April 23, 2008
Why export-led development?
Simon Johnson on development strategies:
Michael Spence is in favor of an manufactured export-led strategy. Larry Summers points out that it would be hard for all countries in the world to do this at the same time. And Robert Rubin emphasizes good governance.Here's a potential way to put it all together. If your governance is good, you can sustain rapid growth even based on primary commodities -- Botswana would be the leading example (but if you want to go back in time, I would suggest Norway and Sweden were mostly commodity producers at key early phases of their development). But if your governance is problematic, then commodities may be more tricky for political reasons; it's just too tempting to try to grab power and get all those "rents".
If your governance is an issue, then a strategy based on manufactured exports may make more sense. Why? After all, manufacturing is more footloose than mining (which is obviously tied to mineral deposits). It's the footloose nature of manufacturing that makes this approach work. If you expropriate some factories, the rest will leave. So you can build an equilibrium in which entrepreneurs believe they will have reasonably good protection for their property rights, even though the laws on the books or the courts or something else about the political environment is not ideal.
And it is striking that almost all countries that have grown fast for the past 30 or so years have done so with manufactured exports as a major focus. It's also encouraging that exporters of commodities more recently have moved to diversify their exports -- this is a key point from chapter 5 of the WEO.
Posted by Dingel at 09:04 AM | Comments (0) | TrackBack
April 15, 2008
William Easterly: Nobody knows anything
I highly recommend listening to the podcast of this event at the Cato Institute from about a month ago. William Easterly delivers a blistering attack on efforts to plan and organize development, calling for us "to oppose ideas that seek collective expert direction of development... basically any effort by the United Nations, IMF, or World Bank." He acerbically notes that "there are all these poor people that have the nerve to achieve development anyway in spite of the lack of our expert advice," and "I don't think anyone has run around saying, 'oh thank god, egypt has shown us the way; the secret is to export bathroom ceramics to Italy'" (30% of Egyptian export manufacturing revenues come from bathroom ceramics sold to Italy).
But Easterly's very critical remarks are born from humility, from the Hayekian insights that "nobody knows anything" and that "to plan or organize progress is a contradiction in terms." Moreover, he has bad news for those who think that the failures of planning mean we just need to preach free markets and follow a Washington Consensus-style recipe. Free market and liberal democratic institutions are endogenously produced by economic and political entrepreneurs.
Of course, Arvind Subramanian has to remind Easterly of the merits of the conventional wisdom. First, policymakers in developing economies do have to make decisions, and the position that economic development is unpredictable and unknowable isn't very helpful to those who have to work on these kinds of questions. Second, the fact that the average effect of a policy or endowment is zero does not make it irrelevant -- we want to tease out the difference between the above-average and below-average cases, if we can.
The ensuing back-and-forth between Easterly and Subramanian as they try to resolve their disagreements is very enjoyable and offers some great food for future thought.
Posted by Dingel at 09:41 PM | Comments (1)
April 03, 2008
The power of the phone
A very interesting QJE article: Mobile phones massively improve fish market arbitrage in Kerala, India, leading to lower price variability, fewer wasted fish, lower average price and greater profits.
Posted by Dingel at 07:19 AM | Comments (0)
March 31, 2008
Income Per Natural
As usual, excellent and exciting work from Michael Clemens and Lant Pritchett:
Income Per Natural: Measuring Development as if People Mattered More Than PlacesIt is easy to learn the average income of a resident of El Salvador or Albania. But there is no systematic source of information on the average income of a Salvadoran or Albanian. In this new working paper, research fellow Michael Clemens and non-resident fellow Lant Pritchett create a new statistic: income per natural -- the mean annual income of persons born in a given country, regardless of where that person now resides. If income per capita has any interpretation as a welfare measure, exclusive focus on the nationally resident population can lead to substantial errors of the income of the natural population for countries where emigration is an important path to greater welfare. The estimates differ substantially from traditional measures of GDP or GNI per resident, and not just for a handful of tiny countries. Almost 43 million people live in a group of countries whose income per natural collectively is 50 percent higher than GDP per resident. For 1.1 billion people the difference exceeds 10 percent. The authors also show that poverty estimates are different for national residents and naturals; for example, 26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States. These estimates are simply descriptive statistics and do not depend on any assumptions about how much of observed income differences across naturals is selection and how much is a pure location effect. Our conservative, if rough, estimate is that three quarters of this difference represents the effect of international migration on income per natural.
The bottom line: migration is one of the most important sources of poverty reduction for a large portion of the developing world. If economic development is defined as rising human well being, then a residence-neutral measure of well-being emphasizes that crossing international borders is not an alternative to economic development, it is economic development.
Hat tip to Wilkinson.
Posted by Dingel at 12:28 AM | Comments (0)
February 24, 2008
Flows, not stocks, of poverty
Anirudh Krishna notes that while there is a lot of research characterising the stock of poor people, there isn't much work on the flows into and out of poverty.
Here's a table from a recent presentation (pdf) by Professor Krishna.
| Escaped poverty | Became poor | Change in poverty | |
| Rajasthan | 11% | 8% | 3% |
| Gujarat | 9% | 6% | 3% |
| Andhra | 14% | 12% | 2% |
| West Kenya | 18% | 19% | -1% |
| Uganda | 24% | 15% | 9% |
| Peru | 17% | 15% | 2% |
| North Carolina | 23% | 12% | 11% |
Studies that focus on changes in the level of poverty mask a lot of "steady-state" turnover. Such churning has a lot of implications for human welfare and policy effectiveness:
Because escaping poverty and falling into poverty are caused by different factors, looking only at the figure for net change will not help to develop appropriate policy responses. The net change in poverty over any period of time is obtained by subtracting one causal stream (escape) from another and separate causal stream (descent). It does not as such have an independent causal significance.
Posted by Dingel at 07:56 PM | Comments (0)
February 22, 2008
Rich country doctors' stupid moral claims about poor country doctors
Pablo spots stupidity:
Rich countries are poaching so many African health workers that the practice should be viewed as a crime, a team of international disease experts say in the British medical journal The Lancet...“The resulting dilapidation of health infrastructure contributes to a measurable and foreseeable public health crisis,” the article said. “The practice should therefore be viewed as an international crime.”
If anyone contributing to a phenomenon that might impede economic development is a criminal, we're going to need a few more jails. Michael Clemens has already refuted this brand of moral nonsense:
"Ethical recruitment", the mis-named practice mentioned in the BBC article of taking steps to block the hiring of African professionals, treats Africa as a homogenous mass because it applies to all countries indiscriminately.If you think that limiting the movement of Ghanaian doctors is justified by the fact that Ghana doesn't have enough doctors, ask yourself: Does Ghana have enough entrepreneurs? Does it have enough engineers? Does it have enough wise politicians? The answer is 'no' across the board, so the logical conclusion of this sort of thinking is that we will somehow develop Ghana if we stand at the airport and prevent all Ghanaians with any kind of skill from leaving, preventing them from accessing the very high-paying jobs to which most of us living in rich countries have access by birthright alone. That is ethically problematic at a minimum, as well as ineffective -- trapping entrepreneurs in Ghana would not produce an efflorescence of investment.
In addition to being ethically questionable, the Lancet's claim is factually incorrect. Clemens' post also explains that the international movement of health care professionals is not a binding constraint on improving African health.
Posted by Dingel at 10:41 AM | Comments (0)
February 17, 2008
Microfinance in the United States
Well, this is ironic:
Bangladesh’s Grameen Bank has made its first loans in New York in an attempt to bring its pioneering microfinance techniques to the tens of millions of people in the world’s richest country who have no bank account.The bank’s entry into the US, its first in a developed market, comes as mainstream banks’ credibility has been hit by the mortgage meltdown and many people are turning to fringe financial institutions offering loans at exorbitant interest rates.
Posted by Dingel at 12:44 PM | Comments (0)
February 04, 2008
Can decoupling insulate Asian growth?
Decoupling is a matter of degree and type, reports the FT:
Thailand is a good example. Recent economic growth has been powered primarily by exports, about 12.5 per cent of which went directly to the US last year, down from about 20 per cent when the previous US recession struck in 2001.Yet Thailand is not as insulated as this might suggest. Sethaput Suthiwart-Narueput, chief economist at SCB Securities, says Bangkok remains vulnerable to a US slowdown since most of its exports to China – about 9.5 per cent of total shipments, up from 4.4 per cent in 2001 – are components used to make goods bound for the US.
The picture is not black and white and decoupling is not an “either/or phenomenon”, says Paul Sheard, global chief economist at Lehman Brothers. Asia emerged relatively unscathed from the 1991 US recession but was much harder hit by the “tech recession” of 2001. Similarly, this time, depending on the precise nature of any downturn, commodity-rich Australia, Indonesia and Malaysia might fare better than, say, countries specialising in electronics, such as Taiwan or South Korea.
Posted by Dingel at 09:44 AM | Comments (0)
January 26, 2008
The cost of high wages
Tim Worstall flirts with the idea that wages are too high in some poor African countries.
