Martin Ravallion is unhappy with HDI

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The 20th Human Development Report has introduced a new version of its famous Human Development Index (HDI). The HDI aggregates country-level attainments in life expectancy, schooling and income per capita. Each year's rankings by the HDI are keenly watched in both rich and poor countries. The main change in the 2010 HDI is that it relaxes its past assumption of perfect substitutability between its three components. However, most users will probably not realize that the new HDI has also greatly reduced its implicit weight on longevity in poor countries, relative to rich ones. A poor country experiencing falling life expectancy due to (say) a collapse in its health-care system could still see its HDI improve with even a small rate of economic growth. By contrast, the new HDI's valuations of the gains from extra schooling seem unreasonably high -- many times greater than the economic returns to schooling. These troubling tradeoffs could have been largely avoided using a different aggregation function for the HDI, while still allowing imperfect substitution. While some difficult value judgments are faced in constructing and assessing the HDI, making its assumed tradeoffs more explicit would be a welcome step.

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Full policy research working paper here.

Climate Change, Agriculture & Poverty in South Asia

[This blog post is adapted from Upali Wickramasinghe’s article on Trade Insight Vol.6, No.3-4, 2010, p.43-45. For a piece on the impact of climate change on agricultural trade in South Asia click here.]

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Climate Change, agriculture and poverty: South Asian agenda

“Most severe flooding the country has seen in over 100 years”, is a heading that appeared in newspapers across the globe several times in the recent past. Two most vivid recent examples are the floods in October 2009 in India and in mid-2010 in Pakistan. The number of such floods has quadrupled between 1980 and 2006. The intensity of other natural disasters such as heat waves and severe cold spells has increased manifold.

The Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) states that climate change will have severe impacts on South Asia. The 2010 Climate Change Vulnerability Index, compiled by the British firm Maplecroft on the basis of 42 social, economic and environmental factors, corroborated this recently. Of the 16 countries listed as being at “extreme” risk over the next 30 years, five are from South Asia, with Bangladesh and India in the first and second places, Nepal in fourth, Afghanistan in eighth and Pakistan in 16th. These disasters disproportionately affect the poor, as they depend on agriculture for livelihoods—an activity heavily dependent on nature.

South Asian countries, individually as well as regionally, have made significant efforts towards tackling the challenges posed by global warming. The Thimpu Statement on Climate Change issued on 28–29 April 2010 during the 16th Summit of the South Asian Association for Regional Cooperation (SAARC) covers most of the critical concerns on climate change and the environment, and proposes an action-oriented programme. However, it does not explicitly recognize the impact of climate change on agriculture and food security although adaptation and mitigation are mentioned.

Vulnerability of South Asia

According to the IPCC’s Fourth Assessment Report, the future impacts of climate change on South Asia include the following: the glacier melting in the Himalayas causing increased flooding and affecting water resources; increased pressures on natural resources and the environment; increased mortality due to diarrhoea primarily associated with floods and droughts; and increased threats from sea-level rise resulting in inundation, storm surge, erosion, and other coastal hazards.

The Himalaya ecological system, comprising the upper Himalaya glaciers and the Ganges, Indus, and Meghna river systems, was the cradle of civilization in South Asia. It allowed some 1.5 billion people to cultivate lands, rear animals and prosper. With climate change, this seemingly endless cycle of life is likely to transform itself. The Himalayan-Hindu Kush glaciers have been receding since 1800, but the pace has accelerated in recent years. If this trend continues, melting ice will increase flood risks in the short term and threaten water supplies in the long run. The effects are magnified due to the fact that 75 percent of the poor live in rural areas and 60 percent of the labour force relies on agriculture for livelihood.

Other areas projected to face severe impacts include the Terrai grasslands and forests of the southern Himalayas, the Western Ghats biosphere of western India; and the Sundarbans wet- lands of West Bengal and Bangladesh. A decrease in wet rainforests and an increase in dry rainforests, prompting more forest fires in places like Sri Lanka, are projected to occur.

