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?