Wednesday, 13 April 2011

Ebrahim Rahbari (Citi) responds to last post (Citi`s 3G)

 Ebrahim wanted to post this comment but either it was too long or other technical problems prevented him (and me) from doing so. Here it is:

The first criticism Helmut raises in this post is that our statement that many emerging countries have reached a modicum of political stability seem particularly questionable today, mostly based on the observation of widespread unrest in the Middle East, North Africa and other parts of Africa. Now these developments are clearly significant from an individual country and often a regional perspective. Our work mostly predated the recent unrest and it is probably worth pointing out that predicting the incidence and timing of such outbursts of unrest is usually a very tricky business and that we certainly did not foresee how the developments in many of these countries are panning out.
So there is risk of unrest in many countries currently, including risk of major escalation, even armed conflict in some parts (mostly Africa and the Middle East), but also of somewhat milder unrest in other parts (say, austerity-induced in Europe, food price-induced in South Asia). But even including these very recent developments, it remains far from clear that we are observing a particularly vicious chapter of recent history. The political transitions in Tunisia and Egypt were remarkably peaceful. Confrontations in Bahrain, Libya, Syria, Yemen and elsewhere are unfortunately less so, but even in these cases, the scale of human suffering caused is arguable much lower than in previous decades. According to the latest World Bank World Development Report 2011 (, battle deaths in civil wars regularly exceeded 100,000 people in the 1970s and 1980s, a number which according to the same report fell to 50,000 in 2008. That number sadly is likely to rise this year, but I remain hopeful that we will remain far off the levels observed in earlier episodes. What is more, many regions, even in Africa, but notably in Emerging Asia and Latin America have – by their own relatively modest historical standards – enjoyed a degree of tranquility that is promising. Relatively peaceful democratic transitions have made their debut in places such as Nigeria and Indonesia in the recent past. And incidents such as the questionable removal of Nobel laureate Yunus from the board of Grameen are certainly bad news, but it is more difficult to argue that these are definite signs of a deterioration relative to previous decades.
So far I have only spoken about about the assessment of current developments. A different issue are long-term projections about the future evolution of political and institutional development. There again, it remains far from clear what outcomes will result from the ongoing transition processes in many of the countries currently or recently embroiled in turmoil – or in many other countries. We (and this ‘we’ includes Willem as well as our local economists and myself) had to make up our mind of what we perceive to be the likeliest outcome: whether we expected the recent unrest to be a sign of a reversal of the trend towards less conflict and some institutional development or whether we expected the recent uprisings to usher in a new era of populist, growth-inhibiting and market economy-constraining policies. In the end, we - generally speaking – were fairly optimistic that modest market-based reforms, including investments in human and physical capital will continue, and this view informed our growth forecasts. We may well turn out to be wrong. But we will most certainly be wrong only with hindsight, as it is far from obvious that the current developments herald a distinctly negative future.
A second, related criticism is that we do not provide specific evidence on political and institutional improvements in some of the countries that we deem promising and that we rely on subjective, qualitative indicators, such as those which are part of the World Bank World Development Indicators, which have been criticised on various points. I would agree that more detail on political and institutional developments in individual countries would have been desirable and an – admittedly weak – excuse are the space constraints that we are subject for projects such as this one. The indicators that are criticised are not actually an input into our growth forecasts. The forecasts were largely made by our local economists on the basis of their – subjective – assessments of the prospects of the economies that they cover. We don’t have complete information about the exact data and methodology our economists use to produce the forecasts so I cannot guarantee that our economists have not relied on some of the discredited measures you mention. Neither can I guarantee that our economists are immune to excessive optimism or what you call positive ‘sentiment’ about developments in their coverage countries. But at the very least, they do possess detailed local knowledge of relevant developments and were explicitly asked to take these into account. Nevertheless I look forward to have a careful look into the OECD publications you mentioned – and I am hoping they will offer us some more appropriate alternative data sources!
A third criticism of our work is that levels of trade barriers remain substantial in many emerging markets and that they are in fact much higher, on average, than in rich countries. But Helmut already notes himself that trade barriers have come down somewhat in 3G countries. We argue that this opening has likely contributed to the relatively benign growth performance of the likes of China (though robust evidence is lacking). The fact that trade barriers remain high is most relevant in the sense you allude to - that lowering them further would potentially provide a source of further growth in the future and the assumption underlying our forecasts is indeed that we will see some further opening.
Finally, there is a criticism that we do not give due weight to the lessons learned by development economists and the relatively dismal historical growth record of poor countries. Now, I probably agree that we do not discuss in sufficient detail the reasons underlying the poor growth performance of these countries in the past. But this should not be taken as a sign of disregard. Rather, it could be interpreted as a sign of disagreement about any fatalism implied by the historical record. After all, China and India, accounting for almost 2.5bn people among them, did manage to launch themselves on new and promising growth and development trajectories after centuries of poverty and stagnation. They were not and are not the slaves of history. The notion that it might be possible for Bangladesh, Indonesia, Vietnam, Nigeria, Egypt and other nations to learn from these successes and to emulate their examples seems less far-fetched than the notion that these countries will be incapable of growth and development.  
There are important complementarities between private and social efforts at low levels of development and these can be amplified by more or less recent experiences of disaster, conflict or simply poverty and may prohibit even initiating the journey to prosperity. Some of these are even explicitly touched upon in our report (investment in education to combat illiteracy, the ‘resource curse’), but I agree that others, notably rising inequality as economies develop do not receive adequate treatment. But our view is that policymakers tend to have the tools to deal with many of these – at least to a degree sufficient to jump-start the convergence process. We don’t advocate seeing development as an automatism, but at the same time, we want to point out that history is not always a good guide for the future. There are ‘game-changers’ or structural breaks. Precedents exist: Not just China, but also Chile or Botswana or a number of countries in Central and Eastern Europe. Taking the historical experience of these countries as a predictor for their future performance when they engaged in reforms that would move them closer to a market-based economy would have been given and inadequately pessimistic picture of their outlook. Put differently and simplistically, I cannot think of any country in which policymakers did comply with the - admittedly very general - prescriptions we advocate and poor performance still ensued.
I want to stress that we do not deny that there are substantial risks to our projections – and even that these are mostly to the downside. Nor do we reject criticism that we do not come close to covering all relevant aspects of the development process in enough detail. But we take the view that many of those risks are challenges that will be met by policymakers and the private sector to an extent sufficient to validate our projections (we also assume that bad luck will visit these countries somewhat less often than in the past), or at least that they would have the tools to do so. We’ll undoubtedly revise our projections over the years. This will reflect more data points and better information – but also an improved understanding of the mechanisms at work that will partly result from discussions such as this one and for which I am grateful. I look forward to more of those in the future.
With my very best regards,

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