Evaluating Projections of African Economic Growth

A discussion of the African Development Bank’s report utilizing the Solow Model and examining welfare effects.

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Introduction

GDP per capita in Sub-Saharan Africa is the lowest in the world at $1,594 in 2015 (World Bank 2015). Rates of extreme poverty (living on less than $1.90 per person per day) are the highest in the world at 40 percent in 2015 (World Bank 2015). While other countries such as China, India, Vietnam and Cambodia have experienced rapid growth over the last quarter century, bringing millions of their citizens out of poverty and industrializing their economies, most African countries have economies based largely on agriculture and commodities, sectors that are susceptible to shifts in exogenous factors such as international prices and weather. As the continent seeks to alleviate the mass poverty, build its vital infrastructure, and join the ranks of other high-growth countries, the African Development Bank (AfDB) was instituted to “spur sustainable economic development and social progress in its regional member countries (RMCs), thus contributing to poverty reduction” (AfDB).

The AfDB recently held its 52nd annual meeting, at which it released its annual assessment on the economic outlook for Africa. A newspaper article in the Ugandan Daily Monitor, “Africa’s Economic Growth Bright – AfDB,” reported on the document and summarized its projections. The report predicted growth of 3.4 percent in 2017, up from 2.2 percent in 2016. The lower growth in 2016 was “due to low commodity prices, weak global recovery and adverse weather conditions” and the expected rebound in 2017 is “on the assumption that as commodity prices recover, the world economy will be strengthened and domestic macroeconomic reforms are entrenched” (Daily Monitor, June 2017).

Are the Report’s Assumptions Realistic?

The growth rates predicted in the AfDB’s report are higher than growth rates in the United States. This is not surprising, as developing countries typically have higher growth rates than developed countries. While higher than projected growth rates in developed countries, the AfDB report’s rates are lower than those projected in China. China’s growth rate, although slowing somewhat (from 14 percent in 2012 to 7 percent in 2015), remains one of the highest in the world. That the projection in the AFDB report is between that of the United States’ and China seems reasonable.

Although the figure might be within a reasonable range, it is important to evaluate if the assumptions made about the drivers of this growth are reasonable. The projection is based “on the assumption that as commodity prices recover, the world economy will be strengthened and domestic macroeconomic reforms are entrenched.”

The assumption that commodity prices will go up is line with most analysts’ estimates. The World Bank’s Commodity Markets Outlook forecasts higher prices for industrial commodities such as energies and metal and stable prices or a small decrease in the prices of grains and some other agricultural products (World Bank, April 2017). As different African countries contain different natural resources and have varying economic dependence on commodity exports, they will be affected individually by price changes. But the overall impact of price changes is likely to be positive.

It is a strong assumption to say that the world economy will be strengthened next year. There is a great deal of uncertainty in international trade and financial markets being caused by international terrorism and the nationalistic movements in the Europe and the United States. Furthermore, the continued cooling of China’s economy will not only affect international growth, but also will significantly reduce demand for raw materials. This will have a severe impact on Africa, as many African countries’ economies are reliant on exports of raw materials.

Finally, the reinforcement of domestic macroeconomic reforms within Africa depends on African leaders’ willingness to fight corruption and make their markets better for doing business. The incentives align for these reforms to advance and Africa’s economy should continue to become more pro-growth. So, while some of the assumptions in the AfDB’s report are more realistic than others, it is safe to expect economic conditions that are favorable for growth in Africa.

Evaluating African Growth Using Economic Models

Economists use formalized models to derive predictions about future economic growth within one country and differences in growth patterns among countries. One such macroeconomic model is the Solow Model, named after Robert M. Solow, who won the Nobel Prize in Economics for the 1956 paper in which he introduced the model (Solow 1956). It is a neoclassical model in that total output is a function of capital and labor. The model expresses output in per worker terms such that per capita GDP only grows with capital accumulation, which in turn only increases by a higher saving rate or lower rate of depreciation of capital. The implication is that a higher saving rate increases per-capita GDP, but that the growth rate of per capita GDP would return to zero. Later revisions to the Solow model added in a term for human capital to explain sustained economic growth and differences in cross-country differences in per-capita GDP (Mankiw et al, 1992).

Unfortunately, the Solow Model is not particularly suitable for evaluating the drivers of growth that are projected in the AfDB report. Higher commodity prices are essentially lump-sum payments to commodity exporting countries. While this is going to make those countries better off, changes in the terms of trade do not have an impact on the Solow Model output function or growth rate function. Similarly, a strong recovery in the global economy does not directly factor into the Solow Model. However, these sources of growth will have an indirect effect on the Solow Model output function. A stronger global recovery will give multinational corporations additional capital to invest, higher commodity prices will direct that capital towards commodity-rich countries, and African domestic macroeconomic reforms will encourage these corporations that Africa is business-friendly. This increase in foreign direct investment raises the level of capital. Per the Solow Model, this will lead to a higher level of output and a higher level of growth in the short-term. These results are consistent with the AfDB’s report.

Welfare Implications

            Assuming the projections within the AfDB’s report are accurate, how will this growth impact poverty, inequality and other measures of household well-being? Because the growth is mainly projected to be driven by changes in commodity prices, demand for the unskilled labor that produces these commodities will increase and the remote areas where these resources are located will gain greater access to domestic and international markets. These changes will reduce poverty and improve the standards of living among the rural poor in African countries. Nonetheless, the clear majority of the income that will arise from the increase in commodity prices will likely flow to wealthier portions of the population who provide the capital to produce these commodities. As such, the effect of the growth on measures of inequality such as the Gini Coefficient is unclear.

 

References

“Africas economic growth bright – AfDB.” Daily Monitor. Nation Media Group, 01 June 2017. Web. 06 June 2017.

 

“Industrial Commodity Prices to Rise in 2017.” World Bank. World Bank Group, 26 Apr. 2017. Web. 07 June 2017.

 

Mankiw, N. Gregory, et al. “A Contribution to the Empirics of Economic Growth.” The Quarterly Journal of Economics, vol. 107, no. 2, 1992, pp. 407–437. JSTOR, www.jstor.org/stable/2118477

 

“Mission & Strategy.” African Development Bank. N.p., n.d. Web. 06 June 2017.

 

Poverty headcount ratio at $1.90 a day (2011 PPP) (% of population) http://data.worldbank.org/indicator/SI.POV.DDAY?locations=ZG&view=chart

 

Solow, Robert M. “A Contribution to the Theory of Economic Growth.” The Quarterly Journal of Economics, vol. 70, no. 1, 1956, pp. 65–94. JSTOR, www.jstor.org/stable/1884513.

 

NBER Working Paper Discussion | Growing, Shrinking, and Long Run Economic Performance: Historical Perspectives on Economic Development

Introduction

This paper by Stephen Broadberry and John Joseph Wallis attempts to shift focus from the typically discussed topic of economic growth, to the often-neglected topic of economic shrinks. The idea is that controlling economic shrinks has more of an effect on long-run economic growth, than promoting economic growths. To test this theory, Broadberry and Wallis examine historical data from multiple time periods, to find trends in the growing and shrinking rates of poor, middle-income, and high income countries.

 
The terms “shrink” and “growth” refer to instances where a country’s economy gets smaller or larger. If, over the course of the year, the economy (measured by GDP per capita) gets smaller, we call this a shrink. Conversely, if we observe the economy to be getting larger, we call it a period of growth. In theory, if a country were to maximize its periods of growth, it would see long-term sustained growth. And in fact, much of the current research into growth theory has been about how to maximize the frequency and magnitude of growth periods. The information that Broadberry and Wallis present shows that the scope of this type of research is not wide enough, and that economic shrinks have a substantial effect on a growing economy, despite the lack of attention they have gotten.

Methods and Findings

To arrive at this conclusion, Broadberry and Wallis create values that they call “contribution of shrinking” and “contribution of growing” which essentially equal the frequency of shrinking times the rate of shrinking, and the frequency of growing times the rate of growing, respectively. Here, the rate of change refers to the average of all the shrinking or growing years over the stated period. Looking at short-run growth data, from 1950-2008, and long-run growth data, from 1348-2008, broken down into shorter periods of about 50 years, Broadberry and Wallis arrive at a few specific conclusions. First, growing and shrinking rates have been high and variable throughout most of history, and remain so in less developed countries today. This finding indicates that more developed countries have found a way to temper not only shrinking, but growing as well, and that consistency in rates of change is key for economic success. Second, improving long run economic performance has occurred because the frequency and rate of shrinking have both declined, rather than because the growing rate has increased. This may be the most important conclusion drawn by Broadberry and Wallis, because it provides a new metric for developing countries to target with policies. If, previously, countries were focused on achieving high growth, and neglecting shrinks, this finding represents a paradigm shift, and one that should, in theory, see results. Finally, the authors conclude that the rate of growing has typically declined rather than increased as long run economic performance has improved. This is interesting, because it is nearly antithetical with what one would intuitively suspect regarding growing rates.

 
After discussing the empirical evidence, Broadberry and Wallis then go on to mention how countries might stop their economies from shrinking, discussing both proximate and ultimate causes of economic shrinks. Four possible proximate causes are given to explain economic shrinks: structural change, technological change, demographic change, and changing incidence of warfare.

Structural change describes the shifting of an economy over time from being centered in one industry to deriving most of its growth from another. The paper uses Great Britain as an example, citing the shift from an agrarian economy in the pre-1800s, to one centered around services and industry (or manufacturing) now. The authors contend that developments within the services and industry sectors increased the net growth rate of Great Britain substantially.

 
Technological change by itself, in theory would lead to an upswing in the GDP of a nation. For this reason, Broadberry and Wallis chose to observe a metric called Total Factor Productivity, which roughly describes how efficiently inputs are used in production. An increase in TFP is associated with increasing efficiency in production, and is thereby used to describe a positive change in the level of technology. By looking at long-run growth rates in both TFP and output, Broadberry and Wallis found that economic growth outpaced technological change, between the formative years of 1760-1873, so that tech change only accounted for just one sixth of the increase in growth. They also found that a decrease in TFP coincided with a shrink in Holland in the 1700’s.

 
Demographic change is a field of study popularized by Thomas Malthus in the late 16th/early 17th centuries. Malthusian theory of population growth says that since population growth is geometric, and resource growth is linear, society will get to a point where a population will outgrow its resources, and experience short run shrinking. In this approach, any measure that increases birthrate, or decreases available land (resource constraint) will result in a short-run shrink (and vice-versa for growth). Broadberry and Wallis note that, for developing economies, this theory holds true.

 
Finally, changing incidence of warfare is just that – the increase or decrease a country sees in the incidence of warring over a period. Economic theory can be found supporting either side of this concept with regards to growth. Warfare can bolster a country’s manufacturing sector, and increase investment, while also increasing the mortality rate – all things that should lead to economic growth. Conversely, warfare necessarily leads to a decrease in the labor force, a possible decimation of infrastructure and physical capital, and a larger segment of the population dependent on social safety nets. What Broadberry and Wallis find, is that incidence of warfare is associated with variable growth and shrink rates.

Conclusions

These four proximate factors are found to be important by themselves in reducing economic shrinks, which leads Broadberry and Wallis to consider the ultimate factor of institutional change. The authors divide a political system into two different possible areas, one based on what they call “identity rules” and one based on “impersonal rules”. In short, an economy is more likely to experience less frequent and less severe shrinking periods once they transition from identity rules system of government, where different rules apply to different levels of society, to impersonal rules, where the same rules apply for everyone in society. Broadberry and Wallis then go on to mention how a government acting within an impersonal rules system can operate though changes in the proximate factors, to bring about periods of sustained growth through limited periods of shrinking. Key to this theory is a move away from agriculture, towards technological progress, and towards a more peaceful environment with stable demographics.

 
This paper refers directly to the development of nations, and as such it can be used as a benchmark for emerging economies. Since much of the research and theory being done now is on growth factors, this paper, and the conclusions that it draws – specifically the importance of limiting frequency and magnitude of shrinks – provides a new perspective on an age-old question. In addition, many poor and developing countries in the world now have political systems that can be described as “identity rules”. It is likely, according to the research done in this paper, that this one aspect may be holding these economies back and preventing them from making the transition into sustained growth.

By: Garrett Blom

 

For reference, the paper can be found here: http://nber.org/papers/w23343

Credit Plan to Revitalize Rural India

By: Tim O’Shea

Introduction

The rural population growth in India has been decreasing on average at a rate of 0.3 percent per decade since 1960, causing more and more entrepreneurs to migrate to big cities to find sustainable income. The Indian government is beginning to recognize a big need to increase rural production to further develop the economy. According to The World Bank database, since 1960 there has been a 15 percent decrease in rural population in India to 67 percent, and resulted in 0.64 percent annual growth for rural population in 2015. The decrease in rural population has been partially due to the volatility of the agriculture industry and the opportunity to make immediate cash in larger urban areas. This has resulted in 80 percent of the poor population in India living in rural areas; 62 percent of which is from seven states combined. The majority of agricultural expenses occur at the beginning of the season and the benefits are reaped at the very end, which is why local farmers will often not have enough money to make it through the entirety of the season. The linking of plant fruition to input requirements (animals, seed, etc.) remain uncalculated for farms in India causing them to overcompensate and waste money in certain areas. If farmers run out of money while still in season they will turn to local cash lenders to get them through the season. The current plan is to hook up over 85 million homes in poverty with up to $100,000 by 2019. The rural development ministry acknowledges the difficulty in starting and maintaining a farm, and wants to revitalize production or help farmers use their other skillsets to make money. The loans should be collateral-free and have subsidized interest rates to reward the use of national banks. With this plan there will be increased opportunities in the rural population of India from the increasing amount of loans being distributed.

Loan Supply and Repayment

Although microcredit has been around for centuries, there have been adjustments and changes made along the way to ensure maximum fairness for both parties involved. Theoretically, a bank gives a loan to a group of well-qualified farmers that are looking to get into the agriculture industry. If the farmers are able to cover variable and fixed costs, then they repay the bank with the amount they loaned out. If they are unable to repay the loan, they then are not allowed to take out loans in the future and suffer the social negligence from your partners because of being unable to repay the bank. The difficulty from this is the inability of knowing who are safe and risky borrowers to loan your money out to. The end goal being a provision of small scale financial services to poor borrowers for small businesses. The advantages from microcredit is the ability to deal with market failures and the joint liability aspect where communities are responsible for making sure everyone is doing their part. The rural development ministry headed by Amarjeet Sinha is using a subvention to cover 4 percent of the banks current 11 percent interest rates, causing the rural households to only have to cover 7 percent of the original loan interest rate. The hopes of increasing rural development have been laid out by the Indian government in an effort to “diversify livelihood opportunities,” said Sinha. In addition, the households in the backward districts (most underdeveloped) of India will get an additional 3 percent subvention which lowers their output requirements even more to cover the banks interest rates. The goal of the attempt by India is to lower costs and increase activity for all rural production through compatible incentives for local farmers.

The grouping together of people in poverty has been studied from the Tamil Nadu Panchayat Level Federation program and Telangana Stree Nidhi Cooperative which provide easy access of credit to groups in need. The Panchayat Level Federation formed Self Help Group’s (SHG) based off of different status levels to help give people a platform to share their experiences and increase transparency. However, problems still arise under these platforms when comparing the agricultural output statistics and the rural population growth. Rural population growth has decreased significantly and consistently over the last 20 years, but the total agriculture sector output in India has increased by over 20 percent in the last four years alone. This is because the State Bank of India in Tamil Nadu issues gold loans based off of the best looking loan portfolio. This gold loan is for more safe borrowers has a higher success rate than the traditional loan and ensures that the bank is automatically receiving gold in return, which makes it more appealing for the moneylender. As a result, 31.5 percent of the loans given out in India belong to 11,000 people within the country. Some people will use the loan amount to pay off a previous loan, further burying themselves in a debt crisis that they cannot solve. This shows huge amounts of disparity and unevenness of the loan process in India, which is why the credit program needs to be properly regulated when implemented for small scale rural businesses. This is accurate with our studies throughout the class and how the adverse selection model works in how risky match with other risky groups and safe like to match with safe.

Impact on households

With the increased amount of loans being given out to households, credit in India has been trending upward. The gold loan is creating a wider gap in agricultural production and not granting equal loans to all eligible parties. The goal of this micro-credit program is to reduce the poverty gap and dependence on local money lenders by promoting the efficient use of loans provided by the government. Non-affiliated moneylenders will come in and charge astronomical interest rates for farmers in need, usually to cover general upkeep charges of maintaining a farm or business because of the frontloaded costs. This subsidy from the government is aimed to be a reward like system for borrowing from the national bank and avoiding smaller micro lenders that will significantly upcharge the interest rates. Rural households in poverty will be able to borrow a smaller amount than they needed for less of a cost, which saves money in the short- and long-run for each household. Along with that, there have been expansions made in the dairy industry in an effort to decrease transportation costs and create more of a consistent revenue stream. The demand for dairy is fairly stagnant and can provide a good source of side income for farmers, so the market linkages between the two groups is huge. Credit in India will have to be monitored over the coming years because of the unpredictability of success rates. The rural population in India is a developing area that needs to be invested in to further develop and fully reach its potential. This is a groundbreaking proposition that could change the lives of the Indian economy forever because of the potential market size and the attempt to lower rural poverty numbers.

References:

Chitravanshi, Ruchika. “Government Planning an Easy Credit Scheme for Rural Households.” The Economic Times. Economic Times, 19 Apr. 2017. Web. 09 May 2017. <http://economictimes.indiatimes.com/news/economy/policy/government-planning-an-easy-credit-scheme-for-rural-households/articleshow/58250161.cms&gt;.

 

Schaffner, Julie. Development Economics. N.p.: Wiley, 2014. Print.

 

Janardhanan, Arun. “Tamil Nadu: Lion’s Share of Bank Loans against Gold, Villages Fall Prey toLoan Sharks.” LexisNexis® Academic. LexisNexis, 23 Mar. 2017. Web. 09 May 2017. http://www.lexisnexis.com/lnacui2api/results/docview/docview.do?docLinkInd=true&risb=21_T25937755023&format=GNBFI&sort=DATE%2CD%2CH&startDocNo=1&resultsUrlKey=29_T25937755016&cisb=22_T25937755015&treeMax=true&treeWidth=0&csi=354268&docNo=4

 

India’s Poverty Profile.” World Bank. N.p., n.d. Web. 09 May 2017.

<http://www.worldbank.org/en/news/infographic/2016/05/27/india-s-poverty-profile&gt;.

Peru’s Recovery From El Niño

A look at how a natural disaster affected Peru’s economy

When El Niño struck Peru earlier this year, it left a line of destruction that must be revived for the country to continue to prosper.  To be able to reconstruct, the Ministry of Economy and Finance (MEF) must dig into public sector budget. This will cause the fiscal deficit to increase with the higher amount of public spending that is being used to fix the city.

Since the government’s previously set deficit goal of 2.5% of GDP had been exceeded by February, a necessary change is needed to prevent the loss of regular expenditures to reconstruction costs. Although the government is hesitant to extend this deficit budget, an economist argues that it is necessary and won’t reflect poorly on the MEF because caring for a natural disaster can be clearly justifiable.

Comparing this natural disaster to an earthquake the country endured previously, there is reason for caution in efficient spending by the government for reconstruction. When the earthquake hit, the country worked to rehabilitate over the course of multiple years. The difference that can be made to make this situation better is to react as soon as possible. An economist, Flavio Ausejo, comments that the state should work on creating a disaster management plan and work on creating preventative measures.

The MEF is already working to accommodate those affected by El Niño. Local governments that have already spent at least 75% of the 100k Sol that had been given before the disaster were transferred an additional 100k Sol. They also gave 1000 Sol bonds per hectare to farmers who were affected. As pointed out by the president of Conveagro, a group of Peruvian agrarian producers, these payments are not completely satisfactory because each hectare planted comes with a generous amount of investment. The type of crop produced by the individual farmer should be taken into account.

Although those efforts have been criticized, the MEF has positively made use of other resources that directly affect the damaged areas. They have created a disaster care budget program that amounts to about 1,088.1 million Sol; they have an intervention fund equaling about 321 million Sol as well as a line of credit worth about $3.7 billion US dollars. There is a Fiscal Stabilization Fund worth around $9 billion US dollars that can be used to rebuild their cities after natural disasters. It is managed by the MEF, Central Reserve Bank, and the Presidency of the Council of Ministers.

How the MEF’s Allocation of Funds Can Affect Farmers

As stated above, the farmers who were affected by this natural disaster were all given a standard consolation of 1000 Sol bonds per hectare, no matter what each individual farm produces. It’s likely that multiple farmers are given too much, while others are given too little and this uncertainty could play a role in an investor’s willingness to support the farmers.

