WTO headed World Bank/IMF way?

October 24, 2014

WTO has become a defunct institution with hardly anyone really caring for it. There was a time when WTO meeting generated enormous hype. Now IMF/WB meetings have just taken over completely. Even after the decline WTO stood for its one member one vote system. This is something which other so called world institutions should have adopted as well. But then most of the time we end up copying wrong ideas.

Emily Jones of University of Oxford writes that WTO wishes to change its one vote system:

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Rejecting both sides of macroeconomics — demand side and supply side view

October 24, 2014

Jeff Sachs rejects both sides of macro calling for a more sustainable and inclusive macro theory:

I am a macroeconomist, but I dissent from the profession’s two leading camps in the United States: the neo-Keynesians, who focus on boosting aggregate demand, and the supply-siders, who focus on cutting taxes. Both schools have tried and failed to overcome the high-income economies’ persistently weak performance in recent years. It is time for a new strategy, one based on sustainable, investment-led growth.

The core challenge of macroeconomics is to allocate society’s resources to their best use. Workers who choose to work should find jobs; factories should deploy their capital efficiently; and the part of income that is saved rather than consumed should be invested to improve future wellbeing.

It is on this third challenge that both neo-Keynesians and supply-siders have dropped the ball. Most high-income countries – the US, most of Europe, and Japan – are failing to invest adequately or wisely toward future best uses. There are two ways to invest – domestically or internationally – and the world is falling short on both. 

Domestic investment comes in various forms, including business investment in machinery and buildings; household investment in homes; and government investment in people (education, skills), knowledge (research and development), and infrastructure (transport, power, water, and climate resilience).

The neo-Keynesian approach is to try to boost domestic investment of any sort. Indeed, according to this view, spending is spending. Thus, neo-Keynesians have tried to spur more housing investment through rock-bottom interest rates, more auto purchases through securitized consumer loans, and more “shovel-ready” infrastructure projects through short-term stimulus programs. When investment spending does not budge, they recommend that we turn “excess” saving into another consumption binge.

Supply-siders, by contrast, want to promote private (certainly not public!) investment through more tax cuts and further deregulation. They have tried that on several occasions in the US, most recently during the George W. Bush administration. Unfortunately, the result of this deregulation was a short-lived housing bubble, not a sustained boom in productive private investment.

New strategy:

Though policy alternates between supply-side and neo-Keynesian enthusiasm, the one persistent reality is a significant decline of investment as a share of national income in most high-income countries in recent years. According to IMF data, gross investment spending in these countries has declined from 24.9% of GDP in 1990 to just 20% in 2013.

In the US, investment spending declined from 23.6% of GDP in 1990 to 19.3% in 2013, and fell even more markedly in net terms (gross investment excluding capital depreciation). In the European Union, the decline was from 24% of GDP in 1990 to 18.1% in 2013.

Neither neo-Keynesians nor supply-siders focus on the true remedies for this persistent drop in investment spending. Our societies urgently need more investment, particularly to convert heavily polluting, energy-intensive, and high-carbon production into sustainable economies based on the efficient use of natural resources and a shift to low-carbon energy sources. Such investments require complementary steps by the public and private sectors.

The necessary investments include large-scale deployment of solar and wind power; broader adoption of electric transport, both public (buses and trains) and private (cars); energy-efficient buildings; and power grids to carry renewable energy across large distances (say, from the North Sea and North Africa to continental Europe, and from California’s Mojave Desert to US population centers).

But just when our societies should be making such investments, the public sectors in the US and Europe are on a veritable “investment strike.” Governments are cutting back public investment in the name of budget balance, and private investors cannot invest robustly and securely in alternative energy when publicly regulated power grids, liability rules, pricing formulas, and national energy policies are uncertain and heavily disputed.

Nothing different really. For a long time economics is interested in issues which matter to no one except their publishing business:

These considerations are reasonably clear to anyone concerned with the urgent need to harmonize economic growth and environmental sustainability. Our generation’s most pressing challenge is to convert the world’s dirty and carbon-based energy systems and infrastructure into clean, smart, and efficient systems for the twenty-first century. Investing in a sustainable economy would dramatically boost our wellbeing and use our “excess” savings for just the right purposes.

Yet this will not happen automatically. We need long-term public-investment strategies, environmental planning, technology roadmaps, public-private partnerships for new, sustainable technologies, and greater global cooperation. These tools will create the new macroeconomics on which our health and prosperity now depend.

These are not even issues in most econ departments across the world who are just busy solving max/min problems..

Nationalising state elections: Old wine in new bottle..

October 24, 2014

MK Venu has this interesting article saying how the recent wins over state election are part of an old plot mastered by Congress Govt.

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Happy Diwali to ME visitors (is it really happy??)..

October 23, 2014

Wishing all the Mostly Economics viewers a very happy Diwali.

This blog does not wish to talk about economics today but is helpless. Once again, prices of most basic things that matter during Diwali are up, up and away. It is highly frustrating to see how the story just repeats each year with people taking advantages of all kinds of shortages.Hopefully, people have a peaceful Diwali amidst the crazy price rise for most things that matter in Diwali.

