Economist's View

W. Arthur Lewis and the Tradeoffs of Economics and Economists

From Vox EU:

W. Arthur Lewis and the tradeoffs of economics and economists, by Ravi Kanbur, VoxEU: There is nothing new under the sun. The passionate political economy discourses of today consume us entirely. But they are in fact perennials, broaching the fundamental questions of economic policy that have ruled supreme since economics gained an independence of sorts from moral philosophy 250 years ago.¹ The nature of market failure, the case for government intervention on grounds of efficiency and equity, and the interplay between economic and political forces are some of the tracks on which discourses have run for generations. The life and work of W. Arthur Lewis, winner of the 1979 Nobel Prize in economics, is a testament to the tradeoffs of economics, and of economists.

Arthur Lewis was born in the British West Indies in 1915. He won a scholarship to study at the London School of Economics, graduating with first class honours in 1937.² And yet Lewis’s path was not entirely smooth. Even at the LSE, an institution founded by Fabian socialists, he faced the racism that he also met in the streets of London. When he was considered for a temporary one year appointment at the LSE in 1938, the Director of the LSE wrote to the Board of Governors that: “The appointments committee is, as I said, quite unanimous but recognise that the appointment of a coloured man may possibly be open to some criticism. Normally, such appointments do not require confirmation of the Governors but on this occasion I said that I should before taking action submit the matter to you” (Tignor 2006: 21).³

Lewis became involved with the burgeoning decolonisation movement in Britain, and consorted with the likes of C L R James, George Padmore, Eric Williams, and Paul Robeson. The 1930s and 1940s were a period of ferment not just on the decolonisation front. Economic policy in general was under discussion and dispute. From Cambridge, John Maynard Keynes had excited a generation of students with his critiques of ‘the Treasury View’ in the face of massive and persistent unemployment. Arthur Lewis was Keynesian in macroeconomic matters, but also more interventionist in microeconomic and structural policy. This set him against Sydney Caine, an influential official in the Colonial Office, in the work of the Colonial Economic Advisory Committee, on which Lewis served. Lewis described Caine as “a religious devotee of laissez-faire, and his headship of the Economic Department at this juncture is fatal” (Mine 2006).

In 1951, Kwame Nkrumah won a sweeping victory in the elections in the British colony of the Gold Coast (soon to become the independent country of Ghana) and in 1952 Lewis was invited by Nkrumah to write a report on industrialisation (Lewis 1953).⁴ At this very time, Lewis was fashioning his Nobel Prize winning argument on ‘surplus labour’, which he argued was the state of affairs in the West Indies, in Egypt, and in India (Lewis 1954). In these situations, the main brake on development was inadequate investment in manufacturing, and to the extent that this investment was held back by market failures in the manufacturing sector, the government should intervene to address them.

However, Lewis’s thrust in his report was that the Gold Coast, unlike India, did not present a situation of surplus labour. Rather, it was one of labour shortages given the large amount of land available in agriculture. In this situation the way of releasing labour for manufacturing, without pushing up wages so much that investment would be choked off, was to increase agricultural productivity. In labour shortage economies, that would have been priority number one. The Gold Coast industrialisation report revealed the evolving balance of Arthur Lewis as the economist. Identify the nature of the market failure first, then design the intervention.

Arthur Lewis was present in Accra for the celebrations when the Gold Coast became Ghana on 6 March 1957.⁵ But he was to return in October of 1957 for a fateful stint as the government’s chief economic adviser, at the invitation of Kwame Nkrumah. His 15 months as resident adviser in Ghana were tumultuous. There were some policy areas in which he sided with the government and Nkrumah. Perhaps the most famous of these is his general agreement that the surpluses from the cocoa price boom should be collected by the government and used for development purposes rather than passed through to cocoa farmers, a view very different from positions being advanced by Bauer (1954) at that time. However, in the main Lewis clashed with Nkrumah, especially on various ‘white elephant’ projects that were being considered and approved, many of them in the name of industrialisation.

