wittering on delivering cogent analysis lately about the importance of productive capacity in the Pacific islands. Productive capacity is defined by some economists as the resources, entrepreneurial capabilities and production linkages which together determine the ability of a country to produce goods and services and enable it to grow and develop.
In other quarters, in contrast, it’s generally imagined that trade agreements will somehow automatically solve all the Pacific’s trade problems; that somehow, given unlimited access to overseas markets, the Pacific island economies will independently generate the corresponding supply. That’s unlikely.
To boost productive capacity countries need an activist government (and maybe even donor community) capable of stimulating capital accumulation, technological progress and structural change through policy. These things won’t happen by themselves. Some of the now-uncool economists like Hirschman and Kalecki said these things long ago.
As I said in this post, putting all your faith in market access is a bit like filling a bathtub with a thimble. Better to use a bucket instead, or even turn on the taps — ie. put at least some effort into also developing the domestic economic engine so that there’s enough to export.
This isn’t true only of the Pacific. My trade diagnostic work in other least developed countries has led me to the conclusion that in most small, peripheral developing countries much more needs to be done to develop productive capacity. Few least-developed economies have the economic flexibility or adaptability to be able to generate much new supply in response to enhanced market access.
Whatever’s been going on until now hasn’t been working. As this World Bank blog points out:
The world’s 45 Least Developed Countries that are not oil producers (non-oil LDCs) are exporting less and less in the global market place. Between 1985 and 2012, the world market share of non-oil LDCs’ exports of goods and services fell from 1.2 percent to 0.8 percent—all while their share in world population rose from 7.5 percent to 9.9 percent.
These 45 countries — around a quarter of the world’s total, containing one in ten people — have been increasingly marginalised despite their products facing no quotas or taxes in any major market: Australia, New Zealand, China, the US or Europe.
In my view the LDCs are borrowing an inappropriate trade model from elsewhere and need a much more development-focused strategy tailored to their own ends. Good intentions exist in that direction, but with little impact so far. It’s no good imagining that the LDCs can emulate the rich economies and concentrate solely on opening markets (in any case there’s not much more to open) because they haven’t got much to sell in those markets.
European, Chinese and US firms are logically concerned with breaking down overseas trade barriers (although even for them the gains are looking more and more slim). LDC economies are incalculably less complex or sophisticated than these bigger economies and just can’t supply the diversity of goods and services. They face a completely a different scenario.
It’s useful that the LDCs have such huge potential market access, and building domestic capacity doesn’t exclude the possibility of maintaining good access to overseas markets. Nor does it necessarily mean protection (which is another story and which might not be possible anyway). Trade liberalisation also helps countries import more cheaply, which can contribute to economic growth and maybe exports. The point is that to export more, you need to be able to produce more.
My deeply non-poetic SDG Haikus were:
LDCs need more
Not market access.
Don’t forget about
Building strong economies.
Originally posted on Post2015.org - what comes after the MDGs?:
Last week marked another milestone in the long and winding process to define a new global development agenda. Governments concluded a year’s work in an ‘open working group’, to propose a set of new Sustainable Development Goals (or SDGs).
To celebrate the group’s final meeting, @clairemelamed and @PJLaddpost2015 initiated a twitter Haiku competition. We could claim that it was a serious effort to explore the various topics in the agenda through the medium of poetry. Actually, it was the work of about 10 seconds in the coffee break at a MY World planning meeting. But anyway. The simple rule: a Haiku is a three line poem, with 5,7 and 5 syllables on each respectively.
The competition unleashed an incredible number of so far hidden poetic souls among the wonks and diplomats of sustainable development. The entries numbered in the hundreds …..
Below we list ten(-ish) of our favourites, but with…
View original 470 more words
A blog I wrote for the Lowy Institute for International Policy:
Solomon Islands last week became the first country to receive approval to export timber to Australia under new guidelines on the legality of logging products. The move secures the $4 million market in sawn timber exports to Australia, an industry which employs at least a thousand workers.
It’s good news, but the move shouldn’t be read as a boost to Solomon Islands’s flagging trade balance, still less a prop to its shaky economy. Logging in the Solomons is in terminal decline and timber sales to Australia remain less than 1% of total exports. Forestry fueled the economy since independence in 1978. So many logs have been felled that there are few viable areas of natural forest left to exploit. Plantations remain a small part of production.
Like many Pacific island countries Solomon Islands has spent decades liberalising its own economy and securing overseas market access for products like timber.
The country is a member of the World Trade Organisation, party to three regional trade agreements and has duty-free and quota-free entry to China, Europe and the US. Australia and New Zealand, the region’s biggest trading partners, also grant tariff and quota-free access. Efforts are underway to reduce quarantine barriers. Under PACER Plus, the trade agreement currently under discussion between Australia and the Pacific Island Forum countries, little remains left to liberalise.
All this emphasis on market access (both inward and outward) hasn’t benefited trade as much as it was supposed to.
Over the past 30 years Pacific island merchandise trade has fallen as a proportion of economic output, according to World Bank data. During the same period exports of goods and services from the Pacific islands rose more slowly than the world average. In some of the most enthusiastic regional liberalisers, like Solomon Islands, exports of goods and services even formed a progressively shrinking share of economic output.
It may seem like a no-brainer, but much of the reason for this underperformance is that Pacific island countries simply can’t produce enough. However much other countries want Pacific island goods, the Pacific just can’t make things for those markets in adequate quantity, consistency or quality.
When I worked in the Vanuatu Department of Trade, a colleague came back from a trade fair in Japan saying that a potential buyer loved Tanna Coffee and wanted 20 containers per month. Great, my friend replied, but 20 containers was total national production in a good year.
That story is typical: across the region, formal work forces are too small, countries too distant and fragmented, and production until now too volatile to fulfil the demand that exists for Pacific products. It’s a bit like trying to fill a bathtub with a thimble.
But this doesn’t mean the islands should give up on trade. Instead of concentrating relentlessly on opening up to foreign markets, much more should be done to boost domestic productive capacity. Use a bucket, not a thimble.
Economists define productive capacity as the resources, entrepreneurial capabilities and production linkages which together determine the ability of a country to produce goods and services and enable it to grow and develop. Productive capacity deals more with the national economy than with foreign markets, although the two are linked.*
The productive engine develops via capital accumulation, technological progress and structural change. Clearly these processes have been weak in most of the Pacific island countries.
Rates of capital accumulation are very low, partly due to the small size of the formal economy in many countries but also as a result of low savings rates and the underdevelopment of financial services, which mean that savings are not converted into investment. Technological progress has been limited or non-existent. Structural change (the rate at which agricultural productivity has risen and manufacturing and services have supplanted agriculture) is similarly slow. Melanesia’s economies in particular remain dominated by large subsistence sectors.
Roads, ports, bridges and wharves in many parts of the Pacific are among the poorest in the world, and this in countries which depend critically on transport. Tertiary, vocational and higher education need to improve if the region is to produce higher value-added goods and services. Low levels of labour productivity and widespread underemployment are among the key causes both of the weakness of productive capacity, and, more importantly, of persistent poverty.
It’s about time the Pacific island countries and development partners stopped putting all their faith in market access and started attending to the more complex task of developing and diversifying the domestic economic engine. Trade can boost development, but only if the islands have enough to sell.
Photo by Flickr user Tony Morris.
*As well as the 2006 UNCTAD Least Developed Countries report this perspective draws analytically on works including Albert Hirschmann (1958) The Strategy of Economic Development. Yale University Press, New Haven, Conn.; Michal Kalecki (1969) Theory of economic dynamics, New York: Augustus M. Kelley; Nicholas Kaldor (1967) Strategic Factors in Economic Development Cornell University Press, Ithaca, New York; Jose Antonio Ocampo (2005) (ed.) Beyond Reforms: Structural Dynamics and Macroeconomic Vulnerability, Stanford Economics and Finance, Stanford University Press and the World Bank, Washington DC.
Here’s a paper I did with Jodie Keane and Yurendra Basnett of the Overseas Development Institute. It uses a series of trade diagnostic studies from the Pacific island countries to argue (amongst other things) the following:
• The Sustainable Development Goals (SDGs) that will be adopted in 2015 need to include a commitment to deliver a new global trade framework for the world’s least developed countries and small-island states, such as the Pacific Island Countries.
• Market access will be meaningless without increasing productive capacity. Focus also needs to also be placed on behind-the-border measures including on rules of origin, supporting adherence to standards, and ensuring that aid for trade is additional and targeted.
• Regional trade agreements are changing the global trade landscape and shaping the future trading opportunities for the Pacific. There is a need to ensure small and economically powerless countries are not adversely affected by such agreements, nor their aspirations to achieve regional integration undermined.
Narrative is often forced. Why should writers oblige rushed readers to plough through their concocted stories? The advantage of those pieces of Internet click-bait – 10 reasons why Putin is a paedophile, 164 ships to visit before you die – is that they convey chunks of information in palatable slices. You can skip the things that don’t interest you without losing your place.
