Development and Protectionism

There has been quite a buzz about global financial crisis and protectionism. Some economists and analysts fear that recent event could lead to more red tapes in international trade and globalization. This has also ignited debate on industrial policy and if this is good or bad.

Easterly termed Rodrik as “the intellectual protector of protectionist” for consistently doubting the promised benefits of trade (assault on the Washington Consensus) and favoring some form of state intervention to solve co-ordination externalities and promote ‘self-discovery’.

Green pours in thoughts (in favor of Rodrik):

‘As economies developed and became more complex, and industries achieved international competitiveness, the costs and benefits of state intervention in both agriculture and industry shifted, and governments started to reduce their role and open up the economy. Exactly the same sequence had previously been adopted by rich countries at an earlier stage of development. Deregulation and liberalisation are thus better seen as the outcomes of successful development, rather than as initial conditions.'

In other words, it is not double standards, but history that leads to the argument that protectionism makes more sense in developing countries than in rich ones. This was the historical basis for the growing emphasis by developing countries on the need to retain ‘policy space’ in trade and investment agreements.

Sequencing of reforms is extermely important and the same set of reforms successful in one country might not be effective in another. Also, how can one forget the role played by MITI during Japan’s take off. State intervention aimed at taking care of coordination failures and information externalities does work in the process of development. This is not about whether state intervention is good or bad- it is about if it works in some countries, especially the developing ones. The application of the same set of policies (under the Washington Consensus) in Sub-Saharan Africa have left them in a bad shape than they were before!

This reminds me these paragraphs from Stiglitz’s book Frontiers of Development Economics:

Market-enhancing can take many forms- from indirect rule-making that affects incentives, to direct government interventions that structure markets...The general principle is that government action can facilitate private sector coordination and provide the necessary incentives to the private sector by creating “contingent rents”- returns in excess of the competitive market, provided certain conditions are fulfilled (as for patents or export subsidies based on targets) (pp34-35).

The sequencing of reforms- that is, whether regulatory politics precede or follow privatization-matters. In one sequence, the result may be a competitive or regulated industry, where the benefits of privatization in terms of lower consumer prices are realized. In the other sequence, one may end up with an unregulated monopoly, which, to be sure, may be more efficient than it was as a public sector producer but which may be more efficient not only in producing goods but also in exploiting consumers(pp419).

Here is Rodrik on industrial policy:

Industrial policy an be viewed as a “coordination device” to stimulate socially profitable investments, In particular, the socialization of investment risk through implicit bailout guarantees my be economically beneficial despite the obvious moral hazard risk it poses (pp27).

…a credible, sustained real exchange rate depreciation may constitute the most effective industrial policy there is (pp48).

Strategies that emphasize industrial policy are appropriate when private returns are depressed not by the government’s errors of commission (what it does), but its errors of omission (what it fails to do) (pp84)… Industrial policy will work when private returns are low because of informational and coordination failures (pp95).

Climate change and scientific paper from developing countries

Here is an interesting article:

To investigate the impact of temperature on innovation the team assessed the number and quality of scientific papers published from 1980–2003.

Poor countries produced fewer scientific papers in hot years — a rise of one degree Celsius was associated with a nine per cent drop in the number of papers published.

This suggests that higher temperatures impede innovation and that over time this could widen the gap between rich and poor countries.

The study also found that a temperature rise of one degree Celsius correlated with a 1.1 per cent decrease in economic growth in the same year.

Full article here.

Open Budget Index 2008

The Open Budget Initiative published Open Budget Index 2008, which evaluates the quantity and type of information available to the public in a country’s budget documents. According to the report France, New Zealand, South Africa, the UK, and the US provide extensive information about annual budget to the public. The average score for 85 countries surveyed is 39 (out of 100= extensive information). Countries like China, Cambodia, DRC, Nicaragua, Sudan, Saudi Arabia, and Nigeria have poor index value, which shows that they provide scant or no budget information to the public. This alone shows how accountable are these governments their people! The report notes that in Nepal, Kenya, Sri Lanka, and Croatia the process became much transparent due to pressure from the civil society. The role of civil society in this process is very important, especially in the developing countries.

