Posts Tagged ‘Development’

I learned quite a bit about Apple from the NYTimes article by Duhigg and Bradsher. One particularly striking passage:

In mid-2007, after a month of experimentation, Apple’s engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That’s when managers woke thousands of workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold one million iPhones. Since then, Foxconn has assembled over 200 million more.

This discussion about the flexibility of Chinese labor highlights that the lack of American competitiveness is not simply due to high wages and living standards in the U.S. It is the entire supply chain that makes production in China so appealing to firms. Americans would protest living in a dorm attached to their factory and being woken up at midnight to start a 12 hour shift. But that is exactly what makes China so enticing for businesses.

Yves Smith fills in much of what the article left out. But here I want to make a connection to economic theory. This article reminded me of my undergraduate macroeconomics course in the Spring of 2008. The economic crisis was just setting in, and one of my classmates asked the professor if the solution was simply to cut wages, so that American firms would be competitive again. The professors answered: “Yes. That’s right.” End of story. The same professor repeated this claim in a panel discussion on the crisis, claiming that decreasing the prices of factors of production will make U.S. firms globally competitive once again. Duhigg and Bradsher demonstrate the danger of assuming away production to a black box “production function.” The production function approach ignores supply chains and institutional arrangements surrounding production, and leads certain economists to make quite silly proclamations. Cutting wages in the U.S. will not make U.S. factories more competitive; China has an entirely different supply chain that simply does not exist in the United States.

One person who does study global supply chains and institutional arrangements is economic sociologist Gary Gereffi (note: again, interesting economics happening outside of economics departments). He also directs the Center for Globalization, Governance and Competitiveness at Duke University, which has mapped Global Value Chains in North Carolina. (The website is quite fascinating to explore.) This approach to studying the global economy looks at the supply chains, and where each stage takes place and how much value is added at each step in the process. This is a type of economic analysis, very different from what academic economists do, that should prove more useful in understanding global competitiveness and production.

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Some of my economics colleagues were certainly unimpressed by the President’s focus on encouraging manufacturing in the United States, and his condemnation of the outsourcing of jobs. Economists tend to have a great deal of faith in market forces, and consider the market price an accurate reflection of “all relevant information.” In economics, aiming for insourcing or encouraging particular sectors of the economy (and not others) is “distortionary” because those policies distort prices and quantities from their market price, which (sometimes!) in theory yields the most efficient price and quantity. Generally, economists have little faith in the government’s ability to “pick the winners.”

However, I found Obama’s focus on manufacturing in America, “an economy to last,” as one of the more promising aspects of the address. As I have written before, we should not ignore the benefits of the manufacturing sector in the economy. A healthy manufacturing sector not only affords well-paying jobs, which fosters a middle class, but also leads to R&D spillovers in related industries that may not even exist yet. Why are Japan and South Korea leading in lithium ion battery technology? Because electronics industries fled to there throughout the 1980s and 90s, and when it became clear that battery development would be the next global challenge, they were already far ahead. The U.S. is trying to catch up, but we are starting for our own goal line.

A great deal of research supports these arguments. One of the classic works on global competitiveness is Alice Amsden’s Asia’s Next Giant, which challenges the conventional wisdom that liberalization and market forces caused South Korea’s economic boom. Amsden attributes Korea’s success to a strong government that supported the manufacturing industry and worked with firms to import key technologies and train workers with relevant skills.

And this brings me to a second key aspect of The President’s address: the relationship between market and government. He is the first president in my lifetime to recognize that it is not about government vs. the market. (Even Bill Clinton favored a small government and lower taxes.) Obama’s speech recognized that the market and the government needed to support each other in order for our economy to succeed. The two are intertwined, and by supporting each other can achieve higher economic outcomes and realize more competitive firms. The debate should not be about whether responsibility lies with the government or the private sector to create jobs; the economy should not be understood as something apart from or in opposition to the economy. Rather, the government can support and even initiate certain desirable industries, so that we may achieve a healthy and resilient economy:

Think about the America within our reach. A country that leads the world in educating its people. An America that attracts a new generation of high-tech manufacturing and high-paying jobs. A future where we’re in control of our own energy, and our security and prosperity aren’t so tied to unstable parts of the world. An economy built to last, where hard work pays off, and responsibility is rewarded.

*Third because the 2009 address shortly after Obama’s inauguration was technically not a state of the union.

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The American Jobs Act would provide much needed stimulus to our ailing economy. However it is more like putting a bandage over the deep flesh wounds inflicted by globalization over the past two decades. The U.S. economy needs to be fundamentally restructured in order to address the prolonged recession in a sustainable way, a restructuring that involves political, legal, and business institutions. More stimulus is no silver bullet.

