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Overnight Sensation

May 12, 2014

On April 30th, one of the major problems plaguing the economic world was partially rectified overnight. The International Comparison Project at the World Bank revised their purchasing power parity (PPP) data for 2011. PPP is a measure to balance the exchange rate between countries based on the purchasing power of of their currencies. PPP is calculated through a basket of goods. For example, if the Thai Baht is able to purchase more food relative to the US dollar, the PPP adjusts accordingly.

Graph depicting forecast of United States and China (The Economist)

One of the geopolitical implications of this change is that China’s economy is now larger than anticipated. The Economist reported that China’s PPP exchange rate is 20% larger than previously considered. This tweak of numbers means that, depending on estimates, China is the largest economy or will shortly be the largest economy in the world. Certain caveats need to be remembered, mostly that numbers self-reported by China always need to be taken with a grain of salt. That being said, the rebalancing is a reminder of what the future holds in store.

China’s inevitable rise is not the only news to come out of the International Comparison Project’s report. PPPs for 199 countries were redone, including most of the world’s developing countries. Sarah Dykstra, Charles Kenny, and Justin Sandefur from the Center for Global Development analyzed the numbers in the report and found an astonishing fact. Based on the new PPPs, global absolute poverty in 2010, defined as living on $1.25 a day, dropped from 19.7% to 11.2%. For example, Bangladesh’s GDP PPP per capita increased from $1,733 to $2,800. This revision caused 247.9 million Indians to no longer be below the absolute poverty line. It also means that more of the world’s absolute poor are now concentrated in Sub-Saharan Africa, increasing from 28% of global absolute povery to 39%. The reason for these drastic changes in figures is that inflation rates rose faster than the prices in the baskets of goods used in PPP calculations, which has been adjusted in the new 2011 numbers.

 

Global Poverty Rate (Center for Global Development)

While this may seem incredible, it merely reflects a statistical change in measurement. There is still  no consensus on whether $1.25 a day is the right measure to use for determining absolute poverty, even if it is adjusted for PPP. Other indicators have been proposed over the years. The most famous is the UNDP’s Human Development Index (HDI), attempting to include health and education along with GDP per capita. After examination, this was considered insufficient because it didn’t fully encapsulate the deprivations that poor people in developing countries face. The UNDP developed the Multidimensional Poverty Index, attempting to include things like the percent of the population that lacks a floor or clean water. As this is based on survey data, only 104 countries are included in the Multidimensional Poverty Index.

Another argument is that the difference between somebody with an income of $1.25 a day and $1.26 a day is not even negligible. Many suggest raising the line at which we measure poverty above the $1.25 a day of absolute poverty and the $2 a day of extreme poverty, with Lant Pritchett suggesting using $15 a day as the international line. What people in poor countries purchase is also vastly different from what people in developed countries purchase, negating some of the benefits of PPP. Poverty lines also vary between countries, so there have been advocates to change the global poverty line to be adjusted more frequently and be comprised of an average of developing countries.

Village in Africa, same scene before and after the ICP adjustments

This adjustment through PPP does not change the lives of those who are still living in poverty, whether their measured status changed or not by the new report by the ICP. They will still struggle to buy food and pay for school uniforms for their children, just as before. However, measuring global levels of poverty will remain important, as that which is measured gets fixed.

Piketty In A Coal Mine

April 28, 2014
Flooded Marina (Gas Pumps)" by Richard Misrach

“Flooded Marina (Gas Pumps)” by Richard Misrach

A new book by French economist Thomas Piketty has been causing quite a stir in academic circles over the past year. Now, with the translated publication of Capital in the Twenty-First Century, that fervor is about to spill out of the ivory towers and onto the streets. Piketty’s book ambitiously tackles the topic of economic inequality. His central thesis, in absolute simplest terms, is that the very rich are getting richer and the poor are staying put. Those who rely on wage income for their wealth (the middle class and the poor), Piketty argues, are not likely to see their lot improve in the near future. The very rich, who do not rely on wage income because they have capital in the form of real estate, financial assets, businesses, or patents, will continue to see their wealth skyrocket into the twenty-first century. Ultimately, if capital growth continues to exceed overall economic growth, Piketty worries that this striking imbalance will cause the breakdown of democratic institutions and the social fabric of society.

The Washington Post's "Wonkblog" considered this the graph of the year in 2013.

The Washington Post’s “Wonkblog” considered this the graph of the year in 2013.

