Arbitrage in Action

You say smuggler, I say arbitrager (HT:Poverty News Blog):

Social Solidarity Minister Gouda Abdel Khaliq cited smuggling to Libya and Gaza as a reason for [gas] cylinder scarcity in Egypt… . "Smugglers benefit from the difference in the price of the cylinders in Egypt," said Hossam Arafat, chairman of the petroleum section at the Federation of Commerce Chambers. "What makes this possible is that the government subsidizes the cylinders to the tune of 90 percent here."

Arbitrage in … used t-shirts?

Now along comes the notion of Project Repat that wants to exploit hipster demand for the double-irony of used t-shirts from Africa by buying these shirts at developing world markets, shipping them back to the United States, and using the profits to finance charitable activities.

Arbitrage in … investment opportunities

The arrival of large numbers of Chinese over the past few years is not something that Africans are so worried about (compared to the fixation in the western press). A Minister in Angola looked at us incredulously asking why we were so obsessed with the Chinese. He said they were only one amongst a range of new investors, and his country was open for business to all of them. …

A Chinese businessman in Accra told us “I don’t think I will be able to make more money in China than I can do here. The conditions in China are getting quite bad, and will be worse with this world crisis”. Commonly businessmen talked about earning anything up to three times what they could make in China for the same investment.

You say “misuse of scarce development funds,” Moss says “development” (emphasis added):

The project will also turn a disused old hotel site into an active hive of economic activity.  If that’s not development, then what is?  … When President Bill Clinton visited Ghana in 1998 he couldn’t spend even one night in Accra because of a shortage of suitable hotels.  Today, Ghana has several world-class business hotels, but if the country is going to live up to its ambition to become a regional business hub, then it needs places for business elites and tourists to sleep, eat, and meet.  Even if this is somehow distasteful to critics who may imagine that poverty-reduction is only about romantic notions of selfless activists helping peasants, development is really about building a vibrant business sector

While staying at one of these more luxurious estates for a development conference for the first time, I proposed a research agenda to my advisor: measure the importance and attention of development institutions in a country based on the presence or absence of luxury hotels. It seems there is some interest in coming to more of an answer of that question. Now if only I can get a grant to stay at a few more of them so I can do some data collection....

Comparative Institutions

What is development and capitalist happiness, USSR edition:

When the Soviet authorities during the 1940s exhibited the 1940 movie The Grapes of Wrath as evidence of how miserable the poor were in capitalist America, it backfired.  What amazed the Soviet audiences was that the Joad family fled starvation by car.

A literature review on connections between agriculture, development, and health. Audibert concludes that the link from agriculture to economic growth is well established, but when agricultural projects are carried out they are not always managed appropriately to prevent the spread of diseases. Improving agricultural methods (e.g. integrated pest management) and investing in public goods (health and education) would significantly improve health and development outcomes. It includes a useful and detailed summary table at the end with numerous papers on the subject. Audibert, Martine (2011) “Endemic diseases and agricultural productivity: Challenges and policy response,” presented to AERC Biannual Research Workshop.
 

The World Bank is contemplating turning into a foundation to fund NGOs. I have several reactions. 1) I really don’t think this is the Bank’s comparative advantage. 2) They haven’t had the best track record in picking winning countries. How are they going to pick winning NGOs? 3) If it amounts largely to a greater willingness to work with NGOs, increase funding possibilities, and have an access route to work around governments, there might be some progress … but there’s going to be a lot of devil in those details. 

On institutional innovation and experimentation:

I for one was very surprised that the UN Security Council endorsed military action against Libya. This is big. I suspect the UNSC’s failure to act in Rwanda and the Congo, and to some extent Iraq, played a big role in their decision. That is institutional evolution in action. That makes me hopeful, because I think unified responses and moral authority matter. … On the other hand, if the world threatens and then backs down, or rewards the most thuggish leaders with coalition governments, we could move in the opposite direction.
The tricky thing: however they turn out, we’ll learn very little from the cases of Libya and Cote d’Ivoire. The effects and institutions will emerge over decades rather than years. So not only do we have low accountability, we have bad feedback.

