Halfway down the Danube

Kyrgyzstan

I spent most of the month of April in Kyrgyzstan, a former Soviet Republic in Central Asia.  And now, seven months later, I'm going to blog a little about it!

I liked Kyrgyzstan.   Bishkek, the capital, was very Soviet. Wide streets, huge squares, women sweeping the sidewalks in the gray light of dawn.  It was spring, and I think spring in that part of the world comes on fast -- it was rather chilly when we arrived, four weeks later it was mellow and warm with flowers everywhere. 

Kyrgyzstan is a smallish country that is mostly mountains.  Bishkek sits on the plains some miles north of where the mountains end.  When the air is clear (which, since this is a former Soviet city, it isn't often) you can see the mountains in the distance.  They're the Tien Shan -- a range I'd barely heard of.  But they're huge: five, six thousand meters. Higher than the Alps, steeper than the Rockies. I had no idea.

Kyrgyzstan's economy has three pillars.  One is remittances from Kyrgyz workers who have left the country, mostly for Kazakhstan and Russia.  (That's pretty common across the former Soviet Union -- Moldova was much the same.)  The second is the mining and re-export of gold. While we were there, the gold bubble popped, which caused a certain amount of entirely justified consternation.  The crash in gold prices is going to knock a couple of points off Kyrgystan's GDP this year, and they were pretty poor to begin with.

The third pillar is that Kyrgyzstan  is a major re-export center for Chinese goods. They come across the border on trucks and then get transshipped to Russia and the other Central Asian republics.  At one point in the visit, we went to the "bazaar" outside of town, which combines wholesale and retail.  Whatever image the word "bazaar" conjures up, this didn't much look like it.  It was more like a series of enormous interlinked warehouses covering a couple of hundred hectares.

One section of the bazaar was all Chinese shoes. imagine a metal roof, two or three hundred meters long and maybe 20 meters off the ground. Under it, freight containers in rows two high. The lower containers are mostly retail outlets and/or showcases. The upper row of containers, connected by flimsy catwalks, are wholesale, just filled with shoes.  A million shoes? More? Anyway, enough to hit some critical mass that the whole place had a special smell. glue and leather and plastic and whatever they make soles out of.  You've had a whiff of it in a shoe store but never like this. A Platonic Smell Of Shoe.

Unfortunately, the transshipment business is also not doing so well -- the Chinese are figuring out how to bypass Bishkek, eliminate the middlemen, and sell directly to the Russians and Kazakhs.  So, all in all it's looking like a rocky year or two ahead for the Kyrgyz economy.

What else?  Well, Istopped by the Bishkek train station. It was very Soviet -- reminded me of the one in Chisinau, and also the one in Yerevan.  Apparently the station (along with some 200 km of track) was built by German POWs after WWII. Also, it seems that many of the POWs died in the process, and were dumped in mass graves somewhere in the area. I haven't been able to find any details online, though. There was no monument or memorial, not even a plaque or something, in the train station.  Kyrgyzstan was a back

The Kyrgyz themselves?  I really liked the Kyrgyz.  They're phenotypically very diverse -- Kyrgyz can look like Mongols, like south Chinese, like Turks, or even like South Asians.   But if you speak the language, and self-identify as Kyrgyz, you're Kyrgyz.  (Kyrgyz is a Turkic language.  Everyone is bilingual in Kyrgyz and Russian.)  The folks I met and worked with consistently were friendly, hospitable, and professional.  Kyrgyzstan has all the standard post-Soviet problems, but the people are pleasant and the food is good.  

Last random detail?  The Kyrgyz, like the Mongols, play a game that is basically bocce ball with sheep vertebra. I thought it was a cultural relic that got trotted out for tourists maybe. But no -- walking through a big monument square, there were a bunch of kids and teenagers playing it, and they were obviously deadly serious.

Kyrgyzstan: I really liked it, and would go back any old time.  (And if I do, I won't take seven months to get around to blogging about it.)

And some more about Ethiopia

I mentioned in the last post that Ethiopia had been enjoying terrific economic growth over the last decade.  Commenter Christine asked where this was coming from: oil, or something?

Well: no oil.   Ethiopia has been enjoying growth in agriculture, in manufacturing, in extraction industries (mining)... and in services.

Yeah, services.  That one is a little weird.  Services is transportation, communication, and finance.  Also tourism and accounting and consulting and haircuts and oh, all sorts of other things, but in an Ethiopian context it's transportation, communication and finance that have seen incredible hothouse growth.  Basically the country came to mobile phones and internet stuff late, but built them very fast; has a state-owned flagship airline, Ethiopian Airlines, that's doing improbably well; and has a banking sector that's seen dramatic, almost explosive growth in the last decade or so.

There are a lot of questions here.  Like: why is Ethiopian Airlines so incredibly successful?  It's a state-owned airline in a Sub-Saharan African country, which means it should either suck, or be going bankrupt, or both.  Instead it's profitable, reliable, and (despite a very famous crash) safe.  the 28th largest airline in the world, and the largest and most successful one based in Africa between South Africa and Egypt.  Ethiopian Airlines is the reason that Addis is a major regional hub, collecting flights from half a continent.  They're partnered with Lufthansa in the Star Alliance, for goodness' sake.  (There are US based airlines that Lufthansa won't partner with.)  How has EA managed this, when most other African airlines (and plenty of non-African ones) have floundered?  I have no idea.  But it's an interesting question, no?

A short primer on the Ethiopian banking system

Because this is what I do.

Ethiopia's banking system is weird.  It's like a throwback to an earlier Africa, the Africa of the 1970s or 1980s.  Three reasons.

First, the system is dominated by two big state owned banks.  One of them -- the Commercial Bank of Ethiopia -- accounts for almost 50% of all lending, by itself.  Throw in the other one (the Development Bank of Ethiopia) and the majority of lending in the country is being done by state-owned banks.  That was pretty common in Africa thirty years ago, when almost everyone had a big state-owned bank or two that dominated the sector.  But in 2012, state-owned banks are an endangered species.  About half of all African countries don't even have them any more.  In those that do, the SOB is usually small and specialized, either a "development bank" or focused on some neglected sector like agriculture. 

There are a couple of reasons for this.  One is that, historically, SOBs in Africa generally didn't work very well.  Another is that the big multinational lenders -- the World Bank and the IFC -- dislike SOBs, and have encouraged African countries to break them up and privatize them, or at least shrink and marginalize them.  (For the record, I think this was mostly a positive thing -- but like a lot of World Bank/IFC policies, it's been applied in a rather ideological and ham-handed way.  A lot of bad, corrupt, ineffective old SOBs needed to go, but a lot of babies got thrown out with that particular bathwater.)

Ethiopia, though.  Ethiopia is run by a bunch of former revolutionaries who are very nationalistic and not inclined to trust or listen to the World Bank and its ilk.  So they're keeping their big state-owned banks.  But at the same time, they've allowed -- no, encouraged -- the growth of a vibrant private banking sector.  There are about fifteen private banks in Ethiopia today, and they account for about 40% of lending and about 60% of deposits.  They're a vital part of the economy already, and they're growing by leaps and bounds.  So the banking sector is a true public-private hybrid. 

The second odd thing about the sector is that it's closed and protected: no foreign banks are allowed.  Ethiopia has no Barclays, no Bank of Africa, no Citi or HSBC.  That's also weird and unusual, because in 2012 most African countries have opened up their banking sectors to foreign competition.  Among other things, you can't join the World Trade Organization unless you agree to do this -- and everyone wants to join the WTO.  Out of 54 African countries, all but seven or eight are already WTO members.  (The ones that aren't are either oil-rich -- Libya, Sudan, Equatorial Guinea -- or weird recluse states like Eritrea, or tiny places like the Comoros.  Oh or Somalia, which doesn't really have a functioning government.)  So pretty much everywhere in Africa, from Botswana to Senegal, you'll encounter a bunch of international banks.  But not in Ethiopia.

