Invader bush and the Namibian savanna

The title link above is to my diary at European Tribune where das monde brought up some issues about Namibia, that I thought would be worth exploring in depth.
Before taking a close look at the "Invader Bush" problem, I wanted to delve into the background and some general information to help us study this part of the world. I know this is a cliché but I see a lot of contrasts in Namibian to study.

First I would like to see what Freedom House/Namibia states:

Namibia's civil liberties rating improved from 3 to 2 due to improvements in the rule of law, including the continued stabilization of the Caprivi region and the creation of a Ministry of Safety and Security.

Also Political rights are rated at 2 which gives Namibia a solid free rating. While the general population has many freedoms, women and homosexuals continue to face oppression and abortions are illegal.

Nambia|Wiki

At 318,696 mi² (825,418 km²[2]), Namibia is the world's thirty-fourth largest country (after Venezuela). It is comparable in size to Pakistan, and is about half the size of the US state of Alaska. After Mongolia, Namibia is the least densely populated country in the world (2.5 persons per km²).
...
Namibia’s economy consists primarily of mining and manufacturing which represent 74% and 11% of the Gross Domestic Product (GDP) respectively. Namibia has a 30-40% unemployment rate...
Although per capita GDP is five times the per capita GDP of Africa's poorest countries, the majority of Namibia's people live in pronounced poverty because of large-scale unemployment. Namibia has one of the highest rates of income inequality in the world.
...
Namibia is the only country in the world to specifically address conservation and protection of natural resources in their constitution [15]. Article 95 states, “The State shall actively promote and maintain the welfare of the people by adopting, international policies aimed at the following: maintenance of ecosystems, essential ecological processes, and biological diversity of Namibia, and utilization of living natural resources on a sustainable basis for the benefit of all Namibians, both present and future.”
...
HIV/AIDS in Namibia

The HIV/AIDS epidemic is a very large problem in Namibia. Namibia’s infection rate is one of the highest on the continent and it shares its eastern border with Botswana which has the highest rate of almost 39%. In 2001, there were an estimated 210,000 people living with HIV/AIDS, and the estimated death toll in 2003 was 16,000 [21]. In urban Namibia, Malaria is also a pressing problem. The malaria problem seems to be compounded by the HIV/AIDS epidemic. Research has shown in Namibia, that the risk of contracting malaria is 14.5% greater if a person is also infected with HIV. The risk of death from malaria is also raised by approximately 50% with a concurrent HIV infection [22]. Given infection rates this large as well as a looming malaria problem, it may be very difficult for the government to deal with both the medical and economic needs resulting from this epidemic.

Nambia|CIA

South Africa occupied the German colony of South-West Africa during World War I and administered it as a mandate until after World War II, when it annexed the territory. In 1966 the Marxist South-West Africa People's Organization (SWAPO) guerrilla group launched a war of independence for the area that was soon named Namibia, but it was not until 1988 that South Africa agreed to end its administration in accordance with a UN peace plan for the entire region. Namibia won its independence in 1990 and has been governed by SWAPO since. Hifikepunye POHAMBA was elected president in November 2004 in a landslide victory replacing Sam NUJOMA who led the country during its first 14 years of self rule.

The positive aspects of this is that there was a peaceful transition of power in government.


Tuesday, April 3, 2007 15:58 PDT Invader bush and the Namibian savanna

Namibia to use invasive shrubs for bioenergy, to meet all power needs

Individual, small farmers whose land is invaded say it is cheaper to buy a new farm than to try to eradicate the hardy bushes.
...
Although there are other methods to limit bush encroachment such as herbicides, use of browsers, fire, stumping or felling and bulldozing among others, many of these methods have been found to be so costly that farmers say it is cheaper to buy another farm than to debush.

This exposes our dilemma in how humans will deal with this economic problem. You can't just continually move to new land when the old land is not going to recover on its own.

Namibia to start bush-to-electricity project from invader-bush

Bush Encroachment Report on Phase 1 of the Bush Encroachment Research, Monitoring and Management Project

http://www.nbri.org.na/documents/IPA_Workshop_Proceedings.pdf


Links:
Namibian National Farmers Union

Namibia Agricultural Union

THOUGHT FOR THE WEEK: THE SUN DOES NOT SHINE FOR A FEW TREES AND FLOWERS, BUT FOR THE WIDE WORLD’S JOY – H W Beecher

DRFN
Energy Payback

Sahara's Abrupt Desertification Started By Changes In Earth's Orbit, Accelerated By Atmospheric And Vegetation Feedbacks

A conservation success story in Zambia's hinterland

Basic Income Studies

Bush to Solve all Problems in Africa!

Well, since I got your attention, let me just say I am not sure if there is enough intellectuals here to be able to help explore the issues in this post. It seems that many of the intellectuals have been "eliminated" here. Some back but others do not seem to come across the divide. Like that Mr. V seemed like an intelligent guy. Before he left he did say that the US was anti-intellectual. I was not sure about that and wanted a chance to discuss it more with him. oh well, on to Bush and what can be done...

Let me start with a couple of problems wrapped up in the article:Namibia: Policy to Create a Water Scarcity?

Ever since the government has started its reform of the rural water supply, water has become a scarce commodity, says Mukuya. Under the colonial South African administration, water was free for people in the communal areas. It was one of the many mechanisms the apartheid regime put in place to control the rural population.

Now communities are organised in Water Point Associations (WPAs), governed by committees, tasked with regulating and collecting the levies for the water supply, explains Mukuya, while he tightens the tap to make sure not a drop is lost.

"The government has stopped buying fuel for the pumps as part of the reform programme. They still come in to fix the pump when it breaks, but that will also stop eventually."

It is meant to lead to a paradigm shift. "Under the South Africans, water was used in a completely ecologically unsustainable manner", says Dr. Thomas Falk, author of a soon to be published study on the impact of the decentralisation of the rural water supply that affects one million Namibians.

Basically a neoclassical approach can help explain the shift from a resource that was free and thus overused to now trying to "get prices right" through the necessary "paradigm shift". Others may look at this trying to reduce the consumption of a precious resource, but who "pays for it" is a question that society must also answer. Namibia already has the highest Ginni index in the world and anything else to make it harder for the rural peasants will not necessarily be good for society.

Though the water situation in Namibia is believed to be extremely precarious - only the Sahara desert nations are more arid - astonishingly nobody knows exactly how little water there is.

"A quantitative analysis of available groundwater data is on the books, but will take three years to complete", says Greg Christelis, deputy director of Geohydrology at the Ministry of Agriculture, Water and Forestry. He says there is no data indicating that aquifers are depleting countrywide, but acknowledges that existing studies are confined to particular geological sites.

"All we know is that bush encroachment has a large effect on the groundwater table. In areas where bush is removed, recharge is much higher."

Bush encroachment is the most common form of land degradation in Namibia with roughly 26 million hectares of rangeland affected.

Some of the knowledge and technology could be provided by other countries. Of course there needs to be a sensitivity in developing their resources including human capital in problem solving. On the initiatives that the IMF has endeavored in helping with is coordination of international aide agencies. As this passage seems to show a lack of coordination:

An evaluation report on various donor projects by the European Commission in 2008 concluded: "There appears to be little co-operation between water supply and sanitation scheme planners and the providers of water; merely an assumption that water is, or will be, available."

OK, so we got to see how "Bush" creates more problems for the world and how it is destroying Namibia and adversely affecting the poorest of the poorest in Namibia. Let me start with an anecdotal story.

At the meeting, geo-hydrologist Frank Bockmuehl said bush encroachment had reached such alarming proportions, that "our rivers flow far less than two, three decades ago or in some cases don't flow at all any more".
"On our farm in the Outjo area, my grandmother used a lovely spring to water her extensive vegetable garden. She regularly supplied the school hostels in town with the vegetables. The spring dried up 18 years ago; the water table on the farm had dropped by 10 metres."

