Poverty in Focus#16: All about creating jobs

Here is a new edition of Poverty in Focus#16: Jobs, Jobs, Jobs- The Policy Challenge. The IPC publishes excellent issues focusing on poverty. This issues is about creating jobs in the developing countries and the increasing role of informal economy in reducing poverty:

Eduardo Zepeda first summarises Mexico ’s recent experience, which includes periods of crisis, of rapid growth and of stagnation. These various episodes make for a good case study of employment with relevant policy lessons for all developing countries.

Marty Chen highlights the links between informality and poverty and presents a policy framework for addressing informality in ways that will help reduce poverty.

Denis Drechsler et al. find informality to be mainly due to insufficient job creation in the formal economy and to warped incentive structures, and discuss what policy makers should do about it.

Rafael Ribas and Ana Flavia Machado study employment and poverty dynamics in Brazil and find that the informal sector has helped people move out of poverty more than the formal sector.

Louise Fox and Melissa Sekkel examine the slow job creation in Africa and draw lessons for countries wanting to realise the aspirations of their growing, mostly urban, nonfarm labour forces.

Aziz Khan analyses the linkages between employment and the relevant MDGs and proposes policy interventions to promote job-intensive growth and public investment.

Terry McKinley advocates structural policies for poverty-reducing employment, as illustrated by an IPC Country Study of South Africa.

James Heintz considers an alternative approach to macroeconomic stability that is more cognizant of the performance of the real economy and includes a coherent employment policy.

Janine Berg and David Kucera revisit the issue of labour market institutions and employment, arguing that policy makers need to take on re-regulation as opposed to de-regulation.

Per Ronnås looks at labour migration and the case of Moldova , where poverty fell rapidly thanks to the dual impact of remittances and improved domestic job and income opportunities.

Erik Jonasson considers the role of rural non-farm jobs as a pathway out of poverty; investment in infrastructure and education stand out as the foremost policy measures.

Christoph Ernst highlights the importance of youth employment as developing countries struggle with the challenge of offering decent jobs for the large number of young men and women entering the labour market every year.

Joe Stiglitz on the financial crisis

Nice piece about the reasons of the financial mess, which is threatening the global economy into a recession, from Joseph Stigltiz. In short, it’s because of faulty ideology that rests on “self-regulation” of government!

A unique combination of ideology, special-interest pressure, populist politics, bad economics, and sheer incompetence has brought us to our present condition.

Ideology proclaimed that markets were always good and government always bad. While George W. Bush has done as much as he can to ensure that government lives up to that reputation—it is the one area where he has overperformed—the fact is that key problems facing our society cannot be addressed without an effective government, whether it’s maintaining national security or protecting the environment. Our economy rests on public investments in technology, such as the Internet. While Bush’s ideology led him to underestimate the importance of government, it also led him to underestimate the limitations of markets. We learned from the Depression that markets are not self-adjusting—at least, not in a time frame that matters to living people. Today everyone—even the president—accepts the need for macro-economic policy, for government to try to maintain the economy at near-full employment. But in a sleight of hand, free-market economists promoted the idea that, once the economy was restored to full employment, markets would always allocate resources efficiently. The best regulation, in their view, was no regulation at all, and if that didn’t sell, then “self-regulation” was almost as good.

OLPC and freedom

Here is a nice piece about how One Laptop Per Child (OLPC) has failed to live up to its expectations of providing free software. OLPC violates the following freedoms, according to the author:

Freedom 0: The freedom to run the program as you wish. Some proprietary software packages come with licenses that restrict even the use of authorized copies.

Freedom 1: The freedom to study the source code—the algebra-like statements that specify what the program does—and then change it to make the program do what you wish. For instance, you could add new features to suit your taste. Or, if the program has malicious features, as Windows and MacOS do, you could remove them.

Freedom 2: The freedom to redistribute exact copies when you wish. We call this the freedom to help your neighbor.

Freedom 3: The freedom to distribute copies of your modified versions when you wish. We call this the freedom to contribute to your community.

OLPC made a big news when it was initially announced. However, frequent news of shifts in software to increase in prices have been costly to its reputation. Also, there was no such enthusiastic response in terms of demand as it was targeted for a large scale, probably government buying tens of thousands of them. Someone needs to do an evaluation of the effectiveness of OLPC program on children’s education and other aspects. I don’t see that much of a connection between having a laptop and a child increasing his intelligence. Again, crude thought!

Does improved health necessarily raise economic growth?

Common belief is that improved health leads to increased prosperity, i.e. a healthy labor force and human resource are assets that contribute to economic growth. Sadly, this seems to be not the case according to two papers, which The Economist cites in its latest edition. The main reason: there is no clear causality between health and economic growth. Regardless of the income level of developing countries, the technological breakthroughs in medicine in the West was made possible there by the WHO, thus improving life expectancy. This has nothing to do with income level of individual countries. Moreover, improved life expectancy amidst stagnation in land and capital resources leads to low per capita, technically.

…the conclusions of two recent papers that improving life expectancy at birth (a common indicator of better health) can depress income per head for as long as two generations may come as a shock.

