Zoellick offers 10-point plan for tackling food crisis

The World Bank President Robert Zoellick writes in the FT today and offers ten point plan for tackling food crisis:

First, we should agree in Rome to fund fully the World Food Programme’s emergency needs, support its drive to purchase food aid locally and ensure the unhampered movement of humanitarian assistance.

Second, we need support for safety nets, such as distributing food in schools or offering food in return for work, so that we can quickly help those in severe distress. The World Bank, working with the World Food Programme and the Food and Agriculture Organisation, has already made rapid needs assessments for more than 25 countries. In Rome we should agree on co-ordinated action.

Third, we need seeds and fertiliser for the planting season, especially for smallholders in poor countries. Together, the FAO, the International Fund for Agricultural Development, regional development banks and the World Bank can expand this effort by working with civil society groups and bilateral donors. The key is not just financing, but fast delivery systems.

Fourth, we need to boost agricultural supply and increase research spending, reversing years of agricultural underinvestment. We must be neither Luddite nor advocates of a single scientific fix. The Consultative Group on International Agricultural Research has been receiving about $450m a year. We should double this investment in research and development over the next five years.

Fifth, there needs to be more investment in agribusiness so that we can tap the private sector’s ability to work across the value chain: developing sustainable lands and water; supply chains; cutting wastage; infrastructure and logistics; helping developing country producers meet food safety standards; connecting retailers with farmers in developing countries; and supporting agricultural trade finance.

Sixth, we need to develop innovative instruments for risk management and crop insurance for small farmers. Next week the World Bank’s board will consider weather derivatives for developing countries, with Malawi being identified as a likely first client. Should Malawi suffer a drought it would receive a payout to offset the price of imported maize.

Seventh, we need action in the US and Europe to ease subsidies, mandates and tariffs on biofuels that are derived from corn and oilseeds. The US’s use of corn for ethanol has consumed more than 75 per cent of the increase in global corn production over the past three years. Policymakers should consider “safety valves” that ease these policies when prices are high. The choice does not have to be food or fuel. Cutting tariffs on ethanol imported into the US and European Union markets would encourage the output of more efficient sugarcane biofuels that do not compete directly with food production and expand opportunities for poorer countries, including in Africa. We need to find ways to advance to second-generation cellulosic products.

Eighth, we should remove export bans that have led to even higher world prices. India has recently relaxed its restrictions. But 28 countries have imposed such controls. Removing these could have a dramatic effect. With only 7 per cent of global rice production traded on markets, if Japan released some of its stocks for humanitarian purposes and China sold 1m tons of its rice, we could damp the price immediately.

Ninth, we should conclude a Doha World Trade Organisation deal in order to remove the distortions of ag­ricultural subsidies and create a more adaptable, efficient and fair global food trade. The need for rules that are agreed multilaterally has never been stronger.

Tenth, there should be greater collective action to counter global risks. The interconnected challenges of energy, food and water will be drivers of the world economy and security. We might explore an agreement among the G8 and key developing countries to hold “global goods” stocks, modelled on the International Energy Agency, governed by transparent and clear rules. This would act as insurance for the poorest people, offering affordable food.

Paul Collier offers "4 ways to improve the lives of the bottom billion"

Around the world right now, one billion people are trapped in poor or failing countries. How can we help them? Economist Paul Collier lays out a bold, compassionate plan for closing the gap between rich and poor. (Source: TED)

Lake from quake!

In this photo released by China's Xinhua News Agency, partially submerged Yuli Town of worst-hit Beichuan County, southwest China's Sichuan Province is seen Wednesday, May 28, 2008. More and more buildings and roads of Yuli Town were submerged because of the swollen Tangjiashan quake lake, Xinhua said. (Source: AP)


An aerial view shows the landslide mud that formed the Tangjiashan quake lake near Beichuan county, Sichuan province, May 26, 2008, in this picture distributed by China's official Xinhua News Agency.

This combination picture of satellite images taken by Taiwan's National Space Organisation (NSPO) shows a lake being formed by landslides caused by the recent earthquake in Beichuan county, Sichuan province, China. The top picture shows the river in 2006. The second and third image show the lake after the quake. (Formosat image © 2008 Dr. Cheng-Chien Liu, National Cheng-Kung University and Dr. An-Ming Wu, National Space Organization, Taiwan/Reuters)

WEF Report: Africa @ Risk 2008

World Economic Forum (WEF) has published a report on Africa highlighting four key risks for Africa: food security, geopolitical instability, economic shocks and climate change. It says that the prospect of sustaining 5% growth rate is credible, but a number of risks loom large, threatening future development and stability.

1. Food and Freshwater Security – How best can Africa cope with increasing food and freshwater insecurity? What are the risks and opportunities for the region?

2. Geopolitical Instability – Can Africa sustain and consolidate progress on transparent and democratically accountable governance? Can it increase its institutional capacity to prevent, manage and resolve both intrastate and interstate conflict?

3. Economic Shocks – Can African resource-rich countries reduce their commodity dependency by diversifying their economies? How can wealth be better distributed? How can African countries increase their trade benefits?

4. Climate Change, the Environment and Challenges to Africa’s Development – How will global warming affect Africa? How best can the region, countries, businesses and communities adapt to mitigate its effects?

Urgent collective action is required, including raising agricultural productivity, strengthening local adaptation to climate change, improving governance and enhancing economic resilience through diversification. Decision-makers cannot assume that tomorrow’s growth story will read like today’s. The economic fundamentals are in place, but political dynamics and the scope of structural reforms are more likely to shape the next chapter. The report concludes that for Africa – a continent characterized by huge opportunities and ever-increasing regional and global interdependence – the imperative is for collective action to mitigate these shared risks.

Easterly on The Growth Report

Easterly loathes planners. This time he blasts Michael Sepence and his team their their two year long research on finding the sources of growth. He argues that the outcome of $4m investment on Commission on Growth and Development is an inconclusive big report; their answer to high growth, as Easterly reads the report, is: "we do not know, but trust experts to figure it out."

