Development Economics

Econ Buff Podcast #4 with John Francois

Dr. John Francois talks with me about development economics. We discuss what development economics is, why it is important, and what topics are covered in development economics. We discuss the role of government in creating growth and how local development translates to national growth. We explore the nature of inequality and health in developing economies and how Dr. Francois views the field of development economics.

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Show Notes and Things discussed in the show

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Transcript

Stitzel: Hello and welcome to the Econ Buff Podcast. I'm your host, Lee Stitzel. With me today is Dr. John Francois professor of economics at West Texas A&M. John, welcome to the Econ Buff.

Francois: Thank you Lee.

Stitzel: Today our topic is that of development, specifically in economics. So John, define for us what development is.

Francois: So economic development is very broad. And to just contextualize that, you would want to think about it as a process of improving the quality of lives of individuals. And this generally include raising the standard of living of these individuals. And it also involves freedom of choice, freedom from servitude, as well as increased self-esteem. These components are extremely important. And we in the development world classify it as the core values of economic development, because you cannot have development when people are still in bondage, right? You have the freedom to choose. So once those basic things including freedom from servitude, good self-esteem, and the most basic things are being met, then you can move on to talk a little bit more about things like raising the standard of living of individuals and the quality of lives of individuals.

Stitzel: So when I think about development I almost unilaterally think about poverty and income. So you are saying there are a lot more topics that go into that that the field itself in economics [that] economists are studying?

Francois: Absolutely. You know, the two things that you mentioned like poverty, income, and all the quote unquote call “the big things” that you may think about, immediately you think about [how] development --- are very important, right? But you realize at last certain other components such as --- just the happiness of individuals, right? And I think there's this measure that has been pushed for a while --- The Happiness Index. And you sometimes find that some of the poorest countries, or some of the poor individuals, tend to be more/tend to be happier than individuals even in very rich countries and all that. So the complexity of economic development is --- it's not an easy one to disentangle. And because of that, we have to kind of be opened to several other topics that can actually define economic development.

Stitzel: So, you know, I have a friend --- he's a bit of a philosopher, and he frequently likes to challenge me on my economics, with this argument that economics just measures material well-being and there's much more to happiness. So I think you if you are right about development, tackling this idea of happiness --- this is one of my friends common points --- that happiness is not that closely related to income. Now I think (and maybe you know [but] we'll get into this later), I think there are important reasons that we might want to see people lifted out of poverty --- because of the good outcomes --- specifically health, literacy, education, [and[ things like that that come with that. But those are not exactly happiness itself, right?

Francois: So I do see where you're coming from on this issue. But again, when you look at the whole concept of development economics from that one dimension, it makes it very difficult, right? Because…

Stitzel: The one dimension being like poverty or income?

Francois:…poverty, and income, you know, and all of that -- those are --- I would get like measures, right, of say the well-being of a nation as a whole. But the individual --- it goes beyond that, when you decide to itemize and go down to the main beneficiaries of some of these good outcomes and all that. You'll quickly realize that you can have one and the other at the same time, right? There should be some sort of simultaneity or complementarity of one. Let's say you cannot still achieve eradicating poverty. Because if you ain't abject poverty, right, like the most --- I mean the worst of the worst, right? So you're living on two cents a day (and these things actually happen), [then] happiness would be important and all, but if you don't have food in your belly, if you don't have good shelter, [and] if you have the most basic needs, [then] happiness might be temporary, right? But let's say you lift them out of poverty. Yeah, you're meeting the most basic needs, right? And that's why development kind of focuses on the core values. Like let's say you have food [and] you have shelter, right? Those are very basic things, if you're able to have those things, saying that that is the threshold and then other stuff also coming --- in the sense that you're saying let's say an individual is living above let's say two dollars a day so they are living on five dollars a day --- right? And then you have another individual living on say ten or fifteen dollars a day. Now you can go beyond just the basic needs of the individual and also look at other components such as happiness, right? But if you haven't met the basic needs, and then you kind of just move away and say our key developments (I'm gonna use happiness as an index) and all that that's problematic. So even in the context of poverty and all that, if you look at the Millennium Development Goals (which was enacted in the 2000s and the Sustainable Development Goals that followed in 2015) and these things are trying to kind of lift everyone out of poverty so that no one is left behind. Now when you cross that threshold, you can now kind of look at other dimensions of economic development, which can include happiness and other layman’s things that are not easily measurable.

Stitzel: Yeah so that's beautifully said. Let's unpack that. If I can summarize what you said -- you said: well you need to have a basic level of shelter and food security (that I can I can know that I'm not gonna die because I'm exposed to the elements or starve tomorrow).

Francois: And this does include freedom from servitude.

Stitzel: Yeah -- freedom from servitude, you know, not being subject to violence, or war, [or] escaping disease there's a couple of basic things. And we could probably think of a long list of things that would go on there (or maybe a short list I don't know). But once we get those, then we can worry about happiness. That's what you're saying?

Francois: So you can have both, right? You still can have somebody who's still in abject poverty and still happy, right? but what I'm saying is the happiness to this person might be temporary, right? Or the possibility of dying because they don't have good shelter and all that --- can just take it out and then happiness will be couldn't quote unquote “not necessary or not too much of a factor,” right? But let's say if this person comes out of all those dangers --- and let's say on average this person who is in let's see five dollars and another person and in ten dollars are all free from say servitude, right --- there's a chance that you can go ahead and now say --- look this person is making five dollars the other is making ten or fifteen dollars --- is there any other factor that is driving their well-being? [An] example [being] happiness, right? On the other hand, you can still look at somebody who is still in abject poverty and still ask: why is this person happy? Even though define themselves as so? Those are some of the things that kind of generate the complexity of economic development, right? Because you see a kid who have/just have one or two meals a day, right? Doesn't have good drinking water, but is extremely happy in a sense that he can go play with all friends and all that. And then you see another kid who has like all the things that they have including iPads and all those things. But as they are, well-being in terms of measured in terms of happiness, [could be] greater than somebody who is in abject poverty (or not). So the point on the summary that you make is important. There's a threshold. There's a poor system that has to be achieved to kind of push economies or individual to a different level of well-being and development. And this can include moving them from poverty or abject poverty and then hidden and other factors that may drive their well-being.

Stitzel: So you perfectly anticipated what I was gonna say.

Francois: O.K.

Stitzel: Which is O.K. --- it seems like living hand-to-mouth having to fight every day for survival. You and I wouldn't want that. We don't live it. But maybe people who live in that scenario are happy. Now you're saying: O.K. well they're temporarily happy and, you know, some level of security [and] some level of stability is very important. So I think you did a good job sort of anticipating what where I was going at that. And I don't want to linger too long on this because we're sort of asking philosophical (is sort of like) meta-development economics or something. So you've done a good job laying the groundwork. But, and for highlighting that idea of what we think about these kind of thresholds. So how much of the field is focused on that threshold of just these fundamental basics --- keeping us from being subjected to violence, starvation, and exposure --- those kind of things? And how much of it is focused more on the things that I kind of mentioned early on that are the classic topics like let's, you know, increasing income?

