Being Underdeveloped: A Fate or An Option !?

It is a well-known fact that private investments create more value added, higher net taxe revenue and insurance premiums than public investments. The most preferred source of private investments is private savings. Now let’s talk about the person who has made the clearest and simplest definition of this proposition. 


Encouraged by those who consider Adam Smith the father of modern economics, I say that the uncle of modern economics is Keynes since he is described as the wealthy uncle who appears whenever the father does not want to give away his money or whenever he cannot afford buying an item.  


He also underlined that, unlike traditional economists, “full employment” is not necessary for the economy to reach its equilibrium, instead saving and investment equality will better help achieve this balance. In formula terms: 


Y = C + S 

Y = C + I 

S  = I 


In this equation, Y refers to income, C to consumption, S to savings, I to investments. When savings are greater than investments, it means idle money but when consumption is greater than investments, it naturally lads to a choice: “Not investing or borrowing”. The importance of saving and investment equality will become more evident with the explanation and example I will provide below. 


According to Keynes’ theory, governments should meet people’s needs, whenever the private sector cannot find sufficient funds to meet them or finds it unprofitable to engage in an investment to meet people’s needs. However, Keynes has omitted one fact in this theory: It is inevitable to experience a lack of savings as a result of the abuse of this responsibility by governments. Perhaps the “epistemological divergence of neoliberal economics” has begun here. The following words, which were said by the Minister of Finance and Treasury in Turkey in a speech and later my colleagues have made it a joking matter among themselves, actually contains a specific reality: 


There has been a contextual divergence between neoliberal economics and liberal economics. Liberal economics thrives on the rule of law, which is the essence of liberal democracy, and creates value through increasing competition and equal opportunities. Neoliberal economics, on the other hand, can survive under any regime, rich richer and the poor poorer. For further details on this issue, you may refer to a previous article of mine.* 


Some of the developing countries have experienced the journey of capitalism under various regimes. Argentina and Latin American countries for example have not been able to get out of the debt spiral for almost 200 years, and have social and political problems as well as chronic problems such as unequal income distribution, high inflation, unemployment and unstable growth, and none of these problems occurred coincidentally. Because no economic model can be analysed by separating it from the political environment in which it inhabits. In this respect, defining the poverty and financial bottlenecks in these countries as “exploitation by powerful countries” would be an oversimplification of the situation. It is known that the United States and some countries cause political turmoil in these countries to serve their own interests, however we must also accept that the vulnerabilities that give rise to turmoil are created by the governments themselves. 


So, do people living in developed countries have no problems? Of course, they have. Just look at all those US-made movies and documentaries on debtors and the loan system. But this problem does not happen much in Germany and France. What happened in Greece, Spain, Italy and Portugal can mostly be explained by people’s greed and their lack of financial literacy. Nevertheless, the Western World and other developed countries surely have a more careful and cautious approach to financial matters due to the financial crises that ravaged their past.  Thanks to the film industry, the whole world knows that the assets of the companies with no bosses, almost all of which are publicly traded, are embezzled by “magically” appointed executives. 


However, Latin America seems not to learn from the financial crises that it has suffered from for a period of 200 years. This means that the sensitivity of countries in financial matters can change over time in accordance with the way they are governed. The reason for chronic savings deficits in Latin America is also closely associated with the government style. In every country that cannot easily abandon the habits of the old totalitarian regimes after a speedy transition to democracy, governments that will use this totalitarian memory for their own benefit may eventually come to power. Although Spain, Portugal and Greece occasionally face great disturbance because of the remnants of the old regime, in the end, the “rule of law” prevails. In this regard, Italy passed the test during the office term of its previous Prime Minister, and did not allow autocracy, but we have to wait a little for the new PM for that matter.  


In electoral democracies, formerly characterised by constant coups d’état or coup attempts and therefore the traces of totalitarianism cannot be fully eliminated, governments always seek “absolute power”. In the Middle East and Asia, on the other hand, absolute power is the prerequisite for governing a country. In countries that define democracy merely by elections, the governments are considered “powerful” when they spend money on everything from employment to consumption, investment to health. For this reason, in such countries, taxes always remain high compared to incomes, and there are practices that even impose taxes on taxes. 


Since the increasing budget deficit caused by the never-ending government spending cannot be covered by taxes, the governments are using the savings of the citizens through borrowing. Where it is not enough, governments borrow foreign currency in order to attract foreign savings. All of this causes the funds required for private investments to become more and more expensive, which is called the “crowding out effect” in economic theory. ** 


“Negative Effects of Corruption…” 


As morality and social values are degenerating in the majority of electoral democracies, “reputable people” are no longer defined by their values but by their assets. In these countries where justice is shattered, the “demand for privilege” inevitably grows, and servility replaces merit. Because people see the assets they have acquired by borrowing as their social status, and they mistake their desires for their needs, so they constantly feel the need to ingratiate themselves with those who pay them wages or promote them to higher positions. 


For this reason, interest rates are often used as political material by governments in economic models that constantly suck its citizens into further debt, and banks and financial institutions are blamed constantly if the interest does not go down.  Those who are lucky to borrow are forced to pay back throughout their working life, maybe longer. That’s why people do not want to lose their jobs. They keep silent about the wrongs they witness in their organisations, even praise these wrongs if need be. John Stuart Mill describes this situation in his book On Liberty as “the inevitable corruption where people advance in their careers not by merit but by servility and ingratiation”. 

Crushed under debt they can’t pay, people expect from governments amnesty or restructuring of their financial debts, taxes and insurance premiums, tuition fees, checks, loans and credit cards, and buildings that violate the law. People’s expectations and government’s promises about all of these things largely help the ruling party to come to power again in next elections. In such countries, governments pursue populist policies, claiming to act as “the voice of the people” instead of doing what is right. Thus, the vicious cycle never breaks. While inflation, interest rates, unemployment, injustice, poverty and indebtedness keep growing, civil liberties, critical thinking and education are disrupted. Because the perception that moral and ethical values are no longer helpful in achieving success are more and more accepted in society.  


In the process, citizens begin to see the governments that hold the “absolute power” as a “State” therefore, they are afraid to criticise them for the reasons I mentioned above. And as governments see themselves as the State itself, they treat those who criticize them as “public enemy” and treat them as such. Since everyone, from business people to ordinary people on the street, has controversial side jobs or activities, they tend to ignore government’s acts, expecting that the government does the same for them. This is the miracle behind some governments’ stay in power for consecutive terms in some countries:  The decay of moral values, caused by people’s ambitions and wants that they satisfy with debt. 


Since I analyse these issues in a specific context, I expect most people to ask for statistical proof. But, I have to say this: The notion we call science is the activity of utilising mathematics to rationalize the developments that are known to be true through experiment, observation, discovery and experience. Therefore, being able to notice development in its visible form without the need to prove its existence with mathematics is a scientific activity in itself. 


As Paul A. M. Dirac. Said, “Mathematics is only a tool” and added: 


“Meaningful mathematics is removing the details that are too small to see from the equation, not the details you do not want to see.”