Wednesday, April 30, 2008

Food Inflation Watch: Food crisis is a chance to reform global agriculture

Martin Wolf writes in Financial Times column:

Demand factors:

  • Rising incomes per head in the emerging economies
  • Changing pattern of food consumption (shift from food to meat reduces food supply as it is being used to rear animals)
  • Subsidised biofuels production in the West raise demand for maize
  • Aggregate maize, rice, and soybeans production stagnated in 2006 and 2007 (partly due to drought)
  • Increasing speculation because of declining stock

Are prices going to remain high? Two opposing forces are at work. The first is the market, which will tend to bring prices back down as supplies expand and demand shrinks. But the latter is also what we want to avoid, at least in the case of the poor, since reducing their consumption is not so much a solution as a failure. The second force is the current intense pressure on the world’s food system. This is true of both demand and costs of supply. Prices are likely to remain relatively elevated, by historical standards, unless (or until) energy prices tumble.

Food prices

What needs to be done?

  • humanitarian factors
  • trade and other policy interventions
  • longer-term productivity and production

The present crisis is a golden opportunity to eliminate this plethora of damaging interventions. The political focus of the Doha round on lowering high levels of protection is largely irrelevant. The focus should, instead, be on shifting the farm sector towards the market, while cushioning the impact of high prices on the poor.

Finally, far greater resources need to be devoted to expanding long-run supply. Increased spending on research will be essential, especially into farming in dry-land conditions. The move towards genetically modified food in developing countries is as inevitable as that of the high-income countries towards nuclear power. At least as important will be more efficient use of water, via pricing and additional investment. People will oppose some of these policies. But mass starvation is not a tolerable option.


The ultimate optimist and the dismal science

This article extols Jeffrey Sachs excessively by labeling him as "long before ambition and optimism conspired to make him the Man Who Would Save the World, Jeffrey Sachs was merely the Man Who Would Save Bolivia." Also, now he has a new label: "Barack Obama of economics."

...Philosophically, his proposed remedies are more closely aligned with the left-leaning John Maynard Keynes than they are with Milton Friedman, but Mr. Sachs, who is also director of Columbia University's Earth Institute, has clearly been influenced by both.

...Like Mr. Friedman, he believes in market solutions for many economic issues - he just doesn't think that unfettered markets, left to their own devices, will lift Africans out of abject poverty or stamp out environmental degradation. These crises, he insists, require strong public policies to align private interests with the goals of sustainable development.

...He insists that the path to salvation lies in a multidisciplinary approach; private players must work with willing governments, academics, scientists and non-governmental organizations to create sustainable technologies.These technologies are where he places a great deal of faith - not merely in their ability to help contain some of the environmental damage (carbon capture sequestration is an example he's fond of citing) but to improve agricultural yields with more resistant, bountiful seeds.

Fixing the food crisis: he is obsessed with creation of multi-billion dollar fund (he did that in Bolivia and Poland but attributed the failure of reforms in Russia for a lack of stabilization fund to build confidence on the Russian currency).

  • Provide immediate funds to the FAO
  • End ethanol subsidies
  • Create $5 billion Fund to increase production in the poor countries
  • Improve agriculture (R&D)

Links of interest

Dumb as We Wanna Be (Thomas Friedman on the NYT)

Africa: Why Continent's Poverty is Only Artificial

PhD students living below poverty line

Food Inflation Watch: Export restriction and price decrease?

Last week the Nepali government decided to ban export of wheat. This should have increased price of wheat. Incidentally, the price of wheat decreased by NRs 100 (about $1.5) per quintal. How is this possible? Is the free market, as Cowen argued, really working? See this as well. See Rodrik's take on this.

Oh ya, you might say! But, that's not the case. The response to a change in an economic indicator (mainly price) in the Nepali market is so slow that it takes weeks (at least two months) for the effect of price change to take affect consumer and investor behavior. Too much lags due to information asymmetries and coordination failures. The other reason is that there might be more supply than demand in the domestic market. But this is unlikely because before the ban wheat price was already rapidly rising.

Moreover, the ban would not itself substantially affect wheat trade because most of the wheat is exported to India, with whom Nepal enjoys a free border. With free border and official ban on exports, we will see more smuggling across the border. The net effect would probably, on average, be the same.


Banks merger in Nepal

This is what Nepal really needs. Five financial institutions have merged to become a commercial bank of 'A' level.

...Five financial institutions — Mahalaxmi Finance Ltd, Birgunj Finance Ltd, Siddhartha Finance Ltd, Butawal Finance Ltd and Himchuli Development Bank — have signed an accord yesterday to merge and upgrade to ‘A’ level commercial bank.

...All the financial institutions are planning to increase their paid up capital to Rs 400 million each to make Rs 2 billion in total required for the upgradation for the commercial banks.

Nepal has more than 20 commercial banks, several development banks, and cooperatives. They are fiercely competing with each other to increase market pie, which as of now seems saturated with urban customers. They have not been able to reach the villages, where most of the population lives and engages in farming.

More mergers are good for the economy because it will help domestic banks consolidate their expertise and market power to fend off sharp competition from international banks, which will be allowed to enter the Nepali financial market in 2010, according the WTO agreement.

Merger and acquisition would help banks effectively compete with international banks, which would come with huge capital, human resource, expertise, and attractive scheme. In principle, this is considered good but at times of crisis and uncertainty, we might not even know how fast savings would fly out of the country, thus worsening the situation (remember Argentinean crisis in 2000, East Asian Crisis in 1997). To avoid the same fate, we definitely need some rational capital control that would rightly address this concern but not temper/distort individual and market incentives too much.

Food Inflation Watch: Birdsall and Subramanian on rising food prices

Food and Free Trade

Each country is trying to keep domestic supplies high on the justifiable grounds of food security. But by holding prices artificially low, export bans keep the market from sending accurate demand signals to domestic farmers. This penalizes farmers, who can't get the full, world price for their produce. That impairs efficiency, and undermines the incentives for investments that can increase long-term supply. Topping it all off, such measures subsidize high-income households, not just the poor.

Moreover, as more countries implement export controls, global supply contracts even further, pushing prices up by at least 10% and possibly much more. A vicious spiral lurks here, as panic- and policy-induced speculative hoarding drives world prices even higher.

Without a collective agreement to undo these restrictions, the world's poor, already at terrible risk, will be even worse off. Industrial countries should eliminate any practices, including all forms of ethanol subsidies and tariffs, that divert food production toward biofuels. In turn, developing-country food producers should eschew export restrictions and allow market forces to help boost agricultural supply. The assurance that all countries will do so should give each developing-country government incentives to better target assistance to the most affected and vulnerable consumers in their own countries.

Unfortunately, the ongoing Doha Round of trade negotiations won't on its own address these problems. And that's not just due to the poor prospects for completing these negotiations in the current environment in the U.S. when the antitrade lurch during the primary season has made even the U.S.-Colombia free trade agreement difficult to ratify.