If an unlucky farmer produces a good that needs more than the allocated 1000 Sol bond, only risk-loving investors will want to stay and people have shown to be more risk averse after a natural disaster (Cassar et al. 2017). This would decrease the amount of produce that can be bought and traded, eventually removing the contribution that farmers can make to the GDP.

Given that a natural disaster such as this one will affect everyone, not just the farmers, there could be benefit from using some kind of informal insurance institution, as described by Schaffner (2014). If everyone in the community would assist those farmers who did not receive enough to revitalize the entirety of their farms, there would be benefits for all. The farmer would benefit by not losing his farm and source of income, and the community would benefit by not losing that specific product.

Luckily, there are localized groups who value the social and necessary need for these farmers and their crops. Conveagro, a group who shares goals of educating about agriculture. On their website, their listed “Declaration of Principles” shows support to not only make the earth more sustainable, but also decentralization of the economy and a support for social justice.

Disaster Relief and Beyond

The beginnings of a disaster care budget program and an intervention fund will be valuable to stabilizing the economy of a country that is prone to be affected by the natural elements. If the funds are not needed a particular year, then there is an increase in the wealth of the country. If the funds are needed, then there shouldn’t be an increase in the budget deficit goal because those funds have already been accounted for and, if properly funded, shouldn’t exceed the amount needed to rebuild. Additionally, the funds will already be there, so the amount of time it will take to reconstruct will decrease.

As described in the article, the Fiscal Stabilization Fund wasn’t created to assist economy during a natural disaster, but the additional funds would make the increased deficit less hurtful to the population, specifically the farmers and the funds they receive.

Works Cited

“About Us.” Conveagro.org. Accessed May 7, 2017. http://www.conveagro.org.pe/quienes-somos.

Cassar, Alessandra, Andrew Healy, and Carl Von Kessler. “Trust, Risk, and Time Preferences After a Natural Disaster: Experimental Evidence from Thailand.” World Development 94 (June 2017): 90-105. Accessed May 7, 2017. doi:https://doi.org/10.1016/j.worlddev.2016.12.042.

“El impacto de los desastres naturales en las cuentas públicas.” El Comercio, March 17, 2017. Accessed May 7, 2017. http://elcomercio.pe/economia/peru/impacto-desastres-naturales-cuentas-publicas-noticia-1976722?ref=flujo_tags_17964&ft=nota_39&e=titulo.

Schaffner, Julie. Development Economics: Theory, Empirical Research, and Policy Analysis. Wiley, 2014.

Translation:

“The impact of coastal El Niño on the economy is not yet known . Analysts are still measuring the effect. However, the potential magnitude of this phenomenon is already being compared with that of the 1998 El Niño phenomenon that swept the country.

The Ministry of Economy and Finance (MEF) has announced that it has the necessary resources to handle the emergency and reconstruction, but it is anticipated that these will exceed what is projected in the public sector budget for this year.

Increasing public spending would inevitably increase the fiscal deficit. “But in this context, you have to do it,” says Carlos Casas, a professor at the University of the Pacific.

The target for the fiscal deficit for this year was set at 2.5% of GDP and in February the annualized figure closed at 2.7%. If the goal remained unchanged, extraordinary expenses for emergency care and reconstruction would force the execution of ordinary expenditures to be sacrificed, warns economist Luis Alberto Arias.

“These [extraordinary] expenses should not be accounted for for the purpose of meeting the fiscal target,” says Arias, who believes that emergency care justifies the state’s level of indebtedness. Thus, it recommends extending the deficit fence by 2017 in an exceptional way so that it can be “spent quietly”. For this, Congress is required to approve the change in the fiscal trajectory.

REBUILDING AND REACTIVATING

This week, Central Reserve Bank President Julio Velarde said that public spending that will be made to recover the country from the damages suffered will be a driver of the economy.

However, the recent recent reconstruction experience of Peru after the Pisco earthquake revealed a great inefficiency in spending and severe problems in its execution. For example, it was expected that the rehabilitation of the city would take three years, but almost a decade later the process does not end. For this, Arias recommends that this phase be planned and executed as soon as the disaster ends.

“These things can not happen again [as in Pisco]. They have to establish expeditious procedures to be able to spend the money in a timely manner, not two or three years later, “Arias concludes.

“This phenomenon tests the state’s ability to react to natural disasters, but it also highlights the tremendous institutional shortcomings we have,” said Pacific University economist Flavio Ausejo. He adds that the next item on the agenda is to work on disaster management and prevention mechanisms to make the country more resilient to these phenomena.

In this way the El Niño phenomenon would affect our economy. In January the GDP growth rate was 4.8%, but for February it is estimated to be half of that. (Video: El Comercio)

RESOURCE MANAGEMENT

The MEF announced this week the immediate measures that are being implemented to mitigate the effects of disasters. These include the transfer of an additional S / 100 thousand to local governments that have executed 75% or more of the S / 100 thousand already delivered to them in February.

It was also decided to deliver S / 1,000 bonds to farmers for each affected hectare. However, guilds of the sector have considered it insufficient. “It is still much lower, because on the coast when one hectare is planted there is a strong investment. The average amount should be evaluated according to the crops of each farmer, “said Héctor Carrasco, president of Conveagro, to the newspaper” Gestión “.

