Do we need to ration growth, and if so, who gets what’s left?

Spoke at a Quaker conference on the ‘zero growth economy’ at the weekend. Quaker meetings are different: when I finished speaking to an audience of 350 people, there was total hear-a-pin-drop silence. Instead of clapping, people reflect, eyes closed, on what they have just heard. And no, even though it was after lunch, they weren’t asleep (well, most of them) and it wasn’t just me – the next speaker got the same treatment, despite beginning his talk by acting out the train-wreck metaphor, ending with him running into a closed door at full speed and slumping to the ground. The two pigeons flying round the hall just added to the sense that this was not an average meeting. Actually, I really enjoyed it – free from all the rigmarole of applause, the quiet, dignified exchange and moments of shared silence felt respectful, even intimate. Plus Quakers are great readers – the stock of From Poverty to Power sold out in seconds and I spent the rest of the afternoon kicking myself for not bring more.

As for the discussion, the audience was deeply anti-materialist and apocalyptic (trainwreck man – ‘we are moving into the dying time – the 21st Century will be like working in a planetary hospice’), so I was forced first to defend the importance of growth to poor countries, then talk about whether it needs to be rationed to stay within the limits of climate change. The argument is best illustrated with three country scatter plots:

1. Rate of poverty reduction v growth: 3 points to note: firstly that on average, countries that grow faster see greater poverty reduction. Secondly there is a lot of variation above and below the line of best fit, showing that you can get a lot more/fewer poverty bangs for your growth buck depending on the quality of growth (levels of equality, labour intensity, effectiveness of government redistribution and so on). Thirdly, you need 2% growth before you even get into poverty reduction (zero growth corresponds to a 1% increase in poverty rates).

2. Carbon intensity and overall carbon emissions: global carbon intensity (grammes of carbon per $ of economic output – the blue line) has been improving steadily for decades, but the rate of improvemement is much lower than that of the long term growth trend of GDP. Also, it got stuck around 2000, presumably due to the relative rise of carbon-heavy Chinese production. As a result overall global emissions (the red line) continue to rise, and are even accelerating. That leaves 3 options if we want to stay within two degrees of warming:
a) a drastic improvement in the next few years of the rate of fall of the blue line
b) reduced global GDP
c) a geoengineering magic bullet (a variety of Dr Strangelove solutions like putting tinfoil in orbit to reflect away sunlight, likely to have all sorts of unintended side effects)

Politicians are desperately clinging to (a), but I don’t see convincing evidence that carbon intensity is likely to fall at the speed required, which leaves a real need to at least consider (b), still an almost complete taboo in government circles. But if we are going to reduce the rate of global growth, how do we decide who gets what? Time to click on chart 3.

3. Life satisfaction v GDP: what this shows is that in poor countries, growth leads to a sharp improvement in people’s reported quality of life. Not surprisingly, being able to feed your family, increase your resilience to sudden shocks like sickness or unemployment, and watch your children grow up healthy and educated makes people happier. But above $20,000 or so (Czech Republic or South Korea), growth no longer adds to happiness.  In fact if you believe life satisfaction surveys in the UK, gross national happiness in my country peaked in the long hot summer of 1976, (ah yes, I remember it well) and has been falling ever since, despite considerable subsequent growth in the British economy.

So there you have it: if you want to maximise happiness (a utilitarian argument which offends the rights-based people, I know, but not a bad start) AND prevent catastrophic global warming, you need to make sure that incomes rise in the poor countries, but are steady or falling in the rich ones. i.e. we need to ration growth – it’s just too precious (and dirty) to waste on the rich countries. Convinced?

However, I suspect that such arguments were excessively rationalist for some in the audience (although there is a Quakernomics blog if you’re interested). Much of the discussion revolved around the role of believers who are neither lobbyists nor scientists. It came down to changing attitudes and beliefs to prepare the ground for more fundamental shifts : ‘We Quakers are being called to be the midwives of a new style of living and being’ one said. Recalling the history of the Quaker-led abolition of slavery, I wouldn’t bet against them achieving something significant. Trainwreck man Alistair McIntosh ended with the words of poet Adrienne Rich:

‘My heart is moved by all I cannot save:
so much has been destroyed

I have to cast my lot with those
who age after age, perversely,

with no extraordinary power,
reconstitute the world.’

Update: train wreck man has now written his own account of the event in the Guardian 

What happened at the Pittsburgh G20?

I didn’t attend the G20 summit in Pittsburgh last week, but I’ve been poring over the communiqué. Here are some initial thoughts on what it all means (numbers in square brackets refer to paragraphs in the original), incorporating analysis and intel from the Oxfam team at the event.

Headline: Pittsburgh formally enshrined the rise of the BRICs and relative decline of the G8: ‘We designated the G-20 to be the premier forum for our international economic cooperation’ [preamble, 19]. The passing of the baton takes place in Canada next June, where the G8 and G20 summits will coincide.

Winners and Losers: Institutions
The World Bank and IMF were once again anointed as the lead agencies on almost everything. ‘The World Bank and other multilateral development banks are critical to our ability to act together to address challenges, such as climate change and food security, which are global in nature and require globally coordinated action…. The World Bank should strengthen.. its focus on food security, … Its focus on human development and security in the poorest and most challenging environments, … support for private-sector led growth and infrastructure… contributions to financing the transition to a green economy through investment in sustainable clean energy generation and use, energy efficiency and climate resilience.’ [24]

The IMF ‘must play a critical role in promoting global financial stability and rebalancing growth’, including an enhanced role in providing oversight of the global financial system and its imbalances [20].