Francois: O.K. so the field of economic development is very dynamic, right? And like any field appears where one particular scene dominates. We've had several years (on say decades) of kind of looking at the macro questions. Like does foreign aid work? Does foreign direct investment feel the capital gap in developing countries to kind of induce growth and development? And I myself still work on the aggregate questions. And some of the new topics are like remittances. And we want to ask the question does remittances for instance increase growth, right? But in recent times, we've also kind of moved to the very applied micro. And in fact, this decade that we live in, we've kind of see serious growth in applied micro experiments. And kind of going to (what I like to call) the true beneficiaries of economic development --- the people, right? The kind of style focusing on questions like that, and all that. So I guess the way to think about this question is: is there any complementarity between those two areas, right? Do you just have to focus on one and not enough focus on the other? Or find a way to kind of say that these two are important and they complement each other, right? And so I would say that the development world is really, really filled with a lot of macro questions. You cannot discount that. Some of the biggest economists --- Jeffrey Sachs, William Easterly, amongst others --- have looked at some of these questions on debt [and] foreign aid. They do ask the important questions. But then you also have the generation where they focused on more --- like looking at the micro questions and going on with randomized control trials to ask (I wouldn't call it small questions but) --- questions that macro-economists would immediately look up. This is important because, when at the end of the day, when you go back to the government, right, experiments are important. But let's say the experiments are just focused on one particular area. They shed a lot of light on policy. But as a policymaker, sometimes they also need information on the aggregate outcomes of certain economic issues. So the policymaker would be more interested in the macro issues. But the micro issues also guide certain specific economic policies that are very important. So in my humble opinion, I think these two macro/micro questions are very important and complement each other. And there has been, I would say in recent times, there's been growth of both. And there's still a debate going on whether one is a substitute for the other or one is a complement. I think there's generally a slowly converging point to say that both important and they're [both] complements [of] each other.

Stitzel: So your small questions [of] your applied micro type stuff --- they're looking at a certain kind of data [looking] at individuals, at households, [and] at regions. And your broader development is tackling things with aggregated data, which you brought up. Which is one of the things that I wanted to talk about a little bit. How much can you learn when you're at that level of aggregation? My, some of my, personal work in local public policy even tackles that question of: how much can we really learn about trends in a city when I'm using city level metropolitan level data? Maybe I need individual firms. And of course, I think as you rightly pointed out, you sometimes have to use that kind of data as well. And you have to use individual data. So O.K. my bias is that those things would be compliments. You've already hinted at that idea. Is there a trend towards using the things that people are tackling --- the different types of data --- to inform questions or conclusions even in the in the other branch of development?

Francois: So when you say the other branch, what do you mean?

Stitzel: Just the people that are looking at individuals versus the people that are looking at aggregate data, right? So these classic you mentioned easterly for example, right? A lot of Easterly's work is using country level data, and building up these panel data sets of different countries, and then learning things about their capital stock or their/these kind of things, right? Whereas the work that you referenced is going to have their datapoints --- are individuals who, you know, whatever went to school a certain number of days or didn't --- and their policy implications just like you mentioned. And it seems so far they're sort of studying the same thing. And yet simultaneously they seem far apart. So how do you view that in terms of the ability for those things to cross over?

Francois: O.K. So I think --- let's look at this simple example of examining when (I think it's fairly understood, at least in your classical world, that) a high level of capital can induce long term growth or raise income of countries permanently and all that. But answer the question from a macro perspective is important, right? Does aggregate capital, you know, lead to growth? And I think in a world there's a general consensus that it does. So an example [would] be if you look at the African continent. One of the reasons why they were getting a lot of aid, and we are pushing for foreign direct investments and all that in those economies, was to kind of fill an investment gap in those countries to induce growth. That's a macro question. Now behind that, you want to take a little step back and ask yourself: when you look at aggregate capital, right, you don't see who owns it, right? So behind the aggregation, the question is who really owns it? It could be that there's an individual in a country who owns all the capital, right? So the aggregate data is only going to show you that capital is inducing growth and all that. But maybe growth and the worth and everything is being what accrued through just one person in the economy. So and then the rest of the people in the economy are struggling to get access to loans and capital to start a business and all that, right? So they are almost kind of shut off right? And there'll be a cycle where they remain what just hand to mouth, or just depend on government assistance for the rest of their lives, because you don't have enough capital to take your kids to school, right? Or they don't have enough capital to start business or something, right? So what micro folks are trying to do is that --- let's identify the people who are struggling to (so this is just one example, right) --- let's identify the people who are struggling to – what? -- get capital right? What experiments or what situations can actually help broaden, you know? And this actually ended up of bringing into play the whole idea of microcredit, right? Microcredit changed development in a way, right? So people who would never have had access to credit today, have credit because of such research and all that. But the microworld has helped us understand how capital is an important input to growth, right? And the microworld is saying: well, it's important, but the distribution of capital is also important. Or the access of capital is important. Who gets the capital? So you see how they complement each other? Because the microworld has told us that capital is good for growth and investments and all that, right? It helps, let's say, or complements the micro-folks who say: no focus on these individuals. We know capital is good, but who is getting it, and then that can help. Now if capital is well distributed, because there everyone who won't start a business can start a business, it can help the household. And then it's gonna yield this ripple effect of now I have capital, I can start a business. I got some money [and so] I can take my kids to school. My kid that was sick now can go to the hospital and all that. So these are some of the general questions that macro asks. And micro-questions --- micro-economists try to kind of look a little bit deeper at their itemized level or to the individual level if you wanna think about it that way.

Stitzel: That's fascinating. Very interesting stuff. So we can sort of think of macro-level work is --- especially in development, you know, always has this causality kind of problem. And did we have capital and then get growth? Or did we grow for some reason and then get capital? And that's as you just hinted --- that we think part of the answer is that that the capital ends up eventually causing that kind of growth and development? But it's much harder to do with that type of data [and] that level of aggregation. Do you see a role for not just refinement, because I think that's what you've described, that you just said it was one example. O.K., what about distributional effects? That's a good question. Do you see a role for being able to address some of the causality kind of problems in development with micro-level research? Or is it more of an issue of refining topics?

Francois: So, you know, this is a difficult question. I mean, macro-economics in terms of macro-development always has. It's more of like we uncover a correlation….

Stitzel: Right.

Francois:…rather than causality…

Stitzel: Yeah.