More important is that in the Doha Round, the key trade policy culprits – biofuel subsidies and export restrictions – are not the focus of negotiations. The round has been devoted to traditional forms of agricultural protection – trade barriers in the importing countries and subsidies to food production in producing countries – which are becoming now less important as food prices have soared and import barriers have declined. While concluding the round would be good for the world and the trading system and would help secure long-run supply incentives for developing country food producers, it makes no immediate contribution to alleviating the current crisis.

It sounds counterintuitive, but the challenge of the food crisis affords a win-win opportunity: to collectively agree to policies that promote trade and efficiency while also boosting agricultural production and reducing the vulnerability of the poorest around the world. The challenge for world leaders is to seize that opportunity.

Food Inflation Watch: The Washington Post Global Food Crisis series III

The quest for higher profits is changing production pattern in the West.

Emptying the Breadbasket:

...Fleishman and his customers are hardly alone. Across America, turmoil in the world wheat markets has sent prices of bread, pasta, noodles, pizza, pastry and bagels skittering upward, bringing protests from consumers.

But underlying this food inflation are changes that are transforming U.S. agriculture and making a return to the long era of cheap wheat products doubtful at best.

Half a continent away, in the North Dakota country that grows the high-quality wheats used in Fleishman's bagels, many farmers are cutting back on growing wheat in favor of more profitable, less disease-prone corn and soybeans for ethanol refineries and Asian consumers.

...Problems started last summer with poor European harvests and a disappointing winter wheat crop in the southern Great Plains. U.S. prices moved above $7 a bushel, then crossed $10 after Australia harvested yet another drought-damaged crop in December. As supplies of wheat ran low, foreign countries began grabbing limited stocks of premium wheat from the northern plains -- the variety used to make the flour for Fleishman's bagels. Morocco, its own harvest of wheat to make traditional couscous inadequate, jumped in with a purchase of 127,000 tons.

Food Inflation Watch: The Washington Post Global Food Crisis series II

The irony of specialization, globalization, and the 'Dutch disease' (well kinda)!

Where Every Meal Is a Sacrifice:

...By sacrificing the she-goat last month, the 39-year-old day laborer and goatherd traded the family's morning milk for dinner meat. It lasted a few days. With the family unable to afford skyrocketing prices for basic foods, he said, his two young children now cry in the morning from hunger. One recent morning, he could take it no more. He took the goat's kid -- one of the last two animals in his flock -- to the squalid livestock market here in the hopes of selling it to buy food. "Everything -- the wheat, rice, sugar and animal feeds -- is higher priced than I have ever seen them before," he said. "What will we do? Soon we will have nothing left to sell."

Like most of the world's poorest nations, Mauritania is caught in a global food trap, producing only 30 percent of what its people eat and importing most of the rest. As prices skyrocket, those who can least afford it are squeezed the most as the world confronts the worst bout of food inflation since the Soviet grain crisis of the 1970s.

...Mauritania's government abandoned long-standing policies of fixed food prices in the 1990s. But it also gave up on large-scale efforts to boost agricultural production, shifting resources to iron ore mining and other industries.The last big agricultural push here -- an internationally backed effort to grow irrigated crops in the country's south -- failed more than 15 years ago, officials say, because money went to businessmen rather than farmers. They lacked the motivation and know-how required for large-scale cultivation.


Food Inflation Watch: The Washington Post Global Food Crisis series

I thought of blogging this one two days ago but could not do so due to busy internship work schedule and other stuff happening in D.C.

The Washington Post has been been publishing a series of articles related to the food crisis. It is very comprehensive, analytical, and informative.

The New Economics of Hunger:

On the usual list of the demand-push factors for driving up prices add this one as well: "Food was becoming the new gold. Investors fleeing Wall Street's mortgage-related strife plowed hundreds of millions of dollars into grain futures, driving prices up even more." is outpacing even the Soviet grain emergency of 1972-75, when world food prices rose 78 percent. By comparison, from the beginning of 2005 to early 2008, prices leapt 80 percent, according to the United Nations' Food and Agriculture Organization. Much of the increase is being absorbed by middle men -- distributors, processors, even governments -- but consumers worldwide are still feeling the pinch.

...A big reason for higher wheat prices, for instance, is the multiyear drought in Australia, something that scientists say may become persistent because of global warming. But wheat prices are also rising because U.S. farmers have been planting less of it, or moving wheat to less fertile ground. That is partly because they are planting more corn to capitalize on the biofuel frenzy.

Tuesday, April 29, 2008

Review of neo-classical economics

This link has a good review and critique of the neo-classical economics. As you read it, you feel like taking a review course on economics, starting right from the time of Adam Smith. Not a whole lot of new stuff but it is refreshing.

Keynes vs. Friedman:

The greatest challenge was posed by the unprecedentedly severe and long lasting depression in the US economy from 1929 onwards. The laws of Neo-classical Economics required cut in wages to cut costs and create profits, which would stimulate business and raise the economy out of trough. But this did not happen. On the other hand cut in wages reduced demand and deepened depression. Market did not provide an automatic correction and public intervention on a massive scale in the shape of President Roosevelt’s New Deal Programme became necessary.

It is against this background that J.M. Keynes came out in 1936 with his “General Theory of Employment, Interest and Money”. He presented a new theoretical construction. He moved from micro to macro and focused attention on Aggregate Demand and Aggregate Supply. Aggregate Demand and Aggregate Supply could be in equilibrium but at less than full employment level. For the economy to be lifted to equilibrium at full employment level, public authorities would have to stimulate aggregate demand by augmenting investment and consumption. Inducement to invest and propensity to consume are the dynamic elements in the economy which have a multiplier effect. These new concepts and insights came like a breath of fresh air ushering in what came to be known as the “Keynesian Revolution”.

...But World War II intervened and the economic stimulus provided by the war effort absorbed unemployment. On the other hand, demands for war supplies created scarcities and inflationary pressures, which continued even after World War II. Keynesian remedies, that is, fiscal policies in reverse were required to cut public expenditure and curb excessive investment and consumption. Instead, Keynesian economics was held responsible for inflation. The centre of gravity shifted from fiscal to monetary remedies. Under the leadership of Milton Friedman emerged the Chicago School which debunked Keynesian economics and returned to orthodox economics and its remedies and focused on inflation rather than employment.If inflation is curbed through a steady money supply, flexible labour market, cut in wages, control over TU demands and curtailment of social benefits of a welfare state, free market would take care of the economy. The sole function of the Central Bank of a country should be to keep a stable money supply and prevent the emergence of inflationary pressures. If there is still some amount of unemployment, it should be treated as “natural unemployment” which was bound to exist in any economy. Thus, to the old concepts of “frictional unemployment” and “structural unemployment” was added “Natural Rate of Unemployment” (NRU).

Development Economics:

...While economists like Rauel Prebisch of Argentina advocated the strategy of import substitution, which was followed by a country like India, others like South Korea followed the strategy of export promotion.In both models, it was recognised that entrepreneurial activity needs judicious state support. Through a combination of visionary government and entrepreneurial activities, Singapore has risen rapidly to a level higher than that of many European countries.

