A Commentary on Research Priorities in Development Economics

Over at the Bank’s Future Development blog, Princeton Economist Jeffrey Hammer writes:

The Chief Minister posed serious questions that have traditionally been the bread and butter of the economics profession. Unfortunately, we are not even trying to answer them any more. The specific question was “Should I put more money into transport? Infrastructure (power, roads, water)? Law and order? Social services? Or what? And where am I going to get the money?” What questions could be more solidly part of the core of economics than these? Unfortunately none of these were even remotely the focus of the “evidence-based” policy making discussed.

Almost all of the cases analyzed were  single, simple policy “tweaks” that were, first of all, isolated from the broader market context in which they occurred and, second, had no conception of opportunity cost – what we would have to give up to pursue these things? We had an answer to “how to improve a public food distribution system” but even with a precise answer (to whether a tweak would work) we had no idea whether the substantial amount of money funding such a system is a good idea. Maybe the Chief Minister would be better off improving education or road networks or police or rural electricity. Some of these alternative policies could have more impact on food consumption than food distribution if we thought about how the world worked. Getting food to market securely (roads, better cold storage, trustworthy police and safe roads – this is Pakistan, which no one seemed to notice) may increase food availability much more than any tunnel-visioned food program Or not – maybe the food distribution system is better. We just don’t know. And none of us “experts” are trying to find out.

When someone says “we should have more “X” because we have evidence that it works”, the response should be “compared to what?” What should we cut in order to promote your particular interest? My hobby horse these days is more sanitation in South Asia. I should have to defend it against (at least) a few alternatives.

What’s your justification for your latest hobby horse?

My take on the gap highlighted by Hammer is that what is good for reviewers is seldom useful to policymakers. The incentive for academics is to publish. And this will always be reflected in the design and implementation of interventions headed by academics. This is not necessarily a bad thing [For obvious reasons we should firewall academic research from the actual process of policymaking. The latter should be the political process that it is, albeit informed by the former]. I think the widespread acceptance of rigorous evidence-based policymaking has been a net benefit for the developing world. What it means though, is that the “public sector” development research community — i.e. the IMF, the World Bank, & host country research institutes — should do more to ensure that funding for hyper-targeted interventions do not detract from broader macro research (like, when and why did the rain start beating Ghana?)

However, in the long run, developing countries will be better served by having more and more of their own/country-based politically relevant macroeconomists.

This is because answering the types of questions posed by Hammer requires one to also take a political stand (on account of a lack of consensus among economists). Economists who can’t do this will invariably resort to “technical” solutions that can be perceived as “apolitical” by both host governments and the sponsoring foreign development agencies. Again not necessarily a bad thing, just a reflection of the politics of knowledge production.

H/T William Easterly.

The potential impact of a Chinese slowdown on Africa’s economies

The FT reports:

For Africa’s non-oil exporters, the collapse in crude prices has provided a cushion. But, with many African countries import-dependent, the depreciation of currencies affects inflation and the cost of imports. It will also put a strain on those nations that have taken advantage of investors’ search for yields to tap into international capital markets.

The likes of Zambia, Ethiopia, Rwanda, Kenya, Ghana, Senegal, and Ivory Coast have all issued foreign currency dominated sovereign bonds in recent years. “In the past, foreign exchange weakness in Africa was largely shrugged off. Economies adapted and found a way to cope with it, but the recent surge in eurobond issuance has been a game-changer,” says Razia Khan, chief economist for Africa at Standard Chartered.

“Now, when currencies depreciate, external risks are magnified, public debt ratios rise, and perceptions of sovereign creditworthiness alter quite dramatically.”

Prof. Deborah Brautigam of SAIS sees the following happening:

  • Prices for African commodities will worsen, then improve. In recent years, China’s slower growth has pushed down prices for gold, crude oil, copper, platinum and iron ore. South Africa’s mining sector was expected to lose over 10,000 jobs due to lower demand
  • Africa will import even more from China. Cheaper Chinese exports will please African consumers while putting Africa’s manufacturers at a further disadvantage. There will be more pressure for tariff protections
  • [L]ow wages in Ethiopia and elsewhere had been attracting significant factory investment from China. With costs now relatively lower in China, the push to relocate factories overseas will slow. This will save Chinese jobs, but postpones Africa’s own structural transformation.