The availability of water for human consumption and agriculture is a major concern. It is predicted that a 2–4 percent rise in temperature will expose up to 924 million people to water stress. If climate-induced glacial retreat happens at the predicted rate, the water available from the Himalayan glaciers in South Asia will decline from the current level of 85 percent of total water consumption to 30 percent over the next 50 years.

By 2020, South Asia will have five of the world’s mega cities: Mumbai, Delhi, Dhaka, Karachi and Kolkata. A majority of the people in those cities will also be living in slums with little infrastructure and poor sanitation. Supplying water to these mega cities while allocating enough for agriculture will be a challenge.

Coastal ecosystems, particularly low-lying mega deltas, coastal regions and small islands, are at severe risk from climate change. Land loss due to sea flooding, seawater intrusion into freshwater sources and increased salinity will have a significant impact on economic activities, including fisheries. A one metre rise in sea level can displace several million people in the region’s coastal zones. The social and economic impact will be severe in densely populated areas such as Bangladesh and east India.

Intricacies of climate change and poverty

Climate change, agriculture, poverty and food security are intricately linked, and thus removing constraints for economic development and human well-being will certainly require careful scrutiny of the global environment.

Agriculture contributes a quarter of South Asia’s national income and over 50 percent of employment. South Asia’s population is estimated to exceed 2.2 billion from the current level of 1.5 billion by 2050. Over 600 million people live on less than US$1.25 a day and mostly rely on agriculture and forest resources. It needs only a minor change in the economy for the millions languishing just above the poverty threshold to fall back into poverty, as happened during the 2007–2008 food and financial crises.

Detailed projections based on simulation models¹ suggest a 15–30 percent decline of cereal productivity on average across the region by the middle of the century, but the declines will be higher in arid zones and flood-prone areas where agriculture has reached tolerance limits. Rice yields are expected to decline by 0.75 tons/ha if temperature rises by 2–4 degrees Celsius. If these models include the possible impacts of diseases, pests and microorganisms, crop yields and production will face steep declines. As crops respond to climate change differently, the impact on food security will depend on crop intensity.

Food consumption is determined by the interaction of individual preferences, incomes, prices and other social characteristics, whereas prices are determined by the interaction of demand, supply and the market structure. From 2000 to 2050, population and income growth would push global food prices up by as much as 62 percent for rice, 63 percent for maize, 72 percent for soybeans and 39 percent for wheat.² Climate change expects to raise food prices by 32–37 percent for rice, 52–55 percent for maize, 94–111 percent for wheat, and 11–14 percent for soybeans.

The predicted rise in food prices, particularly cereal prices, due to climate change will further reduce the amount of food that the poor can consume as the share of food expenditure among the poor is already high. They often switch to cheaper food alternatives and give up nutritious food. It should be noted that South Asia will have 52 million undernourished people even under a no-climate-change scenario.

Another group of victims will be female children in societies where female children are less likely to get the same amount of food as male children when faced with shortages.

One silver lining is that South Asia has the potential for further gains in agricultural productivity. If productivity can be increased by the introduction of better technology and institutional innovations, the above scenarios could substantially be altered. Agricultural gross domestic product (GDP) growth is more effective in reducing poverty, compared to non-agricultural GDP growth.

The crucial test will be on how much technology can be transferred and investment is carried out to improve critical infrastructure in rural areas. According to available estimates, South Asia can counter the effects of climate change on nutrition with an additional annual investment expenditure of US$1.5 billion, covering irrigation efficiency, irrigation expansion, agricultural research and rural roads. This should also extend to investment in biodiversity conservation, as in the rice seed bank maintained by the International Rice Research Institute in the Philippines.

Agenda for action

The Thimpu 16-point agenda provides a useful framework to think through how SAARC member states can collaborate to thwart the potential disastrous consequences of climate change on agriculture and food security, although it does not mention agriculture and food security explicitly.

