Friday, 29 July 2011

Peace of change

By Noshua Watson

I spent my holiday in a beach chair near Chania, Greece, drinking frappes and watching NATO aircraft carriers, planes and submarines go by on their way to Libya. Despite Greece’s macroeconomic problems (you might have heard about this) and its microeconomic problems (a taxi strike that peeved the tourists who bothered to visit), life still seemed awfully good.

It’s obvious that war can boost GDP (at least in the short term), but peace is better for the development of human capital. What is not so obvious is that our models of growth are premised on peace, but war, or at least conflict, seems to be the default in human activity.

Is peace a precondition for growth? It can be, but can we develop policies for growth that assume conflict? Of course, a lot of people find that conflict is pretty good for their line of work. But IDS researchers on the MICROCON project have also found that the poor have ways of coping, but sometimes thriving in conflict, as well. How can we help others grow without waiting for peace?

Monday, 25 July 2011

So long and thanks

By Neil McCulloch

I feel strange.  I can hardly believe it, but, after 13 years, I am leaving IDS (I am going to be the Lead Economist for Australian aid (Ausaid) in Jakarta, Indonesia) and so this will be my last post for the blog.  Thinking back over the last decade, it is fascinating to see how development and “Globalisation” have changed. 

In the days before 9/11, the focus of the globalisation agenda was on trade – arguments raged about whether trade liberalisation was good or bad for the poor (remember Dollar and Kraay’s (in)famous Growth IS Good for the Poor paper).  IDS’s Globalisation Team response (with our friends from Sussex) was to produce evidence and to map out exactly how and when trade liberalisation helped or hurt the poor. It is fascinating to see this coming back up the agenda again in the UK, with an eclectic mix of political heavyweights in the Trade Out of Poverty campaign.

After 9/11, the agenda shifted – the focus was on security and fragility.  The new aim was to reach the Bottom Billion.  But again IDS’s response was to highlight a different perspective, The New Bottom Billion – the billion poor in the world’s booming middle income countries.  Indeed, the Globalisation Team was highlighting the tectonic shift in the world economy associated with the new Asian Drivers, long before it was fashionable to talk about the rise of China and India.  The secret of the remarkable success of such countries in reducing poverty lay in finding the right way to engage with the global marketplace.  And so the Globalisation Team worked on how the poor get integrated into global value chains (or not) and what policy can do to help them do so.

Now, as the challenges change, the agenda is shifting again.  We are remembering that the private sector is the engine of growth, and IDS is helping to understand how public policy can best shape the actions of myriad investors, large and small, to promote better development, whether in nutrition or infrastructure.  At the same time, we are re-learning the important role of the state in promoting equity and driving poverty reduction (see UNICEF’s new report on this).  As we pick up the pieces from the global financial crisis, we are re-discovering the importance of macroeconomics and good financial regulation and generating evidence about new ways of calming markets and raising revenue for development.  And, as climate change reshapes our world, IDS is helping to understand how to crowd-in the sorts of investments needed for a low-carbon future.

It is 12 minutes to 1pm and I must go.  I leave an Institute that tackles the key development issues with rigour and passion and a team that understands the power, potential and pitfalls of globalisation.  So this is Neil McCulloch signing off … so long and thanks.

Wednesday, 20 July 2011

Can inequality decrease under a neoliberal economic model?

By Carlos Fortin

I have just returned to the UK after spending six months in Chile, where there is an intense public debate on development policy.  The issue of inequality features prominently in this debate because, despite an impressive economic growth record, substantial improvement in poverty reduction, and successive governments that were outwardly committed to egalitarianism, Chile appears to be today a most unequal country. Its Gini coefficient is the 19th worst in the world, and it has remained essentially unchanged since 1990.

Something has obviously gone wrong.

Along comes a young Chicago-trained economist, Claudio Sapelli, to argue in a recent book 1  that the problem is how you measure inequality. ‘Fine’, he writes in the opening pages, ‘so Chile has a high Gini [………] So what?’

His answer is that when you use the appropriate measure, inequality in Chile is actually decreasing.  He argues that the conventional Gini is a ‘stock’ measure based on cross-section surveys. What is needed is a measure that captures changes in inequality through time. In the absence of panel data in Chile, a good second best is cohort analysis.

He divides the population in cohorts based on the year of birth (1902-1978) and calculates the Gini coefficient for each cohort for every year from 1957 to 2004. When plotted against time, the coefficients seem to suggest there are three periods. At first the curve is flat.

‘Starting with cohorts born in the early thirties there is a deterioration that continues up to cohorts born in the fifties. The income distribution then undergoes an improvement, starting with cohorts born in the early fifties and especially after the cohort born in 1959. The improvement is statistically significant and numerically important: of about 9 points in the Gini index’ (Sapelli 2011: 241).

The methodology and its results have been hailed as a breakthrough by the defenders of the neoliberal economic model that has prevailed in Chile since the Pinochet dictatorship. Others have been more cautious. To begin with, Sapelli does not offer a clear account of the mechanisms by which inequality is supposed to be diminishing. His initial hypothesis that the phenomenon was due to increases in educational opportunities was not supported by the data. He is forced to rely on the statistically problematic concept of returns to experience as the explanatory variable; he does recognize, however, that this is just a hypothesis that requires testing.

More seriously, Sapelli does not explain why, if inequality is decreasing, the overall Gini remains the same. Instead he hints that while the improvement is not discernable today, it will be in the future.  This is not very convincing; it reminds me of the comment by my former boss and current Prime Minister of India, Manmohan Singh, who once said that the long run was the last refuge of failed policies.

Still, the questions raised by Sapelli are intriguing and his data and conclusions certainly worth scrutinising further. My colleagues at the Chile 21 Foundation workshop on development policy and inequality are doing just that. Watch this space.

1. A summary English version of the argument is offered in Claudio Sapelli, “A Cohort Analysis of the IncomeDistribution in Chile”, Estudios de Economía, Vol. 38, N° 1, June 2011, pp. 223-242

Thursday, 14 July 2011

It's a private matter

By Neil McCulloch

It’s no secret, nor is it surprising that business is at the top of the agenda for most development policymakers, practitioners and researchers.  The fact is that the private sector is the driving force for most economies and this is as true of developing countries as for rich ones. Because of this business has to go beyond the superficial elements of Corporate Social Responsibility, and incorporate development objectives into their core business plans. But, how to do so?  There are lots of things on inclusive business, but it isn’t at all clear how to measure it (notwithstanding attempts by INSEAD’s Kapstein and Coca-Cola, Oxfam and Unilever).  And, let’s be honest – there are tradeoffs.  Not all things that are developmentally desirable are profitable – but they still need to be done.  And not all things that are profitable are good for development.  Although there are lots of win-wins to exploit and the emphasis has been on these, we have to remember that sometimes there are conflicting interests. 

Here are some links that have caught my eye on this issue – hope you enjoy them!

Friday, 8 July 2011

Building your country’s brand

By Noshua Watson

Don’t tell my colleagues, but I’m counting the days until my summer holiday. The funny thing is that I have never seen a travel advertising campaign that actually persuaded me to go somewhere. Aren’t they tedious? (See here, here and here).

Developing countries face difficulties when trying to attract tourism or other industries on a sustainable basis. They offer new opportunities and markets, yet investors and potential customers don’t fully engage because the countries don’t have a track record. It makes me think about a study that I am working on with a novelist colleague about the importance of reputation for online literary fiction journals. (Not that I have time to read anything besides The Economist or journal articles, ahem. But check out State of Wonder by Ann Patchett.)  I think our findings might also say a bit about how developing countries can build their reputations for business.

Although new literary fiction magazines spring up online all the day and offer more publication opportunities to aspiring wordsmiths, print journals are still more respected. So where and how is a young writer meant to publish? 

People are loyal to the same brands in different contexts because they can predict their satisfaction in one domain based on another. So people read the same journals online and offline. I think that countries not only need to find their strengths, but they shouldn’t be afraid to make comparisons and emphasize that if you like the beach there, you’ll also like the beach here.

We tell new writers who want to build a reputation to publish in journals (online or offline) with high quality content and design, are associated with high status people, have a good track record and charge what they’re worth. We suggest to online editors that they cultivate a niche or cult brand, form an alliance with a strong, well-known brand and provide a distinct offering. Kind of like this country here.

Monday, 4 July 2011

Hypothetically speaking - what would happen if Greece were to drop out of the Euro?

By Neil McCulloch

In my last blog I called for a large reduction in Greece’s debt – this may seem like impossibility. But if Greece were to drop out of the Euro, it could completely change the incentives for debt reduction.

Initially Greece would need to announce that it will pay back its foreign denominated debts at a discount.  The discount depends on the speed with which private creditors provide new financing.  It does this by taking the entire private foreign denominated debt and dividing it into, say, 200 pieces.  It then invites daily bids for new funding of X Euro (where X = total private Forex debt/200). 

The winner of the bid will be the bank that provides the best terms (i.e. lowest interest rate/longest term). The twist in the tail is that the bank that wins the bid on day one is guaranteed to be repaid their existing debt at 100 per cent of face value; the winner on the second day will be repaid their existing debt at 99.5 per cent of face value; on the third day the winner gets 99 per cent and so on.  In other words, the longer private banks take to provide new funding, the bigger the discount on their debt.

Now the incentives for private banks are completely the opposite of the current incentives.  It is in their interest to provide new funding immediately if they wish to get anything back on their existing loans.  Wise banks will quickly realise their losses and lend to Greece.  This will both reduce the face value of the debt and provide new finance for the government.

There is, of course, a major snag with this scheme.  Other European countries will be outraged at Greece forcing their banks to accept losses. They might encourage their banks to take legal action against Greece for the full amount, rather than participate in the bids.  However, there are a few things that Greece could do to mitigate this risk. 
  1. It could announce publically that it will honour all sovereign debt in full i.e. all loans from other European countries and the IMF will be honoured in full; only private creditors will be asked to take a hit. 
  2. It can ensure that the daily bids are confidential.  This will make banks anxious that their competitors are secretly bidding and getting ahead of them in the queue, which, in turn, makes them more likely to bid. 
  3. And finally, they could try to bolster the credibility of their threat to discount and default their debts by accessing other major sources of financing, e.g. sovereign wealth funds from the Middle East or China.  Private creditors are more likely to accept losses if their threat to withdraw future funding has less bite. 
All of this is hugely undesirable. An orderly write down by European countries and their banks would be far preferable, although even more unlikely. 

Friday, 1 July 2011

How to default – The Greek tragedy continues

By Neil McCulloch

I have sinusitis and a thumping headache.  I can’t sleep for the pain.  All I can do is think.  So what does one think about in such a situation?  Obviously, mechanisms for Greek default!  As my last blog on this argued – the current approach to the Greek dilemma will lead to a lengthy process of austerity and structural adjustment. 

The best solution, an immediate and substantial write down of Greek debts – which is politically impossible. 

The worst solution, however, – a disorderly default – remains a real possibility.  Which set me thinking.  Imagine if Greece wanted to take the “nuclear” option, drop out of the Euro and default – what would be the best (or the least bad) way of doing so?  The following steps are needed:
  1. Temporarily Close the Capital Account - Drop out and default is a huge shock – the first thing to do is to prevent people from running away with the money
  2. Establish a market value for the New Drachma (ND) - The government could do this by floating a bond denominated in ND on the market.  The Euro bids for this would determine the new exchange rate – it would be much less than 1:1
  3. Freeze all bank accounts and mandate the conversion of all Euro assets into ND at the market rate determined - Hence if you had Euro 1000 in your bank account and the new rate was 2 New Drachma to 1 Euro, then the bank would replace your Euro 1000 with ND 2000.  Similarly if you had a loan of Euro 1000, this would be replace with a new loan of ND 2000.  In this way all domestic assets and liabilities are inflated by the new exchange rate leaving everyone in exactly the same position as before. 
  4. Require all wages and prices to be in ND - All shops must convert their Euro prices into ND; all wages must be paid in ND.  Both should be increased by the publically announced exchange rate.
The above steps have to be taken very quickly – within a week – to ensure that people can access the new cash and use it for payments.

So what follows is the clever bit ... or, as all the other European countries will call it, the downright dishonourable bit.  Greece needs a reduction in its debt, a large reduction, to bring it back to a sustainable situation.  The European Central Bank is, wrong-headedly, doing all it can to prevent any kind of debt reduction, for fear of contagion around the union.  The best it can manage is to ask private creditors to roll over debts and sadly I don’t think there will be lots of volunteers. But if Greece is to default – this is the way to do it.