Everything sucks at the Lapindo mud volcano

Lapindo mud volcano

BP’s Gulf oil spill has been the center of attention, and rightly so, for some months. But literally half a world away from the Gulf, a similar drilling-related disaster with many similar features has been taking place for nearly five years, almost completely under the world’s radar. That’s the Lapindo mud volcano, in the district of Sidoarjo, a few kilometers outside the city limits of Surabaya, the country’s second largest city. Here are a few facts.

The “mud volcano” is actually an upflow of natural gas and pressurized subterranean water. It began when a natural gas well operated by the company PT Lapindo Brantas ruptured in May 2006. The gas began flowing uncontrollably at about 1m cubic feet per day. According to a Durham University study cited by Wikipedia, “They had overestimated the pressure the well could tolerate, and had not placed protective casing around a section of open well. Then, after failing to find any gas, they hauled the drill out while the hole was extremely unstable. By withdrawing the drill, they exposed the wellhole to a “kick” from pressurised water and gas from surrounding rock formations. The result was a volcano-like inflow that the drillers tried in vain to stop.” In other words, the earth sucks.

Used to be factories

As it comes to the surface, the mud and water create a toxic lake; this now covers over 800 ha. It has swallowed several villages, as well as roads, an intercity tollway, factories and fields; 13 people have died and a total of over 13,000 households (i.e. about 50,000 people, although some sources say as many as 100,000) have been displaced.

A massive dyke, reaching up to about 20 meters high in some places, has been constructed to contain the lake. For a fee, displaced villagers will give you access to the top of the dyke, point out features of the volcano (the few there are, in what is essentially a sea of grey mud) and explain what took place. They’ll show you where their villages used to be and sell you DVDs with pictures and movies of the disaster and its aftermath. And for another fee they’ll take you by motorcycle along the top of the dyke, around the perimeter of the mud lake. With a couple of brief photo-stops, this trip takes about an hour.

Showing his "Victim" ID card

Its official name is the Sidoarjo mud flow, but it’s popularly known as Lapindo after the drilling company that seems to be responsible. Lapindo itself blames an earthquake that occurred in Jogjakarta, 280km away. The Indonesian government appears to have agreed, at least tacitly, but there’s more than just a faint chance that this could be related to politics and influence. At the time of the disaster, the national government’s Coordinating Minister for Welfare was Aburizal Bakrie, a business figure who is said to be Indonesia’s third-richest man. Bakrie’s family company, Bakrie Group, is also the owner of PT Lapindo Brantas. Since 2009 Bakrie no longer holds a cabinet position; however, he is now chairman of the Golkar Party, a key member of the unstable coalition that makes up Indonesia’s current government.

Show me where your village was

While PT Lapindo Brantas has been asked to make compensation payments, and some have actually been made, there is no evidence that his company will be held accountable in the way that BP is for the Gulf spill. Most of the compensation being paid is Indonesian government money, not Lapindo’s. Funds set aside for amelioration and remediation are judged by outside observers to be woefully inadequate. Apart from the encircling earthworks, the main form of remediation currently visible is the pumping of vast quantities of the toxic sludge into a nearby river.

With no house, village or job to return to,  the victims of this “natural” disaster have either dispersed, or live in ramshackle refugee camps nearby, subsisting on compensation payments supplemented by whatever they can earn from putting their deprivation on display for visitors. It’s impossible not to wonder what is going through their heads as these unofficial tour guides point out buried buildings, destroyed villages, and the other evidence of their ruined lives. Their lives must suck. Meanwhile the toxic earth continues to suck in the landscape, at a rate of about 100,000 cu.ft. per day. And above all, the system that allowed this accident to occur, and which continues to shiled the most likely responsible party from being held fully accountable, sucks—big time.

Productive workers and livable cities: keys to Vietnam’s growth

In January 2011, at its 11^th Congress, the Vietnamese Communist Party is expected to approve a Socio-Economic Development Strategy (SEDS) for the decade 2011-20.  This document will set the scene for Vietnam’s third decade of modern economic development.  The first decade, in the 1990s, was a period of transition from the postwar command economy.  The second decade – the first of the new millennium – saw tremendous acceleration in economic growth, and widespread improvement in levels of living.  Though many Vietnamese still severe poverty, the country as a whole now stands at the threshold of middle-income status.  What challenges and opportunities does the next decade hold, and what should Vietnam be doing to prepare for them?  In this note we focus on the important area of employment and labor force development.

Vietnam’s accession to the WTO (in January 2007) was anticipated and accompanied by a huge boom in export earnings and foreign investment inflows.  These trends are causing fundamental changes in the way Vietnamese workers earn their living.  A country whose economy had previously depended mainly on agriculture has suddenly developed a thriving export-oriented manufacturing sector, which now employs hundreds of thousands of workers.  Compared with previous economic transitions, even in dynamic Asia, these shifts (as seen in Figures 1 and 2) have taken place almost overnight.[i]

The changing structure of production and employment is mirrored by rapid growth of urban centers – especially Ho Chi Minh City, which is poised to become Asia’s next megacity as it nears 10 million inhabitants. Many of them are first-generation migrants from rural households, where their parents and siblings (and in some cases children) remain.

Non-farm jobs and rural-urban migration have reduced somewhat the dependency ratio (roughly speaking, the number of mouths to feed per worker) in Vietnam’s countryside.  Even so, land and capital remain very scarce, and farm profits still rely on weather and world prices, both of which are increasingly volatile.  Farm incomes, though higher now in real terms than ever before, remain low and unreliable, and rural poverty is far more prevalent than in the nation as a whole.

Increasingly, however, the incomes of rural households are supplemented by savings remitted by migrants.  When migrants have steady work in factories or other formal enterprises, the relative stability of their incomes helps both to raise and to stabilize rural incomes too, through the remittance channel.  The ability and willingness of rural workers to change both occupation and location has thus played a dual role in Vietnam: it has facilitated the growth of export-oriented, labor-intensive manufacturing industries; and through remittances, it has helped redistribute the gains from Vietnam’s globalization, from cities and factories to rural and farm-based households.

