This paper will be looking into the phenomenon of the recent US recession in light of its relationship with the economies of developing countries. It seems that Keynesian Economics managed to save the US Economy from the inefficiencies caused by the free market economy, but how can such a tragedy be handles in small developing countries wherein governments don’t have the same resources to bailout corporations?
This writer believes that it is important to analyze the repercussions of this phenomenon as there are many developing countries whose development and more specifically their economies , are modeled after the economy of the United States. In Episode 1, “The Battle of Ideas,” we saw that Keynes believed that the private sector decisions sometimes lead to unproductive macroeconomic outcomes and therefore, he advocated active policy solutions by states or governments.
It was followed by huge economies in order to survive the Great Depression of the 1930s but was dismissed in the late 1970s-1980s (and seemingly) until now for the free market economy or with what Hayek has been advocating decades back. But recently, due to the economic recession that the US and much of the world’s huge economies experienced, it would seem that Keynes can be correct after all. This can be illustrated by the fact that without numerous bailouts from the federal government, US capitalism would have collapsed under its own knees.
This statement in Episode 1 by Robert Skidelsky is worth saying to those who have scoffed at Keynes in the years before this recent recession (2007-present), “Hayek always rejected macroeconomics. He rejected any government intervention during the Great Depression itself, whereas Keynes was an activist. He said in the long run we’re all dead, and in the long run if we allow things to go on without remedy, we get lots of Hitlers, lots of wars, and lots of Stalins. And who was right? “
What the US Federal government did in bailing out the almost bankrupt financial institutions was much like what Keynes (as mentioned in “The Battle of Ideas”) has been advocating: Governments should spend against the wind. In good times they should reduce their spending and build surpluses; in bad times, like the Great Depression, they should step up spending, run deficits, and put purchasing power into the hands of working people. ” It is worthwhile to first look at the long history of rivalry between Keynesian and Classical/Neo-Classical Economics.
Before the Great Depression of the 1930s, the market was left alone (‘laissez faire’) as was advocated by Classical Economists like David Ricardo and Adam Smith until the Great Depression occurred. Industries collapsed, the thriving economy in a slump,jobs lost, people went hungry. After the Great Depression, government adapted the Keynesian Economics and resuscitated the economy back to life. All was well and until the economies become stagnat and inflation sky-rocketed. When welfare states and dependent economies failed, it was the free market economy that went on to give life to sick economies.
The transition to this was difficult as we have learned from “The Agony of Reform”. There may be three reasons that can be pointed out why struggling economies found it difficult to make the transition from having a state-run economy into letting the market work by it : 1. From Episode II, “The Agony of Reform” we can see the first reason may be the fear of the shock that the change will make. Price of essential needs will inevitably skyrocket at first while the market evens out itself after price controls have been lifted as what happened to Bolivia.
2. The second reason is the political context in the country wherein the transition will be made. Political leaders fear that they will lose power because of the discontent or worry of people caused by the sudden impact of the transition from state-run economy to market economy (As such with the leadership of Nixon and other Latin American Countries). 3. The third reason is that the leaders themselves have gotten used to dependency and conservatism and are afraid to take risks. The same seems to be true for their citizens.
Another reason, I think, that was a factor for struggling economies’ (at least those in the Latin Americas) difficulties in making the transition was because they are pressured into following models prescribed by the bigger and stronger economies such as Britain and the US. In this shift from one paradigm to another, we have seen that the most difficulty was experienced by the developing countries during that time (as shown in the film, particularly Latin America). Going back to the present situation of economies today, there great curiosity on what will happen next with economic giants such as US and UK but how about developing countries?
Most developing countries are highly dependent on direct foreign investments. When economies of developed countries are doing well, the supply of investment for developing countries go up but during a recession, supply of investment for developed countries go down. As developing countries are highly dependent on agriculture and usually without their own national industries, lack of foreign investments coming in would mean loss of jobs and decrease in the Gross National Income. No jobs would mean fewer taxes for the government and less support for its jobless citizens on social services.
It is indeed a cycle of poverty. This is what happens to developing countries. Due to lack of their own national industries, they do not even have corporations to bail out. Instead, they seem to be mere extensions of the bigger economies instead of being equally connected as is ideal in a globalized economy that is being advocated by the World Bank and the International Monetary Fund. Right now, I believe that developing countries should encourage its own citizens to take part in their economy through small and medium-scale enterprises in order for their economy as they encourage foreign investment.
This is for them to have a fall-back in times of a global recession. Also through this way, people will not be so dependent on foreign investment in providing jobs for them. In our course, I have learned the different macroeconomic theories that have worked and failed through the years. Through historical analysis and study of the positive and negative sides of the theories and their applications, I believe that the same obstacles will be faced. Thus the importance of carefully reviewing economic policies that have worked and following or enhancing them and also making sure that those policies that have failed are not enforced again.
In order to overcome these obstacles, a balance with the private and the public sector in the economy should be achieved after all, too much of anything can never be good. History has shown us that markets fail because of the abuse of some corporations in their quest for more financial gains therefore better business ethics on the part of corporations should be promoted. On the part of the government/state, regulatory boards and committees should always be present, the roles of which are to draft “loose” rules particular for each industry in order to ensure that no abuse by market players are being done.
By “loose”, it is meant that these rules should be more of a monitoring mechanism rather than controlling. By establishing institutions such as these, recessions or market inefficiencies can be avoided, also saving the state the need to majorly interfere through providing financial help to the market by creating stimulus programs or bailouts. I believe that achieving the balance between the application of Keynesian and Free Market Economics (Neo-Classical) will ensure the stability of markets thus ensuring development of all nations. .