Democracy Lab

Gorging on Investment, Choking on Red Tape

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.

Good Riddance to the License Raj. Prior to India's economic reforms in 1991, businesses needed government permission to do just about anything -- to enter an industry or leave one, to grow, to shrink, to import machinery, etc. The nominal goal was to protect small firms from big bad ones, though, the "License Raj" rapidly devolved into a honey pot for ethically challenged bureaucrats. One of the few virtues of the four-decade experiment was that its end has given researchers a chance to measure just how distorting India's version of capitalism-with-a human-face really was.

The answer, according to Laura Alfaro (Harvard Business School) and Anusha Chari (University of North Carolina) was very distorting. No surprise there, but their analysis is enlightening in other ways. Post-1991 deregulation increased both the number of small firms, which were no longer blocked from entering industries, and the number of large firms, presumably because the efficient medium-size ones were also no longer blocked from growing. Overall, industries became less concentrated rather than more, as measured by the index used by antitrust authorities. One other striking point: The failure to fill in the missing middle in the years since deregulation suggests that small firms still face substantial hurdles to growth -- principally, lack of competitive access to credit. Harvard Business School Working Paper 13-056. Download free here.

The Rising Tide. The price of economic growth in emerging market countries, we've been told time and again, is rising inequality. The best one can hope for is that the tide will carry all boats, even if the poor occupy less buoyant craft. And that's certainly been true in China, where a half-billion people have been rescued from abject poverty, yet migrant workers still huddle in the shadows of flashy skyscrapers.

But happily, it's not true everywhere. According to World Bank researchers Nora Lustig, Luis F. Lopez-Calva and Eduardo Ortiz-Juarez, most of Latin America has been bucking the trend over the last decade, growing fairly briskly even as inequality shrinks. And since much of the inequality on the continent has been associated with lack of competition, the decline actually went hand in hand with greater efficiency.

Why the good news, and why now? The three economists offer a close look at Mexico, Brazil and Argentina. Argentina's a bit of an anomaly; the country benefitted enormously from the temporary run-up in export prices for grain and meat early in the decade, and its Peronist government distributed much of the windfall to the party's labor union constituents. But in Mexico and Brazil, declining inequality seems to be in large part a durable payoff for very well targeted social benefits for the poor. World Bank Policy Research Working Paper 6248. Download free here.

Future Shock. Other things equal, global financial integration makes emerging market economies (EME) more vulnerable to financial shocks.  If you doubt that, think about what happened to East Asia -- and then in Russia and Brazil -- in 1997.

But all things aren't equal. Since the 1997 debacle, most EMEs have pulled their socks up, avoiding big budget deficits and inflationary monetary growth, while imposing tighter regulation on banks. So, are these economies more or less susceptible to external shocks than they were two decades ago?

According to Gustavo Adler and Camilo Tovar of the IMF, EMEs are, on balance, less vulnerable: Improved macroeconomic management paid off big-time for countries ranging from Indonesia to Brazil to Egypt during the 2008 global financial crisis. The only glaring exceptions are the western-oriented Eastern European countries that have become ever more integrated with the rich western European economies -- notably Germany. But even there, the cloud has a silver lining; European economic integration has dramatically increased productivity and living standards on its eastern periphery.  IMF Working Paper 12/188. Download free here.

Too Much of a Good Thing? China's economy has been growing by 10 percent annually, give or take a percentage point or two, for three decades. How have they managed it? One reason (among many): By saving a startlingly high 50 percent of national income and plowing it into capital. But as any economist will tell you, there's such a thing as too much investment -- a surfeit in which resources are diverted from consumption, slowing the growth in living standards for the current generation of workers. And according to a new IMF working paper by Il Houng Lee, Murtaza Syed and Liu Xueyan, China is way past the line.  

Government regulations artificially reduce the cost of capital borrowed from the banking system, force-feeding the growth of productive capacity in big, export-oriented factories at the expense of households that are induced to save even more for emergencies and retirement. The IMF economists estimate that the distortion reduces the welfare of the Chinese people by about four percent. Or, to put it another way, simply eliminating the distortions would be equivalent to a four percent increase in national income -- real money in a country that only recently achieved middle-income status.  IMF Working Paper WP/12/277. Download free here.

Scrambling for Africa. Did European colonialism spur or retard economic development? There's pretty much a consensus that it increased the pace of growth in North America and Australia (though little or none of the gravy trickled down to the indigenous peoples). But views on colonialism's impact on Africa are divided. On the one hand, earlier generations of both Marxists and free-marketeers were wed to the idea that colonialism yielded benefits (purely in terms of GDP growth) because it propelled Africa into the global capitalist economy. On the other, those steeped in the traditions of social democracy typically argue that the benefits of western technology and market institutions were more than offset by the legacy of autocracy and racism left by the colonial powers.

Leander Heldring (Oxford) and James Robinson (Harvard) point out that much depends on educated guesses about the "counterfactual" -- that is, about what would have happened if Europe had left Africa alone. Of course, guesses are just that, leaving room for plenty of disagreement. What makes this paper important is that it lays out the plausible counterfactuals in a very disciplined way.

For what it's worth, Heldring and Robinson conclude that it wasn't a close call. Colonialism, they say, reduced economic efficiency by focusing enterprise on short-term gains from resource extractive industries, by failing to invest in human capital and by undermining the prospects for good governance once the Europeans departed. There are some ambiguous cases -- places lacking virtually any institutions of government like South Sudan and Somalia -- and some hard-to-read cases like Sierra Leone. But check out their reasoning yourself: This is a game many can play. National Bureau of Economic Research Working Paper 18566. Download here (for $5).

Jobs and Carbon. To date, the European Union's commitment to reducing emissions of climate-changing gases has not exacted much in terms of output or employment. But the crunch may come over the next few years, as the European Union reaches to meet the ambitious goals of cutting carbon emissions to 80 percent of the 1990 level and generating 20 percent of energy from renewables by 2020. This is likely to hit Eastern Europe disproportionately hard because much of its industrial and transport capacity is relatively inefficient.

While the adjustment process will be expensive in terms of replacement of factories, electricity generation capacity and vehicles, the long term cost is probably manageable. But in the short run, the new regulations will work like an energy price shock, driving some productive capacity offline and displacing a lot of workers. Here, IMF economists Isil Oral, Indhira Santos and Fan Zhang estimate the impact (albeit temporary) on employment by country, which largely turns on how dependent they are on energy-intensive industries.

Turns out the biggest potential losers in Eastern Europe are the Czech Republic, Slovak Republic, Slovenia, Bulgaria, Hungary and Estonia. The duration and severity of the shock will depend in large part on the flexibility of labor markets -- that is, the ease with which workers can move between localities and industries -- and on the investment governments make in retraining and job search.  IMF Policy Research Working Paper 6294. Download free here

Photo by OLIVER LANG/AFP/Getty Images

Review

Dreams from David Maraniss

What does the new Obama bio tell us about the president's view of the world?

David Maraniss's Barack Obama is an engrossing and thorough (sometimes exhaustingly thorough) account of the U.S. president's early life and family background. The book has already made headlines for its revelations about the young Obama's early girlfriends and enthusiastic high-school pot use, and by pointing out some of the inaccuracies and fudged details in the president's memoir Dreams from My Father -- which Obama himself has acknowledged contained several composite characters and a rearranged timeline.

But even as the book punctures some of the mythology built up by the official campaign version of Obama, it doesn't really contain many scandalous revelations for his detractors, either. (That said, Maraniss's portrayal of Barack Obama Sr. as an abusive, womanizing, alcoholic is very much at odds with the flawed but largely sympathetic character in Dreams.)

Although the book ends before Obama enters politics, it does contain some interesting moments for those interested in the president's view of the world and how it evolved.

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Anti-colonialist? Not so much.

Some critics have attributed Obama's worldview to his Kenyan background and the "anti-colonialist" sympathies of his family -- particularly his grandfather Hussein Onyango. Onyango's surviving fifth wife, Sarah Ogwel (Called "Granny Sarah" in Dreams though she's not a blood relative of the president), has told the story of how her husband, while working as a cook for British families in Nairobi, was secretly helping anticolonial insurgents and was captured and brutally tortured by British authorities.

Maraniss makes a compelling case that the tale -- which no one else seems to remember -- is false:

Several pieces of logic contradict the story. First, if Hussein Onyango had been imprisoned, even if one were to further accept that he was eventually cleared of whatever charges were against him, he likely would have had difficulty... securing employment in the homes of security-conscious white officials in the following years, when the country was in turmoil and there were increasing concerns about the motives and loyalties of Kenyan workers. Yet he continued to be hired throughout the next decade and became especially popular with foreign officers at the American embassy in Nairobi. Second, it is also unlikely that his son would have been accepted into the most prestigious boarding school in western Kenya within a year of his father's imprisonment, or that after many months without a salary the family would have been able to afford to the tuition.

