India's growth dilemma in a graphic

I am labouring this point. Cities are already India's economic growth engine. In the years ahead, they are estimated to contribute 70% each of the national economic growth and all new jobs created. But rural India, where 65% of the population lives, takes up the major share of public spending and administrative energies. The graphic below summarizes India's public policy priorities.



This skewedness may be guilty of killing the goose that lays the golden eggs. India needs to grow near the double digit rate so that its tax revenues and new jobs created grow fast enough to meet the massive and growing demand. Higher tax revenues would provide governments with the necessary resources to expand public investments, both in rural and urban areas. Faster pace of job creation would provide adequate opportunities to accommodate the rapid additions to the workforce. It would ensure that the danger of our demographic dividend turning sour is averted. And, as I have blogged earlier, transfers are a function of tax revenues. Higher the tax revenues, more the resources available to reduce poverty and mitigate any rise in inequality through effective redistribution policies.

Unfortunately, both state and district-level public policy and public spending (investments and welfare spending) are disproportionately focussed on rural India. Much more needs to be done for rural development. But a more effective strategy to achieve that objective would be to strengthen the urban growth and job creation engine and then utilize the resultant growth in tax revenues to promote effective rural development.

Doubling per capita incomes

This graphic in The Economist highlights how average incomes in developing economies are growing more quickly than at any previous time in history.

Some observations on the Great Stagnation

An interesting article in The Atlantic by Derek Thompson where he highlights a deep productivity decline in the US economy.

He draws attention to the increasing deprivation of middle class Americans despite food, clothing, and entertainment getting cheaper and forming a smaller share of household budgets. He attributes this to the rising prices of health care, education, housing, and energy,

"You could say that everything is getting cheaper except for almost everything you need. We need places to live, energy to move, education to move up, and insurance to stay healthy. The productivity revolution isn't doing much to make those things more affordable. Even after decades of building up and building out, homes and apartments are still prohibitively expensive in our most productive cities. Adjusted for inflation, home energy costs doubled between 1967 and 2003, and continued to rise in the last ten years. The cost of medical insurance is growing faster than wages. Tuition and higher education fees are growing even faster."

The graphic below highlights how the rise in the prices of these items have far exceeded the general wage increases.



Thompson points to a graphic from a McKinsey report which shows that more than half of total productivity growth comes from computers and information technology and practically zero have come from health care, education, and housing. It is therefore no surprise that health and education have to keep hiring people to do the same job, even as elsewhere the same job is being done by far fewer people than earlier. The resultant pressure to keep prices up is therefore unexceptionable.



Health care and education are susceptible to Baumol's cost disease, where the wages of workers rise even in jobs that have experienced no increase of labor productivity since the wages of workers in other jobs which did experience such labor productivity growth have risen. He attributes the productivity weakness with health care and education to their inherent nature - both are local services that are labor intensive - and are therefore not amenable to any external competition.

I have three observations from this

1. Interestingly, this brings us to the issue of increasing productivity in both these services. How do we get the same teachers and doctors to cover more students and patients? How do we leverage technology to reduce the cost of service delivery in both these services?

All available evidence and experience of other sectors indicates that this can be achieved only through competition, direct or indirect. One, atleast some of these services should be outsourced or off-shored and technology leveraged to deliver the same or higher level of service, so that the cost of service delivery comes down. Or else, there should be direct supply-side competition in these markets. This can be brought about by direct participation of foreign teachers and doctors in the US labour markets.

Either way, there appears to be a strong possibility for convergence of interests between the developed and developing economies. As I had blogged earlier, immigration offers the greatest poverty eradication potential. The same immigrants also offer the best chance for America (and many other developed economies) to ward off the Great Stagnation's impact on their middle class. In the circumstances, labour mobility, atleast in knowledge-based fields like education and health care has the potential to be win-win trade for all sides.

2. The changing dynamics of deprivation from that caused by food, clothing and basic consumer durables, to one that is caused by the prohibitive cost of education, health, housing, and energy, has implications for many developing countries. In fact, in countries like India, as a generation of people emerge out of the traditional consumption poverty, they are set to face the poverty wall erected by these newer requirements.

As economies and jobs become more knowledge and skill-based, the college education premium (and more specifically those related to certain elite colleges) would rise, and if supply fails to keep up with demand, as is most certain to be the case if the prevailing trends continue, then access to education will be a major source of middle-class deprivation. In health care, since technology will improve and expand its scope but with a rising cost, affordability will emerge as a major problem.

Urban housing is already showing signs of reaching breakdown point, as affordable housing in most of our major cities is already beyond the reach of a large majority of the middle class. As economy becomes more energy intensive and people start using more of it, it will become untenable for utilities to supply energy at its current cheap and subsidized rates. This energy requirement will go beyond household electricity use to include fuel used for private vehicles and cooking gas. The share of income that gets spent on energy will only increase.

In view of all this, public policy has an important role in promoting the development of these sectors. Fortunately, countries like India have just about time to put in place these policies, before the real middle-class deprivation problem will materialize. Education will have to be carefully deregulated to attract greater private investments and government will have to dramatically increase its investments in secondary and higher education. Most importantly, policy will have to catalyze the development of a vibrant market for financing education.

The only way to sustainably and meaningfully address the problem of rising health care costs is to put in place a nation-wide health insurance system. This has to be complemented by substantial investments in public secondary and tertiary care facilities, which will provide the critical "public option" that is necessary to improve competitiveness and keep prices under control.

Housing will be a much more difficult challenge to surmount. In simple terms, urban immigration is simply much faster than anything that can be done to increase supply. The only way to address the supply-side is to deregulate urban planning regulations and permit massive vertical growth, while simultaneously providing the infrastructure to support that growth. Urban slums will have to go vertical. Government policy will have to catalyze the development of an adequate stock of affordable urban housing. Instead of the prevailing paradigm of urban home ownership, a more appropriate strategy would be for governments to themselves build and encourage private developers to construct these housing stocks which could then form the platform for a liquid and vibrant market for rental housing.

The requirements of energy is tied to purchasing power since both consumption of all energy sources will increase and their prices too will rise as subsidies get withdrawn. Consumers' pockets will face the impact of this twin effect. This cannot be easily mitigated with any one policy. Public transport facilities will have to improve dramatically, so as to minimize the reliance on private transport which will become increasingly expensive. Further, even if governments want to susidize people's energy consumption, subsidizing public transport may be one of the least distortionary and most effective means to do so. Piped gas will reduce many of the overheads and reduce the cost of cooking gas.

3. Derek Thompson argues that the middle class have been able to manage with relatively less problems though from 1970 to 2010 despite real earnings of middle class men falling 28% even as the real GDP doubled. This has been facilitated by people working harder (typical two-parent family worked 26 percent more hours in 2010 than in 1975) and the sharp increase in women entering the workforce and thereby nearly doubling family incomes. However, both these trends have now run their course leaving the middle class with nothing to fall back. In the circumstances, without higher wage growth, the deprivation will only increase.

This requires a more balanced distribution of the gains from economic growth. Inequality and the forces that have been responsible by accelerating its widening, need to be reined in. Or else, the middle class will face a hollowing out of their incomes, and income and social mobility will be increasingly constrained.

The Economics of Migration

Removal of cross-country barriers to labour mobility has often been described as the largest single policy intervention to address global poverty and the last remaining prominent distortion in the global economy.