[...]This conclusion is fleshed out with statements such as: “It is hard to know how the economy will respond to a policy, and the right answer in the present moment may not apply in the future.” Growth should be directed by markets, except when it should be directed by governments.

My students at New York University would have been happy to supply statements like these to the World Bank for a lot less than $4m.

[...]The Growth Commission correctly pointed out that such an attempt to find secrets to growth has failed. The Growth Commission concluded that “answers” had to be country specific and even period specific. But if each moment in each country is unique, then experts cannot learn from any other experience – so on what basis do they become an “expert”?

[...]The commission made the common mistake of anointing high growth rates as the measure of success, whereas high growth mysteriously comes and goes. Indeed, only two of the 13 high-growth episodes the commission studied were still going at the time of the study. Yesterday’s growth failures (for example India) are today’s successes and yesterday’s growth successes (for example Brazil) are today’s failures. Much of this volatility is inexplicable and unpredictable. To give credit to whatever leader happens to be in power during a burst of high growth is just circular reasoning (How do we know they were a great leader? Because there was high growth!).

As always Easterly blasts the WB and similar 'development expert' models. He argues that growth is accidental and unpredictable by bringing in Hayekian perspectives of serchers and spontaneous order.

What to do in a world of such unpredictability? There are some general principles and they do not require experts. Another Nobel laureate gave the crucial insight a long time ago – the answer is freedom for multitudinous individuals to figure out their own answers. Friedrich Hayek said: “Liberty is essential to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realising many of our aims. It is because every individual knows so little and ... because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.”

The evidence for this vision is not found in those baffling fluctuations of growth rates, it is in the levels of development attained in the long run. Confirming Hayek, systems that give more liberty to individuals – featuring both more economic and political freedoms – are associated with much less poverty. The evidence for this comes from both history (for example old, despotic, poor Europe compared with modern, free, rich Europe) and cross-country comparisons (for example South Korea compared with North Korea, former West Germany compared with East, New Zealand compared with Zimbabwe). This alternative paradigm has a much smaller role for experts, because experts cannot direct or impose freedom from the top down (or else it would not be freedom).

I do not totally agree with Easterly and think that industrial policy and highly specific government intervention can work to rectify market failures. More here and here. More on the Growth Report here and here.

Nepal becomes a Federal Democratic Republic

Today Nepal became the newest member of the federal republic clubs. Nepal was declared Federal Democratic Republic today by first meeting of the Constitution Assembly. With this comes the ending of centuries old monarchy in Nepal. More here. More from BBC News.

To loud cheers and resounding handclaps, the first sitting of the Constituent Assembly (CA) unanimously declared the country a republic late on Wednesday night, with only four votes against. The much-anticipated meeting took the decision late on Wednesday night after a nearly ten-and-a-half-hour delay, effectively ending the 240-year-old institution of monarchy and making the king an ordinary citizen.

The Chairman of the CA KB Gurung announced that the proposal to declare the country a federal democratic republic which was tabled at the CA meet was passed with a majority vote on Wednesday at the historic meeting held at the Birendra International Convention Centre (BICC) in the capital. Out of a total 564 votes, the proposal garnered 560 votes in its favour, while only four votes were cast against the proposal.

“In the context of implementing a republic in the country, the CA meeting directs the now then King residing at the Narayanhiti palace and the private secretariat structure concerning him to leave within fifteen-days,” said Gurung reading out the government’s decision. He also directed the Nepal government to immediately control and manage the Narayanhiti palace which has now become a national property.

Home Minister Krishana Prasad Sitaula, on behalf of Prime Minister Girija Prasad Koirala, tabled the proposal for the implementation of a federal democratic republic at the CA meeting before the final votes were cast.

The CA, elected through the landmark election held last month, formally passed the proposal, bidding farewell to the only Hindu King of the world.

Emerging from the meeting, NC leader and Minister for Peace and Reconstruction Ram Chandara Poudel said,” Today we have agreed to transform the country into a federal democratic republic and oust the king and replace it with a presidential system.” Poudel added that the cabinet will sort out all the remaining issues such as the powers and duties of the president and the Deputy-President. In a meeting held at Baluwatar in the run-up-to the first CA sitting, the ruling Seven-Party alliance (SPA) agreed on a provision of a constitutional president who will execute his duties on the recommendations of the cabinet. However, in what appeared to be an eleventh-hour syndrome, the major constituents of the CA failed to reach a common agreement on other key issues until late Wednesday evening.

The 601-member CA is assigned with the responsibility of writing a new constitution and ushering the country into a new era.

On Tuesday, a total of 568 CA members took the oath of office and secrecy after being elected in the landmark CA polls conducted under First-Past-the-Post and Proportional Representation electoral systems in April.

The former rebels CPN-Maoists won 220 seats in the April 10 ballot, Nepali Congress won 110 seats, while the CPN -UML secured 103 and the newly emerged party Madhesi People’s Rights Forum (MPRF), representing Madhes the country’s southern plains along the Indian border, won 52 seats.

Amartya Sen on rising food prices

Nobel laureate Amartya Sen writes in the NYT that the demand driven food crisis would eventually end:

[...]It is a tale of two peoples. In one version of the story, a country with a lot of poor people suddenly experiences fast economic expansion, but only half of the people share in the new prosperity. The favored ones spend a lot of their new income on food, and unless supply expands very quickly, prices shoot up. The rest of the poor now face higher food prices but no greater income, and begin to starve. Tragedies like this happen repeatedly in the world.

[...]Much discussion is rightly devoted to the division between haves and have-nots in the global economy, but the world’s poor are themselves divided between those who are experiencing high growth and those who are not. The rapid economic expansion in countries like China, India and Vietnam tends to sharply increase the demand for food. This is, of course, an excellent thing in itself, and if these countries could manage to reduce their unequal internal sharing of growth, even those left behind there would eat much better.

