Wednesday, December 31, 2008

Eight best economists of the next generation

The Economist magazine names the eight best economists of the next generation:

  1. Jesse Shapiro, University of Chicago
  2. Roland Fryer, Harvard University
  3. Raj Chetty, Harvard University
  4. Xavier Gabaix, New York University
  5. Marc Melitz, Princeton University

Clearly, Esther Duflo is the star in the list!

Esther Duflo of the Massachusetts Institute of Technology (MIT) received more recommendations than any other economist. Some who didn’t nominate her thought she was too established to count as “new”.

With her colleague, Abhijit Banerjee, Ms Duflo and Mr Kremer have remade development economics, nudging it away from its concern with policies, towards a preoccupation with projects. They study economic development as seen from the field, clinic or school, rather than the finance ministry. They might be called the “peace corps” of economists, bringing the blessing of their investigative technique to the neglected villages of India or the denuded farms of western Kenya.

Ms Duflo has made her name carrying out randomised trials of development projects, such as fertiliser subsidies and school recruitment. In these trials, people are randomly assigned to a “treatment” group, which benefits from the project, and a “control” group, which does not. By comparing the average outcome of each group, she can establish whether the project worked and precisely how well.

More about Duflo here. She answered my question here in September.

Possibilities of global recession and regime change in Zimbabwe in 2009

The FT sketches some of the main upcoming events in 2009. Hot in the list are recession in 2009, rock-bottom interest rates, exchange rate renminbi vs. other currencies, price of oil, the role of state, New Deal, Cuba, Mugabe, and artificial life, among others.

Will the recession end in 2009?

No, as far as the US, the UK, Spain and Ireland are concerned; possibly Yes for other European economies and Japan. Whatever happens, 2009 will not be pleasant. For all the cuts in interest rates and taxes, higher unemployment will be the dominant issue of the first half of the year, outweighing gains to real incomes from these policies and lower commodity prices. Uncertainty will be the watchword for the year, making any prediction precarious, but there is still a good chance that rising incomes will become powerful forces in the continental European and Japanese economies later in the year. For those economies that need much bigger rises in household savings rates to adjust for the recession, recoveries will be delayed. There is also a good chance the world will enter a debt-deflation trap, although I hope the authorities will do everything to avoid this. But even if we experience genuine green shoots of recovery, as I expect, 2009 will be a year to forget. Chris Giles

Will Mugabe go in 2009?

“Only God who appointed me will remove me.” Thus spoke Robert Mugabe after refusing to bow to the ballot box earlier this year. Tragically, there is no reason yet to think he is wrong.

No amount of huffing and puffing in London and Washington will bring about regime change. Nor will southern Africa take decisive action, although images of starving Zimbabweans stumbling across the border will force Pretoria to toughen up its talk.

Starving people, though, make poor revolutionaries and Mr Mugabe still exercises a mesmerising authority over the better fed members of his own coterie, which militates against a palace coup. Low as it is already, Zim­babwe can fall much lower in 2009. Only natural or divine causes will remove the man so determinedly taking it down. William Wallis

Tuesday, December 30, 2008

Liquidity trap and optimal fiscal policy

Following New Keynesian Economics models, Krugman sketches out a model where he shows the optimal fiscal policy (increasing government expenditure up to the point where full employment is maintained) when the economy is in a liquidity trap.

…when the economy is in a liquidity trap government spending should expand up to the point at which full employment is restored. That’s not a guess or a statement of personal preferences, it’s a result.

The basic intuition behind this result is that when the economy is in a liquidity trap, the social marginal cost of government spending is low, because there isn’t enough private demand to fully employ the economy’s resources. This means that we would normally expect more government spending to raise welfare, right up to the point that full employment (a concept that needs a bit of explanation here) is restored. At that point the marginal cost of government spending jumps up, because it’s diverting resources from private spending.

What I’ve illustrated here is the marginal cost and benefit of government purchases of public goods in and near a liquidity trap. The marginal benefit is presumably a downward-sloping
curve. If G is low, so that monetary policy cannot achieve full employment, the marginal cost of an additional unit of G is low, because the additional government purchases don’t crowd out
private spending. Once G is high enough to bring full employment, however, any further rise in government purchases will be offset by a rise in the interest rate, so that extra G does come at the expense of C, implying a jump in the marginal cost.

As the figure suggests, there should be a fairly wide range of situations in which the optimal level of G is precisely the level at which the marginal cost jumps – that is, the optimal fiscal
expansion is one that brings the economy right to full employment.

…The bottom line here is that while we usually think of Keynesianism as the preserve of ad hoc models, in this case doing it “right” – using a macromodel with maximizing agents and a proper concern for intertemporal constraints – actually suggests a very strong case for big government spending in the face of a liquidity trap. When the economy is depressed and monetary policy can’t set it right, the true opportunity cost of government spending is low. So let’s get those projects going.

The year 2008 in review- the WB version

Here is WB’s review of the year 2008

Monday, December 29, 2008

YCL and load-shedding fall heavy on the industrial sector

The Maoists militant youth force, YCL, and 13 hours of load-shedding in Nepal is taking toll on the industrial sector. Lack of energy and YCL’s campaign to close down industries by putting unjust demands that are beyond the rich of the fledging industrial sector are forcing industries to close down.

Global economics crisis, moribund garment and textile industry, energy crisis, threats to property rights, lack of appropriability (private), high inflation rate…the list of problems in the Nepali economy is never-ending…The last thing Nepal needs now is YCL’s politically motivated rage and labor unrest.


UPDATE: THT reports that the industrial sector is in fact feeling the heat of YCL’s excesses pretty intensely!

With increase in load-shedding hours in the country, up to 50 per cent of the productivity has been cut. “Serious alternative measures should be taken immediately to prevent the collapse of industries,” he recommends to the government.

Sunday, December 28, 2008

Resource curse and reversal of (corrupt) contracts

The latest democracy to be a victim of a coup d’├ętat is Guinea, a country rich in natural resources, mainly bauxite, gold, diamonds, iron and nickel. Nearly one-half of the world’s bauxite reserves is located in Guinea.

After overthrowing the elected administration, following the death of a repressive president, the army officials announced that they are going to review mining contracts and stamp out corruption. Actually, stamping out corruption and holding new free and fair election have been favorite lines to justify coups.

Without naming firms, Capt Moussa Dadis Camara told a public meeting in Conakry that any contracts found to be "defective" would be revised.

He outlined his view of the mining sector, which has attracted billions of dollars in investment from international firms.

"We have blocked the mining sector," he said. "There will be a renegotiation of contracts."

Without naming names, Capt Camara vowed to eradicate corruption, saying: "It was the government officials who surrounded the [late] head of state who looted the country."

"Anyone found guilty of corruption will be punished," he added. "Anyone who has misappropriated state assets for his benefit, if caught, will be judged and punished before the people

The junta thinks that there is massive corruption and unfair contracting in the mining sector, its main revenue base. So, it wants a review of unfair deals. Good! But free and fair review as is stated by juntas rarely happen. In Russia, Venezuela, and Bolivia, the governments reviewed contracts in favor of their cronies, often forcing foreign companies to leave the country. Leaders start with good intentions but things take a different turn later on due to inefficient administration and weak regulatory bodies.

