Archives for posts with tag: poverty

The Great Surge, Steven Radelet, 2015

radelet

The proportion of countries living in extreme poverty has fallen from 42% in 1993 to juts 17% in 2011. The opening of China accounts for a large share of the change, but  the fall also affects dozens of countries in every region of the world (sample of 109 developing countries with population greater than 1 million is considered)

People in developing countries have incomes today that are nearly double those of their parents 2 decades ago.

People born in developing countries live 1/3 longer than they did 20 years ago.

In 1980, only half of the girls enrolled and completed primary education. Today 4 out 5 are.

In 1983, 17 countries had democracies. By 2013 the number had tripled to 56.Violence decline sharply. Since 1980, incidence of civil war in developing countries has been cut by half. Battle deaths in war have fallen by more than 75%.

But there are still 1 billion people in extreme poverty and those just above $1.25 a day are hardly well off. Every year, 6 million children still die of preventable disease.

When the global food crisis struck in 2007, many predicted that poverty would rise sharply, but developing countries showed their resilience, and poverty continued to fall. The financial crisis of 2008 slowed the pace of progress but developing countries rebounded faster than rich countries.

Paul Theroux ‘I can testify that Africa is much worse off than when I first went there 50 years ago’. Evidence points to the contrary. Africa today is less poor, less sick, better educated, and better  governed. Dambisa Moyo charges that ‘evidence overwhelmingly demonstrates that Aid to Africa has made the poor poorer’. The facts are rather different: poverty is falling, incomes are growing, debt levels have plummeted, inflation is at its lowest in decades, investment is pouring in as never before and civil conflict has fallen.

Explaining development through the long term perspective: David Landes “The Wealth and Poverty of Nations”: Europe’ ascendancy had much to do with its culture, work ethic, attitudes toward science and religion, and social organization. Jared Diamond “Guns, Germ and Steel” found that Europe’s prosperity was largely the result of differences in geography, demography and ecology. Daron Acemoglu argues that the repressive institutions set up by European colonizers to extract resources through violence are central to understanding institutions in developing countries today. All these conclusion do not explain why so many developing countries began to turn at roughly the same time in the 1990s.

Explaining development through analysis at the micro level: Esther Duflo focuses at specific impact of actions and programmes in particular context. They help design programs and help understand why people make decisions but fail to explain why a country that was stagnating turns the corner.

Explaining development through the idea of “poverty traps”. Jeffrey Sacks, Paul Collier have refined the model. Sachs shows that developing countries are more prone to endemic disease. Collier argues that poor countries are more vulnerable to conflict and war. Bad governance keeps countries poor and poverty makes it harder to build the legal, government and political institutions necessary to improve governance. Most people in developing countries have been trapped in one way or another for much of the last several centuries. And that some escaped does not mean the traps are not real for those left behind.

Three major catalysts sparked the great surge. First, a geopolitical shift: the end of the cold war and the collapse of Soviet Union. Obstacles to development melted away. Second, globalization and new technologies provided new opportunities. Financial flows to developing countries now top $1 trillion a year, 12 times larger than in 1990. Third, the surge required the right skills and capabilities, in particular leadership to bring about institutional changes. Nelson Mandela, Cory Aquino, Oscar Arias (Costa Rica), Lech Walesa, and many others worked to build new and more inclusive political system. Civil Society gave greater voice to everyday citizens. As effective leadership began to emerge in some countries, it spread to others.

Foreign aid played a supporting role in bolstering development progress. The bulk of the evidence shows that on the whole aid has moderate positive impact on development progress. It had in particular strong effect on improving global health, mitigating impact of natural disasters and humanitarian crises, and helping jumpstart turnarounds from war in some countries. The bulk of the research shows a modest positive relationship between aid and economic growth.  Duke University Sarah Bermeo found that after 1992 foreign aid from democratic donors was associated with an increase in the likelihood of a democratic transition. Aid from non-democratic donors – such as china – did not have that effect.

Economic growth in the world’s leading economies will increasingly depend on growth and prosperity in developing countries. Development in developing countries is good for 3 reasons: it enhances global security; it is good for trade, business and global income growth; it helps spread shared values of openness, prosperity and freedom.

There is no guarantee that the surge that started 20 years ago will continue.

The $1.25 (in 2005 prices) is WB extreme poverty. It is not picked out of the air. It is roughly equal to the average of the national poverty lines in the poorest 15 countries in the world. WB PovcalNet database.

From 1.3bn of people living with less than a $1 dollar a day in 1993 to 600 million in 2011. Abject poverty dropped by more than half in just 18 years.

The decline of extreme poverty ranks as one of the most important achievements in global economic history, with far reaching economic, political and security implications.

The biggest force behind the decline in poverty is clear: China. 84% of the Chinese population was extremely poor in 1981. Deng Xiaoping began to introduce economic reform. In 2011, the number of extremely poor had dropped to 84 million, just 6% of the population.

Sub Saharan Africa is the only region were the total number of extremely poor is not yet falling, but the number essentially level off in 2002. The % went down from 59% in 1993 to 47% in 2011.

Developing countries started to invest in health, education, social safety nets to support the poor and strategies to support agriculture.

For the first time in human history there are more people living on more than $5 a day than on less than $1.25 a day.

In 1980, trade between developing countries accounted for less than 6% of the global total; by 2010 it accounted for more than 21%.

Economist often use 2% per capita growth as a standard because it is roughly equal to the average long term growth rate of the US and major economies and to the average world growth rate since 1960.

21coutries achieved a 2% per capita growth rate from 1977 to 1994. 71 did it from 1995 to 2013. The number more than tripled.

Not only are developing countries more important to the global economy, but it is clear that economic policy makers in developing countries are much more astute and skilled than their predecessors.

Investment and other financial flow peaked in 2007, fell rapidly in 2008 and 2009, but by 2010 they were back to their previous high. Trade was back to its peak within 2 years.

The idea of a turnaround just as a commodity boom is too simplistic.  Turnaround started in 1995, long before the current boom. In fact, late 1990s global commodity prices were falling.

There has been growth, more jobs and higher wages. Growth benefitted the poor: while growth is not the only driver for poverty reduction, there is no force more powerful for reducing extreme poverty than sustained economic growth. This relationship is not automatic and depends a lot on the policies and strategies that country pursue. Cases in which the poor do not benefit from growth are the exception, not the rule.

Public demand for conservation grows in tropical developing countries as they reach upper middle income status.

‘The haves and the Have-nots: a brief and idiosyncratic history of global inequality’ – Branko Milanovic.

It is true that within some countries inequality has gotten worse – such as China – but inequality has improved in others – such as in Brazil. For the majority of developing countries, inequality hasn’t changed much, even alongside the acceleration in growth.

Since so many poor countries have been growing so fast for the last decade, the income gap between rich and most poor countries has been shrinking.

Inequality across countries is not worsening: in 1994 the average income in the world’s richest countries was more than 8 times larger than the average in 109 developing countries, by 2011 the ratio has closed to around 6. Still a large gap, but also a big drop in 20 years.

Malaria mortality declined 47% between 2000 and 2013; AIDS related death reduced by 35% in 8 years to 2013; Tuberculosis death fell 33% in 10 years to 2013; Children death from diarrhea was reduced 7 times between 1990 and 2013 (from 5 millions to 760,000)

Polity IV Project with data on political regime characteristics and transitions, complementary to Freedom House focus on basic rights.

