The rise of the indian car industry

Some people argue that Japan, South Korea and some European countries succeeded in catching-up richer countries through an intelligent mix of economic liberalization and industrial policies aimed at picking winning industries (which generally include the car industry). The empirical evidence on industrial policies is at best mixed: Beason and Weinstein for a criticism of the Japanese industrial policy; Rodrik has the case for some forms of industrial policy; Acemoglu, Aghion and Zilibotti (2006) provide a more nuanced approach and look for the economic environment necessary for industrial policies to work. Yet, politically, they can be tempting - the latest example being the ailing U.S. car industry (see here for the case for and here for the case against). Swaminathan Aiyar in the Economic Times (thanks to Ajay Shah for the pointer) has the latest about the fastest growing car industry in the world, which, it seems, does not benefit from any form of state planning. The secret: a competitive industry, open to foreign technologies together with a booming and large-enough domestic market.

India has overtaken China as a car exporter this year, exporting 201,138 cars in January-July against China’s 164,800. What accounts for India’s success? Visionary planning? Long-term strategy? No, India’s triumph was completely unplanned. No planning document ever envisioned or planned for beating China.

Analysts say China has become a great auto exporter because of huge subsidies, an undervalued exchange rate and dirt-cheap credit. But India never aimed at an undervalued exchange rate to pile up large trade surpluses — rather, it aimed to keep the real effective exchange rate unchanged from 1993 onward. India’s interest rates were always among the highest in Asia. It stubbornly refused to reform its inflexible labour laws, with adverse effects on productivity and wages relative to Asian competitors. No Indian strategic vision targeted special provisions or subsidies to the auto sector. Indeed, the sector for years suffered exceptionally high excise duties and sales tax.

How then did this sector become world class? In the early 1990s, auto production was freed for investment by any domestic and foreign investor. Indian planners as well as foreign investors regarded India as a low-skilled, low-productivity country producing third-rate cars like the Ambassador and Premier. Foreign investors came only because car imports were virtually banned. The small size of the Indian car market created serious scale diseconomies.

Nobody foresaw what fierce competition would do. Auto companies compete by constantly producing new models with improved features like fuel efficiency. Indian consumers are very price-sensitive, so design changes to reduce costs are also vital. India’s auto parts companies had rarely been asked for innovative changes during the old licence-permit raj, when the Ambassador and Premier faced little competition. But MNCs brought in competition, and started a dialogue with auto ancillary manufacturers on constant design changes. To their surprise, they found that Indian engineers had considerable skills, and could make improvements quickly and cheaply.

Incidentally, Aghion, Burgess, Redding and Zilibotti (2005) have an interesting paper about the dismantling of the licence raj in India. They show that de-licensing (and hence increased competition) did not benefit all Indian States equally: those who have more more flexible labour law (more generally pro-employer labour law) benefited more than those who are more “pro-workers.”

Turning Guantánamo Bay into the next Hong Kong

Paul Romer, who brought growth theory back from the dead in the 1980s, has left his teaching position at Stanford to start a new project, that of turning city-sized, uninhabited territories into successful cities where millions of people would live and work. The idea sounds simple, as simple as Romer’s idea that it is the accumulation of ideas that actually brings about economic growth. In a TED talk, Romer explains the jist of it:

To all intents and purposes, the idea is not completely revolutionary as there are millions of people working in Free Trade Zones (also known as Special Economic Zones) already. China is already at the forefront of building Free Trade Zones outside of its borders. Romer’s innovation is that his ‘charter cities’ will be built in poor nations but administered (at least initially) by a coalition of advanced nations with rules formalised by the latter. A coalition of advanced nations will would bring the stability and the rule of law necessary to attract Foreign Direct Investment (FDI) until the host country becomes credible enough to take over.

