Thursday, July 31, 2008

Meager benefits of the Doha Round for the developing countries

Here is a research done by Sandra Polaski from Carnegie Endowment for International Peace (CEIP) about the winners and losers from the Doha Round under different scenarios. The general equilibrium model showed that total gains from trade to be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head).

Global Real Income Gains from Trade Scenarios:

  Agriculture Central Doha Central Doha with “Special Products” Hong Kong Full liberalization
Gain in US$ (billion) 5.4 58.6 57.7 43.4 168.1
Gain over base year GDP 0.02% 0.19% 0.18% 0.14% 0.53%
Polaski also argues that a complete agricultural trade liberalization might actually hurt the developing countries. Full elimination of agricultural subsidies could increase food prices, which is not good for net food importers. Developing countries might gain more from liberalization of goods than agriculture.

The biggest winners among industrial nations would be Japan and the European Union, where incomes stand to grow by $6.5 billion and $5.8 billion, respectively. Among developing nations, the chief beneficiary by far would be China, which would gain $10.3 billion in annual income, or more than four times the increase expected for India. In fact, China's expected benefits account for nearly half of those likely to accrue to the developing world. The biggest losers would be Bangladesh, Malawi, Tanzania, and Uganda and the rest of the nations of sub-Saharan Africa (excluding South Africa). The numbers are so small, however, relative to the size of national economies, that the precise figures are less important than the broad picture they paint.

Here is a paper on how India would stand on different trade policy choices. In terms of change in real income, it seems that India would benefit the most from the Doha Round. Surprisingly, India would lose from India-EU FTA.

Here is a previous blog post on why the most recent Doha Round of trade negotiations failed.

Dalits and discrimination in Nepal

Jay Ram Hirajan, a member of dalit community, waiting in front of a local police station seeking protection and justice. He was threatened of eviction (also black coal painting on his face) from Rupendehi by locals who alleged him of de-purifying utensils belonging to a non-dalit community. Hirajan's pet pig entered houses owned by two locals and touched cooking utensils, which was handed to Hirajan by the locals and ordered him to pay the cost of replacing new ones. He was warned of forced face painting with coal powder and eviction if he did not comply with the local's demand. In the picture, he is seen with the utensils in front of a local police station seeking protection and justice. (Source: Kantipur daily, July 30, 2008)

Social discrimination based on caste system is one of the constraints to mainstreaming marginalized groups into the national economy. These groups have been marginalized for centuries, resulting in a highly unequal social setting where the most poorest and discriminated ones never rises above a certain level, irrespective of the level of economic progress in the country. Somebody tell people to shed off useless conservatism and embrace socially progressive ideas!

Links of Interest

The world cannot grow its way out of this slowdown 

Kenneth Rogoff raises the inflationary alarm: "In policymaker’s zealous attempts to avoid a plain vanilla supply shock recession, they are taking excessive risks with inflation and budget discipline that may ultimately lead to a much greater and more protracted downturn." Well, I would be more worried about a fire engulfing my house right now then a potential fire that would engulf my house! Inflation does posses a risk but it is in the long run, when according to Keynes "we all are dead." That said, I believe that we can manage the dangers of inflation as time passes by being particularly careful with embedded inflation expectations. Mark Thoma weighs in: "Inflation is a concern, but raising interest rates too fast risks throwing the financial sector into a tailspin, and that would bring the economy down with it, and that's a risk I'd rather not take. We need to keep an eye out for signs that inflation is becoming embedded and self-reinforcing, but we need to be even more concerned about a domino effect taking hold in the financial sector. That danger is not yet over." More by Krugman here

Is the WTO no-deal a big deal?

If the real effects of a no-agreement are not likely to be important, is all this noise about the Geneva failure justified? Yes. Perhaps. To the extent that an agreement in the WTO would have strengthened (or at least would have not weakened) the multilateral trading system, the no-agreement may well be a setback. Such a system binds countries to respect a certain set of trading rules, for example preventing possible temptations towards self-sufficiency in the face of difficult domestic and international situations. This is not to deny the importance of domestic policy space. Allowing for moderate policy space is welcome to satisfy particular domestic needs, but a weak multilateral trade regime may allow for an abuse of domestic policy, which may promote protectionism. This is especially the case in a time of adverse international economic environment, as the current one.

Collapse of the WTO trade talks: A pity, and potentially a problem, but not a disaster

Putting a lasso on inflation

There are other ways to approach the challenge of high prices, of course. In its paper, the Asian Development Bank recommended income support to poor families...It's a cheaper and more economically efficient solution than one-size-fits-all subsidies, and it also allows households to prioritize their own purchases. Moreover, once people have the ability to pay global prices for the commodities they need, the problem of guaranteeing supply to the local market simply disappears.

What is Called Development? Exploring the Nexus of Economy

India lags behind Ethiopia in child nourishment

The consequences of a collapse of the Doha negotiation from the perspective of developing nations

Here is Jean-Michel Severnio, CEO of the AFD. More here.

Wednesday, July 30, 2008

Not a big deal: the WTO Doha round failed again

Newspaper editorials are abuzz with anger and frustration against India and China for creating a gridlock, again, in the WTO talks, leading to collapse of the protracted Doha "development" round of trade talks. High on the agenda were the US and the EU farm subsidies and demand posed by the US to developing countries to open up their manufacturing/industrial sector for trade. It is understandable that the US wants the manufacturing to be as free as possible despite its intransigence attitude in reducing farm subsidies --note that the US automakers and manufacturing firms have been struggling to stay put in the market chiefly due to stiff competition from low priced and better fuel economy vehicles from Japan and South Korea. They could not compete in home, so now they want to compete in places where the economy cannot afford to invest in manufacturing plants now. Its like grabbing before anyone grabs it or develops a potential to grab it!

India raised last minute alarm by insisting on inclusion of a provision for it (and the G33) to raise tariff in sectors very vulnerable to international price fluctuation.  Though the new condition was hugely unpopular among the West's negotiators, Indian chief negotiator and commerce minister, Kamal Nath, was also in a dilemma: domestic politics and international trade. He chose the first (remember, the Indians are going to polls in couple of months). He is being cheered in India now! The US, India, and China failed to agree a compromise on a proposal called the Special Safeguard Mechanism (SSMs), which was designed to protect farmers in the developing world against temporary surges in cut-price imports of cotton and rice...Kamal Nath claims that he had the backing of 100 developing countries. He was concerned about the livelihood of poor and subsistence farmers in India, where 70% of the population still depend on agriculture for living, rather than the inflated gains from trade and manufacturing sector deals.

Kamal Nath argues:

It is unfortunate in a development round, this is the last mile we couldn’t run because of an issue of livelihood security.

The Washington Post bemoans and argues that it will make the developing countries more poorer (what a ridiculous argument???) Surprised :

...China's role in the demise of the Doha Round is particularly dismaying, considering China has reaped huge benefits from global trade in the seven years since it joined the organization -- with strong U.S. support. Chinese exports have quadrupled from $300 billion in 2002 to $1.2 trillion in 2007, thanks in large part to free access to the U.S. market. U.S. supporters of Chinese inclusion in the WTO argued that drawing China into a system of multilateral give-and-take would mute its nationalistic tendencies. Evidently, the Chinese see the matter differently. They, and the world, will be poorer because of it.

Similar, but a milder, tone from the NYT:

...A breakdown would certainly be harmful. And the world’s poorest countries would lose the most.

...If the world’s richest nations give in to the temptations of protectionism, the world’s poorest countries will suffer the most. But no one, including the rich nations, will escape the damage to the global economy

Did the collapse of this trade talks mean that we lost a whole lot in terms of tariff and welfare gain? Well, not really. The tariff loss would amount somewhere between $50 billion to $100 billion-- that is equal to or double the amount of foreign aid given to developing countries in a year. It is a very tiny fraction of world GDP (around 0.1%). Worse, the benefits of trade would have gone mainly to the West- not to the poor farmers in developing countries. Ironically, the Doha round is also termed as "development round" in the belief that a success in trade talks would help the poorest people the most. Also, the poor countries already have special access to the markets of the rich world, meaning that a general cut in tariff across the globe would either not affect them or they would lose (the latter one having higher probability of occurrence!)

Here is Rodrik's advice to not cry loud for Doha:

Actually, not much. There was not a whole lot at stake to begin with for poor nations as a whole. (Cotton is a somewhat big deal for West Africa, but pretty much everything else is a mixed bag.) And if the taxpayers and consumers of the U.S. and EU want to reap the considerable benefits of reducing farm supports, they can surely do that on their own without having to be bribed by increased market access abroad.  So don't listen to trade officials and editorialists who will bemoan the huge downside risks.

The Economist says the collapse was expected (and it really was):

The failure of the Geneva talks will not send that into reverse. But with the world economy slowing, it is singularly ill-timed nonetheless. The best that can be said for the collapse of negotiations is that, after all the difficulties and acrimony that have plagued the Doha round for much of its seven-year life, few outside Geneva (and perhaps not many on the lake’s shore) expected a deal. But bad news, even when it is entirely predictable, is bad news all the same.

Bilateral and multilateral trade deals will be popular now (the Doha round is not dead yet...and it should not be!) because countries would be willing to go for free trade in a regional block where they face similar overhead costs and structural problems. For instance, India is really pushing forward for a free trade agreement in the SAARC region (known as SAFTA) and have already been allowing duty free entry of numerous goods into its market.

Here is an assessment from a recent study (The Promise and Perils of Agricultural Trade Liberalization: Lessons from Latin America) by the the Global Development and Environment Institute (GDAE) at Tufts University. It accentuates the need for SSMs:

The government’s responsibility is to provide the tools necessary to enable small farmers to take advantage of high global food prices to enter this virtuous cycle of development.  Governments should retain the ability to use tariffs to protect small holder agriculture when global prices fall; focus poverty alleviation programs on rural areas; accumulate food stocks to cushion citizens from price fluctuations; and act as a guaranteed buyer to small farms in acquiring these stocks.  Developing countries must navigate multilateral and bilateral trade negotiations in a way that allows them to retain the use of tariffs and safeguard measures.

Here is a nice summary of why the the talks stumbled.

The upside of rising global food prices-- Is there any?

An interesting debate is going on about the impact of food prices in positive direction-- actually trying to find out "an upside for humanity in the rise of food prices".

Here is the proposition posed by The Economist :

"There is an upside for humanity in the rise of food prices."

Here is an excerpt from an email I got from Lauryn Nicasio on behalf of the ongoing debate:

Although we can never overlook the grave situation posed by rising food prices, we hope to dissect the issue and view it from fresh perspectives to see if it can have a positive impact. For example, do rising food prices benefit farmers? Can they lead to development of safe, genetically modified foods which in turn can help developing nations with marginal farmlands become self-sustainable? And are the shorter-term pains of creating biofuels worth the longer-term gains of reduced transportation costs? 

Here is the debate hall

Here is Joachim von Braun (I agree with him!)

Here is Homi Kharas

Here is Papa Abdoulaye Seck

I think the answer is "it depends"...some farmers can gain from it but in the long run many more will suffer...we have to look at the net effect, especially from the perspective of farmers in the developing countries. Some initial thoughts:

  1. I think the moderator is asking a wrong/misplaced question, because the impact of global rise in food prices cannot be answered in plain black and white; the options cannot be either 0 or 1.
  2. Switching production from low price food products to high price food products will not be as easy as has been assumed. Especially in the developing countries, farmers are too poor to buy new seeds, local development banks are reluctant to offer a reasonable line of credit for such activities because of moral hazard problems. Development aid for agriculture has fallen from a high of 17% of total aid to just 3% today, with some international donors demanding that fertilizer subsidies be eliminated, making it even more difficult for cash-strapped farmers to compete. Paul Collier puts it in this way: "Unfortunately, peasant farming is generally not well-suited to innovation and investment: the result has been that African agriculture has fallen further and further behind the advancing productivity frontier of the globalized commercial model. Indeed, during the present phase of high prices the FAO is worried that African peasants are likely to reduce their production because they cannot finance the increased cost of fertilizer inputs. While there are partial solutions to this problem through subsidies and credit schemes, large scale commercial agriculture simply does not face this problem: if output prices rise by more than input prices, production will be expanded because credit lines are well-established."
  3. The big producers from the West would definitely benefit as they shift production to high priced corps, which earns them higher marginal revenue. These farmers can offer the technology needed for large scale production.
  4. Obviously, #2>#3 in terms of population...hence, the farmers in the developing countries will lose...(But if #2 is not a problem, then there might be upsides benefiting most of the people-- as of now a highly unlikely case...keep reading for some reasons!)
  5. About technology transfer: Even if higher food prices would trigger development of new technology and innovation in the West, the new technology might not transfer to developing countries as easily as we have been thinking. Have we seen a sea change in technology in the oil sector, even though prices skyrocketed during the 80s? Also, did the oil price rise change consumption patter? (Also, was there a change in consumption pattern after high global food prices during the 80s?)
  6. Moreover, transfer, adoption, and right use of new technology depends on institutional constraints, governance, culture, education, transportation, and communication, among others. How would my parents-- who entirely depend on agriculture for livelihood and live in an area where there is just one single lane, unpaved road--constructed in 2006/07, thanks to donors!--be able to use, in our small farm, a new technology made in the West? Also, would my parents be able to afford it? (Ans: No!)...Moreover, would the new innovation in the West, where farming is done in a large scale, be suitable for farmers in the developing world who hold small, fragmented land? Obviously, the transfer of technology would be too slow, if any. We have not seen high mobility of technology, one of the foundations of successful economies, from the West to Africa in the past couple of decades. Technology transfer argument is easier said than done!Confused
  7. People argue that markets clear itself and we will have an equilibrium price soon? Well, this argument is based on the assumption that there already is a free market in this sector-- which is not true! For instance, the subsidies given by the West and also by the developing countries like India and China to its farmers have been creating a situation where price stabilization towards an equilibrium is just not possible. There will be high degree of volatility and fluctuation, depending on many environmental variables. It should be noted that the subsidies in the US and EU alone in crops used for producing biofuels is driving 60% of the rise in food prices. Will this stop? As of now, it won't-- the protracted WTO talks collapsed just because of some of these thorny issues. See here how Japan alone can distort price of rice in the global market.
  8. Along the veins of the preceding argument, free market-- interpreted in conventional terms-- is not possible in this sector. No country would be willing to put its population under threat of a certain product and shift production pattern. For instance, India, where 70% of the population prefer rice and chapati (made from wheat) two times a day for meal, would not be willing to shift production from rice and wheat to say soybean, just because its price is rising in the international market. The very survival of millions of farmers and households depend on the agriculture sector (rural households spend more than 70% of their household budget on food). This sector is too vulnerable to let it freely flow along with the free market principles. We have already seen how deep we ran in troubled waters (in fact, the depth is still not reached) after the housing market and banking sector was let free flow according to the principles of free market. There is already a backlash-- more regulatory power given to the Fed and government administrations. As one of my Romanian friend used to say, "Free market cannot sustain in very vulnerable sectors because it is not a matter of losing an asset if anything goes wrong--it is a matter of life and death." Free market in sectors where survival is not in line-- like auto industry, airline sector, etc-- is good but not in sectors which have a direct bearing on the survival of poor people...(that said, I do believe in the power of market if things are as they should be!). Governments do not want to let their population fall prey to increased volatility and uncertainty in global food market, which is beset with demand and supply shock--there seems to be no end to it! Collier argues, "The sharp increase in the world price of staple foods is an inconvenience for consumers in the rich world, but for consumers in the poorest countries, especially in Africa, it is a catastrophe."
  9. The final effect would depend on whether households are net buyer or seller (or in a country level, whether countries are net importer or exporter). As of now, poor households are net buyers, which means that higher prices not only put too much strain in their household budget, any upside benefit would only go to the farmers in the West who can invest large sum of money. Also, poor households in the developing countries do not enjoy economies of scale as they own small pieces of land. Unlike them, the farmers in the West own large farmlands, enabling them to reap economies of scale--thus, making sure that their over the long run price of their product is always lower than the price of similar product produced by the poor country farmers.
  10. Any change in consumption and production patterns has to be global to ensure that upsides are fair to all. As Joe Stiglitz argues, Only new patterns of consumption and production – a new economic model – can address that most fundamental resource problem." Note that, we need a completely new economic model. The present model will not solve the problem.
  11. Well, follow The Economist's Debate Hall, which will feature expert views...I will spill some more thoughts in the coming days, especially on the incentive factor... I will also discuss why production in Lanao del Sur, which is one of the most fertile regions for rice production in the Philippines, is not done in the way it should have been to reduce pressure of rice demand in the Filipino economy, one of the most high rice consuming nations...incentives do come in play here???...that discussion is for later date...Sleepy

Here is a good summary of the implications of rising global food prices. A more extended discussion from a variety of sources on this issues here. Also see this.

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Tuesday, July 29, 2008

Links of Interest

Africa: Soon to be the next China?

How to Get the Biggest Bang for 10 Billion Bucks (Bjorn Lomborg argues that the same dollar spent on tackling diseases would generate greater economic payoffs than from investment in tackling transitional terrorism or hunger.)

Transitional terrorism: Stopping one catastrophic terrorist event would save the world at least $1 billion. Under these assumptions, this would mean a return of about $9 on each dollar spent.

Diseases: Each dollar spent on ensuring people are healthier and more productive would generate $20 in benefits.

Hunger:The improved nutrition would lead to higher productivity and fewer health problems. Each extra dollar spent would generate economic benefits worth $16.

Rising Income Inequality: Technology, or Trade and Financial Globalization?:

We examine the relationship between trade and financial globalization and the rise in inequality in most countries in recent decades. We find technological progress as having a greater impact than globalization on inequality. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization-and foreign direct investment in particular-is associated with an increase. A key finding is that both globalization and technological changes increase the returns on human capital, underscoring the importance of education and training in both developed and developing countries in addressing rising inequality.

Where are the jobs that take people out of poverty in Brazil?

11microfinance groups agree to publish rates; Nobel winner says don't profit from poor


Martin S. Feldstein: "Father of modern NBER"

David Warsh extols the contribution of Martin S. Feldstein, whom he labels as "father of modern NBER" :

Here’s a challenge for the economics profession: to think up something suitable, an occasion or a prize, to commemorate the contribution of Martin S. Feldstein.

