Signs of progress in Zimbabwe

Praveen Kumar over at the Africa Can…End Poverty blog writes:

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In the two years since the Government of National Unity (GNU) was formed and Zimbabwe dollarized fully, there have been encouraging developments on the economic front.

The economy grew at nine percent in 2010, following on six percent in 2009. Government revenues climbed to 29 percent GDP in 2010; they were just three percent of GDP in 2008. And the banking sector which had dis intermediated almost fully during the hyperinflation grew its dollar deposits briskly to around 30 percent of GDP at the end of 2010. But election talk has suddenly mushroomed in 2011, setting off political competition that could slow down Zimbabwe’s return to normalcy.

This good performance starts from a low base; the economy had contracted by more than 45 percent from 1999-2008. Furthermore, world prices of commodities, such as platinum, tobacco and gold, which are Zimbabwe’s main exports, have been on the rise. Weather has been good in the past two years. But the point is that Zimbabwe was able to make good use of these conditions. There was a supply response to high prices in agriculture and mining, and manufacturing showed signs of life. And importantly, some key economic institutions such as the revenue agency performed. These are the good economic genes.

The revival of agriculture goes against commonly held wisdom. Redistribution of erstwhile large commercial farms to indigenous Zimbabweans has been largely achieved. There is a widespread concern about disputed titles and insecure tenure. Yet smallholder agriculture appears to be moving.

The number of smallholder farmers in tobacco has increased sharply. Output of tobacco, maize, and cotton is recovering. The yields are nowhere near their previous levels. But then Zimbabwean agriculture has undergone a huge structural change and some yield losses, particularly those due to the reduction in average farm size, could be permanent. The ability of farmers to respond to price incentives is a strong signal that policy distortions in the sector are minimal and markets are functioning well. In the long run structural constraints could bind however.

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The Rise of the Rest

I just finished reading Fareed Zakaria’s book The Post-American World and the Rise of the Rest. It is quite an interesting and easy to read book. Zakaria, one of my favorite commentators, explores the rise of America, its declining power and the rise of the rest of the world (mostly few emerging economies like India, China, Russia, Brazil, South Korea, Japan and Turkey, among others). His main point, commonly sensed and very true, is that America’s superpower status (and ability to influence global diplomacy, economics and military power) is waning as the rest of the world rises, both economically and politically, but no country will replace America as the superpower. It will just have to live with a little bit of diminished influence (political and economic) but still will wield the most power to influence global politics and economics. To smooth out the transition, he recommends America to not be Britain (during its imperial rule and how it got diminished), but be Bismark, who tried to project Germany as the center of engagement in power (America has to become the pivot of world’s international system).

He tries to make a point that the world is in transition, both economically, politically and militarily. First, Britain (and the Western world) rose during the Industrial Revolution and made great strides in economic, technology, military and political fronts. Then the USA rose during the beginning of the 20^th Century and sidelined Britain’s global power. Now, the rest of the world is rising, which will wane America’s global influence, but will not depose it as the superpower. It will remain the sole superpower but will not wield the same power it had during and after the WW II.

Excerpts from the book:

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[…] The United States never could have arrived at such a position had there not been nations willing to lend it the money. That’s where the economic and political empowerment of the developing world—the “rise of the rest,” as I call it—comes in, and it’s best symbolized by the rise of China.

[…] The rise of the rest is at heart an economic phenomenon, but the transition we are witnessing is not just a matter of dollars and cents. It has political, military, and cultural consequences. As countries become stronger and richer, and as the United States struggles to earn back the world’s faith, we’re likely to see more challenges and greater assertiveness from rising nations.

[…] if properly managed, the rise of the rest need not be destabilizing. America is not sinking fast, about to be replaced by a single country. Everyone is, in a deep sense, in this crisis together. Other countries can play major stabilizing roles. And not just in economics.

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My disagreement with this otherwise excellent weekend reading is that on page 154 he argues that “Buddha was Indian, and Buddhism was founded in India, but there are virtually no Buddhists in the country today”. This is simply untrue. Buddha was born in Lumbini, Nepal. He went to Bodhgaya to meditate and became Buddha (previously, he was known as Siddhartha Gautam). And, yes, there are Buddhists in India. It is pretty puzzling and surprising how Zakaria could have made this mistake and not crosschecked facts and historical accounts.

