Relevant and even prescient commentary on news, politics and the economy.

Culture Matters – Oil Curse Edition

The concept of the so-called Oil Curse is that countries that have an abundance of oil tend to be basket cases – undemocratic, kleptocratic, and poorly developed.  The Oil Curse is a special case of of what is sometimes called the Resource Curse.

Of course, not every country rich in oil has suffered from the Oil Curse.  Norway is a prime example of a nation that has benefited greatly from finding oil, but it is almost the exception that proves the rule.

On the other hand, if you think about it more broadly, there are plenty of other exceptions.  The big one is England.  Historians seem to think one of the reasons that the Industrial Revolution began there is because England had plenty of easily accessible coal and iron.  Which is to say, England struck oil, or at least the 18th century version of it.  Similarly, the oil boom that began in Titusville, PA around 1860 did great things for the US economy.

So what causes oil to be a curse for some countries but a boon to others?  One explanation commonly brought up is exploitation, particularly by Western oil companies.  I am no historian, but I don’t think this is right.  Many of the Oil Curse countries chose to go it alone, though some did so after expropriating the initial investments made by foreigners.

I think countries that appear to fall prey to the Oil Curse or any other Resource Curse don’t actually do so.  Instead, they are basket cases before the discovery of whatever resource, and they remain basket cases after.  On the other hand, countries that have functional economies that encourage innovation tend to find stumbling upon a resource to be a blessing.

Put another way…  having a culture that is conducive toward positive outcomes matters a lot.  And it seems to me that England on the verge of the Industrial Revolution, the US before 1860, and Norway before it stumbled on oil have a lot, culturally in common.  And the cultural traits those three cases have in common don’t seem to be shared by Oil Curse countries.

As I keep pointing out, the data shows that culture is a strong determinant of economic outcomes..

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Is that a good economic development deal? A checklist

In my last post, I discussed one of the most important sets of questions regarding any proposed economic development subsidy: How much does it cost? Is that too much? The answer, assuming that we are not going to overhaul our broken subsidy system overnight, was that we see if we’re paying too much by looking at what other states and cities have paid for similar projects.

This presumes, of course, that we know how much the incentive package costs in the first place. There are, unfortunately, far too many cases where total incentives were far higher than what was originally announced to the press. Two noteworthy examples are Nissan in Mississippi and Electrolux in Tennessee. It may take sustained political effort just to keep politicians and economic development officials from trying to pass off this kind of balderdash.

Once we know the cost, we need to ask questions about the benefits of the project and the administration of the project by the relevant government(s). Without further ado, let’s jump right in:

1) Is this a new project, or is the subsidy simply being given to move an existing facility from one location to another? If this is a relocation subsidy, just say no. It does the country no good to give subsidies to create no new jobs. Many times, such moves take place within a single metropolitan area (Kansas City, for example). One state’s temporary gain creates an incentive for later retaliation. The Job Creation Shell Game has many more examples of these outrages, and points out that states already know how to write legislative language to prevent within-state relocations from being subsidized.

However, just because a project doesn’t directly move an existing facility, that doesn’t mean the jobs created will all be net new jobs for the national economy; indeed, they may displace existing jobs in the same state or same city. The automobile industry in the U.S. and Canada has shown this dynamic for decades, and the St. Louis retail study mentioned below provides another well-documented example.

2) Is this a retail project? This, too, is an automatic disqualifier. As Greg LeRoy of Good Jobs First like to say, retail is not economic development; it’s what happens after you have economic development. Egregious cases like the wealthy St. Louis suburb of Des Peres (median household income of $90,000 in 1990), which in 1997 gave a $29 million subsidy to a local mall to attract a Nordstrom’s, are legendary. But in the most comprehensive regional study of its kind, the East-West Gateway Council of Governments, the regional planning organization for metropolitan St. Louis, documented that from 1990 to 2007, local governments gave $2 billion in subsidies to retail. In that time period, retail employment grew by only 5400, which can probably be fully explained by income growth in the metropolitan area. In any event, these jobs vanished with the Great Recession.

Possible exception: Good Jobs First lists one possible exception: “Except in the rare instance where there is a true dearth (a low-income neighborhood without a grocery store, for instance), retail should be built without taxpayer aid.” Amen to that.