The third weird thing: the Ethiopian Central Bank?  The guys who regulate the banks, control the money supply, set interest rates and all that?  The Central Bank is not independent.  Doesn't even pretend to be.  It's an arm of the executive branch.  It's there to do all the normal central bank stuff, but it's also there to carry out government policy.

Here's an astonishing example.  Couple of years back, the Ethiopian government wanted to build a hydroelectric dam.  Huge, huge thing.  Going to light up half the country.  Also going to displace tens of thousands of villagers and do untold ecological damage, including possibly wiping out Lake Turkana, but do you want electricity or not?  -- So they want to build a dam, but for various reasons nobody wants to lend them money to build it.  (Ethiopia's credit is not good: Dagong rates them CCC, and Moodys and Standard & Poors don't even bother.)  Where to get the money, then?

Well, the government of Ethiopia simply followed the Willie Sutton principle.  The Central Bank told the private banks that they needed to start buying dam bonds.  Lots of them.  In fact, the Central Bank announced that for every dollar lent by a private bank, they would have to buy twenty-seven cents worth of bonds.  Since commercial loan rates in Ethiopia are around 12% to 15%, and dam bonds pay just 3%, the banks were not very happy about this.  But they had no choice: if they didn't comply, the Central Bank would shut them down.  So they've been buying dam bonds -- millions and millions of dollars of them.  And now the government has money to build its dam.

So, a mixed public-private banking system that's protected from international competition, run by a non-independent central bank with a history of brutal intervention.  How's that working out?

Surprisingly well.  But this may need another post.

 

 

Tangle, Part 1

So I'm in the West Bank.

One of the things I occasionally do is give advice on commercial laws.  Not as much as you might think, mind.  I'm a lawyer, I'm a commercial lawyer, I'm a development consultant, sure.  But commercial laws?  Mostly sets of solved problems.  (Emphasis on "mostly", and also on "sets".  Maybe I'll unpack that sometime.)  There's been a lot of convergence in commercial law around the world in the last 15 years or so, and a lot more consciousness of comparative law.  (Except in the US, of course.)  Investment and trade are powerful drivers of legal standardization.  And then of course there are the World Bank Doing Business Indicators, about which don't get me started. 

So these days, a broken commercial law is almost like the economist's legendary $20 bill on the sidewalk: if the Zambian bankruptcy law were really as bad as that, someone would have fixed it by now.  More seriously, if it really is that bad, then there's some strong reason: either some local power center is making a lot of money from that bad law, or there's some overwhelming ideological reason for it.  The former is generally depressing; the latter, endlessly varied.  ("It's because President Nyerere, God rest him, drafted that provision himself."  "It's to prevent foreign guest workers from owning shares in companies."  "There's a concern about Genetically Modified Organisms."  "It's because we're still officially socialist.") 

Because if there's not a strong reason to keep the bad law, and nobody important is getting rich from it, there's going to be a surprising lot of pressure to fix it.  A donor -- USAID or someone like it -- will come in and target it in order to claim a win: "Our mission was responsible for drafting Yemen's wonderful new law on secured transactions!"  Or pressure from investors and traders will make itself felt: "We're going to lose the regional tractor distributorship to Zimbabwe if we don't fix the finance leasing law."  Or (sigh) the World Bank Doing Business rankings will come out:  "Dammit, man, we're 168th in the world for construction permits!  Who's working on the licensing law?"

So while I do occasionally get to do this sort of work -- I wrote Albania's invoice financing law from scratch in 2005, and I'm still pretty chuffed about that -- these days most developing countries have surprisingly complete legal frameworks for the conduct of modern business.  Oh, the courts may be corrupt and the currency may be unstable and you may have to bribe the Minister's brother in order to get your work permit.  But the actual laws on the books -- contract law, company law, secured transactions -- are likely to be surprisingly okay.  There's a wonderful phrase that gets used: broadly consistent with international best practices.  More and more, the world's commercial laws are just that.

Except in Palestine.

 

 

Zambia: Cross-border trade

There's a lot of trade between Zambia and the DR Congo.

Makes sense, right?  Congo's agricultural sector is a mess.  And the southeast corner of the country -- Katanga Province, next to Zambia -- is all mining country, with few farms or ranches anyway.  Someone has to feed those miners, and it might as well be Zambia.  Food from all over the country flows up the Great North Road to Congo.

But!  Most of the trade?  is informal.  That is to say, it's smuggling.  Trucks full of (say) sacks of grain drive north towards the DRC and then park a couple of miles from the border post.  Guys on bicycles swarm south across the border, using bush trails that snake well wide of Congo's Customs checkpoint.  The truck is unloaded, a sack at a time, and its contents dispersed onto dozens of bikes.  Back they go through the bush.

(A while back I blogged about a border post between the DRC and Uganda.  There was smuggling around that border post, too, but not so much -- it was in a mountain valley, so smugglers would have to go far around, and through some pretty rugged terrain.  The DRC / Zambia border, OTOH, runs through a lot of flat land that's covered in scrub forest... easy to get around.)

Since Zambia doesn't charge export taxes, the Zambian government doesn't get too upset about this.  (Congo is losing a lot of money on import duties, but hey: that's Congo's problem.)  In fact, Zambia rather likes the current system.  The Congolese pay in dollars -- their economy is very dollarized, and anyway nobody's going to take Congolese francs.  That's hard currency for Zambia, which is good. 

The smugglers in Zambia -- sorry, the "informal traders" -- are actually organized; they've set up their own group, the "association of small cross-border traders" or some such.  It's formally registered as a business organization in Zambia, and it barely bothers to conceal its members' activities.

However, Zambia is losing one thing: good statistical information about exactly what is leaving the country.  So, a year or two back, the Zambian government contacted the "association", and offered them a modest sum of money to produce a study estimating just what, and how much, was crossing the border from Zambia for the DRC without going through Zambian Customs first.  Effectively, the government was saying "Hey smugglers -- we'll give you some money to tell us just what you're smuggling out of the country".

And they did.  It's a nice study, too -- very professional.

More on this anon.

The Mouth of the Congo again

This is another post about two topics I discuss a lot, viz., "infrastructure" and "why Congo is screwed".  If those topics don't interest you, move on.

So Congo touches the Atlantic Ocean, but it doesn't have a proper ocean port.  There's Matadi, 150 km up the Congo River.  (Nothing goes past Matadi because of the rapids.)  But it turns out that the lower stretch of river from Matadi to the ocean is choked by sand bars.  The maximum draft?  Currently about 6 meters. 

That's not much.  You can't bring big ocean-going ships into Matadi.  Back in colonial times, it was tolerable. But the average ocean vessel today is something like ten times bigger than the average in 1950.

-- You'll notice I said "currently". That's because the lower river can be dredged.  In fact, Congo has a couple of big dredges to do the job!  But they're not working because of deferred maintenance, lack of spare parts, the usual.  A team from the Netherlands is trying to get them going.  But even if you dredge like crazy, it only increases the maximum draft to 8 meters -- better, but still not good.

So how do you get goods into Matadi?  Two ways. 

One, you ship it in a smaller freighter.  This happens.  Not all the world's freight traffic is carried in immense, 100,000 ton vessels.  A fair amount of Congo's imports, especially from Europe, come in smaller ships.   But they're more expensive, and you can't easily get them for long-hauls (i.e., to and from China).

