Help the world's poor: Buy some new clothes

This is a guest post written by Benjamin Powell, an assistant professor of Economics at Suffolk University and a Senior Economist with the Beacon Hill Institute.  He is the editor of Making Poor Nations Rich, and is currently writing a book entitled No Sweat: How Sweatshops Improve Lives and Economic Growth. Back to school shopping leads many people to buy apparel that was made in sweatshops. Rather than feel guilty for “exploiting” poor workers, shoppers should rejoice.  Their spending is some of the best aid we can give to people in poorer countries.

When workers voluntarily take a job they demonstrate that they believe the job is the best alternative available to them – even when that job is unsafe and the pay is very low compared to wages in the United States. That’s why economists with political views as divergent as Paul Krugman and Walter Williams have both written in defense of sweatshops.

Sweatshop jobs are often far better than the vast majority of jobs in the countries where they are located. David Skarbek and I researched sweatshops that were documented in U.S. news sources (or see here for my shorter, more general defense of sweatshops). We found that sweatshop worker earnings equaled or exceeded the average national income in 9 out of 11 countries we studied. Working in a sweatshop paid more than double the national average in four of the countries.

Sweatshops can also play a crucial role in economic development. Sweatshops bring investment, better technology, and the opportunity for workers to build skills. It was not long ago that sweatshops existed in many now-wealthy Asian countries.

New York Times columnist Nicholas Kristof wrote that “We need to build a constituency of humanitarians who view low-wage manufacturing as a solution” for poverty in the third-world.   I hope many AidWatchers will join that constituency by defending sweatshops.

Superstition and Development

By Peter T. Leeson, BB&T Professor for the Study of Capitalism at George Mason University. Gypsies believe that the lower half of the human body is invisibly polluted, that supernatural defilement is supernaturally contagious, and that non-Gypsies are spiritually toxic.

Far from irrational, these superstitions are central to Gypsies’ system of social order. Gypsies can’t rely on government-created legal institutions to support cooperation between them. Many of their economic and social relationships are unrecognized or illegal according to state law. Yet Gypsies’ need for law and order is as strong as anyone else’s.

To provide such order, Gypsies leverage superstition.[1] Consider Gypsies’ belief that non-Gypsies are spiritually toxic and that supernatural toxicity is contagious. Unable to use government to prevent cheating, Gypsies must use the threat of ostracism to prevent socially destructive behavior.

The problem is that Gypsy societies are tiny islands in a sea of non-Gypsies. Ostracism isn't much of a punishment if ostracized Gypsy cheaters can integrate and interact with the larger outside society. To give the threat of ostracism “teeth,” Gypsies cultivated a strong belief that outsiders are supernaturally polluting, that their pollution is contagious, and thus that interacting with outsiders would supernaturally contaminate them too.

Under this belief, the threat of ostracism is serious indeed: cheating cuts one off from all social contacts. This deters Gypsies from socially destructive behavior. Perhaps unexpectedly, Gypsies’ superstition promotes law and order.

We often look down on the superstition of “others,” such as Gypsies. But Europeans also have a rich history of superstitions, some of which may also have been socially productive. When medieval judges were unsure about a criminal defendant’s guilt or innocence, they ordered him to undergo an ordeal.[2] In the hot water ordeal, for instance, the defendant was asked to plunge his hand into a cauldron of boiling water. If the defendant’s arm showed signs of severe burning or infection three days later, the court convicted him. If his arm showed no such signs, the court exonerated him. These ordeals were based on a superstition according to which God performed a miracle for innocents, permitting them to escape trial by fire unscathed.

As in Gypsies’ case, what appears to be an irrational belief on the surface, on closer inspection, is socially productive. Confronted with the specter of boiling their arms at ordeals, guilty defendants would always decline them. They believed in the superstition according to which God exonerated the innocent and convicted the guilty through ordeals. So they expected to be burned and then convicted if they went through with them. Better to fess up or to settle with their accusers instead.

In contrast, innocent defendants would always want to undergo the ordeal. They also believed in the superstition that underlaid ordeals. So they expected God to prevent their arms from boiling, and thus to exonerate them, if they went through with them. Innocent defendants had nothing to fear from undergoing the ordeal. So they were willing to undergo them.

