African Cheetahs ≠ Asian Tigers

Here is a short article from the IPC about why one should not rejoice the impressive growth rates in sub-Saharan Africa (SSA) as the growth rate (4.4% between 2000 and 2007 for the whole SSA and five countries had 7% growth rate) and  is based largely on commodity exports, not on the contribution of manufacturing sectors. The author concludes with a nice sentences: Cheetahs (high- and medium-growth economies in SSA) run fast, but no for long. Learning the lessons of history may lead them to the Tiger’s (Asian Tigers) trail.

The manufacturing value added (MVA) matters for stable growth and development, which has not been seen in Africa because MVA is pretty low; the Asian Tigers had four times higher MVA than the share of high-and medium-growth economies of SSA. Manufacturing’s share of total merchandise exports is just 1.7% in high-growth economies and 9.7% in medium-growth economies in SSA, as opposed to 83% in the Asian Tigers. The Cheetahs of SSA are Botswana, Cape Verde, Mauritius, Angola, Chad, Equatorial Guinea, Sierra Leone, and Sudan.

The author argues that though high-growth performances are encouraging, there is little sign of expansion in manufacturing activities among the “Cheetahs” in SSA. This means that countries that are relying on commodity exports (especially oil and diamonds) will have to face a low income elasticity of demand, leading to unexpected impact on growth performance due to price volatility of commodity exports; in other words, the growth rate is not reliable unless it is underpinned by increasing MVA.

Why manufacturing? It is well established that the sector is superior in productivity increases, economies of scale and spurring all-round linkages. The sector also demands and absorbs a mix of high- and low-skilled labour. This is what distinguishes the Tigers from the Cheetahs. The former reaped the benefits of industrial policy. For instance, the Tigers managed allocations of credit and coordinated its flow to the manufacturing sector. They relied more on the provision of credit-based than on equity-based financing. Manufacturers in South Korea were subsidised by as much as 75 per cent when obtaining credit.

Does poverty cause civil war?

Not necessarily, according to this column by Simeon Djankov and Marta Reynal-Querol. It is generally argued that poverty is one of the causes of civil war. One corollary to this argument is that to avert civil war, poverty should be reduced first. The authors argue that this line of argument banks on the findings of two major studies by Fearon and Laitin and Collier and Hoeffler.

This “stylised fact,” that poverty breeds conflict and war, is supported by two empirical papers. Fearon and Laitin (2003) find that lower income per capita increases the likelihood of civil war. They argue that income per capita is a proxy for the state’s overall financial, administrative, police, and military capabilities. If the government is weak, rebels can expect success. Collier and Hoeffler (2004) find that income per capita, which could be related to the viability of rebellion, has considerable explanatory power in civil war regressions. Neither study deals with the possibly endogeneity of war to economic stagnation.

They argue that this line of argument could be accounted for by historical phenomena that jointly determine income evolution and conflict in the post-WWII era. Poverty and civil war could be driven by the same determinants (like colonial history), some of which are missed by in the typical econometric specifications.

A plausible explanation for the results found in the literature, on the strong relationship between poverty and civil war, is that there are some determinants that favour both economic development and peaceful negotiations, which are absent in the traditional specification. If this is the case, then OECD countries are peaceful not because they are rich, but because historically they suffered some circumstances that favoured negotiated settlements and economic development at the same time.

In particular, in a recent paper (Djankov and Reynal-Querol 2008), we show that the statistical association between poverty, as proxied by income per capita, and civil wars disappears once we include country fixed effects. The standard regression in the literature usually omits country fixed effects. In this context, these dummies capture any time-invariant country characteristics that affect the probability of civil war. This is important in the study of the relationship between per capita income and civil war, as some determinants that affect the condition for conflict may at the same time affect the condition for economic development. These results are robust to dividing the sample by 5-years 10-year, or 20-year periods or using annual data. Using a historical sample from 1825 to 2000, divided in periods of 25 and 50 years, produces the same result.

The authors not only look at the relationship between poverty and civil war in recent decades but also go back to history (from 1825 to 2000) and account for historical variables, which they include in their civil war regression. They find that poverty does not have an effect on civil wars. They include variables like European settler mortality rates and the population density. So, the relation between poverty and civil wars is at best indirect.

This finding has a very different policy implication: economic policies to reduce poverty does not necessarily lower the probability of having civil war.

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Update: Fisman and Miguel respond by arguing that in Africa an income drop of 5% increases the risk of civil conflict in the following year to nearly 30%.

If we believe that a direct link connects poverty and violence, then when failing rains create economic hardship, war should follow. In this case, we can actually figure out whether poverty caused violence by isolating rainfall’s effects. Drought and the resulting economic hardship turn out to matter a lot for understanding conflict in Africa. In work with co-authors Shanker Satyanath and Ernest Sergenti of NYU, we find that a 1% decline in national GDP increases the likelihood of civil conflict by about 2 percentage points. So an income drop of 5%—a large but altogether common deterioration in economic conditions, especially when the rains fail—increases the risk of civil conflict in the following year to nearly 30%, up from an already-high average probability of conflict in Africa of around 20% in normal rainfall years. So we find that short-term shocks to income – exactly the type that Djankov and Reynal-Querol purport to study – do trigger violent conflict on the world’s war-prone continent.

Law of demand in action

It is a familiar story that economic agents respond to changes in price of a commodity by changing quantity demanded. This is the basic law of demand formally learnt in Econ 101—that is, price and quantity demanded are inversely related.

Here is the same principle applied in the real world:

The number of climbing expeditions to Himalayan mountains, including Mount Everest, has risen since Nepal reduced off season climbing fees three months ago, officials said on Wednesday.

Nepal announced a 50 percent cut in the climbing fees in August for the three-month autumn season starting in September as incentive to off-season climbers and boost tourism, hit by years of Maoist civil war and political unrest.

As a result the number of expeditions to different Himalayan peaks in Nepal during the Autumn season had increased to 145 this year, up from 84 in 2007, Tourism Ministry official Gyanendra Shrestha said.

Officials say tourist arrivals in 2007 also jumped 27.1 percent to 360,000 as visitors began to return to the scenic nation after the Maoists declared a ceasefire in 2006.

By the way, eight of the world’s 14 highest peaks above 8,000 meters, including Mount Everest, are located in Nepal, which is the poorest country in Asia with a GDP per capita income of $1,500 (PPP 2006 estimate).

Sachs and Green on the financial crisis

Jeff Sachs argues for expansionary, co-ordinated action from the US, EU, China, Japan, and the Middle East to prop up credit market and domestic demand in these countries and in the developing countries as well.

Any co-ordinated expansion should include the following actions. First, the US Federal Reserve, the European Central Bank and the Bank of Japan should extend swap lines to all main emerging markets, including Brazil, Hungary, Poland and Turkey, to prevent a drain of reserves. Second, the International Monetary Fund should extend low-conditionality loans to all countries that request it, starting with Pakistan. Third, the US and European central banks and bank regulators should work with their big banks to discourage them from abruptly withdrawing credit lines from overseas operations. Spain has a role to play with its banks in Latin America.

Fourth, China, Japan and South Korea should undertake a co-ordinated macroeconomic expansion. In China, this would mean raising spending on public housing and infrastructure. In Japan, this would mean a boost in infra- structure but also in loans to developing nations in Asia and Africa to finance projects built by Japanese and local companies. Development financing can be a powerful macro­econ­omic stabiliser. China, Japan and South Korea should work with other regional central banks to bolster expansionary policies backed by government-to-government loans.

Fifth, the Middle East, flush with cash, should fund investment projects in emerging markets and low-income countries. Moreover, it should keep up domestic spending despite a fall in oil prices. Indeed, the faster a global macro­economic expansion is in place the sooner oil prices will recover.

Sixth, the US and Europe should expand export credits for low and ­middle-income developing countries, not only to meet their unfulfilled aid promises but also as a counter-cyclical stimulus. It would be a tragedy for big infrastructure companies to suffer when the developing world is crying out for infrastructure investment.

Finally, there is scope for expansionary fiscal policy in the US and Europe, despite large budget deficits. The US expansion should focus on infrastructure and transfers to cash-strapped state governments, not tax cuts. This package will not stop a recession in the US and parts of Europe, but could stop a recession in Asia and the developing countries. At the least it would put a floor on the global contraction that is rapidly gaining strength.

Again, support for Keynesianism, which is the need of the hour (even Bernanke is falling into the lap of Keynes with all those talk about second round of stimulus package)…actually, it Keynesianism is always relevant in some scale! Also, a US sponsored global summit on Nov 15 will decide whether to overhaul key global institutions like the IMF and WB. It will most be in the regulatory side.

Meanwhile, Duncan Green fleshes out more on the financial crisis, Keynesianism and the climate change.

From the wreckage of the Depression emerged radical new approaches to running the world’s economies: Roosevelt’s New Deal, Keynesian beliefs in using government spending to manage slumps, and, in developing countries, a wholesale switch away from reliance on exporting raw materials such as coffee or copper to the pursuit of industrialisation.

A similar scale of tectonic shifts may be building below the surface of the current crisis. Some could resemble earlier transformations, others will have to break new ground – the world and its economy are now very different.

