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Friday Roundup – Inequality, Biofuel Prices, Exchange Rates and Keynes vs Austerity

Three new Policy Research Working papers, a Project Syndicate piece by Ken Rogoff, and an Eduardo Porter column in the New York Times, titled ‘A Keynesian Victory, but Austerity Stands Firm,’ made for an interesting week.

A working paper published this week by Milanovic Branko uses multiple techniques to gauge how close measured inequality is to the maximum inequality that can exist in a given society. Looking at historical data tracing back several centuries, Branko finds that inequality in colonies was pushed almost to its maximum. Branko also looks beyond inequality as measured by income inequality to inequality in social terms.

Harry de Gorter, Dusan Drabik and Govinda Timilsina have a working paper on the relationship between volatility in crude oil prices, biodiesel and oilseeds (soy beans and canola). They find that higher crude oil prices increase biodiesel prices if biofuels benefit from a fuel tax exemption, but lower them when a blending mandate is imposed. When both canola and soybeans are used to produce biodiesel, an increase in the crude oil prices lead to higher canola prices, but the effect on soybean prices is ambiguous.

A Paean to Reason and Empathy

The following blog post is an excerpt from my commencement address delivered at the Diploma Ceremony of Fordham University, held in New York on May 19, 2013

The first rule of reason is honesty. There are situations in life where kindness and concern for others make us hold back on certain kinds of speech. That is as it should be. Speech can hurt as much as physical violence. If the latter is wrong, so must be the former. But to ourselves, in our minds, we should practice the utmost honesty. Honesty in thought may be inconvenient but in the long-run it helps.

Consider what we are often told—that if there is a will, there is a way; with sufficient determination, we can achieve anything. But to believe in this you have to suspend reason. And my advice is don’t. There are things in life which through sufficient determination you can achieve; but there are also things which no matter how hard you try, you will never get. It is best to see this clearly and realistically and then make your own choices rationally. You will make better decisions.

Financial Inclusion in Europe and Central Asia

The countries of Europe and Central Asia have made undeniable, if uneven, progress in expanding financial inclusion in recent years. The well-developed microfinance industry and relatively widespread use of wage accounts in some countries are signs of success, though low savings rates and high levels of mistrust in the formal financial sector signal that much work remains to be done. The exclusion from the formal financial system of more than 175 million adults—disproportionately located in Central Asia—presents particularly difficult challenge for policy makers in the region. Our recently published Findex note takes an in-depth look at financial inclusion in the ECA region.

After 25,000 interviews in 23 ECA economies, a subset of the larger Global Financial Inclusion (Global Findex) database , we now know that 45 percent of adults in that region have an account at a formal financial institution. This is on par with the rest of the developing world. But of course we know that there is more to financial inclusion than account ownership, it is equally important to have data on how accounts – and other basic financial tools - are used. Account holders in ECA are much more likely to use their account to receive wages or government payments, as compared to account holders in the rest of the developing world (77 percent vs. 41 percent). This is an interesting insight as to what mechanisms are already working to engage adults with formal financial systems, and something to keep in mind when we think about how to move forward.

Seizing Opportunities under Extreme Risks: Fragile and Conflict-Affected States

Fragile and conflict-affected countries confront some of the most extreme risks and constraints to their management that, if unaddressed, could create a vicious cycle of poverty, fragility, and conflict with far-reaching implications beyond these states. A well-balanced and collective approach to risk and opportunity can build on the progress made toward better development results going forward.

One thing that fragile and conflict-affected states (FCSs) have in abundance is the extreme risks facing their people. In these environments, consequences of risks materializing are often a matter of life and death. People living in such states make up only 15 percent of the world population, but represent nearly one-third of all people in extreme poverty, one-third of the HIV-related deaths in poor countries, one-third of people lacking access to clean water, one-third of children who do not complete primary education, and half of children dying before reaching their fifth birthday. Only eight of the 36 FCSs have so far met the Millennium Development Goal (MDG) of halving extreme poverty, according to a new World Bank analysis, and the upward trend in the number of poor in FCSs (figure) is expected to take their share in the global poor population to 50 percent by 2015, according to an OECD report. The majority of MDGs in fragile states will not be met by 2015.

The incidence of extreme risks in FCSs is matched by the prevalence of severe constraints on the ability of people to manage risk. Characterized typically by high levels of corruption, weak governance and institutional capacity, an unfavourable environment for doing business and low competitiveness (figure), these states offer limited access to functioning market mechanisms, communities, or governments that provide an enabling environment for managing risk. Three quarters of the limited foreign investment in fragile states go to only seven (resource-rich) states.

In the long run, we all want to be alive, and thrive

Ninety years ago, in his A Tract on Monetary Reform Keynes famously wrote “In the long run we are all dead”. That observation recently stirred a lot of debate for all the wrong reasons, after Niall Ferguson obnoxiously claimed that Keynes did not care about the future because he was childless. Whether Keynes cared about the long-term future or not (and whether he had children or not) is completely irrelevant in this context, as many (e.g. Brad DeLong and Paul Krugman) have pointed out.

