Geithner and Keynes

US Treasury Secretary Timothy Geithner echoes Keynes in an article published in the WSJ:

Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets.

When financial institutions come to us for direct financial assistance, our government has a responsibility to ensure these funds are deployed to expand the flow of credit to the economy, not to enrich executives or shareholders.

Irrationality and clean indoor air!

Behavioral economist Dan Ariely studies the bugs in our moral code: the hidden reasons we think it's OK to cheat or steal (sometimes). Clever studies help make his point that we're predictably irrational -- and can be influenced in ways we can't grasp.

Researcher Kamal Meattle shows how an arrangement of three common houseplants, used in specific spots in a home or office building, can result in measurably cleaner indoor air.

Protectionism? Nah, too dangerous!

Here is Catherine Ashton, European Commissioner for Trade, making a case for keeping open markets and not resorting to protectionism despite the fallout of the current global financial crisis. She makes a case for quick passage of the Doha Round by arguing that even if tariffs were raised to the level allowed under WTO, global income could reduce by at least half a trillion dollars.

To truly deliver on those commitments made at the G-20, we need to turn the rhetoric into the reality and complete the Doha round of  world trade talks. This agreement would add hundreds of billions of dollars to the world economy every year and allow the developing world to continue to lift its citizens out of poverty through the dignity of their own labor and the genius of their own ideas. Doha is also, too, our insurance policy against protectionism. Recent studies show that if tariffs were raised to levels still allowed under the current World Trade Organization’s ceilings, global income could be reduced by at least half a trillion dollars. That’s a large chunk of the financial fiscal stimulus gone.

And if the Doha round is concluded, it’s certainly not just others that will gain, as some have already claimed. U.S. exports to key markets in Europe, Asia, Latin America will grow, in some cases at double-digit rates. The U.S. trade deficit is expected  to improve and U.S. GDP would increase. But let me make a  point about the impact on jobs. Our analysis shows that Doha will modestly improve real wages in all sectors of the United States economy for both skilled and unskilled workers and that the net effect of the round will be job creating.

The loss in welfare is on average; it has to be seen in perspective and one should not hasten to a conclusion that there will be a huge loss in welfare. Of course, there will be loss in welfare (arising from higher deadweight loss) and increasing tariffs above the existing levels would be terrible, both in terms of growth and employment. But, if we break up the dividends of the full Doha Round, it seems that the poorer countries would get the least of the benefit pie. The most going to China, Brazil and South Africa. In fact, Sandra Polaski’s general equilibrium model of global trade flows under different scenarios shows that the total gains from trade would be between $32-55 billion, with rich nations getting $30 billion; middle income countries like China, Brazil and SA getting $20 billion; and poor countries getting $5 billion (about $2 per head). So, argument for not raising tariff from existing levels makes sense. But, without looking at the spread of benefits out of the Doha round, it does not make sense to argue for its quick passage. Let the Doha Round be rewritten for what it was first perceived to be- a development round. Putting development argument first before tariff and protectionism arguments would give a clearer picture (that includes the argument for policy space, not necessarily tariffs).

Meanwhile, Becker and Murphy put inputs on the ongoing chorus (among rightists) against growing government spending (despite the desperate need for stimulus, which the markets can’t do own its own right now!). Honestly, they cherry-pick their arguments from a narrow base and make a case against government spending and try to over glorify markets.

As governments continue to determine how many restrictions to place on markets, especially financial markets, the destruction of wealth from the recession should be placed in the context of the enormous creation of wealth and improved well-being during the past three decades. Financial and other reforms must not risk destroying the source of these gains in prosperity.

Therefore, in devising reforms that aim to reduce the likelihood of future severe contractions, the accomplishments of capitalism should be appreciated. Governments should not so hamper markets that they are prevented from bringing rapid growth to the poor economies of Africa, Asia and elsewhere that have had limited participation in the global economy.

Most interventions, including random policies, by their very nature would hurt rather than help, in large part by adding to the uncertainty and risk that are already so prominent during this contraction. Government reactions have demonstrated the danger that interventions designed to help can exacerbate the problem. Even though we had well-qualified policymakers, we have gone from error to error since August 2007.

Oops, despite growth, poverty reduction remains stagnant in Africa (more people actually fell below the poverty line in SSA after the experimentation with SAPs and Washington Consensus). Inequality has also increased. Regulations succumbed to lobbyists’ petty interests (in reference to the failure to regulate investment banks and their shady securities that were priced far less than the risk they posed).That being said, the rise in global income is definitely due to the wonders of market mechanism. However, with this comes the responsibility to take care of the leftovers, those who perpetually remain at the lowest strata of income and social opportunities. Moreover, some lose and some gain by following the price signal and participating in the market. It is the government’s responsibility to take care of those who are left behind by the market, which itself is either reluctant to help or ignorant of those squeezed hard by its process. Always worth to read Krugman’s response on these sort of issues.

Also here is Jack Schwager writing in the FT:

Taken as a whole, Republicans seem to be following a new economic doctrine of deficit spending during bubble economies and deficit restraint in collapsing economies. This could be termed as “Bizarro Keynesianism” – in the Bizarro World, a creation of the Superman comic book series, everything is the opposite of what it is in our world.