Key findings:

• 80 Percent of Governments Don’t Account for Spending

• The worst performers tend to be low-income countries and often depend heavily on revenues from foreign aid or oil and gas exports.
• Many poor performers have weak democratic institutions or are governed by autocratic regimes.
• Almost all countries publish the annual budget after it is approved by the legislature.  However, in China, Equatorial Guinea, Saudi Arabia, and Sudan, the approved budget is not published, completely preventing the public from monitoring its implementation.
• Most countries provide much less information during the drafting, execution, and auditing stages of the budget process.  This prevents the public from having input on overarching policies and priorities, improving value for money and curbing corruption.
• In many countries the supreme audit institutions do not have sufficient independence or funding to fulfill their mandate, and often there are no mechanisms in place to track whether the executive follows up on audit recommendations.
• In Croatia, Kenya, Nepal, and Sri Lanka, significant improvements either were influenced by the activities of civil society groups or have created opportunities for greater civil society interventions. Important improvements in budget transparency were also documented in Bulgaria, Egypt, Georgia, and Papua New Guinea.

Computer and Competition: From $100 laptop to $10 laptop

First, Nicholas Negroponte started the OLPC program that made headlines around the globe. It was initially projected to cost around $100 but costs now shoot up to $200. Then, Intel came up with its own low-cost computer “Classmate” seeing a large untapped market in the developing countries. Then came other low cost laptops in the range of $200-400. Competition is brewing up pretty fast. ‘Self-discovery’ (information externality) is in action!

Now, Indian investors and the government are all geared up to introduce a laptop for $10 for education purposes. The government is subsiding $10 on each laptop. If this project kicks in real good in the beginning, then the OLPC project, which is already facing stiff competition and deficient demand, might be…

The $10 laptop will be equipped with 2 GB of memory, WiFi, fixed Ethernet, expandable memory, and consume just 2 watts of power.

The unveiling of the laptop will occur at the government's launch of the National Mission on Education through Information and Technology, held next Tuesday in Tirupati. The Indian government is working with publishers to provide e-content on educational subjects which will be available free of cost. The government is also considering a plan to subsidize internet connections for schools.

Currently, the government is consulting with different production agencies, and hopes to make the computers commercially available in the next six months.

Fyi, here is one-egg-per-child (OEPC) in Uganda!

Update: Oops! This seems to cost $100, not $10:

Early reports of the cheap laptop suggested that it would cost only 500 rupees (£7). However, this could be a mistranslation, because transcripts of the speech, in which it was unveiled, mentioned it costing $10 (£7) but this was later corrected to $100 (£70).

Even if the finished device costs $100, it will significantly undercut other low cost laptops aimed at the developing world, such as the One Laptop Per Child's XO machine and the Intel Classmate.

Originally, the XO was intended to cost $100 but the finished version ended up costing about $188 (£131).

Evolution of exports and output in Nepal

Fig: Log of GDP per capita 2006 (constant 2000 US$) vs. log of exports per capita (current US$), Nepal

I was looking into the evolution of exports and output in Nepal and was trying to figure to how much drag does exports have on GDP. It seems that beginning 1991, increase in exports has definitely dragged GDP per capita in its direction. This stopped between 1995-1996, continued between 1998-2001, stopped between 2001-2003, and then…. Since 2001 even though exports per capita has declined, GDP per capita is increasing. Before 1991, exports did not have too strong effect on GDP. This shows that fluctuations in exports in Nepal does not substantially affect GDP per capita.

Does it mean that Nepal has no future in the exports sector? Well, it is difficult to grow at a rate of more than 5% just on the back of agricultural sector. Nepal has to find a way out to make a transition to export-based economy and home grown demand that is hinged on industrial production. This is the only way out to attain double-digit growth rate and some periods of growth acceleration.

This pushes one to think: so why is the export sector and the domestic demand for industrial output not increasing? Well, the main strongest constraints lie in poor infrastructure and increasing microeconomic risks (corruption, taxes, instability, property rights). More on these constraints on later posts.

Financial crisis and the developing countries

Great debate about developing countries, global financial system, and financial crisis on VoxEU website ahead of G20 meeting.

Rodrik writes:

There is just possibly a silver lining for developing nations in the present crisis, and it is that they may well emerge collectively with a much bigger say in the institutions that govern economic globalisation. Once the dust settles, China, India, Brazil, South Korea, and a handful of other “emerging” nations will be able to exercise greater influence in the way that multilateral economic institutions are run. And they will be in a better position to push for reforms that reflect their interests.

In trade, the present round of global trade negotiations has already demonstrated that if rich nations want developing nations to play ball, they will need to let them shape the rules of the game.

