Pollution vs. Income

Just what I am pondering.  From more recent work out of the Cleveland Fed: Manufacturing and Pollution: Trends in Old and New Industrial Centers is this graphic:

Maybe It’s Time to Give Up on Africa

Britain’s international aid budget costs the equivalent of 22 days of national borrowing from international markets. By 2015, British Aid will have increased by 34.2% to £11.5 billion per annum. Including personal donations and state spending, Britain gives 0.8% of GDP in international aid. With state aid increasing, more people should ask: Why are average per capita incomes in Africa lower than 40 years ago after $1 trillion of aid being given over that period?

If there is one thing I simply do not understand in this scenario, it would have to be why Britain feels compelled to help Africa at all.  The British government’s only concern should be with taking care of its citizens and acting directly in their best interest.  (Of course, as a libertarian, I’m inclined to argue that this can be accomplished simply by ensuring that property rights are observed, and that the taxation necessary to ensure this result is as small and painless as possible.)

I simply do not see how giving aid to Africa is in the best interest of British citizens.  Need cheap labor?  Asia is a good place for that, and doesn’t generally require near the amount of aid that Africa does.  Besides which, Asian labor is more reliable in terms of quality, and many Asian governments have made a point of developing their infrastructure.  So why care about Africa?

This question becomes extremely poignant once on also considers that African countries have not simply stagnated in spite of aid, but have actually regressed.  This being the case, it seems obvious that aid, if not hurtful, is at least irrelevant to African countries.  And if they can’t manage the money transferred to them from the pockets of productive first-world citizens, then how and why would anyone think that they are worth investing in?

Quite simply, it is time to cut the purse-strings to Africa.  They squander the generous gifts given to them time and again, and it appears that this trend isn’t going to change anytime soon.  If insanity is doing the same thing over and over again while expecting different results, then the sane thing to do at this point might be to cut the aid and force Africa to stand on its own feet.  And who knows?  It just might be crazy enough to work.

Demographic patterns and structural change in North Africa and the Middle East

The political turmoil in Tunisia and Egypt that precipitated the abrupt end of decades of political dictatorships that governed the vast majority of countires in the MENA (Middle East and North Africa) region. The political revolution, influenced by democratic upheaval in Tunisia and Egypt, facilitated the attempts to overhaul the autocratic regimes in Bahrain, Syria, Yemen and Libya.

One of the most interesting and highlighting puzzles to resolves is which features contributed to the rise of democratic revolutions sweeping across the entire region. In fact, MENA region is world’s largest exporter of oil, enjoying the largest oil reserves in the world. Saudi Arabia, Qatar, Algeria, Libya and Kuwait constitute more than 42 percent of world oil reserves. In recent decades, MENA region experienced a growing degree of macroeconomic stability with low and stable inflation rate and steady economic growth. Large oil inflows, driven by the growing oil consumption in emerging markets such as China and India, boosted local currency appreciation and current account surpluses. The rates of growth in recent decade were remarkable, reflecting the growth of domestic demand as well as robust investment as the engine of growth. Countries in the MENA region also enjoyed favorable demographic conditions with low old-age dependency ratio and high share of working-age population, resulting in a demographic dividend which brought robust economic growth.

The indices of political change in the MENA countries prior to the outburst of the political protests in Tunisia and Egypt were nearly impossible to predict since a variety of macroeconomic, demographic and structural indicators facilitate the course of political change in developing countries, shifting from authoritarian political leadership towards a democratic political institutions with free press, free election and a vibrant civil society. Prior to the onset of the protests against authoratic governments in the MENA countries, the latter experienced benign levels of economic freedom. In the MENA region, the majority of countries experienced rampant corruption, heavily regulated labor markets, financial underdevelopment and inefficient legal systems. Bahrain, Qatar and Saudi Arabia enjoyed the highest degree of economic freedom in the region while Yemen, Syria and Algeria were already suffering from institutional paralysis and bad governance which brought these countries on the brink of failed states. If political change could be predicted on the basis of the level of overall economic freedom, Yemen, Syria, Algeria and Libya would experience the highest likelihood of political protests that would eventually lead to the political change.

