Friday, October 29, 2010

Trade and industrial production back to pre-crisis level?

The figure below shows that trade and industrial production have returned to pre-crisis level. Look carefully. The recovery relates to by volume measure. The growth rate of trade and industrial production is still down after months of incline.

The recovery, measured by growth rate, of trade and industrial production potentially looks like a W-shaped recovery (the level of troughs might differ depending on government activism!). When government intervention for aggregate demand management was high, both trade and industrial production growth rate was increasing. Now, since this is forgone because of austerity fetish in most of the countries, growth rate is beginning to come down as well. See the dent on output loss in developed countries. Andrew Burns argues that this might be permanent. Look at China’s output. Its surging upwards. The price of hands off approach by governments in developed countries is clearly seen in the figure.

By volume, global industrial production, the sector of activity most affected by the crisis—which fell by 10 percent between August 2008 and January 2009—regained pre-crisis activity levels by March 2010. Trade, which had declined by 19 percent in volume terms as of January 2009, has also regained pre-crisis levels, although somewhat later than industrial production.

For more see this piece by Andrew Burns.

Thursday, October 28, 2010

Experimentation and coordination as industrial policy

Industrial policy can be thought of as any type of selective government intervention or policy that attempts to alter the structure of production in favor of sectors that are expected to offer better prospects for economic growth in a way that would not occur in the absence of such intervention. Countries do not know ex ante if a select policy would be successful in successfully aiding a sector or production. So, there has to be trial and error to discover which sector is successful and which is not.

Gebreeyesus and Iizuka study floriculture and salmon industry in Ethiopia and Chile, respectively, and argue that experimentation and coordination also has to be a part of industrial policy. They look at (i) knowledge development and diffusion, (ii) entrepreneurial experimentation, (iii) influence of the direction of search, (iv) market formation, (v) legitimating, (vi) resource mobilization and  (vii) development of positive externalities.

“Even though these two cases are different in many aspects (for example, geography, type of activity, developmental stage, and even the guiding philosophy of the governments), we found various similarities that tie these two successful cases together. The triggering factors for the emergence of the new activities were a combination of different factors including natural endowment and favourable climate. The entrepreneurial experimentation by private entrepreneurs was, however, critical for 'discovery' of the sectors in both countries.

One characteristics of the early stage in new activities is the existence of large uncertainty in technology, marketing, and infrastructure. The governments' selective support at the initial stage was equally critical in reducing these uncertainties. In both cases, the government role changed through phases of development of the sectors. At the early stage governments played a developmental role by providing some inputs and sharing costs (for example, finance and technical support in the case of Chile, and finance, land, and transport co-ordination in the case of Ethiopia). These helped for the success of the pioneers and entry of many other investors, thus created conditions for take-off. In the growth stage other forms of engagement such as increasing regulatory role, formalization of the interactions, and strengthening of institutions start to take place.

Another important lesson from both cases is harmonization between the governments and private sector in the sector building. This was made possible by the presence of pathfinder institutions that consistently pursue the development of the sector and co-ordinate activities accordingly. In Ethiopia, the industry association played the pathfinder role. In Chile, FundacionChile was the key institution from start, even though in the later stage the Association of Salmon Industry was also instrumental. In both cases the pathfinders play important roles in consensus-building between government and the sector, standard-setting (self-regulation), collective market search, developing capacity of members, promotion and legitimation of their respective sectors.”

Here are two more stuff on industrial policy:

Nobel Prize in Economics for Unemployment

My latest piece is about the recently announced Nobel Prize in Economics. I briefly discuss some of the main points of MDP’s research and its implications in real life. For more discussion about the trio’s work, reaction from other economists, Diamond Paradox, and, following their work’s trail, the rationale for “aggregate demand management”, see this blog post.

Nobel for unemployment

The Nobel Prize in economics is probably one of the most eagerly awaited prizes. Officially known as Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, this year’s laureates are Peter Diamond, Dale Mortensen and Christopher Pissarides. They were given the prize for “their analysis of markets with search frictions.” It is basically a Nobel for unemployment! Apart from labor markets, their work is also used to analyze and fathom a variety of fascinating economic and social issues.

Given the tumultuous global economy and faltering recovery, many predicted that this year’s prize would go to some scholars who had done work related to recession and recovery. Economists like Alberto Alesina, Nobuhiro Kiyotaki, John Moore, and Kevin Murphy were high on the list of Thomson Retuers, which regularly predicts scholars who might win the Nobel Prize. Additionally, economics blogs were flooded with names of Robert Barro, Wiliam Nordhaus, Martin Weitzman, Robert Shiller, and Eugene Fama. However, like in the previous years, the Nobel committee surprised most of the economists and analysts by awarding the coveted prize to economists who had done seminal work not on the causes and making of recession, but on one of the outcomes of recession, i.e. unemployment.

The trio showed that an unregulated market does not clear by itself, as has been asserted by classical economists. The classical economists believe that markets always clear because prices are determined in such a way that demand matches supply (they assume perfect information and no transaction costs). In reality, it is not so. The trio’s work shows that even if there are jobs available in an economy, employers might not be able to find suitable workers, and vice versa.

In reality, buyers and sellers face costs in their attempts to locate each other (“search”) and meet pair-wise when they come into contact (“matching”). A small search cost could drastically change the outcome, which is not factored in the classical labor market models. Search cost moves equilibrium price away from competitive price. Aggregate welfare is not necessarily higher with more searches since searches itself are costly. Resource utilization could be either low or high as the search and matching process involves costs. There could be too little or too much searches.

Simply, buyers are unable to find perfect sellers, or vice versa, all the time. Even if they did, there might be disagreements in the prices. This means that both buyers and sellers will continue searching for deals until a settlement is reached for a cooperative transaction that satisfies both of their aspirations. This process of finding the desired outcome is not frictionless. Though this might sound intuitive, the trio clarified this feature of the labor market by using economic models and by applying that to real life. Their work helped economists and policymakers comprehend how unemployment works and persists in an economy and what can be done about it.

One important implication of their research is that an external agent could intervene in a market and provide lubrication to reduce friction that emerges in transaction between sellers and buyers. When unemployment is high despite the availability of jobs, the government can facilitate the process of matching workers and employers, thus reducing search costs incurred by both the agents. Furthermore, the government can roll out training programs to upgrade skills of workers so that their skills are compatible to requirements of employers. In the absence of such a lubricating force, the continuous search and matching environment can lead to macroeconomic unemployment problems as coordinating trade does not match one-to-one. This provides a rationale for “aggregate demand management” to steer the economy towards the best equilibrium by reducing coordination failures.

Their work has been used to analyze various issues in real life. For instance, it is used to examine the effect of policies concerning hiring and firing costs, minimum wage laws, taxes, and unemployment benefits on unemployment and economic welfare. It is also used to explain dating, marriage, fertility, and divorce behavior. It has been used to explain why women tend to prefer older men for marriage more in developing countries than in developed countries (Hint: Social norms matter and wages tend to increase with age!).

More relevant to this discussion is the following realistic situation: There are numerous men and women looking for partners in the marriage market. However, not everyone is successful, leading to gradual development of anxiety and frustration. The search, which involves cost, by agents willing to marry might not lead to a satisfactory equilibrium. The search costs of finding perfect match might increase with time. Had there been perfect information about everybody looking for a partner in the marriage market, there would have been equilibrium, i.e. everyone would find a suitable, or at least satisfactory, partner. However, we live in an imperfect world where there are information asymmetries and coordination failures. So, sometimes the search continues endlessly and frustratingly for extremely eligible bachelors.

What could be the solution? One idea coming out of the work of the Nobel laureates is to reduce search costs by facilitating the matching process. Since the agents searching for partners are unable individually to strike a cooperative deal, the market should be intervened or facilitated by external agents. This could come in different forms. For instance, relatives could intensify their search and lubricate friction in search process. Another increasingly popular idea could be facilitation of matching process online through matching portals. This helps to clear the marriage market to some extent by reducing search time and friction, and facilitating meaningful deliberations between willing agents in the marriage market.

This is one of the many applications of the work pioneered by Diamond, Mortensen and Pissarides. Their fundamental work had been in analyzing search frictions and its impact on unemployment. This year’s economics Nobel is a prize for unemployment!

