Why a functioning electricity grid is crucial to economic development

... in two graphs:

THOUGHT FOR THE DAY: Decentralised power is a nice ideal -- and in some cases is the best option -- but it remains a poor alternative to the grid for the moment.

PS - I've previously written about why the electricity grid is best viewed as a (regulated) natural monopoly here.

Review: Surviving Progress

Apologies for the lack of posting recently. Aside from research stuff, most of my "internet" time has been spent working on the RECONOMICS HUB.[*] We have now officially gone live and will hopefully see a consistent level of posting from the various contributors in the weeks and months to come. Please free to stop by and let us know what you think... or follow us on Twitter!

My latest contribution to the blog is a review of the film Surviving Progress (produced by Martin Scorsese). To summarize, the film is long on intent and activism, but often fails to make a convincing argument. A snippet:

In another segment, the film jumps from Ronald Wright’s idea of a “progress trap” — something which certainly has merit in of itself — to claim that modern technology is at complete odds with our primitive physiology. (Wright: “We are running 21st century software, our knowledge, on hardware that hasn't been upgraded for 50,000 years.”) The language is undeniably provocative but is it necessarily meaningful? After all, our knowledge and innovations didn't occur in a vacuum. It is certainly hard to believe that any technological development can persist without bringing at least some form of benefit to its progenitors. The very strong conclusions that the film draws don’t necessarily follow from the premises that it provides.

Surviving Progress relies on a number of interviews and some of these work better than others. I was particularly unimpressed by a clip involving "geneticist/activist" David Suzuki, who is unilaterally scathing about the economics profession. (He calls conventional economics "a form of brain damage").

So, according to Suzuki, “externalities” is a collective term that economists use to explain away pesky things like the ozone layer, topsoil and biodiversity. Hmmm… 

There’s no other way to put this, so I’ll simply come out and say that Suzuki has completely mangled the concept of economic externalities. I cannot think of a single economist who subscribes to anything approaching the definition that he gives. (I’d even be surprised if anyone that has followed an ECO101 class would define an externality in this way.) Suzuki could open any introductory economics textbook and discover that an “externality” is simply some spillover cost or benefit incurred by a third party, which is not accounted for in the market price.

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[*] Resources. Energy. Climate. Economics

The real reason to be wary of Kony 2012

With the internet abuzz about Invisible Children's "Kony 2012" viral campaign, it was predictable that there would be some blow-back from critics. The most compelling criticism from my perspective is that Kony 2012 offers an extremely simplified message that is largely disconnected from the problems that presently plague Uganda.

In its own small way, I believe that such issues are laid bare by IC's vocal endorsement from James Inhofe, the Oklahoma senator who features prominently in the viral video.[*] Call me crazy, but I don't think that someone who has campaigned on the discriminatory platform of "God, gays and guns" is particularly well suited to act as spokesman for Uganda's current problems... Which -- more than the unspeakable acts of the now exiled Joseph Kony -- include massive discrimination and violence perpetrated against gay people.

Non-partisan support is something that we should almost always strive for. However, I am troubled by the fact that IC have unquestionably accepted and advertised Inhofe's endorsement, even though he has a record of overt bigotry. I suggest that IC might want to think a little more critically about the signals that they are sending to the Ugandan people, given the country's struggles against rabid homophobia.

UPDATE: Well, it seems that the case against James Inhofe's moral leadership on Ugandan issues is even stronger than I first guessed. A group of evangelical US politicians and lobbyists -- Inhofe foremost among them -- have been documented as providing advice to David Bahati, and implicitly inspiring him to introduce Uganda's infamous anti-Homosexual Bill (aka "Kill the Gays Bill") that I linked to above. Disturbing stuff.

[*] I've previously discussed Inhofe here if you are interested. Notably, his demanding role as the US Senate's climate change denier-in-chief... a hotly contested title if ever there was one. (A sadly amusing postscript to that saga here.)

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Disclaimer -- I wrote this post, and especially the title, with my tongue pressed angrily against my cheek. Joseph Kony undoubtedly deserves to face justice for his crimes. If this Kony 2012 campaign achieves nothing else, it's still good to know that millions of people around the world have now learnt who he is and understand the nature of his barbarism. Still, I think that this illustrates how simplified messages can distract from the real issues in development; a sadly recurring theme in field. For a nice, short summary, see Chris Blattman.

