Waylaid Dialectic

May 6, 2014

Democracy and Economic Development

Does democratic governance deliver economic dividends? Even if it didn’t we might still have cause to think democracy was worth it. After all, it seems fair to let people have a say in shaping the rules that govern their lives, and there is some evidence to suggest that democracy delivers important non-economic benefits. Nevertheless, the question of democracy’s impact on economic growth is an important one; at least up to a point wealth is an important component of welfare. And until recently the most influential studies in economics suggested that democratic governance has not been growth enhancing. In particular, sophisticated econometric work by conservative economist Robert Barro showed, or appeared to show, democracy having a small average negative effect on growth, everything else being equal. Barro’s work wasn’t the final word on the matter. Empirical work by political scientist John Gerring and co-authors found that in the long run democracy was probably growth enhancing, and at least one, more recent, econometric study suggests democratisation improves subsequent economic performance. Yet, for the most part, empirical work post-Barro has failed to find a positive causal relationship between democracy and growth. And this, coupled with the recent spectacular economic performance of China, has been enough to suggest to many observers that, however nice it may be, democracy is no better, and maybe even worse, than autocracy in generating growth.

All this might be about to change though…click here to read the rest of this post on Devpolicy.

March 4, 2014

Resistance (to Acemoglu and Robinson) is futile…

Filed under: Development Theory,Institutions — terence @ 7:02 am

Of all the competing explanations to ‘Institutions Rule’, the human capital one always struck me as the most plausible. Or, at least, on the basis of observations of Solomon Islands, I could be very easily convinced that education’s contribution to the world of ideas, and the re-fashioning of ties it also induced, was a deep(er still) determinant of growth. Working in part through its effects on institutions.

However A&R are here with a new NBER working paper, which aspires (on the basis of the abstract only) to lay waste to human capital’s claim to importance…

Institutions, Human Capital and Development
Daron Acemoglu, Francisco A. Gallego, James A. Robinson

NBER Working Paper No. 19933
Issued in February 2014
In this paper we revisit the relationship between institutions, human capital and development. We argue that empirical models that treat institutions and human capital as exogenous are misspecified both because of the usual omitted variable bias problems and because of differential measurement error in these variables, and that this misspecification is at the root of the very large returns of human capital, about 4 to 5 times greater than that implied by micro (Mincerian) estimates, found in some of the previous literature. Using cross-country and cross-regional regressions, we show that when we focus on historically-determined differences in human capital and control for the effect of institutions, the impact of institutions on long-run development is robust, while the estimates of the effect of human capital are much diminished and become consistent with micro estimates. Using historical and cross-country regression evidence, we also show that there is no support for the view that differences in the human capital endowments of early European colonists have been a major factor in the subsequent institutional development of these polities.

 

August 21, 2011

Teh Non-Government is no alternative to teh government!

Filed under: Institutions — terence @ 8:53 am

Chris Blattman thinks Pranab Bardan’s essay on NGO’s, democracy and economic development in the Boston Review is ‘outstanding’. I’m not so sure: ‘interesting but unconvincing’ is how I’d describe it.

It’s not just that article is long on speculation and short on specifics, and actual evidence, but more than this its two core arguments strike me as tenuous. The arguments being:

1. That the particularist concerns of individual NGOs and advocacy groups are no substitute for broad based democratically inclusive political parties.

2. That the rights claims and legal actions of NGOs come with trade-offs. Specifically, they may come at the cost of economic development.

On point 1 — first, it strikes me as premature to assume that NGOs are a substitute as opposed to the early building blocks. In Brazil, at least, the Workers Party sprung out of civil society. Trades Unions played a major role but so did other activist groups and social groups. Second, even if — in the case of India, which Bardan uses to illustrate his arguments — there’s no nascent democratic movement buried in the social movements, it’s still a major leap to argue that they are actually a causal impediment to its formation. This, I think, is very unlikely. Rather, I’d say the NGOs are the response of activists and ordinary people to a resolutely politically unequal society. What does Bardan actually expect Indians to do? Sit quietly, waiting patiently for high quality multi-party democracy to arrive someday while, in the meantime, wrongs are committed against them?

Bardan’s argument here is essentially the same one used often by aid critics: if what you’re doing isn’t perfect, then clearly it isn’t any good.

On point 2 — is there any actual evidence that people engaging in collective action in search of their rights is something that has costs in terms of medium-long run economic development? Bardan provides none (remember India is a growth success story in recent years). For what it’s worth there’s good empirical evidence (ala Sokoloff and Engerman, Rodrik, Acemoglu and Robinson etc) that suggests that political and legal equality and broadly distributed access to economic institutions such as property rights are essential to economic growth. And I’d say, if anything, India’s NGOs are promoting this not forestalling it.

August 18, 2011

Nasty, Brutal and Shot

Filed under: Institutions,Random Musings — terence @ 6:39 am
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A few years ago I engaged in one of the most futile activities possible on the internet: arguing with Libertarians.

Of all the things I learnt about Libertarianism while doing this, one of the more interesting/amusing was being made aware of the existence of a sub-genre, Anarcho-Capitalism, whose adherents’ thirst for liberty was so strong that they would tolerate no state at all but who, at the same time, were still rather keen on property rights. Their solution to the question, ‘How can you have property rights without the institution of the state to define and enforce them?’, was fantastic: employ competing private militias to do the job. Contract people to enforce contracts and make the market work.

To my mind this seemed rather implausible. One of those ideas that was so silly that all you could say for it was that it would never actually happen.

Of course, I was wrong. From an excellent review by Misha Glenny:

Mafia groups typically act as informal policemen who make themselves available as arbitrators to buyers and sellers in markets that the state is either unwilling or unable to regulate. In Sicily itself, Diego Gambetta and others have traced the origins of the mafia back to the first half of the 19th century, when they acted as middlemen whose function was to ensure fair play in the agricultural markets of central and western Sicily (to this day the mafia has only a limited presence in eastern Sicily, which shows how difficult it is to expand zones of criminal influence). They would guarantee the price of cattle or fruit at market and see to it that buyer and seller stuck to their agreement. They would be paid for their services, but if one of the players failed to pay his dues, the mafia would in all likelihood resort to violence – or, at the very least, the credible threat of violence.

Across the world, mafias police both legal and illegal markets. It could be restaurants, it could be drugs, though it’s quite rare for them to give up their core protection service to try their hand as restaurateurs. Drugs, because prohibited, are far more lucrative. Mafias determine who has access to the market and have little reason not to exploit their advantage (it doesn’t follow that mafiosi are necessarily good drug dealers). This is where a mafia’s participation in an illegal market and its protection of that market begin to blur, but the distinction is important in trying to understand how the underground economy works. A mafia seeks to exploit an absent or weak state. It assumes the state’s policing responsibilities and usurps some of its monopoly on violence…

September 21, 2010

William Easterly: Libertarians all talk

Filed under: Aid,Governance,Institutions,Social Justice — terence @ 1:06 pm
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Meanwhile, in a helpful post at AidWatch, libertarian aid blogger William Easterly outlines in a diagramme one of the main shortcomings of modern libertarianism: when it comes to issues such as human rights and dictatorship in developing countries, libertarians are all talk and no action.

Of course, there are times when there is no better option than not to act, but it seems to me that to declare from the outset that you’re against all intervention, whilst at the same time professing to care about human rights, is simply another strategy for thwarting change and protecting privilege, while appearing ethical yourself.

Easterly’s post is a good illustration of this. Aid agencies face a real dilemma when dealing with authoritarian states: if they provide aid they may, in effect, be propping such states up, on the other hand, if they withdraw aid they may do nothing to bring about regime change and simply harm the very people they were hoping to help. Or worse, as recent research appears to show [pdf] (h/t the Monkey Cage), rapid aid withdrawal may well lead to armed conflict.

What’s more, it’s very hard for an aid agency to openly criticise a host country: official government aid agencies aren’t actually mandated to do this (criticism must come from their political masters) and, for NGOs, criticism usually leads to being expelled – in other words withdrawing your aid.

Which isn’t to say that aid agencies should never criticise repressive regimes or that they should never withdraw their support. Rather, as I’ve pointed out before on this blog, the point is that there is a dilemma. A challenge with no easy answers. This is the sort of thing aid agencies have to negotiate all the time. And it would be nice if at some point William Easterly would stop polishing his own halo long enough to acknowledge this.

August 24, 2010

Whole-lotta-links

Ok so I missed Friday but here goes…

The Guardian covers recent criticism of Wilkinson and Pickett’s book the Spirit Level, while the authors have a page devoted to responding to the critiques.

Meanwhile, the British Medical Journal has a meta-review of studies of the impact of inequality on health. Summarised conclusion:

The results suggest a modest adverse effect of income inequality on health, although the population impact might be larger if the association is truly causal. The results also support the threshold effect hypothesis, which posits the existence of a threshold of income inequality beyond which adverse impacts on health begin to emerge.

On the subject of inequality, and following from my earlier post on inequality in Latin America, Arthur Ituassu has an interesting article at OpenDemocracy in which he examines the relationship between Brazil’s falling inequality and its rising democracy.

Speaking of democracy, Dani Rodrik a does good job of summarising the economic case for democracy at Project Syndicate.

And at VoxEu John Gibson and David McKenzie examine the economic consequences of migration, in particular the dreaded brain drain. Their conclusion:

Our findings question both the pessimistic view that high-skilled migration hurts development, and the optimistic view that most countries can benefit to the extent Taiwan, China and India have from trade and investment flows. For most countries, the first-order effects are mostly an individual phenomenon – individuals stand to gain a lot from migration, and the second-order effects on others are small in comparison and seem to at least balance one another out if not also be a net positive. In the absence of compelling evidence for massive externalities from their presence, we argue governments should not be so concerned about high rates of skilled emigration, but focus instead on the basics of providing the policy environment needed to foster growth and innovation at home.

On to aid, and a blast from the past in the form of a 1997 Foreign Affairs review by David Rieff of Michael Maran’s book the ‘Road to Hell’. No surprise to discover that people have been launching polemics at aid for a very long time. Rieff’s review is well worth a read both because, depressingly, many of the issues covered remain with us, but also because its evenhanded on the aid industry, criticising where it’s fallen short but also acknowledging the real dilemmas the aid workers face.

I wrote a while ago on the challenges for aid agencies when it comes to admitting they got it wrong. Meanwhile Johann Hari tries to do this on a personal level.

On Melanesian Politics, Phil Twyford writes of his time as an election observer in Solomon Islands, and in doing so provides a handy summary of Solomons politics.

And finally, Our Word is Our Weapon, one of the first blogs I encountered writing regularly about aid, is back. Or maybe it never went away and I just had the URL wrong? Still mostly only posting links; interesting links mind you…

July 9, 2010

Link Friday

Filed under: Aid,Governance,Institutions,Social Justice,Trade — terence @ 12:13 pm
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Starting with industrial policy…

At VoxEU Ann Harrison and Andres Rodriguez-Clare make the case for “soft industrial policy”…

…whose goal is to develop a process whereby government, industry, and cluster-level private organisations can collaborate on interventions that can directly increase productivity. The idea is to shift the attention from interventions that distort prices to interventions that deal directly with the coordination problems that keep productivity low in existing or raising sectors. Thus, instead of tariffs, export subsidies, and tax breaks for foreign corporations, we think of programmes and grants to help particular clusters by increasing the supply of skilled workers, encouraging technology adoption, and improving regulation and infrastructure. While “hard” industrial policy is easier to implement than “soft” industrial policy measures, tariffs and subsidies become entrenched and are more easily subject to manipulation by interest groups.

The article is an excellent overview of the industrial policy debate, and their suggestion certainly has appeal. As always though, I’m still not confident that what they’re arguing for could really work in the institutional environment of developing countries, or that it would be any less subject to manipulation by interest groups than traditional industrial policy. Still, well worth a read.

Meanwhile, industrial policy is now on the menu at the World Bank, courtesy of their interesting new chief economist Justin Lin. And at Poverty to Power Duncan Green reviews some of Lin’s suggestions for industrial policy, offering similar concerns about feasibility in less than optimal institutional environments. To which Lin offers a thoughtful response.

Sticking with Oxfam, Oxfam New Zealand, spurred by last year’s Ministerially mandated change of focus to New Zealand’s aid programme (the core focus now being on economic development), have produced a really interesting piece of research [pdf] on what might work in terms of aid for economic development in the Pacific.

Also on the subject of aid, Owen makes an uncharacteristic error in attributing an incorrect figure to William Easterly. And yet the underlying point of his post is correct and bares repeating. The West really, really hasn’t given that much aid to developing countries:

The G-20 countries have, over the whole history of aid, given less aid to sub-Saharan Africa than they spent on fiscal stimulus in the single year of 2009.

Keeping the segues flowing, William Easterly is at least 50 percent correct in his most recent post at AidWatch:

Here’s why direct solutions to problems cannot foster development. Each direct solution depends on lots of other complementary factors, so the solutions can seldom be generalized across different settings; Solutions must fit each local context. Solutions that generate the highest payoff in each setting should be a higher priority than the lowest payoff solutions. Since there is little or no feedback on how well each solution is working in each local situation, there is little possibility for any such adjustments.

Hear, hear.

Where his post falls apart is in it’s extolling of markets and democracy as the best possible means of finding solutions to the complexities of context. The invisible hand is a miraculous allocational tool, and functioning markets have a critical role to play in enhancing human welfare. But markets are embedded in institutions and when institutions are poor markets are often absent or have perverse outcomes. And in most developing countries institutions are poor. Similarly, democracy is an incredibly good thing. And it’s certainly the least worst means of governance that humans have developed. But in countries where the nation state sits awkwardly against identity and informal institutions, democracy struggles. It’s not a panacea.

Which isn’t to say that economic markets or democratic polities are bad things, even in the most troubled developing countries, but rather that they aren’t the sole answer to the curly problems of aid and development. They’re only part of the answer: compliments to good aid and hard work in determining what works in governance; not alternatives.

Finally (and by now I’m all out of segues) Johann Hari attributes the commodity price crisis, not to rising demand in China, not to supply shocks, not even to ethanol, but rather to investment banks working the futures market. Is he correct? I don’t know. If he is, he’s certainly right about one thing: morally, if not legally, that’s an incredible crime.

May 17, 2010

China and the World Bank

Filed under: China,Institutions — terence @ 5:44 pm
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I’ve always held the belief that giving developing countries more power on the boards of the World Bank and IMF would be beneficial. And, along these lines, had you asked me, I would have instinctively answered that recent moves to give more power to China on the boards of the Bank and Fund would be a good thing. However, over at AidWatch, erstwhile World Bank staffer William Easterly, provides one very good argument as to why this might not be the case: censorship.

The globalisation of censorship isn’t new (remember the Salman Rushdie affair, or Margaret Thatcher’s attempts to get a book about the British secret service banned elsewhere in the English speaking world). And in New Zealand there was recent controversy regarding the Chinese government reportedly pressuring local council’s in New Zealand not to let Falun Gong marchers enter in their Christmas parades.

But while it isn’t new – the rising economic might of China and density of economic inter-linkages between China and the rest of the World give pretty good reason to believe that it’s probably intensifying. Which isn’t good.

Or, to put it another way: censorship bad; globalisation really freakin complicated.

April 25, 2010

Deliberative Democracy

Filed under: Institutions — terence @ 6:43 pm
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Not directly development related but an interesting read:

Mark Thorma on Deliberative Democracy

April 24, 2010

Property Rights and Wrongs

Filed under: Aid,Institutions — terence @ 3:46 pm
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A few weeks back Aid Watch came to visit. Aid Watch in this instance not being the name of Bill Easterly and Laura Freschi’s website but rather the left-wing Australian NGO. The visit was part of a speaking tour in which to raise awareness of land privatisation in Melanesia. The allegation implicit in the campaign being that privatisation is taking place at the behest of aid donors.

The panel discussion I attended was – for better and for worse – about what I expected.

For better: two of the three speakers were Melanesians who clearly knew about the context and cared about the issues; and the issues they raised were all real ones. Above and beyond the specifics of the talk it was also great to see independent civil society organisations holding government agencies to account. Accountability in development is, it goes without saying, a good thing.

For worse: arguably there was a bit too much blaming of donors – they’re not omnipotent and as one Pacific Island member of the audience pointed out, domestic governments play a major role in land policies too. More significantly, I thought the solutions the speakers offered, which all appeared to revolve around tradition and the past, weren’t really practical solutions to the problem of land in Melanesia. In all the Melanesian Countries with the partial exception of Fiji, populations are growing rapidly, and the idea that people might continue living off the land as they always have, in the face of this, doesn’t seem viable to me. Not to mention the fact that for the islands’ urban populations this option is already largely forgone.

Having said that I readily confess that I have no idea what the solutions to issues of land and land tenure in Melanesia are. And so, as the talks progressed I decided to jot down notes on the pros and cons of the privatisation of land.

Pros:

Secure property rights encourage investment, which brings in capital, which can provide jobs in the short term and facilitate development over time.

Commercial farms may be more efficient producers than communal plots, enjoying efficiencies and economies of scale.

Even for small scale farmers, privatisation and the ability to profit may foster increased productivity.

Secure tenure may serve as collateral for loans.

For urban slum dwellers actual rights to property *may* also translate into political rights and empowerment more generally.

Cons:

It may not do so for everyone, and the effect will be less in the future as populations grow, but common land serves as a social safety net in countries where formal safety nets are absent.

Often there are many competing claims to common land (i.e. one group ‘owns’ it but another can harvest from it, and another cross it) this makes it hard to formalise tenure and it means privatisation is often likely to create far more losers than winners.

As institutions property rights sit nested within other institutions (social and political). This means there are a hundred and one ways that privatisation processes can go astray, with the property ending up in the hands of the few while the poor stay as poor as ever just now without a safety net (see Russia, the looting of; and this article in Slate).

There’s also the issue of positional goods in an unequal world. There’s only a finite amount of land, and if it all gets brought up by wealthy expats to set up holiday homes (as is happening in at least one Melanesian Island at present) the price of land will become so inflated that the locals will never be able to buy.

Finally, there’s the fact that in some Pacific Island Countries the ownership of land is intricately linked to political structures. Meaning that changes in land regime may lead to wholesale political change. Something that’s not inherently bad, but which can go awfully wrong.

Jotting the notes down was helpful, and at least made the issues clearer for me. But I’ve still no idea of what the best means of land management in Melanesia might be. Consider me confused.

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