Wednesday, July 2, 2008

Lagging the pack - the grim realities of Burma's place in the economic firmament

In May we illustrated the extent of the challenge (purely in terms of the remorseless arithmetic of growth) that Burma would face in achieving something like Thailand's current standard of living. To further underscore the urgency of the need for regime change in Burma, we have compiled an assessment of where Burma is situated currently with regard to a wide range of countries and what will be required in terms of growth performance to close the gaps. It is vital to bear in mind that what is presented here represents unavoidable, non-contextual constraints. Increasing per capita income to a multiple of 4, say, in a short time requires, by definition, very high rates of annual growth by historical standards; maintaining low rates of growth must cause the time taken to blow out significantly. With that said, consider the following depiction of Burma's relative economic position and prospects for catchup and convergence circa 2007.

This table shows, for a range of countries:

* the ratio of 2007 GDP per capita on a purchasing power parity basis to that for Burma (source: CIA World Factbook)
* the rate of annual growth in real GDP per capita required for Burma to reach the country's 2007 PPP GDP per capita in 50 years
* the number of years it will take for Burma to reach the country's 2007 PPP GDP per capita if Burma's real GDP per capita continues to grow at its long run (1953-2003) average rate of 2.9% pa (source for long-run growth data: Angus Maddison's 1-2003 AD database)
* the number of years it will take Burma to converge to the same GDP per capita as the country in 2007 PPP terms if both continue to grow at their respective long-run (1953-2003, Maddison) averages

Some points of explanation are in order. The two numbers in each column reflect different population figures used to calculate per capita GDP. In a macabre sense, the CIA figure for Burma is 'best-case' as they use a population figure adjusted for excess mortality due to AIDS (47,758,181). The latest official figure (apparently the SPDC was able not only to run an astonishingly successful referendum and an incredibly painstaking damage assessment in the aftermath of Cyclone Nargis, they also managed to slip in a census as well!) is considerably higher at 57,504, 368. The first number in each set is based on the CIA figure of $1900 per capita in 2007, the second is based on the official population which yields a GDP per capita of $1620. Only countries that had an estimate of GDP per capita for 2007 and that were ahead of Burma on at least one of the measures of GDP per capita are included. Some countries lack the data required to compute the long-run growth rates needed for the convergence calculation and so have no entry in the final column. Countries with a red 'X' in the final column have long-run per capita growth rates that exceed Burma's 2.9% - if these relativities are maintained then convergence will never occur. Obviously, average growth rates decline with time (typically 100- year average rates, where available, are 4/5 of 50-year rates in the Maddison data) so a red 'X' does note that convergence is impossible - but in these cases Burma would have to outperform the countries in question very significantly historically speaking in terms of both growth rates and duration for it to occur.

The data confirm Burma's status as one of the poorest countries in the world, and the striking distance between it and many countries considered mediocre rather than stellar performers. The median GDP ratio (using just those based on the CIA estimates) is 5.4 - hence 50% of countries in the sample have per-capita incomes that are more than 5.4 times that of Burma's when compared on a common value (PPP) basis. 25% of listed countries have incomes that are more than 12.8 times that of Burma. 25% have per-capita incomes that are at most 2.3 times the size of Burma's - which means that 75% of the sample are more than twice (and a bit) as wealthy as Burma in 2007 on a per capita basis.

These gaps require time to close. Hence, at its current long-run per-capita growth rate, Burma is a generation away from matching the current living standards of say Jamaica, or Jordan and given a life expentancy of 63 years (according to the CIA world factbook) the representative person born now need not expect to live to see Burma as well off as Venezuela, Libya or Gabon. The temporal ground to cover to reach contemporary Western European levels of income per capita stretches to a century and beyond. Actual convergence times (although less relevant as policy goals) measure several centuries in many cases.

Catch up can be faster if growth rates are higher - but Burma's position at the back of the pack means that if catch-up to current standards is to occur within 50 years, growth rates will have to rise now to 'Asian Tiger' levels. For example, catching up to where Trinidad & Tobago is now in 50 years rather than in 80+ years will require real per-capita growth of 5% per annum for those 5 decades - a prodigious feat of extreme historical rarity. Adding an extra 1% to the long-run rate and maintaining it for 50 years (the difficulty of which must not be underestimated) will see Burma's income per-capita rise no higher than that of Libya or Venezuela now.

It is easy to underestimate the significance of the ratios in the first column - doubling per-capita income in real terms may not seem like a particularly onerous task. Historical experience tells a different story. The following table of historical comparisons is based on the Maddison dataset. It shows the historical points of comparison for a selection of countries in terms of ratios of GDP per capita in constat-dollar PPP terms. The ratios in question are the quartiles of the set of 2007 ratios to Burma as discussed above.

So, for example, 75% of the countries selected in 2007 had per-capita incomes which were more than 2.3 times that of Burma. What exactly does that imply? Well according to Maddison's 1AD to 2oo3AD data, for Australia GDP per capita in 2003 was 2.3 times what it was in 1963. Hence the gap between 75% of the countries examined and Burma in 2007 was greater than that between Australia in 2003 and Australia in 1963! In other words, comparing Bolivia to Burma in 2007 is like comparing Australia in 2003 to Australia in 1963. The median ratio was 5.4 - this ratio is comparable to that of Australia in 2003 to Australia in 1904! So that is the comparative situation to the Belarus:Burma ratio in 2007, and 50% of countries in 2007 were further ahead of Burma in relative terms than 2003 Australia was of 1904 Australia. The third quartile ratio of 12.8 is equivalent to that of Australia in 2003 to Australia in 1847 on the Maddison data. So the contemporary gap between South Korea and Burma is comparable to that which took Australia 150+ years to traverse. 25% of our sample of countries are further ahead than this. The maximum ratio (42.5 for Luxembourg) equates to the comparison between Japan in 2003 and Japan in 1500. In a very real sense, at historically observed growth rates over the long-long-run, Burma is currently centuries behind the world's most well-off nations. The importance of periods of sustained rapid growth is evident for the entries for Asian countries in the table; the effects of long periods of stagnation are clearly identifiable in the Brazlian and Mexican experiences.

The point of these numbers is not to instil despair but clear thinking. The calls for increased aid for Burma after Nargis often appear based on the mistaken idea that international disparities in income are like pie-distribution problems: the North currently has too large a slice and so what is required is a trimming thereof and a redistribution to reduce inequality. As such, the problem of international disparities appears solveable by a kind of lump-sum transfer, a transaction at a point in time (e.g. more aid). This 'synchronic fallacy' fails to take account of the fact that disparities can only be eliminated by growth (a process in time, 'diachronic') at appropriate rates. Nothing will eliminate the disparities unless it causes the poorer countries to grow faster. William Easterly's work on growth spells out quite clearly that aid does not do this, and his work specifically on aid performance shows some of the reasons why.

Growth can only occur if the economic environment is conducive to (provides incentives for) productive activity. Pouring aid into toxic economic environments achieves nothing - as the history of aid expenditure shows. It need not even achieve its immediate objective: this chart shows for Burma the share of total health expenditure accounted for by 'external financing' after household out of pocket expenditure has been removed and external financing reduced by the measured expenditure of NGO's - in other words the share of external financing in total 'government' health expenditure in Burma. What is clear is that increasing external financing (rising by a factor of 7 between 2000 and 2006) has led to pari passu reductions in expenditure by the regime: health spending has not increased so much as changed in composition to be virtually all aid-driven. Thus greater aid for health spending doesn't necessarily lead to more health spending (which isn't surprising: the initial problem is that the regime chose not to devote sufficient resources to health expenditure; why would handing them money alter their motivation?). As for health, so for other aspects of ODA.

What Burma desperately needs is a rapid change in the economic environment - by one means or another. Regime change is required to permit transition to a growth path that can close the gap to reasonable economic health in an acceptable timeframe. The 'Asian Tigers' experience shows that this need not entail liberal democracy immediately, but it also shows that a relatively rapid transition to democracy may require the disruptive and catalytic effects of sustained growth at extremely high rates. Growth performance like that requires an environment that provides the right incentives (in terms security of property rights etc) that the Tigers had and Burma manifestly does not. Propping up the regime with increased aid will lead to mediocre growth and negligible prospects for endogenous institutional transformation. We need to look beyond the time horizon of self-interested individuals and NGO's who are content to feed the flames rather than put them out. The people of Burma need revolution, not reproduction of their grim status quo.

1 comment:

henrylow said...

There's a movement to radically change California government, by getting rid of career politicians and chopping their salaries in half. A group known as Citizens for California Reform wants to make the California legislature a part time time job, just like it was until 1966.