Pirate capital structures

I’m not in the Horn of Africa right now, so Somalia is no longer next door, but this elucidation of the economics of pirating is really outstanding, e.g.

To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

The punch line is:

When ransom is received, fixed costs are the first to be paid out. These are typically:
• Reimbursement of supplier(s)
• Financier(s) and/or investor(s): 30% of the ransom
• Local elders: 5 to 10 %of the ransom (anchoring rights)
• Class B shares (approx. $15,000 each): militiamen, interpreters etc.
The remaining sum — the profit — is divided between class-A shareholders.

African growth rates and oil

Looking at this chart from Roving Bandit, the first thing that jumps out at me (by design, to be fair) is that oil countries pretty much straddle the spectrum.
Which of these is sustainable is of course another question, and one on which I will soon post a new point of view I recently read.

Wind power in Africa

Interesting – I wasn’t aware of Africa’s largest wind project.

Kenya’s Lake Turkana Wind Power project – set to become Africa’s largest wind farm – looks to be back on track after securing financing through a new shareholding structure.

The project now appears to be co-funded by private sector firms and the African Development Bank.

The 300-megawatt, $625 million project is expected to begin providing 50 megawatts of power to the Kenyan national grid by June 2011. Once in full operation, the project could provide roughly a third of Kenya’s current peak demand of 1,089 megawatts.

Not at the scale of Desertec, of course, but worth keeping an eye on. I predict that if it does get up and running, the intermittency will nevertheless frustrate some locals.

Via Green Inc.

Quote of the day: Easy problems to solve

Lula no doubt came to this conclusion on his visits to the United States, where racism has been eliminated since the election of Barack Obama.

That's FP Passport on Lula's choice of successor and the supposed death of macho.

Political economy of boreholes

Via Roving Bandit, the political economy of boreholes:

“Boreholes are the cause of frequent fights amongst women. There are simply not enough bore holes to go around the population and thus it is the principle of first come first served which can create great injustice. There is nobody responsible for order at the bore holes. Often the neighborhood will only hear shouting and insults coming from the boreholes with people whose houses are near by using the shouts as their daily alarm clocks.”

As I commented, this type of water development is really hard, with many more failures than successes.

Update: I enjoyed reading Daniel Rogger’s stylized account of building a borehole in Banglageria, which rings true with my own experiences.

Quote of the day

You wouldn’t want to be inside the sausage factory that is the GDP calculation in Chad.

That's Chris Blattman on how fast African poverty is falling (or not) and the reliability of data on developing countries.

A mining success story

To add to the recent slew of thoughts on the resource curse, here is a micro-level success story which has been verified with academic rigor:

This paper studies the impact of Yanacocha, a large gold mine in Peru, on the local population. Using annual household data from 1997 to 2006, we find robust evidence of a positive effect of the mine's demand of local inputs on real income. The effect, an average income increase of 1.7% per 10% additional mine's purchases, is only present in the mine's supply market and surrounding areas. We also find evidence of improvements on measures of welfare and reduction of poverty. We examine and rule out that our results are driven by increased public expenditure associated to the mining revenue windfall. Using a spatial general equilibrium model, we interpret these results as evidence of net welfare gains generated by the mine's backward linkages and its multiplier effect.

It is good to inform the macro-level resource curse debate with positive anecdotes like this one, to balance the many negative ones.

Via Roving Bandit, who also celebrates his one-year blogiversary. With so many good bloggers only one year (or two years) old, I find the robustness and vibrancy of the blogosphere simply astounding. Can you imagine what it will be like after another year, or five, or ten?

Induced innovation in agriculture

Two interesting things Michael Roberts learned at the recent NBER ag workshop:

1. On the political economy of agricultural subsidies: Bruce Babcock suggests that the reason we subsidize field crop farmers and do not subsidize vegetable crop or livestock farmers is that supply of field crops is inelastic, which gives these farmers (or the owners of the land on which these farmers farm) a stronger incentive to seek rents in the form of subsidies. This incentive doesn't exist for other kinds of agriculture because the relatively elastic supply will quickly dissipate potential rents. This view was new to me and makes a fair amount of sense.

2. The real crux going forward with regard to agricultural production, biofuels, demand growth coming from Asia, and what all this will mean for food prices going forward is the extent of induced innovation. In other words, will (or has) the prospect for higher commodity prices induced greater yield growth, perhaps through further development and adoption of genetically modified crops? And if so, to what extent? Economists tend to be technological optimists and I wouldn't call myself a pessimist. But I am skeptical about finding clear and compelling evidence of induced innovation--I think this is very hard to detect in the data.

On the question of induced innovation, I think we can disaggregate further into privately and publicly funded research. High crop prices will certainly induce private investment in agricultural research by polarizing companies like Monsanto as long as there is sufficient intellectual property protection for them to reap the financial rewards. There are promising signs that high food prices are also attracting attention back to publicly funded agricultural research, but this induction mechanism is less direct and perhaps more prone to breaking down.

I agree that induced innovation is probably very hard to prove empirically, and the lag between investment and sizable effect on yields is probably on the scale of decades.

Weather as an instrument, etc.

Michael Roberts explains in a nutshell the econometrics of his fascinating and widely-referenced paper on temperature's worrying effect on corn yields. If you’ve ever wondered why more agricultural economists don’t use weather as an instrument or worry about the fundamental endogeneity of futures prices, this post is for you.

WWID: Not growth policy?

In Chapter 6 of What Works in Development, Abhijit Banerjee of JPAL recaps the ineffectual history of research on economic growth and concludes that "it is not clear that the best way to get growth is to do growth policy of any form." Perhaps it would be better, he says, to focus on keeping our house in order - maintaining social stability and building human capital - so that we can take advantage of the growth "spark" when it occurs.

I sympathize with commentator Peter Klenow, a micro-oriented macroeconomist, who responds:

Beyond accounting, macroanalysis has contributed a slew of robust correlations that help guide microexperimental work. Correlation need not imply causality, of course, but certainly does not rule it out... It is up to theorists and microexperimentalists to flesh out the causal mechanisms behind these correlations.

Bill Easterly - editor of the book, and reserving the last word for himself - makes three main points:

1. Macroanalysis established the negative effects of extreme policies and outcomes (e.g. land expropriation and hyperinflation in Zinbabwe); it was only in cases of moderate variation where the conclusions broke down completely.


2. "Macroeconomists have earned their ignorance the hard way," largely "because the demand for explanations of growth was so intense."


3. RCTs "do not really offer a serious alternative to how to achieve 'growth success'", because the small interventions they test in specific situations could never scale up to meaningful increase growth on a macro scale.
   

I think Easterly is being too pessimistic here, and Klenow is closer to the mark - the right answer has to be a middle ground where RCTs are one of many tools in the toolkit, microexperimental work complements and is informed by macroanalysis, and we keep on trying to crack the mystery of growth, counter to Banerjee's skepticism that we ever can.