Botswana: For how long can it spark on diamonds?

The IMF Working Paper series has published a new report that looks at the sustainability of rising Botswanian expenditure financed by diamond mining, which contributes on average 38.5 percent to GDP. Since the past three decades Botswana economy has grown at a rate of 7 percent, usually due to diamond mining and good investment climate. For more on the role of good investment climate check out a paper by AJR on Botswana: An African Success Story. They argue that Botswana has been able to grow and attract investment because of the strong institutions of private property.
This new report from the IMF African Department is titled "Are Diamonds Forever? Using the Permanent Income Hypothesis to Analyze Botswana’s Reliance on Diamond Revenue". Obviously, the conclusion is that Botswana will not be able to sustain the current level of high expenditure just from the diamond mining and trade. Recommendation: it needs to save (to the tune of 1.2 points of GDP each year) to ensure a policy of no debt because diamond reserve could deplete by 2029, leading to sharp shortfall in fiscal revenue (by almost two-thirds). Here is the summary:

This study assesses the sustainability of Botswana's diamond-related fiscal revenue. Diamond reserves are not adequate to generate enough permanent revenue to sustain a high level of expenditure. Under the current fiscal rule that no debt may be accumulated, Botswana will have to save more to avoid an abrupt adjustment in the medium term.

Also, check out IMF's Finance and Development magazine, March 2008. The title for the issue is Commodity Boom: How Long Will It Last?

Zoellick’s “One Percent Solution” to Africa’s problems

Today I attended a discussion forum organized by the Center for Global Development (CGD) in DC. The World Bank President Robert B. Zoellick gave an interesting and insightful speech titled “A Challenge of Economic Statecraft.” Zoellick floated an idea to work with sovereign wealth funds, which amount to almost $3 trillion in assets, to create a “One Percent Solution” for equity investment in Africa. Watch the speech here and read the WB's press release here.

He argued that if only one percent (around $30 billion) of this fund is invested in Africa, the African continent would be able to find its own “sources of growth”….wondering what own “sources of growth” mean? Well, this is kind of diversification of growth (which is not as much affected by the current financial crisis as the West is) China and India are experiencing right now. He wants to invest sovereign wealth funds in Africa so that they could find their own diversified “sources of growth.” Well, I wonder why with already more than $1.3 trillion of aid, the sub-Saharan Africa (SSA) is not still able to find its own “sources of growth”? Is the problem a lack of aid money (volume) or very few effective programs (efficient, down-to-earth) that utilizes local knowledge and stimulates local economy? Bill Easterly, any comments?... Also, he is in favor of more direct cash assistance rather than commodity assistance to effectively tackle hunger and poverty issues. This reminds me of Breakfast and Lunch Program and several other food assistance programs in the US.

He made good points about finding solutions to the current food crisis and the need to pass the Doha Development Round by 2008. He argued for a “New Deal for Global Food Policy” so that the people in desperate need of food and nutrition are taken care of immediately in the short run and in the long run a sustainable agricultural “Green Revolution” should be created by helping build local food markets and by boosting farm production in the SSA. So, what does the WB did on its part? It invested in knowledge (research) and increased lending for agriculture in Africa from $450 million to $800 million. Again, more aid and lending! Can we reach the same goal by getting rid of astronomical subsidies and agriculture trade restrictions in the West? He is obviously against these restrictive measures though:

This moment of decision is not only for the Doha Round.  It is for trade itself. Powerful voices across the political spectrum, including in my own country, are calling for, and rationalizing, protectionism. This economic isolationism signals a defeatism that will reap the losses, not the gains, of globalization.

He also talked about Extractive Industries Transparency Initiative (EITI), which basically encourages resource rich countries to publish and verify company payments and revenues from oil, gas and mining so their citizens can hold them more accountable.  The WB is now planning to launch EITI++, which would expand EITI to include such areas as the awarding of contracts, improving economic management, and investing revenues effectively in sustainable development.

