Synergies between Public Infrastructure and Private Investments

This post describes an hypotetical financing solution that could help reduce a common problem of mismatching between public and private investments, by using an IDA Private Sector Window to create incentives for the private sector to follow the lead of the public infrastructure investments. The result would be better synergies between public and private resource allocations, and thus an increase in the benefit for both sectors, and for the general public.This financing solution is an idea that could be offered by multilateral development banks and be implemented in conjunction with national, regional, o local governments depending on the scale of the funds and the confidence of the rule of law in the particular geographical area to be implemented. Although I think this solution could be applicable to many developing countries, this example is created with Mexico in mind.

Mexico is the 13th biggest country in terms of area and home to a wide diversity of ecosystems. Furthermore, it has access to both the Pacific and the Atlantic Oceans through a long coast on the east and west sides. This size and diversity provide a lot of opportunities for development. However, the diversity also makes it hard for the national government to establish clear priorities that can benefit the whole country at once. This requires smaller regional plans that focus the national, statal, and local efforts to develop one region, and then use this economic growth either to expand the benefits or to replicate the process somewhere else.

However, the private sector and even different government levels can have different incentives that make them focus their priorities on different areas. My financial solution seems to make the biggest investment (public investment in big infrastructure projects) the guide to pull other smaller investments in the same direction. This comes from the assumption that bigger investment projects are subject to more detailed feasibility plans and are included in broader development plans.

The key financial solution is to tie preferential loans for the private sector with the bigger infrastructure public loans by joining funds from the IDA Private Sector Window with the normal funds used to make government loans for infrastructure. The condition for the private sector to get the loans is that the private projects are aligned and complements the infrastructure investment. The synergies will promote a faster use of the infrastructure and a faster economic growth that will, in turn, reduce the time to get the return of the investment from the infrastructure and improve the conditions for the private projects.

As an example, if the government gets funded to develop or improve a commercial port, the complementary preferential loan for the private sector can be targeted to small and medium companies that complement the port such as logistic companies, import-export companies, transportation companies, etc. By synchronizing the loan with the calendar for the port project, the companies can be ready to use the port when it´s finished reducing its time to become fully operational.

Reflecting on urban safety: Targeting the wrong side

Crime and other urban safety concerns are usually dealt where the damage is done - put some police agents in the bank, be careful of that dangerous area, take care at night - but efforts to attack its root causes are limited. Many new preventive options can be explored by focusing in the roots of safety, such as education programs, decrease inequality, increase employment, but while reading a report on urban safety in Asia I had a quick thought about an approach that is closer to the one that micro-finance schemes use.

The key to this approach is social pressure. How can you recognize those people that you can trust will pay you back a loan, when they have no physical proof of their paying capacity: you ask the people that know them. By making small loan groups where everyone knows each other in which one failing to pay affects the rest of the group, the groups self-organize among people that trust each other to pay.

If we can assume that criminals have a common set of values/moral that allow them to damage other people (yes there might be exceptions), it is probably expected that these values are shared with their close social groups. This idea is reinforced by gangs being common support groups for people that can't mingle in other social settings. Furthermore, the context around your home is presumably a big influence when developing your own moral, so it is to be expected that potential criminals can be found in the neighborhoods where actual criminals live or grow up.

Now, this doesn't mean that everyone in a neighborhood is or will be a criminal; but perhaps in these area there is more tolerance to people pursuing criminal activities and/or environmental factors that push people to a criminal life. 

While this probably won't show us anything new, as this areas might be expected to have the already common factors that cause criminals (poverty, lack of social services, deficient education, etc), this might be a useful way to target integrated intervention that aim to change a neighborhood into a place that promote safety, instead of one that promotes criminals. The ability to target specific areas instead of people or sectors, might be better accepted in these communities and have proven good results in Medellin for urban interventions. 

Can we come up with original measures to promote urban safety from these insights?

