Category Archives: Development Economics

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

Has the WTO done enough to help developing countries?

Below is a good clip from Al Jazeera about the problems facing developing economies and it asks the question has the WTO done enough to assist poor nations. It goes back to the WTO: Doha Round of trade talks in 2001 which aimed to lower barriers to trade and therefore facilitate greater global trade but agricultural subsidies and tariffs remain unresolved. The issues seem to be between developed v developing countries and the changing nature of the world economy since 2001.

Fed might tighten but emerging markets could ease.

From the Espresso app by The Economist I came across a useful graph showing inflation figures in emerging economies. I used this with my NCEA Level 2 class when we discussed inflation and how if the inflation rate is below the target rate there may be room to loosen monetary policy and cut interest rates. This should stimulate demand in the economy and increase output and employment.

In America investors are experiencing the novelty of an inflation scare. But in many emerging economies, including several of the biggest, price pressures are at unusual lows. In China and Indonesia inflation is below target. In Brazil, for the first time this century, it has remained under 3% for seven straight months. And in Russia, where the central bank is meeting today, prices are rising at their slowest pace since the fall of the Soviet Union. This lack of inflationary pressure gives central bankers some welcome room for monetary manoeuvre. Even if America’s Federal Reserve turns hawkish, emerging markets need not slavishly follow its lead.

Gourmet chocolate the economic lifeline to Venezuela

At the end of the 18th century Venezuela was the world’s leading cocoa producer. But the rise of the oil industry in the 20th century and the emergence of Hugo Chavez saw the decline of the cocoa industry. Chavez boosted state involvement in the economy and promised to create a society of equals. However since the crash in oil prices – up to 90% of government revenue came from oil – society has been divided. Doctors and engineers rarely make as much as US$50 a month whilst other with access to small amounts of hard currency can afford gourmet products.

Recently in Caracas there have been some 20 new businesses launched producing bars of Gourmet chocolate which retails for around US0.80 each in high end grocery stores — well out of the reach of most Venezuelans who earn less than that in a week but catering for the well-off in a two-tier system. Bars can fetch US$10 in a place like New York and Paris but bureaucracy makes this very difficult.

Although aware of these barriers one producer, Nancy Silva, is now focused on getting her chocolate to France, where she once sold a single kilo of her chocolate for the equivalent of 80 euros (US$96), which is today the equivalent of five years of minimum wage salary in Venezuela.

Venezuela cocoa beans

Venezuela produces 16,000 tonnes per year which is less than 1% of the global output and less than 10% of regional output when you take into consideration big producers like Brazil and Ecuador. However the use of Venezuela cocoa is seen as a marketing tool for shops as bars are produced with 100% local cocoa which is deemed high quality.

Many gourmet bars made in the United States now prominently advertise the use of Venezuelan cocoa but generally mix in other less-desirable cocoas. Bars made in Venezuela by contrast are made with 100 percent local cocoa.

This gives the new Venezuelan chocolatiers a leg up as they tap into the global ‘bean-to-bar’ movement, in which chocolate makers oversee the entire process of turning cocoa fruit into sellable treats.

On the second floor of an old mansion in Caracas, economist and chef Giovanni Conversi has been making specialty chocolate for two years under the name Mantuano. Sprinkled with sea salt or aromatic fruits from the Amazon, the chocolate bars are a hit in London, Miami and Panama City in specialty chocolate stores or shops that specialize in Latin American food.

Source: Reuters – Gourmet chocolate becomes economic lifeline in Venezuela crisis – 12th January

Property rights needed for post-Mugabe Zimbabwe

Determining who owns the land is a necessary step to development and democratisation in Zimbabwe. Nearly all Zimbabweans who benefited from Mr. Mugabe’s land reform policy lack titles, or legal ownership of their property — leaving them at the mercy of the politically powerful. Titles are necessary if landowners are going to secure bank loans and without these loans farmers cannot buy the equipment needed to move on from a subsistence farming environment and their dependence on the government for aid etc.

Government officials, aware of the situation, have urgently started to survey the 6,000 farms that were seized after the fast-track program (where white farmers were forced off their land by the pro-Mugabe ‘Zimbabwe National Liberation War Veterans Association’) in the late 1990’s. This move will hopefully mean that Zimbabwe can now qualify for badly needed loans from international creditors like the International Monetary Fund and the World Bank.

Mr. Chaparadza, the village leader, said that as part of any resolution of the land issue, the new government should compensate white farmers.

“Even if they come back, that’s fine as long as they give us another place,” he said. “We won’t deny them. What we need is only some land where we can survive — and title to the land.’’

