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.
A view from Central Europe and the Baltics
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.
Africa’s combination of urban, educated, unemployed youth and economies still dominated by a narrow range of commodities and the public sector has spurred many to call for structural shifts in production and employment as part of an inclusive growth strategy. A recent entry into the debate is the 2014 African Transformation Report, launched last week by the African Center for Economic Transformation (ACET). As Homi’s and Julie’s post states, the depth, sophistication and pragmatism of the analysis are commendable. But if all the recommendations were implemented, what would they do for the employment prospects of today’s African youth? Not much. They would barely affect the job prospects of 90 percent of young people entering the labor force in this decade.
In an earlier blog post, we commented on the sources of corruption, the factors that have turned it into a powerful obstacle to sustainable economic development. We noted that the presence of dysfunctional and onerous regulations and poorly formulated policies, often created incentives for individuals and businesses to short-circuit them through the paying of bribes. We now turn to the consequences of corruption, to better understand why it is a destroyer of human prosperity.
Crony capitalism is the key development challenge facing Tunisia today
Last week’s Economist magazine focused on Crony Capitalism. From the powerful oil barons in the USA in the 1920s to today’s oligarchs in Russia and Ukraine, they show that such entrenched interests have been a major concern over time and around the globe. North Africa is no exception. The fortunes accumulated by the family and friends of President Zine Al-Abidine Ben Ali of Tunisia and Hosni Mubarak of Egypt were so obscene that they helped trigger the Arab Spring revolutions, with protestors demanding an end to corruption by the elite.
Africa is growing fast but transforming slowly. This is the message of the 2014 African Transformation Report, launched last week by the African Center for Economic Transformation (ACET). The report addresses a worry on the minds of many: in spite of impressive growth, the structure of most sub-Saharan African economies has evolved little in the past 40 years, with a poorly diversified export base, limited industrialization and technological progress, and a large informal economy whose economic potential remains mostly overlooked. In many African economies, manufacturing—the sector that has led rapid development in East Asia—is declining as a share of GDP. The worry is that without a major transformation Africa’s recent growth may soon run out of steam. The report argues that for growth to continue, Africa needs to invest in “DEPTH”–diversification, export competitiveness, productivity, and technological upgrading, all for the purposes of human well-being.
A couple of weeks ago, just after International Women’s Day, we had a coffee hour in the World Bank’s Ankara office to watch short videos of five women that have recently started up their own business and transformed their lives and that of their families (stay tuned for the release of these films, currently being edited). Their stories were uplifting, but the discussion quickly turned to the dismal field of statistics. Commentators stressed that female labor force participation in Turkey remains at only half of the OECD level, that Turkey loses around 25 percent of its potential GDP because of this, and lamented that social norms and mixed political messages on the role of women in society were preventing greater progress towards gender equality.
The Western Balkans Case
The Western Balkans have a lot going for them: ideal location next to the world’s largest economic bloc, a well-educated workforce, relatively low wages and decent infrastructure. FDI and investors should be rushing in … but are they?
Southeast Europe is the next frontier of EU expansion and includes six countries: Albania, Bosnia & Herzegovina, Kosovo, Macedonia, Montenegro and Serbia. These countries have a lot in common and an equal amount of differences. They are all relatively small open economies, with a growth strategy premised on deeper international integration. Some, especially Macedonia, are more advanced in attracting international investors but as a whole, the region seems to be stuck in a classical Middle Income Trap: they are too rich to compete on low-cost manufacturing but are too poor to be global innovators. After a strong recovery following war and conflicts in the 1990s, the growth momentum has stalled over the last five years and the region has been particularly vulnerable to external shocks.