Don't Buy Local

This summer I finally got around to doing my first Park Run, joining the now millions of people around the world who turn up on Saturday mornings for a free 5km timed run around their local park (I managed a not too shabby 27 minute time, roughly average for my age). 

I also work on global development, so was pretty disappointed to receive an email announcing a new clothing line from the founder of Park Run that will be manufactured exclusively in Europe. Paul Sinton-Hewitt CBE was concerned with the “horrendously exploitative … factories in the Far East employing questionable practices, paying the lowest wages and exposing their workers to dangerous conditions”. 

Paul is right to be concerned about the wellbeing of East Asian factory workers, but moving those jobs to Europe is not the solution. Moving manufacturing jobs from places where jobs are scarce, to Europe where jobs are not scarce, is not a good thing. 

My point is not a new one; Paul Krugman, the nobel-prize winning left-wing economist wrote more than ten years ago in praise of sweatshops. But the point still stands, and is still apparently missed. The factories in which most of our sports gear are made have poor working conditions compared with jobs in rich countries, but they are usually preferable to the actual alternatives facing people unfortunate enough to be stuck in poor countries.

In 1980, before it became the workshop of the world, extreme poverty in China was close to 90 per cent. Today it is less than 1 per cent. That change would not have been possible without the manufacturing industry. It’s hard to think of anything else that has had a bigger positive impact on human wellbeing that the transformation of China’s economy. 

And it’s not just China that has benefited. Now that wages are starting to rise in China, manufacturers are moving on to other lower-income countries, such as neighbouring Vietnam and Cambodia, but also further afield, to Ethiopia and Nigeria. 

Researchers Rachel Heath and Mushfiq Mobarak looked at what happened in Bangladesh when garment factories started opening. As factories rewarded basic literacy and numeracy, girls who lived in villages near to new factories chose to stay in school longer. The effect on education was bigger than a government social programme explicitly designed to increase schooling. In Ethiopia, Chris Blattman and Stefan Dercon found that people use factory jobs as a safety net. Pay and conditions may be poor in the new factory jobs, but they are always there, even when other informal means of getting by fall through. 

So what is a concerned Park Runner to do? Ultimately pay and conditions in poor countries will only improve when workers get better outside options. Thanks to the hard work of poor Chinese in the 1980s and 1990s, China’s economy has grown, wages have risen, and Chinese workers today can afford to ask for more and turn down the worst offers. The best way to encourage that trend is to continue to buy things made in poor countries. Other ways to give poor people more options are to just give them cash directly (you can do literally that at givedirectly.org), to go on holiday to poor countries and spend money on services from poor people, or if you’re a citizen of a rich country to encourage your government to make it easier for people from poor countries to come and work in your country. 

I have nothing but admiration for Paul Sinton-Hewitt’s founding of Park Run, and of his desire to create an inclusive and ethical line of sportswear. I just hope he reconsiders his decision not to support jobs where they are needed most.

Cash-on-Delivery Aid for Trade Facilitation

One of the new ideas in our CGD trade-for-development-policy-after-Brexit paper was using the "Cash on Delivery" approach for trade facilitation. "Cash on Delivery" is an idea well developed by Nancy Birdsall and William Savedoff but still under-actually-piloted, and as yet not proposed for use in trade facilitation, for which it may actually be a really good fit. From the paper:

"The UK can improve upon its existing Aid for Trade offer by making increased use of results-based programmes. “Cash-on-delivery” aid (paying for outcomes, not inputs) is most appropriate where local contextual knowledge matters, where the best combination of inputs is uncertain and local experimentation is needed, and where precise design features and implementation fidelity are most critical (see, for example, the discussion by Savedoff [2016] on energy policy). All of these criteria also apply to Aid for Trade.

A typical Aid for Trade programme might carry out an extended diagnostic project to identify the constraints to change, and then design and contract a project to address these constraints. The payments would typically be made for activities (for example, technical assistance for improving a certain process) that, according to a theory of change, should lead to the desired outcomes. But contracting for activities and inputs doesn’t allow for sufficient experimentation and change.

