Review

The Ravenous Dragon and the Fruits of Adversity

Academic economists usually air their new ideas first in working papers. Here, before the work gets dusty, a quick look at transition policy research in progress.

Food Aid Conundrum. Civil wars in poor countries, ranging from Darfur to Somalia to Afghanistan, disrupt farming and food distribution, and thus cause hunger -- if not outright starvation. Hence the welcome intervention of humanitarian aid groups, both public and private.

It's long been understood that a portion of the food aid must be written off because it is diverted by corrupt local officials or stolen outright by bandits. The bigger worry, though, is that the food will be appropriated by local militias, and thus serve to lengthen the conflict.

A new analysis by Nathan Nunn (Harvard) and Nancy Qian (Yale) confirms those fears. Using data from USAID projects, they found that food aid increases the frequency as well of the duration of civil conflicts in recipient countries. That, of course, ought to force aid donors to confront the reality that their actions may cost more lives than they save. Ideally, it will change the way the aid is handed out, with a premium placed on guarding distribution channels against predation. Aiding Conflict: The Impact of U.S. Food Aid on Civil War. National Bureau of Economic Research Working Paper 17794. Download (limited free distribution) here.

Manna from Spectrum. Business school guru Clayton Christensen coined the term "disruptive innovation" -- a technological advance that fundamentally changes how something important is done. (Think of the automobile or electric lighting.) The mobile phone fits this category in many developing nations, where in a single generation it has leapfrogged the sluggish expansion of costly wired telecom networks.

Kenya is a case in point. At the turn of the millennium, just one percent of Kenyan households had telephone service of any sort. Eleven years later, the figure was 93 percent -- virtually all of it via mobile phones. Equally startling, suggest Gabriel Demombynes and Aaron Thegeya of the World Bank, wireless phones are filling a vacuum in the provision of financial services to the poor and struggling middle class, radically boosting the growth of the financial services industry.

You can now deposit cash into your mobile phone account at phone company outlets in virtually every neighborhood and village, and then use your handset to transfer the money electronically to just about anyone you want. Mobile money is rapidly becoming the premier medium of exchange in Kenya. That's because it's far more cost-effective than bank-based checking. And, perhaps more importantly, it finesses the problem of street robbery in urban areas. Mobile money customers in Kenya went from zero in 2007 to 18 million in 2011. The system is now rapidly deepening to become a vehicle for interest-earning household savings as well as for bill payments. Kenya's Mobile Revolution and the Promise of Mobile Savings. World Bank Policy Research Working Paper 5988. Download (free) here.

No Polish Joke. For hundreds of years, Poland has been a pawn in the games of empires, shrinking, expanding, and sometimes disappearing altogether at the whim of tyrants and geo-politicians. Could anything good have come from this endless struggle for independence and identity?

Mitchell H. Kellman and Yochanan Shachmurove of the City University of New York do see hints of a silver lining. They argue that the aplomb with which the Polish economy has adjusted to dislocation over the last three decades is testament to its hard-earned adaptability and resilience.

In 1980, Poland was a primary supplier of heavy machinery for the Soviet Bloc. But when COMECON (the USSR's autarkic economic system) fell apart in the 1980s, Poland's exports slipped back to agriculture. Strikingly, though, the export sector recovered quickly after privatization, and its industrial sector has integrated exceptionally well into the European Union, in spite of the EU's recent problems.

Kellman and Shachmurove offer four measures of trade sophistication, ranging from the rise of intra-industry trade in components to the speed at which Polish industry became a major exporter in new categories of goods. But their bottom line is always the same: Tempered by adversity, Poland's economic culture is highly adapted to managing dislocation and rapid change. The Ability to Adapt and Overcome Obstacles: Machinery Exports of Poland. Penn Institute for Economic Research Working Paper 12-004. Download (free) here.

Rain or Shine. Economists are (way too) fond of explaining that there's no such thing as a free lunch. But in fact, bargain lunches are just about everywhere in the form of institutional innovation that can increase material welfare without the need for further inputs. Case in point: weather insurance for farmers in developing countries who absolutely cannot afford to have a failed crop.

World Bank consultants/researchers Daniel J. Clarke, Olivier Mahul, Kolli N. Rao, and Niraj Verma explore the design and impact of weather-based crop insurance in India, which now covers some nine million farmers. These farmers paid premiums totaling $258 million in 2010-11 in order to insure some $3.1 billion worth of crops against adverse weather. Claims are linked to complex formulae that attempt to capture the impact of drought, flooding, and crop-damaging extremes of temperature. In some areas, the insurance is compulsory, with premiums that are capped at just a few percent of the value of the crop and are heavily subsidized by the government. In others, it is voluntary, with premiums determined by free markets.

