- higher returns on capital than labour (Piketty factor)
- high incomes from labour and capital are increasingly concentrated in the same peoplez
- technological innovation that favours the rich (capital rents, higher wage dispersion)
- decreasing power of unions (due to changing labour markets)
- high availability of labour (opening up of China, India and USSR in 1990s)
- increasing scalability and emergence of more winner-takes-all markets (e.g. education)
- capture of political process (democracy) and media by the rich
- monopolisation of sectors
- investment in public education
- redistribution of wealth through progressive taxes or social programmes
- wars, epidemics and natural disasters (World Wars or the Plague in medieval times)
- scarcity of labour (can be reduced by immigration)
- technological innovation that favours the poor (speculative)
Developed countries stimulate developing countries to adopt the “good” institutions and “good” policies which will bring them economic growth and prosperity. These are promoted by institutions such as the WTO, the IMF and the World Bank. Recipes such as abolishing trade tariffs, an independent central bank and adhering to intellectual property rights feature high on their agendas.
In his book “Kicking away the ladder” Ha-Joon Chang shows that these policies are not so beneficial for developing countries. Through historical analysis he shows that developed countries actively pursued all types of interventionist policies to achieve economic growth, contradicting the recipes they are now prescribing. A case of poachers turning into gatekeepers.
Policies that were intensively used by the USA and European countries include tariff protection, import and export bans, direct state involvement in key industries, refusal to adopt patent laws, R&D support, granting monopoly rights, smuggling and poaching expert workers. Chang points out that alleged free trade champions, the UK and USA, were the most protective of all and only switched to liberalisation after World War II when and as long as their hegemony was safe (see table below). Asian tigers such as South Korea and Taiwan did the same, which explains their success. Ha-Joon Chang shows that, in comparison, current developing countries offer relatively limited protection to their economies.
What does it imply for development cooperation? Developed countries often expect developing countries to adopt world-class institutions and policies in a nick of time. However, the path to these kinds of institutions for developed countries was a long and winding path, a slow process that took decades, with frequent reversals. We sometimes forget that universal suffrage was only achieved as recently as 1970 (in Canada) or 1971 (Switzerland). It took the USA until 1938 to ban child labour. Switzerland was notoriously late to adopt patent laws (explaining its success with pharmaceutical companies). Imposing world-class institutions or policies on developing countries can be harmful because they take a lot of human and financial resources, which may be better spent elsewhere. In fact, adopting such institutions and policies mainly benefits the developed countries, not the developing ones.
Ha Joon-Chang calls this practice of using successful strategies for economic development and then preventing other countries from applying the same strategy “kicking away the ladder”. The WTO negotiation rounds or regional trade agreements have a lot in common with the “unequal” treaties between colonisers and colonised countries.
Why is institutional development so slow? Are there no last-mover benefits? Chang gives following reasons:
- Institutional development is firmly linked with the state’s capacity to collect taxes. This capacity is linked to its ability to command political legitimacy and its capacity to organize the state (see blog post on Thinking like a State). That’s also another reason why tariffs are so important for developing countries: they are some of the taxes that are easiest to collect. Institutional development is linked to the development of human capacity within a country by its education system. Setting up “good” institutions in countries that don’t have the human capital for it will lead to undermining, bad functioning or draw away scarce resources from other sectors.
- Well-functioning institutions and policies need to fight initial resistance and prejudice. Chang points to the resistance to introducing an income tax at the beginning of the 20th century in western countries. It can take years and gradual policy changes to overcome this. The struggle to raise the retirement age in western countries is another illustration of the sometimes double standards we use toward developing countries.
- Many institutions are more the result of economic development rather than a condition for it. This is contentious, but Chang points to democracy as an example.
Chang advocates for developing countries to pursue an active interventionist economic policy. His thesis confirms the importance of supporting developing countries in the strengthening of their education systems. However, it also illustrates that the financial harm to developing countries as a result of unequal trade policies can be much higher than the aid flows to these countries.
Time and time again, governments and NGOs herald the purchase of ICT as a panacea for improving the quality of education. The recent plans of Gauteng in South Africa are a good example. This study from the Inter-American Development Bank (IDB) provides an useful summary of the research done on the impact of ICT in primary level classrooms. Latin America and the IDB have been at the forefront om some high-profile “One Laptop per Child” projects such as the Plan Ceibal (Uruguay), Enlaces (Chile) and the OLPC Programme in Peru, on which I blogged before.
