The BRICS Development Bank: The Future of South-South Cooperation?

Conclusion of the BRICS Summit in South Africa.

The BRICS countries (Brazil, Russia, India, China, and South Africa) announced their intention to fund a new development bank to challenge what they perceive as the Western-dominated agenda of the international financial institutions (IFIs). The move, which came about two weeks ago, has generated considerable discussion both of the charges leveled by the BRICS against the IFIs and about the role of the BRICS in global politics more generally.

The BRICS’s new development bank would be funded through an initial donation from each of the five countries, though considerable debate over what precisely the new bank will do. And therein lies the fundamental problem. The idea of South-South cooperation, that is, the exchange of resources, knowledge, and technology between developing countries, has been popular since the 1970s. Its proponents argued that South-South cooperation could reduce developing countries dependence on the developed world and could lead to a shift in the international balance of power away from the first world. But little real progress has been made.

And that precisely is the issue. As the al Jazeera article announcing the BRICS development bank noted, “Disputes remain over what the new bank will do, with all sides trying to mould the institution to their own foreign or domestic policy goals, and with each looking for assurances of an equitable return on their initial investment.”

Collectively, the BRICS countries represent approximately for one-quarter of global economic activity and are home to about 40 percent of the world’s population. And yet their interests are often at odds, reflecting the diversity of their political and economic experiences. Blogging at Project Syndicate, political economist Dani Rodrick argues that, “just about the only thing these countries have in common is that they are the only economies ranked among world’s 15 largest that are not members of the OECD.” Rodrick notes that in the structures of their economies (Russia and Brazil depend on commodity exports, India on Services, and China on manufacturing), their political systems (Brazil and China are democracies, China and Russia are not), and on their global position (China is rising while Russia is a superpower in decline), the BRICS have little in common.

Further, apart from the development bank proposal (which still lacks any real details), the BRICS have failed to articulate a coherent global policy in any real sense. Rodrick argues that the  BRICS have played “a rather unimaginative and timid role” in global politics, while  Joseph Nye notes that the diversity (indeed, the rivalry) between the BRICS countries undermine their potential to work together to develop a coherent challenge to the existing global political and economic infrastructure.

What do you think? Does the BRICS bank represent a challenge to the international financial institutions? Can Brazil, Russia, India, China, and South Africa present a new impetus for South-South cooperation? Or do the stark differences between the countries undermine the potential for effective cooperation? Take the poll or leave a comment below and let us know what you think.

Currency Devaluation and Development

Venezuela’s currency, the bolivar.

The government of Venezuela last week cut the value of its currency, the bolivar, by 32 percent against the U.S. dollar. The move, intended to boost the economy’s sluggish performance, was the fifth devaluation by Hugo Chavez’s government since 2003.

Governments usually devalue their currency in an effort to address balance of trade disparities. Because most commodities (including Venezuela’s primary export, oil) are priced in U.S. dollars, devaluing the local currency boosts exports and cuts imports. A country that exports more and imports less will experience an improvement in their balance of trade and a reduction of their trade deficit.

But will it work? Devaluation generally works best when the country is exporting commodities for which there is steady demand and importing luxury goods. Countries which depend heavily on imports for basic commodities like food or gasoline will often not benefit from devaluation, because in the relative increase in the cost of imports offsets any increase in exports. This was the case, for example, when Rwanda devaluated the Rwandan franc in 1993. Because Rwanda exported primarily coffee (for which there was already excessive supply) and imported foodstuffs, devaluation of the Rwandan franc failed to result in any real improvement in the economic situation in the country. Venezuela, on the other hand, exports primarily oil and imports primarily machinery and construction materials, suggesting devaluation may have a positive effect.

But Venezuela also faces some real challenges. The Venezuelan bolivar was already trading at four times the official exchange rate on the parallel market, suggesting that even with the recent devaluation it remains overvalued. And price controls have left many basic consumer commodities in short supply. Still, Venezuela is in far better straits than Zimbabwe, which last week reported that the country had just $217 (yes, that’s $217.00, not $217 million, or even $217 billion) in its coffers.

What do you think? Will Venezuela’s devaluation of the bolivar help turn the country around? Or is it too little, too late? Take the poll or leave a comment below and let us know what you think.

Pollution and Development in Beijing

Sunrise over Beijing’s polluted skyline.

Air pollution in the Chinese capital Beijing reached levels deemed hazardous to human health over the weekend. According to World Health organization guidelines, air is “unhealthy” when the tiniest particles (PM 2.5) reach 100 micrograms per cubic meter. Individuals are usually warned to remain indoors when they reach 300 micrograms. Unofficial readings from the U.S. embassy recorded levels over more than 800 micrograms per cubic meter. Inhaling such particles can cause respiratory infections and increase the likelihood of developing lung cancer and heart disease.

Pollution in Beijing and other Chinese cities is primarily the result of the country’s rapid economic development. In Beijing, air pollution is derived from two primary sources: car exhaust and coal dust.

The environmental Kuznets curve helps to make sense of this relationship. According to curve, there is a relationship between environmental quality and economic development. As countries industrialize, environmental degradation (pollution, etc.) tends to increase until the country reaches a particularly level of development, at which point it begins to fall. The theory is that a “clean environment” is a post-material demand. Individuals living in deep poverty place a clean environment relatively low on their list of priorities, which generally focus on more immediate survival concerns. However, once those survival needs are satisfied, individuals begin to demand other rights. This theory has been advanced to explain everything from environmentalism to democratization and minority rights.

In the case of the environment, there is clear data that suggest that—for many contaminants—the curve holds true. Interestingly, the tipping point, the level of economic development at which pollution begins to decline, appears to vary by pollutant. Lead, for example, begins to decline at a relatively low level of economic development, while air pollution (particulates) decline at a higher level. For others—most notably carbon dioxide emissions—there appears to be no decline, and levels of CO2 emissions continue to increase in step with the size of the economy at all levels of development.

The environmental Kuznets curve raises some interesting questions for sustainable development. If correct (and the theory is itself contested), it suggests that sustainable development is really about transitioning countries from a relatively low point on the curve to a higher point. Once at that higher point, the level of economic development would result in local incentives and demands for a cleaner environment. But the lack of relationship between the level of development and levels of certain pollutants, such as greenhouse gasses, are reason for concern.

What do you think? Does China’s economic development raise environmental concerns? How might Chinese development be made greener? Take the poll or leave a comment below and let us know your thoughts.

Development Aid Priorities

The Guardian’s Datablog today has a fascinating map  illustrating global development aid flows over the past decade. They’ve been running a contest for the best map, and today’s entry shows the winner.

The interactive map highlights aid received and given by each country, both in total, over time, by source and by sector. You can also put the map in motion, and see how aid flows have changed over time.

The map provides a compelling way to view the changing global priorities in development aid. You see, for example, the rise of Iraq as a major recipient of foreign aid following the 2003 U.S. invasion. But the map also helps to raise some interesting questions, particularly around the basis on which foreign aid should be distributed. Given the ongoing debate over the fiscal cliff and the pressing desire to cut government spending, it seems clear that foreign aid is going to be expected to do more with less in the future. Yet Americans have always vastly overestimated the amount of foreign aid the country provides. A 2010 survey found that Americans believed foreign aid was one quarter of the total U.S. budget, but believed that it should “only” be 10 percent. In truth, foreign aid comprises less than one percent of the federal budget. The belief that we can balance the federal budget by cutting foreign aid (or public television, for that matter) is simply absurd.

But the broader conversation about the role of foreign aid and its relationship to foreign policy priorities is a conversation worth having.

What do you think? What should American foreign aid priorities be? Leave a comment below and let us know what you think.

Measuring Economic Activity and Development in Africa

Lagos, Nigeria

According to a report by Reuters, Nigeria’s gross domestic product will grow by 40 percent in the second quarter of 2012. If correct, Nigeria’s GDP would increase from $273 billion to $370 billion, and Nigeria would become Africa’s second largest economy in Africa. Growth forecasts suggest that Nigeria would surpass South Africa to become Africa’s largest economy within a few years.

The move has significant implications for Nigeria and the rest of the developing world. Symbolically, Nigeria’s newfound economic prowess could afford the country greater leadership and influence on the continent, particularly within West Africa.

