The one-handed economist

Leander writes*

Costa Rica (CR) has long been celebrated as a trailblazer of sustainable development and successful ecosystem conservation. Their pioneering implementation of a national program for the payment for ecosystem services (PES) has received a lot of international attention. CR managed to reverse the deforestation that cost it up to half of it its original forest cover by 1987. As of 2020, its forest cover reached 60% with the PES program being said to play an essential role. Yet, the impact of the PES program on environmental conservation and economic development is not exactly clear.

In the second half of the 20th century, CR had some of the world’s highest deforestation rates, declining from 75% cover in the 1940s to 25% cover by 1995. CR introduced its PES program in 1997, called “Pago por Servicios Ambientales” (PSA). A PES program effectively is the economic evaluation of environmental or ecosystem services, such as carbon sequestration, and is a system of payment incentivizing landowners to conserve the existing biodiversity on their land instead of allowing other uses. The national government expanded the PSA as its popularity  increased, introducing payments for agroforestry to increase incomes of farmers, for example. More than 18,000 families benefitted from the PSA between 1997 and 2019.

However, while it seems like the PSA not only provided a steady income to thousands of families, but was the driving force behind CR’s reforestation success, evaluations of the programs impact do not show such clear results. So far there is no clear consensus on the impact of the PSA; some research shows no clear effect on forest conservation. Instead, other conservation policies, such as the ban on deforestation, are said to play a bigger role in CR’s progress.

Moreover, the PSA has been accused of suffering from unequal access to payments for environmental conservation. The program has been found to generally benefit large landowners and to exclude the rural poor from participation as a result of historical agrarian settlement patterns and the inability of the state to recognize certain property claims.

The PSA program has weaknesses and its impact on employment and economic development are unclear, but it has potential. If the authorities stay flexible and adaptive to changing circumstances and weaknesses are continuously corrected, then the PSA program can improve its efficiency and equity substantially. Upcoming expansions and improvements of the program, such as the Mixed Systems scheme aiming at small landowners and farmers give hope that the PSA might correct weaknesses such as the unequal access to the program’s benefits.

Bottom Line: Costa Rica’s Payment for Ecosystem Services program can boost environmental conservation and economic development if its weaknesses (such as unequal access) are addressed and the program can adapt to changing circumstances.

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* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Ashley writes*

On April 1st 2022, a Memorandum of Understanding was signed between the President of Indonesia, Joko Widodo, and the Prime Minister of Malaysia, Ismail Sabri Yaakob, committing to improving the safety and protection of Indonesian migrant workers in Malaysia. This agreement came about after several reports and complaints were filed on the abuse of migrant workers. At the same time, Malaysia is experiencing a shortage in foreign labour due to government measures to protect locals during the Covid-19 pandemic.

How can we make sense of the contradictions facing migrant workers in Malaysia? How do Malaysia’s migration policies affect labor?

It is estimated that there are two million legal migrant workers and two million undocumented migrant workers in Malaysia, most of them coming from Bangladesh and Indonesia. In total, they account for 15% of workers — a similar share to Indians who are the third largest ethnic group in Malaysia.

This is hardly surprising, given that migrant workers have always been an integral part of Malaysia’s economic development model, especially during its transition from lower to upper-middle income. During the colonial era, Chinese immigrants worked in the tin-mining industry, while indentured Indians from British India worked in agriculture and transport. These early migrant workers contributed directly to the development of industries, infrastructure and as a result, the economy of Malaya, and later assimilated themselves to become Malaysians.

Malaysia’s businesses are still heavily reliant on cheap migrant workers.

Migrant workers are subjected to abuse, discrimination, poor living conditions and other human rights violations. Many are forced to work off their debts resulting from trafficking, face risk of sudden termination, arrest or detention. Since they are also assimilating, it is important to help migrants integrate in harmony with the local population.

Bottom Line: In Malaysia, migrant workers are vital for economic development but their treatment is detrimental for social development. My research seeks to investigate active labour migration policies as a way of understanding this co-existing relationship between economic and social development in Malaysia.  

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* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Mimoza writes*

The tradition at Turkish weddings is to pin gold on the bride, in lieu of getting the newlyweds a present, as a way to help them start off their married life in prosperity. However, now due to the high inflation, couples prefer dollars to gold coins.

Turkey has been facing a financial crisis: the Turkish lira has fallen from 3.50 to the US dollar (May 2017) to 18 per dollar (Dec 2021), and inflation reached 68% in April, where it is expected to stay for some time. The COVID-19 pandemic has directly harmed income and employment by reducing travel to a country that relies on tourism for 4% of its GDP and almost 10% of employment.

The COVID pandemic has only been an issue for 18-24 months. President Reccep Tayyip Erdoğan’s counter-productive economic policies are older. His influence of the Central Bank overheated the Turkish economy. Excess growth and artificially low interest rates have spurred inflation and strained supplies of the lira: “Sometimes we cannot find money,” said a 29-year-old bike courier in Istanbul to the New York Times.

Traditional economic theory posits that a weak currency will stimulate foreign investment and exports, thereby producing economic growth. The case of Turkey, however, lines up with structuralist economic theory: inflation and devaluation have increased production costs and constrained economic growth. Turkey, for example, depends on imports of automobile parts and medicine so the devalued currency has raised costs and reduced exports and income.

Devaluation has not only reduced purchasing power for citizens but economic growth. Combined with a multitude of other deviations from orthodox economic policy (i.e., overuse of external financing, not regulating the exchange rate, etc.), the Turkish financial crisis harms the economy and increased political unrest.

Turkish brides must be hoping for enough dollars to keep the lights on.

Bottom line: The Turkish Central Bank needs to employ traditional economic remedies to their financial crisis, i.e., increasing interest rates to decrease liquidity and spending and support the lira. On a longer time horizon, Turkey needs to free its central bank from political interference, if it wants fiscal stability and economic prosperity.

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* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Hannah K writes*

Like many developing states, Gulf countries like Qatar, Saudi Arabia, and the United Arab Emirates (UAE) have largely resource-dependent economies. However, in contrast to other states, these countries have apparently managed to escape the negative effects of the resource curse (Hollo, 2013).

This blog post aims to provide some basic background information about Rentier State Theory (RST), which is crucial for understanding the Gulf state’s development trajectories. In short, the rentier state is a state that relies on “rents” or income from foreign individuals, governments or corporations in order to sustain its economy (Beblawi, 1987). Resource-rich nations often fall into this category as foreign companies are heavily involved in resource-extraction and export. In the second half of the twentieth century, three key academics reimagined the workings of the rentier state in the context of the Arab world: Hazem Beblawi, Giacomo, and Hossein Mahdavy. All of them predicted that, in the long run, the oil states would succumb to the pitfalls of the rentier state both politically and economically, since rentier states discourage productivity when they “buy” loyalty from citizens (Schliep, 2017).

To critically assess the role of RST in the development of the Gulf States, it is necessary to understand the theory’s main arguments. According to the literature, rentier states cannot diversify their economies. They remain reliant on oil and gas revenues to maintain political stability, and labour market imbalances further pose a big challenge to shift the economy away from natural resources (POMEPS, 2019). Labour market imbalances are exacerbated as societies become prone to a “rentier mentality,” which discourages citizens from taking an active role in political and economic life (Beblawi, 1987). Rentier states that are unable to develop or grow collapse into economic stagnation and political stability because they cannot appease their population (Schliep, 2017).

Now, almost fifty years later, how do the predictions hold up? Arguably, there are some missing elements of RST. The Gulf countries have seen sustained economic growth, but also unprecedented investment in key economic sectors for sustainable development. Somehow, they appear to have escaped the resource curse. Dubai is a prime example, as it has shifted the focus of the economy from rapidly depleting oil and gas exports to becoming a hub for international business, indicating an ability to diversify the economy (Hollo, 2013). These results seem to undermine the idea that political stability is rooted in buying loyalty.

Bottom line: Rentier State Theory simply falls short in explaining the current development trajectories of the Gulf States. There is clearly a more complex system in place that encourages long-term investment into the economy.

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* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Jacob writes*

Energy is an integral part of development, anywhere in the world. Research shows, that access to productive energy is crucial for economic growth, but also for education, health, and environmental protection. However, in many countries there are huge inequalities when it comes to access to sustainable and productive energy. In Ethiopia, among the rural population only 51% had access to energy, whereas for urban dwellers it is 93%. Strengthening and intensifying agriculture, the main source of revenue in the periphery, is however crucial for economies and demands an increase of productivity through energy access.

This is the goal of Energizing Development (EnDev), a developmental initiative driven mainly by the Dutch and German developmental agencies. Through market-based measures, it aims to increase both rural supply and demand in energy. In the project “Sustainable Energy for Smallholder Farmers (SEFFA)”, it tries to combat rural poverty and rural-urban energy inequality. Strengthening the private sector to supply better and cheaper products, as well as increasing the capability of customers to pay for installing solar power mini-grids, are on top of the agenda. This is in addition to the social mission EnDev undertakes, which includes empowering women and youth entrepreneurs.

Sounds great, right? However, some aspects of the project are not entirely clear. One of the main aspects of SEFFA is the provision of energy systems through private sector empowerment. But it is opaque how the state is involved in the actual delivery of the project in Ethiopia. Leaving the state on the side, and not increasing its capacity to run similar projects in the future, is dangerous and can in the worst cases even increase inequality in the long run. Additionally, there is low awareness among the rural population about ongoing energy access programs. Other research has shown that empowering marginalized groups among the rural population, most notably women, is crucial for the development of the agricultural sector in rural areas. Increasing their stake in a participatory program is therefore crucial. EnDev’s “target” of having 25% of project beneficiaries being women, does not necessarily ensure active participation, nor does it include accountability mechanisms. As Ethiopia’s economic output has more than tripled in recent decades, it becomes crucial to ensure the equitable provision of services, not only for the duration of ongoing projects but in the form of permanent systemic improvements.

Bottom line: The provision of energy access, which is crucial to development, is unequally distributed in many regions of the world. To combat this inequality and be responsive to social challenges, such as gender inequality, on the long term developmental agencies are required to bring in the state and strengthen capabilities, while identifying the most effective solutions.

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* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Clara writes*

The myth that exploiting the unconventional reservoir of oil and gas of Vaca Muerta in the Patagonia region would “save Argentina” has been spreading fast in the country. Both right- and left-wing governments have claimed that exploitation would make Argentina the new Saudi Arabia of Latin America and that energy sovereignty would be finally achieved.

Vaca Muerta is a rock layer at 3000 meters depth containing large endowments of fossil fuels over an area the size of Belgium. Exploiting the reserve requires fracking — or hydraulic fracturing — which works by drilling wells and using water at high pressure to extract the fuels. Fracking has been controversial due to the high socio-economic and environmental impacts connected to it – such as pollution, higher risk of earthquakes, and displacement of people. Recent governments are pro-fracking because they prioritize economic growth. Environmentalists, indigenous and local communities oppose fracking because they prefer sustainable social development and environmental justice.

Fracking in Vaca Muerta has brought new clashes with the Mapuche indigenous people, revealing different perspectives on development and the human-nature relationship. Pro-fracking actors argue that fracking occurs in unpopulated Patagonian areas, but Jorge Nahuel — the representative of the Mapuche Confederation in Neuquén — disagrees: in his province alone, fracking is affecting fifty Mapuche communities by displacing them from their land and polluting their environment.

The Añelo Lof – the main social organization of the Mapuche people –  already  suffers from water and air pollution that damage their flora and fauna, affect community life, and alter their traditional worldview. Pollution is blamed for the death of the Lof Gelay Ko’s chief from respiratory problems. Furthermore, the expansion of the extractivist frontier has also challenged indigenous land sovereignty. The Lof Campo Maripe have endured a long judicial processes to affirm that they, not fracking industries, are owners of the lands.

The tension between indigenous people’s rights and the economic gains that come with the extractive industry reflects the different understandings of development and the role of nature between the pro- and anti-fracking actors. The State hopes that economic growth save the country and catalyze development through capital inflows and energy self-sufficiency, but it ignores the negative environmental outcomes in Vaca Muerta.

The Mapuches have a broader definition of development embedded in their worldview of Kvme Felen (or “living well”), a holistic viewpoint that sees harmony and circularity in the different components of life such as politics, environment, and spirituality. In their perspective, nature and humanity are in a constant synergetic relation, with nature sustaining and premitting life.

Vaca Muerta reveals the tension between economic growth and sustainable development. The Mapuches communities have long resisted “fracking-as-savior” in favor of a Kvme Felen, or integrated development, framework.

Bottom Line: Argentina’s government supports fracking at Vaca Muerta, choosing economic growth over sustainable development and environmental justice. This position has displaced Mapuche communities, violated their Kvme Felen worldview, and radically altered their synergistic relation with nature.

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* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Hannah H writes*

According to Iain Hay and Samantha Muller, we are in a “Golden Age of Philanthropy” due to the unprecedented donations from the ultra-rich to philanthropic causes in recent years. Take a look at the Giving Pledge; since its founding in 2010, this voluntary commitment by the world’s richest to give away the majority of their wealth to philanthropic causes has amassed $600 billion of pledges.

