The fatal misconception of population control

development ▪ policy ▪

For the holiday, I decided to finish Michael Connelly's Fatal Misconception: The Struggle to Control World Population. It's an excellent history of how a hypothesis -- that unchecked, population growth will result in all sorts of problems -- became an ideology that got translated into policies and spun out of control to ruin many lives of women, mostly in developing countries. From the book's concluding chapter:

The great tragedy of population control, the fatal misconception, was to think that one could know other people's interests better than they knew it themselves. But if the idea of planning other people's families is now discredited, this very human tendency is still with us. The essence of population control... was to make rules for other people without having to answer to them. It appealed to the rich and powerful because, with the spread of emancipatory movements and the integration of markets, it began to appear easier and more profitable to control populations than to control territory. That is why opponents were correct in viewing it as another chapter in the unfinished history of imperialism.

The book is full of examples of how good intentions is a poor substitute for good evidence when devising (and scaling up) public policies. Yet, this seems to be the default mode of policy-making -- not only in Indonesia, but also within many international organizations and NGOs. Personally, I find this rather scary.

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Scholes on financial regulation

economics ▪ policy ▪

From Myron Scholes's opening statement on The Economist's debate on financial regulation with Joseph Stiglitz:

Economic theory suggests that financial innovation must lead to failures. And, in particular, since successful innovations are hard to predict, the infrastructure necessary to support innovation needs to lag the innovations themselves, which increases the probability that controls will be insufficient at times to prevent breakdowns in governance mechanisms. Failures, however, do not lead to the conclusion that re-regulation will succeed in stemming future failures. Or that society will be better off with fewer freedoms. Although governments are able to regulate organisational forms, they are unable to regulate the services provided by competing entities, many yet to be born. Organisational forms change with financial innovations. Although functions of finance remain static and are similar in Africa, Asia, Europe and the United States, their provision is dynamic as entities attempt to profit by providing services at lower cost and greater benefit than competing alternatives.

Thanks to Puspa Amri for the pointer.

On a side note: Rodrik put up a challenge in his blog for anyone to come up with financial innovations that have made us better off, and Steve Wadman took it up. HT: Dani Rodrik.

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Clive Crook on the crisis and innovation

economics ▪ policy ▪

Growth economists will tell you that the key to long term growth is productivity improvement, driven by technical changes and innovations. Economic history suggests that technical changes create boom-and-bust cycles as people adapt to the new technology. One can say that the crisis is a consequence of technical changes and innovations.

So, what of the present crisis? Does it suggest the utter failure of market forces, hence a need for an overall greater regulation in the financial market -- and not just those related to the specific problems at hand? FT's Clive Crook on the crisis' impact on the regulatory regime:

There is a broader point. The financial crisis was indeed a failure of regulation. The system was overwhelmed by innovation. Regulators are going to have to catch up and, you could say, try to hold innovation back. But finance is not a normal industry. The question to ponder is this: in which other industries will curbing innovation - also known as market forces - strike governments or voters, in the US or anywhere else, as a good idea?

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Easterly on the wrong lessons from the US crisis

economics ▪ policy ▪

William Easterly on what not to learn from the crisis, ie., "that development flows from all-knowing states rather than creative individuals". His last two paragraphs:

How much poverty has endured because individual entrepreneurs were shunned in favor of the likes of the $5 billion state-owned Ajaokuta Steel Mill in Nigeria, which never produced a bar of steel? Or because African governments spend their time preparing World Bank-required national Poverty Reduction Strategy Reports instead of freeing space for innovators?

We will never know. But we do know that the free market has a long-run track record of creating prosperity -- even with the occasional crash. The Depression's deceptive intellectual legacy is that development flows from all-knowing states rather than creative individuals. Here's hoping that the backlash to today's crash will not spawn another round of bad economics for the poor.

HT: Marginal Revolution

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Why a high oil price is a good thing...

economics ▪ policy ▪

Foreign Policy gives five very good reasons.

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McLeod on "renewing" the rupiah

monetary ▪ policy ▪

Ross McLeod argues for dropping some zeros off the Rupiah:

[It] is far easier to eyeball numbers if they consist of three or four digits rather than a dozen or more (and of course many more numbers can be reported in a single table if they are rounded). For the same kinds of reasons, it is highly inconvenient to have to undertake low value transactions in very large nominal amounts.

