An intriguing historical narrative of this story is given in the recent edition of EJW.
Archive for the ‘Growth and development’ Category
Carl Kitchens (of University of Mississippi) explains how rural electrficiation in 1930s helped US economy:
It is a result which would be really surprising if it did not happen:
Economists have found that large-scale infrastructure investments tend to increase economic growth and reduce poverty. However, there has been relatively little research on the effects of smaller, more targeted investment projects. This column discusses recent research on the effects of the US Rural Electrification Administration, which provided subsidised loans for connecting farms to the electric grid. Counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity than similar counties that did not.
Subsidised loans? Did I read that correctly?
While large-scale projects have demonstrated benefits, often at a large expense, the literature has neglected smaller, more targeted, less expensive projects. In new research (Kitchens and Fishback 2013), we focus on electrification projects that directly connect rural consumers to the electric grid. In 1935, the Rural Electrification Administration (REA) was created in the US. In a five-year period, the REA provided $3.6 billion in subsidised loans to newly established cooperatively owned utilities. With these funds, rural utilities doubled the number of farms receiving electric service, and constructed more rural distribution line than private companies had constructed in the previous 50 years.
Using a sample of approximately 1,400 rural counties in the US from 1930 to 1940, we estimate the relationship between changes in access to electricity via the REA and agricultural outcomes such as crop values, livestock values, farm size, and land values. We are interested in how counties that received access to electricity from the REA changed relative to similar counties that did not receive REA electricity.
Our empirical findings suggest that access to electricity improved outcomes in agricultural counties. While agriculture was in decline everywhere at the peak of the Great Depression, counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity relative to counties that did not obtain electricity from the REA.
Just to point this as a start – Estonians actually elect their Parliament online!
I was amazed to read this piece by Sten Tamkivi (of The Atlantic) on Estonia’s emergence as a tech powerhouse . It lost a lot of years due to Soviet Occupation in 1991 but has geared up really well since then. It has taken on the technology big way.
We should be talking more about its ventures with technology:
Building a circular economy — based on reuse and refurbishment of products, components, and materials..January 23, 2014
Long back Mahatma Gandhi said “the world has enough for everyone’s need but not for everyone’s greed”.
Frans van Houten CEO of Royal Philips has this interesting piece revisiting the Gandhi dictum (does not mention it though). He says world economy is going to be majorly urbanised and middle classed by 2030. This will put huge constraint on the available resources given our current economic system of use and throw:
A billion dollar (or trillion?) dollar question facing most citizens across the world. And this is perhaps the oldest research question which remains relevant today and likely to remain in future as well.
What research says is something really simple and intuitive — Seeing is believing. So unless people see that the govt is working for them, they are always going to feel nothing is working. So, for a government to demonstrate its efforts it needs to show people that something is going on.
What is interesting in the research is how they come about these results:
Happy New Year to all once again. Hope you had a great time last night. Fireworks in some places was as always brilliant. But I particularly liked the lightning in Shanghai which was different and looked really cool.
So how should ME start the new year? By pointing to an article that questions one of the oldest theories in economics – comparative advantage. It is by Prof Ricardo Hausmann of Harvard who has been writing some fascinating and food for thought stuff recently.
Comp Adv. theory says countries gain from trade by specialising in the good/service in which they hold comparative adv. Prof Hausmann says much talk about importance of specialisation is a myth. The more diversified an economy the richer it is.
He begins saying it is really hard to defy an idea that looks really good on paper:
Got this interesting press release from IMF in my mailbox today.
The International Monetary Fund’s Executive Board met today to consider the Managing Director’s report on Argentina’s progress in implementing remedial measures to address the quality of the official data reported to the Fund for the Consumer Price Index for Greater Buenos Aires (CPI-GBA) and Gross Domestic Product (GDP).
While noting that Argentina has not adopted the measures called for by the Fund to address the inaccurate provision of CPI-GBA and GDP data, the Executive Board recognized Argentina’s ongoing work and intention to introduce a new national CPI in early 2014. The Board also noted that Argentina is working to address the shortcomings in its GDP data.
