Girl Power and the Fragility Trap

Eye of the Needle. It's become fashionable to view economic development aid with considerable skepticism. And for good reason: As William Easterly documented a decade ago, the aid going to poor countries (including debt relief) has had little impact on growth. But Noro Aina Andrimihaja (World Bank), Matthias Cinyabuguma (University of Maryland) and Shantayanan Devarajan (World Bank) argue that the case against aid has been oversold.

They claim that aid could help to tip some of Africa's poorest-performing economies out of the "fragility trap" -- the mix of pervasive violence, insecure property rights, and corruption that has prevented 22 out of 48 sub-Saharan countries from busting out of wretched poverty. If enough aid is funneled to the right places (admittedly, a big "if"), the authors claim there is solid evidence that the money can trigger a virtuous cycle in which institutional gains generate growth and growth generates more institutional gains. Avoiding the Fragility Trap in Africa. World Bank Policy Research Working Paper 5884. Download (free) here.

Sauce for the Gander. China has for the most part welcomed foreign direct investment in the form of factories, retail stores, and the like since the economy opened for global business in the 1980s. In the high-stakes scramble to gain access to Chinese consumers, the big multinationals have invested hundreds of billions of dollars there. GM, for example, now sells more cars in the Middle Kingdom than in the United States. But the flow of direct investment goes both ways. Indeed, China's appetite for companies, joint ventures, and production facilities in countries ranging from the United States to Russia to Algeria is large, and growing rapidly. A big question is why.

Leonard K. Cheng (Hong Kong University of Science and Technology) and Zihui Ma (Renmin University of China) use government data through 2006 (the latest available) to explore the motives of these Chinese corporate investors (virtually all of which have close ties to Beijing). Not surprisingly, acquisition of critical natural resources (think oil and gas) and the opportunity to sample foreign technology rank high on the list. But China is also increasingly interested in using FDI to gain a foothold in the global financial services industry, to diversify its mammoth foreign exchange reserves, and to disarm foreign critics by creating jobs in the advanced industrial economies. China's Outward Foreign Direct Investment. National Bureau of Economic Research. Download (free) here.

Convergence, By the Numbers. Economists know (though a surprising number seem to have forgotten since 2008) that the whole point of discretionary fiscal policy is to smooth fluctuations in the business cycle. Running surpluses (or at least cutting budget deficits) in boom times dampens inflationary pressures, while running deficits in recessions offsets falling private demand. This explains why most advanced industrial economies practice "countercyclical" policies most of the time.

By contrast, developing countries -- especially those dependent on raw materials exports -- have actually run "procyclical" fiscal policies, and it's not hard to see why. A good chunk of their government revenues come from taxes and royalties on exports. In global booms, commodity prices generally go up. Politicians typically couldn't resist the pressure to spend the money, thereby exacerbating inflation. Meanwhile, in economic downturns, export revenues lag and these governments lacked the credit to borrow in order to sustain demand. So when America or Europe or Japan coughed, the developing world caught cold.

But according to the statistical analysis of Jeff Frankel (Harvard), Carols Vegh (University of Maryland), and Guillermo Vulletin (Colby College), that's changing. The big emerging market countries including China, India, and Brazil (along with many lesser developing economies) weathered the last recession very nicely, in large part because they now have the discipline and the means to use fiscal policy in countercyclical fashion. The explanation, the three economists say, lies in the strengthening of government institutions -- everything from the ability to contain corruption to the capacity to collect taxes. Good news, indeed. On Graduation from Procyclicality. NBER Working Paper 17619. Download ($5 charge) here.

Girl Power. It's obvious that limiting women's access to education and jobs is costly, and almost as obvious that the countries paying highest price for discrimination are among the poorest. But oddly, nobody has done a credible job of quantifying the problem -- or, at least, not until now.

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