Politics in the Way of Progress: Live Over at Project Syndicate

Live at Project Syndicate: Politics in the Way of Progress https://www.project-syndicate.org/commentary/populist-politics-block-development-goals-by-j–bradford-delong-2017-10: BERKELEY – There are 17 United Nations Sustainable Development Goals (SDGs), which aim to tackle problems including poverty, hunger, disease, inequality, climate change, ecological degradation, and many others in between. Clearly, 17 is too many. As Frederick the Great supposedly said, “He who defends everything defends nothing.” Similarly, those who emphasize everything emphasize nothing.

This points to the problem of forging goals through consensus: they can end up being a wish list for everything short of heaven on Earth. But, to be effective, goals should operate like turnpikes, which allow you to make progress toward a specific destination much faster than if you had taken the scenic route. The purpose of consensus building, then, should be to get us to the on-ramp, after which it becomes harder to make a wrong turn or reverse course… Read MOAR at Project Syndicate

Musings on the Science of “Scaling”: Blum Center U.C. Berkeley

No subject brad delong gmail com Gmail

This is not at all the so-called “replication crisis”.

The devices built work as assessed by all engineering yardsticks: cheap, easy to maintain, rugged, and simple to operate. The interventions conducted work as assessed by all social science standards: they pass gold-standard RCT tests with effects that are statistically and substantively significant.

And yet…

“Scaling” is very hard…

My largely uninformed and probably wrong view is that it has everything to do with organizational and systematic robustness. In the engineering lab and in the social science RCT 98% of things go right. But out in the real world societal capabilities vary: while Toyota can hit six nines–99.9999%–at times I think U.C. Berkeley is lucky to hit nine sixes, and Berkeley is, in global context, a relatively functional organization. So: engineering and societal organization institutions designed for robustness, to degrade gracefully when you cannot attain the degree of organizational tautness of a Toyota. How do we do that? That, I think, is the BIG QUESTION here.

(And, of course, if we can attain the degree of organizational tautness of a Toyota, we no longer have a problem of economic development in any sense, do we?)

Blum Center: The Science of Scaling: Building Evidence to Advance Anti-Poverty Innovations:

September 26 @ 8:00 am – 5:00 pm
100 Blum Hall, Haviland Road
U.C. Berkeley
Berkeley, CA 94720 United States

The Development Impact Lab (DIL), headquartered at UC Berkeley and funded by USAID…

…has developed a “Development Engineering (Dev Eng)”… interdisciplinary framework for designing and testing new povertyalleviation and economic growth technologies in the field… encourag[ing] researchers to build scal[ing] into the R&D process, from the beginning. Yet… there are few generalizable mechanisms for scaling evidence-based interventions in emerging markets…. [Thus] DIL[s]… annual State of the Science conference [is] on The Science of Scaling:

The conference will bring together academic researchers, development practitioners, technology developers, and investors to review the evidence on scaling successful anti-poverty innovations…. Are there proven methods for technology transfer from university to government agencies and non-governmental organizations? Why do some products and interventions scale quicker than others? What facilitates the adoption of new technologies by end-users? This event will explore these questions and help articulate a research agenda for the “Science of Scaling”…


2016 09 26 08 3057 Scanner Pro pdf 1 page

Thinking About “Premature Deindustrialization”: An Intellectual Toolkit I

End of export led growth would not be good for post crisis Asia Asia Pathways

OK. Popping the distraction stack again. The very sharp Matthew Yglesias writes about:

Matthew Yglesias: Premature Deindustrialization: The New Threat to Global Economic Development:

In the popular imagination, the old industrial landscape has moved abroad to Mexico or to China, perhaps due to bad trade policies or simply the vicissitudes of changing circumstance… [and] the migration of factory work to much poorer countries has been a boon to those countries’ economic development…. [But] ‘premature deindustrialization,’ in which countries start to lose their manufacturing jobs without getting rich first…. [Dani Rodrik:] “Developing countries… have experienced falling manufacturing shares in both employment and real value added, especially since the 1980s.’…

Jana Remes… economy-wide productivity growth in Mexico has been dismal… [because] Mexican manufacturing sector has… remained quite small…. The dynamic manufacturing sector, in other words, simply isn’t big enough to employ many people. And it’s not really growing much…. [Future] manufacturing enterprises will increasingly look more like software companies–where designing, programming, maintaining, and debugging the machines will be more important than staffing them. A country like the United States with a very robust high-tech sector will be a strong contender for those technologically intensive manufacturing jobs, even if there aren’t very many of them. Countries that haven’t yet industrialized, meanwhile, may be left out in the cold…


