Extractive growth and natural resources
In a recent post, Daron Acemoglu and James Robinson discuss the conditions for extractive growth, putting in perspective cases such as Colombia and Syria, among others.
“The second precondition for extractive growth is an elite that is not threatened by growth, creative destruction and some institutional opening. China started its rapid growth only when the new leadership under Deng Xiaoping decided that they could hold on to power — and in fact strengthen their power — while at the same time reforming economic institutions and encouraging economic growth. Many segments of the business and political elite in Colombia are similarly vested in economic growth — both because they own some of the businesses that will be the main beneficiaries of this growth and because, despite all of the electoral problems in many parts of Colombia, national politicians who deliver economic growth are more likely to get reelected. The situation in Syria is again very different. The Alawi elite has consistently opted for extreme repression and even shunned private-sector activity partly because they have seen any institutional opening or independent economic activity as inimical to their interests.”
I think one additional element needs to be brought into the picture. Sticking to country narratives, take the case of Paraguay. This is a country in which one group, organized around the Colorado Party, privatized State resources for more than 60 years until they lost power in 2008. During that time, they used public sector employment and public procurement to reward friends and please their constituency. As a result, the country lingered for decades at the bottom of the Latin American class, with sluggish growth, weak institutions and outrageous corruption. One factor, however, shaped this story. As we wrote in this paper with my colleagues Emmanuelle Auriol and Thomas Flochel, Paraguay:
“…enjoys a unique source of rent in the form of revenues from big hydroelectric dams shared with its neighbors Argentina and Brazil. The biggest one is Itaipú, on the river Paraná between Paraguay and Brazil. Until the Chinese Three Gorges dam was built, Itaipú was the largest hydroelectric power plant in the world. It has 20 turbines, 1 of which provides 90% of all the energy used in Paraguay. The rest is channeled to Brazil.5 In exchange, Paraguay receives every year an enormous amount of royalties, amounting to US$ 366 million in 2005 (resp. US$ 553 million in 2006), equivalent to 4.9% (resp. 5.8%) of GDP. This is approximately 50% of the total government tax collection (from VAT, custom duties, and corporate income, by order of magnitude).”
The interesting fact is that not only did the dams’ money facilitate the type of corrupt redistribution mentioned above, it also meant that the rulers were able to disregard their taxation base. In other words, they did not need to have at least some successful entrepreneurs around, which they could tax to sustain their extractive institutions. Having a free flow of resources from an exogenous resource makes it possible for the elite to prosper while looting the private sector. There is thus no room for extractive growth as defined above.
Now, coming back to Daron and James’ example, Syria has oil, and so does Yemen to a lesser extent. Not such a big surprise then that corrupt elites there can prosper in the absence of private sector development and growth. Note finally that this story fits well with more recent views of the resource curse story (see for example a synthesis here), where the exogenous abundance of a source of rent is thought to constitute an obstacle to development rather than a blessing, with the caveat that this is conditional on the quality of political institutions in place.
Central bank independence?
Do you still believe it is effective? Daron Acemoglu and Simon Johnson argue it is probably not in this New York Times piece. Or rather they think that while there might be formal independence, there are plenty of insidious ways for bankers to bring their influence to bear.
Monetary policy has an impact on inflation, output and employment. But it also has a major impact on stock market prices. Any central banker raising interest rates is reducing stock market values and thus eroding the bonuses of top bankers and other chief executives.
Those people will lobby, asserting that higher interest rates will undermine the economy and cause us to plummet into recession, or worse.
In principle, the Fed could stand up to the bankers, pushing back against all specious arguments. In practice, unfortunately, the New York Fed and the Board of Governors are quite deferential to financial-sector “experts.” Bankers are persuasive; many are smart people, armed with fancy models, and they offer very nice income-earning opportunities to former central bankers.
In recent decades the Fed has given way completely, at the highest level and with disastrous consequences, when the bankers bring their influence to bear – for example, over deregulating finance, keeping interest rates low in the middle of a boom after 2003, providing unconditional bailouts in 2007-8 and subsequently resisting attempts to raise capital requirements by enough to make a difference.
One Laptop per Child in Peru: An evaluation
Following on the topic addressed in a previous post, here is a summary on the Inter-American Development Bank blog of a working paper presenting an RCT evaluation of the Peruvian OLPC program. The absence of improvement in test scores results tends to be in line with what the previous literature suggested.
Technology and Child Development: Evidence from the One Laptop per Child Program
Although many countries are aggressively implementing the One Laptop per Child (OLPC) program, there is a lack of empirical evidence on its effects. This paper presents the impact of the first large-scale randomized evaluation of the OLPC program, using data collected after 15 months of implementation in 319 primary schools in rural Peru. The results indicate that the program increased the ratio of computers per student from 0.12 to 1.18 in treatment schools. This expansion in access translated into substantial increases in use both at school and at home. No evidence is found of effects on enrollment and test scores in Math and Language. Some positive effects are found, however, in general cognitive skills as measured by Raven’s Progressive Matrices, a verbal fluency test and a Coding test.
When tap water can make you sick
This report presents the findings of an impact evaluation of investments to improve water supply and sanitation for urban households in the provincial towns of Amran and Zabid in Yemen. These infrastructure investments, supported by German bilateral DC, took place between 1990 and 2004 and were implemented via the German KfW Entwicklungsbank (development bank). The overall goal of these interventions was to provide clean drinking water as well as to improve sanitary conditions in the program towns. The ultimate aim was to improve the health situation of the population by providing access to safe drinking water and effective sanitation infrastructure. Additional objectives were to generate positive secondary effects related to income, education, and livelihood.
