Another Conference on Poverty

Yet another conference on poverty-reduction took place, this week-end in Mauritius. The conference focused on the SADC region, where more than 45% of the population lives on less than $1 a day and, in some countries, up to 70% of the population is undernourished. Amid a sumptuous banquet given in honour of the King of Swaziland on his 40th birthday (who, together with his 13 wives and 23 children, rule over the small nation of Swaziland where one out of ten babies dies at birth and life expectancy is a mere 33 years), an unsurprising conclusion was reached: foreign donors need to give more. It is claimed that $8 billion is required for the SADC region each year. But will more development aid help? Here are three facts worth remembering on aid and poverty-reduction.

Men are from Mars…

The standard economic model usually starts with something like this: “We consider an infinite horizon economy, with a continuum of individuals of measure 1, etc.” These individuals have are neither men nor women, because economists, in their quest for simplification, assume that men and women make choices in much the same way. While this assumption is perfectly fine for most stories that economists want to tell, some experiments show that gender matters. Here are two examples, taken from a survey paper on Field Experiments in Development Economics by Esther Duflo:

Mauritian Stocks: Quick Update

In a previous post on the booming stock market in Mauritius, I brushed aside the possibility of a bubble, despite a 130% rise over the past 2 years. There has indeed been some inevitable corrections as the financial crisis took a global dimension, with stocks of financial institutions being the worst hit. Yet, against this backdrop, the Mauritian stock market can be said to have performed rather well, as the following figure illustrates:

Decoupling and the Euro

There is a considerable debate about whether the Eurozone has broadened and deepened enough to have become less dependent on the US economy (the ‘decoupling’ hypothesis). The recent decline in stock prices in major European economies (with, in places, greater losses than in the United States, where the financial problem originates) rebuts this hypothesis. But there is the possibility that the Eurozone may not slow down as much as is expected this year. And the stubbornness with which the ECB refuses to cut interest rates, which if it turns out to be right, would show that there is something going on, albeit a partial decoupling. Could this be related to the existence of the Euro? Wolfgang Munchau hypothesizes what would have happened without the Euro:

The New El Dorados

After years of stagnation and war, some Portuguese-speaking nations are among the fastest growing economies in the world today. Angola grew by 23% in 2007 and is projected to grow by a staggering 27% this year (which at this rate implies a doubling of GDP every 3 years!). Mozambique is also racing ahead and so are Brasil, Cape Verde, Macau and São Tomé and Príncipe. Out of the 8 Lusophone nations, only Guinea-Bissau and Portugal have growth rates below the average world growth rate (see figure below). What lies behind the growth surge in some Lusophone countries?

Getting Out of The Middle-Income Trap

Will poor countries ever catch up with rich countries? Some have. But will the rest do? In a 2000 paper entitled “Some Macroeconomics for the 21st Century,” Bob Lucas suggests that, yes, by 2150, all countries will be rich. The reason: the recipes for growth are known and gradually productive ideas and technologies will seep into the most remote corners of the globe, while the resisting forces against progress will be swayed by economic forces. Globalisation in trade and the increased mobility of capital can only speed up this process. This pre-supposes that there is no trap in the development process: no ‘poverty trap’ for poor nations, and no ‘middle-income trap’ for middle-income nations. In a recent NBER Working Paper, Jan Eeckhout and Boyan Jovanovic raise the possibility of the latter trap. They explain how the integration of the world’s labour markets creates big gains for rich and poor countries alike (blueprints flow from California to China, while manufacturing goods flow in the opposite direction), leaving middle-income countries in limbo: they are not technology-savvy enough to compete with rich countries and are not cheap enough to compete with China.

Assessing Flat Taxes

In the last decade, the list of countries where taxes are ‘flat’ (a tax system which taxes incomes and profits, beyond a certain threshold, at the same rates) has been growing. Flat taxes, it is argued, do two things: they reduce tax evasion and they induce middle to high-income earners to work harder (supply-side effects). These boost government finances and economic growth. Countries that have adopted flat taxes provide experimental material for testing these claims. Baltic countries, like Estonia and Lithuania, and Russia have reported significant increases in government income after introducing flat taxes. However, it is often argued that there may be other factors at play. An IMF study of Russia in 2005 shows that there is no evidence that flat taxes have had supply-side effects, and that the improvements in public finances and of the economy are likely to be the consequence of high oil prices. In a recent paper given at an NBER Conference last week, Gorodnichenko, Martinez-Vasquez and Sabirianova Peter make a similar claim: flat taxes had very little supply-side effects in the Russian case. But, they argue, they have led to a significant reduction in tax evasion. So, where do we stand on flat taxes?

The Time is Ripe for Means-Testing

Mauritius has relatively low levels of absolute and relative poverty: less than 1% of the population lives with less than $2 a day and around 8% of the population earns below half of median-income (compared to 17% in the United States). Several explanations: (1) the ‘rising tide did raise most boats’ (Mauritius has been among the top 10 fastest growing nations in the world in the last 30 years), (2) a generous welfare state, by the standards of middle income countries (for example, it is estimated that, if the current universal state retirement pension scheme were to be removed, relative poverty would rise from 8% to 14%) and (3) Asian-style family structures which ‘insure’ individual members against income shocks. The Mauritian welfare state has traditionally been universal in its nature: education and health (a copy of the NHS) are free to all, the state retirement pension is non-contributory and there are direct subsidies on basic commodities such as flour, rice and gas. Right now, there is a heated debate in the country about whether the state transfers should be more targeted towards, well, those who really deserve them, i.e. the poor or they should stay universal. Current empirical evidence elsewhere in the world is at best mixed, but for a country like Mauritius, the balance seems to be tilting in favour of means-testing.