Micheal Clemens, one of the leading researchers on labor migration and who has described it as the "world's greatest arbitrage opportunity", has an excellent summary of the literature on migration in the current issue of JEP. His conclusion about the benefits of labor migration is unambiguous,

"The available evidence suggests that the gains to lowering barriers to emigration appear much larger than gains from further reductions in barriers to goods trade or capital flows — and may be much larger than those available through any other shift in a single class of global economic policy... For the elimination of trade policy barriers and capital flow barriers, the estimated gains amount to less than a few percent of world GDP. For labor mobility barriers, the estimated gains are often in the range of 50–150 percent of world GDP. In fact, existing estimates suggest that even small reductions in the barriers to labor mobility bring enormous gains."

He finds "trillion dollar bills on the sidewalk" from liberalizing restrictions on emigration. The paper has a nice summary of the estimated benefits from emigration.



He argues that research on migration has hitherto focussed on remittances and "brain drain", and paid limited attention to the considerable direct and indirect human capital externalities that arise when people migrate from poorer countries to richer in search of livelihood opportunities. More fundamentally, migration research has focussed on the effects of immigration but little on emigration. He therefore sets out the agenda for work on this field,

"It should be a priority of economic research to seek a better characterization of the gains to global labor mobility and to investigate policy instruments to realize a portion of those gains. The four questions in this paper suggest one structure for that agenda. We clearly need a better theoretical and empirical understanding of human capital externalities; the dynamics of labor demand under large-scale migration flows; the magnitude and mechanisms of the effect of workers’ location on their productivity, relative to the effect of workers’ inherent traits on their productivity; and the policy instruments that might make greater labor mobility possible."

As Prof Clemens writes, the reason why "migration packs such an economic punch" is that a worker's productivity depends much more on location than any other factor, including skill. An earlier study (see also here), profiled the wage gaps of Peruvian workers with different profiles working in Peru and as immigrants in the US, and found massive differentials. The same would apply to workers from any other developing country migrating to developed economies and doing the same occupation. Differences in work environments, regulatory environments, legal systems, technology spill-overs, proximity to other high-productivity workers, etc explain this difference. The graphic below captures the differential for Peruvian domestic workers and immigrants.



The biggest challenge in achieving success with reduction of barriers to emigration will be political. In particular, it immediately raises the regular bogeys - loss of jobs for the destination country labour, downward pressure on wages there, impact on national security, and so on. Surmounting these very formidable and entrenched fears will be a big challenge before the issue of barriers to emigration can be addressed to some level of satisfaction.

The current weakness in developed economies is a dampener to immigration. The political opposition to immigration can be blunted only when the economy is flourishing and when the domestic workers in these developed economies are themselves not constrained by unemployment. At a time when protectionism is slowly creeping into international trade, policies that favor relaxation of restrictions on labour mobility may generate intense opposition in these economies.

However, the silver-lining could be the demographic trends in many developed economies. As the demographic profiles of these economies shift upwards, they will experience labour shortages across many areas. Once this starts affecting their economies, like what is already happening in Japan and parts of Western Europe, policies that favor immigration will find greater acceptance. This shortage is more likely to manifest itself in less knowledge-based and lower skilled professions, especially in services, which the older-aged workers will not be able to perform. Fortunately, these are also precisely the same labour categories where the marginal gains from immigration are the largest.

There are possibly two other reasons why this differential will be predominant among lower skilled than high-skilled knowledge workers. In case of the later, as part of globalization and demand in advanced economies, restrictions on labour mobility have been eased considerably over the past two decades. This has also had the effect of lowering arbitrage opportunities in their wages. Further, many of these activities are not location based and could be easily off-shored. In contrast, many semi- and lower-skilled professions in the services sector cannot be off-shored, and their persistent high wage differentials coupled with the impending labour shortage (in developed economies) will offer attractive opportunities for migrants.

On rights-based development and populist quick-fixes

Pranab Bardhan has a brilliant essay in Boston Review that strikes an immediate chord with development discourse in India. Instead of commenting, let me reproduce portions.

He appreciates the concern among civil society groups and activists at the extreme poverty and vulnerability of the marginalized and their enthusiasm for a rights-based approach (as against the dole-based approach of traditional welfare state). However, he cautions against the prevailing craze for it,

"It (rights-based approach) serves to raise consciousness among the poor and the vulnerable about their entitlements, and remind them that they are not mere supplicants to politicians and bureaucrats. In a weak administrative and institutional context, however, the NGO approach of uncompromising support for citizen’s rights can cause more harm than good. If the structure for implementing some of these rights is weak and corrupt, then the rights are hollow and promoting them breeds cynicism."

In the context of India where courts have joined civil society groups in taking up the cause of the poor and vulnerable, he strikes a much-needed but politically incorrect note of caution,

"India is already littered with hundreds of unenforced or spasmodically enforced court injunctions, some of them on the implementation of rights. This proliferating judicial activism, egged on by the rights-based movement and the media, may end up, for all its good intentions, undermining the credibility and legitimacy of the judiciary itself."

Prof Bardhan hits the nail on its head when identifying the real limitation of civil-society activism driven rights-based approach to development in societies where the ability of governments to deliver is severely constrained. He writes,

"The social activists share with left-wing unions a preoccupation with redistribution, and a lack of concern for generating enough surplus to enable it. There are obvious trade-offs here between incentives for private enterprise and the need for social justice... When real capacity to create wealth is missing, social activism is often reduced to mere populism, which in the long run can be wasteful and counterproductive."

This is the biggest problem with the dominant development policy discourse in India - too much of wealth re-distribution and too little of wealth creation!

Again, in light of the political drama surrounding anti-corruption activists and their populist quick-fixes, Prof Bardhan questions their right to appropriate the mantle of popular legitimacy in democratic societies,

"In the policy arena... such non-party organizations cannot and should not threaten to replace the role of traditional party organizations in a democracy. Voluntary groups, as single-interest advocacy lobbies, lack the mechanism of transactional negotiations and give-and-take among diverse interest groups that large party organizations, representing and encompassing those varied interests, possess.

This kind of give-and-take is particularly important when resolving controversial issues and requires complex trade-offs and balancing of diverse interests. Those who speak for the poor usually underplay the diversity among the poor and sometimes romanticize their traditional way of life. A dam may benefit thousands of small farmers in hitherto parched land, even as it displaces thousands of others; a development project may displace some from their ancestral land but provide jobs and more productive livelihoods for others; and so on. Each such case involves complex trade-offs and demands negotiated compromises and compensations across groups and over time. Such deliberations should take place within a party forum where diverse interests and stakeholders are represented."

Finally, this message for those opposing capitalism on the grounds that capitalist exploits the poor, is extremely relevant,

"Activists who romanticize the pristine life of the poor and the indigenous, and ignore a great deal of misery and stagnation, should keep in mind that the horrors of capitalism fade in comparison with the horrors of pre-capitalism."

Catch-up growth and global convergence

Citigroup economists Willem H. Buiter and Ebrahim Rahbari, who earlier identified 11 global growth generating (3G) economies for the first half of this century, have another paper investigating the likely future sources of global economic growth between 2010 and 2050.

They use 40 year economic forecasts by Citi economists, historical GDP data for the most recent 10-year period, and available economic research on the drivers of long-term growth, to examine national-level global growth generators. They assume United States as the technology frontier country and draw the distinction between growth at the technology frontier (productivity growth at the frontier) and catch-up or convergence growth (mainly through adoption and importation of best-practice technology and know-how from the frontier countries). Naturally, they foresee most of the global growth to come from the latter source.

Their earlier 3G index aggregates some key growth drivers - gross fixed domestic capital formation; gross domestic saving; a measure of human capital (which aggregates demographic, health and educational achievement indices); a measure of institutional quality; a measure of trade openness; and the initial level of per capita income. Their final analysis and prescription about how a country grows fast

"1. Start poor
2. Start young
3. Open up to trade in goods and services and to foreign direct investment
4. Achieve reasonable political stability (the absence of significant external and internal conflict)
5. Create some semblance of a functioning market economy
6. Boost the domestic saving and investment rates
7. Invest in human capital (educate and train both boys and girls, focusing on pre-school, primary and secondary education and on vocational training)
8. Invest in infrastructure
9. Don’t be unlucky. Avoid war-like neighbours and natural disasters
10. Don’t blow it. Avoid internal conflict and populist assaults on the incentives to work, save and invest; avoid macroeconomic mismanagement, premature capital account
liberalisation and financial regulatory disasters.

