The potential benefits of a more integrated World are huge, but unevenly distributed.

Globalization requires adjustment, flexibility, mobility and change, but many people are ill-equipped to handle change and unable to turn change into new opportunities.

The ability to take advantage of change is highly correlated with education, which is why well-educated people and countries benefit much more from globalization than poor, un-educated people and countries. In a dynamic and rapidly changing world, the poor are often either left behind or may even suffer reductions in living standards as their skills and jobs get replaced by new technology.

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For many years I thought that the reason why natural resource abundance could turn into a curse was that people and governments reacted in an irrational and counter-productive way when confronted with new natural resource wealth. That seemed logical because it didn’t seem possible that additional money distributed fairly and invested wisely could do any harm.

So I was as perplexed and frustrated as everybody else when confronted with my own research results(1). Using a Computable General Equilibrium Model of the Bolivian economy we found that the current natural gas boom is likely not only to increase inequality, as might be expected, but also to increase poverty.

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By: Lykke E. Andersen*

There are many ways for a country to develop, but there is no way to develop a country: Development has to come from within.

Just as you cannot help a child develop by doing his homework, giving him all the toys and candy he wants, and protecting him from all potential dangers, you cannot help a country to develop by giving it money, writing its poverty reduction strategies, or protecting it against basic market forces.

You don’t help a child develop by constantly telling him that he is stupid, ignorant, retarded and helpless, just as you don’t help a country by labeling it poor, underdeveloped, indigenous, and hopelessly indebted.

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Last week’s post on the Principles of Education Reform caused quite some discussion among the readers, and there is indeed much more to be said on this important topic.

Having benefited enormously from 20 years of excellent, free public education in Denmark, I wouldn’t dismiss the idea of public education as completely hopeless and in violation of basic economic principles.

Well, to be honest, Denmark is not benefiting much from the investment as I left the country right after finishing my education, and, again to be honest, my own kids are in one of the most expensive private schools in Bolivia (fortunately heavily subsidized by the French government).

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It was recently shown in an academic paper (1) that the natural gas boom in Bolivia is likely not only to increase inequality but also to increase poverty.

How can this be true? How can windfall revenues of $700 million per year, received by a clearly pro-poor government, increase poverty???

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“Plato told Aristotle that no one should have more than five times the wealth of the lowest-paid member of society.”

It has been reasonably well-established in the literature that not only absolute income levels matter for the level of happiness, but also relative income levels. You don’t like to see too much poverty around you (thus the case for altruism), but you don’t like to see rich, ostentatious people either (causing envy). This article is mostly about the latter.

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Bolivia is one of the top 15 countries in the World in terms of biodiversity and endemic species. Consequently, Bolivia is of high priority for the international conservation community and so far more than 16% of the country’s surface has been declared protected area.

However, Bolivia is also one of the poorest countries in Latin America, desperately seeking ways of rapid development. This often involves the exploitation of natural resources, such as land, timber, minerals and petroleum in national parks and other areas that provide important environmental services.

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The impacts of windfall profits such as foreign aid or hydrocarbon revenues depend crucially on how the money is spent and/or invested. There are basically the following three options:

      1)True Public Goods:

Theoretically, the most growth and welfare enhancing option is for the government to invest the money in true public goods. True public goods are goods/services which enhance the productivity and welfare of everybody by making life and business easier. A classic example is a road which allows goods and persons to move around much easier, and, importantly, the fact that one person uses the road does not preclude others from also using the road (1).

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It does not necessarily have to be expensive to improve the health of the population. It could be free – or even revenue generating!

 Here are two ideas:

         1)Slap a substantial tax on distinctly health-damaging products such as cigarettes:

According to the World Health Organization, tobacco use is the leading cause of preventable death in the world today. With almost 5 million tobacco-related deaths per year, no other consumer product is as dangerous, or kills as many people, as tobacco (1). In a poor country like Bolivia, a cigarette tax may actually work as a deterrent to smoking.

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There is arguably nothing worse for long run growth prospects in an economy than low social mobility. Without the possibility of advancing upwards in society, poor people have little incentive to work hard and invest in human and physical capital. Conversely, without investment and hard work, there is little chance of improving. Thus, the poverty trap.

Maybe the only thing worse than low social mobility, is low social mobility AND high inequality. This situation reflects a country with a large gap between the rich and the poor, and little chance of ever crossing that gap – a situation which by any standards must be considered unfair. Outcomes are mostly determined from birth, by factors entirely outside the control of each individual, whereas subsequent effort and investments make little difference.

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