The Impact of Christian Theology on Economic Outcomes

Religion, spiritual practices, and faith are easily observable factors in the daily lives of people almost anywhere in the world. This leads many to speculate and theorize about the role of religion in driving economic and social outcomes. Positive correlations abound between religiosity and a host of factors that may influence economic success. Correlation, however, does not imply causation and pinning down the real causal relationship is complicated by the fact that people tend to choose their religion. Therefore, observing that people of faith experience different economic outcomes fails to account for the fact that unobservable personal characteristics may cause both religiosity and economic outcomes.

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Two better ways to improve outcomes of small businesses (in Togo and Nigeria)

Two recent and excellent studies offer some important insights into how best to help improve the outcomes of small business owners in developing countries. Both studies evaluate programs motivated by the perception that the traditional way business skills training programs operate could be improved. (For more on this idea, read McKenzie and Woodruff (2013).)

The first study compares two programs, implemented in Togo, against each other (and a comparison group). The “traditional training” simply teaches participants lessons in accounting, management, financial decision making, and marketing. The second training included insights from psychology and aims to not only teach business skills but also to instill a mindset of self-starting behavior and encouraging personal initiative. This strategy behind this second training program acknowledges that simply being trained with the necessary business skills is not sufficient in spurring high-growth small business growth. Entrepreneurship takes a particular penchant for risk, a market opportunity, and a little bit of luck — all things that are typically tough to come by in many developing countries. The impact evaluation of these programs, published in the journal Science, found that the psychology-based training program produced better outcomes compared to the traditional training program. Here a link to the World Bank write up of the study and the abstract of the full study:

Standard business training programs aim to boost the incomes of the millions of self-employed business owners in developing countries by teaching basic financial and marketing practices, yet the impacts of such programs are mixed. We tested whether a psychology-based personal initiative training approach, which teaches a proactive mindset and focuses on entrepreneurial behaviors, could have more success. A randomized controlled trial in Togo assigned microenterprise owners to a control group (n = 500), a leading business training program (n = 500), or a personal initiative training program (n = 500). Four follow-up surveys tracked outcomes for firms over 2 years and showed that personal initiative training increased firm profits by 30%, compared with a statistically insignificant 11% for traditional training. The training is cost-effective, paying for itself within 1 year.

In the second study, after a brief business skills training session, an organization in Nigeria funded a large-scale business plan competition. The winners of the competition, which included over 1,000 business owners from over 24,000 applicants, received a grant of about $50,000 on average. This study aims to answer the very basic but also provocative question, “what would happen if we just gave all the money used to organize and implement business training programs directly to entrepreneurs instead?”

Perhaps unsurprisingly, since I’m blogging about this study, the business plan contribution lead to very positive outcomes. Not only did firms that received a grant show more resiliency to economic ups and downs, but they also significantly expanded employment. A jaw-dropping stat comes from the American Economic Association write up: “Experimental winners were about twenty percentage points more likely to have ten or more workers than their counterparts — a result that is especially significant in Nigeria, where 99.6 percent of companies have fewer than ten employees”. Here is a link to the study, recently published in the American Economic Review, and the abstract:

Almost all firms in developing countries have fewer than ten workers, with a modal size of one. Are there potential high-growth entrepreneurs, and can public policy help identify them and facilitate their growth? A large-scale national business plan competition in Nigeria provides evidence on these questions. Random assignment of US$34 million in grants provided each winner with approximately US$50,000. Surveys tracking applicants over five years show that winning leads to greater firm entry, more survival, higher profits and sales, and higher employment, including increases of over 20 percentage points in the likelihood of a firm having ten or more workers.

Not only are these studies well-executed, but they provide accessible lessons for lots of people working hard to improve outcomes of small businesses around the world. The first study shows that there are potentially huge gains to be realized from experimenting and iterating with the content of business skills training curriculum. The second study shows that reimagining how governments and development donors spend money on small business development can also lead to much needed benefits.

Both of these lessons are important considering that these programs tend to be relatively expensive. For example from 2002 to 2012, the World Bank invested $9 billion dollars across 93 business skills training programs around the world. These studies imply this money could have been spent much better. The good news is we can learn from these studies and do better in the future.

On Sweatshops and Industrial Development (in Ethiopia)

One of the cool things about blogging is it documents how one is thinking (and how these thoughts have changed) over time. Back in 2015 I wrote a post entitled, “So the garment industry makes you uncomfortable…” It was my reaction to a wave of guilt being tossed around about participating in “fast fashion” and buying clothing made in sweatshops. At the time, my thinking was basically, “Well if you think sweatshops are bad, you should see the alternatives – the situations those who willingly accept sweatshop jobs are coming from.”

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Hope as a “Gustibus Multiplier” in Development Economics

What is a “Gustibus Multiplier”?