Two, you ship it to the nearest deep-water port that can handle large freighters.  In this case, that's Pointe Noire, 250 km northwest of Matadi, in the country of Congo-Brazzaville (aka The Other Congo).  At Pointe Noire it gets offloaded into one of several smaller ships that run a shuttle service back and forth, along the coast and up the lower Congo river to Matadi.

There are a couple of additional wrinkles.  One is that Matadi is a horrible, horrible port.  It's overcrowded, most of the equipment doesn't work, and it's afflicted by broad, profound and relentless corruption.  It's rated as one of the most expensive ports in the world, while at the same time being one of the slowest.

Another is that the Matadi-Kinshasa rail line is in terrible shape.  It's run by a state-owned company, so it's slow, dilapidated, and corrupt.  Normally it's much cheaper to move stuff by rail than by road, but the Matadi-Kinshasa line is so bad that 80 to 90 percent of stuff coming in from Matadi uses the road instead.

So, to summarize, most imports to Kinshasa go to Pointe Noire first; get unloaded and reloaded into a much smaller ship; go to the horrible port of Matadi and get unloaded again; and then travel the last 300 km by road. 

Okay, this is pretty bad.  Are there any solutions on hand?

Well... maybe.  With help from -- can you guess? -- China! -- the government of The Other Congo is building an excellent new road from Pointe Noire inland to its capital, Brazzaville.  Brazzaville, you may recall, sits right across the Congo River from Kinshasa.  Once that road is finished (sometime next year), it will be possible to skip Matadi altogether.  Big ships can unload at Pointe Noire, then stuff can come by road to Brazzaville, then cross the river to Kinshasa.  The last leg will need a container ferry (there's no bridge), but that's surely doable.

It'll still be pretty Rube Goldberg for the country's most important transport link.  But nothing comes easy in Congo.  Baby steps.

Back from Bandundu

Well, that was interesting.

Bandundu is a town of a couple of hundred thousand people about 400 km north and east of Kinshasa.  By road, this takes about seven hours.  Which is, by African standards, not bad!  The first couple of hundred km is paved, even.  (Recent development, last couple of years. It hadn't been paved for long time before that.)

Bandundu sits where two large rivers come together, just a few kilometers before flowing into an even bigger river (the Kasai), which in turn flows into the truly immense Congo River. 

Let me digress a moment and note that the Congo River is really frickin' huge.  Put it next to the Mississippi/Missouri: the Congo's capture area is comfortably larger, and its discharge volume is more than double.  On my last visit, I noted that nature had played a cruel joke on Congo by putting some of the world's largest, nastiest rapids near the mouth of the river, rendering it non-navigable from the sea.  It turns out that situation's even worse than I realized; not only are there rapids, but the mouth of the river is choked by sand bars.  But inland from Kinshasa, it's navigable for hundreds of miles inland, with tributaries going off in all directions.

So Bandundu -- sitting by the intersection of a bunch of large rivers, a few hundred km upstream from the capital -- hould be a pretty major river port.  Right?

Ah hah hah oh dear.  No.

Tuesday night in Kampala

Brazil is beating North Korea, 2-0.  (Though the North Koreans made them work for it.)

Some odds and ends from the last day or two.  Uganda grows a fair amount of corn (maize) -- something north of a million tons.  About half of this is exported, some to Kenya, some to Sudan.  This is a fairly impressive achievement given that (1) nobody uses irrigation, (2) almost nobody uses chemical fertilizer, (3) use of herbicides and pesticides is pretty limited, (4) almost all the corn is non-hybrid or very old (>30 years) hybrids, and (5) there are very few warehouses or grain silos, and (6) the transport links to Kenya are bad, and the ones to Sudan are worse... basically, corn gets carried in 50-kilo bags loaded on 10-ton trucks.

Watching the system work, my reaction is one part "holy crap, what will these people do if they ever get a proper Green Revolution with capital and inputs and modern seed and stuff", one part "wait, how the hell is a country as desperately poor as Uganda ever going to manage that?" and one part "well they better figure out how really soon, because the population here is going to double in the next 20 years".

Back in Uganda

I'm in Kampala, Uganda again.

It's been a year since I was here.  Not much seems to have changed.  Well, Uganda has added nearly a million people since then -- it's one of the fastest growing populations in the world.  But Kampala looks much the same.

I'm looking at agricultural supply chains -- similar to the work I did in Tanzania a few months ago.  Uganda looks fairly similar, though already I can see some differences. 

One difference: Uganda has ridiculously fertile soil, multiple climate zones, and sits right on the equator.  So the diet is, on average, a bit more diverse than in Tanzania.  This has consequences for agricultural economics.  For instance, in Tanzania the price of corn (maize) fluctuates by about 200% over the course of an average year -- it can easily go from, say, $200 a ton to $600 a ton and then back again between harvests.  In Uganda, the presence of multiple alternative food crops flattens those fluctuations; over a year, you might see a 100% increase, from $200 to $400 and back, but more would be unusual.

One's first reaction is "stable food prices!  That's good, right?"  And yes it is, but of course there are complications.  Like: the bigger price swings down in Tanzania are encouraging the construction of warehouses (grain silos) to capture the time arbitrage.  These can have the pleasant by-product of enhancing food security.  (Can.  It depends.)  In Uganda, less extreme price swings = less profit in building warehouses = fewer warehouses.

Another difference: in Tanzania, certain agricultural supply chains are just totally dominated by Asians.  In Uganda, less so.  For instance, all the big grain buyers in Tanzania -- every one, without exception -- are Asian.  In Uganda, only about a third are.  That's because of Idi Amin, of course; he expelled all the Asians in the 1970s, crippling Uganda's economy for a decade.  Some of them came back in the 1980s and 1990s, and they're once again very important players in Uganda's economy, but they're not dominant in this sector the way they are in Tanzania. 

On a personal note, I went off to Frankfurt on Friday feeling fine, got my hair cut -- yeah! -- and then came down with a relapse of the ugly viral coughing thing that Claudia and I have been sharing for the last week or so.  Sleepless and hacking in a hotel room in Frankfurt, blah.  But that's travel sometimes.

Oh, and also: Uganda is only one time zone ahead of Germany.  But I have, no kidding, jet lag.  Why?  I think it's because it's June.  In Germany, sunset is around 9:15 at night, and it's still light well past 10:00.  In Uganda, sunset is at 6:30, it's dark by 7:00.  So my body is all "whoa, it's been dark outside for a while now!  It must be time for bed!"  Programmable brains: we're all waiting.

Last notes from Tanzania

Haven't posted anything for weeks.  Part of that is because I got sucked into editing the Tanzania report.  I wasn't originally supposed to edit it, but the people who were, got busy.  So I ended up with an extra couple of weeks' work.  12 chapters, 200+ pages.  Then a few more days because one chapter was, basically, unreadable and had to be rewritten more or less from scratch.

Two things that weren't my department, but that I found interesting.

First, the use of photovoltaic (PV) solar electricity is spreading steadily across the country.  PV solar generation is growing by about 15% per year -- from a tiny base, but doubling every 4-5 years. 

Since Tanzania sits on the equator, there's no shortage of sunshine: a square meter of PV solar paneling can produce about double what it does here in Germany.  PV panels are being used all over the country now.  Some of the popular uses include hospitals and clinics (they can run a fridge and basic lab equipment), barber shops (a couple of pairs of electric shears), rural police stations and government offices (computers, keeping lights on) and mobile phone chargers (apparently these are ubiquitous).

