Normative Narratives


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Economic Outlook: Of Minimum Wages and Employment

The CBO released its analysis of the employment and budgetary effects of minimum wage increase yesterday. Advocates from both sides of the isle will seize on the reports findings to “prove their point” about the (de)merits of increasing the minimum wage. I found Jared Bernstein’s Economix blog on the subject pretty even-handed:

It is important to recognize that there is a very wide range of estimates from which the budget agency can choose, as shown in the chart below, which plots results of the employment effect from dozens of studies (from a recent set of slides from the White House Council of Economic Advisers).  This wide range does not imply that the budget office made a mistake, though it looks to me as if it applied a higher job-loss estimate than is the current consensus among economists who’ve closely studied the issue.

Note:

As the chart shows, the employment impact from this “meta-analysis” clumps around zero, which is why the report finds that the policy is a significant net plus from the perspective of low-wage workers: Many more workers get a raise from the policy than are displaced from their jobs.

In fact, the study points out that the range, or confidence interval, around their central estimate ranges from a “very slight decrease” to one million.  The authors guess that there’s a two-thirds chance that the true estimate is in that range.

There is no policy I can think of that generates only benefits without any costs, and policy makers always have to weigh the two sides. In the case of the minimum wage, on the benefits side of ledger, the budget office shows that 16.5 million low-wage workers would directly get a much-needed pay increase at no cost to the federal budget.

There is one paragraph of the report Bernstein does not seize on, which I believe merits greater consideration:

An increase in the minimum wage also affects the
employment of low-wage workers in the short term
through changes in the economy-wide demand for goods
and services. A higher minimum wage shifts income from
higher-wage consumers and business owners to low-wage
workers. Because those low-wage workers tend to spend a
larger fraction of their earnings, some firms see increased
demand for their goods and services, boosting the
employment of low-wage workers and higher-wage
workers alike. That effect is larger when the economy is
weaker, and it is larger in regions of the country where
the economy is weaker. (p. 7)

The positive employment effect of increasing the minimum wage (redistributing money to lower income individuals who, by definition, spend a greater share of every dollar earned; i.e. people who have a higher “marginal propensity to consume”) is “larger when the economy is weaker“.

Can there be any question that the economy is currently very weak? Specifically, aggregate demand is most depressed for the poorest, who have seen decreases in real household income over the past decade(s) (as opposed to the wealthiest 1%, who have captured 95% of income gains since 2009).

It is, therefore, quite reasonable to assume that job losses will be closer to the “very slight decrease” end of the CBO range, if indeed they are negative at all (an assumption that is directly in line with “the current consensus of economists who have studied the issue closely”).

The other findings of the report are fairly straightforward: 16.5 million workers will benefit from a $10.10 minimum wage by 2016, 900,000 will be raised out of poverty, with negligible effects on the federal budget:

“CBO concludes that the net effect on the federal
budget of raising the minimum wage would probably be
a small decrease in budget deficits for several years but a
small increase in budget deficits thereafter.” (p. 14)

Given that any budget forecast after “several years from now” borders on divination, one can even conclude that raising the minimum wage would actually result in a net gain for the federal budget. Spending on automatic stabilizers will fall (automatically) as poorer families / individuals rise above certain income thresholds. On the other hand, lower tax revenues are estimated to come from wealthier individuals, whom tend to find ways to have an effective tax rates below what their income bracket would suggest. In other words, spending cuts will occur automatically, while drops in tax revenue are considering tax revenues that may never have been realized in the first place.

As Mr. Bernstein concluded, no policy change is without trade-offs. However, it seems pretty clear that, in the current context, the benefits of increasing the minimum wage far outweigh the losses. So when you hear conservative politicians beating the “1,000,000 jobs lost drum” and/or the “increasing the deficit drum” over the next few  months, question whether that estimate is reasonable or simply an attempt to turn public support against a common sense policy reform.


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Economic Outlook: An Ounce Of Crisis Prevention Is Worth A Pound Of Cure

So why do the international community and national governments under-fund crises prevention initiatives? (Especially given that there is no singular “cure” for various crises).