Catch-up and convergence will do the rest."

If we examine the Indian economy with respect to these ten attributes/tenets, the picture is indeed encouraging, especially if point 9 is taken care of. Points 1, 2, 4, and 5 are inherent and historical advantages. Points 3 and 6 are true reform achievements. Even point 7 is being addressed. This leaves us with the real concerns - points 8 and 10.

All our immediate (inflation) and long term (growth prospects and convergence growth pace) macroeconomic challenges are closely linked with infrastructure. This is all the more so since infrastructure forms the basic platform that underpins the growth of the modern economy. We need to plan, design, raise resources and execute massively in all infrastructure sectors. And even if we mobilize the resources and show the requisite commitment to conceptualize and create infrastructure, the greater challenge is to ensure that we do not blow it up.

Here I am not worried about macroeconomic mismanagement nor financial market problems nor even corruption or internal conflicts. All these dangers always lurk around the corner and will even explode once a while, but when seen in historic perspective and when analyzing growth prospects over half-century, they are all surmountable, especially for a continental economy like India. A real worry will be with picking up the pieces from the "populist assaults on the incentives to work, save and invest". I will come back and post on this in the days ahead.

Development priorities!

Sometime back I had blogged about the priorities of government at its cutting edge, as represented by the amount of time spent by District Collectors on various development sectors. I had argued that District Collectors, who head the implementation machinery, spend most of their time on poverty mitigation welfare programs at the cost of economic growth creating development.

Here is a Venn Diagram representation of the priorities of a District Collector in a typical Indian District.



The "everything else" includes electricity, roads, urban development, drinking water, other infrastructure, health, education, and so on. The skewedness in priorities, a reflection of the priorities of governments themselves, is stark.

Poverty and vulnerability in India

One of the most interesting graphics in the recently released World Bank report on poverty in India is one that highlights how much vulnerable are a large proportion of the non-poor to aflling into poverty. Vulnerability is defined in terms of the threat of the family falling into poverty in future. It is a measure of the volatility of household incomes and exposure to various external risks.

The graphic below captures the clustering of rural, urban, and mega-urban populations around the poverty line. The intensity of clustering has hardly changed over the decade.



I can think of four implications for poverty eradication and development policy-making from this finding

1. It is as much important to monitor and support those who have moved into poverty (from being non-poor) as it is to assist those who are below the poverty line. In other words, the poor are a dynamic population, more so in rural India. People continuously move in and out of poverty, possibly with seasonal periodicity. Given the close clustering of people around the poverty line, especially in rural areas, large numbers of people are likely to fall into poverty in times of economic uncertainty (in rural areas mainly, weather related shocks, say, a poor monsoon).

2. Targeting those below the poverty line becomes a near impossible task given this close clustering, especially in rural areas. Even if we are able to narrowly and quantitatively measure those below and above the poverty lines, it is impossible to qualitatively assess, with any reasonable degree of satisfaction, whether their lives correspond to those of the poor or non-poor.

In other words, accuracy in targeting, even with technologies like bio-metric identification, will come up against the difficulty of cracking the eligibility criterion. The fact is that, atleast in rural areas, most people are either poor or run the risk of falling into poverty. This also means that strategies that seek to leverage self-selection (the non-poor will naturally de-select themselves from accessing the benefits, and therefore enable more effective targeting) becomes relatively ineffectual.

3. In view of the tight clustering of the overwhelming share of the population around the poverty line, is there a case for universal subsidy transfers, especially in rural areas? Why not subject the same flawed below poverty line (BPL) figures in various states to more rigorous analytics to identify the degree of clustering, and decide on making subsidy universal if the numbers of poor exceed an agreed cut-off parameter? The transaction costs and inefficiency distortions associated with targeting (and a dual-price regime) would far outweigh the additional expenditure required for the expansion.

4. Addressing this type of pervasive poverty may require going beyond the prevailing development paradigm in India that seeks to overcome poverty through wealth re-distribution (welfare programs, self-employment and livelihood programs, etc) instead of wealth creation (rapid and equitable economic growth, and massive job creation).

Welfare enhancing policies cannot address the issue of development when poverty is so widely pervasive. It works best when poverty exists at the margins, and that too only to the extent of providing welfare support. It is growth promoting policies that are required to pull an entire population out of poverty, as is the case with the widespread poverty in India.

This is not a call to junk all welfare programs, but only a reminder that welfare policies cannot achieve the objective of poverty eradication. That requires policies that promote growth and create jobs. Welfare policies can at best provide the cushion or platform on which wealth creation policies can be sustained (or its risks mitigated).

Where are Dani Rodrik's shamans and councils of elders to regulate China's activities in Africa?

Dani Rodrik recently posted a nice parable that seeks to capture a simplified version of the development process facing developing countries. He describes the development tale of a poor little fishing village beside a lake, and cut-off from the mainland by a dense forest tract, whose residents lived off the fish they caught and the clothing they sewed and who are slowly faced with the challenges of globalization.

The tale traces the challenges the villagers faced when the fishing stock in their lake plummeted (they responded with co-operatives that imposed fishing quotas), started trading dried fish in return for sewed clothes with the villages on the other side of the forest (fishermen got rich, while those who sewed clothes were flooded with cheaper and better quality garments - resolved by forcing fishermen to make higher contributions to the village feast), and when transportation facilities opened the floodgates for fishermen from outside (which depleted fishing stocks and was remedied with toll collection on outside fishermen).

One could easily replace the fishing village with any African country or Suriname and the foreigners from beyond the forest with Chinese migrants to represent the problems generated by massive Chinese economic and political activity in many emerging countries of Africa and Latin America. In fact, we could also substitute the shaman with local advisors and opinion makers and the council of elders with the political establishment in Africa. In this context, the recent events and trends relating to China's economic activities in Africa and Latin America provides an excellent and immediate test to managing globalization effectively following second-best approaches.

China has emerged as Africa’s biggest trading partner (crossing $120 bn in 2010) and has replaced Europeans as the most important external economic and political influence in these countries. In the past two years China has given more loans to poor countries, mainly in Africa, than the World Bank. China has invested more than $40 bn in the 2005-10 period in sub-Saharan Africa. The physical Chinese presence itself in many African countries is substantial and migrants now run everything from small factories to health care clinics and trading companies.

As the NYT reported, "for many budding Chinese entrepreneurs, Africa’s emerging economies are inviting precisely because they seem small and accessible. Competition is often weak or nonexistent, and for African customers, the low price of many Chinese goods and services make them more affordable than their Western counterparts."

Politically, Beijing sees a great opportunity to exercise some form of control, even pick up stakes, in strategic mineral and oil assets, and that too on the cheap, in these resource rich African countries. The big-ticket infrastructure contracts that are in any case inevitable for economic development, apart from being critical for the exploitation of these natural resources, form a major economic attraction for Chinese companies. These state-owned firms have developed massive economies of scale in heavy infrastructure equipment manufacturing and expertise in execution of huge road, railroad, irrigation, electricity, and urban infrastructure projects.

Though, such investments and labor migration has its beneficial effects on the host country economy, there remain serious concern, especially given the scale of China's interventions and historical experiences, domestically or from elsewhere, of previous such activity,

"Africans view the influx of Chinese with a mix of anticipation and dread. Business leaders in Chad, a central African nation with deepening oil ties to China, are bracing for what they suspect will be an army of Chinese workers and investors... When they arrive, will they bring their own workers, stay in their own houses, send all their money home?

