Monday, November 14, 2016

International cooperation, ethics and climate change

In pursuing meaningful sustainable development, and investing in conservation and redressing the environmental damage caused by decades of neglect, we need to better explore and understand the role of international cooperation and why human values and ethics are central to this debate.

International cooperation. A key ingredient for generating a sustainable development path will have to be a significant strengthening of the current mechanisms of international cooperation, which have turned out to be insufficient to meet the global challenges that we face. The process of globalization is unfolding in the absence of equivalent international institutions to support it and harness its potential for good.

There is no global environmental authority, for instance. Policy on the climate change front is being done via ad-hoc approaches involving elements of international cooperation, voluntary compliance, and large doses of hope. In the absence of a body having jurisdiction over the global environment with corresponding legal enforcement authority, the international community has, de facto, abdicated management of the world’s environment to chance and the actions of well-meaning states. Even the 2015 Paris Agreement, bringing together 175 countries pledging reductions in emissions, if implemented in full, will not prevent a warming in excess of 2°C, the threshold recognized by climate scientists as necessary to avoid “potentially devastating consequences” (Stern 2016).

Whether we focus our attention on climate change or other global challenges, the fact is that major planetary problems are being neglected because we do not have the mechanisms and institutions strong enough to deal with them.

Effective, credible mechanisms of international cooperation, that are perceived to be legitimate, and capable of acting on behalf of the interests of humanity—rather than those of a particular set of countries—are essential if the world is to meet the challenge of striking the correct balance between concern for the environment and the policies that must underpin such concern, on the one hand, and the need to ensure that the global economy develops in a way that provides opportunities for all, particularly the poor and the disadvantaged, on the other.

It is an open question whether the existing system of sovereign nation states is capable of achieving this level of cooperation, or if such a system will require a more fundamental restructuring involving greater levels of national accountability to ensure outcomes that will better serve present and future generations.

Ethics and human values. Finally, no strategy aimed at fostering the emergence of a sustainable development path would be complete without a fundamental rethinking of the human values that have driven much of the development process during the past century. A considerable body of academic research in recent years has examined the issue of the correlation between growing income and human happiness. The question itself might have appeared slightly quaint a couple of decades ago, when economists in academia and policymakers in government and international financial organizations more or less accepted as an article of faith that higher growth and income would always be desirable and would increase human welfare, and along with it, happiness.

Several insights, however, have contributed to a gradual change of perspective. First, the realization that, however beneficial might have been the several decades of robust post-war economic growth in improving living standards, the global economy was beginning to run up against environmental constraints which could actually be measured.

Second, psychologists, newly empowered with analytical tools developed in other sciences, were able to show that human happiness was correlated with income only up to a certain level. Money seemed to be crucially important for happiness when basic material needs had not been met. But once these had been satisfied, the sources of happiness shifted to other concerns, reflecting deeper spiritual aspirations, including friendship, relationships, a sense of purpose in life, security, among others.

The above observations suggest the need to broaden the definition of what constitutes “well-being” and investigate more closely the relationship between increasing market activity and the welfare of the people participating in the economic system. One starting point would be to establish a clearer mental demarcation between the concepts of “growth” and “development.”

The first is essentially a quantitative concept which captures the expansion in the scale of the economic system, while the latter refers to qualitative changes in this system and in its relationships with the environment and other aspects of life in the community. Properly understood, economics should concern itself less with how to add to the physical dimension of the economic system and more with the long-term welfare of the community whose interests the “system” is ultimately intended to serve.

Monday, August 1, 2016

Ensuring a sustainable development path

I’ve suggested recently that although high economic growth in recent decades has greatly improved average life expectancy, infant mortality, and other leading indicators policymakers and development practitioners were still worried about the sustainability of these trends and whether people in developing countries would eventually enjoy the high standards of living of high-income countries. This, against the background of a planet under increasing stress, particularly as a result of climate change. In this blog, I explore some of the actions needed to sustain our global economy.

Climate change risks. A key finding of the latest scientific work on climate change is that the annual cost of introducing control measures for greenhouse gases is far smaller than the potential cost of uncontrolled climate change. Duly aware of the margins of uncertainty associated with such calculations, the UN’s Intergovernmental Panel on Climate Change (IPCC) has, in the past, provided estimates suggesting that stabilizing greenhouse gases by 2030 would slow global economic growth by slightly more than 0.1 percentage points per year.

The risks of inaction, however, are huge. It has proved difficult for computer models to deliver robust cost estimates for scenarios that lie outside the range of recent human experience. A rise in temperatures of 3°C with respect to pre-industrial levels, for instance, has not been seen on the planet in the last 1 million years, though this is the envisaged increase consistent with the pledges made by 175 countries in Paris in 2016.

So, one central element of the solution will be implementing a transition to a low carbon economy that will involve the use of cleaner fuels, including solar-photovoltaic and onshore-wind technologies, which have become increasingly competitive and which will have a number of other collateral benefits, such as preventing 2 million premature deaths in India and China every year linked to air pollution.

We will also need to invest in energy infrastructure, to replace aging capacity, and meet growing global energy demand, but also to boost efficiency. More generally, it is estimated that over the next 20 years global investment in infrastructure will be in the region of $5-6 trillion per year, three quarters of which will be new infrastructure in the developing world. Since well over half of total greenhouse emissions stem from investment in and use of various infrastructures, there is an overwhelming need, going forward, for all new such investments to be clean and green, as called for by Stern (2016) and others.

Conservation. We will also have to invest in conservation and in redressing some of the damage done to the environment through decades of neglect.  According to the Earth Policy Institute something like US$100 billion should be spent annually to protect topsoil in croplands, to stabilize water tables, to restore fisheries, and protect biological diversity. This sum of money is small in relation to the size of the global economy and it is certainly very small in relation to the trillions made available by governments in some of the largest countries to deal with the short-term effects of the last global financial crisis.

Energy subsidies. Another key dimension of this debate concerns the need for better utilization of existing resources, to promote opportunity and shared prosperity, particularly in the developing world, rather than to create distortions and worsen income distribution. An eloquent example of this is provided by a recent IMF study (2015), which factors in the cost of negative externalities from energy consumption (e.g.,  global warming, pollution) according to which energy subsidies (for petroleum, electricity, natural gas and coal) amount to some $5.3 trillion per year.  This astronomical sum is equivalent to about 6.5 percent of global GDP or somewhere between 5-35% of total government revenues, depending on the region.

The benefits of gasoline subsidies are the most regressively distributed in the world, with over 60 percent of the total accruing to the richest 20 percent of households.  If such subsidies were removed, the authors of the IMF study estimate that it could lead to a 21 percent reduction in CO2 emissions.  It could also generate positive spillover effects by reducing global energy demand and thus have a tangible impact on mitigating the effects of climate change.  Indeed, it would be difficult to come up with a public policy that is more socially and environmentally destructive than subsidizing energy consumption.

Technology. Obviously, technology can also play a key role. More efficient use of energy has reduced the size of energy consumption in global GDP by more than 30 percent in the past 25 years. Much more can be done in this area, particularly by resort to new technologies of energy conservation and renewable energy, including—as noted earlier—greater use of solar power, wind, and alternative fuels.

Simultaneously, a number of studies are underway in leading research centers to identify a range of human interventions which could either remove CO2 from the atmosphere or reduce the amount of sunlight that comes to the earth, under the general heading of “geo-engineering.” Some scientists think that, over the longer term, they could play a necessary, complementary role to other measures aimed at precipitating the necessary changes in human behavior which have been too slow in coming. For now, however, the consensus seems to be that putting too much emphasis on “technological fixes” could result in complacency, since politicians will always be receptive to solutions which do not, in the end, involve sacrifices on the part of voters, such as, for instance, higher carbon taxes or—God forbid—changes in patterns of consumption or lifestyles.

While this technological potential undoubtedly exists in the long term, its development will require global institutional arrangements, efficiencies of governance, financial resources and a culture of change in political and social systems, all of which are lacking at the present time. The immediate issue for sustainability is less one of ultimate limits and technological possibilities, but rather our present slow pace of change when faced with growing social and environmental challenges.

We have technological solutions for most our environmental problems, but are not applying them at anywhere near the speed necessary to avoid future crises. In the next (and last) blog on the sustainability of our development path I will address two important issues: the role of international cooperation and why human values and ethics are central to this debate.

Monday, June 27, 2016

Are we travelling on a sustainable development path?

Global development as a universal objective to improve people’s social and economic wellbeing is a relatively recent concept.

It was first embodied in the United Nations Charter, signed in San Francisco 71 years ago this week, which stated: “the United Nations shall promote higher standards of living, full employment, and conditions of economic and social progress and development.” In time, at least among practicing economists in academia and policymakers in government, “development” came to be seen as improved economic opportunity through the accumulation of capital and rising productivity.

The implicit assumption here was that economic growth would lead to rising living standards, increases in life expectancy, reduced mortality, and a reduction in the incidence of poverty.

And so, between 1950 and 2014, as world GDP per capita expanded at an annual average rate of 2.1 percent, this trend was associated with a remarkable evolution in three key indicators of human welfare. In the half-century between 1960 and 2014, infant mortality fell from 121 to 34 per 1000 live births; average life expectancy at birth rose from 52 to 71 years, a 36 percent increase which is nothing short of spectacular; and adult illiteracy fell from 53 to 16 percent. Equally impressive was the sharp drop in the incidence of poverty: data show that between 1990 and 2015 the number of people living in extreme poverty fell from about 2 billion to slightly over 700 million.

In parallel to the encouraging trends in development, a growing number of economists and scientists began to ask if the processes and policies underlying our development path were sustainable. Among environmentalists, in particular, the focus has been on climate change, biodiversity loss and pollution. That the earth has self-correcting mechanisms, that the physical processes underpinning changes in the environment have huge inertia, has not hidden the growing consensus in the scientific community that current trends are not sustainable.

Let me suggest several examples: global carbon dioxide emissions from fossil fuels have sharply accelerated over the last several decades, reflecting a quickening in the pace of growth of the global economy, a sharp rise in energy consumption in China and the weakening of natural carbon sinks, such as forests and seas. Not surprisingly, large volumes of the Arctic ice have melted along with parts of the Greenland glaciers contributing to a rise in sea levels. Satellite observations of the Arctic ice cap show a significant reduction in the ice cover, with a record reduction in 2012 to less than half the area typically occupied four decades ago. In 1996, the volume of ice melted in Greenland was 92 cubic kilometres. By 2005, this figure had risen to 221 cubic kilometres and the latest figures show 373 cubic kilometres per year.

Even when world economic growth came to a halt in 2009 because of the global financial crisis, these perturbing trends were not reversed, as world economic growth quickly resumed. But even beyond purely environmental concerns, there are other forces at work which are already having a major impact on our system’s institutional underpinnings, and which have been at the center of the progress achieved during the past half century. Key among these are population growth and the corresponding pressures on resources. According to the International Energy Agency, energy demand will grow by a third by 2035, reflecting the addition of some 2 billion people to the world's population and the corresponding needs for housing, transportation, heating, illumination, food production, waste disposal, and the push for sustained increases in the standards of living. Because the mothers that will bear these 2 billion children are already alive today, this expected increase in the world’s population—barring some unexpected calamity—will materialize and will be largely concentrated in urban environments in developing countries.

Beyond the inevitable pressures on resources, rapid population growth in the next couple of decades will lead to a broad range of challenges for governments, businesses, and civil society. For instance, in the Middle East and North Africa, high fertility rates and the highest rates of population growth in the world will put enormous strains on labor markets. These countries already suffer from the highest rates of unemployment in the world.  Simply to prevent these rates from rising further it will be necessary to create well over 100 million new jobs within the next decade and a half, an extremely tall order. The failure to do so has already led to political and social instability in the region. In sharp contrast, the populations of countries such as Italy, Russia, Japan, and others in the industrial world will continue to shrink, a demographic trend which, in turn, will put huge pressures on public finances.

Powerful demonstration effects are also at work: the spread of instant communication and the Internet have led billions of people in China, India, Latin America, and other parts of the developing world to aspire to lifestyles and patterns of consumption similar to those prevailing in the industrial world. Furthermore, these populations are often unwilling to postpone such aspirations and increasingly expect their governments to deliver rising levels of prosperity, implicitly pushing for a more equitable distribution of the world’s resources.

As if these demand pressures were not enough, there are emerging supply constraints as well. World cereal production per person has been on a downward trend since the late 1980s. It is estimated that by 2025 the number of people living in regions with absolute water scarcity will have risen to some 1.8 billion. Climate change, soil erosion, and overfishing are expected to dampen food production and will put upward pressures on food prices.

As a result, the fundamental development question which we now face is how to reconcile the legitimate aspirations of citizens in developing countries to recreate for themselves the high living standards that they see in the developed world, with all the challenges of an economic system and a global environment under severe stress as a result of the pressures put on it by the meteoric economic growth of the post-war years?

In my next blog, I will explore some practical answers to this fundamental question of whether we can sustain our current development pathway.

Wednesday, December 2, 2015

Why economic convergence matters in today’s globalized world

In his fine book The Upside of Down: Catastrophe, Creativity and the Renewal of Civilization, professor Thomas Homer-Dixon refers to the projected divergence in average income per capita between the rich and poor countries.

Even if one assumes that the low income countries grow for the foreseeable future at much higher rates than the high income countries, because the current gap in per capita income is so large, the gap widens for many decades to come before convergence finally sets in well into the next century, if not later.

In other words, by 2015 the rich countries are so far ahead of the rest of the world that, except for a handful of countries with incomes very close to the income of the poorest rich country, no one else has a realistic chance of converging, as Taiwan (China) and South Korea did during the post-World War II period. This phenomenon, of widening income gaps in the future notwithstanding the presence of higher growth rates in the poor countries today is what Homer-Dixon (p. 189) calls “the dirty little secret of development economics.”

There are several problems with such widening gaps. A first obvious one is that the larger the gap, the more difficult it is to make the jump. Taiwan (China), Singapore and Korea did it and Chile has been admitted to the OECD—but these cases of upward mobility are few and far between. Landes (1990) thinks that an important constraint is knowledge and know-how, which cannot be easily acquired.

The development of Taiwan’s human capital during its transition into the rich economy club was an extremely complex process. Although seemingly a disadvantage at the time, the brain drain of the 1960s and 1970s—when some 50,000 of the brightest young Taiwanese went overseas (principally to the United States) for university and advanced studies—allowed Taiwan to build a large pool of qualified and experienced people before its economy was ready to absorb them.

From 1985 onwards, incentives drew them back to Taiwan as entrepreneurs, to create start-ups in the science parks, or to take up research, academic, and management positions, bringing not only their knowledge and experience, but also their networks of contacts and working relationships with leading international companies, and enabling today’s Taiwanese universities to educate its own manpower for continuing expansion at home.

These informal networks, supplemented by overseas offices of various institutes and research centers, have facilitated technology transfer, innovation, and strong entrepreneurial relationships. In other economies, the story of training and higher education has often been, as noted by Landes, “the permanent loss of talent.”[1]

Being far behind creates a difficult context for the implementation of sound policies. The populations of poor countries can readily and accurately estimate—because of the power of communications technologies—how far back they are vis-à-vis the rest of the world, particularly the rich economies of the industrial world. This is likely to create unrealistic expectations of catchup and, in turn, force governments to favor a populist path, instead of the deliberate, gradual and at times difficult path chosen by the few successful cases of upward mobility.

When the gap is so wide that the possibility of catching up within a generation or two is no more than a pipe dream, governments may find it difficult to engage the public in the pursuit of cautious, coherent policies. “Lateness is the parent of bad government” [2] is how Landes puts it, where he uses the noun “late” to mean late entry into the development process, captured by a low per capita income.

Furthermore, the combination of widening income gaps between countries and the globalization of ideas, knowledge, access to information and awareness of others’ living standards provides powerful incentives for the movement of people across international boundaries.

If to this we add the likely future effects of climate change on vulnerable populations (developing economies are far more dependent on agriculture, which will be hard hit by climate change) and the sort of chaos and generalized upheavals we have seen in recent years in a growing number of countries (e.g., Syria, Iraq, Yemen, Afghanistan, Mali, Venezuela, to name a few), then those incentives are magnified and migration risks becoming an even bigger challenge.

Some economists (e.g., Paul Collier) have highlighted some of the difficulties associated with a segmentation of the world into two broad regions, one characterized by either high income or at least positive economic growth and another where some 60 countries with a combined population in excess of 1 billion are not only falling behind but often falling apart, becoming exporters of “violence and people instead of goods and services,” [3] thereby beginning to pose a security threat to the rest of the world.

Collier argues that economic development is very much about giving ordinary people the hope that, at some point in the not too distant future, their children will have access to the same opportunities available to children in Germany and Sweden and other rich countries. The notion of convergence is very much at the heart of much of what we do at the World Bank, the idea that we will gradually see in the developing world the unfoldment of the policies and institutions that have propelled the rich countries to levels of wealth and prosperity never before reached in the last several thousand years of recorded history. In the absence of that hope, smart, motivated people will seek to escape from their societies and try to look for those opportunities elsewhere.

This creates a huge challenge for the recipient countries if the numbers are large enough to put strains on rich country budgets and infrastructures and it can deprive the sending countries of essential human capital. Hence the central importance of the World Bank’s current focus on shared prosperity; it matters not only for development outcomes, but it also clearly has a security and political dimension that goes far beyond a narrowing of income differentials.

[1] Landes, David S. 1990. “Why Are We So Rich and They So Poor?”, American Economic Review, Vol 80, No. 2, Papers and Proceedings of the Hundred and Second Annual Meeting of the American Economic Association, p. 1-13.
[2] Landes (1990), p. 12.
[3] Collier, Paul. 2007. The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It, Oxford University Press, p. 12.

Thursday, July 30, 2015

Equality of opportunity as an engine of prosperity

EEOC 35th Anniversary Art Contest
Chelsea Lapp, Age 11
Sixth Grade
Flying Hills Elementary School
El Cajon, CA
We have learned much over the past several decades about the connection between gender inequality and economic growth, particularly when we talk about inequalities in education and employment. Inequalities in education, for instance, artificially reduce the pool of talent which societies can draw from; by excluding qualified girls from the educational stream and promoting less qualified boys, the average amount of human capital in a country will be reduced and this will have an adverse impact on economic performance. We also know that the promotion of female education leads to lower births per women, not only because educated women will have greater knowledge about family planning but also because education creates greater opportunities for women that may be more attractive than childbearing.

Lower fertility levels help reduce child mortality and expand the range of educational opportunities available to the next generation. All of these factors combine to boost economic growth. Indeed, the effects of lower fertility levels associated with improved female education have long-lasting effects and deliver a “demographic dividend” a couple of decades later. With reduced fertility levels the working-age population will grow more rapidly than the overall population and this will boost per capita economic growth.

Yet another powerful driver of economic growth associated with the narrowing of employment gender gaps has to do with the “bargaining power within families.” Not surprisingly, when women work and earn income as a result, they will be more empowered within the home. Beyond the direct personal benefits to her, the economics literature has identified a number of other favorable effects such as higher savings, more productive investments and better use and repayment of credit, all of which are beneficial for economic growth. Other studies have shown that with greater female power within the household there will be higher investments in the health and education of children, thereby planting the seeds for the accumulation of human capital in the next generation.

A further avenue of influence has to do with growing evidence that women workers are less prone to corruption and nepotism than men workers. The criminology literature, for instance, has long established that “the most consistent pattern with respect to gender is the extent to which male criminal participation in serious crimes at any age greatly exceeds that of females, regardless of the source of data, crime type, level of involvement or measure of participation.” [1] More recently, a survey of 6,500 companies carried out in the United Kingdom looking at the gender composition of company boards showed clear evidence that companies with greater female participation in boards were less likely to be hit by governance scandals involving bribery, fraud and other factors likely to depress business confidence.[2] So, boosting the employment of women is likely to be beneficial for economic growth through improvements in the quality of governance.

Of course, while governments have played a central role over the past century in the creation of a legal framework that has placed important limitations on women’s ability to contribute meaningfully to the economy or that have shaped in some adverse way her economic surroundings (see the Women, Business and the Law report for a detailed compendium across 143 countries of the ways in which this has been done), there are many other forms of discrimination embedded in the law, that go well beyond issues of gender.

Article 20 of the Constitution of Iran establishes that all citizens of Iran have to be "in conformity with Islamic criteria." Hence, members of the Baha’i community, Iran’s largest religious minority, are denied access to schools and universities, barred from public sector employment, and face severe work restrictions in virtually every other sector of the economy. In Lebanon, groups such as Baha'is, Buddhists, and Hindus may own property and assemble for worship, but may not marry, divorce, or inherit property within the country. The Uganda Anti-Homosexuality Act of 2014 punishes "aggravated homosexuality" with life imprisonment and the "offence of homosexuality" with a prison sentence of up to 14 years.

There is clearly a role for government to create the enabling conditions for a sound economy and an equitable society that makes efficient use of the natural, economic and human resources available to it to meet the needs and ensure the well-being of everyone. Poverty is one indicator of government failings in this area. Despite the rapid growth experienced in several developing countries over the past few decades, more than 1 billion people still live in extreme poverty, and inequality is increasing around the world.

The World Bank has committed to achieving the twin goals of eliminating extreme poverty and boosting shared prosperity. These goals go hand in hand with equality of opportunity and the inclusive participation of all segments of society in the economic and social spheres. Poverty is often greatest in traditionally marginalized groups, and various forms of discrimination can greatly depress the prospects for its alleviation.