Most of the resource-rich countries are marred with corruption because contracting is often done without following normal procedures or by bypassing regulations. Also, nepotism and favoritism is a common feature in countries rich in natural resources. Moreover, coup threats are also high. This means natural resource abundance leads to slower growth. See this paper.

Here is a paper about political foundations, resource curse, and the importance of solid institutions:

(1) politicians tend to over-extract natural resources relative to the efficient extraction path because they discount the future too much, and (2) resource booms improve the efficiency of the extraction path. However, (3) resource booms, by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections, increase resource misallocation in the rest of the economy. (4) The overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes. Countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create. Countries without such institutions however may suffer from a resource curse.

Saturday, December 27, 2008

A wonderful Xmas gift: 13 hours of load-shedding in Nepal!!

12-14 hours of load-shedding. That’s a Xmas gift from the government to the Nepali people!

Faced with acute shortage of power in the country, the government declared “power crisis” in the country. This means use of electricity on hoarding boards is banned. Too bad for the advertisement industry! The government has encouraged use of compact fluorescent lamp (CFL). It has also given subsidies on import of such lamps, initiated generation of 200 MW electricity from thermal plants, and is trying to import electricity from India. There is a shortage of 3.8 million units of electricity in the country. Moreover, the government has waived red tapes for investors willing to immediately invest in power plants below 50 MW.

Why so late? Why did not the leaders heed to this impending crisis earlier? Corruption? Lack of visionary leaders? More here. Compare the state of energy production in Bhutan and Nepal and you’ll realize how messed up is the political system in Nepal to forge a consensus in a unified energy plan for the country. Note that, Nepal has a comparative advantage in the production of hydro electricity. Why not exploit it rather than scrambling to resuscitate the beleaguered export-oriented firms?

Assessments needed:

[1] the fallout of power crisis on the advertisement industry

[2] the effect of [1] on advertisement revenue for newspapers and online news portals

[3] the effect on price of diesel due to increase in demand for use in thermal plants

[4] the effect of this crisis on the industrial output

[5] the effect of this crisis on FDI

[6] the effect of this crisis on private sector demand for new hydropower plants

[7] the effect of this crisis on the price of alternatives like candle, lamp, biogas generation

Thursday, December 25, 2008

The mechanics of growth

Abhijit Banerjee explains the mechanics of growth:

The problem is that for a business to rise beyond its many competitors—the thousands of fruit vendors in Chennai---it has to have something special about it: The product (P) must be different or the quality (Q) must be especially high, or the firm must have special reputation for reliability (R) or the scale of operations (S) must be large enough to generate significant cost savings. And each of these requires a combination of special skills and substantial amounts of money, both beyond the reach of all but a few poor or even not so poor business owners.

It is these PQRS businesses that generate the good jobs that other aspire to, and the earnings that come out of them lead to other businesses and so on. This, to a first approximation, is my vision of the process of how growth happens. It is what China has managed to do very successfully and Africa will have to find a way of doing.

Consider this particular feature of self-employed, self-sustaining, (and stagnant at lowest equilibrium)  business model in the developing countries (“follow-the-herd” business model):

It turns out that the businesses of the poor are also poor businesses: The typical business has zero paid employees and no machines in almost every country where we have data and where we have the information to be able to calculate this, what the household earns from the business is less than what they would earn on the lowest end of the labor market. They are in effect buying a job and not particularly good job at that.

Isn’t this just a reflection of the fact that they do not have enough capital to run a proper business? Yes and no. These businesses are certainly undercapitalized, but the businesses of those who are significantly richer (those who live on $6 to $10 a day, for example) really do not look all that different from these. Moreover the amounts of money invested in these businesses are so tiny that a family living on three or four dollars a day per capita, could easily double or treble their capital stock in a year by simply halving what they spend on tea or cigarettes.

Dean Karlan and Sendhil Mullainathan, in a recent paper, put this point rather starkly. They study fruit vendors in Chennai, India, who make about two to three dollars a day by buying fruit in the morning on credit and paying it back at night. It turns out that the interest rate they pay is 5% per day and at that rate, saving the ten cents they spend on tea for just one day would allow them to pay back their entire loan in six months (the power of compound interest) and add a dollar a day to their earnings. Yet most of them seem to be permanently stuck in their business model.

More praise for Keynes

Martin Wolf writes, “We are all Keynesians now.” [This exact sentence was used by Krugman and Stiglitz in the beginning of their past columns. In fact, this has been a popular starting sentence among writers who want to discuss the connection between Keynesianism, present financial crisis, and increasing government spending in the economy!]

Three relevant Keynesian stuff, according to Wolf:

The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”.

The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.

I like the second one: that economy cannot be analyzed in the same way as an individual business. This also means sum of individual units does not equal to a whole, i.e. the sum of outputs generated from self-interested individual’s actions does not equal to the output generated from one big player’s action. Micros do not add up to macro!!

And, very nice (and comforting) words about Keynes:

Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.

…Yet Keynes would have insisted that such approaches are foolish. Markets are neither infallible nor dispensable. They are indeed the underpinnings of a productive economy and individual freedom. But they can also go seriously awry and so must be managed with care.

Again, not that Keynes did not say markets don’t work. He said markets do not always work, so government should fill the gap. He treated markets and governments not as substitutes but as some form of complementary forces.

Here is an old article from Time magazine, which put Keynes’ picture on its cover page and named him Person of the Year in 1965. More here.

Wednesday, December 24, 2008

Economic impact of AIDS and policy interventions

Devarajan and Goldstein discuss how economics can be used to fight AIDS. Economics matters because it involves allocating scarce resources to multiple uses in the fight against AIDS.

Noting that earlier work on the economic impact of AIDS, which treated it as a shock to labor supply, showed only mild effects, we pointed to recent work that examined the effects on the transmission of human capital across generations (parents’ providing for their children’s education, for example), which showed much larger effects on economic growth—including the possibility of an economic collapse in three or four generations.

More here. One interesting stuff they discuss is the outcome of various policy interventions in the fight against AIDS. Training program for teachers in Kenya was the most expensive among all the interventions but it produced no significant reduction in teen pregnancy. However, information campaigns for Kenyan teenagers to learn about high HIV prevalence among adult males was the least expensive and it produced 32% drop in teen pregnancies.

Tuesday, December 23, 2008

Nepal Maoists’ civilian militia wages war against the independent media

They did it again! In fact, they did, have been doing, and will do it repeatedly till they shed off militant mentality!!

The Maoists’ war against the media is reaching its apogee. The Maoists, who are currently running the government, affiliated trade union stormed the building of Himal Media, which publishes the popular Nepali Times and Himal Khabarpatrika, and beat up the journalists and vandalized their office. The media house has been particularly critical of the Maoists’ excesses, especially its trade union and militant youth organization named as YCL. These two extralegal organizations lack discipline, have been terrorizing industries and business executives at a time when the whole industrial base in grounded due to domestic inefficiencies and global recession, and are pretty much above the law.

Several journalists were injured when the police baton charged a peaceful rally against the excesses of the Maoists’ affiliates. The UN, human rights organizations, civil society, and other media houses have condemned the supererogatory acts of the Maoists.

