The Russian mess and the Socialist debacle

Why and how did one of the infamous Socialist experiments, the Russian economy, collapse? Many economists argue that it was due to the US policies (Cold War expenses) and capitalism. However, Richard Lipsey, argues that the destruction was in the making internally because of incoherence in production, prices, demand, and supply of goods and services.

Why did the academic community get the Russian story wrong? Well, because they were too naive and bought the state-cooked statistics at face value.

- They believed that Soviet statistics, although not good, were just subject to honest errors and reliable enough to convey useful information.

- They believed that national income figures were accurate representations of the economy.

- They would not listen to dissenters such as Jasny and Birman and other more recent émigrés who told of the decline in living standards. (Academics often do not see real events because of  concentrating exclusively on value statistics, which can obscure the reality of the physical objects that lie behind them.)

The following list captures what was wrong with the Soviet command economy:

Soviet managers were rewarded for fulfilling quantity targets with little attention to quality. Thus:

• Administered prices plus allowing firms to retain some part of their profits give an incentive to maximize the quantity of output with little attention to quality.
• Shoddy consumer goods abounded (a typical later example being black and white TV sets that tended to explode when overheated).
• Shoddy parts were passed on down the line from one stage in the production process to the next. When a parts producer found that it was producing substandard parts, the incentive was to pass them on anyway and let the firms down the line cope rather than slowing production to fix the quality.
• Quantity targets were often set on finished goods but not on parts so, for example, farm fields were littered with tractors that could not be repaired because of lack of spare parts while new tractors were available.
• Prices were typically set with considerations other than market clearing in view. Thus prices did not respond quickly to changes in demand and supply, making the economy poorly adapted to deal with large shocks. Shortages and surpluses abounded.
• Pricing of capital investments did not reflect opportunity costs. For years, because of the dogma that interest was a capitalist phenomenon, capital investment was not evaluated efficiently so that waste abounded.
• The communist leaders were all urban persons and thought they could treat agricultural work as if it was a 9-5 factory job. Having no appreciation of the life and work of peasants, they collectivized agriculture, treating it as factory with disastrous results, including a famine in which several millions died in the 1930s and low agriculture productivity from then on. (Later what should have been one of the
  worlds’ great bread baskets came to require imported food in the 1970s and 1980s.)
• Workers are paid more than the value of their output at controlled prices and so are forced to save because there are no goods available to buy. This is a time bomb as financial savings for which there is no real counterpart accumulate.
• Services were valued at cost while there was little incentive to produce real value in many service activities. (For a later example, I once waited for an hour for a taxi in Budapest while the drivers played chess. Measured GNP is same if they play chess or take me to where I want to go.

The short paper is really informative about what was wrong with the analysis produced by Russia analysts in the US. This somehow has relevance to the current US involvement in Pakistan and Iraq.

(Thanks to Professor Farrant for the link).

Documentary: Corruption in Africa

I don't know its source but it is worth watching!

Lessons from Cash Transfers from Africa and Latin America

There is a nice review of conditional cash transfers (CCTs) and the lessons learnt from African and Latin America in UNDP’s IPC website. CCTs are probably one of the most successful welfare, cash transfer programs that have helped tackle poverty effectively while ensuring better enrollment rates and healthcare of children from participating households. Here are some snippets from the publication:

Degalo Hailu and Fabio Veras Soares write:

…CCTs are considered innovative for several reasons: (i) their targeting mechanisms; (ii) beneficiaries receive cash rather than in-kind benefits; and (iii) the transfers are conditional. CCTs are designed to increase the human capital of beneficiaries by making transfers conditional on certain requirements, such as school attendance, visits to health clinics and renewals of immunisation. Additionally, CCTs aim to alleviate poverty in the short-term.

…Impact evaluations of CCTs have shown promising results. First, there is evidence of positive impacts on education and health outcomes. Second, there is some evidence of positive impacts on nutrition, mainly when the CCTs have been accompanied by the distribution of food supplements. Third, no major negative impact on labour supply has been observed (despite criticisms that CCTs foster dependency). Fourth, large-scale programmes have had impressive results in reducing inequality and some impact on poverty measures, especially by narrowing the poverty gap and lessening the severity of poverty.

