Public Lecture - Cities: Places to live, places to work
A Growth Week 2012 public lecture with Professor Paul Collier (Oxford), Professor Tony Venables (Oxford) and Ben Akabueze, Commissioner for Economic Planning & Budget of Lagos State, Nigeria.
Urban areas are the most productive parts of the developing world, yet concentrated urban poverty presents some of the biggest policy challenges. By 2008, for the first time in history, more than half of the world’s population was living in urban areas and it is projected that by 2030 this number will swell to almost 5 billion, with urban growth concentrated in Africa and Asia.
This discussion addressed the potential and the challenges of economic development in urban areas.
Public Lecture - Policy challenges for growth in Africa and South Asia
A Growth Week 2012 public lecture with Dr Asim Khwaja (Harvard), Dr Abdul Hafeez Shaikh (Minister of Finance, Pakistan), Dr Louis Kasekende (Deputy Governor of the Bank of Uganda), Dr Ijaz Nabi (IGC Pakistan), and Dr Omotunde E.G. Johnson (IGC Sierra Leone).
The developed world has recently fallen behind in the numbers game, as African and Asian countries have experienced enviable growth.
This debate focuses on the challenges that the two continents now face in maintaining this positive trend and the policies that are necessary to ensure that growth is sustainable.
Ideas for growth session 1: Agriculture
Chaired by Tavneet Suri (MIT; IGC), the Agriculture session began with a presentation by Maitreesh Ghatak (LSE) who addressed the question of compensation policies for rural communities that lose their traditional lands and livelihoods to make way for business (e.g., industry, commercial agriculture, urban development). Households in affected areas as well as neighbouring non-affected areas were surveyed in order to estimate the income losses for the former, and assess the suitability of compensations offered by the government in relation to these losses. Ghatak explained that the land acquisition strategy has been inadequate mainly because there is a large discrepancy between government records of offered compensation and household reports for particular kinds of land. He expects to provide guidelines for the design of compensation policies that could be used in the future, which most likely would have an impact on the policy debates on land acquisition in India, which has traditionally been one of the most sensitive issues.
Guush Berhane (IFPRI) presented research that aims to introduce an index-based drought insurance product in 15 areas in rural Ethiopia, via their informal insurance groups, the local funeral societies. In Ethiopia, these groups are widespread, highly inclusive and well structured. They charge premiums against risks and increasingly offer other products beyond funeral insurance. The weather index product, calibrated for local circumstances is sold via a private insurance company, Nyala Insurance. The main objective is to improve product uptake, and at the same time ensure basis risk—the difference between risk insured and the actual risk experienced—is reduced and informal insurance mechanisms are not undermined but used to increase coverage. The project uses a randomized controlled trial to investigate the uptake among groups and farmers, and the way it affects their functioning and the behavioural impact on agricultural technology choices and productivity. It also assesses how the introduction of these products will affect existing informal insurance arrangements.
Douglas Gollin (Oxford) talked about how high transportation costs—affecting both domestic and international trade—influence the current structure of African economies and consequently contributes to the slow transformation from agrarian to industrial and service-oriented economies. The study developed a calibrated model of spatial production and consumption to examine how public-policy interventions, such as investment in the rural road network or in exposing domestic transport and distribution activities to greater competition, impact on the spatial and sectoral structure of production in the economy.
Both discussants, Former President of Zanzibar, Amani Karume and Alex Kanyankole, Director General of the National Agricultural Export Development Board of Rwanda pointed out that it is crucial to find a common ground between farmers and the government when negotiating adequate compensation policies. They also argued that drought insurance is the beginning, but may not be sufficient to address all risks related to the agricultural sector, therefore, a holistic approach must be taken into consideration.
Ideas for growth session 2: Infrastructure and Urbanisation
Enrico Moretti (UC Berkeley and IGC) chaired Session 2 and introduced Nathaniel Baum-Snow (Brown University) who presented his research on transport infrastructure and cities spatial development in China. The researchers’ main question is to understand the extent to which elements of infrastructure that has been built over the last 20 years in Chinese cities have shaped the spatial form of cities, redistributed population and decentralized production. Elaborating on the infrastructural elements, the main findings of the paper are: highway rays have had no effect on industrial decentralization; railroad rays, on the other hand, have displaced about 26% of industrial GDP from the centres to the suburbs but have had no effect on population displacement; finally, ring roads have affected both decentralization of industrial GDP and that of population. These results would be important for city planners and government when they check the costs and benefits of different infrastructural projects.
The second presenter, Diego Puga (Instituto Madrilene Estudios Avanzados), presented research on explaining the discrepancy in wages between bigger and smaller cities: more specifically, why are employers willing to offer/accept higher wages in big cities. Some potential explanations span: firms’ static advantages of being in a big city, sorting advantages in bigger cities of workers with higher initial ability, and learning advantages, whereby bigger cities allow workers to accumulate more valuable experience. The authors used administrative data with longitudinal information of measures of social security, income tax and census records, and other factors that help explain the variability in wages. Some of the most interesting results are that most of the wage differences between big and small cities come from worker ability and experience learnt in a bigger city. Furthermore, the extra earning in bigger cities is enhanced by in workers with greater ability.
Ideas for growth session 3: Trade
The goals of the IGC trade session were to (1) promote interaction among the members of the programme and the policy-makers that came from the IGC countries, (2) motivate members to stay engaged with IGC and submit research proposals on trade and development for funding, and (3) give members a chance to see and discuss cutting-edge research at the intersection of trade and development.
David Atkin (Yale) presented a paper on the “cost of globalization”. The opening up of a country to free trade is indeed very costly. The researchers estimation on the intra-national trade costs in developing countries suggests that the marginal cost of distance approximately double when only use source-destination pairs and that marginal costs of distance approximately double again when spatial variation in marks- up are taken into account. This paper is particularly timely because there is an increased understanding of trade among the practitioners. It is therefore entirely relevant, and especially for Africa.
Amit Kahndelwal (Columbia) presented his work on exports and firms performance. This is a path-breaking study because it implements for a first time a randomised controlled trial in a trade study. Much of the literature on microenterprises focuses on supply-side constraints preventing firms from growing. However, there is a large gap for work on demand constraints. Thus, this project analyses demand shock driven by a specific policy intervention: matching firms with new export opportunities. The field experiment is in Fowa, Egypt with the authors examining firms that manufacture handmade rugs using wooden looms. The advantages to choosing this case study are threefold: i) technology is common across firms and relatively simple to understand; ii) there is a large sample size; iii) the research can explore the link between exporting and poverty reduction. The study is still ongoing and it will produce the first results in the first months of 2013. The feedback from the audience was very positive.
The final presentation by Eric Veroogen (Columbia) on technology spillovers was particularly satisfying because it brought to the table one of the most relevant trade issue in developing countries: technology spillovers. The project looks at the production of soccer skilots balls in Pakistan in trying to understand the role of technology spillovers and their impact on productivity and firms’ performance. Al three papers had a respective discussant, precisely for the last paper.
