Last week, the World Bank's Europe & Central Asia region published Diversified Development, a highly readable report written by Indermitt Gill, Ivailo Izvorski, Willem van Eeghen, and Donato De Rosa. The subtitle, making the most of natural resources in Eurasia, indicates that the report focuses on countries that are currently highly specialized as a result of their comparative advantage in natural resources. It addresses the question to what extent these countries have to diversify to ensure long-term prosperity. Clearer than ever before, the authors show that that is the wrong question to ask. That question gets the causality backwards. A diversified economy can result from successful development, but forced diversification is unlikely to lead to successful development.
“The most calamitous failures of prediction usually have a lot in common. We focus on those signals that tell a story about the world as we would like it to be, not how it really is. We ignore the risks that are hardest to measure, even when they pose the greatest threats...We abhor uncertainty even when it is an irreducible part of the problem we are trying to solve.” (Silver 2012)
Each year governments invest billions of dollars towards long-term development. Yet their investment decisions are engulfed in deep uncertainty – about long-term demography, economic growth, technological developments, cost of energy, the impact of climate change, and a host of other factors. Deep uncertainties are difficult to acknowledge, understand, and manage. We are more comfortable facing risks we can quantify and solving problems for which we have familiar, well-honed tools. Compounding the problem, analysts and decision makers routinely face pressure to demonstrate that a decision is risk-free. Political and cultural expediency presses them to ignore rather than acknowledge uncertainty and present their decision as advantageous and certain. Such thinking can keep us in the dark about the real threats to our decision, and may lead us to make brittle decisions that fail when the future surprises us.
India has covered a long distance in what seems like a short time. Once proudly reckoned as one of the BRICS countries, it is now making frequent headlines in the international financial press as one of the financially fragile countries (fragile 5, fragile 8, edgy eight etc.). Like many other emerging markets in the world, India is feeling the pinch of the global liquidity retrenchment and rebalancing on its exchange rate and capital flows. Several observers have rationalized the investors’ behavior on account of the hard data on the Indian economy: growth has decelerated (from 8.9 % two years ago to 4.5 percent in fiscal year 2013), current account deficit is reigning high, inflation remains stubbornly high, and savings and investment rates have been falling. And all of this is happening amidst an upcoming national election, when elections anywhere invariably are associated with political and economic uncertainty.
What would it take for India to regain its place in a more revered acronym soon, rather than a less flattering fragile ‘n’ ensemble?
William Dar of ICRISAT describes how global farm innovators can help re-green the Sahel.
A new World Bank study, 'Fish to 2030: Prospects for Fisheries and Aquaculture', analyzes the rise in seafood demand and how to sustainably expand aquaculture.
Dani Rodrik has an article in the Journal of Economic Perspects on when ideas trump interests.
- weekly round up
As a way of reaching out on the core messages for WDR2015, I asked for feedback on Linked In via two groups that I’m a member of -- the International Development Forum and Society for International Development groups. I received the following diverse comments, including from Tunisia, South Africa, Congo Brazzaville, France, Italy, and the US:
It was time! I am impressed that in development literature, classical and practical anthropology is not present. May be they should have listened to Drucker –more well-known than many anthropologists: “culture eats strategy at breakfast”.
I trust the [World] Bank will examine 'rationality' among the poor in the context of recent studies which demonstrate a relationship between the stress of day-to-day life, particularly decision-making, among the poor and the loss of cognitive capacity. See here for a popular discussion of the science. Rules of thumb may replace rationality in decision making by poor people as a means of coping with the stress of repeated daily decisions on actions requiring financial resources a poor person does not have. It may be quite challenging for professional economists to enter the mindset of the chronically poor.
To usher in the Lunar New Year read this Jakarta Post piece on the high-spirited Year of the Horse.
John Hilsenrath warns in Central Station on the WSJ Real Time Economix blog that there may be 'No Bottom in Sight for Emerging Markets' and he uses a chart from the World Bank's Global Economic Prospects to make his point.
India, Turkey and South Africa have all raised interest rates this week. This was in part to stop sharp devaluations fuelling inflation as investors switch into recovering developed countries such as the US. India‘s central bank governor has hit out at the US and other industrialised countries for running selfish economic policies.
More than half the world’s population cooks with solid biomass fuels, such as wood, dung, charcoal or agricultural residues. Use of these fuels has been found to cause significant levels of respiratory infections, as well as trachea, bronchus, and lung cancers, ischemic heart disease, cerebrovascular disease, chronic obstructive pulmonary disease, and cataracts. The Global Burden of Disease Study 2010 found Household Air Pollution (HAP) from solid fuels to be the third leading cause of disease worldwide. Mitigation of HAP has a vital role for lowering health risks, particularly for women and children in developing countries where cooking with solid fuels is a common practice.
As incomes rise, the transition to modern energy sources will ultimately reduce HAP. During the transition, efforts to increase access to cleaner fuels, provision of improved stoves, and public information leading to improved ventilation and behavior change may significantly reduce exposure to household smoke. Design of HAP reduction strategies has been hindered, however, by a lack of data on air quality in households and the health benefits of potential mitigation measures.
As a poverty economist, I know how difficult it is to forecast poverty numbers for even the next year. But, since the World Bank Group (WBG) announced the goal of ending extreme poverty by 2030, I have been projecting poverty numbers of some countries and regions for nearly two decades into the future. I could not help but ask myself “What am I doing this for?”
Forecasting versus Benchmarking
I looked for answers by reading recent papers on similar topics. Most seemed to be competing to prove that their projections were the most plausible. Some seemed better than others, but they were not convincing enough to erase my doubt. Before giving up the search, I reread Ravallion (2012, 2013) , and at last got an answer. In both papers Ravallion projected future poverty under the assumption that the developing world maintains its current pace of growth and poverty reduction. Although his methodology ensures that his projection predicts future poverty accurately if this assumption holds, it is still uncertain whether this assumption will hold and, consequently, whether his projection will prevail.
India's Telegraph newspaper reports on a Q&A Kaushik Basu had recently with economist/filmmaker Suman Ghosh.
Nobel laureate Michael Spence writes on Project Syndicate about The Real Challenges to Growth.
World Bank President Jim Yong Kim shares his views on LinkedIn on how income inequality ought to be discussed at Davos.
Patterns of intergenerational income mobility in the United States reveal valuable lessons for economists and policy makers not just in this country, but also for the developing world, where successful efforts to promote shared prosperity and foster create better prospects for youth and children too often meet with frustration.
Raj Chetty, Professor of Economics at Harvard University lectured on this topic recently at the World Bank. For his talk, Chetty drew on recent research by him, Nathaniel Hendren, Patrick Kline and Emmanuel Saez. Chetty and team analyzed anonymous tax records on earnings of 40 million US children and their parents to gauge a child's chances of moving up the income distribution relative to his or her parents.