Germany provides a wonderful example of how a society can fight back and protect itself from the damaging effects of the spread of the market economy, (á la Karl Polanyi). Instead of just giving away manufacturing industries as the United States did, Germany took a very active role in preserving manufacturing. They have an entirely different institutional environment. Corporate boards have labor representation, the government works to encourage industries that provide jobs that they want in Germany, and the corporations are not chasing extraordinary short term profits like we do in the United States as a result of mandatory quarterly reports and their influence on the capricious stock market.

While it is important not to romanticize manufacturing, we must not ignore its benefits. Maintaining industry has had massive benefits for Germany. While unemployment is higher than it was before the crisis, it is much lower that we are still suffering in the U.S. (by some est., 6% vs. 9% in the U.S.).  Industry provides jobs for middle skilled laborers; these jobs have left the U.S. and left a growing gap in income – and this is the cause of the disappearance of the middle class that everyone is talking about but no one understanding. In addition, R&D activities have been shown to follow manufacturing; certainly it is not difficult to imagine the benefits of having the research teams in close proximity to the manufacturing process. It is only a matter of time before R&D and “high tech” jobs also leave the U.S. in pursuit of the industries, unless we do something to protect our economy.

There are other spillovers, too. The article linked above details how German companies are exporting kitchens to China. These companies build the kitchens to fit European size ovens, which are smaller than American ovens. This has essentially blocked all competition from American companies that might want to export ovens to China, and has paved the way for a boom in German oven businesses as well.

The restructuring necessary for the health of the U.S. economy will require a multifaceted institutional reform, that includes the political system, the legal system, and the stock market.

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Wealth Breeds Rage

John Githongo warns that in Africa, uneven economic growth can lead to a combustible situation when inequality festers and is not well managed [ht:cr]:

Across the world, as growth has spread and accelerated, so has inequality. It is clear that growth is often not enough to guarantee stable, cohesive societies. Rather than create a rising tide that lifts all boats, it can actually increase inequality in a society. And inequality, unlike poverty, is far more easily politicized, ethnicized and militarized, especially in African countries with heterogeneous populations and weak judicial and regulatory institutions. It is also far more combustible because it creates an identifiable enemy — a class that benefits disproportionately because of its unfair access to those who wield power. Mismanaging it can be catastrophic.

Steady economic growth and urbanization, combined with high levels of youth unemployment and conspicuous consumption on the part of the corrupt ruling elite, create a situation in which growth exacerbates political volatility instead of quelling it.

This story highlights the importance of a political economy of development that takes in to account changing socioeconomic conditions and respects local cultural institutions and social networks in order to promote a cohesive and stable society. Mainstream growth models, however, completely neglect any of these factors while only focusing on how to best promote the development of markets, which by definition will optimize growth for everyone. Githongo reminds us that a narrow approach to growth can lead to social unrest, outbreaks of violence, and the fragmentation of traditional social networks.

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Bourgeois Dignity: Why Economics Can't Explain the Modern World

It is no secret that modern economic theory fails miserably at explaining the tremendous explosion in economic activity and income levels that has taken place since the 18th century. We don’t have a good story of why in 1800 an ordinary person lived on $3 a day, whereas today an ordinary person in a “bourgeois” country earns over $100 a day.

In her new book, Bourgeois Virtues, Deirdre McCloskey attempts to tell such a story of why the past two centuries have been so good to ordinary people in bourgeois countries [ht:sn]. She describes how economic theory in its current state is useful for explaining how resources are allocated – but in order to explain the economic revolution that took place since 1800, economic theory needs rhetoric:

I am claiming that the economy around the North Sea grew far, far beyond expectations in the eighteenth and especially in the nineteenth and most especially in the twentieth century not because of mechanically economic factors such as the scale of foreign trade or the level of saving or the amassing of human capital. Such developments were nice, but derivative. The North Sea economy, and then the Atlantic economy, and then the world economy grew because of changing forms of speech about markets and enterprise and invention.

She takes the usual line that innovation drove the Industrial Revolution. But she has an uncustomary explanation for innovation:

But I also argue—as fewer historians and very few economists would—that talk and ethics and ideas caused the innovation. Ethical (and unethical) talk runs the world. One-quarter of national income is earned from sweet talk in markets and management.  Perhaps economics and its many good friends should acknowledge the fact. When they don’t they get into trouble, as when they inspire banks to ignore professional talk and fiduciary ethics, and to rely exclusively on silent and monetary incentives such as executive compensation. The economists and their eager students choose Prudence Only, to the exclusion of the other virtues that characterize humans—justice and temperance and love and courage and hope and faith—and the corresponding sins of omission or commission.

