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Overpromise and Under-Deliver: Growth in Mexico

July 24, 2014

Over the past three decades, and despite great hopes to the contrary, Mexico’s economy has under-performed. In the early 1908s, Mexico introduced aggressive political and economic reforms in an attempt to gain footing among the world’s strongest economies. These reforms embraced global markets and decreased the state’s role in the economy. An independent central bank was introduced along with more developed financial markets, as the country faced a tough macroeconomic stabilization period. Additionally, the country liberalized foreign trade and investment by privatizing nearly 1,000 state-owned enterprises. By 1994, Mexico joined the OECD, a sign that the country was on the right track. Despite these efforts, Mexico has  seen capita income grow by an anemic 1.1%  per annum over the past 25 years. Compared to other countries with similar economies (see below), Mexico’s relative stagnation seems all the more acute..

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 In 2012, Enrique Peña Nieto took office as Mexico’s 57th President, eager to tackle the country’s growth challenge. So far, President Nieto seems to be heading in the right direction promoting an ambitious reform agenda that seeks to not spur economic growth, but also develop and enforce anti-monopoly regulation. The President’s agenda highlights two main reforms: energy and education. His education reforms target the quality of working educators by introducing a series of rigorous tests that may cost teachers their jobs if they fail. The energy reforms aim to reduce the market share of Pemex , which will go along way in strengthening the energy sector through increased competition.

President Peña Nieto intends to have all reforms approved by the end of 2014, but this is just half the battle. The most challenging part of these reforms will be enforcing all the regulations once implemented and winning over the general population.

Early last year, Elba Esther Gordillo, the powerful leader of Mexico’s teacher’s union, was arrested on massive charges of embezzlement of over 2 Billion Pesos (159 Million USD). The arrest came the day after President Nieto signed the education reforms into law. Shortly after, thousands of teachers stormed the streets to protest the education reform package. This forceful disapproval of the president’s reform agenda is a much-needed reminder that optimism for growth in Mexico is far from reality, and that Peña Nieto still has much to accomplish.

According to researchers at the Wilson Center’s Mexico Institute, the principal cause of Mexico’s stagnant growth is misguided education reform and dismal worker productivity. Worker productivity in Mexico has failed to increase over the past three decades despite the steady increase in school enrollment over the past five decades (see figure below). Educational facilities in Mexico focus on teaching cognitive skills rather than the technical skills that employers demand. The lack of technical skill-focused education in Mexico has lead to disappointing levels of worker productivity. This will continue unless the government seeks further reform focused on increasing the quality of educators and the type of education, not just the amount of people who receive an education.

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In the past, the government’s answer to dismal growth has been disjointed. The Mexican Government has managed isolated efforts with no comprehensive strategy to patch up the economy. This erratic policymaking has led to many conflicting reforms, hindering growth in an economy that has been dreaming of development for decades. President Peña Nieto’s aggressive reform agenda brings newfound optimism for growth in Mexico. In his four remaining years in office, Peña Nieto is expected to accomplish what many have failed to do. Is it finally Mexico’s time to shine?

 

 

 

Matatus and Mobile Money: Bridging the Gaps in Kenya

July 14, 2014

In the United States, there are some planes, a few trains, and many automobiles. In Kenya, it is all about the matatu.

Though there are other forms of transport, Kenya is best know for the omnipresent and chaotic mass transit system. Larger than vans and smaller than full-size buses, matatus are known to be one of the most utilized and certainly most colorful of Kenya’s transportation systems.

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While concentrated around the capital, Nairobi, matatus operate throughout the country, linking urban and rural settlements across a complex network of poorly-maintained roads. In Kenya, such convenience comes at a price, or in the case of matatus, a severe safety risk. In 2010, the World Health Organization estimated over 8,400 traffic-related deaths. And while data from Kenya’s National Transport and Safety Authority (NTSA) indicates that traffic-related fatalities have declined since 2010, Nairobi still ranks as the world’s fourth worst commute according to IBM’s Commuter Pain Index. With over 5,000 matatus serving the greater Nairobi area, it is likely the mini-buses are part of the problem, not the solution.

In June, as part of a series of reforms, the NTSA decided to modernize the matatu system by mandating cashless payment methods for the country’s estimated 20,000 privately owned matatus. Prior to the NTSA mandate, matatu drivers relied on cash transactions. This allowed drivers to set their own fares, negotiate with customers, and keep their own loose records of the number of passengers. As a result, matatu owners may not know how much profit their vehicles make. Matatu drivers, with no incentive to report the proceeds often pay a flat fee to the owners and keep the remaining revenue for themselves.

In an effort to provide a uniform system NTSA is calling for a payment system similar to London’s Oyster card. Matatu patrons have the option of filling cards at various locations throughout Nairobi or using a mobile banking service such as  M-Pesa. With a multitude of payment options, government officials anticipate a streamlining of transportation payments, a decline in corruption, and an increase in tax revenue.

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Despite some concerns about cashless payments, the NTSA’s system is tried and true. Last year, Beba Pay, a joint venture between East Africa’s largest bank and Google, announced a cashless payment system that would work for select bus fares throughout Nairobi. With prepaid fare cards, passengers simply tap their card to an onboard card reader, the first system of its kind in Kenya. Though many commuters enjoy the convenience of going cashless, not all bus lines accept the prepaid cards.

While the United Nations still classifies Kenya as “developing,”the country is poised to be Africa’s economic powerhouse. Perhaps the greatest indicator of Kenya’s progress lies in widely available technology. In 2013, a record 70% of Kenyans used cellphones, the fastest cellphone use growth rate in all of Sub-Saharan Africa. With the lowest phone tariffs on the continent and continued deregulation of the telecommunications industry, mobile phone use is expected to continue to grow, perhaps becoming on par with 91% user rate in the United States.

The popularity of mobile phones has also encouraged the growth of mobile banking. Popular programs like M-Pesa allows Kenyans to manage their finances without actually having a bank account. M-Pesa users can transfer money to and from individual accounts with a simple text message, making the service easy to use and more convenient than visiting an actual bank. The program is so widely used that 25% of the country’s GNP is filtered through the service and 60% of Kenyans use their M-Pesa accounts to shop, pay bills, and transfer money to relatives or friends, especially in rural areas where banks are unavailable.

With a cashless payment scheme, the NTSA expects increased tax revenue. In a cash-dominated payment structure, drivers arenot held accountable for reporting the number of passengers or making due payments to matatu owners. . In a cashless payment system, governed by prepaid cards, tax revenue is bound to increase as records become more transparent and more accessible. Currently, matatus and similar mass transit vehicles are taxed by whichever is more of their maximum passenger capacity or a flat fee of 2,400 KES (27.35 USD). With increased tax revenue, the Kenyan government hopes to meet its 2030 plan to build more roads and improve its mass transit system.

Ideally, all of Kenya’s estimated 20,000 matatus will adopt the cashless payment scheme, though the transition will not be simple. Cashless payment methods were supposed to be fully implemented by early July, but only 2,000 matatus have forgone cash-only payments. This is due to the Matatu Owners Association’s calls for extension of the deadline to implement the new payment systems. Further criticism from matatu drivers asserts that new cashless systems will deprive drivers of their “fair share” of wages by forbidding them to adjust prices and negotiate at their own discretion.

Mobile banking and matatus have something in common: they connect people and goods across Kenya. Whether urban or rural, within Nairobi or to its sprawling suburbs, both signify Kenya’s progress as a developing country and regional leader of development. Though the matatu is met with government demands and some backlash from the public, one thing is certain: the matatu is here to stay.

Into the Twilight

July 11, 2014

An aging population can pose many challenges to both families and developing nations. In China where the dominance of traditional filial pieties have dictated social norms, manly elders fear having no warrant for filial support after retirement due to changing norms. At this juncture, a brilliant trend-spotter, Starcastle offers a promising alternative. Starcastle is a Shanghai-based joint venture company between a large Chinese conglomerate, Fosun Group, and an American hedge-fund giant, Fortress Investment Group, that caters to hospitable senior living communities for retired elders. A stereotypical life of quiet retirement is unheard of at Starcastle. Instead, classy, up-to-date activities like tai chi, calligraphy, dances, social media messaging, and gaming in open-air cafés invigorate the facility and the lives of its residents.

The vibrant scenes playing out in this “castle” reflect a prominent trend in China’s social service market. Attracted by the country’s aging population, major U.S. firms including Emeritus Corp., Life Care Services LLC, and John C. Erikson have broken into the Chinese market in a tight consultation with Chinese firms, developers, and government officials. Small-scale government sponsorship like tax incentives and direct financial support for private nursing institutions dates back to as early as the 1950s. The number of institutions established, however, was not even close to being enough to care for the country’s elderly population, and poor infrastructure, service quality, and prices never appealed to the Chinese people. Reflecting on its past failure to build up the senior services market, the Chinese government made some effort itself to increase participation by allocating a huge block of land in Beijing for senior housing, overtly relying on the private sector in developing senior care.

Source: The Economist

Services for the aging population in China do in fact need a serious overhaul. In 2000, China’s 60-year-and-older population reached approximately 10% of the total population. Chinese government officials project that one third of China’s population will be over retirement age by 2050. Many blame the demographic fallout on the 1979 One-Child Policy, which dramatically shifted population balance. Increasing life expectancy has also contributed to the problem. In 1980, life expectancy for both sexes was 64 years. In 2001, it rose to 78.1 years. When these numbers are tied together with the average retirement age – 55 for female and 60 for male – it turns out that the elderly have a significant portion of their lives left after retirement.

 

The developing senior care sector is also in response to another noteworthy demographic trend – the rise of the urban middle class. The increase in China’s middle class population has been extraordinary. By 2022, more than 45% of the population is expected to be categorized as middle income earners. Right now, the mass middle class accounts for more than half of that number, but many expect the upper middle class, who can pay a premium for quality products and discretionary services, to become the new mainstream. Senior care does not come cheap. Starcastle primarily targets wealthy business owners in Shanghai who are capable of paying high costs for independent-living apartments, nurse care, housekeeping, and healthy meals. Rising labor and service costs, prices for land-use rights, and costs involved in the overall process inevitably drive the industry to target the rich for profitability. Senior care communities are attainable only for the powerful middle class, at least for now.

Of course, current efforts by foreign firms and domestic developers are not enough to entirely fend off the burden of caring for the aging population. There is still a large chunk of the population, mostly in rural areas, who cannot take part in this upmarket industry. China’s remarkable economic growth may also stall, dragging down middle-class ambitions with it. Chinese government’s ambiguous guidelines on its censorship and regulations on private, especially foreign, firms may put a halt to the deluge of development efforts in elderly care, as well.

In most developed countries, social benefit programs along with the long-lived culture of planning for post-retirement have been a cornerstone for caring for the elderly. China’s unique social, economic, and cultural environments  requires a new or revised development model that suits China’s characteristics. Amidst many uncertainties, one thing seems to be clear though; greater government participation and subsidies beyond allowing foreigners to participate is needed, so that all can comfortably live out the twilight of their lives.

What Narendra Modi Can Do for Development

June 26, 2014

 

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Nearly one month after the landmark 2014 Lok Sabha election, India waits for newly-elected Prime Minister Narendra Modi to make good on his election promises. During his campaign, former Chief Minister Modi vowed to catalyze economic growth, curtail corruption, and defend the poor, a platform that surely helped him earn the largest margin of victory in the country’s history. Now, in the face of slowing economic growth and rising income inequality, Modi is expected to apply his development prowess for the rest of India.

But how?

The answer is simple: subsidy reform.

Since India’s independence from Britain, subsidies have had a major presence in India’s budget. India’s 2014-2015 interim budget estimated $21.2 billion in subsidies for food and petroleum alone. Until Modi’s election, this trend showed no sign of changing.

Next month, the Modi government is set to unveil its first budget, the first likely indicator of Modi’s fulfillment of campaign promises. Recently, Mr. Modi has hinted that his economic policies and corresponding budget will be unpopular with India, most likely due in part to the diminishing role of petroleum and agriculture subsidies.

India is host to a myriad of subsidies. From petroleum to education, India even subsidizes Muslim citizens to make the Haj. Of these, some of the most controversial are food subsidies. Within this broad scope, there are subsidies for fertilizer, irrigation, and electricity as well as in-kind food subsidies. The Government of India has barely reformed its food subsidy policy since the mid-1970s, with the exception of the 2013 National Food Security Act. The National Security Act provides food to two-thirds of India’s population, though only 22% live beneath the poverty line.

Designed with combating poverty in mind, subsidies are expected to boost production and increase efficiency while bolstering India’s recently declining growth rates. However, in reality, the inverse is true. Indian subsidies in agriculture are distributed unequally across the states. For example, the states of Assam and Madhya Pradesh, receive disproportionate agricultural subsidies, with the former receiving 600 rupees per agricultural person and the latter receiving 40 rupees per agricultural person. Both states, with active agricultural sectors, receive unequal subsidies for their efforts, leaving Madhya Pradesh to be one of the country’s more prosperous states and Assam one of the least developed.

Further, it is unlikely that in-kind food subsidies even reach India’s poorest. As early as 1985, the public distribution system was responsible for a mere 15% of the allocations meant for the poor, a track record that has worsened over time.

Though it may seem that business-centric Modi has neglected the poor in lieu of increasing foreign investment and freeing the labor markets, the new Prime Minister ’s policy reforms could be a key to reducing poverty. In a recent speech to Parliament, Modi alluded to administrative changes to increase the efficiency of the state-run Food Corporation of India. These reforms could come in the form of a nation-wide cash transfer system that could increase distribution efficiency and restore foodstuffs to market prices. With demonstrated effectiveness in neighboring Indonesia, cash transfers allow more targeted assistance and more effective poverty reduction. Though it is unlikely that Modi will eradicate subsidies altogether, it is clear that he is dedicated to their reform.

For better or for worse, Narendra Modi’s victory is a sign for changing times in Indian politics. The Modi government’s new budget is expected to be introduced in early July, but the transition from planning to implementation will be a challenge. Parliament must review and approve the budget, meaning that the Modi’s budget could be met with opposition before it even reaches the Rajya Sabha. Though scaling back subsidies and bolstering growth are ambitious, the greater obstacle could be a lack of political will.

 

 

Democracy and Development in Pakistan: Where are we headed?

June 24, 2014

On June 11th, 2014 the Center for International Private Enterprises hosted a panel discussion entitled “Strengthening Democracy through Economic Reform In Pakistan: Challenges and Opportunities.” Last May, the Pakistani Peoples Party (PPP) became the first democratic government to serve out a full term in the country’s 66-year history of independence. This historic accomplishment created a great deal of optimism and speculation about democracy and development in Pakistan. In light of this accomplishment, it may be important to question how successful democracy has been effective in Pakistan and whether or not democracy has promoted development.

The recent terrorist attack at the Karachi Airport, the arrest of Pakistani political leader Altaf Hussain in the UK, and the Karachi Riots in 2010 only highlight a share of the complicated political, economic, and social issues shaking the country’s fragile security. According to the panelists, the outlook for Pakistan is very pessimistic, unless the government recognizes these issues and takes action as soon as possible. According to Dr. Ehtisham Ahmad of the London School of Economics, the Pakistani government must address two core issues: the financing of political parties, and the management of state finances. The PPP and PLMN have both neglected these major issues, hindering institutional and political development.

