Links of Interest (09/23/2008)

Economics for everyone- The Paradox of Poverty

How financial madness overtook Wall Street (excellent review of how we got into this financial mess and what’s up next)

Why Paulson is wrong

Why Paulson is (maybe) right

Cash for Trash

An emerging consensus against the Paulson Plan

Anatomy of the financial crisis

Economists’ find three fatal pitfalls in Paulson’s plan

Putting Doha on life support

A systemic crisis demands systemic solutions

Development impacts of the financial crisis

An analysis of the so-called export-led growth (interesting paper from the IMF… the main point is that solely focusing on export-led through tradable sector might not be wholly right; non-tradable sector led-growth could be as powerful as tradable export-led growth)

Budget undermines free market policy: FNCCI

More on the same budget stuff

Here is a PDF file of the actual Opinion page on print:

Here is an image file of the same page.

Budget 2008/09: Enter Socialism with Inflation

My latest Op-Ed published today is titled “Enter Socialism with Inflation”. It is about the quantity and quality of budget presented on September 19, 2008 by Finance Minister Dr. Baburam Bhattarai,  to the first elected parliament of the Federal Democratic Republic of Nepal.

Although I am happy that sectoral priorities have been quite upfront and to the point this time- putting hydropower and tourism on the top of priority list- I am not satisfied with the inflated budget, econ-political slogans, policies to tame the private sector, promotion of cooperatives, plans to revive sick and moribund firms, and complete disregard to rising inflation rate. This budget is crafted with a socialist and planner mentality, which might not necessarily lead to a servile state but is certain to screw up individual and private sector incentives, which is the last thing Nepal needs if it wants to see the light of a double-digit growth rate.

Read the full article here. My preliminary notes on this budget article is here. Extended summary of the budget is here.

Sept. 19, 2008 will definitely go down as one of the most important dates in the history of the Federal Democratic Republic of Nepal. On that day, Finance Minister Dr. Baburam Bhattarai presented the first budget, albeit two months late, for the coming fiscal year. The first thing that will be noted in the economic history of Nepal will be the heavy, inflated size of the budget, which amounts to Rs. 236,015,900,000. Another thing that will be noticed with raised eyebrows will be socialist stunts like grand but empty slogans, attempts to restructure and tame the private sector, huge deficit financing and high inflation.

…positive aspects, however, are eclipsed by grand and unrealistic plans, digressive policies to revive sick industries, an ambitious GDP growth rate, ignorance of inflation resulting from increased salaries and deficit financing and unrealistic revenue estimation. Considering the quality of the existing social and political institutions, it will not be long before he realizes that these grand plans and expectations are only good on paper.

…Dr. Bhattarai has waved a socialist wand to tame the private sector, which has been largely unhappy with the budget, by creating a parallel body to foster cooperatives. Make no mistake; this is not an assault on the private sector. However, this is definitely a move that will discourage individual and private sector incentives, which are dearly needed now to stimulate entrepreneurial instinct and increase investment.

By placing the Cooperative Board and the Investment Board -- both to be part of the Economic Council chaired by the prime minister -- on an equal footing, the finance minister has embarked on a grand socialist stunt the like of which has not been seen anywhere in the world for the past two decades. Without a clear demarcation of their responsibilities, the interests of these two boards are sure to collide, particularly in the agricultural sector where there is a real possibility of private sector investment being crowded out. Dr. Bhattarai needs to be reminded that the private sector is more efficient than cooperatives, and that if we want to attain a double-digit growth rate, then the last thing needed is a planner mentality and a clash between cooperatives and the private sector.

…These magnificent plans will also bring down the purchasing power of the rupee. Market prices are going to come under tremendous pressure from deficit financing to the tune of Rs. 42 billion, an increase in wages and allowances, cancellation of debts owed by poor farmers to agricultural banks, injection of money into sick industries and the expected increase in remittances and foreign aid.

The mammoth budget, social security investment, post-conflict reconstruction and investment plans will push inflation over the expected rate of 7 percent for the next one year. Since this jeopardizes the exchange rate in the medium term, diminishes export competitiveness and fosters inflation embedded on expectations, the central bank will be forced to raise the interest rate. This will strain lending and investment thereby putting a question mark on the promise of double-digit growth.

The finance minister has given the country a fresh dose of socialist planning agenda filled with unrealistic promises of double-digit growth and prosperity, and a recipe for rising prices. Yes, this budget will find its place in history as being socialist, inflationary, populist, ambitious and unrealistically grand!

Read the full Op-Ed piece here.

Development Diary: Sachs and Bono blog about MDGs

Jeffrey Sachs and Bono are writing a blog for the FT from the MDGs summit starting today. Here is a link to the blog.

Earlier, development economist Paul Collier wrote an Op-Ed in the NYT calling for vigorous pursuit of MDGs, increase in aid, and offering a sense of hope to help the bottom billion.

Easterly would stab this paragraph:

The laggards in the struggle for the MDGs are not the poor countries or their ostensibly corrupt governments.  The laggards are the rich world, so full of promises and high rhetoric and so low on delivery.  The MDGs are falling short because of a lack of promised financing to put in place the clinics, schools, roads, power, and other investments needed for their success.  Six years ago, the rich countries pledged in Monterrey, Mexico to “make concrete efforts toward the international target of 0.7 per cent of GNP in official development assistance.”  Yet the United States stands are 0.16 per cent, Japan at 0.17, Italy at 0.19, Canada at 0.28, Germany at 0.37, and France at 0.39.

Collier calls for “Decade of the Bottom Billion”

Paul Collier calls for a vigorous pursuit of MDGs, increase in aid, and offering a sense of hope to help the bottom billion. In the wake of UN General Assembly starting today, he questions why the UN did not did not act to set international guidelines on taxation and investment in resource rich poor countries, why it did not intervene in Mauritania when a coup was staged recently, why it does not do anything on biofuel scam and the prospects of genetically modified seeds in Africa, etc. As always, Collier’s pieces are thought-provoking, lucid, and to the point.

…Hope makes a difference in people’s ability to tolerate poverty; parents are willing to sacrifice as long as their children have a future. Our top priority should be to provide credible hope where it has been lacking. The African countries in the bottom billion have missed out on the prolonged period of global growth that the rest of the world has experienced. The United Nations’ goal should not be to help the poor in fast-growing and middle-income countries; it should do its utmost to help the bottom billion to catch up. Anti-poverty efforts should be focused on the 60 or so countries — most of them in Africa — that are both poor and persistently slow-growing.

A further weakness with the Millennium Development Goals is that they are devoid of strategy; their only remedy is more aid. I am not hostile to aid. I think we should increase it, though given the looming recession in Europe and North America, I doubt we will. But other policies on governance, agriculture, security and trade could be used to potent effect.

…Why, also, did the United Nations not intervene militarily when the democratic government of Mauritania, another country in the bottom billion, was overthrown by a coup last month? Where is an alternative initiative to open international trade to poor countries now that the Doha round talks have collapsed? Above all, with a five-year-old commodities boom transferring wealth to some of the countries of the bottom billion, where are the international guidelines on taxation and investment that might help these countries convert earnings from exports of depleting minerals into productive assets like roads and schools?

…We need not just a “Year of the Bottom Billion,” but several decades. This session of the United Nations is an appropriate moment to get started.

New global poverty line: Ravallion replies to Reddy

The IPC has a one pager on Ravallion’s reply to Reddy objections to the methodology used in the calculation of the new global poverty line ($1.25 a day at 2005 PPP prices). This is a much condensed version of a long reply by Ravallion to various objections to the new paper, its methodology, and the new poverty line.

...As Reddy notes, $1.25 is lower than the value in the US of our old poverty line, which works out to be $1.45 in 2005 prices. This has nothing to do with Reddy’s claimed faults in our methods, but stems from the revisions to the PPPs in the light of the better price data from the 2005 ICP; naturally, with higher PPPs in poor countries, the $US value of their national poverty lines falls.

Reddy thinks $1.25 a day is “…far too low to cover the cost of purchasing basic necessities,” He asserts that: “A human being could not live in the US on $1.25 a day in 2005 (or $1.40 in 2008), nor therefore on an equivalent amount elsewhere, contrary to the Bank’s claims.” I have no idea how Reddy reconciles this view with the fact that one quarter of (say) India’s population manages to live below the country’s official poverty line, which is about $1.00 per day in 2005 prices—even lower than our international line.

The (misplaced) role of markets

Here is a piece from the NYT about how the head of the Treasury and the chairman of the Fed- both proponents of liberal, free market idea-, fearing further negative repercussion in the economy emanating from the sub-prime mortgage crisis, changed their the administration’s economic ideology!

…Just like that, Mr. Bernanke, the reserved former Ivy League professor, and Mr. Paulson, the hard-charging former Wall Street deal maker, launched what would be the government’s largest economic rescue operation in modern times, one that rivals the Iraq war in cost and at the same time may redefine Washington’s role in the marketplace for years.

The plan to buy $700 billion in troubled assets with taxpayer money was shaped by two men who did not know each other until two years ago and did not travel in the same circles, but now find themselves brought together by history. If Mr. Bernanke is the intellectual force and Mr. Paulson the action man of this unlikely tandem, they have managed to create a nearly seamless partnership as they rush to stop the financial upheaval and keep the economy afloat.

…Along the way, they have cast aside the administration’s long-held views about regulation and government involvement in private business, even reversing decisions over the space of 24 hours and justifying them as practical solutions to dire threats.

…For Mr. Bernanke, the current crisis is the culmination of a lifetime of figuring how the system works from a theoretical viewpoint…Mr. Bernanke’s research into Japan’s financial crisis in the 1990s reinforced his view that the government had to be aggressive in intervening during market crises.

Interesting discussion about the causes of this crisis here. Intellectuals’ discussion about the crisis here.