The author is the associate chairperson and director for Graduate Studies Program, Department of Economics, Ateneo De Manila University.
In a typical academic discussion, the Neo-Classical Growth Model starts
by discussing the production function. In layman’s terms, as capital
equipment per person increases, productivity per person increases.
Ultimately, income per person increases.
After the production function, the discussion shifts to the derivation
of the “steady state” level. This derivation has to do with the amount
of money that is invested on capital equipment and the depreciation of
value of capital equipment due to wear and tear. With investment, the
value of total capital increases. The available equipment per person
increases. The average productivity of workers improves. So income per
person increases. With depreciation, value of capital wears out. The
available equipment per person decreases. The average productivity
deteriorates. So income per person decreases.
If money invested is greater than depreciation, equipment per person
increases. Average productivity improves. And income per person
increases. Unfortunately, the increase of income does not continue
forever. When equipment increases, the cost of maintaining them
increases too. So eventually cost of depreciation catches up with
investment until the two equal.
If money invested is less than depreciation, the opposite occurs. That
is equipment per person decreases. Average productivity and income per
person decrease. Fortunately, the decrease does not continue forever.
When equipment decreases, the cost of maintaining them decreases too.
So eventually, cost of depreciation is caught by investment until the
When the two equal, the value of equipment is constant. So equipment
per person is constant. Average productivity is constant. And income
per person is at steady state. In conclusion, regardless of where the
economy starts, investment is bound to equal depreciation, and income
is destined to approach a constant level called the steady state level.
But what if investment equals depreciation and the two happen to be
zero? For most discussions, economists assume that capital equipment is
never zero. Understandably, zero capital equipment and infrastructure
never occurs in developed countries and so economists never ponder of
such a condition. But in a developing country, this is common. Take
Basilan for example. Knowing that the economy is so poor, the average
income must be close to zero. As result, there is no market to sell
one’s products. Investors do not even dare think of investing there. So
investment is zero. Add the fact that capital infrastructure is almost
zero. Then there is no capital that will depreciate to start with. So
depreciation is also zero.
By Neo-Classical paradigm, investment equals depreciation equals zero.
Capital equipment per person is constant at zero. Average productivity
per person is constant at almost zero. Income per person is at steady
state of almost zero. And since the economy is at steady state, the
standard of living is stuck at absolute poverty!
So this leaves us to the question: what do we do about this? Private
investment would surely get Basilan out of this hole. But this is
granted that someone is dumb enough or philanthropic enough or both to
invest in such a market. I myself would not suggest my clients to put
money in Basilan. And with fairness, they should not because their
profit motive will likely fail.
This leaves us with government investment. By government investment, we
do not refer to building infrastructures for Basilan by the Marines or
by American engineers. Rather, the infrastructure must be for Basilan
by Basilenos. When government investment fund comes in, the fund must
be used to hire residents to build infrastructures. This generates jobs
and income for residents. The take home income generates savings,
however, little it is. The little savings results to little investment
to build little capital equipment. Little equipment leads to little
maintenance cost. But since the little investment is greater than the
little depreciation, the value of equipment, then equipment per person,
then productivity, and then income per person increases. Eventually,
the economy gets out of absolute poverty threshold. Come to think of
it, the solution is Neo-Classical!
But this has to be complemented by peace and order. Granted that
government implements the Neo-Classical solution, a negative shock due
to terrorism can destroy every little capital infrastructure built. If
this happens, investment, capital and depreciation go back to zero. And
the economy goes back to the absolute poverty threshold. In other
words, military muscle should match government investment.
In sum, Neo-Classical analysis and facts show that Basilan is stuck in
a poverty threshold and that there is no inherent economic force that
can pull the place out of the hole. The private investors are not
likely to help because it just does not make profit sense to do so.
This leaves us with government to do the investment for “Basilan by
Basilenos” – the Neo-Classical solution. Added to this, military muscle
must match government investment to avoid negative shocks. That is:
classical power must complement Neo-Classical finesse.