Category Archives: Development Economics

Globalisation for Africa

By end of the century 40% of the world’s population is projected to be living in Africa and still globalisation seems to have a limited impact on its people. In order to make Africa more inclusive policies will have to focus on accelerating regional integration, bridging gaps in labor skills and digital infrastructure, and creating a mechanism to own and regulate Africa’s digital data. Although the first industrial revolution resulted in a significant increase in international trade Africa has been a poor benefactor and this has led to the “great divergence” in income levels between the Global North and South. In the 1980s, the Brandt Line was developed as a way of showing the how the world was geographically split into relatively richer and poorer nations. According to this model:

  • Richer countries are almost all located in the Northern Hemisphere, with the exception of Australia and New Zealand.
  • Poorer countries are mostly located in tropical regions and in the Southern Hemisphere.

With the advances in technology over the last two decades Asian countries like China, Taiwan and South Korea have been able to narrow the gap with developed nations mainly because of the emergence of complex global value chains. However although Africa might have benefitted from the commodities market developed economies can now produce goods more cheaply and African countries have found it difficult to develop local industries that create jobs.

Unsurprisingly the economic disparity between Africa and richer countries has widened in recent decades, with the ratio of African incomes to those in advanced economies falling from 12% in the early 1980s to 8% today. In order to reverse this trend and enable Africa to benefit more from globalisation, the region’s policymakers should accelerate their efforts in three areas.

Policies to promote growth in Africa:

  1. Governments should promote further regional integration to make Africa economically stronger and more effective at advancing its agenda internationally. Progress so far is very encouraging.
  2. Africa must improve its digital infrastructure and technology-related skills to avoid being further marginalised. Moreover, the low-cost, low-skill labour on which Africa has traditionally relied is becoming less of a competitive advantage, given the advent of the Fourth Industrial Revolution
  3. Africa must create a system for owning and regulating its digital data. In the modern era, capital has displaced land as the most important asset and determinant of wealth.

By 2030, the continent will be home to almost 90% of the world’s poorest people. Unless globalisation works better for Africa than it has in the past, its promise of shared prosperity will remain unfulfilled.

Source: Project Syndicate – Making Globalization Work for Africa May 30, 2019 Ngozi Okonjo-Iweala , Brahima Coulibaly

China and the Easterlin Paradox

I have blogged before on the Easterlin Paradox and was interested to read about the relationship between economic growth and happiness. In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives. It is an interesting paradox to study when you are writing about measuring economic welfare and the standard of living.

What is the Easterlin Paradox?

  1. Within a society, rich people tend to be much happier than poor people.
  2. But, rich societies tend not to be happier than poor societies (or not by much).
  3. As countries get richer, they do not get happier. Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.

GDP growth is generally held as the most reliable predictor of a country’s level of happiness but in China GDP has increased 5 fold over the last 20 years but the level of well-being is less that in 1990. The levels of well-being bottomed out in the period of 2000-2005 and although have recovered they are not a level to that of 1990 – levels of happiness were high for then a poor country. This was similar to Russia before its transition where high levels of subjective well-being were reported.

Growth not a reliable indicator of happiness in China

Chinese level of happiness was highest in the 1990’s In the days of the “iron rice bowl system” – Chinese term used to refer to an occupation with guaranteed job security, as well as steady income and benefits. So it transpires that GDP growth in China was highest when happiness levels were falling. In fact, none of the six predictors used in the World Happiness Reports prove to be reliable predictors in China as there was little or no correlation between happiness and the six predictors- see below:

  1. GDP per capita,
  2. healthy years of life expectancy,
  3. social support (defined as having somebody to rely on in times of trouble),
  4. trust (defined as perceived absence of corruption in government and business),
  5. perceived freedom to make life deci-sions,
  6. generosity (defined as giving to charity)

The two main factors explaining China’s trajectory in happiness levels are unemployment and the social safety net. Unemployment rose sharply after 1990, reaching its peak in 2000–2005—the trough of China’s happiness—and has since declined moderately, as happiness levels have risen moderately. The level of unemployment is mirrored by the relative coverage of the social safety net over the same time period.

