Archive for the ‘Growth’ 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.

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The “Dutch Disease” Effects of Aid in Uganda

1 December, 2008

In my recent post on Sorious Samura’s programme for Panorama on BBC One – an expose of aid to Africa, in particular to Sierra Leone and Uganda – I said we would come back on whether Uganda is experiencing a negative impact from the aid flows.

Remember the issue is whether foreign aid to Uganda is deterring export production via a “Dutch Disease” effect. If so, then aid is having perverse effects, hindering rather than helping economic growth.

How does this work?

Short explanation: A capital inflow like foreign aid raises domestic demand. This pushes up domestic prices and, if the exchange rate is not fixed by the government, the currency tends to appreciate as well (a shilling buys more dollars). Hence: exporting is less profitable and imports are cheaper (putting pressure on domestic producers of import-substitutes – for example domestic food crops suffer competition from cheaper food imports). Result: economic growth falls.

(Long explanation: The money is spent on two types of goods and services. First, non-tradables, that is items whose prices are mainly determined by domestic supply and demand. The price of a haircut in Kampala for example. Haircuts aren’t internationally traded. Second, tradables. These are goods and services whose prices are driven by international markets. The price of Uganda’s coffee, for example (Uganda is a ‘price-taker’ in commodity markets: some countries are big enough exporters to affect world prices – Saudi Arabia and oil, for example). A demand expansion caused by a capital inflow tends to push up the prices of non-tradables more than tradables, because the former are less-responsive (more inelastic, as economists say) in supply. The ratio of non-tradable prices relative to tradables prices rises, making it more profitable to produce the former. If the exchange rate is flexible – i.e. the central bank doesn’t fix it as a matter of policy – then it tends to appreciate as well. This adds to the appreciation of the real exchange rate that is caused by the rise in domestic prices as non-tradables prices outpace tradables prices. Result: people give up producing tradables such as coffee and move into the non-tradables sector, and growth falls).

Aid is not the only capital inflow that might cause this. The term Dutch Disease was first coined (and is most often used) to describe the impact of a natural resource windfall (natural gas in the case of 1970s Netherlands). Nigeria and other oil exporters suffered catastrophically from Dutch Disease in the 1970s when oil prices boomed (resulting in a severe contraction in Nigeria’s agriculture, a highly tradable sector).

However, much depends on what aid (or oil revenue) is used for. If it finances infrastructure construction, and if this is the right kind of infrastructure, then aid will have a supply-expanding effect. This could be of sufficient scale to offset any Dutch Disease effect (or the latter might be evident for a while until the infrastructure is built and then productivity effect kicks in: see Chris Adam and David Bevan).

So much for the theory. What about Uganda? The country has certainly had a large injection of aid, which has a big budgetary impact (see Martin Brownbridge and Emmanuel Tumusiime-Mutebile). An IMF study, by Mwanza Nkusu argues that Dutch Disease does not necessarily occur – especially when the economy has unused capacity (which is typical of countries like Uganda recovering from civil war). So the academic jury is still out.

What does recent data tell us? Economic growth was just under 10 per cent over 2007-08 according to a recent IMF staff mission to Uganda. Exports grew by 50 per cent over the same period. The Fund expects both to fall – the result of the global financial crisis that is weakening commodity prices (go here). Uganda is dealing with high inflation (core inflation is 14.5 per cent) – but this is more the result of the run-up (until recently) in global energy and food prices. The shilling has depreciated, not appreciated, recently. So, no indication of aid having Dutch Disease effects: the shilling is down, not up, and exports are up, not down.

But certainly the economy faces a tricky adjustment as it responds to the global economic shock of the last 6 months (true of all low-income, primary-commodity dependent, economies).

Whatever the other effects of aid on Uganda (whether it is being well spent, whether it targets the poor effectively etc.) there does not seem to be a Dutch Disease effect – at least recently. Perhaps more worrying is the potential Dutch Disease effect of the oil revenues that come on stream next year. If Uganda can manage oil well then it will be the first country in Africa to do so. Now that would be an achievement.

