Category Archive for: Development [Return to Main]

Saturday, June 07, 2014

'What Does Piketty’s Capital Mean for Developing Countries?'

Gabriel Demombynes:

What Does Piketty’s Capital Mean for Developing Countries?, by Gabriel Demombynes: The economics book that has launched a thousand blog posts, Thomas Piketty’s Capital in the Twenty-First Country, tells a grand story of inequality past and present. One would expect that a book on global inequality would have much to say about development. However, the book has limited relevance for the developing world, and the empirical data he marshals for developing countries is weak. ...[continue]...

Tuesday, May 20, 2014

'Democracy Causes Economic Development?'

Daron Acemoglu, Suresh Naidu, James A Robinson, and Pascual Restrepo:

Democracy causes economic development?, by Daron Acemoglu, Suresh Naidu, James A Robinson, Pascual Restrepo, Vox EU: Many analysts view democracy as a neutral or negative factor for growth. This column discusses new evidence showing that democracy has a robust and sizable pro-growth effect. The central estimates suggest that a country that switches from non-democracy to democracy achieves about 20% higher GDP per capita over the subsequent three decades.

Thursday, April 17, 2014

'Secular Stagnation or Secular Boom?'

Antonio Fatás:

Secular stagnation or secular boom?: The notion that some countries are caught in a long and protracted period of low growth ... has been labeled "secular stagnation". The pessimism that the idea of secular stagnation has created has been reinforced by the notion the potential for emerging markets to grow is becoming weaker. ...
Let's start with a simple chart that summarizes the pattern of annual growth in ... advanced and emerging markets...

... So stagnation might be the right label for 50% of the world, but accelerating growth is the right label for the other half.
And if we look at the engines of growth, in particular investment rates (in physical capital) we can see again the divergence in performance.

... Looking at the above charts... Could it be that investment opportunities in emerging markets moved capital away from advanced economies? Not obvious because we know that the explosion in investment rates in emerging markets came in many cases with even larger increases in saving rates and (financial) capital flew away from these countries. In fact, interest rates in the world were trending downwards during this period. And this makes the performance of advanced economies even more surprising: despite a favorable environment in terms of low interest rates, investment and growth declined.

Monday, March 03, 2014

'Fed Tapering News and Emerging Markets'

How much did Fed tapering affect emerging markets?:

Fed Tapering News and Emerging Markets, by Fernanda Nechio, FRBSF Economic Letter: In the wake of the global financial crisis and recession of 2007–09, the Federal Reserve carried out a series of large-scale purchases of government and asset-backed securities to lower longer-term interest rates and provide additional stimulus to the economy. Following then-Chairman Ben Bernanke’s May 22, 2013, congressional testimony about the possibility that the Federal Reserve would begin scaling back these purchases—a reduction widely known as tapering—some financial market participants revised their beliefs about when the central bank would begin normalizing its highly accommodative monetary policy. Market participants moved forward the dates they expected the Fed to start reducing its large-scale asset purchases as well as the dates when they expected it to start raising the federal funds rate, its short-term policy interest rate (Bauer and Rudebusch 2013).
These changes in policy expectations led to reductions in market participants’ tolerance for risk and in particular to a downward reassessment of the probable returns from investing in emerging market economies. Following the global financial crisis, advanced economies put in place exceptionally easy monetary policy. During this period, many emerging market economies had received large waves of capital inflows. By contrast, after Chairman Bernanke’s testimony, many emerging market economies in Asia and Latin America experienced sharp capital flow reversals.
However, the distribution of these capital movements was not uniform. Patterns of capital outflows appeared to be related to a country’s macroeconomic fundamentals. Those in turn reflected to some degree the policies a country pursued during the years that followed the global financial crisis. This Economic Letter assesses how recent emerging market capital movements are related to a country’s economic situation. In particular, countries with larger external and internal imbalances during the low interest rate period faced larger currency depreciations when interest rate expectations for advanced economies tightened. ...

Tuesday, November 12, 2013

'The Inequality of Climate Change'

Annie Lowrey:

The Inequality of Climate Change, by Annie Lowrey, NY Times: ... “No nation will be immune to the impacts of climate change,” said a major World Bank report on the issue last year. “However, the distribution of impacts is likely to be inherently unequal and tilted against many of the world’s poorest regions, which have the least economic, institutional, scientific and technical capacity to cope and adapt.”
That is the firmly established view of numerous national governments, development and aid groups and the United Nations as well. ...
The reason is twofold. First..., poorer lower-latitude regions are expected to face desertification and more-intense storms. The increase in the sea level might be 15 to 20 percent higher in the tropics than the global average, meaning flooding for coastal cities in regions like southern Asia. Droughts are also expected to increase significantly in lower-latitude areas, including in Africa and the Middle East. (The United States and Australia might also be hard hit...) Moreover, in many countries, the vulnerable poor might cluster in areas where climate change might have a disproportionate impact, like flood zones and dry rural areas. ...
The second, more significant reason is that the poorer the country, the harder it might be for it to respond to a changing climate. ...
For that reason, many poorer countries hold rich countries like the United States responsible for climate change, and want them to help pay for its effects. ...
“Poverty reduction and climate change are linked,” said Dr. Jim Yong Kim, the president of the World Bank... He concluded: “If we don’t confront climate change, we won’t end poverty.”

Thursday, October 17, 2013

'Is Aid a Roadblock to Development?'

Chris Blattman (the original is much longer):

Is aid a roadblock to development? Some thoughts on Angus Deaton’s new book, by Chris Blattman: I was talking with a prominent development economist... He expressed surprise that Angus Deaton’s new book on development wasn’t getting more attention. Deaton is one of the three or four intellectual giants of the field...
You have to be careful what you wish for. The NY Times wrote a positive but skeptical review this weekend, and my Twitter feed has been full since then with some support but a great deal more skepticism for the book. ...
The bulk of Deaton’s book is an overview of half of humanity’s climb from abject poverty to health and wealth. ... It is a marvelous overview for the newcomer and the oldcomer. Where he’s enflamed passions, though, is his last chapter: “How to help those left behind”. It’s a tirade against aid, especially naive aid. Overall one message comes through: Aid is a roadblock to development.
I’m half with Deaton and half not. ... Aid isn’t a uniform mass. Deaton knows this, and my guess is he’s talking about a particular kind of aid. I don’t think he means emergency relief for disaster and conflicts. I don’t think he means the money behind peacekeeping forces and post-war assistance. He might exclude child sponsorship. I’m guessing he’s not talking about money spent on vaccine research in the West. He might even exclude support for elections and party-building and other democratization.
I think Deaton has his sights aimed at dollars sent by the West to local governments to supposedly reduce poverty, improve health, and ignite growth. This is a lot (if not the bulk) of money sent to poor countries, and so it’s a fair target.
This makes it easier to see what he means by aid not working. It probably hasn’t produced growth... And it might not be what’s responsible for falling poverty levels. Frankly we don’t know, but I think we can say that if aid did ignite this growth, it certainly has been coy about it.
But I wouldn’t diminish these other kinds of aid. ... Without a doubt, big chunks of the aid machine are broken. I’d prefer to fix them and not throw them away. In large part, this is what Deaton recommends. He also reminds us there are things that are harder to do than give money, like opening our borders, that could help more.
The polemic will sell more books and get people talking about the world’s problems. That’s exactly what polemic is supposed to do. But I would recommend paying the most attention to the concrete suggestions and solutions in the book. I think the promoters and detractors are all closer to sharing the same opinions than we think. ...

Thursday, April 04, 2013

Video: Growth, Adjustment, and Covergence in Asia - INET Hong Kong

One of the things I hoped to hear about at the INET conference here in Hong Kong is the degree to which China’s development model can be used by other countries. This is a nice discussion of this topic, including whether the development model will continue to work for China itself:

They are far more worried than I would have guessed about the resource constraints, etc. associated with adding "a billion new consumers" to the global economy (this is emphasized during the Q&A).

Thursday, December 27, 2012

'Disease Burden Links Ecology to Economic Growth'

Many development economists argue that "the foundation of economic growth is in political and economic institutions." This research argues that "vector-borne and parasitic diseases" are just as important as "crime or government corruption" in explaining the global distribution of income. This is not my area, so I won't comment on the quality of this research, but hoping development economists will chime and explain the degree to which these results should be noted or ignored:

Disease burden links ecology to economic growth, EurekAlert: A new study, published December 27 in the open access journal PLOS Biology, finds that vector-borne and parasitic diseases have substantial effects on economic development across the globe, and are major drivers of differences in income between tropical and temperate countries. The burden of these diseases is, in turn, determined by underlying ecological factors: it is predicted to rise as biodiversity falls. This has significant implications for the economics of health care policy in developing countries, and advances our understanding of how ecological conditions can affect economic growth.
According to conventional economic wisdom, the foundation of economic growth is in political and economic institutions. "This is largely Cold War Economics about how to allocate property rights—with the government or with the private sector," says Dr Matthew Bonds, an economist at Harvard Medical School, and the lead author of the new study. However, Dr Bonds and colleagues were interested instead in biological processes that transcend such institutions, and which might form a more fundamental economic foundation.
The team was intrigued by the fact that tropical countries are generally comprised of poor agrarian populations while countries in temperate regions are wealthier and more industrialized. This distribution of income is inversely related to the burden of disease, which peaks at the equator and falls along a latitudinal gradient. Although it is common to conclude that economics drives the pattern of disease, the authors point out that most of the diseases that afflict the poor spend much of their life-cycle outside the human host. Many cannot even survive outside the tropics. Their distribution is largely determined by ecological factors, such as temperature, rainfall, and soil quality.
Because of the high correlations between poverty and disease, determining the effects of one on the other was the central challenge of their statistical analysis. Most previous attempts to address this topic ignored disease ecology, argue Bonds and colleagues. The team assembled a large data set for all of the world's nations on economics, parasitic and infectious vector-borne diseases, biodiversity (mammals, birds and plants) and other factors. Knowing that diseases are partly determined by ecology, they used a powerful set of statistical methods, new to macroecology, that allowed variables that may have underlying relationships with each other to be teased apart.
The results of the analysis suggest that infectious disease has as powerful an effect on a nation's economic health as governance, say the authors. "The main asset of the poor is their own labor," says Dr Bonds. "Infectious diseases, which are regulated by the environment, systematically steal human resources. Economically speaking, the effect is similar to that of crime or government corruption on undermining economic growth."
This result has important significance for international aid organizations, as it suggests that money spent on combating disease would also stimulate economic growth. ... The research sets the stage for a number of future analyses that need to lay bare the relationship between health care funding and economic development.

Wednesday, October 03, 2012

'Why the US Demonizes Venezuala's Democracy'

Hoping you'll help me sort out the truth about Venezuela. Is this correct?:

Why the US demonises Venezuala's democracy, by Mark Weisbrot, CIF: ...On 30 May, Dan Rather, one of America's best-known journalists, announced that Venezuelan president Hugo Chávez would die "in a couple of months at most." Four months later Chávez is not only alive and campaigning but widely expected to win re-election on Sunday.
Such is the state of misrepresentation of Venezuela,... a journalist can say almost anything about Chávez or his government and it is unlikely to be challenged, so long as it is negative. Even worse, Rather referred to Chávez as "the dictator" – a term that few, if any, political scientists familiar with the country would countenance.
Here is what Jimmy Carter said about Venezuela's "dictatorship" a few weeks ago: "As a matter of fact, of the 92 elections that we've monitored, I would say that the election process in Venezuela is the best in the world." ... But because Washington has sought for more than a decade to delegitimize Venezuela's government, his ... comments went unreported in almost all of the US media. ...
The opposition will probably lose this election not because of the government's advantages of incumbency..., but because the living standards of the majority of Venezuelans have dramatically improved under Chávez..., poverty has been cut in half and extreme poverty by 70%. And this measures only cash income. Millions have access to healthcare for the first time, and college enrolment has doubled, with free tuition for many students. Inequality has also been considerably reduced. By contrast, the two decades that preceded Chávez amount to one of the worst economic failures in Latin America...
In Washington, democracy has a simple definition: does a government do what the state department wants it to do? ... So it is not just Venezuela that regularly comes under fire from the Washington establishment: all of the left and newly independent governments of South America, including Argentina, Ecuador, and Bolivia are in the crosshairs (although Brazil is considered too big to get the same treatment except from the right). ...
But Venezuela is part of a "Latin American spring" that has produced the most democratic, progressive, and independent group of governments that the region has ever had. They work together, and Venezuela has solid support among its neighbors. This is the former president of Brazil, Lula da Silva, last month: "A victory for Chávez is not just a victory for the people of Venezuela but also a victory for all the people of Latin America … this victory will strike another blow against imperialism."
South America's support is Venezuela's best guarantee against continuing attempts by Washington – which is still spending millions of dollars within the country in addition to unknown covert funds – to undermine, delegitimize, and destabilize democracy in Venezuela.

Saturday, September 01, 2012

The Great Divergence between China and Europe

This is from Dan Little:

The great divergence, by Dan Little: It has been ten years since Ken Pomeranz published The Great Divergence: China, Europe, and the Making of the Modern World Economy, a book that forced some real rethinking about the economic history in Europe and China. Along with Bin Wong in China Transformed: Historical Change and the Limits of European Experience, he called for a deep questioning of many of the basic premises of much twentieth century economic history, which was premised on the backwardness and stagnation of China and the dynamism of Western Europe. Industrial revolution and sustained economic growth were unique products of the west, and China was incapable of these transformations at the beginning of the modern epoch -- 1600, let us say.
So the central problematic for "European exceptionalism" was to identify some set of features of western society lacking in China that could account for takeoff. Was it merchant culture? Perhaps Newtonian science? Was it European family and reproductive behavior? Or perhaps it was some feature of Christianity?
Pomeranz doesn't like these theories. More basically, he doesn't accept the premise of European economic superiority in 1600, whether in institutions or ideology. He considers agriculture first and holds that Chinese agriculture was as productive in terms of land and labor as English farming; it was not undergoing involution through population increase; and it supported a rural standard of living that was competitive with that of Europe and England, his primary focus.
Pomeranz doesn't doubt that there were sharp differences in European and Chinese economic development in the 18th century. This is the "great divergence" to which he refers. But he doubts that there are grand socio-cultural explanations for this fact; instead he focuses on contingent conjunctival circumstances that gave England a lead that it maintained for 200 years. These include the fortuitous location of coal in Britain, the fact of New World wealth, and the returns if slave labor in North America. None of these is a deep systemic factor but rather a lucky break for Britain.
Bin Wong adds a different theme to the debate. He recognizes that Europe and China possessed complex political-economic systems that were different from each other. And he agrees that these systems had consequences for development. But he agrees with Pomeranz that neither system is inherently superior. And he calls for an economic history that pays attention to the differences as well as similarities. Each process of development can be illuminated by comparison to the other.
So where is the debate today? This was the focus of a productive conference at Tsinghua University in Beijing last week. Some of the primary contributors to economic history participated, including Robert Allen, Bozhong Li, and James Lee. It isn't possible to summarize the papers, but several themes emerged. The most basic is the need to bring substantially more factual detail to the debate. What we need at this point isn't more theorizing about large causes; it is more fine grained factual discovery across both Europe and China.
Three areas in particular have gotten much more factual in the debate in ten years. the first is agricultural productivity. Historians like Robert Allen and Bozhong Li have substantially sharpened our knowledge of the farm economies of England and China.
Second is the question of the historical standard of living in various places. Essentially this depends on price data, wage data, and a system for comparing consumption across countries. Here too there has been a great refinement of our knowledge. Robert Allen has contributed much of this.
Third is population behavior. The Malthusian theory of the difference between China and Europe is a stumbling block, and of course this theory was created in a fact-free universe. Now comparative historical demography has advanced a long way thanks to researchers like James Lee. The Eurasian Population and Family History Project has now refuted the Malthusian view.
A key idea in the Pomeranz debate is Philip Huang's idea the Chinese agriculture was "involutionary". The work provided by Bozhong Li demonstrates that this theory is simply incorrect when applied to the lower Yangzi River delta. Moreover, China's development after 1970 makes the theory implausible in any case. As Li pointed out at the conference, "It is inconceivable China's modern development could have occurred in the conditions of involution described in the debate." China was clearly not caught in an inescapable involutionary trap.
So there is work to be done still on the origins of the great transformation. And it is valuable for this work to take place with a global and comparative perspective. But most valuable will be detailed factual research that adds significantly to what we know about the past.