In light of these developments, the Executive Board adopted a decision calling on Argentina to implement specified actions to address the quality of its official CPI and GDP data according to a specified timetable. The decision calls on Argentina to implement an initial set of specified actions, including the public release of a new national CPI and revised GDP estimates, by end March 2014.
Prof. Ricardo Hausman of Harvard and former minister of planning of Venezuela has this really nice piece on the topic. each time you think this is different, the reality is it isn’t..
It is often difficult to understand how countries that are dealt a pretty good economic hand can end up making a major mess of things. It is as if they were trying to commit suicide by jumping from the basement.
Two of the most extreme cases (but not the only ones) are Argentina and Venezuela, countries that have benefited from high prices for their exports but have managed to miss the highway to prosperity by turning onto a dead-end street. They will eventually have to make a U-turn and backtrack over the terrain of fictitious progress.
The puzzling thing is that this is not the first time either country has veered into an economic cul-de-sac. It has been said that only barbers learn on other people’s heads, but some countries seem unable to learn even from their own experience. The ultimate reason for such self-destructiveness may be impossible to identify. But it is certainly possible to describe how the road to hell is paved, whatever the intentions.
He says the troubles begin whenever the govt. tries to put controls to keep inflation and exchange rate under control:
It all starts when some imbalance causes overall inflation or some key price – typically the exchange rate, but also power, water, and gasoline – to come under upward pressure. The government then uses its coercive power to keep a lid on price growth. For example, Brazil has wreaked havoc on the financial health of its national oil company, Petrobras, in order to keep gasoline prices low. Argentina destroyed its natural-gas sector with price controls. Many countries have kept power and water prices too low and have ended up with shortages.
But things become really nasty when the government opts for foreign-exchange controls. The usual story, nicely summarized by the late Rüdiger Dornbusch and Sebastian Edwards, is that lax fiscal and monetary policies cause a flood of freshly printed currency to chase more dollars than the central bank can provide at the going exchange rate. Rather than let the currency depreciate, or tighten its policies, the government opts for foreign-exchange controls, limiting access to dollars to those who “really” need it and thus preventing “speculators” from hurting “the people.”
Foreign-exchange controls, typically accompanied by price controls, give the government the sense that it can have its cake (lax policies) and eat low inflation. But controls lead to a parallel exchange rate, which can be either legal, as in Argentina, or illegal and even unpublishable, as in Venezuela.
But having two prices for an identical dollar creates enormous arbitrage opportunities. A dollar purchased at the official rate can be sold for almost twice as much in the “blue” market in Argentina and a whopping ten times more in Venezuela. Repeat that game a few times and you will be able to afford a corporate jet. Nothing becomes more profitable than over-invoicing imports and under-invoicing exports. In Venezuela, importing spoiled food and letting it rot is more profitable than any investment anywhere else in the world (disregarding, of course, the bribes needed to make it happen).
The dual-exchange-rate system ends up distorting production incentives and causing the effective supply of imported goods to decline, leading to a combination of inflation and shortages. But here things turn interesting. Public spending tends to rise with inflation more than government revenues do, because revenues depend on the tax on exports, which is calculated at the pegged official exchange rate.
So, over time, fiscal accounts worsen automatically, creating a vicious circle: monetized fiscal deficits lead to inflation and a widening gap in the parallel exchange-rate market which worsens the fiscal deficit. Eventually, a major adjustment of the official rate becomes inevitable.
He points how Venezuela continues to suffer from this choice of policies. Why does this happen all the time?
Why do countries opt for such a strategy? Any system creates winners and losers. In Argentina and Venezuela, the winners are those who have preferential access to foreign exchange, those who benefit from the government’s profligacy, those who can borrow at the negative real interest rates that lax policies create, and those who do not mind waiting in long lines to buy rationed items.
Such a system can generate a self-reinforcing set of popular beliefs, which may explain why countries like Argentina and Venezuela repeatedly drive down dead-end streets. Because so many businesses make money from the rents created by the rationing of foreign exchange, rather than by creating value, it is easy to believe that markets do not work, that entrepreneurs are speculators, and that governments need to control them and impose “fair” prices. All too often, this allows governments to blame the car, and even the passengers, for getting lost.
It looks at political economics of why wheeled transport was not introduced in West Africa in colonial times. More interestingly, it shows how railways could have created a visible impact in these economies: