What is the economic rationale for taxing incomes of women less than those of men? Does it improves overall welfare or is it just an income redistribution scheme? For an overview of the arguments for and against gender-based taxation, visit the Vox forum; see, in particular, the opposing views contained in the recent articles by Alberto Alesina (and his co-authors) and Gilles Saint-Paul.
Friday, March 21, 2008
Monday, March 3, 2008
Avoiding the Resource Curse
In few years from now, Eritrea will probably become an exporter of mineral resources such as gold and copper. In light of this development, it is appropriate to discuss about the prospects and challenges for an economy that will likely depend heavily on resource revenues.
The discovery of natural resources represents an addition to the wealth of a nation and should normally be welcomed. So why should one worry about it? Well, as experience of resource-rich countries shows, resource abundance may not always be good news. To be specific, on average an abundance of natural resources tends to slowdown overall economic growth, a phenomenon referred to as the "resource curse," and even worsen income inequality.
One obvious cause of resource curse is mismanagement by resource owners (usually governments). Another is that, with the discovery of natural resources, some of the productive inputs (labor and capital) are shifted away from the manufacturing sector, which is the source of long-term growth. Moreover, higher mineral wealth leads to an appreciation of the real exchange rate, which in turn hurts export competitiveness of the economy (so called Dutch disease). Add to these the fact that prices of natural resources are highly volatile with substantial uncertainties about export revenues.
To begin with, mineral wealth represents a collective windfall for a nation's citizens, in some way analogous to an individual winning a lottery worth millions of Nakfa. Naturally, we would expect the individual to spend part of it for current consumption and save the rest. But that is where the analogy ends because collective ownership of natural resources involves solving problems much more complex than those facing an individual.
Of course, Eritrea can avoid the resource curse by taking appropriate measures and learning from success stories such as Norway. One of these measures involves the creation and management of a national fund.
Creation of a national fund: a commitment by the people and the government to create a national fund for saving and investing part of the resource income. In particular, this requires goodwill on the part of the government backed by specific actions.
Independence: setting up an independent professional body for managing the fund. This would prevent misuse of the fund for political purposes and ensures the growth and sustainability of the fund. For example, Norway followed this path by letting its central bank, which is independent by law, manage its "Petroleum Fund." Central banks are the natural choice because they are the authorities responsible for managing reserves of gold and foreign exchange and therefore they have the necessary expertise.
Diversification: the fund is diversified across asset classes and geographical regions, ensuring a balanced risk-return profile. There maybe a temptation for actively managing the fund, that is, frequently moving funds in and out of certain categories of stocks or bonds. However, active management should not be a priority as it relies on speculation and can result in large capital losses.
Intergenerational equity: although the fund should help insulate the economy from unexpected shocks in the short-run, fund managers should take a long-term perspective in order to ensure the equitable distribution of wealth across generations. Intergenerational equity can also be the rationale for limiting active management of the fund.
The discovery of natural resources represents an addition to the wealth of a nation and should normally be welcomed. So why should one worry about it? Well, as experience of resource-rich countries shows, resource abundance may not always be good news. To be specific, on average an abundance of natural resources tends to slowdown overall economic growth, a phenomenon referred to as the "resource curse," and even worsen income inequality.
One obvious cause of resource curse is mismanagement by resource owners (usually governments). Another is that, with the discovery of natural resources, some of the productive inputs (labor and capital) are shifted away from the manufacturing sector, which is the source of long-term growth. Moreover, higher mineral wealth leads to an appreciation of the real exchange rate, which in turn hurts export competitiveness of the economy (so called Dutch disease). Add to these the fact that prices of natural resources are highly volatile with substantial uncertainties about export revenues.
To begin with, mineral wealth represents a collective windfall for a nation's citizens, in some way analogous to an individual winning a lottery worth millions of Nakfa. Naturally, we would expect the individual to spend part of it for current consumption and save the rest. But that is where the analogy ends because collective ownership of natural resources involves solving problems much more complex than those facing an individual.
Of course, Eritrea can avoid the resource curse by taking appropriate measures and learning from success stories such as Norway. One of these measures involves the creation and management of a national fund.
Creation of a national fund: a commitment by the people and the government to create a national fund for saving and investing part of the resource income. In particular, this requires goodwill on the part of the government backed by specific actions.
Independence: setting up an independent professional body for managing the fund. This would prevent misuse of the fund for political purposes and ensures the growth and sustainability of the fund. For example, Norway followed this path by letting its central bank, which is independent by law, manage its "Petroleum Fund." Central banks are the natural choice because they are the authorities responsible for managing reserves of gold and foreign exchange and therefore they have the necessary expertise.
Diversification: the fund is diversified across asset classes and geographical regions, ensuring a balanced risk-return profile. There maybe a temptation for actively managing the fund, that is, frequently moving funds in and out of certain categories of stocks or bonds. However, active management should not be a priority as it relies on speculation and can result in large capital losses.
Intergenerational equity: although the fund should help insulate the economy from unexpected shocks in the short-run, fund managers should take a long-term perspective in order to ensure the equitable distribution of wealth across generations. Intergenerational equity can also be the rationale for limiting active management of the fund.
Sunday, February 24, 2008
The Invasion of GM Food
Recent increases in demand for food products across the world, accompanied by a surge in food price inflation, is likely to lead to further growth in the supply of genetically modified (GM) food. In fact, the move towards GM food is already taking hold in many countries. Currently, countries such as America, Argentina, Brazil, India and China are dominating the global supply of GM food (see The Economist). Continent wise, Europe and Africa are still not keen in joining the wagon, but they will if the current trend of strong growth in food demand continues, putting pressure on conventional method of agriculture.