Wednesday, August 08, 2012

Rodrik: No More Growth Miracles

Dani Rodrik argues that the future for developing countries is not as bright as many people believe:

No More Growth Miracles, by Dani Rodrik, Commentary, Project Syndicate: A year ago, economic analysts were giddy with optimism about the prospects for economic growth in the developing world. ... Today, such talk has been displaced by concern... Recent economic data in China, India, Brazil, and Turkey point to the weakest growth performance in these countries in years..., there are strong reasons to believe that rapid growth will prove the exception rather than the rule in the decades ahead.
To see why, we need to understand how “growth miracles” are made. Except for a handful of small countries that benefited from natural-resource bonanzas, all of the successful economies of the last six decades ... were exceptionally good at moving their labor from the countryside (or informal activities) to organized manufacturing. ...
But this time-tested recipe has become a lot less effective these days... First, technological advances have rendered manufacturing much more skill- and capital-intensive ... even at the low-quality end of the spectrum. ... Second, globalization ... has greatly increased competition on world markets, making it difficult for newcomers to make space for themselves. ...
Moreover, rich countries are unlikely to be as permissive towards industrialization policies as they were in the past. Policymakers ... looked the other way as rapidly growing East Asian countries acquired Western technologies ... through unorthodox policies such as subsidies, local content requirements, reverse engineering, and currency undervaluation. Core countries also kept their domestic markets open...
Now, however, as rich countries struggle..., they will apply greater pressure on developing nations to abide by World Trade Organization rules... Currency undervaluation à la China will not go unnoticed. Protectionism, even if not in overt form, will be politically difficult to resist.
Manufacturing industries will remain poor countries’ “escalator industries,” but the escalator will neither move as rapidly, nor go as high. Growth will need to rely to a much greater extent on sustained improvements in human capital, institutions, and governance. And that means that growth will remain slow and difficult at best.

Monday, August 06, 2012

Dynamic Comparative Advantage

Joseph Stiglitz on how African countries can (and should) use their newfound resource wealth to shape their long-run comparative advantage:

From Resource Curse to Blessing, by Joseph Stiglitz, Commentary, Project Syndicate: New discoveries of natural resources in several African countries ... raise an important question: Will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries? ...
[T]hese countries must do more to ensure that their citizens get the full value of the resources..., the money gained through natural resources must be used to promote development. The old colonial powers regarded Africa simply as a place from which to extract resources. Some of the new purchasers have a similar attitude.
Infrastructure (roads, railroads, and ports) has been built with one goal in mind: getting the resources out of the country at as low a price as possible, with no effort to process the resources in the country, let alone to develop local industries based on them.
Real development requires exploring all possible linkages: training local workers, developing small and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country’s economic structure. Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries’ comparative advantage is having other countries exploit their resources.
That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant that it is today. It might be the world’s most efficient rice grower, but it would still be poor. ...

Friday, June 22, 2012

Evaluating the Millennium Villages

I met with Gabriel Demombynes, a World Bank economist stationed here in Nairobi, this evening. Recently, he pointed out that there was a fundamental flaw in the way in which progress in the Villages is evaluated. Essentially, the evaluation looked at changes in measures of performance over time, but it did not make comparisons to any type of baseline. For example suppose an evaluation finds that the percentage of people engaging in a negative behavior falls from 20% to 10%. If the percentage of people doing this falls, that's a good thing, right? Yes, but it doesn't mean that the Villages should necessarily pat themselves on the back. To see why, suppose that in other comparative villages -- which are not Millennium Villages -- the percentage also falls from 20% to 10%, or perhaps even lower. Now things don't look as good. Measured against the baseline, performance has stayed the same, or even worsened.

That's essentially what Demombynes and his co-authors showed in their academic paper on this topic. The measures for Kisumu in the report are very highly correlated with measures at the national level. The response from Village supporters such as Jeff Sachs was to say that the evaluation wasn't the actual evaluation, and the real one would come soon. But when the second evaluation arrived, it's major finding that infant mortality had fallen significantly in the Villages, was subject to similar questions.

Gabriel, via an email, points to further discussions of these points:

Have a great time in Kisumu. An hour or so away is Sauri, the first Millennium Village. I've had a long back-and-forth with Jeff Sachs about the project's evaluation. Here's an early blog post I wrote about my visit to Sauri:
 http://blogs.worldbank.org/africacan/evaluating-the-millennium-villages More recently I wrote this blog post which led to the MV project retracting its major finding in a paper in Lancet: : http://blogs.worldbank.org/impactevaluations/the-millennium-villages-project-impacts-on-child-mortality 
The retraction on the MVP website: http://www.millenniumvillages.org/field-notes/millennium-villages-project-corrects-lancet-paper 
The retraction in the Lancet: http://press.thelancet.com/MVP.pdf 
…from the Lancet editors…http://download.thelancet.com/flatcontentassets/pdfs/S0140673612607879.pdf my letter with others published in the Lancet: http://www.thelancet.com/journals/lancet/article/PIIS0140-6736%2812%2960848-4/fulltext 
Related: http://retractionwatch.wordpress.com/2012/05/31/millennium-villages-project-forced-to-correct-lancet-paper-on-foreign-aid-as-leader-leaves-team/ 
http://www.economist.com/node/21555571 
http://www.economist.com/blogs/newsbook/2012/05/jeffrey-sachs-and-millennium-villages?fsrc=gn_ep 
http://blog.givewell.org/2012/05/18/millennium-villages-project/

Being here emphasizes how big the problem is, and how important it is to get these measures correct.

Wednesday, June 20, 2012

The Pumwani Maternity Ward

Today we visited a maternity ward in a poor area of Nairobi to get a sense of the scale of the population explosion in Kenya, and the level of care for this population.

The charge for maternity care at this hospital is 3,000 shillings for a normal birth, and 6,000 shillings for a C-section, plus 400 shillings per day for room charges. (If you cannot pay at the end, they keep you for two weeks -- room charges accumulate -- then eventually release you. About 2% do not pay, and that comes to around a million shillings per month.)

Maternity Ward 004Entrance

I was interested in a comment made during a presentation prior to the visit that health care for the poor is allocated by a voucher system. The vouchers cost 100 shillings, or a $1.25, That doesn't seem like a lot, but the population we visited yesterday, for example, is excluded by this practice (secondary options for care are not very good).

Maternity Ward 022Post-natal training

I asked the government official making the presentation why they chose to allocate care in this way. The money they collect is nothing -- that can't be it -- it seems like an intentional exclusion of the lowest income population. The answer: they can't afford to cover everyone. Then why exclude this population? Why not adopt a different allocation mechanism that targets very specific areas of need? Why do they think this is the best way to allocate the money? There was an answer, but it didn't really address the question, and it left as many questions as it answered.

Maternity Ward 008These will be occupied soon

I was left wondering how the voucher system came to be in the first place. I asked, again words were spoken, but there was no answer. Is this, for example, the result of some donor saying funds will be given, and insisting on an allocation mechanism that involves vouchers (it worked in Kenya, and it can work in the US too!)? Was it from economists in Kenya? I wish I had the answers.

Maternity Ward 017I bet this is really effective

Another comment made by the director of the maternity ward interested me as well. We were told that every other hospital gets 2 million shillings per month to cover maintenance, gardening, and other expenses, but this one does not. We asked why, and the answer was: he wished he could tell us, but he didn't know. I suspect the money is ending up in someone's pocket, but who knows? Another puzzle is that they receive very little donation money (though this could have been a pitch to donors that exaggerated the conditions so that we would write about it -- there was no way to tell). But this is a place where donations could do a whole lot of good, and it's hard to imagine that some NGO wouldn't want to do this (there is a funder on the trip who thought donors should be salivating over this place). But donors do check before giving money, especially very large sums, and if the money is not epected to end up where it was intended to go, then they would be hesitant to begin a relationship. We were all puzzled by why donors shied away, and we tried hard to find out why. But, once again, there was no good answer, only more questions.

I'm finding that a lot here.

[We also had a presentation on female genital mutilation, or female circumcision as some insist on calling it, and it seemed to me it could be characterized, at least in part, as a multiple equilibrium, collective action problem with tipping points. So I asked what they knew about tipping points -- the point where the social pressure switches from doing it to not having it done as fewer and fewer have the procedure done to them, but that will have to wait -- we have to catch a plane to Lake Victoria to meet the CDC and see other things, like hippos coming to get water (apparently like clockwork) and we depart at 6 am. That's in five hours.]

Tuesday, June 19, 2012

Kenya's Kibera Slum

The International Reporting Project took us to the Kibera slum today, everyone here says it's the largest slum in the world (though Wikipedia says it's third), and we heard presentations from youth groups, Doctors Without Borders, and others. We also broke into small groups and interviewed families -- we were free to ask anything we wanted -- about half of which were HIV positive.

Kenya 1672
Kibera

It's hard to understand how many of them make it at all. Rent for a dirt-walled shack is 1500 shillings per month (the exchange rate is approximately 80 to 1 so this is around $18.75 per month). All of the people we talked to were casual laborers, and they found work when they could doing things such as knocking on doors and asking if people needed their clothes washed. But the income they bring home, at least as far as I could tell, was hardly enough to pay the rent, let alone buy food (many ate once per day, one woman said she waited until just before bedtime to feed her kids since they didn't sleep well if they were fed earlier).

Kenya 1630The Sewage System

As for infrastructure, they get water from the government twice per week, maybe (Tuesdays and Sundays). At other times they have to buy it. If they want to use anything but a hole in the ground to go to the bathroom, they must pay 10 shillings (only 6 toilets are plumbed for 1 million people, the sewage dumps into trenches running along the roads -- even the outhouses, a generous term for what they actually are -- were shared by 50 or more families).

Kenya 1676
He has aids, his wife is virus free

Nevertheless, the economy was more vibrant than I expected. There is the small economy inside of the slum as they trade with each other, but more importantly there is a huge daily flow of people out of the slums to do work in the industrial and service sectors (mostly by foot, and they walk long ditances daily).

Kenya 1678
Food Stand

The money from working, when they can, comes back to the slums, but there are all sorts of corrupt institutions that take it right back out. Because of this, e.g. making slum residents pay exorbitant amounts for water and charging rent on land that is supposed to be free, the money they bring home (and money from aid programs, etc.) flows back out of the slum, and guess who loses on the exchange due to the unequal power relationships in every transaction they face?  (When asked, they say the rent is for the structures, not the land, but one of the reporters on the trip made a good point -- how did the landlord get control of the land in the slum so that they could put these shacks on it? What power enforced and allowed them to control land that is supposed to be free? What corruption allows this?)  

Kenya 1632School

Another disappointment is that they seem to understand that schooling is one way out. I asked lots of kids this question in the home visits, and without prompting they all said school was their best hope (one 8 year old boy wanted to be a pilot). But school is not free, they must pay, so the kids only get spotty lessons here and there, if at all (there was some confusion here, some said elementary school was free, but most don't go in any case). There are a few schools run by NGOs, but the kids must perform well enough to be accepted and the need far outweighs the opportunity. Nevertheless, for those who do get in you could see that they looked healthier and happier, perhaps due in no small part to the fact that they are fed once a day at school (for one child we talked to, and surely more, that was pretty much it for the day).

Kenya 1628
Trees are used for fuel, and are mostly gone

Kenya 1668
Charcoal is used too -- if you have 35-45 shillings

One final observation. At first I thought the key to helping these people would be to create more jobs in the industrial sector -- to bring them regular, dependable incomes from this low-skill employment. There are also huge infrastructure needs that go unmet. For example, when asked why they only get water from the government twice per week, they answer that there's not enough water to serve all the slums every day, so the government must ration. But from what I understand, there's plenty of water, it's the infrastructure to supply it that is missing (a lot of water is diverted into flower production). So jobs and basic social services are a first priority.

Kenya 1660
Those solid walls that landlord build
(fleas, bedbugs, etc. hide in the walls)

But I'm starting to understand how corruption interferes with the development process. There are, for example, many phantom schools -- schools on the books that were paid for by government money, but the schools don't actually exist. The same is true for health clinics, and for other money intended to help the poor. So its easy to call for more social services, and the government sometimes answers, but how much of it reaches its intended destination? I don't know the exact figure, but it's nowhere near what's allocated from what I heard today (no politician has ever been jailed for corruption, there was one removed from office over corruption in school construction, he admitted the problem and repaid donors to compensate for what had been stolen, but the president reappointed him the next day so there was no real penalty even in this case). 

It's been a long first day, and I haven't really had time to digest all of this -- it was a bit surreal and it never really hit me that I was in a slum in Kenya -- so these are just a few observations from the first day. Hopefully, the picture and the economics, cultural, and social forces driving all of this will clear up a bit over the next nine days.

Monday, June 18, 2012

Kenya in Transition

An interview with Kenya’s Vice President and Minister for Home Affairs Stephen Kalonzo Musyoka:

Kenya in Transition: A Conversation with Vice President Stephen Kalonzo Musyoka: Summary Few countries have experienced transitions as dramatic as those occurring now in the Republic of Kenya. Just in the past year, Kenyans have adopted a new national constitution, deployed security forces to Somalia in pursuit of al-Shabaab militants, and discovered commercially-viable oil deposits. Amid these developments, Kenya is preparing for its first presidential elections since the 2008 election disputes.

On May 22, the Africa Growth Initiative (AGI) at Brookings hosted Kenya’s Vice President and Minister for Home Affairs Stephen Kalonzo Musyoka for a discussion on these dramatic transitions and current national challenges and opportunities. Vice President Musyoka was appointed by President Mwai Kibaki in 2008, and previously served as foreign affairs minister from 1993–98 and 2003–04.

Monday, May 07, 2012

"The Case for Industrial Policy"

Chris Blattman makes the case for more research on industrial policy:

The case for industrial policy (a paper and a rant), by Chris Blattman: A new paper, where some very good economists look at data from Chinese medium and large firms:

…sectoral policy aimed at targeting production activities to one particular sector, can enhance growth and efficiency if it made competition-friendly.

…if subsidies are allocated to competitive sectors… and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant.

“You can’t pick winners” is the knee-jerk retort to the mention of anything that even rhymes with industrial policy. I would call it the triumph of ideology over evidence, except that even “ideology” feels like a generous term. Lazy thinking might be a more accurate description. Some have given the question a great deal of thought, but most have not.

