Archive for the ‘China’ Category

Around the World with Joseph Stiglitz

1 December, 2008

BWPI Chair and Nobel Laureate Joe Stiglitz has a new documentary just out. ‘Around the World with Joseph Stiglitz’ is a hard-hitting look at globalization. Joe takes two journeys. His own journey began in Gary, Indiana. The documentary returns to his hometown to see what shaped his thinking. It then heads across the world, taking in Botswana, Ecuador, India and China. It weaves together the social and economic effects of globalization, recommending ways to manage it for the good of all.

If you are in New York you can catch it at the Lincoln center this Wednesday (3 December).

In the meantime, check out Joe’s interview with Alex Jones on YouTube on his book The Three Trillion Dollar War: the True Cost of the Iraq War, with Linda Bilmes. And Joe on the sub prime crisis on CNBC.

Should Aid be Capped?

16 September, 2008

Aid is in the news at the moment. The Accra Aid forum took place last week in advance of the UN’s Financing for Development meeting in Doha later this year (on Accra see Simon Maxwell on ‘High Drama at the High Level Forum’ over on the ODI blog).

Meanwhile, in Martin Wolf’s Economists’ Forum at the FT Adrian Wood argues for capping aid. He writes:

“… one can have too much of a good thing. Some developing countries, most of them in Africa, have had high levels of aid dependence – in excess of 10 per cent of gross domestic product, or half of government spending – for decades. It is questionable whether this has been helpful”.

“I therefore propose that donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals”.

This proposal has mileage. Countries certainly don’t benefit from excessive dependence on aid. But Adrian’s idea needs refinement to make it work, as I point out in a response posted on the FT blog. In particular, I worry that it increases the pro-cyclical nature of aid. That is, donors reward governments in good times (when they need aid least) and reduce aid in bad times (when they need it most). (On the evidence that aid is pro-cyclical see: John Thornton in the Journal of African Economies and the IMF on the macroeconomics of managing aid).

Capping aid at 50% of the country’s tax revenue, as Adrian suggests, could exacerbate the budgetary impact of negative shocks, either external (such as energy costs) or internal (such as drought). How? Shocks reduce GDP and therefore tax revenue. This is especially so for indirect taxes as market sales fall, and tariff revenues as import volumes decline (on which many low-income countries are still very dependent). As revenue falls, aid will be automatically reduced under Adrian’s proposal. The proposal would punish governments hit by shocks that are not of their making. In sum, this exacerbates an existing and undesirable bias in the timing of aid.

Here is my solution: governments and donors will need to agree a time frame (say 5 years) over which to monitor the aid/tax ratio (i.e. a period matching the country’s business cycle: different economies might need different time frames). Then agree a level of aid over the next five years, based on the outcome for the first five. And make sure that most of this extra tax revenue is spent wisely, for example on the “seekers” that Bill Easterly has written about (NGOs working to find better solutions to chronic poverty).

So, Adrian has an interesting idea, but it needs refinement.

But a bigger question is: how do you get donors to co-ordinate, so all their aid adds up to less than 50% of tax revenue? Getting donors to act together is like herding the proverbial cats: this is despite the 2005 Paris Declaration (as this FT report discusses). And that’s the OECD-DAC donors, who are supposed to coordinate. What about the aid donors who don’t participate in the DAC, most importantly China and India – the so-scalled ‘new donors’ (although China was giving substantial aid to Africa back in the 1970s). Can you design incentives to encourage their co-operation? (on the non-DAC donors see Peter Kragelund’s paper in the DPR here).

Adrian’s proposal has received a lot of comment (go to the CGD blog for a collection of these).

Can Donors Help Cook Up Growth?

15 February, 2008

Making an economy grow should be easy. Just invest in technology (to raise labour productivity — a new seed variety for instance). Add lots of education (especially high quality primary schooling). And then a dash of institutions (protecting the property rights of investors). Oh, and don’t forget the infrastructure. Voilà! 10 per cent growth year-on-year, and before you know it everyone will be rich (and moaning about how unhappy they are).