...A number of textbooks were written—such as W.A. Lewis’s Theory of Economic Growth, or Kindleberger’s “Economic Development”. But orthodox economists like Peter Bauer rejected any special category of “Development Economics”.

...The first amongst the models of development was the “Harrod Domar Model”—investment rate divided by capital-output ratio determines the rate of growth. Robert Solow’s 1956 article emphasised the role of technology for long-term growth. Papers by Robert Lucas (1988) and Paul Romer (1986-1990) focused on human capital (stock of knowledge) and technological innovation respectively. A paper by Arvind Dixit and Joseph Stiglitz (1976) drew attention to the role of differentiated products and increasing returns to scale. Paul Krueger emphasised the role of geographical clusters, education, research and innovation in boosting productivity and growth. In addition to traditional, physical capital of machines and buildings, investment in skills and abilities of work forces were emphasised.

...Development Economics, however, suffered a set- back when as a part of the “Washington Consensus”, the World Bank and International Monetary Fund and later the World Trade Organisation after it was set up in 1995, started insisting that countries approaching them for assistance should strictly follow the Structural Adjustment Programme (SAP) which envisaged marketisation of the economy as against planning, liberalisation as against dirigisme or state control and regulation and privatisation as against the public sector, open economy as against autarky and fiscal discipline implying minimisation of public expenditure and “minimal state”.The programme was uniformly insisted upon irrespective of different socio-economic, geographical and historical background and different problems faced by different counties. The approach was “one size fits all”. The result was hardly beneficial—several countries of Latin America and Africa suffered a set-back after the SAP was imposed as brought out by economists like Jeffrey Scotts and Joseph Stiglitz.

When the poster boys of development, the East Asian countries—like Thailand, Malaysia, Indonesia and South Korea—suddenly suffered an unanticipated economic crisis in 1998, the remedy suggested was also on the lines of the SAP which made for painful recovery. A country like Malaysia, which did not follow the advice, did better.Under the leadership of Milton Friedman and the Chicago boys, a “shock therapy” was imposed by dictator Pinochet’s regime in Chile. A similar strategy was imposed on Russia after the collapse of communism. In both countries it led to the emergence of oligarchies who looted the natural resources of these countries.

What's wrong with neo-classical stuff?

  1. ...the concept of “homo-economics”, the individual economic agent, whether consumer or producer, making choices or taking decisions is a faulty one.
  2. ...the stipulation that an individual makes “rational” choices and takes “rational decisions” in “self-interest” is not valid.
  3. ...the assumptions relating to a perfectly competitive market are inconsistent with the conditions in the real world...As J. K. Galbraith has pointed out, corporations of today are so powerful that with the aid of advertisements and money power they are able to reverse the proposition that supply is according to demand. Corporations manipulate demand to be in accordance with supply.
  4. ...Nor is the assumption of “perfect knowledge” valid.
  5. ...firms in the real world do not take decisions regarding production by equating marginal cost with marginal revenue or by constantly substituting at the “margin” one factor of production for another with a view to optimisation.
  6. as conceived in textbooks of Micro-economics bears no resemblance to the market in the real world.
  7. equilibrium as envisaged by Micro-economics is in “stationary state”.It does not deal with dynamics in the economy. Uncertainty is an integral part of economic life and yet will not be analysed in any rigorous way in the competitive model until the early 1950s when Kenneth Arrow introduced uncertainty in equilibrium analysis, although in a specific and restrictive way.
  8. ...Micro-economics completely overlooks the institutional set-up in the context of which the market functions. The institutional set-up includes the legal framework, educational set-up, cultural institutions etc.
  9. ...Micro-economics confines its attention to economic activity in the “market”, overlooking economic activity conducted in the fold of family, health and educational institutions and government to give a few examples.
  10. ...the record of Micro-economics in understanding and forecasting the economy at macro level is not impressive.

Idealogical Biases

With all its scientific pretensions, Micro-economics claims to be a positive, value-neutral discipline, but its ideological biases are quite apparent. It has provided in recent years intellectual support to a neo-liberal policy, initiated in 1982 by Ronald Reagan in the USA and Margaret Thatcher in the UK and imposed by the “Washington Consensus” on all economies and the world economy. Deregulation of the private sector and minimal government became the key words. This has created acute disparities between countries and people within countries. In neo-liberal Britain, managers of companies draw salaries thousand times more than the wages of its own employees on the ground of efficiency and productivity. The underpaid are asked to improve their own productivity before claiming a better deal.

Farmers in India, who commit suicide, are asked by the Chief Minister not to be lazy. In the home of neo-liberalism, namely, the USA, when Hurricane Katrina wiped out the homes of the poor, the local Republican Senator was cheerful that natural disaster has removed the blot which human agency could not have! The task of rehabilitation of the homeless was entrusted to a private company because the public agency could not be trusted; it made money but made a hash of the job leaving the poor in a miserable state. The task of security in Baghdad was entrusted to a private agency which itself shot dead eleven Iraqis, an act which scandalised even the puppet government.

The reckless lending for sub-prime housing mortgages threatened the banking system not only in the USA but also in Europe and there was run for return of deposits on the North Rock Bank in England forcing Gordon Brown, the PM, to assure the depositors that the government would guarantee the safety of their deposits and yet the run would not stop. Such is the rationality of the market. Some years back, deregulation of financial markets in the USA led to a savings and loan scandal. With her fetish for privatisation, Margaret Thatcher squandered away the precious oil resources discovered in the North Sea, while the Government of Norway used these resources as assets out of whose income the standard of welfare services were improved.

The neo-liberal philosophy downgrades the role of the government in creating the legal framework, regulating the private enterprise so as to ensure that it works within the framework of common good, penalising illegalities and financial scandals, building up essential infrastructure, caring for those whom market does not take care of and using natural resources for social benefit. As Ha-joon Chang of Cambridge University, a teacher of Economic History, has shown, rich countries did not develop on the basis of policies that they now force upon the developing countries.

With the neo-liberal ideology generated by Micro-economics, it can hardly be called “Soul Economics”; rather it is “dismal economics” a title conferred on Economics by Thomas Carlyle. The mainly technical contributions of modern-day economists like the Game Theory or mathematical economics with little empirical base and purely intellectual model building can do little to widen the horizon of Economics. Above all, Economics needs to be “humanised” by restoring the place of value, morality and happiness in economic theory and studies.

Monday, April 28, 2008

Trade and low prices: Rocky road to nowhere???

no roads

In this recent photo mules are driven along a mountain road in Manang district to market against the backdrop of the Annapurna himal. Traditional methods are still used to transport livestock in the region due to lack of motorable roads. (Source: Ekantipur)

Okay, this reminds me of the earlier blog post on trade and the article by Tyler Cowen in the NYT. I know the theoretical stuff in international trade but still I feel something else is missing. So, I want to know how freer trade would help lower food prices for these folks living up in the mountains. Probably, the domestic/local food prices is lower than in the big cities because major foodstuff (except rice) are grown and sold locally. Surplus is taken to nearby market or stored for next season plantation or as buffer against climatic uncertainties.

