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I have viewed Fair Trade labeling as a benign if rather limited movement. On one side, the Fair Trade organization certifies that a product like coffee was produced in a way that lived up to a certain code of conduct for how workers were treated, environmentally friendly practices, and the like. On the other side,  consumers in high-income countries who are willing to pay higher prices for goods like coffee produced according to such standards could then identify this output. But how much does Fair Trade really help workers in low-income countries? The Fairtrade, Employment and Poverty Reduction in Ethiopia and Uganda (FTEPR) research team, based at SOAS at the University of London, set out to gather evidence on this question. The main authors are Christopher Cramer, Deborah Johnston, Carlos Oya and John Sender, but the process of data collection and processing was extensive and required a full-time research officer in the UK, as well as research supervisors in Ethiopia and Uganda, and many other contributors. The total cost of the study ran about 700,000 British pounds. The group has now published \”Fairtrade, Employment and Poverty Reduction in Ethiopia and Uganda\” (April 2014) and the results will be disheartening for supporters of fair trade.

The researchers chose about a dozen local areas by to collect detailed evidence in rural areas of Ethiopia and Uganda, focusing on coffee and flower producers in Ethiopia and coffee and tea producers in Uganda. They then sought to interview enough people in each of these local areas that they could have a locally representative sample of wages and earnings for that area, looking both at those who worked for a local certified Fair Trade producer and those who didn\’t. They tried to gather data on each member of entire households, including children, and they returned to these areas for either 2-3 years to do follow-up surveys.  Some people were surveyed more intensively or by different methods than others, but the overall result is that data was gathered from thousands of local farm workers. As the study authors wrote: \”[T]he over-arching research question was whether a poor rural person dependent on access to wage employment for their (and their family’s) survival is better served by employment opportunities in areas where there is a Fairtrade certified producer organization or in areas where there is none.\”

And after several years of effort, what did the researchers find?

\”This research was unable to find any evidence that Fairtrade has made a positive difference to the wages and working conditions of those employed in the production of the commodities produced for Fairtrade certified export in the areas where the research has been conducted. This is the case for ‘smallholder’ crops like coffee – where Fairtrade standards have been based on the erroneous assumption that the vast majority of production is based on family labour – and for ‘hired labour organization’ commodities like the cut flowers produced in factory-style greenhouse conditions in Ethiopia. In some cases, indeed, the data suggest that those employed in areas where there are Fairtrade producer organisations are significantly worse paid, and treated, than those employed for wages in the production of the same commodities in areas without any Fairtrade certified institutions (including in areas characterised by smallholder production). At the very least, this research suggests that Fairtrade organizations need to pay far more attention to the conditions of those extremely poor rural people – especially women and girls – employed in the production of commodities labelled and sold to ‘ethical consumers’ who expect their purchases to improve the lives of the poor. . . .

Another issue of importance both to the Fairtrade literature and more widely is the governance and structure of producer cooperatives. The research finds a high degree of inequality between members of these cooperatives, i.e. the area cultivated with the certified crop (tea and coffee) and the share of the cooperative’s output are very unevenly distributed among members: there are large numbers of members who have tiny plots of land and sell very little to the cooperative, and there is a small number of members who dominate sales to and through the cooperative. One clear implication of this is that the many benefits of being a member of a Fairtrade certified cooperative – tax breaks, direct marketing channels to high-value niche markets, international donor financed subsidies – accrue very unequally. Fairtrade may ‘work’ but it does not quite do what it says on most of the labels: it aggravates rural inequality and at best may do so by supporting the emergence of rural capitalist producers; and it fails to make a difference, on the data collected, to the welfare of the poorest people involved in the Fairtrade chain, i.e. manual agricultural wage workers. . . .

In conclusion, it may be argued, for the areas and producer organisations where this research was conducted, that Fairtrade certification has failed to benefit poor wage workers because it has overlooked their existence, because it has proven institutionally incapable of monitoring effectively the wages and conditions of those working in production conditions (e.g. flowers) where there is acknowledged hired labour, despite the existence of auditing procedures against the Hired Labour Standard, and because it is relatively ineffective compared to other factors that are more likely to influence both productive efficiency and working conditions. … 

The reasons for Fairtrade’s failure to make a clear positive difference to wages and conditions, or to the amount of work offered, are fairly clear. They have to do – especially in the production of “smallholder” commodities – with what this research suggests has been in the past a wilful denial of the significance of wage labour and an obsessive concentration on producers/employers and their organisations. … [T]his research suggests that a large number of obstacles remain in implementing improved standards in a way that will benefit rural workers. First and foremost is the need not just for more monitoring and evaluation, but also for better methods. And they have to do – again, especially where Fairtrade certification is awarded to cooperatives – with the espousal of a romantic ideology of how cooperatives operate in poor rural areas.