A better approach is to contract for outcomes (i.e., to offer cash on delivery) and allow those with the required information the flexibility to determine the best way of achieving those outcomes.

Common concerns around cash on delivery focus on exactly what outcomes are contracted for, how they are measured, and whether there is any risk of distortion of priorities according to what is measurable or gaming of indicators. Indicators should be quantifiable, ideally continuous (to allow for variable payment in proportion to the degree of progress), and independently verifiable. Another common concern is how governments might fund any up-front investment costs. Here, then, the proposal is not that cash on delivery should replace all aid, but simply that it replace a portion of aid in a piloted manner. Further, if the outcomes are focused on “soft” rather than “hard” infrastructure, these up-front costs should be limited.

With trade, contracts could be based on the World Bank’s ‘Doing Business’ indicators. We have reasonable econometric evidence (Hoekman and Nicita 2011) that these indicators of the cost of importing and exporting (in both time and money) are associated with greater volumes of imports and exports.

An alternative but similar set of possible indicators that could be used as outcomes for contracted payments are the OECD Trade Facilitation Indicators, which probe border procedures in more detail. Moïsé and Sorescu (2013) estimate that streamlining the costs represented by these indicators could reduce trade costs by 15 per cent for low- and lower-middle-income countries.

Rather than trying to tell a specific country how best to reduce that time and cost, we could instead just write a contract to pay a specified amount for each hour the country reduces the time it takes goods to clear the border and exporters and/or importers to comply with documentary requirements.

The potential gains to developing countries are high. The estimated gain to a low-income country from reducing its cost of exporting to that of a middle-income country is 2 per cent higher exports (Hoekman and Nicita 2011). For a typical low-income country, such as Malawi, with total annual exports of around US$1.5 billion, a 2 per cent increase would be worth US$30 million a year. The expenses associated with reducing export times would almost certainly cost less than this amount.

In summary, the UK could take the lead in applying a more innovative and potentially much more effective approach to Aid for Trade by using cash on delivery. It could be used as a complement to the other proposals in this note and, as a relatively new approach, could be established relatively promptly as a pilot."

How the UK can lead the world on trade for development

Prime Minister Theresa May has said that the UK will be a "global leader on free trade”.  How can the UK use that opportunity to give the biggest possible boost to global development?  If the UK wanted to be the world leader on trade-for-development, what would the policies look like? 

There are options to consider not only on tariffs, quotas, and preferences, but also on improvements in UK systems and aid for trade as well as taxation.

I suggest some answers in a blog and paper with Ian Mitchell and Michael Anderson at CGD.

Global Organ Trade

Here’s a great idea from Al Roth, the 2012 Economics Nobel Prize winner.

Al got his prize for developing his theoretical matching ideas into a computerized kidney exchange - so if you want to donate a kidney to a family member but you aren’t the right match, you can find another pair of people in the same situation from a different city and criss-cross the pairing, so both kidney transplants can go ahead.

In his new book (reviewed here by Alex Tabarrok), Al proposes extending the kidney exchange internationally.

"Mr. Roth, however, wants to go further. The larger the database, the more lifesaving exchanges can be found. So why not open U.S. transplants to the world? Imagine that A and A´ are Nigerian while B and B´ are American. Nigeria has virtually no transplant surgery or dialysis available, so in Nigeria patient A’ will die for certain. But if we offered a free transplant to him, and received a kidney for an American patient in return, two lives would be saved.

The plan sounds noble but expensive. Yet remember, Mr. Roth says, “removing an American patient from dialysis saves Medicare a quarter of a million dollars. That’s more than enough to finance two kidney transplants.” So offering a free transplant to the Nigerian patient can save money and lives. It’s hard to think of a better example of gains from trade (or a better PR coup for the U.S. on the world stage). Better matching with computerized markets is saving lives, but more than 100,000 people are still waiting for kidneys in the United States alone."

