Subsidizing education in developing economies

Endogenous growth theorist David Romer's ideas on subsidizing education:

"One policy innovation, for example, that would boost the growth rate would be to subsidize universities to train more undergraduate and graduate students in science and engineering. Also, you could give graduate students portable fellowships that they could use to pay for training in any field of natural science and engineering at any institution the students choose. Graduate students would no longer be hostage to the sometimes parochial research interests of university professors. Portable fellowships would encourage lab directors and professors to develop programs that meet the research and career interests of the students." (Source)

This would be a good idea for foreign aid given on a competitive merit basis to foreign students outside the United States. Another interesting comment: "Because the economics of ideas are so different from the economics of markets, we’re going to have to develop a richer understanding of non-market institutions, science-like institutions. This is going to be a new endeavor for economics." Ethnography, as opposed to strict math models that often stifle with their rigidity, might be a good approach. Harvard Business School case studies [Wikipedia] are already a form of ethnography, albeit proprietary ethnography not accesible in developing countries. Pity these aren't open sourced or readily available in published form like Prahalad's case studies for bottom of the pyramid markets.

The ideas in his interview do seem to advocate stronger property rights over ideas than has traditionally existed and seems to run counter to traditions of university based education developed over hundreds of years.

1. One glaring example where this approach seems to be a little bit old-fashioned is the software to teach economics that he is developing as proprietary software rather than open sourced software. This is clearly against the trends of software used in academic institutions which is increasingly open sourced, for example Perl for bioinformatics.

2. Stronger property rights over ideas also runs quite contrary to the ideas of famous computer scientist Donald Knuth at Stanford on the intrusion of patents on science, for instance on software patents:

In a letter to the US Patent Office in 2003: "I strongly believe that the recent trend in patenting algorithms is of benefit only to a very small number of attorneys and inventors, while it is seriously harmful to the vast majority of people who want to do useful things with computers."

"When I think of the computer programs I require daily to get my own work done, I cannot help but realize that none of them would exist today if software patents had been prevalent in the 1960s and 1970s. Changing the rules now will have the effect of freezing progress at essentially its current level."

"If software patents had been commonplace in 1980, I would not have been able to create TEX."

3. I can't help think that throwing the spirit of innovation found in universities to the patent lawyers might dampen innovation significantly. As a journalist in Thailand, I remember reading editorials in the paper I work at, the Bangkok Post, written by patent lawyers advocating trying to protect academic research in Thai universities with patents. What it actually needs is more cooperation with foreign universities to develop world class research programs.

US healthcare: Wealth sink, national disgrace, opportunity for offshore services...

Apparently, the American healthcare system, besides being responsible for most new job creation, also has great offshoring potential:

Business Week article; U.S. Health-Care System Gets a "D"

"Although American healthcare probably excels at research and new technology, in terms of serving the citizens fo the United States it doesn't seem to be doing much good: "The U.S. health-care system is doing poorly by virtually every measure. That's the conclusion of a national report card on the U.S. health-care system...gave the U.S. system low grades on outcomes, quality of care, access to care, and efficiency, compared to other industrialized nations or generally accepted standards of care. Bottom line: U.S. health care barely passes with an overall grade of 66 out of 100."

"...the U.S. spends more on medicine, by far, than any other country. Approximately 16% of the nation's gross domestic product (GDP) is devoted to health care, compared with 10% or less in other industrialized nations."

"Health care is also responsible for most new job creation...The study estimates that each year 115 out of 100,000 U.S. deaths could have been avoided with timely and appropriate medical attention. Only Ireland, Britain, and Portugal scored worse in this category, while France scored the best, with 75 preventable deaths per 100,000."

"The U.S. ranks at the bottom among industrialized countries for life expectancy both at birth and at age 60. It is also last on infant mortality, with 7 deaths per 1,000 live births, compared with 2.7 in the top three countries. There are dramatic gaps within the U.S. as well, according to the study. The average disability rate for all Americans is 25% worse than the rate for the best five states alone, as is the rate of children missing 11 or more days of school...."