3) How many jobs will be created? This is obviously the most common justification for incentives that government officials give. Once we know how many jobs are supposed to be created, we can calculate cost per job, an important comparison metric. It also gives us a clear benchmark to see if the proposed investor is living up to its commitments. But beware: Job numbers can be manipulated. Not only is indirect displacement possible, but the rosy numbers the company, consultants, and government throw around can be misleading. Only be concerned with what the company will be held responsible for, which almost(?) always means direct jobs. Consultants will bandy about model-based predictions of “indirect” and “induced” jobs, but if a company’s subsidy won’t be cancelled or cut for failure to meet those predictions, don’t get distracted by them.

4) What are the pay and benefits for this job? The higher the better, obviously, and one more reason that retail should almost never be subsidized, since its job quality is usually substandard. Worker training is another positive characteristic an economic development can provide.

5) Does the project require the use of eminent domain? This is usually a disguised subsidy, since the possibility of a court deciding the value of a person’s property gives the buyer more leverage in negotiating with property owners. Not to mention that the trauma of forced relocations is a highly disturbing one.

6) Does the area that will host the project have objective evidence of economic deprivation, such as high unemployment or low per-capita income? If not, the subsidy probably isn’t needed, and just raises the subsidies that genuinely deprived areas will have to pay to land investments.

7) What is the track record of the company involved? Is it known for bad labor, environmental, or other practices? Demerits for problems here.

7a) Is the company’s identity hidden by a site location consultant? It’s worth saying “no” to this pernicious practice. Information asymmetries are bad enough already in the site location process without having taxpayers being deprived any way to evaluate the company involved.

8) What taxpayer protections are built in? Does the city or state have strong requirements on job quality and other best practices, and will it enforce them through clawbacks of the subsidies (requiring repayment) if necessary? This should be second nature to states, but in the past few years, Tennessee has negotiated at least three megadeals (Electrolux, Wacker Chemie, and Hemlock Semiconductor) that specifically excluded clawbacks from the agreement, even though clawbacks are on the books in Tennessee.

9) Would the investment go forward even without the subsidy? If so, obviously you don’t want to give the subsidy. In practice, of course, you’ll never really know. Did I mention information asymmetries?

10) Does the project connect to the public transportation grid? Alternatively, is it contributing to urban sprawl?

11) What is the opportunity cost to government? The total amount of state and local subsidies is more than enough to hire every public-sector worker laid off since the beginning of the Great Recession. Could the money going to the subsidy be better spent on education, health, or infrastructure?

To summarize: Just say no to subsidized relocations, subsidies to retail, anonymous investors, and subsidies in rich locations. Calculate the cost per job and aid intensity of the proposed project and compare them with those of similar projects. Then comes the more difficult task of estimating the benefits of the project (jobs, training, wages, etc.), where it is necessary to carefully examine claims made by proponents, which will always err on the side of overpromising. Dig into the proposed investor’s track record. Companies rarely change their spots, with British Petroleum being a egregious example. And always ask if the money could get more economic development bang for the buck if spent on things like infrastructure, education, and health.

Good luck!

By the way, if you’ve got disagreements or suggestions, I’d love to hear them.

UPDATE: Phil Mattera of Good Jobs First let me know that I missed points 6, 9, and 10 in my original post. I can only plead temporary insanity.

Cross-posted at Middle Class Political Economist.

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Job Piracy Marches on in Alabama

Unmentioned in the recent Good Jobs First report on job piracy, it turns out that both relocation subsidies and retention subsidies are commonplace in Alabama. Greg Varner (@varnergreg) directs me to this report on how a Birmingham auto dealership, Serra Automotive, is demanding a multimillion incentive deal to keep it from relocating to another municipality in the metro area. As Birmingham News columnist John Archibald tells the story:

Across the Birmingham area cities spend tens of millions of dollars on incentives. Sadly, it is rarely to draw new opportunity or gain new blood. Instead we spill blood, as competition for existing businesses in the region pits city against city.
It happens all the time.
Birmingham commits millions to steal a hospital from Irondale, and St. Clair sweetens a deal to lure a coffee maker out of Jefferson County. Birmingham outspends the suburbs to take a Walmart, and the escalation continues.
We love the smell of industrial recruitment in the morning. And it gets us frustratingly  nowhere.
We beat each other senseless. For a zero-sum game.
Because the city – the cities across the Birmingham area – pay to keep what they already have. Taxpayers lose and the region gains no jobs.

Here we have an example of the intra-metro area job piracy that Good Jobs First covered in its 2011 report on the Cleveland and Cincinnati metro areas, Paid to Sprawl. It would be interesting to see if Birmingham shows the same tendencies as those two regions, where most moves, even from one suburb to another, put facilities further from the city center. My guess is that’s exactly what we would find.

And I should emphasize, as the most recent Good Jobs First study does, that the state of Alabama knows how to put anti-piracy provisions in state subsidy programs. The very first entry on p. 45 of The Job Creation Shell Game shows Alabama’s Enterprise Zone Credit program as containing no-raiding language. Since cities are legally the creation of states, it’s time for Alabama to clip its cities’ wings and force them to stop this completely indefensible intra-state job piracy. The same holds true in many other states.

Cross-posted from Middle Class Political Economist.

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A good result in economic development

by Kenneth Thomas

Leigh McIlvaine at Clawback reports that Colorado Governor John Hickenlooper has vetoed SB 124, a bill that would have expanded the use of sales tax for tax increment financing of tourist projects under the Regional Tourism Act. While subsidy reformers in the state have so far been able to defeat sales tax TIF at the local level (unlike, for example, Missouri), the Regional Tourism Act allows this at the state level, but only for two projects per year expected to bring in tourists from out of state — not that interstate sales tax competition is such a great use of subsidy dollars anyway.
 
The bill would have made it possible to approve six projects in a single year. This would weaken oversight of the program since all the projects would have been approved at one time. As McIlvaine points out, the bill was especially controversial because Gaylord Entertainment in Aurora (near Denver International Airport), already heavily subsidized, had applied to receive a further subsidy through the Regional Tourism Act. Gaylord has already lured a major convention, the Western Stock Show, to relocate from Denver.

Gaylord, already in the top 25 subsidies in the U.S. since 2000 (a revised version of my paper on this is almost ready to go back to the journal) at $300 million, is demanding that the state provide the full $85.4 million it has requested under the Regional Tourism Act or the $824 million project will not be built at all. This represents a nominal aid intensity of 46.8% of the investment and, according to Denver Business Journal, is more than twice as high a subsidy as Gaylord has ever received. The Colorado Economic Development Commission must make a decision on this and five other applications for the two awards on May 18.
 
The Governor’s veto ensures that only two projects can be approved this year and allows him to “keep limits on the on the new tax-incentive program before the state committed too much money on an annual basis to tourism projects,” as the Denver Business Journal said Tuesday. The story notes that the bill only passed the House of Representatives by a 37-27 vote. This guarantees that the veto will not be overridden.
 
Though it was a bad move to approve state sales tax TIF at all, Hickenlooper’s veto prevents it from becoming a worse problem and slows the likely push to increase total subsidies under the program and weaken the targeting inherent in authorizing only two projects per year. For this, he is to be commended. crossposted with Middle Class Political Economist

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CGI2011: Women’s Rights: What’s In It for Men?

As regular—well, obsessive–readers know, I’m stealing a title from the sainthood-destined Michèle Tertilt.  But it seems appropriate—and a better title than “Engaging Boys and Men as Allies for Long-term Change”—for today’s Plenary hosted by Former Chilean President Michelle Bachelet.

We got a taste of this yesterday, on the panel hosted by Robin Roberts (now a host at Good Morning, America, apparently; I stopped paying attention to her career after she left ESPN, around the time I stopped paying attention to ESPN), when Dikembe Mutombo declared that having daughters had changed his worldview, no to mention a CGI member from the floor who reminded anyone who had forgotten that the doors that opened for Roberts herself were largely driven by the opportunities created by Title IX, If you treat half of the population as if it only consume and can never produce, you lose opportunities. When you stop doing it, opportunities open and the pie gets larger.

Gary Thomas Barker, the International Director of Instituto Promundo, notes that two-thirds of the men in the world don’t abuse women, and that we need to move closer to 100%, since abuse reduces chances of economic development (no matter how self-delusional the U.S. Supreme Court may have been), even if there were an excuse for it.

UPDATE: Market share corrected in the following paragraph; with thanks to Maggie Edinger at Hill & Knowlton for the correction and a link to this Reuters article discussing the company’s plans in Afghanistan for this year.

