We need more rigour in the evaluation of Petrobras

There is little douhttp://latinamericandevelopment.blogspot.com/bt that Petrobras is in trouble. The current government (and previous administrations?) most likely used it to secure political funding and other corruption activities. This is unfortunate for many reasons, including that it hurts the credibility of one of the best public companies in Latin America. Yet in considering Petrobras´s current situation, we should distinguish more clearly between what we know and what we don´t know and stop mixing things up. The problem of corruption is quite different to the potential existence of productive inefficiencies or to the use of Petrobras as an instrument of industrial policy. Petrobras may still be a useful instrument for industrial policy (I have not seen any evidence to the contrary yet) even if there is corruption at the same time. Unfortunately this is not the way the mainstream press (and many mainstream economists) analyze the situation. Take a recent FT article here. . In describing the current situation, an opposition observer argues that "“At the end of the day, all of this is happening because the PT (Workers’ party) has fostered monopolies and, to a certain extent, cartels which generate inefficiencies and an atmosphere that is conducive to corruption". Yet there is no evidence that this is the case, that is, using Petrobras as a monopolistic instrument of industrial policy has nothing to do with corruption. You can do one without the other. In fact, I am still hopeful that the policies of local content requirements that Petrobras have used end up being successful.

Universal Health Coverage

Two weeks ago we celebrated the universal health coverage day, an important initiative given the importance of securing health care for all. An article by Sir David Nicholson (former NHS boss) discusses the advances in this area in many countries, with interesting efforts to fund basic health care for all. Yet, as Juliana Martinez Franzoni and I have argued in much of our work (see, for example, this working paper) universalism should not just be about coverage but also about quality and equity: we should try to offer as much as we can for everyone in the same way. This will be a powerful way to improve health outcomes but also improve social cohesion and reduce inequality. Moreover, securing universalism over the long run will require more than quick, short term responses: you need to develop a stable policy architecture that secures funding and manages competition from the private sector as well.

Latin America under threat?

Many of us have worried about this moment when commodity prices would decrease and the Chinese economy slow down. Eduardo Portes has a great article at the NYTimes explaining the negative consequences that are already materialising. It is clear that at the macro-level the region will have to readjust, yet many questions still remain: a. What will happen with exchange rates? And will non-commodity exports react to any depreciation of the exchange rate? This may depend on what happens with capital inflows, which are decreasing in several countries. b. How should countries react to these changes? Do they have space now to do new production policies? Which countries need to adjust their fiscal policy to the new conditions and which countries have a more diversified tax structure? c. One thing that I don't buy is that countries cannot do any reforms in social policy. Quite the contrary, reforms are even more important now that reforms are more scarce and there are many regulations that can be introduced: restrictions on the private sector (what Juliana Martinez Franzoni and I call the "outside option"), improvements in how the services are delivered, etc.

Back to the future regarding Central Banks?

There are several aspects of the recent elections in Brazil that I find surprising.  One is the excessive concern about the opinion of foreign investors and the need to do policies that they find attractive. Here is a good criticism from an Indian newspaper  (even if the comparison between India and Brazil in terms of political options is probably misplaced).  Another is the whole debate about the autonomy of the Central Bank.  I realize that only two decades ago Brazil was suffering from hyperinflation and that the risks of new problems is always present. Also, the minimum wage policy is great in many ways--particularly its role on income distribution--but without productivity growth it can fuel inflation even more. 

And yet the risk of high inflation is still low and the claim that the PT has been to loose in this area totally unproven.  It is just rather surprising that even sensible Brazilian observers are calling for further Central Bank autonomy.  Why is that needed?  How much has the government truly influenced monetary policy?  And after all the recent problems in Europe, shouldn´t we abandon the technocratic dream of an independent and almost apolitical monetary policy?

Prebisch at ECLAC

ECLAC has produced an interesting project on Prebisch in the past and today.  Although most of the resources are in Spanish, it explains key concepts well and it clearly signals how ECLAC has tried to recuperate key concepts from traditional structuralism, including structural hetegoneity and the role of industrial policy.

I only miss a little more discussion of the political economy behind the recommended policies.  Asking for industrial policy and for a compensation of the deteriorating of the terms of trade is meaningless without some thought of who is going to drive the new policies and how they are going to be effective.

