Extreme Poverty and the Graduation Approach

Nearly 1.2 billion people are living below the extreme poverty line on less than $1.25 USD per day. Unfortunately, many of these individuals do not meet the qualifications of many poverty alleviation programs or are too consumed with meeting basic needs to apply for such programs. In partnership with the Ford Foundation, the Consultative Group to Assist the Poor (CGAP) set up ten pilot programs in eight countries (Ethiopia, Ghana, Haiti, Honduras, India, Pakistan, Peru and Yemen) to test and observe the “graduation approach” to poverty alleviation developed by the Bangladesh Rural Advancement Committee (BRAC). The graduation approach identifies individuals living in extreme poverty and provides them with basic resources, financial education, technical training, life skill coaching, and social support so that they can “graduate” from the program with food security and sustainable sources of income.

In September 2014, CGAP conducted evaluations of six programs that used the graduation approach. These evaluations were used to produce a detailed report that could serve as a technical manual for future programming. With the possible exception of the Honduran program, Mejoramiento Integral de la Familia Rural, five out of the six programs evaluated by CGAP had measurably increased their participants’ income, assets, food security, health, and happiness.

While CGAP’s evaluation supported the effectiveness of the graduation approach, it also identified some of the barriers to graduation. In order to achieve a truly sustainable income, participants needed to diversify their assets and income sources. This was particularly clear in Honduras where 83 percent of program participants had purchased chickens as a long-term investment. Unfortunately, many of these chickens contracted illnesses and died, plunging their owners back into poverty. Since illnesses and other acts of nature are often unavoidable, diversification of long term assets is essential.

Ultimately, the evaluations performed by CGAP and the Ford Foundation showed significant improvements for program participants. According to CGAP, pooled estimates of program participants’ per capita consumption increased 5.8 percent. In a true test of the graduation approach, per capita consumption continued to increase even after program support ended. The evaluations also revealed that participating families experienced fewer days in which a member of the household skipped meals or went a whole day without food. Finally, CGAP noted that the graduation approach had significantly and persistently increased household assets, improved psychosocial wellbeing, and increased self-employment income. By February 2016, 40 new programs had adopted the graduation approach. The success of the ten pilot programs established by CGAP and the Ford Foundation illustrated the efficacy of the graduation approach and ensured its use for decades to come.

Landlocked Developing Countries Face Unique Hurdles for Growth

Developing countries are often characterized by deficiencies in institutional security, infrastructure, and market openness. Among such emerging states, Landlocked Developing Countries (LLDCs) are set apart by their lack of direct access to the world’s oceans and seas. While landlocked European nations are on average 170 km away from the nearest port, their LLDC peers average nearly 1,370 km, placing them at a distinct disadvantage. The inability to access maritime transportation networks creates additional burdens that most developing countries do not have to face, including additional border crossings and significantly higher costs of doing business and transporting goods.

The plight of LLDCs is not, however, unknown to the international community. In November 2014, the United Nations held its Second Conference on LLDCs in Vienna, Austria. At the conclusion of the conference, the General Assembly adopted a 10 year action-plan for LLDCs, identifying six key priorities that need to be addressed in development efforts:

• Fundamental transit policy issues
• Infrastructure development and maintenance
• International trade and trade facilitation
• Regional integration and cooperation
• Structural economic transformation
• Means of implementation

These priorities may be boiled down into two major issues that need to be addressed vis-à-vis development in LLDCs: transportation infrastructure and trade relations between bordering countries.

While efficient and reliable transportation and logistics are important issues in all nations, they are essential in LLDCs. To date, only nine LLDCs have more than 50% of their roads paved. Recent research conducted by Paras Kharel (of the South Asia Watch on Trade, Economics & Environment) and Anil Belbase (of the Institute for Policy Research and Development) used data from the World Bank’s Logistics Performance Index (LPI) to determine the correlation between LLDC logistics performance and exports. The LPI is determined on a scale of 1 to 5 “based on efficiency of customs clearance process, quality of trade- and transport-related infrastructure, ease of arranging competitively priced shipments, quality of logistics services, ability to track and trace consignments, and frequency with which shipments reach the consignee within the scheduled time.” Kharel and Belbase discovered that, all else being equal, a 1% increase in the LPI performance of LLDCs is associated with an average increase of exports by 2.84% – 3.27%. Similarly, a 1% increase on the LPI in transit nations (nations that lie between LLDCs and port access) is associated with a 1.1% – 1.2% average increase in LLDC exports, all else being equal. However, if LLDCs do not share positive relations with their neighbors, a relatively high LPI score is essentially meaningless.

A common thread between many LLDCs is a lack of positive diplomatic relationships with major neighbors. Ethiopia’s relationships with Eritrea and Somalia, for example, are frosty at best. Newly minted South Sudan shares most of its border with other landlocked nations and Sudan, from which it declared independence in 2011 after a long, bloody conflict. For meaningful and sustained development, improving relationships with border nations is essential in order to allow and obtain greater access to the world’s ports—and by extension the world’s markets. Many LLDCs, such as Tajikistan and Uzbekistan, must use routes that go through more than one transit nation to reach a port. Encouraging trade agreements that knock down tariffs and nontariff barriers should be a priority.

The private sector and civil society can also play major roles in the process of developing LLDCs. Civil society and the private sector can help provide more intimate perspectives of ordinary people who live in LLDCs which can lead to more specific and productive policy recommendations tailored to each nation’s unique needs. Civil Society can also advocate for streamlining procedures and eliminating barriers in order to promote more robust FDI, an important cog in LLDC development. The UN Conference on Trade and Development reported that FDI is significantly more important for GDP growth and capital formation than in developing countries as a whole.

Figure 1. FDI stock as a percentage of GDP, 2004–2013 (Percent)

Source: UNCTAD, World Investment Report 2014

Figure 2. FDI inflows as a share of gross fixed capital formation, 2004–2013 (Percent)

Source: UNCTAD, World Investment Report 2014

The report found that the share of FDI stock in GDP averages about 5% higher than in other developing countries. The report also found that “In terms of the ratio of FDI to gross fixed capital formation (GFCF) – one of the building blocks of development – FDI’s role was almost twice as high for LLDCs than for developing economies over the previous 10 years.”

As logistics performance, diplomatic relations with immediate neighbors, and engagement with the private sector and civil society improves, LLDCs will be enabled to overcome the unique barriers to development that they face.

Haven “Of the People, For the People, By the People”

It sounds reasonable to assume that a high crime rate correlates with political, economical, and social turbulence. But Nicaragua, a country lying in the center of Central America, defies this apparent logic. Despite its reputation as the second poorest country in the western hemisphere, Nicaragua has made remarkable strides in public security compared to its regional neighbors, the Northern Triangle– El Salvador, Guatemala, and Honduras. In 2012, the homicide rate in Nicaragua was 11.3 per 100,000 persons, less than one-third of the rates seen for its three northern neighbors.

From CentralAmericanPolitics

Nicaragua’s public safety profile is an even bigger surprise once you consider its economic, political, and geographical reality. As mentioned, Nicaragua’s living standard is one of the lowest among its regional neighbors with almost half the population in unemployment and homelessness. The wage rate for police officers, set at $120 a month, as well as their availability, 18 per 10,000 persons, is just as bad as the country’s poverty level. Politically, it has only been forty years since the revolutionary knock-over of the Somoza family dictatorship, and the foreign-intervened guerilla war against the subsequent authoritarian Sandinista regime. Such a short history of recovery is a fair enough excuse for Nicaragua to have security irregularities as past remains. What takes people aback the most is probably that Nicaragua has eschewed violence by drug traffickers and youth gangs like the MARAS or BARRIOS that have defined Central and South America for centuries. While Nicaragua shares a border with Honduras, a country pegged as one of the most dangerous areas in the world with the largest presence of the Maras, it has little identified indigenous terrorism and organized crimes.

It is neither stellar sociopolitical stability nor geographic prerogative that undergirds Nicaragua’s peace-mongering environment. Then, what? The most sounding answer lies in “preventive, proactive, community-oriented police model.”

Four decades of civil war the in Northern Triangle occurred at the end of the twentieth century, though they all differed in intensity, nature, and longevity. These conflicts caused these nations to develop national security policies that engagee the military in reactionary and repressive fashion. In contrast to their iron-fist policies, Nicaragua’s police system, while still retaining the pattern of military engagement in public security, proactively seeks to create a safe social environment. For example, the Nicaragua National Police (PNN) has created specialist bodies for youth violence and intra-family and sexual violence, which take up 20% of the national crime rate. These bodies carry out comprehensive three stage responses – transforming local environments, cooperating with local NGOs and health centers for victim support, and vocational training and education.