The demise of CCTs in Nicaragua

This one pager published the IPC looks at why a popular Conditional Cash Transfers (CCT) program in Nicaragua, Red de Proteccion Social (RPS), was put to death bed despite initial success in education and health sectors.

In the CCT program, funds were channeled to female households in exchange for commitment to send children to school and administer regular medical check-ups at local health centers. This had positive impact on school enrollment and other education indicators and reduced stunting by 5 percentage points. Despite these successes, the program was discontinued by the Nicaraguan government in 2006, thus marking the demise of a successful 6 years of CCTs.

The end of the Nicaraguan experience with RPS is disappointing
in light of the programme’s achievements, but it provides relevant lessons to policymakers working with CCTs, particularly those receiving external funding. Even if a programme is deemed successful to the international community, domestic constituents must still approve of it. The support of both the non-beneficiary populace and government officials is important. Key domestic officials may change over time, and support cannot be provided solely by a few officials who may not remain in their positions. Frequent communication of a programme’s purposes, policies and results is important to gaining and maintaining support. Without steady domestic approval, even an excellent programme may lose support and eventually be discontinued. With such support, the programme is more likely to continue to function, improve and enjoy greater backing and influence.

Here is my earlier blog post on the need for CCTs during the financial crisis. And, here is a review of CCTs in Latin America and Sub-Saharan Africa.

How green are human rights?

There was an event held at my college yesterday. It was about the how human rights are connected with environment sustainability. There were three panelist- three professors from Mexico, Britain, and Cameroon.

I found this quote, by Professor Bruce (from UEA), interesting:

It is our human rights to use water. However, our choice/decision to use water affects the usage by others. Imports and waste of water, while exercising human rights in one part of the world, is in a sense exports of water (potential stream) from other part of the world. Hence, the very daily choices arising from exercise of human rights is not independent of how individuals use water for daily purposes.

Listening to the Poor: Voices from the Bottom Up

The WB has released a new book (Moving out of Poverty: Success from the Bottom Up), which contains findings from a study carried out in 15 countries and interview with 60,000 people, about poverty reduction. I am surprised why Nepal was not included in the list of countries from where “voices of the poor” were collected because Nepal is one of the poorest countries in Asia and 18th poorest in the world (in terms of GDP (PPP) per capita figure from the IMF). The report does not even mention the word Nepal. It looks like a follow up to the Voices of the Poor report, which incorporated voices of 60,000 people from 60 countries, published in 2000.

One of the main findings of the report is that when researchers asked respondents about how they can move out of poverty, almost all of them underscored “individual effort, self-reliance and initiative”. This is not new but still I can’t exactly figure out what this really means (or what the authors really meant by this).

I think it misses to mention an important assumption: ‘provided necessary tools such as credit, relevant infrastructure, healthcare, market access, education, and technology among others, individual effort, self-reliance and initiative could lead poor people out of poverty.’ I think the initiative factor (coming out of agents) and the necessary conditions (usually provided by external agents/exogenous factors) are complementary and have to be synchronize in order to get the biggest bang from a poverty reduction initiative.

… the focus of poverty reduction strategies must therefore shift to increasing economic, social and political opportunities in the local communities where the poor live. These local opportunities include the provision of business know-how, basic access to health and education and the improvement of local governance. Local governments that are responsive and accountable have a critical role in creating the local conditions for households to escape poverty.

One can also get a test of the love with ‘liberalization mindset’ in the report. The report recommends “poverty reduction efforts need a liberalization from below” that includes removing restrictive government regulations, expanding access to markets (especially by providing connectivity through roads bridges and telephones), and integrating poor people’s businesses on fairer terms in new business models”. Nothing new and surprising about these recommendations but still I would be interested in seeing policy experiments that validate these claims.

What I don’t understand is, despite knowing (and having a feel about) these solutions for a long time, why were/are not the development agencies and the aid industry synchronizing their initiatives to tackle the problems head on? It kind of baffles me more than anything else because the poverty reduction strategies we study in school are not in line with the actions of most of the development and aid agencies that are making high pitch noises voices about poverty alleviation for the last four decades.

That being said, the report is useful in knowing what the poor people (as opposed to experts from development agencies and development models) actually say about their condition of life. It also discusses the concept of poverty and how it has evolved over the years.

Self-initiative is considered is the most important factor for moving out of poverty.

Here is a generalized diagram of how to move out of poverty:

Wise Chinese stimulus stuff

The NYT reports:

The country is using its nearly $600 billion economic stimulus package to make its companies better able to compete in markets at home and abroad, to retrain migrant workers on an immense scale and to rapidly expand subsidies for research and development.

Construction has already begun on new highways and rail lines that are likely to permanently reduce transportation costs.

And while American leaders struggle to revive lending — in the latest effort with a $15 billion program to help small businesses — Chinese banks lent more in the last three months than in the preceding 12 months.

The Guangdong training programs are half in the classroom and half in the factory, usually the business that plans to employ the trainees. By increasing productivity, training programs can hold down corporate labor costs per unit of production for years to come.

China’s huge training programs may also help preserve social stability by keeping the unemployed off the streets, although Chinese officials deny that is their intention.