Thursday, September 18, 2008

Critique of the new poverty line

Sanjay Reddy, in a new one pager from the IPC, argues that the new global poverty estimate ($1.25 a day) just digs dipper into the pitfalls of earlier estimate. He is unsatisfied with the methodology used in the survey. Here is a paper, written by the World Bank economists Ravallion and Chen, Reddy is referring to. Check this one as well (Dollar a day revisited). Here is more from Reddy.

...The new international poverty line is too low to cover the cost of purchasing basic necessities. One could not live in the US on $1.25 a day in 2005, nor therefore on an equivalent amount elsewhere. One’s daily income can be a great deal higher than $1.25 and still leave one unable to fulfill basic nutritional requirements. Since the international poverty line is defined in equivalent purchasing power units, this incoherence is not easy to overcome.

...The PPPs calculated for each country also inappropriately reflect irrelevant information about the pattern of consumption in third countries other than the country in which the price level is being assessed and the base country with which prices are compared (the US). This is because the worldwide pattern of consumption determines the weights placed on different commodities when assessing the price level in each country.

...The underlying source of the problems is the lack of a clear criterion for identifying the poor. We have no basis to conclude that the new set of PPPs generate poverty estimates which are closer to the “truth”.

...The relative extent of poverty in different countries and years, and the estimated trend, is dependent on the base year chosen for the exercise and there is no convincing basis to pick the estimates corresponding to one base year over those corresponding to another.

After the WB published new poverty estimate, which upped the number of people living below the global poverty line to 1.4 billion from around 800 million, the Asian Development Bank (ADB) also published its own estimate of poverty line for Asia. The ADB set Asian Poverty Line at $1.35 per day. Here is more about the new global poverty estimate from The Economist.

Stiglitz's six point solution to avert the next Wall Sts meltdown

Stiglitz sees a pattern of deep systemic problems in the events leading to a series of bankruptcy and state bail outs in the economy. In an earlier piece, he puts the blame on "a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers."

  1. We need first to correct incentives for executives, reducing the scope for conflicts of interest and improving shareholder information about dilution in share value as a result of stock options. We should mitigate the incentives for excessive risk-taking and the short-term focus that has so long prevailed, for instance, by requiring bonuses to be paid on the basis of, say, five-year returns, rather than annual returns.
  2. Secondly, we need to create a financial product safety commission, to make sure that products bought and sold by banks, pension funds, etc. are safe for "human consumption." Consenting adults should be given great freedom to do whatever they want, but that does not mean they should gamble with other people's money. Some may worry that this may stifle innovation. But that may be a good thing considering the kind of innovation we had -- attempting to subvert accounting and regulations. What we need is more innovation addressing the needs of ordinary Americans, so they can stay in their homes when economic conditions change.
  3. We need to create a financial systems stability commission to take an overview of the entire financial system, recognizing the interrelations among the various parts, and to prevent the excessive systemic leveraging that we have just experienced.
  4. We need to impose other regulations to improve the safety and soundness of our financial system, such as "speed bumps" to limit borrowing. Historically, rapid expansion of lending has been responsible for a large fraction of crises and this crisis is no exception.
  5. We need better consumer protection laws, including laws that prevent predatory lending.
  6. We need better competition laws. The financial institutions have been able to prey on consumers through credit cards partly because of the absence of competition. But even more importantly, we should not be in situations where a firm is "too big to fail." If it is that big, it should be broken up.

And, Stiglitz throws a punch at those who consistently parrot for minimal regulation:

This is not the first crisis in our financial system, not the first time that those who believe in free and unregulated markets have come running to the government for bail-outs.

The state of Nepal's stock market

Here is a brief analysis from the Institute for Development Studies (IfDS):

...The share price of the commercial banks listed in the stock exchange is very high with no relation whatsoever with the earnings of the concerned institutions. As a result, the capitalized value of the share price of the seventeen commercial banks is Rs. 259 billion, compared with the face value of not exceeding Rs. 30 billion. The main question that must be taken into account seriously by the monetary authorities is the continuity of such bubble in the share price. If such bubble bursts due to any reason, the country will be in a very difficult situation both politically and economically, as the experiences of several developed countries of the recent past suggest.

Nepal's stock market is so insulated to political situation and fiscal and monetary policies that the effect of a change in these variables would be felt in the stock exchange at the beginning of the next such change in the variables! Okay, this might seem a little inflated, but the reality is that the time lag is very long. Also, there are instances when the stock market was indifferent to the changes in fiscal and monetary policies. How could this happen?

Note that there are 21 commercial banks, 58 development banks, 79 finance companies, 12 micro credit banks in Nepal. This for a population of around 26.4 million. Sadly, the handful of commercial banks are awash with liquidity and the poor people are yet to see this being channeled for investment/development purposes.