And concludes that:

In the short term it is hard to see how this devaluation can help Africa, notably its productive and export sectors.

The thing to note is that different African countries have different kinds of exposure to China. The commodity exporters (both petroleum and metals) will be hit hard. The effects will be somewhat attenuated in countries exposed primarily through Chinese FDI and infrastructure loans. Domestic fiscal reorganization and resources from the AfDB and other partners should plug a fair bit of the hole left by declining Chinese investments (although certainly nowhere near all of it). And with regard to sovereign debt, a Chinese downturn might persuade the US Central Bank to delay its planned rate hike — which would be good for African currencies and keep the cost of borrowing low.

Lastly, for geopolitical reasons I don’t see China rapidly reducing its footprint on the Continent. In any case, as Howard French makes clear in his latest book, there is a fair bit of (unofficial) private Chinese investment in Africa. Turmoil back home may incentivize these entrepreneurs to plant even deeper roots in Africa and expatriate less of their profits. The net result will be slower growth in Africa. And like in China, slower growth will challenge prevailing political bargains in democracies and autocracies alike.

The Obama Visit to Kenya: Four Key Issues Deserving Special Attention

This weekend Kenya is hosting the 2015 Global Entrepreneurship Summit. The chief guest at the summit is U.S. president Barack Obama. Mr. Obama is scheduled to hold bilateral talks with his host President Uhuru Kenyatta; and will also give two public speeches on the sidelines of the summit — one at Kenyatta University and another at the Moi International Sports Centre in Kasarani. Here are the things I hope Obama and his team will focus on while in Kenya:

  • Infrastructure Development and FDI: Kenya is currently in the middle of an epic infrastructure investment drive (power generation and transmission, roads, railway lines, ports, and water systems). The most impactful thing the U.S. president can do for Kenyans is to facilitate a more robust involvement by the U.S. private sector in these projects – either through private investment or PPPs (Public-Private Partnerships). And perhaps the most natural place for U.S. companies to put in even more money is Kenya’s buzzing tech scene. IBM, Intel, Google, Microsoft, and GE have led the way. More need to follow.
  • A New Approach to Civil Society Support: The Kenyan government still has a lot to do in terms of governance reforms. But the way partners like the U.S. and the EU approach the challenge needs to change. The 2010 Constitution devolved and, by a large measure, professionalized government in Kenya. Unfortunately, the Kenyan Civil Society appears to not have caught up. The same can be said about political affairs officers in various embassies in Nairobi. The new institutional game is different and favors Think Tanks with deep research benches as opposed to multipurpose activists. Support for the Kenyan Civil Society therefore needs to catch up to this reality. Project cycles need to be elongated. Also, if I were a donor with a large pot of money I would focus a lot of energy in getting governance right in a few of Kenya’s 47 counties as an example to the rest. These subnational units have substantial financial and political resources that make them ideal testing grounds for public policies. They are also sources of future national politicians.
  • Taking Security Seriously: Kenya continues to be mired in the conflict in Somalia as part of the AMISOM mission. The involvement has exposed Kenya to terror attacks by al-Shabaab – the most bloody of which was the Garissa University College attack that left 148 people dead. The U.S. has been a key partner of AMISOM, providing equipment, funds, intelligence, and air support. Given its leverage, America could do more in making sure that Kenya’s involvement in Somalia does not lead to an erosion of KDF’s professionalism. Credible reports have linked KDF officers to the smuggling of charcoal and sugar, activities that line the coffers of al-Shabaab. There is also evidence that the Generals are the ones driving Kenya’s Somalia policy, instead of elected civilians. U.S. support should be predicated on civilian control, a healthy reverence of military professionalism, and an appreciation of the local and regional consequences of American actions in Somalia. America also needs to realize that Kenya is still a young democracy struggling to consolidate rule of law. Unlawful arrests, disappearances, and executions of suspected terrorists who are Kenyan nationals must stop. The fight against al-Shabaab must not be allowed to erode hard fought gains in the quest for rule of law.
  • A Constructive Political Engagement About Reforms: The U.S. can help Kenya clean up its public sector through reforms founded on political reality. For example, presently corruption appears to be worsening in the country. This is both a function of media exposure and dispersal of power. More people in government now have access to state coffers – mainly throught the tender process (as a result tenderpreneurs abound). Corruption is also political. The president is ultimately a politician who wants to be reelected. the same applies to MPs and Governors and Senators. Many of them engage in corruption as a means of campaign finance (Harambees are expensive). Tackling corruption therefore requires more than mere moralizing about its ills on society. All involved must be willing to address the hard and uncomfortable truths about the political economy of the vice. This would mean, for instance, coming up with a way to allow politicians access to campaign money in a legal and transparent manner. It may also entail some form of amnesty for past offenders (you can’t jail the entire public service). Corruption in Kenya is not a simple law enforcement problem. The same logic applies to other reform initiatives. They are likely to succeed if grounded on political realities, instead of some notion of a moral failing among Kenyan politicians.

