Monthly Archives: October 2014

“Ending ‘poorism’ in Kenya” NYTimes Op-Ed cites study by Mwangi wa Githinji and Frank Holmquist

A column about “poorism,” where wealthy tourists visit slums in cities such as Nairobi, Kenya, notes that while Kenya has its share of extremely poor people, it isn’t really a poor country, it’s just that the top 10 percent of the population controls 40 percent of the country’s income, so wealth is poorly distributed. A 2008 study conducted by Mwangi wa Githinji, economics, and Frank Holmquist of Hampshire College, found that in Kenya, while agricultural production grew at 6.9 percent in 2006, 25 percent of that was attributable to growing flowers. (New York Times, 10/29/14)  From UMASS Amherst Daily News Summary 10-29-14

NAIROBI, Kenya — One of the thriving sectors of the tourism industry here is also one that no government would want to put on brochures inviting visitors to the country. For a small fee, companies operated by entrepreneurs like the young rapper Henry Ohanga (Octopizzo to his fans) offer guided walks through Kibera, a sprawling slum in the heart of the capital. Tourists get to see up close the mountains of garbage and dense rows of low-slung wattle-and-mud houses that have made that township one of the most notorious urban settlements on the continent.

Mr. Ohanga is an investor in “poorism” — the business of taking well-off tourists off the beaten track to see how the destitute of this world live. It is a market niche that has grown a great deal in the past 10 years, and not just in Africa. Visitors to Brazil can join guided walks through Rio’s toughest favelas; tourists in India get to see how Delhi’s street children spend their nights; and in Johannesburg, for a fee, a visitor can explore the inner reaches of Soweto, home to thousands of struggling mine workers and their families.

Poorism’s critics are many. Not least among them are the inhabitants of these hard-bitten urban enclaves. Lillian Wambua, who ekes out a living selling mandazi, a local doughnut-like delicacy, from a tiny shack in Kibera, detests having her young son photographed by tourists. But she says she dares not raise her voice because visitors are often accompanied by local toughs working as guards for the tour companies. “I feel bad when people come from other countries to see how poor we are,” she told the Daily Nation recently.

But Mr. Ohanga, who himself rose from one of the city’s toughest neighborhoods to become a popular rapper, offers a staunch defense of his tours: “We don’t bring people to Kibera to show how poor the residents are,” he told me. “We want them to see the other side of the slum. When they come they realize that locals are clean, hardworking, normal people who simply lack good job openings. As a result of these tours, many projects have been launched to improve their livelihoods.”

Both critics and defenders of poorism make fair arguments, but in many ways this debate is beside the point. Kenya isn’t a poor country, it’s the economic powerhouse of the Horn of Africa, with a gross domestic product of $55.2 billion in 2013, classified by the World Bank as a middle-income nation. But our national wealth is very poorly distributed and the political elites who determine national priorities have never made better housing standards a priority. Given that the urban poor, like most Kenyans, vote mainly along ethnic lines, there is hardly any political lobby to press the case for better housing.

Still, the Kenyan government has taken modest steps to make its urban slums a bit less distressing. In mid-September, hundreds of young people from the National Youth Service — a government program that offers high school graduates vocational training — were dispatched to Kibera to unclog drains, build communal toilets and set up a waste-disposal system. Residents largely welcomed the initiative. “Youths are kept busy,” Sheikh Yusuf Abu Hamza, told journalists, speaking outside a Kibera mosque. “We have seen a reduction in criminal activities here because the engagement with the N.Y.S. has offered the youth a source of livelihood.”

Laudable though that may be, the effort only scratches the surface of the real problem — a yawning gap between rich and poor.

The desolation in our slums is a graphic reminder that the boom that began in 2003 has not raised all boats. According to U.N.-Habitat, an arm of the United Nations that deals with housing, about 60 percent of Nairobi’s inhabitants live in informal settlements that together occupy only 5 percent of the land area of the Kenyan capital. Though new towers dot the skyline and a record number of students are pursuing higher education, Kenya and its neighbors have not managed to follow the trajectory of the many Asian nations that have lifted millions of people out of poverty by attracting industries that spur job growth. The Kenyan economy remains reliant on sectors like real estate and financial services that do not generate high levels of employment. Even earnings from agriculture, a major economic motor here, are primarily derived from a few large, mechanized farms.

