south africa

My favorite things Utah

Lately there has been too much travel, yes, but writings these posts is fun.  I am headed toward Sundance.  Here goes:

1. Author: Orson Scott Card’s The Ender Trilogy (start with Ender’s Game) is a modern landmark which will be read for years to come.  Next on my list is Wallace Stegner’s Angle of Repose.

2. Actor: James Woods, as he plays in Casino and Virgin Suicides, two fine movies.

3. Best Robert Redford movie: Out of Africa, schmaltz yes but I love it.

4. Film, set in: Butch Cassidy and the Sundance Kid comes to mind.

5. Novel, set in: Norman Mailer’s The Executioner’s Song.  The first half in particular is a knockout.

6. Can I have a category for kidnapping victim?  Jeopardy champion?

The bottom line: I love Utah.  I love its baked goods, its Mexican food, its sense of building a new world in the wilderness.  I love that it has a uniquely American religion and I find Salt Lake City to be one of America’s most impressive achievements.  I regard southern Utah as quite possibly the most beautiful part of the United States.  That said, I had a tough time filling out these categories and of course plenty of the usual categories are blank altogether.

Would it have helped to give freed slaves land?

Melinda Miller says yes, based on a clever natural experiment:

Although over 140 years have passed since slaves were emancipated in the United States, African-Americans continue to lag behind the general population in terms of earnings and wealth. Both Reconstruction era policy makers and modern scholars have argued that racial inequality could have been reduced or eliminated if plans to allocate each freed slave family “forty acres and a mule” had been implemented following the Civil War. In this paper, I develop an empirical strategy that exploits a plausibly exogenous variation in policies of the Cherokee Nation and the southern United States to identify the impact of free land on the economic outcomes of former slaves. The Cherokee Nation, located in what is now the northeastern corner of Oklahoma, permitted the enslavement of people of African descent. After joining the Confederacy in 1861, the Cherokee Nation was forced during post-war negotiations to allow its former slaves to claim and improve any unused land in the Nation’s public domain. To examine this unique population of former slaves, I have digitized the entirety of the 1860 Cherokee Nation Slave Schedules and a 60 percent sample of the 1880 Cherokee Census. I find the racial gap in land ownership, farm size, and investment in long-term capital projects is smaller in the Cherokee Nation than in the southern United States. The advantages Cherokee freedmen experience in these areas translate into smaller racial wealth and income gaps in the Cherokee Nation than in the South. Additionally, the Cherokee freedmen had higher absolute levels of wealth and higher levels of income than southern freedmen. These results together suggest that access to free land had a considerable and positive benefit on former slaves.

Here is the paper, she is on the job market this year from University of Michigan.  The abstract is vague on magnitudes, for more detail see pp.29-30, for instance:

The livestock calculations find that the difference in the wealth gaps was substantial, and ranged from 46% to 75%.  For crop income measures, the difference in the gap was smaller, but still substantial.  My estimates place it between 20 to 56%.

Underappreciated economists, a continuing series

Vivian Hoffman, currently a Ph.d. candidate at Cornell.  When I read this description of her research I think that modern economics is very much on the right track:

I study the economics of anti-poverty and health interventions using household survey and experimental economics methods.  Most of my work to date has been in East Africa.  For my dissertation research on demand for and intra-household allocation of insecticide-treated mosquito nets, I conducted fieldwork in southwestern Uganda. Ongoing projects include a study on the impact of food aid receipt on labor supply and agricultural production in Malawi, estimateing the returns to farm assets in rural Ethiopia, and an experimental investigation into the effect of stigma on HIV testing behavior.  I hope to continue working at the intersection of health and development economics.  My interests also include health and poverty-related issues in Canada and the United States.

Here is the abstract on her main paper:

This paper reports results from a field experiment in Uganda. Whether a mosquito net was purchased or received for free affected who within the household used the net. Free nets were more likely to be allocated to those members of the household most vulnerable to malaria, whereas purchased nets tended to be used by the household’s main income earners. The effect was strongest for free nets received by the mother, increasing the probability that all children five and younger slept under nets by 26 percent relative to when nets had been purchased by either parent or given to the father.

In other words, within the household the breadwinners have a greater practical ability to control priced goods than non-priced goods.  This hints at one reason why men are often more willing to "think like economists" within the family.