The Portuguese Elections

The Portuguese went to the polls last Sunday and gave a second mandate to the Socialist Party, a centre-left party led by José Socrates, with 36% of the votes compared to 45% in 2005. Interestingly, the other main party, the Social Democrats did not improve their 2005 score (roughly 29%), leaving two big winners: the Bloco de Esquerda (a party which which positioned itself on the left of the Socialist Party and improved its score from 6.45% of the votes in 2005 to 9.8%) and the CDS-PP (a right-wing party positioning itself on the right of the Social Democrats and went from 7.3% in 2005 to 10.5%).

During the current mandate, the Socialist government undertook what could be regarded as centre-right policies in the form of public sector reforms (it made itself a few enemies among teachers) and of fiscal austerity (until the financial crisis forced debt-financed spending like everywhere else). It also embarked on the modernization of infrastructure, science and technology and education. Yet, despite these efforts, the unemployment rate currently stands at 9% (a 20-year high) and the economy, which has been diverging from the EU average since 2001 following the boom of the 1990s, has not yet picked up. Voters have been asking themselves whether their government has done enough to alleviate the impact of the financial crisis, and whether the austere, pre-crisis policies have helped to worsen or soften the blow. To a certain extent, they appear to have sanctioned the Socrates government by not giving it the absolute majority to form a new government (with its 96 seats, the Socialist party falls 17 seats of a majority), forcing it into a coalition government (potentially with the Bloco de Esquerda).

It is worth noting that that there is no evidence that governments that are fiscally austere are systematically punished by voters (voters are actually quite smart!). Alesina, Perotti and Tavares (1998) show that it is indeed the contrary: “governments that cut spending are often rewarded at the ballot box“. Perhaps the reduced majority could be related to other factors, such as political scandals.

From a European perspective, what makes Portuguese politics remarkable is the absence of far-right politics. The only party which occasionally mentions immigration is the right-wing CDU-PP led by Paulo Portas and its discourse appears extremely tame compared to what is openly debated in many European countries. Why is the far-right so weak in a country which has one of the highest proportion of immigrants in Europe (the 3 main sources of immigrants being Brazil, Cape Verde and Ukraine)? For a start, far-right parties are effectively banned in Portugal. Also, historically the Portuguese themselves have emigrated to the far-corners of the planet. And statistically, immigrants add considerable value to the Portuguese economy, tend not live off the State (the Portuguese welfare state is not that generous anyway) and do not commit more crime than the average Portuguese. While these statistics help, the average person needs to be aware of them and not be led to believe the contrary, which seems to be the case in some other parts of Europe.

Lazy Japanese and Thieving Germans

Does economic development depend on culture or does culture adapt to economic development? Here is what an Australian businessman had to say about Japanese workers in 1915 (Ha-Joon Chang, chapter 9, link from Brad de Long):

My impression as to your cheap labour was soon disillusioned when I saw your people at work. No doubt they are lowly paid, but the return is equally so; to see your men at work made me feel that you are a very satisfied easy- going race who reckon time is no object. When I spoke to some managers they informed me that it was impossible to change the habits of national heritage.

And what British visitors said about the Germans in the 19th century:

plodding, easily contented people … endowed neither with great acuteness of perception nor quickness of feeling…it is long before [a German] can be brought to comprehend the bearings of what is new to him, and it is difficult to rouse him to ardour in its pursuit.

the [German] tradesman and the shopkeeper take advantage of you wherever they can, and to the smallest imaginable amount rather than not take advantage of you at all … This knavery is universal

The Weberian idea that culture determines economic outcome has taken its toll in the 20th century. Weber’s thesis was that ”some cultures like Protestantism are simply better suited to economic development than others.” After the second World War as catholic countries in Southern Europe began catching up with countries in Northern Europe, the theory had to be revised from “Protestants vs the rest”, to “Judeo-Christians vs the rest”. Then in the 1960s, Japan started catching up and now the theory had to be adapted into “trust-based societies vs the rest” (Fukuyama, 1995). It was indeed believed that Japan’s success was due to its special version of Confucianism which “valued cooperation” unlike the Chinese and Korean version which values “individual edification.” Then in the 1970s, as Taiwan, South Korea, and other East Asian nations also embarked on the growth path, the theory had to be narrowed down even further. Instead of defining the lucky ones versus the rest, it was better to define the unlucky ones versus the rest. Hence, the notion of “Hindu rate of growth” (ironically coined by an indian economist).

