[funny how he doesn't say Economists rather than Technocrats]
Don't trust technocrats
Economic policies are not neutral, but ideological - and populist
resistance to them is a rational response
Joseph Stiglitz
Wednesday July 16, 2003
The Guardian
Developing countries are often advised (or instructed) to undertake
reforms recommended by experts who are called technocrats and are
often backed by the IMF. Opposition to the reforms is usually dismissed as
populist. Countries that fail to undertake these reforms are dismissed
as lacking political will, and soon suffer the consequences: higher
interest rates when borrowing abroad.
But many of these technocratic proposals are more often based on
ideology than economic science. Technocrats can, of course, make an
electricity plant work better - to produce electricity at as low a price
as possible. This is mostly a matter of engineering, not politics.
Economic policies are usually not technocratic in this sense. They involve
trade-offs: some may lead to higher inflation but lower unemployment; some
help investors, others workers.
Economists call policies where no one can be made better off without
making someone else worse off Pareto efficient. If a single policy is
better than all others for everyone, it is said to be Pareto dominant. If
choices among policies were purely Paretian - ie if no one was made worse
off by choosing one policy as against another - the choices involved would
indeed be purely technical.
But few policy choices are Paretian. Instead, some policies are better for
some groups, but worse for others. In East Asia, for example, IMF bailouts
helped international lenders, but hit workers and domestic firms hard.
Different policies might have imposed more risk on lenders and less on
workers and domestic firms. Deciding which policy to choose involves
choices among values, not just technical questions about which policy is
in some morally uncontroversial sense better. These value choices are
political choices, which cannot be left to technocrats.
Of course, there is scope for technical analysis even when political
choices are at the crux of the decision. Technocrats can sometimes help
avoid Pareto inferior policies, that is, policies that make everyone worse
off. The problem is that many policies advanced by technocrats as if they
were Pareto efficient are in fact flawed and make many people - sometimes
entire countries - worse off.
Look at the litany of technocratically inspired examples of privatisation
and deregulation in the 1990s. Banking reform, for example, frequently
required government bailouts, leaving a few people much richer, but the
country much poorer. These failures suggest we should have less confidence
in the supposed skills of technocrats - or at least less confidence than
they have in themselves.
But there is also a more fundamental point. Democratic processes are
likely to be more sensitive to the real consequences of policies, to the
real trade-offs involved.
Of course, some criticisms of technocratic remedies may be populist
posturing, but sometimes they contain insights that ivory- towered (and
usually US-trained) technocrats miss. Consider the case of Mexico, where a
proposal to raise revenue by taxing food and medicines consumed by the
poor was, unsurprisingly, rejected by a democratic legislature.
Rejecting this proposal was not a matter of unbridled populism. The
problem was with the proposal. Its advocates argued that efficiency
required adopting a value added tax. Advanced industrial countries in
Europe use such a tax. Developing countries, the technocrats said, should
do likewise.
But there is a fundamental difference between developed European countries
and emerging markets: the size of the informal sector, from which VAT is
not collected. This vast black economy makes VAT inefficient in most
developing countries. Indeed, because VAT is a tax on the formal sector
whose incomes and expenditures can easily be traced (as distinct from
those of the cash-based street vendors, village enterprises and poor
farmers) - VAT impedes development.
Developing countries that impose VAT perversely encourage production to
remain in the informal sector. But it is the formal sector that produces
higher value-added manufactured goods that compete with developed
countries.
There are other sources of tax revenue in many developing countries that
are both more equitable and distort economic incentives far less than VAT.
Many developing countries lack a corporate income tax. It may also be
possible to impose taxes on luxury goods (many of which are imported),
thereby promoting equity without stifling growth.
Economic theory supports VAT only if one does not care about distribution
and if one can impose a tax on all commodities. You don't need an
economics PhD to recognise that, in developing countries, you can't impose
a tax on all commodities. Moreover, you should care about equity.
So the next time you hear rumblings in
