Saturday, August 29, 2009

Skidelsky on economics and Keynes

The FT interviews Robert Skidelsky, the biographer of Keynes. Some interesting perspectives:

Skidelsky on if economists failed to foresee the dangers posed by uncontrolled capitalism hinged on mathematical models and detached from reality:

Skidelsky believes economists missed the danger signs ahead of the financial crisis. They were preoccupied with sophisticated mathematical models – a serious weakness, he says, in academic teaching of the discipline – and they were over-confident in self-regulation of the market.

He blames this mindset on the revival of anti-Keynesianism in the 1970s when government intervention in the economy made way for supply-side theory of tax cuts and labour market deregulation. But Keynesians, too, were guilty of overreaching: they assumed the state was capable of fine-tuning demand to mitigate the effects of the economic cycle. Today, Keynesianism has reasserted itself through multi-billion pound government interventions to stimulate the economy and recapitalise the banking system. Skidelsky is no statist but he says the crisis has exposed serious weaknesses in economic policy, from the Bank of England’s inflation targeting (“They did not have the tools”) to the Labour government’s belief in light-touch regulation.

A famous quote from Keynes:

The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy a task ... if they can only tell us that when the storm is past the ocean is flat again.

Friday, August 28, 2009

Hans Rosling’s new presentation

Hans Rosling gave a fantastic presentation (combining academic substance plus technology) at a talk show. Watch the interesting presentation about growth, healthcare, and infant mortality.


Equally interesting are his 2006 talk and 2007 talk.

Wednesday, August 26, 2009

Chang calls for constructive debate on industrial policy

Ha-Joon Chang has a new paper on industrial policy (I think it is still a draft), which he presented at ABCDE conference in South Korea recently. He tries to push the debate over industrial policy in a constructive path, i.e. how to make industrial policy work better rather than wholly criticizing it despite knowing that every country in one way or the other, even under the WTO rules, engages in industrial policy. Below is a summary of main point of the paper.

Chang argues for "selective industrial policy", which basically is a policy that deliberately favors particular industries over others, against the dictates of market, to enhance (not necessarily) efficiency and promote productivity growth. Almost all industrial policy measures involve selectivity and targeting; the real difference lies in the degree of targeting. A more targeted industrial policy would mean easier monitoring and lesser "leakages".

He argues that the state can sometimes “beat the market" because it designs policies based on a national and long-term perspective, rather than sectional, short-term perspective. This is close to the development experiences of Japan, South Korea, Taiwan, and Singapore in the post WWII period. [Rodrik also makes a similar argument for selective intervention to clear information externalities and coordination failures in the market. For instance Brazil directly aided its steel, aircraft and shoe industries (high levels of protection and public ownership, R&D investment and subsidized credit); Chile aided its grape, forestry, and salmon industries (R&D investment), and Mexico aided its motor vehicle and computer industries (ISI initially followed by preferential tariff policies under NAFTA)].

Chang shows evidence that industrial policy had been practiced for a long time, even in the existing bastions of free market economy. The US government ran a huge industrial policy-- between 1950 and 1980, 47-65% of national R&D spending was financed by the US government as against approximately 20% in Japan and Korea and 30% in Europe. The US and Britain had the world's highest levels of tariff protection during their respective catch-up periods (45-55%). The successful countries right now provided subsidies to promote targeted industries, set up state-owned enterprises or public-private joint ventures for risky projects and regulated FDI, among other measures. In the post-WWII period, Japan was the first country that used the term industrial policy (sangyo seisaku) to mean selective industrial policy.

According to Chang, industrial policy measures in East Asia included:

  1. coordination of complementary investments (Big Push)
  2. coordination of competing investments through entry regulation, "investment cartels", and (in declining industries) negotiated capacity cuts
  3. policies to ensure scale economies (e.g., licensing conditional upon production scale, emphasis on the infant industries starting to export from early on, state-mediated mergers and acquisitions)
  4. regulation on technology imports (e.g., screening for overly obsolete technologies, cap on technology licensing royalties)
  5. regulation on FDI (e.g., entry and ownership restrictions, local contents requirement, technology transfer requirements, export requirements)
  6. mandatory worker training for firms above a certain size, in order to resolve the collective action problem in the supply of skilled workers due to the possibility of "poaching" [It is like reducing information externalities by publicly investing in industries-oriented/job-oriented education.]
  7. the state acting as a venture capitalist and incubating high-tech firms
  8. export promotion (e.g., export subsidies, export loan guarantees, marketing help from the state trading agency)
  9. government allocation of foreign exchanges, with top priority to capital goods imports (especially for export industries) and the bottom priority to luxury consumption goods imports.