As even India is now growing, cultural determinism needs further narrowing down to survive. Here is what an African author, Daniel Etounga-Manguelle has to say about fellow Africans:

The African, anchored in his ancestral culture, is so convinced that the past can only repeat itself that he worries only superficially about the future. However, without a dynamic perception of the future, there is no planning, no foresight, no scenario building; in other words, no policy to affect the course of events…

In the same spirit, many now consider Muslim culture (as if there exists such a thing as a single Muslim culture) to be antagonistic to development. Such a view would have sounded ridiculous in the 10th century when the Arabs were ahead in Mathematics and Astronomy. And one could mention contemporary Malaysia or the UAE to discredit this claim.

It is not difficult to think about how economic development can affect culture. The imperatives of efficiency induces people to become more organised, more punctual, etc. And successive generations become different from each other, if they are born in different times and have different expectations (after all, the term “generation gap” exists for a reason).

Lies, damn lies and statistics

There are a lot of information out there on the net for the data nerd but there are scattered and sometimes hard to find. I’ve just discovered (belatedly) Swivel, which is an interesting tool allowing users to upload their data and play around with others’ (other somehow similar resources I am aware of are Gapminder, Wolfram Alpha, IBM’s Many Eyes). Here are some interesting things I learned today from Swivel:

1. the Turks are the least faithful to their spouses followed by the Danes. The Israelis are the most faithful
2. there is more teenage pregnancy in more religious states in the US.
3. that 47% of Americans would disapprove if their child would want to marry an atheist (the disapproval rate is 33% in the case of a potential spouse who is muslim, 27% for African-Americans and 6% for conservative christians)
4. only 3% of Americans report themselves as atheists, as opposed to 81% of Vietnameses
5. based on data of pensioners from Boeing Aerospace, people who retire at around the age of 50 expect to live to age 86. Those who retire age 65 live to 67 only.
6. That internet users around the world google for the word “sex” far more often than the world “love,” except in the Philippines. But bloggers write far more often about love than about sex.

The worlds of Becky and Desta

What is Economics for? What should economists spend their time doing? In the prologue to his “Economics: A Very Short Introduction,” Partha Dasgupta tells us about the world of Becky, 10 years old, who

…lives with her parents and an older brother Sam in a suburban town in America’s Midwest. Becky’s father works in a firm specializing in property law. Depending on the firm’s profits, his annual income varies somewhat, but is rarely below $145,000. Becky’s parents met at college. For a few years her mother worked in publishing, but when Sam was born she decided to concentrate on raising a family. Now that both Becky and Sam attend school, she does voluntary work in local education. The family live in a two-storey house. It has four bedrooms, two bathrooms upstairs and a toilet downstairs, a large drawing-cum-dining room, a modern kitchen, and a family room in the basement. There is a plot of land at the rear – the backyard – which the family use for leisure activities.

Although their property is partially mortgaged, Becky’s parents own stocks and bonds and have a saving account in the local branch of a national bank. Becky’s father and his firm jointly contribute to his retirement pension. He also makes monthly payments into a scheme with the bank that will cover college education for Becky and Sam. The family’s assets and their lives are insured. Becky’s parents often remark that, because federal taxes are high, they have to be careful with money; and they are. Nevertheless, they own two cars; the children attend camp each summer; and the family take a vacation together once camp is over. Becky’s parents also remark that her generation will be much more prosperous than theirs. Becky wants to save the environment and insists on biking to school. Her ambition is to become a doctor.

