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Myopia and (dis-)incentives - The political economy of managing risk

Jun Erik Rentschler's picture

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.

It is an old and well known criticism of electoral politics: the conflict between short political mandates and long term objectives. To galvanize political support, policy makers not rarely resort to “benevolent” political measures, such as short-sighted tax reductions or infrastructure investments, which are often more beneficial to their own election polls than to their electorate. Such political myopia is alarmingly common, and stands in the way of effective policy making in the long term interest of people.
Risk management is one of the fields in which effective action tends to be impaired by political myopia. For instance, implementing comprehensive regulation in the financial sector, or imposing stringent environmental requirements on certain industries, would help managing the risks of financial or environmental crises. Similarly, the installation of early warning systems for tsunamis or hurricanes could provide decisive information for preparation and timely evacuation. 

Samoa Diary

Kaushik Basu's picture

A discomfiting feature of going to places off the beaten track is the surprise shown by the natives themselves. I recall traveling to Dushanbe from Moscow by Somon Airways; the flight attendant--a young Tajik woman--on learning that I am an Indian living in Washington, looked puzzled and asked, enunciating each word, "Why, may I ask you, are you going to Tajikistan?" The slight sense of alarm caused by the query hinting at faulty decision making on my part was heightened by Aristomene Varoudakis, a gifted economist and one of my advisers at the World Bank, pronouncing, ten minutes into the flight: "So far, so good." Those words, meant to be comforting, were disquieting in their suggestion that this was a journey in which ten minutes without a mishap deserved a toast.

The same was true as I headed to Samoa. The flight was full of Samoans who could have walked out of a Paul Gauguin frieze, a few surfers and some missionaries. Jimmy Olazo and I from the World Bank did not fit into any of these categories and faced the inevitable interrogation on why we were going there. Samoa is indeed an unusual country to visit. It is impossibly small, with a population of less than 200,000. Its resources are meager, consisting of fish, some agricultural products and spectacular scenery. To an economist the viability of an economy like this is a conundrum. Where do you get the economies of scale from to produce your cars, hospitals, clothes? How much fish and tourism can you supply to the rest of the world to pay for these? Is it possible to help Samoans organize a steady flow of workers, skilled and unskilled, to other nations and rely on their remittances? How do you provide any insurance against the risks of natural disaster and calamity, a concern that, as I discovered over the next three days, dominated the lives of the Samoans? How do you conduct monetary policy in such an impossibly small nation?

Who creates jobs?

Ejaz Ghani's picture

The role of entrepreneurs in job creation has a long intellectual tradition (Cantillion 1730, Knight 1921, Schumpeter 1942). While the great economic minds throughout history recognized the link between entrepreneurship, regional development, and job creation, controversies remain. Our understanding of entrepreneurship is still at an early stage (Glaeser et al 2009, Klapper and Love 2011). How does one quantify entrepreneurship? Do young/small establishments or large/established firms contribute to job growth? Have manufacturing or service sectors created more jobs? What is the geographical scale at which entrepreneurial mechanics function? Why do some cities attract more entrepreneurs? Do agglomeration economies and networking differ across formal and informal sectors and industries, cities, and gender? What makes some local governments fiscally more entrepreneurial than others? These questions provide insights into job creation and they have rightly attracted the attention of researchers, but many of them remain unanswered.

Finance as an Economic Cholesterol

Otaviano Canuto's picture

A country’s income depends on its accumulated wealth and how efficiently and innovatively this wealth is employed to produce goods and services. Does what a country produce matters? Are there constraints or drivers of wealth accumulation that can be associated with specific economic activities within a country?

The question is as old as development economics. Is specialization in producing (mineral or agricultural) commodities inherently more limiting than producing manufactures? More recently, the question has been extended to a contraposition between manufactures and services.

Increasing Flood Risks Create Major Challenges for World’s Coastal Cities

Stéphane Hallegatte's picture

Increasing flood risks create a major political and institutional challenge for the world’s coastal cities as ambitious and proactive action at the local level over the next decades will be needed to avoid large-scale flood disasters. However, the implementation of flood risk management policies meets many obstacles. 

In a recent study written with colleagues Colin Green, Robert Nicholls and Jan Corfee-Morlot as part of an OECD project on urban vulnerability, we estimate how flood risks could change in the future in 136 coastal cities, in response to increasing population and wealth, local environmental change, and climate change. We find that because current flood defenses and urbanization patterns have been designed for past environmental conditions, even a moderate change in sea level is sufficient to make them inadequate, thus magnifying flood losses to catastrophic levels. If no action is taken to reduce flood vulnerability, most coastal cities would become inhospitable and dangerous places to live, with annual losses in excess of $1 trillion dollars.
 

Emerging Markets Sell-Off: What’s Next?

Otaviano Canuto's picture

The last weeks of summer have been marked by renewed pressure of capital outflows and exchange rate devaluations in several systemically relevant emerging markets. In fact, this is just the latest round of a global portfolio rebalancing that has been in motion since May 22, when talk of the US Federal Reserve shrinking – and eventually reversing – its asset purchase program (QE -quantitative easing) was made public.

Chart 1 (taken from the Financial Times) uses figures of emerging market mutual funds and exchange-traded funds (ETFs) to illustrate this shift. According to Morgan Stanley analysts, as a result of outflows and central bank interventions on currency markets, reserves in the developing world – excluding China - have shrunk by US$81billion, or roughly 2% of the total, during May, June and July.

Top Incomes and the Measurement of Inequality in Egypt

Paolo Verme's picture

The January 2011 revolution in Egypt that overthrew 30 years of autocratic rule was in part due to a sense of deteriorating economic situation, injustice and growing inequality in the society. This was voiced by protesters during the revolution but also by intellectuals and the press after the fall of the old regime in an effort to explain the revolution. The World Values Surveys administered in Egypt in 2000 and 2008 confirm that the subjective aversion to inequality has intensified between the two years and for all social groups.  

It is thus surprising that economic inequality in Egypt as measured by household surveys is low and has been declining during the past decade. In 2009, the most recent year when a large household income and expenditure survey was administered, the Gini coefficients for inequality in incomes and expenditures were 32.9 and 30.5 respectively , far lower than in surrounding countries, southern Europe or the United States. This finding led observers to dismiss these figures as “unreliable” and incapable of capturing the true economic inequality in Egypt.

India's Moral Churning -- Excerpts from August 16 Tata Lecture, Delhi

Kaushik Basu's picture

Revised excerpts from the 16th JRD Tata lecture, delivered in New Delhi, 19 August 2013.

This is a difficult time for the Indian economy. Growth has slowed, with industry shrinking over the last two successive months, wholesale price inflation has risen to 5.8%, and the rupee has been losing value sharply. There is reason to be upset about this and to demand more from policy makers. Yet, as I argue in this lecture, this is not India's biggest problem. The nation's biggest challenge at this critical juncture is a moral and an ethical one. This, for India, is a moment of moral churning. Skullduggery and corruption, cutting across party lines, have been rampant, eating into the moral fabric of the nation, leaving ordinary people befuddled and in despair. This is breeding a corrosive cynicism, leading people to believe that maybe this is the only way to be, that petty corruption and harassment is simply the new normal, whereby we should complain when we are left out of the gravy train and merrily join in if and when we get a foothold on that train. Yes, the economy has not done well over the last year or two. But once we look beyond the proximate causes we will realize that one important factor for the economy not doing well is the corrosion of values like trust and trustworthiness and their concomitant, poor governance.

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