On Hiatus

So, what was supposed to be a short vacation break from the blog is going to turn into a much longer absence, as I’ve stumbled into a great summer job which is going to be taking up pretty much all of my time until October. I may try to get the odd post in here or there, but don’t expect much… I’ll be back in the fall!

The Rise of the Failed Middle Income State and the Growing Divide between Economic and Political Governance

Earlier today Foreign Policy and the Fund for Peace released their annual ranking of the world’s failed states. The list is based on indicators of 12 different measures of state failure, ranging across social, economic, political, and military factors. This year 34 countries fall into the “Alert” category, denoting those in the worst shape. Somalia and DRC lead the way; the bottom five countries are all in sub-Saharan Africa.

What I think is most interesting about this year’s list is the fact that 12 of the “Alert” states – over a third – are middle-income countries. This is a new high, and indeed the emergence of failed middle income states is a relatively new phenomenon; back in 2006 there were only 3 of these countries. Whereas the failed states list used to be populated almost entirely by desperately poor countries like Somalia, Afghanistan, and Haiti, today we increasingly see a number of countries which combine moderate affluence with dysfunctional political governance, such as Nigeria, Pakistan, and Yemen.

The experiences of these failed middle-income countries present a challenge to a lot of established development thinking. There are two ways to approach this trend, depending on whether you’re a glass-half full or glass-half empty person. On the one hand, it’s possible to ask, how have these countries managed to achieve some economic success, despite the fact that they fare so badly in so many other metrics of state quality and good governance? On the other hand, one can look at these countries and say, why are their political institutions doing so poorly when in economic terms they’re not so badly off? While untangling the causality between economic and political governance has always been an extremely complicated question, it’s generally been assumed that the two improve together; indeed this is the heart of modernization theory. But for the Nigerias and Pakistans of the world, that doesn’t seem to be what’s going on.

Here’s a quick graph I pulled together using the new FP/Fund for Peace data that shows this divide between economic and political governance for failed middle income states. The graph shows the average score for failed middle income states compared to failed low income states for a selection of the indicators used to measure state capacity. The first two columns are the indicators which best cover a state’s ability to deliver on bread and butter economic issues; the Poverty and Economic Performance category includes variables such as unemployment, GDP growth, inflation, and government debt, while the Provision of Public Services category includes infrastructure, energy reliability, education, and policing. As can be seen, in these two categories the failed middle income states do considerably better than the failed low income states (a lower score on the index is an improvement in governance – details on the indicators can be found here [PDF]).

What’s really interesting, though, is that despite their ability to deliver economic growth and provide the public services necessary for a functioning economy, for these middle income countries economic success is not translating into improved political outcomes. Across the four indicators that most closely measure a state’s political stability and competence, the failed middle income countries do just as badly – indeed a little bit worse – than the failed low income countries. While their economies are relatively strong, these 12 states have very low state legitimacy (which includes democracy, corruption, political participation, and government effectiveness), fail to protect human rights and the rule of law (including press freedom, civil liberties, and political freedoms), lack a monopoly on the legitimate use of force (including internal conflict, military coups, riots, and protests), and have highly factionalized elites (including power struggles, flawed elections, and defectors).

Understanding just what’s going on in these failed middle income countries is an important question in contemporary political economy, and it’s something that I’ll be researching more closely with a colleague over this summer; look out for a new paper on these issues later in the year…

This post also appears on Politics in Spires, the joint Oxford/Cambridge politics and international relations blog.

