Category: EGD

Daria writes*

“Brain drain” is defined as the emigration of highly skilled workers from developing economies to more developed ones. Globalisation and  membership in the European Union have had positive and negative impacts on Eastern European countries, which in the context of liberalisation have become known as human-capital-exporting countries. Unfortunately, the surge in medical personnel, engineers and entrepreneurs working abroad has caused serious damage to the countries of origin that now struggle with dormant economies.

Romania ranks first in emigration among European countries. The 1989 fall of the Communist regime was the first opportunity for Romanians to look for new prospects abroad. However, only following Romania’s EU joining, the brain drain effect started to impede development in specific sectors. The healthcare sector is one in which innovation seems impossible.  More than half of its workers have migrated to Western countries, meaning that those left behind are struggling to meet day-to-day health care demands.

Reports have shown that four out of five Romanian doctors consider working abroad and over 20,000 have left to practice in countries such as the UK or France since 2007. This problem disrupts the country’s development. There is often concern regarding the financial losses, since Romanian taxpayers pay for the education of doctors and nurses. The training of one doctor in Romania costs approximately 100,000 €. These costs deepen the economic disparities between Western and Eastern Europe, but education costs are overlooked during EU budgeting meetings. That oversight may not be accidental when destination countries gain knowledge and economic benefits from such workers.

While long-term economic consequences involve a more elaborate analysis, short-term repercussions are more visible. The brain drain has depleted the healthcare system, with a 20% personnel shortage in Northern Romania The recent outbreak of COVID-19 has exposed the workforce to risk and the weaknesses of the sector. The lack of qualified personnel and scarcity of hospital funding (Romania allocates only 5% of GDP to healthcare) led to unprecedented measures such as closing hospitals in major cities.

Brain drain is often irreversible, so Romania should soon focus on a “brain gain” approach. Various studies have shown that such a strategy might foster and encourage growth . “Brain gain” generates economic gains and knowledge capital. Policies promoting  return-migration would bring experience and skills to the healthcare sector.

Although remittances from the diaspora of 1.9 billion dollars in 2014 helped the economy, monetary gains cannot entirely offset the negative effects of brain drain. As an increasing number of highly skilled Romanians work abroad because of exacerbated income inequalities and corruption in their home country, radical institutional change to encourage “brain gain” is needed.

Bottom Line: Brain drain has little to no positive effects for Romania, especially in the healthcare sector losing trained specialists. Reversing the drain is needed to foster progress and development.

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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 :).

Manon writes*

Global issues like climate change require governments to invest in ways that will cost them in the present to hopefully provide a better future. But, investing in the future is a lot harder when you are already struggling with investing in the present. The wealthiest of countries are having a hard time making such a change. For low-income countries, it seems near impossible due to a lack of government capacity.

The original Kuznets curve illustrates that as a country goes through economic development, inequality will first increase. When, due to economic growth, the government has a high enough revenue through taxes, it can set up a welfare system and inequality will go down again. The environmental Kuznets curve is based on the original curve and argues that as a country develops, pollution will first go up. However, when the country reaches a certain level of economic growth, pollution will go down again through technical innovation and switching from fossil fuels to green energy.

However, climate change is knocking on everyone’s door, albeit often a bit more urgently on those of poorer countries. Countries that have not reached the level of economic development that the environmental Kuznets curve talks about are being forced to deal with climate change before they are, in a sense, ready. This force is coming from either them being directly affected by climate change or through international pressures, such as the UN’s Sustainable Development Goals.

Low-income countries often do not have the capacity to invest in the future as their tax revenue is still low. They have not reached the point of economic development in the original Kuznets curve where they have enough tax revenue to set up a welfare system, let alone to invest in the future. A big struggle in raising the needed tax revenue to finance public spending in low-income countries is that the economy is largely informal. Many people have a varying income and are often paid in cash, making income tax hard to implement. Consumer taxes are equally hard because many people shop at smaller stores that might not keep an accurate account of sales and inventories. In such a situation, one would ideally tax the rich more heavily than the poor as they often have a more formal and constant income or assets to tax. However, these figures often have considerable political sway to prevent them from being taxed more. Furthermore, creating an administrative body that is well-educated, well-trained and well-paid has proven difficult as there is a lack of funding, coming from a lack of tax revenue. As you can see, a rather vicious cycle occurs.

Low-income countries that are still very much to the left of the turning point in any Kuznets curve are thus being pressured to make changes surrounding climate change that they cannot afford due to low tax revenue. Furthermore, these changes will most likely hurt current economic activity in the country, leading to an even larger need for public spending and simultaneously even less tax income.

Bottom line: Countries all over the world will have to work together to combat climate change by making some necessary adjustments to the way we live. Countries that do not have the capacity, due to a lack of tax revenue, to provide welfare will also be the countries that will struggle most with these adjustments.

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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 :).

Anzelika writes*

Estonia has become a global model for e-government, having created a secure, transparent and efficient digital platform, where both businesses and citizens can access necessary governmental services online.

Estonia is a small Baltic country located in Northern Europe. Gaining independence from the Soviet Union just under 30 years ago, Estonia has emerged to be one of the wealthiest countries in the world. Between the years 2001 and 2007, Estonia showed one of the highest GDP growth rates in Europe [pdf], currently is number 30 out of 189 countries in Human Development Index and (ranks higher in Economic Freedom than the United States or the Netherlands.

Estonia’s economic success can, in part, be attributed to its innovative way of governing society. Estonia has been able to build the world’s first paperless government – e-Estonia.  Today 99 percent of all Estonian state services can be accessed online, 98 percent of Estonian citizens have an electronic ID card, and more than 45 percent of the population use internet voting. Estonia has further introduced what has been termed as e-Residency. It is a transnational digital identity that can be used by anyone in the world to get access to Estonia’s digital technologies, including legal or accounting services, and the entrance to the EU business environment. This makes Estonia one of the most advanced digital societies in the world, and it comes with its benefits.

For example, moving government services online has dramatically reduced corruption. The problem of corruption was of particular concern back in 1994, when e-Estonia was first introduced. By moving essential state services online, it has meant that interaction between government officials and citizens has dramatically reduced, eliminating most bribery. This issue still plagues many of the post-Soviet countries.

Further, the ease of starting a business online together with the e-Residency program has allowed Estonia to become Europe’s leading startup hub. Estonia currently has 31 startups per 100,000, which ranks 6 times higher than the EU average. Companies such as Skype and TransferWise have emerged in the tiny Baltic State. Not only do these startups contribute to Estonia’s economic growth, the favourable economic climate for businesses has also attracted significant levels of FDI to the country.

As governments around the world seek to improve their economies, they should look towards the small Baltic state that can serve as a blueprint for the effectiveness of a digital society. As the Estonian MEP Marina Kaljurand has stressed: “if used properly, digital solutions can be essential drivers for economic growth and equity.”

Bottom line: Estonia has been able to successfully create e-government, which in part has helped the country emerge as one of the most advanced economies of the world.

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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 :).

Jade writes*

Last summer, I spent a month in Ethiopia. My family and friends thought my travel plans were surprising, but upon arrival in Addis Ababa, I learned that I didn’t attract much attention from the Ethiopians. They are used to seeing Chinese faces like mine. The value of Chinese investment projects in Ethiopia reached an estimated 4 billion USD last year. China is Ethiopia’s largest trade partner in terms of  exports (16% of the total, worth 344 million USD) and imports (33% of the total, worth 2.65 billion USD). These numbers reflect two sets of policies.

First, Ethiopia wants to attract foreign investments by improving its investment and business climate. Favourable policies combined with a big domestic market and a strategic location in the Horn of Africa make Ethiopia attractive for foreign investors.

