Sunday, April 27, 2014

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.

Saturday, April 26, 2014

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.

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."