Happy New Year: Economic Optimism

Economic optimists have a tough time against doomsayers and pessimists in the battle for public opinion and newspaper headlines, despite the wealth of statistics on their side. Their message just isn't that attention-grabbing or entertaining - even I strongly prefer 'The Walking Dead' over Teletubby-type shows (if they made Teletubbies for adults, which they don't, which kind of proves my point) (!!). So, I was happy to see this NYT article on the topic of oil supplies and energy prices, which provides a nice counter-balance to the latest malthusian pronouncements from Paul Krugman. Happy New Year everyone!

Treasure troves of new data

Here are two interesting projects that allow us to significantly improve our ability to measure important economic and social phenomena. The first, provides us with a way to calculate daily inflation rates for several countries by piecing together billions of prices from online retailers.While this is for now mostly confined to developed countries, the project is rapidly expanding to the developing world, where official inflation data tend to be less reliable.
The second is a hot off the press tool developed by Google to mine digitized text for word usage. Taking advantage of Google's massive efforts to digitize over 15 million books, researchers created a user-friendly tool that counts how frequently strings of up to 5 words appear in books in different languages (German, Spanish, American English, British English, etc). This is a good start and reveals some interesting patterns. We look forward to future iterations of this product, especially once it starts including searches through other forms of mass media, which are perhaps even more norm and culture-defining than books.
Happy Holidays!

Happy Holidays!

Here is a lovely story (despite being an obituary!) for the holidays.

land, property rights and development

Last term we discussed several mechanisms through which property rights were related to both growth and the environment; among these, Graciela Chichilinsky pointed out that if a country has very poor property rights, natural resources (like land) look like open access resources and create an illusion of a comparative advantage in that resource. If the country opens to trade, then, the resource will be over-exploited (well, to be fair, the resource might have been over exploited before trade as well, but that situation would get worse). We also reviewed the Ostrom-related literature on (often informal) common property resource management and the ambiguous consequences of privatisation. Finally, we can't forget all the Engerman/Sokolof and Acemoglu-related literature on the relationship between the widespread existence of family farms, as opposed to plantation agriculture, the resulting income distributions and power structures in society, and the institutions that subsequently evolved over time.

It is a good idea to keep all these theories in mind when reading this story in the New York Times today about the ongoing 'land grab' taking place around the world, and often in Africa, these days. Even in Wisconsin the price of farm land is rising -- but how might the consequences of soaring farmland prices in Wisconsin differ from the outcome of the same increased demand for land in Africa? And why? It is not obvious at all, but the literature we reviewed last term should help us develop more nuanced and complex interpretations than are reflected by the journalists. What are the policy implications?

China, human capital, and global economic growth

Astonishing new results from Chinese student test scores are being reported in the US newspapers (well, in the NY Times) as something of a 'competitive threat' to future economic prosperity. But is this really a 'bad' thing for Americans that all these exceptionally smart young people are about to join the world economy? Remember again Jones and Romer - they might have to revise their estimates of the global impact of Chinese assimilation even higher now. Plus there may be a further multiplier effect - think of all the extra human capital that will be generated by the (now, hopefully) increased efforts to improve education of all these countries trying to keep up. That increase could arguably be said to be 'caused' by China as well. And, the return to the human capital that a country does have, high or low, will be augmented by the extra stock of knowledge. As a gizmo lover myself, the prospects boggle the mind!

All this potential makes the low educational achievements of many very poor countries all the more tragic, considering what might have been ... next term hopefully we will learn about concrete strategies to help poorer countries harness this amazing source of growth and prosperity.

The Cost of Fads in Development Practice: lessons lost

Here is a classic example of the lumpiness of development policies. In a competitive landscape, as product placement becomes increasingly difficult, development projects are often fully endorsed, or fully rejected, leaving little space to learn about their true potential. As microfinance hits the doldrums, the knee jerk reaction may be to dismiss it, as yet another fad gone bust. However, in the words of Ralph Waldo Emerson "Bad times have scientific value. These are occasions a good learner would not miss."

In that spirit, a new debate has emerged to discuss the relative merits of microfinance, reminding the development world that just like any development product, microfinance will require different periods of experimentation, fine-tuning, reshaping and perhaps even re-branding as we learn about its real potential. This could mean changing the groups microfinance targets, combining microcredit with different products, or developing new features that can minimize the probability of defaults. It seems like the problem microfinance came to solve has not gone away. We just need to keep experimenting with a different mix of tools until it does.

We will discuss this in more detail in Lent Term with a class on Credit in the Developing World but in the meantime, here is some food for thought!

Gates Foundation and aid

In the spirit of the last post, here is another article in today's NYT about the development of a new class of vaccines specifically developed for poor countries, both in terms of the diseases targeted and the costs involved.

development optimist or pessimist?