He then started a debushing exercise and cleared 300 ha recently.
"To my great surprise and joy, the water at the fountain came back a few months ago and has kept a steady flow," the geo-hydrologist said. "The water table rose."

Luckily, there seems to be a solution but maybe this is the area that I honestly need more information about. The quote above and our further discussion is from: Namibia to start bush-to-electricity project from invader-bush. I have other documents that talk about this process but hasn't the USA has tried some of these projects over at least the last 30 years? Even "the Bush" talked about switch grass a few years ago.

A new way of combating bush encroachment and restoring Namibia's savannah landscapes will start in September when a N$ 14 mm project to set up an independent power plant fed with invader bush will kick off. The “bush-to-electricity” project is run by the Desert Research Foundation of Namibia (DRFN), an energy expert at the organisation has announced.
"Other partners are the Namibia National Farmers' Union (NNFU) and the Namibia Agricultural Union (NAU)," Claus-Peter Hager told a meeting of charcoal producers at Otjiwarongo. "The Ministries of Environment and Tourism and Agriculture were also consulted. Funding of N$ 14 mm from the European Union over the next 24 months has been secured," Hager said.

Vast tracts of farmland cannot be used for farming because of encroachment by hardy shrubs and trees, generically known as invader bush. Studies indicate that about 26 mm hectares of agricultural land are infested, which is preventing the growth of useful grass species. It also results in soil compaction in the bush-encroached areas.
This has reduced Namibia's carrying capacity for livestock, resulting in reduced cattle numbers over the past 50 years -- from 2,5 mm in the commercial farming areas down to some 800,000 head of cattle. According to experts, the reduced availability of land for grazing causes economic losses of N$ 700 mm in the agricultural sector every year.

Another worrying factor is that the extensive root network -- up to 40 metres long -- of some invader bush species robs the soil of moisture. Soil also gets compacted, which prevents rain water from penetrating the soil and replenishing the underground water table. Hager told the meeting that usually, underground water was recharged with just 6 % of rain received.
"In bush-infested areas it is less than 1 %." Another adverse effect is that invader bush increases water run-off and erosion.

The project will be located in one of the areas with the highest density of invader bush -- around the north-central towns of Tsumeb, Otavi and Grootfontein. It wants to use farms that already harvest invader bush for charcoal production. The proximity of the areas to power lines, where the generated power can be fed into the national electricity grid, will also play a role.

Well, read the rest of the article since it is short and covers the issues quite succinctly.

What do you think? What other issues/problems should be discussed for this project?

Washington Consensus II

My last post entitled Washington Consensus I talked about Jacques J. Polak and his financial programing approach to financial stability. This simple financing accounting equations allowed the IMF to readily see how the economy was performing from data that was easily to gather and was more accurate than most data available especially during the 60s, 70s and 80s. These were incorporated into more broadly defined Structural Adjustment Programs (SAP).

Now turning toward development finance in the "Two-Gap Model:

The growth model used in the IFIs today, despite frequently expressed misgivings and caveats, is the Harrod 1939-Domar 1946 model as further developed by Chenery and Strout 1966 as the Two Gap Model. The model has two important features: (A) investment requirements to achieve a given growth rate are proportional to the growth rate by a constant known as the Incremental Capital Output Ratio (ICOR). (B) Aid requirements are given by the “Financing Gap” between the investment requirements and the financing available from the sum of private financing and domestic saving. I will call the Harrod-Domar-Chenery Two Gap Model the “Financing Gap Model” for short, because its most important use is to determine financing shortfalls. (A) and (B) imply the following testable propositions: (1) aid will go into investment one for one, and (2) there will be a fixed linear relationship between growth and investment in the short run. The constant of proportionality is one over the ICOR. Both predictions are about the short-run evolution of aid, investment, and growth; nothing in this paper addresses the long-run relationship between growth and investment or the long-run effectiveness of aid.The Ghost of Financing Gap-WB-PDF

Or in other words from class notes:

This is the assumption of a 'fixed capital-output ratio'; the amount of capital required for any increase in output would have to be supplied in fixed proportions. Labour was assumed to be plentiful and so not a growth constraint. (DF201-unit 1 page 6)

And another site that gives a nice break down of the Harrod-Domar Growth model and the two-gap model is located at: Economic Development Theory.
So basically lack of growth in LDCs was attributed to too low of investments deriving from lack of savings and lack of foreign capital.

The two constraints we started with can be translated into two kinds of 'gap'=the gap between investment and savings (demand and supply of capital) and the gap between import payments and export receipts. Foreign finance can fill both of these gaps, since it is both an inflow of foreign saving and of foreign exchange. The two-gap model has, therefore, been the basis for calculating the requirement for foreign financial inflows necessary to remove the constraints on reaching target growth levels.

Along with some of these issues, I also already brought up issues dealing with Financial Liberalization and the 'financial repression' model at DF201 Assignment I.

From UNCTAD #40:

Two different concepts of efficiency - cost efficiency and allocative efficiency - both need to be considered in this context. Cost efficiency is about the cost of financial intermediation, and may be measured by the spread between lending and deposit rates, allowing for the effects of such factors as required reserves. Allocative efficiency refers to the degree to which the allocation of financial resources among different sectors and activities reflects the social rate of return or, more broadly, serves to attain longer-term development objectives

The Quality Effect: Does Financial Liberalization Improve the Allocation of Capital?

This study documents evidence of a "quality effect" of financial liberalization on allocative efficiency, as measured by dispersion in Tobin's Q across firms. Based on a simple model, we predict that financial liberalization, by equalizing access to credit, reduces the variation in expected marginal returns. We test this prediction using a new financial liberalization index and firm-level data for five emerging markets: India, Jordan, Korea, Malaysia, and Thailand. We find strong evidence that financial liberalization, rather than financial deepening,
improves allocative efficiency.

So the answer at least in this study was yes financial liberalization is good for the economy.

Liberalization, Prudential Supervision, and Capital Requirements: The Policy Trade-Offs

This paper investigates the importance of the quality of prudential supervision during financial liberalization and its implications for the level of minimum capital requirements. The analysis is based on an extension of the theoretical model proposed by Hellmann, Murdock, and Stiglitz (2000). By now there is a consensus that financial liberalization, while necessary for financial development, needs to be handled with care. Furthermore, empirical studies have found poor prudential supervision to be an important factor behind more “bumpy” liberalizations. However, few theoretical papers address explicitly the role of prudential supervision during liberalization or highlight the trade-off between the quality of supervision and the level of minimum capital requirements. This paper finds that the level of capital requirements should be increased to compensate for poor supervision.

While there is an extensive literature on the benefits of financial liberalization,2 recent econometric studies have pointed out the importance of first strengthening prudential supervision: Lindgren, Garcia, and Saal (1996) have found that prudential regulation and supervision3 are weak in most countries that experienced financial crises; Williamson and Mahar (1998) have observed that the countries with high-quality supervision have experienced less costly financial crises; Demirgüç-Kunt and Detragiache (1998) have pointed out that the dangers of liberalization are more pronounced in countries where the institutions to support financial markets were less developed. Finally, Rossi (1999) has found that postliberalization financial fragility is exacerbated by weak supervision.

In practice, prudential supervision was often inadequate at the time recent liberalizations took place. In a series of papers, Caprio and Honohan4 have characterized the evolution of prudential supervision during financial liberalization. Prior to liberalization, there is often little need for prudential supervision: interest rates and credit allocation are under direct government control; the number of banks is small and competition is limited; public ownership of financial institutions is widespread. When liberalization occurs, bank competition and the sophistication of financial instruments both increase. Bank managers, often lacking experience in traditional banking, see the franchise value of their banks
deteriorate, while the opportunities for risky investments increase. To keep up with these developments, supervisory agencies need to redirect their efforts toward more
sophisticated, risk-based, supervision. But this takes time, in part because the number of supervisors, their skills, and the level of their remuneration may remain inadequate for a long period.5

A nice summary of research that shows financial liberalization is beneficial but needs to be done with proper safeguards which includes sequencing as a technique.

For an example of an example of sequencing of financial liberalization that resulted in success: CAPITAL ACCOUNT LIBERALISATION: THE INDIAN EXPERIENCE. It is a fairly long piece but has some important points about the liberalization process in India. It was interesting to note that India does not want their currency to be used for external transactions or as a reserve currency. It also limits dollarization of their citizens (transactions between citizens for debts). The article also has some good Appendixes on capital account liberalization including: Three proposals for “sand in the wheels” capital controls, and how they differ.
The article Capital Account Liberalization and the IMF is a bit old (98) but does point out some issues with the IMF:

But these developments, as the official community has acknowledged, raise important questions about the role of the IMF in financial liberalization. In September 1996, the Interim Committee (the committee of finance ministers and central bank governors that reviews IMF activities) requested the IMF Executive Board to analyze trends in international capital markets and examine possible changes to the IMF's Articles of Agreement so that the organization could better address the issues raised by the growth of international capital flows. In April 1997, the Interim Committee agreed that there would be benefits from amending the Articles to enable the IMF to promote the orderly liberalization of capital movements. It reiterated this position in a statement issued at the Annual Meetings of the World Bank and the IMF in Hong Kong SAR the following September.

This idea that the IMF should actively promote the liberalization of capital flows has not gone unchallenged. In the wake of the Asian crisis, which has seen sharp reversals of capital flows for a number of countries, officials and academics alike have questioned how desirable capital account liberalization is and whether it is advisable to vest the IMF with responsibility for promoting the orderly liberalization of capital flows.

It is important to note that even in 98 there was discussion in the IMF of sequencing.

Countries in which these problems are severe but that suddenly and fully open the capital account run the risk of incurring a serious crisis. This implies that countries should liberalize the capital account gradually, at the same time as they make progress in eliminating these distortions.

Links:
Fiscal Rules

The Interest Elasticity of Savings in Developing Countries: The Existing Evidence

The Interest Elasticity of Savings in Developing Countries: The Existing Evidence by Alberto Giovannini, Massachusetts Institute of Technology, 1983.

Fry and Mason in a variety of studies from the 70s covering data mostly from the 60s shows:

He finds that an increase in the real rate of interest 1% would raise the ratio of domestic savings to income by 1.6 to 2.1 tenths of 1%, asymptotically from 1.8 to 2.2 tenths of 1%.

3. Concluding Remarks

Serious doubts are cast on the view that interest elasticity of savings is significantly positive and easy to detect in developing countries.
...
We discuss what we think are the most serious drawbacks in the list below.
1. The first problem, and certainly the hardest to solve, is the quality and homogeneity of the data.
2. The savings variable used in the regressions is aggregate domestic savings: households and corporate savings plus the government budget surplus. [Yes treating the different sectors as homogeneous is a problem when trying to look at savings from the general households]
3. Absence of any tax considerations. ...cases like Singapore, the marginal capital income tax rate has varied significantly in the 1970s.
4. The exclusion of relevant variable from the regressions reported is suggested by the magnitude of the lagged dependent variable.

Notes:
Life Cycle Theory?

DF201 Exam| Question 2

#2. Why may financial liberalization policy and stabilization policy be incompatible? Discuss with respect to Chile 1973-83.

...

The immediate macroeconomic effects of financial liberalization may not be favourable to external adjustment for two reasons that are commonly overlooked. First, by raising costs, higher interest rates adversely affect the supply side, especially when the corporate sector is highly indebted. Second, and more important, imperfections in domestic goods markets can produce perverse results.

Especially with regard to monopolistic powers in the market that can pass on prices in the market, thus the increase in interest rates may therefore act like a currency appreciation, and thus discouraging investment in exports and import substitutes.


"Stabilization with Liberalization: an Evaluation of Ten Years of Chile's Experiment with Free Market Policies, 1973-1983" Sebastian Edwards (PDF)

"The International Capital Market and Economic Liberalization in LDCs" Ronald McKinnon for Institute of Developing Economies


And since we started talking about this subject let me include some of the comments here:

Growth of Monetary Aggregates, Chile

Annual Inflation, Chile

Annual Inflation Rate, Chile 1985-2000

Yeah, who'd have thought a recession was in the cards?

The IMF and Chile, A Parting of Ways?
It does not seem so since after 24 years they are still members of the IMF.

In effect, the revaluation of the peso tended to generate an excess supply in the nontraded goods sector at a time when what was needed was a reduction in the excess supply already created by the decline in the rate of growth of domestic credit. In addition, the subsequent use of the exchange rate as the major stabilization tool resulted in an important real appreciation of the peso and a significant loss in the competitiveness of the domestic industries. ...the adoption of the fixed exchange rate-with inflexible real wages-in June of 1979, as the final step of stabilization process, was a serious policy mistake, which precipitated the 1982-9183 recession.

DF201|Question 3|Chile 73-83

#3. Can the widespread 'financial distress' among banks in the 1980s be explained satisfactorily by 'market failure' within the banking sector? Discuss with respect to Chile or Argentina.

First we need to look at the Financial Distress and "Market Failures" as opposed to Financial Distress arising from the business cycle. This identifies 'market failures' arising within the credit market itself which can be described as a microeconomic approach.

In the Stiglitz-Weiss model, very high interest rates increased the perceived riskiness of returns on loans, reducing expected returns for banks and inhibiting lending at very high rates. This produced an optimum interest rate below the maximum possible.

Credit rationing would avoid the market failures of moral hazard and of adverse selection to banks perceived as less risky.

...there may be circumstances where interest rates for some reason rise above the banks' optimum rate and, at these very hight interest rates, no new equilibrium rate can be found.

'Perverse' Credit Allocation and Loan Concentration
Credit rationing that occurs at very high interest rates creates a perversion by lending to existing borrowers that already have non-performing loans-which then is defined as a 'mis-allocation' of credit allocation. The banks may be afraid that the lender may go bankrupt and thus may lose any chance of getting their principle back.

It results in a phenomenon known as 'loan concentration' among existing borrowers, which goes against the principle of risk diversification. The 'market failure' in question is that of adverse selection, as the mix of borrowers becomes worse at high interest rates.

Business may also create moral hazards by allocating new funds for highly speculative (gambling) investments based on need to create even hight rates of return to pay back the initial loan as well as the secondary, and all in a way to avoid bankruptcy. Prisoners dilemma.

Lastly, the increased perceptions of the riskiness of investments brought about by the difficulties of existing borrowers cold cause the banks to over-estimate the riskiness of projects of prospective new clients who approach them for a loan. This again increase loan concentration and denies credit to some 'worthy' loan applications.

It seems that this implies that banks are judging the macroeconomics of the economy based on a very small sample of their clients.

These kinds of market failures can be exacerbated by the 'interlocking' ownership of directorships of banks and the productive enterprises that borrow from them. If there are special links or relationships which lead banks to favour certain borrowers, both adverse selection and moral hazard are likely to increase in difficult times.

Before discussing the question with regard to Chile let me briefly cover the 'financial distress' arising from the Business Cycles and Money Supply.
The Business Cycles can easily be described as 'self-perpetuating philosophies'. If the business climate is good then everyone assumes that it will continue forever. Unfortunately there are not enough bears in the market when things are good and not enough Bulls when things are bad. This ingrained beliefs creates expectations that overshoot the long term full employment or industrial capacity equilibrium.

Financial Distress and Money Supply

If the monetary authorities tighten the money supply too much, banks run short of the necessary reserves and have to sell of their assets in order to boost their reserve positions.
...
...financial distress in the 1980s was not associated with monetary contraction.

