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Sing it from the rooftops

A bunch of serious economists have been pointing to this comment by Paul Collier. It is so good that I’m going to reproduce it in full:

The sharp increase in the world price of staple foods is an inconvenience for consumers in the rich world, but for consumers in the poorest countries, especially in Africa, it is a catastrophe. Despite the predominance of peasant agriculture, most African countries are net food importers and food accounts for over half of the budget of low-income households. This is the result of decades of agricultural stagnation combined with growing populations. Although many of the net purchasers are rural, evidently the problem is at its most intense in the urban slums. These slums are political powder kegs and so rising food prices have already triggered riots. Indeed, they sow the seeds of an ugly and destructive populist politics.

Why have food prices rocketed? Paradoxically, this squeeze on the poorest has come about as a result of the success of globalization in reducing world poverty. As China develops, helped by its massive exports to our markets, millions of Chinese households have started to eat better. Better means not just more food but more meat, the new luxury. But to produce a kilo of meat takes six kilos of grain. Livestock reared for meat to be consumed in Asia are now eating the grain that would previously have been eaten by the African poor. So what is the remedy?

The best solution to a problem is often not closely related to its cause (a proposition that that might be recognized in the climate change debate). China’s long march to prosperity is something to celebrate. The remedy to high food prices is to increase food supply, something that is entirely feasible. The most realistic way to raise global supply is to replicate the Brazilian model of large, technologically sophisticated agro-companies supplying for the world market. To give one remarkable example, the time between harvesting one crop and planting the next, in effect the downtime for land, has been reduced an astounding thirty minutes. There are still many areas of the world that have good land which could be used far more productively if it was properly managed by large companies. For example, almost 90% of Mozambique’s land, an enormous area, is idle.

Unfortunately, large-scale commercial agriculture is unromantic. We laud the production style of the peasant: environmentally sustainable and human in scale. In respect of manufacturing and services we grew out of this fantasy years ago, but in agriculture it continues to contaminate our policies. In Europe and Japan huge public resources have been devoted to propping up small farms. The best that can be said for these policies is that we can afford them. In Africa, which cannot afford them, development agencies have oriented their entire efforts on agricultural development to peasant style production. As a result, Africa has less large-scale commercial agriculture than it had fifty years ago. Unfortunately, peasant farming is generally not well-suited to innovation and investment: the result has been that African agriculture has fallen further and further behind the advancing productivity frontier of the globalized commercial model. Indeed, during the present phase of high prices the FAO is worried that African peasants are likely to reduce their production because they cannot finance the increased cost of fertilizer inputs. While there are partial solutions to this problem through subsidies and credit schemes, large scale commercial agriculture simply does not face this problem: if output prices rise by more than input prices, production will be expanded because credit lines are well-established.

Our longstanding agricultural romanticism has been compounded by our new-found environmental romanticism. In the United States fears of climate change have been manipulated by shrewd interests to produce grotesquely inefficient subsidies for bio-fuel. Around a third of American grain production has rapidly been diverted into energy production. This switch demonstrates both the superb responsiveness of the market to price signals, and the shameful power of subsidy-hunting lobby groups. Given the depth of anti-Americanism in Europe it is, of course, fashionable to criticize the American folly with bio-fuels. But Europe has its equivalent follies.

First, the European Commission is now imitating the American bio-fuels policy. At present the programme is small enough to be unimportant, but we need to pull it back before it does real damage. We have surely learnt enough about European agriculture to realize how important it is to kill this incipient scam before we are engulfed by it. But the true European equivalent of America’s folly with bio-fuels is the ban on GM. Europe’s distinctive and deep-seated fears of science have been manipulated by the agricultural lobby into yet another form of protectionism. The ban on both the production and import of genetically modified crops has obviously retarded productivity growth in European agriculture: again, the best that can be said of it is that we are rich enough to afford such folly. But Europe is a major agricultural producer, so the cumulative consequence of this reduction in the growth of productivity has most surely rebounded onto world food markets. Further, and most cruelly, as an unintended side-effect the ban has terrified African governments into themselves banning genetic modification in case by growing modified crops they would permanently be shut out of selling to European markets. Africa definitely cannot afford this self-denial. It needs all the help it can possibly get from genetic modification. Not only is Africa currently being hit by rising food prices, over the longer term it will face climatic deterioration in the context of a rapidly growing population.