The top 10 percent of the richest households in the country control 40 percent of the country’s income. A 2008 study by Mwangi wa Githinji of the University of Massachusetts-Amherst and Frank Holmquist of Hampshire College, found that while agricultural production grew at 6.9 percent in 2006, 25 percent of that growth was attributable to the flower sector, which is dominated by 10 farms, one of them producing over 50 percent of the output.

To address such problems, East African countries with good political and trade ties, such as Kenya, Uganda and Rwanda, should pool resources to invest in the sort of major infrastructure projects — port expansion, efficient transport links — that attracted investors to Asia. Some efforts have been made in this direction, but clearly not nearly enough.

Many Kenyans in rural areas are subsistence farmers. Life on a hard-scrabble farm has little appeal for many young people. Every year, tens of thousands pour into the cities to find work. A visit to Kibera at dawn reveals throngs of workers traveling to low-paying jobs as laborers. Everywhere, there are signs of the bustling economic activity that prompted The Economist to declare that Kibera “may be the most entrepreneurial place on the planet,” with peddlers selling everything from bananas to phone credit cards to water.

This enterprising bent has inspired people like Mr. Ohanga, who says his business is helping others climb out of poverty. “I try to impress upon visitors to start projects here and promote existing ones,” he told me.

It’s a worthy enough effort, but it would not be necessary if the government promoted more policies designed to make “poorism” a thing of the past, instead of a growing concern.

Murithi Mutiga is an editor at the Nation Media Group in Kenya.

In Peru, Badgett Addresses Economics of LGBT Discrimination

M.V. Lee Badgett

Lee Badgett

During a trip to Peru from Oct. 12-17, M.V. Lee Badgett, director of the Center for Public Policy and Administration, educated diplomats, government officials, working professionals and university students on the potential negative economic consequences of discrimination against lesbian, gay, bisexual and transgender people.

While the purpose of Badgett’s talks was largely educational, she said the U.S. Embassy in Lima is considering adopting some new policies that would improve working conditions for LGBT embassy staff.

“It is exciting to consider that my research could have real and direct effects on people’s everyday lives and working conditions,” Badgett said. “Peruvians are actively discussing LGBT issues in many contexts, and I found a lot of interest in what the positive consequences could be for employers and the overall economy.”

The U.S. State Department’s Bureau of Educational and Cultural Affairs invited Badgett, and the U.S. embassy organized Badgett’s week of lectures, discussions and meetings. During her time in Lima, Badgett spoke with officials at the embassy; representatives from local nongovernmental organizations working on LGBT issues; as well as with Peruvian government officials, international agencies, businesspeople, an openly gay member of Congress and university students.

Last year, Badgett began examining how discrimination against people based on sexual orientation and gender identity affects a country’s economy. She has presented parts of this research at the World Bank, the Organisation for Economic Co-operation and Development, and at a forum sponsored by the U.S. Agency for International Development.

More than 20 years of research has established Badgett as a leading international expert on the economics of LGBT employment and family policies. In her first book, “Money, Myths, and Change: The Economic Lives of Lesbians and Gay Men,” she debunked the popular stereotype of gay affluence. She has spent the last decade researching the economic impact of marriage equality in the U.S. and abroad.

From Inside UMass, October 23, 2014 / Office of News & Media Relations

Financial Interconnectedness and Systemic Risk-NRao,JMontecino,GEpstein

Financial Interconnectedness and Systemic Risk: The Fed’s FR Y-15  (Originally published at Triple Crisis)