That is what I thought when I read the title of Michael Carter’s recent paper in Agricultural Economics entitled, “What farmers want: the ‘gustibus multiplier’ and other behavioral insights on agricultural development“.

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[Book Review] From Aid to Trade: Lessons Learned from Haiti

Haiti is a country that has been almost “NGO’d” to death. In their new book, From Aid to Trade, Daniel Jean-Louis and Jacqueline Klamer (full disclosure: two former colleagues of mine) highlight this issue in a clear and meaningful way. They make the case that even with this vast abundance of NGOs, Haiti as a nation has not seen very much of an improvement in the last several decades.

The book begins with a vivid story of Laurent Auguste, owner of a local soap manufacturing company in Port-au-Prince, Haiti. After the cholera outbreak in 2010, bars of soap were being donated and distributed for free in Haiti by everyone from the United Nations to small churches across the United States. According to Daniel and Jackie, these donations effectively pushed Laurant and his soap company out of business.

This is just one anecdotal example of perhaps thousands of stories demonstrating the misallocation of good intentions in Haiti. More recently, in early March 2016 The New York Times Magazine ran a story highlighting a group of older Christian missionaries who volunteered their time in the hills above Port-au-Prince by “struggling with heavy shovels to stir a pile of cement and sand.”

They were there to build a school alongside a Methodist church. Muscular Haitian masons stood by watching, perplexed and a bit amused at the sight of men and women who had come all the way from the United States to do a mundane construction job… Imagine how many classrooms might have been built if they had donated that money rather than spending it to fly down themselves. Perhaps those Haitian masons could have found weeks of employment with a decent wage. Instead, at least for several days, they were out of a job.

One of the key lessons of these stories is that poverty alleviation and economic development always requires more than good intentions.

I, myself, learned this lesson while volunteering with a student organization in college. Our group was affiliated with an organization that facilitated trips for business and economics students to travel to Panama (and other countries) in order to perform microenterprise consulting and financial literacy training. I went on two trips, each a week long, in back to back summers. During the first trip, we worked with a microfinance institution (MFI) in a rural village. Through that MFI our group provided funds for the village to build a roadside stand to sell their hand-made crafts and souvenirs. Returning a year later, the materials that had been purchased with these funds were sitting—unused—in a pile on the side of the road.

This is a crucial lesson for anyone who possess the persistent desire to help the less fortunate, the oppressed, the poor, or the marginalized around the world. If you are new to the field of international development then this may be a worthwhile book for you. The stories told by Daniel and Jackie introduce the complexity of our world and exposes this inconvenient reality: that good intentions are necessary but not sufficient in our world.

If, however, you are more experienced in the field of international development, then continue reading because even this complexity is complicated. My remaining thoughts can be separated under two headings: ‘economies not economics’ and ‘war aid, what is it good for?’.

Economies not Economics

(Some may catch this as one of the key points of Morten Jerven’s book Africa: Why Economists Get it Wrong. It’s important, so I’ll expound on it a bit.)

In From Aid to Trade, Daniel and Jackie develop and present a strategy of economic development, what they call, opportunity-based economic development (OBED). This strategy is defined as the following (pp. 66):

As a comprehensive strategy, OBED means harnessing assets and capital through entrepreneurial opportunities to increase balanced transactions, a key activity to implement OBED, thereby meeting needs profitably and generating resources. It means that needs should be met through market-based opportunities and initiatives, not through projects or programs that do not generate profit.

To me, this sounds a lot like the so-called “Washington Consensus” policies of the late 1970s and 1980s. Here’s a brief summary of the goals of these policies: The term “Washington Consensus” denotes the ambitious agenda that considered developing nations as no different than economics 101 textbook cases of free-market economies. Basically, the agenda reflected an urge to “unshackle” these economies from the “restraints” of government regulation and in return institute “market-based” policies that “stabilized”, “privatized”, and “liberalized.”

Looking back on the outcomes of these policies, it’s not very controversial to state that they “didn’t work” – by that I mean they didn’t deliver the expected outcomes. Why? Well, in short, because policymakers, at the time, were studying economics and not economies. They treated the diversity of the developing world as being characterized by oversimplified stylized facts often found in an economics 101 textbook.

Never mind that the critical assumptions of a free and efficient market as presented in economics 101 (i.e. individuals maximizing self-interest, secure property rights, full information, no monopoly power, access to a complete set of markets) fail to hold in many, if not all, of the local economies of developing nations. Never mind the institutional underpinnings of market-oriented economics. Never mind that the very institutions that allow market-oriented policies to “work” – by that I mean create flourishing societies – in developed countries took decades, or perhaps even centuries, to form and mature. Never mind the intricacies of local contexts, of local history, of local culture that effect how people make decisions and behave. Never mind political interests that may make certain policies more urgent or feasible in a given country.