Francois:…right? So the micro-level analysis sometimes kind of helps resolve this issue of causality, right? And that's why they are very, very important in that context. But that's not to discount macro, because I still do macro-analysis and all that. Again, they have complementary or complementary effects ran for even the micro-studies. For instance, right, if you look at let's say a developing country in debt, right, they are in debt because let's say they have low levels of investment [and[ low levels of investment both in fiscal and human capital, right? And they've been borrowing. And, you know, there are other issues including institutional effects including things like corruption, right? And they've gone into the cycle of debt, right? That is this is on the government scale. This is on a macro-scale. The same questions that micro-economics/applied-micro cannot directly answer, right? But macro can. But while macro can answer that question, would it be able to kind of disentangle any issues of --- let's say I don't want to go deep into the econometrics but any issues of --- causality, right? The answer might be: well, it may not be able to kind of disentangle it from the data perspective. But it can shed light on it from let's say using economics models that would kind of shed light into the transition or the transitional mechanics on how let's say debt forgiveness can help a country grow, right? Or let's say you have to forgive debt by putting other conditions to help the country grow and all that. So if I understand your question correctly: macroeconomics may not, just from the data standpoint, help you resolve economic issue related to causality; but using economic models (that are what I want to try to call like positive economics) where you have mathematical models that mimic the economy, [and] where you can pass data through, or test implications in order to see what they have which shed light into some of the bigger questions (like debt forgiveness to developing countries and all that). And macroeconomics has done that. So when you look at the early 2000s, a lot of developing countries were into crazy debt. Or they had a debt from the 80s going through the 90s. But economic/macroeconomic research was able to kind of push forth the idea of debt forgiveness. But this time when you have forgiven the debt --- put in conditionalities. For instance, you're telling them: hey, we're gonna forgive you the debt. Meaning you don't have to repay your debt. But the money that you have to use to repay the debt --- use it to build, let's say, good sanitation facilities. Use it to build schools and all that. And the bigger question is that --- yeah, when you build the schools and all that, does it necessarily mean that kids are gonna go to school? The answer is probably no. Because a kid that you've built the school for, to go to school, probably has a parasitic infection, right, who needs deworming, right? But the macro-question wouldn't be able to identify that. So the causality thing are you talking about --- oh would that forgiveness increase growth, right? And the answer is --- it depends. Because if you forgive the debt, the government does all the right things to build the schools and everything. But again, the beneficiaries of the schools being built, and the hospitals, or whatever --- would they be able to still go? Is it gonna raise human capital? And from a macro-perspective, the idea is that: oh yes it should. Kids will go to school. But a micro/applied-micro person is gonna tell you: well, if the kid has a parasitic infection, and they are really sick, and they are home, [then] the school is just gonna be there. And you're not gonna have kids go, right? And there's several kids that phase that. So, and [the] micro-person will come [and] is like: yeah, the school is good, [and] they will do a test --- like why are kids not going to school, right? We've done all the right things. The government’s down there asking why are kid’s not going to school? And the simple answer is that the kid is suffering from issues of what --- parasitic infection. Deworm them, right? You need to deworm them for school enrollment [when enrollment time] pops up and jumps up, right? So you see where we came from --- debt forgiveness using it to build schools with the intention of increasing human capital. But then we don't see any increasing human capital. And then we go back to see that the pause was what --- worms or parasitic infection [so] you see. So these things are very complementary, in a sense, that if for instance micro/macro shed light into debt forgiveness, [it] is good. It can help people build schools, or it can help them come in to build schools. And then the micro-folks come and say that this is good, but the kids that are supposed to go to school have what --- parasitic infections. Then a macro-policing people can say: you know what? This is how we're gonna do it. The kid can go to school. And there will be what --- people there to bring dewormers and stuff. So that any kid that goes to school will get what --- a dewormer. Or they can say that part of the money is going to be used to what --- give people to go to houses in those villages to kind of give the dewormers to kids the next few weeks they finally stop going to school. So that is the dynamics, in my humble opinion, I think macro and micro has.

Stitzel: Yeah. You've painted a very clear picture, which I like. And you've also led us to a very convenient transition. So you've talked about debt forgiveness, foreign direct investment, foreign aid, remittances --- things like that. Can you give us --- you know, just pick your favorites (any [of them] including ones that I didn't mention) --- and just give us a sense of kind of like what are trends in the field? What are we seeing --- even if you could give us some like summary or conclusions? Your choice about what those are topically.

Francois: Foreign aid is a big thing, right? Because we all do it in our small way. Let’s say if you're driving and you see a poor person on the street (a homeless person), you want to give them money and all that. But then you give them the money, [and] the next day you come they're still there, right? In your head you say: oh well, maybe ten people are giving them the money. Or maybe you go and you say: oh well, I give them one dollar, it’s nothing. Their just probably gonna get a meal. So maybe I have to do more? Maybe if I give them, you know, with the intention, maybe if I given thirty thousand dollars it would change their lives completely and all that. It might be true, but there might also be certain structural things behind that you may not see. I don't want to pick on any homeless person or anything of that sort. But there could be a homeless person who is just homeless because they had certain structural things happening to them. For instance, after school they had to take care of other issues related to spending. For instance --- one (this is anecdotal) --- but one individual I met was homeless [but] had two master's degrees --- one in physics and an MBA from a very good institution and all that. But then became homeless because the mom was/had cancer and used all his income and revenue to just make sure that the mom was comfortable and all that. By the time they were done they lost their house and all that. So this is [why] certain things that can make a homeless person just stay on the streets and all that. Where maybe give them thirty thousand dollars, [it] may change their lives. Or looking for a job --- if they hit/land the job may change their lives and all that. And then there's also another one, where the structural issues are related to things like --- again I don't want to pick on anyone but like --- drug abuse and other things of that sort.

Stitzel: What about another one --- would be mental health, right?

Francois: [Agrees] Mental health.

Stitzel: They may not be able to/they wouldn't be able to fix that and then might….

Francois: Right. And the help is probably, you know….

Stitzel: ?? @28:24-28:26

Francois: Yeah.

Stitzel:…that would make use of the capital you gave them.

Francois: And I really like the mental health part, right? Where there's no technical assistance and all that. I'm building this to come to a point. So these are two scenarios, right? Where whatever money give them --- you can give that person with mental health a large sum of money and it wouldn't change their life structurally.

Stitzel: Doesn’t solve the fundamental problem.

Francois: Doesn't solve the fundamental problem. So now let's move to foreign aid, right? Foreign aid in the last 50 years has been a very important source of income to a lot of developing countries. And whereas a lot of countries have graduated from, you know, receiving those huge amounts of foreign aid and all that.

Stitzel: Is that true? Are there foreign aid success stories? I'm not aware of those.

Francois: Not success stories, right? But not the same [and] not receiving the same amount. For instance, if you move from being a low-income country to an upper-middle income country, [then] the amount of aid you [would] be receiving will change compared to a country that is still a fragile state, right? But one of the success stories perhaps is South Korea, right? Because they are at a point where [they were a] low-income country (or I would say maybe lower/middle income country), and today they are part of the high-income countries, right? They receive foreign aid up to a certain point. And today they are giving aid out. Even India I think, [is] on the net [of official development assistance] since [giving] aid out, despite having large amounts of people…

Stitzel: Really?

Francois:…?? though. Yes. @29:58

Stitzel: That’s surprising.

Francois: So when you look at the data of net official development assistance, in certain cases, you actually see India having positive. Where I mean they sent more out than they receive, right? So these things do happen and all that. But the point is that despite 50, 60 years of giving aid, we've seen very few success stories, right? So the question that we are asked --- and we're still asking because fragile countries or fragile economies still received aid, right --- the question then becomes: does aid for instance help with growth?

Stitzel: So I don't derail you. But for those of us (like me) who are not development experts, what do you mean by fragile? That's a little bit of a…

Francois: O.K. So fragile economies is that economies can, for instance, can collapse anytime or they are still in a civil war. All of the economy is just crazy-bad, right? You have a lot of countries in Africa (not a lot), but some countries like Somalia for instance. You wouldn’t even want to call Somalia like a field-state, right? There [are] other countries in Eastern Africa that the economies are kind of doing well. But they're still ?? @31:18 are the points where you can just let them be ?? @31:20 --- so like a lot of foreign intervention (like finance going into the country helping the countries with technical assistance and things like that) --- [and] is really important because once you remove those things, then the states become like really (a little bit) unstable and all that. So fragile economies are --- they are still classified as developing countries. But like, I'll just say countries that are very, very low on the development scale for instance --- their capital stock is very, very low or there's a civil war going on. No it might not be a major, major civil war, but like there's still unrest in the countries and all that. So some of these countries still receive things like military aid [and] things like humanitarian aid and all that. So these are the type of countries you may want to call the fragile countries.

