Archive for the ‘Growth and development’ Category

Why growing via value addition is not enough?

July 28, 2014

Ricardo Hausmann again questions the prevailing wisdom with respect to growth.

He says one of the standard growth mantras is value addition. Take a raw material and add value to it. But growth comes from identifying innovation around those raw materials.

Poor countries export raw materials such as cocoa, iron ore, and raw diamonds. Rich countries export – often to those same poor countries – more complex products such as chocolate, cars, and jewels. If poor countries want to get rich, they should stop exporting their resources in raw form and concentrate on adding value to them. Otherwise, rich countries will get the lion’s share of the value and all of the good jobs.

Poor countries could follow the example of South Africa and Botswana and use their natural wealth to force industrialization by restricting the export of minerals in raw form (a policy known locally as “beneficiation”). But should they?

Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues – say, the availability of raw materials – and blinds societies to the more promising opportunities that may lie elsewhere.

He discusses the case of Finland:

Consider Finland, a Nordic country endowed with many trees for its small population. A classical economist would argue that, given this, the country should export wood, which Finland has done. By contrast, a traditional development economist would argue that it should not export wood; instead, it should add value by transforming the wood into paper or furniture – something that Finland also does. But all wood-related products represent barely 20% of Finland’s exports.

The reason is that wood opened up a different and much richer path to development. As the Finns were chopping wood, their axes and saws would become dull and break down, and they would have to be repaired or replaced. This eventually led them to become good at producing machines that chop and cut wood.

Finnish businessmen soon realized that they could make machines that cut other materials, because not everything that can be cut is made out of wood. Next, they automated the machines that cut, because cutting everything by hand can become boring. From here, they went into other automated machines, because there is more to life than cutting, after all. From automated machines, they eventually ended up in Nokia. Today, machines of different types account for more than 40% of Finland’s goods exports.

The moral of the story is that adding value to raw materials is one path to diversification, but not necessarily a long or fruitful one. Countries are not limited by the raw materials they have. After all, Switzerland has no cocoa, and China does not make advanced memory chips. That has not prevented these countries from taking a dominant position in the market for chocolate and computers, respectively.

Interesting bit as always from Prof Hausmann..

Relationship between trust and the size of the welfare state…

July 18, 2014

An interesting piece by Yann Algan, Pierre Cahuc, Marc Sangnier, all three based at France’s economic schools. French econs are really getting popular these days.

They say the relationship between trust amidst citizens and size of welfare state  isn’t as linear as imagined. The higher the trust and higher the size of welfare is not really true. What we see is twin peaks. Both states with high and low trust can have higher welfare spending:

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Importance of framing questions – an interesting example..

June 17, 2014

There is another interesting debate over whether the western world has run out of major innovations and are now going to be on a steady decline. Robert Gordan has been making this argument for a while. Ofcourse, there are people who disagree and say innovation likely to continue and generate future growth. Here are the debates — one, two, three.

Coming to the title of the post. Prof Gordon often asks this question which innovation do you value most – A toilet with piped water or a smartphone?

Are all of mankind’s best inventions behind us?

Economist Robert Gordon thinks so. When giving speeches, the Northwestern University professor often flashes a photo of a smartphone and a toilet on a screen and asks his audience what they would do if they had only two options: Keep everything invented up until 2002, or keep everything invented up until today—but give up running water and toilets. The answer to him is obvious: Indoor plumbing changed how people live, he says, smartphones are just a handier form of what already exists.

Which would you choose?

The answer here most likely (atleast for me) is toilets. Here there is a case of lack of supply as well. Much of India does not have toilets but phones have become too common.

But the same post takes a poll but frames the question differently:

Which invention of the past would you rather live without?

Here the choice is smartphones not toilets. But unknowingly you end up ticking on toilets!

Importance of framing the questions and nudging people into making choices.

 

A conversation between Ministry of Energy and Ministry of Finance…

June 12, 2014

IMF Blog has this interesting post on how Minister of energy calls up MoF over  discovery of some natural resource.

MoF who understands a bit of economics is not too thrilled given the experiences of countries with such resources. So what does he/she do? One idea is to distribute the revenues to people and then clawed back via taxation:

The Minister remembers reading a paper by Sala-i-Martin and Subramanian that argues citizens of an oil-rich country such as Nigeria—where institutions are weak—would be better off if all oil revenues were directly distributed to the citizens themselves. The authors’ main argument is that mechanisms of direct distribution circumvent inefficient or corrupt budget institutions and foster public demand for government accountability. If resource revenues are distributed to the public and clawed back through taxation, the argument goes, the public will demand accountability for the use of the resources.

