Links of Interest

The expected benefits of trade liberalization for world income and development  (it is much more lesser than previously expected/claimed...using the MIRAGE model, the authors estimate that full trade liberalization would increase world real income by US$100 billion (+0.33 percent) after 10 years of implementation....a different study had found that full trade liberalization would increase world welfare between 0.2 to 3.1 percent only.)

How imbalances led to credit crunch and inflation 

A fair Zimbabwe poll is not enough 

How best to manage global imbalances 

Mohamed El-Erian writes: "...the fact that the system has ended up eschewing the superior policy solution speaks to the urgency of learning from them. An increasingly interconnected world cannot maintain high growth and low inflation without a bold modernisation of the mechanisms for international policy co-ordination, starting with the G7. Governments must continue to refine their policy instruments and pay greater attention to the secondary and tertiary consequences of their actions. The private sector must assume greater responsibility for ­forward-looking risk management. In the absence of these changes, the inevitable adjustment of the global imbalances will continue to entail a serious cost in global welfare."

Does money transcend cultural identity?  

Lessons from Latin America: Donors, democracy and development 

How a Kenyan village tripled its corn harvest (thanks to Sachs's Millennium Villages Project)

Georgy Dyson at the TED: The birth of the computer

Time to look for new patterns of consumption and production

Joe Stiglitz argues that the scale of food and fuel crisis right now is an indication for the need to look at new patterns of consumption and production.

The world needs to rethink the sources of growth. If the foundations of economic growth lie in advances in science and technology, not in speculation in real estate or financial markets, then tax systems must be realigned. Why should those who make their income by gambling in Wall Street's casinos be taxed at a lower rate than those who earn their money in other ways? Capital gains should be taxed at least at as high a rate as ordinary income. (Such returns will, in any case, get a substantial benefit because the tax is not imposed until the gain is realised.) In addition, there should be a windfall profits tax on oil and gas companies.

Given the huge increase in inequality in most countries, higher taxes for those who have done well – to help those who have lost ground from globalisation and technological change – are in order, and could also ameliorate the strains imposed by soaring food and energy prices. Countries, like the US, with food stamp programmes, clearly need to increase the value of these subsidies in order to ensure that nutrition standards do not deteriorate. Those countries without such programmes might think about instituting them.

Two factors set off today's crisis: the Iraq war contributed to the run-up in oil prices, including through increased instability in the Middle East, the low-cost provider of oil, while biofuels have meant that food and energy markets are increasingly integrated. Although the focus on renewable energy sources is welcome, policies that distort food supply are not. America's subsidies for corn-based ethanol contribute more to the coffers of ethanol producers than they do to curtailing global warming. Huge agriculture subsidies in the US and the European Union have weakened agriculture in the developing world, where too little international assistance was directed at improving agriculture productivity. Development aid for agriculture has fallen from a high of 17% of total aid to just 3% today, with some international donors demanding that fertiliser subsidies be eliminated, making it even more difficult for cash-strapped farmers to compete.

Rich countries must reduce, if not eliminate, distortional agriculture and energy policies, and help those in the poorest countries improve their capacity to produce food. But this is just a start: we have treated our most precious resources – clean water and air – as if they were free. Only new patterns of consumption and production – a new economic model – can address that most fundamental resource problem.

Links of Interest

Tanzania: An African success story?

Nepal Maoist chief to get top peace award

The paralysed and inefficient institutions of Kosovo

Is Ethiopia really enjoying economic development?

A theory of military dictatorships

Singapore: The Global Schoolhouse

This is what the state can do to create a high-value knowledge based economy. Singapore, which is considered as a state that successfully engineered its economy to the path of sustained economic development by reforming itself into a global commercial hub (obviously, following the unorthodox policies to create the orthodox outcomes), has now drawn up plans to transform itself into a global hub of education and medical services. It has formulated the Global Schoolhouse, a policy (with an initial funding worth US$8 billion) designed to attract top notch international students to Singapore based public and private institutions, remodel education system, and establish high class universities in Singapore. It is reported that elite universities like MIT, Yale, John Hopkins, Duke, etc were funded to run graduate-level programs and research activities. Similar policies were implemented by Saudi Arabia, Romania, Ireland, and Malaysia.