Five Second ... Age of Declining Turbulence

I discovered a book in my mailbox a few months ago: The Age of Declining Turbulence: Are Alan Greenspan's Projections Wrong? by Douglas N. Thompson. There was no explanatory note attached, no information, just a thin, blue book. At the time, there was precious little information about it online, though now it has an Amazon page. One Amazon reviewer tells me why I find so little: "This 92-year old retired Professor of Economics from University of Utah..." aha. I just got around to it and since I can only assume I'm being asked for a review, here it is:

The main purpose of the book is to refute Alan Greenspan's prediction that we are entering an Age of Turbulence. I haven't read Mr. Greenspan's book, so I'm unable to judge whether Thompson addresses specific points from Greenspan's arguments. I came away agreeing that lower turbulence (economically and militarily) is one possible outcome, but far from convinced it must be so. It was an interesting read; I'm glad I read it; but it's not one I'm going to return to again.

An odd thing stood out to me from the close to chapter 1. He claimed to "demonstrate that Greenspan's two main worries will not likely be realized." The book is not about proving or demonstrating anything. It's an argument for an alternative version of what will happen, based largely on the optimistic assumptions that 1) the US government has learned from the recessions and macroeconomic shocks of the past how to deal with problems in the future; and 2) the lure of capitalism's abundance will continue inexorably to pull other countries into market or state-market institutions. He then follows these assumptions to show how a better long-term future is ahead of us. His arguments are plausible and his scenario holds together well. I like a good portion of what he says, but he does far more sketching out how events will eventually play out than defending why they will more probably follow his assumptions than Greenspan's.

While this is clearly a love poem to capitalism, his argument is not ideologically against governments: he argues for fiscal and monetary (mostly fiscal) response to the current recession, for some form of carbon tax, and for government programs of various levels to promote "the basic social service": full employment, with "nanny state" welfare and prison programs also having an important role to fill for those who cannot or choose not to be responsible citizens. These programs (promoting full employment on down) will be part of preventing the social tensions Greenspan foresees causing increasing strife because of economic inequality.

There is little discussion of the validity of his assumptions and he is sometimes not as careful as he claims to be. For instance, while he is usually content to say that the long-run trends are in his favor even if individuals or groups running governments sometimes make mistakes, he actually claims that "stock, credit, foreign exchange, and other markets will likely force Mr. Putin back onto the path toward capitalism and peace fairly soon." Like much of the book, it's a bald assertion (no slight to Mr. Putin's hair) with no facts brought forward to support it.

Some of his other interesting arguments (many of which I debate, but that's what makes them interesting to me. The stuff I already agree with was less interesting!) are below the fold:

Laws of Fiscal Austerity

The IMF has some guidelines (by Blanchard and Cottarelli) for developed countries that would like to improve their fiscal balance sheets. Only, this being the IMF, they call them Ten Commandments. I'm not kidding. They include:

Thou shalt neither put all the spending cuts up front, nor all in the distant future.

Thou shalt reform health care and social security as soon as possible.

Thou shalt be equitable.  In fact, the IMF is going to tell you what VAT tax rate to have (15%).

Thou shalt coordinate. Both between fiscal and monetary and between countries. "Calls for an early monetary policy tightening in advanced economies are misplaced."

It will be interesting to see the reactions, if any, to such advice. Some possibilities:

A) Developed countries give the IMF a boost of credibility and follow through the way they claim developing countries should.
B) Developed countries decide the IMF may not understand in-country perspectives and adjusts their governance structure to reward more modest policy pronouncements.
C) Advice? What advice? We didn't hear any advice. Oh, sorry, were you talking to me?
D) The IMF loses* legitimacy and its governance worsens as developed nations reprimand it for not being their tool of third world oppression [It sometimes frightens me how easy it is to write someone else's propoganda.]

*Extra credit: Draw a political cartoon depicting what would happen if the IMF 'looses' legitimacy on an unsuspecting government....

Speaking of the Ten Commandments, Arnold Friberg has passed away.