The broad base of gains has helped Vietnam escape the worst distributional effects of sectorally unbalanced growth.  In fact, the most recent analyses even suggest that the average urban-rural income ratio actually declined somewhat from 1993 to 2006.  If true, this is a strong contrast to distributional trends in other transitional countries – most notably China, which has rapidly become one of the most unequal economies in the world, due mainly to huge disparities in growth between its urban/industrial and rural/agricultural populations and limited mobility between the two.

Overall, these have been deservedly impressive achievements for a poor economy in transition.  However, several indicators presage problems and policy challenges for the next decade.  Foremost among these is the need to continue creating rewarding jobs at a rate sufficient to match the growth of the labor force.  Second is the need to match these workers with productive jobs, which depends on continued (or even increased) rates of labor mobility as well as an appropriate sectoral distribution of job-creating investments.  Third, and closely related, is the need to ensure that demand growth for skilled workers in all occupations can be matched by growth in supply.  In each of these areas, Vietnam is showing signs that the relatively easy part of its transition is over.

In the last decade, approximately 1m new workers have joined the labor force each year. The total number of jobs created has on average been just sufficient to match the growth of labor supply (Figure 3).  As Figure 2 showed, however, the vast majority of workers remain in either agriculture or services.  The latter is a catchall category – it includes bankers and bureaucrats as well as construction workers, housemaids, and garbage sorters – but most service sector workers have few skills, and most service sector jobs are in the informal, or unregulated, labor market, where skill requirements are low and job security and legal protections for workers are often absent.  Lately, as Figure 3 shows, agricultural employment has contracted, and of the new jobs created, two-thirds have been in services. Services, and thus the informal sector, are absorbing the majority of new entrants to Vietnam’s labor force.  This helps keep the official unemployment rate low, but raises questions about the true success rate in job creation and the quality of new jobs created— especially for young people, among whom the official unemployment rate is three times the national average, at 9.3%.[ii]

Trends in skills improvement are also cause for concern.  In 1990, the average Vietnamese workers had 6.3 years of schooling—0.7 years less than the next lowest SE Asian country, Indonesia.  This improved to 7 years (a gain of 11%) by 2000, but all the other regional economies did better; Indonesia’s gain was 20%, to 8.4 years.  Projections of current trends to 2010 and 2020 show more of the same pattern: improvements in average schooling, but a widening education gap between Vietnam and its neighbors.[iii] This presages a loss of competitiveness within the regional trade network, and also flags future difficulties for the growth of skill-intensive industries within Vietnam itself; the projected 2020 schooling rate (7.8 years) is comparable to those for China and Thailand in about 1990.  In its 2008 report, the government’s leading economic think-tank (CIEM) estimated that only 30-40% of skilled labor demand was being met.[iv] The university system offers low salaries and few rewards for professional achievements, and is chronically short of places; it has not been effective at responding to higher education demand.  State-funded vocational programs, meanwhile, seem to be missing their mark by a wide margin, turning out too few trained workers and focusing on occupations and skills sets that are mismatched with the requirements of the more dynamic industries.[v]

Managing urbanization is another looming issue.  Vietnam’s government appears consistently to underestimate the population and growth rate of its largest and most economically dynamic metropolis, Ho Chi Minh City.  All of the country’s large urban areas are net contributors to the central government’s budget, while almost all rural areas are net recipients.  This resource transfer inhibits city growth, and in particular the provision of public services and urban infrastructure, such as roads, schools, sanitation, and mass transit.  If cities cannot offer such services and instead become congested, polluted, and underserviced, then workers must demand higher rewards to more there; this raises industry costs and reduces international competitiveness.

The alternative strategy is for individual migrants rather than entire households to relocate.  This is acceptable for unattached individuals, such as the young workers, mainly young women, who make up a large part of the low-skill manufacturing workforce.  However, older (and thus more experienced) workers face the choice between migrating for a better living or retaining an intact household with their spouses, children, and other dependents in the countryside.  So building better cities is an important element of maintaining and encouraging occupational and spatial labor mobility— and therefore, to maintaining the momentum of economic growth.

In its first two development decades, Vietnam grew in part by exploiting opportunities created by one-time reforms such as the reintroduction of markets to agriculture, the relaxation of binding trade policy constraints, and the opening of key sectors to private and foreign investment.  But many of these are changes that can occur only once.  Sustaining economic growth requires ongoing commitment and creativity.  In Thailand, a decade of very fast economic growth 1985-96 encouraged policy complacency, which led to underinvestment in schooling and skills as well as urban congestion, all of which rapidly raised labor costs.  This has been identified as a key factor contributing to a decline in export earnings that helped precipitate the 1997 exchange rate crash and financial crisis—and a growth slowdown that has continued to this day.

After employment creation, the most important growth challenge facing Vietnam is to support expansion of an adequate and productive human capital endowment.  Labor productivity increase is the mainspring of long-run economic growth, and a country that fails to promote and sustain expansion of labor skills risks falling into a ‘lower-middle income trap,’ in which firms do not innovate or invest because there are not enough skilled workers, while workers do not acquire education or training beyond a basic level because there is insufficient demand for skills.  Long-term, such an economy is doomed always to compete for low-skill jobs and low-tech industries in the global manufacturing system.  Fixing it calls for a coordination of efforts that is beyond the capacity of private actors alone.  It requires policy action, and so the government should address it as part of its development strategy.  Fixing higher and vocational education is one urgent task.  Making cities livable and affordable is another.  The two, as this note suggests, are strongly complementary.

A much longer and more detailed version of this post is available (in English and in Vietnamese) here

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[i] Data in all figures are from the Asian Development Bank’s Key Indicators series.

[ii] CIEM (Central Institute for Economic Management), 2009. “Vietnam’s economy in 2008: a reference book.” Hanoi: Finance Publishing House.