It is ironical that the Prime Minister Prachanda, the chief of Maoists party, who parrots media freedom and rule of law, has declined to admit that his party’s militant miscreants were responsible for the heinous act against the media. This is surprising because almost all the reports that came out yesterday clearly mentioned two names closely associated with the ruling Maoists-affiliated unions and personnel. The government’s spokesperson and communication minister says he is oblivious to the marauding act of its cadres (all the major newspapers published news condemning the act…does the communication minister follow newspapers?). What a HYPOCRISY?

Get it straight: The Finance Minister is parroting high revenue and growth for the country. However, he fails to realize that foreign investors are scared to invest in Nepal due to YCL’s and the Maoists Unions’, who have demanded higher minimum wage and better working conditions that is beyond affordability given razor thin profit margin of the industries. Many garment firms have already disappeared and the few remaining are on the verge of closing down due to labor problems and lack of price competitiveness. Imposing a higher minimum wage means increase in cost of production, which will further erode price competitiveness and could potentially lead to wiping off of the whole garment and textile industry.

Furthermore, if exports and imports decline, then the expected revenue collection would be a day-dream. One can imagine how much loss the country will have to endure do to the crisis. The ADB has estimated that one day of industry closure (due to bandhs and industry closures) costs at least $100,000 to the state coffers. Add the 10-plus hours of load-shedding every day and its impact on the manufacturing sector, you will discover that the total loss would be much more than the one hundred thousand dollars. My preliminary estimation points this figure to over $300,000 every day.

I can go on and on about the effect of the YCL’s stupidity and belligerent trade unions on the national economy but due to interest of time, I will save further discussion for later posts.

The bottom-line: the imbecility and lack of discipline of the YCL, and moronic attitudes of the trade unions, especially their unjust demands given the fragility of our industries are costing the nation dearly. The revolution in the name of worker’s welfare is nothing more than a politically motivated, opponent-smearing, and populist campaign implicitly sanctioned by the Maoists party itself. No where in the world has a nation progressed by waging a war against the independent media and the private sector. This is a perfect recipe for economic and political downfall. Even the elite planning commission of the nation is politicized. The Maoists government is making probably the biggest policy blunder in the history of the country by politicizing appointment in the NPC, which is supposed to be filled with experts conversant with the economic condition of the country. No words to describe their double standard behavior!

STOP taking advantage of the working class for your own benefits. STOP the excesses. STOP the madness. DISBAND the private militia. CRIMINALIZE the politically indoctrinated trade unions whose demands go well beyond the accepted norms. CEASE mobilization of belligerent youths to promote Maoists interests. STOP messing up with the independent media and the private sector.

Monday, December 22, 2008

Growth accelerations and decelerations in Western Africa

Here is a new working paper from the IMF:

The growth literature has had problems explaining the "sub-Saharan African growth dummy" in cross-country regressions. Instead of taking the usual approach of focusing on long-run growth and assuming that sub-Saharan countries have homogenous parameters in growth regressions, we concentrate our analysis on episodes of growth turnarounds (identifying growth accelerations, decelerations, and collapses) and use only West African countries in our sample. The driving force of growth turnarounds are estimated by analyzing external shocks, political and institutional changes, economic reforms, and indicators particularly relevant to the region. Using probits for a group of 22 Western African economies for the period 1960-2006, we find that growth accelerations are most clearly associated with external shocks, economic liberalization, political stability, and closeness to the coast; decelerations occurred during short-lived regimes and when corruption indices weakened; and collapses are linked to external shocks, falling domestic credit, and proximity to the coast. We then identify policy implications.

Nice discussion about the (Barro model)  cross-country panel growth regressions, growth accelerations, growth decelerations, and growth collapses in the context of a region where all these three episodes of growth are visibly seen over the past several decades.

Conditional Cash Transfer in the Philippines


More about the CCTs here.

Sunday, December 21, 2008

Jeff Sachs on population growth and Malthus


Sachs argues that the Malthusian prediction (the rate of population increase would outstrip the rate of increase in output) has not been true so far because of tremendous increases in output per capita (due to technology breakthroughs).

However, he warns:

… it could be argued we have not really found a way to solve the Malthusian problem. We have thus far only managed to feed the globe’s growing population through mining of raw materials and sources of energy. We all know this cannot continue forever – some sources will run out and others will damage the earth beyond repair.

And, more more need of Keynesian policies in Africa:

Keynesian spending plans could be used to provide a massive investment of infrastructure to Africa that would set the continent on its way to development.

Greg Clark is a bit more assertive about the Malthusian prediction in his book.

Saturday, December 20, 2008

Three decades of development economics and WDRs

New publication from the World Bank: Development Economics: Through the decades. This book examines how World Development Report (WDR) in the past three decades has influenced development economics. Cannot find the online downloadable version.

Here is an interesting figure/summary of country’s transition to a high-growth path.

Here is Joe Stiglitz about the WDR:

Throughout the history, the WDR has played an active role in shaping thought and policy, both within the World Bank and in the wider development community.It was sometimes overly ambitious, hoping to be able to summarize in a few clear messages the received wisdom on a key aspect of development. The world is too often too complicated for that to be done. When the WDR did so, it risked reemphasizing the obvious or what was well accepted, or conducting the discussion as such a high level of abstraction as to be of limited use. Occasionally, it became the publication vehicle for official doctrines- a summary of beliefs of the moment.Even here, it served a hopeful role, at least for students of evolution of economic thought, for they could see how thinking about development evolved over the years.

But to me, at least, its greatest contributions occurred when it helped to frame controversial issues, when it pushed the boundaries of thinking, when it opened up new frontiers- thinking about issues that had previously received too little attention- when it sparked a global debate. In those cases, the WDR’s effect was not only immediate, but also likely to be long lasting.

Links of Interest (12/19/2008)

The impact of global financial crisis on Sub-Saharan Africa

The rebirth of industrial policy

Keynesianism and Employment-linked tax incentives

Three decades of growth and economic perils on China’s path

VAT and enforcement with an informal sector

Greenspan thinks banks need more capital

Nepal’s finance minister warns to nationalize property if income tax is not paid by mid-Feb

Effect of energy crisis in Nepal (already affecting mobile operation and the embattled garment industry) More here, here, and here

UNWELCOME REPOSE: Workers at Heritage Fashion garment factory in Balkumari halt work after load-shedding, Thursday. Nepal Electricity Authority has increased power cut from forty-five hours to sixty-three hours a week. Power outage has hit industries and business installations severely, leading some to abrupt closure. (Source: The Kathmandu Post, 12/19/2008)

Friday, December 19, 2008

New papers about the global financial crisis

Stages of the 2007/2008 Global Financial Crisis: Is There a Wandering Asset-Price Bubble? by Lucjan T. Orlowski

This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble”. Unstable allocations elevate market, credit and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed.

Monetary Ease – A Factor behind Financial Crises? Some Evidence from OECD Countries by Rudiger Ahrend

This paper addresses the question of whether and how easy monetary policy may lead to excesses in financial and real asset markets and ultimately result in financial dislocation. It presents evidence suggesting that periods when short-term interest rates have been persistently and significantly below what Taylor rules would prescribe are correlated with increases in asset prices, especially as regards housing, though no systematic effects are identified on equity markets. Significant asset price increases, however, can also occur when interest rates are in line with Taylor rules, associated with periods of financial deregulation and/or innovation. The paper argues that accommodating monetary policy over the period 2002-2005, in combination with rapid financial market innovation, would seem in retrospect to have been among the factors behind the run-up in asset prices and financial imbalances -- the (partial) unwinding of which helped trigger the 2007/08 financial market turmoil.

