Wednesday, 24 June 2020

The OECD Development Centre in the 1980s

The OEEC had been the European child of the Marshall Plan since 1948, the OECD was its North Atlantic grandchild since 1961; the OECD Development Centre became its South oriented late-birth. Founded in 1962 at the suggestion of US President John F. Kennedy[1], the semi-autonomous research-oriented institution was intended to serve as a forum for the exchange of policy know-how and as a link between OECD members and developing countries.

Despite offers from the IMF (DC), Moody's (NYC), KfW (Ffm) and GIGA (HH), I remained associated with the Development Centre in Paris for almost 29 long years[2], from 12/1983 to 9/2010. This post recollects my 1980s at the Centre.

Both the OECD and the OECD Development Centre probably had the best time behind them in December 1983, when I started there. Secretary General Emile van Lennep had been highly regarded by the OECD economists but was about to retire. He was a lawyer who was not a Do-It-Yourself economist and so enjoyed listening to his Economics Department (all other departments were only entitled to refer to themselves as Directorate). His Keynesian chief economist Stephen Marris was someone who did not allow himself to be infected by the then popular currents in economics (rational expectations; supply-side theory). A typical agency problem that was often encountered in multilateral organizations: the agent only apparently cared about the preferences of his member countries, the principal[3]. In times of Reagan and Thatcher this could not go well for long.



The OECD Development Centre had experienced its best period to this date thanks to the British Deputy Director Prof. Ian M.D. Little[4] (†2012) who during his short term of office (1966-68), gathered around him market friendly British and Indian top economists (e.g. Jagdish Bhagwati, Deepak Lal, Sir James Mirless (Nobel 1996), Tibor Scitovsky, Maurice Scott). Two studies - Manual of Industrial Project Analysis II, Social Cost Benefit Analysis (1969) and Industry and Trade in Some Developing Countries (1970) - had a lasting, albeit controversial, influence on the development economics literature[5]. When I joined the OECD Development Centre in December 1983, academic orientation, liberalism and excellence had faded away, the key protagonists having migrated mostly towards Nuffield College (Oxford U) and the World Bank.

The Centre was thus market liberal during the Keynesian orientation of the OECD in the 1960s. Subsequently, the OECD gradually and belatedly shifted towards supply side policy. Meanwhile, the Centre came increasingly under the influence of small European OECD countries (Table 1) and moved into internal opposition to the "main OECD” that was dominated by the US and the UK at the time. Giulio Fossi, who had joined the OEEC in 1949 and later the Centre in 1963, incarnated that opposition second to none. Responsable for external cooperation and aiming to link especially with NGOs active in the South, he was keen to counteract the OECD image as a rich man´s club. Closer to the Society for International Development (SID), Giulio despised bureaucratic censorship and defended researchers´ independence at the Development Centre.

Table 1: One female & six male heads of the OECD Development Centre, from 1983

Period

Development Centre

OECD

Period

1983-85

Justus Faaland (†2017), N

Emile van Lennep (†1996), NL

1969-84

1985-92

Louis Emmerij (†2019), NL

Jean-Claude Paye, F

1984-94

1993-99

Jean Bonvin (†2017), CH

Don Johnston, Can

1996-06

1999-03

Jorge Braga de Macedo, P

 

 

2003-07

Louka Katseli, Gr

José Ángel Gurría, Mex

2006-

2007-10

Javier Santiso, Esp

 

 

2010-

Mario Pezzini, I

 

 

 

The Norwegian Just Faaland, a former concentration camp prisoner (Buchenwald 1943-45), became my first boss at the OECD Development Centre; reluctantly, because I had published very little academically until then and was arguably suspect to him as a German[6]. A student of the Nobel Prize winner Ragnar Frisch, Faaland was employed in 1949 by the OEEC in Paris, where Angus Maddison and the later recipient (2005) of the Nobel Prize, Tom Schelling, worked among others. In 1952 he was appointed a member of the Chr. Michelsen Institute (Bergen), where he later served as director for 28 years[7]. Prof. Faaland advised several countries and international organisations before becoming President of the OECD Development Centre. For his advisory work on Malaysia's multi-ethnic Bumiputra policy, Tan Sri Just Faaland received the Merdeka Award in 2010.