One will need to read the entire book to see if her argument is persuasive. I appreciate her attempts to integrate virtue into economic discourse, seemingly reminiscent of the origins of the discipline in moral philosophy. But at the same time, she endorses neoclassical economic theory as the main tool for economic analysis – a tool which grew in popularity because of its supposed value-neutrality.

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It’s a well observed phenomenon that human development incomes are highly correlated with economic measures like GDP. However, that doesn’t mean that improvements in GDP cause, or even correlate with, improvements in human development indicators. Economix points to the UN’s new Human Development Report, which addresses this issue. As Catherine Rampell writes,

As you can see, the correlation between per-capita income and other measures of human development is, in the works of the report, “remarkably weak and statistically insignificant.”

Rampell goes on to explore some possible explanations:

The report offers a few possible explanations for this puzzle, including that there might be a long lag between economic growth and the types of social services and infrastructure that could lead to better national health and education systems. There also may be many other country-specific variables — like cultural differences — that mask a possible relationship between wealth and human development.

I don’t have time to read the report, but I wonder if they address the issue of inequality. Someone came to Brookings a while back and showed how inequality was a key factor in determining the poverty-reducing content of economic growth. Thus, high inequality could also hold back these indicators, which are correlated with levels of poverty.

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I’ve been chewing on this review for a while, but I think I need to just post the darn thing, so here goes (and as a disclaimer, I was sent a review copy of this book, although I was not directly solicited or charged to write one). As an added disclaimer, well, look at the time stamp on the post- I tried my best to weave together some disparate threads and half-thoughts…the principle of charity is my friend on this one.

Several weeks ago, I wrote about the introduction to Paul Collier’s new book, Plundered Planet. The chapter touched on something that is receiving more focus in the environmental economics discussion, the notion that ethics and value judgments can enter into the debate. And, of course, they must; I know that I harp on the discount rate constantly in this space, but when dealing with complex climate models, this rate is both incredibly important and wholly non-arbitrary. How we value the future is necessarily a value judgment. Other issues like cross-national equity pale in comparison to this one, and I’m glad Collier emphasizes this point. However, as I describe below, I think his book fails to move the ball forward in our understanding of environment action in some very key ways.

His entry point for talking about this critical issue is the “ethics of custody,” in which we are custodians or stewards of scarce and depletable natural resources. As a student of Catholic social tradition, which uses the language of stewardship, I really appreciate this language. It’s an all-too-rare normative statement in a discipline focused on making purportedly positive judgments. Economists, as citizens of the world, should be able to make these ethical statements, and transparently so.

Rather then spend the whole book on climate change, Collier, a development economist through and through, spends the greater part of the book discussing the tensions of governance and resource stewardship in developing countries. These issues, as you might guess, are thorny. There are so many corruptible steps in which plunder, as Collier calls it, can occur, and he readily admits that it’s highly unlikely that each of them will go as they should. Instead, Collier seeks an expansion of transparency, such that resource extraction is met with accountability in at least some stages. His involvement in initiatives to foster this transparency is laudable, but he admits they may not be a cure-all.

While his coverage of resource-use issues is thorough, he makes a key conceit when dealing with depletable resources. He seems to gloss over the externalities of extraction in favor of maximizing their long-term benefit stream. Granted, developing countries would be much less polluted if resources were extracted at a rate in keeping with Collier’s ethics, which would leave much more in the ground for future generations. Neverthless, it was at this point that I became frustrated with Collier’s repeated dismissal of “romantic environmentalists,” who supposedly have a disdain for economic growth. As it turns out, Collier can only temporarily set aside his economist hat, and he lets a one-sided notion of “development” carry the day. By ignoring things like the BP oil spill (or the decades-long pollution of the Niger Delta), it is he who seems romantic. Undoubtedly the extraction of resources involves the plunder of myriad other natural resources with less easily measured value.

What’s problematic is that Collier’s other glossings-over likely alienate those most important to the movement- it’s the “romantics” who are most likely to step up and act, and their involvement requires a holistic ethic. Decrying plunder while encouraging extraction that maximally beneficial from an economic standpoint is philosophically and practically dissonant.

