Here’s an interesting tidbit from a paper (pdf) on the impacts of China’s great famine in 1959-61 by Xin Meng and Nancy Qian that’s full of interesting stuff:

Officially, the cause of the famine was a fall in grain output due to bad weather. Several recent studies have argued that although there was a fall in output, the “three years of natural disasters” (san nian zi ran zai hai ), was largely driven by a set of misguided policies (Kueh, 1995; Li and Yang, 2005; Peng, 1987; Yao, 1999; Yang, 1996; Chang and Wen, 1997; Perkins and
Yusuf, 1984; Lin, 1990). Using official aggregated data on historical weather conditions, Kueh (1995) finds that although bad weather was a contributing factor, it was unlikely to have caused the full extent of the grain reduction necessary to explain the severity of the famine…

We obtained historical climate data from China’s 205 permanent weather stations and county level data on non-famine grain output and survival. Figure 3A plots the annual mean precipitation and mean temperature by year in the eight provinces included in this study. There is no noticeable difference during the famine years. The relationship between natural conditions and grain output can be examined more directly. We use county-level grain output and weather conditions for non-famine years to estimate the correlation between natural conditions and output. We then use these estimates and climate data from 1959-1961 to predict output during the famine years. If the famine was caused by natural conditions, the predicted output for famine years should be significantly different from normal output. Instead, we find that the predicted output is highly correlated to actual non-famine output. Alternatively, we can also examine the correlation between survival and historical weather conditions. Figure 3B plots a proxy for survival at the county level (the ratio of famine birth cohort population in 1990 to non-famine birth cohort population in 1990) against weather conditions during the famine relative to normal periods (the ratio of famine period rainfall to non-famine rainfall, and the ratio of famine period temperature to non-famine temperature). There is no visible correlation. These results all show that the famine was unlikely to have been caused by “natural” disasters.

It seems that the real question is how much did Mao know?

US foreign aid spending may be shifting from poverty reduction to democracy promotion, and democracy may not do much to help the poor.

If you enjoyed Steve Radelet and William Easterly’s sparring about foreign aid at Cato Unbound, they’re doing it again at the Council on Foreign Relations.

[HT: CGD]

I attended a lecture by Robert Wade this afternoon that drew from a forthcoming paper by the LSE professor of political economy and development. His talk was titled “How can the developing countries catch up? The case for open economy industrial policies.”

The presentation was over an hour and touched on a number of important debates concerning the relationship between trade and development, so my comments here will be limited to a small subset of the issues Wade covered. In the broadest terms, Professor Wade first argued that globalization isn’t working and then made the case for revisiting and deploying industrial policy to improve economic growth in developing countries.

Wade argued that the Washington Consensus is in place and not delivering on its promise of economic growth. He said that we have been witnesses to an empirical test of an “if A, then B” proposition, where A is globalization and B is economic improvement:

How do we know we’ve had globalization? The world average for tariff revenue as a percentage of GDP has fallen significantly in the last 25 years, while trade as a portion of world GDP has approximately doubled since 1970. And the World Bank is now sheepishly conceding that context and country-specifics might matter for policymaking.

Has it worked? No. Except for Asia, regional average income per capita (in PPP terms) as a percentage of developed countries’ GDP has fallen. Moreover, as Branko Milanovic shows in Worlds Apart, income inequality between countries has grown in the last forty years.

Do I find the previous two paragraphs convincing? Not really. While the rest of Professor Wade’s presentation was marked by disaggregation, close examination, and nuance, this introductory case against free trade is quite crude. While globalization has been happening, using global aggregates masks the vast differences in openness between countries. As Brink Lindsey forcefully argues in Against the Dead Hand, market fundamentalism hardly rules the globe. Moreover, using regional averages for economic performance groups together winners and losers, as well as open and closed economies. This tells us very little about the impact of liberalization in developing countries. Finally, Professor Wade holds globalization to a very high standard — it is expected to not only increase economic growth in poor countries, but cause absolute convergence with the rich!

Additional objections could also be made, but there’s no need to dive into messy issues like the debate between Milanovic and <A href=”Surjit Bhalla whether inequality amongst individuals has increased. I believe that Professor Wade is attacking a strawperson by showing that African economic performance during the last forty years has been miserable despite the phenomenon of globalization occurring simultaneously. Perhaps this argument will be better developed in his forthcoming paper. Thankfully, despite Wade’s use of globalization’s supposed failure as a motivating reason to explore industrial policy, it is not necessary for the rest of his argument, which is intriguing, well-argued, and relevant.

Wade put forth five propositions:
(1) Development involves diversification of production, not specialization. Putting all your eggs in the comparative advantage basket is foolish. (Imbs & Wacziarg 2003)
(2) That diversification needs to be into products associated with higher levels of income. (Hausmann, Hwang & Rodrik)
(3) Poor countries face a tradeoff between ease of diversification and gains from it. It’s easy to move to near products, but “structural transformations” that promote development are harder. (Hausmann & Klinger)
(4) Public inputs can be sector-specific. “Investment climate” surveys that ignore this are unhelpful.
(5) The supply of public inputs is subject to government failure (information, incentive, and exit failures). Developing countries should look to the institutions of Korea, Taiwan, and Japan to learn how to address these issues.

Many of these arguments echo what Dani Rodrik has been saying about industrial policy. Summarizing their intricacies and supporting evidence is beyond the scope of this blog post, so I recommend reading Rodrik’s work until Wade’s new paper becomes available.

Many of Wade’s arguments are motivated by his view of the historical success of the East Asian tigers. He assigns significant credit to industrial policy in explaining the growth of South Korea and Taiwan. I have not yet read Governing the Market, Wade’s treatise on the topic, but its thrust is summarized in this working paper. Arvind Panagariya provides a brief overview of the conflicting schools of thought on this topic.

In short, I found the discussion regarding globalization and the Washington Consensus shallow, but the great bulk of Professor Wade’s lecture was thought-provoking and nuanced. With top-class economists such as Rodrik and Wade defending interventionist industrial policy, free traders had best prepare for a vigorous debate. I look forward to Wade’s paper.

Muhammad Yunus and the microfinance bank Grameen have won the Nobel Peace Prize.

Dani Rodrik says that outward-orientation would improve South Africa’s growth:

South Africa has undergone a remarkable transformation since its democratic transition in 1994, but economic growth and employment generation have been disappointing. Most worryingly, unemployment is currently among the highest in the world. While the proximate cause of high unemployment is that prevailing wages levels are too high, the deeper cause lies elsewhere, and is intimately connected to the inability of the South African to generate much growth momentum in the past decade. High unemployment and low growth are both ultimately the result of the shrinkage of the non-mineral tradable sector since the early 1990s. The weakness in particular of export-oriented manufacturing has deprived South Africa from growth opportunities as well as from job creation at the relatively low end of the skill distribution. Econometric analysis identifies the decline in the relative profitability of manufacturing in the 1990s as the most important contributor to the lack of vitality in that sector.

The policy prescription is a bit fuzzy, however:

Prices, costs, and productivity are the main drivers of manufacturing production and employment. Therefore putting manufacturing on a permanently steeper trajectory will necessitate working on these same levers. In particular, it will require reversing the decline in relative profitability which the econometrics tells us has been the primary culprit for the sector’s misfortunes.

PDF here.

AdamSmithee points to two recent papers that question measures of corruption derived from opinion surveys:

Two recent papers suggest that the noise-to-signal ratio in indicators built on perceptions of corruption is likely to be extremely high.  Ben Olken uses physical and financial audits to measure levels of corruption across villages in an Indonesian road project and then compares this measure to the levels of corruption perceived by villagers… [T]heir answers were far more strongly correlated with factors such as the level of ethnic diversity in the village than with actual levels of corruption.

Using a pretty nifty instrumental variable, James Feyrer & Bruce Sacerdote argue that colonialism improved the performance of island economies:

We have argued for an “islands as experiments” approach where random variation in the colonial experiences of islands can be used to think about the long run effects of colonial history on economic performance. The most interesting fact in our sample is a robust positive relationship between the years of European colonialism and current levels of income. While some of this relationship could be driven by smart selection of islands by
colonizers, we suspect that part of the relationship is causal. When we instrument for colonization and settlement using wind patterns, we obtain coefficients on years of colonization that are identical to our OLS results.

While the basic results suggest that longer European colonial exposure is good for the modern inhabitants of the islands in our sample, there are a few interesting caveats that we can introduce. First, there is a discernable pecking order amongst the colonizers. Years under US and Dutch colonial rule are significantly better than years under the
Spanish and Portuguese.

Second, later years of colonialism are associated with a much larger increase in modern GDP than years before 1700.

“Better Off Stateless: Somalia Before and After Government Collapse” by Peter Leeson strikes me as a fun paper because its claims ought to spur some controversy and debate. The abstract:

Could anarchy be good for Somalia’s development? If state predation goes unchecked government may not only fail to add to social welfare, but can actually reduce welfare below its level under statelessness. Such was the case with Somalia’s government, which did more harm to its citizens than good. The government’s collapse and subsequent emergence of statelessness opened the opportunity for Somali progress. This paper uses an “event study” to investigate the impact of anarchy on Somali development. The data suggest that while the state of this development remains low, on nearly all of 18 key indicators that allow pre- and post-stateless welfare comparisons, Somalis are better off under anarchy than they were under government. Renewed vibrancy in critical sectors of Somalia’s economy and public goods in the absence of a predatory state are responsible for this improvement.

In the short term, no government at all may be superior to some forms of government. In the long term, would it be more difficult to transition from predatory state to sucessfully developing country or from anarchy to successful development? Which country would you bet on: Somalia or Zimbabwe?

(This paper by Tatiana Nenova and Tim Harford suggests that some Somali success depends upon the presence of governmental institutions in other countries, such as the Saudi banking network.)

I have not read C.K. Prahalad’s The Fortune at the Bottom of the Pyramid, but I’ve caught a few newspaper columns like this one summarizing his position. The message, that entrepreneurial MNCs are discovering that they can profit by significantly improving the consumptive well-being of the impoverished, is good news for fans of both markets and helping the poor. Unfortunately, it may be too good to be true.

Aneel Karnani, a colleague of Prahalad at Michigan’s Ross Business School, has posted a working paper attacking the thesis:

Poor people – at the bottom of the pyramid (BOP) – represent a very attractive market opportunity. The ‘BOP proposition’ argues that selling to the poor can simultaneously be profitable and help eradicate poverty. This is at best a harmless illusion and potentially a dangerous delusion. This paper shows that the BOP argument is riddled with fallacies, and proposes an alternative perspective on how the private sector can help alleviate poverty.

I have not read Prahalad’s work, but it seems that Karnani has a good case. The first sentence of the book is:

Turn on your television and you will see calls for money to help the world’s 4 billion poor-people who live on far less than $2 a day.

You don’t have to believe we’ve already achieved the MDG poverty reduction goal to find that number a bit high. It implies that more than half the world lives in moderate or extreme poverty. The real number is certainly below three billion.

That’s just the first sentence. Dive into the rest of the debate by reading the paper.

[Update: Prahalad’s response is here.]

This October 2004 lecture by Dani Rodrik nicely summarizes two of his recent contributions to thinking about growth. He (and his coauthors) tackle an empirical question (growth accelerations) and suggest a theoretical approach (growth diagnostics).