Stationary Bandit

A New Approach to Microfinance

Microfinance offers great hope to alleviate extreme poverty in the developing world.  Unfortunately, donors like the World Bank (see page 23) have not had much success in terms of their microfinance projects.  Problems no doubt have arisen but one simple problem has been the public sector's large role in microfinance.  Donors often do not provide the incentives for small firms to transition to big firms.  It pays to remain small as these firms are eligible for microfinance funds.  A new approach has been developed by Ebay that allows private citizens to provide their own money to small projects. 

MicroPlace, a for-profit company which enables everyday internet users to invest $100 or more in the world's working poor, launched on Wednesday. The site is notable for two reasons: it's not only owned by eBay but it's also the first microfinance site to allow everyday folks to earn interest on their investment. Interestingly, eBay plans to donate all profits from MicroPlace to various non-profits, including (but not limited to) its own eBay Foundation.

Here is the story.  I am not sure that Ebay donating the profits is interesting but I find the idea of a marketplace for microfinance quite interesting.  Technological improvements that have arisen in countries with secure contract and property rights has led to the present situation where everyday people in the developed world now have the opportunity to provide funds to the poor of the developing world.  Soon we will find out if this is a better approach and if the end of poverty in out time is possible. 

Is Chinese Economic Growth a Myth?

Bryan Caplan, like myself, remains skeptical regarding the growth miracle of China since 1980.  He notes two "weird" facts.  The first is that "60% of the Chinese remain in agriculture, where they produced 12% of GDP" and the second is that "Chinese consumer spending is only 36% of GDP."  Both appear odd and Bryan offers a brief explanation as to why. 

I am not inclined to think that because it is a communist regime it will everywhere and always overstate its growth numbers (although it is surely possible).  So why remain skeptical?   Alwyn Young's paper "Gold into Base Metals" published a few years analyzes the numbers as presented by the Chinese government and explains what has actually happened in China.  This is from the first paragraph:

Rather than discount the Chinese statistical record, I embrace it. Accepting all the numbers the statisticians of the People's Republic produce, but making systematic adjustments using their own data, I show that one can (a) reduce the growth rate during the reform period to levels previously experienced by other rapidly growing economies, so that (b) once one takes into account rising labor force participation, the transfer of labor out of agriculture, and improvements in educational attainment, labor and total factor productivity growth in the nonagricultural economy are found to be 2.6 and 1.4 percent per year, respectively; a respectable performance, but by no means extraordinary. 

In other word, nothing special has happened nor has a Chinese path to development been revealed.  The usual suspects- rising participation rates, improvements in educational attainment, and the transfer of labor out of agriculture- account for its growth.  Hardly a miracle but maybe I am missing something.   Does anyone know have reasons to believe that Young's analysis is incorrect?

Mo Ibrahim Prize

The first winner has been announced. 

Former Mozambique President Joaquim Chissano has won the first Mo Ibrahim prize rewarding a retired African head of state for excellence in leadership. Mr Chissano, who is credited with bringing peace to Mozambique, had been seen as a frontrunner for the prize.

Story here.  Commentary to come...

Inflation in Zimbabwe

The tragedy continues.

The state central statistical office said September's inflation heated up to an annual rate of 7,982 percent — meaning an eightyfold jump in prices over a year. The official rate was 6,592 percent in August, but independent estimates put real inflation closer to 25,000 percent.

Here is the whole story.

What can prediction markets predict?

Apparently not scientific or literary achievements.  The betting markets did not predict the Nobel Prize in Economics. Hurwicz was no where to be found although Myerson and Maskin were very low probability winners, at least the last time I looked.  In some ways, this is not surprising.  What information other than rumors and knowledge about who attended select conferences appears to be the basis of trading?  Best I can tell, citations do not predict winners very well; if it did, then Thomson Scientific would have a better prediction history.  The betting market for the Man Booker Prize has experienced similar difficulties.  It has been five years since the markets accurately predicted the winner- 2002’s Life of Pi (see here).  Since then, the most likely candidate based on individual betting has not won.  This year’s winner Anne Enright's "The Gathering" continues the trend (see here).  I can think of at least three explanations for the failure of the betting markets to predict the winners:

1. The selection committee knows the odds based on private information and decides to prove it wrong. 
2. The amount of money involved is low so individuals bet on the favorites rather than best candidates.  Whoever retired or expects to retire because they successfully bet on the Booker prize winner?
3. "Nobody cares about this except economists, and hardly any economists gamble! Only a few hundred dollars were put at risk in the InTrade market."  That is from Steve Levitt.

Will Eritrea Be No More?

Few people have taken notice of the plight of Eritrea for the past four decades.  Its long struggle for independence finally bore fruit in the 1990s.  But now troubles have arisen both within the country and with neighboring Ethiopia (not that they have ever ended).  Today's NYT has a little piece on the current situation. 

There are bread lines, milk lines and lines for rationed cooking gas. At night, dissidents meet on dark streets to chat secretly in parked cars.  Because of the rising prospects of war with Ethiopia, essentially Round 2 of a border conflict that has already killed 100,000 people, tens of thousands of Eritrean students have been conscripted into the army.

Furthermore, problems with the US government have developed.

