Monday, April 14, 2014

The fragile middle class in developing countries

Much has been made of the emergence of the new middle class in developing countries, particularly in Asia and Latin America (in fact, we will have a conference at Oxford in late October on this precise subject).  The fragility of this new group has always been known, and now a great FT article emphasizes it:

"In that, the young Indonesian is emblematic of a group increasingly in focus as emerging economies slow. For all the talk of a new middle class, Muljoko is in fact part of what is better described as the world’s fragile middle: the almost 3bn people in the developing world surviving on between $2 and $10 per day, putting them above the poverty line but often still struggling for the financial security that is a middle class hallmark."

A few reflections:

1. As the article says, we tend to think about poverty reduction as a one way street.  When you move above the poverty line, you never come back down.  But this is cannot be further from the truth: various shocks lead to common reverse of fortunes.  This is the major point of Anirudh Krishna's excellent book One Ilness Away.

2. Replacing anti-poverty and means tested social policies with universal ones becomes even more urgent than before.  We need policies that incorporate the poor and the fragile middle class into the same systems, thus improving quality of services, benefiting from economies of scale and reducing risk and volatility.

2. Much of the fragile middle class works in relatively low productivity jobs in small and medium firms (the examples from Malaysia in the article are great).  Finding new, more creative ways to support these companies is a major challenge of a two-tiered industrial policy.

Thursday, April 10, 2014

Elections in Costa Rica

On Sunday Luis Guillermo Solis, candidate of the Citizens Action Party (PAC) was elected president with 1.3 million votes (almost 78% of the vote).  This was a great result (300,000 more votes that Solis was hoping to get and the highest relative support in recent decades) even if he was running against himself since the other candidate (from the governing PLN) abandoned the campaign trail in early March.

The election of Solis is an exciting change: he is not a career politician and this is the first time left-center PAC wins the election.  What should be his priorities?  And how likely is he to deliver fundamental change?  We had an interesting panel yesterday at Canning House were it was clear that Costa Rica faces many challenges and that change in policies may be less substantial than initially expected.

Solis has five different challenges that can be written as questions:

1. How can the country reverse the unequal pattern of income distribution? How can the government tackle the crisis of social security, both in health care and pensions?
2. How can it increase tax revenues and deal with the country’s difficult fiscal position?
3. How can Costa Rica build an economy with two motors which depends less on non-traditional exports from the export processing zones?
4. How can the new government stop the erosion of state institutions and increase state capacity?
5. How should it promote  transparency and get politicians closer to the people?

In confronting these questions, it is clear that Solís will try to slow down the past neoliberal agenda, continue some of the good policies (e.g. education) from the last administration, try to pass a tax reform and strengthen social insurance.  In practical terms, this means that the accent on free trade agreements will diminish (Costa Rica is unlikely to become a full member of the Pacific Alliance) while an accent on state subsidies for agriculture and a push for a reform of social insurance is likely.  These are all welcome changes, but they are more footnotes to the current model than a radical transformation.

Solis will have to confront significant political challenges: he is an outsider to his own party, has a very small minority in the Legislative Assembly (the PAC has 12 deputies out of 57 plus another one that was surprisingly spelled from the party but will likely support its agenda) and will have to deal with a PLN (the most important political party in Costa Rica which has 18 deputies) which is very divided.  To success, he will have to promote social dialogue and build a direct relation to the electorate, which helps to pressure political parties in the Assembly to build coalitions and implement reforms.  Easier said than done!

New working paper in Desigualdades

It is a shame that recently I am only blogging to announce new publications, but I will be back in full speed soon.  Juliana Martínez Franzoni and I just published a new working paper for Desigualdades in Berlin.  You can find it here.  The draft of a chapter for our upcoming book on universalism, the working paper discusses the definition of universal policy and provides arguments for its relevance.  Here the abstract:

"In recent years, attention to universal social policy has intensified in Latin America and other parts of the periphery. Definitions of universal social policy have traditionally varied between a minimalist approach focused on broad coverage and a maximalist approach focused on generous, citizen-based programs funded exclusively with general taxes. Unfortunately the former is too narrow and the latter relies on over-ambitious policy instruments, hardly attainable in the periphery. Instead, we propose a definition focused on policy goals: universal social policies are those that reach the entire population with similarly generous transfers and high quality services. In the second part of the paper, we review the advantages of universal policies, which can be more redistributive, create less stigma and be easier to manage than means tested programs and can also have positive effects on social cohesion and economic growth. The paper concludes with a discussion of different types of fragmentation as significant threats towards the expansion of universal social policies in Latin America and beyond."