Singapore's government formulated the Global Schoolhouse, a policy platform based on three pillars: investing financial support with an identified group of "world-class universities" to establish operations in Singapore; attracting 150,000 international students by 2015 to study in both private and state-run education institutions; and remodel all levels of Singaporean education. The Global Schoolhouse articulates with policy reforms in education, research, urban redevelopment, taxation, immigration, and intellectual property.

Bringing in foreign expertise to contribute to Singapore's knowledge-economy agenda resonates with earlier state-led industrialization policies. The government's aphorism, "build it and they will come," was translated into the provision of state-of-the-art facilities and tax concessions and grants for foreign companies. This enabled Singapore to build capacity in key industries and integrate itself into the capitalist economy, at a time when the newly independent states were deeply suspicious of capitalism. The prime minister noted that Singaporeans were "learning to do a job" from foreign companies, something they may not have otherwise learned. The issue of "whether or not we were exploited" was less relevant to him.

This is yet another example of how the state can play a crucial role in promoting economic growth, engineer such growth methodologies, and provide incentives to achieve the growth goals.

By the way, this is how the Singaporean government support the education system:

The government offers resources and opportunities to do less administration and more research, including scientifically proactive research unencumbered by short-term commercial imperatives. Expatriate faculty also express appreciation for the professional freedoms provided by a forward-thinking, scientifically literate leadership that prizes intellectual achievements and a setting without any urban violence. Despite the limitations in democratic freedom for its citizenry, Singapore is not considered a police state. It is described as well governed, with impressive public-good achievements in infrastructure, health, education, and redistribution exceeding those of its neighbors.

...Singapore continues to use foreign companies, universities, and knowledge institutions to build capacity in key knowledge industries and to exploit new and emerging expressions of knowledge capitalism.

 

Lessons from the South African electricity crisis

In a one pager published this month by the IPC, Kate Bayliss from the Center for Development Policy and Research argues that the South African electricity crisis is a result of the failure of the private sector to respond to an ambitious electricity restructuring and privatization program beginning early 1990s and the lack of public investment in this sector. Bayliss maintains that though power sector is open to the private sector in other countries as well, there has been a decline in investment, implying that just making arguments on investment gap by following the orthodox restructuring economic models of the 80s and 90s would not work.

During the recent power cuts, a very high proportion of generation capacity was out of service. During January 2008, for example, this reached 23 per cent, mostly due to unplanned maintenance.

The Eskom plant is under severe strain due to factors such as poor coal quality, staff shortages and a high load on its capacity. A vicious circle has developed: a high proportion of plant is out of action, so further strain is placed on the existing plant, which becomes even more likely to break down.

Because of this additional strain on the system, frequent outages are inevitable. Similar reform packages have been repeated in much of sub-Saharan Africa. But the ‘unbundling’ of the electricity supply industry to facilitate private sector participation has failed to elicit the critically needed investment.

Across all developing countries, private sector investments in the power sector declined from US$ 47 billion in 1997 to US$ 14 billion in 2004. However, international advisors have continued to adhere to the orthodox package of restructuring policies, claiming that obtaining private sector investment is unavoidable because of a widening ‘investment gap’ in the power sector.

Bayliss concludes that in the wake of private sector's failure to tap into the opportunities in the power sector, the state must fill in the tap by investing more in the sector.

The electricity crisis of South Africa demonstrates that the widespread efforts across developing countries to encourage private sector investment in the electricity industry are unlikely to succeed. So the government and state utility must continue to scale up public investment in order to maintain and expand electricity capacity.

Of course, concerns against corruption and malgovernance in the public sector, where ever it might be, would run very high. This does not mean that the state should completely privatize power sector. Both the state and the private sector need to work together to harness untapped resources and opportunities. The state can kick-start the process through initial lump sum investment while keeping in mind that crowding out of private investment is eschewed. Keeping this balance in investment requires good policy work.

