Chris Blattman

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A tale of two economies

There are essentially two beers in Liberia: Club, brewed in Liberia, and Heineken, which needs no introduction. Funnily enough, all of the non-African ex-pats seem to drink Club, and all of the Africans–native Liberians as well as the West African peacekeepers–drink Heineken. The best explanation I can think of: Westerners get positive utility from drinking a beer they think helps the local economy; locals get positive utility from consuming anything that is non-Liberian. I suppose West Africans could simply like the taste better, but my gut says no.

The dichotomy reminds me how, in most developing countries, there is a dual economy—one for local goods and services where prices are extremely low, and one for luxury goods and services (nice hotels, ex-pat food, taxis) where you pay near-Western prices. It’s a perfect example of price discrimination at work.

(Come to think of it, there’s the same thing in Manhattan–one world for I-bankers, and one for the rest of us mere mortals. But I digress.)

In war zones (and post-war zones), the dual economy is even more dramatic. With low levels of investment, costly transport, and a low starting stock of luxury goods (e.g. hotels with screens on the windows) these price differentials with the outside world–even the rest of the country–can be very persistent. Arbitrage opportunities persist for years in some cases.

In northern Uganda we had a three bedroom home and office that cost us about $1000 a month, and it was considered a steal. $1000 per month, in a small town, in the middle of nowhere! The alternative was a small or cramped room somewhere for about $30 a month. Unfortunately, it was nearly impossible to be a foreigner and not pay at least 10 or 20 times the local rate. Especially for an office. New buildings are coming up at a quick pace to meet the demand, but new NGOs are moving in even faster. The place is a circus.

In Monrovia, however, the schism between the two economies was, for me, unprecedented. Hotels cost either $5 or $125 a night. Meals cost either 25 cents or $35. No middle ground to be seen.

The only thing priced the same in both markets is beer–a quasi-luxury good that both locals and ex-pats enjoy and (no matter your groups’ preference is for Club or Heineken) I suspect the substitutability between brands is high.

All international development activities generate these dual economies, but peacekeeping missions can be especially inflationary: so many troops, staff and procurement in a such a short space of time.

A recent study has tried to quantify the macroeconomic damage and unintended consequences of PK missions. It’s a good read.

The overall conclusion of this study is that United Nations missions do more good and less damage, in economic terms, than is commonly believed:

  • there is an immediate upsurge in economic activity associated with the restoration of basic security;

  • spending from international staff allowances, local procurement and on national staff wages provides a stimulus to the local economy; and

  • the perception of widespread inflation is not borne out—some price rises occur in parts of the economy servicing internationals, and wages for scarce skilled labour increase.

These impacts on the skilled labor market and the urban housing industry should not be dismissed. In northern Uganda, it was very difficult for small civil society organizations and small outside groups (like our research project!) to match UN salaries.

Even though there was excess labor, the fact that some international organizations were paying higher wages for similar (and often easier work) made it very difficult for us to pay something closer to the local wage. Overtime pay and exceptionally generous allowances for travel were introduced by the UN, raising the expectations of all other workers.

I hope I don’t sound like a cruel 19th century capitalist squeezing poor people out of wages. These labor market distortions can be extremely damaging. If they exceed the returns that can be had locally from other socially or economically productive activities, it can depress development. In the extreme case, the UN creates incentive to create less business (and wealth) and more paper-pushing technocrats.

Of course we and other small organizations and businesses did not have to match these exorbitant increases, but the disparity did generate discontent. Norms and expectations matter. In the end, small operations end up with inflated wage bills and high operating costs, meaning less money goes to the beneficiaries they are trying to serve.

The report agrees, and argues that these wage effects can be persistent, distorting skilled labor markets long after the missions are over, inhibiting development. It also has many good suggestions on what to do. Ending some of the silliest salary-setting practices is up there. I find it impossible to believe that any of these reforms will ever see the light of day, however.

But back to my expensive Monrovia meals. On the occasions we coughed up for the $35 meals, I consoled myself with the fact that at least I was eating squid, fish, lobster and shrimp caught just off the coast.

I was soon to be disappointed, however. At one meal, I asked for a mixed platter of shrimp and squid, rather than simply one or the other. “Oh no,” said the waiter, “we can’t do that. They come in individual bags.”

That’s right. Sitting on one of the finest stretches of coast in Africa, with rich fields of shellfish, squid and fish mere kilometers away, and all of my meals were being flown in frozen from Belgium and Atlanta.

I’m hoping that the fisheries industry recovers before my next visit.

4 Responses

  1. More on the African luxury goods market – I heard a bit on CBC Radio yesterday afternoon about how luxury SUVs stolen here (in Toronto) are actually being shipped to Nigeria, because they sell for about three times as much there.

  2. Another comment on the fish, I found that in Ghana it is impossible to find good tuna. It’s all low quality and shipped from either the US or Europe. Yet, off the coast of Ghana is some of the best tuna in the world. Some Japanese boats go all the way there to illegally catch the tuna. But there are also a lot of Ghanaian fisherman catching as well. So why no decent tuna in Ghana? Because its worth too much. They get more out of exporting it than eating it themselves. My guess is that all that nice Liberian seafood is in fact exported far far away.

  3. Don’t blame it all on the UN – many small NGOs do add up, and can have a significant impact.

    As for the fish (and Africa more generally) there is always more than meets the eye – many of these waters are poorly regulated, international trawlers trawl at will and so, in fact, stocks are more depleted that in the English Channel.

    Oh, and that beautiful beach – it might be polluted by PCBs dumped from some international garbage disposal fly by night company…. You might be better off in Naples…

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