Links of Interest

How to see world economy through two crises

The machine that spun the world around

Paths out of Zimbabwe's dead end

Ways to stem the drift into protectionism

Boy rescues toddler trapped in gorge; Professional rescuers unsuccessful

Lessons for Africa from China's success against poverty

China's success against poverty is probably one of the most important economic phenomena/developmental success in a period of three to four decades since the Industrial Revolution. There are many explanations for the success of China's fight against poverty (usually ascribed to household responsibility system, township and village enterprise, market-based incentive fostering policies, strong leadership, increase in FDI, etc). There is no doubt that China's economic system was the one with heavy public involvement in creating a market-based/incentive fostering system. While China has been able to decrease poverty by astounding figures, Africa's progress is dismaying. In 1981, China's poverty to Africa's poverty was 4:1, but by 2004, 500 million fewer Chinese lived under a dollar a day than in 1981, while in Africa, the number of poor people rose by 130 million in the same period. Why is there such a divergence? What lessons can we learn from the success of China's fight against poverty? Is similar model applicable in Africa?

Martin Ravallion, director of the WB's Development Research Group, in a policy research working paper titled "Are there lessons for Africa from China's success against poverty?"argues that despite differences in constraints faced by Africa, two lessons clearly stand out:

The first is the importance of productivity growth in smallholder agriculture, which will require both market-based incentives and public support. The second is the role played by strong leadership and a capable public administration at all levels of government.

He warns that advocating successful policies tested in the East for implementation in Africa without heeding to constraint would not produce the intended results. African now has different characteristics (higher income inequality, lower population densities, and higher dependency rates) than China had when it embarked on market-based economic reforms.

...China’s success illustrates the generic point that freer markets can serve the interests of poor people...Chinese farmers responded dramatically to market incentives, and African farmers are unlikely to be any different in this respect—but there’s far more behind China’s success than just letting markets do their work.

...With Africa’s levels of poverty and relatively abundant supply of land, and with today’s high food prices, an agriculture-based strategy must be at the center of any effective route out of poverty.

Ravallion rightly argues that Africa should learn from Chinese agricultural reform and focus on increasing productivity of small farmers by concentrating policies on fostering rural economy. Most people think that the Chinese success is due to increase in FDI and open markets. However, it should be noted that the boom in FDI occurred only after 1990s, i.e. after China substantially reduced extreme poverty though closely monitored agricultural policies centered at household responsibility system and TVEs (or decollectivization). In fact, Ravallion argues that growth in agriculture over 1981-2004 had about four times the impact on national poverty as growth in manufacturing or services. This should be sufficient to realize that Africa needs to develop small scale farming and increase productivity from these farmings to fight best against extreme poverty. This carries more weight in the wake of recent rise in global food prices. Small scale farming could earn higher income for households if policies are focused on fostering agricultural productivity.

While growth in manufacturing helped reduce poverty in the 1990s by absorbing surplus rural labor, it’s important to note that the “heavy lifting” in reducing poverty took place in the early 1980s, in the wake of China’s rural economic reforms.

...Impatient governments often try to “jump start” the (mostly urban) industrialization process, often by-passing the pressing needs of their rural poor. Arguably even China may have tried to industrialize too quickly. Here, there are useful lessons for Africa from Vietnam, which maintained a more enduring sectoral emphasis on agriculture and rural development than China.

Policy lessons for Africa:

• Freer markets can serve the interests of poor people.
• Market-oriented reform must be complemented by strong state institutions.
• Policies must avoid doing harm to poor people.
• Macroeconomic stability is crucial.
• Internal market integration should not be neglected.
• The agricultural sector should be given high priority.
• China can help Africa build up agricultural research and extension systems.
• Industrialization should not take precedence too rapidly.
• Rising inequality is not an inevitable outcome of higher growth and less poverty.

These lessons come from the assumption that the African people would also respond to market-based incentives as the Chinese people did when their economy was opened up to markets and trade. Moreover, it also argues that the African states should implement supportive policies and invest in the economy (i.e. more public investment and a constructive role for the state). An informative paper...good to read!

