Against the “debt-trap diplomacy” narrative

Cross-posted from my Substack; read, like, and share the Substack link, if you can!

In March 2000, Chinese president Jiang Zemin argued that China should pursue a strategy of “Going Out,” with the explicit aim of fostering Chinese investment abroad. As Zongyuan Zoe Liu documents in her book Sovereign Funds, this was — after the Asian financial crisis of the 1990s — an effort to redirect its surplus of financial capital abroad, to reduce both speculative investment at home and upward pressure on its currency (p. 56). 

One element of “Going Out” has been a substantial increase in overseas lending. Between 2000 and 2021, China lent a total of $1.3 trillion to other countries, through the government, state-owned policy banks, and other state-owned commercial enterprises. This was heavily influenced by the Belt and Road Initiative, a major global infrastructure lending initiative launched in 2013 by Xi Jinping: globally, 151 countries (representing over two-thirds of the world’s population) have signed on to or expressed interest in Belt and Road infrastructure projects. 

Due to these loans, by 2017, China had surpassed the World Bank and the IMF to become the world’s largest official creditor. To illustrate, consider its lending in Africa: between 2000 and 2019, Chinese lenders committed $153 billion to public sector borrowers throughout Africa alone. This represented a significant change since the 1990s. In 1990, more than 85% of construction projects on the continent had American and European contractors. By 2013, the Western share fell to 12%, compared to the 31% in Chinese firms’ hands.  

In November last year, President Biden accused China of engaging in “debt-trap diplomacy,” in contrast to “high-quality transparent approaches to infrastructure and to development.” This has echoed the stance of the Trump White House, made explicit by Mike Pence in 2018

What exactly is debt-trap diplomacy? The Indian scholar who coined the phrase, Brahma Chellaney, has argued that China’s goal with this lending is primarily geopolitical, not commercial. In particular, per this argument, China intentionally places countries in debt traps with its lending with harsh contracts and low-quality projects, both to seize the infrastructure built as collateral if defaults occur and to get geopolitical concessions in exchange for debt relief in periods of financial distress. 

Overall, I’m pretty uncompelled by this. Geopolitics is probably part of the mix, but my guess is that Chinese firms and banks are often acting independently, rather than in coordinated ways; that commercial interests are a big part of the picture; and that the aim of China’s lending isn’t really to encourage defaults or push countries into debt traps on purpose (rather than to have the loans repaid). 

Many of these infrastructure projects have failed

Debt-trap diplomacy, as a hypothesis, is an attempt to explain the following fact: many Chinese-funded infrastructure projects abroad have failed, placing countries in debt with little to show for it. 

Consider the Mombasa–Nairobi Standard Gauge Railway (SGR) in Kenya, the first phase of an ambitious railway system known as the Kenya Standard Gauge Railway — a $3.6 billion, ~600-kilometer project launched in 2017. 90 percent of the project’s cost was covered by China’s Exim Bank (one of the main financiers of Belt and Road projects), and the China Roads and Bridges Corporation (CRBC) managed the project, including its construction, after conducting a feasibility study. 

This project strikes me as basically a white elephant. Taylor (2020) documented numerous issues (referring to it scathingly as “Kenya’s new lunatic express”), noting that the line made a loss of $9.8 million in its first year of operation, largely due to low cargo business. The SGR was designed to transport up to 22 million tons of freight annually, but investigative reports show that only 5 million tons were transported in 2018. In May 2019, the Kenya National Bureau of Statistics revised its revenue report for the SGR down by 44 percent, with less than ten percent of the freight in and out of Mombasa utilizing the SGR in 2018. 

What about the CRBC’s feasibility study? David Ndii (who I’m generally a fan of) picks it apart:

The CRBC feasibility study has a chapter titled Economic Evaluation, though it is unlike any investment appraisal I have come across. It asserts that the project has “high profitability” and “financial accumulation ability”, but there are no cash flow projections to back this up. It presents Net Present Value (NPV) of three different configurations of US$ 2.0, 2.4 and 2.6 billion as evidence of viability, leaving one at a loss to understand how this justifies borrowing US$3.2 billion for the project. NPV is the current value of the future earnings of a project and should be higher than the cost of the project.

Apart from this, he criticizes the feasibility study’s claim that the SGR would make freight cheaper, since the tariff it would need to charge to break even was higher than the prevailing railway tariff. 

Many other Chinese-built infrastructure projects globally are riddled with cracks. In the case of Pakistan’s Neelum-Jhelum Hydropower Project, these cracks are literal — the project was closed once in July 2022 due to major fractures in its tailrace tunnel, and within a week of its reopening earlier this year, power generation fell sharply again due to cracks in its headrace tunnel. (See slide 23 of this presentation if you’re curious about the difference between a tailrace and a headrace tunnel!) 

