Sri Lanka through the eyes of a Venezuelan

Tonight (Jan. 9) I am flying back from Sri Lanka to Boston after a 3 day visit. The Center for International Development at Harvard University (which I am so happy to lead), helped organize the Sri Lanka Economic Forum, together with the Prime Minister’s Office and George Soros’ Open Society Foundation. We had a half day open seminar and a day and a half closed door seminar with policymakers including all the economic area ministers, the governor of the Central Bank and the senior staff. Besides George Soros, the meeting had a great set of word class economists and policymakers including Joseph Stiglitz, Montek Ahluwalia (India), Alan Hirsh (South Africa), Erion Veliaj (Albania), Robert Conrad, Christopher Woodroof, Filipe Campante, Frank Neffke, Ljubica Nedelkoska, Daniel Stock and Tim O’Brien. Continue reading

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What Should We Do About Inequality?

Inequality is the result of many different phenomena. Some of them should be a source of policy concern while others should not. My main problem is the inequality that arises from differences in productivity—namely, differences in productivity across regions, across cities, within cities and across social groups. We know that there are huge differences in income across countries of the world: the richest countries are 200 to 300 times richer than the poorest countries in per capita terms. That’s inequality at the global scale.

That is mostly caused by differences in productivity. It’s not because there’s a global pie and it is shared unequally between the rich countries and the poor countries. These are just independent pies of radically different size. At the global level, the bulk of inequality across countries is inequality in productivity.

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Los Retos del 2016

Pensé que la alegría de la victoria electoral de Venezuela en las elecciones parlamentarias del 6D me duraría más tiempo. Pero en este momento me embarga un sentimiento de gran preocupación y quisiera compartir sus causas.

Venezuela enfrenta, en el 2016, el año más difícil de su historia, un año que va a ser aún peor que el 2015, el que ya es record. Esto es consecuencia de la errada conducción política y económica del país en todos estos años. Por si faltaba poco, la abuela ha parido una caida del precio del petróleo de $7 por barril (17%) en las últimas 3 semanas. Dado lo frágil (o mejor dicho, desastrosa) que ya estaba la situación, esto complica las cosas aún más.

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How Should We Prevent the Next Financial Crisis?

Financial crises are a bit like airplane crashes. Airplanes, and banks, operate well most of the time. But every so often they crash with very bad consequences and our strategy is to do a forensic study of the last crash, see what we learn, and incorporate that learning into the system so that we might prevent the recurrence of the same kind of crash. In aviation, that has made air travel incredibly safe, to the point that, right now, the Civil Aviation Board does not only analyze crashes but they also analyze “near misses” because there are so few crashes that it’s very hard to keep on learning. So near misses are a way to reduce the likelihood of bad things happening that have not really happened.

Banks are different from airplanes in that innovation in banks is happening much faster than innovation in airplanes. So every time there’s a financial crisis, the financial instruments that cause the problem did not exist at the time of the previous crisis. We have never had a repetition of a financial crisis that looks just like the last one.

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What are the Challenges of Economic Growth?

The challenges of economic growth are very different in different countries. The U.S. and Europe face a certain set of issues that look very different from the issues faced in China or India, or the issues faced in the Americas or in Sub-Saharan Africa.

It would not be wise to cover all regions of the world with the same brush. There is a subset of countries in the developing world that are growing faster than the rest and are tending to converge towards the developed world, such as China, India, Thailand, and Vietnam. These countries are poised for growth, so you could say “the check is in the mail.” They just need to keep the growth process going and they face a certain set of challenges in doing so.

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Does controlling corruption really lead to higher economic growth?

It would seem so. After all, diverting public resources for private gain is unlikely to be good. But what is the evidence? The Millennium Challenge Corporation summarizes its view in the following way:

“Corruption hinders economic growth by increasing costs, lowering productivity, discouraging investment, reducing confidence in public institutions, limiting the development of small and medium-sized enterprises, weakening systems of public financial management, and undermining investments in health and education. 1 Corruption can also increase poverty by slowing economic growth, skewing government expenditure in favor of the rich and well-connected, concentrating public investment in unproductive projects, promoting a more regressive tax system, siphoning funds away from essential public services, adding a higher level of risk to the investment decisions of low-income individuals, and reinforcing patterns of unequal asset ownership, thereby limiting the ability of the poor to borrow and increase their income.”  1

Now, corruption is one of the bads that comes from the absence of a good. The good in this case is a capable state. To achieve the things that states want to achieve, it is obvious that they have to be able to prevent their bureaucrats from diverting resources for private gain. But preventing bureaucrats from doing bad is not the same as having the capacity to do good. Continue reading

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Why the MDGs do more harm than good

In a recent letter to the editor, Kevin Watkins responded to my March 18 op-ed on aid coordination in the Financial Times. I had argued against the idea that all countries should have the same targets on the same goals. I also argued that the mechanisms to make development assistance compatible with the MDGs – with its Poverty Reduction Strategy Papers, its consultative groups and roundtables – is an inconvenient hierarchical structure in a space that is too complex for hierarchies to work. Instead, I argued in favor of a more open architecture in which donors and recipients self-organize and goals emerge as a consequence, just as in the market and in democratic politics. To assess the quality of aid coordination and improve self-organizations Michele Coscia, César Hidalgo and I wrote a paper and developed the Aid Explorer website.

Kevin Watkins asks: “Is there anyone out there who doesn’t see eradicating extreme poverty, preventing child deaths, providing clear water and sanitation, and extending opportunities for education as goals that should figure in any list of priorities?” And then adds that the MDGs [do not] “limit the scope for priority setting at a national level.” As he says: “You can let a thousand flowers bloom under the MDG canopy.” Continue reading

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