Anyway, it is an excellent book. Light and pleasant reading for one fine weekend.

Food price inflation and poverty in South Asia

A new ADB study (Global Food Price Inflation and Developing Asia) finds that a 10% rise in domestic food prices in developing Asia, home to 3.3 billion people, could push an additional 64 million people into extreme poverty based on the $1.25 a day poverty line. Also, if the global food and oil price hikes seen in early 2011 persist for the remainder of the year, economic growth in the region could be reduced by up to 1.5 percentage points.

The report estimates that a 10%, 20% and 30% increase in food prices would increase percentage of poor by 2.0, 4.1, and 6.1 percentage points respectively in Nepal. This translates into 0.55, 1.10, and 1.65 million people respectively. This calculation is based on food price elasticity of poverty. To address food insecurity, the Nepali government has planned to import 100,000 tons of rice (to be financed by WFP) and is releasing 30,000 tons of rice allocated for food deficit mid-and far-western regions. It is also subsidizing food prices at government depots.

The table shows corresponding figures for the other countries in South Asia (excluding Afghanistan and Maldives). It looks like rural India would have the largest impact of food price inflation on poverty. Sri Lanka faces the least impact (among South Asian countries) by food price inflation.

Food prices and poverty (USD 1.25-a-day poverty line) in South Asia
ADB 2011 estimate	Change in percentage of poor (in percentage points) with an increase in food prices by			Change in number of poor (in millions) with an increase in food prices by
	10%	20%	30%	10%	20%	30%
Bangladesh	2.5	5	7.5	3.83	7.65	11.48
Bhutan	1.8	3.5	5.3	0.01	0.02	0.03
India—Rural	2.9	5.8	8.8	22.82	45.64	68.45
India—Urban	2.1	4.3	6.4	6.68	13.36	20.04
Nepal	2	4.1	6.1	0.55	1.1	1.65
Pakistan	2.2	4.5	6.7	3.47	6.94	10.41
Sri Lanka	1.2	2.4	3.6	0.24	0.47	0.71

The report notes that production shortfalls caused by bad weather along with the weak US dollar, high oil prices and subsequent export bans by several key food producing countries have caused much of the upward global price pressure since last June, with double digit increases seen in the price of wheat, corn, sugar, edible oils, dairy products and meat. Rice prices are likely to continue their uptrend as the effects of La Niña persist, prompting consumers to seek less costly and less nutritious substitutes. Persistent structural and cyclical factors such as rising demand for food from wealthier emerging economies, changing diets, competing uses for food grains, shrinking available agricultural land, and stagnant or declining crop yields, are also causing the upward pressure.

In the longer term, structural adjustments are needed to secure food supplies. These include measures to improve crop productivity, increased infrastructure investments (e.g. irrigation and food transport/storage), stronger market integration, and closer global/regional cooperation on food production and supplies. Countries should refrain from export bans on food items.

Meanwhile, a different study by Maros, Martin and Hassan (2011) of the WB found that the food price rise of 2010-11 led to an average poverty change of 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries. The net increase in poverty was 44 million people (falling below the $1.25 per day extreme poverty line).

A loner Paul Krugman!

New York magazine has an interesting profile of one of my favorite economists, Paul Krugman. The author portrays Krugman as a loner trying to counter unrealistic conservative ideas and policies from the left.

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[…] For Krugman, the path forward was perfectly clear: The only way to avert a deepening crisis was massive Keynesian stimulus. During the nineties in Japan, he had seen the nightmare alternative. Officials in Tokyo, faced with a very similar scenario, had done too little to stimulate the economy, again and again, and as their nation’s recovery stumbled, they found they were toggling an unplugged joystick.

[…] Paul Krugman is a lonely man. That he is comfortable in his solitude, that he emphasizes its virtues, that his intelligence gives it a poetic gloss, none of this diminishes the poignancy of his isolation. Krugman grew up an only child and is deeply self-conscious. He will list his shortcomings as though he’d been preparing for the chance: “Loner. Ordinarily shy. Shy with individuals.” He is married but has no children nor—rare for a Nobelist—many protégés. When I asked him if there were any friends of his I could talk to in order to understand him better, he hesitated, then said, “That’s going to be hard.”

