you can’t print babies, but you ought to divide by them

Tyler’s macro experts, Hugh and Scott don’t seem to understand what economic growth is for, or how to measure it.

People, a country with a zero percent change in its overall GDP combined with a shrinking population is actually generating higher living standards for its citizens.

In other words, for most economic purposes, it’s per-capita growth that we should be measuring.

Sure, the raw size of the economy might be a problem for debt ratios and total war, but I’d rather live in an economy with zero change in GDP and a population growth rate of -1% than an economy with a1% growth rate in GDP and a population growth rate of 2%.

Living standards are rising in the first case and falling in the second case.

This is why the worry about, “the Chinese economy may be bigger than the US economy” makes no sense from an economics standpoint. China is still a relatively poor country in terms of income per capita or median income.

Sure, Japan could do a lot of things better. It could be more open to women in the workforce (I think this may be starting to happen). It could be more open to trade and investment.

But it is very very far from being an economic disaster.

Political Business Cycles in Mexico

Kevin and I have long been interested in political business cycles in developing countries.  We have a 2000 JLE piece called Political Cycles in Non-Traditional Settings, Theory and Evidence for Mexico, where we find a significant postelection economic collapse but no preelection boom, and that elections create, rather than resolve, inflation uncertainty.

So it was interesting to see the WSJ yesterday remarking on the same phenomena in Mexico in an article called “Mexico’s Curse of Economic Slowdown.” Anthony Harrup puts Mexico’s weak economic growth in 2013 in political context, noting that the first year of a new presidency often brings with it disappointing economic performances.

He lists GDP growth rates in the first and last years of presidential terms.  Presidents can only serve one term in Mexico so a transition always involves a change of leadership.

1994, last year of Carlos Salinas de Gortari 4.7%
1995, first year of Ernesto Zedillo -5.8%

2000, last year of Ernesto Zedillo 5.3%
2001, first Year of Vicente Fox -0.6%

2006, last year of Vicente Fox 5.0%
2007, first year of Felipe Calderón 3.1%

2012, last year of Felipe Calderón 3.8%
2013, first year of Enrique Peña Nieto 1.2%*

* Private consensus estimate from Bank of Mexico survey
Source: Inegi, Bank of Mexico

I didn’t know there was a term for this phenomena, but apparently the economist Jonathan Heath has named it the “sexenio curse” (presidents serve a 6 year term, or sexenio).  It was curious to find such a pronounced political business cycle in a one-party system, but the Mexican political system was unique in creating the incentives for one.  It’s interesting that the phenomena lives on in a democratic Mexico.  Perhaps we should update our paper and see if this new PBC is statistically significant…

 

 

 

Virtuous cycles: or Growth is good

Nice new NBER working paper, “Does Economic Growth Reduce Corruption? Theory & Evidence from Vietnam”

(Ungated version here).

The paper studies corruption across industries and provinces, finding that higher industry growth rates do reduce bribe payments, especially in industries that are mobile.

As the authors put it, “Our results suggest that as poor countries grow, corruption could subside “on its own,” and they demonstrate one type of positive feedback between economic growth and good institutions.”

 

Are Leaders to Blame for Slow Growth?

Andrew Mwenda has another excellent article up on the Independent.  He argues that it isn’t helpful to blame Africa’s economic problems on bad leadership.  It may be true that Africa has had a disproportionate share of bad leaders, but this just begs the question of why bad leaders keep rising to the top.  Here are some of his main points:

1. “Sub-Saharan Africa has had many changes of leaders over the last 50 years – in all over 300 presidents. Basic mathematical probability would tell you that if the personalities of these individual presidents were the main explanation for poor performance, out of these 300 leaders Africa would have had a high chance to produce the hero we have been looking for like a Lee Kuan Yew (Singapore), a Park Chung Hee (South Korea) or a Chiang Kai Shek (Taiwan). Yet even after 14 presidents of Nigeria, 10 of Ghana, eight of Uganda, four of Tanzania and Kenya, five in Zambia etc we have not seen this happen.

2. Our leaders don’t come from Asia or Europe. They are products of our societies. Therefore, even if their venality was the driving force behind our poverty and bad politics, there must be unique fissures within our societies that produce such a disproportionate amount of poor leadership.

3. There was as much corruption, dictatorship and nepotism in Indonesia under Suharto as in Nigeria under its various military rulers. Yet the developmental results of the two countries were different. In South Korea two former military rulers were arrested and tried for corruption in the 1990s – Chang Du Hwan and Tae Won Roh and both admitted to accumulating fortunes worth over US$ 600 million while in office. 

4. This tendency to perpetually condemn our political leaders is actually one way we African elites exonerate ourselves of the blame we must share and allows us to carry a holier-than-thou attitude.”

Mwenda consistently has interesting and thought provoking columns on development and comparisons between Africa and Asia.  I’ve been so impressed that I have incorporated a couple of them into my Ph.D. syllabus on economic development.

A round up of interesting news articles

1. Mexico bets on reforms to boost wages, but no quick fix (indeed, if there was one, I think they would have already tried it)

2. Young India irony: 75% will vote but 52% support dictatorship

3.  In the Violent Favelas of Brazil (“There is a de facto sharing of power between the legitimate organs of the state and the gangs, the militias. The police cannot safely enter a large part of Rio by land or by air.”)

4.  Anarchy along Mexico’s southern border crossings (“Unmonitored goods and migrants cross the Suchiate River all day long in southern Mexico, where criminals and corrupt officials lie in wait.”)

5.  When Liberian Child Soldiers Grow Up (“This desolate stretch of land is known as Poto Corner in the local Liberian-English vernacular, meaning a place for those without use. It is situated within Monrovia’s largest slum, West Point, on a peninsula home to migrants, fishermen, crack addicts, street kids, and many Liberians who fought and were displaced by the successive and complex civil wars that ravaged the country during most of the 1990s”)

Mexico: “Disappointing Indeed”

Eric Verhoogen has a very interesting working paper called “Industrial Structure and Innovation: Notes Toward a New Strategy for Industrial Development in Mexico.”

While good policies may be necessary for rapid economic growth, it’s increasingly clear that they are not sufficient (see my paper with Kevin, Only Income Diverges: A Neoclassical Anomaly, for more on this topic).  I think one of the reasons for reform backlash is the fact that the promised benefits haven’t been very forthcoming. Mexico is a perfect example of this.

Eric shows that a wide variety of countries have performed better than Mexico in the 1980-2008 period, including Chile, Malaysia, Thailand, Indonesia, Turkey, Hungary and Bulgaria.  Instead, he argues that “Mexico is in a league with Brazil, Argentina, the Philippines, and Romania, none of which has adhered as faithfully to orthodoxy. Mexico convincingly beats only Venezuela. Disappointing, indeed.”

A lot of reasons have been put forth for why Mexico has not lived up to expectations, but Eric has a different perspective.  He argues that Mexican manufacturing have specialized in areas with “low rates of innovation.” While this might have been consistent with Mexico’s comparative advantage, it isn’t a strategy that will fuel economy-wide growth nor move Mexico up the development ladder:

“Mexico has been facing a generic problem of industrial development in middle-income countries: how, in the presence of market failures in the learning process, to continue to move up the ladder of quality and technological sophistication, while staying ahead of poorer countries trying to move up the same ladder. It is not clear that market processes alone would have solved this problem.”

On a more optimistic note, he finds that things are already starting to change and that a different industrial strategy could lead Mexico to much brighter economic future.