Whether or not one agrees with his final premise, Piketty has done his fair share of research and is well respected within the economics field. While studying at the prestigious École Normale Supérieure and subsequently while teaching at MIT, Piketty began to collect historical data on income and wealth, something that economists at the time neglected to do. Although Capital in the Twenty-First Century was written for a global audience, Piketty has the data to back up his findings, though it has not gone without criticism. Most of Piketty’s harshest critics paint him as Marxist or Communist, when in reality he is merely challenging certain aspects of the current free market system – the part that contributes to a great deal of economic inequality. But any work that deals with inequality is bound to get political. And as Piketty notes in an interview with the New York Times, he is welcoming the debate.

Piketty’s ideas for solving this rising inequality are perhaps the weakest part of his argument. In his book he calls for a global tax on wealth that is at best impossible and at worst extremely out-of-touch with the political realities that frame any worthy discussion of policy prescriptions in developed countries. But we should not shrug off his work because of his ideas on policy. Piketty succeeds in collecting and presenting decades of historical data on an issue that has come to define the early twenty-first century. Working as an economic archaeologist, Piketty has made some fascinating discoveries. He has dug up a set of evidence that captures in a new light the increasing economic inequality today. His work is best read as a challenge to our current paradigm of economic inequality, not as a revolutionary tale of two cities.

Deep Impact: Impact Investment in Pakistan

April 23, 2014

On Thursday, April 17, the Center for Global Prosperity had the pleasure of hosting an event, “Philanthropy for Civil Society in Pakistan”, with CEO of the Aga Khan Foundation, Dr. Mirza Jahani, Chairman of the Pakistan Centre for Philanthropy, Shamsh Kassim-Lakha, and CGP’s Director Carol Adelman. The panelists spoke on topics ranging from the recent growth of civil society in Pakistan to the impact of economic development on future philanthropy.

imgres-1One very interesting point Lakha made was the pervasiveness of a giving culture in Pakistan and the importance of leveraging that community giving to strengthen civil society. He spoke about how Muslim culture has an ethos of giving that Pakistanis take very seriously. According to Lakha, approximately 80% of Pakistanis participate in some form of philanthropy, whether it be through monetary donations, volunteering, or both. These are levels equal to the US, one of the most philanthropic populations in the world. To further illustrate his point, he spoke of how 28% of those participating in philanthropy live on $2 a day.

Throughout the discussion, Lakha placed special emphasis on the growing role of civil society. He claimed that as Pakistani civil society develops, citizens would increasingly rely on it to fill the government gap in providing social services. Because of this, Pakistan must find a way to leverage the philanthropic culture to promote civil society growth. It is not enough to just participate philanthropy, Pakistan must find a way to develop and apply this philanthropic culture in a systematic and effective way.

Dr. Jahani made an intriguing comment on the current organization of philanthropy in Pakistan. He claimed that it fell into two camps: pure philanthropy and pure investment. He argued that in order to leverage the philanthropic culture, Pakistan must find a way to fill the gap between these two approaches. Both philanthropy and investment are needed in the development of civil society but often seem to be at odds. Philanthropy has the perception of being perfectly altruistic while investment is about the investor’s monetary returns. How can these two approaches that seem at complete odds work in conjunction with one another?

imgresSome argue that impact investment could be the connection between pure philanthropy and pure investment. Simply stated, impact investment is strategic investments companies make for financial gain that also have a social or environmental improvement goal. Impact investment gained popularity last year when it became a focus at the G8 Social Impact Investing Conference and the Aga Khan Foundation has had an impact investment initiative since 2011. In 2012 alone, companies donated more than $8 billion to impact investment. It is a way for companies to increase profits while also earning public goodwill.

Because impact investment primarily occurs through private corporations, the concept connects strongly to the economic development of Pakistan. During the discussion, Lakha pointed out that the economies of developing nations are growing at a faster rate than those in high-income countries. This means an increase in overall philanthropy and investment in Pakistan. He argued that corporate philanthropy is becoming increasingly important and will be critical to the development of a strong civil society. While an increase in philanthropy is a desirable trend, through impact investment Pakistani corporations could scale up the impact and returns of its investments through a single action. If Pakistani corporations catch on to the impact investment trend, Pakistan might see a large increase on its returns on investment, both on the economic and social ends. Now the country must figure out the best approach to encouraging impact investment.

If you would like to listen to the entire discussion on “Philanthropy for Civil Society”, please click here.

