Martin Ravallion is unhappy with HDI -- Part II

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The changes introduced in the new HDI have reduced its (seemingly low) valuations of longevity in poor countries even further. The Human Development Report’s implicit valuation on an extra year of life expectancy is now over 17,000 times higher in the richest country than in the poorest – a far greater difference than in their average income (which is 460 times higher in the richest country than the poorest). A poor country experiencing falling life expectancy due to (say) a collapse in its healthcare system could still see its HDI improve with even a small rate of economic growth.

A rich person will be able to afford to spend more to live longer than a poor person, and will typically do so. But how much should one build such inequalities into our assessment of a country’s progress in “human development”? That is a difficult question, which has certainly not been resolved here. However, given that the last 20 Human Development Reports have clearly intended to support a high value in development policymaking on attainments in health, it is puzzling that the 2010 Report has chosen a trade-off that puts such seemingly low value on the gains from longevity in poor countries. Possibly the construction of the HDI did not adequately consider what trade-offs were acceptable. Good intentions alone do not make for good measurement.

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More by Martin Ravallion here. Here is a back-and-forth charges between Ravallion and Sabina Alkire about the new Multidimensional Poverty Index (MPI). Ravallion argues that the troubling tradeoffs could have been largely avoided using a different aggregation function for the HDI, while still allowing imperfect substitution.

Climate change economist vs. climate change scientist

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Me: I work on climate change economics in DFID.

Stranger in lift: Climate change. Not sure I’m convinced of the science.

Me: I’m not a climate change scientist. I work on the economics of climate change - how much it costs to take action or not take action.

Stranger in lift: Oh… (looking confused)

Me: But not in an abstract way – though I do commission some research, yes – but mostly I advise developing countries on what to do about climate change.

Stranger in lift: So you tell developing countries what to do? Surely that’s not morally right? They didn’t cause the problem.

Me: Well, many governments actually seek DFID’s advice and funding to help with issues like this (stranger smiles politely and breathes a sigh of relief as the doors open to let us out) and taking action might be in their interest anyway (I trail off)…nice to meet you anyway, bye…

Hmm. Perhaps not the simplest of explanations.

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More by Hannah Ryder, senior economist at DFID, here.

Did Global Imbalances Cause the Global Financial Crisis?

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Global imbalances -- the coexistence of large deficits and surpluses in the global economy, such as too much spending by U.S. consumers and too little by Chinese consumers -- were not a major cause of the global crisis, according to a new working paper by Luis Serven and Ha Nguyen. In fact, how international capital flowed before and during the crisis suggests global imbalances are the result of structural distortions in global financial markets and major individual economies, which have led to a steady rise in demand for U.S. assets from the rest of the world. Without changes in those structural and policy choices, global imbalances could persist. This contradicts the conventional view that global imbalances are caused by unsustainable, high demand for goods in the U.S. and other rich countries and that a correction must involve major U.S. trade adjustment and depreciation of the dollar. The paper also evaluates the future of global imbalances, especially their impact on developing countries.

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Full paper here . The paper argues that global imbalances were not among the main causes of the financial crisis.

US$ 100 Trillion Additional Credit Needed to Support Global Growth

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Credit levels will need to double over the next 10 years, growing by US$ 103 trillion, to support consensus-projected economic growth. This doubling of credit could be achieved without increasing the risk of major crisis, finds More Credit with Fewer Crises: Responsibly Meeting the World’s Growing Demand for Credit, a report released by the World Economic Forum in collaboration with McKinsey & Company.

Asia will face the challenge of meeting the high credit demand growth of US$ 40 trillion with less developed financial systems and capital markets. In the European Union, a further US$ 13 trillion of credit in the form of bank lending will be needed. To supply this, banks will require additional capital that, after retained earnings, could lead to a capital shortfall of US$ 2 trillion. Analysis shows that the US would continue to need to draw on global savings, potentially by up to US$ 3.8 trillion in 2020, in order to fund its credit needs, unless there is a marked increase in US domestic savings rates.

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More here

Nepal’s BoT with India, the US, Germany & Japan

Nepal's trade deficit with major trading partners (US$ million)
Year	Balance of Trade (BoT)	India		United States		Germany		Japan
		Total	% of BoT	Total	% of BoT	Total	% of BoT	Total	% of BoT
1990	-375	-44	12	36	-9	54	-14	-108	29
1991	-243	-68	28	54	-22	103	-43	-106	44
1992	-124	-59	48	75	-61	131	-105	-63	51
1993	-175	-66	38	94	-54	166	-95	-71	41
1994	-283	-80	28	109	-39	132	-47	-70	25
1995	-444	-93	21	88	-20	107	-24	-65	15
1996	-988	-375	38	89	-9	78	-8	-81	8
1997	-1244	-344	28	89	-7	114	-9	-68	5
1998	-990	-294	30	93	-9	86	-9	-42	4
1999	-624	3	-1	151	-24	75	-12	-24	4
2000	-850	-267	31	173	-20	87	-10	-32	4
2001	-813	-260	32	185	-23	61	-7	-27	3
2002	-785	-210	27	89	-11	31	-4	-22	3
2003	-954	-572	60	141	-15	16	-2	-18	2
2004	-1113	-650	58	112	-10	22	-2	-16	1
2005	-1257	-691	55	81	-6	22	-2	-28	2
2006	-1568	-919	59	74	-5	1	0	-19	1
2007	-1967	-1000	51	57	-3	-3	0	-41	2
2008	-2206	-1222	55	52	-2	7	0	-46	2
2009	-2121	-1079	51	21	-1	6	0	-40	2