Lots of authors might as well just list their unconnected ramblings by number. They’re in a privileged position and excess verbiage is self-indulgence. More often than not our treatises are imagined. I doubt that the Internet is killing the written word. Far from the end of a golden age of literature, we’re all probably now reading more than ever before, just in smaller bits.
On the other hand proper explanation requires joining dots. As Robert Fisk implies here (h/t Aditya Chakrabortty), there’s something worryingly goldfish-like and conservative about a series of unconnected splurges. The modern 24-hour news cycle, for example, makes the world seem like a list of disparate happenings when in fact separate events often amount to a story and it’s important to make connections. Remember the anecdote about the slowly boiling frog? The frog only noticed a rather important cumulative trend when it was too late. Lyotard was wrong: grand narrative hasn’t collapsed; narrative is explanation.
Academic and policy reports are often so deadly boring because their authors don’t tell stories, which need character development, narrative arc, plot and suspense. As Gordon Peake says, “With each draft, and each round of comments, the awkward, the ineffable and the ‘you really couldn’t make it up’ get leavened out.” The unexpected contributes to a sense of the human. Without these age-old storytelling traits, reports are just piles of barren bones featuring endless abstraction. That’s why they don’t get read.
One of the books that first got me interested in economic methodology was Deirdre McCloskey’s The Rhetoric of Economics, which broadly argued that most economic research is in fact rhetoric; not rhetoric in its sometimes dismissive modern usage but in the original Greek sense meaning to convince. Despite economists cloaking themselves in the garb of objectivity, they just use sophisticated methods to prove their cases – and nothing wrong with that. But they’re telling yarns (albeit sometimes useful and fascinating ones), not proving timeless truths. All findings about human society – even dead clever ones, like supply and demand – are provisional generalisations specific to a time or epoch. As I said in this post, they’re still scientific, albeit scientific in a special sense.
Narrative is critical in making sense of the world. I suppose what really irks me about those boring reports is that they’re just so inhuman and pseudo-objective. We’re all just spinning stories and we might as well admit it. But at the same time I think that the Fisks of this world risk looking like fuddy-duddies. There’s a role for rapid-fire information. And those of us who aren’t Ernest Hemingway might sometimes be excused the search for narrative. Unexpected ending (sorry, just trying to avoid hypocrisy).
Here’s a piece I wrote for Australia’s Lowy Institute for International Policy about the Regional Assistance Mission to the Solomon Islands.
A pointed joke used to do the rounds in Honiara: if you needed to call on the Australian police you could usually find them in the Lime Lounge, a swanky cafe at the west end of the main street that serves silky flat whites and a range of delights including the ‘RAMSI breakfast’.
The cappuccino cops were in town as part of the Regional Assistance Mission to the Solomon Islands (RAMSI), which aimed to support security, the economy and government following the period of political instability and conflict between 1999 and 2002 known as ‘the Tensions’. The Lowy Institute has for the first time calculated the cost of Australia’s contribution to RAMSI: a staggering $2.6 billion from 2003-13.
The Lowy analysis implies that this sum amounts to one-third of gross domestic product, more than the Solomon Islands government spent over the decade. For a donor to spend more than the host government over such a long period may be without precedent in the Pacific region, if not the world. Such huge public spending also contradicts the advice of RAMSI government advisers, which was to lower expenditure.
Given the amount of money invested, you’d think the economy would be purring like a finely-tuned Holden (maybe not a Ferrari, given that the economy was starting from such a low base). But after some initial success in restoring growth and calming the political situation, the economy stagnated, losing ground to its regional neighbours. Income per head is now among the lowest in the Pacific region. The following graph, using the World Bank’s official Pacific island small states category, shows income per head using the Atlas Method, which takes inflation into account and averages three years of exchange rate data so as to iron out short term fluctuations. Whichever measure you use, the rest of the region has pulled away from the Solomon Islands.
Source: World Development Indicators, Atlas method. (Nb. The World Bank Pacific island small state category includes Kiribati, Fiji, Tonga, Marshall Islands, Federated States of Micronesia, Palau, Samoa, Solomon Islands, Tuvalu and Vanuatu.)
The Solomons’ performance on the UN Human Development Index, which includes per capita income, education and health, lags the region and other developing nations. In 2003 the country was said to have ‘medium’ human development, ranking 123rd out of 175 countries. By the end of RAMSI, human development had deteriorated to ‘poor’, with the Solomons in 143rd place out of 186, just behind the Congo. You can’t read too much into this apparent slide owing to a change in how the rankings were calculated. But it remains the case that Solomon Islands’ human development performance is far from stellar. A quarter of people live in poverty, kids only go to school for an average of 4.5 years, and 36 out of every 1000 children won’t live to see their fifth birthday.