Second, China huge Belt and Road Initiative (BRI) means that trillions of dollars in infrastructure financing are flowing to developing countries. On the one hand, BRI can be seen as a massive development project, providing unprecedented economic growth. On the other, BRI might result in unsustainable debts to Chinese creditors [pdf] and lost sovereignty. These are the two main narratives around Chinese investment in Africa.

It is indisputable that foreign investments have brought economic growth to Ethiopia. It has the fastest growing economy in the region, but growth has not necessarily brought higher incomes or better living conditions for the poorest citizens of one of the poorest countries in the world

This relationship may resemble the picture of foreign investors swooping into African countries to plunder natural resources with the cooperation of local elites, but Ethiopia’s story seems different. For one, Ethiopia does not have fossil fuels or rare earth minerals. Its main export is coffee, and  Chinese investments are focused on infrastructure and manufacturing. Second, the crackdown on corruption under Prime Minister Abiy seems effective. Our usual suspects, the resource curse and corruption, are not the main perils facing high-growth Ethiopia.

So is it just a matter of time until economic growth ‘trickles down,’ or are  new industrial parks, power plants and railways only benefitting Chinese companies and employees? And what other adverse effects might there be?

I was in the northern Afar region. Here, Afar men have worked for generations to extract blocks of salt in the sweltering desert heat. The salt is then transported by camels to the nearest market. The trek takes several days. When I was there, I saw many trucks marked with Chinese characters. New tarmac roads were just under construction, with the promise of more efficient transport. But infrastructure developments could have huge environmental impacts.

Will these developments destroy the environment and traditional ways of living, or bring prosperity? In the end, it is probably a combination of both.

Bottom line: Chinese investments in Ethiopia have brought economic growth, but development is a more complicated story.

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

Alex writes*

Inequality in Europe changed with 19th century industrialisation. At that time, wealth was concentrated amongst the upper echelons of society, but the industrial bourgeoisie used their profits to join the landed aristocracy [pdf]. 

Work in cities led to rapid urbanization of Western Europe throughout the 19th century. Terrible conditions led people to call for more rights. This was first met by deaf ears, but the Communist Manifesto of 1848 mobilised the workers to call for decent working and living conditions. Stronger labour rights meant less working hours for children  and reasonable salaries for adults. Politicians in Western Europe supported such reforms to compete with rising social democratic and socialist political parties. Germany’s Bismarck, for example, enacted laws in 1883-84 that compensated workers for sickness and accidents. The development of labour rights led to political rights. Voting rights in Germany were granted universally in 1919 under the Weimar Republic.

The changing norms in society led to new institutions, the labour rights movement, universal voting rights, and the welfare state. These changes increased economic development as prosperity benefited more people. Changing norms in Germany and Sweden (where men could vote in 1919 and women in 1921) gave rise to notions such of “Gemeinschaft und Volk” or “Samhälle och Folk” (Community and People), which led to institutions such as “Folkhemmet,”  a political idea that presented the Swedish welfare state as a home for the people and means of development.

Bottom line: The normative changes that Europe has experienced throughout the 19th and early 20th century are largely due to industrialisation. Wealth inequalities and a growing workforce demanding more labour rights led to a more equal distribution of wealth. Hence a shift from solely economic growth to better economic development. These labour rights then further translated into voting rights, changing values, and a welfare state that would protect workers and citizens from the hazards of life. 

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

Dyma writes*

One of the main outcomes of the Revolution of Dignity in Ukraine was the removal of a Russian puppet government. It was believed that the Russian grip on Ukraine’s economy was so strong that it was almost solely to blame for the country’s bad economic performance. After the revolution and a period of deep recession and inflation, the first quarter of growth relieved the country. However, in the years to come GDP growth was nowhere near as fast as some predicted or hoped for (Trading Economics, 2019). Ukraine was also lagging in development measures. Why?

Let us start with one of the root causes of the problem. In order to stay in power, the government had no problems with popularity right after the revolution, given the alternatives. After time, however, leaders had to defend their position, and they did this by avoiding responsibility for slow or missing progress. The government had two groups to please: normal people and economic elites. Normal people have no problem starting another revolution. Economic elites have a lot of political leverage due to the double balance problem (North et al., 2006).

In order to please the people, the government subsidises communal utilities: water, electricity, natural gas, and internet. In order to please the oligarchs, the government effectively subsidises their economic activity: usage of the national railway system, their businesses and factories, including the commodities that they need such as natural gas and coal (Evans, 2006). As a result, commodities used by the heavyweight industries owned by the oligarchs are available at below-market prices.

But what’s the connection between too low prices and slow development?

Let us use natural gas as an example. If it can be bought for less than the market price by people and industries, then two things happen. First, the subsidy money is usually extracted from another government controlled industry, which makes that industry uncompetitive. Secondly, the industry that ends up purchasing the cheap gas becomes uncompetitive too, should the price of gas increase because of a higher market price or a reduced subsidy. The reason for this being the fact that gas may constitute half of the price of the final product – an increased cost or a decreased market price for that product disables the business to some extent.

Uncompetitive businesses, in turn, do not invest into R&D, innovation, education, infrastructure and technology, which slows down growth and development. Apart from the lack of ability to invest, there is usually lack of incentive too. If the gas is that cheap, why would you look for more advanced technology?

Bottom Line: After a revolution and a period of recession Ukraine is not experiencing fast growth or development rates that one would expect or hope for. The mechanism that is preventing the improvement from happening has its root in the government’s need to avoid responsibility to the people and oligarchs. Through subsidising communal utilities as well as the large-scale economic activity of big economic players in the country, the government effectively makes those industries uncompetitive. Which, in turn, prevents any investment into R&D, innovation, education, infrastructure and technology.

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

Jorn writes*

Privatization has occurred in many countries and throughout different types of economies, but is most prominently featured in transitioning economies that move from a planned system to a market-led one. There are multiple ways to go about privatization. Which methods are employed determines for a large part which types of stakeholders are advantaged. This impacts ownership structures and consequently efficiency. The goals of economic growth and development are often at odds when choosing between methods.

This post first discusses common privatization methods. Secondly, it addresses the main considerations for governments deciding between these methods. Finally, it highlights the tension between growth and development.

Common forms of privatization are the public sale of shares and auctions of whole companies. The former enables more citizens to take part in the privatization, but risks dispersion, which tends to inhibit restructuring efforts. The latter is expected to create the highest value for the government and more efficient business governance, as ownership is with a large party that can easily replace inefficient managers.

When companies have a strategic importance, states often privatize via public tenders or direct negotiations. Their benefit is the control the government exerts over assets vital to the country and the guarantee that companies will have large ownership blocks, allowing for restructuring. It is also easier to limit foreign influence via these methods. A downside is that these processes are easy to be politicized, which creates advantages for the incumbent political elite.

A final method, employed especially in former Soviet and other Eastern European countries, is the use of voucher sales [pdf]. This process entails handing out vouchers with which citizens/employees can obtain ownership of companies. Many former Soviet states chose this method because most citizens possessed too little capital to obtain shares via other methods. The advantage therefore is that equality is promoted. The disadvantage is that the market process has no influence here, thus companies may not be obtained by the most efficient owners.

The dominant literature on privatization argues that private ownership is more efficient than state ownership; management ownership more than employee ownership; outsider ownership more than insider ownership and foreign ownership more than domestic ownership. See for more information this EOCD report on privatization in the Baltics [pdf].

Employees have incentives that collide with profit-maximization, such as the will to retain jobs and high wages. Managers have these incentives to a smaller extent, while the incentives of outsiders are likely to align most with profit maximization. In the case of poorer countries with weak institutions, foreign ownership provides a large advantage to enterprises. The foreign owners have better access to capital, management skills, and international business networks. However, political issues matter too. For privatization efforts to be feasible, they needs support from powerful groups in society and to some extent the population. Moreover, a government may be reluctant towards foreign ownership of its companies, as economic power often leads to political influence.

There thus exists a tension between development-oriented method and growth-oriented methods. The former stimulate for instance employee or management ownership, a form of more equitable, but less efficient ownership. The latter create ownership structures driven by primarily foreign investors. Although these are expected to be more efficient and thus stimulate economic growth in terms of production, they grant less benefits to ‘ordinary’ citizens and may slow down a country’s development.

Bottom line: The choice between methods of privatization is crucial, because it has a large impact on the ownership structure and subsequent development of enterprises. In many instances, growth and development will be at odds here.

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

Genie writes*

Bangkok had quite a hazy start to 2019. In January, the city was blanketed in smog and had a concentration of PM2.5 particles that was at dangerous levels. The Bangkok Metropolitan Administration (BMA) tried washing up the streets and buildings with water cannons, but the smog persisted. This lead Bangkok residents to express their dissatisfaction on social media platforms. But, was there more that the BMA could have done? Maybe slowing down growth in Bangkok could help.

In the past 250 years, Bangkok grew from a village on the bank of the Chao Phraya River to a megacity with over 14 million residents. Today Bangkok is the centre of economic activity for Thailand. The gross regional product (GRP) per capita for Bangkok is double the national GDP per capita. Bangkok’s GRP also represents 44.2 percent of Thailand’s GDP. The primacy of Bangkok’s economy is a result of government policies that have devoted funding to Bangkok and preference of foreign investors. Bangkok also benefits from being a first-mover agglomeration economy which makes it difficult for other cities to compete with Bangkok.

With Bangkok’s economic growth comes air pollution (related post).  The concentration of economic activity in Bangkok has lead to an increase in the city’s population, and consequently, an increase in the quantity of vehicles needed to transport that population. The lack of adequate public transit developments early on has also made Bangkok residents dependent on private cars. Thailand’s Pollution department estimates that vehicle emissions is responsible for approximately 60 percent of Bangkok’s greenhouse gas emissions and particulate matter. Bangkok’s current air pollution situation is harmful to the health of residents and can cost up to 6.6 billion baht (€180 million) in losses for the healthcare and tourism sector. Thus, improving the air quality is crucial for both Bangkok’s economic growth and development.

The haze is an important wake-up call for Bangkok. Urban experts urge the BMA to improve transport policies and invest in public transportation in Bangkok. However, the growth in Bangkok may no longer be economic. The worsening air pollution is one example of the many challenges that Bangkok faces that has potential to undermine its long-term economic growth and residents’ quality of life. It may be an indicator that the additional costs for Bangkok’s economic growth exceeds the additional benefits, and growth is uneconomic. Bangkok already receives high levels of public investment as the Thai government attempts to uphold its deteriorating quality of life, so it may be worth investing in peripheral regions that can ease pressures in the capital.

Bottom line: Bangkok’s economic growth may no longer be economic because of increasing costs such as air pollution. Therefore, instead of investing more resources in Bangkok’s growth, allocating resources for the development of peripheral regions can help promote Thailand’s development.

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

Maddalena writes*

Today 5 million Italians live in extreme poverty in an economy that suffers from chronically low growth and high public debt. But let’s not worry too much about that, the new populist government came up with a very simple solution. During their electoral campaign, the 5 Star Movement proposed the implementation of a basic income for those families who live below the poverty line. The leaders of the movement believe that this measure will fight poverty, inequality and social exclusion, guaranteeing access to jobs, adequate education and information. Sounds like real development!

This is how it works. The state gives a special card, charged with €780 every month, to any Italian or European who have a difficult financial situation and meet particular requirements (such as limited financial and capital assets). In the meantime, these people will also be reintroduced to the labor market through specialized centers that will provide training programs to those who need to be trained and will guide to job opportunities those who are already qualified. This project also includes incentives for enterprises to hire the beneficiaries of this basic income. The enforcement will be strict: those who cheat risk 2-6 years in prison. So far so good.

