Category — Economic Development

Stewart Brand has a very bold article appropriately titled How slums can save the planet about the benefits (while admitting some of the real problems) of highly compacted urban environments. One paragraph about urban farming really struck me and I’m very curious to hear whether it’s actually accurate and sustainable. If so it makes for some very interesting possibilities:

One idea that could be transferred from squatter cities is urban farming. An article by Gretchen Vogel in Science in 2008 enthused: “In a high-tech answer to the ‘local food’ movement, some experts want to transport the whole farm shoots, roots, and all to the city. They predict that future cities could grow most of their food inside city limits, in ultraefficient greenhouses… A farm on one city block could feed 50,000 people with vegetables, fruit, eggs, and meat. Upper floors would grow hydroponic crops; lower floors would house chickens and fish that consume plant waste.”

Saturday’s Kiva Dev Garage was a huge success with a great turnout and real progress on both some existing and entirely new projects. We had people working on iPhone and Facebook Apps, a Kiva loan browser, and lots of other cool things. My team worked on a Wordpress Widget that is both really easy to install and hopefully really compelling and will lead to more people lending to Kiva Entrepreneurs. Check out this great video from the event:

I just found this interesting tidbit from a paper I was reading last night that shows how teenagers in developing countries literally tend to underestimate the returns to education. Researchers asked students about how much more educated people earn compared to uneducated ones and found that they substantially underestimated the amount. More importantly, informing them about the true difference increased their likelihood of staying in school:

Jensen recently carried out a randomized experiment in which he gave secondary school students in the Dominican Republic information about how much more money an educated person makes compared to someone who did not get an education. He found that teenagers substantially underestimate the returns to education, and that providing them with this infor mation had a substantial effect on the children’s likelihood to stay in school. In the treatment group, children were 5 percentage points (an increase of 10% since only 50% return) more likely to come back to school the year after the intervention.

Before you think that this is somehow limited to the Dominican Republic a similar result was found in Madagascar where parents were more likely to keep their children in school upon being given similar information:

These results are confirmed by recent work from Nguyen, who provided parents in Madagascar information about returns from primary and secondary education. There, too, many parents underestimated the returns from education, and when they were informed about the measured returns reacted by making sure that their children went to school more regularly. At the end of the year their grades were also better.

This is one powerful illustration of how people often lack critical information that can improve their future choices. It is also a good indicator that giving people more and more choices without the necessary mechanisms for choosing between them will not necessarily produce the expected return.

Richard Florida has a phenomenal article on how the current crisis will shape the geography of American cities. Recent growth has focused around growth in increasingly suburban cities clusters and the feedback loop that this created and about how the kind of sustainable economic growth that we want for the future will be about communicating and spreading ideas. But first things first, let us look at a typical housing boom city:

As prices rose, more people moved in, seeking inexpensive lifestyles and the opportunity to get in on the real-estate market where it was rising, but still affordable. [...] Cities grew, tax coffers filled, spending continued, more people arrived. Yet the boom itself neither followed nor resulted in the development of sustainable, scalable, highly productive industries or services. It was fueled and funded by housing, and housing was its primary product. Whole cities and metro regions became giant Ponzi schemes.

The big increase in suburbanization was a product of the World War II era, young men returning from the war, starting families, buying houses in cheaper areas, stores opening to sell to this new market, factories also moving to make use of the cheaper space and plentiful labor, creating jobs, attracting more workers, … This is where it gets interesting:

The US economy is reeling and we are all worried, many of us have lost their jobs or know several people who have. There are good economic arguments for trying to keep as much as possible of the economic stimulus inside the country (to maximize the impact of each dollar spent) while avoiding new protectionism that might spark a trade war. With all of us so focused on the domestic economy it is easy to forget that things are also happening in the rest of the world and that they aren’t that different from what we are going through here (and many of the problems like speculative investment in Eastern Europe are not at all the US fault).

However, if the current crisis has taught us anything, it is that nations are interlinked. The economic decoupling was a myth and the economic crisis is hurting everyone and endangering many US foreign policy priorities, including the recovery of Iraq. Because of this I was extremely shocked to see the following shortsightedness from Richard Posner:

I think the big foundations, such as the Gates foundation (the biggest), should be strongly urged to redirect their extensive foreign charity to the United States at this time of depression. I am not suggesting that his projects should “Buy American,” in the sense of buying U.S. products to give to foreign recipients of his charities. The point is rather that charity should begin at home when home is suffering.