In principle, genetic engineering of crops so that they become resistant to, say, pesticides and extreme weather conditions (such as drought) should be welcome. However, when one scratches the surface, the underlying issue is more complicated. The main reasons are related to health and environmental consequences of GM food production (see, for instance, greenpeace and the interview with the director of the film The Future of Food (2004)).
Ultimately, the success of GM foods will depend on market demand, provided that consumers are aware of GM foods and that they can easily identify GM food labels from supermarket shelves.
In principle, genetic engineering of crops so that they become resistant to, say, pesticides and extreme weather conditions (such as drought) should be welcome. However, when one scratches the surface, the underlying issue is more complicated. The main reasons are related to health and environmental consequences of GM food production (see, for instance, greenpeace and the interview with the director of the film The Future of Food (2004)).
Ultimately, the success of GM foods will depend on market demand, provided that consumers are aware of GM foods and that they can easily identify GM food labels from supermarket shelves.
Sunday, February 10, 2008
The IMF and Fiscal Policy: Back to the Keynesian Solution?
The IMF's long-standing position on fiscal policy austerity, especially in its dealings with countries facing financial or balance-of-payments crisis (up until recently, mainly developing and emerging countries), is well known. However, in a recent commentary, the fund's managing director, Dominique Strauss-Kahn, gave his blessings for fiscal stimulus to ward off the risks of a global economic slowdown due to financial-market turmoil that originated in the US housing market in summer 2007.
While Mr. Strauss-Kahn directed his commentary to developed countries and emerging economies, he did not say a word on how a fiscal package could or could not work in developing countries. Clearly, developing countries are not immune to the problem facing the rest of the world. Rather, as strong global growth over the past few years has helped them earn higher export revenues, any risk of a global slowdown will have the opposite effect. Thus, developing countries face the same sort of policy dilemmas as anyone else.
Actually, the argument for fiscal support rests on the apparent weakness of monetary policy to prop up domestic demand. The reason is that monetary policy is effective only when the banking system is well functioning, which, judging by the recent events, is not the case at the moment. Due to heightened uncertainty about risk exposures, banks are reluctant to lend as much as one would like them to. By this standard, the problem for monetary authorities in developing countries is even be worse because their financial markets are underdeveloped, making monetary policy ineffective as a tool for demand management. The case for using fiscal policy to support their economies is, therefore, stronger than that in developed countries.
While Mr. Strauss-Kahn directed his commentary to developed countries and emerging economies, he did not say a word on how a fiscal package could or could not work in developing countries. Clearly, developing countries are not immune to the problem facing the rest of the world. Rather, as strong global growth over the past few years has helped them earn higher export revenues, any risk of a global slowdown will have the opposite effect. Thus, developing countries face the same sort of policy dilemmas as anyone else.
Actually, the argument for fiscal support rests on the apparent weakness of monetary policy to prop up domestic demand. The reason is that monetary policy is effective only when the banking system is well functioning, which, judging by the recent events, is not the case at the moment. Due to heightened uncertainty about risk exposures, banks are reluctant to lend as much as one would like them to. By this standard, the problem for monetary authorities in developing countries is even be worse because their financial markets are underdeveloped, making monetary policy ineffective as a tool for demand management. The case for using fiscal policy to support their economies is, therefore, stronger than that in developed countries.
Friday, February 1, 2008
What's Special About the Middle Class?
The belief that the middle class matters for economic growth because of its entrepreneurial spirit goes as far back as John Stuart Mill, who said “The virtues of a middle class are those which conduce to getting rich—integrity, economy, and enterprise.” (quote is from The Economist)
However, using household surveys in 13 developing countries, Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology, USA, find little evidence to back the belief (see the paper). The authors analyze the pattern of consumption and investment by the middle class, which they define as those whose daily consumption per capita is between $2 and $10 in 1993 purchasing power parity (that is allowing for cross-country differences in price levels). They conclude that people in the middle class are more likely to prefer a steady well-paying job to running their own business. On family and spending patterns, the authors find that middle class families have fewer children, and spend much more on education and health.
What is equally important but missing from the study is what factors help or hinder the creation and sustainability of the middle class. For instance, the role of education and health in increasing labor productivity (human capital in general) and income, and therefore in the expansion of the middle class. Evidently, the lower class (the poor) in developing countries can not invest or consume as much they like by borrowing because of credit constraints. This is related to underdeveloped capital markets and not necessarily lack of entrepreneurship.
In any case, the notion that the middle class is more of a wage-earning class and less of an entrepreneur class has some merits; see Robert Reich's comment in the Financial Times: America's middle classes are no longer coping.
However, using household surveys in 13 developing countries, Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology, USA, find little evidence to back the belief (see the paper). The authors analyze the pattern of consumption and investment by the middle class, which they define as those whose daily consumption per capita is between $2 and $10 in 1993 purchasing power parity (that is allowing for cross-country differences in price levels). They conclude that people in the middle class are more likely to prefer a steady well-paying job to running their own business. On family and spending patterns, the authors find that middle class families have fewer children, and spend much more on education and health.
What is equally important but missing from the study is what factors help or hinder the creation and sustainability of the middle class. For instance, the role of education and health in increasing labor productivity (human capital in general) and income, and therefore in the expansion of the middle class. Evidently, the lower class (the poor) in developing countries can not invest or consume as much they like by borrowing because of credit constraints. This is related to underdeveloped capital markets and not necessarily lack of entrepreneurship.
In any case, the notion that the middle class is more of a wage-earning class and less of an entrepreneur class has some merits; see Robert Reich's comment in the Financial Times: America's middle classes are no longer coping.
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