Then there is Desta, 10 year old from Ethopia:

Desta, who is about 10 years old, lives with her parents and five siblings in a village in subtropical, southwest Ethiopia. The family live in a two-room, grass-roofed mud hut. Desta’s father grows maize and teff (a staple cereal unique to Ethiopia) on half a hectare of land that the government has awarded him. Desta’s older brother helps him to farm the land and care for the household’s livestock, which consist of a cow, a goat, and a few chickens. The small quantity of stuff produced is sold so as to raise cash income, but the maize is in large measure consumed by the household as a staple.

Desta’s mother works a small plot next to their cottage, growing cabbage, onions, and enset (a year-round root crop that also serves as a staple). In order to supplement their household income, she brews a local drink made from maize. As she is also responsible for cooking, cleaning, and minding the infants, her work day usually lasts 14 hours. Despite the long hours, it wouldn’t be possible for her to complete the tasks on her own. (As the ingredients are all raw, cooking alone takes 5 hours or more.) So Desta and her older sister help their mother with household chores and mind their younger siblings. Although a younger brother attends the local school, neither Desta nor her older sister has ever been enrolled there. Her parents can neither read nor write, but they are numerate.

Desta’s home has no electricity or running water. Around where they live, sources of water, land for grazing cattle, and the woodlands are communal property. They are shared by people in Desta’s village; but the villagers don’t allow outsiders to make use of them. Each day Desta’s mother and the girls fetch water, collect fuelwood, and pick berries and herbs from the local commons. Desta’s mother frequently complains that the time and effort needed to collect their daily needs has increased over the years.

There is no financial institution nearby to offer either credit or insurance. As funerals are expensive occasions, Desta’s father long ago joined a community insurance scheme (iddir) to which he contributes monthly. When Desta’s father purchased the cow they now own, he used the entire cash he had accumulated and stored at home, but had to supplement that with funds borrowed from kinfolk, with a promise to repay the debt when he had the ability to do so. In turn, when they are in need, his kinfolk come to him for a loan, which he supplies if he is able to. Desta’s father says that such patterns of reciprocity he and those close to him practise are part of their culture. He says also that his sons are his main assets, as they are the ones who will look after him and Desta’s mother in their old age.

Where does Economics fit in?

Economics in great measure tries to uncover the processes that influence how people’s lives come to be what they are. The discipline also tries to identify ways to influence those very processes so as to improve the prospects of those who are hugely constrained in what they can be and do. The former activity involves finding explanations, while the latter tries to identify policy prescriptions. Economists also make forecasts of what the conditions of economic life are going to be; but if the predictions are to be taken seriously, they have to be built on an understanding of the processes that shape people’s lives; which is why the attempt to explain takes precedence over forecasting.

Understanding their [Becky's and Desta's] lives involves a lot more; it requires analysis, which usually calls for further description. To conduct an analysis, we need first of all to identify the material prospects the girls’ households face – now and in the future, under uncertain contingencies. Second, we need to uncover the character of their choices and the pathways by which the choices made by millions of households like Becky’s and Desta’s go to produce the prospects they all face. Third, and relatedly, we need to uncover the pathways by which the families came to inherit their current circumstances.

These amount to a tall, even forbidding, order. Moreover, there is a thought that can haunt us: since everything probably affects everything else, how can we ever make sense of the social world? If we are weighed down by that worry, though, we won’t ever make progress. Every discipline that I am familiar with draws caricatures of the world in order to make sense of it. The modern economist does this by building models, which are deliberately stripped down representations of the phenomena out there. When I say ’stripped down’, I really mean stripped down.

And what can we take as given about these two girls before building our models?

That the lives people are able to construct differ enormously across the globe is a commonplace. In our age of travel, it is even a common sight. That Becky and Desta face widely different futures is also something we have come to expect, perhaps also to accept. Nevertheless, it may not be out of turn to imagine that the girls are intrinsically very similar. They both enjoy playing, eating, and gossiping; they are close to their families; they turn to their mothers when in distress; they like pretty things to wear; and they both have the capacity to be disappointed, get annoyed, be happy. Their parents are also alike. They are knowledgeable about the ways of their worlds. They also care about their families, finding ingenious ways to meet the recurring problem of producing income and allocating resources among family members – over time and allowing for unexpected contingencies.