I agree that in these tough times all of us who have steady incomes should help less fortunate ones by donating more to local charities. But taking away funding from the developing world would both be immoral and counter productive. These countries are already suffering immensely from a crisis that they did not create, the World Bank’s Chief Economist for Africa expects up to 700,000 additional infant deaths in Africa because of the crisis and an increase in conflict and decrease in governance quality. Ted Miguel and Ray Fisman have shown how economic shocks greatly increase the likelihood of civil wars and the same is true for a rapid fall in natural resource prices. Offering aid and then withdrawing it can be much worse than not giving anything in the first place. This decade has taught us that failing states, from Afghanistan, to Pakistan, to Somalia are real security problems, not just for their neighbors but also for the West.

If the Gates Foundation and others like it suddenly stopped funding projects in developing countries countless projects that have come to depend on their funds (many of which were started because of it) would have to shut down and it would take a long time for them to recover once the money becomes available again. The cutting of funds would worsen the impact of the crisis in affected countries, increase the time it will take for the global economy to recover, endanger long term research into tropical diseases, and produce a (potentially protectionist) backlash against the United States that we really don’t need right now.

This crisis and the way we get out of it is a chance for the US to show its leadership and creativity in the face of tough problems and together we can achieve that. If you as an individual want to help those less fortunate than you consider making a loan on Kiva or donating to a US charity.

Update: As Lauren pointed out in the comments you can also contribute by spending your time solving important problems and make a career out of making the world a better place.

Update 2: Richard Posner wrote another post supporting the elimination of tax deductions for charitable donations to foreign countries while Gary Becker (on the same blog) had a more nuanced opinion. Posner also maintains that we should regulate such giving which as an entrepreneur leaves me just flabbergasted. Many innovative non-profits started by young upstarts with great ideas such as Kiva, Forge, Face Aids, and Unite for Sight would never have been started under this plan and the world would be worse off for it. Let’s foster entrepreneurship in all sectors of the economy, not limit it without good reason.

I was just reading a little bit about the Greek Economy and wanted to highlight the following observation about the IMF that ends up giving it a bad name for government’s mistakes:

One key feature in all this woe has to be a political process that is extremely ineffective, and driven by the fact that no one likes to hear bad news, and that the last thing a politician is able to say is tighten-up your belts now lads and lasses, we are in for a rough ride. But isn’t this just how the IMF gets such a bad name for itself, since the IMF doctors get called in just where the domestic political process breaks down, and where local politicians haven’t the ability to stand up in front of their citizens and say, it’s going to have to be like this, I’m afraid. Isn’t this what just happened in Ukraine, Hungary and Latvia? And then people say, those “nasty folk” at the IMF, they cut pensions everywhere they go, and wages are down 8% in Hungary, and 15% in Latvia once the IMF get to run the show. That is the IMF make for a convenient scapegoat, but people seldom ask themselves why wages needed reducing, or why there is no money to pay the pensions.

Granted, there are other ways to reduce a deficit and the IMF might be biased on how it wants to cut deficits but the general point stands.

I’ve been writing a lot about the Financial Crisis and relatively little about African development but I found a great short little paper by Shanta Devarajan, Chief Economist of the Africa Region at the World Bank, about the impact of the crisis on Africa that combines the too. If you’re curious about how the crisis has impacted other countries here’s a post about it’s impact in Eastern Europe and Iceland. It’s late and I want to keep this short but here’s the core idea followed by the five ways of how the crisis could have an impact, read the paper for more:

It is argued that the transmission mechanisms between the financial systems in Africa and the rest of the world are weak and will minimize the impact on the crisis. African financial institutions are not exposed to risks emanating from complex instruments in international financial markets because most banks in Sub-Saharan Africa rely on deposits to fund their loan portfolios (which they keep on their books to maturity); the interbank market is small; the market for securitized or derivative instruments is either small or nonexistent, and few rely on foreign borrowing to fund their lending operations. Exceptions to this position are then made for countries like Nigeria and South Africa which are seen as having meaningful transmission mechanisms with the larger financial systems in crisis.

This conventional position is now being challenged. As the immediate crisis faced in the last couple of months subsides, and policymakers begin to consider the longer term impact of the crisis in Africa, an emerging view is that the impact on the financial sector in Africa may actually be more significant and longer lasting than first assumed, and the impact on the non-financial sector in Africa will be more notable.

Impacts:

1. Weakened local investor confidence in equities and bonds on African Stock Exchanges
2. Return to ultraconservative lending practices 
3. Losses arising from central bank reserve management practices 
4. Renewed debate on the role of governments in the financial system 
5. Weakened balance sheets resulting from a downturn in the real economy

Finally, one obvious way the crisis will affect the real economy is through a drop in commodity prices:

Declining demand for commodities will impact African countries significantly. In Zambia for example, the economy is likely to take a hit from a share decline in copper prices (-24%ytd). As the financial crisis surges into all parts of the real economy in developed economies, African countries will experience a substantial decline in exports as the rapid pace of trade expansion in this decade decelerates sharply.

