Measuring socio-economic status in Kenya
I was just screwing around with some data we collected a bit ago. In a nutshell, I’m working to try to improve the way we measure household wealth in developing countries. For the past 15 years, researchers have relied on a composite index based up easily observable household assets (a la Filmer/Pritchett, 2001).
Enumerators enter a households and quickly note the type of house construction, toilet facilities and the presence of things like radios, TVs, cars, bicycles, etc. Principal Components Analysis (PCA) is then used to create a single continuous measure of household wealth, which is then often broken into quantiles to somewhat appeal to our sense of class and privilege or lack thereof.
It’s a quick and dirty measure that’s almost universally used in large surveys in developing countries. It is the standard for quantifying wealth for Measure DHS, a USAID funded group which does large surveys in developing countries everywhere.
First, I take major issue with the use of PCA to create the composite. PCA assumes that inputs are continuous and normally distributed but the elements of the asset index are often dichotomous (yes/no) or categorical. Further, PCA is extremely sensitive to variations in the level of normality of the elements used, so that results will vary wildly depending on whether you induce normality in your variables or not.
It’s silly to use PCA on this kind of data, but people do it anyway and feel good about it. I’m sure that some of the reason for this is the inclusion of PCA in SPSS (why would anyone ever use SPSS (or PASW or whatever it is now)? a question for another day…)
So… we collected some data. I created a 220 question survey which asked questions typical of the DHS surveys, in addition to non-sensitive questions on household expenditures, income sources, non-observable assets like land and access to banking services and financial activity.
The DHS focuses exclusive on material assets mainly out of convenience, but also of the assumption that assets held today represent purchases in the past, which can act as pretty rough indicators of household income. So I started there and collected what they collect in addition to all my other stuff.
This time, however, I abandoned PCA and opted for Multiple Correspondence Analysis, a technique similar to PCA but intended for categorical data. The end result is similar. You get a set of weights for each item, which (in this case) are then tallied up to create a single continuous measure of wealth (or something like it) for each household in the data set.
Like PCA, the results are somewhat weak. The method only captured about 12% of the variation in the data set, which sort of begs the question as to what is happening with the other 88%. However, we got a cool graph which you can see up on the left. If you look closely, you can see that the variables used tend to follow an intuitive gradient of wealth, running from people who don’t have anything at all and shit in the shrubs to people who have cars and flush toilets.
We surveyed three areas, representing differing levels of development. Looking at how wealth varies by area. we can see that there is one very poor area, which very little variation to the others which have somewhat more spread, and a mean level of wealth that is considerably higher. All of this agreed with intuition.
“Area A” is known to be very rural, isolated and quite poor. Areas B and C are somewhat better though they are somewhat different contextually.
My biggest question, though, was whether a purely asset based index can truly represent a household’s financial status. I wondered if whether large expenditures on things like school fees and health care might actually depress the amount of money available to buy material items.
Thus, we also collected data on common expenditures such schools fees and health care, but also on weekly purchases of cell phone airtime. Interetinngly we found that over all the two were positively correlated with one another, suggesting that higher expenses do not depress the ability for households to make purchases, but found that this relationship does not hold among very poor households.
There is nothing to suggest that high expenses are having a negative effect on material assets among extremely poor households located in Area A at all. It might be the case that there is no relationship at all. This could indicate something else. Though overall there might not be a depressive effect of health care and school costs on material purchases, they might be preventing households from improving their situation. It might only be after a certain point that the two diverge from one another and households are then able to handle paying for both effectively.
Also of interest were the similar patterns found in the three areas.
“Kenya is a cash based economy”– Not.
Riding a matatu is one of my favorite activities and without the carbon monoxide and blaring reggae music, the experience is just not complete. Elaborate light shows are just a bonus.
The Kenyan government has partnered with Google to introduce a new Android based transit card system to replace the current cash based “system.” The idea is to standardize price, eliminate volatility in drivers’ incomes (reducing incentives to drive badly) and efficiently tax the ridership.
The NYT did a great write-up on the Kenyan transit card effort, which I won’t rehash here, but one part of the article stuck out to me.
One of the matatu drivers expresses his resistance to the pre-paid digital system by barking “Kenya is a cash based economy!”
Nothing could be further from the truth. Digital payments are common everywhere in Kenya now. People send and receive money regularly through the M-PESA system, with transactions exceeding 6 billion dollars per month in a country where the average person makes less than $5 a day, many much less.
People buy things at the biggest and the smallest stores with M-PESA, as evidenced by a visible placard displaying the shops M-PESA number. I buy groceries with M-PESA, gas and even have paid my rent with M-PESA. Once, I even bought a $.50 bunch of bananas with M-PESA from an informal vendor on the side of the road.
In Nairobi, where it’s always possible to get robbed, M-PESA is great. I don’t have to carry around big wads of cash with me. Even if my phone gets ripped off, I can still access my money digitally.