The hybrid system apparently works pretty well. But like other sorts of societal catastrophe insurance, there are wheels within wheels that affect individual incentives or misdirect payouts. Weather Based Crop Insurance in India. World Bank Policy Research Working Paper 5985. Download (free) here.

The Dragon's Appetite. It's no surprise that the Chinese economy is now big enough -- and growing fast enough -- to have an enormous impact on the global economy. But even those who have been paying close attention to the phenomenon may get a jolt from this latest finding.

Ambrogio Cesa-Bianchi (Inter-American Development Bank), M. Hashem Pesaran (Cambridge), Alessandro Rebucci (IDB), and TengTeng Xu (Cambridge) used data from the last three decades to assay changes in the economic linkages between the China and Latin America. They found that the impact of a change in GDP in China has tripled since the mid-1990s, even as the parallel sensitivity of Latin America to swings in the U.S. economy has halved.

Part of the impact come from just what you'd expect: changes in China's demand for Latin American exports. But a surprisingly large portion is indirect, amounting to a secondary shock transmitted through the U.S. and European Union economies. That is, when China imports less from the United States and the European Union, the U.S. and EU import less from Latin America. Come to think of it, though, that shouldn't be much of a surprise, since the interdependence of national economies is growing ever more complex. China's Emergence in the World Economy and Business Cycles in Latin America. Inter-American Development Bank Working Paper Series IDB-WP-266. Download (free) here.

Solid BRIC Work. The BRICs (Brazil, Russia, India, China), all of which are coming into their own in economic terms, are an endless source of fascination to economic historians these days. One big question is: Why did they fail to catch fire in the late 19th and early 20th centuries, when America and Western Europe were growing at a prodigious rate?

Latika Chaudhary (Scripps), Aldo Musacchio (Harvard), Steven Nafziger (Williams), and Se Yan (Peking University) focus on one key element: the lack of mass access to primary education. They argue that in each country, provision of public education was decentralized, allowing local elites to prevent such investment in human capital. There's much more to the story, of course: each BRIC country faced unique challenges to growth. But whether or not you buy one-size-fits-all explanations (to be fair, the authors don't entirely), the paper is worth reading because it is chock-full of anecdotal evidence about the development experiences in countries that were home to half the world's population in 1910 and now constitute the most dynamic force in the global economy. Big BRICs, Weak Foundations: The Beginning of Public Elementary Education in Brazil, Russia, India and China. National Bureau of Economic Research Working Paper 17852. Download (limited free distribution) here.

TONY KARUMBA/AFP/Getty Images

Democracy Lab

Girl Power and the Fragility Trap

Academic economists usually air their new ideas first in working papers. Here, before the work gets dusty, a quick look at transition policy research in progress.

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.

Jad Chaaban (American University of Beirut) and Wendy Cunningham (World Bank) measured the loss in terms of the "opportunity cost" of not allowing girls to finish high school, not allowing them to join the labor force, and inducing them to have children prematurely. This cost varies from country to country, of course, so the authors crunched the numbers for some very big developing countries (including China, India, and Brazil) and some very poor ones (including Malawi, Tanzania, and Burundi).

The results are sobering -- and in some cases startling. For example, allowing the current cohort of girls to complete the next level of education in Burundi would add the equivalent of 68 percent of one year's GDP to their lifetime earnings. Delaying first pregnancy for the current 15-19 year olds in Uganda until they are no longer teenagers would add 30 percent of one year's output to the country's GDP.  And none of this, mind you, includes what may be the largest cost of discrimination against women: the retardation of institutional development ranging from the suppression of corruption to respect for property rights. Measuring the Economic Gain of Investing in Girls. World Bank Policy Research Working Paper 5753. Download (free) here.

IMF Knows Best? Governments across Latin America -- notably Argentina, Venezuela and Bolivia -- moved left in the last two decades. Subsequently, income inequality declined, suggesting that left-wing governments did deliver on their promises to share the wealth. But Darryl McCloud (Fordham) and Nora Lustig (Tulane) make what they believe is a key distinction between the social democratic left (winners in Chile and Brazil) and the populist left (who govern in Venezuela, Bolivia, and Argentina). The social democrats more or less followed the so-called Washington Consensus formula, honoring foreign financial commitments and managing fiscal and monetary policy conservatively. The populists -- notably in Argentina -- did not. Indeed, the Argentine experience with default has been held up as evidence that "no pain, no gain" prescriptions are obsolete.

McCloud and Lustig find, however, that isolating the impact of factors for which current governments deserve little credit -- for example, improvements in the terms of trade due to the global commodity boom -- radically changes the picture. Social democrats, they argue, were actually more effective in reducing poverty than their populist counterparts. Inequality and Poverty under Latin America's New Left Regimes. Tulane Economics Working Paper 1117. Download (free) here.

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