Advice # 876: Take A Longer Perspective

I look at a graph showing Indonesia per capita GDP level and annual growth from 1970 to 2007 and could not stop to marvel (if it is the right word) that the depth of our 1997 crisis actually makes the US zero growth this year look like a one lazy Sunday afternoon.

It takes a mere two years from around 15 percent GDP per capita contraction to regain positive growth, as Reinhart and Rogoff (in pdf) rightly point out; but around 7 years to get back to pre-crisis income per capita level. Even more daunting, after the crisis, the average annual growth has been substantially lower than before, despite its accelerated upward trend.

And today we have global recession. I just hope that we don't take a wrong lesson by taking short-sighted economic populist policy and dramatically departing from market-based reform that has been responsible for much of the longer-run pre crisis growth and post crisis recovery.

Getting off the track is too expensive. Although the temptation is high, especially if you want to run for President/House members/funny pundit.

Economic Growth As We Know It

Like Arya Gaduh, I also haven't yet got time to read a new report on growth by The Commission on Growth and Development. But it seems that problem of growth and development economics now resurface in public discussion, thanks to the books of Sachs, Easterly, and Collier.

After some years of detour to more exotic agendas and plans for the developing world such as Millenium Development Goals and Bono-type of Aid; economic growth, the most crucial element for developing countries, yet hard to understand, is back

It was an ambitious research, probably to the scale of another report on global warming by Nicholas Stern. So it is surely worth to read the whole report. But for the time being, let use the interview to its chief, Michael Spence, from the Foreign Policy, to catch a glimpse on what's inside the report.

He said that:

This report is really more about a framework. How do the growth dynamics work, and what kind of policies tend to support it? When you get to the country level, it has to get very specific and depends entirely on history and the initial conditions and things like that

I am actually rather surprised with this kind of stating-the-obvious argument. In an earlier posting, I wrote that we already pretty much had an idea what make a good espresso economic growth, and as the Report's summary for Asia says:

These nine high-growth countries all share common characteristics: engagement with the global economy, macroeconomic stability, high rates of saving and investment, the market allocation of resources, and credible and capable governments.

But each characteristic is, alas, minutely variable. And it is not really clear to me the degree of importance of each variable: say, the market allocation or capable government?

The better question, I guess, is not how to find recipes for sustainable growth, but how to get into a turnaround from a low growth trap to an accelerating pace of growth, the focal points in which a country then could orchestrate themselves into those desirable characteristics --hopefully without curtailing democracy.

Usually such turnaround doesn't come from much grandiose scheme, but a small but critical reform.

HT: Arya Gaduh

The Making of Good Espresso --and Economic Growth

What is a good shot of Espresso? Here is the standard.

The ideal espresso (according to the Instituto Nazionale Espresso Italiano) is a 25ml beverage extracted from around 7g of finely ground coffee, using water at a temperature of 88C, passing through the grains at a pressure of 9 bar. See, dead easy. It should be thick-textured, having emulsified many of the oils, retain most of the volatile aromas and flavours of the bean and be capped with a thick colloidal foam layer - "crema" - reddish, creamy and flecked.

It's taken from a nice writing in The Guardian on 'the God-shot'--the nickname for a perfect home espresso. That article, somehow, reminds me the pursuit of, well, economic growth. We have pretty much had a good idea what espresso economic growth is, and a good deal on the mechanics. At least theoretically.

We know how seductive the crema economic growth is, too, that in Robert Lucas' words in 1988: once one starts to think about them, it is hard to think about anything else.

Yet, when it comes into policy making, the problem is:

Each one of those factors is minutely variable, potentially causing thinness, bitterness, under- or overextraction or - the ultimate humiliation - a thin or patchy crema.

Of Leader and Grassroots Participation

Here is the teaser:

“...found big changes in growth when autocratic leaders die in office—both positive and negative, but no substantial change when democratic leaders died in office......(T)hat individual leaders can play crucial roles in shaping the growth of nations,”

and (in Indonesia)

“increasing government audits reduced missing expenditures, as measured by discrepancies between official project costs and an independent engineer’s estimate of costs, by eight percentage points. By contrast, increasing grassroots participation in monitoring had little average impact…. Overall, the results suggest that traditional top-down monitoring can play an important role in reducing corruption.”

Who do you think found that (rather unpopular) evidence?

Yes, it's Ben Olken, one of the rising stars in economics.

Alas, No Easy Answer

Ap, in his reply to Ben of Indonesia Anonymus, wonders:

"What's interesting was how it (US, my word) overtook Europe only less than two centuries....(w)hat's interesting was why the Europeans who conquered the world, not vice versa (or why not the Chinese)"

It's an elusive quest indeed to explain what was going on --let alone, what will be going on next. But here is some thoughts on institution, based on my limited reading.

Why China and Middle East before Europe? Geography, said Jared Diamond.

Why Europe got industrial revolution? Culture, said David Landes. Culture embedded in evolutionary biology (or demography), argued Gregory Clark. And perhaps economic institutions (a.k.a private property right and market), said Acemoglu et.al (in pdf).

Why US and later Asian Tigers? The same Acemoglu's economic institutions.

Who's next and why? We don't know (Rodrik and Easterly position).

Do you have any idea?

Determinants of subnational growth, what do we know?

Last week Neil McCulloch, Bambang Suharnoko and Sumawah Yuningsih presented their empirical work on determinants of regional growth in Indonesia at the World Bank Office Jakarta (the paper is not yet available).

They did a standard Barro-type growth regression with growth rate on the left hand and a set of explanatory variables on the right hand, using district-level data. They did the regression in three different periods to capture the pre-crisis, crisis and post-crisis era. In addition to the standard variables like initial GDP level, share of population with secondary high school or more, telephone line density and some indicators of infrastructure, they introduced average growth of neighboring districts to capture the 'growth spillover effect.' However, because such data is not present, they were not able to add physical capital stock or investment in the regression.

A few weeks before the presentation I told one of the co-authors that I won't be surprised if they don't find anything significant in the regression. Indeed, except for initial GDP at t-zero, which indicates the convergence across districts, they found virtually nothing else was significant. Even the convergence seems to be driven by the crisis; richer regions got hit more.

This work was what Jeffrey Frankel once considered as 'zen economics' -- where your empirical work just prove... nothing. Or, in Neil's words, "We thought we knew what causes regional growth... In fact we don't."

Well, in empirical works, if nothing is significant then nothing is significant. But how do we explain such 'no finding?' Apart from some measurement error problems, I think of two things:

1. Before 2000 provinces and districts were not independent units of economic activities. Most of decision-making made by the central government. So what matters for regional growth were a) national growth, and b) the way resources were distributed by the central government. Hence the variation of regional physical or human capital did not explain the variation of regional growth.
2. Since decentralization has just formally started in 2000, the time frame is too short to see the effect. True, some regions perform better than the others. But perhaps that was due to non-standard variables such as leadership, or even luck. I think regions who do well are those lucky enough to have committed, visionary leaders. An article in Kompas about how Sragen became a pioneer in e-government, mainly because the leader had the vision and commitment to do that, provides an anecdotal evidence (unfortunately now Kompas doesn't provide the link to its previous editions).

I suggested my co-author friend to redo the regression ten years from now, when we have enough post-decentralization data points.