The evidence so far is quite persuasive that programs that overlook teacher training and the development of software may yield low returns.
One promising avenue lies in the use of ICT to realise productivity gains in school management:
The collection, transmission, and analysis of data on enrollment, absenteeism, test scores, and infrastructure can help principals spot a problem in a given classroom, administrators spot an exemplary school, and policymakers track the performance of the educational system and the resources available. However, the gains in productivity seen in the business sector are rarely seen in the educational system, some have argued, because most education managers are not knowledgeable in the use of information management tools.
Studies that measured the impact of ICT, both of the access to computers and the use of computers, found more often than not no significant impact on learning outcomes – an overview is included in the report. The authors note that it’s not sufficient for ICT investments to produce a positive impact, they should produce a positive impact compared to traditional instruction and, even better, to similar investments in other areas such as teacher training, smaller classes or libraries.
All other things being equal, the impact of ICT investments will be higher when the quality of teaching is low, as the potential for learning gains is higher. This underlines the risk of extrapolating findings from developed to developing country context.
Some recommendations from the report:
- Given the high investments, the low number of decent impact studies is surprising. The impact of ICT investments heavily depends on the context and on the implementation. As such, results from impact studies cannot be generalized over different programmes. Start on a limited scale and build impact evaluation into the programme design is important.
- Important to keep the Total Cost of Operation (TOC) of ICT investment into account rather than the purchase price. This includes maintenance, training, connectivity and electricity costs. Recurrent costs typically take up about 40-50% of the initial investment (in Latin America). These are permanent costs, which imply savings elsewhere in the education system or an overall increase in expenditure. A large share of rural schools, high electricity and connectivity costs and high wages (as in South Africa) thus increase the share of recurrent costs.
- Most successful ICT project implementation focus on honing ICT skills of learners and pursuing Computer-Aided Instruction (CAI), for example for maths.
Science recently published a theme issue on income inequality in the developing world (free access, with registration). It includes contributions from, among others, Thomas Piketty, Martin Ravallion and Angus Deaton.
The main idea from Piketty’s bestseller, Capital, is that inequality has been rising since the 19th century because yields on wealth are higher than those on income. This trend was only interrupted by the 2 world wars. Piketty’s thesis rests on historical data from the US and Europe. This theme issue looks whether the conclusions are valid for developing countries as well.
Has the strong economic growth in developing countries since 2000 resulted in falling levels of inequality? And what has been the effect on poverty? The main findings from the article of Ravallion:
Inequality has fallen between 1981 and 2010. However, the period between 2005 and 2010 shows an increase. The variance over time is mainly attributable to inequality between countries. Again, most recent data indicate that the component between countries has fallen, whereas the component within countries has risen.
- Economic growth has lead to increasing inequality between countries, but to falling inequality within countries (although the latter trend has weakened in recent years).
- The effect of economic growth on poverty depends on the initial level of inequality. The higher that level, the lower the share of economic growth that flows to the poor and the lower the poverty reduction resulting from that growth.
- Even if inequality has not been rising overall, there are still worries about high levels on inequality in developing countries:
- capital tends to have diminishing returns, implying it’s more ‘useful’ when more equally spread;
- high inequality means that many poor, talented people cannot reach their full potential;
- high inequality tends to erode democracy, as a small group of people may hijack the democratic process and turn ‘inclusive institutions’ into ‘extractive ones’ (see Acemoglu’s and Anderson’s work);
- low inequality and a strong middle class tend to create a more diversified and robust economy, as a result of a stronger focus on consumption goods and support for pro-growth policies.
- Three cautionary remarks on the data:
- The data, using the Gini or related MLD indicators, represent relative inequality. This means that inequality is the same whether incomes are 1$ and 2$ or 1000$ and 2000$. This implies that even with constant relative inequality, the absolute differences in income and wealth can grow much larger.
- Data on inequality in developing countries are notoriously unreliable. The main data sources are the national accounts (household consumption item) and household surveys. In the latter, the rich either don’t participate or tend to under-report their income and wealth.
- Developing countries are a mixed bag. Countries with rising inequality from a low base (India, China), countries with rising inequalities from a high base (South Africa, with Gini = 0.7!!!) and countries with decreasing inequality (most countries in Latin America).
- Falling inequality is not something which happens ‘automatically’ as countries grow rich, as was postulated by Simon Kuznets. It’s the result of pro-equity policies, such as investments in health and education (Bolsa Familia in Brazil) and job creation.