Health care dominates new American jobs: Opportunities for offshore medical treatment

The governments of some Gulf States send their citizens to Thailand for checkups and health care, specifically Bumrungrad Hospital. That's what someone from Bahrain told me recently.

In today's Business Week there's an article about how health care accounts for most of the new jobs in the United States. It doesn't surprise me. A few years ago I was talking to a young woman in her early twenties about her university and career plans and she told me about how she was on the waiting list for admissions into the San Jose State occupational therapy program.

Careers as well as prices in health care are virtually immune from the business cycle. Unlike technology jobs like computer programming, these jobs also seem to gracefully upgrade workers' technological knowledge as technology affects their jobs. I always seem to be bumping into refugees from the last technological downturn. In graduate school at Stanford there were refuggees from disk drive companies upgrading their skills, high tech of the 1980s. I remember bumping into refugee engineers and programmers from the aerospace defense industry later on, then the internet era.


According to today's business week article:

"Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in spending -- half public, half private -- health care is propping up local job markets in the Northeast, Midwest, and South, the regions hit hardest by globalization and the collapse of manufacturing..."

"Health care is highly labor intensive, so most of that $2 trillion ends up in the pockets of workers. And at least so far, there's little leakage abroad in terms of patient care. "Health care is all home-produced," says Princeton University economist and health-care expert Uwe Reinhardt. The good news is that if the housing market falls into a deep swoon, health care could provide enough new jobs to prevent a wider recession. In August, health-services employment rose by 35,000, double the increase in construction and far outstripping any other sector."

"John Maynard Keynes would nod approvingly if he were alive. Seventy years ago, the elegant British economist proposed that in tough times the government could and should spend large sums of money to create jobs and stimulate growth. His theories are out of fashion, but substitute "health care" for "government," and that's exactly what is happening today."

"Make no mistake, though: The U.S. could eventually pay a big economic price for all these jobs. Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured."

"Moreover, as the high cost of health care lowers the competitiveness of U.S. corporations, it may accelerate the outflow of jobs in a self-reinforcing cycle. In fact, one explanation for the huge U.S. trade deficit is that the country is borrowing from overseas to fund creation of health-care jobs."

It would be nice to hear a critique of all this from a trained health care economist.

China restricts foreign investment: Opportunity for other Asian countries?

A Business Week article reports on new Chinese policy moves to restrict FDI and also participation of foreign businesses.

Could this be a harbinger of future policy in other Asian countries?

Or is it an opportunity for them to seize, making intentions for a more accomodating policy clear?

Un-Atlantic Economic History: The Economies Bordering the Indian Ocean and the China Seas, 1000-1950

Economics professor Brad DeLong of UC Berkeley is putting together a book of readings on Asian economic history:

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Brad DeLong: "It is a fair criticism that we Berkeley Economics people think Economic History is Atlantic Economic History, and overwhelmingly North Atlantic Economic History.

Well, now I have a new course's worth of readings to compile--and I know I will have read only an appallingly small portion of it:

Un-Atlantic Economic History: The Economies Bordering the Indian Ocean and the China Seas, 1000-1950

Where to start? Where to start? Start with what I have read and know:

* Fernand Braudel, The Structure of Everyday Life (Civilization and Capitalism: 15th-18th Century)

* Janet Abu-Lughod, Before European Hegemony: The World System A.D. 1250-1350

* K.N. Chaudhuri, Trade and Civilisation in the Indian Ocean: An Economic History from the Rise of Islam to 1750

* Tirthankar Roy, The Economic History of India 1857-1947

* "Un-Atlantic Economic History: The Economies Bordering the Indian Ocean and the China Seas, 1000-1950."

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My contribution, so far:

1. To make economic history less dry try: Brook, Timothy. (1998) The Confusions of Pleasure: Commerce and Culture in Ming China. Berkeley: University of California Press.

