Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal

Zimbabwe Inflation 'Incalculable'

Marginal Revolution sends us to:

BBC NEWS | Africa | Zimbabwe inflation 'incalculable': Zimbabwe's chief statistician has said it is impossible to work out the country's latest inflation rate because of the lack of goods in shops. "There are too many data gaps," the Central Statistical Office's Moffat Nyoni told state media. Many staple goods are often absent from shop shelves after the government ordered prices to be halved or frozen in a bid to stem galloping inflation. September's inflation rate was put at almost 8,000%, the world's highest. Other reports suggest the rate could be at near 15,000% and the International Monetary Fund had warned it could reach 100,000% by the end of the year....

Maize meal, bread, meat, cooking oil, sugar and other basic goods used to measure inflation largely disappeared from shops after Robert Mugabe's government ordered prices to be slashed. Manufacturers have said they cannot afford to sell goods at below the cost of producing them. Most basics are intermittently available on the black market at well over the official prices...

Why Thabo Mbeki has not deposed Mugabe remains a mystery to me.

Which Institutions Matter Most for Economic Growth?

Liam Brunt writes:

Which institutions matter for economic growth?: Historical evidence from a natural experiment in South Africa suggests that changing particular institutions is really only tinkering at the economic margins. Establishing clear property rights, by contrast, facilitates almost all economic interactions and unleashes the full potential of the economy....

When we talk about “institutions”,  we are referring to something much broader than simply the set of easily recognisable legal entities.... An institution is any generally accepted procedure that governs the process of interaction between members of a society. For example, waiting in line is a well-known institution for allocating goods that is particularly popular in England. Property rights.... Legal systems.... A challenge that we face in disentangling the economic impact of these and other institutions is that their occurrence tends to be very highly correlated....

[W]e need to find a country that has significantly changed its institutions... and we need to have sufficiently detailed data that we can reliably detect any performance changes.... South Africa... founded by the Dutch East India Company in 1656... seized by the British in 1795.... The Dutch system of property rights, law and administration were followed continuously until 1814... in 1814 [the British] undertook active steps to strengthen the colonial economy.... In 1827, the British imposed the English common law system over the former Dutch system.... In 1843, the British introduced a new Empire-wide policy that required public lands to be auctioned off in freehold to settlers....

There was a substantial step up in output after the British took over in 1795, despite the absence of any formal institutional changes.... But South African output was then static for the next 30 years, through two periods of important institutional reform: the government attempt at economic stimulation after 1814; and the transformation of the legal system from a civil to a common law régime in 1827. Only when private property rights in land became substantially more secure in 1843 do we see any significant improvement in the rate of output growth, at which point it suddenly quadruples. There is considerable evidence from agricultural surveys and census data that the increase in output was due largely to very substantial increases in fixed capital investment, particularly the creation of reservoirs and irrigation systems in areas that were naturally too arid for wheat production....

South African institutional development suggests that government efforts to stimulate growth by revising the institutional framework (such as labour laws and marketing regulations) are largely ineffective in the long run. Nor is it important whether legal disputes are resolved in the context of a civil or common law régime. By contrast, firmly establishing private property rights has very positive effects. This result is perhaps not surprising. Changing particular institutions is really only tinkering at the economic margins. But establishing clear property rights facilitates an almost infinite variety of economic interactions – most of them unforeseen and unforeseeable ex ante – that is limited only by the imagination of economic agents to dream up new types of contracts that permit them to more efficiently exploit the available resources. It is the firm establishment of private property rights that unleashes the full potential of the economy. Several developing economies – such as Vietnam and China – have recently been moving down this road and history suggests that the economic gains are likely to be large...

Zimbabwe: When Price Controls Fail...

Hilzoy watches the disaster that is Zimbabwe:

Obsidian Wings: Zimbabwe: When Price Controls Fail...: When last we checked in on the slow-motion disaster that is Zimbabwe, Robert Mugabe had decided to impose price controls. Predictably, this just caused shops to become empty: when people cannot sell at a profit, they tend not to sell at all. According to the Zimbabwe Independent:

Business lost over $40 trillion since government declared war on big business. As a result government lost $13,1 trillion in revenue and that is when the warning bells sounded, prompting a rapid policy shift on the matter.

Now that price controls have been called off, what do you suppose Mugabe has done? If you guessed imposing controls on wages, you win!

Zimbabwe’s government slapped a six-month freeze on wages, rents and service fees on Friday, the latest step in what some analysts call an increasingly desperate campaign to sustain an economy gutted by hyperinflation. (...) The new freeze, announced in Friday’s editions of government-controlled newspapers, is intended to combat an annual inflation rate that the government says exceeds 7,600 percent, and private economists say is twice that. It bars businesses from indexing wages or fees to inflation, a method employed in many wage agreements.