The discussants – John Page (IGC Tanzania and Ethiopia), Paulo Bastos (World Bank), and Shujaat Ali (Government of Punjab, Pakistan) – challenged the researchers with very relevant policy questions which created an extremely interesting debate in the spirit of Growth Week.
Ideas for growth session 4: Climate Change
Greg Fischer (LSE) presented on research using the Becker–DeGroot–Marschak method (BDM) to accurately estimate willingness to pay (WTP) for water filters in Ghana. The BDM is useful as it gets at the critical point of whether people will treat a good differently if they paid for it or not. The research compared the BDM to a ‘take-it-or-leave-it’ offer in order to directly estimate demand and also to estimate the effect of an AfriClay water filter. The BDM was better than a ‘take-it-or-leave-it’ mechanism because it provides much more precise information on WTP, and also lets us know more accurately how much different individuals benefit from the filter through a reduction in reported diarrhoea.
Susan Murcott (MIT), founder of Pure Home Water, an NGO founded in 2005 to provide safe household water in Ghana using AfriClay water filters, responded to Fischers’s presentation. The filters are given away for free via UNICEF, but sold for GHS 5 via Rotary. Murcott had two key questions: Should they charge at all, or if they should charge, at which price? Based on Fischer et al’s results it appears that GHS 3.5 may be the optimal price to charge to obtain a 25% reduction in diarrhoea. The discussion emphasised the critical importance of real-world experimentation to avoid the biases of the lab.
Mushfiq Mobarak (Yale) presented on communicating with farmers about the adoption of sustainable farming technologies, such as pit planting and compost application, which remain low in many African countries despite demonstrated large gains. The Malawi-based research focused on information failures and the use of social networks, such as interactions between farmers, as a persuasive source of information. The results of a survey of 4200 households in 168 villages show that incentives matter a lot to technology communication (farmers needed to have been given an incentive to initially learn about, retain over time, and then transmit the information to others). Poor farmers respond most strongly to incentives and female farmers respond more than male farmers. The research also concludes that there is a role for external agents to intervene in the process of learning, as information transmission is not automatic, especially about entirely new technologies.
Audio is unavailable for this session.
Ideas for growth session 5: Governance
The session was chaired by Gerard Padro i Miquel (LSE; IGC) and organized around research on understanding and improving electoral accountability. The first speaker, Macartan Humphreys (Columbia), presented a case study on citizen empowerment and political accountability in Uganda. The main purpose of the study was to understand how accountability and transparency affect voters’ decisions and alters politicians’ behaviour, once the latter are aware that their performance is being scrutinized prior to elections. The results of the intervention suggest that peoples’ election was largely independent of the score a politician got, whereas the peer assessment of politicians was very predictive of whether they were getting elected. Furthermore, people who thought that their representatives were good but their performance scores turned out to be low reported a downward adjustment in their assessment.
The second speaker, Pedro Vicente (Universidade Nova de Lisboa) presented research on how an NGO-conducted campaign against electoral violence can help undermine violence, drawing on a case study of Nigeria. The main results include: the anti-violence campaign increased the sense of security of the general population; the campaign increased empowerment to counteract electoral violence; the campaign increased voter turnout by 7-11 percentage points, and; it decreased the intensity of violence as reported by journalists.
The session followed with Michael Callen’s (UCSD/UCLA) evidence from a field experiment in Afghanistan on institutional corruption and electoral fraud. His research showed that a lack of constraints on election officials may be a serious obstacle to free and fair elections; political connections facilitate access to impunity, and; there is strong evidence that suggests that reducing fraud increases popular support. The discussions were enriched by a more practical perspective given by Barbara Smith (Carter Center) and Miriam Golden (UCLA). They suggested that working with domestic observers, although underfunded is of paramount importance in reducing fraud. Furthermore, they expressed concerns stemming from the field that even if electoral violence and fraud are effectively eliminated, political corruption may continue to distort outcomes and accountability.
Ideas for growth session 6: Human capital
Chaired by Imran Rasul (UCL; IGC), the Human capital session began with Orzaio Attanasio (UCL) presenting on a randomized early-childhood home-visiting intervention in Colombia. The study found that while provision of micronutrient supplements had no impact on measures of child development, a curriculum of stimulation designed to promote child development did have a significant impact on cognitive development. The results are suggestive that the mechanism of impact may be increased parental investment. It is also important to note that reliance in this intervention on local resources and existing infrastructure (including on women from the communities to conduct home visits) kept intervention costs low and contributed to community ownership of the program. Key for policy is evidence that if interventions improve human capital accumulation early in life this will not only raise human capital levels but also better enable individuals to exploit opportunities for further human capital accumulation later in life. Thus investments in human capital over the lifecycle are complementary and investments early on can have very high returns. However, when children accumulate early human capital deficits, these lags may be very difficult to reverse.
Tessa Bold (Goethe University Frankfurt; IGC) presented on experimental evidence of scaling up education reforms in Kenya. Specifically, Bold noted that while Randomized Control Trials from Western Kenya suggest that contract teachers may be a viable strategy for improving education outcomes, in a scaled up contract teacher intervention spanning the eight regions in Kenya, the Ministry of Education was unable to produce similar success. The intervention in fact compared the performance of student outcomes in schools where contract teachers were managed by an NGO with performance in schools where the Ministry of Education was charged with implementing the contract teacher program. While students in schools under the stead of the NGO did see an improvement in test scores, the impact of contract teachers administered by the Ministry of Education was essentially zero. These results are consistent with a line of criticism that questions the external validity of randomized control trials and suggests that large scale policy reforms may provoke hostile reactions from groups whose rents are threatened. A key implication is that institutions matter and that there needs to be more attention paid to experimental settings.
Finally, Karthik Muralidharan (UCSD) presented work on performance pay for teachers. Muralidharan discussed results from a 5 year long experimental evaluation of both group and individual teacher performance pay in a large representative sample of schools in the Indian state of Andhra Pradesh. The study found that students in schools under the individual teacher incentive program did significantly better than students in control schools throughout the duration of the program, and even in subjects for which there were no teacher incentives. These improvements in student outcomes were broad based and the intervention is cost effective when compared to reducing class size. However, when incentives were taken away, the effect in the year of discontinuation on student performance is basically zero, indicating a return to business as usual. The study suggests that compensation reforms have the potential to drive improvements in public sector productivity.
Ideas for growth session 7: Firm capabilities
Chaired by Chris Woodruff (University of Warwick; IGC), the well-attended session on Firm Capabilities was opened by Margaret McMillan (Tufts) who presented research on the impact of China on the Ethiopian leather industry , which has significant untapped potential as it is currently inefficient with outdated technology. Foreign investment is increasing. Key research questions were how active Chinese investment is in the leather value chain, and whether foreign firms are operating in isolation or if they are integrating with Ethiopian firms and people. Using survey methodology the research showed technology transfer, networking, and training occurring between Ethiopian and foreign firms.