But the same growth also puts pressure on global food markets — sometimes through increased imports, but also through restrictions or bans on exports to moderate the rise in food prices at home, as has happened recently in countries like India, China, Vietnam and Argentina. Those hit particularly hard have been the poor, especially in Africa.

There is also a high-tech version of the tale of two peoples. Agricultural crops like corn and soybeans can be used for making ethanol for motor fuel. So the stomachs of the hungry must also compete with fuel tanks.

[...]The global food problem is not being caused by a falling trend in world production, or for that matter in food output per person (this is often asserted without much evidence). It is the result of accelerating demand. However, a demand-induced problem also calls for rapid expansion in food production, which can be done through more global cooperation.

[...] While population growth accounts for only a modest part of the growing demand for food, it can contribute to global warming, and long-term climate change can threaten agriculture. Happily, population growth is already slowing and there is overwhelming evidence that women’s empowerment (including expansion of schooling for girls) can rapidly reduce it even further.

What is most challenging is to find effective policies to deal with the consequences of extremely asymmetric expansion of the global economy. Domestic economic reforms are badly needed in many slow-growth countries, but there is also a big need for more global cooperation and assistance. The first task is to understand the nature of the problem.

Links of Interest

The Festival of Economics: An Antidote to Fear

Special Report: China In Africa

China strengthens rail link with Nepal

Google, Yahoo, Microsoft: antitrust confusion

Narayanhity royal palace to be turned into national museum

CA members sworn in at BICC

Oil exporters lead continent's strong economic growth

Nepal requests India to waive duty on steel

The Growth Report on Asia

• Nine of the 13 countries that have been successful in achieving sustained high growth are from Asia: China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan (China) and Thailand.
• These nine high-growth countries all share common characteristics: engagement with the global economy, macroeconomic stability, high rates of saving and investment, the market allocation of resources, and credible and capable governments.
• Many of these Asian economies (Hong Kong, Japan, Korea, Singapore, and Taiwan) grew all the way to high-income levels.
• The region seems to be able to anticipate and change its policies on growth, Korea’s evolution from labor-intensive manufacturing to a more knowledge-based and capital-intensive economy being one example.
• Asia’s saving rates are seen as a strong engine for growth, with many Asian countries having saving rates 20 percentage points higher than Latin American countries, for example.
• High savings rates in Asia are due to macroeconomic stability, fewer dependents to take care of, and more direct measures, such as mandatory saving schemes.
• Foreign Direct Investment and the transfer of knowledge are very successful in Asia, one example being Malaysia, which has attracted multinationals to its three electronics clusters.
• Public investment in infrastructure is also viewed as a hallmark of many Asian economies accounting for 5 to 7 percent of GDP or more.
• Resource mobility is also seen as key, with governments not resisting the market forces that pull people into the urban areas. In Malaysia, agriculture’s share of employment fell from 40% in 1975 to 15% in 2000.
• Growth requires committed, credible and capable governments. Reform teams in countries, such as Singapore, Japan and Korea, were able to chart a program for growth.

Recommendation for Asia:

• Establishing a mechanism to coordinate policies of the growing number of influential countries – particularly in Asia - and to safeguard the stability of the global financial system.

There is good event on discussion about about the report at PIIE (organized by CGD). The full report is here. It would be interesting to hear what Hausmann and others have to say about this big report. Here is what Larry Summer has to say about similar report launched earlier.

Frank on the Invisible Hand stuff

Higher gas prices is good, irrespective of what Smith implied with the "invisible hand"!:

The production and consumption of many other goods, however, generate costs or benefits that fall on people besides buyers and sellers. Producing an extra gallon of gasoline, for example, generates not just additional costs to producers, but also pollution costs that fall on others. As before, market forces cause production to expand until the seller’s direct cost for the last unit sold is exactly the value of that unit to the buyer. But because each gallon of gasoline also generates external pollution costs, the total cost of that last gallon produced is higher than its value to consumers.

The upshot is that gasoline consumption is inefficiently high. Suppose that pollution costs are $2 for the last gallon consumed, but that its $4 price at the pump is just enough to cover its direct production costs. Reducing production and consumption by a gallon would then cause consumers to lose fuel that they value at $4, which would be exactly offset by the $4 in reduced production costs. The $2 in reduced pollution costs would thus be a net gain for society.

That simple example captures the classic breakdown in the invisible hand when a product’s market price doesn’t reflect all its relevant social costs and benefits. In such cases, the simplest solution is to discourage consumption by taxing it.

Doing so would not only raise revenue to pay for public services; it would also make the allocation of society’s resources more efficient — hence economists’ almost universal dismay when Senators John McCain and Hillary Rodham Clinton recently proposed eliminating the federal tax on gasoline for the summer.

The stated aim of their proposal was to ease the financial burden of sharply higher gasoline prices. But adopting inefficient policies is never the best way to help people in financial distress.

Efficiency is important because any policy that enlarges the economic pie necessarily lets everyone have a bigger slice than before. Economists opposed suspending the gas tax because doing so would make the economic pie smaller.

Robert Frank explains more here.

Free and Shared Wireless

Free and shared wireless:

Three years ago, aiming to create a global wireless network, he founded FON, a company based in Madrid that wants to unlock the potential power of the social Internet. FON’s gamble is that Internet users will share a portion of their wireless connection with strangers in exchange for access to wireless hotspots controlled by others.

The swaps, in theory, would allow “Foneros” to have ubiquitous, global wireless access while traveling for business or pleasure. But despite $55.2 million in backing from such corporate heavyweights as Google and BT, the former British Telecom, as well as newer enterprises like Skype and a handful of venture capital firms, FON and Mr. Varsavsky are still missing a crucial ingredient: scale.

At the moment, there are just 830,000 registered Foneros around the world, and only 340,000 active Wi-Fi hotspots run FON software. Because it’s built upon the concept of sharing Wi-Fi access, FON works well only if there are Foneros everywhere.

