Challenges, opportunities for Applied Economics in the 21st Century

By Prof. Piyasena Abeygunawardena
Principal Energy Economist, Energy Division, South Asia Department of Asian Development Bank

There are 800 million people living under poverty earning less than a dollar per day.

In the world today there are 800 million people living under poverty earning less than a dollar per day.

Though the international community agreed to reduce hunger and poverty by half by 2015 (MDG), the estimates suggest about 600 million hungry people in 2015 ($1/day) and one billion people under absolute poverty ($2/day) by 2015. It is also estimated that about 60% of these will live in Asia, especially in South Asia. Scientific contributions by the agricultural professionals, in particular the green revolution made the largest contribution in uplifting the lives of millions of farmers in the world, despite the negative impacts came along with it.

From 1970s to mid 1990s the world increased food production by 107% with the increase of land extent under cultivation of a mere 4%. Per capita income increased by 189% with the increase of population of 60%.

These are good. However abject poverty in the world still is a major problem. Not only that, unfortunately the world has so many new problems as well as old problems. For example, AIDS, TB, malaria, fundamentalism, global warming, social disintegration, increasing energy prices, bird flue, mad cow disease, SARS and terrorism are major threats to mere survival of human life.

Today the world also has new nuclear power houses, new space travelers, new economic giants like China and India . As in the case of the past 50 years, the newly industrialized Asian economies continue to grow. The Asian financial crisis seems to be over. Moreover, new economic powerhouses such as Thailand and Malaysia are emerging.

In the southern hemisphere, countries like Brazil , Mexico and Argentina are becoming major forces of economic growth. The transition economies in Eastern Europe and other areas of the world including Russia are also emerging as new economic powers. Vietnam is growing very fast. There are few exceptions too. For example, the Sub-Saharan Africa is still lagging behind, perhaps except South Africa. Countries like Myanmar, North Korea, and Zimbabwe are taking a different direction. The smaller island nations also have difficult times.

Increasing energy prices have become a major constraint to economic growth of poor countries, in particular non-oil producing countries. When the financial crisis hit Asian economies most of the urban workers moved back to rural areas to find food. Time and again when fuel prices go up people look into other alternatives, and agriculture sector is the fall-back position. Brazil and the USA today are major gasohol producers and users. They use corn as the basis for alcohol production. Recently Pakistan made it legal to sell alcohol mixed petrol in roadside filling stations (few years ago alcohol production was illegal). Bio-fuel and alternative energy may place additional pressure on hunger. Land allocation between bio-fuel and food is going to be a major policy dilemma.

India is discovering new alternative plants to produce bio-fuels. Jethropa and Pongamia Pinnata cultivation is becoming successful new bio-fuel plantations. India found the varieties that can be cultivated in "waste" land. These species are not competing with food crops. Generally they consume less water, little fertilizer and agro-chemicals. To my knowledge both, USA and China are yet to develop non-food crops for bio-fuels production. Would it be possible for such varieties to be found in southern or western US? What about pine seeds? Is there any attempt to collect pine seeds and extract oil? Can cellulose be the basis for next generation of gasohol production? I do not know the answer. But I am sure it is only a matter of time before the world will come up with many more alternative bio-fuel crops. However, the long term solution would be either hydrogen fuel cell or nuclear power. If not, more widely available solar or wind power will dominate the energy sector in the world. I am certain that the world will not and cannot depend on hydrocarbon based energy production forever. That is because, (i) the world has only a finite amount of hydrocarbon reserves, (ii) the increasing price and the adjustment cost have been painful and (iii) environmental consequences are unbearable - - in every respect -- technical, social and political.

Assistance
The whole programme for international assistance is changing. USAID’s focus has been changing. The World Bank’s approach to economic development and the Washington Consensus have been changing. Gender and development, and the role of NGOs are changing.

Civil society is taking more and more active role. The IT and communication revolution made these changes faster and more transparent.

The world is asking a higher and more economic growth but social development must be an integral part of it. It is also evident that natural resources management, in particular, water scarcity, de-forestation, desertification, and air pollution are major problems.

Moreover the climate change is real. Can the new developments in bio-technology answer these questions? Can the world absorb a similar set of negative impacts that came along with the green revolution again under development of bio-technology?
Five hundred years ago North America was poorer than Asia . What made the difference today? History tells us not all countries develop or innovate or adapt technology in the same way. Newly industrialized countries have adapted technology quite different to India and China. Japan’s experience is unique. What policies and institutions do countries need to promote innovation and adaptation?

Let me share with you an example. About 2.25 million ha of land under solar cells (15% efficiency) could yield the same energy as 60 million ha of wood plantations. Moreover, about 7-8 million ha of land with solar cells could give India energy independence even 25 years from today. Solar cells can be in arid land, deserts, mountains, roof tops and need no water, fertilizer or pesticides. If India used to generate bio-fuel based on the food crop type approach what would be the environmental and other costs? I do not know the answer. But it would be tremendous. So, technology is part of the answer. But technology can not solve the problems fully. This is applicable to bio-technology developments too.

Let’s compare the green revolution (GR) package with a possible new bio-technology (BT) package. The GR was primarily driven by the public sector and it focused mostly on cereal crops. BT is mostly in private hands while it focuses on high value crops. BT is going to promote intensive cultivation though GR had a major part of extensive cultivation. GR focused on poor farmers while BT will focus on rich farmers. GR focused on increased yield through existing genes and BT looks for genetic modifications. GR was born with minor opposition from certain elements of the society. BT is born with a major opposition from many segments of the society. You can expand this list as you like. You may also prepare a list of similarities of GR and BT.