While the policies needed for the long term have been befuddled by romanticism, the short term global response has been pure beggar-thy-neighbour. It is easier for urban slum dwellers to riot than for farmers: riots need streets, not fields. And so, in the internal tussles between the interests of poor consumers and poor producers, the interests of consumers have prevailed. Governments in grain-exporting countries have swung prices in favour of their consumers and against their farmers by banning exports. These responses further politicize and fragment an already confused global food market. They increase the risks of investing in commercial-scale food production and drive up prices further in the food-importing countries. Unfortunately, trade in agriculture has been the main economic activity to have resisted being subject to global rules. We need stronger and fairer globalization, not less of it.

What can I say?  Just this:  Amen.

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*sigh* (Zimbabwe)

This is from The Independent. It’s a fairly short article, so I’ll include it in full (all emphasis is mine):

Chinese troops have been seen on the streets of Zimbabwe’s third largest city, Mutare, according to local witnesses. They were seen patrolling with Zimbabwean soldiers before and during Tuesday’s ill-fated general strike called by the opposition Movement for Democratic Change (MDC).

Earlier, 10 Chinese soldiers armed with pistols checked in at the city’s Holiday Inn along with 70 Zimbabwean troops.

One eyewitness, who asked not to be named, said: “We’ve never seen Chinese soldiers in full regalia on our streets before. The entire delegation took 80 rooms from the hotel, 10 for the Chinese and 70 for Zimbabwean soldiers.”

Officially, the Chinese were visiting strategic locations such as border posts, key companies and state institutions, he said. But it is unclear why they were patrolling at such a sensitive time. They were supposed to stay five days, but left after three to travel to Masvingo, in the south.

China’s support for President Mugabe’s regime has been highlighted by the arrival in South Africa of a ship carrying a large cache of weapons destined for Zimbabwe’s armed forces. Dock workers in Durban refused to unload it.

The 300,000-strong South African Transport and Allied Workers Union (Satawu) said it would be “grossly irresponsible” to touch the cargo of ammunition, grenades and mortar rounds on board the Chinese ship An Yue Jiang anchored outside the port.

A Satawu spokesman Randall Howard said: “Our members employed at Durban container terminal will not unload this cargo, neither will any of our members in the truck-driving sector move this cargo by road. South Africa cannot be seen to be facilitating the flow of weapons into Zimbabwe at a time where there is a political dispute and a volatile situation between Zanu-PF and the MDC.”

Three million rounds of AK-47 ammunition, 1,500 rocket-propelled grenades and more than 3,000 mortar rounds and mortar tubes are among the cargo on the Chinese ship, according to copies of the inventory published by a South African newspaper.

According to Beeld, the documentation for the shipment was completed on 1 April, three days after the presidential vote.

Zimbabwe and China have close military ties. Three years ago, Mr Mugabe signed extensive trade pacts with the Chinese as part of the “Look East” policy forced on him by his ostracising by Western governments over human rights abuses. The deal gave the Chinese mineral and trade concessions in exchange for economic help.

The shadow Foreign Secretary William Hague called on David Miliband to demand a cessation of arms shipments.

A South African government spokesman Themba Maseko said it would be difficult to stop the shipment.

*sigh*

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Farm subsidies promote terrorism

Well, maybe not directly, but it bears thinking about. It’s not a new idea, either, but I thought I’d put it out there anyway …

US and European farm subsidies artificially suppress world crop prices by causing American and European farmers to produce more than they profitably otherwise could. By the World Bank’s estimates, the prices of course grains, rice and wheat would rise by between 4% and 7% relative to other prices if all subsidies and other impediments to trade were removed (hat tip: Dani Rodrik).

That means that farmers in places like Afghanistan turn to other crops like poppies (for heroin). Since drugs are illegal, the farmers can only sell their crops through black (well, in Afghanistan, grey) markets that are controlled, America tells us, by people who support and funnel profits to the Taliban and al-Qa’ida.

Those Afghani farmers don’t really care what they grow. They just want to make a profit, like anybody else. How do we know this? Because when the price of crops goes up for other reasons, they happily started switching to planting wheat:

In parts of Helmand Afghan farmers are this year sowing wheat instead of poppy – not because they have suddenly been converted to the argument that producing heroin is not in the national interest.

Market forces have been the deciding factor – with wheat prices doubling in the past year, and the street price of heroin falling, it is now more cost effective to grow wheat.