[Published in Republica daily, October 26, 2010, pp.7]

Tuesday, October 26, 2010

Colonial Indian railroads and its benefits

“How large are the benefits of transportation infrastructure projects, and what explains these benefits? To shed new light on these questions, this paper uses archival data from colonial India to investigate the impact of India's vast railroad network. Guided by four predictions from a general equilibrium trade model, I find that railroads: (1) decreased trade costs and interregional price gaps; (2) increased interregional and international trade; (3) increased real income levels; and (4), that a sufficient statistic for the effect of railroads on welfare in the model (an effect that is purely due to newly exploited gains from trade) accounts for virtually all of the observed reduced-form impact of railroads on real income in the data. I find no spurious effects from over 40,000 km of lines that were approved but - for four different reasons - were never built.”

The paper by Dave Donaldson here. The figure below shows the evolution of railroads between 1860 and 1930 in India. The British built one of the prerequisites of growth in India! [It would be interesting to see the impact of roads built under NREGA on rural households.]

Monday, October 25, 2010

Why isn’t Mexico rich?

“Over the last three decades, Mexico has aggressively reformed its economy, opening to foreign trade and investment, achieving fiscal discipline, and privatizing state owned enterprises. Despite these efforts, the country’s economic growth has been lackluster, trailing that of many other developing nations. In this paper, I review arguments for why Mexico hasn’t sustained higher rates of economic growth. The most prominent suggest that some combination of poorly functioning credit markets, distortions in the supply of non-traded inputs, and perverse incentives for informality creates a drag on productivity growth. These are factors internal to Mexico. One possible external factor is that the country has the bad luck of exporting goods that China sells, rather than goods that China buys. I assess evidence from recent literature on these arguments and suggest directions for future research.”

That is the abstract of a paper written by Gordon Hanson. Read the full paper here. Hanson argues that “Mexico’s underperformance is overdetermined.” Though faulty provision of credit, persistence of informality, control of key input markets by elites, continued ineffectiveness of public education, and vulnerability to adverse external shocks each may have a role in explaining Mexico’s development trajectory, we don’t yet know the relative importance of these factors for the country’s growth record, he asserts.

Btw, in 2009, Mexico exported 0.3% of GDP to China and imported 4.1% of GDP from China. The US imports more from China than from Mexico. The manufacturing inputs exported to the US could be either substitute or near-substitute goods. So, China could be displacing Mexican exports to the US.

Thursday, October 21, 2010

Economic policy for South Asia after the crisis

In a new book published by the WB, Dipak Dasgupta, Ejaz Ghani, and Ernesto May have a chapter on economic policy challenges for South Asia. The authors have the following recommendations for South Asia:

  • Create fiscal space to improve macroeconomic stability, avoid crowding-out the private sector, and permit financing of infrastructure and social safety nets.
  • Manage inflationary pressures, particularly food prices, with renewed attention to agricultural productivity growth.
  • Revisit South Asia's trade and investment integration strategy to take advantage of the global rebalancing underway, including supporting faster manufacturing growth.
Attention has to be focused on governance, conflict, demographic transition, and urbanization and spatial transformation. Also, tax revenue needs to be increased as the ratio of tax revenue to GDP is very low in South Asian countries.
Also, South Asia needs to invest in infrastructures, a key binding constraint to economic growth in the region. It also needs to have effective social safety nets, control inflation and food prices, revitalize agricultural sector to increase production, seek quick integration into East Asia, and support faster manufacturing growth as East Asia is transitioning to more skill-intensive manufacturing.
Conflict has severely impacted growth in South Asia. Given its income level, Nepal had the most fatalities between 1998 and 2004 as a result of conflict. Note that conflict-affected countries had lower GDP growth rate and trade.
Since 150 million people are entering the labor force in the next decade, without appropriate provision of providing them decent paying jobs, they could be a liability instead of providing demographic dividends. Workers are trapped in low-wage, low-productivity jobs. More jobs have to be created in the industrial sector. Skill enhancement and addressing high informality are also necessary.

[Here is a general summary of the book which argues that developing countries will come to the rescue of the world economy in the post-crisis period. Here is a summary of a chapter on economic crisis, migration and remittances/ )

Wednesday, October 20, 2010

Marx vs. Hicks: Technical change in India

“We use the real wage–profit rate schedule to examine the direction of technical change in India’s organized manufacturing sector during 1980–2007. We find that technical change was Marx biased (i.e., declining capital productivity with increasing labor productivity) through the 1980s and 1990s; and Hicks neutral (increasing both capital and labor productivity) post-2000. The historical experience suggests that Hicks-neutral technical change may only be a passing phase before we see a return to the long-term trend of Marx-biased technical change. We also find that the real profit rate has increased from about 30 percent to a very high 45 percent, that the real wage rate increased marginally, and that the share of capital in value added doubled. Overall, technical change in India’s organized manufacturing sector during 1980–2007 favored capital.”