Conference on the new middle class in Latin America

As part of the ongoing collaboration between our Latin America Centre (University of Oxford) and CAF-Development Bank of Latin America, we are organizing the second international conference on 31 October in Oxford.  The title is "The emerging middle class in Latin America: causes, challenges and opportunities".  It will be a great opportunity to explore the extent to which the emerging middle class is truly new, truly part of the new middle class and to discuss its economic and political impacts. One of the many things that makes the event exciting is the mix of policymakers (including former Ministers of Colombia, Peru and Costa Rica) and academics.   More details, including how to sign, at http://www.lac.ox.ac.uk/caf-oxford-conference-emerging-middle-class-latin-america-causes-challenges-and-opportunities.

If you are a student in the UK, we have bursaries of up to 100 pounds to attend the conference.

More on inequality

Two interesting videos illustrate the extent of wealth inequality in East Africa and in the world.  They are worth watching and the data is as always striking: half of all East Asians own less wealth valued at less than £500. This is equal to the combined wealth of the richest six people in the region.  Six people have as much as 66 million!!!! More broadly, 2% of the world population controls half of the total wealth, which makes calls for redistribution rather obvious.

What is the situation in Latin America?  We should do similar videos and the numbers will be as striking or not more.  This is clear when consider the limited research on inequality at the top.  See, for example, this paper on Chile by López, Figueroa and Gutiérrez.  This graph, in particular, shows that according to their estimations, the income share of the top 1% in Chile is significantly than the US--which has become model of inequality:

The situation in terms of wealth is likely to be even more dramatic

Oxfam on inequality

Two interesting posts on inequality from Oxfam minds here and in a new blog on the subject here.  I was surprised by the blog entry Ducan Green refers to: the idea that we don´t know much about the poor is rather surprisingly (hasn´t Claire Melamaid seen this book for example?).  The problem is that, despite Piketty and all, we still know very little about the global rich: who they are, where they invest, how do they relate to the rich in other countries and how they influence the political process.

More importantly, there are many ways in which policies to reduce inequality at the top will benefit the people at the bottom in many, many countries.  Just three examples: (a) the most obvious is taxation: while it is true that taxing the rich may not benefit automatically the poor... it is clearly a necessary condition.  Latin America could not have expanded social policy in recent years if it was not because of higher rents from oil and natural resources which no longer go to the very rich.  (b) More interestingly, weakening the rich will also reduce their political influence, therefore improving the quality of democracy in many countries.  To use the terminology from Acemoglu and Robinson (even if it is always rather problematic), extractive institutions are to a large extent reproduced by the rich... and have high costs for the poor.  (c) More significantly and more connected to the work I am doing with Juliana Martínez Franzoni (see, for example, this paper), universal social policy will favour the poor and the middle class and, by promoting cross-class alliances will create pressures to increase taxes for the rich.  This is why true universalism (which is defined by similar, high-quality services for all) should be at the heart of an equitable development agenda.

The rich American know that inequality is too high but nothing should be done about it

There are now a growing number of webpages and projects on inequality, particularly on the US. One of the most interesting is Equitable Growth.  In their blog, there is today three useful entries on the evolution of income at the top.  Two of the articles are interesting but do not say much new.  The third is actually quite striking.  Fiona Chin from Northwestern University has interviewed a group of very rich Americans and concluded that " The wealthy know that economic inequality is rising, but they do not agree that anything should or can be done to reverse the trend".  Is this the vision of the rich in all parts of the world like Latin America?  Probably yes.  The question is: will the situation stay the same if nothing is done?  Or are they being a little too naive? 

Economics by definition requires maths and econometrics

At the end of his interview with the FT, Jean Tirole makes an unsurprisingly but frustrating statement.  He not only argues that economics is about mathematical modeling and statistical testing, but he then (implicitly) equates this to being a science.  There is little doubt that the type of modelling most economists forces clarity and helps to establish causal chains.  Yet the idea that this is the only way we can discuss economic problems continues to be really questionable for two reasons. First, you can be clear about your causal model with words.  Tirole recognizes that economic ideas have to be translated into words to get to the general public but, following his reasoning, you will lose clarity in that process.  Second, there are many economic issues (e.g. the role of the elite) where there is not enough data available and there are "qualitative" processes to consider... surely we need to consider those processes and surely they are economic in nature.