Distress Borrowing

Many of the symptons fo financial distress point to 'distress borrowing', that is, an inelastic credit demand from borrowers attempting to stay liquid though unable to service existing loans. Such borrowing is also known as 'artificial' or 'false' credit demand because the demand does not relate to new economic activity.
...
"The signs for the interest rate and inflation coefficients are the oppposite of what would normally be expected: the estimated coefficients for loans rises in real terms when the real cost of credit goes up.

4 Financial Liberalisation Policy and Financial Distress (Unit 3 Page 18-19)***

You may be puzzled by the fact that the World Bank reading here appears to blame both financially repressive policies, such as selective directed credits to priority sectors, and also financial liberalisation policy.

5.2 Oligopoly and a Bank Holding Company Structure in Chile
From Galbis paper:

The Chilean experience is especially revealing because of the purity of the deregulation model that was followed and the rather serious difficulties that the system generated in the course of time. The Chilean financial reform was initiated in May 1974 with a view to freeing all interest rates, denationalizing the banks, and opening the financial system to competition by foreign institutions. Simultaneously, the authorities focused their policies on pursuing basic stabilization objectives-the reduction of inflation and the achievement of balance of payments equilibrium-starting from an initial position of hyper-inflation (around 500 per cent) and entrenched inflationary expectations.

For a long period of time, the achievements of these policies appeared to be considerable. Since interest rates were freed in 1975, deposit interest rates stayed at highly positive real levels, facilitating thereby a rapid real growth of the financial sector. Previously nationalized banks were quickly returned to private ownership and control and in order to moderate their market power, were increasingly subject to a degree of competition from foreign banks. At the same time, with the reduction in the rate of growth of domestic credit and inflation (from over 500 percent in 1975 to 29 percent in 1979) it became possible to eventually fix the exchange rate with respect to the U.S. dollar in July 1979, thereby making growth of monetary aggregates endogenously determined by money demand responses. In this connection, the authorities also began to remove capital inflow controls in order to integrate the domestic financial market with external markets and increase domestic competition.

Paradoxically, measures designed to increase competition in financial markets had only limited effect on reducing the high interest rate levels and spreads prevailing in the Chilean domestic financial markets. With the benefit of hindsight, it appears that the restoration of the bank holding company structure that resulted from the de-nationalization policies, together with the unbounded pressures of domestic and foreign competition, created an unrestrained drive on the part of the groups for market shares in order to finance the group's projects. The maintenance of abnormally high real interest rates contributed to the eventual illiquidity and bankruptcy of large segments of the Chilean business sector. With widespread bankruptcy in the business sector component of the bank holding companies, bad and doubtful loans and arrear accumulated in the financial sector, and created an unprecedented financial sector crisis (1982.83). A number of banks and other institutions had to be liquidated and the remaining ones had to be supported with central bank funds.

The collapse of the Chilean economy was also participated by rapid real wage increases and the overvaluation of the peso. However, it is important to realize that these macroeconomic disturbances which contributed to the deteriorating position of the nonfinancial firms, should have led, under competitive conditions, to a decline in the demand for the credit on the part of the firms, and also to a more selective approach in the supply of credit by financial institutions, because of the higher risks involved in lending during a cyclical downturn. In these circumstances, the rate of interest should have tended to decrease especially after the authorities abolished all capital inflow restrictions, a measure which was directly intended to increase the supply of credit and thus to reduce the domestic rates of interest to the international level. Finally, it is possible that, despite the success already achieved in reducing inflation to a very low level and the maintenance of extremely tight fiscal and monetary policies, market participants might have continued to hold relatively high inflationary expectations in relation to actual inflation during the post-1980 period, just as they had during the period until 1980, But, as Mathieson has pointed out, this behavior was only consistent with an interest-inelastic demand for bank loans on the part of nonfinacial sector portfolio owners and a relatively slow adjustment on the part of banks towards increasing the real supply of bank loans. In turn, these characteristics of the credit market are consistent with the pressure generated by the bank holding company groups to attract aggressively financial resources to finance nonfinancial firms of their respective groups.

Some more important considerations are "Insider Transactions" and "Interlocking Directorates".

The conclusion that the problem of financial repression in LDCs (or alternatively instability) would not necessarily go away by lifting existing regulation means that different and better regulations, unleashing new market forces must be relied upon to achieve needed corrections. Banking concentration and the bank holding company structure are realities which, however unsettling, cannot easily be altered. Indeed, the attempt to a free market policy by eliminating those structural obstacles to market competition would involve the seeming contradiction of attempting to free markets by means of more policy decisions and regulations. Of course the nature of these regulations would be of the market-making type as against the market-destroying type.

References:
"Stabilization with Liberalization: an Evaluation of Ten Years of Chile's Experiment with Free Market Policies, 1973-1983" Sebastian Edwards (PDF)

Galbis, V. (1986) 'Financial Sector Liberalisation under Oligopolistic Conditions and with a Bank Holding Company Structure', Savings and Development, Vol X No. 2

The World Bank 1993 The East Asian Miracle

The World Bank (1989) 'Financial Systems in Distress', World Bank Development Report, Ch 7 pp 70-83.

[url=http://www-wds.worldbank.org/external/default/main?pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&theSitePK=523679&entityID=000009265_3961214175618&searchMenuPK=64187283&theSitePK=523679]Bank restructuring : lessons from the 1980s-World Bank[/url]

Part 1|DF201|Question 5

A Clear understanding of the rural interest rate formation is at the heart of a successful rural credit and finance policy. Discuss.

Factors and Aspects of Rural Credit
1. Many peasant households live an insecure and precarious economic life. Thus it creates emergency aspects of borrowing that thus making interest rates inelastic on the demand side.

2. Thus a large percentage of loans are of present consumption and may be even due to the lack of investment opportunities. Lack of information may also lead to this market failure. Outreach programs may increase the knowledge base to create an enterprise mentality.

3. Cyclical nature of the farming. As crop harvest tends to be seasonal then liquid savings will also rise and fall as the harvest season is occurring. And this can be even compounded by community having this same cyclical manner-especially in regions of distinct seasons.

4. Lending tends to be short-term and less than a year. This tends to create higher interest rates since what are the holders of the capital to do with the assets during the other parts of the year?

5. And since the whole community will be facing the same general production and consumption factors then all in the community may have booms or busts that can stretch the savings pretty tight.

6. Informal Sector is composed of two sub-sectors: Commercial (people with excess liquidity-local merchants, landlords, input traders, crop buyers, wealthy individuals and professional money lenders) and Non-Commercial (Friends and Family-no interest on reciprocal basis).

7. Much criticism of professional money lenders for their exorbitant interest rates. But the fact that they remain around must signify some benefit of such arrangements. Some positive factors of non-institutional sources of rural credit are: proximity to and more intimate knowledge of borrowers (lower default risks); minimal protocol; easy access to and speed of operations; repayment flexibility; lower transaction costs and better rates of loan recovery, etc.

3.2 The Formal Sector
Commercial Banks even if mandated to build offices in rural areas have lack of penetration to the landless families and small peasant households. And the effectiveness in extending rural credit is widely disputed.

State Agriculture Banks have come under severe criticism and scrutiny as in:
1. Their large commercial farmer bias-less costly to administer and manage.
2. Their over-dependence on state resources.
3. The one way nature of their operations from the state to the rural sector-as opposed to intermediaries between rural savers and borrowers. But considering the cyclical nature of savings it may not even possible to do this.
4. Their susceptibility to political manipulation and personal favoritism.
5. Their high transaction costs and low recovery rates.

Cooperatives have many advantages over s-such as group lending resulting in lower transaction costs and better access to small farmers, for example. Despite this, however, the building up of effective cooperative movements has been fraught with difficulties.