[iii] Goujon, A., and Samir.A.C., 2006. “Past and future of human capital in SE Asia: 1970-2030.” Vienna Institute of Demography, Working Papers No. 2006-07.

[iv] CIEM, ibid.

[v] Mori, Y.; Nguyen Thi Xuan Thuy, and Pham Truong Hoang, 2009.  “Skill development for Vietnam’s industrialization.”  Manuscript, Hiroshima University.

Chimericasia

The term “Chimerica” has recently come into vogue, thanks to the Harvard historian Niall Ferguson (see here, for example). He uses it to summarize the increasingly important and prominent economic bond between China and the US. Functionally, this bond has two parts: the United States’ merchandise trade deficit with China, and a countervailing flow of Chinese savings into US treasuries and other assets. The former has been a function of American overspending relative to income, and the latter have contributed to making overspending possible – or more accurately, cheaper to finance – by holding US interest rates low.

However, this bilateral bond of trade and financial flows, while impressively large, is not free-standing. It exists only because of many other economies, especially in the developing world, have become counterparties to North Pacific trade. It’s worth devoting a few minutes to thinking about these corollary links and some of their implications. That’s the subject of this không sao entry.

The global boom in trade with China

In the West, most discussion of China’s rise as a global trading power has focused exclusively on its success as an exporter of labor-intensive manufactures. From a developing world perspective, however, China is often more properly seen as a major importer, of raw materials and of manufactured components for final assembly in Chinese factories. The majority of developing economies have been drawn into this international production network. For many, this has resulted in major changes in production structure and the volume and direction of their international trade. These changes, in turn, have implications for their long-term development.

The reorientation of developing economies toward China has had three big types of impact. First, just as in rich countries, the producers of labor-intensive manufactures have encountered intense competitive pressures. Second, natural resource export industries have enjoyed a sustained commodity price boom (recent fluctuations notwithstanding). Third, manufacturers of skill-intensive goods such as components for computers, phones, and other electronic devices have found opportunities to expand through participation in so-called “fragmentation trade” (i.e. trade in partly finished manufactures) with China.

The first impact is obvious. Producers of garments, footwear, furniture, low-end electrical appliances and similar low-tech products everywhere, whether in Raleigh or Rawalpindi, are locked in competition with Chinese factories operating on razor-thin margins. The end of the Multi-Fiber Arrangement, under which the USA and the EU imposed “voluntary” quotas on garment exports from developing countries, removed a big barrier to China’s growth in this product category, thereby intensifying competitive pressures on producers in other countries. The overall expansion of Sino-American and Sino-European trade has also conferred advantages on Chinese producers by creating and enhancing trade networks and other forms of market infrastructure. Some of this growth has come at the expense of firms elsewhere (e.g. Indonesia).

The second impact, on global markets for natural resources, is also pretty clear, but the numbers are big enough to merit review. China is now the world’s largest consumer of most of the main metals (accounting for a quarter or more of world imports), and a major consumer of energy. It is the largest world consumer of many agricultural products (including wheat, rice, palm oil, cotton and rubber), and the second largest in others (soybeans, soybean oil, tea). Between 1990 and 2003, Chinese demand for major metals grew at an average of 14.7 per cent yearly; since 1999, it has grown at over 17 per cent and absorbed around two thirds of incremental global output. For any country that is specialized in primary commodity exports, China is a major destination and the driver of a sustained export boom. Brazil’s exports to China (mainly iron ore, soybeans, crude oil, wood pulp and bovine leather) grew by 800% in the first 5 years of this century. Other resource exporters have similar stories.

The third impact is more subtle. As global trade and transport costs have fallen, firms have been quick to abandon the old manufacturing model in all (or nearly all) stages of production take place within a single economy. Increasingly, parts and components are manufactured in specialized plants located wherever economic logic or business expediency dictates, then shipped to China (or another low labor cost location) for final assembly and packaging. The more advanced Asian economies (Korea, Japan, Taiwan) are leaders in this trade, but even such latecomers to industrialization as Malaysia and Thailand have significant exports of skill-intensive electronics parts and components to assembly plants in China. The more China’s factories grow, the more they draw in imports from locations such as these.

Putting it all together helps us understand China’s trade balances with the rest of the world. China runs a substantial merchandise trade deficit with Brazil, and a smaller one overall with South America as a whole (see table below). Its trade balance with Africa is a wash: China’s massive imports of African energy and minerals are about matched by its earnings from low-end manufactures exported to the continent. With Asia, however, China runs a huge deficit: $US187bn in 2007 ($178bn, if we exclude Japan), almost as large as its surplus with the US ($220bn in 2007). The growth rate of China’s exports to the US (23% annually in 2000-07) was lower than that of its exports to South America (33%), C.I.S. (47%), Africa (33%) and Asia other than Japan (26%). Meanwhile, China’s merchandise imports from developing Asia also grew at about 26%, while those from resource-rich Africa expanded at 31% and S. America 38%. So the Chimerica phenomenon is not independent: during boom times, the growth of Chinese trade with the wealthy West has also supported the emergence of Chinasia, Chinafrica and Chilatinamerica.

In global perspective, developing Asia is just as important a destination for Chinese exports as the US (both account for about 25%). Developing Asia sells China 1/3 of its merchandise imports – over $500bn worth in 2007, against just $70bn imported from the US. Put another way, all of China’s trade (imports plus exports) with North America amounts to less than 2/3 of its trade with developing Asia — $409bn in 2007, as opposed to $653bn.