I’m not suggesting that ... governments can pick winners (probably they can’t). Nor am I forgetting that industrial policy is easily politicized and distorted (as surely it is). So what am I talking about?

I’ll make two claims. The first: industrialization is the most important and essential process of development. ... The problem? We have little to no idea how to do that. And many of the tools in the current policy tool box are deeply flawed.

Some take this as evidence economists and researchers should focus on other things. This brings us to the second part of my argument, where I make the opposite claim: there is no more important or promising frontier of knowledge. The fact that we know so little, and the tools are so poor, suggests (to me) that the marginal gains from more research are huge. there is no more important place for scholars to spend their time. ...

When my students run rushing in the direction of micro-poverty programs, or randomized trials, I steer them away. Yesterday’s research and policy frontier is tomorrow’s old news. What is the next frontier? I would put money on industrial development and, with it, a new breed of industrial policy.

Some of the most interesting development research is coming from people swimming ahead of this wave: Eric Verhoogen, Nick Bloom, David Atkin, David McKenzie, Dani Rodrik, Ricardo Hausman, the authors of this post’s paper, and a slew of others. I haven’t seen the same swell in political science, but surely it will come.

Saturday, March 10, 2012

Paul Collier on Why Nations Fail

Paul Collier reviews Acemoglu and Robinson's Why Nations Fail:

Why Nations Fail by Daron Acemoglu and James Robinson – review, by Paul Collier The Observer: As the turbulence of global economic crisis starts to recede,... fundamental features of the world economy in our times re-emerge. One is the gap between rich and poor countries...: the same people can live in abject poverty in one country, yet be prosperous once they move to another...: why does a border make such a difference? ...
Scholars have struggled for decades to find a convincing answer. ... In the 1960s, the dominant explanation was that poor countries lacked capital; by the 1980s, it was that they had poor economic policies.
The last decade has appeared to offer a new and potent clue: the ascent of China ... is an economic phenomenon without precedent... It has lifted millions out of penury... The beacon offered by China has been widely interpreted, especially by African elites, as demonstrating the benefits of autocracy.
For anyone remotely interested in these issues Why Nations Fail is a must-read. ... Far from seeing China as the clue to spreading prosperity,... China is not, on their analysis, on course for our own level of prosperity.
Their argument is that the modern level of prosperity rests upon political foundations. Proximately, prosperity is generated by investment and innovation, but these are acts of faith: investors and innovators must have credible reasons to think that, if successful, they will not be plundered by the powerful.
For the polity to provide such reassurance, two conditions have to hold: power has to be centralised and the institutions of power have to be inclusive. Without centralised power, there is disorder, which is anathema to investment.
China most certainly ticks this box – it has centralised power and order in spades. Some African societies don't; localised power usurps the authority of the state. But China resoundingly fails to tick the box of inclusive institutions. ... Their argument is that order without inclusive institutions ... will not permit the full ascent to modern prosperity. Their explanation is that if the institutions of power enable the elite to serve its own interest – a structure they term "extractive institutions" – the interests of the elite come to collide with, and prevail over, those of the mass of the population.
So, if inclusive institutions are necessary, how do they come about? Again, Acemoglu and Robinson are radical. They argue that there is no natural process... Rather, it is only in the interest of the elite to cede power to inclusive institutions if confronted by something even worse, namely the prospect of revolution. The foundations of prosperity are political struggle against privilege. ...

Which leads me to wonder how inclusive our political institutions really are.

Friday, November 18, 2011

Minimum Wages and Industrialization

Chris Blattman:

Do minimum wages drive industrialization?, by Chris Blattman: Minimum wages kill employment, right?

Maybe not..., evidence from Indonesia’s industrialization:

Big Push models suggest that local product demand can create multiple labor market equilibria: one featuring high wages, formalization, and high demand and one with low wages, informality, and low demand. I demonstrate that minimum wages may coordinate development at the high wage equilibrium.

formal employment increases and informal employment decreases in response to the minimum wage. Local product demand also increases, and this formalization occurs only in the non-tradable, industrializable industries

A new paper from Jeremy Magruder.

Sunday, July 31, 2011

"The Great Divergence, the Other Way Around"

Dani Rodrik:

The great divergence, the other way around, by Dani Dodrik: As rich economies' prospects dim under their crushing debt burdens and political paralyses, the world's hope for economic dynamism rests with developing nations. These countries had an exceptionally good decade before the global financial crisis struck. And most among them have recovered quickly.
Check out this picture, which I find quite interesting:

For the first time ever, developing countries as a group grew have been growing faster than industrial countries. Not only that, as the figure makes clear, the growth differential between the two groups has been widening in favor of the poor countries.
And it isn't just China, India, and a few countries that have been doing well. For a change, Africa and Latin America actually experienced some convergence with rich countries over the last decade.
Many analysts have projected these trends forward and predict rapid global growth, largely off the back of emerging and developing nations. In the words of a Citigroup report, "this time will be different."
I am not sure that it will. Growth in Latin America and Africa is fragile; much of it is making up for lost time rather than real convergence. Asia, I am more optimistic about. But growth in Asia has required unconventional policies (undervalued currencies, industrial policies) that will be difficult to rely on in a world where rich countries are facing economic crises.
More on these points later...

Here's the follow-up: Will the divergence in growth result in eventual convergence in incomes?

Friday, June 24, 2011

Fiscal Policy in Developing Countries: Escape from Procyclicality

The cyclicality of a  fiscal policy depends upon the quality of the country’s institutions:

Fiscal policy in developing countries: Escape from procyclicality, by Jeffrey Frankel, Carlos A. Vegh, and Guillermo Vuletin, Vox EU: Fiscal policy is taking centre stage. Among advanced countries, the news is bad; Europe’s periphery teeters, the UK slashes, the US deadlocks, Japan muddles. But in the rest of the world there is good news. In an historic reversal, many emerging market and developing countries have over the last decade achieved a countercyclical fiscal policy.
In the past, developing countries tended to follow procyclical fiscal policy. They increased spending (or cut taxes) during periods of expansion and cut spending (or raised taxes) during periods of recession. Many authors have documented that fiscal policy has tended to be procyclical in developing countries, in comparison with a pattern among industrialized countries that has been by and large countercyclical (Gavin and Perotti 1997, Tornell and Lane 1999, Kaminsky et al. 2004, Talvi and Végh 2005, Mendoza and Oviedo 2006, Alesina et al. 2008, and Ilzetski and Végh 2008).
Most studies look at the procyclicality of government spending, because tax receipts are particularly endogenous with respect to the business cycle. Indeed, an important reason for procyclical spending is precisely that government receipts from taxes or mineral royalties rise in booms, and the government cannot resist the temptation or political pressure to increase spending proportionately, or more. We can find a similar pattern on the tax side by focusing on tax rates rather than revenues, though cross-country evidence is harder to come by.1
Figure 1 (which is a version of evidence presented in Kaminsky et al. 2004) depicts the correlation between government spending and GDP for 94 countries over the period 1960-1999. More precisely, it shows the correlation between the cyclical components of spending and GDP with the longer-term trends taken out. The set includes 21 developed countries, which are represented by black bars, and 73 developing countries, represented by yellow bars. A positive correlation indicates government spending that is procyclical, i.e. destabilizing. A negative correlation indicates countercyclical spending, that is, stabilizing.
There is no missing the message. Yellow bars lie overwhelmingly on the right-hand side. More than 90% of developing countries show positive correlations (procyclical spending). Black bars dominate the left hand side. Around 80% of industrial countries show negative correlations (countercyclical spending).

Figure 1. Correlations between government spending and GDP, 1960-1999

Vx1
[click on figure for larger version]

Why would policymakers pursue procyclical fiscal policy? One does not have to believe in “fine tuning” to see the undesirability of a pattern under which government response exacerbates the amplitude of the business cycle. The most convincing explanations in the literature entail either imperfect access to credit or political distortions.
The historic shift in cyclicality
Over the last decade there has been a historic shift in the cyclical behavior of fiscal policy in the developing world. Figure 2 updates the statistics, showing the period 2000-2009. The number of yellow bars on the left side of the graph (negative correlations) has greatly increased. Around 35% of developing countries 26 out of 73 now show a countercyclical fiscal policy, more than quadruple the share during the earlier period.

Figure 2. Correlations between government spending and GDP, 2000-2009

Vx2
[click on figure for larger version]

Figure 3 presents a scatter plot with the 1960-1999 correlation on the horizontal axis and the 2000-2009 correlation on the vertical axis. The lower right quadrant shows the graduates from procyclical to countercyclical fiscal policy. The star performers include Chile and Botswana; but 24 developing countries altogether (out of 73) have made this historic shift.

Figure 3. Correlations between government spending and GDP, 1960-1999 vs. 2000-2009

Vx3
[click on figure for larger version]

The evidence of countercyclicality among many emerging-market and developing countries matches up with other criteria for judging maturity in the conduct of fiscal policy, such as debt/GDP ratios, rankings by rating agencies, and sovereign spreads. Low income and emerging market countries in the aggregate have achieved debt/GDP levels around 40% of GDP over the last four years. The IMF estimates the 2011 ratio at 43% among emerging market countries and 35% among low-income countries. This is the same period during which debt in advanced countries rose from about 70% of GDP to 102%.
The financial markets have ratified the historic turnaround. Spreads are now lower for many emerging markets than for some “advanced countries.” Rating agencies rank Singapore as more creditworthy than Belgium, Korea ahead of Portugal, Mexico ahead of Iceland, and just about everybody ahead of Greece. Euromoney ranks Chile as less risky than Japan, Korea less risky than Italy, Malaysia less risky than Spain, and Brazil less risky than Portugal.
Largely as a result of their improved fiscal situations during the period 2000-2007, many emerging markets were able to bounce back from the 2008-2009 global financial crisis more quickly than advanced countries (Didier et al. 2011).  
How did they do it?
What explains the ability of some countries, particularly emerging-market and developing countries, to escape the trap of procyclical fiscal policy? We believe that the main story concerns institutions.2 In our new research (Frankel et al. 2011), we find that the cyclicality of a country’s fiscal policy is inversely correlated with the country’s institutional quality which includes measures of law and order, bureaucracy quality, corruption, and other risks to investment.
Although one thinks of institutions as slow-moving, they can change over time. Chile’s institutional quality has risen strongly since the early 1980s, during which time its fiscal policy has turned from procyclical to countercyclical. A country with good institutional quality in the general sense of rule of law can help lock in countercyclical fiscal policy through specific budget institutions. Frankel (2011a) explains how Chile did it, with the structural budget reforms of 2000 and 2006. Chile’s approach could be emulated by others.
Fiscal rules, such as the Eurozone’s Stability and Growth Pact, may accomplish little in themselves. Rules can actually worsen the tendency of governments to make overly optimistic forecasts for economic growth and budget balance (Frankel 2011b). Chile’s key innovation was to give responsibility for forecasting to independent expert commissions, insulated from politicians’ wishful thinking.
Even advanced countries have something to learn about countercyclical fiscal policy from Chile and others to the South. Saving during expansions such as 2001 to 2006 is critical for weathering the storm in recessions such as 2008-09. Otherwise there may be no way out but to adjust at the worst possible time.
References

Continue reading "Fiscal Policy in Developing Countries: Escape from Procyclicality" »

Wednesday, May 25, 2011

Developing Countries Have Extensive Informal Taxation Systems to Finance Public Works

This study "shows 'informal taxation' in developing countries is far greater than suspected, supporting public works -- and adding a burden for the poor." I don't have much to say about it -- maybe you will? -- just found it interesting:

MIT research: Taxation without documentation, EurekAlert: Developing countries often lack the official government structure needed to collect taxes efficiently. This lack of systematic tax collection limits the ability of those countries to provide public services that aid growth, such as roads, sanitation and access to water.
But a new study co-authored by MIT economist Benjamin Olken reveals that developing countries actually have extensive informal systems in which citizens contribute money and labor to public-works projects. In effect, local governments in the developing world collect more taxes and produce more public goods than many outsiders have realized, a finding with implications for aid groups and governments trying to decide how to fund anti-poverty projects worldwide.
"It's really surprising just how many people are doing this, and how prevalent this is," says Olken, an associate professor in MIT's Department of Economics. "...It's supporting a large share of what's going on at the village level."
These informal taxes are generally regressive: While better-off citizens contribute more than the poor do in absolute terms, the percentage of income they pay is lower than the percentage of income that the poor pay. Because organizations such as World Bank sometimes recommend that governments use local co-financing of public-works projects, that means some programs intended to help curb poverty may actually place a larger relative tax burden on the poor.
"For aid groups, it's useful to know what the distributional implications will be, and compare that to other financing mechanisms," Olken says. "I hope that people will start thinking about these implications."...
Researchers have been aware that such practices existed; in Indonesia, these informal systems are called gotong royang, and in Kenya they are called harambee. But while the existing data Olken and Singhal used, such as the World Bank surveys, contain information about local life, that information had not previously been pieced together to create a picture of local taxation practices.
"We're not the first people to have noticed this phenomenon, but I think this is the first paper to treat it like a tax issue," Olken says. ...
Give me your money or your labor
Among the quirks of informal taxation in the developing world, Olken notes, is that "it's not formally enforced through the legal system." And yet, the size of people's contributions is not quite voluntary. About 84 percent of households in the survey data report that their levels of taxation are assigned by village or neighborhood leaders.
In many places, those payments can be made either by cash, or by contributing labor to the public-works projects. "The poorer people tend to contribute more in kind, and the richer people tend to do more in cash," Olken says.
As Olken notes, that option — paying by labor or cash — constitutes what economists call an "optimal screening mechanism," which adds to the knowledge local leaders have about their neighbors. "This kind of device, letting people do either in cash or in kind, can be a way of getting people … to reveal some information about themselves that you might otherwise not know."
Luttmer hopes future research will help scholars further understand how citizens make these kinds of decisions. ...

Saturday, April 16, 2011

"Our Hands Become Dirty When We Help a Terrorist or a Dictator"

Dani Rodrik:

...I have had intensive economic-policy discussions with Prime Minister Meles Zenawi [of Ethiopia]. ... I have no illusions about Meles’ commitment to democracy – or lack thereof. But I also believe that he is trying to develop his economy, and I offer policy advice because I believe it may benefit ordinary Ethiopians. ...
But choosing an action for the greater good does not absolve us from moral culpability. Our hands do become dirty when we help a terrorist or a dictator. ... In the end, an adviser to authoritarian leaders cannot escape the dilemma. ... But when the adviser believes his work will benefit those whom the leader effectively holds hostage, he has a duty not to withhold advice.
Even then, he should be aware that there is a degree of moral complicity involved. If the adviser does not come out of the interaction feeling somewhat tainted and a bit guilty, he has probably not reflected enough about the nature of the relationship.

With large consulting fees at stake, it would be easy to convince yourself that the advice will benefit a large segment of the population, i.e. that it is not "engagement only to legitimize" the position of the rulers. In cases where such moral questions are present, it might be best to refuse compensation for offering advice. That would help to ensure that the person giving the advice really does believe that it is in the best interests of ordinary citizens rather than what's best for the individual's pocketbook. On the other hand, the quantity of advice given would be smaller without compensation, and that might, on net, hurt those we'd like to help. Thus, another way to guard against individuals convincing themselves that it is morally correct to take the money would be to leave the decision to a relatively neutral third party.

How would you make this choice?