2. Ian Brown at SOAS wrote the best overview economic history of modern Southeast Asia: "Economic Change in South-East Asia, c.1830-1980." (1997, Kuala Lumpur: Oxford UP)

3. That labor markets were rather rigidly built into the very fabric of Southeast Asian social structure is conveyed in: Reid, Anthony ed. Slavery, Bondage and Dependency in Southeast Asia. 1983.

4. For the administrative incompetence that led to the Bengal Famine of 1943-44 see Christopher Bayly and Tim Harper "Forgotten Armies: The Fall of British Asia 1941-1945." (2004)

5. To complement the discussion of Russian serfs and peasant mobility in the classic Domar this article is worth looking at: Peter Perdue (1996) "Military Mobilization in Seventeenth and Eighteenth-Century China, Russia, and Mongolia”, Modern Asian Studies, vol. 30.4, p.757-93.

6. This is also a classic favorite that challenges the popular notion that all Indian moneylenders in Burma were bad: Adas, Michael. The Burma Delta: Economic Development and Social Change on an Asian Rice. Frontier, 1852-1941. Madison: University of Wisconsin Press. 1974. .

Pre-World War II immigration in the British empire

The British empire seems to be a test case in many respects for all the arguments of market liberalisation that the discipline of economics presents, such as freedom of immigration. This book looks like only a military history, but it is actually a panoramic social history of the pre-World War II British Empire in Southeast Asia too:

Forgotten Armies: The Fall of British Asia 1941-1945 (2004)
by Christopher Bayly,Tim Harper.

This book is a near perfect history book. It is well written in an engaging style that has made it popular. The book is built upon original primary archival sources such as memoirs which make it original, not just another rehash of secondary sources. It combines multiple perspectives from the high level governor or viceroy to the coolies at the waterfront. It gives you a better idea of the impact of war on society as a whole than any other book that I've read.

This book is also a sobering story of free flowing immigration in the British Empire on the eve of of World War II. It shows some of the chaos that this freedom for all to immigrate led to. Massive Indian immigration into Burma overwhelmed the local population, displacing them with cheap labor. In the agricultural sector money lenders foreclosed and seized land, the Japanese invaded, the Indians fled, and a dependence on Burmese rice to the tune of 15% in Bengal contributed to a famine, 3 million people died, who had specialized in jute production before the war. Can one fully predict exogenous shocks? The pre-empire social formations were probably more resilient to them.

How efficient is capital allocation in rural developing economies? II

This MIT working paper that discovers that interest rates do not equal the marginal product of capital in rural Indian bank lending that I found in Brad DeLong's blog, here are my comments (no doubt I'll discover that I'm full of it once I find detailed analytical writings with or without math on this topic, the search begins) :

The author of the paper points out the legal system may cause some moral hazard distortions, but doesn't provide many background references to the general problem in the paper.

I can imagine institutional historical details that might cause MPK to deviate from interest rates. Legal delays when the economy goes into a tailspin, defaults increase, eventually leading to a culture of default, then the spiggot of funds gets turned off to the bank, the land is repossessed by the government, resold at ridiculous prices by the bank, but what the buyer is really buying here is the loan, because loans are so scarce, what I'm describing here is post-1997 reality in Chiang Rai, Thailand, where I actually live next to farmers. Sometimes, land holders even work out a deal with the bank, you keep this plot and I'll do a pig farm on the plot next to it.

What the moral hazard effect are of this labyrinth of institution on the rural banking system over the long-term, there might be a neoclassical description if augmented with institutions, the actors are very rational, even if the institutions aren't always.

More interesting, a small agriculture community that was socially homogeneous and insulated from the outside world, with their own moneylenders and their own, more efficient modes of debt collection, a little world of Ricardo's time, let's say,...it would be interesting to see whether neoclassical MPK = interest rates held then.

In a broader context with EXIM loan guarantees or MIGA political risk insurance, then there's a different moral hazard problem that probably causes MPK not equal interest rate.