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Inequality in US– Some Trends

October 22, 2014

Yellen has this useful speech to show how inequality has risen so much in US.

This is a trend which has clearly caught US econs napping. Economists is around two questions: How much to produce and how to distribute. The question of distribution was dismissed by most economists in recent years. There was a widely held belief that just like econs have resolved the problem of depression, they have  resolved for distribution as well.

And now both, depression and inequaity have hit these economies hard. And what is worse that there were clear signs of this but were ignored.

The mumbo jumbo of forward guidance..

October 22, 2014

David Miles of BoE has this article on forward guidance. FG was something which was slated to replace all mon pol tools or supersede them. With all these inflation targeting forward looking central banks came the idea of guiding markets towards the future policy decisions. So statements like what central bank is likely to do etc became fashionable. Some central banks started even giving paths over how their interest rates shall move going ahead. In other words central banks became nothing but Gods.  There is a reason why they are so hyped and celebrated after all.

This was all good till this crisis and things have become crazy since then. FG was taken more seriously as economies dived to assure markets but as things moved ahead one is not sure how to forward guide. Whatever you say, it is usually the opposite making you look mere human.

So Miles says, we should not be so precise. C-banks FG statements should be more qualitative:

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Reorganisation of States in India – A different Approach

October 22, 2014

This is perhaps one of the things to do in India. Somehow be a part of next State reorganisation committee whenever it is floated. I mean the learning will be just fabulous.

M P Parameswaran (All India Peoples Science Network and the Kerala Shastra Sahitya Parishad) and Srikumar Chattopadhyay (Centre for Earth Sciences, Thiruvananthapuram) have this picturesque paper on the topic. The say by looking at states natural resources etc. and size of population we can have 50 states in India:

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Walking/Living in Indian city vs western cities

October 22, 2014

Sanjay Srivastava of IEG has this interesting observation. We in India ignore strangers but really warm to people we know. In the west there is far more warmth with strangers but they draw a line with people they know.

As our cities grow, it increasingly appears that we might be inching towards – if we are not already there – a specific sensibility of people and spaces, one that lies at the heart of the relationship between strangers, and that between spaces. This sensibility may tell us something about the seeming hostility between city people, and the hopelessness of civic exhortations to care for public spaces.

I do not wish, however, to harken to a golden age before the decline of comity and social responsibility for “common” spaces. Rather, unsure about the comforts of the past, I merely wish to point to the troubles of the present. I am increasingly convinced that the most significant way in which urban selves deal with one another is through personal friendships and kin networks. In other words, we do not have ways of dealing with strangers at all, and the only persons we are willing to treat with care are those we already know.

This way of dealing with strangers would seem to be quite different from practices in the West where exaggerated p­oliteness is exchanged between people who have never met before (and may never meet again). The interesting thing is that in India someone who may be completely unmindful of another’s safety on the street is likely to be the same person who turns out to be extremely warm and personable otherwise: known persons allow each other access to the most intimate of domestic spaces and lives in a way that is not true in the West. There, while strangers are dealt with – in a manner that the sociologist George Ritzer might call “McDonaldized” – warmth, there are strict limits to the leeway familiar persons allow one another. We in India have no ways of dealing with strangers in tolerable ways, while in the West there are limits to tolerance between acquaintances. This conundrum, to return to my “garbage” reference, also extends to spaces: just as we provide unlimited care to acquaintances but almost none to those who are not so defined, the care we extend to spaces is limited to those of our “own”. Needless to add, our own people have unlimited access to our own spaces.



In addition to the physical and material displacement, could this also be part of the making of a new urban consciousness, that which strengthens (or, only allows) relations among known persons? Is displacement also a process of separating different sections of the population to create strangers and intimates?

Another noteworthy development of our times also contributes to the growth of the sensibility of kindred interaction: the rapid proliferation of gated residential enclaves, which reinforces the idea that those who are not one of us deserve indifference, at best, and utmost hostility, at worst. Extreme social and economic asymmetries do not substantially affect this situation since unknown persons within the same socio-economic “band” do not necessarily offer greater care to one another.

Why do we hate each other? Are the mercies of McDonaldised civility our only recourse? Is the poor bargain of market-sociality – where we allow capital to colonise our social selves – the only working solution?

The extremes of our behavior..

Do We Need a Lender of Last Resort? Lessons from Australian banking history..

October 21, 2014

Nicolás Cachanosky of Mises Institute argues what Austrian school argues best- There is no need for a central bank.

Why can’t banks manage the money on their own? Why do they need a LOLR?

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Assessing economic projections of Finance Commission..

October 21, 2014

Nithin K of IIFT and Rathin Roy of NIPFP evaluate the economic projections made by Fin Com.

FinCom has been broadly right in its revenue projections. But its expenditure projections have gone awry:

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Thinking about Catalonia break up from Spain referendum now..

October 21, 2014

The vote is set to happen on 9 Nov 2014.