And this has real effects on countries’ debt burdens. Horn, Reinhart, and Trebesch (2022) created a large dataset of defaults and debt restructuring operations involving China in the 21st century. Across 39 developing countries, they find 84 credit events and distressed debt restructurings between 2000 and 2021. They compare this to data about lending from the Paris Club, and show that China’s overseas loans have been responsible for more sovereign credit events since 2008 than loans from members of the Paris Club. 

On top of this, their data suggest that China rarely grants face value relief on debts. Instead, akin to Western governments in the 1980s and 1990s, the vast majority of restructurings of Chinese loans are simply reschedulings, rather than actual reductions in the debt owed. 

Now, Brautigam, Huang, and Acker (2020) find that between 2000 and 2019, China has canceled $3.4 billion in debt throughout the continent. However, their other findings are consistent with the previous paper: changes in interest rates, reductions in principal, and refinancing of loans are very uncommon when restructuring Chinese debt. When borrowers have requested Paris Club terms to rescheduling, Chinese lenders have occasionally agreed to apply those terms, but usually set different, often confidential terms depending on the specific loan in question. This problem is in part explained by bureaucratic problems — to write off a loan, civil servants need permission from the State Council. But as The Economist puts it, “Being the face of a write down — in effect admitting that the bureaucracy made a mistake — is a professional stain that is hard to scrub.”

I think these are serious problems. Many of these infrastructure projects are often poorly managed white elephants that put countries at elevated debt risk. But I don’t think this is evidence that China aims to intentionally put countries in debt traps, that this is primarily driven by geopolitics rather than commercial interests, or that China uses the promise of restructuring frequently to extract geopolitical concessions. Instead, as Michael Pettis notes, I think “Chinese lending to developing countries is characterized more by inexperience — veering at times towards incompetence — than it is by some master plan of debt-trap diplomacy.” 

The evidence for debt-trap diplomacy is relatively weak

The most commonly cited example of supposed debt-trap diplomacy is the case of Sri Lanka. For instance, Chellaney himself has said, in his essay introducing the phrase, that it is “Exhibit A.” He argues that Sri Lanka’s indebtedness to China allowed it to gain a substantial stake in the Hambantota International Port (a deep-water port financed by a loan from China Exim, constructed by the China Harbour Engineering Company), and also allowed it to pressure Sri Lanka to gain other concessions, like restarting previously-suspended Chinese initiatives. 

Similarly, Maria Abi-Habib has argued in The New York Times that China and Sri Lanka’s deal involved China using its loans to apply pressure on Sri Lanka, allowing it to “seize” the port in exchange for erasing “roughly $1 billion in debt for the port project.” Abi-Habib argues that this gives China a “strategic foothold along a critical commercial and military waterway.” Lauren Freyer of NPR has characterized this as effectively foreclosure, claiming “the Chinese state-owned operator physically took control of the port in late 2017 — on a 99-year lease — after the Sri Lankan government defaulted on its loans.”

As far as I can tell, this seems like a misrepresentation of what actually happened. For starters, the final claim, that the Sri Lankan government defaulted on its loans, is outright false. There was no default. The debt for the port project was not erased either. As Umesh Moramudali points out in The Diplomat, Sri Lanka is still obliged to repay the five loans it obtained from the Exim Bank to construct the port. It did give CMPort, a Chinese state-owned company, a 99-year lease of the port, but it did not use the $1.1 billion received to pay off these five loans. Instead, the “dollar inflow was used to strengthen the country’s foreign reserves and make some short-term foreign debt repayments.” Crucially, as Jones and Hameiri (2020) note in their paper for Chatham House, most of this debt was owed to private investors in international markets — this makes sense, seeing as only two loans of the five in question ($357 million out of $1.2 billion) were obtained at commercial rates (the rest were concessionary). Moramudali adds that “[t]hose loan installments  (including interest) amounted to less than 5 percent of Sri Lanka’s total foreign debt repayments.” In fact, Jones and Hameiri document that, in 2016, Sri Lanka lobbied Indian, Japanese, and Chinese firms to try to lease the port to them in exchange for US dollars — it wasn’t just Chinese firms they were looking at. 

Why did Sri Lanka desperately need the dollar inflow to begin with? In 2016, Sri Lanka was effectively in a state of debt crisis. Between the end of the civil war in 2009 and 2014, Sri Lanka’s total debt tripled. By 2016, debt servicing absorbed 44 percent of government revenues. The economist Saman Kelegama wrote that Mahinda Rajapaksa’s government employed a borrowing-led development strategy, helped by the Fed’s quantitative easing lowering global interest rates in the aftermath of the Great Recession. When the Fed began moving away from QE in 2013, Sri Lanka’s borrowing costs rose, and its foreign reserves shrank due to failed attempts to defend its currency. In short, Rajapaksa’s government placed Sri Lanka at risk of currency crisis, largely due to debt owed to international capital markets, and leasing the port was a way of acquiring dollars. 

