Natural resources: blessing or curse?

This blog post appeared in Dutch on the Oikocredit Netherlands website.

Ghana, Uganda and Tanzania have recently discovered oil, gas and minerals. While a blessing at first sight, history teaches us that many countries hardly benefit from their natural resources. Nonetheless, a few countries (such as Norway) have experienced spectacular economic growth. Why do some countries succeed while others fail?

Source: The Economist 

I’ve just spent a month in Bergen, Norway, for work. While I was staring out of the bus window on the way to university, a thought sprung to my mind: “If only I had been born here.” Norway is a welfare state pur sang, which takes good care of its citizens. While the social safety net in The Netherlands is being torn down, Norwegians don’t need to worry when they get sick, unemployed or pregnant.

My enthusiasm is being supported by official statistics such as the UN Human Development Index, which has ranked Norway first since 2000. It is also one of the richest countries in the world, which is mainly a result of oil and gas exports. “Yeah, that’s easy” you might think. Of course you take good care of your people if you have a money tree growing in the backyard.

Intuitively, it seems a blessing to find oil or the like in your soil. However, Paul Collier shows in his book ‘The Bottom Billion’ that this is not always the case. Countries with natural resources do not automatically perform well socially and economically. Even more, they often perform worse than countries without such richness. Collier calls this the ‘Natural Resource Trap’ (also commonly called the ‘resource curse’), in which conflict becomes more likely and governments are less accountable. In addition, economic problems are looming, such as the Dutch disease (and, no, this is not an allergy for Gouda cheese).

Norway managed to avoid these problems by investing the oil money in the Government Pension Fund Global (or Oil Fund). With 760 billion Dollars in the bank, it is the largest of its kind and an important international investor. The Oil Fund invests in a careful manner. First of all, money is only invested abroad in order to keep the Norwegian economy from overheating. Secondly, an ethical committee checks whether investments are directed at ‘proper’ organizations, which do not sell weapons, violate human rights or harm the environment (click here for a list of excluded companies).  

Countries like Sierra Leone, Nigeria and Congo fared a lot worse: their discovery of diamonds, oil and minerals only helped the political elites. Why did it work out in Norway, while so many others fell prey to the resource curse? An obvious explanation is that Norway is a rich country and therefore better organised. But then we would forget that Norway’s wealth is a consequence – rather than a cause – of its resource management. For years, it was one of the poorest countries in Europe. Only in the 1960s did the economy start to grow as a result of the discovery of oil. By the way, also non-European countries – such as Chili and Trinidad and Tobago – avoided the resource trap. Hence, geographical and cultural factors cannot be the sole explanation of the Norwegian wonder.

So what is the explanation of Norway’s success? This question touches upon one of the most important questions in economics: Why are some countries poor and others rich? Daron Acemoglu and James Robinson give a compelling answer in their book ‘Why Nations Fail’. In their view, economic success is not determined by culture or geography, but by political and economic ‘institutions’ in a country. Institutions can be regarded as laws and practices in a country. These institutions don’t magically appear: they are manmade and often the result of a long history.

Institutions (or the lack thereof) affect how a country deals with the profits of its natural resources. Norway has democratic institutions, which means that political leaders can be held accountable for their decisions. As a result, revenues are being invested responsibly and to the benefit of all Norwegians. Such institutions lacked in other countries, which enabled officials to loot without consequence.

Countries like Ghana, Uganda and Tanzania are now standing at a crossroads. They have just discovered an abundance of minerals, oil or gas. Will they choose the road towards Norway or will they go towards Sierra Leone? Let’s hope that their institutions will push them in the right direction.  

The faces behind the numbers

This post appeared in Dutch on the Oikocredit Netherlands website. 

Today is Blog Action Day. On this day, people around the world post blogs to draw attention to a designated theme. This year: inequality, a topic that I focus on in my research.

I travelled to Bolivia two years ago. During my stay I interviewed individuals about their experience with inequality. I was perfectly prepared. I had carefully drawn diagrams representing different income distributions on my computer. Identical rectangles pieced together into a pyramid or an hourglass. The questions – thanks to my language course – were translated to Spanish. And, of course, I had read all the relevant academic papers. I was ready.