More in this paper. Does this mean India will have increasing labor productivity and decreasing capital productivity in the long run? If so then, India might have low growth rate as in the “Marx biased” period. Now, what’s up with the growth projections that India will be the third largest economy by the next three decades?

Wednesday, October 13, 2010

The state of hunger in Nepal

It is no better even after two decades, according to latest Global Hunger Index 2010. Nepal’s ranking is 56. The hunger level in Nepal is ALARMING. But, Nepal fares better than India and Bangladesh in ranking. Sri Lanka is relatively better than all other South Asian countries.

The hunger situation in Nepal is still the same. Now, I wonder whats up with all the aid money in battling hunger and increasing agriculture production? What has it done to address their own primary objectives? We need some accountability here. Is our strategy to fight against hunger fundamentally wrong? Are we just wasting resources and giving band-aid solutions that require structural changes in the way we do farming and respond to emergencies? We seriously need to think. That said, lets not wholly blame the aid agencies working at the frontlines to combat hunger. But, how about questioning their strategy in combating hunger? Is it time to change that now? Now, lets see how much difference USAID’s “Feed the Future” initiative will make?

GHI is calculated based on three equally weighted indicators: (i) The proportion of undernourished as a percentage of the population; (ii) the prevalence of underweight in children under the age of five; (iii) and the mortality rate of children under the age of five. As a group, there has been a decrease in hunger in both South Asia and Sub-Saharan Africa. Globally, the countries that have made the most progress in the fight against hunger since 1990 are Kuwait, Malaysia, Turkey, Mexico, Tunisia, Nicaragua, Ghana, Iran, Saudi Arabia, and Peru. The losers are Congo DR, Comoros, Burundi, North Korea, Swaziland, Zimbabwe, Guinea Bissau, Liberia, The Gambia.

Monday, October 11, 2010

2010 Nobel prize in economics for unemployment!

This year’s Nobel prize craze finally ended with the announcement of the prize in economics to Peter Diamond, Dale Mortensen and Christopher Pissarides for “their analysis of markets with search frictions”. It is a prize for (structural) unemployment! I have heard and read some of Diamond’s stuff but not other’s. Here is an interview with Peter Diamond.

This blog post is largely derived from an extended note by the prize committee. Just to help me understand what’s up with the DMP model. It is pretty fascinating. Even though the main conclusion of their work looks obvious, they modeled it and systematically applied it in the real world. Their work has a Keynesian twist and slaps the classicists notion that markets clear itself. Tyler Cowen thinks of Pissarides “as the least Keynesian of the trio.” Here is Cowen on Diamond and Mortensen. Krugman is happy that the trio won the prize.

Diamond, Mortensen and Pissarides showed that an unregulated market does not clear by itself, as has been asserted by classical economics. The classical economists believe that markets always clear because prices are determined in such a way that demand matches supply as there are no transaction costs and there is perfect information. In reality, it ain’t so. Buyers and sellers face costs in their attempts to locate each other (“search”) and meet pairwise when they come into contact (“matching”). They explored how price formation works in a market with search frictions. How much price dispersion-- if the law of one price should be expected to hold in markets with frictions-- will be observed and how large are the deviations from competitive pricing?

Buyers are not able to find sellers, or vice versa, all the time. Even if they did, there might be disagreements in price of the product in question. This means that both will continue searching for the perfect deal. This process of finding the desired outcome is not frictionless. The trio clarified this by both using economic models and applying that to real life. They analyzed how (frictional) unemployment works and persists in an economy. Agents in an economy always look for cooperative patterns in order to meet their desired goal. For instance, in order to reach a settlement, there is always a search for cooperative deal between a buyer and a seller of a product, between employers and prospective employees, and between firms and their suppliers. When a producer produces an item, it does not sell automatically, unless it is pre-ordered, which usually does not happen all the time. This means that the seller will have to wait until he finds the right customer willing to pay the right price, and vice versa.