Global food crisis and the Doha Round

Jagdish Bhagwati and Arvind Panagariya write in FT (always for trade liberalization, no matter what!):

[...]instead of our being able similarly to exploit the food crisis to push for trade and globalisation, many people and some governments wrongly blame the crisis itself on trade and globalisation.

[...]Agricultural liberalisation in the European Union and the US is good for several reasons, but it will not help moderate the food crisis. A key component of the proposed Doha agreement is a substantial reduction in agricultural subsidies. This would reduce the supply of grains from some countries that subsidise them and increase it from other countries, especially in the Cairns group. The net effect on supply would be negative.

[...]But now that food prices have risen dramatically, the payouts to US farmers will be almost negligible since they vary inversely with market prices. High prices are expected to continue, so the need for subsidy will also remain negligible. It should therefore be possible to soften significantly US opposition to restricting post-Doha agricultural subsidy payments to lower levels, making it likely that India would respond and making Doha success possible.

Pariah for couple of days:Taboo that needs abolition

A Maoist worker in menstruation, from Bhairavsthan VDC in remote Achham district, living in isolation in a makeshift tent near her house, Friday. This practice known as Chhaupadi is widely condemned by women’s rights groups as inhuman. In this part of Nepal, women are considered impure for 11 days after childbirth and four to seven days during menstruation and kept in isolation. (Source: The Kathmandu Post, June 21)

Easterly ranks aid agencies

Always critical of aid agencies, Easterly has now come up with his own raking of aid agencies. Starting his assumptions from a distrust on aid agencies, of whatever nature they are, he focuses on the difficulties faced by aid agencies because "they are typically not accountable to their intended beneficiaries." He considers dimensions of aid practices like transparency, specialization (the degree to which aid is not fragmented among too many donors, countries, and sectors), selectivity (the extent to which aid avoids corrupt autocrats), use of ineffective aid channels such as tied aid, food aid, and technical assistance, and the overhead costs of aid agencies.

Among the 48 aid agencies he looked at, the World Bank's IDA, of which he is always critical of, is in the first place. Here is the full ranking

The first five on the list are: International Development Assistance (IDA), Department of International Development (DFID), African Development Bank, Asian Development Bank, and Inter-American Development Bank. The IMF is ranked in 26th position, which is worse than USAID's 16th position.

Easterly said that he was surprised by the performance of the World Bank: “The World Bank is seen as professional and staff is chosen on the basis of merit." Meanwhile, the UN agencies have performed poorly in his list. I am surprised that UN WFP is third from the last in his list. UNHCR is in the last. Easterly argues that this happened because these agencies are considered "bloated and politicized." He is also unhappy with limited information disclosure from WFP. This might have skewed the results further because it is unbelievable that WFP and UNHCR are in the bottom of the list. These agencies conduct targeted aiding in the most difficult places in the world. And, the outcome is generally positive. Food aid directly given to the most affected people, be it in an in a country run by an autocrat or in a democratic country, should not be viewed differently. Targeted food aid is for survival and WFP's work in the despot states should not be viewed negatively, thus affecting its ranking. Easterly explains that the data are incomplete, which means that the ranking is just another ranking with doubts in its findings.

The main conclusions of our paper appear somewhat contradictory: (1) the data are terrible, and (2) the pat- terns the data show are terrible. If the data are terrible, how do we know the patterns they seem to show hold true? Still, we remain convinced that some data is better than no data. Also, we hope that as researchers publish findings based on the currently available fl awed data, additional data collection and quality improvement will take place. The data situation among aid agencies, such as the murky data available on operating costs of aid agencies and the non-reporting of essential items like aid tying and sectoral shares of aid spending, would be unacceptable in most areas of economics in rich country democracies. It is particularly sad in an area where the objective of these agencies is helping the poorest people in the world, and where one of the few mechanisms for accountability is for outsiders to check what they are doing.