Back to the blog... with inequality

After months without writing anything, the beginning of a new academic year at Oxford is a great reason to get back to writing.  George Gray Molina, an alumni from Oxford and new Chief Economist for Latin America at UNDP, has an interesting article on the Guardian. The reduction of income inequality that took place in Latin America since the early 2000s has stagnated; in countries like Brazil, the Gini coefficient has actually increased in the last two years.  It is hard to know exactly why, but it was clear that the current strategy had its limits.  Unless the region develops a more dynamic economy--something that may need more creative answers that more liberalization--we may not witness further improvements in the region.

Cities vs countries

Another interesting article on the power of cities and its growing political and economic influence.  According to its author, Arif Naqvi, "This shift means that nearly half of the economic growth expected over the next decade will take place in just 400 cities in the world’s global growth markets."

The growth of cities can be extremely important for poverty reduction and the expansion of social services.  We know that providing health care and education and even organizing cash transfers is much easier in cities, where government officials are concentrated and civil servants want to live.  When cities growth, opportunities to provide services grow as well.

The growth of cities could also contribute to make inequality a more salient political issue.  In the cities it is easier to see how others live and to protest against the concentration of income, wealth, infrastructure, etc.

Yet the argument that we are replacing a world of nations with a world of cities seems totally unconvincing. The state still has a national presence and governments are particularly successful when they are able to be present in the whole territory.  In fact, the big challenge in the future will be how to link leading geographical spaces and leading sectors with the rest of the economy.  And this is a national challenge that can only be successfully met with powerful central administrations.

Latin America and inequality reduction

Kathleen Geier, who has a great blog on inequality, writes a blog on Latin America for The Nation that reflects a dangerous mixing of ideas about recent reduction of inequality in the region.  It is also a common position around some progressive quarters in the US.  Her title says it all "How Economic Populism is Transforming the Most Unequal Region in the World", 

"Economic populism has swept the continent, leading to the election of left-of-center political parties that have implemented anti-equality [she most likely mean anti-inequality] agendas. Their efforts have borne fruit. During a decade when economic inequality grew by leaps and bounds in the rest of the world, it declined significantly in Latin America."

She starts with the example of Chile and then goes on to praise Evo Morales in Bolivia: "Between 2002 and 2010, the Bolivia’s poverty rate was cut by a third, and in 2009, UNESCO declared the country illiteracy-free. Economic growth was over 5 percent last year and has averaged above 4.5 percent during Morales’ presidency."

Several elements of this line of reasoning may be both incorrect and politically unhelpful. First, it is unclear that the term "populist" is helpful to refer to several of the governments in the region (maybe it is unhelpful in all cases). There is nothing populist about the Chile, Brazil or even Bolivia.  Yes, Evo Morales is an influential figure in Bolivian politics, but his party is a MAS movement, which links the electorate with policymakers in a more or less effective way. Second, few of the policies that Latin America have implemented are populist in true sense of the world; in fact, they are at best social-democratic and at worse liberal (in the European sense).  Brazil is undoubtedly the most interesting case of inequality reduction because the Gini has been decreasing for longer than in any other country, and Brazil has done it with a mixture of industrial policy to promote key sectors, formalization of the labour market to create more low productivity, low skilled but relatively well paid jobs and some new social policies.  Labeling Latin America's policies "social democratic" may be politically more useful, as it emphasizes the non-radical nature of the policies.

In fact, and this is my last point, policies in many Latin American countries may not have been far enough and the sustainability of recent reductions in inequality may be questioned.  In a paper Juliana Martinez Franzoni and I have just published here (and was facilitated by our work in the network Desigualdades), we call for a more detail discussion of policy variance in Latin America and try to show that several countries have not adopted enough policies to secure better, more productive jobs over the long run.

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.

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."

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.

...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.

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...

An anthropologist in Intel

Fascinating article about Genevieve Bell who leads a team of anthropologists and social scientists at Intel. A quote that is particularly interesting for academics is the comparison between universities and the private sector.  She is probably exagerating, but it is true that sometimes we academics are less supportive of debate than we think (and we should), no?