How efficient is capital allocation in rural developing economies?

Brad DeLong's blog referenced an MIT working paper entitled "The (mis)allocation of capital". Two standard properties of the neoclassical economic model are questioned:

1. Is capital allocated so that the Marginal Product of Capital (MPK) is equated to the market interest rate?
2. Is the marginal product of capital equalized across its alternative uses?

The conclusion, capital markets in India are very far from the neoclassical ideal evidenced by large gaps between the MPK (marginal product of capital) and

1. The market interest rate.
2. The rate paid to savers

The legal system may be to blame:

"Investors who on average are less productive may invest as much as three times more than their more productive counterparts. All this is not necessarily surprising given that the legal system is slow, inefficient and sometimes corrupt, and defaulters usually get off lightly."

This seems to imply that there is a moral hazard problem. An inefficient legal and bankruptcy system making default easier during business cycle downturns, creating a contagion effect or "culture of default". It shouldn't be so surprising that traditional agricultural economies closer to the Polyani reciprocity end of the spectrum than the market-based economy end, should exhibit deviations from neoclassical theory. Neoclassical ideals seem more like an ideal to be achieved only with a perfectly frictionless legal system.

How to alleviate rural indebtedness without inadvertently creating incentives for default on that debt in the future? Rural life needs to be sustained for sure, it is the lifeblood of most cultures. Economists who have neoclassical daydreams of frictionless transitions to perfect neoclassical economic realitiees, should live in one of these communities for a while. Sustain the agricultural lifeblood to be sure, but through cancelling outstanding debts? Or through subsidies? Protecting land and sheltering traditional agriculture a bit locally might help. That a rural family, even teachers and civil sservants, produce their own food supply is axiomatic. They can play with the surplus beyond that commercially.

The rural agricultural economy is thoroughly saturated with politics that effects the legal system and moral hazard incentives. Take the transition from the colonial era in Burma. It was too easy for, for instance, for ethnic Burmese to blame the chettiar money lenders who fueled the expanding rice frontier of Lower Burma during the colonial era with credit, documented by Michael Adas, with culpability. From my residences in Yangon, I still have images of those Indian families who had all their wealth, such as rice mills nationalised after World War II. One old guy, living down the street from the secretariat building, still remembered the day Aung San was shot in front of the secretariat building. Another was slowly drinking himself to death, supported by his grandson in Bangkok. Guaranteed this nationalised Indian capital equipment did not go to more efficient uses after it was nationalised and given that there were not even banks as we know them and various degrees of coercion probably existed in the price set for buying farmers' rice. There's probably a whole oral hsitory of market distortions waiting to be written.

How does one reify the moral hazard that the legal system creates for lenders? There are always informal credit networks that avoid taxes and the legal system entirely, perhaps using violence, and certainly summary repossession of motorcycles bought at usurious interest rates, effortless repossession with the help of the local mafia, followed by resale on a very robust second-hand motorcycle market, actually moped by American definitions.

I love economic models with their simple assumptions and clear modelling of effects, but human institutions create mismatches between reality and model that quickly cascade into the necessity of analyzing this reality of "political economy" with words and language, looking to history for similar examples in the past while trying to construct some historical cover law (See Wikipedia and a paper that discusses Hempel's notion of historical covering laws, not much online about this topic).

There are many dimensions to the moral hazard effect on a firm's incentives. Besides legal delays, that can be used strategically by one partner to stonewall the other, there is also the uncertainty of laws. For instance, in foreign holding rules that require 51% local ownership, for instance, local nominee shareholders are used to hole the remainder of the corporation. Larger companies, like Hutch in Thailand, get away with this, until it becomes a political issue, then there is a significant risk that some local shareholder will end up with the foreigner's investment. I would even characterise this as a strategic way of doing business employed in the past. The business people willing to play the legal system like this verge on being legal themselves. The use of gunmen to shoot business rivals being another case of extra-legality.