The rising scale of needs, a collective inability to resolve protracted crises, and the interplay of new factors such as climate change, are making it harder for Governments and aid workers to effectively respond to humanitarian challenges, the United Nations today reported, stressing that development aid must contribute to managing crisis risk.

The report, World Humanitarian Data and Trends 2013, authored by the UN Office for the Coordination of Humanitarian Affairs (OCHA), highlights major trends in the nature of humanitarian crises, the underlying causes and drivers, and the actors that participate in crises prevention, response and recovery.

“Climate change, population growth, rapid and unplanned urbanization, and food and water insecurity are leaving more and more people at risk of crisis,” write the report’s authors, listing some of the new factors facing the humanitarian community.

Among other trends, the report shows that today’s major humanitarian crises are protracted “with few signs of improvements over the long term.”

Of countries that had an inter-agency appeal in 2012, eight had an appeal in eight or more of the previous ten years, including in Sudan, Democratic Republic of the Congo (DRC) and Somalia.

When not protracted, the crises are often recurrent, occurring as a result of shocks – climate, conflict, price – to chronically vulnerable people.

On these factors, the report concludes that humanitarian assistance is still overwhelmingly focused on response and development aid often fails to target the most vulnerable.

“Less than five per cent of humanitarian funding and less than one per cent of development funding is spent on crisis preparedness and prevention,” according to figures provided.

Just as one human rights violation enables others, one humanitarian crisis often leads to future manifestations of the same or related crises. The intractable / recurrent nature of humanitarian crises highlights the need to focus on a preventative approach to building resilience to humanitarian crises. Programs which build resilience to humanitarian crises are essentially poverty reduction / sustainable human development programs (think I am oversimplifying? The United Nations Development Programme’s motto is “empowered lives, resilient nations”).

Least developed countries (LDCs) do not have access to private sector credit (at affordable rates), particularly in times of great need (like after a major crisis). Therefore, an essential component of crisis preparedness are counter-cyclical fiscal policies. Many LDCs rely on natural resource rents for financing government programs. Counter-cyclical natural resource funds, such as the Nigeria’s Sovereign Investment Authority (which draws on excess oil rents), can be powerful tools for crisis preparedness.

Responsible use of ODA / natural resource rents relies on “good governance“. Corrupt leaders can easily embezzle ODA / public savings, and send that money offshore where it can never be recoveredFinding the right balance between prevention / preparedness and crisis response is a difficult task even for the most well intended governments / organizations.

However, it is obvious that spending only 1 % of official development assistance (ODA) on preventative / preparedness measures is a short-sighted strategy (although using a broader definition of “preventative action”, as I have, may encompass a larger portion of ODA). Further exacerbating the problem, there is a large gap in ODA commitments from the worlds wealthiest nations. Dedicating a bigger slice of a bigger pie to crisis prevention / preparedness is needed to strike a responsible balance

There are obvious reasons why the vast majority of ODA goes towards crisis response. Failure to respond to a humanitarian crisis can create breeding grounds for disease, human rights violations, violence/terrorism, and/or lost generations of economic growth. In addition, it is generally easier to mobilize resources in response to a specific incidence (which is seen as unavoidable), than it is for under-development / extreme poverty (which people often unmistakably attribute to laziness). However, it should be the job of development organizations to direct funding to the avenues which will have the greatest impact.

The democratic governance based approach to sustainable human development helps overcome common development issues. By emphasizing political rights and accountable governance, donors and citizens can be confident money is going (or in the case of preparedness, staying) where it is “supposed” to go. Farsighted “good” governments, whose capacities are fully developed with adequate resources (a combination of public savings / ODA), can achieve the simultaneous goals of economic development and resilience to crisis. By emphasizing human rights and environmental sustainability, humanitarian crises are addressed preventatively.

There is no one “road-map” for Sustainable Human Development. Every country is unique and has to build its own path–what Dr. Jeffrey Sachs refers to as “differential diagnosis“.

However, there are some common steps all LDCs should take if they wish to be on the path to sustainable human development: 

1) Draft Poverty Reduction Strategy Plans (PRSPs) that take into consideration the indispensable role of human rights and accountable governance; 

2) Legislate the human rights accountability from all relevant stakeholders (governments, civil society, NGOs, private sector, IGOs, etc.);

3) Mobilize a greater share of resources for sustainable human development programs to prevent / prepare for humanitarian crises.

