Kiva: Individual microlending

When looking at Questionable Content (it is a webcomic – I’m addicted to watching the guy develop his drawing style!) I saw a link for a site named Kiva. To explain what this is I will leave it up to the Kiva about page.

Kiva is the world’s first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world.

It is so incredibly cool – it lets you loan money to individual entreprenuers in developing countries. Instead of giving money to a charity as a black hole you are giving money directly to someone who you believe will make good use of it – furthermore, you are pretty likely to get you money back!

This is a great way to incentivise capital transfers and charity – seriously cool.

Is anyone keen to join a TVHE Kiva group – I’m sure I can rope at least the other authors into it 😉

Slavery and growth

Many writers have noted that colonisation contribute to the sad state of many African economies today. Now Nathan Nunn claims that the slave trade may also have had a long-term impact on economies. The author

…find[s] a robust negative relationship between the number of slaves exported from a country and current economic performance. To better understand if the relationship is causal, I examine the historical evidence on selection into the slave trades, and use instrumental variables.

This analysis indicates that “…it was actually the most developed areas of Africa that tended to select into the slave trades”, which points to a causal relationship running from slavery to poor economiic performance. The author suggests that the reason might be that “…procurement of slaves through internal warfare, raiding, and kidnapping resulted in subsequent state collapse and ethnic fractionalization.”

Yet another reason why the West is morally required to help African nations out of their current strife?

The new SAP in Iraq

A commenter on the ‘Democracy and Growth’ post below said that he didn’t think “…growth was ever a putative justification for the invasion of Iraq”. While that may be the case, it didn’t stop the US from using post-war Iraq as a playground for a few ideologically driven economists. Using a regime that reminds one of the IMF’s widely criticised Structural Adjustment Programs (just Google it if you think I’m being selective in my link choice here), the US has drastically reformed Iraq’s economic policy.

Dismantling the public service, privatising much of the public sector and removing any bias towards Iraqi companies in the granting of contracts has resulted in massive unemployment and poverty in the formerly wealthy nation. Dani Rodrik links a couple of other interesting article in this post.

Admittedly, there is debate over how well the Iraqi economy is doing these days. However, whatever the goals of the invasion, they could have done better in the aftermath than pursue policies that even the IMF is now moving on from. Development economics has come a long way since the inception of SAPs and the reconstruction of Iraq was a great opportunity to show what can be done.

Democracy and growth

One of my favourite development economists, Daron Acemoglu, has a new paper out. Acemoglu is generally of the view that a country’s level of wealth can be traced back to the country’s institutional development. In a fascinating earlier paper he argued that the institutions set up by European colonists are a major predictor of the current wealth of colonised nations. His new paper proposes that the wealth of a nation is not correlated with the level of democracy in that country, nor is it correlated with regime change towards democracy in the country.

It seems that a trend among Western democracies is to promote democracy as the way forward for developing nations. This has particularly been the case with the US’s recent foreign policy under the Bush/Cheney regime. Does this paper suggest that efforts to ‘nation build’ and push countries towards democracy does little for their economic well-being? Hopefully, it will force nation-builders to be more rigorous about the way that they justify intervention in favour of democracy in developing countries. Suggesting that it’s the one, true path to economic growth will no longer be enough.

Product diversity and development

Tim Harford’s latest Undercover Economist column covers some interesting research on industrial development. The paper examines the type of products that countries produce, and the way that a country’s ‘manufacturing portfolio’ changes over time. The key finding is that countries tend to develop by producing similar products to those that they already produce.

This makes intuitive sense: if a country already has infrastructure suited to the manufacture of a particular product then it will be less costly to develop similar products than to develop radically different ones. The problem arises when a poor country with limited production diversity approaches the limits of its current manufacturing processes. It is very difficult and costly to make the transition to producing a new, unrelated product type. The paper’s data confirms that this rarely happens. Notably, the authors find that:

Rich countries have larger, more diversified economies, and so produce lots of products […]. East Asian economies look very different, with a big cluster around textiles and another around electronics manufacturing […]. African countries tend to produce a few products with no great similarity to any others.

If poor countries are to make the step to producing new products then some intervention in the development process may be required. This points to a role for some government industrial policy at a national level, or structural intervention at an international level. It could mean a new justification for infant industry protection in developing countries. It also, perhaps, points to a different way of making effective use of the limited aid money available to organisations such as the IMF and World Bank.

Import substitution, good or bad?

Free exchange and Dani Rodrik have both made intelligent posts on the issue of import substitution. Free exchange sticks to the common line that import substitution is bad, Dani says that there is evidence that it is good.

I know very little about any of this, but I’m going to say something anyway. As far as I can tell, trade policy should work off the idea of comparative advantage, implying that each country should make what the good they are ‘relatively’ better at making (specializing in goods with the lowest opportunity cost). As a result, government policy should react in ways that take advantage of this concept.

This might imply to some people that government should not intervene in trade, and just let the free market choose the most efficient industries, which will in turn trade with the rest of the world. However, I’m not sure I fully agree.

It is possible that an industry that would have a comparative advantage in trade terms may not have been founded given high fixed costs and the requirement of skilled and experienced labour which will only be created when the industry exists (infant industry type argument). If the government can recognise these industries, it can subsidise their creation until they become fully efficient, by which times they will be net exporters.

Now this form of intervention isn’t the same as import substitution (although it is often placed as a subset of it). Import substitution involves creating the goods you import at home, now if this is a good where another country has a comparative advantage then all you are doing is hurting yourself and the other country. Import substitution is a bad idea (unless there are security of supply or political issues), but government policy to develop domestic industries does have some potential.