Our findings on aid best practice tend to confirm a number of long-standing complaints about foreign aid. The aid effort is remarkably splintered into many small efforts across all dimensions—number of donors giving aid, number of countries receiving aid from each donor, and number of sectors in which each do- nor operates. A lot of aid still goes to corrupt and autocratic countries, and to countries other than those with the lowest incomes. Aid tying, the use of food aid-in-kind, and the heavy use of technical assistance continue to persist in many aid agencies, despite decades of complaints about these channels being ineffective. In addition, some agencies have remarkably high overhead costs. The broad pattern that emerges from our evidence is that development banks tend to be closest to best practices for aid, the UN agencies perform worst on these dimensions, and the bilaterals are spread out all along in between. Explaining why each of these patterns persists over time raises an interesting agenda for research in political economy

 

Collier in favor of coups!

Paul Collier argues that, in light of international incapacity and unwillingness to deal with dictators, in order to topple tyrant regimes like that of Mugabe of Zimbabwe and General Shwe of Burma, the West needs to support coups by the country's own army. Quite disturbing argument at least for those who always drumbeat the virtues of democracy. But, as Collier argues, this is essential because if tyrants cannot be toppled by international pressure while they continue to plunder on domestic resources at the cost of starving/dying citizens, then it is better to support domestic coups, which might provide a glimmer of hope when there is none. He favors coups because the existing system of governance would simply get worse without change in power/leaders. However, coups, which are "unguided missiles," should be provided with a guidance system so that governance is better than in a tyrant's rule.

So how can the grossly excessive powers of the Mugabes and Shwes of the world be curtailed? After Iraq, there is no international appetite for using the threat of military force to pressure thugs. But only military pressure is likely to be effective; tyrants can almost always shield themselves from economic sanctions. So there is only one credible counter to presidential power: the country's own army.

Realistically, Mugabe and Shwe can be toppled only by a military coup. Of course, they are fully aware of this danger, and thus have appointed their cronies as generals and kept a watchful eye on any potentially restless junior officers. Such tactics reduce the risk of a coup, but they cannot eliminate it: On average, there have been two successful coups per year in the developing world in recent decades. A truly bad government in a developing country is more likely to be replaced by a coup than an election: Mugabe will presumably rig the runoff vote scheduled for Friday by intimidation. Or he could follow the example of the last Burmese dictator, who held an election, lost and simply ignored the result.

I find it a little awkward to be writing in praise, however faint, of coups. They are unguided missiles, as likely to topple a democracy as a dictatorship. But there is still something to be said for them.

Since the fall of the Soviet Union, the international community has taken the rather simplistic position that armies should stay out of politics. That view is understandable but premature. Rather than trying to freeze coups out of the international system, we should try to provide them with a guidance system. In contexts such as Zimbabwe and Burma, coups should be encouraged because they are likely to lead to improved governance. (It's hard to imagine things getting much worse.) The question then becomes how to provide encouragement for some potentially helpful coups while staying within the bounds of proper international conduct.

Good article! Read the full article in the Washington Post on June 22.

New country ranking on trade facilitation/enabling

The World Economic Forum (WEF) has published a report titled The Global Enabling Trade Report 2008, which ranks countries by looking at four issues/indexes: market access, border administration, transport and communications infrastructure, and the business environment.

The first subindex measures the extent to which the policy and cultural framework of the country welcomes foreign goods into the country. Once goods have been allowed in to the country, the second subindex assesses the extent to which the administration at the border facilitates their entry. Once goods have made it over the border, the third subindex takes into account whether the country has the transport and communications infrastructure necessary to facilitate the movement of the goods from the border to destination.

These "pillars of enabling trade" are further divided into ten subindexes: tariffs and non-tariff barriers, proclivity to trade, efficiency of customs administration, efficiency of import-export procedures, transparency of border administration, availability and quality of transport infrastructure, availability and quality of transport services, availability and use of ICTs, regulatory environment, and physical security.

