Development Bank Research Bulletin

Technology industry and the over-educated Russia

In a Goldman Sachs research note (pdf file), the human capital of four BRIC countries are analyzed.

It is found that, China has only marginally more tertiary graduates than Russia despite having 10 times the population of Russia.

Russia, despite much lower income than the U.S., already reaches 60% the U.S. level, in terms of tertiary graduates per capita.  Among population over age 25, in the U.S. there are 192 tertiary graduates in every 1,000 people, while in the Russia, it is already 115. The correspond number for China and India are merely 16 and 14, respectively.

Russia seems to have huge potential in moving to higher value-added technology industries than India does!

The research also finds that Russia has almost as many science and engineering PhDs as Germany, which is much richer than Russia.

But when it comes to the number of R&D workers, i.e., those who went through the education and are actually applying what they learn in the college to what they are supposed to do,  Russia starts to fall behind China and Japan. India is nowhere in the sight.

For Russia, the gap between number of people with science and technology degrees and the number of R&D professionals  seems to corroborate the worry by  cops around the world: mafia organizations are entering a new level of sophistication after Russians enter the trade, because most Russian mafia members have Ph.D. degree in physics or mathematics.

Private Sector Development is good for the environment: new data from World Bank’s China office

Private sector and privatization is always blamed for the degradation of the environment. Some self-proclaimed “environmentalists” always insist that greed and evilness is deeply rooted in the heart of  private sector and big “bad” corporations, and only the angel, i.e. the government, can and always benevolently acts as the savior of the earth.

Let’s set aside for a moment the debate on who (private sector or the government) are more greedy (there are certainly more government corruptions than corporate scandals, don't you agree?), and see some hard data first.

The World Bank’s survey results recently released show that, within China, wherever private sector prospers, more efforts are exerted to improve on environmental standards, and residents enjoy not only higher wage but also cleaner air and more green space. When state-owned firms dominate, the reverse happens.

The reason is quite simply: private sector development increases government’s tax revenue, which is necessary (although not sufficient) for the conduction of environmental projects. We always hesitate to talk about money when it comes to environmental protection. How dare we introduce the sinful money into the purest domain of human race: environmental protection?  We sometimes think.

But the cold truth is that: to carry out environment-improving projects, you need money more than lip services. As Dan Harris in the China Law Blog rightly points out: “Copenhagen can afford a state of the art sewage system; Freetown, Siera Leone cannot.”

Certainly private sector development is not a sufficient condition for better environment, but we do know that state-owned firms are always the worse polluters.

The World Bank’s China country office surveys 12,400 firms in 120 Chinese cities. It is found that private sector development varies across China. In Wenzhou and Jiaxing, 99% of the firms are privately owned, while in the old Northeastern rust belt, only 60%. The cross-city variation of private sector development is then closely associated with local environmental standards.

According to an article written by David Dollar (World Bank's China country director) for the Newsweek:

“A good investment climate for firms also goes hand in hand with a good environment for people. As expected, cities with better investment climates tend to have higher wages (averaging $3,000 to $4,000 a year in coastal cities, versus $1,000 in the interior), less unemployment, lower infant mortality and higher education spending.

But surprisingly, they also score higher on environmental measures such as green space per capita, clean-air days per year and percent of water discharge that is treated. For example, cities like Weihai, Qingdao, Suzhou, Hangzhou and Fuzhou all score very highly in terms of business climate, and all treat 97 percent or more of their industrial waste water, with Weihai treating a perfect 100 percent.The opposite is also true. The average waste water treatment rate for cities with poor investment environments was about 78 percent. Why is this so? Cities with poor investment climates tend to have industry dominated by state firms, which often are the worst polluters.”

In an article "China's Pearl River Smells, But the Mayor insists to Swim in it" I posted in this Bulletin some time ago, I reports on the improved river water quality in Guangzhou, a southern Chinese boom town.  An American teacher living in that city comments with his/her first hand experience that the river still smells badly. It is very true that the river still smells. But five years ago, it stunk and it could hardly be called a river. And the river’s water quality is still much better than other Chinese cities.

Why? The reason is very simple. Guangzhou is one of the richest cities in China, and government tax revenue grows at 40% a year, and residents who are now better off financially are very sensitive to the environments surrounding them. Everything comes naturally after a country or a city gets richer.  London stunk too in the 19th  century.

Without private sector development, there certainly will be no greed, no pollution, because the earth will become a large zoo with all human beings living primitive lives. Note that these do not include some half-hearted prominent environmentalists residing in rich countries. They will still stay in New York, complaining about air pollution, and telling media how much they love Africa, as their zoo.