Missing the point

This image might seem like a silly joke but it points out an important effect of our economic system. Economic development is important as a mean to satisfy the needs of a society. The basics of Economy have always been to manage scarce resources, that is, to make the best use of the available resources which implies there is a goal different from "managing" itself. Mistaking economic development as a goal instead of a mean seems to be a terribly common mistake.

Economic development has evolved to a simplified conception of economic growth. Even worse due to the most commonly used indicator to measure this (GDP or a variant of it), many times people are actually talking about "production level/growth". While this can arguably a simplified way to express the "economy size" (a more complete definition should include a measure of capital and natural resources, not only production), it is very far away from what true economic development should mean, fundamentally because it refers to the outcome of a system as a way to describe the system; this completely avoids the potential of the system or the characteristics that brought this outcome into place. Describing a car in this way would be something like "10000 km/year" which definitely leaves a lot of important elements of the car out.

An even deeper discussion of this topic would mean if it makes sense to qualify an economy on its size. Is it a bigger economy better than a smaller one? Even on "per capita" terms, this indicator is rather limited. It doesn´t tell you anything about how efficient is the economy in generating benefits from the resources available, or on what is the potential for keeping this level of economy in the future. More fundamental questions like whether this economy can satisfy the necessities of its people (which should be the goal of any economic system) are very far away.

It is said that what can´t be measure can´t be improved, however the way we measure something sets the direction in which this will be improved. We can´t expect to have a sustainable development unless we start evaluating the potential of an economic system to generate future benefits. Furthermore, achieving any kind of development is meaningless if this development doesn´t improve the situation of the society.

What can democratic countries learn from China's urbanization report?

The recent report by the World Bank and the Development Research Center of China's State Council aiming to address the challenges and opportunities of urbanization in China called "Urban China: Toward Efficient, Inclusive, and Sustainable Urbanization" points out the following 6 main areas of work:

1. Amending land management institutions to foster more efficient land use, denser cities, modernized agriculture, and more equitable wealth distribution; 
2. Adjusting the hukou household registration system to increase labor mobility and provide urban migrant workers equal access to a common standard of public services; 
3. Placing urban finances on a more sustainable footing while fostering financial discipline among local governments; 
4. Improving urban planning to enhance connectivity and encourage scale and agglomeration economies; 
5. Reducing environmental pressures through more efficient resource management; 
6. Improving governance at the local level.

While some of the concepts including here are common to other western urbanization theories such as Transport Oriented Development, TOD, when including connectivity, environmental concerns and density, there are some interesting new inputs in this list.

As can be seen, the concept of urbanization goes way beyond of just building an efficient city, it includes to a great degree an improvement in the governability of cities by including issues as labor mobility, urban finances, and governance at the local level. This extends the idea of urbanization further away from just buildings, to actually having a functioning urban system. 

The obvious lack of use of market mechanisms compensated by an emphasis in government regulation is to be expected with the political system of China. However, this system is exactly what could actually bring this complex plan into a reality. Long-term sequenced planning was a key factor for building Special Economic Zones such as Shenzhen from a small fishery town to a major city of 10 million people and southern mainland China's major financial center (info taken from here). The political stability of China is required for the development of such a big urbanization projects (Shenzhen development started in 1979). 

While China has been proved capable of making such remarkable reforms once it sets a plan, it is not so clear what can the "western world" learn from this experience as it seems the fundamental political and economic systems are so different that a similar enterprise would be close to impossible in an democratic system where leaders change their ideologies and programs so drastically. What will the market response for this be is what is left to see in countries like India where similar urbanization efforts are probably also needed, but the political system only allows to push a few pieces of the required reforms at a time (such as the Low Emissions Transport Toolkit tested in 3 cities and now trying to be expanded into a tool for nationwide Low Carbon City Planning)

With pressing issues in so many sectors (climate change, natural resources, traffic congestion, economic efficiency, logistics, etc.) in the  cities of the world, big steps should be taken to anticipate and expected increase in urban population. China can definitely be a place to look for ideas in the future in this area.