There is little doubt – or at least I’m not arguing – about the goal of developing countries to become self-sufficient, industrialized, market-oriented countries. I just want to suggest that achieving this goal is tricky. It’s context specific. There is no universal recipe. And the solutions almost certainly lie beyond the realm of economics 101 textbooks. I would have loved more specific details, from Daniel and Jackie, on when and where the OBED strategy works best and a discussion of the limitations of OBED as a strategy for the development of economies.

War Aid, What is it Good For?

The title of the book is catchy, and I’d say a bit jarring. Both words, “aid” and “trade” carry a lot of baggage and are difficult to wrap one’s head around. The idea of moving “from aid to trade” sounds nice on the surface. But what do we actually mean?

As I’ve written about before, painting “aid” as a singular thing uses a brush that is a bit too wide. Aid takes many different forms. There is humanitarian aid. Food aid. Aid for education. Aid for health. Aid for infrastructure. Aid for energy. Aid for the environment. Aid for security. Aid for political stabilization. Aid for economic reform. Aid for data collection. Aid for policy analysis. And on and on and on. Do all of these “not work”? Should all of these be replaced by trade? I’m not sure if that’s even possible, let alone desirable.

Next, lets relax the assumption that aid is altruistic. Instead lets allow ourselves to live in a world where countries give aid for purposes of their own benefit. In this case, countries like the United States give foreign aid primarily for self-interested purposes – i.e. for reasons explained by public choice theory. As much as I dislike this reality, I’d argue this is the world we live in.

If the reality is that the primary reason for countries like the United States giving foreign aid is for self-interested reasons, then it’s no wonder that lots and lots of foreign aid funded programs haven’t delivered growth or development. Additionally, if this characterization of foreign aid spending is true, then the bulk of the effort from those of us who actually do have so-called altruistic intentions should be to figure out how aid can be used most effectively. In a sense, we should move away from the “aid vs. trade” characterization and think more carefully about aid plus trade.

Now, this “aid plus trade” characterization is (I think) actually what Daniel and Jackie’s book is all about. So don’t let the title discourage you, From Aid to Trade is a book that (thankfully) moves us beyond the tired “aid debate” and is more about how aid can facilitate trade. This much is alluded to in the subtitle: “How Aid Organizations, Businesses, and Governments Can Work Together”. But remember, these are lessons learned from Haiti. Be careful when applying them to different economies.

[Book Review] The Taste of Many Mountains

I write this as I sit in a coffee shop sipping a cappuccino. The coffee beans were grown in Kenya. They had to be irrigated, harvested, packed into bags, imported, roasted, packaged again, transported, marketed, and brewed. The milk was likely farmed in the United States. It was taken from the cow, pasteurized, homogenized, packaged, transported, marketed, steamed, and finally aesthetically mixed into my cappuccino. Remarkably the whole thing cost me only $4.25! I say ‘only’ because, just think about all the people involved, all the families that this product influences. Still I tend to wonder: Who benefited most? And was anyone exploited?IMG_2195

This is the topic of Bruce Wydick’s novel about coffee production and consumption in today’s world. Yes, that’s right, a novel. An empirically minded development economist has written a story (with a setting, a plot, complications, a crisis, a climax, and denouncement). And, I’m not kidding, it is quite a page turner. This is a unique quality of a book with the topic of globalization and agricultural value chains. Not only does the book present the nuances of poverty and globalization, it includes themes of love, life, joy, and lament.

TMM_CoverThe Taste of Many Mountains‘ follows four graduate students – Angela, Alex, Rich, and Sofia – on a summer of fieldwork in Guatemala where they are charged with the task of calculating the value added and profits at each link in the global coffee supply chain. A primary research objective being: is fair trade coffee better for poor farmers than free trade coffee? The answer, of course, is nuanced and rather technical, but this book explains the concept as well as I’ve ever read.

What sets this book apart from other books is it is both a story that doesn’t loose sight of the evidence and a research report that doesn’t loose sight of the story. The story is based on actual research that has recently published in The Review of Economics and StatisticsAdditionally the book is filled with impassioned discussions about the core tenants of international trade economics and the sometimes visceral (perhaps spiritual) call to help the poor and vulnerable. These conversations engage a tension anyone who has spent time in a developing country has likely considered. For example, After Angela’s first day in Guatemala, she has the following conversation with Sofia:

“Sofia, about what we saw today… why? I know I’m probably being too persistent, but why is there so much poverty in places like this?”

“Again, I don’t have a satisfying answer to that question.”

“Try me. I just might be satisfied.”

Sofia turned out her own light and lay in a sleeping bag that she had thrown on her bed. She gazed upward where some lights from the town illuminated the pine boards that made up the ceiling. “Well, it seems to be related to a couple of basic things, one being how people in society organize themselves.”

