No Child Without Vaccination, No Family Without Health Insurance: The Political Economy of Public Health in Rwanda

In just 100 days, almost one million Tutsis, moderate Hutu and Twa were massacred in one of the most brutal episodes of violence n modern history. Today’s podcast episode is about the process of rebuilding from the ravages of the genocide. Paul Kagame and the Rwandan Patriotic Front that took power after 1994 have overseen an economic miracle, and real improvements in the standards of living of the Rwandan people. I will be focusing on the ideological roots of Rwanda’s economic miracle, the process of reducing corruption and improving state capacity, and resulting ability of Rwanda to dramatically improve ordinary citizens access to healthcare.

The Rwandan genocide left immense social scars in addition to physical damage. The majority of Rwanda’s population after the genocide was till overwhelmingly Hutu, the majority of whom willingly or through coercion, participated in the genocide. Both the Belgian colonial government, and the post-independence Hutu led government emphasized the difference between and inequality between a Tutsi elite and the Hutu masses. The RPF was committed, through customary Gacaca courts, to convict those guilty of crimes during the genocide while at the same time propagating an ideology that emphasized the shared language and culture of Hutu and Tutsi. At the same time, the stark reality remained that the majority of the population, whether willingly or unwillingly, participated in the genocide. The current RPF government, dominated by former exiles from Uganda, is unsurprisingly terrified of losing political power. The RPF has concentrated all political power in its hands, and has strived to gain political legitimacy by developing the country.

Part of gaining legitimacy to govern is stamping out petty corruption in the bureaucracy. To government regularly takes action such as firing hundreds of police officers, or entire departments of the ministry of health suspected of corruption and as a result Transparency International’s Corruption Index ranks Rwanda the least corrupt Least Developed Country in the world. Moreover, the government has worked assiduously with donors to adapt best practices on institutional design to local circumstances. An example of this is the Imihigo system of to a management. Imihigo refers to a precolonial system where warriors would publicly pledge what they would accomplish in battle, and face humiliation if they failed to achieve those goals. In its modern adaptation, mayors and other higher level officials would pledge to accomplish development goals, and assisted by a large core of elected local leaders in achieving those goals. While the goals were set by the central government, elected leaders have high levels of authority in how goals are to implemented allowing for best practices to spread from district to district.

One of the greatest successes of the efficient and flexible state is improving public health outcomes in Rwanda. Rwanda today has a life expectancy of 67 and an infant mortality rate of 29, levels of health outcomes similar to much wealthier nations such as India or Bolivia. Part of this success stems from the over 45,000 elected community health workers at the village level. They are generally respected members of the community and tasked with ensuring universal vaccination, and to serve as the first line of healthcare. In order to improve health in a systematic manner, the government has implemented a health insurance system that covers over 90% of the population. The bottom quarter of the population does not have to pay into the system, and even the top .5% of Rwandans only have to pay $9 a month. However, given most Rwandans hover above basic subsistence, it has taken the coercive might of the Rwandan state to make this system financially feasible.

Suggested Reading

The politics of state effectiveness in Burundi and Rwanda: ruling elite legitimacy and the imperative of state performance , Benjamin Chemouni

PERFOMANCE CONTRACTS AND SOCIAL SERVICE DELIVERY- LESSONS FROM RWANDA  , African Development Bank

Near universal childhood vaccination rates in Rwanda: how was this achieved and can it be duplicated? , James Bao

Games of Thrones, Sri Lanka Edition?

On October 26th, the President of Sri Lanka, Maithripala Sirisena, dismissed then Prime Minister Ranil Wickremsinghe from office and replaced him with Mahinda Rajapaksa. Mahinda Rajapaksa had served as President of Sri Lanka from 2005 to 2015. He was a controversial leader in part for the brutal tactics used by the Sri Lankan army used to end the rebellion of the Tamil Tigers, and the massive amount of debt incurred by the Sri Lankan government in a series of massive development projects. Mahinda Rajapaksa, at least before the crisis, was the most popular politician in the country especially among the rural Buddhist ethnically Sinhalese masses. However the move is extremely controversial because the Sri Lankan constitution does not grant the president to dismiss the prime minister at will, throwing the country into a political crisis. Just yesterday, the Sri Lankan Supreme Court ruled that Rajapaksa cannot serve as Prime Minister, but it is unclear how Rajapaksa will react to this blow.

