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 Forecasting America's Destiny ... and the World's

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Generational Dynamics Web Log for 2-Jul-05
Paul McCartney and a Pink Floyd reunion at Live 8! London's the place to be today.

Web Log - July, 2005

Paul McCartney and a Pink Floyd reunion at Live 8! London's the place to be today.

Meanwhile, tens of thousands march in Scotland, to end poverty in Africa.

Why not march to end cancer and traffic accidents at the same time?

Oh, I shouldn't be such a curmudgeon, since this is big news.


Pink Floyd
Pink Floyd

Ex-Beatle Paul McCartney and U2's Bono were the warm-up acts for the must-see Live 8 reunion of all four members of 70s rock bank Pink Floyd, for the first time in 24 years.

And that's just the London concert. The complete lineup for all Live 8 concerts taking place today in London, Cornwall, Versailles, Ontario, Berlin, Rome, Moscow, Tokyo, Johannesburg, and Philadelphia, and in Edinburgh on 6 July reveals some of the greatest musical artists of our time.

The purpose of the concerts is to call attention to the G-8 meeting to be held in Edinburgh, Scotland, next weekend. G-8 stands for the "Group of eight" major industrialised states, whose members are US, UK, Canada, France, Germany, Italy, Japan, Russia. The major agenda item for that meeting will to end poverty in Africa.

To that end, tens of thousands of protesters are marching today in Edinburgh to demand action.

According to the UN, more than 300 million Africans live on less than $1 a day, and less than half of children on the continent complete primary school. In the last 50 years, there have been 186 coups and 26 wars in Africa, with more than 7 million people killed, the United Nations says. Africa is the only continent to have become poorer in the last 25 years, according to the UN.


Africa is larger than Europe, America, Alaska, China, and New Zealand (not shown) combined. <font size=-2>(Source: Boston Univ)</font>
Africa is larger than Europe, America, Alaska, China, and New Zealand (not shown) combined. (Source: Boston Univ)

As I wrote in an article last month, just the sheer size of Africa makes any attempt to cure African poverty impossible. Africa is huge -- bigger than China, America, Alaska, Europe and New Zealand combined. If all the so-called "rich nations" of the world gave every penny they had to Africa, it still wouldn't be enough.

But at the meeting next week they won't give every penny they have to Africa, and so the crowds attending Live 8 concerts and marching on Edinburgh this week are going to be very disappointed next week. It'll be interesting to see how it all falls out.

Africa is no different from the rest of the world. It's true that they've had a lot of wars recently, but that's just because they're on a different timeline. The other countries of the world had their major wars in World Wars I and II, and are now headed for a "clash of civilizations" world war with 100% certainty.

And it's true that HIV/AIDS is widespread in Africa, but Asia is facing an AIDS explosion, with India leading the way. And a UCLA study reveals that US teens with AIDS are taking greater risks, indicating that AIDS will be increasing in America as well.

And this week, reports of two new research studies by the International Monetary Fund (IMF) reveal that increased aid will not solve Africa's problems.

One of the working papers, What Undermines Aidís Impact on Growth? by IMF researchers Raghuram G. Rajan and Arvind Subramanian, does the following:

"We examine one of the most important and intriguing puzzles in economics: why it is so hard to find a robust effect of aid on the long-term growth of poor countries, even those with good policies. We look for a possible offset to the beneficial effects of aid, using a methodology that exploits both cross-country and within-country variation. We find that aid inflows have systematic adverse effects on a countryís competitiveness, as reflected in a decline in the share of labor intensive and tradable industries in the manufacturing sector. We find evidence suggesting that these effects stem from the real exchange rate overvaluation caused by aid inflows. By contrast, private-to-private flows like remittances do not seem to create these adverse effects. We offer an explanation why and conclude with a discussion of the policy implications of these findings."

The paper concludes that foreign aid pours money into a poor country and has many adverse effects, usually involving a great deal of corruption. But even if corruption is avoided, foreign aid usually makes the country worse off that it was because the influx of money inflates the country's currency, and increases wages in the industries favored by the aid, making the country less competitive on the world market and more and more dependent on continued aid.

An interesting finding is that the negative effects of foreign aid don't occur with an equal amount of money provided as remittances. The word 'remittances' refers to "Money earned or acquired by immigrants that is sent back to their country of origin. For some developing countries, remittances can form a sizeable chunk of their economy."

The IMF has found that money from remittances amounted to $100 billion of capital inflows of 90 developing countries, about 50% of total capital inflows.

"For a number of developing countries, remittances are the single largest source of foreign exchange, exceeding export revenues, official aid, FBI and other private capital inflows. As an example, Mexico receives about $15 million in remittances per year, and this is probably an underestimate because we don't measure remittances that well.