What about loan guarantees for foreign multi-nationals doing projects in developing countries. MIGA provided Thailand's Siam Cement and Japanese companies with political risk insurance for participating in a polyurethane plant. Wikipedia's Moral hazard page provides an example of a Westinghouse built nuclear reactor in the Phillipines during the Marcos era.

I guess my conclusion is merely that, yes, there are a lot of political-social-legal factors that might lead to interest rates being out of sync with Marginal Products of Capital. There might be small well-defined localities with their own justice system and well-functioning social norms, for intance, for which the neoclassical ideal holds though.

Whew! That was a little bit too long-winded, but by gabbing with myself, I've better defined some of the issues and started to read further....and learn.

Rorty's Contingency, Irony, and Solidarity and the possibility of cultural integration

The philosopher of pragmatism Richard Rorty has a lot to say liberal politics across cultural divides that are difficult to bridge. Here's a good summary:

"In his later and most accessible work, Contingency, Irony, and Solidarity (1989), Rorty considers the consequences of...inevitable ethnocentrism and the tendency towards 'solidarity' with like-minded world-makers. The recognition that all claims to truth and knowledge of reality are contingent upon our spatial and temporal position in the world leads us to speak of what we believe with a strong sense of irony. The committed ironist accepts that the language of any other community could be just as real or true as our own. If this hint at relativism sounds alarm bells at the threat of might is right, then Rorty prescribes what he sees as the only social construction robust enough to avoid the threat of ethnocentric impasse: political liberalism.

Part of the problem, as Rorty sees it, is the repeated attempt to fuse the private domain of self-realisation, fulfilment, and perfectionism with the public domain of morality and justice. The ideal liberal society limits its concerns to the balancing of freedom, wealth, and peace whilst allowing its members the scope and opportunity to pursue their own ideas of how they ought to live. Any attempt at a fusion of the private and public tends in fact to privilege the public over the private and either redefine the private in terms of the public - and generally suppress many private practices - or make public the private practice of the strong or the majority.

Rorty denies the possibility that humanity could one day be united by a common realisation of the truth of how we ought to live. Indeed, he accepts that the best we can possibly hope for is a consensus amongst a very large percentage of the population. What matters most is that there is a 'them' opposed to 'us' and that we are open to the possibility of changing our historical, contingent language-game to expand it to include others. Liberalism is the only political philosophy, to Rorty's mind, that allows alternative language-games to co-exist side-by-side and thus keep open the possibility of us hearing the 'unfamiliar noises' of others and incorporating them into our world view. Inevitably then, he has drawn the wrath of neo-Marxists in particular from whose ranks come the strongest critics of his political philosophy. However, Rorty has continually rebutted and refuted his 'enemies' and, in public debate, he is a formidable opponent, well worth handing over real money to see and hear.

Active development states or passive free markets?

The development strategies that the international economic community advocated for developing countries during the 1980s and 1990s were flawed and need to be changed according to the latest United Nations thinking.

In their annual Trade and Development report for 2006 released last week UNCTAD, the United Nations Conference on Trade and Development, is encouraging developing countries to be proactive in their industrial and growth policies and to adjust tariffs and subsidies so as to nuture promising innovative businesses in their countries.

In fact, the best historical example of development we have in recent history is South Korea which went from almost nothing in 1953 to 12th largest economy in the world 50 years later.

South Korean president Park Chung Hee, the president during the era (1961-1979), led the Korean economy, often micromanaging it, into the era of the Heavy-Chemical Industry (HCI) drive. Since this time, South Korea has established its own chemical, steel, shipbuilding, and automotive industries independent of foreign multinational corporations.

The UNCTAD report is available for downloading and reading online.