Here are some pieces I liked about Obama’s trip to Africa:

– Charles Kenny on why Obama is selling Africa short

– Todd Moss on Obama’s missed opportunity in Africa 

– The challenges facing power Africa in Nigeria

Presidential Salaries in Africa

Paul Biya of Cameroon earns $610,000 per annum, 229 times the earnings of the average Cameroonian.* Screen Shot 2015-07-22 at 10.31.57 PM

Think about it for a second: Paul Biya earns $210,000 more than Barack Obama.

Notice that these figures do not include all manner of allowances.

Source: Daily Nation

*Note that the interns at the Daily Nation mixed up Mauritania and Mauritius. The CNN bug is contagious.

Key Issues That President Kenyatta Will Raise During Obama’s Visit

This week for the first time a serving American leader will visit Kenya. Such a high profile visit has been long coming. It was eight years ago that the North American country witnessed only the 43rd peaceful handover of power following a free and fair democratic election.

Many analysts had expected that then Kenyan president, Mwai Kibaki, would extend a courtesy invitation to president Barack Obama in order to signal Kenya’s commitment to the process of democratic consolidation in the United States. President Kibaki’s decision to avoid being associated with Obama was perhaps emblematic of the concerns many in the Kenyan government still have regarding the American leadership’s commitment to reforms, including in areas such as police brutality, income inequality, ethnic and racial tensions, and overall respect for human rights.

For example, America has only 5% of the world’s population but 25% of its prisoners. Many of those languishing in crowded jails are people of color serving long sentences in large part due to racially-biased laws and police departments.

obamaAware of this blot on America’s record, Obama sought to assuage Kenyan officials by visiting a federal prison in the region of Oklahoma as well as publicly declaring his commitment to reforming the justice system in America. As a gesture of goodwill the American leader also released several prisoners ahead of his visit. The Kenyan Ambassador in Washington, Robinson Githae, welcomed this move by the U.S. government, but reiterated the need for structural reforms. Mr. Githae also emphasized Kenya’s commitment to supporting governance reforms in the United States and the Americas in general.

The Kenyan Ambassador also listed a number of issues that President Kenyatta hopes to raise with the American leader during his two-day visit in Nairobi. These include:

  • Regional and global security: The United States is the most militarized nation in the world. As such, it has had a hand in nearly every single geopolitical hotspot on the globe. President Kenyatta will remind the American leader of the need to respect international law and the sovereignty of other nations, even as his country pursues its interests abroad. For example, in a statement last week Mr. Kenyatta commended the American negotiating team for reaching a deal with Iran just in time for the visit. He also lauded the American leader’s decision to by-pass the country’s sophomoric parliament and first seek the deal’s approval at the United Nations. Eager to please Kenyan officials, America this week began the process of normalizing relations with Cuba. The government of Kenya hopes that these gestures will endure beyond the current administration and signal a new American commitment to engaging other nations of the world with mutual respect.
  • Ethnic and racial violence: Having lived in the Americas during his college years, Mr. Kenyatta is well aware of the evils of racial discrimination in that part of the world. The president will particularly focus on the utterances by some candidates in next year’s U.S. election who suggested that all immigrants from neighboring countries are violent criminals. Mr. Kenyatta will emphasize the need for ethnic and racial tolerance ahead of the election in order to avoid ethnic violence or a souring of relations with America’s neighbors. The Americas hold the dubious title of being the murder capital of the world, in addition to being a leading source of drugs such as cocaine. Kenya is keen to ensure that the volatile region remains reasonably contained since it is a vital supplier of movies and soap operas to the global market.
  • Respect for human rights: Despite its impressive rebound from the stolen election of 2000, the United States continues to experience several challenges with regard to human rights. It’s police routinely brutalize men, women, and children in front of cameras, and get away with it. Just this year almost 400 people have been killed by the police or died under mysterious circumstances while in the custody of police. The U.S. government also continues to spy on its own citizens, in many instances in direct violation of its own constitution. Mr. Kenyatta will press the American leader on these issues, and remind him that his country lags other nations that share its level of political and economic development.
  • Bilateral Trade: Trade ties between Kenya and the United States are weak. In 2013 the total volume of trade between the two countries was a mere 2 percent of Kenya’s GDP. America’s economic insignificance to Kenya is signaled by the fact that the latter is the former’s 96th largest trading partner. President Kenyatta will press the American leader on the need to maintain the American EXIM Bank (whose authority has lapsed) as a financier of bilateral trade. The president will also remind the throngs of businesspeople and cronies that will be part of the Obama delegation that they need to stop the habit of hiding behind “political risk”  and warped ideas about Kenya as excuses for not investing in the country.

