Advanced nations must increase their foreign aid

Its Wednesday and only a short blog post day. I have been following the disaster unfolding in Timor-Leste over the last few days as I continue to compile research material as part of the development of a plan to increase the resilience of the Island state. We know that accumulating new public infrastructure is a key to the growth process. It crowds-in private investment, which leverages off the capacity provided by such infrastructure. A lack of essential public infrastructure is a major aspect of poverty and exclusion. While natural disasters impact on all nations when afflicted, the problem for Small Island Developing States (SIDS) like Timor-Leste is that they regularly face major capital destruction as a result of natural disasters and do not have the capacity to defend themselves and reduce the consequences of the events. Climate change is rendering this problem more severe. This is where the creation of a new multilateral agency to replace the corrupt IMF is necessary.

Timor-Leste – the development challenge

Like most nations, Timor-Leste is now fighting the coronavirus.

The last thing that it needed was for a natural disaster to necessitate the crowding in of people in emergency shelters where any sense of social distancing was near impossible.

But as we know, that is exactly what happened.

The pictures coming out of the nation have been devastating.

While flooding is not uncommon during the wet season in the region, what happened in the last week has been of another scale.

The floods and mud torrents have wiped out houses, bridges and roads in the island state. And the accumulation of rubble has meant assessing the full-scale of the crisis has been difficult, including gaining access to survivors, especially, in the regional areas outside of Dili.

With so much water around, the next problem is the waterborne diseases such as typhoid, cholera, etc.

There are economists who think that natural disasters have a beneficial effect on less advanced nations – the so-called ‘blessings in disguise’ idea.

The notion draws on Joseph Schumpeter’s concept of – Creative Destruction – which posits that out of industrial turmoil, the economic structure of a nation is revolutionised with the strong squeezing out the weak firms.

As a result, the conjecture is that the economy becomes more efficient (lower cost of production) and grows more strongly.

Schumpeter, got the idea from Marx and Engels, who in – The Communist Manifest – of 1848, wrote that (p.17):

Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeois and of its rule. It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.

I have always loved that characterisation of economic crises driven by a shortfall in overall spending. Marx knew about macroeconomics long before Keynes articulated the same idea about effective demand.

Marx refined this idea of the destructive characteristics of economic crises in Chapter 17, Volume II of the epic – Theories of Surplus Value – published in 1863 where he wrote (p.496):

the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use-values. What one loses, the other gains. Values used as capital are prevented from acting again as capital in the hands of the same person. The old capitalists go bankrupt. If the value of the commodities from whose sale a capitalist reproduces his capital was equal to £ 12,000, of which say £ 2,000 were profit, and their price falls to £ 6,000, then the capitalist can neither meet his contracted obligations nor, even if he had none, could he, with the £ 6,000 restart his business on the former scale, for the commodity prices have risen once more to the level of their cost-prices. In this way, £ 6,000 has been destroyed, although the buyer of these commodities, because he has acquired them at half their cost-price, can go ahead very well once business livens up again, and may even have made a profit. A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction. This is also the period during which moneyed interest enriches itself at the cost of industrial interest.

Marx did not fully anticipate the rise of monopoly capitalism, where concentrated sectors dominated by large firms, have greater capacity to withstand crises and maintain their nominal capital intact.

Schumpeter built on Marx’s views but instead of seeing crises as the manifestation of the inherent contradictory, self-destruction of Capitalism (Marx), he rather saw the process of capital being destroyed and recreated as a creative, beneficial process.

Development economists who call on this idea of creative destruction – claiming that such crises provide opportunities to purge inefficient sectors and to add resilience and efficiency – however somewhat miss the boat when it comes to the type of disasters that less-advanced nations in the Pacific region face on a regular basis.

The ‘blessings in disguise’ approach is inherent in mainstream neoclassical growth theory, which posits that natural disasters do not impact negatively on the rate of technological progressin the long-run.