In return, the G20 put numbers on IMF and World Bank quota reform: ‘at least’ 5% of voting power for both institutions [the World Bank figure was 3%, on top of 1.5% already redistributed] will shift from over-represented to under-represented countries’. The US had offered 5%, and the BRICS had been asking for 7% – the ‘at least’ means this isn’t totally shut down. Europe, which will lose influence under the reforms, had been asking for no target at all.

The shift means that middle income countries whose GDP or trade has grown in recent years (eg China, South Korea, Singapore, Turkey) will get bigger shares, at the expense of countries whose quota share is now bigger than the calculations justify (eg Belgium, Saudi Arabia, Venezuela, France). It is still the richest countries in charge, but updating the quotas at least takes account of which countries are now the richest. To protect the voting share of the poorest countries, the G20 gave guarantees that whatever happens, they won’t lose vote share as the emerging countries like China and India increase their muscle

How much difference will this make? Some pretty rich countries are counted as ‘developing’ by the IMF. Our calculations (which rely on some assumptions about how this would be done) suggest that the shift for high income countries would be from around 68.3% to around 65% of the votes and the maximum benefit for the poorest (PRGF-eligible) countries is from 7.7 to 7.8% of the vote. Hardly seismic.

Other aspects of IMF reform were explicitly put on the table, including size and composition of the Board, role of governors, effectiveness of the Board, staff diversity. [21]

The ILO also had a good summit, with a major focus on job creation in the crisis response [43-47] and a strong endorsement of its work: ‘The international institutions should consider ILO standards and the goals of the Jobs Pact in their crisis and post-crisis analysis and policy-making activities.’ [46]. The G20 agreed an early 2010 meeting of G20 Employment Ministers ‘to assess the evolving employment situation, review reports from the ILO and other organizations on the impact of policies we have adopted, report on whether further measures are desirable.’[46]
 
As for losers, once again the UN was largely missing in action – the circus at the General Assembly in New York prior to the G20 can’t have helped. All it got was a token acknowledgement that the ‘UN’s new Global Impact Vulnerability Alert System will help our efforts to monitor the impact of the crisis on the most vulnerable’ [34] and a couple of vague short paragraphs on the UN-led climate change negotiations that merely ‘note’ the principles agreed at the July G8 in l’Aquila [32-33].

Winners and Losers: Issues
Reflecting US priorities, food security received serious attention: ‘Sustained funding and targeted investments are urgently needed to improve long-term food security. We welcome and support the food security initiative announced in L’Aquila and efforts to further implement the Global Partnership for Agriculture and Food Security and to address excessive price volatility. We call on the World Bank to work with interested donors and organizations to develop a multilateral trust fund to scale-up agricultural assistance to low-income countries.’ [39] The communique called on the Bank to set up yet another multilateral trust fund – the proliferation of such funds on health, agriculture etc is threatening to undo much of the recent progress in trying to reduce the bureaucracy of aid reporting requirements, which eats up scarce staff time in poor country governments.

At the last minute, German insistence led to a new, if oblique, paragraph on the Tobin Tax: ‘We task the IMF to prepare a report for our next meeting with regard to the range of options countries have adopted or are considering as to how the financial sector could make a fair and substantial contribution toward paying for any burdens associated with government interventions to repair the banking system.’ [16] President Sarkozy and Chancellor Merkel both specified that this para refers to the Tobin Tax, and TT campaigners are celebrating – this is a new high water mark in getting the idea onto the international agenda. Still this language seems vague enough to allow considerable room for backing down – taxing the financial sector could be a lot more restricted than a currency transactions tax, and in any case, is only being discussed in terms of paying back bailouts, not wider issues such as using a Tobin Tax to fund climate mitigation and adaptation. Lots to play for, here.

Clean energy [31] and getting rid of fossil fuel subsidies [29] both prospered and that is important (ending subsidies could reduce greenhosue gas emissions by 10%, according to the communique). But that was the extent of environmental concern, apart from a liberal and apparently random sprinkling of the word ‘sustainable’ all over the text. A wider shift to a low carbon development model was missing, and without that the overall statement that ‘our objective is to return the world to high, sustainable, and balanced growth’ [3] increasingly looks incompatible with the objective of stopping the planet from frying. The ‘G-20 Framework for Strong, Sustainable, and Balanced Growth’ [annex] is almost entirely oblivious to environmental constraints and issues (‘sustainable’ appears to refer more to economic than environmental sustainability – the word should perhaps be changed to ‘sustained’ to avoid confusion).

On climate finance, the can was kicked firmly down the road by asking the G20 finance ministers’ meeting in November to report back on climate financing. [33] An effort to outline principles for climate finance in an earlier draft of the communiqué was dropped.

Reportedly, there was lengthy discussion on climate change at the leaders’ lunch at the summit. Swedish Prime Minister Fredrik Reinfeldt and French President Nicholas Sarkozy both suggested that the leaders could talk again on climate change in as little as two weeks time – possibly by videocon. Other reports suggest, however, that President Obama indicated that reaching a final global deal at Copenhagen was not vital, suggesting that if anything the summit may have undermined momentum.

On aid, there was no new money for the poorest countries, but at least an endorsement (reportedly after a struggle) of the promises made at the Gleneagles summit in 2005.   There was a recognition that a number of G20 members will recycle their SDRs (the IMF’s version of quantitative easing) through the IMF.  It is not yet clear how much more they will recycle but it is likely it will only be used to deliver the amounts already promised in London.