In 1405 Admiral Zheng commenced a 2 year journey to Vietnam, Indonesia, Sri Lanka and India. He had 317 ships and 27,000 men. The fleet included 62 enormous treasure chips which measured 120 meters long. The 4 ships of Vasco de Gama and 3 ships of Columbus could all fit on the deck of one treasure ship.  In 1424 the new emperor of china ended the expeditions and turned China inward (to focus at the defense against the Mongols and avoid the enrichment of merchant that would be hard to control).

Total trade share of GDP in developing countries jumped from 66% to 95% from 1990 to 2012: trade increased 50% faster than GDP. Financial flows are 12 times larger (1990 to today); FDI is up to 600billion a year, up from 26 billion in 1990.

International private capital flows to developing countries (investments, bond, lending) declined during the 1980s in real terms. They doubled from 91 billion in 1990 to 215 billion in 2000, then expanded more than fivefold to 1.1 billion in 2012. A 12 time increase since 1990.

The origins of the Asia economic miracle: it all began with the green revolution and the increases in agricultural productivity and nutrition that came with it.

The Center of Disease Control was originally founded in 1946 to fight malaria. It was located in Atlanta, in the midst of US’s major malarial zone.

 

 

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The Future, Declassified. Mathew Burrows, 2014

 

mathew burrows

A member of the European Parliament went on to describe how Internet has ruined her life. Constituents were overly demanding and relentless; it had become a 24/7 world where longer term goals could no longer be worked on. It was clearly a trend. Everyone agreed that individual empowerment was the number one megatrend and the right starting for looking at the future. However, more and more voices sounded the alarm. Individual empowerment comes at a high risk. Ethnic affinity is a reality of life, but can be politicised and become a weapon for conflict. Populism that’s anti-market, anti-welfare, anti-government is on the rise. Growing fragmentation comes with individual empowerment.

Over the next couple of decades, a majority of the world’s population won’t be impoverished, and the middle class will be the most important social and economic sector – not in the West but in the vast majority of countries around the world.

2015 is the first time in three hundred years in which the number of Asian middle class consumer will equal the number in Europe and North America. China could become the largest single middle class market in 2010. But China might be overtaken by India in the following decade thanks to the country’s more rapid population growth and more even income distribution. Much of this global middle class will be lower middle class by Western standards. The top half of this new middle class – likely to be more in line with Western standards – will be substantial, rising from 350 millions in 2010 to 679 millions in 2030.

Poverty won’t disappear, and the fear of slipping back is likely to haunt many in the new middle class.

Today about 1 billion people are living in extreme poverty (less than $1.25 a day) and 1 billion are undernourished. The number of those living in extreme poverty has been stable for a long time, but the rate has been declining with population growth. Absent a global recension, the number of poor could drop by 50% by 2030 as incomes continue to rise in most part of the world but could still remain substantial – nearly 300 million in Africa alone.

Under any scenario, there will still be plenty of poor people: the problem may be harder to solve because many of these people are concentrated in countries with few inherent sources of economic opportunities.

AIDS appears to have hit its global peak – around 2.3 million deaths per year – in 2004.

The main symbol of the new middle class (in Brazil) has been the explosion in formal employment – workers with a formal employment contract rather than a cash-only arrangement. During the 2000s, formal job creation outpaced informal job growth by a 3 to 1 ratio. People were not only consuming but investing in their future. The growth rate in education was very high.

Slower economic growth in the West will ingrain the perception of a struggling middle class that faces greater competition from an increasingly global employment market, including competition for job requiring higher skills.

Some estimates (ADB) see middle class consumption in North America and Europe only rising by 0.6% a year over the next couple of decades. In contrast, spending by middle class Asian consumers could rise 9% a year through 2030.

Samuel Huntington has talked about the middle class that tends to be born revolutionary and become conservative by middle age. Middle classes are defenders of social and political order, but only if it serves their interest. In this day and age, that means the state must provide good public services. In Brazil, there was a growing resentment because the middle class did not see their taxes translated into better services, especially in health and education.

Senior UAE officials told us of their worries about satisfying growing expectations for democratic rights despite the high standard of living. They worry that western NGOs interested in advancing democratic and human rights could prey on this sense of public dissatisfaction with the lack of rights and increase the level of political discontent. They also see religious extremism as a symptom of growing dissatisfaction and link any outside effort to bolster democracy and human right groups as helping religious extremists.

China is slated to pass the threshold of US$15.000 per capita in the next five year or so. The US$15.000 per capita is often a trigger for democratisation, especially when coupled with high level of education and a mature age structure.

Democracy is a goal for many Chinese, including, oddly enough, some in the Communist party. The Party School has held conferences on democracy. It is not a matter of if, but when. The problem is that no one had an idea of how to undertake political reform without major disruption or disorder. Individuals will be ‘more important’ in determining the future. At the same time, the rising middle class is seen as a ‘destabilising factor’ in rich countries as well in developing countries .In China, new problems have been created, with growing demands and higher expectations of government.

The economics of globalisation have spread the West’ ideas of scientific reason, individualism, secular government, and primacy of law to societies seeking the west’s material progress. But many citizens in these states are reluctant to sacrifice their cultural identities. Religion is likely to be at the center of these ideological debates within and across societies. Islam especially has strengthened owing to global increases in democratisation and political freedoms that have allowed religious voices to be heard, and owing as well to advanced communications technologies and the failure of governments to deliver services that religious groups can provide. A 2013 Pew poll underlines the overlap between the strong belief in democracy and the desire by Muslim publics for religion to play a prominent role in politics. A large number of Muslims across the world say religious leaders should have influence over political matters.

Nationalism is another force that is intensifying particularly in regions where there are unresolved territorial disputes and countries’ fortunes may be rapidly changing. Pew’s research showed that beliefs in moral and cultural superiority are strongly held everywhere. This sentiment is particularly strong in developing countries. Fully 9 in 10 in Indonesia and South Korea and more than 8 in 10 in India are strong boosters of their own culture.

The move to the city is leading to increased expression of religious identity. Immigrants – mostly Muslims in Europe and Russia for example – are coalescing along religious lines. Urbanisation is driving demands for social services provided by religious organisations. Islamic and Christian activists have been effective in using this to bolster cohesion and leverage.

2012 European Union study on the global middle class showed that around four in every five people worldwide believe that democracy is the best available system of government.

From 2000 to 2012 BRICS grew on average by 6.2% a year. This won’t happen again as BRICS did not push ahead with structural reforms. The recession in the west affected the developing countries which still look the West as trade and investment partners.

There is no longer a country or a group of countries like the G7 that have the political and economic leverage to drive the international community toward collective actions. This adds up to global cooperation being difficult to forge in the best of times and breakdown becoming increasingly likely.

The BRICS are so diverse – some autocratic, other firmly democratic – and have so many competing interests that they are highly unlikely now or in the future to share a unified vision.

Doctor Watson is the IBM robot that beat two human champion to Jeopardy in 2011… To keep up with the state of the medical literature would take a human 180 hours a week according to one estimate – an impossible feat. However, it’s child’s play for a superendowed robot. Watson provides doctors recommendations for treatment based on its surveying of all the available literature and what is in the patient file.