Varieties of foodstuff not produced locally and are imported to the village from nearby cities cost extremely high. Why? Because transportation cost is much more higher, usually adds up 30% more to the original price of foodstuff. I know the trade theories but still can't figure out where these folks stand out in terms of gains from trade. I feel they are always in the losing side...Are we thinking of the end before giving due attention to intermediate stuff...I mean is it not technically wrong/unwise/unsound to put too much emphasis on trade before giving due attention to the factors that are needed to realize the gains from trade (I am referring to roads, markets, credit, social insurance, governance, etc.)?

Good reform teams led growth

A new paper (Reform Teams) from the Commission on Growth and Development explores how keeping an arm's length relation with the private sector, through careful planning by reform teams/experts, helped Botswana, Japan, Taiwan, Cape Verde, Mauritius, and Malaysia attain astounding growth rates and reduction in poverty levels. It explains the virtues of experts/reform teams led growth and how they can help developing countries grow and reduce poverty levels. Before enjoying the juicy explanation in the paper, we need to be clear that the countries that are chosen as success examples in this paper carried out the reforms well before the WTO regime's harsh conditions on SEZs and import-substitutions policies were in place, which essentially allowed them to engage in export-led growth strongly supported by the state. This is exactly the theme of earlier paper written by Nobel laureate Michael Spence and Mohamed A. El-Erian. Almost all the stuff that is coming out of the CGD recommends countries to learn from the experiences of China and India. See this discussion as well.

Anyway, the paper outlines six functions of reform teams/experts:

  1. Designing development strategies
  2. Leading the dialogue with the private sector
  3. Grooming political leaders
  4. Leading critical policy negotiations
  5. Mobilizing and allocating resources
  6. Compelling the administration to act

...How did these reformers organize themselves at the beginning of their development journey? A recent study examined that question by focusing on five cases—Botswana, Cape Verde, Malaysia, Mauritius, and Taiwan (China)—chosen because of their varied cultural and administrative heritages (ranging from strong autocratic governments to weak multiparty coalitions). These economies achieved remarkable performance despite dire starting conditions. Botswana was the poorest country in the world in 1966, with only 22 university graduates and 12 kilometers of paved roads. Mauritius had an economy that depended almost exclusively on sugar and was prone to violence in the decade before independence in 1968. Cape Verde had virtually no private sector and among the world’s worst human development indicators in 1975.

...Malaysia’s team was its Economic Planning Unit, which reported directly to the prime minister. The unit started in the early 1960s with 15 staff, half of whom were expatriates. Cape Verde relied on three returnee advisers around the prime minister (who was also the minister of planning and development assistance) in 1975. Botswana also had an Economic Planning Unit, which started in 1965 with two economists and soon became the core of the powerful Ministry of Finance and Development Planning. Taiwan (China) had the Council for U.S. Aid (created in 1948), which reported directly to the president and combined some of the economy’s best engineering minds with top-notch U.S. economists.

Other star performers followed a similar approach—with Singapore relying on its Economic Development Board, Chile on its “Chicago boys,” the Republic of Korea on its Economic Planning Board, and Japan on its Ministry of Trade and Industry.

...The reform teams identified key constraints and success factors by industry, such as ensuring good governance in mining and developing best practice export processing zones for light manufacturing and information and communication technology. They also adapted the strategies to changing conditions (such as rising labor costs) and terminated bad experiments (Taiwan, China, is one of the few economies ever to abandon an ailing automotive assembly industry).

All the economic planning units that the paper mentions relied on a carefully planned industrial policy designed to reduce coordination failures, bridge informational gaps and asymmetries, and reduce negative spillover effects. One strong point that can be inferred from this paper is: You need to have a carefully planned industrial policy!

Food Inflation Watch: Cowen thinks freer trade can fill empty rice bowls

Professor Tyler Cowen argues that empty rice bowls can be filled if there is more freer trade in foodstuffs (only about 5-7% of total rice production is traded across borders). He thinks that in the long-run restrictions on food exports is going be counterproductive.

..Restrictions on the rice trade run the risk of making shortages and high prices permanent. Export restrictions treat rice trade and production as a zero- or negative-sum game where one country’s gain comes at the expense of another. That’s hardly the best way to move forward in a rapidly growing world economy.

This lack of support for trade reflects a broader and disturbing trend. An increasing percentage of the world’s production, including that for agriculture, comes from poor countries. Over all, that’s good for rich countries, which can focus on creating other goods and services, and for the poor countries, which are producing more wealth. But it can slow the speed of adjustment to changing global conditions.

...Many poor countries, including some in Africa, could be growing much more rice than they do now. The major culprits include corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice.

...The sadder truth is that when it comes to food production — arguably the most important of all human activities — Mr. Friedman’s free-trade ideas still haven’t seen the light of day.

Okay, honestly this is yet another attempt to fully justify the virtues of free markets and free trade. Cowen explains basic economics about trade and relates it with the stuff going on in the Philippines and other countries. However, he stretches this analysis too far by bringing Friedman into his explanation. We know that free trade and all the efficiency and productivity arguments related to it are possible only when there are no distortions or inefficiencies in other complementary factors. For instance, how would Nepal and Burkina Faso benefit from freer trade in rice if the transportation cost is at least 30% over the price of foodstuff. Moreover, if there is freer trade (which is unlikely without revision of the Doha Round given the economic and political constraints...though I root for more open markets but with some caution), then major rice producers like India, Vietnam, and Egypt, among others would be the only producers in the long run because it would 'creatively destruct' meager rice production in, say, Nepal and Burkina Faso (I am not sure whether there will be creative creation of new rice producers because those who can have been producing since decades). The relatively cheaper (if any) rice from major producers (remember economies of scale, mass production, and cheaper price leading to existence of few big companies in the market...and who knows they might jack up prices again) would take over markets all over the world. This is fine but what if some emergency happens or a major policy shift occurs, which would disrupt the supply chain. Well, people from net importers would again have empty bowls!

Anyway, the dictates of Friedman would not work precisely because there is "corruption in the rice supply chain, poorly conceived irrigation systems, terrible or even nonexistent roads, insecure property rights, ill-considered land reforms, and price controls on rice." Tyler admits the existence of these inconsistencies (which are going to stay with us because of greedy and self-interested nature of human beings) but still repents that "Mr. Friedman’s free-trade ideas still haven’t seen the light of day.". I sense some contradictions! Also, the incentives thing Cowen talks about is pretty hard to come by. How would farmers up in the mountains in Bhutan, Nepal, India or farmers in Sub-Saharan Africa get incentives to grow more rice, even in the face of higher prices in the international market, if they do not have control over land, lack credit to buy seeds and fertilizers, bear higher transportation cost, and, most importantly, are very unsure about climatic factors. There are so much lags in information dissemination, procurement of seeds, harvesting, and accessing the markets.

Farming in the emerging markets (and developing countries) is riddled with market failures and does not react to price signals as other businesses do. This sector is sticker than any other sector (a 10% increase in prices leads to a 1% increase in output), and there are numerous bottlenecks, such as lack of access to finance- the main reason why Kenyan and Ethiopian farmers planted less this year. Even if there is substantial move towards free trade (hopefully, under a revised Doha Round), bottlenecks and market failures would decrease the pace of transition to a new equilibrium. The adjustment process Cowen talks would be very slow and might in fact make some countries much more worse off.