On Tax Havens, the vaguely promising language around exploring a multilateral mechanism that was in the communiqué for the G20 finance ministers meeting in London in early September was dropped from the Pittsburgh communiqué, which instead patted itself on the back for ‘impressive results.’[15]. Really? Care to offer some examples of increased flows of tax payments to poor countries? There is, however, a threat to go further: ‘We stand ready to use countermeasures against tax havens from March 2010.’ [15]

Finally, at the opposite extreme from the bank mega-bailouts that have characterized the crisis, the G20 set up a ‘G-20 Financial Inclusion Experts Group’ to look at how to promote financial services for the poor and specifically for small and medium enterprises (SMEs).[41] Oxfam has a rather good paper coming out on this next month, so we may have some useful suggestions for them.

Overall verdict? Even though the impact of the crisis on the poorest countries has become more pressing since the London Summit in April, it felt like development had slid down the agenda this time around. No more money on the table, missing the moment on climate change, and a general sense that the regulatory tide is receding as we move to ‘a critical transition from crisis to recovery’, in the words of the communique’s triumphalist first para. As I discussed in a recent lecture at Notre Dame, maybe the crisis simply isn’t proving big and painful enough to trigger the structural changes we need.

Do poorer countries have less capacity for redistribution? A new paper

When can a country end poverty by redistributing wealth from its rich people, and when must it instead rely on aid or growth? That’s a question Martin Ravallion, head of the World Bank’s research department seeks to answer in a new paper. Essentially he is trying to put precise numbers on the relatively obvious point that the richer a country becomes, the more potential it has to redistribute wealth.

Ravallion is trying to measure the capacity (rather than political will) for redistribution. He does so as follows:

He specifies that redistribution will only take place from those who would not be considered poor in the US (> $13 a day income; all $ figures are 2005 PPP)

He then calculates how much cash would need to be transferred to end absolute poverty ($1.25 a day) or to fund various basic income schemes of social protection, where the whole population receives a transfer of $1.25 a day (i.e. uniform, rather than targeted)

He then converts this into a marginal tax rate on the rich – the extra tax they would have to pay on all earnings above $13 a day. An MTR above 60% (the highest rate in rich countries) is seen as an impossibly high level.

His findings?

‘Developing countries fall into two distinct groups. The first appears to have little or no scope for making a serious impact on the problem of extreme poverty through internal redistribution from those who are not poor by Western standards. The second group appears to have far more scope for such redistribution. Most of the poorest countries in terms of mean consumption fall into the first group.

The marginal tax rates needed to fill the poverty gap for the international poverty line of $1.25 a day are clearly prohibitive (marginal tax rates of 100% or more) for the majority of countries with consumption per capita under $2,000 per year. Even covering half the poverty gap would require prohibitive MTRs in the majority of poor countries.

Yet amongst better-off developing countries–over $4,000 per year (say)–the marginal tax rates needed for substantial pro-poor redistribution are very small–less than 1% on average, and under 6% in all cases.

Basic-income schemes financed by progressive income taxes also require prohibitive marginal tax rates in the poorest half of developing countries. Indeed, if the tax burden is confined to those who are not poor by developed-country standards, then providing a basic income of $1.25 a day would call for marginal tax rates of 100% or more for three-quarters of countries. Even for middle-income developing countries, this type of redistribution only starts to look feasible if one allows for a basic income appreciably less than $1.25 a day and/or significant tax burdens on the middle class [i.e. those earning less than $13 a day].’

He illustrates this in Brazil, China and India:

‘For Brazil in 2005, covering the poverty gap for $1.25 a day would only require a MTR of 1% on those who are not poor by US standards. Even for the $2 a day line, the necessary marginal rate would only be 4%. Recall that these are international lines, and they are lower than the poverty line commonly used in discussing poverty in Brazil, which is about $3 a day; filling the poverty gap for this line would call for a MTR of about 12% on those living over $13 a day.

The marginal tax on Chinese living above the US poverty line that would be needed to cover the poverty gap for $1.25 a day is 37% in 2005. China’s national poverty line is closer to $1 a day, which would only requite a MTR of 30%. However, the tax rate needed to cover the $2 a day poverty gap would require a prohibitive rate of 100%.

The capacity for redistribution in India is far more limited than in China or (especially) Brazil. Indeed, it would be impossible to raise enough revenue from a tax on Indian incomes above the US poverty line to fill India’s poverty gap relative to the $1.25 a day line; the required MTR would exceed 100%. Even at a 100% MTR, the revenue generated could fill only 20% of India’s aggregate poverty gap.’

These findings are important for a number of reasons:

They make the case for a much greater focus on redistribution and taxation in middle income countries, where tax systems are generally much less progressive than in many developed nations.

They raise serious questions about the affordability of tax-funded universal social protection

They suggest that poverty reduction in very large poor countries like India is primarily going to be achieved through economic growth, rather than aid or redistribution.

In small poor countries, the best combination is growth + aid – large scale redistribution has to wait until there is something to redistribute! However, I would add that even in poor countries, there are other reasons for strengthening a government’s tax base, such as building the social contract between citizens and state.

G20 curtain raisers; Will China integrate Africa?; using humour for healthcare reform; Congress and New York Post v climate change: links I liked

A handy websearch of G20 curtain-raisers from Michael Harvey at Global Dashboard . 

‘While 82% of the IMF’s newly loaned resources have gone to European area countries, just 1.6% have gone to countries in Africa.’ Ngaire Woods analyses the development response to the global meltdown since the April G20 summit in a paper for the European Parliament.

Will Chinese investment provide the catalyst for East African integration?

