Links of Interest (2/7/2009)

The impact of inflation targeting on employment

Nepal's connection to American banking

Global financial regulator? No, No!

Effective development writing

Fear and loathing in Davos

Votes and violence

Nepal plans to tap global coffee market

Worth watching video: Bill Gates's presentation at TED

Financial crisis and developing countries

The Globalisation Team at the Institute of Development Economics has a nice compilation of views and analysis on the fallout of global financial crisis on the developing countries. It has interesting perspectives from different countries.

They argue that the cause of the global financial crisis is not just restricted to the US subprime mortgage crisis. In fact, it was a result of the interaction between at least three factors: (i) excessive reserves in surplus countries and huge US fiscal and current account deficits, (ii) expansionary monetary policies in the OECD, and (iii) complex and flawed financial innovation in the developed countries.

Six ways the financial crisis will affect the developing countries:

lower demand for exports: In Bangladesh, orders for ready-made garments from Europe and the US dropped 7 per cent in September. In Kenya, the cut flower industry is suffering as European customers are hit by the crisis

fall in portfolio and direct foreign investment: Investors shy away from markets that are perceived to be riskier. The Ethiopian Electric Power Corporation has indicated that its investment plans will be severely affected due to the crisis

falls in exchange rate: The sudden withdrawal of foreign capital from several developing countries has caused dramatic falls in their exchange rate. Companies and governments with substantial foreign currency denominated debts may contract or even collapse as a result

rising risk premiums and interest rates for developing countries on global capital markets

decline in remittances from workers in recession affected countries

foreign aid decline: Richer countries will reduce aid as governments reassess their fiscal priorities during a downturn. This could have particularly negative consequences for Africa

 

It is a great compilation but the policy recommendations are kind of shallow! They propose increase in aid flows, enhancing social protection, and restructuring IFIs. It is incredibly difficult to do all of these at this time, especially when the major donor economies are in distress. I think rather than depending on foreign aid perennially, they should focus on streamlining governance and accountability, ease business restrictions and create a more investor-friendly climate so that domestic entrepreneurs become active in the economy. It does not make sense to prescribe policies that were/are the same  as before and during the financial crisis.

The dynamics has changed drastically and the developing countries should heed it and flow with it. Though aid is vital for the developing economies to sustain health care, development and education expenses, it should not be seen as an elixir to all the problems.

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).