Since only guilty defendants would decline an ordeal and only innocent ones would undergo one, judges learned whether defendants were guilty or innocent by observing how they reacted to the specter of the ordeal. Medieval citizens’ superstitious belief facilitated criminal justice and, with it, law and order.

This isn’t to say that all superstitions promote law and order. They don’t. But we shouldn’t dismiss the possibility that some bizarre, scientifically unfounded beliefs may actually improve social cooperation by substituting for institutions of government where those institutions don't exist or work well. Which superstitions in developing countries are in this category?

[1] For a comprehensive economic analysis of Gypsy superstition see, Leeson, Peter T. 2010. “Gypsies.” Mimeo.

[2] For a comprehensive economic analysis of medieval judicial ordeals see, Leeson, Peter T. 2010. “Ordeals.” Mimeo.

Wow did somebody actually read one of my obscure academic articles?

I was surprised to get the illustrated award in the mail some time ago. I didn't know anybody actually ever read this article. Of course, I don't know exactly what it means to be "most cited" -- you mean relative to the usual average of your adviser, your mother, and your spouse reading your articles? (My co-blogger Laura Freschi reassured me that she had never heard that I had written such an article.) Anyway, the answer to the title question of the article What did structural adjustment adjust? was -- contrary to conventional wisdom -- not much, as far as policy changes in the 80s and 90s. Macroeconomic policies did get better in many countries (according to the mainstream academic consensus of what's "better"), but these improvements were unrelated to the intensity of World Bank/IMF "Structural Adjustment Loans."

The World Bank and IMF seem to have achieved the worst of both worlds -- they were blamed for forcing policy conditions on unwilling governments, without actually succeeding at enforcing those conditions. It even led to a xenophobic populist backlash in some Latin American countries. The Fund and the Bank tried to reverse this public relations disaster in the new millennium by retitling the loans Cute Puppies and Adorable Children Poverty Reduction Growth Facilities, but I think they were lastingly tarnished.

A more articulate economist formulates perfectly my most unpopular development argument

From the wonderful, recently updated book by Paul Seabright, via Greg Mankiw via Peter Gordon:

Politicians are in charge of the modern economy in much the same way as a sailor is in charge of a small boat in a storm. The consequences of their losing control completely may be catastrophic (as civil war and hyperinflation in parts of the former Soviet empire have recently reminded us), but even while they keep afloat, their influence over the course of events is tiny in comparison with that of the storm around them. We who are their passengers may focus our hopes and fears upon them, and express profound gratitude toward them if we reach harbor safely, but that is chiefly because it seems pointless to thank the storm. (p. 25)

I think Greg is thinking mainly of politicians' responsibility for recession or expansion, but Paul's point was more general -- nobody is really in charge but the economy (usually) works anyway.

In another classic passage from the first chapter titled “nobody’s in charge”, Paul describes buying a shirt and then wonders how it would happen if somebody had to be in charge of providing shirts:

The United Nations would hold conferences on ways to enhance international cooperation in shirt-making…committees of bishops and pop stars would periodically remind us that a shirt on one’s back is a human right. The humanitarian organizations Couturiers sans Frontieres would airlift supplies to sartorially challenged regions of the world…the columns of newspapers would resound with arguments over priorities and needs. In the cacophony I wonder whether I would still have been able to buy my shirt. (p. 18)

We have this terrible tradition in development of leader-worship, in which leaders get credit for any economic success that happens on their watch, and we think development can only happen through the intentional designs of the leaders (advised by us all-knowing development experts). This blog has vainly tried to protest this is all wrong-headed. I'm glad Paul is there to say it better than I can -- read his book!

Can aid win hearts and minds?

A recent Christian Science Monitor article reported that USAID is “losing hearts and minds” in Afghanistan’s northeastern Badakshan province because of failed and shoddy projects, corruption, secrecy and waste. Given how much of the US aid budget is spent trying to make the world a safer and more secure place for Americans, you might think there would be plenty of studies testing the hypothesis that aid funds can reduce terrorism or shift hostile public opinion. In fact, there is startlingly little evidence that we know how to use aid for this purpose.

Andrew Wilder, who led a two-year study at Tufts on the relationship between aid and security in Afghanistan, Pakistan and the Horn of Africa, has studied perceptions of the US following the 2005 earthquake in Pakistan, for which the US quickly pledged $50 million and played an early and visible part in relief efforts. A widely-cited poll taken a month after the quake showed that the percentage of Pakistanis with a favorable opinion of the US had doubled, from 23 percent to 46 percent.

But it took only six months for those numbers to drop back down to near pre-quake levels. A year and a half after the earthquake, Wilder’s team found that while the US response was effective from a humanitarian perspective, there was “little evidence of any significant ‘hearts and minds’ or security benefits....”

A slightly sunnier outlook on the question  comes from a quantitative study on Iraq by Eli Berman, Jake Shapiro, and James Felter, entitled “Can Hearts and Minds Be Bought?” The answer seems to be a tentative “sometimes:” The authors concluded that increased public service provision did reduce violent incidents, but could only speak to CERP funds, which are allocated to small-scale projects and made up a very small fraction of overall reconstruction funding.

But researchers working with Wilder on the Tufts study conducting interviews in eastern Kenya found that small-scale projects (carried out in this case by AFRICOM’s Joint Task Force) didn’t succeed in getting communities to change their minds about the US. The authors explained:

…We found that attitudes were influenced by factors that went beyond the scope of aid projects- faith, the relationship between target populations and the Kenyan state, US foreign policy, and events in Somalia- were all much more important.

And in a context where US foreign policy in Afghanistan and the Middle East is perceived as an attack on Islam, a strategy that aims to win both "hearts" and "minds" appeared to people locally as an attempt to directly influence a Muslim community's faith and beliefs.

Wilder also tipped us off to a German longitudinal study underway in northeast Afghanistan. They found that aid positively influenced perceptions of the peacekeeping mission, but only when people felt that their own security was not at risk. Aid also had a positive impact on perceptions of local government, but these perceptions were “short-term and non-cumulative.”

So, are there cases in which aid COULD be used to promote security objectives? Maybe. The studies cited here lead to a couple of possible hypotheses, both of which would need much more research:

1. Aid could help consolidate stability in areas that are already relatively stable, but is not much use in stabilizing a war zone
2. Aid could help shift public opinion in a country that is already favorably disposed towards the US, but is less useful where attitudes are hostile to begin with.

It is hard enough to demonstrate that development assistance effectively promotes development. Especially in conflict zones like Afghanistan, the smart aid programs that can show lasting impact are sadly few and far between. The additional, unproven assumption that aid can tamp down terrorism and change the way people think about Americans in the midst of a conflict fought by Americans is almost certainly too much for it to bear.

African Export Success: Shooting Fowl while riding an Antelope

Contrary to the image of African countries as static mono-exporters, it is unpredictable from one period to the next which will be the top exports in each country. Consider this picture of Tanzania’s top exports in 1998 and 2007.

This is pattern of rapidly changing success is the norm across African countries. If you take the top 100 exports in each country in 1998 (or the first year in which data is available), its correlation with the rank of those same exports in 2008 is only .29.

Moreover, almost none of the changing success is explained by global commodity prices. In fact, there is little difference in the dynamic changeability of African commodity export performance and that of the continent’s non-commodity export performance. Nor is there any difference between how much global prices explain commodity exports (which is hardly at all) compared to non-commodity exports.

The usual stereotype of African exports as just given by a natural commodity or mineral endowment, with fluctuations mainly explained by global commodity prices, is just ... wrong.

These findings were featured in a paper by Ariell Reshef  (UVa) and myself in the National Bureau of Economic Research conference on African  Development Success July 18-20 in Accra.

What does it all mean? Actually, the patterns in Africa were similar to those in non-African countries. In all cases, succeeding in exports requires aiming at a moving target. Who will do better under these conditions, state industrial policy planners or decentralized entrepreneurs with specialized knowledge of what is working and what is not in each sector?

Was the poverty of Africa determined in 1000 BC?

The usual development conversation about determinants of per capita income revolves around modern choices of institutions or economic policies. But what if history is the main determinant of development today? A paper by Diego Comin, Erick Gong, and myself was just published in the American Economic Journal: Macroeconomics. We collected crude but informative data on the state of technology in various parts of the world in 1000 BC, 0 AD, and 1500 AD.

1500 AD technology is a particularly powerful predictor of per capita income today. 78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 AD – even BEFORE the slave trade and colonialism.

