on a wide range of issues to non-economists. His gift for writing about topics in applied economics, accessible to a mass audience, established Friedman as one of the world’s most famous economists. Throughout his professional academic life, because of his high public profile, the ideas of Milton Friedman certainly aroused strong reactions from both opponents and supporters, and, until very recently, with respect to many of his ideas, he swam against a strong and extremely hostile tide of opinion. However, whatever view is held about Friedman’s libertarian political and economic philosophy, most commentators would agree that his recent passing brings to an end the life of the last great economist guru of the twentieth century. In this paper, Brian Snowdon and Howard Vane review his most influential contributions to economic analysis and political economy.
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What Future for Central Banks?Central banks around the world differ in their functions, size, efficiency and status. In this article, Sir Howard Davies, a former Deputy Governor of the Bank of England, discusses the development of central banking over the last few years, and where it might go in the future. His main focus is the political setting within which central banks operate, and their institutional structure and governance.
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Education in a Globalized WorldThe arguments in favor of education rest on various premises: legal and humanitarian—that children are entitled to an education as a basic human right; economic—that countries will advance faster when people are educated; social and political-that education is essential for building cohesive, equitable, democratic societies; and moral-that devoting resources to education is the “right” thing to do. For decades, countries have worked together in an attempt to ensure that all children get an education, particularly primary education. Falling short, these efforts have been repeatedly renewed. Although enrollment ratios have increased in all developing regions, several regions are likely to fall short of the 2015 goal of universal primary completion. Gender disparities remain high in some regions. Several developing regions are particularly far behind developed ones in secondary and tertiary enrollment, and although enrollment at these levels has been increasing, international efforts have not focused on this. Globalization has offered the biggest rewards to countries that have emphasized education and made improvements at these levels, and it has most benefited individuals who have gained higher-level skills through quality education. In many developing countries, however, the quality of education is low, a fact that has received insufficient attention. Greater investment in education will be needed, but better use of educational funds is also important.
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Running the IMFIncreasing concern has been expressed by both scholars and officials about political bias and influence in the IMF. This is seen as threatening the effectiveness of the institution. But how can the problem be resolved? One way would be to try to create greater political balance by changing quotas and therefore voting rights. In limited form, this is the approach that was adopted at the Fund’s Annual Meetings in Singapore in September 2006. The article critically examines this option. It goes on to explore the idea of granting greater independence to the Fund. Although far from straightforward, it may be sensible for policy to begin to work towards this objective. However, IMF independence would also force the world to decide what purposes the Fund should fulfil and what instruments it would need in order to fit these purposes.
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Agricultural Reform and Trade NegotiationsIn this essay, Kim Elliott examines the patterns of support for agriculture across countries and commodities in the industrialized world. She then summarizes the approach to reducing trade-distorting support that came out of the Uruguay Round, and concludes with a discussion of the implications for reviving and successfully concluding the Doha Round.
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Hosting the FIFA World CupCountries often compete fiercely for the right to host the football FIFA World Cup finals, but apart from national prestige, are there any concrete economic benefits to be gained from hosting sporting events such as the Olympics or the World Cup? The evidence is mixed. Many estimates suggest that large gains in employment and a boost to economic growth result. Some economists conclude that the net economic impact arising from a boost to aggregate demand is often negligible or even negative. This paper surveys a range of studies assessing the macroeconomic impact of hosting the finals. The authors argue that it is inappropriate to rely on measures of the economic impact that are concerned only with the effect on macroeconomic variables to decide whether a bid should be made or not, since hosting events can have major effects on the structures of the football market and related industries.
