Textbooks do not matter

I have complained before, and I am far from being the only one, that textbooks are too expensive. But we still use them because we think they are useful, or because we are too lazy to come up with class material ourselves. Beyond the benefit for the lazy teacher, do textbooks actually bring something to the classroom?

Maria Kuecken and Marie-Anne Valfort looks at a case where textbooks are sometimes simply not available, classrooms in 11 Sub-Saharian countries. And it turns out the availability of textbooks does not matter, whether owned by each pupil or shared. It is only in one case, the richer kids, where there is a noticeable improvement in school achievement for shared textbooks. So it looks like teachers manage to adapt well to the absence of textbooks. And I think there is virtue in working without them: students have to listen to the teacher, learn to take notes or absorb material on the spot, and they are more active in the classroom. I wish I could go without textbooks, but unfortunately rules are rules. And publishers also need to make a living, right?

Time preference may vary across goods

When we model intertemporal choices, we usually go with a single consumption good, which means (up to some aggregation assumptions) that all goods have the same intertemporal elasticity of substitution and economic agents have the same risk aversion for each. Or that somehow any dispersion would not matter through aggregation. Is there any evidence of such dispersion?

According to Diego Ubfal, there is, and it is considerable. Using a quite large experimental survey of 2400 people in rural Uganda, he finds that the monthly discount rate goes from 110% (meat) to 66% (salt). And unlike this literature, this paper does not assume linear utility and goes through the trouble of estimating the curvature of the utility function as well (without reporting results, though). I wonder, however, how seasonality may play in this. For households that are that poor and who have to live from day to day, it is perfectly understandable that the rate may vary widely whether the good is in season or not, whether one is in a period of the year with relative slack on the budget or resource constraint, and add to this whether the size of the remuneration from the experiment may distort things. Still, this is an interesting and detailed study.

Is Africa doing much better than we thought?

When economic historians will look back at the global economy of last decade or two, they will likely summarize them as marked by a big recession in western economies, tremendous growth and convergence in Asia and South America, and stubborn lack of growth in Africa. As usual, one would say for Africa, which is a really frustrating continent.

Alwyn Young writes that this last assessment may be all wrong because the official statistics are biased downward. Looking at the consumption of durable like cell phones, cars, housing and health, as well as the use of time on the market by women (all reported by the Demographic and Health Survey), he finds that growth rates are more than triple what is indicated in the official statistics. How could they (or him) be so wrong? For one, price data is almost non-existent, which makes deflating nominal statistics rather hazardous. Second, it looks like the informal sector is being vastly underestimated. Mozambique and very recently Ghana have seen their GDP multiplied after the analysis of detailed surveys of their economies. If Young is right, Africa may not be quite catching up, but at least it is not losing ground.

School subsidies may increase school attendance and child labor

Child labor is widely recognized as a poverty trap problem. Parents know their child should go to school, but they cannot afford missing out on supplemental income or domestic help. And in cases where there is actually no good reason to send the child to school, it is because the economy does not have jobs for people with more education, because no one has more education. This is why several programs have been very successful in getting children into school as long as they provided the right incentives for parents: cash transfers and free lunches that provide the economic replacement of the income the child would have generated. The success is usually measured by looking at school attendance or outcomes.

Jacobus de Hoop and Furio Rosati point out that the impact on child labor is not so clear, especially as it is difficult to measure. Indeed, most of child labor is inside the household or in informal markets. Using data from Burkina Faso, they find that recipients from the BRIGHT program both increased school attendance and child labor. The BRIGHT program also includes the construction of school and provides for take-home food rations for girls.

De Hoop and Rosati show that these disheartening results can be consistent with altruistic parents when there are some non-convexities. The latter stem from the fact that there are substantial commuting times for school attendance. As the program built new schools, it reduced those commuting times. This in itself makes school attendance more likely, but at the cost of providing more time for work for those who were already going to school. This does not mean one should not build schools, though, rather one should find some other intervention that counteracts this perverse effect.

Cashless banking in informal economies

We are used now to playing with plastic, yet we still hold cash. The fact is that there are still plenty of occasion where only cash can be used for transactions, either because the amount is very small, or because for some reason the merchant does not want to accept plastic. Not infrequently, it is because of the fear of a paper trail, or rather an electronic trail, or because of some tax avoidance. The fact that plastic money discourages the latter should be seen as beneficial, right?

Victor Olajide thinks that is not necessarily the case when the informal sector is substantial. Taking the example of Nigeria, he points out that if the informal sector cannot use cash anymore, then this could have strong implications for banking, as reserve requirements rely on deposits, and those could go missing. That does not seem to be a major problem to me, as reserve requirements can be changed or redefined. I find more problematic that the Central Bank of Nigeria is pushing for a cashless economy while many of the market participants simply do not have the means to tool up for it. I think there are more important issues to tackle in Nigeria than going cashless.

Why does Angola invest in Portugal?

Standard theory tells us that a country with a low capital endowment, relative to its labor endowment, should have high capital returns and thus should be attracting foreign capital until capital returns are equal at home and abroad. While there is foreign direct investment from the North to the South, it is by far as high as it should be, and capital returns are far from being equalized. There are proposed answers to this puzzle, from mismeasurement to country-specific risk, but that does not explain why there would be foreign direct investment from the South to the North.

Carlos Pestana Barros, Bruno Damásio and João Ricardo Faria look at the case of Angola investing substantially in its former colonial master, Portugal. They build a model of a open economy subject to corruption practices. It is not quite clear to me how this model maps into the linear equation that is estimated (partly because not all equations display in the paper). But at this points, the interesting results is that this FDI is driven by exports and mostly by corruption. One has to understand that corruption in Angola is among the world's highest. For example, there is an unexplained residual in the country's fiscal account that corresponds to about a quarter of its GDP, which is absolutely mind boggling. This corruption is so big that not only does it dry out the FDI flow from Portugal, it reverses it.

Africa should finally industrialize

Africa is frustrating, as it seems to be regressing in many ways despite substantial development aid. Several have pointed out that the problem is with this aid, for example because it provides perverse incentives. But I think an important aspect is this obsession with improving agriculture on a continent where land is simply not good for agriculture. While the development stage in development in the rest of the world went first through a boost in agricultural productivity followed by industrialization, I see no reason why Africa cannot skip straight to industrialization. It has a lot of labor. There is the problem with poor transportation and low education, but they will improve if demand increases through industrialization, which little growth in agriculture cannot.

I am mentioning this after reading the report of John Page, who shows that, if anything, Africa is deindustrializing. While one can discuss whether the strategies he advocate can work, the fact is that the climate is not the best for investment into industry in almost all of Africa. Maybe charter cities could be the right trigger?

Male circumcision and risky sexual behavior

There is a well-known phenomenon that states that when an activity becomes safer, people will respond with riskier behavior. The classic example is the use of seat belts that has lead to more aggressive driving (although there is a claim that this example is wrong). Now switch to another risky behavior: sex. It is well established that male circumcision leads to a significantly lower transmission probability of AIDS. Is risk compensation also happening here?

Nicholas Wilson, Wentao Xiong and Christine Mattson look at recently circumcised males in a region of Kenya and find that their sex behavior is less risky than the uncircumcised control group. This is not a selection effect, as circumcision has been randomly assigned. The authors think that the circumcised ones have become less fatalist about future life prospects and thus changed their behavior for the better (this is also why you want to provide health insurance conditional on not dying from AIDS). I wonder though whether the circumcision has made them more aware of the risk of AIDS as well.

More on the long term consequence of slavery in Africa

Since the start of this blog, one of the most popular posts has been one that analyzes the long-term costs of slavery in Africa. Of course, it is about the consequences in regions where slaves were taken from. There is also a region where they have been taken to, that is South Africa. What has been the impact there?

Johan Fourie writes that farmers taking slaves prospered thanks to economies of scale of specialization, to the point that they were considered by some to be the richest in the world at the time. But this advantage did not last long, as the use of slave labor discouraged further immigration from Europe. And as education opportunities were limited to (free) whites, large inequalities were maintained through a period where human capital became more important. These inequalities and the large fraction of poorly educated citizens, even after emancipation and the end of apartheid, stills drags the South African economy down, because institutions emerged to perpetuate these inequities.

This persistent impact of inequality in human capital is consistent with evidence from the US, as I reported in a previous post, with a recent update by the same authors just published recently. Graziella Bertocchi and Arcangelo Dimico expand on their use of US panel data. In short, they find that the education gap between whites and blacks at the county level today is determined by the initial gap in 1940, with only little convergence since. And the initial gap is largely explained by prevalence of slavery in earlier years.

Malthus visits Rwanda

Rwanda has always struck me as the perfect example of a Malthusian economy. A dense population where land is systematically divided up among descendants, leading to tiny lots that are barely sufficient for survival.Lots are so small that new capital for its exploitation is not relevant, and no technological improvements have any significant bite. In the end the land can only support a population at the edge of famine.

Marijke Verpoorten brings an intriguing connection between the Malthusian theory as applied to Rwanda and the genocide of 1994. Using regional data, she finds that the areas where there was the most urgent population pressure (through density or growth) were also the ones with the most killings. In a way, society was taking care of a business nature and famine could have.

Why is funeral insurance so popular in Africa?

Probably the oldest form of insurance is existence is funeral insurance, which takes cares of burial (and now cremation) costs at death. In developed economies, its popularity has vanished, while it is still very common in Africa. One reason could be that when life insurance is available, people believe it is sufficient to cover funeral costs, and the beneficiaries are committed to take care of this. When life insurance is not available or when not commitment can be elicited from descendants, then funeral insurance ensure your body is properly disposed of.

Erlend Berg writes a model along those lines and finds that only middle income should favor funeral insurance. The rich do not face a tight budget constraint and the poor cannot afford it. Then using a marketing survey conducted in South Africa finds results that are consistent with the model. This lack of commitment in Africa for financial matters is pervasive. It is, for example, at the heart of the strange institution that ROSCAs are.

How to kill growth: corruption and large military

While it is not a slam dunk, there is pretty good empirical evidence that corruption and government expenses that are not tied to public infrastructure are not good for economic growth. This evidence comes largely from linear cross-country regressions of the kind that anybody with a little sense of theory or econometrics shudder. But sometimes this is done a little bit better.

Giorgio d'Agostino, John Dunne and Luca Pieroni take a simple growth model where government expenses are divided in public infrastructure, public consumption and military expense. Along with private capital, all three enter the production function for reasons that are not entirely clear, but we can let the data speak here. In addition, each expense is adorned with a multiplier that identifies how much is lost through corruption. The result is an equation for the growth rate that can be brought to the data, specifically a set of 53 African countries over 5 years. This is were things become iffy, as it is by now well-known that using panel data in growth regressions leads to very spurious results, especially when African data is considered. Using instruments and GMM will not help you much when data is of poor quality, especially from one year to the next. And taking lags of growth rates will make things even worse.

Results show coefficients "of the right signs" and a particularly strong interaction between corruption and military expenses. I am not sure I can believe these results given the above problems, but they make sense. And if one can extrapolate this African result to other countries, I would be especially worried for the US, where military expenses are always high and bribery of politicians is common and legal.

Want more FDI in Africa? Get a foreign-trained leader

You know the mantra: if you want to get funding for a project, you need to be well connected. It turns out the same holds true at the macroeconomic level for foreign direct investment in Africa.

Indeed, Amelie Constant and Bienvenue Tien point out that have an head of state educated abroad increases on average FDI by up to 100%. And 40% of African leaders obtained their tertiary education outside of the continent. More importantly, it is once you have some FDI flows going that the foreign connection becomes important. Indeed, for countries in the lower quantiles of FDI, foreign education of the leader has no impact. But if there significant FDI, then it matters a lot. It is not clear why, perhaps part of the story is that low FDI countries cannot attract funds no matter what. And why would foreign education matter? It is probably not because of human capital, as those with tertiary education in Africa do worse, but still better than those without tertiary education. It must be the connections.

Time for an agricultural revolution in Africa?

When you think about income differences across the world, Africa is really depressing. It seems nothing is making a lasting impact in terms of policy for it to catch up with the others, and seeing how Asia managed to transform itself makes you wonder what is fundamentally wrong. While one may think this has to do with misguided policies, so much has been tried that something ought to have stuck. But no. One thing that helped Asia is that evolution in rice brought an agricultural revolution that freed human resources for manufacturing, so could such a revolution also happen in Africa?

Donald Larson, Keijiro Otsuka, Kei Kajisa, Jonna Estudillo and Aliou Diagne claim that several areas in Africa are suitable for rice, but local diets and tastes are too diverse for rice to have the success it had in Asia. The productivity of other crops needs to improve as well. So it does not look like there is a ready-made solution that will kick-start the agricultural revolution soon, despite some very localized successes.

That said, why insist of improving agriculture on a continent that is visibly not appropriate for this? Much like telecommunications in Africa jumped over landlines directly to mobile telephony, why not bypass agricultural development straight to manufacturing? One argument against this is the large transportation costs that make local agriculture essential and manufacturing away from the ports unprofitable. But why insist on keeping the population on the countryside? Why not develop coastal cities and take advantage from returns to scale there, like Singapore and Hong Kong did, and

Growth success in Africa: firms become smaller

How could one characterize a developing economy with little growth? Large informal sector, small firms, lots of red tape in the formal sector. As the informal sector typically has low productivity (before red tape), a typical prescription for growth is to move its activity into the formal sector. This can be achieved, for example, by reducing regulation in the formal sector.

Justin Sandefur looks at Ghana, which has recently experienced solid growth following some deregulation, and remarks that average firm size was halved over a 17 year period, while the share of the informal sector has increased. Using a manufacturing survey covering 1987 to 2003, Sandefur finds that aggregate growth did not come from firm growth, but from firm creation. These microenterprises stay tiny until they die, while the existing big firms stay as big.

While the growth experience of Ghana seems encouraging, one needs to realize that small informal firms stay small and informal. Thus once all entry opportunities have been used, growth will petter out.

The economics of piracy in Somalia

Piracy off the shores of Somalia has come to the front news after a few spectacular cases, prompting an international response, mostly in the form of military surveillance on the waters, which has not prevented pirates from extending their hunting grounds. But some people have argued that this patrolling is just treating a symptom. Short of establishing a lawful state in Somalia, which has proven impossible so far, providing alternative livelihoods for the pirates would work better.

Sarah Percy and Anja Shortland doubt this would work. They claim a stable state and economic growth would actually help piracy. Indeed, piracy is a business and any business becomes more difficult in unstable conditions. The way to think about it is that pirate get income from piracy, and they invest locally. The better the return on that investment, the more you want to conduct piracy. Naval operations are useful here because they raise the costs of operations of pirates, but they imply also that attacks are more likely to turn violent, in particular for hostages. But I digress. Another in which local stability would be detrimental is that the whole region may be destabilized, not only Somalia.

An alternative would be to buy off the pirates and turn them into coast guards who enforce fishing rights. This deters them from piracy and would allow the fishing industry to come back to life. But this could also backfire by creating a better trained and equipped pirate force. This is a really difficult situation. Percy and Shortland think things will improve once the stakes for insurance companies and shipping companies become higher: ransoms are getting larger, and violence is becoming more commonplace. At some point they will start intervening with more conviction.

National drought insurance

Some aggregate shocks can have a very large and costly impact. Not your typical business cycle in a developed economy, but rather shocks like earthquakes, droughts or major hurricanes. They put a lot of strain on affected regions, who would clearly gain from acquiring some sort of insurance against such adversities. Robert Shiller has been advocating cross-country insurance mechanisms against GDP fluctuations (say ... markets), but it calamities would have an even more pressing need for that.

Joanna Syroka and Antonio Nucifora explore this in the case for draught insurance in Malawi. With the help of the World Bank, this country is now offering a derivative contract based on index computed from the measurements of 23 weather stations in the country. The hope is that if international markets buy these instruments, the financial consequences of weather fluctuations will be born outside of the country, and macroeconomic stability will help growth and poverty alleviation.