Another frequently repeated story that appears in Dreams from My Father holds that the father of Obama's Indonesian stepfather, Lolo Soetoro, had been killed while fighting the Dutch during Indonesia's independence struggle. According to Maraniss, however, the story is "a concocted myth in almost all respects." He goes on: "Not only did Martodihardjo die two years after the struggle had ended, but he died a most domestic death far from any battlefield. He fell off a chair at his home while trying to hang drapes, presumably suffering a heart attack."

As for Barack Obama, Sr., he was certainly an "anti-colonialist" with communist sympathies. Maraniss digs up a fascinating article penned by him in the days following independence in which he argues for the nationalization of business and industries -- particularly those owned by Europeans -- and argues that it is the duty of government when considering the "good of society" to "force people to do things they would not otherwise do."

But the elder Obama was more of an intellectual -turned-bureaucrat than a revolutionary. He was still in high school during the most violent years of the Mau Mau uprising against British rule, worked for a literacy program supported by the colonial authorities, traveled to the United States to study thanks to an "airlift" of Kenyan students sponsored by baseball star Jackie Robinson with the blessing of Vice President Richard Nixon, and was doing graduate work at Harvard when his country finally became independent. He was not exactly the Kenyan Che Guevara.

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The Kibaki connection

Obama has disappointed many in his father's homeland by not visiting Kenya as president, though Hillary Clinton and Joe Biden have made the trip. Nor has President Mwai Kibaki visited the White House, as he did when George W. Bush was president. The last one-on-one meeting between the two leaders was in 2006, when Obama was a senator.

This may be because of the high levels of corruption and ethnic conflict in Kenyan politics -- Obama pointedly opted for relatively stable Ghana for his first Africa trip in 2009 -- but there's also an interesting family backstory between the two men.

Kibaki was largely responsible for Barack Obama, Sr.'s political comeback when the onetime rising political star had hit a rough patch in his career in the mid 1970s. Obama père had lost an influential job in the country's tourism ministry -- partly because of the assassination of his political patron, Tom Mboya, one of the leaders of Kenya's independence movement and the most prominent politician from Obama's Luo tribe -- and partly because of his heavy drinking. That's where Kibaki -- a member of the politically dominant Kikuyu tribe -- stepped in:

As [Obama] told the story, he was walking in downtown Nairobi one day when a prominent Kikuyu, Mwai Kibaki, minister of finance and planning in the Kenyatta administration, stopped his car and gave him a ride. Kibaki had studied at the London School of Economics, but the Harvard-trained Obama considered himself the better economist and was not intimidated. Whatever conversation transpired during the car ride, it ended, or so Obama said, with Kibaki offering him a job. Variations of that story were told by Obama's associates. One version had Obama and Kibaki enjoying drinks at the Inter-Continental Hotel, where they were both frequent patrons, and after downing several "double-doubles" between them (Obama's favorite: double the whiskey), Kibaki agreed to hire him.

That drinking bout between a future president and the father of a future president led to Obama Sr.'s political second act as a fairly influential trade official.

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Visa troubles

Given the current controversy over the White House's shift on immigration policy, it's interesting to note that visa problems were very much an issue for both of Obama's father figures. Obama Sr. was questioned by INS officials following his marriage to Stanley Ann Dunham over the question of whether he was legally divorced from his first wife in Kenya. (As it turns out, he probably actually wasn't.) The prevailing attitudes of the time toward interracial couples probably also played a factor, Maraniss notes, and the INS decided that while it didn't have grounds to deport him, he should be "closely questioned" before being granted a visa extension. Several years later, after separating from Dunham, he was forced to leave Harvard before completing his doctorate when the INS denied him a visa extension.

Lolo Soetoro, the younger Obama's stepfather, also faced visa trouble when his student visa ran out in 1964. Although the Indonesian government expected him to return to serve in the army, he was by then involved with Dunham and took a $2-an-hour surveying job just so he could stay in Hawaii for another year. As much as they were in love, the timing of his marriage to Dunham in 1965 may also have been motivated by visa considerations -- Indonesia was in the midst of political turmoil at the time and Soetoro worried he would be targeted for persecution for having studied in the United States. He eventually returned, with his wife and stepson, in 1966 after the Sukarno government had fallen -- but only once he had completely run out of visa extension options.

