Overnight Sensation

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.

Past Reconstruction to Constructing Rwanda

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.

Niger Delta Blues

The nickname “black gold” has always been apt when dealing with oil. But dreams of riches and development have been masked by the murky nature of money flows connected to it. Nigeria in particular has been blessed and cursed with its abundant oil supplies. With the second largest GDP in Africa, Nigeria still has 46% of its population below the poverty line. This is despite the oil and gas sector representing 35% of the Nigerian economy, according to OPEC. The Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture has even asserted that the oil and gas sector has been distorting the Nigerian economy. Recent revelations have shown that corruption in the oil sector is still rampant. The question becomes what pressure can be brought on the industry.

Lamido Sanusi, former Nigerian central banker and whistle-blower

Recently, Lamido Sanusi, the Nigerian central bank president, was suspended and removed from his position by President Goodluck Jonathan. Sanusi’s suspension was prompted by the revelation that $20 billion in oil revenue was not accounted for by the Nigerian National Petroleum Corporation. The revelation created enough of an uproar that a forensic audit has been called for to try and account for the missing money. This is on top of the fact that a month earlier, the NNPC was selling kerosene to marketers at one-third of the international price, allowing them to mark up kerosene to Nigerian citizens 300-500%. The mark-up is the difference between 140-160 naira per liter ($.85-$.97) and 40 naira per liter ($.24).

In the past, Nigeria tried to tackle the issue of corruption and the lack of transparency in the oil sector by establishing the Nigeria Extractive Industries Transparency Initiative (NEITI) in 2007, which is the local adaptation of the Extractive Industries Transparency Initiative (EITI). NEITI is mandated to audit the extractive industries, and provide transparency and accountability. It is comprised of representatives from the government, oil industries, and civil society. While the cooperation of national governments and NGOs is a laudable achievement, the voluntary nature of the EITI has been criticized.

Shell and the Niger Delta

International NGOs, such as Oxfam and Publish What You Pay (PWYP), feel that the standard adopted by extractive industries should also be backed by a legal enforcement framework. EITI has also been criticized for the role of civil society organizations (CSOs) in the EITI framework. EITI can be considered a top-down reform, and the governments and extractive industries still have more power than the CSOs, creating pressure for the CSOs to go along with the EITI process, according to Kees Visser at the Focus on the Global South. There is also the question of which CSOs are chosen to be represented. EITI has also not been shown to reduce the Corruption Perceptions Index. In Nigeria, the NEITI has published audits, which have had no effect on laws,  because dissemination is not simple in a country with low internet access. There have also been representatives of NGOs who were actually single person self-promoters.

With the doubt cast over the EITI, the question remains on what model civil society in Nigeria should use to ensure that all Nigerians benefit from their extractive industries. While there is a local chapter of Publish What You Pay, coalitions in Ghana and Uganda could serve as templates for counterbalances to the government and industries. The Civil Society Coalition on Oil and Gas (CSCO) in Uganda and the Ghana Civil Society Platform on Oil and Gas are both large coalitions of CSOs: 40 in CSCO and 120 in Ghana compared to 19 in PWYP. Both coalitions use the expertise from individual CSOs to issue media campaigns and community interaction to pressure governments to keep oil and gas taxes and concessions transparent. In Ghana, the Civil Society Platform on Oil and Gas issues “Readiness Report Cards” and actively contributes to the Public Interest and Accountability Committee and proposed laws through the committee. The Ghana platform is funded by various international donor agencies, such as USAID and the EU, and therefore have the backing of powerful partners. Both of these countries have only recently discovered oil, so it remains to be seen how successful these coalitions will be in exerting pressure. For the most part, there’s nowhere to go but up.

Between a Schoolhouse Rock and a Hard Place

In both developed and developing countries, governments are trying to figure out the vital components of a successful education system. Partially, this stems from the rate of return on education, with as little as 8.5% in OECD for primary education to 25.4% in Sub-Saharan Africa for primary education as reported by the World Bank, though some of these figures are disputed. The solutions range from teacher accountability through standardized tests to competition from private schools. Some trends have been emerging from the data, and common themes are starting to become apparent.

 

Top 10 countries in categories according to PISA

Recently, the OECD came out with the results from the Programme for International Student Assessment (PISA), a cross-country test comparing the results in math, science, and reading of 15-year-old students. PISA is taken every 3 years in all 34 OECD countries, along with 31 developing countries who wish to participate, such as Jordan, Kazakhstan, Thailand, and Indonesia, among others. The stark results from this year was the drop of Finland and the rise of the East Asian states. Meanwhile, a number of developed countries underperformed the average, including the United States and Sweden. The mean score for OECD countries ended up being 494, with Shanghai-China attaining 613 and Peru propping up the table with 368.

