Penis size and growth

Understanding why some countries are poor and why some grow than others is probably one of the most important questions in Economics. The traditional tool to tackle this challenge has been growth regressions: use cross-country data and regress the GDP growth rate on various indicators that could be relevant in order to find which matter most. These regressions have been abused over the years, especially as there are obvious endogeneity and collinearity issues. Also, the results are driven by a multitude of (poor) countries where data quality is quite horrendous. The worst is probably all the data mining that is going on in this literature, which culminated with Xavier Sala-i-Martin's two million regressions.



Tatu Westling uses a variable the previous literature completely ignored: the average length of the erect human penis. Adding this variable to the regression shows a U-shaped relationship for the GDP level, explaining 15% of its variation. The optimal penile length is 13.5 cm, and 16cm is disastrous. For GDP growth, the relationship is negative, explaining 20% of the dispersion. This is not negligible, and more than institutional variables that are thought to be the key to growth and convergence.



I wonder how many people will take these results seriously and try to get policy recommendations from it. Westling hypothesize about the impact of self-confidence. The paper is very well written, taking the 'male organ hypothesis' very seriously, but in truth tongue-in-cheek. Very different from this study on flag colors I wrote about previously.

Land titling and access to credit

It is widely believe that a key ingredient of economic development is the accessibility of credit. Indeed, entrepreneurs typically need credit to develop their business plans, and much of capital accumulation is performed through credit. But no one is going to grant credit on a promise, some collateral is needed. And that is a problem in many developing economies, as people hold little property and even land is communal or without clear property rights. Hence the idea that distribution of untitled land, with well-established property rights, should provide collateral to a large fraction of the population and make credit possible. How does this work in practice?



Caio Piza and Maurico Moura study the case of a major land titling initiative in Brazil. They use an interesting natural experiment. Two neighboring and very similar communities of the city of Corosco (correction: Osasco) were to get property titles for every inhabitant, but five year apart (2007 and 2012). This leads to a nice control group, which allows to overcome the problem of the endogeneity of ownership rights of a typical study by using a difference-in-difference approach. Indeed, the authors conducted a survey in 2007 before the titling, and another one in 2008. In addition, the context here is urban, which is unusual for a titling study. It appears access to credit increases by 22 percentage points, or about a half, within 18 months of titling. This is major. I do not think such large estimates have been found in rural studies. And given that developing countries become increasingly urbanized, this is very interesting.

Aid and remittances as hedges against food price shocks

Food is a substantial part of household expenses in developing economies, and in many of the latter foreign aid and remittances from emigrants provide a substantial part of national income. As world food prices have been subject to large fluctuations lately, causing much grief and even riots, it is natural to ask whether aid and remittances can provide some smoothing against the effects of these fluctuations.

Jean-Louis Combes, Christian Ebeke, Mireille Ntsama Etoundi and Thierry Yogo use a cross-country panel data set to study this question. First, they confirm that food fluctuations have a notable impact on aggregate consumption, especially in the poorest economies. Second they find that aid and remittances do help, and remittances seem to be more efficient at hedging. Indeed, an aid-to-GDP ratio of 29% is theoretically necessary to absorb food price fluctuations, while 9% is sufficient is for remittances. Only Mozambique and Nicaragua satisfy the first, while a few more countries satisfy the second.

Kuznets in a post-industrial world

The Kuznets curve traces the evolution of inequality as an economy develops. It is based on Kuznets observation that income and wealth inequality increased and then subsided as economies get richer. While this was established on a cross-section of countries, it has been proven right in the time dimension in some cases, like England and Wales through the Industrial Revolution. But what happens thereafter, when an economy further develops into one where the service sector dominates or globalization becomes most relevant?

Jordi Guilera asks this question noting that most developed economies have recently experienced a sharp increase in inequality. Is thus Kuznets' inverted-U becoming a N? Beyond simply observing this, one would also need a theory with predictions about other correlations to make some progress. The theory here is that skill-biased technological change generates increasingly large education premia, and evidence from long-term wage inequality in Portugal seems to corroborate this hypothesis. In particular it shows that inequality between sectors was the leading determinant of inequality until the 1980s, while inequality within sectors has taken over now.