He maintains that industrial policy cannot be measured purely in terms of financial transfers because the effect of many of industrial policies (especially at the sectoral level and the economy-wide level) are not quantifiable. Also, the impact of a country's industrial policy cannot be fully measured in few years because of "super-sectoral" policy measures that address issues like complementarities, linkages, and externalities-- all of these take years, even decades, to come to full shape. For instance, Korea's resurgence in steel trading took years after Heavy and Chemical Industrialization (HCI) was launched in 1973. Chang rejects the notion that the East Asian countries could have grown even faster if there were no industrial policies. He also dismisses the argument that East Asian countries were more productive because of culture (high savings rate, strict work ethic, high-quality bureaucracy).

These countries must have had some country-specific "countervailing forces" that were so powerful that they cancelled out all the harmful effects of market-distorting industrial policy and still generated the highest growth rates in human history (6-7% annual growth rate in per capita income over four decades). I find this highly implausible. Are these skeptics really seriously suggesting that, without industrial policy, these powerful countervailing forces would have made the East Asian countries grow at- what?-9%, 10%, or even 12%, when no country in history has ever grown at faster than 7% for an extended period, industrial policy or not?" [...] "Korea's savings rate on the eve of its economic miracle was barely 5% and started rising after growth took off. At the end of colonial rule, literacy rate in Korea was only 22% and its industrial base was smaller than that of Ghana. After 1950s, Korea and Taiwan did not get an exceptionally high amount of foreign aid.

He believes that industrial policy did work in East Asia and its relevance has not died yet.

If industrial policy is so bad, how is that in every era, the fastest growing economies happen to be those with a strong industrial policy- Britain during the mid-18th century and mid-19th century, the US, Germany, and Sweden during the late 19th and the early 20th century, East Asia, France, Finland, Norway, and Austria in the late 20th century, and China today.

Chang argues that industrial policy should be taken as a standard policy measure rather than an extreme argument intended to generate a fear of government takeover of industries. Rather than wholly rejecting or criticizing it, it is helpful to debate on how it can be improved and really targeted at reducing market inefficiencies. For this to happen, developing countries need the institutional reforms that would aid the objectives of a good industrial policy. This way industrial policy can be disassociated with past ISI policies , which did not produce as good a result in Latin America as the selective industrial policy produced in East Asia. In order for industrial policy to work, there has to be some experimentation at home (Chang calls it "trying at home"), i.e. policies should be tried at home rather than copying from somewhere else. Even if bureaucratic capability is weak, industrial policy can be tried, i.e. you don't have to wait for first-order conditions to implement industrial policy.

He opines that export-oriented industrial policy helps to inculcate better discipline in bureaucracy because the “objective, hard-to-manipulate” performance indicator is pretty much free of lobbying and special interest pressure, i.e. export performance indicators are less open to manipulation by the recipients of state support than domestic performance indicators.

Economic development is impossible without good export performance. He argues that the failure to promote enough exports is one of the reasons why Latin American stint with ISI was not successful as those in East Asia. Balance of payments could be a strong constraint to economic growth.

Even if a country can export some goods with comparative advantage, industrial policy is still needed because there might be other sectors that could turn out to be more favorable if productive capabilities are built in time (with state support). For long run growth, it is not enough to rely on comparative advantage-conforming industries. For instance, a small rise in wages, which in turn could be caused by rise in exports of narrow set of goods, could undermine the balance of an economy. Avoiding this would require upgrading from export industries to comparative advantage-defying industries, which requires even stronger industrial policy. Example: Heavy and Chemical Industrialization (HCI) program in South Korea. He thinks that globalization has not diminished the role of industrial policy as some form of tariff structure, however minimal, always exist in WTO rules.

Export policy would require a mixture of free trade, export promotion, and infant industry protection—all part of an industrial policy. He argues that many proponents of industrial policy do not fully appreciate how critical export is for the success of industrial policy, while many opponents do not fully appreciate how export success also requires industrial policy.

Sunday, August 23, 2009

After over 8 years, where does AGOA stand?

Africa Growth and Opportunity Act (AGOA), signed in May 18, 2000, provides Sub-Saharan African exports (mostly textiles and apparel) duty and quota free entry into the US markets and also provides for trade facilitation and technical assistance to African producers. After more than eight years, how much has African countries actually benefited and if it is helping them achieve what AGOA was supposed to. Mwangi Kimenyi, Brookings Institution, argues that though trade volume has increased multiple folds, the AGOA's impact on stimulating growth and increasing employment have been limited. It is not good news since AGOA is usually touted as one of the best trade and investment strategies offered by US to the Sub-Saharan African countries. At present, 37 countries are AGOA-eligible.

What's the impact of AGOA? First, there is always an increase in volume of trade whenever there is free trade or trade under preferential trading agreements. The imports to US from Sub-Saharan Africa (SSA) increased by multiple folds-- in 2008, the US imported $81 billion of duty free goods from AGOA-eligible countries, up from $7.6 billion in 2001. Kimenyi argues that though there has been an increase in trade volume, the African countries have not been able to exploit fully the opportunities given to them by AGOA. The share of African countries' exports in global trade is very low.