So, all you need is a growth cookbook (maybe this is Nigella’s next opus?). You could pick up a US one (a bit tired around the edges, but well-tested homely fare). Or an Asian takeaway (select from Malaysian, Korean, Chinese, or Vietnamese). Or how about Scandinavia’s rather bland — but very successful — growth Smörgåsbord? (Finnish being our favourite).

What you will not find is much from Africa. Indeed the shelf is largely bare, Botswana and Mauritius excepted. And it is Africa that aid donors are mostly concerned about (although the Pacific islands and Haiti are huge challenges too). True, Africa is now growing, pushed ahead by rising commodity prices. But Africa has been here before (the 1970s, when it largely squandered the fruits of the last commodity boom — resulting in economic turmoil, spectacularly so in Nigeria). Nobody is yet writing up Africa as a growth success-story — because recent growth seems so fragile.

And a lot of that growth doesn’t reach the people who need it: GDP is rising fast in Angola and Equatorial Guinea but the average person doesn’t see much benefit, let alone the poor (on Angola see my book here). Nigeria looked more hopeful last year, especially after the debt deal. But never underestimate the ability of Nigeria’s politicians to clear the pot before anyone else gets a turn (see recent back-sliding on corruption).

So what’s an aid donor to do? This is now becoming urgent — we hear that donors are pushing growth up their priority list. Seems sensible: countries will remain aid-dependent until they get their GDP up. And growth can reduce poverty, especially when new jobs and tax revenue (for pro-poor public spending) are the result (however, the chronically poor can miss out, and some types of growth harm poor people — see our recent post).

But which growth cook-book will donors turn to? And will the recipes be palatable to aid-recipients? We’ll return to this theme in a future post. Meanwhile, over to Nigella.

China in Africa — More Light, Less Heat, Please

6 February, 2008

Much heat, but not enough light, is being generated by recent commentary on China’s economic and political drive into Africa. Here are 7 thoughts (maybe they add light, or just more heat — let us know):

1. China’s investment. Much needed: jobs and growth will flow. But also disquiet. Investment snapshots: China is now Zimbabwe’s biggest foreign investor (Mugabe has a friend); China has lent Gabon US$ 83 million for a hydro-electric dam (we await an environmental assessment); China is taking stakes in some of Africa’s biggest investors — Rio Tinto is the latest (hope this doesn’t weaken corporate social responsibility). Africa needs more investment, but China must act responsibly.

2. China is to get copper and cobalt in a loan deal with the DRC. Hmm, the murky world of foreign investment in the Congo — say no more. Plenty of western nations haven’t practiced what they preach in the DRC. Can China do better? Will countries that received debt relief from the OECD-DAC donors under the HIPC Initiative (and then the MDRI) again build unsustainable debt positions — this time with loans from China? Helmut Reisen over at the OECD Development Centre finds no evidence of ‘imprudent lending’ by China to debt relief beneficiaries — so far. But this is one to watch.

3. Aid. The World Bank has hitched its wagon to China — a real sign of the times. China helped replenish the World Bank’s soft-loan arm (the International Development Association) last year — the first time it has contributed to IDA. And World Bank President Robert Zoellick wants more joint project lending with China (and Justin Yifu Lin has been appointed as the Bank’s new chief economist). This is all good news. Now that China is a Bank partner its aid stands a chance of being more rigorously assessed. And this moves China closer to bringing its aid within the OECD-DAC framework (see Richard Manning). More transparency might result. But it’s early days still.

4. Human rights. Oh Dear. One positive: China watered down support for Mugabe last year (Mugabe has a fickle friend). A big negative: Darfur (Sudan has oil, Zimbabwe does not). China is a permanent UN Security Council member. It needs to live up to the associated responsibilities (not helped when the other members don’t, notably the present US administration — see John Bolton’s latest fulmination against the UN here — but only if you must).