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Noteworthy:

1. China's importance as a destination for developing country exports (p. 86),

2. "These countries should not be overly restricted by international trade rules or by conditions imposed by international lenders from doing what is best for their economies." (Source)

3. Emphasizes that policy "must respect the specific situation of each country." There is no `one-size-fits-all.'

4. Policies supportive of innovative investment.

5. Adaptation of imported technology to local conditions

5. Strengthening of industrial policy

6. Strategic trade integration — which is "careful, managed introduction of domestic business into international markets." (Source)

FDI including cross-border mergers and acquisitions among developing countries is still in its infancy compared to developing countries.

I.F. Stone on transparency and the cold war and its applicability to the current political situation in Burma (c. 2006)

Brad De Long's blog quotes from the cold war era independent journalist I.F. Stone. He highlights the shortcomings of the Communist economic system of the Soviet Union:

No society is good in which men fear to think--much less speak--freely. I don't care how many tons of steel the Russians produce.... This society is a paradise only for a rather stupid type of Communist party member.... If you believe everything you read in the papers, lack imagination, and feel no need to think for yourself, you can be happy in the Soviet Union. Or you can shut yourself up in a scientific laboratory and work on your own scientific problems and close your eyes and ears to what is going on outside or maybe even to your unlucky colleague next door....

Lack of transparency is a major theme:

The present leaders of the Soviet Union are dishonest... with their own people.... If they want to make a clean break with the Stalinist past, they can best demonstrate it by telling their people what they are doing and why.... No one outside a very small circle at the top really knows why Beria was executed.... Only persons rendered permanently idiotic by complete submergence in party-line literature ill take at face value the charge that he was a British or imperialist agent. This is how Stalin operated... first slander and then the firing squad were his answers. And everybody turned out to be a foreign agent!...

To blame the evils of Stalinism on Stalin is obviously inadequate.... Stalinism was the natural fruit of the whole spirit of the Communist movement. The wanton executions, the frame-ups, the unjust convictions and exiles--these would not have been possible except in a movement whose members had been taught not only to obey unquestionably but to hate.... This was the spirit the Communist movement bred. Stalin embodied that spirit. To change it one must do more than hang Stalin in effigy, or defame him in self-serving panic as Khrushchev is doing....So long as there is only one party, and it has a monopoly of government and controls all expression, there cannot be freedom."

Then I.F. Stone writes in 1954 of McCarthyism and how it has stifled all thought in the United States:

"To doubt the power of the devil... is... to incur suspicion of being oneself in league with the powers of evil. So all the fighters against McCarthyism are impelled to adopt its premises... Ther are some charges which must be laughed off or brushed off. They cannot be disproved. If a man charges that he saw Eisenhower riding a broomstick over the White House, he will never be convinced to the contrary by sworn evidence that the President was in bed reading a Western....

Nowhere in American politics is there evidence of any important figure (even Stevenson) prepared to talk in sober, mature, and realistic terms of the real problems which arise in a real world where national rivalries, mass aspirations, and ideas clash as naturally as waves of the sea. The premises of free society and of liberalism find no one to voice them, yet McCarthyisms will not be ended until someone has the nerve to make this kind of fundamental attack on it...

Finally, I.F. Stone notes that there were lost opportunities for peace and world prosperity, a wasted window of opportunity for detente, glasnost, and end of the cold war:

"[T]he ferment that began with Stalin's death... events whose momentum [the oligarchs] may not be able to control... **opened Russia's windows on the West... given us a chance to resume contact with this huge and wonderful segment of humanity**....[W]e ought to **strive to keep the windows open, and to help along the process which may someday carry Russia forward... to freer institutions**. I believe not only her people but her rulers want peace; and I believe that given peace they will slowly liquidate Russia's terrible backwardness and unholy past."

Wasted, as Stone points out, by McCarthy era rhetoric, the blather of people so self-absorbed in their own ridiculous nonsense that they lost an invaluable opportunity.

The current situation between the Burmese government and the rest of the world is very similar to the cold war era situation that I.F. Stone describes. In likewise fashion, there have been and will be in the future, opportunities to open Burma up, end its long isolation, and start improving life for its people in terms of work, business, health, and educational opportunities.