Posted by Ignacio on
Fri, 27/10/2006
Like every Friday, from Raj Nallari and Breda Griffith's teaching notes.
At their most fundamental, institutions are the informal rules and norms that govern personal and social behavior, and the formal rules and norms that govern economic, social, and political life. Institutions emerge as rules and norms developed to provide the predictability needed for societies to function. Put another way, society is an organization in which exchange and production are mediated by formal and informal institutions, themselves the underpinnings for markets. Institutions can be more or less effective in facilitating exchange, production, and market operations. Studies have shown that institutions matter greatly for growth but, given their deep-rooted nature, are very difficult to change.
Institutions perform certain functions in every society, the form they take in doing so varies considerably. Unfortunately, very little of the empirical work done to date on the importance of institutions examines the link between institutional form and performance. Researchers have focused instead on the link between institutional performance (for example, perceptions of the rule of law or of protection of property rights) and economic performance. This is important, but it does not teach us how to improve institutional performance and, in turn, foster economic growth. We do know, however, that adopting other countries’ laws and formal regulations will not necessarily produce the same institutional performance or indeed economic performance. The Washington Consensus that held sway in the 1980s suggested that developing countries would improve their fiscal position by liberalizing the banking system, reforming and privatizing state enterprises and reforming tax structures. The success of these policy prescriptions depended on properly functioning instutitions; developing countries that did not have the necessary regulatory and legal frameworks in place, endorsed by government policies and committiment – in effect good governance - ended up in far worse macroeconomic positions.
The importance of good governance for economic growth and development has long been understood. A sub-discipline of the literature on New Institutional Economics (NIE) is the link between governance and growth. NIE builds on neoclassical economic theory that examines the relationship between buyers and sellers. Any transaction between buyers and sellers is beset by transactions costs that include uncertainites about the honesty of buyers and sellers and the administrative costs that exist to reduce this uncertainty. “Institutions are formed to reduce uncertainty in human exchange. Together with the technology employed they determine the costs of transacting (and producing). It was Ronald Coase (1937 and 1960) who made the crucial connection between institutions, transaction costs and neo-classical theory” (North, 1990). Transactions costs are reduced when properly functioning institutions exist, i.e. rules and the enforcement of rules. Moreover, the scope for markets – the exchange of goods and services - is increased when institutions exist. Unwritten rules such as social customs, norms and religion that are slow to change over time are enforced by groups within society. Unwritten rules are informal institutions and constitute social capital, they also represent the first level of Williamson’s (2000) four-level classification and hierarchy of institutions. Formal rules are rules that are written and enforced by the state, for example, constitutions, political parties, and legal systems. Formal institutions are also slow to change, but not as slow as social capital. (Formal institutions make up “positive political theory” in Williamson’s hierarchy). The third level is where day-to-day transactions take place to minimize uncertainity as described ibid. (North 1990). The fourth level consists primarily of institutions for market-oriented economic activities, such as stock markets and securities regulators.
Williamson (2000) hierarchy of institutions
Source:Azfar (2002) “The NIE Approach to Economic Development: An Analytic Primer”.
A considerable literature has evolved in recent years on the link between economic growth, development and institutions. Driving this has been the empirical evidence suggesting that cross-country differences in income are correlated with differences in indicators of institutional quality.Institutions have been defined along a broad spectrum from the establishment of rules to “actual organizational entitites, procedural devices, and regulatory frameworks” (WEO, 2003). In practical terms, a large proportion of the work on institutions and economic growth has focused on measuring how well public institutions function and their impact on private sector behavior.
Relationship between Institutions and Income
Source: WEO, 2003.
Next week we will examine measures of institutional quality relating to the “perceptions and assessments of public institutions”.
Posted by Raj on
Wed, 25/10/2006
(Adapted from Debraj Ray in Understanding Poverty, 2006)
Individuals are born within a social context, with a ‘local society’ comprising of social, economic and political norms. Individuals aspire to be at par or exceed the ‘local society’s’ life-style and economic well-being. This set of aspirations will influence individual behavior. A poor individual looks at consumption bundle of others (akin to Jones’ effect frequently mentioned nowadays or the emulation effect of Veblen in Theory of Leisure Class) who have are in that individual’s ‘aspirations window.’ For example, a poor farmer is likely to talk and follow practices of farming that are similar to his neighboring farmer or from a person who is close to him. A person’s aspiration window depends upon an individual’s socioeconomic status, religious, ethnic, cultural and other factors, such as lack of role models in the individual’s day to day living, or because of restrictions on flow of information about successful individuals. The greater the mobility of individuals or flow of information in a country, the broader are the aspirations likely to be (so-called CNN effect where one from developing country aspires to acquiring goods and services advertised in the CNN).
Aspirations gap is the difference between the standard of living one aspires to and the living standard that individual currently enjoys. Investment in education, health etc and effort to reach this higher level of material standard will depend on this gap. For economic success to occur, individuals have to be cognizant of ‘aspirations window’ and be willing to sacrifice (i.e. cost of being at current living standard) and make every effort to break-open and widen the window and move towards higher and higher levels of living standards.