A key concern is how to feed close to 2.2 billion people who will inhabit South Asia by 2050 while also meeting the challenges of climate change. This is in addition to the higher demand for food generated by higher income. The answer lies in investment in adaptation, enhancing productivity of agriculture and science-based technology such as the development of plant varieties with higher adaptability under severe weather conditions and capacity to perform in a broad set of climate conditions.

Regional investment will help the most vulnerable nations with capacity limitations. Mechanisms such as the SAARC Development Fund should be fully exploited towards this end. In line with other regional development banks, South Asia should also establish a regional bank to mobilize resources for economic development. Adaptation to climate change is easier when individuals have better options to cope with disasters. The best way to ensure that is through the implementation of a pro-agricultural development policy with climate mitigation and adaptation as key components. While efforts towards adaptation are carried out, South Asia should also be ready with sufficient funds to pay for resettlement, rehabilitation and provision of services to climate refugees.

Similar to the proposal made elsewhere (e.g., in the Association of Southeast Asian Nations) to create a fund to pay for efforts towards adaptation, it would be in the interest of South Asia to set up a fund for such an eventuality. This could perhaps be part of the negotiating agenda along with a fund for agricultural adaptation. Among others, the fund could be used for technology transfer, a key component in the struggle against global climate change.

Collective action plays a significant role in adaptation and mitigation. Farmers who are willing to adapt to changes are outnumbered and thus forced to follow outdated techniques and farming cycles for fear of pest at- tacks, if faming activities are not synchronized with the rest. The extent of collective decisions taken and the use of community adaptation strategies will determine the success of adaptation. South Asian countries have both the capacity and resources to help one another in developing adaptable crop varieties. Expansion and support for using the already available advanced technology for monitoring the impact of climate change on agriculture and food security, e.g., remote sensing, will be needed urgently. Developing countries need support from regional and international organizations for new technology and training.

As South Asia is recognized as the worst affected region from climate change, it is legitimate to call for more assistance as committed by the Annex I industrialized countries for developing countries under the United Nations Framework Convention on Climate Change. Such a fund can assist communities or regions that have shown remarkable success in adapting to new situations and still protect the environment.

As climate change has no political boundaries, it is in the best interest of all in South Asia to collaborate both within the region and in international forums. Emissions targets need to be specified in quantitative terms with time-frames, rather than mere commitments to making “deep cuts” in the future, to ensure binding agreements rather than vague statements and commitments. The voice in international forums on climate change will have added strength if it is also in line with the commitments and actions taken within the region to address climate change concerns.

[Dr. Wickramasinghe is Regional Adviser on Poverty Reduction and Food Security, UNESCAP-Centre for Alleviation of Poverty through Sustainable Agriculture (CAPSA), Bogor.]

Notes

¹ Lobell, D.B. and C.B. Field. 2007. Global Scale Climate-crop Yield Relationships and the Impacts of Recent Warming. Environmental Research Letters 2.

² Gerald, C. N, M. Rosergrant, et al. 2009. Climate Change: Impact on Agriculture and Costs of Adaptation. October. Washington, D.C.: International Food Policy Research Institute.

Capping microfinance interest rates?

Not a good idea, argues The Economist.

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The rush to impose restrictions on MFIs also betrays a fundamental misunderstanding about how the poor use credit. Many politicians cite the existence of clients with loans from several MFIs at once to argue that the poor are over-indebted. This ignores the fact that most microcredit loans are tiny, so that several are needed to meet the needs of even a small business. Indeed, the poor often use microloans to pay off far more expensive loans from village moneylenders. This suggests that restricting people’s access to microcredit by capping rates could have the perverse effect of driving more poor people into the arms of village loan-sharks, who still provide the bulk of rural credit in poor countries. (In rural AP, 82% of households have such informal loans, whereas only 11% have loans from MFIs.) That would be good news for these moneylenders, but is surely not the outcome that policymakers want.

