Tracking the Economy

Assorted on India

2011-12-05T10:51:00.001-08:00

India’s growth in the 2000s: Four facts

The rupee: Frequently asked questions

Talk is cheap

Conclusion: there is precious little fundamental reason for the rupee to depreciate as it has done in 2011, and even less reason for it to depreciate at the speed of a Ferrari. If there are no fundamental reasons, what gives? Sentiment and expectations. The Centre has done everything possible to sour expectations and sentiment with regard to India. This has hurt. If this were not enough, the RBI messed up, by talking too much and stating that the rupee was a free floating currency. The market tested that ridiculous assertion. The market won. The RBI had to backtrack. Central bankers should be seen more, heard less. The rupee slide was aided and abetted by mismanagement of the interest rate and exchange rate policy. There is ample reason to believe that RBI is not independent, and that a considerable portion of mismanagement might actually be attributable to the Centre. Whatever the real cause, India is the loser.

The Price of Civilization

2011-12-05T10:28:00.001-08:00

Like many Americans, I looked to Barack Obama as the hope for a breakthrough. Change was on the way, or so we hoped; yet there has been far more continuity than change. Obama has continued down the well-trodden path of open-ended war in Afghanistan, massive military budgets, kowtowing to lobbyists, stingy foreign aid, unaffordable tax cuts, unprecedented budget deficits, and a disquieting unwillingness to address the deeper causes of America’s problems. The administration is packed with individuals passing through the revolving door that connects Wall Street and the White House.

-Sachs, Jeffrey D. (2011-10-04). The Price of Civilization: Reawakening American Virtue and Prosperity (Kindle Locations 62-66). Random House. Kindle Edition.

Book Recommendation

2011-12-05T10:25:00.001-08:00

10½ Things No Commencement Speaker Has Ever Said

The Harris School of Public Policy

2011-12-05T10:20:00.001-08:00

Ph.D. students are required to pass four qualifying examinations offered by the Harris School: methods (statistics and econometrics), microeconomic theory, political economy, and a field exam in a substantive field of public policy studies chosen by the student and the student's advisor. These examinations will ordinarily be taken following two years of coursework. In exceptional cases, a student may propose an alternative to either the methods or the theory examination.

The Harris School's doctoral program (PhD)program - how's it rated among the public policy programs?

Why IMF did nothing when Russia defaulted

2011-12-02T11:14:00.001-08:00

We hear relatively little about the struggles between “area” departments, which tend to be relatively sympathetic to the countries they oversee, and “functional” departments such as those responsible for monetary and fiscal policies, which tend to be more critical. Certain departments within the IMF are notorious for being more or less open to new ideas; one functional department during the period in question was informally referred to, less than fondly, as the thought police. Again, this is something about which one would wish to learn more....

The book turns next to the Mexican, Russian, and Asian crises. Although these episodes have been extensively analyzed, Boughton offers a few revelations. We are told, for example, how the IMF first learned of the peso’s impending devaluation not from the Mexican government but through an offhand remark by a high-ranking U.S. official. We learn that the reason the IMF did not do more to discourage Russia from defaulting was because of a telephonic miscommunication between Camdessus, on summer vacation in Bayonne, France, and the Fund’s man in Moscow, John Odling-Smee.

At points the drama is compelling. One cannot help but be impressed by the number of emergency phone calls at 2:00 a.m., and by how frantically IMF officials shuttled to Moscow and Jakarta to keep the world economy from falling off a cliff.

Boughton describes just how close the world came in 1995, in 1997, and again in 1998 to a “Lehman Brothers moment.” In retrospect it is clear that, already in the 1990s, something was dreadfully wrong with a global financial system that was so vulnerable to collapse. One wonders why the IMF did not do more at the time to rectify the problem.

See the full review of the book by Eichengreen.

Thinking Fast and Slow

2011-11-20T07:56:00.001-08:00

In the highly anticipated Thinking, Fast and Slow, Kahneman takes us on a groundbreaking tour of the mind and explains the two systems that drive the way we think. System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical. Kahneman exposes the extraordinary capabilities—and also the faults and biases—of fast thinking, and reveals the pervasive influence of intuitive impressions on our thoughts and behavior. The impact of loss aversion and overconfidence on corporate strategies, the difficulties of predicting what will make us happy in the future, the challenges of properly framing risks at work and at home, the profound effect of cognitive biases on everything from playing the stock market to planning the next vacation—each of these can be understood only by knowing how the two systems work together to shape our judgments and decisions.

Meet the Economist- Columbia Professor Naidu

2011-11-19T06:27:00.001-08:00

It was in Seattle that he first decided to go into economics. "You realized, 'There're not very many economists coming out of our political movement,' and so I thought I could be one of those," he explained.

He studied at the University of Massachusetts at Amherst and then at Berkeley before arriving at Columbia, focusing on political economy, economics history and labor economics. His first research paper, which he wrote with Michael Reich and Arin Dube, showed that an increase in the minimum wage did not, as many economists assumed, necessarily lead to an rise in unemployment.

He grew up in Newfoundland, where, he says, dinner occasionally meant moose curry. His parents came from, in his words, "small villages in the middle of nowhere, India." He said his visits to those places made a lasting impression on him.

"You're a 6-year-old and you see your counterpart, who's another 6-year-old, having blond hair from malnutrition," he said. "That will stay with you."

A few days ago, Naidu reflected on his experiences in the anti-globalization movement that emerged from Seattle in 1999. "It was exciting and exhilarating -- and it felt like we were winning," he said. "I think for like two years we were winning -- and I think we did win. Now, as a professional economist, I look back on that and think, ‘Wow, that was a great thing we did -- changing the terms of the debate on free trade and exposing the politics that were underlying what was supposed to be win-win for everybody and in fact might not have been."

"Even now that I'm teaching economics," he continued, "so many of the people that I hang out with, that I associate with, are people that I hung out with in that period."

"And that is what I think will happen with the Occupieds," he said. "Even if the movement goes away, the social networks that have formed will hang around. People will be friends, even if they're no longer camping together in the camps, and when strangers meet in whatever venues, they'll be like, ‘You were there,’ and there will be an immediate rapport. In the long run that will have a big political impact."

Chile's Economic and Social Challenges

2011-11-19T05:04:00.001-08:00

Panelists included:
- Guillermo Calvo, Professor of Economics, SIPA,
- John Dinges, Professor of Journalism, CJS
- Nelson Fraiman, Director, Program on Entrepreneurship & Competitiveness in Latin America
- Nara Milanich, Professor of History, Barnard College
- Miguel Urquiola, Associate Professor of Economics, SIPA

Book Recommendation on Health Care Reform

2011-11-17T07:11:00.001-08:00

A Sneak Peek At ‘Health Reform: The Comic Book;

I think Mitt Romney is the hero of this story. But I want to make clear that the way he’s portrayed in this book has nothing to do with his presidential campaign.Mitt Romney is the single person most responsible for health care reform in this country: Without his leadership we don’t get reform in Massachusetts, and without Massachusetts reform we don’t get national reform.

Cool Summarizer Tool

2011-11-15T03:15:00.001-08:00

wikisummarizer

Debt Dynamics

2011-11-10T09:18:00.001-08:00

Winner of the Coolest Statistical Agency on web

2011-11-10T08:58:00.001-08:00

The revamped ONS website is just great- congratulations. Checkout their You-Tube Channel and the interactive charts

Latest Employment Data from ONS

2011-11-10T08:44:00.001-08:00

Movies about the Financial Crisis

2011-11-10T07:34:00.001-08:00

There are three ways to make a living in this business. Be first, be smarter, or cheat.

India - Pakistan Relations Assorted

2011-11-10T00:44:00.000-08:00

Pakistani Foreign Minister Hina Rabbani on Indo-Pak relations

Pakistan, India, MFN: What are the implications? ;

In the intuition of economists, there is a gravity model in the affairs of men. Proximity and low transactions costs are incredibly important. The natural opportunity for India to grow international integration on all dimensions (goods, services, people, ideas, capital) lies in our immediate neighbourhood. India's connections into the region are shockingly below those seen for all other large countries. Doing better on connections with Pakistan would be a nice step forward.

For Discussion: Would the gravity model work when India is just too big for its neighbors unlike ASEAN?

Related:

The Gravity Model

Trade Frictions and Welfare in the Gravity Model

Gravity models are mathematical models based on an analogy with Newton s gravitational law and used to account for aggregate human behaviors related to spatial interaction such as migration and traffic flows. In regards to trade, the gravity model states that the volume of trade can be estimated as an increasing function of the national incomes of trading partners, and a decreasing function of the distance between them. Although the model’s ability to predict trade flows has been popular for several decades, it is often criticized for its lack of theoretical foundations. On August 6, 2002, Edward Balistreri presented his collaborative work with fellow International Trade Commission (ITC) economist, Russell Hillberry on an evaluation of the gravity model and its ability to replace traditional methods of welfare and policy analysis

Book Recommendation

2011-11-09T08:46:00.000-08:00

'In Capitalist Revolutionary, Backhouse and Bateman cut through the misinformation, the caricature, and maybe even the web memes, to give us an actually useful understanding of Keynes as a philosopher offering a moral critique of our capitalist system.

According to Backhouse and Bateman, Keynes was essentially a man who wanted to create a revolution in how we thought about economic problems'

Peter Boettke highly recommends the book- 'the most informative and best read on Keynes that I have read recently'

The Economics of Good and Evil

2011-11-09T08:24:00.000-08:00

Economics of Good and Evil-The Quest for Economic Meaning from Gilgamesh to Wall StreetTomas Sedlacek

There’s a song that says that rules and laws are created by lawyers and poets. Poets (in the wider meaning of the term) give rules meaning and spirit; lawyers give them form and letter. Similarly, we may say that a great economist can be either an outstanding mathematician or an excellent philosopher. It appears to me that we have given lawyers and mathematicians too large a role at the expense of poets and philosophers. We have exchanged too much wisdom for exactness, too much humanity for mathematization.

-Sedlacek, Tomas; Havel, Vaclav; Havel, Václav (2011-06-03). Economics of Good and Evil : The Quest for Economic Meaning from Gilgamesh to Wall Street (Kindle Locations 5420-5422). Oxford University Press, USA. Kindle Edition.

Think the quality of writing needs much improvement.

Bangladesh Economy Blogs

2011-11-09T06:51:00.000-08:00

Bangladesh Economic News
Centre for Policy Dialogue
Bangladesh Budget Watch

Photo Source: The Economist

Elizabeth Warren talk

2011-10-07T05:56:00.000-07:00

The previous fall, Geithner huddled with top aides to develop what one called an “Elizabeth Warren strategy,” a plan to engage with the firebrand reformer that would render her politically inert. He never worked out a viable strategy—a way to meet with Warren without drawing undesirable comparisons—and so, like the president, he didn’t.