Jonas Hjort (Columbia) presented on the topic of ethnic division and production in firms in Kenya. Research on the effect of ethnic heterogeneity in the private sector in developing countries is largely absent, so this research addresses whether ethnic discrimination distorts supply chains. Results suggest that teams made up of multiple ethnicities have lower output, with conflict increasing taste-based discrimination, and thus also increasing the difference in output between homogeneous and mixed ethnicity teams. Introducing team pay structures may help to reduce this gap. His research suggests that a non-taste-based explanation for lower output in mixed teams is unlikely and that taste-based discrimination responds to the macro-level political environment.
Oriana Bandiera (LSE) presented research on how CEOs use their time in India. The research sampled 364 CEOs of listed Indian manufacturing firms, and by collecting time use data found that the average CEO works 39hrs/ week, with the majority of time spent in in-person meetings. Firms’ productivity is higher when CEOs work longer hours but not all CEOs’ time is equally productive. Bandiera focused on the differences between domestically-oriented family firms and those which are multinationals or export-oriented, and showed that style differences in working practices may impact productivity.
Discussant Mulu Gebreeyesus Gebreyohannes (United Nations University) highlighted the practical policy concerns for the role of FDI in Ethiopia. He queried the overall benefit of FDI to Ethiopia, but suggested that perhaps it’s too early to make definitive conclusions. Discussant Naved Hamid (Lahore School of Economics; IGC) highlighted the interesting result from Hjort’s research that people are willing to discriminate even when it’s of an economic cost to themselves. Lower productivity and lower growth are possible consequences of ethnic conflict, and the micro focus of Hjort’s research is an important area to examine. He also noted the interesting point of the difference between CEO behaviour in domestic versus export-oriented firms.
Ideas for growth session 8: Finance
- Colin Mayer, Professor of Economics, University of Oxford; IGC Research Programme Director, Finance
- Sabri Oncu, Head of Research, CAFRAL, Reserve Bank of India, ‘Non-bank finance companies’
- Tarun Ramadorai, Professor of Financial Economics, Oxford University, ‘Mortgages and housing finance in developing economies’
- Rajesh Chakrabarti (Indian School of Business), ‘Institutional Trading Strategies and the Transmission of Shocks During Crises’
- Vikrant Vig, Associate Professor of Finance, London Business School
- Colin Mayer, Professor of Economics, University of Oxford; IGC Research Programme Director, Finance
Ideas for growth session 9: Macroeconomics
The session was chaired by Silvana Tenreyro (LSE; IGC), who gave the floor to Jaume Ventura (CREI, Universidad Pompeu Fabra and Barcelona GSE). Jaume’s presentation aimed at giving an overview of the interaction between two different ways of financing development in emerging countries: mobilizing domestic savings (financial reforms) and mobilizing foreign savings (financial or current account liberalization). The most important message of his research is that the success of financial liberalization depends on keeping domestic asset trade flowing, which in term depends on country characteristics and luck. With regard to the timing of such a policy, unless a country is very poor, policy-makers should wait until certain preconditions that stimulate domestic savers’ optimism are met.
The session continued with a presentation by Tony Venables (Oxford; IGC) who presented his views on the optimal steps needed to make the most out of natural resource revenues, especially in low income countries, where the model of Permanent Income Hypothesis and the Norwegian model of managing revenues are not particularly suitable due to these economies’ immediate development needs. Some of the most recurrent mistakes of resource rich economies are: relying on a boom-bust model of revenues and failing to save. Tony using resource revenues for current spending (consumption), capital spending (investment in the domestic economy) and foreign assets accumulation – with a combination that depends on the country’s characteristics, such as the ability to absorb extra domestic spending, government’s capacity for appraisal and implementation of projects, etc.
The last presenter was Dave Donaldson (MIT), whose research tries to understand the impact of reductions in barriers to international trade for consumers in remote locations, by looking at barriers at the intra-national level. Looking at a carefully selected basket of goods in Ethiopia and Nigeria, Dave finds that marginal costs from distance are very high, although the pass-through of marginal costs to prices generally reduces mark-ups. Furthermore, less social surplus from trade is available to remote consumers. Lastly, remote markets seem to be less competitive than markets closer to the source of products. The dynamics of the session were enriched by the policy-makers’ take on these issues, discussed by Nii Sowa (IGC Ghana) and Hamza Malik (State Bank of Pakistan).
Country Session 1: Ghana
The Ghana session at this year’s Growth Week was motivated by the Enterprise Map of Ghana book which has stirred an intense interest in discussing how to promote the growth of the private sector in the country since its launch in April 2012. Under the theme ‘Promoting Private Sector Development for Growth in Ghana’, the session brought together academics, key policy-makers as well as private sector practitioners and stakeholders. The presentations and discussions focused on what government is doing in terms of policies to promote the private sector; how the private sector is performing and responding to what government is doing; areas of policy gaps and knowledge gaps; and whether there are endogenous feedbacks from the private sector that influence the quality of business regulations.
One key message from the session is that there is a strong possibility that even though the private sector is influenced by government policies, there are feedback influences from the private sector on the quality of business regulations. There is also a need to find out where there is a critical size that the private sector must reach for its impact on governance to be significant. These conclusions were drawn from the preliminary result of studies being undertaken by Matthias Busse (Ruhr University Bochum) and Robert Osei (University of Ghana). The session also showed that while government efforts under the PSDS II programme were laudable, the private sector still experienced a lot of challenges mainly due to lack of infrastructure and a long term development plan. The government policies were presented by Joe Tackie (Ministry of Trade and Industry) while Nana Osei-Bonsu (Private Enterprise Foundation) spoke on behalf of the private sector.
The session was very well attended with about 45 participants and the discussions were very deep, passionate and comprehensive. One participant – the governor of the Bank of Zambia – commented that among all the workshops and conferences he had attended on the private sector this was the most serious discussion.
Country Session 2: Rwanda
The Rwanda session at Growth Week 2012 was chaired by Richard Newfarmer (IGC Rwanda). Rocco Macchiavello (Warwick University) presented preliminary results of IGC work in understanding the downstream structure of coffee value chains. Coffee washing stations play a crucial role in the coffee value chain in transforming commodity coffee into specialty coffee, a process that adds more than 100% value to the bean. A nation-wide survey highlighted three important operational constraints: access to finance, competition, and transport costs. Focusing on finance in particular, preliminary analysis shows evidence of moral hazard being a key factor; in particular, experimental data shows that low trust levels between actors in the value chain prevents pre or post financing agreements between buyers, service providers and farmers. Alex Kanyankole (National Agricultural Export Board) indicated that the government of Rwanda was aware of the risks posed by excessive competition in the sector, as it was noted that the number of stations has increased rapidly in the past few years. In order to increase traditional financing mechanisms on the coffee value chain, the government is encouraging financial institutions to study and gear products towards the sector value chain.
