Chapter Four CLINICAL ECONOMICS - By Jeffrey D. Sachs (From the book "The End of Poverty")

Chapter Four

CLINICAL ECONOMICS

Checklist for Making a Differential Diagnosis

I. Poverty Trap

•   Poverty mapping
•  Proportion of households lacking basic needs
•  Spatial distribution of household poverty
•  Spatial distribution of basic infrastructure (power, roads, telecoms, water and sanitation)
•  Ethnic, gender, generational distribution of poverty
•  Key risk factors

Ø  Demographic trends

Ø  Environmental trends

Ø  Climate shocks

Ø  Disease

Ø  Commodity price fluctuations

Ø  Others

II. Economic Policy Framework

•  Business environment
• Trade policy Investment policy
• Infrastructure
• Human capital

III. Fiscal Framework and Fiscal Trap

•   Public sector revenues and expenditures by category

Ø  Percent of GNP

Ø  Absolute levels in comparison with international norms

•  Tax administration and expenditure management 
•  Public investment needs to meet poverty reduction targets 
•  Macroeconomic instability Overhang of public sector debt 
•  Quasi-fiscal debt and hidden debt 
•  Medium-term public sector expenditure framework

IV. Physical Geography

• Transport conditions

Ø  Proximity of population to ports, international trade routes, navigable waterways

Ø  Access of population to paved roads

Ø  Access of population to motorized transport

•  Population density

Ø  Costs of connectivity to power, telecoms, roads

Ø  Arable land per capita Environmental impacts of population-land ratios

•  Agronomic conditions

Ø  Temperature, precipitation, solar insolation

Ø  Length and reliability of growing season

Ø  Soils, topography, suitability for irrigation Interannual climate variability (e.g., El Nino)

Ø  Long-term trends in climate patterns

•  Disease ecology

Ø  Human diseases

Ø  Plant diseases and pests

Ø  Animal diseases

V. Governance Patterns and Failures

• Civil and political rights 
•  Public management systems 
•  Decentralization and fiscal federalism 
•  Corruption patterns and intensity 
• Political succession and longevity 
•  Internal violence and security 
•  Cross-border violence and security 
•  Ethnic, religious, and other cultural divisions

VI. Cultural Barriers

• Gender relations 
•  Ethnic and religious divisions 
•  Diaspora

VII. Geopolitics

• International security relations 
•  Cross-border security threats

Ø  War

Ø  Terrorism

Ø  Refugees

•  International sanctions 
• Trade barriers 
•  Participation in regional and international groups

The Extent of Extreme Poverty

The first set of questions involves the extent of extreme poverty. The clinical economist should make a set of poverty maps, using available or newly commissioned household surveys, geographic information systems data, national income accounts, and other information. What proportion of households live in extreme poverty? What proportion of households lack access to basic needs in schooling, health care, water and sanitation, electricity, roads, nutrition? What is the spatial distribution of poverty? Is poverty mainly urban or rural, and is it concentrated in a few regions or distributed evenly throughout the country? How does poverty relate to demographic conditions of the household (femaleor male-headed household, number of children, health of household members) and to its asset ownership and economic activities (landless poor, smallholder farmer, commerce, industry, and so on)? In the course of mapping poverty, the clinical economist should also identify key risk factors that may exacerbate poverty in the coming years. What are the demographic trends (births, deaths, internal and international migration) that may affect the numbers and distribution of the extreme poor? What environmental shocks and trends (sea level changes, coastal erosion, deforestation, land degradation, depletion of water aquifers, biodiversity loss) might impinge on poverty? What climate shocks (El Nino, long-term warming, chronic drought, extreme weather events) are likely to affect public health, disease, and agricultural productivity? What changes in infectious disease incidence and prevalence may weigh on the national or regional economies? How might world-market fluctuations in key commodities affect extreme poverty and prospects for economic growth?

Economic Policy

The second set of questions involves the economic policy framework. These are more traditional questions, but they should be addressed systematically. What is the cost of doing business in the country (and in different regions within the country)? What is the coverage of key infrastructure (power, water, roads, transport services), focusing on subnational regions, both urban and rural, as well as national averages? How are costs affected by the lack of infrastructure? What is the trade policy framework, and how are trade barriers impinging on the costs of production, especially for export-oriented businesses? What are the incentives in place for potential domestic and foreign investors, and how does the incentive system compare with the incentives in place in competitor countries? Is the government investing adequately in human capital through programs on nutrition, public health, disease control, education, and family planning?

The Fiscal Framework

The third set of questions homes in on the fiscal framework, since the budget must carry much of the burden of key investments in infrastructure and social services. What are the current levels of budget spending and public revenues? These should be measured both as a percent of GDP and in dollars per person. The share of public spending in GDP in various categories (health, education, infrastructure) gives a sense of the level of effort that a country is making to reduce poverty. The absolute spending, in dollars per person, gives a sense of the adequacy of the spending to ensure basic needs and to support the escape from a poverty trap. To what extent is the government hampered by an overhang of public sector debt inherited from the past? How much would debt relief contribute to the capacity of the government to expand public services? Are there hidden or off-balance-sheet lines on the public sector, such as debts of the central bank, or hidden losses of the commercial banking system that will have to be covered by the government's budget?

Physical Geography and Human Ecology

The fourth category of questions involves the physical geography and human ecology (meaning the interface of society with the physical environment). Economists are surprisingly untrained in this area, despite its fundamental importance in diagnosing and overcoming extreme poverty. What are the transport conditions in the country, on average and by subregion? How much of the population is proximate to seaports and airports, navigable rivers, paved roads, and rail services? What are the costs of transporting freight (such as fertilizers, food crops, machinery, industrial products) within the country and internationally, and how do those costs compare with competitor countries? What is the distribution of population between coastal and interior areas, rural and urban settlements, and densely and sparsely populated areas? How does population density in various parts of the country affect the costs of infrastructure, for example bringing the population into road, rail, power, and telecom grids? How are agronomic conditions affected by the physical environment? What is the length of the growing season, and how does that affect crop choice, nutrition, and income levels? What are the patterns of soils, topography, hydrology, and land use affecting crop yields, suitability for irrigation, and costs of land improvements? How are agronomic conditions affected by interannual climate variability linked, for example, to the El Nino fluctuations? How are agronomic conditions affected by long-term trends such as global warming and changes in precipitation patterns, like the evident decline in rainfall in the African Sahel? How are ecosystem functions changing, and perhaps degrading, over time? Is deforestation threatening the functioning of ecosystems (for example, by exacerbating flooding and land degradation) and the livelihoods of the poor (for example, by exhausting the supplies of fuel wood)? Is the loss of biodiversity threatening ecosystem functions (for example, by reducing the pollination of agricultural products)? Are invasive species affecting the fertility of the land and fisheries? Is the introduction of toxins into the environment threatening the air and drinking water? How does the ecology affect the burden of disease and its change over time? Malaria is a disease heavily conditioned by climate and mosquito species. Is malaria transmission epidemic or endemic (year-round), and is it changing over time as a result of population movements and climate change? What are the key patterns of animal disease that may have major effects on agricultural productivity (such as African sleeping sickness, a classic example)? What plant pests and diseases pose the gravest threats to livelihoods, international trade, and human health?

 Patterns of Governance

 The fifth category of the differential diagnosis involves patterns of governance beyond the specifics of the budget process and detailed economic policies. History has shown that democracy is not a prerequisite for economic development. On the other hand, a regime that is despotic, arbitrary, and lawless will easily destroy an economy. Is there a rule of law, or only the arbitrary command of a dictator? Do the systems of public management—for registering businesses, trading property, defending contracts, bidding for government tenders—work effectively? Are public services such as water and sanitation, power, and basic health and education efficiently provided (given the resources at hand), or are they subject to massive waste and fraud? Is corruption rampant, and at what levels of government? Is the succession of power from one government to the next regularized, or subject to the whim and abuse of the current rulers? Are public services run on behalf of a narrow elite, a subregion of the country, or particular ethnic groups?

 Cultural Barriers to Economic Development

 The sixth category of issues involves possible cultural barriers to economic development. Is the society torn apart by class, caste, ethnicity, religion, or gender inequity? Do women and girls face severe discrimination in personal rights (for example, sexual and reproductive choices) and access to public services (education, health facilities, family planning services)? Are women deprived either legally or informally of the right to own and inherit property? Can women participate with substantial equality of opportunity in the economy beyond home production? Do cultural norms and practices define limits to the economic opportunities of minority groups? Is interethnic violence rampant? What role, if any, is played by a diaspora, such as the offshore Chinese and Indian communities, in terms of investment, remittances, and social networking?

Geopolitics

The final category of the differential diagnosis involves geopolitics, the country's security and economic relations with the rest of the world. Is the country part of a security bloc that might define or limit its economic possibilities? Is the country subject to international sanctions, and if so, what are the consequences of the sanctions for economic development? Are there critical cross-border security threats, such as refugee movements, terrorism, or cross-border warfare? Do the contiguous neighbors cooperate regarding cross-border infrastructure? Is there an effective regional trade group, and if so, is it supporting an overall expansion of trade or merely a diversion of trade from nonmembers? What trade barriers in the rich world seriously impede development prospects? The checklist is long. Answers to these questions cannot be ascertained in a fifteen-minute checkup at a clinic, nor, in practice, can they be addressed by a single international agency like the IMF. The answers must be systematic, continually updated, and put into a comparative framework for sound analysis. Many institutions, both within the lowincome countries and internationally, should cooperate to address these diagnostic issues. Not only the IMF and World Bank, but also the specialized United Nations institutions such as the World Health Organization, UNICEF, the Food and Agriculture Organization, and many others, should cooperate in the diagnostics.