She [Bell] also discovered that Intel engineers were more welcoming of naysayers than many professors she had encountered.

“At Stanford, they didn’t like it when you told the faculty they were dead wrong, whereas here, that was a cultural value,” Dr. Bell explains. “Here I would say, ‘You are dead wrong and here are 17 reasons why and six data sources,’ and they would say, ‘That’s very interesting; tell me more.’ ”

How can Mankiw miss the point so much?

Gregory Mankiw has today a column in the NYT arguing that the top 1% have high income because they generate huge amount of wealth for everyone in society:

So, by delivering extraordinary performances in hit films, top stars may do more than entertain millions of moviegoers and make themselves rich in the process. They may also contribute many millions in federal taxes, and other millions in state taxes. And those millions help fund schools, police departments and national defense for the rest of us.

Unlike the superheroes of “The Avengers,” the richest 1 percent aren’t motivated by an altruistic desire to advance the public good. But, in most cases, that is precisely their effect.

The use of the actors and basketball stars to make his point is clever but the column misses totally the point and ignores convincing research that points into a different direction.  Most people recognizes that some levels of income disparities are justified: unique talent should be rewarded.  The question is how handsomely should we reward it?  Is there a reason Robert Downey should get paid 55 million for his role in "The Avengers"?  Would he be unwilling to act and get famous if he was receiving just 10 million?  5 million?  Robert Frank from Cornell and others have argued convincingly (see, for example, this book) that most people care about their comparative income positions and that inequality forces everyone to aspire for more consumption and spend more on luxury goods.  The world would be a much better place if talent was rewarded... but at lower income levels than now.

Mankiw is in particularly shaky grounds when defending astronomic rewards in the financial sector. How he can defend with a straight face after the global crisis that the role of hedge funds and banking managers is only to allocate credit to the most profitable and important activities in society is hard to believe.  Rents and not profits from competitive markets  is what the financial sector is too many times allocating. 

The different trajectory of the middle class in the UK

The reports on income inequality continue piling up.  In the FT today, there is a great report on the different trajectory of various groups within the middle class.  The article talks about the "über-middle" and the "cling-on".  Banking professionals dominate the first group, which also includes doctors in the NHS.  Their presence within the richest 5% of the country has increased sharply in recent decades.  On the other hand, we have teachers, engineers and... us lecturers who have seen their income levels in real terms stagnate and their presence in the top 5% decreased sharply.

Surprisingly, there are some references again to the level of skills of different groups to justify income trajectories: but is this really credible?  Are university lecturers really less skilled than a generation ago?  Is it enough with supply and demand to explain income changes?

The other question we need to ask is whether there is and there should be some relationship between the social value of a profession and its pay.  I am here thinking less about university lecturers and more about primary and secondary teachers: we all recognize that this is where we have to focus the efforts of society and where we need to attract talent... while simultaneously we pay players in the casino capitalism more than anyone else.  El mundo al revés....

The micro consequences of macro shocks

Today we will discuss in my Macroeconomic class for MA students, the impact of shocks in an open economy and the options in terms of fiscal and monetary policy.  One thing that is particularly important but that we don´t always highlight enough is the micro implications of shocks like crisis in the balance of payments or large recessions.  Who suffers from them? How do people respond?  A series of articles from the Washington Post in 1998 constitute a great illustration of some of these impacts.  See, in particular, this one on the middle class. Of course, the crisis ended up being less difficult than initially expected... but this is only because the East Asian economies have always proved very resilient.

China and structural change in Latin America: the case of Ecuador

Via Geoff Goodwin, PhD candidate at the Institute of the Americas (UCL), I got to read this article on Ecuador's relationship with China.  Ecuador is a rather extreme case of financial dependence from China: the volume of debt is quite large (more than US$4.6 billion equal to 39% of total public debt) and, more uniquely, part of it is guaranteed by Ecuador's oil reserves.  The article raises a couple of important questions:

a. Given that the interest rate that China is offering is higher than, say, CAF's, why does Ecuador continue promoting it? Is it really getting technological transfer and support for strategic projects?  Or is it that China puts less conditions but, at the same time, imposes higher guarantees?  If it is the latter, this experiment could finish quite poorly...

b. The type of activities Ecuador is aiming to promote are quite interesting: pharmaceuticals, shipbuilding, metal production, pharmaceuticals and other heavy industries.  On the one hand, it is great to see governments with an ambitious agenda.  On the other, however, is this really the best sectors to promote?  Given its location and size, are these sectors were Ecuador will be successful?  Who is making decisions and how are these decisions being made?  Would more basic, labour intensive consumption good make more sense?  And how is the government approaching these questions?  For those of us that are proponents of industrial policy, these are key questions to distinguish between a promising strategy and a set of "white elephant projects" that will not go anywhere.  Do any of you know answers these questions based on the Ecuadorean experience?