So, BT or any other form of development package must not repeat the mistakes of the GR. When we talk about a new technological package, it is inevitable for us to look at the low hanging fruits.

Where can we get the most investing the least? Perhaps the rain-fed food crops, improved food processing efficiency, nature friendly agricultural systems, low input systems and high output systems. Of course it must be an out of the box solution. Not only that, it must also be a broad based solution. It must address gender concerns. It must be owned by the local people, and it should encourage local technologies. The world has no more water. It has no more land.

The new package must combine with the appropriate institutional setting. In Sri Lanka it cannot be limited only to rice. The technological package must be extended to other crops including plantation crops. The world’s agriculture cannot serve the needs of the people without a major breakthrough. This is a challenge that we cannot pass on the next generation.

There are three key issues equally important to modern day Sri Lanka . They are (i) economic nationalism and professional wisdom, (ii) good economics which is the key, and (iii) the role of education.

Economic Nationalism and Professional Wisdom
Economic nationalism is a term used to describe policies which are guided by the idea of protecting domestic consumption, labour and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labour, goods and capital. It is in opposition to globalization in many cases, or at least it questions the benefits of unrestricted free trade. Economic nationalism may include such doctrines as protectionism and import substitution. We, in particular in the developing countries, need economic nationalism. It is a deviation of the neo-liberal approach to economic development. However, it is consistent with the market based economic theory. Strictly speaking almost any policy option is an intervention to the market. However, some policies, we implement to correct market failures. Some others, we implement to correct institutional or policy failures. Why only market, policy or institutional failures? Why not political failures in our societies? Maybe nationalistic policies maybe to correct political failures?

Having defended so much nationalism I must also stress the importance of not over-doing it. No country can live today without interactions with the rest of the world. Sri Lanka has to sell its tea, rubber, coconut, other export crops, garments, gems, hotel rooms and many other things to the rest of the world.

The country has to buy medicine, food, energy and so many other items from outside. It has to depend on much needed capital for various development activities including energy, roads, water supply and sanitation. So, even a little overdose of nationalism can harm much more than the relative damage of under dosage of it. So, it must be handled with care. Today, in Sri Lanka what you see as nationalism, patriotism, or something else could be decided by the audience here better than me.

Good Economics is the key
Economics is close to political science. Sometimes economists are even closer to the politicians. Economics teaches how to get revenue to the hands of the government. It is always important that one does not lose the sight of professional integrity in collecting such revenues and it is not a way to harness personal or political benefits. Government must use its revenues to protect the dignity of the magistrate (constitution).

Economists must tell the politicians the truth about the economy. Recently, I read in Sri Lankan newspapers various statements made by economists. One said that Sri Lanka’s monetary policies are intact. However, the annual inflation rate is much higher than the economic growth rate.

Another economist argued it is better to issue a three year bond instead of borrowing from a multilateral bank when the latter had a much longer repayment period and lower interest rate.

If you want to call yourself as an economist please learn good economics. Then practice good economics. If we are economists, economics must remain at the centre of the work we do irrespective of our own specializations – marketing, natural resources or business.

Good economics is the key which allows us to move wherever we want to go, but not the other way around. I can speak about my own experience. My final year, 500 Series Specialization Course was the first major shift in my career to become an economist. Starting from there, I have traveled on many different paths with lot of ups and downs. During this journey, my understanding of economics has been the most important guiding post to me. Still I may not be a good economist. However, I am trying and always I question myself what is good economics? I believe good economics is synonymous to benefit cost analysis.

Education
A person who cultivates his own land with his hands, combines three different characters together. S/he is the landlord, farmer, and labourer. The output, therefore, should pay the person the rent of the first, the profit of the second, and the wages of the third. The whole, however, is commonly considered as the earnings of labour. Both rent and profit are, in this case, confounded with wages. Education will allow you to collect all these three revenues, sometimes even the fourth factor of capital also. That is because education is in fact treated as human capital. So, when you treat education as a private good it pays off well.

There are many countries in the world and they are integrated much more than ever before. Today, how many Indian IT experts work in the Silicon Valley? How many call centres are in the Philippines? Is this brain drain or what? When Sri Lanka sends housemaids to the Middle East nobody cries about brain drain? Why? Don’t housemaids sell their labour and doesn’t Sri Lankan economy benefit from their hard earned cash? Why do we talk about brain drain only when educated people leave their countries? Perhaps the argument is that they have used public money for their education. Or they may go to western countries and earn higher incomes. Did only public money make the difference between housemaids’ labour and professionals’ contribution to economic development? There is a major contribution from professionals in receiving their education at their personal capacity. I am not an expert on the issue of brain drain. However, in the modern world we need a better understanding of the concept of brain drain. It seems to me that the traditional argument is becoming outdated.

Let me go back to the new technology package I described earlier. The new breakthrough must be a package with broad based agriculture. It must address multidisciplinary concerns such as environment, poverty, institutional, etc. More than anything else, it must be owned by local people. The role of education, in particular, the role of international education, has become more important than never before in our history. That is because the younger generations are faced with more challenging tasks, and fewer resources in a more polluted world.

Who can develop this new package and educate the younger generations? Of course one can argue it depends on where the facilities and incentives exist. In my view, the next chapter of technology development would be written by knowledge based agencies like universities and publicly funded research institutions.

They will also have the responsibility of educating the younger generations to face the world. This requires tremendous effort and skills.

(This presentation was made at the recent research sessions of the Sri Lanka Agricultural Economics Association (SAEA).