PSD Blog - The World Bank Group

Weekend Reading

Regulatory failure, special interests, and financial sector lobbying: European Union edition.

Negative interest rates on T-bills: This time is different.

"The fact that oil is trading at $80 a barrel in this climate should tell you that it is trading more as a financial asset than on supply/demand imbalances".

California is doing its part in the fight against deflation, one university at a time.

The recession is having quite an impact on migration trends in the United States. Plus, our People Move blog looks at new remittance data.

Tyler Cowen describes these two posts from Paul Krugman and Brad Delong as "critically important stuff and two of the best recent economics blog posts, in some time."

War is brewing in the financial blogosphere.

Matthew Yglesias thinks that Chinese leverage over the US is overblown.

More emerging market attempts to stop the appreciation of their currencies.

Finally, as the US gets ready for the Thanksgiving holiday, Adam Gopnik analyzes our hunger for cookbooks.

World Bank Events Shout-Out

The World Bank and IFC are featuring several excellent events this week that are well-worth attending.

On Thursday and Friday, a Conference on Entrepreneurship and Growth will be held in at the World Bank's main headquarters. Topics range from "Promoting Business Formalization and Growth" to "Firm Dynamics and Size". Dozens of speakers will be featured, from both inside and outside the Bank.

Next, Infoshop will be hosting a discussion this Thursday with Robert Skidelsky, who has just finished his latest book, Keynes: The return of the master. I am especially fond of Skidelsky, and look forward to hearing his thoughts on how Keynesianism is back with a vengeance as a result of the financial crisis. The conversation begins at 12:30pm EST.

All events are open to the public. If you are not in the Washington area or are unable to attend, fear not! I will be Tweeting highlights from each event as they unfold. (If you missed this morning's conference on achieving scale in entrepreneurship, you can view a summary on Twitter).

Bringing Finance to Pakistan's Poor

Yesterday I attended the World Bank's book launch of Bringing Finance to Pakistan's Poor: Access to Finance for Small Enterprises and the Underserved. The authors, Tatiana Nenova and Ceclie Thioro Niang, interviewed 10,000 households from across Pakistan's geographic and socio-economic landscape, including both men and women.

In general, Pakistanis are underserved by both formal and informal channels of finance. Only 14 percent of the total population has formal access, while just over 59 percent have access to either formal or informal finance. As the chart above illustrates, this is quite low compared to Bangladesh (32% formal access), India (48%) and Sri Lanka (59%). Small and medium enterprises, which account for 30% of GDP and 78% of jobs, only account for 16% of the country's overall credit.

What can the Aswan Dam teach us about building a safe financial system?

Back in grade school, I was the kind of kid who got excited about things like fractal geometry. I even went so far as to attend math camp one summer on the Eastern Shore. I learned back then about what is still a relatively unknown branch of mathematics. 

Everyone in school learns about Euclidean geometry, which describes perfect shapes that are never actually observed in nature. Yet few learn about fractal geometry, even though it is the best tool we have to describe many types of complex natural phenomena, e.g. weather patterns, turbulence, the location of oil and other natural deposits in the earth, irregularity in the rhythm of heartbeats, etc. (With a very simple formula, it also produces the infinitely complex object pictured above known as the Mandelbrot set.)

Until a few weeks ago, I hadn't given much thought to these ideas for many years. However, I stumbled on a book by the man who discovered fractal geometry, Benoit Mandelbrot, while browsing through the section of the store devoted to finance. I was surprised to see that Mandelbrot had applied this new branch of mathematics not just to purely natural phenomena, but also to the world of finance. After reading The (Mis)behavior of Markets, I also discovered that Mandelbrot was—perhaps ironically—the dissertation advisor of Eugene Fama, the father of the now much disputed efficient markets hypothesis.

The problem of the "development expert"

Last year Bill Easterly came out with some harsh criticism of the development community after the release of the Growth Commission report. The crux of Easterly's complaint: "this report represents the final collapse of the “development expert” paradigm that has governed the west’s approach to poor countries since the second world war." But the problem of the expert is not one that is limited to development institutions—it is a problem faced by all large organizations.

I'm continuing to make my way through Clay Shirky's brilliant Here Comes Everybody, and here is another great passage:

Blackbeard's co-op on the high seas

If you are looking for something a little different to read at the beach, then Peter Leeson’s new book on economics and piracy might fit the bill. In The Invisible Hook, Leeson applies an “economic way of thinking” to the actions of Blackbeard, Captain Kidd and co.