The rapid growth of Asian and African minority in low fertility West Europe states risks increasing erosion of social cohesion and growing reactionary politics.

Soon a lot more things will be connected to the internet; some estimates place the current figure at over 15 billion internet connected objects – the Internet of Things-, everything from smartphone, PCs to sensors monitoring agriculture production, city functions, medical devices, forests and individual trees.

In general, the countries most vulnerable to food inflation will be import dependent poor countries, the primary line of defence to cope with rising food prices will be to expand existing subsidies on basic foodstuff. This is difficult proposition, especially as many of these countries are waging a battle against ballooning budgets.

The amount of land that was acquired between 2000 and 2010 equals an area eight times the size of UK.

The Fund for Peace’s failed state Index.

In late September 2013, millions in Dakar, Senegal, were left stranded without drinking water when a pipeline carrying water over 155 miles to the city residents burst. Their plight provides a taste of the possible scale of urban disruption if infrastructure is not kept in good repair.

The United States has more than enough natural gas for domestic needs for decades to come, and potentially substantial exports. With the new super fracking technologies, recovery rate could dramatically increase.

The IEA see renewables becoming the second largest source of electricity before 2015, approaching coal as primary source by 2035, but 2/3 of the increase in power generation from renewables [will be] in non-OECD countries…the increase in China will be more than that in the EU, US and Japan combined.

Butterfly Solar Farms in Botswana that had simple in-field assembly and panels with double efficiency of normal ones. It could be used for desalinisation systems, for crop drying, and to power freezers in slaughterhouse of dairy farms.

These good ideas (energy saving ideas) need some sort of government help. Poor countries won’t be able to manage it. They are not only coming from behind – not having adequate infrastructures to begin with – but they also face the greatest challenges going forward, including rapid population growth, deleterious climate change, and environmental devastation that hits food and water supplies. For them, without assistance, the future does look Malthusian.

Four game changers stand out for me: a China that can’t manage the next development leap, the growing possibility of war, possible runaway technology and a United States that can’t stay on top of an increasingly complex world.

The bigger question may be whether China wants to rewrite the current rules for how the international system operates. Although ambivalent and even resentful of the US-led international order, I don’t think Chinese leaders have a vision for a new international order. Along with other emerging powers, they are eager for a greater say in the running of the global institutions like the UN or the IMF.

Free Lunch – David Smith – 2012

free lunch

 

Markets tend towards equilibrium, towards the balancing of supply and demand, though they may take a while to get there. Remember that and you are well on your way to understanding market economies.

Only sellers really know whether a car is perfect or not, buyers can never be certain. Economists call this ‘asymmetry of information’.

House prices rise because incomes do. The house price-earning ratio is not perfect. Incomes have risen steadily (by about 2% a year more than inflation) for as long as anybody can remember (except 2010-2011. In 1900 the average worker had to toil for a couple of hours to earn enough to buy a loaf of bread. Today, it is about 5 minutes. Supply [of houses] is inelastic – it responds slowly to rising prices – whereas if builders were able to flood the market with new properties in response to high prices it would be elastic.

While economists would regard the market of potatoes …as the preserve of microeconomics, the housing market in aggregate is so important that it makes it into the macroeconomic arena.

Gordon Brown gave the Bank of England operational independence in 1997 – which meant control over the instruments of the monetary policy to meet inflation target set by the government. It would be fully independent if the Bank would set its own target.

A low activity equilibrium: equilibrium is when demand and supply are in balance. In this case, both demand and supply were weak. Unusual things happen.

The history of English food suggests that a free market economy can get trapped for an extended period of time in a bad equilibrium in which good things are not demanded because they have never been supplied, and are not supplied because not enough people demand them.

We should always treat claims about current economic conditions that draw historical parallels with a pinch of salt. If things are bad now it is from a higher base; there is no real comparison with the 1920s or the austerity period that followed the 2nd World War. Earlier generation would not have had the luxury of devoting an eighth of their weekly spending to recreation and leisure.

Diminishing marginal utility – the more you have the less you want another one. It can even go negative. After 6 cups of coffee in the morning, I would pay someone to drink the 7th I was offered.

The idea that incentives work underpins much of economics.

Of course obesity is bad for you – but it’s not as bad for you as it used to be (thanks to drugs that cut your cholesterol and increase life expectancy). The price of obesity (measured in health risk) is down, so rational consumers will choose more of it.

Independent taxation, a separate taxation for husbands and wives (women paid tax at a rate reflecting their earning and not their husbands), introduced under Thatcher contributed a a huge increase in number of women working.

A high quantity and high quality investment has two key influences: it increases the level of input in the economy, increasing productivity and earning for workers. But it is also a vital channel for the introduction of new technology and processes.

The multiplier effect: an initial increase in government spending flows around the economy for quite a while. But a pound spent by the government does not, however, produce a pound of spending at the next stage.  Some of it will be taken by tax, some will be spent on imports, some will be saved. In 2010, America’s Congressional Budget Office had fiscal multiplier ranging from 0.2 for tax cuts for higher income individuals (i.e. a 1 billion tax cut would boost the economy by 0.2 billion) to 2.5 for certain type of spending. In UK change in VAT had a multiplier of 0.35 and infrastructure spending a multiplier of 1.

Debt: 40% of GDP rule was maintained until 2007-8 fiscal year but was quickly broken, and suspended when the crisis hit. The current budget deficit rose to 7.6% of GDP in 2009-10 while overall government borrowing hit more than 11% of GDP. By mid 2011, government debt stood at 61% GDP. Including the banks rescued during the financial crisis, the debt went up to 148% of GDP.

I would rather be vaguely right than precisely wrong” Keynes.

Keynes advocated a programme of government spending, of deliberately running a budget deficit. The additional spending at the right time would ‘prime the pump’ triggering higher growth in the economy through a multiplier effect.

For almost 2 decades  from 1990 Japan was a living example of an economy caught in a liquidity trap, where interest rates were cut to zero without stimulating the economy, not least because of falling price – or deflation.  Japan tried Keynesian policies but failed because they never followed through consistently, did not address the banking sector issues and because of loss of confidence in their political leaders.

In 1992, Sept 16th was the day the bank of England ran out of the reserve needed to prop up the pound within the Exchange Rate Mechanism (official targeting of exchange rate) thanks to George Soros and other speculators. The way in which interest rate affect the economy is called transmission mechanism of monetary policy. The maximum impact of a change in interest rates on inflation takes up to about two years. So interest rate have to be based on judgment about what inflation might be – the outlook over the coming few years – not what it is today.

Negative interest rate: penalizing those who hold deposit at the central bank, mainly commercial banks, by charging them for keeping their fund there. This hardly seemed sensible in the middle of the financial crisis. Instead they used quantitative easing or electronically creating money (to reduce cost of borrowing and boost assets prices). First implemented in Japan in 2001, in UK in 2009…there is little consensus on whether it worked.

Few economist would dispute that there is a relationship between the money supply and inflation, although many would question whether that relationship could ever be precise.

A government that introduce ‘tax and spend’ policies, raising tax to increase public spending will boost the economy. Government spending provides the economy a greater stimulus – it goes directly into extra demand for goods, services and people. Tax however is subject to various leakages (savings, imports). Therefore £1 billion spent by Government will have a bigger impact than £1 billion used for tax cuts.