Trade constraints of developing countries

With all the current posturing in the US and Europe, while addressing doubtlessly important problems, it is easy to forget that there are much bigger issues that need to be solved: how to get the poor and especially the poorest economies to a decent standard of living. We have been blessed to be born in the right families and in the right countries, and we should share this luck with those who were no so fortunate. This does not necessarily mean to give to the poor, just giving them a fair chance may be enough.

Jean-Jacques Hallaert, Ricardo Cavazos Cepeda and Gimin Kang consider the consequences of trade barriers on developing economies. The latter should be able to benefit greatly from selling on world markets goods produced with the factor they are relatively rich of, unskilled labor and to some extend land, while importing the complementary goods, likely capital-intensive investment goods. This OECD study finds that developed economies cannot do much more in terms of reducing import tariffs. Where there is more potential is with home-grown issues: unreliability of electricity, high transportation costs, poor education, bad governance, and instability. These results have been obtained by regressing exports, imports or their sum on a number of indicator for a panel of data. I am not particularly keen on these exercises due to poor data quality, gigantic endogeneity and especially the fact that proxies for essentially unquantifiable variables are used, like property rights and governance. But I suppose this is the best one can do, and the results appear to be rather stark. Now as to how to solve these economic problems, that is a gigantic task that we should be really talking about these days, instead of posturing for political gain.

The child quality/quantity trade-off in the Industrial Revolution

Non-economists cringe when they hear us talking about investment in children and the quantity/quality trade-off in this regard. Yet, this is a very real aspect of child rearing pointed out by Gary Becker that is at the core of many models, and has been found wild in nature. This trade-off is though to be an integral part of the demographic transition, where fertility suddenly drops massively in the course of development.

Marc Klemp and Jacob Weisdorf look at data from Anglican parish registers from the 18th century that contain all sort of demographic data to look at the child quality/quantity trade-off during the Industrial Revolution. Theory tells us that if the returns to education and/or the cost of time (wages) get larger, parents switch from having many children with no education to few of them with better education. Klemp and Weisdorf's data indicates clearly that this trade-off is present: each additional sibling reduces by 8% the probability of a child eventually becoming literate. That is a strong effect, in particular considering the larger number of children at the time, and its rather large standard deviation during this time of transition.

Venezuela's downfall

Venezuela was once the poster child in Latin America on how to do well (the opposite being Argentina), growing richer than European economies in the 1950's from quite modest means in less than two generations. And then all went downhill, and the country continues to slide into poverty. While many like to put blame on Chavez and his "revolution," the trend started long before he came to power.

Omar Bello, Juan Blyde and Diego Restuccia, instead of going through the usual case study that just rehashes anecdotal evidence, perform a growth accounting exercise to give the start of an answer. They find that the exceptional growth episode was due to a combination of plain old capital accumulation along with total factor productivity growth originating in the booming oil industry and its foreign direct investment transferring know-how to locals. The following collapse shows the undoing of this but with a very different origin. A severe misallocation of resources lead to a drop in total factor productivity, which then triggered capital loss. And how did the government manage ti create the mess? First, it steered the economy away from oil, which may be a good idea for diversification. But the second error was to favor heavy industries, a common development mistake. And third, general government meddling in affairs it should not be looking at. Chavez has just continued a long tradition in this regard.

Mission drift in microfinance?

Microfinance is based on a very simple principle. The poorest can only improve if they invest, and very small loans may be sufficient to get them started. But conventional banks do not bother with such loans, and informal money-lenders charge horrendous rates. Microfinance step in and lend small amounts, often without collateral in a community-based scheme where one's reputation is sufficient to obtain somewhat reasonable repayment rates. I am not totally convinced this scheme would work without subsidies, but it obviously serves a useful purpose, as long as it does not crowd out the regular financial system.

Beatriz Armendáriz and Ariane Szafarz point out that the latter can become a problem because of mission drift: as microfinance institutions grow, they gradually target larger loans, neglecting their original mission and becoming more like regular banks. This is like car models that grow in size through the years to follow the life-cycle of their drivers. But Armendáriz and Szafarz think that what looks like mission drift could very well be cross-subsidization, and larger and more profitable loans are made to help continue giving small and less profitable ones. The distinction is important, as donors could be put off by mission drift.

Entrepreneurs need an educated workforce

Entrepreneurship is the driver of growth and wealth, or at least an important driver. This is why so many initiatives are geared towards making life easier for entrepreneurs. And the champion in the US, with relatively little red tape, low taxes and especially very developed financial markets. One aspect that is much discussed right now is how low these taxes should be, especially as lowering them implies reducing some public benefits such as education. Is there a trade-off?