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The Stern Review: A Dual Critique Author: , December 2006
The Stern Review, described as the most comprehensive review ever carried out on the economics of climate change, was published on 30 October 2006. The twin papers from a combined team of scientists and economists present a critique in two parts of the Stern Review. Part I focuses on scientific issues and their treatment in the Review. It forms the point of departure for Part II which deals with economic aspects. Each paper has its own list of authors. In relation to both scientific and economic issues, the authors question the accuracy and completeness of the Stern Review’s analysis and the objectivity of its treatment. They conclude that the Review fails to present an accurate picture of scientific understanding of climate change issues, and will reinforce ill-informed alarm about climate change. Two interrelated features of the Stern Review are that it greatly understates the extent of uncertainty as to possible developments, in highly complex systems that are not well understood, over a period of two centuries or more; and its treatment of sources and evidence is persistently selective and biased. These twin features have combined to make the Review a vehicle for speculative alarmism. In the judgement of the authors of the Dual Critique, the Stern Review mishandles data; gives too little attention to actual observation and evidence, as distinct from the results of model-based exercises; and takes no account of the failures of due disclosure, and the chronic limitations of peer reviewing, that have been characteristic of work relating to climate change which governments have commissioned and drawn on. As to specifically economic aspects, the authors note among other weaknesses that the Review systematically overstates projected costs of climate change, partly though by no means wholly as a result of its failure to acknowledge the scope for long-term adaptation to possible global warming; underestimates the likely cost—including to the world’s poor—of the drastic global mitigation programme that it calls for; and proposes worldwide adoption of a specially low rate of interest for discounting the costs and benefits of mitigation, on the basis of inadequate analysis and without regard for the problems and risks that would result. So far from being an authoritative guide to the economics of climate change, the Stern Review is deeply flawed. It does not provide a basis for informed and responsible policies.
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A Review of the Stern ReviewThe Stern Review on the Economics of Climate Change was published on 30 October 2006. In this article Richard Tol and Gary Yohe, while agreeing with some of the Review’s conclusions, disagree with some other points raised in the Review and they address six issues in particular: First, the Stern Review does not present new estimates of either the impacts of climate change or the costs of greenhouse gas emission reduction. Rather, the Stern Review reviews existing material. It is therefore surprising that the Stern Review produced numbers that are so far outside the range of the previous published literature. Second, the high valuation of climate change impacts reported in the Review can be explained by a very low discount rate, risk that is double-counted, and vulnerability that is assumed to be constant over very long periods of time (two or more centuries). The latter two sources of exaggeration are products of substandard analysis. The use of a very low discount rate is debatable. Third, the low estimates for the cost of climate change policy can be explained by the Review’s truncating time horizon over which they are calculated, omitting the economic repercussions of dearer energy, and ignoring the capital invested in the energy sector. The first assumption is simply wrong, especially since the very low discount rates puts enormous weight on the other side of the calculus on impacts that might be felt after the year 2050. The latter two are misleading. Fourth, the cost and benefit estimates reported in the Stern Review do not match its policy conclusions. If the impacts of climate change are as dramatic as the Stern Review suggests, and if the costs of emission reduction are as small as reported, then a concentration target that is far more stringent than the one recommended in the Review should have been proposed. The Review, in fact, does not conduct a proper optimization exercise. Fifth, a strong case for emission reduction even in the near term can nonetheless be made without relying on suspect valuations and inappropriate summing across the multiple sources of climate risk. A corollary of this observation is that doing nothing in the short term is not advisable even on economic grounds. Sixth, alarmism supported by dubious economics born of the Stern Review may further polarize the climate policy debate. It will certainly allow opponents of near-term climate policy to focus the world’s attention on the estimation errors and away from its more important messages: that climate risks are approaching more quickly than previously anticipated, that some sort of policy response will be required to diminish the likelihoods of the most serious of those risks, and that beginning now can be justified by economic arguments anchored on more reliable analysis. These six points are discussed in separate sections before the authors reach their conclusion.
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Book Review Author: , December 2006
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An Economist Looks at Suicide TerrorismSuicide terrorism has an economic aspect. The organisation of a suicide mission requires an incentive, a voluntary transaction, and a contract that is enforceable by the parties to it. A terrorist faction that competes for power in a community that is both oppressed and oppressive provides young people with an incentive to invest in an identity that is rendered more valuable by death. Suicide attacks are then the outcome of a voluntary agreement between the faction and the young person to trade life for identity. The institution of the “living martyr” renders the agreement privately enforceable. Thus, suicide terrorism is the outcome of an individual rational choice. There are some implications for counter-measures.