In 2008 total apparel imports to the U.S. were valued at $93 billion, of which SSA accounted for $1.1 billion (1.26 % of the total market). In the same year, Bangladesh alone exported $3.5 billion worth of apparel (3.79 % of total market)—more than double the entire exports from SSA. Also of concern is that African exports under AGOA have declined in recent years. For example, African AGOA exports in 2004 and 2007 accounted for 54.5% and 36.5% of total exports to the United States respectively.

Also, AGOA has not fully helped the African countries diversify their production structure. Some of the goods that are exported now are the same covered under Generalized System of Preferences (GSP). Importantly, almost 96 percent of the exported items are energy related, which would have been exported anyhow due the continuing rise in demand for energy in the global market.

Of the AGOA exports, $52.8 billion of exports (95.7 percent) consisted of energy related products (mainly crude oil). Thus, the real benefits of AGOA to African countries are much lower than what aggregate numbers show—about $3.5 billion of exports.

He argues that since the African countries have been unable to exploit the opportunities provided by both GSP and AGOA, emphasis should be put on helping the countries overcome their trade-related shortcoming. Two important recommendations are:

-Cutting down the cost of doing business: SSA countries are not competitive because of a lack of infrastructure, ports, electricity; regulatory burden and licensing procedure. The Doing Business Report shows that the ease of doing business in SSA is the lowest when compared to other regions.

-Investing in value addition: Economic transformation is required for development and policies should be designed to help in diversification of production and export goods so that increased production also means increased value addition.

Other recommendations include simplifying the approval process (especially on health and safety standards while importing to the US); evaluating proposed preferences to less developed countries (providing similar access to other developing countries that are already established in the field destroy SSA investment and exports); revocation of status (investors might pull back investment if there is a possibility that a given AGOA-eligible country could be stripped off the AGOA benefits due to political reasons); harmonizing member positions (African countries should have a collective, concerted voice through the African Union so that they are well represented and well heard during trade negotiations).

Friday, August 21, 2009

Collection of my op-eds

  • "Ceiling Salary: Is it NRB's job to cap pay of executives?" Republica, 1 September 2010:6 (related blog here)

  • "Remittance's ugly face." Republica, 18 august, 2010:6 (related blog here)

  • "Future of Nepal's exports: Everything ain't good, but everything ain't bad either." Republica, 1 August, 2010:6 (related blog here and exports sophistication of Nepal)

  • "Convenient Conclusions?" Republica, 14 July, 2010:7 (related blog here)

  • "NTIS 2010: A strategy without a comparative advantage." Republica, 3 July, 2010:6 (related blog here)

  • "Economic discourse & accountability." Republica, 16 June, 2010:7 (related blog here)

  • "Industrial Policy 2010: Good but inadequate reform." Republica, 29 May, 2010:6 (related blog here)

  • "Impending economic tsunami: Definite economic meltdown with indefinite bandas." Republica, 7 May, 2010:7 (related blog here)

  • Five Reform Agendas.” Republcia, 22 April, 2010:6 (related blog here)

  • Nepal-US TIFA & Exports.” Republica, 10 April, 2010:6 (related blog here)

  • Exchange Rate: Stay the Course.” Republica, 23 March, 2010:6 (related blog here)

  • Constraints on NTY 2011.” Republcia, 14 March, 2010:6(related blog here)

  • Is Nepali export passé?”. Republcia, 28 February, 2010:6(related blog here)

  • Don’t forget the starving poor.” Republica, 18 February, 2010:7(related blog here)

  • High costs of Nepal bandas.” Nagarik, 9 February, 2010:6.(related blog here)

  • Costs of Nepal bandas.” Republica, 30 January, 2010: 4.(related blog here)

  • Demise of garment industry.” Republica, 19 January, 2010: 5.(related blog here)

  • Dahal’s trade deficit.” Republica, 30 December, 2009: 4.(related blog here)

  • Strike-unemployment cycle.” Republica, 17 December, 2009: 4.(related blog here)

  • Regional integration & growth.” Republica, 2 December, 2009: 4.(related blog here)

  • Futile efforts.” Republica. 10 November, 2009: 4.(related blog here)

  • Don’t prolong death of NDB.”Republica. 23 October, 2009: 4.(related blog here)

  • State of no reform.” Republica. 1October, 2009: 4.(related blog here)

  • Is Nepal gaining from WTO?Republica. 9 September, 2009: 4.(related blog here)

  • "Nepal's aid industry." Republica. 20 August, 2009:4 (related blog here)

  • Sticky inflation & policy options.Republica 6 August, 2009: 4.(related blog here)

  • Budget lacks focus: Macro issues in mammoth budget.” Republica 20 July, 2009: 4.(related blog here and here)

  • Dismal progress in trade facilitation.” Republica 14 July, 2009: 4.(related blog here)