Karim Khoja, Chief Executive Officer of mobile phone provider Roshan runs the largest telephone company in Afghanistan—with 6% 35% of the market—and notes that 55% of the people in Afghanistan (his potential customers) are women. But Roshan knew when going into the country that the financial decisions for the household are controlled by the men, so direct targeting of women would not work—until very recently.  The initial pitch was “know where your wife is.”  Three years later, there are women buying their own mobiles—with, presumably, the full knowledge and blessing of men who have seen and understood the advantage to themselves of having them doing so.

Khoja also noted that, while women spend about 20% less than men on their mobile services, they are more loyal to the company—and are, therefore, the more profitable customers to have.

Most interesting is Khoja explaining the hoops the company had to go through to hire their first woman: direct family discussion, including driving her to and from the office, ensuring an appropriately courteous work atmosphere (White House employees need not apply), and that it took nearly a year before the company reached critical mass.  At this point, he essentially had noted that he was discussing a chicken-egg cycle where women could not get jobs or start businesses without having access to funding, and couldn’t get access to funding without getting a job or starting a business.

Muhammad Yunus of the Yunus Center then took over, explaining the details of the early days of Grameen: how their making loans to worthy business ideas—which largely came from and were to women—led to having to explain to men the advantages that come from having a two-income family.  This was followed by discussions with the women, who were then alert to (and, of course, able to address) the issues raised by their husbands. The initial result is that everyone became comfortable with the new situation; the collateral effect—which should be to no one’s great surprise—was that many of the women’s businesses improved even more after familial buy-in was achieved.  By the third year, the villages have a strong base of working women’s businesses and the model expands itself.  Generations of progress were made in the space of a few years, and Yunus and Grameen have never had to look back from that model.

President Bachelet notes that she probably would not have been President if she had not first been Minister of Defense—not, conspicuously, Minister of Health.

Muhammad Yunus notes that we have to move to the next step: it’s no longer just about making money, it’s also about problem-solving. “Social business” produces more loyal employees and a better chance at successful innovation. From the floor, a leader of Coca-Cola notes that they have been expanding their small business efforts with female leaders, which has given them better work.  (Also notes that the sponsored a “water-harvesting project” for every goal scored in the 2010 World Cup—which resulted in 520 projects being initiated.)

Another commenter from the floor notes that, fifteen years ago, 75% of the new AIDS cases in Africa were girls under the age of fifteen. It’s difficult to educate, let alone turn into a businesswoman, someone who is dying and/or pregnant.

Republic of Rwanda President Paul Kagame closed by noting that this entire panel has been “common sense.”  The scariest part of it is that these things keep needing to be said.

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CGI 2011: Haiti Development Workshop

[updates and edits, especially in the 4th-6th grafs]

“The winner” in Haitian development created 12,000 jobs in the garment industry in the past eight years in Haiti.  Seems as if all of the participants today will be garment manufacturers, though WJC notes that companies such as Coca-Cola and Newmont Mining are also considering investment.

When I sent an email out indicating that I was thinking of attending, the best response I got to questions you would like to ask was “Is Haiti doomed forever to be the developed world’s sweat shop? Will it ever be allowed to have an agricultural economy of its own?”

Only 43% of the aid pledged after the earthquake nearly two years ago has been disbursed today. (Take that, “shovel-ready” complainers!) WJC: “Haiti will not have a sustainable economy unless there are new investments, new jobs, and new business.”  President Clinton describes the disaster as “best opportunity in my lifetime” for the country.” (I’m guessing this is in the same way as education privatization has worked in New Orleans since Katrina.)  Most of the donor monies have not gone through the local institutions, but President Martelly is determined to have local government integrated in the discussions. 

As an example of the problems before the earthquake, WJC notes that there was no market in lending—even mortgage lending—in the country before now.

WJC describes Donna Karan as “Haiti has taken over her life to the extent that I am now a back-bencher.”  I think this is a positive statement.  Also gets a pledge for development from the new group run by Mohammed Yunus (who I interviewed at the 2009 CGI) and one other group [update: Zafen appears to be the other Commitment].

WJC, leading up to the President of Haiti, mentions that W. described the President of the United States as the “decider in chief.” Clinton said that he rather agrees with that statement, noting of Martelly that “This man will make a decision.” He also declares that most of them have been good ones, something he did not say, at least now, about GWB.