The letters of this time provide a real insight into the clash between the economist and the politician. After a series of attempts by Lewis to intervene in the drafting on the Five Year Plan, his verdict on the plan was that it made “inadequate provision for some essential services while according the highest priority to a number of second importance….Alas, the main reason for this lack of balance is that the plan contains too many schemes on which the Prime Minister is insisting for ‘political reasons’” (Tignore 2006: 167). Nkrumah’s responses to Lewis were to be expected from a man who had famously said “seek ye the political kingdom first”. In an exchange that brought to a head Lewis’s decision to leave his post as economic adviser, Nkrumah emphasised “political decisions which I consider I must take. The advice you have given me, sound though it may be, is essentially from the economic point of view, and I have told you, on many occasions, that I cannot always follow this advice as I am a politician and must gamble on the future” (Tignor 2006: 173).

How can one explain the seeming contradictions in Lewis? On the one hand was the critic of laissez-faire economic policies, whom the radical anti-colonialists expected to be on their side. On the other was the economist who acted as a check on the extreme statist interventions proposed by this same tendency in economic policy discourse, arguing against heavy state subsidy to industry on purely economic grounds, even leaving aside its propensity for corruption and use as political patronage.

As a student, Lewis must have read John Maynard Keynes’s clarion call in his essay “The End of Laissez Faire” (Keynes 1926).⁶ This was, seemingly, a call to abandon the tenets of 19th century economic liberalism in favour of a more interventionist credo – “let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded” (Keynes 1926: 287-8). This is Keynes presaging the Lewis of the 1930s and 1940s railing against Sydney Caine and his laissez-fair policies for the colonies. And yet in the same essay Keynes hints at a different world view, a more nuanced perspective on state intervention:

“We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed ʹone of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion’” (p. 288-91).

How like Lewis, or rather how like the economist Lewis became in Ghana.⁷ I have argued elsewhere that Edmund Burke’s question is the eternal question of political economy and accounts for the cycles of thought in economics (Kanbur 2016). This is what allowed Lewis to support some industrial intervention in his first report on the Gold Coast, while at the same time asserting the primacy of agricultural development. It is what allowed him to support substantial taxation of cocoa while at the same time railing at the (economic and political) misuse of the funds so raised. That was Arthur Lewis in Ghana, but it was Arthur Lewis all along. It has also been political economy all along, and will continue to be so.

References

Aryeetey, E, and R Kanbur (eds.), The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.

Bauer, P (1954), West African Trade: A Study of Competition, Oligarchy, and Monopoly in a Changing Economy, Cambridge University Press.

Kanbur, R (2016), “The End of Laissez Faire, The End of History and The Structure of Scientific Revolutions”, Challenge, 59 (1), 35-46.

Kanbur, R (2017), “W. Arthur Lewis and the Roots of Ghanaian Economic Policy”, In E Aryeetey and R Kanbur (eds.) The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.

Keynes, J M (1926), “The End of Laissez-Faire”, in The Collected Writings of John Maynard Keynes, Volume IX, Essays in Persuasion, Royal Economic Society, Palgrave MacMillan, 1972.

Lewis, W A (1953), Report on Industrialization of the Gold Coast, Accra.

Lewis, W A (1954), “Economic Development with Unlimited Supplies of Labour”, Manchester School, 22 (2), 139-191.

Mine, Y (2006), “The Political Element in the Works of W. Arthur Lewis: The 1954 Lewis Model and African Development”, The Developing Economies, XLVI-3, 329-355.

Tignor, R L (2006), W. Arthur Lewis and the Birth of Development Economics, Princeton University Press.

Endnotes

[1] The conventional dating for this is of course the publication of Adam Smith’s Wealth of Nations in 1776.

[2] I draw liberally on the comprehensive and excellent biography by Tignor (2006).

[3] Tignor (2006: 37) also recounts the story of how, despite his by then brilliant academic qualifications, his appointment to a Chair at Liverpool was blocked for reasons of “other considerations than high academic standing.” Finally, however, he did get his Chair, the Stanley Jevons Chair at the University of Manchester in 1948.