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

Nigel Lawson: No Fiscal Stimulus, Darling

24 November, 2008

You can rely on Nigel Lawson, Chancellor of the Exchequer 1983-89, to go against the conventional wisdom (see his views on climate change here and here, for example). He’s certainly not a member of the “we’re all Keynesians now” group. In today’s FT he argues that monetary policy is the key tool, not fiscal stimulus. Keynes was wrong:

“Britain … recovered faster than any other major nation from the 1930s slump. It did so largely on the basis of cheap money and a balanced budget. Between the slump’s deepest point, in 1932, and 1937 the UK economy grew at an unprecedented 4½ per cent a year. Nor was this due to rearmament spending, which did not start until 1936”.

I await the comments of economic historians on his reading of the 1930s. For the moment let me focus on his central message.

Lawson argues that recapitalizing the banks is the priority. Certainly, deleveraging by the banks has been huge. Nobody can deny that the economy can’t move again until the banks are sorted out. They are the achilles heel of the battered Anglo-Saxon model of capitalism. Today Citgroup got a $300 bn bailout.

But is this enough? It won’t be if deflation sets in. Then the real value of debt will rise, which will punish Britain’s already highly indebted households. Once deflationary expectations take hold, they are very difficult to shift as Japan in the 1990s demonstrated. Then monetary policy becomes next to useless: interest rates cannot be cut below zero.

Not using fiscal policy to stimulate consumer spending is therefore enormously risky. For sure, consumers might save rather than spend (see my previous post). And Britain will face a big tax bill (after the next election). The gilts market might take fright, but for now they are buying (few want equities).

Back to the lessons Lawson draws from the 1930s: if Britain was to revert to a balanced budget then it would have to cut public spending in a recession rather than raise it. This would have its own deflationary effect which, as economic activity fell, would reduce the tax base – thereby requiring a further expenditure cut to maintain a balanced budget. This is not a recipe for achieving economic recovery.

So, Nigel Lawson’s defiance of the Keynesian consensus is brave, but wrong. His recommendation is too risky. The same goes for doing nothing about climate change (on the latter: go here for a debate between Lawson and Oliver Letwin).

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

“A fool at 40 is a fool forever”

24 November, 2008

Internationally acclaimed film maker Sorious Samura has a critical article on aid on the BBC News web site in advance of his Panorama programme on aid to Sierra Leone and Uganda – which is broadcast tonight (see our post a few days ago). He writes:

“Where I come from in West Africa, we have a saying: “A fool at 40 is a fool forever”, and most African countries have now been independent for over 40 years. Most are blessed with all the elements to help compete on a global stage….. And yet today, my continent, which is home to 10% of the world’s population, represents just 1% of global trade. I have no doubt we have to take responsibility for our failures. We can’t afford to keep playing the blame game. But when 50 years of foreign aid has failed to lift Africa out of poverty, could corruption be the reason?”

Much of what he says hits the nail on the head. Corruption has been pervasive, and the Rich World must take its share of the blame – for everyone taking a bribe, there is someone giving. And ‘grand corruption’ has been spectacularly rampant in Africa’s oil sector (see EITI here). My IDPM Colleague, Sarah Bracking, has a new book out on corruption and development and what is being done to reduce it (go here).

One point that I do take issue with in Sorious Samura’s article is his view that Uganda is being crippled by what economists term ‘Dutch Disease’, resulting from large aid inflows:

“Large inflows of foreign currency push up the value of the Ugandan shilling making its agricultural and manufactured goods less price competitive. This results in fewer exports and less home-grown, sustainable earnings for the country. Local entrepreneurs such as coffee growers and flower exporters should be cashing in on rising food and commodity prices across the globe at the moment, but they are finding themselves crowded out of their own economy by foreign aid dollars”.

Maybe, but I would like to see hard evidence of this in Uganda’s case. Aid also funds infrastructure investment which, when well-designed, reduces the costs of production, marketing and transport. This raises the profitability of businesses that use the infrastructure. This can more than offset the disincentive to export production resulting from the currency appreciation that Samura worries about, making exporting more profitable, not less, after aid.

