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Posts Tagged ‘development

The Art of Economic History

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I read Nicholas Crafts’ ‘Economic History Matters‘ last night again. (This essay will appear in the special conference issue of Economic History of Developing Regions prepared for the World Economic History Congress 2012 to be held in Stellenbosch from 9-13 July.)

What struck me was his emphasis on the unique contribution economic historians can make to understanding economic growth (or the lack there-of), and which policies ignite or contract growth. He notes the example of Japan:

If continual reform is needed to achieve full catch-up, it is very possible that countries find catch-up easy to start but difficult to complete. Japan, where catch-up of the United States stalled 20 years ago, epitomizes this problem (Chen, 2008). Idiosyncratic features of the Japanese economy such as lifetime employment, the main bank system, business groups, industrial policy, and the absence of competition in non-tradables were no longer advantageous in the 1990s but were hard to reform (Ito, 1996). This suggests that predictions of catch-up and convergence of China with the United States – which is taken to be a done deal by the general public – might be viewed sceptically by economic historians. Similarly, the projections of future catch-up by the so-called BRICs economies, popularized by Goldman Sachs (Wilson and Purushothaman, 2003), have a mechanistic flavour which abstracts from the political economy of development. Exploring the sustainability of catch-up growth processes in the light of historical experience is an area where economic historians have important insights to offer.

In short: be less optimistic about the long run growth prospects of BRICS or, at the very least, about theirs being a homogenous experience. Catch-up is not simply following a widely known blueprint, as the disgruntlement with the Washington Consensus has shown. Incidentally, Crafts in another 2011 paper argues that the original Washington Consensus has much in common with the Marshall Plan which famously helped Europe recover rapidly after the Second World War. Proof, again, that what might be very successful economic policy in one period, may be totally ineffectual at another time.

Theory and evidence often don’t overlap. Endogenous growth theory allows us to investigate the fundamental causes of growth (improving human capital, for example), but country-level economic histories shows that good-intentioned policies may sometimes have less than great outcomes, their success ruined by (the interaction of) idiosyncratic domestic factors (Japans culture of life-time employment, for example) or exogenous external shocks (the international economic environment or climate change). Perhaps another truism we should reflect on is that, apart from institutions and history, timing matters. This makes economic history such an ambivalent science, and transforms economic policy-making from formulae to art.

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Written by Johan Fourie

March 10, 2012 at 07:45

When things fell apart

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This is by far the best analysis of the post-independence African tragedy that I’ve read. And the shortest. In When Things Fell Apart, Robert Bates distills decades of research into a compact but powerful book that will take you an afternoon to read, but will keep you contemplating much longer. How is it possible that African states, inheriting growing economies at independence, could radically deteriorate into constant conflict and, in a few cases, genocide? Bates has the answer: political order rests on three variables, namely, the level of public revenues, the rewards from predation, and the specialist’s rate of discount. The interplay of these three factors determines whether a state protects or preys upon its citizens. Bates shows how the decline in public revenues, from internal and external forces, the capture of state revenues by elites (often in the name of nationalisation), and the natural resource wealth most African countries are endowed with, all combined to explain the decline of state order, and the rise of disorder (or failed states), often with devastating consequences. The analysis draws on several examples, showing how each case corresponds with the theoretical model. And given the success of the model to explain past failures, it also points to important trends that might help predict, or avoid, such disasters in the future. This is a book that is worth reading to anyone, but perhaps Cambridge University Press can send a complementary copy to each of the 54 heads of African states and their members of parliament. Understanding the past – in this case, the causes of state failure – remains the best way to navigate the future successfully.

Written by Johan Fourie

February 2, 2012 at 14:49

What recession?

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Too much has been made of the Great Recession. While global growth has slowed in 2008 and 2009, we are still living in an age where most of the world population’s income is increasing. These increases translate into millions of people being lifted out of extreme poverty every year. This year, 2012, the average person’s income will rise, not fall, which also means that their standards of living will probably increase. In fact, the income of the average person on earth has never been as high as it is today.

How is this possible in the face of what is now generally accepted as the greatest recession since the Great Depression? Why can I be so sure when the European Union is in a severe debt crisis and US politics makes it nearly impossible to boost the fragile economy? With all the noise in the North, most have missed that the rest of the world is, in fact, booming.

The graph, for example, shows the average person’s GDP growth rate across all countries of the world for which data is available. (For all my calculations, I use the 2011 World Development Indicators which can be downloaded online.) This is not the same as the average GDP per capita growth rate, which is weighted by the income of each country (regardless of how many people live in that country) and the most widely used as an indicator of global prosperity. Here, I weight by population of each country. Thus, in the new measure, China and India contribute much more to the growth rate than they would if total income is used as weight. In contrast, the US would weigh only 4.5% (in 2010), even though it represents a much greater share of global income (23% in 2010).

What does the graph tell us? It suggests that the first decade of the new millennium has been the most prosperous for the average person in the world, ever. The 2008/2009 recession certainly had a negative impact, but different to the negative global growth rate reported of 3.4% in 2009, the average person’s income actually increased by 1.5% in 2009. And this dip seemed to be short-lived: in 2010, the average person’s income growth rate rebounded to a high 3.1%, the third highest recorded growth rate for the last 40 years! (I should add that earlier growth rates should be even lower, but because data is not available for many smaller countries early on, they are excluded.)  How is it possible that GDP per capita weighted by income is negative while GDP per capita weighted by population is positive? Well, a disproportionate number of people in rich countries’ incomes fell, while the incomes of most people in poorer countries (that would contribute little to global income) increased. So, while the fall in incomes were larger in absolute terms than the increases (in 2009, that is), a greater number of people’s incomes increased (and considerably so) rather than declined.

