The damage done to third world countries by Harvard and UChicago

I recently read an article in The Economist about Jair Bolsonaro and one of his prominenet supporters  (a UChicago economist) and it remineded me of the damage done by such ‘luminaries’ to other third world countries such as Pakistan.

“In July, at a convention of his small and inaptly named Social Liberal Party, Jair Bolsonaro unveiled his star hire. Paulo Guedes, a free-market economist from the University of Chicago, has done much to persuade Brazil’s business people that Mr Bolsonaro can be trusted with the country’s future, despite his insults to women, blacks and gays, his rhetorical fondness for dictatorship and the suddenness of his professed conversion to liberal economics. At the convention Mr Guedes praised Mr Bolsonaro as representing order and the preservation of life and property. His own entry into the campaign, he added, means “the union of order and progress”.”

Further in the article,we learn more about the adventure of ‘Chicago Boys’

“[Chile’s dictator from 1973-90, Augusto] Pinochet sensed, rightly, that corporatism would require him to share power with his military colleagues. Instead, he called on a group of civilian economists, dubbed the “Chicago boys” because several had studied at the University of Chicago, where the libertarian economics of Friedrich Hayek and Milton Friedman held sway.

The Chicago boys applied these principles in Chile, whose economy had been wrecked by the irresponsibility of Salvador Allende, a democratic socialist overthrown by Pinochet. Their programme would eventually lay the foundations for Chile to become Latin America’s most dynamic economy at the turn of the century. But it was akin to a major operation by trial and error and without anaesthetic. They slashed import tariffs and the fiscal deficit, which fell from 25% of GDP in 1973 to 1% in 1975. They privatised hundreds of companies, with no regard for competition or regulation. Worried that inflation was slow to fall, they established a fixed and overvalued exchange rate. The result of all this was that the economy came to be dominated by a few conglomerates, heavily indebted in dollars and centred on the private banks.

In 1982, after a rise in interest rates in the United States, Chile defaulted on its debts and the economy slumped. Poverty engulfed 45% of the population and the unemployment rate rose to 30%. Pinochet eventually dumped the Chicago boys and turned to more pragmatic economists, whose policies contributed to Chile’s post-dictatorship prosperity.”

Pakistan was one of the countries that was ‘advised’ by economists from Harvard during the 1950s and 60s.

M. Ziauddin, veteran Pakistani journalist, wrote about the influence of Harvard and UChicago on Pakistan’s economy in his piece titled: Way Out of Deepening Inequality.

Some critique of the Harvard Advisory Group’s (HAG) broader actions can be found in a paper (found here and without paywall here) by Nadeem ul Haque and Mahmood Hasan Khan (Haque obtained a PhD from UChicago and Khan from a Dutch University).

“The HAG vision was flawed in three respects and sowed the seeds of the distorted development of the economics profession in these three respects.

First, it did not attempt to develop an economics profession that was rooted in the country. They left the universities and colleges in a state of neglect attracting resources to these new non-academic, semi-bureaucratic institutions and attempted to give them the lead in the profession. Without the seed of the pure profession being nurtured and jealously guarded in academia, the profession was bound to have a distorted growth.

Second, the HAG trained economists were very different from the economists of the time. The HAG training was very development oriented and specific to Pakistan. They were not encouraged to do any theoretical or pioneering research. Third, given the importance of HAG and the new institutions and the symbiotic relationship between these institutions and the bureaucratic and political setup of the time, these HAG trained economists acquired a large and visible role in the economy. These visible economists not only played an important role in Pakistan’s history but also distorted the country’s perception of an economist, the economics profession and economic policy.

By design, the HAG group was interventionist, plan and budget allocation oriented. They mistrusted the market and had the arrogance of having more information than the market and the rest of society. Interestingly enough, the HAG training of development economics was collapsing on itself. Because these people had no behavioral relationships in mind and no faith in markets, they did not merely push policy levers and study response lags and dynamics. Instead, they developed lengthy plans or wish lists and used the bureaucratic structures to control the environment to make these plans happen. This control-oriented and market-mistrusting civil service loved this new intellectual force given to their view.

A second element in the thinking of the HAG economist was the concern with inequality. Haq and Baqai (1986), two important economists of the HAG era, note with concern that “early writing on economics in Pakistan surprisingly did not contain much reference to poverty related themes.” It is very interesting that most of the early econometric or behavioral research is done mainly by the HAG advisor, whereas the work on measuring poverty, productivity (the ratio calculation work) is done by the Pakistani economist. Before anything about the economy was understood, poverty indices, regional inequality indices, and declines in real wages (when hard wage data was hardly available) were the main areas of concern.

The manner in which these economists were trained itself created a certain perception of economists in the country which lasts till today. These economists were trained to be policy-oriented development economists. A sharp distinction was made between such economists and those who studied more theoretical and academic economics. The erroneous impression was unintendedly cultivated that the study of theory or more rigorous economics is of limited use to the country. Such a pursuit was considered a luxury that the country could ill-afford. This view has persisted and developed over time and reinforced the perception that to be a good economist for Pakistan a grounding in economic theory is not only not required but perhaps may even be a hindrance. The result is that there is a tremendous disrespect for academic and theoretical economics. The term “ivory tower” intellectual was used to describe anyone who attempted to read and keep abreast of academic economics. Instead, an amalgam of general knowledge and mild development verbiage has been established as sound Pakistani development economics.’ Fragmentation of the Profession”.

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2 Replies to “The damage done to third world countries by Harvard and UChicago”

  1. The early 80s Chile crash was driven by a huge debt splurge by banks and private companies when economic confidence rocketed, similar to most boom and bust stories.

    I don’t think economists have much to blame for the sake of Pakistan. Doubt any of them would have said structuring an economy where the rent-seeking elite pays no taxes, spends zilch on human development and operates a sclerotic, crony capitalist-riven economy where trade with the largest economy in the region is outlawed was the way to go.

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  2. Interesting post. In your view, what would the right theoretical framework be for the economic development of Pakistan (i.e. any authors worth reading)?

    Regarding Chile — one of the most striking things about it compared to other LATAM nations is the relative strength of its institutions. Low level corruption is way lower than in neighboring countries. It also seems to have a much more `protestant’ work ethic relative to other LATAM nations, to which some of my (left wing) Chilean colleagues ascribe its relative success rather than any (still neo-liberal) post-dictatorship economic policies.

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