 

Test scores and economic growth vs. years of education and economic growth.

PISA has found certain elements in school systems to be correlated with higher educational outcomes through test scores. High-performing school systems are more likely to distribute resources more evenly between socio-economically advantaged and disadvantaged areas. The better performers also tend to give more autonomy to schools, principals, and teachers over curricula and assessments than the lower performing schools. Better school systems also recruit and retain high quality teachers through higher salaries and more autonomy, although the correlation only works for countries with GDP per capita over $20,000. Finally, the less stratification there is in classes, by tracking gifted students into a separate track, the better the school test scores are.

Other reports from various academics tend to corroborate the data that OECD has been producing. Eric Hanushek and Ludwig Woessman have done a large amount of research using PISA and data from other test scores. They found that 73% of variation between test scores is down to educational quality, with a higher effect in countries below the median GDP per capita. This effect is also magnified through the openness of trade withing a country. Over a long time horizon, a 20 year reform leads to 5% higher GDP, with the effect over 75 years after the room resulting in a 36% higher GDP than without the reform. Meanwhile, the effect of dollars spent or number of years of schooling have little to no effect on educational outcomes.

 

Finnish primary education classroom

The question then turns to the factors that improve educational quality. Charles Kenny found that an increase in school autonomy over budgets, hiring teachers, and course content improves scores on average 17 points, which would be a big swing for most countries. Adding a couple hours of instruction, assessments for student promotion, and monitoring by principals for lessons makes scores leap 42 points, which would be almost a 10% improvement for the OECD average. This highlights the how autonomy and accountability complement each other. Private schools have also been shown to improve schooling in Indiaand Kenya, though other reports on private voucher programs in Chile and Catholic schools in the United States show no effect. The idea from these mixed results is that private schooling in countries with weak public institutions could benefit from private schools while in developed countries its questionable.

 

Growth and education reform

A final factor on improving educational quality is equity. Another study by Hanushek and Woessman showed that the earlier that tracking, or placing students into different classes or schools based on ability level, the more inequality there is in the system. As family socio-economic background is one of the major determinants of educational attainment, Hanushek and Woessman show that background is negated the longer that there is no tracking. This partially why Pasi Sahlberg, director of the Finnish Ministry of Education’s Center for International Mobility, has been emphasizing that the Finnish school system reformed decades ago to make education more equitable. Subsequently, test scores improved.

Education and its effect on human capital is probably one of the most important factors in development. Slowly, we are moving away from the model of just building schools, and realize that the quality of instruction also matters. In different circumstances, pre-primary education, choice in schools, autonomy, and equality have all been shown to have some impact in multiple countries. Now it’s simply a matter of determining which course of action is the best and for what circumstance.

Breaking Up the Breadwinner

For the last few decades, female empowerment has become an ever increasing component of international development. Many studies have proven that conditional and unconditional cash transfers to women have had substantial impacts on human development through education and health. Under Bolsa Familia and Progresa/Oportunidades, cash transfers are given to mothers based on whether their children go to school or get preventive health care. These programs have been proven to increase school attendance. In a different realm, micro-finance institutions, such as Grameen Bank and BRAC in Bangladesh, have focused their lending to women. This is largely because women are considered to invest more wisely and repay loans more often than men.

Much of the research rests on the assumption that men and women have different preferences, generally speaking. The idea is that men prefer to spend more money on consumption goods, like clothes or alcohol, while women prefer to spend money on goods that benefit the household as a whole, such as education or healthcare. Experiments have seen this played out in numerous, creative ways. Esther Duflo and Christopher Udry showed that in Cote d’Ivoire, men and women farmed different crops, with male crops being sold for profit and female crops being used for consumption by the household. Essentially, an increased production of female crops led to more food consumption and nutrition, while male crops had no effect on food consumption and nutrition. In another study in South Africa, grandmothers were more likely improve the nutrition of children, and especially young girls, compared to the grandfathers.

Within this context, a new paper by Matthias Doepke and Michele Tertilt has come out with the provocative title “Does Female Empowerment Promote Economic Development”? The argument behind the article is that different spouses don’t have separate preferences but that they have different comparative advantages in the household. In the model by Doepke and Tertilt, one spouse has a higher wage while the other spouse has a lower wage. Human capital, such as education and nutrition, is considered to be a comparative advantage for the spouse with a lower wage, which tends to be the wife. A transfer from the husband to the wife tends to lead to more investment in education and nutrition, along with consumption by the wife for herself. All this is at the expense of the husband spending money on himself.