Posted by Dingel at 02:14 PM | Comments (0)
January 22, 2008
A Chinese crash?
Some say China is due for a stock market crash.
Posted by Dingel at 08:42 AM | Comments (0)
January 15, 2008
Why India lags behind China
At VoxEU, Arvind Panagariya, previewing his forthcoming India: The Emerging Giant
(Disclosure: I am now editorial assistant and copy editor at VoxEU.)
Posted by Dingel at 09:08 AM | Comments (0)
December 19, 2007
PPP revisions for India and China
The ADB's revised PPP estimates for China and India are now confirmed by new World Bank estimates that reduce the two economies by approximately 40%.
Posted by Dingel at 11:32 PM | Comments (0)
December 12, 2007
Arbitrary Development Numbers: MDGs
William Easterly has a new paper exposing silly development bureaucracy numbers: the Millennium Development Goals.
Measuring social and economic progress is not at all as straightforward as the discussion of the MDGs makes it seem. Setting targets in a particular way will make some regions look better and others look worse depending on a number of choices that any target-setting exercise must make. These choices include the following:
1. Choice of benchmark year
2. Linear vs. nonlinear relationships with time or per capita income
3. Absolute changes versus percentage changes
4. Change targets versus level targets
5. Positive vs. negative indicators
There has been very little discussion of these choices that were made in setting the MDGs. Sometimes, the choices made just seem a priori to make no sense; other times, they seem arbitrary and it is unclear on welfare grounds which measure to prefer; finally, the choices do not seem consistent across the seven MDGs. Unfortunately, as this paper will argue, many of the choices made had the effect of making Africa’s
progress look worse than is justified compared to other regions.
For example, for the poverty goal, countries are given credit when a citizen exits poverty, but met with silence if a citizen moves from near-poverty to a comfortable life. And why are the targets set vis-a-vis 1990, when the grading was announced in 2000? To meet targets, "17 African countries... would need 6 percent per capita growth over 2005-2015": failing to meet the target is merely failing to produce a miracle.
Read the full paper. See a prior installment in arbitrary development numbers.
[HT: Pienso]
Posted by Dingel at 10:12 PM | Comments (0)
December 07, 2007
Congress frustrated by MCC independence
The NYT reports that some members of Congress are unhappy with the Millennium Challenge Corporation's rate of progress - it hasn't spent fast enough. They want to grab the MCC's unspent billions and make it come back to Congress when it needs money. This attack on the MCC's independence undermines its founding purpose and has serious consequences:
If the agency gets the lesser Senate amount, under the current rules requiring the money up front, Burkina Faso, a West African country that has spent more than two years qualifying for and drafting its $560 million to $620 million plan, will get nothing, agency officials said. Tanzania and Namibia are ahead of it in line...In small, poor countries like Burkina Faso, every burp and hiccup of an aid agency like the Millennium Challenge Corporation is news — and often front page news. David Weld, the agency’s country director for Burkina Faso, said he did not know how he could face people there if Congress did not come through with enough money to help them.
“What type of message does that send to Burkina Faso, a country that has spent a huge amount of political capital and money on this process?” he asked. “What does that tell the Togos, the Nigers that want to become eligible? It tells them: Do everything like Burkina Faso, make all these reforms, spend millions of your own money, and then maybe at the end we might be able to sign a compact with you — or maybe not.”
Posted by Dingel at 03:26 PM | Comments (0)
December 04, 2007
Foreign Capital and Economic Growth
E. Prasad, R. Rajan & A. Subramanian say that capital outflows are correlated with greater economic growth.
Posted by Dingel at 04:12 PM | Comments (0)
November 21, 2007
Hanke recommends free banking for Zimbabwe
Steve Hanke thinks Zimbabwe should adopt a new monetary regime by allowing competition between privately issued currencies. Given the current disaster, with inflation exceeding one thousand percent, that sounds quite reasonable. But the reason the country is in the midst of hyperinflation is that Robert Mugabe is not reasonable, so there's little reason to call for free banking in Zimbabwe.
Posted by Dingel at 01:16 PM | Comments (0)
November 15, 2007
Promising African growth rates
Is Africa turning the corner?
Posted by Dingel at 08:02 PM | Comments (1)
November 14, 2007
New PPP estimates for China and India
The acting director of the US Treasury department’s Asia Office says that the world just gained a few hundred million poor people:
In a little-noticed mid-summer announcement, the Asian Development Bank presented official survey results indicating China’s economy is smaller and poorer than established estimates say. The announcement cited the first authoritative measure of China’s size using purchasing power parity methods. The results tell us that when the World Bank announces its expected PPP data revisions later this year, China’s economy will turn out to be 40 per cent smaller than previously stated...The number of people in China living below the World Bank’s dollar-a-day poverty line is 300m – three times larger than currently estimated... The ADB’s announcement also indicates that the number of dollar-a-day poor in India is closer to 800m than the current estimate of 400m.
Calculating the number of poor people is a difficult task, and disagreements about methodology abound, so I don't take this FT piece as authoritative, but the issue warrants renewed attention.
I believe this ADB report is the one mentioned, though I cannot find any figures describing the number of people below the poverty line.
Posted by Dingel at 05:07 PM | Comments (1)
November 07, 2007
"Targets like 0.7 percent are like the Vatican’s tithe or the Islamic zakat."
Jagdish Bhagwati did a Q&A session with the IHT. Here's his comment on Jeff Sachs:
My worry is that such a technocratic approach will – if aid flows are increased precipitously (right now, there is no evidence that they will), and aid is seen to be wasted and misused – turn the spring in aid into winter. He will then have done for Africa, in the public eye, what he did for Russia with his technocratic shock therapy: an outcome that every serious Africanist scholar I have talked to fears.
Read the full interview for his thoughts on Africa's absorptive capacity and other issues.
Posted by Dingel at 06:45 PM | Comments (0)
Greg Mills: "The New Imperialists"
Greg Mills sees Paris Hilton and "white, generally loud" humanitarians in "a shabby-chic uniform of T-shirt, jeans and sandals" heading to Africa and decries them as "the new imperialists":
It perpetuates perceptions of helplessness and a victim mentality. At a time when many have realized that African development depends on Africans determining their own policies and making those choices, such actions transfer power and emphasis away from the continent's decision-makers.
[HT: Tom Palmer]
Posted by Dingel at 09:08 AM | Comments (0)
October 27, 2007
Exports & HIV in Africa
Emily Oster finds a downside to exports in Africa - transportation and trade spread epidemics (pdf):
I find a large and significant positive relationship between HIV and exports: a doubling of exports appears to lead to as much as a quadrupling in number of new HIV infections, which suggests that if exports overall had been 25% lower in Africa over the course of the epidemic only about half as many people would have become infected. In addition, this relationship seems to explain at least some of the very large decline in HIV prevalence in Uganda in the 1990s, which is typically attributed to the ABC (Abstain, Be Faithful and use Condoms) campaign, a widely replicated anti-HIV education effort. A decline in the coffee market accounts for between 30% and 60% of the decline in HIV incidence, suggesting the success of the ABC campaign may be overstated...A central concern with interpretation is the possibility that is not the export-transit mechanism which drives the result but, rather, some omitted variable (for example, GDP) which drives both exports and HIV. Although this is potentially consistent with the primary results, I argue that there is evidence in favor of a causal interpretation of exports. First, the relationship between HIV and exports is stronger in areas with a greater density of roads and areas closer to ma jor cities, which is consistent with the transit mechanism. Second, instrumenting for export volume with world commodity prices also points to a positive and significant relationship. Third, the relationship between exports and HIV is stronger in countries where the major export is more closely linked to trucking. Finally, new HIV infections can be linked directly to truck imports, which strongly points to an effect of transit.
Of course, it's not international trade per se that increases the spread of HIV. If economic activity within national borders spurred increased use of truckers to transport goods, that would result in the same effect. And the benefits of economic growth may outweigh the costs of higher HIV incidence. Nonetheless, this isn't good news.
[HT: MR]
Posted by Dingel at 04:13 PM | Comments (0)
October 18, 2007
Simon Johnson: Complete the Doha Round
IMF Chief Economist Simon Johnson says that globalization is a great oportunity for poor countries, but undereducated citizens may have difficulty enjoying the benefits. The result will be increasing income inequality. He recommends more trade liberalization, including the completion of the Doha Round, to spread the benefits more equally.
Posted by Dingel at 01:16 PM | Comments (0)
September 29, 2007
Why economists need epidemiologists
Tim Harford says that Emily Oster's work on AIDS has serious flaws:
One of her celebrated articles is an analysis of the Aids epidemic in Africa: she offers her own epidemiological model and concludes that the virus is best fought by treating other sexually transmitted diseases. The research was published in the prestigious Quarterly Journal of Economics (QJE) in May 2005.But Oster’s conclusion is probably wrong. Epidemiologists embraced the idea of treating other sexually transmitted diseases a long time ago, but it has been discredited (to their deep disappointment) by a series of rigorous clinical trials. Oster says that the most convincing evidence came out after her paper was written; still, she has repeated her recommendations more recently in Esquire magazine.