1. lack of management expertise
2. political manipulation
3. insufficient supervision and auditing
4. top-down structures of credit delivery
5. low membership involvement and participation
6. poor loan recovery rates
Types: users' associations, credit unions, informal savings clubs, and Rotating Savings and Credit Associations (ROSCAs)!

Part 2|DF201|Question 5

4 The Determination of Rural Interest Rates
The four components of interest rates specified by Bottomley are:
1. the opportunity cost of capital (cyclical nature of loans)
2. the administration premium
3. the risk premium
4. monopoly profit (are there barriers to entry-ie no other capital is available?)

The summary of costs of Moneylender and Urban Banks costs.
1. Basic rate is 15% for ML-I assume that the opportunity costs are quite high vs. liquid banks that can obtain other revenues to have 5% opportunity costs. Also as noted above that seasonal nature of the ML then his capital may be idle for longer periods.
2. Administrative costs start are 1/2 what it is for Urban for all loan sizes.
3. Default is highly in favor of ML at low size loans but approaching 1000 it goes to Urban Banks.
4. Overall risk premium is much lower at smaller loan sizes for ML but goes to Urban at higher size loans. Urban banks do get to Average Risk as compared to ML that may not be able to diversify risk as easily.

Risk Premium= (assumed default rate*(principle + lending costs)/principal actually repaid

Causes of Default:
1. Loan size: the more a man borrows, the larger will be the probability of his being unable to repay. I am not sure nominal size matters, loan size to net worth. But some of the other factors are listed below.
2. Borrower net income: there will often be a positive relationship between net income and levels of payment but the correlation is not always as great as one might expect.
3. Debt-equity ratio.
4. Value of collateral.
5. Defaulters brought to court. Lack of an adequate legal system of property rights.
6. Income variance. Thus an inelastic demand curve based on consumption needs instead of basic investments.
7. Administrative costs of collection.
8. Real rate of interest. If negative-subsidization then defaults should be low since why bite the hand that feeds you (free gifts). Which is a wealth transfer.
9. Type of lender. The closer the relationship from lender to borrower is the more likely to repay, for example Cooperatives before urban banks.

It is also important to understand that even if borrowers have the ability to repay there may also be the factor of willingness to pay as we saw above.

References:
Bottomley, Anthony (1975) "Interest Rate Determination in Underdeveloped Rural Areas", Reprinted in Von Pischke (1983)

Part 5|DF201|Q 5 Summary

Unit 6.2.1 The Traditional Rural Credit Policy Re-examined
Main Assumptions
1. Credit was considered to be a major constraint for farmers.
2. The existing credit shortages led to high interest rates on loans.
3. Concessionary institutional loan arrangements were needed in order to break or counteract the vicious circle of poverty and indebtedness.
4. The equity considerations of high interest rates were reinforced by their likely implications for borrowing decisions.
5. The limited savings capacities of poor rural households reinforced the case for credit intervention so as to relieve the financial constraint in rural economic development.
6. Rather than wait for economic activity to expand the demand for financial services, 'supply-led' strategies were needed to stimulate such activities and to cater for the credit 'needs' of the rural sector.
7. Formal financial institutions were seen to be the forefront of these strategies to ration and direct funds to target groups and activities, and to enforce strict loan supervision.
And then for Policies:
1. Targeted credit programs.
2. The instruments used loan guarantees, concessionary lines of credit and subsidized interest rates to end borrowers.
3. Little attention paid to mobilizing rural savings.
4. Relying almost exclusively on government and donor funds.
5. Distribute loans quickly and to reward staff on the basis of loans made (rahter than on results achieved or other indicators such as loan recovery or returns on investment.
6. State intervention in the agricultural sector.

D.H. Penney:
...but the resources used in credit programs rarely give a satisfactory profit compared with the returns from investments in agricultural research and extension or in social capital (such as roads).

It is not difficult to discover whether farmers need additional capital...simply ascertain whether farmers can afford fertilizer, new tools, and so on. ...many peasant farmers can afford to finance some investments from their own resources.

But even if some is being purchased is it fairly being distributed? Not to say that we could not expect some marginal farmers to choose different lines of work.

Why are credit programs advocated an pursued so vigorously?
1. Governments and economists are unaware of the attitiudes of peasant farmers toward debt and credit.
2. They forget that credit does not necessarily represent capital. Capital is not created merely by increasing the supply of money.
3. ...they fail to realize that the growth of such institutions is as much a result of as a cause of development.
4. do not recognize the powerful economic reasons for the high nominal rates of interest charged in so-called unorganized money markets.

A Rural Financial Market (RFM) consists of relationships between buyers and sellers of financial assets who are active in rurla economies.

DF201|Q6 (Howard White)| P2

#6. Discuss Howard White's view that the aid literature has failed to advance our understanding of the macroeconomics of aid because it neglects the mechanisms by which aid may affect savings.

Critiques of Dual Gap Theory:
First, it is a very sticky model, with no substitution in production (either between factors to reliever capital shortage or to reallocate factors between sectors).
Second, the underlying Harrod-Domar model is too simplistic a representation of the growth process: many other factor besides capital accumulation affect growth. (Like human capital.)
Finally, the two gap model does not incorporate any mechanisms by which aid may not be matched by one-for-one increases in investment, government development or foreign exchange.

The Savings Debate:
...an anticipated aid inflow will be treated as an increase in income and so, unless the marginal propensity to save is one, allocated between both savings and consumption.
1. Griffen's Presentation of the Negative Impact of Aid on Savings.

Four adverse effects on foreign aid are postulated:
1. lowering domestic savings
2. distorting the composition of investment
3. frustrating the emergence of an indigenous entrepreneurial class
4. inhibiting institutional reform

Four sets of issues are critically analyzed:
1. whether domestic savings should be defined as being determined by income alone
2. the secondary (feedback) effects of aid via future increases in income
3. fungibility of aid between consumption and investment
4. the centrality of savings in the determination of growth potential

...it may be argued that aid inflows reflect low savings rates in developing countries (rather than vice versa).
...the share of exports in GNP is found to provide a better explanation of changes in the savings rate compared to aid.

Harrod-Domar Growth Model:
g=s/c
g: is growth (dY/Y)
s: the net investment or savings ratio (dK/Y)
c: incremental capital-output ratio or ICOR (dK/dY) the quantity of capital needed for attaining a one unit increase in output, thus:
dY/Y=(dK/Y)*(dK/dY)

Phases of Growth in Chenery and Strout's Dual Gap Model:
Phase-Growth Constraint----Foreign Capital Determined by
IA----Ability to invest----Savings Gap
IB----Ability to invest----Trade Gap
II----Growth target--------Savings Gap
III---Growth Target--------Trade Gap

The point may be clarified by using the leontief fixed-coefficients production function, as done by McKinnon [1964]
Y=min{aK(d),bK(m))
K(d) is domestically produced capital goods
K(m) imported capital goods
a and b are the output capital ratios for both d and m respectively.

...aid...will cause indirect effects on savings that will be difficult to isolate, and their inclusion on the right hand side is inappropriate.
...aid will affect savings including:
1. there will be a relationship between aid and the savings rate.
2. aid will affect the interest rate
3. aid alters income distribution in ways that are imperfectly understood.
4. aid will affect the level of exports.
5. public savings will vary directly according to how government responds to changes to its income from aid.
...
It is possible that high aid inflows per capita and low average savings propensities are both caused by some third, exogenous, factor...
The problem of simultaneity.
Studies have found aid allocation to be more strongly influenced by donor interests than by recipient need.

Conclusion:
The radical position that aid displaces savings, most strongly associated with the name of Keith Griffin, was shown to have a weak theoretical foundation. It is therefore not surprising that the empirical data do not, contrary to the claims of some, support their arguments.