Overall, it was a good speech. The Q&A session was okay...a lot of time Bob digressed from the main point of the questions. Luckily, there was Nancy Birdsall, President of the CGD, who tried to keep him on track! I met with some professional and academic people during the lunch time. It was nice to build networks while staying in DC.    :)...Also, the first picture was taken by my friend Jehea Song using her beloved iphone! :-)

Highlights from the speech:

…There is a challenge of statecraft in times such as these: to recognize the changing landscape, often as events and fate rush by, so as to address pressing needs, while also planting seeds that may become the supportive timbers of the future.   Today, we need to counter immediate threats while also building an inclusive and sustainable globalization that will offer more sources of growth and innovation for the future, enhance multilateral cooperation to deal with shocks and downturns, and maximize opportunity and hope for all.

… We need a New Deal for Global Food Policy.   This New Deal should focus not only on hunger and malnutrition, access to food and its supply, but also the interconnections with energy, yields, climate change, investment, the marginalization of women and others, and economic resiliency and growth.   Food policy needs to gain the attention of the highest political levels, because no one country or group can meet these interconnected challenges. Skyrocketing food prices have increased attention to the larger challenge of overcoming hunger and malnutrition, the “Forgotten” U.N. Millennium Development Goal (MDG).

…Hunger and malnutrition are a cause, not just a result, of poverty.

...  In many cases, cash or vouchers, as opposed to commodity support, is appropriate and can enable the assistance to build local food markets and farm production.   When commodities are needed, purchasing from local farmers can strengthen communities.   Funds can buy micro-nutrients customized to locations.   School lunch programs draw children to classrooms, while helping healthy kids to learn, and some offer parents food, too.

… A fairer and more open global trading system for agriculture will give more opportunities – and confidence – to African and other developing country farmers to expand production. Taxpayers and governments can save the costs of subsidies, improving budgets.

… The cuts in tariffs in both agriculture and manufactured goods will be through formulae that cut higher figures more than through a straight percentage; higher farm subsidies will also be cut more deeply… These negotiations are not worldwide poker contests, where Ministers hold cards tight, and a winner sweeps the pot of chips.   They are complex problem-solving exercises.   Everyone must return home with benefits and political explanations.

GDP/GNI Per Natural: New way of measuring development!

Michael Clemens from CGD and Lant Pritchett from the KSG have come up with a new measure of development to reduce bias emerging from using income per capita (which only focuses on the nationally resident population) measure for economic analysis and policy design.

In a CGD working paper series titled "Income Per Natural: Measuring Development as if People Mattered More than Places," the authors argue that calculating national statistics by taking in consideration all the citizens (both living inside and outside the country) gives a clearer and an unbiased (regarding the policy prescriptions arising from such calculation) picture of the actual income of a person of a certain country.

They use income per natural, which is the annual income of persons born in a given country, regardless of where that person now resides. So what's the advantage of using this measure instead of just GDP or GNP per capita? The authors argue that it will give a systematic source of information on the average income of a person, irrespective of which country s/he resides  i.e. average income of a Turk, or a Nepali, or a Salvadoran.

One policy implication of this approach would be to look critically the way we fund poverty reduction initiatives in the developing countries. For instance, formulating a  wholesale  poverty reduction policy considering that 80% of Haitians live below the poverty line might be a bit misleading and out of touch of the reality because "26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States." Poverty reduction policies that take this new factor into account would be more realistic and may be effective as well. This is my wild guess! I really want to know more about the policy implications of designing development and poverty reduction strategies using this approach.

...If income per capita has any interpretation as a welfare measure, exclusive focus on the nationally resident population can lead to substantial errors of the income of the natural population for countries where emigration is an important path to greater welfare. The estimates differ substantially from traditional measures of GDP or GNI per resident, and not just for a handful of tiny countries. Almost 43 million people live in a group of countries whose income per natural collectively is 50 percent higher than GDP per resident. For 1.1 billion people the difference exceeds 10 percent. The authors also show that poverty estimates are different for national residents and naturals; for example, 26 percent of Haitian naturals who are not poor by the two-dollar-a-day standard live in the United States. These estimates are simply descriptive statistics and do not depend on any assumptions about how much of observed income differences across naturals is selection and how much is a pure location effect. Our conservative, if rough, estimate is that three quarters of this difference represents the effect of international migration on income per natural.

...The bottom line: migration is one of the most important sources of poverty reduction for a large portion of the developing world. If economic development is defined as rising human well being, then a residence-neutral measure of well-being emphasizes that crossing international borders is not an alternative to economic development, it is economic development.