If you are buying flowers for tomorrow, buy them from Kenya

The Mirror has an exposé looking at the shocking conditions of workers on Kenyan flower farms - some earning just £30 a month. 

What they fail to point out is that absolutely the best thing you can do for global welfare is to buy your flowers from Africa rather than Europe. Even if flower-pickers are on a low wage, it's a better wage than their alternative, your spending stimulates the Kenyan economy, and it is even good for the environment (flights from sunny places on the Equator pollute less than all the electric lights you need to grow flowers in cloudy Europe).

Yes be shocked at wage rates in Kenya. But then the best thing you can do to fix that is to do more business with Kenya and spend more money on Kenyan products. Happy Valentine's Day. 

Is it wrong to shop from places that use child labour?

I got told off recently for shopping at H&M because of some sweatshop / child labour scandal (a burden I share with Beyonce who has also been criticised for her H&M links). But is a boycott really the right individual action?

Two new(ish) papers look at the impact of government bans on child labour in India:

One economics paper by Bharadwaj, Lakdawala, and Li (via Berk Ozler) looks at the impact of India’s Child Labour (Prohibition and Regulation) Act of 1986. They find that the ban led to a decrease in child wages and an increase in child labour. This is consistent with the theory that families use child labour to reach subsistence levels - so a ban which leads to a reduction in child wages, will make families make their children work more to earn the same amount and reach that subsistence level.  

Second is a note by my colleagues (Ian MacAuslan, Valentina Barca, Yashodhan Ghorpade and Gitanjali Pande) based on qualitative fieldwork in India (150 interviews and focus groups with both children and adults). Their findings support the results of Bharadwaj et al - parents make rational trade-offs, child labour is driven by household poverty, and outright bans might be counter-productive - better to invest in social protection and improving the quality of schooling.

What does all of this imply for me and my new H&M jumper? I'm not really sure. I asked the question a few years ago in Juba, and further quick googling hasn't got me any closer to an answer. I suppose the theory of change is that individual boycotts could force H&M to improve their procurement and make sure no child labour is involved. But this could either lead to those children leaving the factory and going to school, or perhaps more likely and in line with these two papers, a reduction in the going wage rate for children, and an actual increase in child labour.

Any ideas? References? Once again, I'm left wishing that there existed some rigorous impartial GiveWell-style analysis for consumption decisions so I could outsource some more everyday moral dilemmas and not have to do the thinking myself.

ChatBasket

Alex Andon just sent me the link to his new venture ChatBasket linking up developing country artisans with US consumers via an online chat room. It's a cool idea - maybe we can increase the value of trade if western consumers value and will pay for that personal connection and narrative behind a product (see also http://significantobjects.com, in which consumers paid around $45 for a $1.50 object that comes with a totally made-up background story). You can support the crowdfunding campaign and/or buy a handmade Guatemalan iPad case here.

Killer facts on migration

With a nod to Duncan Green - I asked Michael Clemens for some "killer facts" on migration after being invited to put some questions to a panel a few weeks ago. In the spirit of Adam Ozimek's call for more blogging on migration, I'm reposting them here.

• Economic gains to even modestly greater global migration flows are much larger than the total elimination of all policy barriers to trade and all barriers to capital flows (source).

• 82% of the Haitian-born who have left poverty have done so by leaving Haiti (at a PPP$10/day poverty line, i.e. 1/4 of median income for the bottom decile of UK incomes)  (source).

• A Ghana-born, Ghana-educated semi-skilled construction worker earns at least six times the real living standard for doing exactly the same job in the US versus Ghana (source). 

• A McDonalds worker can make up to 10 times as much in real terms doing exactly the same job in one country versus another country (source).

Which is your favourite fact?

Where is the Bono for migration?

Given that

the overwhelming explanation for who is rich and who is poor on a global scale isn’t about who you are; it’s about where you are

and

immigration restrictions are probably the greatest preventable cause of global suffering known to man.

Why are there no celebrity advocates for immigration?