Individuals who have aspirations close to their current level of living will find an approach based on minimalist-effort because they can reach their goals quite easily, while an individual whose aspirations are very far away from current level will also have little incentive (i.e. less fire in the belly to succeed) to work hard because the aspired-set is a lot harder to reach and there could be a lot more frustration involved. Therefore, investment efforts are likely to be minimal for both individuals having high- and low-aspirations gap.
A socially polarized or stratified society (say due to slavery, caste, racial discrimination) is likely to have poor people with a ‘narrow aspirations window’ because aspiring to be successful and rich in such a society has a large aspirations gap. Frustration and likelihood of aspirations failure is quite high in such a dysfunctional society. So it is not poverty alone but social context of disconnectedness in the form of lack of role models or inadequate profiles of successful persons in the aspirations window of a poor person that could result in poverty trap. Poverty trap is therefore difficult to reverse.
At the society’s level, actual living standards should increase with aspirations gap, otherwise growth is likely to lead to riots and violence and be socially de-stabilizing (a la the hypotheses of Tocqueville and Mancur Olson) especially in a country fragmented ethnically and for other reasons. On the other hand, societies like the USA which are more homogenous, poor are assimilated in a ‘melting-pot.’
Posted by Ignacio on
Tue, 24/10/2006
A recent paper on the very much debated linkages between Globalization and Poverty, by Ann Harrison:
This essay surveys the evidence on the linkages between globalization and poverty. I focus on two measures of globalization: trade and international capital flows. Past researchers have argued that global economic integration should help the poor since poor countries have a comparative advantage in producing goods that use unskilled labor. The first conclusion of this essay is that such a simple interpretation of general equilibrium trade models is likely to be misleading. Second, the evidence suggests that the poor are more likely to share in the gains from globalization when there are complementary policies in place. Such complementary policies include investments in human capital and infrastructure, as well as policies to promote credit and technical assistance to farmers, and policies to promote macroeconomic stability. Third, trade and foreign investment reforms have produced benefits for the poor in exporting sectors and sectors that receive foreign investment. Fourth, financial crises are very costly to the poor. Finally, the collected evidence suggests that globalization produces both winners and losers among the poor. The fact that some poor individuals are made worse off by trade or financial integration underscores the need for carefully targeted safety nets.
Read the full paper.
Related: our own Fridays Academy posting on Trade, Inequality and the Poor.
Posted by Ignacio on
Fri, 20/10/2006
At the Poverty and Growth Program of the World Bank Institute we are organizing an E-learning course on "Economic Literacy for Civil Society", which will be based on the lecture notes we have been posting in the Fridays Academy series during the last few months.
Participants in this free course will have the opportunity to discuss these issues online with other participants from around the world, and to ask questions to the authors Raj Nallari and Breda Griffith.
You can apply online. Deadline to apply is Tuesday October 24th.
Posted by Ignacio on
Fri, 20/10/2006
Like every Friday, from Raj Nallari and Breda Griffith's teaching notes.
Open trade is good for overall economic growth and by extension poverty reduction, but what effect does it have on inequality? Trade liberalization tends to reduce monopoly rents and the value of personal connections with bureaucrats and politicians, thereby reining in the rich. In developing countries, it may be expected to increase the relative wage of low-skilled workers, who are likely to be scarcer in the world economy than at home. Multilateral liberalization of agricultural trade may increase rural incomes but expose urban dwellers to higher food prices. And, in many countries, trade openness may have adjustment costs with which the poor are ill-equipped to cope. At first glance, therefore, the relationship between trade and inequality is unclear.
Trade reform in developing countries took off from the late 1970s. Until then, developing countries had pursued inward-looking policies by promoting import-substituting industrialization strategies. The aim was to encourage domestic production and restrict foreign investment by multinational firms in order to support the growth of domestic firms. But not only do inward-looking policies create many distortions, as discussed above, they also tend to benefit relatively rich and powerful groups at the expense of the poor (Dollar 2004).
Since the late 1970s, developing countries have become more integrated with the world economy through foreign trade, foreign investment, and immigration. Integration has been driven by technological advances in transport and communication and by deliberate policy changes. China’s ratio of trade to national income has more than doubled since it opened to the world in the early 1980s, and countries such as Bangladesh, India, Mexico, and Thailand have seen large increases as well.
While the popular press is almost uniform in its view that trade reform is bad for the poor, the economics literature paints a completely different picture. While the relationship between trade and inequality remains unclear, the relationship between trade and growth is strong and positive, meaning that trade is most definitely pro-poor. According to Dollar and Kraay (2001a), increased trade generally accompanies more rapid growth while showing no systematic change in household income distribution thus increased trade generally goes hand-in-hand with improvements in well-being of the poor. This finding is also borne out by Berg and Krueger (2002), who point out that, while the vast literature on the effects of trade liberalization on income distribution reveals no systematic relationship between openness and the income of the poorest, the positive effect of openness on overall growth and, in turn, on poverty, is firmly supported by the evidence.