In 1971, Peter Diamond examined how prices are formed on a market where buyers look for the best possible price and sellers simultaneously set their best price while taking buyers’ search behavior into account. A small search cost would drastically change the outcome, which is not factored into the classical labor market model. He showed that the mere presence of costly search and matching frictions does not suffice to generate equilibrium price dispersion. He found that even a small search cost moves the equilibrium price away from the competitive price (typically exists under perfect competition). The only equilibrium outcome is the monopoly price. This is dubbed the “Diamond paradox”. This means that a small search friction can have a large effect on price outcomes, and it would not lead to any price dispersion at all.

Mortensen and Pissarides extended Diamond’s model to this notion to labor markets. Their work sheds light on how economic policy and regulation can affect unemployment, job vacancies, and wages. It relates to figuring out unemployment insurance or hiring and firing rules. Their work shows that a more generous unemployment benefits give rise to higher unemployment and longer search times.

Their research showed that an unregulated search market does not give rise to an efficient outcome. Aggregate welfare is not necessarily higher with more search since search itself is costly. Resource utilization could be either low or high as the search and matching process involves costs. There are external effects that an agent does not know of. For instance, intense search for jobs by an agent means more difficulty for other job seekers to find employment because it will be easy for companies to find desired personnel, and vice versa. Additionally, unlike in the unregulated classical models, when search costs exist, there could be several optimal points, but only one superior optimal point. This is where the role of the government comes in. It can find ways to ensure that the search process results in a superior outcome when the final deal is sealed. Unutilized resources can be put to good use by intervention from an external agent.

The search and matching environment can lead to macroeconomic unemployment problems as coordinating trade does not match one-to-one. This provides a rationale for “aggregate demand management” to steer the economy towards the best equilibrium. Diamond’s work is viewed as “a careful analysis, using microeconomic foundations, to analyze some of the central themes of Keynes’s business-cycle theory.” Coordination problems feature on both of their writings. An appropriate intervention by the government can address coordination problems.

Their work on the determinants of unemployment (DMP model) can be used to explain the position of the Beveridge curve and the location of the economy on the curve. A Beveridge curve shows that the labor market fluctuates between situations of either high unemployment and few vacancies or low unemployment and many vacancies. If unemployment increases when vacancies go down, then it is related to the demand for labor and is related to business cycle. But, if vacancies go up and unemployment also increases, then the labor market is not performing well, signaling that there could be weaker matching efficiency resulting in long-term unemployment. Understanding why this happens is important to reducing unemployment.

The DMP model addresses the following questions:

    1. How workers and firms jointly decide whether to match or to keep searching
    2. In case of a continued match, how the benefits from the match are split into a wage for the worker and a profit for the firm
    3. Firm entry, i.e., firms’ decision to “create jobs”
    4. How the match of a worker and a firm might develop over time, possibly leading to agreed-upon separation.

The model is used to examine the effects of policies concerning hiring costs, firing costs, minimum wage laws, taxes, and unemployment benefits on unemployment and economic welfare.It also used to analyze how aggregate shocks are transmitted to the labor market and lead to cyclical fluctuations in unemployment, vacancies, and employment flows.

As a side note, here is an abstract from a paper that uses search theory in marriage where older men appear to be attractive in the marriage market for younger women!

It is commonly observed that across societies and time, women tend to marry older men. The traditional explanation for this phenomenon is that wages increase with age and hence older men are more attractive in the marriage market. The explanation holds even where differences in fertility between men and women are taken in account. This explanation, however, involves an implicit assumption about female specialization in home production - an assumption that does not generally hold, especially in modern times. This paper shows that a marriage market equilibrium where women marry earlier in life than men can be achieved without making any assumptions about the wage process or gender roles. The only driving force in this two sided search model is the asymmetry in fertility horizons between men and women. When the model is calibrated with Census Data, the average age at first marriage and the pattern of the sex ratio of single men to single women over different age groups mimics the patterns observed in developed countries during the last decade (e.g. France, the U.S. and Sweden). However, the fit is less accurate for developing countries and for earlier decades in developed countries. This result may indicate a more important role of social norms and wages in the determination of marriage pattern in those cases.

2010 Nobel prize in economics

Peter Diamond, Dale Mortensen and Christopher Pissarides share 2010 Nobel prize in economics for “their analysis of markets with search frictions”.

Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year's Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish. Simultaneously, there are both job vacancies and unemployment on the labor market.

This year's three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.