Let me back up and quickly sketch the argument that manufacturing matters, and manufacturing exports matter a lot for industrialization and economic development in the Global South. And let me make the argument in what I regard as the proper way–that is, dropping far back in time and running through the economic history…

I do not, all thing considered, think that, absent the luck and randomness that gave us the British Industrial Revolution, a permanent or semi-permanent “Gunpowder Empires” scenario was the third-millennium likely historical destiny of the Sociable Language-Using Tool-Making Big-Brained East African Plains Ape.

However, this does not mean that the historical destiny looking forward from 1750 or so in the Global South was bright. World population had quintupled in the 2000 years to 1750, carrying with it a notional five-fold shrinkage in average farm sizes, or at least in the amount of land supporting the typical family. The slow pace of technological progress from -250 to 1750 had made up for–indeed, had caused–this rise in population. And the biotechnologies of agriculture were indeed mighty: to 1750 we have the creation and diffusion of maize, of double-crop wet rice, of the combination of the iron axe and the moldboard plow that could turn northern temperate forests into farms, of domesticated cotton, of the merino sheep, and of the potato.

But a human population growing at 10% per generation required more such innovations, lest living standards fall in order to curb population growth via children so malnourished to have compromised immune systems, women who were too thin to ovulate, or increased female infanticide. People in 1750 were as well fed and clothed as they had been in -250. But what would have been the next agricultural miracles? You would have needed a number of them to attain continued total factor productivity growth at 0.02%/year to compensate for the further quartering of farm sizes that would have been inevitable for population growth to continue and human numbers topped 3 billion by 2050. And draft animals are not that much help in a densely populated near-subsistence society: they have large appetites, and the land their foodstuffs grow on is subtracted from that available for people. Only a relatively rich society can afford to replace human backs and thighs with those of horses and oxen.

However, these problems in the economic growth of the Global South ought to have been solved by Britain’s Augustan Age industrial breakthrough. Let’s rehearse the story briefly:

(1) The Protestant Wind that blew in 1688 and a century before in 1588 created in Great Britain an ideologically mobilized ruling class willing to commit previously unheard-of resources to first defensive and then imperialist war. (2) The resulting fiscal-military state coupled with the fact that Great Britain is an island created the first British Empire and funneled the maritime trade profits of the world into the island. (3) The resulting high wages coupled with the extremely low price of coal made the R&D to invent and deploy the first generation of technologies of the coal-steam-iron-cotton-machinery complex profitable. (4) The first generation of this complex of technologies are barely profitable even in the most favorable regions of Britain. (5) But the third-generation technologies are wildly profitable in Britain and profitable in selected other regions like New England and the lower Rhine valley. (6) And by the fifth generation–1850 or so–British-style industrial technologies would have been profitable anywhere in the world the resources could have been brought together, as long as there was large enough market demand to serve.

Thus as of 1850 the problem of finding the agricultural and industrial technologies needed to move the Global South to wealth and prosperity appeared solved. The technologies existed–in Britain. They could be easily transported–they were embodied in the capital goods made in the machine shops of Lancashire. Writing around 1850, Karl Marx saw 50 years as the time span for his bourgeois economic and political revolutions to spread as far as India–and thus set the stage for global socialist utopia.

Writing around 1850 and still writing so in the 1870s, John Stuart Mill saw the big economic problems as not ones of innovation and technological diffusion but rather of the demographic transition: The conscious human management of fertility was essential if technology was going to win its Malthusian race against population even in the Global North, and that required widespread cheap artificial birth control coupled with the dropping of the Victorian modesty that prevented public discussion of such “things”.

But Marx and Mill were wrong. The problems of the demographic transition turned out, in the long sweep of things, to be easy presuming successful development and income growth: They solved themselves within two generations after girls attained the leisure to learn how to read.

It was, rather, the problems of technological and institutional development and transfer that turned out to be the nastiest and most stubborn ones for the Global South. The U.S. was about twice as rich as China and India in 1800. It was 30 times as rich as they were at purchasing power parities come 1975. And, at least according to Hans Rosling and company, China and India were no richer in 1975 than they had been in 1800.