Independent Central Banking and the Other Great Moderation

Has independent central banking jumped the shark? That’s the question Dan Drezner poses to his readers, in response to this op-ed from Pascal-Emmanuel Gobry arguing that central banks’ collective failure during the Great Recession should encourage us to return to more political central banking. This is actually a topic I spend a fair bit of time thinking about, and indeed wrote about back in January when Hungary was considering a shift away from independent central banking. I won’t rehash what I said then, but here are two additional thoughts on the question:

– The first is that Drezner is spot on in emphasizing that the dichotomy between “independence” and “political control” isn’t really all that clear cut. I think as societies we should be having more open and engaged discussions about monetary policy and the normative, distributive questions surrounding the inflation/unemployment trade-offs. These issues matter a lot, and when central banking is viewed as a purely technical domain they tend to fade to the background, allowing certain groups – generally the financial class – to quietly shape these debates in their own interests; it’s far better that they be addressed consciously and out in the open. But it’s not clear that this means central banks should be more closely under the thumb of our legislative institutions, and I’m particularly not eager to give the current US Congress much more power over monetary policy. To put it another way, there are a lot of issues that I think are overpoliticized in contemporary Western society – global warming, religion, culture, etc. Monetary policy is one of the rare issues which is underpoliticized; particularly with the current state of the economy, debates over monetary policy should play out not just in economics blogs but amongst the public in broader society. Like supreme courts, central banks shouldn’t necessarily be closely controlled by elected politicians, but they should be more engaged in their societies and reflect the interests and demands of the general public, including over contentious distributive issues.

– The second point is that when judging the value of independent central banking as a concept it’s worth looking beyond just the OECD countries and to the developing world as well. One of Gobry’s key points is that the financial crisis has revealed that the Great Moderation – the reduction in business cycle volatility in Western economies since the mid-80s, hailed as the great success of independent central banking – was something of a mirage. Now maybe this is true and maybe it isn’t, but it’s worth pointing out that the concept of independent central banking also deserves considerable credit for what I might call the Other Great Moderation, the one which took place in the developing world. Simply put, the quality of monetary policy has greatly improved across the developing world over the last couple decades, underpinning the widespread economic success of developing countries in recent years. As with the Western Great Moderation, there are a lot of potential explanations for this development, but the greater independence of central banks is a pretty big part of the story. And importantly, unlike the Western Great Moderation, the Other Great Moderation appears to have survived the crisis intact.

Here’s the Other Great Moderation in one graph, showing the share of developing countries with inflation above 20 percent and above 80 percent from 1980 until today (data from the IMF’s latest WEO):

Back in the 1980s it was common for about a quarter of developing countries to be experiencing average annual inflation above 20 percent, and for a non-negligible number to see inflation above 80 percent. In the early 90s, with the crisis in the former Soviet Union, these figures picked up considerably. Since then, however, episodes of high inflation have declined dramatically, and except for a small bump during the 2008 crisis have all but disappeared. (Two small asides on the graph: First, the thresholds were rather arbitrarily selected, but as a quick robustness test I also tried other levels for “high” and “very high” inflation, and the picture always looks about the same. Second, it’s worth noting that because of data availability issues and the changing number of countries in the world (i.e. FSU), I had to make the graph the share of developing countries with high inflation rather than the absolute number, and this probably understates how big the change has been, as I imagine the countries missing data in the early period systematically have higher inflation than the rest of the sample.)

I don’t necessarily think this fact should hugely weigh on debates about whether to preserve independent central banking in the West, other than perhaps as a reminder that what really matters is the interaction between the independence of the central bank and the general quality and competence of political institutions. But I do think it’s very important for our understanding of the value of central bank independence as an abstract idea, and should be noted before we start writing a eulogy for independent central banks.

From “Austerity” to “Growth” – The Politics of Painfully Slow Economic Recoveries

Much to Angela Merkel’s chagrin, international political momentum seems to have rather decidedly swung from “austerity” to “growth”. The transformation had been underway for some time – playing out in debates across the economics blogosphere – but the elections in France and Greece clearly accelerated this evolution. The recent G8 summit communiqué – which leads with the phrase “Our imperative is to promote growth and jobs” – epitomizes the shift.

In terms of our collective understanding of economics and how to fight recessions, I think there’s actually a lot less here than meets the eye, and indeed a lot of rather meaningless talk. To begin with, as Tyler Cowen has pointed out, “austerity” means many different things to different people, and analytically is just not a very useful word. So while the slogan “austerity has failed” might sound good, in reality we a) don’t really know what “austerity” means, b) even if we could define it we don’t really know if it’s been tried or not, and c) even if we could claim it’s been tried we couldn’t really say if it’s failed or not.