Jonathan Argent (IGC Rwanda) presented implications from the interim evaluation of the one cow project on the importance of providing training alongside asset transfer program. The GIRINKA – one cow – project is a government initiated program that aims to provide one cow to poor households in the country. As cows are provided by a range of actors with different array of support services, including training, the supply driven nature of such services can be used to estimate the impact of training in performance. Results from a comprehensive survey of beneficiaries show that having received any sort of training increases the probability of successfully breeding and selling calf and milk production.
Marguerite Duponchel (IGC Uganda) presented the results of a joint World Bank and IGC study on the impact of land titling on credit constraints. Potentially negative impacts of credit constraints on economic development have long been discussed conceptually but empirical evidence for Africa remains limited. The study assess the nature of credit constraints and the impact on productivity through a method of direct elicitation. The analysis focuses on the semi-formal credit sector, as the formal sector is almost inexistent while the amounts borrowed in the informal sector are small and used more towards consumption smoothing. Levels of credit rationing in the semi-formal sector are high (71%), with 32% related to supply-side factors (10% mentioning lack of collateral), and decreases with wealth. An endogenous switching model points towards significant impacts on productivity, suggesting that elimination of all constraints would increase value of total output per ha by about 17%. Whether, and to what extent an ongoing land registration program will be able to eliminate these constraints will be of considerable interest.
Garth Frazer (University of Toronto) presented results from his research that assesses the introduction of the EAC common external tariff (CET) and develops a set of priorities for tariff negotiations with the aims of poverty reduction and removing barriers to export growth. Frazer found that the price changes in key products, driven by the CET, caused a 4% reduction in the real income of low-income households in Rwanda. This is due primarily to the products on the Sensitive Items (SI) list which are subject to a tariff rates of up to 100%. The SI list was responsible for an increase in tariffs on agricultural products of 380%. Frazer found that reductions in the import tariffs on inputs under the move to the CET had a significant positive impact on Rwanda’s exports – it is plausible that this extends to domestic production too although this is something that would require further study. His findings suggest that a further 5 percentage point reduction in tariffs would likely result in a 5-10% increase in exports, mainly through lowered costs of imported inputs.
Audio is unavailable for this session.
Country Session 3: Pakistan
The Pakistan country session at Growth Week 2012 was chaired by Ijaz Nabi (IGC), and addressed by Honourable Finance minister Abdul Hafeez Shaikh as the key-note speaker. Shaikh highlighted that Pakistan’s economy is currently undergoing a transition allowing policy makers to take corrective measures to achieve Pakistan’s growth potential. He reviewed the past challenges that prevented growth spurts from being converted into sustained high growth over longer periods of time. He then outlined developments that are helping address those challenges, emphasizing the importance of democratic transition, strengthening of institutions, and progress on macroeconomic stabilization. He pointed out initiatives to strengthen state capabilities and international competitiveness to achieve high growth, linking them to on-going IGC work for sustained high growth in Pakistan. A large number of international researchers in the audience appreciated in particular the minister’s candour in acknowledging the challenges that remain to be addressed specially in the energy and power sector.
The session was divided under two sub themes: governance and firm capabilities. The first presentation under the governance theme was on the use of ICT to improve governance in the health sector in the Punjab. Michael Callen (UCSD/UCLA) presented early evidence of increase in supervisory visits to basic health units in the Punjab, due to the use of android cell phones. He discussed several factors, such as political connections, affecting the performance of supervisory officers. The second presentation under the same theme was on improving efficiency in public procurement. The presentation was made by Oriana Bandiera (LSE), describing the existing procurement patterns at the provincial level. She discussed the main challenges intrinsic in the procurement systems. She also outlined the various interventions being designed by research team to address issues of wastage and inefficiency.
The next presentation was under the firms capabilities theme by Theresa Chaudhry (Lahore School of Economics) on incentives schemes to improve worker attendance in the fan industry in Pakistan. She discussed the impact of tenure and social network on the response to incentives. The last presentation was by Eric Verhoogen (Columbia) on dispersion of technology in export oriented soccer ball firms. He discussed early results from his experiment in Sialkot, drawing policy lessons from baseline and follow up surveys of soccer ball manufacturers. The session was wrapped up by Resident Country Director, Naved Hamid (IGC). He appreciated the diversity of research and its linkages with the public sector, making IGC a unique platform to engage in policy oriented research. In the end, the Finance Minister concluded the session, pointing out ways of bringing out policy relevance of the research discussed in the session.
Country Session 4: Ethiopia
Chaired by John Page (IGC Ethiopia), the Ethiopia session at Growth Week 2012 focused on industry and agriculture. Måns Söderbom (University of Gothenburg) presented research examining the problem associated with high transaction cost to small manufacturing firms due to poor infrastructure, which creates market segmentation. Ethiopia is landlocked, with no effective railways and few navigable rivers. Using GIS data from the Ethiopian Road Authority and the census on firm data from the Central Statistical Agency, the research examined the relationship between an increase in roads from 26,550km in 1997 to 46,812km in 2009, and the concentration of firms in Addis Ababa reducing from more than 60% to 40%. Using cross sectional and panel data, the research estimated the effect of road sector improvement on enterprise. A positive relationship was observed between average size of firm entrants and infrastructure quality, as well as a high positive correlation of infrastructure improvement on value-added productivity. The key policy implication is that better roads may result in more and larger firms, but does not necessarily mean that building more roads is required for enterprise development. Mulu Gebreyesus (United Nations University) commented that suggesting causality from road network development to enterprise development is complicated, as it may also be a causal relationship in the other direction. Another issue raised by Mulu was that some important policy variables such as the government’s initiative to promote industrial clusters, the cost of labour and land should also be considered in such studies.
The second part of the session was a panel discussion on agriculture chaired by Pramila Krishnan (IGC Ethiopia; Cambridge) with His Excellency Ato Newai Gebre-ab (Chief Economic Advisor to the Ethiopian Prime Minister; Ethiopian Development Research Institute), Stefan Dercon (DFID), Doug Gollin (Oxford University), and Alemayehu Seyoum (IFPRI). The focus of the discussion was on public investment on agriculture, particularly on agricultural extension in Ethiopia. Seyoum focused on three related issues: fertiliser use, improved seed adoption and irrigation use in Ethiopia, and the return on fertiliser use. He mentioned that fertiliser use has risen to 60% (i.e. 60% of the smallholder farmers use fertiliser), but the adoption of improved seed and irrigation use is still very low in Ethiopia. The former is adopted by less than 30% of farmers, with irrigation use even more limited. On average the return to fertiliser is still very low (less than 1%) and application rates are not changing significantly. Finally he mentioned the significant heterogeneity in technology adoption among farmers that is not location-related. Gollin mentioned that this heterogeneity is well known in the economic literature, and noted that agricultural technology is location specific. Dercon reflected on yield growth in Ethiopia. He mentioned that national data do not show much intensification although there is high yield growth. The Ethiopian Rural Household Survey (ERHS) shows lower yield growth about 22% growth for all cereals mainly for maize and wheat and a modest increase in intensification in fertiliser and improved seeds. Finally Ato Newai made his reflection on some emerging future opportunities and challenges to Ethiopian agriculture. He mentioned labor shortage as one challenge and see mechanisation as one important option to address this problem. The issue of agglomeration, irrigation and commodity exchange are also important issues that are related to the performance of Ethiopian agriculture.