José María Millán, Emilio Congregado, Concepción Román, Mirjam van Praag and André van Stel use a panel dataset from several European countries to show that education matters for entrepreneurial performance, and it is not only the entrepreneur's own education, but also that of the workforce. An entrepreneur who cannot find appropriate workers or clients who are sophisticated enough for her products is not as successful. While the results are strong, I am a bit wary of using a short annual sample to tease anything out of education measures, but this is worth further investigation.

Charter cities and colonialism

Growth is very unequal across the world. In some areas, the experience has been very frustrating, foremost in Africa, others have been booming, foremost dense areas like Singapore, Hong Kong, or Taiwan. From there, growth has spilled over to neighboring areas, the best example being Guangzhou next to Hong Kong. These areas all have in common that they are autonomous from the surrounding areas, either by history or by design. This has lead Paul Romer to push for charter cities as a new development concept in other areas: give a preferably coastal city autonomy from the rest of the state in its management, allow it to trade freely in goods with the rest of the world, and allow free movement of people. As these charter cities grow, they will eventually help the backcountry to grow as well.

This idea is met by some resistance, though. One is that this is once more the people from the North trying to impose a radical change in the way business is done. This sounds like colonialism all over again, but as Voxi Heinrich Amavilah points out, the concept of charter cities is precisely about imposing anything, letting the locals run the show as they wish. Also, the rents from trade remain local, as the locals are free to trade, whereas under colonization foreigners took the rents. I think the idea has merit, especially for areas where a failed state is a major impediment to progress.

How to kill growth: corruption and large military

While it is not a slam dunk, there is pretty good empirical evidence that corruption and government expenses that are not tied to public infrastructure are not good for economic growth. This evidence comes largely from linear cross-country regressions of the kind that anybody with a little sense of theory or econometrics shudder. But sometimes this is done a little bit better.

Giorgio d'Agostino, John Dunne and Luca Pieroni take a simple growth model where government expenses are divided in public infrastructure, public consumption and military expense. Along with private capital, all three enter the production function for reasons that are not entirely clear, but we can let the data speak here. In addition, each expense is adorned with a multiplier that identifies how much is lost through corruption. The result is an equation for the growth rate that can be brought to the data, specifically a set of 53 African countries over 5 years. This is were things become iffy, as it is by now well-known that using panel data in growth regressions leads to very spurious results, especially when African data is considered. Using instruments and GMM will not help you much when data is of poor quality, especially from one year to the next. And taking lags of growth rates will make things even worse.

Results show coefficients "of the right signs" and a particularly strong interaction between corruption and military expenses. I am not sure I can believe these results given the above problems, but they make sense. And if one can extrapolate this African result to other countries, I would be especially worried for the US, where military expenses are always high and bribery of politicians is common and legal.

Towards better growth accounting

There are some literatures that I find very frustrating, and the empirical growth literature is among them. The initial idea to take a production function to see the contribution of labor and capital to the average growth rate of an economy and then also to compare this way differences in income levels was initially very instructive, in particular because it highlighted how total factor productivity was important. It went all downhill from there, as people started wildly regressing whatever they could get their hands on across countries, mostly with poor data. TFP can be influenced by many things, and there is no way one can identify anything without applying some structure, even with good data.

Gino Gancia, Andreas Müller and Fabrizio Zilibotti use a model to distinguish the contributions of factors (labor, human capital and physical capital), barriers to technology adoptions and technology inadequate for local conditions. The results are interesting, too. Removing these barriers would increase per capita income by 24% in the OECD and 36% elsewhere. And given that a model was estimated, it can be used for various scenario analyses. For example, they find that globalization increases skill premia and thus world income disparities, but this can be reversed by coupling trade liberalization with a reinforcement of intellectual property rights. These latter results are somewhat counterintuitive, but are justified by the fact that with stronger IP rights, there can be a transfer of technology to the South.

Time for an agricultural revolution in Africa?

When you think about income differences across the world, Africa is really depressing. It seems nothing is making a lasting impact in terms of policy for it to catch up with the others, and seeing how Asia managed to transform itself makes you wonder what is fundamentally wrong. While one may think this has to do with misguided policies, so much has been tried that something ought to have stuck. But no. One thing that helped Asia is that evolution in rice brought an agricultural revolution that freed human resources for manufacturing, so could such a revolution also happen in Africa?