To be read, read again and again…

Should we focus on happiness rather than on GDP?

Two exciting innovations coming from France recently: the introduction of a carbon tax (on which there is substantial agreement among economists) and, following the Stiglitz-Sen-Fitoussi Report on the measurement of economic performance and social progress, the introduction of new economic indicators which will include measures of well-being and environmental degradation (on which there will be less unanimous agreement). Gross Domestic Product (GDP) is, without doubt, a flawed measure of economic activity, But is there a better one? Introducing an environmental consideration into it is perhaps interesting. But it is debatable as to whether happiness should be included into GDP. The Easterlin Paradox is often the basis of the argument for those in favour of inclusion: rich societies tend not much happier than poor societies and as countries get richer, their people do not get happier. Recognizing that this is perhaps a bit of an exaggeration, some have argued that there is a ceiling to happiness: citizens of really poor countries are probably unhappier than those in really rich countries, but above a certain income level, happiness reaches a ceiling. Richard Layard places this income level to $15 000 per head per annum. So, why should a country focus on getting rich if the people do not get any happier? For a start, the results could be flawed, as Wolfers and Stevenson have recently worked out: richer countries are happier than poorer countries and the increase in happiness is still noted for income levels above $15 000. Another argument is the data can be flawed as there can also be considerable cultural variations in the way people report their happiness. But perhaps more importantly, GDP seems to be positively correlated to almost any measure of well-being: health, education, freedom, the quality of institutions, etc. Thus, the argument against using happiness as a measure of well-being runs as follows: why invent indicators which are bound to be subjective (how do we really measure the value of personal activities, social connections, economic insecurity, political voice and governance, etc) when we have an objective measure of economic activity, GDP, which illuminates us on many of these indicators anyway? Nevertheless the Stiglitz-Sen-Fitoussi Report remains an excellent read in the breathe of topics it covers. However, it remains to be seen whether the French initiative will catch on.

Why do women earn less than men?

Women generally earn less than men within the same occupation. They are also under-represented in politics, high-paying jobs and in leadership positions and this despite educational attainments similar or above those of men. The Global Gender Gap report 2008, which measures gender gaps in 130 countries, concludes that there is a 40% gap between women and men in terms of economic participation within the economy and a 84% gap in political empowerment despite the fact that gaps in education and health are almost being closed. There are many theories explaining gender gaps, many having recourse to discrimination. Claudia Goldin who has studied, more than any other economist, the evolution of female labour participation in the last century, proposes a “pollution” theory of discrimination, whereby discrimination against women is “the consequence of a desire by men to maintain their occupational status or prestige, distinct from the desire to maintain their earnings.” Hence, male-dominated board of directors, for instance, do not welcome women in their midst because this would diminish the prestige of being a board member.

Economists are skeptical of theories of discrimination because they consider profit motive and competition to be powerful forces in business. Hence, if company X undervalues women, its competitor, company Y, will step in, hire these women and pay them slightly more than company X does, but less than their equally-qualified male counterpart, thus making a profit. With enough competition, women will eventually get the same opportunities and earn the same as men. This is certainly a gross simplification, as their is a lot of inertia in the business world which can lead to persistent discrimination.