On the other hand, there are three sources of resources to face the climate phenomenon and to rebuild the damaged. On the one hand, a budget program for disaster care amounting to S / 1,088.1 million. To this is added an exclusive intervention fund for these anomalous cases amounting to S / 321 million, of which S / 42 million have already been transferred to subnational governments. And, finally, a contingent line of credit that amounts to US $ 3.7 billion.

The resources of the Fiscal Stabilization Fund are also available. These resources are assigned to the MEF and are managed by a board composed of three representatives distributed between the MEF, the Central Reserve Bank and the Presidency of the Council of Ministers. Although their primary use is to provide the country with a “mattress” in the face of adverse economic cycles, they can also be used in the face of natural disasters. Currently, the fund is around US $ 9 billion.”

Addressing the Learning Gap in Developing Countries: Improving Instruction for Struggling Students in India

Finding solutions to substandard education systems in developing countries
By Kevin Strasser

Introduction

The lack of effective education is a significant problem faced by developing countries.  While many of these countries boast high levels of enrollment, students often advance through school without learning basic concepts in reading and arithmetic, creating a learning gap that is detrimental to the productivity of the working population.  A 2016 paper entitled, “Mainstreaming an Effective Intervention: Evidence from Randomized Evaluations of “Teaching at the Right Level” in India” (Banerjee et. al) aims to locate the causes of the learning gap faced by students in India (specifically four states: Bihar, Uttarakhand, Haryana, and Uttar Pradesh) and determine a model for a program that can be scaled and implemented to the entire Indian education system.

Causes of the Learning Gap

Government-run primary schools in India feature automatic promotion through grade 8. Each grade level teaches a common syllabus to every student, regardless of their ability.  Therefore, even students who lack a fundamental understanding of concepts taught early in school advance to the next grade with no checks in place.  For example, an Annual Status of Education Report (ASER) for Indian schools in 2014 shows that “39 percent of fifth graders could not read at a second-grade level” (Banerjee et. al 4).  Banerjee’s paper concludes that automatic promotion, along with a lack of targeted teaching based on current learning levels of students, are some of the reasons for the learning gap in India.  Solutions to these problems are readily available.  However, the authors mention that while “simple changes in pedagogy can lead to significant improvements in learning levels” (4), the government is mostly unwilling to experiment with changes in teaching style and remedial education for struggling students.  Thus, most of the burden falls on NGOs to reform education.

Methodology

With evidence to support the positive effects of pedagogical changes on student success, the authors of this paper set out to produce a replicable model that would reform the government school system and improve the quality of existing government schoolteachers.  The experiment conducted in this paper is based on an instructional model devised by Pratham, an NGO that aims to improve learning on a large scale while remaining cost-effective.  Pratham implemented a system in Uttar Pradesh where students would be organized into groups based on their current ability rather than grade level.  These groups would be taught by “carefully monitored but lightly trained community volunteers” (5), and would focus on basic language and arithmetic skills.  A study from 2010 conducted by Banerjee and his colleagues (Banerji, R., Duflo, E., Glennerster, R., and S. Khemani) showed that Pratham’s program had significantly improved the reading levels of children who had attended.

The Pratham program had shown signs of progress, but its success on a national scale was uncertain.  To determine whether this type of intervention was worth pursuing at the national level, the authors of the paper set up experiments in four Indian states: Bihar, Uttarakhand, Haryana, and Uttar Pradesh.  In Bihar, a “summer camp” was conducted where government teachers were recruited for remedial classes during the students’ summer vacation.  After the summer camp, test scores improved by .07-.09 standard deviations.  This program carried on to Haryana and Uttar Pradesh, where test scores also improved (in Uttar Pradesh, on-site monitoring was a likely factor in the successful implementation of the summer camp).  In Uttarakhand, the experiment involved three different scenarios.  In the first scenario, schools were given learning materials (not specified in the paper) without any additional assistance.  In the second scenario, teachers were trained to use the Pratham strategy and the school received the same materials.  In the third scenario, materials were provided, teachers were trained, and additional in-school volunteers were hired to use the Pratham method in conjunction with the teachers.  Schools were randomly selected to receive one of these three treatments, and results were compared after two years.

The results from the experiments after the two year observation period were interesting, if not unexpected.  Exact replication of the Pratham method (conducted in Bihar, then Uttarakhand as scenario two) proved successful (see Appendix for results of the experiment), but the other scenarios failed.  Scenario one failed simply because providing additional teaching materials is not sufficient to improve test scores.  Scenario three also failed, but for an unexpected reason: instead of the volunteers functioning as valuable assets to aid teachers with implementing the Pratham method, teachers were instead using them only as assistants and reverting back to their old teaching style.

Conclusions and Importance to Future Efforts

The successes and failures of the experiments conducted in Bihar, Haryana, Uttar Pradesh, and Uttarakhand led the authors of the paper to note two “key ingredients” that play a major part in the Pratham model and its ability to scale and improve government-run schools.  The first ingredient is the grouping of children by their current learning level as opposed to grade level, and the second ingredient is focusing on concepts that are suitable for all children at a given learning level.  However, these ingredients only seem to be followed when additional support from Pratham staff is available and rigorous on-site monitoring is frequent.