As I said it has to be well-designed aid. Aid that simply goes to raising consumption won’t do the trick (although if it is consumption of the poor – including humanitarian aid – then I worry less). And nobody doubts that Africa needs a lot more infrastructure – partly to change the pattern of infrastructure that was created to serve the colonial economy. That pattern still dominates much of Africa 40 years on. Disadvantaged regions, in which chronic poverty is high, especially need better transport infrastructure. Tim Harford, the Undercover Economist, quotes a study that road transport in Francophone Africa is six times more expensive than in Pakistan.

So, I look forward to tonight’s Panorama programme. Sorious Samura will be rightly hard-hitting. We can’t tolerate corruption. And we need well-designed and well-implemented aid. In the meantime, I shall be reading up about Uganda’s aid programme, and whether “Dutch Disease” has been a problem. If you have some suggestions, do please send them along.

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

Institutions for Pro-Poor Growth

12 October, 2008

How institutions do and do not work for development is intensely debated, especially the link to economic growth. And state-business relations are of immense importance. For the latest research check out the redesigned website of Institutions for Pro-Poor Growth (go here).

IPPG is running a panel session at the Development Studies Association Annual Conference in London on 8 November (go here), with Adrian Leftwich, Kunal Sen, and John Morton. And Kunal Sen is giving a lecture ‘What a Long, Strange Trip It’s Been: Reflections on India’s Economic Growth in the Twentieth Century’ at the British Association of South Asian Studies in November (details here)

Other IPPG highlights include discussion papers on:

‘Land Tenure, Farm Investments and Food Production in Malawi’ by Ephraim Chirwa, Universty of Malawi

‘Exploring the Politics of Land Reforms in Malawi: A Case Study of the Community Based Rural Land Development Programme (CBRLDP)’ by Blessings Chisinga, University of Malawi

‘Informal Institutions in Transition: How Vietnam’s Private Sector Boomed without Legal Protection’ by Liesbet Steer (ODI) and Kunal Sen (University of Manchester)

Coping with Global Inflation

29 September, 2008

Our readers don’t need reminding that Inflation has been on the rise globally (although the present financial crisis could knock that on the head). The poor are being hit hard by rising food prices – the price of rice in Asia has doubled, causing real distress in countries without effective social protection. Africa is scrambling to respond.

Macro-economists in central banks and finance ministries are worried people. Today looks alarmingly like 1979-81: inflation pushed up by the second oil price spike and recession looming. That combination of inflation and recession – stagflation – is the worst scenario for policymakers. Inflation requires demand restraint, recession requires demand expansion – and policy-makers have a difficult time in choosing which direction to go down. The early 1980s are a warning of what can happen. Real interest rates (the interest rate minus the inflation rate) turned from negative to positive – pushing up the real cost of borrowing for firms already hit by weakening sales. Eventually the oil price collapsed, bringing inflation down with it, but also distress for over-borrowed oil producers such as Mexico and Nigeria. That then set the stage for the debt crisis that took a full decade to work itself out, with massive social fall out, and poverty spiking higher (the 1980s were Latin America’s “lost development decade”).

So what should today’s policy-makers do? The Centre for Development Policy and Research at SOAS has a new Development Viewpoint out on global inflation. The author, Terry McKinley, argues that they must be clear on the causes, otherwise the response could make the situation worse. Since the sources of recent oil and food inflation are ‘globalised’, developing countries cannot hope to maintain low domestic inflation by the standard practice of raising domestic interest rates, argues Terry. Such a misguided “monetarist response” would only heighten the risks of recession, he concludes. Go here for the paper, a timely contribution to the present debate — and a warning from the past.

US Financial Crisis Hammers the Poor

18 September, 2008

Former IMF chief economist, Ken Rogoff worries that the dollar is headed for another dip in today’s FT (go here). He says:

“If the US were an emerging market country, its exchange rate would be plummeting and interest rates on government debt would be soaring”.

Instead the dollar has strengthened over the last month. But he doesn’t think this will continue. Rogoff is worth listening to: over the summer he said a major US financial institution would fail before the end of the year (reported here). And this has now come to pass (with more on the way?).

