Category Archives: Development

Counterproductive efforts against child labor

Matthias Doepke &  Fabrizio Zilibotti say international boycotts and sanctions against child labor actually exacerbate the problem:

In our analysis, we find that international interventions weaken domestic support for child-labour restrictions because they reduce competition between children and unskilled adult workers in the labour market. Unskilled workers then have less incentive to push for child-labour regulation.

When effective, trade sanctions or consumer boycotts move child workers from formal employment in the export sector to informal production, often in family-based agriculture. In the export sector, particularly in factories, children and adults perform similar tasks and therefore compete directly for jobs. In the informal sector, children and adults usually have different work responsibilities.

For example, on family farms children often specialise in tasks such as tending small animals, allowing adults to work in areas where they are most productive. Once adult and child labour become complementary in this way, restrictions on child labour no longer raise adult wages, which removes unskilled workers’ (and their unions’) incentives for supporting child-labour regulation.

Dave Donaldson’s “Railroads of the Raj”

Another paper applying trade theory to India’s intranational trade? You bet! It’s Dave Donaldson’s “Railroads of the Raj: Estimating the Impact of Transportation Infrastructure.” The model is a multi-industry version of Eaton & Kortum (2002), and the data come courtesy of the British Empire’s meticulous recordkeeping:

How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, I collect archival data from colonial India and use it to estimate the impact of India’s vast railroad network. Guided by six predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) eliminated the responsiveness of local prices to local productivity shocks (but increased the transmission of these shocks between regions); (4) increased the level of real income (but harmed neighboring regions without railroad access); (5) decreased the volatility of real income; and (6), a sufficient statistic for the effect of railroads on welfare in the model accounts for virtually all of the observed reduced-form impact of railroads on real income. I find similar results from an instrumental variable specification, no spurious effects from over 40,000 km of lines that were approved but never built, and tight bounds on the estimated impact of railroads. These results suggest that transportation infrastructure projects can improve welfare significantly, and do so because they allow regions to exploit gains from trade.

Easterly on Chang

Bill Easterly, writing on the “anarchy of success” in the New York Review of Books, isn’t very fond of the policy recommendations in Ha-Joon Chang’s Bad Samaritans. As the book has been out for nearly two years, I suspect that his criticisms won’t deter many sales. Easterly’s bottom line is that “third-world growth seems to have been fairly expert-proof.”

Against aggregative theories of growth

Abhijit Banerjee and Esther Duflo make the case against aggregative theories of economic growth:

The premise of the aggregative approach to growth was that markets function well enough within countries that we can largely ignore the fact that there is inefficiency and unequal access to resources within an economy when we are interested in dynamics at the country level. The evidence suggests that this is not true: The cross-country differences in marginal products or technology that we want to explain are of the same order of magnitude as the differences we observe within each economy. A theory of cross-country differences has to based on an understanding and an acknowledgment of the reasons why rates of returns vary so much within each country.

A randomized experiment with firms

We’re used to seeing randomized controlled trials in education, finance, and health interventions. Nick Bloom and his co-authors have performed a randomized experiment on firms. They selected 16 garment firms in India and provided the 8 treatment firms with extensive management consulting by Accenture and 8 control firms with very light consulting. The preliminary evidence from a pilot program shows lots of room for management improvement.

The case for preferential trade with Africa

Karol Boudreaux criticizes Jendayi Frazer for advocating preferential trade with Africa. She writes:

I’m only going to discuss one of her recommendations, which is this: do not extend AGOA trade preferences to a small subset of developing nations that includes some south Asian and some Islamic nations. Ms. Frazer argues: “extending the same trade preferences to hypercompetitive Cambodia and Bangladesh—each of which individually exports more apparel to the U.S. than all of sub-Saharan Africa combined—will undermine the program’s success in Africa.” Here’s a link to the proposed legislation that would expand the trade bill — it’s currently in committee.