  • Views from the bottom.” Republica 1 July, 2009: 4.(related blog here)

  • Let NDB go away.” Republcia 21 June, 2009: 4.(related blog here)

  • Economy under the Maoist administration.” Republica 6 June, 2009:  4.(also see Report Card and related blog here)

  • What’s holding back growth?.” Republica 14 May, 2009: 4.(related blog here)

  • Growth Strategies for Nepal.” Republica 27 April, 2009:  4.(related blog here)

  • Poverty, conflict & armed rebellion.” Republica 14 April, 2009: 4.(related blog here)

  • Reality about Nepal’s GDP growth rate.” Republica 24 March, 2009: 4.(related blog here)

  • High hopes amidst weak foundation." Republica 8 March, 2009: 4.(related blog here)

  • Pay taxes, become responsible citizens." Republica 15 February, 2009: 4.(related blog here)

  • Bust factors: Poor appropriability and load-shedding." Republica 6 January, 2009: 4.(related blog here and here)

  • Impact Of Global Financial Crisis On The Nepali Economy." Republica 8 December, 2008: 4.(related blog here)

  • "Roads to progress: Nobel thoughts about the Nepali economy." The Kathmandu Post 15 October, 2008: 4.(related blog here)

  • "Enter Socialism with Inflation." The Kathmandu Post 23 September 2008: 5.(related blog here and here)

  • "Industrial Policy for Nepal." The Kathmandu Post 2 September 2008: 5.(related blog here)

  • "Times up for the garment industry." The Kathmandu Post 19 August 2008: 4.(related blog here)

  • "Leaking customs and weak trade." The Kathmandu Post 2 August 2008: 4.(related blog here)

  • "Red tapes under the red flag." The Kathmandu Post 10 June 2008: 4.(related blog here)

  • The Economics of Reservation, December 2007, Business Journal, Kathmandu

  • Untangling the threads associated with defaulters , July 2007,New Business Age,Kathmandu (related link here)

  • Consequences of weak industrial relations, March 2007, New Business Age, Kathmandu

  • Troubles in Nepal, March 1, 2004, Letter to the Editor, Time magazine

  • Assault on freedom of press, April 21, 2004, The Himalayan Times

  • Partial attitude, September 24, 2004, The Kathmandu Post

  • The burning culture, September 8, 2004, The Kathmandu Post

  • What’s wrong with the aid industry in Nepal?

    In my latest op-ed, I look at the performance of aid industry in Nepal. I was planning to write about this issue after Jajarkot health crisis. I was more interested in finding how much aid money poured in into the Nepali economy, its impact on poverty and growth. I will write in detail about these links in the coming days. However, for now, I believe that the people should seriously question the effectiveness of the aid industry in Nepal. Here is a good one that looks at donor-funded drinking water mess in the same district where diarrhea killed more than 300 people in three months.


    Nepal's Aid Industry

    In less than three months, more than 300 people lost their lives due to diarrhea and cholera outbreak in remote districts. The government, constrained by a lack of resources and effective contingency plan, scrambled to tame down diarrhea and cholera outbreak in Jajarkot and surrounding districts. The spread of these diseases is not yet contained and still there is no encouraging response from one sector that should have aggressively intervened during difficult times like this. The sector I am talking about is the aid industry in general and the development agencies, both NGOs and INGOs, that are working in the social/health sector in particular.

    The passiveness of this sector reflects its inefficiency and inconsistency in dealing with such incidents. Accountability, transparency, rigorous evaluation of aid effectiveness, coherence among aid interventions to avoid duplication and waste of resources, and efforts to make donors responsible for their interventions, both humanitarian and technical, are missing from the Nepali economy. The aid industry in Nepal is like a cherry-picking, trigger-happy enterprise i.e. handful of successful social and humanitarian interventions are heavily publicized while multiple failures of aid to deliver intended results are never made public, thus leaving no room for feedback mechanism from the aid recipients.

    Who is keeping track of (most importantly, published details about) how much aid money is channeled, for what purpose, and how many of them have been successful in meeting their own targets? Neither the government nor the aid agencies have evaluated and made public the effectiveness of aid interventions. Already more than US$15 billion (more than one and half times the total value of goods and services produced in the country) is poured in into the economy but the progress is dismal. More than 40 percent of central government expenditure is covered by aid. A latest survey carried out by the government shows that out of every Rs 100 foreign aid, Rs 26 is unaccounted for in the government budgetary system. No one knows how much out of Rs 74 that passes through the government budgetary system is actually delivering the intended results. Note that only 14 percent of development assistance is coordinated among donors.