Moreover, these technological differences had already appeared by 1000 BC. The state of technology in 1000 BC has a strong correlation with technology 2500 years later, in 1500 AD.

Why do technological differences persist for so long? The ability to invent new technologies is much greater when you have more advanced technology already. James Watt had acquired a lot of tech experience in the mining industry which he used to invent the steam engine. Other people with the ability to make steel could then slap his steam engine on a vehicle running along steel rails and give us railroads.

Past technology alters probabilities of future success, but does not completely determine it. The most famous counter-example: China was historically technologically advanced and did NOT have the industrial revolution.

A large role for history is still likely to sit uncomfortably with modern development practitioners, because you can’t change your history. But we have to face the world as it is, not as we would like it to be: deal with it. Perhaps when you acknowledge the importance of your own history, you are then more likely to transcend it.

Fitting Kwame the cabbie into the brain drain equation

The following post is by Yaw Nyarko, a Professor of Economics at NYU and founding director of Africa House. Not too long ago I got in a cab in New York with a Ghanaian taxi driver named Kwame. He remembered picking me up several years ago. What a memory he has. Anyway, he told me he has four children: one is a doctor and the two youngest are in private school. He said his kids were doing exceptionally well, and he is paying for elite schooling from his taxi driver salary.

Aid Watch has blogged about a paper I co-authored which argues four ways the benefits of brain drain could outweigh the costs to African countries. Kwame made those arguments real to me. I wondered again why we rarely consider the gains to the migrants themselves when talking about the African brain drain.

Kwame said he was glad to see me, but he nearly died this year. “Died?” I asked, not sure I heard him clearly through all the Manhattan traffic. Yes, he explained, he got malaria while in Ghana; it was cerebral malaria which was not properly treated. Clearly, this was one brain drainer who still went back to his home country and cared about public services there.

I was going to dinner with the Minister of Health for Ghana that same evening. I thought to myself that I should tell the Minister that Kwame believes something should be done about the open sewers in the country and there should be more insecticide spraying as was done in the Nkrumah era.

I got out of the taxi and left a huge tip. I felt very proud of Kwame as I thought of his four children educated off his taxi earnings. I also reminded myself to redo the calculations on the pluses and minuses of the brain drain to account for the Kwame’s.

How the crisis is making us more aware of the best economists: Alberto Alesina, for example

One small positive side-effect of the current crisis is more public recognition of economists' research. The media frequently gets wrong who are the best economists to quote on any given issue (no names please), but sometimes they get it right. So I want to add my own wee bit to Greg Mankiw's much more high-powered blog-push to recognize Alberto Alesina. Greg cites a new Business Week article on Alesina's research on fiscal stimulus vs. budget cuts.  The Business Week headline was "Alesina Who?" which definitely confirms the theory about the media being clueless on economists.

Of more direct interest to readers of this blog is Alesina's work on political economy and foreign aid (Alesina played a huge role in founding the modern field of political economy). On aid, see in particular his articles on whether corrupt countries receive less foreign aid, and who gives aid to whom and why. If you are still not satisfied, check out his web site at the Harvard Economics Department. (Full disclosure: I have known Alberto for many years, have learned a lot from him, and co-authored several papers with him.)

Can we move beyond a religious war over free markets?

UPDATE: Did I betray the free market side? see end of this post. From a review I wrote in yesterday's NYT Book Review of Matt Ridley's book The Rational Optimist:

The word “market” tends to set off a religious war. Opponents accuse proponents of blind faith in the Miracle of the Market. The proponents too often seem to confirm this accusation by overpromising and underproving what the market can do. (Opponents are often guilty of equally unthinking belief in the Immaculate Government Intervention.) Each side recites its creeds, giving heart to the faithful but making no converts.

Alas, Matt Ridley’s new book, “The Rational Optimist,” which argues for markets as the dominant source of human progress, is such a case. ... he shows a surprisingly casual attitude toward logic and evidence, which is likely to cause the antimarket side to see him as rigging the contest. It’s an example of a phenomenon many economists have noted: natural scientists have remarkably low standards for reasoned argument when they discuss social science, as compared with the rigor they bring to their home fields

....

