Category: Economic Growth

“Not Even an Unchallenged Autocrat Can Repeal the Laws of Supply and Demand”

 

   "Essentials like bread, sugar and cornmeal have all but vanished in Zimbabwe after the government commanded merchants nationwide to counter 10,000-percent-a-year hyperinflation by slashing prices in half and more. The shelves at this grocery store are mostly bare."  Source of the caption and the photo:  online version of the NYT article cited below.

 

(p. A1)  BULAWAYO, Zimbabwe, July 28 — Robert G. Mugabe has ruled over this battered nation, his every wish endorsed by Parliament and enforced by the police and soldiers, for more than 27 years. It appears, however, that not even an unchallenged autocrat can repeal the laws of supply and demand.

One month after Mr. Mugabe decreed just that, commanding merchants nationwide to counter 10,000-percent-a-year hyperinflation by slashing prices in half and more, Zimbabwe’s economy is at a halt.

Bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs who denuded stores like locusts in wheat fields. Meat is virtually nonexistent, even for members of the middle class who have money to buy it on the black market. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.

Manufacturing has slowed to a crawl because few businesses can produce goods for less than their government-imposed sale prices. Raw materials are drying up because suppliers are being forced to sell to factories at a loss. Businesses are laying off workers or reducing their hours.

The chaos, however, seems to have done little to undermine Mr. Mugabe’s authority. To the contrary, the government is moving steadily toward a takeover of major sectors of the economy that have not already been nationalized.

. . .

(p. A8)  . . .  Most of the goods on store shelves this week were those people did not need or could not afford — dog biscuits; ketchup; toilet paper, which has become a luxury here; gin; cookies.

At various locations of TM, a major supermarket chain, aisles of meat coolers were empty save a few plastic bags of scrap meat for dogs. Flour, sugar, cooking oil, cornmeal and other basics were not to be found. A long line hugged the rear of one store, waiting for a delivery of the few loaves of bread that a baker provided to stay in compliance with the price directive.

The government’s takeover of slaughterhouses seems ineffectual: this week, butchers killed and dressed 32 cows for the entire city. Farmers are unwilling to sell their cows at a loss.

The empty grocery shelves may be the starkest sign of penury, but there are others equally worrisome. Doctors say that at most, there is a six-week supply of insulin and blood-pressure medications. Less vital drugs like aspirin are rarities.

“You can boil willow bark, just as Galen did,” one physician quipped.

 

For the full story, see: 

MICHAEL WINES.  "Caps on Prices Only Deepen Zimbabweans’ Misery."  The New York Times (Thurs., August 2, 2007):  A1 & A8.

(Note:  ellipses added.)

 

   "Women in Esigodini, Zimbabwe, cook melons into mash.  Meat has been so scrace that melons have been their main source of nutrition."  Source of caption:  print version of the NYT article cited above.  Source of photo:  online version of the NYT article cited above.

 

Measuring Trends in Government Corruption

 

CorruptionWorldBankGraph.jpg   Source of graph:  online version of the NYT article quoted and cited below.

 

(p. A6)  Africa, often stereotyped as a place of epic corruption and misrule, emerges in a World Bank report as a continent of great variety, with some countries — Tanzania, Liberia, Rwanda, Ghana and Niger — making notable progress over the past decade, and others — Zimbabwe, Ivory Coast and Eritrea — moving backward.

The report, released yesterday and based on the most comprehensive data on governance in more than 200 countries, found that not just poor countries struggled with corruption and flawed government.

. . .

The report, “Governance Matters, 2007: Worldwide Governance Indicators 1996-2006,” was written by Mr. Kaufmann and the World Bank researchers Aart Kraay and Massimo Mastruzzi. It was posted on the Internet at www.govindicators.org. Data came from an ideologically diverse array of groups that included Freedom House, Transparency International, the Heritage Foundation, Reporters Without Borders and the State Department.

“This is the best data source on governance now,” said Steven Radelet, a senior fellow at the Center for Global Development, a Washington research group. “It is of huge importance in development. Ten years ago, there was no data. Fifteen years ago, we didn’t talk about this stuff.”

. . .  

The report found that the gains and losses balanced out such that the average quality of governance worldwide over the past decade was little improved.

 

For the full story, see: 

CELIA W. DUGGER.  "World Bank Report on Governing Finds Level Playing Field."  The New York Times  (Weds., July 11, 2007):  A6. 