Through Faaland's mediation I soon got to know the Scottish bestselling author of the Development Centre - the "chiffrephil" economic historian Angus Maddison[8] - who had previously worked with the OEEC like Faaland. Since then Angus had been commuting from his "electronic cottage" in northern France to his chair at the University of Groningen and the OECD in Paris - unless he was traveling through the big wide world to obtain historical output data. When we met at lunch, Faaland and Maddison toasted Maggie Thatcher's future fall with champagne. Cheekily, I had a glass of milk.

Prof. Christian Morisson joined the Centre in 1984; he would stay until 1994 as a head of research division. His appointment clearly brought back some academic spirit and Africa exposure to the Centre. With Prof. Christian Morrisson joining from Université de Paris 1 , the Centre slowly started to recover at least in academic perception; not yet, however, in esteem inside the OECD family. Christian Morrison also attracted as a nonresident Prof. François Bourguignon (later Chief Economist of the World Bank and then founding Rector PSE). Thus, before income inequality became a wildly popular subject of economics, Christian and François brought their expertise on global income distribution to the OECD Development Centre. (Cf. e.g. François Bourguignon & Christian Morrisson (1992), “Inequality Among World Citizens: 1820-1992”, American Economic Review, VOL. 92, no. 4, September 2002, pp. 727-744. F. Bourgignon also coauthored the first working paper of OECD Development Centre, joint with the late W. Branson and J. de Melo (1989), "Macroeconomic Adjustment and Income Distribution: A Macro-Micro Simulation Model," OECD Development Centre Working Papers No. 1.)

Faaland's presidency of the OECD Development Centre does not appear in any of the obituaries nor in his wiki page. It was a big misunderstanding and ended quickly. The shy, silent and distanced Norwegian despised the OECD and its ambassadors, who liked to hear themselves talk but understood little about development. This earned him a lot of sympathy from the staff; yet for his political survival at the OECD this attitude was fatal[9].


I myself was sent out from Bonn for initially three years. I was asked in Paris to publish on the subject of "Latin America's debt crisis and international trade" - even upon request, the assignment was not made more specific. Well...

After publishing a first neo-classical childsplay (in the style of the exiled Hungarian Bela Balassa) I discovered the obvious parallels between hyperinflationary Latin America of the 1980s and post-war Germany of the 1920s. The idea of catching up on the missing doctorate before my supposed return to the BMWi quickly matured. Since Cologne could be quickly reached by train and my sister lived there near the university, I contacted Prof. Gerhard Fels at the IW, who recommended me to Prof. Hans Willgerodt and Ralph Anderegg.

I literally threw myself into the post-war literature on the German reparations problem. That the German transfer problem had many more facets than just the foreign exchange problem (in the form of worsened terms of trade) as emphasised by the Keynes/Ohlin debate, that is what I learned especially in the writings of Fritz Machlup and Wilhelm Röpke. Like the Germans forty years earlier, the net financial transfers of several emerging countries failed not because of the dollar problem, but because of the internal budgetary problem of raising funds[10]. It was not easy to convince the development and finance directorates at the OECD that indebted emerging countries did face a net financial transfer problem; my proposition was flatly rejected on the (fancy) argument that debt service was not a capital flow.

Since Latin America's debt problem had so far been interpreted primarily as a dollar problem, especially in Washington, DC, the OECD version made a splash, fired mainly by William R. Cline (PIIE) as spelled out in his later review[11] and by Vito Tanzi (IMF). As fiscal director of the IMF, Vito Tanzi also had a bureaucratic interest in my work: this led to my own personal Tanzi effect. He invited me to an IMF lecture in Washington and to the 1988 Istanbul Congress of the International Institute of Public Finance. This was followed in 1989 by an invitation from the World Bank, just before the US Treasury presented the Brady Plan, in which I explored the question of how the industrialized countries were able to maintain their high public debt ratios without a crisis after World War II. More than thirty years later, the Covid crisis has brought the essay back up to date[12]. The Brady Plan gave rise to further work, joint with Bert Hofman (who would later rise at the World Bank to become its director for China), notably on the adjustment incentives of debt relief. See, e.g. Review of World Econmics, 1991). 

