Monday, January 24, 2011

Martin Ravallion is unhappy with HDI -- Part II

The changes introduced in the new HDI have reduced its (seemingly low) valuations of longevity in poor countries even further. The Human Development Report’s implicit valuation on an extra year of life expectancy is now over 17,000 times higher in the richest country than in the poorest – a far greater difference than in their average income (which is 460 times higher in the richest country than the poorest). A poor country experiencing falling life expectancy due to (say) a collapse in its healthcare system could still see its HDI improve with even a small rate of economic growth.

A rich person will be able to afford to spend more to live longer than a poor person, and will typically do so. But how much should one build such inequalities into our assessment of a country’s progress in “human development”? That is a difficult question, which has certainly not been resolved here. However, given that the last 20 Human Development Reports have clearly intended to support a high value in development policymaking on attainments in health, it is puzzling that the 2010 Report has chosen a trade-off that puts such seemingly low value on the gains from longevity in poor countries. Possibly the construction of the HDI did not adequately consider what trade-offs were acceptable. Good intentions alone do not make for good measurement.

More by Martin Ravallion here. Here is a back-and-forth charges between Ravallion and Sabina Alkire about the new Multidimensional Poverty Index (MPI). Ravallion argues that the troubling tradeoffs could have been largely avoided using a different aggregation function for the HDI, while still allowing imperfect substitution.

Climate change economist vs. climate change scientist

Me: I work on climate change economics in DFID.

Stranger in lift: Climate change. Not sure I’m convinced of the science.

Me: I’m not a climate change scientist. I work on the economics of climate change - how much it costs to take action or not take action.

Stranger in lift: Oh… (looking confused)

Me: But not in an abstract way – though I do commission some research, yes – but mostly I advise developing countries on what to do about climate change.

Stranger in lift: So you tell developing countries what to do? Surely that’s not morally right? They didn’t cause the problem.

Me: Well, many governments actually seek DFID’s advice and funding to help with issues like this (stranger smiles politely and breathes a sigh of relief as the doors open to let us out) and taking action might be in their interest anyway (I trail off)…nice to meet you anyway, bye…

Hmm. Perhaps not the simplest of explanations.

More by Hannah Ryder, senior economist at DFID, here.

Did Global Imbalances Cause the Global Financial Crisis?

Global imbalances -- the coexistence of large deficits and surpluses in the global economy, such as too much spending by U.S. consumers and too little by Chinese consumers -- were not a major cause of the global crisis, according to a new working paper by Luis Serven and Ha Nguyen. In fact, how international capital flowed before and during the crisis suggests global imbalances are the result of structural distortions in global financial markets and major individual economies, which have led to a steady rise in demand for U.S. assets from the rest of the world. Without changes in those structural and policy choices, global imbalances could persist. This contradicts the conventional view that global imbalances are caused by unsustainable, high demand for goods in the U.S. and other rich countries and that a correction must involve major U.S. trade adjustment and depreciation of the dollar. The paper also evaluates the future of global imbalances, especially their impact on developing countries.

Full paper here . The paper argues that global imbalances were not among the main causes of the financial crisis.

US$ 100 Trillion Additional Credit Needed to Support Global Growth

Credit levels will need to double over the next 10 years, growing by US$ 103 trillion, to support consensus-projected economic growth. This doubling of credit could be achieved without increasing the risk of major crisis, finds More Credit with Fewer Crises: Responsibly Meeting the World’s Growing Demand for Credit, a report released by the World Economic Forum in collaboration with McKinsey & Company.

Asia will face the challenge of meeting the high credit demand growth of US$ 40 trillion with less developed financial systems and capital markets. In the European Union, a further US$ 13 trillion of credit in the form of bank lending will be needed. To supply this, banks will require additional capital that, after retained earnings, could lead to a capital shortfall of US$ 2 trillion. Analysis shows that the US would continue to need to draw on global savings, potentially by up to US$ 3.8 trillion in 2020, in order to fund its credit needs, unless there is a marked increase in US domestic savings rates.

More here