It will be interesting to see whether there will be demand for these derivatives. Experiments have run in Ethiopia and Mexico, but in both cases it was with re-insurers. This time, a government is directly involved. If this works, there are many other candidates for this, think for example Bangladesh, whose GDP depends crucially from the yearly monsoon. And once such markets are well developed, smaller risks like GDP fluctuations in GDP countries may be insurable as well for governments.

A libertarian dream?

Libertarians, at least the most extreme ones, dream of a world without a government. The only example of such a society nowadays is Somalia, and it certainly is not a shining example. However, I came across this BBC story about the Ivory Coast that could provide a second, better example of a society without a government.

The Ivory Coast went recently through a brief civil war with the outcome that the government has lost control over the northern part of the country, held by "rebels." Civil servants, including teachers, have left this area which is now not governed and does not received any tax-funded public goods. Didi this turn into Somalia? Not quite, as people spontaneously stepped in and started teaching in schools as volunteers, or provide some postal service and policing. Is this how a libertarian society would look like?

There is one big difference between Somalia and the Ivory Coast: a reunification and a return of government will happen in a foreseeable future in the latter. The volunteers have thus stepped in temporarily to bridge the lack of government. In fact, they may be hired in their current roles once things return to "normal." Consider this as a variation of the open source movement where people contribute freely to show their skills and the be hired for pay. Would the Ivorian volunteers have done this forever? Most likely not, as they would still need to make a living. I am afraid Somalia is still the most appropriate example of extreme libertarianism.

Africa was underpopulated

There is a common perception that Africa is overpopulated. Historically, this was certainly not true, as there was such abundance of land relative to population that land had no value. In fact one traditional measures how well a society was developed in history by looking at population density, and it was very low for Africa.

I am mentioning this as I am reading a paper by James Fenske who is out to test some theories that, among others, the poor institutions of Africa originate in low population density. The logic is the following. If land has no value, it cannot be used as collateral or as a store of wealth. States could not tax land and thus had little means. Property rights were not defined as there was not property to give rights to. Wage employment was substituted by coerced labor and slavery.

Fenske tests this by using data from an ethnographic atlas and a model with endogenous institutions. And its predictions that land rights appear where population is more dense and/or where agricultural yields are higher holds true. He also looks at he Egba of Nigeria, who have abundant land but well established property rights. That institution emerged from their time of immigration, where land was scarce.

Institutions take a long time to change and Africa has poor institutions. Understanding where they come from can help in reforming them for the better. And by many accounts, Africa is still underpopulated. Following the results above, Africa still has a long way to go to reform its institutions.

How to forecast inflation in Sudan

We tend to get interested in large developed economies because this is where we live and where loads of data are available to make interesting observations and run empirical exercises. But there are also lots of issues elsewhere that need to be studied and that are relevant, at least locally. Those are harder, because data is scarce and also because theory that could guide us may not be available.

Take as an example a study by Kenji Moriyama and Abdul Naseer that tries to forecast inflation in Sudan. This is very important in an economy as disrupted as this one, because the lack of efficient financial markets and banking leaves only currency as a tool for savings. If inflation is high or uncertain, using it for savings is not likely either. The problem is that there is very little data available for Sudan. The authors use ARMA techniques, which at least rely on a limited number of series but require rather long samples. But they can rely only on eight years of monthly data.

Another way to work this out would be to have a structural model, but this requires quite a few additional data series, which are not likely to be available. Maybe then, letting theory guide us could be a solution. This is particularly important in a country where shocks are very important and regime changes are likely. The Lucas Critique has a lot of bite here, and you want to go as deep as possible in the structure in order to study the reactions of agents and markets to situations that may never have happened before. But do we really have a good theory to describe Sudan, with its civil war, population displacement, humantarian aid, etc.? This is the kind of theory that needs development, as this is where the marginal return of theory to real-world well-being is the highest. And this is not just about inflation in Sudan.