-Suskind, Ron (2011-09-20). Confidence Men: Wall Street, Washington, and the Education of a President (pp. 4-5). Harper. Kindle Edition. Related: Consumer Finance Protection Bureau

Tourism Spending

2011-09-29T23:44:00.000-07:00

Real spending on travel and tourism increased at an annual rate of 2.6 percent in the second quarter of 2011 after increasing 2.8 percent (revised) in the first quarter. Growth in travel and tourism outpaced growth in real gross domestic product (GDP), which increased 1.0 percent in the second quarter after increasing 0.4 percent in the first quarter. The growth in real spending on tourism primarily reflected increases in total transportation and in recreation and entertainment.

Overall growth in prices for travel and tourism goods and services remained high, increasing 7.3 percent in the second quarter of 2011 following an 8.5 percent (revised) increase in the first quarter. The growth in prices for travel and tourism goods and services reflected increases in prices for traveler accommodations and for gasoline.

Definitions:
Tourism spending. Tourism spending comprises all goods and services purchased by tourists (defined as people who travel for any reason). In the following tables, tourism spending is referred to as direct tourism output.

Indirect tourism-related spending. Indirect tourism-related spending comprises all output used as inputs in the process of producing direct tourism output (e.g., toiletries for hotel guests and the plastic used to produce souvenir key chains).

Total tourism-related spending. Total tourism-related spending is the sum of direct tourism spending and indirect tourism-related spending.

Direct tourism employment. Direct tourism employment comprises all jobs where the workers are engaged in the production of direct tourism output (such as hotel staff, airline pilots, and souvenir sellers).

Indirect tourism-related employment. Indirect tourism-related employment comprises all jobs where the workers are engaged in the production of indirect tourism-related output (e.g., employees of companies that produce toiletries for hotel guests and the plastic used to produce souvenir key chains).

Total tourism-related employment. Total tourism-related employment is the sum of direct tourism employment and indirect tourism-related employment.

Data Watch

2011-09-29T23:37:00.000-07:00

Since the recession ended, businesses had increased their real spending on equipment and software by a strong 26%, while they have added almost nothing to their payrolls....

You can’t fault companies for investing in new machinery rather than hiring new workers. As two news reports detail, labor costs are rising, a function of both private and public pressures.

First, employers face a jump in health insurance costs. The Kaiser Family Foundation reported a 9% average increase in the premiums paid by employers this year. The average yearly cost to cover a family hit a record $15,073, up sharply from $13,770 in 2010.

Krugman's History of Macro

2011-09-26T11:46:00.000-07:00

So, here’s the history of macro in brief.

1. In the beginning was Keynesian economics, which was ad hoc in the sense that on some important issues it relied on observed stylized facts rather than trying to deduce everything from first principles. Notably, it just assumed that nominal wages are sticky, because they evidently are.

2. In the 1960s a number of economists started trying to provide “microfoundations”, deriving wage and price stickiness from some kind of maximizing behavior. This early work had a big payoff: the Friedman/Phelps prediction that sustained inflation would get “built in”, and that the historical tradeoff between inflation and unemployment would vanish.

.....

7. The Lesser Depression arrives. It’s clearly not a technological shock; clearly, also, nobody is confused about whether we’re in a slump, as the old Lucas model required.

In fact, it looks a lot like what Keynes described, and old-Keynesian models work very well, thank you, both at explaining it and in making predictions about such things as interest rates and the effects of fiscal austerity. But the descendants of the Lucas project know that Keynes was wrong — it’s what their teachers and their teachers’ teachers have been saying all these years. They cannot accept anything resembling a Keynesian explanation without devaluing everything they’ve done with their intellectual lives.

Related: Stephen Williamson debates Krugman.

Discuss- are escalators decreasing?

2011-09-26T11:39:00.000-07:00

Arnold Kling always gives us good brain food on economics;

There are multiple escalators in the economy. At any one point in time, some people are on up escalators, and some people are on down escalators. From 1970 to 2000, I think that cohort data would tell you that many more families rode escalators up than rode them down. From 2000 to today, my guess is that the proportion riding up escalators has not been as high.

Confidence Men

2011-09-26T11:31:00.000-07:00

Brad de Long reviews Confidence Men;

Since the spring of 2009 I have became more and more alarmed by the economic policy choices made by the Obama administration. A new administration needs to (1) forecast what is most likely to happen, and (2) design and implement policies that will deal with what is likely to happen, The Obama administration did that. I think that some of its initial policies were wrong, but given the press of events I would give the administration moderately high marks for the policies it designed and implemented up through, say, April 2009.

Thereafter, however, things to me seemed to gradually fall apart. An administration has a third task it needs to carry out: (3) think hard about the risks--what if the administration has misjudged the situation? what if more things go wrong?--figure out what it needs to do to buy insurance against those risks, and do those things as well.
It needs to ask itself:
What if we are wrong in our estimation of the situation--what might the world then look like three years from now?  
What if more things go wrong in the next year or two--what might the world then look like three years from now?
In those possible scenarios, what will we wish then that we had done today to prepare the way for dealing with the situation?

....
Why Obama chose the policies he did, why Geithner and Orszag and company were so optimistic in 2009, why the Reconciliation process was not teed up for emergency expansionary fiscal policy action if it turned out to be necessary, why Fannie and Freddie were not teed up for emergency mortgage action if it turned out to be necessary, why the administration turned so decisively away from unemployment and toward long-term deficit reduction in early 2010, why Summers and Romer did not wipe the floor with Geithner and Orszag in the long twilight bureaucratic struggle when NEC collegiality broke down, and why Bernanke forgot about the employment and output part of the Federal Reserve's dual mandate - these are all questions that I would dearly love to know the answers to.

Two and a half years ago I would have given long odds that Ron Suskind's book would provide me with a lot of the answers to these questions.

It does not.

Christine Lagarde's 4 Rs

2011-09-18T10:02:00.000-07:00

A recent speech of IMF's Lagarde;

But before talking about solutions, we need to be clear about the problems. I would isolate three distinct, albeit related, issues—balance sheet pressures sapping growth, instability in the core of the global economic system, and social tensions....I want to propose today four key policy dimensions needed to secure recovery and economic stability—repair, rebalance, reform, rebuild, the “4 R’s”.

First, repair. Before anything else, we must relieve some of the balance sheet pressures that risk smothering the recovery—on sovereigns, on households, on banks.

On sovereigns, advanced countries need credible medium-term plans to stabilize and lower public debt ratios. This must come first. But consolidating too quickly can hurt the recovery and worsen job prospects. So the challenge is to navigate between the twin perils of losing credibility and undermining growth. There is a way to do this. Credible measures that deliver and anchor savings in the medium term will help create space for accommodating growth today—by allowing a slower pace of consolidation.

Of course, the precise path is different for each country. Some have no choice but to cut deficits today, especially if they are under market pressure. Others should stick to their adjustment plans, but be ready to change course if growth falters further. Others still are probably pushing too hard today, and could slow down a bit.

One more point—it’s not just the what of the adjustment, it’s the how. In the short run, policymakers must focus on measures with the biggest bang-for-the-buck, that create jobs and kick-start growth, and that take distributional considerations into account. The how of adjustment is also important in the medium term, where fiscal plans should seek to support growth. I’m thinking of issues like tax reform, including by broadening bases. Equally, entitlement reforms will be essential in establishing long-term debt sustainability in virtually all advanced economies.

Policymakers must also deal with household and bank balance sheets.

In light of the jobs crisis in the United States, I welcome President Obama’s recent proposals to address growth and employment. At the same time, it remains critical for policymakers to clarify in parallel their medium term plans to put public debt on a sustainable path. In tandem with this crucial employment agenda, it is important to relieve overburdened households through actions like more aggressive principal reduction programs, or helping homeowners take advantage of low interest rates.

In Europe, the sovereigns must address firmly their financing problems through credible fiscal consolidation. In addition, to support growth, via private sector lending, all banks must have sufficient capital buffers.

The second “R” is reform. If repair was about getting the economy moving today, reform is about laying the foundations for a more stable economic future tomorrow.

A priority here is financial sector reform. On the plus side, we have broad agreement on higher quality capital and liquidity standards with appropriate phase-in arrangements. But substantial gaps remain in areas like supervision, cross-border resolution, too-important-to-fail, and shadow banking systems. We need international cooperation across all dimensions to avoid regulatory arbitrage. The fact that so many of these issues are still unresolved three years after Lehman should be of concern to us all.

We also need to develop and fine-tune macro-prudential tools to guard against financial risks. I’m thinking here of policies like having banks hold more capital when times are good or implementing maximum loan-to-value ratios to guard against housing price bubbles.

Under the reform banner, I would also include the social dimension. Employment must be central. It not only sustains demand, but supports human dignity. In the words of Dostoevsky, “deprived of meaningful work, men and women lose their reason for existence”. This is especially important among the young, who risk losing the race even before the starting gun has sounded. We should also seek growth that is inclusive, benefiting the whole of society.

The third “R” is rebalance. This has two meanings. First, it means shifting back demand from the public to the private sector, when the private sector is strong enough to carry the load. This hasn’t happened yet.

The second rebalancing involves a global demand switch from external deficit to external surplus counties. The idea here is straightforward—with lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery. But any rebalancing so far is largely due to lower growth. In some countries, rebalancing is being held back by policies that keep domestic demand growth too slow and currency appreciation too modest. Some other emerging markets are dealing with dangers from capital inflows that are too rapid.

This lack of sufficient rebalancing hurts everyone. In our inter-connected world, any thought of decoupling is a mirage. If the advanced economies succumb to recession, the emerging markets will not escape. Nobody will. Rebalancing is in the global interest, but it is also in the national interest.

Woodrow Wilson would have appreciated that, I'm sure.

My fourth—and final—“R” is rebuild. Here I am thinking mainly of the low-income countries that need to rebuild their economic policy buffers—including fiscal positions—that served them so well during the crisis, to protect themselves against future storms. This will also help provide the space for growth-enhancing public investment and social safety nets—for example, allowing countries to deploy well-targeted subsidies to protect the poor from commodity price swings with minimal damage to fiscal sustainability.

Ireland and World Economy

2011-09-18T09:44:00.000-07:00

Ireland and the World Economy Guest Lecture from Stephen Kinsella on Vimeo.