More here.

Bad summer for job seekers!

This is not a good news:

As the forces of economic downturn ripple widely across the United States, the job market of 2008 is shaping up as the weakest in more than half a century for teenagers looking for summer work, according to labor economists, government data and companies that hire young people.

This deterioration is jeopardizing what many experts consider a crucial beginning stage of working life, one that gives young people experience and confidence along with pocket money.

More here ( "Toughest Summer Job This Year Is Finding One")

Japan opens borders to Nepali workers

Good news for Nepali labor force:

...Japanese officials have agreed to accept Nepali semi-skilled and skilled trainee workers for employment with different business enterprises in Japan, said a top Nepali official.

...Japan is expected to absorb Nepali workers mainly in the industrial and agriculture sectors.

... workers having knowledge of Japanese language and culture, good work experience and the skills that can be capitalized by the home country in future will be favored while selecting them for jobs.

...Under the understanding, the trainee workers will get two years of training and one year of internship at work places in Japan, with handsome pay. He said during their trainee period the workers can earn between Rs 80,000 and Rs100,000 per month as allowance, excluding overtime, depending on the status of the employing companies.

More here.

Links of Interest

How to Think About the World's Problems (by Bjorn Lomborg)

Getting Governance Right is Good for Economic Growth (by Dani Rodrik)

Douglass North's talk on The Natural State (HT: The Bayesian Hersey)

Answering the Critics: Why Large American Gains from Globalization are Plausible ( by Gary Clyde Hufbauer)

Rising Food Prices: Drivers and Implications for Development

Falling Short: Aid Effectiveness in Afghanistan

WB has huge confidence in Nepali people

Implications of fiscal disparities for federal Nepal

Seven Questions: The Child Laborer Who Became President

India lifts ban on cement export to Nepal

Three NYU Professors named intellectuals

CGD's The Growth Report 2008

The Commission on Growth & Development (CGD) has released The Growth Report: Strategies for Sustained Growth and Inclusive Development, arguing that developing countries can achieve fast, sustained, equitable growth if they engage with the global economy and have committed leaders.

Key findings:

--Fast, sustained growth is not a miracle – it is possible for developing countries, as long as their leaders are committed to achieving it and take advantage of the opportunities provided by the global economy.

--Developing countries also need to know the levels of incentives and public investments that are needed for private investment to take off in a manner that leads to the long term diversification of the economy and integration into the global economy.

--Spence argues: “The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth. Growth can spare people en masse from poverty and drudgery. And with India needing to grow at a fast pace for another 13-15 years to catch up to where China is today, and China having another 600 million people in agriculture yet to move into more productive employment in urban areas, growth will lift many more people out of poverty in the coming decades.”

--Actions recommended by the Report to combat food price rises (once the current emergency situation is dealt with) include an end to export bans; more effective safety nets and redistribution mechanisms to protect people vulnerable from sudden shifts in prices; and a revitalization of infrastructure investment for agriculture. The Report also urges that policies that favor bio fuels over food be reviewed and, if necessary, reversed and that reserves and inventories be accumulated to relieve temporary shortages.

--The Report calls for establishing a mechanism to coordinate the policies of the growing number of influential countries and to safeguard the stability of the global financial system. Given the increasing economic importance of new global players, the document argues for a rebalancing of global responsibilities and representation.

--Just as the current credit crunch is affecting advanced economies, the Report also stresses the importance of a strong financial system in developing countries and argues for careful supervision of the banking sector to prevent banks expanding credit too far, and the removal of capital controls only in step with the financial market’s maturity.

--That growth is a crucial part of poverty reduction and the improvement of people’s lives. It is impossible for poor countries to lift large populations out of poverty without growth. Equality of opportunity and a focus on individuals and families, gender inequalities, and economic security, however, is critical to maintaining the support for growth oriented policies.

-- That growth is a long-term challenge that requires leadership, persistence, stamina, pragmatism, transparency and the support of the population.

-- That growth requires engagement with the global economy to import knowledge and technology, to access markets, and to generate a strong export sector – critical in the early stages of growth.

-- That growth must be inclusive. The Report highlights the importance of sharing the benefits of globalization, providing access to the underserved, and dealing with issues of gender inclusiveness. It notes the importance of infant and childhood nutrition to avoid long-term impairment in acquiring cognitive and non-cognitive skills, ensuring that they derive greater benefit from the education system and become more effective in the workplace.

-- That resources, especially labor, must be mobile. The Report also recommends a bridging of the divide between the formal and informal labor sectors by allowing export-oriented industries to recruit workers on easier terms than prevail in the formal sector but with the same essential worker protection in the areas of health and safety, working hours and child labor. It highlights the need to better manage the migration challenge and the results of changing demographics.

-- That growth requires high rates of investment, with the Report suggesting that overall public and private sector investment rates of 25 percent of GDP or above are needed.

-- That investment in education and health are particularly important. The Commission also calls for greater research into the measurement of students’ abilities in literacy and numeracy, and increased opportunities for women in the education system.

-- That money spent subsidizing energy consumption in developing countries is often misspent. Better to invest the resources in education and infrastructure. In addition subsidies bias the capital investment in long-lived assets away from energy efficiency and may negatively bias the structural evolution of the economy, the Report says.

Recommendations:

-- That industrialized countries finance the expansion of Africa’s tertiary education to make up for Africa’s brain drain. The report also recommends that industrialized economies implement promptly the time-bound trade preferences granted to manufactured exports from African countries to help them overcome the disadvantages of being late starters.

-- In small states, the Growth Report recommends greater regional economic integration, and a spreading of the burden of public services, through partial union, helping reduce the high per capita costs of effective government. Good governance is also an important foundation on which regional cooperation and multinational integration can build, the Report says.

-- Better governance in resource-rich countries, and more balance and transparency between the returns to the entities exploiting the resources and the governments in resource-rich countries.

-- And increased investment in higher education and innovation as economies transition from middle income to high income status.

