Ten Principles of Economics

What are the ten principles that economists generally agree upon? Mankiw has his in his best-selling introductory textbook, but, according to econblogger Gabriel Mihalache, too much credit is given to rationality and too little to the role of government. Here’s a combination of Mankiw, Mihalache and Rodrik, plus a bit of mine:

1. People do the best they can, given their knowledge and circumstances, as they understand them.
2. Markets are usually a good way to organise economic activity, but strategic behaviour and information problems can alter the outcome.
3. Short run trade-offs faced by individuals, firms, governments and nations are not always the same as their long-run trade-offs.
4. Resources that do not clearly belong to an individual or a group are likely to be over-used by them.
5. Political outcomes, including fiscal policy and regulations, are driven by the relative influence of interest groups.
6. The long-run prospects of the economy are determined by technological progress, education, savings and the quality of institutions.
7. Prices rise when the government prints too much money.
8. Financial markets influence people’s ability to best use their income.
9. Some initial conditions (such as the quality of institutions, the distribution of wealth) matter for the development of a country.
10. Trade can benefit everyone, but throw in some economies of scale, trade can hurt some.

I’ll add an eleventh one, from Dani Rodrik: Economics is rarely as simple as it is made to seem

The Budget for 2007-08

Sequels are never as good as their originals. This applies to movies, books and … to the second budget of Mr Sithanen, presented yesterday to the National Assembly. Last year’s budget was one of the most ambitious budget ever presented by a Minister of Finance in Mauritius. Short and up-to-the-point, it made remarkable economic sense: for an open-economy in need of reforms to compete with global giants, what can be better than a simplification of the personal income tax regime, a reduction in corporate taxation and measures to encourage FDI and SMEs? In an economy with galloping public debt, doesn’t it make sense to freeze current spending and cut wastes? This year’s budget is, by any standard, a very good one too. Yet, it does present an important shortcoming: with an economy expected to grow by 5.5% next year, it misses on the historic opportunity to reduce the deficit to below 3% of GDP. Here are some highlights of the government budget for 2007-08:

Embracing Capitalism

In the previous post, I mentioned how, after the elections of June 11th, 1982 which was won on the promises of the creation of socialist economy, the U-turn to pro-market, Foreign-Direct-Investment(FDI)-friendly, export-oriented policies was salutary to the small island of Mauritius. The question asked in a recent NBER working paper by Rafael di Tella and Robert MacCulloch is why doesn’t capitalism flow to all poor countries, when its virtues are well-known? Indeed, why haven’t countries like Sudan, Mozambique and Madagascar aggressively pursued strategies to attract FDI? Their take is that, corruption in those countries lead their people to refuse capitalism and “lean left”, i.e. choose redistributive policies, and intrusive governments. A logical conclusion to this study would be that too much democracy is bad for poor countries. This study contains some valid points but, taking the example of Mauritius, I find this study naive for two main reasons:

June 11th, 1982

It’s June 11th, 1982. Your party, until then always in opposition, has won all the 60 seats in Parliament, and you have been made Minister of Finance. The elections have been won on a manifesto of wealth redistribution, nationalisation of sugar estates and greater government planning and control of the economy. With electoral victory, you now hold the opportunity to make real improvements in the well-being of ordinary workers, and your followers are eagerly awaiting your new economic program. But the sober realities of managing an economy in distress soon closes in around you: your country is suffering an economic slowdown, unemployment has climbed to 15 percent, wages have failed to keep up with the rate of inflation, the budget deficit has reached record levels, and the country is in the middle of a structural adjustment program with the International Monetary Fund (IMF) and the World Bank. In one month, you will have to travel to Washington to confront the World Bank and the IMF; they are certainly not going to be excited about the nationalization of sugar estates. What to do?

Public Transport in Mauritius

One of the joys of owning an Italian car is to get to enjoy public transport…when the car needs a bit of fixing! Last week, I rediscovered Mauritian buses and learned quite a few things:

The Battle against Malaria: Luck or Effort?

An International Trade specialist, Ben Muse, from Juneau in Alaska, occasionally blogs about Mauritius. In a recent post, he talks about how Mauritius mastered malaria. Did you know that, despite the fact that Mauritius has an ecology which is among the most hospitable to malaria in the world, only six deaths in the island are attributable to malaria since 1955, that there are no reported indigenous cases since 1996, and that Mauritius (together with Cuba and a few Caribbean islands) managed to complete its malaria eradication on its own? Why and how did Mauritius succeed, when, every 40 seconds in the world today, a child dies of malaria? Here are excerpts from Muse and from a paper by Amar Hamoudi and Jeffrey Sachs:

The IMF on Mauritius

In an interview on Radio One last Monday, I was asked the following question: ” Trade unions leaders have warned the government against adopting the pre-budget recommendations of the IMF. According to them, the IMF has failed many countries, as their involvement in the Asian Crises exemplifies. What are your views?” Two important points here. Firstly, East Asia suffered financial crises and yes, the IMF’s prescriptions for resolving these were not particularly brilliant, but the current situation in Mauritius is very different. Secondly, the IMF deserves some credit for putting Mauritius on the path for growth in the 80s through its structural programmes that promoted sound economic management (see here for an interesting account). Some days ago, the IMF has released a Public Information Notice (PIN) on Mauritius (hat tip to Bayesian Heresy). Here is what it has to say: