Friday, May 9, 2008

Geography vs. Institutions at the village level

Quite interesting paper: Geography vs. Institutions at the Village Level

There is a well-known debate about the roles of geography versus institutions in explaining the long-term development of countries. These debates have usually been based on crosscountry regressions where questions about parameter heterogeneity, unobserved heterogeneity, and endogeneity cannot easily be controlled for. The innovation of Acemoglu, Johnson and Robinson (2001) was to address this last point by using settler mortality as an instrument for geography-induced endogenous institutions and found that this supported their line of reasoning. We believe there is value-added to consider this debate at the micro level within a country as particularly questions of parameter heterogeneity and unobserved heterogeneity are likely to be smaller than between countries. Moreover, at the micro level it is possible to identify more precise transmission mechanisms from geography via institutions to economic development outcomes. In particular, we examine the determinants of economic development across villages on the Indonesian Island of Sulawesi and find that geography induced endogenous emergence of land rights is the critical institutional link between geographic conditions and technological change. We therefore highlight and empirically validate a new transmission channel from endogenously generated institutions on economic development.

The AJR paper is An African Success Story: Botswana. Rodrik argues for the role of institutions (Esterly and Levine also reached similar conclusion) against the role of geography, which is the usual Sachs argument. Also read this one by Devesh Roy and Arvind Subramanian. This is a really popular paper by Rodrik, Subramanian, and Trebbi (Institutions Rule: The Primacy of Institutions Over Geography And Integration In Economic Development). A summary of this paper here. Sachs hits back at the paper here.

New book: Africa's Future, Africa's Challenge

New Book: Africa's Future, Africa's Challenge: Early Childhood Care and Development in Sub-Saharan Africa. Full text here.

This book, the first of its kind, presents a balanced collection of articles written by African and non-African authors ranging from field practitioners to academicians and from members of government organizations to those of nongovernmental and local organizations. This book compiles the latest data and viewpoints on the state of Sub-Saharan Africa’s children, covering topics such as the rationale for investing in young children, policy trends in early childhood development (ECD), historical perspectives of ECD in Sub-Saharan Africa including indigenous approaches, new threats from HIV/AIDS, and the importance of fathers in children’s lives.

I haven't read the book. It is added to my summer reading list. I wish I had it in printed format so that I can read it while traveling!

Effect of Conditional Cash Transfers in Education

I have been inundated with papers (quality ones) and I cannot stop myself reading them. This one is related to conditional cash transfer (CCT) program, which is probably one of the most effective ways to help achieve goals in education and health care.

This one also comes from the WB Policy Research Working Paper #4850. It is titled (actually, pretty long) "Conditional Cash Transfer in Education: Design Features, Peer and Sibling Effects Evidence from a Randomized Experiment in Colombia."

Here is a summary:

This paper presents an evaluation of multiple variants of a commonly used intervention to boost education in developing countries – the conditional cash transfer – with a student level randomization that allows the authors to generate intra-family and peer-network variation. The analysis tests three treatments: a basic conditional cash transfer treatment based on school attendance, a savings treatment that postpones a bulk of the cash transfer due to good attendance to just before children have to re-enroll, and a tertiary treatment where some of the transfers are conditional on students’ graduation and tertiary enrollment rather than attendance. On average, the combined incentives increase attendance, pass rates, enrollment, graduation rates, and matriculation to tertiary institutions.

Changing the timing of the payments does not change attendance rates relative to the basic treatment but does significantly increase enrollment rates at both the secondary and tertiary levels. Incentives for graduation and matriculation are particularly effective, increasing attendance and enrollment at secondary and tertiary levels more than the basic treatment. There is some evidence that the subsidies can cause a reallocation of responsibilities within the household. Siblings(particularly sisters) of treated students work more and attend school less than students in families that received no treatment. In addition, indirect peer influences are relatively strong in attendance decisions with the average magnitude similar to that of the direct effect.

Mapping education with the labor market

A new report (Linking Education Policy to Labor Market Outcomes) from the WB looks at how education improves labor market outcomes. One of the main recommendations of the report is that it is not rational to increase skilled labor force without first assessing demand of such manpower in the labor market. Increasing skills of labor force if there is limited demand for such manpower in the market would be just a waste of resources and would neither spur economic growth nor help the trained labors get high wage jobs, i.e. policymakers need to first look how elastic the market is and bring out economic policies accordingly.

Some interesting stuff from the report:

...If, however, the attainment of these basic skills takes 8 to 12 years of education, as in the systems in the countries analyzed in this report, the system is extremely inefficient. Similarly, if a 15-year-old enrolled in school is unable to use his or her literacy skills for further learning and attainment of knowledge, as indicated by low proficiency scores in international student assessments,the education system has failed the individual.

...The data analyzed in this report indicate that just increasing the quantity of education at the lower educational levels will not raise earnings substantially, and thus not prove to be effective in helping people climb out of poverty.

...In spite of improved primary education completion rates, fewer individuals might be attaining competitive skill sets.

...The literature on human capital accumulation indicates that high quality education at the primary level generates the highest returns, both at the primary level and all levels thereafter.

...Improvements to the quality and efficiency of basic education are urgently needed, in both developing and transition countries.

...Although a number of studies indicate that achieving literacy and numeracy skills in developing countries has a high cost, more research on this topic is needed.

...Different macroeconomic and country contexts create very different labor market demands and associated rewards, suggesting that educational policy needs do not follow traditional development groupings or categories. (In Pakistan, high returns are seen at all levels of education, particularly among women in wage employment, and these increase at higher levels of education, whereas higher returns are apparent only at the highest level of education in Ghana.)

...To gain a comprehensive picture of education–labor market linkages in any country, supply-side analysis needs to be complemented with demand-side analysis.

...The role that FDI flows, trade penetration, and industrial policies play in inducing skills-biased technological change, and thus affecting the demand for education, merits greater research.

...Policies aimed at improving the skills of the workforce will have limited impact on the incomes of those who acquire these skills, or on the performance of a national economy, unless other policies are in place that increase the demand for those skills.

...The framework within which educational supply and demand are analyzed needs to be broadened to include a country’s macroeconomic situation, investment climate, and labor market policies. (A more comprehensive framework will not only strengthen the diagnostic capacity of education supply and demand analysis, it will also streamline the policy approach to education issues.)


Selective intervention in ICT

Bill Gates writes in the Asian WSJ:

Across Asia, public-private partnerships are playing an important role in creating new economic opportunities. In South Korea, the Ministry of Information and Communication has worked in close partnership with the private sector for nearly 15 years to build a national technology industry. Today, South Korea is a global leader in information and communications technologies.

The ultimate goal is to support the development of local economies that have the infrastructure and skilled work force needed to create sustainable growth. My hope is that this will help increase the number of people who have the tools and knowledge to participate in the digital revolution from one billion to two billion and beyond. As this happens and more people join the global knowledge economy, they will spur further innovations that address difficult issues faced by so many people around the world. This, more than anything, will be the key to creating a world where everyone can expect to lead long, healthy, productive and fulfilling lives.

Recommendations for economic growth in South Africa

These are snippets of conclusion of an international panel on growth for South Africa written by Ricardo Hausmann, its Chairman. These are just growth diagnostic snippet from the summary paper. There is a long list of recommendation- a good set of recommendations, in fact. More here.

...the growth acceleration observed since 2004 does not appear to be externally sustainable. Eventually, domestic demand will have to grow more slowly than GDP in order to reestablish external balance, but as demand slows down, it will bring down the growth in the non-tradable sector: (construction, finance, retail and other services). To maintain overall growth and employment, the country will need to rapidly increase its exports.

This is a major challenge, as South Africa’s exports have exhibited remarkably little dynamism over the long run. In the 44 years between 1960 and 2004, the real value of exports grew by only 34 percent (about 0.7 percent per year). By contrast, export growth was 169 percent in Argentina, 238 percent in Australia, 1887 percent in Botswana, 385 percent in Brazil, 387 percent in Canada, 390 percent in Chile, 730 percent in Israel, 1192 percent in Italy, 4392 percent in Malaysia, 1277 percent in Mexico and 120 percent in New Zealand, to name a few relevant comparators.

The recent growth spurt has also highlighted the importance of infrastructure bottlenecks. Over the long period of slow growth since 1980, the country has invested little in its transportation and energy infrastructure and this translates into congestion and brown-outs as the increased demand pushes against a limited supply. This corroborates the importance of the investment program identified in ASGI-SA. But since investment is particularly import-intensive, this will further increase the pressures on the external accounts.

Summing up, the current rate of growth of the economy is above what is sustainable given the current pattern of growth and the structure of the economy and, still, it remains below the desired target of 6 percent announced by ASGI-SA for the start of the next decade. To achieve the growth target of 6 percent, additional efforts will have to be made to relax the binding constraints that keep the speed limit of the economy below what ASGI-SA would like to achieve. Identifying those binding constraints and relaxing them through policy interventions in a way that achieves a better participation of the population in the fruits of growth is the key to achieve the goals of ASGI-SA.

In contrast with other high growth countries, the decline in primary sector jobs was not compensated with increased employment in manufacturing, which also declined since 1982. During the decade between 1994 and 2004, manufacturing jobs fell by 11.7 percent or 165,448 jobs and by 21.0 percent or 332,441 jobs since its 1982 peak.