Stitzel: That's great. So to summarize then ---- fragile states are ones that should be worried if you took certain types of aid away would become unstable and potentially…

Francois: Economically…

Stitzel:…fail.

Francois:…from both an economic standpoint...

Stitzel: Yeah so it's…

Francois:…and a political standpoint.

Stitzel:…a little easier to think about political instability in that, but economic instability also matters which is sort of fascinating.

Francois: So let me give you a good example, right? Like my country, for instance, underwent in the 80s --- they went through a serious point where there was a famine, right? Where the economy was just this high --- was in high debt. [And] the economy wasn't doing well. We had a military individual in office that was in the 80s, ‘83 I think. So the World Bank had to kind of step in and work with the country to come up with ---- both I would say most of our economic assistance where what I call the structural adjustment program to kind of put into/put forth ---policies to kind of help the country get out of this bad situation, right? Because when you leave the country in that bad situation, it's gonna be like a bad equilibrium. So a bad equilibrium simply means that in the short-run, it feels like you're doing O.K. But in the longer run, you just come back to the same bad point again, right? So like a push from an outside entity --- kind of pushing them from that bad equilibrium or bad situation to a good one. [And] when it gets that good one, if it's a stable one, then at least they'll be doing good going for it, both in the short term and in the long term. So over the period in the mid-80s my country was one of those countries that you may want to classify as like a country struggling. Now you may call it at points a fragile economy.

Stitzel: And your country is?

Francois: Ghana.

Stitzel: Yeah.

Francois: O.K. so I come from Ghana. So afterwards we've done very well. We are one of the most stable countries in Africa for the last, I think, thirty years or so. We've been very good and all that. So that's an example, right? The structure adjustment program overall had its own issues and all that. But ever since, as other help or interventions have helped, like the Highly Indebted Poor Countries Act where some poor countries that were in high debt where their debt was forgiven and all that. So that helped us. We got enough savings to kind of kickstart our economy through investments in both fiscal and human capital. Yeah.

Stitzel: So the structural adjustment program is a World Bank program?

Francois: Yes. It came from mainly the World Bank, but you also have other entities or think tanks like the IMF kind of working alongside with the World Bank.

Stitzel: And what was that targeted at?

Francois: So mostly fiscal policy, right? There was a lot of spending going on. Countries were in debt and stuff like that. It's like O.K. well, we want to kind of help to reduce debt and to --- because when you're a country in a very, very high debt it's almost impossible for you to get the opportunity to ---- borrow in the international market to use it for both fiscal capital investment and even human capital investment, right? So despite the fact that the return, on let's say, some investments will be high, just because your debt is too high, no one wants to what --- kind of borrow, sorry, lend money to you…

Stitzel: Right.

Francois:…and all that. So in kind of, in order to kind of, work with the countries to bring them back to a level where it's good, right, it's like O.K. well cut government investment, got [to] cut government consumption. Or, you know, common consumption is very difficult to cut because of things like the fact that you're paying teachers with government consumption, right? But investment is sometimes you can choose to say: O.K. I'm not going to build a road, but you cannot say I'm not gonna pay a teacher, right? So this is some of the differences. But the structural adjustment program for instance --- because it was easy to cut government investment there were a lot of policy advocacies saying that [there should be] cuts [to] investments and all --- this had a detrimental effect on a lot of developing countries. And some are still recovering from that. So it had its own problems. But their/the rationale behind doing it was a good one --- to kind of help countries get to low levels of debt, [and] to kind of help them go back on the international market, [in order] to be able to borrow from the international market --- among other things. Yeah.

Stitzel: So you've said there aren't a lot of success stories from foreign aid. And simultaneously you've given us a lot of reasons to think that foreign aid is important, and would have a lot of clear mechanisms for helping developing countries. So is there a verdict on foreign aid? Where are we at with that…

Francois: So that was --- that was…

Stitzel:…balancing those two things?

Francois:…yeah, so very quickly, I'm just gonna try to remind the listeners about the example we gave ---- whether to homeless individuals. There's ---- foreign aid is important. You cannot discount its role, right? Because it might be poverty alleviating, if it reaches the true beneficiaries of foreign aid, right? It may help. I mean, foreign aid has worked to eradicate certain diseases like polio, right? I think (forgotten the level of) because there are different types of polio now. It's helped eradicate certain things. It's helped vaccinate all of our children so that they are not affected by certain diseases. The six killer diseases that was causing a lot of deaths in the past, in a lot of developing countries --- these risks have been reduced, right? Malaria was one of the biggest killers of children and even adults in developing countries. But through foreign aid and the distribution of things (like mosquito nets and stuff like that), we've kind of seen a drop in deaths, right? And then in addition, we've seen general increase in life expectancy, even in developing countries and all that. Foreign aid has kind of helped a lot of countries after wars, right, in a humanitarian form and all that. So [coughs], sorry. So in this context, right, foreign aid sometimes (I would like to say), up to the first order, can help. And up to the first order is like alleviating poverty and stuff like that. It can help improve certain economic conditions that were bad for a lot of people, right? But at the same time on an aggregate level, there's no decisive conclusion on whether it can, for instance, spare growth, right? And those are the two schools of thought. Because I hate using schools of thought, but that several [of the] research that have [for] one, found sudden good outcomes for foreign aid somehow found no effect at all. [And two], others have found positive, sorry, literally [a] negative effect. And the conditions for the spectrum of results are that --- some say: look, if you send in foreign aid to a country that is extremely corrupt, right, it's not gonna feel any investment gap. Because these countries or these governments are just gonna take the money, use it for their personal needs, and then that nation just goes into a very poor cycle (of what we are receiving all these money and it's not doing anything). Sometimes there are certain parts of foreign aid where you have to kind of pay back, but at a very, very, very, very, very low cost, right? But, and then there are other things like that and all that. All those things are some form of finance to these countries with the intention of helping them feel a certain macroeconomic input gap like investment, right? But we do not see a translation one for wanting to, let's say, building roads [and] building schools, which in turn would lead to what --- higher human capital formation, for instance, if kids are going to school. And then with higher human capital formation, you do expect higher productivity and higher growth, right? We don't see that. Why? Because the money never ever gets there. I'll give another anecdotal example. There's a book called Africa's Odious Debt, right? And it looks at both foreign direct investment, foreign aid, and debt itself. And one of the examples, I think, was from [the country of] Gambia or Gabon (forgot), but the president (that there was one time) --- they transferred five hundred million dollars to the country to help, right, the country economically. And let's say the money was transferred today to a private (not a private) government account or office or whatever. And then in the next few days the money --- the same five hundred million dollars --- left the country to a foreign account. But this time was a private account, right? So that goes along with --- say zero of the money that was transferred into the country stayed in the country. So these authors, I think, was Leonce Ndikumana and James Boyce, I think, made one interesting ?? @41:34 like even if a small fraction a single 5% of it stayed in a country, right, it could have really held the country economically, right? So they're even saying that even if corruption was an absolute, right, say there's only a part of the money stolen (or kind of taken), and the rest of the money stays in the country, [it] may actually help with growth, right? So these are some of the challenges that we face. Because, let's say, a lot of it is going through governments, right? So if the government, right, so the government is like the middleman, if you want to think about it. The whole goal is for these Western countries, or the high income countries, is to transfer aid to developing countries with the aim of kind of reaching the true beneficiary who's the populace of the people, the populace in the country, so that this can help like, you know, increase businesses [and] the easing of credit. Or even let's say the government is gonna use the money to kind of build schools, build roads, provide electricity, such that businesses can run and all that. If the government is extremely, extremely corrupt, then it is not gonna work. So I think in the 2000s, there came a paper by [Craig] Burnside and [David] Dollar that was talking about the fact that well, aid it should only go to countries with good institutions, right? And I think [Alberto] Alesina (forgotten) this author, because the aid let's say is very big. But I don't want to kind of miss the authors, but there were a lot of papers that talked about the condition that sent money to other countries with good institutions. Because if the institutions are good, they're/where corruption is low/less, strong political stability, government is effective, [and] there's voice and accountability, and all those things; then there's a high chance that the money will be used for what is supposed to used for, right? And then a country will grow and all that. But people have also said other things. That yeah, you can have all these strong conditions and all that. But aid is not --- what? [Aid is not] gonna have, for instance, no corruption. Aid, for instance, is gonna be fungible, where it's not necessarily used for what it's supposed to be used for and all that. So there are a lot of ---- it's very broad. And the result is that it can be positive, it can be negative, and it can be no effect (that it can have no effect at all).