[4] Lewis’s transmittal letter on the report, written to Minister of Commerce and Industry K A Gbedemah and dated 5th June, 1953, notes the details of the assignment: “I have the honour to transmit herewith my Report on industrialization and economic policy, which I was commissioned to write by letter No. MCI/C,16/SF.3/18 from your Ministry, dated November 29, 1952. I visited the Gold Coast from December 15th, 1952, to January 4th, 1953, and travelled extensively in the country, covering about 1,800 miles by road and by air. I had the opportunity of visiting many industrial establishments, and I discussed the subject with as many persons as possible in the time available.” (Lewis, 1953, p. i).

[5] For an assessment of Ghana’s economy in the sixty years since independence, see Aryeetey and Kanbur (2017).

[6] For an assessment of this essay in the broader context of the evolution of economic thought, see Kanbur (2016).

[7] Tignor (2006) and Kanbur (2017) further discuss Lewis’s post-Ghana life and work.

Is ''Neo-Imperialism'' the Only Path to Development?

Branko Milanovic:

Is “neo-imperialism” the only path to development?: As is well-known (or should be well-known) Marxism has gradually developed two approaches to imperialism. Marx’s own position was (until the very last years of his life) essentially and unbendingly positive: imperialism, however brutal and disruptive, was the engine whereby more advanced social formation, namely capitalism, was introduced in and transformed more backward societies. Marx’s own writings on the British conquest of India are fairly unambiguous in that respect. Engels’ writings on the French conquest of Algeria are  (as is usually the case when one compares Engels’ and Marx’s writing styles) even more “brutal”. In that “classical” view, Western Europe, the United States and the “Third World” would all develop capitalistically, may relatively quickly come to the approximately same levels of development, and capitalism will then directly be replaced by socialism in all of them.

This view  depended crucially on two assumptions: that (1) the Western working class remain at the low level of income (subsistence) which would then (2) assure its continued revolutionary fervor. Assumption (1) was common to all 19th century economists, was supported until the mid-19th century by the observed evidence, and Marx was not an exception. But towards the end of the century, Engels had noticed the emergence of “workers’ aristocracy”  which blunted the edge of class conflict in Britain, and possibly other advanced countries. The increase in wages was “fed”, Engels argued, from colonial profits realized by British capitalists. Although the increases were mere “crumbs from capitalists’ table” (Engels) they exploded the theory of the “iron law of wages” and, collaterally, the revolutionary potential of the working class in the West.  Thus the seeds of the idea that imperialism may undermine class struggle in developed countries were sown and that had far reaching consequences. ...[continue]...

What is Inclusive Growth?

Tim Taylor:

What is Inclusive Growth?: "Inclusive growth" is an unquestionably astute rhetorical formulation. Those who use it can support both economic growth and helping the poor in a two-word phrase. But where did the term come from? Does the term have different content from seemingly similar terms like "broad-based growth" or "pro-poor growth"? Or do all these terms mean pretty much the same thing? Most of all, is "inclusive growth" a specific set of policies or just a desirable outcome?

Rafael Ranieri and Raquel Almeida Ramos explore the history of the "inclusive growth" terminology in "Inclusive Growth: Building up a Concept," published in May 2013 by the International Centre for Inclusive Growth (Working Paper #104). A little earlier,  Elena Ianchovichina and Susanna Lundstrom produced a note on "What is inclusive growth?" for the World Bank in a note published on February 10, 2009.

Apparently, the term "inclusive growth" originated in an essay "What is Pro-poor Growth?" by  Nanak Kakwani and Ernesto M. Pernia, which appeared in the Asian Development Review in 2000. They use the term "inclusive" growth only once, and in a way which makes it synonymous with "pro-poor growth." They write: "Broadly, pro-poor growth can be defined as one that enables the poor to actively participate in and significantly benefit from economic activity. It is a major departure from the trickle-down development concept. It is inclusive economic growth."

The reasons why "inclusive growth" or "pro-poor growth" seemed like a new thing back about two decades ago was rooted in how people used to talk about development economics . A common framework at that time was the notion that low-income countries were trapped in poverty, and needed big boost of investment capital to jolt themselves forward into a process of industrialization. The "Kuznets curve" held that a process of economic development first brings a period of greater inequality, as new industries take hold, which would then followed by a period of greater equality as prosperity spreads or diffuses through an economy.