Update: The UNDP-EU just released interactive maps detailing their joint projects over the last 10 years. One of these maps focuses on crisis prevention and recovery projects.


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Economic Outlook: “Supply-Side” Issues Keep 1/3 Of Children Under-Educated

Original article:

“This learning crisis has costs not only for the future ambitions of children, but also for the current finances of Governments,” says the independent Education for All (EFA) Global Monitoring Report Teaching and Learning: Achieving Quality for All,commissioned by the the UN Educational, Scientific and Cultural Organization (UNESCO).

“Around 250 million children are not learning basic skills, even though half of them have spent at least four years in school. The annual cost of this failure: around 129 billion,” it says, noting that in around a third of countries, less than 75 per cent of primary school teachers are trained according to national standards. Some 57 million children are not in school at all.

“These policy changes have a cost,” UNESCO Director-General Irina Bokova says in a forword. “This is why we need to see a dramatic shift in funding. Basic education is currently underfunded by $26 billion a year, while aid is continuing to decline. At this stage, Governments simply cannot afford to reduce investment in education – nor should donors step back from their funding promises. This calls for exploring new ways to fund urgent needs.”

The report notes that in 2011, around half of young children had access to pre-primary education, but in sub-Saharan Africa the share was only 18 per cent. The number of children out of school was 57 million, half of whom lived in conflict-affected countries. In sub-Saharan Africa, only 23 per cent of poor girls in rural areas were completing primary education by the end of the decade.

Supply and Demand Side Impediments to Education:

My professor for Community Economic Development  had an interesting way of framing development challenges. She urged the class to think about development challenges as primarily “supply-side” or “demand-side” issues.

As one would expect in a development economics course, education was a recurring topic; was the education-gap primarily a demand-side issue (are parents in the developing world not sold on the advantages of education, perhaps compared to the immediate need for income from child labor), or a supply-side issue (was it a lack of schools, roads, electricity, teachers, etc.)?

Of course, supple-side concerns can perpetuate  demand-side issues. For instance, if a parent does not believe their child will receive an adequate education, they may be more inclined to send their child to work instead of school. Therefore, in instances where there is an immediate need for child-labor income, it is all the more essential to ensure that a viable alternative (adequate education) exists.

According to this UNESCO report, the education-gap is primarily a supply side issue. This is encouraging news; given adequate government funding, development aid, and accountable / transparent governance, the education-gap is not an insurmountable problem. There is not some cultural difference holding back educational goals. Given the opportunity, parents will send their children to school (as proven by inputs from “The World We Want” Post-2015 National and Thematic Consultations).

However, even “good governments” that receive development aid face fiscal constraints–notably small tax revenue bases and high borrowing costs. Therefore, these governments must consider innovate means of “stretching a dollar” of education expenditure. One idea worth considering is combining prerecorded classes (taught by an excellent teacher), with an in-person “teaching assistant” to facilitate discussion, monitor homework assignments, and answer basic questions.

Similar to using nurses / physician assistants instead of doctors in certain instances to keep healthcare costs down, using a teaching assistant would put less pressure on finding the elusive “quality teacher” (which tend to be in short-supply even in developed countries). Prerecorded classes could be translated into dialects so that traditionally marginalized groups would have access as well.

This hybrid online / in-person model is not a panacea, but it does present a reasonable substitute for quality education given supply-side constraints. It is certainly an alternative education policymakers in developing countries (and poorer areas in developed countries) should explore.

The Role of Good Governance:

Governments should have an interest in delivering a quality education to all children. Under-education has both an immediate ($129 billion lost in global put) and future costs (the report said that ensuring an equal, quality education can increase a country’s gross domestic product per capita by 23 percent over 40 years.).

This normative stance requires a long-term and accountable outlook on governance. It is always easier (and personally beneficial) to embezzle development aid than invest in education. This is one reason why democratic governance plays such an important role in development. Governments must be made accountable to their constituents, otherwise socially beneficial policies will be foregone for personal benefits.