Apparently there are two sorts of PV panels for sale in Tanzania: ones from Europe (expensive but good) and ones from India and China (less expensive but crappy).

There are problems.  To use PV solar for much more than cell phone charging, you need batteries and a modest level of electrical competence.  Neither of these are present in abundance.  The local universities train electrical engineers, and I assume someone is training electricians, but they tend to cluster around the larger cities and towns. 

The Tax Revenue Appeals Board: grace, hope and wigs

Saturday night in Dar. 

In the first part of the evening, the team worked on our big presentation.  Afterwards, I had Indian food.  (East Africa: good Indian food.)

My brother-in-law John spent the last week in Goma (Eastern Congo) and Kampala (Uganda).  John works for the American Bible Society, so he's coming with a very different perspective.

-- Very different.  You know what gave me a really positive feeling in the last couple of days?  A morning spent at the local Tax Revenue Authority Appeals Board. 

Okay, I suppose I should try to explain that. 

Tanzania: things sort of work

Still in Tanzania!  But the last few days I was in Arusha, where I had a truly awful internet connection, and so could not post.

Couple of quick, general thoughts.

-- They missed a bullet with the tribal thing.  Tanzania -- unlike Congo or Kenya -- has a really strong sense of nation.  Kenyans are likely to say "I am Kikuyu" or "I am Luo" before "I am Kenyan", and this has had really poisonous effects on the country's politics.  (And let me pause here to recommend Michela Wrong's wonderful book It's Our Turn To Eat, which goes into detail about why this is so, and why it is bad, and how much evil has flowed from it.)  Congo, same-same.  But Tanzania, nobody much cares what tribe you're from.

This is one of the great positive legacies of the late Julius Nyerere, who ruled Tanzania for its first 25 years of independence.  Nyerere had his little quirks -- he was a romantic socialist who ran the country's economy into the ground -- but he got the tribal thing superbly right.  Okay, he was helped by the facts that (1) the tribes in Tanzania tend to be smaller but more numerous than the large groups in Kenya, so that no tribe had more than maybe 10% of the population, and (2) almost all the tribes already shared a common second language (Swahili).  Still, it was an impressive achievement, and a truly admirable legacy.

(I heard the difference between Kenya and Tanzania summed up like so: "After independence, Kenya built an economy.  Tanzania built a society.")

-- They've missed... well, partly missed a bullet, on corruption.  (Can you partly miss a bullet?  Grazing, light flesh wound?)

I mean, Tanzania has corruption.  No question.  We are in Africa. 

But compared to Kenya or Congo?  It's Sweden.  You can conduct your business without being harassed by inspectors looking for bribes.  A truckload of produce can travel across the country without being stopped by cops demanding a handout.  Foreign investors do not have to accept a Minister's nephew as a "local partner" in order to do business.

Talk to businessmen -- which is pretty much all I've been doing for the last ten days -- and you'll hear that taxes are a problem.  Finding competent people is a problem.  The sluggish, bureaucratic, not-really-business-friendly government is a problem.  Constant theft and pilfering and the need to spend money on guards and fences; difficulties with getting credit from the banks; the bad roads, the electricity that goes off, the general shoddy state of infrastructure... problems. 

But what you don't hear, or at least right off, is that corruption is a problem.  If you raise the issue, you'll hear that it exists, but it's usually not even in the top five.  And when you ask them to describe how it works, much of what you hear is dinky stuff -- slipping a tax inspector a few hundred bucks to settle an outstanding dispute, type of thing.  I mean, yes, that's bad, but it's not the kind of shakedown / protection stuff that just kills investment dead.

Or the port.  The port of Dar Es Salaam deserves a post of its own, but here's the short version: it used to be horribly congested, totally dysfunctional.  So the port authority made an aggressive effort to fix the problem.  And now it just somewhat sucks.  It's still a bad, congested port where containers may take weeks to process, leading to annoying storage fees and possibly the loss of perishables.  But it's no longer a godawful port where everything always takes weeks or months to process, and may disappear altogether.  It's gone from horrible to just bad.  That's real progress.

Noel Maurer raises the issue of a foreign private company taking over Customs.  That's unlikely to happen in Tanzania, for the simple reason that Tanzania's Customs system kinda works.  It's not very good, and it's certainly not very fast, and there are problems with corruption, collections, data accuracy, competence of the customs agents... you name it.  But there's a big difference between something that works, albeit not very well, and something that doesn't.  In Tanzania, things work.  Sort of.

Here's a comparison: if you look at a list of countries by per capita GDP (PPP adjusted), Tanzania comes out a little bit ahead of Haiti.  But Tanzania just doesn't give off the same vibe of deep dysfunction.  N.B., I have never been to Haiti.  But I know a lot of people who have.  Even the ones who like it concede that it's a very troubled place.  Well, Tanzania too, but... not the same.

One big difference between the two: Tanzania has one of the lowest Gini coefficients in Africa, or indeed in the developing world.  At 34.6, it's around the low end of the EU, comparable to the United Kingdom or Poland.  By way of comparison, Kenya's Gini is 44.5, and Haiti's is 59.  Tanzania has, by African standards, an incredibly flat distribution of wealth.  This probably goes a long way towards explaining why, while Tanzania is certainly very poor, it doesn't feel as poor as the raw numbers might suggest.

So, another point for Nyerere.  We'll talk about some of the less positive aspects of the Great Teacher's legacy later, time permitting.

Paying the mortgage

Let's start by saying I can't stand Megan McArdle.  I think she's a so-so writer and a deeply mediocre thinker, and her continued popularity baffles and slightly dismays me.

That said, this discussion seems to be a new low even by McArdle's low standards. Mike gives some good arguments, and if you click on the links Steve Waldman gives some more.  Apparently I'm coming late to this discussion, which was all over a certain particular slice of the blogosphere last week.  (Although, oddly enough, one of the best ripostes was actually written a couple of weeks earlier.)

The heavier hitters have already weighed in and hit, but I'm going to scamper in between their legs and make a perhaps slightly disreputable but, I think, relevant point: I would bet a fair amount of money that Megan McArdle has never had to worry about making a mortgage payment.

For no particular reason -- this isn't relevant, really -- that makes me want to write a little about my own mortgage payments.

Yet still more adventures in the McDonalds in Charles De Gaulle, Terminal 2A; or, the Congo and the Paris Club

I have been joined in the McDonalds by some very disconsolate Germans. 

They were supposed to fly to Frankfurt yesterday, but their flight was canceled.  So they got rescheduled onto a flight today, but that one got canceled too.  The next available flight is tomorrow morning.  So rather than spend yet another night at Charles de Gaulle Airport, they have decided to take a flight this evening to Berlin.  How will they get from Berlin to Frankfurt?  They do not know.  But at least it's in Germany, okay?

Outside, temperatures have risen just over freezing.  There's a wide broad expanse of snow on the tarmac just outside the window, and I can see it getting a bit slushy around the edges.

Let's talk about debt relief for the Congo.

Further adventures at the McDonalds in Charles de Gaulle Terminal 2A; or, banks of the Congo

Second day at Charles de Gaulle Airport.

Last night's flight was cancelled; apparently the weather over Central Europe is continuing uncooperative.  So I got to stand in line for an hour at the transfer desk, then got a voucher for a night at a hotel and a boarding pass for the next afternoon.  Well, we shall see.

Meanwhile, let me carry on with some further thoughts about dollarization in the Congo.  If this is not the sort of thing that interests you... um, I dunno.  I was going to put another link there?  But somehow sitting here in the McDonalds is sapping my urge to surf the net for interesting links.  Although not, apparently, my urge to talk about dollarization.  Go figure.

