Yesterday Foreign Policy and the Center for Global Development released their 4th annual Commitment to Development Index (CDI). This index attempts to quantify how well rich countries “help poor countries build prosperity, good government, and security.” The index measures seven policy areas: aid (per capita and quality), trade, investment, migration, environment, security, and technology.

Many countries’ own policies stand in direct contradiction to one another showing, perhaps, that internal politics are primary, and policies affecting the poorest countries on earth are secondary. Andrew Natsios, the former head of the U.S. Agency for International Development (USAID), pointed out some of these contradictions before resigning in January, 2006. As Foreign Policy notes:

“Natsios criticized a law that requires the U.S. government to buy food from U.S. farmers, ship it on American boats, and deliver it to famine-stricken regions via U.S.-based organizations. The U.S. government must deliver food aid this way even when it depresses local food prices, pushing more farmers into poverty, and even when it could buy food from farmers just outside a famine zone for much less. Some nongovernmental organizations that get a large fraction of their funding from the program defended the status quo, arguing that dropping the ‘made in America’ requirement would undermine the program’s support among American farmers and shippers. Congress quickly axed Natsios’s proposal for reform. That the U.S. government must pay off American interests to feed the starving is a sad commentary on how low the commitment to development may still be.”

In an unrelated but equally interesting measure, Transparency International has for several years been publishing the Corruption Perceptions Index (CPI) in order to draw attention to the role of corruption in stifling economic development. When we look at corruption in rich countries, there appears to be a parallel between increased corruption and decreased effectiveness at helping poor countries. To be fair, the 21 rich countries ranked in the Corruptions Perceptions Index are squeaky-clean relative to the countries they are trying to help (with the exceptions of Italy and Greece).

Is there a link? Perhaps pandering at home - the constant political pressure from competing interests - creates economic inefficiencies that hurt poor countries. These policies could come in the form of unfair trade policies (e.g. Switzerland’s $987.58 per-cow subsidy) or environmental indifference (the United States’ ultra-low gas taxes).

Then again, it’s also easy to be small. The 5 countries “most committed to development” have an average population of 7.9 million whereas the bottom five have an average population 53.7 million. Similar ratios hold for corruption: the most transparent rich countries have smaller average populations.

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Sources: Statastic research; Foreign Policy; Center for Global Development; Wikipedia

Today’s announcement that British Petroleum would be taking crude oil production offline to make urgent repairs drove up oil prices to $77 a barrel. So what about those renewable resources we keep hearing about? We want to break the oil addiction!

Ethanol is indeed sparking renewed interest and a flurry of investment in the U.S. Most of the 3.9 billion gallons of ethanol came from corn and was used in the states where it was grown. Impressive until you realize that Brazil produces 4.8 billion gallons of sugarcane-based ethanol, providing about 40% of their annual gasoline needs.

We have been producing ethanol-based fuels in the United States for decades. Most of the Midwestern states (see charts below) that benefit from $4 billion in corn subsidies have an available 10% mix of ethanol in their gasoline. And with low corn commodity prices, high gas prices and a lack of ethanol refining in the Midwest, it has created the perfect investment storm.

Profit from Archer Daniels Midlands’ (ADM) corn bioproducts increased from $259 million to $446 million this year, and they have aggressive expansion plans. According to today’s Barron’s:

“In the past year, the difference between ethanol [prices] and corn prices has soared from less than 50 cents to about $3.10 a gallon…. That’s lifted the annual return on capital for some ethanol plants toward 50% and set off a stampede of new investment in ethanol refining.”

So it will come as no surprise that the ethanol industry has a strong lobby to protect itself. It’s a twisted relationship. The federal government’s price supports and subsidies regularly create overproduction of corn. This drives corn prices lower suppressing world prices (something the developing nation’s rightly bemoan).

Some of this surplus is used for ethanol. Why? Refineries - and consumers - are incentivized by a $.51 per gallon tax credit for 10% ethanol-based gasoline. Ethanol producers also enjoy significant trade protection in the form of a 2.5% ad valorem tariff and import duty of 54¢ per gallon of ethanol.

In August, 2006, Amani Elobeid and Simla Tokgoz from Iowa State University published a paper that analyzed the economic effects of removing these protections:

“The study finds that the removal of trade distortions induces an increase in the world price of ethanol and a decrease in the U.S. domestic ethanol price, which results in a decline in U.S. ethanol production and an increase in consumption. Consequently, U.S. net ethanol imports increase significantly….”

The Iowa State paper shows that if we were to remove trade barriers and the tax credit, we would see a 14.46% price drop in ethanol for consumers. Ethanol currently makes up 10% of our gasoline in a limited number of markets in California and the Midwest. Lifting trade barriers would allow Brazilian ethanol to more easily reach ports on the East Coast.

Yet we continue to protect ethanol refineries. ADM Chief Executive Patricia Woertz told Barron’s that “ethanol demand could triple. ‘It looks like it has room to grow to 14 billion or 15 billion [gallons per year],’ she said, ‘which is a full 10% blend in the gasoline pool in the United States.’”

Barron’s analysis of the ethanol market was about as sheltered as the heavily-protected ethanol refining industry: “Unfortunately, before ethanol refiners can reach that goal [14 billion or 15 billion gallons per year], they might reach the limits of the country’s corn supply. America’s entire corn crop would satisfy just 12% of gasoline consumption, leaving no corn to feed livestock and humans.”

No corn to feed our delicious cows? Once we remove ADM’s trade protections and give the Brazilians a new market for their ethanol, we should have plenty of corn to feed those future Big Macs. It will help our farmers counteract the predicted 1.7% drop in domestic corn prices, and it might help lift some desperate Brazilians out of poverty.

Didn’t most of us learn competitive advantage in econ 101? This may be a good time for Congress to brush up.

Sources: Statastic research; Environmental Working Group - Farm Subsidy Database

Trade model based on scenario 2 in the following paper: “Removal of U.S. Ethanol Domestic and Trade Distortions: Impact on U.S. and Brazilian Ethanol Markets,” Amani Elobeid and Simla Tokgoz, Working Paper 06-WP 427, August 2006, Center for Agricultural and Rural Development, Iowa State University

Statastico appreciates nurses. They know when to apply pressure, whether to put ice (or is it heat?) on a sprain, even how to keep someone conscious who might otherwise go into shock. With a rapidly aging American population and massive cost increases in the medical industry, it’s hard to understand why there is constantly talk of nursing shortages.

Sure it seems a little simplistic, but aren’t nurse wages subject to the same supply and demand forces as other wages? If there aren’t enough nurses, don’t salaries just go up to attract more young folks into the profession? Somewhat.

Nursing has historically benefitted from a captive labor market: women. Women in the post-war years had scarcely any choice besides teaching or nursing. No longer. Women now make up 48.5% of our future doctors, and earn 47.5% of the law degrees. While the next generation of women has expanded into new occupations, nursing has remained decidedly behind the times, as seen in Chart 4.

So the nursing population is aging. But is it underpaid? It depends where you are. There are indeed shortages in rural areas and numerous states have implemented programs such as loan forgiveness to lure nurses to less desirable areas.

An economic concept called monopsony may help explain why nursing shortages persist in some of these areas. Whereas a monopoly company can dictate prices to consumers because it’s the only business in town (e.g. cable TV), a monopsony is the only employer in town for a particular industry. This means that a single hospital in a smaller town might be able to dictate wages to nurses who are unwilling to relocate.

But is there a really a looming nursing shortage? In a 2001, Douglas Staiger, an economics professor at Dartmouth predicted “a 400,000-nurse shortage in 20 years.” Despite expert projections, Statastico is going out on a limb and predicting that the shortage won’t occur.

Why? The market is already reacting. From 2000 to 2004, average inflation-adjusted nursing salaries went up by 12.8%. That’s real salary, not nominal, folks. Salaries for teachers and nurses were about equal in 1986. Now full-time nurses average $60,000 annually, while teachers make about $48,000. In fact, over the last 20 years, registered nurse salaries have risen faster than teachers, professors, architects, engineers, ubiquitous lawyers, even physicians.

The high percentage of (ahem) “seasoned” nurses does tend to skew salary averages upward. But assuming that the National Labor Relations Board doesn’t scare new recruits away from nursing by preventing unionization, we’ll surely find an unanticipated source. Currently, men make up only 5.7% of registered nurses. Perhaps more lucrative salaries will lure them to the field, reducing the taboo of the male nurse.

Gender equality may yet reach the medical profession.

Notes: Teachers include primary and secondary school teachers. Academia includes all full time college faculty. All data are median salaries except for registered nurses and teachers which are average salaries.

Sources: Teacher salaries 1996-2005: National Education Association

Teachers (national) salaries 1986-1995: Pennsylvania State Data Center

Academia, physicians, lawyers, engineers & architects 1986-2005: American Association of University Professors; Original source for Figure 3: ‘‘Median Weekly Earnings of Wage and Salary Workers Who Usually Work Full Time, by Detailed Occupation and Sex, 1983–2002’’ and ‘‘Median Usual Weekly Earnings of Employed Full-Time Wage and Salary Workers by Occupation, 2000–04,’’ unpublished tables, U.S. Bureau of Labor Statistics, January 2006.

Registered Nurse salaries 1984-2004: U.S. Department of Health and Human Services; 1986 and 2005 estimated by statastic. 1986 was calculated by averaging real salaries from 1984 and 1988. 2005 was estimated to continue the 3.1% real annual increase that occurred between 2000-2004.

CPI-Inflation statistics: Federal Reserve

The Internet has been available in the developing world almost as long as it’s been here in the U.S. Internet cafes were popping up in Cameroon in the mid 1990s before the local Peace Corps volunteers even knew how to use them. Penetration rates, however, lag predictably behind the richer countries in the north. But the lack of telecommunications infrastructure is something of a blessing in disguise: developing nations have the potential to leapfrog technologies. Cell phones and VOIP prove easier than installing costly land lines, and there’s no need for telephone poles and copper cable if governments can create WiFi and WiMAX zones around burgeoning urban areas.