Saturday, April 02, 2011

Sachs: The Arab Young and Restless

Jeff Sachs says governments in the Middle East "must make the youth unemployment crisis their highest priority":

The Arab Young and Restless, by Jeffrey D. Sachs: Many factors underlay the ongoing upheavals in the Middle East... To top it off, rapid population growth is fueling enormous demographic pressures. ... Rapid population growth means a bulging youth population. ... Employment growth is simply not keeping up with this population surge... The unemployment rate for young people (15-24 years old) in North Africa and the Middle East is 30% or more. ...
If democracy is to take hold and flourish in Egypt, Tunisia, and elsewhere in the Arab world, the new reform-minded governments must make the youth unemployment crisis their highest priority. ...
The deposed authoritarian rulers – Tunisia’s Zine El Abidine Ben Ali, Mubarak, and soon Libya’s Col. Muammar el-Qaddafi – stashed away billions of dollars stolen from the public treasury. This ill-gotten money should be recovered and put into a special fund for youth employment. ...

Monday, March 21, 2011

"The World Economy Goes East"

Bill Easterly:

The World Economy goes East: should the West get hysterical?, by William Easterly: Danny Quah of LSE has a new article “The Global Economy’s Shifting Center of Gravity“. Here’s the shift, where black dots denote the easterly shift that has already happened 1980-207, and red dots the projected shift 2010-2049:

The future shift extrapolates current trends. This is iffy given how individual country growth is mean-reverting, but I will leave that for another day.
If the Economy indeed continued East this way, is this really bad for the West? Professor Quah does not address this in the article, but ... the ... answer is: Of course not. Economic growth is not an elimination tournament like the current NCAA basketball madness, where one team wins and the other goes home. When a previously poor part of the world gets richer, everybody wins.

Temporarily and illegimately assuming the role of official spokesman for the West,... the richer are our trading partners, other things equal, the more demand for our products, the more and better jobs created thereby, the more gains from trade, the more innovation as the extent of the world market grows, and the more we can benefit from the additional human capital and innovation happening in the East.

And then temporarily and illegimately becoming development spokesman: higher growth in the poorer East means catching up to the richer West. Isn’t that what we always wanted?

In sum, what’s not to like?

Saturday, March 12, 2011

"The End of the 'Washington Consensus'"

Kevin Gallagher:

The end of the 'Washington consensus', by Kevin Gallagher: Colombian President Juan Manuel Santos sent shockwaves through Washington when he told the Financial Times that his nation is holding negotiations with China to build a multibillion dollar "dry canal" that would compete with the Panama Canal. ...
This deal is charged with politics. Colombia is trying to get the US to pass a long-stalled trade deal. ... Whether or not this deal goes through, it highlights the stark contrast between China's foreign economic ventures and those of the United States.
For 30 years, Washington has been shopping a trade-not-aid based economic diplomacy across Latin America and beyond. According to what is generally known as the "Washington consensus", the US has provided Latin America loans conditional on privatization, deregulation and other forms of structural adjustment. More recently, what has been on offer are trade deals such as the US-Colombia Free Trade Agreement: access to the US market in exchange for similar conditions.
The 30-year record of the Washington consensus was abysmal for Latin America, which grew less than 1% per year in per capita terms... East Asia, on the other hand, which is known for its state-managed globalization (most recently epitomized by China), has grown 6.7% per annum in per capita terms ... in that same period. ...
This dismal economic record prompted citizens across the Americas to vote out supporters of this model in the 2000s. Growth has since picked up, largely from domestic demand, and exports to China and elsewhere in Asia.
Interestingly, the only significant card-carrying members of the Washington consensus left in Latin America are Mexico and Colombia. That explains why Washington was so shocked at Santos' remarks.
Before China "gets" Colombia, there is now a rallying cry that says the US must pass the US-Colombia Free Trade deal – which would make Colombia deregulate its financial services industry, scrap its ability to design innovative policies for development, and open its borders to subsidised farm products from the United States. According to a study by the UN, the agreement will actually make Colombia worse-off by up to $75m, or 0.1% of its GDP.
Ironically, the US's renegade Congress failed to renew trade preferences last week, under which the majority of Colombia's exports enter tariff-free without the conditional terms of US trade deals.
Meanwhile, the Financial Times reports that China has lent over $110bn to developing countries over the past two years, more than the World Bank has made in three years. Relative to the World Bank, these loans come with far fewer "conditionalities" and are going to massive infrastructure projects across Africa and in places like Argentina, Venezuela and, perhaps now, even Colombia.
China is loaning nations money to fund each nation's own priorities for growth and development. China isn't doing so out of altruism; these are not acts of sainthood. China just has a better handle on economic development. Looking at the experience of other East Asian nations and itself, these types of projects are a much better bet than trade deals. China hopes that the projects will jumpstart growth so that nations will be able to supply greater amounts of exports to China, and be a source of Chinese exports. US trade deals, by contrast, seem to have been hijacked by a few interest groups that may benefit in the short term, but have dubious results over time.
The bigger point here is that, even if Colombia gets the sorry trade deal it wants and doesn't get a canal, the United States is literally and figuratively bankrupt in its competition with Chinese finance. Literally, because the US has the largest deficit on the planet and owes a big chunk of that to the Chinese. Figuratively, because the economic model that the US has exported to Latin America hasn't worked. China is funding infrastructure, exploration, science and technology, and all the other things that President Obama says we should be spending on here at home.
Why don't we do that here and enable others to as well?

Wednesday, December 01, 2010

Bhagwati: India or China?

Who will grow faster, China or India? Jagdish Bhagwati says it depends upon whether you adopt a short or long horizon. In the short-run, China has the advantage, but in the longer run, India has the advantage:

India or China?, by Jagdish Bhagwati, Commentary, NY Times: ...Will China grow faster than India...? In fact, this contest dates back to 1947, when India gained independence and democracy..., while China turned to Communism...
As it happened, however, both giants slept on – until the 1980’s in China and the early 1990’s in India – mainly because both countries embraced a counter-productive policy framework...
Reflecting flawed economic arguments, India embraced autarky in trade and rejected inflows of equity investment. It also witnessed economic interventionism on a massive scale... In China, the results were similar, as the political embrace of Communism meant going autarkic and giving the state a massive role in the economy.
After progressively dismantling their inefficient policy frameworks in favor of “liberal” reforms, the ... race was finally on. And ... China ... grew faster, because it changed its policy framework much faster than democracy permits. But there are good reasons to suspect that China’s authoritarian advantage will not endure.
First, while authoritarianism can accelerate reforms, it can also be a serious handicap. ... Moreover,... as growth accelerates, political aspirations are aroused. Will the Chinese authorities respond to them with ever greater repression,... creating discord and disruption, or will they accommodate new popular demands by moving to greater democracy? ...
Finally, China’s growth must continue to depend on its exploitation of external markets, which makes it vulnerable.., hassles and hiccups for Chinese exports can be confidently expected.
Economic factors also militate against Chinese prospects. China was clearly able for many years to ... grow rapidly without facing a labor-supply constraint... But now,... labor is getting scarce and wages are rising. ...
By contrast, India has a far more abundant supply of labor,... so that, as India’s investment rate increases, labor will not be a constraint. India will thus become the new China of the past two decades.
Besides, in contrast to China, where economic reforms were quicker and more complete, India still has a way to go: privatization, labor-market reforms, and opening up the retail sector to larger, more efficient operators are all pending – and will give a further boost to India’s growth rate once they are implemented.

Thursday, September 09, 2010

Rodrik: Is Chinese Mercantilism Good or Bad for Poor Countries?

Dani Rodrik argues that China's currency policy has hurt other developing countries, but "we should not hold China responsible for taking care of its own economic interests":

Is Chinese Mercantilism Good or Bad for Poor Countries?, by Dani Rodrik, Commentary, Project Syndicate: ...Discussion of China’s currency ... is viewed largely as a US-China issue, and the interests of poor countries get scarcely a hearing... Yet a noticeable rise in the renminbi’s value may have significant implications for developing countries. Whether they stand to gain or lose from a renminbi revaluation, however, is hotly contested. ...
 Strip away the technicalities, and the debate boils down to one fundamental question: what is the best, most sustainable growth model for low-income countries? Historically, poor regions of the world have often relied on ... exporting to other parts of the world primary products and natural resources such as agricultural produce or minerals. ...
But this model suffers from two fatal weaknesses. First, it depends heavily on rapid growth in foreign demand. When such demand falters, developing countries find themselves with ...  a protracted domestic crisis. Second, it does not stimulate economic diversification. Economies hooked on this model find themselves excessively specialized in primary products that promise little productivity growth.
Indeed, the central challenge of economic development is not foreign demand, but domestic structural change. The problem for poor countries is that they are not producing the right kinds of goods. ... The real exchange rate is of paramount importance here, as it determines the competitiveness and profitability of modern tradable activities. When developing nations are forced into overvalued currencies, entrepreneurship and investment in those activities are depressed.
From this perspective, China’s currency policies not only undercut the competitiveness of African and other poor regions’ industries; they also undermine those regions’ fundamental growth engines. What poor nations get out of Chinese mercantilism is, at best, temporary growth of the wrong kind.
Lest we blame China too much, though, we should remember that there is little that prevents developing countries from replicating the essentials of the Chinese model. They, too, could have used their exchange rates more actively in order to stimulate industrialization and growth. True, all countries in the world cannot simultaneously undervalue their currencies. But poor nations could have shifted the “burden” onto rich countries, where, economic logic suggests, it ought to be placed.
Instead, too many developing countries have allowed their currencies to become overvalued... And they have made little systematic use of explicit industrial policies that could act as a substitute for undervaluation.

Given this, perhaps we should not hold China responsible for taking care of its own economic interests, even if it has aggravated in the process the costs of other countries’ misguided currency policies.

I don't think I have anything to say about this that hasn't already been said, many times, and I'm running behind at the moment, so I am am going to leave comments to you. One question might be whether or not rich nations are, in fact, obligated to pay part of the "burden" for the development of poorer countries. If so, why, and if not, why not?

Friday, August 20, 2010

Does China Prove That the Washington Consensus Works?

This might provide some amusement on a Friday afternoon. Stanford's Ronald McKinnon says China proves the Washington Consensus works. It comes via John Taylor, who comments:

Does China’s remarkable economic growth, its stability during the recent financial crisis, and its immense foreign aid/investment in Africa raise doubts about free market policies and provide evidence in favor of a more interventionist approach? In a new review paper, my colleague Ronald McKinnon says “Surprisingly no.” In fact, while many tout a "third way," China has followed quite closely the 10 liberal market-oriented rules commonly called the Washington Consensus after John Williamson wrote them down 20 years ago. McKinnon convincingly shows that “The Chinese economy itself has evolved step-by-step…into one that can be reasonably described by Williamson’s 10 rules!”
Some experts worry that U.S. influence is waning relative to China, and there is cause for worry, but McKinnon argues that “U.S. influence…can be largely recouped if its government returns to a hard version of its own 'Washington Consensus'— as China has done."
McKinnon also offers a fascinating political/economic analysis and explanation for China’s rapidly growing economic involvement in Africa.

It's interesting how, after so many years of dismissing Europe and China as inferior to the dynamic US economy -- we grew faster, could handle shocks better, had a much better financial system, had lower unemployment, etc., etc. -- the right is suddenly urging us to be more like Europe (deficits, Germany, etc.) and China (as below). Here's McKinnon's argument:

Review - China in Africa: the Washington Consensus versus the Beijing Consensus, by Ronald I. McKinnon: ...The Beijing Consensus versus the Washington Consensus In promoting growth in developing countries through foreign aid and investment, does the Beijing approach conflict with “Washington” guidelines used by the World Bank, International Monetary Fund, the OECD, and the United States itself?

The Beijing Consensus is hard to write down as a precise set of rules because of its pragmatism involving “a commitment to innovation and constant experimentation” (Ramo 2004)—as per the old Chinese saying “crossing a river by feeling the stones”. It is also associated with China’s specific commercial interests in, say, investing for extracting minerals on favorable terms—which enhances sustainability on both sides. In contrast, the Washington agencies in principle are more selfless (at least since the end of the Cold War) in aiming to raise per capita incomes and welfare in the recipient countries—but run the risk that aid recipients become permanent supplicants.

John Williamson (1990) did all a great favor by writing down the rules for what he called “The Washington Consensus” for developing countries to follow to absorb aid efficiently:

  1. Fiscal policy discipline.
  2. Redirection of public spending from subsidies (“especially in discriminate subsidies” toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care, and infrastructure;
  3. Tax Reform—broadening the tax base and adopting moderate marginal tax rates:
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization—with particular emphasis on the elimination of quantitative restrictions; any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation—abolish regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions.
  10. Legal security for property rights.

To provide perspective on these ten rules, the year 1990, when Williamson wrote, is important. It was just after the fall of the Berlin Wall and the complete collapse of confidence in Soviet-style socialism. The rules reflect the hegemonic confidence that most people then had in liberal market-oriented capitalism—think Ronald Reagan and Margaret Thatcher. But, 20 years later, should the meteoric rise of socialist China—both in its own remarkable growth in living standards, and in the effectiveness of its foreign “aid” to developing countries, undermine our confidence in Williamson’s Washington Consensus?

Surprisingly, no. The Chinese economy itself has evolved step-by-step (feeling the stones) into one that can be reasonably described by Williamson’s 10 rules! Chinese gradualism avoided the “big bang” approach to liberal capitalism, with the financial breakdowns that were so disastrous for Russia and some smaller Eastern European economies in the early 1990s, while retaining financial control in a model textbook sense (McKinnon 1993). So let us look again at Williamson’s 10 rules to see how well they fit China today in comparison to the United States.

Continue reading "Does China Prove That the Washington Consensus Works?" »

Monday, August 16, 2010

What Actions Should the Fed be Taking? Do Authoritarian Governments Reduce Growth?