Links of Interest

Re-uniting development economics (Paper here)

Dollar a day revisited

Is Austrian Economics Heterodox Economics?

The Economic Cost of Failing to Educate Girls

Economic Growth and Education

Education Quality and Economic Growth

Preserving the open economy at times of stress

Easterly's Reinventing Foreign Aid

I could not hold on reading the first chapter of William Easterly’s new book Reinventing Foreign Aid. As usual, he blasts Jeffrey Sachs, the MDG and similar projects, and gets irritated with the star-studded aid campaigns for their ignorance to a completely faulty aid bureaucracy. He also draws attention to lack of accountability, transparency, decentralization, and one-sided imposition of priorities on behalf of aid recipients by large aid donors like WB, IMF, PRSP programs, UNDP, OECD, G8, etc.

As in previous book, he explains the planners and searchers dichotomy in foreign aid and argues that the planning mentality of big aid agencies foreshadows the priorities of aid recipients, often leading to outcomes that are primary concerns of aid donors before releasing money. He also argues that arguments like aid works for economic development are nontestable and nonfalsifiable, leading to so much of inconclusive debate on the efficacy aid despite emerging evidences show that highest aid recipients are the ones that grew least.

He kind of cherry picks quotes from reports released by aid agencies like WB, IMF, DFID, and UN, among others and blasts them for contradictory statements and analysis. Easterly’s main arguments are like this: “Aid does not work. Either overhaul and restructure it or stop it. Let searchers find their own priorities and destinies. Enhance aid bureaucracy’s quality and efficacy based on the priorities laid out by the aid recipients.” He repeatedly (and rightly) blasts the aid agencies for being like planners (top-down approach), putting their priorities before the priorities of the aid recipients.

Everything sounds good and he more or less argues vociferously against planning mentality of the aid agencies. He also summarizes core of each chapters written by a wide range of authors. However, he explains more about those chapters that argue against the current aid structure and, more broadly, aid intervention. He explains less about chapters written by Banerjee and He and by Duflo and Kremer who argue that aid intervention can be made more effective by conducting randomized controlled trials (RCTs) of its efficacy.

Here are some of Easterly’s main points:

[…]“Nevertheless, the aid agencies often seem to have in mind the kind of engineering problem that a dam poses when designing Planning solutions to the problems of poverty. They seem to assume a Leontief production function between aid inputs and development outcomes that lends itself to detailed planning (and makes it possible to come up with precise estimates for costs of attaining plan targets): ‘‘The starting point is for donors and aid recipients to agree on a financial needs assessment that identifies the aid requirements for achieving the MDGs. Donors then need to provide predictable, multiyear funding to cover these requirements, and developing countries need to implement the reforms that will optimize returns to aid.”

[…]Because of the insistence on working through governments, aid funds get lost in patronage-swollen national health bureaucracies, not to mention international health bureaucracies. In countries where corruption is as endemic as any other disease, health officials often sell aid-financed drugs on the black market. Studies in Guinea, Cameroon, Uganda, and Tanzania estimated that 30 to 70 percent of government drugs disappeared before reaching any patients. In one low-income country, a crusading journalist accused the Ministry of Health of misappropriating $50 million in aid funds. The ministry issued an astonishing rebuttal: the journalist had irresponsibly implied the $50 million went AWOL in a single year, whereas they had actually misappropriated the $50 million over a three year period.

[…]In the domestic politics of democracies, the people who vote are the same ones who receive the services. In foreign aid, this feedback and accountability loop is broken: the rich people who give the money or vote for foreign aid are not the ones receiving aid services. The poor have no way of registering their satisfaction or dissatisfaction with aid services by how they spend or how they vote. The bottom line is that aid agencies have more of an incentive to please the rich than the poor.

[…]The comprehensive ambitions of the planners have misfired badly, crowding out more sensible and pragmatic approaches that are humble about their own limitations. The world’s poor will mostly determine their own fate by their own home-grown institutions and initiatives, as much historical and contemporary evidence suggests.

Here is Easterly about searchers and planners:

[…]The UN Millennium Project also suffers from the first problem: that planners do not really know the precise technology that translates inputs into outputs. The participants in the Millennium Project themselves know this obvious point—‘‘it is often difficult to precisely quantify the link between coverage of interventions and MDG outcomes’’—yet insist in the same sentence that somehow ‘‘national MDG planning involves mapping interventions to MDG outcomes.

I think there is something wrong with his extreme Hayekian views (see this as well) on “searchers” and “planners” because left to themselves, searchers would not even imagine to realize their own potential! Even if they do, it might take years to realize this (sadly, the poor people do not have the luxury of waiting for the right searchers for years!). Obviously, there is no doubt that the current aid structure is faulty but this does not mean that aid intervention does not work at all. Very selective aid intervention does work. For instance, Yunus (one of Easterly’s celebrated searchers) would not have been able to attend Vanderbilt University had he not received some form of financial aid and scholarship. Moreover, Yunus might not have been qualified to apply for higher education had he not attended primary and secondary school, funded by donors, in Bangladesh. Selective aid in education sector helps accelerate the emergency of searchers Easterly is talking about. Aid in education that is aimed at enhancing human capital surely works. What does not work is aid that is channeled through corrupt leaders, dictators, warlords, and those backed by special interest (especially business and corporate sector). Africa received this form of aid more than the workable form of aid. Selective intervention (not a wholesale one) in aid does work and it helps produce the searchers Easterly talks about.

Easterly also argues against “poverty traps” and doubts its very existence. He is going a bit far here because though there are doubts about countries embroiled in poverty traps, there should not be any doubt that individual households (a substantial number of them) in a poor, resource-stricken community could be in poverty traps arising from low education, lack of credit, poor healthcare, landlessness, and risk and vulnerability, among others.