The sad truth is that usually “an affordable UBI is inadequate, and an adequate UBI is unaffordable”. The problem is also that in the case of Italy, the basic income is neither one or the other. This reform would approximately cost €9 billion every year, an expenditure that is not affordable for an economy with a public debt of 132% of GDP. Ignoring that little detail, the populist coalition endorsed a deficit of 2.4% of GDP, three times larger than the 0.8% adopted in the previous years and over the 1.6% limit suggested by the minister of finance.

The expectation behind this reform is that it will create job opportunities for people who will eventually contribute to boost the economy through fiscal stimulus. However, this will only happen in the long run and will require a short-term increase in taxes in a country with one of the highest tax wedges in the  OECD. In the meantime, another risk is that the cost of borrowing will rise, increasing the costs of servicing debt for businesses. This will harm the balance-sheet of domestic banks that are the main holders of Italian debt. Another risk that should be considered is the incentivization of undeclared work, which would result in tax evasion which is already particularly high in Italy.

In addition, this reform is also inadequate for the composition of the country. Giving the differences between north and south, €780 is too little for those living in the North and too generous for those living in the South. In the long term, this would contribute to the timeless division of the country, increasing the existing resentment of the North towards the South.

Moreover, the amount of €780 has been established according to the idea of “relative poverty”, that accounts for all those people who have an income that is below the 60% of the median income”, which means that inflation and the performance of an economy are not taken into account in the calculation. This means that this sum will require constant adjustments and political controversies in a country that doesn’t have bureaucratic apparatus that is efficient and responsive enough.

Bottom line: The implementation of a universal basic income is unlikely to succeed given Italy’s weak institutional framework and unaffordable in its even weaker economic situation.

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

Willem writes*

Presidential elections recently took place in Nigeria. The build-up to these elections saw tragic violence between groups of pastoral Muslims and farming Christians that was sparked largely by fake news circulating on Facebook. This fake news was designed specifically to instigate ethnic violence. Facebook is active in Nigeria with their initiative Internet.org, which aims to realize global internet connectivity, and meanwhile gives users ‘free’ access to Facebook. In Nigeria alone, 53 million new mobile internet users are expected to come online in the next seven years, a profitable market for Facebook.

The spread of fake news is but one example of the disruptive impact that digital technologies can have on society. In particular,  artificial intelligence (AI) is expected to have a profound influence on societies in the near future.

Studies on the potential impact of such AI technologies on economic growth are remarkably unanimous in their conclusions: AI is great for growth.  A model by the McKinsey Global Institute predicts that between now and 2030, AI will deliver additional economic output of a whopping $13 trillion. A question that has received much less attention, however, is how this growth can translate into economic development.

AI has already made positive contributions to economic development in numerous areas: early detection of epidemics, disease detection in crops, and providing financial services to rural areas, to name a few. However, particularly for poorer countries, it seems that it will be very difficult to actually realize these benefits.

The social effects of technologies are shaped by institutional, political, economic context in which they are rolled out. The example from Nigeria shows that in a society that is already characterized by ethnic divides, AI can reinforce or aggrevate existing systemic biases and lead to inequalities and even violence against certain social groups. Evidence from the U.S. suggests that algorithms and AI applications systematically aggrieve those in lower social classes and those with lower digital ‘literacy’. In poorer countries, which generally have more social inequality and lower quality insitutions, these social effects of AI are likely to be even larger. Furthermore, persisting differences within many developing countries between those who are able to participate in the design and implementation of AI and those who are not, could result in an uneven distribution of the benefits from AI.

Mitigating these negative effects presents a daunting task to policymakers, and demands a wide range of economic and institutional reforms. Even for the richest countries, regulating tech giants like Facebook is proving very difficult. However, the speed at which AI evolves and the potential benefits it promises make that this should be a top priority, particularly for poorer countries. Tragedies like those in Nigeria may unfortunately be a new reality, but inequality, social unrest and political instability resulting from AI must be minimized if development is to occur.

Bottom line: AI may be great for economic growth, but not for economic development. Poorer countries need to implement drastic economic and institutional reforms if they are going to benefit from AI.

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