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The critical issue of absorptive capacity

Hector McNeill1

One of the most common causes of failure to secure objectives is the mismatch between financial resources assigned to a project and the absorptive capacity of the project. Absorptive capacity is a central criterion applied in development economics and is used as a basis for the assessment of a project, community or country to make effective use of the money made available (see also, "Absorptive capacity - a note" ).

Unfortunately the combination of poor economic theory, lack of a practical bent and almost religious belief in the power of the market, leads many economists and policy makers to assign money to solve problems which end up not being solved because they see a gap but do not bother to work out why the gap is there but leave others to sort it out.

In the field of macroeconomics, invariably gaps arise as a result of the time-based evolution of conditions that diminish the development of absorptive capacity and therefore the gaps persist or even increase as a result of ineffective and therefore inappropriate policy frameworks.

It has been evident for a long time that macroeconomic theory does not square with reality; it does not give rise to effective policies. It is time that more economists acknowledge this fact and collaborate to improve economic theory based on the evidence, that is in super-abundance, of the negative impacts of "conventional" policy founded on the central tenets of Keynesianism and monetarism.

Gaps, needs and constraints

In the process of identifying solutions to social, economic and environmental issues the normal process is to involve those affected in a participatory process to identify the symptoms of something going wrong and referred to as gaps. Gaps are a deficiency in the state of something such as wage levels, poverty, poor dietary status, pollution or inadequate educational provisions. So the need is quantified as the resource requirement to close the gaps to a defined and preferably quantified level such as a living wage, raising all above a poverty line, eliminating pollution and raising educational provisions. Constraints are the specific factors that led to the creation of the gaps in the first place such as payment of low wages, inadequate provisions for the poor, high prices of nutrition food, unregulated, or defiance of regulations by polluting activities and an inadequate number of teachers or educational infrastructure. Usually constraints contain a significant component linked to past and current policies having been inadequate in preventing the evolution in the growth of gaps.

Priorities in the context of political economy

In the context of the political economy of the United Kingdom, policy priorities are laid out in political party agendas (manifestos) and these are drawn up by a tiny number of people who are members of parties. In the United Kingdom this amounts to less than 1% of the electorate most of whom make no contributions to policy propositions but are there for the ride. Therefore, policy is proposed and decided by a tiny faction. If one combines flawed economic theory, upon which party economic advisers will base their advice, with the completely unrepresentative nature of party membership and the tendency of political parties to wish to please corporations and the corporate media, it is fairly apparent that the resulting priorities are unlikely to address the gaps and needs of the majority of constituents in the country. They are marshaled through dog whistle tactics with false promises. In any case, under the British system, if a political party gains a working majority in parliament then any mandate can and are abandoned and the country becomes subjected to a trail of arbitrary decisions, which were never agreed to through a vote by the people. These decisions are made by an even smaller faction in government through a cabinet and whose proceedings remain secret. There is no effective parliamentary representation of the people on such matters with most MPs voting along with cabinet decisions and the whip's "advice".

It is self evident that such as system cannot be relied upon to do an effective job in reviewing gaps, needs and constraints analysis to design policies that fall in line with the needs of the majority until the policy framework is delivering such poor results that the situation becomes dire and an "election victory threatening status" but by this time, too much damage has been done.

Absorptive capacity revisited

It therefore becomes very evident that the problem in the United Kingdom it that we have a political system where the absorptive capacity of parties to be aware of the range of gaps and needs are exceptionally limited and anyway they are not designed to operate in such a participatory way. It is therefore more than apparent that the whole system is not fit for the purpose of providing the people of Britain with a governance that is capable of addressing the needs of the majority.

The danger here is that as conditions get worse, as they were before Covid-19 turned up, it will create fertile ground for a demagogue to promise to resolve the most pressing problems that current political parties are not addressing. This normally means a shift to the extremes of the political spectrum, intolerance of diverse opinions, a militant drive to electorate success based on an intimidation of the opposition. The knee jerk reaction to this trend is, of course, the "law and order" agenda which has the effect of shutting off discourse around the situations motivating law breaking as a result of "statutory" regulations, fines and prison sentences. This only diminished the absorptive capacity of the political groups of relevant information to help guide them in the right direction.

Quantitative abandonment of responsibility

All of the trends mentioned above and the general decline in absorptive capacities of the economy and the government have been exacerbated, ruinously, by 12 years of quantitative easing. This had led to a disastrous economic and social state of affairs before Covid-19 arrived. While people listen to the various proposals for "re-sets" and getting back to the "new normal" they need to ask themselves if the system of governance in this country is up to the job. It does not seem to be at all adequate. Is it not well past the time for participatory discussions across the nation on the role of constitutional economics in serving the needs of the people of this nation? The current lack of absorptive capacity of government needs to be corrected through an obligation on any political party and government, under the law, to be structured so as to proactively work to identify all gaps, needs and constraints facing communities across the nation and then to prioritize according to available resources and the absorptive capacity of targeted actions. Part and parcel of any actions should be to improve those aspects of local conditions that impair absorptive capacity.

There is a need for more informed participatory public choice in the prioritization and policy designs of governments. In this way, political parties, economic advisers and government economic policies can become supportive of "front line workers" and the "working poor" by adopting the vocation of being caring professions.

1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.

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