Links of Interest (1/3/2009)

Easterly on The Poor Man’s Burden

Today, just when we were getting over the long, toxic legacy of the Depression and its misguided emphasis on statist plans to fight poverty, this financial crash threatens to take us back to the bad old days. To avoid such a return, we must keep some principles in mind.

First, we must not fall into the trap of protectionism—neither unilaterally nor multilaterally, neither in rich countries nor poor. Protectionism will just make the recession spread further and deeper, as it did during the Depression.

Second, when changing financial regulations to repair the excesses of the past several years, don’t strangle the financial system altogether. You can’t have a Revolution from Below without it. This lesson is especially salient as Washington bails out Wall Street banks and failing industries and intervenes in the U.S. financial sector to an unprecedented degree. This bailout might turn out to be the bitter medicine that saves “finance capitalism” from a stronger form of anticapitalism, but in developing countries, open economies are still an open question.

Third, keep slashing away at the enormous red tape that is left over from previous harebrained attempts at state direction of the economy. Learn from the combined dismal track record of state-owned enterprises but also from the unexpected success stories: Private entrepreneurs are far better than the government at picking industries that can be winners in the global economy. Although fierce opposition will be inevitable, to adopt these policies would be to turn the bad hand we’ve been dealt into an outright losing one.

Fourth, don’t look to economists to create “development strategies,” and don’t back up such experts with external coercion like IMF and World Bank conditions on loans. Such efforts will be either a waste of local politicians’ time or positively harmful. Jeffrey Sachs alone can take partial credit for the rise of two xenophobic rulers hostile to individual liberty—Evo Morales and Vladimir Putin—after his expert advice backfired in Bolivia and Russia. If like-minded experts couldn’t get it done in the 50 years after the Great Depression, they can’t do it in the next 50 years. Nothing in the current crash changes these common-sense principles.

Five economists who gave prophetic warnings about the global financial crisis

Nafta’s unhappy anniversary

Rainfall and the probability of conflict

Antonio Ciccone argues that a 5% income shock (say by drought) raises the likelihood of civil conflict by 15 percentage points.

To see whether impoverishment causes the onset of civil conflict, I take a detailed look at data on rainfall levels in years before the outbreak of civil conflicts in Sub-Saharan African countries between 1980 and 2006. It is well known that living standards in these countries tend to be below trend in drought years and above trend when rainfall levels are above average. If civil conflict is triggered by sudden impoverishment, civil conflict onset in Sub-Saharan Africa should therefore have been more likely following drought years.

…If civil conflict onset is partly driven by sudden impoverishment, conflict outbreak in Sub-Saharan Africa should be more likely following below-average rainfall years. I find this to be the case. This result, combined with the effect of rainfall on income, allows me to estimate the effect of sudden impoverishment on the probability of civil conflict onset. My estimates indicate that a negative 5% income shock raises the likelihood of civil conflict by 15 percentage points.

More here

This is consistent with Fisman and Miguel’s argument that in Africa an income drop of 5% increases the risk of civil conflict in the following year to nearly 30%.

However, Simeon Djankov and Marta Reynal-Querol disagree by arguing that poverty does not have an effect on civil wars.

In Nepal, during the Maoists rebellion (1996-2006), the GDP growth rate averaged 4.1% which is barely different from the average growth rate of one decade before. However, head count poverty rate declined by more than 11 percentage points. This means that conflict did not substantially affect GDP growth rate. This can be explained by the rise in remittances inflow, even during peak time of conflict. This means declining poverty did not affect the likelihood of conflict in Nepal during 1996-2006. The effect of remittances far outweighed the negative effect of conflict on poverty and growth (though growth rate did plunged to –0.1% in 2001).

The figure below shows the increase in remittances:

Financial crisis in one package

Global financial crisis 2008: All the discussions and links summarized here

Lobbying nomads in Nepal

The only “nomadic” tribesmen in Nepal, Rautes, are lobbying to keep their tradition and livelihood alive.

… The Raute tradition comprises of three salient features: they leave the forest looking for a fresh place to settle on immediately after someone in their tribe dies; they don’t cultivate land; and they hate education. The Rautes hunt monkeys for food. And, to get food grains, they fell trees to make wooden utensils that they then barter for grains in the villages near the forest where they live. They use wooden nails in their products and the tools they use to build the products are also very traditional.

… The Rautes, who are in Kathmandu, say they would like to live like that, but want state support as their livelihood is being threatened both by the popularity of plastic utensils, and by the hindrance posed by villagers with regards to their use of forest wood.

Financial loss and best soccer goals in 2008

From the NYT:

All told, about $7 trillion of shareholders’ wealth — the gains of the last six years — was wiped out in a year of violent market swings.

Billionaire blowups of 2008:

More than 300 of the 1,125 billionaires we tallied on our annual list last March have since lost at least $1 billion; several dozen lost more than $5 billion. The 10 richest from our 2008 rankings dropped some $150 billion of wealth, dragged down by steel tycoon Lakshmi Mittal, estranged brothers Mukesh and Anil Ambani and property baron K.P. Singh, who together dropped $100 billion. America's 25 biggest billionaire losers of 2008 lost a combined $167 billion.

This video is quite amazing!

 

Now, the best 2008 football goals:

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Nepali economy in 2009

My former colleague Prem Khanal writes:

The year 2008 ended further cementing historic changes in the political front but little enthusiasm the economy saw to turnaround deepening economic woes. Instead, topsy-turvy policy often contradicting with market-based economic principals, acute power shortage and shattered private sector’s confidence all have emerged as major headwinds that the Maoists-led government will be confronting to lay groundwork to achieve a ‘double-digit growth’ in 2009.

My main worries: gradual wiping off of the industrial base due to load-shedding, negative impact on the service sector, rising general price level (14% inflation rate is one of the highest in South Asia) and stalemate in hiring (low-skilled jobs abroad) by foreign companies. All could lead to social unrest!

Eight best economists of the next generation

The Economist magazine names the eight best economists of the next generation:

1. Esther Duflo, MIT
2. Jesse Shapiro, University of Chicago
3. Roland Fryer, Harvard University
4. Amy Finkelstein, MIT
5. Raj Chetty, Harvard University
6. Ivan Werning, MIT
7. Xavier Gabaix, New York University
8. Marc Melitz, Princeton University

Clearly, Esther Duflo is the star in the list!

Esther Duflo of the Massachusetts Institute of Technology (MIT) received more recommendations than any other economist. Some who didn’t nominate her thought she was too established to count as “new”.

With her colleague, Abhijit Banerjee, Ms Duflo and Mr Kremer have remade development economics, nudging it away from its concern with policies, towards a preoccupation with projects. They study economic development as seen from the field, clinic or school, rather than the finance ministry. They might be called the “peace corps” of economists, bringing the blessing of their investigative technique to the neglected villages of India or the denuded farms of western Kenya.

Ms Duflo has made her name carrying out randomised trials of development projects, such as fertiliser subsidies and school recruitment. In these trials, people are randomly assigned to a “treatment” group, which benefits from the project, and a “control” group, which does not. By comparing the average outcome of each group, she can establish whether the project worked and precisely how well.

More about Duflo here. She answered my question here in September.