The Economist asks:

1. What actions should the Fed be taking?

My stock answer is here. I decided to stay on message with regard to fiscal policy. I don't think we should let Congress off the hook as we criticize the Fed for its inadequate response. There are also responses from Viral Acharya, Laurence Kotlikoff, Guillermo Calvo, Michael Bordo, and Tom Gallagher, with (perhaps) more to follow. (all responses)

There is another question:

2. Do authoritarian governments reduce growth?

I didn't answer this one, but there are responses from Ricardo Hausmann, Alberto Alesina, Lant Pritchett, Daron Acemoglu, and Arvind Subramanian. Again, additional responses may follow. (all responses)

Saturday, August 14, 2010

Sachs: Market Reforms, 20 Years Later

This a comparison of developments in Russia and Poland over the last twenty years by Jeff Sachs. I don't know as much as I should about the biases Sachs might bring to the table due to his role as an advisor to Poland, who took his advice after the break-up of the Soviet Union, and his resignation as an advisor to Russia when he felt his prescriptions were being ignored (he is known for the "shock doctrine"):

Market Reforms, 20 Years Later, by Jeffrey D. Sachs, Commentary, Scientific American: I recently had the pleasure to revisit Warsaw, Poland, and St. Petersburg, Russia, two decades after the start of market reforms in which I had participated as an economic adviser. ...
Warsaw has enjoyed a building boom ... despite the economic slowdown in western Europe. St. Petersburg glories in the architectural treasures of the past but with much less evidence of current dynamism. ...
I have often been asked since then why market reforms took stronger hold in some places than others. The answers, rooted in the complex interplay of geography, politics, history and culture, are well worth understanding.
The greatest dividing line in outcomes has been the Soviet border. Countries such as Poland, Hungary, the Czech Republic and Slovakia—which had been outside of the Soviet Union but under Soviet domination—were eager to dash toward membership in the European Union. That membership process usefully steered their internal politics and legal reforms and prompted incoming foreign investments from Germany, Italy, Austria and Scandinavia.
Conversely, Russia was not dashing to Europe but was instead grappling with its own past and future. The collapse of the Soviet system was not followed by a consensus on a new economic and political model within Russia... Russian statecraft continued to be guided by the centuries-old practice of bureaucratic rule that cast a wary eye on market forces.
Culture has also shaped the dynamics of reform. ...Poles maintained a healthy skepticism toward state power... Out of 180 countries evaluated by the ... index of perceived public-sector corruption, Poland stands as the 49th least corrupt. ...
In Russia, on the other hand, corruption has run rampant during the past 20 years... The institutions of civil society, suppressed by centuries of tsarism and obliterated by Soviet-era state brutality, remain weak... Russia, not surprisingly, lands at a dismal 146th on the ... corruption list.
One of the sad parts of the story was the failure of U.S. presidents George H. W. Bush and Bill Clinton to support Russia’s embattled reformers at crucial moments. ...American officials were insensitive to the growing Russian corruption and remained passive when they could have helped reformers to keep it in check. After all, the U.S. has its own corruption problems, ranking a rather dreary 19th on the ... list, below most other high-income countries.
I left St. Petersburg feeling that so much more economic reform was still possible ... throughout Russia. The people’s high education and technical expertise do not adequately translate into new businesses and higher incomes. The bureaucracy keeps its traditional grip, even maintaining the internal registration system from the time of the tsars that constrains Russians from moving from city to city. Small businesses are similarly encumbered with arbitrary regulations. Russia’s gains in political and economic liberalization are undoubted, but this country with so much talent has yet to combine the best of its cultural heritage, its technical skills and the advantages of greater economic freedom

Sunday, August 08, 2010

"History Versus Expectations in Sub-Saharan Africa"

Rajiv Sethi:

History Versus Expectations in Sub-Saharan Africa: Ngozi Okonjo-Iweala believes that sub-Saharan Africa "is on the verge of joining the ranks" of the so-called BRIC nations... She supports these claims with a wealth of data on recent trends in growth, inflation, exchange reserves, foreign direct investment flows, receipts from international tourism, spreading democratization, declining gender disparities, and improved security.

But Ngozi is also careful to note that this projected take-off is by no means a foregone conclusion. She argues that a concerted development effort is necessary, including a "big push" on investments in education and infrastructure. ... While such an initiative would help close an infrastructure funding gap over the next few years, Ngozi maintains that its most important effect would be to "change perceptions overnight about Africa as a place to do business."

The idea that coordinated optimism about the future prospects of a region could be a critical determinant of its subsequent growth performance was advanced in a classic paper by Rosenstein-Rodan in 1943, building on earlier work by Allyn Young. The argument is based on the fact that the development of any particular industry may only be privately profitable if an entire set of interlocking industries were emerging simultaneously. Hence the need for a "big push":

Complementarity of different industries provides the most important set of arguments in favour of a large-scale planned industrialisation... It might easily happen that any one enterprise would not be profitable enough ... out of its own profits. But the creation of such an enterprise... may create new investment opportunities and profits elsewhere... If we create a sufficiently large investment unit by including all the new industries of the region, external economies will become internal profits out of which dividends may be paid easily.

Or, as Paul Krugman put it in his influential paper on history versus expectations, "the doctrine of Rosenstein-Rodan" entails the following claim: "the willingness of firms to invest depends on their expectation that other firms will invest, so that the task of development policy is to create convergent expectations around high investment." 

Krugman's goal in that paper was to point out that there are a many contexts in which multiple equilibria of the kind that concerned Rosenstein-Rodan arise, and to address the question of how one of these is eventually selected: 

Once one has multiple equilibria, however, there is an obvious question: which equilibrium actually gets established? Although few have emphasized this point, there is a broad division into two camps... On one side is the belief that the choice among multiple equilibria is essentially resolved by history: that past events set the preconditions that drive the economy to one or another steady state... On the other side, however, is the view that the key determinant of choice of equilibrium is expectations: that there is a decisive element of self-fulfilling prophecy...

The ... world in which history matters and a world of self-fulfilling expectations are different from the standard competitive view of the world, but they are also significantly different from each other. Obviously, also, there must be cases in which both are relevant. Yet in the recent theoretical literature models have tended to be structured in such a way that either history or expectations matter, but not both... in the real world, we would expect there to be circumstances in which initial conditions determine the outcome, and others in which expectations may be decisive. But what are these circumstances? 

It's clearly an important question, and in order to address it Krugman builds a simple two-sector model with increasing returns in one sector and constant returns in the other. There are two long run equilibria, each of which involves complete specialization in one of the two goods. If the initial state of the economy involves incomplete specialization there will be movement of resources across sectors. But in which direction? ...

Krugman shows that there is a range of initial conditions, which he calls the overlap, from which either one of the two long run states can be approached if and only if it is expected to be realized.  If initial conditions lie outside this range, then history is decisive, otherwise expectations matter a great deal in affecting the eventual pattern of specialization.

The overlap may be viewed as a zone of uncertainty within which coordinated optimism can have major economic effects. Outside this zone, for better or worse, we are shackled by our history. Within it, expectations become crucially important. 

The question, then, is whether or not sub-Saharan Africa is now in or around this zone of uncertainty where expectations can be a critical determinant of its future development performance. Shanta Devarajan has recently pointed to a number of success stories that seem to suggest the stirrings of something major:

In recent years, a broad swath of African countries has begun to show a remarkable dynamism.  From Mozambique’s impressive growth rate (averaging 8% p.a. for more than a decade) to Kenya’s emergence as a major global supplier of cut flowers, from M-pesa’s mobile phone-based cash transfers to KickStart’s low-cost irrigation technology for small-holder farmers, and from Rwanda’s gorilla tourism to Lagos City’s Bus Rapid Transit system, Africa is seeing a dramatic transformation.  This favorable trend is spurred by, among other things, stronger leadership, better governance, an improving business climate, innovation, market-based solutions, a more involved citizenry, and an increasing reliance on home-grown solutions.  More and more, Africans are driving African development.

I quoted this passage in an earlier post as a counterpoint to William Easterley's rather startling claim that "78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 AD – even before the slave trade and colonialism." My quarrel is not with this statement as an empirical claim, but rather with its implication that the heavy hand of history will continue to weigh inexorably upon the region. Sometimes we are bound by the past and sometimes not, and it is important to recognize opportunities to break free when they arise. And such an opportunity may well be emerging right before our eyes in Africa. ...

Sunday, July 11, 2010

"America Needs a Growth Strategy"

I am not fully familiar with the things Michael Spence has written in the past, but from what I know I was surprised to hear him call the Andrew Grove article thoughtful, and also surprised by his call for industrial policy:

America needs a growth strategy, by Michael Spence, Commentary, Financial Times: ...America’s economy shows worrying signs of weakness. Worse, and in common with other developed countries, it also lacks a credible strategy for longer-term growth. ...
The real issue is employment: not just stubbornly high unemployment, but a bigger problem described recently in a thoughtful article by Andy Grove... He argued that manufacturing is vanishing in the US, a trend that must be reversed. The question is how.
There is little doubt that America’s social contract is starting to break. It had on one side an open, flexible economy, and on the other the promise of employment and rising incomes for the motivated and diligent. It is the second part that is unraveling.
Incomes in the middle-income range for most Americans have stagnated for more than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods and services that is tradable is expanding, but the US and other advanced countries are not competing successfully...
The availability of low-cost, disciplined labor forces in developing countries reduces the incentive for ... companies to invest in technologies that enhance labor productivity in the tradable sectors of the advanced economies. As a result, the evolving composition of advanced economies is increasingly weighted towards the non-tradable sector, combined with a set of high-end tradable services where both human capital and proximity matter. The rest of the tradable sector is shrinking.
The shrinkage creates problems. ... Spillovers between R&D, product development and manufacturing will be lost... Employment will stagnate. Income distribution will move adversely and the social contract will erode further.
Solutions to these problems are not easy to find. The unequal distribution of income can be dealt with through the tax system, although this does not attack the underlying problem. Protectionism could alter the pattern of out-migration of manufacturing, but only by imposing costs on domestic consumers and risking the breakdown of the open global economy model.
To avoid an outbreak of protectionism, there has to be an alternative. President Barack Obama’s new export council ... is a step in the right direction. But a bolder move is needed: a broad public-private partnership to invest in the development of ... the tradable sector where there are opportunities to make advanced countries competitive. The goal must be to create capital-intensive jobs that have labor productivity levels consistent with advanced country incomes. ...
We are already on a lengthy and bumpy road to a new normal. That is unavoidable. The risk is that without a new direction in American economic policy, the new normal may be as unpleasant as the journey.

There appears to be a change in thinking underway among economists on these issues, particularly industrial policy. There are some who will oppose this change with all the shrillness they can muster. If this trend continues, and it looks like it will, there will be big fight within the profession -- more so than now -- about these ideas.

Sunday, July 04, 2010

Patriotism, Nationalism, and Economic Policy

How patriotic should economic policies be? (dual posted):

Patriotism, Wikipedia: Patriotism is love and devotion to one's country. The word comes from the Greek patris, meaning fatherland. Patriotism, however, has had different meanings over time, and its meaning is highly dependent upon context, geography, and philosophy. Although patriotism is used in certain vernaculars as a synonym for nationalism, nationalism is not necessarily considered an inherent part of patriotism. Among the ancient Greeks, patriotism consisted of notions concerning language, religious traditions, ethics, law, and devotion to the common good, rather than pure identification with a nation-state. Scholar J. Peter Euben writes that for the Greek philosopher Socrates, "patriotism does not require one to agree with everything that his country does and would actually promote analytical questioning in a quest to make the country the best it possibly can be." ...
During the 18th century Age of Enlightenment, the notion of patriotism continued to be separate from the notion of nationalism. Instead, patriotism was defined as devotion to humanity and beneficence. For example, providing charity, criticizing slavery, and denouncing excessive penal laws were all considered patriotic. In both ancient and modern visions of patriotism, individual responsibility to fellow citizens is an inherent component of patriotism.
Many contemporary notions of patriotism are influenced by 19th century ideas about nationalism. During the 19th century, "being patriotic" became increasingly conflated with nationalism and even jingoism. However, some notions of contemporary patriotism reject nationalism in favor of a more classic version of the idea of patriotism which includes social responsibility.
Contemporary scholar of ethics, Paul Gomberg,... argues that the primary implication of patriotism in ethical theory is that a person has more moral duties to fellow members of the national community, than to non-members. Patriotism is therefore selective in its altruism. Gomberg notes the view (in ethics) that moral duties apply equally to all humans, which is known as cosmopolitanism. ...

When we think about issues such as immigration and international trade, how important should "cosmopolitan" influences be? Should we ever place, say, the elimination of poverty in underdeveloped countries above our own interests, or is our duty always first and foremost to ourselves? There is a theory that says pursuing our own interests indirectly maximizes the interests of everyone -- the metaphor of an invisible hand is used to illustrate this -- but the conditions for this result to hold aren't always present.

I recently said:

while I think the US should consider the welfare of other countries when implementing policy..., the Fed has made it clear that's not how it operates.

So I think that, when formulating economic policy, our concerns ought to extend beyond our borders. That's not to say that the interests ought to be weighted equally, so I'm not "cosmopolitan" in that sense, but I don't think the weight on external concerns ought to be zero either. I would give it meaningful weight. But not everyone agrees. For example, As Alan Krueger says with respect to immigration policy

There are no simple answers on immigration policy because different people can legitimately assign different weights to the welfare of new immigrants, recent immigrants, and various groups of natives.

This is not a new debate. It is expressed here in terms of immigration, but it is easy to generalize the arguments to economic policy more generally:

Greg Mankiw and Brad DeLong talk about libertarian, egalitarian, and cosmopolitan explanations for why economists do or do not support immigration. Here's Brad's post:

Greg Mankiw Explains Why Economists Favor Immigration: He does it very very well:

Greg Mankiw's Blog: Why Economists Like Immigration: With members of the House and Senate sparring over immigration reform, it is worth summarizing why most economists are sympathetic with the more welcoming approach of the Senate bill.

The study of economics leaves a person with two strong impulses:

The Libertarian Impulse: Mutually advantageous acts between consenting adults should, absent externalities, be permitted. The ability to engage in such trades is how people in free-market economies achieve prosperity. When the government impedes voluntary exchange, it prevents the invisible hand of the market from working its magic.

The Egalitarian Impulse: The market economy rewards people according to supply and demand, not inherent worth. Markets often fail to provide people the ability to adequately insure themselves against the vicissitudes of life and accidents of birth. We should, therefore, look for ways to help those who end up at the bottom of the economic ladder.

Most economists feel these two impulses to some degree. The difference between right-leaning and left-leaning economists is how strongly they feel each of them. Right-leaning economists have a stronger libertarian impulse, whereas left-leaning economists have a stronger egalitarian impulse.

Although some debates in economics come down to which impulse a person feels more strongly, on immigration the two impulses are reinforcing. The libertarian impulse says, let the American employer hire the Mexican worker, for it is voluntary exchange. The egalitarian impulse takes note that the Mexican immigrant is the poorest person involved in the situation, and he benefits from more relaxed immigration restrictions.

Here is a conjecture: Whenever a policy appeals to both the libertarian impulse and the egalitarian impulse, economists will offer a relatively united view, as they do on the topic of immigration.

I would add a third impulse: the cosmopolitan impulse. Economists tend to think that foreigners are people, and thus that their well-being counts. From the economist's point of view, increasing immigration is a hell of a powerful global economic development policy. The most you can say for restricting immigration is that it is an extremely costly and relatively ineffective domestic anti-poverty policy.

Greg says the libertarian and egalitarian impulses, "are reinforcing" and that is why "economists ... offer a relatively united view ... on immigration."... I would qualify this discussion slightly along Brad's lines. It depends upon your utility function, and that is another way to frame the impulse to support, or not to support, immigration. If you are a person, economist even, who cares deeply about the poor anywhere in the world irrespective of borders, the benefits of low-skill immigration will look quite different than they will to someone who believes our allegiance is to our own poor and our own citizens first and foremost. From a policymaker's perspective, what should U.S. policy address, the welfare of poor anywhere in the world which may represent the preferences of constituents, or should U.S. economic policy attempt only to maximize the welfare of U.S. citizens?

What do you think? What does "patriotism" require? I like the older definition of patriotism better than the one that equates it with nationalism ("devotion to the common good, rather than pure identification with a nation-state"), but how it's defined is part of the issue.

Monday, June 07, 2010

"Can Emerging Markets Save the World Economy?"