So there you have it. If America was serious about fighting drugs and terrorism, it would cut it’s farm subsidies.

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Killing the worlds’ poor through good intentions

This sort of stuff makes me very, very angry.

Kerry Howley, writing at Reason, does an interview with Robert Paarlberg:

In May 2002, in the midst of a severe food shortage in sub-Saharan Africa, the government of Zimbabwe turned away 10,000 tons of corn from the World Food Program (WFP). The WFP then diverted the food to other countries, including Zambia, where 2.5 million people were in need. The Zambian government locked away the corn, banned its distribution, and stopped another shipment on its way to the country. “Simply because my people are hungry,” President Levy Mwanawasa later said, “is no justification to give them poison.”

The corn came from farms in the United States, where most corn produced—and consumed—comes from seeds that have been engineered to resist some pests, and thus qualifies as genetically modified. Throughout the 90s, genetically modified foods were seen as holding promise for the farmers of Africa, so long as multinationals would invest in developing superior African crops rather than extend the technology only to the rich. When Zambia and Zimbabwe turned away food aid, simmering controversy over the crops themselves brimmed over and seeped into almost every African state. Cast as toxic to humans, destructive to the environment, and part of a corporate plot to immiserate the poor, cutting edge farming technology is most feared where it is most needed. As Robert Paarlberg notes in his new book, Starved for Science: How Biotechnology is Being Kept Out of Africa (Harvard University Press), in 2004 the Sudanese government “took time out from its genocidal suppression of a rebellion in Darfur to issue a memorandum requiring that all food aid brought into the country should be certified as free of any GM ingredients.”

Starved for Science includes forwards by both Jimmy Carter and Norman Borlaug, the architect of Asia’s Green Revolution and the man credited with saving more human lives than anyone else in history. Paarlberg, a Professor of Political Science at Wellesley and a specialist in agricultural policy, wants the West to help small African farmers obtain promising technologies just as it helped Asia discover biological breakthroughs in the 60s and 70s. Instead, he says, a coalition of European governments and African elites are promoting a Western vision of rustic, low-productivity labor.

Do read the entire thing. Megan McArdle offers her comment here:

My understanding at the time was that this was even worse than ignorance: Africans keep out relief grain because they know that farmers will hold some of it for seed. They were afraid that if GM entered the food chain, they would that never, ever be able to export any plant products to Europe because of their stringent regulations (these have, I believe, been somewhat relaxed). So even if the president of Zambia knew GM was harmless, he couldn’t risk permanently impairing his country’s economic future.

In fact, let me quote some more from Howley’s interview with Paarlsberg:

reason: Can you give us a sense of what an average African farmer in, say, Zambia, is currently working with?

Paarlberg: It would be a woman and her children primarily, and they would plant not a hybrid maize, but a traditional openly pollinated variety, and they would time the preparation of the soil and planting as best they could for when they thought the rains would come. But the rains might not come in time, or they might be too heavy and wash the seeds out of the ground. It’s a risky endeavor. They can’t afford fertilizer, and it’s too risky to use fertilizer because in a drought the maize would shrivel up and the fertilizer would be wasted. They don’t have any irrigation. As a consequence, even in a good year their yields per hectare will be only about one third as high as in Asian countries, 1/10 as high as in the United States.

reason: Just as it used to be in Asia.

Paarlberg: Everywhere!

…

reason: No African government other than South Africa’s has made it legal to plant GMOs. You call this “out of character” for the same governments.

Paarlberg: They have not yet enacted the law, set up the biosafety committee, and granted approval, which is the laborious process that [the United Nations Environmental Program] and the European governments have coached them into adopting.

It’s interesting. In no other area are governments in Africa particularly concerned about hypothetical environmental risks. They know better than to invoke the precautionary principle when it comes to unsafe food in open air markets. They know that they need to first get rid of actual food shortages and raise income; then and only then can they afford to impose the same extremely high standards of food safety on open air markets that are imposed on supermarkets in Europe. Yet curiously when it comes to GMOs they adopt the highly precautionary European standard, which makes it impossible to put these products on the market at all. I take that as evidence that this is not an authentic African response, it’s a response imported from Europe.

reason: So the romanticization of bucolic farm landscapes unmarred by scientific advance has an American and European pedigree.

