Saturday, February 09, 2008 Nobel awardee urges gov't policy reforms
A MONTH after a 2004 Nobel Laureate for physics visited Cebu to promote peace and scientific research, another 2004 Nobel Laureate, this time for economics, made a stopover in the city yesterday to encourage institutions like the government to create good policies.
“With good policy, there is potential in poor nations for not one-two percent, but 1,000-2,000 percent income increases,” said Prof. Finn Erling Kydland in his lecture at the University of San Carlos.
Such policies would have to be “credible and forward-looking” for them to produce far-reaching effects on economic growth, he added. These should also aim at reining in corruption, making it easier to import technology, improving institutions and maintaining stability.
“Private decision-makers should feel confident that if they engage in an activity, the fruits will come to them and they will earn a reasonable income in the long run, and that the government won’t turn around five years in the future and adopt anti-competitive measures or regulations,” Dr. Kydland added during the open forum.
Dr. Kydland’s visit was part of the program “Bridges: Dialogues towards a culture of peace” organized by the International Peace Foundation. It was the second time the University of San Carlos in Cebu City hosted a Nobel Laureate’s lecture so far this year.
According to the foundation’s founding chairman Dr. Uwe Morawetz, this program will be held in the country and in Thailand from November 2007 to April 2008 in various institutions “as an international, interdisciplinary platform for creative cultures of learning and continued education for all people.”
Drs. Kydland and Edward C. Prescott received the 2004 Nobel Prize in economics for their research that has contributed to understanding what drives business cycles and macroeconomics policy, specifically the “time consistency” of economic policy.
In his talk, he raised the need for governments to avoid policies that protect vested interests, prevent new technology from entering to protect old-fashioned industries and enable corruption.
Decisions
In one of his research papers cited by the Nobel Committee, Dr. Kydland observed that the optimal government policy is generally consistent over time and requires a “commitment mechanism” to be implemented.
In planning for today and the future, the optimal government policy takes into account current and future private decisions that depend on the current situation and anticipated future policies.
“Still, when the future arrives, private decisions up until then have already been made, implying a temptation even for a benign government to change its policy from then on. So it is important that when the government makes its plan, it must also consider how business will react to its policies,” Kydland explained.
New decisions or policies may lead to the accumulation, for instance, of human capital over time, making it difficult for new graduates to find jobs.
This is the reason, he said, that economic development is “very important” since it could yield high wages without government interference. In Ireland’s case, its workers who had left for other countries returned to their homeland not just because of high wages but because of industrialization and an increasingly productive domestic economy.
Restricted
The driving forces of economic growth are innovative activity and technological change. Low income is often the result of country-specific policies that directly and indirectly restrict technological change, he added.
Kydland cited two nations, Ireland and Argentina, to illustrate how economic policy has created “spectacular performance” in the first country and how it didn’t in the second one over the past 20 years.
Argentina experienced a depression from 1980 to 1990, although it recovered after that.
When Kydland and Prescott studied data from that 10-year period, they learned that the country would have done better if it hadn’t suffered from a “time-inconsistency disease” due to hyperinflation, among others, and if it hadn’t suffered from the lack of confidence from investors. (NRC)