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Economic, Neurobiological and Behavioral Perspectives on Building America’s Future WorkforceA growing proportion of the US workforce will have been raised in disadvantaged environments that are associated with relatively high proportions of individuals with diminished cognitive and social skills. A cross-disciplinary examination of research in economics, developmental psychology, and neurobiology reveals a striking convergence on a set of common principles that account for the potent effects of early environment on the capacity for human skill development. Central to these principles are the findings that early experiences have a uniquely powerful influence on the development of cognitive and social skills, as well as on brain architecture and neurochemistry; that both skill development and brain maturation are hierarchical processes in which higher level functions depend on, and build on, lower level functions; and that the capacity for change in the foundations of human skill development and neural circuitry is highest earlier in life and decreases over time. These findings lead to the conclusion that the most efficient strategy for strengthening the future workforce, both economically and neurobiologically, and for improving its quality of life is to invest in the environments of disadvantaged children during the early childhood years.
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Has the European Social Model a Future?The European Social Model, involving high levels of government spending and taxation, labour and product market regulation and the involvement of the “social partners”, is in crisis. The core European economies are experiencing low economic growth, slow job creation and high levels of unemployment. In the longer term, demographic pressures are a serious concern. Faced with these problems, economists argue for reform but politicians find this difficult and the European Union is in political crisis. This article explores these issues and suggests that the answers lie at national rather than EU level.
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What Could Brake China’s Rapid Ascent in the World Economy?There has been much hype about China’s rapid ascent in the world economy. For instance, economists from Goldman Sachs and the OECD have predicted that the Chinese economy will overtake the Japanese and the US economies well before the mid–21st century. However, these optimistic, straight-line projections are based on extrapolations from past trends, without paying sufficient consideration to the many challenges that China must face going forward. This paper aims to balance this sanguine perspective by identifying a number of near-, medium-, and longer-term potential “growth-decelerators”—i.e., economic overheating, widening regional and rural–urban economic divides, banking sector fragility, environmental degradation, rampant corruption, an ageing population and military conflict with Taiwan—that could possibly brake China’s rapid ascent in the world economy. It also seeks to examine how these potential “growthdecelerators” would impact China’s future expansion trajectory.
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Making Fiscal Space Happen!Debt relief and the scaling up of aid to low-income countries should allow for increased fiscal space for expenditure programs to spur long-term growth and reduce poverty. But as discussed in Peter Heller’s article “Pity the Finance Minister” (World Economics, Vol. 6, No. 4), designing a suitable medium-term fiscal framework that fosters a sustainable delivery of better public services and infrastructure while maintaining a credible commitment to fiscal prudence raises many challenges. This article first discusses what low-income countries can do to formulate fiscal policy frameworks that are ambitious in their goals for absorbing additional aid while maintaining longer-term sustainability of the expenditure programs and government finances. It then suggests the approaches required to manage the heightened fiscal policy risks associated with a scaled-up aid environment, including issues of coordination with monetary policy. And finally, the article discusses what institutional changes are needed if donors and countries are to facilitate the implementation of a higher level of aid-financed spending programs.
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From The Hong Kong WTO Ministerial Conference to the Suspension of the NegotiationsThis paper makes an assessment of the WTO Doha Negotiations from the Hong Kong Ministerial Conference until the suspension of the Doha Round at the end of July 2006. The paper analyses the events from a development perspective distinguishing between the perspectives of two broad groups of developing countries; the first that have an interest in an ambitious outcome in the agriculture negotiations; and a second group of developing countries that constitute the least developed and other small, weak and vulnerable economies. The paper concludes by arguing that the suspension of the Doha Round, and the almost certain extension of the round beyond 2006, means that the prospects for the development outcomes of the round to be realized have been postponed once again for both the above groups of developing countries.
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The Emergence of a Regional Financial Architecture in AsiaThis paper provides an assessment of monetary and financial cooperation in Asia since the regional financial crisis of 1997–98, with a view to determining whether the emerging Regional Financial Architecture in Asia is compatible with the global financial architecture and what are the prospects for possible economic and monetary union. Monetary and financial cooperation has focused on four architectural pillars (economic policy surveillance, crisis prevention, liquidity support, and bond market development), which can be consistent with the global architecture. However, progress toward full integration is likely to be gradual and experimental, given the lack of strong regional institutions, regional economic disparities, and the need to build political commitment to such a goal.