Two tracks to tenure in higher education?

Although this is a blog about Latin American development (and inequalities in other parts of the world), I will pick on some of the discussions on college education from time to time.  This is not only the sectors where I work but one that I feel passionate about improving.

Adam Grant proposes a two track tenure system: one for great researchers who may not want to be in the classroom and one for great teachers.  Based on a key study, he also argues that the correlation between good teaching and good research is low.  I am all in favor of valuing teaching more in higher education, not only because I love it but also because it is an useful way to influence how the world is run in the future.  At the same time, I find this dichotomy a little simplistic at least at the post-graduate level where I have always taught: is it possible to teach MA and Phd students in social science without having done research?  Can you show passion for development or for Latin American countries without doing consistent fieldwork?

Maybe the first step should not be to create two tracks but to evaluate the full body of work of all academics when making tenure or promotion decisions and when evaluating their contribution to the world more generally.

Generational conflicts and the welfare state: are developing countries different?

Two policy briefs of Policy Network highlight the generational conflicts within welfare state reform in many European countries. With the crisis, most of the cuts have concentrated (once again) in young people: we have the example of scholarships or reductions in unemployment insurance payments.  Maccinnes and Spijker argue that population aging is not as problematic as it is normally argued because life expectancy has increased and people can work longer.  Bruno Palier argues that unskilled workers, women, children and other groups are now more at risk of poverty than the elderly.  All these authors call for a more future-oriented welfare state that pays more attention to education, skills, youth unemployment and even pre-school education.

This is extremely important in countries like Spain where youth unemployment is so high and, therefore, market incorporation so difficult to start with.  Yet how does it translate to Latin American countries? In many ways, a welfare state for the elderly should be less of a problem because the population is still younger. There should be more room to invest in education and skills without crowding out any other investment.  At the same thing, there is a paradox in these countries: relatively too much expenditure on pensions for some interest groups (think about Brazil) together with high poverty levels among the elderly.

What is the conclusion of all of this in developing countries?  First, securing universalism is sometimes about reducing the benefits of the upper middle class--a point Hunter and Sugiyama made a few years ago for the case of Brazil.  Second, we also need to promote non-contributory pensions which secure a minimum living standards not only for the poor but for large segments of the middle class as well.  This should be less expensive than in other countries.  Third, because unemployment insurance is harder to organize in a highly informal context, maybe the concentration should be on children at all ages from pre-school to primary and secondary education.  This would mean creating a welfare state that focuses in the two extreme of lives and on low income groups and the middle class simultaneously.

If only the reforms were even more radical...

The neoliberal belief that the failure of the Washington Consensus was caused by its insufficient application is alive and well.  In yesterday's NYT, Juan Carlos Hidalgo from the Cato Institute maintains that Costa Rica's problems are caused by excessive protection, incentives to selected sectors like tourism and a weak exchange rate. He concludes that "what Costa Rica needs are genuine market reforms that eliminate the government’s power to pick winners and losers."  At the same time, he repeats the unproven claim that Frente Amplio wants to replicate Chavez's policies.  

This is rather surprising: together with Mexico and Chile, Costa Rica has been an avid participant in free trade agreements.  Openness has radically transformed the agricultural sector and has reduced the opportunities to survive through subsistence agriculture for the domestic market.  Most of the manufacturing sector has suffered due to liberalization and not despite of it.  The tax system has not helped to raise enough taxes and any attempt to reform it and make it more efficient has failed because of political pressures (including those from the Libertarian party that is closest to Hidalgo's ideas). The problem of Costa Rica is that the current model has failed to support domestic producers and has built few linkages between the dynamic sectors (which receive incentives) and the rest.

