TOPICS IN POLITICAL ECONOMY

"One Laptop Per Child" - A Case Study in Good Intentions Gone Awry

Good intentions towards poor countries, a neat idea and a favorable press launch a lot of projects - and garner many billions of dollars from donors, private and public.  That, of course, was the story of The World Bank in its first  several decades. 

But the refusal of well-intentioned politicians, academics, and otherwise intelligent people to  work with market forces to provide a better life for several billion souls is an unending, costly drama.  The latest example appears to be Nicolas Negroponte's "One Laptop Per Child" (OLPC) project . The objective has been to design and distribute $100 computers to children in developing countries so as to provide them with access to web-based knowledge.

As discussed recently in the New York Times and  by Steve Nussbaum in  Business Week, the project's directors suddenly realize that developing country governments are not terribly enthusiastic about the project.  And since they were expected to buy the laptops, Negroponte is now looking to the American public to "Give 1, Get 1" - buy two laptops for $399 and donate one to a child in a developing nation. 

Technology Isn't Everything. Negroponte seems to have been seduced by the rhetoric of "the digital divide" crowd.  Shortly after PCs and then the web burst on the scene, the usual foundations, non-governmental organizations and UN agencies started agitating for resources to distribute PCs to the developing world.

The OLPC project has been part of this movement.  But, until very recently, the project had precious little input from the intended users.  The main objective appears to have been a technology oriented push to get the cost of manufacturing a basic laptop down to $100. Very little serious thought has been given to (1) how the laptops are to be distributed and (2) once distributed, how to persuade children (and their parents) not to sell the laptop for something more immediately necessary (medicine?) in a societies where the per capita income might be under $1,000 a year.

Negroponte's answer to the first problem is that distribution will be "exclusively through national or government agencies of the countries involved." Clearly, he has never walked through an African market where bags of American corn labeled "A gift of the American people" are on sale at market prices.  Has Negroponte never been briefed on the distribution and corruption problems in getting hybrid seeds and pharmaceuticals distributed through developing country government agencies?

His answer to the second problem is to admit it exists and to handle it by designing the laptop to be "so distinctive that it is socially a stigma to be carrying one if you are not a child or a teacher."  I wonder how many village chiefs Negroponte's team interviewed to come up with that solution.

Is the Digital Divide Already Bridged? The deployment of cellphone technology is the relevant case to study. In developing countries the information revolution is already touching peoples' lives through cellphones, including those with web access.  The technology is being deployed wherever governments have permitted two or more companies to deploy the technology - and to charge prices that give those companies a reasonable return on their investment. 

Africa, collectively, is the fastest growing cell phone market in the world.  In many countries, individuals buy and then rent out cell phones by the minute so that merchants can place orders, sellers can determine market prices, and would-be workers can contact potential employers. 

Here's some reasonable advice: forget OLPC's distribution problem.  And instead of giving a single Taiwanese manufacturer (Quanta) monopoly manufacturing rights, why not make the technology freely available to all?  That would be a major public service.  If the market for the laptop is really as large as OLPC believes, it should be large enough for more than one manufacturer to enjoy the necessary economies of scale - and to figure out what improvements can be made, in conjunction with private distributors selling them for their highest-valued uses.

Just like Motorola's ill-fated Iridium satellite phone project (which cost the company's shareholders more than a billion dollars in losses - and has emerged from the ashes of bankruptcy a smaller and more focused company), the OLPC project may prove to be helpful in deploying technology, learning, and ideas. But it needs a market test, not public or private charity if it is to truly succeed.

WORLD STEEL: GLOBALIZATION RULES

On August first, Mittal Steel, a Dutch-registered, London-based, Indian-managed steel company that did not exist 25 years ago, took control of Arcelor, Europe’s largest producer. All of a sudden, a rank outsider, Lakshmi Mittal, has assembled the world’s largest steel company, with an annual capacity of more than 100 million tons of raw steel or 10% of the global market.

Mittal’s success is another manifestation of how the "Anglo-Saxon" market-based vision of economics continues to displace the statist "national champion" mindset in a world where the forces of globalization dominate.

When Mittal’s bold bid was announced in January, Arcelor tried to rally European politicians behind its campaign to stay independent. French President Jacques Chirac denounced Mittal’s bid as "purely financial, devoid of any industrial objective." Belgian and Luxembourg officials grumbled and talked about legal strategies to derail the bid. Arcelor tried to bring in a Russian "white knight," but found that control of the company was now being exercised by a multinational array of shareholders (including hedge funds) rather than managers or politicians. In the end, Mittal raised his offer to roughly $33 billion, a 40% improvement from the initial offer in January.