Country Session 5: Sierra Leone
Chaired by Omotunde Johnson (IGC), the Sierra Leone session featured Sylvester Gasopan Goba (Deputy Minister of Tourism and Culture of Sierra Leone), and Cecil Williams (General Manager of the Hotel and Tourist Board of Sierra Leone). They presented their views and the country’s challenges on developing tourism as a high-yield avenue of export diversification and key to the development of post-war Sierra Leone.
The presenters focused on the diversity of tourism possibilities in Sierra Leone and the main struggles to development of the sector. Among the binding constraints to realizing high returns from this promising sector are i) lack of coordination among different Government Agencies, ii) a very low marketing budget, iii) lack of human and institutional capacity, iv) limited government support, v) poor infrastructure, and vi) obsolete regulatory framework. Looking forward, the Hotel and Tourist Board, coupled with the Ministry of Tourism and Culture, see their role as facilitating coordination between the government and private sector in carrying through both practical and strategic reformations of the sector. The main issues to be addressed in this direction include providing access to tourism financing to the private sector, improving accessibility to tourism (mainly infrastructure) and diversify the tourism sector itself into including cultural tourism and active tourism.
Audio is unavailable for this session.
Country Session 6: India Bihar
The first half of the India Bihar session was chaired by Anjan Mukherji (NIPFP). The session opened with a presentation by Karthik Muralidharan (UCSD) who presented the findings of his joint research with Nishith Prakash (University of Connecticut) on the impact of Bihar’s flagship Cycling to School programme. He finds that the programme increased girls enrollment in secondary schools by 5 percentage points and had a greater impact for girls who lived further away from school. He highlights that the programme reduced gender gap by about 25 per cent and that it was at least as cost effective as other comparable programmes. Sushanta Mallick (Queen Mary University of London) stated that not only is Bihar’s credit deposit (CD) ratio significantly lower than the national average but also stagnant over the last few years. The stagnation in CD ratio is a clear indication of low level of financial intermediation which appears to be due to historical non-performing assets driving down the appetite of the financial intermediaries to give loans. He concluded that the positive link between finance and development is evident only in the context of agriculture and that measures such as the Kisan Credit Card and branch bank expansion at the district level tend to have a positive effect on per capita income in Bihar.
The second half was chaired by Robin Burgess (LSE and IGC) who gave a brief introduction for the policy round table on ‘Constraints to Industrial Development in Bihar’. T. Nandkumar (National Disaster Management Authority of India) said that the preconditions to industrial development are good governance and infrastructure. He highlighted that possible areas of investments are sugarcane, corn and power industry. R.K. Khandelwal (Government of Bihar) agreed with Mr Nandkumar regarding the constraints to industrialization. He highlighted that the present government has tackled some of these constraints through tax incentives, single window clearance among other initiatives. Shaibal Gupta (IGC and ADRI) said that the resurrection of Bihar is only a recent phenomenon and that Bihar was a non-functional state for a very long time. He pointed out that there is need to encourage local entrepreneurs, increase productivity of agriculture, update land records and carry out land reforms to push industrial development in Bihar. Maitreesh Ghatak (LSE and IGC) argued that Bihar cannot jump agriculture transformation since that is a precondition for industrial development, which in turn needs land reforms. Prabhat P. Ghosh (ADRI) said that Bihar should focus on small and micro industries as this is where Bihar’s comparative advantage lies.
Country Session 7: Tanzania
Chaired by Country Director John Page (IGC Tanzania) and Resident Director Charles Mutalemwa (IGC Tanzania), the Tanzania country session focused on was opened by Stefan Dercon (DFID; Oxford) who gave an opening presentation on global food price increases and associated consequences, noting the sharp increases of 2008 and the resulting impact on poverty. Dercon discussed the measurement of these poverty increases by various organizations, but mentioned that the numbers may not take into consideration the responses by individual people as well as governments to food price increases. He also noted that some may be applying what is happening in local markets and attributing this to global prices/markets rather than local economic conditions. It thus may be quite important to be suspicious about the aggregate data and look closely at the local data. Better methods are also needed to assess what is going on. Following Dercon’s presentation, Christopher Adam (Oxford; IGC) presented on fiscal and monetary policy responses to global food price shocks with regard to recent Tanzanian experiences. As part of the IGC-Tanzania country programme, Adam and his colleagues are examining to what extent well-designed fiscal and trade policies can benefit monetary policy. Traditionally, central banks work on the assumption that optimal monetary policy ignores food prices, as these are determined on the global market. Central banks instead target the price rigidities in the non-food sector. However, Adam and his colleagues are examining to what extent food and energy prices are spilling over to inflation, particularly as food and beverages comprise 51% of the consumption basket in Tanzania. Adam mentioned that at present in Tanzania, monetary policy remains relatively conventional, with the Bank still focused on core inflation, though there are possibly high costs to this, which is not yet clear.
Following these presentations, Pantaleo Kessy (Bank of Tanzania; IGC) and His Excellency, the Former President of Zanzibar, Amani Karume, provided their comments as discussants. Kessy mentioned that the way the Bank responds to rising food prices is influenced by the mandate of all central banks, that is, to produce low inflation. The Bank also must manage pressure from both the public and politicians to act. This is hardest in the case of supply side shocks, which are most difficult to manage. The Bank tries to manage expectations and to disentangle second round effects of supply shocks (which can be influenced by expectations) from direct shocks.
Former President Karume mentioned that politicians in Tanzania refrain from meddling with the Central Bank, as it is an independent entity, but he acknowledged that politicians are indeed very concerned about stabilization of food prices. In order to control food prices locally, Karume noted that the government in Zanzibar works closely with private importers to reduce taxes by the amount necessary to ensure that a given staple commodity is both stable and affordable. He acknowledged that such intervention is not sustainable in the long-run, as it results in lost revenue that could have been used for development programmes. He welcomed the inputs from researchers to alternative ways to stabilize food prices in the future.#
Country Session 8: Mozambique
- Ronald Fischer, Professor, Universidade de Chile, ‘Mozambique infrastructure, PPP contracts and appropriate oversight and regulation’
- Vasco Nhabinde, Professor, Eduardo Mondlane University
- Robert Conrad, Associate Professor of Public Policy and Economics, Duke University, ‘Fiscal Policies in Mining in Mozambique’
- Vanda Castelo, Ministry of Planning and Development
Country Session 9: Uganda
The session was chaired by Tessa Bold (University of Frankfurt; IGC Uganda), lead academic for IGC Uganda. Tessa highlighted the themes and on-going and prospective projects of the newly launched IGC country programme in Uganda.
