Cassette tapes "cause" conflict

Nathan Nunn and Nancy Qian published a very worrying paper in 2014 showing that US food aid causes conflict in recipient countries. Their research design used total US wheat production as a source of quasi-experimental variation in the amount of food aid countries received, to show causality rather than just correlation.

A new paper by Paul Christian and Christopher Barrett apparently debunks the study, showing that the "causal" correlation is spurious. Replace "US wheat production" with "US tape cassette sales" and you can almost exactly replicate the results.

Which reminds me of an earlier paper showing that "average male organ length" is a strong predictor of GDP growth. We only have about 200 countries, which is not a lot of observations to power a robust statistical analysis, so you should take most cross-country empirical analyses with a pinch of salt. These "male organ" and "cassette sales" papers are helpfully colourful reminders.

HT: Jeffrey Bloem

This is why I don't care about climate change

Well, not "don't care at all", but, you know, not as much as about poverty and development. Stefan Dercon puts it better than I ever have:

Poverty reduction tends to be strongly linked to economic growth, but growth impacts the environment and increases CO2 emissions. So can greener growth that is more climate-resilient and less environmentally damaging deliver large scale poverty reduction? ... We argue that there are bound to be trade-offs between emissions reductions and a greener growth on the one hand, and growth that is most effective in poverty reduction. We argue that development aid, earmarked for the poorest countries, should only selectively pay attention to climate change, and remain focused on fighting current poverty reduction, including via economic growth, not least as future resilience of these countries and their population will depend on their ability to create wealth and build up human capital now. The only use for development aid within the poorest countries for explicit climate-related investment ought to be when the investments also contribute to poverty reduction now

Does growth always depend on natural resources?

George Monbiot writes:

"Economic growth is an artefact of the use of fossil fuels."

Is this right? Actually most economists think that growth is driven by ideas and innovation not raw inputs. This 3 minute video by Deidre McCloskey provides a short economic history of growth since the beginning of time.

Can this really be true? Below are two charts showing energy consumption and GDP per capita from 1970 to 2012. In the UK, whilst our per capita GDP has doubled, our energy consumption has barely moved, and actually slightly decreased.

Of course there is a caveat to this story, and its a pretty big caveat. Whilst growth at the technological frontier (in advanced economies) can only be driven by innovation, in developing countries further away from the frontier, catch-up growth is possible by pure investment and copying existing technologies (such as, er coal-fired power plants). So whilst rich countries don't necessarily need to increase their overall energy consumption to grow, developing countries almost certainly do.

So the question for rich environmentalists is: was there one rule for us and another for everyone else? Or is it actually incumbent on us to invent some better technologies for the world to copy, rather than expecting them to choose between polluting the environment (like we did) or continuing to live on $3 a day for the rest of their lives?

Development as... no measurable increase in happiness

Recent Chinese economic growth has led to half a billion people being lifted out of poverty, without doubt just an amazing wonderful story. The poverty rate halved in just over a decade. Human development - measuring not just income but also health and education, has also leapt.



And happiness? Nothing. No change at all. Maybe a bit of a drop. Measured across three different surveys. Chew on that one.

Data from a new CSAE working paper by John Knight and Ramani Gunatilaka. 

Is Green Growth Good for the Poor?

A new-ish paper from Stefan Dercon, Chief Economist at DFID;

The paper contrasts some common and stylized green-sensitive growth ideas related to agriculture, trade, technology, infrastructure, and urban development with the requirements of poverty-sensitive growth. It finds that they may well cause a slow-down in the effectiveness of growth in reducing poverty. The main lesson therefore is that trade-offs are bound to exist; they increase the social costs of green growth and should be explicitly addressed. If not, green growth may not be good for the poor and the poor should not be asked to pay the price for sustaining growth while greening the planet.

What are the policy research priorities for South Sudan?

There was an interesting session at the IGC Growth Week at the LSE today on South Sudan, with speakers including the President's Economic Adviser Aggrey Tisa Sabuni (also doing a public lecture at LSE on 2 Oct), former Minister Luka Biong Deng, IGC Juba staff Peter Biar Ajak and Utz Pape, and trade economist Pierre Sauvé. You can read my notes on twitter under the hashtag #growthweek.