Furthermore, when development aid does not go to its intended recipients, it fuels anti-development-aid sentiments. People in the U.S. often argue “why do we send money abroad when we have social problems at home”? When this aid does not go where it is supposed to go (which to be fair, is fairly often), these people see their views as vindicated. Of course it is not an “either-or” situation; there is no reason why the richest nations in the world cannot reach their 0.7% of GDP aid commitment while also addressing domestic concerns. Development aid is a popular scapegoat, not only because the beneficiaries aren’t “us” but “them”, but also because people chronically overestimate the amount we spend on official development aid (ODA).

ODA should be conditional on “good-governance”, including independent oversight of aid-delivery. It is fair for those paying for the aid, and those receiving it. Any government that uses the “national sovereignty” excuse to deny independent oversight of aid-delivery should be found in violation of Article 2.1 of the International Covenant on Economic, Social and Cultural Rights, which states:

“Each State Party to the present Covenant undertakes to take steps, individually and through international assistance and co-operation, especially economic and technical, to the maximum of its available resources, with a view to achieving progressively the full realization of the rights recognized in the present Covenant by all appropriate means, including particularly the adoption of legislative measures.”

 


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Transparency Report: Anti-Corruption Movements and Populism

World Bank President Dr. Jim Yong Kim called corruption “Public Enemy Number One“:

“In the developing world, corruption is public enemy number one,” said Kim, speaking at an event hosted by the World Bank’s anti-corruption investigative arm, the Integrity Vice Presidency. “We will never tolerate corruption, and I pledge to do all in our power to build upon our strong fight against it.”

“Every dollar that a corrupt official or a corrupt business person puts in their pocket is a dollar stolen from a pregnant woman who needs health care; or from a girl or a boy who deserves an education; or from communities that need water, roads, and schools. Every dollar is critical if we are to reach our goals to end extreme poverty by 2030 and to boost shared prosperity.”

An important step toward fighting corruption and helping more people lead better lives is to build institutions with greater integrity, Kim noted.  He described three key elements in the World Bank Group’s approach:

“First, we need to improve the way we share and apply knowledge about building institutions with greater integrity; second, we need to empower citizens with information and tools to make their governments more effective and accountable; and third, we need to build a global movement to prevail over corruption.”

In addition to governmental action in anti-corruption, Kim called on other partners to join the fight, including the private sector. 

“The private sector has to be part of the solution as well. Oil, gas, and mining firms are increasingly disclosing their contracts with governments. This gives everyone a chance to scrutinize the behavior of corporate and public officials.”

This transparency and accountability approach to development marks a stark contrast from the World Bank of 1990s. The IMF has recently also taken a more context-sensitive approach compared to “Washington Consensus” policies of the 1990s. This trend points to greater policy coherence between the World Bank, the IMF, and the U.N. as the Post-2015 development agenda is finalized.

These organizations have fully embraced the importance of the political economy of development. Without considering “good governance”, economic gains can be embezzled or misused. Corruption retards growth, increases inequalities, and causes grievances which can boil over civil if not regional conflicts. Economic growth and poverty reduction cannot be achieved on a large scale without considering political factors.

Ultimately, there are limits to even what global organizations can accomplish. To sustain social progress, people must be able to hold “duty bearers” (generally governments, but also private sector actors and social service providers) accountable for their human rights obligations. The role of international organizations and governments is mainly an empowering / enabling one–provide access to information, advocate for avenues / institutions to meaningfully voice grievances, and let people-power do the rest.

The anti-corruption push has recently taken hold in a number of countries. Below are a few notable examples:

India:

“Today, the common man has won,” Kejriwal said in a triumphant speech at Delhi’s Ramlila grounds, the very place were huge protests over corruption erupted in 2011, opening the way for the birth of the AAP.

“This truly feels like a miracle. Two years ago, we couldn’t have imagined such a revolution would happen in this country.”

In a December 4 election to the legislative assembly of Delhi, a city of 16 million people, no party won the majority of seats required to rule on its own.

Wearing a simple blue sweater and with a boat-shaped Gandhi cap on his head, Kejriwal pledged to set up an anti-bribery helpline.