With Axel van Trrotsenburg- who subsequently went to the World Bank -  I published a first paper on the optimal monetary regime in East Asia in the same year[13]. Here, the policy background was pressure by the US Treasury excerted on the Asian NICs to appreciate their currencies and Bundesbank President Karl Otto Pöhl´s advice to peg to the Yen, on the pattern of the European Monetary System. From then, I was earmarked in some minds (such as the brilliant Jeffrey Shafer) to sabotage the US Treasury. The 1980s were the heydays of monetarists in two distinct varieties, domestic or international. The corollary were extreme prescriptions for currency regimes: domestic monetarists (Milton Friedman) opted for a pure float of the exchange rate, international monetarists (Robert Mundell) for a hard currency ped to an anchor currency. My stance was in between these extremes; my conviction owed a lot to East Asia´s growth performance based on reliably competitive real effective exchange rates and to work by Max Corden, Sebastian Edwards, Peter Kenen and John Williamson. Again, I got flak from the main OECD where New Zealand, a pure floater, had some influence, not least through the formidable John Llewellyn.


Just Faaland's Dutch successor Louis Emmerij (also "Big Louis") came from The Hague, where he had previously served for nine years as Rector of the Institute of Social Studies, without fulfilling his ambition to become Dutch Development Minister (like his PvdA party friend Jan Pronk). Before that, Big Louis had earned merits at the ILO, where he had headed the World Employment Program from 1971-76. Under Big Louis' leadership, the concept of basic needs had been developed, a forerunner of the Human Development Index later developed by UNDP head Mahbub Ul Haq, who shaped the development debate.

Emmerij brought some interesting economists to the Centre (Eliana Cardoso with Rudi Dornbusch; Jacques J. Polak; Keith B. Griffin). Rudi lobbied Peter Kenen to disseminate my dissertation globally in a concentrated form as a Princeton Study in International Finance[14]. For Jacques Polak I became the in-house sparring partner of two OECD publications, of considerable interest given Polak´s great influence at the Fund[15].

Emmerij's father had died in 1945 in the Dachau concentration camp[16]. As a German, I was treated quite reservedly by Big Louis for understandable reasons, like I was previously treated by Just Faaland. My macro themes "your pet subject" did not interest him very much either. Nevertheless, I admired Big Louis for his alert intelligence and punctual limited working hours. And I forgave the caviar socialist for his feudal predilections; at noon he had his own chauffeur drive him in the official car to the expensive country club in nearby Bois de Boulogne, where he liked to keep court when the weather was good.

Either Louis Emmerij seems to have left no lasting mark as Centre President or the OECD is sloppy in keeping up its records on the internet, so much institutional memory gets erased. Neither the OECD's iLibrary nor the OECD Development Centre lists Big Louis, which could suggest that he did not leave behind any enduring conference volumes. In fact, he would start a very fruitful collaboration with Enrique Iglesisas at the IDB, which gave rise to a first joint IDB/Development Centre seminar in late 1990. (I will come back to those in the next post on the 1990s). 

Big Louis made good personnel decisions, however. He also lured back David Turnham, who Ian Little had already brought along as a research assistant and who since the 1970s had been working for the World Bank. David was one of the first to address the problem of underemployment in poor countries.  In 1988, the South African high flyer Ian Goldin was also hired (from Oxford U). He ran research on Changing Comparative Advantage in Food and Agriculture, to promote less protective agricultural policies in OECD countries. With the support of Dominique van der Mensbrugghe, a general equilibrium model saw the light: the Rural/Urban-North/South (RUNS) model. "Have model, will travel" (so David Turnham).  Indeed, Ian did not stay long at the Centre (1988-92) as he was invited by Nelson Mandela to join his government at the helm of the state-owned Development Bank of Southern Africa. On that period, read Ian Goldin´s obituary of Mandela in the OECD Observer

 



[1] The establishment of the OECD Development Centre was proposed by US President John F. Kennedy in a speech to the Canadian Parliament in Ottawa on 17 May 1961: https://youtu.be/tVO4HifEqEk

[2] In Germany (1976-1983), I had four employers during a rather short period as a professional economist. See https://reibreisen.blogspot.com/2020/06/meine-deutschen-chefs-1976-1983.html. (available only in German)

[3] In multilateral organizations, the double delegation problem (voter->government->IO) complicates the principal-agent dilemma. Cf. Nielson, Parks & Tierney (2017), „International organizations and development finance: introduction to the special issue”, The Review of International Organizations , Vol. 12, pp. 157–169.