Perspectives

That the Oslo-Utøya killings were a heinous, monstrous act is beyond question. However, the sheer scale of shock cannot be separated from the fact that they occurred in Norway.

Idyllic, secure and wealthy, Norway is not without reason a model nation for the rest of the world. Certainly, it has felt by far felt the safest place that I have ever lived. And, as has been repeated many times over the last few days, it is also composed of a small population (4.9 million). All these factors have surely had some impact in magnifying the shock felt by the country and the rest of the world.

According to revised figures, Breivik's actions have resulted in the deaths of 76 people. That more than doubles the number of homicides that Norway typically expects in any given year. Over the five-year period 2004-2008, official statistics show that an average of only 33 people were murdered in the country per annum.

In comparison, South Africa averaged an astonishing 18,635 annual homicides over roughly the same period.  In other words, the daily murder figure in SA is one and a half times the Norwegian yearly figure. Another way of looking at it, is that Breivik's tally of 76 lives is lost every 34 hours in SA.

Granted, South Africa has a much bigger population (49.3 million). However, even adjusted for population differences, the difference remains fairly staggering. The murder ratio per 100,000 people in SA is approximately 38, versus a mere 0.7 in Norway. In other words, someone is 50+ times more likely to be the victim of a homicide attack in South Africa than Norway.[*]

And then there are natural afflictions. At this very moment, the Horn of Africa is battling the worst drought in 60 years. Exact figures are hard to determine, but UNICEF estimates that nearly 500,000 children in the region are suffering from life-threatening, severe acute malnutrition. It is believed that as many as 10 million people stand to be affected by the drought (although not all will face life-and-death circumstances). While I maintain that there are strict limitations to adaptation in a world characterised by increased climate extremes, economic development and freedom -- as well as robust political institutions -- are the fundamental pillars towards unchaining human suffering from natural disasters.

This should go without saying, but in no way do I wish to underplay the impact of Friday's events. Further, and while it may still be too early to make sweeping statements, my sense is that the Norwegian people have done themselves eternal credit in the immediate wake of this tragedy. Almost every interview, camera shot or news editorial has depicted a nation coming to grips with devastation in a unified dignity. Norway has only reinforced its qualities as a model for inspiration.

However, these figures do serve to illustrate the stark differences by which we continue to measure life and death in wealthy countries versus the rest of the world. Economic development may be the most humane -- and humanising -- pursuit ever undertaken.

[*] And now... having written the above, I'm struck by an immediate sense of patriotic regret. I don't wish to convey the sense that South Africa is a dangerous hell-hole. It certainly isn't. The disparity between the two countries has as much to do with Norway's exceptionally peaceful environment, as the fact that certain areas in South Africa are beset by crime. SA has its problems, but still offers wonderful lifestyle opportunities for those fortunate to enjoy them. I hope to return after my studies are completed and truly believe that it is a must-see for anyone wishing to do some travelling... And very safe provided you don't take unnecessary risks.

Sustainability: Defining the undefinable

What does it mean for something to be "sustainable"? Does the term, as it is widely used in the public lexicon today, contribute anything useful to our everyday lives, or even those of future generations?

David Friedman, scion to the more famous Milton, thinks not. He has written several posts that have received a fair amount of attention in the blogosphere recently by attacking our fixation with "sustainability". Without trying to paraphrase too loosely, he essentially argues that the concept of sustainability is mostly vacuous and -- to the extent that it does contribute anything original to discussions of how humankind might plan for the future -- this new contribution could only result in some "indefensible" policy decisions if taken seriously. A paragraph to illustrate:

Making sure we can continue our present activities into the indefinite future makes sense only if we believe that we will be doing those things into the indefinite future. Judged by what we have seen in the past and can guess about the future, that is very unlikely. [Note: In an earlier paragraph, Friedman cites the futility of preserving pasture land in the early 20th century for horses that were ultimately replaced by automobiles.] We do not know what the world of forty or fifty years hence will be like, but it will not be the same as the present world, hence it is very unlikely that we will be doing the same things in the same way and requiring the same resources to do them with.