“If anyone in the government asks you for a bribe, don’t say ‘no’,” he said. “You report it on the phone number and we’ll catch every bribe-taker red-handed.”

 Kejriwal, who has tapped into a vein of urban anger over the venality of the political class and the neglect of citizens’ rights in the world’s largest democracy, has promised to expand his movement across the country.

Along with a pledge to send Delhi’s corrupt lawmakers to jail, the AAP has also promised free water for every family in the capital and a sharp reduction in their electricity bills.

business lobby group said on Saturday the unorthodox ideology was not important as long as results were delivered.

“We feel that though the promises made by it may look tall, they can still make a good economic sense if the objective … is achieved by bringing in operational efficiencies,” Rana Kapoor, president the Associated Chambers of Commerce and Industry of India, said in a statement.

Turkey:

The allegations of high-level corruption threaten to undo Mr. Erdogan’s accomplishment of wresting Turkish politics from the military and overseeing a long period of economic growth. Like a Moses in the wilderness, he has led his people from one sort of bondage but appears unable to deliver them to a promised land of transparent government where people are ruled through consensus rather than bullying and threats.

Mr. Erdogan does not know how to play defense. Last weekend, he addressed rally after rally and cursed the “international groups” and “dark alliances” trying to undermine Turkey’s prestige.

The government is treating the crisis as nothing short of a coup by those jealous of its success. This is nonsense.

The opposition it faces has emerged because of the A.K.P’s own lack of respect for the rule of law and a cynical disregard for public accountability. It can no longer hide behind conspiracy theories and bluster.

Indonesia:

Since its establishment in 2002, the KPK (Corruption Eradication Commission) has become, contrary to all expectations, a fiercely independent, resilient, popular and successful institution that is a constant thorn in the side of Indonesia’s establishment.

[In 2009] police arrested two KPK commissioners for extortion and bribery. The charges were dropped after nationwide street protests and a Facebook campaign that gathered one million supporters.

“The KPK’s only friend is the public,” says Dadang Trisasongko, secretary general of the Indonesian chapter of global corruption watchdog Transparency International.

The international business community is watching this tussle closely. Executives surveyed in the World Economic Forum’s Global Competitiveness Report 2011-12 said corruption remained “the most problematic factor for doing business” in Indonesia.

The World Bank has said corruption across the world costs $1 trillion. No one has done a thorough study of the costs in Indonesia, the world’s fourth-most populous country and one of the hottest emerging markets with an economic growth rate of 6 percent. The Anti-Corruption Studies Center at Gadjah Mada University in Yogyakarta put the losses to the state at $1 billion over the past five years alone.

Thailand:

Thailand protests are different in the sense that the opposition is arguing for less democracy and less populist economic policies. Opponents of Prime Minister Yingluck’s Pheu Thai party cite corruption as their main grievance.

Populist economic policies, while generally beneficial in the long run, do have a common pitfall of corruption. Populist policies rely on the government signing many contracts for social goods and services. Without proper oversight, these contracts themselves present many opportunities for corruption / embezzlement of tax-payer money.

I do not know if this is what has happened in Thailand, or whether these claims are unfounded (it is worth noting that Thailand does not score well on Transparency International’s “Corruption Perception Index“. Regardless, the Pheu Thai party should consider setting up social accountability mechanisms to allay the fear of corruption.

Anti-corruption measures are themselves populist policies. Enabling people to hold corrupt government officials accountable realizes a key political right. Moving money from corrupt politicians pockets to social services helps fulfill economic and social rights. Therefore, the anti-corruption movement is an indispensable aspect of the human rights based approach to development.

The near universal embrace of anti-corruption measure–from the highest level of global governance to local politicians and their constituents on the ground–bodes well for the Post-2015 development agenda. While much work remains to be done, every anti-corruption / accountability / civilian empowerment policy is a step in the right direction.


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The Pope’s Quandary: Contraception and Poverty

To much fanfare, last week Pope Francis denounced the economic system which he believes perpetuates inequality and extreme poverty. Hopes are high that this progressive Pope can use his influential post to reform the Catholic Church. Already, Francis has gone on record saying that the church is “too obsessed” with birth control, abortion, and gay marriage:

“It is not necessary to talk about these issues all the time,” Pope Francis told an Italian outlet. “The dogmatic and moral teachings of the church are not all equivalent.”