MoF then floats a study to figure the pros and cons of direct distribution:

As a first step, the advisor looks at how other countries have responded in similar circumstances. To his surprise, he finds only one instance in which resource revenues are distributed directly, that is, in Alaska. However, the Alaskan approach is underpinned by strong budget institutions and official oversight, and the amount distributed is relatively small—only 3 to 6 percent of per capita income—and the direct distribution is made out of income earned from saved resource revenues.

To be thorough, the advisor also looks at the experiences of countries where governments provide cash or in-kind transfers to their populations—including conditional cash transfers, subsidies, and income support programs. He finds that these transfers have proven effective in reducing inequality, but that larger transfers to wealthier recipients might have the unintended effect of encouraging withdrawal from the labor force. He also learns that income support programs have tended to narrow their coverage in order to address the perception that they discourage recipients to work. He studies how entrenched energy subsidies are—despite being inefficient, inequitable, and bad for growth—as citizens see them as a way to reap benefits from resource abundance. Finally, he learns that the use of resource revenues outside the budget process can also fall prey to rent-seeking.

Nice bit..

How Centre and States share taxes in Brazil?

June 12, 2014

This whole idea of sharing taxes between centre and states is a fascinating project by itself.

This note by World Bank econs gives some perspective on how Brazil shares its taxes (and other resources) amidst Centre and States. It also discusses proposed reforms on the matter:

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Fixing city finances and governance post Detroit…

June 6, 2014

Chicago Fed conducted a forum to discuss several issues post Detroit bankruptcy. The main q was what is the way forward post Detroit? There are some interesting presentations particularly this one which shows how Washington DC managed to resolve its city crisis. This one by Robert Inman of Wharton also sets the entire agenda for cities..

The discussions are explained in this short note. The key points were make sure there is accountability, to have a fiscal watchdog even at city level, making sure basic public services are not disrupted even during crisis, pricing these services properly and so on..

Our cities are far off from this kind of discussion. But the idea of ensuring basic governance is valid wherever you are on the graph of devleopment

Why not go for Surface Rail public transport instead of Metros/Rapid Bus system?

June 4, 2014

The blogger has always wondered why we don’t go for Mumbai Local train system in Indian cities instead of fancy metro? Mumbai local may not be as elegant but carries far larger number of passengers. Moreover, in some cities the existing train lines could be used to atleast connect some points in the city. This will save both costs and time.

Anyways, here is an interesting paper by experts in the matter making a case for surface rail. It is written by M Ravibabu of  Ministry of Railways and V Phani Sree of Jawaharlal Nehru Architecture and Fine Arts University:

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A Reading List – Understanding Economic Development

June 4, 2014

Arvind Subramainan taught a course on econ development recently. He has put up his reading list and is quite a comprehensive one. It is spread across  14 topic with each topic having multiple things to read..

A nice way to read on different perspectives of development..

Book review: Catch Up — Developing Countries in the World Economy

June 3, 2014

Here is a nice review of an interesting book on history of developing economies and how they have shaped in the world economy.

The book is written by Prof. Deepak Nayyar and reviewed  by Marianne Ward-Peradoza of Loyola University Maryland.

Deepak Nayyar, Professor Emeritus at Jawaharlal Nehru University, takes us on a journey tracing the contours of developing country participation in the world economy from the second millennium to the present.  Catch Up thus goes beyond the traditional post-1950 assessment of development experiences, providing additional context and some new perspectives on developing country economic performance.  In particular, the author seeks to contrast divergence between developed and developing countries in the nineteenth and early twentieth centuries with the closing of the gap that occurred in the late twentieth and early twenty-first centuries.  In addition to the evolution over time, the analysis highlights the disparity in outcomes across regions in the developing world.  For the purposes of this study, the developing world is Africa, Asia (excluding Japan), and Latin America including the Caribbean.

Looks like a nice read..

Profile of Chris Pissarides and review of his work on labor economics…

May 30, 2014

IMF has a great review of an economist who is hardly known – Chris Pissarides.  And this despite getting “the prize” on the topic “which is one the most relevant” – labor markets.

The interview has this rare case of an eminent economist admitting his policy error – pushing Cyprus into adopting Euro:

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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.

Hmmm..

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:

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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:

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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.

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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.

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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:

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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.

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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?

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

April 10, 2014

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