(Note:  ellipses added.)

 

Effective Foreign Aid

 

   "HOMELAND SECURITY.  Many women in Mexico, like Estela Palacio Calzada, with her granddaughter, rely on money sent back from the U.S. "  Source of caption and photo:  online version of the NYT article quoted and cited below.

 

Adam Smith argued in The Theory of Moral Sentiments, that altruism is more effective when it is directed toward those we know best–mainly our family, and immediate neighbors.

A policy implication may be that the most effective foreign aid is to have more open immigration policies, that then permit the migrants to send back funds to those in their home country who they know best.

 

THE money flows in dribs and drabs, crossing borders $200 or $300 at a time. It buys cornmeal and rice and plaid private school skirts and keeps the landlord at bay. Globally, the tally is huge: migrants from poor countries send home about $300 billion a year. That is more than three times the global total in foreign aid, making “remittances” the main source of outside money flowing to the developing world.

Surveys show that 80 percent of the money or more is immediately spent, on food, clothing, housing, education or the occasional beer party or television set. Still, there are tens of billions available for savings or investment, in places where capital is scarce. While remittances have been shown to reduce household poverty, policymakers are looking to increase the effect on economic growth.

Some migrants, for instance, send home money to savings accounts at small bank-like microfinance institutions, which use the resulting capital pool to lend to local entrepreneurs.

 

For the full story, see:

JASON DePARLE. "Migrant Money Flow: A $300 Billion Current."  The New York Times, Week in Review Section  (Sun., November 18, 2007):  3.

 

   Source of map graphic:  online version of the NYT article quoted and cited above.

 

Strong Global Support for Free Markets

 

FreeMarketsPositiveViewTable.gif   Source of table:  "World Publics Welcome Global Trade — But Not Immigration." Pew Global Attitudes Project, a project of the PewResearchCenter. Released: 10.04.07 dowloaded from: http://pewglobal.org/reports/display.php?ReportID=258

 

(p. A10) WASHINGTON, Oct. 4 — Buoyed and battered by globalization, people around the world strongly view international trade as a good thing but harbor growing concerns about its side effects: threats to their cultures, damage to the environment and the challenges posed by immigration, a new survey indicates.

In the Pew Global Attitudes Project survey of people in 46 countries and the Palestinian territories, large majorities everywhere said that trade was a good thing. In countries like Argentina, which recently experienced trade-based growth, the attitude toward trade has become more positive.

But support for trade has decreased in recent years in advanced Western countries, including Germany, Britain, France and Italy — and most sharply in the United States. The number of Americans saying trade is good for the country has dropped by 19 percentage points since 2002, to 59 percent.

“G.D.P. growth hasn’t been as dramatic in these places as in Latin America or Eastern Europe,” said Andrew Kohut, president of the Pew Research Center, referring to gross domestic product, the total value of the goods and services produced in a country. “But worldwide, even though some people are rich and some are poor, support for the basic tenet of capitalism is pretty strong.”

 

For the full story, see: 

BRIAN KNOWLTON. "Globalization, According to the World, Is a Good Thing. Sort Of."  The New York Times   (Fri., October 5, 2007):  A10. 

 

United States Cotton Subsidies Hurt Poor African Farmers

 

Dan Sumner did his dissertation many years ago under T.W. Schultz, a great economist, and a great human being.  (Dan was a friend of mine in grad school–we were members of a club that gathered once a month to discuss the works of Bertrand Russell.) 

 

Eliminating billions of dollars in federal subsidies to American cotton growers each year would reduce American cotton production and exports, raise world prices by about 10 percent and modestly improve the incomes of millions of poor cotton farmers in Africa, according to a new study by Oxfam, the aid group.

Agricultural economists at the University of California, Davis, who conducted the study for Oxfam, found that a typical farm family of 10 in Chad, Benin, Burkina Faso or Mali — Africa’s major cotton producers — that now earns $2,000 a year would have an extra $46 to $114 a year to spend if American subsidies were removed.

“Fifty to a hundred bucks is a lot of money to these people,” said Daniel Sumner, chairman of the Department of Agricultural and Resource Economics at the university. “It’s not right to think that changing U.S. subsidies will turn very poor people into middle-class households by our standards. That’s a generational process. But it’s money in their pocket.”

. . .