In the new interview, Francis pointed out that the Church should be “a home for all, not a small chapel that can hold only a small group of selected people.”

However, saying it is “not necessary to talk about these issues all the time” is a bit of a cop-out, especially given overwhelming evidence that increased access to contraception can reduce poverty:

Some family planning proponents emphasize health and longevity benefits; others talk of human rights.

In the mix of available arguments, Population Action International has been focusing on the promise of economic prosperity. The organization advocates for women and families to have access to contraception in order to improve their health, reduce poverty and protect their environment.

“Right now, 222 million women, or 1-in-4 women of reproductive age, in the developing world do not want to become pregnant but need modern contraception,” said Dilly Severin, director of communications at the group, known as PAI. The organization “has a history of highlighting the common sense connections between fulfilling a woman’s right to contraception and the health, economic and other benefits that flow from it.” 

African political and cultural leaders made statements about the importance of youth to the demographic dividend, the economic growth that may result from changes in a country’s age structure, Weinstein-Levey said.

“They recognized that investing in youth’s sexual reproductive health and rights is critical to helping young people and to helping African economies reach their full potential. Many of these nations are on track to achieve the demographic dividend, but could significantly expedite progress with the boost of family planning,” she said.

Mothers and infants in sub-Saharan Africa face the greatest risks, according to Save the Children’s annual State of World’s Mothers report 2013, which assesses the well-being of mothers and children in 176 countries. The bottom 10 countries on the Mothers’ Index are all in sub-Saharan Africa, with infants in Somalia having the highest risk globally of dying on their birth day. First-day death rates are almost as high in the Democratic Republic of Congo, Mali and Sierra Leone. Meanwhile, mothers in Somalia and Sierra Leone face the second and third highest lifetime risk of maternal death in the world, respectively.

Surely, reducing infant and/or maternal mortality are at least as important in “protecting the sanctity of life” as contraception / abortion are…

The “common sense” benefits between fulfilling a women’s reproductive rights and poverty reduction are not new or novel–they are generally accepted in development economics. What is new / novel is a Pope who puts poverty alleviation above opulence, and human rights above religious dogma.

The Bible say’s “judge not lest ye be judged”. Pope Francis seems to be an accountable man; he has judged the global financial system, now he should judge the Catholic Church. It is hypocritical to blame the global economic system for perpetuating inequality, while ignoring the role his organization plays in allowing poverty to persist in the developing world.

Furthermore, while the Pope (and indeed any individual) has a very limited ability to affect the entire global economic system, it is very much within the Pope’s ability to shape the thinking and policies of the Catholic Church.  

It appears Pope Francis “practices what he preaches”, by living a humble life and even sneaking out at night to help the poor. I am not Catholic or even religious, but I support the stances Pope’s Francis has taken thus-far. However, instead of just finger-pointing, there are steps he can take that would allow the Catholic Church to take the lead in the battle against extreme poverty. 

 


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Green News: Access to Energy, Poverty Reduction, and a Reason to be Optimistic About Renewable Energy Use in the Developing World

The image shows projections for COemissions and global temperature changes based on different scenarios. Since we cannot know the future of environmental policies, technological advances, or economic growth, projections based on are the best way to hypothesize about these issues. One thing should become apparent after viewing these graphs–while the future is yet undetermined, failure to take action will have dire consequences.

Economic development is an essential component of poverty reduction in the worlds least developed countries (LDCs). However, economic development /poverty reduction are impossible without increased access to energy. Looking at the UN’s “My World 2015” survey, most of the 16 variables “for a better future” rely, to varying degrees, on energy access.

Original article:

In a speech on Monday in Warsaw, the United Nations’ top officer on climate change warned coal industry executives that much of the world’s coal will need to be left in the ground if international climate goals are to be met.

Godfrey G. Gomwe, chairman of the World Coal Association’s energy and climate committee, responded in a speech that, with “1.3 billion people in the world who live without access to electricity,” the questions of climate change and poverty reduction could not be separated.