It seems that the restructuring of state-owned enterprises (SOE) has had the most profound effect on the happiness of Chinese people. This mirrors developments in Eastern European countries. In addition to unemployment rates and the social safety net, education and age are also important factors in determining Chinese people’s happiness over the period. Levels of education and of happiness are indeed linked; not only does a college education provide access to better job opportunities, but it also makes one more adaptable to changing circumstances.

Source:
Chinese Discourses on Happiness (2018) Edited by Gerda Wielander and Derek Hird

China’s ghost cities – there needs to be another plan

Below is a very good report from 60 Minutes Australia that gives you an update on China’s ghost cities. Roughly 22 percent of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That adds up to more than 50 million empty homes, he said. One solution that the government could use is property or vacancy taxes to try to counter the issue, but neither appears imminent and some researchers, including Gan, say what actually counts as vacant could be tricky to determine.

For so long China has relied on major infrastructure projects including building cities to drive growth figures in their economy. Historically China’s economic model was based on export-led growth, massive government injections into the economy and access to cheap money. This is not sustainable and although you can keep blowing up bridges and build cities that nobody lives in at some point it becomes unsustainable. Furthermore since the global financial crisis economies have increased protectionist policies to look after their own economy and this has been followed with by the potential trade war with the USA. Therefore the Chinese government need to refocus the growth of the economy on domestic consumption rather than building things – Gross Fixed Capital Formation. So much more C than I in the GDP Expenditure equation. EG:

GDP = C↑+ I↓+ G + (X-M)

Chile looks to cherries for transition away from copper

As with a lot of developing countries (and developed countries for that matter) there tends to be a reliance on a particular resource which can be to the detriment of its economy. Invariably if an economy is going to become more resilient it must be able to diversify into other areas that generate growth.

Traditionally Chile has relied on copper which accounts for over 50% of its export value but if it is going to become more developed it must start to rely on other goods or services. In November 2017 a free trade agreement (FTA) between Chile and China was signed and this was the catalyst for the cherry industry to flourish. Garces Fruit, just south of the capital Santiago, has become the world’s biggest producer of cherries and the development of the industry has been due to a combination of the government and the private sector. Cherries in China are viewed as a symbol of prosperity and marketed as something closer to a luxury product rather than ordinary fruit. With the harvest in Chile around the Chinese new year they make a perfect gift. However the benefits of the primary sector began in the 1990’s, with rising exports of wine, salmon and grapes but farmers are now tearing out vines and replacing them with cherries which are more profitable. Even though the cherry industry requires a lot of labour, which Chileans are not keen on doing, between 2015 and 2017 700,000 immigrants, mainly from Haiti and Venezuela, averted a labour shortage.

Chile Cherry export destination – 2017

Cherries remain the most planted fruit in Chile along with walnuts and hazelnuts due to its high profits and increasing demand from China. However, prices in China decreased with large supplies exported to that market (demand), but China still pays higher prices than the price other country destinations offer to Chilean exporters. China is the top market for Chilean cherries. Chile exported 156,497 MT or 85 percent to that market in 2017 (see graph above), a 109 percent increase over MY2016/17. Chilean cherry export season starts in November and end in February and it focuses its market promotion and export campaigns in China. It is expected that Chilean exports to China will increase to that market since demand for Chilean fruits keeps increasing, and Chilean exporters get higher prices in China for their fruits than in other destinations.

Sources:

The Economist – January 19th 2019 – Bello Adam Smith in Chile

USDA – Chile Report Stone Fruit – 8th October 2018.

Human Development Report – 2018 – gaps reflect unequal opportunity

The Human Development Index (HDI) is a composite index focusing on three basic dimensions of human development:

  • the ability to lead a long and healthy life, measured by life expectancy at birth;
  • the ability to acquire knowledge, measured by mean years of schooling and expected years of schooling; and
  • the ability to achieve a decent standard of living, measured by gross national income per capita.

