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Lessons from China, Brazil, Ukraine, Indonesia, the Philippines and Thailand, and looking empirically at fragile states and budget execution
On a recent trip to Ireland, stories about the impact of the continuing economic crisis were abundant. Newspapers ran stories about the substantial loss of wealth and purchasing power, such as the increase in 'negative equity' as the value of homes owned by the middle class fell significantly below their mortgages. Cab drivers explained how jobs had been shed throughout the economy, and bemoaned the resulting rise in the number of drivers and increased competition for fares. The reality of the recession and fiscal collapse following the banking crisis of late 2008 was clear.
However, anecdotal evidence about a different aspect of Irish finance – foreign direct investment – suggested a more positive story. I walked through one neighborhood in Dublin that houses the European headquarters of Google, Facebook, and LinkedIn. The latter two were established after the onset of the economic crisis, and Google is in the process of expanding its presence in Dublin. Lawyers at large corporate law firms were excited to discuss FDI, citing it as a key driver of Ireland’s future growth. One firm even maintains a FDI index that highlights large inflows and the positive perception of Ireland as a destination for US investment.
Might FDI in Ireland be the best indicator to consider the strength of the economic fundamentals that enable long-term growth? Ireland has historically benefitted from large inflows of FDI relative to its size. And despite the recent economic crisis, these inflows have largely continued.
Over the past 10 years, inflows of FDI into Ireland tend to be substantially higher as a percentage of GDP than inflows into other OECD economies (see Figure 1). In 2009 and 2010, the two years immediately following the banking collapse, Ireland attracted three to four times more FDI proportionately than other OECD economies. These inflows were not just large in relative terms – they were equivalent to 11.7% of GDP in 2009 and 12.9% in 2010. The negative inflows in 2005 and 2008 do indicate that more money was disinvested out of Ireland than newly invested in the economy those years. However, such outflows are mostly loans or dividend payments from foreign-owned firms in Ireland to their affiliates abroad, at least some of which were likely caused by a 2004 change in the US tax rate on foreign profits.
Figure 1: Net inflows of FDI as percentage of GDP, Ireland vs OECD
Source: UNCTAD and author’s calculations
Our interest in mapping at the World Bank is strong and growing.
The complexity of climate change issue is a challenge for most mainstream media, which increasingly seek the shortest possible sound bite to interest an audience with a very limited attention span. Yet a recent example illustrates the importance of looking past the headlines to understand the importance and true meaning of scientific announcements. The article featured the optimistic headline: “New study finds oil sands fuels would cause imperceptible temperature rise.”
This declaration understandably attracted considerable attention from climate policy-watchers because Canadian oil sands (also commonly referred to as “tar sands” reflecting the heavy, molasses like quality of the substance) are the resource proposed for transmission via the controversial Keystone XL pipeline recently denied a permit by the Obama Administration. (Oil sands deposits have also been found in Russia, Venezuela and Kazakhstan, but a majority of identified reserves and virtually all commercial production are in Canada.)
Some advocates for developing the oil sands see their use as essentially a national energy security issue, maintaining the pipeline is an important step forward toward fulfilling the long cherished dream of US energy independence, not to mention the potential to reduce or at least stabilize gasoline prices: ``Is US Energy Independence Finally Within Reach”, National Public Radio, March 7, 2012.
To be sure, the promise of lower gasoline prices and energy security are strong considerations. But an ongoing debate continues as to whether or not this economically attractive resource can be extracted, refined, and distributed without unacceptable environmental harm. This is why an otherwise academic analysis by Neil Swart and Andrew Weaver at the University of Victoria in British Columbia proved newsworthy. They calculated the global temperature rise that would result from the carbon dioxide released by burning currently proven reserves of Canadian oil sands: Neil Swart and Andrew Weaver, “The Alberta oil sand and climate,” Nature Climate Change, Feb. 19, 2012.
Many firms in developing countries are informal, that is they operate without registering with the government. For example, in a labor market survey of Mexico, nearly 50 percent of business owners report that their firm is not registered with the authorities.
Different explanations have been put forth to explain why firms operate informally. One view, associated with De Soto (1989), is that informal business owners are viable entrepreneurs who are being held back from registering their firm due to complex regulations. Another view, expressed for example by Tokman (1992), sees informal business owners as individuals who are trying to make a living while they search for a wage job.
I used to be partial to the De Soto view. However, a few years ago, I wrote a paper on the impact of a business registration reform in Mexico (Bruhn, 2008), expecting that I would find that the reform led informal business owners to register their business. Surprisingly, this is not what I found. The reform had positive effects, creating more registered businesses and employment, but these businesses came from wage earners setting up new businesses, and not from informal business owners registering.
“There is nothing in this book that needs to be confirmed by complex laboratory experiments. You have only to open the window or step into the street”, Hernando de Soto, The Other Path, p14., 1989.
We know the impact of violence can last generations. We also know that people can be affected by repeated cycles of conflict and instability. The result is that the poor get poorer and become less resilient to further shocks, whether natural or man-made.
We have all heard the buzz: How the Internet has changed the world; how social networks are allowing young people to voice their aspirations and organize to bring real changes on the ground; and how the developing world is awash in mobile phones and hyper-connected youngsters.