In support of this argument, Dollar (2004) identifies trends in trade liberalization starting from 1980 that support a positive relationship between trade reform and poverty reduction. These are:
- Poor country growth rates have accelerated (developing countries on average grew 3.5 percent per capita in the 1990s) and are higher than rich country growth rates for the first time in modern history.
- The number of poor people in the world has declined significantly (by 375 million since 1981), and the share of the developing world population living on $1 a day or less has declined by 50 percent since 1981.
- Global inequality has declined modestly, reversing a 200-year old trend toward higher inequality.
- There is no general trend toward higher inequality within countries. The share of the bottom quintile does not vary with per capita national income, a relationship that has not changed over time. Some countries had increases in inequality—China and the United States, for example—while others had decreases.
- Wage inequality is rising worldwide (but wages are a small part of household income in developing countries).
- Trends toward faster growth and poverty reduction are strongest in developing countries that have embraced trade liberalization.
In contrast to this generally positive picture, there are reasons to expect that trade reform may not benefit the very poorest members of developing countries. The following paragraphs, based on Bannister and Thugge (2001) outlines possible impacts of trade liberalization on the welfare of the poor.
Trade liberalization normally increases real income by reducing the prices of imports and substitutes for imported goods. In general this is seen to have a positive impact on the poor. Imported products such as basic foods, pharmaceuticals, other medical and used clothing are important for the poor. Moreover, the poor may benefit from the removal of export taxes to the extent that they are net producers of exports, which is often the case in agriculture, for example. An open trade regime improves access to new products and the importation of new technologies and processes that may have positive effects for the poor.
The effect of trade liberalization on wages and employment depends on the level of labor regulation in the country. In a highly regulated labor market, the adjustment to changes in the prices of outputs will translate into changes in real wages. If firms are constrained from reducing their workforces, then wages will decline. Where minimum wages prevail and labor mobility is high, the adjustment will take place through changes in employment. Generally, the poor live in the rural and informal urban sectors that are characterized by flexible labor markets—thus adjustment to trade shocks will take place through employment, and we would expect the poor to suffer disproportionately. Furthermore, if the impact of trade liberalization is to remove protective barriers from sectors in which the poor predominate, we would expect a lowering of relative wages for the poor. Examples from Latin America (Ravallion and Chen, 2004) suggest that trade liberalization has increased wage disparities, benefiting higher income groups more than the poor.
The expectation that trade reform, by lowering trade taxes, leads to lower government revenues in the short run is unsubstantiated. It is likely, in fact, that reform as actually practiced will raise government revenue by replacing nontariff barriers with tariffs and eliminating tariff exemptions. Moreover, removing tariffs that are high initially may reduce the incentives for smuggling and corruption and therefore increase the amount of goods recorded at customs. Finally, simplifying the tariff regime and thereby promoting transparency may boost fiscal revenue. In the long run, however, lower tariffs may lead to lower government revenues. Policies designed to increase revenue—tax reform or expenditure restraint—may be needed to minimize the adverse effect of revenue losses on the poor.
By reducing the anti-export bias of trade policy, trade liberalization brings about a more efficient allocation of resources that favors economic growth. Sustaining that growth, however, requires complementary macroeconomic and institutional reforms. For example, if the country’s exchange rate is overvalued, policy makers may choose to implement changes to improve competitiveness and avoid impeding the additional growth that would otherwise be possible as a result of trade liberalization.
Trade liberalization deepens economic integration. While there are many positive externalities to integration—such as less dependency on a single export market or product, and less dependency on the domestic market—adverse external shocks can significantly affect economic growth. Moreover, the shocks may affect the sectors in which the poor are employed—agriculture for example. As noted in the literature, it is important that other macroeconomic reforms should be pursued in line with trade reform so as to maximize and sustain the beneficial effect of trade reform on poverty.
Given the lack of assets and access to resources by the poor, they are more likely to suffer the adjustment costs that arise from trade liberalization. A transitory loss in income has a deeper impact on the poor than on other citizens and can reduce their chances of escaping poverty. Because the poor are disproportionately vulnerable, trade liberalization policies should include a social safety net.
The literature agrees that the adjustment costs of proposed reforms may be high in some countries and may affect the poor disproportionately. In other words, any reform plan will create some losers among the poor, especially in the short run, as well as many winners. For this reason, researchers agree on the importance of a social safety net. In the long run, most researchers agree that changes in investment and technology will lead to higher growth that will benefit the poor in the long run. Ravallion and Chen (2004a) found that periods of greater trade liberalization in China did not coincide with periods of poverty reduction. Moreover, tariff reductions in the lead-up to China joining the World Trade Organization (WTO) had minimal effects on poverty and inequality. Yet Ravallion and Chen (2004a) note that overtime there will be both gainers and losers from trade reform and that long-run productivity gains will have a positive impact on growth and poverty reduction. In the meantime, policy makers must be in a position to assess the impact of various policies through the use of diagnostic tools that measure the effect of trade-liberalization policies on the more vulnerable members of their society. Facts such as these can direct social protection policy in conjunction with trade reform.
