Do development indicators deceive us? Here is a better approach

Measuring politics and Political Development indicatorsMeasuring how countries perform is all the rage. Everyone from the World Bank to Bertelsmann to Africa’s most famous entrepreneur does it, producing indices on things like how competitive economies are, how hungry populations are, how free the press is, how risky investments are, and how corrupt public sectors are.

Many of these indices are directly relevant for people working in development. They help countries determine how they compare with other states and where they ought to improve their performance. And they help aid agencies decide where and how to invest their resources.

Indicators tracking everything from GDP per capita to poverty to governance are ubiquitous across the field, especially among international professionals. Such numbers are used to determine need, priorities, and strategies (such as whether a government ought to be funded directly).

But do the indicators that have the greatest influence measure the right things? Are they focused on the issues that are most important to development? Can they predict how governments work or how countries will evolve in the future?

Too often, developing countries are assessed on a very narrow set of indicators, leading to an overemphasis on certain programs and “results” that have little to do with their prospects. Reducing poverty and hunger are worthwhile goals but may not reflect how well a country is doing (aid can reduce both without helping a state function better). “Good governance” may indicate good prospects, but bad governance certainly does not point to the reverse, as a long string of countries can attest to (including China, Indonesia, Cambodia, and Vietnam). GDP per capita is widely used to assess how well countries are doing (not least by the World Bank and many leading poverty analysts), but may actually be saying very little about the subject (such as when only elites benefit from natural resource wealth, as in Nigeria, Libya, and Angola).

Indicators on state fragility can easily miss the mark. The Failed States Index, for instance, completely failed to pick up the fault lines that threaten many Middle Eastern countries before the Arab Spring brought them into the open. The 2011 FSI ranked Syria as the 48th most fragile state in the world, but its complex ethnic and religious landscape has always made it far more fragile than it appeared. In 2012, Syria plummeted down to 23rd in the FSI. Next year, it will inevitably be much worse. Bahrain and Libya did not even make the ranking before 2011.

Many of the most important development issues are not included in major indices because they are not easily measured or are simply not considered as important as they ought to be.

In Fixing Fragile States, I wrote:

Development describes a complex process that transforms both the way people think and behave and the system of how they work together. Although economics drives development, politics plays a far greater role in the key take-off stages, with social, business, and government modernization inextricably linked as the process advances.

Do we ever measure how well a people work together? How institutionalized politics is (something quite different than democracy and “good governance”)? How cohesive a population is?

Assessing a country’s political dynamics may not be easy—especially if the goal is to measure it numerically—but is arguably more important than the majority of the indicators we currently use. The right kind of assessment ought to better gauge how resilient a country is, how prone to conflict it is, how stable its current political system is, how likely its elites are to work together to promote progress. All these things help us understand a country’s overall prospects in a way that few existing indicators can.

Measuring politics and political development requires creating a set of indices that reflect—or at least depend upon—the nature of sociopolitical dynamics, the degree of social / political / economic inclusiveness, the institutionalization of the state, the robustness of the rule of law, the level of social capital, the capacity of societies to create wealth (separate from natural resources), and the ability of government to get things done (which may not reflect existing governance scores).

What would these indicators look like? The new assessment criteria would seek to answer questions such as:

1) How great are group-based (ethnic, religious, caste, clan, etc.) economic, political, and cultural horizontal inequities?

2) How equitable is public spending?

3) How equitable are markets?

4) How equitable is the rule of law? Do elites or particular groups have systemic advantages over others?

5) How effective is public authority and the rule of law (taking into account a variety of mechanisms to achieve these)?

6) How inclusive is the concept of citizenship?

7) How equitable is the system of property rights?

8 ) How inclusive and poverty reducing is growth?

9) How diversified is the economy and exports (which depends on the robustness of institutions)?

10) Is political succession institutionalized and predictable?

11) How much does politics revolve around political parties and policies (rather than ethnicity and patronage)?

12) How much do political leaders depend on group identities to gain, hold onto, or compete for power?

13) How well do formal institutions (such as laws) reflect informal institutions? How widely accepted are these? How well do they penetrate society (as opposed to existing above it)?

14) How much investment is going into large factories (which are more risky than other investments)?

15) What is the level of political risk to invest in labor-intensive businesses (which require more effort and are more beneficial to a population)?

16) Is the economy producing an adequate number of jobs for young people?

17) How well can the government implement the policies it puts into place (if a road is supposed to be built, does it? How good is it?)?

18) How well can the government project authority across distance (is it as effective in outlying districts as it is in the capital)?

19) Are the government’s capacity and the country’s economic prospects keeping up with increases in education, urbanization, and the expectations of the population?

20) Are levels of dissatisfaction/frustration rising among powerful out of power actors (elites, identity group leaders, youth leaders, religious leaders, etc.)?

Some of these questions could be turned into indicators very easily (the data is available). Others could be turned into indicators by substituting another data source (for instance, tracking how well a government delivers public services at various distances from the capital will give a decent account of how well it projects authority). Many may be hard to assess, and require a more a concerted effort involving more spending on research and analysis.

If politics and political development mattered as much as they should, more effort would be made to create and use such indicators. Without these, we are flying blind, trying to understand the terrain using the wrong instruments.

Let’s Drive a Lot More

In The Economist, Schumpeter extols the benefits of driverless cars:

When people are no longer in control of their cars they will not need driver insurance—so goodbye to motor insurers and brokers. Traffic accidents now cause about 2m hospital visits a year in America alone, so autonomous vehicles will mean much less work for emergency rooms and orthopaedic wards. Roads will need fewer signs, signals, guard rails and other features designed for the human driver; their makers will lose business too. When commuters can work, rest or play while the car steers itself, longer commutes will become more bearable, the suburbs will spread even farther and house prices in the sticks will rise. When self-driving cars can ferry children to and from school, more mothers may be freed to re-enter the workforce. The popularity of the country pub, which has been undermined by strict drink-driving laws, may be revived. And so on.

The column, however, misses a key point. If the technology gets good enough, then it will be possible for cars to be driven at higher speeds and much closer together. I imagine we’ll see ‘flocks’ of cars on motorways and freeways – moving very quickly and in tight formation, with the odd few peeling off the side at each exit.

Combine this with vehicle interiors that look quite different – a commuter would want a work station that converted into a flat bed like an airline’s business class seat – and the feasible length of journeys could become very long indeed.

I’d guess that people might be prepared to double the time they spend on their journey to work and would be able to go much further in that time (higher speeds + less congestion). Occasional overnight trips – to the holiday home in the country – would become feasible as well if you had your very own sleeper service. At the same time, other forms of transport – trains in particular – would become significantly less attractive.

And that makes the driverless car a potentially hugely important medium-term disruptor for the energy sector, for climate change, and for urban planning. I don’t think many people have woken up to this yet.

“The struggle between incumbency elites and those who see the need for change will be the defining struggle of our times”

Such a great intro to a speech:

Business as usual died in 2008. Publics understand that. Elites, on the whole, do not. In Britain, our economy is now almost one sixth smaller than economists were saying five years ago it was going to be by now.

Young people in my country understand that they are the first generation for over 300 years since the beginning of the industrial revolution who, as they look at their future, see a prospect that might well be worse than the one their parents contemplated a generation ago. Progress – the betterment of our lives from one generation to the next – is no longer something we can afford to take for granted. People know that something has gone seriously wrong.

We need a new growth model that is less vulnerable to shocks; that rebalances from excessive debt and casino finance towards the creation of value in the real economy; and that greatly reduces the stress that a growing and increasingly affluent population puts on the resource base including the climate.

This is not a minor adjustment. It demands a substantial redesign of the economy and of the system of power relations that underpins the economy. That is the heart of the matter because the forces of incumbency will always start from the strongest position and they will always fight reform.

That is not how things look to many elites around the world. Some profit too much from the old system to countenance the thought of anything different. Others are imprisoned within an economic theory that under current conditions has lost its power to make useful predictions.

The struggle between incumbency elites and those who see the need for change will be the defining struggle of our times. It will demand a monumental effort to build a new consensus between those who govern and those who are governed; between the over 40s and the under 30s; between those who said “trust us” and those who are no longer willing to take it on trust that elites must know what they are doing, and that they are doing it for the best.

(That’s recently retired UK Foreign Office Special Representative on Climate Change John Ashton, pulling no punches. H/t Casper TK.)

Banks screwing with price discovery mechanisms: water’s next

Frederick Kaufman in the current edition of Nature:

Making money come out of the tap means that fresh water must be given a price anywhere it is traded — a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere. A water calamity in China or India — and the food inflation, political instability and humanitarian crisis that will surely follow — will reverberate in price spikes from London to Sydney. This is how bankers will profit.

Economists have begun to model a global water-based futures market featuring financial puts, calls, shorts, longs, exchange-traded funds, indices of indices, options piled on top of options, and all sorts of opportunity for over-the-counter swaps. Flood-insurance companies will certainly want to buy stakes that could mitigate their financial risk. In fact, every corporation that conducts its business in a flood plain, anywhere, would probably participate. Farmers will want to hedge their bets that it will or will not rain, as will frackers and fishermen. As for the speculators, we know who they will be.

Conclusion:

The reverberations of a global water futures market can hardly be imagined. This much is clear: a water betting game will leave crops thirsting and push the global price of food far beyond the peaks of the past five years.

The good news is that, unlike the failed attempts to regulate the derivatives markets in food, something can still be done in the case of water. There are plenty of examples of valuing water outside the realm of pure commodification. One of the best examples has been developed in the Ruhr basin in Germany. This riverine resource is managed not by the invisible hand of the market, but by a policy-creating body called the Ruhr Association. Cities, counties, industries and enterprises in the region are represented by associates and delegates. A total of 543 stakeholders negotiate water-abstraction fees and pollution charges. The politics may be messy, but it works. Unfortunately, that is the way with democracy.

There is no easy panacea for the world’s water needs, least of all the global derivatives business, which has proved that it is not to be trusted with mortgage-backed securities, much less our most precious resource. There is no need to initiate a futures market in water only to create yet more financial madness that seems to resist all attempts at regulation. This time around, let the business stop before it starts.

Worth reading the whole thing. He’s pretty scathing about Payments for Ecosystem Services (PES) and work on The Economics of Ecosystems and Biodiversity (TEEB).

Separated at birth: Lehman Brothers, nukes

Great post from Nils Gilman on Small Precautions:

In 2006 RAND staged a wargame to think through the implications of a nuclear terorr incident. They created a specific scenario – a tactical nuclear device being detonated by a terrorist organization in the Long Beach harbor – and then staged a role-play to determine how key stakeholders would react and work together. The experience must have been incredible, because even the write-up is riveting. When I revisited this text today, however, what struck me with particular force was RAND’s assessment (this is in 2006, remember) of what the longer-term economic implications of such an event would be:

“The attack is likely to have dramatic economic consequences well beyond the Los Angeles area:  

  • Many loans and mortgages in Southern California might default. 
  • Some of the nation’s largest insurance companies might go bankrupt. 
  • Investors in some of the largest financial markets might be unable to meet contract obligations for futures and derivatives. 

“While exact outcomes are difficult to predict, these hypothetical consequences suggest alarming vulnerabilities. Restoring normalcy to economic relations would be daunting, as would meeting the sweeping demands to compensate all of the losses.”

As some of you will no doubt observe, all of these consequences in fact did come to pass just two years after this report was issued – as a result of the Lehman Brothers default, the consequent collapse of AIG, and the cascade effects which are still creating malign reverberations throughout the global economy, above all in the Eurozone.

Usually when people say that something would be “like a nuclear bomb going off” they are exaggerating; but in the case of the Lehman default, it is accurate.

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