...Whatever challenges these plum jobs might have offered, they probably pale in comparison to the satisfactions of the position that Feldstein devised for himself more than thirty years ago, hashing over the possibilities with friends while watching his daughters skate at the rink next to Belmont High School. Today Feldstein is a grandfather. His economist wife, Kathleen, and their daughters came to the party the NBER threw for him. And like any father, figurative or otherwise, he is not without his flaws.

But his “family” has grown far beyond the thousand or so professors of economics or business who are research associates, bringing to their work together a broad spectrum of policy views...

Sunday, July 27, 2008

Government activism in the US

Here is a brief history, from the WSJ, about activism in the US. (Long story short: The more the depth of market failure, the more longer the hands of the state!) Proof: the sweeping powers to the Fed and other new regulatory establishments due to the subprime housing crisis, bank runs, Fannie Mae and Freddie Mac mess, and symptoms of recession, and a general pessimism over the performance of US markets. Were the virtues of free market overblown?


The end of the Civil War and the completion of the intercontinental railroad helped spur industrialization. Around the 1980s, great industrialists -- including petroleum magnate John D. Rockefeller Sr., left -- dominated the steel, oil and banking industries. Later, outrage among Progressives over J.P. Morgan's role in bailing out markets in the Panic of 1907 led to the creation of the Federal Reserve to handle monetary issues.


During the post-World War I boom of the 1920s, fast economic growth was powered by the expansion of automobiles, home electricity, radio and telephone. The U.S. moved to a dominant position in international trade and global business. President Calvin Coolidge took a hands-off approach to markets.


After the 1929 market meltdown and amid the ensuing Great Depression, President Franklin D. Roosevelt brought the New Deal and tough new regulatory agencies to Washington. Later, Republican President Dwight D. Eisenhower oversaw a further expansion of federal power by funding the interstate highway system.


Turning power over to technocrats has led to disaster on any number of occasions, including the escalation and loss of the war in Vietnam by the "best and the brightest" of the Kennedy and Johnson administrations. Inflation starts to be a problem.


Disgust at bungled government policies and the stagflation of the late 1970s led to the Reagan-era canonization of the free market and a series of anti-inflation and anti-big-government policies, as well as tax cuts


The government took a backseat to the market's needs and desires during much of the tech-powered expansion of the 1990s -- and in the subsequent stock-market bubble of the late 1990s.


A new era of government activism started with the terrorist attacks of Sept. 11, 2001, which led to the nationalization of airport workers and the creation of the elephantine Homeland Security A gency. The Enron and WorldCom scandals dealt a heavy blow to the Reagan revolution of deregulation and smaller government, and the Sarbanes-Oxley law in 2002 subsequently increased regulation and oversight of U.S. companies.


The collapse in the housing market and the battering of financial institutions has required the kind of fast infusion of liquidity that only the Federal Reserve can provide. As a result, expert government technocrats are gaining power across the economy, and the Fed itself has seen the biggest accumulation of power. The depth of the government response will depend on the depth of the crisis.


US activism

Here is Alan Blinder's view:

"There's a backlash against the laissez-faire, 'isn't-it-wonderful-how-creative-markets-are' viewpoint... Markets are creative, but sometimes the creativity leads to strange and dangerous directions."

The American people tend to agree with this view:


More here.

Saturday, July 26, 2008

Economic Growth: Institutions rule but endowments do matter more than expected

What are the reasons for highly rich and poor country clubs? The  reasons  vary based on researchers-- institutions,  geography,   genetically capitalist  and bourgeois virtues (mainly Gregory Clark), and also see Diamond on guns, germs, and steel determining the fate of human societies. However, two school of thoughts have garnered more attention in this debate. One believes in geography/endowments (led by Sachs) and the other in institutions (led by ???...but Rodrik, AJR and AJR are some of the ones I studied).

The debate is never ending. Some also argue that these school of thoughts might be getting different interpretations by running very similar correlations. Dixit seems unsatisfied with econometric evidence so far because the instrumental variables used by the school of thought that emphasizes the role of institutions are either geographic variables themselves or are highly correlated with geography, hence making it difficult to distinguish the partial effect of geography and institutions on income.

Now, a recent study (The Colonial and Geographic Origins of Comparative Development) by Raphael Auer shows how the effects of institutions and geographic endowments on income can be distinguished. He writes:

The key insight is that one can distinguish between the determinants of development by utilising the fact that geographic endowments had a differential effect on institutional development in former colonies and in the rest of the world. For example, in a former colony, high prevalence of malaria has reduced income because of both the direct effect of the disease on income and the indirect effect of the disease on settler mortality and thus colonisation policies. In contrast, in a country that has never been colonised, only the first of these two effects is present.

While the indirect impact of endowments on colonisation policies and thus institutions is present only in former colonies, the direct impact of endowments on income is present in all countries. Therefore, one can identify the relation between income and institutions by utilising the difference in how endowments have shaped institutional development in former colonies and in the rest of the world.

In contrast to the existing literature, this way of identifying the relation between institutions and income does not restrict the direct effect of endowments on income to be absent, thus allowing me to estimate the partial effects of the two channels.

He concludes that though institutions are not the only one, it is the main determinant of development. He underscores that endowments do have a statistically significant and economically relevant impact on income. Easterly and Levine also show that though geography does not affect economic development directly, it definitely affect indirectly through institutions. Similar conclusion was also reached by Rodrik, Subramanian, and Trebbi but they place very little (almost nil) emphasis on the role of geography and endowments. This is where Auer differs from Rodrik et al:

For example, in a typical specification, I find that a one standard-deviation difference in the included measures of geographic endowments is associated with a direct effect on income per capita equivalent to a seven-fold difference in GDP per capita. For a former colony, the same one standard-deviation difference is associated with an effect on colonisation policies, institutional outcomes, and thus income equivalent to an additional 18-fold difference in GDP per capita. Thus, while institutions are substantially more important than endowments, the direct effect of economic endowments can hardly be neglected.Together, both channels can explain around 40% of the variation in international income levels.

What are the policy implications for poverty reduction? Well, Auer argues that the current focus on aid and healthcare intervention would only help solve extreme poverty, not end poverty. Ending poverty requires appropriate institutional reforms that can convert development aid into sustained economic growth. Not a surprising policy prescription (despite quite and interesting study) because we all know these recommendations already! But an interesting study overall.