At the onset of the global financial crisis, many financial institutions that engaged in risky practices were on the verge of bankruptcy as the housing market crashed. Top regulators soon discovered that shocks suffered by large banks spread quickly throughout the financial system and then to the whole economy. Those large firms, colloquially dubbed “too big to fail,” were also highly interconnected.  Jane D’Arista, James Crotty, and a few other economists had identified these inter-connections, but most economists and policy makers had remained clueless.
As the crisis worsened, Fed Chairman Ben Bernanke, New York Fed President Timothy Geithner and others tried to come to grips with what was happening. They started referring to Citibank, Bank of America, Goldman Sachs and other banks as “systemically important,” though former regulator Bill Black more aptly referred to them as “systemically dangerous”. A systemically important/dangerous institution is one that is so large and well-connected to other firms that shocks it suffers are transmitted to many other participants in that system. When these systemically important firms were failing, taxpayers bore the brunt of the impact as the government was compelled to inject massive amounts of taxpayer funds, or face massive economic losses, damages, and inefficiencies. This, of course, gave rise to the now well-known problem of moral hazard, where actors that do not directly bear the costs of risks are incentivized to pile on more risk. Taking into account the potential effects of systemically important firms, it is easy to understand why they can be closely associated with institutions that are “too big to fail.”
Tackling the scourge of systemically dangerous financial firms requires a theoretical and empirical understanding of their evolution and dynamics. But before the Great Recession, only a few academics analyzed situations in which market participants were of similar sizes and they found that interbank deposits could act as primary channels for liquidity shocks (Allen, Franklin, Gale). Some other scholars concluded that interbank credit extensions could result in banks that were “too interconnected to fail” (Freixas, Parigi, Rochet). Recent academic research suggests that this may lead to the exacerbation of externalities. Further post-crisis studies considered sectors or market systems that did not have equal-sized participants. They concluded that shocks to the most interconnected banks spread widely across the financial system (Gai, Haldane, Kapadia) and that large interbank exposures were linked with systemic risk (Cont, Moussa, Santos).
While some progress has been made on understanding theoretical linkages, prior to the crisis, data collection and action by the relevant regulators lagged behind. Some recent estimates of intra-financial lending have tried to fill this gap. But these estimates have had to rely on sectoral, not bank level, data and can therefore be, at best, “guesstimates” of the interconnections (Montecino, Epstein, Levina). In a step forward, the Dodd-Frank financial reform bill passed in 2010 created a special designation for “systemically important financial firms” and directed the regulators, especially the Federal Reserve, to strengthen their information gathering and regulatory focus with respect to these firms.
Now, late to the game, regulators such as the Basel Committee on Banking Supervision (BCBS) have sought to identify certain characteristics that determine an institution’s level of systemic importance, and interconnectedness is one of them (Federal Reserve, BIS).And finally, the Federal Reserve has begun collecting and disseminating data on the contributions of large financial institutions—dubbed “globally systemically important banks” (G-SIB)—to systemic risk. An important feature of this new FR Y-15 report is the measurement of intra-financial activities via the “Interconnectedness Indicators” in Schedule B and the data collected is similar to BCBS’s assessment of global systemic risk. The FR Y-15 report is accessible on the National Information Center’s website and covers holding companies (banks and Savings & Loans) with total assets of $50 billion or more as of June 30 of the reporting year. Of the 39 holding companies listed as having total assets of greater than $50 billion, 33 banks filed the report, with AIG, GE Capital, Teachers Insurance and Annuity Association, Charles Schwab, State Farm Mutual, and United Services as exceptions.
This new data source gives us an unprecedented level of detail on intra-financial links and other aspects of systemic risk. These data suggest that high levels of intra-financial assets are held by the very largest banks. Other banks appear to hold relatively low levels of intra-financial assets. In fact, 26 of the 33 institutions in question held relatively low amounts of intra-financial assets that ranged from 1.5 to 44 billion dollars.
But seven of the largest banks held very large amounts of intra-financial assets and therefore are also the most interconnected. These seven institutions—J.P. Morgan, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon—have become household names in the narrative of the financial crisis and bailout. These data give an unprecedented picture on their intra-financial connections. The figure below shows, using intra-financial assets as a share of each bank’s total assets, the most interconnected banks. The figures range from 10% of total assets to a whopping 65% by Morgan Stanley; almost 40% of Goldman Sachs’ assets were intra-financial assets.