You might think that Vivian has not yet done enough to be judged, but surely she has done enough to be judged as underappreciated.  So go appreciate her and remove that label from her name!

Does the youth dependency ratio drive economic growth?

Jane Galt and Malcolm Gladwell have a tiff

Gladwell, citing David Bloom and David Canning, suggested that changes in the "youth dependency ratio," account for a big chunk of Irish economic growth.  The youth dependency ratio refers to how many young-uns require support, relative to the broader population.  The Irish legalized contraception in 1979, birth rates continued to fall, and later the economy boomed.  But is the connection a causal one?

Here is a basic argument and model that the youth dependency ratio can matter.

I can see three possible mechanisms.  1) Fewer babies mean that more women work.  2) Fewer babies mean that each baby gets more parental investment; in the long run those people are smarter.  3) Fewer babies raises the savings rate.

Which of these might have operated in Ireland? 

On Mechanism #1, Irish women still work much less than the OECD average, yet Ireland is wealthier than almost anywhere else in Europe.  If a theory of growth first postulates a big or dominant effect, and then predicts rates but fails when it comes to predicting levels, I worry.

If we look at "rates of growth" only, this estimate suggests that more Irish female labor accounts for 1.5 percent Irish growth a year.  That hardly covers the growth gap between Ireland and the rest of Europe.  One estimate of elasticities suggests that an extra kid lowers an Irish woman’s chance of working full-time by 11.3 percent, but raises her chance of part-time work by 7.7 percent.  How far does that get us?  Bloom is a renowned labor economist but his article is far from state of the art macroeconomics.  Do note that increases in "total factor productivity" — often driven by foreign investment — seem to be more important than "growth in labor inputs" by a three to two ratio.

It ought to be easy to show evidence that the Irish boom has been strongest in the sectors where women work the most, such as services and not manufacturing.  I can’t find that evidence, can my readers?

Mechanism #2 is for the long run and it cannot explain the Irish boom of recent times or the timing of its possible connection to contraception.  Higher skills are a big part of the Irish story, but the trend started in about 1967

Mechanism #3: In Ireland, since the mid 1970s, gross private savings rates have been falling, more or less.  More generally, time series models for a single country, including demographic ones, don’t predict savings rates very well.

These studies I am citing have their defects, but they do show that the overall question is not so simple.

Notes:

1. These graphs show that, for developing countries, the change in the youth dependency ratio has "eyeball power" for 1975-1990, but not for 1960-1975. 

2. This study of Asia suggests that the youth dependency ratio matters, often through the savings rate (not the Irish scenario); the entire story is conditioned by "institutional factors."

3. Latin America has had falling birth rates but has failed to cash in.  As Bloom stresses, favorable birth rates help only if the country has good policies for putting the new female workers into productive positions.  In this regard Galt and Gladwell may not be so far apart.

The bottom line: How much of the Irish boom is caused by the change in the youth dependency ratio?  I don’t know.  If I had to offer a "I’m just a poor lil’ ol’ blogger but I’ve read lots of real business cycles macroeconomics simulation papers" seat of the pants sort of estimate, I would opt for a maximum of 15 to 20 percent.  That’s certainly worth writing about, but it is not the major story either.  I’d like to see a sectoral decomposition analysis, and I suspect that would point our attention toward FDI, education, and a favorable tax regime as bigger factors.

Addendum: Malcolm adds more.

World population 1500, and other maps

Here is a population-weighted map of the world, circa 1500:

World1500

Here is the projected world population map, circa 2050:

World2050

Here are other neat maps.  Here are maps of tourism, emigration, and refugees.  Here is my favorite, a map of the flow of net immigration.  Or try this map of aircraft departures, watch Africa disappear.  Here is the strange geography of fruit exports.  Here is how to make South America look really big, or reallly small (can you guess?).

Drought Insurance

The NYTimes reports on an innovation in disaster aid, drought insurance taken out by relief agencies.

In a pilot project that could someday transform the world’s
approach to disaster emergencies, the World Food Program has taken out
an insurance policy that will pay it should Ethiopia’s notoriously
fickle rains fail this year…

The policy, which costs $930,000, was devised to create
a new way of financing natural disaster aid. Instead of waiting for
drought to hit, and people to suffer, and then pursuing money from
donors to be able to respond, the World Food Program has crunched the
numbers from past droughts and taken out insurance on the income losses
that Ethiopian farmers would face should the rains fail…

….If it works, the insurance will get emergency money flowing
faster, before the haunting images of dying babies reach television
sets. It would also shift the risk from farmers to financiers.

