1 the alchemist of the poor 2 “erik thorbecke, the alchemist of the poor” a short retirement...

1

THE ALCHEMIST OF THE POOR

2

“ERIK THORBECKE,THE ALCHEMIST OF THE

POOR”

A SHORT RETIREMENT TALEBY

ALAIN DE JANVRY AND ELISABETH SADOULET

DEDICATED TO ERIK ON BEHALF OF NEUDCIN

ADMIRATION AND FRIENDSHIP

3

DEFINITIONS

DEVELOPMENT ALCHEMIST :

“AN ECONOMIST WITH MAGIC POWERS OF TRANSMUTATION OF POVERTY INTO

WEALTH”

ALCHEMIST:

“A PERSON WITH MAGIC POWERS OF TRANSMUTATION OF BASE METALS INTO

GOLD”

4

PART I

LEARNING FROM THE ALCHEMIST

HOW TO MANAGE POVERTY

ERADICATION PROGRAMS?

5

THE ALCHEMIST’S SECRETS:

ERIK’S FIRST PRINCIPLE OF ALCHEMY

INTRODUCE

P2-BASED WELFARE BUDGETS

IN NATIONAL CONSTITUTIONS

6

1999 MEXICAN CONSTITUTION

CHAPTER V, ARTICLE 34

“CENTRAL GOVERNMENT TRANSFERS WILL BE

ALLOCATED ACCORDING

TO THE SEVERITY OF POVERTY”

(THE FGT-P2 CRITERION AT WORK)

7

SIMULATION EXERCISE:

WHAT WOULD A P2-BASED WELFARE

PROGRAM DO

TO THE MEXICAN POOR?

8Po = 50%. Source: INEGI data, 1995

Poverty profile Mexico

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

9

10

P1.1 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

11

P1.2 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

12

P1.3 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

13

P1.5 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

14

P1.75 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

15

It’s too expensive!

16

P1.75 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

17

P1.5 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

18

P1.3 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

19

It’s in the constitution!!

20

P1.5 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

21

P2 welfare program

0

500

1000

1500

2000

2500

3000

0 20 40 60 80 100

% of population

22

ALCHEMIST’S OUTCOME OF THE P2-BASED WELFARE PROGRAM

INITIAL Po = 50%

CURRENT Po = 0%

88% OF THE FORMER POOR ARE NOW RICHER THAN THE 2% RICHEST IN THE COUNTRY

23

ERIK’S SECOND PRINCIPLE OF ALCHEMY

“USE SAM PATHS MULTIPLIERS TO INCREASE

THE INCOME OF THE POOR”

24

NET GAIN FOR THE POOR $100

Governmenttax

$100

Income ofthe poor

$100

25

NET GAIN FOR THE POOR $150

Governmenttax

$100

Income ofthe poor

$150

Consumptionexpenditures

Production

Factorincomes

SAM multipliers

26

NET GAIN FOR THE POOR $50

Governmenttax

$100

Income ofthe poor

$50

Alchemist trick multiplierRECYCLE $100

27

NET GAIN FOR THE POOR $200

Governmenttax

$100

Income ofthe poor

$200

Consumptionexpenditures

Production

Factorincomes

SAM multipliers

Alchemist trick multiplier

28

NET GAIN FOR THE POOR $250

Governmenttax

$100

Income ofthe poor

$250

Consumptionexpenditures

Production

Factorincomes

SAM multipliers

Alchemist trick multiplier

29

NET GAIN FOR THE POOR $300

Governmenttax

$100

Income ofthe poor

$300

Consumptionexpenditures

Production

Factorincomes

SAM multipliers

Alchemist trick multiplier

30

NET GAIN FOR THE POOR $$$$

Governmenttax

$100

Income ofthe poor

$$$$

Consumptionexpenditures

Production

Factorincomes

SAM multipliers

Alchemist trick multiplier

31

ALCHEMIST’S OUTCOME OF SAM

MULTIPLIER-BASED WELFARE PROGRAM

AFTER ∞ NUMBER OF ITERATIONS

THE POOR HAVE BECOME ∞-TELY RICH

32

PART II

THE ALCHEMIST’S FUTURE

SOLVE THE ALCHEMIST’S RETIREMENT PROBLEM

33

PROBLEM:

REBALANCING OF ACTIVITIES UNDER

FULL INCOME CONSTRAINT

34

• CHARLA AND GRANDCHILDREN• TENNIS• MANAGE CALIFORNIA HOMESTEAD WITH

MILLENARIAN SEQUOIAS• COOPERATE WITH DEVELOPMENT ECONOMISTS

AT U.C . BERKELEY ALMA MATER• MORE TENNIS• CONNECT WITH ROOTS IN DUTCH HISTORY• VISIT FORMER STUDENTS AROUND THE WORLD• VOLUNTEER TIME FOR DEPARTMENTAL

ADMINISTRATION (!!!)• MORE MORE TENNIS• MORE TIME TO RESEARCH

OPTIONS FOR TIME REALLOCATION?