Nor does Ridley grapple with why so many people doubt market-based progress. His entertaining account of how such pessimism is always in fashion — whether the subject is overpopulation, genetic engineering, Y2K or global warming (he thinks we’ll all end up living on a slightly hotter but richer planet) — also predicts that today’s pessimists will ignore his message. Ridley is tone-deaf to the 20th-century traumas that were huge setbacks for the gospel of progress. “Despite the wars,” he writes, “in the half-century to 1950, the longevity, wealth and health of Europeans improved faster than ever before” — a true statement that surely misses the point.

Ridley also fails to really address inequality and uncertainty. The free market may produce cornucopia, doubters concede. But it also gave Richard Fuld of Lehman Brothers $60,000 a day (in 2007, the year before the company went bankrupt) while one billion other people survived on a dollar a day. In his discussion of global warming, Ridley argues that we’ve avoided all previous doomsday predictions. But our resourcefulness, or our luck, could run out sooner or later.

A case for individual freedom and market exchange would have to convince doubters that alternatives would create even more inequality and uncertainty, or something worse. Such a case could argue that some of those 20th-century traumas were caused by a backlash against both the “free” and the “market,” and that central planning tends to create even more rigid inequality between political “ins” and “outs” while lacking the creativity needed to cope with future threats. But the case must move from “maybe” to logic and evidence. Alas, this book does not get there.

So read “The Rational Optimist” for its fascinating history of trade and innovation. But also ponder whether the debate over markets can move forward while it remains a purely religious war. Those willing to confront honestly all the doubts about the “free market” might then actually be persuasive in arguing that it is the worst system humans have ever tried — except for all the others.

UPDATE: some have expressed puzzlement and dismay that I was critical of a book when I am in agreement with the conclusions of the book: enthusiasm for free trade, free markets, the creativity of individuals to fuel optimistic hopes that we will keep solving our problems and getting better off.  Did I betray my own allies, the free market side?

There are two models of book reviewing: (1) just be positive about a book when you are on the same side of the conclusions, (2) analyze the argument that led to the conclusions, and be positive or negative based on whether it's a good argument. My model was obviously (2).

It doesn't do the free market side any favors if all of its advocates are willing to overlook sloppy logic and evidence and just follow clan-like loyalties based on the final conclusions. We will only move beyond the "religious war" if both the anti-market and pro-market sides are rigorously honest about the strengths and weaknesses of their own arguments.

Humanizing poor people

A certain economist praises the Portfolios of the Poor book in a thrilling and moving video -- for showing us the complexity and resourcefulness of poor individuals. See here.

Was Africa set up to fail on the Millennium Development Goals?

“Africa far from reaching Millennium Development Goals”

News report on African Development Bank conference, May 28, 2010

“No country in sub-Saharan Africa is on course to achieve all the Goals by 2015.”

United Nations, Key Messages for September 2010 Summit

“It is easy to see that Sub-Saharan Africa lags on all the MDGs.”

World Bank and IMF, Global Monitoring Report 2010, full text download page here

Africa has had some successes and good news in the last decade, and has made much progress on some social indicators over a longer period. Why isn’t that reflected in this drumbeat of universal failure on the MDGs?  The answer is that Africa was set up (probably unintentionally) to fail on the MDGs.

This set-up to fail is not well known, probably because you have to go through some really boring details to document it. One problem with the MDGs is that success on a goal is very sensitive to how you define the goal. There are actually three different choices you have to make to define a goal in 2015 relative to the 1990 baseline. Let’s use primary enrollment as an example, and say that a random country went from 50 percent primary enrollment in 1990 to 90 percent enrollment in 2015.

(1) Do you define the goal in CHANGES or in LEVELS (e.g. the change in primary enrollment from 1990 to 2015, or the level of primary enrollment attained in 2015)?

If your answer to (1) is CHANGES, you still need to make two more decisions:

(2) Will it be PERCENT CHANGE or ABSOLUTE CHANGE (e.g. percentage change in primary enrollment (90-50)/50=80%, or the absolute change (40 percentage points)?

(3) Will you use the USUAL social indicator or its REVERSE (e.g. percent enrolled OR percent NOT enrolled)?

(1) defines two possible indicators of LEVELS vs. CHANGES, and the different combinations of (2) and (3) create 4 different ways to define CHANGES. The MDGs did not make consistent choices, but actually use 4 out of the 5 possible combinations for MDGs 1 through 7, as shown in the table (where the actual indicator used is highlighted in yellow).

