Physiology and Malthus

The Malthus model of economic growth (or the lack thereof) is now standard fare in undergraduate education. Basically, it shows that there is a limit to the size of an economy that hinges on decreasing returns to labor in production and on mortality increasing as standards of living, as measured by GDP per capita, decrease. Those two critical assumptions are based on observations that were certainly valid at Matlhus' times, and are likely to still be true today.

Carl-Johan Dalgaard and Holger Strulik go a little bit further in this theory. As more food is available, people grow taller. But being tall requires more food to sustain the body, which provides an additional reason for stagnation. This makes it more difficult to break loose from this "development trap" and may explain why economies stagnated for so long. But as Malthusian theory, this dies not explain why the economy suddenly exploded in the 19th century.

Is index-based weather insurance useful?

Whenever you are facing a risk, you want to be able to hedge against it (at least if you are risk averse). For this, there are all sorts of insurance policies. There are also markets in all sorts of instruments that allow you to find the right contingent claim for your situation. This includes farmers (and others) who want to hedge against meteorological risks. If you crop yields depend on weather patterns, you are looking for securities that pay out depending on some weather statistic. And they are available and have been heavily pushed by aid agencies in developing countries.

Chiratan Banerjee and Ernst Berg say they may not be such a great idea. They take the examples of rice farmers in the Philippines who bought wind-speed based indexes on the hypothesis that rice yields are lower when there are typhoons. But rice is remarkably resistant to typhoons and wind in general, the reason why it is so popular in the region in the first place. This means that rice farmers are heavily over-insured. That is especially bad and farmers are now confused about the concept of insurance as it looks like they face more risk than before.

Unemployment insurance in developing economies?

There is no doubt that absent moral hazard, insuring against unemployment shocks is welfare improving. But moral hazard, either through the unemployed not searching hard enough or rejecting job offers, can have a vicious effect on welfare if it is sufficiently widespread and successful. In addition, as unemployment insurance contributions typically do not depend on unemployment risk, only bad risks want to participate, and the insurance collapses without mandatory participation. With all this in mind, does it make sense to implement unemployment insurance in developing economies, where there is a large informal sector that makes mandatory contributions difficult to enforce and where moral hazard is, of course, rampant?

David Bardley and Fernando Jaramillo show that introducing unemployment insurance actually makes the formal sector more attractive and that we should thus not worry that much about the current level of informality. The presented model, however, does not allow for someone to collect UI benefits while working in the informal sector, a very real possibility that could easily overturn the results.

No convergence in the Caribbean

I have always found the Caribbean fascinating because it is a microcosm of the world, with tiny countries trying to get a workable government without the economies of scale the rest of the world enjoys. But as a readers of Economics research, the presence of this myriad of too-small countries lead to many frustrations, as they bias results in cross-country regressions. But sometimes, these micro-countries can be useful for research.

Roland Craigwell and Alain Maurin use them to study whether there is convergence in the Caribbean. It is well established that there is no convergence on world-wide country data, but it is very visible on subsets, such as US states. In the later case, all US states are under the same currency and roughly the same laws and government systems, there is some cross-state redistribution and no trade barriers. As you drop these features, which one gets you lack of convergence. In the case of the Caribbean, there is a partial monetary and trade union, laws and governments are more dissimilar than in the US and there is no redistribution. And as Craigwell and Maurin show, that is sufficient to make convergence disappear. Once more, it looks like once more institutions and to a lesser extent globalization are the keys to development for the poorest economies.

Marx and Solow

For all the justified criticism one can have about the work of Karl Marx and the economic system that resulted from it, old Karl was onto something. The Industrial Revolution saw the rise of a new class, the capitalist, that generates a smaller share of its income from manual work and instead uses its brain and capital. That is in terms of welfare a positive evolution, were it for the fact that workers hardly had it better compared to their previous agricultural life and thus did not get a share of the new riches. What especially irked Karl Marx was the lot of the workers could not improve, either because they were not getting a larger share of income, or because there was no path to become capitalists themselves in large numbers, something later termed as a lack of social capilarity.