Stitzel: So I want to bring up three things. The first is something you hinted at and said: aid is fungible --- that is when we get aid into a country, that the story you described, was just outright theft. That's fraud. That's just theft. And that's the worst-case scenario of corruption. Of course we could also spend that five hundred million dollars on things that it ought to be spent on. And then take the money that we would have spent government money on, and then go buy ourselves yachts and private things. And so then if you only track those particular dollars, it doesn't look like anything's gone. But there's money that should have been paired with that money, right? So I think the idea with foreign aid in this scenario you described, is you have a five hundred million dollar budget and --- the government --- we give you five hundred million dollars on top of that. Now you have a billion dollars to spend on the positive things that you described. So that's one story. Did you have comment about that or was that what you were getting at?

Francois: So I think you mentioned the issue of fungibility which is very interesting, right? So the whole concept of fungibility is: aid dollars flowing into a country is used for other activities not, that are not, or wasn't really intended for, right? And that's, I think, that we brought types of fungibility --- this includes general fungibility, right? And I'll explain that. And then there’s sectorial fungibility. And then there's aggregate fungibility, right? So the sectorial fungibility is simply saying what money was given to you for health, but letting you using it for education, right? [Or] funds to be used for agriculture but letting you use it for something else. Also it's still being used for something, but….

Stitzel: Now that could be a good thing, right? Because it could be --- I'm from the outside of your country [and] I don't know what's best for you. I say: put this towards ag [short for agriculture]. And you say: well actually, we really need it for health, and then you move it over. So there's another thing potentially.

Francois: There's sometimes a lot of due diligence done before the money is sent, right? So we work with government [and] work with research [and it] is like what does these [monies go to], you know. [But] the problem with aid is the issue of monitoring, right? The course of monitoring is also very high and all that. So it's like you just give it to them -- the government and trust that you're gonna use and then later your monitor. There's [also] all the outcome analysis, and just sometimes there's conditionality [as] well [that] says: like well, if you don't use this for X, [then] next time we are not giving you this, right? So they try to find ways and means to mitigate these issues. The general fungibility is…

Stitzel: Of course.

Francois: Yeah.

Stitzel: But I'm saying those are not always --- I mean you could spend time mitigating that and get worse outcomes, even if you're successful mitigating. I remember a famous story where they gave people mosquito nets, ‘cause they were trying to fight malaria, and people used them for fishing.

Francois: Yeah. Yeah. Yeah.

Stitzel: Right. That's a famous story. And I’m probably more on the micro-side than the development stuff. And it's like malaria --- bad, horrible. We don't want. But men were starving over here. And so if we prevent them from using those nets to catch fish, we might have made them worse off. We could have made them better off figuring how to give them fishing nets. So the sectorial fungibility could be a good thing.

Francois: Yeah. So look. Again, it could be [or] it could not. Both our outcomes are possible, right? Both outcomes are possible. And the point that we're saying is that, for instance, right, when a researcher is going to, for instance, check whether foreign aid has had a good impact on education, right; but then at the background, the reason why (aid) we don't see that aid has had a good impact on education is because a lot of the aid was diverted into another sector of the economy. You know what I’m saying? And say the health and education sector…

Stitzel: Exactly.

Francois:…it going into that part was diverted into, let's say, another complete sector of the economy. So when you are doing the analysis, you wouldn't find any correlation of multi-collinearity any causal effect of aid on, you know. So there is that, right? And then it's the other part, where let's say, you give money for general investment in the economy, right? And then the money is moved away from investments to something like government consumption, right? Those two. So those two are the traditional definition of government spending. You have government investment and government consumption. I actually did a work on general fungibility where we said: there's been a lot of arguments saying that general fungibility is not a problem (or it's a good thing like, you know). And we're saying that: well investment, we all know that when money goes into investment like public capital formation, that would lead to a direct effect on barring all other negative effects. Or let's say all other things equal, if you raise investment in a production function, or capital in a production function, you do expect an outcome (or a positive outcome) on output, right? So if you divert money away from that to consumption, that can be detrimental to growth, right? So people have used that to explain why it may not have a positive effect on growth at the aggregate level and all that. And one of the works that I did was looking at the fact that is general fungibility always bad? Because for instance, if the money is being transferred, right, from government investment to government consumption --- but then consumption turns out to be complementary to household consumption, then that can have a positive effect. Because it will raise the marginal utility to your private consumption. And then private agents are likely to kind of demand and spend more in the economy and on aggregate or raise income. So it wouldn't be terribly bad, right? But if [it] is going to government consumption, and it turns out that government consumption is a substitute in/for households, right, in a private utility (or if you think about like if you take --- so let me give an example?? @49:51: if I get good public education, right, there's a chance, or like let's say if this all of sudden opportunity for me to go to school and all that, [then] there's a chance that I'll start demanding things like what --- pencils, pens, books, uniforms, right, shoes, socks, [and] all those things that can what), [it can] spare the private sector to kind of grow because there's high demand for private consumption. On the other hand, if the government is spending the money on things that are say subsidies or perverse subsidies to me, or do not have a direct utility for me --- let's say they're spending the money to buy airbuses or Boeing whatever to kind of travel and all that ---that is still spending, right? But the money is likely is still government spending, but that money is not directly having any positive effect on, let's say, household consumption, right? Because maybe the government spending that they are using it for is wasteful, right? So again, it's very complex disentangling, well, if it is fungible or [if] it is being moved to another sector or aggregate. It is kind of used to relax the budget constraint for the government. Say the government doesn't have to tax households more to kind of pay for spending because they’re getting aid money coming in, right? So taxes may fall. Or like the whole budget constraints will be relaxed and all that.