Another paper by Ray Fisman, this one together with Roberta Gatti on how government decentralization affects corruption. They use cross country data and find that “fiscal decentralization in government expenditure is strongly and significantly associ-
ated with lower corruption.” I’m not going to go into the actual methodology of the paper here – it’s definitely an area that needs some further study but I wanted to summarize the different theories as to why decentralization might increase or decrease corruption (from the paper):
Decrease:

• Political competition reduces the ability of bureaucrats to extract rents in exchange for services – The Power to Tax, Brennan and Buchanan (1980)
• Competition among localities will more generally discourage governments from establishing interventionist and distortionary policies that might drive away valuable factors of production – Regional Decentralization and Fiscal Incentives, Jin et. al (1999)
• Related to last point: Implement corruption free zones to force other localities to improve their own bureaucracies - Special Governance Zone: A Practical Entry-Point for a Winnable Anti-Corruption Program, Shang-Jin Wei (2000)
• Agents in centralized bureaucracy are responsible for many tasks in many jurisdictions, in decentralized bureaucracy they are responsible for a single task. This makes them more directly accountable while in centralized bureaucracy only the aggregate performance is measured - Constitutional determinants of government spending, Persson and Tabellini (2000)

Here’s an excellent article by Fareed Zakaria on why the financial crisis also presents a huge opportunity to clean up some of the problems of the political, financial, and economic system of the last decade(s) and how the new administration has (available) the brain power to effect this change:

Volcker has also argued that the highly complex financial system was not nearly as stable as people believed and that far-reaching efforts were needed to regulate and stabilize it. Now these issues will get attention at the highest level. The fear on Wall Street is that a Democratic administration would overregulate. But look at who is advising Barack Obama—Buffett, Volcker, former Treasury secretaries Robert Rubin and Larry Summers. It is more likely that what will come from their efforts will be a better-regulated financial system that, while producing less-extravagant profits, will be more stable and secure.

What I personally find really interesting is his succinct summary of something I have heard over and over in the last few weeks – How the inflated financial industry caused a misallocation of talent into the financial sector:

The financial industry itself is likely to shrink, and that’s not a bad thing, either. It has ballooned dramatically in size. Curry points out that “30 percent of S&P 500 profits last year were earned by financial firms, and U.S. consumers were spending $800 billion more than they earned every year. As a result, most of our top math Ph.D.s were being pulled into nonproductive financial engineering instead of biotech research and fuel technology. Capital expenditures went into retail construction instead of critical infrastructure.” The crisis will stop the misallocation of human and financial resources and redirect them in more-productive ways. If some of the smart people now on Wall Street end up building better models of energy usage and efficiency, that would be a net gain for the economy.

Esther Duflo recently wrote about this for VoxEU and two years ago I read an excellent paper on the incentives for productive and unproductive economic behavior by William Baumol that I cannot recommend strongly enough:

[The] allocation between productive activities such as innovation and largely unproductive activities such as rent seeking and organized crime. This allocation is heavily influenced by the relative payoffs society offers to such activities. This implies that policy can influence the allocation of entrepreneurship more effectively than it can influence its supply.

While The web isn’t flat anymore is one of the slogans of Apture, the startup I co-founded, this post is actually not about that, but about a comment that David Abernethy made during one of his lectures on India on the Stanford Travel podcast. For those of you who don’t know about it, Stanford has a large number of classes and lectures available for free download on iTunes, and I’ve been making my way through them for the last few weeks. I will write more about these other lectures later.

I have never read Tom Friedman’s The World is Flat because it’s a very long book with a relatively simple point and there are so many other fascinating things to read, but I found this particular comment really interesting. Abernathy thinks that “The World is Flat” is actually a misnomer because what the book is really about is certain points of the world being much closer connected to other points, e.g. Bangalore being linked more closely to Palo Alto.

He then goes on to argue that the world was in fact flat before the industrial revolution when economic production dependent almost entirely on human labor and the economic output of a country was roughly proportional to its population. While there were obviously some inequities due to differences in geography, etc. and some minor technological advances gdp-per-capita was relatively uniform throughout the world – the world was flat. Only with the start of the industrial revolution were some countries/regions able to vastly increase their productivity and thereby race ahead of the others and if you look at charts of per region GDP over the last few centuries you really do see them starting at relatively equal levels and then see a big gap opening up. The world isn’t flat anymore. Not rocket science but an interesting thing to keep in mind. I very much recommend the whole lecture, (European “Envasions:” Competition for Wealth and Power, 1498 -1757).