Thus, it’s problematic that when Collier zooms out to issues global governance with respect to climate change, he argues that grassroots understanding of climate issues- a form of transparency, no doubt- are paramount. He eschews global frameworks, but instead hopes that citizens demand their politicians act at a national level to price carbon in an internationally consistent manner. This general mindset is apparently in keeping with his ethics of custody approach. Citizens motivated to act as custodians can and should rise up together to speak for future generations. Unfortunately, given the recent collapse of efforts in the US Senate for a relatively watered-down climate change bill, it’s hard to believe that a bottom-up movement will result in effective measures. While ever cognizant of the political economy of plunder in developing countries, Collier seems to miss the information asymmetries in the US’s political economy, in which information is distorted, corporations assert their will by way of access, and citizens are unable to really affect the process.

I have no idea if Collier is aware of the effectiveness of community organizing, but I doubt he’s referring to it when he calls for a bottom-up approach. Instead, I’m guessing that he’s hopeful a movement (better and stronger this time, we promise!) will emerge, forging a citizen’s consensus on climate change. While the process may be time consuming, I think it may be time for environmental advocates to take a step back, realize that their movement building has failed, and build an organization. What is interesting is that his ethics of custody could actually serve as a unifying framework for such an organization.

I’ve gone off the rails a bit here, but ultimately, Collier’s final chapter is a call to action, and I just found it a little lacking in substance. The meat of the book is incredibly instructive for folks who care about natural resources. The problem, though, is that Collier doesn’t seem aware of what action looks like on an issue as big as climate change. Transparency, as his initiative on mineral plunder shows, is certainly important, but so is power. It’s unsurprising, but still disappointing, that this economist fails to see that. While not directly related to his seeming misunderstanding of the romantics, it seems both oversights are cut from the same economist cloth. I appreciate Collier’s intent- understanding the normativity of these judgments is important, but at this stage in the game, it’s more essential that we know how to act.

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Two years ago, I spent a semester studying in Uganda, two weeks of which were dedicated to studying grassroots development. We were exposed to several approaches- community-based advocacy, collective savings and loans arrangements, and grassroots skills and capacity building. With the exception of our visit to an AIDS advocacy group that had rendered a visit (and then funding) from Prince Charles at one point, most of these efforts revolved around internal resource pooling, rather than resource extraction through the political system.

While experiencing all of this, I was continuously trying to see how the Alinksy model of relational power building could apply in an LDC. For the unacquainted, Alinksy posited that there are two types of power- organized people and organized money. The only way for citizens to achieve results in the political space is to organize themselves around issues in their self-interest and demand accountability from their elected officials. At the time, my perception of this approach’s applicability in a less-developed context was blurred by the idea that in a poor country, there aren’t many resources to be extracted. If budgets are being supported by donors, then what crumbs are left over for collective action?

I hadn’t thought about this issue much since I left Uganda. However, this weekend, I was fortunate to encounter a pastor and community organizer from Rwanda at a social justice retreat at my church. John Rutsindintwarane, now secretary general of the Lutheran Church of Rwanda, spoke about his experiences applying the Alinksy model in his local parish. He learned the model after a chance encounter led him to a training led by PICO, an organization of faith-based community organizations on the West Coast. He took on the work of holding relational meetings with villagers in Mumeya, in Rwanda’s Eastern province. 22 villagers of all ages and genders were elected as an organizing committee, and within 4 months, had conducted 2,000 hours of one-on-one meetings.

They learned that the most pressing issue was the lack of a health center, and decided to build a health clinic. They began the construction themselves, but to complete the project they secured meetings with political figures, starting with the mayor, and slowly worked their way up the political food chain, eventually meeting with the Minister of Health. The relational nature of the organization provided the power to hold accountable politicians who might otherwise take advantage of diffuse interests and lack of information. The health clinic was built with the help of funding from the government, improving the lives of 17,000 local citizens, and now Fr. John is working with priests in a number of other parishes to train them in community organizing. Their organization is called Congregations Rebuilding Community in Rwanda.

My posts on this blog tend to operate at a much more abstract level, so forgive me for zooming out for a second- there is a broader economic lesson to be learned. While it’s unclear how scalable this approach is in an LDC, it is clear that there are resources to be had. For the last decade, the World Bank in particular has turned its focus to governance issues, which are most often relevant for a simple reason- weak institutions lead to wasted resources. A number of academic economists now pay lip service to the importance of strengthening civil society organizations to improve accountability. However, I’ve never seen this type of community organizing advocated. Maybe they don’t realize it, but when economists talk about institutions and civil society, it’s this type of community organizing that they’re ultimately calling for. Whether we’re talking about Rwanda, Washington DC, London, or even the US at large, there are resources to be had. There are also powerful forces and hidden incentives marshalling those resources to various interests. The best way for ordinary citizens to get their share is to create their own power by organizing. I now believe this is true in any context, and I’m grateful for having met Fr. John to learn from his experiences.

For more information about CRCR, visit their page on PICO’s website.

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