Supply side economics goes beyond tax cuts. Supply side economics embraces anything that raises the economies’ long-run, or sustainable, growth rate.  It can be tax cut, increasing competition by breaking up cartels, attacking restrictive practice of trade union, improving climate for business, making it easier to hire and fire workers.

Milanovic: inequality have increased sharply from the early XIX century until around 1950, then stabilized. Most inequality though is now between countries (not within countries). Landes estimated that the income gap between Switzerland and Mozambique is 400 to one. Prior to the middle of XVIII century it would been about 5 to one.

Why such disparities? Three broad explanations. 1. The late developer thesis. Prosperity and success will come to all but for some it takes longer than others. Anti-globalisation critics argue that rich countries have effectively kicked the ladder away. Certainly rich country have tended to control the rules of global trade. 2. The location: poor countries tend to be in tropical zones. There diseases tend to be rife, agriculture more difficult, trade more difficult. Sachs attributed Africa’s economic failure to climate, disease, geography and poor policies. 3. Culture makes all the difference. Division of labour, work ethics, organization was key to harnessing and advancing the powerful force of industrialization. The message is positive: culture can change, adapt.

Lord Bauer who died in 2002 pointed out that over decades indiscriminate aid did poor countries more harm than good. Douglas North, Nobel Prize in 93, considers that institutions provide the basic structure by which human beings throughout history have created order and attempted to reduce uncertainty in exchange.

Paul Collier, oxford economist, identified a range of explanations:  conflict trap, resource curse, corrupt governments. Not only are they stuck in poverty but their situation and prospects diverge so dramatically from the rest of the world. The challenge for development is not to reduce global poverty: it’s to replace divergence by convergence. Reducing poverty in not enough, the bottom billion have to catch up with the rest of mankind.

Dani Rodrick on globalization : There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety net, and, of course, no global democracy. In other word, global markets suffer from weak governance and therefore weak popular legitimacy.

Tanzi and Schuknecht wrote “perhaps the level of public spending does not need to be much higher than 30% of GDP to achieve most of the important social and economic objectives that justify government interventions. However this would require radical reform, well working private market and efficient regulatory role of the government”

Robert Mundell: an optimal currency area requires all participants not only to be closely interlinked through trade, but also broadly similar in structure.

In 2007, the potential losses for the banking system were unknown (and difficult to know) but estimated at $4 trillion by IMF in 2009.

The Credit Default Swap (a type of insurance contract: a firm wishing to minimize its credit risk would get somebody else to get on that risk, and pays a premium to it to do so. In 2007 the CDS market was worth $55 trillion (almost the world GDP) in a global market of so-called derivative of $500 trillion. Derivatives are any instruments to transfer risks from those who should not take them to those who care willing and are capable of doing so. (unfortunately the financial markets were willing but not capable…)

Countries like China where consumer spending is low and saving high were generating surplus that washed around the world economy. The surplus kept interest rate low, fuelling the credit boom. China is the biggest international owner of US treasury bonds.

Lord Saatchi : the crisis was not the fault of the bankers, regulators or borrowers but a misguided faith in inflation targeting. All were lulled into a false sense of security by the idea that if policy makers could maintained low inflation then all good things would follow. It encourage the view that it was safe to borrow, safe to invest. Some suggest the problem that the inflation target did not include house prices. The boom in asset prices told a story of a very rapid credit growth…(while inflation was low). Two lessons for the banks: ultra-low interest rates might not be enough. Central bank buying government bonds pushed up their price and contributed to lower their yields (the interest rate on them) – an effect that replicated on the market of corporate bonds.

 

Poor economics – Esther Duflo, Abhijit Banerjee – 2011

banerjeeduflo

 

The field of antipoverty policy is littered with the detritus of instant miracles that proved less than miraculous. To progress we have to abandon the habit of reducing the poor to cartoon characters and take the time to really understand their life.

The poor are no less rational than anyone else. Precisely because they have so little, we often find them putting much careful thought into their choices: they have to be sophisticated economists just to survive.

Living on 99 cents a day means you have limited access to information and just don’t know certain facts that the rest of the world takes as given, like, for example, that vaccines can stop your child from getting measles….It means not having anywhere safe to keep your money, because what the bank manager can make from your little savings won’t cover his cost of handling it.

It is not easy  to escape poverty but a little bit of well-targeted help (a piece of information, a little nudge) can sometimes have surprisingly large effects. Similarly minor hurdles can be devastating.

About an experiment : students, it seems, were willing to take some responsibility for helping a 7 year old from Mali, but when faced with the scale of the global problem (3 millions Zambian face hunger) they felt discouraged.

Jeffrey Sacks, the poverty trap: countries are poor because they are hot, infertile, malaria infested, often landlocked. This makes it hard to be productive without initial large investment to help them deal with these endemic problem. But they cannot pay for these investments precisely because they are poor. Until something is done, neither free market nor democracy will do very much for them. This way foreign aid is key.

William Easterly has become one of the most influencial anti-aid public figures (joined by Bambisa Moyo) and argues that aid does more bad than good.: it prevents people from searching their own solutions, undermine local institutions and create a self perpetuating lobby of aid agencies. The best bet is to rely on free markets. The poverty trap does not exist. Some rich country becomes poor, poor countries become rich: if the condition of poverty is not permanent then the idea of a poverty trap is bogus (P10)

The data on a couple of hundred countries show that those who receive aid more aid did not grow faster than the rest. This is often interpreted as evidence that aid does not work. But perhaps the aid help them avoid a major disaster, and things would have been much worse without it. We simply do not know. This book will say whether particular instance of aid did some good or not.

It is not clear that answering some of the big question is important. Although aid looms large in London, Paris or Washington, it is only a very small part of the money that is spent on the poor every day. India received virtually no aid in 2004-2005, yet it spend US$31bn PPP on primary education for the poor. In Africa, aid represent 5.7% of total budgets in 2003 (12% if we exclude Nigeria and South Africa, two countries that receive little aid).

More important : where the money goes. This a matter of choosing the right kind of project to fund – should it be food for the indigent, pensions, clinics – and then figuring out how best to run it.

Amartya Sen: poverty is not just a lack of money; it is not having the capability to realize one’s full potential as a human being.

www.thelifeyoucansave.com

Millenium Village project: 500,000 per village a year, to transition from self subsistence farming to self sustaining commercial activities.

The lack of grand universal answer might sound vaguely disappointing but it is what policy want to know  – that there are few key factors that create trap, and that alleviating those particular problems could set them free and point toward a virtuous cycle of increasing wealth and investment.

First there are now high-quality data from a number of poor countries and second we have powerful tool: randomized controlled trials (large scale experiment – individuals or communities are randomly assigned different treatments. Since the individuals/communities are comparable, any different between them is the result of the treatment.

2003 the poverty action lab (Abdul Latif Jameel PAL) to encourage researchers and diffuse knowledge among policy makers. By 2010, 240 experiments in 40 countries.

www.pooreconomics.com

MDG : poor people were essentially defined at having not enough to eat.