The President of Haiti Michel Martelly rehashes some of these points in more detail and discusses the plans of his administration to make it easier to start a business in Haiti and complete a new Industrial Park, with two more apparel companies and a furniture manufacturer joining there by the end of the year. Working with USAID, IADB, and others to ensure that their business-friendly approach will be highlighted around the world. Revamping processes and reshaping policies to create trade agreements with other countries, such as Brazil, using the model of the 10-year agreement with the United States.

Upsides: free education for all pledged, as well as opening a state university and (separate) vocational school.  Will be subsidizing the education of 772,000 Haitian children and leverage their location near the largest market (U.S.) and the “booming markets of Latin America.”

WJC notes that even the long-antagonistic Dominican Republic has worked with Haiti to rebuild since the earthquake.

First speaker is Magalie Dresse, owner, Caribbean Craft, who notes that her business has expanded rapidly thanks in large part to Donna Karan’s commitment and some major effort from Ms. Dresse herself.

A representative from the Haiti Action Network—or perhaps Denis O’Brien of Digicell—follows, claiming that Haiti has been a democracy for only five years.  He’s still alive, and follows that by declaring that “there’s no country that has more creativity than Haiti.”

Luis Alberto Moreno, the president of the Inter-American Development Bank (IADB), follows, declaring that the five-month President”inspired us all.” (I’m hoping I misheard that and that he was really referencing WJC.)  He then goes on to talk about “Juan Valdez” and the Colombian coffee industry.  I cannot tell if the audience is too polite, too young (doesn’t look like the way to bet), or just too stunned.  But he goes on to make good points about possible developments that would not be dependent on the rag trade.

President Martelly speaks again; it’s easy to understand why people like him, and he clearly has a vision for agricultural development as well as economic development.  Not certain I would quit my job to work for him, but it would be worth thinking about.

The next speaker is Woong-Ki Kim, chairman of the Sae-A Trading Company—or, more accurately, Ron Garwood, who is working as his interpreter. Chairman Kim has several reasons for his Haitian investment, including shorter delivery times, “an abundant and motivated labor supply,” a preferential Trade Agreement with the U.S. that provides duty-free entry, and that the U.S. and the IADB are building up the North Industrial Park, including an eco-friendly , state-of-the-art waste-water treatment plant, a power plant, and housing, not to mention giving them land (150 hectares, if I heard correctly). Mr. Alberto Moreno notes that another Korean company—a Fiber-Optic firm—and an American furniture company are also seriously planning to move into that park to create jobs.

WJC, who I still maintain is rivaled by no one in his ability to process and retain data, asks about sugar production in Haiti, noting that it is very fragmented and strongly concentrated in rum manufacturers.  Mr. Alberto Moreno notes that the IADB has been speaking with the Brazilians about their recent efforts in using sugar cane as energy and leveraging that technology into power generation. Haiti pays the highest KwH power cost of anywhere.  “This is insane.” – WJC.  As most of this is effluvia to sugar generation, the marginal cost is almost solely derived from capital investment—virtually no labor cost, even if you provide better (“good”) income to workers.  Mr. Alberto Moreno confirms President Clinton’s vision for energy generation, noting the hydropower generation opportunities as well.

President Martelly notes that Haitian are working to produce sugar—in Santo Domingo.  Providing the opportunities at home would cause repatriation and improve human capital. (“They would rather stay home and do it—so we should try it.”)

Talk goes to tourism, with the best sight gag of the day: President Martelly says, “I could stand up and tell you”—stands up—“that Haiti is the most beautiful country in the world.”  He then goes on to note that voudoun is an attraction. (Maybe I would quit my job and work for his government after all.)

Mr.O’Brien notes that he toured Haiti this summer and that there are many opportunities for “boutique” hotels (20 rooms or fewer) and other boutiques in areas—“either way, left or right, as you come out of the airport”—that are growing in other areas but are underavailable to tourism.

(Having been to Punta Cana, I suspect that the areas outside of Port-au-Prince are more diverse, and therefore more interesting, than those in the DR.  But I could be wrong; if I am, please note so in comments,)

WJC notes that former colonies tend to have “a legacy rules-based government.” (This is standard cant among the technocratic center, with a large grain of truth and somewhat deliberate elision of the reason many of those rules were put in place initially.)

