Published by sunandoroy on Tue, 2008-09-16 01:53 in http://www.prmia.org
Development Economics , when it started evolving with a lot of new nations getting out of their colonial mould post World War II, was all about growth. growth was the be all and end all indicatorofdevelopment of a nation. It was defined by GDP , both overall and in per capita terms. This view of development remained deep rooted over several decades, before economists such as Amartya Sen and others started expanding the concept of development, to be adopted by the United Nation in due course. Thus were born the alternative indicators of development, including inequality, quality of life and human development. this happened in the late 1980s and early 1990s.
Further challange to the notions of development was provided by Sen in his 1998 classic Development and Freedom and later in his Identity and violence: The Illusions of Destiny. Sen brought forth the new insight that freedom is a critical aspect of progress without which material wealth failed to find any clear meaning.
The journey of development economics thus progressed over time. If you look at it, however, development ignored one critical aspect, that in exercising choices in the process of development , the State ( and market players) were exposed to a variety of risks. Effective handling of risks contributed to robust growth while its neglect thwarted the growth process. Research in development has remained deficient in this area, focussing rather on the outcome of the process. A risk based analysis of development has not taken place in development studies.
However, we would all agree that in many countries, good efforts at alleviating poverty has been constrained by the uncertainitiesbrought out by the corruptdelivery process, volatile rainfall contributed to huge risks in agricultural production and the inability to develop a risk-return framework contributed to ineffective policymaking by the State.
The performance of the State is important for the economy. Understanding the risks embedded in its actions can hugely influence the outcome of State policy decisions. Operational risks time and again renders state policies defunct. Often, State decisions are not based on sound judgements but on the whims of politicians. Given the strong role in development process, Governments in emerging markets must define their risk appetite and strategy formulation must be aligned to the appropriate risks.
An example of State failure due to inadequate risk assessment was on display yesterday. Why on earth, did Fed stay away from bailing out the Lehman Brothers? Is it because its taxpayers money, and ethically the money should not be used to bail out irresponsible financial engineering? Not at all. Did the Fed underestimate its implications at the global level? Can’t buy this argument, Fed guys are smart enough! Then what? The answer was given by Joseph Stiglitz yesterday on CNN. He said that in 2001 crisis, the Government had a lot of money. There was a fiscal surplus and the Fed could bail out many in distress. The case is no longer the same in 2008. Fiscal deficits are high and the US treasury is in deep debt. The three trillion dollar war not only took away investible resources from industry and services reducing employement opportunities and thereby repayment capacity ( a factor in the accentuation of the credit crisis), it is now constraining the FED in going all out in fighting the deadly crisis. Money power is crucial for firefighting. Regulatory rehauling can wait. The Wall Street needs cash, not regulation, at least for now.
This brings me back to the question : Did the US Government properly understood the risks of a protracted policy shift towards higher fiscal deficit? Did it raise an alarm at a threshold? Why a limit structure based on fiscal responsibility was absent?
The crux of the matter is that the development processes is not adequately risk sensitive. Risk awareness is low among the policy makers and those who implement policies. A proper risk management framework at an enterprise wide level can indeed raise the policy effectiveness. This has not been done in the past. This is not done now. But to break this inaction, development economics must make inroads into risk based approaches to development, which is conspicuously absent from existing literature. Fredom, HDI, Quality of Life are all outcomes. There must be a realization that better outcomes are possible through improved risk management at the process level. Surely, risk management as a theoritical stream has come a long way to contribute to development process of emerging economies.
Leave a Reply