One item that jumps out is the strict system of governance at work on pirate ships, in part a consequence of the ships being owned by their crews. For example a flat pay structure minimized opportunities for abuse, which is in stark contrast to merchant ships where officers took advantage of strict hierarchies.

It seems that today’s CEOs, facing public anger over executive pay, greed and governance failures, might have something to learn from “pirate management”. Those calling for greater employee ownership within struggling firms (as the Financial Times reports in Germany) might find ammunition from this tale of the high seas.

Dollars and sense

Editor's Note: Anushka Thewarapperuma is a consultant with Advisory Services - Access to Finance at the IFC.

Think you’ve got better money management skills than the world’s poorest? You might be surprised to find out that you’d be up against stiff competition.

Jonathan Morduch and Daryl Collins report on their journey to various corners of the world (Bangladesh, India and South Africa to be exact) to observe how people living on less than $2 a day managed their financial lives in the recently published book Portfolios of the Poor. Their findings were summed up nicely in a recent review in the Washington Post: "the poorest people on earth engage in the sort of sophisticated money management that would make Chuck Schwab proud."

Michela Wrong's turn at the World Bank

Michela Wrong, the author of It's Our Turn to Eat: The Story of a Kenyan Whistle-Blower and a former journalist at the Financial Times, has been making the rounds promoting her new book. It's Our Turn to Eat tells the story of John Githongo, a Kenyan anti-corruption crusader who was eventually forced into exile. Wrong has kindly to agreed to give a talk on June 29 at the World Bank, and I think this is an event not to be missed. 

For useful reviews of the book, check out Chris Blattman, the Financial Times, and the Economist. Also check out this recent interview with Wrong on NPR.   

The beef with Dambisa

A few months ago Dambisa Moyo came to the World Bank to present her new book, Dead Aid. I had a favorable impression from her talk, but quickly became aware of a host of criticisms of the book (see, for instance, Owen Barder or Dani Kaufmann). 

Now that I've had a chance to read the book myself, I appreciate what the critics are getting at. Their criticism focuses on the first half of the book, where Moyo argues not only that aid has not worked, but that it is really an obstacle to development. (I should be quick to add that she is talking about what she terms "systematic aid" and not humanitarian or charity-based aid.) I summarize the main criticisms of her argument here briefly:

1. Correlation does not equal causality: Moyo points out that "over the past thirty years, the most aid-dependent countries have exhibited growth rates averaging minus 0.2 per cent per annum." However, critics of the book rebut that just because much of Africa remains poor and has received lots of aid does not mean aid was the cause. Kevin Watkins puts it well: "Using her logic, you could argue that fire engines cause fires because you find them near burning houses."
   
2. It really does depend on the context: Moyo attacks the notion that aid works even in good policy environments. Kaufmann counters that "the reality is more complicated and less PR-sexy, I am afraid: ‘Aid Can Work’, yet it can also fail miserably, as it has done in many countries. The mediating factor for aid effectiveness is governance and corruption."
   
3. Cherrypicking: Moyo cites selective data points to support her arguments, e.g. the democracy agenda is oversold because Senegal has been growing slowly but Sudan has grown quickly. However, a more systematic approach to the data (e.g. Do Democratic Transitions Produce Bad Economic Outcomes?) reveals that democracy does have a positive effect on growth, even in low-income countries. (This particular example is my own, but others also make this general point.)  

Portfolios of the poor

Daryl Collins, one of the authors of an important new book (Portfolios of the Poor: How the World's Poor Live on $2 a Day), discusses how the world's poorest manage their cash flows in an interview in The Boston Globe. Collins explains just how sophisticated some of the poor are at managing their often irregular cash flows:

Here is an interesting mechanism...They call it money guarding. If you get a fairly decent chunk of money, you give it to a money guard, a neighbor or relative or friend that you trust and say, "Hold this, and don't let me touch it." Sometimes the same money guard asks you to hold their money, and so when someone comes to borrow money, you say, "It's not my money." It works.

The difficulty of saving money - as evidenced by the need to resort to a money guard - just might explain the popularity of microcredit. If it's that difficult to save up for a big purchase or investment, it's probably simpler to borrow for it and repay over time. Considering the recent unflattering findings about microcredit, however, perhaps it's time for the microfinance community to focus more on access to savings rather than access to loans.

(Thanks to Giulio Quaggiotto for the pointer.)