I agree with many of the points that Friedman makes. In fact, I'd go so far as to suggest that most development and environmental economists (say nothing of practitioners in related fields) have conceded these issues long ago. For example, the first time I ever came across the famous Brundlant Commission's definition of "sustainable development" -- i.e. "development that meets the needs of the present without compromising the ability of future generations to meet their own needs" -- was in an undergraduate class on environmental economics. I recall my lecturer saying something along the lines of: "Nice concept. Pity that it's too vague to be of any real use." Similarly, here's a fable about sustainability from a more recent class that I took on energy economics:

Some two centuries ago, a farmer in Ireland calculated how much peat he and his family needed to subsist. He then marked out fields for a maximum number of generations that could subsist from the peat available on his land and made a vow not to take more than his share. His son did the same, as did his grandson, and his grandson's son. But one day there was no more peat dug up and, yet, there was still plenty left.

It wasn't only peat farmers that were caught out this way. William Stanley Jevons, the pioneering co-founder of the "marginal revolution" in economics, pondered how Britain might best use its precious, yet limited, coal resources in his 1865 treatise, The Coal Question. At the end of his book, Jevons confronted the fact that Britain's use of coal was on an unsustainable path relative to its supplies. Given coal's central importance to the British economy, he was left to conclude that the country faced an uncomfortable choice in prolonging the lifespan of its reserves: "We have to make the momentous choice between brief greatness and longer continued mediocrity."

Of course, looking at these two stories, we can now see that two key components were missing from the analysis, namely: i) Substitution, and ii) Innovation. I won't comment in-depth on either of these aspects, except to say that, yes, they have absolutely and continually expanded the boundaries of our horizons.

Now, going back to Friedman's posts, it should be clear from what I've already written that I and (I believe) many others are already largely in agreement with him. But not completely. I have some nagging issues with his criticism, which might explain why I don't think that the ideal of sustainability should be discarded...

1) The historical precedent of technological innovation and/or new resource discoveries in some cases offers no guarantees that resource limitations will be overcome as easily (or fortuitously) in the future. The peat farmer would have appeared more sage in hindsight had he lived, say, 500 years earlier. It might not be that -- as Friedman says perfectly reasonably -- that we should expect to be doing the same things indefinitely into the future. However, that is a very poor argument for unchecked profligacy. It's clear that we live in an age of increased technological breakthrough and, yet, not every generation can simply rely on the timely discovery of fossil fuels, or whatever the relevant equivalent is. Actually, if we're talking historical precedent, then I should say that the historical record makes this rather clear... Take a look at Jared Diamond's Collapse to get an idea of how societies through the ages have brought about their own downfall by failing to adequately respect (and adjust to) their natural environment. Similarly, this post discusses what imperfect substitutability between different goods might mean in the context of climate change.

2) Since I don't believe that sustainability is about us "doing the same activities into the indefinite future", let me briefly explain what I think it should be about. To the extent that substitution between goods is possible, sustainability is concerned with the transformation of wealth into... well, sustainable forms of wealth. A famous example from own my specialisation of resource economics is the so-called Hartwick Rule. Put simply, this is an investment rule that says you should invest the profits from non-renewable resources into renewable forms of capital. At its heart, the Hartwick Rule is thus about preserving some form of intergenerational equity. The sovereign wealth funds of many resource rich countries are based on this logic... For example, Norway's "Global" Government Pension Fund, which invests the country's petroleum income in equity shares and stocks around the world.

3) Unlike conventional planning (which takes place at the individual, household or firm level), to me "sustainability" confers something on a grander scale. This may seem an amorphous concept, but it needn't be. Looking at things from the societal level means that you are forced to factor in future generations in locations that may be far removed from your home town or area of influence, precisely because these people may still stand to be affected by our actions today. So, it's not that sustainability is about dismissing the fact that people and companies already make important decisions about trade-offs and opportunity costs. Rather, it concerns the fact that we may need to incorporate additional trade-offs, which are easily overlooked simply because they are far-removed from our current circumstances. Sustainability should therefore be about expanding the scope of people's (and society's) immediate concerns to include things like public goods. An obvious candidate is climate change and I think that this is one area where Friedman gets his criticism badly confused.[**] His argument actually fails to acknowledge the fundamental concern of climate change economics, which is to evaluate the costs and benefits in equalised terms, both geographically and inter-temporally. Again, uncertainty about how mankind's future welfare or technology will develop is not a license to profligacy. Yes, we may be wrong in our projections of what the world will look like in a hundred years, but that hardly means that we should abdicate responsibility in making reasonable investments and sacrifices based on our best estimates. I also wonder why people think that we won't be able to shift goal posts as the game changes and new facts emerge? The idea that we might be paralysed by the fear of making mistakes (in our predictions of the future) is analogous in its intellectual poverty to the Luddite idea that we should leave the earth exactly as we found it. These are empty false choices.

