Can Africa meet the MDGs target by 2015?

In 2001, all 192 United Nations member states agreed to a set of eight international development goals to be achieved by 2015. With only five years to go before the deadline, only a third of those targets have been reached. Most countries are not expected to meet the Millennium Development Goals (MDGs) target in time. What is going on with MDGs and why Africa is lagging behind? Can Africa really meet the MDG targets by 2015?

 

There questions were discussed at an event in Carnegie Endowment last week, Jan Vandemoortele, a former UN staff member and co-architect of the MDGs, highlighted the progress made so far at the global level. Shanta Devarajan, chief economist of the World Bank’s Africa Region, focused on the progress so far in Africa toward achieving the MDGs. Selim Jahan, director of Poverty Division at UNDP, discussed the successful policy interventions that could assist countries in achieving the MDGs target by 2015. Carnegie’s Eduardo Zepeda moderated the event.

Regional vs Global Progress

The Millennium Development Goals are, by their nature, collective goals applied in a broad global canvas. The targets themselves are set by extrapolating global trends through 1990. The panelists agreed that applying the targets to individual regions can be problematic:

• Since the MDG targets for 2015 are extrapolated from global trends, it is incorrect to look at a single region, such as Africa, and say that they are off-track for the 2015 targets, argued Vandemoortele. MDGs are collective global targets. They are not targets for Africa only. It is the international community missing the point, insisted Vandermoortele.
• The MDG targets set a bar particularly difficult to achieve for African nations, which started the twenty-first century at very low development levels, Vandermoortele reminded the panel.
• Jahan agreed that vast disparities in the regional and national levels require a consideration of the MDG targets that goes beyond global averages. With only five years remaining to meet the MDG targets, he suggested that an analysis of proven interventions that could be scaled up and replicated in the regions that are lagging could help accelerate progress.

From a global perspective, the world is on track to achieve the income poverty targets, mainly due to massive poverty reduction in China. However, Devarajan pointed out, global progress does not mean that Africa is equally on track to achieve the targets.

 

The Pattern of Progress

Panelists discussed some of the factors contributing to slow progress toward the MDG targets in Africa, including inequality, structural constraints, and unemployment:

• Increasing economic inequality in African nations has meant that when progress toward the MDG targets has yielded tangible benefits, those benefits have bypassed the poorest citizens who need them the most. Vandermoortele pointed out that there is evidence that in a more economically equal society, fewer people live in poverty and there are fewer health and social problems. An increase in social inequality will thus impede progress toward achieving the MDGs.
• To sustain the progress made so far, it is necessary to address the social, political, and economic constraints that are hindering sustained economic growth, increase in trade, and improvement in human development, said Jahan. He suggested the implementation of a comprehensive, integrated reform package to deal with all facets of the existing constraints. He also suggested using models from other successful southern hemisphere development initiatives to help African nations move forward on the MDGs. 
• Jahan argued that employment creation could be the missing link between economic growth and poverty reduction. “For a long time, we depended on growth-led employment generation, which basically turned out to be jobless growth. Can we have employment-led growth?” he wondered.

Africa and the Global Economic Crisis

 

The global economic crisis has slowed down and perhaps even reversed the progress made towards the MDGs. “Fortunately, the timely and appropriate responses of African policymakers have helped dampen the impact and set the stage for the continent to benefit from a global recovery,” argued Devarajan. He contended that Africa’s rapid growth since 1995, improvements in service delivery, and better policies have changed the MDG outlook for Africa.  Africa can meet the MDGs, “if not by 2015 then soon thereafter,” he concluded.

Aid Effectiveness and International Financial Institutions

Panelists discussed the effectiveness of international aid and international financial institutions in making significant and long-lasting progress toward achieving the MDG targets.

• Jahan argued that a multi-pronged strategy and multi-actor involvement is necessary to enable international development aid to contribute to progress on the MDGs. He suggested that international financial institutions have three crucial roles they can play:
  1. They can play a positive role in international development by speeding up the process of meeting development goals. 
  2. They can bring outside knowledge and expertise to developing countries; 
  3. They can effectively deal with global constraints related to a country’s growth such as international trade, innovation, and acquisition and use of new technology.
• Vandermoortele stated that sustainability depends on achieving a deep transformation at the local level. International donors and financial institutions cannot create local change, and there is a risk that international involvement will keep the MDGs from the grassroots effect they are intended to have.

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[Btw, the event was organized by TED program and, yours truly, noted the main points!]

Export Promotion Agencies (EPA): It worked but small is beautiful!

Export promotion agencies have done a fantastic work to solve coordination failures and asymmetric information problems associated with exports of heterogeneous goods. Though these agencies have been successful in boosting exports, the smaller they are in size, the better it is because of “strong” diminishing returns, says Lederman and Olarreaga in a new policy research working paper #5125. [Also, check this blog post about the positive relationship between sufficiently diversified trade and low growth volatility.]