One thing that stood out for me were the suggestions for policy research priorities by Utz Pape; land rights, mobile money, the labour market, macroeconomic management, and oil management. For me, the economics of the macro and oil issues are fairly straightforward, the question is the politics of implementation. The questions on land rights (would improved private land titling increase agricultural investment?), mobile money (what is the best regulatory system to encourage development?), and the labour market (why is it so dominated by foreigners?) are all interesting.

Any other ideas for important research questions?

Modern Growth and Development in the UK

We may still be coming through the deepest recession in living memory, but we are for the most part incomparably better off than we were in the Silver Jubilee year [1977]. Incomes have doubled on average. We need devote much less of our spending to necessities such as food, leaving us free to spend more on leisure pursuits. As a nation, we are vastly better educated. We have moved decisively away from a manufacturing economy towards one based on services. Many more of us work in professional and whitecollar occupations. Women are much more established in the labour market and have made particularly substantial strides in educational attainment.

From IFS, Jubilees compared: incomes, spending and work in the late 1970s and early 2010s

There is no great stagnation

One of the points that Tyler makes in his great book is that though there has been a US innovation slowdown of late, the internet is a technology which, though not reaping immediate economy-wide benefits in terms of jobs and revenues, is something which might just pay off more in the long-run. Let's hope it can be analogous to steam power:

Steam power is an example of a general-purpose technology (GPT), that is a technology that can be applied to a variety of uses. Other GPTs include electricity and computers. It takes decades to develop the potential of GPTs, so their contribution to economic growth takes place long after their invention. That was certainly true for steam. As late as 1800, almost a century after Newcomen’s invention, steam power made only a minute contribution to the British economy. By the middle of the 19th century, however, the potential of steam was finally being realized as it was applied widely to transportation and industry. Half of the growth of labour productivity in Britain in the mid-19th Century was due to steam. 

And lets hope it doesn't take us a century. From Global Economy History: A Very Short Introduction (thanks Tom for making me read it. Very good. As is much of the rest of the series, including the Economics one)

Towards a Growth Strategy for Africa?

Long before all those randomised evaluations, my youthful enthusiasm for microfinance was killed by this:

"in the long-run, a growth strategy is the most cost effective way of dealing with poverty. This is true for two fundamental reasons: first, growth lifts many of the poor out of poverty; second, it generates the government revenues necessary for anti-poverty measures. A donor strategy that focuses exclusively on short-term poverty alleviation is a dead end, condemned to last indefinitely ... 

Food relief, micro-finance, improved wood-stoves, and reforestation are all examples of interventions aimed primarily at helping the poor to deal with their harsh environment.1 In nearly all cases these interventions correspond to a real need. In many cases they are effective in alleviating the worst effects of poverty. But by themselves they cannot lift the African continent out of poverty any more than food relief, micro-finance, and improved wood-stoves were responsible for lifting England, Japan, or Korea out of their poverty."

1. This is not to deny that these programs also have expected growth benefits. But it is probably a fair approximation to say that their primary effect is poverty alleviation.

Marcel Fafchamps, Francis Teal, and John Toye

(Of course, I've now come full circle and lean closer to the Banerjee-Duflo "we have no clue really how to do growth so lets focus on helping the poor deal with their harsh environment")

Dreze and Sen on Poverty in India

There is probably no other example in the history of world development of an economy growing so fast for so long with such limited results in terms of broad-based social progress.

Outlook India (HT: @cdsamii)

Can Cash Handouts Lead to Economic Growth?

Probably not. And it probably doesn't matter, because the moral case based on evidence of effectiveness in alleviating poverty (and lack of evidence, as far as I am aware, that cash blunts work incentives), should be powerful enough.

But for those who don't dig the whole equity thing, Stefan Dercon has a new paper proposing how social protection could contribute more to overall economic efficiency and growth.

• Social protection focusing on children, especially before the age of five (there are large documented life-time earnings/productivity gains for healthier and better nourished young children)
• Social protection measures to make migration smoother and cities more attractive places to live for low skilled workers, possibly via urban workfare schemes focusing on urban community asset building (cities are engines of growth. A promising similar idea being tested by Mushfiq Mobarak is providing an insurance policy for migrants - a free return bus pass)
• Social protection targeted at adolescents and young adults, including transfers conditional on training focused on urban labour market transitions (something to tackle all that youth unemployment). 

Do educated leaders matter?

Tim Besley and co-authors have extended the brilliant (if morbid) Jones-Olken paper which estimates the impact of national leaders on economic growth, to consider the impact of education upon leadership performance.