Meanwhile, Rodrik disagrees with Cowen's assertion that freer trade would boost global supplies and lower prices. He uses similar basic economics arguments to assert that the net effect would depend on whether a country is net importer or net exporter of food in the international market. If a country is a net importer, then it would see lower prices. However, if a country is net exporter, then its domestic market would see higher prices relative to other products. Relative to the international market prices, domestic prices would be lower but when there is higher demand, it also pushes domestic prices up, which might still be cheaper to customers from other countries. See more here

Trade works by relieving the relative scarcity of goods.  The key here is the term "relative."  Food importing countries are food scarce countries, and as they open up to trade, the relative price of food falls.  But if you are Thailand or Argentina, where other goods are scarce relative to food, freer trade means higher relative prices of food, not lower.  And all the induced efficiency benefits and short- vs. long-run effects that Cowen talks about have no bearing on this conclusion: in the end some countries have to be net importers, and others net exporters.

Here is Esther Duflo's take on rising food prices. Here is food crisis in figures and charts.

Sunday, April 27, 2008

Shattering taboo: Woman with a buffalo-cart!

tharu woman with a buffalo-cart

A Tharu woman drives a buffalo-cart at Tikapur in Kailali district on Friday. This activity used to be male preserve until recently.

(Source: The Kathmandu Post, April 26, 2008)

Food Inflation Watch: Duflo argues for the need for insurance

MIT economist Esther Duflo on rising food prices:

...Several reasons explain the upward trend in prices, including the demand for biofuels (which consume a significant part of the corn produced worldwide), and the growth and enrichment of the world population (particularly the increased demand for meat in China – paradoxically, it takes more grain to produce a calorie in meat form than it does to produce a calorie in grain form).

Several short-term factors also help to explain the recent price peak. Because the main consumers of rice are also producers, the volume of rice traded is low compared to the volume of rice produced (only seven percent of produced rice is traded). Restrictions by big producers (such as India) can thus have large impacts on the world price of rice, since they affect a large proportion of the volume of rice traded. It keeps the prices in India relatively insulated from what is happening on the world market, however. Wheat harvests have been poor in several major producing countries, rice is suffering from a mysterious parasite in Vietnam, and following accusation of corruption and mismanagement in the last few years, there have been sharp declines in grain stocks maintained by governments to stabilise prices (they are at their lowest levels since 1984). As a result, prices are not only high in general, but also more volatile (another drop in rice prices is expected after the harvests in Indonesia and India); even the financial crisis plays a role: in the current meltdown, commodities offer an interesting betting opportunity.

...So when grain prices rise, some of the poor gain, and some lose – in the short-term. In part, the uproar over food prices reflects a fundamental political economy reality: when some gain and some lose, the voice of those who lose is always louder. This is particularly true of an increase in food prices, which hurt primarily the urban poor. In the medium-term, however, an increase in price volatility is damaging for everyone. Poor families in developing countries are already facing enormous risks (they are often self-employed, they are subject to the uncertainties of weather, and their health is fragile), and there is very little insurance against such risks, apart from their own savings or informal solidarity. Furthermore, these risks are more serious for households struggling to provide the bare minimum. A setback might mean sacrificing the children’s education, or not being able to save a little girl from a diarrhea attack (on this, see a beautiful paper by Elaina Rose, which showed that during drought, the relative survival probability of girls dramatically declines).3 A passing difficulty can leave a permanent scar.

Beyond emergency relief, which the world community is scrambling to organise at the moment, it is essential to establish effective insurance against variability in food prices for the poorest. Many argue now that the way to do it is to stop trade and encourage countries be “self sufficient” in food. This seems of course a third best solution, since the countries would then be entirely dependent on the vagaries of the weather at home. It is also not clear what countries that are net food importers would do (in the long run, the argument goes, they will improve their productivity… however, given Senegal’s climate, producing rice there will always be much more expansive than doing it in Thailand). The traditional method used by developing country governments – maintaining large stockpiles of grain by buying when the price is low and selling when the price is high – has its share of problems. In India, it was said that at some point that there were enough bags of rice in those storage facilities to go to the moon and back. The losses in storage and to corruption were important. Alternatively, the governments can manipulate prices using taxes and subsidies. Or perhaps it is time to be creative and make the international financial services actually work for the poor: governments could provide price insurance for the poor (in the form of transfers to some when price are high, and others when price are low). Countries that are neither net sellers nor net buyers could do this internally, and countries that are either net sellers or net buyers should be able to sell this insurance on the world market. There is nothing straightforward about these solutions. The key point, however, is that it is urgent to think of something.

The Cost of Food: Facts and Figures (from the BBC News)






Stuff by and of John Maynard Keynes

Here are some interesting stuff from the great economist John Maynard Keynes.

  1. The Economic Consequences Of The Peace (published in 1920)
  2. The World's Economic Outlook (published in 1932)
  3. Introduction by Paul Krugman to The General Theory of Employment, Interest, and Money, by John Maynard Keynes
  4. The General Theory of Employment, Interest, and Money (published in 1935)
  5. An Open Letter to President Roosevelt
  6. Keynes, Einstein and Scientific Revolution (by James K. Galbriath)
  7. Tonnes and tonnes of stuff here

Enjoy the classic masterpieces by Keynes(except for #3 and #6)! HT to DeLong

Friday, April 25, 2008

Food Inflation Watch: Ban Ki-moon urges action

The UN Secretary General Ban Ki-moon has urged all countries to contribute money to FAO (to the tune of $755 million) so that it can provide immediate relief to the most needy ones. The food crisis, triggered by rising prices, have turned violent and costly for governments around the world. The World Bank estimates that as many as 100 million people could go down the poverty line- a watershed in the achievements against poverty in last few years. Moreover, it also estimates that 33 countries are extremely vulnerable to chaos due to rising food crisis.

What I am wondering is why is it so difficult to raise $755, that too for a genuine cause? The developed countries organize so many development forums for developing countries and raise million of dollars in a day or two (for instance, for Afghanistan, Nepal, etc for reconstruction.) but why can't it do the same to solve this crisis? Everyone knows that the crisis is bubbling fast and it can explode any time, any where in the world, triggering a chain reaction (some say it might lead to "cold war" over food...a very exaggerated notation and prediction). Still, why are the developed countries so stingy in contributing money for a genuine, immediate cause? I can comprehend the economics behind it but not the politics. The champions of capitalism and free markets should be more concerned about calls for move to socialist state structure in Latin America due to capitalism's inability to deal with crisis in necessary items (remember, the president of Bolivia talked about revising capitalism last week!). This could prove more costly because it might accelerate the rate of move to socialist state in Latin America.

Interesting papers from the Journal of Development Economics

From Journal of Development Economics, Volume 86, Issue 2 (June 2008)

Roads out of poverty? Assessing the links between aid, public investment, growth, and poverty reduction


This paper presents a dynamic macroeconomic model that captures key linkages between foreign aid, public investment, growth, and poverty. Public capital is disaggregated into education, core infrastructure, and health. Dutch disease effects associated with aid are accounted for by endogenizing changes in the relative price of domestic goods. The impact of shocks on poverty is assessed through partial elasticities and household survey data. The model is calibrated for Ethiopia and changes in the level of nonfood aid are simulated. The amount by which (nonfood) aid should increase to reach the poverty targets of the Millennium Development Goals is also calculated, under alternative assumptions about the degree of efficiency of public investment.


Is migration a good substitute for education subsidies?


Assuming a given educational policy, the recent brain drain literature reveals that skilled migration can boost the average level of schooling in developing countries. In this paper, we introduce educational subsidies determined by governments concerned by the number of skilled workers remaining in the country. Our theoretical analysis shows that developing countries can benefit from skilled emigration when educational subsidies entail high fiscal distortions. However when taxes are not too distortionary, it is desirable to impede emigration and subsidize education. We then investigate the empirical relationship between educational subsidies and migration prospects, obtaining a negative relationship for 105 countries. Based on this result, we revisit the country specific effects of skilled migration upon human capital. We show that the endogeneity of public subsidies reduces the number of winners and increases the magnitude of the losses.


Remittances, transaction costs, and informality


Recorded workers' remittances to developing countries reached $167 billion in 2005, bringing increasing attention to these flows as a potential tool for development. In this paper, we explore the determinants of remittances and their associated transaction costs. We find that recorded remittances depend positively on the stock of migrants and negatively on transfer costs and exchange rate restrictions. In turn, transfer costs are lower when financial systems are more developed and exchange rates less volatile. The negative impact of transactions costs on remittances suggests that migrants either refrain from sending money home or else remit through informal channels when costs are high. We provide evidence from household surveys supportive of a sizeable informal sector.


Institutions and concentration


In a new dataset of 1.3 million firms from over 100 countries, I establish a number of regularities in cross-country differences in economic concentration. Concentration of sales and employment is substantially higher in smaller countries and in less-developed countries; these two factors alone explain roughly half the cross-country variation in concentration. Nevertheless, a number of institutional factors offer additional explanatory power for concentration. Concentration is higher in countries with higher entry costs for new firms, in countries with weaker antitrust policy, in countries with less financial development, in countries with weaker rule of law, and in countries with more burdensome regulation. Weak institutions are associated with higher concentration especially in industries that do not have naturally high levels of concentration. In addition, the relationships between institutions and concentration are more pronounced in nontradable and investment-intensive industries, suggesting that natural barriers to competition facilitate the monopolization of sectors especially when institutions are weak.

Bringing world-class health care to the poorest

Dr. Ernest Madu runs the Heart Institute of the Caribbean in Kingston, Jamaica, where he proves that -- with careful design, smart technical choices, and a true desire to serve -- it's possible to offer world-class healthcare in the developing world. Listen for some eye-opening statistics on heart disease, which is as ruthless a killer in poorer nations as in richer ones.

Thursday, April 24, 2008

Food Inflation Watch: Maize export ban by Nepal

The Nepali government has banned export of wheat from the country amidst rising food crisis in the international market. This move comes on the backdrop of shortage of wheat in the country because producers were increasing exports to Bangladesh, where wheat price is much higher than in Nepal. This reduced wheat supply in the Nepali market and shot up prices. Nepali flour mills, bakeries, biscuit, and noodle factories are expected to benefit from this move.

India, Vietnam, China, Bangladesh, Thailand, Philippines, Egypt, and many others have either imposed export ban or quotas and liberalized imports. Meanwhile, there have been riots in Latin America, Asia, and Sub-Saharan Africa. If all countries follow suit, then individual acts would stall international trade. This is going to put another hurdle in passage of the Doha Round, where agricultural sector reform has been a bone of contention between the West and the developing countries. What would be an acceptable solution?

My reaction: now even Nepal is fueling speculative drive in the international market. Prices began to rise rapidly after India impose ban on exports, followed by China, Vietnam, Thailand, and many others. More worse to come. The countries are ruining their own markets!

Will Green Revolution Help Solve Poverty and Hunger in Sub-Saharan Africa?

No, says a policy brief (an old one, published in October 2006) from the Institute for Food and Development Policy. I somehow stumbled upon this policy brief. It looks interesting though I think that a global effort to promote (rather revive) the Green Revolution is definitely going to produce some good outcomes.

The policy brief is titled : Ten reasons why the Rockefeller and the Bill and Melinda Gates Foundations' Alliance for another green revolution will not solve the problems of poverty and hunger in Sub-Saharan Africa.

The authors argue that, based on the first Green Revolution experience, this initiative will not succeed because:

  1. the Green Revolution actually deepens the divide between rich and poor farmers.
  2. over time, Green Revolution technologies degrade tropical agro-ecosystems and increase environmental risk.
  3. the Green Revolution leads to the loss of agro-biodiversity.
  4. hunger is not primarily due to a lack of food, but rather because the hungry are too poor to buy the food that is available.
  5. without addressing structural inequities in the market and political systems, approaches relying on high input technologies fail.
  6. the private sector alone will not solve the problems.
  7. genetic engineering (GE) will make Sub-Saharan smallholder systems more environmentally vulnerable.
  8. GE crops into smallholder agriculture will likely lead to farmer indebtedness.
  9. the assertion that "There Is No Alternative" (TINA) ignores the many successful agro-ecological and non-corporate approaches to agricultural development.
  10. AGRA's "alliance" does not allow peasant farmers to be the principal actors in agricultural improvement.

Recommendation from the authors: Invest in the service of the struggle by peasant and farmer organisations and their allies to truly achieve food sovereignty.

The recommendation is quite blurry. At a time when there have been calls for revival of the Green Revolution in Sub-Saharan Africa due to sky-rocketing food prices, it won't hurt to look at the concerns of the authors of this policy brief.

Food Inflation Watch: Zoellick's take on high food prices

The World Bank president Robert Zoellick argues that we have to solve the burden of high food prices on the most vulnerable people in the short run and in the long run, through a New Deal for Global Food Policy, we need to solve not only the food crisis but its underlying causes (energy, yields, climate change, investment, marginalization of women, economic resiliency, and growth). The column is pretty much snippets of the same speech he delivered at a CGD event in Washington, D.C.

Nancy Birdsall and Arvind Subramanian propose that under such a "new deal major developing country producers set aside for now their reasonable objections to traditional rich country agricultural protection -- the bone of contention in the Doha trade round -- at least in the case of food staples (if not cotton and cocoa). Rich countries would ideally reduce this protection on their own (as their taxpayers might well like in the case of domestic production subsidies). But for a hunger deal now their long-perverse agricultural protection is not a central issue -- and leaving it aside has the political virtue of greasing the wheels of a global deal on hunger."

Rodrik agrees that "unilateral trade policies in this area have clear negative externalities--export taxes in food exporting countries and import liberalization in food-importing countries both raise world food prices--the case for some kind of international coordination is indeed quite strong." However, he finds it pretty "mischievous" that Birdsall and Subramania want Zoellick to head the effort.


We should start by helping those whose needs are immediate. The United Nations' World Food Program requires at least $500 million of additional food supplies to meet emergency calls. The U.S., European Union, Japan and others must act now to fill the gap -- or many more people will suffer and starve.

Skyrocketing food prices have increased attention to the larger challenge of overcoming hunger and malnutrition, the underlying cause of the deaths of an estimated 3.5 million children under 5 each year. More than 20 percent of maternal deaths are traced to malnutrition. It weakens immunities to diseases. Hunger and malnutrition are a cause, not just a result, of poverty.

A shift from traditional food aid to a broader concept of food and nutrition assistance must be part of this New Deal. In many cases, cash or vouchers, as opposed to commodity support, is appropriate and can enable the assistance to build local food markets and farm production. When commodities are needed, purchasing from local farmers can strengthen communities. School lunch programs draw children to classrooms, while helping healthy kids to learn, and some offer parents food, too.

We can help create a "Green Revolution" for sub-Saharan Africa by assisting countries to boost productivity throughout the agricultural value chain and help small-holder farmers to break the cycle of poverty.


Food Inflation Watch: Drought in Thailand

Thailand is one of the largest rice producer and exporter. Now, reprots are coming in that it is too suffering drought. This is going to potentially push the food prices up. Too bad! Also see this

More than 10 million people in parts of Thailand's rice bowl region have been hit by drought, the government said on Monday, causing further concerns as prices of the staple grain soar. Thailand's Disaster Prevention and Mitigation department reported that 55 of the kingdom's 76 provinces were struggling with drought, mostly in the central, north and northeastern regions. More than 151,000 rai (60,000 acres) of farmland has been affected, they said in a statement, including half of the key central rice growing provinces.

The first rice harvest of the year in Thailand, the world's biggest rice exporter, traditionally ends in late March or early April. Farmers then let the fields recover, before planting a second harvest in May. But as export and domestic rice prices hit record highs, many farmers are trying to plant a third crop or move their second harvest forward to take advantage of the boom. The benchmark Thai variety, Pathumthani fragrant rice, was priced on April 9 at 956 dollars per tonne for export, up about 50 percent from a month earlier, the Thai Rice Exporters Association said in its price survey. International demand for Thai rice has soared after other top exporters, Vietnam and India, imposed limits on exports to ensure domestic supply.

Monday, April 21, 2008

Private school fad in Pakistan

A new WB reprot on the state of education in Pakistan (particularly a survey from Punjab)argues for reevaluation of the education sector policies and reforms. It argues that there has been a dramatic rise in private schools in Pakistan and the public schools, with similar wage rate for teachers, are vying with the private schools to attract students. The report argues that the government should reevaluate its education policies and rather than fostering neck-to-neck competition between public and private schools, it should focus on providing better information to the public by assessing the quality of education-both public and private- so that households can make better decision. This means that the government should try to narrow information asymmetry gap. The report finds that between 2000 and 2005, the number of private schools increased from 32,000 to 47,000, and by the end of 2005, one-third of enrolled children at the primary level was studying in a private school.

Just an increase in the number of private schools is not a stuff to celebrate. What matters is the type and quality of education in the private and public schools and their reach in the rural areas. As generally expected, the report finds out that children in private schools score significantly higher than those in government schools, even when they are from the same village. In fact, it will take children in government schools 1.5 - 2.5 years of additional schooling to catch up to where private school children are in Class 3.
So, why are we seeing such a tendency in Pakistan? Well, the report argues that it is because the wedge between public and private school household expenditure is decreasing, i.e. private schools are becoming cheaper- one month's fee in a private school is roughly the equivalent of one day's wage for an unskilled labor. This means that sending kids to a private school is becoming cheaper and easier. It should be noted that people in South Asia view those attending private school as "well-off" than those attending public school, even if the private and public schools are identical in all respect. It is a matter of status in the society. This might explain the influx of students to private schools despite the fact that the report shows outcome from attending private school is more than from public school.
I am wondering why the government is still operating public schools when the cost to educate a child in a private school is Rs.1000 per year whereas in a public school it is Rs.2000. The report also finds out that since 1995, 50% of all new private schools have set up in rural areas. Is it becasue of private school are biased against operating in rural areas? More

Saturday, April 19, 2008

Maoists, price distortion, and economy

The Kathmandu Post has a nice editorial about the need for the Maoists to face the reality and get hit by the forces of market. The Maoists are vociferous against any decrease in fuel subsidies and increase in fuel prices. The country has been reeling under fuel shortages, whose reason range from strikes to subsidies to colossal deficit in NOC's balance sheet to IOC's unwillingness to supply fuel without NOC clearing its outstanding dues to mismanagement and corruption. The main reason why the NOC is running in deficit and debt and is not able to pay dues to the IOC is because of huge price distortion. Any attempt to up fuel prices was met by violent riots and closures, mainly initiated by the Maoists. Now, the real test for the Maoists have come. They have won the election with a landslide victory and when they take over the government, it will be interesting to see how they deal with the pressure from IMF, WB, and the donor agencies to reduce price distortions. They got to realize that populist agenda can bring them in power but it cannot rectify the distortions in the market. Meanwhile,I am wondering from where they would find money to break-even the balance sheet of NOC, which is already at a loss of over Rs 3 billion.

Good paragraph from The Kathmandu Post:

Why should the Nepali Congress and the UML remain out of the government? First, the people have rejected them. Second, the Maoists will never be completely exposed in public otherwise. The people should get to understand that even the Maoists cannot stop taking the overdue action of raising the price of petroleum. Both the people and the Maoists have to realize that price rises are not under anybody’s control. The only way to fight inflation is economic growth and job creation. Third, the political parties should go to the people and reform their grassroots structure. They will have enough time for that purpose, if they refrain from joining the government. This is also an opportunity for the parties to weigh their colleagues and find out who are really committed to democratic principles and who are opportunists.

More on fuel crisis in Nepal here, here, here, and here.

Wednesday, April 16, 2008

Africa’s Economic Growth

I attended one more discussion forum yesterday. Actually, it was a book launch ceremony organized by the Center for Global Development (CGD). The huge, expensive two volume book “The Political Economy of Economic Growth in Africa, 1960-2000” is written by nine authors, whose profession range from academicians to central bank governors.

book Frankly, the program was boring, not in terms of content but in style of presentation (monotonous style). Also, the book is too expensive (costs more than $250; it is a little less than GDP per capita of a Nepali!).

Anyway, I tried to follow what is unique about this book, apart from the historical background and blame on crisis, political strife, famine….the list goes on and on. Benno J. Ndulu, Governor of Central Bank of Tanzania argued that 1980-2000 was “two decades of lost opportunity” for Africa. Why? I did not get his reasoning for this! I think he was implying that the large countries like Nigeria, DRC, and Sudan are not growing as China and India have done. The growth rate of Sub-Saharan Africa (SSA) was just 0.5% between 1960 and 2004. The developing countries had a growth rate of 2.5%.