“You mean institutions? That always sounded king of boring.”

“Trust me, it’s not boring. Understanding them is something people win Nobel prizes for.”

“I guess I don’t really get it,” said Angela.

“The rules of the game that society makes for itself. Institutions either encourage people to make a living by creating or doing things that benefit other people, or by siphoning off what other people have earned doing just that. In rich countries it’s mainly the former, and in poor countries it’s more of the later. When people learn that the rewards of creativity and hard work are mostly confiscated, they don’t bother. So a lot of people say that it’s all about institutions.”

Sofia stopped. Angela figured that Sofia wanted to go to sleep, but she’d had a cup of coffee after dinner, her bed was hard, and she was surprisingly wired even though it had been a long day. So my relatives are poor because their rules of the game aren’t any good, she thought.

“So what’s the other part of it?” Angela asked. There was another pause.

Sofia turned her head on the pillow back to face her. “Well, probably another part of it has to do with things like the aspirations people have for their lives and their identity. Sometimes it’s hard for, say, the son of a peasant to see himself as capable of being anything other than a peasant. But if your dad was a doctor or an engineer, then you might have higher aspirations.”

Angela thought about herself for a moment. “My dad was a doctor, at least my American dad. I have plenty of aspirations, but I think also plenty of identity issues.”

The book is stuffed with engaging yet informative dialogues like this one. Discussing cutting edge topics in development economics such as institutions and aspirations to debating the merits and demerits of International Trade Theory vs. World Systems Theory.

It is a really enjoyable read and is applicable for almost anyone interested in helping others across national borders. If I ever get the chance to teach an introduction to development economics class at an undergraduate level, I would seriously consider crafting a curriculum around this book. For those interested, the book also includes a list of references to the papers that inform the various dialogues throughout the book.

And (SPOILER ALERT) Bruce recently wrote about The Flaw in Fair Trade on his blog. But I suggest reading the book.

Measuring Hope: Lessons from Rural Myanmar [Post-Op Notes]

For those who don’t know, a great new blog about applied development economics was launched last academic year. Managed by some folks over in Cornell’s Dyson School of Applied Economics and Management the “Economics That Really Matters” blog references Theodore Schultz’s 1979 Nobel Lecture when he said the following:

Most of the people in the world are poor, so if we knew the economics of being poor, we would know much of the economics that really matters. Most of the world’s poor people earn their living from agriculture, so if we knew the economics of agriculture, we would know much of the economics of being poor.

I like this quote by Dr. Schultz and I love this new blog.

The blog is typically reserved for graduate students in Cornell’s Applied Economics program (more accurately the folks who make up Chris Barrett’s research group), but this summer the blog was opened up for graduate students from outside of Cornell to write about their research. I took them up on the offer and yesterday they published a piece in which I talk about my recent trip to Myanmar trying to study the economics of hope.

Here’s the article:

As behavioral economics has become the mainstream of economic science, there has been a growing recognition that economic behavior is often influenced by historical experience, social observation, and individual aspirations. A recent demonstration of this can be found in a widely discussed article published last May in Science. Banerjee et al. (2015) speculate about the specific mechanisms driving the results of their evaluation of a multi-dimensional program aiming to ‘graduate’ participants from poverty, saying:

Perhaps this program worked by making beneficiaries feel that they mattered, that the rest of society cared about them, that with this initial help they now had some control over their future well-being, and therefore, the future could become better. (p. 14)

Several other studies have aimed to measure the formation of aspirations in India,Pakistan, Ethiopia, Indonesia, Kenya, and Peru. They all demonstrate something fundamental about human behavior, particularly when surrounded by life-stealing poverty.

Psychologists (see Snyder, 2002 for a summary) say hope is comprised of three elements: aspirations (or some specific goal), avenues (or a visualized pathway toward aspired outcomes), and agency (or a feeling one can attain aspired outcomes). In aworking paper, Travis Lybbert and Bruce Wydick (2015) draw a distinction between wishful hope, which they call “Hope 1,” and aspirational hope, which they call “Hope 2,” Of primary interest to development economists then is “Hope 2,” as aspirations without sufficient agency or avenues could become wishful and relatively inconsequential in economic decision making.

I’ve been part of a team of researchers trying to contextualize this research to Myanmar. The Myanmar Development Resource Institute (MDRI) is a think-tank established to provide independent policy analysis and research related to economic reform, poverty reduction, and improved governance. Michigan State University’s Food Security Groupand IFPRI have partnered with MDRI to provide technical support on an agricultural and livelihood household survey of Mon State (a coastal region close to Thailand in Southern Myanmar).