Finally, I have to emphasize that, to re-forest the earth, you need to plant more trees instead of consuming less paper. Research shows that the average American consumes the equivalent of one mature tree every year. This means that, however hard you try, you cannot save more than one tree even if you restrain from using any paper-related products.  But when you use less greeting cards, those people in developing countries who make these cards lose their jobs. I am quite curious why we are making so much fuss about sending paper Christmas cards. Isn’t it more efficient to donate some money to plant more trees instead of going through so many hassles to save one tree every five years?  No.... then a lot of lobby groups will lose their jobs. It is politics, stupid.

Note: I don’t think these “environmentalists” are true environmentalist. To qualify as a true environmentalist, you have to care about lives of the local people more than your daily media coverage. In the case of some labor unions, don’t disguise your own agenda as “helping poor people in developing countries”. If you truly want to help out, let the most capable and hardworking people from the developing countries compete with you and take your job.  And when you say you hate the pollution in New York and like to turn it into Amazon jungle, you must have a concrete plan to move to live in Amazon jungle, and let the local Brazilians to move here to occupy your apartments. Isn’t it a perfect exchange program: you want natural forest, and they want higher living standard. Kenyans are not stupid either, and they don’t want to live in a zoo watched by you, no matter how you portrait nomad life as a perfect integration with the environment. Enjoy it by yourself if you like it.

Genetic determinant of national economic prosperity: empirical evidence

Is economic prosperity of a nation partly determined by genes of its population?

Is this a question that is too politically incorrect? Well, scientific inquiry has no boundary. Economics professors Enrico Spolaore and Romain Wacziarg study genetic and economic data for a wide cross section of countries around the world, and discover that genetic distance, a measure associated with the amount of time elapsed since two populations' last common ancestors, bears a statistically and economically significant correlation with pairwise income differences.

They also find that genetic distance between two populations also determines differences in human capital and social institutions, which suggests that differences in human characteristics transmitted across generations - including culturally transmitted characteristics - can affect income differences by creating barriers to the diffusion of innovations.

The Diffusion of Development  (PDF file)
Abstract: This paper studies the barriers to the diffusion of development across countries over the very long-run. We find that genetic distance, a measure associated with the amount of time elapsed since two populations' last common ancestors, bears a statistically and economically significant correlation with pairwise income differences, even when controlling for various measures of geographical isolation, and other cultural, climatic and historical difference measures. These results hold not only for contemporary income differences, but also for income differences measured since 1500 and for income differences within Europe. We uncover similar patterns of coefficients for the proximate determinants of income differences, particularly for differences in human capital and institutions. The paper discusses the economic mechanisms that are consistent with these facts. We present a framework in which differences in human characteristics transmitted across generations - including culturally transmitted characteristics - can affect income differences by creating barriers to the diffusion of innovations, even when they have no direct effect on productivity. The empirical evidence over time and space is consistent with this "barriers" interpretation.

Economic growth is ultimately good for the environment! Cross-country evidence

Princeton economics professors Gene Grossman and Alan Krueger discover that economic growth is ultimately good for environment. Once the per capita income of your country reaches $8,000, enviromental quality will start to improve because now you can better afford those enviromental luxuries!

Their  study covers four types of indicators: urban air pollution, the state of the oxygen regime in river basins, fecal contamination of river basins, and contamination of river basins by heavy metals.

They find that economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement.

The turning points for the different pollutants vary, but in most cases they come before a country reaches a per capita income of $8,000.

Reference:
Economic-growth and the environment (published in the Quarterly Journal of Economics)
China’s Pearl River smells, but mayor vows to swim (earlier in this Bulletin)
Saving the environment from the environmentalists (also in this Bulletin)

The lasting legacy of colonial land tenure system in India

Why are some parts of India more productive than the rest of the country? Professors Abhijit Banerjee and Lakshmi Iyer have a new explanation.

They trace it back to colonial times. Back then, areas where the land revenue collection was taken over by the British between 1820 and 1856 are much more likely to have a non-landlord system, for reasons that have nothing to do with factors that directly influence agriculture investment and yields. They show that areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period than areas in which these rights were given to the cultivators.

Map (click to enlarge)

History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India (PDF file)
Abstract: We analyze the colonial land revenue institutions set up by the British in India, and show that differences in historical property rights institutions lead to sustained differences in economic outcomes. Areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period than areas in which these rights were given to the cultivators. These areas also have significantly lower investments in health and education. These differences are not driven by omitted variables or endogeneity problems; they probably arise because differences in historical institutions lead to very different policy choices.