Who knows what would have happened without RAMSI? Maybe the performance of economic and social indicators would have been even worse. But other island states in the region seem to have done all right.
And economic development should have been imperative. The Tensions weren’t really just ethnic; they related to two decades of increasing poverty, worsening public services and the consequent failure of state legitimation. Many people looked at Honiara and saw a greedy cabal helping itself to logging wealth. As is customary the world over, a small minority, facing unsustainable deprivation and inequality, then looked for scapegoats.
Beyond the RAMSI honeymoon period, Solomon Islanders (particularly the poor) weren’t really listened to. The RAMSI People’s Surveys only started in 2007, four years after the start of the mission. Education, health and wealth consistently featured as more important than would be suggested by the allocation of funding under RAMSI.
Development interventions are usually only successful if they truly reflect local demands, not least because people don’t buy in to programs for which they haven’t asked. Australia burnt 83% of its RAMSI funding on law and order, a mighty $2.2 billion, spending only a tenth of that sum on the economy.
So many dollars were spent on the cappuccino cops because Canberra was more scared about a failed state on its doorstep than about the future of ordinary Solomon Islanders. ‘The intervention…is in part about reducing the danger that vulnerable Pacific island states will become havens for transnational crime, including terrorism,’ said Australian Prime Minister John Howard in November 2003.
What most people want is not just security but health, education and a better standard of living, which requires economic development. Economic growth would have created long-term stability and employment, and in turn the tax revenues for the state to provide for its citizens including hospitals, schools and, ultimately, security. Ploughing money directly into the police and law should always have been a short term measure; a stop gap until the country could fend for itself.
Of the money spent on the economy, very little was on infrastructure or the vital ingredients of development. It’s telling that the pillar of RAMSI devoted to the economy was called ‘economic governance’, as if only oversight was needed rather than full scale intervention.
Travel almost anywhere outside Honiara and you’ll be struck by the terrible state of the roads and bridges. Inter-island air and sea transport remains unreliable and irregular. Access to water and electricity is among the worst in the region. The tiny private sector simply can’t supply these vital needs, and donors must step in to provide them. If RAMSI had an economic strategy it appears to have been based on the misplaced hope that by studiously ignoring the economy and building, literally, Adam Smith’s famous ‘night watchman state’ the economy would flourish spontaneously.
As we have seen, it didn’t. Economic development is about structural transformation; an alteration in the composition of the economy so that it moves from an agrarian, subsistence society into higher value-adding activities in services and manufacturing. Basic infrastructure enables those things to happen. Most successful developing-country governments performed a number of other key activities to grow productive capacity, including expanding investment, savings and the diversity of exports.
The sad truth is that if you’d simply handed the $2.6 billion to Solomon Islanders they’d have done a better job of spending it. It’s the equivalent of 5900 Solomon dollars a year per adult over the decade, enough to meet one person’s entire basic needs.
Despite the goodwill and dedication of many of the figures involved with RAMSI, the mission ultimately did not allow Solomon Islands to stand on its own two feet and to operate as a successful independent economy. The problem wasn’t that RAMSI was too expensive, it was that far too much was spent on law and order and not enough on building infrastructure and changing the composition of the economy, with the ultimate aim of improving the lot of the poor.
The Lime Lounge continues to prosper and the police still start the day with a RAMSI breakfast, but many Solomon Islanders are ruing a missed opportunity.
Image courtesy of the Australian Civil-Military Centre.
The no campaign portrays Scottish independence as a leap into darkness. Within the union, the conventional reasoning goes, Scots know what they’re getting.
Project Fear therefore thinks it only needs to periodically tweak the buttons on the scare-o-meter and Scots will scurry back to their tellys, allowing Westminster to carry on undisturbed.
Quite the contrary. Many Scots are figuring out that the union could prove more unpredictable than independence. Here’s why:
1. UKIP is a source of immense uncertainty. In Thursday’s European election Farage’s rabble is expected to win up to two-fifths of the English vote, as many as 41 seats, making it the biggest single party. At minimum UKIP looks set to double its support from the last euro poll. The Daily Express says this amounts to a rewriting of the electoral map.
I’m not so sure. UKIP is a bonkers party with nonsense policies. Like the British National Party its light will hopefully fade as the anti-EU protest voters realise that they don’t want these plonkers running Britain. The 2010 manifesto, which Farage labelled “drivel”, called for “taxi drivers to be required to wear uniforms, dress codes for the theatre and for the Circle line on London’s underground to be made a circle again.” The new manifesto is little better.
