Monday, October 10, 2011

Nobel prize in economics to Thomas Sargent and Christopher Sims

This year's the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel  goes to Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy". Below is the press release:

How are GDP and inflation affected by a temporary increase in the interest rate or a tax cut? What happens if a central bank makes a permanent change in its inflation target or a government modifies its objective for budgetary balance? This year's Laureates in economic sciences have developed methods for answering these and many of other questions regarding the causal relationship between economic policy and different macroeconomic variables such as GDP, inflation, employment and investments.

These occurrences are usually two-way relationships – policy affects the economy, but the economy also affects policy. Expectations regarding the future are primary aspects of this interplay. The expectations of the private sector regarding future economic activity and policy influence decisions about wages, saving and investments. Concurrently, economic-policy decisions are influenced by expectations about developments in the private sector. The Laureates' methods can be applied to identify these causal relationships and explain the role of expectations. This makes it possible to ascertain the effects of unexpected policy measures as well as systematic policy shifts.

Thomas Sargent has shown how structural macroeconometrics can be used to analyze permanent changes in economic policy. This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments. Sargent has examined, for instance, the post-World War II era, when many countries initially tended to implement a high-inflation policy, but eventually introduced systematic changes in economic policy and reverted to a lower inflation rate.

Christopher Sims has developed a method based on so-called vector autoregression to analyze how the economy is affected by temporary changes in economic policy and other factors. Sims and other researchers have applied this method to examine, for instance, the effects of an increase in the interest rate set by a central bank. It usually takes one or two years for the inflation rate to decrease, whereas economic growth declines gradually already in the short run and does not revert to its normal development until after a couple of years.

Although Sargent and Sims carried out their research independently, their contributions are complementary in several ways. The laureates' seminal work during the 1970s and 1980s has been adopted by both researchers and policymakers throughout the world. Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis.

Here (also here) is technical note that further describes the new laureates contribution.

Are Nepali workers underpaid in terms of salary and benefits?

Well, so claim the labor union leaders. That might be true. But it is unfair to ask for similar benefits for workers in Nepal like the workers (even Nepali) in South Korea, Malaysia and the Gulf get. It is fair to ask for a decent working condition, but most of the strikes are hinged on politics and salary hike only. Both the sides (industrialists and unions) are on fault here. That being said, there is no doubt that the unions are more politicized than warranted and this is more problematic than the complain about salary and compensation issue. Is there any cases where unions and industrialists (at central and firm level) sat down together, talked about working condition and productivity, and honestly did the necessary from their part to work on this regard?

Below is a piece by Prem Khanal who looks at both sides of the debate. My take on the issue here, here and here.

Embroiled in low pay and poor performance dispute

Prem Khanal

It needs no close scrutiny to discover the biggest obstacles to Nepal´s industrialization. Talk to any group of industrialists and you will hear scary accounts of militant extremism of Nepali workers.

Surya Garment, one of the largest apparels producing multinationals with annual turnover of over one billion rupees and providing employment to 700 workers, decided to fold down operations after it was compelled to call for police intervention to free three dozen officials locked for two days without food and water by workers in June. 

Another foreign venture, Fire and Ice, a famous Italian pizza restaurant located in downtown Kathmandu, and employing some 70 youths remained closed for six weeks after workers padlocked the restaurant demanding dismissal of a newly appointed manager. Undoubtedly, the two incidents speak volumes about how workers here have made Nepal an unsavory place for business.

Are the Nepali workers really so undisciplined? Absolutely not. Nepali youths in the Indian and British Armies have earned repute for hard work, bravery and obedience. By winning the best performance award for the two consecutive years in South Korea, Nepali youths have proved that they possess unparalleled qualities.

The South Korean government has announced to increase the quota for Nepali workers to 15,000 from 2012. What´s more, Japanese factories, which employ a large number of South East Asian and Chinese workers, have also started eyeing Nepali workers.

However, it is puzzling that the Nepali workers who are so notorious back home undergo a dramatic behavioral change when they are outside the country.

“It is the attractive incentive -- that is well over ten times -- that brings about this drastic transformation,” says Bishnu Rimal, president of General Federation of Nepalese Trade Unions (GEFONT). “When the monetary incentives you get from your job barely makes your ends meet, not only do commitments falter but even makes the workers hostile to the management,” he says.

On the top of the handsome incentives that Nepali workers enjoy in South Korea, they also get additional reward for hard work. This results in greater commitment to work and increased productivity, says Rimal, who has also authored a book “´Enhancing Decent Work Agenda in Workplace: Trade Unions Efforts through Social Dialogue in Nepal.

Padma Jyoti, former president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and the Chairman of Jyoti Group of Companies, admits that low incentives instigate unrests. But he blames politicization of labor unions as the biggest obstacles to industrialization in Nepal.

“Frequent strikes in factories that provide good pay are the testimony that trade Unions instead of promoting workers´ welfare have become tools in the hands of political parties. This has posed a big challenge to Nepali industries,” Joyti says. Growing factionalism in political parties and the tendency of dishonoring agreements have made matters worse,” he said.

Rabi Bhakta Shrestha, former FNCCI president, says politicization of labor unions, has sounded death knell for Nepal´s industries. “The productivity of Nepali laborers has shrunk so dangerously in recent years that even the businesses with absolute comparative advantage have become financially unviable,” Shrestha says.

According to a study, the productivity of a Nepali garment worker is currently 9.6 pieces of shirts in an 8-hour shift whereas the same for the Chinese is 25.5, Bangladeshi 18.6 and Indians 16.

“How we can we increase the workers´ incentives in this situation,” questioned Shrestha, adding, “We are ready to double the salaries if the workers bring up their productivity on par with the South Asian average.

However, Rimal, a lawmaker with nearly two-decades of involvement in labor activism, rubbishes the claim that politicization is the only reason for low productivity of Nepali laborers. Apart from the non-labor related factors like power shortage, Rimal blames the industrialists themselves for low productivity of workers.

“How many factories pay enough to ensure workers a decent life, how many factories invest for trainings to enhance workers´ skills, and how many factories have a healthy working environment,” he questions.

Dr Shiva Sharma, General Secretary of National Labor Academy, concurs and attributes low pay scale for poor productivity. “Low pay scale has forced Nepali workers to opt for jobs in Malaysia though they are not very lucrative,” Sharma said.

Sharma also blames factory owners for politicization of labor unions. When workers feel that the employers are indifferent toward their grievances, it is natural for them to seek help from political parties, he said.

Rimal claims that the factories that have addressed workers´ grievances have not suffered strikes for many years. He also blames the factory owners for allowing political clout inside the factories. Instead of making efforts to win workers´ confidence by addressing their genuine concerns through regular dialogues, many factory owners opt for fast track solutions by using political connections to suppress labor unrest.

As a result, the mistrust between the workers and factory management has been widening like never before. Workers see employers as oppressors, whereas owners feel that laborers are least concerned with the growth their workplace.

“The desperation of workers for higher incentives in Nepali factories so high that there is hardly any resistance to calls made by any unions of any political hue to go for strikes,” says Sandeep Gautam, president of Labor Union of Him Electronic Nepal.

Jyoti acknowledged that some employers seek the support of political parties to deal with labor disputes and said such practices have made political leaders the de facto owner of Nepali factories. Shrestha further added that the practice has become so prevalent that an employer needs political connections to bring the workers back to work even after meeting their demands.