On top of this, it’s important to note that “austerity” is a means and “growth” an ends; while “austerity” may never have been a well-defined policy position, “growth” certainly isn’t either. As Gideon Rachman wryly noted, “Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before?” Furthermore, calls for a pivot from “austerity” to “growth” can refer to two quite separate debates, which have tended to become muddled in media discussions. One question is whether current policies are imposing too much suffering and hardship, and if given high unemployment rates and weak economies (and, for some countries, low borrowing costs) new short term, Keynesian stimulative measures should be taken to kick start growth. A second question is what’s the best way for countries to work down their debt-to-GDP ratios, and the argument is that focusing too much on cutting the numerator is self-defeating and countries should instead prioritize growing the denominator, i.e. implementing long-term structural reforms to spur growth, thereby growing their way out of their debts. There’s some overlap between the two – with time the short term becomes the long term – but only some.

While the actual economics of the debate might be overhyped, I do think the rhetorical shift is of considerable political interest, and could have lasting effects. To better understand what’s going on it’s important to step back and look at the big meta-narratives of the crisis response and their political fallout.

The first big response of Western governments to the crisis was bank bailouts/recapitalization programs, which were, by almost every account, massively successful, and also almost immediately hated by the public. Then came a wave of stimulus programs, which I think most economists would also say were by and large successful, and which also quickly became despised by the public (certainly in the US at least, as seen in the 2010 Congressional elections, though I can’t speak as much to their reception in other countries – thoughts on this point from Europeans welcome in the comments). The word “stimulus” now has a clear pejorative tone in American politics, such that no supporter of short term stimulus legislation can actually use the word (hence we get Obama’s “jobs bill”). After stimulus the next response was “austerity”, though again as noted above this has meant different things to different people. And now the people are fed up with austerity.

Notice a pattern? Such is the art of politics during extended slumps; when momentum coalesces around a certain idea as the response to the downturn, and then the economy doesn’t quickly pick back up, yesterday’s solution quickly becomes politically toxic, mostly regardless of whether it was a good policy or not.

And so “austerity” is now on the way out, a fact which will be most obvious when – as has happened with stimulus in the US – even its advocates begin to disown the term. David Cameron might stick to his general small-government vision, but I’m willing to bet he won’t be making many more speeches centred around the theme “The Age of Austerity”; that’s about as likely as Barack Obama running for re-election on the popularity of bank bailouts and stimulus programs.

So will the new “growth” policy have a longer political shelf-life? As long as it stays at such a broad, vacuous level perhaps – it’s hard to imagine the public turning against “growth” as a concept. But if momentum begins to build for a more specific line of responses and Western economies don’t quickly turn around (which, let’s be honest, they won’t), disillusionment could set in once again. Somewhat paradoxically, this actually gives pundits and politicians an incentive to refrain from cheerleading too loudly for the policies they think might actually help, in order to keep public expectations modest and avoid a future backlash. So here’s hoping for some quiet support for infrastructure investment and expansionary monetary policy…

This post also appears on Politics in Spires, the joint Oxford/Cambridge politics and international relations blog.

The World Bank Responds on Chinese Poverty Forecast

In response to my earlier post on the World Bank’s China poverty forecast I received the following reply from the Bank’s poverty team, which (at their request) I am happy to post here in full. Below their response I offer a few further comments.

Thanks for your interest in the World Bank’s poverty estimates and forecasting. As we often have said, these poverty forecasts are only reliable at the aggregated level, not at the individual country level. That’s why we do not normally release country-level forecasts.

That said, the Bank’s poverty team has no serious concerns about the quality of China’s 2008 survey data. Nor do we want to hide our poverty projection for China in 2015.

The easiest way to answer your questions is to show you our estimates. I am attaching the poverty estimates for China here which has exactly the same format as the GMR 2011.

