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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.

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Out of Kenya

20120521-220226.jpgWoke up at 6 to start my journey back home. I say goodbye to the house lady, Janet. Fortunately, she tends to Japanese people, who never picked up the absurd habit of tipping. Her kind goodbyes are genuine and I’m appreciative. She’s a wonderful cook.

Actually, I’m marveling (as I do every time) at the amount of weight I’ve gained. Malarone, in addition to making me dizzy, blind and nearly psychotically depressed, robs me of the ability to feel hunger, and the ability to tell when I’m full. A bad side effect when fried foods and meat are the only things available.

Takatou appears. He’s been my dinner partner for the past couple of weeks and politely puts up with my half garbled, nightly political rants. He kindly drives to the Mbita ferry port.

The Mbita ferry is full of surprises. Today, I sat next to a pile of goat hair. I take pictures of boats and enjoy the ride. It will be relaxing compared to the manic, 100 mph taxi ride to Kisumu airport. This area is pretty empty, but I’ll never get used to driving on African highways.

I arrive at Kisumu. The easy part is now over. From here on begins the harrowing adventure of African airports. Mostly, its a game of “hurry up and wait.” Today goes smoothly until Nairobi, where I discover that my flight has been delayed by six hours, at least if the sign is to be believed. Of course this means I’ll miss my flight home and will have to spend the night in Dar. I’m frantic.

The airport staff inform me that the signs are never to be believed. “Oh that? Those things are always wrong.” Never believe the digital signs with the Kenya Air logo.

Mbita, Kenya

I’m too busy writing other things to actually write anything for this blog, so my two readers will have to suffice with pictures.

Right now, I’m in Mbita, Kenya, located in Nyanza Province. The area is known to be one of the least developed places in all of Kenya, but has to be one of the friendliest. It’s not hard to find someone to talk to, and even easier to get their picture. Most times, they ask you to take one.

Tanzania Day 6: The Road

It takes more than 20 hours to get from the eastern coast to the western end of Tanzania. Though the road is largely paved between Dar es Salaam and Mbeya in Rukwa Region, areas in more remote sections of Tanzania are what one would expect: hills, rain swept crags and valleys, and treacherous mountain paths. Compounding this distance is the multitude of police stops along the way.

So far, we’ve had to pay fines for “speeding” and not having a sticker that no one seems to have heard of-though I suspect that it’s a permit for carrying white people in the country of Tanzania. As I’m writing this, we’ve just been stopped for doing 40 in a 30 zone, which set the driver back about $10. In total, we’ve been stopped more than 10 times and I don’t expect it to end anytime soon. I’m reminiscing about driving through Tennessee, where cops will pull over anyone with an out of state tag and concoct any number of fine-able “offenses.” No one asks specifically for a bribe, but it’s pretty clear that the police are pocketing the “fines.”

This is the main artery that connects the ports of Dar with Malawi, Zambia and the DRC. Back to back trucks take goods in and out of Tanzania all day long. Gasoline and diesel appear to be the most transported items, followed by Coke and Pepsi bottles both empty and full. Trucks carrying farming and construction equipment are not rare. It’s reassuring to see flatbeds carrying brand new Massey tractors toward Malawi and Zambia.

It’s the harvest right now, so farmers are busy bagging rice and loading them on to large trucks for consumption in other areas of Tanzania, and presumably for export to other countries. This area is famous for rice, and I can attest to the quality. Wood is also in plentiful supply. Trucks full of African mahogany that would bring hundreds of thousands of dollars in the US are to be seen everywhere.

We pass through Tunduma, on the Zambia/Malawi/Tanzania border. The air here in this border town is thick and black with exhaust. Its remnants coat everything in sight, even the humans, leaving it a dull and dirty brown. If I were to spend any more time here, I’m sure my lungs would begin to hurt. Looking around at all the auto parts shops, it’s probably the best place in this region to go if you’re looking for parts for your Scania truck, presumable scavenged from the series of metal husks that adorn the sides of the road. Most are half buried from the rains.

Just got pulled over again, this time for a hanging cooling belt. This time, we don’t have to pay. While we’re all thankful to know that the cooling belt needs to be replaced, the driver remarks that this road is notorious. What should be an 8-hour trip from Mbeya to Dar turns into twelve due to all of the pointless police stops.

The drive on the way back is a harrowing series of mountain paths and thin highways. Cows, goats, baboons and children present constant hazards. By far, though, the most dangerous parts of the road here are the vehicles. Even the largest of trucks run long past their date of expiration. It isn’t at all reassuring to remember that the number one reason that people decommission their vehicles is the expense of repairing worn brake lines. Engines can be replaced. Safety is another matter entirely.

We see the remains of not one, but several horrific truck accidents. Even if the drivers survived the crash, it’s unlikely that any hospital in Tanzania would be equipped to provide adequate care to manage massive blood loss and trauma. Honestly, I wouldn’t want a transfusion here anyway. It is notable that as we approach Dar and the road widens, the number of accidents appears to dwindle. I become more and more at ease the closer we get. I have to admit, though, my worries are likely overblown and unwarranted, but it never hurts to be careful.

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