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Peace-process critic

Maraniss shares a paper Obama wrote at Occidental College, where he studied for the first two years of his college career before transferring to Columbia University, as part of a class debate on the recently signed Camp David accords. As he was representing the position of a group in the exercise rather than giving his own opinion, it's hard to read too much into it, but there may be some early hints of "leading from behind" in Obama's critique of American power:

"In conclusion, we feel that the [other] group's paper proceeds from the faulty premise that Egypt and Israel can solve the delicate problem of the Palestinians, with the U.S. overseeing and insuring the whole process. This takes a naïve faith in American ability to control the world according to its whims. In actuality, this has not been the case for some time -- the U.S. today has limited influence in the Middle East, and must be viewed as a participant rather than a controller of the world system....

Camp David was definitely a step in the right direction but only by transcending its context and allowing the Palestinians and Arab nations to participate in the settlement can the problem be solved."

Reading the excerpt, it's tempting to wonder how college student Obama would have critiqued President Obama's frustrated efforts at Mideast peacemaking.

Maraniss notes that while studying at Columbia, Obama took a class with the literary theorist and Palestinian activist Edward Said, but the only reaction the biographer found from the class was a letter complaining about Said's habit of handing back papers later and arguing that that he "should feel justified in labeling him a flake."

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The first foreign-policy speech

Barack Obama's first ever political speech was at a Feb. 18, 1981, rally pushing for Occidental to divest from companies doing business in apartheid South Africa. Maraniss quotes the opening:

"There's a struggle going on... I say there's a struggle going on... It's happening an ocean away. But it's a struggle that touches each and every one of us, whether we know it or not. A struggle that demands we choose sides. It's a choice between dignity and servitude, between fairness and injustice."

The speech was actually part of a bit of guerrilla theater in which Obama was interrupted by other activists pretending to be police officers who "arrested" him before he could finish. People present remember being impressed with his speech, but in Dreams from my Father, he recalls telling his friends, "I don't believe we made any difference by what we did today."

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Travel notes

Interestingly, the future community organizer was critical of the role of international NGOs when he went to visit his mother in Indonesia after college. His mother, at this time, was researching the conditions of rural women on behalf of the Ford Foundation. Maraniss writes, "His perspective had been shaped in part by the opinions of the international friends he had made at Occidental, including Hasan Chandoo, who had often criticized the notion of American benevolence, arguing that, in supporting military dictatorships, it had done as much harm as good in the developing world."

Visiting his friend Chandoo -- a Pakistani from a wealthy shipping family -- in Singapore, where he was living at the time, Obama wasn't particularly impressed, as he wrote in a letter to a friend:

"An incongruous place, Singapore, slick and modern and ordered, one vast supermarket surrounded by ocean and forest and the poverty of ages ... Mostly peopled with businessmen from the States, Japan, Hong Kong, as well as various family elites of Southeast Asia. Everything is bought and sold, with unconscious satisfaction."

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The Pakistani connection

Relations with Pakistan have been one of Obama's biggest headaches as president, but the country also played a formative role in developing his worldview. Many of his best friends at Occidental and later Columbia were Pakistanis with whom he frequently debated politics. (Chandoo, as it happens, was mentored during a brief stint at the now-defunct Windham College in Vermont by a young professor named Peter Galbraith, who helped get the young man admitted to Occidental and decades later played a pivotal role in Obama's Afghan policy as U.N. Special Representative.)

"The Pakistanis at Oxy," Maraniss writes, "wealthy, intellectual, and intensely opinionated, with their worldly presentation of political theories and capitalist panache -- brought urgency to these discussions of foreign affairs, while the American students seemed to have less at stake."

In 1981, Obama visited his Pakistani friends in Karachi. At the time, the country was under martial law under the rule of the Islamist dictator Zia ul-Haq. Though Obama again mocked his friend Chandoo for espousing leftist politics while living in luxury, Maraniss argues that the trip was an eye-opener for the future president. "Every evening at dinner, often at the homes of various relatives of Chandoo's or Hamid's, he listened to intense discussions about politics and religion. Chandoo was Shia, Hamid [another friend] was Sunni, but both were heavily Weternized and not dogmatic." Chandoo also remembers Obama taking note of the African sharecroppers who worked the fields in Sindh province.

Much has been made -- by allies and enemies alike -- of Obama's complicated relationship with Islam. As he himself has said, "I am a Christian, but my father came from a Kenyan family that includes generations of Muslims." But Maraniss makes a compelling case that these Muslim roots have been overstated. Hussein Onyango, the grandfather Obama never met, may have converted to Islam but was never particularly religious, and was equally influenced by the Christian missionaries in his region. Barack Obama, Sr. was an atheist and Lolo Soetoro was almost entirely unobservant.

To the extent that Obama gained insights on Islam and Muslims early in life, Maraniss suggests, his wealthy, liberal, Pakistani college buddies were probably more influential than his own family.

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