Top remittance receivers in 2007

According to a WB report on Migration and Remittances Factbook 2007, the top five recipients of migrant remittances in 2007 were:

1. India ($27 billion)

2. China ($25.7 billion)

3. Mexico ($25 billion)

4. the Philippines ($17 billion)

5. France ($12.5 billion)

The top emigration countries were:

1. Mexico (11.5 million)/Russia (11.5 million)

2. India (10.0 million)

3. China (7.3 million)

4. Ukraine (6.1 million)

5. Bangladesh (4.9 million)

In 2007 alone recorded remittances flows worldwide are estimated to be $318 billion, of which $240 billion went to the developing countries. Here is the world's standing on migration and remittances. Nearly 200 million people (3% of the world population) live outside the country of their birth.

FAST FACTS ON MIGRATION & REMITTANCES

• The top immigration countries, relative to population are Qatar (78 percent), the United Arab Emirates (71 percent), Kuwait (62 percent), Singapore (43 percent), Israel (40 percent), and Jordan (39 percent). The average share of immigrants in population is under 10 percent in high-income OECD countries.

• The Mexico–United States corridor is the largest migration corridor in the world, accounting for 10.4 million migrants by 2005. Migration corridors in the Former Soviet Union— Russia–Ukraine and Ukraine–Russia —are the next largest, followed by Bangladesh–India. In these corridors, natives became migrants without moving when new international boundaries were drawn.

• The volume of South–South migration is almost as large as that of South–North migration, which accounts for 47 percent of the total emigration from developing countries. South–South migration is larger than South–North migration in Sub-Saharan Africa (72 percent), Europe and Central Asia (64 percent), and South Asia (54 percent).

• Smaller countries tend to have higher rates of skilled emigration. Almost all the physicians trained in Grenada and Dominica have emigrated abroad. St. Lucia, Cape Verde, Fiji, São Tomé and Principe, and Liberia are also among the countries with the highest emigration rates of physicians.

• In 2007, the top recipient countries of recorded remittances were India, China, Mexico, the Philippines, and France. As a share of GDP, however, smaller countries such as Tajikistan (36 percent), Moldova (36 percent), Tonga (32 percent), the Kyrgyz Republic (27 percent), and Honduras (26 percent) were the largest recipients in 2006.

• Rich countries are the main source of remittances. The United States is by far the largest, with $42 billion in recorded outward flows in 2006. Saudi Arabia ranks as the second largest, followed by Switzerland and Germany.

And, here is how my home country, Nepal, stands in this global migration and remittance picture:

• Inward remittance flows: US$ 1453 million in 2006 (US$ 1600 million estimated for 2007)

• Inward remittance flows amounted to 18% of GDP in 2006

• Outward remittance flows: US$ 79 million in 2006

• Outward remittance flows amounted to 1.0% of GDP in 2006

• Top ten destination countries: India, Thailand, Saudi Arabia, United States, United Kingdom, Brunei, Republic of Korea, Japan, Germany, and Australia

• Stock of emigrants as a percentage of population: 2.8% in 2005

Rounds around the Doha Round!

This is continuation of the previous blog post about a conference I attended on Friday in D.C. The third panel dealt with current state of global trade relations. The panelists consisted of pretty well known economists and researchers: Kim Elliott, Oliver Griffiths, Gawain Kripke, Will Martin, Christine McDaniel, Devesh Roy, and Steve Suppan. The discussion on the current state of the Doha Round of trade negotiation was pretty stimulating and I was pretty impressed with Roy’s kind of different views on the issues floated by speakers who spoke before him.

First Secretary of the British Embassy at D.C., Oliver Griffiths presented the EU’s views on the Doha Round and made it absolute clear that the EU has given a mandate to its negotiators that the upcoming trade negotiation should not lead to further cuts in agricultural subsidies. Note that agriculture trade accounts for just 10% of global trade but it remains the most contentious issues because a small group of influential farmers are protected in the West at the expense of millions of farmers and farm productivity in the developing countries. Norway and the Netherlands have one of the highest subsides and taxes on agriculture trade. It is worth noting that 63% of the gains from trade will directly go to the developing countries, showing that openness of this sector alone would help the developing countries fight poverty, hunger, and other thorny dimensions of development. Griffiths argued that the EU would like to see further negotiations in three key fields in the future:

1. Future trade negotiation should move from goods to investment and service sector

2. Future trade negotiation should address climate change (tariff on high carbon imports)

3. Trade policies should be coupled with domestic policies to realize a larger effect

Then came the US view from Christine McDaniel, Deputy Assistant Secretary (Policy Coordination) in the Office of Economic Policy at the Department of Treasury, who argued that the US “cannot isolate our path to prosperity.” She argued that the Congress (particularly, the House Judiciary Committee) has been blocking a legislation on service liberalization abroad, especially from India (I think it is known as Mode 4 or 5, I am not sure though!). I was expecting to hear that the US would push forward for the success of the Doha Round sooner than later. However, she opined that we should expect some more years to make Doha Round a success (the Uruguay Round took 8 years of negotiation), and expected president of the WB, Robert Zoellick, to vigorously push forward this agenda as he did during the Uruguay Round. She made a honest remark by admitting that any passage of crucial multilateral bill depends on how well the US economy is doing. In other words, in today’s context- slump in the housing market, fears of recession, financial turmoil, sub-prime market crisis, high oil prices- the immediate success of the Doha Round is of just not possible. There also might be a high potential for investment protectionism (we’ve already seen in the case of Unocal). Also, she opined that given the way in which the global economy is locked in low tariffs, no future President would be able to turn that around unless there is a major economic shock!

Then Will Martin presented the World Bank’s views on the Doha Round and argued that the success of this round would mean a lot to the developing countries. Gawain Kripke from Oxfam America presented civil society view and Steve Suppan from Institute for Agriculture and Trade Policy presented some thorny issues on biopiracy (he constantly referred to ‘blue box’, but I don’t know what this exactly is!).

Interesting stuff came from Devesh Roy from International Food Policy Research Institute (IFPRI). He made four points that were completely different from what others panelist were arguing about the developing countries.

1. Subsidies and agriculture market distortion is not exclusively a North phenomena. There is huge amount of distortion and subsidies in the developing world as well ($15 billion farm support recently in India is a form of subsidy).

2. There are limits to what agriculture can bring to poverty reduction and growth. China’s success is attributable to off-farm activities.

3. There is huge domestic market price distortion in the developing countries because of geographical/topological factors. The developing countries are not homogenous geographically, so the mountain region in Nepal has 18 times higher prices of food than in the plains. Similar is the case in India and Bangladesh. It has nothing to do with trade and the Doha Round would have little impact on these prices unless we complement agriculture reform with investment in infrastructure to reduce transport and transaction costs.

4. Unless we check the current state of high commodity prices, which has been skyrocketing by almost 200%, the Doha Round, even if it succeeds- would mean little because the developing countries like India has already banned rice exports, which will hurt poor neighbors like Nepal and Bangladesh.

Okay, this is getting longer than I thought. I would like to point out my earlier perspectives on the recent Indian farm bail outs. I think what the Indian government did was good (think historical injustice backed by feudal society and caste-based discrimination) and was needed because the market in that particular sector was in stalemate and poor farmers were in a ‘debt trap’. Obviously, the market created the trap (adverse selection and moral hazard) and it was unable to break it ; so, we need an exogenous force to break the trap for once and set appropriate conditions for the credit market to work for the poor farmers. Can't we view this debt write offs similar to the US stimulus package of about $150 billion? See here for extended discussion about the Indian debt write off in the farm sector.

Chinese Marshall Plan in Africa

Today I attended a conference on “South-South Cooperation and Global Trade: Bypassing the Hegemon?” – organized by GMU’s Center for Global Studies- at the Carnegie Endowment for International Peace, Washington D.C. The first two panels were pretty lame, at least for me because more political and cultural arguments were being discussed (which do not interest me, though they are significant in their own place)! The third panel was about the current state of global trade relations, especially the fledging Doha Round and its implications to the developing countries. This round was pretty interesting (may be because I am more interested in economics than in politics)...(interesting stuff from the third panel will appear as a separate blog topic)...

One particular speaker during the first panel made some interesting points about Chinese interest in Africa and Chinese strategy in controlling African resources through its financial grants/loans and coaxing foreign policy. Before proceeding further, I have to say that Mark Katz’s presentation on the Russian geo-economic vision and their intent in appearing “strong” in the international arena was also pretty good.