Finally, the Hambantota Port was a Sri Lankan project from its inception, not a project proposed by Chinese companies. Hopkins political scientist Deborah Brautigam notes that the idea of constructing a port near Hambantota has been in Sri Lankan development plans for decades, with an early French feasibility study conducted in 2002. In 2006, Brautigam says that Ramboll, a Danish engineering company, “concluded that Hambantota could compete with Singapore’s vehicle transshipment and bulk cargo handling facilities,” and that Sri Lankan business leaders wanted the government to go forward with such a plan.

Many other examples of supposed debt-trap diplomacy don’t hold up to scrutiny either. 

Consider Kenya’s SGR again. Since 2018, there has been an internationally spread rumor that Kenya was at risk of losing the Kenya Port Authority (KPA)’s assets, including the Port of Mombasa (East Africa’s largest seaport). Indeed, a leaked letter from Kenya’s Auditor General warned that the port could be seized if Kenya defaulted on its SGR loans. 

Brautigam, Bhalaki, Deron, and Wang (2022) find that this rumor is false, and their evaluation identifies many mistakes in the AG’s assessment, as well as reports of the leaked letter. For one, they found that the Kenya Port Authority was not named as a borrower, but the AG incorrectly read the contract and assumed they were. Additionally, both the AG and reports ignored strong evidence to the contrary. The KPA’s 2019/2020 annual financial report made it clear that the only risk faced by the KPA was its cash flows, not its assets. Lastly, if ports and similar assets were indeed collateral, the Government of Kenya would have been required to file papers that created a public record of this arrangement, but no such record exists. 

Another major case frequently mentioned is that of Pakistan. As Chellaney puts it in his piece for The Hill,

Saddled with huge Chinese debt, Pakistan has given China exclusive rights, coupled with a tax holiday, to run Gwadar Port for the next four decades. China will pocket 91 percent of the port’s revenues. It also plans to build near the port a Djibouti-style outpost for its navy.

I think there’s a chronological problem in this diagnosis of debt-trap diplomacy. The first phase of the Gwadar Port’s construction happened from 2002 to 2006, at $248 million, and the second phase of construction is occurring right now as part of the China–Pakistan Economic Corridor. The contract for construction and operation of the second phase — the “exclusive rights” Chellaney references — was drawn up in 2013. But 2013 was before most of the rise in external debt to China that Pakistan experienced (since that’s when the CPEC plan even began). So I don’t think this is strong evidence of debt-trap diplomacy, as China didn’t need to put Pakistan in a debt trap to operate the Gwadar Port or pocket most of the revenues. 

Similarly, examples of Malaysia and oil investments in Angola turn out to be exaggerated. In fact, Brautigam and Rithmire say that their “research shows that Chinese banks … have never actually seized an asset from any country.”

The big picture

To be sure, China’s lending often differs in significant ways from many other bilateral and multilateral loans. 

Gelpern et al. (2022) review 100 contracts between state-owned companies and institutions in China and government borrowers, including 47 contracts in Africa (largely south of the Sahara). As a benchmark, they compare these contracts to loan contracts from bilateral creditors within and outside the OECD, regional development banks, and commercial banks, among other major lenders.

They find several major differences between China’s loan contracts and loans in the benchmark sample. First, they often have substantially more far-reaching confidentiality clauses than other loan agreements. Second, 30 of the studied contracts required borrowers to maintain a special bank account, at an approved bank, with certain revenues (e.g., a portion of revenue from the infrastructure projects in question) required to flow into them. These bank accounts were controlled by the lender, and served as security for the loan — in essence, cash collateral. Third, nearly three-quarters of the contracts studied included a “No Paris Club” clause, which requires borrowers to commit to not restructure their debts in the Paris Club. Fourth, many contracts try to give lenders some influence over the domestic policy of countries that receive loans. 

Chellaney argues that the fourth point, in particular, offers evidence of debt-trap diplomacy. This is not very strong evidence, in my opinion, because many of these clauses actually aim to ensure the loan is repaid. One example the authors cite of a clause of attempts to “influence domestic policy” is, “All CDB [China Development Bank] include the termination of diplomatic relations between China and the borrowing country among the events of default, which entitles the lender to demand immediate repayment.” This seems like an attempt to avoid defaults, rather than an attempt to cause them. I do think these clauses are evidence of willingness to exert influence over domestic policy, but it mostly seems like an effort to either insulate Chinese investments against shocks from significant policy changes (“protecting against policy changes,” as the authors call it) or preserve other Chinese investments in the region (“protecting Chinese economic interests, broadly defined”). 