A long piece in The Economist recently on the evolution in purchasing power parity between economies of developed and emerging countries. Up until a few years ago, it looked as if convergence would be reached within 30 years, even if excluding Chinese growth. Hundreds of millions of people were drawn out of poverty. Voices have been calling for the post-2015 global development goals to include the eradication of poverty by 2030.
However, the pace of economic growth has been slowing in emerging economies, not just in China, which is managing a difficult transition from low-wage, export-based manufacturing towards an economy dominated by services and internal consumption. However, at the current pace, it will take 150 years to catch up (using as indicator GDP/ person in PPP as % of US GDP).
Convergence was foreseen by economists like Robert Solow. As the main drivers he identified capital influx (as a result of higher interest rates offered by developing countries) and technological progress (enabling emerging economies to leapfrog development stages). Pietra Rivoli saw a ‘race to the bottom’ by poor countries as a way to attract labour-intensive industries, allowing people to abandon agriculture, get access to better services, creating a virtuous spiral.
The main reasons why the convergence has grinded to a near standstill are:
- The peak of manufacturing in a country’s development occurs earlier and is lower than previously. Dani Rodrik attributes this to the growing role of technology, reducing demand for low-wage manufacturing jobs, lowering the incentive for companies to seek out regions with low wages and lowering the share of manufacturing in the total value chain of a product.
- The previous decade was a period of exceptional hyperglobalisation, spurred by strong demand for natural resources, China’s accession to the WTO and strong growth in trade (also outside China).
Rather than the optimistic scenario foreseeing income convergence within a generation, it looks we’re back at the slow grind towards convergence, driven by incremental progress in geography (infrastructure, see work of Jared Diamond), institutions (see work of Daren Acemoglu) and trade (e.g. regional agreements on trade in services).
The article is rather pessimistic in tone, as it considered the gains in poverty reduction as an exceptional feat not likely to be repeated soon. It raises critical questions for countries like India and Bangladesh which are looking to benefit from their demographic dividend and take over some of China’s low-wage industry. It also underlines the need for investments in education.
A recently published 4-year study of The School of Oriental and African Studies (SOAS) in London which uncovered some uncomfortable findings about the fair trade industry in Ethiopia and Uganda, may make Fairtrade coffee even taste less good. It has raised a flurry of reviews (The Guardian, The Economist). Some extracts.
From The Guardian
“Our research took four years and involved a great deal of fieldwork in Africa. We carried out detailed surveys, we collected oral histories, we talked to managers of co-operatives, to owners of flower companies, to traders and government officials, to auditors, to very young children working for wages instead of going to school, to people who had done fairly well out of Fairtrade, and to people who appeared not to have benefited.”
“One of our interviewees, James in Uganda, is desperately poor and lives with his elderly father in an inadequate shack very close to a tea factory supported by Fairtrade. Despite the fact that his father was once a worker at the tea factory, James is charged fees at the factory’s Fairtrade health clinic. He cannot afford them and instead has to make his way on one leg to a government clinic more than 5km away to get free treatment.”
Some main findings:
- Fair Trade agricultural seasonal and casual workers often earned lower incomes than those working for non-FT employers.
- Social community services intended as a by-product of Fair Trade are often not accessible for FT workers.
- More concern with the incomes of producers than with wage workers’ earnings.
- Differences could not be attributed to the fact that Fairtrade cooperatives were based in areas with higher or particular disadvantages.
The study raises some questions about Fairtrade, to say the least. It may not fit with our view of helping the poor, but workers may be better off working with large producers, offering higher wages, better facilities and more days of work. Moreover, most of the organisations that are certified tend to come from richer, more diversified developing countries, such as Mexico and South Africa, rather than the poorer ones that are mostly dependent on exporting one crop. As one of the researchers writes:
” If we are interested in what makes a difference to extremely poor people, it is important to compare areas with Fairtrade organisations not only with other smallholder producing areas, which we did, but also with areas where producers are much larger. If larger farmers can pay better and offer more days of work, this is surely an important thing to understand.”
The findings may have some parallels with wider issues with development:
- the convenience of small efforts that show solidarity with the poor
- charging a premium for easing one’s conscience
- a stereotypical view of ‘the poor’ and what they prefer
- the attractiveness of simple, straightforward solutions
- a proliferation of labels and organisations, harnessing this desire ‘to do good’
- a romanticized ‘small is beautiful’ view on development