Bannister and Thugge (2001) suggest how trade liberalization policies might be made more egalitarian. They argue for broad-based liberalization, so that the costs of adjustment are spread across a wide range of sectors. It may be necessary to sequence reform at different speeds for different sectors. Furthermore, exchange rate flexibility will facilitate a faster adjustment to trade reform policies and dissipate their shock throughout the economy. As already mentioned, trade reform policies will have a more positive impact if they are accompanied by other reforms. The authors identify three areas in particular—infrastructure development, development of markets, and labor mobility and training.
Rich countries can play a part in helping developing countries achieve and benefit from trade liberalization. The requirements for joining the World Trade Organization (WTO) and for settling disputes within the organization are onerous for poor countries. The advanced economies maintain extensive protection, especially in agriculture and labor-intensive products, that lowers the incentive for developing countries to pursue multilateral trade liberalization and reduces the benefit of unilateral reform.
Agricultural subsidies and protectionist policies distort trade. In the high-income countries, subsidies of various sorts account for nearly one-third of agriculture revenue. Most of these subsidies are provided through mechanisms that artificially boost production and undercut the market for farmers in developing countries. The group known as the West Africa 4 (Benin, Burkina Faso, Chad, and Mali) can produce high-quality cotton at the lowest cost in the world. In spite of their productive efficiency, the West Africa 4 lag far behind the world’s largest producer, the United States, where cotton is heavily subsidized. This leads to paradoxical results. Because of cotton subsidies, which cost the United States up to $4 billion each year, Mali alone loses $43 million in cotton earnings, each year, while receiving $37 Million in U.S. aid. As the production of cotton supports 10 million people in West Africa but just 25,000 farmers in the United States, protectionist policies seriously impair poverty reduction strategies by depriving farmers in developing countries of their livelihood. The subsidies depress world cotton prices, cutting the income of poor farmers around the world. EU sugar subsidies have the same effect. Aid from developed to developing countries totals about $75 billion per year, far less than the subsidies provided to developed-country farmers, which amount to about $350 billion per year.
Conclusion
Trade openness has been an unequivocally positive development for the poor in developing countries. Evidence on the relationship between trade development and inequality, on the other hand, is plentiful but inconclusive. Nevertheless, it is clear that trade is good for growth and that growth is good for the poor. In order to work best, policies opening a country to trade should be sequenced properly and accompanied by complementary reforms, so that the growth benefits of opening to trade can be maximized.
Advanced countries have a role to play in helping developing countries reap the benefits of trade. Trade subsidies provided to agricultural producers in advanced countries are distortionary and hurt poorer countries. Their harmful effects far outweigh the amount of aid typically provided by donor countries. As the same time, it is also fair to say that trade distortions within poorer countries themselves are also highly damaging. Further progress is also needed in this area if the full growth potential of international trade is to be realized.
Next week: Institutions and Growth
Posted by Ignacio on
Thu, 19/10/2006
Development Marketplace 2007 is offering US$4 Million in awards for proposals with innovative ideas to improve health, nutrition, and population outcomes of poor people in developing countries.
Development Marketplace is a competitive grant program of the World Bank that funds creative, small-scale development projects that deliver results and have the potential to be expanded or replicated.
Winning project ideas last year ranged from using native freshwater mussels to clean up China’s lakes, to establishing a decentralized supply of renewable energy throughout Rwanda, providing water-pumps, to using a solar-powered desalinization and water-purification system in Turkey, to improving access to water in Haiti, to using LED light units to bring lighting to tribal homes in India.
The theme of this year's Global Development Marketplace, “Improving Results in Health, Nutrition, and Population for the Poor,” will recognize and support efforts to improve health, nutrition, and population outcomes for poor people in developing countries. The World Bank is seeking initiatives that use innovative mechanisms to reach vulnerable groups, public-private partnerships to improve delivery of health goods and services, and inter-sectoral linkages for illness/disease/injury prevention. We are also keen to identify cost-effective approaches and technologies that build local capacity to gather and use information on health, nutrition, and population in developing countries.
Deadline to apply is November 17th
Posted by Ignacio on
Wed, 18/10/2006
The October issue of Development Outreach, the World Bank Institute's magazine, is just out. This month it focuses on Human Rights and Development.
Below all the links to the individual articles:
Human Rights and Development
-Guest Editorial
Joseph K. Ingram and David Freestone
The editorial highlights the current discussion on how human rights impact economic, social and human development.
Using Human Rights to Reduce Poverty
Louise Arbour
Human rights serve as instruments for achieving poverty reduction through social mobilization, judicial review, and political action.