The lack of a formal mechanism for funding political parties has led to politicians looking for funding from wealthy groups and individuals. As a result, purchasing votes and favors has become a regular occurrence. These factors have created an inefficient and corrupt tax system that does not generate revenue or demographic information. In order for a democratic country to run properly, tax revenue and demographic information is heavily relied upon.  According to panelist Moin Fudda of CIPE Pakistan, the government missed its tax collection target by 77% last year, which indicates a need for major reform. The graph below displays tax revenue for Pakistan and similar countries in South Asia. The data shows the decline of tax revenue in Pakistan over the last sixteen years to one of the lowest tax revenue percentages in South Asia.

Tax Revenue Pakistan

 

The population living below the poverty line has been hit the hardest. The central government has given the provinces the responsibility of providing public services for its citizens, such as healthcare and education, but the inefficient tax system has left them without enough funding. The provinces have no way of providing viable public services unless they do not pay taxes, inevitably leading to a tax war within the government. This inability to provide basic services has also hindered development.

Dr. Ahmad stresses that these issues need to be tackled immediately, but Pakistan has quite shockingly done nothing to find a viable solution. If the Pakistani government won’t act, then what else can be done  to remedy the situation? Dr. Ahmad believes that foreign investors can press for a level playing field in order to incentivize reform. The Pakistani government needs to implement a strong corporate income tax and provide public services for the poor, especially education. Most importantly, these core issues must be taken seriously by the government, and the population must strongly push for reform and public services. Despite these issues, the economy has performed quite well and has seen solid growth in the past four years according to the data below.

 

GDP Growth Rate

 

 

Pakistan GNI

 

At a time when political and economic  unrest is very high, people are wondering whether this growth is due to the development of an informal economy that is quietly keeping the formal economy afloat . This question is of great relevance and will unfold in the near future as the political demographics of the country either stabilize or spin out of control.

 

Liberty to the People, Fetters to the Government

June 16, 2014

China’s Non-Governmental Organization (NGO) sector has long been surveilled, regulated, and suppressed by the central government. But there is now a gleam of hope: the Third Plenum of the 18th Congress Party adopted a reformist decision on November 12, 2013, signaling a possible willingness to extending the role of NGOs under the Xi Jinping administration. The Decision highlighted “social governance” to delineate the country’s governing order, acknowledging the significance of a mutual assistance between the government and the people.

In fact, the gesture of relaxed control over NGOs was looming even before this official pronouncement. In just the past 25 years, over 50,000 officially registered NGOs have emerged, and Karla Simon, an author of “Civil Society in China” expects this number to double in the next two years or so. Until 2011, NGOs were required to have a state sponsor to officially register with the government. Nonetheless, the government has eased this rule, and some even say that they encourage organizations to have a non-state sponsoring agency.In China, all NGOs must, by law, be registered with local governments, but the reality tells a different story. There are approximately 1.5 million unregistered NGOs, constantly mounting in number and influence. Although those that deal with overtly contentious or subversive political issues remain on local governments’ radar, the array of causes the government condones has significantly increased as well.

 

 

Behind this increasing tolerance is political and social decay that has almost coerced the government into allowing its people more participation in governance. Politically, it has become difficult for the Chinese Communist Party (CCP) to legitimatize its monopolistic rule. Since the erection of the People’s Republic of China (PRC) in 1949, the CCP’s legitimacy depended on its strict adherence to the socialist ideology, a consummation of Chinese culture. Since the party adopted a market economy which contradicted socialist roots during the 1989 reform, it has constantly refurbished its new economic framework as necessary ‘pragmatism.’ Yet, the party’s intensive reinforcement of a capitalist economy has inevitably breached on socialist tenets and jeopardized people’s trust in the government.