Health impacts: more households connected to water and sanitation subjectively report that disease incidence improved after water and sanitation access was provided than reported a deterioration in disease incidence; the majority reported no change. When examining actual reported disease incidence and comparing them – using statistical matching techniques, regression analyses, comparisons with the baseline, or comparisons with secondary health data – a different trend emerges rather robustly: In Amran, all of these indicators point to a statistically significant deterioration in disease incidence as a result of the water connection. The study suggests that reliable water supply and water quality issues are at the heart of these findings. Additional connection to sanitation has no further effect on health status, again probably related to low and unreliable water access in Amran. In Zabid, there is overall little robust evidence of a positive or negative effect of water connections on health, while there is some evidence of improvements in health conditions due to the additional access to sanitation services. At the same time, the study is unable to establish a clear link between the pollution levels in the water and the health impacts which can be due to a range of data issues; this requires further investigation.
Likely explanations behind the increase in waterborne diseases observed in some cases include the fact that “rationing of piped water causes storage tank pollution by pipe flushing”, and also “that about a quarter of the E.coli prevalence at point of use can be attributed to unhygienic water handling at household level”. The policy conclusions are worth noting. Among them:
– Investments in providing piped access to water in regions affected by water scarcity should be prepared and considered with high caution when future availability and reliability of water supply is unstable or unpredictable. A careful assessment of water rights, water availability, analysis of competing water uses (esp. for agriculture), and the installation of a water allocation system (e.g. via water permits, water charges, tradable water rights, etc.) that ensures sufficient availability and reliability of water supply to households should come before investments to extend a network.
– Extensive networks of piped water require high standards of maintenance and regular water quality testing to ensure that no pollution enters the network. Alternative solutions to extensive networks should be rigorously tested. Such alternatives might include programs for household level water treatment or smaller networks with standpipes. In smaller towns under water stress conditions drinking water supply via tanker trucks could be tested as a possible alternative to complement existing schemes.
– Storage of water at the household level is a source of contamination. It is also an opportunity to purify the water. Thus if water storage at the household level is required or practiced, assisting households with purification at the household level (e.g. using chlorine tablets, filters, etc.) should be a priority intervention.
– Effective training to improve water handling at the household level is critical to improve actual sanitary and hygiene conditions in households. Without such improvements, investments in extending water and sanitation services are unlikely to yield significant positive impacts.
Nature News feature on how mother nature has been resisting the drive to grow caffeine-free coffee.
Coffee contains some 2,000 chemical compounds that give the drink its enticing aroma and flavour, including caffeine, a stimulant and natural pesticide. Removing the caffeine while leaving all the others intact poses a significant challenge. Brewers have generally turned to chemistry: Ludwig Roselius of Bremen, Germany, patented the first commercial decaffeination process in 1905. But his coffee, marketed as Kaffee HAG, used benzene in the extraction process, and the chemical was later replaced by less toxic solvents. Today, companies may instead douse raw green coffee beans in high-pressure liquid carbon dioxide or soak them in hot water for several hours to remove the caffeine before roasting. Aficionados say that all these methods destroy the taste, but the decaf market is still worth US$2 billion a year.
Researchers have long sought a better bean, harvested directly from the plant caffeine-free. This would preserve coffee’s complex flavour and give growers a high-end slice of the decaf market. But developing such a bean through conventional breeding or even genetic modification has proved more difficult than anyone anticipated (see ‘The ups and downs of decaffeination’). Coffee plants take years to begin producing beans, and can be fickle when they do. Moreover, to make them profitable to farm, the plants need to be productive, ripen synchronously and be of a size and shape that can be harvested easily by hand or by machines. The loss of any of these traits can render a plant worthless. The caffeine-free quest has produced a string of high-profile papers, but not a drop of marketable coffee.
Now, should we really want to eliminate caffeine, reported in this history talk to have produced one of the most profound societal change in recent history (signaled to me by my colleague Pepita Miquel-Florensa, who found it on Greg Mankiw’s web site)? I especially like the idea of what happens when a society’s norm moves from widespread use of a depressant (alcohol), to a stimulant (coffee):
A new World Bank president (2)
Following Jim Yong Kim’s nomination by President Obama as US nominee to take over as President of the World Bank, Lant Pritchett had a dissenting view amidst a concert of positive reactions, as reported in this Forbes article:
In the World Bank’s 68-year history, the U.S. has always nominated the president, who must be voted on by the Bank’s 25-member executive board. This year, Angola, South Africa and Nigeria nominated a competing candidate, Ngozi Okonjo-Iweala, the Nigerian finance minister and a former World Bank official. Pritchett insists she is much more qualified than Kim. He points out that the U.S. has less than a 20% share of board votes and though he gives Kim a 60% chance of being appointed, he says that countries like India and China could wind up opposing Kim’s nomination and pressing for Okonjo-Iweala.
“There is no way you can say with a straight face that this man is more qualified to head the World Bank than Ngozi,” insists Pritchett. Okonjo-Iweala has tackled corruption in Nigeria and because she has worked inside the Bank and as the Bank’s government counterpart in a developing country with complex problems, Pritchett insists she has precisely the kind of experience needed in a World Bank leader.
“At best, Kim has worked with ministers of health, but they are in one of many, many government agencies,” says Pritchett. “A minister of finance has to make hard choices across sectors. Having the experience of a minister of finance is the optimal experience for being president of the World Bank.” Adds Pritchett, nominating Kim “is like picking the short stop for the New York Yankees out of the scrub leagues.”
Well, I am afraid I do agree with him. I am not quite sure we have here the kind of leadership that Jeffrey Sachs was calling for when he mentioned the necessary “first-hand professional experience regarding the range of pressing development challenges”.
However, I agree slightly less when Pritchett reminds us of his friend Lawrence Summers, as I already noted in this previous post. Actually, this web site refers that the note attributed to Summers had in fact been written by… Lant Pritchett.
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