Driving too fast?

“you’re driving too fast…you went straight past the curve and you never go back…driving too fast…the road was a blur and it all turned to black…driving too fast… hang on to the wheel, I think you’re going to crash…” (Rolling Stones)

In the neoclassical growth model developed by Bob Solow and Trevor Swan, one learns that countries that start off with a low level of physical capital (infrastructure, machines, etc) will grow faster than better-endowed countries and eventually catch up, provided they get access to the same technology and share similar features (savings rate, fertility, etc). Convergence within much of ‘Old’ Europe in the last 75 years and, right now, that of ‘New’ Europe with the ‘Old’ (per capita income in the Baltics has grown by 50% since joining the EU four years ago) are illustrations of this. The issue not raised in Solow, however, is whether catching-up too early, too fast can be problematic. In a recent article, the IMF Senior Representative for Central Europe and the Baltics takes the example of Portugal to warn Baltic states to ‘avoid the portuguese trap’: since EU accession in 1986, Portugal enjoyed impressive growth rates until 2000, after which the Portuguese economy has slowed down considerably, without converging to the EU-average per capita income. His argument: “large wage increases, fueled by unrealistic expectations, which exceeded productivity growth and undermined Portugal’s competitiveness.” Olivier Blanchard agrees. So, what happened to Portugal and what are the lessons to be learnt?

Is there a Bubble on the Stock Market in Mauritius?

The recent performance of stocks traded in the Stock Exchange of Mauritius has been remarkable. The SEMDEX, the official index representing all the 40 or so stocks has grown by 130% in the last two years (Figure 1). From January to November this year, the SEMDEX went up by 40% in US dollar terms. If history can serve as a guide, it is to be noted that a similar trend was observed between 1990 to 1994, when the stock market crashed, and took nearly 8 years to recover (Figure 2). The obvious question therefore is: is there a bubble in the stock market in Mauritius and if so, will it burst and when? In my view, things are different this time. I can find two interrelated reasons for this:

Two Africas

The Time Magazine has an interesting article about the fate of two Sub-Saharan countries: Angola and Mauritius. Angola has oil and grew at 35% last year, after years of stagnation. Mauritius has no oil and has been among the top 10 fastest growing economies in the world for the last three decades. Why Mauritius grew and Angola did not is exemplified by the lives of two entrepreneurs, Mr Francois Woo, a Mauritian and Mr Adérito Cassolongo, an Angolan. Here are excerpts:

One Economics, One Objective for Monetary Policy

Has the conduct of monetary policy become the routine application of a set of core principles, much like the science of treating a dental cavity? The answer is: “not quite”, according to Stefan Gerlach in his guest lecture at the Bank of Mauritius yesterday. But, he adds, the overriding objective of monetary policy should be the fight against inflation. What do economists agree upon and what do they disagree upon as far as monetary policy is concerned?

One Economics, Many Exchange Rate Policies

Which is better, a flexible exchange rate regime or an inflexible one? As always, the answer, it seems, is: “it depends.” According to economists Aghion, Bacchetta, Ranciere and Rogoff, it depends on the degree of financial development. In countries with underdeveloped financial sectors, the volatility of exchange rates induced by a flexible exchange rate regime is a drag on economic growth. On the other hand, countries with advanced financial sectors benefit from flexible exchange rate regimes. Here are highlights of this paper, which was the topic of a guest lecture given yesterday by Philippe Bacchetta at the Bank of Mauritius:

Rewards and the Allocation of Talent

The academic community in Mauritius is rather peculiar. Many academics do not seem to be interested in, well, being academics! Research is often done out of a simple necessity: to get that job promotion that enables one to (1) finally earn a certificate for tax-free car, (2) to take on more administrative duties and exercise more power (yes, there is a place on earth where academics like admin!), (3) to be noticed by politicians and hopefully become their adviser! And some, unable or unwilling to do research, resort to bickering, office politics, etc. Yet, it is generally agreed that the best part of the job is the pleasure one gets from uncovering and learning things, from the independence in one’s thinking and from one’s contribution to society. So, why do people misallocate their effort and talent?

The Monkey Trade

Monkeys are intelligent creatures: they care for their siblings, they are altruistic towards their peers and they possess a strong sense of fairness. They can even be trained to use money and exchange it for food and sex! The fact that they are used in medical research leave us in a rather awful moral dilemma. For some, their use is essential in advancing medical research, especially in the study of neurodegenerative diseases, such as Parkinson’s and Alzheimer’s and infectious diseases, such as AIDS. Others claim that (1) research has not borne much fruits, (2) there are alternatives to animal testing, (3) animals are routinely used in unessential things such as cosmetics. It remains that the use of non-human primates in US and European labs is heavily regulated and is likely to remain so in the foreseeable future. But little is known about the treatment of these animals before they reach those labs. In fact, the monkey trade is a very lucrative business and for the past 10 years, Mauritius has taken it seriously - the country is second to China in the monkey export.