But in the meantime UKIP is dragging the other parties to the right and prompting them periodically to blurt out ill-considered statements on immigration and Europe. The prospect of UKIP getting even a seat or two in Westminster is horrifying, and holds open the prospect of Labour and the Tories competing with each other to out-Farage Farage. Who knows? Scottish politics is more predictable.
2. The promised referendum on EU membership means Scotland may be forced to choose between a union with England or with Europe: another source of scariness which Scots can’t do much about. Scots may go to the referendum in the knowledge that England could vote to quit the EU. Contrary to what the no campaign says the EU is unlikely to freeze out Scotland. Ditching Brussels may even create more instability than severing ties with Westminster.
3. The bursting of the London housing bubble will cause another economic downturn. London house prices have leapt by an average of £80,000 since the beginning of the year, a rate of change last seen in October 2007 at the start of the global economic crisis. That means that in less than half a year prices in the capital rose by enough to buy a decent semi in Falkirk. The average asking price is now nearly £600,000, almost four times the level in Scotland, which has a more rational market. The housing wealth of just 10 London boroughs could buy all the homes in Scotland, Wales and Northern Ireland combined.
Japan’s asset price explosion carries eerie parallels. In 1989 the land underneath Tokyo’s Imperial Palace was rumoured to have been worth as much as the entire state of California in the same year. We’re not quite there yet, but the Japanese crash caused the economy to flounder for decades. Scotland should distance itself from any similar calamity.
4. The London financial sector remains the biggest source of risk for the UK economy. Independence would reduce this source of instability for Scotland. City cheerleaders tout the square mile as a source of strength when in fact the banks avoid more tax than other industries, create fewer jobs, suck in talent which would be better employed in productive industries and over-concentrate economic activity. Finance caused the global crisis and has even been described as a curse. Scotland’s economy is more diversified than England’s. All popular Scottish parties recognise the risks of over-reliance on finance.
5. Scotland plans to use North sea oil to foster stability. Scottish parties broadly support the oil fund and talk of the need to invest the proceeds from oil or use it to pay down the debt, unlike the Westminster parties which would continue to fritter it away. Nobel prize-winner Joseph Stiglitz was correct to say that Britain should have invested its oil revenues from the start instead of squandering them to prop up the shaky 1980s economy. Thatcher’s public spending cuts were only viable because of a readily-available stream of hard cash. If Scotland stays in the union there’s no reason to believe much would change.
6. Scotland’s electoral system improves policy certainty. The first-past-the-post system, as is well known, means Westminster parties can foist half-baked policies on to Scotland without having to bear the consequences. There are more pandas in Scotland than Tories, so they can test out their inegalitarian schemes north of the border first without losing MPs. Think poll tax and privatisation. Who’s to say they won’t punish Scotland further if it votes no in September?
A winner-takes-all electoral system generates boom and bust. The Condem coalition is currently praying that it can sneak back in before the property bubble pops, a bubble it has purposefully pumped up in order to make its own electoral base feel richer. Holyrood is more consensual and gradualist – not because Scots are more touchy-feely, but because the system was designed that way. And the white paper is in effect the SNP manifesto, bringing greater clarity to the debate than any Westminster party is able to.
7. Continued austerity makes everyone worry about the future, not just those whose benefits are being cut. The cuts have plunged 36,000 Scots into poverty, causing some with mental health issues to starve to death or kill themselves. One charity boss called this a “crime against humanity”.
At a less extreme level, unemployment benefits calm people’s fears about their prospects and allow the temporarily jobless to look for work: it’s called social security for a reason. Independence would create the opportunity to build a fairer society. More equal societies are usually more stable, with less poverty and crime, better education and more cohesion.
8. Economic stagnation throws doubt over jobs and wages. Even if you’re lucky enough to have a job, you’re likely to be worse off now than six years ago given that on average real wages have fallen. Unemployment is stuck stubbornly at over 7%, while economists talk of ‘secular stagnation’ – code for permanent slump. Scotland’s economy has grown slightly faster than England’s since the start of the crisis because investment has been higher, partly the result of Scottish government policies. All the signs are that any independent government would reflate the economy and tackle unemployment.
Osborne’s ultimate economic scare story – that he wouldn’t let Scotland keep the pound – is just bluster. It’s not likely to be his decision anyway, and why would England purposefully cripple its main trading partner? Even if Scotland were excluded from a currency union it could use the pound if it wanted to, just like the 20 or more countries which use the dollar or peg their currencies to it without Washington’s say-so.
Don’t believe the scaremongers. In a sense the union has always been a source of uncertainty for most ordinary Scots. They’d be safer distancing themselves from the Westminster stramash and crafting sane policies which Scotland actually voted for.