The objectives of EPAs are to help exporters understand and find markets for their products. They engage in (a) country image building (advertising, promotional events, advocacy); (b) export support services (exporter training, technical assistance, capacity building including regulatory compliance, information on trade finance, logistics, customs, packaging, pricing); (c) marketing (trade fairs, exporter and importer missions, follow-up services offered by representatives abroad; and (d) market research and publications (general sector, and firm level information, such as market survey, on-line information on export markets, publications encouraging firms to export, importer and exporter contact databases). EPAs are required because there are market failures (coordination externalities and information externalities).

The first EPA was created in 1991 in Finland to boost exports and reduce trade deficits. Many EPAs were established after that but they became controversial in the developing countries. The were criticized for “lacking of strong leadership, being inadequately funded, hiring staff which was bureaucratic and not client oriented, and suffering from government intervention.” Many development agencies withdrew support for EPAs because they were promoting import substituting trade regimes. After 1991, EPAs resurged partly because of more involvement of private sector, larger funding, and a stronger organization and leadership. What is the impact of EPAs  and are they effective in increasing exports?

Lederman and Olarreaga argue that on average EPAs have a positive and statistically significant effect on national exports. They seems to be effective when they are most needed, namely, when exporters face onerous trade barriers abroad, and when a large share of the export bundle is composed of heterogeneous goods. However, there are decreasing returns to scale in resources devoted to export promotion. So, they recommend that small EPAs are “beautiful” and effective.

The elasticity of export promotion agencies at work with respect to increase in exports is 12 percent. This means that “a point estimate of 0.12 suggests there are strong diminishing returns to scale.” Also, they find that GDP per capita has a positive and statistically significant sign in all specifications (this means richer countries, with stronger and better institutions export more). Furthermore, the restrictiveness faced by exporters, exchange rate volatility and geography component of trade negatively affects exports. Interestingly, the number of years since the EPA was created may be negatively correlated with exports at the time of EPA’s creation.

They find that a 10 percent increase in EPA budgets at the mean leads to a 0.6 to 1.0 percent increase in exports, after correcting for selection and endogeneity biases. Also, EPAs that have larger private sector representation in the board and larger public sector funding for operation are associated with higher national exports. This means that full privatization of EPAs may not be ideal. This could be a part of selective industrial policy.

Romance and Innovation!

Source: Africa Can...End Poverty

Sufficiently Diversified Trade Lowers Growth Volatility

If exports of a country are sufficiently diversified, then there is less volatility even when there is increased openness, argue Haddad, Lim and Saborowski. Before opening to trade it is usually not clear if greater openness would have a positive or a negative impact on growth, i.e. the growth volatility. However, they argue that the composition of the export basket matters in determining if growth volatility is positive or negative.

In particular, the vulnerability of countries to (some types of) external shocks should be reduced when these countries are better diversified in their exports. More specifically, the effect of trade openness on growth volatility – whether negative or positive on average – is likely to be exacerbated when the country in question exports either a relatively small set of products, or sells its goods to a small number of destination markets. The argument is that a higher degree of concentration in exports would imply that any idiosyncratic price shock experienced is more likely to have a substantial impact on the country's terms of trade, and this would then induce greater fluctuations in a country's growth process. Furthermore, a higher degree of diversification would likely imply that a country is involved in a larger number of both implicit and explicit international insurance schemes, which would similarly serve as a cushion against such fluctuations.

Fig: The level of export diversification determines the total effect of openness on growth volatility.

The plot is based on the share of the 5 most important products in total exports as a diversification measure. We can see that the impact of trade openness on volatility is significantly lower than zero, with 90% confidence, as long as a country scores lower than about 0.24 on the diversification variable. The effect gradually increases and changes sign (threshold) at about 0.48. In contrast, above a value of about 0.71, the impact of trade openness on growth volatility is significantly positive.

As expected, all high income economies, with the exception of Norway and Ireland, have attained levels of diversification that lie substantially below the threshold value we identified, implying that they are likely to enjoy the benefits of trade openness while being well shielded against global shocks via the participation in a large number of global value chains. Yet, we also see that the vast majority of countries above the diversification threshold are low income countries, although a large number of low income economies also fall below the threshold. Whereas countries such as Nigeria and Botswana are troubled by extremely high export concentration, China and Nicaragua have reached levels of diversification that fall clearly below the threshold.

The authors argue that diversification is indeed possible in developing countries. In fact, with appropriate policies, the developing countries can expedite diversification process.

This means that export-led growth that is founded on diversified export basket will work. Industrial policy works. And, what countries export matters.

More specifically, policymakers can encourage entrepreneurial export activity by instituting a broad- based system of tax relief and subsidies that support the discovery process, complemented by a liberal trading regime that combines export incentives while relaxing restrictions on the import of intermediates. One way to do this is to facilitate the costly search process for exporters by alleviating information externalities (export promotion agencies) or setting tax incentives for firms to engage in the costly trial and error process of exporting.

