February 2008

In the past few years, the world economy has done very well. Almost every nation has grown richer. In the last six months, however, bad news has been pouring in.
 

In a few weeks the Arab League will meet. The 2002 Arab Peace Initiative will again be placed on its agenda with the hope to push for the quest of a two-state solution. Many people are hoping for an end to this conflict that has brought hardship and pain to people on both sides.  There are many envoys trying to mediate. There is no lack of plans and initiatives on how the Israeli-Palestinian conflict could be settled; rather detailed ideas exist.

Sovereign Wealth Funds (SWFs), government owned investment vehicles typically funded by foreign exchange surpluses or natural resource revenues seem to be in the news about everyday.  Their massive size, rapid growth, and high-profile investments in the U.S. and elsewhere in 2007, has generated this attention.  Some of the SWF investments have been viewed as market stabilizing, for instance the substantial equity investments in large U.S. financial institutions that recently got into financial trouble after the sub-prime mortgage crisis.  However, there is great suspicion from many quarters of the SWFs as being politically motivated and the SWFs currently at the center of the storm are in Asia.   

Concerns on SWFs:  Much debate is now taking place, both in academic and political circles. Politicians and financial officials from the U.S., United Kingdom, France, Germany and others have called for more intensive scrutiny of SWF investments.  This call has come due to three reasons:  (i) SWF investments could potentially be used to exert economic influence and to acquire strategic assets; (ii) a perceived lack of transparency of SWF operations; and (iii) seemingly opaque corporate governance structures.   These concerns have been amplified during this moment in financial history when the economies of the investee countries are increasingly vulnerable. 

What follows is a discussion of two of the many challenges that often bedevil efforts to bring out pro-poor social and political change and an approach that is a way of dealing with them. You know the deal: well-meaning technocrats try to introduce a bit of governance reform...by stealth. Then it runs into trouble- usually due to vigorous attacks by vested interests likely to lose out if the reform succeeds - yet the potential beneficiaries are not organized, do not even know that they might benefit from the reform. And so the reformers are defeated.  Or the reform, if it has already been introduced, is reversed or stalls. The problem is that many technical specialists are uncomfortable with the public sphere and all it entails: people, the media, controversy and debate, 'noise'. But unsupported reforms tend to become orphans and street urchins.

As you may have heard, our new World Bank Chief Economist is Chinese, so it was with interest that I watched a short interview of him on Bloomberg about China's economy: 

One key point that I picked up is that he also remains optimistic about China's growth prospects in 2008. He answered a question about China after the Olympics, but in his answer he expressed the confidence in China's domestic economy more generally. World growth prospects have come down as the economies of the US and Europe are starting to feel the impact of the financial turmoil triggered by the sub prime problems in the US.

This will have an impact on China's exports and investment in the tradable sector. However, as Justin mentioned, China's domestic economy has pretty robust growth momentum at the moment and this will help support China's overall growth. And, given China's increasing weight in the world economy, this in turn should also help the world economy.

For the past few weeks, the Philippine media have been intensely focused on a controversy regarding a foreign loan meant to fund the creation of the National Broadband Network (NBN), a project envisioned to seamlessly link all government offices across the archipelago via the Internet. Whistleblower Jun Lozada alleged in a senate committee hearing that a former high level official was poised to receive $130 million in kickbacks, a claim that has been repeatedly denied.

The year 2007 was an important milestone in modern economic history.  While the U.S. grew well, China contributed more to global GDP growth than the U.S. did.  That pattern is likely to continue for the foreseeable future.  Roughly speaking, the U.S. economy is about four times the size of China’s.  If the U.S. grows at 2% -- which is solid for an advanced economy – and China continues to grow at 10+%, then China will be adding more to global GDP each year than any other country.  The same can be said for global trade: China’s imports have risen 28% in the past year, so that it is an increasingly important source of demand for other countries. 

The growing importance of China in the global economy is the main reason that we have launched this China Development Blog.  There is huge interest in the prospects for China and in what is actually happening on the ground here. 

While China has emerged as an economy of nearly equal importance to that of the U.S., it is also important to note that China and the U.S. are closely intertwined.  There is broad agreement that the U.S. economy is slowing down in the wake of the sub-prime financial mess.  Views on whether the U.S. goes into recession are about 50:50; but what is clear is that there will be a significant slowdown in U.S. growth.  How much effect will this have on the global economy?  How much on China?  One school of thought has it that China and the rest of East Asia are increasingly “de-linked” from the U.S. cycle, hence they will feel little impact. 

If you are interested in development economics, here is an interesting puzzle.

According to conventional wisdom, investment is a key ingredient for economic growth. If you invest, you grow - not immediately of course, as everything takes time. If you don’t invest, your economy stagnates.

Basically - so the wisdom goes - the accumulation of physical (e.g.: infrastructure – roads, dams) and human (i.e.: education and health) capital brings about growth and prosperity.

So, what is happening in the Philippines? The Filipino economy is growing fast, but - over the last few years - domestic investment shrunk as a share of GDP. Being an open and growing economy, one must wonder: why the decline? (click on the graph in the top left corner).

I got very interested in understanding this, and - hoping to contribute - I wrote a paper on the subject. I hope you don’t mind me summarizing my own findings.

In the Philippines, three factors explain why investment does not grow at the pace of GDP:

As usual on Fridays,  based on Raj Nallari and Breda Griffith's lecture notes.

Gender Statistics

 Measuring gender remains a work in progress.  On the one hand, official data that capture for example, labor statistics, demographics, have been engendered by disaggregating data into male and female components.  However, there is widespread agreement among women’s organizations and feminist scholars that this falls far short of the mark.  Since the 1970s, significant progress has been made in pushing for a more accurate representation – conceptual and methodological – of women’s work in particular.  Furthermore, in recent years, there has been an effort to develop databases that capture the economic realities of gender inequality in opportunities, be that rights, resources and voice (World Bank, 2001) and/or gender-biased macroeconomic policies. The following paragraphs examine the progress that has been made in understanding and measuring women’s work, thus facilitating a more accurate measure of gender and the databases that have been developed to examine gender inequalities.

Many years ago, in a class on the English Epic as a literary genre, one of my professors asked: 'What is an anthem?' We all struggled to come up with definitions of an anthem, as in the national anthem of a country. We thought that an anthem was a song set to music commissioned by the leaders of the country and declared to be the national anthem. He said that was not the case. He explained that a song simply acquires the status of an anthem over time. His definition, and I still remember it clearly, is as follows: 'An anthem is one man's song that strikes a responsive chord in the minds of millions of others.'

The UNDP's International Poverty Centre has announced the publication of the book The Many Dimensions of Poverty, which draws from the  International Conference on “The Many Dimensions of Poverty”, held in Brasilia in 2005.

This book takes a multidisciplinary approach to poverty, including five different perspectives from the disciplines of economics, sociology, anthropology, psychology and institutional economics. The book also explores the link between poverty and the concept of freedom, as articulated by Amartya Sen, in terms of capabilities that are valuable to people. There are also studies of chronicity of poverty, the concept of vulnerability, the political economy of poverty alleviation and the pro-poorness of government programs. The book presents a panorama, as large as possible, of the many facets of poverty. The broad view of poverty that the book offers is likely to orient research on poverty in directions neglected hitherto and to help those in charge of implementing poverty reduction policies.