To measure human development more comprehensively, the Human Development Report presents four other composite indices.

  • The Inequality-adjusted HDI discounts the HDI according to the extent of inequality.
  • The Gender Development Index compares female and male HDI values.
  • The Gender Inequality Index highlights women’s empowerment.
  • And the Multidimensional Poverty Index measures non income dimensions of poverty.

The 2018 Update presents HDI values for 189 countries and territories with the most recent data for 2017. The main points are:

59 are in the very high human development group,
53 in the high,
39 in the medium
38 in the low.

In 2010, 49 countries were in the low human development group.

The top five countries in the global HDI ranking are:

Norway (0.953),
Switzerland (0.944),
Australia (0.939),
Ireland (0.938) and
Germany (0.936)

New Zealand comes in at 16 with 0.917

The bottom five are:
Burundi (0.417),
Chad (0.404),
South Sudan (0.388),
the Central African Republic (0.367)
Niger (0.354).

The largest increases in HDI rank between 2012 and 2017 were for Ireland, which moved up 13 places, and for Botswana, the Dominican Republic and Turkey, which each moved up 8. The largest declines were for the Syrian Arab Republic (down 27), Libya (26) and Yemen (20) .

Why is Inequality a problem for development?
A recent Oxfam International report showed that:

“8 men own the same wealth as the 3.6 billion people who make up the poorest half of humanity”
“82 percent of all global wealth in the last year went to the top 1 percent, while the bottom half of humanity saw no increase at all”

Deep imbalances in people’s opportunities and choices stem from inequalities in:
income  – education – health  – voice – access to technology – exposure to shocks.

Human development gaps reflect unequal opportunity in access to education, health, employment, credit and natural resources due to gender, group identity, income disparities and location. Inequality is not only normatively wrong; it is also dangerous as:

  • It can fuel extremism and undermine support for inclusive and sustainable development.
  • It can lead to adverse consequences for social cohesion and the quality of institutions and policies, which in turn can slow human development progress.

The global level inequality in income contributes the most to overall inequality, followed by education and life expectancy. Countries in the very high human development group lose less from inequality than countries in lower groups

Source: Human Development Indices and Indicators 2018 – Statistical Update

World Economic Centre of Gravity – 2018

Danny Quah of the London School of Economics (LSE) wrote a paper in 2011 describing the dynamics of the global economy’s centre of gravity. By economic centre of gravity he refers to the average location of the planet’s economic activity measured by GDP generated across nearly 700 identifiable locations on the Earth’s surface.

The graphic below from The Economist shows an updated WECG. In 1AD China and India were the world’s largest economies. European industrialisation and America’s rise drew the economic centre of gravity into the Atlantic. However Japan’s economic boom made it the second largest economy in teh world pulling the centre north. As China has regained economic leadership, the centre is now retracing its footsteps towards the east. Extrapolating growth in the 700 locations is projected by 2025 to locate between India and China.

It is interesting to note how the WECG seems to move horizontally so does this suggest that the north-south divide will remain invariant? In looking at the actual data in Quah’s research, it shows that latitude declines from 66 degrees North to 44 degrees North by 2049. This might seem to imply that the south, like the east, is actually gaining considerable relative economic strength. Policy formulation for the entire global economy, and global governance more generally, will no longer be the domain of the last century’s rich countries but instead will require more inclusive engagement of the east. Many global policy questions will remain the same, e.g. promoting growth in the world economy, but others might change in character, e.g. appropriate political and military intervention. If you are interested in Quah’s paper you can download it by clicking here.

Sources:

The Global Economy’s Shifting Centre of Gravity by Danny Quah. 2011

The Economist – The Chinese Century – October 27th 2018

Why dearer oil impacts developing economies more.

It wasn’t long ago that $100 for a barrel of oil was the norm but with the advent of the shale market the production increased which depressed prices. It was felt that the flexibility of large scale shale production from the USA could act as a stabiliser to global oil prices.