The argument for introducing another ‘new rupiah’ is compelling. (The present rupiah was itself once new, having been introduced to replace the old one, which had become almost worthless as a result of the hyperinflation of the mid-1960s.) Quite simply, it is grossly inefficient to have to calculate and undertake transactions in the millions, when they could just as easily be done in hundreds or thousands.

I can think of only one counter argument: that the introduction of a new rupiah would be confusing and worrying to many members of the public. No doubt if the transition were not handled carefully, that would be the case. But people are not stupid. Provided high-level government officials explain the rationale for the change carefully and patiently, the general public will understand. Perhaps the most important aspect to stress is that the old currency will be exchangeable for the new at a rate of, say, 1000 for 1, for a reasonably long period of time. It would probably be sensible to introduce new cents at the same time.

I wholly agree.

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The newly-published growth report

growth ▪ policy ▪

The final version of the growth report, published by the Commission on Growth and Development is out and can be downloaded here. I don't have time to read it in full yet, but here is a snippet from this summary on Asia:

Nine of the 13 countries that have been successful in achieving sustained high growth are from Asia: China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan (China) and Thailand.

These nine high-growth countries all share common characteristics: engagement with the global economy, macroeconomic stability, high rates of saving and investment, the market allocation of resources, and credible and capable governments.

And here is an interview of Michael Spence, Nobel Laureate and chairman of the commission, on the report.

More on this once I read the report once I pass my core exams.

UPDATE 1: William Easterly doesn't like the report.
UPDATE 2 (6/3/08): Martin Wolf takes on Easterly. (HT: Dani Rodrik).
UPDATE 3 (6/16/08): Dani Rodrik joins the fray.

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Poverty trap in the US

policy ▪ poverty ▪

When one hears about poverty trap, the image that comes up usually involve developing countries. It isn't necessarily so. Here is Jeffrey Liebman, Harvard professor (and an adviser to presidential candidate, Barack Obama):

Despite the EITC and child credit, the poverty trap is still very much a reality in the U.S. A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me. She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn’t make ends meet any more. I told her I didn’t know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. She really did come out behind by several hundred dollars a month. She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance. Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule). She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child. She lost around $1600 a year of the EITC. She paid payroll tax on the additional income. Finally, the new job was in Boston, and she lived in a suburb. So now she has $300 a month of additional gas and parking charges. She asked me if she should go back to earning $25,000. I told her that she should first try to find a $35k job closer to home. Also, she apparently can’t fully reverse her decision to take the higher paying job because she can’t get the child care voucher back (the waiting list is several years long she thinks). She is really stuck. She tried taking an additional weekend job, but the combination of losing 30 percent in increased rent and paying for someone to take care of her child meant it didn’t help much either.

The question is what is the policy solution here...

You can read the rest at Jeff Frankel's blog here. It's not easy to design a policy support for the poor -- a means-tested program such as EITC that cuts off benefit at a certain income may create an adverse incentive at the margin for those whose income is around the cut-off point.

HT: Greg Mankiw.

Slightly off topic, I think it's about time Indonesian politicians start to think in a systematic way about policy support for the poor that minimizes the incentive distortions to the broader economy. I think this can be done -- for all its faults, especially as a program designed and implemented in such a short time, the cash transfer program was relatively successful in achieving such an objective. It's high time that we think of such programs, especially given the expected global food price hikes.

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Indonesians want more globalization

indonesia ▪ policy ▪

...according to this survey. Asked the following:

Overall do you think economic globalization, including trade and investment, is growing much too quickly, a bit too quickly, a bit too slowly, or much too slowly?

more than half of the representative respondents in Indonesia think that the current growth of globalization is too slow (39% thinks it's a bit too slowly, another 15% much too slowly). Only 40% think that the current pace of globalization is either a bit or much too fast. Surprised?



HT: Dani Rodrik

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Boudreaux and Cowen on microcredit

economics ▪ microfinance ▪ policy ▪

Karol Boudreaux and Tyler Cowen ask the following on microcredit:

But can microcredit achieve the massive changes its proponents claim? Is it the solution to poverty in the developing world, or something more ­modest—­a way to empower the poor, particularly poor women, with some control over their lives and their ­assets?

and conclude that, more often, it's the latter:

Microcredit is making people’s lives better around the world. But for the most part, it is not pulling them out of poverty. It is hard to find entrepreneurs who start with these tiny loans and graduate to run commercial empires...[Microcredit] is important even when it does nothing more than stave off ­decline.

