Column: How to use wealth of any kind to cure poverty

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Updated: June 4, 2016 8:51:05 AM

Just a few years ago, South America seemed to be the hope of the Left. Brazil had the Workers Party in power with the popular trade Union leader Luiz Inácio Lula da Silva as president.

poverty-reu-LThe situation in Venezuela is much sadder. Hugo Chavez was spending the buoyant oil revenue while petrol prices were high. Now, with price of oil having more than halved, his successor, Nicolás Maduro, faces a collapsing economy shrinking at 8% and rampant inflation. (Reuters)

Just a few years ago, South America seemed to be the hope of the Left. Brazil had the Workers Party in power with the popular trade Union leader Luiz Inácio Lula da Silva as president. His policy of helping poor families in the urban slums—Bolsa Famiglia—proved popular. Hugo Chavez was making waves in Venezuela where he established what seemed like a progressive welfare state, the most generous in Latin America. In Bolivia, Evo Morales was president and as the first political leader to emerge from the indigenous population he was very popular. His progressive policies involved taxing the companies extracting natural gas and using the money to reduce poverty which seemed to work.

Fast forward to now, and the situation is very different. Lula was succeeded by Dilma Rousseff, another fighter against the established order and the first woman president of Brazil. Now, she faces impeachment on the decision of the two Houses of Parliament and has been replaced. She was accused of having fudged the budget accounts by transferring money from Petrobras, the nationalised petroleum company. There is a wider case against many parliamentarians and businessmen concerning embezzling money from Petrobras.

The situation in Venezuela is much sadder. Hugo Chavez was spending the buoyant oil revenue while petrol prices were high. Now, with price of oil having more than halved, his successor, Nicolás Maduro, faces a collapsing economy shrinking at 8% and rampant inflation. Power and water are scarce and Maduro has had to appeal to women in Caracas not to use hair dryers. In the elections to Parliament, the opposition has already won a majority. Maduro is under close watch by the Army and he may face a coup. If he lasts till January, he can name his successor as the Constitution allows. But even so, there is no cure for the economy.

Of course Rousseff calls the decision to impeach her a coup and wants to reverse it. Maduro blames Venezuela’s problems on the American imperialists as he blamed Chavez’s death from cancer on the Americans. Yet, the issue is the nature of the economic policy which these leaders followed.

The basic malaise is easy to see. If you have a non-renewable asset—minerals or oil—you should save the revenue and invest it for the long run. If you consume it for wasteful,government schemes or even redistribute it to the poor, it will vanish. When the price falls or the mine or oil well is exhausted, there is nothing left. The poor remain poor or even become poorer. Wealth of any kind has to be used for investment to cure poverty in the long run. Fritter it away in subsidies and you live to regret your decision.

Both Brazil and Venezuela thrived while oil price was high. Now, they are in trouble. They rushed to redistribute income before securing its permanence. Something very similar happened to the Spanish imperialists when they invaded South America back in early sixteenth century. They extracted all the gold and silver and shipped it back to Spain. Their home economies reacted to the influx of gold and silver by inflation and a resultant balance of trade deficit vis-a-vis other European economies.

Thus, they spent the wealth rather than invest. When the money went, Spain became a stagnant economy. The British who colonised North America found no gold but invested in the abundant land available and with careful husbandry made the colony prosperous. This was sound business practice.

The idea that there is a pot of gold somewhere, and, if only we could get it, all problems will be solved. This was the idea of the drain which the British had imposed on India. Stop the drain and you can be rich. At its highest in the middle of the 19th century, the drain was around 5% of India’s national income and had declined to a much lower figure by the inter-war period. When Independence came, no longer having the British to drain the economy was not much help. The problems of ensuring growth were as difficult as ever.

The basic economic lesson is that prosperity comes from raising productivity of all workers via education, skilling and investment. A country is poor because of low productivity, lack of investment and enterprise. In the days before the Industrial Revolution, labour productivity was roughly similar across the world. The more populous nations of Asia, especially China and India had the same share of global income as their share of population. Once new technology came in, Europe, and later America, soared away with higher productivity. It was due to innovation, application of science to devising new technology and then the willingness to save and invest the fruits of technology rather than consume them. A viable welfare state can be built only after the hard work has been done raising productivity. There are no quick fixes in economics.

The author is a prominent economist and Labour peer

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