Oil shocks – supply or demand?

Oil shocks are not all the same. They tend to be associated with supply issues caused by conflict or OPEC reducing daily production targets. In the case of an increase in global growth there is the demand side for oil which increases the price. However this doesn’t have a great effect as in such cases the rising cost of imported oil is offset by the increasing export revenue. However today’s increase has a bit of both:

Demand – global consumption has increased as the advanced economies recover after the GFC especially China
Supply – supply constraints in Venezuela from the economic crisis. Also tighter American sanctions on Iran and OPEC producers are not increasing supply with the higher price.

Higher oil prices do squeeze household budgets and therefore reduce demand. Lower prices are expected to act as a stimulus to consumer spending but it can also have negative effects on the petroleum industries.

Emerging economies the impact of higher oil prices

Oil importing emerging economies are badly impacted by higher oil prices:

  • Terms of trade deteriorate as the price of their imports rise relative to their exports
  • Exports pay for fewer imports = importers’ current-account deficits widen.
  • Normally this leads to a depreciation a a country’s currency which makes exports cheaper and imports more expensive.

However this is not the case today. World trade is slowing and with it manufacturing orders therefore higher oil prices make the current account worse which in turn depreciates the exchange rate. For emerging economies who have borrowed from other countries or organisations a weaker exchange rate intensifies the burden of dollar-denominated debt. Companies in emerging economies have borrowed large amounts of money being spurred on by very low interest rates but they earn income in the domestic currency but owe in dollars – a weaker exchange rate means they have to spend more of their local currency to pay off their debt. Therefore indebted borrowers feel the financial squeeze and may reduce investment and layoff workers.

Another problem for emerging economies, as well as higher oil prices, is that central banks are looking to tighten monetary policy (interest rates) with the chance of higher inflation.

Source: The Economist – Crude Awaking – September 29th 2018

Global poverty rates down but challenges still remain

The world attained the first Millennium Development Goal target—to cut the 1990 poverty rate in half by 2015—five years ahead of schedule, in 2010. Despite the progress made in reducing poverty, the number of people living in extreme poverty globally remains unacceptably high. And given global growth forecasts, poverty reduction may not be fast enough to reach the target of ending extreme poverty by 2030.

According to the most recent estimates:

  • 1990 – 36% of the world’s population lived on less than US$1.90 a day
  • 2013 – 11 % of the world’s population lived on less than US$1.90 a day
  • 2015 – 10 % of the world’s population lived on less than US$1.90 a day

Nearly 1.1 billion fewer people are living in extreme poverty than in 1990. In 2015, 736 million people lived on less than $1.90 a day, down from 1.85 billion in 1990.

While poverty rates have declined in all regions, progress has been uneven:

  • East Asia and Pacific (47 million extreme poor)
  • Europe and Central Asia (7 million) have reduced extreme poverty to below 3 percent, achieving the 2030 target.
  • More than half of the extreme poor live in Sub-Saharan Africa. In fact, the number of poor in the region increased by 9 million, with 413 million people living on less than US$1.90 a day in 2015, more than all the other regions combined. If the trend continues, by 2030, nearly 9 out of 10 extreme poor will be in Sub-Saharan Africa.
  • The majority of the global poor live in rural areas, are poorly educated, employed in the agricultural sector, and under 18 years of age.

Challenges

One of the main challenges is that it is becoming very difficult too reach those that are in extreme poverty as they often live in countries that are remote or have internal strife amongst its population. Furthermore access to good schools, health care, electricity, safe water, and other critical services remains elusive for many people, often determined by socioeconomic status, gender, ethnicity, and geography.

Even those that seem to be able to move out of poverty can only do it for a certain period of time as economic shocks, food insecurity and climate change can be their undoing and revert them back into poverty.

Policies

The book ‘The End of Poverty: How we can make it happen in our lifetime’ by Jeffrey Sachs (2005) looks policies to overcome poverty. Although it is an old publication it does have some valid points. However what is imperative is that a one-size fits all policy doesn’t work as all countries have some unique variables that requires a customised approach.

