What is development and developing countries?

In the last few weeks, I have had several conversations with colleagues and friends about the meaning of development and the usefulness of the distinction between developed and developing countries.

 This is obviously important for those of us who work in Departments of International Development and have been brought on the belief that there were structural differences between various types of societies. Yet as soon as one walks in the streets of Mexico DC or any Brazilian city, the problematic nature of the categories becomes clear. Despite all its problems, Mexico and Brazil have high quality infrastructure, a strong middle class and high consumption patterns. They have GDP per capita that are closer to Spain than to some low income countries.

 The "DFID solution" (influenced by prominent economists like Paul Collier) is to leave the term "developing country" only for very poor countries in post-conflict situations. Development is about fragile states and the bottom billion. Yet this seems totally unsatisfactory for many reasons: most poor people are in middle income countries and in many emerging economies, institutions are weak; the middle class is still small and much of the territory away from big cities suffers from poor infrastructures and the absence of the state (and well functioning markets).

 But we are still left with the question of what separates developing countries and developed ones or, in terms of specific examples, what distinguishes, say, Mexico from Greece. There are many potential answers, but let me emphasise a few:

 a. The concept of vulnerability at the household and country level is particularly important. When there is a crisis in a developed country, the middle class may suffer but has some insurance mechanisms. As a result, most of the middle class maintains its living standards. When the same happens in a developing country, much of the middle class ends up among the poor and have difficulties to rebuild their lives. This also happens at the country level: any shock has more negative implications in a developing country.

 b. The sustainability of the growth patterns: it is not only about how fast you grow but about how sustainable those growth patterns are. c. At the same time, however, it is more important than ever to compare different groups among various countries to understand better what a "poor" and a "middle class" person means in different contexts.

 Other factors I am forgetting?

A conversation on universalism and taxing the private option

My colleague and friend Ken Shadlen and I have begun a conversation on how to deal with the private option in social policy (much influenced in my case by my joint work with Juliana Martínez). Here you have the initial exchange. Feel free to join the conversation!

Ken: When I was in Brazil I was talking with someone about the "problem" of wealthy people leaving the SUS [the public health system] for private options and then coming back to the state system for expensive treatments. It got me thinking.... Why not put a special sales tax on private health care plans (like a higher VAT or something like that), and earmark the money for public health system. After all, if the rich people are leaving public sector for basic stuff, that actually could be good as it allows public resources to be used on smaller number of people, and the point that the rich people come back to public sector for expensive stuff is sort of irrelevant, because they'd be covered in the public sector anyway if they didn't leave. So those who want to go can go, but at a higher price, so there are not just fewer people left to treat in the pub sector but there's more money to treat the with too.

Diego: I think you are totally right and it is something that can be expanded to education. Expanding taxes on the private option is a way to expand revenues (although we had not thought about earmarking and I think it is a great idea) and reduce demand. However, this is much easier to do if the only ones leaving are the top 10% (or 15%) than if large parts of the middle class (say the top 40% of the population) are both in the private and public sector. In those cases, a tax on the outside option will be rather unpopular and very difficult to implement. At the end that is why confronting the outside option requires a commitment of the middle class to public services, which also require that those services are of relatively high quality.

Ken: I understand what you write, but if the top 40% of the population is leaving that suggests that the pub sector needs to be improved, which only makes a tax to acquire the revenues that much more important. I’m less sure about this line of reasoning for education, because the effects of segregation on those left behind less clear in education. The poor people in the public health system may benefit from the rich people not being there consuming doctors’ and nurses’ time and resources, and, provided the resources are available, the poor people left can be treated well. In contrast, the poor people in the public education system do benefit from having the richer people in their classroom, and the quality of education being delivered in a public education system that is almost all poorer kids will be worse. So here I think everything is different. To put it simply, I don’t think exit from the public system has to damage the system in health, but I do think it does so in education.

Diego: I agree that in terms of the delivery, the exit from the middle class is worse in education than health. Yet it is also quite problematic in health for two reasons: (a) The creation of tax specifically for these services will become politically challenging. The middle class will argue that "not only the public health is weak but we also need to pay for our private insurance! It is double payment!" If this tax affects the middle class, then it may be impossible to implement it. (b) Much of the argument about involving the middle class in public services is about voice: if public health care is poor, they are more likely to protest individually and collectively than the poor. This is why letting the middle class simply leave is quite problematic (the very rich are likely to leave almost by definition in much of Latin America).

Brazil pensions: has the time for change come?

Useful article on Brazil's pension system in the NYT. It clearly describes what is useful about the system but also its huge problems of inequality. The good comes from generous non-contributory pensions, particularly in the rural sector:

The pension system can ease extreme poverty. For instance, rural workers can retire five years before others even if they have never contributed to the public pension system, receiving a monthly payment equal to the minimum wage, about $210 a month.