But note that the success Ms. Frazer identifies is based on playing favorites. Maybe African producers should be favored over Bangladeshi producers, but on what grounds? A different version of this question would be: “why should African manufacturers be shielded from competition from other developing world producers?”

Boudreaux condemns such preferences as “favoritism” and “protectionism” and argues that more liberal, open trade (combined with better governance) offers the best path for African growth and development. Perhaps. But shouldn’t Boudreaux at least address the respectable economic arguments underpinning the idea that African economies need a foothold to establish nascent industries? Paul Collier and Tony Venables have argued the case for AGOA on such grounds, both in a VoxEU column and in an article in The World Economy.

Africa has lagged behind partly because its economic reforms lagged those of Asia. When export diversification started to boom in Asia in the 1980s, no mainland African country provided a comparable investment climate. Now a number of African cities — Accra, Dakar, Mombassa, Maputo and Dar-es-Salaam, etc. – offer reasonable investment climates, but they cannot compete with Asian cities that have comparable investment climates since the Asian cities have established clusters of firms in the new export sectors. Such clusters provide firms in the cluster with the advantages of shared knowledge, availability of specialist inputs and a developing pool of experienced labour. A classic chicken-and-the-egg problem.

Until African cities can establish such clusters, firms located in Africa face costs that will be above those of Asian competitors, but because costs are currently higher individual firms have no incentive to relocate. If Africa is to diversify its exports and create employment it must develop such efficient clusters of modern sector activity. Where it is feasible, this offers a more reliable development path than the commodity extraction model which Africa has followed to date.

Trade preferences offer a potential solution to the chicken-and-the-egg problem

Boudreaux may be right about the value of trade preferences, but her blog post solely discusses static comparative advantage and competitiveness, whereas industrialization and development is also about dynamic comparative advantage and export diversification.

If you'd like to learn more, the UN isn't going to help you

The United Nations’ The Millennium Development Goals Report 2009 doesn’t have any footnotes, which makes it almost worthless. For example, they write: “Worldwide, the number of people living in extreme poverty in 2009 is expected to be 55 million to 90 million higher than anticipated before the global economic crisis.”

That’s a headline-worthy number. It’d be nice to see their calculations. Or at least identify who produced the number. Was it the UN or someone else?

A UN press release from 24 June 2009 says “The crisis-related slowdown in growth in developing countries implied there were an estimated 55 to 90 million more extremely poor people in 2009 living on less than $1.25 a day, than had been projected before the crisis.” This contrasts with numbers produced by World Bank researchers Shaohua Chen and Martin Ravallion in late April, who estimated that

the crisis will add 53 million people to the 2009 count of the number of people living below $1.25 a day and 64 million to the count of the number of people living under $2 a day. Given current growth projections for 2010, there will be a further impact on poverty in that year, with the cumulative impacts rising to an extra 73 million people living under $1.25 a day and 91 million more under $2 a day by 2010.

So did we learn during May and June that an additional 37 million persons were likely to fall below the $1.25 per day poverty line? Did Chen and Ravallion revise their updates recently, or does the UN source disagree with their estimates? We’ll never know, because the MDG Report doesn’t have footnotes or references. But at least it has photo credits!

What does USAID stand for?

Lant Pritchett says that promoting development and providing assistance to developing countries are not the same thing:

An existential question the next leader of USAID has to face is whether USAID is about assistance—in whatever forms and for whatever goals political support can be mobilized and logistics can be arranged—or whether it really is an agency whose mission is to promote development…

Development, for better or worse, has always been defined as a deliberate acceleration of modernization, conceived as a synchronized (if not simultaneous), complex, four-fold transition of economy, polity, administration, and society…

Even addressing a series of important problems for well-being like vaccinations, schools for girls, HIV/AIDS prevention or malaria does not add up to a development agenda. If the next leader of USAID does not own that objective and mission—putting the big “D” in USAID and not just little “a” in aid—he or she is sealing USAID’s irrelevance.