All increases must now be approved by a government commission, the state-run Herald newspaper reported.

The freeze follows a decree issued in late June that forced merchants and wholesalers to reduce all prices by at least 50 percent. Shoppers stripped store shelves of clothes, meat and other basic goods after that decree, and producers have largely failed to ship new stock because goods now sell for less than it costs to make them.

Most commodities are now available only on the black market, where prices have continued to skyrocket. Moreover, as the last remaining stocks of goods trickle out of factory warehouses and onto the market, Zimbabwe could soon see the start of an inflationary spiral that would make today’s prices seem cheap, John Robertson, a Harare economist, said in an interview.

“It could go much higher — 10 times as much for some things in the next couple of weeks, as goods cease to exist,” he said."

The BBC quotes Robertson as saying: "I just wonder when they will try and reverse the laws of gravity, because this does not work." It's a pity Mugabe doesn't seem to realize that.

Last January, I posted a compilation of catastrophes that had befallen Zimbabwe during the previous week or two: doctors and teachers on strike, water shortages, sewage treatment plants crumbling, people unable to go to work because the bus fare was too expensive, upper- and middle-class Zimbabweans resorting to urban gardening in desperation: you name it. Since then, things have gotten much, much worse, and yet somehow, mysteriously, the government is holding on.

Sometime, something will have to give; I only hope that whoever replaces Mugabe when it does has some shred of concern for the Zimbabwean people, who have suffered enormously.

Thabo Mbeki to the white courtesy phone, please. A Security Council resolution and an OAU resolution placing Robert Mugabe under the Ban of the Globe would, I think, be very welcome right now.

Tyler Cowen on Paul Collier's "The Bottom Billion"

He runs into an interesting problem:

Marginal Revolution: Auditing natural resource revenues: When my editor and I were exchanging drafts of this piece, my spam blocker wouldn't let them through.  There is too much talk of Nigeria and diamonds!  Here is one excerpt:

Paul Collier, an economics professor at Oxford University, has a new and potentially powerful idea.  In his recently published book, “The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It” (Oxford University Press), Professor Collier favors an international charter — some widely publicized guidelines that countries can voluntarily adopt — to give transparency in spending wealth from natural resources.  A country would pledge to have formal audits of its revenues and their disposition.  Imagine PricewaterhouseCoopers auditing the copper revenues of Zambia and issuing a public report.

It's not as futile as it might sound:

Professor Collier’s proposal at first glance seems toothless; a truly corrupt country probably wouldn’t follow the provisions of the charter, which, after all, is voluntary.  Yet citizens could pressure their government to follow such a charter, and the idea of the charter would create a focus for political opposition and signify international support for concrete reform.

Foreign corporations would bring further pressures to heed the charter.  Multinational companies that are active in corrupt countries might receive bad domestic publicity. Eventually the companies might push for adherence to the charter, even if the charter limited their ability to bribe.  In another context, De Beers has been stung by bad publicity about “blood diamonds,” and the company is now a force for positive change where it operates.

In the optimistic case, a few poor countries start abiding by the charter. Those countries prosper and attract more investment and status in the international community.  The pressure to adopt the charter would then spread.  Of course, promoting the charter costs relatively little and the potential benefits are significant.  International pressures did eventually force a change in South African apartheid.  So maybe they can improve other countries as well.

Did you know that Tony Blair was already promoting such a charter?  And the Nigerian government (really) already commissioned a private sector audit and now has enacted a version of this idea into law?  We'll see how that goes, but Nigerian flirtation with rule of law ideas is one of the underreported stories of this year.

Paul Collier's The Bottom Billion is a very exciting and important book.  It is rare to read something on economic development that is true, non-trivial, and potentially useful.  I recommend this book highly, it is also short and easy to read...

Understanding Botswana

Seretse Khama vs. Colonial History in Accounting for Botswana's Relative Economic Success Scott Beaulier takes on Acemoglu, Johnson, and Robinson:

Scott A. Beaulier, "Explaining Botswana’s Success: The Critical Role of Post-Colonial Policy" sbeauli1@gmu.edu: We need not abandon the “good institutions” account [of Botswana's growth] provided by AJR.... [But i]f we are to make the story of Botswana’s explanation... more accurate... “inclusive pre-colonial institutions” and hands-off British policy needs to be downplayed... emphasis needs to be placed on the responsible and prudent policy choices made by Khama and his administration at the time of Botswana’s independence....

