Lehman to 'Layman Brothers'

This is not directly related to development economics but is interesting in the sense that how incapable our system is to deal with the economic and psychological consequences of failure of a firm seen earlier as a foster child of liberal financial market. Lehman Brothers is now scrambling to find saviors, but in vain . The only road left to explore now is liquidation (which loosely means termination of a business operation by using its assets to discharge its liabilities). In other words, a slow but certain death! What a tragedy for the liberal financial market system!! Chapter 11 protection in high demand, again!

The NYT reports:

...But that plan fell apart on Sunday, making it likely that Lehman would be forced to liquidate.

What remained unclear was how a liquidation might proceed. One option that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks.

Here is a piece from the BBC News:

...If no new financing is found before Wall Street opens on Monday, Lehman will have to seek so-called Chapter 11 bankruptcy protection.

Here is WSJ on why didn't Lehman use Fed's discount window?

Why wouldn’t Lehman borrow? For one thing, it may not need to. As in the case of Fannie Mae and Freddie Mac, one of its key problems is with capital and not short-term funding. Another possibility: Taking a discount window loan while everyone is watching for it — and expecting it — might create a new set of confidence problems. Because there was no borrowing leading up to this week, Lehman would’ve been tagged as the borrower of any loan taken out. (The Fed does not disclose the identities of the borrowers.) One way around it would be for several other firms — healthier ones — to step up and offer cover, taking loans and somehow signaling publicly that they also had done so. Another would be to wait until the weekly reporting period ended Wednesday and then borrow on Thursday, allowing a week of breathing room before the next report comes out.

Update: see this one as well: Nightmare on Wall Street

Links of Interest (09/13/08)

1) Dani Rodrik questions whether export led growth strategy still fulfills its purpose (of stimulating growth).

Many countries are trying to emulate this growth model, but rarely as successfully because the domestic preconditions often remain unfulfilled. Turn to world markets without pro-active policies to ensure competence in some modern manufacturing or service industry, and you are likely to remain an impoverished exporter of natural resources and labor-intensive products such as garments.

Nevertheless, developing countries have been falling over each other to establish export zones and subsidize assembly operations of multinational enterprises. The lesson is clear: export-led growth is the way to go.

(The title of this piece is similar to the title of Paul Krugman's 1987 paper: Is Free Trade Passe?)

2) Jones, Ocampo, and Calice propose channeling 1 percent of developing countries' foreign-exchange reserves to investment in infrastructure.

Although economic growth and poverty reduction in many developing countries has been impressive in recent years, a significant increase in investment in areas such as infrastructure is required to sustain such growth in the future. We propose that a very small portion of developing countries’ total foreign-exchange reserves – say, 1% – be channeled to the expansion of existing regional development banks or the creation of new ones that would invest in infrastructure and other crucial sectors.

Indeed, infrastructure investment is recognized as a key ingredient in sustaining and accelerating growth. However, there is a large financing gap. According to the World Bank, developing countries spend an average of 3-4 % of GDP on infrastructure every year, compared to an estimated 7% of GDP required to meet existing infrastructure needs for maintaining rapid growth. This translates into an annual gap of at least $300 billion at current prices.

3) Pedro de Araujo urges to increase condom distribution and awareness among the poor and uneducated in India to avert rising risk of HIV infections.

HIV knowledge in the Indian population is very poor. Seventeen percent of males and 40% of females say that they have never heard of HIV/AIDS. These numbers are much higher when compared to responses from populations of sub-Saharan African countries. Those who said they knew of AIDS were not necessarily very knowledge: when asked if a healthy looking person could have AIDS, 27% of males and 38% of females did not know the answer. These statistics raise some concerns as to how inadequately prepared the population is in the advent of an outbreak. Another point of concern is the reported levels of stigma in the population. Thirty six percent of males and 37% of females would not buy vegetables from an HIV-infected person. This variable is the most commonly used proxy to measure stigma in these surveys.

...Even though a great part of the Indian population is faithful and abstains from sex, there are still large segments of the population at risk of contracting HIV. Because condom use is very low and knowledge about the disease is very poor, especially with respect to females and poorer and uneducated single males, preventive policies should be targeted at these groups by increasing condom distribution and awareness, increasing substantially HIV/AIDS basic education, and promoting women’s empowerment particularly with respect to sexual choices.

4) Brookings papers: The unofficial Economy and Economic Development (by Rafael La Porta and Andrei Shleifer) and The Real Exchange Rate and Economic Growth (by Dani Rodrik)..links via Rodrik's blog.

Keynes widely quoted than understood

Paul Krugman explains what Keynes really meant when he said "In the long run we are all dead."

Keynes's famous remark "In the long run we are all dead" is more widely quoted than understood. Here is how Krugman explains it: "What he meant was recessions may eventually cure themselves. But that's no more a reason to ignore policies that can end them quickly than the fact of eventual mortality is a reason to give up on living."

This one is from an interview done by Subramanian for IMF's Finance & Development magazine. Read the full interview here. Not a new interview but could be a refresher (...to fend off 'hungoverness' on Saturday morning)...

