Development as disaster insurance

Matthew Kahn's new paper, via MR:

While richer nations do not experience fewer natural disaster events than poorer nations, richer nations do suffer less death from disaster. Economic development provides implicit insurance against nature’s shocks. Democracies and nations with higher quality institutions suffer less death from natural disaster.

This is intuitive to many, such as the MR reader who asked, "Which earthquake killed more people today?", FP Passport in its initial assessment of the Chilean earthquake, and the NYT's David Brooks in a prescient January column:

On Oct. 17, 1989, a major earthquake with a magnitude of 7.0 struck the Bay Area in Northern California. Sixty-three people were killed. This week, a major earthquake, also measuring a magnitude of 7.0, struck near Port-au-Prince, Haiti. The Red Cross estimates that between 45,000 and 50,000 people have died. [Note: latest estimates are up to 300,000, or 3% of Haiti's population]

Now, if only we knew more about what works in development...

Update: "Less death from natural disaster" should not be confused with lack of devastation:

Photos from Boston.com, via Ben Casnocha who describes his firsthand experience of the temblor.

WWID: Recognizing high dimensionality

In Chapter 6 of What Works in Development, Ricardo Hausmann makes, in commentator Ross Levine’s words, an “imaginative, provocative, and substantive” argument that much work on economic growth willfully ignores the complexity inherent in the classical development formula (“peace, easy taxes, and justice” in Adam Smith’s words, or trade openness, sound finances, and property rights, to paraphrase Larry Summers). Providing the right public inputs, particularly regulation, to enable a nation to develop new productive capabilities is a very “high dimensional” problem, which Hausmann compellingly illustrates with the myriad policy elements required to enable an efficient real estate market.

The necessary information to determine optimal policies is highly dispersed, Hausmann continues, and in such a context central planning is bound to fail. Unlike a product market, the market for public inputs lacks mechanisms to aggregate information (prices), incentivize action (profits), and allocate resources (capital markets). Hausmann then hypothesizes that in the United States, the open political architecture allows lobbyists may play a market-making role in the provision of public inputs. (Not without some rent-seeking, of course, but this is a necessary tension “in the absence of an omniscient and benevolent social planner.”)

How, then, to incorporate broad input into the provision of public inputs in developing countries? He doesn’t have all of the answers, and neither do commentators Nava Ashraf (who suggests looking to social enterprise for systems) and Levine (who uses the example of racism to argue that institutions themselves evolve in response to underlying incentives, and their change cannot be mandated independently of those incentives). But I find the question alone quite profound.

Very interesting stuff… I will have to let it marinate for a while, and hope to have further reflections at some point.

Quick-and-dirty calculation of ag footprint

Following a comment discussion on resource footprints over at Greed, Green and Grains, I felt the urge to do a very rough calculation of the relative per capita agricultural footprints of a few countries (U.S., China, India, and Brazil). Here’s what came out:

	U.S.	Brazil	China	India
Caloric consumption (Kcal/capita/day)	3,855	3,118	2,970	2,348
Ag footprint (Kcal/capita/day)	6,024	4,819	3,979	2,597
Relative ag footprint (U.S. to country)	1.0x	1.3x	1.5x	2.3x
Relative oil footprint (U.S. to country)	1x	~5x	~12x	~30x

I’m not surprised by this result – back-of-the-envelope is that U.S. eats ~70% more calories, gets 23% of calories from meat/dairy compared to 6% in India, and uses 3.4 kg of feed per calorie of animal product vs. 1.8 kg since U.S. is more heavily weighted toward meat. Add these factors up and the overall gap not much bigger than double.

I didn’t include waste because while consumer waste is much lower in developing countries, harvest and post-harvest waste is much higher. Even if we do assume the U.S. wastes 40% and India only 10% of food production, the ratio only jumps to 3.3x – still an order of magnitude less than the oil consumption differential of ~30x.