Of course, it would be unwise to condemn all of Fair Trade based on a single study of about a dozen local areas in two countries. Matt Collin and Theo Talbot at the Center for Global Development take on the task of putting the results in context in a blog post. They point out that although the study was focused on wage-earning farmworkers, not on the farm-owners. Although the study tried to compare farmworkers at Fair Trade operations to similar farmworkers at similar non-Fair Trade operations, such comparisons are always difficult. The results show that the Fair Trade workers were paid less, but they do not conclusively show that Fair Trade is what caused the workers to be paid less. Some other studies of Fair Trade have have found more positive results for how the pay of the small number of Fair Trade producers is increased.

Perhaps you don\’t quite remember this event. But back in 1982, the videocassette recorder was just about about to wipe out the movie industry, and probably also the television industry. We know this is true because of the April 12, 1982, Congressional testimony from Jack Valenti, then the President of the Motion Picture Association of America, given in hearings before the House of Representatives, Committee on the Judiciary, Subcommittee on Courts, Civil Liberties, and the Administration of Justice.

Valenti was arguing in favor of a bill that would allow a charge to be imposed on all makers of VCRs and blank videotapes, most of which were at that time made by Japanese firms, with the proceeds to be distributed to the U.S. film and television industry. If you need a reminder to be skeptical when business leaders prophecy doom and gloom if their industry has to adapt to new technology, here\’s a sample of the rhetoric from Valenti. It\’s a minor classic in the genre of special interest pleading, in which an industry is about to experience worse than a tidal wave, worse than an avalanche, but indeed a jungle, where it will hemorrhage and bleed and be strangled–but the industry\’s real concern, as we all know, is that it just wants to protect the old and the poor and the sick.

I am merely coming to start off by talking about the American film and television industry, not as an economic enterprise, but as a great national asset to this country, to the U.S. Treasury and the strength of the American dollar. And I am not just talking on behalf of people whose names are household words, like Clint Eastwood and some of his small band of peers. I am speaking on behalf, as he is, as he will no doubt tell you on behalf of hundreds of thousands of men and women who without public knowledge or recognition, who are not besieged by fans, but who are artisans, craftsmen, carpenters, bricklayers, all kinds of people, who work in this industry, not only in this State but in the 50 States where American films are shot on location. And they deserve no less, Mr. Chairman, than the concern of the Congress for the preservation of their industry. . . .

But now we are facing a very new and a very troubling assault on our fiscal security, on our very economic life and we are facing it from a thing called the video cassette recorder and its necessary companion called the blank tape. And it is like a great tidal wave just off the shore. This video cassette recorder and the blank tape threaten profoundly the life-sustaining protection, I guess you would call it, on which copyright owners depend, on which film people depend, on which television people depend and it is called copyright. … 

Because unless the Congress recognizes the rights of creative property owners as owners of private property, that this property that we exhibit in theaters, once it leaves the post-theatrical markets, it is going to be so eroded in value by the use of these unlicensed machines, that the whole valuable asset is going to be blighted. In the opinion of many of the people in this room and outside of this room, blighted, beyond all recognition. It is a piece of sardonic irony that this asset, which unlike steel or silicon chips or motor cars or electronics of all kinds — a piece of sardonic irony that while the Japanese are unable to duplicate the American films by a flank assault, they can destroy it by this video cassette recorder. . . .

Now, I don\’t have to tell anybody in politics — I have spent most of my adult life in politics and you learn one thing. Nothing of value is free. It is very easy, Mr. Chairman, to convince people that it is in their best interest to give away somebody else\’s property for nothing, but even the most guileless among us know that this is a cave of illusion where commonsense is lured and then quietly strangled. That is what it is all about. Now, these machines are advertised for one purpose in life. Their only single mission, their primary mission is to copy copyrighted material that belongs to other people.  . . .

The permission of the copyright owner is required for the use of their programs in all markets. Now, I those markets include theaters, cable, pay cable, pay television, prerecorded cassettes, network television, syndicated television, video discs. Every one of those markets is going to be competing for Mr. Eastwood\’s new film \”Firefox.\” They are going to license that film at a negotiated price. Now, we cannot live in a marketplace, Mr. Chairman — you simply cannot live in a marketplace, where there is one unleashed animal in that marketplace, unlicensed. It would no longer be a marketplace; it would be a kind of a jungle, where this one unlicensed instrument is capable of devouring all that people had invested in and labored over and brought forth as a film or a television program, and, in short, laying waste to the orderly distribution of this product. . . .