‘The main argument against climate action probably won’t be the claim that global warming is a myth. It will, instead, be the argument that doing anything to limit global warming would destroy the economy.’ Paul Krugman prepares us for the Congressional climate change debate, which may surpass even the courtesy and intelligence of the healthcare reform discussions (my cheap sarcasm, not his). He looks at the numbers and concludes ‘the campaign against saving the planet rests mainly on lies’.

Sticking with healthcare reform, how to subvert a demo with humour. From the Huffington Post’s collection of funniest protest signs of 2009. Focus on the tall guy in the middle……. (h/t Alex Evans)

And finally, a fun video on a spoof climate change issue of the New York Post – watch out for the enraged NYP executive scoring a spectacular own goal half way through

“SPECIAL EDITION” NEW YORK POST from The Yes Men on Vimeo.

All the latest stats on the global crisis and its development impact

In time for the G20 summit later this week, my indefatigable colleague Richard King has revised and updated his invaluable synthesis of the key data on the global economic crisis and its development impact. Here goes:

Unemployment (ILO) 

Gender impact of the economic crisis in terms of unemployment rates is expected to be more detrimental for females than for males in most regions of the world and most clearly in Latin America and the Caribbean (only regions where expected to be less detrimental for women are East Asia, developed economies, and non-EU south-eastern Europe and CIS)
Continued labour market deterioration around the world in 2009 is forecast to produce an estimated increase in global unemployment of between 39 and 61 million workers relative to 2007, which could result in global unemployment ranging from 219 to 241 million – the highest level ever on record.

Economic Growth (IMF)[UN-DESA] {World Bank} N.B. IMF figures are PPP, others are market rate

World economic output is expected to contract by (1.4) [2.6] {2.9} per cent in 2009, down from growth of (3.1) [2.1] {1.9} per cent in 2008, and (5.1) {3.8} per cent in 2007.
Economic output in emerging and developing economies [{developing economies only}] is expected to grow by (1.5) [1.4] {1.2} per cent in 2009, down from (6.0) [5.4] {5.9} per cent in 2008, and (8.3) {8.1} per cent in 2007.
Based on World Bank data, in 2009 economic growth in developed countries will only be 1.3 per cent below 2007 rates, whereas in developing countries it will be 3.7 per cent lower. By 2011 growth in high-income countries will have recovered to just 0.2 per cent below 2007 rates; developing country growth will still be down by 2.4 per cent.

Economic Growth Per Capita (UN-DESA)

The number of countries in the world witnessing a decline in GDP per capita has increased from 16 in 2007 to 26 in 2008, to a forecast 107 in 2009. In the developing world the number of countries has gone from 0 to 12 to 33.

 

Public Finances (World Bank source 1 and source 2), (IMF)

Financing shortfalls to cover at-risk core spending on health, education, safety nets, and infrastructure amount to about $11.6 billion (1.1% of GDP) for 60 of the poorest countries. Just over two-thirds of this is for countries in sub-Saharan Africa (World Bank).
The crisis impact on health and education spending in these 60 countries will amount to $3.6bn (0.4% of GDP) (World Bank).
Low-income countries are expected to face large external financing needs in 2009, estimated at around $59 billion (World Bank)
The fiscal balance (including grants) in sub-Saharan Africa is projected to have declined by $69.2bn (constant 2008 USD) or 6.9% of GDP in 2009 from an estimated surplus of $20.8bn (2.1% of GDP) in 2008 to a deficit of $48.4bn (4.8% of GDP). In 2010 the fiscal deficit is still projected to be $32.5bn (3.1% of GDP) (IMF).      
The external financing gap opened up by the economic crisis in developing countries is estimated between $352 billion and $635 billion in 2009 (between $30 and $45 billion in sub-Saharan Africa) (World Bank).

Bank Bailouts (IMF)  (UN Secretary General) 

As of May 2009, headline support to the financial sector by advanced economies had reached 50.4 per cent of their GDP, compared with 2.4 per cent in emerging economies. In the G-20 the support was 32.5 per cent of GDP (IMF).
$18 trillion (almost 30 per cent of gross world product (GWP)) has been made available to recapitalize banks, nationalize financial institutions and provide guarantees on bank deposits and other financial assets (includes financial rescue packages (including government guarantees on bad debts) and liquidity injections into financial systems from 1 September 2008 to 31 March 2009) (UN SG).

Fiscal Stimuli (UN-DESA) (IMF)

Between 1 September 2008 and 31 March 2009, public funds committed to addressing the financial crisis totalled 33.8 per cent of global GDP or $21 trillion. Of this 4.3 per cent of GDP or $2.7 trillion represented fiscal stimuli (UN-DESA).
· G-20 countries have adopted or plan to adopt fiscal stimulus measures averaging 0.5 per cent of GDP in 2008, 2.0 per cent in 2009 and 1.5 per cent in 2010 (IMF).

Poverty Impacts (Chen & Ravallion, unpublished update of April paper, UN-DESA)

The crisis will add 50 million people to the 2009 count of the number of people living below $1.25 a day, and 64 million people to number of people living under $2 a day (Chen & Ravallion).
Given current growth projections for 2010, the cumulative impacts will rise to an extra 89 million people living under $1.25 a day and 120 million more under $2 a day by 2010 (Chen & Ravallion).
Between 73 and 103 million more people will remain poor or fall into extreme ($1.25 a day) poverty in 2009 in comparison with a situation in which pre-crisis growth would have continued (UN-DESA).
Most of this setback will be felt in East and South Asia, with between 56 and 80 million likely to be affected, of whom about half are in India. The crisis could, in 2009, keep 12 to 16 million more people in poverty in Africa and another 4 million in Latin America and the Caribbean (UN-DESA).