Cash is a fiction. While it may seem like poor people benefit from using pieces of paper inscribed with pictures of the first president, cash is unwieldy and simply unsafe in many cases. Moreover, the crumpled and worn bank notes are easily lost and change not always available. Try using a 1000 (or even a 500) schilling note to buy bananas. You’ll be waiting a long time.
New insurance product protects pastoralists from losses due to drought in Kenya
This is rather interesting. Pastoralism is characterized as a complex system of avoiding, accounting for and taking advantage of risk, not unlike hedge fund managers in the United States. Animals represent potential earnings, prices at markets vary with grazing conditions and perceived long term benefits, and decisions to sell animals are not made lightly.
In the past, pastoralists have protected against devastating losses through herd maximization and cooperation and conflict over prime grazing spots, along with systems of redistribution where animals from wealthy herders are given away or stolen with the approval of the community. The world has become complicated, though, as droughts become more and more frequent, political borders and conflicts constrain the movements of pastoralists, and as the spear has been replaced with the AK-47.
An interesting though appropriate insurance system might help to mitigate losses and stabilize communities.
Capital and inequality
Joseph Joyce, professor of economics at Wellesley College wrote and interesting piece to day on capital liberalization and inequality.
I’m glad to see that so much attention is being fawned on Piketty’s most excellent book, “Capital in the 21sr Century.” It’s sure to go down as a classic in the economics literature, but the debate and discussion surrounding the book couldn’t come at a better time.
I don’t think it’s an accident that Piketty’s book, would top the NYT best seller list just a week after appearing, that a sitting President of the US would mention that inequality is one of the most important issues of our time, or that Christine LaGarde, head of the IMF would make a case that we need to address inequality at a global level.
They (Florence Jaumotte, Subir Lall and Chris Papageorgiou) analyzed the effect of financial globalization and trade as well as technology on income inequality in 51 countries over the period of 1981 to 2003. They reported that technology played a larger role in increasing inequality than globalization. But while trade actually reduced inequality through increased exports of agricultural goods from developing countries, foreign direct investment played a different role. Inward FDI (like technology) favored workers with relatively higher skills and education, while outward FDI reduced employment in lower skill sectors. Consequently, the authors concluded, while financial deepening has been associated with higher growth, a disproportionate share of the gains may go to those who already have higher incomes.
This is a scenario we’re all mostly familiar with, though the broad effects are still debatable. Increasing investment by giants like the US in overseas manufacturing push down wages on domestic unskilled labor, but it’s hard to say whether this had a major effect on overall employment. Unemployment remained steady even after Clinton signed NAFTA, and continues to remain well under European levels today, though the lowest level of workers feel the worst pain. I’m not sure if I can really advocate for protectionist measures to keep capital at home or dissuade foreign investment on principle alone, but it is true that the worst effect of foreign competition has been the erosion of labor’s political power.
Jayati Ghosh of Jawaharlal Nehru University of New Delhi has examined the role of capital inflows in developing countries. She maintains that the inflows appreciate the real exchange rate and encourage investment in non-tradable sectors and domestic asset markets. The resulting rise in asset prices pulls funds away from the financing of agriculture and small firms, hurting farmers and workers in traditional sectors. Eventually, the asset bubbles break, and the poor are usually those most vulnerable to the ensuing crisis.
Well, this is somewhat more interesting. Foreign investment in developing countries appreciates the exchange rate, leading domestic investors to put their money into, say, real estate assets. This is certainly the case all over Africa. Land and building developments are occurring at a breakneck pace, with the hopes that expensive properties will be bought up by foreign companies and individuals. It’s certainly the case that no common African could ever afford some of these places (or would even want to buy them if they could). Nairobi, Dar es Salaam and Luanda, Angola are all in the middle of a real estate bubble. The problem, of course, is that domestic investors are hoping to make a quick buck, rather than attempting to create long term, profitable industries. No wonder Africa imports the lion’s share of it’s manufactured goods. No local will invest in the infrastructure to create it locally since urban real estate is so absurdly profitable right now. This, of course, means that money flows directly into the pockets of the urban elite and then sent back out to bank accounts and retailers in France and England, further entrenching the poorest of the poor.
Without the development of local industries, domestic economies can’t function and opportunities for revenue collections are missed. and countries like Tanzania and Kenya, for example, will continue to be beggar economies which depend on the good graces of the international community to support domestic social programs.
I really don’t want the US to go back to 19th century monetary policy
But Ron Paul did.
I’m checking out the graphic below, and, first, wondering why anyone ever thought that gold was the only investment to make given it’s bubblish nature, and second, wondering what it must have been like to have investments in the 19th century. Granted, most people didn’t, and some people were even the targets of investment themselves. The wide volatility in the inflation rate must have driven people nuts.