At the same time, Hidalgo's criticism of the incentives some sectors like tourism have received should be taken seriously by proponents of industrial policy.  The fact is that many of us believe that it is important to develop new sectors and that attracting companies like Intel was probably a good thing.  Yet contrary to what Hidalgo says, the problem has been insufficient state intervention to promote linkages and to use the reduction of external bottlenecks created by higher exports to support other sectors.  This is something Eva Paus in her book on Ireland and Costa Rica and my paper in World Development showed.

Regarding the Frente Amplio, it is just better not to say anything.  The "politics of fear" should be clearly named for what they are: not only unhelpful but also undemocratic!

More on inequality

A new policy brief from Oxfam provides striking numbers on the extent of inequality at the top in the global economy and in a few countries like the US. Much of all the data we use is questionable, but it is still clear that we are moving to a world of super-rich and everyone else.  Here some the information they provide:

·         "Almost half of the world’s wealth is now owned by just one percent of the population.

·         The wealth of the one percent richest people in the world amounts to $110 trillion. That’s 65 times the total wealth of the bottom half of the world’s population.

·         The bottom half of the world’s population owns the same as the richest 85 people in the world.

·         Seven out of ten people live in countries where economic inequality has increased in the last 30 years.

·         The richest one percent increased their share of income in 24 out of 26 countries for which we have data between 1980 and 2012.

·         In the US, the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009, while the bottom 90 percent became poorer."

The real question, however, is whether any of this will truly feed into the political agenda and where.  Nothing significant is likely to happen in much of Latin America... or in Spain for that matter.

Central America: growing violence and persistent economic problems

The AECID (the Spanish cooperation agency) organized last week an interesting conference in Antigua (Guatemala) on the changes in Central America in the last 25 years and the challenges for the future.  The conference highlighted many of the improvements but also challenges discussed in the Handbook of Central American Governance we recently published.  Four are particularly important:

a. The growing costs of violence, which is now almost an epidemic in Central America. Carlos Dada, director of the great daily El Faro, gave an insightful talk on the failures of recent policies to prevent crime. He highlighted the costs of inequality and the lack of young people´s opportunities in the labour market.  He also explained why "mano dura" proposals tend to be so popular: they at least respond to poor people´s anxieties when they lose a member of their families or are victims of crime.

b. The difficulties that the region has to transform its economic model.  Several participants still hope that regional integration can help to promote economic growth and trigger a process of economic transformation.  Will this really be the case? Can small and medium firms (the main source of employment in the region) build links with regional partners?

c. The weakness of the state. Talking about new social policies or industrial policy (and, fortunately, there was a lot of talk about both) is useless unless we are able to improve the quality and autonomy of the bureaucracy and make the state stronger and more responsive in all countries.

d. The central role of the elite.  As I discussed with my friend and colleague Salvador Martí i Puig, we need to know much more about the elites: who they are now? How they operate? What are their everyday practices? And how the old and new elites interact with each other?

New LAC Working Papers in Political Economy

I am happy to announce that the Latin American Centre at the University of Oxford is launching a new working papers series in political economy.  Supported by CAF-Development Bank of Latin America, the working papers aim to publish high quality research on political economy and economic issues that deal with the region.  This will include the annual working paper from the CAF Visiting Fellow.  You can find the new webpage here.

I am particularly happy because the first paper we publish has been written by Jorge Katz, formerly at ECLAC and now at the University of Chile.  Jorge is not only one of the best specialists on innovation in Latin America, but also a great teacher and colleague.  In this paper, he elaborates a great critical account of growth theories with examples from the region.

Five reasons why Latin America is important for debates on development

Paul Collier has famously argued that development debates should focus on the "bottom billion"--the poorest countries in the world--and should ignore regions like Latin America. The region is too rich, too modern and, for others, too unimportant from a geopolitical perspective.

 This kind of approach--which is becoming increasingly dominant in the UK--does not make much sense. There are many reasons why the region offers important lessons and illuminate many debates in development studies. Here you have five (a catchy number!):

 1. For at least a century, Latin America has been one of the most (if not the most) unequal region in the world, but many Latin American countries (led by Brazil) are now reducing inequality faster than ever.