As in the previous crash, we are likely to see a retreat from the excesses and bubbles of laissez-faire capitalism as markets are re-regulated.

…Even before the current crisis, the world was facing new challenges. Since the Second World War, massive economic growth based on fossil fuels has brought material benefits to millions. Now we are entering an age of scarcity – of water, fertile soil and, above all, carbon.

Whether through the onset of “peak oil” or the response to climate change, the rationing of carbon will transform the nature and language of politics. Avoiding catastrophic climate change while still allowing poor countries to grow their way out of poverty will require the United States and Canada to reduce their per capita emissions from 20 tonnes to roughly two (some argue it should be nearer one tonne). The average starting point for Germany and France is ten tonnes per head. China stands at three tonnes.

…But that is not enough. Development requires effective states. The extraordinary transformation of countries such as South Korea, Vietnam and Botswana has invariably involved governments able to ensure their people are healthy and educated and that there are decent roads and power supplies, and which are willing to steer their economy through the dangerous, but ultimately rewarding rapids of globalisation.

The fight against poverty, inequality and the threat of environmental collapse will define the 21st century, as the fight against slavery and for universal suffrage defined earlier eras. It is hard to imagine a more worthwhile cause. Fail, and future generations will not forgive us. Succeed, and they will wonder how the world could have tolerated such needless injustice and suffering for so long.

Larry Summers argues for activist policy

Larry Summers argues that policy activism, especially in the fiscal side, spurs growth (well, at least it did after the WW II). He agrees that investment in interstate highway system, air travel and electronics led to such growth rate.

The most plausible explanation is that an array of transforming investments and technologies – the interstate highway system, widespread air travel and the expansion of electronics – were spurs to growth during the postwar period.

And, he also argues for selective policy intervention—identification of investments that stimulate demand in the short run and positively affect productivity in the long run. Does not this sound familiar, like industrial policy, to which Summers is so opposed to. See this as well.(This is exactly what Senator Obama has been arguing for in his campaign speeches).

So there is a need to ensure that the pressure to increase spending is directed at areas where it will have the most transformational impact. We need to identify those investments that stimulate demand in the short run and have a positive impact on productivity. These include renewable energy technologies and the infrastructure to support them, the broader application of biotechnologies and expanding broadband connectivity, an area where the US has fallen behind.

All of these considerations suggest that the pendulum will swing – and should swing – towards an enhanced role for government in saving the market system from its excesses and inadequacies. Policymakers need to be attentive to potential government flaws as well. For example, they need to recognise that, even as events compel larger deficits in the short run, they reinforce the need for longer-term measures to keep government finances on a sound footing. They must also be wary of measures that have a short-term superficial appeal, yet have adverse long-term consequences.

Nepal at a loss of $256 million due to financial crisis

$256.16 million is the amount of loss the Nepali manufacturing sector will have to incur because of the global financial crisis (and ensuing economic slowdown). This estimate comes from the Confederation of Nepalese Industries (CNI). Though not a huge sum in terms of the scale of bail out package in the West, this means a lot to an economy with GDP amounting to US$ 42 billion. Also, this number accounts for just the manufacturing sector. The main sectors to be hit hard will be tourism sector, and possible hydropower—the two most prioritized sectors that could lead to stimulation of economic growth in the short and medium term. Moreover, melting purchasing power of customers in the West mean less demand for exportable products from Nepal. This loss will be much more higher and severe than the number CNI came up with. In Nepal, the effect will be seen in full scale in late 2009/early 2010 if the financial meltdown in the West reaches its nadir by this end of this year.

The industries that are hit hard now are iron, plastic, edible oil, metals an other manufacturing industries. It is also expected to affect tourism sector, FDI, housing and financial transactions and remittance inflow. This will pose a challenge in meeting the expected revenue for the current fiscal years, as was outlined by the Finance Minister in his budget speech.

The recent decision by the central bank to increase reserve ratio from 10 to 20% has worried investors because of potential tightening of credit market. Due to series of collapse of banks in recent months in the US and EU, the Nepali government increased reserve ratio by 10 percentage point to avert bank failures in Nepal. However, it seems that it comes with high opportunity cost of high cost of borrowing/finance for the private sector, the engine of growth for the economy.

A mockery of copyrights

Big Mac...actually, its Yac Donalds!


7-Eleven up in the mountains...

These pictures are interesting. They were taken in Mustang, a trekking site in Nepal very popular among domestic and foreign tourists. I sourced the pics from Manoj Gajurel's facebook album.He is a popular comedian in Nepal.

And, a real pic of Kagbeni, Mustang: