Thank god for maquiladora growth?

Diego writes*

In the 1960s, Mexico created a program to help northern Mexican states develop. The “Border Industrialization Program” (BIP) led to the birth of Mexican maquiladoras (Truett and Truett, 2007). Maquiladoras are foreign-owned firms exempt from import tariffs on (US) inputs that can therefore export finished manufactured goods more cheaply back to the US.

The BIP led to impressive employment growth — from 76,000 workers in 1974 to 1.3 million workers in 2000 (Truett and Truett, 2007). Carrada-Bravo (1988) argue that these jobs also pay more since they relate to international trade; Durand (1994) adds that the large share of women in these jobs empowers women and frees them from depending on their partners to survive.

So maquiladoras improved living standards for for Mexicans, right?

Maquiladora employment growth from 1975 until 1999 (Gruben, 2001)

Unfortunately, no. U.S. companies are exploiting the BIP in two ways:

First, maquiladora workers are paid less than they would be in the US, i.e., $4.01 per day rather than the US minimum wage of $16.17 per hour (Durand, 1994). Low wages limit improvements in workers’ standard of living. President Salinas de Gortari (1988-1994) did not want to increase and discourage  foreign investors (Durand, 1994).

Second, maquiladoras do not have a safe and clean working environment (Durand, 1994). The working conditions are comparable to sweatshops in the United States during the early stages of industrialization (Durand, 1994). The Mallory battery plant in Matamoros, for example, allowed pregnant women to handle highly toxic chemicals with only rubber gloves for protection.

Since American FDI comes with disadvantages, U.S. companies must decide if they want to ignore or improve the working conditions. DeGeorge (1997) explores two views on U.S. corporate responsibility:

  1. “When in Rome do as the Romans do.” A U.S. firm need only follow Mexican standards without worrying about corporate responsibility.
  2. “The Righteous American View.” U.S. firms should follow U.S. standards when abroad as part of their corporate responsibility.

Should U.S. companies follow the Roman or Righteous view? Personally, I think the Mexican government should recognize the detrimental conditions of workers in maquiladoras and enforce the Righteous view, especially since very few companies are doing so voluntarily.

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

The Portuguese minimum wage

Matilda writes*

The minimum wage in Portugal has steadily increased throughout the years, to account for inflation and a rising cost of living. Yet, workers who receive the minimum wage testify that it is not a “living wage” as they often cannot afford food by the end of the month (Público, 2021).

As of 2022, the minimum wage in Portugal is €705 per month (Pordata, 2021). Prime minister Costa proposes to increase the minimum wage to €900 per month in 2026 (Público, 2021). However, accounting for a 5.3% of inflation in 2022 and projected inflation, this prediction for 2026 does not rise above the trend established in 2014, when the Financial Assistance Program — triggered by the 2008 financial crisis — ended (Pordata, 2021).

Interviews with full-time workers earning the minimum wage could not afford rent, heating, food, and medical expenses; extended family had to live together, draw on food banks and food subsidies, and still ran short by the end of the month (Público). According to the Instituto Nacional de Estatística (2020), the proportion of full-time employees earning the minimum wage has risen from 8.1% in 2009 to 25.6% in 2019. As of 2020, 9.5% of the employed population faces poverty (Pordata, 2021).

Minimum wages are supposed to lift people out of poverty, but they seem to keep people in poverty and depending on help from family (Diogo et al., 2015). An interviewee even suggested that minimum wages in Portugal are an excuse for employers to keep wages at the minimum (Público, 2021).

Under the European Comisson’s Pillar of Social Rights, minimum wages should “provide for the satisfaction of the needs of the worker and [their] family in the light of national economic and social conditions” (European Comission, 2022). Portugal does not comply with this definition.

In a study on the “impact on firms of minimum wage policies in Portugal,” Alexandre et al. (2022) suggest that an increase in the minimum wage would weed out inefficient “zombie” firms and firms that exploit workers.

An increase in the real minimum wage does not seem to be on the political agenda — Portugal dissolved its parliament in 2021 after failing to  approve the state budget — but an increase could increase standards of living, increase productivity, and weed out inefficient firms.

Bottom line: Increasing the minimum wage as a palliative measure for inflation does not protect workers from poverty and may perpetuate exploitation of workers and of inefficient industries.

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

The making of a Guadeloupean identity

Etienne writes*

Although they all share a colonial past, the Lesser Antilles have since gone in very different directions. Many islands have obtained their independence (Saint Lucia, Saint Vincent & the Grenadines, Saint Kitts & Nevis…) but others are still overseas territories of their former colonial powers (Guadeloupe, Curaçao, Puerto Rico…). Studies have shown that dependent Caribbean islands tend to perform better economically than their independent counterparts. However, “is that level of development sustainable or desirable since they [dependent islands] are often strings attached?” Indeed, economic support comes at a cost: dependent islands have less formal autonomy and socio-cultural differences with the “metropole” [the ruling country] are often less recognized. The French overseas territory of Guadeloupe is an example of how dependent islands attempt to balance their lack of autonomy with spontaneous identity-building cultural movements.

It all started with Kassav’. Formed in 1979 by Pierre-Édouard Décimus and Jacob Desvarieux, the band quickly became famous in the French Antilles and abroad. In an island that had undergone no real decolonization process —the land of plantation owners was not redistributed, self-determination was minimal—, Kassav’ altered Guadeloupeans’ self-perceptions and shaped Antillais identity in a revolutionary way. Paul Cohen argues that Kassav’ “represents an inventive cultural and commercial response to structures of neocolonial and capitalist exclusion in the French Caribbean”. Inspired by their first trip to Africa, the band’s album Gorée —named after the island off Dakar from which slaves were deported to the French Antilles — faces the island’s colonial heritage. The song An-ba-chen’n la (‘Chained Below’) pays homage to the victims of the transatlantic slave trade. The band calls on Antillais to take pride in their African heritage in the song Doubout pikan (‘Standing Tall’). In Neg mawon / balata, they remember the runaway slaves who joined Native Caribs to form highland societies away from colonial power. Interviewed by Gladys Francis in 2016, lead female singer Jocelyne Béroard highlighted the importance of bringing Amerindians to the core of Antillais identity as the first inhabitants of the island.

Compensating for Guadeloupe’s historical amnesia, Kassav’ initiated through its music an effective decolonization process that contributed to Antillais identity. Others have followed their tracks: Soft, formed in 2002, continues Kassav’s (unconscious) nation-building project, with an even more political stance. In songs such as Ti gwadloupéyen and La vi fofile, the band remembers the colonial injustices of the past and promotes a new Guadeloupean identity, reminding the “ti nèg ti blan ou ti zindien” (‘little blacks, little whites, and little Indians’) that they are “ti gwadloupéyen” (‘little Guadeloupeans’).

Bottom line: Although dependent Caribbean islands benefit from economic support from their metropole, they often face an identity crisis due to the lack of decolonization and to their formal non-differentiation with their former colonial power. However, cultural movements have arisen to shape identities and counter neocolonialism. In French Guadeloupe, the band Kassav’ has shaken an historical amnesia, pushing Antillians to face their colonial past and form a common identity.

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

Corruption in Kenya’s Education

Tanne writes*

The Free Primary Education (FPE) policy, introduced in 2003, aims to increase accessibility to primary education in Kenya. Whilst student enrollment in primary education skyrocketed afterwards, many have argued FPE reduced educational quality. Kenya’s education system suffers from a high student to teacher ratio, absence of materials, lack of electricity, bad quality of buildings, and unequal treatment of students. Consequently, low-cost private schools have often become a preferred option for parents. Nonetheless, the latter do not provide better quality of education due to the same systematic problems.

In this blogpost I aim to explain how corruption has played a crucial role in complicating Kenya’s development of the educational system, and how geospatial data collection and publication could help solving problems of misallocation.

Corruption in Kenya’s education sector comes in varying forms, from the large-scale scandal in which (international) FPE money for 4 million Kenyan children was misappropriated to lower-level corruption practices such as bribery for entering university without qualification, to ‘sex for grades’, to tribalism in allocating jobs and promotions for teachers. The complex nature and context in which these practices take place, and the contribution of the government to these scandals, could explain why efficiency of the education sector is low and quality is seen to have fallen.

Where education management gets complicated due to a limited number of resources, ICT facilities for optimal management could be a solution. Currently the teacher:student ratio in Kenyan schools is 1:40, 1:120, and 1: 250 for tertiary, secondary and primary levels, respectively. Investing in ICT facilities that distribute geospatial data on educational quality to communities has been proven to be an efficient tool for understanding gaps in Nigeria. Where it allows for 1) sharing knowledge on technology and problems, 2) understanding on where huge funding gaps are, and 3) understanding disparities between regions, transparent publication of the results additionally allows for local communities to understand how much of the money their educational institution spent appropriately. Teachers in non-governmental schools, who often do not show up to work, can this way be held accountable by communities; such bottom-up pressure could reduce corruption.