This is more than a tidal wave. It is more than an avalanche. It is here. If those aftermarkets are decimated, shrunken, collapsed because of what I am going to be explaining to you in a minute, because of the fact that the VCR is stripping those things clean, those markets clean of our profit potential, you are going to have devastation in this marketplace. . . . We are going to bleed and bleed and hemorrhage, unless this Congress at least protects one industry that is able to retrieve a surplus balance of trade and whose total future depends on its protection from the savagery and the ravages  of this machine. . . .

I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone. …

Movies are the single most recorded program type accounting for approximately 30 percent of all the recorded minutes. Now, what I am about to read you now boggles my mind and it is going to boggle the mind of everybody in the movie and television business in this city. If 56 of the 93 movies recordings made by the 250 households during the first 3 days of a diary week — just 56 of those movies are saved for the shelf and for additional playback — then the number of movies collected in a year by the Nation\’s 2.4 million VCR households, only 2.4 million, the number of movies collected would be 6,537,216. At a prerecorded purchase of $50, they would have a retail value of $3.2 billion.
Mr. Chairman, things like that could make a grown men cry. . . .

By 1990, the Japanese estimate that 30 to 35 million U.S. homes will be equipped with VCR\’s. VCR owners will buy about 225 million or 300 million blank tapes. But, and here is an explosive political fact, Mr. Chairman, two-thirds of U.S. households will not own VCR\’s, Mr. Chairman. One-third of VCR households will not be on cable or won\’t have access to cable. Now, if there is a scarcity of film and television entertainment, it won\’t be the well-groomed and the well-heeled that will suffer. It is going to be, as always it is, Mr. Chairman, the less-affluent, the disadvantaged people pressed against the wall, out of work, who can\’t afford these expensive machines, and free television to the sick and the old and the poor will remain the primary source of home entertainment. . . .The loser will be your public because they don\’t have these expensive machines. And that is what I am saying, sir. The public is the loser when creative property is taken and here is the reason why. The investment of hundreds of millions of dollars each year to produce quality programs to theaters and television will surely decline. … 

Mr. Chairman, I am done. The public interest is at stake here. It is the public interest that you have by solemn oath sworn to serve because what I am talking about and what the rest of these witnesses are talking about is making it possible for a steady stream of quality entertainment to reach people through their television sets and to keep the incentive and reward mechanism in line so that people can risk great sums of money in this very dicey forum. That is what is at stake, and, finally, the preservation of a huge and valuable trade asset that can\’t be duplicated by any country in the world.

Last week, I noted that I have authored an essay for the June 2014 issue of Finance and Development on the subject of \”Economics and Morality\” (51: 2, pp. 34-38), and I offered some snippets from the article.

There there is also an accompanying six-minute podcast/interview from the IMF where I talk about some of these issues. It\’s called \”How Economics Can Inform Moral Decisions.\” It\’s on Soundcloud, and a free registration is required to listen or download.

When other nations send foreign aid with the intention of helping those enmeshed in a civil war, does the aid make the conflict worse? The question has been asked by some with high credibility in these matters, like the 1999 Nobel Peace Prize winner Médecins Sans Frontières. In reflecting on their attempts to help those in the conflicts in Chad and Darfur, the organization wrote:

We are unable to determine whether our aid helps or hinders one or more parties to the conflict … it is clear that the losses—particularly looted assets—constitutes a serious barrier to the efficient and effective provision of assistance, and can contribute to the war economy. This raises a serious challenge for the humanitarian community: can humanitarians be accused of fueling or prolonging the conflict in these two countries.

Nathan Nunn and Nancy Qian offer this quotation as a starting point for their investigation of the relationship between \”US Food Aid and Civil Conflict,\” which appears in the June 2014 issue of the American Economic Review (104:6, pp. 1630–1666). (The AER isn\’t freely available on-line, but many readers will have access through library or personal subscriptions.) They find that \”an increase in US food aid increases the incidence and duration of civil conflicts.\”

There is considerable anecdotal evidence that foreign aid may prolong civil conflict. Here\’s Nunn and Qian (citations and footnotes omitted):

Humanitarian aid is one of the key policy tools used by the international community to help alleviate hunger and suffering in the developing world. The main component of humanitarian aid is food aid. In recent years, the efficacy of humanitarian aid, and food aid in particular, has received increasing criticism, especially in the context of conflict-prone regions. Aid workers, human rights observers, and journalists have accused humanitarian aid of being not only ineffective, but of actually promoting conflict. These qualitative accounts point to aid stealing as one of the key ways in which humanitarian aid fuels conflict. They highlight the ease with which armed factions and opposition groups appropriate humanitarian aid, which is often physically transported over long distances through territories only weakly controlled by the recipient government. Reports indicate that up to 80 percent of aid can be stolen en route. Even if aid reaches its intended recipients, it can still be confiscated by armed groups, against whom the recipients are typically powerless. In addition, it is difficult to exclude members of local militia groups from being direct recipients if they are also malnourished and qualify to receive aid. In all these cases, aid ultimately perpetuates conflict. A large body of qualitative evidence shows that such cases are not rare, but occur in numerous contexts.