5. The Chinese Development ‘Model’. African commentators have been talking up China as a model. Seems more appealing than the policies the western donors pushed for years. And who can ignore growth rates of 10% year on year (even if the numbers look a might suspect to us)? China has lifted the largest number of people out of poverty in history — and Africa could sure use a lot of that. But fans forget (i) China has an enormous internal market — so import substitution is a more viable strategy than in tiny African countries (Africa needs an EU-style free trade zone to get anywhere near the economies of scale that Chinese companies enjoy). (ii) China is very good at mobilizing public revenues from growth — and Africa’s tax systems are mostly awful (iii) China’s one party state can force its way through development blockages that Africa’s young democracies cannot — and woe betide any Chinese who protest too vigorously (most African government’s don’t monitor access to the Internet in the way China does: Mugabe excepted). (iv) China’s model has involved stupendous environmental damage — we don’t need any Three-Gorges style projects in Africa, thank you.

6. Authoritarian regimes can retain political power if they ride a vigorous private sector — delivering rising living standards to keep (most) people happy. This is China’s political model. It appeals to some African leaders (notably Ethiopia and Rwanda). But to succeed you have to limit your ‘take’ — not a lesson likely to find favour with Africa’s long-stranding authoritarians but one that Africa’s next generation of political leaders might note (hopefully democrats, but also new authoritarians overthrowing the old).

7. That ‘other China’ — Taiwan — offers a model of how to make a successful transition to democracy while retaining (and strengthening) a vigorous maket economy. Taiwan is one of development’s great poverty success stories — a point that gets lost amidst the clamour of praise for its big brother neighbour. Taiwan is also aiming to win African friends.

That’s my 7 points. A good source of information on China in Africa is the Centre for Chinese Studies at the University of Stellenbosch. They do a weekly briefing, where some of the news cited here comes from. For China itself go to the Centre for Chinese Studies at Manchester University. And remember what Chou En-lai said when asked about the effects of the French Revolution — “its too early to tell”. Maybe that’s the case for China in Africa.

Surging Food Prices — Globalization’s Downside

4 February, 2008

Globalization is often said to be good for the poor. The jury is in fact still out. But for certain, many of the poor are now being hit by rising global food prices — FAO’s food price index was up 37% in 2007, on top of the 14% increase in 2006 — and globalization is the cause.

How so? Asia’s demand for food is surging along with robust economic growth and urbanization. And with oil close to $100 a barrel — again due to strong global growth — the world’s farmers are turning land over to corn and sugar for ethanol. The New York Times summarises it all here.

Folk are getting worried. Over on the ODI blog Simon Maxwell reports from Davos that World Bank President Robert Zoellick and World Food Programme (WFP) Head Josette Sheeran are both running initiatives to highlight the ‘forgotten MDG’ (No.2 — Halve, between 1990 and 2015, the proportion of people who suffer from hunger).

Anxious governments are keeping a close watch over food inflation; it’s politically dangerous — especially to authoritarian states. The urban poor may join street protests organized by political dissidents. And the rural poor often can’t produce enough to eat (if they are farmers) — while the poorest are often labourers without any land at all. Rural discontent is a big worry for the Chinese government (many rural people have not shared in China’s globalization-driven economic boom). Food riots have now taken place in Indonesia and Pakistan (See the FT report here).

Some governments are stepping up price controls; China, Russia and Thailand have all capped basic food staples. Malaysia is planning to stockpile basic foods. Venezuela is threating to expropriate food companies that hoard.

We have been here before; the 1970s saw the widespread adoption of price controls (that then create black markets, and decrease producer incentives, thereby exacerbating shortages) and large government subsidies to contain the consumer price of food (fiscally ruinous unless you have generous oil revenues). Governments often swear that these measures are temporary — but they are politically very difficult to remove once in place. For the poor, better measures are social protection and targeted nutrition interventions (consumer food subsidies often benefit the rich more than the poor since the rich consume more food — especially meat, including animals fed with subsidized bread).

