Wednesday, May 18, 2005

DESTIN-STICERD joint seminar part II

The second DESTIN-STICERD joint seminar. (See here for the first one held last November.)

This time, the main theme is "Aid and the End of Poverty". As it suggests, the background is Jeffery Sach's recent book The End of Poverty (see 9th April for Sach's basic argument) and a recent political initiative undertaken by the British government to end poverty in Africa (see Commission for Africa website).

The first speaker is Francesco Caselli, representing development economists. His main point is that the effectiveness of aid depends on which world the poor live in, the nonconvex one or the convex one.

In the nonconvex world (or the world endowed with increasing return technology), the poor cannot get richer because of (1) minimum consumption to survive (therefore they can't save at all), (2) lack of education, (3) lack of healthiness, and (4) lack of infrastructure. But if your wealth exceeds a certain level, then these problems are suddenly solved, hence you start getting richer and richer. This is the world Jeffery Sachs envisions, and the rationale for more aid as aid money brings the poor immediately above the threshold level of wealth.

In the convex world (or the world endowed with decreasing return technology), on the other hand, the poorer you are, the higher the investment return. In this case, aid is wasteful because at the end of the day everyone reaches the equilibrium level of wealth (remember the Solow growth model). What matters is the curvature of production function, which is affected by, say, governance.

Therefore, the question is which world the poor live in. Based on evidence available, the convex world seems more likely as empirical studies have shown that return to education is higher in poorer countries and that return to physical capital is also higher in poorer countries (see Professor Caselli's own working paper).

He also raises two questions. Are the middle class people (whose wealth level is above the threshold in the non-convex world) becoming richer fast? If so, the world is non-convex. Is there any evidence that aid triggered the take-off of the economy? If so, the world is non-convex.

The second speaker is Dr. Teddy Brett from DESTIN. He points out quite a few countries where aid worked because the government was good (Uganda after the 1980s, India, Botswana, Ghana, Mozambique, Morocco, and, to a lesser degree, Egypt). So we shouldn't be so pessimistic. His main point is that aid is effective with good governance, which consists of bureaucratic capacity and the government's commitment.

Now it's PhD students' turn. The third speaker is Masa Kudamatsu from STICERD.

Yes, I was the speaker. :) I talked about under what conditions self-interested political leaders are willing to use aid money to tackle poverty. I introduced two theories in the literature of policy-making in autocracy.

The first one is Mancur Olson's stationary bandit theory (see McGuire and Olson 1996). According to this theory, political leaders tackle poverty by using aid money if both of the following two conditions are met: (1) The government is capable of collecting taxes (Self-interested politicians are assumed to consume tax revenue for their own benefit, and therefore we need to have a positive correlation between poverty reduction and tax revenue); (2) Political leaders won't be ousted in the near future (otherwise leaders cannot reap the benefit from poverty reduction even if the first condition is met).

The second one is the agency model approach (or what is sometimes called the political accountability model), first proposed by Barro (1973) "The Control of Politicians: An Economic Model", Public Choice, 14, pp.19-42, and Ferejohn (1986) "Incumbent Performance and Electoral Control", Public Choice, 50, pp.5-25. Although these two authors had in mind democratic politics, the basic idea can be applied to autocracy as well (see Gallego and Pitchik 2004, for example). This theory tells us again that we need both of the two conditions to be satisfied so that self-interested political leaders are willing to tackle poverty out of aid money: (1) the poor can play a role in leadership selection (otherwise political leaders will stay in office without tackling poverty); (2) the poor can trust a potential new leader who will assume office after the current leader is ousted (otherwise, the poor are happy with the incumbent who takes poverty serious only marginally because the alternative to the current leader is even worse). (The second point was brought to attention by Bueno de Mesquita et al. 2002, and Padro-i-Miquel 2004 applied it to African ethnic politics.

I couldn't effectively connect these ideas to the points raised by the two faculty members earlier in the seminar. That was my regret. But I guess the presentation went well overall as Robert Wade, a professor from DESTIN, told me it was interesting and crisp. (I didn't know the meaning of "crisp". Later I looked it up in the Collins Cobuild English Dictionary; it says, "If you describe someone's writing or speech as crisp, you mean they write or speak very clearly, without mentioning unnecessary details.") Special thanks goes to Paolo, who gave me comments on my slides, saying, "Difficult to understand." :)

The last speaker is Elliot Green from DESTIN. He is a specialist of Uganda. He points out that the headcount ratio (the percentage of the poor over the total population) in Uganda had been in decline during the 1990s but went up around 2000. He attributes this dynamics to the coffee price in the world market. If you look at the headcount ratios by region, the number of poor people is falling mainly in the central region, where coffee beans are produced. Plus, the world coffee price was on the rise durng the 1990s and began falling until 2002. He also mentions that democratic elections for regional governments in Uganda actually caused a fall in tax revenue because the governments cut taxes in order to win votes. This is detrimental to good governance in his view (and, it seems, in the view of most development studies researchers) because the link between the government and citizens is broken without tax collection. (This argument is shared by The Economist magazine as well. See this article.)

So there seemed to be a consensus between me and Elliot (and some DESTIN students) that tax collection is key to poverty reduction.

During the floor discussion that followed, a couple of interesting interactions between economics and development studies emerged. In relation to Professor Caselli's question - is the middle class people getting richer quick? - Bettina, a DESTIN student, pointed out the fact that middle class people in poor countries simply invest their money overseas or emigrate to rich countries. Prof. Caselli's response was that it indicates the return to investment for middle class people is low, supporting the idea of the convex world.

Also in response to Professor Caselli's comment that good governance comes with a good leader, which is more or less a matter of luck, Dr Brett raised an interesting point. President Yoweri Museveni of Uganda and former President Charles Taylor of Liberia were both rebel leaders who succeeded in defeating the government forces. But under Museveni's rule Uganda has seen improvements in the economy (with caveats pointed out by Elliot, though) while Charles Taylor just brought another civil war to Liberia (see this BBC article). The difference between these two cases is, in Dr Brett's view, higher education. Uganda received a lot of aid money to improve its higher education system in the 60s and 70s, which President Museveni enjoyed before turning to be a rebel leader. This didn't happen in Liberia. So Dr Brett welcomes one suggestion made by the Commission for Africa that aid should target higher education in order to bring about good governance. This point is revealing to me as development economists all ignore the role of higher education in development.

The seminar ended with this argument on the quality of leadership. This is somehow encouraging to me because that's what I'm now trying to figure out: how the quality of leadership is determined in nondemocratic countries.

Overall, I benefited a lot from this seminar though other STICERD people didn't seem to (plus, none of STICERD professors attended the seminar)...


Linus Hayashi said...

there must have been a trade off between enjoying sunshine and attending the STICERD seminar. And if it was held on a Friday - I do nto think we require a model to predict the outcome.

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