Category Archives: Development

What's the growth cost of developed countries' tariffs?

Oddly, I didn’t come across this paper until just now:

John Romalis, “Market Access, Openness, and Growth”, NBER Working Paper 13048, 2007 (ungated version):

This paper identifies a causal effect of openness to international trade on growth. It does so by using tariff barriers of the United States as instruments for the openness of developing countries. Trade liberalization by a large trading partner causes an expansion in the trade of other countries. Trade expansion induced by greater market access appears to cause a quantitatively large acceleration in the growth rates of developing countries. Eliminating existing developed world tariffs would increase developing country trade to GDP ratios by one third and growth rates by 0.6 to 1.6 percent per annum.

Trade-induced learning

The review of trade-induced learning on pages F324 to F332 of this new article by Ronald Mendoza seems like a pretty good introduction to the topic. He covers the empirical literature on firm-level productivity (selection vs learning by exporting), the roles of quality and variety in importing and exporting, the importance of export destinations’ characteristics, and the product space. As with any survey, you’ll have to turn to the underlying papers to get into the methodological issues and strategies.

[HT: Jim]

Today at Vox

There are two columns on important, big-picture topics at VoxEU today.

Martin Ravallion: The World Bank’s estimate of China’s real GDP per capita was revised down by 40% in 2005. This column explains how price surveys led to dramatically different estimates once they considered the effect of economic growth. It argues that while large revisions were needed, they could have been avoided with better economic models to measure PPPs.

Yiping Huang: Should the US follow Paul Krugman’s advice and use protectionist policies against China’s exports to encourage a revaluation of its currency? This column argues against this idea. Far from saving jobs, a revaluation of the Chinese currency might even cut global economic growth by 1.5%.

What will we learn from Millennium Villages?

Michael Clemens on the Millennium Villages Project:

The only independent evaluation of the MVs is currently planned to proceed in three waves: baseline, year 3, and year 5 of the project. That is, the evaluation has no publicly-stated plan to proceed long past the end of the five-year intervention in each village, before deciding whether or not it would be right to vastly scale up the intervention all across Africa. A recent research paper starkly showed how inadequate such a stance can be.

That paper, by Shaohua Chen, Ren Mu, and Martin Ravallion, is a lesson in humility (ungated version here, published here). It studies the Southwest Project in China, a village-level development package intervention executed in 1,800 rural villages in the late 1990s. Like the Millennium Village intervention it targeted the poorest villages, lasted about five years, and cost hundreds of thousands of dollars per village. It sought to permanently reverse the fortunes of those villages with a broad-based package including roads, piped water, power lines, upgrading schools and clinics, training of teachers and health-care workers, microcredit, and initiatives for raising crop yields, animal husbandry, and horticulture.

Right before the end of the Southwest Project intervention, five years after it started, the project seemed to indeed be reversing the fortunes of the treated villages. Income in those villages grew by 20% more during the project than in similar villages in the same area that had not received the intervention, and savings grew by 100% more.

Then the intervention ended and—fast forward five years—all those effects on income and savings disappeared. Ten years after the five-year project began, average income and savings in the villages that got that massive package of interventions were indistinguishable from income and savings in villages that did not.

Notably, incomes in both the treated and untreated Chinese villages in the Southwest Project area increased greatly during the span of the project (1995-2000) and for years thereafter. The reason this happened is because the Chinese economy was being transformed during this period, not because of massive village-level package development interventions.

The point here is not that the Southwest Project was the same as the MVP; it wasn’t. The point is that short-term evaluation is plainly inadequate. It is obvious that the MVP is going to have short-term impacts. The size of the intervention is the same order of magnitude as the size of the entire economy of each village; that is, the MV intervention is roughly 100% of local income per capita (see the bottom of this post for this calculation). Indeed, it would be astonishing to not see short-term effects with an intervention that gargantuan. The three-year evaluation results that the MVP plans to release this year simply won’t tell us much.

The only interesting evaluation question is in the long term, for three reasons: 1) because unlike short-term impacts the answer is not obvious, 2) because long-term change is the stated goal of the MVP, and 3) because other village-level package interventions have shown that short-term effects and long-term effects can be completely different from one another.

Ravallion on Pinkovskiy and Sala-i-Martin

Martin Ravallion is open to the idea that African poverty has been improving to the last 15 years, but he is cautious regarding the quality of our data and methods:

Maxim Pinkovskiy and Xavier Sala-i-Martin (PSiM herafter) have confidently claimed that “The conventional wisdom that Africa is not reducing poverty is wrong” and that “African poverty is falling and is falling rapidly.” This sounds like good news. But is it right?

We must first be clear about what we mean when we say “poverty is falling”. What many people mean is falling numbers of poor. However, PSiM refer solely to the poverty rate—the percentage of people who are poor. (There is no mention of this important distinction in their paper.)…

Here we agree: aggregate poverty rates have fallen in Sub-Saharan Africa (SSA) since the mid-1990s.  Shahoua Chen and I came to exactly the same conclusion in our research, for the World Bank’s global poverty monitoring effort, although our methods differ considerably and (no surprise) I prefer our methods.

However, Chen and I also point out that the decline in the aggregate poverty rate has not been sufficient to reduce the number of poor, given population growth…

Two points to note here: (i) Chen and I show that the poverty decline in SSA tends to be larger for lower poverty lines (in the region $1-$2.50 a day) and (ii) PSiM’s method attributes the entire difference between GDP and household consumption to the current consumption of households, and they assume that its distribution is the same as in the surveys. These assumptions are very unlikely to hold, and they give an overly optimistic picture.

In effect, PSiM are using a lower poverty line than us…

PSiM do not tell readers just how few survey data points they have actually used after 1995. Indeed, readers of their paper may be surprised to hear that there is any uncertainty about the trend decline since the mid-1990s; their main graph has 30 annual data points since 1995. But these are not real data points in any obvious sense; rather they are synthetic (model-based) extrapolations based on national accounts and growth forecasts.

We have national household surveys for all but 10 of the 48 countries in SSA since 1995. However, for only 18 countries do we have more than one survey since 1995; for 30 countries, there are is at most one survey since 1995.

As we warn explicitly in our paper, this is not yet sufficient survey data to be confident about the (promising) downward trend for Africa’s aggregate poverty rate that PSiM have announced with such confidence.

Hopefully we will see a confirmation of the emerging downward trend for Africa in the years ahead, as more (genuine) data emerge.

HT: Larry W-S.

Addendum: Blattman beat me to it and has more thoughts.

Export-led Growth 2.0

Otaviano Canuto, Mona Haddad, and Gordon Hanson in the World Bank’s Economic Premise write:

How dependent are developing countries’ exports on de- mand in developed countries? This note shows that much of the recent growth in developing countries’ exports was driven by demand in other developing countries. This means that developing countries may continue to rely on South- South trade to recover from the crisis. In fact, countries like China are leading the recovery through strong import demand. Over the medium term, the development of an “export-led growth v2.0,” in which South-South trade plays a more important role, will be essential. Policy makers can support this process by continuing to liberalize South-South trade, focusing in particular on nontariff measures.

Exporting raises productivity in sub-Saharan African manufacturing firms

Now here’s something you don’t see every day – evidence that exporting raises firm-level productivity. The conventional evidence says that exporters are more productive because of selection effects rather than learning-by-exporting (Clerides, Lach, and Tybout, QJE, 1998). But things may be different in Africa:

Proponents of trade liberalization argue that exporting helps firms to achieve higher productivity levels. This hypothesis is examined for a panel of manufacturing firms in nine African countries. The results indicate that exporters in these countries are more productive and, more importantly, exporters increase their productivity advantage after entry into the export market. While the first finding can be explained by selection–only the most productive firms engage in exporting–the latter cannot. The results are robust when unobserved productivity differences and self-selection into the export market are controlled for using different econometric methods. Scale economies are shown to be an important channel for the productivity advance. Credit constraints and contract enforcement problems prevent firms that only produce for the domestic market from fully exploiting scale economies.

Johannes Van Biesebroeck (2005), “Exporting raises productivity in sub-Saharan African manufacturing firms,” Journal of International Economics, 62(2): 373-391.

Commodity price volatility and long-term growth

Blattman, Hwang, and Williamson (2007), “Winners and losers in the commodity lottery: The impact of terms of trade growth and volatility in the Periphery 1870-1939,” Journal of Development Economics.

Differences in price trends and volatility across primary commodities explain much of the global income divergence observed in the last century and a half. We show that most countries outside Western Europe and the US have been specialized in the export of the same handful of primary commodities for most of their history. Moreover, some commodity prices have proven more volatile than others, and some have enjoyed better secular growth…

In reconstructing nearly a century of terms of trade experience from 1870 to 1939 and assessing its impact on economic performance, we see that some commodities proved more volatile in price than others, and that those countries with more volatile terms of trade grew more slowly than other commodity-specialized nations. Countries with just one standard deviation higher volatility, moreover, grew on average more than half a percentage point per annum slower.