Prior to the independence from France, MENA countries have been plagued by authoritarian governments given the extensive reserves of oil and natural gas. The absence of market institutions based on the rule of law under good governance and independent judicial systems eventually intensifed the rise of hybrid political regimes prone to corruption and poor governance. Even though corrupt military rule and political dicatorship precipitated the rise of the protests against authoratic rule, the pattern of structural change could be easily seen from the changing demographic landscape across the MENA region.

For most of the 20th century, countries in the MENA regions experienced rising income per capita levels. In fact, the growth of per capita incomes in North Africa surpassed the regional average given the fact that North African countries enjoyed high relative levels of income per capita at the beginning of the 20th century compared to Sub-Saharan Africa. For instance, in 1913, Tunisia enjoyed higher per capita income than Mauritius. The change in the demographic structure of the population began after 1950s. In all countries of the MENA region, the fertility rate decreased substantially. In Syria, the fertility rate almost halved between 1950-1955 and 2005-2010, from 7.30 to 3.29. The same trend in the fertility rate swept across the entire region. In Libya, the fertility rate between 2005 and 2010 fell below 3 children per women while Tunisia’s fertility rate dropped below 2 children per women in the same period. The astounding drop in fertility rates strongly reflected the growth in per capita incomes which boosted domestic consumption of durable and non-durable goods. In addition, oil-exporting countries such as Libya and Bahrain have experienced a substantial increase in export earnings. Large inflow of oil earnings, in fact, unleashed the income effect, brining higher spending on education and infrastructure. The distribution of literacy rates across countries (link) shows that literacy rates in MENA regions are remarkably high. In fact, Bahrain and Turkey boast of 88 percent literacy rate. Libya remained the North African leader in literacy rate (86.8 percent), ahead of Tunisia, Egypt and Algeria which, given the fragmentation and dichotomy of the population, enjoy literacy rates below 80 percent of the total population.

Countries from the MENA region differ substantially in the demographic projections of old-age dependency ratio. The estimates by the UN suggest that by 2030, the dependency ratio in North Africa and the Middle East is expected to experience a persistent rise. In fact, under constant fertility rates, the share of the population 65+ is expected to increase by 25 percentage points in Bahrain, 24 percentage points in Libya, 23 percentage points in Tunisia, 20 percentage points in Algeria, 15 percentage points in Syria and Saudi Arabia and 14 percentage points in Egypt. In Turkey, favorable fertility assumptions predict 7 percentage point increase in old-age dependency ratio until 2030. The empirics behind the clear explanation of fertility dyanmics across the MENA region reveals a persistent shift towards rapidly aging population across the entire region. The expedience of high fertility rates boosts the demographic dividend alongside the growth in income per capita until the break-even point when the pressure of aging population raises public pension expenditure and the introduction of social security schemes. These schemes, in fact, do not pose a systemic threat to the long-term solvency of public pension system as long as high fertility rates boost stationary population growth. The remarkable decrease in the fertility rates in the MENA is partly beared by the increasing amount spent on education. For instance, Tunisia’s education spending amounted to 7.2 percent of the GDP. The ratio is higher than in many advanced countries in the world. In 2007, Italy spent 4.3 percent of GDP on education, the same ratio as Algeria in the year later. The increasing amount of education expenditure, in both absolute and relative sense, reflects robust literacy rates for middle-income countries of the MENA region. In fact, the increasing amount of education expenditures per inhabitant boosted the information awareness by driving up reading, mathematical and computer literacy. Higher literacy rates, compounded by free access to various Internet applications, could substantiate hypothetically greater awareness of the public demanding political liberties, freedom of assembly and free press.

