Eight best economists of the next generation

The Economist magazine names the eight best economists of the next generation:

1. Esther Duflo, MIT
2. Jesse Shapiro, University of Chicago
3. Roland Fryer, Harvard University
4. Amy Finkelstein, MIT
5. Raj Chetty, Harvard University
6. Ivan Werning, MIT
7. Xavier Gabaix, New York University
8. Marc Melitz, Princeton University

Clearly, Esther Duflo is the star in the list!

Esther Duflo of the Massachusetts Institute of Technology (MIT) received more recommendations than any other economist. Some who didn’t nominate her thought she was too established to count as “new”.

With her colleague, Abhijit Banerjee, Ms Duflo and Mr Kremer have remade development economics, nudging it away from its concern with policies, towards a preoccupation with projects. They study economic development as seen from the field, clinic or school, rather than the finance ministry. They might be called the “peace corps” of economists, bringing the blessing of their investigative technique to the neglected villages of India or the denuded farms of western Kenya.

Ms Duflo has made her name carrying out randomised trials of development projects, such as fertiliser subsidies and school recruitment. In these trials, people are randomly assigned to a “treatment” group, which benefits from the project, and a “control” group, which does not. By comparing the average outcome of each group, she can establish whether the project worked and precisely how well.

More about Duflo here. She answered my question here in September.

Possibilities of global recession and regime change in Zimbabwe in 2009

The FT sketches some of the main upcoming events in 2009. Hot in the list are recession in 2009, rock-bottom interest rates, exchange rate renminbi vs. other currencies, price of oil, the role of state, New Deal, Cuba, Mugabe, and artificial life, among others.

Will the recession end in 2009?

No, as far as the US, the UK, Spain and Ireland are concerned; possibly Yes for other European economies and Japan. Whatever happens, 2009 will not be pleasant. For all the cuts in interest rates and taxes, higher unemployment will be the dominant issue of the first half of the year, outweighing gains to real incomes from these policies and lower commodity prices. Uncertainty will be the watchword for the year, making any prediction precarious, but there is still a good chance that rising incomes will become powerful forces in the continental European and Japanese economies later in the year. For those economies that need much bigger rises in household savings rates to adjust for the recession, recoveries will be delayed. There is also a good chance the world will enter a debt-deflation trap, although I hope the authorities will do everything to avoid this. But even if we experience genuine green shoots of recovery, as I expect, 2009 will be a year to forget. Chris Giles

Will Mugabe go in 2009?

“Only God who appointed me will remove me.” Thus spoke Robert Mugabe after refusing to bow to the ballot box earlier this year. Tragically, there is no reason yet to think he is wrong.

No amount of huffing and puffing in London and Washington will bring about regime change. Nor will southern Africa take decisive action, although images of starving Zimbabweans stumbling across the border will force Pretoria to toughen up its talk.

Starving people, though, make poor revolutionaries and Mr Mugabe still exercises a mesmerising authority over the better fed members of his own coterie, which militates against a palace coup. Low as it is already, Zim­babwe can fall much lower in 2009. Only natural or divine causes will remove the man so determinedly taking it down. William Wallis

Liquidity trap and optimal fiscal policy

Following New Keynesian Economics models, Krugman sketches out a model where he shows the optimal fiscal policy (increasing government expenditure up to the point where full employment is maintained) when the economy is in a liquidity trap.

…when the economy is in a liquidity trap government spending should expand up to the point at which full employment is restored. That’s not a guess or a statement of personal preferences, it’s a result.

The basic intuition behind this result is that when the economy is in a liquidity trap, the social marginal cost of government spending is low, because there isn’t enough private demand to fully employ the economy’s resources. This means that we would normally expect more government spending to raise welfare, right up to the point that full employment (a concept that needs a bit of explanation here) is restored. At that point the marginal cost of government spending jumps up, because it’s diverting resources from private spending.

What I’ve illustrated here is the marginal cost and benefit of government purchases of public goods in and near a liquidity trap. The marginal benefit is presumably a downward-sloping
curve. If G is low, so that monetary policy cannot achieve full employment, the marginal cost of an additional unit of G is low, because the additional government purchases don’t crowd out
private spending. Once G is high enough to bring full employment, however, any further rise in government purchases will be offset by a rise in the interest rate, so that extra G does come at the expense of C, implying a jump in the marginal cost.

As the figure suggests, there should be a fairly wide range of situations in which the optimal level of G is precisely the level at which the marginal cost jumps – that is, the optimal fiscal
expansion is one that brings the economy right to full employment.

…The bottom line here is that while we usually think of Keynesianism as the preserve of ad hoc models, in this case doing it “right” – using a macromodel with maximizing agents and a proper concern for intertemporal constraints – actually suggests a very strong case for big government spending in the face of a liquidity trap. When the economy is depressed and monetary policy can’t set it right, the true opportunity cost of government spending is low. So let’s get those projects going.