If you owed money, one year, you’d make out like gangbusters, watching inflation obliterate your debt obligations, the next year, you’d watch your world crumble as the currency became worthless. If people owed you money, you’d be in the opposite pinch. Either way, you were screwed and had little ability to plan for the future. By the time you rode out the constant rough spots, though, you’d end up with the same amount of money you started with decades earlier. I’ll take steady inflation and reasonable economic certainty over crazyland, but Ron Paul might be into it, I guess.
Odd claims that biofuels were responsible for skyrocketing commodity prices
The blog Uneasymoney, posted an article this morning claiming that policies which encouraged the production of biofuels was responsible for the crazy run in commodity prices throughout the 2000’s and was ultimately responsible for the 2007/2008 crash.
The post refers to an article in the Journal of Economic Perspectives, which I am reading now but the results of which are summed up here:
the research of Wright et al. shows definitively that the runup in commodities prices after 2005 was driven by a concerted policy of intervention in commodities markets, with the fervent support of many faux free-market conservatives serving the interests of big donors, aimed at substituting biofuels for fossil fuels by mandating the use of biofuels like ethanol.
What does this have to do with the financial crisis of 2008? Simple. ..the Federal Open Market Committee, after reducing its Fed Funds target rates to 2% in March 2008 in the early stages of the downturn that started in December 2007, refused for seven months to further reduce the Fed Funds target because the Fed, disregarding or unaware of a rapidly worsening contraction in output and employment in the third quarter of 2008. Why did the Fed ignore or overlook a rapidly worsening economy for most of 2008 — even for three full weeks after the Lehman debacle? Because the Fed was focused like a laser on rapidly rising commodities prices, fearing that inflation expectations were about to become unanchored – even as inflation expectations were collapsing in the summer of 2008. But now, thanks to Wright et al., we know that rising commodities prices had nothing to do with monetary policy, but were caused by an ethanol mandate that enjoyed the bipartisan support of the Bush administration, Congressional Democrats and Congressional Republicans. Ah the joy of bipartisanship.
So then, what I’m gathering here is that the Fed was obsessive about commodity prices fearing inflation, despite the fact that the Fed was in no position to influence commodities markets. This distracted the Fed from focusing on the real causes of the crash and the Lehman disaster, making a bad situation worse.
I’m not sure that this correctly connects the dots, given that there is little evidence that the run in commodity prices had anything to do with biofuels. Even as biofuel consumption increased throughout the 00’s, overall production of corn and yield per acre also increased. Assuming that commodity prices are in part dictated by supply, I would (from an armchair economist perspective) assume that prices should remain somewhat constant.
I’m interested to see that the article disregards financialization of commodities, following a loosening of rules of speculation on ag products in the 90’s and the move toward commodities following the equity bust of 2000 as not being a major factor in the rise in corn prices. This is particularly strange when we consider that non-energy commodities also exhibited rapid price increases and violent fluctuations throughout the 00’s. I fail to see how energy policy could result in increases and volatility in, for example, copper.
It’s a tempting thesis, and made more tempting by the explicit identification of individuals who suggested and implemented such policy, but not one borne out by the data, in my limited, amateurish opinion. The list of potential factors which influenced the run in commodities is a long and confusing one (climate change, increased demand from China and India, global instability, etc. etc.), but I don’t think that the effect of Wall Street greed can be discounted as a major determinant. Interestingly, despite the overall themes of the paper, the author does a poor job of discounting the effect of financialization in the creating of commodity price bubbles.
In reading this paper now, I’m somewhat confused. On the one hand, he confirms many of my initial suspicions that the rising price of food is unrelated to supply and demand factors as growth of both supply and demand were more or less constant, despite localized climate shocks. On the other, he seems to blame a rise in prices during the crash to a shift in energy policy toward biofuels, while overlooking that commodities were already volatile and rising, beginning with the crash of the tech bubble in 2000. I am thining that much of the rise in commodities during 2007/8 was due to panicky speculation as real estate markets tumbled, not to any change in energy policy. Certainly, it may be the case the the policy influence traders to try to exploit potential areas of growth, but it’s hard, then, to discount the effect of financial speculation in commodities outright.
I can at least agree with this:
The rises in food prices since 2004 have generated huge wealth transfers global landholders, agricultural input suppliers, and biofuels producers. The losers lobal landholders, agricultural input suppliers, and biofuels producers. The losers have been net consumers of food, including large numbers of the world’s poorest ave been net consumers of food, including large numbers of the world’s poorest peoples.
Lacking anything constructive to write about, I thought I’d list what’s been on my reading list today.
First was an article from the Guardian reporting on Mark Zuckerberg’s statements that internet connectivity is a “human right.”