...three channels for aid impact on the growth of output:
direct impact
crowding out
crowding in
Dennison's study for 1950-62 found that increases in capital stock accounted for only 25% of growth.
Joshi and Findlay's Critique of the Dual Gap Model:
the impossibility of substituting domestic for imported inputs in to the production of the investment good sector. The assumption of rigidly fixed technical coefficients may be valid in each particular line of investment, but the overall proportions can be changed by varying the composition of investment so the model assumes that not only techniques but also demand patterns are rigidly determined.
Edwards on Real Exchange Rate (RER)
aid is a transfer from the rest of the world, and as such it will generate an equilibrium real appreciation. That is, foreign aid-perhaps paradoxically-will reduce the degree of international competitiveness in the recipient country, making the country's exports less competitive internationally.
Notes:
Bacha's three gap model [1990]

DF201|Q7|Fishlow

'An effective debt strategy is part of an overall development strategy' (Fishlow). Discuss.

The Baker Plan (Structural change, increase reliance on the private sector.):
1. Tax Labor Market
2. Financial Reforms
3. Trade Liberalization

One (differs from other plans) is the greater emphasis upon fundamental, structural change in developing countries and a prescription of growth, tather than adjustment, strategy. The other is the direct involvement of the US government, rather than the IMF, in inducing greater finance.

Banks have taken their profits in the form of commissions and fees rather than in interest income. (I.E. "Securitization" and this developed into a secondary market.)

To close the financing gap requires three complementary actions. The first is an increase in official flows to restore an appropriate public-private balance in development finance that was discarded in the 1970s. The second is a reduction in the disproportion between outflows to service private sector debt and voluntary inflows. The third is a domestic development strategy that emphasizes not only export growth but also efficient import substitution as a means of conserving foreign exchange.

Baker Plan needs these three amendments:
1. They are simply not large enough.
2. narrow balance of payments approach to finance.
3. assumption that the principal source of the debt problem is the inadequate macroeconomic policies of developing countries: the balance of payments deficits were caused by excessive public sector expansion and corresponding internal expenditure.
Three types of policy lessons:
1. appropriate size of the debt
2. to its management
3. the need for development strategies that better integrate financial openness.

???
2. to reduce the uncertainty inherent in exchange rate variability, borrowing in different currencies should correspond more closely ot the flows of foreign exchange earnings.
3. maturity mismatches should be reduced as much as possible
4. interest rates for bank borrowing should be specified in terms of the bank cost of resources (LIBOR?).
5. more information exchange among debtor countries.
6. (final) an effective debt strategy is part of an overall development strategy.

D=M-X+iD Foreign Exchange Gap
D=I-S+iD Saving Gap
D=G-T+iD Public Sector Gap
i: average interest rate
D: debt stock outstanding
Thus Fishlow is based on the three-gap model.

Even the frequently cited rule "export growth must exceed the rate of interest for countries to be able to pay" depends on the presumption that countries are unwilling to accept continuing export surpluses.

References:
Fishlow, A. (1988) 'External Borrowing and Debt Management' Chapter 9 in R Dornbusch and F. Leslie C.H. Helmers 'The Open Economy', Oxford University Press for the World Bank, pp187-222

DEBT AND THE PRSP CONDITIONALITY: THE KENYA CASE

Duplicat

FE201|Q9

What role does the IMF play in low-income countries? Discuss with reference to country examples.

The title link has a good review of this question for the final also but let me make a couple of notes here.

Steps in the process for LICs to get help.
1. Creation of Poverty Reduction Strategy (PRS) which was defined as PEAP (Poverty Eradication Action Plan) in Uganda.
2. Submitting the Poverty Reduction Strategy Paper (PRSP) or 'Interim PRSP' as a satisfactory initial step for access to the...
3. Poverty Reduction Growth Facility (PRGF). Which is the concessional loans that the IMF lends to LIC (Low Income Countries).
4. Then after showing a commitment to maintaining a stable economy with an emphasis on poverty reduction they become eligible for Heavily Indebted Poor Country that were obliged to wait 3 years. Now with the 'Enhanced' HIPC the can debt relief by the concept of 'floating Completion Points'. This of course now depends on how quickly the country can formulate its won poverty reduction strategy.
5. HIPC initiative was not to eliminate debt by to reduce it to a manageable level of 150% of the LICs yearly exports or 250% of its government revenue. The concern was of creating a moral hazard if complete forgiveness occurred.
6. Since the class was produced it looks that Policy Support Instrument (PSI) has been added to the IMFs list of Technical Assistance (TA) that it provides LICs.

“PSIs are designed to address the needs of low-income members that may not need Fund financial assistance, but seek Fund endorsement and assessment of their economic policies. A PSI will be available only upon request of a member and will add to the toolkit of instruments from which low-income countries can choose their desired form of engagement with the Fund.”

Types of Technical Assistance (TA)
Monetary and Exchange Affairs Department(MAE)
Fiscal Affairs Department
Policy Development and Review Department
Statistics Department
Legal Department
Treasurer's Department
Bureau of Computing Services



James Levinsohn 'The Poverty Reduction Strategy Approach: Good Marketing or Good Policy?'

Debt and The PRSP Conditionality: The case for Kenya

Kenya’s problems are typical; when the economy was growing fast, it was possible for the government to fund new priorities while retaining the old ones but once growth stagnated and donor funding petered out, resource allocation became fixed and priorities failed to change in line with circumstances
...
Kenya received nineteen structural adjustment loans during the reform period.
...
Under the new HIPC initiative it is expected that debt to exports ratio in present value terms will be reduced to a sustainable level of not more than 150 percent of exports reduced from 250% under the original initiative.
...
Debt service to [government] revenue is projected to fall from 49% to 42% while debt to GDP ratio is projected to decline from 71% to 58%.
...
The poverty reduction strategy was introduced following the recognition that growth is necessary but not sufficient for poverty reduction. Therefore the need to put in place measures targeted to poverty reduction. The Interim PRSP had no pro-poor growth strategy and that this proved to be a major weakness. In order to address this weakness, the government commissioned work on Pro-Poor Growth Strategy.
...
Hanmer and Naschold (2000) as quoted in Ndung’u et al (forthcoming) conclude that
elasticity of poverty reduction with respect to growth is around 0.3 in highly unequal economies like Kenya.
...
The National Poverty Eradication Plan (NPEP) outlines the goal as poverty reduction by 50% by the year 2015.[...] Using this elasticity in the table above, it indicates that the economy needs to grow at 8% if the NPEP goal is to be achieved in the next fifteen years.
...
Another shortcoming in the introduction of the process in Kenya is that some useful
stages were left out of the budget process; the Project Investment Appraisal, (PIP), for instance has been omitted from the budget process. The PIP was useful in prioritisation of capital projects for inclusion in the budget. The interfacing of the development plan and the PRSP/MTEF is also not clear. The PER, which is useful in identifying implementation constraints, has not been undertaken for three years.
...
Investigating the growth-poverty relationship, Dollar and Kraay (2000) found standard
macro-pro growth policies—reducing government consumption, stabilizing inflation,
macro stability, openness to trade and secure property rights—to be good for the poor. They conclude that such policies raise mean incomes without significant adverse effect on the distribution of income.

DF201|Assignment I

Development Finance: Principles & Experience was my hardest class so far. But now that I am again reviewing notes on Two-Gap model and Financial Repression, I thought I would post my assignment here.