Marx and Engels were talking about the capital that owners of the material means of production hold. The aim of Capitalism is to convert nominal capital (money) into productive capital (machinery etc) to produce surplus value, which can be realised as profits and return a larger stock of money capital the so-called M-C-M’ cycle that typifies Marx’s approach to capital accumulation.

But the problem facing these island nations goes beyond the damage that natural disasters cause to the profitability and the private capital accumulation process.

The process of growth for any nation requires the accumulation of both productive and social capital, such as public infrastructure (roads, bridges, transport systems, telecommunications, water supply, power, etc).

Usually, it is the latter that crowds in the former as private sector investors take advantage of the growing stock of public capital and leverate profit-seeking opportunities.

For advanced nations with large capital stocks – both private and public – a natural disaster can interrupt the accumulation process but usually not derail it.

In the last 2 years, Australia, for example, has had widespread bushfire trauma and then the recent floods (which are still abating).

These events are disruptive but the capacity of the nation to quickly restore opportunities is large and the disruption is short-lived, which is not to say, the problems do not cause considerable trauma for those impacted the most.

But less-advanced nations lack this capacity to defend themselves against natural disasters and minimise the negative consequence of them

There is nothing creative or a ‘blessing’ about having a large proportion of a nation’s public infrastructure wiped out regularly by major weather events.

In ordinary times, the so-called Small Island Developing States (SIDS) face the prospect of losing a considerable proportion of their capital stock when a major weather event occurs.

The SIDS face multiple developmental challenges at the best of times – isolation, fragmented islands making up the nation, remoteness from major shipping routes (which increases the difficulty of creating export opportunities), dependence on imports for food, energy etc.

But then to have to regularly deal with the destruction of essential infrastructure makes the challenge that much harder.

And now, climate change has meant that these events are no longer just ordinary capital depletion disasters.

The intensity and frequency of these events are increasing and the capacity of the nations to rebuild their capital to get the process of development restarted is now reduced.

When Hurricane Irma struct the Caribbean in September 2017, 1.7 million people were displaced and Barbuda lost 90 per cent of its infrastructure (Source).

50 per cent of its population became homeless.

The current chaos and destruction in Timor-Leste will be similarly detrimental.

What the advanced nations need to do is recognise that they have currency sovereignty which means their foreign aid allocations can increase dramatically to help the SIDS deal with the regularity of capital destruction and to provide buffers to deal with climate change.

The IMF needs to be dissolved and a new multilateral body created to funnel capital into these vulnerable nations from the advanced nations without the sort of neoliberal conditionality that essentially makes it impossible for these nations to develop in any coherent way.

I am working on a plan for Timor-Leste which requires it to spend more of its oil revenue immediately and abandon the dollarisation.

More on that another day.

And I hope all my friends in TL are safe at present.

Music – My latest album

This is what I have been listening to while working this morning.

I often feature albums I have had for years (decades) but sometimes a fabulous new release takes my breath away.

Such is the latest release on Blue Note records – Breathe (no pun intended) – which became available on March 26, 2021. I am an early adopter!

It is from master organ player – Dr Lonnie Smith – who is now 78 years of age and has been a Blue Note staple.

Here is a – Review.

Lonnie Smith is one of the reasons I love Hammond B3 organs.

He played a lot with George Benson and Lou Donaldson.

If you are wanting some chill out today then this is it.

The track is World Weeps – one of Dr Lonnie’s own tracks.

It was recorded live in 2017 at New York’s Jazz Standard to celebrate his 75th birthday.

The other players are:

1. Jonathan Kreisberg – guitar.

2. Johnathan Black – drums.

3. Richard Bravo – percussion.

The Dr bit has nothing to do with medical training or a PhD in another discipline.