Nigeria’s larger economy would also have important policy effects for international institutions. By increasing its GDP, Nigeria’s debt ratio (the size of the country’s national debt as a proportion of the total size of its economy) will nearly be cut in half. At the same time, the improved economic status of the country could affect its ability to secure concessionary loans. When Ghana’s GDP was increased by more than 60 percent in 2010, its debt-to-GDP ratio fell from 40% to 24% and the World Bank reclassified it from a low income to a lower-middle income country.

So how did Nigeria and Ghana grow their economies so dramatically? In truth, they didn’t. Gross domestic product is the total value of goods and services produced win a country in a given year. But in most countries in most years, economists don’t actually go out and add everything up. Instead, they start with a year in which a fairly accurate survey was conducted and adjust it annually based on other variables like population growth. In both Ghana and Nigeria, the dramatic increase in GDP was not the result of sudden and dramatic economic growth. Rather, in both cases, the upward shift in GDP was the result of how the number was calculated and which base year was used.

This methodology raises several important questions.

First, how accurate is the baseline year? If the baseline year is incorrect, then all subsequent calculations based on that initial estimate also be inaccurate. The exclusion of the informal sector, which can include everything from sales by unlicensed street vendors to prostitution to the sale and trafficking of illicit drugs, often leads GDP to be underestimated. A 2010 World Bank report estimated the size of the informal economy in the United States as 8.8 percent of the formal economy. The median figure for developing countries was 41 percent. In the countries with the largest informal economies (such as Azerbaijan, Bolivia, Georgia, and Panama), it exceeded 60 percent.

Second, how old is the baseline year? When Ghana’s GDP increased in 2010, it was because Ghana shifted its baseline year from 1993 to 2006. Similarly, Nigeria’s baseline year shift from 1990 to 2008 will likely account for a significant portion of the increase in its GDP. Think for a moment about the importance of the baseline year. In the early 1990s, the cell phones which are no so ubiquitous across Africa will still in their infancy, widely unavailable on the continent. This one example illustrates how dramatically the structure of an economy (and a society) can shift in a relatively short period of time.

This means that GDP figures for developing countries are best thought of as general estimates falling within a wide margin of error rather than concrete numbers that reflect real, on the ground economic activity. It teaches us that we should be critical consumers of data.

Those interested in learning more about this questions would be well advised to seek out Morten Jerven’s new book, Poor Numbers: Facts, Assumptions and Controversy in African Development Statistics, forthcoming from Cornell University Press.

What do you think? Should we continue to use GDP as a proxy measure for development? If so, how can we acknowledge the limits of that figure while making meaningful decisions? If not, what do we use instead? Leave a comment below and let us know what you think.

Doha is Dead….Long Live Doha?

Dani Rodrick has an interesting discussion of the World Trade Organization and the Doha Round at his blog this week. Citing comments by Martin Wolf, Rodrick argues that the Doha Round of trade talks is dead, and that continuing to push the round is doing more harm than good. According to Wolf,

Doha was essentially a political response to 9/11. I supported it then because it indicated the global will to co-operate and sustain globalisation. Its chance of completion was in the first few years. Once the political reasons weakened, as they did, after Iraq and then the obvious fact that globalisation was ongoing, the will to complete this round disappeared. Today, no top-level politician would now use his or her desperately limited political capital to complete this round, which they see (rightly) as a low-level priority. After all, are we really living in an era of collapsing trade? Is protectionism rampant? Given the shocks of the last few years, it is almost astonishingly absent.
Then people will say that the WTO will collapse if we don’t keep on doing rounds. I think that’s absurd. Do we think the legal system will collapse if we don’t go on writing more laws? At some point, we were bound to get to the point when a round failed. At some point, we would have to declare an end to rounds. Before 9/11, I thought we were already there. After 9/11, I thought it made sense to have one more go. I was wrong. Doha is weakening the WTO, not strengthening it.
So what now? Make the WTO work in a world without rounds, that’s what. Move on. This is over.

I think that both Rodrick and Wolf are correct in their assessment of the future of Doha. Doha is dead. It’s basically been so since the round was launched in 2001. The inability of contracting parties to arrive at agreement on a number of issues, most notably liberalization of agricultural trade, meant that it was unlike to ever be successful.

