Twenty-five years ago, I lived in a fishing village, Tanji, on the coast of The Gambia. The village came alive before sunrise: if you got up early, you could see the brightly colored "pirogues" pushing out to sea, with six or seven brave young men sailing their precarious wooden dugout canoes. This was no mean feat. The Atlantic was unforgiving and sometimes treacherous.
I worked with the fishermen as part of a European Union fisheries project and, with time, we became friends. We spoke Mandinka, drank atyre, and shared our struggles and hopes. They told me how over the years catches had declined dramatically, forcing them to sail farther and farther out; how the trawlers were creeping closer to the shore, often mangling their fragile nets.
Law and Regulation
From time to time, countries experience rapid economic growth without a significant decline in poverty. India’s GDP growth rate accelerated in the 1990s and 2000s, but poverty continued to fall at the same pace as before, about one percentage point a year. Despite 6-7 percent GDP growth, Tanzania and Zambia saw only a mild decline in the poverty rate. In the first decade of the 21st century, Egypt’s GDP grew at 5-7 percent a year, but the proportion of people living on $5 a day—and therefore vulnerable to falling into poverty—stagnated at 85 percent.
In light of this evidence, the World Bank has set as its goals the elimination of extreme poverty and promotion of shared prosperity. While the focus on poverty and distribution as targets is appropriate, the public actions required to achieve these goals are not very different from those required to achieve rapid economic growth. This is not trickle-down economics. Nor does it negate the need for redistributive transfers. Rather, it is due to the fact that economic growth is typically constrained by policies and institutions that have been captured by the non-poor (sometimes called the rich), who have greater political power. Public actions that relax these constraints, therefore, will both accelerate growth and transfer rents from the rich to the poor.
Some examples illustrate the point.
In many economies of the Balkans high formal unemployment is often blamed on insufficient skills in the labor force. But this intuitive diagnosis glosses over two fundamental questions, namely: why are workers not training themselves to find jobs, and why aren’t firms investing in upgrading the skills of their employees? In other words, the market seems to be failing by not allocating resources where high returns can be found. In this blog post, we cast doubt on the diagnosis and look beyond the skills gap explanation to high unemployment in the Western Balkans. But this is not unique to the Balkans. Take the US construction industry, which is among the most productive in the world even though it employs many relatively low skilled workers, often immigrants from Mexico and other Latin American countries, who improved their individual productivity several fold by migrating – not upgrading skills.
There is no doubt about the problem as throughout the region unemployment – particularly formal – remains unacceptably high. Serbia is a case in point: Out of a population of 7.2 million people and a workforce of 4.5 million, only 710,000 Serbians have a formal, private sector job. If you add some 380,000 ‘sole proprietors’ – basically people who run mini-shops – you get to around 1.1 million people in the formal private sector. That means that the livelihood of the whole country is built around this 15 percent of the population. Can it really be that firms are still not able to find sufficiently skilled employees in the large remaining pool, especially given that Serbia has decent education results? If finding skilled workers in Serbia is like looking for needles in a haystack, there are surely a lot of needles to be found.
بعد أن تعرفنا على بعض الطرق التي يضر بها الفساد النسيج الاجتماعي والمؤسسي لبلد (e)ما، ننتقل إلى خيارات الإصلاح المتاحة أمام الحكومات للحد من الفساد والتخفيف من آثاره. وتوصي روز أكرمان (1998) باستراتيجية ذات شقين تهدف إلى زيادة فوائد الأمانة ورفع تكاليف الفساد، وهي عبارة عن مزيج معقول من الثواب والعقاب باعتبارهما القوة الدافعة للإصلاح. هذا موضوع كبير. ونناقش فيما يلي ستة نُهج تُكمل بعضها بعضاً.
Having looked at some of the ways in which corruption damages the social and institutional fabric of a country, we now turn to reform options open to governments to reduce corruption and mitigate its effects. Rose-Ackerman (1998) recommends a two-pronged strategy aimed at increasing the benefits of being honest and the costs of being corrupt, a sensible combination of reward and punishment as the driving force of reforms. This is a vast subject. We discuss below six complementary approaches.
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.
Europe faces a significant job challenge. At an average of 11 percent, unemployment remains stubbornly high while labor force participation, at 58 percent of the working age population, lags behind most other regions of the world. This means, that only every second person in working age currently has a paying job across the region. Addressing the job challenge requires multifaceted labor market policies. We argue however that reducing the tax burden on labor, which remains high across the region, holds the promise of improving labor market outcomes. Such tax cuts could especially target low-wage workers, which often face the highest marginal tax rates and very elastic labor demand and are therefore most likely to be priced out of the formal labor market.
Recently three IMF economists published a paper arguing that redistribution is in general pro-growth (Ostry et al. 2014). The paper caused a stir as it dismisses right-wing beliefs that redistribution hurts growth. However, even people sympathetic to the ideas of inclusive growth and equality of opportunity find this finding problematic. One reason is that the authors rely on a measure of redistribution that misrepresents the true cost of redistribution in an economy. Another has to do with the omission of factors that affect positively the income growth of the poor and vulnerable, such as employment. This omission would exaggerate the importance of equality through redistribution as a source of growth and underplay the importance of structural transformation and investments directed towards sectors that use unskilled labor more intensively, and therefore have the potential to generate inclusive growth and productive employment for the poor segments of the population.