India is about as extreme an example as you can get – not only low average caloric intake (people tend to forget that India has worse malnourishment than Sub-Saharan Africa), but abnormally low meat consumption when adjusted for income level due to cultural/religious factors. So unless my calculations are totally off (and I’ll lay out the details below, so someone can point out if they are), we can say with confidence that rich-poor differential in per capita agricultural footprint is an order of magnitude smaller than the rich-poor differential in energy footprint.

(If you adjust calories consumed for local yields, the gap will be even smaller due to low agricultural productivity in many developing countries… but that's an entirely different topic.)

Calculation details
To simplify I made the assumption that a calorie of grain has a fixed “agricultural footprint.” I used FAOStat data on per capita caloric consumption and FAPRI data on per capita meat and dairy consumption. Conversions for calories/kg and feed conversion are from internet and personal knowledge – please let me know where they’re wrong.

Animal product	Kcal/kg	kg feed/kg product
Beef	1,500	8.0
Pork	2,800	4.0
Mutton/Goat meat	2,070	4.0
Chicken	1,440	2.0
Milk	600	1.5
Cheese	3,300	1.5
Butter	7,720	1.5

I’m missing fish and eggs. There are probably other errors as well – tell me!

Oil footprint, by the way, is based on barrels of oil consumed per capita per day.

Update: How convenient - the FAO's 2009 State of Food and Agriculture report (entitled "Livestock in the balance") has a chart showing calories of livestock products consumed by region. My estimates were within 100 calories for each, which gives me incremental confidence in my answer above.

U.S. ag subsidy effects

Following up on this earlier post, I thought I'd post this comment sequence from Michael Roberts' Green, Green and Grains.

R: Your argument that ag subsidies don't boost production is very interesting. I don't understand how the conservation acreage is determined (or by whom) - is it centrally decided, or do farmers have the option in any given year of either growing crops or receiving a fixed (or varying?) payment for setting aside land?

Also, I think I saw you mention somewhere that most subsidies are not volume-related - is that true? If so would be interested to learn more.

Michael: Good questions. Conservation acreage is determined by legislation. I also know from first-hand experience that program administrators in USDA anticipate, even now, about how they might change the size and nature of conservation programs in the event commodity prices rise. Congress ultimately sets the acreage goals, but things change quickly when commodity prices change and bureaucrats know to expect this.

And yes, most payments received by farmers are not tied to the amount the produce. Most are tied to the amount and mix of crops they produced many years ago. The payments are attached in some sense to the history of the land, and so they transfer from one farmer to the next. These payments are called "direct payments" and "counter-cyclical payments."

It could be that some farmers plant particular crops today in anticipation of payments in the future. But since programs and prices change so much over time, only farmers very confident in their foresight might try to game the system in this way.

Subsidies that are connected to production volume come from the "loan rate program," which effectively servers as a price floor--the government pays farmers the difference between the price they receive and the "loan rate" should it turn out lower than the marketed price. The ostensible purpose of the program is to give farmers flexibility about when they sell their crop. But if they can't sell it for more than the loan rate, the loan rate serves as a price floor. Loan rates have been well below market prices for quite awhile.

One last point: The demand for commodities is really steep. Prices go up a lot if production falls just a little short. So, the purpose of farm programs is to keep farm incomes high then the best way to do this is to limit production somewhat. This helps to keep prices high. Paying farmer to produce too much really defeats the purpose because that steep demand curve means that extra supply will drive down prices a lot. So restricting production is the easiest way to keep farm income high.

R: Hmm. So who has the final say on conservation acreage for a given season? I have to imagine it's the USDA since it must be impossible to get Congress to turn on a dime in response to commodity prices...

Also, how are the top-down acreage targets cascaded down to thousands of producers? Is there any choice at the individual producer level, and how are they compensated for not growing?

And finally... if removing rich-world subsidies wouldn't materially shift world production or prices, why are developing countries so hung up on them in free trade negotiations like Doha? Do they simply misunderstand the mechanics and implications of the subsidies, or is there something else going on?