The Congolese Franc and its special friend, Mr. Dollar

Noel Maurer just wrote a whole post about how much he's enjoying the Congo stuff.  So I figure it's time to tackle a subject near to his heart: dollarization. 

This may take a couple of posts.  I'll try to keep it accessible for readers who are not economists.  (Note: IANA economist.)

First let's talk a little about the Congolese Franc.

The mouth of the Congo (2)

A little more about the lower Congo.

So there are these immense rapids, the largest in the world, cutting off most of the Congo basin from the lower river and the Atlantic.  Nothing larger than a kayak can descend the lower Congo to the sea, and even kayakers don't always get through.  In some spots the river runs through narrow gorges, flowing at over 50 km/h and becoming for a while the deepest river in the world at over 200m (650 feet) deep.  The rapids are so powerful that they create microenvironments that can create new species of fish.  There's one medium-size dam on the river already -- the Inga Dam, built in the 1970s as a showpiece for Mobutu's Zaire -- but it's not tapping a tenth of the river's potential.

A full-size hydroelectric system plus locks for shipping would utterly transform the region.  The amount of electricity that could potentially be generated is boggly-huge -- basically, the lower Congo is like the Mississippi dropping the height of the Chrysler building.  And locks or a canal would allow oceanic shipping far into the center of Africa.  It's such an obvious idea that it's been floated since colonial times, and it's still being discussed today.

But I'll be very surprised to see it happen.  The amount of money required is fairly immense -- much larger than Congo's current government budget, or indeed its entire GDP.  And while the project could, in principle, be quite profitable, the administrative, economic and social difficulties are at least as huge as the engineering ones. 

Apropos of which, I met an interesting engineer in Lubumbashi.

Lubumbashi: the Central Bank

Visited the regional Central Bank office today.  High point of the visit: money distribution.

The Congolese franc trades at about 900 to the dollar.  However, the largest note is the 500 franc -- about 55 cents.  So, large purchases require great masses of cash.  On Kinshasa's street of the moneychangers -- universally known as "Wall Street" -- one can see the changers sitting beside piles of cash, the notes assembled into bricks, the bricks piled high in stacks. 

The regional central bank was like that, only more so.  Besides Lubumbashi, Katanga Province has five or six towns large enough to have banks.  And each town gets a shipment of cash every sixty days.  Depending on the size of the town, the shipment will weigh between half a ton and six or seven tons of money.

Since the roads have pretty much collapsed, the cash is sent by air.  The bank puts the money into large metal lockers -- about the size and shape of an old-fashioned steamer trunk -- and loads them onto one of the little propellor planes run by Congo's many local air services.  The cash, along with a manager and several security guards, is then flown to the town and distributed to the local banks.

A Random thought while working on my Burundi report

Burundi's banking system has problems, but its fundamentals are sound.

Really. Despite a lot of bad loans, most banks are firmly in the black.  They have a great deal of liquidity -- most are well above their reserve requirements, with surpluses invested in safe government bonds.  (Strange but true: since its founding in 1962, Burundi's Central Bank has never defaulted on a bond payment.)  The bad loan problem is partially balanced by the fact that most good loans are overcollateralized -- for a $100,000 loan, banks will require $125,000 or $150,000 of security.  Burundi hasn't seen an asset boom, so those valuations are surprisingly solid.

And because the system is very small, it's transparent in spite of itself -- despite lacking most of the formal mechanisms for credit analysis (credit bureaus and the like), everyone in Bujumbura knows who the bad actors are.  There's no secondary mortgage market, which is a pity, but which also means they don't have to worry about lack of transparency in rebundled loans. 

High interest rates and low operating costs have kept the banks' margins up.  Conservatism and timidity -- they like only a few sorts of loans, mostly to import/export companies and construction, and they dislike loans of longer than a year or two -- have sharply limited the banks' ability to fund development projects, but they've also limited their exposure.  Because they do just a few safe things, they're not in any danger.

So, it just struck me: in many regards Burundi's financial system is in better shape than the United States'.

I am so tempted to title this post 'Bodacious'.

The number of times I drive a year is closely correlated with the number of weddings I attend. So I have no emotional investment in this development: Tata Nano: The World’s Cheapest Car (more info here: Four Wheels for the Masses: The $2,500 Car, and especially this graphic). Any thoughts? (My usual design guru is incommunicado, planning a wedding of her own.)

On a related note, the IMF has recently found that biofuel production has helped to increase world food prices. Personally, I don't want my form of transportation to be an ecological competitor. Thank God no form of transport runs on bratwurst.

In a Free State of Mind

I have just discovered Tyrone.  Tyrone is a wise wise man.  I like Tyrone.  Check him out yourself, starting here, and moving on to here.  The title of this post should make sense once you've read to the bottom of the first link. 

The rest of the blog, whatever. 

There is another Tyrone, of course.  I like him too.  Another wise wise man.   

Institutions at Odds

Around this time last year I was in Afghanistan.  I was there with some U.S.-run provincial reconstruction teams, some where you could walk around and eat in the locals’ homes; some where the “security situation” (read: RPG attacks) meant the PRTs reconstructed very little.  It was ... educational.  I will be going back, probably in May, although it’s still uncertain. 

I wrote the below essay (among other, less interesting things on the same topic) after I returned.  It’s an attempt to put my thoughts in order, although upon re-reading I think it might be more informed by my historical research about the Philippines than anything that I saw first-hand.  Be warned:  it’s long, and I don’t know if it really makes any sense.  At some point I’ll publish it, I suppose, but right now I’m still too confused. 

Comments and suggestions would be very helpful. 

Falling

Trivia question: which world leader, just a couple of weeks ago, referred to the US dollar as "a worthless piece of paper"?

Update: Global Tax Credits, corrected

The Knicks seriously suck.  Luckily for Eric, he's a Celtics fan.  Not that last season was any good, but this one is looking much better.  Luckily for me, I have every plan to abandon the hapless Knickerbockers the second the Nets put "Brooklyn" on their new jerseys.

Over email, Eric pointed out an error in my reasoning in the last post.  Here's our interchange:

Interlude: Global Tax Credits

Eric Werker, an assistant professor here at HBS, co-authored a rather provocative piece in the New York Times a week ago.  In it, he argued that the U.S. should replace its foreign aid program with a 39-percent tax credit for foreign investment in targeted countries. 

Now, let me start by saying that Eric is a brilliant colleague.  His work is clever, interesting, and iconoclastic.  He hasn’t written a paper that I didn’t wish I’d thought of first.  He’s also got a ton of real world experience in development work in the hairier places on the planet.  I think I’ve probably seen more dead bodies than he has, but I’m not sure.  Other than that, Eric’s got me beat cold on the travel-to-serious-places and do-serious-things tip.  In fact, to be brutally frank, he’s got me beat cold in pretty much everything.  Eric is smarter than me, taller than me, better-looking than me, younger than me, and he dresses hella better than I do. 

Nevertheless, this proposal seems, well, wrong. 

This is sweet

This might be the nicest result I've ever got, in any of the fields I've worked in.

Minimum Capital Requirements

Noel Maurer wants to know why I'm here. And also why no pictures!

The second question first, because it's easy: I don't have a camera.

Why I'm here. I ask myself that every day... No, wait, why I'm in Jordan. Well, that gets a little technical. I don't often write about work here. But what the heck. Let's try an experiment. If y'all find it boring, just don't comment.

Minimum Capital Requirements

Noel Maurer wants to know why I'm here. And also why no pictures! The second question first, because it's easy: I don't have a camera. Why I'm here. I ask myself that every day... No, wait, why I'm in Jordan. Well, that gets a little technical. I don't often write about work here. But what the heck. Let's try an experiment. If y'all find it boring, just don't comment.