Studies like this provide much-needed evidence to present to the governments of developing countries, in the hopes that they will be able to reform their schooling systems and immensely improve the quality of their education.  This paper in particular shows that simple changes in pedagogy and the method in which students are grouped can lead to a hugely improved education system (Uttar Pradesh’s summer camp presented a staggering .61-.70 standard deviation increase in test scores after only two years).  Education is one of the most important problems faced by developing countries, but the methods described in this paper detail a way forward that is simple enough for widespread implementation, and effective enough to make the effort worth it.

 

References

Banerjee, A., Banerji, R., Berry, J., Duflo, E., Kannan, H., Mukherji, S., . . . Walton, M. (2016,

October). Mainstreaming an Effective Intervention: Evidence from Randomized

Evaluations of. Retrieved May 08, 2017, from http://www.nber.org/papers/w22746

Banerjee, A., Banerji, R., Duflo, E., Glennerster, R., & Khemani, S. (2008, September). Pitfalls of

Participatory Programs: Evidence From a Randomized Evaluation in Education in India.

Retrieved May 08, 2017, from http://www.nber.org/papers/w14311

 

Appendix

Pratham Model Results

Disrupting Education? Experimental Evidence on Technology-Aided Instruction in India

The impact of technology-aided teaching on the development of middle school students skills in math and Hindi.

Introduction

Human capital is a key ingredient for the continued progress of a developing country, and is largely determined by the education the children receive. Even though these countries have seen improvement in school enrollment over the years, the quality of the education received is in question. The use of technology in teaching has said to be a top qualifier in fixing this problem, but past studies have shown in mixed results. The experiment conducted in “Disrupting Education? Experimental Evidence on Technology-Aided Instruction in India” by Karthik Muralidharan, Abhijeet Singh, and Alejandro J. Ganimian, aimed to see the impact of a technology-led instructional programs that focused on attention to design detail to accommodate individual student development. To address this, the experiment only looked at the results of student’s math and Hindi skills, even though English was also subject.

Method

The experiment was conducted in 2015 in low income neighborhoods in Delhi, where children would enroll in an after-school program held in Mindspark centers, an established Indian education firm. There the children would use the centers’ computers and software to complete activities on math, Hindi, and English for a fee of INR 200 (USD 3) per month. With the use of their Mindspark CAL software, the program would determine a student’s learning level and then customize the learning material to match it, while adjusting to their rate of progress. Students were expected to sign up for 90 minute sessions at the center for 6 days a week where half that time was just computer based instructions and the other 45 minutes were supervised instructor-led-group based. Out of the 6 days enrolled, the material was split so that two days were dedicated to math, two days were dedicated to Hindi, one day was dedicated to English, and one day where the student could decide which subject to choose.

Sample

Out of the students enrolled in the five public schools surrounding the centers, 619 students in grades 6-9 took a baseline test for the experiment. Each student was then randomly placed into either a treatment or control group through a random lottery system for free sessions, splitting them into groups of 314 and 305 students respectively. Unfortunately, out of the 619 students that were selected for the experiment, only 533 completed the full duration of at least 50 days of attendance where an endline test was to be given. This resulted in a smaller sample of 270 control and 263 treatment students.

Results

With the use of the Mindspark Cal system that tracks and monitors each student’s activity and progress, data was easily available to observe and determine the experiments results. In the beginning of the experiment, every student is first given an assessment through the program that showed the actual grade level each student’s learning level before any treatment. The results showed that the, “average student academic achievement is progressing at a lower rate than envisaged by the curriculum” (Muralidharan et al, 10). For example, students in the 9th grade perform on average at 4.5 (e.g. at a 4th grade level) grades below in math and 2.5 grades (e.g. at a 6th grade level) below in Hindi. Clearly the children are just being passed along the educational system without fully grasping the material taught in each grade. Looking at Figure 3, the impact that the program had on students was found to be very beneficial for the treatment group compared to the control. The lottery winners were found to have increased their mean test scores from the baseline and endline tests given to them in math and Hindi. With the results of Table 2 over 4.5 months, the lottery winner’s scores have increased 0.36σ higher in math and 0.22σ higher in their Hindi test scores compared to the control group. Overall, it seemed to show that the use of technology in teaching seemed to have a great impact on the comprehension of math and Hindi by adjusting to the learning level of the student.

Conclusion

After the experiment was complete and the data collected, the researchers concluded some interesting findings on how to properly integrate technology with teaching. First off, they found that the program was effective at teaching students from all levels of education, bringing up both math and language test scores. They also found the program to be cost and time effective for the short time the students were enrolled in the program. Now clearly, here the use of technology in teaching has helped develop the education of this students but not so much when it comes to public school tests. Since many students were found to be a few grades below in their math and Hindi compared to their current grade, the Mindspark program only helped them increased their own individual knowledge of the subjects. If they were to take the school tests their grades would show a great improvement, but might not be enough to pass the test. The paper also concluded that with the use of this blended learning in schools, teachers would be better informed on their students’ performance to be able to plan accordingly. In the end of the experiment the Mindspark program seemed to show great promise for all students and if schools started to take notice of details on students like the program, India’s human capital could skyrocket.