It is assumed that poor people need food and without food, they are less productive and remain poor. Yet this is not what we see. Most people living with less than 99 cents a day do not seem to act as if they are starving. Even with the very poor, food expenditure increase much less than one for one with the budget. Equally remarkable, when poor people put some money into more food, they do not maximize calories or nutrients. They buy better tasting, more expensive calories. Remarkably in an experiment in India, the caloric intake of those who received the subsidies did not increase. Probably because the subsidies made people richer, they consumed less of the staple food (the food of the poor).

It is not that the lack of food could not be a problem or isn’t a problem from time to tim, but the world we live in today is for the most part too rich for hunger to be a big part of the story of the persistence of poverty. Sen has shown that most recent famine have been caused not by lack of food availability  but by institutional failures that led to poor distribution of available food.

No large country has less medals in the Olympics than India. India has 0.92 medal per Olympic, just below Trinidad and Tobago. Bengladesh, Pakistan are also doing very badly. It seems plausible that there is a connection between wasted children and Olympians.

In rich and poor country, taller people earn more. In UK, US studies showed that good nutrition in early childhood lead to taller and smarter people. And because they are smarter, they earn more.

P35 A family (from South Africa) that had just lost one of its potential earners might have spent some 40% of the household annual income for the funeral party. In Africa social norms for funeral were set at a time when most deaths occurred in old age or infancy. As a result of HIV/AIDS epidemic many prime age adult died without having accumulated burial savings. Poor people in developing countries spend large amounts on social events (wedding, christening…) probably in part as a result of a compulsion not too loose face.

Generally, things that makes life less boring are priority for the poor. This may be television, something special to eat, just a cup of sugary tea. In Udaipur, poor spend 15% of there budget on festivals.

The poor  may well be more skeptical about supposed opportunities and the possibility of radical change in their lifes. They often behave as if they think that any change that I significant enough to be worth sacrificing for will simply take too long. This could explain their focus on the here and now, on living their lives as pleasantly as possible, celebrating when occasion demands it.

Child who gets proper nutrients in utero or during early childhood wil earn more money every year of his or her life. This suggests that we need to rethink food policy (based on supply of more grains, more money – even increase income). In contrast investing in pregnant women and children is tremendous (fortified food in school, treating children for worms…)

Sacks’ poverty trap : health is a source of different traps: workers many workdays, children unable to do well in school, mother may have sickly babies…’The end of poverty’ optimistic message is about eradicating disease that affect people in poor country (malaria etc.). Studies shows that eradicating malaria does results in a reduction of long term poverty, although the effects are not as nearly as large as those suggested by Sacks (yet they can be significant 50% increase in income for the entire adult life – no enough to get people out of poverty in a generation, as Sacks argues).

 

P45 In 2008, 13% of population lacked access to improved water sources and 25% access to water that is safe to drink. It is estimated that by piping uncontaminated, chlorinated water to households, it is possible to reduce diarrhea by 95%. Lorna Fewtrell, HNP discussion paper 2004 “water, sanitation and hygiene kinks to health”. Nevertheless, today at $20 per household per month, providing piped water and sanitation is too expensive for the budget of most developing countries. Experience in India show that it is possible to do it much more cheaply: $4 per household.

We argued that buying bed nets to reduce the risk of getting malaria has the potential to raise annual incomes by a substantial 15%. However, the demand for bed nets, though very sensitive to price, is not very sensitive to income: people who are 15% richer are only 5% more likely to buy a net.

There is a “psychological sunk cost” effect: people are more likely to make use of something they have paid a lot for. In addition people may judge quality by price. In the “white man’s burden” Easterly seems to suggest that this is what is going on, based on anecdotes (bed nets used as wedding veil etc.). However there are a number of careful experiments that such anecdotes are oversold. Studies that have tested whether people use things less because they go them for free found no evidence of such behavior.

Immunization just prevents some diseases – there are many others – an uneducated parents do not necessarily understand what their child is supposed to be protected against. So when the child gets sick despite immunization, they are likely not to go through it again. They may not understand why all the different shots are needed. And they generally do not trust their doctors (which may not even be doctors at all, as in India).

The poor might appear to believe in all kind of things, but there is no much conviction behind many of those belief.

It is easy to see why small incentives encourage the use of life saving device and why small cost discourage it. A we may want to postpone the purchase of a bottle of chlorine until later because we have a better use for the money now. Vice versa a small incentive received today compensates for the little extra cost (in time or money or side effect) she bears today (by getting her child immunized for instance).

Given high sensitivity to prices, delivering preventive services for free, rewarding people for getting them or making them the default option when possible. There should be public investment in water and sanitation infrastructure in densely population areas.

Aren’t we , those who live in the rich world, the constant beneficiairies of a paternalism now so thogroughly embedded in the system that we hardly notice it? It not only ensures that we take care of ourselves better than if we had to be on top of every decision, but also,  by freeing us from having to think about these decisions, it give us the mental space to focus on the rest of our lives.

Enrollment rates have increased in all developing countries from 1999 to 2006, the number of children of school age who were out of school went from 103M in 1999 to 73M in 2006. The implicite assumption was that learning would follow from enrollment. Unfortunately, things are no so simple.

Conditional cash tranfers: PROGRESA in Brazil, parents gets more money if their children are in secondary than primary, more money if it was a girl who went to school rather than a boy. And payment were presented as compensation to the family for wages lost when children went to school. Such programme does substantially increase school enrolment rates.

Comparing conditional and unconditional transfers, a study in Malawi showed that the effects were large on drop out between those who received transfers and those who did not, but effect were the same for those who receive conditional and unconditional transfers: parents did not need to be forced to send children to school, they needed to be helped financially.

If parental income plays a vital role in the educational investment, rich children will get more education even if they are not particularly talented. And talented poor children may be deprived of education. Leaving it the market will not allow every child to be educated according to his/her ability.

P82 Unless parents are unwilling to treat their children differently from one another, it makes sense for them to put all their educational eggs in the basket of the child they perceive to be the most promising….rather than spreading the investment evenly across all the children.

Lower caste teachers were actually more likely to assign worse grade to lower-caste students (compared with higher-caste teacher). They must have been convinced that these children could not do well.

I should now be clear why private schools do not do better at educating the average child – their entire point is to prepare the best performing children for some difficult public exam that is the stepping-stone toward greater things….

In 1991, 15,000 more or less indigent Ethiopian Jews, including many children, were airlifted out of Addis Ababa in a single and dispersed into communities all over Israel. These children, whose parents completed on average between one and 2 years of schooling, reached graduation level with as much success as kids from other Israeli children, whose parent had on average 11.5 years of schooling. Even the most severe disadvantage in terms of family background can largely be compensated for.

It takes relatively little training to be an effective remedial teacher, at least in the lower grades.

By the end of 1976, 21% of Indian couples were sterilized (large financial incentives for those who agreed to be sterilized; compulsory sterilization laws). But the violations of civil liberties that were integral part of the implementation of the program were widely resented. It is widely believed that Indira Gandhi’ defeat in 1977 elections was in part driven by popular hatred for this program.

“The gift of dying” in a article Alwyn Young argued that epidemic (of HIV/AIDS) would make future generation better off by reducing fertility. Reduction occurs first because of the reluctance to engage in unprotected safe and because the resulting labor scarcity  makes it more attractive for women to work. South Africa could be 5.6% richer in perpetuity as a direct consequence of HIV/AIDs. “one cannot endlessly lament the scourge of high population growth in the developing world and then conclude that a reversal of such processes is an equal economic disaster.”