In recent decades, no manufacturing sector has been more influenced by political forces than the global steel industry, partly because of its traditional association with national defense. In many countries, governments owned the major producers; in most countries, trade barriers attempted to keep imported steel from putting inefficient domestic producers out of business. Government loans kept bankrupt firms in business long after they should have disappeared. As a result, compared to other major industrial sectors, the global steel industry was highly fragmented, burdened with overcapacity, and slow to adopt new technology and management processes.

Not all of the above impediments have disappeared: steel producers still have a tendency to run to government whenever imports threaten their profit margins. But the forces of globalization and the energy of individuals like Lakshmi Mittal and the American financier, Wilbur Ross (who helped to consolidate the U.S. industry) have finally brought the industry and most of the politicians into the modern age.

The drivers of globalization – the dismantling of barriers against international movement of goods, services, and finance, the collapse of the socialist model of production, and the deployment of radically new technologies in communications and transportation – continue to reshape patterns of production and ownership on a world scale. This reshaping has provided an extraordinary impetus to economic growth in many countries - and has helped to lift millions of individuals out of poverty, even as it has disrupted the livelihoods of many others.

In steel, as in every other industry, the reshaping process is far from over. The integration of Japanese, Korean, Russian and Chinese firms into a coherent global structure has just begun. It makes less and less sense to move vast amounts of iron ore and coal around the world to make hot metal in the United States and Europe instead of shipping steel slabs from Brazil or Russia to those destinations. So, more change is in prospect.

For as long as globalization rules and stimulates industry adjustments, the average person in the world is likely to enjoy gradually increasing living standards and longevity. But the economic growth that underlies these trends is "inherently a byproduct of change," as Rosenberg and Birdzell have pointed out in How the West Grew Rich. And the resistance to change, whether from anti-globalization protestors or entrenched commercial interests must never be underestimated.

(For more background on the globalization of the steel industry, see my 1999 paper, "American Steel and International Trade: The Challenge of Globalization.")

WHY THE WORLD BANK AND THE IMF WILL ALWAYS BE WITH US

It’s annual meeting time again for The World Bank and the International Monetary Fund.  More than 10,000 people are expected in Singapore this week to rub shoulders and listen to an endless stream of finance ministers reading from scripts prepared by dutiful subordinates. Reporters will be looking out for colorful and maybe violent protestors railing against globalization and other favorite causes. 

But, barring some al Quaida spectacular, it should be very much like most other years: speeches and communiqués will discuss trade, debt, and the plight of Africa; China and India may get a few more votes on the Board of the Fund; calls for fiscal responsibility and “appropriate” exchange rate adjustments will be heard. TV cameras will record some scruffy marchers with placards and pithy slogans. Considerable wining and dining will take place, much of it at the expense of private bankers.

No one on an official podium is likely to ask, “Didn’t the main rationale for these institutions disappear some time ago?” The IMF was established to facilitate “fixed but adjustable” exchange rates; The World Bank was envisioned to function as a lender of last resort to countries seeking to restructure their economies.  But the collapse of the fixed exchange rate system in the 1970s obviated the primary reason for the Fund’s existence.  And the re-opening of international capital markets to most developing countries in the 1980s did the same for The World Bank.  Today, both institutions devote the bulk of their time and all their frequently overlapping financial operations on developing countries.

And both are still increasing their staffs: fiscal 2006 administrative budgets for the two multilateral institutions (which exclude their lending and grant programs) totaled over $3 billion. The two institutions do perform some useful advisory work, and their research programs provide a wealth of data for what works and what doesn’t in developing countries. But these activities require a fraction of $3 billion (most of which is paid by the developing countries).

Nearly a decade ago, with a view towards trying to build support for merging the two institutions, I wrote, “No serious effort at substantive reform for either institution has ever been mounted.”  (The Washington Quarterly, Spring 1999). The Congressionally mandated Meltzer Commission in 2000 developed some worthwhile (but certainly not dramatic) proposals.  However, with one partial exception, they were never taken up.  Proposals for serious reform continue to be made by academics and think tank types, some of whom cite my earlier papers.

I have reluctantly concluded that we would-be reformers should move on to projects with greater possibilities of success. The reality is that the political capital required on the part of major shareholder governments is far too great. The need to coordinate such a project with at least half a dozen other governments, with their own competing agendas and bureaucracies, would be daunting.  The likelihood that some new crisis would intervene and derail the extended campaign is high. 

As former U.S. Treasury Secretary George Shultz once reported, after he had suggested a major restructuring, such as merging the two institutions, to a leading central banker, the reply was, “You are probably right . . . but I am tired just thinking about the effort involved.”

Probably the best that can be done is to make sure that neither institution engages in counter-productive financial operations, nor receives another general capital increase requiring taxpayer funds or commitments.  So, if you are in Singapore this week, enjoy the party – and not to worry – there will be plenty more in the years to come.

