Unit 9 Lecture Notes

The main ideas driving international development in the early years were theories of Walt Rostow on linear stages of economic growth and modernization, the Harrod-Domar model on capital accumulation driving economic growth, and Rosen stein-Rodan's big push model. These are largely silly modern economic models with which I will not waste the reader's time, except to offer a broad characterization of the general conclusion which motivated development planners at the time. The Harrod-Domar model assumes and concludes (all of these models basically assume the conclusions they want) that growth is a direct function of the savings rate. The growth rate in an economy in this model is simply the saving rate multiplied by a made-up constant. The model argues that the reason developing countries do not have the desired economic growth is that they do not have enough savings. In order for them to have higher growth, they need higher savings. But since, the model assures us, developing countries cannot save because they are poor, it is incumbent upon their governments to borrow to fill "the savings gap", or the deficiency in the savings needed to achieve the growth desired.

According to Rosenstein-Rodan, capital would be spent on a big push, to build out critical infrastructure and transform the economy from agrarian, rural, and isolated to educated, modern, urban, and industrial under government planning.

While any economist (including myself) would agree that capital accumulation is key to growth, it does not follow that government borrowing capital would have the same effect as capital accumulation. Borrowing is the exact opposite of saving, and if investments are financed by loans, they will incur extra costs related to interest; whereas investments financed with capital will have no interest to pay. But more importantly, when governments borrow to spend, they are simply centrally-planning their economies and gaining massive power over the productive members of their society.

One of the key insights from Austrian economics concerns the role of government in the allocation of capital. If the government owns capital goods, a market is not possible in these goods and the government will fail at allocating them efficiently. (See the discussion of the Socialist Calculation debate in The Bitcoin Standard starting on Page 109). As governments are handed large amounts of funds to spend, they are able to engage in all kinds of politically popular projects with little regard for opportunity cost or alternatives. Whereas in a free market capital is allocated by people who have generated it, and is lost by those who do not use it productively, in a government-planned economy politicians who did not earn the money are able to do with it as they please without facing the consequences of their folly. Government can continue to tax and borrow to finance itself as it makes bad economic decisions, while private actors are not afforded such a luxury.

As such, capital allocation by governments cannot be compared to capital allocation by individuals. It makes little sense to think of the money that they spend as capital investment, as it really behaves more like consumption, and not investment. Governments face little restrictions on their spending, and with money printing, there is no meaningful opportunity cost to their spending. Governments spend the money to buy votes and loyalty more than investing in the future, and the profligacy of government development projects, and the conspicuous consumption by everyone involved only highlights this point.

Had development economists understood economics they might have realized this point, but having been miseducated at Keynesian and socialist universities, the conclusions they arrived at blamed everything and everyone except international lending and the World Bank. A new round of models, buzz words, and development strategies were announced, and lending and central planning were to resume under their banner. This ritual would continue for seven decades of insanity, and has proven highly rewarding for the parasites who work in the misery industry and highly destructive to the helpless victims of their relentless "help". The misery industry constantly judges its failures and concludes the problem was in some of the cosmetic meaningless terms they use to impress each other ("more participatory planning is needed", "stakeholder engagement needs to be improved"., etc…) and that the solution is bigger budgets, more debt, and more central planning.

After the failure of the initial generation of development plans, development economists moved on to more convoluted models that viewed development as a more complex transformation of society. With lots of meaningless mathematical models, the misery industry started moving toward a more hands-on approach to central planning, getting into smaller projects, managing critical infrastructure, and targeting poverty alleviation directly. The results were not much better than before.

By the 1970s the development failures piled high, and a lot of soul-searching within the misery industry inevitably resulted in the leftist direction of desiring more government control and planning. As the "dependency school" approach became more popular, full blown Marxists and communists further infested the misery industry's debt and central planning apparatus and sought to use their usual unhinged economic policies of nationalization and inflation. The catastrophic result was consistent across everywhere it was tried, and particularly extreme in Latin America, the continent that has been cursed with the most prolific infestation of Marxist economic ideas.

The 1970s was also a pivotal time for the developing world and the misery industry because the US government's decision to suspend gold redeemability had unleashed the Federal Reserve's inflationary instincts, resulting in the artificial manipulation of interest rates downward, a massive increase of the money supply, and easy global lending worldwide. The combination of Marxist lunatics in power and global easy money was to prove disastrous.

Global banks had a flood of liquidity they wanted to lend, while Marxist and Keynesian governments had insatiable demand for more money to run their catastrophic central plans. The misery industry was more than happy to be the match-maker in this, as more and more developing countries were saddled with massive debt in the 1970s while interest rates continued to drop.

