Development Bank Research Bulletin

Easterly vs. Sachs

Bill Easterly, former World Bank official and currently professor of economics at NYU, has just published "The White Man’s Burden:  why the West’s efforts to aid the rest have done so much ill and so little good”.  The only point of the book is that aid (2.5 trillion US dollars in the last four decades) has been, and will be, useless to reduce poverty and bring development to poor nations.  It runs squarely against Jeffrey Sachs and his book “The End of Poverty”, which argues otherwise.

To reduce poverty for the millions of human beings that live with less than 1 dollar a day is a Herculean task.  Clearly, one would not expect a single person –or organization—to have all the answers, nor a single approach to be valid.  Debate is necessary, as it would enrich the prescriptions and understanding of the greatest challenge for this century.  However, Easterly misses an extraordinary opportunity to bring fresh ideas and serious debate, by making his attacks against Sachs seem childish and personal.

Easterly in his presentation of the book is juvenile and tries to be funny by pushing the Bono-Sachs relationship too much.  Is the call for doubling aid to poor nations invalid just because Bono and Angelina Jolie endorse it?  Or is there more scientific evidence?  When confronted with this question, Easterly responds that those countries that have received more aid are the ones that have grown less.  Well, maybe that’s why they received so much aid in the first place!  He also argues that all those nations that became failed states (Somalia, Haiti, Liberia, Zimbabwe, etc.) were under IMF surveillance before failing.  Is this concluding evidence that IMF causes a collapse of the government and society?  Well, no again, as if the autopsy performed to dead patients in a hospital shows that they were receiving medicine before they died!

Finally Easterly seems to conclude that imposing free markets and democracy is enough to stop the plight of the poor.  At a different level of development that might be the case, but Sach’s focus is on those cases where the people are dying at an incredible rate (30,000 children every day from diarrhea), not even eating or being strong enough to bring anything to market.

This could have been a good book and a good debate.  Unfortunately the pages radiate two feelings: that Easterly greatly resents the World Bank for sacking him (after all, he spent 16 years doing what he criticizes now), and that he resents Sachs for his popularity.  Opposite to what the Economist said about “The End of Poverty”, in this case man and book are unimpressive.

The economic costs of Democrat “dictatorship” in the South before the passage of 1965 Voting Rights Act: Hard data

When talking about one-party "democracy", what usually come to our mind are Singapore, Malaysia, Japan, etc. But United States had such experience too, before the passage of 1965 Voting Rights Act (which eliminated poll taxes, literacy tests, etc). Prior to the act, it was impossible for Democrats to lose any elections in American South.

Recently, economic data reveal that Americans living in the south suffered a lot from such “dictatorship”.  Several economics professors, Timothy Besley (LSE), Torsten Persson  (Stockholm) and Daniel Sturm (Munich) examined the history and found that:

By their  bottom-line estimate, the increase in political competition triggered by the Voting Rights Act raised long-run per capita income in the average affected state by about 20 percent, and the quality of Governors went up significantly.

Competition is always good!

Political Competition and Economic Performance: Theory and Evidence from the United States
Abstract: We formulate a model to explain why the lack of political competition may stifle economic performance and use the United States as a testing ground for the model’s predictions, exploiting the 1965 Voting Rights Act which helped break the near monopoly on political power of the Democrats in southern states. We find statistically robust evidence that changes in political competition have quantitatively important effects on state income growth, state policies, and quality of Governors. By our bottom-line estimate, the increase in political competition triggered by the Voting Rights Act raised long-run per capita income in the average affected state by about 20 percent.

Chinese Dream: inequality of prosperity vs. equality of poverty

There are a lot of concerns about China’s income disparity between costal provinces and inland provinces. Let me show you why we shouldn’t worry TOO MUCH about it (we do need to worry about it though, and we definitely need to come up with solutions; but don’t’ worry too much or go against natural laws).

Some stylized facts for our readers:

50% of World's population and 67% of World's GDP are within 100 KM of an ocean or a river that is navigable as far as the sea. In Japan, 97% of population live within 100 KM of coast. In Europe, 89%, live within 100 KM of coast or ocean-navigable waterway. The ratio is 65% for the United States.

Thus it is natural that income disparity will always exist between costal region and inland of China, because you are naturally disadvantaged if you reside in inland areas.

You will certainly question me: why is the income disparity that huge in China then? Americans residing in inland are relatively poor but the gap is not as large as that is found in China.