These choices are not neutral. Initial conditions determine whether a given choice makes it easier or harder to meet the Goal. Most obviously, if you have a LEVEL goal (primary enrollment, gender equality), the further away you are at the beginning, the harder it is to meet the goal.  This was true for Africa for MDGs 2 and 3. (A plus sign shows whether each way of stating the goal would have INCREASED the probability of Africa making it, a MINUS sign indicates the choice of goal made it harder for Africa, relative to other countries with different initial conditions).

If you have a high initial level then a PERCENTAGE DECREASE is harder to achieve.  This was true for poverty (MDG 1)  and child mortality (MDG 4) in Africa. It was also true for MDG 7, because the REVERSE INDICATOR was used (percent WITHOUT clean water instead of the USUAL INDICATOR:  percent WITH clean water).

If you have a low initial level, on the other hand, a PERCENTAGE INCREASE would be easier to achieve. If the MDGs had been set in terms of PERCENT CHANGE in the USUAL INDICATOR (as it was for MDGs 1 and 4), then Africa would have easily met MDGs 2,3, and 7 on primary enrollment, gender equality in enrollment, and percent with clean water, and all of the above statements about universal African MDG failure would be nonsense.

Instead, each of the goal choices made for MDGs 1, 2, 3, 4, and 7 made it HARDER (if not impossible) for Africa to meet the goals, compared to alternative, equally plausible choices. ANY consistent choice of goal type except LEVELS would have made it easier for Africa to meet some of the goals.

The craziest statements implicitly made above are that Africa is failing on MDGs 5 and 6 (67% reduction in maternal mortality and reversing spread of AIDS), since there were NO data on these indicators for the benchmark year of 1990 (actually  hardly ANY reliable data for any year until very recently).

So this is SO boring, and who cares? Nobody, apparently, because the sweeping statements about Africa failing are made every year without anyone bothering to check the details. Because Africa ALWAYS fails, right?

I published an academic paper on all this here in 2009, with a working paper version available since 2007. Michael Clemens and Todd Moss and Clemens, Moss, and Charles Kenny had made related criticisms as early as 2004-2005. Michael Clemens in 2004 described how Africa's progress in education was impressive by both historical and contemporary standards. The MDG crowd are aware of these papers. For example, the World Bank and IMF quote them in their recent Global Monitoring Report 2010 . This report acknowledges “what low-income countries {mainly African} achieved before the crisis {on the poverty and social indicators}  is indeed remarkable.” But this point was soft-pedaled and has had no effect on the endlessly reiterated "Africa fails on all MDGs" line.

I think the MDG design was unintentional after some conversation with the original creators of the goals, who did not intend the MDGs to be applied at the regional or country levels. What is less forgivable is the aquiescence in making Africa look like a failure after the bias was clear to anyone who would bother to check. Of course, there are areas and time periods where Africa has done badly, but is that any reason to take the successes and make them look like failures?

The Age of Democratic Capitalism is Over

Washington Post reviews three new books arguing this. Very convincing, except for the "over" part.

Oops, did I just prove "Confessions of a hit man" conspiracy?

Ray Fisman in Slate takes my paper with Daniel Berger, Nathan Nunn, and Shanker Satyanath on Commercial Imperialism as partial confirmation of John Perkins' allegation of a global conspiracy to take down poor nations for the benefit of rich corporations. This is fun, so let's run with it. Of course there's a eeny weeny difference between conspiracy theories and social science that just says, yes, CIA interventions could have been helpful to US corporations making a few export sales in US client states (Fisman knows this as he makes clear in the article). The full-fledged conspiracy version has the World Bank coordinate and centrally plan the actions of myriads of large corporations, US government agencies, and other aid agencies, all with their own separate interests, to all work for the general obscene profit of all corporations. Which is a bit implausible when the World Bank can't even plan malaria control.

Alright, you got me, I'm part of the conspiracy. They threatened my dog Lucy if I did not recant my candid research. Which is also kind of the problem with conspiracy theories: if there is no evidence for them -- it just means the conspiracy hid the evidence! Conspiracy theories never go out of fashion because it's impossible to disprove them.