Of course, a bunch of anecdotes don\’t prove the general case that aid increases civil conflict. As social scientists like to say, \”data\” is not the plural of \”anecdote.\” But figuring out a persuasive statistical approach for investigating whether food aid causes additional conflict is tricky. After all, if civil conflict and dysfunctional political and economic institutions lead to a situation where it looks like more aid is needed, then there might be a positive correlation between conflict and aid–but the conflict is causing the need for aid, rather than the aid causing additional conflict.

In a perfect world for social science, there could be experiments with foreign aid, where aid would be randomly given for some civil conflicts but not for other equivalent civil conflicts, and over a period of a few decades researchers could then study the results. In the real world, the challenge is to find some way of looking at the existing evidence that can approximate this thought experiment of the effects of random variation. Nunn and Qian offer an approach that is a nice illustration of a method called \”two-stage least squares,\” and which I\’ll try to explain here in words.

The authors focus on two reasons why food aid for countries can vary that are not related to whether the country is currently experiencing a civil conflict. One is the size of U.S. agricultural harvests; bigger US harvests are correlated with  more food aid. The other is how likely a specific country is to receive food aid in any given year over the 36-year period of the data, from 1971-2006. These trick is first to estimate how much of the year-to-year variation in humanitarian food aid for any given country is determined by these two factors. This calculation will determine what share of the rise and fall in food aid is determined by U.S. weather, which can be viewed as an event that is increasing or decreasing food aid randomly whether there is a civil conflict or not. (This is the \”first stage\” of a two-stage least squares approach.)

Next, calculate whether these random rises and falls in food aid are correlated with civil conflict in the recipient countries. (This is the \”second stage\” of two-stage least squares.) Nunn and Qian summarize the results:

[T]he 2SLS [two-stage least squares] estimates identify a large, positive, and statistically significant effect of US food aid on the incidence of civil conflict, but show no effect on the incidence of interstate conflict. The estimates imply that increasing US food aid by 1,000 metric tons (MT) (valued at $275,000 in 2008) increases the incidence of civil conflict by 0.25 percentage points. For a country that receives the sample mean quantity of US food aid of approximately 27,610 MT ($7.6 million in 2008) and experiences the mean incidence of conflict (17.6 percentage points), our estimates imply that increasing food aid by 10 percent increases the incidence of conflict by approximately 0.70 percentage points. This increase equals approximately 4 percent of the mean incidence of conflict. 

In more detailed statistical work looking at large-scale and small-scale civil conflicts, as well as whether conflicts are starting or the length of conflicts, they find \”these findings suggest that the primary effect of food aid is to prolong the duration of smaller-scale civil conflicts.\”

Perhaps the bottom line goes without saying, but I\’ll say it anyway: These results certainly don\’t prove by themselves that food aid is overall counterproductive, or overall a bad policy idea. They do suggest that food aid, regardless of its humanitarian intentions, has a mixture of effects, and that sensible public policy will seek ways to tilt the balance toward the good and away from the bad.

The Food and Agriculture Organization at the United Nations suggess estimates that 870 million people are undernourished–roughly one in eight people in the world. Moreover, the world population has risen past 7 billion and is headed for about 9 billion by mid-century. Thus, it may seem contrary-minded, even for an economist, to suggest that the world may already be growing a sufficient quantity of food. But that\’s a finding of that same Food and Agriculture Organization,which together with the United Nations Environment Programme is focusing on the issue of food waste. For example, here\’s UNEP, referring to a 2013 report from the FAO:

Research shows that at least one-third, or 1.3 billion tonnes, of food produced each year is lost or wasted – an amount corresponding to over 1.4 billion hectares of cropland. Even a quarter of this lost food could feed all the world\’s hungry people. According to the FAO, almost half of all fruit and vegetables is wasted each year. About 10 per cent of developed countries\’ greenhouse gas emissions come from growing food that is never eaten, and food loss and waste amounts to roughly USD 680 billion in industrialized countries and USD 310 billion in developing countries.