Why is this important? The crisis – for the first time – is mostly a developed country phenomenon. So, too, are the pundits and the media that report their daily dosage of pessimism about the future. Even in South Africa, where I live, the woes of European and US markets dominate financial news. We hear about China’s staggering 9.8% growth rate, yes, but don’t know about Uruguay and Ethiopia’s 8% growth rates, nor discuss the 7% growth of Turkey, Turkmenistan and Thailand (all 2010). Sure, some of these rates are from a very low base. That’s not the point. Growth is essential for these countries’ citizens to partake in the global economy. A growing middle-class will buy more goods, creating new markets and perhaps offer the fragile developed world economic salvation (if they can fix their own internal struggles).

The message should be that the world is growing, even if some regions are struggling. The tide is lifting, but not from its usual source. Economic Armageddon is not near. Capitalism is safe. In fact, the future looks quite bright for the average global citizen.

Written by Johan Fourie

January 31, 2012 at 16:40

Lesotho

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Helanya and I spent six days in Lesotho just before Christmas. We had wanted a break from the usual South African holiday experience and booked a four day pony trek through the Mountain Kingdom. Starting at Malealea Lodge, about an hour South of Maseru, we trekked valleys, up mountains and down river gorges, spending three nights in remote villages. It was certainly not a luxurious holiday, but no less enjoyable.

Lesotho is still a predominantly agricultural country. 77% of the land is used for agriculture, ranked ninth in the world (South Africa is fifth with 88%), but only 8% of its GDP is from agricultural, 65th in the world (WDI 2011). This dependence on agricultural is obvious for any visitor; especially in the low-lying areas, maize is the staple crop, and nearly every inch of land that is not lost to erosion is under cultivation. In the higher mountain areas, pastoral goat and sheep farming is the primary economic activity, with mostly younger boys faithfully fulfilling their duty as herders (see picture). While the cultivated areas support larger villages, and perhaps higher standards of living, I was surprised to see that what must surely be surplus production each year does not translate into greater investments in physical and human capital, and resultant productivity increases in these areas. Asking our guide about this, he explains that the surplus is stored for winter and shared with those who might need it. Surely, though, competition would result in the better farmers winning and the weaker farmers losing land? No, not if the land belongs to the king. For the casual observer, land ownership certainly plays a critical role in inhibiting productivity improvements. Land sales in the rural areas are uncommon; even though Lesotho follows the British parliamentary model, the traditional leaders still have power in matters of land distribution. Foreigners are not allowed to own land. (Until recently, women were not allowed to either.) Without institutional changes, the current work of several development agencies in the country can at best only alleviate severe poverty; it cannot propel the country into a high-growth trajectory.

Even given its relative geographic disadvantages and small size, Lesotho is certainly a country that can be optimistic about the future. It has plenty of water, a resource that will only become more valuable. It also has plenty of fertile land. With some investment in infrastructure, the fruits of these two resources can be shipped globally. But to do that, the Basotho will have to allow (foreign) investment, will have to protect property rights and, perhaps, think about closer integration with South Africa. These changes will not be easy, but as the pony trek has taught me, hardship is not an infrequent visitor to the mountain people.

Written by Johan Fourie

January 29, 2012 at 20:05

On Agency

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Jan Luiten van Zanden recently published what I think is an important contribution to the discussion about the future direction of economic history research. His main point is that too much of recent research has focused on those factors that have had a causal, long-run impact on development outcomes today. Think, for example, of Nathan Nunn’s work on slavery, showing convincingly that the slave trades had the largest detrimental impact in those areas where most slaves originate from (Nunn 2008). Or, for an even more long-term causal link, Ashraf and Galor (2011) show that “in the course of the exodus of Homo sapiens out of Africa, variation in migratory distance from the cradle of humankind to various settlements across the globe affected genetic diversity and has had a long-lasting effect on the pattern of comparative economic development that is not captured by geographical, institutional, and cultural factors”. In short: our level of income today is determined to some extent by how far our Kenyan ancestors walked. Seriously?

That deep historical changes matter today is clear, but Jan Luiten’s point is simply whether that is the right question to ask. Should we all be “prisoners of the history we inherited”? Should economic historians not focus on those factors that allow us to escape the historical legacies? In his words: “even if history can explain 60% or 80% of the outcomes, it would make sense to be most interested in the remaining 40% or even 20% that allows us to change things in the future”.

Understanding the impact of past effects on development outcomes today is important, as it allows us to avoid similar mistakes. It also informs and expands economic theory. But how policy-relevant is slavery, or the Out-of-Africa hypothesis, for African leaders today? Are the more critical questions for policy not those that investigate the determinants of societal change, the factors that give people agency? In other words, how do we overcome the disadvantages of slavery, or the large genetic diversity in African societies that might limit our productivity?

Jan Luiten asks: “Can we try to free our profession from an overemphasis on historic determinism?” Economic historians will have no choice if we hope to contribute to a better understood, and ultimately more prosperous, world.

Read the paper here.

Written by Johan Fourie

January 25, 2012 at 12:08