He argued that the endowment argument does not explain the variation in growth in Africa. For instance, Zambia and Botswana are both resource-rich and landlocked, and Cote d’Ivoire and Mauritius both have coast and are resource-poor. They have different development paths. Four stuff worth noting from the book:

  • Growth experience varied and was episodic

  • Slow productivity growth (investment return is just 1/3 that of Asia)

  • Policy and governance matters a great deal for growth

  • Disadvantage from geography and resource-curse (account for 1/3 of the gap of growth with other LDCs)

The other speakers were a bit unclear about the stuff they were presenting. It might be that they were skipping and speeding parts of their presentation in the interest of time. So what does Africa need? One of the speakers said, it needs “four big I”: Investment, Infrastructure, Innovation, and Institutional Capacity. More here

Growth Strategies for the Developing Countries

Today I attended a very useful panel discussion on Economic Growth Strategies for Developing Countries in an Era of Global Uncertainty. The discussion focused less on the global uncertainty and more on how to propel growth and policy recommendations based on the experiences of China and India. Particularly amazing was the disagreement between Michael Spence and Lawrence Summers, who argued that the conclusions drawn by Spence and Mohamed A. El-Erian in a paper titled Growth Strategies and Dynamics: Insights from Country Experiences, a working paper series published by the Commission on Growth and Development, is biased towards the unconventional thinking in development economics.


The panel consisted of very well-known economists: Michael Spence (Nobel Laureate in Economics in 2001 and professor at Stanford University), Lawrence Summers (professor of economics at Harvard University), Robert Rubin (director and chairman of executive committee of the Citi Bank), Han Duck-soo (former Prime Minister of South Korea), Danny Leipziger (VP for Poverty Reduction and Economic Management, PREM at the World Bank), and Lael Brainard (VP and director of the Global Economy and Development Program and Chair in International Economics at the Brookings Institution). The event was organized by the Brookings Institution.

Spence presented the main findings of his paper. He argued that the advanced countries’ model of growth strategies is an incomplete guide but not worthless for the developing countries. He was arguing for the gradualism in growth strategies and polices as seen in China and to a lesser extent in India. Experimental approach is needed for successful navigation of growth strategies and policies, again as done by China. He also argued for the effectiveness of government intervention in key areas to bring coordination in economic activity. Governments should engage in vigorous policy debate with a definite end, i.e. policy wrangling is not enough, there should an end to policy debates and concrete action should follow such debate. Moreover, governments should admit and fix mistakes (especially ex-post determined).

He outlined key areas of policy debates with incomplete maps:

  • Speed of opening up the current account

  • Financial sector maturity and opening up of capital account...(see how Rodrik responds to this issue here)
  • Stimulate export diversification (lessen inefficiency and provision of transitory incentives)
  • Industrial policy (exchange rate and capital account management)
  • Surplus labor problems in the early stages of growth
  • Finding successful formula and doing it for too long
  • Protecting people and families during transition (creation/destruction during transition)

Spence was pretty much positive on all the points listed above. He also briefly talked about climate change and argued that we need to reduce per capital CO2 emission by a factor of 2. He was stressing more on the growth model of China and the experimental approaches to policy design.

Larry Lawrence Summers was not happy with the conclusion of the paper. He argued that he sensed trouble with three issues: (i) Methodology and policy recommendation, (ii) Cheap shot nature of growth strategies recommendation (not to be quick to pick up Chinese success and advocate its emulation in one or the other form. Remember, how WDR 1979 extolled Romanian growth model, which crumbled few years later...), and (iii) Belief in unconventional approaches...

Larry seems very much discontent with the way Spence recommended unconventional approaches followed by countries like China. He labeled the unconventional approach a “modern mercantilist approach” obsessed with export-led strategy, which Spence favors as a growth strategy in early stages, partly because of the existence of surplus labor in the agricultural sector in the developing countries. As Larry was arguing, the discussion was becoming intense (I think Larry felt he was being pounded hard when other panelist kind of agreed to Spence’s conclusion…Larry was showing strong discontent with the “cheap shot” approach of policy recommendation and the glorification of industrial policy). Anyway, he thinks there are three key problems with the unconventional approach recommended by Spence.

  1. How can an industrial policy differentiate whether one sector is better than the other? How sure are we that there is existence of labor surplus in the developing countries?...(wait Larry, please see Rodrik's paper Normalizing Industrial Policy... also see this one.)

  2. If all the developing countries try to subsidize exports (like South Korea, Mauritius, Malaysia) then who guarantees that the increased volume of goods would be bought? Who is going to be importer and will there be enough import demand?

  3. How capable is government to execute policy reform?

Larry argued that these questions are overlooked by the unconventional approaches, which overemphasize heterodoxy. He is very skeptical of local heterodoxy model followed by China and argued that those who derive quick conclusion on the effectiveness of heterodoxy looking at China are making arguments like Joe Stiglitz does! Larry was pretty much pissed by this time (quite visible from his white-turned-red face in just ten minutes!). Meanwhile, I was wondering why Larry is so pessimistic about import demand. Why does he think that whatever the developing countries produce has to be consumed by the West for the former to grow? South-South trade is already rising up at record level and if businesses concentrate more in serving the bottom billions, then there is huge demand, both domestic and import demand. I wonder why Larry does not consider the bottom billions as potential customers. See here how cell phones are already customized to tap the huge bottom billion market. Larry seems pretty much obsessed with the neoclassical approach, whose steadfast followers have gained little in the past five decades.

After Larry’s fiery discontent, Han Duck-soo came to Spence’s rescue. Being a PM of a country which had followed the unconventional approaches during the early stages of growth, Han argued that the world foreign demand of exportable goods is elastic and there is still scope for export-led growth strategies. He argued that South Korea tried to eliminate widespread distortions in the economy by harmonizing the activities of the private sector through an industrial policy. The businesses were competing with each other in an unhealthy fashion and there were a lot of distortions. All the government did was to reduce coordination failure, minimize information asymmetry, and maximize positive spillover effects in the economy. This is the unconventional approach Larry doubted. But he gave a caveat: there should be strong political leadership and effective government though. Moreover, an industrial policy can differentiate the best sector after looking at the constraints and harmonizing similar activities in the economy. The ingredients of growth are in an economy but not always in a good combination. They need to be harmonized through a good policy package. Spence and Han resonated the arguments usually argued by Rodrik (as far as I know!).

Then Robert Rubin argued that there is nothing wrong with export-led policy in the low income countries. However, the US should cope with the changes in the global economy and focus on distributional and social safety nets in the domestic market. Rubin argued that an effective government is itself an ingredient for growth. Also, he said that a relatively authoritarian government in the early stages of growth has been successful (South Korea, China, Malaysia). The biggest challenge now is: How to promote effective governance with a democratic system?

There was so much stuff going on in there. Unfortunately, I cannot summarize all of them. I will definitely go through the paper in the next couple of days and write a summary. The paper is highly recommended. Also, credit for the first picture goes to my friend Jehea Song, whose company and event pictures from her iphone I always enjoy!