Social Impacts (World Bank)

At current growth projections it is estimated that there will be 30,000-50,000 excess infant deaths in sub-Saharan Africa in 2009 as a result of the economic crisis.

Remittances (World Bank)

Remittance flows to developing countries are expected to be $304 billion in 2009, down from an estimated $328 billion in 2008.
The predicted decline in remittances by 7.3% this year is far smaller than that for private flows to developing countries.  Remittances are relatively resilient because, while new migration flows have declined, the number of migrants living overseas has been relatively unaffected by the crisis.
The new forecasts show a 6.9 percent decline in remittances for the Latin America and Caribbean region (in large part because of a slowdown in the US construction sector), and 8.3 percent in sub-Saharan Africa. However, flows to South Asia and East Asia have been strong; but remittances are expected to decline somewhat in 2009. India, China and Mexico retain their position as the top recipients of migrant remittances among developing countries. Smaller economies such as Tajikistan, Moldova, Tonga, Lesotho, and Guyana are the top recipients in terms of the share of remittances in GDP; which exceeded a quarter of their GDP.
South-South remittances from Russia, South Africa, Malaysia and India are especially vulnerable to the rolling economic crisis. Also the outlook remains uncertain for remittance flows from the GCC (Gulf Cooperation Countries) countries.

Trade Flows (IMF) (World Bank source 1 and source 2),  (Bloomberg)

IMF expects world trade volumes to contract this year, falling by 12.2 per cent 
World Bank expects world trade volumes to contract this year, falling by 9.7 per cent
Export market demand for low-income countries (LICs) is estimated to have fallen by between 5 and 10 percent in volume terms in 2009. In dollar terms, merchandise exports from LICs are anticipated to drop by 14.4 per cent in 2009, compared with a 22.8 per cent rise in 2008. The aggregate deficit on LIC trade has increased from $19.4 billion in 2005 to $48.6 billion (2009 estimate), or from 6.3 to 9.2 per cent of GDP (World Bank).
The Baltic Dry Index (a benchmark indicator of shipping costs, which serves as a proxy for world trade flows):
o Is 52 per cent lower than its one year high in September 2008
o Has recovered from its one year low in Dec 2008 (87% below September ’08 peak)

Net Private Capital Flows (Institute of International Finance), (World Bank source 1 and source 2)

Volume of net private capital flows to emerging markets is likely to decline dramatically to $141 billion in 2009, after an estimated $392 billion in 2008, and a record volume of $888 billion in 2007 (IIF).
A modest revival of flows is now starting to become evident and the IIF projects that the 2010 volume will reach $373 billion (IIF).
Net private capital inflows to developing countries fell to $707 billion in 2008, a sharp drop from a peak of $1.2 trillion in 2007. International capital flows are projected to fall further in 2009, to $363 billion (World Bank). 
Net private capital flows to low-income countries declined significantly in 2008 to $21 billion from $30 billion in 2007 and are projected to drop further to $13 billion in 2009 (World Bank).
In 2009, FDI in developing countries is projected to fall by 30 percent to $385 billion – a decline of about 1 percentage point of GDP (World Bank).        

Vulnerable Countries (World Bank) (IMF) (Economist)

According to the World Bank, 43 developing countries are highly exposed to the poverty effects of the crisis (with both declining growth rates and high poverty levels).
The IMF identifies 26 highly vulnerable low income countries.
The Economist identifies 17 vulnerable emerging-market economies on the basis of current account, short-term debt, and banks’ loan/deposit ratio.

Food Prices and Hunger, Oil Prices (FAO source 1 and source 2), (Energy Information Administration, US)

After bottoming out in Jan/Feb food and oil prices have risen again, though food (in general) and cereal prices fell slightly in Jul. Oil prices also fell slightly in late June, early July but have now picked up again.
World hunger is projected to reach a historic high in 2009 with 1,020 million people going hungry every day.
The most recent increase in hunger is not the consequence of poor global harvests but is caused by the world economic crisis that has resulted in lower incomes and increased unemployment. This has reduced access to food by the poor.
This year, mainly due to the shocks of the economic crisis combined with often high national food prices, the number of hungry people is expected to grow overall by about 11 per cent.
Almost all of the world’s undernourished live in developing countries. In Asia and the Pacific, an estimated 642 million people are suffering from chronic hunger; in sub-Saharan Africa 265 million; in Latin America and the Caribbean 53 million; in the Near East and North Africa 42 million; and in developed countries 15 million in total.

GDP v Well-being – the Stiglitz Commission and other news

According to Otto von Bismarck, the father of modern Germany, ‘Laws are like sausages. It’s better not to see them being made.’ Having skimmed the report of the ‘The Commission on the Measurement of Economic Performance and Social Progress’, commissioned by President Sarkozy and released last week, I would say GDP (Gross Domestic Product, the standard measure of a country’s economic performance) is right up there alongside laws and sausages – it’s pretty unsavoury.

The Commission, chaired by Joe Stiglitz, first picks over the shortcomings of GDP, and argues that ‘those attempting to guide the economy and our societies are like pilots trying to steering a course without a reliable compass’. It then discusses how to a) improve GDP within its current definition, b) measure quality of life and c) measure sustainability. The report is not for the fainthearted – a 12 page executive summary, a 64 page ‘short narrative’, and a full 200 page set of ‘substantial arguments’. There are also some shorter, rather more accessible coverage in the Guardian, The Economist and Financial Times, among others, and op-eds by Stiglitz. Here are some excerpts from the exec sum, and some thoughts of my own at the end and in square brackets. It’s a long post, but a lot shorter than the original!