“A life lived without access to modern energy is a life lived in poverty,” said Mr. Gomwe, who is also chief executive of the mining company Anglo American’s thermal coal business. “As much as some may wish it, coal is not going away.”

Todd Stern, the United States envoy on climate change, said at a news conference in Warsaw that the world’s reliance on coal is “not going to change overnight.” But, “high efficiency coal is certainly better than low efficiency coal,” he added, noting that carbon capture and storage technology was “the most important hope” for coal’s future.

Does this mean that the goals of (extreme) poverty reduction and environmental sustainability are incomparable? No, international efforts for poverty reduction have taken place in the context of “Sustainable Development“. While coal will not “go away”, the chief executive of a coal business is hardly an unbiased agent–he is likely to overstate coals importance in the global energy portfolio. In order to reconcile these two goals, LDCs must meet growing energy demands primarily with zero / low emissions renewable energy sources.

I, for one, am optimistic that LDCs will pursue sustainable development. This is not blind optimism, it is based on political and economic realities.

In the U.S., renewable energy industries face the impediment of strong, established “traditional” energy industries (such as coal power). These industries have billion dollar profit margins and employ large numbers of people. Furthermore, infrastructure or “energy grids” already exist which may not be able to distribute renewable energy, representing large “sunk costs” to switching to renewable energy. In sum, these factors lead to strong local level support and national lobbying efforts for traditional electric. The benefits of renewable energy are realized in the future, while the costs (higher energy prices) and resistance from special interests occur in the present.

In LDCs, where many people are “off the grid”, these “incumbency” obstacles do not exist. In LDCs, people rely primarily on the agrarian economy, and are therefore more likely to support environmentally sustainable energy sources. Furthermore, “off-the-grid-renewable energy” represents a way of bypassing the large fixed costs associated with building traditional energy grids–something that is extremely important in the context of the world’s poorest countries:

Sub-Saharan Africa is also seen as a promising context for renewables. An analogy with the region’s adoption of mobile phones suggests sub-Saharan Africa could dispense with polluting, grid-connected power plants – just as it skipped landline telephones — and move straight into distributed generation from renewables.

Yet a note of caution enters any forecast for any region that so consistently outwits the sharpest analysts. Bhattacharyya tallies up several points for optimism but, while sharing Cohen’s enthusiasm, expresses doubt about the scale of development.

‘The market-driven approach’ has started to ‘flourish’ in areas such as Kenya, he says. He also sees grounds for optimism in how global attention on the lack of access to clean energies by agencies such as the UN, IEA and World Bank has also raised local recognition and awareness of the issue.

In ‘an optimistic case’ he forecasts that sub-Saharan Africa could add a few gigawatts through off-grid technologies, bringing electricity to millions of its people.

‘There is surely huge potential for off-grid options but it is difficult to tell how much is really likely to materialise,’ he says.

The issue with financing renewable energy projects was supposed to be addressed by the UN Green Climate Fund; developed countries promised $100 billion a year to the developed world by 2020 to help cope with and reverse climate change. Issues over “common but differentiated responsibilities“, as well as austerity measures in response to the Great recession, call the availability of these resources into question.

One potential means of making up this funding gap is through a so-called “feed in tariff“:

The report by the World Future Council says providing feed-in tariffs for developing countries so that they can finance setting up large-scale renewable systems and feed electricity to their grids is the best way forward for the fund.

Feed-in tariffs provide the owners of small or large-scale wind and solar arrays with a guaranteed price for electricity over 20 years, so the investor is certain to get a return on their capital. The scheme has worked in developed countries like Germany and Italy to rapidly boost renewable output.

An added problem in developing countries is making sure that the national or local grid can take up and use the electricity generated. Some developed countries have already had difficulties with this, so sorting out the grid must be part of any financing package, the report says.

The report envisages 100 gigawatts of electricity being funded in this way by 2020 – the equivalent of the output of 100 large-scale coal-fired power plants. This would cost 1.3 billion euros a year to fund, sustained over two decades. 

Feed-in tariffs require energy grids to feed-into, and for that reason are not a viable option for the most impoverished / remote areas in the world which do not currently have traditional energy grids. For areas in the developing countries with traditional grids, this is a viable solution. For other areas, financing for off-the-grid renewable energy must be made available. The ability to reconcile economic development, environmental sustainability, and poverty reduction–sustainable development–depends on it.