Phoning Kosovo

Here are some things I've recently discovered about telecommunications in Kosovo. [Pause to allow people to run away.] Kosovo doesn't have a country code. Makes sense, right? It isn't a country. Officially, legally, it's still part of Serbia. So it still must use Serbia's country code, 381. This has some interesting consequences.

Beet, the unknown root

OK. This is the weirdest thing and I'm not sure I got it down pat. I'm actually quite sure it can't be the way I understand it from the meagre sources I have available. Follow me and then explain to me where my thinking is wrong. All right. Says Mr. Vasile Puscas, Romanian Minister Delegate and the Chief-Negotiator with the European Union:

Concerning the sugar sector, I must say that the negotiations were extremely tough, taking into account the low production obtained in Romania during the last years (the average production during 1998 � 2002 is 99,000 tons, with 55,000 tons in 2000) and the considering that Romania is net sugar importer country. In these circumstances we succeeded in obtaining a total sugar quota (quota for sugar beat plus processing quota), which together with the quota obtained for isoglucose covers entirely the domestic consumption in Romania. This quota is about four times as much as the quota presented by the mass media as being the Commission proposal. We have chosen this strategy in order to support the sugar industry. I must underline the fact that we obtained the best results in comparison with all the other sugar importer countries that acceded to the European Union in May 2004.
Via The Periscope

OK. This is what I understand: 1. Romania is a sugar importer. 2. Romania is allowed to export an amount of sugar to the EU that equals its sugar consumption. Confusing? Yeah, well. Then read this:

Beet! Give me a beet!

It's hard to make a sugar beet look sexy. What do you think, did the PR people of this campaign succeed?

Ah. You're wondering what this is all about - and what it has to do with Romania. Good questions, both of them. The first one I'm going to answer today. If there is any interest at all, then I'll answer the second question tomorrow. Personally, I encountered this particular sugar beet for the first time about three hours ago, as I turned a page in my beloved Zeit magazine and saw a one-page ad by the German sugar beet industry. Until then, I had been blissfully unaware that the EU plans to recklessly ruin the livelihood of thousands of German (and other EU) sugar beet farmers. In order to understand the sheer magnitude of this problem, you have to know that large areas of Germany look like this:

More about the Logan

A bit more about the Logan, the new built-in-Romania car that Renault hopes will be the developing world's Model T. First, here's a picture:

Not too bad looking. Although: I recently chatted with a Romanian acquaintance who had bought a Solenza. (The Solenza was the model immediately preceding the Logan. It was only made for a year or two.) "It looked great in the show room," he said, "and I thought, finally I'm going to buy a car that doesn't let the rain in." And? "It let the rain in." So, looks may not be everything. Still, the Logan is at least an interesting car. Fun facts:

Economic growth, watch out for that tree!

This one is for the Three-Toed Sloth, who kindly linked to some of my past entries. So I was paging through Dani Rodrik's recent anthology on conundrums of economic growth, In Search of Prosperity, when I got to the chapter on the Philippines. The Philippines is the sort of place that makes growth economists' heads hurt. It's a nation of eighty million avid consumers steeped in American institutions for fifty years, and American popular culture for fifty more. English is the lingua franca to such an extent that Scrabble is incredibly popular there, that and basketball. I mean, they show the high school games on the sports channel. And the general level of education is very high; the Philippines may export housemaids to the Persian Gulf, but it exports computer technicians and medical personnel to the United States, where they're the highest-earning immigrant group here. You can't throw a stone in Manila without hitting a diploma mill. But it's been economically stagnant for decades. In Rodrik's anthology, Lant Pritchett has a paper which compares the Philippines versus Vietnam, or in his words, "a Socialist Star and a Democratic Dud", the Philippines being the Democratic Dud. Elsewhere in his paper, it's "Tarzan of the Jungle" versus "George of the Jungle" growth. There is something about the Philippines that brings out bad pop culture wordplay in people, including Filipinos themselves. Come take comparative advantage of us. Pritchett's conjecture is simple:

[A]lthough in some ways 'institutions' may have improved under democracy, 'institutional uncertainty' has increased. This increase in institutional uncertainty -- the reliability with which economic actors can anticipate the rules of the game (no matter how good or bad those rules might be) -- may account for a stagnation in the level of supportable output that accounts for the Philippines' growth dynamics.

But that's not the interesting part of the paper.

Dawn of the Logan

Saw my first Logan this week. Romanian readers will instantly say, "Ah! A Logan." Everyone else will be saying "Do what?" So, skip the next few paragraphs, Romanian friends, while I explain. Back in the bad old days of Communism, Romania had its own car brand: the Dacia. (Well, actually it had two car brands, but the Oltcit probably deserves a post of its own.) Dacias were boxy little sedans made at the Dacia factory in Pitesti, about 100 km west of Bucharest. They were originally made by Renault under a licensing agreement, and right up to the end they had a vaguely little-French-car-from-the-1960s look. Originally, I am told, the Dacia was a decent car. Small, simple, and completely lacking in frills or luxury, but not bad. But like a lot of things in Ceausescu's Romania, it tended to get worse with time. Renault's license expired in 1978, and the state took over the factory. Lack of foreign currency meant that more and more of the parts were made in Romania. The quality of the car gradually dropped, until by the end of the regime it was iffy even by the low standards of Communist Eastern Europe. (But Romanians seemed to keep a certain affection for it anyway. Or so I'm told. They were bad cars, but any car at all was a luxury in those days; you had to wait three to four years for delivery, and that was after you'd already paid for it. And since all Dacia models were essentially the same car, made in the same factory, they tended to be bad in the same ways. So you knew where you stood, and everyone was in the same boat.)

Farm to Factory, the final years

And now we come to that period in history Allen calls "the Soviet climacteric". As you may have noticed, Allen consistently stakes out the contrarian point of view against the standard account of the Soviet Union's economic rise and fall, so it's no surprise that he does it again here. (As someone pointed out to me, it's an excellent career move.) But in the final chapter of Farm to Factory, he does it twice. Here's the play by play. In the standard view, central planning by its very nature caused persistent inefficiencies in the Soviet economy, due to its lack of price signals and incentives, leading to poor economic productivity and stagnation. This line of thought goes back to Mises's economic calculation argument of the 1920s, and appears to show up in the data, as a drop in total factor productivity growth, starting in the 1960s. But wait, said Weitzman, Easterly, and Fischer. It may be that the structural problems caused by central planning do not result in poor productivity per se at all, but simply make it harder to substitute capital for labor as well as a market-based society. Taking that structural difficulty into account, Soviet productivity growth is reasonable, though not stellar. Ah, but what contrarian position can Allen take? "I argue," says Allen, "the value of .4 is an illusion. The low measured value of elasticity reflects massive errors in Soviet investment strategy rather than a real difference in technology. It was not purely happenstance that these errors occurred in the 1970s and 1980s, for the end of the surplus labor economy posed new management problems, and the party leadership bungled them." In other words, even under central planning, had the party leadership planned better, the Soviet economy could have still managed to become more productive. To anyone familiar with the history of late Soviet (or eastern European) Communism, this is rather difficult to argue with, contrary position or not. I mean, the sheer waste is legendary.

Farm to Factory, or, Production junction, what's your function?