Property rights and Hernando de Soto

Peruvian economist Hernando de Soto sees a main obstacle to the development of markets and capitalism within developing countries being linked with the lack of property rights. The result of this is that most people’s resources are commercially and financially invisible. Nobody knows who owns what or where, who is accountable for the performance of obligations, who is responsible for losses and fraud, or what mechanisms are available to enforce payment for services and goods delivered. Consequently, most potential assets in these countries have not been identified or realized; there is little accessible capital, and the exchange economy is constrained and sluggish. However in the West, where property rights and other legal documentation exist, assets take on a role of securing loans and credit for a variety of purposes – building capital with capital.

De Soto estimates that about 85% of urban parcels in Third World and former communist nations, and between 40 and 53 % of rural parcels, are held in such a way that they cannot be used to create capital. The total value of the real estate held but not legally owned by the poor of these countries is at least $9.3 trillion. This is approximately twice as much as the total circulating U.S. money supply and nearly as much as the total value of all the companies listed on the main stock exchanges of the world’s twenty most developed countries. The lack of such an integrated system of property rights in today’s developing nations makes it impossible for the poor to leverage their now informal ownerships into capital (as collateral for credit), which de Soto claims would form the basis for entrepreneurship. However, in reality, it cannot be seen as the panacea. Titling must be followed by a series of politically challenging steps. Improving the efficiency of judicial systems, rewriting bankruptcy codes, restructuring financial market regulations, and similar reforms will involve much more difficult choices by policymakers. Zimbabwe seems to be in need of Hernando de Soto’s ideas. His book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else is a good read.

Source: New York Times – 20th January 2018

Below is are two great clips from the ‘Commanding Heights’ series with Hernando de Soto talking about property rights. The second one has an interview with a Tanzanian coffee farmer and asks the question – “who owns the land around here?”

 

 

Foreign Aid – where does it come from?

Below is an informative clip from The Economist on foreign aid. Useful for A2 students looking at developing economies and foreign aid.

Rich countries are giving away more in aid than at any other time on record. In 2016 more than $140bn was distributed around the world. According to the latest breakdown in 2015 America gave the most money away – nearly $31bn to at least 40 countries and organisations such as the world bank. This included $770m to Pakistan and $250m to Mexico. This may sound generous but the United States has the largest economy in the world. American foreign aid spending in 2015 was only 0.17% of the gross national income. Far less than other rich countries. Sweden and Norway are the biggest givers, donating over 1% of their gross national income to foreign aid. The biggest receivers of aid in 2015 were Afghanistan, India, Vietnam, Ethiopia and Indonesia. Afghanistan received $3.8bn and India $3.1bn. Despite being the second biggest economy in the world, China received $1.5bn in development aid in 2015. This included around $750m from Germany and $67m from Britain. The total amount of foreign aid is at an all time high – up 9% in 2016. This is largely down to the generosity of six countries who meet or exceed the United Nations foreign aid target, donating more than 0.7% of gross national income.

Norway sovereign wealth fund takes an ethical stance

Norway’s soveriegn-weatlh fund surpassed US$11trn in assets on September 19th this year. With its significant revenue from North Sea oil and gas getting invested overseas it is likely to get even bigger to the extent that Norway can start to shape ideas abroad. It is increasingly speaking out on ethical behaviour of companies and is an increasingly activist shareholder. The ethics watchdog for the fund recommends that it excludes several firms in oil, cement and steel industries for emitting too much greenhouse gas. This may seem hypocritical in that Norway produces significant amounts of oil but it operates under its own ethical guideline set by parliament.

Source: The Economist – 23-9-17

Missing out on billions of dollars

Norway’s sovereign wealth fund has share in 9,000 companies, 1.3% of the entire world’s listed equity. It has lost out on billions of dollars of revenue by its government prohibiting any investment in tobacco companies and manufactures of certain weapons. The fund is forbidden by law from investing in firms that produce nuclear weapons or landmines, or are involved in serious and systematic human rights violations, among other criteria. These include Boeing, Airbus, Imperial Tobacco, Philip Morris. Last year the council looked into the construction industry in Qatar – host of the 2022 soccer World Cup – and neighboring countries, after reports of abuse by human rights groups. Since then new regulations have been implemented which protect the rights and living and working conditions of labour in the construction industry. This includes the right of immigrant workers to hold onto their passport. There is a broad consensus in Norway that the fund should not make money from companies that take people’s lives.