In Zambia, where anti-Chinese sentiment has been building for several years, merchants at the central market in Lusaka, the capital, said that if Chinese people wanted to come to Africa, they should come as investors, building factories, not as petty traders who compete for already scarce customers for bottom-dollar items like flip-flops and T-shirts...

Africans in many countries complain that Chinese workers occupy jobs that locals are either qualified for or could be easily trained to do... The problem with the Chinese companies is that they reserve all the good jobs for their own people. Africans are only hired in menial roles. Another frequent criticism is that the Chinese are clannish, sticking among themselves day and night."

Though Chinese development assistance and cheap labor helps build roads, low-cost housing, set up renewables based power plants, promotes shrimp farming, and so on, there are several concerns, especially with the influx of significant Chinese labor (estimated to be over 10% of the country's population) in countries like Suriname,

"In parts of Suriname, concerns over whether some Chinese laborers illegally stay past the end of their visas has led to debate over whether Chinese companies should be allowed to bring their own workers to the country, possibly depriving some Surinamese of jobs... many of the new arrivals are visibly involved in commerce, standing in contrast to Brazilians, Suriname’s other fast-growing immigrant group, who work largely at remote gold mines in the interior."

The Economist has an article that highlights how Chinese business practices are creating tensions in many African countries,

"Chinese expatriates in Africa come from a rough-and-tumble, anything-goes business culture that cares little about rules and regulations. Local sensitivities are routinely ignored at home, and so abroad. Sinopec, an oil firm, has explored in a Gabonese national park. Another state oil company has created lakes of spilled crude in Sudan...

At Chinese-run mines in Zambia’s copper belt they must work for two years before they get safety helmets. Ventilation below ground is poor and deadly accidents occur almost daily. To avoid censure, Chinese managers bribe union bosses and take them on 'study tours' to massage parlours in China. Obstructionist shop stewards are sacked and workers who assemble in groups are violently dispersed. When cases end up in court, witnesses are intimidated."

However, unlike Dani Rodrik's fictional fishing village, which had a benevolent and wise shaman and a far-sighted and disciplined council of elders, not many African countries or Suriname enjoy the guidance of such institutions to help chart the vicissitudes of the development process. Can African governments, with a notorious reputation of being willing participants in the loot of their own countries, and its civil society summon the necessary foresight, commitment, and spirit of co-operation to guide their nations through the uncertainties like that posed by the increased role of China in their economies and societies?

Happily, Prof Rodrik also tries to provide some answers to these countries to face upto these challenges,

"The parable suggests that internal debate and deliberation can produce a reasonable compromise. The compromise does not entail the blocking of trade or high barriers, as some groups want. But it does entail accepting some transaction costs on external trade and a departure from complete free trade."

And underlining the departure from first-best solutions and embrace of second-best ones, he writes,

"It would be little comfort to the villagers to be told that they should resort to lump sum taxation, non-linear income taxes, or allocating property rights over the fish stock – when the practical implementability of such potentially more efficient solutions remains unclear...

When openness to trade raises overall national income, a properly structured political process should not have an anti-trade bias to begin with. And allowing greater "policy space" to individual nations will in fact make it easier to uphold the social bargains that enable openness to trade. A (small) deviation from the ideal of complete free trade (hyperglobalization) is a small price to pay for this."

Even assuming a second-best approach, the challenge still remains of formulating inclusive and reasonable policies that accommodate the interests of all sides, and then mobilizing the political support and commitment to implement them. In the absence of policies that can manange a "reasonable compromise", the fishing stocks will decline, fishermen will refuse to pay up their share for the monthly feast, and xenophobic sentiment against outsiders "stealing our jobs" will grow and explode. Does Africa have wise shamans and enlightened political elders who can prevent such damaging outcomes?

Post script

MR points to Chinese interest - massive investments and labor migration - into Caribbean too. Diplomatic concerns, arising from the need to out manouvre Taiwan, and economic interests may be the primary motivators here.

West Complains About Yunus Ouster from Grameen

[NOTE: This is the second of two posts reflecting on the ouster of Muhammad Yunus from Grameen as demanded by the Bangladeshi government.] Well it's finally happened: the Bangladeshi authorities have forced the removal of microfinance pioneer Muhammad Yunus from Grameen Bank. Although Yunus has his critics--witness Jagdish Bhagwati portraying him in a negative light in the post below as being Grameen v Bangladesh--I am still shocked that their government would treat someone of such renown so harshly. Yes, it's like bashing the Dalai Lama or criticizing Aang San Suu Kyi--something which won't go down too well with Western audiences. Once more invoking rather odious comparisons, Yunus' defenders are likening his treatment to the political persecution of Mikhail Khodorkovsky in Russia--too influential to meddle with electoral politics.

At any rate, the Western backlash has started more quickly than you can say "Moammar." First out of the chute are those diplomatic dervishes, the French (to no one's real surprise). From Auntie:

Both the US and France have lamented the removal of Nobel laureate Muhammad Yunus from the Grameen micro-finance bank he founded. French President Nicolas Sarkozy has said his government will monitor developments and discuss the issue with the Bangladesh in the next few days. The US has warned Professor Yunus's removal could harm bilateral ties.

Meanwhile Bangladesh's Supreme Court has adjourned hearing two last-ditch petitions challenging the removal. Correspondents say neither of the petitions, which will now be heard on 2 May, has much chance of success and that Professor Yunus appears reconciled to leaving his job as managing director of the Grameen Bank.

President Sarkozy expressed his strong support to Professor Yunus in a letter released to the French press by Friends of Grameen, a voluntary organisation established to promote the microcredit activities of the bank and its affiliates. He wrote that the creation of the Grameen Bank "was an audacious initiative, which has been an ongoing source of inspiration for the international community".

"I know the difficulties you are going through at the present moment. I trust the institutions of your country will find a fair resolution to these...The French government will closely monitor the situation and will definitely address the issue with Bangladeshi authorities over the next few days."

As Hillary Clinton had already sided with Yunus instead of the Bangladeshi incumbent PM Sheikh Hasina prior to his ouster, the American response has unsurprisingly been negative as well:

The US Assistant Secretary of State for South Asia, Robert Blake, said on Tuesday said that his country had a "strong interest in maintaining close relations" with Bangladesh, which he called "a democratic and moderate Muslim country". But he told a congressional hearing he had, during a visit last month to Dhaka, "warned that a failure to find a compromise that respects Dr Yunus's global stature and maintains the integrity and effectiveness of Grameen could affect our bilateral relations".

On Tuesday the Supreme Court upheld the argument of the Bangladesh central bank that Professor Yunus had been improperly appointed while past retirement age. But Professor Yunus said the attempt to remove him from Grameen Bank had been politically motivated. The Grameen Bank has pioneered micro-lending to the poor by giving small loans to millions of borrowers.

It was in effect Prof Yunus's last legal option to keep his job as managing director of the Grameen Bank. In March Bangladesh's High Court ruled that his dismissal was legal. His supporters say he fell out with Bangladesh's Prime Minister Sheikh Hasina after trying to launch his own political party in 2007.

The BBC also has another story on the seemingly rapid downfall of Professor Yunus after signalling his intention of entering politics. Very Khodorkovsky-like, I must observe. It's odd but yes, I'll probably side with Missus Clinton in giving the microfinance pioneer the benefit of a doubt here.

