Development, microeconomic phenomenon – 05/13/2023 – Samuel Pessôa

The most impactful economic event of the 20th century was the Great Depression. For years the US economy has lived with unemployment rates greater than 20%.

In 1936, Keynes revolutionized economics. He created a new field, macroeconomics, and established the policies that would pull economies out of that bad balance. Expansionary fiscal and monetary policies were enough. Pretty simple solution.

As Krugman wrote in the preface to the commemorative edition marking the 70th anniversary of the publication of the General Theory, Keynes’ masterpiece, “Keynes was right about the problem of his time: the world economy had a problem with its alternator, and all that was necessary to do for the economy to work again was a surprisingly simple fix”.

Keynes was faced with perhaps the only complex problem in social science that had a simple solution.

The success of Keynesian thinking was so overwhelming that for decades, from the post-war period until the 1980s, academia looked for “Keynesian” solutions –that is, a technical and limited correction– to the problem of underdevelopment.

The diagnosis was that underdevelopment, as well as the balance of an economy with open unemployment, was the result of a very acute market failure, associated with a serious coordination problem. In general, something was missing and economic planning had to provide for this something.

The first candidate was physical capital. For decades, the World Bank calibrated its aid program for the development of the poorest economies based on the amount of capital required to reach a target of economic growth. The bank provided the capital. The long experience is that the growth never came. In general it turned to corruption and war.

It was tried with education and the problem in this case is that putting a child in school is not a guarantee of learning, as we know very well. And so on. Something was missing. Let’s offer. It was offered and the result did not appear. This story is well told by William Easterly in “The Growing Show” from 2004.

From the 1980s, greatly influenced by the new institutionalism, led by the historian Douglass North, the academy began to see development essentially as a problem of governance, that is, a problem of alignment of incentives.

Unfortunately, this learning has not arrived here. In the past PT cycle, the diagnosis was that underdevelopment was a lack of things. Don’t we have a shipping industry? Take BNDES and subsidy to build a naval industry. No one wonders why we don’t have a shipbuilding industry and what to do to have a sustainable shipbuilding industry.

Apparently, the new government is going the same way. The magic words became the sectors of energy transition and the health-related industry, due to the recent experience with the pandemic, among other items.

Everything suggests, therefore, that the diagnosis is that the errors of the previous cycle were essentially focused. The wrong sectors were prioritized. There is no question whether the governance of the policies adopted was correct.

If the incentives are not right, regardless of prioritizing this or that sector, the policy will not work. The success of the policy depends on the focus being right and the microeconomic design aligning private and social incentives.

Nothing indicates that this learning took place. We will go back to pushing the buttons of developmental activism and wasting scarce public resources.

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