Michael Spence and Mohamed El-Erian argue that we can be fairly certain that emerging economies will do their part to keep the world economy growing, the problem is the developed economies:

Can Emerging Markets Save the World Economy?, by Mohamed A. El-Erian and Michael Spence, Commentary, Project Syndicate: Over the past two years, industrial countries have experienced bouts of severe financial instability. Currently, they are wrestling with widening sovereign-debt problems and high unemployment. Yet emerging economies, once considered much more vulnerable, have been remarkably resilient. With growth returning to pre-2008 breakout levels, the performance of China, India, and Brazil is an important engine of expansion for today’s global economy. ...
So it is important to know whether this breakout growth phase is sustainable. The answer comes in two parts. One depends on emerging economies’ ability to manage their own success; the other relates to the extent to which the global economy can accommodate this success. The answer to the first question is reassuring; the answer to the second is not.
While still able to exploit the scope for catch-up growth, emerging economies must undertake continuous, rapid, and at times difficult structural change, along with a parallel process of reform and institution building. In recent years, the systemically important countries have established an impressive track record of adapting pragmatically and flexibly. This is likely to continue. ...
Overall, emerging economies are well placed to continue to navigate successfully a world rendered unstable by crises in industrial countries. Yet, again, the decoupling is not complete. A favorable outcome also requires industrial countries’ ... to accommodate the growing size and prominence of emerging economies. The risks here are significant...
[When] advanced countries have stubbornly high unemployment and bouts of financial volatility..., growth in the global economy comes to be seen as a zero-sum game, leading to suboptimal reactions. As a result, the continued openness of industrial-country markets cannot be taken for granted. ...
And then there is the issue of global institutions and governance. Managing a growing and increasingly complex set of transnational connections is an even bigger challenge in a multi-speed world that is being turned upside down. Such a world requires better global governance, as well as overdue institutional reforms that give emerging economies proper voice and representation in international institutions.
In the absence of such changes, the global economy may bounce from one crisis to another without a firm hand on the rudder to establish an overall sense of direction. ...
Where does all this leave us? Emerging economies will be called on to play an even larger role in a multi-speed global economy characterized by protracted rehabilitation of over-extended balance sheets in industrial countries. Left to their own devices, they are up to the task. But they do not operate in a vacuum. Emerging economies’ ability to provide the growth lubrication that facilitates adjustment in industrial countries is also a function of the latter countries’ willingness to accommodate tectonic shifts in the operation and governance of the global economy. Let us hope that these global issues receive the attention they require.

The political problem will, I think, take care of itself. As the developing countries grow and gain economic power, and they will whether developed economies like it or not, the political and institutional power will follow. The old institutions will either change with the shifting global economy, or be replaced by new ones. I don't think developed economies will have any choice except to "accommodate tectonic shifts in the operation and governance of the global economy." For one, corporations of today do not have traditional national boundaries, and the globalization of production cannot be easily reversed. We can make it hard, or we can accept the inevitable. Other countries are starting to grow up, and we will have to begin treating them like adults. That means, among other things, giving them a seat at the big table.

Tuesday, April 27, 2010

"Donors’ Three Mistakes in Fragile States"

Chris Blattman argues that we can't expect too much from countries in need of aid:

Donors’ three mistakes in fragile states, by Chris Blattman: You’re the Finance Minister in a country just coming out of conflict. Or maybe you’re disaster-struck like Haiti. Donors line up and make big pledges. UN agencies arrive and occupy whole blocks of office buildings. Each come in with a template. It looks reasonable. It’s certainly well-intentioned.
None of you know it yet, but you’re setting yourself up to fail ... with three mistakes donors will probably make.
1. Let’s set high standards for governing and disbursing public money. Bad idea. Bureaucracies need procedures, norms and experienced personnel. If a Mozambique or Liberia improves its bureaucracy at the fastest rate in human history, it will have the sophistication of an India or Pakistan in 20 years.
2. Invest quickly in education, health and infrastructure. Actually, these aren’t the country’s first priority. Law, order and security come first. Unfortunately, freedom from violence, or access to justice, are not MDGs [Millennium Development Goals]. Your donors are focused (and evaluated) on human development and poverty alleviation. That’s also what they know how to do best. Security sector reform and justice? Less so.
3. Get NGOs to deliver aid directly. Since the state bureaucracy can’t meet high standards, you can forget direct budget support. But how to build schools and clinics and roads? Enter the NGOs and contractors. Unfortunately, this direct delivery is not going to help you build bureaucratic capability. It might even undermine it.
So what’s the solution?
Set goals for the rate of bureaucratic improvement, not the level of standards. In the meantime, this or that Deputy Minister is going to need to send pork to his constituents. And money is going to get mismanaged or diverted.
Keep education and poverty on the table, but make certain that law and order are first not fourth on the agenda. ...
Finally, in place of direct aid, there’s a nice new trick: community-driven development. Rich countries give the state a big pot of money, then the state defines simple local procedures for disbursement. The donors love it: it sounds all participatory and pro-poor (and often it is). But most of all, it lets a weak state actually disburse cash without a ridiculous amount of accounting, with lots of room for pork and (diminishing over time) diversion of funds to ruling party coffers.
The short story: shoot for the possible, not the impossible.

Tuesday, April 13, 2010

"The Return of Industrial Policy"

Dani Rodrik welcomes the "shift toward embracing industrial policy":

The Return of Industrial Policy, by Dani Rodrik, Commentary, Project Syndicate: British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs. French President Nicolas Sarkozy talks about using it to keep industrial jobs in France. The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations. McKinsey is advising governments on how to do it right.
Industrial policy is back.
In fact, industrial policy never went out of fashion. Economists enamored of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation.
China is a case in point. Its phenomenal manufacturing prowess rests in large part on public assistance to new industries. ... Chile, which is often portrayed as a free-market paradise, is another example. The government has played a crucial role in developing every significant new export that the country produces. ...
But when it comes to industrial policy, it is the United States that takes the cake. This is ironic, because the term “industrial policy” is anathema in American political discourse.  It is used almost exclusively to browbeat political opponents with accusations of Stalinist economic designs. Yet ... the US federal government is the world’s biggest venture capitalist by far. ...
The shift toward embracing industrial policy is therefore a welcome acknowledgement of what sensible analysts of economic growth have always known:... scratch the surface of any new successful industry anywhere, and more likely than not you will find government assistance lurking beneath.
The real question about industrial policy is not whether it should be practiced, but how. Here are three important principles to keep in mind.
First, industrial policy is a state of mind rather than a list of specific policies. ... Second, industrial policy needs to rely on both carrots and sticks. ... Third, industrial policy’s practitioners need to bear in mind that it aims to serve society at large, not the bureaucrats who administer it or the businesses that receive the incentives. ...
The standard rap against industrial policy is that governments cannot pick winners. Of course they can’t, but that is largely irrelevant. What determines success in industrial policy is not the ability to pick winners, but the capacity to let the losers go – a much less demanding requirement. ...
Thomas Watson, the founder of IBM, once said, “If you want to succeed, raise your error rate.” A government that makes no mistakes when promoting industry is one that makes the bigger mistake of not trying hard enough.

Monday, March 29, 2010

"Taking Hope in the Long View"

De long view:

Taking Hope in the Long View, by J. Bradford DeLong, Commentary, Project Syndicate: In the United States, we sit in the midst of 10% unemployment. In some countries, fiscal policy is crippled by legitimate fears that more deficit spending will trigger government-debt crises. In many other countries, fiscal policy is crippled by confusion between short-term cyclical and long-term structural deficits.

Meanwhile, banking policy is crippled by populist reaction against more bailouts, and monetary policy by a strange mindset among central bankers that fears inflation even as wage growth continues to drop. ...

It is time to calm down. And the best way to calm down is by taking the long view.
If all goes well in China and India in the next generation – and if nothing goes catastrophically wrong in the rich, post-industrial, North Atlantic core of the global economy – the next generation will reach a real milestone. For the first time, more than half of the world will have enough food not to be hungry, enough shelter not to be wet, enough clothing not to be cold, and enough medical care not to be worried that they and most of their children will die prematurely of micro-parasites.
The big problems for most of humanity will be to find enough conceptual puzzles and diversions in their work and leisure lives to avoid being bored, and enough relative status not to be green with envy of their fellows. And, of course, they will have to dispose of thugs who used to have spears but will now have cruise missiles and H-bombs...
How did this miracle come about?
Some say that it was ... the shift from a worldview that relied on prayer and the propitiation of spirits to one that relied on rational manipulation and management of nature and of society. But the Classical Greeks had natural philosophy, and the Classical Romans believed in figuring out what worked and applying it. Yet all they produced were some splendid works of architecture and infrastructure and a system of military training that spread their society beyond the Mediterranean.
Some say that the miracle stemmed from an agricultural revolution... But eleventh-century China had a bigger and earlier agricultural revolution than eighteenth-century Britain, and China would have to wait another millennium before emerging as a global power.
Some say that the European conquest of the Americas deserves the credit. But what was shipped back from America across the Atlantic to Europe ... was never real wealth. It was merely sterile gold and silver, some empty calories (in the form of sugar), and some psychoactive products –coffee, tea, chocolate, and tobacco.
Some say that it was the commercial revolution and the rise of the middle class that brought us to the brink of victory over scarcity. But Adam Smith in 1776, and David Ricardo a little later, looked forward to a future Britain that looked a lot like China – a full country with high agricultural productivity and a well-developed division of labor but a very poor peasantry and working class ruled by very rich landlords.
Or maybe it was the industrial revolution of the eighteenth century... But, as late as 1871, John Stuart Mill was writing that it was doubtful whether all of the industrial revolution’s inventions had lightened the day’s toil of a single worker.
Looking back, it is difficult to avoid the conclusion that it was at the end of the nineteenth century that something really special happened. That really special thing had three parts.
First, the advent of global communications meant that ideas invented or found or applied in one part of the world could be quickly made known to and adapted in other parts of the world, rather than waiting decades or centuries to percolate across the oceans.
Second, the coming of global transportation meant that any good idea could be put into practice to produce enormous profits as it was leveraged across the entire globe.
Third – and in large part a consequence of the other two – the rise of the professional inventor and the industrial research laboratory created a class of people whose business was not to make and apply a single invention, but to invent the process of continuous and constant invention and innovation itself.
Because all three of these developments occurred at roughly the same time, we had our critical mass and the chain reaction that has brought us here. Let’s hope that we can keep it in motion, and that we don’t spoil it by losing sight of what was really important in bringing it about.

When nearly 10% of the people are unemployed and government is looking the other way hoping it will somehow fix itself, I have no intention of calming down no matter how rosy the long view might be. It's nice that all these wonderful things are happening, and I also hope they will continue, or even accelerate, but that doesn't change the immediate needs one bit.

Calm down while people are struggling to make ends meet? I don't think so.

Tuesday, March 09, 2010

"Macroeconomic Policy: The Elephant in the Room"

Alejandro Nadal says "Progressive movements need to seize the initiative in defining new avenues for macroeconomic policy":

Macroeconomic Policy: The Elephant in the Room, by Alejandro Nadal, Triple Crisis: International conferences on poverty and the environment come and go. There’s always a big pachyderm in the meeting room. It’s got the words “macroeconomic policy” written on its forehead. Nobody wants to talk about it.
Consider the following. The Millennium Development Goals were debated in many conferences, but nobody spoke about the macroeconomic policy framework needed to achieve them. As if reducing hunger and extreme poverty, generating employment and providing health services and education had nothing to do with fiscal policy, monetary policy and financial deregulation. Aside from some pious words about financing and overseas development assistance, the implicit message was to carry on with the same macroeconomic policies. That could only have been based on faith in the trickle-down potential of neo-liberal globalization.
At UNFCCC-COP events, everyone recognized there are serious issues in terms of financial resources for mitigation and adaptation. Vulnerability and poverty go hand in hand, it is said. But, again, nobody wanted to discuss the relationship between neo-liberal macroeconomic policies and poverty, as if they had no connection. Even the Stern report kept safely away from the thorny issues of macroeconomic policies in developing countries. ...
The 2008 crisis led the UN Environment Program (UNEP) to launch its Green Economy Initiative and the Global Green New Deal (GGND). Their objective is to revive the global economy, “boost employment and accelerate the fight against climate change, environmental degradation and poverty.” According to the GGND, the triple crises demand the same kind of initiative as shown by Roosevelt’s New Deal of the 1930s, but “at the global scale and embracing a wider vision.” The punch line is that “re-booting the world economic system” is simply not enough to get us on the road to sustainability.
One would think that macroeconomic policy would be a relevant issue in this context, especially after the reference to FDR’s “New Deal.” Well, the authors appear to think differently: the Global Green New Deal is unconcerned with macroeconomic policies.
What? Monetary and fiscal policies, financial regulation, exchange and interest rates, capital flows, and incomes’ policies, they have nothing to do with environmental and social sustainability?
Let’s assume we keep a monetary policy obsessed with price stabilization, a fiscal policy focused on generating a primary surplus for “responsible debt management”, an open capital account and financial deregulation. On top of this, let’s say we also maintain downward trends for real wages. Clearly, more efficient automobiles and intelligent buildings will not, by themselves, give us at the end of the day a “green global economy.”
Why is macroeconomic policy ignored in so many important conferences? Is it because macroeconomics focuses on the short term and is unconcerned with long term developmental and sustainability issues? This is a real problem, but I think there might be a deeper reason.
Perhaps another explanation is the state in which macroeconomic theory finds itself today. For one thing, many people find it difficult to get around in this messy land where everything is, as Blanchard and Fischer once remarked, in a state of flux. What with getting to know who are the New Keynesians and how they differ from the Keynesians, the Neo-Keynesians and the Post-Keynesians, it can get a bit confusing. ...
Maybe there is an additional explanation for why the elephant in the room is met with silence. Discussing macroeconomic policies raises awareness about the inner workings of the neo-liberal model and its political economy. Suddenly, the relation between cuts in social expenditures and a primary surplus becomes crystal clear. The rapport between controlling inflation and holding back aggregate demand (all too frequently through repressing real wages) turns out to be self-evident. Pretty soon people are talking about how macroeconomic policy is subordinated to the priorities of financial capital. This morphs the discussion into a political debate, something the establishment dislikes.
Progressive movements need to seize the initiative in defining new avenues for macroeconomic policy. They have done this in debates on agricultural policies, as well as with social and environmental policies. But we still have a long way to go to replace that elephant with a friendly creature.

Saturday, January 16, 2010

David Brooks says "Intrusive Paternalism" is the Answer for Haiti

Chris Blattman:

David Brooks saves the world in 1000 words, by Chris Blattman:
Haiti, like most of the world’s poorest nations, suffers from a complex web of progress-resistant cultural influences. There is the influence of the voodoo religion, which spreads the message that life is capricious and planning futile. There are high levels of social mistrust…
We’re all supposed to politely respect each other’s cultures. But some cultures are more progress-resistant than others, and a horrible tragedy was just exacerbated by one of them.
…it’s time to promote locally led paternalism. In this country, we first tried to tackle poverty by throwing money at it, just as we did abroad. Then we tried microcommunity efforts, just as we did abroad. But the programs that really work involve intrusive paternalism.
These programs, like the Harlem Children’s Zone and the No Excuses schools, are led by people who figure they don’t understand all the factors that have contributed to poverty, but they don’t care. They are going to replace parts of the local culture with a highly demanding, highly intensive culture of achievement — involving everything from new child-rearing practices to stricter schools to better job performance.
That is David Brooks selectively quoting the development literature.
His confidence makes me uncomfortable. To paraphrase, unkindly: These Haitians need to be more like hardworking, thrifty Americans. We’ve spent five decades learning that everything we thought would work in aid did not. Clearly it’s time to get tough. I read about some people who made this work in Harlem, so it’s obviously the answer for Haitians, whom through newspaper reading, I have deduced are also resistant to progress.
Don’t misunderstand me: Brooks could be right. In fact, I’m starting one randomized control trial to test the idea. I’m a little further from propounding it as God’s honest truth on the pages of the Times.
Sometimes the  problem with big development solutions is they spring from hubris and certitude rather than caution and humility. ...
I’m slightly terrified now that Bill Clinton, special envoy to Haiti, has said David Brooks is his leading intellectual light.