But the importance of Doha went far beyond the continued liberalization of international trade. Doha was both the first round launched under the auspices of the World Trade Organization as well as the first concerted effort to address the intersection of trade and development. Doha undertook an ambitious agenda—based in part on the standoff in Seattle in 1999—to address a series of issues with key implications for development in the global south: essential medicines, agricultural trade, trade in services, and special and differential treatment, among others. The collapse of Doha signals to the developing world—as if a new signal were necessary—that the rules of the international trade system are stacked against them, that their interests are not taken seriously in international talks. The WTO can certainly continue in its current form. But the cynicism of the developing countries will rightly be directed towards the organization.

What Makes the World’s Happiest Country Happy?

Once again, Norway was named the World's Happiest Country.

Forbes magazine has released its annual ranking of the world’s happiest countries, using data compiled from the Legatum Institute’s annual prosperity index. The prosperity index is an effort to rank countries based on wealth, freedom, security, life satisfaction, and so on. As in years past, Norway topped the list.

While interesting in their own right, these sorts of indices also provide some interesting insights into broader questions of economic and political development.  In most studies, gross domestic product (GDP) per capita [glossary] is the proxy measure of development. The higher the GDP per capita, in other words, the more developed a country is. With its 2010 GDP per capita of approximately $47,000, the United States is relatively more developed than South Korea, with a GDP per capita of approximately $20,000. South Korea, in turn, is considerably more developed than Haiti, which has a GDP per capita of approximately $650. Indeed, the World Bank and other international institutions regularly categorize countries using GDP per capita. Thus, for World Bank lending purposes, maintains four categories of countries: low income countries, with GDPs per capita of less than $996, lower-middle income countries, with GDPs per capita between $996 and $3,945, upper-middle-income countries, with GDPs per capita between $3,946 and $12,195, and high income countries, with GDPs per capita of more than $12,195.

But while we use GDP per capita as a proxy for “development,” the figures often tell us very little about what is actually going on in a specific country. Further, while we generally operationalize development as an increase in GDP per capita, an increase in GDP per capita may or may not actually result in an improvement in the quality of life or life chances in a given country. This is where other figures and indices come in. The Human Development Index, the Gender Empowerment Measure, and Happy Planet Index, even more specific measures like life expectancy, child mortality, or literacy rates can tell us a great deal about what is going on within a specific country.

One interesting comparison is to look at the top ten countries in the various measurements. Let’s take GDP per capita and human development.

According to the IMF, the ten wealthiest countries in the word in 2010 were:

1. Luxembourg $104,390
2. Norway $84,543
3. Qatar $74,422
4. Switzerland $67,074
5. Denmark $55,113
6. Australia $54,869
7. Sweden $47,667
8. The United Arab Emirates $47,406
9. The United States $47,132
10. The Netherlands $46,418

If we compare this to the top ten countries in the UNDP’s 2010 Human Development Index, which is a composite index which incorporates health, education, and wealth, we see some interesting shifts. The top ten rankings for the HDI are:

1. Norway
2. Australia
3. New Zealand
4. The United States
5. Ireland
6. Liechtenstein
7. The Netherlands
8. Canada
9. Sweden
10. Germany

Some countries, in other words, overperform relative to the size of their economies, while others tend to underform. Ireland, for example, moves up 7 spaces (from 12th largest economy to 5th best ranking in the HDI), while Germany improves 9 positions (from 19th to 10th). At the other end of the scale, Qatar and the United Arab Emirates experience a sharp drop in their rankings, falling from 3rd and 8th to 38th and 32nd respectively.

And where things get really interesting is when the various measures diverge greatly. When we’re looking at measures which incorporate concrete variables, such as infant mortality rates, literacy rates, or access to education, explanations can be relatively straightforward. One could make a strong case, I think, that the reason that Qatar and the UAE fall so sharply in their standings is because they have not been successful in converting the oil wealth both countries enjoy into social and health benefits for the country’s population as a whole.