The Last Lecture

First I read it in the WSJ, then in NYT, then in Time, then in Post, and in many blogs...It is about Randy Pausch, a professor at Carnegie Mellon University, who died of cancer recently and his last lecture in life. So what is The Last Lecture about. Well, here it is from YouTube. Simply amazing!


Here is more from Time.

Wednesday, July 23, 2008

What is really causing global food price to rise so rapidly?

There has been tremendous buzz about the real culprits of global food price inflation--some blame increasing demand from China and India, some blame biofuels, some blame droughts, some on speculation, and some on even excess liquidity in several non G-7 countries. However, which one of these has the greatest bearing on the rising food prices? Stefan Tangermann, Director for Trade and Agriculture at the OECD, argues that biofuels accounts the most part of the rise in prices because it has driven 60% of the growth in global consumption of cereals and vegetable oils.

The use of agricultural products, in particular maize, wheat, and vegetable oil, as feedstock for biofuel production has expanded dramatically in recent years. Between 2005 and 2007, i.e. in the period when food prices began to explode, nearly 60% of the growth in global consumption of cereals and vegetable oils was due to biofuels. Global output of cereals and vegetable oil did not decline during that period, but just grew slower than the rapid expansion of use.

In a situation of depleted stocks and very low demand and supply elasticities, this gap between use and output growth has pushed prices up very strongly. As a large part of the use expansion was due to biofuels, there cannot be any doubt that biofuels were a significant element in the rise of food prices. More specifically, in North America and Europe biofuels cannot be produced, and would be very little used, in the absence of government support through subsidies, tax breaks, tariffs, and use mandates. In other words, biofuel support policies have contributed greatly to the rise in global food prices.

Trade pigs for daughters, but keep both!

This is one ingenious way to stop human trafficking, especially girls for sex and house labor. It is like putting a market value for girls and then compensating that with commodities, but the seller is allowed to keep both--commodities and girls-- with a commitment to send the girls to school!

[...]Murray asked the Tharu village fathers to keep their daughters home and send them to school instead of selling them at the annual Maghe Sakranti Festival every January. In exchange, families could raise the pigs and sell them for the same amount they could fetch for their daughters. Murray's nonprofit organization, the Nepalese Youth Opportunity Foundation, also would pay for the girls' school expenses. Plus, it would kick in a kerosene lamp and 2 liters of kerosene a month - coveted items in an area without electricity.

It was an experiment based on Murray's understanding of Nepali culture after living there off and on for five years and sponsoring the education of orphans and street children. She knew pork is a prized meat and that for some families, selling a daughter was the only way to afford food for the rest of the family.

[...]Murray and Paneru have since steered 3,000 girls away from slavery and all but eradicated the long-held tradition of indentured servitude in the Tharu village.

Read more here. Great work by the Nepalese Youth Opportunity Foundation.

Cherished myths of free markets fall victim to economic reality

Paul De Grauwe writes in the FT that what we learn and champion about free markets is in fact relevant to an ideal world only, not to this world with information imperfection. This also means that a new equilibrium should be sought between markets and state action, without tempering individual incentives.

[..]The credit crisis has destroyed the idea that unregulated financial markets always efficiently channel savings to the most promising investment projects. Millions of US citizens took on unsustainable debts, pushed around by bankers and other “debt merchants” who made a quick buck by disregarding risks. While this happened, the US monetary authorities marvelled at the creativity of financial capitalism. When the bust came, a large number of Americans who had been promised a new life in their beautiful homes were told to move out. This boom and bust cycle cannot have been an example of efficient channelling of savings into the most promising investment projects.

The fact that unregulated financial markets fail to deliver the wonders of efficiency does not mean that governments should take over. That would be worse. What it does mean is that a new equilibrium must be found in which tighter regulation is reintroduced, aimed at reducing the propensities of too many in the markets to take on excessive risks. The need to re-regulate financial markets is enhanced by the fact that central banks, backed by governments, provide an insurance against liquidity risks. Such insurance inevitably leads to moral hazard and excessive risk-taking. The insurer cannot avoid monitoring and regulating the be­haviour of those who obtain this insurance.

[...]If we have learnt one thing from the credit crisis it is that individuals did not understand the “truth” and, it must be admitted, neither did economists. Individuals who sold the new financial instruments did not understand the risk embedded in these instruments, nor did the buyers. When the bubble started many interpreted the happy turn of affairs as permanent and took on massive levels of debt that turned out to be unsustainable. When the bubble burst, they did not understand what had happened and nor did most experts. Our world is one of a fundamental lack of understanding of the “truth”.


Game theoretical approach to the Batman movie

Here is an excellent analysis in terms of game theory of the blockbuster Batman movie. It is a kinda spoiler if you have not watched it already, but the analysis is simply amazing. Some of the figures below:

Read the full post here.

Nepal gets first president

new president of Nepal

Continuing the change in political sphere after the end of centuries old monarchy system in Nepal, the people elected the country's first president and vice-president yesterday. Its a historic day. Both the gentlemen who will be in charge of the country through this crucial phase come from the usually sidelined ethnic groups from the Terai-- call it Madheshi. True representation is seen there! More here, here, and here.

Meanwhile, the Maoists, who have been really cocky in recent days, have said that they would not join the upcoming government despite winning a clear majority in the CA election. Reason: their presidential candidate lost the election. This is absurd! If you want to participate in democracy, then it is vital that you accept both failures and success. The Maoists cannot have success all the time and if the don't, it does not make sense to not join the government. This is one glaring example of opportunist and selfish party trying to derail the hard gained political gains. Moreover, what I don't understand is why was it okay when the other two big parties allied with the Maoists and why it is not okay now then the two parties switch their alliance to a Madhesi party? Maoists need to look into themselves-- their haughty, rebellious attitude. Things are dealt differently when you are out of jungle? Don't act like barbarians!

Here is the VP (sorry, in Nepali):

Sunday, July 20, 2008

Political Institutions and Economic Development

What types of institutions matter for development and poverty reduction? What lessons should be drawn by policymakers and development practitioners hoping to support institutional change in developing countries?...etc...Such type of questions were addressed at a recently held IIIS Conference on Strengthening Institutions for Development and Poverty Reduction,Trinity College, Dublin. Here is a presentation by Stephen Haber, professor at Stanford University, who draws a comparison between political economy of Mexico and the current state of Sub-Saharan Africa.