I confess to being a fairly exuberant development optimist. Not because I think we really know the secret to growth, but because I'm not sure that that matters. Heretical! perhaps. Of course we should keep trying to implement the best policies possible and keep trying to learn what works and what doesn't. In the meantime, the world just keeps on getting better and better in many dimensions that are critically important. I also believe that the key to solving some of the problems that are not getting better, like global warming, is the advance of incomes and technology, which is happening, with some hiccups and a number of caveats. You can focus exclusively on the exceptions and the caveats, or you can keep the 'big picture' always in the back of your mind - to help with the (happier) latter strategy, fellow DV409 student Michael Homes sent me this video that helps put everything into perspective.

What do capital controls and the gold standard have in common?

Both capital controls and the gold standard are both fairly marginal, fringe economic ideas -- but that is more or less where the similarity ends! We have been discussing capital controls in DV409, and the gold standard here on this blog, so I thought a recent column by Paul Krugman in the NYT made some great points related to both.

In comparing the way in which the economic crises played out in Ireland and Iceland, he mentions first that only in Ireland did the government nationalise private debt by providing guarantees. OK, that's not related to this topic, exactly, but it is a pet peeve of mine so I thought I would point that out anyway - government guarantees, explicit or implicit, are often a good thing, but not always, and certainly not in this case, it seems to me. In DV409 we have already discussed a lot of the reasons and conditions under which government guarantees may or may not be a good ideas.

Now, back the point mentioned in the title. The second difference was that Iceland used capital controls to stem initial panic and capital flight. Why might capital controls have been effective for Iceland when they were so ineffective in so many other cases? Hopefully, after reading all our DV409 papers, you now have, if not an answer, some sensible things to say about that.

The last point is that Iceland devalued its currency, something that Ireland, with its fixed exchange rate regime (which is what the Euro area is), cannot do. And this is where the gold standard comes in. That is also a fixed exchange rate regime, and in this case had it been in effect would also have precluded the kind of adjustment that Iceland has apparently had (and seemingly weathered reasonably well, all things considered).

So what do capital controls and the gold standard not have in common? The former is an idea that usually doesn't work, but can be a great policy tool in some select cases. On the other hand, I still have not come across a modern situation where the gold standard would have been a good idea.

Strategic Intellectual Pursuits or Selection Effects?

Now here is a tough nut to crack. How can we disentangle supply and demand effects? Are journals biased towards certain countries? Are researchers internalizing these biases and planning their research accordingly? Or is there something to be said about barriers to entry into different countries (safety, language, local human capacity) and how that impacts the quality of the research and the type of researcher they attract...?

This seems important since research on different developing countries is, well, a necessary condition for evidence-based policy-making. But to move to a high level equilibrium we need the best researchers to have an incentive to learn more about experiences in different countries and academic journals, conditional on the quality of the analysis, to be ready to reward them for it.

When you read the paper attached, which is mostly descriptive, think about the research design that would allow us to distinguish between these competing hypotheses...

More on the Gold Standard

Apparently the arguments for the gold standard around the Department of International Development are ratcheting up (!). So, here are a few additional links to more weighty discussions on the gold standard than the NPR radio blurb offered:
Paul Krugman
Barry Eichengreen and Peter Temin

Culture, Institutions and the Wealth of Nations

Here is an interesting and provocative new paper by two economists from UC Berkeley that may be of interest to DV409 students. The abstract is as follows:

We construct an endogenous growth model that includes a cultural variable along the dimension of individualism-collectivism. The model predicts that more individualism leads to more innovation because of the social rewards associated with innovation in an individualist culture. This cultural effect may offset the negative effects of bad institutions on growth. Collectivism leads to efficiency gains relative to individualism, but these gains are static, unlike the dynamic effect of individualism on growth through innovation. Using genetic data as instruments for culture we provide strong evidence of a causal effect of individualism on income per worker and total factor productivity as well as on innovation. The baseline genetic markers we use are interpreted as proxies for cultural transmission but others have a direct effect on individualism and collectivism, in line with recent advances in biology and neuro-science. The effect of culture on long-run growth remains very robust even after controlling for the effect of institutions and other factors. We also provide evidence of a two-way causal effect between culture and institutions.

Population and the Environment

Last year the theory that population growth was the single most dangerous threat to the environment and human existence became suddenly quite popular with the publication of a few review articles on the topic.

It is clearly a good idea to improve environmental conditions, both for biodiversity and human well-being. Since it is politically unlikely (and anyway undesirable) that this will be feasible by prematurely constraining consumption, the most promising approach is the development of new technology - i.e. finding new ways to produce the consumption goods and services that we need while polluting less and using fewer resources, and discovering ways of reversing previous environmental damage.

If you even partially accept that innovation will play a major role in the ability of humans to maintain and increase both well being as well as environmental conditions, then the focus in this popular literature on population size seems rather bizarrely misplaced. In particular, it has mostly ignored the single largest and arguably most fundamental causal impact of a larger population: increased innovation rates. Across countries we generally associate higher incomes with fewer children, but over the very long run, as the graph below (from the excellent 2009 working paper by Jones and Romer) illustrates, a larger population size increases the rate of technological innovation for all the reasons outlined in the paper and which we have explored in DV409 lectures. An article today in the New York Times reminded me of this again.