This doesn’t mean the contracts aren’t concerning. In many cases, they genuinely are — making Paris Club restructuring efforts harder, for instance, has mired countries like Zambia in uncertainty about debt relief for years. But I don’t think this represents a very well-coordinated plot. Why? Because China’s development financing system is quite fragmented, rather than coordinated toward common political goals. 

Most of these projects, including their contracts, are undertaken by specific state-owned companies, like CMPort and the China Harbour Engineering Company. In theory, the Chinese government could order an SOE to take on a project for political purposes. But in practice, these SOEs often function in somewhat autonomous ways, as profit-seeking enterprises. 

Jones and Zou (2017) find that, since the late 1970s, the executive’s control over state-owned enterprises has weakened substantially, and relations between the state and SOEs are closer to “weak oversight” than purposeful direction from the center. Even the regulatory oversight over SOEs that does exist often struggles to be enforced. They point to the example of a dam project in Myanmar run by China Power Investment Corporation (CPI), which until 2015 was one of the five largest state-owned electricity producers in the mainland. Simply put, CPI routinely violated regulations and ignored warnings from the national government, including risk-mitigation measures it was directed to implement by the Finance Ministry, the requirement that “SOEs must consult China’s embassies in countries where they are considering projects,” and environmental protection laws, but the regulatory state was so fragmented, it struggled to stop these violations. This resulted in popular resentment against the dam project, significantly dampening Sino-Myanmar relations. While this is a bit of an extreme case, it illustrates the willingness of some Chinese SOEs to pursue profits without much oversight from the state. 

In the context of China’s overseas lending, Jones and Hameiri argue that SOEs do retain a lot of autonomy. For instance, they point to cases of SOEs refusing to build “flagship” projects for the Belt and Road Initiative in Romania and Pakistan when they can’t secure their desired margins. More broadly, even though SOE leaders are appointed by the state, “their performance is primarily evaluated against economic targets,” while the state agency that oversees SOEs is focused on maximizing the value of state assets. They further that these incentives also apply to the two main financiers of these projects, CDB and China Exim. If these institutions are operating with relative autonomy, aiming toward their own profits, or the regulatory state struggles to keep them on a very short leash, it seems harder to believe they’d be willing to sacrifice those profits to create geopolitical leverage for the Chinese state. 

On top of this, while there haven’t been many haircuts or write-offs for countries struggling to repay debt, there really has been a lot of rescheduling — of the 84 credit events Horn, Reinhart, and Trebesch found, in nearly all cases, China was happy to “kick the can down the road” by giving borrowers more time to repay the loan, much like Paris Club restructurings in the 1980s. This is another serious problem. When the Paris Club’s approach to restructuring just involved delaying payments, overindebted countries experienced sluggish growth. As the authors put it, “serial rescheduling would not resolve the debt overhang.” At the same time, it suggests that China isn’t eager for countries to default, or a massive beneficiary of defaults occurring, as the debt-trap diplomacy thesis might suggest. 

Many Chinese-backed infrastructure projects deserve scrutiny — for poor implementation and the frequency of major white elephants, the risks to macroeconomic stability posed by increasing debt and the relative lack of willingness to restructure by reducing said debt’s face value, and perhaps, in Africa’s case, for focusing too much on infrastructure. However, focusing on treating these projects as intentional debt traps is a non-starter.

Thanks to Elizabeth Li, Karthik Tadepalli, Kithmina Hewage, Pradyumna Prasad, Vivian Zhu, and Zi Cheng Huang for valuable comments, although this doesn’t necessarily reflect any of their views.

Unintended consequences and HIV testing

I’m trying to blog more actively, and I figure that a good way to start is to write small pieces about research that I read.

A new working paper by Yang et al. (2021) suggests that interventions that aim to improve awareness about HIV/AIDS can backfire by reducing testing rates.

They start with a theoretical argument. People at higher risk are more likely to get an HIV test. Others might see the decision to get an HIV test as a signal of high risk, and hence choose not to interact with them (stigma). The level of stigma increases if HIV is perceived as more transmissible. Anticipating this, people at higher risk become less likely to take a test as perceived transmissibility increases.

This is an incomplete model in many ways. For instance, a negative test – if that information is made public – could cause people to stigmatize someone less than the average person even if they’re at higher risk, because they aren’t HIV-positive right now. That is one incentive to test. Another is that people might internalize some of the costs of transmissibility – so if, for example, you’re in a relationship, then more transmissibility might increase the benefit of knowing your test result, so you know if you need to take precautions. In such environments, it’s also possible that others can tell whether you’re at high risk through ways that aren’t just testing information.

