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..

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

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

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

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

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

 

 

 

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Democracy and Development in Pakistan: Where are we headed?

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

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

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

Tax Revenue Pakistan

 

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

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

 

GDP Growth Rate

 

 

Pakistan GNI

 

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

 

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.

V.E.T. ‘Nam – The Role of Vocational Training in Development

Vocational Education and Training (VET) has proven to play a critical role in developing countries’ economic adaptability. In the past ten years, Vietnam’s GDP per capita has more than doubled. This can be largely attributed to the “doi moi” policy implemented in 1986. This reform allowed for a rush of privately owned enterprises, foreign and domestic, to take control of a large share of the previously state-run economy. But, with this economic reform came the need for an adequately trained labor force matching the substantial technological and institutional changes to allow for continued growth. With the right forecasting, a robust VET program can be key to providing the needed labor reforms.

There are two obvious considerations needed when thinking about the role of VET in a nation’s educational system, and more broadly its economical development.

  • What is the appropriate balance between general education and VET in the nation’s education system?
  • How does a country’s VET program adequately forecast the needed skills and labor structure?

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Education in Africa Fails The Test

This month, UN Secretary General Ban Ki-Moon announced that a top goal for the rest of his term is MDG 2, which is “to achieve universal primary education”. In order to meet this goal one policy could simply call for more schools and more teachers, but in Africa, the solution will be far from that simple.   During the Brookings panel, “The State of Learning in Africa”, Justin van Fleet explained that because the quality of education in many African schools is so poor, attending class has little or no impact on a child’s potential to learn basic reading and writing skills.  Along with Dr. van Fleet were panelists Lanre Akinola, editor of This Is Africa, a Financial Times publicationand Talya Bosch, Western Union vice president of social ventures. Continue reading

The Korean “Goose Family” Phenomena: Educational Migrants

Travelling thousands of miles to attend university in a more developed country is nothing new: China and India combined sent over 260,000 students to the United States in 2011, making up a staggering 36% of all international students.  It’s not surprising that these emerging economies along with other developing nations want to send their youth to highly regarded universities abroad. Surprisingly, South Korea, now a DAC donor, also sends vast numbers of students to study at universities in English speaking countries, with 73,351 in the U.S. alone.  However, South Korea distinguishes itself by not only sending university aged children, but elementary, middle, and high school children as well.

Seoul – The hyper modernized capital of South Korea.

In South Korea, the 15th largest economy with the fastest and widest broadband internet coverage, and some of the top performing students, a mass “education exodus” is taking place. An estimated 200,000 middle class families are sending their pre-college children overseas to be educated in Western countries; most often New Zealand, Australia, the U.S., Canada, and the U.K. Continue reading