However be careful about the policy implications of this result: it does not mean that each and every family should have lots and lots of children (!). It does mean that low fertility rates in the wealthy world are not necessarily so good for the future of the environment. As Jones and Romer calculate (and as we reviewed in DV409), the increased innovation and resulting increase in per capita wealth from the introduction of 1.3 billion Chinese into the modern global economy should (by a rough back of the envelope calculation) much more than compensate for the costs of carbon mitigation, even at today's mitigation costs (which will likely decrease significantly when all those Chinese put their heads to it).

So, yes, if we could hold the rate of technological innovation constant and decrease the number of people on earth, we would use fewer resources. However that is a false hypothetical experiment, as the two variables are so closely linked.

India’s Microcredit Sector Faces Collapse From Defaults

Former DV409 students will be aware of the tepid academic evaluation literature on the effects of microfinance. Now an alarming article in today's New York Times raises further questions...

Analogies, social contracts, and teaching

As many of you now know, I like to use analogies in lecture to illustrate concepts that may seem abstract and technical in the original context, and my favourite analogies often draw on our everyday social lives. These stories may seemingly have little to do with economic development policy, but this week I'm feeling kind of vindicated and pleased with myself (!). An article in the Economist Magazine (on, oddly enough, sociopaths) made the very interesting point that our brains are hard-wired to instinctively comprehend social contracts, so abstract problems redefined in social- contract-space will be much easier to solve and understand. So, now all I have to do is figure out how to map instrumental variable estimation into a love triangle scenario!

The Gold Standard

My, nothing like a prolonged recession/economic crisis to bring back out all the fringe ideas into more general discussion! Why is that? Yesterday I discussed growing calls for trade repression, and today NPR ran a short piece on calls to return to the gold standard.

Popular rhetorical resistance to freer trade from all sides

How much of the suspicion and complaints about harm from trade are due to actual net harm from trade, and how much due to political economy - the ideological, political and psychological issues - some of which we reviewed last week?

As we have been discussing the last few weeks, trade can impact an economy through a variety of channels and depending on the underlying conditions, these mechanisms (either for good or for bad) will be more or less important in the net final outcome. This does not mean that the outcome is arbitrary, however - and for the most part, most of the theory and evidence suggest that freer trade should in most cases be beneficial, especially in the longer run. I have certainly never seen a convincing case that all or most countries would generally be hurt from fewer trade barriers (in goods).

However the chorus of anti-trade rhetoric is growing, and it seems to be growing on all sides. At least in the corridors of ID, I hear complaints that the WTO and international trading system is biased in favour of rich industrialised nations "who wrote the rules." Many people in the rich countries, however, believe exactly the opposite, that the current trading system is biased against them in favour of developing countries - and this view is gaining ground, as described in this recent op-ed in the New York Times. Each view sounds plausible (a view or idea must sound plausible to become so widespread -- so among all widespread ideas, plausibility is not actually much evidence of veracity, however), but I find it highly unlikely that both arguments could be correct.

Thus perhaps paradoxically, I personally find the increasing complaints about the effects of trade from all sides to be increased evidence not so much of any actual harm of trade, but more for the political and psychological explanations for trade resistance. What do you think? DV409 students must be hearing a variety of perspectives in their classes so comments welcome!

Economic policy and "picking winners"

Today in the Science Times section of the NYT there is a good op-ed piece about the underlying rationale for subsidizing basic research. I found it interesting that the discussion about the impact of 'picking winners' here mirrors at least part of the arguments surrounding the practice (for manufacturing firms) in trade policy. Note in this article we are talking about the first best policy of subsidies, while the trade protection recommendation is a second best policy when direct subsidization is not politically or financially feasible (it is much easier to stealthily make a diffuse group of consumers pay the costs). Nevertheless, elements of the intuition are strikingly similar.

Smoking and dementia - but is it True?

I am as strong an anti-smoking fundamentalist as they get, but a recent story in the New York Times about a study that found a relationship between smoking and dementia (which I am naturally primed to accept, given my dislike of smoking) caught my attention as a perfect example of how DV409 students can put their analytical tools to work.

There are several things to think about here. First, this is a cross-sectional study on a time-series issue. Are people who smoke now a good proxy for the future of someone who currently doesn't smoke but might take it up? Second (related to the first), the authors included some control variables (the NYT does not list them but provides a link to the actual paper), but are these sufficient to control for all the characteristics that differentiate smokers from non-smokers and that might also be correlated with dementia? Finally, could the relationship be the result of reverse causality? Could people prone to dementia have related neurological issues for which smoking provides some relief, so that smoking is a form of self-medication? This is not necessarily as much of a 'high tide and full moon' (i.e. very low probability) possibility as you might think; there is evidence that many of our behaviours, from smoking to drinking to chocolate-eating (my particular vice!) have at least some element of self-medication to them.

