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Post-Keynesian economics and the developing world

Post-Keynesian economics and the…

SEF London - It goes without saying that John Maynard Keynes and his strand of economic theory otherwise known as Keynesian economics has had a profound impact on governments the world over for the past six decades. The essential precept of Post-Keynesian economics which sets it apart from Neo-classical & Monetarist economics is that free markets are by their very nature volatile & therefore not always self-correcting; instead we’re left with unpredictable “Boom & Bust” cycles. As outlined in his seminal work; “The Theory of Income and Employment”, Keynes believed that national income and the employment rate were determined by the level of aggregate demand and aggregate supply within an economy. No doubt Keynes theories were relevant to Western states in the Post World War Two era, yet eyebrows are often raised when Keynes theories are applied to developing countries in Africa and Asia. The main doubt shared by economists is that Post-Keynesian economics is not applicable to the developing countries because their overriding aim is essentially economic development and poverty alleviation. In contrast, developed states can devote their energy to the lofty pursuit of the Keynesian holy grail of Full Employment.

Nevertheless, I share the view of an increasing number of economists from the developing world (especially from the Indian subcontinent) that Post-Keynesian economics can be applied to the economic conditions faced by less developed countries (LDCs). In particular, developing economies all share the ills of aggregate demand deficiency which acts as a barrier to attracting direct investment to their economies and critical sectors such as; agriculture and infrastructure. Thus, if we were to adopt a Keynesian outlook, one could make the case that investment in LDC economies are minimal mainly due to the small nature of the market. Yet, the size of the market is consequently a reflection of the level of aggregate demand for various goods and services within the economy. As a result, arguably these economies are small due to widespread poverty which has meant that consumers from LDC economies themselves have limited purchasing powers. Only when one looks at the rise of the “New Middle Class” in the Global South can they see that such a marginalisation of aggregate demand in LDC economies is a feature of yesteryear. This is in no small part due to the explosion in the purchasing powers of consumers from across African capitals and cities in South East Asia.

Keynes and his avid fascination with increasing investment and aggregate demand was best understood by his habitual promotion of “Animal Spirits” to lift investment levels aswell as increasing aggregate demand throughout the economy. To digress, it is this one theory in particular that symbolised Keynes’ irrevocable split from standard, Neo-Classical economic theory. In essence, Keynes believes that the economy & by extension investment is not a random and self-adjusting phenomenon but rather based on human expectations and subtle behaviour. Thus, for Keynes when economies benefit from “Animal Spirits” (increased expectations) then investment increases which lifts incomes aswell as aggregate demand and accompanying aggregate supply. In short, a “Multiplier Effect” takes place where the whole economy is growing in tandem. The other side of the coin is that a lack of Animal Spirits helps us to understand why economies stagnate as there is a lack of investor and consumer confidence within the wider economy. If we apply this theory briefly to African economies, one can see that a government possessing higher savings but yet low investment levels or a state riven by political uncertainty will in turn lower Animal Spirits by reducing aggregate demand within the economy and by extension the incomes of its citizens thereby severely reducing their consumer purchasing powers. It is these scenarios that cause economic recessions and according to Keynesian economics; state intervention and increased government borrowing will in turn save the day by stimulating their respective economies. It is here that Keynes made his controversial claim (according to Neo-Classical economists) that a budget deficit can be utilised effectively to finance capital spending in economies by rallying its Animal Spirits and thereby boosting the overall economy. It’s no surprise to find that the implementation of Keynesian economics has been credited with saving Western economies on the brink of collapse in the aftermath of the 2007-08 financial crises.

To conclude, if we are to make Keynesian economics work for the economies of developing countries and particularly African economies, then we will need to strengthen the institutional strength and autonomy of these African states. Indeed, we can find a correlation between African economic stagnation in the 1980s and the ill-fated IMF “Structural Adjustment Plans (SAPs). These SAPs severely restricted the power of African states to exercise their own fiscal and monetary powers, a key function of governments according to Keynesian economics. Instead African economies had harsh policies imposed on them by these Western institutions such as the IMF. African governments were forced to abolish critical subsidies in terms of food and fuel for the poorest within its labour markets. Also, the already low paying public sector was severely downgraded pushing a significant amount of the population into poverty as whole families relied on these salaries to live. In addition, critical sectors of the economy were callously opened to foreign investment at manipulative and ridiculously unfair terms thereby leading to an undervaluation on the part of key assets within African economies. These controversial IMF policies were inspired by the belief, inherent in Classical economic theory that austerity will limit state largesse and spending in the long run, thereby boosting private sector development. These policies combined to create a whirlwind of poverty characterised by a collapse in consumer incomes, confidence and purchasing power which meant that Animal Spirits were in fact non-existent. Thus, if we are to apply Post-Keynesian economics to developing countries, it is imperative that in the short term these states exercise autonomy over their economic policies, because although the long term is all good & well, as Keynes famously declared; “in the long run we are all dead”.


By Bashir Ali – Research Analyst at the Somali Economic Forum

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Somalia Investment Summit 2014 - Dubai

Somalia Investment Summit…

Somalia Investment Summit 2014 - The 2nd Somalia Investment Summit comes after our last year’s successful summit hosted in Nairobi, Kenya in 2013.

The 2014 Investment Summit themed ‘Opening Your World to New Possibilities’ is once again brought to you by Somali Economic Forum. Over 250 leaders from the public and private sector, international business experts and investors, will converge in Dubai to discuss opportunities, share best practice, forge strategic partnership and showcase Somalia that is ready for foreign direct investment. Together, the political and business leaders will discuss ways of ensuring that Somalia turns its economic growth into real prosperity.

SIS 2014, will offer a platform for the Somali government department and ministries to engage, with both national and international investors and showcase the abundant investment opportunities available throughout the country.

Given the increasing interest in the whole region, now is the time for domestic and international players to examine the vast potential in Somalia. Clearly the Somalia Investment Summit Dubai 2014, is the place to be for those businesses looking to venture into the Horn of Africa and particularly Somalia.

The Summit hosted a day after the Annual Africa Global Business Forum will certainly attract regional and international decision makers, international business community, academics and media.

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