To help fix some of these problems, they look at a specific PEPFAR-supported program called Força à Comunidade e Crianças in Mozambique. It is “a community-level program that implements home visits to households, as well as complementary interventions in communities and schools.” They test the program’s efficacy in an RCT involving 3,700 households among 76 communities. Half the communities were in a treatment group and half were in a control group, and, among the former, a subset was given stronger encouragement to participate. Using administrative data on HIV tests, the study compared households that received stronger encouragement from within the treatment group and households in the control group on the likelihood of receiving a test two weeks after the endline survey.

They found that “the FCC program has a negative effect on HIV testing: -10.9 percentage points, relative to a base of 26.3 percent in the control group.” Indeed, treated respondents became more likely to believe falsehoods about transmission. But this data doesn’t prove the theoretical argument the paper outlines. They used a different strategy to do that: “Immediately after the endline survey, our research staff then randomly assigned households to a set of ‘minitreatments’ aimed at encouraging further HIV testing, or a minitreatment control group. The different minitreatments provide HIV-related information, seek to alleviate concerns about HIV-related stigma, and provide additional financial incentives for HIV testing.” They find that minitreatments that improve information or reduce stigma can help offset the negative effect of the treatment on testing.

The basic results are here (from table 2, page 40):

This is from Table 2 of the paper linked above, showing the results, finding a negative effect of the treatment, and that minitreatments can help offset this effect.

This doesn’t distinguish between minitreatments, so here’s a table looking at individual minitreatments (from table 5, page 42):

This is from table 5 of the paper on page 42, comparing different minitreatments. The anti-stigma and financial incentive minitreatments all have positive effects, and all the minitreatments except one help offset the negative effect of the treatment.

Perhaps unsurprisingly, the financial incentive – the high-value coupon – has the largest effect on coupon redemption, but the anti-stigma treatment also seems to have a small positive effect. The other minitreatments seem negative in terms of testing, but they do seem effective at offsetting the negative effects of the treatment.

This research also raises some potential ethical concerns about RCTs – is it ethical to subject people to treatments that could be negative? I’m not compelled by the ethical objection to RCTs here, since this is a program that exists anyway and information about how we respond to it is useful. I’ll also note that HIV testing is only one variable, so we can’t automatically conclude the treatment is negative.

I found this paper an interesting example of well-intentioned policies not aligning incentives well enough.

Minimum wages in a monopsony

A well-known result in microeconomics is that a monopsony in a labor market produces a deadweight loss (assuming it does not wage-discriminate), leading to the counterintuitive result that some binding minimum wage levels might increase both employment and wages. 

A graph illustrating the welfare costs of a monopsony.
The deadweight loss of a monopsony. CC BY 2.5 (, SilverStar at English Wikipedia.

(I promise we won’t be talking about this graph at all. It’s just for the aesthetic.)

When initially learning economics, I found it hard to grasp this concept intuitively. I recently consulted Perloff (2020), Varian (2014), Landsburg (2013), and other textbooks searching for an answer that explained this without mathematics or graphs and didn’t find anything – so I thought I would try to articulate my understanding of this. I’m not sure this explanation is correct: it’s just my attempt at roughly translating the math to English, and I would appreciate if anyone could correct me on inaccuracies. 

A monopsonist is a single consumer of a good or service, often in a market with many suppliers. In a labor market, that is a single employer, with many workers willing to supply their labor. 

In a competitive market (i.e., many employers and prospective employees), standard economic theory suggests that imposing a binding minimum wage would decrease employment, because firms would lay off workers to compensate for the increased cost of labor. The empirical research is mixed on this question (and indeed, on the question of whether labor markets are competitive or monopsonistic/oligopsonistic). Here’s a good post on this subject by Trevor Chow.

A monopsonistic market – as you may have guessed – is more complicated. So let’s (re)build a model. I’ll outline some assumptions first. This is a single labor market – for example, a labor market in a particular type of worker (someone who does the same job). The employer pays every employee of this type the same wage. This seems reasonable – since workers do not have an incentive to accurately report their reservation wage (the lowest wage at which they are willing to work), a monopsonist does not have a metric by which to wage-discriminate. Furthermore, there are tangible barriers on many blue-collar employers from wage discriminating – including unions, legislation, fear of backlash, common labor contracts, and so on.

Back to a competitive labor market for a moment. In a competitive labor market, with many employers competing for workers and many employees competing for jobs, the wage in the market will end up (1) being the same and (2) equalling the marginal revenue product of labor (MRPL, which is the marginal increase in revenue from hiring an additional worker). (1) is true because if one employer pays a higher wage, every other employer will lose out on workers and be forced to raise their wages. If one employer pays a lower wage, they will either lose access to their workers (forcing it to raise its wage) or operate at a higher profit than others (forcing others to lower their wage). In the end, wages will normalize to be about the same. This is the Law of One Price. (2) is true because an employer is making a loss if the wage is significantly above the MRPL, while if the wage is significantly below the MRPL, the worker will find an alternative job (since there are many employers competing). 