The answers to these questions must be derived from our knowledge of biology and behaviour, but the fact that we pose them in this way at all is a result of our methodological understanding.

Ideas on how to change the world

Here is an interesting article by another DV409 household name, Abhijiit Banerjee, on how to introduce more rigour into social policy. The rest of the site has other great articles on how to change the world. So that you keep your dissertations in perspective and start thinking about the real challenges ahead! Otherwise...

How Econometrics Can Help You to Understand World Cup Football

Now that the DV409 exam is done many of you will have turned your full attention to World Cup football (if you can stand that noise....). But did you know that your newly honed econometric skills can also help you better understand the Beautiful Game?

In the middle of the 1990s, the European soccer body UEFA recommended to the National Soccer Federations that they should reward three points for a win instead of two points as under the old regulations. Soon, this new system was universally adopted by all countries. The purpose of this change in the rules was to encourage a more attractive attacking style of play and reduce the number of scoreless games that were then widespread.

However, as Olkesandr Shepotylo (a friend of mine from Kiev) pointed out, the increase in points potentially created a high incentive for collusion in games between teams that are almost equally strong (since the possibility of a draw is very high and the reward for one victory and one defeat is higher than the reward for two draws), and do not compete for the upper ranking positions in the championship (for reasons that are clear to soccer fans and those who read his paper carefully, but which eludes me...). In particular, under the new rules colluding clubs will pursue a strategy of winning home games in exchange for losing away games.

Oleksandr compared data from the Italian, Soviet and Ukrainian league from 1980 (or 1993 for Italy) to 2003. He found that in low-corruption countries (Italy... yes, yes, I know - this is relative corruption, remember!) with highly competitive tournaments, the three-point rule had a positive effect. However in the high corruption countries (Ukraine in particular) there was a pattern consistent with collusion (i.e. many more home wins and away losses than draws compared to the pattern before the rule change).

Collaborative Development

One of your colleagues who attended Nestle's conference on Creating-Shared Value last week would like to share some thoughts with those of you who were interested, but did not manage to attend. Please read Ankit's notes that are now posted to Moodle. The conference seems to have proposed a new notion of "collaborative development", based on strong partnerships between the government, the private sector and the non-profit sector.

The shape and form of these partnerships should be the matter of further experimentation. We still know very little about what partnerships (if any) work, under what circumstances and for how long... Here is a vivid example from Haiti on how difficult it is to engender these relationships from scratch.

Conspiracy theories and development

A recent talk this week at the LSE on climate change denial and conspiracy theories by Stephan Lewandowsky has had me thinking about conspiracy theories more generally. The speaker made a rather striking claim that 'the capitalist individualist economy' encourages this kind of thinking, a claim which I find (without any evidence) to be absurd. I've never heard more conspiracy theories than I did in Egypt, and today in the NYT this article reports on the phenomenon in Pakistan. Are these kinds of widespread (mis)beliefs the result of analytical illiteracy, poor journalism, authoritarian government, or something else? Are they damaging economically or politically? Is this a reasonable topic for more research?

Coming soon ... Enhanced Bailout ..?

The recent global financial crisis and related euro/Greek crisis have proven a goldmine for thinking about high discount rate behaviour, moral hazard, time inconsistency and the importance of credibility for policy effectiveness. Now comes Obama's pledge to end bank bailouts 'once and for all.' Whether or not this is a good idea, is it a credible threat? Can the U.S. government pull it off? Could the EU pull it off? If it becomes U.S. law personally I actually think it might be a fairly strong and reasonably credible threat (hence all the banks' jitters at the thought!), at least over the medium term, but perhaps I am naively confident of my own government (question: what is required for credibility: that in fact they will hold steady, or that people simply believe they will hold steady...). What about the UK and EU? Would similar threats be credible from them? How does the heterogeneous credibility shape the international financial and economic landscape?

Endogenous political power

Why do some groups of people, and some countries, have more political power than others? Is the relative wealth of the more powerful a consequence, or a cause, of that power? Should we take relative political weight to be an exogenous factor when analyzing policy? Is there a difference between the micro cases and the macro, the short run and the long run? The recent global financial crisis and immediate euro-zone crisis provide an interesting real-life and up-close view of changing balances in political and economic power that may persist (or not!) for some time, long after these immediate events have faded from memory. An op-ed in the Financial Times today provides one interpretation of those shifting seats of power. Only time will tell if the writer is correct ...

Measuring progress and human well being

The GDP is by far the most common measure of economic well-being, and there are many good reasons for this. But as we have discussed this year, it also has a number of shortcomings. An article in this week's New York Times Sunday Magazine examines some of these criticisms (excerpt: “The main barrier to getting progress has been that statistical agencies around the world are run by economists and statisticians...”) and discusses a few interesting alternatives, including a new database on 'The State of the USA' coming online soon.

Doing charity is more difficult than we think...