The political crisis has impacted the Sri Lankan economy as well. It is unclear who has authority in the Sri Lankan government. Current parliamentary allocations will run out in 2019, and without a legitimate government it is unclear how doctors, teacher and policemen will get paid.  A major plank of Sri Lanka’s economic policy has been to build massive infrastructure projects with international, especially Chinese funding. The government owes close to $13 billion, with most of the loans have rapid repayment schedules, and the government will have to make a billion dollars in payments in January of 2019. The country could default on its debt if parliament does not allocated money to finance its debt. So far the Sri Lankan rupee and financial markets have been resilient to political uncertainty, but it is unclear how long this can last.

The recent domestic political crisis needs to be understood in an international context. Sri Lanka has a strategic location  along some of the busiest shipping lines in the world and has emerged as a pawn in geopolitical conflict between India and China. China has been highly supportive of Mahinda Rajapaksa who is seen a pro-Chinese. Maithripala Sirisena has accused Indian intelligence agents of plotting his assassination. While those claims strike me as outlandish, India has long seen Sri Lanka as part of its backyard, and sought through influence Sri Lankan politics through both overt and covert means. Sri Lanka has not been able to leverage its geopolitical significance into increased development, and is instead rivalries are only amplifying divides within the country.

Grand Theft Afghanistan: What Happened to the $126 Billion of Reconstruction Aid Spent in Afghanistan?

In 1948, US president Harry Truman announced the Marshall Plan to rebuild Europe and Japan in the aftermath of the destruction of World War II. The United States invested over $100 billion to rebuild these nations, and Europe and Japan rapidly exceded prewar levels of prosperity.  After the US overthrew the Taliban regime in 2001, the United States announced a modern equivalent to the Marshall plan to rebuild the country.  However, the Afghan economy has sputtered after a burst of growth in the early 2000s and per capita income has actually declined over the last three years despite the fact the US has spent far more in Afghanistan than in Europe after WWII after adjusting for inflation. The purpose of today’s podcast is to explore why massive investments in Afghanistan have only garnered modest results so far. I will discuss the Tarakhil power plan, a $335 million white elephant in the outskirts of Kabul, the looting of $850 million from the Kabul Bank by Afghan elites,  and the contrasting success and dynamism of Afghanistan’s grape and raisin sector.

The Tarakhil powerplant, inaugurated in 2011, is one of most spectacular examples of corruption and incompetence in the reconstruction of Afghanistan. Despite costing $335 million, the diesel plant was only operating at 1% capacity and providing 0.34% of Kabul’s electricity by 2014. The contract to build the Tarakhil power plant was handed to US engineering firm Black and Veatch without doing due diligence or properly completing feasability studies. The US did not want Kabul to rely on electricity from Uzbekistan, a questionable ally, and then president Hamid Karzai wanted to have a major accomplishment in the run-up to the 2009 reelection, Powerful transportation and logistics cartels controlled by powerful politicians and their relatives were lining up for cushy contracts to supply the Tarakhil power plant with diesel. Providing electricity to Kabul was a secondary condition at best. The construction of the power plant was beset with delays and cost overruns, and electricity from Uzbekistan was always cheaper than that from Tarakhil plant. The Tarrakhil power plant became a symbol of the corruption of the corruption of Afghanistan’s elite, and little diesel was ever imported to the power plant. The inability for the corrupt elites to cooperate sabotaged their attempts to enrich themselves, and more important sabotaged the Afghan economy.

The dysfunctional behavior of Afghanistan’s elite can further be seen in the collapse of the Kabul Bank in 2011. The Kabul Bank was founded in 2004, and quickly became the largest and most trusted financial institution in Afghanistan. The Kabul Bank attracted thousands of small depositors, and US and Afghan government paid government employees through the Kabul Bank. Rather than serving as a trusted financial intermediary, the Kabul Bank was instead a giant ponzi scheme for the benefit of the elite. The managers of the Kabul Bank kept two sets of books. In one, artificial, set of accounts, the bank made sensible set of loans to growing Afghan companies. However, in reality, the bank made questionable loans to powerful shareholders, and most of the money ended up in bank accounts and property in Dubai. Details of the mismanagement leaked in 2011, resulting in a run on the entire Afghan financial system and a $820 million bailout. Almost the entirety of Afghanistan’s elite had received loans on the basis of corruption, including the brother of the president, vice president and family members of the financial regulators. It is telling that the Afghan government was more interested in siphoning money out of the country, rather than investing in their own nations.