2. Many Latin American countries have relatively well-functioning states capable of implementing industrial and social policies... but without the autonomy and capacity to do so effectively. 

3. Their shift in economic policies across history has probably been more radical than in any other region: from an export-led liberal model to import substitution to neoliberalism (see Rosemary Thorp's full book in the web for a great illustration) and to the current rich debates on post-neoliberalism and the left today.

4. Latin America has benefited from some of the best economic thinkers in the developing world (including Raul Prebisch) and some of the most dynamic international organizations.

 5. Latin America is probably the region with most ecological wealth and diversity in the planet and with more creative debates about the conflicts between development, the environment and human rights. What (many) other reasons am I missing?

Los problemas de España: siempre acabamos perdonando a la elite económica

El profesor Luis Garicano de la London School of Economics ofrece un diagnóstico interesante, aunque también bastante repetido, sobre los problemas políticos y económicos en España en una entrevista en El País. Como ha sucedido tradicionalmente en América Latina, el problema es que los empresarios tienen más probabilidades de éxito si cultivan relaciones con los políticos encargados de la regulación que si crean nuevos procesos productivos y nuevos productos. En otras palabras, es más provechoso ser Paco el Pocero que Bill Gates. Además, la atracción por convertirse en funcionario después de años de estudiar una oposición es mayor que el de crear e innovar. Todas ideas que se asemejan mucho a los argumentos de Acemoglu and Robinson en Why Nations Fail. No dudo que hay mucho de verdad en esta interpretación de los problemas españoles y que Garicano los explica muy bien. Sin embargo, me preocupa siempre el excesivo acento que se acaba poniendo en el Estado. Aunque se habla de que hay un problema institucional, en realidad se está diciendo que hay un problema con los partidos políticos y con la forma de gestionar el Estado. Ello contribuye a perdonar bastante a la élite económica (y con ello no me refiero a los pocos empresarios que han salido de la nada para crear las Zaras del país sino el entramado de familias que se sientan en los Consejos de Administración de bancos, constructoras, Telefónica y las otras grandes empresas). Su poder, su influencia y la falta de control sobre ellos es tan problemática como los otros chanchullos de los que habla Garicano. Sin embargo, no sólo no se mencionan sino que acaba por decir que "las empresas internacionalizadas [pregunto yo: ¿los grandes bancos? ¿Sacyr?] ya van por otro camino".

Readings on time management and similar topics for graduate students

In Inside Higher Education, Kaitlin Gallagher offers some book recommendations for graduate students. I have taken a quick look at them and they all look useful to organize our time better and to have a more positive state of mind in dealing with theses and exams. Yet I always find the concept of success in this kind of book troublesome and contradictory. Success is about happiness and fulfillment but at the same time about having powerful management roles and playing an important role in society. Do these two definitions always go hand in hand? And isn´t part of our problem that we hope to have it all at the same time?

How to understand Cuba

John Paul Rathbone traveled to Cuba and has an interesting article on the FT. He begins with a striking piece of data: "in a dusty Havana parking lot, a group of Cubans examine the prices of the modern cars they can now buy from the state for the first time: $263,000 for a 2013 Peugeot saloon that retails in Europe for $30,000". Yet his overall interpretation may not be the most accurate. According to the mainstream view on Cuba that he shares, Cuba is moving to slowly and timidly. Many liberalization reforms do not work because they are reversed or implemented too slowly. This type of approach assumes that a fully functioning market economy should be the ultimate goal and the faster you move to it the better. Yet Emily Morris, a UCL researcher,in her dissertation (and upcoming book) calls for a very different interpretation of Cuba. Using evolutionary economics, she shows how the Cuban government has always adopted a pragmatic strategy of "trial and error" and gradual adaptation. The issue is how to confront the problems of the present and gradually improve productivity, but without creating major disturbances or questioning the major objectives of the overall model (some level of equity and social provision for the whole population). Of course, this approach is not always the most efficient in economic terms but may be the most successful and politically savvy in the long run. In conclusion, we should evaluate Cuba in its own terms and considering the political constraints and development goals as a central component of the process and not simply as obstacles to a more market-friendly environment.