…The low cost of CCTs, relative to traditional in-kind social assistance interventions, is another attractive feature of the programmes. The costs of Brazil’s Bolsa Família and Mexico’s Oportunidades—the two largest programmes in the region—are much less than 1 per cent of GDP. The way programmes are financed, however, can have crucial implications for their financial and political sustainability.

Tatiana Britto writes about Bosla Familia:

...No single transfer programme, on its own, can lift beneficiaries out of poverty permanently. This can only be done with a synergistic combination of public policies and economic growth, which is far beyond the scope of Bolsa Família.

...Bolsa Família now reaches 11.1 million families across Brazil and provides two different kinds of benefits: a basic transfer, completely unconditional and given to extremely poor families; and a transfer that varies according to the number of children in the family up to the age of 17. This is for poor and extremely poor families and is conditional on human capital investments such as school attendance, immunisation of children and pre-natal check-ups.

...The programme’s rationale is very similar to that of most CCTs in Latin America: to combine the short-term goals of poverty alleviation, through the cash transfers, with the long-term objectives of breaking intergenerational poverty traps, through the conditionalities on health and education.

Illiana Yaschine and Laura Davila write about exit conditions from CCT programs:

...Beneficiaries leave Mexico’s Oportunidades if they are above a certain poverty line. But this strategy does not mean that beneficiaries have built the human capital to break the intergenerational transmission of poverty.

Departure from CCT programmes should not be tied to poverty criteria. Because of the absence of an effective social protection system, the criteria should be based on the initial objective of the programme—building human capital.

…leaving the programme means that families are above the extreme poverty line at a particular moment, but it does not mean that they are no longer poor. This is particularly significant in Mexico’s case, given the limitations of its social and economic policy. The country lacks an effective social protection system, and thus it is not possible to ensure that households leaving Oportunidades will have access to other social programmes or will benefit from overall economic and labour market conditions. Families that leave CCT programmes must have recourse to other policies that enhance their living standards and guarantee their social rights in order to allow them escape from poverty.

Charity Moore write about the sources of funding for CCTs:

...Externally-financed programmes in small countries face challenges that differ from those of self-funded programmes in larger countries. Externally-funded programmes usually focus on short-term goals, while domestically-funded programmes focus on long-term human capital accumulation.

...The CCTs in Honduras and Nicaragua— respectively, the Programa de Asignación Familiar (PRAF) and the Red de Protección Social (RPS)—were two such programmes funded by an external lending institution. They faced obstacles that manifested themselves in different ways, but that stemmed from the similar core challenges involved in balancing the interests of internal and external stakeholders.

...Policymakers must work to balance the short- and long-term interests of internal and external stakeholders in order to create efficient and effective programmes. These can eventually be transformed into broader social protection strategies.

Rafel Perez Ribas and Guilherme Issamu Hirata write about what we do and don’t know about the impact of CCTs:

...Health co-responsibilities (“conditionalities”) might be more difficult to enforce and monitor than educational ones. CCT programmes affect decisions on time and budgetary allocations in favour of children, but it is unclear whether these changes stem from the transfer itself or from other programme components.

Households can be affected by the mere existence of a social programme and the presence of other beneficiaries in their community, whether or not they themselves are participating.

…the evaluation of Bolsa Família in Brazil has shown that beneficiary children are almost four percentage points more likely than non-beneficiaries to fail at school. This evidence raises concerns about the quality of the schooling that beneficiary children are receiving. A current challenge is to determine how CCT programmes could interact with other educational programmes in order to improve school quality and student performance.

...In Mexico, the supply of nutritional supplements for children might be the main reason for this positive impact. In Colombia, positive outcomes are supported by effective enforcement of the health check-up conditionality. In contrast, Bolsa Família’s evaluation shows no evidence of an impact on child nutrition or immunisation. Although it has raised the number of visits to health centres, Paraguay’s pilot programme, Tekoporã, has not managed to increase immunisation either.