Search theory has been applied to many other areas in addition to the labor market. This includes, in particular, the housing market. The number of homes for sale varies over time, as does the time it takes for a house to find a buyer and the parties to agree on the price. Search theory has also been used to study questions related to monetary theory, public economics, financial economics, regional economics, and family economics.

Saturday, October 9, 2010

Global economic crisis, migration & remittances

In a new book (here is a general summary of the book which argues that developing countries will come to the rescue of the world economy in the post-crisis period) published by the WB, Sanket Mohapatra and Dilip Ratha have a chapter on the impact of the global financial crisis on migration and remittances. They discuss recent trends in and the outlook for migration and remittance flows for 2010-11. Remittance to developing countries is estimated to decline by 6 percent in 2009. Remittances amounted to US$223 billion in 2008 (3x larger than ODA to developing countries). Remittances account for more than one-third of GDP in Lesotho, Moldova, Tajikistan, and Tonga.

Remittance inflows to South Asia is estimated to be US$82.8 billion in 2011 from  US$71.7 billion in 2008. Remittance inflow to developing countries is estimated to be US$359.1 billion in 2011.Total world remittance flows is estimated to be US$464.9 billion in 2011. East Asia and the Pacific is expected to see the highest growth of remittances in 2010 (9.8 percent) and 2011 (9.2 percent) following negative growth rate of 0.4 percent in 2009. Remittances is expected to amount US$102.7 billion in East Asia and Pacific in 2011.

The factors that affected migration and remittance flows in 2009 were:
  • effects of the economic crisis on migrant stock,
  • diversification of migration destinations,
  • currency effects, and
  • the link between barriers to labor mobility and the impact of economic cycles on remittances. If the barriers to labor mobility is low, then economy cycles and remittances are strongly related.

Existing migrants are unwilling to return back to their home countries, so remittances is expected to increase. Meanwhile, low demand for labor in the Gulf countries would reduce the stock of migrants from Nepal, Pakistan, India, and Bangladesh, among others.

The countries that have the most diverse migration destinations have better chances of remittances being more resilient. Additionally, the total value of remittance inflows to developing countries depends on the prevailing exchange rate, usually between US dollar and their domestic currency. The Indian rupee depreciated by almost 25 percent against the US dollar, leading to a surge in remittance flows and an increase in spending in housing sector, and in bank deposits and stocks.

Similar signs of investment-related remittance flows were seen in Nepal, Bangladesh, Pakistan, Tajikistan, Ethiopia, Moldova, and the Philippines.

One notable feature of remittances have been its impact on offsetting balance of trade deficit. It is particularly true in Nepal, the Philippines, Bangladesh, and Mexico.

Thursday, October 7, 2010

5 steps to prevent another food crisis

  1. Countries with large grain stocks should release some of their reserves to calm domestic and global prices.When distributing public food supplies, it is important to properly target poor people.
  2. Effective social safety nets are needed to protect the most vulnerable groups, including women and children.In the long term, these safety nets should be combined with other interventions that increase productive capacity and improve the nutrition and health of the poor.
  3. Smallholder productivity enhancing mechanisms are needed to sustainably reduce hunger and poverty.Investments should be scaled up to improve smallholder access to inputs such as seeds and fertilizer, as well as financial and extension services and crop insurance. New agricultural technologies suitable for smallholders in developing countries should also be strongly promoted, and rural infrastructure should be strengthened to increase access to markets.
  4. An international working group comprised of key institutions should come together to regularly monitor food production, stocks, prices and policies.Close attention should be paid to the policies of large food importers and exporters. In particular, governments should be encouraged to eliminate existing export bans and refrain from imposing new ones.
  5. New institutional arrangements should be created to decrease price volatility, including a global physical grain reserve and regional reserves for specific commodities.IFPRI proposes the establishment of a global, coordinated physical grain reserve, which could be managed by the WFP. Regional reserves for specific commodities could be set up first, then scaled up to the global level. In addition, a global market-analysis unit can be created to help forecast prices, identify price abnormalities, and trigger market intervention.

More from IFPRI director general Shenggen Fan here

Tuesday, October 5, 2010

Developing countries to the rescue...