[4] For an appreciation of the economist IMD Little, see C. Bliss and V. Joshi (2014). "Ian Malcolm David Little 1918–2012" (PDF). Biographical Memoirs of Fellows of the British Academy. XIII: 317–318.

[5] As usual, Prof. Little did not mince his words in his recollections. Therefore worth reading: Ian Little (2002), „The Centre since the 1960s“, in Jorge Braga de Macedo, Colm Foy and Charles P. Oman (eds.), Development is Back, Paris: OECD Development Centre, 257-262.

[6] The German delegation to the OECD had speculated in vain on a high post at the Centre. It was only when this appointment fell through that she put pressure for my candidacy.

[8] Among his many OECD bestsellers, the most cited is Angus Maddison (2006), The World Economy, Vol.1: A Millenial Perspective; Vol. 2: Historical Statistics Paris: OECD Development Centre.

[9] Since the OECD does not cultivate its institutional memory very much, it does not pay tribute to former Development Centre presidents. Cf. the Chr. Michelsen Institute (2017), In memory of Just Faaland , Bergen.

[10] Helmut Reisen (1987), Über das Transferproblem hochverschuldeter Entwicklungsländer, Nomos Verlagsgesellschaft, Baden-Baden. Extended OECD version Helmut Reisen & Axel van Trotsenburg (1988), Developing Country Debt: The Budgetary and Transfer Problem, Paris: OECD Development Centre. 

[11] William R. Cline (1995), International Debt Reexamined, Washington, D.C.: Institute for International Economics, pp.151-153.

[12] Helmut Reisen (1989), “Public Debt, North and South”, Policy Research Working Paper Series 253, The World Bank.

[13] Helmut Reisen & Axel van Trotsenburg (1988), „Should the Asian NICs Peg to the Yen?“, Intereconomics, vol. 23(4), pages 172-177, July.

[14] Helmut Reisen (1989), "Public Debt, External Competitiveness, And Fiscal Discipline In Developing Countries," Princeton Studies in International Economics 66, International Economics Section, Departement of Economics Princeton University.

 [15] Jacques J. Polak (1989), Financial Policies and Development, Paris: OECD Development Centre;  J.J. Polak (1991), “The Changing Nature of IMF Conditionality”, OECD Working Paper No. 41.

[16] Richard Jolly (2020), „Louis Emmerij obituary“, The Guardian, 27 January.



Friday, 29 May 2020

Covid-19: Does rich-country lockdown raise poor-country child mortality?


Does the German "lockdown"[1] endanger millions of children around the world? Tübingen's Mayor Boris Palmer (Greens) had provoked at the end of April: "The shutdown, as we operate it, tries to prolong the lives of very old, seriously ill people in the rich countries and costs the lives of a much larger number of children in poor countries".
Is this true?
As lively as the general outrage about Palmer's thesis was, the connection "lockdown here, dead children there" prima facie cannot be dismissed. After all, Germany is an important part of the globalised economy, closely interwoven in world trade and an important donor nation. And that child mortality continues to be a major problem for the international community of states can be seen, for example, in the 17 Sustainable Development Goals (SDGs). The SDGs are political objectives of the United Nations (UN), which are intended to ensure sustainable development worldwide at the economic, social and ecological level. And in particular goal 3.2 - the reduction of global infant mortality to a maximum of 2.5% of all newborns five years after birth by 2030 - was already far from the target set before the Covid pandemic[2], well before the target came into force in 2016.