The demographic transition in the Middle East and North Africa is remarkably uneven, reflecting the variation in income per capita across the region. One of the key drivers of the demographic adjustment is the changing immigration landscape. Traditionally, North African countries have boosted one of the highest outward migration rates, particularly into Italy and France where Muslims account for about 9 percent of the population, the highest share in Western Europe. In addition, with 2.01 children per women, France enjoys one of the highest fertility rates in Europe. A brief overview of the ethnic fertility rates in France shows that French women of the Muslim origin boost significantly higher fertility rates compared to immigrants from Western countries. For instance, the fertility rates for women of Algerian and Moroccan descent exceed the fertility rates of Spanish and Italian immigrants by almost three times. In the next decade, income per capita across the Arab world is expected to increase robustly. Higher incomes would mean a shift towards the increasing amount of expenditures on durable goods. The change in the consumption pattern would be accompanied by a robust decline in the relative amount of income spent on food and other non-durables. Hence, the assumed fertility rates would converge to the Despite the prolonged decline in fertility rates across the Arab world, the demographic transition could precipitate the subsequent decline in robust economic growth rates which exacerbate the rapid rise in per capita incomes in the MENA region.

The peculiar feature of the majority of countries within the MENA region with the exception of Turkey is the presence of natural resource barriers. The abundance of natural resources, such as oil, phosphate and natural gas, is a major constraint on the quality of public sector governance replaced by the seizure of the state by powerful political elites such as the military regime during the Mubarak rule in Egypt prior to the 2011 revolution. Unless accompanied by democratic institutions and systemic constraints on the executive power, the political revolution can eventually result in the organic evolution of the failed state with a strong persistence of the old elites pushing for the status quo to protect the privileges preserved under the old system. The Arab awakening signaled the beginning of the demographic transition with decreasing fertility rates and slowly growing old-age dependency ratios. Hence, diminishing returns to demographic dividend and the gradual relative decline of the share of the working-age population both indicate a tendency towards greater democratic governance.

Does big government weaken the social fabric?

Perhaps I should confess at the outset that I cannot provide a definitive answer to this question. What I am about to present is some evidence suggesting that big government might weaken the social fabric. I think the evidence is sufficiently strong to suggest that the question should be considered seriously. (I provided similar evidence a couple of years ago – and I might have to write about it a few more times before many people take notice!)

The current post is one of a series in which I am looking at how values differ between high income countries with big governments and those with smaller governments. Previous posts have looked at child qualities that are encouraged, attitudes toward work and success and tolerance of neighbours who are different.

The indicators I am using to measure strength of the social fabric are estimates of the percentages of populations who say that the following activities are never justifiable: falsely claiming government benefits; cheating on taxes; and accepting a bribe. As in previous posts in the series I have focused on 14 high-income countries with broadly similar European cultural heritage for which data is available from the most recent World Values Survey.

In the table below these countries have been ranked by size of government, using government spending as a percentage of GDP as an indicator of size of government. (For each variable the five highest numbers are shown against a red background and the five lowest ratings are shown against a blue background.)

The data in this table provides evidence that people in high income countries with big governments tend to have more permissive attitudes toward a range of anti-social activities than those in countries with smaller governments. That doesn’t establish causation, but I think it should make researchers interested in trying to understand what is happening.

Why should we be concerned if big government does tend to make people more relaxed about welfare fraud, tax evasion and bribery? Can’t the problem be solved by just employing more public servants to prevent such anti-social activity? I don’t think so. Increased surveillance poses further problems including the added cost of service delivery and the increased intrusion of government officials into the private lives of citizens.

Are we losing faith that hard work brings success?

I have recently been thinking about differences in values held by people in high income countries with big governments and those with smaller governments. In my last post I looked at evidence from the World Values Survey of differences in qualities that people consider are important for children to learn. One of the differences noted was that people in countries with relatively small governments tend to place more emphasis on hard work as an important characteristic to encourage in children. In this post I look at more evidence relating to beliefs about hard work.