Wired Magazine recently featured a map with average prices for one hour of online access in Internet cafes around the world. Statastic used the average hourly price as a percentage of daily wages to provide a glimpse into the state of Internet access in a selection of low to middle income countries.

The chart below begs several questions. Could lowering the cost of public Internet access lead to higher usage rates? What is the demographic profile of the average Internet user in the developing world? Should multi-lateral donors subsidize the cost of public Internet access?

Among this small sample, D.R. Congo, Nigeria and Kenya are the three most expensive places for locals to access the Internet, relative to income. They also have some of the lowest usage rates. But these countries have several other characteristics in common: low literacy, high rates of corruption, and a high level of inequality. These countries may simply have a limited number of Internet cafes that cater to tourists, corrupt officials and the wealthy locals who are lucky enough to have an education and a job.

Brazil’s usage rates are surprisingly high. Perhaps Brazil’s high inequality can help explain how 14% of Brazilians have regular access to the Internet despite the fact that one hour in an Internet café costs nearly one sixth of average daily wages. Just who are those fortunate 14%?

Sources:
http://internetworldstats.com
WIRED Magazine, May 2006

Agricultural subsidies criticized in the Washington Post… but not very well

The Washington Post is running a series of articles that expose some of the true costs of agricultural price supports in the United States. Agricultural subsidies are indeed very bad. These subsidies hurt developing nations by artificially depressing global agricultural commodity prices for the crops that developing nations are desperately trying to export. Proponents who claim that such price supports help smooth price fluctuations ignore unintended consequences, and political rhetoric about “saving the family farm” is empty… as are most of the family farms.

Although the Washington Post’s first two reports are well researched, their data is often misleading, incomplete or anecdotal. An example comes from today’s article about the failure of our current system of price supports, also known as Loan Deficiency Payments (LDPs):

One who played it right last year was Michael T. Sullivan, who produces a million bushels of corn annually with his three sons in Franklin, Minn. He thrived even during the depressed post-Katrina market.

Well before the storm, Sullivan said, the family had arranged to sell three-quarters of its crop to a local grain elevator for about $2 a bushel. The practice, called “forward contracting,” is increasingly common and helps insulate farmers from the market’s routine ups and downs.

On top of their contracted price, the Sullivans got the subsidy: $292,054 for that same corn, according to payment records.

Sullivan considers the LDP a godsend, given the uncertainties of farming. “Without it, Main Street Minnesota would have no money to keep the economy rolling,” he said.

Great, lots of numbers in there. A million bushels. $2 per bushel. And the hardest hitting of all: $292,054 in subsidies. Wow, that’s a lot of subsidies American taxpayers are shelling out.

Problem #1: The numbers cited are production and income based. How much did the family actually net in 2005? $292,054 sure seems like a lot of money in government subsidies, but relative to what? It looks like the Sullivans would have earned about $2 million had they 1 million acres at the market price of $2 per bushel.

Readers would be more sympathetic to the Sullivans if the inputs to produce those 1 million bushels cost them $2.25 million, netting them only $42,054 in income, and only being cash positive because of those government price supports. But what if their costs were only $200,000? Then the Sullivans would millionaires, netting $2.09 million in 2005.

Problem #2: How does the Sullivan family’s subsidy compare to the average subsidy for a corn farmer in Minnesota? How about compared to the U.S.? Is this the average corn production for a farm in Minnesota? A million bushels sounds like a lot to me. But is it? I mean, I probably only eat 200 or 300 bushels a year. (Statastico really likes corn.) Of course this doesn’t matter, because of problem #1: we don’t know anything about their income.

Next, the Washington Post produced a colorful map that makes Iowa look like price support central for corn. Sure, most counties receive more $10 million is price supports for corn. But how much corn does Iowa produce? Well if you’ve seen Field of Dreams or Children of the Corn, you won’t be surprised that Iowa produces 18.8% of all U.S. corn. So the map is colorful, but it tells a deceptively simple story.

If you want harder hitting numbers, head to Iowa State University. Chad E. Hart reports that according to USDA projections, almost half of the market value of Iowa’s 2005 corn crop was made up of government payments. Now we can start to understand why those nations struggling to boost agricultural export walked out of WTO trade talks.

I’ll leave you with some data based in part on what the Washington Post Business section reported on Friday. If you take a look at how much the following countries pay in government support to farmers in 2005, you’ll see that every European paid $293.20 in agriculture support. Americans paid al total of $43 billion, or $145.40 per person. In contrast, the per capita GDP in Sub-Saharan Africa was only $575 in 2002. Statastico does not advocate transferring those agricultural subsidies to development. These subsidies should, however, be reduced to zero over time. Give Africa and other poor farmers around the world a chance to export, an incentive to develop, and above all, a level playing field.