Balanced_Economy - Proutist Economic Development This presentation introduces the ideas of alternative economic indicators in a balanced economy. The structure of an economy is defined by the relative importance of its three main sectors, the agricultural sector, the industrial or manufacturing sector and the service cum commercial sector. The structure of the USA economy has changed considerably over the last 200 years. It has developed in a way that traditional or conservative economists consider desirable. At first the economy was dominated by the agricultural sector while services and manufacturing were not significant. Today the service sector is dominant and the agricultural sector employs less than 5% of persons. In the early 20th century, the manufacturing sector was dominant but has since declined relative to the service sector. The general structure of four national economies is worth examining. USA Australia Brazil Venezuela (2001) Agriculture 2 3 26 5 Industry 18 26 23 50 (oil 33%) Services 80 71 13+36 45 They are arranged from most developed to least developed using the importance of the service sector as the indicator of development. Venezuela is an interesting case because its economic structure has been distorted by the development of one major sector, the oil sector. This has led to a phenomenon known as Dutch disease. Dutch disease gets its name from the Dutch-Shell Oil company. Wherever this company developed an oil industry, the local economy showed a typical pattern of distortion - that is, development of the service sector but underdevelopment of the agricultural sector. The production of oil generates an income and therefore demand for goods and services. Goods can be imported easily, whereas services cannot, hence there is development of the service sector and underdevelopment of other industries, especially agriculture. The solution to this problem is diversification and decentralised development of agriculture and manufacturing. Venezuela has the typical economic structure of a nation that relies excessively on oil. Due to stimulation of the service sector, there is an excessive number of persons who are "rent-taking". Rent takers are administrators and middle-persons in a productive chain who actually contribute little to the productivity of an enterprise or country but earn large incomes. In a healthy economy, the numbers of such persons should be minimised. An interesting phenomenon in the recent development of the New Zealand economy under the influence of neo-liberal economic policies has been a marked increase in the number of managers and the salaries they command. This is classic rent-taking. Prout rejects the traditional economist's notion of economic development defined by growth in per capita - GDP - and by increasing dominance of the service sector. Growth in GDP hides problems of what is measured and how wealth is distributed. Growth in the service sector hides problems of rent-taking. Instead, Prout would promote different measures of economic activity that attempt to take into account quality of life indicators, such as those developed by the Calvert-Henderson group. And Prout also promotes balanced development of the different economic sectors. The Calvert-Henderson indicators can be divided into two groups - those which are denominated in money units and those which are not denominated in money. The following list of indicators belong to the first group (money units): - A reformulated GNP to correct errors and provide more information - Purchasing power parity: corrects for currency fluctuation - Income distribution: is the poverty gap widening or narrowing? - Community-based accounting: to complement current enterprise-based accounting - Informal and household sector production: measures productive hours worked (paid and unpaid) - Deduction of social and environmental costs - Account for depletion of non-renewable resources - Energy input/GDP ratio: measure of energy efficiency and recycling - Military/civilian budget ratio - Capital asset accounts: for built infrastructure and public resources Note the inclusion of a measure of income distribution and a measure of real purchasing power (that is, corrected for inflation). P R Sarkar notes that two monetary measures of economic advancement are a decrease in the gap between rich and poor combined with an increase in real purchasing power. These two should be in balance. Note that the complete absence of incentives (and therefore no gap between rich and poor) would lead to a general decrease in real purchasing capacity. Lack of incentives (combined with centralised planning) lead to the downfall of communist economies. The second group of complementary indicators are non-monetary. The include: - Education: literacy levels, school dropout and repetition rates - Health: infant mortality, low birth weight, weight/height/age ratios - Nutrition - Basic services: water, sanitation, telephones, electrification, etc - Shelter - Child development - Political participation and democratic process - Status of minority and ethnic populations and women - Air and water quality and environmental pollution levels - Environmental resource depletion: hectares of land, forests lost annually - Bio-diversity and species loss - Cultural and recreational resources The Calvert-Henderson indicators have been developed by experts in the different areas and by statisticians. They attempt to paint a broad picture of the quality of life in a nation. When indicators like these are applied to the economy of the United States of America, it is observed that there was an increase in well being up to 1972 and a decline thereafter. It is interesting to note that that this date corresponds to the weakening of the global financial system due to the Vietnam war and the oil crisis. These complementary Calvert-Henderson indicators can be thought of as an attempt to apply triple bottom line accounting at the national level. An important aspect of economic development is a balanced economy. According to Prout, around 25% of persons in a balanced economy should be employed in agriculture (in its broadest sense), around 15% in each of agro and agrico-industry, some 25% in non-agricultural manufacturing and 10% in each of the commercial service sector and the white-collar service sector. Clearly agriculture (in the widest sense) employs a much greater percentage of people in a Proutist economy than it does today. This is partly because the agriculture sector would also be involved in the production of renewable energy sources (bio-mass crops) and the production of medicines, forestry products etc. In addition, the agricultural sector would include an expanded research component that is now included in the service sector. Furthermore, some countries import a lot of food and so with greater self-sufficiently there would be a large agricultural sector. NOTE: Public servants, politicians and military personal would be included within the white-collar service sector. Agricultural Sector (% employment in sector) <10% - dangerous, loss of tradition & technology <20% - unhealthy 20-40% - balanced economy >40% - underdeveloped, rural poverty, land degradation Non-agricultural Industrial Sector (% employment in sector) <20% - underdeveloped 20%-30% - balanced economy >30% - over industrialised These figures represent the mid-points of ranges. Sarkar notes that a healthy economy could have from 20-40% of persons engaged in agriculture. However less than this is dangerous because it is possible to loose the community traditions and customs required to support effective agriculture. On the other hand, more than 40% of persons engaged in agriculture places undue pressure on the environment. It is an indication of subsistence farmers trapped in poverty. Sarkar defines an economy as underdeveloped if less than 20% of persons are employed in non-agricultural industries and over-developed if more than 40% of persons are so employed. The separation of agricultural industries from non-agricultural is an important feature of a Prout economy. When agriculture is properly developed it can quickly produce a surplus. Thus it is necessary to develop food processing industries in balance with agriculture. The relative importance of the different economic sectors in a Proutist balanced economy can be compared to that in Venezuela today. A rough sketch of sector employment shares and GDP shares gives some indication, even if only in terms of qualitative validity. Statistics that separate agricultural industry from non-agricultural industry can be incomplete, as agriculture can include a wide range of matters. Roughly, Venezuela has a 5% share comparable to the agricultural sector. The Venezuelan economy is like a horse trying to run on two legs. As economist, Prof. Ravi Batra notes, specialised economies are very vulnerable to fluctuations in the global economic environment. The concept of a balanced economy along Sarkar's lines is new and interesting. The main point is that there should be proper adjustment among agriculture, industry and commerce. For example, a fixed percentage of people should be engaged in agriculture, another fixed percentage in industry and some percentage in commerce, that gives a proper balance. Otherwise there will be no equipoise or equilibrium in the socio-economic sphere of life. Unfortunately no such adjustment exists in any country of the world today.