Nevertheless, there is a desire within the economics profession to find explanations to the gender gap that do not violate the assumption of profit maximisation by employers. Breen and Garcia-Penalosa(2002) show how expectations can be self-fulfilling: if women expect little success as political leaders or as CEOs, they will not work towards becoming one of them. Studying the labour market outcomes of MBA graduates from top US business schools, Bertrand, Goldin and Katz (2009) show that, although at the beginning of their careers, female and male MBA graduates earn similar salaries, over time, the gaps between men and women widens up to 60%. Their explanation: eventually, women (especially those with children and with rich husbands) choose to shorter working hours and have children-related career interruptions and this explains their lower salaries. Here is Goldin on the topic:

Equivalent men and women, who go to the same college, graduate from the same law school, get the same job after graduation—we see them ten years later, the guy’s making a gazillion and the woman is in a small practice making maybe 60 percent as much. Why is that the case? Most likely, she made a conscious decision to shift into a smaller practice that didn’t have 80-hour work weeks to combine family with career and to do it in a way that was satisfying. Now, why not her husband?

Why not the husband indeed? Path dependence, history, perhaps. Or persistent discrimination?

Ichino and Moretti (2009) show that biological differences between men and women explain a big chunk of the gender wage gap in the Italian banking industry. They find that there is a higher probability for women than for men to be absent 28 days after being absent on a given day and this 28-day absenteeism cycle (related to the menstrual cycle) explains 11%  of the wage gap. Against this, one could argue that there are other factors that make men less productive than women: men have a greater tendency than women to resort to violence, crime, alcoholism, bankruptcy, etc.

There is also the argument that women are less competitive and more-risk averse than men and as a result they select lower-paid occupations. Gneezy, Niederle and Rustichini (2003) and Niederle and Vesterlund (2007) make this point. The question is whether these differences are biologically-determined or culturally-determined. The evidence points largely towards the second. Gneezy, Leonard, and List (2008) conduct a interesting natural experiment by studying these differences in two societies: a patriarchal society (the Maasai of Tanzania) and a matriarchal society (the Khasi in India). They find out that, in the matriarchal society, women are more competitive than men while in the patriarchal society it is the opposite, suggesting that these gender differences are culturally determined. In an experiment comparing 11-year old girls from single-sex schools with girls from mixed schools, Alison Booth (who has a column today in Vox on this issue) shows  that “girls were found to be as competitive and risk-taking as boys when surrounded by only girls.”

Ease of Doing Business

The 2010 version of the Doing Business report is out, and for the first time since its first publication in 2004, a sub-saharan African country, namely Rwanda, tops the list of the reformers. And this year, more than ever, countries are taking bold reforms, notably low-income countries. The average sub-saharan African country is still ranked low (139 out of 183 countries) but the disparity is large: Mauritius, the top performer, ranks 17 (ahead of the OECD average of 30) but the Central African Republic ranks last at the 183th position. Rwanda came top in reforms related to ‘Employing Workers’, ‘Access to Credit’ and ‘Protecting Investors’. Between 2008 and 2009, most countries (131 out of 183) have reformed in some way or another by “making it easier to start and operate a business, strengthening property rights and improving the efficiency of commercial dispute resolution and bankruptcy procedures.”  Encouragingly, the report notes, “competition among neighbors helped inspire widespread reform.“

In The Bottom Billion, Paul Collier reminds us about the importance of peer influence. On a visit to the Central African Republic, he asked government officials his usual question: “Which country would you like your country to look like in 20 years’ time?” The surprising answer was Burkina Faso, also an impoverished nation. Why not Switzerland, one could ask? Well, people compare themselves with those who are similar to them and Switzerland is way too different from the Central African Republic to serve as an example. Improvements in the business environment in Rwanda, Malawi, Tajikistan, Egypt to name but a few are very encouraging signs indeed.

Another Perspective on Africa

Having lived in the three major colonial nations (and still living in one), I have often been (and still am) confronted with an outdated and highly pessimistic view of Africa. Granted that the bottom billion is to be found mainly in the continent, but there has been much progress that has gone unnoticed. This article in Foreign Policy by Charles Kenny provides a refreshing view of the continent:

More than 63 million Nigerians have cellphones…

About 10 percent of infants die in their first year of life in Africa — still shockingly high, but considerably lower than the European average less than 100 years ago, let alone 800 years past. And about two thirds of Africans are literate — a level achieved in Spain only in the 1920s.