While corruption and mismanagement have characterized much of the Afghan economy, the situation is very different for the grapes and raisin industry. Total grape production has increased 230% over the last ten years, and exports of grapes (primarily in the form of raisins to India and Pakistan) have increased 6 fold over the last decade. Grape production is concentrated in the Shomali plain, a broad area north of the capital Kabul. Grapes have thrived in the region because of its ready access to water, and proximity to major highways so as to get raisins to markets. Private sector and aid financed projects have led to major investments in raisin processing facilities. The first modern raisin factory was just inaugurated in Parwan province. The governors of the region aren’t any less rapacious than the warlords and crooks found in the rest of Afghanistan. However, raisin exports will collapse if the cost of production costs go to high, and reliance on export markets place a check on the rapaciousness of elites. Raising production requires maintenance of irrigation networks, relatively safe and efficient transportation, and investment into raisin processing facilities and the regional warlords provide this out of simple self interest.

The Tarakhil Diesel Project, and the Kabul Bank collapse highlight the weak institutions and corruption endemic to Afghanistan while the grape and raisin industry provide a glimmer of hope. It should hardly be surprising that Afghan reconstruction cannot match Europe after the Marshall plan. Japan and Europe were industrialized even before the World Wars, and violent conflict has not yet ended in Afghanistan. However, the examples given above shows an important aspect to the reconstruction in Afghanistan. The self interest of the Afghan elite, and the public good are in conflict in many sectors of the Afghan economy. Industries, such as the grape and raisin industry, where this is not the case have seen rapid growth and engendered development in other sectors of the economy. However, high value horticultural exports are only a small segment of the Afghan economy. The lack of development and corruption of Afghanistans’ political class have fueled the insurgency in Afghanistan. This insurgency will only gain steam unless the Afghan elite can work together and stop hindering development.

Selected Sources:

Challenges to Effective Oversight of Afghanistan Reconstruction Grow as High-Risk Areas Persist

Grape Revitalization for Afghanistan Productivity and Empowerment (GRAPE)

Who Killed Jorge Enrique Pizano?

On November 8th, Jorge Enrique Pizano died of an apparent heart attack in his home. One week later, his son died from cyanide poisoning after drinking a bottle of water on his father’s death. The death was doubly suspicious because Jorge Enrique Pizano is at the center of a massive Colombian scandal. The investigation into the Petrobras corruption scandal in Brazil has uncovered corruption throughout Latin America. Jorge Pizano had just made public evidence showing Grupo Aval had noticed $30 million in irregular payments by Odebrecht to non-existant consultancies to win the contract to build the Ruta De Sol highway along the Colombian Pacific coast. . Grupo Aval, one Colombia’s largest banks, owned by Colombia’s wealthiest family and whose former chief counsel is Colombia’s Attorney General, has long been denying the existence of any such payments. The circumstances surrounding the death of Jorge Pizano and his son remain murky, but it is clear that Pizano’s revelations had made a lot of powerful enemies.

Colombia has long struggled with corruption in infrastructure. However, Colombia has been introducing institutional reforms to reduce the risk of corruption. One of the most important of which is the creation of the National Development Finance Corporation, or the FDN. The FDN’s mandate demands that 75% of the financing for any infrastructure program it invests in must come from private sources, domestic or foreign. Moreover, respected international organizations such as the Andean Finance Corporation and the World Banks International Finance corporation have substantial minority stakes and a seat in governing the FDN. As a result, the decision making of the FDN is separated from the clientelistic networks between construction companies and politicians as much as possible. The FDN expects to close  17 projects worth $8.7 billion in 2018, and bidding for more in the future. Ruta De Sol was not financed by the FDN, and so far the model does not seem as marred by corruption.

King Copper’s Ghost: The Democratic Republic of the Congo and the Natural Resource Curse

The Democratic Republic of the Congo is currently in the midst of an Ebola outbreak that has cost the lives of 191 individuals. Although a vaccine for Ebola has finally been developed, constant warfare makes it all but impossible to distribute treatment. The recent history of the DRC has been marked by brutal series of wars that has cost of over 4 million lives, and the DRC has a per capita income under $800. This dismal picture is shocking given that Congo is blessed by rich deposits of copper, diamonds, cobalt and other national resources. Today’s podcast episode is going to focus on why Congo has been unable to translate this natural resource wealth into prosperity for ordinary people. In part one, I will discuss the paternalistic policies of the Belgian Congo and how the left the country unprepared for independence. In part two, I will discuss the corruption of the Mobutu regime, and how the mining industry collapsed under his rule. Finally, in part three I will discuss the current transformation of Congo’s mining industry, and the pivotal role the Congo will play in the rise of electric cars.