Dani Rodrik, an economist at Harvard who is skeptical of the importance of reduced agricultural subsidies, said he found Oxfam’s new estimates credible, but said the gains forecast were relatively small.  . . .

. . .

But the authors of the report said that removing American subsidies would permanently shift the price of cotton upward, with prices subsequently fluctuating around a higher average. 

 

For the full story, see: 

CELIA W. DUGGER.  "Oxfam Suggests Benefit in Africa if U.S. Cuts Cotton Subsidies."  The New York Times  (Thurs., June 21, 2007):  A12.

(Note:  ellipses added.)

 

Human Capital and Rule of Law Are “Largest Share of Wealth”

 

Two years ago the World Bank’s environmental economics department set out to assess the relative contributions of various kinds of capital to economic development. Its study, "Where is the Wealth of Nations?: Measuring Capital for the 21st Century," began by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal and mineral resources), cropland, pasture land, forested areas and protected areas. Produced, or built, capital is what many of us think of when we think of capital: the sum of machinery, equipment, and structures (including infrastructure) and urban land.

But once the value of all these are added up, the economists found something big was still missing: the vast majority of world’s wealth! If one simply adds up the current value of a country’s natural resources and produced, or built, capital, there’s no way that can account for that country’s level of income.

The rest is the result of "intangible" factors — such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth. In fact, the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries."

Once one takes into account all of the world’s natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: "Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity."

 

For the full commentary, see: 

RONALD BAILEY.  "Secrets of Intangible Wealth."  The Wall Street Journal  (Sat., September 29, 2007):  A9.

 

How the Congo Government ‘Inspires’ Technology Entrepreneurs: More on Why Africa is Poor

 

KapingaMichelineCellPhone.jpg  "Micheline Kapinga of Kamponde, Congo, uses a cellphone on the only site in the village that is sometimes able to capture a signal."  Source of caption and photo:  online version of the NYT article cited below. 

 

I AM just back from Tanzania in East Africa.

In the mornings, disregarding the protests of the armed guards at my lodge near Arusha, I jogged along muddy footpaths. After the heavy rains, and under a low, misty sky, the fields looked as ruined as a battlefield. Very poor farmers and their children stared curiously at me as I passed.

In the afternoons, I attended the TEDGlobal 2007 conference, held by the Technology, Entertainment and Design organization in the modern Ngurdoto Mountain Lodge. The contrast between the two experiences troubled me.

TED conferences, mostly held in Monterey, Calif., are invitation-only affairs, are attended by the aristocracy of Silicon Valley and are known for their adventurousness in drawing together wildly disparate trends in technology, business and the arts.

On this occasion, Bono, the Irish rock star and champion of African causes, had persuaded the conference’s organizer, Chris Anderson, to invite the usual crowd, as well as African entrepreneurs, activists, health care professionals and artists to this tropical, leafy region midway between the Serengeti Plain and Mount Kilimanjaro.

. . .

At least one of the African attendees of the conference was representative of the kind of technological entrepreneurialism that the show advocated.

Alieu Conteh, the chairman of Vodacom Congo, was born in Gambia, in West Africa, 55 years ago and moved to Congo in 1981. For years, he was a successful coffee buyer and exporter.

Congo is about the size of Western Europe and has an estimated population of 65 million people. It is one of the least-developed nations in the world, with less than 300 miles of roads, most of them in poor condition.

In 1997, Mr. Conteh recalled in an interview, he heard Laurent D. Kabila, then the country’s president, deliver a speech in which he called upon his countrymen to rebuild Congo’s infrastructure after the 30-year dictatorship of Mobutu Sese Seko. Mr. Conteh, who had no experience in telecommunications, said he was inspired. He decided to build the nation’s first GSM (Global System for Mobile communications) digital network.

At the time, according to Mr. Conteh, fewer than 10,000 people living in Congo — mainly business people, foreigners and government employees — had mobile handsets. They paid $7 to $10 a minute to make a call, using an older technology. Less than 15,000 homes had a telephone landline.

Mr. Conteh said he went, cap in hand, to the minister of communications to ask for the country’s first GSM license. In January 1998 he got it — but he first had to pay the government a license fee of $100,000. Over the years, and with little explanation, he said, the government, which is often terribly short of money, increased the license fee, first to $400,000, then $2 million.

  

For more of the commentary, see: 

JASON PONTIN.  "SLIPSTREAM; What Does Africa Need Most: Technology or Aid?"  The New York Times, Section 3  (Sun., June 17, 2007):  3. 

