This is the Marshall Plan on steroids.
Done right, this could do a lot of good.
I know foreign aid is a dicey thing. I know, I know, I know.
But with Great Depression levels of unemployment I feel like the chances that this would not do a whole lot of good in a very volatile part of the world is very, very low.
Tuesday, May 28, 2013
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Where is the evidence that this is caused by a demand shortfall?
ReplyDeleteThis is one instance where I think the whole regime uncertainty thing is quite persuasive!
With 23% unemployment I can't imagine demand problems don't have something to do with it, and really I've always thought of regime uncertainty as a class of demand problems (although perhaps with a different solution). You've certainly got structural/supply side problems too. I imagine the West Bank is a buffet of economic problems.
DeleteThis sort of money will build capacity, boost demand, and it will definitely come with increased scrutiny by both the U.S. and the Israelis. That seems like it'll push things in the right direction whether you're concerned about supply, demand, or regime uncertainty. That's what's nice about an infusion that's two thirds of GDP. Nobody is just going to cut a check to a party boss and let him deal with it.
I have a hard time believing supply side factors aren't dominant there! As Nick Rowe says about Cuba, the existence of a rare supply-limited economy helps to contrast with the demand-constrained ones we normally see. On the other hand, I have no idea how monetary policy over there works.
ReplyDeleteAlso, here's an old article by Tyler Cowen on the Marshall Plan.
I doubt that this will have any good effects and it will certainly have many bad effects. These types of development plans haven't worked in the past, and for reasons that doom this proposal.
ReplyDeleteFor one thing, building capacity will do nothing. Capacity is built endogenously with growth, and what kind of capacity a nation needs will be determined by how it develops. That there isn't this "Capacity" in Palestine is not a sign that Palestine is not growing because of a lack of capacity; it's a sign that capacity isn't being built because Palestine isn't grow. Public works can help to provide that capacity, but the public works has to happen in tandem with growth because public works need to be aimed at providing those public goods that can help sustain and intensify social cooperation. What public good does Palestine most need to encourage human cooperation? Peace. And when has dumping cheap money on a country every brought peace?
The politics need to be fixed and we cannot pretend that simply sending cheap money to a country will do anything but proliferate rent-seeking factions. This money may very well worsen the situation because it'll encourage the development of institutions that thrive off of the foreign aid rather than local cooperation and the gains to trade that result.
In addition I wouldn't be surprised that this will have the result of Palestinians taking this as what is really is (a bribe to be OK with Israeli policies the world cannot change and the United States provides tacit consent to) and resulting in even more anger and the entrenchment of hostile factions within Palestinian society who take not accepting the bribe as a badge of honor. Indeed, that this effort is being spear headed by an organization that stands behind Israel's more aggressive actions against Palestine is going to worsen how emotionally charged this bribe will be.