The most sustainable path towards ending extreme poverty and promoting shared prosperity is through creating an inclusive society, allowing everyone, including traditionally marginalized groups such as ethnic, religious, and other minorities, the same opportunity to participate in and benefit from the economy. Governments have a critical role in creating a foundation for equality of opportunity, both through dismantling laws, regulations and policies which actively discriminate against certain groups, and through adopting and promoting mechanisms enhancing the enforcement of anti-discrimination legislation.

Prosperity involves more than just increasing and distributing wealth. Human well-being includes social, cultural, ethical and spiritual dimensions. The diversity and additional perspectives contributed by presently marginalized groups can, when allowed full expression and participation, enrich the community and society and add to collective prosperity. Equality of opportunity not only prevents a waste of human resources and capacities, but also opens the potential to even higher levels of social and economic well-being.

[1] From a study conducted by the National Academy of Sciences of the United States, cited in Swamy, Azfar, Knack and Lee (2001).
[2] Financial Times (March 9, 2015).

Thursday, May 28, 2015

Unpacking the drivers of inequality relationship between growth and income inequality is more complex than the one between growth and poverty, and has been the subject of considerable study.

An early contribution in the 1950s by Nobel Prize-winning economist Simon Kuznets, for instance, noted that at least two forces tended to increase inequality over time. One was the concentration of savings in the upper-income groups; he observed that in the United States the wealthiest 5 percent of the population accounted for close to two-thirds of total savings.

A second factor, which has been a universal characteristic of development over the past century, was the gradual shift away from agriculture. Between 1991 and 2001, for instance, more than 8 million people left agriculture in India. Between 1965 and 2000 the share of the labor force employed in agriculture fell from 49 to 21 percent in Brazil, from 26 to 5 percent in Japan, from 55 to 11 percent in Korea, from 81 to 47 percent in China, and it fell to 2 percent in the United States.

As people moved from villages to cities, from agriculture into industry, they moved from a low productivity sector to one of higher productivity and this heightened income disparities. Incomes tended to be more equal in agriculture, but as people moved to the cities this meant the share of the population where income was more unequal increased.

Other factors were also at work, some of them exerting an influence in the opposite direction. One was the increasing role of government and the implementation of policies intended to reduce income disparities, whether through inheritance taxes, mechanisms for social protection,  or critically, the extension of publicly financed education to large segments of the population, including girls.

In some countries—particularly in East Asia—land reform also strongly contributed to diminished income disparities and, may have unleashed rapid economic growth and convergence. The role of government policy implied that, often, there was a growing distinction (or gap) between inequality in living standards and inequality in incomes, with the former often boosted through the redistributive attributes of the government budget. Demography and migration had an impact on the distribution of income too.

At least as important was the impact of technology and the dynamic forces associated with industrialization. New technologies, and associated processes meant that those with the skills to handle new machinery or read instruction manuals—the vast majority of them men—could command much higher wages, and this inevitably led to a widening of income disparities between the genders.

Moreover, this phenomenon was self-reinforcing. Those who, because of their skills commanded higher wages, could afford to get loans to start new ventures and save more, accumulated a growing share of the country’s wealth, something that provided additional opportunities for profitable investments and create new companies. In countries with weak institutions, ineffective regulations and poor law enforcement, this often translated into expanded opportunities for the unscrupulous, particularly those with access to the levers of political power.

The expansion of huge wealth stemming from corruption has surely been a regular feature of economic development during the past couple of centuries. Where growing income disparities were partly (or mainly) due to corruption and the abuse of power the result often was growing social tensions, political instability or, at the extreme, civil disturbances. However, absent corruption, the result was often the creation of new industries and the emergence of a powerful culture of innovation.

The relationship between education, training and a skilled labor force and inequality is strong and dynamic. At one level, as education spreads and a growing share of the population partakes of its benefits, one might expect a leveling off of income inequality. There is evidence that this is exactly what happened in England in the 19th century, widening at first as the process of industrialization got underway and leveling off before the end of the century. (Benjamin Friedman argues in “The Moral Consequences of Economic Growth” that “Karl Marx’s claim that capitalism inevitably leads to ever increasing misery of the working classes, and hence to an explosive polarization of society, resulted from Marx’s myopic extrapolation of the widening inequality that accompanied England’s economic growth in the first half of the nineteenth century” (p. 349)).

However, there is no guarantee that this leveling off will be permanent. Since technological change is relative, the arrival of new technologies can, in principle, induce exactly the same sorts of changes which the introduction of simpler technologies had on skills-based wage differentials during earlier stages of the development process, leading, yet again, to rising income disparities.