What does the financial crisis mean for the poor? Earlier in the year we commented on the big rise in the number of people using America’s food banks (see our February and US archives). The US government buys surplus food for distribution through organizations like America’s Second Harvest — and these are facing heavy demand in areas worst hit by the house-price collapse.

Given the US slowdown, unemployment will rise further. With few if any savings, plus the cost of health care (and the fact that many Americans are uninsured), unemployment can quickly push people into poverty. The US prides itself on social mobility (the rags-to-riches story that all those self-help books play upon). But only 6% of children born to parents with a family income at the very bottom move to the very top (see the Economic Mobility Project here). It’s actually a very static society, especially for African Americans.

Unemployment is, in turn, pushing up the default rate in the already hard-pressed mortgage market. This adds to pressure on mortgage-bonds and the balance sheet of the financial sector.

Putting in place effective safety nets for those on low-incomes could help establish a floor under house prices (and thereby indirectly help the dollar, which is Ken Rogoff’s concern). Since many low-income families were lured into mortgages they cannot now afford through so-called ‘teaser rates’ (low interest rates to suck them into debt) they deserve as much help as the banks — if not more.

But we fear that any help will be squeezed out by the fiscal costs of the financial crisis itself (not to mention the continued cost of Iraq: see Joe Stiglitz here on the ‘three trillion dollar war’). And it is very likely that the US will exercise even less voice in international development, since its bilateral and multilateral aid commitments will come under budgetary pressure as any new administration (be it democratic or republican) will focus on domestic priorities first. The bottom line: it’s not just America’s poor who are hammered, but the world’s poor as well.

Far from Correcting the Distortions of Unbridled Capitalism, the Political Process Makes Them Worse

29 August, 2008

So says Sam Brittan in today’s FT, reviewing Robert Reich’s Supercapitalism: the Battle for Democracy in an Age of Big Business. You’ll remember Reich as Bill Clinton’s secretary for labor.

In a nutshell, Reich argues that the golden age of capitalism — the rebuilding of the post-war years up to the 1970s — delivered enough prosperity to win the allegiance of most ordinary folk. That got replaced by ‘supercapitalism’ which has delivered our present mess.

For Brittan the novelty in Reich’s book lies in his rejection of a central role for corporate social responsibility. Instead, Reich gets into the intellectual bed of Milton Friedman — who famously argued that it’s the job of businessmen to make lots of dosh, and that’s their sole responsibility. For Reich we need to strengthen states to ensure that dosh-making is compatible with society’s goals — as set out by democracy.

Brittan likes this (unexpected) approach. But he’s less optimistic about democracy pushing business in the right direction. US energy policy is Brittan’s example (presumably excessive subsidies for biofuels driving up world food prices). And Brittan cautions that this might also let business off its (moral) hook:

“… there is a danger that the Friedman-Reich position could inadvertently give sustenance to the “I was only doing my job” defence for evil actions”.

We continue to think this one over while awaiting our copy of Reich’s book. In the meantime, you can read his excellent blog here.

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.

What next for Kenya? The Poor will Suffer — That’s Certain

14 February, 2008

The big guys are still talking. Agreement was reached last week on a framework peace plan, brokered by Kofi Annan (the Ghanains previously sent in President John Kufuor to no avail — you can’t help but admire their persistence). The framework commits both parties to avoid inflammatory statements and hold more meetings. Annan is pushing them still — the outline of an interim government might emerge soon (breaking news: a deal to write a new constitution is reported here). At least parliament was recalled — a key step.

In public both the Orange Democratic Movement (ODM) led by Raila Odinga and the Party of National Unity (PNU) led by Mwai Kibaki are keeping to a hard line: claiming no deal is in place. You might say it’s what happens in private that matters — around the negotiating table. That’s only partly true. Political leaders need to rein in their increasingly volatile and aggressive supporters. More murders (at least 1,000 since December) add fuel to the fire — and generate a momentum that the politicians might find hard to stop. “Let Annan do his bit but there is going to be no resolution. The clashes will continue”, said one youth manning a road block (see a BBC report here).