The United States still remains the main source of remittances, over $30 billion in 2003, and the outflows from the U.S. have almost quadrupled in the last 15 years. So this is a big and growing source of external financing for a number of countries.

What is most important about remittances which the essay highlights is their stability. They're sent in good times as well as bad times and so they play a role in cushioning adverse shocks such as wars and natural disasters. In fact, they lower the volatility of GDP growth which I just told you from the other essay was so harmful.

They also are very well targeted at the poorest people, so in that sense they contribute significantly to reducing poverty which again the essay demonstrates.

So given these benefits, we need to find ways to encourage remittances. For example, by reducing the cost of sending them as well as to impediments to their flow, and the essay makes clear what kinds of policies might make sense."

In the working paper, the IMF researchers contrast the results of remittances with an equal amount of foreign aid:

"We now turn to the question of whether the effects of aid are unique or are shared by other unrequited transfers such as remittances....

[A] large body of micro-evidence suggests that remittances can have a positive effect on entrepreneurship, supply of labor, and increased investment.... Even so, it is somewhat puzzling that remittances do not give rise to the kinds of adverse competitiveness effects resulting from aid inflows.

One possible explanation is that remittances are spent on items like adding a room to a house, which in turn increases the demand for plentiful unskilled labor or for imported cement, and thus does not lead to real exchange rate appreciation....

However, a more compelling explanation comes from examining the pattern of remittance inflows and exchange rate overvaluation.... [C]ountries that had overvalued exchange rates in the 1990s received significantly lower remittances. The same pattern is seen when we plot remittances in the 1990s against exchange rate overvaluation in the 1980s..., suggesting that causality runs from exchange rates to remittances.

It is plausible that emigrants stop sending funds as they see an overvalued exchange rate, and as they find it cheaper to send goods directly. It is also likely that overvalued exchange rates in many of these countries were accompanied by exchange controls and dual exchange rates, which IMF 2005 finds are deterrents to remittances.

Whatever the reason, we may have an explanation of the apparent puzzle. The reason that remittances do not lead to a significant loss of competitiveness is that they tend to dry up if an exchange rate starts getting overvalued. Thus, it is only countries that through astute macroeconomic policies manage to keep the real exchange rate competitive in the face of remittances that continue to attract them. The endogeneity of remittances offers one explanation of why we do not see remittances adversely affecting the growth of tradable industries. Aid, by contrast, might even increase if exchange rate overvaluation leads to poor economic performance, thus further exacerbating the problem."

So the thrust of the IMF report is that foreign aid is counter-productive, while remittances not only improve the lives of the people in the countries that receive them, they even encourage "astute macroeconomic policies," which in turn encourages good government and discourages corruption.

This means, according to the IMF report, that we ought to be looking for ways to make remittances easier -- programs that encourage people to help people. For example, instead of giving $1 billion to a country's government ages, which will harm the country and make life worse, we should spend that same $1 billion in a program that somehow matches up Americans with ordinary people in another country, and then pays the aid to the foreign individuals, based on recommendations by the matching Americans. I'll bet that a way could be found to make that work, but anything is better than destroying a country by pouring money into it so that all the politicians can pat themselves on the back for being such deeply caring people.

Such a matching program might do some actual good, but it won't happen because politicians really don't care much about doing good, except for themselves.

Incidentally, Generational Dynamics explains why there's so much poverty in the world, and why it continues to increase. The reason is that the population grows much faster than the food supply. According to my own computations, food production increases by at most 0.96% per year, while population grows at 1.72%. Therefore, the amount of food per person keeps decreasing, and so food becomes scarcer and, by the law of supply and demand, the price of food keeps going up. In fact, the worldwide price of food has been skyrocketing in the last couple of years, thanks to massive feeding programs in China. As the price of food goes up, poverty increases in large marginal populations around the world.

There is no solution to this problem except the ones provided by nature.

Nature has three ways of reducing the population in order to match the food supply: famine, disease and war. Famines are actually quite rare, so throughout history the major method for reducing population to match the food supply has been genocidal crisis wars (such as World War I and World War II). The problem has been exacerbated in the last 150 years by advances in medicine which have significantly reduced the rate of infant mortality -- from almost 50% to about 2%. This has created a huge pool of young men ready to kill and be killed in new genocidal crisis wars, such as the impending "clash of civilizations" world war, which is expected to kill some 2-3 billion people out of the current world population of 6.5 billion.

However, today we can also expect disease to reduce the world's population. A bird flu pandemic will kill hundreds of millions of people, and will bring international commerce to a standstill. There is some good news, however: After the pandemic and world war end, there'll be plenty of food for the survivors. (2-Jul-05) Permanent Link
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