Many of my readers are likely familiar with the ruthless rule of King Leopold in the Congo Free State that cost the lives as many as 8 million Africans. If not, I strongly recommend reading King Leopold’s Ghost, by Adam Hochschild. The Belgian government took over the administration of 1908, and very much took “the White Man’s Burden” seriously. By 1960, the Belgian Congo had eradicated the tsetse fly from populated areas, and the highest literacy rate in sub-Saharan Africa. However, there was a very real dark side to Belgian rule in the Congo. Exploitation and coercion where everywhere. The government forced Congolese to work one sixth of the year on public works projects, and private corporations had the power to force Africans to work on plantations.

The achievements of the Belgian Congo were financed by the rich reserves of copper in the Katanga province of Congo, and UMHK, an Ango-Belgian conglomerate, sent the bulk of its profits to Europe. The Belgian colonial government deliberately privileged certain ethnic minorities to create ethnic conflict they could manipulate. Above all, the Belgian government saw Africans as little more than big children and presumed they would rule indefinitely. The education made primary education readily available, but only a handful of university graduates. At independence there wasn’t a single African military officer in the police and security forces, and no Africans in the colonial administration with real authority. The Belgians left the Congolese as unprepared as possible for independence.

After independence, the United States supported the regime of Mobutu Sese Seko, a brutal and corrupt dictator because he was strongly anti-Communist.  At first, the mines ran much as before, with mining output reaching all time highs of around 500,000 tons in the late 1970s. However, the government assumed the period of high commodity prices would last forever, and so did not maintain large financial buffers, or invest in maintenance. Instead, the Congolese elite consumed the wealth with avarice. The fall of the USSR proved a disaster for Mobutu mean the end of vital American support. The power lines that connected the mines in the interior to hydro-electric power plants on the coast were cut by militias, and rioters chased the ethnic minority that held the majority of management jobs in the mines. Mining output decreased from close 500,000 tons of copper to 35,000 in 1993. In 1994, millions of Rwandans refugees fled into the Congo in the aftermath of the Rwandan genocide, sparking the brutal Congo Wars and putting the final nail in the coffin in the Congolese mining industry.

The DRC’s mining industry has steadily rebuilt itself after the end of the Second Congolese war in 2003. Cobalt has emerged as a key component in the manufacture of lithium ion batteries used in electrical cars. Soaring demand has led to the price of cobalt more than doubling over the last two years to $50,000. While some electric car companies, such as Tesla, are attempting to minimize the use of cobalt, demand is likely to soar in coming years. Whether the Congo benefits from this boom is a more complicated question. About one fifth of the cobalt is comes from artisanal mines, where wages are low and workers as young as seven.  Dan Gertler, an Israeli businessman who financed the father of the current dictator’s rise to power, controls the allocation of new mining permits. The Inga-Kolwezi transmission lines that connect hydro-power dams at the mouth of the Congo to Katanga only generate power for the mines, but not the surviving villages. While export revenues have soared, it is unclear if Congo has the institutions to transform this into prosperity for ordinary people.

The DRC’s natural resource wealth has not benefited ordinary people because those in charge have little incentive to do so. The Belgians had no incentive to make to Congolese capable of self rule. Mobutu had little incentive to allow the countries resource wealth to benefit those not connected to his regime. The current regime does not seem able to use Congo’s resource wealth in a way that benefits the country. The news stories coming out of Congo are almost universally tragic, whether it is civil war or epidemic. Changing the narrative about the Congo will require reforming the countries institutions. Lets hope this time the Congo manages to do so.

Selected Sources

Copper Giants Lessons from State-Owned Mining Companies in the DRC and Zambia

MORE CONTINUITY THAN CHANGE? NEW FORMS OF UNFREE LABOR IN THE BELGIAN CONGO, 1908–1930

Globalization Rules, Republicans Drool: Why I am Voting for Democrats in the 2018 Elections

On Tuesday November 6th, the United States will be holding elections for Congress and a host of state level positions. As the world’s most important economic powerhouse, the actions of the United States government play an outsized role on the economies of the developing world. The current Trump administration has for some time been playing a worrying role on the world stage. The United States government has placed tariffs on solar panels, washing machines, steel, aluminum and on a host of imports from China.  The Trump administration has hamstrung the WTO by refusing to re-appoint appellate judges, bringing the gears of global trade arbitration to a halt.