Why should this be the case in a world in which the technology was embodied in large hunks of metal shaped in the machine shops of Lancashire–hunks of metal that could be cheaply transported all over the world? Why did the 20th century see a world sharply divided between a Global North and a Global South, with productivity in the Global North growing at 2% per year while the Global South fell further and further behind?

What I believe to be the correct answer was given by W. Arthur Lewis (1977): The Evolution of the International Economic Order:

Lewis’s first step first step is to note nineteenth-century labor mobility. Between 1850 and 1914 more than 50 million people left Europe to settle elsewhere, and more than 50 million people left China and India to settle elsewhere. Racism and imperialism exclude Chinese and Indian migrants from settling in the temperate zone colonies and ex-colonies with agricultural profiles familiar to the relatively rich Europeans. Thus the need to pay wages high enough to attract migrants from Europe kept living standards in what Lewis calls the temperate zones of European settlement high, and kept the prices of the temperate-zone commodities that they alone could produce high as well.

Migrants from China and India went to the tropics. China and India were both then in the down-phase of the Malthusian cycle, with emigrants thus being willing to accept barely more than raw biological subsistence wages to move to the world’s Malaysias and East Africas. Their pressure pushed wages in tropical migrant-recipient economies down, and pushed the world market prices of the tropical-zone commodities that they made and sold down. That meant that even tropical economies that did not receive immigrants from China and India found their relative wage levels collapsing as well. Manaus, the capital of Amazonas in Brazil, looked to be getting rich providing services for the prosperous rubber tappers of the Amazon basin–until the British Empire brought Brazilian biologics and Chinese workers to the Malay Peninsula, and the world price of rubber collapsed.

Thus when Modern Economic Growth began in the last third of the nineteenth century, the world was then being rapidly divided by migration and the world labor market into a Global North producing high-price temperate and a Global South producing low-price tropical agricultural products. And it was in this world that first the fifth-generation technologies of the coal-steam-iron-cotton-machinery complex and then the knock-on Second Industrial Revolution technologies of modern metallurgy, internal combustion, electricity, and organic chemistry diffused.

And here something peculiar happened.

The overwhelming bulk of the labor required for Industrial Age factory-floor work is not high: “semi skilled” is the buzzword–which means a degree of familiarity with machine technology and the operations of the particular system, plus a willingness to accommodate your motions to those enforced by the system as a whole. It is the kind of thing but almost anyone can pick up any few months at most. No deep knowledge or understanding of the underlying processes and engineering mechanisms is required to be a productive assembly line worker. The high technology is embodied in the machines. And the machines can be cheaply shipped anywhere on earth. Yes, you do need a few engineers who understand the machines at a profound and comprehensive level. But, ever since the day in 1789 that the 21-year old [Samuel Slater][] sailed for America, finding qualified engineers willing to work as expatriates has not been an insurmountable problem.

You would imagine, therefore, that once the iron-hulled ocean-going screw-propellered steamship and the submarine telegraph cable had made their appearance, factory work worldwide would have rapidly gone to where labor was cheap. Yet from 1850-1980 that was not the case. Factory work by and large stayed where labor was expensive. And those economies that did manage to figure out how to utilize British Industrial Revolution and Second Industrial Revolution technologies at near-frontier levels of efficiency rapidly joined the club of rich economies that was the Global North.

In fact, up until the 1980s, with the important exception of the move of the textile industry from New England and Old England to the U.S. South and the European Mediterranean, outsourcing and offshoring were simply not things putting downward pressure in aggregate on the wages and prosperity levels of old industrial districts. For every job that left for, say, low-wage Korea or Taiwan putting downward pressure on wages, there was another job where rapidly rising wage levels in Japan or Italy putting upward pressure on Global Manufacturing wages. Before the 1980s it was rapidly increasing productivity in manufacturing coupled with a less than unit price elasticity of demand for staple manufactures that hollowed out the Global North’s old industrial disticts–not globalization.

So why was it that manufacturing stayed in the Global North for so long, given that the machines could be shipped anywhere, the skill required of the workers was not so high, and expatriate engineers (and managers) were cheap relative to the scale of operations?