In other words, a very large part of what Americans count as “imports from China” is in fact imports of minerals, energy, timber, processed ores, basic chemicals, and electrical and electronic parts and components from elsewhere in the developing world which have passed through China, and in passing, have been transformed with the help of Chinese labor into products recognizable by American consumers. Want to verify this? Next time you dispose of a worn-out or broken “made in China” electronic device, disassemble it first and count the countries from which its interior parts originate. The primary goods that China sources from the rest of the world are harder to identify, but they’re in there too: pulp and paper used in packaging and printed products; minerals and ores used in metal and electrical products; palm oil, rubber, soybean, and other industrial crops used in tires, inks, processed foods; plywood and timber used as formwork in construction of China’s factories, ports and warehouses; and so on. Far from being a bilateral relationship, Chimerica’s trade is just the tip of the global trade iceberg.

The global financial crisis

During the global recession, the “rebalancing” of China’s economy (the term used to refer to an increased reliance on domestic demand rather than exports) has sustained its growth and maintained the relationships with the rest of China’s trading partners, insulating them (to an extent) from the worst effects of the global trade downturn. The most recent IMF World Economic Outlook (July 2009) predicts China and India to grow in 2009 at 7.5% and 5.4% respectively—in the case of China, ten percentage points faster than the United States. Once the global recession is over, developing Asia’s share of global GDP will have risen even faster than in previous years. Prof. Ferguson asks whether China’s robust growth in the face of a US recession spells the end of “Chimerica”. One could with equal validity see these differences as further evidence that the strength of the link was always—well, chimerical.

Chimericasia and the environment

There is an important coda to this story that is about trade not in goods, but in services—specifically, environmental services. Much of the growth of China’s imports from the developing world has been in resources, including tropical timber, minerals, and agricultural produce. Resource extraction by miners, loggers and so on draws down natural capital, and the expense of doing so is being borne not by Chimerica but by the source countries themselves. In this way, both America and China have “offshored” many of the natural resource costs of their own consumption, even as they implement more restrictive environmental policies on their own domestic industries. Sustained demand growth for tropical timber and agricultural products have catapulted some resource-rich developing countries way up the global league table of greenhouse gas emitters: according to the Stern Review, land use conversion accounts for 18% of global GHG emissions; 20% of this from Brazil and 30% from Indonesia, making that country the world’s third-largest emitter of GHGs. That’s a very significant downside of resource-based development.

China’s merchandise trade balances with regions and selected countries ($US billion)

Balance of trade	1997	2003	2004	2005	2006	2007
World	40.4	25.5	32.1	102.0	177.5	261.8
North America	16.6	90.4	121.9	167.5	214.6	242.4
– United States	16.4	85.2	115.0	156.1	195.7	219.8
– Other North America	0.1	5.2	7.0	11.3	19.0	22.6
South & Cent. America	0.6	(4.7)	(6.5)	(6.7)	(4.8)	(8.4)
– Brazil	(0.4)	(3.7)	(5.0)	(5.2)	(5.5)	(7.0)
– Other South & C. Am.	1.0	(1.0)	(1.5)	(1.6)	0.7	(1.4)
Europe	6.5	41.6	64.2	106.9	146.8	197.3
– European Union (27)	5.9	41.6	63.9	104.3	140.7	188.2
– Other Europe	0.6	0.1	0.3	2.6	6.0	9.1
Cwealth of Indep States (CIS)	(2.7)	(3.8)	(2.4)	0.7	5.2	20.0
– Russian Federation	(2.0)	(3.7)	(3.0)	(2.7)	(1.7)	8.8
– Other CIS	(0.6)	(0.1)	0.6	3.4	6.9	11.2
Africa	0.7	1.8	(2.0)	(2.5)	(2.6)	0.2
– South Africa	(0.0)	0.2	(0.0)	0.4	1.7	0.8
– Other Africa	0.7	1.6	(2.0)	(2.9)	(4.3)	(0.7)
Middle East	(0.2)	(1.2)	(4.7)	(8.9)	(11.3)	(3.9)
Asia	21.9	(98.6)	(138.6)	(155.2)	(171.3)	(186.9)
– Japan	(15.5)	(3.3)	(4.7)	1.9	(3.6)	(9.1)
– Six E. Asian traders*	55.1	(72.3)	(96.0)	(102.7)	(101.0)	(106.3)
– Other Asia	11.3	2.1	0.8	0.7	6.7	14.3

* Hong Kong, South Korea, Malaysia, Singapore, Taiwan and Thailand.

Source: WTO.

Thailand’s ‘Liberty of the Moderns’: PAD’s proposed constitutional reform

Since late 2006, a group of Thais has conducted protests against the current national government, calling for the Prime Minister resign and his government to be dissolved.  Their protests have been assertive, and their confrontations with police become increasingly violent; hundreds have been injured and two protestors have died.  The protest group, which calls itself the Peoples’ Alliance for Democracy (PAD), is understandably very unhappy with the current government, a successor to the widely despised regime of former Prime Minister Thaksin Shinawatra.  Thaksin, who lives abroad and faces criminal charges in Thailand, and his party Thai Rak Thai (TRT) had won power in two successive elections, the second (in 2005) a landslide giving TRT a mandate to rule without coalition partners.  They achieved this by deploying populist policies—subsidized health care, loan forgiveness and the like—that won them the support of the large majority of Thais that are rural and relatively poor.  A third general election in April 2006 was declared invalid after many other parties refused to participate; shortly thereafter the military seized power in a coup and TRT was ordered to dissolve.  Civilian government returned in December 2007 with a general election in which the People Power Party (PPP), the successor to TRT, once again won an outright majority.  Frustrated by the electoral lock that that TRT/PPP has thus achieved, PAD now seeks to change the government by non-electoral means.  Moreover, they seek also to change the constitution in a way that they hope will permanently break the electoral dominance of rural Thailand, arguing that rural Thais are not sufficiently well educated to be trusted with such power.  They originally demanded a parliamentary system within Thailand’s constitutional monarchy in which 70% of parliamentary seats are filled by appointment from “the professional classes”, with the remaining 30% by popular vote.  This demand has since undergone modifications in response to loud protests, but its elitist spirit persists in more recent proposals. 