Note: Numbers are rounded to the nearest whole number; For % of balance of trade (BoT), negative value means trade surplus as a percent of total trade balance, and vice versa. Source: Key Indicators for Asia and the Pacific 2010 (xls).

Total trade deficit as of 2009 was US$ 1079 million (US$ 1.079 billion). Trade deficit with India accounted for 51 percent of the total trade deficit; with the US 1 percent surplus of total trade deficit; and with Japan two percent of total trade deficit. Surprisingly, there was trade surplus of around US$ 3 million with India in 1999. With the US, there generally is trade surplus, which is decreasing continuously since 2003. The high trade deficit with India is partly because of a result of high petroleum and fuel imports. These figures slightly vary depending on which database (WB’s WDI, IMF’s DOTS, ADB’s Key indicators, and the GoN’s data) you use. But, the trend is pretty much the same. It looks like trade deficit is a permanent feature of Nepal’s performance in external trade.

In 2009, after two successive years of negative growth, exports increased by 13.5 percent. Meanwhile, imports have been increasing at a rapid pace, reaching 28.2 percent in 2009. Over the period 2005-2009, average exports, on an annual basis, increased by 4.7 percent, but imports surged by 16 percent. Total exports and total imports in 2009 amounted to US$ 698 million and US$ 2820 million, which means that total exports represented 25 percent of total imports.

India is by far the most important export and import destination, accounting for 60 percent of total exports and 53 percent of total imports. Trade deficit with India was around US$ 1079 million with the world (excluding India) was US$ 1042 million.

The other significant export destinations are the US, Germany, Bangladesh, the UK, France, Canada, Italy, Japan, and Turkey. Meanwhile, the other significant imports destinations are China, Singapore, Thailand, Japan, Saudi Arabia, Indonesia, Germany, Australia, and the US.

Costs of international trade in services

Fig: World aggregate trade costs indices for goods and services, 1995-2007 (1995=100).

Trade costs in construction services have increased markedly over the last decade, by nearly 20%. Construction is also the most insulated sector, with ad valorem equivalent trade costs of around 200%. Trade costs in transport services have remained approximately constant over the last decade. By contrast, trade costs in financial and computer services have fallen by more than 10%. This finding is perfectly consistent with the rise of outsourcing in those sectors over roughly the same time period: as trade costs fall, probably due to improved information and communications technologies, it becomes feasible for firms to have more of these kinds of tasks performed overseas. Sectors such as transport and construction, on the other hand, are largely immune to such developments because of the need for physical proximity between producer and consumer.

More here. Miroudot, Sauvage and Shepherd (2010) find that trade costs in services are much higher than in goods, perhaps a multiple of two or even three times. This makes a strong case for more liberalization in services trade. However, Hoekman and Matto argue that explicitly recognizing that services liberalization cannot – and should not be – divorced from services regulation will do much to help harness the potential that trade agreements have to expand services trade and investment.

Nepali middle class and their expenditure

Middle Class and Expenditure in Nepal
HH Survey 2004/05 (means, 2005 PPP$) – per day	% of population	Total population (million)	Annual expenditure (billion)
$2-$4	16.74	4.45	4.32
$4-$10	5.3	1.41	2.91
$10-$20	0.85	0.23	1.09
Total	22.89	6.09	8.32
$20 plus	0.38	0.1	2.4
Middle class is defined as those earning between $2 and $20 (2005 PPP$)
Source: ADB 2010, p.46

The latest ADB’s report (Key Indicators for Asia and the Pacific 2010) states that total annual expenditure of middle class (defined as having income between $2 and $20 per day at 2005 PPP$-- whose number is 6.09 million) is around US$8.32 billion. This is approximately 27 percent of total value of goods and services produced in the country (i.e. gross domestic product -- GDP). In Nepal, total consumption level is above 90% of GDP. Private consumption is close to 80% of GDP. The data are derived from household survey done in 2004/05. The figures should have increased substantially as remittances has increased drastically since five years back. I wonder how someone earning $2 a day falls under middle class. These people are hardly above the global poverty line. The authors of the report might have taken the lower bound of middle class projections/definitions in literature. But, this does not give the true economic strength and potential of the middle class. Anyway, the above figures give an indication of a rough estimate of the market strength of Nepali middle class.