Eventually food output should rise to dampen at least some of the price rise (although this effect could be muted by the switch of crop land to corn for ethanol). But the chronically poor have very few means to cope: being largely unskilled they find it hard to get compensating wage increases when food prices rises; many are women with young (and hungry) children; and many are too old or too sick to find work. So even if production does rise eventually, the chronically poor could get badly squeezed by rising food costs. They can’t wait.

This is not just a problem for the poor world. The US government buys surplus food for distribution through food banks such as America’s Second Harvest — but these purchases are now at a 26-year low as farmers switch to biofuel crops. So the food banks face shortages — at a time of rising unemployment and a stalling economy.

Here in Britain we have much the same story. Except now its got caught up with another debate about food quality (see our recent post about the history of British food).

Talking chicken, a free-range bird costs £6, while one eking out its miserable life in a battery-farm goes for 3 quid. But many poor families can afford only the latter. And they get berated by middle-class foodies for not feeding their families well. Jay Rayner in The Guardian worries that “We have managed to confuse our foodie obsessions – a set of lifestyle choices for the affluent – with a wider and much more serious debate on public nutrition that affects the very poorest in society”.

Of course you can go vegeterian (a good idea in itself), but British bread prices are up following a 15% rise in the price of flour (a standard loaf cost 52p in 2000; now its nearly £1). There is no escape.

US Property — Prices Come Down, Poverty Goes Up

22 January, 2008

Big shifts in the US income distribution continue. Trade and technology are all doing their work. But another cause is the asset price inflation of the last few years, now halted in its tracks — and going rapidly into reverse. Homeowner bankruptcies were up about 25% in 2007. Lenders are aggressively tightening their standards in areas where house prices are falling most — thereby driving demand and prices down further (Florida and Mississippi have the worst mortgage delinquency rates).

Tough if you are in the lower middle-class, even tougher if you are on a low income — and managed to get a NINJA (No Income, No Job, No Assets) mortgage a couple of years ago.

America’s financial wizards are getting a good kicking: rightly so. They repackaged the NINJA’s and sold them on to delighted financial markets — who were desperate for yield (every asset went up in price over the last five years, the consequence of the post 9-11 rate cuts and booming emerging markets: so yields fell everywhere. Heck, even Latin American debt looked good. See my paper here). The US authorities were quite happy: the global savings glut got recycled into the US, thereby financing a record external deficit. Now things look positively Argentinean for the US economy: boom-bust-boom-and bust again (see Paul Krugman in the NYT).

The property downturn is biting into revenues. States and local governments have done well over the last few years — the housing boom pushed up property taxes. Property is now being valued downwards, so taxes will fall. Funds for urban regeneration will take a hit. So, don’t expect America’s deprived neighbourhoods to get much better soon.

This all plays out in an election year (didn’t you notice?). The voters that count in US politics are not the poor but in the middle-income and lower-middle-income ranges. Its that part of the income distribution which presidential candidates keep an eye on. The Democrats are playing to the ‘anxious middle’ — America’s middle-class that isn’t as secure as it once was. Hilary Clinton started to do this in December when she cast doubt on the ‘virtues’ of free trade (see our December posts).

In the meantime America’s food banks will get even busier; America’s Second Harvest distributes two billion pounds of donated food and grocery products annually, and demand rose through 2007 as the housing crisis came on. But the food banks don’t have enough food to distribute, because America’s farmer are selling to China or turning to biofuel crops. So America’s poor face a double squeeze: job losses, and higher food prices. Expect child poverty rates to go up shortly — especially in urban low-income neighbourhoods with high rates of home foreclosure.

