Empirical test of poverty trap hypothesis

Here is an interesting paper, An Empirical Test Of The Poverty Traps Hypothesis, written by Francisco Rodriguez and published by the UNDP's International Poverty Center (IPC):

This paper presents an empirical test of a subclass of poverty traps hypotheses. The test is based on the observation that the nonconvexities in the production function necessary to generate multiple equilibria need only be present in the region between the equilibria. Increasing returns should therefore be strongest when the economy is transitioning between steady states than when it is at or near one of those steady states. I implement this idea by estimating the degree of increasing returns during growth accelerations and growth transitions for a panel of developing and developed economies using UNIDO's Database of Industrial Statistics. I find no evidence of systematic differences in economies of scale between transition and non-transition episodes, shedding doubt on the idea that increasing returns in manufacturing generate poverty traps.

Impact of rising food prices on the rural poor

Here some are key facts compiled by the IFAD:

The food crisis is real, and it is affecting poor rural people across the developing world.

In virtually all countries, food prices have increased in 2007 and early 2008. The extent to which they have increased varies considerably country by country, and indeed within countries, from 10-20 per cent to 200 per cent. Consumer prices have typically increased to a greater degree than producer prices.

The factors behind the increased prices include higher input costs, higher transportation costs (both a consequence of increasing fuel prices), in a few countries civil unrest, and above all, agro-climatic conditions. Floods, droughts and frosts led to substantial increases in prices in many countries.

Poor rural people, many of whom are absolute or net food buyers, are losing out and are becoming poorer.

As consumers, they are responding by reducing the quantity they eat, and are shifting to lower costs – and in some cases lower quality – foods. There are suggestions from a number of countries that malnutrition is on the rise.

As producers, they are responding either by withdrawing from the market and reverting to low-input low-output production, for home consumption; or, where they are able, by shifting into higher value market-oriented production, as a means to earn the income to assure their food security.

Others in the rural economy are reacting to increased market opportunities, and in a number of regions – above all Latin America – land ownership is becoming increasingly concentrated. The rural poor are already losing out in some cases.

To date, government responses to rising food prices have been principally short-term and aimed at urban consumers. A number of countries have also introduced measures aimed at stimulating increased market supply.  Yet poor rural people risk being excluded from both.

Norman Borlaug: The man who fed the world!

Norman Borlaug, father of the Green Revolution and the only man who was awarded the Nobel Peace Prize for contribution in agriculture and food production, is considered as "the man who fed the world" during the 60s, 70s, and 80s, when millions of people in the world (especially in India, Pakistan and China) were under threat from famine. Borlaug is a legend for his contribution in spearheading the agriculture revolution at a time when people were skeptical about the use of fertilizers and hybrid, high yielding seeds.

I spent the whole day yesterday reading a biography of Norman Borlaug. The Man Who Fed The World: Nobel Peace Prize Laureate Norman Borlaug And His Battle to End World Hunger is written by Leon Hesser. It is an excellent book and has high relevance to today's rise in global food prices.

Borlaug is the undisputed father of the Green Revolution--a term coined in 1968 by William S. gaud, the then Administrator of the USAID. He was awarded the Nobel Peace Prize in 1970 for spearheading the Green Revolution. He was was a researcher and always sought answer to how to increase yield and productivity.He defied Malthus' prediction-- unchecked population growth always exceeds the growth of means of subsistence-- by emphasizing in new technology, research, and use of high yielding hybrid seeds to increase production and productivity.

Bourlaug’s Mexican dwarf wheat varieties and their Indian and Pakistani derivative had been the principal catalyst in triggering the Green Revolution. The unusual breadth of geographic adaptation combined with high genetic yield potential, short straw, a strong responsiveness and high efficiency in the use of heavy doses of fertilizers, an a broad spectrum of disease resistance had made the Mexican dwarf varieties the biological bombshell that launched the Green Revolution.

Borlaug was not only a pragmatic agronomist and researcher but he also knew that without a fair price for harvest, credit, fertilizers, and infrastructure agriculture revolution was simply not possible. Back in the 70s he argued that infrastructure is key to higher food production and productivity-- clear example is India where fairly good infrastructure, along with credit injection and purchase (from Mexico) and use of high yielding seeds, in Punjab led to boom in food production, which helped India attain self-sufficiency in food production by 1974.