35

ASSUME THE SOLUTION: MORE TIME TO RESEARCH

ERIK’S THREE MAIN RESEARCH AREAS:

1. ECONOMY-WIDE MODELING IN SAM-CGE

2. INSTITUTIONS AND MARKET CONFIGURATIONS

3. POVERTY INDICATORS AND STRATEGIES

36

PART III

MAKE GRATUITOUS

SUGGESTIONS

FOR RESEARCH AGENDA

IN EACH AREA

37

AREA 1 ECONOMY-WIDE MODELING IN SAM-CGE

ERIK’S WORK: IMPORTANT POLICY QUESTIONS IN GENERAL EQUILIBRIUM FRAMEWORK.

NEW CHALLENGE: CGIAR problem. How to optimize the use of agricultural technology to reduce poverty through direct and indirect effects?

Direct effects: benefits for poor adopters

Indirect effects: benefits to poor else than adopter through:- Price of food- Employment creation in agriculture- Growth linkages

38

IMPORTANCE OF PROBLEM

CGIAR:

16 INTERNATIONAL CENTERS (IFPRI, ETC.)1300 SCIENTISTS

US$350 MILLION/YEARDID THE GREEN REVOLUTION

REFOCUSING FROM COMMODITIES TO POVERTY

HOW DO? WHAT TECHNOLOGY FOR WHOM?

39

Technological change inagriculture

Africa Asia Latin America

Main Po reducingmechanism

Direct Indirect Indirect

Source of Po reduction TFP in smallfarms

Employmentcreation in ag.

Lower foodprices

Main gainers Peasants Landless Urban poor

Best technological optionto reduce Po

High value addedcrops for small

farmers

Labor intensiveagriculture

Food crops inlarge farmers

PRELIMINARY RESULTS SAM-CGE

40

AREA 2

INSTITUTIONS AND MARKET CONFIGURATIONS

ERIK’S WORK:

MARKET/NON-MARKET TYPES OFCONFIGURATIONS ---------------> TRANSACTIONS (EXOGENOUS) (ENDOGENOUS)

Transactions costs: Household market integration:Observables (surveys) Seller, buyer, self-sufficient; Non-observables? Supply and demand responses.

41

FUNDAMENTAL CONTRIBUTION TO THE NEW INSTITUTIONAL ECONOMICS

MEASURE THE MAGNITUDE OF TRANSACTIONS COSTS

EVEN THOUGH THEY ARE LARGELY UNOBSERVABLE

42

PROPOSITION:

OBSERVE HOUSEHOLD BEHAVIOR AS PRODUCERS AND CONSUMERS UNDER

TRANSACTIONS COSTS (TRANSACTION)

INFER FROM THIS WHAT ARE THE UNDERLYING TRANSACTIONS COSTS

(CONFIGURATION)

43

STRATEGY TO MEASURE TRANSACTIONS COSTS

Proportional transactions costs (PTC) in selling and buying:

Effective price paid for purchase

Effective price received for sale Fixed transactions costs (FTC) in entering and exiting markets:

tps,tp

b

tfs,tf

b

pm+tpb

pm - tps

44

D p

m

( )

S p

m

( )

/ Supply w o TC

Market price p

m

Quantity

S&D FOR STAPLE FOOD. NO TC

45

Market price p

m

Quantity

Supply with PTC

S p

m

- tp

s

( )

S&D WITH PTC IN SELLING

46

Market price p

m

Quantity

Net sellers

Net buyers

p

*

+ tp

s

p

*

- tp

b

S&D WITH PTC IN SELLING & BUYING

47

Market price p

m

Quantity

Net sellers

Net buyers

Self-sufficient

p

*

+ tp

s

p

*

- tp

b

p

*

S&D: THREE MARKET INTEGRATION REGIMES

48

Market price p

m

Quantity

p

s

Minimum sale to cover FTC

S&D WITH PTC AND FTC FOR SELLER: THRESHOLD

49

Quantity

Market price p

m

S WITH PTC & FTC IN SELLING AND BUYING

50

s

s

(

s

Market price p

m

Quantity

p

*

+ tp

s

∑p

V

*

= V p - tp

s

, y - tf

s

)

Proportional TC

Fixed TC

S p

m

- tp

s

( )

S

*S

ESTIMATE: CENSORED SUPPLYTHRESHOLD QUANTITY FOR SELLERSUPPLY FOR SELF-SUFFICIENT.