This isn’t true in a monopsonistic labor market. If workers have no (or few) alternatives, then an employer will pay a wage less than the MRPL – because they can. This is a simple syllogism: the profit-maximizing wage for a firm with no competition is less than the profit-maximizing wage for a firm that does compete for workers, and we’ve established that the profit-maximizing wage is the MRPL for a firm that does compete. Now, remember: the MRPL is how much the firm values the worker (approximately) – it is how much a marginal worker would bring in. But a firm has chosen a profit-maximizing wage less than how much it values a marginal worker. That suggests that there are workers willing to work for a wage just incrementally below their additional revenue product, but who are not willing to work at the monopsonistic employer’s current wage. The monopsonist has a choice. Either they raise wages for everybody (since wages have to be the same, per our assumptions) to get these people to work, or they don’t hire some workers (hiring whom would give them a surplus) because it would mean raising the costs of keeping everyone else. Hence, many monopsonists would choose not to hire these workers.

This is a deadweight loss. There is a trade to be made that, on its own, would benefit both parties – the workers would get a job a bit above their reservation wage and employers would hire people a bit below how much they value their work. However, the implication it has for the wages of other employees (whom a monopsonistic employer can afford to pay below the MRPL) means the employer doesn’t maximize a profit when it hires everyone willing to work at below the employer’s value for a worker. 

You can now see how a minimum wage set at the MRPL would likely increase employment for such a monopsonist. If the government sets a binding minimum wage at the MRPL for each worker, then a monopsonist would have to pay all its existing workers the MRPL. That means hiring these new workers does not mean raising everyone else’s wage – so the monopsonist makes the decision on whether to hire a new worker solely on whether the wage they’re willing to accept is less than the value they offer the monopsonist. Since there are some workers who meet this condition who were not hired earlier, they are hired now.

This also means a minimum wage set a bit above the MRPL has an ambiguous effect on employment. It has two counteracting effects – one increasing employment and one decreasing it, and which one of these effects dominates depends on how high the minimum wage is set. 

Beef bans likely reduce animal welfare

[Note: Beef bans probably significantly diminish human welfare, because, in some contexts, beef is a cheaper meat than many alternatives, because beef is a key export, and because beef bans are often targeted at particular minority communities, increasing resentment and legitimizing actions such as lynchings. This post, however, is not about human welfare—it looks at the very specific issue of how beef bans impact animal welfare.]

[Update below.]

Many Indian states and cities have implemented bans on the production and sale of beef (but not of other forms of meat), on predominantly religious (and majoritarian) grounds. Poorva Joshipura of the People for the Ethical Treatment of Animals argues in favor of these beef bans in India on the grounds that they advance the welfare of animals.

I disagree. I think beef bans, on net, diminish the welfare of farmed animals.

Why? Because beef is a substitute in consumption for other goods—including pork, goat, and chicken.

Much of Joshipura’s op-ed assumes that, in the presence of a beef ban, people will replace beef with vegan food. On an intuitive level, that seems unlikely. All else being equal, people who lose access to one good try to replace it with a good that’s a close substitute. Other meats are a closer substitute for beef than vegetarian and vegan food. When a beef ban reduces the quantity of beef supplied (assuming no black market formation, it reduces it to zero), the demand for other meats, which are often more common (e.g., chicken), increases, raising the equilibrium quantity.

There is empirical evidence for this as well. Reuters reports that many firms, anticipating bans on beef in Maharashtra, were considering increasing production by 5–8 percent back in 2015. By 2017, that change was far more substantial. According to The Hindu, the equilibrium quantity of chicken rose by 35–40 percent nationally in light of beef bans throughout the country.

On average, this reduces the welfare of animals. (Note that since the policy proposal here is a beef ban, we don’t have to take into account supply elasticities.) Two reasons. First, on a pound-for-pound basis, equal amounts of beef and chicken have vast disparities in terms of the number of animals that suffer and die. This is fairly intuitive. Cattle are larger than chickens. A single beef cow, on average, produces 212 kilograms in edible meat (out of a total weight of 544 kilograms), according to data from the 2017 version of this report. On the other hand, a single chicken raised for meat, on average, produces 1.35 kilograms of edible meat (out of a total weight of 2.5 kilograms). This needs to be adjusted for lifespan, however. Chickens farmed for meat, on average, live 42 days, whereas beef cattle live 395 days. Thus, per kilogram of meat, the number of days of life lost for a chicken is 42 * 0.74 = 31.08 days, whereas for a cow, it’s 395 * 0.0047 = 1.86 days. Since -31.08 < -1.86, ceteris paribus, eating beef is worse (unadjusted for (a) moral weight and (b) quality of life, both of which I’ll get into soon).

Second, the quality of life of smaller animals such as pigs and chickens are worse than that of cattle raised for beef. Joshipura’s article describes quite vividly the suffering beef cattle go through. It doesn’t match the suffering chickens go through. This paper makes some comparison. Brian Tomasik estimates that a chicken goes through 1.8 times more suffering than a beef cow, on average, even after adjusting for lifespan.  

There are two common objections to this. The first is that cattle have more moral relevance than chickens. This may well be the case, but it doesn’t seem intuitively true that one cow’s life is morally more relevant than 212/1.35 = 157 chickens. The differences in the extent to which these animals can experience suffering aren’t nearly as high. Brian Tomasik is more charitable—and more rigorous—than me, and says that only if you think a cow can experience more than forty times as much suffering as a chicken would the moral weight you assign to a cow relative to a chicken make a difference as far as maximizing animal welfare (measured in utilitarian terms) is concerned.

The second common objection is that beef farming is more environmentally harmful and that environmental harms increase animal suffering. Scott Alexander responds to this:

Some quick calculations: average American eats about 100 kg of meat per year. If that’s entirely beef, then that produces greenhouse gases equal to 8000 lbs CO2 (note unit conversion), which can be offset for $0.40 at carbon offset sites.

If it’s entirely chicken, then that adds up to about 100 chickens per year.

So if one chicken worth of animal suffering seems more than 40 cents worth of bad to you, you should go with beef.

I think it’s at least a bit weird to measure the extent of negative effects of pollution by the amount of money it takes to prevent it rather than the monetary loss it creates, since most people who eat beef aren’t spending money on carbon offset sites—but it does indicate that the environmental harm of beef doesn’t really stack up to the suffering this policy would induce on chickens, especially since chicken farming hurts the environment too.  

Some caveats:

(1) This does not take into account wild animal suffering at all, since the effects of meat consumption on wild animal suffering are deeply unclear.

(2) This analysis needs more rigor because it needs to take into account cross elasticities across beef and chicken—in other words, it needs more evidence on how much chicken production increases due to beef bans, and needs to factor that into the (implicit) animal welfare function I’m using.

(3) This analysis needs to consider non-chicken substitutes, such as pork and goat, but also buffalo meat.

(4) There is insufficient evidence on the extent of suffering the average chicken goes through in comparison to the average beef cow, especially since cattle have to live longer lives, on average.

(5) Further research into how much suffering the environmental impacts of beef would create when compared to the environmental impacts of other meats is necessary.

(6) This also doesn’t take into account negative effects on the cattle themselves. As Lewis Bollard briefly points out in his interview with Rob Wiblin, “[W]hat happens when these slaughter bans get passed at the same time as the Indian dairy industry is rapidly growing is huge numbers of surplus cows that can’t be legally slaughtered [are] either smuggled long distances to be slaughtered or they’re dumped in these sanctuaries where they will slowly die or won’t receive medical treatment.” I’m unclear about whether this outweighs the long-term impact of reduced beef consumption on the welfare of cattle.

(7) Lastly, most beef bans serve as bans on all cattle slaughter. This article doesn’t look at cattle slaughter and suffering in the leather industry, where there is no such substitution effect; but overall bans on cattle slaughter do have a substitution effect, so this doesn’t significantly adversely affect my argument.

However, on the margin, I think the evidence is fairly consistent with the notion that beef bans reduce animal welfare, measured in utilitarian terms, other things being equal.

Note that this should also affect your personal choices, in contexts where beef isn’t banned. Consuming chicken, pork, lamb, goat, farmed fish, or even eggs is likely worse—on a moral level—than consuming beef or wild-caught fish. While the ideal option may be to go vegan or lacto-vegetarian—I’m vegan myself—it would be prudent for people who consume meat to change their eating habits to make it more ethical.

Update (May 30, 2019):

I just discovered some further responses to the argument that beef production is worse for the environment. First, methane—the main source of environmental pollution unique to ruminant livestock such as cattle—is a short-lived greenhouse gas. This means that, in the long run, the effects of beef production on the environment significantly reduce. Second, Julian Baggini of The Guardian writes an article criticizing a proposed tax on red meat. There, they explain, “Most industrially produced meat is raised on imported feed made from crops such as soya, heavily dependent on commercial fertilisers and irrigation, often grown on woodland and forest cleared for cultivation. In contrast, properly pasture-reared animals feed on grasslands unsuitable for arable farming, watered by the clouds. These animals don’t depend on fertilisers further down the food chain, they actually provide manure for crops. If we were to tax red meat, many people would switch to more poultry, which is almost always reared on feed, adding to our burden on the planet.” This would apply to a ban on red meat such as beef as well.

Contra Mankiw on political philosophy

Harvard economist Greg Mankiw, someone I greatly respect, wrote an article for The New York Times a few years ago on the political philosophy of economists. The thesis of his piece is two-fold.