Oster also made a mistake in handling her data. The error – which she has acknowledged, and which makes a modest but noticeable difference to her calculations – was quickly spotted when I asked two epidemiologists to review her research. The QJE will be publishing a correction.
Oster quite reasonably says that her article has other merits. But it might have been much better if the epidemiologists had taken a look long before the FT got involved.
The problem is that the economists couldn’t get the epidemiologists to take the research seriously enough to comment. Oster tells me that she tried, but she couldn’t name an epidemiologist who was familiar with her QJE paper. And Larry Katz, the QJE editor who published Oster’s paper, acknowledges that the epidemiologists would not typically agree to review papers for the QJE.
Props to Harford for his productive contributions to the research process.
Posted by Dingel at 02:16 PM | Comments (0)
September 17, 2007
"Cultural assimilation, cultural diffusion and the origin of the wealth of nations"
Quamrul Ashraf & Oded Galor propose a cultural explanation for economic growth, but it's not the usual story:
A thousand years ago, Asia was ahead. Why is Europe richer now? Asia was geographically less vulnerable to cultural diffusion and thus benefited from enhanced assimilation, lower cultural diversity and greater accumulation of society-specific human capital; this was an edge in the agricultural stage. Greater cultural rigidity, however, diminished the ability to adapt to a new technological paradigm, delaying their industrialisation.
Full Vox column.
Posted by Dingel at 10:03 AM | Comments (0)
September 05, 2007
Make Poverty History... very slowly
"The grievous truth is that although a range of public actions can and should help many people, most of the bottom billion will not -- and cannot -- be freed from poverty in our lifetimes." - Michael Clemens
Posted by Dingel at 10:36 PM | Comments (0)
September 04, 2007
Trade and inequality -- in developing countries
From the NBER Digest:
While trade liberalization was expected to help the less skilled, who are presumed to be the relatively abundant factor in developing countries, there is overwhelming evidence that they are generally not made better off relative to workers with higher skill or education levels.One of the few uncontroversial insights of trade theory is that changes in a country's exposure to international trade, and to world markets more generally, affect the distribution of incomes within the country. Not surprisingly, the entry of many developing countries into the world market in the last three decades coincides with changes in various measures of inequality in these countries. What is more surprising is that the distributional changes went in the opposite direction from what the conventional wisdom suggests: while trade liberalization was expected to help the less skilled, who are presumed to be the relatively abundant factor in developing countries, there is overwhelming evidence that they are generally not made better off relative to workers with higher skill or education levels.
In Distributional Effects of Globalization in Developing Countries (NBER Working Paper No. 12885), authors Pinelopi Koujianou Goldberg and Nina Pavcnik attempt to explain this paradox. They question whether the underlying conventional wisdom is too stylized to capture the reality of the developing world and they ask whether other forces at work may have overridden the effects of globalization. They also examine the mechanisms through which globalization has affected inequality and try to determine whether general lessons can be drawn from the experience of the last three decades.
The authors' findings suggest a contemporaneous increase in various measures of globalization and inequality in most developing countries, although establishing a causal link between these two trends has proven more challenging. However, the evidence has provided little support for the conventional wisdom that trade openness in developing countries would favor the less fortunate.
The authors also find little support for the premise that adjustment to changing economic conditions would occur through labor reallocation from declining to growing sectors of the economy, at least at the aggregate industry level usually considered in traditional international trade models of comparative advantage. A common finding of studies of the effects of trade reforms in developing countries is the lack (or small magnitude) of sectoral labor reallocation. In some instances, the data also suggest that the wage response to trade barrier reductions is more pronounced than the employment response.
The cumulative evidence points to constrained labor mobility as one plausible explanation for the lack of sectoral reallocation. Indeed, the strict labor market regulation that many developing countries had in place prior to the recent reforms is a potential source of labor market rigidities. The importance of these rigidities is likely to diminish in the long run, especially since many developing countries have by now significantly liberalized their labor markets.
The authors' findings highlight several globalization-based explanations for the increased relative demand for more educated workers within industries. In some cases, trade reforms that liberalized, in addition to goods flows, factor flows (most importantly capital) may have generated additional demand for skilled workers. In other instances, globalization affected not only trade in final goods, but also trade in intermediate goods that, from the developing country perspective, were skill-intensive. Even in those cases where liberalization was concentrated on final goods, the highest trade barrier reductions often were concentrated - contrary to conventional wisdom - on low-skill sectors that originally had enjoyed a higher level of protection. Technological change that favored skilled workers may have interacted with trade reforms to further depress the relative demand for low-skilled workers. Increased exposure to currency fluctuations boosted exports from developing count! ries in some cases and provided incentives to upgrade the product-mix of their domestic plants. These compositional changes may have fostered a quality upgrading of plants that further contributed to the widening of the wage gap between skilled and unskilled.
Overall, it appears that the particular mechanisms through which globalization affected inequality are country-, time- and case-specific; that the effects of trade liberalization need to be examined in conjunction with other concurrent policy reforms; and that implementation details of particular policies matter. This conclusion may seem disappointing, according to the authors, as it offers no simple predictions regarding the distributional impact of globalization and hence no straightforward recipe for remedial measures to alleviate potentially adverse impacts. Yet, it is hardly surprising given the heterogeneity of countries, reforms, and overall globalization experience within the developing world.
Finally, the authors emphasize that most of the existing evidence refers to narrow measures of inequality such as the skill premium, or wage inequality. Broader concepts of inequality that focus on consumption and general well-being have received substantially less attention. The very scant evidence that exists on these issues, however, seems to suggest that the labor market effects of globalization dominate its effects on consumption through relative price changes, so perhaps the focus on wages alone is not as limiting as one would have thought.
Posted by Dingel at 09:23 PM | Comments (0)
August 13, 2007
Chinese cloning
Here's a great Popular Science article on China's industrial development via copying developed country manufacturers. I'm not terribly concerned about the patent violations slowing innovation, but the trademark issues are troubling from a consumer perspective in terms of knowing who actually made the good you're purchasing.
[Hat tip: Patri.]
Posted by Dingel at 07:38 AM | Comments (0)
July 18, 2007
China's product quality
Via David Altig, a WSJ piece that's skeptical of China's ability to ascend the product quality ladder:
China's industries are composed of hundreds of thousands of tiny factories and farms -- plus traders, brokers, haulers and agents, all of whom take control of the goods and materials but add little value to the product. With every additional player in the chain, the cost, risk and time grow. Effective quality control in this environment is difficult... As the product recalls demonstrate, China can barely make low-value goods reliably, much less higher-value ones. The problems are structural, not the result of a few bad apples...To compete head-to-head with the American economy, China will have to revolutionize the very way its industries are organized. It must shake out the thousands of low-value middlemen and integrate the tiny factories into larger, more competitive companies. It must train a workforce in modern technology and business practices. And, it must instill transparency and a uniform rule of law. Such an effort could span generations.
These observations complement more scholarly work in weakening Dani Rodrik's argument that China's export profile is unusually sophisticated.
Posted by Dingel at 10:18 PM | Comments (0)
July 17, 2007
Aid & Growth
Dani Rodrik says that the Rajan & Subramanian paper (pdf) on the impact of foreign aid (now forthcoming in the REStat) is "most comprehensive analysis to date of the cross-national evidence on the effect of aid and growth." The verdict? There is little evidence that aid significantly impacts growth.
Posted by Dingel at 07:27 AM | Comments (0)
July 13, 2007
Motivations for development
Paul Collier argues against the emotional approach to development taken by some activists and NGOs:
To date policy towards the bottom billion has been driven predominantly by guilt: America’s guilt about slavery, Europe’s guilt about colonialism. Unfortunately, guilt is an appallingly bad basis for action. It leads into the headless heart: the belief that we should ‘atone’ by charity. But its worst effects are within the bottom billion: these small societies lack the intellectual scale to free themselves from our mental models...Guilt has seldom been an effective driver of change: in the rich countries we are likely to get far more impetus from the tried and tested psychology of enlightened self-interest. A world in which the bottom billion continue to diverge from the rest of mankind bequeaths to our children a legacy of insecurity for which their pampered lives will make them ill-prepared.
Posted by Dingel at 07:14 PM | Comments (0)
July 08, 2007
Africa's image
William Easterly writes in the LA Times:
Today, as I sip my Rwandan gourmet coffee and wear my Nigerian shirt here in New York, and as European men eat fresh Ghanaian pineapple for breakfast and bring Kenyan flowers home to their wives, I wonder what it will take for Western consumers to learn even more about the products of self-sufficient, hardworking, dignified Africans. Perhaps they should spend less time consuming Africa disaster stereotypes from television and Vanity Fair.