All of these frameworks have been challenged in various ways. It's not clear that low-income countries are in a poverty "trap"--it's just that they have slow growth, which isn't necessarily the same thing. It wasn't clear that industrialization would necessarily diffuse through an economy: for example, Latin American countries had a reasonable degree of growth from the 1960s on, but with persistent and high levels of inequality. By the 1970s, arguments were emerging that poverty itself held back economic development, so rather than seeking development first and hoping it would reduce poverty eventually, a direct approach to improving the nutrition, health, education, and income-earning prospects of the poor could bring development. The greatest economic development success stories from the the 1960s through the 1980s, the East Asian "growth miracle" that saw the take-off of economies like South Korea, Thailand, and Taiwan didn't involve a large rise in inequality, nor did the earlier take-off of Japan's economy. As Ranieri and Ramos note:

Another core reason for the shift of development thinking towards a constructive, or at least not pernicious, relationship between growth and equity was the phenomenal developmental performance of the so-called Asian tigers: Hong Kong, Singapore, South Korea and Taiwan. The East Asian developmental experience, which unfolded over the course of a larger time span but received most attention from the 1970s into the 1980s and early 1990s, decisively challenged the existence of an inescapable trade-off between growth and equity. Combining rapid growth in per capita income with relatively stable and low inequality,  it suggested that “there might be policy measures to foster the benign combination of high growth and rapid poverty reduction” ...

But as the goal of inclusive growth became common, a number of detailed questions emerged. For example, did inclusive growth mean an improvement in the level of standard of living for the poor, or did it mean that the standard of living for the poor needed to be faster than the average for the middle and upper income groups? To what extent did the word "inclusive" apply to the broader middle-class as well as the poor? Does inclusive growth refer to income that includes government transfers, or only to income earned in the market? Does inclusive growth include only private income, or does it also refer to improved provision of government services like education, health services, sanitation and water, or reliable electricity? Should the "inclusiveness" of growth be understood at least partially in terms of institutions for democratic representation and governance?

These different concepts of inclusive growth have different policy implications. While it's easy to feel an attraction to the concept of inclusive growth, it's not clear that it offers a growth formula that works. After all, for many low-income countries around the world, it hasn't seemed that their choice was between "inclusive growth" or "noninclusive growth," but rather they were just struggling to have meaningful growth of any kind.

There's no question that the conceptual problems with "inclusive growth" are severe. Rememver, the Ramieri and Ramos working paper is written for what is called the International Policy Center for Inclusive Growth (which in turn seems to be a joint venture between the UN Development Programme and the Brazilian government), and the writers nonetheless conclude:

"[G]overnments and multilateral development institutions speak of inclusive growth and devise and label objectives, strategies and policies accordingly. But there is no clarity about what is actually meant by inclusive growth; definitions vary and tend to be vague. In general, what seems to be implied is that inclusive growth involves improving the lot of underprivileged people in particular and overall making opportunities more plentiful while lessening barriers to the attainment of better living conditions. But exactly what these entail and whether and how they are interconnected is not made clear. As the meaning of inclusiveness determines policy objectives, while it remains unclear, so do the objectives to be sought in designing policies aimed at promoting inclusive growth."

But despite the conceptual confusion, it seems to me that the terminology of "inclusive growth" does capture some important themes. The great problem of economic development is we cannot yet enunciate any compact list of government policies that reliably leads to a growth miracle. Indeed, given the many different circumstances of nations and economies, it may be that no single list exists, and that instead each country must diagnose which economic or institutional constraints are holding it back. Or it may even be that such diagnosis is too faulty to be reliable, and the best a a country can do is to work on basics like education, health, physical infrastructure, rule of law, and hope for best.

But when thinking about either the inputs to the development process or the outputs of the process, the inclusive growth concept can offer a useful reminder.  When thinking about policies to encourage development, it's a reminder that steps which help lower-income people in a direct way are worthwhile, not only because they might help to bring about economic growth but because benefiting those with lower incomes is beneficial in itself. In the general category of policies to help people in a direct way, I would include not just vaccinations and schooling and nutrition, but also policies that help people overcome the hurdles to starting a small business, or that allow people to monitor how public officials are spending money. When judging the results of development efforts, it's a useful reminder to look beyond the images of a huge and flash project like a dam, highway, factory, or mine, and consider the extent to which the project improved the day-to-day lives of lower-income people--whether through jobs and wages or through more affordable goods and services.