    The amount of development aid has increased by multiple folds since the time aid started flowing into the county. During the periods 1970-79, 1980-89, 1990-99 and 2000-06, development aid, on average, amounted to US$172 million, US$494 million, US$483 million and US$475 million respectively. In 2007 alone, it amounted to US$598 million, up from US$ 65 million in 1969. Aid per capita has increased from US$16 in 2000 to US$21 in 2007. With so much money flowing in and so little success attributable to the aid industry, the fact of the matter is that the aid industry has failed to deliver on its promises, especially on poverty reduction and economic growth.

    That being said, I am not arguing for the elimination of aid from the impoverished nation. Yes, we do need outside money to bridge the hole in our fiscal budget (almost 3.6 percent of GDP was covered by foreign grant and 1.1 percent by foreign loan in the last fiscal year) and to buttress development activities that are targeted to reach the most vulnerable people. I am also not arguing that all the development agencies have fallen short of making a difference; sure, there are some success stories. Thanks to aid intervention in the education sector, primary and secondary enrollment rates are going up. Also, its contribution in helping poor people weather through miseries brought about by exogenous variables like weather and economic shocks is commendable. However, what it has not done is to create an environment where poor people are ‘incentivized’ to engage in entrepreneurial activities, thus helping to carve a path for meeting their immediate social security needs by themselves. It has instead made them perennially dependent on aid. A case in point is the persistent episodes of starvation in Mid- and Far-Western Regions, where instead of funding projects, say introducing better technology, irrigation and fertilizers, that could boost agriculture productivity, the poor people are supplied with (or implicitly guaranteed) food aid year after year.

    Let us look at two issues very dear to the aid industry. First, directly or indirectly, almost all the development aid agencies boast that their ultimate goal is to reduce poverty. According to NLSS II, between FY 1995/96 and FY 2003/04, headcount poverty rate declined from 42 percent to 31 percent, urban poverty from 22 percent to 10 percent, and rural poverty from 43 percent to 35 percent. A World Bank report attributes this successful feat to an increase in remittances, farm wages, urbanization and a decline in fertility. The direct contribution of the aid industry to bring about this change is dubious.

    Second, the progress in the health sector is also not that encouraging. It might not do justice to the aid industry’s contribution to improving health services in Nepal if I wholly blame them for episodes like the spread of diarrhea in remote districts. Nevertheless, the Jajarkot incident shows how unprepared the aid industry was in dealing with the outbreak of a disease that could be prevented by taking simple sanitary measures. Where was all the money that has been pouring into the economy for prevention of such kind of diseases through public awareness campaigns and education going? What were rapid response teams and aid workers in the health sector doing when diarrhea outbreak was paralyzing the whole district? Despite so much money poured into the health care sector by the aid industry, why was there an absence of health posts and basic equipments to deal with such diseases? These questions beg answers from the aid industry. There was an utter failure to harmonize aid and relief activities in the diarrhea-hit districts. If development initiatives are not working, then the aid industry should be honest about admitting failure so that new strategies could be forged to make such initiatives effective next time.

    The aid industry should harmonize their humanitarian activities so that assistance and care is provided to the neediest ones at the most appropriate time. Importantly, it should help the economy lessen its dependence on aid. One way to do this would be to aid activities that would stimulate entrepreneurial activities, with participation of poor people, in the economy. For instance, funding activities that would help poor people to produce marketable agricultural and industrial goods would jack up their household income, thus enabling them to take care of their family needs by themselves. Helping the poor people take control of their fate by providing them with the necessary tools and skills to unleash their entrepreneurial instincts would do more to improve development indicators than just providing them with readymade products, money and “expert” advice. Similarly, increasing funding to prop up manufacturing activities, which has been growing at a negative rate, to take advantage of the country’s accession to the WTO would be extremely helpful to the poor people.

    The aid industry needs to seriously evaluate success and failure of development interventions in the Nepali economy and let the public know what is working and what is not. Injecting money (and increasing external debt, which amounts to over US$3645 million and is approximately 421 percent of total exports) without discernible outcomes is not helpful to the poor people. A better aid bureaucracy with clear rules of intervention, timely evaluation of projects, harmonization of aid activities to create synergies and lessen waste, and projects that would assist and give incentives to poor people to engage in building their own future, would do well to the Nepali people than just operating in an opaque, secretive manner.

    Thursday, August 20, 2009

    A demand-determined economy

    A country-specific policy package that recognises economies to be demand-determined would have the following components: (i) an expan fiscal budget, consistent with the rule that the overall deficit not exceed public investment; (ii) an accommodating monetary policy that tolerates moderate inflation in order to achieve higher growth by providing subsidised credit for poverty reduction programmes (the target could be that the real interest rate equals the sustainable growth rate of per capita income—the Golden Rule); and (iii) a managed exchange rate regime that seeks to promote exports and alter the relative price of tradeables and nontradeables without causing unmanageable inflation spirals.

    That's from Degol Hailu and John Weeks on IPC's One Page#92. The point is that low income countries can implement counter-cyclical economic policies if they adopt a demand-determined economy framework instead of price-determined economy framework.