51

ESTIMATION OF PTC

FROM NON-LINEAR SEGMENT OF CENSORED SUPPLY:

ˆ t ps =zs ˆ b p

s

lnqs =b ln pm - tps

( ) =b ln pm - zsbps

( )

52

ESTIMATION OF FTC

SOLVE FOR

IN EQUIVALENT VARIATION FOR EQUALITY OF UTILITY OF BEING IN SELF-SUFFICIENCY OR IN MARKET AT ENTRY THRESHOLD:

tfs

V* p*,y[ ]=V ps - tps,y - t f

s[ ]

53

AREA 3: POVERTY INDICATORS

ERIK’S WORK: CELEBRATED FGT INDICATOR OF SEVERITY OF POVERTY

P2 =1n

z- yi

zÊ Ë Á

ˆ ¯ ˜

2

i =1

qÂ

WHY P SQUARED?

WHY NOT 1.5 OR 3?

DOES 2 OVER OR UNDER ESTIMATE THE WELFARE COST OF INCOME DEFICITS?

54

PROPOSITION:

USE Pu AS ALTERNATIVE TO P2

Pu MEASURES THE UTILITY LOSS DUE TO THE INCOME DEFICIT.

V = INDIRECT UTILITY FUNCTION

Pu =1n

V z( )- V yi( )

V z( )i =1

qÂ

55

UTILITARIAN APPROACH TO THE MEASUREMENTOF Pu

ASSUME A PARAMETRIC FORM OF V.

V SAME FOR ALL HOUSEHOLDS, BUT FUNCTIONOF HOUSEHOLD CHARACTERISTICS.

USE BACKWARD INTEGRATION:

ESTIMATE DEMAND FUNCTIONS;

RECOVER THE PARAMETERS OF V

56

SPECIAL CASE

IF UTILITY IS SEPARABLE IN AGGREGATES

CAN RECOVER V FROM A SINGLE DEMAND

EQUATION, e.g., FOOD

EXAMPLE

INDIRECT ADDILOG V APPLIED TO MEXICAN HOUSEHOLD FOOD CONSUMPTION AND

EXPENDITURE DATA

57

WEIGHTS OF INCOME DEFICIT

IN P1: WEIGHT = 1. CONSTANT

IN P2: WEIGHT = LINEAR IN y

IN Pu: WEIGHT EXPONENTIAL IN y

z- yz

Ê Ë Á

ˆ ¯ ˜

z- yz

Ê Ë Á

ˆ ¯ ˜

58

WEIGHTS OF INCOME DEFICIT

P-CLASS INDICATORS MEXICO

y = 5.9452x -0.6801

0

0.05

0.1

0.15

0.2

0.25

0.3

0 200 400 600 800 1000

Household income

P1P2PuPower (Pu)

Poverty line

59

CONCLUSION:

SQUARE IS NOT ENOUGH!

(IN THIS CASE)

NEED USE HIGHER EXPONENTIAL (OR

OTHER FUNCTIONAL FORM) TO

CAPTURE THE SEVERITY OF POVERTY

AS A WELFARE LOSS

60

RETIREMENT TALE

EPILOGUE

61

AS ANOTHER ALCHEMIST (IN PAULO COELHO) SAID:

“TO REALIZE ONE’S DESTINY IS A PERSON’S ONLY OBLIGATION”

AS DEVELOPMENT ECONOMISTS (OUR DESTINY), THIS GIVES US QUITE A CHORE TO DO!

AS A DEVELOPMENT ALCHEMIST, YOU GAVE US A MAGNIFICENT ROLE MODEL TO EMULATE.

62

WE THANK YOU FOR THIS

AND WISH YOU

SUCCESS AND HAPPINESS

IN YOUR NEW TIME ALLOCATION SOLUTION

THE END