Michael: In some cases the USDA (the Secretary of Agriculture) has discretion for the amount of acres so long as it is beneath a target set by congress. That discretion can vary somewhat from bill to bill.

Today all the land is in the Conservation Reserve and the amounts in that program do appear a bit more "sticky" than more discretionary set-asides in the past (probably more environmentally beneficial, too). But when prices spiked last summer, there was serious pressure to reduce the size of the program, and they did. If prices staid high, I'm quite sure CRP would have further declined. Right now about there are about 34 million acres in the program and that is begin ratcheted down to 32 million. Before the run-up in prices the cap was 39 million acres. If prices staid high acreage would have fallen much more (I'd guess another 10-15 million acres).

Enrollment in CRP is up to the farmer. Most acres are enrolled in a competitive process wherein the farmers offer parcels with certain environmentally friendly covers, request a rental rate, and then all offers are scored and ranked. Some of the land is more targeted (like buffers for streams and lakes). For the targeted lands farmers are offered generous sums that they are unlikely to refuse.

I don't completely understand the trade negotiations. Clearly developing countries don't like us giving cash to our farmers. They like our conservation program (that's a "green box" program) because they keep prices high. The politics here must be very complicated. I've speculated here that agriculture may be something of a red herring to muck of the negotiations or other purposes. But I just don't know.

To make things stranger, I think developing countries as a whole would benefit more from lower commodity prices than from higher prices. The U.S. exports food to developing countries and this helps to feed more people in the world. But the hungry masses aren't the ones sitting at the trade negotiation table...

Anyway, on fairness grounds alone, I can see why people really don't like the big cash payments to farmers.

R: I had a quick look and both the FAO and IFPRI project world price rises in full trade liberalization scenarios. I'm guessing they are knowledgeable enough to know what they're talking about (what do you think?). So two hypotheses:

1) Are EU ag subsidies more volume-linked or otherwise production-increasing than ours?

2) Maybe there is also an effect from removing the domestic price controls (usually caps) in many developing countries?

Food prices are a double-edged sword. On one hand, it irritates me when people like Pollan root for higher food prices without acknowledging (or even realizing?) how they would increase undernourishment in poor countries, since most hunger is due to lack of purchasing power, not physical access. On the other hand, low ag commodity prices make it harder for agriculture to be an engine of economic development in rural areas of poor countries (where it is often 80-90% of the rural economy). So low prices are definitely good for poor urban food buyers, but their net effect on the rural poor is tricky to judge.

Interesting stuff, and great to have someone with such substantial academic and practical knowledge on the other side of the conversation.

Where U.S. oil comes from

Green Sheet has this great graphic on where U.S. oil imports come from:

It illustrates very clearly a point I've made before: while the U.S. is highly dependent on oil imports, most of that oil comes from close to home, rather than the Persian Gulf. Note how Canada, Venezuela, and Mexico are our three biggest suppliers, and Saudi Arabia is supplying less than 5% of total U.S. oil consumption.

Score one for free trade in agriculture

In a victory for anyone who believes that distortionary agricultural subsidies should be eliminated, the WTO has ruled against the U.S. over cotton subsidies.

A ruling against the U.S. in a long-running fight with Brazil over American payouts to cotton growers sets an important precedent for developing nations concerned by what they see as excessive U.S. support for farmers.

A World Trade Organization arbitration panel ruled Monday that Brazil is entitled to $295 million upfront, and nearly $150 million a year, for the U.S. failure to eliminate subsidies to the cotton industry.

If the U.S. does not comply, Brazil can retaliate with its own tariffs in completely different industries:

The ruling opened an important door to retaliatory measures that, under certain circumstances, could punish American pharmaceuticals companies and other owners of intellectual property.

The WTO panel said Brazil could target other American goods for retaliation if U.S. cotton supports rise significantly beyond current levels for its 25,000 farmers. Brazil, which has a robust pharmaceuticals and generic-drug industry, has targeted patented U.S. drugs for potential retaliation. That means the country could allow domestic drug makers to manufacture copies of U.S. pharmaceuticals that are still under patent protection.

