Archive for the ‘IMF’ 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.


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.

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.

Suharto — A Bandit No More

1 February, 2008

So Suharto is no more (obituaries here and here). The ex-general ruled Indonesia for 32 years, after the military took control in 1965. Founder of the Nation, Sukarno, was kept on for a couple of years, but Suharto and the military governed. Suharto was proclaimed president in 1968 and his ‘New Order’ show had a long run: he was finally forced from office in 1998 when Indonesia was whacked by the Asian Financial Crisis. (GDP dropped by 15%, forcing a humiliated Suharto into the hands of the IMF — see the famous pic of Suharto and then IMF boss Michel Camdessus here).

Suharto was complicit in the slaughter of 500,000 to a million Indonesians during the 1965-67 army-backed massacres of communists and others (see Human Rights Watch). (The movie ‘The Year of Living Dangerously’ remains a highly watchable account of the time. Go here to see a clip). The 1975 East Timor invasion killed maybe 200,000 more (with further atrocities in Aceh, Papua and the Moluccan islands). “Suharto has gotten away with murder – another dictator who’s lived out his life in luxury and escaped justice,” said Brad Adams, Asia director at Human Rights Watch. “But many of Suharto’s cronies are still around, so the Indonesian government should take the chance to put his many partners in human rights abuse on trial.”

How much did he steal? One (government) estimate is US$ 441 million between 1978 and 1998. The family took more than either Marcos and Mobutu, reckons Transparency International.

But as venal and vicious as it was, Suharto’s dictatorship clearly differed from those of Marcos and Mobutu. For Suharto achieved some 30 years of growth and poverty reduction. This was unexpected: Indonesia in the mid-1960s was written off (Africa was the bright star). “No economist holds out any hope for Indonesia” said Nobel Laureate Gunnar Myrdal in Asian Drama, 1967). Poverty and hunger fell steadily. From 1967 to 1996 per capita income rose by 5 per cent a year, with those below the poverty line seeing their income rise at the same rate (or more). From the mid 1970s to the mid-1990s, poverty fell from 40% to 11% — one of the most successful episodes of pro-poor growth in history (see World Bank). (Poverty then jumped to 22% during the financial crisis). Meanwhile, neighbouring Philippines — which with its more educated population looked a much better bet — just went down hill under Marcos and his cronies.

This is not to defend Suharto or his family and friends. But it’s important to understand why his dictatorship wanted economic growth while Zaire’s Mobutu didn’t (Mobutu once advised his fellow dictators not to build any roads: they only make life easier for rebels).

Was it Indonesia’s technocratic economists? Seems so. They kept the country from succumbing to the ‘curse of oil’ (that killed Nigeria’s growth in the 1970s: see Brian Pinto’s 1987 paper which remains a classic). The IMF and the World Bank made much of this when, in the 1980s, they started to write-up the Indonesia story. Suharto told his macro-economists to end the country’s hyperinflation — inherited from the chaos of the Sukarno years. And end it they did. They in turn taught economics to the generals-turned-politicians. The macroeconomics seemed to be sound (at least until 1997). And the United States, Japan and the multilateral donors, provided generous aid — eager as ever to buy into a success story.

Did Suharto realize that you can only cream off so much before growth collapses (and with it your own wealth)? It seems so — at least until the latter years when the children became troublesome. Entrepreneurs got to make money (especially when in business with the Suharto clan). Investment was strong. Suharto acted as a ‘stationary bandit’ (willing to invest to maximize the take) rather than a ‘roving bandit’ (take the money and run) — as Mancur Olson described. (One exception from the start: timber and the massive environmental damage of unsustainable logging — which still goes on — making Indonesia the third largest emitter of greenhouse gases after the United States and China). His wife, Madame Tien, took her cut (becoming known as ‘Madame Tien Percent’) but otherwise reigned in the children to avoid killing the golden goose. After she became ill, the kids ran amok: one managed the national clove monopoly, pocketing the money that should otherwise have gone to poor farmers. The cosy elite-business relationship hit the rocks with the Asian financial crisis — but until then it delivered the growth and jobs that Mobutu (and Marcos) didn’t.

Did the rural population matter to the elite? Seems so. Hunger stalked the land in the mid-60s. Getting the rice economy back to work was imperative for keeping Suharto in power. Once the economy stabilized in the late 1960s, it grew strongly, with the oil revenues being reinvested into rural villages through infrastructure and services. Indonesia benefited tremendously from the new Green Revolution technologies then coming on stream. Farm GDP increased by nearly half from the 1960s to mid-1990s (see Peter Timmer’s paper). And rural inequality fell. Agricultural policy received high marks from the development economists of the 1980s. Villagers mattered politically to the elite while they didn’t in much of Africa. And the elite made lots of money through BULOG, the food distribution agency.

Fascinating questions. Meanwhile Indonesia struggles on. There remain some 40 million people still in poverty. And many of the victims of Suharto and his friends still wait for justice.

IMF’s chief economist warns that financial globalization increases shocks

8 January, 2008

The IMF is becoming less naive about the perils of financial globalization (or at least some Fund staff are). The Fund’s Chief Economist Simon Johnson’s blog notes that “… the spread of financial globalization since 1987 means that shocks can jump to faraway and seemingly unconnected places with extraordinary speed. Shocks can also hit places with no apparent weaknesses in their macro policies and regulatory framework”. This is far from the IMF’s position some ten years ago when, pre Asia-crisis, the Fund promoted financial liberalization without much thought to what happens if short-term capital flows reverse themselves.