Watch the Throne: Nigeria is Now leading Africa in GDP

April 14, 2014
Photo Courtesy of Zouzou Wizman: https://www.flickr.com/photos/zouzouwizman/

Photo Courtesy of Zouzou Wizman: https://www.flickr.com/photos/zouzouwizman/

Nigeria has catapulted ahead of South Africa for the title of largest economy on the African continent. On April 6, Nigerian government officials announced that they had revised their 2013 GDP calculation to the tune of $510 billion. But in 2012 the World Bank estimated Nigeria’s GDP at $262 billion. So what can account for this rapid change? The answer lies in how the Nigerian government did the math.

The process is called “rebasing.” To calculate any country’s GDP, economists must first set a base year on which to model the economic growth. Then economists try to paint a picture of the economy in that year by studying different industries like agriculture, energy, and manufacturing. In the years to come, economists look at how these industries have grown. All GDP calculations, sometimes many years later, are based on this initial point of reference. However, this system of measurement does not account for the informal economy. Nor does it account for rapidly developing sectors such as telecommunications and film—industries that have sprung up in Nigeria over the last 20 years.

Nigeria’s model year was 1990. The new base year is 2010. As we will see, much has changed in the Nigerian economy since 1990. New industries have emerged and historically strong industries have fallen. Thus far, the World Bank has supported Nigeria’s recalculation. It is recommended that a country rebase its GDP numbers every five years. Since Nigeria has held off for so long, the change was quite drastic. Nigeria saw the highest gains in the service industry. The agriculture, oil, and gas industries decreased in terms of percentage of GDP. Telecommunications shot up from less than one per cent to 8.7% of GDP. The Nigerian film industry, known as Nollywood, makes up about 1.2% of GDP.

Sadly, despite these good numbers, the average Nigerian citizen will not see improvements in their quality of life. South Africa, who Nigeria unseated from the throne, has a GDP per capita of $7,336, a long way from Nigeria’s $3,000 (and that is with the new rebased numbers). There is still corruption, terrorism, power outages, and vast inequality in Nigeria. Many have criticized the new calculations, saying that nothing will ultimately change for poor Nigerians. What the new numbers can do, however, is open the door to more Foreign Direct Investment. As Africa’s largest economy, Nigeria has put itself in an advantageous position in the world marketplace by calling positive attention to themselves. As Forbes recently reported, the country is full of potential. They have a growing educated class, energy reserves, and a spirit of entrepreneurship. But as of today it seems that there remains many political and institutional barriers to overcome.

Past Reconstruction to Constructing Rwanda

April 11, 2014

Twenty years after the genocide in Rwanda, things seem to be looking a bit brighter. With an average annual growth rate of eight percent since 2001 and over one million people lifted out of poverty, Rwanda is poised to continue growing by leaps and bounds. Even so, 20% of Rwanda’s economy comes from foreign aid, only trailing its exports of coffee and tea. As with most developing countries, one of the most visible signs of growth is the new buildings sprouting from the ground around the capital of Kigali. As impressive as office buildings and shopping malls are, it remains to be seen how beneficial these structures are to the economy and people of Kigali and other developing cities.

Construction workers in Kigali

The benefits of the construction industry in developing countries is clear. The global construction industry was approximately $1.7 trillion in 2007, and typically accounts for 5-7% of each country’s GDP. Jobs in the construction sector tend to be low-skill jobs, something that most developing countries, and especially Rwanda, have in abundance. A report by the International Labor Organization (ILO) found that workers in places as diverse as India, Brazil, and China were significantly more likely to be illiterate and have few years of schooling. Construction is also an investment, as there are roads, buildings, and other structures that can be used to house offices, transport goods, and improve the human and business capabilities. Kigali is already one of the most urbanized cities in Africa, and is expected to grow by 79.9% by 2025. Construction in Kigali and satellite cities is meant to ease congestion of an already dense capital of a densely-populated country.

Map of Rwanda

There are some issues with the construction industry in the developing world. The first one involves property rights. Large amounts of people in cities in the developing world don’t have a title or ownership to the land that they live on, especially in slums. Hernando de Soto, president of the of the Institute for Liberty and Democracy in Peru, has referred to slums as “dead capital”, alluding to the idea that people make improvements by building shantytowns but are not able to use it for collateral due to red tape. The perniciousness of not actually owning the land that one’s house is built on is even worse. In Kigali, 70% of housing is informal, with the government proposing to demolish that housing and creating more high-density areas and rent-to-own schemes. However, housing in the suburbs of Kigali currently typically costs 25,000 francs ($36.87) a month in a country where 45% of people still live below the poverty line. There’s a fear that parts of Kigali could end up like Nova Cidade de Kilamba, a suburb of Luanda that is a ghost town built and funded by the Chinese.