The US has slashed spending on public health, including cutting $225 million on Ebola funding exacerbating the current crisis in the Democratic Republic of the Congo. The complete disregard for global institutions by the Trump administration has been deeply disturbing. The Great Recession did not turn into the Great Depression thanks to high level of international cooperation by international agencies. The pennywise pound foolish aproach to the Trump administration to international economic organizations raises the risk of a minor economic disturbance turning into an economic disaster.

The two most important points about global development that I want to impart is that gaps in development between the wealthiest nations in the world, and the poorest are massive and that globalization has engendered massive progress on all fronts in the fight against global poverty and inequality. Today 17 million in Yemen are at risk of famine, and 50,000 children have died of starvation. Levels of violence in places such as Honduras and Venezuela are similar to those in war zone such as Iraq and Afghanistan. More broadly, opening US borders to immigration is the single most effective action the US can take to improve the lives of the global poor. Yet the Donald Trump has chosen to demonize immigrants and refugees and shut the huddled masses outside of the US. Donald Trump’s vision of America is one in which international trade and immigration are threats. Yet the forces of globalization have enriched both America and the developing world.

Although many of the policies I have discussed so far are the purview of the president, Congress has real powers to check the actions of Donald Trump. Although Fast Track Authority gives the president the power to negotiate trade treaties, but all treaties must still be approved by both houses of Congress. The House of Representatives controls appropriations, including spending on foreign aid and measures to counter global warming. The Senate has the power to approve judges who interpret where the powers of the president to change immigration and trade laws begin and end. The Democrats are far from a perfect party. However, the Republican legislators have barely spoken, and taken little action against the policies of the Trump government. I therefore strongly encourage all listeners of the Wealth of Nations podcast to vote for the Democrats in the upcoming elections.

Race to the Bottom or Race to Prosperity: How the iPhone is Transforming the Global Economy

On November 3rd, 2017 Apple announced the iPhone X, the most expensive in its line of iPhones, with a price tag of $999.  The high cost of the iPhone is in stark contrast to the low wages paid to the millions of workers toiling away in factories in China where the starting pay for an assembly worker in a electronics factory is only around $400 a month. iPhones and almost all the other electronics we use in our daily lives are manufactured in poor countries by workers making next to nothing in dollars. Today’s podcast is about how and why Apple and other countries have moved to poor Asian countries. In part one, I discuss Apple’s contract manufacturing model, and how this led to moving iPhone production to Shenzhen. In part two, I discuss the move of iPhone manufacture to the inland of China, especially to the city of Zhengzhou. Finally, in part three I discuss the rise of Vietnam’s electronics industry, and why it is likely iPhone assembly will eventually move to Vietnam.

Apple from the very beginning has seen itself more as a design and technology company rather than as a manufacturing company. Apple began outsourcing manufacturing to Singapore as early as 1981, Starting from 2000, Apple began increasingly contracting the assembly of products to Foxconn, a Taiwan based company. Apple provided the design, high tech electronics companies such as Samsung and Intel the components, and Foxconn and a handful of other companies provide the labor. Of the $999 cost of the iPhone X, the majority goes to Apple, around $360 go to components makers, and only a few percent to the company providing the labor that assembles the final product. The business of contract manufacturing is a brutally competitive one. Despite employing 1.3 million people, and manufacturing millions of phones a year Foxconn has a gross profit of under $500 million, only a small fraction of Apple’s profits. In order to keep labor costs low, Foxconn built its assembly plants in Shenzhen. However, as I discuss in my podcasts on hoverboards and Shenzhen’s relationship with Hong Kong , Shenzhen has transformed itself into a center of innovation. The price of land, cost of living, and above all wages have been rising at an exponential pace, and as a result Foxconn has moved more and more of itself factories to the interior of China, especially the city of Zhengzhou.