But a closer search for clues proves (without reference to the dubious morality of his claim): Palmer's thesis is wrong, and in several dimensions.
1.        Palmer refers to a new UN paper from April of this year. However, the authors of the paper do not present any empirical evidence and also note themselves that this will only be possible later. In addition, the assumptions made in the study about the link between Covid-19 and pandemic-induced excess mortality of children in poor countries are limited to three impact channels, which are also quite plausible: increased susceptibility to morbid virus infections, overburdening of local health care systems[3], and jeopardizing the UN Agenda 2030 with its 17 goals for sustainable development (SDGs). But: The UN document does not mention the lockdown, it is even recommended (on page 15)!
2.       Neither Palmer nor the UN study explicitly mention the so-called poverty elasticity in developing countries as a function of the growth of the rich countries[4]. The sequence of effects would be indirect: the stringency of the lockdown reduces GDP in the rich countries, on which GDP growth in the poor countries depends[5]. In the poor countries, the elasticity of poverty in turn determines child mortality, at least below a certain income threshold. However, the poverty elasticity of growth in developing countries depends even more tightly on the inequality of income and wealth there. If Palmer had read the recent study by the prominent African economist Augustin Fosu[6], he ought to have known that.
3.       Lockdowns to contain the spread of the virus have immediate and dramatic effects on daily economic activity. The impact on GDP will depend on how long the lockdowns last and how stringent they are. By way of illustration, a two to three-month crisis with a five-week national "peak austerity" that reduces GDP by 20% per day would result in a 7% to 8% decline in quarterly GDP, Fitch rating agency recently estimated. However, lockdowns and changing consumer habits are not easy to separate: Sweden, for example, is also experiencing a dramatic slump despite liberal Covid policies. Economists at the University of Copenhagen have found that lockdowns have had little impact on consumer habits and that the real damper on buying activity is fear of the corona virus itself.
4.       What is the prevention paradox for public health corresponds to the Global Public Good in the interdependent world economy (Quah, 2020)[7]: a preventive measure that has a high benefit for the population and communities often brings little to the individual and vice versa. Historical evidence from the 1918 Spanish flu, analyzed by the Federal Reserve Bank of New York[8], shows that those US cities that continued to experience higher employment growth in manufacturing after that date also had lower mortality rates due to the epidemic. Importantly, they introduced tighter public health interventions in the form of physical distancing, quarantine and lockdown. Strict preventive measures have a high health benefit for the population as a whole, but harm individual interests. Therefore, a loud minority rebels against public health measures which, paradoxically, are acceptable in their own interests.
The search for clues thus reveals that Boris Palmer has quoted the UN study incorrectly, misjudging important causal relationships between our prevention measures and child mortality in the poorest countries and ignoring the prevention paradox. Palmer was wrong in his provocation, not only morally. After all, in the pandemic, strict prevention measures are ultimately the least harmful way for the economy, in rich countries and elsewhere.



[1] Mind you, the term "lockdown" has not applied to Germany in the corona crisis so far. Germany does not have a lockdown, but contact restrictions and school closures. The Blavatnik School Covid Stringency Index, a composite of 13 individual indicators (e.g. curfews, stops of public transport, closures of restaurants, schools and stadiums) has always been well below the levels of the top stringent Italy, Spain and France.
[2] Max Roser (2019), Child mortality: achieving the global goal for 2030 would be a huge achievement – but we are currently far away, Ourworldindata, Oxford U, 23. April.
[3] Simulations by the Johns Hopkins Bloomberg School of Public Health have confirmed the importance of the state of health systems for child mortality in poor countries. Another major determinant is malnutrition. Cf. The Lancet, May 12, 2020.
[4] The growth elasticity of poverty (GEP) is the percentage reduction in the poverty rate (PR) associated with a percentage change in mean (per capita) income (y): GEP = - (d%PR/d%y).
[5] Note that the poorest countries' dependence on China for growth has exceeded their dependence on OECD countries for the past two decades. Cf. Chris Garroway et al. (2012), „The Renminbi and Poor‐country Growth”, The World Economy, Vol. 35.3., S. 273-294. 
[6] Augustin K. Fosu (2017), “Growth, inequality, and poverty reduction in developing countries: Recent global evidence”, Research in Economics, Vol. 17.2, S. 306-336.
[7] Danny Quah (2020), Keeping people from dying is good for business, medium.com, 18. May.
[8] Sergio Correia et al. (2020), “Fight the Pandemic, Save the Economy: Lessons from the 1918 Flu,” Federal Reserve Bank of New York Liberty Street Economics, 27. March.