This notion of food that is \”wasted\” can be an elusive one. After all, most food products can spoil, and they can do so in the field, in storage, in a processing or production facility, in a wholesale or retail establishment, or in a home. Calling something \”waste\” can involve judgments about what counts as food: for example, one of the the websites linked to this effort offers suggestions like the joys of eating fish heads. Measuring what is \”wasted\” is a tricky empirical problem. Indeed, the whole idea of \”waste\” is tricky for economists. If the food that is \”wasted\” has economic value–and could be sold to someone–then there would be strong incentives not to waste it. Thus, an economist is tempted to infer that \”waste\” really means \”not worth the costs of saving it.\”

The problem for the world food supply isn\’t a physical inability to grow enough food. Those around the world who are severely malnourished often live in a geographic areas where the supply of food is broadly adequate for the population as a whole: they just have very low incomes and find it hard to buy enough food. Thus, a substantial part of feeding the world isn\’t about raising the physical supply of food, but instead raising the buying power of those who need the food most.

In addition, while the world has the physical capacity to feed its population a healthy diet, the task becomes harder if the obesity rate keeps rising. Depending on just how you measure obesity and undernourishment, it is likely that the two problems are now about the same size from a global perspective–but undernourishment is shrinking and obesity is rising. Here\’s an illustration from a 2013 World Bank report, showing the trends in the share of world population that is obese or undernourished.

Various studies suggest that well-focused technological progress and productivity growth can create enough of a rise in food supply to cover population growth in the decades to come (for discussion, see here and here). The efficiency gains from reduced food waste at all the stages of the food production process would surely help in this task as well. But even with sufficient food being produced, the question of sufficient diets for some and appropriate diets for others will remain.

One of the biggest economic adaptations for high-income economies in a globalizing world is the recognition that the lion\’s share of economic growth in the next few decades will be happening outside their borders in \”emerging\” economies. The U.S. economy, with its enormous domestic market, has been somewhat insulated from world markets in the past, and European companies have often focused more on building ties across the internal market of the EU. Such a strategy made sense back around 1980, or perhaps even 1990. It won\’t make sense in the next few decades. A team at the McKinsey Global Institute–James Manyika, Jacques Bughin, Susan Lund, Olivia Nottebohm, David Poulter, Sebastian Jauch, and Sree Ramaswamy–sketches how the world economy is evolving in an April 2014 report, \”Global flows in a digital  age: How trade, finance, people, and data connect the world economy.\” They write (footnotes omitted): 

\”Yet the fact remains that even the world’s largest multinational companies remain underweight in emerging markets. In 2010, McKinsey research found that 100 of the world’s largest companies headquartered in developed economies derived just 17 percent of their total revenue from emerging markets—despite the fact that those markets accounted for 36 percent of global GDP and are likely to contribute more than 70 percent of global GDP growth between now and 2025. Business leaders need to not only invest more in emerging markets but also understand how the role of these countries in the world economy is undergoing a historic transformation. In the first wave of globalization, developing countries first supplied commodities and raw materials for production and then economies recently became an abundant source of cheap labor for global supply chains. In the current wave of globalization, the emerging world is increasingly becoming a source of new customers. But a third wave is coming, enabled by digital technologies. In the new era, emerging economies will increasingly be the source of new talent pools, innovations, competition, and partnerships. Companies need to look globally for the right talent, suppliers, and innovation—and much of those could be in emerging markets.\”

Large companies based in emerging economies are already changing the shape of global competition.

[L]arge companies from emerging markets are increasingly formidable global players. For instance, Bharti Airtel, the largest telecommunications company in India, has more than 260 million mobile customers around the world, more than the combined population of Germany, Japan, and Spain. Lenovo is the largest PC seller in the world. Mumbai’s Tata Sons is now the largest private-sector employer in the United Kingdom with more than 40,000 workers across Tata Steel, Jaguar Land Rover, Tata Consultancy Services, and TGB, a drinks branch that acquired British tea company Tetley. Two Mexican companies—Cemex and Bimbo—are the US market leaders for cement and bread, respectively.

For a deeper sense of these changes, contemplate how quickly economic growth is moving in some of the converging economies. This figure shows the amount of time that it took various economies to double their per capita GDP from about $1300 to $2600. In the UK, this process took 150 years from about 1700 to the mid-1800s. In the U.S. and Germany, it happened in a little more than half-century in the middle of the 1800s. It took Japan 33 years in the early 1900s. Not only has that process been much faster in China and India, but look at the size of the populations involved. When the US started its process of doubling per capita GDP between these two levels in about 1820, the U.S. population was about 10 million. When China and India started the same step, their populations were close to 1 billion people each. Buying power is shifting to the emerging markets of the world.

The greater involvement of emerging markets in most aspects of the international flow of goods, services, finance is already underway. Here are the changes in the share of emerging markets in the last decade or so. For example, emerging markets were 22% of global GDP in 2002, and 39% of GDP in 2012, just a decade later.