However the claim that HIV/AIDS will lead to reduce fertility has been refuted and the fact that reduced fertilityy will make everyone richer is less obvious than it sounds (we are richer today – and more numerous – than at the time of Malthus….)

Today there is no argument that large family are bad for children, contrary to what Sacks argues in “Common Wealth”.  That family does not adversely affect children seems counterintuitive, however: if the same resources have to be shared among more people, some of them should end up with less. If children do not suffer, who does? One possible answer is the mother.

Contraceptive access may make people happy by giving them a much more convenient way to control fertility. But it appears to do, in itself, little to reduce fertility. But better access to contraceptives help teenagers postpone pregnancies.

ABCD (Abstain, Be faithful, Use condoms or die): tested in 170 schools, no changes in behavior were reported and pregnancy rates after 1, 3 and 5 years after intervention was the same as in school without ABCD teaching.

Fertility is in part a social and religious norm, and deviation from it get punished  (by ostracism, ridicule or religious sanctions). Therefore, it matters what the community deems to be appropriate behavior.

The contraceptive adoption by Hindus had no effect on the adoption by their Muslims neighbors, and vice versa. This pattern must mean that the women were progressively learning about what was acceptable behavior within their communities.

Telenovelas in Brazil (where most female characters under the age of fifty had no child and the rest had one): right after soaps became available in an area, the number of birth would drop sharply (and many children were named after the characters in the soaps)

In India, girl babies stop getting breast fed earlier than boys, which means they start drinking water earlier and have accelerated exposure to waterborne disease diseases. In addition, after the birth of a girl, parents are more likely to want to stop breast feeding earlier in order to increase the wife’s chances of getting pregnant again (breast feeding act as contraceptive).

Economists often ignore the fact that a family is not just one person. There are important policy consequences from ignoring the complicated dynamics within the family. Giving women access to formal property title is important for fertility choices because it makes her view count more.

Perhaps women are expected to do something for the family when they get some windfall cash and men are not. If this is the case not only who get the money but how it is earned, also matters.

Of course the global crisis increased risk for the poor, but it added little to the overall risk they have to deal with daily, even when there is no crisis for the World Bank to worry about. During the Indonesian crisis in 1998….rice farmers, who tend to be among the poorest people, actually gained in terms of purchasing power. Government employees ended up worse off.

Drought may have more negative impact on wages in the villages that are more isolated: workers will compete with each other to find job and, given the limited amount of work available, competition with drive salary down. Working more is not always an effective way of copping with getting paid less.

The insurance company does not want only sick people signing up. To avoid adverse selection, the trick is to start from a large pool of people who came together for some other reason than health (employee of large firm etc.). this is why many microfinance institutions thought of offering health insurance.

Another possibility is that the poor do not understand the concept of insurance very well. It is true that insurance is unlike most of transaction the poor are used to. Something you pay for, hoping you will never need to make use of it….Farmers were able to understand the concept but were simply not interested in buying it. They were however swayed in their decision by relatively small things (home visits). The household must trust the insurer completely: trust, credibility of the insurance is an issue.

There are reasons why people don’t feel comfortable with insurances proposed on the market. On the other hand the poor clearly bear unacceptable risks. There is thus a clear role for government action.

Microfinance, with its 150 to 200 millions clients, has earned its place as one of the most visible anti-poverty policies. But does it works.  Unfortunately, until recently  there was in fact little evidence to prove this.

Many positive case studies, anecdotal evidence was sufficient for supporters of micro credit. Governments however worry that microcredit might be a new usury. Because most of the Microcredit Institution are financially sustainable, evaluating how beneficial they are was not necessary. But in reality they are generally subsidies by donors or by policies (priority sector qualifying for incentives etc.)

Microfinance give the poor a chance to map out the future in a way that was not possible for them before, and this is the first step toward a better life….we found no evidence that women were feeling more empowered, at least along measurable dimensions. They were not exercising greater control over how the household spend the money.

Microcredit has earned its rightful place as one of the key instruments in the fight against poverty. Microcredit is not miraculous, but it is working (though more studies are needed).

Why microcredit is not more popular:  it probably has something to do with precisely what makes it able to lend relatively cheaply and effectively: its rigid rules and the time costs it imposes on clients.

In many ways, their success comes from making repayment an implicit social compact, in which the community ensures that loans will be repaid and MFI continues to provide loans. The situation can quickly unravel is trust disappears (if people believe the MFI will go under then they stop repaying…). Opening the doors to defaults, even as a way to encourage risk taking, may lead to an unraveling of the social contract that allow them to keep repayment rates high and interest rate relatively low. The necessary focus on repayment discipline implies that micro finance is not the natural or best way to finance entrepreneurs who want to go beyond micro-enterprise. Microfinance is not well suited to discover who has a appetite for risk taking.

We are far from seeing the equivalent of the microfinance revolution for SME, nobody has figured out  how to do it profitably on a large scale. This is the next big challenge for finance in developing countries. Changes in business environment, such as improvement in the functioning of the courts, may well make that difference.

That view of the poor as essentially different people, whose innate inclination toward shortsighted behavior is what keeps them poor, has persisted over the years. Garry Becker, 1997: the possession of wealth encourages people to invest in becoming more patient (by implication poverty makes people more impatient).

As a result of administrative fees, most of the poor may not want a bank account even when they are entitled to one.

The poor live under considerable stress, and stress induced cortisol makes is choose more impulsive decisions. The poor thus have to do a harder job on fewer resources.

The vast majority of the businesses run by the poor never grow to the point where they start having employees or much in a way of assets. In addition they are not making much money. The very small scale of many of these businesses explains why their overall returns are often so low, despite the high marginal return. This low profitability of business run by the poor also explain why microcredit does not see, to lead to radical transformation in the client’s lives. Small business can’t borrow and what they borrow is very expensive. And even if money was available, developing business may require some management and other skills that they don’t have and can’t afford to buy. Therefore they are stuck staying small.

Given that micro entrepreneur may not be fully committed to make every penny count (knowing that it would not change their life in a meaningful way) may also explain the disappointing effects of the business training programs that MFIs offers to their clients. This lead to improve business knowledge but no changes in profits, sales and assets.

The enterprises of the poor often seem more a way to buy a job when a more conventional employment opportunity is not available. It is not a reflection of a particular entrepreneurial urge.

Stability of employment is what distinguish the poor from the middle class (weekly or monthly pay rather than daily pay). A sense of stability may be necessary for people for people to be able to take the long view.

Easterly has criticized randomized controlled trials (RCTs): they are infeasible for many big questions in development, like economy wide effects of good institutions and led development researchers to lower their ambitions.

Why Nations Fails: these institutions (political, economic institutions) are the prime driver of success or failure of a society. Acemoglu, Robinson showed that  former colonies where the disease environment prevented large-scale settlement of Europeans tended to have worse institutions during colonial times (because they were picked for being exploited from afar) and these bad institutions continued after decolonization.

The Bottom Billion : Paul Collier, it is western world’s duty to get the countries stuck in vicious circle of bad economic and bad political institution out, if necessary through military intervention.

Easterly : freedom (political and economic) is the best advice we can give to poor countries. But it can’t be imposed from outside. All that can be done is to campaign for the ideals of individual equality and rights.