The NYT today had a front pager about a conspiracy theory in Pakistan that sees a vast effort to destroy Pakistan led by an American "think tank." I wonder which one? Some think tanks I know (NOT including my good friends in think tanks) could possibly wield deadly weapons of mass boredom.  Let me investigate further and get back to you.

Unfortunately for those fighting the proliferation of conspiracy theories, the US military is doing it's best to spread mass paranoia about Americans everywhere. According to the headline story in yesterday's NYT, General David Petraeus has ordered a vast secret intelligence gathering program around the world, among other things:

General Petraeus’s September order is focused on intelligence gathering — by American troops, foreign businesspeople, academics or others — to identify militants and provide “persistent situational awareness,” while forging ties to local indigenous groups.

Thanks a lot General Petraeus! Now no American academic can go anywhere in the world with being seen as a spy. John Perkins knew it all along...

Commercial Imperialism? Political Influence and Trade During the Cold War

We exploit the recent declassification of CIA documents and examine whether there is evidence of US power being used to influence countries' decisions regarding international trade. We measure US influence using a newly constructed annual panel of CIA interventions aimed at installing and supporting leaders during the Cold War. Our presumption is that the US had greater influence over foreign leaders that were installed and backed by the CIA. We show that following CIA interventions there was an increase in foreign-country imports from the US, but there was no similar increase in foreign-country exports to the US. Further, the increase in US exports was concentrated in industries in which the US had a comparative disadvantage in producing, not a comparative advantage. This is consistent with US influence being used to create a larger foreign market for American products. Our analysis is able to rule out decreased bilateral trade costs, changing political ideology, and an increased supply of US loans and grants as explanations for the increase in US exports to the intervened country. We provide evidence that the increase in US exports arose through direct purchases of US products by foreign governments.

This is the abstract for an NBER Working Paper just released, which I co-authored with Daniel Berger, Nathan Nunn, and Shanker Satyanath. Read the whole thing here.

Dani Rodrik's pessimism on democracy: let the debate begin!

Dani has been dropping tantalizing hints about his forthcoming book. One of his arguments, as judging by the preview in his column on the Greek crisis, is the political trilemma: Democracy, globalization, the nation state are not mutually compatible, you can only pick 2 out of 3.

I look forward to the book for the detailed logic and evidence. Of course, skepticism is allowed already, since Dani's already put it out there and since the burden of proof is on the proponent of a new hypothesis. So far I have 2 big reasons for skepticism:

(1) exaggerating the constraints of globalization.

Dani has a much more respectable version of this than Tom Friedman's ridiculous "golden strait jacket," but the reason for doubt are the same: we do observe a lot of diversity of policies in the rich globalized economies, and they became rich all the same.

(2) over-predicting the demise of either democracy or good economics

There's a long history of arguments about why democracy is incompatible with good economics that benefits everyone. Either the masses will vote to expropriate the capitalists, or the capitalists will use their wealth to buy votes to get power to exploit the masses. Neither happened in capitalist democracies (maybe the two threats cancel each other out).

So I am skeptical about the Rodrik Trilemma, but maybe the book will provide some convincing arguments. Can't wait!

Inequality does cause underdevelopment: insights from a new instrument

Consistent with the provocative hypothesis of Engerman and Sokoloff (1997, 2000), this paper confirms with cross-country data that agricultural endowments predict inequality and inequality predicts development. The use of agricultural endowments –specifically the abundance of land suitable for growing wheat relative to that suitable for growing sugarcane -- as an instrument for inequality is this paper’s approach to problems of measurement and endogeneity of inequality. The paper finds inequality also affects other development outcomes – institutions and schooling –which the literature has emphasized as mechanisms by which higher inequality lowers per capita income. It tests the inequality hypothesis for development, institutional quality and schooling against other recent hypotheses in the literature. While finding some evidence consistent with other development fundamentals, the paper finds high inequality to independently be a large and statistically significant barrier to prosperity, good quality institutions, and high schooling.

I got two useful suggestions yesterday. One is why not use the blog to promote my own research papers, some of which remain tragically under-read and under-cited. The second is why not balance my blog posts a bit more from my usual playfulness, irreverence, and satire with an occasional reminder that I actually do work as a serious academic for a living?

The title and abstract are from my article in the Journal of Development Economics, Vol. 84, Issue 2, November 2007, 755-776. For dataset click here.