Graph – Intrafinancial Assets as Percentage of Total Assets

These reported data on the intra-financial lending of the largest banks are roughly in line with the estimates based on macro data made by Montecino, Epstein and Levina, who found that intra-financial assets on average comprised about 25% of total assets in the 2000’s (Montecino, Epstein, Levina). These data, though, are based on detailed bank level data and show that some banks, for instance Morgan Stanley, have truly astounding levels of intra-financial assets.
These highly detailed data allow us to drill down and look at specific intra-financial assets. A closer look at the data reveal, for example, that a significant portion of intra-financial assets held by institutions are in the form of Over the Counter (OTC) derivatives associated with unaffiliated third party firms. In fact, amongst the largest banks, OTC derivatives constitute between 6% and 27% of intra-financial assets.
Some doubt that more transparency and information such as contained in this new data set will do much to diminish the dangers arising from interconnectedness. But, in fact, there are already provisions in law requiring the regulators to use data such as these to limit dangerous levels of intra-financial exposures. As Jane D’Arista has emphasized, sections 609, 610 and 611 of the Dodd-Frank Act require the implementation of restrictions on various kinds of credit exposures to other financial institutions. The Volcker Rule, which limits proprietary trading, can also help. Yet, as with much of Dodd-Frank, the strength of the implementation and enforcement of these provisions remains questionable due to the opposition of banks and the connivance of legislators. Other structural solutions have been proposed. For example, breaking up the too big and too interconnected to fail banks is a popular suggestion.
To be sure, better information on these dangers is not sufficient to solve these problems. The key now is to use the information to implement the necessary changes, starting with strictly enforcing the laws that are on the books. If proper measures are not undertaken to curb interconnectedness, it is possible that another unmitigated financial disaster is in the offing.

 

 

 

Deepankar Basu, Debarshi Das on India’s WTO stand re: public stockholding for food security

For a WTO stand with PDS in hand

India should continue with its stand at the WTO to demand a permanent solution to the issue of public stockholding for food security before the protocol on trade facilitation is signed. It should also resist efforts to dismantle the Public Distribution System

In December 2013, two important items among the many others adopted at the Ninth World Trade Organization (WTO) Ministerial Conference in Bali were the decisions respectively on the Agreement on Trade Facilitation (TF) and on Public Stockholding for Food Security Purposes. The former relates to the reduction of administrative barriers to trade — like dealing with custom barriers, documentation and transparency — while the latter concerns the procurement and storage of food grains by state agencies for the public distribution of food.

Recently, global attention was focussed on these two items as India argued that the adoption of the protocol on trade facilitation should be postponed till a permanent solution to public stockholding for food security had been worked out. Despite intense pressure from the developed countries, including the United States, India stuck to its stand even as the deadline for adopting the protocol on TF passed on July 31.

Even though the developing countries have generally backed measures to enhance food security, support for India’s stand was not easy to come by this time round. Only Cuba, Bolivia and Venezuela stood with India at the WTO. Later the U.N. International Fund for Agricultural Development came out in support of India’s position. Many countries have openly criticised this step as India’s intransigence. But is India’s stand unreasonable?

Hunger and under-nutrition India faces serious problems of hunger and under-nutrition. According to National Sample Survey data, average calorie and protein intake have been steadily declining over the past few decades. In rural areas, the average calorie intake per person per day declined from 2,221 kcal in 1983 to 2,020 kcal in 2009-10. Over the same period, the average protein intake per person per day declined from 62 gm to 55 gm. One sees a similar pattern in urban India; the average calorie and protein intake declined from 2,089 kcal and 57 gm in 1983 respectively to 1,946 kcal and 53.5 gm in 2009-10. The vast majority of the population remains seriously undernourished.

If we look at more direct measures of malnutrition, this picture is equally grim. According to the latest National Family Health Survey (NFHS, 2005-06), about 40-45 per cent of children under the age of 3 years are underweight and stunted. Close to 80 per cent of children aged between 6-35 months and 58 per cent of pregnant women aged between 15-49 years are anaemic. About 33 per cent of women and 28 per cent of men aged between 15-49 years have a below-normal body mass index. In terms of malnutrition, India fares worse than many sub-Saharan African countries.

Trade collides with food security Given this enormous burden of hunger and under-nutrition, it is only natural that India places a high priority on food security. A key mechanism to address the problem of hunger and under-nutrition has been the Public Distribution System (PDS). It involves the procurement of food grains from farmers, transporting and storing them in warehouses and then distributing them to consumers. In recent years, the price paid to farmers — known as minimum support price (MSP) — has been higher than open market prices. Also, the price at which the food grains are distributed to consumers — known as the issue price — has been lower than the market price.

Hence, PDS involves providing a subsidy to both farmers and consumers. The subsidy to farmers, estimated to be about 20 per cent of the overall food subsidy, provides income support to poor agricultural families. The subsidy to consumers, by providing staple food grains at affordable prices, is necessary to increase consumption of poor families and address the widespread problem of hunger and under-nutrition.