    Monday, August 17, 2009

    Quality of education and economic growth

    Here is a short piece about why the quality of education matters more for growth than just quantity of education (high enrollment rates). The authors argues that this (quality of education) might provide answers to the Latin American puzzle-- despite high school enrollment (partly also due to quantitative goals set by MDG--to ensure universal primary education by 2015), why Latin American is lagging in terms of economic growth. Good quality of human resource with high cognitive skills matter more to economic growth than simple quantitative goals. Not a very surprising result but they do statistical tests to provide more validity to this line of argument.

    What has been missing is a focus on the quality, rather than quantity, of education – ensuring that students actually learn. While Latin America has had reasonable school attainment, what students in fact know is comparatively very poor. Latin American countries have participated infrequently in worldwide student achievement tests, but their students always rank near the bottom of worldwide comparisons.

    Source: Hanushek and Woessmann (2009b). Added-variable plot of a regression of the average annual rate of growth (in percent) of real GDP per capita in 1960-2000 on the 1960 level of real GDP per capita and average scores on international student achievement tests (mean of the unconditional variables added to each axis). Region codes: Asia (ASIA), Commonwealth OECD members (COMM), Europe (EURO), Latin America (LATAM), Middle East and North Africa (MENA), Sub-Saharan Africa (SSAFR).

    As the figure makes patently clear, considering this low level of cognitive skills is sufficient to reconcile the poor growth performance of Latin America with outcomes in the rest of the world over the past four decades. Our interpretation is simple. Even though many things enter into economic growth and development, the cognitive skills of the population are extremely important for long-run growth.

    The crucial missing link in explaining why Latin America went from reasonably rich in the early post-war period to relatively poor today is its low cognitive skills. […] Our results using the regional test data support the important role of cognitive skills in understanding Latin American growth. These test scores are statistically and quantitatively significant in predicting economic growth differences in intra-regional growth regressions. They increase the explanatory power of standard growth models considerably and render the effect of years of schooling insignificant. In sum, schooling appears relevant for economic growth only insofar as it actually raises the knowledge that students gain as depicted in tests of cognitive skills.

    Wednesday, August 12, 2009

    Why China is growing faster than India?

    Why are China and India growing faster than other countries? Also, why is China growing faster than India? T.N. Srinivasan argues (via Chris Blattman) that it is because of:

    First, productivity growth is king. Sustained growth in both countries comes from learning to make better things more efficiently.

    Second, reforms stimulate productivity growth. In both nations, a period of intense economic and political restructuring (mostly towards markets) led to takeoffs in growth.

    Third, the reforms followed major crises. In China, reform followed the failures of the Great Leap Forward and the Cultural Revolution, while in India it was the balance of payments crisis in the early 1990s.

    So why did China take off sooner and faster than India? Because the crisis hit earlier. Today’s fruits of prosperity grew from the seeds of Mao’s disastrous policies.

    Srinivasan asserts that in the future India has higher potential for higher growth than China does because (contingent on right reforms in India):

    India is younger, more rural, and engaged in lower productivity activities. A shift into higher productivity activities will only accelerate their growth.India’s economy is more market oriented, has a more efficient financial sector, and more experience in domestic innovation and entrepreneurship. China has less room for improvement; the population is aging, is already better educated and healthier than India, and has less capacity to innovate. Growth will continue, but it may have peaked.

    Interesting perspective!

    Sunday, August 9, 2009

    Why decline in global trade is faster than decline in global GDP?

    The IMF projects a decline in international trade of as much as 12 percent in 2009 in comparison to 6 percent fall in 2008. It all started with bursting of housing and asset markets bubble, which is not particularly related to international trade. However, with a financial crisis in the US, the world economy went in a downward spin, contracting global trade. Why would global trade, which has been growing on average 11 percent since 1957 as opposed to 4 percent growth of global output, collapse all of a sudden and inflict so much harm to major exporters? The ratio of fall in trade to fall in GDP has been 4:1 Economists and analysts hunt for the reasons (published in Spring 2009 edition of International Economy):

    Barry Eichengreen, UC, Berkeley

    He argues that we really don’t have an adequate understanding of the causes of collapse in world trade. However, few factors can be singled out.

    1. The most important one is the disruption in global supply chain, i.e. something like a domino effect in the form of decreasing demand for goods from one country leads to decline in exports of final goods from another and further decline in demand for intermediate goods from another country and so on. The growth of global supply chains has magnified the impact of declining final demand on trade.
    2. Another reason might be the disruptions to the supply of credit from international banks to some developing countries and industries.

    Fred Bergsten, PIIE

    He offers solutions rather than reasons for why trade declined more than GDP.

    1. There should be new protectionist measures (G20 needs to honor this pledge). Competitive currency devaluation should be avoided.
    2. Policy needs to correct large global trade and current account imbalances.