Will the agreement work? Who knows. The poor will suffer — that’s certain. For them it gets worse day by day, in at least 5 ways:

1. Family incomes are under intense stress. Tourism revenue has collapsed. One Masai community used to earn £400 (approx $800) per month from tourist visits: now all gone (story here). Over a quarter of a million people have fled their homes (and livelihoods). Result: more chronic poverty (see Tom Jayne et al on Kenya here).

2. Education and health-care are very disrupted. HIV and TB patients are finding it hard to collect their life-saving medicines. TB patients must repeat the whole course again (see Rhona’s blog on The Lancet Student). And TB develops drug resistance when treatment is incomplete. NGOs are working hard to help. But one MSF worker describes the situation of a HIV-positive mother who needs formula milk for her baby: “It broke my heart to see this woman, badly beaten up, sitting in the waiting bay with her four month old baby. She was making her way back home to fetch the baby’s patient card when they got hold of her. She looked completely petrified.” (story here). Infant mortality is rising.

3. A lasting solution must address Kenya’s deep inequality (see my paper here). This dates back to colonial times but intensified after independence in 1963, especially when former president Daniel arap Moi got to work. His network of patronage kept the big guys happy while the economy, once of Africa’s most promising, stagnated (growth picked up again over the last few years, the result of the global commodity boom). The Kikuyu — the country’s largest ethnic group and the one to which President Kibaki belongs — have dominated politics and commerce (Moi, who backed Kibaki in the elections, is from the Kalenjins, one of the smaller communities). Kibaki has lost some of the support of Kikuyu professionals — who have done well from the economic growth of the last few years. This is a sign of hope. When there is growth, the contending parties have an incentive to keep it going — if they have benefited. But many Kenyans have missed out or not benefited at all. They can take the economic hardship — because they are already used to hard times. The politics and the economics of conflict therefore interact. Consolidating a political solution depends on delivering tangible gains to the excluded (and fast).

4. As the economy sinks, so it becomes easier for nascent warlords to recruit the poor for their purposes — the slums have divided along ethnic lines. Most of the ODM protestors — in Nairobi and other places — belong to the Luo and Klenjin communities. They turned on the Kikuyus. Kibera, the big Nairobi’s slum, saw much anti-Kikuyu violence. And then the Kikuyus took their revenge. This is an acceleration of the rising ethnic violence seen over recent years (especially over land claims, further exploited by local political leaders). Organized crime is profiting handsomely from the looting, taking the banditry that has bedeviled Kenya to new heights (see this video by the Guardian’s Xan Rice). Conflict that starts as grievance often ends up driven by greed, making it all the more difficult to halt (see discussion here and here).

5. How to restore faith in the democratic process? The peaceful transition in 2002 — which ended the 24-year old presidency of Moi — gave hope to the poor that their vote would achieve real change (go here and read Joel Barkan in Foreign Affairs). The longer this goes on, the more difficult it becomes for the parties to move beyond the framework peace deal. And without a permanent deal the murders will continue. Time works against peace.

6. For aid donors it’s a tough call. They have large programmes in Kenya. They must act in good faith (and be seen to be doing so). The World Bank got off to a bad start, when a leaked memo appeared to support the result of the flawed December election. The director of the Royal African Society, Richard Dowden, has a scorching Op-ed piece in the Guardian on the British response. The ODM has called on donors to shut down aid: “A government that steals the vote from its own people will steal any aid given to it” (reported here). That’s a very powerful argument. Zimbabwe is the precedent (no OECD-DAC aid to speak of, just humanitarian help). But aid sanctions are tools that need to be kept in reserve as we await the outcome of the Annan initiative.

We leave the last word to Edward Clay (who was the UK’s High Commissioner to Kenya 2001-05). In a letter to the Economist he writes: “…the poorest, whether in the slums of Nairobi or in the rural areas, had all too little to lose in the recent violence. Most people living in the slums are inhabitants of shanties erected at the whim of rapacious landlords, who are themselves part of the political class. Some of these residents have now had their votes stolen as well…. The poorest attack their equally poor neighbours and set fire to the little they have in common not because they hate these targets in themselves but because they see no other adequate way to express their grievance”. That is Kenya today.