In 2004, the end of the WTO's Multi-Fibre Agreement flooded world markets with Chinese textiles. This accelerated the decline of the textile industry across the African continent, posing great challenges to countries that were becoming fairly competitive in the export of garments like Madagascar, Lesotho and Kenya (at least in the short-run!). A couple of years later, a well-intentioned charity is heavily criticized for trying to do the same. This is the latest installment in the debate about aid in the developing world.

While careful economic analysis could have saved Sadler some grief, the interesting part was that this whole story unfolded very quickly under the scrutiny of many. Sadler's attempt to ship used t-shirts to Africa drew the ire of economists, bloggers and aid experts. Faced with such scrutiny and criticism, he backed down, suspended his efforts and decided to harness the power of networks and social media to save face and re-invent his charity. What then, he asked, should he be doing to help Africa? Let's keep an eye out to see how this story ends.

Coming soon to an auditorium near you

Next week will bring to LSE two heavyweights in their respective fields who have been dubbed the profits of doom. Nouriel Roubini was one of the few economists to warn about the impending financial crisis while Bill Easterly never misses an opportunity to tell us how the aid industry can doom development if it continues on its current path.

While Bill shares some of Angus Deaton's concerns about the merits of experiments, his scientific and methodological approach to development economics and policy is actually not that different from that of Duflo et al. He refutes top-down policy-making arguing instead for decentralized experimentation to find out what really works in development. And yet conformity rents are pretty low in the scholarly profession (why?) so if asked, I bet he would not see it this way....

His nemesis will stop by later in the month as well. Busy times!

A household name for DV409

Here is the latest talk by Esther Duflo on how to improve development policy. She is this year's winner of the Clark medal and last year's winner of a MacArthur Genius Grant. A sign that the gap between scientific research and public policy is slowly being bridged.

HIV/AIDS and international aid effectiveness

The last post presented some optimistic data suggesting that many of the world's poor are better off. An article in today's New York Times, however, paints a more disturbing picture when it comes to HIV/AIDS in Africa.

Beyond the immediate human tragedy of the illness, the article raises a number of very difficult questions about the role of international aid. Currently the world (mostly the U.S.) spends about $10 Billion on HIV/AIDS, whereas it would cost more than twice that to control the epidemic. Given the heartbreaking scenes described in the article, this seems like the right thing to do. But is it? It costs about $11,000 to save the life of an African with HIV, but...

"Donors have decided that is too much, that more lives can be saved by concentrating on child-killers like stillbirth, pneumonia, diarrhea, malaria, measles, and tetanus. Cures for those killers, like antibiotics, mosquito nets, rehydration salts, water filters, shots and deworming pills, cost $1 to $10."

So there are trade-offs; if the objective is to save the most lives for a given budget, how should the money be allocated?

The debate also touches on questions of aid effectiveness. In DV409 we found that there was no robust macro-econometric evidence that aid increases economic growth. However from the descriptions in the article of the millions of Africans benefiting from HIV antiretrovirals financed through international aid, this would seem to be a straightforward case of aid really making a big difference.

Or is it? What might have happened in the absence of that aid? Once the price of drugs had fallen, would the recipient African governments have stepped up to fund treatments for their own citizens themselves? To what extent is aid fungible and to what extent could aid flows be subsidizing other spending on not-so-laudable priorities? These are counterfactual situations that can only be speculated on, but the article hints at an underlying situation that is complex and difficult to control:

"United States Embassy officials debated adding $38 million, he said, but cabinet-level Ugandan ministers had been caught stealing from other donors and, though forced to repay the money, were not jailed. The government “hasn’t shown the leadership or commitment to transparency to earn additional funds,” the official added.

Also, he said, Uganda contributes too little. Oil was recently discovered near Lake Albert and the government promised to spend the royalties on roads and electricity, but did not mention AIDS.

“And now the paper says they’re buying Russian jets,” another official added with obvious disgust. Uganda is negotiating for a $300 million squadron of Sukhoi fighter-bombers. "

The article really paints a picture of the international aid community stuck between the proverbial rock and a hard place - What do you think?

Are the world's poor leading ever improving lives?

We have seen several pieces of evidence this year that, contrary to popular belief and even contrary to some aggregate GDP statistics, the lives of the global poor - with some notable exceptions - seems to be improving significantly. Here is more evidence to that effect - despite the huge increase in the global population and the rise of HIV, maternal deaths have fallen to about 342,900 in 2008 from 526,300 in 1980. Besides the obvious good news (and, indirectly, the implication about the effectiveness of certain policies), the other striking point of this article was how some groups actually try to suppress favourable information about good development outcomes. What do you think? Is this justified on the grounds that good news might make people relax?

Big Banks Draw Profits From Microloans to Poor

Those of you following developments in microfinance might find this article from today's New York Times interesting. The article raises a number of troubling concerns about some microfinance programmes - but should the main concern be that banks might make a profit off of poor people? What is really the problem here? Can behavioural economics shed light on some possible solutions?

New Database on Aid Flows

AidData.org is a new online data resource on foreign aid:

The web platform links to a query-able database that contains almost 1 million development finance transfers from governments to recipients in developing countries or from international organizations to recipients in developing countries. It does not track FDI, trade, military assistance, or aid flows that originate from private foundations.