Let's hope this is a step towards bringing down the existing edifice of American and European agricultural subsidies. Not only would the direct benefit be massive (one FAO study estimated that complete liberalization of agricultural trade would boost global incomes by $165 billion per year), but this would also clear the major obstacle to progress in world trade negotiations, success in which would carry even larger benefits to global welfare.

(with appropriate protections for poor countries, etc. - I am not a blind free trade fanatic, but even lefty economists acknowledge the enormous benefits that freer trade would bring)

Cap-and-trade, U.S. refiners and carbon leakage

Good post and comments discussion over at Energy Outlook on the effect of cap-and-trade on U.S. oil refiners, of which I'll attempt a brief synopsis:


- Geoff judges as reasonable the scenario described by the new API-funded study on Waxman-Markey, which says that U.S. refiners will suffer under the Waxman-Markey bill because they will bear more costs than foreign refineries, becoming less competitive and losing volumes to imports.

- Commenter bartman points out that this loophole could be closed by requiring import terminals to also buy permits, and that the real danger to refineries is falling domestic consumption due to higher CAFE standards, higher gas prices and electric vehicles.

- Geoff responds that yes, but importers probably wouldn't be required to have permits for upstream and refining emissions, just combustion emissions, and that the 2% permit allocation in W-M will not cover all of U.S. refiners' direct emissions.

- bartman agrees that refiners in non-carbon-pricing jurisdictions would have a slight advantage, but most U.S. refined product imports come from Canada or Europe, which have or will soon have carbon pricing. (he also opines that climate legislation won't pass this year)

- PelinoC then adds that Canada energy firms will be worse-off (e.g. oil sands have more upstream emissions) and predicts that carbon tariffs will quickly be imposed.


I don't mind that Waxman-Markey is a back-handed gasoline tax, because I think a higher U.S. gas tax is probably a good thing and there's no way one would pass through the front door. The more I think about it, though, the more I fret about the unappealing choice between protectionism on one hand and carbon leakage on the other. A global trade war would be disastrous, but examples like this in refining show increasingly plainly that most of the benefits of cap-and-trade (not to mention many industrial jobs) could leak away if the system has holes and other countries don't follow. There's been encouraging news from China and India lately, but we are still a long way from anything that looks like a globally consistent and enforceable price on GHG emissions.

Traces of GMO halt US-EU soy trade

It doesn't take export bans to throw a wrench in the smooth workings of the world food market:

European trade sources said US soya shipments to Spain and Germany were found to have traces of GMO maize varieties which are prohibited in the EU.

Mattias Sundholm told the Reuters news agency: "The shipments have been rejected at the EU borders, and have been consigned and recalled when already on the market within the EU, unless they have already been consumed."

The US Grain and Feed Trade Association estimates that 200,000 tonnes of US soya had been denied entry to the EU, by mid-July. Given the uncertainty, international traders have ceased all further shipments.

This has raised concerns about supplies of key feed ingredients for European livestock.

A simple mistake (or was it?) has the potential to disrupt the flow in a way that has systemic consequences, which is worth bearing in mind when thinking about the future of where food will be produced vs. consumed. It's easy to dismiss food self-sufficiency schemes in a globalized world, but the past two years have shown us how rapidly trade can break down, and that caution is warranted.

Win-win for the U.S. and China on cleantech

Speaking of win-win, a new McKinsey article asserts that the U.S./China cleantech race doesn't need to be a zero-sum game. Green Sheet picks out the areas of potentially fruitful collaboration:

1. Electric Cars: Each country will have private companies battling to create the best electric car. However, the countries can help each other, and those private companies by:

* Setting coordinated product and safety standards across the two markets
* Funding the rollout of infrastructure
* Sponsoring joint R&D initiatives in select areas (such as new materials for car parts)
* Ensuring that trade policies support rather than hinder the development of a global supply chain for the sector
* Providing consumers with financial incentives to buy the new models.

2. Carbon capture and sequestion: Working together on clean coal projects would speed the development by doubling resources. Together the governments can "fund demonstration plants...set standards and drive down costs."

3. Concentrated solar power: CSP uses mirrored solar panels which reflect heat that create steam that power a turbine. Without a joint effort between China and the US, Woetzel says CSP might not even have a future. Again, he says, "Setting common standards, coinvesting in pilot projects and R&D, and undertaking other joint initiatives are the way to get this started."

It is an attractive idea, and, as Green Sheet points out, small-scale research collaboration is already underway. But for me IP seems like a massive barrier to larger co-investments. McKinsey believes it is manageable:

Even the thorniest—IP protection—is manageable. Because companies from many nations would contribute to making these three big technologies a success, IP agreements should be international. On that front, China will need to improve its ability to enforce global IP rules.

... but that simple-sounding last sentence is a world away from actual operating practice in China today, which will likely take a long time to change, and a longer time to develop the kind of IP track record that makes Western companies and governments comfortable.

Moving chart of the day

Via MR, Calculated Risk has the animated distribution of U.S. population by age. A bit frightening

Finance as rent-seeking

Finance in its modern American form is not productive. It is not conducive to further sustained economic growth. The GDP accruing from these activities is illusory – most of finance is simply a tax on what is done by more productive members of society and a diversion of talent away from genuinely productivity-enhancing activities.

The rise of China does not necessarily imply slowdown or demise for the United States. But if they specialize in making things and we specialize in finance, they will eat our lunch.

That's Simon Johnson at The Baseline Scenario on why finance is rent-seeking. I wouldn't go so far as "our most pressing national and international strategic priority", but I think his point is right.

Update: Here are some more quotes I liked:

China mostly invests in activities that raise productivity, raising the amount of goods and services that they can produce. This could be manufacturing or infrastructure or various kinds of services. Agriculture lags but continues to get some new investment. And of course they pour money into education.

I’m not a fan of the Chinese way of organizing their economy or their society. They no doubt have weaknesses that will catch up with them eventually (including waves of overinvestment in some sectors), and there’s good reason to think they will be the center of a big new “Asia Century” Bubble that is just now starting to emerge.

But contrast their pattern of investment in recent years with ours. What sector in our economy has expanded more than any other? Where should you work if you want both the highest wages on average, potentially very big bonuses, and quasi-retirement by age 40? Finance.

Of course, we need finance and an important part of modern economic development involves intermediating savings and investment. The US did this well, with some bumps in the road, and built a system that worked through the 1960s or 1970s.

But finance as a share of our activities (i.e., percent of GDP) has roughly doubled in the past 40 years. What has this really added in terms of productivity? The ATM and the credit card were great breakthroughs, but they are old.

I'm tempted to excerpt more, but I've already done so for about 30% of the post, so if you like it so far go read the whole thing.

Angola: Africa's new oil giant

We tend to think of Nigeria as the major producer of oil in Africa, but major unrest has diminished its output even as new discoveries have pushed Angola into the number one spot:

Chevron's latest find marks the latest in a flurry of discoveries off Angola in the past few years that have made it Africa's biggest oil producer, with output of around 1.85 million barrels a day in July.

That title used to belong to Nigeria, but a constant flow of militant attacks the past three years on oil infrastructure have knocked out about 20% of Nigeria's output capacity.

Angola's emerging importance was underscored by U.S. Secretary of State Hillary Clinton's recent visit, which had an "unusual" focus on energy security.

China was not officially on the agenda:

"I'm not looking at what anyone else does in Angola," she said.

... but somehow I find that hard to believe.

Update: According to a new report, Western oil majors are still in charge in Angola and Nigeria:

“More importantly, the oil majors remain the leading players in both countries,” said the report, which focuses on Nigeria and Angola. “They dominate production and hold the majority of reserves.”

Rather than challenge the leading Western energy producers, companies from China, South Korea and India, “latecomers to West Africa,” have become rivals for hydrocarbon interests in the two countries, the report said.