Norway and coase theorem

Another way Norway is trying to influence global warming is by using its sovereign wealth fund to change behaviors of other countries. Ronald Coase argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution. An example of this was the a deal between Liberia and Norway. Norway will give $150m in aid in return for Liberia stopping the destruction of its forests.

Stick and Carrot

The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

5 or 6 more China’s

The reality is that the planet can’t stand another 5 or 6 China’s but developing countries still need to grow and, like their developed country counterparts, it will involve greenhouse gas emissions. If we are to curb global emissions developing countries will have to leapfrog to new technologies as the burning of traditional fossil fuels will just exacerbate the problem. However developing countries have neither the resources nor the incentive to reduce dependence on fossil fuels on their own as their main focus is economic growth. Whilst developed countries have a lot to lose from developing-world emissions it is in their interest to pay the latter to curb emissions e.g. Norway paying Liberia not to chop down its trees. Although this looks a simple enough policy politicians will not be so enthused by it as money that is paid overseas to cut climate change is not very popular with the electorate and therefore the government.

China’s changing trade dynamics

On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China, an economy which in the 1970’s was one of the poorest countries in the global economy. Today China is the world’s second largest economy and the fastest growing at a rate around 7% per year. However China’s trade composition has changed significantly over the years as its economy has developed. Two main trends stand out.

The decline in importance of primary goods (mainly food) as a proportion of China’s total commodity trade.  China’s exports have changed from being dominated by labour-intensive manufactured products in the mid 1990’s to more sophisticated manufactures today. 1994 – 40.6% of exports were miscellaneous manufactured articles. 2014 45.8% of exports were machinery and transport equipment.

A changing comparative advantage

A country’s comparative advantage refers its production of a good or service at a lower opportunity cost than another. Instead of every country trying to produce a wide of goods , countries can grow faster by specializing in the goods they can produce most cheaply and trading for others. Many Asian countries – Japan, Korea, Taiwan – have gone through 4 stages (as shown below) of development through a specialization index. It shows the first stage is the Developing Country stage, where Primary commodities are more competitive than both Other manufactures and Machinery. The second and third stages are the young and mature NIEs (newly industrialised economies) respectively, where for both stages Other manufactures is the most competitive sector, but the ranking of Other manufactures vis-à-vis Machinery is opposite. At the fourth stage – the pinnacle of trade structures – Machinery is most competitive.

Stages of Development.png

*NIE = Newly Industrialised Economy

A country’s trade structure can be classified into any of these 4 stages according to the relative magnitudes of the country’s specialisation indices across 3 sectors:

Three Sectors - China Trade.png

The figure below illustrates the evolution of China’s trade structure during 1984-2014. It can be seen that China became a young NIE in 1990 – when the specialisation index of Other manufactures surpassed that of Primary commodities – and then a mature NIE in 1999 – when Machinery passed Primary commodities. This pattern is consistent with the changing composition of China’s exports, from labour-intensive products to a more sophisticated mix led by various types of machinery and equipment.

China change in specialisation.pngImplications for the global economy
China’s rapid rise poses both challenges and opportunities for other countries as they are exposed to increased competition at home and abroad. For many firms in rich countries, intensifying competition from China’s exports has reduced demand for the goods they produce, with a corresponding decline in workers employed. Such changes in the global economic environment affect the allocation of factors of production and cause sectoral productivity fluctuations, as well as driving changes in comparative advantages among nations. Trade between developing (e.g. China) and developed economies (e.g. US) has been on the rise. Developed countries with high wages and expensive welfare programmes are having trouble coping with the effects of developing countries becoming major global players. It is estimated that 2.0-2.4 million people in the US lost their jobs as a result of increasing Chinese import competition during 1999-2011.

Source: China’s changing comparative advantage: Trends and implications by Murat Ungor. EcoNZ@Otago – August 2016

 

China’s investment in Africa and the Flying Geese Paradigm

I have blogged before on Chinese Investment in Africa and recently came across a very interesting article in the Harvard Business Review ‘The World’s Next Great Manufacturing Center’ by Irene Yuan Sun. It outlines the effects of Chinese investment in Africa and how it could lead to an industrial revolution in the continent.

Investment in manufacturing by privately owned Chinese companies has increased from only 2 in 2000 to well over 150 in 2015 and 2016 and are transforming Africa’s economy by providing millions of jobs and encouraging a new generation of local entrepreneurs as well as attracting support from inspiring African institutions. Investment by the Chinese in Africa has usually been associated with natural resources or services but with manufacturing now being more prevalent industrialization is a growing possibility.