One effect of a US recession (or near-recession) will be fewer jobs for illegal immigrants (already happening in construction). So despite the political heat from the immigration issue, this might become less of a concern in US politics over the next year or two as recession bites. But it will be a big worry in Mexico and central America, as remittances dry up. The financial wizards have already marked down Mexico’s stockmarket, expecting the country to take a macro-hit — thereby recouping their losses on the NINJAs.

Does Growth Reduce Poverty? – It Does and it Doesn’t

22 January, 2008

The good news from the UN’s recently released World Economic Situation and Prospects is that the developing world’s economies grew on average by just under 7% last year. Only 9 countries saw their GDP fall (see our recent post).

So what does this mean for the world’s poor?

God gave economists two hands. On the one hand, poverty should fall. On the other hand, it might not. And growth sometimes increases poverty. This is a three-hand issue.

Let me explain.

On the one hand, the link between growth and poverty is now well-sorted out conceptually. If initial inequality is high, then growth’s effect in reducing poverty is modest. (In their recent BWPI working paper Ajay Chhiber and Gaurav Nayyar work through the effects). It stands to reason that if you own a 1,000 acres of prime land and agricultural prices are booming (which they are in Brazil as sugar-based ethanol production rises) then you will make more from growth than if you have an acre of scrub. The upshot: 7% GDP growth will benefit the poor most in the least unequal societies.

On the other hand, many chronically poor people exist outside the main growth poles (dirt poor, environmentally-stressed regions, cut off from major markets, for instance). Or they are too sick to be productive. Unless they get help (maybe that cousin who now has a job in a boom area) then growth might not do much for them. This is so even in China, where growth is going at 10 per cent a year (see this NYT report).

And on my third hand, some folk are ‘adversely incorporated’ into the market-economy. Their assets get stolen by richer folk — urban land that suddenly becomes valuable for commercial development for instance (in South Asia’s booming cities, but this is also happening in parts of Africa: Addis Ababa is one case). So, their lot gets worse with growth. In the global boom of the late 19th century, whole swathes of African smallholders were dispossessed to create what is today one of the world’s most unequal societies: South Africa. Which is why many South Africans don’t feel they get much from today’s boom — a big issue in the lead up to the 2009 elections. (On South Africa see the CPRC working paper by Andries du Toit and David Neves).

Now, God also gave economists two feet, and 10 toes, so……(to be continued).

BRIC train keeps running — despite US economic woes

10 January, 2008

The World Bank’s annual Global Economic Prospects is now out. The prognosis for the developing world looks good: growth of 7% is forecast — only fractionally down from 2007 (global growth should be 3.3% overall — not so bad).

Emerging market economies are affected by the US slowdown (see our post earlier this week). But internal demand is an increasingly powerful growth engine according to the Bank. And so the emerging economies are increasingly less dependent on exports to the US. The big emerging markets (Brazil, Russia, India, and China = BRICs) are the leaders. Their need for primary commodities is benefiting Africa and Latin America especially. This is all for the good: when Uncle Sam caught a cold in the past everyone else went down with flu. Now global growth is much less unequal in its distribution across countries. This has to be good for the world’s poor.

Two risks remain, however. The US could fumble the policy response to the sub-prime mortgage crisis. The Bank is worried that the US monetary easing (to flush liquidity into the credit-market) could flow into more speculative bets on the BRICs — thereby generating financial bubbles there, which eventually go bang. And the dollar’s recent decline could become disorderly — generating a flight into hard assets such as gold (which is topping recent highs). This would create more investor uncertainty, and an eventual destabilizing rush out of emerging markets (both equity and debt).

Of course these aggregate numbers hide a wide dispersion: China’s locomotive is going at 10% or so (although the steadiness of that growth makes the number suspect). But Kenya will be lucky to see zero growth this year. And the crisis there, and the disruption to trade with landlocked Rwanda and Uganda, will reduce their growth as well. Its no good being able to sell your commodities to China if you can’t get them out of Mombasa.