Easterly vs. Sachs: The big push Deja Vu

One of our Bulletin contributors,  Warbug,  already covers the “Easterly vs. Sachs” debate in a previous commentary. Warburg does not think Bill Easterly to be constructive in his new book "The White Men’s Burden". I however think that Professor Jeffrey Sachs is even worse.

Professor Jeffrey Sachs has a lot of big plans. He has a long  “Checklist for Development Economics” that coveres every technical details on how to lift a country out of poverty, but as Arkady Volsky (a  former Soviet official) rightly points out: “People say that Russia should become like Sweden. But the problem is that we don’t have enough Swedes.”

Professor Sachs tells us that a mere $3 per year would help save an African from Malaria, but as Bill Easterly points out: “Doesn't he have a little curiosity about why this easy problem wasn't solved with some of the $568 billion (in today's dollars) in foreign aid given to Africa over the last 43 years?” “What about the World Bank studies in Guinea, Cameroon, Uganda and Tanzania, which estimated that 30 to 70 percent of government drugs disappeared into the black market rather than reaching the patients?”

I absolutely applaud Professor Sachs’ efforts in helping poor people. His plan is absolutely beautiful. But what I can see is that the money he raises will never reach the poor in need. The huge amount of money will simply go into the personal pockets of local corrupted officials. I don't disagree that sometimes we should have beautiful dreams, but don't dream too much, particularly when you are in your day job.

References:
Bill Easterly: The Big Push Deja Vu (PDF file)
A modest proposal (Easterly's review on Sachs' book "The end of poverty"), Washington Post
Sachs' reply  ,  Washington Post

New evidence: Politically Connected Firms are prevalent around the world

Professor Mara Faccio’s new paper (publisehd in the American Economic Review)  shows that politically connected firms are prevalent around the world (not only in Thailand, Indonesia), and the announcement of a new political connection (e.g. businessmen entering politics) results in a significant increase in value.

Politically connected firms (PDF file)
Abstract: Examination of firms in 47 countries shows a widespread overlap of controlling shareholders and top officers who are connected with national parliaments or governments, particularly in countries with higher levels of corruption, with barriers to foreign investment, and with more transparent systems. Connections are diminished when regulations set more limits on official behavior. Additionally, I show that the announcement of a new political connection results in a significant increase in value.

Is Poland the next Spain? Is China the next Spain?

In the 1970s and early 1980s, income level in southern European countries such as Spain rapidly converged to the rest of the Western Europe. As central and eastern European countries are joining the common market, it is natural to ask “is Poland the next Spain?” Will they catch up with their western neighbors? And how long will it take?

Professors Francesco Caselli and Silvana Tenreyro analyze the case and bring one piece of bad news and one piece of good news.

The bad news is: as the income gap between agriculture and industry is quite small in Eastern Europe, it is unlikely that they could raise income dramatically by massive reallocation of labor from agriculture to manufacturing and services (which was what happened in Spain in 1970s). The only option for Eastern European countries is to increase productivity in manufacturing as the productivity gaps in this sector compared to Western European countries are still enormous. This is more complicated a task and will take a long time.

The good news is: Eastern Europe already has levels of human capital similar to those of advanced Western Europe. Human capital gaps have proved very difficult to overcome in the experiences of Southern European countries such as Spain. Eastern European countries however start out without the handicap, and they may catch up even faster because higher human capital enables them to emulate their western neighbors’ frontier technologies and best practices without inventing the wheel.

New questions: Is China the next Spain? Is India the next Poland?

In China, increase of per capita income is evidently achieved through mass reallocation of labor from unproductive agriculture sector into urban manufacturing sector.This happend in Spain too. In India, the higher education system produces higher quality graduates as competitive as their Eastern European counterparts.........

What are missing for both China and India, however,  are geographic neighbors that are as rich and as responsible as Western European countries. I don't see Japan can play such a role in the near term. Rich EU countries have a well-designed package of programs to help their Eastern neighbors to harmonize their system and converge to Western standards.This isn't ready for Asia yet; the income and institutional gaps are too big in Asia!

References:
Is Poland the next Spain? (PDF file)
Professor Jeffrey A. Frankel wrote an interesting piece of  comment titled “Is Slovakia the next Portugal?” (PDF file)

Why do Southern states have lower judicial efficiency? Blame the Yankees?

Many scholars believe that former colonies by Western countries have corrupted judicial system because the legal systems imposed by colonizers are not compatible with local conditions.