Haber gives concise and nice presentation about the impoverishment of Sub-Saharan African and its link to authoritarianism and slow growth. Note that authoritarianism does not necessarily cause slow growth. He argues for drawing capital into production by offering special privileges that could raise rates of return. This is especially relevant if access to credit is constrained and domestic capital mobilization is very slow. But he also warns that coaxing capital into production has been one of the mainstays of authoritarian regimes because they tend to support monopolies and industries that aid the ruling elites to stay in power. This also breeds corruption, lack of transparency, and rent-seeking-- all of which are endogenous. However, attracting capital into production though other incentives that could raise rates of return is not a bad idea. He also argues that authoritarian governments collect little in taxes, which directly affect other dimensions of poverty like education and health, as low taxation means low public investment. Here is a figure about the comparison between Mexico and other economic blocs on tax revenue (he considers Mexico under authoritarian regime until 1997).

mexico polity and taxes

He argues that property rights should be reformed in Africa for development. He also supports aid that aims at increasing government transparency and programs like conditional cash transfers (something like Progressa/Oportunadides). He also argues that the development aid will not be a panacea to slow growth because it would take years to reform the more intractable institutions that have emerged under authoritarianism: weak tax bases, weak educational systems, weak property rights, and inefficient and corrupt police and judiciaries.

Papers from the conference here.

How best to conduct fertilizer intervention/ subsidy?

Here is paper where the authors look at how best to intervene with fertilizer subsidy in developing countries:

It is argued that there are compelling rationales for “smart” fertiliser subsidy programmes in Africa. However, achieving these benefits depends greatly on how the programmes are implemented. The authors assert that the contribution of fertiliser subsidy programmes to reducing poverty and hunger would be higher if they could be designed and implemented so as to:

  • target households with little ability to afford fertiliser
  • target areas where applying fertiliser can actually contribute to yields
  • promote the development of a commercial fertiliser distribution system rather than undercutting it

The paper argues that several points should be considered before implementing fertiliser subsidies. These include:

  • they may not be the best option; for example, subsidies targeted to particular crops such as maize may reduce output of other food crops such as cassava, therefore reducing the net food supply response
  • fertiliser subsidies have a questionable recordas a tool for increasing overall agricultural productivity, especially for small, poor farmers
  • low or no fertiliser use by many smallholders is explained not just by credit constraints that limit acquisition, but also by the risk of crop failure, with resulting financial losses and consumption shortfalls. The lack of insurance causes inefficiency in production choices, therefore, recent trials of weather-indexed insurance are a promising potential solution for the risk problem

Drawing on experiences of Zambia and Malawi, the authors suggest several practical guidelines for how to maximize the effectiveness of fertiliser subsidies in meeting important national objectives such as improved national food security, alleviation of hunger, and equity. These include:

  • implement a targeted input voucher system
  • if budget resources are highly constrained, then target fertiliser vouchers to farm households with low purchasing power
  • seek to involve a wide range of fertiliser importers, wholesalers, and retailers in the input voucher scheme
  • focus on alleviating infrastructure and input supply constraints as well as improving procurement efficiency

(Via Eldis)

Saturday, July 19, 2008

Links of Interest

What exactly are Ronaldinho and Ronaldo worth?

Government 'must step in' to close gap (Keynes calling in South Africa: "Market forces will not reverse South Africa’s trend of growing inequality without state intervention...Our levels of inequality, the chasm that is there between the first and second economies, the experience over the past four years of high growth — where you were able to reduce poverty but not inequality — all those issues would inform you that the market on its own would not resolve the problems that we face...“In a developing country such as ours and given our history, the state would have to play a critical role in addressing these issues that the markets are incapable of dealing with...")

EU's 'spare 1bn euros' for Africa (Easterly would hate it...but good that unspent farm subsidies,which would have continued to further distort prices, is being given to Africa!...note that, the EU's agricultural budget is in excess of 40% of the EU's annual expenditure.)

Remember Doha?

Also see, Defrosting Doha

Land of the rising price

Equitable Access to Financial Services: Is Microfinancing Sufficient? (Answer: Not really! See the figure below)

access to microfinance 2006

Friday, July 18, 2008

Hayekian quote

"Free market opportunity depends on bottom-up social choices that Planners usually don't begin (or try) to understand."


-(William Easterly, The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good, p.101)

Thursday, July 17, 2008

2,200,000% inflation rate in Zimbabwe

Robert Mugabe is leading a nation which is in a path of accelerated price levels and decelerated growth rates!

According to official figures inflation rate now is 2,200,000%, up from 165,000% in February.

More here 

Rising costs are forcing retailers to increase prices a number of times a day for goods purchased with billion dollar bank notes and the number of people falling into poverty is on the rise.

In May, the central bank issued a 500m Zimbabwe dollar banknote, worth US$2 at the time of issue, to try to ease cash shortages amid the world's highest rate of inflation.

This is in stark contrast with the situation at independence in 1980 when one Zimbabwe dollar was worth more than US$1.

Wednesday, July 16, 2008

World Trade Report 2008: Trade in a Globalizing World

The WTO, in a new report Trade in a Globalizing World, extols virtues of free trade and at the same time reminds us that deeper integration has not benefited all sections of society. It argues that globalization, which is basically driven by technological innovation (chiefly low transportation, communication, production, and manufacturing costs), political change, and economic policy choices, has led to increased fusion of product, capital, and labor markets internationally and resulted in a more efficient allocation of economic resources. The report examines “the gains from international trade and the challenges arising from higher levels of integration.” This is what the report has:

The Report explores a range of interlinking questions, starting with a consideration of what constitutes globalization, what drives it, the benefits it brings, the challenges it poses and what role trade plays in this world of ever-growing interdependency. We ask why some countries have managed to take advantage of falling trade costs and greater policy-driven trading opportunities while others have remained largely outside international commercial relations. We also consider who the winners and losers are from trade in society and what complementary action policy-makers need to take in order to secure the benefits of trade for society at large. In examining these complex and multi-faceted questions, the Report reviews both the theoretical trade literature and empirical evidence that can help to give answers to these questions.