Paarlberg: It’s not what we do at home—only two percent of agricultural products in the US are organically grown. And many of those that are organically grown are grown on industrial scale organic farms in California that don’t bear any resemblance to small bucolic farms. But it’s the image we promote in our new cultural narrative. It’s something that affects the way we give foreign assistance.

reason: Many of the anti-agricultural science gurus you mention in your book have a spiritual dimension. Can you talk a bit about Sylvester Graham?

Paarlberg: Sylvester Graham, the father of the modern graham cracker, was opposed to the modern flour milling industry. He didn’t like the industrialization of bread production, and he wanted women to go back to grinding flour. He was a religious man, a minister, and he had all of the narrow minded prejudices we might associate with a New England clergyman from the 19th century. He thought that women should stay in the home, he believed people should be vegetarians because that would keep their sexual appetite back. We sometimes forget what goes along with the food purist zealotry. It’s often zealotry about more than just a certain kind of food to eat.

In Zambia today there are expatriate Jesuits from the United States who have come to believe genetic engineering is against God’s teaching, though this is not a belief that is embraced by the Vatican. They believe that all living things, including plants, have a right not to have their genetic makeup modified. Of course we have been modifying the genetic makeup of plants ever since we domesticated them 10,000 years ago, but these particular fathers are focused only on genetic engineering.

…

reason: Isn’t it paternalistic to blame Europeans for the decisions of African governments? Is this something African elites are at least as complicit in?

Paarlberg: It’s a codependency. The African elites depend upon Europe for financial assistance, they depend upon European export markets, they depend on NGOs for technical assistance, it’s just easier for them to follow the European lead than to go against that lead. And to some extent the European governments depend upon having dependents in Africa that will, despite the difficult experience of colonization, continue to imitate and validate and honor European culture and taste.

reason: What exactly have European NGOs done to discourage productivity in farming? You quote Doug Parr, a chemist at Greenpeace, arguing that the de facto organic status of farms in Africa is an opportunity to lock in organic farming, since African farmers have yet to advance beyond that.

Paarlberg: Some of it is well intentioned. The organic farming movement believes this is an appropriate corrective to the chemical intensive farming that they see in Europe. In Europe, where prosperous consumers are willing to pay a premium for organic products, it sometimes makes sense to use a more costly production process. So they think, “Well it’s the wave of the future here in Europe, so it should be the future in Africa as well.”

So they tell Africans who don’t use enough fertilizer that instead of using more they should go to zero and certify themselves as organic. That’s probably the most damaging influence — discouraging Africans from using enough fertilizer to restore the nutrients they mine out of their soil. They classify African farmers as either certified organic, or de facto organic. Indeed, many are de facto organic. And their goal is not to increase the productivity of the organic farmers, but to certify them as organic.

I just find that to be lacking in moral clarity.

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Should the World Bank promote human rights?

Victoria Stodden (blog, Harvard page) has an interesting post up on her own blog and that of the Internet & Democracy Group at Harvard based on a recent talk given by Galit Sarfaty on “why no mandate for human rights has been incorporated into the organizational culture at the Bank.”:

She sees the reason as resulting from a clash in ideology between the human rights people, which are largely the lawyers, and economists. Economists dominate the bank, hold most powerful positions, and have a unique and prestigious research group[, while] lawyers are seen as technocrats that aren’t directly involved in projects. The legal department has a culture of secrecy because of this.

Okay, that’s probably true. My question, though, is not over how to get the World Bank to promote human rights but whether they ought to in the first place.

[Sarfaty] suggests three reasons she expects the World Bank to have implemented a human rights policy:

1) peer institutions like UNICEF, UNDP, DFID, have one,
2) the Bank is subject to external pressure by NGOs and internal pressure from employees,
3) even banks in the private sector have human rights frameworks. ICS (the World Bank commercial banking arm) has a human rights framework based on risk management.

These don’t seem like valid reasons to me, as they in essence argue that the World Bank should do something because other organisations are already doing it (the obvious omission is any mention of the IMF). There is also an important difference between merely having a stated policy on human rights and attaching human rights-related conditions to World Bank assistance. I’ll assume that Sarfaty and Stodden are speaking of the latter.

I suspect that this conflict turns on differences of opinion over what “development” actually is and which aspects of development each international organisation ought to seek to promote. It is a truism that nations can develop in a variety of different ways, including economically (both in aggregate and in distribution), socially, politically, educationally, or in public health.