Robert Reich at Google

2011-09-18T08:51:00.000-07:00

Robert Reich on his new book After Shock

It hurts some times

2011-09-18T03:03:00.000-07:00

IMF on fiscal contractions;

Second, external adjustment is not driven solely by the fall in domestic demand from fiscal consolidation. The contractionary effect of fiscal consolidation is now well established, with consequent effects on import demand, and this is something policymakers cannot ignore—fiscal consolidation hurts. But the current account also improves because exports get a boost from the real exchange rate depreciation that tends to accompany fiscal consolidation.

Chapter 4 of WEO- The Twin Budget and Trade Balances

2011-09-18T02:53:00.000-07:00

How do changes in taxes and government spending affect an economy’s external balance? Based on a historical analysis of documented fiscal policy changes and on model simulations, this chapter finds that the current account responds substantially to fiscal policy—a fiscal consolidation of 1 percent of GDP typically improves an economy’s current account balance by over a half percent of GDP. This comes about not only through lower imports due to a decline in domestic demand but also from a rise in exports due to a weakening currency. When the nominal exchange rate is fixed or the scope for monetary stimulus is limited, the current account adjusts by as much, but the adjustment is more painful: economic activity contracts more and the real exchange rate depreciates through domestic wage and price compression. When economies tighten fiscal policies simultaneously, what matters for the current account is how much an economy consolidates relative to others. Looking ahead, the differing magnitudes of fiscal adjustment plans across the world will help lower imbalances within the euro area and reduce emerging Asia’s external surpluses. The relative lack of permanent consolidation measures in the United States suggests that fiscal policy will contribute little to lessening the U.S. external deficit.

We find that fiscal policy has a substantial and long-lasting effect on the currentaccount. A fiscal consolidation of 1 percent of GDP improves the current account by over ahalf percent of GDP within two years, with the improvement persisting into the mediumterm. The improvement in the current account comes not only through lower imports due tofalling domestic demand, but also from an increase in exports arising from a weakerdomestic currency.

See chapter 4

Something to think about?

2011-09-18T02:35:00.000-07:00

'We call the negative outliers "rogue traders". What do we call the positive outliers?

From Junkcharts

Target what you can hit- follow up

2011-09-18T01:55:00.000-07:00

In case you don't have time to read the entire chapter 3 , please read the two boxes
-Box 3.1. Inflation in Sub-Saharan Africa during the 2008 Commodity Price Surge
- Box 3.2. Food Price Swings and Monetary Policy in Open Economies

What accounts for the relative stability of nonfood inflation? As Table 3.1.4 indicates, the macroeconomic environment was broadly neutral during this period. There was a small increase in government spending. On the monetary front, there was a small increase in the growth rate of monetary aggregates; money targets were missed in eight countries for which there are data; and nominal interest rates stayed constant—all of which is broadly consistent with an accommodation of first-round effects.

Target what you can hit

2011-09-18T01:47:00.000-07:00

The analytical chapters of the WEO is out. The 3rd chapter address the following questions;

-What are the effects of international commodity price swings on inflation across a variety of economies? What economic factors influence these effects?

-What is the appropriate monetary policy response to commodity price shocks? In particular, how does the approach of targeting underlying inflation rather than headline inflation perform in terms of delivering macroeconomic stability in different types of economies? Should central banks respond to persistent commodity price shocks any differently than to one-time shocks?

-Finally, what are the implications for monetary policy in today’s environment, with excess demand pressures in some emerging and developing economies and economic slack in advanced economies?

These are the main findings of the chapter:

-Food price shocks tend to have larger effects on headline inflation in emerging and developing economies than in advanced economies. On a related note, because medium-term inflation expectations are weakly anchored in many emerging and developing economies, food price shocks have larger effects on inflation expectations in these economies.

-The measure of inflation used to define a central bank’s target matters because of its effect on the central bank’s credibility. In economies with low initial monetary policy credibility and high food shares in the consumption basket, focusing on underlying inflation—that is, a measure that reflects the changes in inflation that are likely to be sustained over the medium term—rather than on headline inflation, makes it easier to build credibility. The reason is that it is harder to hit headline inflation targets when commodity prices are volatile. Higher credibility, in turn, leads to better-anchored inflation expectations and lower volatility of both output and headline inflation.

-The desirability of setting and communicating monetary policy based on a measure of underlying inflation depends on the relative importance of headline inflation and output to a country’s welfare. A headline framework can lower the volatility of headline inflation, but at the cost of significantly higher volatility in output (and hence in household income).

-Finally, in economies where central bank credibility is still limited and the share of food in consumption is high (as in a number of emerging and developing economies), a food price shock is likely to have even larger second-round effects and require a more aggressive policy response when excess demand pressures are high and inflation is running above target. This assumes that the economic costs rise as the gap increases between actual inflation and the target. In contrast, in economies where the central bank’s credibility is strong, where food accounts for a low share in consumption baskets, and where there is substantial economic slack (as in major advanced economies today), the monetary policy tightening required to stabilize inflation is more gradual.

Nepal can expand external debt?

2011-09-17T05:44:00.000-07:00

The debt reduction has created fiscal space, but in the short run maintaining the peg calls for containing domestic borrowing close to current levels. With external debt within thresholds, the debt sustainability analysis indicates that Nepal is at moderate risk of debt distress (see Annex 1). This fiscal room could be used for building infrastructure and human capital, and for the peace process, provided spending quality is ensured. But, in the short term the worsening external position requires that domestically financed deficits remain close to current levels, while the overall deficit could be expanded provided it is funded with external grants or concessional debt.The main considerations in determining the appropriate fiscal stance are;

Debt level target. Nepal’s external debt, with an NPV of debt-to-GDP ratio of 21¾ percent, and an NPV of debt-to-exports-and remittances ratio of 63 percent, is well within DSA thresholds. Nepal’s public debt is well below the average of comparators. However, contingent liabilities of some 2–3 percent of GDP arising from the required recapitalization of state-owned banks, and potential additional liabilities stemming from the weak financial sector suggest that adequate cushions be maintained. In sum, a public debt target of around 40 percent would be appropriate to anchor fiscal policy. To stabilize the public debt-to-GDP ratio in the long run at this level, the overall deficit could rise to 3½ percent of GDP, and the domestically financed deficit would be in the range of 2¼–2½ percent of GDP, higher than in previous years.

Support for the peg and demand management. The expected slowdown in output growth would suggest a more expansionary fiscal stance in the short term. However, inflationary pressures remain high, and the peg to the Indian rupee requires that domestically financed deficits remain contained.

Crowding out and borrowing costs. A high money-to-GDP ratio suggests that, in the longer run, a somewhat higher domestic debt burden can be accommodated. However, in the short run, the expected slowdown in money growth due to the deteriorating external position, public sector borrowing may need to be contained to leave sufficient room for private credit and control interest costs

Source: Nepal: 2010 Article IV Consultation and Request for Disbursement Under the Rapid Credit Facility - Staff Report

Random Data- Nepal's Government Revenues

2011-09-17T03:43:00.000-07:00

Random Data- What's Bhutan's Government Revenues

2011-09-16T12:30:00.000-07:00

The answer is it depends. See also the latest Economic Update on Bhutan from the World Bank

Government Debt in Europe

2011-09-16T12:16:00.000-07:00

Egypt, Israel and Spain

2011-09-16T12:12:00.000-07:00

Having a bit too much fun with Google Data Explorer

Google Data Explorer is cool

2011-09-16T12:04:00.000-07:00

Government Revenues and Expenditures

2011-09-16T11:55:00.000-07:00

Note to Self: IMF DataMapper users the following definitions for public revenues and expenditures.

General government revenue (National currency)
Revenue consists of taxes, social contributions, grants receivable, and other revenue. Revenue increases government’s net worth, which is the difference between its assets and liabilities (GFSM 2001, paragraph 4.20). Note: Transactions that merely change the composition of the balance sheet do not change the net worth position, for example, proceeds from sales of nonfinancial and financial assets or incurrence of liabilities.

General government total expenditure (National currency)
Total expenditure consists of total expense and the net acquisition of nonfinancial assets. Note: Apart from being on an accrual basis, total expenditure differs from the GFSM 1986 definition of total expenditure in the sense that it also takes the disposals of nonfinancial assets into account.

What's the quickest way to find public finance data on the web?

2011-09-16T11:13:00.000-07:00

So whats the quickest way to find International Public Finance data on the web? Is it
A- Wolfram Alpha
B- World Development Indicators
C- IMF Data Mapper

Homework: Try finding the latest estimates of Bhutan's government revenues estimates?

Something for Nothing

2011-09-06T08:46:00.000-07:00

Something for Nothing-A Novel
Michael W. Klein

David Fox (Ph.D. Economics, Columbia, Visiting Assistant Professor at Kester College, Knittersville, New York) is having a stressful year. He has a temporary position at a small college in a small town miles from everything except Albany. His students have never read Freakonomics. He thinks he is getting the hang of teaching, but a smart and beautiful young woman in his Economics of Social Issues class is distractingly flirtatious. His research is stagnant, to put it kindly. His search for a tenure-track job looms dauntingly. (The previous visiting assistant professor of economics is now working in a bookstore.) So when a right-wing think tank called the Center to Research Opportunities for a Spiritual Society (CROSS)--affiliated with the Salvation Academy for Value Economics (SAVE)--wants to publish (and publicize) a paper he wrote as a graduate student showing the benefits of high school abstinence programs, fetchingly retitled "Something for Nothing," he ignores his misgivings and accepts happily. After all, publication is “the coin of the realm,” as a senior colleague puts it.

But David faces a personal dilemma when his prized results are cast into doubt. The school year is filled with other challenges as well, including faculty politics, a romance with a Knittersville native, running the annual interview gauntlet, and delivering the culminating "job talk" lecture under trying circumstances. David’s adventures offer an instructive fictional guide for the young economist and an entertaining and comic tale for everyone interested in questions of balancing career and life, success and integrity, and loyalty and desire.

When Fiscal Adjustment is not enough

2011-09-03T09:52:00.000-07:00

The mission and the authorities agreed that fiscal adjustment alone will not
ensure debt sustainability (MEFP, paragraph 10). It was recognized that attempts to achieve higher primary fiscal targets over the medium term would not be sustainable unless accompanied by a meaningful reduction in the public debt service burden, which will require burden sharing by all stakeholders. In this context, the authorities have retained debt and legal advisors, publicly announced to seek a comprehensive and substantive restructuring of the public debt, initiated discussions with creditors, and obtained financing assurances from the Paris Club. The authorities’ strategy (Box 4), developed with the assistance of their debt advisors, emphasizes dialogue with all creditors and information transparency (including publishing relevant information on the debt restructuring on their website).