The rest of the article, Charles Kenny in Business Week, is excellent, including the research finding that McDonald's staff in the US earn 2.4 Big Macs per hour, compared to just one third of a Big Mac in India (for identical work producing an identical product).

Sweatshop Logic Fail

corporates manufacturing goods in Chittagong need pay workers an average of only $48 a month, said the zone manager. That's about $1.50 a day.  

Are these factories the new sweatshops, as some developments groups say? People are paid more to work in the zone than in factories beyond the gates and, from what I could see in the two works I visited, the conditions - albeit perhaps not surprisingly - looked good. But the pay rates, which are set by government and not by the companies, are terrible.

Read that again. Emphasis on the "people are paid more to work in the zone than in factories beyond the gates" and the "But the pay rates are terrible."

Now folks, please, take a seat, because what I'm about to say here is going to blow your mind. When poor people get jobs that pay more that is generally a good thing.

(And perhaps worth noting, the reason that those improved wages are still terrible by Western standards is global labour market segmentation: we use force to stop Bangladeshis from getting jobs in the West where wages are not terrible, because our median voters would rather that people were trapped in low wage labour markets than be allowed to move to our high wage labour markets. Charming.)

Market failure

Sudanese first Vice-President Ali Osman Mohammad Taha asked the parliament last week to amend laws in order to allow execution of anyone found guilty of smuggling food to South Sudan.

Sudan's heterodox economic strategy to boost its floundering economy by executing exporters. 

Richard Dowden on Structural Adjustment

By the end of the 1980s most African countries were indeed in a bad way. The end of the Cold War gave the West - which had always believed it could tell Africans what to do - the chance to impose its own solutions. The West's new agenda was democracy, respect for human rights and the free market.
Africa's economies were handed over to World Bank and IMF economists. "Structural adjustment" introduced a dose of tough economic medicine that would restore the patient to health. Governments were forced to let the "free market" decide the value of their currencies, cut public spending and sell off their assets.
As a theoretical economic solution it might have looked right, but on the ground in Africa it pushed up prices, impoverishing all but a few, and destroying Africa's professional classes by reducing the value of their salaries. Those in power who had mismanaged things so badly, now sold run-down state assets to themselves at knock-down prices.

Really Richard? I find the left’s demonisation of the Washington Consensus a bit annoying and a bit of a distraction. The main reason the evil neoimperialist economists recommended that African governments spent less and sold off assets is because they were broke. It’s really not that controversial, you can’t spend more than you earn forever. That’s life.
I also think the influence of those economists is a bit overdone. There is a great documentary film, “Our friends at the bank” which includes scenes of the Ugandan government politely telling the World Bank to get lost.
All of this is a distraction from the issues where Western policies really are (still!) self-serving and detrimental to the poor - such as farm subsidies and labour market restrictions. How about a bit our own free-market medicine huh?

The Economics of Marmite?

people often retain very strong preferences for the kinds of food they grew up eating. Just ask the expatriate Britons who flock to “Tea and Sympathy” in New York’s Greenwich Village for pots of Marmite, a yeast-based spread whose delights baffle other nationalities (and many of their own compatriots).

So what you might say? Well,

the effects of habit formation in consumption may also lead economists to rethink the way they calculate the gains from trade. This is because opening up to trade is in some ways akin to migrating. It changes the composition and prices of the goods that are available to a person. In particular, it can raise the relative prices of the goods that a region or country has a comparative advantage in, such as crops that the country’s climate or soil favour. These are the things that would have been relatively cheap and common in a closed economy and therefore the things that people might have acquired a taste for. To the extent that such preferences persist, people will benefit less from the increased variety of goods and altered relative prices that trade brings about than they would do if habits were not a significant determinant of consumption.

And the bottom line: for internal migrants within India:

As a consequence, migrant families consume fewer calories per rupee of food expenditure than non-migrants do.