Lewis (1977) provides his explanation:

In a closed economy, the size of the industrial sector is a function of agricultural productivity. Agriculture has to be capable of producing the surplus food and raw materials consumed in the industrial sector, and it is the affluent state of the farmers that enables them to be a market for industrial products…. If the smallness of the market was one constraint on industrialization, because of low agricultural productivity, the absence of an investment climate was another. Western Europe had been creating a capitalist environment for at least a century; thus a whole new set of people, ideas and institutions was established that did not exist in Asia or Africa, or even for the most part in Latin America, despite the closer cultural heritage. Power in these countries—as also in Central and Southern Europe—was still concentrated in the hands of landed classes, who benefited from cheap imports and saw no reason to support the emergence of a new industrial class. There was no industrial entrepreneurship.

Of course the agricultural countries were just as capable of sprouting an industrial complex of skills, institutions, and ideas, but this would take time. In the meantime it was relatively easy for them to respond to the other opportunity the industrial revolution now opened up, namely to export agricultural products, especially as transport costs came down…. And so the world divided…. It came to be an article of faith in Western Europe that the tropical countries had a comparative advantage in agriculture. In fact, as Indian textile production soon began to show, between the tropical and temperate countries, the differences in food production per head were much greater than in modern industrial production per head….

Trade offered the temperate settlements high income per head, from which would immediately ensue a large demand for manufactures, opportunities for import substitution, and rapid urbanization…. The factorial terms [of trade] available to them offered them the opportunity for full development in every sense of the word.

The factorial terms available to the tropics, on the other hand, offered the opportunity to stay poor-at any rate until such time as the labor reservoirs of India and China might be exhausted…

The key is that the technologies of the first British and the Second Industrial Revolution, as they developed, rapidly grew in productivity, scale, and capital intensity. You needed a large market in order to support an industrial complex at a scale capable of near-efficient production. And a poor economy with a poor middle class could not do the job from demand at home.

To recapitulate: If you were a rich, temperate zone economy with a high wage level, the market for your nascent manufacturing sector was all around you. As long as you could keep Britain (or later the United States) from sucking up all of the oxygen, your manufacturing sector could grow organically. And so you can gain the learning-by-doing expertise needed for successful industrialization, growth, and development to carry you to the world’s productivity and living standard frontier.

But if you were a poor, low-wage, tropical country, you could not. Your own citizens were too poor for your middle-class to be a source of mass demand for manufacturers. Thus successful economic development would require much more than import substitution.

It would require export promotion, and successful export promotion at that. You could not industrialize and develop by relying on your own home market. You had to borrow someone else’s. And as the twentieth century proceeded that turned out to be a tricky and a delicate task indeed.


[Samuel Slater]: https://en.wikipedia.org/wiki/Samuel_Slater (Wikipedia: Samuel Slater

Must-Read: Gideon Rachman: Xi Jinping Has Changed China’s Winning Formula

Must-Read: Gideon Rachman: Xi Jinping Has Changed China’s Winning Formula: “What Mr Xi has done is essentially to abandon the formula that has driven China’s rise…

…created by Deng Xiaoping… and then refined by his successors…. In economics, Deng and his successors emphasised exports, investment and the quest for double-digit annual growth. In politics, China moved away from the charismatic and dictatorial model created by Mao Zedong and towards a collective leadership. And in foreign affairs, China adopted a modest and cautious approach to the world that became colloquially known in the west as hide-and-bide…. Under Mr Xi, who assumed the leadership of the Chinese Communist party towards the end of 2012, all three key ingredients of the Deng formula have changed….

China has moved back towards a model based around a strongman leader…. The years of double-digit growth are over…. The Xi era has seen a move away from hide-and-bide towards a foreign policy that challenges US dominance of the Asia-Pacific region….

In economics… the shift to a new model is perilous… an unsustainable splurge of credit and investment…. China still has to get used to lower rates of growth…. A healthy economy is crucial…. The country’s leaders have relied on rapid economic growth to give the political system a ‘performance legitimacy’, which party theorists have argued is far deeper than the mandate endowed by a democratic election…. When it comes to politics, in the post-Mao era the Communist party has… embrace[d] a collective style of government, with smooth transitions…. Mr Xi has broken with this model…. Many pundits believe that Mr Xi is now determined to serve more than two terms in office…. At the same time as economic and political tensions within China have risen under Mr Xi, so the country’s foreign policy has become more nationalistic….

The key to the Deng formula that created modern China was the primacy of economics. Domestic politics and foreign policy were constructed to create the perfect environment for a Chinese economic miracle. With Mr Xi, however, political and foreign policy imperatives frequently appear to trump economics. That change in formula looks risky for both China and the world.

Why No Byzantine Road to Modernity?

Fall of constantinople 22 jpg 400×311 pixels

The extremely-sharp Branko Milanovic asks a very good question that I had never considered before:

Branko Minanovic: Economic Reflections on the Fall of Constantinople: This Sunday, May 29 marks the anniversary of the Fall of Constantinople in 1453…

…Thinking of… what is called (somewhat inaccurately) the Eastern Roman Empire, led me to two, I hope interesting, observations. First, why did the Industrial Revolution not happen in the Eastern Roman Empire?… There are many answers… from… ‘barbarians at the gate’… inability to incorporate lower classes… ‘dead hand’ of a rising military bureaucracy… slavery: cheap labor that provided no incentive for the use of labor-saving machines… [to] those who… thought, like Moses Finley and Karl Polanyi, that Roman institutions did not contain at all the seeds that could have led to capitalist development…. Constantinople become the capital in 330 AD… and that lasted for another 800 to 900 years with no interruption. (That is, if we want to date the end of the Roman Empire in 1204 when Byzantium was conquered by the Crusaders). Wasn’t there enough time to find out if ancient institutions could become capitalistic? Eight or nine centuries seems plenty.

Moreover, what, culturally and institutionally, better place to develop than the Eastern Empire: direct continuator of the larger Roman whole with an educated elite, same institutions, stable currency (solidus, ‘the dollar of the middle ages’), reasonable protection of property rights, people knowledgeable of Greek and Latin and thus able to read everything from Herodotus to Columella’s agricultural treatises without the intermediation of translation, with Roman laws codified and simplified by Justinian. Why did not there develop ‘bourgeois virtue’, ‘inclusive institutions’, Landes’ ‘culture’?  Or does it all have to do with ‘serendipity’ of having coal and expensive labor in one place? Yet despite all of these advantages, no one reading the history of the Eastern Roman Empire would come thinking that there was any chance of it developing in the capitalistic direction. It was as feudalistic as they come…. There is plenty of recent scholarly work on why China failed to become capitalist and start the Industrial Revolution… but it seems to me that equally revealing and rewarding would be to study why the  Eastern Roman Empire, seemingly full of all the necessary prerequisites, failed to do so….

It is a very good question. Why had I never considered it before? I have thought about Hellenistic and classical Greece, medieval India, the long history of China, the Aztecs and the Incas, Rome proper, the Mashriq late in the first millennium, medieval Japan, and the interesting time from 1400-1550 when the Ottoman, Safavid, and Mughal Empires are all on the march with what look like much more effective ways of mobilizing and directing resources than anyone else in the world. But I never thought about Byzantium.

Why not? I think in the back of my mind that I assumed that the Plague of Justinian landed it with a very top-heavy aristocracy that maintained control and was used to exacting much more in the way of resources out of the productive sectors of the economy that they could bear and still grow. And then the empire comes under severe military pressure from both Avars and Sassanids. Tiberius and Maurice hang on–and then with Maurice’s assassination everything goes to hell. From 602 on the empire is always under immense military pressure, and the need to scoop up every possible bezant and to make military mobilization primary precludes any relaxation of taxation or social control that could produce intensive economic growth.

There was a substantial military recovery under the Macedonian Dynasty–perhaps some succession-luck after Basil II the Bulgarian-Killer’s reestablishment of the Danube frontier in the west and conquest of Aleppo in the east could have created breathing-space for economic efflorescence. But, unfortunately, the Normans and the Turks then show up…

So I don’t think you ever get to the second-line question: How to develop governmental institutions that are developmental rather than extractive–to merchants rather than princes, as Andrei Shleifer and I like to put it? The military pressure is overwhelming (and, when it isn’t, inter- and intra-dynasty fratricide is).

And you definitely don’t get to the third line of questions: autocratic rule by emperors under immense land-focused military pressure is enough. And, unlike sea warfare (cf.: Athens, Venice, Genoa, Holland, England), land warfare is inevitably a resource sink rather than a resource source. You never get to the two questions of: How to invent a steam engine with very cheap labor and not-cheap coal? And is there an alternate road to produce enough productivity growth to set a virtuous circle in motion without a steam engine as a non-human power source?

Must-Read: Andrew J. Nathan

Must-Read: Wilhelmine China: a rapidly-industrializing country ruled by a social caste that has lost its role…

Andrew J. Nathan: Who Is Xi Jinping?: “Xi Jinping’s respect for Mao is not a personal eccentricity…

…It is shared by many of the hereditary Communist aristocrats who… form most of China’s top leadership today as well as a large section of its business elite….. Contrary to the Western consensus that Deng saved the system after Mao nearly wrecked it, Xi and many other red aristocrats feel that it was Deng who came close to destroying Mao’s legacy…. The children of the founding elite see themselves as the inheritors of… a vast world that their fathers conquered under Mao’s leadership. Their parents came from poor rural villages and rose to rule an empire. The second generation… do not propose to be the generation that ‘loses the empire.’… They see no irony in cheering Xi Jinping’s attack on corrupt bureaucrats although Mao purged their own fathers as ‘capitalist roaders in power.’ Mao’s purges they excuse as a mistake. But they see today’s bureaucrats as flocking to serve the Party because it is in power and not because they inherited a spirit of revolutionary sacrifice from their forebears. Such opportunists are worms eating away at the legacy of revolution.

The legacy is threatened by other forces… a slowing economy… laid-off workers… underperforming giant state-owned enterprises… bad bank loans… climate change and environmental devastation… downsize and upgrade the military…. Any leader who confronts so many big problems needs a lot of power, and Mao provides a model of how such power can be wielded…. Xi emulates Mao in exercising power through a tight circle of aides whom he can trust because they have demonstrated their personal loyalty in earlier phases of his career…. Xi wants ‘rule by law,’ but this means using the courts more energetically to carry out political repression and change the bureaucracy’s style of work. He wants to reform the universities, not in order to create Western-style academic freedom but to bring academics and students to heel (including those studying abroad). He has launched a thorough reorganization of the military, which is intended partly to make it more effective in battle, but also to reaffirm its loyalty to the Party and to him personally. The overarching purpose of reform is to keep the Chinese Communist Party in power….

Deng built a system… senior leaders were limited to two terms… divided leadership roles… made decisions in consultation with other leaders and retired elders. By overturning Deng’s system, Xi is hanging the survival of the regime on his ability to bear an enormous workload and not make big mistakes. He seems to be scaring the mass media and officials outside his immediate circle from telling him the truth. He is trying to bottle up a growing diversity of social and intellectual forces that are bound to grow stronger. He may be breaking down… the consensus about China’s path of development…. He has broken the rule that retired leaders are safe once they leave office, throwing into question whether it can ever be safe for him to leave office. As he departs from Deng’s path, he risks undermining the adaptability and resilience that Deng’s reforms painstakingly created for the post-Mao regime.

As the members of the red aristocracy around Xi circle their wagons to protect the regime, some citizens retreat into religious observance or private consumption, others send their money and children abroad, and a sense of impending crisis pervades society. No wonder Xi’s regime behaves as if it faces an existential threat. Given the power and resources that he commands, it would be reckless to predict that his attempt to consolidate authoritarian rule will fail. But the attempt risks creating the very political crisis that it seeks to prevent.

Must-Read: Branko Milanovic: How Unequal Is India?

Must-Read: Branko Milanovic: How unequal is India?: “In the 1990s… the survey numbers began to diverge more and more from National Accounts statistics…

…NSS kept on producing a fairly stable consumption Gini… with only a small increase in inequality after India’s sharp turn toward capitalism in the early 1990s… made India inequality look about the same as in developed countries. But until recently we had no other reliable and nationally-representative survey to confront NSS with. Now… we have… the first income based surveys of Indian population for 2004 and, just released by LIS, another same survey for 2011…. First, Indian Gini is… 51… the level of Latin American countries and is some 15 points… higher than… NSS….

Now, if we replace NSS with the new income survey as I have done for the global inequality calculation for the year 2011 (unpublished), you may expect that the greater inequality revealed by IHDS would push global inequality up, especially since India is such a populous country. Right? Wrong…. Global inequality goes down by approximately 1 Gini point since the higher income levels implied by IHDS push Indians toward the middle of the global income distribution and more than offset the contribution to higher global inequality that comes from the stretched-out Indian distribution…. In conclusion, more unequal but richer India, makes the world more equal.