Foxconn moved production to Zhengzhou, in the interior province of Henan, because wages for manufacturing tend to be 10 to 15% lower than along the coast. However, given the cost of housing is a quarter of what it is in Shenzhen, many workers were eager to move to Zhengzhou. By American standards, labor standards in Foxconn factories are very poor. The starting wage for the average Foxconn worker is only around $400 a month, rising to closer to $700 with experience. The work of assembling and iPhone is monotonous and uncomfortable and during peak seasons workers work a hundred hours of paid overtime a month. The city of Zhengzhou further provided billions of dollars of subsidies to Foxconn (and by proxy Apple) worth billions of dollars, including forgoing all corporate and value added taxes for five years and building the factories and housing used by Foxconn workers. As problematic as the relationship between Apple, Foxconn and Zhengzhou are, it is important to keep in mind that wages and labor standards at Foxconn factories tend to slightly above industry average. Moreover, Foxconn and Apple have sparked a boom in the region. The population of Zhengzhou has increased 36% since 2010, making it the fastest growing major metropolitan region during this period, and the province of Henan has been one of the fastest growing provinces during this period going from being the 23rd richest province to the 19th.

However, globalization isn’t a force that can be contained to a single country. In the last decade, Vietnam has emerged as a major center for labor intensive electronics manufacturing. Total electronics exports from Vietnam has exploded from only $7 billion in 2008 to over $120 billion today. Foxconn currently does almost all of its smartphone assembly in China. Although factories have been opened in Brazil, India and Wisconsin they are more about politics and tariffs than anything else. The primary attraction to manufacturing out of Vietnam are the low wages, which are only a third of what they are in China. Moreover, the Vietnamese government puts much less pressure on manufacturers to transfer intellectual property to Chinese partners and Vietnam isn’t subject to the brewing trade war between the US and China. Samsung has already turned Vietnam into a hub of smartphone assembly, and many Apple suppliers have started manufacturing components in Vietnam. It is likely that the final assembly of smartphones will eventually move to Vietnam as well.

The move of smartphone assembly from the US to Shenzhen, from the coast of China to it’s interior, and from China to Vietnam may seem like a race to the bottom in wages and labor standards. While that is perspective that has a lot of merit to it, it is just as important to remember that the forces of globalization provide a ladder that poor countries can climb to achieve prosperity. Low cost manufacturing helps poor regions become wealthy, and then spreads to process to new locations. While the workers in the factories that make iPhones will likely never be able to afford an iPhone, Apple and other electronics companies are still helping the workers and the regions they come from achieve prosperity.

Selected Sources

Global capital, the state, and Chinese workers:  The Foxconn experience , Pun Ngai and Jenny Chan

Moving In and Moving Up? Labor Conditions and China’s Changing Development Model, Yujeong Yang and Marry Gallagher

What Does Jair Bolsonaro Mean For Brazil?

On October 28th, 2018 Brazil will vote in the second round of the presidential election. The election pits far-right Jair Bolsonaro against Fernando Haddad of the left wing Worker’s Party. Bolsonaro won 46% to 29% of Haddad in the first round of the elections and most polls have Bolsonaro winning the presidential election with a comfortable majority. Bolsonaro has made a series of deeply racist, sexist and homophobic comments in his election campaign, surrounded himself with ex-military officers and regularly praises the dictatorship that ruled Brazil until 1985. Bolsonaro has promised to crack down on crime, with little regard to the rights of the accused, similar to Rodrigo Duterte of the Phillipines.

Jair Bolsonaro has soared in popularity in part due to the Petrobras scandal that has implicated huge swathes of the countries political and economic elite, and the deep recession that Brazil is only starting to emerge out of. Despite Brazil’s dire economic condition, Bolsonaro has never thought deeply about economics. He has stated that he is going to outsource all economic decision making to his advisor, Paulo Guedes, who has promised to privatize Petrobras and other state owned enterprises, and drastically cut Brazil’s expensive pension system. However, Bolsonaro was not an economic free marketeer during his long career as a legislator, and supported truckers in their demands to maintained poorly designed fuel subsidies in the run up to the election. I am skeptical of the idea that Bolsonaro has any idea in pursuing deeply unpopular economic policies, regardless of what Paulo Guedes recommends. Moreover, I worry that the government will enact deep cuts to essential services rather than cutting unnecessary expenses. While economics has played little role in his rise to power, managing the day to day affairs of state will be central to his presidency.

