Political Institutions and Economic Development

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

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

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

Papers from the conference here.

How best to conduct fertilizer intervention/ subsidy?

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

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

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

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

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

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

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

(Via Eldis)

Links of Interest

What exactly are Ronaldinho and Ronaldo worth?

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

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

Remember Doha?

Also see, Defrosting Doha

Land of the rising price

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

Hayekian quote

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

 

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

2,200,000% inflation rate in Zimbabwe

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

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

More here 

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

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

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

World Trade Report 2008: Trade in a Globalizing World

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

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

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

A warning against autarky:

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

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

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

Here is Pascal Lamy, director general of the WTO:

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

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

Rodrik calls for 'new Keynes'

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

More here.