- St. Kitts and Nevis: 2011 Article IV Consultation and Request for Stand-By Arrangement - Staff Report

Ideas for PhD

2011-09-03T09:30:00.000-07:00

PhD in Political Economy & Government;

The PhD in Political Economy and Government is designed for students interested in the impact of politics on economic processes and outcomes, and the reciprocal influence of economic conditions on political life. It is appropriate for students whose academic interests are not served by doctoral studies in Economics or Political Science alone...

Things to consider before applying

Required quantitative preparation for the PhD in Political Economy and Government includes:

Minimum two semesters of Calculus.
Mathematics preparation up to and including Multivariable Calculus.

I want to work for IMF/WB?

2011-09-03T05:55:00.000-07:00

A certain Praveen Kishore comments on the Dani Rodrik's blog sometime back- which worries me a bit about the type of people who get attracted to jobs at multi-lateral institutions.

For past three months, I have been collecting information regarding Ph.D. in Eco. and MPA/ID and similar other programs. I have gone through other blogs as well. However,I am still not decided about Ph.D. or MPA/ID. I like economics. I have basic undergraduate degree in Eco.and Mathematics. Thereafter, I got MBA(Finance) from Calcutta University (India) and Masters in Public-policy and Management from IIMB (Indian Institute of Management, Bangalrore, India). I am part of permanent Indian civil service (IRS - Indian Revenue Service, to be precise) with around 10 years of experience in Central (Federal) direct tax department, Ministry of Finance, Govt. of India - at operational as well as policy level. I am aged 35 years.

I want to work for IMF/WB or consulting organization. I also like academics/research.

In such a situation -What should I do? MPA/ID or Ph.D.in Eco?

Justin Lin on Esther Duflo

2011-08-31T13:27:00.000-07:00

Justin Lin summarizes the Jackson Hole conference;

Esther Duflo, meanwhile, posited that a long term strategy to balance growth with equity should entail policies that maximize the chance for the poor to fully participate in markets. Her paper describes market failures in finance, insurance, land, and education in developing countries, and discusses what is known, and not known, about how best to tackle them.

My view is that fixing all those market failures that are biased against poorer people might not be sufficient. Poor people’s income comes mostly from their labor earnings, while the rich people derive a large portion of their income from capital. If a developing country can follow its comparative advantage and starts its structural transformation by developing labor-intensive industries, the poor will have better employment opportunities, the economy will be competitive and dynamic, labor will turn from relatively abundant to relatively scarce, and the increase in wage rates will be much faster than the return to capital. In this way, the country may achieve growth with equity as Japan, Korea, Taiwan-China, and Singapore achieved during their catching up process.

September is going to be David Henderson month

2011-08-31T13:18:00.000-07:00

Plan to finish reading two books by David Henderson next month- so will be blogging extensively about the books in the coming month.

Justin Wolfers says good bye to DC

2011-08-31T13:03:00.000-07:00

Life in D.C. is not just about public policy debates, it is also a wonderful city to live in. My usual running route takes me home past the White House, the Washington Monument, perhaps the Lincoln Memorial and Reflecting Pool, and for hill work, I head to the Capitol. There’s something special about running past monuments. There’s terrific trail running, too. Great restaurants are on every corner, although perhaps too many expense-account steakhouses. The cupcake scene is incredible. I would say something about the happy hour culture, but, well, I’m now a parent. So instead, I can say that a typical weekend might involve taking my daughter to visit the dinosaurs at the Natural History Museum, burn off steam in the atrium at the National Portrait Gallery, picnic in the Sculpture Garden, or take a twirl on the Carousel on the National Mall.

Justin Wolfers is one of our favorite economists!

Do check-out Wolfers' parenting habits;

OK, so one randomized trial that we actually did read had a huge impact on us, which was teaching babies sign language. And it turns out that this is a great way of even increasing their vocab before their speaking skills kick in. And Matilda speaks terrific sign language and his been able to sort of communicate her needs whether she wants milk or Cheerios, you know, for about a year now. No not a year, I misspoke, six, seven months now. But you know, preverbal. We made that a priority.

What Steven Landsburg been reading

2011-08-31T12:44:00.000-07:00

It's all fiction

;

The Brothers Karamazov (Fyodor Dostoevsky) (for the fourth time!). Arguably the greatest novel ever. The issue with the Brothers K is always the choice of a translation. The last time around (maybe ten years ago or so), I went with Pevear and Volokhonsky, and pronounced it by far the best. This time I went back to the classic Constance Garnett translation that I last read at age 16 — and reminded myself that this one is also great.

Alan Krueger to replace Austan Goolsbee

2011-08-29T11:25:00.000-07:00

Mr. Krueger has been on Princeton's faculty since 1987, the year he earned his Ph.D. in economics from Harvard University. He did a stint as chief economist at the Labor Department during the Clinton administration.

The work he has done in academia ranges from attempts to explain why job growth wasn't stronger during the 2000s, to findings that increases in the minimum wage don't depress employment, to a work showing that terrorists often come from middle-class—and often college-educated—backgrounds.

While at Treasury, Mr. Krueger worked on analyses of a variety of programs, including tax incentives to encourage employers to hire the employed, the "cash for clunkers" initiative to jump-start auto purchases and Build America taxable municipal bonds.

Treasury Secretary Timothy Geithner, through a spokeswoman, said that "given his expertise in labor economics, he is precisely the right choice to lead the CEA at this moment in history."

Martin Feldstein, who was CEA chairman in the Reagan White House, praised the choice. "His experience at the Treasury will give him a running start in his new job," he said. "Alan is an expert in labor-market problems, taxation and the economics of terrorism. I hope the president listens to him."

-Labor Economist to Fill Key Post

Leon Levy Lecture - The Lot of the Unemployed

A closer look at Alan Krueger’s academic work;

The minimum wage: Krueger might be most famous for the paper he did with David Card back in 1992 showing that an increase in the minimum wage doesn’t always increase unemployment, as most economists had long believed. Krueger and Card compared fast-food restaurants in New Jersey and western Pennsylvania and found that New Jersey, which had hiked its minimum wage from $4.25 to $5.05, didn’t lose jobs as expected. In fact, in some conditions, an increase in the minimum wage can actually boost employment. As Robert Waldmann explains, “Their logic is basically that firms can choose to pay a low wage and have a high quit rate and take a long time to fill vacancies or pay a high wage and have fewer quits and fill vacancies more quickly.” That said, Waldmann adds, this research doesn’t appear to be relevant to current labor-market conditions.

Unemployment: In 2011, Krueger and Andreas Muller conducted a survey of 6,025 unemployed workers and found a couple of interesting things. One, “the amount of time devoted to job search declines sharply over the spell of unemployment.” Second, out-of-work job-seekers tend to be picky: The minimum wage a worker will accept tends to be pretty close to the wage of his previous job, and it doesn’t drop very much over time, even if he stays unemployed.

Krueger to CEA

Reading for the Weekend- paper by Kashik Basu on Indian Inflation

2011-08-29T10:08:00.000-07:00

Understanding Inflation and controlling it

Vijay Kelkar- A Practitioner in Indian Economic Policy

2011-08-29T09:35:00.000-07:00

Vijay Kelkar's is a fascinating story in Indian public policy. He started out as an economics Ph.D. and turned himself into a consummate policymaker. While he did many interesting things in the field of oil and gas, and as executive director of the IMF, I worked with him in his fiscal phase...

...I used to get astonished at the way Kelkar, who is 20 years older than me, consistently found the energy and morale to go back into the fray again and again, chipping away at solving long-standing problems. This also taught me that while weary cynicism is a more fashionable pose, progress is only achieved through the dint of boundless optimism.

Practical people are often dismissive of the world of ideas, but that is not the Kelkar that I have known. For one thing, he made a point of reading the current global research in economics on an astonishing scale. I have been frequently humbled in finding that his knowledge of the current literature was better than mine. I suspect his years at the IMF were very useful in tooling him up in modern open economy macroeconomics, which is often a gap in the knowledge of those who experienced a closed India in their formative years. Kelkar has always encouraged me, saying that in an open society, ideas matter, so it was important to build good ideas, and to push important messages out in the public domain, even when this makes many people uncomfortable.

via Ajay Shah

Doing Economic Theory in Practice

2011-08-27T07:51:00.000-07:00

A book that Olivier Blanchard wishes he had written should be a must read for economic policy students;

To give a sense of what they do, I shall take one example, the creation or reform of fiscal frameworks like the European Stability and Growth Pact (SGP). To come to an intelligent set of recommendations, think of all the elements you need to put together:

•You need to understand what sustainability means in theory and in practice, what the costs of not abiding by it are, and how to assess it. When does a debt-to-GDP ratio become truly excessive? What happens then? How fast can you reach that threshold? How fast can you move away from it?
•You need to understand the long-term effects of deficits and debt on output and its composition. How do deficits and debt affect output in the medium and the long run? How do they affect the interest rate, the net foreign debt position, the capital stock? What is the cost in terms of lost consumption in the future? Which generations gain, which generations lose?
•You need to understand the short-term effects of deficits, and how counter-cyclical fiscal policy can help in the short run. Do deficits affect activity in the same way, whether they come from tax cuts or spending increases? How important are expectation effects? Can the anticipation of large deficits in the future lead to a decrease in consumption and investment, and a decrease in output today? When is this more likely to happen?
•You need to understand the macroeconomic costs of decreased policy flexibility. Are constraints on deficits and debt consistent with an appropriate response of fiscal policy to shocks? What explains sustained divergences within the euro area during the first ten years? Were such divergences avoidable? Then you should determine whether and to what extent fiscal policy is the right tool to deal with country-specific shocks and to what extent it can (should) substitute for the lack of an independent monetary policy. Finally, you need to figure out how much policy space is left to governments after they have fought the great recession and rescued their banks.
•You need to think about how to define the rules in practice. How should debt be defined? How should implicit liabilities, coming from social security and other promises to future generations, be treated? If rules are defined in terms of deficits and debt, what are the most appropriate definitions of the two concepts for the question at hand? How should rules deal with privatization revenues? Should rules apply to gross debt or to net debt? Should the budget be separated between a current account and a capital account? Should the deficit rules apply only to the government current account? Can rules be enforced by politicians or do we need to set up independent committees?
•You need to think about political economy issues. Why are rules needed in the first place? To protect people from their governments, or to protect the governments from themselves? How can a particular set of rules be manipulated or distorted by a national government? How will sanctions against a misbehaving government be imposed? Will these sanctions be credible ex ante? Is international coordination, such as in the G-20 framework, an asset or a diversion from every government’s duties?