Professor Daniel Berkowtiz and Karen Clay show that this is true within the United States too, as our lands were acquired from many countries of very different legal systems. They argue that Southern states, which were acquired from the hands of civil law countries (France, Spain, and Mexico) after American revolution, had highly developed legal systems around the time of legal transplantation (i.e., they were forced to conform to British/American common law system when they joined the Union), and this made them vulnerable to transplantation effects, the same ways African colonies did.

Empirically, they show that the chaos created by legal transplantations can still be seen after 200 years. These Southern states so far still have lower quality state courts, less competent judges, and higher corruption. The results hold even after control for slavery history.

They argue that it is the transplantation, not the superiority or inferiority of either system,  that causes the problem. In states that were acquired from French before American revolution (Illinois, Indiana, Michigan, Ohio, Wisconsin), as they  were very lightly populated at that time of acquisition, transformation to common law system created less problems.

But isn’t it possible that civil law system is inherently inferior? That the longer a region is under administration of civil law courts the more corrupted it will become? Although most African countries have corrupted legal system, it still seems to me that those colonized by British are at least less corrupt, as shown by Professor Andrei Shleifer's famous "Law and Finance" (PDF file) paper.

Initial Conditions, Institutional Dynamics and Economic Performance: Evidence from the American States  (PDF file)
Abstract:   Using state-level data from the United States, we find that differences in colonial legal institutions have affected the current quality of state legal institutions. These differences in colonial legal institutions arose because some states were settled by Great Britain, a common law country, and other states were settled by France, Spain, and Mexico, all civil law countries. To explain these findings, we develop a transplant-civil law hypothesis that highlights the disruption associated with large-scale legal transplantation and the possible relative inefficiencies of colonial civil law. We find strong support for the transplant-civil law hypothesis. Our results are robust to the inclusion of additional variables capturing climate, geography, initial population, resource endowments, state level rules, and legal environment. Given the 150-200 year gap between the initial conditions and the measures of the current quality of legal institutions, we provide indirect evidence on the persistence of legal institutions. We then use initial legal systems as a source of exogenous variation in current institutions for providing a series of estimates of their impact on current economic performance.

United States as a costal nation: why is America inherently richer than Africa?

Why is America inherently richer than Africa? Jeffrey Sachs will say geography. Most rivers in the United States are navigable to oceans, while in Africa rarely they are. Whether you have access to oceans determines your income level, Professor Sachs argues.

In his research paper “The United States as a Costal Nation”, he finds that “US economic activity is overwhelmingly concentrated at its ocean and Great Lakes coasts”.

In another research paper "Climate, Water Navigability, and Economic Development", he discovers that “Temperate ecozones proximate to the sea account for 8 percent of the world’s inhabited land area, 23 percent of the world’s population, and 53 percent of the world’s GDP. The GDP densities in temperate ecozones proximate to the sea are on average eighteen times higher than in non-proximate non-temperate areas.”

Thanks to geography, the narrow band of costal regions of Africa are still more affluent (or more accurately, less poor) than inland. But because of the lack of rivers navigable to oceans, Africans who unfortunately were not born in costal regions may not have the luck of benefiting from oceans. In the United States and Europe, in contrast, as shown by the map, “ocean access” are almost universal, even in deep inland area.

References:

The United States as a Coastal Nation (PDF file)
Jordan Rappaport and Jeffrey D Sachs
Abstract: US economic activity is overwhelmingly concentrated at its ocean and Great Lakes coasts, reflecting a large contribution from coastal proximity to productivity and quality of life. Extensively controlling for correlated natural attributes and initial conditions decisively rejects that the coastal concentration of economic activity is spurious or just derives from historical forces long since dissipated. Measuring proximity based on coastal attributes that contribute to either productivity or quality of life, but not to both, suggests that the coastal concentration derives primarily from a productivity effect but also, increasingly, from a quality of life effect.

Climate, Water Navigability, and Economic Development (PDF file)
Andrew D. Mellinger, Jeffrey D. Sachs, and John L. Gallup
Abstract: Geographic information systems (GIS) data was used on a global scale to examine the relationship between climate (ecozones), water navigability, and economic development in terms of GDP per capita. GDP per capita and the spatial density of economic activity measured as GDP per km2 are high in temperate ecozones and in regions proximate to the sea (within 100 km of the ocean or a sea-navigable waterway). Temperate ecozones proximate to the sea account for 8 percent of the world’s inhabited land area, 23 percent of the world’s population, and 53 percent of the world’s GDP. The GDP densities in temperate ecozones proximate to the sea are on average eighteen times higher than in non-proximate non-temperate areas.