But it is not only the sheer sums pledged that set recent years apart; the entrance of more businesspeople into the world of philanthropy, who Matthew Bishop calls “philanthrocapitalists”, brings a new mindset to development. Gone are the days of anonymous donations to established charities working to eliminate extreme poverty around the globe. Instead, foundations set up under the names of their financiers look for efficiency, growth, and scaling in causes. The websites of the Bill and Melinda Gates Foundation and the Chan Zuckerberg Initiative are peppered with references to “strategic investments” or “ventures.” In this new era of philanthropy, the ultra-rich treat poverty alleviation as a business.

Philanthrocapitalists are bringing market-based approaches to poverty reduction which, as Kate Cooney and Trina Shanks explain, aim to remove “the barriers that prevent the poor from participating in markets as both producers and consumers,” i.e., poverty traps. The idea that the market has the potential to reduce poverty is not particularly new. Henry Ford paid employees good wages so that they could afford his Model T. Today, the most widely used market-based solutions include micro-financing, the provision of low-interest loans to individuals to invest in small businesses or projects, and asset-building, often in the form of matched savings accounts to help individuals build wealth.

Market-based approaches are somewhat successful. Microfinance has funded a range of projects, such as developing local capacity to produce medical equipment and insuring small businesses against risk. Moreover, over 95% of loans are repaid which is substantially higher than, for instance, the rate of student loan repayments in the US. Proponents of market-based approaches believe that the outcomes improve on traditional approaches: growing wealth produces positive externalities in nutrition and education and solutions are more sustainable.

Critics of market-based approaches worry about risk. One of the arguments in favour of philanthrocapitalism is that it can take risks that governments can’t, meaning that projects which previously struggled can get funding. But what happens when risks are undervalued or ignored? At the very least it could lead to wasted dollars, but there are also examples of where microfinance loans have only acted to push people further into debt.

There are also limits to what market-based approaches can achieve. While market-based approaches can grow the capacity of small businesses, it is harder to see how they can train healthcare professionals or build schools. In these cases, other solutions might be better.

Bottom line: Market-based approaches to poverty alleviation, which have gained prominence in a new era of philanthrocapitalism, offer new pathways in the fight to reduce poverty and inequality. However, it is possible that its potential is over-stated and its risks under-acknowledged.

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* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Taleen writes*

While it is impossible to determine one specific cause of the outbreak of the Lebanese Civil War (1975-1990), it cannot be denied that the religious division that is so deeply ingrained into Lebanese society played a massive role. This is evidenced by the fact that each party involved in the multi-faceted war was determined by religion. For example, the Druze religious sect’s militia was the the Progressive Socialist Party, and the Muslim Shia religious sect’s militia was the Amal Movement (Abouzeid, 2021).

After 15 years of conflict, bloodshed, and death, the Taif Agreement was introduced to Lebanon in hopes to put an end to the war. Interestingly, one of the main conditions of the agreement was that once the war would end, the government was to be restructured according to a sectarian regime (Nagle & Clancy, 2019). This was to be done using religious quotas for parliament seats — e.g., 34 seats for Christian Maronites and 27 seats for Muslim Sunnis (Rosiny, 2015). The thought process behind this was that no single religious group would be able to gain enough power to have an unfair political advantage over the others.

The implementation of a sectarian regime was also done in foolish hopes that somehow this would phase out religious division and reduce hostility and animosity between the sects; it did not. In fact, it did the complete opposite. One particularly interesting piece of evidence that corroborates this is how the Taif Agreement manifested a physical divide among the religious sects which severely reinforced the societal divide. To elaborate, after the Taif Agreement was signed, the strategy that was implemented in order to disarm all militias in the country physically solidified divisions among the faiths, erasing any hope of creating a socially cohesive society.

The strategy in question dictated that the Druze Progressive Socialist Party would retreat to the Chouf mountains, the Shia Amal Movement would withdraw to the eastern Bekaa, and the Maronite Lebanese Forces would go north to the Kesrouan range. The figure below depicts the current distribution of Lebanon’s main religious groups.

One can easily see that the religious groups remained in their designated areas, resulting in societal divisions that remain to this day. The Taif Agreement failed before it was even fully implemented.

 

Bottom Line: The Taif Agreement aimed to end the civil war and remove  religious divisions amongst the population, but it failed miserably by physically embedding those divisions into Lebanon’s map.

 

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* Please help my Economic Growth & Development students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).