(Note:  ellipsis added.)

 

David Warsh on Paul Romer’s ‘Triumph of Formalism’

 

  David Warsh prepares to speak as Sandra Peart introduces him at the HES meetings at George Mason.  Source of photo:  me. 

 

David Warsh in his plenary address to the History of Economics Society on June 9, 2007, recounted a version of the account that he gives in his 2006 book Knowledge and the Wealth of Nations. (A key part of this story was also told in an article in the Sunday magazine section of The New York Times.)

Here I concentrate on the plenary lecture presentation.

Warsh said that he is the first to give Romer his due; that Romer has managed to alienate the economists both at Chicago and at MIT. (Well, maybe, but Tom Friedman sure gives Romer a lot of attention and praise in his best-selling The World is Flat.) Warsh also said that he (Warsh) has been accused of writing a hagiography of Romer.

Warsh identifies the key contribution of Romer as being that he identifies the key properties of knowledge, namely that it is nonrivalrous and nonexcludible. He claims that Romer was the first to see this, and so is responsible for beginning the crucial field of the economics of knowledge.

Further, Warsh claims that the economics profession only achieved this insight when Romer found a way to incorporate knowledge in his formal models.

This story, Warsh says, is a triumph of formalism; only through formalism could such an important advance have been made.

At this point in the presentation, I became rather annoyed—I had my hand up during most of the question session, but Warsh chose not to call on me.  (In fairness, I was seated on his far left, though at the front, so it is possible that he did not see me.)

What I told Warsh afterwards was that the lesson from this episode is the exact opposite of the one he claims—it is not an example of the triumph of formalism, but rather an example of the shame of formalism.

Long before Romer, others had pointed out the nonrivalry and nonexcludibility of knowledge. E.g., Arrow briefly in a famous essay (1962), and Harry Johnson at greater length in an obscure essay (1972).

The requirement that serious knowledge requires formalization before it is taken seriously, meant that economists ignored for several decades, what had been nonformally known. It is to the shame of formalism that for decades useful issues were ignored.

And even more strongly, to say that Romer is responsible for founding the economics of knowledge is to add insult to injury to the economists who had actually founded this field: economists such as Richard Nelson, Nathan Rosenberg, Zvi Griliches and Edwin Mansfield.

Not only was their work largely ignored for decades, but a leading advocate and exemplar of the formalist methodology responsible for the ignorance, is himself given credit for their achievements.

 

The reference to Warsh’s book, is:

Warsh, David. Knowledge and the Wealth of Nations: A Story of Economic Discovery. New York: W. W. Norton & Co., 2006.

 

For further information on the founders of the economics of science and technology, one could consult:

"Economics of Science." In Steven  N. Durlauf and Lawrence E. Blume, The New Palgrave Dictionary of Economics, 2nd ed., forthcoming, 2008, Basingstoke and New York:  Palgrave Macmillan, reproduced with permission of Palgrave Macmillan. This article is taken from the author’s original manuscript and has not been reviewed or edited. The definitive published version of this extract may be found in the complete New Palgrave Dictionary of Economics in print and online, forthcoming, 2008. 

"The Economics of Science."  Knowledge and Policy 9, nos. 2/3 (Summer/Fall 1996): 6-49.

"Edwin Mansfield’s Contributions to the Economics of Technology."  Research Policy  32, no. 9 (Oct. 2003):  1607-1617.

"Zvi Griliches’s Contributions to the Economics of Technology and Growth."  Economics of Innovation and New Technology 13, no. 4 (June 2004):  365-397.

 

The full reference on the Arrow article, is: 

Arrow, Kenneth J.  "Economic Welfare and the Allocation of Resources for Inventions."  In Richard R. Nelson, ed., (National Bureau of Economic Research), The Rate and Direction of Inventive Activity:  Economic and Social Factors.  Princeton:  Princeton University Press, 1962, pp. 609-625.

 

The full reference on the Harry Johnson article, is: 

Johnson, Harry G.  "Some Economic Aspects of Science."  Minerva 10, no. 1 (January 1972):  10-18.

 

Mugabe Driven by Quest for Power, More than from Paranoia, or Marxism: More on Why Africa is Poor

 

No one outside of Mr. Mugabe’s inner circle, of course, can say with certainty why he has pursued policies since 2000 that have produced economic and social bedlam. For his part, Mr. Mugabe says Zimbabwe’s chaos is the product of a Western plot to reassert colonial rule, while he is simply taking steps to fight that off.