The index basically measures the factors, policies, and services facilitating the free flow of goods over borders and to destination. The top ten countries based on the index are:

 

The results bear witness to Hong Kong and Singapore’s openness to international trade and investment as part of their successful economic development strategy. Both countries have put into place customs administrations that are highly efficient in getting goods over borders. They are also endowed with well developed transport and telecommunications infrastructures ensuring rapid transit to final destination. These attributes are further supported by business environments that are conducive to the logistics and transport industry.

The report describes China's trade position as:

China occupies the 48th position.This fairly low position for one of the world’s most successful exporters highlights a number of underlying weaknesses in China’s economy and its trading regime.Above all, China is a fairly closed country. Although its economic success relies heavily on exports, imports are still severely inhibited by tariff and non-tariff barriers, despite the country’s accession to the WTO.The country ranks 108th out of 118 economies on tariff barriers, which amount to almost 15 percent.The country’s border administration is fairly efficient; importing products is not costly, although it can be quite time-consuming. A particular concern when exporting and importing is the lack of transparency of border administration, which can be particularly heavy for foreign businesses. Because of large export volumes, the country is well connected to international markets, yet its transport infrastructure is not on a par with the world’s best. In particular, airport density and the quality of air transport infrastructure are fairly low.The quality and availability of transport services, however, are among the best in the world, ranked 17th overall. Improvements to the regulatory and security environment would further enable trade. In particular, greater encouragement of FDI and more openness to foreign air transport service providers would help.

About India:

Further down the rankings we find India, at 71st place. India’s weak position reflects a mixed performance on the four pillars of the ETI.While it boasts fairly good border administration and an acceptable business environment, market access continues to be severely restricted. Indeed, India ranks 105th on the relevant component with, unlike most other countries, tariff barriers representing a more serious impediment than nontariff barriers. Only a small share of goods is imported duty-free. India’s border administration meets many needs of importers and exporters. Ranked 55th on this indicator, a vast number of customs-related services is available in India and clearance entails low pecuniary costs, although it is time-consuming. Border administration continues to be affected by corrupt practices, however, hampering an efficient transport of goods across borders.Trade-related infrastructure and the relevant services are equally fairly well developed in India, ranking 52nd in the overall sample. However, although the country is well connected through maritime routes, it needs more airports and high-quality roads. India’s business environment is in line with the country’s overall assessment, with the regulatory environment ranked 64th and security assessed at 56th among the countries assessed.

Highlights of the report is available here. It needs to be seen how representative the results are because it is an outcome of "Survey data" and "hard data". The Survey data was collected by surveying the opinions of CEOs and top business leaders in all economies covered by their research. It just reflects the views of the owners of big companies and their opinions are highly subjective, probably giving bad score to things that increase their cost of business/procurement. The report claims that trade openness is associated with higher growth and poverty reduction. This is quite a claim in light of stagnant poverty and growth figures of countries that are fairly open to trade. In most of the cases the countries with low rankings suffer from corrupt custom administration, lack of transparency, limited market access, bad quality of communication and transport infrastructure, and insecurity.

What about my own country, Nepal? Well, it is in third position from the last! Nepal's overall ranking is 116 (with a score of 2.70), just above Burundi and Chad. In the individual subindexes, Nepal's rankings are 106 (with a score of 2.77) in market access, 94 (with a score of 3.14) in tariff and non-tariff barriers, 115 (with a score of 2.41) in proclivity to trade, 108 (with a score of 2.70) in border administration, 117 (with a score of 1.92) in efficiency of customs administration, 101 (with a score of 3.37) in efficiency of import-export procedures, 103 (with a score of 2.83) in transparency of border administration, 113 (with a score of 2.34) in transport and communications infrastructure, 111 (with a score of 2.45) in availability and quality of transport infrastructure, 97 (with a score of 2.97) in availability of transport services, 115 (with a score of 1.61) in availability and use of ICTs, 118 (with a score of 2.98) in business environment, 116 (with a score of 3.14) in regulatory environment, and 117 (with a score of 2.82) in physical security.

Here is a video where Robert Lawrence, Albert Williams Professor of Trade and Investment at the John F. Kennedy School of Government, Harvard University comments on the results of the World Economic Forum's Global Enabling Trade Report 2008.