Last summer, Shreya Shah wrote:
With better media coverage, the United States and the world would realize that there is more to Africa than death, disease, disaster, and despair. The promotion and visibility of a brighter Africa within society-at-large will play a significant role in creating cultural pride, encourage good business practice and sound investment in African businesses.
Posted by Dingel at 05:16 PM | Comments (0)
July 03, 2007
The IMF and WB in Africa
Ha-Joon Chang has a new book promoting protectionism, titled Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism
As for Africa, its per capita income grew relatively slowly even in the 1960s and the 1970s (1-2 per cent a year). But since the 1980s, the region has seen a fall in living standards. There are, of course, many reasons for this failure, but it is nonetheless a damning indictment of the neoliberal orthodoxy, because most of the African economies have been practically run by the IMF and the World Bank over the past quarter of a century.
While I agree that the IMF and the World Bank haven't done a great job, I think it's wrong to portray them as the caretakers of Africa and the institutions responsible for its disappointing growth rates. They've never had that much power, and I've never seen another academic suggest it. Research on African economic performance has focused on institutions and geography. As Paul Collier summarizes (pdf):
Africa’s growth failure has attracted competing explanations. During the 1980s the World Bank diagnosed the problem as inappropriate economic policies, Berg (1981) offering the first clear statement of this position. Bates (1981) was the first to explain these dysfunctional policy choices in terms of the interests of powerful groups, notably the taxation of export agriculture. During the 1990s the limited response to reform induced a broader search for explanations (Collier and Gunning, 1999, 1999a). Recently three further explanations have gained currency: institutions (Acemoglu et al., 2001), leadership (Jones and Olken, 2005), and geography (Sachs, 2003).
Is there any academic research that concurs with Chang in blaming the IMF and World Bank for Africa's disappointing growth?
Posted by Dingel at 06:00 PM | Comments (1)
June 26, 2007
Schools of thought
People in the first group have names like Bono, Angelina Jolie, Bob Geldof, Bill Gates, John Edwards, and Jeffrey Sachs. People in the second group have names like Abhijit Banerjee, Tim Besley, Francesco Caselli, Esther Duflo, Lant Pritchett, and Mark Rosenzweig. Guess which point of view gets the bulk of media coverage and of public attention.
Dani Rodrik describes two schools of thought in development economics, and it's not the hackneyed market vs. state or Sachs vs Easterly dichotomies.
Posted by Dingel at 02:40 PM | Comments (0)
June 18, 2007
Running to the hills
Very interesting work on African geography and development by Nathan Nunn & Diego Puga:
In Africa, between 1400 and 1900, four simultaneous slave trades, across the Atlantic, the Sahara Desert, the Red Sea and the Indian Ocean, led to the forced migration of as many as 18m people. The economies they left behind were devastated: political institutions collapsed, and societies fragmented.For African people fleeing this slave trade over the centuries, rugged terrain was a positive advantage. Enslavement often took place through raids by one group on another, and hills and mountains provided plenty of lookout posts and hiding places (caves, for example) for those trying to escape. In general, countries with flatter, more passable terrain lost more of their population to the traders.
Today, however, that same geographical ruggedness is an economic handicap, making it expensive to transport goods to port; raising the cost of irrigating and farming the land; and simply making it more expensive to do business... hundreds of years of flight from the slave trade has left the African population disproportionately concentrated in hilly areas...
So the slave trades left a doubly toxic economic legacy in Africa: not only did they devastate the population in many areas, with long-lasting impacts which still persist centuries later; they also left the African population concentrated in areas which make contemporary economic development harder.
From the non-technical column. Technical discussion paper.
Posted by Dingel at 10:12 PM | Comments (0)
May 30, 2007
African Growth Prospects
Johnson, Ostry & Subramanian - "The Prospects for Sustained Growth in Africa: Benchmarking the Constraints" - NBER & IMF working paper, March 2007
I saw Simon Johnson present an early version of this paper -- it's very interesting.
IMF blurb:
Africa is experiencing its strongest growth in years. But for those who view Africa's prospects through the perspective of the "deep" determinants of development—geography, institutions, and history—the outlook still seems somewhat bleak. The paper tries to assess Africa's prospects by comparing Africa today with countries that were similarly weak in the past—in terms of their institutional development—and yet managed to escape from poverty.The authors say the data suggest that these deep indicators, especially for a group of "promising" countries, are not much worse in Africa today than they were in much of East Asia in the early 1960s or in Vietnam and China around 1980. There are inherited institutional weaknesses in Africa—and internal conflict and social fragmentation remain concerns—but the East Asian experience demonstrates that some institutional weaknesses can be fixed. So the good news for countries seeking to escape their current poverty trap is that breaking away from their institutional legacy is possible because it has been done by others.
Creating a stronger and more dynamic manufacturing export sector is likely to be one of the keys to sustaining growth. To achieve this, though, reducing direct regulatory costs for exporters and avoiding real exchange rate overvaluation will be essential. And on these scores, the authors see risks going forward that were less of an issue for the East Asian escapees: commodity-based growth and sizable aid inflows that partly underpin the positive prognosis for Africa may impede institutional development and make it harder to avoid real exchange rate overvaluation. Sub-Saharan Africa's escape from poverty, although certainly possible, may be more challenging than it was for East Asia.
Posted by Dingel at 10:54 PM | Comments (0)
May 19, 2007
Takeoffs
This abstract presents some interesting findings, as well as a few puzzles:
This paper identifies factors associated with takeoff -- a sustained period of high growth following a period of stagnation. We examine a panel of 241 "stagnation episodes" from 146 countries, 54 % of these episodes are followed by takeoffs. Countries that experience takeoffs average 2.3% annual growth following their stagnation episodes, while those that do not average 0% growth; 46% of the takeoffs are "sustained," i.e. lasting 8 years or longer. Using probit estimation, we find that de jure trade openness is positively and significantly associated with takeoffs. A one standard deviation increase in de jure trade openness is associated with a 55% increase in the probability of a takeoff in our default specification. We also find evidence that capital account openness encourages takeoff responses, although this channel is less robust. Measures of de facto trade openness, as well as a variety of other potential conditioning variables, are found to be poor predictors of takeoffs. We also examine the determinants of nations achieving sustained takeoffs. While we fail to find a significant role for openness in determining whether or not takeoffs are sustained, we do find a role for output composition: Takeoffs in countries with more commodity-intensive output bundles are less likely to be sustained, while takeoffs in countries that are more service-intensive are more likely to be sustained. This suggests that adverse terms of trade shocks prevalent among commodity exports may play a role in ending long-term high growth episodes.
Joshua Aizenman & Mark Spiegel - "Takeoffs" - NBER WP 13084. Ungated copy here (pdf).
Posted by Dingel at 09:22 PM | Comments (0)
Venezuelan update
"[President Hugo] Chávez has now reached the Robert Mugabe level of economic incompetence by messing with the farm sector. Let's hope he does not move past that to the Mao Zedong/Great Leap Forward level of economic mismanagement." -- Dan Drezner
The latest issue of Foreign Policy has a provocative piece by Alvaro Vargas Llosa on the "Latin American Idiots" who love Chávez and President Evo Morales of Bolivia.
Posted by Dingel at 06:07 PM | Comments (0)
May 15, 2007
Microfinance skepticism
Emmanuel points to an article in the American by Tom Bethell, who is skeptical of Muhammad Yunus.
Posted by Dingel at 07:32 AM | Comments (0)
May 07, 2007
World Development
via Johan Norberg: "For the first time, more people worldwide work in the service sector than in agriculture (the biggest employer the last 10,000 years)."
Posted by Dingel at 09:10 AM | Comments (0)
May 04, 2007
Under one billion
For the first time since the World Bank started measuring poverty, the number of people in extreme poverty around the world is now fewer than 1 billion.
WDI press release here.
Posted by Dingel at 08:12 AM | Comments (0)
March 29, 2007
Birdsall on Inequality
Nancy Birdsall of CGD will be doing an online Q&A session about globalization and inequality tomorrow. Submit questions here.
Posted by Dingel at 07:36 PM | Comments (0)
March 27, 2007
WEF: Big Names on Aid
Bill Gates, Paul Wolfowitz, Ellen Johnson-Sirleaf, and Bill Easterly discuss scaling innovation in foreign aid at the World Economic Forum.
Hat tip: Emmanuel
Posted by Dingel at 10:14 AM | Comments (1)
March 25, 2007
African economies burdened by "one of the worst ideas ever"
Easterly's Law: "The poorer the country, the poorer the economic analysis applied to it."
Read the full WSJ piece courtesy of Mark Thoma, who also provides reasons to be skeptical of Easterly's claims.