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Agricultural Trade and Climate Change in South Asia

There is a consensus among scientists that climate change is real and will variably affect the world we live in and our livelihoods. With nearly 600 million people living below US$1.25 a day, high population density, low-lying areas, and high dependence on agriculture for livelihood, South Asia is one of the most vulnerable regions to climate change. More than 75 percent of South Asia’s poor people live in rural areas and bank on rain-fed agriculture, livestock and fragile forests.

Climate change affects agricultural yield, which in turn has a strong bearing on economy and livelihoods. It alters comparative advantage in the trade of agricultural goods. Due to an expected decline in yields, potential restrictions on food trade and food- price inflation, food insecurity might increase. Against such a backdrop, apart from attempts to reduce agricultural as well as non-agricultural emissions and smoothen trade flows, adequately funded and concerted adaptation measures have to be implemented in South Asia.

Agriculture and emissions

The emissions level of developed countries with respect to their population is higher than that of developing countries. Yet, the developing countries disproportionately bear the burden of climate change. High-in come countries, with one sixth of the world’s population, are responsible for nearly two thirds of the greenhouse gases in the atmosphere.¹ Methane and nitrous oxide produced by the agricultural sector account for about 10 percent of anthropogenic warming. Most of it comes from the guts of cattle and sheep.² Globally, agriculture and land-use change and forestry contribute 14 percent and 17 percent of CO₂ emissions, respectively.³

Source: WDI 2010

In terms of CO₂ emissions (kg per PPP$ of gross domestic product–GDP), the Maldives comes ahead of India and Pakistan in South Asia. Over this decade, CO₂ emission is decreasing in India, but is pretty much stable in other countries. Meanwhile, agricultural methane emissions were decreasing until 1995, compared to 1990 levels, but increased by over 10 percentage points in 2000 in all countries except Sri Lanka (Figure). India emitted the highest amount of agricultural methane in 2000. Fortunately, agricultural methane emissions are now again decreasing in all South Asian countries.

Trade and production

Since most of South Asian countries are net importers of food and all except India are consistently running agricultural trade deficit (Table 1), climate change will not only impact yields but also alter trade flows by affecting prices and volumes of agricultural goods traded within and beyond South Asia.

Table 1: Agricultural trade balance (US$ million)
Country	1994-1996	1999-2001	2005	2006	2007
Afghanistan	-103.919	-201.554	-708.639	-824.99	-722.815
Bangladesh	-847.266	-1619.12	-2078.89	-2706.83	-3611.82
Bhutan	-4.89333	-8.325	-13.183	-6.339	-5.859
India	2649.018	1351.741	3659.151	4190.592	8974.276
Nepal	-120.834	-151.065	-257.962	-135.267	-200.323
Pakistan	-992.736	-800.784	-1195.89	-1449.75	-1697.7
Sri Lanka	29.099	215.2273	389.077	-354.751	-398.91

Source: FAO Statistical Year Book 2009/10

A country’s supply of food is usually a function of total domestic yield, and prices of imports and exports of food. Hence, trade in agricultural goods is essential to satisfy demand in countries with deficit food production. They will suffer heavily if import prices go up due to a decline in regional or global production triggered by climate change. Climate change also alters temperature and precipitation patterns, directly affecting crop yields and indirectly affecting water availability for irrigation. Its impact on the economy will be reflected through fluctuating prices, production, productivity, agricultural investment, food demand and consumption, and human well-being. It will decrease per capita calorie availability, potentially increasing childhood malnutrition.

Climate change will alter the existing pattern of comparative advantage in agricultural trade. It will either in- crease or decrease trade flows depending on the biophysical determinants of relative advantage and socioeconomic determinants of demand. A sudden rise in prices either due to a fall in supply or an increase in demand might disturb agricultural trade flows, and ultimately production, as farmers tend to shift production to those crops that fetch high prices in the market. Partly because of high food and commodity prices, South Asia, on a net basis, suffered an income loss equivalent to about 9.6 percent of GDP between January 2003 and April 2008.⁴ Climate change is expected to affect prices of major crops such as rice, wheat, maize, soybean, and lentil. It will have a strong bearing on the vulnerability and livelihood of South Asian people.