Andrew Zeitlin (Oxford) opened the session focusing on community-based monitoring of public services as a possible solution to accountability problems when state oversight is limited. Combining field and lab experiment in 100 primary schools, the results show substantial impacts of participatory monitoring has a positive impact on pupil test scores as well as significantly decreases pupil and teacher absenteeism, while the standard community-based monitoring, without the participatory design, has small and insignificant effects. The results have implications for the design of community- based monitoring policies, and help to explain their variable effectiveness across contexts.
David Yanagizawa-Drott (Harvard) then presented an investigation of the mechanisms that determine the prevalence of fake antimalarial drugs in local markets, their effects, and potential interventions to combat the problem. Using samples from a large set of local markets in Uganda the authors find that 37% of the local outlets sell fake antimalarial drugs. A market-level experiment revealed evidence that an intervention to introduce authentic drugs reduced prevalence of fake drugs by half. The study also provides suggestive evidence that misconceptions about malaria lead consumers to overestimate drug quality, and that opportunistic drug shops exploit these misconceptions.
Audio is unavailable for this session.
Country Session 10: Bangladesh
Chaired by Mushfiq Mobarak (Yale; IGC), the Bangladesh session started with Mark Rosenzweig (Yale) presenting his work on the hidden costs of arsenic contamination in rural areas of Bangladesh. He finds that young men with higher arsenic contamination have lower schooling attainment and are less likely to have skilled occupations. Reducing arsenic contamination to USA’s average would enable Bangladesh to increase its productivity by as much as 9%. Elimination of arsenic contamination could also lead to a rise in per household benefits of $94 per year, which over 20 years would amount to $1000-$1400 (for discount rates up to 8%). This can provide a benchmark of investment that could be made on elimination of arsenic contamination in the country, and which could still be beneficial merely on economic grounds.
Kala Krishna (Penn State University) presented her on-going work on the possible impact of potential policy changes regarding the garment export sector of Bangladesh. She and her colleagues estimate that had the preferences for Bangladesh garment exporters been completely removed, it would not only risk the garments sector of Bangladesh, but would also lead to welfare loss of 481 million USD for the EU, and 69 million USD for the USA. Trade facilitation could thus aid not only a developing country, but would also ensure welfare gain for the country providing the facilitation.
Lack of supervisory skills is generally perceived as a bottleneck in increasing productivity in the large garments sector of Bangladesh. In an attempt to precisely comprehend the gains from possible training programmes, Christopher Woodruff, along with Rocco MacChiavello and Andreas Menzel (University of Warwick), evaluate the impact of a supervisory training programme provided to female garment workers in Bangladesh. From this on-going study, they find that a few weeks of training provided can let the trainee operator outperform even the existing experienced supervisors. Also, at a more disaggregated level, female trainees tend to outperform male trainees, as well as the existing supervisors. The challenge, however, as identified by the discussant of the paper Md. Ghulam Hussain (Secretary, Ministry of Commerce, Bangladesh) remains in implementing such training programmes on a larger scale.
Nasiruddin Ahmed (Chairman, National Board of Revenue, Bangladesh), Shamsul Alam (Member, Planning Commission, Bangladesh) and Riti Ibrahim (Secretary, Statistics Division, Ministry of Planning, Bangladesh) also provided their comments as discussants in the session.
Country Session 11: South Sudan
- Aggrey Tisa, Economic Advisor to the President, ‘Recent political developments and implications for growth’
- Utz Pape, In-Country Economist, IGC South Sudan, and Peter Biar Ajak, Deputy Country Director, IGC South Sudan, ‘Current situation and challenges by IGC Country Team’
- Luka Biong Deng, Director, Kush Institute
- Isaac Bior, South Sudan Economic Association
- Kenyi Spencer, Economist, SSEA and Central Bank Board
- Samson Wassara, Associate of Political Science, University of Juba
- Pierre Sauve, World Trade Institure, University of Bern
Country Session 12: India Central
The India Central country session at Growth Week 2012 was chaired by Anjan Mukherji (IGC India-Central). Three projects funded by the IGC India Central programme were presented, following which a policy roundtable discussion on the Public Distribution System (PDS) in India was held. The session also included a briefing on ‘Ideas for India’ by Ashok Kotwal, Editor-in-Chief.
Nidhiya Menon (Brandeis University) presented the findings of her project, which evaluates the infant and child health implications of exposure to fertilizer agrichemicals in water. She finds that a mother’s exposure to agrichemicals in water in the month of conception increased likelihood of infant mortality and malnutrition. The research highlights the tension between increased use of fertilizers to improve agricultural yield and the subsequent negative child health effects, and points to possible ameliorative strategies including reliance on alternative farming techniques to increase yields, health interventions for exposed mothers and low birth weight babies, and so on. P.P. Ghosh (Asian Development Research Institute) commented that he found the magnitude of the effects alarming, and recommended that the authors consider redoing the study for individual states using the same methodology in order to better capture the regional variations.
Farzana Afridi (Indian Statistical Institute, Delhi Centre) presented results from her ongoing research which analyses whether female representation in local governments affects the implementation of the National Rural Employment Guarantee Act (NREGA) in India. She finds that female leaders may be more vulnerable to capture of power leading to governance failure and corruption, and that political and administrative experience is key to improving their performance. The findings imply that capacity building and institutional support are critical for effectiveness of affirmative action policies. Rajeev Malhotra (Ministry of Finance) noted that the conclusions are counter-intuitive and not something that policymakers would hope for. However, he noted that it is encouraging that there is evidence of learning by doing, and that capture of power can be avoided by policy programmes promoting capacity building and training for first time women leaders.
Nirupama Kulkarni (University of California, Berkeley) presented her research investigating whether government guarantees distort market competition during a financial crisis. Comparing public and private sector bank performance in India during the crisis period of 2007–09, the study finds that access to government guarantees provides stability, which results in crowding out of private sector during crisis periods. This is consistent with greater market discipline of private sector banks and lack thereof of state-owned banks. Moreover, the changes seem to be permanent and do not revert following the crisis. Rajesh Chakrabarti (Indian School of Business) said that he agrees with the basic premise of the paper that there is greater faith in public sector banks due to government guarantees, and this attracts deposits rather than efficiency. However, he questions the suitability of the paper’s measure of systemic risk in the Indian context wherein a majority of the shareholding of the public sector banks remains with the government, and survival of the banks is not threatened in a crisis.
The session concluded with a roundtable discussion on the challenges associated with the Public Distribution System (PDS) in India. Ashok Kotwal opened the discussion by elaborating on some of the most common debates such as corruption in the PDS, the universalisation of food security through a right to food bill, cash transfers as an alternative to the PDS and so on, and invited the panelists to speak to these issues. Reetika Khera (IIT Delhi) presented evidence to suggest that there was a ‘revival’ of the PDS or a reduction in corruption and leakages resulting in an increase in coverage and that the ‘hard sell’ on cash transfers should be reconsidered based on the results of an all India survey that concludes that the willingness of households to accept cash is low in states such as Tamil Nadu where the PDS functions well. Bharat Ramaswami (ISI, Delhi) discussed the question of the fungibility of in-kind transfers and presented evidence to suggest that the PDS transfer should be equivalent to an income transfer, and thereby the question should be about the most effective mechanism for this subsidy or transfer. T Nandakumar (National Disaster Management Authority) suggested that policy makers might want to consider a hybrid model, as there is a large variation across states in grain production, procurement and the performance of the PDS and that states should be able to experiment and adopt the most appropriate mechanism.