The growth of the minimum wage has made these advances even more significant. Yet, at the same time, there are huge problems with inequality in the system--something that Hunter and Sugiyama explained well years ago. See this extreme case

In 2000, for instance, officials did away with rules allowing the daughters of military officials to receive the pensions of their fathers after they died. But the shift applied only to new entrants into the armed forces, so more than 185,000 women still draw military survivors’ pensions, often amounting to the full salary of their fathers upon retirement. Spending on such pensions is forecast to last through the end of this century, economists say.

There is little doubt that advances towards a more universal, redistributive system require a reduction of some of these benefits and an increase in other transfers and services. Yet this will be difficult as the upper middle class uses anti-austerity rhetoric to prevent reform. Here you have a former leader of the shopkeepers' associations:

Making retirees pay the price is just not fair,” said João Pimenta, 63, a former director of a shopkeepers’ association who retired at age 49 and regularly leads protests against pension cuts in Brazil’s capital, Brasília. “Why isn’t the economic elite being called upon to sacrifice? I’m sick of hearing that normal people need to pay the price with their pensions.”

How can we promote anti-austerity and, at the same time, reduce segmentation in social policy is one of the main challenges of Latin America in the post-commodity boom era.

How useful lectures are?

Molly Worthen offers a nice defence of the value of lectures in the NYT. Yet I have two problems with it: a. I am not totally convinced that this is a humanities vs "hard" science. Yes, lectures makes more sense in humanities but the lack of attention is a problem everywhere. b. What she never really demonstrate is that students are actually paying attention in the lecture. Moreover, as this useful set of videos show, the problem is that great students will truly benefit from lectures but many others accustomed to surface learning will not. c. Presenting lectures vs gadgets as a trade off does not make much sense. There is obviously space for lectures in the classroom but there is also room for all kinds of activities that may or may not involve computers.

Horizontes: Latin American Centre Newsletter

The last issue was published some time ago and can be found here. It has a nice summary of the experience of key academics who were members of the LAC. It is quite funny!

Call for papers

Here a call for papers for a special section in the Revista de Economia Mundial /World Economic Journal that I am co-editing. We are looking for short (5,000 words) contributions on income inequality in Latin America both historically and contemporarily. Send us your contribution or, if you have any questions, email me.

Role of fathers in transforming families

Let me return to my blogs one more academic year with a topic that is far from my research on Latin America. In recent feminist discussions on how to transform society in a women-friendly way, men are mentioned but occupy a background role. In Lean In, Sheryl Sandberg , highlights the need to have supporting partners... but nothing else. This is rather disappointing because without more men actively demanding change, things are going to move slower than many of us would love. Now we have an interesting contribution from Andrew Moravcsik, Anne-Marie Slaughter's husband, in the Atlantic. He rightly highlights the need to have committed fathers if women are going to be successful in the labor force. Implicitly, he also shows the need to recognise the value of fatherhood and praise it. Many of the problems he discusses and the need to have a "lead parent" can resonate with many others in different circumstances. Nevertheless, like Sandberg and like Slaughter, his class-bias is obvious and limits the usefulness of the analysis. How many husbands have a wife who is Dean or NGO president? How many are full professors but still playing the role of lead father? Of course, having really successful women of the type Moravcsik is discussing is important. Yet most other families are in a different situation: some will have parents struggling to make ends meet. Others will be made of professionals with busy but workable lives. Do we need a lead parent in all those cases? Or is the big question there how do you negotiate so that both parents can lead? And is the real challenge to increase the number of Deans or to simply shift the distribution of effort in the household in all cases?

Central America's supposed bad performance

I am currently working with Juliana Martínez and Salvador Martí on a project for CEPAL on social policy in El Salvador, Guatemala and Nicaragua. I just calculated growth rates for the last 25 years and was surprised once again by one fact: Central America has not performed any worse than the rest of Latin America. Of course, this is still disappointing as this means that two of the countries have not been able to catch up with the regional average. Nevertheless, I think the idea (which I have also written about) that the last few years were much better for commodity exporters than for the rest may not be totally warranted. Just a thought based on this table: Annual average rate of growth. GDP per capita (dollars 2005), 1990-2014