Traps arising from different causes do exist but the question is whether it can be broken through aid and expert advice? Sometimes yes, sometimes no. Traps can be broken by selective intervention, a piecemeal intervention approach followed after diagnosing the causes of poverty and growth. Selective intervention has high feedback and accountability and is a piecemeal intervention approach based on recipient priorities and needs.

It can also be thought of as “little-P planning” that Easterly is talking about. Relying on searchers through repeated trial and error would be too expensive in terms of time and resources needed to create them. Through selective intervention, states can create an environment where Easterly’s searchers (“firms in private markets and democratically accountable politicians”) can emerge faster than it would take naturally (through trail-and-error experimentation). This is needed because private markets are always not efficient due to coordination failures and spillover effects, and democratically accountable politicians are hard to come by in the near future, at least in the politically messed up African continent. States can facilitate the rise of searchers by instituting reforms to create customized institutions that are consistent with history, culture, local capacity, resources, politics, socio-economic setting, and technology.

Easterly is, however, supportive of randomized trials to evaluate aid interventions but rues that this method is sidelined by aid agencies:

[…] Duflo and Kremer in chapter 3 discuss the methodology of randomized controlled trials (RCTs) to evaluate aid interventions. They argue, ‘‘There is scope for considerably expanding their use, although they must necessarily remain a small fraction of all evaluations.’’ The RCT is a welcome introduction of the scientific method into foreign aid and development, an area where wishful thinking, politically motivated conclusions, and pseudoscience have perhaps been more predominant than in other areas of economics. The RCTs are not a panacea, and they are not applicable to all areas of foreign aid and development, but they have already made a great contribution to the field of economic development.

Easterly’s suggestion: Easterly’s solution is to make the aid recipient masters and the aid agencies as quality service delivers:

[…] Having multiple searches for what works may sound like a lot to a planner, who thinks in terms of a top-down bureaucratic hierarchy. However, the great thing about searching is that it can be totally decentralized. A myriad of searchers are available in the field to look for what works for each piece of the puzzle. The aid system just has to be designed so that it rewards successful searches and scales them up to achieve widespread benefits for the poor.

[…] Another market-oriented step would be for the common pool [of aid money] to issue vouchers to poor individuals or communities, who could exchange them for development services at any aid agency, NGO, or domestic government agency. These service providers would in turn redeem the vouchers for cash out of the common pool. Aid agencies would be forced to compete to attract aid vouchers (and thus money) for their budgets.

Review of Sach's Common Wealth

Review Sachs will (not) like:

Sach’s essential thrust is how to eliminate poverty, indeed a noble goal, and to do so with our most “important responsibility [being] a commitment to know the truth as best we can, truth that is both technical and ethical.” One needs to add complete, for in discussing the global situation in relation to poverty, the distribution of wealth, the unequal relationship between the haves and have-nots, he covers much valid territory but no work on global economics can be fully valid, can fully argue about poverty and its causes, effects, and cures without including to a fairly large degree significant information on two parameters: militarization and corporate power.

[...]Sachs on occasion mentions these various organizations in passing but only the World Bank receives a spot in the index, with four mentions that are nothing more than passing references and have no influence on his arguments. The WTO, OECD, and IMF receive no index listing and only minimal passing mention in the text, an error of such huge proportion for the knowledgeable reader that it essentially destroys his arguments and perspectives however logical and rational they might seem at first.

To ignore the effects that the WTO and IMF have had in restructuring global economies by their imposed rules of engagement (while not necessarily ‘forced’ onto the countries involved, there is much in the way of coercive threats that can be intimated or stated to make ‘compliance’ much easier) with the result of large agricultural losses (consider Haiti and its loss of rice production, similarly in Mexico with its loss of corn production – with other factors involved to be sure) as the involved countries are forced to pay back huge debts at the expense of their own people. That includes the loss of community social services, education, health and welfare, job safety and other factors that Sachs argues for in his presentation.

[...]So this poverty and all the poor youth it creates leads to “state failure”. But now look at the main failed states that are presented: Afghanistan, Iraq, Somalia, Pakistan…oh my gosh…all the countries that have been invaded, attacked, occupied, and otherwise abused by the United States and earlier imperial powers! For ending the poverty trap he then has the audacity to use Afghanistan as the example, as it “exemplifies the end of the line for desperately poor countries when poverty, overpopulation, and environmental degradation are allowed unchecked for decades.”

For a supposedly intelligent man, this is an incredibly stupid statement!!!

More here.

Red flag on red!

I can't figure out what the Maoists' economic policy would be after they take over power in Nepal. This one is definitely not business friendly- they murdered a local businessman.

Enraged by the abduction, torture and murder of businessman Ram Hari Shrestha, locals, relatives of the victim, members of the business community and sister organizations of various political parties on Saturday demanded formation of a high level probe into Shrestha's death.

They also demanded stringent action against the perpetrators of the heinous crime and asked the CPN (Maoist) leadership to immediately halt their "excesses".

Expressing solidarity against the brutal murder of the capital-based businessman, the sister organizations have also demanded guarantee of people's security, a public
apology from PLA supremo Pushpa Kamal Dahal and a pledge from the Maoists to
make public the murdered man's body.

After abducting Shrestha and inflicting extreme torture on him during his captivity of over two weeks, PLA commander at Shaktikhor Kali Bahadur Magar a.k.a. Bibidh admitted that his men had killed the man.

More here

Reinventing Foreign Aid by Easterly

New book "Reinventing Foreign Aid" by Easterly. I am eagerly waiting to get one copy for myself on July.

The urgency of reducing poverty in the developing world has been the subject of a public campaign by such unlikely policy experts as George Clooney, Alicia Keyes, Elton John, Angelina Jolie, and Bono. And yet accompanying the call for more foreign aid is an almost universal discontent with the effectiveness of the existing aid system. In Reinventing Foreign Aid, development expert William Easterly has gathered top scholars in the field to discuss how to improve foreign aid. These authors, Easterly points out, are not claiming that their ideas will (to invoke a current slogan) Make Poverty History. Rather, they take on specific problems and propose some hard-headed solutions.