He also talks about Tobin tax on global foreign currency transactions so that revenue generated from this source could be used in the promotion of global public goods (development assistance, vaccines for tropical diseases, and in green technologies). Great idea! But, wouldn’t it reduce G8’s and IFI’s clout on the developing world? Is it politically feasible?

The idea about giving ‘policy space’ to developing countries in WTO agreements is essential if Doha Round is to pass in the coming days. It was precisely because of this shortcoming that the last WTO negotiation failed after India and other developing countries demanded SSMs facility amidst global food crisis.

I think donors and IFIs should also focus on harmonizing foreign aid allocation and assistance to developing countries so that competing donor interests do not collide and doubling of projects is avoided.

Here is Subramanina on ‘policy space’ for developing countries:

Dani’s view is that these openness levels can be maintained by a bargain around “policy space.” Developing countries would then use this space to figure out the best development policies. In return, industrial countries would be allowed to use this space to push for some kind of global harmonization of tax and regulatory policies that would help buy off middle class anxieties about globalization that might otherwise lead to outright protectionism.

Nancy Birdsall’s take on the issue:

Dani’s agenda – a global trade regime allowing for “policy space”, a climate change agreement that is just as well as enforceable, credible deployment of the proceeds of a Tobin tax, an IMF with the resources to respond to crises – none of these has any legs if the developing countries have minimal influence at the international financial institutions. And one thing is clear to me: Those institutions will not only enjoy fundamental governance reforms until and unless the developing countries collectively assert themselves to get it done.

Duncan Green adds more:

Policy space is a two-way street. [President Obama's] chief economic advisor Larry Summers has also been vocal of late on globalisation’s adverse impact on workers. It will not do much for good for developing countries to raise the spectre of protectionism each time such concerns are voiced. They should say no to trade protectionism straight and simple. But they should be willing to negotiate with advanced nations on avoiding regulatory races to the bottom in such areas as labour standards or tax competition.’

Food crisis revisited!

LeMelle and Stulman on Africa Policy Outlook 2009:

The World Trade Organization's Doha Round mistakenly attempted to fix global food challenges by liberalizing agricultural markets. Poorer producers have been left without government support and developing countries have grown increasingly dependent on imported food. Even given the enormity of the financial crisis, the U.S. government continues to perpetuate failed solutions for Africa. More must be done to protect the poor. Fair, not free trade must be adapted immediately as a part of creating a new global economic system.

The food crisis is largely overshadowed by the financial crisis and ensuing global recession. At times, development policy becomes one dimensional!

Meanwhile, the Kerala model (state-sponsored land reform, education, infrastructure, and social services initiatives), which is largely insulated from the current financial crisis.

The southern state of Kerala boasts nearly universal literacy — 91% as opposed to the Indian national average of 65%. It's also one of the fastest growing states in India, second only to the tourism-rich state of Goa…In addition to its tremendous literacy rate, Kerala boasts one of the nation's finest healthcare systems, even for those who can't afford to pay user fees and therefore depend on government hospitals. Kerala's infant mortality rate is about 16 deaths per 1,000 births, or half the national average of 32 deaths per 1,000 births.

Aside from the social development indicators, Kerala's growth rate is nothing to sneeze at. In the last few years it averaged between 6-10%, not only keeping pace with the national average but at times ranking among the fastest growing states in the country. The sectors that are doing well are largely those that are thriving across India — IT, services, and tourism — but agricultural production and small-scale manufacturing are also succeeding.

• the state had a matrilineal and even a matriarchal society, with a line of forward-looking queens that still ruled much of Kerala in the early days of the British Empire…A single party, the Communist Party of India (Marxist) or CPI(M), has ruled Kerala for much of the past 50 years. The CPI(M) successfully pushed for three major reforms in the 1960s and 1970s. The first and most important was land reform.
• the CPI(M) deliberately and methodically invested in education, setting goals so popular with the electorate that even when the Communists lost power, new governments did not dare modify education policies.
• Kerala invested heavily in government-financed healthcare. The state now boasts 160 patient beds per 100,000 people, the highest rate in the country.

…With the end of this ideology, Kerala represents a real alternative. Investing in people — whether through breaking the oligarchy of big landlords (or perhaps investment bankers) or providing social services including universal education — will ultimately lead to the development of a meaningful middle class.