With microcredit, life becomes more bearable and easier to manage. The improvements may not show up as an explicit return on investment, but the benefits are very real. If a poor family is able to keep a child in school, send someone to a clinic, or build up more secure savings, its ­well-­being improves, if only marginally.

I agree: A lot of the benefits of microcredit programs come from the "consumption support" function that allows poorest households to smooth consumption (as well as human-capital investment in their children's education) during bad times. Unfortunately, many still don't appreciate this function of microcredits. One World Bank Jakarta official once told me how he could not convince a forum of local NGOs and donor agencies not to require microloans be used for "productive activities" in a microcredit program they were considering. An instance of policymaker paternalism, perhaps?

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Restricting modern retailers: Winners and losers

economics ▪ urban ▪ policy ▪

From last week's Jakarta Post:

The government has issued a regulation to restrict the expansion of modern retailers including supermarkets, hypermarkets and convenience stores, which have been widely criticized for edging out traditional retailers.

Widely criticized for edging out and causing the decline of traditional retailers? Sure -- but are they really the culprit? Not according to this study.

The law apparently will focus on zoning issues. Take Jakarta, for instance. According to one of the ministry's general, in Jakarta, (I presume, new?) hypermarkets can only be opened at the outskirts. This is, indeed, a victory... for Carrefour, Giants, and all others that have managed to establish themselves in Jakarta prior to the regulation (I presume, the local government isn't going to revoke the licenses for existing hypermarkets). Unfortunately, it's bad news for the rest of us, which is very likely to include the very small retailers that the regulation was supposed to protect.

Why? Hypermarkets operate in an oligopoly market. By removing the threat of new entrants, the regulation makes the environment in which the hypermarkets operate more "stable". This has an effect of "softening" the competition amongst existing oligopolies. This softened competition allows oligopolists to increase their profit margins. Hence, I suspect that this regulation will increase the real profits of hypermarkets located in Jakarta.

And, if I am correct, guess from whose pockets will these increased profits come from? The rest of us, obviously. Since many owners of warungs -- street-side vendors -- also purchase their goods from these hypermarkets, they are likely to have to pay more that before. They would pass some of those costs to the consumers, but since goods offered by these small vendors tend to be elastic, this will reduce their overall revenue.

Herein lies the irony: A regulation that is supposed to "protect" smaller retailers (despite evidence showing that the hypermarkets are not the most important culprit in their decline) might end up accelerating their demise. On the other hand, the supposedly "big-and-evil" hypermarkets might actually gain from the whole enterprise. And consumers, which is clearly the largest constituents, will lose out from all this.

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Growth policies: No substitute for thinking

economics ▪ growth ▪ policy ▪

I have just finished reading Chapter 2 of Rodrik's latest book (which is a revised version of this "Growth Diagnostics" paper):

Most well-trained economists would agree that the standard policy reforms included in the Washington Consensus have the potential to be growth-promoting. What the experience of the last 15 years has shown, however, is that the impact of these reforms is heavily dependent on circumstances...We argue in this paper that this calls for an approach to reform that is much more contingent on the economic environment, but one that also avoids an “anything goes” attitude of nihilism. We show it is possible to develop a unified framework for analyzing and formulating growth strategies that is both operational and based on solid economic reasoning.

The authors then offer a growth diagnostics framework that is summarized by Rodrik here. The paper concludes with the following:

Across-the-board reform packages have often failed to get countries growing again. The method for growth diagnostics we provide in this paper should help target reform on the most binding constraints that impede growth... As our discussion of El Salvador, Brazil, and the Dominican Republic illustrates, each of these circumstances throws out different diagnostic signals. An approach to development that determines the action agenda on the basis of these signals is likely to be considerably more effective than a laundry-list approach with a long list of institutional and governance reforms that may or may not be well targeted on the most binding constraints to growth.

I agree with Rodrik's general message on the context-dependency of growth policies. His offered framework is also useful for policymakers. Yet it is no substitute for thinking by developing countries' economists and policymakers: They need to analyze which of the agenda are particularly relevant to their respective economies. Rodrik puts it best: "The framework does not economize on inputs (the thoughtfulness required to reach decisions), only on outputs (the list of things that we recommend governments should do to get growth going)".

PS: For a somewhat similar exercise for Indonesia (though it doesn't seem to be using this exact framework), see the reports posted here (particularly its Special Focus on Regions reports, on the left sidebar).