Friedman (2005) offers an interesting analysis of the impact of outsourcing on income inequality. When an American manufacturer closes its plant in the United States and shifts it to India, American workers’ job losses will be offset by job gains in India. While some US workers may be able to find jobs elsewhere, others may not. Also, profits of the company are likely to rise because of the lower labor costs and the net impact, therefore, will be to widen inequality within the United States. Moreover, because some workers in India will now be earning wages well above the average in India, the closing of the plant in the United States will also widen inequality within India. However, inequality between the United States and India will have been narrowed. Friedman then asks: “If India’s average income draws closer to America’s, but in the process some Indians—in this example, the lucky workers who get the new factory jobs—pull ahead of their neighbors, is the net outcome a victory or a defeat for the cause of equality?”

We do not have a full understanding of the relative importance of all these factors—accumulation of savings, the declining role of agriculture, demography, government policy, migration, technological change, and globalization, to name a few—in shaping the evolution of income inequality. Some are obviously more amenable to change through shifts in the content of policies. Others—technological change being perhaps the leading example—are more exogenous in nature, responding to a combination of human creativity, the profit motive and, only at the margin, possibly government incentives and being, therefore, much more unpredictable in its impact.

One can reasonably assume that the importance of these factors will vary from country to country, depending on their stage of development, and that that importance will shift over time, in reflection of structural changes in the global economy. However, Kuznets was correct in arguing that without better knowledge of the evolution of income inequality and the factors that shape it, our own understanding of the process of economic development would be undermined as would our capacity to respond effectively to the challenges created by income divergence.

Wednesday, December 10, 2014

The samurai and globalization: does culture matter for development?

Augusto Lopez-Claros & Valeria Perotti

The transformation of Japan into a modern economy at the end of the 19th century is a tale of culture and cultural change. The centuries-long transmission of values like honor, loyalty, duty, obedience and discipline in the bushido (the code of conduct of the samurai) contributed in fundamental ways to shape Japan’s human capital. However, a change in mindset – triggered by the personal influence of key political figures – needed to happen in order for the country to devote its efforts to economic development.

Japan’s 250-year old feudal shogunate collapsed in 1867-68 and power returned to the emperor in Kyoto. The Home Minister appointed in 1873, Okubo Toshimichi, was relentless in the recruitment of talent for his Ministry, believing that promotions should be based on merit rather than family or military connections, and that those trained abroad were particularly well-suited to assist him in his efforts to launch Japan in a sustained process of modernization. But perhaps Okubo’s most important attribute was his willingness to examine the economic and scientific achievements in the developed world and to inspire others at home with a vision of the meaning of a modern Japan.

Okubo embarked on a program of reforms, such as export promotion, the development of a merchant marine, the establishment of model factories, and government loans to small-scale industry. By 1878, when a group of former samurai assassinated Okubo as a consequence of the deep grievances generated by the collapse of the shogunate in key segments of Japanese society, the mindset had changed and Okubo’s associates had no problems moving his program forward. Within a hundred years, Japan had emerged as the world’s second largest economy and one of its foremost technological innovators.

It is difficult to argue against the extent to which a particular work ethic and system of personal values and attitudes—part of what we normally understand as culture—played a central role in Japan’s emergence as a world economic power. But for a variety of reasons, economists have avoided getting too closely involved with the concept of culture and its relationship to economic development. There is a general acceptance that culture must have a role in guiding a population along a particular path, but, as Landes (2000) points out, a discomfort with what can be construed as implied criticism of a particular culture has discouraged broader public discourse.

The role of culture in economic development is not an easy subject to get a handle on. To start with, one faces issues of definition. The more all-encompassing the definition, the less helpful it tends to be in explaining patterns of development. Economists tend to narrowly define culture as “customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation” (Guiso, Sapienza and Zingales, 2006). This approach is largely dictated by the aim to identify causal relationships, by focusing on aspects of culture that are constant over time. Not surprisingly, some of the most insightful writing on the subject has been done by anthropologists. Murdock (1965) argues that a culture consists of habits that are shared by members of a society. It is the product of learning, not of heredity. Woolcock (2014) highlights how the sociologic scholarship has evolved to consider culture as “shaping a repertoire or ‘tool kit’ of habits, skills, and styles from which people construct ‘strategies of action’” (Swidler, 1986, p.273).