Haddad's Sensible Questions on Effectiveness

Aid effectiveness:

Why has no-one asked whether conditional cash transfers make sense in sub-Saharan Africa? Most of the effort has been spent on answering if cash transfers have an impact on hunger. Of course they do. ...

The "randomistas" and even the quasi-experimentalists often answer the question "does it have an impact?", sometimes "for who?", but rarely "why?". This requires innovative issue-driven blends of quant and qual. ...

 Some more:

Is the UK taxpayer getting value for money from 30 or so global organisations? ... [Factors impacting the answer to that question include transaction costs, credibility, and:]

Ownership. Can multilaterals support government systems better than direct budget support? I'm not sure. And I'm not even sure the best way to find out-who to ask? Civil society in the South? Recipient Governments? The new Aid Watchdog?

Impact. It is harder to demonstrate to donor citizens that their taxes are having a particular effect when resources are pooled in multilaterals.

And, for a change of pace, one answer:

some work I was involved in in the late 90s showed that for 100 public works projects in Western Cape, the ones led by communities were the most cost efficient at transferring resources to the poorest

WB on Africa's successes

The World Bank's Kenyan report is out. It cheers that Kenya's economy is recovering from the global recession. They expect growth of about 4 percent this year and nearly 5 percent next year. However, they are concerned that growth is not more widespread throughout economic sectors (mostly non-tradable services) and they really want investments to be made to improve Mombasa's port which slows trade.

The Bank also cheers successes from government getting out of the way:

The best example is Ghana’s cocoa sector, which was destroyed by the hyperinflation and overvalued exchange rate in the early 1980s. When the exchange rate regime was liberalized and the economy stabilized, cocoa exports boomed (and continue to grow). Similar examples include Rwanda’s coffee sector and Kenya’s fertilizer use. Africa’s mobile phone revolution, too, is an example of the government’s stepping out of the way—in this case by deregulating the telecommunications sector—and letting the private sector jump in.

Getting involved where it needed to:

The example of Mali’s mangoes is a beautiful illustration of how, when governments intervene to provide genuine public goods—and only those goods—the private sector can spur growth and poverty reduction. In Lesotho’s textile industry and Rwanda’s gorilla tourism case, too, the government stepped in to provide just the enabling factors for take off.

And giving "smart" subsidies:

In the case of NERICA (New Rice for Africa) or the KickStart pump, the government went beyond providing an initial subsidy. They continuously consulted with farmers about the design of the new technology (in the case of NERICA) and how to market it (in the case of KickStart). They were able to avoid the fate of other subsidy programs that simply provided the subsidy without paying any attention to the beneficiaries’ knowledge or preferences.

I find it interesting that both the market and the government are cheered throughout while also discussing the failures of each. "In fact, what distinguishes these successes from similar efforts that didn't succeed is that they emerged from a domestic consensus or idea within the countries."

WIDER Panel: Summing Up

Richard Jolly of City University of New York
Margaret Kakande of Uganda Finance Ministry
Per Pinstrup-Andersen of Cornell
Gita Sen of Indian Institute of Management

WIDER Panel: Global Governance and the Triple Crisis

Charles Gore of UNCTAD: Global Governance - Development Finance for LDCs
Gerry Helleiner of U Toronto - "Some Elements of Improved Global Financial Governance"
Vladimir Popov on devaluation as successful industrial policy to promote growth - very interesting. I propose a question he answers.

Triple Crisis Panel 1

I'm at the UNU-WIDER 25th Anniversary Conference, The Triple Crisis: Finance, Food, and Climate Change. This introductory panel sets the stage with an expert on each element of the triple crisis. Most of this was sent out on my Twitter account (derrillwat), which I normally use only sporadically.