Please notice that China conducts rural and urban household surveys separately. The national poverty estimates are the population weighted average from rural and urban poverty measures. China’s National Bureau of Statistics will soon release new urban population share from the 2010 census, and the time series of urban population share between 2000 and 2010 will also be updated. So, too, will the World Bank’s poverty estimates for China. But as of now, these are our best estimates.

Your blog said that “the most recent poverty survey for China, which covers the year 2008, has been the subject of considerable rumours in the past. Specifically, there was quite a long delay from when many people thought the results would be released to the public until when they actually were, which was just a few months ago.”

That is simply wrong. The delay in the public release of the World Bank’s poverty numbers had nothing to do with China. Rather, it was due to delays in the access of the data for a number of countries in Africa.

Sincerely,

Shaohua Chen
Senior Statistician
Development Research Group
World Bank

 

First off it’s great to have the World Bank respond on these issues, and especially great to respond by sharing the data. It’s still not particularly clear to me why the China projection was left off of the official publication this year; if the China story is interesting and important enough to merit its own line on the table – as I certainly believe it is – and the Bank has faith in the projection, then surely the 2015 figure should be included in the table, rather than listed as “not available”. But in any case, it’s great to now have the figures.

And indeed I’d argue it’s particularly important to highlight the China figure as it’s seen a rather substantial revision; last year the Bank thought in 2015 there would be just 66 million Chinese living in poverty, and this year that projection has risen to 100 million, a 50 percent increase. That’s an important change, and one that deserves to be discussed. Personally my guess is that it’s far too high, and that several years from now when we have the full data the actual 2015 figure will be considerably lower; time will tell. (Incidentally, it’s possible the 100 million figure is about right as an “expected value” prediction rather than a baseline prediction, in the sense that there are multiple possible equilibria for China’s future, including some unlikely-but-possible ones involving a hard landing, where poverty stops declining altogether or potentially even increases. So there’s a high (baseline) probability there will be fewer than 100 million Chinese living in poverty in 2015, but a small probability there will be much more, which could balance out to something like 100 million. But that’s not how people usually think about poverty projections.)

Finally, one small point of clarification: in the original post I did not mean to suggest that the China data was the reason for the delay of the overall new poverty results released earlier this year, but rather just that there were delays with the China data itself, such that China was not included in the April 2011 Povcal update…

Is the World Bank Deliberately Hiding its China Poverty Forecast?

I want to preface this post by saying that by nature I’m not a conspiracy theorist. But it seems to me that there is something funny going on with the World Bank’s efforts to monitor and forecast poverty in China.

I’ve done some work on poverty forecasting in the past, so I’m always excited to see when the World Bank, the official voice on such matters, puts out new forecasts. Last month the Bank released its Global Monitoring Report 2012, which includes its latest estimates of poverty for the year 2015. Here’s the relevant table:

When I first read this table my eye immediately focused in on the “—“ for China in 2015, which I initially took to mean the Bank believed $1.25 poverty would be effectively eliminated by then. While this would be an optimistic forecast, it actually doesn’t sound that crazy to me; after all, the World Bank’s China office (which, importantly, I believe operates mostly independently of the poverty team) wrote all the way back in March 2009 [PDF] that “extreme poverty, in the sense of not being able to meet the most elementary food and clothing needs, has almost been eliminated in China.”

But when you look at the bottom of the table, you see that “—“ actually means not available, rather than effectively zero. The obvious question, then, is why isn’t it available? Since we’re talking about forecasts, this can’t be a “data availability” issue in the strict sense of the term, because of course none of the data is actually available; these are the Bank’s best guesses at what poverty will be in 2015. So why isn’t there a guess for China?

The fact is there is a guess for China – there has to be – the Bank just won’t tell us what it is. And not only will they not explicitly tell us what it is, but they’ve gone out of their way to ensure we can’t calculate it ourselves.

We can be sure that there is a China estimate simply by noting that there’s an estimate for the East Asia and Pacific region as a whole; China accounts for about two thirds of the region’s population, so obviously it’d be impossible to guess how many poor people there’d be in the region without having a pretty good guess as to how many poor people there’d be in China.