Although Bolsonaro is a deeply worrying figure, there are some guard rails against an autocratic president. His Social Liberal Party only controls 52 of the 513 seats in the Brazilian Chamber of Deputies. Brazil has an independent judiciary that has been willing to imprison some of the country’s most powerful politicians. The military has made it clear that it has no interest in renewing the dictatorship Bolsonaro so eagerly praises. At the same time, Bolsonaro has created a lot of fear among the weakest in society, and those the law may no longer protect. It is unclear what the future holds for Brazil, and a Bolsonaro presidency is likely to put the countries democratic institutions under extreme strain.

Pressure Creates Diamonds, Globalization Creates Industrial Clusters: How Surat Conquered the Diamond World

Every year hundreds of thousands of Americans spend $41 billion on diamonds. Few purchasers of these diamonds know that nine of out of ten of all diamonds are cut and polished in India, and the obscure city of Surat at the heart of this industry. Surat and the surrounding region employs millions of diamond workers, and produces over $23 billion of exports a year. The rise of Surat as the center of the world’s diamond industry is a fascinating story in and of itself, but is also representative of the importance of entrepreneurial networks and industrial clusters in fueling globalization. From cars in Detroit, to software in in Silicon Valley, many of the worlds most innovative industries are concentrated in specific cities. Clustering is especially important to firms in developing countries, where firms do not have the experience and financial clout of their competitors in global market. In today’s podcast episode, I am going to be explore the process of cluster formation in developing countries by exploring the experience of Surat. 

The diamond industry has long been dominated by ethnically and religiously bounded small merchant communities. Today communities of orthodox Jews, and Palanpuri Jains dominate the diamond trade, due to the structure of the diamond trade. De Beers has long had a near monopoly on the mining of diamonds, and produce roughly two thirds of total diamonds. De Beers grants 125 diamond companies sightholder status, and assigns these sightholders large parcels of diamonds at highly discounted policies. Sightholders cannot sort through these parcels before purchasing, and refusing to purchase can lead to a revocation of sightholder status. Sightholders recieve far more diamonds than they can deal with, and so they sell them two smaller merchants, who sell them to smaller merchants until the diamond reaches the small workshops that cut and polish the diamonds. A diamond can pass through a dozen hands before reaching its final destination. Diamonds are small, valuable and very easy to steal. Both orthodox Jews and Palanpuri Jains have developed strong arbitration systems backed norms or reciprocity and community punishment to allow diamond to buy and sell diamonds on credit without needing cumbersome legal contracts.

Palanpuri Jain merchants moved from trading diamonds to cutting and polishing diamonds in response to the government severely restricting imports of what the government considered luxuries. The process of cutting and polishing diamonds is highly labor intensive, and the Palanpuri Jains, a small merchant community, needed to hire workers from other communities for their factories. Palanpuri Jains recruited heavily from the peasant Patidar caste of the drought prone region of Saurashtra. Saurashtra Patels quickly started their own workshops, eventually moving into trading diamonds in their own right, and creating their own tightly knit community of traders. Estimates for the size of the diamond labor force vary dramatically, with some estimates as large as 4.5 million workers. The city of Surat is not nearly large enough to host the entirety of the diamond industry, and by the early 2000s Surat suffered from extreme overcrowding. Wages for diamond workers in Surat are around $250 a month, almost double that of the average manual labor. The cost of labor in rural parts of the country are much lower, and in theory it makes a lot of sense for diamond workshops to be set up there.

Entering the diamond industry requires little in terms of capital, and it only takes about three months to train a skilled diamond cutter. However, a major obstacle to the growth of the diamond cutting and polishing industry in rural India is the lack of regular industry. Powerful large farmers had long hogged all of the electricity in rural areas, while manipulating meters to pay only a nominal amount. The cash starved Gujarat Electrical Board chose not to invest in rural electrical infrastructure, resulting in limited access to electricity for rural households and businesses. From 2006 onwards, the government of Gujarat solved the rural electricity crisis by creating two separate electrical networks, one for tubewells and another for everyone else making sure all villages had 24 hour access to electricity. The diamond industry has been one of the strongest supporters of these policies. The diamond industry has grown by leaps and bounds in rural Gujarat, with close to 10,000 producing a quarter of all of India’s diamonds and half of all small low value diamonds. 