The survey question I am looking at requires respondents to assign a value from one to ten depending on whether their beliefs are closer to the proposition that ‘in the long run, hard work usually brings a better life’ (1) or ‘hard work doesn´t generally bring success – it´s more a matter of luck and connections’ (10). I have focused on the percentages who are most optimistic that hard work brings success, looking at population averages and averages for young people aged 15 – 29.

As in the last post I have focused on 14 high-income countries with broadly similar European cultural heritage for which data is available from the most recent World Values Survey. The results are presented in the table below, along with the data in my last post on the importance for children to learn the virtue of hard work. As in the last post, the five highest percentages for each variable are shown against a red background and the five lowest percentages are shown against a blue background.

As might be expected, there seems to be a reasonably close correspondence between emphasis on the importance for children to be encouraged to learn the virtue of hard work and the belief that hard work usually brings a better life. People in countries with small governments are more likely to hold those beliefs than those in countries with big governments.

What should we to make of this result? It could mean that incentives associated with big government tend to weaken the work ethic. It could mean that a weakening of the work ethic tends to promote big government. Or, as seems more likely to me, the results might reflect a complex interaction between cultural heritage and changes in beliefs, values, ideologies and economic incentives.

The results in the last column of the table are particularly interesting (and somewhat disturbing to me as an Australian). In most of the countries considered the proportion of young people who are optimistic that hard work brings success is somewhat lower than for the population as a whole. In the case of Australia, however, the difference is more substantial. Closer inspection of the data indicates that the proportion of young Australians who think that success is a matter of luck and connections is also lower than for the population as a whole. So, members of the younger generation are not particularly cynical about the rewards of hard work – they are just markedly less optimistic about this than older generations.

It would be premature to conclude that these results indicate that we are heading toward some kind of brave new world where few people bother to work hard because no-one believes strongly any more that hard work brings success. I need a better understanding of the implications of changes in beliefs about the relationship between hard work and success before reaching any conclusions. If anyone knows where I can find relevant research perhaps they could enlighten me.

Does the importance of values encouraged in children vary with size of government?

If big government is taking us towards a brave new world we might expect this to show up in differences in values held by people in countries with big and small governments. As discussed in my last post there seems to be some evidence that people in high-income countries with big governments tend to hold more secular-rational values than those in high-income countries with small governments. In this post I explore this further by looking particularly at differences in the values that children are encouraged to learn at home.

World Values Surveys ask a directly relevant question about what qualities it is especially important for children to be encouraged to learn at home. Respondents are asked to choose from the following list: good manners, independence, hard work, feeling of responsibility, imagination, tolerance and respect for other people, thrift (saving money and things), determination/ perseverance, religious faith, unselfishness and obedience.

I have focused on the 14 high-income countries with protestant or catholic heritage for which data is available from the most recent World Values Survey (WVS 2005 – 2008). These countries have been ranked by size of government, using government spending as a percentage of GDP as an indicator of size of government (OECD Economic Outlook data on general government outlays as a percentage of nominal GDP, averaged over the three years 2005–08).

Child qualities which apparently differ in importance between the countries with big and relatively small governments were identified by looking at the differences between the averages for the four countries with largest and smallest size of government. The differences were greatest (relative to the mean) in the case of hard work, thrift, religious faith and unselfishness.

The results are shown in the following table in which countries are ranked by size of government. For each variable the five highest numbers are shown against a red background and the five lowest ratings are shown against a blue background.

The results suggest that hard work tends to be more strongly encouraged in the countries with relatively small governments, while thrift tends to be more strongly encouraged in countries with big governments. (I find that result surprising because hard work and thrift often tend to be linked together as traditional virtues.) The results for religious faith and unselfishness do not appear to be consistently related to size of government.

It will be interesting to see whether any consistent patterns emerge from an examination of other values that apparently differ according to size of government.

Can New Zealand catch up to Australia?

Is New Zealand disadvantaged by economic geography to such an extent that it cannot hope to catch up to Australia’s average income levels, even with further improvements in institutions and policies? That is probably the most important question considered in the second report of the 2025 Taskforce that was released a few days ago.