Q & A with Esther Duflo

Professor Esther Duflo, the co-director of the Abdul Latif Jameel Poverty Action Lab at the MIT, has answered questions asked to her through Managing Globalization blog. She has also answered the question I asked about policy prescription on macro level from the conclusions derived from RCTs.

Professor Duflo is "one of a new wave of development economists who have been instrumental in changing the focus of their field - away from one-size-fits-all solutions and towards specific, detailed studies of ground-level problems in poor areas. She is known for highly rigorous work addressing the roots of poverty in India, Kenya, South Africa and elsewhere. Her topics have included education, health and pollution, saving patterns and even the rate of return on fertilizer."

Q. How far can conclusions derived from randomized controlled trials be stretched when it comes to policy prescription to tackle poverty? If we find out that a certain intervention is having a positive impact on the fight against poverty, then how appropriate would it be to prioritize the intervention at a macro level and deduce national economic policy based on the result of the intervention? Besides local political and economic institutions, what other factors should we be careful of when scaling up policies which are rigorously and successfully tested at a micro level?

Chandan Sapkota
United States

A. This question, as well as Kartik’s (below), is an excellent question, and both are related. Let me start by reminding everyone what a randomized control trial is, and how they are used to evaluate poverty alleviation intervention. You can find much more information on the site of the Abdul Latif Jameel Poverty Action Lab. In particular, we describe randomized control trials and their rationale in some detail.

Generally, people or communities who benefit from an intervention are not comparable. For example, schools that receive extra textbooks may be either richer or poorer than other schools: they could be richer because only rich schools can afford books, or poorer because an NGO has decided to give textbooks to the poorest schools in the area. This makes it very difficult to evaluate the impact of extra textbooks by comparing schools with and without them. Randomized evaluations follow the lead of medicine: a sample of schools is selected, and half of them are randomly assigned to receive the textbooks (usually, the other half is also given textbooks after the experiment is concluded and the results are out). If the sample is large enough, we can now be sure that the children in schools with and without extra textbooks differ only because of the textbooks. When we compare their scores after a year, we can be sure that any difference is due to textbooks, not to something else. Michael Kremer and colleagues ran exactly such an experiment in Kenya, and found quite surprising results, which you may want to check out….

Now, let me turn to your question. When we run an experiment and we get the results, we know the effect of this program had in this particular place. This is much better than the information we have in general to decide on policy (nothing…), but is it good enough to act on and to move on to recommend a more general policy? There are several obstacles.

First, the results may not replicate across contexts; I discuss that in the next answer.

Second, a program may be implemented in very different ways in a large scale. For example, it may be done well by a non-governmental organization, but corruption problems may creep in when it is implemented by a government. These implementation issues will have to be ironed out. This is important, and scaling up challenges have to be considered, but it does not take away from the finding that we now know what the potential of the program would be if it were correctly implemented. If we find an effective program, this suggests that it is worth investing some effort in figuring out how to correctly implement it on a large scale. This can also be experimented with, by the way: some of the very exciting work in development economics these days is precisely about how to effectively implement programs (see for example Ben Olken’s work, which I discussed in response to another question).

Third, there may be market equilibrium effects. For example, if I find that by randomly offering secondary school scholarship to some kids, I increase their wage, compared to those who did not receive the scholarships, this may not tell me what the effect of doing this nationwide would be: if everybody received a secondary education, the returns to secondary school may go up or down, compared to a situation where few people received a secondary school education. There are two ways to deal with these: in some cases, it may be possible to organize experiments at the “market” level (though I think it would be hard in the example I just described). In others, we have to use a priori economic reasoning to think whether market equilibrium effects are going to be important or not. In many cases, we have no reason to think they would be large enough to undo the effect of the policy.

Abhijit Banerjee and I discuss these issues in a recent article (“The Experimental Approach to Development Economics”), which I have posted on my web page at MIT.

The whole Q&A with Duflo is very enriching and she articulately and in great detail answers other questions related to poverty reduction and the work done through the MIT's Poverty Action Lab.

Personally, the three fields, in development economics, that I have great interest in and want to work on in grad school are growth diagnostic approach, RCTs, and economic policies (on growth and development) derived from a sound theoretical and a rigorous experimental approach from the first two fields. As for my senior honors thesis I am exploring the growth diagnostic approach and will apply it in the context of Nepal (and if possible Burkina Faso). My future Op-Eds (columns) will be about the identification of constraints to economic growth in the Nepali economy. Read my earlier Op-Eds here. The latest one is here.

Doing Business Report 2009

The IFC and WB have just published an annual report on the ease of doing business in countries around the world. The report, which is widely covered in the media and is taken as one of the tools to gauge investment and business climate in a country, states that the top ten reformers in 2007/08 are: Azerbaija, Albania, Kyrgyz Republic, Belarus, Senegal, Burkina Faso, Botswana, Colombia, Dominican Republic, and Egypt. It tracks ten stages in the "lifecycle of a business" and ranks countries on their regulatory ease of doing business. Here is the report overview.

The indicators used in the report are: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. The rankings do
not reflect such areas as macroeconomic policy, quality of infrastructure, currency volatility, investor perceptions, or crime rates.

Singapore leads the global rankings on the overall regulatory ease of doing business for a third consecutive year. New Zealand is runner-up, and the United States third. Bahrain and Mauritius join the ranks of the top 25 this year.

The top 25 are, in order, Singapore, New Zealand, the United States, Hong Kong (China), Denmark, the United Kingdom, Ireland, Canada, Australia, Norway, Iceland, Japan, Thailand, Finland, Georgia, Saudi Arabia, Sweden, Bahrain, Belgium, Malaysia, Switzerland, Estonia, Korea, Mauritius, and Germany.

Sadly, the report states that "no major reforms were recorded." Nepal rank is 121 on the list. In South Asia, Maldives has the highest ranking (69), followed by Pakistan (77), Sri Lanka (102), Bangladesh (110), Nepal (121), India (122), Bhutan (124), and Afghanistan (162).

I will have more on the ease of doing business in Nepal and in South Asia discussion in later posts.

I am getting late for class now!

Links of Interest (9/9/08)

Thomas Friedman talks about his new book Hot, Flat, and Crowded: Why We Need a Green Revolution- and How It Can Renew America(More here from Foreign Policy magazine: Seven Questions)

"Hot, Flat, and Crowded": There is a convergence of basically three large forces: one is global warming, which has been going on at a very slow pace since the industrial revolution; the second--what I call the flattening of the world--is a metaphor for the rise of middle-class citizens, from China to India to Brazil to Russia to Eastern Europe, who are beginning to consume like Americans. That's a blessing in so many ways--it's a blessing for global stability and for global growth ... And lastly, global population growth simply refers to the steady growth of population in general, but at the same time the growth of more and more people able to live this middle-class lifestyle. Between now and 2020, the world's going to add another billion people. And their resource demands--at every level--are going to be enormous. I tell the story in the book how, if we give each one of the next billion people on the planet just one sixty-watt incandescent light bulb, what it will mean: the answer is that it will require about 20 new 500-megawatt coal-burning power plants. That's so they can each turn on just one light bulb!

The green revolution is about how we produce abundant, cheap, clean, reliable electrons, which are the answer to the big problems we face in the world today. I would point to five problems, and they’re all related: Energy and resource supply and demand, petrodictatorship, climate change, biodiversity loss, and energy poverty. They all have one solution: abundant, cheap, clean, reliable electrons. The search for and the discovery of a source of those electrons is going to be the next great global industry. And I think the country that mounts a revolution to be the leader of that industry is going to be a country whose standard of living is going to improve, whose respect in the world is going to improve, whose air is going to improve, whose innovation is going to improve, and whose national security is going to improve. That’s what this book is about.

10 worst ideas of McCain and Obama

Freddie Mac and Fannie Mae: A rebuild or a teardown?

Bail out of NOC, a financially bankrupt state-owned enterprise in Nepal

Reforming without resourcing: The case of the urban water supply in Zambia

The commercialisation of the WSS in Zambia has proven to be less than effective because of inherent design flaws. The reforms stressed tariff rationalisation and cuts in government transfers. At present, commercial utilities persist in a “vicious circle” of low investment levels, high system losses, unaffordable tariffs and low access levels. The commercial improving the effectiveness of cross-subsidisation and ensuring the utilities’ financial viability, since such a step would help reduce the unit cost of production through both the scale effects and lower UFW rates.

Is the conditionally necessary in CCT Programmes? Evidence from Mexico

Our results show that the benefits of conditionalities can be large. They could also be made much more efficient by  calibrating the design of programmes based on the heterogeneity of the effect of the conditionality, they could be much more efficient.

Microfinance meets the market

The role of public and private sectors

Here is Jean-Michael Severino on the role of public and private sectors in the economy. Behind his argument lies the fact that market is not perfect and there are numerous sectors where the private sectors have not yet penetrated due to high risks and uncertainty. It is the public sector job to encourage the private sector to invest in these untapped sectors (infrastructure, education, health, irrigation, agriculture, energy, environment protection) by first sharing risk and then, if necessary, providing other incentives like funding and insurance against potential losses due to high overhead costs. Gone are the days of too much inclination to either one of the ideological schools of thought in economics. We need to be practical, which demands the role of both the government and the private sector. No sector is naturally reserved for this or that entity! The depth of state's involvement should be restricted to the point where its involvement is not disturbing incentives in individuals and in the private sector.

 

Severino puts it in a better way:

 

The role of public actors can precisely be to make private actors step into sectors which they would not have thought of penetrating, and enabling or inciting them to walk the extra mile in a way that is compatible with their business approach, but for which they would have lacked financial means, or for which they need to share risks with a third party. So in itself, private sector intervention is a significant contribution to development policy.

The public sector’s role is to comfort the private sector in risk-taking. The private sector’s role is fundamentally to insure and take on that risk, and to manage the concrete operations. Ultimately, what this public-private partnership in favor of economic growth and global public goods in developing countries does is this: developing new services in favor of the populations by taking on additional risks and filling in gaps, I would say, in the financial market. In pushing limits that appear and that would not have been surpassed without concerted action of these two types of actors.”