The reason is population density. Starting more than 1,000 years ago, Chinese migrated westward and southward for new lands, and eventually the population density in these new-found lands becomes as high as where Chinese were originated. So long as the population density in inland region is higher than what its geography can support, you will have lower standard of living there; At least you have to try much harder.  American inland income level will go down substantially too if Mountains states have to support the same level of population density as in New England. There can only be several Las Vegas.

The only solution to this is migration of labor, as well as increase of accommodation capacity in already densely-populated costal area through better planning.  In Japan, the government does manage to increase population density in Tokyo bay area without compromising too much in environmental protections.

For the past twenty years, high geographic and social mobility in China has been a great weapon in combating poverty and social unrest. 

Believe it or not, most of China’s middle class and new rich were born in inland countryside. They left their stifling hometown and headed for costal cities.  There are few opportunities in inland usually not because of high transport costs. It is more a culture thing, that inland people are relatively isolated and have less exchange with outsiders, as a result, through generation after generation’s cultural reinforcement, they become  less open-minded and less flexible, which is very bad in today’s commercial world.  Many inland Chinese who get successful in cities are unwilling to return because they really hate the gossiping and equalitarian culture back in their hometowns. Such culture really kills talented people.

Some leave by attending colleges in cities, thanks to the standardized college entrance exam which is probably the last area of the system that is not yet corrupted. Even the most totalitarian emperors in Chinese history dared not to abort or corrupt the exam system, because by doing so you are closing the route of social mobility and you are calling for grassroots uprisings.

Those who are less intelligent usually start  as laborers in construction sites in big cites, save some money, start small businesses, grow bigger. They are advantaged because they are more hard-working than those born in cities, and can take any pains in the process (what kind of pains and humiliations can be greater than returning to their hometowns without getting rich)

Whichever routes they take, they settle in cities, and within one generation of sacrifice they place their children on the same starting point as those who were born in cities. We talk about American dream, and this is Chinese dream!

We rarely notice such high social mobility in China because once these country folks settle in cities they blend with the other people and most of them are unwilling to reveal their original roots. Most of them deep down still feel inferior. 

This doesn’t matter though, so long as the system has provided paths for inland people to step up the social ladder.  It is the fact that most senior officials in all levels of government and businessmen in the Forbes list of richest Chinese were born in countryside.

World Bank’s “ World Development Report 2006: Equity and Development” calls for equality, but isn’t inequality of wealth through personal hardworking more beautiful than equality of poverty through government intervention.

World Bank president Jim Wolfonson realizes this too, and write down some important caveats in the introduction page in case the message of the book get mis-interpreted.

"The history of the twentieth century is littered with examples of disastrous policies which were promoted in the name of equity or equality, and the results of which were ruinous. No policy that pursues equity without respecting market-based individual incentives for prosperity is likely to succeed. The joint pursuit of equity and prosperity must therefore be cognizant of the primacy of individual freedoms, and of the role of markets in allocating resources"

It is more profitable to lend to “priority sector” in India?

According to a report in Indian Times, Chennai-headquartered Indian Bank is making very good profits in so-called “priority sector”(agriculture, backward areas, women-owned businesses, etc), to which other banks are willing to lend only when forced to by the government.  According to another report in Hindu Business Line,  many banks actually have to buy loans from public sector banks in order to meet the government-set target of priority sector lending.

Thus the news sounds too good for me to believe ( I checked my calendar and today is not April the First). The report doesn’t give details on how they manage to do it, but I think we definitely need to learn from them if it is true.

“At a time when most banks are fighting for market share in corporate/SME business, Chennai-headquartered Indian Bank is betting big on priority sector lending.  Against the mandated 40%, this bank’s priority sector portfolio accounts for 51% of its advances. “Our experience of lending to priority sector has been good. Non-performing assets (NPAs) in agriculture, for instance, account for less than 2% of that portfolio. The average net interest margin (NIM) is around 4% which is much higher than what we would get by lending to corporates,” says KC Chakrabarty, the bank’s CMD.”

How do they do it? If any readers know about articles about the experience of Indian Bank's lending to priority sector, please let me know. I'd like to look into it.