The 2025 Taskforce was set up by the New Zealand government after the 2008 election to recommend how the gap between average incomes in Australia and New Zealand could be closed. Incomes of New Zealanders have generally risen less rapidly than those of Australians over the last 40 years, resulting in a gap between average incomes of around 35 percent in recent years. After the 2008 election, the NZ government committed to closing this income gap by 2025.

Since the Taskforce presented its first report last year, Philip McCann – an economist with expertise in economic geography – has advanced the view that New Zealand’s geographical disadvantages prevent it from becoming a high productivity economy. McCann has implied that structural features that are advantageous in the current era of globalization differ so much from those exhibited by New Zealand that this economy could not reasonably be expected to have relatively high productivity. He suggests ‘this is true irrespective of the degree of flexibility in the domestic labour market, the degree of transparency in the local institutional environment, or the levels of cultural aspirations for success’ (‘Economic geography, globalisation, and New Zealand’s productivity paradox’, New Zealand Economic Papers, Dec. 2009: 299).

The particular aspect of geography that McCann considers to be most disadvantageous to New Zealand is its relative lack of agglomeration economies associated with large cities. These agglomeration economies arise from knowledge exchanges, better networking and coordination, a nursery role for new enterprises, improved labour market matching processes and greater competition.

McCann argues that agglomeration economies can explain the decline in New Zealand’s per capita incomes relative to Australia because of the way the world has changed. One strand of the argument has to do with the increasing importance of knowledge-intensive activities that can often be undertaken at lower cost where face to face contact is possible among the various participants. Another strand is that with closer economic integration between Australia and New Zealand the economy with relatively larger agglomeration economies, i.e. Australia, has become a relatively more attractive location for capital investment and employment of highly skilled workers.

McCann sums up: ‘ … although New Zealand underwent fundamental institutional reforms in the 1980s and 1990s, at exactly the same time as this was taking place the landscape of global economic geography was shifting in favour of other places. It may well be that the deregulatory reforms limited some of the most adverse aspects of these shifts, thereby minimising the productivity gap. Yet the point still remains that the world changed, and the world of the late 20th and early 21st centuries is very different from the world that provided New Zealand with almost a century and a half of productivity advantages’ (p. 300).

How does the Taskforce respond? The Taskforce acknowledges that both New Zealand and Australia have been disadvantaged by geography. It notes that according to recent OECD research the impact of greater distance to markets is equal to around 10 percent of GDP per capita for both countries. However, it judges the evidence in support of the view that New Zealand’s small population limits the potential to obtain agglomeration effects to be weak. In particular, Auckland’s position within the regional hierarchy of Australasian cities is not declining – the population of Auckland has been growing faster than the populations of Sydney and Melbourne. The Taskforce also points out that there is no evidence that New Zealand suffered an adverse shock from globalization during the 1980s; that migration from New Zealand to Australia is disproportionately of highly skilled workers as agglomeration theory implies; or that the relative performance of small countries has declined in the past 20 years.

The Taskforce concludes: ‘… modern growth theory provides stronger support for the importance of institutions and policy than it does for geography, especially in the deterministic interpretations of economic geography’ (p. 41).

Sitting in Australia, current concerns in public policy discussions about the emergence of a two-speed economy in this country make the agglomeration theory of relative decline in New Zealand’s economic performance seem rather odd. Rather than a concern that agglomerations centred on Sydney and Melbourne are leaving the rest of Australia behind, the main concern is that New South Wales and Victoria (along with other states) are being left behind as economic growth steams ahead in Western Australia and Queensland, as a result of rapid expansion of the minerals sector and related industries. There is also reason for concern that, over an extended period, the particularly poor performance of the New South Wales government has detracted from the substantial location advantages that Sydney should enjoy.