…though there have been all too many humanitarian disasters in the region, the great majority of Africa’s population has been unaffected. The percentage of Africans south of the Sahara who died in wars each year over the last third of the 20th century was about a hundredth of a percent. The average percentage affected by famine over the last 15 years was less than three tenths of a percent. Africa has seen child mortality fall from 26.5 to 15 percent since 1960 and life expectancy increase by 10 years.

Botswana, Mauritius, Tunisia are among the successful African nations leading the way in Africa and are being used as models of development. At the rate at which, say, Mauritius is growing, it is set to overtake some European nations in terms of GDP per capita in the near future (15-20 years). Increasingly it doesn’t make sense to bundle all African countries in the same basket. A significant part of Africa has put war aside and is keen on good governance. There are some failed states where things will stagnate. And the gap between the two is growing fast.

Finance and Inequality

In the current context in which the consequences of the excesses of financial innovations are all too obvious, it is easy to underestimate the positive role played by the financial system. There is indeed a strong body of evidence which links better financial systems (as measured by their size, their depth, their efficiency, and their reach) with faster economic growth. In a recent NBER working paper, Asli Demirguc-Kunt and Ross Levine point to the often-neglected relationship between finance and economic inequality. By giving the poor enhanced access to funding, financial systems play a positive role in alleviating economic inequality and in promoting equality of opportunities. Its excesses aside, subprime lending ought also to be remembered for enabling home-ownership to millions of low-income households.

But, the authors argue, finance can also widen inequalities, by disproportionately enhancing the opportunities of the wealthy at the expense of the poor (for it is the former who possesses enough collateral to borrow). This, they argue has largely been neglected by economists, with the exception of Greenwood and Jovanovich 1990. One can however argue that, better access to funding by the rich, although bad for inequality, can be also be good for poor as this increases their employment opportunities. Indeed, in countries that have experienced sustained growth over several decades, the economic conditions of the poor have improved, often considerably. Hence, it makes more sense to look at how finance reduces poverty rather than inequality.

Demirguc-Kunt and Levine summarise a growing research on the topic and conclude that there is generally a  “strong beneficial effect of financial development on the poor and that poor households and smaller firms benefit more from this development compared with rich individuals and larger firms.” How do they benefit more? For small firms, the benefit is in terms of the ability to borrow when faced with liquidity problems. For poor households, finance allows them to “smooth their consumption”, i.e. to save and borrow whenever they need to, and this allows them to invest in education and to take more risks in general. In a study of Kenyan farmers, Esther Duflo, Michael Kremer and Jonathan Robinson found that, although the use of fertilizers is proven to significantly increase productivity in the growing of corn and even though they do not necessitate a large investment, farmers do not use fertilizers because they cannot even save the little that is required to purchase them and they are very reluctant to deviate from their old ways of farming.

The trouble with the Mauritian Health System

In a  WHO report on the overall efficiency of health systems, the Mauritian Health System ranks 84th out of 191. This is pretty dismal for a country with an annual GDP per head of $11 000 (at purchasing power parity). Indeed, Mauritius came behind countries that have GDP per head of $4000. In practical terms, the inefficiency of the health system is reflected in an infant mortality rate still in excess of 10 per 1000 newborns, and in an average life expectancy which is only slightly above 70.  What is wrong with the Mauritian Health System, a system based on the UK’s NHS (meaning that it is universal and free at the point of use, and is funded by taxes)?  The question is certainly worth asking as Mauritius is set to become the country most affected by the H1N1 flu in Africa. The short answer is that Mauritius spends only 4% of its GDP on health and this is too little by any standard (for instance, most OECD countries spend more than 8% of their GDP on health). So why is so little spent on health care as a % of GDP, while in other areas, such as education and even infrastructure, the gap between Mauritius and middle/high income countries is not that wide?