Even a very imperfect local elections can make a substantial difference in how local government are run.

It might therefore be better for the decentralization to be designed by a centralized authority, with the interest of the less advantaged or less powerful in mind.

In Benin, the clientelist speech was a clear winner (comparing political campaigner speech – one about national unity, one more clientelist) with 10% more vote. Being from the right caste of ethnic group is sufficient to be elected.

Brazil, since 2003, 60 municipalities are drawn at random every month in a television lottery, and their accounts are audited. Results are made public through  the internet and local media. Honest incumbent were 13% more likely to be elected at the next elections. Corrupt incumbent were 12% less likely to be re-elected.

First the poor often lack critical pieces of information and believe things are that not true (e.g.in health, educ etc.).  They bear responsibility for too many aspects of their lives (i.e. the richer you are the more right decision are made for you, social insurance etc.).There are good reasons that some markets are missing for the poor, or the poor face unfavorable prices in them (e.g. they get negative interest on their accounts – too little in bank, too large admin fees). Poor countries are not doomed to fail because of their history. Finally, expectation about what people can or can not do  end up turning into self-fulfilling prophecies (role of expectations means that success feeds on itself).

 

 

 

 Making Globalisation Works – Joseph Stiglitz –  2006

 stiglitz_20990t

P X  My research cast doubt on the validity of the general claims about market efficiency but also on some of the belief underlying globalisation, such as the notion that free trade is necessarily welfare enhancing.

 

P XIV the reason that the invisible hand seems invisible is that it is not there. Without proper regulation and intervention, markets do not  lead to economic efficiency.

P XVI Free market economists believe that the benefits will trickle down to the poor. Interestingly, such beliefs have persisted, even as economic research has undermined their intellectual foundations.

 

P6 Changes in the thinking of globalisation: in the 90’s discussion at Davos focused on virtues of opening international markets. By early 2000 it centered on poverty reduction, HR, and the need for fairer trade arrangements

 

Argentina, Mexico saw lending to local companies dry up after many of their banks were taken over by foreign banks in the 90’s.

 

“the World Commission on the Social Dimension of Globalisation (ILO, 2004 report). Out of 73 countries, 59% of people were living in countries with growing inequalities (rich and poor countries alike). Only 5% in countries with declining inequalities.

 

P 10  If globalisation is being used to advance the American model, many elsewhere are not sure they want it. Developing world compliant that globalisation has been used to advance a version of market economics that is more extreme and more reflective of corporate interests, than can be found in the US.

 

China economic growth has lifted several hundred millions out of poverty. But China was slow to open is markets for imports and even today does not allow the entry of hot speculative money.

 

Dev Countries face more risks has they have no insurance against the insecurity of globalisation: in more advanced countries governments fill in the gap by providing pensions for senior citizens, disability payments, health insurance, unemployment insurance…In DC the poor are left to fend for themselves and so are vulnerable when the economy slows down or job are lost due to competition by foreign countries.

 

P 14 Poverty has at last become a global concern.

 

P16 Advanced countries were allowed to levy tariffs on goods produced by DC that were on average 4 times higher than those on goods produced by other advanced countries. While DC were forced to abandon subsidies designed to help their nascent industries, industrialised countries were allowed to continue their own enormous agri subsidies…

 

By 2003 IMF conceded that  at least for many DC capital market liberalisation had led to no more growth, just to more instability.

 

P17 Washington consensus paid too little attention to equity, employment, competition, sequencing and pacing of the reforms or how privatization were conducted.

 

A decade ago, concern about ENV and globalisation was limited to advocacy group and experts. Today, it is almost universal.

 

At the end of the 90’s there was money to bail out western banks but not for minimal food subsidies for those on the brink of starvation.

 

P20 While globalisation has put new demands on nation-states – in particular DC – to address the increasing inequality and insecurity that it can cause and to respond to the competitive challenges that it presents, globalisation has, in many ways limited their capacity to respond.

…There has yet to be creatd at the international level the kinds of democratic global institutions that can deal effectively with the problems globalisation has created.

 

P21 The fact that the institution which make the decisions suffer from a democratic deficit is clearly a problem.  It results in decision that are too often not in the interest of those in the developing world.

 

P 22 Most of us will always live locally…But globalisation has meant that we are at the same time, part of the global community…we have to think globally…this entails more than just treating others with respects. It will entail thinking about what is fair: what for instance would be a fair trade regime?

 

P23 China, India in the global economy: this is an event of historic proportions. Even in the most successful years in the west, growth seldom exceeded 3%. China has been three time that over the last 30 years.

…Even developed countries start questioning globalisation ( economic insecurity, inequality…) There may be growth but most people may be worst off

 

There has been reversal of globalisation before – the degree of economic integration fell after world war I and it can happen again.

 

P26 Dev is a process that involves every aspects of society, engaging the efforts of everyone…A DC that simply open up itself to the outside world does not necessarily reap the fruit of globalisation.

 

P29 Today most academic economists agree that markets, by themselves, do not lead to efficiency. The question is whether government can improve matters.

 

P31 China Vietnam Indonesia in the 90’s achieved growth and stability. They focused not only on price stability but on real stability, ensuring that new jobs were created in pace with new entrants to the labor force.

 

P35 Critics argue that IMF policies were not designed to protect countries from recession but to protect lenders by rebuilding reserve so that international creditors (such as the IMF) could be repaid.

 

P 36 in the 80’s  fighting its own problem of inflation, the US initiated interest rate increases that climbed to over 20%. These rates spilled over to latin America, triggering the crisis…

 

 P44 India did far less well than China in reducing poverty  but it has done better in preventing the rise of inequality, the disparities across region and between the very top and the rest.

 

 

P51 Brain Drain: another way in which developing countries wind up subsidising the developed world.  Former Malaysian prime minister referred to this loss, as stealing the developing countries intellectual property.

 

P55 In Uganda, the government has been publicizing all checks sent to the local level, so that villagers know what they should be receiving – and can make sure that those between Kampala and the village do not take their cut.

 

P56 IMF conditionality undermines democracy. Many international trade agreements especially bilateral by circumscribing  the legitimate activities of democratically elected government do that too…

 

 

P57 And recent Trade agreement  have made those policies – promoting  technology, closing the knowledge gap,  using financial markets as catalysts for growth – more difficult if not impossible to pursue.

 

P59 The rest of the world cannot solve the problem of the developing countries.  They will have to do that for themselves. But we can  at least create a more level playing field. It would be even better if we tilted it to favour the developing countries. There is a more case to do it There is also a case that it is in our interests. Their growth will enhance our growth. Greater stability and security in DC will contribute to better stability and security in developed world.

 

 

Making Trade Fair

 

P62 Assymetric opening up of markets have put Dc at a disadvantage. … trade liberalisation can help development.

67 Free trade is a substitute for people having to move.  We can sit at home in developed world and buy product made in China. Conversely Chinese can stay in China and buy high tech product made in US. This will push unskilled labor to increase and higher wages…

 

People may buy cheap good from China instead of from US. Fear of lost job opportunities. High productivity job will be created to compensate for low skilled job lost.  In many country people don’t move to better paid job, this is particularly true in DC were liberalisation was fast and private sector had no time to respond and create new job and with high interest rate could not invest to do so.