My host family in Tarija, a small town close to the Argentinian border, warmly welcomed me. I went to a wedding, celebrated New Year’s Eve, and got acquainted with all the aunts and uncles. The culture shock that I had expected didn’t come. The heels were a bit too high for my Dutch feet and the language was more melodious than my own. But with Teresa, the host family’s daughter, I chatted as I would with my friends at home. We shared experiences, enjoyed the same food, and our jeans looked alike.

Shock

The biggest shock I experienced in those first days was that I sometimes felt relatively poor. Like when Jorge – member of the local Rotary Club – showed me a new Santa Cruz neighbourhood. Ten years ago it had been a deserted area, now it was filled with villas, fancy cars, and high fences. Or the time that I was invited for a lunch in an old colonial house filled with antique furniture. When we had finished our starters, my host rang a copper bell. A second later, the two helps entered to clean the table and serve the main dish.

The fifty-eight year old woman Venita broke my bubble. Equipped with a stack of questionnaires, I had arrived at the office of Mujeres en Acción. This organisation aims to empower women that work as household help. Since recently this occupational group was legally entitled to the minimum wage. However, in practice little had changed.

Venita was shorter than me by twenty centimeters. She was dressed in a gray sweater and a worn pair of jeans. “How happy are you on a scale from one to ten?” “One” she answered. She looked fragile and I wondered whether I should just leave her alone. “My employer pays me 200 bolivianos (23 euro) per month. I don’t dare to ask for more. They will probably fire me if I do. And I have no other place to go. I am too old. I live outside in a small tent.”

Rich and poor

“Next, I am going to ask you some questions about the distribution of money between rich and poor in Bolivia” I continued. I glanced at the abstract diagrams I had designed in The Netherlands. Venita could neither read nor write. I cursed at myself. How was she supposed to understand these collections of rectangles? But before I could ask my first question, she started to talk. “Let me tell you how Bolivia works. There are many poor people and very few rich. There is nothing in between.” She straightened her back. “And it only gets worse. People are not to be trusted, let alone the government. Many words, but no actions.” She looked at me with her dark eyes. I bit my pen and flipped through the questionnaire. Venita had just, without realising, answered two pages of questions.

I sometimes think of her when I am gazing at averages, standard deviations or regression coefficients. Because Venita hides behind these numbers. Or Jorge. Or Teresa. People who sometimes taught me more than a dozen academic papers. People who gave faces to abstract concepts. People who answered questions that I could not have thought of. It is their voice that I want my research to echo. 

How Nigeria became twice as rich overnight

This post appeared in Dutch on the Oikocredit website.

One Sunday in April, something remarkable happened: all of a sudden Nigeria became almost twice as rich. The Nigerian statistical agency had recalculated the official statistics and the GDP turned out to be 89% higher than previously thought. Overnight, Nigeria had become the largest African economy, surpassing South Africa.

www.photocontestinsider.com/2013/04/winners-of-the-malaria-photo-contest-announced

Had someone messed with the numbers? After all, companies and other parties have an interest in a larger economy. For years, South Africa had been the African country to invest in; this revision could divert investors’ attention from South Africa to Nigeria. However, economists seem to agree that not the new, but the old statistics were unreliable.

The old statistics could not be trusted because Nigeria was using severely outdated methods for its national accounting (read a more detailed explanation here). This is not just a Nigerian problem: Morten Jerven writes in his book  Poor Numbers that African statistical agencies generally lack people and knowledge, causing them to publish inaccurate numbers. It is not only economic statistics that are often of low quality in Africa, but also other types of data. For example, education and health statistics are often incorrect.

Why should we care about good data? Isn’t that a problem for number fetishists in rich countries? Aren’t there more urgent problems in Africa? It’s probably not the sexiest topic, but data quality is essential for poverty reduction and development. Without good data it is impossible to know where money should be invested, how health care is doing, and what the impact is of a new education policy. Without good data, new policy measures are merely shots in the dark.

Claire Melamed mentions the example of malaria. Malaria is one of the foremost causes of death in poor countries. Nevertheless, good data is scarce. To fight the disease effectively it is important to know which areas are confronted with malaria, how many patients are there, and what is the quality of local healthcare facilities. Moreover, the results of eradication programs can show what works and what doesn’t. For example, should mosquito nets be free or is it better if people pay for them? (Answer: hand them out for free.) Such knowledge doesn’t fall from the sky: local organisations report figures or special teams collect the information needed. This costs money, but such investments have high returns: less people fall ill, less people die.