Country Session 13: Zambia
Alan Hirsch (IGC-Zambia) chaired session 12 at Growth Week 2012 and introduced Kayula Siame (Private Sector Development Reform Programme) and Kelsey Jack (Tufts University). The PSRP presentation highlighted the achievements and challenges of improving the business environment in Zambia. This was discussed by Rosetta Mwape (Zambia Association of Manufacturers). With the key objective of reflecting the Zambian government’s commitment to improving the business environment and to reduce the cost of doing business, the PSDRP has seen Zambia’s ranking in ease of doing business improve and the creation of a credit guarantee scheme for Small to Medium Enterprises(SMEs) during its first five years of existence. The licensing processes of business has also drastically been improved, and coupled with the creation of a one stop border post the first of its kind in Southern Africa; there has been a drastic reduction in delays in customs clearance time. The main challenge of the programme has been its mainstreaming into all relevant government departments and inertia to change in the bureaucratic system. There are also concerns from the private sector on their inadequate representation in the reform programme. This has resulted into limited ownership thus affecting its implementation pace. Notwithstanding that, political commitment from the Ministry of Commerce has been immense which will see its sustainability.
Kelsey Jack presented research investigating the adoption of agro-forestry in Zambia in the context of the Reduced Emissions from Deforestation and Degradation Plus (REDD+) campaign. Discussed by David Kashole (Zambian Ministry of Lands and Natural Resources), study presents the preliminary findings of the required incentives to encourage the adoption of agro-forestry by farmers in the Eastern Province of Zambia. The research found that both input costs and short term rewards (incentives) affect the participation of farmers into the programme. The adoption of REDD+ approaches that involve land use depend on getting the incentives to farmers’ right. Further, cost effectiveness of the programme to adopt REDD+ approaches depends on both fixed and variable costs, and cannot avoid the legal issues of land tenure. Continued work from this study is expected to feed into the government’s climate change policy.
Audio is not available for this session.
Country Session 14: Myanmar
Robin Burgess (IGC) opened the Myanmar County Session at Growth Week 2012, in which three delegates from the Centre for Economic and Social Development (CESD) at the Myanmar Development Resource Institute presented on pressing reform issues in the country. As IGC engagement in Myanmar is in its early stages, the session was used effectively to provide some information on the state of play in Myanmar and identify potential areas of work where research would be of particular use to policy-making efforts in the country.
Zaw Oo (CESD), provided a brief overview of the political and economic context, highlighting recent political reform initiatives from President Thein Sein, the political participation of Daw Aung San Suu Kyi, as well as the persistent challenge of negotiating peace with ethnic minority groups in the border states. Dr Oo suggested that fiscal management and structural transformation including broad based growth, rural development and a strengthened private sector were pressing issues and areas that provide an opportunity for collaboration with the IGC. He noted, however, that capacity in government, resource constraints and data quality remain significant challenges to evidence-based policy-making. In addition, issues of political economy are of critical importance and particular attention given to the sequencing and prioritization of reforms is needed.
Soe Nandar Linn (CESD), spoke about the sub-national budgeting process in Myanmar and highlighted initial successes in fiscal and monetary reform including recent reductions in the budget deficit, the exchange rate unification and improved public access to budgetary information. She emphasized the need for further progress in several areas including horizontal resource allocation rules and regulations governing transfers from central to state and regional governments, more systematic formulation of the sub-national fiscal plan, more equitable resource sharing and participatory planning for regional development. Min Zar Ni Lin (CESD) spoke about labor migration in Myanmar and the impact of remittances, which may be contributing to currency appreciation. He noted that remittances are transmitted through informal channels, and are a crucial source of income to many in Myanmar, particularly for emergency needs and as a safety net. However, he noted, families mainly rely on remittances for consumption rather than investments in, for example, agricultural production or education. Min Zar Ni Lin suggested that the impact of remittances on dependent families may in fact be to facilitate unproductive investments and irresponsible spending.
Audio is not available for this session.
Joint Country Session: Mozambique, Tanzania and Uganda
The session was chaired by John Page (Brookings Institute) and was opened by Tony Venables (Oxford). Venables drew from international experiences to identify the points and issues to be thought at this particular point in time. He stressed the critical importance to manage expectations of both citizens and governments in these countries. Governments will in addition need to anticipate and prepare for a large demand shock and associated boom as foreign investment flies in. Mark Henstridge (Oxford Policy Management) highlighted the fact that the resource scene is changing and the importance to put a realistic scale on the energy discoveries and on the boom that will be associated. Two different perspectives are to be considered the firms’ and government’. Complex sets of decisions on both side will lead relatively long time horizon.
Louis Kasakende (Bank of Uganda) emphasized the importance of understanding the difference between proven reserves and what is commercially recoverable (with an estimate of 35% of the Ugandan reserves). Critical decisions are to be made on both infrastructures –build a refinery or a pipeline- and macro-economic management – deal with the volatility in international prices, ensure the management of increased governmental expenditures and avoid a Dutch disease syndrome.
Claudio Frischtak (IGC) presented the Mozambique case. Resource discoveries of both coal and natural gas are of significant amount and Mozambique could become a new energy hub. Claudio emphasized the non-trivial issue of managing rising expectations and increasing asset prices in the short term in the absence of perceived life improvements for citizens. In addition, Mozambique will have to prepare for a wise use of these new resources on both and internal and external markets.
Plenary: Entrepreneurship, firms and growth in developing countries
Alan Hirsch (IGC) opened the first plenary session of Growth Week 2012 and introduced Chris Woodruff (University of Warwick and IGC) who presented a concise and thorough summary of lessons learned about microenterprise dynamics from randomized control trials. Woodruff organized his survey of the literature using a standard production function, and drew out lessons from a diverse set of interventions targeting capital (K) and labour (L) constraints, as well as those designed to improve total factor productivity (A).
Citing work in Sri Lanka, Mexico and Ghana, Woodruff explained that there is reasonably robust evidence that returns to marginal investments of capital are very high on average in microenterprises, though with a great deal of heterogeneity across firms within samples. Interestingly, these returns are not accompanied by employment growth. While acknowledging that work investigating the impact of microfinance generally finds only insignificant returns, Woodruff questioned whether these studies had enough statistical power to capture an impact. There is not much as much work, in comparison, on the impact of labour constraints on of microenterprise growth, but a study in Sri Lanka found that only a small percentage of firms respond to temporary incentives to hire workers. This study did find some evidence that temporary subsidies may spur further employment growth in a small percentage of firms. Finally, Woodruff highlighted the large amount spent on microenterprise training programs around the world, and particularly in low-income countries, despite mixed evidence of their impact. On average, training appears to have modest effects on microenterprise growth, though Woodruff again noted that in general these studies are under powered. Small sample sizes and heterogeneous samples make it hard to detect significant effects. There is a trade-off, however, as while a more homogenous sample may make it easier to measure a statistically significant effect, it also may reduce the external validity of the study. Finally, Woodruff discussed studies on the impact of formality and highlighted that at the upper tail of the distribution, formality has a large effect on a small number of firms, though this is not observed at the median.