At any rate, it is no longer unimaginable that the US will apply sanctions against poor Bangladesh over this incident (as if it needed more troubles aide from political instability and chronic flooding among others). Think of China being ostracised for the longest time, or Myanmar up to the present. Given that the US has provided Bangladesh with $5 billion in aid since it became a nation on one hand and that Bangladesh owns 25% of Grameen on the other, it's an interesting tug-of-war:

The U.S. has provided more than $5 billion of development assistance since 1971 to Bangladesh, according to U.S. government data...Bangladesh’s government owns 25 percent of Grameen, Yunus said, while customers hold the balance. The bank has lent $10.3 billion since it began operations in 1976 and had a loan recovery rate of 97 percent as of the end of February, according to the lender’s website.

It's depressing news, but don't shoot the messenger. For all his foibles, it makes you appreciate the tightrope industrialist-politician Silvio Berlusconi has navigated for years and years when canny operators like Yunus stumble at the first hurdle.

Dev't Battle: Jagdish Bhagwati v Muhammad Yunus

[NOTE: This is the first of two posts reflecting on the ouster of Muhammad Yunus from Grameen as demanded by the Bangladeshi government.] Here is a clash of the titans from the Indian subcontinent if there ever was one. On one side we have Jagdish Bhagwati, arguably the most influential international economist of his generation. On the other side we have Muhammad Yunus, Nobel Peace Prize winner and the man recognized by most for having popularized microfinance.

I make these qualifiers about Yunus and microfinance for a reason: Apparently, his fame has not gone down so well with a number of economic commentators--including Bhagwati. To wit, the venerable Professor Bhagwati highlights four criticisms of Yunus in a recent op-ed in Al Jazeera:

1. It wasn't Muhammad Yunus who invented microfinance but rather Ela Bhatt who founded the Self-Employed Women's Association (SEWA) in April 1974--two years before the former made his start in Jobram Bangladesh;
2. Yunus has relied on periodic inflows of foreign cash to keep Grameen afloat, whereas SEWA has never been reliant on foreign donors;
3. What is more, SEWA has been regulated by Indian authorities practically since its inception, while the same doesn't hold true for Grameen which resists such regulation;
4. Microfinance does not promote large-scale development.

There are interesting points which Muhammad Yunus would probably be better served rebutting himself. However, I can offer some counterpoints and suggestions here:

1. Yunus' innovation was perhaps more a case of marketing; that much is true. Prior to him, the term "microfinance" had barely entered the lexicon and was certainly not widespread worldwide. That said, why begin with SEWA? Those who've worked in development studies for any period of time are familiar with the Rotating Savings and Credit Association (ROSCA) which has similar features of credit pooling and turn-based lending among a small group. As far back as 1962, the famous anthropologist Clifford Geertz had already written about "The Rotating Credit Association: A 'Middle Rung' in Development." It's hardly an obscure work since Google claims it has 397 citations. ROSCA was already operative long before Geertz described it, so the origin of ROSCA certainly predates SEWA by an even more considerable margin. But if neither the ROSCA nor the SEWA folks coined the term "microfinance" despite having essentially similar mechanics, then I'll give Yunus the nod for doing so.

2. It would of course be good if Bhagwati came up with evidence to back his claim that could be very damaging to Yunus' operation not being self-sustaining by relying on periodic cash infusions from abroad.

3. It is incorrect to say that Bangladeshi microfinance institutions (MFIs) do not face banking regulation. Instead, they have a separate banking regulator in the Microcredit Regulatory Authority (MRA) which oversees their operations and has the power to impose sanctions. Instead of saying Grameen gets by with lax regulation, it would have been better if Bhagwati could explain why microfinance and conventional banking are similar enough to warrant coming under the same regulatory body (such as the Reserve Bank of India). Given India's own woes with allegedly usurious interest rates, the specificities of microfinance may warrant having a separate regulator as Bangladesh has decided to do. Yunus, after all, has been instrumental in creating a microfinance monitoring body in Bangladesh and calls for one in India as well:

“We have been lobbying for a regulatory authority in Bangladesh and as a result created the microcredit regulatory authority in Bangladesh,” Yunus said. “That’s what I have been recommending for India also.”

Speaking of which, Bhagwati should note this provision of Bangladesh's MRA:

MFIs should not be permitted to accept deposits from the non-member/ general public.

4. Alike many other things in development--remittances come to mind, personally--it is unlikely that microfinance is the "magic bullet" to development. Although some folks do a disservice as styling it as such, perhaps Yunus is even culpable to an extent. I personally think Clifford Geertz suggested as much since he termed ROSCA as a "middle rung" in development long before the chattering classes arrived on the scene. Microfinance is an intermediate stage in the development of financial institutions. That is, habituating folks climbing up the income ladder in the disciplines of borrowing, investment, and repayment is certainly not a bad thing when it comes to administering credit. Certainly the Americans--its government, states, municipalities and citizens--do not have a firm grip on such fundamentals given the parlous state of their finances at virtually every level of society.

It's interesting times for Grameen,to say the least.

Drops Not Drones, Vaccines Not Marines

You are likely to be judged by the company you keep. In Osama bin Laden's case, the isolated mountains of tribal Afghanistan and Pakistan provide a perfect safe haven for him and for polio. Thirty years of conflict and low economic development have resulted in security and health infrastructure that is inadequate for deploying an effective regional eradication program. Thus the Af-Pak borderlands remain one of only a handful of places (including India and Nigeria) where polio is endemic, though flare-ups also occur across Africa and Central Asia due to importation.

As the Afghan war moves into its tenth year and intensifies to ten airstrikes per day, the time is beyond ripe to question whether we're packing the right payload. The United States spends more than $100 billion per year executing the war in Afghanistan, while Afghan GDP is around $15 billion. Clearly this is unsustainable.

Compare this to the figures required for global health and development. Bill Gates said recently that $2 billion is needed for polio eradication over the next two years, while the campaign is currently experiencing a $700 million shortfall. In a speech at the former Roosevelt home in New York, Gates delivered his annual foundation letter in which he outlines his strategy for charitable giving. Polio eradication is the key focus this year, and his rationale centers on four points:

1. We are close to eradication: There are only about 1,000 cases left per year globally;
2. Eradication will permanently free up resources for other vaccination and health campaigns;
3. The affected regions will benefit in terms of economic productivity; and
4. Eradication will provide a motivational victory for the health industry, driving further hope and investment.

As polio is just one affliction of poverty among many, it's important to consider the opportunity costs. Critics such as D. A. Henderson, the leader of the team who eradicated smallpox, feel that dumping billions into polio eradication is a misallocation of funds. Polio is difficult to kill because of a number of combined factors: the variety of strains, asymptomatic carriers, a vaccine that is not 100 percent effective, parental refusal, a lack of infrastructure, and management problems in organizing all the national campaigns. It is very much a door-to-door endeavor, but so was smallpox eradication.

THE GATEWAY IMMUNIZATION

A point in favor of financing polio eradication is that the vaccine can be viewed as a gateway process leading to routine immunization services for more common diseases. One-fifth of children today don't have such access. Beyond the obvious health consequences, lack of access also presents an organizational problem in the fight against polio because it leads to underreporting and thus keeps the virus elusive.

There is also the issue of innovative and appropriate technologies: Something as simple as camel-portable refrigerators could go a long way toward keeping vaccine doses fresh. If the U.S. military is deploying innovative solar modules to replace the generators that power air conditioning at its forward operating bases in Afghanistan, then clearly some of these technologies can be repurposed for more benign operations.

THE MORAL DIMENSION

At the Bill Gates event, David Oshinsky, author of Polio: An American Story, said we need to motivate a new March of Dollars to "get kids interested in the moral dimension" of helping other kids around the world. The original March of Dimes organized by the National Foundation for Infantile Paralysis was able to finance research for the polio vaccine through a flood of small private contributions.