An often under-appreciated aspect of this visit is that the American leader’s father was Kenyan (indeed, America’s leading TV station has speculated that Obama himself was born in Kenya). It is unclear what, if any, President Kenyatta has planned for the American leader to mark this historic visit to his father’s home country.

The case for well-planned infrastructure mega-projects

No one likes white elephants. But some mega-projects are simply unbeatable. One example is India’s Golden Quadrilateral highway project, constructed between 2001-2012. In a new paper, Ghani, Goswami and Kerr write:

Golden_Quadrilateral

Source: Wikipedia

We exploit a large-scale highway construction and improvement project in India, the Golden Quadrilateral (GQ) project. The analysis compares districts located 0-10 km from the GQ network to districts 10-50 km away, and we utilize time series variation in the sequence in which districts were upgraded and differences in the characteristics of industries and regions that were affected. Our study employs establishment-level data that provide new insights into the sources of growth and their efficiency improvements.

The GQ upgrades stimulated significant growth in organized manufacturing (formal sector) in the districts along the highway network, even after excluding the four major cities that form the nodal points of the quadrangle. Long-differenced estimations suggest output levels in these districts grew by 49% over the decade after the construction began. This growth is not present in districts 10-50 km from the GQ network nor in districts adjacent to another major Indian highway system that was scheduled for a contemporaneous upgrade but subsequently delayed. We further confirm this growth effect in a variety of robustness checks, including dynamic analyses and straight-line instrumental variables (IV) based upon minimal distances between nodal cities. As the 0-10 km districts contained a third of India’s initial manufacturing base, this output growth represented a substantial increase in activity that would have easily covered the costs of the upgrades.

Decomposing these aggregate effects, districts along the highway system experienced a significant boost in the rate of new output formation by young firms, roughly doubling pre-period levels. These entrants were drawn from industries intensive in land and buildings, suggesting the GQ upgrades facilitated sharper industrial sorting between the major nodal cities and the districts along the highway. Despite a substantial increase in entrant counts, the induced entrants maintained comparable size and productivity to control groups. The young cohorts, moreover, demonstrated a post-entry scaling in size that is rare for India and accounted for an important part of the output growth.

Of course these findings should not come as a surprise to anyone who has seen the rapid growth along the $360m Thika Superhighway in Nairobi and Kiambu counties in Kenya — the African Development Bank (a key financier) estimated the project to have an internal economic rate of return of 30%. Which is precisely why Harambee House ought to consider fast-tracking the construction of a dual carriageway linking Mombasa to Busia and Malaba.

A slightly different story on administrative unit proliferation

The emerging stylized story about administrative unit proliferation in the developing world is that it is often a result of political machinations by national and local elites intent on creating new units for marginalized groups and for the ruler to buy votes; and that such proliferation only serves to re-centralize actual power — see for example these really cool papers by Grossman and Lewis (on the specific case of Uganda), Mai Hasssan (on the use of new districts to buy votes in Kenya) and Kimuli Kasara (also on how heightened electoral competition after 1992 accelerated the process of administrative unit proliferation in Kenya).

But there is also a slightly different, and in some ways complementary, story.