A Rights-Based Approach to Removing Poverty
Arjun Sengupta
Points to the value added of placing human rights within the frame of the development discourse.
Misconceptions About the Right to Development
Stephen P. Marks
Once misconceptions on human rights are dispelled, the right to development may be distilled into five principles: equity, participation, non-discrimination, transparency, and accountability.
Pro-Human Rights Growth Policies
Jean-Pierre Chauffour
Discusses two different definitions of pro-human rights growth policies and concludes that, far from being inconsistent, there is potentially strong congruence between these two approaches.
Human Rights, Governance and Development
Daniel Kaufmann
Shows that, according to the results of empirical analysis, political and civil rights continue to be violated in many settings. This has a negative effect on socio-economic and development rights.
Using All the Tools at Our Disposal: Poverty Reduction and the Right to the Highest Attainable Standard of Health
Paul Hunt
Focuses on the right to health, which is closely related to the enjoyment of other human rights such as the right to food, housing, education, participation, and access to information.
Structural Adjustment to Human Rights
Bernards A. N. Mudho
Mainstreaming human rights within the process of development requires cooperation between development practitioners and the human rights community, and accountability of all states and international institutions.
The Significance of the UN Task Force on the Right to Development
Margot E. Salomon
An overview of the work of the UN Task Force and its recommendations for furthering the right to development.
The Legal Aspects of the World Bank's Work on Human Rights
Roberto Danino
Argues that human rights are becoming an integral and legitimate part of the World Bank's work, and draws on the legal aspects of the Articles of Agreement to support this argument.
Operationalizing Human Rights: The Challenge for Development Organizations
Kenneth Roth
Highlights some positive initiatives by the World Bank to integrate human rights, and also points to what remains to be done.
The Way Forward: Human Rights and the World Bank
Ana Palacio
The new World Bank General Counsel speaks out on the issue
The author expresses her support for the incorporation of human rights concepts into the work of the Bank, but stresses the importance of maintaining a firm conceptual framework for these as legal rights.
Posted by Ignacio on
Tue, 17/10/2006
The Day seeks to promote increased awareness of the need to eradicate poverty and serves to remind all people that sustained and concerted effort is vital to achieve the millennium development goal (MDG) of halving, betwen 1990 and 2015, the number of people living in poverty (less than 1 dollar a day).
More information about the Day.
From the Millennium Development Goals Report 2006:
In 1990, more than 1.2 billion people – 28 per cent of the developing world’s population – lived in extreme poverty. By 2002, the proportion decreased to 19 per cent. During that period, rates of extreme poverty fell rapidly in much of Asia, where the number of people living on less than $1 a day dropped by nearly a quarter of a billion people. Progress was not so rapid in Latin America and the Caribbean, which now has a larger share of people living in poverty than South-Eastern Asia and Oceania. Poverty rates in Western Asia and Northern Africa remained almost unchanged between 1990 and 2002 and increased in the transition economies of South-Eastern Europe and the Commonwealth of Independent States (CIS). These two regions had previously nearly eradicated the worst forms of poverty, and recent survey data suggest that their poverty rates are again dropping. In sub-Saharan Africa, although the poverty rate declined marginally, the number of people living in extreme poverty increased by 140 million. Many sub-Saharan countries are now showing potential for long-term growth that could bring up standards of living.
Posted by Ignacio on
Mon, 16/10/2006
Nobel Peace Prize to Mr. Yunus and Grameen Bank
Numerous articles and comments about the Nobel Peace Prize. General agreement on a well deserved prize and some questions about microfinance itself.
In an article in The New York Times last Saturday, Celia Dugger summarizes what microcredit is about, mentions some of the criticisms it has received in the past and includes comments from Mr. Yunnus and other economists.
But in interviews yesterday, Mr. Yunus’s skeptics and fans alike credited him and Grameen with helping to fundamentally change the way the world saw the potential of poor people and to popularize the movement to provide financial services to the poor.
“He proved the impossible: that the poor were bankable,” Professor Morduch said.
In BusinessWeek Jeffrey Gangemi writes about what the Nobel means for microcredit and discusses the link between peace, poverty and entrepreneurialism.
Still, when you think of the benefits of small loans, achieving peace and stability isn't the first idea that springs to mind. But it is exactly what Yunus, 66, is aiming for. While he may not be brokering treaties, he's actually promoting peace by uprooting one of the root causes of conflict: poverty. At the same time, he's demonstrating how effective entrepreneurialism can be.
And in Bangladesh the Prize is seen as a great honour for the country.
Winner of Nobel Peace Prize 2006 Professor Dr. Muhammad Yunus Friday termed the award 'a great honour' for the country, where he pioneered micro credit programmes to help reduce poverty.
'I feel extremely good to hear the news. It's a great honour not only for me but for entire Bangladesh,' he told local journalists at his modest Mirpur apartment immediately after hearing the news at around 3 pm.
'I've brought honour for the country. Now my first job is to eliminate its poverty,' said an emotion-choked Yunus, adding that he has been working for reducing poverty through micro-finance programmes.