Among many outside that circle, however, the growing conviction is that Zimbabwe’s descent is neither the result of paranoia nor the product of Mr. Mugabe’s longstanding belief in Marxist economic theory. Instead, they say, Zimbabwe is fast becoming a kleptocracy, and the government’s seemingly inexplicable policies are in fact preserving and expanding it.

. . .

Mr. Mugabe’s government declares currency trading illegal, but regularly dumps vast stacks of new bills on the black market, still wrapped in plastic, to raise foreign exchange for its own needs, business leaders and economists say.

The nation’s extraordinary hyperinflation, last pegged by analysts at 10,000 percent a year, is an economic disaster that, by all accounts, the government needs to address. Yet after it ordered merchants in July to slash their prices, cadres of policemen and soldiers moved into shops to enforce the new controls, scoop up bargains and give friends and political heavyweights preferential access to cheap goods.

. . .

Mr. Mugabe’s 25-bedroom mansion in Borrowdale, the gated high-end suburb of Harare, the capital, is the locus of a boomlet that has spawned luxury homes for government and party officials. (Mr. Mugabe said his mansion was built with goods and labor donated by foreign governments.)

Mr. Mugabe arrived to open Zimbabwe’s Parliament this month in a Rolls-Royce. Equally telling, the legislature’s parking lot was crammed with luxury cars.

Such riches have been accompanied by a steep decline in living standards for just about everyone else. The death rate for Zimbabweans under the age of 5 grew by 65 percent from 1990 to 2005, even as the rate for the world’s poorest nations dropped. Average life expectancy here is among the world’s lowest, according to the United Nations.

 

For the full commentary, see: 

MICHAEL WINES.  "News Analysis; Zimbabwe’s Chaos: The Powerful Thrive."  The New York Times (Fri., August 3, 2007):  A8. 

(Note:  ellipses added.)

 

Pyramids Can Take Many Forms: More on Why Africa is Poor

 

My Wabash economics prof Ben Rogge used to say that rulers have always liked to spend the people’s money to build pyramids intended to proclaim the glory of the ruler.  But in modern times the rulers have to be a tad more subtle than the Egyptians, so, for instance, in Brazil they build Brazilia, instead of actual pyramids. 

And according to the story below, summarized from the May 2007 IEEE Spectrum, in Africa, they build large dams.

 

Small dams could help deliver electricity to much of Africa’s population, but since they lack the prestige of larger-scale projects, few of them get built.

. . .

In Uganda, which has plenty of rivers and streams to supply power, Mr. Zachary describes how a small water-power generator, supplied by a small nearby dam, delivers 60 kilowatts of energy to a nearby hospital. The generator would barely be enough to run a single magnetic-resonance imaging machine, a staple in Western hospitals. But it does provide enough power to light the hospital and keep basic equipment running for the 100 nurses and doctors who work there. The entire generation system cost $15,000 to build.

Still, Africa’s leaders are unlikely to abandon their preference for big public works, says Mr. Zachary, since they create thousands of construction jobs and reinforce the political might of the central government. 

 

For the full summary, see: 

"Informed Reader; ENERGY; Small Dams Might Help to Electrify Africa."  The Wall Street Journal (Tues., May 8, 2007):  B10. 

(Note:  ellipsis added; the original article in IEEE Spectrum is by G. Pascal Zachary.)

 

More Millionaires

 

The ranks of the richest Americans expanded last year at an increased pace, driven by a strong economy, but that growth is expected to moderate in coming years, according to a new study.

The 11th annual World Wealth Report, compiled by Merrill Lynch & Co. and Capgemini Group, shows that in 2006, the U.S. population of high-net-worth individuals — those with at least $1 million in investible assets, excluding their primary residences — rose 9.4% to 2.92 million. In 2005, the same population increased 6.8% to 2.67 million.

Robert McCann, president of Merrill Lynch Global Private Client Group, attributed the increased pace of wealth generation to gains in economic output and continued growth in the world’s stock markets, two primary drivers of wealth creation.

 

For the full story, see:

DAISY MAXEY.  "Ranks of Rich in U.S. Grow at Faster Pace."   The Wall Street Journal   (June 28, 2007):  D6.