Why (many) development economists don't know shit

For any of you economics-of-development buffs out there, here is a scathing academic critique (pdf unfortunately) of the widely-read Doing Business reports issued by the World Bank. The report's subtitle says "measuring business regulations," but givers of development aid (including the US and EU) often use it as a proxy for general liberalization, and make it a condition for countries to receive aid. Academics are also enamored with the reports, and many a complex econometric regression has relied on its data.

The problem is that the data don't capture the reality on the ground very well. I'm not really in the mood to summarize the paper, but a major issue is ex ante vs. ex post costs – that is, whether ease-of-registration in the beginning is gained at the expense of a lot of hassle later when disputes have to be adjudicated. Doing Business measures the fixed costs, but neglects the later costs that are incurred if a business has to prove things that in a system weighted towards ex post costs would already have been taken care of. The author's point isn't that a system of ex ante costs is necessarily better, but just that the World Bank doesn't take the later costs into account at all.

Unlicensed and unregulated private schools in the Third World

In the City Journal (one of today's most underappreciated publications, in my opinion), Liam Julian has a quick book review of The Beautiful Tree, a book by James Tooley (published by Cato) about unlicensed, unrecognized, and unregulated private schooling among the world's poorest children. Here's an excerpt from the book that stood out to the reviewer, where the book's authors did a study to determine how well these private schools actually taught:

The results from Delhi were typical. In mathematics, mean scores of children in government schools were 24.5 percent, whereas they were 42.1 percent in private unrecognized schools and 43.9 percent in private recognized. That is, children in unrecognized private schools scored nearly 18 percentage points more in math than children in government schools (a 72 percent advantage!), while children in recognized private schools scored over 19 percentage points more than children in government schools (a 79 percent advantage).

And it's not just those without access to free public schooling who are taking advantage of the private schools – even many of those entitled to free public schools don't trust them. It sure makes you wonder about the UN (and pretty much everyone else in the development community) putting so much emphasis on free, universal primary and secondary schooling.

Like most book reviews, this one is little more than a summary, but here's an interesting bit of criticism from Amazon.com reviewer D. W. MacKenzie:

The one nit I have to pick with the Cato crowd is on vouchers. Entitlements to education, like vouchers, can produce the same results that the author of this book decries- corruption and waste. But this disagreement does not detract from the general value of this book. Read it and learn more about learning.

I'd like to see some figures on the breakdown of where the world's poorest parents choose to send their children to school, and how many of those sending them to private schools have access to public schools.

The upside of being dirty

The NYT has a fascinating article on something that I've long suspected is true: we're too clean. Here's the gist:

When my young sons were exploring the streets of Brooklyn, I couldn’t help but wonder how good crushed rock or dried dog droppings could taste when delicious mashed potatoes were routinely rejected.

Since all instinctive behaviors have an evolutionary advantage or they would not have been retained for millions of years, chances are that this one too has helped us survive as a species. And, indeed, accumulating evidence strongly suggests that eating dirt is good for you.

In studies of what is called the hygiene hypothesis, researchers are concluding that organisms like the millions of bacteria, viruses and especially worms that enter the body along with “dirt” spur the development of a healthy immune system. Several continuing studies suggest that worms may help to redirect an immune system that has gone awry and resulted in autoimmune disorders, allergies and asthma.

These studies, along with epidemiological observations, seem to explain why immune system disorders like multiple sclerosis, Type 1 diabetes, inflammatory bowel disease, asthma and allergies have risen significantly in the United States and other developed countries.

Though the article isn't very rigorous or quantitative, it also hints at the fact that some development efforts aimed at "deworming" could possibly be counterproductive:

In studies in mice, Dr. Weinstock and Dr. Elliott have used worms to both prevent and reverse autoimmune disease. Dr. Elliott said that in Argentina, researchers found that patients with multiple sclerosis who were infected with the human whipworm had milder cases and fewer flare-ups of their disease over a period of four and a half years. At the University of Wisconsin, Madison, Dr. John Fleming, a neurologist, is testing whether the pig whipworm can temper the effects of multiple sclerosis.

In Gambia, the eradication of worms in some villages led to children’s having increased skin reactions to allergens, Dr. Elliott said. And pig whipworms, which reside only briefly in the human intestinal tract, have had “good effects” in treating the inflammatory bowel diseases, Crohn’s disease and ulcerative colitis, he said.