It is because he loves to “‘doctor up’ their music” (Source)

Very cool record.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 7 Comments

  1. “What the advanced nations need to do is recognise that they have currency sovereignty which means their foreign aid allocations can increase dramatically to help the SIDS deal ”

    I’ve been thinking about this over the Easter Weekend. ISTM that the ‘aid budget’ is actually vendor financing for a nation’s export businesses.

    We could even do it explicitly – the Western government asks the developing nation what stuff they need and then buys tractors, water cleaners, whatever from its own surplus export producers and ships it to the area needing development.

    That demonstrably solves the ‘money going abroad’ issue that seems to be the blocker of foreign aid. You could even dress it up as ‘export industry support’.

    On the other side, the developing nation ideally needs to asking for capital goods in aid to improve its food and energy productivity so it can free up people to bootstrap its own capital development.

    “The ‘blessings in disguise’ approach is inherent in mainstream neoclassical growth theory”

    Is that because they see capital as homogenous rather than heterogenous? I can’t imagine how the destruction of crops, livestock or the pollution of farmland will improve the capital stock of a nation.

  2. @Neil Wilson; no, it’s because neoliberalism has to find a way to deal with excess production, so they can persist with their obsolete classical “scarcity” ideology. Even free markets will be obsolete soon enough, when production via robots is the norm.

  3. “Marx did not fully anticipate the rise of monopoly capitalism, where concentrated sectors dominated by large firms, have greater capacity to withstand crises and maintain their nominal capital intact.” Nor did Marx even begin to appreciate–as no one else did at the time, of course–the full impact of the ecocidal trajectory of capitalism, an overriding issue which trumps all things purely economic. Nor did Marx’s vision of a revolutionary proletarian class ever materialize to any significant degree. So when will the Marxist left, paying due respect to Marx’s genius and continuing to draw upon the wisdom he offered, shift its focus to other major thinkers, grapple with current issues via updated, more relevant, more accurate frameworks? The position of the diehard Marxist reminds me of exclusive religious devotion to old revelations, ancient scriptures, a rigidity which stifles the evolution of new spiritual insights. And, yes, you can add Marx’s materialistic rejection of the spiritual dimension of human life, so characteristic of the 19th Century, into the mix of what, in the 21st Century, should seen as Marx’s obvious, fundamental mistakes.

  4. Agree with Neil. Foreign aid helps out export industry. Ultimately its aiding oneself.

    @Newton Finn,

    “So when will the Marxist left, paying due respect to Marx’s genius and continuing to draw upon the wisdom he offered, shift its focus to other major thinkers, grapple with current issues via updated, more relevant, more accurate frameworks?”

    Who are these major thinkers who have more updated, more relevant, and more accurate frameworks?

    Being dogmatist on anything is unhealthy.

  5. More on China’s remarkable rate of development:

    In a rare show of unity, Congress is ganging up on China: “The United States must retain “credibility as a defender of the democratic values and free-market principles embodied by Taiwan’s people and government,” the act said.”

    Isn’t it obvious by now that the US minimal interventionist “free market” is inferior to China’s state management of private sector free-markets? Don’t ‘free-markets’ alone result in winners and losers, whereas state intervention can avoid creating a class of losers, recognising everyone has something to contribute?

    Hence the US government has c.50% support, whereas more and more Chinese are satisfied with their government with > 90% support, according to a Harvard Research poll (google it).

    So what’s so wonderful about “democratic values”? Is it the freedom to fight your ideological opponent? Last time I looked the US was so wracked by hyper-partisanship, the sole attempt to build some HS rail between LA and SF ended in ignominious failure caused by arguing over who should pay for it.
    Which reveals democratic values are illusory, they only empower self-interest, as opposed to community wellbeing which ought to be enjoyed by all.

    The US is a monster whose military -industrial complex requires constant feeding, and the disastrous effects of the pandemic may well see the beast sticking its nose into ‘One China’s’ business, when that should be left to the Chinese themselves to sort out. Mainland China’s relations with Taiwan were satisfactory until the US decided the mainland was becoming too powerful…..

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