The year 2008 in review- the WB version

Here is WB’s review of the year 2008

YCL and load-shedding fall heavy on the industrial sector

The Maoists militant youth force, YCL, and 13 hours of load-shedding in Nepal is taking toll on the industrial sector. Lack of energy and YCL’s campaign to close down industries by putting unjust demands that are beyond the rich of the fledging industrial sector are forcing industries to close down.

Global economics crisis, moribund garment and textile industry, energy crisis, threats to property rights, lack of appropriability (private), high inflation rate…the list of problems in the Nepali economy is never-ending…The last thing Nepal needs now is YCL’s politically motivated rage and labor unrest.

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UPDATE: THT reports that the industrial sector is in fact feeling the heat of YCL’s excesses pretty intensely!

With increase in load-shedding hours in the country, up to 50 per cent of the productivity has been cut. “Serious alternative measures should be taken immediately to prevent the collapse of industries,” he recommends to the government.

Resource curse and reversal of (corrupt) contracts

The latest democracy to be a victim of a coup d’état is Guinea, a country rich in natural resources, mainly bauxite, gold, diamonds, iron and nickel. Nearly one-half of the world’s bauxite reserves is located in Guinea.

After overthrowing the elected administration, following the death of a repressive president, the army officials announced that they are going to review mining contracts and stamp out corruption. Actually, stamping out corruption and holding new free and fair election have been favorite lines to justify coups.

Without naming firms, Capt Moussa Dadis Camara told a public meeting in Conakry that any contracts found to be "defective" would be revised.

He outlined his view of the mining sector, which has attracted billions of dollars in investment from international firms.

"We have blocked the mining sector," he said. "There will be a renegotiation of contracts."

Without naming names, Capt Camara vowed to eradicate corruption, saying: "It was the government officials who surrounded the [late] head of state who looted the country."

"Anyone found guilty of corruption will be punished," he added. "Anyone who has misappropriated state assets for his benefit, if caught, will be judged and punished before the people

The junta thinks that there is massive corruption and unfair contracting in the mining sector, its main revenue base. So, it wants a review of unfair deals. Good! But free and fair review as is stated by juntas rarely happen. In Russia, Venezuela, and Bolivia, the governments reviewed contracts in favor of their cronies, often forcing foreign companies to leave the country. Leaders start with good intentions but things take a different turn later on due to inefficient administration and weak regulatory bodies.

Most of the resource-rich countries are marred with corruption because contracting is often done without following normal procedures or by bypassing regulations. Also, nepotism and favoritism is a common feature in countries rich in natural resources. Moreover, coup threats are also high. This means natural resource abundance leads to slower growth. See this paper.

Here is a paper about political foundations, resource curse, and the importance of solid institutions:

(1) politicians tend to over-extract natural resources relative to the efficient extraction path because they discount the future too much, and (2) resource booms improve the efficiency of the extraction path. However, (3) resource booms, by raising the value of being in power and by providing politicians with more resources which they can use to influence the outcome of elections, increase resource misallocation in the rest of the economy. (4) The overall impact of resource booms on the economy depends critically on institutions since these determine the extent to which political incentives map into policy outcomes. Countries with institutions that promote accountability and state competence will tend to benefit from resource booms since these institutions ameliorate the perverse political incentives that such booms create. Countries without such institutions however may suffer from a resource curse.

A wonderful Xmas gift: 13 hours of load-shedding in Nepal!!

12-14 hours of load-shedding. That’s a Xmas gift from the government to the Nepali people!

Faced with acute shortage of power in the country, the government declared “power crisis” in the country. This means use of electricity on hoarding boards is banned. Too bad for the advertisement industry! The government has encouraged use of compact fluorescent lamp (CFL). It has also given subsidies on import of such lamps, initiated generation of 200 MW electricity from thermal plants, and is trying to import electricity from India. There is a shortage of 3.8 million units of electricity in the country. Moreover, the government has waived red tapes for investors willing to immediately invest in power plants below 50 MW.

Why so late? Why did not the leaders heed to this impending crisis earlier? Corruption? Lack of visionary leaders? More here. Compare the state of energy production in Bhutan and Nepal and you’ll realize how messed up is the political system in Nepal to forge a consensus in a unified energy plan for the country. Note that, Nepal has a comparative advantage in the production of hydro electricity. Why not exploit it rather than scrambling to resuscitate the beleaguered export-oriented firms?

Assessments needed:

[1] the fallout of power crisis on the advertisement industry

[2] the effect of [1] on advertisement revenue for newspapers and online news portals

[3] the effect on price of diesel due to increase in demand for use in thermal plants

[4] the effect of this crisis on the industrial output

[5] the effect of this crisis on FDI

[6] the effect of this crisis on private sector demand for new hydropower plants

[7] the effect of this crisis on the price of alternatives like candle, lamp, biogas generation