Peace, development linked: Laureate

The Nation, February 5, 2008

THERE IS a connection between peace and economic development while deficient economic development often gets in the way of peace, says Professor Finn E. Kydland, the 2004 Nobel laureate for economic.

Kydland, it joint winner of the prize, gave a speech on "peace and economic development in the age of globalization” at the University of Thai Chamber of Commerce yesterday as part of the series of speeches organized by the Vienna-based International Peace Foundation.

He showed graphics demonstrating that while countries in Europe tend to
have a similar GDP growth curve from the 1950s to 2004, many countries in Africa have volatile and highly fluctuating curves and this is reflected in the lack of peace in these countries.

"Corrupt politicians, unrest and lack of economic development are inter-related somehow,” said Kydland.

He said it was essential to try to calibrate an economy, like a measuring device, as reliably as possible. To achieve this, millions of households in a national economy needed to be taken into consideration along with business and the government sector.   

The fundamental reason for inconsistency in predicting the economic future is complex, said Kydland. Government policy should take into account current and future private decisions, which in turn depend on current and anticipated future government policie.

Kydland is a professor at the University of California in Santa Barbara and is credited for shifting the practical discussion of economic policy away from isolated policy measures towards the institutions of policy-making.

"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," he said.

Kydland said the main driving force for economic growth included innovative activity and technological change along with incentives to invest in new capital such as factories, machines and buildings.

He warned that some aspects of government policy may be detrimental to such growth and could result in I insufficient economic development, citing Argentina, which used to be one of the five or six highest per-capita GDP nations 100 years ago, but has since fallen spectacularly.

The period between 1980 I and 1990 saw 20 per cent of Argentina's GDP drop, which was a dramatic decrease, said Kydland. This "lost decade" was due to Argentina suffering from what is called "time-inconsistency disease" which includes past hyperinflation, devaluation, deposit, freezes and defaults on government obligation, resulting in a lack of credibility among investors.

"The credibility of Argentina among investors was not high,” he said, adding that restoring confidence is very hard and needs policies geared for the long run, say five to 10 years.

On the other pole stands Ireland, which rose from the 1950s from being at the same economic rank as Spain and Greece to being among the top in Europe today.

One of the factors behind the Irish success, said Kydland, is the creation of a higher educated work force made possible after free secondary education was provided by the state in the 1980s. Ireland also gave tax breaks on income for 20 years into the future and did not have a history of fooling people when it comes to economic policy unlike some countries.

One Thai member of the audience expressed doubts as to whether countries like Thailand, where governments change frequently, could sustain any unified long-term economic policy.