Yunus came to know of the news over a telephone call from the Nobel authority in Norway, but had to hold the receiver for about 10 minutes. 'I'm delighted, really delighted they have endorsed a dream to achieve a poverty-free world,' he said.
The 65-year-old economist, who is the first Noble Prize winner from the country, appeared before the local press accompanied by his physicist wife Afrozi Yunus and daughter Deena Afroz Yunus at the lawn of his home.
He was seen embracing his near and dear ones and admirers who rushed to his home. The prizewinner was seen smiling, but could not hold a few drops of tears of joy. Hundreds of people thronged the home of the Nobel laureate to congratulate him with flowers, causing traffic congestion in the locality. Replying to a question, Prof. Yunus said poverty would be eliminated through strengthening the economic growth, which will ultimately establish peace in the country.
He said he would use the prize money looking for more innovative ways of getting poor people into business.
(Via United News of Bangladesh Limited / Factiva. Oct. 13 2006)
Audeamus includes many more related links.
On knowledge sharing
Koichiro Matsuura, Director-General of UNESCO, writes in the Jakarta Post about Knowledge sharing and its importance in the fight against poverty. "Is knowledge sharing a utopia, the international community's new buzz word? We do not think so".
(Via Factiva, Oct. 14 2006)
On Elections in Ecuador
The Economist describes Rafael Correa as "An enigmatic leftist".
In today's Miami Herald, a comment on the first results and the upcoming runoff between a businessman and an economist.
Posted by Ignacio on
Fri, 13/10/2006
Posted by Ignacio on
Fri, 13/10/2006
Like every Friday, from Raj Nallari and Breda Griffith's teaching notes.
Most economists believe that openness is good for economic growth. Krueger and Berg (2002) cite a number of economists who found that differences in output per capita across countries was explained by openness. The results were robust across various measures of openness, other variables that might explain differences in income and to reverse causality running from growth to trade. Openness to trade promotes competition in domestic markets, increases pressure on firms to be competitive and innovative, provides consumers with a wider choice at lower prices, and allows firms to bring in new skills and technologies to fully exploit their comparative advantage. Firms that export are highly productive, and exporting allows them to grow faster. Trade also raises the marginal returns of other reforms, in that better infrastructure, telephones, roads, and ports translate into better performance by the export sector. By contrast, the path of self-reliance, or autarky, followed by many developing countries in the past, causes huge economic distortions and ultimately hampers growth. Quantitative restrictions, licensing requirements, and prohibitive tariffs keep imports out of the domestic market, leaving the market to inefficient local producers that have little incentive to become more productive.
International trade helped to drive postwar global growth. In the 1950s global merchandise exports accounted for approximately 8 percent of GDP, a proportion that had increased to almost 26 percent in 2004 (Krueger 2004). In-depth analyses by Srinivasan and Bhagwati (1999) of country experiences during the 1960s and 1970s showed that trade continued to create and sustain higher growth during this period. In the past two decades, international trade has continued to drive economic growth and has grown twice as fast as worldwide income (Dollar and Kraay 2001). Recent evidence suggests a “statistically significant and economically meaningful effect of trade on growth—an increase in trade as a share of GDP of 20 percentage points increases growth by between 0.5 and 1 percentage point a year” (Dollar and Kraay 2001).
Dollar and Kraay (2001a) examine the growth experience of countries differentiated by their openness to trade over the past 20 years, after controlling for correlation across growth-enhancing variables and addresssing difficulties in determining causation. Three groups are identified—rich countries, globalizers, and nonglobalizers. Globalizers are those developing countries that experienced a particularly large proportionate increase in trade as a share of GDP—doubling, for the group, from 16 percent of GDP to 33 percent in 20 years. The rich countries showed a 70 percent increase over the same period (from 29 percent to 50 percent). The nonglobalizers, which make up two-thirds of all developing countries, experienced a decline in trade as a share of GDP. The globalizers also experienced an increase in their growth rates from 2.9 percent per year in the 1970s to 3.5 percent in the 1980s to 5 percent in the 1990s, while the nonglobalizers saw annual growth decline from 3.3 percent to 0.8 over the first two decades before recovering to 1.4 percent in the 1990s . The results provide robust evidence about the effect of openness on growth.
Growth in Real Per Capita GDP for Rich Countries and Globalizing vs. Nonglobalizing Developing Countries
There are a few dissenters from the positive view of trade and growth, notably Rodriguez and Rodrik (2000), who argue that the high correlation between trade openness measures and other explanatory variables such as geographic characteristics, and domestic policy choices/reforms mar the literature’s results. Despite these methodological disagreements, it remains generally accepted that trade is good for growth and correlated with growth.
However the direction of causation between trade and growth is unclear. For example, as an economy experiences growth its opportunities for trading will increase. Simply dismantling or reducing tariffs does not guarantee economic growth. The challenge, is to provide a framework in which trade can thrive. Here, trade liberalization is the key.