But when we get into the fuzzy area of happiness and life satisfaction, things become much murkier. According to the Legatum Institute’s study, the world’s ten happiest countries are:

1.  Norway
2. Denmark
3. Finland
4. Australia
5. New Zealand
6. Sweden
7. Canada
8. Switzerland
9. The Netherlands
10. The United States

Money, in other words, helps but it doesn’t buy happiness. Wealth is certainly part of the picture—we don’t see very poor countries cracking the top of the charts. But size, trust and social cohesion, and extensive redistribution of wealth, also appear to play a role. Food for thought in development studies.

Economic Development and Intellectual Property

Solar Panel Production: One of the areas China has been accused of engaging in development-through-copying.

Development has long been an elusive challenge. Despite more than sixty years of theorizing, debating, modeling, and discussing, I think a compelling case can be made that we really still don’t understand how and why development takes place. Sure, we understand the basics: corruption is generally bad, loans and foreign investment are insufficient, and so on. But there’s much, much more that we don’t really understand: How are democracy and development related? Is there a resource curse? What are the necessary conditions for economic growth? And so on.

So when Chris Blattman blogged on Chinese development last week, I read it with particularly interest. Blattman noted the negative coverage the Chinese purchase of a Spanish company received in the New York Times. According to the NYT,

The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.

Blattman then goes on to deconstruct this narrative, noting that “there is nothing dark or nefarious here [just] good hold fashioned industrial policy at work.” He notes that the story of Chinese development-through-copying echoes previous patterns of development, including Europe in the 19th century, Japan after the Meiji Restoration, and the Asian Tigers in the 20th century.

Indeed, copying has long been a tool for developing countries to catch up with the industrial leaders of the day. For this reason, developing countries often afford much weaker intellectual property protection than developed countries. Weak IP protection, in other words, was frequently used as a developmental tool. As the U.S. Office of Technology Assessment noted in a 1986 report,

There have been political tensions between nations whose role as producers of intellectual property allowed them greater access to such products, and nations that imported technology products, and had only limited access to them.  When the United States was still a relatively young and developing country, for example, it refused to respect international intellectual property rights on the grounds that it was freely entitled to foreign works to further its social and economic development.

Ironically, however, today weak IP protection is often cited as a significant barrier to technology transfer. Further complicating the situation, the development of a uniform system of intellectual property protections deployed globally through the World Trade Organization also serves to preclude this avenue of development-through-copying.

Barack Obama’s United Nations Day

President Barack Obama Addresses the United Nations

President Barack Obama was in New York yesterday for United Nations week, the annual gathering of the world’s heads of government to discuss issues of global importance. Discussion of the Millennium Development Goals had dominated the discussion leading up to Obama’s speech (and will likely be the focus of ongoing discussion, as Texas in Africa notes).

President Obama’s speech was—as many of the speeches to the United Nations by heads of state tend to be—long on rosy rhetoric and short on details. Obama did hint at a couple of (potentially) interesting shifts. He announced a new “U.S. Global Development Policy” and outlined his “new approach and new thinking” in which America’s “national security strategy recognizes development as not only a moral imperative, but a strategic and economic imperative.” Collectively, according to him, means that “the United States is changing the way we do [development] business.” Much of the rhetoric offered nothing new. His speech emphasized the same need for transparency, good governance, and commitment to free markets that have defined U.S. development policy since the early 1990s (at least).

More concretely, Obama recommitted the United States to achieving the Millennium Development Goals. He also suggested the need to rethink how we define development. According to Obama,

“For too long, we’ve measured our efforts by the dollars we spent and the food and medicines we delivered. But aid alone is not development. Development is helping nations to actually develop—moving from poverty to prosperity. And we need more than just aid to unleash that change. We need to harness all the tools at our disposal-from our diplomacy to our trade and investment policies.…

[W]e’re changing how we view the ultimate goal of development. Our focus on assistance has saved lives in the short term, but it hasn’t always improved those societies over the long term. Consider the millions of people who have relied on food assistance for decades. That’s not development, that’s dependence, and it’s a cycle we need to break. Instead of just managing poverty, we have to offer nations and peoples a path out of poverty.

This could suggest a more dramatic shift in U.S. foreign policy. For example, the United States may move away from providing in-kind food aid to a greater emphasis on cash for emergency aid and an increase in non-emergency food development. But this kind of shift involves more than a simple speech at the United Nations. The proof, as they say, is in the pudding.