If we reject the idea that Australia’s alleged agglomeration advantages make it impossible for New Zealand to close the income gap, where does that leave us in terms of explaining New Zealand’s relatively poor economic performance? The Taskforce pours cold water – correctly in my view – on another geographical explanation, namely Australia’s good luck in having plentiful supplies of mineral resources to export to rapidly growing markets in China and India. It is only in the last few years movements in Australia’s terms of trade have been much more favourable than in New Zealand. Moreover, New Zealand also has substantial mineral and hydrocarbon resources.

I think that leaves us with having to explain New Zealand’s relatively poor economic performance in terms of policies that are less favourable to economic growth. That also poses a problem because the impression given by various international comparisons of institutions and policies is that since the mid-1990s there has not been much to choose in overall terms between the economic policy environments in New Zealand and Australia. It seems likely, however, that New Zealand has not performed so well in the areas that have mattered most from a growth perspective. For example, one major problem discussed by the Taskforce is the effect of relatively high levels of government spending in discouraging investment in export industries – via impacts on the real exchange rate as well as tax rates.

The Taskforce has expressed the view that closing the gap in average income levels by 2025 will require policies that are superior to those in Australia in their focus on growth. It seems to me that those who believe that New Zealand has geographical disadvantages should logically be strong supporters of that view (unless they reject the objective of closing the income gap). The greater the geographical disadvantage, the greater the policy superiority New Zealand will need in order to meet the objective of closing the income gap by 2025.

Is Economic Growth Causing the Chinese to Become Discontented or Just More Optimistic?

In my last post I suggested that the reasons why rapid economic growth has not resulted in increased average life satisfaction in China over the last couple of decades have more to do with rising aspirations than with increased income inequality. In this post I want to consider those issues further.

My first point is that in recent years the Chinese have been about as satisfied with life as people in most other countries with comparable income levels. This shows up clearly in charts in Angus Deaton’s article, ‘Income, health and well-being around the world’ (“Journal of Economic Perspectives”, 22 (2)).

Second, survey evidence is not consistent with growing discontent caused by rising inequality – or by anything else. According to recent Gallup data about 66 percent of Chinese are satisfied with their standard of living and 83 percent say that their standard of living is getting better. A paper by Nicole Naurath show that in 2008 over 80 percent of Chinese claimed that economic conditions were getting better in the city or area where they live and that it was also getting better as a place to live.

Third, there is evidence that life satisfaction in China is more strongly influenced by satisfaction with income growth (i.e. satisfaction with income now compared with income in the past) than with either absolute or relative incomes. The results of a study by Lina Song and Simon Appleton do not support the view that dissatisfaction with relative income is a major cause of social discontent in China (“Life Satisfaction in Urban China”, IZA DP: 3443, 2008).

Fourth, Andrew Deaton found in his cross-country study, cited above, that while level of per capita income has a positive effect on life satisfaction, economic growth has a negative effect. His results suggest that it would be normal for the negative effect of economic growth to outweigh the positive effects of increases in income levels in countries that are experiencing rapid economic growth (see Table 2 in his article). Deaton argues that his results are consistent with life satisfaction responding to the long-term average income, as in a permanent income model of life satisfaction.

Fifth, the ratings that the Chinese give to the quality of their lives five years ago and five years into the future suggest that large upward revisions are occurring in their aspirations. The Gallup data for 2008 indicates that the Chinese rated their lives five years ago less highly than just about every country in the world outside Africa. The rating they give to their lives five years ahead is higher than that in some western European countries. When they appraise their current quality of life in five years time they will realize that they still have somewhat further to go before attaining “the best possible life”. But they are not likely to become discontented while they continue to experience the economic growth they have come to expect.

I think the lesson to be learned from consideration of the relationship between average life satisfaction and rising per capita incomes in China is that the failure of life satisfaction to rise with income does not necessarily imply discontent with the consequences of economic growth. Those who suggest that economic growth has led to widespread discontent in China are mistaken. Economic growth has merely cursed the Chinese with great expectations.