The classic view of the World Bank Group is that its purpose is to promote and assist in economic development. Traditionally, which is to say up to and including much of the 1980s, it focused on aggregate economic development, but more recently it has indirectly expanded into distributive aspects of economic development by promoting and supporting smaller scale, non-infrastructure projects.

It seems to me that while everybody agrees on the importance of educational and public health development, human rights campaigners argue that social and/or political development is at least as important as economic development. Some members of that community go so far as to suggest that improving the social and political lives of people is more important than economic development and that the relative value of economic development has been over played.

I disagree with that last sentence, but I think that few people would disagree with the importance of social and political development in general, although there may some disagreement over what social and political development actually means. To my mind, then, there are two important questions:

a) What are the causal linkages between the different types of development? They clearly all positively reinforce each other, but does one aspect of development have a greater impact on the others?

b) Should a variety of international development bodies each focus on specific aspects of development or should a smaller number of organisations each take a more holistic approach?

I think it’s reasonable to say that the current global system assumes that the answer to (a) is “it’s long been believed that economic development has causal primacy, but this has been recently been brought into question” and that the answer to (b) is “the world cannot agree on the relative importance of each aspect of development, especially since what comprises social and political development is contested, so on a practical level it’s impossible to use a holistic approach.”

The upshot is that we have multilateral organisations to promote different aspects of development separately with the generally perceived legitimacy of each organisation clearly varying with how much international consensus there is on that aspect of development …

  • Economic Development: The World Bank Group
  • Public Health Development: The World Health Organisation, UNICEF
  • Educational Development: UNICEF
  • Social and Political Development: The UN Human Rights Council

… and individual governments pursuing unilateral aid programmes in areas of development where there is a conflict of opinion.

The push for the promotion of human rights to be embedded within the World Bank seems to be a change of tack by human rights campaigners after many years of failing to make headway through the extant organisation(s) created to serve their very goals. To cut to the chase, though, the fact that the UNHCR is lambasted as toothless ultimately originates from the fact that the world cannot agree on which human rights ought to be internationally enforceable. This is not just a difference between the “glorious, freedom-loving” West and the “ignoble, oppressive” (ex-)communist countries or the “ignorant, violent” Muslim nations. There are real differences of opinion between the Western nations, too. There are large differences of opinion between the USA and Europe on workers’ rights, for example. There is no guarantee of freedom of speech in Australia. Britain imposes restrictions on public protests within one kilometre of parliament.

So I’m not sure that attaching various human rights requirements to World Bank development loans will ultimately serve to help the situation. Telling Mozambique that it can’t get assistance to build a new port unless it guarantees the rights of its citizens to protest against the government or imposes upper limits to the length of the working day for the port’s employees is hypocritical preaching. It is, in effect, no different to USAID insisting that aid money will only go to HIV/AIDS charities that promote abstinence above all else.

On the other hand, if the purpose of the World Bank group is to promote economic development, it doesn’t seem entirely stupid to promote at least that subset of social and political development that is generally held to assist in economic development. This is where Sarfaty apparently sees a way of introducing the promotion of human rights in general at the Bank:

She concludes that the goal is to frame human rights issues for economists, rather than playing to the perception that it is a political issue. So the idea is to frame human rights goals for economists: presenting empirical data as to how they advance human development and thus is a relevant issue for the Bank and within its poverty eradication mandate.

Even this would be politically difficult, though. Should the people of Yemen be denied new schools if they are unwilling to guarantee that half the students will be girls? It may also lead to some uncomfortable questions for some human rights campaigners. One of the movement’s defining attributes sometimes seems to be one of an all-or-nothing attitude. How would its supporters feel about a piecemeal adoption of human rights promotion by the Bank if the data suggest that one right assists economic development but another does not?

Update (5 April 2008):

Credit where credit is due:  My views on this are not entirely my own.  They also come from discussions with my wife, Daniela, who is much smarter than me when it comes to this sort of thing.

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Western Union and incomplete (financial) markets

Via Tyler Cowen, I came across a fascinating article at the New York Times:  “Western Union Empire Moves Migrant Cash Home.”  Tyler is bang on the money when he calls it consistently interesting throughout.  What really grabbed my attention was the last few paragraphs:

[Western Union] has an estimated global market share of 14 percent, versus 3 percent for its closest competitor, MoneyGram. Though Western Union has responded to increased competition by cutting its charges, it typically remains the most expensive service.