Beginning in the 1940s, several medical innovations involving penicillin, streptomycin and DDT made it easier to treat diseases—such as tuberculosis, malaria and yellow fever—that disproportionately affected people in developing countries. Because these ideas originated in the rich world and were spread by organisations such as the WHO, any improvements in health they led to would have been unconnected with prior improvements in the economic circumstances of poor countries.

This international revolution in public health did lead to substantial increases in life expectancy in poor countries by the 1950s. However, the researchers found that income per head actually declined when life expectancy went up and did not recover for up to an astonishing 60 years.

Researchers at Brown University reached a similar conclusion…increased population would more than wipe out any productivity benefits of better health. For the first 30 years after an increase in life expectancy from 40 to 60, income per person would be lower than it would have been if life expectancy had not improved. I think looking just at the life expectancy does not capture the whole link between health, poverty, and growth. There are some diseases like fever and cough and cold, which are so common in the developing countries, are not life threatening but helpful medication does improve enrollment rates and less absenteeism from work.

I think transfer of subsidized health services by the WHO from the West to the developing countries acts as a technological shock. The papers are reviving the famous Malthusian argument that increased life expectancy (population) will create shortage of resources and dampen prosperity later on because it assumes that land is fixed. However, given the increasingly globalized world and integration of economies (including labor mobility), technological transfer could offset this effect. The conclusion derived from the papers reminds me of Gregory Clark’s book A Farewell to Alms, where he used the Malthusian argument frequently.

Here is the paper by Acemoglu and Johnson: Disease and Development: The Effect of Life Expectancy on Economic Growth

Here is the paper by Ashraf, Lester, and Weil: When Does Improving Health Raise GDP?

So, what are the policy implications? Does the purpose of investing in healthcare be reconsidered?

Capitalism with Chinese Characteristics

Here is an interesting piece about the Chinese economic model. Professor Yasheng Huang challenges the Beijing Consensus (that incremental privatization in rural areas was the key to increased prosperity) and says that rural privatization has actually been rolled back in the past 15 years. TVEs led to helped reduce poverty by 154 million between 1978 and 1988 but after this rural privatization was rolled back by restricting loans to entrepreneurs willing to invest beyond agriculture sector and taxes were raised in the rural areas to fund urbanization. Interesting!

He argued that the reforms in the 1980s were very far reaching and substantial for private sector development, especially in rural areas led by township and village enterprises (TVEs). In the 1990s, however, those reforms slowed, and privatization was rolled-back.

From 1978 to 1988, poverty in rural China declined by 154 million people, while it only declined by 62 million people from 1989 to 1999. Huang argued that the key to the greater success in the 1980s were TVEs, which were a focus of the early reforms of the 1980s. Out of 12 million TVEs existing in 1985, fully 10 million were totally private. Along with an abundance of government loans that were easily accessible to small businesses, this strategy created rapid poverty alleviation.

In the 1990s a fundamental reversal was made in rural policy. First, there was a substantial increase in the qualifications enterprises needed for loans. Second, the government’s loan policy emphasized agricultural production instead of expanding rural entrepreneurship beyond agriculture. Farmers found it difficult to obtain money to start a non-agricultural business. Third, although most Chinese live in rural regions, a new focus was put on developing the urban regions. To pay for these urban reforms, the government heavily taxed rural citizens and reduced services in rural health and education. The result of these policy changes was a reversal that slowed down rural poverty alleviation and sharply increased the gap in urban-rural household income. 

Though Huang made a strong case for widely varying economic policies in China between the 1990s and 1980s, his explanation for the reversal, he admitted, is not based on an exhaustive review of the facts. Nevertheless, he suspects that the reason is technocratic. In the 1980s, the Chinese Communist Party (CCP) was led by individuals who grew up in rural regions, while the leadership of the 1990s came from urban areas. Furthermore, this may explain why today’s CCP leaders, like rural-born Hu Jintao, are refocusing on rural reforms.

Here is his book Capitalism with Chinese Characteristics: Entrepreneurship and the State reviewed by The Economist.

World Development Report 2009

The World Development Report 2009 is titled Reshaping Economic Geography.The gist of the report: growth is unbalanced but development can be inclusive…to promote long-term growth policies should be designed to facilitate concentration and economic integration, both within and across countries. Overview of the report here. Full text Part 1 and Part 2

The report warns that trying to fight markets just because it is unfavorable to certain sectors and groups is tantamount to fighting prosperity. Let markets do its function and governments facilitate geographic concentration of production. That being said, governments should institute policies that make provision of basic needs- of schools, security, streets, and sanitation- more universal, the report recommends.