[Why we need better measures of services, the quality (rather than quantity) of goods and government activity]
‘The time has come to adapt our system of measurement of economic activity to better reflect the structural changes which have characterized the evolution of modern economies. In effect, the growing share of services and the production of increasingly complex products make the measurement of output and economic performance more difficult than in the past.

In some countries and some sectors, increasing “output” is more a matter of an increase in the quality of goods produced and consumed than in the quantity. Capturing quality change is a tremendous challenge, yet this is vital.

Governments play an important part in today’s economies. They provide services of a “collective” nature, such as security, and of a more “individual” nature, such as medical services and education. These services tend to be large in scale, and have increased considerably since World War II, but, in many cases, they remain badly measured. Traditionally, measures have been based on the inputs used to produce these services (such as the number of doctors) rather than on the actual outputs produced (such as the number of particular medical treatments).

Because outputs are taken to move in tandem with inputs, productivity change in the provision of these services is ignored [see graph for an example from Denmark]. It is thus important to come to grips with measuring government output.

[It's better to measure income/consumption and wealth, not just production]
There appears to be an increasing gap between the information contained in aggregate GDP data and what counts for common people’s well-being. Because no single measure can summarize something as complex as the well-being of the members of society, our system of measurement must encompass a range of different measures [through a] broad statistical system that captures as many of the relevant dimensions as possible:

When evaluating material well-being, look at income and consumption rather than production [as currently, with GDP]. The available national accounts data shows that in a number of OECD countries real household income has grown quite differently from real GDP per capita, and typically at a lower rate [see bar chart].

Income and consumption are crucial for assessing living standards, but in the end they can only be gauged in conjunction with information on wealth. A household that spends its wealth on consumption goods increases its current well-being but at the expense of its future well-being. Measures of wealth are central to measuring sustainability. What is carried over into the future necessarily has to be expressed as stocks – of physical, natural, human and social capital.

[Broaden income measures to non-market activities like leisure and raising families]
There have been major changes in how households and society function. For example, many of the services people received from other family members in the past are now purchased on the market. This shift translates into a rise in income as measured in the national accounts and may give a false impression of a change in living standards, while it merely reflects a shift from non-market to market provision of services…. [We need to] start with information on how people spend their time [including leisure, though putting a value on it is particularly difficult]

Well-being is multi-dimensional
The following key dimensions should be taken into account:
i. Material living standards (income, consumption and wealth);
ii. Health;
iii. Education;
iv. Personal activities including work
v. Political voice and governance;
vi. Social connections and relationships;
vii. Environment (present and future conditions);
viii. Insecurity, of an economic as well as a physical nature.

Objective and subjective dimensions of well-being are both important
The information relevant to valuing quality of life goes beyond people’s self-reports and perceptions to include measures of their “functionings” and freedoms. In effect, what really matters are the capabilities of people, that is, the extent of their opportunity set and of their freedom to choose among this set, the life they value.[in case you were wondering, yes, Amartya Sen was on the Commission]

Inequalities in human conditions are integral to any assessment of quality of life

Inequalities in quality of life should be assessed across people, socio-economic groups, gender and generations, with special attention to inequalities that have arisen more recently, such as those linked to immigration.

It is possible to collect meaningful and reliable data on subjective as well as objective well-being.

Subjective well-being encompasses different aspects (cognitive evaluations of one’s life, happiness, satisfaction, positive emotions such as joy and pride, and negative emotions such as pain and worry)

Sustainability means measuring stocks, not just flows
Sustainability assessment requires a well-identified dashboard of indicators. The distinctive feature of the components of this dashboard should be that they are interpretable as variations of some underlying “stocks (quantities and qualities of natural resources, and of human, social and physical capital.)

There are two versions to the stock approach to sustainability. One version just looks at variations in each stock separately, assessing whether the stock is increasing or decreasing, with a view particularly to doing whatever is necessary to keep each above some critical threshold. The second version converts all these assets into a monetary equivalent.

[The Commission suggests] a more modest approach, i.e. focusing the monetary aggregation on items for which reasonable valuation techniques exist, such as physical capital, human capital and certain natural resources. In so doing, it should be possible to assess the “economic” component of sustainability, that is, whether or not countries are over-consuming their economic wealth.

The environmental aspects of sustainability deserve a separate follow-up based on a well-chosen set of physical indicators. In particular there is a need for a clear indicator of our proximity to dangerous levels of environmental damage (such as associated with climate change or the depletion of fishing stocks.)’

So will all this make a difference? After all, people have been bashing GDP for decades, but it has proven remarkably impervious to attack. I think there are reasons for both optimism and pessimism on the report’s impact.

Optimism both because of its (intellectual and physical) weight (several Nobel prizewinners, a Presidential commission and high quality analysis), and because it is part of a wider groundswell of calls for new ways of measuring social and economic performance. On 8 September the European Commission issued a communication entitled ‘GDP and beyond: Measuring progress in a changing world’, which argued that ‘there are no insuperable technical obstacles to developing the quality and scope of our indicators even further so that policy decisions can progressively be based on a more integrated, balanced and timely view of social, economic and environmental facts.’ The Commission announced that it ‘intends to develop a comprehensive environmental index and improve quality-of-life indicators’ for inclusion in both the European System of Accounts, and member states’ own national accounts systems. So these ideas are becoming reality in the statistical systems of a major chunk of the global economy. This promising combination of political momentum and technical innovation is also reflected in the OECD’s ‘Measuring the Progress of Societies’ project, which has a big conference in South Korea next month. I am speaking there, so expect an update.