An Oakland group, the Transnational Institute for Grassroots Research and Action, began a boycott campaign in September, demanding that Western Union lower its prices and increase its corporate giving. But it has gained little traction, in part because of the company’s recent courtship of migrant groups.

One critic who now gives Western Union grudging credit is Donald F. Terry, an official at the Inter-American Development Bank. He has spent years trying to get more migrants to use banks, so they could establish financial histories and qualify for loans.

But banks have not fully welcomed migrants, he said, while Western Union and other money transfer companies have more locations, better hours and agents who know their customers’ language and culture.

“You could say they were ripping people off, or you could also say they’re providing a service that poor people desperately needed and were willing to pay for,” Mr. Terry said. “Any consumer company in the world would like to have the customer loyalty they have. They’re doing something right.”

I’ve always been a bit surprised at the rates that financial intermediaries are able to charge.  Whether we’re speaking about “instantaneous” money transfer ala Western Union, money lenders charging 80% (an usurer in the U.S., a life-changing charity in Africa), or the rates charged by bail bondsmen, they’re enormous.  Why?

To a large extent it’s surely to do with a lack of competition, but given the profitability of these ventures, why don’t we see new entrants?  Why don’t we see country- or even region-specific competitors to Western Union?  Where is the all-Spanish-speaking competitor that is staffed entirely with Latinos in the US working off a natural, built-right-into-the-community advertising mechanism?  Even with enormous risk premiums, lending money at 80% is much, much more profitable than putting it in a US-based deposit.  Why don’t people based in that developing country do it?

Update:  Okay, okay, the market isn’t incomplete if there are transactions taking place, but there are real economic profits being made here.  What are the barriers to entry that are keeping suppliers away?

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Article Summary: The Marginal Product of Capital

This paper (forthcoming in the QJE) by Francesco Caselli (one of my professors at LSE) and James Feyrer (of Dartmouth) has floored me. Here’s the abstract:

Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows. Attempts to provide an empirical answer to this question have so far been mostly indirect and based on heroic assumptions. The first contribution of this paper is to present new estimates of the cross-country dispersion of marginal products. We find that the MPK is much higher on average in poor countries. However, the financial rate of return from investing in physical capital is not much higher in poor countries, so heterogeneity in MPKs is not principally due to financial market frictions. Instead, the main culprit is the relatively high cost of investment goods in developing countries. One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries’ incomes.

… which seems reasonable enough. Potentially important for development, but not necessarily something to knock the sense out of you. What blew me away was how simple and after-the-fact obvious their adjustments are. They are:

  1. Estimates of MPK depend on first estimating national income (Y), the capital stock (K) and capital’s share of the national income (?): MPK = ?Y/K. National income figures are fine. A country’s capital stock is typically calculated using the perpetual inventory method, which only counts reproducible capital. Capital’s share of income is typically calculated as one minus the labour share of income (which is easily estimated), but this includes income attributable to both reproducible and non-reproducible capital (i.e. natural resources). Therefore estimates of MPK are too high if they are meant to represent the marginal product of reproducible capital. This error will be more severe in countries where non-reproducible capital makes up a large proportion of a country’s total capital stock. Since this is indeed the case in developing countries (with little investment, natural resources are often close to the only form of capital they possess), this explains quite a lot of the difference in observed MPK between rich and poor countries.
  2. Estimates of MPK based on a one-sector model implicitly assume that prices are not relevant to it’s calculation. However, the relative price of capital goods (i.e. their price relative to everything else in the particular economy) is frequently higher in developing countries. This will force the necessary rate of return higher in poor countries because the cost of investing will be higher.

They give the following revised estimates (Table II in their paper, standard deviations in parentheses):

Measure of MPK Rich countries Poor countries
“Naive” 11.4 (2.7) 27.2 (9.0)
Adjusted only for land and natural resources 7.5 (1.7) 11.9 (6.9)
Adjusted only for price differences 12.6 (2.5) 15.7 (5.5)
Adjusted for both 8.4 (1.9) 6.9 (3.7)

The fact that the adjusted rate of return appears lower in poor countries then goes some way to explaining why the market flow of capital is typically from poor countries to rich countries and, as they say, has some serious implications for development.But that first adjustment! How on earth can that have skipped attention over the years? It seems like something that should have been noticed and dealt with in the ’50s!