"On average," they write, "the departure of an educated leader" -- a leader with a postgraduate education, like a Ph.D or law degree -- "leads to a 0.713 percentage point reduction in growth. This contrasts with the reduction of just 0.05 percentage points after the death of a leader who does not have a post-graduate qualification." It appears that the more educated leaders were doing something right before they were suddenly removed from office -- and that replacing them with less-educated leaders resulted, on some level, in less effective policy. There's a reverse effect as well: when comparatively less-educated leaders die, their replacements are statistically likely to be more educated, and so growth tends to increase after those transitions.

If you believe these numbers, then that is a large effect, and possibly a boon to brain gain/brain circulation arguments regarding migration given the number of African Presidents with advanced education from Europe and America?

Then again, given the robust correlation between penis length and economic growth, we probably shouldn't be putting too much faith in this kind of cross-country empirical work. 

More of the same?

Take a long hard look at these 2 charts.

Afghanistan could have faster economic growth than any country has ever had, and incomes would still not approach US levels for over 50 years.

The charts are from Lant Pritchett (this paper, for more see this podcast and this video).

So - what should we do?

Everything you probably never wanted to know about the Washington Consensus

So apparently Jonathan Glennie

asked a leading World Bank economist how he could explain why South Korea and other countries (including today's developed countries) that had protected their fledgling industries had done so well.

Yawn. Good point Jonathan. Now can you explain how Nigeria and many other countries (including many of today’s still developing countries) protected their fledgling industries and did so badly.

You can’t just cherry-pick the winners and ignore all those who tried the same strategy but failed. The reason most of those economists you spoke to are so skeptical of the infant industry is that they are social scientists who like to pay attention to systematically collected data rather than anecdote. Systematically collected data does not suggest that infant industry protection is a successful strategy (there are some cross-country regressions out there somewhere…).

And here’s the thing; the Washington Consensus basically was not an evil neoliberal conspiracy, it was a reaction against reckless governments pursuing ill-advised statist policies the like of which would look pretty unrecognizable today. These are humdrum bread and butter suggestions for sound macroeconomic management, with perhaps an emphasis on limiting the ability of poorly skilled and often corrupt governments with weak accountability to do damage and mischief.

Here are those Washington Consensus ten broad recommendations in full, from Wikipedia. They all still sound like pretty sensible advice for the poorest countries with the weakest governments to me.

1. Fiscal policy discipline;
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
3. Tax reform - broadening the tax base and adopting moderate marginal tax rates;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates;
6. Trade liberalization - liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation - abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudent oversight of financial institutions;
10. Legal security for property rights.

I used to be much more enthusiastic about the proactive role of government in the economy before I actually worked for one. That goes for the British government as well as the Southern Sudanese government. Let them get the basics right first. The basics are difficult enough; providing security, core infrastructure, social safety nets. Leave the crystal-ball gazing and high-strategizing to someone else.

Player-hating: Some clarifications on institutions

My fiercest critic [I’m sorry for the typos! I’m sorry! Please stop shouting at me!] just harangued me for my lazy and inadequate response to these comments on institutions.

So allow me to make amends.

Anonymous said “knowing that (persistent) social stuff matters isn't at all the same as knowing that institutions matter, and even if we define institutions to mean "persistent social stuff" that still doesn't say what needs fixing.”

Firstly, the terms we use are vague and confusing. What is an institution? What is governance? I like Paul Romer’s use of “rules.” It is easy to think concretely about what rules are, and why they might matter. Even if you think his prescriptions are a little crazy, he does a very good job of explaining the importance of institutions (rules), and you should really watch the TED talk if you haven’t already.

Secondly, you are absolutely right, we don’t know what needs fixing. Which is exactly my point - we know what good institutions are, but we don’t know how to make them.

Here is Dani Rodrik, discussing his canonical empirical paper Institutions Rule in the Finance & Development magazine:

Institutions are thus critical to the development process. But for each of the functions performed by institutions, there is an array of choices about their specific form. What type of legal regime should a country adopt—common law, civil law, or some hybrid? What is the right balance between competition and regulation in overcoming some of the standard market failures? What is the appropriate size of the public sector? How much discretion and how much flexibility should there be in arrangements for the conduct of fiscal, monetary, and exchange rate policies?

Unfortunately, economic analysis provides surprisingly little guidance in answering these questions.

Ed Carr questioned the power of institutions as an explanatory variable, “this is a relative measure - institutions are better than things like geography for predicting outcomes, but they still leave a hell of a lot of variance out there.”