Woodruff’s presentation was followed by a lively question and answer round, during which Woodruff acknowledged that, in many cases, relaxing constraints may not have a large impact on dynamic growth of microenterprises simply because a large portion of firms may not have aspirations grow. However, Woodruff suggested that many micro-entrepreneurs are likely looking to increase their income even if only by a small amount, and questioned why firms weren’t making decisions which would facilitate this. He noted that in the developing the world, the most significant division is between firms which are reliant on own or family labour, versus those that make the jump to hiring non-family labour. Woodruff responded to another question regarding sizes of firms in different sectors and emphasized that while some sectors may be more suited to only large scale enterprises in others, such as retail, a continuous distribution of firm size is observed. When questioned on the implications of this portfolio of work for poverty, Woodruff pointed to the marginal and zero-equivalent effects of capital shocks on enterprises ranked at the bottom of the profit distribution at baseline. He suggested that for these micro enterprises perhaps injections of capital is not enough, and must be matched by investments in human capital as well.
Plenary: Trade, firms and products in the development process
Richard Newfarmer (IGC) opened the Trade plenary and introduced Eric Verhoogen (Columbia and IGC) whose presentation addressed two questions: What can policy-makers learn from research in international trade? and What can researchers learn from the concerns of policy-makers? To address the first question, Dr Verhoogen provided a brief history of trade theory, beginning with traditional thinking focused on sectors, through “new” trade theory, embodied in Paul Krugman’s work, to “new new” trade theory, spurred by access to increasingly detailed data on firms and plants, which documented heterogeneity across firms. From here, Verhoogen moved on to the new frontiers of trade theory, discussing recent work on multi-product firms and product quality made possible by new datasets. In specific, he pointed to evidence of a strong correlation between the number of products that firms export and the number of destination countries they sell to, that value of trade is concentrated among multi-product, multi-destination firms, and to evidence that better firms endogenously choose higher-quality inputs to produce higher-quality outputs. This literature is particularly relevant to developing countries because it suggests that firms need to upgrade quality in order to be successful in selling to rich countries. The key message from research for policy-makers is to think about firms, products within firms, and activities (tasks) that go into making products within firms, rather than just about sectors.
Policy-makers are concerned about the links between the pattern of specialization and growth – in other words, whether what a country produces affects how fast it grows. This concern has not been central to the mainstream academic literature, which focuses on static issues, but Dr Verhoogen suggests it should be: researchers should take the signal from the policy community. To ground this discussion, Verhoogen utilized Mexico as a case study. Despite undertaking an ambitious program of reforms between 1985 and 1994, in line with recommendations from international institutions, Mexico’s growth performance has been disappointing. Noting that there are many potentially valid explanations for this (one common one being the expansion of China), Verhoogen suggested that links between the pattern of specialization and innovation also played an important role. The Mexican manufacturing sector specialized in what was perceived to be its comparative advantage: less skill intensive and less capital intensive activities, both across and within sectors. It appears employment growth was low particularly in those less skill and capital intensive activities. These activities also displayed low rates of innovation and it is very difficult to sustain robust growth without a robust rate of innovation. If not China, another lower-wage country could have emerged to compete with Mexico.
In Mexico’s case, it seems there was a tension between short-term comparative advantage and the rate of innovation and growth. Dani Rodrik, Ricardo Hausmann and others have suggested that in an open economy, if a sector has greater dynamic learning potential, it may be optimal, under certain circumstances, to impose a tax or subsidy to push resources toward that sector, at the cost of static inefficiency. Hausmann, Hwang and Rodrik measure product sophistication using trade-flow data and show that it predicts future growth, conditional on current income. Thus the key message from the policy community for researchers is to examine the links between the pattern of specialization in products or tasks and innovation.
Dr Verhoogen posed a research question: how does knowledge and productivity of firms evolve endogenously based on their investments in learning and on what they produce? Verhoogen conjectures that producing high-quality goods tends to generate technological improvements. While if there are externalities in the learning process, there is a potential case for industrial-policy interventions one important lesson of new work in trade is that interventions should not seek to provide blanket support for entire industries. The key task is to find creative ways to promote innovative activities, without presuming to have knowledge about where in particular the next innovation will come from. We need more research on what works in promoting innovation.
Plenary: Natural resources
Chaired by John Page (Brookings and IGC), the Natural Resources plenary session featured a presentation by Bob Conrad (Duke), “Good News for Growth in Natural Resource-Rich Economies: There’s Nothing Special about Natural Resources.” Conrad explained that there is much talk about special regimes for managing natural resources, but he thinks that the “unique” characteristics of oil and mining industries may not matter for policy. There is of course volatility and uncertainty in prices, but are natural resource prices any more risky relative to other commodities? Conrad explained that there is no strong indication that this is the case and also noted that natural resource prices are sector specific and that the risk can be diversified. The question of volatility needs to be asked in the context of relative prices and relative volatility.
Conrad also explained that when a country has natural resources, its government may take one or more (usually at least two) of the following roles: resource owner, tax collector, investor, and/or mine operator. In his discussion of these roles, Conrad highlighted the issue of royalties. He mentioned that royalty paid needs to be equal to the marginal social cost of extracting reserves, and if this is not zero, it may be efficient to use a royalty. There are a number of reasons to believe that the marginal opportunity cost of reserves is not zero: extraction may be valuable in the future, the government may want to ensure that some reserves are left, and there is an opportunity cost to extraction, as people may have alternative uses for the land (farming, fishing, building houses etc). Countries with natural resources own something of value at the margin, and they should charge a royalty if they believe the extraction of reserves will reduce the wealth of the economy at the margin. If there are rents generated, the country should tax these in all sectors, rather than treating natural resources as a separate sector.
A common question for governments of natural resource rich countries is what to do with the revenue generated. Conrad made it clear that the total revenue accrued from natural resources is not all income, which is a common but incorrect assumption. Instead, governments must understand that income = revenue minus depletion, and thus they must consider depreciation when determining the income available for saving or other uses. This consideration is the same for all assets, both state and private, and is not unique to natural resources. Conrad emphasized that the government should report this depreciation and should save the income it earns in order to protect its capital stock. Countries need to be realistic and need to consider all of their assets, including natural resources. Natural resources can help boost growth, but a given government should not try to build its entire economy on natural resources. Conrad concluded by noting that his “good news” is that governments can treat natural resources just like any other asset. This means that there is thus potential for more rational, more efficient allocation and a fiscal regime that can help improve growth.