... in poor areas the service supply constraint is greater in health than in education…households in poorer communities are more reluctant to change their attitude towards preventive health care than towards school attendance.

…In Mexico, for instance, only 50 per cent of PROGRESA’s diet diversification effect was explained by the monetary transfer (income effect). The remaining effect has been attributed mainly to the talks on health and nutrition.

…Recent studies on PROGRESA have shown that ineligible households are also affected by the programme. Nonbeneficiary households in areas where the programme operated have also increased their consumption because of its effect on the local economy. Moreover, the school enrolment rates of noneligible children have risen in districts that took part in the programme due to the so-called peer effect.

Pablo S. Villatoro writes about the tradeoffs between human capital accumulation and poverty reduction (??? I don’t really get a clear connection!);

…There are trade-offs between poverty reduction in the short- and medium term, and the increase in human capital in the long-term. For instance, if a programme targets those segments of the population with low rates of school attendance, the effects on human capital might be greater than if it had targeted poor families in general. But the impact on poverty would be less because large numbers of the poor would not take part in the programme. Conversely, if a programme focuses solely on the (extremely) poor, the transfers would go to children who are already in school, which may not be efficient in terms of the accumulation of human capital.

...Another approach is to give priority to the population affected by the greatest overlap between poverty and a deficit in human capital. This approach might lead to an increase in transfers to pre-school age children, minimizing the tension between human capital accumulation and poverty relief.

...It would also tackle poverty in the short run because of the demographic composition of the poorest homes. Moreover, it would facilitate labour market participation among poor women, since it lowers the opportunity cost associated with child care.

…if underinvestment in human capital is caused by market failures, income effect (unconditional transfer) is not enough to correct them: the beneficiaries’ behaviour can be more efficiently aligned with the social interest by using conditionalities….it is unlikely that unconditional transfers increase demand, because of the low monetary value of the benefit and the poor quality of the services. But if the aim is to alleviate poverty, using conditionalities makes it harder to achieve that aim, since they limit the beneficiaries’ freedom of choice and imposes extra costs.

...To reduce poverty in the short term, cash transfer programmes would have to impose time limits in order to obviate dependence and graduate beneficiaries who are no longer poor. A programme that seeks to reduce poverty in the medium-term requires complementary policies that foster the adult beneficiaries’ autonomous capacity to generate income, as well as policies that increase local demand for work.

...Programmes that focus sharply on building the human capital of children and adolescents have to provide transfers until the beneficiaries acquire sufficient human capital to increase the probability that they will escape poverty in the future.

Michelle Morais de Sa e Silva writes about Opportunity NYC (which is the first CCT type program in the US):

…The success of an incentivesbased programme such as Opportunity NYC depends partly on how well beneficiaries understand how it operates, so that they can respond to its incentives as expected.

The programme does not intend to alter the governance structure of the school system, nor does it involve innovative pedagogies or new classroom teaching practices.

It simply assumes that, by giving students monetary incentives, it will bring about improvements in test scores.

Sudhanshu Handa and Scott Stewart write about the orphan targeting dilemma in Eastern and Southern Africa:

Targeting households with children has a greater impact on school enrolment than other targeting strategies.

The experience of four countries in Southern Africa demonstrates that an orphan targeting approach reaches more orphans but excludes many of the poorest children, since orphans are not necessarily clustered in the poorest consumption decile. In Malawi, targeting households with children yields an increase in enrolment of five percentage points among children aged 6–17, while targeting households with orphans yields an increase of 4.2 points.

…Hence it is only when the focus is on the ultra-poorest children—those in the bottom decile—that the distinction between the two schemes (child-focused versus orphan-focused) becomes apparent. If policymakers give greater weight to this group, and if good targeting is possible, then the scheme that favours children over orphans will reach more children in the poorest decile relative to an orphan targeted scheme. Such a scheme would also reach about 50 per cent of orphans in the bottom decile.

There is much more in the publication about Social Cash Transfers program in Africa and CCTs in Latin America. Read the full publication here.

