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

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