The knowledgeable people agree on how to reform finance, so Senate gets it wrong

Senate Financial Bill Misguided, Some Academics Say As Democrats close in on their goal of overhauling the nation’s financial regulations, several prominent experts say that the legislation does not even address the right problems, leaving the financial system vulnerable to another major crisis

so says the NYT today.

Meanwhile, the academic I respect most on Finance, Ross Levine of Brown, has just released an NBER Working Paper called The Autopsy of the Financial System (ungated version), with this abstract:

In this postmortem, I find that the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system’s demise. The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble ("accident") and the herding behavior of financiers rushing to create and market increasingly complex and questionable financial products ("suicide"). Rather, the evidence indicates that regulatory agencies were aware of the growing fragility of the financial system due to their policies and yet chose not to modify those policies, suggesting that "negligent homicide" contributed to the financial system’s collapse.

...which gives yet more reason to worry that current reform bills are getting it wrong.

The concern about getting it wrong was what prompted this blog to argue clumsily against the indiscriminate rage towards malevolent bankers as individuals, and pleaded with lawmakers "not to hit the send button while you're angry." 

This is an extremely serious issue that will affect both the future of the US economy and the cause of global development, so therefore it is unlikely anyone will pay attention.

Does complexity doom us? Not always

The NYT has an article about the proliferation of things too complex to understand -- Afghanistan, Iraq, the modern economy, collateralized debt obligations, health care reform, the 10,000 page manual for US accounting standards -- with some gloomy vibes:

There is a lot of end-of-days talk when it comes to this subject. You will find a strain of it in the work of Joseph Tainter, an anthropologist at the University of Utah and the author of “The Collapse of Complex Societies.” In the book, Mr. Tainter examines three ancient civilizations, including the Roman Empire, and explains how complexity drove them to ruin, essentially by bankrupting them.

Here's a more hopeful note, along with a warning. Complex systems do not necessarily have to be understood by any one person for them to work well.  They just need to have rules and incentives for the participants that make them self-correcting.

For example, supply and demand manages the allocation of millions of goods to millions of different users in our economy without anyone in charge. When a good is in excess supply, people act so that its price goes down. When a good is in excess demand, people act so that its price goes up. The system self-corrects. (Ideological code word alert -- just because I gave this example doesn't mean I am some extreme free market fanatic that believes the market solves everything and we don't ever need government for anything ever. It just means I understand supply and demand.)

Here's the warning. Where complexity gets us into trouble is when somebody creates some complex, impossible-to-understand-or-manage thing that is NOT self-correcting.  I will leave it to the readers which items on the above list are in that category.

Are aid agency heads chosen for their looks?

A new NBER Working Paper finds that corporate CEOs are better looking than others, i.e. non-CEOs of the same general demographic. Specifically, they look more "competent" to observers than the control group of non-CEOs.  This is the latest installment on the "economics of beauty" literature, which finds that looking good pays off in economic terms in many surprising ways. Since Aid Watch can never resist a crazy notion, this gave us the idea of running a test of this fascinating hypothesis applied to private CEOs vs. executives of aid agencies. So here goes: which of the leaders in these pictures looks more competent?

Oh, I forgot to mention, the authors of the NBER paper could not find any evidence that the better-looking executives really WERE more competent. But there must be SOME reason the market recruits the good looking. An old theory suggests that firms engage in costly signaling behavior to commit to quality for consumers, such as spending on plush offices that it can only afford if the firm does indeed deliver quality products and has high sales and profits. If you are going to redecorate the office, why not redecorate the CEO also?

Who did you pick above? Their real identities (clockwise from upper left) are:  Robert Iger, the CEO of Disney, Vikram Pandit, CEO of Citi, Supachai Panitchpakdi, UNCTAD Secretary-General, Irene Rosenfeld, CEO of Kraft, Helene Gayle, head of CARE, and Douglas Alexander, Head of British Department for International Development.

Actually, EVERYBODY here looks pretty good compared to the rest of us. So this completely unscientific exercise is suggestive that heads of aid agencies also are partly chosen on their looks.

After laborious attempts, Aid Watch was unable to come up with a comprehensive theory why this might be so. So we ask you the readers: are aid leaders really chosen on the basis of their looks, and if so, why?