The problems with the term human capital

Branko Milanovic rightly critisizes the concept of human capital here and further develops his criticisms here. By equating labour and other forms of capital, the term leads to a terrible misunderstanding. As Milanovic explains, to "“human capital” differs from all other forms of capital, because for all other forms, one’s ownership of that capital guarantees income as such, that is income without work. This is true for financial capital, ownership of an apartment, patent, land or whatever else. Only, for “human capital”, one needs to exercise himself/herself, that is to work, in order to get an income." This is not just a theoretical debate but one that we all experience in our own lives: having 100 pounds in the bank is very different to accumulating knowledge (whatever that means) for an equivalent amount. By not recongnising it, we are failing to understand much of what happens at the microlevel in our lives and much of what happens at the macro-level in all societies. Unfortunately, the confusion remains. See, for example, the treatment of human capital that David Weill does in an otherwise interesting critical review on Piketty´s Capital in the 21st century: "One of the central objects of Piketty’s concern is the split in national income between payments to capital and payments to labor. The missing piece of this story is the change in the nature of payments to labor, and in particular, the increase in the fraction of such payment that represent payments to human capital. In the world of 1700, most wages were compensation for the raw 9 labor that workers supplied; today, a large fraction of the wage bill represents payment for skills acquired through education and training" Again, the point is not that skills and knowledge are not useful and increasingly important in most countries. The point is that for both the way we life, for our own security and for the reproduction of society, they have a very different impact than real capital. The whole debate, of course, reminds us of Polanyi and his criticisms to the commodification of labour.

Great video explaining inequality in the US... why don´t we have something similar for others?

Great video (via Duncan Green) on wealth inequality and its costs in the US. I am note sure that the ethical difference between income and wealth inequality is as large as they argue, but it is still a great explanation of the the size and importance of the problem. Every time I see a video like this I wonder why there is fewer discussions of inequality in Europe within the press and the blogosophere. And there same could be said about Latin America (and other parts of the developing world): we know that there the concentration of income and wealth is as bad as in the US if not worse... but popular debates and useful information about it is much scarer!

Minimum wages and what being modern means

Juan Carlos Moreno-Brid and Stefanie Garry build on this graph to show the problems of having such a low minimum wage. This policy has all kinds of problems, including its negative effect on aggregate demand and productivity. Yet they point out something which is almost as important. Having a sufficiently high minimum wage that is also consistent with legal commitments should be considered part of being modern and developed--a member of the OECD. Too many times, neoliberal economists have dominated the debate on modernization, equating it to free markets and limited rights. It is time that we actually start arguing that meeting the requirements of the ILO and building social institutions is actually a central part of being a modern society in a global context.

Towards a better way of doing Economics

Yesterday I was invited to give a talk on Latin America within a seminar series on The Future of the Neoliberal Society that a great group of graduate students is organising in Cambridge. Over dinner with three students, we discussed their efforts to change the way Economics is taught and, more broadly the best way to do research in Development Economics/Political Economy. All of this resonated when this morning I read Piketty's new great reflections on his book. Even if all his thinking is based on neoclassical models (which many heterodox economists have criticise, see here and here ), I think it is excellent on so many accounts: a. It shows the role of economic models as a baseline through which to think about other processes. The relationship between g and r should be seen as a general pattern that is then shaped and reshaped by institutional, political and social processes that evolve over time. "Models can contribute to clarifying logical relationships between particular assumptions and conclusions but only by oversimplifying the real world to an extreme point. Models can play a useful role but only if one does not overestimate the meaning of this kind of abstract operation. All economic concepts, irrespective of how “scientific” they pretend to be, are intellectual constructions that are socially and historically determined, and which are often used to promote certain views, values, or interests. Models are a language that can be useful only if solicited together with other forms of expressions, while recognizing that we are all part of the same conflict-filled, deliberative process." b. Economics is presented as a discipline grounded in history and aware of the role of social and political processes. c. For the study of many dimensions of inequality, cross country econometric studies will be less useful (not useful at all?) than case studies: "In my view, a more promising approach—on this issue as well as on many other issues—is a mixture of careful case studies and structural calibrations of theoretical models." d. Institutions are central to our understanding of economic changes, but should be studied in particular historical contexts and centred on struggle. In doing so, he criticises approaches a la Acemoglu and Robinson which, while illuminating on some key patterns, are too ahistorical and abstract. So right! "In their fascinating book Why Nations Fail, they develop a broader view of institutions and stress the distinction between “inclusive” and “extractive”.This broad concept might certainly include the type of institutions and policies on which I focus upon, including progressive taxation of income, wealth, and inheritance, or the modern welfare state. I must confess, however, that seeking to categorize institutions with broad terms like these strikes me as maybe a little too abstract, imprecise, and ahistorical. I believe that institutions like the welfare state, free education, or progressive taxation, or the effects of World War I, the Bolshevik revolution, or World War II on inequality dynamics and institutional change, each need to be analyzed in a precise and concrete manner within the historical, social, and political context in which they develop." I realise that many of these arguments have been developed by structuralist economists forever (see much of the work of Lance Taylor, for example). Yet the fact that one of the most influential economists in today's world is stating them so clearly is a great opportunity to think about a new economics that creates more conversation with qualitative researchers and accepts all kinds of useful evidences for the study of social, economic and political struggles.