Regarding the creation of new provinces in Vietnam, Edmund Malesky notes:Screen Shot 2015-07-09 at 12.30.20 PM

The timing of provincial separations after Party Congresses, the dominance of Non-state Provinces despite little change in national output, and the decisive political outcome of this dominance at the 2001 Party Congress bolster the argument that reformers had an explicit electoral strategy in calling for the splitting of provinces in 1996. By creating new Non-state Provinces, modernizers believed they could influence the outcomes of future CCOM debates about
grand strategies and smaller NA debates about implementation of these new policies. While rhetorically it was easier to argue for new provinces based on efficiency, it would seem they were studying maps of
district economic composition and creating new reform-oriented
provinces out of SOE-dominated areas.

The key difference between administrative unit proliferation in Vietnam and Uganda (and Kenya before 2010) is the electoral connection (an aspect that, in my view, is missing in the current literature). Because the provinces had votes (in party congresses and plenums), the creation of new Vietnamese provinces had significant implications for the de facto distribution of power in both Hanoi and the periphery (and in Malesky’s story, made reforms possible). Provincial splits in Vietman were therefore not just about patronage and marginalized groups, but also about securing a win for the reformist bloc at the centre.

This might not be the case in countries where new units can be created without altering the balance of power in the party congress or parliament — either because such action does not create new electoral districts; or the president gets to nominate or can credibly influence the election of the representatives of the new districts. For this reason, I would predict that Kenya, Nigeria, and South Africa (whose subnational units are electorally significant and have a fair amount of fiscal autonomy) are unlikely to create new primary subnational units willy-nilly.

The Crisis in Greece (Lessons for the EAC and UEMOA)

Screen Shot 2015-06-28 at 10.06.13 PM

An abandoned venue from the 2004 Athens Olympics. Source: Guardian.

Greece is on the brink of a financial disaster. Banks and the stock market are closed. Capital controls have been imposed. The country will hold a referendum on July 6th, which could decide whether Greeks keep the euro or go back to using drachmas.

There’s not been a shortage of analyses of Grexit. From adoration of its game theorist Finance Minister, Yanis Varoufakis; to this odd piece in the Journal that says “Greek Prime Minister Alexis Tsipras began leaning toward a risky referendum after creditors covered his proposed policies in red ink” (incidentally, marking papers in red can “damage students”). Barry Eichengreen blames the current crisis on political incompetence – on the part of both Greece and its eurozone creditors, with more blame on the latter. See here for a concise take on Greek fiscal history over the last four decades.

I hope folks at the EAC and UEMOA, the two entities most likely to realize monetary unions, are following the events in Greece closely. The big question on their minds should be: can there be a stable monetary union on the Continent without a fiscal and political union?

Lastly, regardless of how the next few days and the referendum play out, I hope Tsipras’ move will embolden leaders in the developing world to democratize their relationship with the IMF, the Bank, and other creditors. A reasonable democratic involvement in such matters would not just be an easy way to default and blame it on democracy. It would also incentivize creditors against lending money to governments like Greece’s. Obviously voters should not be allowed to decide whether or not they pay their debts (we know how that’d turn out), but they should be consulted before being saddled with crushing debt.

Summer Reading List

For only the second time in the last 10 years I am spending the whole summer in North America (and terribly missing the Jamuhuri). Which means I’ll have a little bit of time for some reading beyond my immediate research work. Here are some books that I have started reading since the beginning of the year or plan to read this summer. I’ll write reviews on a few of them over the next two months.

Fiction: 

We Need New Names – NoViolet Bulawayo

Waiting for the Wild Beasts to Vote – Ahmadou Kourouma

Nervous Conditions – Tsitsi Dangaremba (I am deeply embarrassed to say I’ve never finished reading this classic)

Stoner – John Williams

Political Economy:

The Settler Economies (Kenya and Zimabwe, 1900-63) – Paul Mosley

Medieval Africa, 1250-1800 – Roland Oliver and Anthony Atmore

Democracy in Africa – Nic Cheeseman

Ethnic Patriotism and the East African Revival – Derek R. Peterson

Economic Crises and the Breakdown of Authoritarian Regimes – Thomas B. Pepinsky (If you are a Comparativist, read Pepinsky often)

The Mind of the African Strongman – Herman J. Cohen

Political Order and Political Decay – Francis Fukuyama (Volume I was epic. Very few people do the big picture stuff the way Fukuyama does)

Bonus (time permitting):

The Firm – Duff McDonald (It’s crazy how many of my close friends work for McKinsey or are alums of the firm)

Between the World and Me – Ta-Nehisi Coates

The Philosophical Breakfast Club – Laura J. Snyder