Stitzel: That's a phenomenal point.

Francois: Yeah

Stitzel: If you have foreign aid come in --- and there are institutional or structural things that an economy needs, and they can get that through foreign aid, and that relaxes the budget constraint on individual households because the tax burden falls --- [then] that's a type of fungibility. Because they can take that money and spend it where they need it and where they see fit (hopefully on educational or things or just anything that they would do) [and] that's gonna be an improvement in economy. That's a phenomenal point that I hadn't thought of before.

Francois: Yeah. So those are the types of [reallocation of aid]. So it's just a reallocation of aid, right? it's just reallocation. So it's not necessarily --- that let's say the government is corrupt or something, these are just what I want to call inefficiencies of the allocation, right? And because of the monitoring piece of aid, maybe they are not monitoring it or they are not enforcing certain part of the contract [at] all. It's just difficult to kind of monitor how the money [is] spent and all that. You just kind of think that it's going to be used for X then part of it is used for Y. So it might be that let’s say a country receives aid; [whereas] they use eighty percent of it for government investments as intended by the donors, and then they use twenty percent for government consumption. And what I'm saying is that: yes, you are going to get that eighty percent really going into what they intended. But the twenty percent that it take off is it really bad? And the question is, you know, there are certain conditions; such that depending on how private agents absorb government consumption, you may end up seeing what --- a positive effect (and on aggregate you're actually going to see a bigger positive effect). But if the way the absorb government consumption is negative, then it's actually kind of gonna offset some of the positive effect of aid from investments and all that. So there's a lot of complexity. And that is why we as economists try as much as possible to remain humble to kind of see all the possible channels, right? Where lets say some of these things like remittances, aid, [and] foreign direct investment can actually help drive the economy about. While we do that, we also have to keep our focus on the fact that other (I didn't call it alternative but) complementary research or areas I kind of shed light a little bit more into the channels that can work (examples using applied-micro, and experiments, and the randomized control trials that has kind of grown in this last few decades).

Stitzel: Before we transition on to our last topic --- one of the things that I was thinking about while you're talking about this O.K. --- foreign aid: it has these mechanisms which it's beneficial but there's not that much evidence of growth. So your concern would be: while we can mitigate some of this suffering, some of these bad things, the things that we started this podcast talking about, and that would be good. But we also want them to grow and develop and become wealthier countries like you talked about --- [like the] South Korean experience. Is there any concern that whether it's foreign aid in general, or specific scenarios, or setups of foreign aid that cause mitigation of the suffering that we would like to see; but [in fact] are actually counterproductive towards actually growing and developing for these kind of countries?

Francois: O.K. this is a very good question, and again, a very complex one. But I think sometimes it is very simplified to the layman. But there’s several forms of aid. There’s humanitarian aid. There’s technical assistance. There's general budget support, right?

Stitzel: O.K. so define those three for us. You also mentioned military aid earlier. So maybe…

Francois: Yeah.

Stitzel:…those four. So maybe just give us really quick short definitions…

Francois: So…

Stitzel:…for all of us that aren't in the field.

Francois: As to a precise definition, it would be a little challenging for me. But I like giving examples of military aid. So for instance, there's one of the biggest countries that receives a lot of aid in terms of military is Egypt, right, because of the strategic position in the Middle East, right? So they receive a lot of aid to kind of stabilize/help stabilize the region, right? And [The] U.S. works with them a lot. There's also other parts where, for instance, there's a war going on, or something like, there's money sent to, let's say, local armies or militias to kind of/kind of help support them. Or sometimes when the U.S. itself kind of support/sending their soldiers amongst other developed countries soldiers’ to kind of help, right?

Stitzel: Well these will be things like UN and NATO forces intervening or?

Francois: It's not just the UN and NATO, but usually things like military aid and stuff like that. The U.S. is the biggest aid donor in the world, right, followed by, when you put all the Scandinavian countries together I think, it adds to the ?? @56:25 just like nine or ten percent. The US is above 90 percent or 80 percent of all world aid.

Stitzel: Wow.

Francois: Right. Because of, and again so I digress a little bit --- but if you look at things like the Mexico City policy, right (which is basically kind of looking at fertility, right, with things like family planning and things like that, right), the U.S. for instance tried, right, to kind of curb the whole [I mean actually is] not curb world population or anything. But population growth in a lot of developing countries sometimes is high because of high fertility and all that. So…

Stitzel: So one of the things that I wanted to transition and you want to derail you from this because what I'd like you to do is talk about those types of assistance and…

Francois: Hmm mmm.

Stitzel:…then get into that question that I posed a second ago. But where I want to transition to is about institutions.

Francois: O.K.

Stitzel: And one of the institutions that we think about quite frequently, actually, is fertility rates. So you bringing that up is right on target with where I wanted to go next. So, you know, lay that out for us how that particular part works.

Francois: So it's though the health part, right? But there's always a joke that I when I'm teaching my development class and we get to population, and growth, and all that. Sometimes I like to touch on because it's really important. And sometimes it comes back to poverty. An example is if there's an individual, right, where by five o'clock or six o'clock in a village they don't have lights. And the lights go off. Or there’s nothing, right? The next thing you do is you just go to your rooms or whatever, because there's no entertainment. Nothing else, right? And this increases the tendency for sex. And if they are in their prime ages, and all that, it can lead to what ---??? @58:15 markets and all that, and you can see.

Stitzel: This happens in the first world. There are studies that show, you know, you have big power outages we could, we (you and I) could do this study here in a few months, and see how many [reiterates] how many babies are happening because of the things that are going on in California. This is a well-known phenomenon.

Francois: Yes.

Stitzel: If you knock electricity out, even in the first world, even in the United States, [then] you're gonna end up…

Francois: O.K.

Stitzel:…with more babies.

Francois: Exactly. But the quick question I would want to throw back to you is the fact that how many times this year has the look power gone out in Amarillo?

Stitzel: My guess would be like one. I have a vague recollection, but no specific recollections,

Francois: O.K. so in a lot of developing countries (including mine) when I was there, half of the year you may not get light, right? And the periods that you get light during the day in 24 hours, you're not gonna get 24 hours of light. You're likely to get say 12 hours and 12 hours of darkness, right? There's power rationing and all that. And this goes on everywhere in a lot of African countries. In my country because I lived there, and I experienced [it] in Nigeria [where[ it's even worse, right? So these things are likely to kind of increase. The other thing is education, right? Right there the education itself can help (not care) but like, you know ---- so an example is if a kid is likely to go to school….

Stitzel: So if I can step in just really quickly. Lower fertility rates is typically associated with higher income countries. One of the potential reasons for that is this electricity story that you're telling. Another is the education. One of the things…

Francois: There’s a multitude of factors.

Stitzel: There's a multitude of factors. And it --- what's curious to me, and the reason I wanted you to unpack it a little bit is to see, you know, how much of that is this is just a marker of first world things. For example, you know, kids, you know, they take time and they crowd out other things. They incur certain kind of opportunity costs. In some places in the world those opportunity costs might be lower. And in some places those might be higher. We'd expect fertility rates to reflect that. They almost universally do, right? So how much of that do you think is something fundamentally causal, or just a marker of these other things --- health, education, [and] income?