But it was much easier to motivate Americans to donate when their classmates were leaving behind empty school desks. Gates attributes the moral gap today to this physical proximity problem. Even with his computer software stitching the world together, polio mostly kills and maims people outside the eye of the rich world's collective consciousness. Few things illuminate the power and puzzle of globalization more than the world's richest man reaching out to help some of the poorest. His ethical sense drives him to do it.

COALITION OF THE HEALING

Gates has collected allies along the way. The British government has pledged to double its funding to $60 million from $30 million as a matching grant conditional on contributions from other donor governments. Sheikh Mohammed bin Zayed al-Nahyan of Abu Dhabi recently contributed $50 million, and the government of Pakistan announced an emergency response to the increase of cases in its territory.

So whose side are we on? In one corner we have Robert Gates and the U.S. Department of Defense dropping bombs from drones. In the other corner we have Bill Gates asking the world to spend more to save the most vulnerable. Send in the vaccines, or send in the Marines. It's a pretty stark simple choice.

[PHOTO CREDIT: Gates Foundation (CC).]

BRICs Guy Jim O'Neill: China's Rise Benefits All

Jim O'Neill of Morgan Stanley should be familiar to one and all as the fellow who coined the acronym "BRICs" for the major emerging economies Brazil, Russia, India, and China (though he sometimes expresses regret putting Russia in there). Although a less neat acronym would be required, he's also alluded to including Mexico, South Korea, Turkey and Indonesia. While I'd be inclined not to include South Korea since it famously industrialized earlier as part of the Asian tigers and is not that large population-wise alongside the others, it's his list to make--not mine. Given his track record, he's definitely considered among the top popular commentators on the world economy.

Anyway, while reading the Evening Standard on my journey back from work, the prolific Jim O'Neill had yet another feature, this time on why China's economic rise shouldn't be feared but welcomed. In classic liberal fashion--he still represents an investment bank, after all--the win-win aspects are what he chooses to highlight. (It reminds me of Henry Paulson in his pre-Treasury days, actually.) The occasion was official confirmation that the Chinese economy had surpassed that of Japan--and not by a small margin, mind you:

Yesterday's estimate for Japan's GDP growth in the final quarter of 2010, or rather the lack of growth, was not a surprise. More interesting was that it confirmed China's status as the number two global economy. It wasn't even close: China's GDP stands at around $5.9 trillion, Japan at about $5.4 trillion. The speed of China's ascent relative to Japan is quite remarkable even by my own optimistic standards.

When back in 2001 I first looked at China's remarkable potential at the core of the broader BRIC group - Brazil, Russia, India and China - it wasn't even on my radar that China would overtake Japan as soon as 2010. I was ambitious enough to suggest China would surpass Germany. In 2003, when my team first looked at the world's 2050 potential, we expected China to overtake Japan by 2015. So it has happened five years early.

There is nothing quite like this China phenomenon in modern history. Since 2001, China's economy has grown by $4.3 trillion, in the process effectively creating more than another two of itself than existed in 2001. That growth is equivalent to creating more than two new United Kingdoms.

As the base size of China gets bigger, so does its impact. If China succeeds in growing by the forecasting consensus view of around nine per cent this year, with inflation at around four to five per cent and its currency rising a bit, the end of last year's $5.9 trillion will be close to $7 trillion by the end of this year. In other words, China will create the economic equivalent of another Korea in one year - or one-and-a-half UKs.

Contrary to many perceptions, China is not achieving this growth at everyone else's expense. That is an out-of-date story. Last year China's imports totalled close to $1.4 trillion, and they increased by a massive $400 billion in just that year. Maintained at this pace, within another five years, China's imports will be bigger than those of the US.

Quite simply, China is the single biggest story for us all - and I've been impressed by how the UK Government is grasping it, especially the need to export. This could be our get-out-of-jail-free card. Providing support and encouraging all our manufacturing and, perhaps even more importantly, our service businesses to penetrate further into China is critical.

In this regard, it is imperative that any controls on immigration [by the PRC] don't clash with the importance of this goal (which includes our educational exports too) for China and the other BRICs. It has become quite fashionable - again - to worry about China being some sort of bubble. I'm not sure why this view is so popular but it probably reflects a core belief that a non-democratic country cannot guide its economy to permanent success. Ultimately that might turn out to be true but the same accusations were made a decade ago - and look what has happened since.

The Chinese authorities will soon confirm their next five-year plan and its details. It is likely to embrace a further push towards their consumers and to take the economy away from being driven by exports. We should watch these developments at least as closely as our domestic budget: they are likely to be more important.

It's interesting stuff, though I don't think services liberalization for the benefit of Western firms will happen any more rapidly than it has in the past. Which is to say rather slow especially in financial services. Moreover, China isn't likely to be inundated with FILCH (Failed In London, CHina-bound) British expatriates unless they happen to speak fluent Mandarin. While I appreciate that financial deepening is something desirable in China, especially the provision of sophisticated forms of consumer credit that can make the PRC rely more on domestic instead of international consumption, the West has done itself no favours during the global financial crisis in inspiring confidence in this respect.

BTW, Manchester United fans will also know O'Neill as one of those who have tried to extricate the Red Devils from the revolting Glazer family. Alas, that is a work in progress--unlike the emergence of major emerging economies.

Robert Wade on De-Neoliberalizing the World Bank

Here's yet another interesting article from the new LSE house journal Global Policy. It all started in the second issue of this publication when Robert Wade, a famously "heterodox" economist in our development department, envisioned post-crisis options for developing states. In particular, he mentioned possibilities for something the World Bank has long disdained--industrial policy--correcting the belief that markets are self-obviously superior to states in such areas as disseminating information, determining prices, and allocating resources.

Well, the global financial crisis seems to have broken faith in these "neoliberal" beliefs. After all, a characteristically hypocritical North American nation fond of preaching the gospel of deregulation, liberalization, and privatization as the keys to economic heaven for errant developing countries suddenly began an unprecedented regime of reregulation (of financial services providers), deliberalization (of securities trading), and nationalization (of automakers and banks) when faced with its own crisis. Who's got "national champions" now, white man? Your industrial policy looks a lot like ours--but is far more encompassing in scale and scope. The picture to the right is the Storm Thorgerson-designed cover of Mars Volta's De-Loused in the Comatorium. While not my favourite listen, it may be an apt metaphor for what's happening with the excesses of neoliberalism--delousing subprime globalization as the Washington Consensus is left for dead.

It should thus be mentioned that no small amount of gloating has also emerged from those like Robert Wade and Ha-Joon Chang who've long argued for a more active role for states. To make a long story short, Justin Lin--the first non-G7 chief economist at the World Bank--did not disagree as much as you'd expect with Wade in his succeeding article in Global Policy. Rather, Lin had qualifiers on the extent to which industrial policy should be practised and under what circumstances. In turn, Wade has just issued his comment on Lin's reply. While it's true that the World Bank now has less influence over developing countries--again, many receive much more in the form of workers' remittances than official development aid provided by institutions like the Bank--its relaxation of a hardline market approach as represented by Lin's softer position represents a gradual meeting of minds according to Wade:
----------------------------------------------

Here are a few directions in which some vigorous pushing is needed, whether by the World Bank or others. First, on the supply side, is the distinction between ‘existing comparative advantage’ and ‘future’ or ‘latent’ or ‘dynamic’ comparative advantage. Most of the time Lin wishes to limit ‘interventions’ to helping firms exploit the opportunities offered in the existing comparative advantage – with the qualification that ‘economic development is a dynamic process that requires industrial upgrading’, a dynamic process that may change the existing comparative advantage and in which the government may have an important coordinating role. I wonder how to operationalize the distinction between existing and latent comparative advantage. Lin suggests that government and firms in country X should scrutinize the kinds of products and services produced in comparably endowed countries with per capita incomes roughly double X’s, and look for promising items or processes within this set. Indeed, Japanese, Korean and Taiwanese planners did do a lot of this ‘looking ahead down the river’ kind of exercise. But they often took target countries much more than twice as rich as they were at the time. And today, more than when the capitalist East Asians went through their fast-growth decades, there is more ‘vertical’ differentiation in the production of any one product, creating niches in the production of final products which, as final products, appear to be far beyond the ‘latent’ comparative advantage of country X (see my Governing the Market (Wade, 2004)).

