Friday, April 14, 2017

21st century economics is about thickening the doughnut, rather than expanding the pie

Kate Raworth's new book Doughnut Economics: 7 ways to think like a 21st century economist is out. The book calls for a radical re-think of basic economics 101 as it is presently taught.

The basic thesis seems to be that the economy does not exist within a void. The fetish for growth that development theory promotes has stretched the earth's resources in ways that threaten life on the planet as we know it. It has done so while keeping millions below the poverty line. Growth has benefited mostly the top 1%. This does not represent the best use of resources.

While the author talks of the need for a radical re-set, to me her ideas are in many ways built on the foundation of traditional economics. Take for instance the idea that we don't live in a world of limitless resources. That is a basic tenet taught in any introductory economics class. Economics essentially teaches us that we face trade-offs, and that there is no such thing as a "free lunch".

Another example is her depiction of the global economy, not as a pie that needs to be expanded, but of a doughnut that is made up of two concentric circles (see above). The inner circle is the minimum basic needs that all humans living on the planet need to thrive. The outer circle represents the resource limitations of the planet. This is essentially the traditional household budget constraint theory that is taught in more advanced economics classes. 

In her TED Talk, the author traces the roots of economics back to Xenophon who used the term within the context of a household seeking to make ends meet. Adam Smith in the Wealth of Nations went further by answering the question why do some nations thrive while others stagnate? Raworth concludes by saying that in the 21st century, the issues we are grappling with require us to look for new tools to understand and deal with what is happening. 

Fortunately, those tools already exist. They come from the more obtuse extensions of the economic field, but they have been around for several decades now and are coming into the mainstream. Hopefully, with the release of Doughnut Economics, these new ways of thinking about the economy gain even greater currency among policy makers, the media and ordinary citizens alike.

Sunday, January 8, 2017


President Obama sat down to chat with Ezra Klein of Vox in what he jokingly described as a sort of Wonkapalooza. They discussed the intricacies of the Affordable Care Act derisively nicknamed "Obamacare" by his opponents. He makes a striking comment directed at Republicans: that if they can provide a better approach, he would gladly endorse it.

The interview was quite revealing in a number of ways. Pres. Obama's ability to distill very complex policy issues down to their core essence, and his candid assessments of what worked, what didn't work so well and why, and how things could be improved, was impressive. This could be the last time we hear from an articulate president for a while.

Saturday, November 12, 2016

As I pick up this pen...

It was November 2008 when I first took up blogging in this space, right after Sen. Barrack Obama's election as America's 44th president.

How times have changed.

We now are witnessing the dawn of a new era in America, and the world undoubtedly.

The election of Donald J. Trump to succeed Mr. Obama heralds a new direction for America.

From an outward-looking, open, diverse, collaborative, and multilateralist polity, to one that would have an inward-looking, isolationist, and competitive/winner-take-all mentality.

It comes on the heels of the Brexit vote in the UK and the rise of far-right parties in Western Europe. 

Having taken a break from blogging in the past two years, I feel the need to start writing again.

Now more than ever, the need to find new, better ideas to deal with complex, long-standing problems is emerging.

Monday, March 10, 2014

Blog interrupted?

To my dear readers and followers, I have accepted a new assignment to do development work in the Philippines for an internationally funded aid project that will have me occupied until the end of this year. This means that the entries to this blog will be far less frequent than before. As I make the transition now from my role as a policy analyst to that of an implementer of change, I expect new insights and ideas to come. The experience of working on the front-line of the field will provide me with a different perspective, undoubtedly. I am not sure how this will alter the topics and themes that I will choose to write about from now on. Hopefully, it will help me gain a more well-rounded perspective. This may be the end of The Cusp as we know it!

Thursday, January 9, 2014

Lessons from Rwanda

Twenty years on since the Rwandan genocide how has the country transitioned into a more stable society and been able to punch above its weight in good governance and growth?

Landlocked, under-endowed, war-ravaged, Rwanda a nation of 10.5 million people has faced a number of disadvantages, not the least of which was the ethnic strife between the Hutus and Tutsis that has ravaged the country in the past. And yet it in spite of these setbacks, it has experienced very respectable growth figures (averaging 7.4 per cent per annum) and improving social indicators over the past decade.

Rwanda has undertaken significant efforts to reform its regulatory environment. Just consider the following:

  • The World Bank ranks Rwanda the 4th best country in Africa to do business, after Mauritius, South Africa and Botswana.
  • It only takes 3 days to set up a business, the 8th shortest time in the world.
  • The country is in the 71 percentile rank with a score of 53/100 in Transparency International’s Corruption Perception Index, placing it in the same class as Malaysia and South Korea.

So how has a country which suffered many years of war and as much corruption as any other impoverished nation, managed to turn things around?

Well the short answer is they did this through an accommodative political settlement and the help of both conventional and unorthodox institutions and economic strategies.

Rwanda has had a long history of ethnic violence between the two main rival tribes.  From pre-colonial times up to 1959, the pastoralist Tutsis were the ascendant political class over the agriculturalist Hutus. Ethnic differences were exaggerated under colonial rule. In the lead up to independence in 1962, Belgian colonists transferred their support to Hutu elites. This led to mass killings of Tutsis many of whom fled the country.

Two Hutu regimes ruled the country from 1961-94. Having a single-party dominate politics for most of this period did not prevent the nation from succumbing to decentralised rent-seeking and clientelist behaviour. A group known as Akazu was at the apex of this system. It was related to but not controlled by the administration.

Tutsis sought to regain control of the country through an invading Rwanda Patriotic Army. This culminated in the genocide of 1994 by retreating Hutus. After consolidating their hold on the country, the Rwanda Patriotic Front (RPF) established a government of national unity incorporating moderate Hutus, one of whom led the country as its president.

Although a certain amount of political repression in the guise of preventing a return of “ethnic ideology” has occurred, the coalition governments comprised of all legal parties in parliament being proportionately represented in cabinet (the ruling RPF holds no more than fifty per cent of the portfolios) has succeeded in keeping the nation stable. This inclusiveness along with its program of restorative justice known as gacaca has fostered reconciliation and allowed the country to experience improvements in social and human development not seen previously.

The intrusive intervention of government in everyday life at times borders on social engineering as the government has sought to follow the Singaporean model in both economic and social policy implementation. President Paul Kagame (elected in 2003 and then again in 2010) has been labelled the global elite’s favourite strongman for improvements to public service delivery, particularly in health and education.

Departmental line agencies have been managed through an institution of performance contracts known as imhigo which Tim Kelsall describes as “modern performance agreements supported by a significant component of moral pressure and neo-traditional gloss.” This combination of formal scientific management theory and homegrown practices has permeated down to the grassroots by roping in local officials and civil servants.

On the economic front, Rwanda has applied a hybrid approach to investment promotion. On the one hand, it has adopted policies and institutional arrangements considered best practice by the World Bank’s Doing Business surveys. Responsibility for managing this has been assigned to the Rwanda Development Board (RDB). But this works in parallel with a more activist approach in industrial policy with the RPF’s holding company, Tri-Star Investments getting involved in joint ventures and start-up companies.

Tri-Star helped the RPF raise funds during the Congo wars to overthrow Zairean dictator Mobutu Sese Seko through trading metals in international markets. The surplus achieved was then channeled towards domestic private sector development. The holding company has initiated many successful ventures with demonstration effects for the rest of the economy. Telecoms is one example. When Tri-Star sold part of its stake in Rwandatel in 2007, it got five to ten times its initial investment in the company.

Because profits from Tri-Star that are not ploughed back into its businesses revert to RPF, the party is financially independent. It uses this to fund its political campaigns without having to resort to political donors. Kelsall explains what this does:

The RPF’s financial solvency obviates the need for party officials to engage in election-related corruption, which in turn allows the party to take a very tough line on corruption among its leading supporters and in the bureaucracy.

Apart from Tri-Star the government has also orchestrated the formation of other funds, the Horizon Group belonging to the army, which undertakes socio-economic projects to produce productive enterprises, and the Rwanda Investment Group, a consortium led by domestic and diasporic elite.

The purpose of the second group is to raise capital other than through foreign borrowings to invest in projects of strategic national importance. Without such an interventionist approach, much of the agricultural and industrial transformations currently underway in different sectors of the economy simply would not be happening.

The case of Rwanda demonstrates many similar traits to that of the Northeast Asian developmental states. The RPF led government faced existential threats from the opposition in exile and from a potentially hostile ethnic majority at home just as the South Korean and Taiwanese states did from North Korea and from mainland China.

These threats have kept the ruling RPF focused on improving social and economic well-being for its citizens to maintain its legitimacy and hold on power. The regime has exercised a capacity for long-range vision and forward planning contained in its Vision 2020 roadmap, free from the influence of rent-seeking, private interests. It has ruthlessly pursued its policies at times through heavy-handed regulations and enforcement of rules.

The low crime, low corruption, low red-tape environment this has fostered was not enough. The RPF has used its clout to address market failures and encourage the adoption of productivity enhancing new technology. Through its holding company and other private-led investment groups that it has brought into being, jobs have been found for talented managers and skilled workers that might have otherwise gone overseas.

The Rwandan experience demonstrates the capacity of poor nations to bring about a system of governance that is relatively competent and free from corruption within a short span of time using home-grown institutions, resources and talent. The extremely harsh and disadvantageous position it faced did not become a hindrance, but rather provided greater incentive for it to go down the road it has followed. Surely, any emerging economy seeking to do the same should take heed the lessons from Rwanda.

Monday, November 18, 2013

A Sustainable Climate Policy

In the wake of Typhoon Haiyan, one of the strongest to ever make landfall, the Philippine delegate to the climate talks in Warsaw made a desperate plea for nations to act on climate change. President Aquino when asked by CNN’s Christiane Amanpour whether he believed the warming of the planet had a direct link to the severe weather event affirmed the position. British Prime Minister David Cameron made a similar statement.

The Inter-governmental Panel on Climate Change says that severe weather events will be the consequence if carbon pollution is not abated. And yet what we find is advanced countries like Australia, Canada andJapan, that are all led by conservative governments, back-tracking or weakening their stance on the issue. 

Governments around the world from Beijing to Washington are grappling with the problem to avoid what economists call “the tragedy of the commons”. This is a situation where when a certain market activity has a negative by-product (such as emitting GHG into the atmosphere) and people are free to do (no cost is attached to it), then it will be engaged in excessively to the detriment of all. The only way to avoid this outcome is to make economic agents absorb the cost associated with abating the negative by-product.

The question that policymakers worldwide are grappling with is who should absorb the cost and what mechanisms are needed to make them absorb it? A carbon tax gives residents the right to free air and imposes the cost of abatement on the polluter. The problem is that polluters will then pass on the cost on to consumers.  An alternative would be to pay polluters to stop polluting using taxpayer’s money.

From an economic perspective, it does not matter which mechanism is used as long as no one has the ability to "game" or influence the system. From a political point of view, however, framing the policy as a tax or incentive may have enormous consequences as the Australian Labor Party painfully realised in the last election.

Beyond the theatre and drama of the climate change debate, the political players have to find some kind of common ground, though to make whichever solution is opted for credible and sustainable. One prime example of this is the climate change policy adopted by British Columbia (BC), which has been in place since 2008 and whose popularity remains intact and has even increased.

It involves a tax that puts a price on carbon that is returned to citizens and businesses through reduced income taxes and increased tax credits or benefits. The tax is broad based covering the use of fossil fuels for electricity and vehicles. The policy has reduced the consumption of taxed fuels per capita by 19 per cent in the BC relative to the rest of Canada. GHG emissions in the province fell 10 per cent between 2008 and 2011, compared to a fall of 1.1 per cent for the rest of Canada.

The carbon tax was originally set at C$10 per tonne of carbon dioxide equivalent emissions and was increased by C$5 each year until it reached C$30 in 2012, when it was subject to a review and fixed following the release of a report in 2013. The report suggested that the tax did not seem to have an impact on BC’s economy, although certain sectors such as the agri-food and agriculture sector needed additional relief, which is forthcoming.

The success of BC’s climate change policy matches that of Quebec and California, which introduced a cap on GHG and an emissions trading scheme. BC and other North American states in the Pacific coast, Oregon and Washington have been encouraged to set up similar schemes and to link their systems together. They could soon be joined by provinces along the coast of China. China is working to develop a nationwide approach after 2015.