Amar Bhattacharya (Forum on Debt and Development):
Before the crises: 96 countries were growing more than 5%, over 30 more than 3%
Developing countries have escaped recession faster on average than developed countries.
For the first time, Africa did not see decreasing GDP with global recession
Africa’s long-term growth prospects look better than Latin America
Estimates of cost to reduce climate change: 1) $9b 2) 20-80 billion 3) over 100 billion. Estimates grow as time goes by within this decade. (Translation 1: we have no clue; Translation 2: We're all going to die!)
New donors in Africa twice as important for infrastructure finance than traditional donors
World Bank cheered for extra $3 billion. Compared to private credit flows ($200-$500 billion), it's still 0

Shenggen Fan (IFPRI):
MDG on cutting hunger is not on track, but is still achievable
but only if we drop 69 million hungry people per year
Ethiopia, Chad, and Dem Rep of Congo the most alarming countries for hunger
Finance affects food security largely through capital flows
Climate change affects food security largely through changes in production
IFPRI has a new map of effects of #climatechange on #maize yield worldwide. Mostly bad in Africa, good in some of Asia & Latin America
1 - Improve smallholder productivity and access to markets (esp. inputs, extension services)
In 6/7 African and Asian countries, investments in Agriculture had highest returns. [See also Cases 9-1 and 9-2 for our upcoming food policy book]
2 - Scale up safety nets: conditional cash transfers, maternal and child nutrition, public works, insurance for the poor
3 - Keep trade open and reduce market volatility (national and regional food stocks)
4 - climate change adaptation and mitigation investment (ag research, irrigation)
5 - new partners (BRIC), more use of private sector and private charities

Jomo KS: UN Assistant Secretary-General for Economic Development
Markets alone won't solve climate change. Not that it has no role - the role is complementary rather than fundamental. This is a difference between UN and World Bank views.
Public investment to crowd in private investment on sustainable technology
Need a lot more emphasis on adaptation, particularly in developing countries.
References Clinton's mea culpa on Haiti trade as evidence that trade led to food crisis. Look for my upcoming case study debunking this.
cheap credit led to over-investment. With the current recession, this causes underutilized capacity, making the private sector reluctant to invest. Hence, we need cross-subsidized public investments to crowd the private sector in.

Governance reforms: World Bank

International institutions are schizophrenic.

• Hello, I'm a bank. I want you to loan me money so I can loan money to someone else (or maybe back to you!) so I'll make more money.
• Hello, I'm a donor organization. I want more money to do good in the world.
• Hello, I'm an ultimate representation of capitalist democracy: one dollar, one vote.
• Hello, I'm an international power broker. You only get more voice in here if I say so and if that means I get less money, so be it.
• No, we don't want your stinking currency.
• Well, okay, maybe we do.

In other words, the World Bank just got $5 billion more in capital, a lot of it from developing countries to increase their voting share from 44 percent to 47 percent and giving China the 3rd largest voice behind the US and Japan. Increasing the vote of developing nations is (at current levels) generally considered a Good Thing.

The Bank expects that this infusion will merely enable it to keep up its earlier projects while at the same time being encouraged to "redouble its focus on helping the poor, especially in sub-Saharan Africa; invest in agriculture and infrastructure; promote global “collective action” on climate change, trade and other priorities; combat corruption; and prepare for crises." A lot to do while increasing only enough to maintain status quo.

Pres. Zoellick said this about the move:

“A lot of growth is coming from the developing world, and so the financing we do in the developing world is now beyond charity and social solidarity — it’s a question of self-interest,” he said. “They have become sources of demand.”

Hat tip: Blattman.

A More satisfying large Bag o Blog Links

Hat tip: Owen Barder
For a good time with data, call data.worldbank.org.
A back of the envelope calculation of the effects of trade on development: 200k Euro per day in Ethiopia rose exports and another $2 million per day in Kenya's floristry lost because of restricted air travel.

What is fungibiility? Why is econometrics the wrong tool to use? Whose money and whose ethics?

When econometrics is the right tool to use, the question should not be if the effect of an aid program is statistically different from 0, but if it's statistically better than just giving them cash. (see right)

Blattman and George Mason inform us that:

more than a quarter of television weathercasters agree with the statement “Global warming is a scam,” and nearly two-thirds believe that, if warming is occurring, it is caused “mostly by natural changes.”
(The survey also found that more than eighty per cent of weathercasters don’t trust “mainstream news media sources,” though they are presumably included in this category.)

At last, Chevy Chase's dream has come true: a cleaning and dessert all in one.