Thursday, December 18, 2008

Corruption takes toll in Nepal: Acute energy crisis hits the country

The Nepali government has declared energy crisis and has approved operation of thermal plants to add 200 MW to the national grid. The present demand of electricity is 770 MW but the supply is just 420 MW. The country is in deficit of 2.8 million units power per day. Imagine this happening in a country with the second highest potential to generate hydroelectricity in the world. It is estimated that Nepal can produce 83,000 MW of electricity.

The question is why is Nepal still lagging behind? Is it a lack of funds? I think no given the level of investment and investor’s interest in this sector. Is it appropriability? Yes, it was for around five years back when the Maoists rebellion reached its peak and they attacked hydropower plants. But, now no one is doing that. So, appropriability is not a constraint. Returns to investment and appropriability are not holding back progress in this sector. What could be? Corruption comes on the top of my list. It was estimated that almost 30% of the total estimated cost is actually invested in real project. Where does 70% go? In the pockets of bureaucrats at Ministry, regional offices, and local administration! Corruption is a form of red tape and future tax on people. At present, there is 10 hours of load shedding per week in Nepal.

I wish the corruption investigation (CIAA) body was a little bit more powerful and independent!!

What economics needs now? Search for more of Keynes

Robert Skidelsky, author of John Maynard Keynes 1883-1946: Economist, Philosopher, Statesman, discusses the ideological flaws of the present crisis- the tussle between the left and the right about regulation and markets. Time now for a middle path, which Keynes argued in the 30s by recognizing that markets are not always efficient and when they are not government can help the economy grow. This does not mean that government has to replace markets—only when there is inefficiency and markets cannot work, the government can help. He also argues that economists need to admit now by saying that the benefits of globalization are real, but have often been exaggerated. Keep it real!

…The enquiry must start with economics. If the case for the deregulated market system is intellectually sound, it will be very hard to change. Free- marketeers claim, contrary to Soros, that the crisis is the fault of governments. US money was kept too cheap for too long after the technology bubble burst in 2000 and the attacks of 11th September 2001. The market was temporarily fooled by the government. This is a shaky defence, to say the least: if the market is so easily fooled, it cannot be very efficient.

…But the main source of instability lies in the financial markets themselves. And here it is clear that the battle of economic ideas still needs to be fought. Keynes is important in this because he produced the most powerful case for supposing that financial markets are not efficient in the sense required by efficient market theory. As he explained in The General Theory of Employment, Interest, and Money (1936), classical economics had ignored the two main causes of systemic financial failure: the existence of (unmeasurable) uncertainty and the role of money as a "store of value." The first led to periodic collapses of confidence; the second led investors to hoard cash if interest rates fell too low, making automatic recovery from collapses difficult. The function of government was to remove the depressive effect of both by giving investors continuous confidence to invest.

…Opinion as to the degree of supervision, regulation and control needed to make a market economy well-behaved is to be found along a continuum. At one end are the free-marketeers who believe only the lightest touch only is needed; at the other are classical Marxists who believe it requires public ownership of the whole economy. In between are varieties of social democrats and middle wayers, the most famous of whom is Keynes. This territory is sure to be extensively explored over the next few years as the pendulum starts swinging back. For the question of making markets well behaved goes beyond the question of securing their efficiency. It involves making the market economy compatible with other valued aspects of life. The French social democratic slogan of the mid-1990s—"market economy yes, market society no"—encapsulates the idea that limits should be placed on the power of the market to shape social life according to its own logic.

…But to ensure we have an ordered system requires us to make globalisation efficient and acceptable. In the course of that debate, I expect one crucial point to emerge: the benefits of globalisation are real, but have been exaggerated. Improvements in the allocation of capital and reductions in opportunities for corruption are offset by increased volatility. Globalisation also raises huge issues of political accountability and social cohesion that are scarcely considered by economists, and only lazily by politicians.

…There seem to be four main reasons for this blind spot. The first is the intellectual domination of economics in this debate, with its individualistic and developmental perspective. Globalisation—the integration of markets in goods, services, capital and labour—must be good because it has raised many millions out of poverty in poorer countries faster than would otherwise have been possible. Any interference with this process is impious. A second idea is that it is inevitable: technology—most conspicuously the internet—abolishes national frontiers. Technology cannot be undone. So, whether we like it or not, globalisation is our fate, and our morals and social conventions must adapt to it. The third idea is that globalisation is evolutionary; any check would be regressive. Fourthly, globalisation forces us to think of the world as a unit, which is necessary if we are to solve planet-wide problems.

…In the early 1930s, Keynes thought that the international division of labour could be carried too far. "Let goods be homespun," was the title of an article he wrote in 1932. He wanted a "well-balanced" or "complete" national life, allowing a country to display the full range of its aptitudes, and not simply to be a link in a value-adding productive chain spanning the globe. Moreover, the economic benefits of offshoring are far from evident for richer states.

…Keynes's warning that the pursuit of export-led growth is bound to set nations at each others' throats is still relevant. But that does not mean just sticking as we are. Some rowing back of financial globalisation and cross-border financial institutions is required to rebalance market and state. This process is underway, as national regulators take a tighter grip over the financial institutions they are bailing out. Regulators are increasingly sceptical of banks that depend excessively on wholesale funding. Without this, there will be a natural tendency for banks to shrink back within their own frontiers.

…The crisis has rightly led to a revival of interest in Keynes. But he was a moralist as well as an economist. He believed that material wellbeing is a necessary condition of the good life, but that beyond a certain standard of comfort, its pursuit can produce corruption, both for the individual and for society.

He reunited economics with ethics by taking us back to the primary question: what is wealth for? The good life was one to be lived in harmony with nature and our fellows. Yet "we destroy the beauty of the countryside because the unappropriated splendours of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend." Not everything should be sacrificed for efficiency. And Keynes was a liberal nationalist.

In terms of our pendulum analogy, he was someone who instinctively sought an equipoise: not in the timeless equilibrium of classical economics, but in a balance in political economy between freedom and control, national and international wellbeing, efficiency and morality. He was an Aristotelian, who believed that vices are virtues carried to excess. This is a good philosophy for today.

Financial development and the Doha Round

Here is a nice piece about the future of Doha, financial development, and the current financial crisis. The increase in volume of trade mindset has to be replaced with developing country-specific development mindset. Also, there are dangers of decreasing ODA due to the current financial crisis, whose epicenter is located in the North.

The effectiveness debate must move on from its narrow focus on growth – the new obsession among some bilateral donors – towards its impact on poverty. This is especially so for chronically poor people, many of whom get left behind by growth, even if aid does help to raise the recipient’s growth rate.

As it turns out, the shock has come from the North, first. This demonstrates an iron law of globalization: expect the unexpected. How far the present financial crisis damages the poor economies of the South, and the poor of the South, remains unclear. This is certainly not a good time for countries to mobilize private capital flows via either equity or debt, and foreign direct investment (which has been on the rise) will be threatened by a prolonged global downturn.