Public transportation, democracy and equity

The former mayor of Bogotá, Enrique Peñalosa, has an interesting TED talk on the need for public transportation. He (rightly) argues that improvement in bus and bicycle lines not only benefit the poor but also strengthen equity between individuals. Urban development and public transportation is one of the paradoxical areas in development: the social costs (even without considering the environmental implications) of private transport are much higher: cars are costly, roads are costly, infrastructure building also leads to corruption. Yet at the end public transportation is concentrated in rich country cities and is seen as a luxury that should only come when countries are richer. This is particularly problematic in middle income countries like those in Latin America, where roads are over-crowded but investment in public transportation does not always increase. Public transport is one more area in which state weaknesses are more significant than income levels to explain current problems.

Guatemala maintains its high ranking in... low taxation

Guatemala´s tax burden in 2013 was lower than expected: less than 11% of GDP. With this level of public income, it is almost impossible to meet any of the key development challenges that a country like Guatemala has. yet the likelihood of significant increases in the tax revenue are almost zero, a point Aaron Schneider made clearly in his 2012 book . Yet what are the main challenges for next year according to the Minister of Finance? Fiscal consolidation and to guarantee the payment of the public debt!

More of the same: fear of the bad left

Costa Rica will celebrate elections in less than a month and the candidate from the left-wing Frente Amplio, Jose María Villalta is polling quite well. This could seem surprisingly, but it reflects how tired Costa Ricans are with the PLN in power and how weak is the traditional leadership of the opposition PAC. Costa Rica's main newspaper has become nervous and has responded with the traditional approach of the Latin American elite: warning again the evils of communist. Yesterday's editorial reflects the power of the traditional division between good and bad left and how Venezuela has become the old Cuba. It also reflects how difficult it is to create modern, progressive movements in Central America... even after Funes' experience in El Salvador. This type of approach weakens democracy and prevents serious discussion of alternative social and economic policies to take place.

Inequality is receiving more and more attention... but is too focused on the US

This blog called Inequality Matters is one more sign of the growing attention to inequality among policymakers, academics and the press. One striking characteristic of this new move is its focus on the US and, to a lesser extent, the UK. It is much harder to find good discussions about the increase of inequality in Spain or other South European countries. Moreover, there is also limited attention to what other high inequality contexts can teach about the economic and political costs of a worsening in the income distribution. This provides a great opportunity for Latin Americanists, who understand this problem quite well and have witnessed its negative consequences for quite some time.

How worried should be about Latin America's future?

Check the interesting article on Latin America's future at Vox written by World Bank experts. It offers a nice contrast with the Wall Street Journal article I mentioned last week, and reminds us that all is not bad in Latin America. Many of the countries in the region increased investment during the 2000s and were careful in the management of inflation, their budget and their foreign reserves. The data is fascinating and all the arguments interesting even if controversial: 1. As the article recognizes, the region has failed to undertake important reforms. By this we should read market-friendly reforms, but policy changes that could contribute to improve productivity and reduce structural heterogeneity. Education systems are still problematic and unequal, industrial policy insufficient and support to small, informal firms quite absent and disorganized. More importantly, these problems are as significant in Mexico or Peru as they are in Brazil or Argentina--there are no two Latin Americas there. 2. Notice the significant differences between Central and South America in the numbers. Central America still invests little and grows through remittance-fueled consumption and growing imports. The key division in Latin America takes place between countries North and South of Panama and not between "good" and "bad" countries. 3. With some exceptions (sadly, Venezuela comes to mind), a sudden financial crisis is unlikely to happen in the region. Yet what we still can have is a long period of low growth and stagnant income distribution--sometimes these lack of advance is politically more worrying than sudden crises.

The good and bad Latin American again

An article on the Wall Street Journal a week ago echoes the traditional division between a "good" Latin America (opened to the world, responsible, modern) and a "bad" Latin America (closed to the world, opposed to globalization, irresponsible). Unfortunately this is still the type of simplistic dichotomy that does not take us anywhere... even more when Brazil is included as part of the bad group. There are several problems with the article: a. Is any one calling China "bad" in terms of its policies? Is Brazil doing any different when protecting certain sectors and making (a weak and ineffective) effort to develop its national champions? b. How much longer will we evaluate the success of specific policies through the growth rate of a few months or a year? And is anyone really going to call Mexico´s current performance successful?