Relations with the West, especially the United States, have deteriorated to a historic low point, with the State Department threatening to designate Eritrea, a tiny country on the Red Sea that most Americans have never heard of, as a terrorist state for its support of Islamist rebels in Somalia.

Its independence is threatened and its economy appears on the verge of implosion.  What can be done?  The simplest policy is to resolve its problems with Ethiopia which would improve the economic situation.  Of course, this is easier said than done but economic integration would be a good place to start.  Second, once stability is attained, improving economic and political freedom would spur entrepreneurship (I assume Eritrea is "repressed" as it is not scored in either the Heritage Foundation or Freedom House index).  After that, Eritrea probably would be on the path towards prosperity. 

Addendum: Sam, in the comments, suggests that Eritrea had been doing relatively well and recent political decisions have caused or exacerbated the crisis.  According to the most recent Human Development Report, life is not well in Eritrea and has not been for some time.  Even by African standards, it not doing well.  It ranks 30th out of 50 African countries in terms of the human development index. In other words, it scores near the bottom of the distribution in terms of income, education, and life expectancy. 

WTO Cotton Ruling

As the US Farm Bill continues to evolve, the WTO has decided on an aspect of the 2002 US Farm Bill. 

The World Trade Organization has found that the United States failed to scrap a series of illegal subsidies paid to American cotton growers, a ruling that could open the door to billions of dollars' in Brazilian trade sanctions against the U.S., trade officials said Monday.

The US scaled back its support for cotton but the WTO ruled that it has not done enough.  Supporters claim that US support harmed farmers in Brazil and West Africa.  A victory for free trade?  Probably not.  Brazil plans to respond with its own "corrective" policies which the US can appeal.  Brazil has " reserved the right to impose annual sanctions of up to $4 billion on the United States."  In addition,

Brazil has said it would target U.S. goods, as well as trademarks, patents and commercial services, under provisions in the global commerce body's intellectual property and services agreements.

Maybe I am missing something but it seems like we are replacing one inefficiency (cotton subsidies in the US) for another (retaliation by sanctions).  Furthermore, how does retaliation help the farmers in Brazil and West Africa?  I guess Andrew Rose is correct about the role of the WTO in promoting free trade.

Economics Nobel 2007

Leonid Hurwicz, Eric Maskin, and Roger Myerson won the Nobel Prize “for having laid the foundations of mechanism design theory.”  Tyler Cowen thinks that their contributions are going out of style.  I see things differently.  This is another Nobel for the Hayek tradition of political economy (see here, here, here, here, and here for previous winners).  Their research has improved our understanding of the role of institutions- market and non-market- in addressing issues that arise in the presence of informational asymmetries.  What could be more Hayekian?  Hurwicz’s is clearly responding to the issues raised by Hayek’s 1945 paper, “The Use of Knowledge in Society” (see his 1969 American Economic Review Paper “On the Concept and Possibility of Informational Decentralization”).  His later work is well within the James Buchanan-Hayek study of political institutions in asking the age old question- but who will guard the guardians.  Myerson has continued in this tradition (see here). He has also examined the effects of bicameralism on political decision-making, an idea clearly addressed in Hayek’s Law, Liberty, and Legislation.  He has also analyzed the effects of democratic institutions more broadly (see here).  Maskin’s contributions include his analysis of the soft budget constraint, problems with majority rule, the sometimes perverse incentives that elections introduce, and has raised issues regarding the nebulous role of property rights in the property rights literature (is it really all about contracts?).  Overall, it looks like the Hayek research program is alive and well and continues to provide insight into the social order.

Does Global Warming Cause Conflict?

Apparently some people think so, at least implicitly (see here).  I have never seen an empirical estimate of the impact of a one degree increase in global temperature on the likelihood of conflict.  Maybe it exists but I am not aware of it.  I am not even sure what story one would tell about the mechanisms involved.  I suppose if the oceans rise and resources become more scarce (more droughts) and people live closer together, then conflict may arise.  But is there any reason to think that human ingenuity will not respond in clever and unforeseen ways to prevent the worst case scenario?  I would bet that new technologies, such as higher yielding seeds that grow in harsher conditions, will develop to make disaster unlikely.  Also, I am left wondering what temperature minimizes conflict?  In other words, what is the conflict minimizing temperature for regions (beyond the obvious two)? 

Wonder Seeds are Not the Panacea

Sub-Saharan Africa continues to wait for its Green Revolution.  Agricultural output remains low even though plenty of technology and knowledge about ways to raise productivity exist.  Various groups have tried to spur the agricultural sector by providing technologies such as wonder seeds to the developing world.  Not surprisingly, the wonder seeds have not yielded high payoffs.  Simply importing the seeds will not have a sustained long-term effect on yields unless additional changes occur that provide the incentives and means to efficiently use the seeds.  Yet few people recognize this.  Celia Dugger, in the NYT, does understand this.

New ways to get seeds into the hands of farmers are needed, as well as broader investment in the basic ingredients of a farm economy: roads, credit and farmer education, among others.

Basic infrastructure, a minimal functioning credit market based on secure property rights, and human capital are necessary complements to the wonder seeds.  Farmers must be able to get their products to markets, have access to funds to purchase the necessary seeds and complements, and understand how to use the seeds if these programs are to work.  Maybe Mugabe should have read yesterday's NYT to see the errors in his latest policy to improve the economic situation in Zimbabwe (here).