Friday, March 21, 2014

Policy brief on our recent book

It is too bad that almost two weeks have passed since the last post!  I still want to write something on policy ideas and policy entrepreneurship (concepts that we still have seriously underdeveloped), but have not had the time.  Before that, just to announce a new policy brief, Juliana Martínez Franzoni and I just published for UNRISD.  You can find it here.  Based on our recent book on Costa Rica, it highlights the role of elites and ideas in shaping policy over the long run.  The concept needs further development and empirical backing, but I think it is a good reminder that the composition of the elite and its preferences can vary a lot among countries.  Institutionalist approaches tend to focus too much on commonalities and on institutional incentives and not enough on ideas and structural differences.

Tuesday, March 4, 2014

...and technology makes concern for inequality even more significant

Also in the FT, a great article on the impact of robots and artificial intelligence on jobs.  According to a prediction from colleagues at the University of Oxford, almost half of all jobs in the US are at risk from these pressures.  The article highlights two potential results from these trends in the long run:

"This has fed two visions of the future of work. In one, the machines take on many of the boring parts of a job, setting humans free to supply the more advanced – and satisfying – brain work. The other vision is less harmonious: the machines leave many human workers on the scrap heap altogether."

There are at least two important reflections for the political economy of development:

a. Part of the problem to realize the more harmonious vision has to do with the influence of conservative ideology.  If unemployment is primarily a result of lazy people, it is hard to realize a society where people work less and where society builds new funding systems (including a basic income for all).  Yet these are exactly the types of policies we would need in a world dominated by robots.

b. What will happen in developing countries?  Will robotics slow down offshoring?  Will developing countries start replacing human jobs at lower levels of development than the rich countries are doing?

The IMF on the growth-inequality nexus

On Thursday I will be teaching a lecture on inequality and growth in the MPhil in Development Studies.  The same lecture a few years ago should have emphasized the IMF´s lack of concern for income inequality and its consequences--lack of concern that influenced the shape of its stabilization programs.  Yet this is no longer the case: income distribution and its costs is one of the areas where the IMF has experienced a more significant change (following the leadership of the World Bank a few years back).  In a recent working paper, the IMF´s deputy director for research, Jonathan Ostry and co-authors use cross-country regression analysis to show the negative impact of inequality on economic growth in developed and developing countries.  As stated in a FT column, he published yesterday:

"Taking into account the direct effect of redistribution, and the indirect effect that operates through reduced inequality, we find that average levels of redistribution are associated with higher and more durable growth."

This is welcome news and could gradually shift debates on stabilization and social policy.  Yet we need to follow insights like this with more attention to the broad causes of inequality and with the fact that a large share of inequality in the distribution of income can be explained by the resources of the very rich.

Monday, February 24, 2014

Amazon, the consumer and industrial policy

I am current reading (better say, listening to) The Everything Store, the award winning book on Amazon and Jeff Bezos' story.  It is a very interesting book, with a lot of useful information and quite measured and balanced opinions.  Several issues are important from a political economy / development perspective:

a. Large corporations "pick winners" all the time. Amazon purchased a lot of companies that looked promising and, more importantly, entered into new activities (some close to its own comparative advantages and some far away).  What is important is that some activities were failures (pharmaceuticals, for example) while others were big successes even if not everyone expected it (the Kindle).  One of the things that Amazon did well and that it may be harder for governments doing industrial policy is closing down (or at least stop investing) in activities that were clearly failing.  This just confirms that the debate should not be whether industrial policy is good or bad, but how do you build the right incentives to give up on sectors and companies that are not working.

b. My second observation is even better known but still very interesting: the dangers of placing the consumer at the heart of the political and economic agenda.  The justification for all kinds of abuses and questionable behavior (from pushing for not paying sales taxes to poor labor conditions to prices that undercut competition from small and medium companies) was that this would benefit the consumer.  It did not really matter who would suffer as a result.  But are we really consumer before anything else?  And will continue creating a society of consumers and borrowers instead of workers?

c. The negative impact of Amazon in working conditions is indisputable and the book is full of great and sad examples...