The report looks at the total change in output (product, capital, and labor outputs), which obviously has increased relative to cost structure, but does not fully explore distributional impacts of the existing model of globalization led by Western interest(it discusses production fragmentation based on cost-effectiveness)! However, it discusses the conflicts between globalization and domestic trade policies and its impact on the people. The rate of waning of support for globalization would depend on the “balance between the need for open markets and complementary domestic policies, along with international initiatives that manage the risks arising from globalization.”

A warning against autarky:

When different sources of gains from trade are taken together, it has been shown that protectionist policies may carry significant economic costs. However, the benefits from opening up to trade may not be equally distributed across countries.

Poor countries face hindrances in the process of evolution of production networks because of poor quality of infrastructure, high cost of establishing a business, and poor quality of institutional frameworks (in other words unfavorable trade costs and supply-side constraints). Moreover, the report argues that poor countries are not gaining as much as the richer ones because the pace of technological change (which the report argues is the main cause of any negative impact on poverty and inequality), the timing of trade policy change, the pre-existing level of protection and a range of factors relating to such factors as the structure and functioning of markets, education, and basic infrastructure. It asserts that trade helps alleviate poverty, which is still debatable if we look at he progress in the sub-Saharan Africa.

In general, however, empirical evidence continues to support the idea that trade is good for the poor, although trade is likely to affect individual households differently. The strength of the poverty-reducing effect of trade appears to be country-specific and will to a large extent depend on the policies accompanying trade reform.

Here is Pascal Lamy, director general of the WTO:

Countries missing out on international production opportunities risk being marginalized from globalization – indeed, this is a vivid example of how globalization can leave countries and societies behind. But the good news is that much of what can be done to avoid this outcome is in the hands of responsible government.

The report is informative and will be a good refresher/review of trade theories and controversies (starting from Ricardo to recent ones)!

Monday, July 14, 2008

Rodrik calls for 'new Keynes'

[...]The first three decades after 1945 were governed by the Bretton Woods consensus – a shallow multi-lateralism that permitted policy-makers to focus on domestic social and employment needs, while enabling global trade to recover and flourish. This regime was superseded in the 1980's and 1990's by an agenda of deeper liberalisation and economic integration. That model, we have learned, is unsustainable. If globalisation is to survive, it will need a new intellectual consensus to underpin it. The world economy desperately awaits its new Keynes.

More here.

Friday, July 11, 2008

Nepali garment sector in troubled waters

What happens when the largest exporters in an industry have a single major customer, which goes bankrupt without paying outstanding dues of imports, of another country? Well, the whole industry plunges in troubled waters, putting the survival of the industry at stake. This is happening to Nepali garment sector recently. Four big firms' production and exports are in limbo as its buyer Stephen Berry has sought protection under US Chapter 11 bankruptcy law, which suspends or delays payments of outstanding debts. More misery for the already troubled industry...a result of poor industrial policy!

Knowledgeable people in the industry said it's not only a question of delay. Since the buyer has declared bankruptcy exporters will lose at least a chunk of the payments due.

Stephen Berry, known for dealing in cheap university labels in the US, has been importing a substantial volume of garments from Nepal over the last half decade.

In the latest deal, it placed orders worth US$ 5.25 million with the four Nepali manufacturers in January. Of that, the exporters said they have received payment of only US$ 400,000. While they are yet to dispatch last consignments worth US$ 850,000, they

are also supposed to have received payment of $ 4 million for consignments already dispatched.

According to exporters, the Stephen Berry bankruptcy is bad news for the four exporters and for the Nepali garment industry as a whole. As chances of the US economy going into recession are heightening, exporters warned that more such cases can surface in the days to come.

Delay in payment, which they said is the best case scenario in the Stephen Berry deal, would still affect timely release of bank guarantees, freeze assets, subject them to fines and affect future operations, unless the banks came to the rescue.

"If the court refuses Stephen Berry's appeal, the company will have to go into liquidation, which will be a disaster for Nepali manufacturers," said an official at the Garment Association of Nepal, requesting not to be named.

More here.

Gains from Goats

This is why we need selective intervention (funding source may be either internal or external or both) in the developing countries if we are really and economically serious about reducing poverty. This intervention is about providing what is needed the most to generate sustainable livelihood, in this case goats, to the most affected people. Here, goats are given to lower caste families (aka intervention because market always keeps them in dark!) to help them build livelihood. Incentive mechanism works well and there is rise in real income as well.

The innovative project gives participants breeding stock, allowing them to build up herds to the point where they can return the same number of animals they originally received to the program operator, the District Livestock Services Office (DLSO). In turn, those animals are then given to other needy communities who repeat the process.

In the case of the Pokharathok Goat Lending Group-made up of 50 women from the village including Padma Bhitriya-each member was given three female goats, and each group was given two bucks to kickstart the breeding program.

The program has been a major success, with group members' annual incomes rising to NRs17,000 ($270) each, a far cry from their income of around NRs6,000 three years ago.

The goats were provided under the Community Livestock Development Program, a project funded by the ADB which, in 2004, superseded the successful six-year long Third Livestock Development Program (TLDP). The initial program was kickstarted with an $18 million loan from ADB, supplemented by an additional $4 million from the Government of Nepal and local financing institutions.

More here from the ADB.

Wednesday, July 9, 2008

What is 'feminization of poverty'?

Marcelo Medeiros and Joana Costa from the International Poverty Center (IPC) define feminization of poverty as:

[...] We propose a definition that is in line with many recent studies in the field: the feminization of poverty is a change in poverty levels that is biased against women or female-headed households. More specifically, it is an increase in the difference in poverty levels between women and men, or between households headed by females on the one hand, and those headed by males or couples on the other. The term can also be used to mean an increase in poverty due to gender inequalities, though we prefer to call this the feminization of the causes of poverty.

[...] Feminization is a process, whereas a “higher level of poverty” is a state. Feminization is also a relative concept based on a comparison of women and men, including households headed by them. What is important here is the difference between women and men at each moment. Since the concept is relative, feminization does not necessarily imply an absolute worsening in poverty among women or female headed-households. If poverty is reduced sharply among men and only slightly among women, there would still be a feminization of poverty.