Francois: There's several reasons, right? There are several reasons. And again, let's take this for example, right? A family that has a farm, right, they need more hands to help, right? It's true maybe the first four or five years of the kid’s [life[, they can’t really work much, right? But in their fifth [or] sixth year, they can go to the farm with the families and all that. So there are certain benefits of having more kids, right? In and certain countries is just cultural, right? Where having more kids is seen as a blessing to the family, right? Whereas having no kids feels like a curse to the family. So there are these religious factors that drive that. Other things that also drive that would be just the culture, the culture itself, right? And then you have other factors like electricity [and] poverty. And, you know, there's enough evidence on --- not enough evidence, but like you look at it and you can clearly tell why, for instance, the fertility rate in developed countries is low right? Probably because more people are going to school up to what --- the highest level, right? So the push [for] having kids [is] till forever. And then in doing that, they may just have one kid or something.

Stitzel: You’ve naturally lowered your fertility.

Francois: Exactly. And then in addition, now in education in a way has also helped us recognize that having kids is actually a choice, right? So societal norms and other cultures that will push you to have kids have kind of diminished, partly because there's enough education where people understand that having kids is a choice, right?

Stitzel: Probably for a lot of human history it really wasn't a choice. And that's probably a recent phenomenon that that's the case. Speculating inside of it really.

Francois: Just really as an example, right, where for instance (and again this is just purely me talking as an economist and not picking on anything), but there are centrally religions where based on Biblical text and all that, having more kids is actually fulfilling God's, you know, will and all that. So these things are drivers of, for instance, the choice of I want to have more kids. I mean, if you're part of a faith like that, having it you actually feel certain direct benefits from that. That is not easily quantifiable and all that. Again, with developing countries, [it] is very complex. [There are] so many other factors, so many other factors, are driving these things. And it's almost impossible to kind of look at one factor as: this is the main cause of it and all that. In fact, the thing (if I'm right) we've kind of generally seen [is] a slow like compared to several years ago. Now we've seen a slowdown in fertility --- partly because there's a lot of education [and] there's a lot of foreign aid on things like fertility [and] helping with family planning and all that. When I was in Ghana…

Stitzel: In developing countries…

Francois: In developing countries.

Stitzel:…there is a slowdown in fertility. O.K.

Francois: When I was in Ghana, partly because of the HIV and AIDS pandemic that kind of spread across the whole [of] Africa, where the introduction of condoms and all that. But it also has this endogenous effect where its like O.K. well you're using condoms to try not to get HIV, right? But the same time, is also a birth control factor or tool or however you want to call it. So there's been a lot of things that in the last 10, 15, 20 years we've kind of put forth including things like: the Millennium Development Goals (that helps young girls or has focused on trying to also help girls go to school and all that). If girls are going to school ---they’re in college or they're in high school --- [then] the average years of going to school has increased and all that. Then there's a tendency (you're gonna see by definition) [for] a fall in, you know, ?? @1:04:45 kid was not going to school after primary school they are literally quote unquote “ready for families” and all that. Those things have kind of dwindled because of several universal (I'll say global) efforts from developed countries to help these economies.

Stitzel: So I'm glad we chased that and I do want to return to institutions momentarily. Before we do that, can we return to the question that I posed earlier about, you know, foreign aid mitigating suffering, but potentially having countering effects to a developing nations ability to grow?

Francois: Yeah. So these countries, like, these are, say, negative effects (to just help with the explanation) are sometimes unintended, right? Because the intention of the donor is to make sure that it helps the country grow, help alleviate poverty (depending on the form that these countries get them), and in addition to kind of help close certain investment gaps or capital gaps in the country to help them grow. However there are certain conditions in the country that would stifle that, right? So sometimes all the growth doesn't accrue. We see a little growth, right? But it's just small. Sometimes you see no growth. And sometimes we actually see negative growth. Now the argument in the past sometimes has been that the aid that is being sent to these countries is too small, right? So there's a threshold effect. It's like it's too small. All right, like you're giving a kid food. And the kid is really hungry --- super skinny, right? And they just give them two teaspoons of rice, right? Says: no, give them a whole bowl of rice and beans, right? To kind of…

Stitzel: Yeah. Day after day too.

Francois: Day after day, right? So there's been that argument. But then there's also the other argument saying that: look you can give them the whole bowl of rice and beans day after day. But there's a parasitic infection in the kid, right? We'll fix that by, let's say, deworming them and then the kid will now absorb those things very well, right? So people have said: hey no, rather than give the kids food, [first] identify their root cause. Go in and give the aid in the form of what --- removing the parasitic infection. So aid can take different forms and all that or yeah.

Stitzel: So one potential answer to why it's not helping is there’s too little. That's potentially true. One is it is not solving the fundamental cause. What about a third potential cause? That foreign aid crowds out --- you've said complementary and substitute several time, [so] let's use that language --- that the foreign aid might instead of being a compliment to local economic activity, that it's actually a substitute? And then it crowds out the kind of behavior that you need in order to go from a developing to developed country?

Francois: Yeah. So those are, [reiterates] those are again, unintended effects, right?

Stitzel: Right.

Francois: Now…

Stitzel: No, but I'm not accusing them of intention…

Francois: Yeah.

Stitzel:…people giving aid intentionally trying…

Francois: Yeah

Stitzel:…to hold countries back.

Francois: I do understand.

Stitzel: So I understand that’s completely…

Francois: Yes.

Stitzel:…unintended

Francois: Yes.

Stitzel: But comment on that as a phenomenon. It does, right? There are several situations where you can think that maybe allowing the private sector to provide these things with aid coming in is gonna carve out, you know, these other sectors that can probably innovate and all that, right? So I don't want to go down the road of Dutch Disease and all those things, right? Where it's like O.K….

Stitzel: Well explain that briefly for us, because we don't know what that is.

Francois: So you can think of Dutch disease ---again very simple --- like let's say there's a thriving sector, right? Where if let's say X amount of help (or aid) doesn't come in to spare another sector, right; [then] you may actually end up having money coming in, and this money coming in is kind of slowing down the other sector, right? And to some extent that other sector will completely die, right? Without that money coming in, or the help coming in, you know, all that aid coming in or whatever, because that disease can arise from foreign direct investment, it can arise from foreign aid, it can arise from remittances and all that, right? So it has this slowdown effect, as I want to call it or even want to be harsh on it, like a substitution effect. Where it's like: O.K. well, it kills another sector completely, right? Or slows it down completely. So the point. Yeah.

Stitzel: Is there any --- I remember an example and I want to see if this fits the story that you're telling, right? Where they say: don't donate shirts to certain African countries, because a lot of their local economy is textiles. And if you go and flood to that with clothes from developed countries, it can choke out the local textile economy. And that's extremely deleterious.

Francois: That's an excellent example.

Stitzel: That’s an example of this, O.K. Perfect. So do you have more to say about that, or can we?

Francois: No, we can go.

Stitzel: All right. So I want to move on to one last thing when I teach macro…

Francois: Hmm mmm.

Stitzel: One of the questions I like to ask, because I think this is what we care about…

Francois: Hmm mmm.

Stitzel:…is, you know, why do you have developed and why do you have developing countries? And the textbook answer to that question is institutions.

