Archive for the ‘Growth and development’ Category

Economics of Political leaders favoring their preferred regions

May 29, 2014

An interesting article (hugely relevant to India) in voxeu by Roland Hodler and Paul Raschk.

They point to how politicians favor their regions:

Many political leaders favour their preferred regions. An extreme example is Zaire’s former dictator Mobutu. In his remote ancestral home town Gbadolite, he built a huge palace complex costing $100 million, luxury guesthouses, an airport capable of handling Concords, and the country’s best supply of water, electricity, and medical services. But Mobutu is no exception. There is a large literature on distributive politics documenting regional favouritism. Golden and Min (2013) review the literature on redistributive politics based on an inventory of more than 150 empirical studies. They notice that most studies focus on a single democratic country, and a single policy outcome.

We have many such news around India as well. There has been a lot of news recently on how India’s new PM will revitalise city of Varanasi. Though it is not his place of origin but as he has fought elections from Varanasi, it has become his preferred region.  Similarly how SP leader Mulayam Singh has tried to develop the area around his hometown of Saifai in UP. There are many many others.

So how can one figure this regional bias?

In a recent article (Hodler and Raschky 2014), we complement this literature on distributive politics by taking a systematic look at regional favouritism in a large and diverse sample of countries that includes democracies as well as autocracies, and by employing a broad measure of regional favouritism that captures the aggregate distributive effect of many different policies. In particular, we use information about the birthplaces of political leaders and satellite data on nighttime light intensity to study whether subnational administrative regions have more intense nighttime light when being the birth region of the current political leader.

Our analysis is based on a panel dataset with 38,427 subnational regions in 126 countries, and annual observations from 1992 to 2009. The dependent variable is the logarithm of average nighttime light intensity, which is recorded by US Air Force Weather Satellites and provided by the National Oceanic and Atmospheric Administration. Henderson et al. (2012) document a strong relationship between nighttime light intensity and GDP at the country level, and propose the use of nighttime light intensity as a measure of economic activity at the subnational level. Using regional GDP data by Gennaioli et al. (2013), we find a similarly strong relationship between regional nighttime light intensity and regional GDP. Our main explanatory variable is a dummy that equals one for the birth region of each country’s current political leader, and zero for all other regions.

Our results suggest that being the leader region increases nighttime light intensity by around 4%, and GDP by around 1% on average.


Rise in GDP was expected but night time light intensity too rises..Nice way to capture the impact.

Though this does not lead to sustainable development. Once the elections are lost, out goes the leader and the growth..

Economic History and Economic Development: New Economic History in Retrospect and Prospect

May 28, 2014

Peter Temin, eminent econ historian has this food for thought paper.

He points to this interesting comparison of econ history and econ development. Former looks at high wage econs and latter at low wage econs:


Why do nations succeed/fail in educating their people?

May 19, 2014

Denis Cogneau and Alexander Moradi do a Acemoglu/Robinson model on education. They show how colonial education institutions planted then continue to impact education outcomes in current times as well.

And once again, it is in British colonies where we see favorable impact:


Will China become largest economy? …playing with and understanding PPP

May 8, 2014

There was recent news on how China will takeover US as the largest economy in 2014. Well this will be in PPP terms.

Kaushik Basu, World Bank’s chief econ has this interesting piece on the issue.


Summing up Thomas Piketty’s book – Capital in the 21st century

May 7, 2014

This blog has largely been silent on the storm of articles since the Piketty book has hit the shores. It is a similar feel when Why Nations Fail was released in 2012. Very similar articles were released terming it a defining book and so on. Now we have a similar kinds of response to Thomas Piketty’s book -Capital in the 21st century.

Came across this nice Boston Review piece which sums up the book and the several debates (so far) nicely.


Revisiting the need for Industrial Policy..

May 6, 2014

Life is coming a full circle atleast in economics. Things which were seen a strict no-no are making a comeback. And that too from organisations/experts who considered even mentioning such things as a huge taboo.  One such thing making a sort of comeback is Industrial Policy, a kind of action where government intervenes to  create certain indsutries.

Andres Velasco of HKS says that it is indeed making a comeback in LatAm Inter-American Development Bank  in its recent report is suggesting to use IP to push growth and development in the region.  He agrees that it seems to the best hope for the region. Earlier IP was ridiculed for removing market incentives. Now it is being promoted as addressing market failures. Velasco takes back to classical arguments over the need for state investments in areas where private sector will not be interested (kind of public goods).

Interesting times.. 

Measuring Misery around the World….(India ranks 21st in a list of 90)

April 28, 2014

Steve Hanke of Cato has this interesting article. I was not aware that there is something called misery index which measures economic and social costs of living in a country.

The index is also really simple: Inflation rate + unemp rate . It was developed by Arthur Okun and was further developed by Prof Robert Barro (added interest rate and subtracted per capita GDP growth to the two variables). There is this site which updates the index for US economy regularly (though only for Okun’s formula). It is interesting to note how the index has developed across the regimes of various US Presidents since 1948. Despite the mess US is in, the index is now as high in US (8.21) with most driven by unemployment. It was around 6-7 before the recent crisis.

Prof Hanke puts the list for 90 countries as well along with  the factor responsible for the misery. He uses Barro’s four factor model:


Why we’re in a new gilded age?

April 11, 2014

Krugman reviews the famous Piketty book. And what a title for the book – Capital in the Twenty-First Century. I have not read the book so far and am waiting to get my hands on it.

But Krugman does a good job of explaining the book. It seems it explains the  rise in inequality in Europe in 1920s etc. But does not do as great job for explaining the rise in US.


How much do countries benefit from membership in the European Union?

April 10, 2014

For a moment I thought, could we still have research which looks at this question? But then I looked closer and realised it is European Union and not the monetary union.

Nauro Campos, Fabrizio Coricelli and Luigi Moretti look at this question for EU members. What if the current EU members chose not to join the union?


Using science (sorry politics) to kill the mosquito menace..

April 10, 2014

The price of political uncertainty…

March 31, 2014

Bryan Kelly, Lubos Pastor and Pietro Veronesi have this interesting piece in voxeu.

The authors develop a measure of political uncertainty and see its impact on fin markets:


Lining up to vote is no guarantee for a working democracy

March 27, 2014

Prof. Ricardo Hausmann is in top form given the articles he generates at Proj Synd. Really top stuff.

The recent  one on what makes democracies tick is a reallyold one. But he conveys the message really effectively:

He begins quoting Adam Smith and then goes to the most current event of missing airplane in Maalysia:

When Adam Smith was 22, he famously proclaimed that, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” Today, almost 260 years later, we know that nothing could be further from the truth.

The disappearance of Malaysia Airlines Flight 370 shows how wrong Smith was, for it highlights the intricate interaction between modern production and the state. To make air travel feasible and safe, states ensure that pilots know how to fly and that aircraft pass stringent tests. They build airports and provide radar and satellites that can track planes, air traffic controllers to keep them apart, and security services to keep terrorists on the ground. And, when something goes wrong, it is not peace, easy taxes, and justice that are called in to assist; it is professional, well-resourced government agencies.

All advanced economies today seem to need much more than the young Smith assumed. And their governments are not only large and complex, comprising thousands of agencies that administer millions of pages of rules and regulations; they are also democratic – and not just because they hold elections every so often. Why?

He goes back to Smith and invokes the invisible hand. Just like we have one for markets there is another one for political system as well:

This is an information-rich problem, and, like the social-coordination challenge that the market addresses, it does not allow for centralized control. What is needed is something like the invisible hand of the market: a mechanism for self-organization. Elections clearly are not enough, because they typically occur at two- or four-year intervals and collect very little information per voter.

Instead, successful political systems have had to create an alternative invisible hand – a system that decentralizes the power to identify problems, propose solutions, and monitor performance, such that decisions are made with much more information.

To take just one example, the United States’ federal government accounts for just 537 of the country’s roughly 500,000 elected positions. Clearly, there is much more going on elsewhere. The US Congress has 100 senators with 40 aides each, and 435 representatives with 25 aides each. They are organized into 42 committees and 182 subcommittees, meaning that there are 224 parallel conversations going on. And this group of more than 15,000 people is not alone. Facing them are some 22,000 registered lobbyists, whose mission is (among other goals) to sit down with legislators and draft legislation.

This, together with a free press, is part of the structure that reads the millions of pages of legislation and monitors what government agencies do and do not do. It generates the information and the incentives to respond to it. It affects the allocation of budgetary resources. It is an open system in which anybody can create news or find a lobbyist to make his case, whether it is to save the whales or to eat them.

So it is not about just elections. There is an entire process which is at place. Most developed countries seem to have understood and developed this process. Hence they are developed too:

Without such a mechanism, the political system cannot provide the kind of environment that modern economies need. That is why all rich countries are democracies, and it is why some countries, like my own (Venezuela), are becoming poorer. Although some of these countries do hold elections, they tend to stumble at even the simplest of coordination problems. Lining up to vote is no guarantee that citizens will not also have to line up for toilet paper.

Not sure whether we can ascribe this reason alone for development. But is a worthy reason.

The invisible hand should be as effective in the political arena as it is supposed to be in the economic arena. Alas this is seldom the case. Moreover, we usually ignore the polity and remain focused on economy. We just don’t realise that it is former  that drives the latter. Both are neither independent nor is it the case of latter driving the former. But we just don’t care and keep missing the lessons over and over again. Only when the invisible hand of politics becomes visible via poor governance and malaise do we realise the importance..

But a really good article. Read the comments too..

China’s economic potential is greatly limited by its political system..

March 27, 2014

HBS  Professors William C. Kirby (along with Regina Abrami and F. Warren McFarlan) has written this book –  Can China Lead?: Reaching the Limits of Power and Growth.

HBSWK does a review of the book. The similarity to India is too good to rule out:



The chartbook of economic inequality across the select economies (including India)

March 26, 2014

Inequality trends has taken over the world economy and  captured the interests of economists.

Tony Atkinson and Salvatore Morelli introduce to this superb chartbook on inequality in this voxeu piece. The chartbook captures trends for more than 100 years across twenty-five economies including India.