[P]ost-colonial leadership must be recognized as the key determinant of a country’s economic development. Each sub-Saharan African nation faced a crucial moment after independence: if these newly independent nations tried to implement Marxist ideas, no institutions could possibly constrain them.... Botswana’s crucial moment came in 1965 when the Botswana Democratic Party and Seretse Khama won their elections.... Unlike other African leaders, Khama’s program simultaneously adopted pro-market policies on several important margins... promised low and stable taxes to mining companies... opened the doors both to trade and to people... kept marginal income taxes low to deter tax evasion and corruption... signaled a commitment to markets.

In addition, Khama’s administration preserved many important indigenous institutions... encourages the proliferation of dissenting opinions.... Every African nation could have turned out like Botswana, but most newly elected leaders chose reform paths that were not conducive to long-term economic growth. Khama, by contrast, made good policy decisions during Botswana’s post-colonial transition....

If Khama was able to get Botswana on a high growth path, why have so many other leaders pursued predatory policies? Khama clearly had economic interests consistent with his people’s economic interests, but it is easy to find many corrupt African leaders who had a similar economic incentive[s]... every leader should have an incentive to compete for tax revenue and thereby offer a good set of policies; yet, when we look at current and past governments, we often see predatory states instead of proprietary ones....

Khama was educated at Fort Hare University in the 1940s... an anti-apartheid university with an explicitly “Euro-centric” vision for Africa... Balliol College... introduced to the British common law.... Khama’s policies in Botswana were successful in establishing a strong bond with white commercial interests.... Khama had an extremely cosmopolitan attitude... whites... viewed as an asset in development.... Perhaps this stems from Khama’s interracial marriage to Ruth Wilson....

For other African nations looking to develop, the policy decisions of Seretse Khama could serve as a useful guide....

For AJR, good policy choice came about because of Botswana’s relatively favorable colonial experience, but we have seen that Botswana’s colonial experience was not conducive to the “good institutions” of private property and the rule of law. Botswana’s success was the result of good post-colonial policy choices.... If the wealth and poverty of most sub-Saharan African nations is largely the result of colonial and historical factors, then countries might be trapped by their past.... If, instead, the story of sub-Saharan Africa is one where foolish policy decisions were made by ideological leaders at the end of colonialism, then there is far more hope...

I find myself skeptical. The view that any post-colonial African leadership group could have made the decisions and followed the policies of Seretse Khama and his team is, I think, badly undermined by the fact that Seretse Khama and company are unique. But I share Beaulier's discontent with the AJR reliance on history: the historical differences between the British Empire in Bechuanaland and the British Empire elsewhere in Africa seem to me to be too small to carry the weight that AJR demand that they bear. So I am discontented.

And, of course, AIDS makes the future of Botswana look far from bright.

Timothy Burke: Zimbabwe's Future Is Really Grim

Timothy Burke writes that Zimbabwe's future is really grim, no matter what:

Obsidian Wings: Zimbabwe Melts Down: Much as I think Mugabe is loathsome, and that his loathsomeness was consistently underestimated by many observers and commenters of Zimbabwe's politics in the 1980s, it's important not to overlook the more systemic problems in the postcolonial Zimbabwean state. Mugabe is not in fact a charismatic authoritarian who somehow overwhelmed an otherwise competent or well-functioning liberal democracy and drove into ruin. He's certainly an autocratic and unscrupulous control freak, and has been ever since he first entered politics. But what has happened to Zimbabwe since the late 1980s has as much to do with a wider circle of people around Mugabe, both in the ruling party and in important and powerful institutions, including the military.

When Mugabe dies, I wouldn't expect things to get magically better. First, because much of what gave Zimbabwe a promising economic and social outlook circa 1988 has been thoroughly and structurally destroyed. Second, because at least some of the people around Mugabe have instincts just as self-destructive and have every reason to inhibit good management or democratization (as they will likely be the ones prosecuted by a vengeful reformist regime).

The problem with fantasizing about unilateral military action in this case is connected to this problem. You could drop a bunch of Special Forces guys on the presidential palace in Harare, take out Mugabe, and change absolutely zero. Frankly you could occupy the country with UN forces and change absolutely zero. What's needed is a huge change in the fundamental architecture of the Zimbabwean state and a change in the basic composition of the thin upper range of the most powerful elite. Those are not transformations which occupiers can readily bring about (something which I'd think should be screamingly apparent to everyone by now).

About the only positive short-term scenario is that some of the younger, smarter, more competent guys in ZANU-PF who have been carefully keeping their heads low through the last decade will move aggressively on Mugabe's death to push aside hacks like Didymus Mutasa and clean out the bureaucratic house. But to really succeed at that, they'd have to reverse a lot of brain-drain and draw back competent managerial and professional elites who have (wisely) left for other countries.