Even more telling of the country’s success, is the community-oriented aspect of the police model. A 1995 Constitutional Reform has given the PNN its own General Directorate and greater independence, which allows it freedom from political games. Under the centralized leadership, its operation is enrooted in a strong police-society partnership in a decentralized manner. There are usually broad channels of communication with local residents such as community assemblies and direct linkages with the people. In each district, there is a sector police chief, responsible for paying door-to-door visits to residents, building close ties with them, and inviting them for neighborhood watch activities. Among 100,000 volunteers nationwide assisting the PNN in both crime detection and victim support are some professionals like law and psychology students, as well as some experienced former gang members and victims of violence, and NGOs. The fact that Nicaragua has social culture of parochialism and small-township, resulting in close community ties, complements the picture.

Nicaragua is not completely spared from the threats of violence. There are still 25,000 or so youth gangs. They are small in scale and often do not have foreign connections. But it is a logical sequence that the Mara gangs, contained in the North for now, may move south and reach these youths, especially at the wake of the Central America border control agreement which allows free movement of citizens between Nicaragua, El Salvador, Guatemala, and Honduras. Threats from a Mexican Mob, the Zetas cannot be ignored, as well. The persistence of low income, high poverty level further “legitimizes” participation in cocaine smuggling and investments. Above all, fraud in 2008 municipal elections, and the Police Directorate’s neglect of the limit on a five-year term, a writ-large departure from democratic order, pose a greatest disturbance to the philosophy of the country’s legal system.

Nicaragua has done a fair job so far, fair enough for the neighboring countries to learn from, though not replicate, its police model. Whether it will continue to be exemplary depends first on the collective effort by its regional partners to contain and ultimately eradicate organized crime groups. What remains of greater importance is to strive to live by a pillar that ensures equality of all people both politically and economically.

Overpromise and Under-Deliver: Growth in Mexico

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..

 In 2012, Enrique Peña Nieto took office as Mexico’s 57^th 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.

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?

 

 

 

Into the Twilight

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.

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.

Democracy and Development in Pakistan: Where are we headed?

On June 11^th, 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.

 

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.

 

 

 

 

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.

 

FIFA World Cup: Brazil’s Development Hopes

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:

 

 

 

 

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.

 

 

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.

Growth Under the Haves, the Have-Nots, and the Have-Yachts

Ever since the financial crisis and recession hit in 2007, there has been an increased interest in inequality and it’s effects on economic growth. Most of these arguments have been founded on questions of morality, but also some on pragmatism. Emmanuel Saez at the University of California-Berkeley found that 95% of income gains in the two first two years of the recovery after the Great Recession have gone to the top 1% of income-earners in the United States, leaving the rest of society lagging. More globally, 85 of the richest families in the world control ₤1 trillion ($1.6 trillion), roughly the same as the bottom 3.5 billion people.

Joseph Stiglitz, Nobel Laureate and one of the leading opponents of global income inequality

The issue of inequality and its effects on growth have been debated for a while. One of the earliest hypotheses was put forward by Simon Kuznets back in the 1950s and 1960s, known as the Kuznets curve. This curve basically showed that, empirically, economic development results first in increasing inequality, reaches a peak, and then reduces inequality. The growth in countries like South Korea and Taiwan has largely debunked this hypothesis. An argument put forward by some academics and leaders is that inequality provides incentives for entrepreneurship due to the fact that they have so much to gain. In poor countries, Robert Barro has written that inequality can lead to growth by letting a few individuals get a good education and invest in businesses. Others, in particular Nobel laureate Joseph Stiglitz, have argued that global inequality distorts economic growth through political economic power that promotes rent-seeking and weak corporate governance over strengthening human capital and ideas of fairness.

Through this quagmire, the IMF recently waded into this global argument with a new paper written by Jonathan Ostry, Andrew Berg, and Charalambos Tsangarides about both the effects of inequality on growth and redistribution’s inequality on growth. In particular, they make a distinction between what they call “market inequality”, which is inequality before taxes and transfers, and “net inequality”, or inequality after taxes and transfers. One of the main conclusions from the study is that more unequal societies tend to redistribute more. This is mostly skewed from industrial states, especially in Europe, that have large amounts of redistribution, cutting down their net inequality.

Lower inequality leads to less sustained growth

The bulk of this study focuses on the findings that the higher the net inequality, the lower the real growth rate on GDP. It also finds no statistical significance on redistribution affecting GDP growth. An example given is that an increase in inequality from the level of the United States (ranked 37) to the level of Gabon (ranked 42) would shave 0.5% off of GDP. The last part of the study looked at the duration of the growth spells. Again, the results show that higher rates of inequality are correlated with a higher risk that the spell of growth will end. Turning to redistribution, if there is already a large amount of redistribution in society, such as in some of the developed countries, further redistribution hurts growth. However, for the lower 75% of countries in the world, redistribution has no discernible effect on the duration of growth.