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Comment Author: The ‘climate change’ debate: S. Fred Singer responds to the exchange, in the previous issue, between Nicholas Stern and Ian Byatt et al., September 2006
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Book Review Author: Johannes F. Linn on Ngaire Woods, The Globalizers: The IMF, The World Bank, and Their Borrowers, September 2006
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What is the Economics of Climate Change?A major review of the economics of climate change under the leadership of Professor Sir Nicholas Stern was announced at the end of July 2005, reporting to the United Kingdom’s Chancellor of the Exchequer and to the Prime Minister. The Stern Review on the Economics of Climate Change is due to report in autumn 2006. This article sets out some of the issues the review is considering.
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Russia at the Crossroads Author: An interview with introduction by Brian Snowdon, June 2006
To set the interview in context, Brian Snowdon first traces out some important landmarks in twentieth-century Russian/Soviet Union history. In the conversation that follows, Professor Desai gives her views on a number of key issues relating to the decline of the Soviet system and problems of Russia’s transition to a market economy. Recently, Freedom House has suggested that Russia is at a ‘crossroads’ with respect to its fledgling liberal democracy and market economy. Therefore, also discussed are the prospects for survival of democracy and markets in the new Russian ‘liberal’ order. In the first part of the interview, Professor Desai also comments on the influence of socialist ideas on India’s growth and development strategy.
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Understanding China’s Economic TransformationEconomic change is a process of continual adjustment to new circumstances. Economies are always in the process of becoming. Good economic policy entails pragmatic adjustment so that economic dystrophy is avoided. The experience of economic (institutional) reform in China since 1978 is drawn on—and explained—to illustrate the extent to which Deng’s reforms represent the pragmatist’s focus on the practical effects of purposeful actions. Economies rest on an evolving institutional foundation. Deng understood this and used it to bring China to the forefront of the world’s economic stage. Here is an account of how he managed that transition.
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The Economic Growth of East Asia and Latin America in Comparative PerspectiveThis paper attempts to identify key factors that can account for the divergent economic performance of East Asia and Latin America during the second half of the 20th century. Within the triad of so-called “deep determinants” of economic growth (geography, policy and institutions), the paper argues that differences in policy and institutions are most important in accounting for this regional divergence. In contrast with East Asia, Latin America has exhibited continuing problems of macroeconomic instability and a much weaker degree of integration into the global economy. In addition, there are marked institutional differences between the two regions, with East Asia identified with stronger public institutions and indicators of government effectiveness.
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Are Mr de Rato’s Spectacles Rose Tinted?Since the annual meetings of the IMF in September 2005, its Managing Director, Rodrigo de Rato, has been publicizing a medium-term strategy for the institution based on the organizing principle of globalization. Mr de Rato presents the challenges facing the Fund as global economic imbalances, capital account crises and the problems of low-income countries. But do his envisaged reforms meet these challenges, and are there other issues that need to be addressed? This paper provides a critical evaluation of the main elements of the Fund’s strategy and briefly examines a number of alternative reforms.
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Gold and Silver as Monetary MetalsCommodity money systems, based upon gold or silver, provided relative economic stability for centuries. On the other hand, our modern paper money system, based upon unbacked government liabilities, is particularly vulnerable to abuse. The various financial crises during the twentieth century bear witness to that. This paper seeks to explain the mechanics of the former Gold and Silver Standards and provides an overview of America’s experience with its bimetallic system.
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Reply to Byatt et al. by Nicholas Stern Author: , June 2006
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Making Capitalism Work for EveryoneThere is a widespread belief that free markets do not benefit the common person, let alone the poor: they are only an instrument for the rich to get richer. Not only is this belief false, but in fact the opposite is true. Free markets are the single most important tools to eliminate poverty and spread opportunity. The problem is that people do not distinguish enough between true free market capitalism, which implies competition and equal access, and the failed version experienced in many countries where powerful elites protect their position by denying fair access to markets. Particularly in developing countries, ordinary people never see the benefits of properly working capitalism. To make them work for all, markets need political support to provide the right amount of rules and regulations that will allow them to flourish; a government that is not too interventionist and not too laissez-faire. While there is no single proposal that will preserve the system of free enterprise from its enemies, the authors suggest three mutually reinforcing broad policy objectives: keep borders open to the flow of goods and capital; encourage the transfer of productive assets into efficient hands; and maintain safety nets focused on individuals.