Even more intriguingly, however, look at the bottom two rows of the table; the Bank gives a 2015 estimate for “World”, but the figure for “World excluding China” is once again “not available”. Note that logically this makes very little sense; if the figure for China were truly “not available”, then the Bank should be able to estimate “World excluding China” but not “World”, not the other way around. So why is the figure for “World excluding China” “not available”? Is it because if it were available we’d be able to work backwards and calculate the Bank’s 2015 forecast for China, which for some reason it doesn’t want to reveal?

One face-saving explanation would be if somehow the Bank’s model for producing these results truly only produced regional data, i.e. if the regional figures didn’t represent aggregates of national data (or aggregates of the big countries plus some residuals), in which case there wouldn’t be any “China” figure to show. But I’m sceptical of this for a number of reasons. In order of increasing conspiracy-ness:

One, it would just be a strange way to forecast poverty. While you maybe wouldn’t include every country in the world when you want to be able to add up to a global aggregate, whatever form of model you’re using can surely handle more than the six regions the Bank divides the world into, and the more fine-grained you get the better. And you’d certainly want to have specific data for China and India, as these two countries drive the global picture (and both have some controversial issues concerning their poverty counts, so it’s important to be able to speak about them specifically). And the source says ‘World Bank staff calculations from PovcalNet database’, and the PovcalNet database definitely builds regional aggregates by summing national data.

Two, in earlier editions of the Global Monitoring Report there’s always been a figure for China in 2015. Here’s the relevant table from the 2011 report:

So last year the projection method clearly allowed the Bank to forecast 2015 poverty in China; why not this year?

Three, and this is where we get to the most conspiratorial part – and admittedly most speculative, but of course what is a blog for if not wild speculation: the most recent poverty survey for China, which covers the year 2008, has been the subject of considerable rumours in the past. Specifically, there was quite a long delay from when many people thought the results would be released to the public until when they actually were, which was just a few months ago. Rumours from within the Bank suggested that the Chinese representatives at the Bank were being very secretive with the data, did not want to grant many people access to the raw data, and were deliberately holding up its public release. I don’t think I’ve ever seen anything written on this, so take it with a grain of salt, but I know a number of people who care about poverty data who spent a long time waiting to learn the results of the last China survey…

What are we to make of all this? My guess is there are two possible stories going on. One is that the poverty team within the Bank just doesn’t have enough faith in its China data to be willing to publish a specific forecast for the country – perhaps because of some of the well-known problems with the country’s PPP exchange rate estimate, or perhaps because of some issues with the 2008 survey, or something else. On the one hand this makes some sense – when you’re aggregating national forecasts into regional forecasts you have some room for errors to cancel each other out, and it’s easier to have more confidence in the broader picture than in the narrow one. But on the other hand, China’s a huge country; if we don’t have confidence in the China national data, then why would we have any confidence in the East Asia and Pacific regional data? And, perhaps more to the point, why in the 2011 GMR could the Bank feel confident enough to put out a 2015 forecast, but a year later it doesn’t?

The second possible story is more sinister: that there is some deliberate effort to keep Chinese poverty data and estimates from being released to the public. Did the poverty team within the Bank produce a figure for China – they almost certainly did – but someone else within the Bank decided this wasn’t the “right” number, and so didn’t want it published? Was there originally a number on the China line, but somewhere during the editing process it was crossed out? I know that sounds kind of crazy, but poverty data can be easily politicized – just ask India. I’d hope the Bank would be able to keep these political issues to a minimum, but it is of course not immune to political pressures, both internal and external.

The funny thing is, the Bank could have rather easily avoided this issue by simply eliminating the China-specific rows from the table; it almost seems as though they’re going out of their way to say “we have an estimate for China but we’re not going to tell you what it is”. Just what is going on here? Maybe there’s a good, logical explanation for all of it – and I hope there is – but right now I don’t see it…

UPDATE: See a response from the World Bank here.