To steal a phrase from Ranieri and Ramos, the inclusive growth agenda is to search for a "constructive interaction of declining poverty and inequality and economic growth." That may be an insufficient agenda for economic development, in and of itself, but keep the potential for such constructive interactions in mind is surely worthwhile.

'Reality Check in the Factory'

This is from Peter Dizikes at MIT News:

Reality check in the factory: When the globalization of manufacturing took flight a few decades ago, the problem of industrial workplace safety also became fully globalized. As many scholars, human-rights advocates, and labor leaders have observed, that challenge consists of more than just persuading developing nations to create labor laws — it is also a matter of enforcing those labor laws.

Indeed, enforcement may be the greater challenge, as new factories continue to spread across vast distances in Asia, Central America, and other regions. Problems include unsafe buildings, inhumane hours, pollution, unpaid wages, and more. A common enforcement scenario today involves an underfunded regulatory agency with a small staff, and hundreds of potential cases to examine. Where do regulators even begin?

Matthew Amengual, an assistant professor at the MIT Sloan School of Management, started investigating that question on the ground in Argentina nearly a decade ago — talking to regulators, union bosses, firm managers, and key players with knowledge about labor conditions. Over time, he interviewed hundreds of people, watched inspections occur, and catalogued Argentina’s intricate regulatory politics as deeply as any outside observer has.

What Amengual found surprised him. A large thread within political science theory, drawing from the German sociologist Max Weber, holds that states can best enforce labor laws when they act as politically neutral arbiters of regulations. But such neutral arbiters largely did not exist in Argentina. There, many regulators only learned where to find malfeasance by working closely with non-neutral parties, say, union leaders, or immigrant groups. The process of regulation needed to be politicized to happen at all.

In other cases, active regulators came from the ranks of business managers who were using their knowledge to clean up their own industries. None of this was textbook political science theory. But it was how things worked. ...

A “watershed moment” in Amengual’s research occurred in the Argentine province of Cordoba, when an inspector he knew met up with a union leader representing metal workers. Soon the two of them, and Amengual, were driving off in the union leader’s car to a factory.

‘The labor unions have all kinds of information and resources that allow the inspectors to do their jobs,” Amengual says. In Cordoba, he notes, the regulators “didn’t even have cars to be able to go out and do the inspections. They didn’t have time. They didn’t have strong training.”  

But the regulators did have information they could act on, courtesy of the unions — and so they did. Enforcement would not have been possible otherwise.

That said, while regulators were busy inspecting the metal industry, they were less watchful over small-scale brickmakers, an industry where many kinds of violations may have been even more abundant, but which lacked union organizing.  

“You have enforcement, but it’s happening where the unions are present, not [always] where it’s most needed,” Amengual says.

It wasn’t just labor advocates driving regulation, however. Surprisingly, in the province of Tucuman, where sugar mills that produced ethanol were polluting the water, the move toward legal compliance occurred thanks in part to business managers who joined the government and pushed firms to meet environmental regulations.

The government hired regulators “right out of industry, they gave them short-term contracts, and some of them went right back into industry afterwards,” Amengual says. “It was a recipe for disaster, according to [political science theory]. But those were the guys who were actually doing something to enforce environmental laws.” 

How could that happen? Amengual attributes it partly to the presence of environmental groups, in conjunction with the gradual increase in regulators’ ability to assess the pollution problems. “Industry actually wanted regulators between it and the social movement pressure,” Amengual observes.

In turn, Amengual says, he would like political scientists and policymakers alike to recognize these realities of regulation. Instead of regarding politicized enforcement as a tainted form of state action, he thinks, people should realize that labor regulations are always going to be political. The question is how to let the politics spur enforcement, while not totally capturing the process.

“If this is the way policies are being enforced in much of the world, it does matter,” Amengual asserts. “I don’t think Argentina is unique.” ...