Four main points:

• Economic activity concentrates as places prosper. (Take the fact that the effects of economic growth on concentration of industries and population is uneven. Examples: Tokyo is barely 4% of Japan’s total area but has 35 million people)
• Living standards converge with development. (Estimates from over 100 living standards surveys show that households in the most prosperous areas of developing countries like Ghana and Indonesia have an average consumption nearly 75 percent higher than that in their lagging areas. In wealthy countries, this difference is less than 25 percent.)
• Growth requires geographic transformations. (…what matters for economic growth is the ‘thickness’ of economic borders, which depends on the restrictions on the flow of goods, capital, people, and ideas. Borders between countries in Western Europe are now about one-fourth as thick as those in Western Africa.)
• Prosperity demands mobile people and products. (Korea went from more than 80 percent rural to more than 80 percent urban between 1950 and 1990, as its per capita income grew from present-day Benin’s to more than Portugal’s. The United States, the world’s largest economy, is also among the most mobile, with about 35 million people changing their place of residence every year. In China, more than 150 million people moved to coastal areas during the late 1990s.)

“Lagging and leading places can be brought closer economically by unleashing the market forces of agglomeration, migration and specialization, as we have seen in North America, Western Europe, and East Asia, where intra-industry trade has powered prosperity,” said Justin Lin, World Bank Chief Economist and Senior Vice President, Development Economics. “How well markets and governments work together to harness these forces will determine the wealth of cities, provinces, and nations.”

Trying to spread out economic activity can hinder growth and does little to fight poverty. For rapid, shared growth, governments must promote economic integration which, at its core, is about the mobility of people, products, and ideas.

“In a world where economic concentration is a fact of life, governments should improve land policies, provide basic services everywhere and invest efficiently in infrastructure,” said Katherine Sierra, Vice President, Sustainable Development. “As the WDR shows, incentives intended to attract industry to lagging areas should be used sparingly.”

The WDR reframes the policy debates to include all the instruments of integration—common institutions, connective infrastructure, and targeted interventions. By common institutions, the report means regulations affecting land, labor and commerce, and social services such as education and health financed through taxes and transfers. Infrastructure refers to roads, railways, ports, airports, and communications systems. Interventions include slum clearance programs, special tax incentives to firms, and preferential trade access for poor countries.

This report is related to Nobel laureate Paul Krugman’s work on New Economic Geography and the discussion about increasing returns and transportation costs. I had written an Op-ed about how policies can be designed so that governments can facilitate concentration and agglomeration in the Nepali economy, which has seen massive concentration of industries in few places while leaving other areas at bay. My main policy recommendation in the Op-ed was: invest in transportation and infrastructure and facilitate credits to companies willing to invest in new areas. This report kind of challenges this argument saying that trying to “spread out economic activity can hinder growth and does little to help poverty”. Well, without investing in transportation, domestic integration is not possible in countries like Nepal. And, if money is invested in transportation infrastructure, then lower per unit transportation costs will help spread the concentration of industries. It does not necessarily mean that this will thin out already existing concentration.

In short, the report says: promote concentration and let markets work but also engage in welfare programs so that those unaffected by markets are taken care of. Let growth be unbalanced, but effective policies will make development inclusive. Also, the report flatly states that the world is not flat (on page 8 of extended summary)…I wonder how Thomas Friedman would review this report.

More about the report here and here.

Paul Samuelson blasts libertarians

Paul Samuelson argues that there is no alternative to market system but this is not the same thing as unregulated capitalism. Based on his “rationality and experience” he prefers taking a dynamic moving center position, i.e. ideologically, he thinks Limited Centrist State should be the model for the economy. This piece is going to make the libertarians, who he says are emotional cripples and bad advice givers, very unhappy. He blasts Hayek’s “serfdom” concept, which Hayek uses to argue that increasing role of state will lead to serfdom. The book he is referring to is The Road to Serfdom (pretty good book to read).

Based on my observations of economic history, both short run and long run, I believe that there is no satisfactory alternative to market systems as a way of organizing both economically poor and economically rich populations.

However, using markets is not the same thing as unregulated capitalism so beloved by libertarians. Such systems cannot regulate themselves, either micro-economically or macro-economically. Wherever tried they systematically breed intolerable inequalities. And instead of such inequality being the necessary price to encourage dynamic progress via technological and managerial innovations, it instead breeds dysfunctional shortfalls in what economists call "total factor productivity."

…Libertarians are not just bad emotional cripples. They are also bad advice givers. I refer of course to the views of both Milton Friedman and Friedrich Hayek. The “serfdom” they warn against is not that of Genghis Khan or Lenin-Stalin-Mao or Hitler-Mussolini. Rather, they warn against the centrist states of the modern world. Think only of Switzerland, Britain, the US, the Scandinavian countries, and the Pacific Rim. Why do citizenries there report high indexes of “happiness” and enjoy broad freedoms of speech and belief?

…Yes, public policy should regulate (rationally regulate) corporate life and should work to stabilize the macro economy. Yes, future fiscal systems can in a limited degree reduce the more glaring evils of inequality. However, a centrist system can do measurable harm if it acts too strongly to reduce inequality. My goal is the Limited Centrist State.

I am not a centrist because I can’t make up my mind about the Right and the Left. It is because each of those has proved itself to be so non-optimal that rationality and experience move me toward the dynamic moving center.

Five Nobel prize winning economists write about the global economy here. More about Samuelson here and here. Thanks to Professor Farrant for the pointer.