The PAD vision for Thai politics is strikingly reminiscent of the ideas advanced two hundred years ago by the Swiss-French philosopher Benjamin Constant and labeled by him the ‘Liberty of the Moderns’.  Constant’s concept of ‘liberalism’ was articulated in the interval between the bloody excesses of the French revolution (1789) and Napoleon’s self-coronation as Emperor of France (1804).  (Interesting trivia:  that period coincides with the reign in Thailand of the first monarch of the Chakri Dynasty, which was founded upon the overthrow of another Taksin, killed in 1782.)  In his terrific new book After Tamerlane: The Global History of Empire Since 1405 (Bloomsbury, 2008), the historian John Darwin states that Constant’s writings

“were a fierce rejection of revolutionary violence and Napoleonic tyranny.  Constant argued that ordinary people were bound to resist interference in their private and social lives and that arbitrary acts by the state destroyed the mutual trust between individuals on which all social and commercial relations depended. … Modern societies, he suggested, were too complex to be ruled politically after the fashion of an ancient city state [the ‘Liberty of the Ancients’]… the legislators, to whom the executive should answer, should be drawn from those least likely to favour the extension of arbitrary power or to be seduced by a demagogue.  Politics should be the preserve of the propertied classes, who would exert a wholesome (and educated) influence on the ‘labouring poor’.  The propertied were the true guardians of the public interest.  Thirdly, it was necessary for property rights and other civil freedoms to be protected by well-established rules — an ideal that implied the codification of the law and its machinery” (pp. 229-230). 

Intriguingly, Constant admired the concept of the constitutional monarchy, in which the King retains extraordinary powers to make key appointments, call elections and dissolve governments, while responsibility for governance, policy and administration rests with the legislative branch.  That notion, together with his idea that government should be by the ‘propertied classes’ on behalf of the entire polity, is a vision remarkably consonant with the views now espoused by the PAD.  Thailand’s ‘propertied classes’, now encamped outside Government House and in a state of near-constant conflict with police and security forces, see themselves assuming power in a system in which their representatives, occupying reserved parliamentary seats, make wise policy decisions on behalf of what they see as uneducated and misguided poor (and rural) Thais, under the benevolent gaze of a monarch who (in Constant’s words) “reigns but does not rule”.  It is, in other words, a concept of “liberalism” which, while strikingly modern in the late 18^th century, is by today’s standards atavistic, patronizing, undemocratic, and fundamentally illiberal.  

If the upper-class and middle-class, wealthy, educated, Bangkok-based members of the PAD really cared to make a long-run change to Thai politics, they might consider pushing instead for policies that address the large and widening gap in Thai incomes.  From 1975 to the present, the share of income earned by the top 20% of the Thai population has risen (it is now about 55%), while that of every other quintile has declined.  Poverty is almost overwhelmingly a rural phenomenon. These were the divisions exploited by Thaksin and TRT to such great effect in earlier elections; Thaksin threw a few crumbs to the rural poor, but even those crumbs were more (and perhaps more graciously given) than they’d ever before seen from Bangkok. His vote-winning gambits weren’t great as a development strategy, but they pointed very clearly to the policy direction in which any democratically elected Thai administration must henceforth move.  

Addressing anti-rural bias need not be merely populist.  Education policy would be a great place to start, as made clear in an analysis by Thai economist Sirilaksana Khoman.(1)  All those uneducated rural Thais came through a public school system in which the lion’s share of fiscal resources, the best teachers, buildings and equipment were all devoted to the relatively small urban population.  In Thailand, all public kindergarten schools are in urban areas, and enrollment in municipal schools in Bangkok is about equal to that for the entire rest of the country (the distribution of private schools is even more skewed toward urban areas).  Fees for university education, as a percentage of costs, are much lower than for secondary and vocational schools– an imbalance that subsidizes education more for the urban middle class than for others.  Overall education costs in Thailand, as a percentage of per capita income, are quite a bit higher than in comparable developing countries. Sure, rural Thailand’s lower school enrollment rates, higher and earlier drop-out rates, and lower overall attainment must in part reflect different labor demand conditions in the countryside, but it’s equally clear that the supply of rural educational opportunities is also much less adequate.  Taking a leaf from Thaksin’s book, addressing access and equity issues in the Thai educational system would surely be a great way to win electoral popularity in the countryside– quite apart from its obvious impact on economic well-being — and would embody a true, and truly modern, liberalism.  

As The Economist says of PAD (28 August 2008): “Some of its supporters are genuine liberals, angry at the Thaksin government’s abuses and at the signs that [current Prime Minister] Samak and his cabinet are turning out to be little better. But its leaders are deeply reactionary: the “new politics” they preach is in fact a return to old, pre-democracy politics with a mostly unelected parliament and powers for the army to intervene when it feels like it”.  That unnatural alliance and its ideas are what makes up the Liberty of the Moderns, Thai-style. True liberals should shun it.  

 

(1)   “Education: The key to long-term recovery?” in P. Warr, ed: Thailand Beyond the Crisis (Routledge/ Curzon 2005). 

Agricultural revolutions: the view from Stonefield, WI

“Agricultural development” may not be the first words off your tongue when asked to name a defining event or moment in history, but until well into the 20th century, agriculture was the dominant industry and employer in most countries, and the fortunes of an economy frequently mirrored those of its agricultural sector.  More precisely, the dynamism (or otherwise) of agriculture– its capacity to respond to evolving scarcities on demand and supply sides– frequently determines that of the aggregate economy, so strong are the ties that link this sector to labor productivity and wages, food prices, household welfare, and trade. 