THOUGHT FOR THE DAY: I left a comment under Friedman's second sustainability post, concluding somewhat tongue-in-cheek: Given the vagueness of existing definitions of "sustainability", couldn't we just invoke Potter Steward's famous quip about (hard-core) pornography: "We may not be able to define it, but we'll know it when we see it."?

More seriously, sustainability may be hard to pin down and even counter-productive if taken at the absolute literal level, as some have defined it. However, I think that we've long since moved passed the peculiar notion that we should expect to do the same things, or use exactly the same resources, indefinitely into the future. Sustainability will probably remain an inevitably vague concept, but that doesn't mean that is without value. It is about understanding how our actions today may affect those in the far-off future, or in far-off places, and applying equal weight across those dimensions. It is about acknowledging both the possibilities and limits of substitutability or technological innovation. Lastly, being "sustainable" doesn't mean that we must impoverish ourselves today for the benefit of future generations, any more than it means that we can enrich ourselves at the expense of those future generations. We should expect that people will be "wealthier" than us in the future, just as we are largely better off than our forebears. That seems to be a trend worth preserving.

[*] Having said all this, you could argue that Friedman actually draws up a straw man caricature of these what these naive "sustainability-types" believe... However, I think that we would be an uncharitable reading and, to be fair to Friedman, there are a large number of armchair adherents to the sustainability mantra that comfortably fit the mantle as he's described it.
[**] He writes: "[C]onsider the issue of global warming. Assume that it can be slowed or prevented, but at the cost of slowing the development of much of the world. To make the point more precise, suppose that global warming imposes an average cost on future generations of 10 utiles (or whatever unit you prefer to use to measure the ability of future generations to meet their own needs), but the policies that prevent it impose a cost of 20. Is permitting global warming sustainable? Is preventing it?"

Exploitation and Industrialisation

In the comments thread of the Meat and Veg(etarianism) post, I drew a parallel between the ethical treatment of animals and the banning of child labour. That is both involved society making a collective decision about the appropriate regulations rather than simply leaving it up to individuals to decide upon the standards themselves. The exact quote, if you're interested, was: "[L]ike many cases, I actually think that the decent treatment of living creatures is a social good deserving the requisite levels of public discourse and debate. Similarly, we have not outlawed child labour in modernised countries because it is unprofitable to firm owners, but because it is morally repugnant."

By coincidence then, here is something I happened to read last night in David Landes' masterful The Wealth and Poverty of Nations. Providing some afterthought on the industrialization of Japan and other countries (pp 381-383), Landes writes:

  The traditional account of Japan's successful and rapid industrialization rings with praise[...] It is a good, even edifying story. Yet one aspect of the Japanese achievement has not caught the attention of celebratory historians: the pain and labor that made it possible. The record of early industrialization is invariably one of hard work for low pay, to say nothing of exploitation. I use this last word, not in the Marxist sense of paying labor less than its product (how else would capital receive its reward?), but in the meaningful sense of compelling labor from people who cannot say no; so, from women and children, slaves and quasi-slaves (involuntary indentured labor). The literature of the British Industrial Revolution, for example, is full of tales of abuse[...]

  The most common ailment of these wretchedly unhappy children  [sent to work in the textile mills, coal mines and so on] was a nervous stomach. Small wonder that many fell victim to sexual predators and went on to prostitution. It seemed a promotion. 

  The high social costs of British industrialization reflect the shock of unpreparedness and the strange notion that wages and conditions of labor came from a voluntary agreement between free agents. Not until the British got over these illusions, in regard first to children, then to women, did they intervene in the work place and introduce protected labor legislation. [...]

  The European countries that followed England on the path of modern industry had their own labor problems and scandals, though less serious, largely because they had had warning and were able to introduce protections by anticipation.