Experience with trade liberalization suggests that free trade has to be phased in according to a realistic timetable, beginning with the elimination of trade bias through a realistic exchange rate and a reduction in impediments to exports through elimination of quantitative restrictions on exports and imported inputs. Lowering protection levels and making protection transparent and nondiscriminatory should come later. Zagha, Nankani and Gill (2006) notes that for several South American countries in the 1990s, trade liberalization failed to produce positive economic benefits and poverty reduction given deteriorating export incentives caused by appreciating exchange rates. In other countries, such as China and India, trade liberalization that was more mindful of timing and competitiveness indicators for improved export incentives worked toward increasing economic growth and reducing poverty in these countries.
Next week: Trade, Inequality, and the Poor
Posted by Ignacio on
Wed, 11/10/2006
East Asia – a region that has transformed itself since the financial crisis of the 1990s by creating more competitive and innovative economies – must now turn to the urgent domestic challenges of inequality, social cohesion, corruption and environmental degradation arising from its success, a new World Bank report has found. A new publication by a World Bank team led by Chief Economist for East Asia & Pacific, Dr Homi Kharas and Economic Adviser, Dr Indermit Gill is the first comprehensive analysis of the new forces and challenges at play in the region since the Bank’s seminal report of 1993, The East Asian Miracle.
Launched in a conference edition at the World Bank-IMF annual meetings in Singapore, the report shows that having successfully undergone two waves of integration – first with global markets and then within the region itself – East Asia now needs to move to a third integration, this one at the domestic level.
Full report and interviews with the authors.
(Via PovertyNet)
Posted by Ignacio on
Fri, 06/10/2006
From Raj Nallari and Breda Griffith's teaching notes
Trade Barriers
Countries have a variety of reasons for creating barriers to trade. Some use trade barriers as a method of raising revenue, especially for states that have limited sources of revenue because of a narrow tax base. Trade barriers may also be attractive because they protect domestic industries, which may constitute a powerful political constituency, capable of lobbying effectively to protect their interests. Some countries also prefer not to be dependent on other countries, believing this will protect their sovereignty.
Barriers to trade come in two basic forms: border barriers (also known as tariff barriers) and behind-the-border barriers (nontariff barriers).
Tariffs. A tariff is an excise tax that applies only to imported goods. Its purpose is either to generate revenue or to protect domestic firms. Protective tariffs put foreign producers at a competitive disadvantage when selling in domestic markets. By raising the domestic prices of goods, they stimulate domestic production. When a tariff is very high, it becomes a disincentive to trade. A high tariff may divert trade away from the country to other countries, where tariffs are lower. Low tariffs encourage trade, but generate lower revenue for the state. Unlike nontariff barriers, tariffs are usually transparent; that is, they are of known magnitude. For example:
Quotas. Quotas limit the amount of goods that may be imported or exported, with absolutely or at a given tariff rate. Quotas raise the price of imported goods. A product may be imported in high quantities despite high tariffs if demand is sufficiently strong, but low absolute import quotas may completely prohibit imports once quotas have been filled. Quotas have particularly pernicious side effects, as profits from import licenses increase the potential for bribery and corruption.
Voluntary export restrictions. Voluntary export restrictions are
agreements in which foreign firms "voluntarily" limit the amount of their exports to a particular country. Exporters agree to such restrictions, which have the effect of quotas, in the hope of avoiding more stringent trade barriers.
Nontariff barriers. Nontariff barriers take many forms, among them licensing requirements, unreasonable standards pertaining to product quality and safety, and cumbersome documentary or administrative requirements designed to discourage imports. Growing concern in some countries about the environment and food safety has led to the adoption of regulatory requirements that in some instances function as nontariff barriers to trade.
Next week: Trade and Economic Growth
Posted by Ignacio on
Thu, 05/10/2006
PADI, which stands for Poverty Analysis and Data Initiative, is a network of data producers, analysts and policy makers that had its original roots in East Asia. PADI has organized a number of training activities in East and South Asia. Now, the secretariat of this network is housed at the International Poverty Reduction Center in China (IPRCC).
For more information on East Asia PADI, have a look at their first newsletter.
Posted by Ignacio on
Wed, 04/10/2006
Posted by Yan on
Tue, 03/10/2006
In a little over a quarter of a century, economic reforms and openness have let to rapid economic growth and poverty reduction in China with her international trade soaring to reach $1.1 trillion in 2004 when China became the world’s third largest trading economy (WTO 2005, 16). Policymakers and development practitioners the world over are wondering how. In a recent NBER paper “China’s Embrace of Globalization”, Lee Branstetter and Nick Lardy (2006) provided an excellent overview of China’s pre-WTO and post-WTO reforms, encompassing reforms in trade, investment and foreign exchange regimes.