Getting to a harmonised global scheme is quite challenging, but not impossible as the efforts of some of these jurisdictions are showing. 

Monday, July 1, 2013

The entrepreneurial state: more shoving, less nudging

What is the role of the state?

Since conservative ideology gained ascendancy in the 1980s, most people tend to regard the state as a sluggish, unwieldy and overbearing beast which often gets in the way of private enterprise and creativity by imposing higher taxes and burdensome regulation. 

Those advocating for a minimalist role for the state say that the growth of debt has caused the crisis in the EU, which makes the need for austerity paramount in rebuilding its fortunes.

Mariana Mazzucato, professor of economics at Sussex University has recently published a book called the Entrepreneurial State. The title will sound like an oxymoron especially to those steeped in the tradition of Adam Smith’s Invisible Hand and David Ricardo’s theory of Comparative Advantage in which the market not the state holds primary importance in the economic life of a nation.

Under this rubric of market ideology, the role of the state is to get out of the way of business. State investments are frowned on for “crowding out” private investment. Any type of intervention in the free market only leads to distortions that prevent capital from flowing to those sectors which deserve them the most. 

Today even the task of countercyclical spending when business and consumer sentiment collapses espoused by the Keynesian school of economics is challenged by pro-austerity advocates who question the effectiveness of stimulus measures.

The only place where the importance of the state is acknowledged in promoting growth and industrial diversification is in the developing and emerging world. But even there, the role of the state has been confined to that of a ‘facilitator’: nudging businesses along, addressing ‘market failures’, reducing transactions costs like corruption, providing basic infrastructure, the protection of property rights and the rule of law.

In the advanced economies of the West, where the state is relatively corruption free, where market institutions are mature and where economies operate on the edge of the technological frontier, there does not seem to be any role for the state except in providing tax credits for innovation, improving human capital and supplying basic research and development.

In popular culture, prestige is given to the entrepreneurial class, those rugged individuals who take risks, great visionaries that have given birth to new industries. The stories of Google, Apple and Microsoft are seen as shining examples of this. These are popular myths that Mazzucato’s book seeks to dispel.

Through programs funded by obscure agencies like DARPA, ARPA-E, the National Science Foundation, the National Institute of Health and the Small Business Investment Company, the US government developed the technological building blocks with which these companies built their innovative products. Far from being a bastion of the "market friendly model", the American state has in fact conducted industrial policy by stealth, according to the book. 

Far from being risk averse, these state actors showed the capacity to take risks, support nascent industries, took the role of “patient finance” as opposed to private venture capitalists who came in late in the piece and piggy backed on the wave of technology that the state generated. 

But instead of supporting the entrepreneurial state, what many iconic companies that have benefited the most from it have done is seek to diminish it by availing of tax loopholes.

This leads to another key theme of the book: the socialisation of risk and privatisation of reward deepens inequity in society. A certain amount of wealth creation and concentration is a natural consequence of disruptive innovation which gives rise to massive profits or rents. 

Although the state did much of the heavy lifting in producing general technologies which became the basis for such wealth, it is unable to reap a share of the rewards from it.

There are a number of policy implications presented by Mazzucato including the need for new risk-reward models in public private partnerships. She proposes income contingent loans as a possible alternative, allowing the state to be rewarded when the start-ups it funds become profitable. 

A model that would allow the state to recover its losses from some bad investments by making a killing from a few good ones sounds sensible.

The growing number of sovereign wealth funds in advanced, emerging and developing economies presents an opportunity for entrepreneurial states to fund the next round of innovation. For advanced economies, this would allow them to get out of the productivity rut that has been noticed since the 1990s. 

For emerging economies, it allows them to avoid the middle income trap by moving up the value chain. For developing countries, it would help them “catch-up” in the technological race.

Far from being an inhibitor of growth, the state according to Mazzucato provides the impetus for it:

And this is the punchline: when organized effectively, the State's hand is firm but not heavy, providing the vision and the dynamic push (as well as some 'nudges'- though nudges don't get you the IT revolution of the past, nor the green revolution today) to make things happen that otherwise would not have...This requires understanding the State as neither a 'meddler'nor a simple 'facilitator' of economic growth. It is a key partner of the private sector - and often a more daring one, willing to take the risks that business won't.