    Insurance like this could even have benefits in the United States.  Private firms, of course, often do buy disaster insurance but the United States government might want to do the same.  Hurricane insurance, for example, bought by the US government could better spread the costs of disasters to the well-diversified.  In theory, the government could duplicate any insurance program with a tax and spending program (give Bill Gates money now and tax him when the disaster occurs) but in practice it’s going to be much easier to commit to an insurance plan than to an equivalent tax and spend plan.   

More generally, drought insurance on this scale is part of the New Financial Order.  I refer to Robert Shiller’s work on using macro-markets to
offer large-scale insurance.  A market in GDP futures, for example,
could be used to hedge against declines in GDP such as have occured in
Argentina, South Korea or the future United States (yes Tyler, it could happen!). 
Markets in the income of professions as a whole, e.g. the the income of
dentists, could be used by dentists to hedge against the possibility of
a super anti-cavity sealant.  See Entrepreneurial Economics for more on macro markets.

Thanks to Alex Wolman for the pointer and Robin Hanson for discussion.

James Surowiecki on foreign aid

…it’s a myth that aid is doomed to failure. Foreign aid funded the campaign to eradicate smallpox, and in the sixties it brought the Green Revolution in agriculture to countries like India and Pakistan, lifting living standards and life expectancies for hundreds of millions of people. As for the Asian nations that Africa is being told to emulate, they may have pulled themselves up by their bootstraps, but at least they were provided with boots. In the postwar years, South Korea and Taiwan had the good fortune to become, effectively, client states of the U.S. South Korea received huge infusions of aid, with which it rebuilt its economy after the Korean War. Between 1946 and 1978, in fact, South Korea received nearly as much U.S. aid as the whole of Africa. Meanwhile, the billions that Taiwan got allowed it to fund a vast land-reform program and to eradicate malaria. And the U.S. gave the Asian Tigers more than money; it provided technical assistance and some military defense, and it offered preferential access to American markets.

Coincidence? Perhaps. But the two Middle Eastern countries that have shown relatively steady and substantial economic growth–Israel and Turkey–have also received tens of billions of dollars in U.S. aid. The few sub-Saharan African countries that have enjoyed any economic success at all of late–including Botswana, Mozambique, and Uganda–have been major aid recipients, as has Costa Rica, which has the best economy in Central America. Ireland (which is often called the Celtic Tiger), has enjoyed sizable subsidies from the European Union. China was the World Bank’s largest borrower for much of the past decade.

Read more here.  The quality of this debate has improved markedly in the last ten years.  I’ll predict that most MR readers are skeptical about foreign aid, but I still regard this as an open question.  The key question is whether the above favorable conditions can be replicated by policy or foreign aid formula.

Is education good for growth?

It has long been received wisdom that education spurs economic growth. The education variable pops up as significant in many cross-country regressions. And many of the East Asian countries have had high investment in education and high rates of economic growth.

So how might a skeptical take on this matter look? Here is one pithy excerpt:

…there is actually a striking global correspondence between the world economic slowdown since 1973 and ever-increasing levels of educational spending. Comparisons between countries also confound the idea that more education translates into more growth. For example, South Korea is often given as an example of a country that made education a priority since the 1960s and saw significant economic growth. But as Professor Alison Wolf from King’s College London points out, Egypt has also prioritised investing in education, but its growth record has been poor (4). Between 1970 and 1998 Egypt’s primary enrolment rates grew to more than 90 per cent, secondary schooling levels went from 32 per cent to 75 per cent, and university education doubled – yet over the same period Egypt moved from being the world’s forty-seventh poorest country to being the forty-eighth.

A retort might be that education isn’t the sole determinant of growth – other factors may offset its positive economic role – but it remains a necessary one. But this argument doesn’t stand up either. The rapid growth of Hong Kong, another of the East Asian tigers, wasn’t accompanied by substantial investment in education. Its expansion of secondary and university education came later, as more prosperous Hong Kong parents used some of their newfound wealth to give their children a better education than they had had.