Toward the end of the 1970s, the inflationary pressures unleashed by the Keynesians at the US Federal Reserves had escalated wildly, leading to increasingly high prices, speculative bubbles, and a fast rise in the price of gold as wealth holders worldwide started to dump their highly inflationary government moneys in favor of gold. The price of gold had risen from around $38 in 1971 to $800 in 1980, and there were serious concerns in Washington for the survival of the dollar.

As things got serious for the dollar, it was time for the US government to change its inflationary course, and it did so by bringing in adult super vision to rein in the Keynesian children who had almost driven the dollar off a cliff. Austrian-leaning economist Paul Volcker was placed as chairman of the Federal Reserve board, and he immediately set to work saving the dollar from destruction by reigning in monetary policy and limiting the ability of people to own and speculate on gold.

Volcker raised interest rates, which drastically reduced new loan creation and also raised repayment costs for all variable rate borrowers worldwide. Suddenly, all the third world governments that had an unsustainable but manageable debt burden on low interest rates were now unable to make the increasingly larger interest rate payments. The 1980s would be the decade of third world debt crises.

As a third world central bank's foreign reserves become insufficient to cover the government's debt obligations, the problem of the balance of payment functions described above turns the government's own insolvency into a national catastrophe. Under the classical gold standard, life could continue normally for citizens of a country whose government went bankrupt. The king or government would be considered personally liable for the debts, and would have to sell lands or property or abdicate their rule to their creditors.

But under monetary nationalism, the first thing that sovereigns can do when facing repayment problems is to lean on the central bank to use its monopoly control over virtually all of a country's capital to finance the government. This can of course take many forms, all of which have been tried by your favorite kleptocratic regimes of the twentieth century. The simplest is for the government to issue more local debt and have the central bank sell it, which in turn would increase the local currency supply, bringing its value down. Inflation is but the simplest and most inevitable outcome of the debt and central planning foisted on poor countries. Far more terrible consequences follow as governments attempt to fight this inflation.

Should the government try to prevent the exchange rate from declining, it would witness a collapse in its reserves as people redeem their local currency for global reserve currencies. As it seeks to stem the bleeding of reserves, it will start to compromise the other functions of the central bank, with devastating consequences. It could begin to restrict trade to prevent people from sending their foreign exchange abroad. It could prevent capital from exiting the country. It could confiscate bank accounts. In typical interventionist style, of course, each of these interventions will have the exact opposite consequence of their intent. As capital controls proliferate, the government may maintain the foreign reserves already in its possession, but it immediately scares away any kind of new foreign capital from entering the country for a very long time, snowballing to an even bigger problem for the balance of payment accounts. Trade protectionism can prevent the loss of foreign reserves in the short run, but its second and third order effects are highly destructive to the economy. It leads to a large increase in costs of crucial goods and puts more downward pressure on the currency, driving people to hold more foreign reserve currencies instead. It also leads to an increase in the costs of imported inputs for domestic industries, which are usually fairly significant for developing countries reliant on developed countries for their most advanced capital goods. As the cost of importing capital goods increases for local producers, the competitiveness of local industries is severely compromised and exports decline, which in turn hurts the balance of payments further. While confiscating bank accounts can prove a quick short-term fix, it destroys the trust people have in their banking system and makes them far less likely to save for the future, reducing the amount of capital that accumulates in banks.

As governments fell into debt servicing problems, their entire economic systems collapsed because their central banks allowed them to pillage productive capital to keep financing themselves, and to keep paying off the misery industry loan sharks. As the misery industry's raison d'etre is to lend and create more development programs, it also had a vested interest in the continuation of the status quo; it did everything to help governments avoid defaulting on their debts so that the circus of 'economic development financing' could continue by having them borrow ever-larger quantities.

The IMF shined in its role as global lender of last resort in the 1980s, with its famous stabilization policies and structural adjustment programs. As countries were close to default, the IMF would provide them emergency financing conditional on their compliance with the IMF's package of stabilization policies and policy reforms. These policies were marketed around the world as free market reforms, but in reality they were nothing more than a continuation of debt-financed government central planning.