The second adjustment managed to shed more light (for me) on just how terrible price controls can be. Under the assumption that if inflation is going to happen, it’s going to happen no matter what you do, if you put a cap on the prices of some goods (or services) then the prices of the rest will simply rise commeasurately further. When Messers Chavez and Mugabe institute price caps in an attempt to hold back inflation, they invariably put them on consumer goods because that’s where the populist vote lies. However, that means that inflation in capital goods will be higher still, making them more expensive relative to everything else in the economy. That will increase the rate of return demanded by investors and — in the meantime — chase investment away. By easing the pain in the short run, they are shooting themselves in the foot in the long run.

Caselli and Feyrer’s results also make me wonder about the East Asian NICs. What attracted the flood of foreign capital if not their higher MPKs? Remember that their TFPs were not growing any faster than those of the West. Their human capital stocks were certainly rising, but – IIRC – no where near as quickly as their capital stocks were growing.

Update (11 Oct):
Of course, the NICs also had – and continue to have – very high savings rates, which at first glance goes a long way to explaining their physical capital accumulation. There are two responses to this:

  1. Even with their high savings rates, they were still running current account deficits. I understand, although I haven’t looked at the figures, that these were driven by high levels of investment rather than high levels of consumption.
  2. Did their savings rates suddenly rise at the start of their growth periods? If so, that is extraordinary and needs explaining in itself; at the very least it raises the question that their savings rates (or, if you prefer, their rate of time preference) were endogenously determined. If not, then we still need to explain why their savings were originally being invested overseas, then domestically and now (that they’ve “caught up”) overseas again.
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On “fair trade”

I’ve never been comfortable with the “fair trade” movement. The motives are commendable enough (who doesn’t want higher and more stable prices paid to farmers?), but it has always seemed to me to be predicated on a basic misunderstanding of economics, or at least the belief that in this case, economic incentives can be overruled by political and social will.

My brother and I occasionally debate whether economics or politics is supreme in the life of a nation and it’s people. It’s hard to argue that politics and populism don’t trump economics on occasion. Witness the madness of the U.S.S.R.’s draining of the Aral Sea, or the fact that Robert Mugabe is still in power. However, while terrible and life-destroying, these events nevertheless seem to me to be short-term in the grand scheme of things. In the end, I suspect that the power of economic incentives is (almost) inexorable. The power of personality might hold it at bay for a lifetime, especially if the country has a common enemy to rail against (Cuba), but not forever.

So when it comes to the fair trade movement, I cannot help but wonder how guaranteeing above-market prices for some farmers can — in the end — achieve anything other than to encourage more coffee to be cultivated. As any first-year economics student can (or at least ought to be able to) explain, an increase in supply will lead to a lowering of equilibrium prices, and while a few farmers will be protected by the fair trade scheme, the great majority will be further impoverished.

I also worry that new crops may be planted on poorer quality land that suffers from more variable conditions, meaning that output (and therefore prices) will also be more volatile.

I am reminded of all of this because Dani Rodrik, a strong advocate of attempting to ameliorate the negative aspects of free trade, has just blogged on this very topic. He raises three very good questions (all quotes are from his entry):

  1. “[E]ven though fair trade brands sell as premium products, they often … sell at exactly the same price as the regular one. [T]his is a puzzle because farmers are supposed to get more when they produce the fair trade brand … Here is how the industry explains this: ‘Michael Ellgass, the director of house brands for Sam’s Club, said the company could afford to pay fair trade’s premium because it has reduced the number of middlemen.’ … Come again? So let me get this straight. The company could actually increase profits by cutting out middlemen, but waited to do so until fair trade came around and the increased revenues could be passed on to farmers instead of the bottom line?”
  2. “Fair trade certification requires that growers commit to various farming practices, and often other things too [such as rules on pesticides, farming techniques, recycling and mandating that the children of farmers were were enrolled in school]. Now, which one of us really know what “fair trade” certification is really getting us when we consume a product with that label? The market-based principle animating the movement is based on the idea that consumers are willing to pay something extra for certain social goals they value. But clearly there is an opaqueness in what the transaction is really about. And who gets to decide what the ‘long list of rules’ should be, if not the consumer herself?”
  3. “Isn’t the farmer himself a better judge of how his extra income should be spent? Should these decisions be made by Starbucks instead? (There are of course social assistance programs where cash grants are conditional on things like this, but they are (i) meant to be aid rather than fair payment for work rendered, and (ii) designed and administered by national governments rather than foreign firms.) Is conditionality imposed by multinational companies better than conditionality imposed by the World Bank or the IMF?”

Dani is not alone in his concerns. Joshua Gans has publically worried about this before (here, here and here). The Economist wrote late last year on the topic here (well worth a read). Indeed, in Australia two (admittedly pretty conservative) academics lodged formal complaints with the ACCC against Oxfam Australia, suggesting that it might be guilty of misleading or deceptive conduct.

The London School of Economics cafeterias exclusively stock Fairtrade coffee. You can see mention of it in the official newsletter of the university here (13 March, 2006). Within the sub-discipline of Trade & Development, LSE’s economics department is ranked in the top few in the world. I wonder if any of those faculty members were consulted before the school made their decision?

Update:

Tim Harford covers the topic tangentially in his book, The Undercover Economist, suggesting that retailers that offer both fair trade and regular products are simply using the fair trade brand as a form of price discrimination. This benefit (to the retailer) disappears, though, when they stock fair trade goods exclusively (as LSE’s cafeterias do) or decline to charge more for the fair trade brand (as Prof. Rodrik focused on). As noted by Free Exchange over at The Economist, this latter example implies a lessening of the retailer’s profit and a greater capture of the final product value by the original farmer, unless there really were greater profits to be had by cutting out the middlemen and the retailers waited until the fair-trade movement to exploit them.

Perhaps we have a coincidence of two phenomena. On the one hand, a consumer-driven (or interest-group-inspired) push for non-market-determined prices to be paid to the farmers gave rise to the fair trade movement. On the other hand, perhaps a lessening of administrative and logistic costs have made increased vertical integration (a.k.a. capturing more of the value chain, or cutting out the middleman) economically feasible or even desirable. If this is true, the coincidental timing would answer Rodrik’s first question.

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Afghan opium production (Updated)

The UN Office on Drugs and Crime has just released their latest report, including details on opium production in Afghanistan. Here are a few of the statistics:

2006 Year-on-year difference 2007
Net opium poppy cultivation 165,000 ha +17% 193,000 ha
In per cent of agricultural land 3.65% 4.27%
Eradication 15,300 ha +24% 19,047 ha
Weighted average opium yield 37.0 kg/ha +15% 42.5 kg/ha
Potential production of opium 6,100 mt +34% 8,200 mt
In percent of global production 92% 93%
Number of households involved in opium cultivation 448,000 +14% 509,000
Afghanistan GDP US$ 6.7 billion +12% US$ 7.5 billion
Afghanistan GDP per capita US$ 290 +7% US$ 310
Total farm-gate value of opium in per cent of GDP 11% 13%
Indicative gross income from opium per ha US$ 4,600 +13% US$ 5,200
Indicative gross income from wheat per ha US$ 530 +3% US$ 546

Make sure you read that correctly: Area under cultivation is up 17% and area eradicated is up 24%. That might make you think (as it did me originally) that the total area producing is down, but you’d be wrong … the 17% was on a huge area and the 24% was on a tiny area. Net productive area went from 149,700 ha to 173,953 ha — an increase of 16%. On top of that, yield per hectare is up 15%, so overall output is up 34%.

GDP/capita is US$310 and — assuming that your crop isn’t eradicated by the US — income from growing opium poppy is US$5,200 per hectare (or $US2,100 per acre). That’s an awfully big incentive. On top of all that, I understand that one of the big appeals of growing poppy is that opium has an extremely high value per unit volume and per unit weight, which are important considerations for a farmer living in a country with very low-quality and high-cost transportation infrastructure.

I wonder how they got the yield up so quickly? Was it improved infrastructure (watering systems), the dedication of better quality land to poppy cultivation, better inputs (fertilizer) or something else? Whatever the answer, that looks to me to be fairly serious evidence of planned investment. These farmers are not just doing this on the side.

This would be a good time to point readers to this opinion piece by Willem Buiter (blog, NBER, LSE) . The discussion by other FT contributors is also well worth reading. Here’s a taster from the first paragraph so you know what he’s saying:

As an economist with a strong commitment to personal liberty and responsibility, my preference would be to see all illegal drugs legalised. The only exception would be substances whose consumption leads to behaviour likely to cause material harm to others.

Further update (30 Aug):

The Economist has produced this graph to illustrate world opium production since 1990:

[ Image removed because it was messing with my site. Click on the Economist link to see it ]