[READ MORE OF THIS ARTICLE]

Scarcity, Hope, and the Psychology of Poverty

A psychologist walked around a room while teaching stress management to an audience. As she raised a glass of water, everyone expected they’d be asked the “half empty or half full” question. Instead, with a smile on her face, she inquired: “How heavy is this glass of water?”

Answers called out ranged from 8 oz. to 20 oz.

She replied, “The absolute weight doesn’t matter. It depends on how long I hold it. If I hold it for a minute, it’s not a problem. If I hold it for an hour, I’ll have an ache in my arm. If I hold it for a day, my arm will feel numb and paralyzed. In each case, the weight of the glass doesn’t change, but the longer I hold it, the heavier it becomes.”

She continued, “The stresses and worries in life are like that glass of water. Think about them for a while and nothing happens. Think about them a bit longer and they begin to hurt. And if you think about them all day long, you will feel paralyzed – incapable of doing anything.”

Remember to put the glass down.

This is good advice for many people. For many of us, the stresses and worries in life are similar to a glass of water. We can put glass-of-waterthe glass down when we need a break. We can take vacations from work, relax during and ‘evening in’, and forget about whatever is stressing or worrying us for a little while. This sort of behavior is healthy for us to practice and provides us with the rest we need to succeed in life.

For other people, however, ‘putting the glass down’ may not be possible. For some, it may be practically impossible to take a break or a vacation from the stresses and worries in their life. These people are the global poor all over the world. The people who, in local currency equivalents, consume less than $2 per day – that includes every major dimension of consumption: food, housing, education, health, security, transportation, etc.

This is the broad point of Sendhil Mullainathan and Eldar Shafir’s book Scarcity: Why Having So Little Means So Much. Sendhil (a behavioral economist at Harvard) and Eldar (a psychologist at Princeton) demonstrate through lab and field experiments how the mind is taxed by stresses and worries in our life. When humans are busy, or sleep deprived, or poor we focus extra mental “bandwidth” toward whatever is stressing us. This allows us to do amazing things on a deadline or despite a lack of sleep but it takes attention away from other important aspects of life as our minds only have so much bandwidth. The kicker is the busy and the sleep deprived can take a vacation or sleep in on a Saturday morning; the poor however, can’t take a vacation from their poverty. They can’t put the glass down.

This is an important understanding in itself, but there is increasing evidence that there is an added (perhaps secondary) effect of poverty on human cognition.

Although is is not a standard view in economics, many development economists are coming to the understanding that individual desires and economic behavior are often influenced by historical experience and social observation. Rather than existing in isolation, so-called consumer preferences are conditioned by memorable experiences or are formed by comparison with others. In this vein, for many of the poor around the world the environment in which they life (i.e. multi-generational life-stealing poverty) may influence their behavior specifically as it concerns decisions to invest in the future.

In short, the most devastating aspect of global poverty may the critical lack of aspirations, or more broadly hope in the future.

There is a growing literature on the economics of hope (see herehere, here, and here). This literature can be briefly summarized in the conclusion of an important series of lectures given in 2012 by Esther Duflo, an economist at MIT:

A little bit of hope and some reassurance that an individual’s objectives are within reach can act as a powerful incentive. On the contrary, hopelessness, pessimism, and stress put tremendous pressure both on the will to try something, and on the resources available to do so.

I am currently in Myanmar (a place where George Orwell’s grandmother lived and where he himself spent several years working for the Imperial Police). I am here working to implement a field experiment to measure the psychological and economic effects of hope. The study is still in preliminary stages and I’ve spent the last several days in open ended interviews with small-holder farmers and landless villagers in the rural areas of Mon State.

Myanmar is unique and fascinating place to study the formation of hope at the present time. In 2011 democratic elections led to political and economic reforms. While opportunity abounds in many places as prices of important goods and services (i.e. vehicles, electricity, 3G mobile connectivity, health care, ect.) become more affordable due to the opening of the country to global trade, some areas of the country are still constrained and lack access to this opportunity.

I met with a family yesterday that expresses these challenges all too well. The family is Christian in a country and village that is predominately Buddhist. They live on the grounds of their local church for free and, in return, maintain the church property. They own no land and rent no land. Both the mother and father are day laborers and both are currently unable to find work. The mother forages in the forest for bamboo shoots and mushrooms. They have six children, two of which have migrated to Thailand to find work. None of their children have completed formal education and the chances aren’t great for the younger children, according to the father.

When I asked when the last time the family was happy the father responded, “When we are able to have a good meal”. When I asked how often that happened, he responded, “About twice a week”.

I asked what would make their family happy in the future, the father responded, “Last year the church gave each family $100, we’d be happy if that happened again”.

Psychologists say hope is comprised of three elements: goals, agency, and pathways. This family, at least anecdotally, lacks each of these elements. Their aspirations for the future are low and their goals rely heavily on other people.

