Naked Economics: Undressing the Dismal Science pdfdrive com

part by keeping their economies open to exports from poor countries. Mr. Sachs
has called for a “New Compact for Africa.” He writes, “The current pattern of
rich countries—to provide financial aid to tropical Africa while blocking
Africa’s chances to export textiles, footwear, leather goods, and other labor-
intensive products—may be worse than cynical. It may in fact fundamentally
undermine Africa’s chances for economic development.”
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Responsible fiscal and monetary policy. Governments, like individuals, will get
themselves in serious trouble if they consistently overspend on things that do not

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raise future productivity. At a minimum, large budget deficits require the
government to borrow heavily, which takes capital out of the hands of private
borrowers, who are likely to use it more efficiently. Chronic deficit spending can
also signal other future problems: higher taxes (to pay back the debt), inflation
(to erode the value of the debt), or even default (just giving up on the debt).
All of these problems are compounded if the government has borrowed
heavily from abroad to finance its profligate spending. If foreign investors lose
confidence and decide to take their money and go home—as skittish global
investors are wont to do—then the capital that was financing the deficit dries up,
or becomes prohibitively expensive. In short, the music stops. The government is
left on the brink of default, which we have seen in countries ranging from
Mexico to Turkey. (There is, by the way, some modest concern that this could
happen to the United States.)
On the monetary side, Chapter 10 made clear the dangers of letting the money
party get out of control. It happens often anyway. Argentina is the poster child
for irresponsible monetary policy; from 1960 to 1994, the average Argentine
inflation rate was 127 percent per year. To put that in perspective, an Argentine
investor who had the equivalent of $1 billion in savings in 1960 and kept all of it
in Argentine pesos until 1994 would have been left with the equivalent spending
power of one-thirteenth of a penny. Economist William Easterly has noted,
“Trying to have normal growth during high inflation is like trying to win an
Olympic sprint hopping on one leg.”