Sometimes it\’s the more specific facts that help drive home some of the changes around us. For example, the McKinsey team reports that \”China is already a larger market for BMW than the
United States.\” Computer-to-computer Skype calls barely existed a decade ago; now, they are almost 40% of the volume of traditional international phone calls. \”Netflix, which provides movies and television shows online, has become an increasingly international business. By 2013, nearly one-quarter of its streaming customers lived outside the United States, a testament to the speed at which companies can establish a global footprint courtesy of digital technologies. Some 40 percent of
Amazon’s revenue in 2013 came from sales outside of North America.\”

The United States and other high-income countries are competing for what roles they will play in the globalizing economy, and thus how they can experience domestic economic benefits from the rapid growth of emerging economies around the world. But except for what sounds mostly like 20th-century talk about trade agreements and big-company export sales, the discussion of how to reorient high-income economies around these global realities seems to me barely underway.

The Council of Economic Advisers is organizationally part of the White House. My usual suggestion when reading its reports, under administrations of both parties, is that you can take or leave the politic elements of the report as you please, while still picking up a lot of useful facts and analysis from the figures and discussion. In that spirit, here are some points that struck me from the May 2014 CEA report, \”The All-Of-The-Above Energy Strategy as a Path to Sustainable Economic Growth.\”

As a starting point, here\’s an overview of U.S. energy consumption over the country\’s history. You can see the dominance of wood as a fuel source in the late 18th and into the 19th century, followed by the rise of coal in the late 19th century, and then the arrivals of petroleum, natural gas, and nuclear. A close look at the right-hand side of the figure shows some changes in the last decade or so. Petroleum and coal are down, while natural gas and renewables are up.

The CEA report discusses various economic consequences of cheaper natural gas: gains in direct jobs from production of natural gas, spin-off jobs, cheaper energy for U.S. firms than for their global competitors (which should give a boost to U.S. manufacturing), and an overall reduction in trade deficit. Given that crude oil prices are set in a global market and petroleum is still the single biggest energy source for the U.S. economy, the U.S. economy cannot be fully insulated from movements in world energy prices. But it can be less affected by global energy market fluctuations than in the past.

Here\’s one snapshot of how the U.S. economy evolved in the last 15 years: an identical number of total hours worked in 1998 and 2013, even though the population rose by over 40 million people, but a 42% gain in output. Shawn Sprague explains in \”What can labor productivity tell us about the U.S. economy?\” published as the Beyond the Numbers newsletter from the U.S. Bureau of Labor Statistics for May 2014. Sprague writes:

\”[W]workers in the U.S. business sector worked virtually the same number of hours in 2013 as they had in 1998—approximately 194 billion labor hours. What this means is that there was ultimately no growth at all in the number of hours worked over this 15-year period, despite the fact  that the U.S population gained over 40 million people during that  time, and despite the fact that there were thousands of new businesses established during that time. And given this lack of growth in labor hours, it is perhaps even more striking that American businesses still managed to produce 42 percent—or $3.5 trillion—more output in 2013 than they had in 1998, even after adjusting for inflation. . . .One thing can be said for certain: the entirety of this additional output growth must have come from productive sources other than the number of labor hours. For example, businesses may increase output growth by investing in faster equipment, hiring more high-skilled and experienced workers, and reducing material waste or equipment downtime. In these and other cases, output may be increased without increasing the number of labor hours used. Gains in output such as these are indicative of growth in  labor productivity over a period.\”

A lot can be said about this basic fact pattern. Of course, the comparison years are a bit unfair, because 1998 was near the top of the unsustainably rapid dot-com economic boom, with an unemployment rate around 4.5%, while 2013 is the sluggish aftermath of the Great Recession. The proportion of U.S. adults who either have jobs or are looking for jobs–the \”labor force participation rate\”–has been declining for a number of reasons: for example, the aging of the population so that more adults are entering retirement, a larger share of young adults pursuing additional education and not working while they do so,  a rise in the share of workers receiving disability payments, and the dearth of decent-paying jobs for low-skilled labor.

Here\’s a figure showing the patterns of hours worked, output, and productivity in the aftermath of the Great Recession. Sprague explains: \”[A]s the recession began, productivity flattened out as output and hours both fell approximately in concert with one another. Output and hours continued to fall together until the latter part of the recession, when the fall in output ceased but hours continued to decline. During this period there was substantial productivity growth: from the fourth quarter of 2008 through the fourth quarter of 2009, productivity grew 5.6 percent. In fact, this was the highest four-quarter rate of productivity growth recorded in more than 35 years.\”

Here\’s a figure showing productivity growth rates in the post-World War II era. Notice that annual rates of productivity growth were relatively rapid from about 1947-1973 at 3.2% per year. Then there is a dramatic slowdown of productivity growth in the 1970s, and while higher rates follow in the 1990s and more recently, the U.S. economy has failed to return to the more rapid productivity growth of the 1950s and 1960s. As I\’ve noted from time to time in previous posts (for example, here and here), there is no more important question for the long-run health of the U.S. economy than whether a fairly robust rate of productivity growth can be sustained.