'Botox for Development'

Paul Romer:

Botox for Development: In a talk at the World Bank that I gave last week, I repeated a riff that I’ve used before. Suppose your internist told you:

The x-ray shows a mass that is probably cancer, but we don’t have any good randomized clinical trials showing that your surgeon’s recommendation, operating to remove it, actually causes the remission that tends to follow. However, we do have an extremely clever clinical trial showing conclusively that Botox will make you look younger. So my recommendation is that you wait for some better studies before doing anything about the tumor but that I give you some Botox injections.”

If it were me, I’d get a new internist.

To be sure, researchers would always prefer data from randomized treatments... Unfortunately, randomization is not free. It is available at low or moderate cost for some treatments and at a prohibitively high cost for other potentially important treatments. ...

 I work on high expected-return policies that can be implemented, with no concern about whether I will be able to publish the results from this work in the standard economics journals....

I have the good fortune of knowing that I can be a successful academic even if the journals will not publish results from the work I do. I realize that many other economists do not have this freedom. I understand that they have to respond to the incentives they face, and that the publication process biases their work in the direction of policies that are more like Botox than surgery.

But we can all work to change the existing equilibrium. It is good that economists pay careful attention to identification and causality. This inclination will be even more important as new sources of “big” non-experimental data become available. But it is not the only good thing we can do. We have to weigh the tradeoffs we face between getting precise answers about such policies as setting up women’s self-help groups (the example that Lant Pritchett uses as his illustration of what I am calling Botox for economic development) versus such other policies as facilitating urbanization or migration that offer returns that are uncertain but have an expected value that is larger by many orders of magnitude.

If economists can’t understand the tradeoff between risk and expected return, who can?

'Please Stop Hurting Poor People With Your Skills Training Programs'

 Chris Blattman:

Dear governments and aid agencies: Please stop hurting poor people with your skills training programs: Here is an incredible number: From 2002 to 2012 the World Bank and its client governments invested $9 billion dollars across 93 skills training programs for the poor and unemployed. In lay terms, that is a hundred freaking million dollars per program.

Unfortunately, these skills probably did very little to create jobs or reduce poverty. Virtually every program evaluation tells us the same thing: training only sometimes has a positive impact. Almost never for men. And the programs are so expensive—often $1000 or $2000 per person—that it’s hard to find one that passes a simple cost-benefit test.

You might think to yourself: That’s not so bad. Nobody hurt the poor. Plus the trainers and the firms probably benefited. So it’s not a total loss. If you think this, I urge you to transfer to an organization where you can no longer affect the world. I can think of a couple UN agencies with excellent benefits.

Because when you take billions of dollars a year (because the World Bank is hardly the only spender on skills programs) and you spend them on vocational bridges to nowhere, you have denied those dollars to programs that actually work: an anti-retroviral treatment, a deworming pill, a cow, a well, or a cash transfer. You have destroyed value in the world. ...

If you’re thinking to yourself “hey, I would like to read 20,000 more words on this, preferably in dry prose,” well do I have the paper for you. A new review paper with Laura Ralston: Generating employment in poor and fragile states: Evidence from labor market and entrepreneurship programs. ...

Fortunately the paper includes a 4-page executive summary. And, even better, an abstract!...

Al Gore: Cheap Coal is a Lie

This is from Al Gore and David Blood (it is relatively long, so you may want to "read the whole thing"). Comments?:

Cheap coal is a lie – stand up to the industry’s cynical fightback: It is becoming increasingly difficult to avoid the reality that the days of coal ... are numbered. In a world where carbon emissions will increasingly have to be constrained, coal, as the dirtiest of the fossil fuels, is the energy asset most vulnerable ... to seeing its market value collapse well ahead of its previously anticipated useful life. ...

But as the coal industry fights for survival, it has ... embarked on a global campaign to promote coal as the solution to energy poverty. This disingenuous claim is predicated on the notion that coal is the cheapest way of providing electricity to the one-fifth of the world’s population lacking access to an electricity grid.

This ... is extremely misleading. If ever implemented, it would actually significantly worsen the condition of the 1.3 billion people mired in energy poverty.