George Orwell once wrote, “Within certain limits the less money you have the less you worry”. As I sit in the setting of his classics Burmese Days and Shooting an Elephant I have come to realize, he was wrong. The global poor are subject to incredible levels of stress: diseases, expectantly for children, are more likely to be life-threatening; crop failure can lead to starvation. And as shown by the work of Sendhil and Eldar stress makes good decision-making harder.

Perhaps most importantly, the poor lack the institutional environment which fosters good decisions. People, everywhere, underestimate the benefits of education, struggle to save their income, and spend on health care. In rich countries, however, kids going to school is a common social norm; direct deposit and pension systems make personal finance and saving for retirement something many don’t even think about most days; clean and drinkable water comes out of every tap and childhood immunization appointments are automatically set up. Poor countries provide few such prompts and many poor people around the world don’t experience these luxuries.

David Brooks (I know, I know. He’s a polarizing figure) recently wrote: “The world is waiting for a thinker who can describe poverty through the lens of social psychology”. I think the wait is over, the thinkers are here. It’s the folks working on the economics of hope and the psychology of poverty.

 

The Economics of Climate Change and Water in Kenya

Every once in a while, someone writes something on the internet without thinking really hard. (Ok, ok, it happens all the time.) This past week, this article was written which called into question the link between climate change and water access in Kenya. I thought I’d respond to it as someone who studies economic development and environmental economics, is working on a masters degree in MSU’s Department of Agriculture, Food, and Resource Economics, and recently spent a year in Kenya.

[Full disclosure, the article calls out the Office of Social Justice of the Christian Reformed Church (of which I am am a lifelong member) and at least one current member of their team (of who is made up of several fellow alumni of Calvin College and past classmates of mine). I think I’m far enough along in my training as an objective economist that these facts will not bias my analysis.]

A preliminary note about how environmental economists differ from environmentalists, in general. Pollution is a product of many things we like (i.e. roads, transportation, houses, etc.). Therefore zero pollution is not an optimal amount of pollution. Additionally, allowing firms to pollute as much as they would while maximizing profit and disregarding externalities hurts the production of other things we like (i.e. clean air, fish, parks, ecosystems, etc.). The environmental economist is concerned that we produce the things we like at an additional cost of harming other things we like.

The article (written by Dr. Calvin Beisner, the founder and national spokesperson for The Cornwall Alliance for the Stewardship of Creation) disputes the claim that “To help the poor in Kenya (and other developing nations), we must fight global warming”.

It seems fair to be skeptical of such a broad statement. But lets walk through each of the article’s points and try to (objectively) come to a conclusion without letting our emotions bias the result. Dr. Beisner’s first point:

Kenya has not experienced a significant upward trend in average temperature, either monthly or annually.

He’s not wrong about this. In fact, according to NOAA Kenya’s land temperature has only increased less than 1% since the base period of 1981-2010.

Screen shot 2015-03-21 at 12.02.06 AM

 

But this kind-of completely misses the point. Just because the average temperature of the air that happens to be within Kenya’s boarders isn’t rising, doesn’t mean Kenya or the people of Kenya are not effected by rising global temperatures. This highlights the major obstacle with global climate change policy. The climate is a strict public good. One person’s use of it doesn’t restrict another person’s use of it, and we cannot prohibit anyone from using it. (Economists call these characteristics “non-rivalry” and “non-excludability”.) So, just because the air temperature isn’t per say rising the quickest in Kenya doesn’t mean Kenya isn’t vulnerable to climate change. Consider some quick facts.

  • Agriculture accounts for over 30% of added value of Kenya’s annual GDP growth.
  • Agriculture accounts for 18% of wage employment and 50% of revenue from exports in Kenya.
  • 75% of Kenya’s population lives in rural areas.
  • 75% of Kenyans make their living by farming.
  • About 50% of Kenya’s total agricultural output is non-marketed subsistence production.
  • 45.9% of people in Kenya live below the national poverty line.

(All stats from the World Bank)

Therefore when one begins to map the impacts of Climate Change, Kenya (and other developing countries which rely heavily on agricultural production) are extremely vulnerable. The map below shows vulnerability to a 5.5 degrees centigrade increase in global temperature, which is rather dramatic, but not outside of the trend. It is important to note as well, that this map is produced by running agricultural production models through different scenarios and forecasting output, even if you don’t believe climate change is man-made, you can’t deny our earth’s temperatures are rising, and if trends continue dramatic losses will occur, often in our world’s poorest regions. You may be inclined to bet that global temperatures are cyclical, but why bet on the fate of the most vulnerable in the world, when we can try to make the world better?