There are many instances of these defining moments.  Best-known is the Green Revolution, the release of high-yielding varieties of cereal seeds that helped dramatically to raise yields and stave off starvation in tropical developing countries.  This was an example of “induced innovation”: that is, a process of technological development and adoption that responds to perceived scarcity of productive resources by “saving” the relatively scarce input to production.  In the case of the Green Revolution (and also the dramatic intensification of Japanese agriculture during the Meiji era), the scarce input was land.  New technologies and farming methods were developed that reduced the area of land required to produce a ton of rice, wheat or corn.  Plant-breeding innovations shortened the cropping season and made plants nitrogen-responsive and non-photoperiod sensitive, meaning that crops matured in a fixed number of days regardless of the seasonal signal (day length) that in traditional cultivars determines maturation. Two or three crops could be raised on one plot each year, with higher yields per crop. 

Where land-saving innovation is the key to tropical agricultural development, in the frontier days of United States agriculture it was labor that was relatively scarce.  In a massive burst of technological innovation from the middle of the 19th century to the start of the 20th, farmers and agricultural implement manufacturers (which later evolved into corporations like Case, McCormick-Deering, and International Harvester) sought, found, patented, and sold news ways of preparing land and of planting, cultivating, and harvesting crops that dramatically reduced the numbers of workdays required per crop-acre.  Plowshares were improved and combination plow-harrow systems invented. Hand-seeding was replaced by seed drills that rapidly increased in capacity from two-row to dozens of rows at a single pass.  Hand-reaping with a scythe, manual collection and bundling of cut grain stalks, threshing, winnowing and other post-harvest operations were all transformed by innovations such as the mechanical reaper, then the reaper-binder, balers, threshing machines and ultimately the all-in-one combine harvester.  

The first steps along this path to mechanization involved sometimes diabolically complex combinations of chains, pulleys, levers and gears, all (typically) built onto a sturdy wooden frame and pulled or powered by horses.  But agricultural innovation also stimulated big steps forward in engineering, so that by the early 20th century the horse had been displaced by steam power then the gasoline tractor, and wooden farm implements, along with most farm workers, by slick steel machines.  In the course of this revolution — and most particularly during and after the Civil War (which dramatically cut the numbers of able-bodied men available for farm work), the number of man-hours required to harvest and thresh an acre of wheat fell from over 30 to less than 5.

(Photo: Marin Bozic)

The pace of this innovation was most urgent at the frontier, where land was abundant but labor critically scarce.  Wisconsin, where I live, was briefly the frontier in the middle of the 19th century, at which time its (short-lived) wheat industry made it “the nation’s granary”.  The history of agricultural technologies used in the state during the era is captured in a fascinating (really!) series of exhibits in the Wisconsin State Agricultural Museum at Stonefield, the former farm of the state’s first governor Nelson Dewey, at Cassville on the Mississippi River. I visited Stonefield this weekend with a group of grad students and we were given a fantastic two-hour tour by Dale, the maintenance and restoration guy.  He turned out to be not just a great guide but also a well of knowledge and anecdotes about the machinery, housed in two rows of implement sheds, and the fabulous collection of original, beautifully-crafted scale models used for patent claims and sales demos.  

Of the implements on display, my favorite was the Groundhog Thresher, a vibrating threshing table whose nickname derived from its propensity to work its way into the ground–literally to bury itself–as it shook. This was the first in a long line of mechanical improvements introduced to frontier wheat and grain farmers by Jerome Increase Case, the “Threshing Machine King” from Racine, Wisconsin.  His eponymous company is now, after many decades and more amalgamations, Case IH Agriculture. 

On the same trip we camped at Nelson Dewey State Park, adjacent to Stonefield and located high on the bluffs that line the Mississippi valley in southern Wisconsin.  It’s a great place to camp, watch the sunset or sunrise, and generally admire this amazing river.  As an immigrant, I’ve noticed over the years that the iconic status of the Mississippi River in my mind–it’s emblematic of many things American– is something that I share much more with other foreigners than with Americans.  I’m continually surprised to find how many long-term residents of Madison, my home town, have never made the 90-mile trip west to see this place. Everyone associates the river with Huck Finn and Tom Sawyer, of course, but many Americans seem uninterested in it otherwise, and some express quite negative sentiments.  Maybe the river summons associations with poverty and slavery (think Ol’ Man River), tacky river-boat culture and an industrial past they’d rather forget.  It has all that, of course, but it also has a spectacular natural beauty, a rich history (see Effigy Mounds National Monument), and (to this economist at least) a tangible and even moving sense of the scale and might of the US economy.  The latter can be seen in the mind-blowing volume of freight carried along it by barge tows and high-speed trains: on a typical summer’s day there are 40-60 barge tows navigating the upper Mississippi, each carrying the equivalent of 900 semitrailers in grain, cement, iron ore, scrap metal, or other bulk goods.  

Still skeptical about the Mississippi?  Grab a tent and frying pan and a bottle of wine, choose a sunny autumn weekend, and go see for yourself. And while you’re there don’t forget Stonefield, your one-stop tutorial in the history of an agricultural revolution.  Say hi to Dale for me!

How the Philippines has failed its rural poor (a book review)

I’ve just finished reading a really nice book and writing a review of it for an academic journal.  I doubt that anyone much will read the review once it’s published (no disrespect to the journal; it’s just that there’s so much to read, so little time… ).  But I liked the book, and I enjoyed the train of thought it set me on, so I’ll post a version of it here.  Not that I expect it to attract many more readers this way!

The book is edited by Arsi Balisacan and Hal Hill and is called The Dynamics of Regional Development: The Philippines in East Asia.  It’s a joint publication (2007) of the Asian Development Bank Institute and Edward Elgar Publishing.  Besides the editors themselves, there are chapters contributed by many of the Philippines’ leading economists.  Here is my reaction to the book. 

The Philippines is a nation made up of thousands of islands; its peoples come from a variety of ethnic and cultural origins and speak hundreds of distinct languages.  For most of its history this was a collection of small (even tiny) clan-based fiefdoms; Spanish colonialism imposed superficial uniformity but was in practice highly decentralized.  Only under the US colonial administration (1901-1946) did the central government in Manila gain absolute ascendancy, and only under the Americans was predominantly Muslim southern Mindanao incorporated into the state in more than a merely cartographic sense.  Accordingly, when in 1991 the Philippine legislature enacted one of the developing world’s earliest comprehensive decentralization laws, it was, in part, simply acknowledging the impracticality of imposing ‘one size fits all’ laws and administrative practices on such a heterogeneous state, and taking a few small steps back toward to a more natural prior order. 