Posted by Dingel at 11:54 AM | Comments (0)
March 22, 2007
"Millennium Development Holes"
An editorial in Nature criticizes the Millennium Development Goals for projecting a "pseudoscientific" image:
Every year, the UN rolls out reports with slick graphics, seemingly noting with precise scientific precision progress towards the goals. But the reports mask the fact that the quality of most of the underlying data sets is far from adequate. Moreover, the indicators often combine very different types of data, making aggregation and analysis of the deficient data even more complicated.There are decent data for just a handful of indicators, such as child mortality, but for most of the 163 developing countries, many indicators do not even have two data points for the period 1990–2006. And few developing countries have any data for around 1990, the baseline year. It is impossible to estimate progress for most of the indicators over less than five years, and sparse poverty data can only be reliably compared over decades. To pretend that progress towards the 2015 goals can be accurately and continually measured is false.
[Hat tip: Ruth Levine at CGD]
Posted by Dingel at 05:20 PM | Comments (0)
March 16, 2007
"Africa has enormous potential"
IMF managing director Rodrigo De Rato is upbeat on Africa.
Posted by Dingel at 04:01 PM | Comments (1)
March 14, 2007
Aid & Institutions
A pair of CGD papers on aid and institutions recently caught my eye:
In "Do No Harm: Aid, Weak Institutions, and the Missing Middle in Africa," Nancy Birdsall argues that Africa is better characterized as being in an institutional trap than a poverty trap, and that aid donors need to consider their impact upon recipients' aid dependency, fiscal management, and government hiring of skilled personnel.
In "An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State Building in Sub-Saharan Africa," Todd Moss, Gunilla Pettersson, and Nicolas van de Walle summarize literature describing the negative impact of foreign assistance upon long-term institutional development and recommend that donors avoid directly funding poor governments so as to preserve their incentives to build more effective public institutions. Development assistance could instead fund the eradication of endemic diseases, peacekeeping activities, and global public goods.
Posted by Dingel at 10:29 AM | Comments (0)
March 13, 2007
Todd Moss on Africa
Voice on America posted excerpts from an interview with CGD fellow Todd Moss yesterday:
“Single solutions (to poverty in Africa) are tempting: more aid, more democracy, eradicate corruption, get prices right, get better leadership. But inevitably, these single answers leave true believers disheartened. In the book I call Africa ‘the graveyard of silver bullets’,” quips Todd Moss, a respected international economist and author of the recently-released book, ‘African Development: Making Sense of the Issues and Actors’...“The saintly reputation in some circles of NGO’s is sometimes underserved. Many NGO’s loudly demand to be heard and claim to speak for the people, but are themselves often accountable to nobody.”...
Moss labels the aid industry in Africa a “mess of confused ideas” and “dysfunctional agencies” that is in itself part of Africa’s problem.
Much of the data on which efforts at development in Africa are based is of “pretty bad quality”, says Moss.
“Even very basic information such as GDP, exports, number of children in school, or how much a particular country spends on hospitals, is little more than an educated guess. Sometimes formal surveys are done - through a census or other formal agencies - but these are a lot more infrequent than you would think,” he warns...
“As a whole there is still no clear way to turn Africa around. Even if its recognized that external efforts can only do so much, and that change must come from within, the development community still really does not know how to encourage that process. In short, we simply do not know how to make Chad more like South Korea.”
It's not all bad news. Read more. Unfortunately, the audio link is broken at the moment.
Posted by Dingel at 11:16 PM | Comments (0)
March 09, 2007
Globalization & Poverty
The NBER has posted a summary of a project on globalization and poverty edited by Berkeley's Ann Harrison.
Posted by Dingel at 06:40 PM | Comments (0)
March 07, 2007
Is the Red campaign in the red?
Advertising Age calculates that around $100million has been spent blanketing billboards and magazines with images of Bono and other "celebrities", while the total sum raised for Africa is $18million.
Posted by Dingel at 06:06 PM | Comments (3)
January 31, 2007
Zimbabwe's bad news
Zimbabwe may be slowly imploding. Obsidian Wings highlights a plethora of bad news from the country, all within the last ten days. Hat tip: DeLong.
Posted by Dingel at 09:20 PM | Comments (0)
December 30, 2006
State-Dependent Intellectual Property Rights Policy
Daron Acemoglu & Ufuk Akcigit:
What form of intellectual property rights (IPR) policy contributes to economic growth? Should technological followers be able to license the products of technological leaders? Should a company with a large technological lead receive the same IPR protection as a company with a more limited lead? We develop a general equilibrium framework to investigate these questions... We prove the existence of a steady-state equilibrium and characterize some of its properties. We then quantitatively investigate the implications of different types of IPR policy on the equilibrium growth rate. The two major results of this exercise are as follows. First, the growth rate in the standard models used in the (growth) literature can be improved significantly by introducing a simple form of licensing. Second, we show that full patent protection is not optimal from the viewpoint of maximizing the growth rate of the economy and that the growth-maximizing policy involves state-dependent IPR protection, providing greater protection to technological leaders that are further ahead than those that are close to their followers. This form of the growth-maximizing policy is a result of the "trickle-down" effect, which implies that providing greater protection to firms that are further ahead of their followers than a certain threshold increases the R&D incentives also for all technological leaders that are less advanced than this threshold. [emphasis added]
Given the credentials of the authors, I'm sure the theoretical work is outstanding (non-gated version here). But state-dependent IPR protection strikes me as implausible in practice. How adept are government bureaucrats at identifying technological leaders and the size of their lead? How resistant are they to regulatory capture?
Posted by Dingel at 10:52 AM | Comments (0)
December 18, 2006
Genetic distance and development
Discussion of a recent paper by Enrico Spolaore and Romain Wacziarg:
Wacziarg’s most recent work relates genetic distance between populations to differences in economic outcomes, such as their income per capita, to better understand the process by which innovations diffuse from one culture to the next. He found that countries whose populations are the most remote genetically from the populations that developed major innovations over the past 200 years are the least well off. While geographical remoteness also plays a role, it is genetic distance that most strongly correlates with how rich or poor a nation will be. The research also suggests that the main way genetic distance hinders the diffusion of development is by creating cultural barriers. The greater the genetic distance, the greater the cultural barriers are to the flow of ideas and technologies...Genetic distance is therefore a good indicator of how long ago two groups went their separate ways. “Greater time apart corresponds with greater cultural differences between these groups also, because they’ve had a longer period in which to develop different languages, customs, norms, and habits,” Wacziarg says...
Wacziarg is adamant, however, that such findings do not mean that certain groups are more genetically prone to wealth or poverty. “We’re not looking at what kind of genes are involved, we’re just looking at genetic distance between groups,” says Wacziarg, who has conducted one study on the diffusion of development with Enrico Spolaore of Tufts University. “There have been tremendous reversals in fortune over time. A thousand years ago the richest countries were China and India. Europe was a mess—in the middle of the Dark Ages. If there were something genetic about being European that made you rich, one would suspect it would have made you rich consistently throughout time.”
The relationship between genetic distance and economic status is a function of the closeness of a given group to the locus of an innovation or new invention—something he discerned by comparing the wealth of various groups in different time periods. “Europe in the 19th century benefited economically from developments that led to the Industrial Revolution, for example,” he says. “People in China, say, who didn’t have the same language, norms, habits, and values, took 150 years to start benefiting from those developments. They were physically and culturally far from the invention.”
Hat tip to Pienso.
Posted by Dingel at 10:08 AM | Comments (0)
December 08, 2006
Trade preferences & heterogenous firms
Contra the Washington Post's editorial, Svetlana Demidova, Hiau Looi Kee, and Kala Krishna provide additional evidence that trade preferences aren't obviously beneficial to development in their newest NBER working paper:
This paper models the responses of firms that are heterogenous in productivity to the different types of trade policies they face in different product and export destinations. It presents direct evidence supportive of the model's predictions using a dataset of Bangladeshi garments exporters. In particular, it focuses on the effect of differences in trade polices, trade preferences, and the rules of origin (ROOs) needed to obtain them, on the pattern of firm exports and performance...[O]ur work suggests that trade preferences granted to developing countries that favor more capital intensive sectors can distort their pattern of investment and trade. While such preferences tend to spur investment and exports of the more capital intensive sectors, they also reduce the average productivity of exporters and bias export away from the direction of natural comparative advantage. Consequently, even liberal preferences may be far less effective in promoting development than expected...
Thus, the contribution of this paper is as follows. First, our heterogenous firm model shows how differences in trade policy of the EU and US and in the preferences granted by them to Bangladesh, in combination with the ROOs needed to access them, act as a sorting mechanism for firms. This results in productivity differences between firms that differ in their product lines and markets. We are able to capture both how firm productivity differs according to the toughness of the exporting market, and how the toughness of the market depends on ROOs and trade policy. The former channel is missing in homogenous firm models... Finally, in the area of trade policy-for-growth, our paper suggests that liberal preferences given by the EU to Bangladesh, while spurring exports of the non-woven sector, may reduce its average productivity. Given that the non-woven sector is twice as capital intensive as the woven sector, our result further implies that exports of Bangladesh are biased away from the direction of its natural comparative advantage, and as a result, may be less effective in promoting development.