William Easterly doubts the evidence:

‘African countries with rapid growth in human capital [the fashionable term for people’s work abilities, especially levels of education] over the 1960 to 1987 period – countries like Angola, Mozambique, Ghana, Zambia, Madagascar, Sudan, and Senegal – were nevertheless growth disasters. Countries like Japan, with modest growth in human capital, were growth miracles. Other East Asian miracles like Singapore, Korea, China, and Indonesia did have rapid growth in human capital, but equal to or less than that of the African growth disasters. To take one comparison, Zambia had slightly faster expansion in human capital than Korea, but Zambia’s growth rate was seven percentage points lower.

‘…Eastern Europe and the former Soviet Union compare favourably with Western Europe and North America in years of schooling attained. Yet we now know that [gross domestic product] per worker was only a small fraction of Western European and North American levels. For example, the 97 per cent secondary enrolment ratio of the United States is only slightly higher than Ukraine’s 92 per cent, but the United States has nine times the per capita income of Ukraine’ (6).

My main worry concerns the hoary distinction between correlation and causation. The consumption component of education is commonly underrated. Rich countries spend more on education for the same reason that they consume more leisure. See my previous MR post on education and economic growth.

Diamonds are Forever…Not

How long can the diamond cartel last? I remember, as a kid, watching Milton Friedman tell us that the New York Stock Exchange was the only longstanding market monopoly he could think of. The NYSE has lost much clout, but why isn’t the diamond sector more competitive? Diamonds are found in many countries but the De Beers cartel has been dominant for much of the twentieth century.

But things are now changing:

…this stable, established and monopolistic system is now falling apart…other big miners got hold of their own supplies of diamonds, far away from southern Africa and from De Beers’s control. In Canada, Australia and Russia rival mining firms have found huge deposits of lucrative stones: BHP Billiton, Rio Tinto and Alrosa have been chipping away at De Beers’s dominance for two decades.

De Beers once controlled (though did not mine directly) some 80% of the world supply of rough stones. As recently as 1998 it accounted for nearly two-thirds of supply. Today production from its own mines gives it a mere 45% share. Only a contract to sell Russian stones lifts its overall market share to around 55%.

An Israeli named Lev Leviev has been instrumental in breaking down the old system:

Mr Leviev recently moved into diamond retailing. He claims that he is the only tycoon with interests in every stage of production from “mine to mistress” (a canard in the industry holds that men buy more diamonds for their mistresses than for their wives). But his real power lies in the cutting and polishing businesses. He has factories in Armenia, Ukraine, India, Israel and elsewhere. These give him power to challenge De Beers’s central clearing house and seek instead to channel stones directly, and at a lower price, to his own polishers.

The price of diamonds, however, has yet to fall. My more fundamental question is why these supply-side developments have taken so long.

Perhaps synthetic diamonds will put the market under for good. Few people if any can tell the difference. The diamond industry is spending large amounts to tout “the real thing.” But will a generation used to reproduction and “multiples” buy this line? And will men manage to move to a lower-cost signaling equilibrium in the marriage (and mistress) market?

The bottom line: File this one under “Markets Economists Do Not Understand.” But if there was one commodity I would not want to be holding today, it is diamonds. Someday students will wonder why they ever called it the “diamond-water paradox.”

How much is a Picasso worth?

Pablo Picasso’s Boy with a Pipe (the link is broadband with audio and video; here is a lower tech image) is on the auction block at Sotheby’s, this Wednesday evening. Some analysts expect the painting to go for at least $100 million, an all-time record. The Whitney family bought that same picture in 1950 for $30,000.

Are you thinking of bidding? Well, what else could you buy with $100 million?

One new opera house in downtown Toronto

15,625 pounds (or 7,087 kilograms) of gold

One six-album recording contract with Whitney Houston

Four years of ball-playing by New York Yankees star third baseman Alex Rodriguez

One Adam Sandler movie, including production and marketing costs

1.5 million hepatitis-B vaccines for children in sub-Saharan Africa and Southeast Asia

One day of Iraqi occupation by U.S. forces

Here is the full story. By the way, the Museum of Modern Art in New York is thinking of selling $27 million worth of its Picasso holdings, perhaps to buy more Damien Hirst.