[…] Krugman had begun the work that would eventually win him the Nobel Prize—an aggressive revision of international trade theory—by the time he was in his mid-twenties, and so for nearly all of his adult life he has had good evidence for the proposition that he is smarter than just about everyone else around him, and capable of seeing things more clearly. Krugman is gleeful about being right, joyous in the revelation of his correctness, and many of his most visible early fights were with free-trade skeptics on the left. Of Robert Reich, for instance, Krugman wrote: “talented writer, too bad he never gets anything right.” He was a liberal and a Democrat, but even in 1999, when he was hired by Howell Raines to write his Times column, “I still saw equivalent craziness on both sides.”

[…] But Krugman’s writing voice—sarcastic, data-driven, flecked with just a little bit of maybe-there’s-a-bomb-in-the-wastebasket zeal—was perfect for the Internet. His self-certain empiricism matched liberal vanities as precisely as Rush Limbaugh’s stagy authenticity matches conservative ones, and he became a vehicle for the concentrating energies of the progressive generation of 2006.

[…] I ask Summers what he thinks is Krugman’s underlying complaint with the Obama administration. “Paul may be the smartest and most creative applied economic thinker of this era,” he says, “but there is some element of him that is like the guy in the bleachers who always demands the fake kick, the triple-reverse, the long bomb, or the big trade.”

The two economists have known each other since the late seventies, when they were both graduate students in Cambridge, and there were moments in conversation with Krugman that I began to suspect he viewed Summers as a one-man control group for his study of himself. They each share a high assessment of the other’s intellect (“Larry’s extremely smart—ask him and he’ll tell you,” Krugman says). Krugman’s sense of humor is built upon self-deprecation, and sometimes Summers’s sense of humor is built upon deprecating Krugman, too. In the early eighties, when the two worked together in the Reagan administration, Krugman realized that Summers had a talent for effectiveness—winning meetings, organizing subordinates, convincing economic novices of his point of view—that he himself could not hope to match. Summers became the insider and Krugman the outsider.

[…] I brought up the work of the legal scholar Cass Sunstein, now with the Obama administration, who has studied the radicalizing effects of ideological isolation—the idea, born from studies of three-judge panels, that if you are not in regular conversation with people who differ from you, you can become far more extreme. It is a very Obama idea, and I asked Krugman if he ever worried that he might succumb to that tendency. “It could happen,” he says. “But I work a lot from data; that’s enough of an anchor. I have a good sense when a claim has gone too far.”

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How agriculture supports structural transformation?

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“After 20 years of neglect by international donors, agriculture is now again in the headlines because higher food prices are increasing food insecurity and poverty. In the coming years it will be essential to increase food productivity and production in developing countries, especially in Sub-Saharan Africa and with smallholders. This however requires finding viable solutions to a number of complex technical, institutional and policy issues including land markets, research on seeds and inputs; agricultural extension; credit; rural infrastructure; storage; connection to markets; rural nonfarm employment and food price stabilization. This paper reviews what the economic literature has to say on these topics. It discusses in turn the role played by agriculture in the development process and the interactions between agriculture and other economic sectors; the determinants of the Green Revolution and discuss the foundations of agricultural growth; issues of income diversification by farmers; approaches to rural development; and finally issues of international trade policy and food security which are at the root of the crisis in agricultural commodity volatility in the past few years.”

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Read the full paper by Dethier and Effenberger (2011). Structural transformation is usually thought of as moving labor and production from agriculture to industrial sector. Development of agriculture sector would facilitate structural transformation. But, development of agriculture itself plays a vital role in bringing about structural transformation. They key is to raise productivity by using a range of factors, such as new technologies, farm size and access to land. The most difficult are institutional challenges related to market failures, missing markets and property rights. They argue that because agriculture links to small cities and rural areas, it can also be an engine of growth and provide employment opportunities for the rural non-farm economy.

Food prices in 2010-11 and its impact on poverty

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Global food prices have increased substantially since mid-2010, as have prices in many developing countries. In this study we assess the poverty impact of the price changes between June and December 2010 in twenty-eight low and middle income countries. This is done by gathering detailed information on individual households' food production and consumption levels for thirty-eight agricultural and food commodities to assess the impacts on household welfare. This study estimates that this sudden food price surge increased the number of poor people globally, but with considerably different impacts in different countries. The heterogeneity of these impacts is partly related to the wide variation in the transmission of global prices to local prices and partly to differences in households' patterns of production and consumption. On balance, the adverse welfare impact on net buyers outweighs the benefits to net sellers resulting in an increase in the number of poor and in the depth of poverty. We estimate that the average poverty change was 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries with a net increase of 44 million people falling below the $1.25 per day extreme poverty line.