Poor economies will therefore need more ODA not less. The G-8 has not delivered on its Gleneagles promises. This is especially disappointing given the hard work that many poor countries have put into building better institutions, especially in the area of public finance management, to absorb and effectively use aid for development and poverty reduction. With climate change now firmly on the development finance agenda, the need for innovative financing mechanisms can only grow. This is not the time to be timid. Can the policymakers of both North and South meet the challenge? Or will narrow political agendas prevail? And will the needs of the world’s poorest people – the 1.4 billion – prevail? Time will tell.

Tuesday, December 16, 2008

Hausmann on the financial crisis and the future of USA’s financial clout

Ricardo Hausmann argues that the financial crisis might empower the US, if it plays its hand well. The US is not the only one suffering from this crisis- capital flows to emerging and developing countries has stopped, threatening to destabilize their growth, financial systems, and balance of payments. He disagrees with Nouriel Roubini, who predicted that the widening US current account deficit would erode other countries’ willing to hold dollars, because the US is still the only remaining super-borrower able to issue billions of dollars in debt at very low rates.

First, the US is already running a large current account deficit, a reflection of the fact that domestic spending is well above output. Using the capacity to borrow just to spend it domestically is going to aggravate this deficit and leave the US with a worsened external balance that will limit growth down the line.

Second, net public debt is rising sharply just as baby boomers will begin to collect their social security cheques, worsening long-run fiscal solvency.

Third, many countries across the world are going to suffer the consequences of the lack of access to finance at a time where the decline in their export earnings would have warranted more borrowing to smooth things out. If unchecked, this will cause their economies to shrink and their imports to decline, hurting US exports just when they are most needed. Under these conditions, there is the risk that countries will shut themselves off from the global economy and impose the financial equivalent of the protectionist Smoot-Hawley Act of 1930 . This can lead to an unravelling of the consensus for globalisation that has characterised the post-cold war era.

Fourth, if the US re-circulates financial resources, by on-lending to well behaved countries that have lost access because of the financial crisis, it would not increase its net debt but instead would make money for the US taxpayer while helping increase demand for US exports.

Fifth, re-exporting capital to the rest of the world would prevent the inconvenient strengthening of the dollar.

Finally, exercising this function would give the US enormous soft power in the world. Countries would have to decide whether they want to play ball with market democracy and benefit from access to the financial resources that the US and others can mobilise, or try to form a separate camp with Russia, Iran or Venezuela just as the rug has been pulled from under them.

Saturday, December 13, 2008

Catch-up growth

The IMF's latest Finance & Development magazine focuses on the financial crisis. Good stuff about the impact of financial crisis, its nature, and policy responses.

Nobel laureate Michael Spence chaired the Growth Commission, which recently published a The Growth Report after two years of study on the causes of economic growth. The IMF's new F&D magazine has an interview with Spence and Mohamoud Mohielden (Minister of Investment, Egypt)  about the financial crisis. Spence argues that unclogging credit market should be the first priority of Western  governments and this should be followed by "well-thought-out fiscal stimulus that has a time dimension".

Catch-up growth according to Spence:

We called it catch-up growth because of the global economy's contribution to growth—which we found was an essential element after looking at the dynamics of the successful high-growth cases. It is pretty well understood from trade theory and modern growth theory that global markets are big and a country can grow pretty fast without expanding its market share much—and if it has the terms of trade. But the other part, which is emphasized by Paul Romer and other distinguished leaders in the area of growth theory, is that catch-up growth is really about learning. It's about knowledge transfer. It's expanding your potential output based on what the economy—both the private and public sector sides—comes to have expertise in doing, and that is the catch phrase, no pun intended, for catch-up growth. This is what, we believe, more than anything else enables countries to grow at rates in the 7–10 percent range, and nobody else can do that. You can't do it in isolation and you can't do it as an advanced country with no counterexamples because you have to invent all the technology that moves the production possibility out, whereas developing economies can, at least for a period of time, import it. You have to import it and adapt it so it takes a considerable amount of ingenuity, innovation, and adaptation.

What would The Growth Report have focused on if it were published today? Obviously, financial crisis:

If we wrote the report in late 2008, we would have emphasized the volatility and insurance aspects more, because when they get out of control they produce crises. Also, we already know that such crises are debilitating for progress and growth, and do not adequately support growth policies.

Spence thinks the one key policy ingredient for high growth rate is openness to global economy. Mohielden thinks it is human capital.

In an article relevant to the present global financial crisis, this interview with Robert Shiller is quite interesting. Here is IMF's Chief Economist Olivier Blanchard on the financial crisis and policy responses required during and after the crisis.

Here is an interesting piece from real-world economics review: After 1929 economics changed: Will economists wake up in 2009?

Links of Interest (12/12/2008)

- Bad sign: Ecuador defaults on foreign debt saying it won’t pay “illegitimate” debts owned to “monsters” (Does Ecuador feel like Argentina in 2001 and Mexico in 1994 now?)

- Labor  unrest causes 70 factories to close down in Nepal

- Nepal government rejects USAID’s new programs alleging it of being non-transparent and outside of the budgetary jurisdiction

- The Maoist government’s private armed civilian army (aka YCL) vandalizing a college (see the pic):


- Why taxes should be low in developing countries?

There is a good rule in setting taxes: the poorer the country, the lower the tax burden. This is for two reasons. First, poorer countries waste more tax money through corruption. Second, lower tax burdens for businesses lead to more economic activity.

- Lost Decade? or Memorable Hangover?

Friday, December 12, 2008

Cholera outbreak and rosy coffin business in Zimbabwe

This is a very sad news. The NYT reports that there has been an increase in coffin business during the cholera epidemic in Zimbabwe.

A bad statesman, corruption, lust for power, and complete disregard to public’s concerns are turning the bread basket of Africa into a basket case of failed state. The whole economy is in shambles, with stagnating GDP growth rate and inflation rate hovering at 231 million percent. (some say it could be around 8*10^18 percent)

President Robert Mugabe is demagogue! At a time when the development agencies are calling for urgent need to address cholera outbreak in Zimbabwe, Mugabe is arguing that cholera outbreak is contained and the Western countries are using cholera epidemic as a tool to cause war.

"Because of cholera, Mr Brown, Mr Sarkozy and Mr Bush want military intervention," Mr Mugabe said. He added: "Let's tell them that the cholera cause doesn't exist any more."

Shortly after Mr Mugabe spoke, the UN Office for the Co-ordination of Humanitarian Affairs said the toll from the disease had risen slightly overnight to 783 and that 16,403 were believed to have been infected.

The WHO has warned that the total number of cases could reach 60,000 unless the epidemic was stopped.

Thursday, December 11, 2008

Child Development Index

Save the Children, UK has released The Child Development Index, the first ever ranking of countries in terms of their performance on child-specific indicators in health, education, and nutrition. Here is a fascinating interactive chart about the index and country performance.

The report focuses on distributional effects of growth on children. It shows that there are still high levels of child poverty and depravation, income levels are a poor indicator of progress in reducing child depravation, children’s wellbeing does not linearly increase with adult’s wellbeing, and there are variations between and within country comparisons.

The three indicators used in the report are: health (under-five mortality rate), nutrition (under-fives who are moderately and severely underweight), and education (primary school-age children who are not enrolled in school). An average of these three indicators is taken by giving equal weight to each of them. A low score represents a low level of child deprivation. A zero score means that all children survive beyond their fifth birthday, all under fives are well-nourished, and all primary school-age children are enrolled in primary school.