The actual context in which Keynes wrote this observation was a discussion about the quantity theory of money, which states that doubling the supply of money will only double the prices, but will have no consequences for other parts of the economy. This is the classical dichotomy between real and nominal variables. Keynes argued: “Now in the long run this is probably true”. But “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” So, Keynes’ point was obviously not that the future doesn’t matter. His point was that simple theories that might describe long-term relationships are just not good enough to deal with current issues. In the short run, changes in money supply can have all kinds of important consequences beyond the price levels. Economists will have to make their hands dirty and delve into the complicated dynamics of the here and now.

Microcredit Borrowers in Bangladesh Are Not Necessarily Trapped in Poverty and Debt as many contended in recent years

With spectacular growth of microfinance institutions (MFIs) in Bangladesh, there is a growing concern that borrowers might be borrowing from multiple sources and more than they are able to repay, and hence, they are trapped in poverty and debt. Microfinance programs, operating in Bangladesh for more than two decades, have reached more than 10 million households in 2008, nearly half the rural population, with an annual disbursement close to US$1.8 billion and an outstanding balance of US$1.5 billion. Multiple program membership has increased over the years: it was nonexistent in 1991/92, 11.9 percent in 1998/99 and 36 percent in 2010/11.

However, a recent study shows that increased borrowing, even from multiple sources, has not lowered loan recovery rates.

Also, another recent study observes that microcredit borrowers are not necessarily trapped in poverty and debt. This study analyzes data from a long panel survey over a 20-year period, and finds that although many participants have been with microcredit programs for many years they are not necessarily trapped in debt as the accrued assets due to borrowing outweigh accumulated debt for many borrowers.

Hospital reforms in France: what can we learn?

Hospitals in France deliver services for acute care. Except for surgery, the consumption of hospital care is predominantly public. The sector accounts for half of the national consumption of medical goods and services and is mostly funded through the Health Insurance system.

The public hospital sector has been facing recurrent deficits over the last three decades, associated with weak managerial print and uneven performance. Since the 80s, global budget was the norm, leading to rent seeking within and across public Hospitals in the absence of incentives for quality and efficiency. Thus, the French Government launched a massive reform initiative starting 2004 to strengthen hospital efficiency and quality of care in a resource-constrained environment.

Two Goals for Fighting Poverty

It is widely agreed that eliminating extreme poverty in the world should take priority in thinking about our development goals going forward. The '$1 a day' poverty line is a simple metric for monitoring progress toward that goal. It was chosen in 1990 as a typical line for low-income countries (as explained in Dollar a day revisited). By this measure, poverty in the world as a whole is judged by a common standard anchored to the national lines found in the poorest countries. On updated data, the current value of this international line is $1.25 a day at 2005 purchasing-power parity. Today about 1.2 billion people in the world live in households with consumption per person below this frugal line. Thankfully, the world has made progress in bringing this count down; 1.9 billion people lived below $1.25 a day in 1990.

Notice that I say 'consumption' not income. A standard measure of household consumption is preferable as a measure of current economic welfare than income, and is typically measured more accurately than income. Fortunately, two-thirds of developing countries now have consumption-based poverty measures, although some regions, such as Latin America, are lagging in this respect.

Urbanization? Of course! But how?

The world reached 50 percent urbanization some years ago. By 2020, the less-developed world will have followed suit. Harvard economist Edward Glaeser’s vivid 2011 paperback “The Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier” leaves no doubt about it. Cities set in motion a virtuous machinery of agglomeration economies, with economic growth and happiness following suit.

Not so fast, argue equally many learned scholars! Didn’t Vernon Henderson, another acclaimed urban economist, report in the Journal of Economic Growth that higher levels of urbanization are not necessarily associated with higher rates of economic growth. And, hasn’t Africa been urbanizing rapidly over the past 15 years without much poverty reduction?

As the world turns to ending extreme poverty and fostering shared prosperity, the impact of urbanization, and different urbanization patterns, on poverty and inequality, clearly requires more attention. Can urbanization, for example, occurgo too quickly, inducing poverty to urbanize, instead of to declininge? Or can it be too concentrated geographically, generating faster growth (from larger agglomeration economies and economies of scale), but also higher inequality? Or is maximizing poverty reduction from urbanization simply a matter of smart urban management?

Danger of a pandemic

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

On February 15, 2013, an asteroid 45 meters across sailed past the Earth at 4.9 miles a second. This was the closest encounter on record with an asteroid this big. Such rare events trigger fear because people overestimate the risk of unusual events – at least for a while. The odds of other rare events are often underestimated. People have a hard time understanding frequencies that are longer than a human lifetime; politicians discount probabilities of disasters that are unlikely to hit while they are in office and so they underinvest in prevention. In sum, we have trouble assessing low-probability, high-impact risks – the kind of events dubbed as Black Swan by Nassim Taleb.

Responding to concerns about the asteroid, The Economist (Danger of death! Feb. 14, 2013) created a graphic to illustrate how we are unlikely to die from asteroid impact (odds of one in 75,000,000). The chart showed that more prosaic, but still rare, dangers were worse. For instance, 27 people died in 2008 in America from contact with dogs (a one in 11,000,000 chance of death). The ranking also showed the odds of death in any given year from a range of causes, such as heart disease, choking, falling down stairs, cycling, and bee stings.

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