The database includes $4.2 trillion in development finance from 87 donors since 1945, and it lists nearly one million project records. AidData includes the official OECD information, but it also adds loans and grants from development banks and donors who do not report to the OECD. AidData provides much more descriptive detail on many of the largest projects, and it uses a categorization system that allows for much finer-grained coding.

Happiness, Wealth, and Sandra Bullock

I think it was Woody Allen who once quipped something to the effect of 'what's the use of happiness if it can't buy you money?!' Well, the relationship between wealth and happiness is now a respectable academic field of research and is a hot topic here at the LSE. But what does Sandra Bullock have to do with all of this? In a much emailed article today in the New York Times, columnist David Brooks writes a nice article that I thought summarised quite succinctly the collective wisdom to date emerging from this literature. How could these new approaches and insights be used to improve development policy?

Recycling Kills Trees

Many of you may remember that during DESTIN's Economics pre-sessional workshop I made the outrageous claim that recycling paper could be bad for the environment. I even backed up my claim with some circumstantial evidence that I've been accumulating over the years (I make the claim every year, and it always manages to generate a reaction...!). Now, apparently, the evidence in my favour is growing - an ex-DV409er from a few years ago, Casey Torgusson, had always remembered that argument and two days ago he emailed me this link to a media campaign for print making exactly 'my' argument. So, folks, you heard it here first!!

Alice in Wonderland

As many of you who have visited my office will know, I am a huge fan of 'Alice and Wonderland' for a number of reasons. This delightful NPR radio piece from this weekend discusses some surprising relationships between 'Alice' and mathematics.

Behavioural Economics

Here are some interesting clips with colourful descriptions of the implications of behavioural biases on economic decision-making. How can mistaken expectations, whether we are in control of our own decisions and what increases our propensity to cheat affect the type of economic development policy decisions we have been studying in DV409? Dan Gilbert and Dan Ariely discuss how behavioural biases affect our reactions to terrorism, health care, important financial decisions, and whom to go out to a bar with if you are looking for a date.

Kahneman on the other hand suggests that last impressions are as important as first impressions. How could this affect the way we design policies? Or how firms build reputations? Or how politicians get re-elected?

Sachs vs. Easterly Battle Getting More Interesting

For years Jeff Sachs has been tirelessly, and for the most part evidence-lessly, plugging his big push-types of ideas for foreign aid, all the while heckled from the stands by a more amusing, regression-toting (and much better coiffed) Bill Easterly.

However as an article in today's New York Times discusses, many of those Millennium Villages that Sachs is sponsoring are looking pretty good! There are still excellent Easterly counter-points that the article reviews, but you have to admit it is not quite as easy to roll your eyes at the Sachs camp these days... What do you think?

Tricky Trade Questions

This Op Ed piece in the New York Times this week raises some apparently very shocking questions about how productivity is measured and the supposed benefits of 'offshoring' jobs and trade. These kinds of arguments are everywhere, but is the analysis correct? In thinking about this, you might want to remember the 'Iowa car crop" example from Krugman that we discussed in early in the year. Also, what is American labour productivity? Should it reflect the average labour productivity of every human being across the globe that has contributed to the goods we produce? Is it misleading to only count U.S. based labour? What if China had machines to make the goods rather than people? Would it, as the op-ed implies, make U.S. consumers better off to choose policies that target a more 'global' labour productivity measure instead? If we decided to do that (for whatever reason), what would those policies likely look like, anyway?

It's a small world... and it is getting smaller

Some interesting maps showing world connectivity with surprising findings! The Amazon is as well-connected by ground travel as Quebec.

Some interesting links on the topic of networks and development and growth:

1) maps of business networks : www.xigit.net and www.orgnet.com. How can this affect the nature and structure of businesses?

2) social networks. How could this affect development policy?

3) specialization and export behaviour. Very cool project. How could this affect growth? But how should it affect policy?

Is Fair Trade a development strategy?

In seminar this week we had a brief discussion on how to secure "fair" labour conditions in developing countries. The traditional model is for the state to intervene in setting minimum wages and prices. More recently, an alternative model has emerged in the form of the Fair Trade Movement. Fair trade certification requires farmers or producers to comply with certain rules ( no child labour, adoption of environmental practices, participation in democratically-run cooperatives) in exchange for fair trade certification. There is very limited evidence out there on the real impact of fair trade, but for a handful of case studies that have a hard time overcoming selection bias.

One of you suggested in class a different model altogether based on increasing transparency in the supply chain. This would not impose constraints on farmers to become certified but would require companies to disclose more information to the consumer on the how it sources its products. Presumably, this would be verifiable information (if not by an individual consumer by watchdogs, NGOs, etc), creating incentives for companies to truthfully report information.