According to the report, Japan ranks first with 0.41 score. The other in the top five are Spain, Canada, Italy, Finland, and Iceland. The worse country in terms of child deprivation is Niger (score 85.47). The ten worst countries in terms of child deprivation are all from Sub-Saharan Africa: Niger, Sierra Leone, Somalia, Burkina Faso, Angola, DRC, Chad, Mali, Central African Republic, and Guinea-Bissau. Latin America and the Caribbean performed best with 57% improvement over the three time periods (1990-94, 1995-99, and 2000-06) considered in the report.

The report is critical of slow progress in this front in South Asia (especially India), where high growth rate is not consistent with slacking progress on children poverty and depravation.Nepal’s CDI score is 25.62 and ranks 95 out of 137 countries considered in the ranking. In terms of GDP per capita adjusted ranking, Nepal performed even badly with a ranking of 109. This means that growth in income has not been translated into improvements in child poverty and deprivation!

South Asia has a high level of deprivation, scoring 26.4; this is 3 times worse than East Asia. It is also making slow progress, improving child well-being by just 32% over 1990-2006 (compared to East Asia’s 45% improvement). This is because India (where almost three-quarters of the region’s children live) made the least progress of any country in South Asia; just a 27% improvement. In this region, child nutrition is a substantial obstacle; almost 1 in 2 children is underweight. Malnutrition levels are not being reduced rapidly enough; the region’s enrolment indicator improved by 59% while its nutrition indicator improved by only 14%. Higher levels of economic growth in the region are not widely translating into reduced child deprivation.

Why so much attention on this dimension of poverty? Well, on average each year of schooling increases a person’s wage as an adult by nearly 10% and today’s children are tomorrow’s human capital required for economy.

The report warns that if the current trends in child poverty continues, then there will be more malnourished children in Afria by 2015 than there are today. By 2015, 58 countries will still fall short of meeting the the goal of universal primary education.

HDI vs. CDI:

The United Nations’ Human Development Index (HDI) is similar in concept to our Index, except it mainly uses adult-focused indicators like income and adult literacy.When we compared the ranking of countries in our Child Development Index against the HDI,we noticed substantial differences. Two-thirds of our Index countries are ranked significantly differently (a difference of more than five ranked places) in the 2000–06 CDI than in the current HDI. Several countries are performing much better in terms of the child index than the human index: Malawi,Tanzania and Honduras have moved up in the CDI between 20 and 30 places. And many countries are doing far worse in terms of the child index than the human one, with Oman, Pakistan and the Philippines sliding down in the CDI between 20 and 50 places.

The report suggests policymakers to focus attention on three main dimensions of child poverty and depravation: prioritizing child nutrition, promoting equitable development,and supporting women’s education and empowerment.

Some stats:

  • 9.2 million children die every year before they turn 5 yrs old
  • 97% of all child deaths occur in 68 countries
  • 143 million children are malnourished
  • 1/4 of all the children in the world are underweight
  • 1/3 of all children have stunted growth
  • 75 million primary school-age children are not enrolled in school

An international perspective about the MDGs

New book (fodder for winter break!) - Reaching the MDGs: An International Perspective

Recommendation by the authors to reach MDGs by 2015:

  • identify win-win policy options that can help raise productivity and reduce inequality at the same time
  • accompany the implementation of policy innovations with data collection that can assist policy monitoring
  • invest in impact evaluation strategies, as prioritisation may vary by country or region
  • apply extra effort in focusing monitoring on a small subset of indicators
  • further research the synergies between the various MDGs
  • identify poor households in terms of multiple poverty dimensions
  • balance growth-oriented investment with social service spending that directly addresses the non-income dimensions of poverty
  • in the case of donor countries, comply with their funding commitments and provide recipient countries with funding predictability

    (via Eldis Poverty)

    Tuesday, December 9, 2008

    Impact of global financial crisis on the Nepali economy

    That’s the title of my new op-ed published in a new news portal launched toady in Nepal. More on the new media house and news portal here.

    Impact of global financial crisis on the Nepali economy

    How will this crisis affect a small, landlocked country like Nepal? It will not directly affect the Nepali financial system, nor put strains on monetary policy, as Nepal is largely insulated from the toxic assets of big investment like in the West. However, it will indirectly affect economic growth, revenue collection, and development initiatives carried out by Non Government Organizations (NGOs). Potential monetary imbalance may arise from changes in Indian monetary policies and the exchange rate of NRs vs. INRs.

    The economy could feel the impact of global financial crisis through four different routes- a slowing down in inflow remittances, a recessionary tourism sector, decline in aid, and a demand-deficient manufacturing sector. While a slowing of the first three components will affect poverty reduction and development initiatives, the decline in global demand for Nepali-manufactured products will put direct downward pressure on growth rate. The rate is expected to hover around 5% during 2009.

    A global economic meltdown will decrease demand for products made in India, where a majority of low-skilled Nepali laborers work. Meanwhile, a slowing down of the construction and service sectors in the Middle East, the other major source of remittances, and in countries such as South Korea, Malaysia, and Japan, will result in lowering demand for Nepali labor abroad. Put simply, fewer workers leaving the country in days ahead will decrease remittances inflow in a number of ways. This could affect the rate of progress made in poverty alleviation and potentially lower domestic demand, as households will be more hesitant to spend money due to declining income.

    Remittances, which currently account for 19% of the Gross Domestic Product (GDP), have been extending the economy a lifeline for almost a decade. It is chiefly due to these remittances that the balance of payments is still in surplus despite a huge balance of trade deficit. Remittances have furthermore helped decrease the poverty rate from 42 percent in 1995/96, to 31 percent in 2003/04. More than 34% of households receive remittances, an increase of more than 80% since 1994/95. Over one million Nepalis working abroad send money directly to their families, a portion of which is generally used to meet regular expenditures, and the remainder saved in domestic financial institutions.

    A global slow-down and recession in Western economies will also affect the Nepali service industry, which contributed 50.9% of GDP in 2007. Global recovery is not expected any time soon as the Western financial crisis steadily worsens. This means potential tourists are likely to postpone or cancel travel plans. By working with the government and launching promotional packages, Hotel Association of Nepal (HAN) is hoping to entice about a million tourists in 2010. If the global economic slow-down continues past 2010, this dream seems unachievable

    Meanwhile, the aid industry will also not be spared from the crisis. NGOs operating in Nepal receive funding from corporate donors, governments and large foundations in the West. The global slow-down will limit this funding, forcing the organizations to scale back development initiatives. This will have a negative impact on the fight against poverty and other development challenges. The manufacturing sector will also suffer. Export to major Western countries is expected to slow in the coming years. The Confederation of Nepalese Industries (CNI) recently estimated that the manufacturing sector would incur a loss of $256.16 million as a result of the global economic slow-down.

    An extended and original version of the article is available here.

    Snapshot of the new news portal:

    Monday, December 8, 2008

    Krugman’s Nobel lecture

    Paul Krugman’s Nobel lecture slides here and here.

    The ultimate news source about Nepal

    A new news portal is launched today in Nepal. It is titled Republica, a national daily plus news portal about Nepal. Senior journalists, some of whom I know and have worked with in the past, are working in this new media house (Dhumbarahai Media). It is going to be the ultimate one-stop source of news and information about Nepal. A Nepali version is named Dainikee.