So far we've seen two examples of modeling centrally-planned economies. In the first, by the American game designer Chris Crawford, production depends only on the allocation of labor. In the second, by the Soviet economist G. A. Fel'dman, production depends only on the allocation of capital. I want to pause here a moment to savor the irony. However, their omissions aren't thoughtless ones. A turn in Crawford's game is twenty years, so Crawford made the assumption that any capital investment made in one turn would have depreciated into nothingness by the next. Fel'dman went in the opposite direction: his implicit assumption was of a near-infinite mass of surplus labor in the background that could be allocated wherever production required it. (I should note that the leading capitalist economic growth model of the 1950s and 1960s, developed by Arthur Lewis, also made a similar assumption.) Still, most current economists prefer to model economic production using both labor and capital as input variables. They usually use a standard formula called the Cobb-Douglas function, which looks like this:

output = residual * [labor ^ (1 - alpha)] * [capital ^ (alpha)]

where the variable alpha is the fraction of the economy's output that accrues to capital, and 1 - alpha is the fraction that accrues to labor. In advanced economies, this tends to be around 30% capital to 70% labor. This formula has some nicely realistic properties. For instance, if you double both your labor and your capital -- basically cloning your workers and your factories -- you double your output. In the jargon, it has constant returns to scale. Another nice thing is that this formula shows diminishing returns. Adding more capital or labor to a larger base gives you less output bang for the buck, which is also realistic. Finally, see that term I called the residual? That's better known as total factor productivity, or TFP for short. It's the fudge factor that wraps up technological advances, increases in efficiency and organization, and that secret Chemical X into a nice numeric bundle. Total factor productivity is where the cutting edge of economic growth happens. Notoriously, Soviet total factor productivity is calculated to have been stagnant or negative from 1970 on. This is usually thought to have been a major contributing factor to the demise of the Soviet Union. Allen, of course, has a contrary explanation.

Farm to Factory, Guns or Butter, and Fel'dman

About a decade ago, there was a neat little computer game written by the brilliant but erratic Chris Crawford called The Global Dilemma: Guns or Butter. A solo game, your mission (once you chose to accept it) was to centrally plan production quotas for armaments and food production, move your resulting decimally represented troops around the randomly generated eye-candy map, and conquer your Central Asian-looking computer opponents and thus the world! Mwa-ha-ha! What made the game fun for me was the production functions. Instead of a technology tree to pace the rate of military advance, like Sid Meier used in Civilization, you had a production spreadsheet. In theory you could produce any item on the list, provided you had enough people to make that item (and any other part that item relied on). If you had enough people, you could make enough tanks to conquer every single neighboring province on your next turn! Unfortunately, you started the game with a very low population, usually only enough to make swords and farm tools. But as your agricultural surplus grew, your population grew, and you could put more people into making more complex and productive items, like muskets and iron plows, or rifles and combines, all the way up to tractors and tanks (and engines, and oil, and all the necessary intermediates). Production followed economies of scale, so it was possible to misallocate people in an industry too primitive or too advanced for its number of workers. Yeah, this is basically the Gosplan game. And I got real good at it. My winning strategy was to keep my military just barely strong enough to keep my predatory neighbors at bay, and then, once my population base was large enough, crush their backwards swordsmen-and-musketeer armies with my tanks! At that point, I could expand as quickly as logistics permitted. Kabul, here I come! Only very rarely would I have to engineer a famine to keep up military production. Unsurprisingly, Soviet theoreticians came up with a very similar model, but here's the thing: it was exactly backwards. By investing in the production goods sector (i.e. heavy industry; 'guns') at the expense of the consumer goods sector (food, clothing; 'butter'), they believed that eventually spillovers from the former would benefit the latter. Here's Allen on the background:

Farm to Factory and a billion Russians?

First off, I should probably clarify something. As far as I can tell, Allen is a contrarian, not an apologist. For instance, he calculates that without the increased mortality and reduced fertility caused by Soviet collectivization -- he uses the word 'terrorist' to describe it -- the Soviet population would have been 27 million people larger in 1989. Not exactly a ringing endorsement for Stalin. But Allen has something of AJP Taylor's willingness to tweak the nose of conventional wisdom, I think. Regarding the billion Russians: what Allen noticed was that Russian and Soviet raw birth rates matched Indian ones (barring the years of war, revolution, and collectivization, when drops were followed by rebounds) until the 1940s, when Soviet birth rates dropped and stayed down. Someone once quipped that the Soviet Union was just Upper Volta with rockets. Well, it did have Third World birth rates for a very long time. Allen took heroic amounts of old Russian and Soviet demographic data and analyzed them to determine what factors might be responsible for this drop. His results ended up being numerically rather similar to a fertility model T. Paul Schultz came up with after analyzing Third World fertility in the 1970s and 1980s, which is pretty neat, so I'll discuss it here.

Farm to Factory, Robert Allen

Okay, my secret is out. I love nothing better than to find a new book on some incredibly boring arcane subject and worry at it until it makes sense. So when an online friend recently brought up Robert Allen's book on Soviet industrialization, Farm to Factory, I thought I would give it a look-see. It's an interesting but extremely frustrating book. Interesting in that Allen tries to analyze Soviet industrial development from the point of view of its decision makers, but using modern econometric techniques, in the same way a psychologist or a novelist might analyze a bad relationship from the perspective of its hapless participants: how it made sense at the time to the people involved. On the other hand, it's extremely frustrating when Allen makes comparisons that just don't make sense to me, the reader. For instance, Allen repeatedly makes the claim that Russia without Communism would most likely look a lot more like India demographically than it would any western European state; it would have an extremely large and poor population of perhaps a billion people. At first I thought this was rhetorical hyperbole, the first few times I encountered it. Nope; it forms the basis for chapter six. The possibility of a non-Communist demographic transition is where? But what really made me wince was his comparison of Soviet agricultural and climatic zones to American ones. Now, I'm from Wisconsin, where we know both climate and agriculture pretty well. (Wisconsin is climatically like Belarus, but with more lakefront, and has dairy like Denmark. The closest American analog to Romania would probably be Iowa or Missouri.) So when Allen compared Russian grain yields to North Dakota's -- compared to Wisconsin, a barren dessicated wasteland, though its inhabitants are very sweet -- and used this to claim that the Soviet Union had somehow caught up to American grain yields before Stalin, I knew something was a little weird.

Growing Public, Peter Lindert

Hi all. A little change of pace from the coffee mug guy today. I've been reading Peter Lindert's Growing Public: Social Spending and Economic Growth Since the Eighteenth Century again. It's a troubling book that kicks economic received wisdom in the teeth, and I am puzzled at the lack of attention it's gotten in the blogosphere. (Two posts of Tyler Cowan's, here and here.) Why is it such a troubling book? Well, here is Lindert's seventh of his nine conclusions:

The net national costs of social transfers, and of the taxes that finance them, are essentially zero. They do not bring the GDP costs that much of the Anglo-American literature has imagined. Accordingly, differences in those costs play almost no role in either the rise or the deceleration of social spending's share. No Darwinian mechanism has punished the bigger spenders.

Readers of The Economist know that one major theme in the Anglo-American literature is that welfare kills economic growth. It's widely used to explain Eurosclerosis (as opposed to, I dunno, core-periphery issues in EU policy), and it's become something of a conservative-libertarian shibboleth in the United States. "There ain't no such thing as a free lunch", or TANSTAAFL, a phrase the influential Missouri-born science fiction author Robert Heinlein countrified from the writings of the economist Alvin Hansen. Turns out there might actually be a free lunch. Lindert's regressions are pretty good, unlike a lott of ideologues I could name. I suspect much of the silence has to do with Lindert's interpretive framework, which follows Albert Hirschman's little book, Exit, Voice, and Loyalty, and is rather different from the simplified models of public choice theory and class interest that many people, either consciously or unconsciously, use. There's some food for thought for this US election year as well. As Lindert comments,

Nor is the puzzle strictly international. Within the United States since the 1960s, social transfers have taken a rising share of state product, and the variance in their generosity has also risen -- and has been positively, not negatively, correlated with the level and growth of state product per capita. How can the generous states, like Connecticut, New Jersey, and California get away with giving out more generous welfare and other transfers year after year? Why haven't they grown more slowly than other states? Why haven't businesses deserted them, leaving them with fewer firms and more welfare families?