Donald Larson, Keijiro Otsuka, Kei Kajisa, Jonna Estudillo and Aliou Diagne claim that several areas in Africa are suitable for rice, but local diets and tastes are too diverse for rice to have the success it had in Asia. The productivity of other crops needs to improve as well. So it does not look like there is a ready-made solution that will kick-start the agricultural revolution soon, despite some very localized successes.

That said, why insist of improving agriculture on a continent that is visibly not appropriate for this? Much like telecommunications in Africa jumped over landlines directly to mobile telephony, why not bypass agricultural development straight to manufacturing? One argument against this is the large transportation costs that make local agriculture essential and manufacturing away from the ports unprofitable. But why insist on keeping the population on the countryside? Why not develop coastal cities and take advantage from returns to scale there, like Singapore and Hong Kong did, and

Maximizing the Human Development Index

We all recognize GDP per capita is far from a perfect measure of wellbeing in an economy, hence the Human Development Index (HDI) was developed. It aggregates indicators of health, education and income. The idea is to evaluate how well an individual can function in such an economy. But the elaboration of the HDI did not follow any formal theory in the selection of the precise indicators and their weighting. So what about doing the reverse: take the HDI seriously in theory?

Merwan Engineer and Ian King use a standard growth model, calibrated following Mankiw, Romer and Weil, and look for what it takes to maximize the HDI. And they find massive overinvestment into physical and human capital, which saving rates so much higher than what the Golden Rule would call for that consumption is almost reduced to zero. Because consumption is not part of HDI! That looks a crass oversight, as we generally assume, correctly I think, that people care about consumption for their standard of living.

How to manage rents from non-renewable resources

Some countries are blessed with natural resources, although this turns too often into a curse as rent seeking can turn the economy into a corrupt hell-hole. To make things worse, this type of revenue is highly volatile and there is much incentive to extract rapidly with little thought for smoothing income or investing for the future. Hence, international organizations have pushed very hard for a more sensible management of resources incomes, and their advice has been to extract or invest income in a way to obtain a constant permanent income.

Anthony Venables thinks this is not appropriate for developing countries that have pressing needs right now, like poverty alleviation or a shortage of public infrastructure. In addition, one has to realize that sustained growth is not going to come from the public sector, but through private investment. And making private investment worthwhile can be helped by good, but limited government. This Venables thinks that revenue management should put more emphasis on current expenses than future ones, in order to make sure the country get out of a development trap and can continue growing on its own latter, with relying on its resource income.

PS: the paper's abstract was much more intriguing that the paper turned out to be. The reason is that the abstract make promises about the proper management of income from renewable resources, which would seem much less problematic, unless I was missing something.

Brawn, gender and human capital investment

Females are now more numerous than males in most levels of education, and they perform better in school. Why is that? One hypothesis is that there are biological differences that make that men are better at tasks that require force, while women are better when reasoning is asked for. This is the brawn versus brain hypothesis, and as todays economies indeed ask for more intelligence than brute force from their workers, women find more opportunities and better pay.

Mark Pitt, Mark Rosenzweig and Nazmul Hassan build a model of investment in human capital that differentiates genders. Better nutrition improves strength and education improves skills. Individuals make these choices, as well as in which activities to work. Using panel data from rural Bangladesh, they find that model is a reasonable description of reality. That is particularly interesting, because rural Bangladesh does not strike me as an economy where brain would dominate brawn. Also of interest is that improvements in health do not increase education for men, it may even reduce it, while women education clearly benefits from them. Thus policies that focus on health improvements are likely to improve women's schooling more than men's, lead to more occupational differentiation across genders, and a larger gender wag gap.

The origin of the demographic transition

Compared to two centuries ago, today's world is much different, as the standard of living has dramatically increased, along with population. This has been in strong contrast with previous history, characterized by growth close to zero in both population and the standard of living. During this period, there has been a very strong demographic change, called Demographic Transition, with a large decrease in mortality followed by a decrease in fertility. This has implied that every country that went (or still goes) through this transition has a period of high population growth while mortality is low and fertility has not yet declined. Such major shift in demographics have large implications, but it is also important to understand what triggered the Demographic Transition, especially as some countries are now just at the start of it.