[...]The feminization of poverty can also be defined as “an increase in the share of women or female-headed households among the poor”. In contrast to our proposal, this definition focuses on changes in the profile of the poor and not on poverty levels within gender groups. Thus it has a potential disadvantage. It is difficult to interpret the results from this approach because measures of the feminization of poverty can be affected by changes in the demographic composition of the population. For instance, the impoverishment of female-headed households can be offset by a decline in the total number of such households, and thus the result in terms of feminization can be zero. The definition we propose gives rise to indicators that are not affected by these composition effects, which can be analyzed separately.


Tuesday, July 8, 2008

New book: Mexico's transition to a knowledge-based economy

New book about Mexico's transition to a knowledge-based economy from the WBI. I have not read the book yet but will do so in the following weeks. Here is the link for download. Here is a snapshot:

Mexico's Transition to a Knowledge-Based Economy provides a broad assessment of the country's readiness to join the global knowledge economy, highlighting the importance of education and institutional reform, and of creating an environment that is conducive to innovation.

This transformation, however, is not only about shaping the reform agenda from the top down. It is also means trial-and-error experimentation to test what works and what doesn't in the Mexican context, and then taking successful bottom-up initiatives to scale. The book takes a dual approach in its analysis and recommendations. It tackles both the strategic long-term agenda, which entails many difficult changes and choices, while also proposing a diversity of pragmatic, short and medium-term entry points to initiate and promote the transition within the current institutional structure.

Monday, July 7, 2008

Famine in far-west Nepal

famine nepal

Famine-hit people from Sappata village in Bajura district who came to the Nepal Food Corporation depot at Kolti in the district Sunday in search for rice look dejected after the depot stocks ran out before their turn came. Thousands of people in 11 VDCs in northern Bajura are facing food shortage. (Source: The Kathmandu Post)

Many rural areas which are not connected with vital infrastructures for development, including roads, are facing severe food shortages. These are the same regions where incidence of poverty is also the highest. The people depend on subsidized food supply from the state and aid agencies like the WFP.

More here. Rising food prices coupled with short supply, famine, and rising fuel prices have been crippling food supply in the remote areas. Earlier, the WFP predicted that one-third of the population (about 10 million) would starve if similar situation persist long. The WFP needs more aid and funds to effectively reach these people. Where is all the donor money going or are the donors becoming stingy this year?

The acute food crisis has been looming in at least 11 VDCs in north-eastern Bajura district, leaving thousands of villagers in a state of famine.

Thousands of locals gathered at Kolti food depot for foodgrains. However, some 6,000 quintal foodgrain that the depot received had already been distributed.

And this is very sad for the people who are not only poor but chronic poor:

"Ultimately we will have to die since there is no food in the depot and our meager production has already finished," said Rana BK, a local from Sapta village.  Dhansure BK of Sapta-9, who reached the Kolti depot for food, said, "I am not sure whether my children will be alive when I return home with food."

A local NGO distributed 40 kilograms of rice one month ago under the aegis of World Food Program. However, the people have almost finished up that small quantity of food stuff by now.

Some three weeks ago, hundreds of women had gathered at the District Development Committee (DDC) and threatened to commit suicide consuming poison en masse unless they were provided food at the earliest.

But the political parties settled such a grave issue by providing just 25,000 rupees as relief amount to each VDCs.  Similarly, the remote Kalikot district has also witnessed food scarcity. 

There is a shortage of foodgrain in the north-west Patala area in the district. Locals said that the damage to crops from hailstone in April was the major cause of the looming food crisis in the area.

Political response to solve this problem has been so-so. The leaders too busy bickering on restructuring the state at a time when one-third of the population is going hungry. But, what more can we expect from a virtually bankrupt state? The donors( World Bank, IMF, WFO, UNDP, FAO) should release more immediate funds to tackle this problem. Starvation and hunger is going to wash away the progress Nepal made in poverty reduction in the last decade.


Chronic Poverty Report 2008-09

The Chronic Poverty Research Center is publishing the Chronic Poverty Report 2008-09 tomorrow. Earlier version of the report had focused on identifying five main traps that underpin chronic poverty- insecurity, limited citizenship, spatial disadvantage, social discrimination and poor work opportunities and outlined key policy responses to these traps. This new report focuses on the possible solutions to the traps. Here is a piece about what to expect in the report:

We argue that the development of a ‘just social compact’ between citizens and states must be the focus for poverty eradication. Development actors can nurture such a compact through social protection, public services, effective anti-discrimination action, gender empowerment, economic growth and fiscal policy, and the management of migration and urbanisation processes.

To show the human face behind the statistics and policies, we intertwine the life stories of seven chronically poor people from across Asia and Africa into the report. The descriptions of the lives of Angel, Moses, Txab, Vuyiswa, Bakyt, and Maymana and Mofizul, help the reader to better appreciate the complex and varied causes of chronic poverty.

Most people in chronic poverty strive and work to improve their livelihoods, and to create a better future for their children, in difficult circumstances. They need real commitment matched by actions and resources, to support their efforts and overcome the obstacles that trap them in poverty.

We argue that tackling chronic poverty is the global priority of our time and that eradicating poverty by 2025 is a feasible goal – if national governments and international organisations are willing to make the necessary political commitments and resource allocations.

It is our hope that this report will inspire deeper reflection on how to tackle chronic poverty effectively and – most of all – will stimulate action to make it happen.

Here is more from ODI blog:

The new Chronic Poverty Report asserts that better social contracts can be moulded. It stresses that economic growth is critical. Growth lifts people out of poverty, and provide the revenues to invest in human development, including such services as health, education, water and sanitation that are critical to interrupting inter-generational poverty, and enable the poorest  to participate more effectively in the global economy. Such revenues enable states to invest in social protection – critical to address the livelihood insecurity trap, but also to address discrimination, as Mexico’s Progresa (now ‘Opportunidades’) scheme has shown. Supporting the world’s most fragile states to develop better social contracts is at least as worthy a focus for the international community as climate change.

Note that chronic poverty is slightly different from poverty (informally, the former is a sub-set of the latter). The chronic poor are those who experience significant depravation over many years and/or whose depravation is inter-generational (duration is important). Here is more.

There are an estimated 320 to 445 million people trapped in chronic poverty. Also, 18-24% of South Africa's population, 25% of Ethiopia's population, and 22-33% of India's population are in chronic poverty.