Posted by Dingel at 10:29 AM | Comments (1)
December 05, 2006
Bad policy caused China's great famine
Here's an interesting tidbit from a paper (pdf) on the impacts of China's great famine in 1959-61 by Xin Meng and Nancy Qian that's full of interesting stuff:
Officially, the cause of the famine was a fall in grain output due to bad weather. Several recent studies have argued that although there was a fall in output, the "three years of natural disasters" (san nian zi ran zai hai ), was largely driven by a set of misguided policies (Kueh, 1995; Li and Yang, 2005; Peng, 1987; Yao, 1999; Yang, 1996; Chang and Wen, 1997; Perkins and Yusuf, 1984; Lin, 1990). Using official aggregated data on historical weather conditions, Kueh (1995) finds that although bad weather was a contributing factor, it was unlikely to have caused the full extent of the grain reduction necessary to explain the severity of the famine...We obtained historical climate data from China’s 205 permanent weather stations and county level data on non-famine grain output and survival. Figure 3A plots the annual mean precipitation and mean temperature by year in the eight provinces included in this study. There is no noticeable difference during the famine years. The relationship between natural conditions and grain output can be examined more directly. We use county-level grain output and weather conditions for non-famine years to estimate the correlation between natural conditions and output. We then use these estimates and climate data from 1959-1961 to predict output during the famine years. If the famine was caused by natural conditions, the predicted output for famine years should be significantly different from normal output. Instead, we find that the predicted output is highly correlated to actual non-famine output. Alternatively, we can also examine the correlation between survival and historical weather conditions. Figure 3B plots a proxy for survival at the county level (the ratio of famine birth cohort population in 1990 to non-famine birth cohort population in 1990) against weather conditions during the famine relative to normal periods (the ratio of famine period rainfall to non-famine rainfall, and the ratio of famine period temperature to non-famine temperature). There is no visible correlation. These results all show that the famine was unlikely to have been caused by "natural" disasters.
It seems that the real question is how much did Mao know?
Posted by Dingel at 04:07 PM | Comments (0)
November 30, 2006
Democracy & poverty
US foreign aid spending may be shifting from poverty reduction to democracy promotion, and democracy may not do much to help the poor.
Posted by Dingel at 02:59 PM | Comments (2)
November 28, 2006
Easterly-Radelet on aid
If you enjoyed Steve Radelet and William Easterly's sparring about foreign aid at Cato Unbound, they're doing it again at the Council on Foreign Relations.
[HT: CGD]
Posted by Dingel at 09:18 AM | Comments (0)
October 18, 2006
Robert Wade on industrial policy and development
I attended a lecture by Robert Wade this afternoon that drew from a forthcoming paper by the LSE professor of political economy and development. His talk was titled "How can the developing countries catch up? The case for open economy industrial policies."
The presentation was over an hour and touched on a number of important debates concerning the relationship between trade and development, so my comments here will be limited to a small subset of the issues Wade covered. In the broadest terms, Professor Wade first argued that globalization isn't working and then made the case for revisiting and deploying industrial policy to improve economic growth in developing countries.
Wade argued that the Washington Consensus is in place and not delivering on its promise of economic growth. He said that we have been witnesses to an empirical test of an "if A, then B" proposition, where A is globalization and B is economic improvement:
How do we know we've had globalization? The world average for tariff revenue as a percentage of GDP has fallen significantly in the last 25 years, while trade as a portion of world GDP has approximately doubled since 1970. And the World Bank is now sheepishly conceding that context and country-specifics might matter for policymaking.
Has it worked? No. Except for Asia, regional average income per capita (in PPP terms) as a percentage of developed countries' GDP has fallen. Moreover, as Branko Milanovic shows in Worlds Apart
Do I find the previous two paragraphs convincing? Not really. While the rest of Professor Wade's presentation was marked by disaggregation, close examination, and nuance, this introductory case against free trade is quite crude. While globalization has been happening, using global aggregates masks the vast differences in openness between countries. As Brink Lindsey forcefully argues in Against the Dead Hand
Additional objections could also be made, but there's no need to dive into messy issues like the debate between Milanovic and Surjit Bhalla
Wade put forth five propositions:
(1) Development involves diversification of production, not specialization. Putting all your eggs in the comparative advantage basket is foolish. (Imbs & Wacziarg 2003)
(2) That diversification needs to be into products associated with higher levels of income. (Hausmann, Hwang & Rodrik)
(3) Poor countries face a tradeoff between ease of diversification and gains from it. It's easy to move to near products, but "structural transformations" that promote development are harder. (Hausmann & Klinger)
(4) Public inputs can be sector-specific. "Investment climate" surveys that ignore this are unhelpful.
(5) The supply of public inputs is subject to government failure (information, incentive, and exit failures). Developing countries should look to the institutions of Korea, Taiwan, and Japan to learn how to address these issues.
Many of these arguments echo what Dani Rodrik has been saying about industrial policy. Summarizing their intricacies and supporting evidence is beyond the scope of this blog post, so I recommend reading Rodrik's work until Wade's new paper becomes available.
Many of Wade's arguments are motivated by his view of the historical success of the East Asian tigers. He assigns significant credit to industrial policy in explaining the growth of South Korea and Taiwan. I have not yet read Governing the Market
In short, I found the discussion regarding globalization and the Washington Consensus shallow, but the great bulk of Professor Wade's lecture was thought-provoking and nuanced. With top-class economists such as Rodrik and Wade defending interventionist industrial policy, free traders had best prepare for a vigorous debate. I look forward to Wade's paper.
Posted by Dingel at 09:13 PM | Comments (1)
October 13, 2006
Economist wins Nobel Peace Prize
Muhammad Yunus and the microfinance bank Grameen have won the Nobel Peace Prize.
Posted by Dingel at 03:51 PM | Comments (0)
Rodrik on South Africa
Dani Rodrik says that outward-orientation would improve South Africa's growth:
South Africa has undergone a remarkable transformation since its democratic transition in 1994, but economic growth and employment generation have been disappointing. Most worryingly, unemployment is currently among the highest in the world. While the proximate cause of high unemployment is that prevailing wages levels are too high, the deeper cause lies elsewhere, and is intimately connected to the inability of the South African to generate much growth momentum in the past decade. High unemployment and low growth are both ultimately the result of the shrinkage of the non-mineral tradable sector since the early 1990s. The weakness in particular of export-oriented manufacturing has deprived South Africa from growth opportunities as well as from job creation at the relatively low end of the skill distribution. Econometric analysis identifies the decline in the relative profitability of manufacturing in the 1990s as the most important contributor to the lack of vitality in that sector.
The policy prescription is a bit fuzzy, however:
Prices, costs, and productivity are the main drivers of manufacturing production and employment. Therefore putting manufacturing on a permanently steeper trajectory will necessitate working on these same levers. In particular, it will require reversing the decline in relative profitability which the econometrics tells us has been the primary culprit for the sector’s misfortunes.
PDF here.
Posted by Dingel at 09:04 AM | Comments (0)
October 07, 2006
Development Tidbits
AdamSmithee points to two recent papers that question measures of corruption derived from opinion surveys:
Two recent papers suggest that the noise-to-signal ratio in indicators built on perceptions of corruption is likely to be extremely high. Ben Olken uses physical and financial audits to measure levels of corruption across villages in an Indonesian road project and then compares this measure to the levels of corruption perceived by villagers... [T]heir answers were far more strongly correlated with factors such as the level of ethnic diversity in the village than with actual levels of corruption.
Using a pretty nifty instrumental variable, James Feyrer & Bruce Sacerdote argue that colonialism improved the performance of island economies:
We have argued for an "islands as experiments" approach where random variation in the colonial experiences of islands can be used to think about the long run effects of colonial history on economic performance. The most interesting fact in our sample is a robust positive relationship between the years of European colonialism and current levels of income. While some of this relationship could be driven by smart selection of islands by colonizers, we suspect that part of the relationship is causal. When we instrument for colonization and settlement using wind patterns, we obtain coefficients on years of colonization that are identical to our OLS results. While the basic results suggest that longer European colonial exposure is good for the modern inhabitants of the islands in our sample, there are a few interesting caveats that we can introduce. First, there is a discernable pecking order amongst the colonizers. Years under US and Dutch colonial rule are significantly better than years under the Spanish and Portuguese. Second, later years of colonialism are associated with a much larger increase in modern GDP than years before 1700.
Posted by Dingel at 12:17 AM | Comments (0)
September 06, 2006
Better Off Stateless?
"Better Off Stateless: Somalia Before and After Government Collapse" by Peter Leeson strikes me as a fun paper because its claims ought to spur some controversy and debate. The abstract:
Could anarchy be good for Somalia’s development? If state predation goes unchecked government may not only fail to add to social welfare, but can actually reduce welfare below its level under statelessness. Such was the case with Somalia’s government, which did more harm to its citizens than good. The government’s collapse and subsequent emergence of statelessness opened the opportunity for Somali progress. This paper uses an “event study” to investigate the impact of anarchy on Somali development. The data suggest that while the state of this development remains low, on nearly all of 18 key indicators that allow pre- and post-stateless welfare comparisons, Somalis are better off under anarchy than they were under government. Renewed vibrancy in critical sectors of Somalia’s economy and public goods in the absence of a predatory state are responsible for this improvement.