US trade policy pushes Cambodian girls into prostitution, US foreign policy causes Cambodia to arrest them

Radio Free Asia has a sad article on young Cambodian girls being pushed into prostitution, made all the more horrific because it seems that US trade and foreign policy is exacerbating the trend. The US is working in a few ways that harm these young girls: they push for labor standards that make employing these girls legally more expensive, and thus they are left to professions not subject to the law. But more directly, they pushed for anti-trafficking laws that the Cambodian government interpreted as a directive to crack down on prostitution, driving prostitutes deeper into the underworld and away from the protection that legal tolerance provides to these most vulnerable of businesswomen.

In his NYT column two weeks ago, Nicholas Kristof did a good job of summing up the ways that US pressure on Cambodia's labor standards has decreased employment opportunities:

Cambodia has, in fact, pursued an interesting experiment by working with factories to establish decent labor standards and wages. It’s a worthwhile idea, but one result of paying above-market wages is that those in charge of hiring often demand bribes — sometimes a month’s salary — in exchange for a job. In addition, these standards add to production costs, so some factories have closed because of the global economic crisis and the difficulty of competing internationally.

The Radio Free Asia article explains how the worsening plight of prostitutes is thanks to US foreign policy, and how NGOs are willing partners in crime:

In February 2008, the Cambodian government began enforcing the new “Law on the Suppression of Human-Trafficking and Sexual Exploitation” after years of U.S. pressure to crack down on sex trafficking.

Human rights groups, however, say the law and its enforcement have made life harder for the women they aim to help.

Prostitutes caught in police raids are made to pay fines of up to U.S. $200 for their release, the 17-year-old girl said.

“They take us to district police headquarters and take our money. If we don’t have the money, we will be kept in custody for two or three days. So we have to run for our lives when we see police approaching us.”

“Police arrest us in the hope that the brothel owners will pay, but if we don’t have anyone to pay for our release we will be sent to one of the nongovernmental organizations (NGOs). It’s o.k. to live at the NGOs, but then our families have nothing to eat,” she said.

“If [the NGOs] want to help me, they should also help my family. Otherwise I can’t quit.”

Could Obama's energy plan destroy the environment?

Wired has a headline story today about about a biofuel start-up, and while the article is generally pretty disappointing (nothing about whether or not this company is receiving – or looking for – subsidies?), it's got an absolutely horrifying caveat at the end that some environmentalists think that a biofuel-based energy industry could spell environmental disaster. The article (.pdf) cites a report by the ETC Group, an environmental organization, which warns that even if our economy comes to depend on biofuels not made from food, there is still the risk that the land needs of whatever biomass we end up using will become untenable, and the impact on global food prices could be analogous to what happened with ethanol and food prices in 2007-08.

They term this a "sugar economy," and by sugar they mean carbohydrates in general – foods like corn, but also just generally anything that has ever been living (switchgrass, trees, leaves, etc.). These environmentalists worry that the Economist was being naïve when it said "there's plenty of biomass to go around," and that the poor of the global South will be the ones who end up yielding their cropland to the production of biomass to be liquified for use as America's fuel. The parallel with one form of biofuel – ethanol – is striking. The US government recently believed (ridiculously enough) that ethanol would be an effective and environmentally-friendly way of weening the US off of oil. As it turns out, ethanol is both environmentally deleterious and was responsible for the vast majority of the recent spike in global food prices, which hit developing countries especially hard.

Ethanol's rise began when the government started subsidizing it, and the ETC Group's conclusions would suggest that Obama's promise to subsidize biofuel research and production could lead to similar problems, as biofuel production crowds out the marketplace for food and land in general. What's even more jarring, though, is that Obama's energy plans are much more ambitious than America's recent corn ethanol subsidies, which barely made a dent in the market for fuel in the US. The world's big biggest rent-seekers feel the subsidies about to stream in, and have begun partnering with biofuel startups – the list (36-37 of the report) is a who's-who of America's greatest rent-seeking corporations, with ADM, DuPont, GM, and literally every major pharmaceutical and oil company looking to get in on Obama's promised subsidy binge.