Growth Acceleration and Deceleration in Africa

This one is from an article titled “Good and Bad Times: Volatility and Growth in Africa” by Jorge Saba Arbache and John Page. They look at long term growth episodes and reach interesting conclusions (well, at least to me!). See WIDER Angle newsletter 2008 for the article.

We find evidence that economic, social, governance, and institutional variables are significantly different during acceleration and deceleration episodes. The major changes in national accounts during growth episodes take place in investments and savings, rather than in consumption. Savings and investments are higher during accelerations as compared with normal times and substantially lower during deceleration episodes. Foreign direct investment during accelerations is six-times the figure for deceleration episodes. Trade is substantially lower during decelerations.

Surprisingly, the authors find that growth accelerations do not produce a significant improvement in education and health outcomes. Meanwhile, deceleration has a significant impact on these two development indicators. This means that preventing African states from failing is important. Nations with growth accelerations should devise other techniques to improve the development indicators as acceleration itself do not improve them substantially. For instance, Botswana is growing at an average of 7% but HIV/AIDS transmission and infection rate is pretty high.

We also find an important asymmetry between how growth accelerations and decelerations affect human development outcomes. While growth accelerations result in relatively small improvements in human development, decelerations have important negative impacts on education and health outcomes. Under 5 mortality and infant mortality, for example, are substantially higher during growth decelerations than in normal times, but they do not improve during growth accelerations. These results suggest that preventing growth collapses is essential should Africa want to attain the Millennium Development Goals.

The authors argue that it is easier to predict deceleration than acceleration by looking at key indicators, chiefly low savings and investment rates.

Countries that have low savings and investment have greater probability of a deceleration. Poor macroeconomic management appears to be an important factor in precipitating bad times. Decelerations are accompanied by high inflation and significant exchange rate misalignment; and countries that trade less are more exposed to growth decelerations. Governance indicators deteriorate during bad times. Avoiding conflict appears to be a major part of avoiding growth decelerations.

Red tapes under the red flag

Excerpt from my Op-Ed published today in The Kathmandu Post:

I wonder what route the economic system would take when the leaders of the red flag formally take over executive powers of a new federal democratic republic of Nepal. It seems a no brainer that the Maoists won't part away from their socialist roots because it is the same base from where they ascended to power.

But, the exact mode of economic system under the Maoist leadership is still ambiguous. Of late, the Maoists' second-in-command Baburam Bhattarai defined his party's economic slogan as “new transitional economic policy,” which essentially means development of industrial capitalism -- oriented towards socialism. This policy rests on two components: scrapping feudalism and bestowing more rights to the working class and landless people by following the Marxist bourgeois-proletariat principles. This sounds grand and scary!

Doing away with the “remnants of feudalism -- feudal production relations - and developing industrial relations oriented towards socialism - which would solve long-term demands of the working class” is easier said than done. Practically, this might lead to creative destruction of existing production capacity without compensatory creative creation of new and better opportunities. History shows that any drastic reform in this direction only exacerbates the situation, leading to far-reaching consequences in industrial relations, international relations, and capital investment both from domestic and foreign investors.

One of the main agendas of the Maoists is to abolish the feudal system and its production relations through land reform that is consistent with the Marxian/socialist views. To put it in Bhattarai's own words, the Maoists' interpretation of this policy is “revolutionary land reform based on the principle of land to the tiller.” Unfortunately, we can hardly find the mercantilist system, i.e. Zamindari and landlordism systems so entrenched and widespread that it requires a complete overhaul of the economic system to rectify the problems in land ownership.

Arbitrary enforcement of failed principles of “absenteeism landlordism” and “land to the tiller” would be plainly inconsistent with the present state and evolution of our economic system. Of course, the system is far from perfect and is flawed in some aspects.The reason is not because of the tussle between bourgeois and proletariat classes but because of the absence of political consensus on a specific long-term economic plan for the country, fragile and capricious industrial relations often battered by union strikes, weak governance, political instability, and deeply entrenched corruption in almost all levels of bureaucracy, among others.

Reforming the economic system requires improving existing inefficient institutions and creating new ones in case of deficiency of appropriate institutions, not revival of failed and antiquated Marxist ideas.

Continue reading the Op-Ed here