Some Myths about Informal Trade in Developing Countries
By definition, informal trade is difficult to measure because even if everyone has seen it, there is no evidence of it in official statistics. Thus, estimates are often difficult to arrive at and quite costly because they require the collection of data from several sources (customs data, data from border surveys, local economic and social statistics, interviews with actors and stakeholders in the sectors concerned).
However, such efforts appear to be bearing fruit: as information and data production improves, a number of assertions based on rumors or even beliefs are contradicted by actual figures. It is especially interesting to note that the phenomena and characteristics of informal trade are the same, whether in central Asia, Sub-Saharan Africa, or North Africa.
Some Myths about Informal Trade in Developing Countries
This is a surfer’s dream: catching a great wave, far from the shore, and riding it for long beautiful moments as it stretches further and further gathering momentum until the very end, when it breaks right at the beach. This is how my generation, born in the 1970s (when the Beach Boys released their iconic Surf’s Up album), should feel, as we are riding on a “global demographic wave” which keeps extending further and further.
Lessons on Governance from Bangladesh’s Garment Industry
One year ago today, in the outskirts of Bangladesh’s capital city, an eight-story garment factory collapsed of its own weight, killing 1,130 young workers and injuring thousands more. The ghastly photos of bodies trapped in the Rana Plaza wreckage provoked outrage in the wealthy world, targeted largely at global retailers who purchased garments there. North American and European consumers called for measures to ensure safe conditions and humane treatment for Bangladeshi garment workers, mostly young women from poor families in remote rural areas. Many called for a boycott of the big-box retailers and of the Bangladeshi products they sell.
I had just moved from Bangladesh to Europe at the time, and my advice to friends who asked was: “Go ahead and buy those skinny jeans or that tank top if you want. It’s the right thing to do for Bangladesh and its young workers.”
A puzzle: Sanitation is one of the most productive investments a government can make. There is now rigorous empirical evidence that improved sanitation systems reduce the incidence of diarrhea among children. Diarrhea, in turn, harms children’s nutritional status (by affecting their ability to retain nutrients). And inadequate nutrition (stunting, etc.) affects children’s cognitive skills, lifetime health and earnings. In short, the benefits of sanitation investment are huge. Cost-benefit analyses show rates of return of 17-55 percent, or benefit/cost ratios between 2 and 8.
But if the benefits are so high (relative to costs), why aren’t we seeing massive investments in sanitation? Why are there 470 million people in East Asia, 600 million in Africa and a billion people in South Asia lacking access to sanitation? Why are there more cellphones than toilets in Africa?
- United Kingdom
- East Asia and Pacific
- Europe and Central Asia
- Latin America & Caribbean
- Middle East and North Africa
- South Asia
- Public Sector and Governance
The epic battle of man against machine has been fought on many occasions. One of the most memorable encounters was the chess game between IBM’s Deep Blue and Gary Kasparov. Deep Blue was the first computer to beat a reigning chess champion in 1996 (the machine still lost 2 to 4 after six games). A year later, at their “rematch”, the machine won on the overall score: 3.5 to 2.5.
However, it is surprising that, 18 years later, we still have not figured out the ultimate winning strategy in chess. Any game with limited combinations and full disclosure of information must have ‘safe strategies’ and can be ‘solved’ (as has happened with the game checkers in 2007). The solution, in chess, would from what we know today involve strategies whereby the white player would win or the black player would force a draw. Yet no human or super computer to date has managed to solve chess’ mathematical puzzle. How much more computing power do we need to succeed?
Trafficking in West Africa
Trafficking is not new to West Africa, but its magnitude is. From Northern Mali to The Gambia, smugglers have traded fuel, cigarettes and staple food for decades. Longstanding trade routes and interregional tribal connections have allowed illegal cross-border trading to grow alongside traditional commercial practices.
A view from Central Europe and the Baltics
Saving for old age is important in countries where longevity is increasing. Countries in Central Europe and the Baltics emerged from the economic transition of the 1990s recognizing that they needed to encourage their workforce to retire later and save more in order to be comfortable in old age. To this end, they modified their pay as you go pension systems which collects taxes from workers to pay retirees (the "first pillar") to create an additional or "second pillar" of individual pension accounts funded by taxes. As these second pillar pension accounts were the private property of individual workers, they were expected to encourage saving. Over time as these savings grew, it would be possible to reduce the pensions paid by the government from the first pillar without reducing the standard of living for pensioners who would be able to rely on complementary pensions from their private saving in the second pillar. Typically, a share of payroll tax receipts was redirected to finance individual pension saving accounts. This resulted in revenue shortfalls in pay as you go you pension schemes, and most governments raised additional debt to meet their obligations which was in turn held by the companies who were managing the pension savings on behalf of employees. However, since the economies were growing rapidly, fiscal deficits were generally kept manageable, easing concerns about additional debt.
Some Observations from Nepal
I've been in Nepal since January helping out with the implementation of a household survey. Throughout February and March, we asked people in two districts – Jhapa, in the south-east of the country on the Indian border, and Tibetan-bordering Sindhupalchok to the north – about their livelihoods, the various taxes they pay, and their relationships with state governance. As part of this research, we've also been carrying out a number of more in-depth qualitative interviews.
When asked about the kinds of taxes that most affect their livelihoods on a day-to-day basis, one of the things that struck me about people's responses was the frequency with which electricity bills were mentioned. At first, I couldn't quite understand why this was coming up so much: that's not a tax, I thought, it's simply a payment made in exchange for a service. In my mind, I began to discount these responses, passing them off as information that missed the points we were trying to get at.
My assumptions were misplaced.
As a wave of newly resource-rich countries, especially in sub-Saharan Africa, looks to the best means of managing resource wealth, one compelling recommendation has come to the fore: to distribute at least some portion of resource revenues to the public through direct dividend payments (DDPs). The case is laid out in papers published at the Center for Global Development by Todd Moss and the World Bank’s Shanta Devarajan and Marcelo Giugale. The DDP proposal has several foundations. Payment technology has increased the feasibility of large-scale transfers, as Alan Gelb and Caroline Decker explain. There are already cases of developing countries scaling up identity card systems associated with cash transfers quite quickly. As for rationale, given the poor track record of public expenditure efficiency, especially in resource-rich countries, it seems clear that general welfare could be targeted more effectively through DDPs, and without any of the distortionary effects or distributional flaws of price subsidies. Finally, from a political economy perspective, DDPs coupled with taxation could restore the accountability of a government to its citizens, which is otherwise weakened by its ability to draw on revenues directly from the source.
I was recently at a conference in Lahore, Pakistan sponsored by the International Growth Centre where the keynote address was given by Shahbaz Sharif, the Chief Minister of the province of Punjab, Pakistan (100+ million people). While fun to see old friends and colleagues, the conference was a little depressing in the way it reflected the state of the development economics profession.
The Chief Minister posed serious questions that have traditionally been the bread and butter of the economics profession. Unfortunately, we are not even trying to answer them any more. The specific question was “Should I put more money into transport? Infrastructure (power, roads, water)? Law and order? Social services? Or what? And where am I going to get the money?” What questions could be more solidly part of the core of economics than these? Unfortunately none of these were even remotely the focus of the “evidence-based” policy making discussed.