Jørgen Heibø Modasli finds some of these features in a model inspired by the Solow growth model, augmented by incomplete markets that require that one cannot borrow to become a capitalist entrepreneur and that the entrepreneur can only work for himself. This introduces a non-convexity and quickly a two-class system emerges, with workers not having any reason to save much as they have no chance to become capitalists. Also, the class division persists over time, even when credit and capital markets improve.

Yet, this is not entirely convincing. Indeed, economies with less incomplete markets, say, the United States, should see less inequalities, and inequalities should have declined over time as markets developed. This is hardly what we can see in the United States, where access to credit is widespread, yet income inequalities are high and growing, and social capilarity is largely absent.

More on institutions and growth

There a large belief in the development community that institutions matter. This has emerging from a large number of cross-country regressions, regressions that one should always take with a grain of salt because of methodological issues and data quality. However, this result has emerged so frequently that it must indeed matter. But the precise mechanism through which institutions matter of the course of development is still rather unexplored.

Ines Lindner and Holger Strulik come up with an interesting theory. When the economy is fragmented into small regions, entrepreneurial behavior is governed by local and informal enforcement. But as economies become more integrated, through specialization and/or the reduction in transportation costs, "connectivities" go from local to global, and informal enforcement is not sufficient. Formal institutions need to arise, and if they are weak, entrepreneurship will be weak. I wonder, though, how such a theory of networks could be tested in the data.

Progesa: a success story thanks to academics

I have written a few times about the frustration when policy makers ignore the advice of economists. Yet, there are a few cases where economists were given free reign over the design of policy interventions, which not only allowed to obtain positive outcomes but also useful information for further study.

Nora Lustig reports about Progresa, the Mexican cash transfers program designed to elicit parents to send their kids to school and make sure necessary health check-ups were attended. From the start, the program was designed and administrated by people with an academic background. Progresa has worked remarkably well, to the point that it was not only not scrapped, as is usual, with presidential changes, its coverage also kept increasing. The only setback was a name change to Oportunidades. The critical ingredient to this success was the scholarly involvement, that not only designed it for success, but also provided the tools to measure this. And along with that a wealth of data that has allowed to understand even better what makes good intervention in practice.

Penis size and growth

Understanding why some countries are poor and why some grow than others is probably one of the most important questions in Economics. The traditional tool to tackle this challenge has been growth regressions: use cross-country data and regress the GDP growth rate on various indicators that could be relevant in order to find which matter most. These regressions have been abused over the years, especially as there are obvious endogeneity and collinearity issues. Also, the results are driven by a multitude of (poor) countries where data quality is quite horrendous. The worst is probably all the data mining that is going on in this literature, which culminated with Xavier Sala-i-Martin's two million regressions.



Tatu Westling uses a variable the previous literature completely ignored: the average length of the erect human penis. Adding this variable to the regression shows a U-shaped relationship for the GDP level, explaining 15% of its variation. The optimal penile length is 13.5 cm, and 16cm is disastrous. For GDP growth, the relationship is negative, explaining 20% of the dispersion. This is not negligible, and more than institutional variables that are thought to be the key to growth and convergence.



I wonder how many people will take these results seriously and try to get policy recommendations from it. Westling hypothesize about the impact of self-confidence. The paper is very well written, taking the 'male organ hypothesis' very seriously, but in truth tongue-in-cheek. Very different from this study on flag colors I wrote about previously.

Land titling and access to credit

It is widely believe that a key ingredient of economic development is the accessibility of credit. Indeed, entrepreneurs typically need credit to develop their business plans, and much of capital accumulation is performed through credit. But no one is going to grant credit on a promise, some collateral is needed. And that is a problem in many developing economies, as people hold little property and even land is communal or without clear property rights. Hence the idea that distribution of untitled land, with well-established property rights, should provide collateral to a large fraction of the population and make credit possible. How does this work in practice?