Links of Interest

All you have to know about the Obamanomics

(this is so true and pragmatic)

So what we need to bring about is the end of the era of unresponsive and inefficient government and short-term thinking in government, so that the government is laying the groundwork, the framework, the foundation for the market to operate effectively and for every single individual to be able to be connected with that market and to succeed in that market. And it’s now a global marketplace.

Who is a Southasian?

The Maobaadi prime minister (Interview with Prachanda, the former rebel leader turned prime minister of Nepal)

Available options to Maoists-led government: Binding constraints to growth

Widening access to growth opportunities is possible when support policies are designed for facilitating the priority sectors. Hydropower, for example, is one of Nepal's top priority sectors to expand opportunities for growth. Even in a 1 MW construction site, fairly good employment opportunities can be created to displaced and landless populations. About 500 to 1000 people are normally needed per site in such a labor-intensive infrastructure projects. 

Opportunities can also be created in tourism sector.  It is the second largest sector after agriculture, which employs about 600,000 people with the estimation of generating US $205 million during 2007/08. Tourism can offer growth opportunity provided that serious efforts are made to increase its competitiveness in price index, human tourism, infrastructure, environment, technology, human resources, openness and social index. 

The other areas for widening the growth opportunities include data processing; software development and computer consultancy services; generation and transmission of electricity; manufacture of paper and paper products; manufacture of motorcycles and scooters and parts thereof; and establishment and management of educational and health institutions.   

Manmohan Singh's vision

Power and Roads for Africa: What the United States Can Do

Charles's fantasy farming won't feed Africa's poor (Paul Collier argues for genetic modification of crops to tackle global hunger; organic peasantry will not be enough)

...Organic peasant agriculture is a solution for the angst of affluence, but not hunger. Its apotheosis is the ban on GM crops.

...The GM ban has three adverse effects. It has retarded productivity in European agriculture; grain production could be increased by about 15% were the ban lifted. More subtly, because Europe is out of the market for GM technology, the pace of research has slowed. GM research takes a long time to come to fruition, and its core benefit - the permanent reduction of global food prices - cannot fully be captured through patents. European governments should be funding this research, but it is entirely reliant on the private sector. Private money for research depends on the prospect of sales, so the ban has not only blocked public research - it has reduced private research.

However, the worst consequence of the European ban is that it has terrified African governments - with the exception of South Africa - into banning genetic modification. They fear that growing modified crops would shut them out of European markets. Because Africa banned GM, there was no market for discoveries pertinent to the crops that Africa grows, and so no research. In turn, this has led to the critique that GM is irrelevant for Africa.

Africa cannot afford the GM ban. Its cities, fed by imports, need global prices to be low. Without cheap food the children of the urban poor will be malnourished. Africa's farmers, broadly self-sufficient, need higher productivity. Productivity per acre has stagnated, so rising production has depended on expanding the area under cultivation. But with population growth this option is running out.

A tour of Millennium Villages Project

Here is a nice narration of Millennium Villages Project, spearheaded by Jeffrey Sachs. Sachs' experiment-based grand plan is to pump in money, both from IFIs and private donors, to eradicate extreme poverty by 2015. The success of the project depends on a lot of factors. The reporter sums it up pretty nicely:

Along with the UN Development Program, the Marshall Plan, and USAID, Sachs's project is one of the broadest and most ambitious human experiments ever launched. In some places it may well be of lasting importance. In others, it could fail utterly. It's all a matter of luck, politics, and hard work. Sachs is an expert on the last.

Here is how Sachs wants to scale the program up:

Pull one village up out of poverty, and then, as Sachs says all the time, you can "scale up" to more villages and, eventually, a whole country and perhaps, in time, a continent.

..There are essentially two dueling models of development in the aid community today. Sachs's idea is that with large infusions of money, villages will develop the means to link their own markets with larger, more globally connected markets in urban centers, leading to greater prosperity and at the same time allowing them eventually to assume the costs of the Millennium program innovations. In theory, local governments, having seen the advantages that the project brings, will also step in to help out—with improved programs, continuing financial support, and infrastructure maintenance. Meanwhile, Sachs and many other development experts believe that only huge donations of aid can help the desperately poor.