OECD gender wage gap

At an economy-wide level, the husband is considered to have more physical capital, such as land or farming equipment, while the wife has more human capital, such as education and child rearing. The distinction between the two is that the land, farming equipment, or other physical assets are passed onto the children. Theoretically, cash transfers between spouses increases spending in general, at the expense of savings and investment that could be used on physical assets. If the economy as a whole is more service-based or dependent on education and knowledge, cash transfers would be more beneficial to economic growth in general. However, if the economy is based more on physical capital, such as farm land or industrial equipment, then transfers to the wife may be slightly detrimental as there would be less to leave to the children. No matter the economic structure, growth is affected by higher inequality between the spouses. Once there is no wage difference between the spouses, there is no effect on transfers, meaning that no matter the situation, wage parity is a desirable outcome.

All cash transfers, conditional or unconditional, are not necessarily bad or should be stopped. The structural context of employment, equity, and capital affects female empowerment’s effect on economic development. Places such as Latin America, where the service sector is a more important component of the economy, are more likely to increase sustained growth through female empowerment. There are many assumptions inherent in this article, particularly since this is an economic model not based completely on empirical evidence. The overall environment is just important as the cure.

Migrants and Porters at the Gate

The word “Morocco” conjures images of deserts, Bedouins, and souks in Marrakech, not the flamenco and Paella of Spain. Yet, there are two enclaves of Spain resting in Morocco, much to the chagrin of the Moroccans. Ceuta and Melilla are Spanish autonomous cities that lie along the Mediterranean Sea, nestled among the hills of Morocco. Both cities have been disputed by Moroccan claims, which are rejected by the Spanish government and local populations. Meanwhile, Ceuta and Melilla have become portals between Europe and Africa, both for people and goods.

A map of Ceuta and Melilla on the Mediterranean

It has been well documented that Africans are willing to endure many hardships to cross into Europe, with news stories popping up constantly about capsizing boats off the coast of Lampadusa, Italy or the coast of Greece. Ceuta and Melilla have also become a popular destination for African migration into Europe. The Spanish authorities contend that there are around 80,000 people waiting to cross into those two Spanish cities. The sheer volume of potential immigrants has led Spain to construct a triple layer of 20 foot high fences with barbed wire around Ceuta and Melilla, manned by border police with rubber bullets. These barriers were constructed at a cost of around 30 million euros, and are referred to by some Europeans as “walls of shame”.

The Valla de Melilla, or triple rows of barbed wire fence standing 20 feet high

These fences have not been a deterrent for desperate migrants looking to cross the border into Europe. There are frequent surges of people trying to cross the fences or swim to shore, hoping that their numbers will overwhelm the border guards. Earlier in February 2014, over 250 Africans  tried to simultaneously climb the fences or swim into the safety of Ceuta, while the Spanish border guards fired rubber bullets in an attempt to deter them. So far, 15 bodies have been found from that altercation. The interpretation of Spanish law is largely to blame for these surges. Would-be immigrants have not officially entered Spain until they have crossed the police line, not the border. The Spanish government is looking at reforming the law to ease the pressure. Currently, the migrants are housed in the Temporary Center for Immigrants and Asylum Seekers (CETI), which is chronically overcrowded. In 2013, the Ceuta CETI housed more than 700 people in a space built for 512. Large numbers of the migrants come from countries with whom Spain does not have treaties, giving the migrants the freedom to stay in Spain once they have their paperwork. On the Moroccan side of the border, the government has been trying to “regularise” undocumented migrants to allow them to work in Morocco, while the number of deportations of migrants to the Algerian border has decreased.

It’s not only people that try to cross the border clandestinely, as many Moroccan women attempt to take advantage of a loophole in Moroccan law through Ceuta and Melilla. Any goods that come into Morocco by foot are exempt from duties, as they are considered personal luggage, not goods for sale. Due to this loophole, many porteadoras, mostly Moroccan women, cross the border between Ceuta and Melilla into Morocco with 60 kg (132 lbs) of goods on their backs for as little as 3 euros a trip. Most of these women make 3 to 4 trips a day carrying more than their body weight in clothes, blankets, and other goods. In 2011, this trade was estimated to be worth 15 billion dirhams, or $1.5 billion, all untaxed. Up to 90 million euros is also paid in bribes every year, mostly to Moroccan border guards, according to Moroccan weekly Al Ayam. While these may seem like difficult and hellish conditions, these jobs support 45,000 people directly and 400,000 indirectly, highlighting the importance of cross-border trade and migration. Still, there is a danger, with porters dying every so often, trampled under the crowds of people loaded with kilograms of goods.

The porteadoras, or mule women, carrying goods across the border into Morocco

While these enclaves may seem small and unimportant, Ceuta and Melilla mean so much more to people who depend on them for their livelihood or their freedom into a new life. As much as they cause headaches for Spain, Morocco, and the European Union, there is no easy answer to resolve the issue. These European oases will continue shining like beacons, attracting the weary and desperate from the African continent.