Oded Galor tries to disentangle to various triggers that have been proposed. As this is a dynamic process, obviously some triggers are going to be more important at different stages of the transition. There is too discussion in the paper about the various theories and the quantitative evidence for and against them for me to summarize it efficiently here. Galor concludes that the following theories hold water when plunged into the data: First there is the theory that the higher demand for human capital during industrialization lead to a decline in fertility as parents concentrated more on the quality of their children rather than their quantity. Second, as the wage gap between females and males decreased, the increase in female labor force participation and the associated higher opportunity cost of having children for mothers reinforced the decrease in fertility.

What is important here are the theories that did not passed the test of the data according to Galor: the theory that the emergence of financial markets made in less necessary for parents to have been adult children to support them in old age; the theory that a decline in mortality lead to a too high number of surviving children; and the theory that the general increase in income lead to a rising opportunity cost of raising children.

Luminosity as an indicator of economic activity

When working with worldwide data, it si often frustrating that data quality and availability is far from uniform across countries. Especially for developing countries, or those with large informal sectors or notable self-sustenance, we have a very imperfect idea of how much economic activity there is. Hence, looking at other indicators that GDP can give us interesting clues.

Xi Chen and William Nordhaus make the case for luminosity. By looking at how brightly various locations shine at night, it allows you to infer something about economic activity and the level of development. Also, it allows to say something about regional distribution of economic activity. Of course, this is not going to be perfect, especially for developed economies where data is of much better quality to start with.

The standard data set for international macroeconomics data is the Penn World Tables. It also grade grades to its data, telling us how reliable it is. Unfortunately, these grades are largely ignored in empirical work. Chen and Nordhaus ask whether they can increase the quality of output measured with their luminosity data and they claim this is only useful for those labeled D and E. Yet they do not advocate using luminosity data for countrywide analysis. Indeed, data collection methods will eventually improve and traditional data will move up in the quality ladder. Luminosity data is far from perfect, it is just that in some countries official data is even worse at the moment. Chen and Nordhaus are more confident with luminosity as a proxy for regional activity in some cases, even if measurement error is even larger there.

Is fair trade unfair?

US colleges make big money from the sale of all sorts of items imprinted with their logo, in particular clothes. Of course, to maximize the margins on these goods, their production has been mostly outsourced off-shore, to factories that were often likened to sweatshops. Whether a large portion of those factories were indeed providing substandard working conditions is a debate I do not want to enter for now. The fact is that student activists demanded that those factories should not be retained for production. As universities and their suppliers complied, the poorest workers were out of a job, and the university gift stores are making less of a profit. Unintended consequences.

Aurélie Carimentrand and Jérôme Ballet explore a similar story with fair trade. Their case study is about quinoa from Bolivia. The goal of fair trade is to give local producers in developing countries a larger share of the retail price of their product. But beneficiaries need to get certified, and this process does not necessarily favor the most needy, in particular as they need to obey some rules. In the case of Bolivian quinoa, this works through the membership in a growers' association which markets crops to fair trade networks. As associations typically are, this one is dominated by the big producers. The latter are located in the big plains, where they could get the full advantage of mechanization. The small producers are on steep terrain and cannot use tractors. The latter are the poorest, but, as the authors argue, they benefit the least from fair trade, often even skipping membership. Indeed, the association pays the same unit price to all members, and given the differences in production costs, this exacerbates inequalities.

The authors claim that fair trade has failed here. It made inequities among producers worse. But was domestic income equality really the primary role? Isn't it really about world income inequality? There, clearly fair trade is transferring some rents to developing economies. Whether they are large enough to be worth the trouble is another question.

Growth success in Africa: firms become smaller

How could one characterize a developing economy with little growth? Large informal sector, small firms, lots of red tape in the formal sector. As the informal sector typically has low productivity (before red tape), a typical prescription for growth is to move its activity into the formal sector. This can be achieved, for example, by reducing regulation in the formal sector.

Justin Sandefur looks at Ghana, which has recently experienced solid growth following some deregulation, and remarks that average firm size was halved over a 17 year period, while the share of the informal sector has increased. Using a manufacturing survey covering 1987 to 2003, Sandefur finds that aggregate growth did not come from firm growth, but from firm creation. These microenterprises stay tiny until they die, while the existing big firms stay as big.

While the growth experience of Ghana seems encouraging, one needs to realize that small informal firms stay small and informal. Thus once all entry opportunities have been used, growth will petter out.