Pessimism because the Commission comes out against a single alternative to GDP (probably rightly), and instead proposes various ‘dashboards’ of indicators that allow people to construct different composite indices (like the Human Development Index and dozens of others) for particular purposes. That’s fine if all parties can agree on the particular composite that best reflects a particular issue, but otherwise, everyone grabs the (different) indicators that best ‘prove’ their case, and the debate rapidly gets polarized and stuck. One of the reason’s for GDP’s remarkable durability is that the complexity of the alternatives and improvements frightens the life out of policy makers. Statistics wonks are just not good at KISS (‘keep it simple, stupid’).

Part of me still wishes people would take heed of the sign that Einstein had hanging over his desk at Princeton: ‘Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.’ But for the foreseeable future, policy makers will insist on metrics, and the rest of us should probably back Stiglitz, the OECD and the Commission in trying to ensure that they are as good a reflection of reality as possible.

What’s happening in Brazil? Round up from a quick visit

I spent last week racing round Brazil launching the Portuguese-language edition of From Poverty to Power (Da Pobreza ao Poder, the publishers are looking for distributors in Portugal, Angola and Mozambique – any suggestions?). Here are a few impressions:

A year after the Lehman’s collapse hit the global panic buttons, there’s a striking level of optimism about Brazil’s handling of the global crisis. Last week’s issue of the main weekly magazine, Veja, was entitled ‘The post crisis world is born’, with features on ‘why Brazil was last to enter, and first to leave’ and ‘emerging economies will overtake the rich within 5 years.’ Employment started to rise early in the year and is accelerating, demand has rebounded, and growth projections for 09 and 10 are for a sharp V shaped recovery (see graph), much as in China and India (see previous blog). GDP in the second quarter of 09 was up 8% over the first quarter, behind only China and South Korea.

How did it manage this? In a speech last week, Lula, as Brazil’s President is universally known, put it down to countercyclical measures, including increased government investment in agriculture, housing and infrastructure channelled through the state banks, tax cuts, and increased spending on social programmes such as the renowned Bolsa Familia cash transfer programme. But that all comes to only 1.2% of GDP, small compared to fiscal stimuli in countries like China, the US or South Africa (or the UK), so clearly some other explanations are needed.

One is Brazil’s solid financial system with its bigger than average capital reserve requirements and public banks that kept lending after the crisis hit. Another (which Lula unsurprisingly didn’t mention) is that prior to the crisis, interest rates and tax rates were high, giving lots of room to stimulate the economy through cuts – ‘financial repression’ has its uses, it seems!

Lula also puts the recovery down to the increasing focus on Brazil’s domestic market, and is stressing the need for a more hands on industrial policy, criticising the big iron and steel company, Vale, for not processing its ore like the Chinese do. He also wants to make sure Brazil’s recent big offshore oil finds are used to develop a petrochemical complex, rather than just poured into tankers and exported.

This resurgent confidence is also reflected in Brazil’s foreign policy, with more assertiveness in international fora and increased interest in development issues. Asked what he plans to do after standing down as president after next year’s elections, Lula replied ‘help Latin America and Africa implement better social policies.’ One northern aid official was struck by how the foreign ministry’s traditional hostility to being patronised by aid donors changed to real enthusiasm once the discussion turned to facilitating exchanges between African and Brazilian social policy experts.

The legacy of Lula’s government is impressive: real progress in absorbing and improving the millions of migrants who have flocked to Brazil’s cities in recent decades; stronger and more stable institutions; managing to combine the commitment to economic stability and low inflation inherited from his predecessor, Fernando Henrique Cardoso, with a commitment to social policy (cash transfers, minimum wages etc) that seems to be bequeathing Brazil a basic welfare state, rapidly reducing both poverty and inequality.

But little of this seems to benefit his party, the Partido dos Trabalhadores, whose lilywhite reputation has been battered by repeated corruption rows in Congress and its choice of a lacklustre PT candidate, Dilma Rousseff, for next year’s presidential election. Asked if he plans to stand again at the following election in 2014 (he’s only allowed two successive terms in office, but can return after a decent interval), Lula says he won’t stand if Dilma wins, but if she loses, is open to offers next time round. Latin American presidents often say they’ll do this, but I can’t think of a case where anyone’s managed it. Still, the PT has always been full of surprises – Lula 3.0 here we come?

China rising; a dirty development mechanism; this week’s G20 summit; the Indian drought and why climate change will ruin your beer: links I liked

‘China has emerged as the most significant winner from the global financial and economic crisis’. Martin Wolf feels the geopolitical plates shifting in the FT

Alex Evans lays into the Clean Development Mechanism and provides a handy curtain raiser for the G20 summit in Pittsburgh later this week

The Economist charts the impact of climate change on developing countries and India’s disastrous drought

And finally, now it’s getting serious – climate change is affecting the quality of lager, promising a whole new (and unlikely) constituency of campaigners – lager louts for a safer planet, anyone? (h/t Chris Blattman)

Is this guy the world’s best lecturer on development?

I’m conscious that this blog has been somewhat heavy going this week, so here’s a reward to anyone who got through to Friday (especially for any saddoes like me who end up watching youtube at the weekend).

Hans Rosling is a youtube phenomenon, a Swedish economist whose lectures on data and development have deservedly become legendary. He specializes in showing the evolution of the world’s countries with whizzy graphics and witty commentary, and the good news is that there is a website, gapminder.com, that makes his work available to all. You can either use his database, show some of his issue-specific videos (I recommend a great 4 minute overview of urbanization), or even construct your own graphics.