Globalization has always played a central role in the growth of the diamond industries. The diamond cutting and polishing industry began because of transnational trade networks, and depends on demand from wealthy nations. India liberalized imports in the early 1990s, allowing diamond polishing factories to import hi-tech equipment from Israel. De Beers has invested heavily in building diamond grading stations in Surat so as to identified the highest quality diamonds. Indian firms are rapidly globalizing as well, with Indian diamonds starting luxury brands selling on high streets in London and malls in New York City. Indian diamond polishers started cutting and polishing the smallest diamonds, which required labor intensive processes that took advantage of India’s rock bottom wages. However, these diamonds had the lowest profit margins, and were at greatest risk to commodity price fluctuations. Diamond cutting workshops were forced to match Belgium and Israel if they wanted to compete in the most lucrative segments of the diamond industry. Since 2001, India’s diamond exports has increased from $6 billion to $23 billion while those from Belgium and Israel, India’s primary competitors have stagnated.

The process of creating the Surat diamond cluster has involved three major processes. The first was leveraging international trade networks and encouraging these networks to add more value domestically. The second is to make targeted investments and policy changes, such as improving access to electricity. Finally, it is the importance of globalization in pushing firms to become more productive. Although the history of the diamond industry is important in and of itself, it is just as important to learn policy lessons from Surat. The ingredients of successful industrial clusters can be found throughout the developing world. There are many complex international trade networks, industries held back due to infrastructure and policy bottlenecks, and industrial clusters that lack international exposure. Polishing these industrial clusters in the rough into gems is a key challenge to spreading the benefits of globalization throughout the world.

Selected Sources

Strength in numbers: Networks as a solution to occupational traps , Kaivan Munshi

Diamonds and Patels: a report on the diamond industry of Surat, Miranda Engelshoven

Ethnic networks, extralegal certainty, and globalisation: peering into the diamond industry , Barak D Richman

 

Manchurian Motherboards: Could Chinese Industrial Espionage Could Backfire on Everybody?

On October 4th 2018, Bloomberg Businessweek released a bombshell story on large scale industrial espionage committed by the Chinese security services that has impacted Amazon, Apple and 30 other major corporations. The company at the center of this espionage is SuperMicro, a San Jose based contract electronics manufacturer. SuperMicro is a leading producer of motherboards, and other electronics products. Like many other contractors, SuperMicro subcontracts work to smaller companies when the load of work is to high. The Chinese government has been able to bully and cajole these small subcontractors into allowing the Chinese government to surreptitiously insert microchips the size of a grain of rice that can give the Chinese government access to American national defense and trade secrets. The Chinese government, Amazon and Apple have vehemently denied the accusations, in language that leaves little ambiguity or wriggle room suggesting that Amazon and Apple genuinely believe the story is inaccurate. If these accusations prove true, this would be the largest and most sophisticated cyber attack by China.

The cyberattack needs to be considered in the context of rising trade tensions between the US and China. The US has steadily raised tariffs against China, including $200 billion in tariffs in September of 2018 alone. So far, the Trump administration has arbitrarily applying tariffs to allies and enemies alike. However, there are signs that the US government has a much more focused anti-China approach. For example, the USMCA includes a host of provisions that are squarely aimed at China the most important of which is a provision that any member of the USMCA can withdraw if another USMCA member makes a trade agreement with a non-market economy. The Trump administration has long supported revoking China’s status as a market economy, and effectively blocks USMCA nations from signing trade agreements with China without American consent. The USMCA is expected to be just the first step in coalescing according Larry Kudlow “a Trade Coalition of the Willing”.

The Chinese economy has so far been able to shrug off the impacts of the US trade war. GDP growth is expected to be 6.8% in 2018, and Chinese exports have grown by more than 10% for five consecutive months (although this may be because of exporters rushing to expedite orders before tariffs take effect). However, these positive numbers mask real weaknesses in the Chinese export machine. Chinese electronics exports global market share soared from 5.9% to 25.8%. However, since 2015, China has actually losing market share against global competitors. Rising wages has seen low cost production move from China to countries such as Bangladesh and Cambodia. Chinese attitudes towards intellectual property has led manufacturers to move facilities to Mexico and Eastern European countries. It is likely rising tariffs will see taiff global value chains shift to countries such as Vietnam, where electronics exports have increased from $4 billion to $107 billion. Increasing Chinese government sponsored espionage is part of a greater move towards interventionism in markets. Access to global markets and strong ties to foreign invested firms has sparked massive growth and innovation by Chinese firms. Economic adventurism such as this type of industrial espionage puts these ties at risk, and does far more harm than short term good.