Ms. Dresse notes that Donna Karan’s declaration that the potential for Caribbean Craft is 20-30,000 more jobs “underestimates the potential.”

Mr. Alberto Moreno closes with an announcement of an investor conference on 29-30 November in Haiti. “Guarantee you will be pleasantly surprised.”  Had more than 300 investors from Latin America at a conference three months  before the earthquake.

The abiding feeling from this presentation—for me at least—is that the Latin American countries and Korea recognize and are moving toward an opportunity. Whether U.S. investors are so enthusiastic is still TBD.

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Clinton Global Initiative 2011

As with last year and the year before, I will be (as much as possible) at the Clinton Global Initiative, now with even more Social Media and Networking Goodness.

If you’re here, say hello. If you’re not, look for posts and peruse the offerings for the conference. If there’s something you’re especially interested in, email me or mention it in comments.

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Why Don’t Tax Havens Become Industrial Powerhouses

by Mike Kimel

Why Don’t Tax Havens Become Industrial Powerhouses

Cross-posted at the Presimetrics blog.

The other day I read somewhere (yet again) that low tax rates encourage development. Which got me to thinking about tax havens. I’ve noticed that places like the Cayman Islands, for instance, seem to be magnets for hedge funds, but rarely if ever do countries which are mainly known as tax havens become industrial or technological powerhouses. What gives?

Here’s my thought… a hedge fund can buy and sell assets in country A from anywhere in the world, provided that it knows that country A has strong property rights, infrastructure, and legal institutions. If it can take advantage of those property rights, that infrastructure, and those legal institutions without paying for them (i.e., if it can free-ride), it can increase its private profits by having others pay for some of its costs.

Of course, a manufacturing, tech, or creative firm can also increase its profits by exporting its costs onto third parties (think externalities) which would make a tax haven ideal for such firms too. And yet, except for some transfer pricing games, for the most part, tax havens simply don’t attract or internally generate such firms in large numbers. My theory – it takes something else for that. It takes actually having a sound infrastructure (legal and physical), an educated populace, and a mindset, and these are things which tend to be generated by a not extremely incompetent government.

Your thoughts?

PS. Before the inevitable mention of Hong Kong, construct a Venn diagram of a) former British colonies and b) tax havens.

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The Rich Stay Healthy, the Sick Stay Poor

Health and Economic Development Primer in one easy lesson (via SocProf’s Twitter feed):

This is not surprising to see the contrast between the prosperous (at least until now) areas, in green where chronic illnesses prevail but are diseases tied to aging, as opposed to the semi-periphery and periphery where infectious / parasitic diseases are prevalent along with accidental deaths. Obviously, to be born and live in a prosperous society makes life more secure on different levels.

Extending lifespans and expanding health has been, for the most part, a Macro story of discontinuities.

The rise of vaccines (with a possible contribution from the coincident rise of people getting a high school education) got the Developed World to the point where Major Organ Failure became a primary factor.

Lungs are first: pneumonia and tuberculosis don’t kill the young so often as they did. (Vaccines, testing).

The heart was next. Major advances in the immediate post-WW II (what the Europeans tend to call “post-war”) period—up to and through transplants and ever-advancing bypass surgeries—made it more difficult to die because your heart was weak or flawed.

The next step is the brain; rather more problematic, though progress gets made.

Note that the key assumption in all of the above is access to and use of the available advances. In a system that de facto rations by ability to pay (the U.S.), there is a greater likelihood that the rich will live longer—or, more accurately, that the poor will die unnecessarily sooner. Which is what has been happening.

This post dedicated to the memory of Isaac Asimov, who survived a heart attack for fifteen years and a triple-bypass that gave him nine more years of writing (though with collateral effects that would not occur today).

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Economic Development Made Real

Via David Roodman‘s Twitter feed, the Economic Development video to watch if you’re watching only one:

Pull Quote: “We have several unintended consequences that show that while we were growing Pakistan economically, we retarded our community, we retarded our ability to innovate, we retarded our ability to think. Those things are coming back to haunt us.”

(Aside to Ryan Avent: if you treat economics only as a matter of money, it ceases to be a social science in any real sense. Is that really what The Economist wants to claim?)

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