Most developing countries face serious challenges that are already being exacerbated by climate change-related extreme weather events. They are being battered by stronger storms, more destructive floods, deeper and longer droughts and disruptive switches in the seasonal timing of rain. ... Food security and water supplies are being compromised, natural resources stressed, and critical infrastructure crippled.

Access to affordable and reliable energy is, of course, essential for sustainable development, poverty reduction, improved access to education and healthcare, and the promotion of public safety and stable government. We should not waver in our commitment to remedy energy poverty...

But the relative merits of different energy options must be considered over the long term with an emphasis on three factors: financial cost, reliability, and impact on society and the environment. And when viewed through this lens, renewable energy – particularly solar photovoltaic energy, or PV – far outranks coal as the best future energy choice for developing nations. ...

'Do You Have to Choose Growth or Development?'

Dietz Vollrath:

Do You Have to Choose Growth or Development?: A number of posts/comments have been floating around the last few days that deal with the goals or the World Bank. Lant Pritchett published a piece that asks whether rich countries are in fact good partners for poor countries looking to develop. Pritchett is worried that rich-country development agencies (including the World Bank) have altered their focus from promoting overall economic development, and “defined development down” to be only about alleviating the conditions for the extremely poor – those earning less than $1 per day. ... Pritchett argues that this is to ignore the goals/values/hopes of actual people in those developing countries, who very much would like some material economic growth, please.

I’m very much on Pritchett’s side on this, with a caveat I’ll get to later in the post. I wrote a post back when I started this blog on defining development economics. I contrasted “development economics” with the “economics of poverty”. ...

Pritchett is arguing, in my mind, for the World Bank to return to thinking about growth economics, or about development in the classic sense. Looking for projects like ports, roads, energy generation, and the like. Scale-intensive activities that need someone to coordinate the investment, and investments that will not take place organically because they are essentially public goods. Things that might allow or push economies into sustained growth. ...

Acting to alleviate poverty is a noble, useful, moral activity. But you do not get sustained growth as a freebie on top of it. What Pritchett is arguing (I think. I’m putting words in his mouth here.) is that the Bank has presumed that their poverty alleviation efforts will generate growth as a byproduct. They haven’t, and most likely won’t. Growth is a distinct dimension of development different from poverty alleviation.

Now, here is my caveat to supporting Pritchett’s position. Who cares if it is specifically the World Bank that provides that infrastructure investment supporting economic growth? If the aims and goals of the World Bank have changed to poverty alleviation, fine. Let that be their focus, and the business of promoting growth can be left in the hands of other entities.

This has essentially already happened, and it isn’t clear why one should try to stop it. ... Development banks such as the Inter-American Development Bank, the African Development Bank, the Asian Development Bank, and the new bank proposed by China are all in the business of lending for large infrastructure projects. Let them.

I think Pritchett is wasting his time here, trying to turn the World Bank to a new (actually, old) heading. The Bank is a gargantuan organization, and has reached the point where self-perpetuation is as important as the actual mission. This isn’t to trash the World Bank, it’s no worse than any other large organization on this front. But if the nature of the interventions that the Bank wants to undertake has changed, so be it. Argue instead for increased funding to the existing development banks. Argue for the US to drop its opposition to the Chinese-led development bank. It may be useful or best to separate the poverty alleviation and growth-promotion, anyway. But you need both. Poverty alleviation alone is not a robust path to long-run sustained economic development.

'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]...

'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.

'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.

'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. ...

'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.”

'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. ...

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).

'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.

'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.

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.

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.

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. ...

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.

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.)

Entrance

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).

Post-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.

These 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.

I 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.]

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.

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).

The 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).

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 distances daily).

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?)  

School

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).

Trees are used for fuel, and are mostly gone

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.

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.

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.

• Audio (MP3) of interview
• Uncorrected Transcript

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.

"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.

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.

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.

"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?

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

[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

[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

[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

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. ...

"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?

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. ...

"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?

"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?

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.

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?

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.

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)

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

"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. ...

"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.

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.

"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.

"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.

"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.

"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.

"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.

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.

''Fruitful Decade for Many''

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

"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).]