    Gary Hufbauer, PIIE

    Two reasons why developing world trade collapsed: prices and volume

    1. Commodity prices have been volatile instead of being a shock absorber.
    2. Exports volume is down because most of the developing countries export consumer goods, which has contracted severely due to global recession. He argues, “Any country that sees its exports drop less than 7 percent in 2009 can count itself lucky.”

    Ronald McKinnon, Stanford University

    1. Intensive trading of manufactures went down as people cut back on purchase of durables.
    2. The credit crisis limited financing associated with international trade.
    3. Forward exchange transacting became more difficult and expensive because of disruption in the foreign and domestic interbank markets. Traders found it difficult to hedge themselves from currency fluctuations.

    Jagdish Bhagwati, Columbia University

    1. He argues that drying up of financial credit is the main reason for decline in global trade. Btw, he refers to Naomi Klein as “a fount of many economic fallacies.”

    Richard Erb, University of Montana

    1. The decline in tradeables generally decline more rapidly than the demand for services during a recession.
    2. The finanical crisis intensified this process.

    Steve Hanke, Johns Hopkins University

    1. World trade is elastic with respect to global GDP. So, when global GDP slumps, we should expect an outsized plunge in world trade. And, the panic of 2008 has intensified this process.

    Marina Whitman, University of Michigan

    1. It is because of a severe pull-back in financing added to—and interacting with—the global recession. Almost 90 percent of merchandise trade is dependent on trade finance.
    2. Intra-firm trade slows down more than GDP during financial crisis of this kind because this kind of trading activity is hinged on financing.
    3. Protectionist measures have so far had far less impact on the decline of trade than the other factors.

    William Brock, Former US Trade Representative

    1. Recession led to less money available for investment, less capital to finance new technologies and greater production domestically, and less financing for exports or imports.
    2. He argues that a large part of the answer lies in the habit of making things worse (politically by engaging in protectionist measures) when times are tough.

    Tadashi Nakamae, Nakamae International Economic Research

    1. There are multiple transactions involved in completion of a final good. When demand for that good falls, then the whole chain of transactions collapses, thus reducing world trade drastically. i.e. the fall in global trade is greater than the fall in global GDP.
    2. World trade is collapsing because American consumers are not spending, spreading large ripples across the globe.

    Sylvia Ostry, University of Toronto

    1. We really don’t know what caused this because we have a new trading system and no data that tracks multiple trading of the same goods across borders.
    2. It also could be a widespread recession, a shortage of trade finance, and a rise in protectionism (although Bhagwati argues that there is no evidence that protectionist moves/threats so far have had any dent on trade flows).

    Bernard Connolly, Connolly Global Macro Advisers

    While there is no direct evidence that protectionist measures are the main cause, Conolloy argues that “protectionist measures, overt or covert, were one.”

    1. Reduced trade finance was another reason.
    2. Misallocation of resources and brining forward future spending.

    Andrew Szamossezgi, Capital Trade

    1. Decline in manufacturing output has exceeded the decline in global GDP.
    2. Trade has suffered due to lowering of inventories and an effort to conserve cash.
    3. Disruption in global credit markets has restricted flows of credit needed to support trade.
    4. Commodity prices are falling and inventories of such items are piling up in ports.

    Clayton Yeutter, Hogan & Hartson

    1. Decline in demand globally and businesses focusing more on domestic markets.
    2. Credit crunch hit trade financing.
    3. Risk, uncertainty and rising volatility (exchange rate) pulled back commerce.
    4. Protectionist measures in stimulus packages shrunk trade.

    Norbert Walter, Deutsche Bank Group

    1. The current economic crisis is hitting countries all over at the same time, magnifying the decline in trade.
    2. Destocking of commodities, which were stocked heavily when prices went up in 2007 and 2008, created massive downturn in trade.
    3. The fall of Lehman Brothers brought money markets and the markets for short-term corporate credit to standstill.

    Nicolas Veron, Bruegel

    1. Trade shock is a direct consequence of the events that wrecked the financial system because finance and trade are so deeply interdependent that it is impossible to consider one without the other.

    William Caldwell, Advanced Cell Technology

    1. International production sharing or the internationalization of manufacturing supply chains is a major part of the story. When demand for a product shrinks, the multiple trade flows are terminated; not just the final trade flow.

    Barcamp Kathmandu 2009

    On Saturday morning, I gave a live presentation at the first-ever Barcamp (@barcampktm) organized in Kathmandu. I am totally enthralled by the enthusiasm of the organizers (Shankar and his friends) and most importantly the active participants, lively ( and critical) discussion sessions, the wide range of topics covered in the sessions, and overall management of the whole event. Congratulations to every one who participated, organized and sponsored BarCamp Kathmandu 2009. Thanks to Shankar for excellent correspondence and coordination.