In the short term, no government at all may be superior to some forms of government. In the long term, would it be more difficult to transition from predatory state to sucessfully developing country or from anarchy to successful development? Which country would you bet on: Somalia or Zimbabwe?
(This paper by Tatiana Nenova and Tim Harford suggests that some Somali success depends upon the presence of governmental institutions in other countries, such as the Saudi banking network.)
Posted by Dingel at 11:03 AM | Comments (0)
August 23, 2006
Profits at the bottom of the pyramid?
I have not read C.K. Prahalad's The Fortune at the Bottom of the Pyramid, but I've caught a few newspaper columns like this one summarizing his position. The message, that entrepreneurial MNCs are discovering that they can profit by significantly improving the consumptive well-being of the impoverished, is good news for fans of both markets and helping the poor. Unfortunately, it may be too good to be true.
Aneel Karnani, a colleague of Prahalad at Michigan's Ross Business School, has posted a working paper attacking the thesis:
Poor people – at the bottom of the pyramid (BOP) – represent a very attractive market opportunity. The ‘BOP proposition' argues that selling to the poor can simultaneously be profitable and help eradicate poverty. This is at best a harmless illusion and potentially a dangerous delusion. This paper shows that the BOP argument is riddled with fallacies, and proposes an alternative perspective on how the private sector can help alleviate poverty.
I have not read Prahalad's work, but it seems that Karnani has a good case. The first sentence of the book is:
Turn on your television and you will see calls for money to help the world's 4 billion poor-people who live on far less than $2 a day.
You don't have to believe we've already achieved the MDG poverty reduction goal to find that number a bit high. It implies that more than half the world lives in moderate or extreme poverty. The real number is certainly below three billion.
That's just the first sentence. Dive into the rest of the debate by reading the paper.
[Update: Prahalad's response is here.]
Posted by Dingel at 05:44 PM | Comments (0)
August 18, 2006
Rodrik: Growth Accelerations & Diagnostics
This October 2004 lecture by Dani Rodrik nicely summarizes two of his recent contributions to thinking about growth. He (and his coauthors) tackle an empirical question (growth accelerations) and suggest a theoretical approach (growth diagnostics).
Posted by Dingel at 09:01 AM | Comments (0)
August 17, 2006
Policy Index Rankings & Competition
Laurence Carter at PSD thinks that benchmarks can be an influential tool to spur policy reform. He has a couple examples to back this up. Of course, we might worry about the Goodhart effect.
Posted by Dingel at 05:37 PM | Comments (0)
August 15, 2006
CGD's CDI
The CGD has released the Commitment to Development Index 2006. It "rates 21 rich countries on how much they help poor countries build prosperity, good government, and security." Each rich country gets scores in seven policy areas: trade, aid, security, investment, migration, environment, and technology. Note that the United States does well in the trade rankings, but much worse in regards to migration.
Posted by Dingel at 05:28 PM | Comments (0)
Does aid hurt growth driven by labor-intensive exports?
Interesting paper from last year by Rajan and Subramanian that I didn't encounter until today:
We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies. We look for a possible offset to the beneficial effects of aid, using a methodology that exploits both cross-country and within-country variation. We find that aid inflows have systematic adverse effects on a country’s competitiveness, as reflected in the lower relative growth rate of labor intensive and exporting industries, as well as a lower growth rate of the manufacturing sector as a whole. We provide evidence suggesting that the channel for these effects is the real exchange rate overvaluation caused by aid inflows. By contrast, private-toprivate flows like remittances do not seem to create these adverse effects, a finding for which we offer an explanation...We find strong evidence consistent with aid undermining the competitiveness of the labor-intensive (or alternatively traditional exporting) sectors. In particular, in countries that receive more aid, labor-intensive (or traditional exporting) sectors grow slower relative to capital-intensive (or non-exporting) sectors. As a result of the reduced competitiveness, employment growth in these sectors is slower, and these sectors account for a lower relative share of the economy in countries that get more aid.
We also provide evidence that the channel through which aid works is by inducing overvaluation of the real exchange rate. We demonstrate this by showing that: (i) aid and overvaluation are positively correlated across countries and that overvaluation is correlated with the exogenous components of aid, suggesting that aid does cause overvaluation; (ii) the exogenous (aid-related) component of overvaluation induces the same relative pattern of growth of the labor-intensive and exportable sectors in countries as does the exogenous component of aid; 2 and (iii) the independent effect of aid is attenuated in the presence of overvaluation.
Posted by Dingel at 05:20 PM | Comments (1)
August 01, 2006
Binding Constraints to Growth
In a couple of recent conversations with people about preferential trade, I've said that rich country trade barriers are rarely the binding constraint upon LDC export volume. I've argued that preferential trade policies always have costs, and in the cases where developed country protectionism isn't the binding constraint, zero benefits. It turns out that I've been unknowingly implying one of the ideas behind "growth dianogistics," a "new approach to economic reform" suggested by Ricardo Hausmann, Dani Rodrik, and Andrés Velasco. Here's a summary from the March issue of F&D:
In this article, we propose a new approach to reform—one that is much more contingent on the economic environment. Countries, we argue, need to figure out the one or two most binding constraints on their economies and then focus on lifting those. Presented with a laundry list of needed reforms, policymakers have either tried to fix all of the problems at once or started with reforms that were not crucial to their country's growth potential. And, more often than not, reforms have gotten in each other's way, with reform in one area creating unanticipated distortions in another area. By focusing on the one area that represents the biggest hurdle to growth, countries will be more likely to achieve success from their reform efforts.
Read the full article. Academic version available here as a PDF. Obviously, this ties into Joe Stiglitz's suggestions about policy sequencing.
I am a bit uncomfortable with this example, however:
Instead of solving these problems for all economic activities—a daunting task—the Dominican Republic managed to provide the appropriate public goods... the maquila sector was given special trade policy treatment. In this sense, the Dominican Republic is a good example of an alternative path to development: one that identifies sectors with high potential and then provides them with the institutions and public goods they need to thrive.
My discomfort stems from the fact that I have less confidence in industrial policy and sectoral targetting than Rodrik does, at least based upon the empirical assessments I've read in regards to South Korea.
[Hat tip: Dennis de Tray at CGD]
Posted by Dingel at 07:23 PM | Comments (0)
June 30, 2006
"Artificial States"
Alberto Alesina, William Easterly, Janina Matuszeski:
Artificial states are those in which political borders do not coincide with a division of nationalities desired by the people on the ground. We propose and compute for all countries in the world two new measures how artificial states are. One is based on measuring how borders split ethnic groups into two separate adjacent countries. The other one measures how straight land borders are, under the assumption the straight land borders are more likely to be artificial. We then show that these two measures seem to be highly correlated with several measures of political and economic success.
Neat.
Posted by Dingel at 11:21 AM | Comments (0)
June 27, 2006
UN & Copenhagen Consensus
United Nations diplomats affirm Copenhagen Consensus, ranks climate change last.
[Hat tip: PSD]
Posted by Dingel at 10:16 PM | Comments (1)
June 21, 2006
Foreign Affairs special on India
"In the July/August issue of Foreign Affairs, a special lead package has brought together four top experts to analyze the sources and implications of India's rise — and the policies necessary for it to continue."
One snippet that might generate discussion:
Rather than adopting the classic Asian strategy -- exporting labor-intensive, low-priced manufactured goods to the West -- India has relied on its domestic market more than exports, consumption more than investment, services more than industry, and high-tech more than low-skilled manufacturing. This approach has meant that the Indian economy has been mostly insulated from global downturns, showing a degree of stability that is as impressive as the rate of its expansion. The consumption-driven model is also more people-friendly than other development strategies. [FA]
Posted by Dingel at 10:18 PM | Comments (0)
Arbitrary Development Numbers: 0.7%
Haven't read this paper by Michael Clemens and Todd Moss yet, but this abstract looks interesting:
When we use essentially the same method used to arrive at 0.7% in the early 1960s and apply today’s conditions, it yields an aid goal of just 0.01% of rich-country GDP for the poorest countries and negative aid flows to the developing world as a whole. We do not claim in any way that this is the ‘right’ amount of aid, but only that this exercise lays bare the folly of the initial method and the subsequent unreflective commitment to the 0.7% aid goal. Second, we document the fact that, despite frequent misinterpretation of UN documents, no government ever agreed in a UN forum to actually reach 0.7%—though many pledged to move toward it. Third, we argue that aid as a fraction of rich country income does not constitute a meaningful metric for the adequacy of aid flows.