    Below is a snapshot of the first-ever homepage of

    Stiglitz and Keynes

    Stiglitz argues that the financial crisis has made it clear that we all are Keynesians- admit it or not! The two quite vocal Keynesians- Krugman and Stiglitz, both Nobel laureates, have been arguing that monetary policy might not work now as the interest rate has already hit rock bottom and increase in money supply has not been able to affect economic activity. So, time to raise Keynesian wand! He worries about the potential misuse of Keynesian doctrines.

    Economic theory had long explained why unfettered markets were not self-correcting, why regulation was needed, why there was an important role for government to play in the economy. But many, especially people working in the financial markets, pushed a type of “market fundamentalism.”

    Keynes argued not only that markets are not self-correcting, but that in a severe downturn, monetary policy was likely to be ineffective. Fiscal policy was required. But not all fiscal policies are equivalent. In the US today, with an overhang of household debt and high uncertainty, tax cuts are likely to be ineffective (as they were in Japan in the 1990s). Much, if not most, of last February’s US tax cut went into savings.

    ...That necessitates restructuring both tax and expenditure programs. Lowering taxes on the poor and raising unemployment benefits while simultaneously increasing taxes on the rich can stimulate the economy, reduce the deficit, and reduce inequality. Cutting expenditures on the Iraq war and increasing expenditures on education can simultaneously increase output in the short and long run and reduce the deficit.

    Today, the risk is that the new Keynesian doctrines will be used and abused to serve some of the same interests. Have those who pushed deregulation 10 years ago learned their lesson? Or will they simply push for cosmetic reforms — the minimum required to justify the mega-trillion dollar bailouts? Has there been a change of heart, or only a change in strategy? After all, in today’s context, the pursuit of Keynesian policies looks even more profitable than the pursuit of market fundamentalism!
    More on similar stuff here.

    Top ten missed stories this year

    Foreign Policy lists the top ten stories missed in 2008.

    Sunday, December 7, 2008

    Innovation: 8 Nepali students built an ultra-light aircraft!

    Using mostly locally available materials, eight Nepali engineering students built an ultra-light aircraft and successfully completed a test flight yesterday. Interesting stuff!


    More here and here. Human capital is not a constraint to growth in Nepal. Policies to promote R&D is lacking in Nepal. There is a high potential for “self-discovery”, but policies to promote them are long lacking.

    Friday, December 5, 2008

    Price floor on rent in Nepal

    The left-wing Finance Minister Bhattarai is scrambling to meet revenue target set by him in this year’s budget. Many said that around Rs 42 billion in tax revenue is very ambitious. Recently, the government decided to give bonus of up to 200% on the basis of per worker revenue collection in customs offices. Now, to bring house rental business under the tax net, the government is imposing a minimum price for rent in major cities.

    This means that house owners will have to pay a fixed (minimum)amount of tax even if rent charged by them is below the one earmarked by the government. If the prevailing equilibrium rent (price) is below the one set by the government, then house owners will be forced to pay rent tax that is not consistent with the price charged by them. So, market rent price will rise till the point where the price floor corresponds to the 10% flat rent tax imposed by the government. On the other hand, if the rent price fixed by the government is below the market price, then either rent price will come down or it will not have any effect other than increase in tax revenue from house rent sector.

    Here is the article.

    Kapildev Ghimire, director general at Inland Revenue Department (IRD) told the Post they would conduct a survey later this month on rents in various business and residential areas of Kathmandu and major cities outside Kathmandu to fix reference prices.

    He made it clear the government would collect tax according to the rent it sets even if it is found that the rent is lower than the fixed amount.

    "Fixing minimum prices has become necessary to discourage those who show very little rental prices in paper to evade tax ," he said. The government will start collecting taxes by effectively enforcing the law from mid-January after completing the survey."

    The government has set a revenue collection target of Rs. 1.03 billion through rental tax in the current fiscal year while the amount was Rs. 706 million in the last fiscal year.

    [I have microeconomics-related demand and supply graph in mind but can’t spend time in drawing that in MS Word because it’s finals week and I am overloaded with exams and papers. Next time, if this issue emerges again, then I’ll definitely include a figure to explain the effect of this price floor.]


    This news piece caught my eye. The vegetable ghee industry is perishing in Nepal. Why? due to high import taxes on raw materials, high transportation costs, labor troubles, and lack of power. The high cost of production has made Nepali ghee uncompetitive in the Indian market.

    The ghee industry has been facing the squeeze for the last 10 months. There are 16 vegetable ghee factories in Nepal. High taxes in the import of raw materials from Kolkata of India, high customs duty on export, labour troubles, lack of power and poor transportation facilities have pushed these factories to the verge of extinction, said Laxman Nebatia of Swastik Ghee and Oil Industry. The closure of ghee factories has caused a loss of Rs 2,400 million. The government should revive the ghee industry, said Pradip Murarka of Nepal Ghee and Oil Industries’ Association. High import duty and export taxes have spoilt the competitiveness of Nepali ghee.

    Financial crisis and protectionism

    New e-book from about the dangers of protectionism due to the financial crisis. It is titled The crisis and protectionism: Steps world leaders should take.

    Here is the synopsis:

    Unless world leaders strengthen trade cooperation, new tariffs and competitive devaluations could trigger a protectionist spiral of WTO-consistent trade barriers. To rule this out, world leaders should: 1) Reduce protectionist pressures by fighting the recession with macroeconomic polices; 2) Translate APEC and G20 leaders’ words into deeds by agreeing a framework for concluding the Doha Round; and 3) Establish a real-time WTO/IMF surveillance mechanism to track new protection.

    The dangers of protectionism:

    If all nations put their tariffs up to their bound rate – i.e. the WTO tariff ceilings that they are committed to respecting – then exporters from middle- and high-income nations would faces tariffs that were on average twice as high as they are now; those facing poor nations would triple since they tend to export agriculture goods where tariff bindings are astronomically high or nonexistent. If a vortex of beggar-thy-neighbour moves pushed tariffs ‘only’ up to the maximum level that nations had applied over the past 13 years (i.e. since the last WTO Round was signed), then figures would be more like 50% higher and 100% higher for the groups.

    Meanwhile, Rodrik ponders on Keynesian economics and protectionism. He is also taking about Tobin tax on foreign transactions and redirecting that tax revenue to the developing countries that are in dire need of credit.

    So unless we come up with a solution to the credit constraints in the developing world, we are going to either endanger the effectiveness of Keynesian policies in the U.S. and other advanced nations, or risk a sharp increase in protectionism.  Not a pleasant choice.

    And, here is ‘modern day Keynes’ aka Krugman applauding the great Keynes.

    Indian feels the heat of the financial meltdown

    The NYT reports:

    In a country where most marriages are arranged by parents, the downturn has even taken a toll on the matrimonial prospects of those in technology outsourcing. “Because there is no job guarantees for I.T. people, for the last six months brides’ families have not been accepting grooms from this background,” said Jagadeesh Angadi, a matchmaker in Bangalore.

    The Indian National Association of Software and Service Companies estimates that the country’s technology sector will create 50,000 fewer jobs in 2008 than last year, although it predicts the sector will still have added 200,000 workers by year’s end. India’s technology outsourcing companies have laid off about 10,000 employees since September, according to the Union for Information Technology Enabled Services, a labor group that represents technology workers.

    Meanwhile, India announced a stimulus package worth Rs 20, 000 crore.