There are a few caveats that need to be addressed with this study, though relatively minor ones. As with any statistical study, these are only correlations, and correlation should not be confused with causation. Data on redistribution is also light, with this study using a proxy of direct taxes and subsidies. Amazingly, they don’t include government provisions, such as health and education. Both of these factors have been proven in various studies to have positive impacts on growth, including studies from the World Health Organization showing adult survival rates improving GDP growth to studies by Eric Hanushek and Ludger Woessmann showing how years of schooling is correlated with higher GDP growth. As these factors are a little more difficult to quantify, it’s understandable that they were not included in the redistribution factors. However, the results of these studies, along with others, show a general trend that countries could improve education and health spending along with other measures to reduce inequality while having economic growth at the same time.

Inequality in the developing world

Double, Double Oil and Trouble

How will oil influence Ghana’s development?

In 2011, Ghanaian citizens viewed the discovery of offshore oil as a game changer for Ghana. The oil would provide an economic boost for the developing country and improve overall social welfare through increased revenues, jobs, and infrastructure projects. Yet, oil-led development is notorious for stagnating economic growth and harming overall development. This is known as the “Resource Curse”. Almost every African country attempting oil-led development falls under the curse. Take your pick of examples. There’s Angola, or Equatorial Guinea, or Nigeria. The World Bank even tried to break the curse in Chad and failed. Africa has yet to see a successful execution of oil-led development.

What factors contribute to successful use of oil as a means of development? Terry Karl attributes Norway’s success to strong governance and a diverse economy. Countries relying on oil for development need strong governance to avoid corruption and a misallocation of resources. You only have to look three countries over from Ghana to see an example of this. Nigeria is Africa’s largest exporter of oil, yet the general public sees almost none of the money. A diverse economy is necessary because of the fluctuating value of oil. If a country relies solely on oil its economy will directly fall and rise as the value of oil falls and rises. Look no further than Angola or Equatorial Guinea where oil and gas make up 98% and 95% of exports, respectively. Neither country has experienced economic stability or the developmental benefits of increased revenues.

Ghana has the politics to break the curse

The development community still remains optimistic with Ghana. Many look to Ghana as an example of effective democracy in Africa. Ghana ranked 63^rd on the Corruption Perception Index, the 6^th highest of all African countries. Elections run smoothly and, more often than not, citizens turn to the justice system instead of violence to resolve conflicts. Ghana extends its good governance to its use of oil revenues. It passed the Revenue Management Act in 2011 as a new approach to oil-led development. The Act promises government transparency in its use of the oil money, with 30% of revenues going to savings and 70% towards development projects. It establishes oversight, regulations, and benchmarks for revenue distribution that the government is accountable to present to the public.

Compared to its counterparts, however, Ghana is in a better economic position to benefit from oil-led development. At the time of discovery, Ghana had a relatively diverse economy. Its largest export was gold, at 46%, followed by cocoa products at more than 30%. Ghana also had trading partners throughout Asia, Africa, Europe and the Americas. Since oil production began Ghana’s exports have grown from $7.5 billion in 2008 to $13.5 billion in 2012, but only $500 million is from oil. Ghana’s economic diversity means oil is a form of extra revenue instead of the basis of the country’s economy.

Ghana’s exports in 2008

But Ghanaian citizens have yet to benefit from the oil revenues. The government made a promise to use the oil revenues for infrastructure improvements. But citizens have not seen the benefits of that investment. Is this another case of the resource curse? The government claims the reason citizens have not directly benefited is thanks to lower-than-expected revenues. Current oil production rates are half of what analysts expected but Ghana is working to improve its production capacity and could see $1 billion in revenues in the future. Perhaps this slow production rate is a blessing in disguise for Ghana. At full production Ghana’s oil will run dry in 20 years. At the current rate Ghana can instead find a way to refine its oil and use it towards other industries and create long-term economic benefits.

Ghana is still in the early stages of oil-led development but it is facing a crossroads. Will Ghana take advantage of its good political and economic standing and break the resource curse? Or will it succumb to the draw of high short-term revenues and become another cautionary tale concerning the pitfalls of oil discovery? Ghana’s success could serve as a model for future oil-led development, especially considering the recent oil discovery in Kenya and Uganda.