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.

Low carbon economy as an opportunity for developing countries.

As climate change negotiations have generated questions on whether they can reach the political agreements needed on time to avoid a global climate catastrophe, some people rely on technology to make the change. Jeffrey D. Sachs in his column (which can be read here) argues that "directed technological change" can do what international negotiations hadn´t been able to.

This is a biased opinion from the developed countries, some of them (notably USA and China) have an economy based in oil and coal respectively. Changing such a big economy definitely requires big costs and involves an important risk of losing economic hegemony. Whether this risk is bigger by switching or by staying in an old economic paradigm remains to be seen.

However, developing countries are still building up their economies and their challenges are completely different as they usually have to compete with stronger economies. Finding new niches and competitive advantages is critical for developing economies to grow.

Low carbon alternatives could be the opportunity for developing countries to grow in a sector when some of the current economic powers are not so strong. Despite its coal dependence, China seems to have seen this as an opportunity by supporting companies like Suntech and Yingli which have made a huge business out of solar panels

Growth of Yingli Solar Capacity (http://www.yinglisolar.com/en/about/)

The same could be done by other countries since technology for solar panels (as for other low-carbon technologies) is well developed. In many cases all that it´s needed is natural resources, but in a different way, because this time they don´t have to be depleted. Natural resources such as sunshine days or wind are safest bets to base your economy on than oil or forests which can quickly get depleted and put the economy in trouble if not managed properly. Furthermore, at least for solar energy, countries near the equator have an advantage against countries from the north.

A nice conservative estimate of the amount of land required to fulfill world's energy needs using only solar panels done by the Land Art Generator Initiative (which can be read here). It is a bit old estimate, yet technology improvements can probably balance out any underestimations in the "worst case scenario" used for the estimation. An interesting number they give is that if solar farms would be constructed at the same rate that the amount of forest destroyed (170,000 square kilometers per year), it would take only 3 years to have enough solar farms to meet global needs.

If the technology and the natural resources needed are already available, all that is missing is funding, but more importantly, political will. "Creating" a low carbon economy in developing countries would be a good investment for them as they don´t have to bear the cost of "switching" an economy that developed countries have to pay. And although some developed countries are already ahead in this (for example Germany producing over 50% of its energy need from solar panels thanks to nice weather as can be read here), this is still a much fairer competition for developing countries than competing in other second or third sector economy. Actually, this 2012 list of countries with over 60% of renewable electricity shows how developing countries are doing a good job already.

As climate change is gaining relevance due to its evident costs worldwide, the questions regarding a low carbon economy are now "when?". As in any transformation, the ones who adapt to this change faster will have an advantage, so it is very comforting to see developing countries, who have the populations with big needs, surpassing developed countries and setting a strong foundation to a relevant role in the coming decades.

Can the U.S. Government cost-benefit analysis of climate change policies not look outside of the U.S.?

The post by Timothy Taylor, managing editor of the Journal of Economic Perspectives, "Should U.S. Government Cost-Benefit Analysis Look Outside the U.S.?" made me go back to a common question in environmental economy, how to manage externalities. 

Investopedia defines externality as "a consequence of an economic activity that is experienced by unrelated third parties". Basically externalities are any effect of an action done outside of the considered system. While using the word "unrelated" is misleading as if there´s an effect there will be always related, the meaning here is that is  consider unrelated, that is, it is excluded from the analysis. The reason why this is a central problem in environmental economy is that perhaps the most used example of negative externalities is pollution, an effect done by an activity that is usually not considered as part of the analysis of the activity. Externalities however can be also positive.

The relevance of this is because in Taylor's post he comments on whether including global benefits while evaluating a climate change policy of the US makes sense. His conclusion being that a cost-benefit analysis of US policies should make sure it has "benefits that exceed costs for the U.S. population, and then to look at the global dimensions [as something independent]". This agrees with the basic notion that a government has to be held accountable with its population. 

While I agree in general that a government has to put as its first priority its own people, I believe Taylor argument can be criticized at least in 3 ways.

The first critic is the responsibility of US in terms of climate change which has been broadly discussed in the international climate change negotiations. If you break your neighbors fence by mistake, saying you won´t fix it because it doesn´t benefit your family is irresponsible and unethical even if there is no power to enforce justice and make you pay for your damage. The same goes for climate change where the relevance of the U.S. as an emitter of greenhouse gases (GHG) is clear. According to this page of the US Environmental Protection Agency (EPA) "In 2008, the top carbon dioxide (CO2) emitters were China, the United States, the European Union, India, the Russian Federation, Japan, and Canada". A more recent article from the PBL Netherlands Environmental Assessment Agency shows an interesting graph that shows the USA as the greatest cumulative emitter of GHG emissions until 2010, and is still projected to be the greatest historical contributed at least until 2030. As a matter of coherence between domestic and international principles, the US should compensate for the damage that it has caused abroad with their actions.

The second critic to Taylor's argument comes from the global implications of a climate change policy. While in his article Taylor brings Gayer and Viscusi points (from Ted Gayer and W. Kip Viscusi "Determining the Proper Scope of Climate Change Benefits" (June 3, 2014) that considering global benefits vs local costs would lead to policies against the interests of the US population in areas such as migration or social transfers. However the global dimension of the effects of policies as such is totally different from the ones of a climate change policy. While closing the borders to migrants or having subsidies for poor US citizens might have global implications, the main effect is domestic. On the contrary, climate change is a recognized global issue, where the policies taken by the US, as one of the main global emitters, will have clear global implications both at the political and at the environmental level as have been noted at least here, and here.Other than the US reduction in emissions (which is actually not that significant), the mentioned effects include China's commitment to reduce its own emissions and an increased hope for global climate change negotiations which aim for a global climate deal to be agreed by 2015.

Lastly, US has been acting in the world arena as the "world's police" for over half a century now by actively affecting countries all over the world by diplomatic, violent, economic, cultural, and any other available means. The relative weight of US economy in the international arena gives him a big muscle that it has not hesitated to use to influence the world. In this context including global costs and benefits into its analysis makes sense not only from the moral side, but also because the role of the US internationally is so extended that creating global benefits can easily come back to the US as increased support in other policies. While these benefits are really hard (probably impossible) to evaluate, it is evident that they exist as protests to US policies in foreign countries have been common in the past (for example against Afghanistan war and also against the lack of support for global climate change efforts such as the Kyoto Protocol).

From this arguments I would like to raise the same question Timothy Taylor brought from a different perspective. Given the global influence of the US, can the U.S. Government cost-benefit analysis of climate change policies not look outside of the U.S.?