Colonialism is good for colonies: empirical evidence

Is colonialism good or bad? Professors James Feyrer and Bruce Sacerdote at Dartmouth College put up some hard data to shed some new light on this debate. They collect meteorological (wind speed, direction, etc), historical, and socioeconomic data for a large cross-section of islands. Based on the data, they find that the number of years spent as a European colony and the density of settlement by Europeans is strongly positively related to the island's GDP per capita and negatively related to infant mortality.

They also show that colonizers’ cherry-picking (i.e. they chose better islands to settle) did not cause the results. Instead, wind direction and speed decides where Europeans settled first, which suggest that there is some positive causality betwween colonial rules and socioeconomic outcomes.

Another surprising result is that, French islands appear to outperform British, Spanish, Portuguese and Dutch islands. Well, that’s quite an achievement considering that French are not good sailors.

Is Colonialism Good For You? Evidence From A New Database of Islands
We use a newly assembled database of islands throughout the Atlantic, Pacific and Indian Oceans to ask whether colonial origins affect economic growth and health outcomes. The number of years spent as a European colony and the density of settlement by Europeans is strongly positively related to the island's GDP per capita and negatively related to infant mortality. We show that an island's discovery by Europeans and subsequent settlement is related to the prevailing wind patterns. We instrument for length and type of colonization using wind direction and speed. We argue that wind patterns which mattered a great deal during the age of sail do not have a direct effect on GDP today, but do affect GDP via their historical effects on colonization. Which European country does the colonization and settlement appears to be less important than length of time spent as a colony. French islands appear to outperform British, Spanish, Portuguese and Dutch islands.

Niall Ferguson in his column in the Telegraph, is more explicit about this in his article “Africa doesn’t need handouts; it needs honest governments”

“Nobody, least of all me, claims that British imperial rule was perfect. But most sub-Saharan governments since independence have managed to treat their populations significantly worse than the British did. For all its imperfections, the Colonial Civil Service was not corrupt. When money was sent to build railways or schools, British officials did not simply pocket it”

He further provides evidence that most of the aids sent to African countries after their independence were simply looted by the local elites.

“Between 1950 and 1995, Western countries gave away around $1 trillion (in 1985 prices) in aid to poorer countries....... much of the money that has poured into poor countries since the 1950s has simply leaked back out - often to bank accounts in Switzerland. One recent study of 30 sub-Saharan countries calculated that total capital export for 1970-96 was some $187 billion, which, when accrued interest is added, implies that Africa's ruling elites had private overseas assets equivalent to 145 per cent of the public debts their countries owed. The authors of that study conclude that "roughly 80 cents on every dollar borrowed by African countries flowed back [to the West] as capital flight in the same year".

I think the original title of Ferguson’s article was  “Africa doesn’t need handouts; it needs Europeans governments”, and the editors of The Telegraph changed the title for political correctness reasons.

Equatorial Guinea: second richest country in the world!

Which country is the second richest in the world? Many of us know that Luxembourg is the richest one, but few of us would link Equatorial Guinea, an African country located between Cameron and Gabon,  to the title "second richest country in the world".

But it is! Thanks to discovery of a huge oil reserve,  Equatorial Guinea has become one of the world's richest countries, boasting a per capita income of USD 50,200, second to that of Luxembourg.

Endowed with huge wealth notwithstanding, according to CIA fact book:

"Despite the country's economic windfall from oil production resulting in a massive increase in government revenue in recent years, there have been few improvements in the population's living standards. Businesses, for the most part, are owned by government officials and their family members. "

In number, I guess it is not unlikely that they will overtake Luxembourg soon:

"Undeveloped natural resources include titanium, iron ore, manganese, uranium, and alluvial gold. "

For ordinary people, it will remain a very poor country, as oil revenues do not get into their pockets.

The usefulness of corruptible elections in China

In China, frequent elections are hold at village level. They are believed to be rigged, and at least heavily influenced by the government. Two economics professors Loren Brandt and Matthew Turner at the University of Toronto however find that these elections, although corruptible, are still very effective in reducing rent-seeking activities.

In the fall of 2000, they conducted surveys in 60 villages in 30 counties in 6 provinces in China. Based on the detailed data they collect from villagers, they conclude that  even in most corruptible environment with the most rigged elections,  there is strong negative relationship between rent-seeking activities an re-election success, which suggests that villagers are able to punish those who don’t act in the interests of their constituents.

Most importantly, they find that restrictions on proxy voting improve the ability of rural Chinese electorates to oversee their leaders. This is consistent with reports that proxy voting is widely abused to rig elections. They also find that public nominating procedure also leads to better corporate governance, but mainly through the channel of recruiting the most capable leaders instead of providing incentive for incumbents to work harder in order to stave off more competent challengers.

Surprisingly, they find it does not help much to provide a public forum for candidates to debate and make speeches, or to fix the locations of ballot boxes. The explanations (I beleive) could be that (1) within a village everyone knows each other and public election campaign becomes less relevant; (2) it is easier and safer  to rig the elections through proxy voting procedure than to physically manipulate the ballot boxes.

The Usefulness of Corruptible Elections
ABSTRACT: Using a sample of rural Chinese villages which have recently been the subject of democratic reforms we look for relationships between marginal changes in the democratic process and marginal changes in economic outcomes. We find that even very poorly conducted elections can have large incentive effects. That is, even corruptible elections provide leaders with strong incentives to act in the interests of their constituents. Our findings also allow us to rank the importance of four possible election reforms which have attracted the attention of international observers and academic researchers.

China's new Greater Leap Forward

Yesterday I criticize about India’s lip-service great leap forward. Today I find that some Chinese are making the same mistake.

According to a “China Modernization Report 2006” drawn up by the country’s Chinese Academy of Sciences:

“If the country can maintain its current 9 per cent rate of economic growth, it predicts the average income in China will rise to $1300 a month, about 10 times the current level.”

What a naïve assumption! No such a large country can maintain growth rates of 9 per cent per year for five decades. At the early stage, you grow fast because you are catching up, but once you reach the income level of Brazil, you will slow down unless you can innovate, which is not guaranteed and no one can predict.

Nevertheless, unlike Indians, Chinese not only dream, but also know very well they are dreaming.

“The authors admit the targets will be hard to achieve. He Chuanqi, who headed the research team, said that China's economic situation is 100 years behind the US and there is only a 6 per cent chance of his forecasts being realized.”

China is a sweat shop, not a trade threat!

I find this article quite insightful about the true nature of Sino-American trade war.New York Times: “Some Assembly Needed: China as Asia Factory”.

“But often these days, "made in China" is mostly made elsewhere — by multinational companies in Japan, South Korea, Taiwan and the United States that are using China as the final assembly station in their vast global production networks. Analysts say this evolving global supply chain, which usually tags goods at their final assembly stop, is increasingly distorting global trade figures and has the effect of turning China into a bigger trade threat than it may actually be.”

See? China is making not much money; most of the profits are kept in the pockets of Westerners.

“It may look as if China is getting the big payoff from trade. But over all, some of the biggest winners are consumers in the United States and other advanced economies who have benefited greatly as a result of the shift in the final production of toys, clothing, electronics and other goods from elsewhere in Asia to a cheaper China.”

See? Ordinary Americans benefit from trade as well.

“Asian exports to the United States have actually slipped over the last 15 years. Factories in Taiwan used to assemble many of the world's computers; now China does. Hong Kong garment workers used to stitch tons of fabric into finished clothing; now Chinese workers do.”
"The biggest beneficiary of all this is the United States," said Dong Tao, an economist at UBS in Hong Kong. "A Barbie doll costs $20, but China only gets about 35 cents of that."

See? Americans actually lose nothing. It is other developing countries that are losing market share in face of competition from China.

I have to say

To Chinese:  start your own companies once you save enough money from your factory wage. You shouldn’t work as cheap labor for you whole life.

To some American politicians: Have you no sense of decency or shame? Shut up please!

How to engage China in a constructive way?

I want to show you this very impressive strategy paper by European Commission in how to engage China and help transform China into an open society.  It is not just talking. They actually put up a huge sum of money (250 million Euros) in implementing it, training Chinese judges, lawyers, NGO activities, etc. Europeans are experts in this, with experiences accumulated from transforming Eastern European countries.

Wonder when will the United States start to deal with China in such a constructive way?

China Country Strategy Paper 2002-2006
(PDF file)

The European Commission has today approved the Country Strategy Paper (CSP) for China, which sets out the framework for EU co-operation with China during the period 2002-2006. The co-operation strategy outlined in the CSP is designed to support the implementation of the EU's broad policy objectives regarding China. These include further integrating China into the world economy and world trading system; supporting China's transition to an open society based on the rule of law and respect for human rights; making better use of European resources by improving co-ordination between EU assistance and bilateral spending by Member States; and raising the EU's profile in China.