At the most basic level, the key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development. The development ladder hovers overhead, and the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung. The extreme poor lack six major kinds of capital:

  • Human capital: health, nutrition, and skills needed for each person to be economically productive
  • Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services
  • Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical in-puts into business productivity
  • Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society
  • Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor
  • Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital

Source: The Economist – Espresso

Unemployment – a ‘luxury good’ in the developing world

Image result for unemployment in developing countriesFollowing from my last post about the welfare state, the lack of jobless benefits in developing countries has led to very low unemployment levels as workers simply cannot afford not to work. In order for them to survive they need to be prepared to do any sort of job. Even if unemployment benefits are available a lot of the time they are not worth the effort. In Thailand, for example, payments last six months and range from 1,650 baht per month ($52) to 15,000. To be eligible, a Thai worker must register with the social-security office. But only one in three does so.

Therefore if they have lost their job what do they do? A laid-off factory worker might lend a hand on the family farm, become a casual day labourer, or sell trinkets on the street. When Annan Chanthan left his job as a graphic designer in Bangkok five years ago, he thought about collecting unemployment benefits, but never bothered. He now earns more money selling lottery tickets next to Hua Lamphong railway station than he did in his former profession.

But the situation can be complicated in developing countries, with their large informal sectors, which offer a relatively easy way for unemployed people to pick up some income — undetected by the government — while they continue to receive jobless benefits. However the level of the unemployment benefit influence the duration of the period of unemployment, but it doesn’t really help workers find better jobs (such as those that pay a higher wage). However, the level of the benefit does seem to improve wages somewhat, although not the unemployment duration.

In poor countries, unemployment is paradoxically concentrated among the better off and better educated. They can afford to wait a bit for a job that matches their aspirations and qualifications. Their behaviour may also explain unemployment’s curious stability but when times are bad, they may settle for a worse job or stop looking, rather than wait longer, which would add to the rate of unemployment.

Source: The Economist June 9th 2018 – The luxury of unemployment

 

 

US question globalisation whilst India embrace global trade

The Belt and Road Initiative (BRI) is a development strategy proposed by the Chinese government that focuses on connectivity and cooperation between Eurasian countries. Through infrastructure development China wants to boost trade and stimulate growth across Asia and into Europe. Ratings agency Fitch said that $900bn in projects were planned or in progress.

India is a country that will benefit from this development and recently Prime Minister Modi positively responded to Chinese President XI Jinping’s vision of the world – the BRI being the most obvious and a catalyst to India’s foreign policy aims which responds to the global trends. These are:

  1. India has the potential to become the world’s third largest economy by 2030. It intends to do this by sharing prosperity and working with other countries to set joint goals.
  2. Political ideologies are now encompassing equity and environmental issues. In India they are becoming more main stream policies for government and sustainable resources use is important in the 21st century.
  3. India is looking at Asia as the largest common market. Asia is reverting to its historical equilibrium of an integrated continent and does not want to choose between India or China. Instead, it supports a resetting of their relations to shape the goals of the ‘Asian Century’, which include the Bell and Belt Initiative and security related differences.
  4. India has a comparative advantage in the digital world and the potential to be the engine behind global growth.
  5. India priority is settling the boundary issues with its neighbours, enhancing diplomatic leverage and building a $10 million economy.

China is trying to improve international norms, technical standards and institutions through the BRI which covers more than 900 projects – 76 ports and terminals in 34 countries and special arbitration courts, about 80% which are contracted to Chinese companies. Whilst Prime Minister Modi is trying to divert the Western framework for reducing emissions in favour of human well-being within ecological limits.

And as the rivalry between the US, and Russia and China intensifies, India can play a stabilising role on agreed goals within the framework of a multi-stakeholder in the “Asian Century”.

Source: Neighbors move toward ‘Asian Century’ – ChinaDaily 28-29th April 2018