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Two British Initiatives for IMF Lending to its Members, 1960–1962This paper describes the origin, evolution, and results of two initiatives taken by the United Kingdom in the early 1960s. Both initiatives aimed at facilitating large-scale lending by the IMF (or in close parallel to the IMF), primarily in support of the two reserve currencies of the international monetary system, the US dollar and sterling. The first initiative—of which there appears to be no previous record extant anywhere—achieved its objective, leading to three important changes in IMF policy, including the General Arrangements to Borrow (GAB). The design of the second practically ensured its failure to win international support; but it provoked the United States into proposing a powerful study group on international liquidity which, seven years later, resulted in the creation of the Special Drawing Right (SDR) facility in the IMF.
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Can Iraq Overcome the Oil Curse?A growing literature suggests that the oil sector and the allocation of its revenues is the critical variable in shaping both the economic structure and political systems of countries like Iraq. For the most part this literature focuses on the so-called “oil curse” or the “paradox of plenty.” An examination of the Iraqi situation suggests that the country’s current supply-side development strategy will ultimately result in the dominance of “oil cure” effects. In contrast, an alternative demand-oriented approach might be more likely to succeed in the current Iraqi environment.
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Trade Policy 2006The global momentum in favour of trade liberalisation has slowed down; and there is more liberalisation-scepticism post-Washington Consensus. Chances are that the Doha Round will either collapse or deliver a very modest result. Both outcomes will leave the WTO in very serious trouble. For the WTO to have future relevance, its members must restore a market-access focus, and arrest crippling UN-style decision making. But its days as a major vehicle for liberalisation are probably over. PTAs, however, are not a serious alternative. Nearly all are bitty sectoral deals rather than comprehensive WTO-plus agreements. They distract attention from unilateral reforms and the WTO; and they are undermining non-discriminatory multilateral rules. The silver lining is that liberalisation is likely to come from a different route: from unilateral example-setting and competitive emulation. China is now the unilateral engine of freer trade, and this will reverberate elsewhere, especially in its Asian neighbourhood. That, not trade negotiations, is more important to Asia’s unfolding transformation of the global economy. Multilateralism, especially a workable WTO, has its rightful place. But only if its means and ends are suitably modest and realistic.
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The Enduring Elixir of Economic Growth Author: An interview with introduction by Brian Snowdon, March 2006
“I think that the most important question that an economist can ask is, What is it that makes a country grow? More than anything else it is economic growth that affects human welfare…this is why it must remain a major research interest for economists.” In this interview Xavier Sala-i-Martin—widely recognised as one of the world’s leading economists in the field of economic growth—discusses with Brian Snowdon several important issues relating to economic growth and development. The interview, which follows a review of the historical context of recent research, addresses arguments about growth and history, theories and models, globalisation and convergence, political barriers and the ‘natural resource curse’, the impact of religion and culture, and questions of international inequality, foreign aid, human capital, geography, competitiveness, economic and political freedom, and happiness.
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Global Income InequalityThis paper presents a non-technical summary of the current state of debate on the measurement and implications of global inequality (inequality between citizens of the world). It discusses the relationship between globalization and global inequality. It shows why global inequality matters and proposes a scheme for global redistribution.
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Are We Heading for a Dollar Crisis?The US balance of payments current account deficit is in excess of 5 per cent of GDP. Is this sustainable? A loss of confidence in the dollar could lead to foreign investors selling dollars and to a sharp dollar devaluation. In principle, there could be a dollar crisis. But how likely is it? This paper investigates the extent to which the situation in the mid 2000s mirrors that at the time of the last dollar crisis in 1971. It also examines the causes of the contemporary US current account deficit and the factors determining its sustainability. It goes on to discuss the need for policy action both within the US and in the rest of the world to minimize the risks of a dollar crisis that could have serious implications for the global economy.
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Do the Young British Artists Rule?In recent years, some English critics have claimed that Damien Hirst and his fellow young British artists have made London the new center of the advanced art world. As Hirst reaches the age of 40, this paper uses auction results to measure the importance of the YBAs compared to their American peers. Auction prices show that the YBAs do rule over their American rivals: both Hirst and Chris Ofili have had individual works sell for more than $1 million, a level no American artist under 40 has achieved. Whether London can continue its success will depend in part on whether it can match New York’s ability to attract important artists born in other countries.
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Comment Author: , March 2006
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Book Review Author: , March 2006
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