The more immediate question is what to make of an economy that is growing in size, but not in hours worked, and that is self-evidently having a hard time generating jobs and bringing down the unemployment rates as quickly as desired. I\’m still struggling with my own thoughts on this phenomenon. But I keep coming back to the tautology that there will be more good jobs when more potential employers see it as in their best economic interest to start firms, expand firms, and hire employees here in the United States.

I  have written an essay for the June 2014 issue of Finance and Development on the subject of \”Economics and Morality\” (51: 2, pp. 34-38). Here are the opening paragraphs, the closing paragraphs, and a couple of snippets in between. Of course, I encourage you to read the whole thing.

\”Economists prefer to sidestep moral issues. They like to say they study trade-offs and incentives and interactions, leaving value judgments to the political process and society. But moral judgments aren’t willing to sidestep economics. Critiques of the relationship between economics and moral virtue can be grouped under three main headings: To what extent does ordinary economic life hold a capacity for virtue? Is economic analysis overstepping its bounds into zones of behavior that should be preserved from economics? Does the study of economics itself discourage moral behavior? …\”

\”Rather than focusing on philosophical abstractions about the moral content of work, consider a prototypical family: parents working, raising some children, friendly with coworkers and neighbors, interacting with extended family, involved with personal interests and their community. It seems haughty and elitist, or perhaps betraying unworldly detachment, to assert that people who work are condemned to live without virtue—unless they can squeeze in a bit of virtuous activity in their spare time. On the other hand, it seems bizarrely and unrealistically high minded to assert that daily work surrounds people every day with transformational opportunities for virtue. A middle ground might be to accept that while moments of grace and opportunities for virtue can occur in all aspects of life, including economic life, the range and variety of opportunities for virtue may vary depending on the characteristics of one’s economic life. …\”

\”A standard complaint about studying economics is that the subject is “all about getting money and being rich.” … Economists can feel unfairly singled out by this complaint. After all, many academic subjects study unsavory aspects of human behavior. Political science, history, psychology, sociology, and literature are often concerned with aggression, obsessiveness, selfishness, and cruelty, not to mention lust, sloth, greed, envy, pride, wrath, and gluttony. But no one seems to fear that students in these other disciplines are on the fast track to becoming sociopaths. Why is economics supposed to be so uniquely corrupting? After all, professional economists run the ideological gamut from far left to far right, which suggests that training in economics is not an ideological straitjacket.\”

\”I have become wary over the years of questions framed in a way that seeks to pit economics against moral virtue in a winner-takes-all brawl. No economist would recommend consulting an economics textbook as a practical source of transcendent moral wisdom. As the recent global economic crisis reminded anyone who needed reminding, economics doesn’t have answers for all of the world’s economic problems. But to be fair, moral philosophers don’t have answers for all the world’s spiritual and ethical problems. In his famous 1890 Principles of Economics textbook, the
great economist Alfred Marshall wrote that “economics is the study of people in the everyday business of life.” Economists cannot banish the importance of moral issues in their field of study and should not seek to do so. But when moral philosophers consider topics that touch on the ordinary business of life, they cannot wish away or banish the importance of economics either.\” 

It\’s common to talk about economic development \”in Africa,\” and I\’ve done so on this blog a few times (for some examples, here, here, here and here). But \”Africa\” includes 54 countries and 1.1 billion people, so does referring to it as a single unit make any economic sense? In my reading, one of the themes of the African Economic Outlook 2014, recently published by the African Development Bank Group, OECD, and the UN Development Programme, is that thinking about Africa as a whole does make some economic sense.

The reason is that in the modern global economy, there are no examples of small stand-alone economies that have achieved a high standard of living. Instead, the high-income countries either have an enormous internal market (the US and Japan, for example) or have close economic ties to a number of other national economies (like the countries of the European Union), or both. If the national economies of Africa are going to build on their real if modest economic progress of the last decade or so, one of the big reasons will probably be that they bolster trade relationships within the countries of Africa, as well as tap into international flows of goods, services, people, and finance. To some extent, this change is already underway.

As far as trade within Africa, one subsection of the report is headlined: \”Africa is the world’s fastest growing but least globally integrated continent. … There is only low level connectivity between African economies – although this is gradually improving . . .. This is largely due to an incomplete
legal architecture for regional integration, poor physical infrastructure and one-way trading relationships. Leading African exporters such as Angola, Algeria, Egypt, Libya, Morocco, Nigeria and South Africa have stronger economic links to the rest of the world than with regional neighbours.\” As one example of the issues, the 54 nations of Africa are divided into eight somewhat overlapping regional economic groups, all proceeding with various steps of economic integration at different speeds.