Like I said, I'm surprised at the lack of commentary Lindert's book has received on the Internet. More on it later.

Still! More! Good economic news

Romania's GDP growth rate for the first half of 2004? 6.5%. That's expected to slow in the back half of the year, but the annual growth rate should still be 6% or more. That's a lot. 6% growth is better than the US or any country in Western Europe. 6% growth will double the country's gross product -- and, presumably, its wealth and income -- in just twelve years. Okay, it's very unlikely that these growth rates will be sustained. A fair chunk of this year's growth will come from a really good harvest; Romania's economy is still heavily agricultural, so good weather accounts for 1-2% of that figure. Another big driver is rising global prices for certain sorts of product. The Chinese economy is demanding vast quantities of cement, scrap metal, simple electrical engines, rebar, wire; as it happens, these are just the sorts of things that Romania produces in quantity. That's good news for Romania's manufacturing sector, but it won't last forever. And there are legitimate concerns about how well the growth is being distributed; more and more, it's looking like boom times for people at the top, not bad for those in the small middle class, but little or slow progress for the majority of Romanians. And even if the 6% is maintained, it will take Romania many, many years to catch up to Poland or Hungary, never mind France or Britain. Still... it's an impressive achievement. More on this in a bit.

How long can this go on?

The relentless drum-beat of good economic news continues. In the first quarter of 2004, Romania's economy grew at an annualized rate of -- wait for it -- 6.1%. The growth was led by the industrial sector (which grew at 6.6%) and construction (7.2%). The service sector grew by 5.7% and agriculture by 5.4%... slow compared to the rest of the economy, but still not bad. Inflation is continuing to fall smoothly, down from 14% in December to about 12% now, and on schedule to hit 9% by the beginning of next year. Meanwhile, real wages suddenly surged in the first quarter. After growing only sluggishly (like 1%-2% per year) for the last three years, they suddenly rose at an adjusted rate of nearly 10% after inflation. The foreign trade deficit is still big and still growing -- but the rate of growth dropped sharply; if it continues to drop, then the deficit will stabilize this summer and then start to shrink before the end of the year. (The main cause of this seems to have been a sharp rise in commodity prices, especially things like aluminum, cement and steel -- all major Romanian exports.) Foreign direct investment -- both greenfields and equity purchases -- is up by about a third since last year. It's still pathetically low compared to FDI in, say, Hungary, but it's expected to double in the next two to three years. The leu is stable. Tax revenues are up. The government is projected to run another fiscal deficit this year, as usual... but the surge in revenues means that the deficit will fall to 2.1% of GDP, down from the originally predicted 3.0%. In theory, this means that Romania might see a balanced budget by 2007. I have some thoughts on all this, but I'm going to save them for a later post. Just now I want to put the question to our readers: Is this for real? And, if it is, how long can it go on?

Interest rates fall! Interest rates rise!

"Official sources quoted by Mediafax said The National Bank would reduce the official rate next week, probably by 0.5%. For the time being, the official rate is 21.25%." -- From Gardianul ("The Guardian") this morning. Now that is interesting, and here's why. At the moment, the rate of inflation of the Romanian leu is somewhere around 12%. The National Bank is dealing in leu, so it includes this figure in its interest rate. So the real interest rate is 21.25% minus inflation, or around 9%.

Talking up the leu

A commentor on the last post mentioned the external debt issue. Romania's external debt has been rising and rising, which should cause the leu to fall at some point. But this hasn't happened yet. In fact, the leu has risen a little bit. (Against the euro. It's risen a lot against the dollar, but so has everyone else.) I think the reason for this is that the National Bank is talking tough on inflation. That is, they are LOUDLY saying that they won't allow inflation above 9% next year. What this means -- and what they're really telling the world -- is that if the leu falls, they will raise interest rates to defend it.

Good economic news

Romania's economy is still ticking along. It grew in the first quarter at a rate of about 5.3% (annualized). This means that Romania is heading into a fourth year of respectable growth. Inflation is falling -- still high, but falling. It was 14% last year, is presently around 12%, and is expected to fall to 9% by the end of 2004. (The National Bank has been talking very, very tough about this.) Foreign investment is growing quickly, although from a very small base. Lending is growing like mad, around 50% per year.

Microfinance in Romania, again

Here are some numbers from one of the companies providing microfinance services here in Romania.

Romania: Not Competitive?

So there's this outfit called the International Management Development Institute, a business school in Lausanne, Switzerland. And every year, they publish something called the World Competiveness Scoreboard. I'm sure you can already guess where this is going. For 2003, the IMDI trashed Romania, ranking it 54th out of 60 countries and regions. As usual, this has caused a certain amount of consternation here in Romania. Me? I'm deeply skeptical. We've been through this before, just a few months ago. I haven't had time to look at the "World Competitiveness Scoreboard" in detail yet, but what I've seen so far doesn't impress me much. Romania is less competitive than Russia? Than the Philippines? I've been to the Philippines, and I don't buy that for a second. I'm starting to get really, really dubious about these things.

More about Money

If you don't find economics interesting, don't read this. There are a couple of local wrinkles that complicate the credit situation here in Romania. The biggest one is that National Bank of Romania (Romania's Fed, more or less) has placed a lot of restrictions on the movement of credit. Some of these are stupid remnants of the bad old days of the command economy. Others, though, are entirely rational. The NBR is legitimately concerned about a currency crisis.

Money, money, money

I don't blog much about work here. Partly that's out of discretion; mostly, though, it's because a lot of my work is pretty technical, and I don't think too many people would be very interested. Still, this week I happened to run across some interesting statistics. By chance, my work had me dealing with three different sorts of financial instruments -- mortgages, microfinance loans, and factoring. And I was intrigued to find that all three have been undergoing explosive growth in the last few years.

The American Heritage Index of Economic Freedom

Every year, a US think tank called the American Heritage Foundation publishes something called the "Index of Economic Freedom". The Index claims to measure the economic freedom of the economies of almost every country in the world. Thus, it should give you an idea of whether (say) a Bulgarian in Bulgaria has more economic freedom than a Mexican in Mexico. The Index rates almost every country in the world on ten categories, including things like "Trade", "Regulation", and "Monetary Policy". It gives each category a numerical rating between 1 (best) and 5 (worst). Then it averages the ten and comes up with a composite rank between 1 and 5. This lets it rank the world's countries from best (Hong Kong) to worst (North Korea). Finally, based on the numerical score, it states whether they are "free", "mostly free", "mostly unfree", or "unfree". The Index just came out with its 2004 edition, and Romania didn't do so well. Its overall score was 3.7, it came in 129th out of 180 or so countries, and its rating was "mostly unfree". This has caused a certain amount of consternation here in Romania. Is the Index an accurate reflection of how things are here? Well, it says that it is. "The internationally acclaimed Index of Economic Freedom remains one of the world?s most reliable and authoritative guides to economic growth: an essential resource for anyone who wants to understand why some countries prosper while others still lag behind." Or so says the website. Unfortunately, at least with regard to Romania, the Index is pretty worthless. I think I'd have to do a longer post to explain why in detail, but here are a few reasons.