Tuesday, May 16, 2006

"The Elusive Quest for Growth" by William Easterly

Subtitle: An Economists’ Adventures and Misadventures in the Tropics, Cambridge, Massachusetts: MIT Press, 2002: 

The Roman philosopher Seneca defined luck as the moment when preparation meets opportunity, and in this excellent book Easterly analyses some big-bang moments of development luck, and even extends the concept to include the possibility of unpreparedness meeting opportunity—for instance when not being held down by merely recent technology allows for a better use of the very latest. 

The book makes a great case for PPPs Private Public Partnerships or, as one famous president of Venezuela would have put it, “It is not the private sector or the public sector but just the opposite.” 

The book explains very well the need for developing the right incentives for development, although in doing so it might not emphasize sufficiently those other variables that help the sustainability of development, such as a reasonably equitable income distribution. 

Also, a book that discusses the benefits which development receives from “knowledge leakage” but also promotes strong intellectual-property rights as incentives must, obviously, enter into some contradictions. But, then again, with no contradictions, what would be the role of luck? 

The book is crystal clear about the destructive role of bad governments. When Easterly calls for banning the concept of a financial gap, I feel much at home with my arguments against debt-sustainability analysis.

When the author writes, “Thinking about luck is good for the soul. It reminds us self-important analysts that we might just be totally witless about what’s going on,” I know that William Easterly is one of those rare Ph.D.s whom I could gladly consider inviting to my “Guaranteed Ph.D.-Free University.” 

PS. A quite interesting spin on the issue of whether “To write or not to write … by hand” is made by William Easterly in his book The Elusive Quest for Growth. In it, when he argues, “the productivity gains of the computer are slow to be realized . . . because there are still too many traditional people out there with ink and paper,” he is actually making the point that perhaps we should prohibit handwriting as such, so that the world can move forward.

[Jim, my editor: “Plato suggested—I suspect jokingly—that the invention of writing was a bad thing that ruined human powers of memory.”]

The World Bank and IMF, should give the whole world, Mother Earth and the Global Rovers, more voice at its Executive Boards.

Many seem to opine that if only the votes and the composition of the Executive Boards of the World Bank (and the IMF) reflected better current economic size, then global imbalances had a better chance to disappear, like magic. It might not be as easy as that, and just for a starter why would GDP or the market share of the world trade be more important than market capitalizations for assigning voting power. Also if we are at it, why should we not then go for a full Monty on democratic reform and use population as the basis?

If and when a possible reshuffling of the current 24 Executive Directors should happen, I hope it will be to give representation, perhaps not to Civil Society, which is sort of intangible, but to that very tangible piece of land, water, and air that we all know as planet earth.

Although we proudly name ourselves the World Bank, the fact is that we are more of a “Pieces of the World Bank”, with 24 Executive Director representing parochial interests. As a consequence I sadly had to conclude in that the World itself, call it Mother Earth if you want, in these times of globalization, is in fact the Bank’s most underrepresented constituency.

This needs to be fixed, urgently, as we need to be able to stimulate a profoundly shared ownership for the long-term needs of our planet, if we want to survive as a truly civilized society, worthy of the name civilization. As I see it, adding a couple of truly independent seven-year-term Executive Directors, whose role would be to think about the world of our grandchildren, way beyond the 2015 of the Millennium Development Goals—could be what the World Bank most needs now.

And, while at it, we should perhaps also ask one of the current Directors to give up his Chair for a new constituency—call it, if you will, the Constituency of the International Rovers, by which I mean all those workers, skilled or unskilled, legal or illegal, who nowadays represent jointly one of the largest economies of the world. By the way, the first thing that the Global Rovers’ ED would need to do is to make clear the enormous difference that exists between an immigrant with a long-term plan to emigrate from motherland and forever assume a new nationality, and, on the other hand, a temporary worker who just wants to make a buck in order to help his family to a better life, and who wishes with all his heart and soul to return home as soon as possible. Forcing temporary workers to swear allegiances to foreign flags, just so that they can have the right to a better income, cleaning toilets, seems only like a new generation of artificial trade barriers.

Currently we are too stuck in the geography of the non-globalized world to be able to see what is truly happening around us. For instance, El Salvador has about 2 million of its people working abroad, more than a third of its total workforce and so if to the current GDP figures of El Salvador we add what these workers are earning, gross, well then perhaps El Salvador’s growth rate could actually be higher than China’s. And you tell me, why should we not do it this way? Is not an El Salvadoran still a real El Salvadoran just because he or she is working abroad? The internal emigration in China from west to east might take a Chinese from 50 to 150 dollars per month, but the El Salvadorans going south to north go from 120 to 1.200, and no one is heard complaining about an over or undervalued currency.

(Extract from a presentation of Voice and Noise at InfoShop on May 16, 2006)

My insecurities about the social security debate

The following is extracted from my Noise and Voice of 2006, a book which reflects on what I discussed and opined during my two years as an Executive Director of the World Bank 2002-2004

About disseminating our knowledge

It really is not possible for the value of investment funds to grow, forever, at a higher rate than the underlying economy, unless they are just inflating it with air, or unless they are taking a chunk of the growth from someone else. Therefore when we observe how many Social Security System Reforms are based on the underlying assumption that they will be growing 5 to 7 percent, in real terms, for ever. I wonder when we are going to use our knowledge, and inform the world that this is just plain crazy.

When we speak of expected returns, let say a real 3%, this is just an average of a distribution curve where there are a lot of winners, with higher returns, and a lot of losers, taken to the cleaners. Knowing this, how come we allow the debate on Social Security reforms to use the averages? In systems where you are supposing to pay someone to manage the funds, you should expect the managers to produce different results. Yes of course the returns could be average, but for that you just buy a stock index, and pay no fees.

A question

Are there any real differences between a pay-as-you-go, governmentally backed pension system, and a pension fund that invests completely in government paper?

About the timing and the losers

Any individual Social Security accumulation system that has the luck to start when the markets are close to rock bottom will always perform better than those systems that start when the markets are at the top. This has been the real beginner luck of the Chilean system and future generations of Chilean accumulators might not be as happy with the results as the pioneers were. 

When we now read how investment funds publicly state that they do not wish to receive more funds since they do not know where to invest them and we also observe how many private pension schemes in the United States are running for public cover, we need perhaps to ask ourselves whether the timing for those Social Security reforms that might be en route is really that good.

Those who beat the market average will always love to be on their own, and therefore the problem does always reside with the losers. The difficult question is whether in an individual security accumulation system all of the future losers have truly surrendered their expectations of receiving official assistance and, even if they have, proudly preferring to starve than to ask for help, whether the governments could really get away from their social responsibilities by answering the losers with a “Hard luck, pal, you had a private plan.” 

And so, at the end of the day, to me it seems that you might just be substituting a pay-as-they-fall for a mean-based pay-as-you-go system. So, when we add it all up, it all boils down to the same—except of course for the fees.

On Social Security in Real Terms

In order for your savings and social security investments to be worth something when you need them, the real economy must be in a reasonable condition at the time of your selling your investments. When I hear the many discussions about the financial preparation needed to accommodate for the upcoming demographic changes, I find it truly amazing how little is being said about the economy in real terms. 

Considering that there will be many fewer young ones to drive people around and shovel snow, much of today’s beautiful real estate might drop in value when the elderly start selling their houses to live close to a metro, hospital, and more reasonable weather conditions. So, before putting the money away in a private accumulation trust I think we need to rethink the whole retirement strategy.

Also we should never forget that historically, through all economic cycles, there is nothing so valuable in terms of personal social security as having many well-educated loving children to take care of you, and that you can’t, in real terms, beat that with any social security reform.

Two current updates on the social-security issue

Sir, Delphi’s (a company that supplies General Motors) problems do indeed pose a threat to public-pension institutions, but it also evidences the structural weakness of the alternative of accumulations in private-investment accounts. The fact is that when the old retire and might need to sell their stocks, the young might not be willing to buy them. 

Sir, With respect to GM’s pension woes, you claim that the company recorded a return of 5 per cent in the first half of the year, putting it on track for its assumed annual return of 9% but also that if GM’s pension funds produced the same poor returns as the equity and bond markets, this would of course have a dramatic negative impact. What is thereby implied makes a case for developing a formula that calculates how much arrogance it must take to promise to pay 9% on funds over a life span, and/or to beat the markets continuously.

And more from 1997 "Pension funds - not yet"

Thursday, May 04, 2006

What the World could learn in Sri Lanka

Last week, I heard the presentation of a research paper that studies the impact of migration on growth and spatial inequality in Sri Lanka, titled Can migration be an engine of pro-poor growth?, authored in 2006 by Nobuo Yoshida, K.G.Tilakaratna and Suranjana Vidyarathne. It was a very interesting presentation but; nonetheless, after just a couple of minutes, I could not stop my mind from wandering off into the following reflections. I beg your pardon, Nobuo Yoshida.

Would this study be different if instead of looking at a map of all the very different districts in Sri Lanka we were looking at a map of the world? Can we really research migration from one country to another with the same ease we observe when the analysis is of the internal migration? Do not all the institutional restrictions and emotional biases that arise while analyzing migration from one country to another hinder us one way or another from reaching the real conclusions?

Can we analyze migration from one country to another in a globalized world if we still have to carry the flags from the non globalized world? When we study the migration from El Salvador into the USA, should we instead of looking almost exclusively into their remittances, be looking much more at their gross earnings, salaries; and thereby perhaps conclude that El Salvador, as that nation that is no matter where their people are, might indeed be growing much faster than China. If in China migration might be from west to east, from 50 to 150 dollars of income per month, El Salvador is doing theirs from south to north, from 100 to 1200 dollars per month.

The state of Connecticut showed a per capita income in 2004 of 45,318 dollars while Mississippi had only 24,518, just about half. Does this imply that when deciding upon temporary visa programs the USA should consider more where the temporaries should go? Should they go to the poorer or to the richer states? Can or should the states compensate each other for differences in migration, one way or another? Certainly if we knew more about these issues then we all stand a better chance for rationality to prevail.

Back to the Sri Lanka study, one of its conclusions is that as their internal migration goes mainly to the already congested Colombo Metropolitan Area, this could reduce Sri Lanka’s annual growth rate by 1.5 percentage point, compared with if Colombo were not over-concentrated. Would this be indicating we should start to look at controlling migration flows in the world as London does with its traffic, by officially charging a fee for passing from one area into the other and have market forces decide how much these fees should be.

And we could go on and on this route of analysis, and fight world poverty so much better, if only we could ban the flags. It is clear now that we need many of these internal migration studies, like the one on Sri Lanka, if we are ever to get a chance to understand cross-border migration.