Though a myriad of challenges is to be overcome to reduce inefficient spending and corruption within the education system of Kenya, mandatory cross-regional data collection by using the available ICT facilities, and consequently transparently publishing the findings towards the education-consuming communities, could be a possible solution worth investigating.

Education offers a path to development. It would be a shame if this opportunity was lost to corruption.

Bottom Line: Corruption has limited the success of Kenya’s Free Primary Education policy. Better data collection and distribution could increase transparency and thereby increase accountability and performance in schools and government ministries where corruption is all too common.

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

Why Are We Saving KLM?

Marthe writes*

It has long been argued that airline KLM and Amsterdam airport Schiphol are ‘the engine of the Dutch economy’. These companies have been favored in policymaking, but there is no data available that shows their impact on the Dutch economy and they are among the most polluting organizations in the country. KLM has received much more COVID support than other businesses, €5,1 billion, of which €1,7 billion supported wages and €3,4 billion represented ‘loans’ (as of now). The loans come from two places: €1 billion comes from the government (i.e., taxpayers) and will likely be gifted to KLM; €2,4 billion comes from banks. The government guarantees 90 percent of the bank loans, again, with taxpayer funds.

The five conditions of these loans are vague and seem to contradict the government’s climate goals. First of all, KLM employees will receive a lower salary until 2025; putting relatively more of the burden on the ‘normal worker’ instead of bosses. On top of this, KLM employs over 350 pilots and 330 cabin crew who live in countries with lower taxes than in the Netherlands; KLM’s “free commute policy” arguably facilitates tax evasion. Second, as long as KLM receives financial support, no bonuses and dividends will be paid; the big majority of these usually go (untaxed, as they are bonuses) to the inner elites with high salaries. Third, KLM will reduce the number of night flights from 32,000 to 25,000, but no deadline is mentioned. Critics assume that flights can be increased again in the future. Fourth, KLM should reduce CO2 emissions by 50 percent per passenger kilometre by 2030, but ground emissions are not included. And fifth, in 2030, 14 percent of KLM’s fuel will be sustainable. The last two conditions seem quite unambitious to me.

Politicians have thus far been incapable of producing convincing arguments as to why KLM is being favored. One repeated argument is that the Dutch aviation sector supports jobs: politicians keep repeating 370.000 jobs. Funnily enough, the study supporting this figure includes 55,000 jobs that do not belong in a ‘pure’ macroeconomic analysis and counts 173,800 jobs twice. Even if the aviation sector was responsible for a lot of jobs, there is a general job surplus in the country and research shows that employees from this sector can be retrained relatively quickly. On top of this, working conditions and wages at KLM are terrible, as witnessed by recent strikes at KLM and Schiphol.

Another argument is that KLM helps Schiphol stay big and compete with other airports. But when airports outbid each other with more development space, the absolute number of flights will increase too. More destinations, more options, more competition, lower prices which, from a climate point of view is catastrophic. CE Delft found that Schiphol’s current growth plans will cost the Netherlands €2.3 billion to €3.1 billion over the next 100 years.

It is important to note that while KLM — besides adding less to the economy than claimed and costing taxpayers money — also has negative equity of almost €4 billion and €34 billion in debt. In 2021, interest payments cost over €1 billion. While these are not included in the operating results, thus easily ignorable by policymakers, it remains unclear why the government seems so keen on saving KLM.

Bottom line: It is unclear as to why the government goes above and beyond to save KLM, which loses money, is not significant for the economy, and hinders progress on climate goals.

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

Interesting stuff

  1. Read: How polyester bounced back (from disco to rock climbing)
  2. Read my letter to The Economist on water scarcity in California
  3. Listen: This is one of the best discussions of “value” in meme stocks and cryptocurrencies (i.e., value is a social construct) that I’ve heard. Related: Nobody escapes inflation.
  4. Read: How the fitness industry (in the US) has failed to improve health
  5. Listen: A psychologist discusses happiness, success and “being full”
  6. Read: Michael Lewis on why Americans don’t trust experts and (another episode) on how people get screwed by finance companies
  7. Read: How to sample before making the right a good decision (37% rule)
  8. Listen: Anthony Scaramucci is a lot smarter than his 11 days in the Trump Whitehouse would suggest (or maybe that’s backwards)?

How does human capital matter?

Eduardo writes*

Our capacity to learn and improve our skills is arguably the most important determinant of our future earnings. After all, we as students spend a considerable amount of money on education today as we expect a future payoff in terms of higher salaries or better jobs. This notion that investing in human beings today will provide returns in the future is central to the theory of human capital.

This concept has not only provided insights to how increases in labour skills and thus productivity is translated into higher income. More importantly, human capital has enabled economists to account for the growth residual given that capital and labour do not fully explain the totality of variation in economic growth. In other words, economists have found that human capital – conceived as the stock of skills and knowledge the labour force possesses – “is the main determinant of modern economic development”.

Of course, like any major advancement in research, the theory of human capital did not come without important criticisms, such as treating humans as just another form of capital. Human capital theory also suggests that the only purpose of education is to increase future incomes, which ignores other benefits such as satisfying intrinsic motivation or cultural aims.

In Capital in the Twenty-First Century Thomas Piketty argues that the importance of physical capital is likely to increase as it replaces labour. Branko Milanovic points out that human capital is inherently different than physical capital; the former requires “work” while the latter does not.

Regardless of the terminology or moral attributes, the concept of human capital has helped us understand how economies develop and grow. While before the 20th century economies grew mainly on a basis of physical capital accumulation, the importance of the knowledge economy has dominated the modern growth paradigm. Before, inequality or the concentration of savings among the top brackets of the income distribution was seen as a precondition for development. In contrast, contemporary findings suggest that inequality is harmful for growth and development. The shift is conceived in terms of the increasing relevance of human capital.

At the same time, relevant research suggests that institutions have an important effect on human capital development. This may lead us to think that certain institutional characteristics determine the process of human capita accumulation and subsequent economic growth. Thus, institutions may explain historical income divergences and inequalities among countries.

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

Is a $1 billion Grand Prix worth it?

Emma writes*

The specular 2021 Formula 1 season has resulted in skyrocketing popularity. The final race of the season in Abu Dhabi had 29 percent more viewers than the year before (Ruiz, 2022). Many cities want to benefit from F1 popularity by hosting a Grand Prix, which, local stakeholders claim, will boost their economies (Storm, 2019).

Hosting a Grand Prix costs a lot of public money (All Things F1, 2022). Is that spending worth it, in terms of boosting the local economy? A Formula 1 Grand Prix takes at least three days involving practice sessions, a qualifying session and many media events. The city also needs a suitable circuit, either a street circuit or permanent circuit. A permanent circuit costs $270 million on average but Abu Dhabi’s Yas Marina Circuit cost $1 billion. Street circuits are cheaper and quicker to construct, but their annual costs for converting back and forth are higher (Prydderch, 2022). A 2017 study by Forbes listed other costs for staffing, grandstands, barriers, buildings, insurance, and the hosting fee. In all, Forbes estimates that hosting a Grand Prix costs $1 billion per year.

The race promotor (often is the local government) pays these costs (All Things F1, 2022). Local governments argue that an F1 event will boost tourism, promote the city and boost the local economy (Storm et al., 2020). Ticket sales of (up to) $33 million only cover a fraction of costs. A Grand Prix also generates revenue for local businesses as local and foreign spectators spend money on hotels, food, drinks, and transportation (Remenyik & Molnar, 2017). The Grand Prix in Austin, Texas, increased local receipts by a three-year total $2.8 billion from 2012 to 2015 (Storm et al., 2020), which didn’t cover estimated annual costs of $1 billion. Perhaps a “multiplier effect” added to benefits by that’s hard to measure.

Bottom line: Formula 1 Races can benefit the local economy in terms of monetary costs and benefits, but maybe not.

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

Debt for nature: a win-win swap?

Max writes*

The global strain of public debt crossed $100 trillion at the end of 2020. While developing countries account for a fraction of this sum, they face the highest risk of debt distress due to higher financial scrutiny.  This enforces a feedback loop that does little to stimulate their growth or development.  The growing financialization of environmental goods in recent years has offered a promising lifeline for developing countries endowed with nature reserves in the form of “debt for nature” swaps (DFNs). As the name suggests, a debtor is granted a discount on their debts in exchange for a commitment to conservancy.  In the 2021 case of Belize, this meant a 12% nominal reduction in public debt.  The benefits to the debtor are clear-cut but what do the creditors stand to gain?

In recent years, the parties involved in DFNs expanded from rich creditor governments to include commercial bondholders.  In line with the growing popularity of environmental, social, and governance (ESG) in recent years, investors are jumping on these deals with an eagerness to tap new sources of income.  They are interested because of a new potential for financial returns.  To get a better understanding of how investors get their money’s worth, the case of Belize will be analyzed.

The DFNs were facilitated with the help of The Nature Conservancy (TNC), a US-based environmental NGO, the Belize Blue Investment Company (BBIC), which is a subsidiary of TNC, and Credit Suisse (CS), referred to as the “middlemen” from now on. The deal assumed a tripartite model wherein the middlemen paid off the bondholders of the “Superbond 3,” which in 2021 was trading 40% below its face value and carried high default risk.  On the secondary market, the bondholders were willing to accept the 40% discount because it was better than a default.

As a result, the Belize government’s debt fell by $363 million, but they agreed to a new, non-fixed 6% interest rate loan that would have to be paid back in 19 years. This critical step, which represents a profit opportunity for investors, was what allowed CS to raise funds to pay off the “Superbond 3” bondholders and assure investors. Since the DFNs were made in collaboration with the BBIC, through the Development Finance Cooperation, the US government promised to protect investors if the Belize government defaulted.  This is in addition to $28 million that will be paid out to CS and TNC in legal and advisory fees.

Hence, the debt was restructured and not forgiven; however, $24 million was made available for a national marine trust fund in addition to a promise of $4 million in investment to the fund by the Belize government.  This represents a direct investment in the country’s tourism industry which accounts for 40% of economic activity.

Bottom-line: You can’t eat the cake and have it. The DFN with the Belize government has unlocked new funds for environmental conservancy and prevented a looming default. However, the government is now on the hook for more debt, that it might not be able to repay.

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

A gender gap in financial literacy

Benthe writes*

Even though women have outnumbered men in Dutch universities since 2006, and girls on average score higher than boys on the national high school entrance exam, the female financial literacy (FL) rate is lower than the male FL rate across all age groups in The Netherlands.

The OECD considers a person ‘financially literate’ if they possess knowledge about the most important financial concepts and risks, and have the skills to apply this knowledge to make effective decisions in various financial contexts. FL is generally measured through three questions on interest rates, inflation, and risk diversification. Bucher-Koenen et al., (2017) found that while 55.1% of Dutch men answered all three questions correctly and would be considered financially literate, only 35% of women passed the financial literacy test. Women also performed worse on all three individual questions:

This discrepancy in male and female FL scores has some unfavorable consequences. For example, women’s lower level of financial knowledge means women are less likely to invest responsibly in the stock market, own company shares, and accumulate financial wealth. As such, women also benefit less from capital growth, leading to increased gender inequalities in wealth accumulation over time.

Additionally, being financially illiterate decreases someone’s likelihood of planning for retirement and having savings. Consequently, the FL gender gap, combined with other factors like longer life-expectancies and lower earnings, explain why women have a higher risk of (old age) poverty.

Who or what is to blame? Tinghög et al. (2021) argue that social stereotypes of women being worse at handling money contribute to the FL gender gap. This happens because of a psychological phenomenon called stereotype threat: when women are primed with the idea that their gender is worse at handling money, this will cause them to also make worse financial decisions. Among 13- to 15-year-old girls, financial literacy deteriorated as stereotype strength increased. At the same time, financial literacy for boys increased with the strength of the stereotypes they had.

These stereotypes are perpetuated in the media and at the dinner table. In a Sterling Bank summary of 300 magazine articles, 65% of financial articles targeted at women defined girls as “excessive spenders” who should splurge less or depend on financial support. Among articles aimed at men, 70% stressed the importance of monetary success and financial literacy and 60% gave investing advice. At home, parents are more likely to discuss investing with their sons than with their daughters because they often view their sons as “future financial providers.”

Bottom Line: Dutch women are less financially literate than men, which contributes to the gender difference in wealth accumulation and puts women at a higher risk of poverty. Research suggests that the image of women as big spenders who are bad at handling money contributes to this gender gap in financial literacy.

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