Screen shot 2015-03-21 at 12.24.34 AM

The article then quibbles at the idea that rainfall patterns have changed in Kenya over the years:

Yet the videos did cite native Kenyans saying January rainfall had diminished over their lifetimes, and February rainfall had increased, making it more difficult for them to schedule planting.

But childhood memories are notoriously poor data sources, both for the past and for comparison with the present. Hard data are indispensable.

And the hard data in the table below show that, while rainfall amounts have risen and fallen in Kenya since 1900, there is no significant trend.

In 1990–2009, Kenya’s average annual rainfall was 7.2% higher than in 1900–1930, 8.5% higher than in 1930–1960, 1.5% higher than in 1960–1990, and 5.7% higher than in 1900–1990. Thus, the United Nations Development Program concluded in its country profile for Kenya, “Observations of rainfall over Kenya since 1960 do not show statistically significant trends,” and because annual amounts vary significantly more than those periodic averages, the same can be said for the entire 110-year period.

Contrary to the perceived memories reported in the videos, there was no reduction in rainfall in January or increase in February. The very opposite was true. Average January rainfall in 1990–2009 was 18.7% higher than in 1900–1930, 25.1% higher than in 1930–1960, 11.2% higher than in 1960–1990, and 18.1% higher than in 1900–1990. And average February rainfall in 1990–2009 was 4% lower than in 1900–1930, 4.4% higher than in 1930–1960, 4% lower than in 1960–1990, and 1.4% lower than in 1900–1990.

Here, I’d just like to point out the danger of using averages to draw inference, because if Dr. Beisner had any statistics education worth its fee of admission he’d be concerned with the validity of an average drawn from a heterogeneous population of observations. Just as a patient asks a doctor if a medical treatment shown to cure an aliment on average will work for her, specific regions of Kenya may be concerned that they experience different rainfall patterns than the entire country of Kenya on average.

Now, perhaps he is correct and rainfall patterns haven’t changed very much over the years in the various regions of Kenya. Remember that the only reason rainfall is brought up as a topic is because rain is considered an input for agricultural productivity. Obviously other factors contribute to agricultural productivity, not just rain. And the models which create maps as the one above takes as many of these factors into account as possible. Maize (corn) is Kenya’s largest agricultural product by far, and maize has an ideal temperature in which it likes to grow, too hot and it will die. While the average temperature of Kenya isn’t shown to have risen very much (again) on average. Even one extra day of extreme temperatures will seriously harm maize productivity. This is only one other factor. Other factors include, soil quality, fertilizer quality, human capital effectiveness, etc.

The article continues:

Are poor Kenyans suffering from water shortages? Yes. Is that because of global warming—manmade or natural? No. Is fighting global warming the solution? No.

Despite its moderate annual rainfall totals (about 26 inches per year, similar to that of Kansas and Minnesota), Kenya is potentially a water-rich nation. It borders on Lake Victoria—the second-largest freshwater lake in the world by area and ninth-largest continental lake by volume.

Most of Kenya, including its driest part, the Great Rift Valley, is within 200 miles of Lake Victoria, a distance readily served by aqueducts.

For comparison, the Roman aqueducts, built two millennia ago, carried water 260 miles, and the system of aqueducts constituting the California State Water Project (SWP) provides drinking water for over 23 million people (roughly half the entire population of Kenya) by transporting water hundreds of miles from the Colorado River, the Sierra Nevada, and central and northern California. The shortest, the Colorado River Aqueduct, is over 240 miles long.

What to do with a statement like this. I’ll just list some the problems:

  1. Kansas and Minnesota don’t have rainy seasons like Kenya. So sure, they might receive similar inches in rainfall per year, but the application is entirely different. If Kenya’s rains are disturbed by just a little bit (by being delayed by a week or by raining less) Kenyan farmers are much more vulnerable than farmers in Kansas and Minnesota.
  2. I’d like to see a feasibility study for aqueducts providing Kenya with water from Lake Victoria. It would have to be mighty creative.
  3. It is borderline hilarious that water access in California and the Colorado River Aqueduct are bought up as a potential model for Kenya to mimic, considering that water access in California and the Colorado River Aqueduct is one of the most unsustainable (strictly speaking economically, not to mention environmentally) in the world.
  4. Lake Victoria is bordered by not only Kenya but also Uganda and Tanzania and has rivers that run into Burundi, Rwanda, South Sudan and beyond. If Kenya began to pump tons of gallons of water out of Lake Victoria (like California does to the Colorado River) the rest of these countries would be outraged, and likely begin to pump water out of Lake Victoria themselves. Here we would have a “common pool resource problem” similar to that of the climate and the world.

The article ends with this dramatic statement:

Sad to say, however, if climate change activists succeed in enacting policies to fight global warming, Kenya’s economic growth will be curtailed.