 

P 68 if trade liberalisation works, some groups will still be worse off. Judging from experience in developed countries, it is those at the bottom – unskilled workers – who will be hurt the most.

It is not just those who loose job who are affected – when local industries shut down their suppliers are adversely affected.  Increased insecurity is one of the reasons that opposition to trade liberalisation is so widespread.

Supply side constraints are a big problem thoughout Africa – they may have no infrastructure, they may not have anything to export, interest rate may be too high (as capital market are highly imperfect).

 

P 71 most successful countries developed behind protectionist barrier.

Infant industries argument: it impose enormous cost on the rest of the economy (and special interest get higher profit).  In Bangladesh protection of textile producers puts apparel makers in jeopardy by raising the cost of raw materials. This is a warning for countries contemplating using protection as a basis for encouraging new industries…but there is nothing inevitable in such a failure. Broad based protection – uniform tariff on say manufactured goods is one option (this is the infant economy approach as opposed to infant industry).  Broad based industrial protection can lead to increase industrialisation which is source of innovation  with spill over effect on the economy (institutions, financial market etc. (this does not work with agricultural products).

 

It is export – not removal of trade barriers – that is the driving force of growth. Studies on removal of trade barriers show little relationship with liberalisation and growth.

 

What is fair trade:  it is the trade regime that would emerge if all subsidies and trade restrictions were eliminated.  Note 24 chap 3: stricter rules apply to those countries that want to enter the WTO than for those that are already within. Anyone applying should be welcome and given time enough to adapt. Countries – like Cambodia – were imposed TRIPS to accede to WTO. US is using this practice to enforce the rules it wants to newcomers – Oxfam calls this “extortion at the gate”…

135. Conflict may arise between regions that have resources and those that don’t. Ressources rich region – Ogonilan in Nigeria, Kurdish north of Iraq, Katanga in Congo– have obvious incentives to break away. Why should they share their wealth? The rest of the country will equally be determined to hold on it. The violence that has afflicted resource rich countries represents the extreme of resource curse.

 

137. Democracy is needed to ensure a fair distribution of wealth. (note: Collier argues that electoral democracy actually is worse than autocratic regimes when it comes to sharing wealth but proper democracy (with adequate checks and balances and informed citizens) is part of the solution).The political dynamics of resource rich countries often lead to high level of inequality: wealth is used to maintain economic and political power.

 

139 There is now an OECD convention on bribery, but enforcement is difficult and incomplete. As of December 2005, there had yet to be a single prosecution outside the US under national legislation enacted to implement the convention.

 

139 The Malaysian, the Russian, Indian and Chinese oil companies…have become global players. They do not have to follow OECD agreements banning bribes….

140 Most developing countries are ill prepared to engage in sophisticated negotiations that are multinationals’ stock in trade….[multinationals] want all the risk of environmental damage to be borne by the country rather than themselves. In many cases where natural gas is concerned the contracts are designed to shift ordinary commercial risk – the size of demand for gas – from business to government.

141 after  oil prices skyrocketed in the 70’s, the United States imposed a windfall profits tax on the oil companies. The fact that the typical contract allows oil companies to walk away with windfall profits suggests that something is wrong with the way these contracts are designed.

141: It is the strategy of the oil, gas and mining companies to make sure that governments gets as little as possible…. Too often the only benefit for the country from a mine is the few jobs created….the environmental damage of the mine may simultaneously destroy jobs elsewhere and sometimes impose  enormous budgetary costs as government is forced to pay for the clean up.

142 Before privatization, the amount a government official  can steal is limited by the current sales (of oil etc.). With privatization, the future value of the resources is up for grabs and the stakes increases enormously.

Privatization can lead to lower revenues. With corruption etc. as each bidder believes bidding will be less keen, bidders bid less aggressively and the government may end up accepting a bid that is woefully inadequate. Problem is worse in situation where the number of bidders is very limited…

 

143 The argument for privatisation is that the private sector is more efficient than the public. The opinion is driven as much by ideology as by hard analysis – there are many efficient government oil and mining companies (note: Sweden, Finland in EU): Malaysia’s publicly owned Petronas has become a global player… Dr Mahathir says his country receives a larger fraction of the value of its resources than countries elsewhere who have privatised….Chile has privatised half of its copper mines yet Government mines are just as efficient….Russia provides a dramatic case of privatisation gone amok…

146 DC do not have the ability to weather the wings in export earnings as well as developed countries do. They do not have the built in stabilizers – progressive income tax, unemployment insurance etc. – that pump money into the economy when economy is weak. Individuals do not have savings. Banks are often not as well capitalized or regulated, so they are more prone to collapse.

International bankers are always willing to lend to resource rich countries when price is high. When resource prices drop, bankers of course want their money back  – just when the country needs it most. The boom and bust lending exacerbates the economic volatility brought on by  boom-and-bust prices.

148 Dutch disease…. Inflow of dollars lead to high exchange rate and loss of competitivity…..natural resources have the perverse effect of harming the rest of the economy……Nigeria was a major exporter of agricultural produce. Today it is a major importer.  Reducing amount (of dollars) converted in local currency  reduces exchange rate appreciation: that means a country must spend some money of the resource money on imports and keep some of the rest abroad. This is an argument for stabilisation funds in which a country can save when prices are high and use when recession comes.

 The major responsibility for getting as much value as possible from natural resources and using it well resides with the countries themselves. Their first priority should be to set up institutions that will reduce scope for corruption and ensure that money derived from …natural resources is invested well. It may be desirable to have some hard and fast rules (% on health, on education etc. ) Procedures needs to be put in place for independent evaluations of the returns on investments. Stabilisation funds are essential …Most importantly DC needs to view their natural resources as their endowment, of which the current government are trustees for future generations.

 

151Transparency : sunshine is the strongest antiseptic Citizens’s right-to-know laws are necessary (freedom of information acts). Government can set the rules and there are enough honest companies willing to play with rules of transparency. The citizen’s right to know should trump any claims to business confidentiality.

 

153 Just as a company’s books show depreciation of its assets, so too should a nation’s accounting framework reflect the depletion of its scarce resources. ( Green Net National Product – Green NNP is a measure that subtracts out not just depreciation of capital but depletion of natural resources and degradation of the environment.  A focus on GNNP would induce countries to invest more in conservation.

 

155 An action agenda for international community

In addition to promoting anti corruption laws, curtailing bank secrecy and compensate DC for the environment services they provided (by keeping the forest etc.) – 7 proposals are made:

 

1 – EITI – disclosure of what is paid and how much of resource was extracted…

2– Reducing arms sales

3 Certifications (for diamonds and woods)

4 – targeting financial assistance:

            Should tax payers in the developed world subsidize a government that is itself in effect giving away its resources?  Giving aid to countries that have demonstrated ability to pursue appropriate policies

5 Setting norms: design model contract s that ensure DC are treated fairly and assess what fraction of the value of the resource is being received by DC. Try to create a race to the top….

6 Limiting environmental damages: provide incentive for multinational not to despoil the environment: monitoring of damages by international  agency.

7. Enforcement : there is good practices in the business but this should not be left to goodwill. Trade agreement can be used to force good behaviour: trade sanction against companies and countries that engage in unfair trade practices, failing to subscribe to EITI, to OECD anti bribery measures……..these should be seen as unfair trade practice (and sanctioned accordingly)…