PPS: Here is a set of papers commissioned by the Commission on Growth and Development.

PPPS: Charles Kenny offers a review of new evidence on growth in the last six years (his answer: Not very much!). HT: Marginal Revolution.

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Arianto Patunru on Indonesia in 2007

indonesia ▪ policy ▪

Arianto Patunru, an economist and the Deputy Director of the Institute of Economic and Social Research in Indonesia, offers his take on Indonesia in 2007.

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Rodrik v. Stiglitz

development ▪ economists ▪

Dani Rodrik discriminates himself from Nobel Laureate (and, nowadays, an anti-globalization poster boy) Joseph Stiglitz. Give and take, I am broadly in agreement with Rodrik on all four points of contention, i.e., on the global economic system, the role of international organizations, the substance of development policies, and on macroeconomic policy.

An aside, Rodrik's new book, One Economics, Many Recipes is out. I've just ordered my copy, so can't say very much about it (but, hopefully, will do so before the end of winter break). In the meantime, here is a transcription of the Crooked Timber seminar on the book.

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Are malnutritioned children doomed forever?

economics ▪ health ▪ policy ▪

A question a policymaker might ask is whether a person with poor nutritional status when young can recover from the predicament when older. Subha Mani of the University of Southern California (USC) uses the IFLS data to answer this question and come to a heartening conclusion:

[The] dynamic results indicate that there exists catch-up potential in health outcomes, that is, children who suffered from chronic malnutrition during childhood are not likely to remain as undernourished forever. The presence of catch-up potential suggests that focused attempts must be made towards improving nutritional outcomes of children at all ages with special emphasis on the very young.

The disadvantage will still be there. Her model suggests that children with poor nutrition would have had 0.6 less grades of schooling compared to well-nourished ones, but that in the absence of any catch-up effect, the gap would have been four times larger.

You can read the rest of the paper here.

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Do supermarkets harm traditional markets?

economics ▪ urban ▪ policy ▪

Not according to this not-so-new report by SMERU:

This study measures the impact of supermarkets on traditional markets in urban centers in Indonesia quantitatively using difference-in-difference and econometric methods as well as qualitatively using in-depth interviews. The quantitative methods find no statistically significant impact on earnings and profit but a statistically significant impact of supermarkets on the number of employees in traditional markets. The qualitative findings suggest that the decline in traditional markets is mostly caused by internal problems from which supermarkets benefit. Therefore, ensuring the sustainability of traditional markets would require an overhaul of the traditional market management system, enabling them to compete with and survive alongside supermarkets.

Note that the one statistically significant negative impact of supermarkets was to reduce employment in the traditional markets. However, since supermarkets create employment, I wonder whether the net employment impact is positive or negative.

The report looks comprehensive and I think it deserves a wider coverage in the conventional media. I sure wish SMERU has an Indonesian version of it. Who knows, Indonesian journalists might actually take a look at and investigate the (absence of) empirical evidence behind the case against modern markets, instead of just parroting the anecdotal arguments of the traditional-market lobbies.

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Economic tea-leaves

economics ▪ policy ▪

Paul Krugman on interpreters of US economic statistics:

The truth is that I often feel that people interpreting economic data are taking a kind of Rorschach ink blot test — what they’re seeing is more of a random pattern than anything else, and their interpretation of that pattern is telling you more about their personal demons than it is about what’s really happening in the economy

And right now that’s utterly true. Since there are now data telling you more or less whatever you want to hear, you’re free to believe whatever you want.

The same can be said of interpreters of national poverty statistics, especially when they ignore simple statistical features such as standard deviations (see here and here).

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FP: Why we trade

economics ▪ trade ▪

Once in a while, it's nice to get reminded for the reason we trade. From Foreign Policy:

The logic of “exports, good—imports, bad” seems straightforward at first—after all, when a factory closes because of foreign competition, there seem to be fewer jobs than there otherwise would be. Don’t imports cause factories to close? Don’t exports build factories?

But is the logic really so clear? As a thought experiment, take what would seem to be the ideal situation for a mercantilist. Suppose we only export and import nothing. The ultimate trade surplus. So we work and use raw materials and effort and creativity to produce stuff for others without getting anything in return. There’s another name for that. It’s called slavery. How can a country get rich working for others?

PS: I am back in school, which partly explains the sparse update. Hopefully, I can update slightly more frequently once things get back to "normal" -- whenever that may be.

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