Being a member of the WTO, India is bound by the agreements that have been signed and ratified by its members, including itself. According to Article 6 of the Agriculture Agreement, providing minimum support prices for agricultural products is considered distorting and is subject to limits. The subsidy arising from “minimal supports” cannot exceed 10 per cent of the value of agricultural production for developing countries.

PDS in India entails minimum support prices and public stockholding of food grains. It is possible that, in some years, the subsidy for producers will exceed 10 per cent of the value of agricultural production. In that eventuality, India would have contravened the Agriculture Agreement and be open to legal action by other members of the WTO. It is here that trade and food security collides for India. On the one hand, India needs to continue with the PDS to address problems of hunger and deprivation — this involves procurement and public stockholding of food grains. On the other hand, its membership in the WTO ties its hands on subsidy.

Possible solutions ignored As part of the discussions on agriculture in Bali, this conflict between trade and food security came up for intense debate. Two solutions exist. The first comes from a proposal circulated by the G-33 group of countries in November 2012. This proposal argued for amending the Agriculture Agreement so that support for farmers (that comes through procurement) in developing countries is allowed without limits.

The second solution was offered by India at Bali. The current method used by the WTO to compute the subsidy to producers multiplies the amount of procurement with the difference between the procurement price and a fixed reference price, which is the average of prices prevalent during the period 1986-88. This method is absurd because actual prices have increased several-fold since 1986-88. India has argued that the reference price used in the calculation should be moved forward on a rolling basis.

Both these solutions offered by developing countries have so far been ignored by the dominant forces — the developed countries — in the WTO. The developed countries are more interested in trade facilitation. As negotiations proceeded, India saw a reluctance on the part of some developed countries to deal with the issue of public stockholding. The possibility of a permanent solution to the issue of public stockholding by the 11th Ministerial Conference (i.e., within the next four years) would reduce substantially once the protocol on trade facilitation was adopted. Hence, India refused to agree to sign the protocol on trade facilitation unless there was an assurance of finding a permanent solution to the issue.

There is one area where the interests of the vast majority of India’s undernourished population and genuine concerns of WTO members coincide, and the Indian government would do well to recognise and act on this. A major and genuine fear of WTO members is that India will dump its huge stock of food grains on the world market, crashing food prices. The fact that India has an unusually large stock of food grains is the result of the refusal of the government to disburse these food grains — for instance, through food for work programmes — because of the fear of increasing the food subsidy bill. The government could send appropriate signals by continuously releasing the food stocks only in the domestic market, addressing at one go, the genuine concerns of WTO members and the nutrition needs of its citizens.

Cash for food? While many commentators have been sympathetic to India’s concern with food security, they have also argued for replacing the existing in-kind PDS with a cash transfer system. This would do away with procurement and public stockholding, and automatically solve the WTO issue of subsidy to farmers. Moreover, dismantling the existing in-kind PDS and replacing it with a cash transfer system is also a more efficient way of distributing subsidies. The current system is plagued by corruption and leakage that the cash transfer system will solve. Along similar lines, others have supported the dismantling of the PDS even as they have argued for the continuation of public stockholding to check price instability.

The key thrust of both arguments is to dismantle the existing PDS. Such arguments are problematic because they fail to engage with two important facts. First, the coverage, reach and effectiveness of the existing PDS have improved over time. Second, there is significant variation in the performance of the PDS across States. While some States like Himachal Pradesh, Kerala and Tamil Nadu have consistently performed well, others like Chhattisgarh and Uttarakhand have improved significantly. Thus, arguments for dismantling the PDS are wrong-headed. They are back door arguments for opening up the food economy to big, private capital that can have deleterious effects on the livelihood of peasants and agricultural labourers.

India should continue with its stand at the WTO to demand a permanent solution to the issue of public stockholding before the protocol on trade facilitation is signed. It should also resist efforts to dismantle the existing in-kind PDS; on the contrary, it should make every effort to strengthen it.

(Deepankar Basu is assistant professor in the Department of Economics, University of Massachusetts Amherst, U.S., and Debarshi Das is associate professor in the Department of Humanities & Social Sciences, Indian Institute of Technology, Guwahati.)

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