Easterly himself, in an expansive and impassioned introductory chapter, makes a case for the "searchers"--who explore solutions by trial and error and learn from feedback--over the "planners"--who throw an endless supply of resources at a big goal--as the most likely to reduce poverty. Other writers look at scientific evaluation of aid projects (including randomized trials) and describe projects found to be cost-effective, including vaccine delivery and HIV education; consider how to deal with the government of the recipient state (work through it or bypass a possibly dysfunctional government?); examine the roles of the International Monetary Fund (a de facto aid provider) and the World Bank; and analyze some new and innovative proposals for distributing aid.

Contributors:
Abhijit Banerjee, Nancy Birdsall, Craig Burnside, Esther Duflo, Domenico Fanizza, William Easterly, Ruimin He, Kurt Hoffman, Stephen Knack, Michael Kremer, Mari Kuraishi, Ruth Levine, Bertin Martens, John McMillan, Edward Miguel, Jonathan Morduch, Todd Moss, Gunilla Pettersson, Lant Pritchett, Steven Radelet, Aminur Rahman, Ritva Reinikka, Jakob Svensson, Nicolas van de Walle, James Vreeland, Dennis Whittle, Michael Woolcock.

Partial respite for the Nepali garment sector

The Nepali garment, which has been on decline especially after the end of MFA in January 2005, has finally got a market, India. More here.Yes, yes, India borders Nepal but the latter has not been able to realize the huge market potential there. Now, as abroad market is being taken over by competitors from Bangladesh, Sri Lanka, Cambodia, and Vietnam, Nepal has focused on catering to the nearby Indian market. This is a classic case of comparative advantage in labor (labor cost in Nepal is 30% cheaper than in India). India is one of the countries who have been eating up Nepali garment market in the US and the EU. Despite having cheaper labor, Nepali garment market is lagging behind because of high transportation cost. Nepal is landlocked and freights have to be transported via road to the nearest India port. In terms of markets abroad, India has a comparative advantage.

However, in terms of satisfying Indian domestic market, Nepal has a comparative advantage because the transportation cost (plus taxes) is lower if Nepali producers focus exclusively in the Indian market. Making customized products that are consistent with the purchasing power of the emerging Indian middle class and lower middle class would help Nepali garment sector to once again resurrect and contribute foreign exchange as it had done before 2005.

At a time when Nepal's worldwide garment exports are experiencing a massive downturn, India has emerged as one of its largest buyers with an import volume almost matching that of the USA, the number one customer.

Due to comparative advantages in terms of production costs and geographical proximity besides a vast market, the export of Nepali garments to India has shot up in recent months despite a 30 percent fall in overall exports during the first four month of the current fiscal year.

Prashanta Pokhrel, president of the Garment Association of Nepal (GAN), said exports to the southern neighbor had surged with major Indian retail chains outsourcing and placing orders for more Nepal-made apparels.

“We estimate that garment exports to India in the last four months of 2008 are in the same quantity as our shipments to the US which imported clothes worth around US$ around US$ 7 million during the period,” Pokhrel told the Post.

“India has become a lifeline for Nepal's garment industry which would have collapsed hadn't it emerged as an alternative to the US market,” he added.

Links of Interest

Poverty tops list of severe effect on child's health

In place of drums and samosas

Scrabulous, Scrabble, and Economic Development in South Asia

Is It Africa's Turn? Progress in the world's poorest region

States must act locally in a globalised world

Does the food price crisis enhance the case for self-sufficiency?

Food Crisis: Rising affluence and rising demand or inefficient use of food grains

There has been a lot of buzz about the rising affluence and rising demand of food from the emerging economies, particularly India and China as causes for the rising food prices. Is this true? Well, Daniel Ben-Ami argues that the real culprit is inefficient use of grains in biofuel production and weakening dollar. He argues that we should not be alarmed by rising demand, which can be taken care of by improving infrastructure and bolstering technology development. Read the full article here.

Probably the most striking thing about the discussion of rising food prices is that it is transparently wrong.

The most common explanation for the surge in food prices is that developing countries are becoming more populous and more affluent. A spectre of the Chinese and Indians devouring food like locusts is routinely conjured up. It should be apparent that such images, apart from being insulting, are fundamentally flawed.

If it was simply the case that rising demand could push up food prices then they would constantly increase. Humanity has grown steadily in population, affluence and meat consumption since at least the Industrial Revolution. Yet over the past two centuries the trend is for food prices to plummet in real terms rather than to rise. Indeed, it is an achievement that, for the first time in history, large sections of humanity are not threatened by famine. The 45% increase in food prices since the end of 2006 cannot be explained in relation to long-term trends (see graph, page 29).

It is necessary to examine supply in relation to demand. Rising demand is not a problem if it can be counter-balanced by an increase in supply. The reason the Malthusian nightmare of mass starvation has failed to materialise is precisely that food supply has outstripped rising demand in the longer term (see 1st box below). Despite a steadily rising world population the amount and quality of food consumption per head has risen.

Of course the more sophisticated proponents of the threat of imminent food shortages acknowledge that supply plays a role. They talk about such factors as adverse weather, worsened by climate change, and land shortages. But even here there is a tendency to exaggerate rising demand and understate the potential to increase supply.

To understand the trend in food prices it is vital to take a systematic approach. Short-term and long-term factors must be separated. The reasons prices have surged are not necessarily indicative of the secular trends in food production and consumption. It is then necessary to examine the interaction between the supply and demand of food, rather than simply consider each in isolation. Finally, it is worth questioning why the popular view on the food crisis emphasises consumption in such a one-sided way.

Larry Summers questioned!

Larry Summers is being charged of floating incoherent arguments about globalization by three researchers in a column published in the Financial Times. They argue that Summers is viewing the pace and fruits of globalization from the US perspective, i.e. if the US loses, it is bad and if it wins, it is good. They question Summers' recent argument that the middle class income stagnation (or decrease) and job losses in the US is a product of globalization.