The new wave of cause-related marketing and inclusive business gives us plenty of reasons to pay attention to this issue. The number of products you can find at a supermarket these days that include some sort of claim to support either local communities, an orphanage in Haiti or an endangered species is growing exponentially. Could there be diminishing returns to this strategy? Could this type of consumer activism become a sustainable model of development and would it crowd out traditional charity or even other forms of political participation?

On the bright side, here is an organization that is striving for more transparency. Here is a more negative take on project RED, headed by Bono, a popular charity scheme.

Polar Land Reform?

An interesting issue about land reform that we didn't discuss in class is the difference between communal and individual property rights.

In recent decades, most instances of land reform and land titling projects in the developing world have been driven by the belief that communal property rights do not provide the right incentive structure for the efficient use of land. This belief was expressed by Aristotle over 2,000 years ago:

What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others. (Aristotle)

And yet, recent work in economics and political science by Elinor Ostrom has challenged this account. Her work shows that neither form of property rights can by itself secure the best outcomes in all situations.

It is often thought that concerns about communal vs individual property rights are a problem only for the developing world, as communal property rights are a sign of underdeveloped markets and institutions.

Think again

Capital controls: is the IMF changing its tune?

An article in this week's Economist Magazine discusses the evolving view of capital controls within the IMF. This case is also, I think, an interesting example of how policy prescriptions at organizations like the IMF and World Bank can and often do evolve (albeit with a lag) to reflect information from new data and observations as well as theoretical innovations from academic research.

Rogue donors, Development and Growth

Keeping with the China theme, this was in my inbox today requesting a comment. What are your thoughts?

Here are some additional thoughts on this issue. Some are strongly against rogue donors in general or only against those who blatantly violate human rights, even if indirectly, while others offer a more nuanced view of the conditions under which Chinese aid to Africa is taking place. It is interesting to see in this last article that the conditions imposed by China when providing aid to Zimbabwe - securing preferential access to infrastructure projects for Chinese companies and requiring the purchase of Chinese fertilizer- sound awfully familiar....

I came across this article on China on the CNN money site and found it remarkable for containing, in my opinion, the highest density (and maybe the highest absolute number) of errors of economics analysis in any article written by (presumably) specialist economic reporters that I have ever seen!! There is hardly anything at all here I would agree with!! For those of you are interested why, I will post my lecture notes on transition economies on the Moodle page (macro section), and after reading both please feel free to comment. What do you think; could China escape the effects of an asset price implosion by controlling prices?

Time inconsistent promises, fiscal illusions, high discount rates ... its Europe!

This story has been all over the news the past few days and illustrates that the principles of limited liability (intrinsic inability to enforce a contract), time inconsistency, and high discount rates are problems that apply to rich as well as as poor countries. What was/were the contract (s) involved here? Why can't they be enforced? Is the inability to enforce the contract related to the issue of ex ante threats that were time inconsistent in the first place? Why did Greece cook the books? If Germany bails them out, will Greece see the light and mend its ways? Why does this story sound so familiar?!

The Missing Middle

It seemed like a lot of you were extremely interested in the missing middle problem regarding the distribution of firms in developing countries (or could it just be a "problem set effect"? hmm) Here are some thoughts on the issue and examples of organizations that are already trying to address this problem...

But by far the biggest surprise I had today was this! The problem set was designed to reflect a hypothetical situation and the names of the organizations were randomly picked...we were thrilled to find out that this was a more real and pressing issue than even we thought!

Enjoy!

Mis-Targeting Aid in the War on AIDS...

A recent article in the Wall Street Journal reports a gloomy view on the war on AIDS. War on AIDS

Several of the arguments used seem straightforward in hindsight: there was way too much emphasis on treatment and very little on prevention. With scarce resources (this includes "celebrity capital" to champion a cause), even if the expansion of treatment manages to slow down growth in prevalence rates, it is not surprising that many poor countries are incapable of providing treatment to all those infected. As treatment expansion rates are lower than the rates of new infections, most countries are now in a difficult position of having to ration life-saving treatments.

Earlier in the term we discussed the political economy of global health policies and how this can distort the allocation of resources both between diseases (eg: malaria, AIDS, diarrhea) and between preventive and curative approaches.

Why has it been so difficult to allocate resources to preventive care in HIV-AIDS in order to address the real source of the problem and contain it?

Can Microcredit Make Poverty History?

How much do we really know about how microcredit works, and why is this important? While there is a fair amount of empirical evidence on how the poor are credit constrained, when we design a microcredit program, should we think about it as a tool for credit and business productivity alone, or could it be a tool for empowerment of certain groups, for increasing welfare through investments in health and education, or to spur innovation and growth? Do these effects reinforce each other, or do they cancel each other out?

Understanding the mechanisms through which microcredit can impact the poor, and who it can help the most, is critical for the design of more targeted and more cost-effective policy.

As an example, here is some dissent on the promise of microfinance driven by the lack of rigorous empirical evidence on these issues. Dissent may come in the form of challenging whether the program reaches its goals, whether it reaches the population it should

or in the form of challenging the accountability, cost-effectiveness and transparency of the industry that delivers these programs. On this last point, here is a recent controversy on a microcredit scheme that you may be familiar with, Kiva, and on whether it mis-represents the way the financial contributions they receive reach the poor.