So how can data quality be improved? In order to figure that out, it is key to understand why statistics are unreliable (and sometimes completely absent) in African countries. First of all, there is a lack of resources. Jerven tells about a visit to the Zambian statistical bureau, where one man is responsible for the entire national accounting. “What happens if I disappear?” he wonders. (To contrast, ninety-nine employees work at the national accounting department of the Dutch statistical agency.) Secondly, perverse incentives sometimes encourage organisations to report wrong numbers. A recent article by Justin Sandefur and Amanda Glassman shows that governments exaggerate the number of vaccinated children in order to receive more donor money. Or schools report higher enrollment figures, because the administration pays them per student. 

Data quality can improve by tackling these two causes. There are initiatives, such as Paris21, that focus on enhancing ‘statistical capacity’ of developing countries by giving money and training. However, that doesn’t solve the problem of wrong incentives, which requires fundamental changes in the way development progress is rewarded.

On that Sunday in April Nigeria showed that it is indeed possible to produce better data. Of course, better data is a not an end in itself. The poor man in a Lagos slum didn’t see his income double overnight. Nor did the ill woman in the countryside all of a sudden have access to a better hospital. Only if good statistics are actually used for better policies, can they make a difference.

Counting what counts

This post appeared in Dutch on the Oikocredit website.

“How are you?” It is a question we hear on a daily basis. The answer seems straightforward: “Good.” However, it is arguably one of the most complex questions someone can ask, as it requires the evaluation of every single facet of our lives: job, relationships, health, and so forth.

Many economists and policy makers are interested in quantitative measures of wellbeing. The concept of wellbeing is meant to represent the quality of life of an individual or group. In a way, it puts a number on the answer to “how are you?” And just like this question is difficult to answer, the measurement of wellbeing is difficult to do.

Beyond GDP

For a long time, economists have used monetary measures to proxy wellbeing, such as the gross domestic product (GDP). They are – at least in theory - relatively easy to calculate as the components can be counted and added up. But, as a sign in Einstein’s office at Princeton read: “Not everything that counts can be counted, and not everything that can be counted counts.”

Wellbeing is influenced by factors that are difficult or impossible to count, such as the quality of relationships or the way you feel when you wake up in the morning. Economists are therefore increasingly interested in alternative measures of wellbeing, such as happiness.

It’s all about the money?

As part of my PhD research I travelled through Bolivia and interviewed the local population about their happiness. One of my main research questions was how happiness is associated with other aspects of life. For example, does money make you happy? Based on these data I collected, I can answer sí wholeheartedly. Richer people were happier and many other studies have come to the same conclusion.

However, already in the 1970s, Richard Easterlin found that the relationship between income and happiness is more complicated than it seems. He found that richer people within a country were indeed happier, but that richer countries are not necessarily happier on average. This “Easterlin paradox” can be explained by the fact that individuals tend to compare themselves to others. In that sense, it is not the absolute income that matters, but the relative income. For example, you might be content with your own car until your neighbour buys a new, slightly bigger, one.

Does it count?

Why is this kind of knowledge important? First of all, a wider view of wellbeing can help to set priorities for policy. If we assume that relative income is more important than absolute income, we should aim to reduce income inequality. After all, larger income differences would then cause larger aggregate unhappiness.

Alternative measures of wellbeing can also help us to see things we would otherwise miss. A nice example is Egypt. In the run-up to the Arab Spring, the GDP per capita was steadily growing; the country was doing well according to the traditional measures. However, the percentage of happy people in 2010 was only half of what it was five years earlier. The discontent would come to an explosion at the Tahrir Square at the beginning of 2011.

It would be good if economists and policy makers looked beyond the traditional approaches to measure wellbeing. There are many more possibilities to count what really counts.

Read more?

• The World Happiness Reports of 2012 and 2013 offer a good introduction to anyone who is interested in happiness research.
• An article by Betsy Stevenson and Justin Wolfers, who investigate the Easterlin Paradox using new data. According to their results richer countries are indeed happier than their poorer counterparts, which contrasts with Easterlin’s findings.

Sachsy development

This post appeared in Dutch on the Oikocredit Netherlands website.