Francois: Hmm mmm.

Stitzel: And when I tackled this question, I lay out the following institutions: I say property rights, contract enforcement, economic freedom, public infrastructure, and the human capital growth. But a really common one (that I don't list) that would be in basically every intermediate macro-textbook would be like fertility rates and things like that. So there's a wide variety of things. So as we bring this in for a landing, I just want you to comment on sort of why are some countries rich, why are some poor, and how that ties in is to institutions.

Francois: Very excellent question. And again, I'm by no means an expert in that. But of course, I can share my nice expert points on it, or take on it, right? So think about it this way. For over 200 to 400 years (and this is an economic phenomenon) where a lot of developing countries particularly sub-Saharan African countries never had rights to their own institutions, right, because of the phenomenon of colonialism and slave trade and all that. For me, I think these are permanent shocks that kind of created a huge gap in the starting points of development for both entities and entities ?? @1:12:17 developed countries and developing countries, right? So you think about it this way --- for more than --- so in 1471, I think, that was when the Portuguese touched base in my country Gold Coast, Ghana (today Ghana). And then after that, we have/we had several other European countries coming in and eventually we ended up with the British. But we had the French, we had, you know. So just look at the distortion here where it's like: O.K. look how languages are likely to be distorted, [and] then there comes the point where the barriers or boundaries created borders, created for countries and all that. So there were a lot of what I call, like, things that naturally you do not expect to have to kick-start growth, right, or development in these countries. And then there was the part where human capital itself was kind of taken out of the country through slave trade and all that. That is no excuse, right, to say that: oh well, they went through all this, they still can’t develop, right? But we have to also be fair to these countries. That the latest country in Africa who that gained independence was South Africa, right? And again independence in 1994, right? I was still alive – a kid walking and all that, right? That is early, right? So we by no means should expect, right, that in the next 10, 15 years, [that] South Africa should be as developed like a country like the United States, or England, or something like that. Bearing in mind that there was a huge institutional gap, right? So let me give an example. That see a country gains independence and there's a strong police force. All the police force that lived in the country (or was running a country, or the military, or whatever) was, let's say, the foreign military for instance, right? And then all of sudden these individuals leave because of independence, right? There's a huge gap left in (if you wanted) the military and the police force and all that. Let me just summarize and put it as, like, the political sector of the economy --- there's a huge gap. On the institutional part, the political institutional part of the economy --- there's a huge gap kind of left. And these people in the country have to fill it all of a sudden, right, with world-educated individuals with/to train police and all that, right? So the whole idea…

Stitzel: So there was like corruption in the process?

Francois: Yes. So if, let's say, there's a stable country because it was being ruled, and there where police, [and] there was a military, and all that. And let's say there's a good mine, but the colonial masters are kind of regulating things ---even though they are taking the gold and all the diamonds and silver --- it's being regulated and all that. Immediately you leave the country, right? And there's no military. There's not/there's a high possibility that we're gonna see political instability in the country, right? So I'll give a good example again. In my country, there were a lot of things that happened before we gained independence in 1957, right? We had the British ---- [the British] had helped educate certain part of individuals in the country. We had built a lot of secondary schools through the missionaries and all that. So human capital there was good in terms of training the people and all that. But immediately the British left, right? We had a guy come in [Dr. Kwame] Nkrumah who became quote unquote the “first President of Ghana,” ‘til 1966, right? But he didn't have a grip on the country, a grip in a good way, that like it’s --- there were/there was always the chance for somebody to come in and take him out, right? Because…

Stitzel: Wait do you mean politically, or do politically assassinate him?

Francois: Politically.

Stitzel: O.K.

Francois: Right. To overthrow him or something. So he was overthrown in 1966, and after that we had so many coups, right, up until I think ‘78 or ‘82 where well we started seeing a little bit of stability, right? Because even though we still had a military guy, he kind of won the people over and all that. Now it may look like I've been all over the place, but what I was just trying to say is that one factor that is sometimes discounted is the fact that development for a lot of developing countries started late, right? It started late. But people are gonna say: oh well, there is an easy transfer of knowledge. And right now, Africans do not have to (or developing countries do not have to) reinvent the wheel and produce a new technology. They can easily what --- copy those technologies and all that. But at the same time, certain things like property rights [and] certain things like strong institutions have not been well established for these countries; partly because of the fact that they started late, and they had to endure a lot of other mishaps, including instability of the government, right? So what I say is that: development is a long-term goal, right? My country Ghana, for instance, has enjoyed very, very stable political environment for a very long time, right? The things that we struggle with right now are things related to, let’s say, is our macro-economic environment good enough, right? We still have people under poverty and all that. But there’re still now better mechanisms to kind of help get these people out of, you know, because this good political stability can help. But it will take a longer time to, for instance, put in place mechanisms that would kind of really really, really, really alleviate poverty or really, really alleviate corruption. Do you get all that to really? It will take time, right? Because I think development is not a 20-year idea, or even a 30- year idea, or 50-year [idea]. It can take a very long time before you achieve that. And the question is: are some countries on the path of development? And it's yes. Because with an effect of colonization, you cannot easily take it out, right? It's almost like a permanent shock on these countries. But are they doing other things right? Are they kind of helping to make sure that they are good institutions, right? Making sure that property rights are really, really enforced --- that means, like, that good regulatory, quality government effectiveness (and these things) are there in the economy to kind of help see the private sector thrive and then kind of boost the economy. And rest of the world is also helping these countries achieve it. So yes, there are certain countries that have made, like, progress. You have Namibia. You have Botswana. I like to put my country in there, because they've done very well. In the last few decades they've hit some bumps, but they’re still kind of doing their best and all that. So in general, I focused a lot on Sub-Saharan Africa. But you can also think about South Asia, right? Some countries --- they have made some progress and all that. East Asia --- the forces seen like. You have China that has done extremely, extremely well, right? There are other countries. You have Malaysia [and] Singapore. These were --- Malaysia and Ghana both acting gaining independence in 1957, I think. And Ghana for sure gained independence in 1957. But Malaysia around the same time. And were on the same trajectory in terms of growth and development, right? By today…

Stitzel: Despite two very different cultures and who look…

Francois: Yes. You know --- location and all that. But today Malaysia is way gone. Ghana is not close at all, right? So you then doesn't --- where the big question comes in is like: O.K. well, how come these two countries started off the same? But one had what --- this trajectory which was (I would say) like a mildly bad outcome; versus Malaysia having what --- a very good outcome, right, and get into a very good place now. And the question can include things like: O.K. Ghana had over 10 coups, I think, between 1966 to 1982 or so, right? [There] were several coups, right, or ’84. I forget. But did Malaysia face the same problem? And perhaps the answer is no, right? So these --- does certain other factors [contribute like] did Malaysia go through the structural adjustment program like Ghana did? Probably the answer is no. Was foreign influence, in terms of giving aid and things like that, was it very high in downsize? No. Did Malaysia start enforcing things like strong institutions, good property rights, and all those things early? Probably the answer is yes, right? But these are questions that we have to investigate even more in this modern world. But people have also investigated Iraq. There's some divergence. And why there's convergence for some countries and all that.

Stitzel: My guest today has been John Francois. John, thanks for joining the Econ Buff.

Francois: Thank You Lee. It was great being here.