The reasons are a mix of

1. A lack of public support for a strong publicly-provided health care system. Such a lack of support is often the case in highly unequal societies where the middle class prefer to have recourse to the private sector rather that subsidizing a publicly-provided system.

2. Additionally, Mauritian may not fully realise how much better their health system could be in terms of saving, improving and prolonging their lives. In his recent book “The Idea of Justice“, Amartya Sen explains why individuals may not realise how bad their health systems are:

A person reared in a community with a great many diseases and little medical facilities may be inclined to take certain symptoms as ‘normal’ when they are clinically preventable. Like adaptive desires and pleasures, there is also an issue here of adaptation to social circumstances, with rather obscuring consequences.   (page 285)

3. The presence of strong interest groups whose personal interests lies in a public health system that remains weak. As an example, two days ago, the largest private healthcare provider in Asia, the Indian group Apollo opened its first hospital in Mauritius, in a joint-venture with a politically-influential Mauritian group.

To make matters worse, a major weakness of the Mauritian Health System lies in its primary health care provision, which is generally the first point of entry of patients into the health system. Primary health care is indeed largely dominated by private general practitioners, who have an interest that their patients, who are generally ill-informed, stay within their private system. In a country where improvements to the health system are hardly ever debated, not even during election times, and where Health Ministers are hardly ever chosen among the brightest minds, things are not likely to improve soon.

What makes good parents?

What make good parents? The psychology literature certainly has a lot to say about the topic, but economists have a rather simplistic view of the issue. This is understandable as the aim is not to advise parents but to look at the role played by the family in the economic outcome of individuals and societies. With this in mind, successful parenting can be narrowly defined in terms of the economic success of children (certainly excessively restrictive a definition). Standard economic models (Becker and Tomes 1986)  generally assume that parents make all the choices for their kids and that the economic outcome of an individual depends on the time and money spent by his parents. For  start, this is a gross simplification as other factors, such as culture and peer influence, also play a considerable role, as evidence suggests.  But more importantly, as parents would agree, time and money are not enough; much more is needed. Economists are therefore trying to dig deeper into the “black box” of the family. An important theme emerges so far: successful parents are those who convert “impatient” children into “patient” adults. These patient adults would then make better decisions, in terms of education acquisition, of career choice, of saving for rainy days, etc.

Europe and its Roma

There are 15 million Roma living in the world, between 10-12 million of whom live in Europe. They are probably the most discriminated against people in Europe, to the point of being granted asylum in countries such as Canada. Antonio Capello at the Demography Blog has an interesting graph of the distribution of Roma in Europe and the sad day-to-day reality of Roma life:

Roma have always been victims of intolerance, prejudice and discrimination, their presence in Europe is characterised by centuries of persecution,extermination and discriminatory policies. Nowadays, the majority of modern societies continue to show anti-gypsy feelings and to perceive, disseminate or tolerate negative images linked to ROMA who are still considered “different” and not “fully citizen” of their respective countries. As reaction, Roma have developed, as self defense, isolation and diffidence against society and institutions.

There are many successful Roma. Portuguese football player, Ricardo Quaresma is one of them. Unsurprisingly and rather sadly, his fans completely dissociate him from the Roma community and leave their view of the community unchanged.

In the economic study of discrimination, two topics remain largely unexplored. (1) To what extent does the economic well-being of discriminated groups improve when they move to less discriminatory countries (eg. the Roma moving from Czech Rep. to Canada)? (2) What effects does discrimination have on effort, say in acquiring education or integrating within society. On one hand, one could expect that a discriminated group can react by sending their kids to school in a way that they end up better educated than the average, hence compensating for discrimination. On the other, they can resign to unfairness by excluding themselves from society. Quite often, this is what actually occurs.

Back from the Dead

I have long considered to stop blogging given time constraints and the sheer supply of good econ blogs. But then again time spent blogging is not completely lost. Reading other people’s blogs is good, but there is more one learns about a topic when one writes about it. So basically this blog is not quite dead yet!