The logic is irresistible: if we send enough money to developing countries, poverty will be put to an end once and for all. We have got to help, it’s our responsibility. In the book The Idealist, Nina Munk portrays the charismatic Jeffrey Sachs and his Millennium Villages in Africa. How good intentions can have destructive consequences.

Jeffrey Sachs with U2 singer Bono

Already at a young age Jeffrey Sachs (1954) stood out: he received high grades in school, won math competitions, and displayed leadership qualities. He was already a successful economist when the Bolivian president Victor Paz invited him to help Bolivia in the mid-eighties. The country was poor and the economy was in chaos. Inflation reached 25,000%. Sachs wrote a plan for economic recovery. The strict fiscal and monetary policies caused hundreds of thousands of people to lose their job or pension. But the “shock therapy” helped: inflation fell to 15%. As it turned out: the economy is controllable, as long as you are willing to make concessions.

In 1995, Sachs visited Sub-Saharan Africa for the first time. The trip marked the start of his crusade against poverty. In the decade that followed, he travelled all over the world to convince people that a “Big Push” in development aid was needed. According to Sachs, we “have to stop using the M-word and start using the B-word.” In other words, we need billions, not millions to tackle this problem. His new humanitarian image seemed to conflict with the strict policies he promoted in Bolivia. But in one respect he was consistent: as long as we display enough willpower, everything has a solution.

Sachs had reached the status of a rock star by the time he published his book The End of Poverty in 2005. U2 singer Bono called himself Sachs’s “student” and there was even a Sachs fan club. However, Sachs was not content: despite his tireless campaign, the Big Push had failed to come about. If others wouldn’t do it, he would. In 2006, Sachs convinced billionaire George Soros to finance his Millennium Village project. He would use ten African villages to show that poverty can be annihilated by investing enough money. The project was supposed to last five years, but Sachs assured Soros: “Most of the work can be done in just one year. (...) The rest is just footnotes.”   

Sachs was wrong. Munk describes how, initially, the new money improved the situation in the villages. Schools opened up, doctors were attracted by the relatively high salaries, and farmers received better seeds. But poverty is persistent. For example, the maize harvest in the Ugandan village Ruhiira doubled, but the roads were so bad that the surplus could not be traded. The extra harvest was eventually eaten by rats. Once the money influx started to slow down, the recorded improvements appeared unsustainable. Villagers were angry that their expectations had not been met. In one village, they even wrecked a car owned by the Millennium project.

Sachs denies that his project failed; he even calls it a big success. Who is right? That’s the worst: we’ll never know. There were no proper baseline measures collected before the start of the project, nor are there ‘control villages’ with which the Millennium Villages can be compared. Life seems to have improved in some villages, but Africa has been doing well in general. So, in how far can we ascribe progress, if any, to Sachs and his project?

The Idealist shows that a golden charisma, good intentions, and a brilliant mind are not sufficient for success. The main complaint of the villagers was that the project had a top-down approach and that their voices were not heard. Sachs saw the poverty puzzle as a simple calculation: add up the correct interventions and you will get prosperity as the result. But he forgot the most important piece of the puzzle: he forgot to listen to the people that the project was all about.

Want to read or listen more?

• Order the book The Idealist by Nina Munk here.
• Listen here to an interview with Nina Munk. Listen here to an interview with Jeffrey Sachs, responding to the book and, more generally, to critics of the Millennium Villages project (hat tip to Lukasz Marc for both links).

Trapped in scarcity

This post appeared in Dutch on the Oikocredit Netherlands website.

The book Scarcity by Sendhil Mullainathan and Eldar Shafir had been on my to-do list for months. I kept postponing reading it. Even though it seemed important, it wasn’t high on my list of priorities. I had deadlines: finishing a paper, preparing a presentation or... finishing my next blog post.

I wanted to read the book because it talks about the psychology of poverty. I have been fortunate enough never to have lived in poverty, and it is therefore hard for me to imagine how it must be. That’s why I travel to developing countries, do research and read books about development issues. After a busy period, I finally had time to read Scarcity last week. And? It turns out that my busy existence and a life in poverty are not as different as I thought.

Mullainathan and Shafir show that people who are poor, busy or on a diet, all deal with the same problem: scarcity. Scarcity of money, time or calories. Scarcity requires our full attention and distracts us from other important aspects of our lives: a poor mother is late for work, a busy manager forgets his daughter’s birthday, a student on a diet cannot focus on her exam.