So say the authors of a new book "The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World" published by the World Bank. The economic size of developing countries is projected to surpass the size of developed countries by 2015. The authors argue that developing countries are the "new locomotives of growth which will move global growth forward while high-income countries remain stagnant." This is somewhat in line with growth projections done by Goldman Sachs (2003), Carnegie Endowment (2010), and Pricewaterhousecoopers (2005). These projections look at either BRIC or the G20 economies.

According to the authors of the new book, growth in developing countries is estimated to reach 6.1 percent in 2010, 5.9 percent in 2011, and 6.1 percent in 2012, while corresponding figures are 2.3 percent, 2.4 percent, and 2.6 percent for high- income countries. These diverging growth prospects continue in the medium term. East Asia, Latin America and South Asia have the potential to turn into 'newly developed' nations.

Five factors account for it:

  • faster technological learning

  • larger middle- class population 

  • more South-South commercial integration

  • high commodity prices

  • healthier balance sheets that will allow borrowing for infrastructure investment
The study states that there will be recovery of remittances in the developing countries, an increase in South-South trade, rising investment by sovereign wealth funds, more conservative debt management, and progress by many governments in gaining public trust.

Reason-wise recommendation:

Sub-Saharan Africa, which saw an additional 7-10 million people thrown into poverty as a result of the global economic crisis, will have to address challenges of infrastructure, job creation, governance and shrinking aid in order to achieve faster growth.

MENA region, which will see around 2.6 million additional people fall into poverty by 2011, needs to "open the door for a new generation of private entrepreneurs and for women to fully join economic life." High oil prices and stable financial sector in the Gulf countries is helping in regional recovery.

East Asia and the Pacific is leading the world out of the economic slump. It recommends China to do some "rebalancing" through scaling up of domestic consumption and expansion of service sector. Meanwhile, middle-income countries like Indonesia, Malaysia, the Philippines and Thailand have to move up into knowledge- and innovation-based markets. Trade facilitation is needed in low-income countries like Cambodia, Lao PDR, and Vietnam. Eastern Europe and Central Asia needs to improve its competitiveness and put its social service provision on a fiscally sustainable path.

Latin America had no economic or social meltdown, mainly due to the progress over the previous decade on macroeconomic management and social policy (the success of social workfare and welfare programs in Latin America is well-known and emulated in other parts of the world). The study projects that the region is well-positioned to enter a path of fast and sustained development, given that it fends off external shocks.

South Asia, which withstood the impact of the crisis reasonably well, needs to make recovery stronger, inclusive and sustainable. It still has around 600 million people below the US$1.25 a day poverty line. Fiscal space (for social programs and infrastructure) has to be created by reducing fiscal deficit and taming public debt accumulation. Trade integration within the region will also be critical in shaping the growth path of this region.

Stay tuned for summary of two of the chapters: one about remittances, and the other about economic policy in South Asia.

Monday, October 4, 2010

Past and present of the Doha Round

Pascal Lamy, Director-General of the World Trade Organization (WTO), explains:

Previous negotiations have also attempted to deal with a lengthening list of issues in a single “package” — with the aim of giving every Member an interest in its overall success.  That is why the Uruguay and Doha rounds have been “single undertakings” — where nothing is agreed until everything is agreed.  But this approach can also complicate negotiations — especially for poorer, capacity-constrained countries. And it can mean that progress on uncontroversial and solvable issues is held hostage to progress on more difficult and intractable ones.

Finally, in the past, transatlantic leadership was central to moving negotiations forward.  But trade power is shifting, and the days — last seen during the Uruguay Round — when the US and Europe could essentially strike a deal on behalf of the entire Membership are long gone.  It is not just that established powers need to accept to share the centre stage; emerging powers also need to recognize their responsibility for a system in which they now have a major (and growing) interest.  The old North-South divide seems increasingly outdated when so much of the future trade agenda will be played out among developing countries.

It is not just the composition of leadership that needs to evolve.  The WTO's impact now goes far beyond the traditional scope of trade policy touching on core national and international interests. Yet despite repeated statements of support and of engagement, world governments seem incapable of marshalling the policies and political will needed to move the multilateral agenda forward.  A worrying leadership vacuum has opened that has — so far — proved difficult to fill.   Let's hope that the G20 can help provide an answer.