Even better is it has this common set of questions for all the countries which help understand the trends.

For India this is how it stands:


Is enonomic performance mostly about telling macro stories effectively?

March 24, 2014

The behavioral impressions and biases are not just limited to micro behavior. They seem to be aggregating to macro level as well.

Robert Shiller in his recent piece says much of Japan’s recent revival is based on a powerful economic narrative:


Why indicators like GDP/FDI etc. are misleading in today’s economy..

March 19, 2014

Sometimes I feel like rejecting all economics related stuff and get onto figuring technology. After all much depends on how the latter can generate economic growth and future opportunities. The action always has been in new emerging technologies and how they can change things..

Edward Jung (earlier at Microsoft and now at Intellectual Ventures) argues why it is time to look at new metrics for economic growth. The problem is much of economic activity is getting centred around digital technology but latter is not being measured properly in traditional indicators:


Four Ideas to Help Revive the American Middle Class (Applies to Indian Middle Class?)

March 18, 2014

Apparently US Senate’s Committee on Finance organised a  hearing titled – Innovative Ideas to Strengthen and Expand the Middle Class.

Fiscal Times summarises the suggestions. Most experts cited to reform taxes:

  • Use the tax code to fight the effects of wage stagnation
  • Facilitate restructuring of long-term debt.
  • Remove complexity from the tax code.
  • Ignore all this “innovation” stuff and get back to basics.

No guesses for saying which one the blogger liked the most:

Of all the economists on the panel William C. Dunkelberg, chief economist for the National Federation of Independent Businesses, seemed least excited about the search for innovative answers to the problems of the middle class. 

“My suggestion is that we get back to basics first, fixing what we know is wrong before we try to overlay new “innovative” policies on the economy,” Dunkelberg said in his prepared testimony. Most of his organization’s members he reported, citing an NFIB survey, are concerned about taxes and government regulations. 

“Small businesses are a major source of economic activity and job creation in the economy, but small businesses have struggled to recover from the recession,” he said. “The ‘middle class’ includes millions of small business owners who compete with each other for the business of consumers. And most of the 6 million employer firms provide tens of millions of jobs to the ‘middle class,’ people who want a job and want to earn a living. The best way to help the middle class for those who want to join it is to provide job opportunities in the private sector where they earn their way by producing value.”

I guess this applies to Indian middle class too. Not so sure of taxes as most hardly pay taxes. Though paying taxes is getting highly cumbersome in India too and needs to be simplified without a doubt.

With surging populations and aspiration levels, income and jobs take precedence over everything. But then in India’s case we need even more basics in place, so called basic public services – roads, water, electricity, education, health and so on.

Should be interesting to read the testimonies of the various experts.

High time India moved to such a model of debate and discussion. Our Parliament has committees on everything under the sun but we really do not get exposed to these debates. Experts should be called to present their views on certain topics and they should be displayed on a dedicated website. This will give exposure to the academics and help one learn and figure different perspectives on variety of topics.

May be we already have a website looking at this but am unaware. So, in case visitors know of such a thing, let me know..

How and why economic outcomes of Barbados and Jamaica differed post 1973?

March 12, 2014

Being a cricket follower, interest in Caribbean region remains high. One keeps hoping that West Indies team of yore comes back and we again get to see battery of pace bowlers. Cricket has become too much of a batters game as of now..

So, this paper by Matthew Clair, Peter Blair Henry and Sandile Hlatshwayo on the two countries within Caribbean is pretty interesting. They show economic outcomes for Jamaica and Barbados differed post 1973. Both regions had near similar kinds of institutions and structure but different economic policies changed the outlook in the two places. There was an earlier paper as well by Peter Henry on similar lines but it did not specifically look at the year where the two countries differed. (Plus another paper on Barbados vs Guyana which emphasises on the institutions).


Learning through retaking exams..

March 4, 2014

The children are often told in India (atleast) to practice as much as possible before exams. It helps one understand the subject and also the approach to exams. This is especially the case in math oriented subjects where practice is the key as steps are quickly forgotten and then there are mistakes. The entire ancillary education industry has mushroomed in India based on this logic. There are coaching classes for all things under the sun where they prepare you for “the exam”  taking many retakes..

There is this paper by four econs which look at this learning experiment in Turkey. They find allowng students to retake exams leads to better learning:


Developing Country Lessons for Advanced Economy Growth

March 3, 2014

The tide has turned and how. After decades of lecturing the developing world, time for developed world to get some advice.

Anusha Chari and Peter Blair Henry point to the importance of discipline for advanced economic policy guys. They should learn these lessons from the developing world:

From 1980 to 1992, emerging and developing countries grew by 3.4 percent per year. Their annual rate of growth increased to 5.4 percent between 1993 and 2012. No such increase occurred for advanced nations, whose average growth from 1980-2012 was roughly constant (excluding the impact of the 2008-09 Recession). Developing nations turned themselves around by embracing discipline—sustained commitment to a pragmatic and flexible growth strategy. Three illustrations of discipline through the lens of trade, fiscal, and debt reforms in the developing world offer relevant, practical lessons for recovery in advanced economies and continued catch-up growth in developing nations.

Nice bit..


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