There was, however, much more to decentralization than merely making room for cultural and linguistic differences.  Since independence, political power and administrative authority had been vested exclusively in Manila– a system that was practically unsuitable given the costs and practical difficulties of communicating with remote provinces.  The expense of centralized rule, and the opportunities for corruption, inefficiency and informal local practices that it created all argued for a devolved system of governance, one that moves authority and responsibility closer to its constituent populations and allows it (to some extent at least) to adapt to local conditions and preferences.  That was the claim made for the Philippine decentralization. This book helps us to assess the extent to which it has proved true. 

The task is complicated, as the editors note, by the fact that simultaneous with decentralization, the Philippines in the 1990s was also adopting a broad program of deregulation and economic policy reforms that promoted domestic economic and political integration, and at the same time opened the economy to the rapidly growing and highly volatile world trading system.  The book addresses this with a set of essays comparing the Philippine experience with those of Indonesia and China.  These are interesting, but it’s the second part where the real meat is found, in a set of essays that deal in detail with aspects of Philippine decentralization.  

The overarching context of Philippine regional development is provided by that country’s sorry record of post-colonial growth; in this respect the country has lagged far behind its SE Asian neighbors.  It has maintained highly distortionary policies on trade, industrial development and factor markets and has been highly susceptible to macroeconomic and policy instability.  All this has discouraged private investment in fixed assets; the Philippines has the lowest domestic savings and investment rates in SE Asia and, by contrast with most of the region, foreign direct investment also plays a very small role.  Public investment in infrastructure, energy, education and other growth-related areas has also been woeful by regional standards—about 2-3% of GDP as opposed to 5-6% in adjacent countries.  Transport infrastructure in particular has remained grossly inadequate, and given the country’s geography, this has had a direct impact on the growth of subnational economies by placing strict limits on the spatial spread of tradable industries other than agriculture.  An excellent chapter on this subject by Gilbert Llanto informs us that in 1988-2003, 76% of fixed capital investment took place in the National Capital Region (where the Port of Manila is located) or in Southern Tagalog, the immediately adjacent region.  Little wonder, then, that the brightest and most entrepreneurial Filipinos from the provinces migrate, either to Manila or overseas, to raise their own productivity and thus their earnings (as documented in a chapter by Esguerra and Manning on labor).  That their departure has a brain-drain impact on productivity is clear; it is unlikely that the remittances they send back come close to compensating for this, particularly in the prevailing climate of macroeconomic instability, which discourages private investment and thus encourages the use of remittances in consumption and education, the key to positively selected migration. 

Against this backdrop, how much influence has decentralization had on the course of Philippine development?  The answer, it seems, is not much.  Relatively little real power, a small percentage of public sector jobs, and almost no revenue-raising capacity, has moved out of Manila.  Since devolution, local government expenditures have doubled as a share of GDP, but only from 1.6% to 3.3%; revenues raised by local governments have risen from 0.8% of GDP only to 1.2%; nearly all local government expenditure is funded by central government transfers.  The rates of most taxes devolved to provinces and local governments remain tightly controlled by Manila, which also limits the frequency and the magnitude of revisions—even of taxes denominated in nominal pesos (Chat Manasan’s chapter records all this in detail).  That the World Bank should describe the Philippines as having “the strongest history of democratic decentralization” in Southeast Asia says more about the state of government and governance in neighboring countries than it does about the scope of this devolution.

Despite devolution and a much longer history of regional development policies (summarized in a contribution by Gwendolyn Tecson), the Philippines continues to exhibit glaring spatial distinctions.  Infrastructural deficiencies and disparities in educational attainment play a large role in explaining persistent differences in subnational growth rates, and these in turn are the dominant sources of variation in poverty alleviation.  Arsi Balisacan’s outstanding chapter on growth and poverty captures this in a quantitative analysis. 

Ultimately, Philippine development policies, by fostering a pattern of economic growth based on the primate city Manila, have discouraged investment in the provinces, encouraged outmigration, and stymied growth both in remoter regions and in the economy as a whole.  As Balisacan points out, the elasticity of poverty alleviation with respect to aggregate growth in the Philippines is only about half that estimated in other developing countries.  Without dynamic local economies, devolved administrations in the poorer provinces are trapped between the basic needs of poor constituents and the lack of a buoyant or independent tax base.  Worse, they remain dependent on transfers from a national government whose own permanent fiscal crisis makes both the value and the timing of transfers highly unpredictable.  The provinces furthest from Manila are caught in a trap of persistent poverty, political and policy instability, low investment and low growth. 

The contributors to this book document the story of Philippine regional development (or the lack thereof) in great detail, for the most part with analytical clarity and a pleasing uniformity of style, and this makes for a readable and very coherent volume overall.  However, the book leaves two important subject areas underserved: agriculture, and natural resources and the environment. 

The book assigns no special place to discussion of agricultural development and its links to regional growth.  A chapter on rural non-farm development takes just three paragraphs to document what its authors call “the declining importance of agriculture in providing labor employment opportunities for rural households”, but this statement about a trend (with data, moreover, from atypically fast-growing areas adjacent to Manila) overlooks the importance of the underlying levels: agriculture still employs over 37% of the labor force; farming and associated industries remain the dominant sources of income outside the Manila-centered industrial zone, and poverty is very strongly correlated with rural and agricultural households.  Another chapter, on regional responses to trade liberalization, mentions agricultural trade policy only once before dwelling for an entire chapter on industrial policies.  This neglects (among other things) the general equilibrium penalties imposed on the farm sector by decades of import-substituting industrialization tariffs—a subject that has been the focus of intense analytical attention since the mid-1960s—and their inevitable effects on regional growth rate disparities.  Even though the pace of agricultural trade liberalization has lagged that for manufacturing, many of the indirect penalties imposed on the sector by pre-WTO trade regimes have been relaxed, with the result that some agricultural industries—livestock, for example, and bananas and other export-oriented tropical fruit crops—have flourished in recent years. 