Assignment One
Discuss by means of appropriate theoretical arguments and relevant examples, the links between financial reforms, stabilisation and regulation.
Before I begin to answer this question directly, I would like to shortly explain why the concepts of financial reforms, stabilization and regulation are important. Financial reforms most often started with “Financial Liberalization”. The purpose of financial liberalization in a nutshell is to increase the efficiency of investment and the efficiency of credit allocation. As financial markets are freed to charge the prevailing market rate determined by supply and demand, this reduces the economic dead weight.
But as we learned financial liberalization involved more than simply interest rate rises alone. The budget deficit, money supply and thusly inflation were all affected by financial liberalization which lead to stabilization concerns. The ideals of stabilization are to maintain relatively low but real rates of interest, constant and consistent growth of the money supply (M1, M2 or any other gage), low unemployment rates, consistent and steady economic growth and deficits that would not crowd out private investment without excessive monetization of debts.
Thusly, “There are also reasons for suspecting that liberalization itself may increase instability in the credit market, especially where it is done by means of sudden and extensive deregulation.” (Unit 3 Page 18) This shows that regulation is still needed to overcome either market inefficiencies or the basic lack of information on any and all parties. While deregulation can cause stabilization problems, new regulations and policies may not react in time or appropriately since new institutions with short histories may not know how to implement regulations under the new regime.
Let us look at the steps of financial liberalization while having an eye toward effects on stabilization and what regulators did and did not do to solve or make worse the general goals of financial liberalization. Before the advent of liberalization the simple model was largely known as ‘financial repression’ model. Under the repression model the government implemented regulations that not only restricted interest rate ceilings (deposits and loans) but also the borrowers were segmented based on which industry was considered more important by the government. This lead to a higher variance of interest rates for those who were favored and those were not, the latter having to finance through alternative means at much higher rates usually through secondary intermediaries. But much of the finance of developing countries was self financed. Though not definite, financial regression may actually lead to higher inflation. The reasoning goes that under financial regression the government does not have a market so that the private market may not be able absorb the government debt. This leads to monetized debt and thusly an increase in the monetary base and money supply through the money multiplier and lastly an increase of inflation.
The first effect of financial liberalization assumptions is a raise in real interest rates and nominal rates if stabilization is maintained, but this will only occur if there is some degree of competition. In an oligopoly, competition is limited and the banking group may favor low and even negative real rates of interest for savers. It also may not need to raise interest rates for the lenders because of symbiotic relationships.
Next higher real interest rates will increase the real savings rate. But according to microeconomics this may or may not be the case. If savers negative income affect of rising interest rates is greater than the substitution effect (as in a Giffen good) then they will actually save less. Unlike other goods, savings will increase net worth, so that a rise in interest rates can increase short time consumption as well as long term. Although the text believes that it is possible for “savers in developing countries are not behaving as utility-maximisers” (Unit 1 page 12). I believe that the basic assumption of consumers always being utility-maximisers is true and that in this case the maximum utility for these savers is to equalize income from savings over time derived. And on the borrowers side facing an inelastic demand curve may not decrease consumption or reduce negative savings to offset the increase in consumption of savers. Two possible explanations for inelastic demand curves are expenses related to health and education. Both would be time sensitive decisions and may not matter what the interest rate is in the short term. As Giovannini stated “Serious doubts are cast on the view that the interest elasticity of savings is significantly positive and easy to detect in developing countries.”(Volume 1, Page 59)
A side point I want to make is: when interest rates rise this will lead some creditors to become debtors. But considering that the transaction cost whether on the supply side or the demand side is greater than zero then the slope of the interest rate line (-(1+r))should be ‘kinked’.
Higher real interest rates will lead to an improved quality of investment by weeding out the projects that are not economically efficient investments. But lack of information at least asymmetrical and knowledge about risks involved in a project (including macroeconomic factors) may create conditions of lending to already existing customers (larger and older firms) and not to new ventures. This link may also be compromised if the banking structure is dominated by an oligopoly or monopolistic behaviors. Even if at no time does a ‘price war’ (oligopolistic war) breaks out causing stabilization problems, the oligopoly will create monopoly rents signified by widening interest rate spread. (It would have been fun to live in Canada in 1972!) These rents do not necessarily lead to “high accounting (reported) profits” according to Galbis on page 80 in notes. The rents are either used to “pad the nest” or to give subsidized loans to bank holding affiliates and owners. Even if the owners of the bank holding company and the borrowers are not directly related, there still may be informal ties that lead to collusion. Some of the problems of the Saving and Loan fiasco in the USA could be attributed to members of congress also having an interest in the S&Ls. Thusly people that should oversee the regulation process may have a vested interest in the outcome of regulation. Galbis points out that “In a number of countries one can observe symbiotic relationship between the groups and the political machinery” (Volume 2, page 88). The spread in interest rates also (in addition to excluding non-group) leads to income redistribution from lower to higher income groups. Since economic stability also rests on political stability this redistribution over the long run may cause instability.
Now that I have exhausted all the reasons that financial liberalization could not work for the intended purposes, let me assume that interest rates do increase and savings follow, since we know that it did have changes to many economies. The economic order of events that lead to many stability problems were as followed: (1) Interest rates rose for borrowers that previously had preferential rates. (2) These industries and businesses became distressed and were no longer able to make interest payments on their debt. (3) Banks not wanting the borrowers to go under may make distressed loans. (4) Eventually these loans made the banks themselves financially distressed. (5)These problems can remain hidden until liquidity may hamper the banks ability to create new loans. (6) Banks would often raise interest on deposits to try and increase amount available to lenders and to create some liquidity. (7) But these also lead to ‘riskier’ investments to recover the higher deposit rates. (8) Eventually it becomes completely insolvent whether caused by a run on the bank or not. (9) This may cause either other banks to have runs on them also or just a gradual liquidity problem of other banks. “One troubled bank’s customers may not be able to repay debts to the customers of another bank.” (Unit 3, Page 9) (10) The central bank must either close banks or risk shrinkage of the banking system or bail out the financially distressed banks. (11) Stabilization policies of the government are in jeopardy that is caused by monetizing the debts of the banking system and thusly the money supply increases. (12) Even unemployment in the banking sector can lead to instability policies not being effective.
It must be noted that the initial cause of the financial distress may be caused outside the banking system. This can be caused by deteriorating macroeconomic conditions, policy changes, and credit market structure and behavior.
Now let us look at ways that regulation needs to change or adapt after financial liberalization while still maintaining stability. The central bank did have mechanisms for adequate supervision in place but in many times failed to adequately implement such actions due to lack of knowledge or the will to carry out such policies.
One consideration to make is to make sure that competition is increased and not decreased in conversion from financial repression to financial liberalization. One way is allowing foreign banks to compete but with restrictions on how quickly they can enter the market. Though hard to implement it may be worth to separate the decision making of bank loans from the investment side. Banks just like business can tend to over imagine the business cycle will always be up. Even the USA was caught in the dot-com bubble. Though not the best solution at all times but breaking up the holding bank structure may be necessary to increase competition.
Ronald McKinnon response to failings of the financial liberalization policy was to state that sequencing of events is more important than sudden and drastic changes to the system through extensive deregulation. With this I think that the time frame of liberalization is very important. The US and UK economies have taken 100’s of years to develop and we expect LDCs to do it in 1 year? If McKinnon had an exact sequence of events of financial reform, I would have loved to seen it. As far as I see his main points were that: financial liberalization should be done in an environment without liberalization of other segments such as trade or capital markets. Secondly, keep short term indebtedness out and allow long term capital inflow. Thirdly, slow down capital inflows even if coming from the World Bank, and do not bribe the countries into liberalization. Fourthly, fiscal policy should be brought under control and it is best if there is a fiscal surplus before financial liberalization is begun. Lastly the IMF and World Bank should still play supportive roles in developing countries by providing technical assistance and manage international crisis in the short term.
According to Arnaudo and Conejero the use of early warning indicators could have been used to predict bank failures with the necessary data that had already been available. Duenas and Feldman had six indicators based on financial statements that could have predicted the problem of the banking system. Table 12 (Volume 2, Page 47) clearly shows that problem loans were increasing steadily from 1976 to 1980. I am certain that even the quarterly numbers would have been more dramatic in consistent growth.
Galbis makes a strong point of making sure to enforce regulations on individual lending limits and for interrelated groups. It does not say how to know about the groups of borrowers but inside transactions may also be hard to control if the use of “straw hat purchasers” is possible. Interlocking directorates may be easier to detect but “the more subtle informal relationships among directors and officers and shareholders” (Volume 2, Page 91) seems too difficult. Truth-in-lending provisions are important in a free market so that consumers have as much information about the products they want to purchase. In developing countries the lack of information available can hinder economic growth.
Even though Galbis seems to support democratic forms of government, he points out that at times economic efficiency could be compromised if individuals or groups create demands that do not have the concern of the national interest at heart. As noted: “Democratic regimes are subject to intense pressures from the groups, but their openness to scrutiny by the public is more likely to ensure the national interest than authoritarian regimes”. Long term stability and economic growth is more likely to occur under liberal democracies than any other form of government, so even if there are economic distortions in the short term we can expect better outcome over the long run.