I’m not sure we should go so far as to classify connectivity as a “human right,” given that there are other things like food, security, education and health care that many people around the world don’t have access to, but I do agree that communications are essential for all four. Anti-tech folks will, of course, be annoyed but fortunately powerless. Communications development in Sub Saharan Africa, fueled by intense and enthusiastic demand, is nothing short of impressive. It’s hard to measure, but from a recent survey I performed in Kenya, it would seem that people on the ground are enthusiastic about the technology.
Second was an article on cancer meds in India in the NYT. Drug makers are apparently worried that India will flour patent laws and produce expensive cancer drugs cheaply, pricing out US and European markets. I’m encouraged that anyone at all is talking of cancer in a developing country.
India, no stranger to ignoring onerous patent restrictions on meds, is right to move against the hard-headed pharma industry. While the noted concerns of drug makers are certainly legitimate, there have to be ways to accommodate demand in developing countries while still insuring profitable domestic and international enterprises. If they can’t think of a way to do it, they aren’t thinking hard enough.
Third was an article on GMOs from Henry Miller a molecular biologist at Stanford on the unreasonable hysteria surrounding genetically modified foods.
While it is right to be concerned about the safety of new technologies, the attention and regulatory backlash against GMOs is disproportionate. It is akin to a bizarre witch-hunt or maybe a good Christian book burning. I’m sure that many would not agree with Dr. Miller’s position but I found it to be an interesting article.
But then, maybe he’s just a paid stooge of Monsanto and we really all are slowly dying from “GMO poisoning”. It’s certainly possible; the credibility of academics is being called into question over connections with Wall Street. I’m interested in reading the work of the two academics interviewed here, which argues that price increases in commodities throughout the 00’s had little to do with speculation.
Just as I’m not an expert on biotech, I’m also not an expert on finance but the data shows that price increases seem to be slowing as regulation to control commodity futures speculation has been in the works.
Complexity in Markets: a few random thoughts
I was just checking out an article by Mark Buchanan on Bloomberg about the need to abandon the idea of economic markets as being inherently stable.
For several decades, academics have assumed that the economy is in a stable equilibrium. Distilled into a few elegant lines of mathematics by the economists Kenneth Arrow and Gerard Debreu back in the 1950s, the assumption has driven most thinking about business cycles and financial markets ever since. It informs the idea, still prevalent on Wall Street, that markets are efficient — that the greedy efforts of millions of individuals will inevitably push prices toward some true fundamental value.
Problem is, all efforts to show that a realistic economy might actually reach something like the Arrow-Debreu equilibrium have met with failure. Theorists haven’t been able to prove that even trivial, childlike models of economies with only a few commodities have stable equilibria. There is no reason to think that the equilibrium so prized by economists is anything more than a curiosity.
It’s as if mathematical meteorologists found beautiful equations for a glorious atmospheric state with no clouds or winds, no annoying rain or fog, just peaceful sunshine everywhere. In principle, such an atmospheric state might exist, but it tells us nothing about the reality we care about: our own weather.
This is true. Markets are inherently unstable beasts,as was proven by the crashes of 2000 and 2007/8. Personally, I am an advocate of free markets. The trouble is that no one can agree on what a free market is.
I recently watched a compelling lecture by development economist Ha Joon Chang, where he pointed out (rightly) that “free markets” are truly in the eye of the beholder, pointing out that even the most ardent of free market supporters in 2013 wouldn’t support the free marketers and libertarians who complained of the implementation of child labor laws in the early 20th century.
I should say, then, that I’m an advocate of the “freeest markets within reason” or “the freest markets as will support the moral ideals I hold to be important.” That is, the freeest markets as will support the protection of individual rights to freedom of expression and political thought, the preservation of equal opportunity through education and health, access to capital and social mobility.
Mr. Buchanan points put that where other sciences have accepted that there is no such thing as stability in the rest of the universe, desperate economists and their politically backward fans stick to the idea that, despite evidence of the irrationality of humans in every other space, markets are “self stabilizing.” That humans are rational (they are not) and customers can democratically select optimal prices vs. availability (untrue).
First, I am drawn to the incredible volatility of prices in areas that have the least power to influence them (developing countries).
If there were ever an example of the undemocratic nature of unbridled markets, food in developing countries would be it. Buyers and sellers are legion, yet bodies across the sea set prices with little regard to the demands of the many. In Sub Saharan Africa, stability is a fantastical dream.
Second, I am thinking of the work being done on complex systems in finance, specifically that coming out of Princeton at the moment.
SOME people aren’t waiting around with their heads in the sand, but rather are working to describe the phenomena of finance volatility, noting the increased complexity of financial markets in 2013. It would seem that deeper linkages between financial systems, though necessary, induce the very real problem of volatility. Ignoring it or pretending it doesn’t exist won’t make it go away.
Blaming government regulation and calling for a return to 19th century finance doesn’t work well either.
But that’s enough….