Several main themes in this paper are inspirational: first, prior to WTO accession, China had achieved a greater degree of openness to foreign trade in manufactures than is generally acknowledged; and the reforms accelerated in the late 1990s. Second, to date, China has made reasonable progress toward meeting her WTO obligations, which will likely to make China the most open of large developing countries. Third, the patterns of China’s trade have conformed to patterns of her comparative advantage, benefiting China and her trading partners. In particular, multinational corporations (MNCs / FIEs) are using China as an export platform, and the biggest exporters in China are foreign invested firms. As a result of this displacement effect, the combined shares of the US global trade deficit accounted for by China, Japan, Hong Kong, Taiwan and South Korea actually fell. So it is misleading to just focus on the US-China bilateral trade deficit which is rising rapidly causing so much concern.
One particular point got me thinking. The authors eluted to the possibility that “an overdevelopment of the export sector was a function of a long undervalued exchange rate”. “The longer a currency’s undervaluation encourages an overexpansion of the export sector, the greater the power of the lobbying groups that could seek to halt or limit the adjustment ….” To which I might add, the overexpansion of goods exporting sector is in sharp contrast with an inefficient service sector: even though progress has been made, China’s service sector has been largely sheltered from international competition until recently, and many subsectors are under state monopoly. FDI in these areas has been limited and the budgetary allocation to social services (0.6 percent of GDP on health and 2.4 percent on education) has been lower than other developing countries. The imbalances between the manufacturing and the service sector (accounting for only 40 percent of GDP and declining) are more pronounced in China than elsewhere. It is now the time for rebalancing the pattern of growth to shift the focus on the reform and trade in services. (detailed program)
Posted by Ignacio on
Mon, 02/10/2006
If you couldn't attend one of Joseph Stiglitz's recent presentations at the World Bank or at the Center for Global Development, this is your chance to ask him a burning question.
This very interesting initiative by the International Herald Tribune's Managing Globalization Blog allows you to post a question for a "top voice on Globalization from Columbia University". Last month it was Jagdish Bhagwati, next month it will be Jeffrey Sachs.
Posted by Ignacio on
Mon, 02/10/2006
News on Poverty and Growth issues from around the world.
Elections in Brazil
Lula was unable to secure a victory in the first round of the Brazilian presidential elections. He has a wide support among the poor, thanks to anti-poverty programs such as Bolsa-familia. The challenger Geraldo Alckmin criticizes what he describes as “pathetic” growth, falling short of its potential at a projected three percent this year.
Brazil's two top vote-getters readied Monday for another month on the presidential campaign trail, after incumbent Luiz Inacio Lula da Silva failed to secure reelection in the first round, amid damaging claims of dirty tricks by his aides. Lula led in Sunday's election, but fell over one point short of the 50 percent that would have secured him a second term outright. He will now go to an October 29 face-off against former Sao Paulo governor Geraldo Alckmin, who, with 41.6 percent, was seven points behind the president. (Agence France Presse, Oct. 2 / Factiva)
The Economist’s take:
Above all, the secret of Lula's electoral success is that he has kept his promise to help poorer Brazilians. Thanks to a successful anti-poverty program that channels small cash payments to 11 million families, to low inflation, wider access to education and big increases in the minimum wage, the incomes of the poor are rising much faster than those of the middle class. The result is that in a country notorious for its inequalities, income is more equally distributed today than at any time in the past 30 years. Brazil is often bracketed with China, India and Russia as one of the world's emerging economic powers. When it comes to economic growth, that is flattering. (It is also misleading: Brazil had a growth spurt from the 1950s to the 1970s, and is now a middle-income country in which sustaining rapid growth is harder). If its economy were expanding by five or six per cent a year, Brazil's claim to regional leadership would carry greater weight.
And a special report on Brazil: Love Lula if you’re poor, worry if you’re not.
The FT explains why the poor love Lula
Whatever the outcome, the strength of the president’s support - which up to the weekend had withstood a string of potentially devastating corruption scandals – demonstrates the importance to the mass of poor voters of low inflation and, especially, of the Bolsa FamÃlia, an income transfer programme that will deliver R$8.3bn ($3.8bn) to some 11.1m families this year. Families with per capita income of less than R$120 a month receive monthly benefits of between R$15 and R$95. The amounts are small but their impact on the poor is enormous. It is hard to imagine a better demonstration of the effectiveness and popularity of cheap, well-targeted social policies.
In the Economist, Tanzania as a model of a country moving in the right direction.
Development economists use it as a measure. If Tanzania can haul itself out of poverty, others can too. But if it cannot, there will have to be another rethink about the way that aid money is spent. For the moment, Tanzania is one of east Africa's few good-news stories. That isn't saying much...
Economic growth rate in Vietnam to hit 8.2 pct this year. The European Commission grants that country 8 million euros worth of non-refundable aid to help fight poverty across the nation. (Via Thai News Service/Factiva/Oct 2,3)
The Millennium Challenge Program Officially starts in Armenia
The $235mln grant is to be directed to poverty reduction through the encouragement of economic growth and development of rural communities. (Via Arka News/Factiva/October 2)
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