Caio Piza and Maurico Moura study the case of a major land titling initiative in Brazil. They use an interesting natural experiment. Two neighboring and very similar communities of the city of Corosco (correction: Osasco) were to get property titles for every inhabitant, but five year apart (2007 and 2012). This leads to a nice control group, which allows to overcome the problem of the endogeneity of ownership rights of a typical study by using a difference-in-difference approach. Indeed, the authors conducted a survey in 2007 before the titling, and another one in 2008. In addition, the context here is urban, which is unusual for a titling study. It appears access to credit increases by 22 percentage points, or about a half, within 18 months of titling. This is major. I do not think such large estimates have been found in rural studies. And given that developing countries become increasingly urbanized, this is very interesting.

Aid and remittances as hedges against food price shocks

Food is a substantial part of household expenses in developing economies, and in many of the latter foreign aid and remittances from emigrants provide a substantial part of national income. As world food prices have been subject to large fluctuations lately, causing much grief and even riots, it is natural to ask whether aid and remittances can provide some smoothing against the effects of these fluctuations.

Jean-Louis Combes, Christian Ebeke, Mireille Ntsama Etoundi and Thierry Yogo use a cross-country panel data set to study this question. First, they confirm that food fluctuations have a notable impact on aggregate consumption, especially in the poorest economies. Second they find that aid and remittances do help, and remittances seem to be more efficient at hedging. Indeed, an aid-to-GDP ratio of 29% is theoretically necessary to absorb food price fluctuations, while 9% is sufficient is for remittances. Only Mozambique and Nicaragua satisfy the first, while a few more countries satisfy the second.

Kuznets in a post-industrial world

The Kuznets curve traces the evolution of inequality as an economy develops. It is based on Kuznets observation that income and wealth inequality increased and then subsided as economies get richer. While this was established on a cross-section of countries, it has been proven right in the time dimension in some cases, like England and Wales through the Industrial Revolution. But what happens thereafter, when an economy further develops into one where the service sector dominates or globalization becomes most relevant?

Jordi Guilera asks this question noting that most developed economies have recently experienced a sharp increase in inequality. Is thus Kuznets' inverted-U becoming a N? Beyond simply observing this, one would also need a theory with predictions about other correlations to make some progress. The theory here is that skill-biased technological change generates increasingly large education premia, and evidence from long-term wage inequality in Portugal seems to corroborate this hypothesis. In particular it shows that inequality between sectors was the leading determinant of inequality until the 1980s, while inequality within sectors has taken over now.

Trade constraints of developing countries

With all the current posturing in the US and Europe, while addressing doubtlessly important problems, it is easy to forget that there are much bigger issues that need to be solved: how to get the poor and especially the poorest economies to a decent standard of living. We have been blessed to be born in the right families and in the right countries, and we should share this luck with those who were no so fortunate. This does not necessarily mean to give to the poor, just giving them a fair chance may be enough.

Jean-Jacques Hallaert, Ricardo Cavazos Cepeda and Gimin Kang consider the consequences of trade barriers on developing economies. The latter should be able to benefit greatly from selling on world markets goods produced with the factor they are relatively rich of, unskilled labor and to some extend land, while importing the complementary goods, likely capital-intensive investment goods. This OECD study finds that developed economies cannot do much more in terms of reducing import tariffs. Where there is more potential is with home-grown issues: unreliability of electricity, high transportation costs, poor education, bad governance, and instability. These results have been obtained by regressing exports, imports or their sum on a number of indicator for a panel of data. I am not particularly keen on these exercises due to poor data quality, gigantic endogeneity and especially the fact that proxies for essentially unquantifiable variables are used, like property rights and governance. But I suppose this is the best one can do, and the results appear to be rather stark. Now as to how to solve these economic problems, that is a gigantic task that we should be really talking about these days, instead of posturing for political gain.