As for the veracity of ETC's claims, it all depends on a) the efficiency that biofuel producers can achieve; and b) whether or not they receive the subsidies that Obama promises, and on what basis he chooses to allocate them. I guess we'll see in the coming months and years how serious Obama is about creating a new government-dependent energy industry, and how firms react to the incentives of his policy.

Edit: More on potential ecological destruction caused by non-food biofuels.

Open source hardware and the future of IP

Wired has an excellent, in depth article up about open source hardware. Open source software has changed the software business (the web has, in the last few decades, been very much run on open source software), but the leap from free intellectual property in terms of infinitely and freely replicable software to open source hardware (essentially, hardware without the patent) is a little too much for most people to make, conceptually speaking. But even though you've never heard of it, this article has convinced me that it's real, happening, and going to be a big deal. It seems that the catalyst is cheap, scalable, and increasingly nimble manufacturing operations in East Asia, who make going from plans to device a much easier task than it once was.

The idea has rammifications for the world of patents, especially on things (like hardware) that have traditionally had high R&D costs but relatively low per-unit costs – specifically, medicine. I think it's only a matter of time (and regulatory upheaval) before medicine is created using this decentralized, open source method, and finally developing countries won't have to choose between free trade and the ability to "pirate" Western medicine. The article does delve into the development issue, in discussing the transformative effects of low-cost, open source hardware for developing nations. Given that the world's very poor often spend very high percentages of their income on technology, easing its cost could be a highly effective development mechanism.

I'd quote from the article, but every word is so compelling that I couldn't choose a section to excerpt. Just read it, for your own good.

(Sorry about the drop-off in posts – I've been pretty sick since Sunday morning.)

Should we treat food more like color TVs?

Bill Clinton addressed the UN a few weeks ago, on the UN's World Food Day, and said that "we blew it" in terms of global food policy. However, this quote confused me a bit:

Former President Clinton told a U.N. gathering Thursday that the global food crisis shows "we all blew it, including me," by treating food crops "like color TVs" instead of as a vital commodity for the world's poor.

How the US treated food crops "like color TVs" is beyond me. It seems like treating food more like color TVs – which aren't subsidized, unlike commodity crops throughout America – would have been a better policy. "Vital commodities" such as food, shelter, and healthcare have a tendency to be subsidized, whereas frivolous luxuries like color TVs don't (some subsidies notwithstanding). Looking at the advances in color TVs and food in the last decades, would you rather the government treated food a little more like color TVs?

Mobile banking in the developing world and the modern-day license raj

MIT's Technology Review has an interesting article in their November/December issue about mobile banking in South Asia, and the convergence of banking and mobile phones in the developing world. Having skipped the landline/PC stage of telecom development, the developing world's connectivity needs are most often handled on cell phones and prepaid phone networks. The developing world has astonishing rates of mobile phone penetration – 44% of China's population, and 26% of India's, with much of the growth coming from poor, rural areas – as well as an enormous untapped need for banking services, which the majority of the poor in these countries lack. Mobile banking promises to enable money to be transfered, deposited, withdrawn, and even borrowed (in the form of microcredit) easily from a mobile phone, which are apparently services that would save a lot of time and work for India's poor farmers:

And to grasp how ordinary people could benefit, consider the life of the average farmer in the Bangalore area. Typically, a farmer spends hours trekking into the city for a 4:00 a.m. auction to sell his goods. The auction concludes by 6:00 a.m., after which the farmer takes an IOU to a bank, waits for it to open, and collects his money. Then he returns home, risking theft on the way. "We looked at the model and said, What if the retailer could use mChek to pay farmers electronically, and the farmer would receive notification on his cell phone?" Swamy says. The company conducted a pilot project with Citibank and a Bangalore retailer that buys fresh produce; they learned that 85 percent of the farmers attending the auction already owned cell phones. And some reported that if they could accept payment electronically, not only would they save hours queuing at banks, but they might skip the journey altogether, sending a son or a hired laborer in their place.

Though there is this enormous demand for mobile banking, the concept is still in the beta stages where it's needed most. India – land of the infamous license raj – has regulations that separate the banking and and telecom sectors:

India's regulations, unlike those of some other countries, do not allow telecom companies to enroll people in bank accounts; only banks and nongovernmental organizations, including microfinance institutions like Grameen Koota, can do that. So for now, mChek hopes to form partnerships with such organizations.

