Where do remittances come from?

Courtesy of the Inter-American Development Bank, we get this nice map breaking down the sources of US remittance flows to Latin America by state (click to enlarge).

No real surprises here but it's a kinda nice map, no?

The impact of large natural disasters on economic growth

In the aftermath of the earthquakes in Haiti and Chile it is natural to wonder what impact these two terrible events will have on these countries' future economic growth. Will the damage permanently lower output and burden future generations with the reconstruction bills? Or will the post-disaster construction boom and opportunity for structural change act as an economic stimulus, ushering in a new period of rapid growth?

Well, the folks over at the Inter-American Development Bank have clearly pondered these two questions more than I have. And their results are not exactly what one would expect.

Using a large comparative sample of severe natural disasters, the authors take advantage of the fact that natural disasters are a random event to tease out their causal effects on growth. In other words, the paper attempts to approximate a laboratory setting by also putting together a "synthetic" counterfactual of what would have happened in disaster countries if the natural disaster had never happened (they do this by grabbing a bunch of similar countries and weighting them to approximate the initial conditions of the disaster countries).

The results can basically be summarized with the graph below. It shows the path of real GDP per capita in actual disaster cases and in the counterfactual cases. Real GDP per capita is set to zero on the year of the crisis.

So what does this tell us? Well, disasters appear to have no effect on per capita income. In fact, the path of real GDP per capita following disasters perfectly mirrors the counterfactual index.

There were, however, two exceptions to the rule:

"Contrary to previous work, we find that natural disasters, even when we focus only on the effects of the largest events, do not have any significant effect on subsequent economic growth. Indeed, the only two cases where we found that truly large natural disasters were followed by an important decline in GDP per capita were cases where the natural disaster was followed, though in one case not immediately, by radical political revolution, which severely affected the institutional organization of society. Thus, we conclude that unless a natural disaster triggers a radical political revolution, it is unlikely to affect economic growth."

So there you have it. From the perspective of GDP per capita, a profoundly flawed but nevertheless indispensable measure of economic welfare, even the most severe natural disasters do not have an effect. So what's the moral of the story here? Is this a tale about human resilience in the face of calamity? Or is it another sobering lesson in the perils of statistical abstraction?

Import Substitution vs. the Washington Consensus: Dani Rodrik knows his shit

Dani "master of development policy" Rodrik has a nice breakdown of a recent Inter-American Development Bank report on productivity changes in Latin America. Discussing the changes in productivity during the years of import substitution and then during the Washington Consensus, Rodrik writes:

"For all its faults, IS promoted rapid structural change. Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones. So much for the inherent inefficiency of IS policies!

Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor. The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services. In other words, the WC ended up promoting the wrong kind of structural change."

Good thing I was too lazy to read that IDB report when it came out, because instead of giving you another dose of my ramblings, I could instead bring you Rodrik's far more insightful account. In any case, go check it out, here.

Original Sin no more

It seems that Latin American countries are starting to atone for their original sins, or at least according to a new policy brief by the Inter-American Development Bank.

Original sin, the tendency among developing countries to borrow excessively in foreign currency (yes, academic economists like to come up with dramatic names for seemingly boring subjects), was a common culprit in economic crises during the 1990s. Long story short, countries found themselves with a lot of cheap foreign capital at their disposal and tended to borrow heavily in foreign currency and usually at very short maturities. The problem is that global capital flows can be rather fickle and often come to a sudden stop, unpredictably, leaving countries strapped for cash. Throw in a domestic currency crash and all of a sudden the value of your foreign debt explodes (a so-called "balance sheet effect"), leaving countries bankrupt.

So, the IDB now reports that Latin American policymakers have taken a "step in the directions of "safer" debt composition." Between 1997 and 2009 foreign currency debt as a share of total public debt has plummeted from 64% to 37%.

What is more, this "safer" level of foreign currency debt has not reversed since the onset of the global financial crisis, when the U.S. Fed started to flood the market with cheap funds. In other words Latin American debt managers have resisted the temptation to revert to old patterns and take advantage of all 'em cheap dollars. Now this is the part where someone else would tell you that this shows how the region is "maturing." But don't worry, I find that kinda talk far too patronizing and rather anthropomorphic since these are COUNTRIES we're talking about, not children for fucks sake. Anyway, RANT OVER.