I recommend spending some time learning to use this – I’m a technological Neanderthal, and even I have used the timeline of life expectancy v GDP per capita in a lecture without mishap. Our powerpoints will never be the same again.

You can (and probably should) ask questions about the content – as he bases everything on data, problems arise with less measurable issues like rights (although he does at least talk about them). But that feels a bit beside the point – really you should just sit back and enjoy the show.

He may look like a classic tweedy data-nerd, but he’s a real showman. The most extraordinary lecture I have ever seen ended with him performing an on-stage sword swallowing act. (Note, it’s a 19 minute talk, including sword swallowing, so you’ll need to allow the time). All other occasional speakers on development take note of just how far this raises the bar - I have already signed up for beginner’s glasses in fire eating and escapology……

The UN lays into finance, speculation and the IMF: UNCTAD’s Trade and Development Report 2009

Another day, another UN report, this time the Trade and Development Report 2009, from the UN Conference on Trade and Development (UNCTAD), released last week. It’s surprisingly forthright. Set up in 1964, in the table-thumping days of the New International Economic Order, in recent years UNCTAD had become markedly more cautious, not least under its current secretary general, the distinctly un-fiery Supachai Panitchpakdi, (a former WTO boss). The global crisis seems to have changed all that. Some excerpts from the overview (italicised subheads are my attempt at a summary):

The origins of the crisis lie in financial deregulation:

‘Policymakers also failed to draw lessons from the experiences of earlier financial crises. Like previous ones, the current crisis follows the classical sequence of expansion, euphoria, financial distress and panic….. What makes this crisis exceptionally widespread and deep is the fact that financial deregulation, “innovation” of many opaque products and a total ineptitude of credit rating agencies raised credit leverage to unprecedented levels. Blind faith in the “efficiency” of deregulated financial markets led authorities to allow the emergence of a shadow financial system and several global “casinos” with little or no supervision and inadequate capital requirements.’

Speculation is driving commodity price volatility and needs to be curbed:

‘It is true that deteriorating global economic prospects after September 2008 dampened demand for commodities; but the downturn in international commodity prices was first triggered by financial investors who started to unwind their relatively liquid positions in commodities when the value of other assets began to fall or became uncertain. And the herd behaviour of many market participants reinforced such impulses. Financial investors in commodity futures exchanges have been treating commodities increasingly as an alternative asset class…. In order to improve the functioning of commodity futures exchanges in the interests of producers and consumers, and to keep pace with the participation of new trader categories such as index funds, closer and stronger supervision and regulation of these markets is indispensable. In the first half of 2009, commodity prices rose again, reflecting the return of financial speculators to commodity markets, which appears to have amplified the effects of small changes in market fundamentals.’

Developing country governments have responded well to crisis, but the IMF is holding them back:

‘A number of developing and transition economies also launched sizeable fiscal stimulus packages. On average, their size was even larger than those of developed countries: 4.7 per cent of GDP in developing countries and 5.8 per cent in transition economies, extending over a period of one to three years. The authorities in China were quick to announce a particularly large fiscal stimulus plan, amounting to more than 13 per cent of GDP…. By contrast, some developing and transition economies have had to turn to the International Monetary Fund (IMF) for financial support to stabilize their exchange rates and prevent a collapse of their banking systems. IMF lending has surged since the outbreak of the current crisis, extending to nearly 50 countries by the end of May 2009. However, the scope for expansionary policies to counter the impact of the crisis on domestic demand and employment has been severely constrained by the conditionality attached to IMF lending….. Several announcements were made to the effect that the IMF would recognize countercyclical policies and large fiscal stimulus packages as the most effective means to compensate for the fall in aggregate demand induced by debt deflation. However, in reality, the conditions attached to recent lending operations have remained quite similar to those of the past. Indeed, in almost all its recent lending arrangements, the Fund has continued to impose procyclical macroeconomic tightening, including the requirement for a reduction in public spending and an increase in interest rates.’  

A debt moratorium is needed to avert a new debt crisis:

‘The fallout of the global economic crisis is impairing [low income countries’] ability to service their external debt without compromising their imports…. A temporary moratorium on official debt repayments would allow low-income countries to counter, to some extent, the impact of lower export earnings on their import capacity and government budgets. Such a moratorium would be in the spirit of the countercyclical policies undertaken in most developed and emerging-market economies…. the total amount of such a temporary debt moratorium would be modest, amounting to about $26 billion for 49 low-income countries for 2009 and 2010 combined.’

Financial integration needs to be reconsidered, and the IMF should actively encourage the use of capital controls:

‘The realization that in a globalized world “shocks” emanating in one segment of the financial sector of one country can be transmitted rapidly to other parts of the interconnected system raises some fundamental questions about the wisdom of global financial integration of developing countries in general. The experience with the current financial crisis calls into question the conventional wisdom that dismantling all obstacles to cross-border private capital flows is the best recipe for countries to advance…. Assertions that capital controls are ineffective or harmful have been disproved by the actual experiences of emerging-market economies…. the IMF should more actively encourage countries to use, whenever necessary, the introduction of capital controls as provided for in its Articles of Agreement.’

The TDR also calls for a new international exchange rate system and reserve currency to replace the dollar, a role that could perhaps be played by the IMF’s ‘special drawing rights’ (SDRs). In a short additional section on climate change (every report needs one), it comes up with the new (to me) idea of extending the use of compulsory licensing for climate-friendly technologies, allowing governments to override patents (as they currently can in public health emergencies).