This line of thinking invites serious attention to the rather neglected subject of industrial upgrading and diversification, including to the concept of stages of growth. It is remarkable how ideas about the transition from resource-based industries (for example, textiles and apparel) to heavy and chemical industries, to scale-sensitive assembly-based industries like automobiles and electronics, to Internet-based industries (all with very different appropriate roles of government) have largely disappeared from development economics. Here it is worth going back to the seminal work of the Japanese economist Akamatsu and his flying-geese theory of intra-industry evolution within one national economy and linked flying-geese theory of inter-country evolution in a hierarchical division of labor. Akamatsu published his main work before the Second World War. There is no better place to understand his arguments and see their application to development patterns of the past several decades than Terutomo Ozawa’s important new book, The Rise of Asia: The ‘Flying-Geese’ Theory of Tandem Growth and Regional Agglomeration (2009). Much of Lin’s thinking resonates with that of Akamatsu and Ozawa.

Another big hole in conventional development economics, which Lin and the World Bank could help to give more attention to, is on the demand side – above all, the tendency for wages to increase more slowly than productivity growth, which limits domestic demand and concentrates income and wealth at the top, distorting the economy by the efforts of the wealth holders to find ways to store their wealth (in natural resources, complex financial products, overseas bank accounts, political patronage). The World Bank could give its support to Rooseveltian measures like a legal minimum wage, cash transfers to the poor and guaranteed public sector employment at the minimum wage. The trouble is that its [Country Policy and Institutional Assessment] formula hard-wires in the assumption that a completely free, ‘undistorted’ labor market with virtually no worker protections is the ideal labor market for development. This needs to change.

A third – and for present purposes final – big hole in conventional development economics concerns the strong advantages of mobilizing domestic savings, as distinct from relying on foreign borrowing. For too long economists have presumed that foreign saving will help to raise domestic investment, downplaying its dangers – a presumption indirectly derived from the interests of western financial firms. No one was more adamant – and one eyed – about the need for free capital flows and for developing countries to borrow abroad to supplement domestic savings than Larry Summers, during and after his tenure as chief economist of the World Bank. One of the most eloquent arguments about the need for and methods for boosting domestic savings is set out by the Brazilian economist Luiz Carlos Bresser Pereira, in Globalization and Competition: Why Some Emergent Countries Succeed while Others Fall Behind (2010).
----------------------------------------------

IMHO, the intellectual terrain has shifted from "Should countries be allowed to use industrial policy?" to "How can industrial policy be gainfully applied?" While I still have some trouble with some of Wade's ideas (and Chang's for that matter), let's say we agree that Larry Summers is...not so great. Still, I'd certainly like to see examples other than Asian tigers being cited. If industrial policy can be made to work, then certainly there are other countries who've applied it to good effect, right?

Chuka Umunna, 'British Obama,' Takes on Tax Havens

[Let me try my at hand at a compound post--something I haven't done in quite a while. In three parts, then...]

I. After Barack Obama was elected president and before last year's UK general elections, there was some comment on how British politics could not or would not produce a British Obama:

Britons are ready to elect a black prime minister - but the system may never give them a chance, a study concluded today. It found a "deepening tide of tolerance" over the past 50 years, with attitudes to race similar in Britain to the US. But America's political system was better at promoting black talent than Parliament or local councils.

Author Professor Robert Putman [of Bowling Alone fame] said: "The minimal representation of non-whites in the House of Commons is a significant bar to the arrival of a British Obama." The researchers, from Harvard and Manchester, tracked views on mixed marriage and other tell-tale signs, on both sides of the Atlantic since the Fifties. Last year equalities watchdog Trevor Phillips said he doubted the UK's political machinery would let a "British Obama" break through.

Note that I am exceedingly wary of the term 'black president' for a number of reasons. First, Obama has a mixed race parentage, and it reflects biases that someone with one black parent is considered 'black' while having one white parent does not necessarily make one 'white' in popular discourse. In part, it reproduces deplorable notions of 'racial purity'. Second, phenotype matters: Manchester United footballer Ryan Giggs is not really considered 'black' despite having a black father largely due to his 'white' appearance.

At any rate, we come to another potential post-racial politician (caution advised using that term) with much promise. Also from a centre-left party (post-New Labour Labour, whatever moniker it has nowadays), Chuka Umunna, MP for Streatham and 32 years of age, is gaining national attention by adopting populist stylings reminiscent of someone prior to taking the highest US office. While this comparison works in some respects, it doesn't in others. They share:

• Being young politicians who've made it at an early age;
• Exotic, Africa-sounding last names (as opposed to more racially ambiguous, common surnames such as Brown, Johnson, etc);
• Mixed heritage featuring a father who was, in effect, a first-generation migrant,
• Sharp fashion sense; and
• As we shall see, a gift for oratory

On the other hand, our man Chuka comes from a more distinguished background on both sides:

Chuka Umunna is best known around Westminster for being black [see my caveat above], the one subject which this loquacious MP is rather reluctant to discuss. It is not that he is awkward about his mixed Nigerian/Anglo-Irish ancestry; more that he finds people make boring assumptions about him based only on his skin colour.

Far from being the poor south London kid, Umunna is rather grand on both sides. His father, who in 1964 arrived in the Liverpool docks from Nigeria with a suitcase on his head, was part of the local ruling family of chiefs. He did well in Britain by setting up an import-export business, before his premature death in a car crash when Chuka was 13.

His mother is of a prominent Anglo-Irish family from Sligo, the daughter of Sir Helenus Milmo, high court judge and interrogator of the Cambridge spies. Umunna has lived his entire life around Brixton and Streatham, “but I'm not going to pretend I grew up on one of the toughest estates in my constituency, because I didn't”. Indeed not. When his parents felt that teachers had given up on him in his local state school, they moved him to private St Dunstan's College in Catford, where he immediately began to thrive.

II. From more of the political bit we move, let's move to the international political economy bit. Barclays is undoubtedly familiar to football fans the world over as the title sponsor of the English Premier League. Something it shares though with other major financial institutions--not only those in Blighty--is a penchant for operating in paradis fiscaux or tax havens. And so it came to pass just a few days ago that Barclays President Bob Diamond found himself being grilled in parliament by one Chuka Umunna:

When Bob Diamond came before the Treasury Select Committee this week, he knew he would be asked awkward questions about the ample sufficiency of his multimillion-pound remuneration from Barclays Bank.

But he was not expecting the best-dressed MP in the room, a striking 32-year-old novice with just eight months in the Commons, to land the most painful kicks by suddenly interrogating him about Barclays' offshore subsidiaries. These allow the banks to enhance what lawyers delicately call “tax efficiency” for their clients and shareholders.

With elaborate, mocking courtesy, Chuka Umunna asked Diamond if he would like to tell the committee how many subsidiary companies the group operates in the three benign jurisdictions of the Isle of Man, Jersey and the Cayman Islands. Diamond said he was awfully sorry and would have to get back to the committee on that one. Umunna spared the Barclays chief the bother, and as the television cameras rolled, provided the information — respectively 30, 38 and 181.

