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!