Niger Part Two.

The title link is a backup copy of the title link from: In Niger Trees and Crops Turn Back the Desert. In this post there is a lot of ground to cover and as such I hopefully will keep my comments short for each article.

"The invisible hand of the market doesn't deliver a sustainable nation." True or false? According to the blog post, the invisible hand of the market does deliver a sustainable nation. As the blog title says it all: "...promoting capitalist acts between consenting adults." And this passage was notable:

We know that there exists a huge correlation between the care we give to the environment on one side, and wealth and technological prowess on the other side. It's clear that the poorer the society is, the more brutally it behaves with respect to Nature, and vice versa. It's also true that there exist social systems that damage Nature - by eliminating private ownership and similar things - much more than the freer societies.

The title link introduced us to Chris P. Reij. After a little bit of search, I found a PDF report coauthored by Chris titled THE EMERGENCE AND SPREADING OF AN IMPROVED TRADITIONAL SOIL AND WATER CONSERVATION PRACTICE IN
BURKINA FASO (PDF). A very fine report that talked about development practices that came from above and from the farmers themselves, in essence a cooperative dialog to address the farmers needs and the environment. I do want to quote the abstract here:

This paper describes the emergence of improved traditional planting pits (zaï) in Burkina Faso in the early 1980s as well as their advantages, disadvantages and impact. The zaï emerged in a context of recurrent droughts and frequent harvest failures, which triggered farmers to start improving this local practice. Despair triggered experimentation and innovation by farmers. These processes were supported and complemented by external intervention. Between 1985 and 2000 substantial public investment has taken place in soil and water conservation (SWC). The socio-economic and environmental situation on the northern part of the Central Plateau is still precarious for many farming families, but the predicted environmental collapse has not occurred and in many villages indications can be found of both environmental recovery and poverty reduction.
Keywords: soil fertility, soil conservation, water conservation

A tree grows in the Sahel gave some background information and provided the link to the above report.

Chapter 5: Transforming Institutions on Agricultural Land again points out the minor changes in technology that can reap great rewards. The Zai pits not only store up water for dry periods but allow trees and other plants to use the fertilizers (organic or inorganic) more efficiently.

Researchers find Africa's land degradation can be reversed. Yes and a quote of note:

They showed that dryland degradation can be reversed if farmers, researchers and governments invest in planting trees, farming more sustainably and replenishing groundwater.

I view my attitude toward where information comes from to be agnostic, soIndigenous Knowledge, Biodiversity Conservation and Development brings out some important points while still giving credit that extension services and compilation of the information is important.

The Global Biodiversity Strategy, for example, includes as one of its ten principles for conserving biodiversity the principle that "Cultural diversity is closely linked to biodiversity. Humanity's collective knowledge of biodiversity and its use and management rests in cultural diversity; conversely, conserving biodiversity often helps strengthen cultural integrity and values"

I think they are missing one important aspect of their studies. If the farmers do not have property rights and the general population does not have freedoms then how can cultural diversity survive? So to me the first step is freedoms for the people.

The article Planners or performers? Reflections on indigenous dryland farming in northern Burkina Faso. Agriculture and Human Values states:

The paper argues that indigenous agricultural practices in semi–arid West Africa must be seen as dynamic operations that serve different ends. These ends are not only agricultural, but symbolic. By highlighting how farmers in the Central Plateau region of Burkina Faso organize their farming strategies, the paper begins to challenge and to extend the ‘agriculture as performance’ arguments developed by Richards(1987, 1993) for the humid forest zone of West Africa. Farmers, it is argued, are also keen ‘planners’; in order to meet their goals they invest considerable effort in overcoming ecological constraints, and also spend time forging links with various institutions working for agricultural development.

But that is the problem, nothing is sustainable if it does not keep up with population growth. And although I agree we (Industrialized nations) need to learn more from indigenous farmers and peoples, we also have to realize that many of these techniques have failed also resulting in much famine and deaths.

Since some of the last articles mentioned The World Bank, then I thought about adding a couple of their links here...
World Bank-Niger

World Bank-Niger-Country Brief





Niger: Poverty Reduction Strategy Paper - 2004 and 2005 Annual Progress Reports - Joint Staff Advisory Note (Site)

IMF Executive Board Concludes 2006 Article IV Consultation with Niger

IMF Executive Board Completes the Third Review Under Niger's PRGF Arrangement and Approves US$8.9 Million Disbursement

Economic Growth and Total Factor Productivity in Niger

In Niger, Trees and Crops Turn Back the Desert

The above article from the NY Times started a very interesting debate on Thom's Board and brought out a lot of different sources of information in the debate. I at first did not even pay attention to the thread. But then I saw How Property Rights are Helping Green the Sahel in Niger at "The Commons". And so I thought back the original thread title: Trees reverse Deserts and thought maybe it was related and it was.

And a couple of the points I made on the title link:

[I]ncreased populations does not necessarily degrade the environment.

[W]ell defined property rights of individuals created the incentives to protect the environment? This is a common problem of "tragedy of the commons" when it is owned by everyone then no ONE person owns it.

And I ended my simple points with a link to a PDF report: GROWING GREEN: THE CHALLENGE OF SUSTAINABLE AGRICULTURAL DEVELOPMENT IN SUB-SAHARAN AFRICA . This is a good report that questions some of the theoretical assumptions that organic farming (or more broadly as non-industrial) is always sustainable and better for the environment.

The blog post Property Rights In Action is a very good presentation of what an economist would take away from the title article. I do think that his fears of communal rights is somewhat unfounded and does not take into account the influences a group has on the individual in positive manners also. The second blog post called Small Changes Can Make a Difference calls the transfer of property rights (as the above post states) from the state to individuals (small groups) as the privatization of trees. This is not exactly correct but is headed in the right direction and of course small changes in behavior is most important. What causes that change is why Economists study incentives as much as they do.

Another economist also noted the lack of property rights in Togo: Almost Club Med and I included it in my blog post Freedom and Environmental Protection.

Instead of this post getting too long I will continue with a more broader analysis of Niger in my next post.

Edit (02-16-07): Just a couple of more points on Niger. Niger has a Environmental Performance Index of 25.7 the lowest number in all 133 countries surveyed.
And was based on: Health, Biodiversity, Energy, Water, Air and Natural Resources.

As far as ratings of peoples' freedoms from Freedom House, since 1999 they have become Partially Free from Not Free status. And the trend is going in a positive direction with 2005 being rated as 3 and 3 on a 1-7 point scale (lower number better) for "PR" stands for "Political Rights," "CL" stands for "Civil Liberties," and "Status" is the Freedom Status.


PS: I see someone has stopped by to give us a link to Hello learn more about NIGER LATEST NEWS ON.

PSS: Here is an example of what can happen when measures like above are not used in "Creeping dunes threaten African nation". Yahoo disappears so here is some alternative links: ABC, The Conservative Voice.

PSSS: Update link to Creeping Dunes Threaten African Nation Thursday, 5-Apr-2007 6:14PM PDT

PSSSS: Frances Moore Lappe, "Ecomind: Changing the Way We Think, to Create the World We Want".