Joshua Eisenman argued that China follows three strategies in its dealing with Africa:

1) Bilateral asymmetry: China deals with each nation separately and tries to bring strategic policy coherence among the nations its deals with, however individual African nations are not able, or they do not have the ability, to comprehend long term strategic plan of Chinese interest on their soil. China is particularly concerned with securing economic resources in these countries and it engages through the Chinese Communist Party International Department. The long term vision and vested interest in securing resources from Africa gives China a strategic advantage over the African nations, which are unable to fathom the depth, scale, and scope of Chinese interest in the region.

2) Political resources: China does not care where and to what type of leaders its money goes as long as its interests are secured. China gave $42 million to Mugabe last week to make/renovate his palace. This is hardly been out in the news because secretive dealings, bribery and coaxing is high in China’s engagement with Africa. Additionally, China does not anymore care about ideology, i.e. trying to deal with domestic communist parties in the African countries. It deals with all political parties (party-party ties) to ensure that its economic and vital interests are secured. Since 1997-2006, China had 200 exchanges with the African political parties and it feted 60 African party chiefs in China itself. This is a strategy to morally, financially, and politically bind African leaders so that there is no objection at all to Chinese interests.

3) Financial resources: The whole aid world was shaken when China $15 billion aid to Africa during African-China conference in China last year. However, Joshua argues that it is not aid but an investment for profit. The total grants are specific and low and is incomparable to Western aid/grant. China is trying to bind African nations in financial debt because while it gives debt relief on one hand and it signs more interest-bearing loans, despite knowing that the poor African nations would default on its loans once they mature, in the other hand (one example is China gave debt relief of some $65 million and sanctioned $1.2 billion new loan to the same country). Importantly, the allotted money never go out of Chinese banks. For instance, China announced billions of dollars of aid to Angola, which never received the money. What the Chinese did was that it deposited a cheque in Angola’s name in its EXIM bank and for any new project to be executed in Angola, it transferred money to one of the predetermined five bidders for investment projects. Funds were in fact transferred from one bank to another in China itself. It never made its way to Angola, though infrastructure or whatever project was intended for was started or done. Meanwhile, Angola paid off China's loan from oil exports. This ensured that Chinese money stayed at home, it earned profit, and extremely vital oil flow was guaranteed for a long time.

What a shrewd strategy to dupe the African nations! The conditions for Chinese dealings with African countries are: employ Chinese firms and not recognizing Taiwan. The dragon is marching and widening its mouth slowly and steadily. Welcome to the Chinese Marshall Plan for Africa!

What Makes Growth Sustained?

This is a title of a recent paper from the IMF Research Department authored by Anthony Berg, Jonathan David Ostry, Jeromin, Zettelmeyer. They explore what keeps growth going, not what matters for getting growth going.

We identify structural breaks in economic growth in 140 countries and use these to define "growth spells:" periods of high growth preceded by an upbreak and ending either with a downbreak or with the end of the sample. Growth spells tend to be shorter in African and Latin American countries than elsewhere. We find that growth duration is positively related to: the degree of equality of the income distribution; democratic institutions; export orientation (with higher propensities to export manufactures, greater openness to FDI, and avoidance of exchange rate overvaluation favorable for duration); and macroeconomic stability (with even moderate instability curtailing growth duration).

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Our main findings confirm some previous results in the literature—in particular, that external shocks and macroeconomic volatility are negatively associated with the length of growth spells, and that good political institutions help prolong growth spells. We also have some more surprising findings. Trade liberalization, seems to help not only in getting growth going, as emphasized by previous authors, but also in sustaining it—particularly when combined with competitive exchange rates, current account surpluses, and an external capital structure weighted toward foreign domestic investment.Consistent with the findings of Johnson, Ostry, and Subramanian (2006, 2007), Hausmann, Hwang, and Rodrik (2006) and Hausmann, Rodriguez, and Wagner (2006), we find that the manufacturing share in exports, and more generally, export product sophistication tend to prolong growth. Most strikingly, we find that the duration of growth spells is strongly related to income distribution: more equal societies tend to grow longer. On the whole, these results share some of the flavor of recent work on the political economy of growth and development, as briefly discussed in Section III and in our conclusions.