On the Russian mess:

"The reason shock therapy—as they call it—didn't work in Russia," he says, "was because the policies were not really carried out. People who criticize my work in these places don't read the data. They don't look at data because they are not interested and because, I am convinced, they can't read it. Whereas I live on data. I love data."

Indeed, some academics blame the failure of shock therapy in Russia on Sachs's reliance on statistics at the expense of sociology and politics. One well-known specialist on Russia, Stephen F. Cohen, then at Princeton, recalls plunking himself down next to Sachs on a plane headed for Moscow when Sachs was working with the Russian government. When Cohen asked him what he was reading about Russian history and current affairs, Sachs reportedly looked at him blankly and announced that economists did not need that kind of background, because, since the laws of economics were universal, data and statistics could tell them all they had to know.

Poverty-induced ignorance:

When Sachs gets up to speak ("President Jeff Sex," Toya's mayor announces), he has to explain the project to his listeners; a Malian translates the speech into Bambara, the nation's lingua franca. "I bring many partners who are interested in Toya," Sachs tells the silent crowd. "A movie star—you can see him on television, his name is Matt Damon." Around him the faces are blank. "The Secretary-General of the UN sends his good wishes." More blank faces: Damon and Ban Ki-moon, equally unknown quantities here. "And many international businesses want to help you," Sachs tells them. "A company called Sony, which makes computers, wants to give them to you." But what do they know of Sony or computers? He tells the crowd that there are "many exciting things we'll do together in the coming years." Among these he includes introducing new seed varieties, better irrigation, veterinary health care, fishing, a new ambulance, computers for the school, and even the development of tourism as a source of revenue. These are things the people understand better.

The long article is very descriptive. Nothing especially new stuff though!

Links of Interest

The selfish hegemon must offer a New Deal on trade (by Jagdish Bhagwati)

...First, as with Japan in the 1930s, when one-dollar blouses flooded the world, India and China today are growing and exporting rapidly. They are like Gullivers in a Lilliputian world economy. They create tsunamis for specific industries where their exports concentrate.

Second, competition has intensified. As exemplified by the Boeing-Airbus saga, the margins of competitive advantage have shrunk. No chief executive or any of his workers in tradable industries leads a happy life any more as there is always someone, from somewhere, breathing down his neck. I call this new phenomenon “kaleidoscopic comparative advantage”. It leads to volatility of jobs, as you have an advantage today and can lose it tomorrow.

Third, labour-saving technical change continuously threatens assembly-line jobs for the unskilled. The assembly lines continue but increasingly do not have workers on them; they are managed from a glass cage by skilled operators whose jobs increase instead.

The agenda for institutional change has to address this fragility of jobs, enabling unskilled and skilled workers to face the new uncertainties. To illustrate: higher education will have to be recast to reduce the proportion of time spent on specialisation: this would enable an easier response to shifting skill requirements as the kaleidoscope turns. Unskilled workers will have to be helped and encouraged to acquire skills and therefore increase their ability to shift to other jobs, even as they continue to work.

Emerging markets must shift their focus in wards (by Raghuram Rajan)

...Yet years of strong growth and cutbacks in public investment, which have restored economic health to emerging markets, have also eaten up excess capacity. Any increase in domestic demand, if it is not to result in bottlenecks and even higher inflation, will have to be accompanied by a shift in production from an external focus to an internal focus. This means that emerging market currencies will have to appreciate, and the weight of output will shift from traded goods such as T-shirts and electronics to non-traded goods such as real estate and health services over the next few years.

...Labour markets will have to be more flexible, while product markets will have to be deregulated far more if profitable productive growth is sought in the non-traded goods sector. With more expenditure flowing to assets such as housing, the financial sector will have to be careful not to precipitate booms and busts, and this will mean more reform as well as better supervision. Finally, governments will have to meet the greater demand for public investment without eroding fiscal discipline, maintaining greater caution as the cushion of large foreign exchange reserves diminishes and increases their vulnerability.

Africa's food crisis the handiwork of IMF, World Bank (virtually everything under the sun that goes wrong in Africa now is being traced back to IFIs!...a very cheap shot!)