To answer these questions, you need many conceptual tools. Among them: a dynamic general equilibrium model with overlapping generations; a model of short-run fluctuations with careful treatment of expectations; political economy models to think about the case for rules; agency models to help you think about the design of specific rules. In each case, with the guidance of theory, you need to look at the evidence, so as to get a sense of which theoretical arguments are more relevant. This is not easy to do. Courses will typically give you the theoretical tools, without much motivation, and let you use them on your own, without much practical training. This is not what this book does. It motivates the use of the tools, gives you the tools, and shows you how they can be used.

FRL in Mongolia - some of the Ceilings

2011-08-27T07:40:00.000-07:00

Mongolia's FRL appears interesting;

The floor of structural balance is the deficit of 2 percent of GDP. The structural balance is calculated by using the moving average price of major minerals—currently copper and coal—over 16 years (past 12 years, current year, and future three years). This provision takes effect in 2013.
The ceiling of expenditure growth is the non-mineral GDP growth rate, determined as the greater between its 12-year moving average value and the budget year’s GDP growth rate. This provision takes effect in 2013.
Net present value of public debt cannot exceed 40 percent of GDP. This excludes any borrowing in which the government has agreed to contribute into the paid-in capital of a foreign invested mining entity and which is repayable from the future profits of the entity. The provision takes effect from 2014, with a transition period specified for the preceding years.

IMF's view on Mongolia's fiscal framework;

Medium-term fiscal framework. A sound fiscal policy is necessary for ensuring that Mongolia’s mineral wealth leads to lasting prosperity for all Mongolians. In practical terms, this means managing public spending growth in a way that (i) helps smooth economic growth (through a counter-cyclical fiscal policy); (ii) leaves room for the private sector to thrive; and (iii) provides buffers to insulate the budget—and the economy—against a downturn in global commodity prices. The adoption of the Fiscal Responsibility Law last year was a landmark achievement in this regard. However, the 2011 budget is a big step backwards. The Fiscal Responsibility Law will succeed only if it is strictly adhered to in letter and spirit; failure to do so will undermine its credibility and limits its effectiveness in preventing a recurrence of the policy driven, boom-bust cycles that Mongolia has experienced in the past. Compliance will entail expenditure restraint in the coming years, for example, by keeping spending
roughly frozen in real terms in order to reach the 2013 structural deficit target. Moreover, it is equally important not to circumvent the law by using off-budget vehicles or government guarantees that would, in effect, undo the economic benefits of adhering to the law and come
with the additional costs of an increase in fiscal risks and a loss of transparency. The Development Bank, public-private partnerships, and public guarantees are sources of such quasi-fiscal risk and, if such operations are to proceed, need to be managed prudently and in line with international good practices.

Mongolians can learn from the Dutch

2011-08-27T07:13:00.000-07:00

The story of the Netherlands is of relevance to Mongolia. How does a democracy with good institutions deal with the sudden discovery of mineral wealth? Initially, the Dutch followed a path which would later become known as the Dutch Disease: a strongly appreciating currency made the non-mineral sector uncompetitive, further aggravated by highly inflationary and unproductive government spending on wages and social transfers. Undoing the negative effects of the wage spiral and the overly generous social welfare system was painful and took more than a decade. The cure for the Dutch Disease was based on a voluntary, negotiated agreement between the same stakeholders which had been responsible for the Dutch Disease—government, labor and business. It was centered on conservative fiscal policies, including low public debt, and wage restraint. The essence of this agreement formed the basis of the subsequently highly successful Polder Model—a framework which also held up very well during the 2008 global financial crisis.

Mongolia has laid a strong legal foundation for a similar macroeconomic and fiscal framework in the three rules which form the basis of the Fiscal Stability Law passed with overwhelming majority in parliament in June 2010. The three rules put strict limits and ceilings on the fiscal deficit, expenditure increases and public debt. However, the essence of the FSL only kicks in 2013, when a structural fiscal deficit of no more than 2 percent of GDP needs to be adhered to. In the transition period, Mongolia would do well to heed the lessons from Holland: curing the Dutch Disease can be long and painful. Preventing the Dutch Disease to afflict the economy in the first place would be the wiser path to take, and, if the story of the Polder Model holds true, will also reward the politicians associated with this path.

See the Annex to Mongolia Quarterly Economic Update - August 2011

Mongolia - the Economy in Pictures

2011-08-27T04:41:00.000-07:00

Mongolia Quarterly Economic Update, August 2011

Mongolia’s economic outlook depends heavily on global macroeconomic factors: the current uncertainty and poor growth prospects for the global economy are cause for concern. If there is another global recession, Mongolia’s small, open economy will be affected. In that case, China’s policy reaction will be crucial for Mongolia. If China reacts as fast and as strongly as it did in 2008/9 then the effects of a global recession on Mongolia will be mitigated, largely owing to Chinese demand for minerals from Mongolia. Beyond this, it is up to Mongolia to capitalize on its excellent long term prospects by continuing the reform agenda it embarked on during the 2008/9 crisis.

Where are they now- Susan Athey

2011-08-27T00:25:00.000-07:00

She's now the Chief Economist for Microsoft

A summary of her research areas

Economics 1056: Market Design- an undergraduate course on Market Design taught by Athey

Blog of the Day- Economics of Information

2011-08-27T00:01:00.000-07:00

Economics of Information

Characteristics of an adaptable organization

2011-08-26T10:26:00.000-07:00

Three things: you need to have lots of different experiments going on; they need to be at the right scale, so that a failure doesn't finish you off; and you need to be able work out what is working and what isn't, which is not always easy. (If it was easy, we wouldn't need double-blind randomised controlled trials in medicine.) It sounds sensible enough in principle; the book explores how that actually might work in practice in politics, banking, development aid, science funding, and so on. And of course, in our own lives.

Source:

Ten big infrastructure projects that will transform India?

2011-08-26T10:12:00.000-07:00

An interesting column on India's key infrastructure projects by Vinayak Chatterjee;

National River Linking Project
Kalpasar Project
Jaitapur Nuclear Power Plant
Delhi-Srinagar Direct Rail Link
Samudra Setu — India-Sri Lanka Bridge
Western Dedicated Freight Corridor
Delhi Mumbai Industrial Corridor
Eastern Dedicated Freight Corridor
Mumbai as an International Finance Centre (IFC)
Chittagong Port to Agartala (Tripura) Road Corridor

For Discussion: What would be the equivalent projects for China?

'Economics is a set of problems in need of solution'

2011-08-26T05:31:00.000-07:00

A highly recommended column from John Kay;

The two branches of economics most relevant to the recent crisis are macroeconomics and financial economics. Macroeconomics deals with growth and business cycles. Its dominant paradigm is known as “dynamic stochastic general equilibrium” (thankfully abbreviated to DSGE) – a complex model structure that seeks to incorporate, in a single framework, time, risk and the need to take account of the behaviour of many different companies and households...

As late as 2007, the International Monetary Fund would justify its optimism about the macroeconomic outlook with the claim that “developments in the global financial system have played an important role, including the ability of the United States to generate assets with attractive liquidity and risk management features”...

In his presidential lecture to the American Economic Association in 2003, Robert Lucas of the University of Chicago, the Nobel prizewinning doyen of modern macroeconomics, claimed that “macroeconomics has succeeded: its central problem of depression prevention has been solved”. Prof Lucas based his assertion on the institutional innovations noted by Mr Greenspan and the IMF authors, and the deeper theoretical insights that he and his colleagues claimed to have derived from models based on DSGE and the capital asset pricing model....

Subsequent policy decisions have been pragmatic and owe little to any economic theory. The recent economic policy debate strikingly replays that after 1929. The central issue is budgetary austerity versus fiscal stimulus, and – as in the 1930s – the positions of the protagonists are entirely predictable from their political allegiances.

Why did the theories put forward to deal with these issues prove so misleading? The academic debate on austerity versus stimulus centres around a property observed in models based on the DSGE programme. If government engages in fiscal stimulus by spending more or by reducing taxes, people will recognise that such a policy means higher taxes or lower spending in the future. Even if they seem to be better off today, they will later be poorer, and by a similar amount. Anticipating this, they will cut back and government spending will crowd out private spending. This property – sometimes called Ricardian equivalence – implies that fiscal policy is ineffective as a means of responding to economic dislocation...

Consistency and rigour are features of a deductive approach, which draws conclusions from a group of axioms – and whose empirical relevance depends entirely on the universal validity of the axioms. The only descriptions that fully meet the requirements of consistency and rigour are completely artificial worlds, such as the “plug-and-play” environments of DSGE – or the Grand Theft Auto computer game...

What is absurd is not the use of the deductive method but the claim to exclusivity made for it. This debate is not simply about mathematics versus poetry. Deductive reasoning necessarily draws on mathematics and formal logic: inductive reasoning, based on experience and above all careful observation, will often make use of statistics and mathematics...

Economics is not a technique in search of problems but a set of problems in need of solution. Such problems are varied and the solutions will inevitably be eclectic. Such pragmatic thinking requires not just deductive logic but an understanding of the processes of belief formation, of anthropology, psychology and organisational behaviour, and meticulous observation of what people, businesses and governments do.

IMF's Koshy Mathai on Sri Lankan economy

2011-08-10T05:37:00.000-07:00

We firmly believe that Sri Lanka’s flexible exchange-rate regime is appropriate and that there should be no peg. Of course, a central bank can never be totally hands off – it’s sensible to intervene in order to avoid disorderly movements in the exchange rate that could harm the economy. But economists generally would say that sustained intervention in one direction or the other to keep exchange rates either above or below the levels suggested by fundamentals should be avoided.

Soon after the end of the war, we saw a long period when the rupee was virtually fixed against the dollar. Since then, we’ve seen some flexibility in one direction, with the rupee appreciating. And given the amount of foreign currency flowing into the economy, there’s little wonder that we should have seen stable or appreciating exchange rates over this period.

Going forward though, rising imports and high oil prices could imply smaller balance-of-payments surpluses or even deficits; and in such a scenario, it would be important to illustrate to markets that the rupee is flexible in both directions. This would also encourage the development of forward markets in foreign exchange and discourage short-term, speculative capital inflows, which Sri Lanka doesn’t need.

As for where the rupee should be headed in the medium term, let me just say that I learned a long time ago not to try to predict currency movements! Economists have statistical models that try to explain the appropriate levels for exchange rates, but the results of those models are sometimes difficult to assess, particularly in a world of large capital flows. In the IMF programme here, in Sri Lanka, rather than looking at the price side of things – that is, the exchange rate – we have focused on the quantity side (i.e. the level of reserves at the Central Bank).
Reserves are certainly not a problem for Sri Lanka. In fact, the build-up of reserves over the past two years has been a resounding success, far in excess of what we initially expected – and that’s not just because of foreign borrowings. Nonetheless, reserves are not high compared to levels seen in many other EMEs, and there is probably some scope for at least modest further accumulation. So in the programme, the Central Bank commits to achieving such accumulation and the exchange rate is allowed to adjust however it needs to, in support of that reserves targe

Summary of Chapter One, Adapt

2011-08-08T13:13:00.000-07:00

Chapter One: Thomas Thwaites, Eric Beinhocker, Philip Tetlock, John Kay, Paul Ormerod, Donald Green, Michele Belot, Richard Thaler, David Halpern, Matthew Taylor and Jonah Lehrer.

Summary of Chapter Two, Adapt

2011-08-08T13:06:00.000-07:00

Chapter Two: H.R. McMaster, Andrew Mackay, John Nagl, George Feese, Dennis DuTray, Jacob Shapiro, Steve Fidler, Toby Dodge, and Adrian Harford.

How VAT works

2011-08-08T00:19:00.000-07:00

Under a VAT, businesses pay tax on the value they add to the goods and services they purchase from other businesses. VAT liability is typically calculated in industrialized countries using what is known as the credit-invoice method. Under this method, businesses apply the VAT rate to their sales but claim a credit for VAT paid on purchases of inputs from other businesses (shown on purchase invoices). The difference between the VAT collected on sales and the credit for VAT paid on input purchases is remitted to the government.

Figure 1 illustrates a VAT with a 10 percent rate. A lumber company cuts and mills trees and has sales of $50 to a furniture maker. Assuming no input purchases from other businesses, to keep the illustration simple, the company adds the tax to the price of the goods sold and remits $5 in tax to the government. The purchase invoice received by the furniture maker would list $50 in purchases plus $5 in VAT paid.

If the furniture maker has sales of $120 to a retail store, $12 of VAT would be added to the sales price but the furniture maker could subtract a credit for the $5 VAT paid on purchases and remit $7 to the government. The retailer would receive an invoice showing purchases of $120 and $12 of VAT. Similarly, if the retailer then has sales of $150, $15 of VAT would be added but the retailer could subtract a credit for the $12 paid on purchases and remit $3 to the government.

In total, the government would receive VAT equal to 10 percent of the final sales price to consumers. Thus, a 10 percent VAT is equivalent to a 10 percent retail sales tax in terms of revenue. Under both taxes, the final consumer ultimately bears the economic burden of the tax ($15), except in a VAT, the tax is collected in stages, not just in the final sale.

-Value-Added Taxes: Lessons Learned from Other Countries on Compliance Risks, Administrative Costs, Compliance Burden, and Transition

IMF to Australia- 'resist pressures to prop up declining industries'

2011-08-07T05:47:00.000-07:00

IMF on structural reforms for Australia;

On broader structural reforms, we welcome the steps taken to invest in skills training, which should help workers improve their mobility and income prospects. Looking ahead, it is important to use the window of opportunity provided by the current favorable economic outlook to push ahead with the Council of Australian Governments’ reform agenda, including in the areas of education, infrastructure and harmonization of business regulations. In addition, the government should resist pressures to prop up declining industries

The God Complex

2011-08-07T04:24:00.000-07:00

From a reviewer;

I'm not sure the book told me anything I didn't already feel true; for instance, my job history has been an ode to variation, limiting the scope of failure, and adapting to local circumstances. Still, I think this book has a lot to offer for a wide audience.

From Wired;

It took its most potent form in Edinburgh in an outstanding talk by Wired contributor Tim Harford, who urged his listeners to beware the "God complex" -- the dangerous notion that an expert will make the most appropriate decision. Instead, we would be far better off relying on evidence-based decisions -- in other words, working out the best course of action through trial and error.

Harford began with the tale of Archie Cochrane, a second-world-war prisoner-of-war and doctor, whose men (including him) were ill through a mysterious swelling of fluid under their skin. He had smuggled some vitamin C into the camp, and also obtained some Marmite on the black market. After splitting his men into two groups and giving each group a different "medicine", he found that those treated with Marmite -- containing vitamin B12 -- were cured within days. He had kept detailed data in his notebooks -- which persuaded the Germans to allow PoWs to be given vitamins.

Cochrane was the epitome of a fighter against the God complex -- the notion that, no matter how complex a problem, one has an infallible belief that one is right. Doctors often have it; so do politicians and business leaders. That doesn't mean they're right. "We should adopt humility and abandon the God complex for a system that works," Harford declared.

Are GMU Professors taking over Asian Development Bank

2011-08-05T14:37:00.000-07:00

Asian Development Review - Volume 28 No. 1
;
John Nye, Edda Claus, Iris Claus, Garrett Jones, Qingqing Chen, Chor-Ching Goh, Bo Sun, Lixin Colin Xu, Philip Keefer, Stephane Straub, and Akiko Terada-Hagiwara write about the Political Economy of Development in the Philippines; Effects of Taxation on Migration: Some Evidence for the ASEAN and APEC Economies; National IQ and National Productivity: The Hive Mind Across Asia; Market Integration in the People's Republic of China; Collective Action, Political Parties, and Pro-Development Public Policy; and Infrastructure and Growth in Developing Asia

Poor Economics

2011-08-05T14:22:00.000-07:00

The Experimental Approach to Development Economics- podcast of a talk by Banerjee

Mr. Tanzi vs Mr. Taylor

2011-08-05T14:10:00.000-07:00

An interesting interview with Vito Tanzi;

You are known in the literature for the Tanzi Effect. What’s the secret for getting one’s name attached to an economic phenomenon?

The Tanzi Effect was actually described in two of my papers—the first which described the impact of inflation on revenue, and another which extrapolated this effect to the problem it creates when inflation is intentionally implemented to provide resources for investment. However, getting one’s name on a concept is by no means a guarantee! Take, for example, the Laffer curve. Laffer became very famous for his idea that when tax rates are pushed above a certain level, revenue comes down. But I can point you to books written in the 1850s by Italian economists, who present his exact ideas, but in one clear paragraph! Similarly, there was an equation which appeared in a paper that I wrote in 1980 for the American Economic Review. The paper was edited by John Taylor, who later wrote a paper, which established the Taylor Rule, using this equation (which to be fair was not formulated exactly the same way I had written it). So, it’s a bit of a haphazard affair. I’m sorry, but I do not know the secret either! By the way, I had no role in naming the Tanzi effect, and would like to thank the first person who did!

Blog Recommendations

2011-08-05T13:50:00.000-07:00

Andrew Leigh

Ed Dolan's Econ Blog

Michael Spence - the world is good hands, the chinese

2011-08-05T13:35:00.000-07:00

Eminent Economists- Vernon Smith on Bubbles

2011-08-05T13:26:00.001-07:00

Next Book in the pile

2011-08-05T13:24:00.000-07:00

Poor Economics

Adapt, Chapter 5, Meet Geof,

2011-08-05T13:13:00.000-07:00

Peter Martin reviews Adapt;

Geoff has just seen An Inconvenient Truth and wakes up the next morning determined to take direct action to cut emissions.

He starts his day as he always does, “filling the kettle for a coffee”.

“But then he remembers the kettle is an energy-guzzler, so he has a cold glass of milk instead. He saves more by eating his usual two slices of bread untoasted. As he leaves the flat - pausing to unplug his mobile phone charger - he picks up his car keys, then thinks again and walks to the bus stop instead. By the time he hops off the bus, the lack of morning coffee is getting to him so he pops into Starbucks for a cappuccino.”

Deconstructing the day, Harford notes it wasn’t as successful as Geoff would have wanted.

“Let’s start with the milk, which requires a critical piece of equipment to manufacture: a cow. Cows emit a lot of methane. And methane is a more potent greenhouse gas than carbon dioxide... In producing about 250 ml of milk, a cow belches 7.5 litres of methane, which weighs around 5 grams, equivalent to 100 grams of carbon. Add all the other inputs to the milk - feed for the cows, transport, pasteurisation - and the 250 ml that Geoff drank produced the equivalent of around 300 grams of carbon dioxide. By not boiling his kettle he saved only about 25 grams of carbon dioxide. His first planet-saving decision, eschewing a coffee in favour of a glass of milk increased his greenhouse gas emissions by a factor of twelve. Dairy products are so bad for the planet Geoff would have done better to toast his bread but not butter it rather than buttering it but not toasting it.”

Needless to say Geoff’s cappuccino on the way to work was a greenhouse gas disaster. It’s almost all milk. Calculations by the UK government-funded Carbon Trust suggest that milk is responsible for two-thirds the emissions embodied of a block of Cadbury chocolate even though it makes up only one-third its mass. By contrast unplugging the mobile phone saved as little as 6 grams of carbon dioxide a day.

Harford’s point isn’t that we are ignorant. It is that no matter how much we knew - even if we had an app that used barcodes to correctly display on our mobile phones the emissions created by each the 10 billion products and services we commonly use - we couldn’t do the calculations. Our brains aren’t that powerful.

Fortunately we have already come up with something that is. This month in Melbourne the Institute of Public Affairs will host a symposium celebrating the Genius of Western Civilisation. That genius has perfected the system of market prices, what Harford describes as a “vast analogue cloud computer, pulling and pushing resources to wherever they have the highest value”.

Imagine, he says, a tax on carbon dioxide and equivalent emissions. It would lift the price of petrol a few cents a litre, creating a small incentive to drive less and more efficiently. A $14 per tonne tax would lift the price of an electricity kilowatt hour “by about a cent and a half if the energy came from coal, but only by three quarters of a cent if it came from natural gas, creating a small incentive to use less electricity and for power companies to build natural gas instead of coal-fired power stations”.

“This would not be because of any grand plan,” he says. “It would just happen: a trucker who ignored the higher price of diesel in setting his shipping charges would simply go out of business; so would a tomato cultivator who tried to absorb the cost of heating a greenhouse rather than raising his prices.”

“Geoff, arriving at the supermarket intending to buy tomatoes, wouldn’t have to point his smart phone at any barcodes: he could just look at the price. What the carbon tax would do is recreate the fantasy carbon calculator app, and give it teeth. Every decision maker, from the electricity company to Geoff himself would be given an incentive to reduce their carbon footprint using whatever tactics occurred to them.”

Harford is a making the same point as Australia’s Productivity Commission did last week, if more engagingly.

The take-home message for Tony Abbott is obvious. If he thinks using public money to hand out grants to worthy carbon abatement projects is better than setting a price for emissions and leaving things to the market, he is turning his back on the genius of western civilisation.

The message for Gillard is that, to a lesser extent, she is falling into the same trap. Agriculture won’t be in her scheme. Cows, beef cattle and sheep can belch greenhouse gas intensive methane as much as they like and Geoff can drink as much milk as he likes without paying the price that will face lesser emitters. The signs are that petrol won’t go up in price either. Without a price firms won’t find it as worthwhile to cleanup our farms and our cars.

Harford again:

“If there was some way to reduce the methane being belched out by cows and sheep - almost a tenth of the total gas emissions - that would be a huge achievement. Australian scientists have realised that kangaroos don’t emit methane and are now to trying figure out how to get kangaroo-gut bacteria into the stomachs of cows. It be a blind alley. It may not. But a proper price on greenhouse gases would encourage every path to be explored, even if one of the quests is to make cows belch like kangaroos.”

Memo to Self- Review American System of Bounty Hunting

2011-08-05T13:02:00.000-07:00

The Bounty Hunter's Pursuit of Justice

Bounty hunters and bail bondsmen play an important but unsung role in a legal system whose court dockets are too crowded to provide swift justice. When a suspect is arrested, a judge must make a decision: set the suspect free on his own recognizance until the court is ready to proceed, hold the suspect in jail, or release the accused on the condition that he post a bail bond. A bond is a promise backed by incentive. If the suspect shows up on the trial date, he gets his money back; but if he fails to show, the money is forfeited. We don’t want to deprive the innocent of their liberty, but we also don’t want to give the guilty too much of a head start on their escape. Bail bonds don’t solve this problem completely, but they do give judges an additional tool to help them navigate the dilemma.

Related; The Economics of Bounty Hunting (podcast)

Four Stages of Unemployment Searches

2011-08-05T12:45:00.000-07:00

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From Hal Varian- "Economic Nowcasting with Search-Engine Data"

Fun with IMF reports

2011-08-04T14:14:00.000-07:00

“Going forward, the authorities intend to take fiscal measures to stabilize and reduce the debt-to-GDP ratio and support the economic recovery, while maintaining price and exchange rate stability. They also plan to reform and enhance tax administration, increase fiscal responsibility, and improve transparency for public enterprises. Global developments, including high oil prices, pose risks to the outlook, but upside potential could offset these if projects under consideration materialize. The mission is confident that the determined pursuit of fiscal consolidation and an enabling investment climate will improve the macroeconomic environment and support sustained economic growth.”

Here's the country.

Variation, Survivability, Selection

2011-08-04T13:35:00.000-07:00

David Brooks reviews Adapt;

Harford then illustrates how this basic process can work across a variety of contexts, from business to war to poetry. He’s an able guide to the world of human fallibility. For example, he cites James Reason who identifies three kinds of error. First, there are slips. In 2005 a young Japanese trader meant to sell one share of stock at 600,000 yen but accidentally sold 600,000 shares at 1 yen.

Then there are violations, when someone intentionally breaks the rules. This is what Bernie Madoff did. Then there are mistakes—things you do on purpose but with unintentional consequences.

Errors can be very hard for outsiders to detect. A study by Alexander Dyck, Adair Morse and Luigi Zingales looked at 216 allegations of corporate fraud. Regulators and auditors uncovered the fraud in only one out of six of those cases. It was people inside the companies who were most likely to report fraud, because they have local knowledge. And yet 80 percent of these whistleblowers regret having reported the crimes because of the negative consequences they suffered. This is not the way to treat people who detect error.

Harford is an economic journalist, so he doesn’t get into the psychological and spiritual traits you need to live with error and look it in the face, but he offers a very useful guide for people preparing to live in the world as it really is.

Related Podcast;
Who blows the whistle on corporate fraud?

Book of the Month- Adapt

2011-08-04T13:16:00.000-07:00

Adapt by Tim Harford

Another hero in the book is Peter Palchinsky, a Russian mining engineer who was imprisoned and executed by Stalin’s government in 1929 after many years of dissent against the human cost of the top-down command and control approach to industrialisation in Soviet Russia. Tim Harford suggests 3 Palchinsky Principles shaped to encourage stronger innovation, better leadership and more effective policies:

1/ Variation - seek out new ideas and try new ideas

2/ Survivability - when trying something new do it on a scale where failure is survivable

3/ Selection - seek out feedback and learn from mistakes as you go along, avoid an instinctive reaction of denial

Book Recommendation

2011-08-04T05:58:00.000-07:00

The Ghost of the Executed Engineer: Technology and the Fall of the Soviet Union

Loren Graham

Related:
Peter Palchinsky

Book Recommendations for Public Finance Practitioners

2011-07-26T07:19:00.000-07:00

Chipping Away at Public Debt—Sources of Failure and Keys to Success in Fiscal Adjustment

Economic Policy-Theory and Practice Agnès Bénassy-Quéré, Benoît Coeuré, Pierre Jacquet and Jean Pisani-Ferry
Government versus Markets
The Changing Economic Role of the StateVito Tanzi

Assorted on Skills policies

2011-05-31T08:43:00.000-07:00

Singapore Workforce Development Agency

Skills Australia

Review of Employment and Skills-UK

Employability skills for the future- Australia

NZ Skills Strategy

Skills Policies- what works?

2011-05-31T08:38:00.000-07:00

From ABCDE conference;

The third presentation provides a practitioner’s perspective on research to inform the design of skills policies. Willmott (2011) traces Singapore’s experience in moving to evidence-based policy and practice in continuing education and training, in order to support the country’s strategy for knowledge-and innovation-driven economic growth. A key challenge is to ensure that all workers, particularly the

low-skilled, are able to upgrade their skills and gain access to better-paying jobs as part of a strategy for shared growth.

Great Blogs

2011-05-21T13:52:00.000-07:00

Jared Bernstein

Matt Rognlie

Development Impact

Todd Buchlohz

A fine theorem

MacroMania

Noahpinion

Free Read on Behavioral Public Economics

2011-04-22T06:16:00.000-07:00

Policy and Choice -Public Finance through the Lens of Behavioral Economics
William J. Congdon, Jeffrey R. Kling and Sendhil Mullainathan, Brookings Institution Press

Rodrik Talk at the World Bank- 'a liberal mugged by globalization'

2011-04-16T00:55:00.000-07:00

Development Economics Lecture Series: Prof. Dani Rodrik from World Bank on Vimeo.

A few years ago we were in El Salvador, an economy which has done a tremendous amount in terms of liberalizing its economy, privatizing, stabilizing. Nothing essentially wrong that you can point to in terms of the contractual legal environment. It wasn't the government that was just hell-bent on taxing everything. Quite the opposite. And nothing except for garments had taken off; and garments had taken off because of some special trade privilege in the U.S. market, but nothing except for that. You ask people: If I give you $25 million, what would you invest in in the Salvadorian economy, and they would think about it a little bit and then they would say: Well, can I put it in Miami? Do I have to invest in El Salvador? That's the kind of economy where, when you don't see any Schumpeterian rents--we forget. When we think about Schumpeterian rents, we think it's just about rich countries. Rich countries: Schumpeterian rents are important for innovators, because they get a new product and they need to ensure they have at least some profits from investing in those high risk activities. But in developing countries too there are unique Schumpeterian rents for investors willing to go into new areas, new industries. Capital likes to get a return. Exactly. And when it's risky and when there are huge spillovers to the rest of the economy, the private return is going to be way below what the social return is, so you are not going to get the right kind of transformation. In that kind of a setting it's not government failure that's blocking transformation. It's just a bunch of market failures associated with low levels of income. And there you do want the government to come in and actually do some stimulating

-from the podcast interview on Econ Talk

Structural Change, growth and jobs

Freedom and the Global Economy

Assorted on Well Being Measures

2011-03-26T08:53:00.000-07:00

Measures of well-being

Measures of Australia's Progress, 2010

The State of USA
Gauging the Well Being of Happiness Measures.

Why can't we get rid of the census?

2011-03-26T08:34:00.000-07:00

The main ways of producing population statistics internationally include census type of approaches (short-form, rolling census), surveys and use of administrative sources. The Beyond 2011 Programme will investigate all these approaches and does not rule any out at this early stage...

Some data that might work is: the Council tax register, the Electoral roll, a register of patients using the NHS, Child benefit, pupils registered in schools and pension claimants data.

-Census 2011: can we do without it?

Seven Wisdoms on the Sri Lankan Economy

2011-03-25T13:26:00.000-07:00

Koshy Mathai, the highly-respected and much-sought-after IMF Resident Rep in Sri Lanka left the audience with seven points of his wisdom to ponder if Sri Lanka is to sustain its current euphoric growth experience...

The IMF and its staff have a remarkable skill in using a specially articulated polite language when it comes to addressing a host country’s general public. This is understandable because the IMF is a guest in a host country and should not overtly or covertly rouse popular sentiments or add to the fears of people by speaking the wrong language and be an embarrassment to its host...

Risk factors need urgent attention
Koshy did not say it explicitly, but he implied that the achievements so far are not adequate for sustaining the growth momentum in the medium to long run. He coated it nicely saying that there are “risk factors” facing the economy and they need be addressed urgently and permanently.
In my view, his implication was that the longer Sri Lanka would delay action, the worse would be the results it will have to reap. It is like a cancer patient refusing stubbornly to take medication in time and one fine day finding the cancer invading his vital systems.
To overcome these risk factors and place the economy in a sustainable growth path, he suggested a course of action that embodied the seven points of his wisdom...

One should not forget that the IMF benchmarks are too liberal and were revised upward when it found that it was the only way to save the stand-by arrangement.
Its budget deficit at seven per cent and debt level at 80 per cent, both of GDP, are unsustainable. Therefore, in the long run, there is no alternative but to discipline the budget, as now identified by Koshy too...

In this context, according to Koshy, the Government’s recognition of the need for developing five hubs in Sri Lanka is an important step taken toward the modernisation of the country’s economy.
While all hubs will help Sri Lanka to expand its services sector and sell services to the rest of the world, the knowledge hub will develop Sri Lanka’s human capital base. The early signing of CEPA with India will help Sri Lanka to develop its knowledge base by establishing higher academic institutions in the style of reputed Indian institutes of Technology with Indian partnership.

-Want to uplift the economy? Follow the 7 wisdoms of Koshy Mathai

Quote of the Day- IMF on Sri Lanka program

2011-02-09T13:26:00.000-08:00

Did they meet the targets;

So we think that the target was met, but we can't confirm that, and that is why the government has formally asked the Board to not consider that criterion in deciding on this review. It's essentially like a technicality.