Update: Alternatively, perhaps off the grid renewable energy can be stored in batteries and sold as part of a feed-in tariff. I know advances are being made in large scale renewable storage in large batteries, I wonder if there is a way to make this work on a small scale as well. Just a though…


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Transparency Thursday: Helping the Poor Help Themselves

Lots of attention is paid, rightfully so, to those in extreme poverty in the developing world. However, those living in relative poverty in wealthier countries face similar problems as those living in extreme poverty (albeit generally to a lesser degree) : malnourishment, an underestimation of the value of education, and poor financial choices due to a very high “discount rate” (a little pleasure now is worth more than a lot of pleasure in the future, possibly because of a pessimistic view of the future driven by living in poverty).

Another important similarity is that financial shocks always affect poorer people more than wealthier people; with less income to go around, an unexpected strain causes a poorer family to have to make difficult financial decisions with potentially serious ramifications. This problem is compounded by the fact that poorer people tend have worse credit ratings, further hurting their ability to utilize the financial tools available to them and deal with unexpected financial shocks.

“When there is no cushion, one small mistake can be catastrophic — if you rely on a car to get to work, for example, missing a car payment can result in the loss of a job.”

A major difference is that in the developed world, the institutions, organizations, and infrastructure already exist to help these people. In the developing world, projects often have to be built from the ground up, financing is harder to find, and projects are more susceptible to corruption and general volatility/insecurity that could threaten its success. In the developed world, it is not so much about building a financial system, (and a strong government / judicial system to oversee that financial system) as it is teaching people how to use systems already in place to their advantage. This simplifies the job of poverty reduction in the developed world immensely.

The social “safety net” is a good system, however providing welfare services does not address the root cause of of poverty, it simply mitigates the human suffering being poor can cause. By doing more to prevent people from having to rely on entitlement spending, and helping people avoid entitlement spending by being more financially responsible, the sustainability and integrity of the social safety net is preserved.

“Ideally, the coach can help clients set up systems that keep them on track: automatic savings, automatic bill payment, automatic reminders by text. ‘Distress is an economic state but also a psychological state,’ said Mullainathan. ‘The remedies have to address both.’”

A large part of this process is helping people overcome the fear associated with handling financial problems. This process will depend on experts simplifying ones budget and teaching them about simple financial tools that will help their problems more accessible (and then signing them up for those programs).

People often feel overwhelmed by financial troubles and ignore the situation, which only compounds the problem. By addressing the fear behind getting finances in order, poor people are empowered to take control of their finances. By setting up simple automatic measures, one’s financial position can change drastically.

“Jaimes said that most of his clients come to their first meeting with a stack of collection letters — unopened. ‘Can I open these envelopes for you? We have to deal with them,’ Jaimes tells them.”

 “Lisser begins by addressing clients’ stress, step by step: ‘You will feel relieved after you settle the first one,’ she says. She leads them through opening the debt notices, calling the collections agencies and beginning negotiations. When the client takes over making the calls, she will coach by scribbling notes.”

The process is appealing because it is not “giving” in the sense of a traditional welfare program, but is “empowering”. This empowerment should build confidence when handling financial issues and help build optimism towards the future (and therefore better decision making skills), increasing social mobility while breaking the root causes of “poverty traps”.

This program is currently being championed by, guess who, Michael Bloomberg (you knew it had to be either Bloomberg, Gates, or Buffet right?):
“Currently there are more than 30 centers lodged in neighborhood organizations around the city, offering counseling in multiple languages. Bloomberg Philanthropies, the mayor’s personal charity, is now providing grants to Living Cities’ Cities for Financial Empowerment Fund to replicate and customize the model in Philadelphia, Nashville, Denver, San Antonio and Lansing, Mich., — places that won out over 45 others for these grants. The first centers will open in March.”

It will be interesting to see how successful this program is when tried in different locations. If it is successful, the U.S. government should seriously consider further investing in this empowering model of poverty and debt reduction.  

(Note: debt reduction and poverty reduction are not the same thing, but they are very closely related)