Must-watch: Min Zhu et al.: Breaking the Oil Spell: The Path to Diversification

Must-Watch: Min Zhu et al.: Breaking the Oil Spell: The Path to Diversification: “H.E. Obaid H. Al Tayer… Zeti Akhtar Aziz… J. Bradford DeLong… Simon Johnson… Reda Cherif… Fuad Hasanov…

…Imagine a future in which oil is no longer the main source of energy. Such a future is not necessarily cataclysmic for oil exporters if they succeed in diversifying their economies. To achieve this, however, they must change the prevailing economic model. In the past, countries such as Brazil, Korea, Malaysia, and Singapore have made major strides in economic diversification, and this book distills lessons from their experiences to help guide the Gulf countries and other oil exporters today. Their stories reveal that incentives for firms and workers need to be realigned to develop technologically sophisticated export-oriented industries. More important, their stories show that standard growth policy prescriptions may not be enough and changing incentives for firms and workers is essential. Breaking the Oil Spell sheds light on what constitutes true economic diversification and the role of the state in achieving it.

http://www.imf.org/external/np/seminars/eng/2016/mcd/index.htm | http://bcove.me/5yk1fp5o

Must-read: Rob Johnson: “The China Delusion”

Must-Read: The extremely sharp Rob Johnson is in the camp of those who think that China’s principal short-run problems of problems of macroeconomic management–that investors are not confident that their investments in China will remain profitable–rather than the more-fundamental problems of political economy: the fear by investors that their investments in China are insecure. There’s a return-problems camp. There’s a risk-problems camp. Rob Johnson is in the first:

Rob Johnson: The China Delusion: “China’s transition from an export-led growth strategy to one propelled by domestic consumption…

…is proceeding far less smoothly than hoped. For some people, visions of the wonders of capitalism with Chinese characteristics remain undiminished…. The optimists’ unreality is rivalled by that of supply-siders, who would apply shock therapy to China’s slumping state sector and immediately integrate the country’s underdeveloped capital markets into today’s turbulent global financial system. That is a profoundly dangerous prescription. The power of the market to transform China will not be unleashed in a stagnant economy, where such measures would aggravate deflationary forces and produce a calamity.

The persistent downward pressure on the renminbi reflects a growing fear that Chinese policymakers have no coherent solution to the dilemmas they face. Floating the renminbi, for example, is a dangerous option. After all, with the Chinese economy undergoing wholesale economic transformation, estimating a long-term equilibrium exchange rate that will anchor speculation is virtually impossible, particularly given persistent doubts about data quality, disclosure, and opaque policymaking processes.

But if the current exchange-rate peg to a basket of currencies fails to anchor the renminbi and prevent sharp depreciation, the deflationary consequences for the world economy will be profound. Moreover, they will feed back on the Chinese export sector, thus dampening the stimulative impact of a weakened currency.

The key to stabilising the exchange rate lies in creating a credible development policy. Only then will the pressure on the renminbi, and on China’s foreign-exchange reserves, subside, because investors will see a clear way forward.

Establishing policy credibility will require diminishing the muddled microeconomic incentives of state control and guarantees. It will also require reinvigorating aggregate demand by targeting fiscal policy to support the emerging economic sectors that will underpin the new growth model…

China’s market crash means Chinese supergrowth could have only 5 more years to run

Mapping China s Growth Infographics on What Will China s Growth Look Like in 2020 Business Insider

Now that 90 days have passed, from the Huffington Post from Last August: China’s Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run

Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said–always–that Chinese supergrowth has at most ten more years to run, and more probably five or less. There will then, I have said, come a crash–in asset values and expectations if not in production and employment. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow if at all, and political risks that cause war, revolution, or merely economic stagnation rather than unexpected but very welcome booms will become the most likely sources of surprises.

I was wrong for least twenty-five years straight–the jury is still out on the period since 2005. And that makes me very hesitant, now that a crash–even if, perhaps, not the crash I was predicting–is at hand, to count China and its supergrowth miracle out.

Economic Destabilization Financial Meltdown and the Rigging of the Shanghai Stock Market Global Research Centre for Research on Globalization

A great deal of China super-growth always seemed to me to be just catch-up to the norm one would expect, given East Asian societal-organizational capabilities. China had been far depressed below that norm by the misgovernment of the Qing, the civil wars of the first half of the twentieth century, the Japanese conquest, and the manifold disasters of rule by paranoid Parkinson’s Disease-sufferer Mao Zedong. Take convergence to that East Asian societal-capability norm, the wisdom of first Deng Xiaoping, then Jiang Zemin in applying the standard Hamiltonian gaining-manufacturing-technological-capability-through-light-manufacturing-exports development strategy (albeit on a world-historical scale), and a modicum of good luck, and China seemed understandable. There thus seemed to me to be no secret Chinese institutional or developmental sauce.