Offshore activist Richard Murphy has more commentary on this Umunna v. Diamond episode.

III. Especially after the global financial crisis blew over, the role of offshore tax havens has come back into focus after being off the popular radar for some time--especially with Northern Rock's use of vehicles located...elsewhere. If there are ready-made villains in subprime globalization, rich folks schlepping money away to faraway lands to avoid contributing their fair share of revenue to the tax authorities seem like naturals. Together with Professor Ronen Palan of my alma mater the University of Birmingham and Christian Chavagneux, they also authored a Cornell University Press title last year that is one of the most up-to-date on the subject of tax havens if you're further interested. Here is the introductory blurb:

From the Cayman Islands and the Isle of Man to the Principality of Liechtenstein and the state of Delaware, tax havens offer lower tax rates, less stringent regulations and enforcement, and promises of strict secrecy to individuals and corporations alike. In recent years government regulators, hoping to remedy economic crisis by diverting capital from hidden channels back into taxable view, have undertaken sustained and serious efforts to force tax havens into compliance.

In Tax Havens, Ronen Palan, Richard Murphy, and Christian Chavagneux provide an up-to-date evaluation of the role and function of tax havens in the global financial system-their history, inner workings, impact, extent, and enforcement. They make clear that while, individually, tax havens may appear insignificant, together they have a major impact on the global economy. Holding up to $13 trillion of personal wealth—the equivalent of the annual U.S. Gross National Product—and serving as the legal home of two million corporate entities and half of all international lending banks, tax havens also skew the distribution of globalization's costs and benefits to the detriment of developing economies.

The first comprehensive account of these entities, this book challenges much of the conventional wisdom about tax havens. The authors reveal that, rather than operating at the margins of the world economy, tax havens are integral to it. More than simple conduits for tax avoidance and evasion, tax havens actually belong to the broad world of finance, to the business of managing the monetary resources of individuals, organizations, and countries. They have become among the most powerful instruments of globalization, one of the principal causes of global financial instability, and one of the large political issues of our times.

While I acknowledge that tax havens often are places where corrupt rulers of developing nations siphon off cash from the people's purse, financial activity generated in tax havens surely benefits their hosts too, right? It's not entirely as, ah, black and white an issue as most commentators make it out to be. Whether becoming a tax haven is a legitimate development strategy for small island nations is certainly up for discussion. On the balance--that's what we need to investigate.

Still, it's a pretty good issue for a 'British Obama' to gain attention with, don't you say?

Max Interest Rate Microlenders Should Charge Is...

By now, I'm sure you've read all about the controversies over suicides attributed to microlending in Andra Pradesh state in India and government attempts to regulate such lending. Now, a bigwig has waded into the controversy, claiming that many commercial lenders there have not really been faithful to the original vision of microlending. Any number of issues have cropped up that negatively affect a microborrower's ability to pay:

• lenders offering more loans to microborrowers who already have existing ones with other lenders;
• microborrowers taking on a multiplicity of loans given fast growth in this area (or even from loan sharks);
• commercially-oriented borrowers charging "what the market will bear" as opposed to having any overt social mission that bears on setting interest rates.

Now Nobel Peace Prize Winner Muhammad Yunus, microfinance pioneer, identifies some guidelines that conscientious lenders should observe:

Yunus says he’s not against making a profit. But he denounces firms that seek windfalls and pervert the original intent of microfinance: helping the poor. The rule of thumb for a loan should be the cost of funds plus 10 percent, he says [my emphasis].

“Commercialization is the wrong direction,” Yunus says, speaking in a telephone interview from Bangladesh’s capital of Dhaka. “An initial public offering is the triggering point for making a lot of money personally as well as for the company and shareholders.”

There is a case to be made that Indian microlenders infringe on the Yunus rule, charging well over 10 percent over the cost of funding:

Indian microlenders themselves borrow from banks at 13 percent or more on average and extend credit to the poor. They charge interest rates that can rise to 36 percent, says Alok Prasad, chief executive officer of the Microfinance Institutions Network, which represents 44 microlenders. He says all 44 firms are registered with the Reserve Bank. SKS Microfinance gets funds at about 12 percent interest and lends at 24.52 percent in Andhra Pradesh, spokesman Atul Takle says.

In Bangladesh, Grameen Bank got a banking license in 1983, which allowed it to take deposits. It charges 5 percent for education loans and 8 percent for housing loans. Beggars can borrow for free, and interest on major loans is capped at 20 percent, Yunus says. “Microfinance has been abused and distorted,” he says. “I feel so sad because that’s not the microcredit I have created.”

Andra Pradesh will be a litmus test for microfinance in India. These are probably the three main issues to look at: MFIs overlending to those who already have many microloans; overextended borrowers who borrow from many sources to create "macroloans" if you will; and setting appropriate ceilings to borrowing costs.

MFIs need to take a closer look at their funding sources and how to rationalize their lending rates in light of growing corporate social responsibility questions. Grameen-style self-help groups were meant to be exclusive so that participants could focus on the activities of their peers (and help alleviate "moral hazard" in the process) instead of having multiple groups to deal with that are loosely affiliated as what is often happening now in Andra Pradesh when multiple loans are taken out.

LDCs Inequality: A Lack of Redistributive Capacity?

Martin Ravallion of the World Bank should be familiar to those interested in development studies as one of those who've waded into the highly contested area of poverty and inequality measurement. On the overwhelmingly optimistic side, you have the likes of Xavier Sala-i-Martin of Columbia University. On the more pessimistic side, you have Ravallion's World Bank colleague Branko Milanovic as well as Sala-i-Martin's fellow Columbia academics Thomas Pogge and Sanjay Reddy. Ravallion lies somewhere in between, though he tends to be on the more upbeat side of neutral IMHO. (I've looked at this debate in one of the first posts I made for this blog; it is in need of updating to be honest in light of more recent PPP weights.)

In a recent issue of the online Journal of Globalization and Development, Ravallion has a new paper out detailing a less-studied facet of inequality. Namely, are developing countries more inequitable because their redistributive capacity is less? In other words, inequality is attributed to an inability to make richer folks pay their share. This can be due to any number of things: there aren't really that many wealthy folks; it's hard to identify the wealthy; the wealthy have a relatively lower tax burden; or the wealthy are able to make those less well-off shoulder more in taxes if made necessary by, say, IMF fiscal balance conditionalities.

The conclusion Ravallion ultimately draws is that economic growth is necessary for building the aforementioned capacity to redistribute wealth. Here is the abstract:

Development aid and policy discussions often assume that poorer countries have less internal capacity for redistribution in favor of their poorest citizens. The assumption is tested for 90 developing countries. Most countries fall into one of two groups: those with little or no realistic prospect of addressing extreme poverty through redistribution from the “rich” and those that would appear to have ample scope for such redistribution. Economic growth tends to move countries from the first group to the second. Thus the appropriate balance between growth and redistribution strategies can be seen to depend on the level of economic development.

And here are the main policy implications:

This inquiry offers support for focusing development aid on poorer countries—on the grounds that they have less scope for addressing poverty internally. The emphasis often given to the role of economic growth for poverty reduction in poor countries can also claim support from these findings, given that they cast doubt on the feasibility of redistribution from the rich to the poor as a poverty-reduction strategy in poor countries. While the poorest countries appear to have weak capacity for attacking poverty through income redistribution—given the sheer weight of poverty and thinness of the rich strata in their starting distribution—with sufficient economic growth the tax rates on the rich required for covering the poverty gap start to fall rapidly. So it makes sense for the relative emphasis on growth versus redistribution, and the reliance on external aid, to change with the level of economic development.

It's interesting stuff even if I'm not entirely sure what to make of it just yet. Some might even identify a fiscal spin on "trickle down" theory.