Intrusive Paternalism worked so well in Iraq and other places, especially when combined with forced free market solutions introduced with no supporting institutional structure, and without consideration of local culture, history, or social relationships, that I guess conservatives like Brooks just can't wait to try it again.

Saturday, January 02, 2010

''Fruitful Decade for Many''

Tyler Cowen argues "the last 10 years may go down in world history as a big success."

Thursday, December 03, 2009

"The Civil War in Development Economics"

Anything with the words "Civil War" in it is catching my attention today:

The Civil War in Development Economics, by William Easterly: Few people outside academia realize how badly Randomized Evaluation has polarized academic development economists for and against. My little debate with Sachs seems like gentle whispers by comparison.
Want to understand what’s got some so upset and others true believers? A conference volume has just come out from Brookings. At first glance, this is your typical sleepy conference volume, currently ranked on Amazon at #201,635.
But attendees at that conference realized that it was a major showdown between the two sides, and now the volume lays out in plain view the case for the prosecution and the case for the defense of Randomized Evaluation.
OK, self-promotion confession, I am one of the editors of the volume, and was one of the organizers of the conference... Angus Deaton also gave a major luncheon talk at the conference, which was already committed for publication elsewhere. A previous blog discussed his paper.
Here’s an imagined dialogue between the two sides on Randomized Evaluation (RE) based on this book:
FOR: Amazing RE power lets us identify causal effect of project treatment on the treated.
AGAINST: Congrats on finding the effect on a few hundred people under particular circumstances, too bad it doesn’t apply anywhere else.
FOR: No problem, we can replicate RE to make sure effect applies elsewhere.
AGAINST: Like that’s going to happen. Since when is there any academic incentive to replicate already published results? And how do you ever know when you have enough replications of the right kind? You can’t EVER make a generic “X works” statement for any development intervention X. Why don’t you try some theory about why things work?
FOR: We are now moving in the direction of using RE to test theory about why people behave the way they do.
AGAINST: I think we might be converging on that one. But your advertising has not yet got the message, like the JPAL ad on “best buys on the Millennium Development Goals.”
FOR: Well, at least it’s better than your crappy macro regressions that never resolve what causes what, and where even the correlations are suspect because of data mining.
AGAINST: OK, you drew some blood with that one. But you are not so holy on data mining either, because you can pick and choose after the research is finished whatever sub-samples give you results, and there is also publication bias that shows positive results but not zero results.
FOR: OK we admit we shouldn’t do that, and we should enter all REs into a registry including those with no results.
AGAINST: Good luck with that. By the way, even if do you show something “works,” is that enough to get it adopted by politicians and implemented by bureaucrats?
FOR: But voters will want to support politicians who do things that work based on rigorous evidence.
AGAINST: Now you seem naïve about voters as well as politicians. Please be clear: do RE-guided economists know something the local people do not know, or do they have different values on what is good for them? What about tacit knowledge that cannot be tested by RE? Why has RE hardly ever been used for policymaking in developed countries?
FOR: You can take as many potshots as you want, at the end we are producing solid evidence that convinces many people involved in aid.
AGAINST: Well, at least we agree on the on the much larger question of what is not respectable evidence, namely, most of what is currently relied on in development policy discussions. Compared to the evidence-free majority, what unites us is larger than what divides us.

[On the civil war reference: I'm at the University of Oregon, and my brother played football for Oregon State many years ago - he was a defensive end - so to the extent that either of us cares after all these years, it's a Ducks versus Beavers family war as well (the next generation seems to care more than we do).]

Tuesday, November 24, 2009

"Escaping the Fossil Fuel Trap"

Michael Spence says developed countries should pay the cost of reducing carbon emissions, including paying for abatement measures in developing countries:

Escaping the Fossil Fuel Trap, by Michael Spence, Project Syndicate: ...[The] use of fossil fuels, and hence higher CO2 emissions, seems to go hand in hand with growth. This is the central problem confronting the world as it seeks ... to combat climate change. Compared to the advanced countries, the developing world now has both low per capita incomes and low per capita levels of carbon emissions. Imposing severe restrictions on their emissions growth would impede their GDP growth and severely curtail their ability to climb out of poverty.
The developing world also has a serious fairness objection to paying for climate-change mitigation. The advanced countries are collectively responsible for much of the ... carbon in the atmosphere... As a consequence, the developing world’s representatives argue, the advanced countries should take responsibility for the problem.
But a simple shift of responsibility to the advanced countries by exempting developing countries from the mitigation process will not work. ... If developing countries are allowed to grow, and there is no corresponding mitigation of the growth in their carbon emissions, average per capita CO2 emissions around the world will nearly double in the next 50 years, to roughly four times the safe level... Advanced countries by themselves simply cannot ensure that safe global CO2 levels are reached. ...
So the world’s major challenge is to devise a strategy that encourages growth in the developing world, but on a path that approaches safe global carbon-emission levels by mid-century. ...
These considerations suggest that no emission-reduction targets should be imposed on developing countries until they approach per capita GDP levels comparable to those in advanced countries. ...[A]dvanced countries ... should be allowed to fulfill their obligations, at least in part, by paying to reduce emissions in developing countries (where such efforts may yield greater benefits). ...
The best way to implement this strategy is to use a “carbon credit trading system” in the advanced countries, with each advanced country receiving a certain amount of carbon credits to determine its permissible emission levels. If a country exceeds its level of emissions, it must buy additional credits from other countries... But an advanced country could also undertake mitigation efforts in the developing world and thus earn additional credits...
Such a system would trigger entrepreneurial searches for low-cost mitigation opportunities in developing countries, because rich countries would want to pay less by lowering emissions abroad. As a result, mitigation would become more efficient...
Conflict between advanced and developing countries over responsibility for mitigating carbon emissions should not be allowed to undermine prospects for a global agreement. A fair solution is as complex as the challenge of climate change itself, but it is certainly possible.

Thursday, October 15, 2009

Can Better Logistics Ease Harsh Labor Market Conditions in Developing Countires?

This argues that better workflow logistics can be an effective means of alleviating harsh working conditions:

Saving labor, by Peter Dizikes, MIT News Office: The existence of harsh labor conditions in factories around the world is a pressing moral issue. But to improve those conditions, we should regard it as a logistical issue, too.
Consider the case of ABC, a giant clothing manufacturer whose products are made in more than 30 countries, and the subject of a new study led by Richard Locke ... of the MIT Sloan School of Management. After being accused of poor labor practices in the early 1990s, Locke notes, ABC became a leader among corporations in addressing labor conditions. The firm adopted a code of conduct for all factories providing it with goods, including those owned and run by local suppliers. ABC developed a system to monitor labor conditions, and hired a large compliance staff to enforce its policies world-wide.
And yet for all of its efforts, just 24 percent of the roughly 200 factories in ABC's global supply chain met its own labor standards in 2006, as Locke and some colleagues reveal in a recently published paper based on a study of the firm's own audit data and practices. Garment workers at plants supplying ABC in the Dominican Republic were exposed to noxious chemicals and forced to work in overheated conditions, according to Locke and his co-authors; as they detail it, other laborers, from Honduras to India, were asked to work overtime shifts in excess of ABC's own established limits.
The traditional system of setting labor standards and attempting to enforce them, through periodic checks by corporate compliance officers, has not worked well enough, Locke and his colleagues conclude. ... "My original view was that the compliance system could make conditions better, if it were just better-designed or better-funded," says Locke. "In the process of research, I realized that just checking on factories and threatening them doesn't work." In this view, multinational firms cannot just diagnose factory problems and expect them to vanish, but must take the lead in changing them. ...
Basic policing of factories has "yet to deliver on its promise of sustained improvement in labor rights," the authors say, while by contrast, factory monitors who take a problem-solving approach, have created "sustained improvements in working conditions and labor rights" around the world.
The authors were able to conduct the study because ABC (a pseudonym chosen to protect its identity) allowed them to study its data on labor conditions, and granted the researchers access to numerous factories where ABC's suppliers actually make its clothes.
While evaluating the firm, Locke, Amengual, and Mangla saw with their own eyes evidence that a pragmatic, trouble-shooting mode of enforcement has rapid effects. To solve the problems of exposure to fumes overheating in the Dominican Republic, for instance, compliance officers suggested moving the relevant equipment to the edge of the building space. Ventilation improved and the problem diminished significantly.
To help the factory in Honduras, ABC persuaded its management to re-orient its machinery and workers' schedules, to better handle the short-term "rapid replenishment" orders that had led to excess overtime. The improved logistics cost the factory little financially and let it comply with ABC's standards. The MIT researchers found a similar result at a factory supplying ABC in Bangalore, India, where better workflow logistics also eliminated an overtime problem.
"We know from years of research that when you implement certain kinds of systems in the advanced industrial countries, you get better results," says Locke. But the managers of factories supplying ABC, he notes, often lack "real training or understanding of production techniques and high-performance systems."
Labor-rights advocates applaud Locke's ideas. "People have looked to codes and auditing as a way to force accountability," says Chris Jochnick, director of Private Sector Development at Oxfam America. "But Rick was one of the first people to see that the way improvement happens is probably a lot more nuanced. His work is a valuable way of looking at the problem."
As Locke notes, this logistics-based approach to factory violations is just one piece of a still larger problem; the demands global brands put on local factories must be addressed as well. And as he readily acknowledges, some practical solutions could be expensive for factories, making managers reluctant to implement them. In those cases, a hard-line approach may yet be useful. "Sometimes you do need a bit of a threat," he says. "It's that blend that seems to matter." ...
Later this month, Locke will host a conference of executives both from non-governmental organizations and athletic-wear firms — including Nike, Adidas, New Balance, Puma and Asics — to discuss ways to use this problem-solving approach. ...

Firms must have the desire to set a code of conduct that they are serious about enforcing (as opposed to using the code to gain positive publicity with no real intent of forcing firms to comply), and they must also have the means to enforce compliance. This focuses on the ability to enforce or induce compliance, but the incentive to establish the code and then make a serious attempt to change things when suppliers are in violation of the rules is another important aspect of the problem.

In a competitive marketplace where buyers do not consider the labor market conditions of suppliers when purchasing a good, and where there are no regulations preventing firms from transacting with suppliers who are in violation of minimal standards (something that would be difficult to monitor), firms will have no incentive beyond their own moral values to enforce labor market standards.

I'm sympathetic to the argument that low wage jobs in many developing countries provide opportunities that wouldn't exist otherwise, but there are bounds that shouldn't be crossed.

Monday, October 12, 2009

Should Health Care be a Human Right?

William Easterly says defining health care as a human right "has made global healthcare more unequal":

Human rights are the wrong basis for healthcare, by William Easterly, Commentary, Financial Times: The agonizing US healthcare debate has taken on a new moral tone. President Barack Obama recently held a conference call with religious leaders in which he called healthcare “a core ethical and moral obligation”. Even Sarah Palin felt obliged to concede: “Each of us knows that we have an obligation to care for the old, the young and the sick.”
This moral turn echoes an international debate about the “right to health”. Yet the global campaign to equalize access to healthcare has had a surprising result: it has made global healthcare more unequal.
The notion of a “right to health” has its origins in the United Nations’ Universal Declaration of Human Rights in 1948. But in the decades that followed, foreign aid’s most successful efforts in health – such as the World Health Organization and Unicef campaigns on vaccines and antibiotics – were based on a more limited goal: obtaining the largest possible health benefits for the poor from finite foreign aid budgets.
The moral argument made a big comeback in the new millennium. One of its most eloquent advocates is Dr Paul Farmer, who earned fame with heroic efforts to give people access even to complex medical treatment amid extreme poverty in Haiti and Rwanda, saying that healthcare was “a fundamental human right, which should be available free”. The WHO shifted from pragmatic improvement of health outcomes towards “the universal realization of the right to health”. Even Amnesty International ... added a new section to its human rights report in 2009 on the “right to health”.
So what is the problem? It is impossible for everyone immediately to attain the “highest attainable standard” of health... So which “rights to health” are realized is a political battle. Political reality is that such a “right” is a trump card to get more resources – and it is rarely the poor who play it most effectively.
The biggest victory of the “right to health” movement has been the provision of aid-financed antiretroviral treatment for African Aids patients, who include the upper and middle classes. ...
Saving lives in this way is a great cause – except to the extent that it takes resources away from other diseases. Alas, many observers fear that is exactly what it did.
An evaluation by the World Bank in 2009 faulted the bank for allowing Aids treatment to drive out many other programs. Global deaths due to either tuberculosis or malaria stood at 2m in 2008, around the same as those from Aids. Yet Aids accounted for 57 per cent of World Bank projects on communicable diseases from 1997 to 2006, compared with 3 per cent for malaria and 2 per cent for TB. Other big killers of the poor – such as pneumonia, measles and diarrheal diseases, which together accounted for more than 5m deaths in 2008 – received even less attention. ...
The lesson is that, while we can never be certain, the “right to health” may have cost more lives than it saved. The pragmatic approach – directing public resources to where they have the most health benefits for a given cost – historically achieved far more than the moral approach.
In the US and other rich countries, a “right to health” is a claim on funds that has no natural limit, since any of us could get healthier with more care. We should learn from the international experience that this “right” skews public resources towards the most politically effective advocates, who will seldom be the neediest.

This is not my area, but I do wonder if the problem is the designation of the right, or something more systemic within these countries. That is, the implicit assumption is that with a different goal - a "pragmatic approach" of directing resources where they will have the most benefits - the poor would have fared better, but are we sure that's the case? Who decides what defines "the most benefits"? My guess is that the same people who diverted resources before would manage to do so again by defining the benefits appropriately, i.e. in a way that benefits the same groups of people as before. If so, then the problem is not the designation of a right to health care.

Friday, October 02, 2009

Paul Romer: New Systems versus Evolution

Paul Romer responds to questions from Chris Blattman about his proposal to establish charter cities, in particular, how to construct dynamic rule sets that maximize the chance of success:

New Systems versus Evolution, by Paul Romer: At a recent talk in London, Chris Blattman asked if a charter city could fail in the same way that public housing failed in Chicago. After the seminar and in his follow up post, we started a discussion of the deeper issue: What kind of dynamics would be desirable in the space of rules?
To frame the discussion, it helps to have some vocabulary. A rule set is a large collection of rules that are tightly linked. Rule sets can improve through what I will call an evolutionary dynamic based on small, incremental changes or through a new-system dynamic in which an entirely new rule set enters and competes with an existing one.
Chris and I agree that an evolutionary dynamic can lead a vibrant neighborhood but that it can also lead to a dangerous slum with no roads, sewers, safe water, electricity or other utilities.
We also agree that there is a risk associated with new systems. Sometimes they don’t work, as the public housing projects in Chicago demonstrate. Sometimes they work remarkably well. Architecturally similar high-rise buildings in Hong Kong and Singapore provided livable housing for large numbers of working poor in the 1960s and 1970s. ...
The challenge that Chris posed to me, one that several others have also suggested, but not as precisely, is how to assess the tradeoff between faster growth and higher risk that the new-system dynamic seems to offer. A related question is who bears that risk. These are important questions. Here are some provisional answers.
Start with the distinction between catch-up growth and frontier growth. Catch-up growth is based on copying existing ideas. Frontier growth involves the discovery and implementation of new ideas.
In catch-up growth, the new-system dynamic can be used to copy existing rule sets. This allows faster growth without the additional risk that comes from using the new-system dynamic at the frontier. ...
The concept of a charter city does rely on the new-system dynamic, but in the context of economic development, charter cities can adopt a new rule set made up of rules that are known to work well. It can accelerate catch-up growth with little of the risk associated with the development of new systems at the frontier.
A charter city could be also used, perhaps in the United States, to encourage innovation at the frontier of urban living. An entirely new city could introduce changes to transportation systems or energy systems that are improbable along an evolutionary path. ... But in this case, faster growth would involve more risk.
It is important to recognize that new systems typically need evolutionary improvement after they are introduced. As existing charter cities compete with each other, they will evolve in precisely this sense. ...