    What amazed me was the way the participants were using Twitter (and Facebook) to update, in real time, about the sessions that were in progress. It was simply awesome! Here is a rundown of the sessions during the BCKTM09. Information about my session is available here.

    Thanks to Shishir, I was able to share my desktop PowerPoint presentation in real time with the audience in Nepal. The voice quality was also good (at least on my side). In short, I spoke about how to bring about change by digging in the most relevant development challenges/issues in one’s area of concern; identifying the most pressing ones (on the assumption that we cannot solve all the problems at the same time-- piecemeal and calculative approach); eliciting potential solutions; and letting it be heard in the public (through blogs, newspapers, other media, discussion forms, and also grassroots civil activism) loud and clear so that policymaking is positively influenced going roundabout the corrupt bureaucracy, which necessarily should not be a binding constraint on positive change. I also responded to questions raised by the participants. As far as I remember, Bibek, Vinya, and Jenny asked very good, perfectly valid and stimulating questions. I hope I responded appropriately :)

    Here is how Ujjwol, who led a very popular session (judgment based on tweets about his session) about Sanskrit language, describes my presentation:

    Dig in and let it be heard! : Once the BarCamp was officially started, the first session was Dig in and let it be heard! by Chandan Sapkota. He was conducting the session from the United States, and once the technical glitches were fixed he started his session. In this session, he talked about policymakers in Nepal, prioritizing issues, how to dig in into a problem and solution, and knowing about them using various media. As he said, one work of digging in as example could be taking an policy which has appeared in media as news and start to dig into it, know more about and after the estimated time try to see how has that been implemented and write on what and what has the implementation been done and publish in blog, newspapers and other medias. He discussed on ways to get involved in the current development debates and on how to influence policymaking. And on the getting published to large Medias like Newspaper was what people discussed more, they shared bitter experience of articles not getting published. And on that note, he share his experience of getting article publish into the newspaper which he had face years ago. He said in most of the cases the articles are just rejected but we should always send them so that they will once at take time to read and after one day they will publish and once your article is published for the first time than your next article has a more probability. Finally on this session, the session was itself fruitful for me and others as well, after this I am willing to dig in and let it be heard by writing on my blog and newspapers.

    There are not much blog posts about the BarCamp yet. I hope other participants will weigh in soon. Here is Geshan writing about the event. On a side note, I am very surprised that only one newspaper covered the event the next day (alas, the reporter missed the main point of a BarCamp and even forgot to mention the name--if it is not the reporter’s fault, then it is the editor or copyeditor at the news desk who mistakenly thought that the name and scope of the event do not matter!). I can’t figure out why editors trivialize these kind of crucial events that are wholly organized by youths and eager minds. I think covering the event would have been more fruitful than covering mundane street protests and political quibble! We need to give space to ‘agents of change’ instead of ‘agents of disruption’. Anyway, the quality and output of the event should matter more than an editor’s biases. In all respects, the event was successful.

    I hope more of such events are organized in the coming days.

    Friday, August 7, 2009

    Paul Romer argues for “charter cities”

    Paul Romer argues for a new method to alleviate poverty. It is based on stimulating economic growth (thus reducing poverty overall) by developing “charter cities”, which is a city-scale administrative region governed by a coalition of nations and has a rules-based system that will attract investors and people who want to live in a stable, secure and progressive society. It is like creating commerce hotspots and stable (rules-based) cities like like Hong Kong (administered by British until 1997) or several key costal hot spots like in China. He argues for creating new cities where people can go to escape from bad rules and governance and opt in to new and better ones.

    From TED blog:

    He shows a picture from NASA of the Earth at night, clearly showing the electric lights of cities and town. He points out that North Korea looks like a black hole compared to neighbors, and reminds us that North Korea and South Korea began identically but made choices that led to very divergent paths. He points to the Caribbean. He shows how dark Haiti is compared to the Dominican Republic and that they're both dark compared to Puerto Rico. Haiti warns us that rules can also be bad when governments are weak, as opposed to the strong government of North Korea.

    Romer asserts that we must preserve choices for people and operate on the right scale. A village is too small and a nation too big. Cities give you the right balance. The proposal is he conceives of is a charter city with investors to build infrastructure, firms to hire people and families who will raise children there. All he wants is some good rules, uninhabited land and choices for leaders, which he thinks should translate to partnerships between nations.

    I wonder how the issues related to sovereignty and occupation would be resolved with this new model. Also, if implemented, for how long will this model, which seems more or less like an export-based or trading hub model revolving around SEZs last? Everything is hinged upon having a political will and consensus, which by the way are the most difficult things to have in most of the developing countries. If it were so easy, then aid would have worked better, leaders would have been more responsive to their voters than to donors, governance would have improved, the probability of conflicts and coups would have decreased drastically, market-friendly policies would have actually been implemented in reality, and a democratic, people-centered process have flourished. There would be no need for any special cities with special facilities and characteristics.

    More about Romer and his new initiative here.