He also knew that bringing about a drastic change in a developing country is be very difficult. His used to advise his students: "Don't try to change everything at once, they will slit your throat." He was referring to the intransigence of the Indian and Pakistani bureaucracy to change long running faulty and distorted agricultural policies.

Convincing government officials to change a long running practice is very difficult. Borlaug believed in "Kick-Off Approach", which basically is manipulation of technical, psychological and economic factors to achieve superior, rapid results. He used his research and tests to convince governments to change food policy (technical). He then tested a sample of his seeds to show the people and government that the yield was higher in the same plots and circumstance (psychological). Finally, he forced a change in economic policies so that farmers get a fair price for their produce (economic).

He favored government intervention/action because depending on free markets alone in the food sector would lead to nowhere and increase chances of more hunger and starvation. Markets are not perfect and the government has to ensure that there are right conditions in place to entice markets to operate in the villages, where most of the food is grown. Sometimes, subsidies and credit facility (basically injection) are required to roll the wheels of market, which is too obsessed with adverse selection and moral hazard. He had realized that the poor lack credit to purchase fertilizers, seeds, and farming equipment-- things the government need to provide in the absence of markets. He said, "What India needs is fertilizer, fertilizer, fertilizer, credit, credit, credit, and fair prices, fair prices, fair prices!" Pakistan and India both did it and they became self-sufficient in 1974 and 1978 respectively.

Borlaug indicated that government action was needed to assure (a) the availability of the right kind of fertilizer at reasonable prices at the village level six weeks before the onset of the planting season; (b) credit for the farmers to purchase fertilizer and seed before planting, to be paid back at harvest; and (c) an announcement before the initiation of the planting season that, at harvest, farmers would receive a fair price for their grain.

Fair price for harvest sends a different signal in the market and gives farmers incentive to produce more. When prices are distorted, then farmers would be unwilling to send surplus produce to the market. This is exactly what happened in Pakistan in 1968.

The problem was that, on the advice of economists, the government had dropped its guaranteed price for wheat by 25%. Speculators were hoarding the crop.

Borlaug had rightly diagnosed the problem in Africa by pointing out that lack of infrastructure is basically holding back Africa. He argues:

Lack of infrastructure is killing Africa… Africa needs a much broader network of roads, with many just plain, gravel rural roads, but the continent also needs some surfaced main roads with efficient connections to seaports. Asphalt paving can come later for much for much of the rural road system. Improved basic transport systems would greatly accelerate agricultural production, break down tribal animosities, and help establish rural schools and clinics in areas where teachers and health practitioners are heretofore unwilling to venture… Water resource development has to be high on the development priority list in Africa.

Borlaug is now partnering with Jimmy Carter and the Nippon Foundation of Japan in a program called Sasakawa Global 2000 to bring a Green Revolution in Africa. And success has already been seen in Uganda and possible Ghana within 2009. The test program is being replicated in numerous sub-Saharan African countries. Borlaug believes that with the right seeds, fertilizers, and agricultural policies, we can

An extremely good, light-to-read book. Highly recommended for those who are interested in the current food crisis.

Here is more about Borlaug from the Nobel Prize website. Here is Borlaug's website and information about his foundation.

Links of Interest

Rajasthan gets India's first millennium village 

Amarpura in Churu district of Rajasthan has been declared as India’s first millennium village...“The millennium villages are a way of meeting the millennium development goals,” economist Jeffrey Sachs, director The Earth Institute, said. Sachs will work with the Gita Mittal foundation in Amarpura. The foundation, the trustees of which include steel baron ML Mittal and his sons Lakshmi Narain, Pramod and Vinod, has made a commitment to contribute whatever is required in the area, part of Rajgarh tehsil, which is also their ancestral home.

Sachs & Warner (1995), again

Why was economics so late in starting?