At the time of decolonisation in the 1960s, Africa was not just self-sufficient in food but was actually a net food exporter. Its exports averaged 1.3 million tonnes a year between 1966-70. But today, the continent imports 25 per cent of its food, with almost every country being a net food importer. Hunger and famine have become recurrent phenomena, with the last three years alone seeing food emergencies break out in the Horn of Africa, the Sahel, Southern Africa, and Central Africa.

...Instead of triggering a virtuous spiral of growth and prosperity, structural adjustment saddled Africa with low investment, increased unemployment, reduced social spending, reduced consumption, and low output, all combining to create a vicious cycle of stagnation and decline.

Lifting price controls on fertilizers while simultaneously cutting back on loans to farmers simply led to reduced applications, lower yields, and lower investment. One would have expected anyone to see this.
Moreover, the expected results of the withdrawal of the state in the hope that private sector would develop agriculture did not materialise. Instead, the private sector believed that reducing state expenditures created more risk and failed to step into the breach.

Zimbabwe inflation tops 11 mln pct as talks drag (the Zimbabwean economy has seen prices going out of bound...very unruly price whose cause can be traced back to Mugabe's dirty rule!)

...The Central Statistical Office said year-on-year inflation in June jumped to 11.27 million percent -- the highest current inflation rate in the world -- from 2.2 million in May. That would mean prices double about every three weeks. Many economists believe the real figure is higher still.

The central bank re-denominated the Zimbabwean dollar currency on July 30 by slashing off 10 zeros but this has had no effect on stemming the devaluation of the currency. It trades at Z$100 to the greenback, or Z$1 trillion in the old currency.

 

Times up for garment industry

That's the title of my latest Op-Ed published in The Kathmandu Post. This piece's main point: don't foster ailing industries by seeking preferential treatment in the international market. In Nepal's case, it is the garment and textile industry, which once was the largest foreign currency earning exportable commodity. Now, it has lost almost 80% of jobs and 98% of firms. Why? Because of its inability to withstand competition in the international market, especially after the end of Multi-Fiber Agreement (MFA) in 2005. Interestingly, for Nepal, the year 2005 can also be labeled as 'the Great Garment Depression of 2005'.I favor market competition, which probably is the best way to induce incentives among individuals and firms.

In light of these widely known reasons but scarcely mentioned by the bureaucrats, a new high level delegation, composed of Commerce Secretary and FNCCI and GAN members, is heading to the United States to lobby for preferential treatment of or duty free access to Nepali garments in the US market, which is the largest importer of readymade garments made in Nepal. What surprises me the most is the fact that our leaders and garment sector entrepreneurs have not yet realized the value of competition and the stark truth that the Nepali garment sector cannot simply compete with the big producers, who continue to take an advantage of agglomeration economies, from Cambodia, China, India, Vietnam, and Mexico, at least not in the current situation.

Instead of rectifying defective economic policies considering the changed circumstances in the market brought about by globalization, the bureaucrats are too bogged down and intent on getting the preferential treatment in the US market. It shows how misguided our economic priorities are and how ignorant and unyielding our policymakers are to change the course of economic policy for good.

The prevailing illusionary notion among the policy-makers and garment sector entrepreneurs -- who are already battered hard by the depression in the garment sector -- is that the industry can recoup lost jobs and revenues if they are able to secure special treatment in the US market.

However, what is hard to swallow is the fact that no such recouping would occur and greater revenue generation would just be a dream, unless a miracle happens in favor of Nepali products in the international market. After the end of the MFA, Nepal already has lost market pie to big producers from China, India, Cambodia, and Vietnam, among others.

Read the full Op-Ed here. Here is a previous post about carpet industry, preferential treatment, and poverty reduction (in reality, it is a modern day myth!). Related to this post is this news piece about "carpet exports roll down by 14%" this fiscal year.

Also, this time there is a pic of mine with my Op-Ed. Below is an embedded link of how the Op-Ed page looks like on the actual print version (what could be a better way to advertise myself than this! How much of rationality and selfishness is in question here?)