The terms of what constitutes just globalisation cannot be determined unilaterally from the standpoint of the gains and losses within the US. It has to be determined co-operatively, involving discussions over the costs and benefits to all, especially those least able to defend their interests in both rich and poor countries.

The problem Mr Summers identifies, the hyper-mobility of capital, was an outcome that he and the US actively promoted. Attracting foreign capital was one of the raisons d’être of the Washington Consensus-based reforms. Developing countries were forced to change their intellectual property laws. At the US Treasury, Mr Summers was a leading proponent of capital account liberalisation by developing countries. Having swallowed those bitter pills of intellectual property protection and capital mobility as a necessary price for a better future, developing countries are now told that those medicines cause problems that need more – in this case protectionist – medication.

It is undeniable that the best line of defence for protecting workers has to be overwhelmingly domestic – through progressive taxation, improving education, strengthening the bargaining position of labour and improving the safety nets. Since the Ronald Reagan years, the headlong embrace of market solutions has systematically undermined each of these policy responses.

No New Books!

NEW CLASS BUT OLD TEXTBOOKS: Students of Harshahi Primary School in Sindhuli district attend class with old textbooks due to unavailability of new ones, to be distributed by the government free of cost. Unavailability of textbooks has largely affected studies in many districts across the country. (Source: The Kathmandu Post, May 15)

Rising Food Prices would help Africa!

This argument comes from the OECD:

"Higher prices in agriculture are actually a positive signal," said OECD economist Denise Wolter as the group presented its African Economic Outlook for 2008 in Berlin.

Over the short term, developed nations should provide aid to Africa to counter bottlenecks in food production, she said.

"But the higher prices are also providing incentives (for farmers) to produce more locally," said Wolter.

The OECD forecast that growth in Africa would accelerate to 5.9 percent this year from 5.7 percent in 2007.

This sounds bizarre especially at a time when the African farmers are deprived of the tools to put their incentives arising from higher prices to practice. Farmers lack credit (see this as well)to buy fertilizers, seeds, irrigation, and agricultural equipment. How can anyone bypass this essential stuff (sometimes lifeline of agriculture) and argue that higher prices would incentivize the farmers and encourage them to produce more!

Four ways to ease global food crisis

Bob Davis lists four ways to ease a global food crisis over the next year: (i) Stop hoarding, (ii) Buy locally, (iii) Target subsidies, and (iv)Press Japan

Stop hoarding. The current crisis represents a breakdown of the global agricultural market. Skyrocketing prices should boost production of grain, which can be shipped around the world. But not if countries hoard supplies and restrict exports, which is happening in about 40 countries, including China, India, Vietnam, Kazakhstan and Russia.

Buy locally. The U.S. generally ships sacks of food as its food aid. Europe, on the other hand, ships cash so that food can be purchased locally. Sacks of grain are important in feeding starving masses in the Darfur region of Sudan, where there are few locally grown alternatives. But shipping food can undermine local farmers elsewhere.

Target subsidies.About 30 countries have adopted what are called "conditional cash transfer" programs. Poor families are paid to send their kids to school, have them vaccinated and meet other requirements, depending on the country. Begun in Mexico and Brazil, these programs depend on communities to identify families that are poor by local standards.These programs can be used to get more food to the poor. In Jamaica, a new World Bank loan would be used to boost family benefits by one-fourth and expand the program so it includes about 14% of the population -- roughly the proportion of people below Jamaica's poverty line. The bank also wants to boost programs such as one in Ethiopia in which locals are paid in cash and food to build irrigation ditches. While the Ethiopian program sounds like something out of a John Steinbeck novel, it reaches people in need

Press Japan. The price of rice has leapt about 85% since mid-March mostly due to panic buying and hoarding. Japan could do a lot to relieve the pressure. It has a stockpile of 1.5 million tons of rice, mostly imported from the U.S., which it keeps off the market to boost the income of local farmers. Some of the stored rice is several years old, and some of it is fed to animals, says a U.S. Agriculture Department report.

Nepali economy moving out of the red

My former colleague Prem Khanal writes in The Kathmandu Post...positive news on food production and capital mobilization, stalemate in the manufacturing sector, and general prices rising up (more than 7%)...(by the way, did I tell earlier that I learnt the basics of journalism from Prem while working at the Post):

Leaping revenue mobilization, rising capital expenditures, reviving demands and continuing healthy remittance inflow give positive indications for the fragile economy. However, sluggish growth, creeping inflation, widening trade deficit, mounting loss due to rising oil prices and nasty power outages could jeopardize the course of revival.

Propelled by strong growth in major agro products like paddy, maize and millet, which jointly represent nearly 30 percent of national agro outputs, the total agriculture production is likely to go up by 5.2 percent, highest since 2003/04 and more than the Interim Plan's target of 3.3 percent.

Production of paddy, which has a 20 percent share in national agriculture output, is estimated to soar by almost 17 percent, thanks largely to good monsoon.

Based on overall performance of the economy during the first three quarters, officials at CBS expect economic growth rate to remain around 3.5 percent, less than the budgetary target of 5 percent.

An astonishing 25 percent growth in revenue mobilization, amid slow economic growth, has been the most remarkable achievement of the government. As the government has already mobilized more than Rs 75 billion revenue till April, which is 70 percent of the revised target of Rs 106.6 billion for the current year, it is likely to meet the renewed target.

Creeping inflation, which crossed 7 percent mark, two percentage-points more than budgetary target, has emerged as the central challenge for the monetary authority. A whooping price rise of almost 20 percent in rice, which commands almost 15 percent in consumer basket, and a 27 percent rise in oil price are some of the factors that inflated the inflation figures.

Notwithstanding a 20 percent rise in trade deficit on the back of shrinking exports and booming imports, the current account posted a surplus of Rs 10.4 billion, thanks to continued strong 28 percent rise in remittance incomes.