Why? Because abundant, reliable, affordable energy is an essential condition of economic growth, and activists seek to fight global warming by shunning the use of the most reliable and affordable energy sources for the developing world—coal and natural gas—and putting far more expensive “Green” energy sources like wind and solar in their place.

As it happens, Kenya has an estimated 400 million tons of coal reserves and is about to begin mining them, making the coal available to generate electricity and deliver its people from the smoke that comes from burning wood and dried dung as primary cooking and heating fuels—smoke that causes high rates of illness and premature death, especially among women and children, from respiratory diseases.

In 2013, two other evangelicals made almost identical claims about climate change in Malawi. As I demonstrated then, those claims were false and based on the same kinds of mistakes shown in these videos.

I commend the good motives and lofty goals of those who make these claims. But motives and goals aren’t enough. Accurate facts are essential to wise decisions.

Ironically, and sadly, the climate policy the makers of these videos want will only bring further harm to the very people they long to help, by prolonging their poverty—the real threat to Kenyans’ health and life.

Here lies the problem with the current climate change debate. On the one side we have climate change activists who (probably rightly) see that something needs to be done to curtail climate change, reduce pollution, and protect the environment. On the other side we have climate change skeptics who (probably rightly) see the policies advocated by environmentalists as potentially harmful to economic growth and productivity. The debate has reached a point in which nothing productive is being discussed, even though the optimal answer (in terms of the economy and the environment) is not a compromise on either side but a simple realization in the importance of what each side is selling. Environmental sustainability on one side and economic viability on the other. Good environmental policies will not curtail Kenya’s economic growth, they will make Kenya’s future stronger.

Don’t believe me? Study some economics. (Or simply listen to this Freakonomics Podcast.)

I’d love to hear from you about the topic. Please comment or leave a question below.

The Impacts of Microfinance

My last post highlighted seven randomized evaluations of microfinace programs from around the world. I’ll admit, you have to be a little wonky to read through even one of the papers completely. Luckily, Innovations for Poverty Action (IPA) has created an easy to understand policy bulletin. [Read the entire brief here] Here are some highlights:

Key Results:

1. Demand for many of the microcredit products was modest.
2. Expanded credit access did lead some entrepreneurs to invest more in their businesses.
3. Microcredit access did not lead to substantial increases in income.
4. Expanded access to credit did afford households more freedom in optimizing how they earned and spent money.
5. There is little evidence that microcredit access had substantial effects on women’s empowerment or investment in children’s schooling, but it did not have widespread harmful effects either.

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Take-up is an important indicator of the success of any customer focused enterprise. In settings where access to the services of the MFI were provided to anyone who passed as “eligible” (poorly defined) 13-30% actually took advantage. That’s 3 out of every ten people. At best! (Even in places where access to the MFI was selected out of a group of people who expressed interest for microcredit take-up was roughly around half of the population.) This fact alone should be a huge reality check for those who advocate for microfinance as the vehicle which paves a road out of poverty for the masses.

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Microcredit did lead to increased business ownership in some locations. But a quick statistics lesson and a caveat seem important.

First, for a lesson in statistical significance. Only two out of the seven studies reported results of statistically significant difference between the treatment group and the control group. What this means is that the other five studies did not find much variation in increased business ownership of those who had access to MFI’s compared to those who had no access to MFI’s. This is important as the impact (or average treatment effect) of any program represents the effect of those who received treatment minus the effect of those same people who did not receive treatment. It is actually impossible to measure this, as we can’t go back in time and see how a household would fair in the absence of an MFI. When we randomize assignment (access to the MFI, in this case) we are mimicking this experimental ideal by comparing individuals who are statistically the same.

Second, increased business ownership may not be something we want to see from an MFI. Spend any time in any developing country and you will notice that there is no shortage of small businesses. They line the street and side alleys. Some mistake this popularity in business ownership as a propensity for entrepreneurship among the global poor. It may rather be due to a lack of other viable alternatives for economic activity which drives this popularity in business ownership than anything else. Starting a business is often easy, it’s sustaining it and expanding it which is the hard but important part.

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In summary microcredit fails to impact the things that matter most, consumption (economists favorite observable variable for economic well-being) and social well-being. In fact some studies find decreases in these outcomes!

What does this mean for microcredit moving forward? I don’t think these studies should spell the end for microcredit as a micro-development strategy around the world. I simply think our collective enthusiasm for this medium of assistance needs to be a bit more muted and our expectations need to be a bit more realistic. Also, perhaps microcredit misses the target of what the global poor actually need. Many use microcredit as a way to smooth consumption when income (particularly for farmers) is lumpy. Perhaps we need to think more about products that assist in helping people have more freedom with how they spend their money. Clearly microcredit is not perfect, much can be done to tweak and improve this method. Of course, the best way to do this is through iteration. Trying something new, testing it, gathering feedback, and improving.