People living with scarcity cannot think about much else. That has serious consequences: their cognitive skills suffer. A study among farmers in India shows that their IQ score is ten points higher after harvest – when there is plenty of money – than before harvest – when they are penniless. People also start behaving differently as a result of scarcity: they find it hard to resist temptations, snap at people around them and forget appointments.

I can definitely recognise these symptoms: in a busy period I sometimes forget everything around me. But I differ from a poor person in one crucial way: for me there is a way out. In the worst case I am late for a deadline or have to cancel a meeting. I can choose not to be busy, but someone who is poor is trapped.

‘Poverty traps’ have been an important topic in development economics for decades. Why can’t people escape poverty? Many explanations have been offered: poor people are not intelligent enough, live to close to the equator or live in countries with messed up political systems. Mullainathan and Shafir offer an interesting contribution to this discussion: scarcity creates a vicious circle and pulls poor people further into poverty.

As opposed to many other explanations, this explanation gives hope: poor people are not poor because of who they are, but because of their circumstances. Scarcity creates behaviour that makes poor people even poorer. A mother is fired because she cannot focus on her job, she gets a fine for being late on her electricity bill or she forgets to fill out a form that could get her child into a scholarship programme. Simple changes can make her life easier: early reminders for paying bills, insurance against financial shocks or assistance with filling out complicated forms.

What about me? What can I do to make my busy life easier? I’ll think about that later, I have a deadline to make...

Does microcredit work?

This post appeared in Dutch on the Oikocredit Netherlands website.

In 2010 I travelled across Uganda to visit microcredit projects. I met inspiring people with remarkable stories. Violet, for example, opened a primary school with the help of a loan. Microcredit seemed to be a big succession of triumphs. Nevertheless, something was gnawing away inside of me. What about borrowers that failed to use their loan successfully? And wouldn’t entrepreneurial types like Violet manage to succeed regardless, even without a microcredit? In other words: Does microcredit work?

Three students from Violet's primary school

One way to answer this question is doing a ‘randomized controlled trial’ (RCT). The concept is simple and well known from medical experiments: one group receives the treatment – a microcredit – and another group gets nothing. By comparing the two groups, you learn about the effect of the treatment. A crucial aspect of this method is the random selection of individuals. By doing this you avoid so-called ‘selection bias’. For example, imagine that microcredit clients have more entrepreneurial qualities than ‘normal’ people. It is likely that those with a microcredit will have more success, but to what extent can we assign this to the loan?

Esther Duflo and Abhijit Banerjee are the uncrowned monarchs of the ‘randomistas’, the researchers that focus on RCTs. In The miracle of microfinance?, Duflo, Banerjee and co-authors study the effect of a new microcredit program in Hyderabad, India. The results? Borrowers invest more in their business, but these investments do not lead to a decrease in poverty. Although income does not rise, money is being spent differently: microcredit clients buy less ‘temptation goods’, such as lottery tickets and cigarettes, and more durable goods, such as fridges and television sets. Other studies arrive at similar conclusions: there are positive effects, but microcredit does not seem to be the silver bullet in the heart of poverty.

But: there is not only one type of microcredit. Loans vary in size, duration and interest rate. Some loans are given to groups, others to individuals. So, instead of asking “Does microcredit work?”, we should ask “Which microcredit works?” The research on this question is ongoing, but there are already some interesting results. For instance, Lars Berge and coauthors found that microcredit works better if it’s combined with business training (link). Training does not only teach entrepreneurs how to run their business, it can also help them to find out whether their idea has potential in the first place.

After all, not everyone is a successful entrepreneur like Violet. And not everyone needs to be. As businesses grow, they create jobs for those who are less entrepreneurial. That is exactly why the Violets of this world should have access to credit, and why their loan should be designed in a way that maximises impact. With a microcredit loan in their pockets, entrepreneurs can fight against poverty in their country. 

Want to know more about RCTs?

• Poor Economics – The book by Esther Duflo and Abhijit Banerjee about RCTs in developing countries. (Amazon.com, website of the book)
• Ted talk by Esther Duflo – Esther Duflo talks about why she believes that RCTs can be used to fight poverty. (link)