Review: The Secret of Our Success

I first learned of Joseph Henrich when I read his jointly authored paper “In search of homo economicus: behavioral experiments in 15 small-scale societies” [pdf], which was published in economists’ top journal in 2001. The paper was impressive on two counts. First, it showed economists how anthropologists could use their field knowledge to explain behavior. Second, it undermined (yet again) economists who claimed to be describing “universal”  behavior. Henrich et al.  showed how culture affected human cooperation. Although some economists continue to ignore culture (one of my graduate school professors banned use of that word), those who spend time “among mere mortals” know that culture needs to be accounted for in their theories, analyses, and policy proposals.

It is for these reasons that I bought this 2015 book (subtitled: “How culture is driving human evolution, domesticating our species, and making us smarter”), which I’ll abbreviate as SOS. I wanted to learn more from a guy who asks useful questions and then does all he can to understand and explain the nuances to answering them.

I also want to note that I read this book after Yuval Hariri’s Sapiens, which I found to be insightful but slightly disappointing. (Others are more harsh.) I recommend Henrich’s SOS over Sapiens because it provides deeper insights and more useful ideas.

The secret, btw, is cultural evolution, i.e., how we learn, imitate and improve on ideas, not as individuals but members of a group. It’s from this source that we have language, abstractions, processes and rules-in-use (institutions) that help each generation do better than the last. (Henrich defines “culture” as “the large body of practices, techniques, heuristics, tools, motivations, values, and beliefs that we all acquire while growing up, mostly by learning from other people” Loc(ation) 239.)

For the rest of this review, I will summarize the ideas from SOS that appealed to me and give a few comments. As usual, these notes reflect my own perspective and learning. YMMV 🙂

  1. Some paleo-anthropolgists claim that language differentiates humans  from other primates, but Henrich claims that it is our ability to teach and learn culture. Some primates can learn, communicate and use tools, but they are far worse than humans at these tasks. Data comparing babies to adult and juvenile chimpanzees shows that babies are orders of magnitude better at observing and learning from example.
  2. “Once these useful skills and practices began to accumulate and improve over generations, natural selection had to favor individuals who were better cultural learners, who could more effectively tap in to and use the ever-expanding body of adaptive information available. The newly produced products of this cultural evolution, such as fire, cooking, cutting tools, clothing, simple gestural languages, throwing spears, and water containers, became the sources of the main selective pressures that genetically shaped our minds and bodies. This interaction between culture and genes, or what I’ll call culture-gene coevolution, drove our species down a novel evolutionary pathway not observed elsewhere in nature, making us very different from other species—a new kind of animal” Loc 252, emphasis added.
  3. Humans added “prestige” as a second status that complements or substitutes for status via “dominance,” which animals also have. I think of prestige as wisdom and dominance as strength.
  4. “Norms influence a vast range of human action, including ancient and fundamentally important domains such as kin relations, mating, food sharing, parenting, and reciprocity…Repeated norm violations sometimes provoked ostracism or even execution at the hands of one’s community. Thus, cultural evolution initiated a process of self-domestication, driving genetic evolution to make us prosocial, docile, rule followers who expect a world governed by social norms monitored and enforced by communities” Loc 282-4.
  5. “Our collective brains arise from the synthesis of our cultural and social natures—from the fact that we readily learn from others (are cultural) and can, with the right norms, live in large and widely interconnected groups (are social)… we don’t have these tools, concepts, skills, and heuristics because our species is smart; we are smart because we have culturally evolved a vast repertoire of tools, concepts, skills, and heuristics. Culture makes us smart” Loc 297, 319.
  6. “(N)atural selection made us highly social and cooperative… by working together we conquered the globe” Loc 403. Unfortunately, we seem to have scaled up by too much, as we now lack the cultural or social tools to rein the behaviors that are driving climate change, destroying biodiversity, and thus threatening 100,000 years 2 million years of collective success.
  7. Social learning refers to any time an individual’s learning is influenced by others… Individual learning refers to situations in which individuals learn by observing or interacting directly with their environment and can range from calculating the best time to hunt by observing when certain prey emerge, to engaging in trial-and-error learning with different digging tools…Cultural learning refers to a more sophisticated subclass of social learning abilities in which individuals seek to acquire information from others, often by making inferences about their preferences, goals, beliefs, or strategies and/or by copying their actions or motor patterns…the only exceptional cognitive abilities possessed by young children in comparison to two other great apes relate to social learning, and not to space, quantities, or causality…we humans are rather inclined to copy—spontaneously, automatically, and often unconsciously. Chimpanzees don’t appear to suffer from this cognitive “bug,” at least not nearly to the same degree” Loc 424-564, emphasis added. Humans are worse at game theory than chimps [the real homo economicus!], but humans are much better at learning by imitation, which is an advantage when learning complex processes or concepts.
  8. This skill has its downsides. We learn by copying, and copy more from those with success and prestige. This system works on a small scale as a means of transmitting cultural knowledge, but its remnants fail in today’s world of social media, where people “follow” without any feedback from influencers and copy visible aspects of success without also copying the many hidden steps that led to success. (It also explains the much older practice of paying celebrities to advertise products. Consumers who trust their prestige do not ask questions about the product’s quality.)
  9. “Culture, and cultural evolution, are then a consequence of genetically evolved psychological adaptations for learning from other people. That is, natural selection favored genes for building brains with abilities to learn from others” Loc 808.
  10. “Students may learn more effectively from teachers or professors who match them on these dimensions [sex and ethnicity], which may impact a person’s grades, choice of major, or career preferences…for African-American students at a community college, being taught by an African-American instructor reduced class dropout rates by 6 percentage points and increased the fraction attaining a B or better by 13 percentage points” Loc 1036-44.
  11. “Copying suicide highlights the potency of our imitative tendencies and means that under the right conditions we can acquire practices via cultural learning that natural selection has directly acted to eliminate under most conditions. If humans will imitate something that is so starkly not in our self-interest, or that of our genes, imagine all the other less costly things we are willing to acquire by cultural transmission” Loc 1120.
  12. “You first need to acquire the social norms and rules governing the world you are operating in, and only then is strategic thinking useful. In our world, successful Machiavellians must first be skilled cultural learners. You can’t bend, exploit, and manipulate the rules until you first figure out what the rules are” Loc 1159.
  13. Although our individual ancestors might have been smarter or better skilled at survival than we are (when’s the last time you caught your dinner in the wild?), we are more successful because we can draw on the cumulative cultural experiments and adaptions of our ancestors, some of whom died in ways that help us avoid similar death today.
  14. “Childhood is a period of intensive cultural learning, including playing and the practicing of adult roles and skills, during which time our brains reach nearly their adult size while our bodies remain small. Adolescence begins at sexual maturity, after which a growth spurt ensues. During this time, we engage in apprenticeships, as we hone the most complex of adult skills and areas of knowledge, as well as build relationships with peers and look for mates” Loc 1309.
  15. Cooking, food processing and tools allowed our energy-intensive brains to grow larger and more sophisticated. Our bodies also evolved for hunting, throwing and digesting cooked food. The same processes explain why we sweat to cool ourselves off: we do not need to fear dehydration because we learned to find, store and carry water. 
  16. “Blue and green eyes are a side effect of natural selection favoring genes for lighter skin among cereal-dependent populations living at high latitudes. If cultural evolution hadn’t produced agriculture, and specifically techniques and technologies suitable for higher latitudes, then there would be no blue or green eyes. In all likelihood then, this genetic variant only started spreading within the last six millennia, after agriculture arrived in the Baltic region” Loc 1703.
  17. “Humans reliably develop emotions and motivations to seek out particularly skilled, successful, and knowledgeable models and then are willing to pay deference to those models in order to gain their cooperation (pedagogy), or at least acquiescence, in cultural transmission. This deference can come in many forms, including giving assistance (e.g., helping with chores), gifts and favors (e.g., watching their children), as well as speaking well of them in public (thus broadcasting their prestige). Without some form of deference, prestigious individuals have little incentive to allow unrelated learners to be around them and would not be inclined to provide any preferential access to their skills, strategies, or know-how” Loc 2339.
  18. “Both dominant and prestigious men tended to get their way at group meetings, but only prestigious men were respected and generous… Dominant individuals tended to (1) act overbearing, (2) credit themselves, (3) use teasing to humiliate others, and (4) be manipulative. Meanwhile, prestigious individuals (1) were self-deprecating, (2) attributed success to the team, and (3) told jokes” Loc 2403, 2469.
  19. “Saint Ambrose, the archbishop of Milan, made giving to the poor admirable. Rich Christians began to compete to see who could give the most to the poor (often through the church), inspired by paragons like Ambrose, who gave all their wealth away. Prior to this, giving to the poor was puzzling (at best) since the poor had little or nothing to give back. This move may have been crucial to the long-run success of the Church as an organization (and, no doubt, the poor appreciated it too). For the same reason, charitable organizations open their efforts to raise money by featuring donations from highly prestigious individuals, whose generosity is subsequently made known…by behaving altruistically, and because they are role models for others, prestigious individuals can increase the overall prosociality of their local groups or their sections of the social network. This, of course, means that any altruism is only altruism in the short-term sense. In the longer run, prestigious individuals who behave generously get to live in a social network that, by virtue of their own actions, becomes more generous and cooperative” Loc 2546, 2562.
  20. “If the elderly are so often prestigious across human societies, why aren’t they particularly admired or respected in many Western societies? To answer this, we return to the evolutionary logic. The aged are accorded prestige and deference when more decades of experience and learning can provide a proxy measure for accumulated knowledge and wisdom. However, if a society is rapidly changing, then the knowledge accumulated by someone over decades will become outdated rather quickly” Loc 2630.
  21. “The Great Sanhedrin, the ancient Jewish court and legislature that persisted for centuries at the beginning of the Common Era. When deliberating on a capital case, its seventy judges would each share their views, beginning with the youngest and lowest-ranking member and then proceed in turn to the “wisest” and most respected member. This is an interesting norm because (1) it’s nearly the opposite of how things would go if we let nature take its course, and (2) it helps guarantee that all the judges got to hear the least varnished views of the lower-ranking members, since otherwise the views of the lowest-status individuals would be tainted by both the persuasive and deferential effects of prestige and dominance” Loc 2732.
  22. “Social norms about sexual fidelity mean not only that the husband is monitoring his wife’s sexual and romantic life, but so is the rest of the community, making it much tougher for the wife to behave in ways that might lower the husband’s confidence that his wife’s children are indeed his children. This has a psychological impact on the husband, motivating him to invest more in his wife’s offspring (because they are more likely to be his). Wives also know that if they are caught violating fidelity norms (e.g., having sex with someone else), it will influence their reputation with people well beyond their current husband and his kin” Loc 2902.
  23. College life? “Perhaps even more enduring and powerful than synchrony are the potent social bonds forged among those who share terrifying experiences. Such experiences have been routinely created in different ways by male initiation rites in societies across the globe and throughout history…Being in a ritual relationship, while holding genetic relatedness constant, is strongly associated with sharing meat and information, as well as receiving help when one is sick or injured. These culturally constructed ritual relationships are much more important than close genetic relatedness” Loc 3188, 3242.
  24. In experiments, I found that cooperation within a group rises when it is competing with other groups: “Intergroup competition provides one important process that can help explain the spread of norms that foster prosociality. Different groups culturally evolve different social norms. Having norms that increase cooperation can favor success in competition with other groups that lack these norms. Over time, intergroup competition can aggregate and assemble packages of social norms that more effectively promote such success, and these packages will include social norms related to cooperation, helping, sharing, and maintaining internal harmony” Loc 3300.
  25. … and that cooperation will fade if its raison d’être disappears: “prosocial institutions age and eventually collapse at the hands of self-interest, unless they are renewed by the dynamics of intergroup competition. That is, although it may take a long time, individuals and coalitions eventually figure out how to beat or manipulate the system to their own ends, and these techniques spread and slowly corrode any prosocial effects” Loc 3354.
  26. But these people defectors also put themselves at risk: “In small-scale societies, as in many communities, the sanctioning of norm violators begins with gossip and public criticism, often through joking by specific relatives, and then intensifies to damage marital prospects and reduce access to trading and exchange partners. If violators are still not brought into line, matters may escalate to ostracism or physical violence (e.g., beatings) and occasionally culminate in coordinated group executions…perpetrators can only get away with such actions when they target a norm violator, a person with his reputational shield down. Were they to do this to someone with a good reputation, the perpetrator would himself become a norm violator” Loc 3675, 3691. This passage reminds me of the grim scene in Zorba the Greek, where the young widow is killed after a suitor commits suicide, because she was “too seductive” for the men of the village.
  27. “Why would natural selection have built us to be norm internalizers? Broadly speaking, internalizing motivations helps us to more effectively and efficiently navigate our social world, a world in which some of the most frequent and dangerous pitfalls involve violating norms. Such motivations may help us avoid short-term temptations, reduce cognitive or attentional loads, or more persuasively communicate our true social commitments to others” Loc 3853. Norms, in other words, help us cooperate in producing and protecting the collective goods that contribute to define group prosperity. If you compare successful to failing communities and states, you will see that they mainly differ in the presence or absence of such institutions.
  28. “The psychological machinery that underpins how we think about “race” actually evolved to parse ethnicity, not race. You might be confused by this distinction since race and ethnicity are so often mixed up…when children or adults encounter a situation in which accent or language indicate “same ethnicity” but skin color indicates “different race,” the ethnolinguistic markers trump the racial markers” Loc 3996, 4003. I’ve written about misplaced racism.
  29. Why are so many people engaged in culture wars without a concern for the feelings or future of their neighbors? Too much prosperity. “By strengthening prosocial group norms, the experience of war resulted in more, and more energized, community organizations. Why would war have these prosocial effects? During hundreds of thousands of years, intergroup competition spread an immense diversity of social norms that galvanized groups to defend their communities; created risk-sharing networks to deal with environmental shocks like drought, floods, and famines; and fostered the sharing of food, water, and other resources” Loc 4056.
  30. Sapiens with individually smaller brains beat Neanderthals with individually larger ones because they created a hive mind: “Once individuals evolve to learn from one another with sufficient accuracy (fidelity), social groups of individuals develop what might be called collective brains. The power of these collective brains to develop increasingly effective tools and technologies, as well as other forms of nonmaterial culture (e.g., know-how), depends in part on the size of the group of individuals engaged and on their social interconnectedness… Larger populations can overcome the inherent loss of information in cultural transmission because if more individuals are trying to learn something, there’s a better chance that someone will end up with knowledge or skills that are at least as good as, or better than, those of the model they are learning from… by acquiring distinct elements from different people, learners can create “innovations” without “inventions”; that is, by recombining things copied from different models, novelties can emerge without individuals themselves thinking up a new technique on their own. This process turns out to be crucial for understanding innovation” Loc 4134, 4204, 4277.
  31. “Languages are cultural adaptations for communication. These communication systems had to adapt (culturally) to our brains, exploiting features of our ape cognition, and at the same time, created new selection pressures on our genes to make us better communicators. These genetic evolutionary pressures were powerful, shaping both our anatomy and psychology: they pushed down our larynx to widen our vocal range, freed up our tongues and improved their dexterity, whitened the area around our irises (the sclera) to reveal our gaze direction, and endowed us with innate capacities for vocal mimicry and with motivations for using communicative cues, like pointing and eye contact…cultural evolution is a key reason why existing languages are so easily learned by children, and some of the recurrent features of languages, like syntax, are likely the result of cultural evolution working to keep languages learnable, especially as vocabularies expand” Loc 4494, 4883.
  32. That said, language did not make humans unique: “(1) quite a bit of cultural transmission and cultural evolution is possible without language. Cultural information about tool manufacture, fire making, dangerous animals, edible plants, cooking, and diet (food choice) can all be acquired…(2) language itself is a culturally evolved product, so it can’t cause culture… (3) language has at its core a rather serious cooperative dilemma: lying, deception, and exaggeration. Lying with language is cheap, at least in the short term, and is a potentially powerful way to exploit and manipulate others…Thus, for complex communicative repertoires to evolve in the first place, this cooperative dilemma has to have already been at least partially solved” Loc 5001-18.
  33. West is best different: “People from different societies vary in their ability to accurately perceive objects and individuals both in and out of context. Unlike most other populations, educated Westerners have an inclination for, and are good at, focusing on and isolating objects or individuals and abstracting properties for these while ignoring background activity or context. Alternatively, expressing this in reverse: Westerners tend not to see objects or individuals in context, attend to relationships and their effects, or automatically consider context. Most other peoples are good at this” Loc 5229.
  34. Henrich spends some pages describing his theory for how humans got going, in terms of cultural-genetic evolution. I will not summarize that process, but I’ll tempt you with its start: “In many primates, such as chimpanzees, female bodies unmistakably signal when they are sexually receptive and capable of getting pregnant, sometimes using shiny buttock swellings. This means that once a male has hung around a female long enough, he’ll know her cycle, and thus know when it’s safe to head off to find some more receptive females or build alliances among males. In humans, however, females are potentially sexually receptive all the time, and males cannot reliably predict when their mate can get pregnant. So, by concealing ovulation at least partially, males are forced to be around their mates more often than they would otherwise and end up engaging in a lot of reproductively unnecessary sex. As a by-product, this extra “hanging around” his mate will further solidify his relationships with any offspring who are hanging around their mother” Loc 5904. In the pages that follow, he links hanging around to the growth of clans, sexual division of labor, and collective brains: “we are smart, but not because we stand on the shoulders of giants or are giants ourselves. We stand on the shoulders of a very large pyramid of hobbits” Loc 6239.
  35. And thus we arrive at the secret of our (varying) success: “Once we understand the importance of collective brains, we begin to see why modern societies vary in their innovativeness. It’s not the smartness of individuals or the formal incentives. It’s the willingness and ability of large numbers of individuals at the knowledge frontier to freely interact, exchange views, disagree, learn from each other, build collaborations, trust strangers, and be wrong. Innovation does not take a genius or a village; it takes a big network of freely interacting minds. Achieving this depends on people’s psychology, which arises from a package of social norms and beliefs, along with the formal institutions they foster or permit” Loc 6283.

Bottom Line: I strongly recommend this book for its deep and interesting explanations for how we got here as a species, how we behave and cooperate today, and how to understand the various pushes and pulls of our social and cultural institutions.

Here are all my reviews.

Chinese investments in Ethiopia

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.

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

Stuff to read

  1. Jive Talking: “Zach Malik had 5 jobs before starting his MSc
  2. Bad news for sustainability: American millennials are driving plenty
  3. Ralph Nader has good ideas on how to improve US politics.
  4. Women die because we measure “the world” according to male metrics
  5. I don’t 100% agree with Salaita’s politics, but he writes beautifully about academic corruption and the nobility of “honest” work.
  6. Northern Macedonia The Republic of North Macedonia explains the tricky do’s and don’ts of its name
  7. Generation Z (born since 2000) is very stressed
  8. The president of Y-combinator on start-ups and innovation
  9. Concrete-demand is a macro driver of climate change. Related: This paper explains how 90 private, state-owned and nation-state producers of oil, cement and natural gas are responsible (on the production side) for 63 percent of cumulative global GHG emissions. These guys are, in other words, the biggest opponents to doing anything about climate.
  10. Google and Microsoft are eager to help oil firms, thereby undoing all their “green” pledges.

H/Ts to PB and PH

Inequalities and industrialisation

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. 

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

Accountability and development

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.

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

Transitional privatization

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.

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

Bangkok chokes on growth

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.

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

Italy’s simple solution will fail

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.

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

AI threatens development

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, 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.

Mark Zuckerberg takes a selfie with Nigerian president Buhari (source)

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.

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

A visit from the Russian mafia

Kato writes*

The collapse of the Soviet Union was followed by major economic transformations in the dawn of 1990s Russia. Rapid privatisation of the market and liberalization of economic policies gave rise to many private businesses. Since the collapse of SU left many soldiers, and Soviet team sportsmen unemployed, they came together to form racketeering groups specializing in exploiting the profits the private sector made. Extorting, or “appropriating someone’s property under threat of violence or damage to that subject’s prop­erty” (Volkov, Vadim. Violent Entrepreneurs : The Use of Force in the Making of Russian Capitalism, p.3) was their business model, and given the lack of rule of law, this model proved to be a major success. Since this period coincided with the gradual restoration of Russian central authority, structure of all formal institutions of Russia came came to be shaped by gangsters. Now, in such conditions, paying a bribe was a given, and an economy characterized with corruption started to grow and influence its neighbouring country: Ukraine.

Everything was up for grabs, and therefore ‘Aluminium Wars’ took off. Aluminium Wars were waged by gangsters for the influence on Russian Aluminium production. Violence soared, and those who came out as winners, formed into the network of oligarchs, who practiced huge control over Russian resources. Why these above-mentioned processes had a great impact on Ukrainian economics has an origin in a great political and economic proximity of the two countries.

It has to be noted that Russian ethnic population in Ukraine is substantial, amounting to 17%; therefore, so is proportion of the pro-Russian electorate [pdf, p.5.] In addition to that, Ukraine is dependent on most of its oil and gas from Russia, and this dependency is exacerbated given Ukraine has special discounted prices for these resources [ibid, p.7]. Another indicator to the dependency of Ukraine on Russia is how over time, Russia has always been a significant market for Ukrainian exports. For instance, looking at Ukrainian exports of 1996, 38.7% of total exports is owed to Russia [ibid, p.8]. Lastly, Ukraine is, and was in the 90s, a major receiver of Russia FDI, that’s why in the resource sector “out of the six Ukrainian oil-refining plants (ORPs), four are owned by Russian companies.” [ibid, p.10].

Given the above mentioned, it is reasonable to conclude that the economic phenomenon present in Russia had a great potential of impacting that of Ukraine. Importantly, the clear link is to be made between the roaming banditry and Russian economics at first, before discussing its implications on Ukrainian economy.

The interconnectedness of gangsters and economics ran deep. Russian entrepreneurship was based on engaging in criminal activity such as extortion, bribery, and even murder – “During that time, murder was a depressingly common way of resolving business disputes.” Violent entrepreneurship soared with the increased availability of valuable natural resources. According to CNN, out of the Russian oil, gas, timber and aluminum industries, rose a small number of individuals, and among those small group of people, were not only Russian, but also Ukrainian individuals.

Bottom Line: Russia’s and Ukraine’s strong economic interconnectedness is essentially predisposed by their geographic and cultural proximity. Therefore, Ukrainian economics was greatly influenced by the violent entrepreneurship that took off in post-soviet Russia.

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