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Full paper by Maros, Martin and Hassan (2011). They find that on an average poverty change was 1.1 percentage points in low income countries and 0.7 percentage points in middle income countries. The net increase in poverty was 44 million people (falling below the $1.25 per day extreme poverty line).

Meanwhile, Carnegie’s Shim and Vera explain the differences between the food price rise in 2010/11 and 2007/08. They argue:

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Several of the factors behind today’s increase parallel those that drove the 2007/2008 food-price crisis—including export controls, biofuels production, high oil prices, and poor harvests. But the prices of cereals, particularly rice, have increased less than in 2008 and domestic prices in some of the world’s poorest countries have actually fallen amid better local harvests. The lower incidence of harmful policy responses, which amplified the crisis last time, likely helped as well.

Although these factors have lowered the surge’s impact, prices are likely to remain elevated and volatile for the next few years. Policy makers must heed the lessons of the past if they are to prevent more hunger now.

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The China of India is…

… the state of Gujarat. Steven Pearlstein explains:

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The biggest obstacle to India’s industrialization remains the lack of infrastructure, and no state is tackling that more aggressively than Gujarat. The entire state has been turned into one large public works project, with billions of dollars in investment being poured into dams, canals, power plants, highways, gas pipelines, electric grids and ports. The state is even assembling the land to create industrial cities along the path of a high-speed rail freight line that the central government is planning between Delhi and Mumbai.

Gujarat’s notoriously efficient, autocratic and incorruptible chief minister, Narendra Modi, is a strong adherent to the Asian-style industrial policy who believes that if you build it, they will come. And they have, bringing oil refineries, shipbuilding facilities, steel and auto plants and LNG terminals. With 5 percent of India’s population, 15 percent of its industrial production, 17 percent of its capital investment and 22 percent of its exports, the joke is that Gujarat has become the China of India.

Rajan Shah started Harsha Engineers in Ahmedabad in 1972, back when textile mills were what passed for Gujarat’s manufacturing base. Harsha got its big break in 1997 when Timkin, the giant ball-bearing maker in Canton, Ohio, decided to stop making the metal cages that are used to hold its bearings and rely on Harsha instead, and the company has grown steadily ever since. Shah figures he still has a 10 to 15 percent cost advantage over global competitors, thanks in part to Gujarat’s low wages and the ready availability of good design and production engineers. But just in case, he’s opening a second plant — in China.

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But economic hurdles remain in India:

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Despite such successes, India has a long way to go to modernize an economy where 80 percent of economic activity takes place in the “informal” sector. Beyond the more obvious problems of corruption, poor infrastructure and a low-productivity workforce, too much of the formal economy is controlled by a handful of family-run conglomerates who are quick to use their political and financial muscle to move into any sector that shows promise. In a nation of naturally entrepreneurial people, this creates headwinds for independent companies trying to attract talent and capital. It contributes to the growing concentration of wealth in the hands of a business elite that by all accounts has grown increasingly disconnected from the rest of the country. And it has encouraged many of the best and the brightest either to leave the country or follow the golden path into real estate and finance rather than manufacturing or government.

It also has an effect on foreign investors, who are keenly aware of the dangers of trying to compete against the local oligarchs. Enron tried it and wound up losing $1 billion on an ill-fated energy project. And I found it telling that Wal-Mart, which for years has been pushing hard for the government to relax rules that prevent foreign firms from opening stores in India, may chose to continue its joint venture with the Bharti family rather than go it alone.

A somewhat closed financial system is also restraining growth. India’s central bank is most proud that its tight restrictions on the flow of borrowed money into the country minimized the impact of the recent global financial crisis on India. But business executives complain that those same restrictions also prevent the development of a corporate bond market that is badly needed as a source of infrastructure funding. They require banks to keep so much of their deposits on reserve, or directed to low-return loans to farmers, that the cost of borrowing for businesses and consumers is two percentage points higher than it needs to be. It also doesn’t help that Indians continue to put much of their savings into gold rather than into a financial system that would recycle it into the economy.

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