Open economy or closed economy? I say productive economy!!!

After reading Latin America's Great Economic Divide by Raymond Colitt in Bloomberg Businessweek I got the feeling he´s missing something important. The whole article is based in Latin American examples to support that an open economy will grow faster as long as they give a safe environment for investors. Definitely using foreign investments to promote economic growth has been used before as a developing strategy. The results are good sometimes, and bad in others depending on whether the government managed this push in economic development and the extra currencies to build strong a foundation for its own economy that doesn´t depend on external sources. At the end, the value of an economy lies in how much "added value" can you create, which depends on your productivity, and in how much people want what you produce. Nothing more than supply and demand.

Yet, why people praise so much open economies, and disregard the closed ones? Furthermore, why open economies show better indicators? An open economy brings foreign capitals in two ways, by exporting and by foreign direct investment. The first one means that whatever you´re producing is demanded abroad, so your economy can benefit from the extra currency which will go into your own economy hopefully transforming into capital that would build up your productivity. Foreign investment is more direct as outsiders use their resources to build capital directly (either investing in promising companies or establishing their own), in this way productivity is increased quicker so growth comes faster. Politicians love this because they need giving results in a short time to gain political capital. However unless productivity is somehow internalized in the local economy (and the local people!) the growth relies in outsiders that can leave anytime to a more promising country.

Even worse, if the government supports too much foreigners as a way to attract them to invest, a disparity is created among society building up inequality. This goes against the basic function of a government of protecting its people. Even if this can work for a short time, it is not sustainable so in the long run it will never work.

So, when opening an economy, it is important to be careful to not to institutionalize inequality by settling permanent policies that affect local people to attract foreign investment. On the contrary, in any policy for economic development there should be a goal to increase productivity locally so that the benefits are owned by the local people.

China-US doing progress on Climate Change -> Should UNFCCC be scare about this?

After years of deadlock negotiations in the multilateral debates about climate change, China and US are doing good progress through bilateral meetings as can be seen here. That´s certainly good for the environment, but how does this make the the international organisms leading the climate change negotiations specially the United Nations Framework Convention on Climate Change (UNFCCC), look?

What do you think? US-China making progress in Climate Change will support the global agreement that is being seek at the Conference of the Parties (COP)  for Paris, 2015? Or will it show that multilateral negotiations are too slow and ineffective taking the climate change impetus to other mechanisms such as these bilateral sessions?

Balancing economic and social development

South Korea has been an example for all developing countries by being the first and only "graduate" from developing to developed country, and by doing it all in less than one generation. In economic terms, South Korea has an exceptional track. The following video from prof. Victor D. Cha of Georgetown University points out the following 3 key lessons for developing from South Korea

1. Rational economic decisions 
2. Pragmatic and fast responds 
3. Tough negotiators to achieve the expected results

Tres Lecciones de Corea para LAC from BIDtv on Vimeo.

However, Prof. Cha also points out the cost of development, which for Korea it was mostly in terms of social cost. Despite its development, South Korea has remained the highest among OECD countries in suicide rate for 10 consecutive years (2002-1012) mention a recent article in The Korea Herald quoting OECD Data.

One of the most mentioned reason for social stress in Korea (including suicide) is linked to what can be one of the main causes of South Korea development: a strong internal competition. As mentioned in the video social pressure to get into the best university or company is a common cause of stress that could also be related with South Korea having the highest smoking rates among men, and one of the highest in alcohol consumption.

Living in Korea I saw examples of this very often, and it was impossible not to compare with my more relaxed Latin culture. While I've to accept that Korean efforts definitely drive them higher in education and work related goals than most Mexicans; it is clear than Mexican people enjoy life more than Korean (in general at least!).

The South Korean case shows that while economic development is needed to overcome poverty, it is not enough to guarantee a happy life for everyone. Social development such as having a satisfactory level of gender equality and job rights are important for people to transform economic benefits into a higher quality of life.