This chart is from the same Rodrik Finance & Development article. There is a fair amount of variation, but in the world of real-world data, that is about as tight a correlation as you are ever going to find.

Finally Bottomupthinking asked “Maybe the institutions operate so badly simply because they are not really understood by most of those who live in or with them (the wider populace)?”, which leads me to believe that we are again confusing terms? In any case, I think we agree on the difficulty of improving rules, governance, institutions, whatever you want to call it.

Lant Pritchett is doing some very interesting work on the related-but-not-quite-the-same question of state implementation capacity.

At their current pace of progress countries like Haiti or Afghanistan or Liberia would take hundreds (if not thousands) of years to reach the capability of a country like Singapore and decades to reach even a moderate capability country like India.

Pritchett is also one of the most vocal public advocates for migration as a development policy. It perhaps is no coincidence that he has also spent so much time studying development failure and “state capability traps.”

Everything's Amazing and Nobody's Happy

O'Brien: Do you feel that we now take technology for granted?

Louis C.K.: Well yes, now we live an amazing world, and its wasted on the crappiest generation of spoiled idiots that don't care.

Word.

HT: Kelly Bidwell via Chris Blattman

Easterly on China

I don’t normally bother link to Easterly because you should all be reading him anyway. But this is too good to miss:

I’m saddened to see my favorite magazine [The New Yorker] publish an article seemingly in search of every possible fallacy about growth, the main one being that if you have a high growth rate, then the current autocrats and their economist advisors must be Gods…
… another way of stating China’s rapid growth recipe would be something like the following:
Have a succession of crazy autocrats, political chaos, and war savagely repress one of history’s most inventive peoples, along with not allowing one of the most successful trading diasporas in history to operate in China proper.  Then have things calm down a bit and have somewhat less crazy rulers allow more of the people’s energy and creativity to burst out. Presto, the change from EXTREME NEGATIVE to LESS NEGATIVE is called a “growth rate,” and it will be high. Now accept worship from around the world.

More reasons to give aid to Indians…

… and other residents of middle-income countries.
So. We’ve had a bit of a paradigm-shift then.

in 1990 … over 90% of the world’s poor lived in the world’s poorest places. But it looks out of date now. Andy Sumner of Britain’s Institute of Development Studies* reckons that almost three-quarters of the 1.3 billion-odd people existing below the $1.25 a day poverty line now live in middle-income countries. [The Economist]

The implication to be drawn; if these countries are middle-income then they can afford to pay for their own poverty-reduction projects right?

Poverty … may be turning from being an international distribution problem into a national one.

Not so fast Mr. Sumner. Mr. Ravallion crunched the numbers a few months ago:

The capacity for redistribution in India is far more limited than in China or (especially) Brazil. Indeed, it would be impossible to raise enough revenue from a tax on Indian incomes above the US poverty line to fill India’s poverty gap relative to the $1.25 a day line; the required MTR would exceed 100%. Even at a 100% MTR, the revenue generated could fill only 20% of India’s aggregate poverty gap.’

National redistribution projects, such as conditional (and unconditional?) cash transfers are going to become an increasingly important part of the solution to global poverty.
But redistribution (either national or international) is always going to play second fiddle to economic growth.

UN Security Council reduces growth, democracy, and press freedom

Compared to countries not on the Security Council, countries on the Security Council experienced lower economic growth, became less democratic, and were less friendly to the press for several years after being elected to their two-year term. This pattern was largely confined to nondemocratic regimes and casts doubt on the wisdom of providing generous aid to such regimes.

Bueno de Mesquita, B. & Smith, A., “The Pernicious Consequences of UN Security Council Membership,” Journal of Conflict Resolution (forthcoming).

via Kevin Lewis at Boston.com

Bad News Friday

My nemesis the Stationary Bandit notes that the economy of Botswana shrank last year.

Last year's economic performance was not good.

• Botswana’s economy contracted by 6.7 percent last year as revenue from diamonds plummeted, Central Bank Governor Linah Moholo said.

This succinctly summarizes the problem for Botswana. Although its growth record for decades has been impressive, it remains too undiversified.  Diamonds and cattle remain large sectors of the economy.  When diamond revenues plummet, the economic consequences are severe.  Add in the HIV/AIDS situation with a contracting economy can quickly turn an African success story into another African Growth Tragedy.

I’m going to get drunk.