The expected changes in monsoon—which alone carries over 70 per- cent of South Asia’s annual precipitation in just a four-month period—will affect agricultural yields. The melting of glaciers will increase flooding in the low-lying areas and might induce water scarcity in high altitudes from where glaciers recede. Rising sea levels will affect coastlines and intrude agricultural plains with saltwater, thus jeopardizing production potential of arable land.

The most severe climate change scenario predicts that the Maldives will be submerged and Bangladesh will lose 18 percent of its land. There will be an increase in pressure on natural resources due to rapid urbanization and industrialization. The impact on agriculture and production will cost the economy dearly. Even a temperature rise by 2 degrees Celsius above preindustrial level, which is the minimum the world is likely to experience, could result in a permanent reduction in annual per capita GDP by 4–5 percent in South Asia.⁵

Compared to a no climate change scenario, various models show that, under a climate change scenario, production of maize, millet, rice, and wheat is expected to decline by 6–23 percent, 9–19 percent, 15–22 percent, and 48–53 percent, respectively, by 2050 in South Asia.⁶ Meanwhile, net cereal imports are expected to increase by 66.32–87.20 percent by 2050 compared to 2000 levels in South Asia under all climate change models. Note that all South Asian countries except India and Pakistan have a deficit in cereal trade (see Table 2). Only Afghanistan has a trade surplus in pulses. Afghanistan, Bhutan, India, and Pakistan have a surplus in potato and fruits trade. Except for India and Pakistan, all other South Asian countries have a deficit in meat trade. The trade deficit in major crops reflects production shortages.

Table 2: Agri-goods trade balance, 2007 (US$ '000)
Country	Cereal	Potato	Meat	Fruits
Afghanistan		752	-14,696	2381
Bangladesh	-613509	-2,953	-586	-29592
Bhutan	-2676	349	-1	2227
India	2938739	10,991	897,461	159962
Nepal	-83549	-6,784	-284	-23212
Pakistan	1267348	20,863	27,631	83726
Sri Lanka	-292116	-13,677	-6,954	-14875

Source: FAO Statistical Year Book 2009/10

Food demand for cereals will decline by 3 percent while demand for meat consumption will increase by 150 percent in South Asia in 2050.⁷ The decline in per capita cereal demand will be a result of high cereal prices, while the shift to meat consumption will be the result of an increase in incomes of South Asian people. Overall, per capita food consumption will decline by 19–22 percent in the same period.⁸

Reliable trade in agricultural commodities might help countries effectively cope with food shortages resulting from unexpected weather patterns. More predictable production, supply and trading regimes will help countries manage food stocks and agricultural trade flows. This will also help tame a rapid rise in food prices, as in mid-2008. South Asian countries should work towards creating a framework on not only increasing production, but doing so in an environmentally and economically sustainable way so that there is adequate production and supply for trade to take place unhindered.

Food security

Climate change is expected to increase the frequency and intensity of floods, droughts, storms and heat waves—all of which will negatively impact agricultural production and increase food insecurity. It will not only impede the flow of agricultural goods within and across borders, but also put the already vulnerable people at risk.

With climate change, the price of rice is expected to increase by 29–37 percent when compared to a no climate change price scenario by 2050.⁹ Rice and soyabeans will see the highest jump in prices by 2050. The total number of malnourished children in South Asia will increase by 2.54–2.82 percent in 2050. Prices of other food items such as maize and wheat are also expected to increase. This will further affect the already vulnerable people and potentially push many below the poverty line.

Furthermore, yield of wheat—a critical crop for regional food security—is expected to drop drastically by 2030. Given the existing agricultural practices and crop varieties, agricultural yields will decrease by almost 18 percent in South Asia.¹⁰ Clearly, South Asia will be one of the most affected and vulnerable regions in the world.

Adaptation and mitigation

Even with the best efforts, global temperature will rise to some extent. Such rise will negatively impact agricultural production, human development and agricultural trade flows. So, there has to be serious and substantial efforts aimed at both mitigation and adaptation. Developed countries should primarily focus on mitigation, while developing countries should focus on both mitigation and adaptation.

The adaptation costs in South Asia are estimated to be around US$ 1.5 billion per year, in addition to costs for increased agricultural research and irrigation efficiency. However, there is lack of sufficient financial and technical capacities to manage increasing climate risk. There should be national, regional and global efforts to help South Asian economies adapt to climate change.

At the national level, countries themselves should initiate better agricultural practices such as zero tilling, irrigation efficiency, preservation of forests and afforestation, and protection of biodiversity, among others. Furthermore, crop production per drop of water and per hectare of land should be increased. Smart cultivation techniques geared towards preserving soil moisture, maximizing water infiltration, increasing carbon storage, minimizing nutrient run-offs and raising yields have to be adopted.

Countries should also invest in rural roads so that there is smooth flow of agricultural goods from production sites to markets. Switching to a low carbon world through technological innovation and easing access to them along with instituting complementary institutional reforms will be important to mitigate vulnerability.

At the regional level, South Asian countries should cooperate on areas such as facilitation of agricultural trade, technology and knowledge sharing, effective management and utilization of rivers that cut through multiple nations, among others. Innovative and novel water management strategies are required to help South Asia cope with rising incidence and intensity of floods during monsoon and decrease in water level during dry seasons. It should especially be a combined effort of the members of the South Asian Association for Regional Cooperation that have the same sources of water, i.e., the Himalayas. Additionally, to facilitate agricultural trade, regional infrastructural net- works should be built.

At the global level, South Asian countries should seek funds for better adaptation to climate change. Along with putting a proper carbon financing mechanism in place, donors should increase the share of official development assistance for agriculture as it has the highest number of poor people directly dependent on agriculture.

There should be greater collaboration on technology, knowledge transfer and funding for agricultural trade facilitation. Since the right price of agricultural products sends a good signal to famers, trade- and production-distorting subsidies in the agricultural sector in developed counties have to stop. To counteract the negative impact of climate change on nutrition intake, an estimated annual investment of around US$2,311million to US$2,963 million is needed in South Asia. Specifically, under different climate change scenarios and models, agriculture research will need US$239 million to US$347 million, clean water US$46 million, education US$737 million, irrigation expansion US$310 million to US$403 million, irrigation efficiency US$823 million to US$889 million, and roads US$62 million to US$532 million.¹¹ Developed countries and donors should provide adequate funding to meet these costs.

In the case of high vulnerability in the short run, social safety nets should be introduced. For example, Bangladesh has safety net programmes— such as vulnerable-group feeding programme, food-for-work programme, and employment guarantee programme—to reduce vulnerability to cyclones and floods.

Notes

¹ World Development Report 2010.

² The Economist. 2009. A Special Report on Climate Change and the Carbon Economy. 3 December.

³ IPCC Change Synthesis Report 2007.

⁴ World Bank. 2009. South Asia Climate Change Strategy.

⁵ Note 1.

⁶ ADB. 2009. Building Climate Resilience in the Agriculture Sector of Asia and the Pacific. ⁷ ibid. ⁸ ibid. ⁹ ibid. ¹⁰ ibid. ¹¹ ibid.

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[Published in Trade Insight, Vol.6, No.3-4, 2010, SAWTEE]

Poverty and hunger in Nepal circa 1909

Source: Patan Museum

The picture shows lines of poor people being fed at Tundikhel when the then autocratic Prime Minister Chandra Shamsher, fifth PM from the Rana dynasty, returned from Europe in 1909. The tall structure in the picture is Daharaha.

Are emissions level below 2°C possible?

An IEA economists says that it is “too good to be believed”. The 2°C below pre-industrial temperature benchmark is widely used these days. But, the pre-industrial temperature itself is, on average, 6°C above ice ages temperature.

The Economist writes, “Despite 20 years of climate negotiation, the world is still on an emissions trajectory that fits pretty easily into the “business as usual” scenarios drawn up by the Intergovernmental Panel on Climate Change (IPCC). According to the IEA, the scenario puts the world on course to warm by 3.5°C by 2100. For comparison, the difference in global mean temperature between the pre-industrial age and the ice ages was about 6°C.”

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The IEA also looked at what it might take to hit a two-degree target; the answer, says the agency’s chief economist, Fatih Birol, is “too good to be believed”. Every signatory of the Copenhagen accord would have to hit the top of its range of commitments. That would provide a worldwide rate of decarbonisation (reduction in carbon emitted per unit of GDP) twice as large in the decade to come as in the one just past: 2.8% a year, not 1.4%. Mr Birol notes that the highest annual rate on record is 2.5%, in the wake of the first oil shock.

But for the two-degree scenario 2.8% is just the beginning; from 2020 to 2035 the rate of decarbonisation needs to double again, to 5.5%. Though they are unwilling to say it in public, the sheer improbability of such success has led many climate scientists, campaigners and policymakers to conclude that, in the words of Bob Watson, once the head of the IPCC and now the chief scientist at Britain’s Department for Environment, Food and Rural Affairs, “Two degrees is a wishful dream.”

The fight to limit global warming to easily tolerated levels is thus over. Analysts who have long worked on adaptation to climate change—finding ways to live with scarcer water, higher peak temperatures, higher sea levels and weather patterns at odds with those under which today’s settled patterns of farming developed—are starting to see their day in the uncomfortably hot sun. That such measures cannot protect everyone from all harm that climate change may bring does not mean that they should be ignored. On the contrary, they are sorely needed.

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The Irish Pain

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"nothing quite symbolised this State’s loss of sovereignty than the press conference at which the ECB man spoke along with two IMF men and a European Commission official. It was held in the Government press centre beneath the Taoiseach’s office. I am a xenophile and cosmopolitan by nature, but to see foreign technocrats take over the very heart of the apparatus of this State to tell the media how the State will be run into the foreseeable future caused a sickening feeling in the pit of my stomach.

This is not to say that we would be happy to have our country’s affairs managed by the current, disgraced, government. I yield to no-one in my loathing of the men and women who have done this to my country. What has been the intellectual low-point of the last couple of years? Was it the cash-for-clunkers stimulus package (Ireland does not produce any cars)? Or the statement by our Finance Minister that Ireland need not fear a bank run, since Ireland is an island? Or the biggest Irish joke of them all, which underpinned the bank guarantee in the first place: that if we wanted investors to retain confidence in the creditworthiness of the Irish State, we needed to make sure that nobody who invested in our (private sector) banks ever lost a penny?"

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Dan O’Brien, the economics editor of the Irish Times, quoted by Kevin O'Rourke. He describes more of the Irish pain brought about by the irresponsible banking sector, who will get a substantial portion of the bailout funds. O’Rourke calls it “black hole that is the Irish banking system”. The Irish citizens are suffering because of its banking system. It got too drunk with lending-Guinness!! Now, the Irish State is having a terrible hangover while the debt-ridden drunkards are preparing to run scot-free again to cause another accident. Rein in them and force them to be sober before it is too late, again!

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The latter decision is the one that sank the country. It was the last great act of hubris of the Celtic Bubble, and was immediately denounced by one of the heroes of the crisis, my old UCD colleague Morgan Kelly.  On the night the guarantee was announced, Kelly pointed out that while it was the right policy if the Irish banks were facing a liquidity crisis, it was a terrible policy if they were insolvent, which was in fact the case. As they always do when confronted with someone smarter than them, the Dublin establishment circled the wagons, and Kelly was dismissed as an irresponsible young troublemaker of no consequence. He has been proved right, of course, but the establishment is still at it, making the

same fundamental mistake of thinking that a solvency crisis is just a liquidity crisis. Now, however, the establishment is European as well as Irish, and it is the State rather than the banking sector which is insolvent.

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More on Iceland versus Ireland here.