A great contribution to the debate suggested by your colleague Antoine

The Davos Health Effect

This is perhaps one of the most important pledges coming out of Davos this year. http://ibnlive.in.com/news/bill-gates-promises-10-billion-for-vaccines/109406-17.html

This poses an interesting question about markets and how they work to develop public goods like vaccines. For years, pharmaceuticals have had the capacity to develop vaccines that would have prevented millions of deaths in the developing world. So why hasn't this happened?

Pharmaceuticals had little incentive to develop these vaccines as they would be serving a low-income segment of the market that would not be able to afford high-priced preventive care.

This is one area in which the work of economists has been highly influential in policy circles!

Michael Kremer from Harvard University has advocated for years that we need to intervene in this market to align the incentives of pharmaceuticals (profit), with those of policy-makers and donors (promoting well-being in the developing world). Michael has suggested that donors pledge to guarantee the demand for vaccines aimed at "developing country diseases", to create incentives for the pharmaceuticals to develop them. You can check out his work here:

http://www.economics.harvard.edu/faculty/kremer/files/AMCHealthEconomicsFinal.pdf

http://www.economics.harvard.edu/faculty/kremer/files/innovationsFinal.pdf

http://www.bepress.com/ev/vol3/iss3/art1/

The World Economic Forum is in full swing in Davos, Switzerland.

http://www.weforum.org/en/index.htm

If you think that this is just an obscure meeting of bankers in a swanky ski resort to discuss global banking, think twice! Many important decisions concerning development problems are being made in Davos as the private sector becomes more directly involved in development policy. Treading over what was once the domain of NGOs and international agencies, private companies are now increasingly engaged in providing technical assistance to governments, in devising policies to deal with failed states, in running microfinance initiatives and even in delivering health care and education services to the poorest of the poor.

It is therefore important to understand the way business approaches complex problems in development. Take a look at what have been considered breakthrough ideas for 2010:

http://hbr.org/2010/01/the-hbr-list-breakthrough-ideas-for-2010/ar/1

plenty of good ideas for dissertation topics...

Reconstructing Haiti

Economists weigh in on how to get Haiti back on its feet.

Paul Collier, an economist at Oxford University, is actively involved in planning the reconstruction of Haiti as an advisor to several international agencies. Among other things, Collier suggests light manufacturing and export zones as a potential model for economic development in Haiti.

But perhaps the most controversial part of his plan is who would actually implement it. Collier argues that the Haitian government is in no position to take charge. As a result, the best way forward is to create a temporary development authority with wide powers to govern, under the auspices of the UN or an ad hoc group (US, Canada, EU or Brazil among others), spear-headed by an international figure like Bill Clinton. (or something along these lines...)

http://www.focal.ca/pdf/haiticollier.pdf

Paul Romer, an economist at Stanford University, has recently been advocating the development of charter cities, where people can live and work more freely, in an environment defined by better institutions and rules. To learn more about this revolutionary idea see ( http://www.ted.com/talks/paul_romer.html) and (http://freakonomics.blogs.nytimes.com/2009/09/29/can-charter-cities-change-the-world-a-qa-with-paul-romer/).

Haiti is a clear example of how misgovernance affects development so not surprisingly, the possibility of creating a charter city in Haiti became an appealing idea for some! Paul is now quelling the enthusiasm over this possibility given the level of devastation the country faces.

http://chartercities.org/blog/98/charter-cities-versus-humanitarian-military-occupation

Michael Clemens, an economist at the Center for Global Development, considers immigration policy in the West to be the best non-interventionist approach to rebuilding Haiti:

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/22/AR2010012202274.html

These are three great examples of how simple economic ideas can inform policy and yet, more often than not, the ultimate challenge still lies in the political economy of policy implementation. Let's stay tuned because the debate is just starting...

A great suggestion by Stefan for those who are interested in the topic:

http://www.nytimes.com/2010/01/17/opinion/17rebuildhaiti.html

Dambisa Moyo at LSE

Dambisa Moyo is part of a growing group of African scholars and thinkers who want to change the way we think about Africa, its potential and its future. If you can't make it to the talk, here is an entertaining clip of Dambisa being interviewed by Bill Easterly and sharing her views on Bono and Angelina.

http://www.youtube.com/watch?v=lyV5KBl6siI&feature=PlayList&p=09F0E715F9DBAC80&index=0&playnext=1

Why Aid Is Not Working and How There Is Another Way for Africa

26 January 2010, 6:30pm

The economist Dambisa Moyo argues that millions are poorer because of aid.
Speaker: Dambisa Moyo, economist and author of Dead Aid: Why Aid is Not Working and How There is a Better Way For Africa
Organiser: London School of Economics
Venue: Old Theatre, Old Building, London School of Economics, Houghton Street, London WC2.
Website: http://www.lse.ac.uk/events
Email: events@lse.ac.uk