Not only should export incentive schemes aim at promoting exports of new products, policymakers should also encourage production diversification as such. This would entail setting incentives supporting the discovery of profitable choices of products, perhaps via tax incentives, subsidised public R&D, or laws and regulations that provide greater access to high risk insurance.

Remittances in Nepal after (during) the global economic crisis

This one comes from the IMF 2010 Article IV consultation in Nepal conducted last month. Here is a more comprehensive assessment done by the World Bank analysts.

Things to note:

• Share of remittances to GDP has increased substantially since 2000
• Number of outflow of workers is in line with increasing remittances inflow
• Volatility in remittances is higher than in exports and aid but lower than in FDI
• Remittances are driven by domestic GDP, host GDP and the stock of workers
• As expected due to global financial and economic crises, the outflow of workers has declined.
• The Gulf countries remains to be the most important destination for Nepali workers. The demand of Nepali workers in Malaysia is declining since FY2005/06 but this might increase as there is renewed demand recently. The growth rate in GCC and Malaysia is expected to be at pre-crisis level by 2012, which means there could be more demand (or at least no cut back) of Nepali workers.
• Remittances are expected to grow but at a slower rate.
• The decline in remittances have affected domestic financial system, consumption, and imports. It has indirectly affected tax revenue growth. The slow growth in remittances would mean that the economy needs to adapt with the negative facets of declining remittances.

The following are few charts that substantiate the main point discussed above:

What is wrong with the Nepali economy?

The Under-Secretary at Ministry of Finance, Yoga Nath Poudel, in Nepal questions the increase in tax revenue, limited public services and low saving.

The underlying problem is the conflict between the large demands for investment and paucity of domestic savings. Lowering taxes, reducing public sector prices and improving infrastructure and education could lower public revenue in the short run; but it is the only avenue to save the country from being doomed to sink to the bottom of development failures. Rigorously stringent measures may not be politically feasible at this time, but the government can contain expenditure at a sustainable level so that the incoming government may not have to bear the unsound scale of expenditure. The times demand that we hammer out a plan of action that will not further burden the governments to come after the new constitution is written.

The questions is: if you lower taxes, where will the revenue come from to fund the existing meager public goods. Reducing public sector prices is not politically feasible. The tax revenue has been increasing with no increase in tax rates. How is it possible? Stemming corruption and loopholes in tax collection could be the two reasons. Another might be the incentives provided to tax collectors and tax payers to do fulfill their responsibilities as required. If revenue is higher than recurrent expenditures, then there is something wrong with the bloated public sector. Trimming its size is one evil option. Also, rather than nominal increase in revenue, we need to look at real increase in revenue.

The economy is in a bad shape-- expenditures are higher than revenues; huge balance of trade deficit; strain in exchange rate; balance of payments deficit in more than four decades; strains in fixed exchange rate between Indian rupee and Nepali rupee; decline in remittances; tightening of overall liquidity; real estate bubble; strained financing in the productive sectors; huge unemployment problem in the rural as well as urban areas; population growth rate that matches real GDP growth rate; low development expenditures; high recurrent expenditures; double-digit inflation rate; low productivity; demise of garment industry; slackness in total production in the agricultural sector; increasing migration from the rural areas to the urban areas; the inability of the economy to absorb new labor force entering the labor market, thus triggering massive exodus of talented citizens; inequality is increasing … the economic situation is as gloomy as it could get!

But, there are positive signs waiting to show up in the economy, if only there is improvement in law and order; political stability; restraint in YCL and similar organizations disruptive activities; restraint in militant trade unions; a selective industrial policy; (improvement in infrastructure) … Notice that almost all of these are largely related to political factors. The economic fundamental are still strong but the political fundamentals are constraining them and nipping their growth.

The economics of happiness

David Brooks explains:

Marital happiness is far more important than anything else in determining personal well-being. If you have a successful marriage, it doesn’t matter how many professional setbacks you endure, you will be reasonably happy. If you have an unsuccessful marriage, it doesn’t matter how many career triumphs you record, you will remain significantly unfulfilled.

If the relationship between money and well-being is complicated, the correspondence between personal relationships and happiness is not. The daily activities most associated with happiness are sex, socializing after work and having dinner with others. The daily activity most injurious to happiness is commuting. According to one study, joining a group that meets even just once a month produces the same happiness gain as doubling your income. According to another, being married produces a psychic gain equivalent to more than $100,000 a year.

The second impression is that most of us pay attention to the wrong things. Most people vastly overestimate the extent to which more money would improve our lives. Most schools and colleges spend too much time preparing students for careers and not enough preparing them to make social decisions. Most governments release a ton of data on economic trends but not enough on trust and other social conditions. In short, modern societies have developed vast institutions oriented around the things that are easy to count, not around the things that matter most. They have an affinity for material concerns and a primordial fear of moral and social ones.