A second complication is that even with a sensible definition, one would have to confront the fact that cultural identity is not fixed. Cultural change—anthropologists tell us—begins with processes of innovation, of which cultural borrowing or diffusion is by far the most common.  But it can also be precipitated by social acceptance, by selective elimination and by integration.

From a policy perspective, malleable aspects of culture are more interesting as they open up the possibility for intervention. The World Bank’s 2015 World Development Report cites a number of examples of interventions that have determined a cultural change to trigger improvements in welfare: one example is political affirmative action for women in West Bengal.

There are other complications, however, in attempting to use cultural explanations for economic development.Huntington (2000) remarks how in the early 1960s Ghana and Korea were broadly comparable in terms of income per capita, structure of production, and foreign aid. Thirty years later the contrast could not be more pronounced. According to Huntington, culture had a major role in explaining it: “South Koreans valued thrift, investment, hard work, education, organization, and discipline. Ghanaians had different values. In short, cultures count.”[1] The problem with this formulation is that it does not provide a very auspicious basis to start a dialogue with Ghana as to how they could catch up with Korea. Not surprisingly, international financial organizations and bilateral donors have shied away from framing the debate in terms of cultural norms. 

Beyond issues of presentation, it is possible that “culture”, in fact, disguises other forces at work, more amenable to change. How much of the Ghana’s stunted development is simply the result of bad policies? In many developing countries investors are unwilling to plan for the long-term because of the risks associated with political instability. What may appear to be cultural traits may, in fact, be behaviors shaped by economic incentives and thus amenable to change through changes in the underlying incentives. So, to take an example, the absence of a work ethic in the Soviet Union was not a reflection of some ingrained cultural trait, but rather was a natural response to an environment in which wage differentials were extremely narrow, promotion was not linked to performance, and life-time employment was more or less guaranteed. People’s behaviour at work was totally consistent with this particular set of dis-incentives.

Sachs (2000) identifies a number of factors which have fundamentally affected development in various parts of the world and can be detached from conceptions of culture. He notes, for instance, the (dis)advantages of geography, such as access to natural resources, being landlocked or part of a poor, volatile neighborhood. Easterly (2006) discusses the heavy burden on Africa associated with the historically arbitrary demarcation of international borders. Poverty may have more to do with geography and climate, with natural resource management, and with the toxic interactions between ethnic diversity and artificial borders, than with purely cultural factors.

As a result of globalization, because “citizens are more exposed to successful behaviors elsewhere” (Porter, 1990 p. 26), geography, climate, and natural resources are gradually giving way to knowledge, education, and access to new technologies as the key drivers of productivity and economic growth. We are witnessing the gradual emergence of a universal, global culture based on such values as adherence to civil and human rights, gender equality, respect for property rights, the rule of law, acceptance of market forces as a mechanism for resource allocation.

In saying that education and the acquisition of knowledge and skills are desirable development objectives we are making a statement that holds true across different regions of the world, that applies to all contemporary civilizations. Of course, societies will differ in the ways and the extent to which they have internalized some of these values in their policies, their traditions and their institutions. Acceptance of the desirability of gender equality, for instance, does not mean that inequalities and injustices based on gender—deeply entrenched in all our cultures, to a greater or lesser extent—will suddenly disappear. But few would disagree with the thesis that gender disparities are out of step with modernity and that their presence retards human progress. Development is not only about reducing poverty and expanding opportunities against the background of rising incomes. It is also in a very fundamental way about adopting a set of values that are compatible with humanity’s moral development.

Easterly, William. 2006. The white man's burden: why the West's efforts to aid the rest have done so much ill and so little good. New York: Penguin Press.
Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2006. “Does Culture Affect Economic Outcomes?”, Journal of Economic Perspectives 20: 23-48.
Harrison, Lawrence E., Samuel P Huntington. 2000. Culture Matters. New York: Basic Books.
Landes, David. 1998. The Wealth and Poverty of Nations. London: Little, Brown and Company.
Murdock, George Peter. 1965. Culture and Society. Pittsburg: University of Pittsburg Press.
Sachs, Jeffrey. 2000. Notes on a new sociology of economic development. In: Harrison, L.E., S.P. Huntington. 2000. Culture Matters. New York: Basic Books, 29-43.
Swidler, Ann. 1986. “Culture in action: symbols and strategies”, American Sociological Review 51: 273-286.
Woolcock, Michael. 2014. “Culture, Politics, and Development”. Policy Research Working Paper 6939. Washington: The World Bank.

[1] Huntington, p. xiii.