Developing countries, and Africa in particular, have been raising questions about who benefits from the construction industry. Recent reports by investigative journalists from the Forum for African Investigative Reporters (FAIR) in Kigali have found that foreign firms, notably the Chinese, have done a substantial portion of construction. The Chinese are able to undercut local firms by using Chinese contractors backed by subsidized loans provided by the Chinese state. An operations engineer at a Chinese company working in Rwanda stated that his company could get loans with an 8% interest payment while Rwandan companies could only obtain loans with 17-18%, if they could even get a loan at all.

The view of Kigali’s town center and surrounding areas

There is a final concern about construction and corruption. Since construction contracts tend to be a fee and cost of materials, construction companies tend to be implicated more frequently. They overstate the amount of labor used on a project, pocketing the difference. One field experiment in Indonesia found that an increase in official audits of construction projects reduced missing expenditures of labor, ie nonexistent workers, by between 14 and 22%. Construction and engineering companies dominate the current World Bank list of debarred firms, the largest of which was SNC-Lavalin, a Canadian firm, which was debarred over bribery charges around the $1.2 billion funding of the Padma bridge in Bangladesh. Because of these troubling factors, questions, concerns, and confidence over construction in cities like Kigali will continue to surface.

Quantity vs. Quality: Rethinking ODA

April 9, 2014

The UK has met its .7% Official Development Assistance (ODA) target for 2013, but from the limited coverage of this issue you would never know. Britain barely advertised this huge accomplishment, only sending out a single tweet of acknowledgement. The UK is just one of 7 countries currently meeting the ODA requirement set by Development Assistance Committee (DAC) countries in 1969 and it is the first of the world’s largest economies to do so. The other countries include Norway, Sweden Luxembourg, the Netherlands, and Denmark. By comparison, the US only uses about .2% of its GNI on foreign assistance programs. The timing of the UK achievement is interesting considering the recent criticism of the country’s Department for International Development (DfID).

imgresDfID is the primary channel through which UK ODA flows. It is responsible for almost 88% of UK ODA.  But just last week the Independent Commission for Aid Impact, a watchdog agency evaluating DfID learning strategies, gave the UK agency an “amber-red” rating for its ability to research and apply its findings to foreign assistance programs. The report criticized DfID for poor returns on investment and emphasized the organization’s inability to translate research into effective action. This creates the notion that the UK could achieve the same development goals at a much lower cost if it were to employ more effective investment strategies.

The UK’s interesting situation is a stark reminder that quantity does not ensure quality in development assistance, and begs the question of which is most important for development: the quantity of foreign assistance or its quality? A higher quality means greater returns on investment, but a higher quantity means a larger investment overall. It seems, however, that by increasing the funding for an ineffective organization, the UK is wasting an opportunity to more effectively use its high ODA level but the achievement of reaching the .7% of GNI achievement masks the underlying organizational problems.

It is difficult to deny the benefits of ODA quotas. ODA quotas hold countries accountable for their continued foreign assistance. Bilateral development assistance relies on ODA, and because of the OECD agreement from 1969, developed nations have a mutual obligation to maintain a substantial foreign assistance program. By setting the quota as a percentage of GNI, each country has a high, yet attainable goal to achieve. Even if countries do not reach that goal, just by attempting to do so they contribute a large amount to development programs. The quota also serves the purpose of being an easily measurable target that ideally allows for comparisons across countries. The percentage encourages countries to contribute the same relative amount, creating a sense of equality.

The UK has drastically increased its ODA recently

The UK has drastically increased its ODA recently

The greatest negative aspect, however, of ODA as a percentage of GNI is the measure’s strict simplicity. As demonstrated, the benchmark only demonstrates how much money is spent on foreign assistance. It says nothing about the types of programs and, more importantly, the quality of these programs. Is this foreign assistance money used in the most effective way or in the areas in most dire need of assistance? It allows countries to abuse the ODA system. Countries are already under fire for suspicious ODA practices. A recent post on this blog highlighted how countries use ODA as a way to turn a profit often at the expense of a developing nation. Simply setting a high ODA target for developed nations without addressing organization issues could further contribute to this problem.

Has the age of ODA quotas come to an end? It might be time to move away from a system of ODA targets as a percentage of GNI. Development work is all about the quantifiable measures. Perhaps it is time the development community creates a quantifiable measure for ODA quality instead of merely the quantity. It is not enough for developed nations to merely donate a portion of their GNI, especially when that money is not funneled to effective development programs.

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