Remember, this from arguably the foremost economic historian of recent times and in a book that was, among other things, praised for "unashamedly bang[ing] the drum for the liberal ideals of freedom, hard work and open markets" by the FT and a score of other reviewers. Your dyed-in-red, protectionist, trade-unionist Landes is not. (His snipe at the Marxist conception of "exploitation" direct evidence of this.) Yet his views on the dangers of unfettered industrialism (capitalism?) are laid out quite succinctly above. Like him, I believe that history clearly shows there to be asymmetries of power and information in economic relationships which warrant the protection of certain parts of our society.

"But the one on the left looks happy!"

As an afterthought on the paragraph highlighted above ("the strange notion that wages and the conditions of labor came from a voluntary agreement between free agents"), this is surely analogous to cases of domestic violence. We don't stand idly by while women (or men) suffer abuse at the hands of their partners on the flimsy defense that they are engaged in a relationship of their own accord. Instead, we actively support them through protective structures (legal and police enforcement) that are decided upon and borne by society as a whole because that is the only morally just course of action.

Paul Collier talk on "The Plundered Planet"

I went to a talk last night by Paul Collier. For those of you who don't know, Collier is a big cheese in the development studies world, probably best known for his acclaimed 2007 book, "The Bottom Billion". (I'm fairly embarrassed to say that I actually haven't read it yet. It's been on my bookshelf for a while, but the GF has beaten me to it and is currently finishing it up before I get my chance.) 

Anyway, Collier was in town promoting his new book, "The Plundered Planet", of which I have just bought a copy. To quote the book jacket: he ambitiously aims to "reconcile the immediate needs of the world's burgeoning population with a sustainable environmental future".

Collier is a very good speaker and much of what he said last night made eminent sense. For example, he talked about the pitfalls of poor -- but resource rich -- countries trying to strictly emulate the Norwegian model for managing a sovereign wealth fund. In particular, these nations should almost certainly focus on significant capital development in their own countries rather than investing in equities around the world as Norway has done. (The latter makes sense for Norway since it already has an incredibly high level of in-country per capita investment.) 

He also dismissed the curious notion that developing nations should preserve their natural environment based on the (ethical?) preferences of people in rich countries. [Tip: If you really don't want someone in a poor country to develop a wetland, rainforest, etc... Pay them not to.] Along these lines, Collier made the interesting observation that China's strategy in Africa -- resource extraction in return for infrastructure -- is effectively a monopoly. In other words, if you're an African country in the business to sell your resources in exchange for infrastructure development (without too many strings attached), then China is pretty much the only option available to you.

Now, international agencies such the IMF and World Bank have typically shunned Chinese-style, "resources-for-infrastructure" deals as opaque. Instead, they prefer a more conventional "resources-for-cash" exchange, whereby local governments would build their own infrastructure using money/FDI paid into their treasuries. However, there are many reasons to believe that the Chinese model may be far more attractive to a prudent finance minister of a developing nation. Certainly, he or she might fret over how large a share of the money pie the presidency will ultimately allocate to infrastructure at the end of the day (versus other areas such as military or governmental salaries). By doing business the Chinese way, the finance minister can at least rest assured knowing that badly-needed roads, bridges, etc are going to be built. Thus, if more OECD governments had been prepared to imitate some elements of the Chinese model instead of just criticising it, competition would likely have yielded better environmental and infrastructure outcomes for developing countries than the current situation where China operates alone.

Having said the above, some of Collier's arguments not make sense to me. After providing a nice description of the concept of resource rent, he went on to apply a few insights to the case of transnational resources - in this case, fish. He argued that overfishing is in large part down to the fact that economic rents are not being captured/taxed by any regulatory bodies; that abnormal profits are accruing straight to fisherman which encourages them to overfish. Now, I'm not particularly sure about the direct causation he offers... I think it's just that there are too many people fishing (because of a lack of property rights in the world's oceans), rather than it being a matter of easy profitability. I also wasn't convinced by his proposed solution as he seemed to be arguing for a regulatory system on international fisheries, whereby taxes would be paid to the UN in order to fund the World Food Programme. While admirable its idealism, this scenario strikes me as highly unlikely.

Still, I guess I better read the book before commentating further. It's a few back in the queue right now, but I've certainly heard enough to pique my interest...