When Less Government Means More Growth

The publication this week of The World Bank’s 2007 edition of Doing Business brings welcomed attention to what is probably that institution’s most effective “anti-poverty initiative” ever. Begun only in 2003, this project relies on peer group pressure – not subsidized loans – to create investor-friendly business climates in developing countries – and elsewhere.

Under the leadership of Simeon Djankov, the Bank has documented the time and cost of activities such as starting a business, getting credit and enforcing contracts in 155 countries. It then constructs and publishes an index of the ease of doing business in each, available on an extensive web site along with the underlying data. The correlation between “ease of doing business” and per capita incomes is striking. By my reckoning, as of 2006 the ten top-rated countries (headed by Singapore) had an average per capita income of $37,400; the bottom ten (all but one in Africa) had an average income of $370. In other words, the poorest countries tend to be those with the most oppressive government business regulatory regime.

Thanks to this research and numerous briefings by Bank staff, government ministers in dozens of countries are publicly striving to move up in the rankings - and claiming credit when, for example, licenses are eliminated and nuisance taxes abolished, as I observed last year in Turkey. In other words, peer group pressure generated by the development, publication and “marketing” of such indices may be even more effective than trying, in effect, to bribe officials to adopt sensible policies with nonsensical loans and grants. (A similar effect was achieved by the International Finance Corporation’s emerging markets’ stock index when it was first introduced; the Corporation refused to include any country’s index where it felt that security laws and regulation were inadequate.)

Where is the linkage to economic growth? Statistically, it is buried in that elusive concept “productivity.” In practical terms, it means that businesses can devote more time to market research, developing products and services, producing them, and selling the result. That means less time and resources devoted to filling out forms, standing in line to get them notarized, waiting for imports to clear customs and bribing corrupt officials. The result is easier entry into business, a lower cost of doing business, more competition for established firms, and a better deal for customers at home and abroad.

If you need further convincing, take a look at the sadly neglected book “The Power of Productivity” by William Lewis (formerly Director of McKinsey & Company’s Global Institute). This is a comprehensive a survey of how countries such as India and Brazil hamstring productivity and job growth with restrictive law and regulation, and the accompanying corruption.

But why stop at developing countries? Wide disparities exist in the U.S. zoning and land use regulations, property registration, business licensing and the like. Why not get regional development groups and universities across the United States to focus on measuring the costs of business regulation in their own backyards, and making comparisons with other regions. This could be more productive than lobbying state capitals and Washington for more “earmarks” and subsidies.

Detroit, St. Louis, and Kansas City, where are you?

"The White Man's Burden"

In ancient times, before the illusions of science corrupted men’s traditional wisdom, the founders of Cities were known to be gods or demigods.”

Why does most foreign economic aid end up doing little to raise living standards – or even retarding economic growth in the recipient countries?  Having studied in, worked in or visited  well over 40 countries and serving as the U.S. Executive Director at The World Bank, I found William Easterly’s most recent book, “The White Man’s Burden” (The Penguin Press, 2006), the clearest explanation to date. 

A former World Banker and development economist now at New York University, Easterly’s testimony and analysis should have a high degree of credibility among those who profess to care about the plight of the truly impoverished around the globe.  While he pulls a few punches (perhaps to maintain a bit of an “in” with former colleagues and funders), he makes three fundamental points that anyone who cares about this subject needs to understand:

1. Nearly all foreign aid programs, bilateral or via The World Bank and similar institutions, are primarily designed to reflect the interests of the donors (“The Rich”) and their perceptions of what is best for the recipients (“The Rest”). This applies to rock star Bono as well as G8 heads of state and their ministers.

2. Foreign aid is neither necessary nor sufficient for economic growth.  Under certain, limited conditions, it might help, but that is about all.

3. There is no “secret” to achieving sustainable economic growth: “Only the self-reliant efforts of poor people and poor societies themselves can end poverty, borrowing the ideas and institutions from the West when it suits them to do so.”

In arriving at this bottom line, Easterly joins a growing consensus that the major differences in income levels between countries are due to country-specific policies that prevent or delay the adoption of new ideas and technology.  As Stephen Parente and Nobel Prize winner Edward Prescott put it in their rigorous, capstone work on economic growth, Barriers to Riches (The MIT Press):

If the constraints that prevent firms in the poor countries from using readily available technologies and efficient work practices are eliminated, growth miracles will ensue, and the cross-country differences in income levels will be of the order of magnitude of regional differences within countries . . . there is no reason why the whole world should not be as rich as the leading industrial country [my emphasis].

Or, as Adam Smith put it more succinctly several hundred years ago, “little else is required to carry a state to the highest degree of affluence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things . . .”

It is the great difficulty of achieving these three basic civil conditions that tempts one to conclude, in the spirit of this note’s opening quotation (from another Burnham, in Congress and the American Tradition), that the gods might, indeed, be the secret behind great cities and states.