Amartya Sen bats for industrialisation

After Doha, What's Next? Q&A with CGD's Randall Soderquist

Capitalism and Keynes: From the Treatise on Probability to The General Theory (by Edmund Phelps)...also related Keynes and the current financial crisis

Friedman's Nobel Lecture reconsidered

Recognizing farmer's knowledge in development initiatives: The legacy: Beyond nukes (by Arvind Subramanian)

On the Significance of Geneva

Indigenous bee-keeping in Alaba Special woreda, Southern Ethiopia

(This paper argues that recognizing and documenting indigenous bee-keeping practice in the woreda is a pre-requisite to sustain honey production and strengthen existing development efforts aimed at improving the living standard of low income farmers...the authors argue that early introduction of modern apiculture in the study area has not taken in to account the role and significance of indigenous knowledge in development process.)

Keynes and the current financial crisis

I don't like to get too deep into the US economy because this is not directly related to the stuff going on in the developing countries-- my primary field of interest. However, the stuff that goes in the US economy does have some impact on the developing country's economy. [Well, that said it is hard to believe that at a time when the world stock markets are going downhill, or at least are very vulnerable and fickle, the Nepali stock market (NEPSE) is going uphill-- a hard to believe happening at this point of time. I think the time lag in the Nepali economy is much more larger than in the West's economy (I presume, somewhere at least 8-10 months in the financial sector). I always am amazed by the deviance of Nepali economy from the standard predictions of fiscal and monetary theories!]

Anyway, back to the US economy. I somehow stumbled into the CEPR Policy Insight No. 23 (Keynes and the Crisis by Alex Leijonhufvud). It is an interesting and fascinating discussion (well, at least to those (like me) who are slightly inclined towards Keynesianism) about the Keynes and the current financial crisis in the US. What can we learn from Keynes(ianism) and the moral philosophy associated with it?

The most important lesson from his life and work may be that the macroeconomist should start from the important problems of the day and should face the following questions: (1) How are we to understand what is happening right now? (2) What can be done about it? What is the best policy to follow? (3) Do recent events force us to modify what is today widely accepted economic theory? If so, what is wrong and how might we go about arriving at a more satisfying theory?

Why did the Keynesian policies did not work in Japan (heavy spending on public transportation and other sectors leading to nearly insurmountable debts) when the policymakers tried to tackle two bursts- stock market and real estate? Ans: moral hazard and liquidity trap

The effective demand failure that plagued Japan rather was that business firms could not and later would not do the intertemporal trade of expected revenues from future output for the factor services in the present needed to produce that output; that is, they could not or would not borrow to finance investment. In the early post-crash years, the state of the banks was such that they would not lend. Even when the Japanese banks eventually got into healthier shape, many business firms still had balance sheets in such condition that they were loath to borrow...The other lesson to draw from the Japanese experience is that once the credit system had crashed, a central bank policy of low interest rates could not counteract this intertemporal effective demand failure.

He argues that the current financial crisis is a result of policy failure, particularly obsession with inflation-targeting and too low interest rates. The Fed maintained low interest rates without paying attention to the fact that price stabilization was being done by "competition from abroad and the exchange rate policies of the countries of origin of those imports."

He has a dire prediction about the near term future of the US markets: it is definitely going into stagflation and the "issue is how much inflation and how much unemployment and stagnation are we going to have."

Also, here is a challenge to Miltion Friedman, who said that the real interest rate was determined by real factors and could not be manipulated by the Central Bank. Leijonhufvud argues that the "real interest rate does not exist in reality but is a constructed variable." Why? Because the low interest rates during the Greenspan era produced "virtually no CPI inflation, but drastic asset price inflation and very serious deterioration of credit standards." He also takes on the validity of rational expectation based models and provides arguments showing empirical inconsistency to the Ricardian equivalence, modern financial theory, and the representative agent model.

He extols Keynes:

"More than seventy years ago, Keynes already knew that a high degree of downward price flexibility in a recession could entirely wreck the financial system and make the situation infinitely worse."

Three lessons should be learned from Keynes:

• To take our social responsibilities seriously and focus on the macroproblems of our own day (the ongoing credit crisis and its gradually unfolding consequences).
• To try to understand what can be done with #1 (standard Keynesian policies are not the answer and nor are the standard central banking doctrine)
• To ask whether events proved that existing theory needed to be revised (dynamic stochastic general equilibrium theory is an intellectually bankrupt enterprise)

More importantly, we need to realize that macroeconomic is much more dynamic to just fit into the stochastic general equilibrium models and the current events should not be tied with standard economic theories, which have already fallen prey to empirical evidences, by hook or by crook. Though current economic events should be viewed in terms of standard economic theories, they should not be unnecessarily tied with the theories because the market is too dynamic to follow standard theories!