A new city could still fail, just as Detroit is failing in the United States. The risk of a failure falls primarily on the owners of the fixed assets that can’t leave, not on the labor income of workers who can leave. This seems like just the right allocation for incentives and risk sharing. If the development authority with administrative responsibility for the city owns the land and collects revenue as rent on long-term leases, it has a strong incentive to get the rules right early on and to help the rules evolve in the right direction thereafter. ...
An arrangement with many cities that compete with each other is present today in China. Many new or rapidly growing cities compete for residents and investors. Local officials receive a substantial portion of their revenue from gains in the value of land that they own. To my knowledge, none of the new or rapidly growing cities in China has failed to the degree that public housing failed in the United States.
Finally, it is worth noting that roughly 3 billion people will move to cities in the next 50 years. If this growth takes place by an evolutionary dynamic that expands existing cities, many of these cities will fail as badly as the public housing projects did in Chicago. In fact, particularly many of them already do.
The right question to ask is not whether the new-system dynamic, as applied by charter cities, is subject to some risk. Rather, it is whether the risk of failure in charter cities is any greater than along the status quo path. Because charter cities use the new-system dynamic to copy best practice and create strong competitive pressures for rapid evolutionary improvement after they are built, I’m convinced that they offer the prospect of both faster growth and less risk.

Sunday, September 20, 2009

"The Essential Pillars of a New Climate Pact"

Sheila Olmstead and Robert Stavins argue that three essential elements must be present in the successor to the 1997 Kyoto Protocol:

The essential pillars of a new climate pact, by Sheila M. Olmstead and Robert N. Stavins, Commentary, Boston Globe: The climate change summit at the United Nations on Tuesday is aimed to build momentum for ... a successor to the 1997 Kyoto Protocol, which expires in 2012. To be successful, any feasible successor agreement must contain three essential elements: meaningful involvement by a broad set of key industrialized and developing nations; an emphasis on an extended time path of emissions targets; and ... policy approaches that work through the market, rather than against it.
Consider the need for broad participation. Industrialized countries have emitted most of the ... man-made carbon dioxide in our atmosphere, so shouldn’t they reduce emissions before developing countries are asked to contribute? While this seems to make sense, here are four reasons why the new climate agreement must engage all major emitting countries - both industrialized and developing.
First, emissions from developing countries are significant and growing rapidly. ... Second, developing countries provide the best opportunities for low-cost emissions reduction... Third,... industrialized countries may not commit to significant emissions reductions without developing country participation. Fourth, if developing countries are excluded, up to one-third of carbon emissions reductions ... may migrate to non-participating economies through international trade, reducing environmental gains...
The second pillar of a successful post-2012 climate policy is an emphasis on the long run..., and major technological change is needed to bring down the costs of reducing CO2 emissions. The economically efficient solution will involve firm but moderate short-term targets to avoid rendering large parts of the capital stock prematurely obsolete, and flexible but more stringent long-term targets.
Third, a post-2012 global climate policy must work through the market rather than against it. ... One market-based approach, known as cap-and-trade, is emerging as the preferred approach ... among industrialized countries. ...
Cap-and-trade systems can be linked directly, which requires harmonization, or indirectly by linking with a common emissions-reduction credit system; indeed, this is what appears to be emerging... Kyoto’s Clean Development Mechanism allows parties in wealthy countries to purchase emissions-reduction credits in developing countries by investing in emissions-reduction projects. These credits can be used to meet emissions commitments...
A new international climate agreement missing any of these three pillars may be too costly, and provide too little benefit, to represent a meaningful attempt to address the threat of global climate change.

Wednesday, September 16, 2009

"The Origin of Development as Cover for Imperialism and Racism"

Bill Easterly says economic development was "a new justification for colonial rule to replace the unpopular and increasingly implausible idea that they were a superior race destined to rule inferior races":
How the British Invented “Development” to Keep the Empire and Substitute for Racism, by William Easterly: During the early years of World War II, Japan won major victories (such as the capture of Singapore) against the British and threatened India. Japanese propaganda pointed to British racism and offered themselves as the defenders of non-white peoples. The British feared that non-white people in the colonies might side with the Japanese rather than their colonial masters. The British had to come up with a new justification for colonial rule to replace the unpopular and increasingly implausible idea that they were a superior race destined to rule inferior races. In response, they invented the concept of economic development.
This story is told in an undeservedly obscure book by Suke Wolton, 2000, Lord Hailey, the Colonial Office, and the Politics of Race and Empire in the Second World War, (I have this thing for obscure development history books; this one is ranked #4,399,430 on Amazon)
The Japanese charge of British racism was certainly correct. They were so racist they thought even nonwhites acknowledged their own inferiority, like when Julian Huxley referred to the natives’ “childlike belief in the white as an inherently superior being.” After World War I, the Americans and British shot down a League of Nations resolution for Racial Equality proposed by the Japanese. The Colonial Office said in 1939 “most Africans are still savages.”
But during the dark days when the British were losing World War II, the racism was no longer allowed to be so explicit. The Labor Minister in 1941 banned the N word for Africans and “coolies” for Indians. The Colonial Office further told the BBC that the N-word should be “discouraged” on the radio. A further breakthrough caused the BBC to drop the word “native.”
But something more positive was needed to put the Empire in a good light. A long-time colonial official, Lord Hailey came up with the idea in 1941 of redefining the Empire’s mission as “promotion of native welfare.” (I guess he didn’t get the BBC memo about “native.”) And he argued the colonies could only develop with Britain’s help (sound familiar?) In short, Hailey said:
A new conception of our relationship…may emerge as part of the movement for the betterment of the backward peoples of the world, which stands in the forefront of every enlightened programme for …postwar conditions.
To repress independence movements, however, Hailey made a distinction between political development and economic development: “Political liberties are meaningless unless they can be built on a better foundation of social and economic progress.” (A line that autocrats have been using ever since.) The Colonial Office thought many colonies “little removed from their primitive state,” so “they will probably not be fit for complete independence for centuries.”
Of course, changing the language from racist to economic development did not mean racism suddenly disappeared. As Wolton shows, “the white Western elites still believed in their fundamental superiority.” In the end, Wolton says, “The major powers would continue to be able to determine the future of the colonial territories – only this time the source of their legitimacy was based less on racial difference and more on their new role as protector and developmental economist.” After the war, even more officials went out to the Empire in what became known as the “second colonial occupation.”
Why does this history matter today? After all, the Empire fell apart much sooner than expected, and racism did diminish a lot over time. And I do NOT mean to imply guilt by association for development as imperialist and racist; there are many theories of development and many who work on development (including many from developing countries themselves) that have nothing to do with imperialism and racism.
But I think the origin of development as cover for imperialism and racism did have toxic legacies for some. First, it meant that the concept of development was determined to fit a propaganda imperative; it was NOT a breakthrough in thought by economists. Second, it followed that development from the beginning would stress the central role of Western aid to help the helpless natives (which shows up in the early development theories like the “poverty trap” and the “Big Push,” and the lack of interest in local entrepreneurs and market incentives). Third, the paternalism was so extreme at the beginning that it would last for a long time – I still think it is widespread today, especially after today’s comeback of the early development ideas in some parts of the aid system. And this history also seems strangely relevant with today’s “humanitarian” nouveau-imperialism to invade and fix “failed states” like Iraq and Afghanistan.
Membership in the development elites is far more diverse than in Lord Hailey’s time, but I fear that, to use Wolton’s words, “in the end, the elites still believe in their fundamental superiority.”

Thursday, August 27, 2009

"Would Growth in the U.S. Debt be Inflationary?"

David Andolfatto explains why a worldwide shortage of safe, liquid assets may help the U.S. to avoid the inflationary consequences of high debt levels:

Why the Growing Level of U.S. Debt May Not be Inflationary, by David Andolfatto: History shows that high levels of government debt are frequently associated with inflation. The reason for this seems clear enough. At some point, maturing debt needs to paid back. At high enough levels of debt, rolling the debt over is no longer feasible. Cutting back government spending and raising taxes is politically difficult. The easy way out is simply to print new money. As the money supply expands, inflation results.
Let us consider the U.S. Unlike most other economies, there appears to be a huge worldwide demand for U.S. Treasuries and U.S. dollars (which can be thought of as zero-interest Treasuries). A large scale increase in the supply of these government debt instruments need not lead to a depreciation in their value if there is a correspondingly large scale increase in the worldwide demand for these objects. What is the evidence that this may be happening?
Foreigners Snap Up Treasuries Even as US Debt Keeps Rising
But why should this be so? What accounts for what appears to be an insatiable demand for US debt, especially in the wake of the recent financial crisis?
Ricardo Caballero of MIT offers some hints in a very interesting piece entitled: On the Macroeconomics of Asset Shortages. After reading this paper, I started thinking in the following way. Tell me what you think.
There is a high and growing demand for low-risk assets, both as a store of value, and as collateral objects in payment systems (e.g., repo and credit derivatives markets). This growth has exploded over the last 20 years or so; and stems from the demand from emerging economies and innovations in the financial sector. There is a worldwide "shortage" of good quality (low-risk) assets, like U.S. Treasuries (which explains their relatively low yield). Indeed, many of the innovations in the financial sector can be interpreted as the private sector's response to this shortage: the creation of "low-risk" tranches of MBSs allowing these objects to substitute for U.S. Treasuries as collateral in the rapidly expanding repo market. ...

If this is more or less true, then the implication is this: The massive increase in the supply U.S. Treasury debt may very be "socially optimal" in the sense that the U.S. government is simply supplying the world with an asset that is in very high demand (which, in turn, means that the demanders obviously find some value in the existence of such an asset). To the extent that this "new demand regime" remains stable, the added supply of U.S. Treasuries will impose no financial burden on the U.S. (indeed, they make off like bandits, as the Treasuries are ultimately purchased by exporting goods and services to the U.S.).
The million dollar question, of course, is whether the high world demand for U.S. debt will persist long into the future (and whether the U.S. government will "overissue" debt beyond what is called for by this new high-demand regime). Who knows what will happen. But it appears to me that IF the U.S. government plays its cards right, it may very well enjoy its higher debt levels without the prospect of inflation. U.S. citizens will benefit (from the sales of Treasuries for goods) and the world will be grateful to hold a stable asset.
Well, maybe. But that was a big IF. What could possibly go wrong?

The future level of the debt in the U.S. is not a worry if we get effective health care reform (rising health care costs are the major source of projected future deficits). But if a debt problem does exist, I'm not sure the main risk is inflation since I expect the Fed to hold the line on debt monetization. If so, if the Fed does hold the line, then the pressure would be on government spending and taxes. If congress cannot solve the debt problem by cutting spending and/or raising taxes, the result would likely be high interest rates that crowd out private investment. In any case, what this says to me is that to the extent that this demand for safe assets exists, debt levels can be carried at a lower interest rate than otherwise, and this reduces concerns about crowding out (perhaps this is one of the reasons why long-term interest rates have remained relatively low, financial markets recognize this demand exists, believe the demand is large enough to matter, and believe it will continue for some time into the future).

"Tell me what you think."

*****

[On the relationship between debt and inflation, much of the evidence comes from developing countries. Here's one story about why debt and inflation might be related. Often a developing country will decide to run a government deficit to, say, build new roads, bridges, dams, etc. They are trying to build up the infrastructure. The idea is that the future growth that will come from this spending will allow the debt to be paid off. It's an investment in the future of the country -- borrow now, invest the money in needed infrastructure projects, and then use the resulting increase in future economic output to pay for spending (though much less noble motives for increasing debt exist as well).

How can this debt be paid for in the interim, i.e. during the time period when the projects are being built and before the expected growth is realized? The alternatives are to increase taxes, print the money, or borrow the money.

The countries can't increase taxes, these are developing countries and the tax base is insufficient. The whole point of the infrastructure projects is to begin to change that through economic growth.

If they can't tax, then can they borrow the money? Probably not domestically since, again, they are a developing country with little wealth. The necessary funds aren't available domestically. So that leaves borrowing from foreigners. Is that possible? Not if they have defaulted in the past. If they have defaulted, nobody may be willing to take the risk of lending them money, and if the money comes from international agencies such as the IMF, it may come with so many restrictions that it does no good. And even if the money can be borrowed, at some point it must be paid off, and if the promised growth does not materialize (and overly optimistic promises make this likely), investors will be unwilling to allow the debt to be rolled over. The point is that, for developing countries, supporting government spending through taxes or borrowing may not be feasible. This leaves only two choices, giving up on the spending projects, or printing money to pay for them. Printing money - and the inflationary consequences that follow - is often the choice that is made.

Developed countries are not so constrained. They have much more latitude to borrow from their own citizens or from foreigners, they have the ability to raise substantial sums through taxation, and often their infrastructure and other needs aren't as dire. In addition, they can generally count on future growth to help to pay for the borrowing. For all these reasons, developing countries aren't necessarily forced to pay for spending by printing new money and creating inflation.]

Sunday, July 26, 2009

"A Breakthrough in the Fight against Hunger"

Jeff Sachs seems relatively pleased and cautiously optimistic:

A breakthrough in the fight against hunger, by Jeffrey D Sachs, Commentary, Project Syndicate: The G-8’s $20bn initiative on smallholder agriculture, launched at the group’s recent summit in L’Aquila, Italy, is a potentially historic breakthrough in the fight against hunger and extreme poverty. With serious management of the new funds, food production in Africa will soar.

Indeed, the new initiative, combined with others in health, education, and infrastructure, could be the greatest step so far toward achieving the Millennium Development Goals, the internationally agreed effort to reduce extreme poverty, disease, and hunger by half by 2015. ... One cornerstone of the project was “smallholder farmers”, meaning peasant farm families in Africa, Latin America, and Asia – working farms of around one hectare (2.5 acres) or less. These are some of the poorest households in the world, and, ironically, some of the hungriest as well, despite being food producers.

They are hungry because they lack the ability to buy high-yield seeds, fertiliser, irrigation equipment, and other tools needed to increase productivity. As a result, their output is meagre and insufficient for their subsistence. ...

The Millennium Project recommended a big increase in global funding for this purpose. ... Now the key is to make this effort work. The lessons of history are clear. ... Not only will food yields rise in the short term, but farm households will use their higher incomes and better health to accumulate all sorts of assets: cash balances, soil nutrients, farm animals, and their children’s health and education. ...

Continue reading ""A Breakthrough in the Fight against Hunger"" »