Given that, I focused on how China lacked the good-and-honest-government, the societal trust, and the societal openness factors that appear to have made for full convergence to the U.S. frontier in countries from Japan and Singapore to Ireland and France. One of the few historical patterns to repeat itself with regularity over the past three centuries has been that, wherever governments are unable to make the allocation of property and contract rights stick, industrialization never reaches North Atlantic levels of productivity.

Fast economic convergence is a myth in Europe and in emerging economies

Sometimes the benefits of entrepreneurship are skimmed off by roving thieves. Sometimes economic growth stalls. Sometimes profits are skimmed by local notables, who abuse what ought to be the state’s powers for their own ends. China–in spite of all its societal and cultural advantages–had failed to make its allocation of property rights stick in any meaningful sense through the rule of law. Businesses could flourish only when they found party protectors, and powerful networks of durable groups of party protectors at that.

Another headwind for China in the future is that, as the very sharp young whippersnapper Noah Smith1 points out, the Hamiltonian manufactures-export strategy is played out, not just for poorer countries wishing to emulate China but for China in the future. Historically, the Hamiltonian strategy of moving farmers to factories and setting them to work using imported manufacturing technology is the only reliably-successful development strategy, because manufacturing technology is the only one that can be reliably imported–you buy the machines to make the products, you buy the blueprints for the products to be made, and with a few engineering coaches hired from abroad you are in business. But that requires that people outside your country buy your low-priced manufactures. And the world has reached a point at which demand for manufactured goods is no longer highly elastic. Already James Fallows2 reports on Chinese entrepreneurs lamenting how the real profits flow to the owners of scarce natural resources or the owners of brands and of design and engineering resources, leaving those who actually make the manufactured goods with only crumbs.

Greece or Chile thus seemed to me to be China’s most-likely future, and it always seemed to me it would take quite a while to get there.

Yet, so far, contrary to my expectations for more than a generation, China has hitherto kept growing and growing rapidly even without anything a North Atlantic economic historian would see as the rule of law. It has had its own system of what we might call industrial neofeudalism. Instead of property and contract rights the king’s judges will enforce, Chinese entrepreneurs have protection via their fealty to connection-groups within the party that others do not wish to cross. It is, in a strange way, almost like the libertarian fantasy in which you hire your own personal police department in a competitive market come to life. Such a system should not work: Party connection-groups should find themselves unable to referee their disputes. The evanescence of their positions should lead them into the same shortsighted rent-extraction logic that we have seen played out over and over again in Eastern Europe, sub-Saharan Africa, Southeast Asia, South Asia, and Latin America. And yet, somehow, in China, eppur si muove.

Now I do believe that after this stock market crash China is likely to have another five to ten years of very healthy growth. The party can redistribute income from the rich to the middle and the poor, and from the coasts to the interior. Mammoth demand from an enriched urban middle class and peasantry can provide business for all of China’s factories that otherwise would be selling into an export market with lower-than-expected demand elasticity. The interior can be brought up to the manufacturing productivity standards of the coast.

But that, I think, is the last trick the Chinese government can play to keep anything like Chinese supergrowth going. And after it is played, China will–unfortunately–more likely than not become another corrupt middle-income country in the middle-income relative development trap.

I have been wrong about the duration of China’s growth miracle for all of my adult life. But I am confirmed in my forecast when I read the thoughts of very sharp China perma-bull Stephen Roach3:

There are many moving parts in China’s daunting transition…. While progress on economic rebalancing is encouraging, China has put far more on its plate: simultaneous plans to modernize the financial system, reform the currency, and address excesses in equity, debt, and property markets… [plus] an aggressive anti-corruption campaign, a more muscular foreign policy, and a nationalistic revival couched in terms of the “China Dream.”… The economic-reform strategy [could be] stymied by the lack of political will in a one-party state…. History is littered with more failures than successes in pushing beyond the per capita income threshold that China has attained. The last thing China needs is to try to balance too much on the head of a pin. Its leaders need to simplify and clarify an agenda…

Therefore I once again say: China’s supergrowth has five more years to run. And, after it ebbs, China’s success at grasping the future depends not on economic growth but on political reform–the establishment of the rule of law and an open society rather than the rule of the CCP and a closed party elite–and only after successful political transition might economic growth and convergence resume.