    The package, coming on the back of fresh monetary measures announced by the RBI on Saturday, includes a four per cent cut in ad-valoram duty across the board, to boost additional spending, besides enhanced credit for exporters, along with a Rs 10,000 crore mop up for India Infrastructure Finance Company.

    The measures include additional plan expenditure up to Rs 20,000 crore in current year; total spending in four months till March expected at Rs 300,000 crore. A series of steps to boost exports; Rs 350 crore additional funds for export incentives; back-up guarantee to ECGC for up to Rs 350 crore; to be allowed refund of services in some areas.

    The package also includes import duty on Naptha for use in power sector as well as export duty on iron ore to be eliminated. India Infrastructure Finance Company to raise Rs 10,000 crore through tax-free bonds by March 2009. PSU banks to soon announce package for borrowers of home loans upto Rs 20 lakh. An across-the-board cut on ad valorem rate to encourage additional spending; additional Rs 1,400 crore for textile sector.

    Legal foundations of free markets

    A new book The Legal Foundation of Free Markets published by Institute of Economic Affairs.

    Here is the what this book is about:

    The law, together with the institutions associated with it, plays a central role in economic prosperity, which concerns all of us. The legal foundations of free market economies, which have delivered enormous improvements to the quality of life of countless people, evolved over centuries. Their justification does not lie simply in utilitarian concepts of economic efficiency but also in moral concepts of natural law and a broader concept of freedom. Great care needs to be taken when changes are made to areas of law that can be foundational in shaping market behaviour, to ensure that they are not undermined. Similar care needs to be taken in developing other areas of law, such as competition law and environmental law, where significant inroads may be made, often justified by reference to alleged market failure. This book suggests various practical solutions to these problems, including ensuring greater jurisdictional competition, greater adherence to the doctrine of the rule of law, the restoration of economic rights, greater use of judicial lawmaking,and more constructive engagement between economists and regulators.

    And, a little bit over praise the virtues of free markets and all bad stuff dumped on the government.

    First, the market is more capable of producing institutions for its own enforcement than conventional wisdom permits. Where government is absent, society does not launch itself into a violent and dishonest frenzy that leads to the end of trade and the death of many of its members. Instead, private institutional arrangements emerge as the result of individuals’ efforts to find alternative mechanisms of securing peace and honesty so that they can realise the tremendous benefits of exchange.

    Second, commercial rules, specifically those relating to contracts, can and do emerge where government is absent. Perhaps more importantly, private mechanisms for their enforcement emerge alongside them. Evidence from stateless societies not considered here, such as that from Somalia, and from the international arena, which I considered only briefly, supports this claim. Significantly, this latter arena is a massive one and involves thousands of traders from many different backgrounds and countries who are able to coordinate on such a level that their resulting market activities constitute nearly 25 per cent of global economic activity.

    Finally, contrary to prevailing wisdom, criminal behaviour poses no special problem for markets under anarchy. Like rules for dealing with ‘peaceful theft’, such as those that emerge endogenously to govern commercial contracts, rules for dealing with ‘violent theft’ also emerge endogenously without central direction to regulate the violent disposition of some members of society. importantly, private institutions for their enforcement, including mechanisms for adjudicating claims of criminal behaviour, and mechanisms for enforcing the decisions of such adjudications, evolve along with rules regarding criminal conduct to enhance the safety individuals require for markets to function.

    Wednesday, December 3, 2008

    Expectations about higher growth in Africa

    Adrian Wood asks, “Could Africa be like America?” He believes yes.

    One was that a high-income Africa would be more similar in its sectoral and spatial structure to land-abundant developed countries such as the United States than to land-scarce ones such as Japan.

    The other, more important sense was simply that Africa could be a high-income region.

    Interesting perspective! He believes that improved expectations about potential business opportunities in Africa could lead to optimistic expectations by local entrepreneurs and hence could lead to more local (and foreign) and sustained investment.

    So, and without forgetting about expanding Africa’s exports to the rest of the world, we should remember that the main market for a rich Africa will be in Africa. African countries are small, so they will export more of their output than average, but most of these exports will go to other African countries. Most African growth will consist of African businesses producing more goods and services for African customers.

    If businessmen think a country will be rich, they will rationally invest and make it rich, as is happening in China. If they think a country will stay poor, they will rationally not invest and leave it poor, as has happened in Africa.

    He floats the idea of Afro-EU union to improve positive expectations about investment in Africa. Interesting stuff but quite implausible! However, the idea of viewing opportunities in African through an optimistic lens is quite good because expectations about investment growth are “self-fulfilling”.

    Tuesday, December 2, 2008

    The perils of big budget to VDCs

    This is an isolated case occurring in a Village Development Committee (VDC) in Morang, Nepal. The left-wing Finance Minister Dr. Baburam Bhattarai doubled VDC budget in this year’s fiscal budget.This increased trouble in one particular VDC because armed outfits also doubled the amount of money (forced/compulsory donation!) they used to demand from local government.

    "There was no sense of security in the villages since long," said Murari Ghimire, Chairman of VDC Secretary Rights Protection Centre. "And the bigger budget means we are sure to be targeted by many underground outfits for donations. They are the same people asking for certain portion of the VDC budget in the past too."

    With the government's new budget plan for the current fiscal year, each VDC in Morang will get from 1.5 million to 3 million rupees.

    Members of the armed outfits, who used to demand "donations" in three-four digits earlier, have already begun asking "donations" in six digits following the government decision, according to the VDC secretaries.

    "Big budget means hope for developmental works and thus a matter of happiness for many," said Hari Pokharel, secretary of Rangeli VDC. "But it has become more tension and terror for us."

    More here.

    Monday, December 1, 2008

    Brief recent history of Congo

    A short history of Congo from The Economist:

    Benefits of free trade and the ineffective marginal change in tariff rates

    Are the benefits of free trade exaggerated? Consider this excerpt from a piece in Newsweek:

    "World trade is already so free, we're really talking about stuff at the margins," says Paul Krugman, a Princeton economist and this year's recipient of the Nobel Prize. "Once you are down to tariff rates as low as we have now, a few points up or down doesn't make much difference." Just as important, free-trade deals don't come cheaply; the world might be far better off spending its political capital on projects with a bigger bang-to-buck ratio.

    …Cutting tariff barriers in half yields a lot of wealth and growth when their starting level is 150 percent. But today import tariffs on manufactured goods are about 5 percent in developed countries and 10 to 20 percent in developing countries; they've declined on average by 34 percentage points since the mid-1980s. Now a 50 percent cut in tariffs would yield little more than pats on the back for the world's trade negotiators.

    …In a 2005 study, the World Bank reported that if trade were completely liberalized overnight, and agricultural subsidies (a sticking point in the Doha talks) completely eliminated, the world would be better off by about $287 billion by 2015—an increase of just 0.7 percent of global GDP. The benefits from the Doha round, which has humbler goals than complete liberalization, are far lower, ranging from as much as $119 billion to as little as $18 billion. The latter number represents just 0.04 percent of GDP.

    …if the OECD countries let in just 14 million additional migrants by 2025—that's about 700,000 extra migrants a year, spread across the entire rich world—the global economy would be better off by $356 billion. By comparison, if the world could completely eliminate agricultural barriers, the benefit would amount to barely half that: $182 billion.