Illiberal Capitalism – Freedom foregone?

9 January, 2008

Capitalism and Freedom is a long-running theme (indeed it’s the title of the late Milton Friedman’s book: you can guess what his view was). In today’s FT Gideon Rachman sums up the view of many a decade ago (and epitomised in Francis Fukuyama’s book The End of History). “The chain of thinking works something like this. Communism failed as an economic system. Russia and China have had to embrace free markets. Economic freedom will, in time, produce political freedom”, writes Rachman. Countries that democratize should benefit from higher inward investment (and more growth). They can draw on more of the world’s stock of (commercial and technical) knowledge without worrying about people’s access to knowledge about their country’s politics (see a paper by Tony Addison and Almas Heshmati here).

But the capitalism and freedom thesis doesn’t seem as self-evident as it used to be. Many Russians equate the opening up to democracy with their own hardship as the economy simultaneously went through an often-chaotic liberalization and privatization process (creating today’s wealthy oligarchs, while throwing many workers into the street). Russia experienced the sharpest fall in male life expectancy of any peacetime economy in the early 1990s (Russia’s social crisis during the transitions is documented in the UNU-WIDER book by Andrea Cornia and Renato Paniccià).

The oil price boom of the last few years has provided President Vladimir Putin with abundant revenues; one of his first steps was to raise the state pension (pensioners were impoverished by the transition). Many Russians do not want to return to the penury of the late 1990s. So, prosperity combined with political authoritarianism has gone down well with many of the voters. Spatial inequality remains high with many remoter areas in deep poverty (go to this paper by Stanislav Kolenikov and Anthony Shorrocks at UNU-WIDER) but enough people are benefiting from the last few years of growth to give President Putin a strong power base (aside from his crackdown on political competitors).

In China, the economic transition was much better managed; “walking across the stream while feeling the stones under foot” as the proverb goes. Reforms in the agricultural system in the first phase from the 1970s onwards delivered rising food output, declining real food prices, and rising incomes (while the land reforms of the 1950s, often brutally conducted, provided something of a safety net for the eventual economic transition). The major drive into the global manufacturing economy then created new sources of income. China has thereby created a unique form of state capitalism. Vietnam took the lesson to heart, and is following a similar trajectory: economic liberalization (mostly) and tight political control. Vietnam’s chronic poverty has, for the most part, fallen sharply (for CPRC poverty research on Vietnam go to here).

Rising prosperity delivers support for the one-party state, leading to few challengers (and China has locked up plenty of journalists and monitors Internet access: will this blog make it past the ‘Great Digital Wall’?). China’s reluctance to let the currency appreciate – a source of tension with Washington – reflects a desire to keep growth rolling at an annual 10 per cent (although the currency policy is now relaxing somewhat to contain the inflationary pressures of growth)

Regional grievances have so far been contained, and the Party has moved over the last two years to address the discontent in rural areas of people who feel they have missed out from the boom. High growth is delivering ample tax revenues for the Party to now patch-up the alarming gap in health-care provision that opened up over the last decade.

A pressing challenge is still to reduce poverty in China’s western provinces (UNU-WIDER analysis of China’s spatial poverty is found here). Increasingly warm relations with neighbouring Russia provide part of the solution: expect to see some big Chinese-Russian initiatives in infrastructure to link up new economic zones in China’s poorer provinces with markets in Europe and Japan through better land transport routes (the ‘silk road’ is back).

Rachman’s points out the irony of it all: “In China, hopes that a flourishing private sector might provide an alternative source of power to the Communist party have so far not been realised. On the contrary, the party’s stake in large, cash-generative state monopolies has led some to joke that it is now ‘the world’s biggest holding company'”.

So, for the moment ‘illiberal’ capitalism is gaining traction. The neat link between capitalism and (political) freedom appears to be broken. We wonder what Milton Friedman would have thought of it all.