Hopefully mChek will be able to find a willing partner, but it sure would get mobile banking into the hands of consumers a lot faster if they were allowed to handle bank accounts themselves. In the absence of rules allowing mobile phone companies to enter directly into the banking sector, partnerships are necessary, but add a level of complexity to entrepreneurship that is apparently a serious stumbling block in the wider implementation of mobile banking:

Yet these efforts to graft developed-world banking onto developing-world mobile networks are not commensurate with the swelling popularity of the mobile phone itself. The larger story is one of pilot projects that petered out amid difficulties including cumbersome national regulations, unfriendly user interfaces, and an inability to make the right partnerships. "The reality of the field today is that the promise--which a lot of people understand is huge--is more in the conceptual stage," says Michael Chu. "The banking industry is very suspicious of the cell-phone industry, because they suspect that cell phones will make them obsolete. The cell-phone companies think the banks are like dinosaurs." But these players have to work together seamlessly for cell-phone-based banking to work.

...and while mChek might be succeeding, they seem to be one of the few that's been able to work through the regulations:

For mChek, then, the task now is to forge more such partnerships and navigate a shifting regulatory environment. Draper Fisher Jurvetson's Jolly says that mChek's achievements thus far are unique in India. "I often talk about [mChek] as a company that is dancing with gorillas or behemoths," says Jolly. "You have the banking sector on one side and the [telecom companies] on the other side, and then you've got the MasterCard and Visa folks, and finally the regulatory oversight bodies like the RBI. Trying to corral all of them, for a startup, is next to impossible. What mChek has been able to accomplish in India has never been done before."

In Africa, mobile phone users have found an interesting work-around to mobile banking restrictions: stop dealing in officially-sanctioned currency, and start dealing in an alternative currency, where the rules for transactions aren't as stifling. The currency of choice in many places is mobile phone credit, which can be sent and received easily and cheaply over text message (users text the code required to redeem the minutes, and the recipient can either use the minutes, or trade them on). The rise of this new mobile credit currency has parallels with the natural emergence of another currency: gold. Though at first valued for its useful properties (i.e., jewelry), the precious metal eventually emerged as a currency because people were sure others would accept it, and it was value-dense and it didn't spoil, allowing it to be used as a good medium of exchange, and store of value. Cell phone minutes have the same properties: they're easy to transfer over long distances (at a cost of only a text message), and retain their value over long periods of time.

Living on $4/day and owning a cell phone

There's an excellent article in this coming weekend's NY Times Magazine in which a reporter follows around a "human-behavior researcher" or "user anthropologist" at Nokia. Basically, he travels around the world to discover how people use their phones and what Nokia could do to make them sell better. His work mainly is focused on the Third World, it being the place with the largest untapped market for cell phones. It's full of fascinating anecdotes, and reminds you of the power of something that seems as benign as a cell phone. There's a lot that's fascinating about this article, but this is what I found the most intriguing:

One of the most remarkable findings was that even very poor families invested a significant amount of money in the I.C.T. category — information-communication technology, which, according to Al Hammond, the study’s principal author, can include money spent on computers or land-line phones, but in this segment of the population that’s almost never the case. What they’re buying, he says, are cellphones and airtime, usually in the form of prepaid cards. Even more telling is the finding that as a family’s income grows — from $1 per day to $4, for example — their spending on I.C.T. increases faster than spending in any other category, including health, education and housing. “It’s really quite striking,” Hammond says. “What people are voting for with their pocketbooks, as soon as they have more money and even before their basic needs are met, is telecommunications.”

The fact that one would be surprised at the spending habit's of another seems obvious: human desire and exchange is complex, so complex that we cannot hope to possibly be able to understand it all. This is precisely the reason that communism could never work even under the most helpful conditions: no one can possibly allocate goods as well as the market. And yet, in development, people are so often focused on introducing certain things into people's lives, be it safe drinking water of access to healthcare. And yet, when people make decisions with their own money, they spend it on cell phone minutes!

Also, this makes me feel more optimistic about Somalia, because despite its so-often derided status as a stateless wasteland, it has some of the cheapest calling rates and competitive telecom markets in Africa.