Hence, a strategy for externally sustainable and shared growth involves the creation of jobs in the tradable sector, which in an open economy translates into export for jobs. Such a pattern of growth is needed in order to create the external resources required to sustain growth. It is also needed to create the kinds of jobs that use the human resources that the society has at its disposal.

It is clear from business surveys and from the general national debate that skills are in short supply and a strategy to relax this constraint is necessary. However, we argue that the skills constraint is aggravated by the pattern of growth that South Africa is experiencing, and in fact is in large part its result. The growth strategy of ASGI-SA has to be based on the people that South Africa has, not on the people that it wished it had. A strategy based on the relative expansion of the tradable sector represents a better match with the currently under-utilized human resources of the economy.

The fact that investment and growth in the tradable sector have lagged is indicative of problems with the level and stability of the real exchange rate.

Now, the real exchange rate is an endogenous variable. Its level and volatility are not set by government but are the outcome of the whole macroeconomic balance. Therefore, it is this balance that must be the focus of policy. The greater the level of domestic demand, the stronger the real exchange rate. The more volatile the level of domestic demand, the more volatile the real exchange rate. We will therefore propose that the government maintain the main features of its macroeconomic strategy in terms of fiscal prudence and inflation targeting, but that it introduce some changes. First, fiscal policy should be set with an aim of increasing savings so as to make a significant contribution to funding the ASGI-SA public investment objectives. Second, the target fiscal policy should not be the actual deficit but the structural deficit, i.e. a concept of deficit that takes into account the expected levels of the terms of trade and the cyclical conditions of the country. This will introduce more stability to the level of government spending. Finally, the South African Reserve Bank (SARB) should maintain its flexible inflation targeting regime but should be more responsive to deviations of the real exchange rate. It can do so through a greater use of intervention in the currency market when it deems it necessary to prevent excessive appreciation, and by signaling its concern about the level of the exchange rate to markets when appropriate. The SARB should communicate its new emphasis to the public.

In addition, the effective relative price faced by a particular tradable activity will depend on trade policy. The existence of tariff protection in intermediate goods acts as a tax on those industries that use these goods as inputs. Work by Edwards and Lawrence for this project suggest that this effect is important and that a strategy based on the relative expansion of the tradable sector would benefit from a reduction in the tariff on inputs. We will therefore suggest changes to the tariff regime and to the regional integration strategy followed by South Africa.

In addition, many markets in South Africa suffer from limited competition. High margins and restricted entry are in theory and obstacle to growth. Work by Aghion, Braun and Federkke for this project have shown that on average margins in South Africa are 50 percent higher than in other countries and that this is strongly related to poor growth. Hence, there is evidence that lack of competition is a problem, limiting investment in activities that present large barriers of entry or that use inputs from activities with strong pricing power.

we propose a wage subsidy allowance for all 18-year olds that they can use throughout their life to facilitate the school to work transition and to assure that the educational skills of the new cohorts do not deteriorate through a long period of unemployment. We will propose that during the probation period in which the allowance is used, employers be free to dismiss workers without any justification. This will encourage more experimentation and a more efficient matching of workers to jobs.

We shall propose a strategy to accelerate structural transformation by encouraging search and by addressing coordination problems in the supply of specific public goods. In addition, we will propose a strategy to improve the performance of key government agencies that affect competitiveness.

Rodrik's presentation about the secret of economic growth

Topic: Why Do Some Countries Remain Poor While Others Grow Rich? More here.

How soon can donors exit from post-conflict states?

This paper was published in February 2008 by the Center for Global Development (CGD). The authors assert that donors need to fund operations for a lengthy time to create and give sustainability to institutions in post-conflict regions to prevent a rollback into previous state of affairs. More summery from the Eldis:

This paper evaluates and estimates the time and dollar costs of post-conflict rebuilding. Utilising four post-conflict states - Liberia, Mozambique, Solomon Islands, and Timor-Leste - as case studies, it argues that it will be decades, possibly generations, before post-conflict states are ready to see donors leave.

The research asserts that a lengthy engagement of externals in post-conflict states is critical to the creation and maturation of institutions - necessary to prevent a rollback into state failure on the donor(s) departure.

Recent post-conflict interventions have involved the rebuilding of both physical and social infrastructure. Indeed extended conflicts create self-perpetuating forces, a conflict trap, making it difficult to muster fiscal space for state services and break-out of their predicament on their own.

Key policy lessons include:

  • the timeframe for interventions is longer than had been envisaged by donors and the 'recipient'
  • support for funding of 'state services' and the budget is critical
  • budget support could be withdrawn with a simultaneous substitution of domestically generated revenue as part of a transparent process of reverting sovereignty back to the intervened state
  • incentives for the interveners, as much as for the intervened, to stay the full course have to be built into a contract at the beginning of the mission.