Visualization of the Day

2011-02-07T05:00:00.000-08:00

A Graphical Overview of the 2012 Republican Field

Evolution of Household Durables in Egypt

2011-02-07T02:20:00.000-08:00

Poverty is widespread in Egypt, affecting 40 percent of the population, and there are deep pockets of poverty. The 40 percent overall poverty rate in 2005 represents 28 million people, of which 13.6 million (19.6 of population) are in absolute poverty, and even more, 14.5 million (21.0 percent), are near-poor. Furthermore, 2.6 million of the poor (3.8 percent of population) are extremely poor (see Table 1, panels A and B). Many people are also concentrated around the poverty line, meaning that a miniscule decline in monthly consumption of just LE 4 will make additional 2.3 percent of the population poor. By the same token, concentration of the poor around the poverty line means that even a small income boost can move more than 2 percent of the population out of poverty

via Egypt Poverty Assessment Update- World Bank

Egypt - Binding Constraints to Growth

2011-02-07T02:06:00.000-08:00

The foregoing review of the literature and relevant facts on constraints to growth in Egypt suggests a short list of prime suspects that may deserve deeper investigation(Figure 10). Access to financing, notably, does not appear to be the main recent or current obstacle to growth; real interest rates would be much higher and the external current account under greater pressure if indeed businesses were strongly competing for funding of an abundance of profitable investment ideas. At the same time, there is a question of whether the limited available data really tell the full story: business complaints about lack of access to financing may reflect some nonprice rationing of credit, especially through the state banks, and access to finance for small enterprises and farmers may constitute a binding growth constraint for that sector. The latter would reflect the inefficiency of the financial system in allocating savings to domestic investments rather than lack of domestic or foreign savings, but also capacity constraints on borrowers. The ongoing reform of the financial sector (which by late 2006 had shifted more than half of the banking sector to private ownership, along with governance reform at the remaining state banks and more generally a modernization and liberalization of financial institutions) thus tackles a constraint that would probably become binding soon. But ongoing growth and rising investments may also move the economy, in the near future, to a point where low national savings (reflecting high public dissavings) constitute a critical constraint, unless access to foreign savings (notably higher FDI dedicated to greenfield investments rather than one-off privatizations) could be durably expanded.

32. There is considerable evidence, including surveys and comparative rankings, as well as Egypt’s difficulty in moving toward new higher value-added products, pointing to appropriability of returns as a critical constraint. Private returns are reduced through the high cost imposed by complex regulations and inefficient government services, but perhaps also through the high cost of experimenting and exploring new production ideas. Recent bold reforms have focused on this area, particularly in the tax system and trade regulations, and the concomitant pick-up in growth is consistent with the view that these reforms have been addressing critical constraints. By contrast, a dearth of complementary factors does not appear among the prime suspects of having held up growth—though, again, there is little doubt that over the longer run, and as sophistication in the economy increases, Egypt will need to bolster its human capital if it wants to continue growing.

33. The authorities have started to tackle the high fiscal deficit with a view to halving it to around 4 percent of GDP by 2010, and thus bringing public debt onto a declining trajectory. As indicated above, implementing this plan would help forestall potential debt overhang effects, contribute to greater efficiency of financial intermediation, and help raise national savings—all potential, if not actual, constraints on growth.

34. Overall, the Egyptian reforms launched in 2004 appear remarkably apt at focusing on the most critical constraints and thus maximizing the growth effect out of a limited set of reforms. Since removing the most critical constraint is likely to give both the fastest and the biggest “bang for the buck,” the strategy might also have been the politically most feasible approach, maximizing the return on political capital which, for any government, is always limited. Further reforms aimed at easing the cost of regulations will likely continue to have high payoffs. Increasingly, however, reforms with different political economy characteristics, such as revamping education or reigning in the fiscal deficit, will become the critical challenge. Since these steps take more time (for design, political consensus building, implementation, and pay-off) the authorities are well advised to use the tailwinds generated by the recent reforms to start tackling these more distant constraints. This would reduce the risk that the recent growth episode will become another tale of a growth spurt that fizzled out because some deeper constraints were not addressed.

35. As the various reforms unleash entrepreneurial spirit and investment in Egypt, more attention may also have to be paid to potential pitfalls highlighted by the “Theory of Second Best.” For example, with energy highly subsidized, and energy prices in Egypt among the lowest in the world, lifting financing constraints or raising private returns on investment may trigger higher investment in energy-intensive activities that may not optimize social returns. As highlighted at the beginning, there may be no escaping the fact that, while a few simple bold measures can work wonders for a while, sustaining growth will require reforms along many dimensions and paying attention to the complex interaction among them

-Egypt--Searching for Binding Constraints on Growth

The Great Stagnation in Brief

2011-02-06T23:40:00.000-08:00

From The Economist blog;

Mr Cowen's book can be very briefly (too briefly) summarised as follows. The rich world faces two problems. The first is that a decline in innovation has reduced the growth rate of output and median incomes, making it hard for rich countries to meat obligations accepted when expectations were higher. The second is that a lot of recent innovation is occuring in places like the internet, where new products are cheap or free and create very few jobs.

This is Tyler Cowen himself summarising the major theme of the book;

Beyond the income slowdown, there is a further worry: an increasing share of the economy consists of education and health care. That trend is not necessarily bad, but in these two areas, results are often hard to measure. If health care costs rise 6 percent in a year, for example, that counts as higher G.D.P., but how much is our health actually improving? It’s an open question. America spends more on health care than other countries, but those expenditures don’t seem to produce uniformly superior results. And while there have certainly been gains in medical treatment, we may be overvaluing them. In education, we are spending more each year, but test scores have stagnated for decades, graduation rates are down and America’s worst schools are disasters.

There is an even broader problem. When it comes to measuring national income, we’re generally valuing expenditures at cost, rather than tracking productivity in terms of results. In other words, our statistics may be deceiving us — by accepting, say, our health care and educational expenditures at face value. This theme has been emphasized by the PayPal co-founder Peter Thiel in his public talks and by the economist Michael Mandel in his writings...

Science should be encouraged with subsidies for basic research, as well as private charity, educational reform, a business culture geared toward commercializing inventions, and greater public appreciation for the scientific endeavor. A lighter legal and regulatory hand could ease the path of future innovations.

Middle East Fact of the Day- A message to Dictators and Politicians

2011-02-05T23:15:00.000-08:00

Changes in citizens’ perceived well-being merit close attention as they provide clear messages to government which may not be obvious using traditional measures of progress.

Wellbeing in Egypt and Tunisia decreased significantly over the past few years, even as GDP increased. In Egypt, where demonstrations have prompted President Hosni Mubarak to give up power after elections this fall, the percentage of people "thriving" fell by 18 percentage points since 2005. In Tunisia, where mass protests toppled the country's government last month, the percentage of people Gallup classifies as thriving fell 10 points since 2008

The Cantril Self-Anchoring Scale, developed by pioneering social researcher Dr. Hadley Cantril, consists of the following:
Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top.
The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you.
On which step of the ladder would you say you personally feel you stand at this time? (ladder-present)
On which step do you think you will stand about five years from now? (ladder-future)

Economic History Chart of the Day- Roman Empire

2011-02-05T22:53:00.000-08:00

via Brad Delong

Related:
Edict of Diocletian /, Robert Allen,

Assorted Monetary Policy Games

2011-01-31T12:54:00.000-08:00

Cartoon about Price Stability

Become the ruler of Finanzity! Finanzity is a web-based fast-action game specially designed to help make learning some economic concepts easier

The Great Stagnation on Kindle

2011-01-29T13:10:00.000-08:00

Yes, I agree with Kevin Drum;

The problem with this is that the Kindle sucks at rendering tables and charts. The screen cap on the right, for example, shows a chart from Tyler's book. As Kindle charts go, it's actually not too bad. But what's on the X-axis? It appears to start with 1455, and obviously the numbers go up. I get the idea. But the actual details are completely lost. Later in the book there's another table so badly rendered that I can't make it out at all.

In the case of "The Great Stagnation," this isn't too big a deal. I know what the chart above is getting at, and the table at the end is one I've seen before. But other nonfiction books don't fare so well. Gregory Clark's Farewell to Alms, for example, relies heavily on lots and lots of fairly complex charts and tables, and they're rendered so badly (unreadable graphs, table columns that don't line up, etc.) and placed so haphazardly that they made the book almost impossible to absorb properly. To this day, I'm not sure if my disagreements with his thesis are real, or mere artifacts of the fact that the e-version of the book was really hard to follow. In any case, that was the book that made me give up on the Kindle entirely for nonfiction. Until now.

Though the Kindle sucks in many ways, it is still a great way to get books for someone in a poor developing country.

Book Forum- The Great Stagnation

2011-01-28T04:57:00.000-08:00

Tyler Cowen's The Great Stagnation;

I’m also persuaded by the median income numbers because they are supported by related measurements of other magnitudes. For example, another way to study economic growth is to look not at median income but at national income, gdp, or gross domestic product, the total production of goods and services. Charles I. Jones, an economist at Stanford University, has “disassembled” American economic growth into component parts, such as increases in capital investment, increases in work hours, increases in research and development, and other factors. Looking at 1950–1993, he found that 80 percent of the growth from that period came from the application of previously discovered ideas, combined with heavy additional investment in education and research, in a manner that cannot be easily repeated for the future. In other words, we’ve been riding off the past. Even more worryingly, he finds that now that we are done exhausting this accumulated stock of benefits, we are discovering new ideas at a speed that will drive a future growth rate of less than one-third of a percent (that’s a rough estimate, not an exact one, but it is consistent with the basic message here). It could be worse yet if the idea-generating countries continue to lose population, as we are seeing in Western Europe and Japan.

We will be discussing about the book for the next few weeks.

Crazy Book Pricing- Decline to Fall: The Making of British Macro-economic Policy

2011-01-23T05:13:00.000-08:00

Decline to Fall: The Making of British Macro-economic Policy and the 1976 IMF Crisis-Douglas Wass

Kindle edition costs USD 80
Hardcover on Amazon- USD 125

Related:
A review of the book from F&D;

In the subsequent discussions between U.K. and IMF officials, the main issues were fiscal adjustment and the exchange rate. Particularly on fiscal adjustment, according to Wass, it became clear in the technical discussions that "there could be no meeting of minds on the logic," because the British officials viewed the IMF's financial programming approach as inapplicable to their economy. The officials were skeptical about the basis for targets for monetary growth, and about the assumed links between the fiscal balance and domestic credit expansion in an economy with an advanced financial system. However, the IMF had more of a meeting of minds with Chancellor Denis Healey, who agreed that monetary expansion on existing fiscal policies was likely to fuel inflation, although he disputed the scale of the adjustment that the IMF sought. Differences were eventually narrowed, partly by the IMF's agreeing to the authorities' commitment to fiscal measures to be taken only if growth in the second year of the program exceeded a certain rate.