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Are good intentions bad for advanced economies?

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The economies of the U.S. and other Western nations are now imperiled by disincentives to adopt policies that promote productivity gains and the efficient use of labor and capital.

So warned Dambisa Moyo at Tuesday’s Main Platform of the 2013 Million Dollar Round Table, being held in Philadelphia June 9-13. Moyo, a U.K.-based economist who writes on the global macro economy and world affairs, offered her analysis of the world’s economic ills during on-stage interview with MDRT Past President Phillip Harriman.

Moyo said the political and economic model of the U.S. and other Western nations, based on democracy and free market capitalism, has historically inspired developing countries worldwide to transform their own political economies; and this model has successfully moved millions of people out of poverty. That success was grounded in incentives to deploy labor and capital efficiently and to boost productivity — all key drivers of economic growth.

Now, however, advanced economies are adopting misguided policies that lead to negative economic outcomes. To illustrate, Moyo cited the 2008 credit crisis, which was caused in large measure by financial institutions — among them the government-sponsored mortgage providers Fannie Mae and Freddie Mac — extending credit to people who were unable to repay their loans.

“Time and again, good intentions have led to bad outcomes,” Moyo said. “The good intention in the 1950s was to make everyone a homeowner. But public policy over the subsequent decades, including government commitments to providing subsidized housing and keeping interest rates low, have resulted in massive debts and deficits in both the U.S. and Europe.”

Turning to labor markets, Moyo observed that ingenuity and product innovation, both hallmarks of Western economies in past decades, have declined in recent years because of financial disincentives to work in the private sector. She noted that whereas 401(k)s and other defined contribution plans have all but replaced more generous defined benefit plans at companies large and small, employees in the public sector continue to enjoy fat pensions, even in states that can ill-afford them because of rising deficits.

Upshot: Since 1980, state government employees in the U.S. have on average enjoyed $10,000 more in compensation than their private sector counterparts.

Financial disincentives to deploy resources rationally have also negatively impacted productivity. Case-in-point: unjustifiable federal appropriations for American farmers to grow surpluses of crops the U.S. and markets abroad don’t need, but which the federal government subsidizes to protect its agricultural sector. 

One unintended outcome of such cash transfers, Moyo said, as well as of protective tariffs imposed on imported crops, is a growing “schism”  between developed and developing economies. That’s because emerging markets are being denied the opportunity to grow and export crops in sectors where they enjoy a comparative advantage.

“Farmers in Third World nations are being decimated by ill-conceived agricultural policies in U.S. and Europe,” Moyo said. “They can’t export their crops.”

Western economies are also damaged by such policies because of the misallocation of the capital. The superior economic performance of China and other emerging countries, including India, Mexico and Brazil, relative to their Western counterparts can be accounted for in large measure by productivity differences.

“Political leaders in the U.S. and other Western countries have been running their economies recklessly for more than 30 years,” Moyo said. “They need to do the right thing if they’re to make their economies engines of growth once more.”

To that end, Moyo advocated lengthening politicians’ time in office, while also restricting them to a single term. The advantage: They become more focused on solving long-term economic problems than in supporting policies advanced only to secure their re-election. She pointed to Brazil and Nigeria as examples of nations that have successfully structured their election cycles so as to address long-term issues.

Turning to foreign aid, Moyo described Western cash gifts that aim to alleviate poverty and improve economic conditions in underdeveloped Third World nations as “absurd” because they reward “bad behavior;” the foreign aid discourages these nations from adopting policies that might resolve deep-seated economic and social ills.

“We know from decades of experience about what creates economic growth and how to improve people’s lives,” she said. “Yet we continue to incentivize bad behavior; the more problems you have, be it widespread disease or poverty, the more foreign aid you get.

“We need rather to encourage these underdeveloped nations to save and invest,” she added. “For guidance, they should look to more successful emerging countries that are embedding financial incentives for good behavior into public policy.”

Among the examples she cited: paying a certain amount in cash to parents to inoculate their children against common diseases; or to youths to complete their high school education.

When asked by MDRT’s Harriman about the one issue that the “G20″ — the group of finance ministers and central bank governors from 20 major economies — should focus on most in their next annual meeting, Moyo said their priority should be to create jobs and economic opportunities.

But she insisted that solutions won’t be found solely in the U.S. or China’s political economies. Whereas, she observed, the U.S. has a $15 trillion economy, free-market capitalism and democracy, China has state capitalism, a GDP of $8.2 trillion, and an autocratic political system. The two countries also have comparable levels of income inequality.

“Countries that are trying to improve their living standards shouldn’t view their options as a choice between the American and Chinese models,” Moyo said. “They must be more open about where solutions for economic opportunity will come from. And, increasingly, these solutions are to be found in other emerging nations.”