[..]But the central priority remains concluding the Doha Round — and here too we need to be realistic about the magnitude both of the challenge and of what is at stake.  Early GATT rounds which focused on tariff cutting among a small group of countries, could be wrapped up in a matter of months.  But with expanding issues and participants, and more effective and active dispute settlement, trade rounds have inevitably become more difficult and drawn-out.  The Kennedy Round — which started grappling with development issues and involved 60 countries — took three years to complete.  The Tokyo Round — which addressed “non-tariff” barriers and involved 102 countries — lasted six years, twice as long.  And the Uruguay Round — which created the WTO and involved 133 countries — turned into a negotiating marathon lasting eight years.

With 153 Members now at the table and the most ambitious negotiating agenda yet, the only thing surprising about the length of the Doha Round is that anyone is really surprised.  Not without reason does the term “trade round” takes its inspiration from the boxing ring!

What is at stake is more than the economic benefits that would flow from a successful Doha deal.  The real issue is the relevance of the multilateral trading system itself.  With its global Membership, comprehensive rules, and “world trade court”, the WTO is more central than ever to international economic relations. But this also means that the costs of failure are higher — with ramifications that could be felt more widely. Bringing the Doha Round to a successful conclusion would send the strongest possible signal that the WTO is relevant to today's new world economy, that it remains the focal point for global trade negotiations, and that it will be a key forum for international economic cooperation into the future.  But if Doha stumbles, then doubts will grow, not just about the WTO, but about the future of multilateralism in trade.

In many ways,  the Doha Round marks a transition from the old governance of the old trade order to the new governance of a new trade order.  Covering classic trade issues such as the reduction of import tariffs and subsidies, as well as innovative new chapters on trade facilitation and fisheries subsidies, the Doha Round is a turning point for the system. 

The politics of this Round have had to adjust to the changes that happened since it was launched in 2001. And we all know we need to conclude it in order to address tomorrow's challenge.

Sunday, October 3, 2010

Is China’s growth export dependent?

Yes and No. A new Mckinsey note states that China’s export sector contributed 19 to 33 percent of total GDP growth between 2002 and 2008. That’s only about half of the export contribution indicated by traditional total-exports measures.

Using ‘DVAE analysis’-- which is what you get after subtracting from total exports only those imports used in the production of goods and services that are subsequently exported-- the authors of the note argue that exports have been an important driver of China’s growth, but not the dominant one, and that most common wisdom overestimates the role of exports while underestimating the role of domestic consumption for China’s growth.

The authors of the note estimated that imported goods accounted for 40 to 55 percent of the value of total exports from 2002 to 2008. This means that roughly half of China’s exports represent domestic value added. Concurrently, DVAE’s share of exports generally has risen over time, suggesting that China has become less of a pure assembler of imported goods—a publicly stated government policy goal.

Arguments over the true nature of China’s economic reliance on exports have been rooted in the difficulty of appropriately measuring the export sector. The traditional measure governments and most analysts use is the growth of total exports as a share of GDP growth. This measure indicates that export growth has accounted, on average, for almost 40 percent of the total growth in real GDP since 1990—rising to almost 60 percent since 2000.

Yet these numbers, portraying a dominant and growing role of exports, are at odds with the fact that China was one of the few countries that escaped the great 2008–09 global downturn without a major economic slowdown—suggesting that internal growth played an important role. That’s one reason other economists have used a very different measure: growth in net exports (total exports minus total imports) as a share of GDP growth. By that metric, exports contributed only between 10 and 20 percent of China’s annual 10 percent GDP growth in recent years.

We contend that both measures are misleading. Using total exports neglects the fact that many of China’s export shipments include a fair number of imported goods that are reassembled, combined with domestic content, or otherwise modified before being exported. Failing to remove these imports from the total export figure overstates how much value exports contribute to GDP. On the other hand, a strict net export measure (exports minus imports) underestimates the contribution of exports to GDP, because many imports aren’t used in assembly and exported but rather sold to Chinese consumers and businesses.

We calculated a measure we call domestic value-added exports (DVAE) to assess more accurately the role of exports in GDP growth. DVAE is what you get after subtracting from total exports only those imports used in the production of goods and services that are subsequently exported. In automobiles, for example, finished imports are not subtracted from our measure of exports. But engine parts imported to manufacture motor bikes for export would be.

Friday, October 1, 2010

The value of lobbyists

Once the politician for whom they [lobbyists] worked leaves office, their revenue falls 20%, or $177,000 per year, suggesting that lobbyists are paid more for “who they know” than “what they know”.

Very interesting finding. More here.