First, he says that any economist making a normative judgment—much like any normative judgment made by anyone else—is also assuming a particular political philosophy. Often, they look at what maximizes “social welfare,” measured in utilitarian terms. That’s a value judgment about political philosophy and not an assumption that can be taken for granted.

Second, he offers an alternate political philosophy which he calls a “do-no-harm principle” that is entailed, according to him, by epistemic humility. In his own words:

So, what is the alternative? At the very least, a large dose of humility is in order. When evaluating policies, our elected leaders are wise to seek advice from economists. But if an economist is always confident in his judgments, or if he demonizes those who reach opposite conclusions, you know that he is not to be trusted.

In some ways, economics is like medicine two centuries ago. If you were ill at the beginning of the 19th century, a physician was your best bet, but his knowledge was so rudimentary that his remedies could easily make things worse rather than better. And so it is with economics today. That is why we economists should be sure to apply the principle “first, do no harm.”

This principle suggests that when people have voluntarily agreed upon an economic arrangement to their mutual benefit, that arrangement should be respected. (The main exception is when there are adverse effects on third parties — what economists call “negative externalities.”) As a result, when a policy is complex, hard to evaluate and disruptive of private transactions, there is good reason to be skeptical of it.

He then proceeds to apply this principle to the Affordable Care Act and the minimum wage:

As I see it, the minimum wage and the Affordable Care Act are cases in point. Noble as they are in aspiration, they fail the do-no-harm test. An increase in the minimum wage would disrupt some deals that workers and employers have made voluntarily. The Affordable Care Act has disrupted many insurance arrangements that were acceptable to both the insurance company and the insured; these policies were canceled because they deviated from lawmakers’ notion of the ideal.

I agree with him that anyone making normative judgments is assuming a certain political philosophy. Notice that his “do-no-harm” principle is also a political philosophy—and not one that’s somehow less controversial than utilitarianism. For one, it isn’t prima facie clear to me that people should be allowed to make decisions that hurt themselves. In fact, whether the state should legislate to prevent self harm is a key source of debate among political philosophers.

For another, the fact that a contract exists and was signed by both parties does not necessarily make it truly voluntary. For a truly free choice to exist, I would argue that certain conditions must be met.

First, I think that, for a choice to be truly free, people should be given access to full information. If there’s a significant information asymmetry, then a person is making a choice without knowing what options exist and what the implications of their choice are. That sounds, intuitively to me, like a coerced choice. And there are good reasons to believe that the market for health insurance. In fact, Professor Mankiw made this argument about health insurance himself:

Consumers often don’t know what they need. In most markets, consumers can judge whether they are happy with the products they buy. But when people get sick, they often do not know what they need and sometimes are not in a position to make good decisions. They rely on a physician’s advice, which even with hindsight is hard to evaluate.

And consumers are often unaware of the possibility that they might get sick. In fact, people are empirically really poor at making long-term calculations. Here’s some research to prove it. And here’s a meta-analysis of the literature. And often, information about the likelihood of getting specific illnesses—and the question of whether those illnesses are covered by insurance—exists with insurers but not with consumers. That’s an Econ 101 case of asymmetric information that renders free choice not truly free.

Second, people should have access to many options—or at least, more than a few bad options, at least if this is possible or if government intervention can cause this to occur. If they don’t have options, then them choosing the only option they have available is certainly not ideal—the state should seek to expand the options they have. The labor market is a good example for this. A person chooses to work a low-wage job because that’s the only option they have available—they’d rather a higher wage job. A minimum wage opens this option up to them and doesn’t force them to rely on a $3/hour wage.

Now, Mankiw would likely object to this in two ways. First, he could say that both the suppliers and the demanders should have their choices maximized—a minimum wage removes the freedom of employers. The problem with this is that it potentially doesn’t take into account imbalances in power. Minimum wages often exist in industries where the demanders—employers—have substantial market power. Here, trades between workers and employers aren’t as free as they could be, and minimum wages can help make them free in that context. Second, he could say that minimum wages reduce the options available as firms simply reduce the number of workers available. I agree that that’s a possibility—but now that becomes an empirical question, and not one of political philosophy. My point is simply that a “do-no-harm principle” doesn’t necessarily entail the abolition of the minimum wage.     

In short, I don’t think Mankiw’s proposed political philosophy is any more obvious than utilitarianism, and doesn’t necessarily entail opposition to Obamacare or the minimum wage. Economists do use political philosophy in making normative judgments—I think that’s true and is entailed by the definition of a “normative judgment”—and I agree that we need to be more cautious about assuming the truth of utilitarianism. What I disagree with is his proposed alternative, which seems (at least to me)—and I may very well be wrong here—to run into the very same problems he critiques in his op-ed: assuming a debatable political philosophy without much justification.