That is fine Mr. Economist journalist, but how much fewer? 50 percent fewer calories? 0.00004 percent fewer calories? Don’t magnitudes matter? For that I had to go to the original paper by David Atkin.

holding total food expenditure constant, there will be an average caloric loss of 2.7 percent coming from the correlation between tastes and price changes (about 54 calories per person per day) … In geographic terms, the negative caloric impacts that come from tastes correlating with price changes will not be spread uniformly across India … with poorer regions more likely to suffer caloric losses on the consumption side, with predicted caloric losses of 20 percent in some of the poorest regions.

So yeah then, er, 20 percent is pretty big.

I’d better go pack some marmite in my suitcase.

Do Call Centers Promote School Enrollment?

Yes, according to some new analysis on Indian data by Emily Oster and Bryce Millet of the University of Chicago.

We use panel data on school enrollment from a comprehensive school-level administrative dataset. This is merged with detailed data on Information Technology Enabled Services (ITES) center location and founding dates. Using school fixed effects, we estimate the impact of introducing a new ITES center in the vicinity of the school on enrollment. We find that introducing a new ITES center results in a 5.7% increase in number of children enrolled; these effects are extremely localized. We argue this result is not driven by pre-trends in enrollment or endogenous center placement, and is not a result of ITES-center induced changes in population or increases in income. The effect is driven entirely by English-language schools, consistent with the claim that the impacts are driven by changes in returns to schooling.

Quick Wins in Development Policy

Development is hard. There is plenty that the governments of rich countries can do to help, but sadly much of it is politically too difficult to contemplate (such as allowing more immigration from the poorest countries).

So how about a policy that can help but costs rich countries nothing?

This new working paper from CGD finds that providing Duty-Free Quota-Free access to OECD markets for poor countries provides significant benefits with very small to zero impact upon the rich countries.

A development policy no-brainer?

There are still significant benefits for LDCs from removing the remaining barriers they face in OECD countries, but only if all products are covered.  Since both rich-country tariff peaks and LDC exports are relatively concentrated, excluding as few as three percent of tariff lines, as proposed by the United States at the WTO ministerial meeting in Hong Kong in 2005, reduces the benefits to basically zero.

…

The LDCs account for a trivial share of global exports, the reason for the initiative, and preference-giving countries thus have little to fear from extending full market access to them. The quantitative results show that the expected impact on welfare, exports, and domestic production are very small to zero, including for the quota-controlled agricultural products excluded by Canada, Japan, and the United States, as well as textiles and apparel in the latter case.

…

providing market access is a step that this analysis suggests would be both beneficial for LDCs, and low-cost for preference-giving countries. UN Secretary General Ban Ki Moon just designated 2010 as the “year of development” and called for accelerated efforts to achieve the Millennium Development Goals. The goal of providing duty-free, quota-free market access for LDCs should be easily achievable by rich countries, as well as by Brazil, China, India, and other developing countries “in a position to do so.”

Constraints to growth in Southern Sudan

“One sack of sugar cost 155 [Sudanese pounds, $69.50]. When that train arrived it went to 80 [$35.90],” said John Arop, an NGO manager based in Wau. Soft drinks such as Coca-Cola and Fanta halved in price from 2 SDG (90 cents) to 1 SDG (45 cents), he said. The first cargo train also carried sugar, cement and sorghum.

Rail transport can dramatically cut prices because delivery trucks face multiple roadblocks and taxation

http://www.irinnews.org/Report.aspx?ReportId=88517

The Spaghetti Bowl of African Regional Integration Agreements

You said you liked pictures… (from the same WB report as this one).

Towards the Free Movement of People between Uganda and Southern Sudan?

“I think we better abolish the visa regime and I am going to inform my government so that anybody with a South Sudanese or Ugandan travel document can walk into each other’s country and trade freely”, said [Ugandan Minister of Commerce] Otafire. 

He added that the use of visas “was an introduction of the colonialists to differentiate the people and their countries”. 

He said that abolishing travel permits between the two countries will allow open movement of goods and services which will in turn boost the economic development of the two countries. 

The minister added that enhanced trade will also boost relations between the neighbouring countries.

Gurtong