The book also neglects attention to natural resource sectors.  From the production side, the biggest contrast between greater Manila and the rest of the Philippines is the dependence of the latter on soils, water and other depletable natural resource wealth.  While Manileños justly complain about air and water quality, the real environmental disaster in the Philippines has been the pillaging and destruction of its natural resource wealth, both by corporations acting above the law and by poverty-stricken farmers and fisherfolk lacking viable alternative livelihoods.  In many areas, their actions have sent rural (and especially upland) communities into a spiral of environmental decay, productivity decline, and income stagnation.  Environmental damage increases economic vulnerability (as evidenced by periodic tragedies due to mudslides and flooding) and reduces incentives for fixed capital investment.  The result is higher rural poverty, exacerbated regional disparities and lower aggregate growth.

These omissions aside, this is a volume that defines the state of the art in economic analysis of Philippine development.  It’s a must-read for all students of that country’s economy, and for all who seek to understand better the regional implications of growth, policy and devolution in low-income economies.  

The financial crisis and global poverty… what’s the connection, and what can be done?

Sustained economic growth is a necessary condition for lasting poverty alleviation, and it is well known that macroeconomic stability is the bedrock of stable long-run growth.  A generation ago, low-income economies were not closely integrated with the world economy, and macroeconomic crises (high inflation, exchange rate volatility, capital flight and employment uncertainty) arose mainly from domestic policies.  Nowadays, the same economies are much more open to trade and international capital flows, and for many, the global economy is now a major – if not the major – source of macroeconomic shocks. 

The world will witness this in the next few months (or even years), as the effects of the U.S. consumer spending slowdown and the subprime banking crisis work their way through global commodity and money markets.  Global growth was already slowing prior to the subprime crisis, signaling the end of a 5-year rise in demand for primary commodities and partially processed resources, the staple exports of the world’s poorest countries.  Lower export prices will create or enlarge trade deficits in many low-income economies.  On top of that, the subprime crisis has now generated a massive negative supply shock in capital markets.  This will drive up world lending rates; newly heightened risk aversion on the part of lenders will raise rates even higher in some markets—even, perhaps, those for sovereign debt—and for some more vulnerable economies, possibly cut off access to credit altogether. 

The combined outcome will in all likelihood be just like the early 1980s, if not worse, when sharp slowdowns in the U.S. and other rich countries accompanied by sharply rising world real interest rates drove many developing economies into deep recession, compelling them to adopt “forced-march” adjustment policies with consequent economic and social disruptions, and in some, precipitating violent and economically debilitating contests for economic access and political power. 

The economic and financial crisis of the early 1980s had predictable effects on poverty in the developing world.  Using the World Bank’s $1/day measure, from 1981 to 1987 the numbers of the poor in Latin America, the most heavily indebted developing region, rose by 27%.  In sub-Saharan Africa, the most commodity-dependent region, the rise was 29%.  Developing East and Southeast Asia, less heavily indebted and more export-diversified, saw poverty decline by 14% over the same period—and that’s excluding China, where dollar-a-day poverty fell by 43% but arguably for reasons unrelated to trends in the global economy.  Macro instability may not have been the only cause of poverty increases in Latin America’s and Africa’s “lost decade” (see GDP growth rates) but it was certainly a major contributor.  If reducing poverty is the goal of aid programs, then there is a compelling case for designing aid to prevent the recurrence of such macro meltdowns.

What can be done to forestall or minimize this shock?  Support and assistance for adjustment to trade and financial shocks—including provision of safety nets for the poor—would have been highly beneficial in the early-mid 1980s.  The Bretton Woods institutions (the World Bank and the IMF) were only of limited help at that time, and their role is even further diminished in this century.  There is, however, a well-established history of U.S. support for adjustment to major macroeconomic shocks (the postwar Marshall Plan was one; the 1989 Brady Plan was another).  Well-timed and well-designed assistance for low-income economies suffering macroeconomic shocks can be a powerful tool for preventing the burden of adjustment from landing on the poorest.  Assistance can take many forms, from timely and helpful advice to financial interventions intended to forestall balance of payments crises.  Given the size of most low-income economies, the magnitude of such interventions is likely to be quite small in relation to current estimates of the cost of bailing out America’s delinquent corporate borrowers.  (The four biggest developing-country bailouts—South Korea 1997, Indonesia 1998-99, Brazil 1998, Argentina 2001—cost the international financial system a total of just less than $250bn in 2008 prices (Foreign Policy, September 2008).  And that was the price after each country had fallen into its crisis, which must be many times greater than the cost of actions that forestall its onset.  Compared to what’s been spent in the past couple of weeks to prop up America’s (and the world’s banks, that’s chump change.)

Promoting macro stability may not be as glamorous as many more direct and targeted ODA initiatives, particularly at a time where the magnitude of total ODA itself will be under severe pressure, but it has the distinct advantage that its benefits are widely shared and long-term in nature.  Macro stability is complementary with financial deepening, and thus with the spread of formal capital markets and higher returns to investments in all forms of capital and skills that raise labor productivity.  It has a dynamic positive relationship with political stability, which is now a global public good.  And sustaining growth also means maintaining demand for imports. This is important to the U.S., whose exporters have been instrumental over the past year in preventing the collapse of domestic consumer demand from precipitating a formal recession.  These characteristics and associations mean that every dollar spent on effective means to promote stable macroeconomic conditions in low-income countries is likely to pay a high dividend in terms of gains in economic welfare.  These dividends will be measured as positive poverty outcomes in low-income economies, but will also accrue to countries, like the U.S, which have a stake in global economic and political stability.