Chinese investment is about supply and demand

China sojourn into Africa is become more prevalent and has a lot to do with supply and demand. A generation under the one-child policy has had an impact on the supply of labour causing shortages to arise and ultimately wages – 12% annually since 2001 and productivity adjusted manufacturing wages nearly tripled from 2004 to 2014.

On the demand side Africa has started to integrate regional markets – in 2105 half the countries in Africa joined the Tripartite Free Trade Area, which will combine 600 million people in a single trading bloc, forming the 13th-largest economy in the world. The six nations of East Africa have created a single customs union – same as FTA but all member nations agree a set of standard tariff levels between themselves and outside nations. This is known as the Common External Tariff (CET). Nigeria boosts an enormous domestic market with high margins for companies as there is little competition. Also Lesotho enjoys tariff-free access to the US market and can take advantage of being close to the South African infrastructure.

Chinese companies in Africa employ locals

According to Justin Yifu Lin, a former chief economist at the World Bank. China is about to graduate from low-skilled manufacturing jobs which will free up nearly 100 million labour-intensive manufacturing jobs, enough to more than quadruple manufacturing employment in low-income countries. To put that into perspective, when manufacturing employment reached its peak in the United States, in 1978, only 20 million people had jobs in American factories. Now five times that number of jobs are about to migrate out of China.

By 2050 Africa’s population will reach 2 billion creating the largest pool of labour in the world. Today though some of the highest unemployment rates are in African countries – Nigeria 12.% with approximately 19% of the labour force being underemployed. However youth unemployment is just over 42%.
Although the media in Africa tend to portray an image that Chinese companies don’t employ local labour, recent analysis shows Chinese factories in Africa employ locals in large numbers – no research sample had a figure of local workers in a Chinese company lower than 78% and in some larger companies the figure exceeds 99%. In Nigeria 85% of workers hired by Chinese manufacturers are locals and 90% of workers in Chinese manufacturing and construction companies in Kenya are local.

The Flying Geese Paradigm

Flying Geese Paradigm.pngIn developing economics the flying geese paradigm was the view of Japanese economists upon the technological development in Southeast Asia viewing Japan as a leading power. It states that manufacturing companies act like migrating geese, flying from country to country as costs and demand change. Factories from a leading country are forced by labour-price pressures to invest in a follower country, helping it accumulate ownership and move up the technology curve. This movement shifts the bulk of economic activity in the follower country from low-productivity agriculture and informal services to high-productivity manufacturing. The follower country eventually becomes a leading country, spawning companies in search of new production locations. The paradigm offers a convincing model of how Asian economies developed—in a chain from Japan to the Asian Tigers to China – see image above.

It describes not only the movement of companies from country to country, but also a process of industrial upgrading from product to product within each country – see image below. First a few companies show up to try their hands at making a certain product. As they learn, their profits attract other manufacturers of the same product. But as the field gets crowded, intensifying competition and thinning profits, some companies look for something else to make—this time something slightly more complicated and thus harder to copy. As the cycle repeats, companies that started by copying and learning are inventing and teaching a mere generation or two later. An analysis of 148 countries shows that as GDP rises, manufacturers within a country predictably move toward ever more complicated products. In another decade or two, factories in Africa will be churning out computers instead of ceramics and clothing.

Flying Geese Paradigm 2.png

Investment in manufacturing key to Africa’s development

For any economy to develop being more productive in the long run is the only way to create a higher standard of living. Manufacturing tends to become more productive over time as there is overseas competition from imports as well as having to compete in the export market. Furthermore manufacturing investment has a big multiplier effect – research shows that for every manufacturing job created, 1.6 service jobs follow.

Conclusion

Industrialization will allow Africa to follow in the footsteps of Japan, South Korea, Taiwan, and China: to build factories that employ its booming population and to refashion its institutions to meet the demands of modern capitalism. Most important, it will provide a real chance to raise living standards across broad sectors of the populace. If Africa could lift just half as many people out of poverty as China has in a mere three decades, it will eliminate extreme poverty within its borders. For nearly 400 million people, that would mean the difference between going hungry and being full, between scrounging for work and holding a steady job, between asking their children to do menial labor and sending them to school. The Chinese showing up in Africa today don’t doubt that this will happen. As one of them, who is working to build a special economic zone in Nigeria, said to me: “This is exactly like my hometown 30 years ago. If we could do it, then so can this place.”

Sources:

Harvard Business Review ‘The World’s Next Great Manufacturing Center’ by Irene Yuan Sun. May-June 2017

ANZ Bank – ‘ASEAN – The Next Horizon’ – June 25th 2015