What we need to learn from Keynes, instead, are these three lessons about how to view our responsibilities and how to approach our subject.

The paper reminds me of my Intermediate Macroeconomic and Money and Banking classes!

SAARC Development Fund

South Asian Association for Regional Corporation's (SAARC) 15th annual meeting has just concluded in Sri Lankan capital Colombo. With the eight members countries (India, Nepal, Pakistan, Bhutan, Sri Lanka, Maldives, Bangladesh, and Afghanistan), it is the largest regional bloc in the world in terms of population. It has new "observer" members likes the US, the EU, China, South Korea, Japan, Mauritius, and Iran (now Myanmar and Australia as well). Usually, the meeting is overshadowed by bitter diplomatic ties between India and Pakistan. The meeting is usually a gathering of heads of state, without any substantial outcome. Nevertheless, it provides a very useful forum for the countries to discuss the most common issues plaguing the region with the highest number of people below $1 a day.

This time the meeting decided to establish a SAARC Development Fund (SDF), with an initial capital of $300 million. Bhutan has offered tax breaks and other diplomatic level incentives to host headquarter of SDF. Though the initial capital, which is just a commitment and has yet to be realized in real terms, is very small, the leaders have rightly identified maternal and child health, women empowerment, and teacher's training as a priority. Teacher absentee is one of the most pressing problems in the education sector in South Asia. More here.

It needs to be seen how effective and fruitful the Colombo declaration would be in terms of increasing regional trade, reducing poverty, facilitating energy cooperation and trade, and cooperation in the fight against the threat of terrorism. The people are yet to feel the effect of SAFTA, the free trade agreement among the seven (plus Afghanistan added last year) countries.

Though I am skeptical of great strides in economic cooperation due to SAARC agreements, I am hopeful that it would be one of the most important regional blocs in the world in the coming years. Why? Because of India's growing economic and political power in the international arena, because of the availability of the only forum where the bitter ties between India and Pakistan can be resolved, because of the importance of fighting terrorism in Afghanistan and Pakistan, because of the highest number of people under $1 a day, because of the political development in Nepal, where terrorism was put to rest through political reconciliation-a reminder to the world that victory over insurgency is best achieved through political means, not through military might, and because of increasing interest of the most powerful countries to associate with SAARC as observers (imagine what the US, Australia, Iran, and Myanmar have to with a regional bloc in South Asia!).

Sliding towards Socialism

I have always been skeptical about the Maoists' ability to steer the economy towards a path of success because of their anti-market behavior(I have been always critical of their planned land reform program). Now, they have agreed to form a government and have a 50 point common minimum agenda. And, there are a lot of commissions:

...In the program, the Maoists pledged to form a peace and reconstruction commission, a truth and reconciliation commission, a state restructuring commission, a commission on disappearances and a land reforms commission. It has vowed to make necessary arrangements for monitoring past peace accords through the peace and reconstruction commission.

Besides, the program proposed an administration reforms commission, a youth commission and a powerful Muslim commission.

...The Maoists proposed a model of economic activity through the partnership of government, cooperatives and the private sector. It pledged to formulate immediate short-term, mid-term and long-term plans for development and give priority to agriculture, hydropower, tourism, human resources and infrastructure.

The Maoists have proposed to categorize hydel projects for purposes of investment. "Small and medium-size projects will be run through internal investment and big and export-oriented projects through foreign investment," the proposed program stated.

...The Maoists propose to attract foreign investment in industrialization and development for the benefit of the country. The party pledged dual citizenship for Non-Resident Nepalis to attract their investment in national development.

The Maoist program proposed revolutionary land reforms to end feudal ownership of  land and establish access of peasants to the land.

The program also proposed that primary health care, employment and education up to high-school will be made part of the fundamental rights of the people. The party proposed to reduce the age criteria for senior citizens to 70 from existing 75 for purposes of the old age allowance. It pledged an increment in the allowance amount for widows and old people.