The CCP has also failed to provide its people the ‘iron rice bowl.’ China’s breakneck urbanization and dependence on global markets have led to many social problems including environmental pollution, land confiscation, food scarcity, and shortages of labor resources and public services. In response, inclusive and innovative ways to participate in governance have been introduced by a new middle class less confined by the socialist ideology. The government has little ground to push ahead with in its complete clampdown on Chinese civil society, and they also surprisingly believe in NGOs for their ideas, practical, hard-worn knowledge of social problems, and ability to gain local people’s trust. In short, the economic and social problems that have been limiting people’s lives are now, in the new front, a source of liberty to the people and fetters to the government.

There are still more restrictions and limitations than freedom and potentials. Of the 50,000 official NGOs, most are still quasi-government organizations affiliated with government agencies. Organizations committed to politically subversive subjects cannot be officially recognized. In regards to the government’s intentional oversight over unofficial grassroots NGOs, some argue that there are hidden rules of “no recognition, no banning, no intervention” that implicitly manipulate and restrict organizations’ operations. NGOs are largely seen as a temporary tool for the CCP to realize its ends.

The Third Plenum’s edict does mean a thumbs-up for reforms that have been going on in the NGO sector. With no specific blueprint on how the 18th National Congress will implement laws and regulations, however, the  future of Chinese civil society still remains a question in the long-run.

FIFA World Cup: Brazil’s Development Hopes

June 13, 2014

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Around the world, Brazil is known as the mecca of soccer. The country is loaded with magnificent soccer talent and has an electrifying atmosphere that makes soccer fanatics feel at home. Not to mention that Brazil has won the FIFA World Cup a record five times, and is the only country to have qualified for the World Cup every year since the tournament’s inception. One could not dream up a more soccer obsessed nation to host the 2014 FIFA World Cup that began this week. However, the current tension in the political, economic, and social atmosphere of Brazil has given the rest of the world an apprehensive feeling about this year’s tournament.

Political tension in Brazil has risen in recent years, as a majority of the county is unhappy with the government due to inflation, corruption, and the massive investment of public funds in World Cup preparations instead of Public Programs for the poor, who are in dire need. The estimated cost of the 2014 FIFA World Cup is currently at $11.5 billion. All this unrest comes at a time when Brazil has one of the most unequal wealth distributions in the world, currently entertaining a Gini Index of 54.7, along with a struggling economy. Some Brazilians hope that the World Cup will promote progress, while others worry that the event will push Brazil’s economy over the edge. It also gives rise to the question of whether the World Cup will only benefit the wealthy and further increase the gap between the rich and poor?

According to a recent survey by the Pew Research Center, 61% of Brazilians believe that hosting the World Cup will be detrimental to the economy as it diverts public spending away from public services. 67% also believe that the economy is in bad shape, which increased from 41% last year. Milton Hatoum, a writer from Manaus, asked: “Why does a city like Manaus need an expensive and luxurious stadium when a few meters away there’s a neighborhood, Alvorada, without sidewalks and treated sewage?”

The long-term social and economic effects of a mega-event such as the World Cup should be analyzed. To predict the path that Brazil may follow, it is helpful to take a look at the economic performance of similar World Cup host countries after the tournament. Their political, social, and economic atmospheres may vary, but this is the most direct and simple way to present the possible future outcomes for Brazil. The figures below display indicator data from the World Bank, showing the economic growth of  Argentina, Mexico, France, and South Africa since they hosted the tournament:

 

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It’s worth noting that Argentina, Mexico, and South Africa are more similar to Brazil’s economy and social structure compared to France. Argentina, Mexico, and South Africa all show a sudden rise in GDP Growth Rates, GDP, and GNI following their host year. In all four cases, the indicators suggest a short-term rise in GDP growth, followed by a decline. This gives rise to the heavily debated question of whether or not FIFA World Cup host countries see sustained long-term growth or temporary ripple effect growth following the event.

As we look ahead past this year’s FIFA World Cup, it will be interesting to see how Brazil’s economy fares. Our hope is that the result is a positive one, as the country’s economy is in need of repair. Hopefully the World Cup this summer gives the country’s economy a much-needed boost. At this point, the world will just have to wait and see.

 

 

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