Works Cited

Muralidharan, Karthik, Abhijeet Singh, and Alejandro J. Ganimian. Disrupting Education? Experimental Evidence on Technology-Aided Instruction in India. No. w22923. National Bureau of Economic Research, 2016. http://nber.org/papers/w22923

 

Charts & Table

Figure 3: Mean difference in test scores between lottery winners and losers

ECON Figure 2

Figure 1

Microcredit Success in India: How They Maintain Sustainable Growth

An analysis of the supply of micro credit loans in India and the effects of those loans on households.

finance10new

Introduction

In a country like India, where one in two people do not have a bank account and only 15 percent have access to formal credit lines, microcredit loans can provide people who would otherwise struggle under the harsh financial climate the opportunity to grow as entrepreneurs and gain some form of financial security. Although the microcredit industry in India hit some roadblocks with the Andhra Pradesh crisis in 2010 and the demonetization of the 500 and 1,000 bank notes in 2016, it is still growing strong at a 45 percent compound annual growth rate in the past five years alone. With the growth of an industry also comes an increase in the number of suppliers as well as an increase of the supply of goods; in this case that would be the microfinance institutions and micro-loans respectively. In fact, new institutions, like Inditrade Microfinance, are entering the market all over the country. The chairman of the new company, Sudip Bandyopadhyay, claims that “there are significant opportunities in the semi urban areas of the industrialized states for a focused micro finance player” and other institutions likely have the same thought. The Indian people are being given more and more opportunities to start or grow their businesses with the increase in the supply of loans and in fact, most these clients are women who are striving to support a better livelihood.

Supply of Loans

Although the theory of microcredit can be traced back to the 18th century, the first modern microcredit institution was not introduced until the late 20th century. In practice, an institution gives a loan to a group of aspiring entrepreneurs to start their new businesses. If the clients are successful, they can pay back their loan in full, and if not, the group defaults and they ruin any chance of receiving a loan in the future. Along with the client’s debt comes the social implications; joint lending almost requires that the individuals keep each other accountable for their portion of repayment.

With the introduction of microcredit also comes the theory of uncertainty. How likely is it that the client will pay pack their loan in full? Is the client’s undertaking a risky one or a safe one? If one of the clients in a group is successful, will they assist the others in paying back the loan? In addition to the initial cost of the loan, the institution will also charge interest to at least cover the opportunity cost of funds. Although, in an ideal world, where the credit market is competitive, the lender will not charge an interest rate above his or her opportunity cost of funds. So, with such a large population in India and the fact that it is not a developed country, one would question why lenders would even enter the market. It is a risk that many would not want to participate in; however, in India, institutions shouldn’t worry about repayment. From the 45 million clients, there is a 99.5% repayment rate, so it is no wonder why so many new microfinance institutions are entering the market. The reason for such high repayment rates will be analyzed in a later section, but when there is an increase in the number of lenders in the market for microcredit, the supply of loans will also increase. This and the high repayment rate are two causes of such high growth rates in the Indian microfinance industry.

The article also attributes growth to “adaptability to change” and “resilience in the face of challenges”. One such example of this is the demonetization in 2016. This basically meant that the government declared the 500 and 1,000 bank notes illegal tender. After this new policy took effect the borrowers’ businesses took a hit. Their cash flows started slowing down for weeks after the demonetization and on top of that, the lenders required their clients to repay loans using the new bank notes. Although there was a brief period of confusion for the participants of microcredit, they showed their resiliency and it took about 12 weeks for things to return to normal.

Impact of Loans on Indian Households

Microcredit in India has been particularly successful: new institutions are still entering the market and are being repaid at almost perfect rates. Such success could be caused by many different factors, but one of the main ones described in this article is the social accountability. The author explains that “the business thrives on a very high level of customer connect before, during and after the credit approval with all clients being met face to face in a weekly, fortnightly or a monthly meeting for about 30-45 minutes in a group setting.” By meeting with the rest of the group on a regular basis, the individuals feel more accountable since they would be letting their group members down if they fail in their endeavor. This is especially true in under developed or developing countries in that if their project fails and the other members must repay their portion of the loan for them (if possible), they realize their chance of getting another loan in the future is almost impossible.

Another possible reason for the success is the geographical location of the loans. For example, Inditrade is a company that began its operations in Solapur, India which is “known for handloom and powerloom weaving industry providing employment to a large number of workers.” With a high competition in that area for powerloom industries, the opportunity for new businesses is something a lot of people want to participate in. Therefore, there is a high demand for loans. This type of example is very common in India, which is why microcredit works. The author of this article has big plans for microcredit in India; although it has been successful in the past few years, he believes that there is some necessary “fine tuning” to make the system much more effective and to ensure its longevity. One of the biggest problems is the unpredictability and vulnerability of the customer base. Like the demonetization in 2016, there are many unexpected factors that can affect future repayment of loans. The future of microcredit looks bright and if the right to financial inclusion becomes a priority for the governments of developing countries, “it can become possible to reach the last Indian in need of financial services”.

References

Nambiar, Manoj. “Indian Microfinance industry will continue to demonstrate sustainable growth.” The Economic Times. Economic Times, 22 Apr. 2017. Web. 02 May 2017.  http://economictimes.indiatimes.com/small-biz/money/indian-microfinance-industry-will-continue-to-demonstrate-sustainable-growth/articleshow/58311757.cms

Ray, Atmadip. “Inditrade Capital begins microfinance business.” The Economic Times. Economic Times, 17 Apr. 2017. Web. 02 May 2017. http://economictimes.indiatimes.com/industry/banking/finance/inditrade-capital-begins-microfinance-business/articleshow/58220696.cms