The IMF's privatization programs were immensely corrupt, replacing the government monopolies with private monopolies usually owned by the same people. As part of the debt relief deals signed with the misery industry, governments were asked to sell off some of their most prized assets. This includes government enterprises, but also natural resources and entire swathes of land. The IMF would usually auction these to multinational corporations, and negotiate special deals for them with governments for exemption from local taxes and laws. After decades of foisting the world with easy credit loans, the IFI's spent the 1980's acting as a repo man, going through the scrap heap of third world countries devastated by their policies and selling whatever is valuable to multinational corporations and giving them protection from the law in the scrap heaps in which they operate. This reverse Robin Hood redistribution is nothing but an inevitable consequence of the dynamics created with endowing these organizations with easy money.

As part of these "free market reforms", the IMF would recommend imposing more taxes to close the budget gaps, because the IMF essentially uses "free markets" as a market cover to pass off its global debt entrapment scheme. The role of the IFI's as enablers for Multinational Corporations is something that has of course been repeated often by the IFI's leftist critics, such as John Perkins in his Confessions of An Economic Hitman. While there is some hint truth to Perkins' sensationalist conspiratorial stories, there is of course much that is missing and much that is clueless, primarily due to the fact that the author himself is a clueless lefty economist incapable of understanding the depth of the depravity in which he partook for decades. Having worked for these organizations for decades, Perkins is very typical of the leftists who critique these institutions while living off of their paychecks, and conclude that the problem with them is that they are free market institutions. In fact, it is no exaggeration to say that 90% of the people who work for these organizations can be classified as ‘leftist critics' of the institutions, paychecks notwithstanding. It is only to alleviate their conscience that these lefties start lashing out at Multinational Corporations as if Coca-Cola and McDonald's are the most serious problems facing the third world. This superficial ritual prevents them from coming to terms with harder questions that leftists are incapable of even comprehending: Why is there a global lender of last resort in the first place? Why do these countries have to get into debt in the first place? Why should the IFI's get to plan economic development? Contrary to Perkins' vision, the problem is not that the IFI's allow free trade or free capital movement. The problem is that they control and centrally-plan trade and investment, and that their loans are impossible to repay. These problems don't start when the country defaults and needs a bail-out; the problem starts the moment that the first misery industry plutocrat sets foot in a country and begins to centrally-plan its economy.

The work of Perkins and many others exposes clearly how much large multinational corporations benefit from the special arrangements that the IFI's negotiate for them with developing countries, but that cannot be understood as the root problem, but rather, a symptom of it. It is the fact that these organizations have the enormous power of a credit line from the US Federal Reserve that makes them so powerful over developing countries, making them ripe for capture by multinational companies looking to do business in the developing world.

What happened in the 1970s and ‘80s with third world debt is no different from standard business cycles as explained by Austrian business cycle theory: the manipulation of interest rates downward causes an unsustainable increase in credit, which can only then be sustained with even lower interest rates, and will implode as soon as these artificial rates normalize. The case of third world debt here was similar to dotcom's in the 1990s, housing in the 2000s, or stocks in the 1920s.

In order to get an idea of how utterly destructive the misery industry is, one need just pick up any development economics textbook and read the laughable explanations of this third world debt crisis. It's astonishing to see the mental gymnastics needed by these paper-pushers to pretend that the problem has nothing to do with the monetary policy of the central bank that bankrolls the misery industry, or with flooding the third world with debt, or with their central planning of their economies. In the misery industry, the reason developing countries took on a lot of debt is because Arab countries raised oil prices in the aftermath of the 1973 war, which lead to them having excess amounts of capital stored at banks, which banks then had to lend out. To the extent that the US Federal Reserve is ever blamed for this, it is only blamed for raising interest rates in 1980, not for the decade of low interest rates that had ensnared these countries in debt. Suddenly, central banks stop mattering when they do something bad, it's just "market failure". The masochistic reader is invited to read Chapter 13 in the above linked textbook and see for themself the explanation.

Whereas the misery industry had grown enormously while destroying the economies of the third world and bringing them to bankruptcy, it would also thrive while "rescuing" them from the debt crisis. The staff and budget of these organizations has continued to rise, before and after the debt crisis, irrespective of any success or failure metrics. IFI internal reports will forever bemoan their failures at achieving their macro goals and the individual failure of the their projects, but organizations cannot survive for so long if they continue to fail at their objective. The only way to understand their continued survival is to realize that feel-good buzzwords (development, growth, sustainability, children's education, disease elimination, etc…) are not their actual objective. Their survival can only be understood as the result of their success in meeting their real objectives: 

1. Providing lucrative careers for the insiders in these organizations 
2. Maintaining the dollar's role as the global reserve currency. 
3. Allow the US government an unprecedented degree of control over the economies of the world. 

On all three counts, the IFI's have succeeded remarkably. It makes no sense to speak of any real objectives for these organizations outside these three.