Here\’s a figure comparing intra-Africa trade with other trading partners. A common pattern–say, if one looks at the EU or at North America–is that trade volumes are larger with those who are geographically close. But intra-African trade (the black dashed line) is similar trade between African nations and the US, and lags behind Africa\’s trade with China or especially the EU.

Basic steps to encourage intra-African trade are still lacking. It\’s costly for people to move between countries: \”Africans need visas to get into at least two thirds of other African countries.\” It\’s hard for goods and services to move, because of missing infrastructure: \”While there has been progress in developing regional transport corridors, there are still missing links – which are investment opportunities for African and foreign investors. From the Ethiopia-Djibouti corridor, to Lagos-Abidjan, major road corridor upgrades are needed to link key cities to ports and airports. …  Increasing attention is being given to obstacles such as regulatory bottlenecks, the opaque legal environment and institutional inefficiencies holding up new infrastructure.\”

The economies of Africa are becoming more closely tied to the buying power in the rest of the world economy in various ways. One of the most visible signs is the type and size of financial flows to Africa. The graph shows four kinds of financial flows: remittances sent back to Africa from emigrants working abroad; official development assistance; portfolio investment, which consists of cross-national financial investments that don\’t involve a management interest and thus can be liquidated very quickly; and foreign direct investment, which consists of cross-national financial investments that do have a management interest.

Notice that remittances are now the single biggest category of financial flows into Africa–bigger than foreign aid. Notice also that foreign direct investment, which often involves transfers of management expertise, business connections, and technology as well as financial capital–outstrips portfolio investment.

A common question is whether the foreign direct investment into Africa is all about outsiders developing oil and minerals. That\’s clearly a big part of the picture, but not all of it. Here\’s a breakdown of foreign direct investment into African countries that are resource-rich, and those that are not. The absolute amounts of FDI into the resource-rich countries is larger, but the flow to the non-resource-rich is catching up–and is already larger as a share of GDP.

The overall effect of these foreign capital inflows is that Africa is able to finance more investment than if it had to depend solely on national saving. Here\’s a figure showing that Africa\’s investment/GDP ratio and its rate of economic growth have outstripped Latin America in recent years, although not reaching the levels of high-growth Asian economies.

One of the intriguing possibilities for Africa\’s economic future is for its economies to become more integrated into \”global value chains,\” in which intermediate inputs to production are produced in a number of different countries. The report devotes a special section and several chapters to this possibility.

\”In the past, for a country to industrialise it had to develop the domestic capacity to perform all major steps in the value chains of complex  manufactured products. Today, through linking into an international production network, countries can establish a specific section of a product’s value chain without having all the upstream capabilities in place. These remain elsewhere and are linked through shipments of intermediate products and communication of the know-how necessary for the specific step in the value chain present in the country. . . . Through participation in a value chain, countries and firms can acquire new capabilities that make it possible to upgrade, i.e. to capture a higher share of the value added in a global value chain. The development experiences of several Asian countries show how industrialisation depends on linkages and on innovations arising from knowledge spillovers. For instance, China integrated into global value chains by specialising in the activities of final product assembly and was capable of upgrading its participation by building a competitive supply base of intermediate goods (developing linkages) and by enhancing the quality of its exports. At the firm level, economic upgrading is defined as “moving up” the value chain into higher-value activities, which theoretically enables firms to capture a higher share of value in the global value chain and enhances competitiveness . . .

Many of the factors that hinder economic integration across Africa, or affect economic growth in Africa more broadly, also affect the prospects for Africa\’s participation in global value chains. Still, there are a few initial promising signs. Some African countries are making a push to be involved in the business outsourcing market: \”The global business processing outsourcing market was forecast to grow 5.1% in 2013 and reach USD 304 billion. The race is on among countries such as Egypt, Kenya, Ghana, Mauritius, South Africa, Tunisia and Uganda to become the new “India” in Africa using incentives and special economic zones to develop their outsourcing sectors.\”

Perhaps the biggest problem is that global value chains as they currently exist are regionally concentrated: around east Asia, the European Union, and North America. Geographic areas like Africa or Latin America are thus trying to break into these existing networks:

\”Despite their name, global value chains exhibit high regional concentration, which is shrinking slowly. Africa does not play a significant role yet. When measuring the linkages between major supply-chain traders, the strongest relationships can be found within the regional blocks of East Asia, Europe and North America. About 85% of global value chain (GVC) trade in value added takes place in and around these three hubs. While other regions remain marginal, their share has increased from only 10% in 1995 to 15% in 2011. Africa’s share in GVC participation increased from 1.4% to 2.2% during the same time.\”