Posted by Dingel at 10:07 PM | Comments (0)
June 18, 2006
UNDP: "Aid = Investment = Growth"
Michael Clemens had a post last month that is damning to a recent UNDP paper by Nanak Kakwani and Hyun H. Son titled "How costly is it to achieve the MDG of halving poverty between 1990 and 2015?":
In the thicket of equations, you’ll find two assumptions for which there is zero evidence: All aid becomes investment, and all investment becomes income. No serious economist believes that---not even close---which makes this exercise totally irrelevant to aid policy.
In a five minute skim of the paper, I found passages that support that interpretation:
"Given this assumption, it is obvious that the growth rate of per capita GDP will be equal to the growth rate of capital per person. ""The investment gap can be filled by numerous alternative sources such as Official Development Assistance (ODA), private capital inflows, and borrowing."
"Table 6 presents the average per capita investment-saving gap in 2002 US dollars. The estimates in Table 6 can be, in fact, interpreted as the amount of per person foreign aid required to meet the MDG."
I'm surprised that we've returned to discussing the "investment gap," which received such brutal treatment from William Easterly in The Elusive Quest for Growth that I took it to be dead. I haven't followed UNDP/MDG estimates and projections in the past. Is this quality of work typical for them or an exception?
Posted by Dingel at 06:50 PM | Comments (0)
June 15, 2006
Evaluation Gap Update
Just a few weeks after the release of the Evaluation Gap Report, the Center for Global Development has got African Monitor and the OECD on-board for funding an independent entity to evaluate development project effectiveness.
Posted by Dingel at 12:48 PM | Comments (0)
May 31, 2006
CGD "Evaluation Gap" Report
Lots of people will agree withthe general message of the Center for Global Development's Evaluation Gap Working Group report: there is a dearth of rigorous evidence that independently evaluates the outcomes of development projects.
More controversial will be their recommendation: that a new international entity be formed to address the shortage of meaningful knowledge being produced about the success and failure of development enterprises. Would such a council truly be independent? How would it be funded?
The problem that the report addresses is familiar to many in the development field, but we have yet to identify a credible mechanism to overcome the knowledge gap. This document's proposal can serve as a starting point for debate about the nature of such mechanisms.
Posted by Dingel at 03:34 PM | Comments (3)
May 09, 2006
Foreign aid grudge matches
Pablo at PSD points to an William Easterly vs Jeff Sachs debate on foreign aid in the LA Times, while Jim at Our Word is Our Weapon notes that Easterly and Steve Radelet are still trading comments at Cato Unbound. Pablo bills the former as a Columbia vs NYU scuffle, and I'd like to note that the latter is an in-house match between Center for Global Development fellows.
Despite a number of folks billing these debates as showdowns, I see a consensus emerging:
Easterly: "The two key elements necessary to make aid work, and the absence of which has been fatal to aid’s effectiveness in the past, are FEEDBACK and ACCOUNTABILITY."
Sachs: "The standards for successful aid are clear. They should be targeted, specific, measurable, accountable and scalable."
Radelet: "We need clear, measurable goals, and aid programs should be constantly assessed against those goals by independent monitors."
Apparently it's difficult to get economists to agree about what "accountability" means in practice.
Posted by Dingel at 11:00 PM | Comments (0)
May 02, 2006
Zimbabwe Update
Pablo at PSD points to a NYT article reminding us what a hellhole Zimbabwe is:
"Zimbabwe has been tormented this entire decade by both deep recession and high inflation, but in recent months the economy seems to have abandoned whatever moorings it had left. The national budget for 2006 has already been largely spent. Government services have started to crumble... In February, the government admitted that it had printed at least $21 trillion in currency — and probably much more, critics say — to buy the American dollars with which the debt was paid. By March, inflation had touched 914 percent a year, at which rate prices would rise more than tenfold in 12 months. Experts agree that quadruple-digit inflation is now a certainty."
Not everything is awful: neighborhoods and households financed by American dollars from foreign aid, charities, and remittances are suffering far less. And Robert Mugabe just completed a 25-bedroom mansion.
Posted by Dingel at 09:28 AM | Comments (0)
April 10, 2006
Foreign Aid at Cato Unbound
This month's Cato Unbound focuses on foreign aid. I found Branko Milanovic's criticism of William Easterly very compelling. Perhaps Easterly's full-length book will contain nuances that accomodate Milanovic's objections.
I found Deepak Lal's essay surprisingly pessimistic:
That is why in a recent book I had argued that short of direct or indirect imperialism there seems to be little hope of overcoming the domestic political obstacles to the efficient utilization of foreign aid, particularly in Africa, where most of the current efforts of the "do gooding" brigade in the developed world are rightly concentrated. Given this political constraint, the best the rest of the world could do for Africa is to keep its markets open for the free flow of trade and capital, but otherwise leave Africa alone, to sort out its own problems.
In an essay that Jim will surely enjoy, Steve Radelet writes:
Take a closer look: $2.3 billion over 50 years is $46 billion a year, a modest amount for any global capital flow. And only about half went to low income countries, with the rest to middle-income countries like Israel that didn’t need it. So we have around $26 billion a year for all the low income countries. This works out to be a rip-roaring $14 per person per year in low-income countries. Much of that goes to consultant reports or is tied to purchases in donor countries where it gets much less bang for the buck. As a result the recipients actually get far less than these figures indicate. So let’s cut the grandstanding. It ain’t much. In Easterly’s judgment, based on his opening vignette, because poverty still exists in Ethiopia after it has received all of $14 per person in aid per year (Ethiopia happened to receive exactly the average amount), “aid doesn’t work.” Please! ...And here is the dirty little secret: most of the published research over the past decade has shown a modest positive relationship between aid and growth—not in all countries, to be sure, but on average across countries over time.
I think that Milanovic's exposure of Easterly's argument's weaknesses makes Lal's stance more compelling, but Lal's essay contains insufficient evidence to refute Radelet.
Posted by Dingel at 08:55 PM | Comments (0)
March 15, 2006
Two Papers
I apologize the lack of blogging this month. The dry spell will continue until I complete my thesis at the end of March. In the meantime, let me recommend two interesting papers I came across in the course of my work:
Dani Rodrik - Why We Learn Nothing from Regressing Economic Growth on Policies - March 2005:
Government use policy to achieve certain outcomes. Sometimes the desired ends are worthwhile, and sometimes they are pernicious. Cross-country regressions have been the tool of choice in assessing the effectiveness of policies and the empirical relevance of these two diametrically opposite views of government behavior. When government policy responds systematically to economic or political objectives, the standard growth regression in which economic growth (or any other performance indicator) is regressed on policy tells us nothing about the effectiveness of policy and whether government motives are good or bad.
Alessandro Nicita - Export led growth, pro-poor or not? Evidence from Madagascar's textile and apparel industry - February 2006
Madagascar's textile and apparel industry has been among the fastest growing in Sub-Saharan Africa. Fueled by low labor costs, a fairly productive labor force, and preferential access to industrial countries, Madagascar ' s exports of textile and apparel products grew from about US$45 million in 1990 to almost half a billion in 2001. The impact of this export surge has been large in terms of employment and wages, but less so in terms of poverty reduction. To address the concern of whether the poor benefit and to what extent, the author follows a new approach to identify the beneficiaries of globalization and to quantify the benefits at the household level, so as to understand which segments of the population benefit most and which, if any, are marginalized. The analysis focuses on the labor market channel which has been recognized as the main transmission between economic growth and poverty. The methodology uses household level data and combines the wage premium literature with matching methods. The results point to a strong variation in the distribution of the benefits from export growth with skilled workers and urban areas benefiting most. From a poverty perspective, export-led growth in the textile and apparel sector has only a small effect on overall poverty...
Posted by Dingel at 09:28 AM | Comments (0)
March 02, 2006
Nuclear Power & Indian Well-being
The IHT has a story summarizing the implications of nuclear power for India:
Almost a tenth of India's economy was being murdered in the dark, strangled by power shortages. And then George W. Bush said, "Let there be light." That, in a nutshell, is the thrust of a much-debated nuclear-energy agreement that the U.S. president pursued and concluded Thursday with Prime Minister Manmohan Singh of India in New Delhi...An acute power crisis is all too visible. Computer software companies in Bangalore keep enough generator fuel to last them a week, or longer, in case the overburdened power distribution network breaks down. Households are buying "intelligent" washing machines that "remember" where they had stopped when power went out. That way, people don't waste time, water and detergent by starting all over again after supply resumes. For Singh's government, nuclear energy is fast emerging as the centerpiece of a strategy to ease the power crunch...
In their joint declaration, the two leaders agreed that India would separate its military nuclear program from the civilian one, and that it would voluntarily place the latter under the watch of the International Atomic Energy Agency. In return, Bush recognized India as a "responsible state with advanced nuclear technology" and promised to adjust U.S. and international laws, to give India's civilian facilities unrestricted access to imported nuclear technology...
If India can use the accord to overcome its energy crisis, there is a lot that its fast-growing economy can buy from the rest of the world.