Angel Ubide of PIIE in this piece argues lessons Catalonians need to draw from Scots:

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Paanch Kahani – five Ramayana stories of central banking…

October 20, 2014

Central Bank of Trinidad and Tobago has taken Ramayana really seriously. Last year this blog pointed, how the bank compared central bank to Lord Hanuman (to which this blog did not agree).

This year, the chief of the bank Jwala Rambarran looks at five more characters of Ramayana and once again points to lessons for central banking:

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The world needs to stop listening to American MBAs…..

October 20, 2014

Something which should have happened long ago.

The sheer imperialism of American education in business and economics has just made it a one-dimension world. Moreover, with much of the knowledge coming from American shores may/may not apply to the contexts in other countries. Despite these serious limitations, US MBA education continues to dominate the world MBA curriculum.

Questioning American status quo extends to many fields….

When humans bite/kill sharks..

October 20, 2014

How humans have turned around the game on sharks. Making a hysteria over terror, number of sharks have been reduced greatly.

Bradnee Chambers Executive Secretary of the UNEP Convention on Migratory Species of Wild Animals (what a job title!!) covers the issue in this article.

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Crisis in Vishakhapatnam and Japan….letting economics rule

October 20, 2014

On last Sunday, ToI Had this story by Mr Amit Dasgupta, former diplomat who lives in Vishakhapatnam (link unable to find).

He says how we have stooped so low in India. Even during deep crisis in Vizag, people were looking to make money:

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China ..from virtuous cycle to vicious cycle…

October 17, 2014

It is kind of funny to imagine how quickly an economy declines once the whole world (read economists) start praising the growth rates, models etc.  We have seen this across host of countries.

China is one such example. What was once touted as Chinese strength – undervalued currency, limited growth of finance sector, role of government, industrial policy etc. – is becoming its weakness as well.

Keyu Jin of LSE writes on how Chinese have entered the vicious cycle:

Most economists have a reason to be worried about China’s economy – whether it be low consumption and large external surpluses, industrial overcapacity, environmental degradation, or government interventions like capital controls or financial repression. What many fail to recognize is that these are merely the symptoms of a single underlying problem: China’s skewed growth model.

That model is, to some extent, a policy-induced construct, the result of a deep-rooted bias toward construction and manufacturing as the leading drivers of economic development. This predilection harkens back to the Great Leap Forward of the 1950s, when scrap metal was melted to meet wildly optimistic steel-production targets, thereby advancing Mao’s dream of rapid industrialization.

Today, China’s proclivity for industrial production is manifested in large-scale manufacturing and infrastructure projects, encouraged by direct and indirect government subsidies. By boosting investment and generating tax revenue for local governments, this approach has a more immediate positive impact on GDP than efforts to develop the service sector.

But the model also carries considerable costs. Indeed, China is now locked in a vicious economic circle, sustained by seemingly unrelated distortionary policies that are, in fact, deeply interconnected, even symbiotic.

And the story has started in another direction. How convenient economics is really. Argue on both sides with ease.

I have another side of the story. Countries and companies which wish to grow and in a sustained manner should avoid all the hype and buzz. The policy-makers should maintain a low profile and not be too bothered about what the world has to say. The more you avoid all the attention and photo-ops better are the chances for growth and sustenance. But this is so difficult to practice..

Coal industry and corruption cases are not limited to India..

October 17, 2014

Nice piece by Marina Lou of Greenpeace International.

She says how coal industry worldwide is rife in corruption:

Juan Pablo Perez Alfonso, one of the founders of OPEC, once compared the world’s fossil-fuel use to “drowning in the devil’s excrement.” There is certainly plenty of evidence supporting his prediction that the fossil-fuel industry, with its powerful corrupting influence, will “bring us ruin.” Indeed, coal-related corruption stories are breaking worldwide, shining a light on the murky space between “illegal” and “improper” where the extractive industries work.

Last year, in the Australian state of New South Wales, the Independent Commission Against Corruption investigated former Labor ministers Eddie Obeid and Ian Macdonald for conspiring to defraud the state over the issuance of multi-million-dollar licenses for coal exploration and mining. Today, the ICAC is conducting an even more far-reaching and complex investigation into a number of figures from the Australian Labor Party and the Liberal/Nationals Coalition, including for favoring the interests of Australian Water Holdings, a major infrastructure company.

Last month, India’s Supreme Court found that all 218 coal-mining licenses allocated by the government in 1993-2009 had been granted in an “illegal and arbitrary” manner, with the committee responsible for the process lacking transparency and rife with corruption. Following the landmark decision, the government has canceled 214 of the coal block allocations – and has fined several companies that have already begun production.

For its part, Indonesia is set to revoke the contracts of 17 coal producers that failed to pay government royalties. And, since the beginning of this year, the country’s corruption commission has been focusing on the extractive industry, including the state officials who facilitate mining companies’ illegal activities.

Likewise, China’s ongoing anti-corruption drive – the largest in its modern history – has begun to focus on the coal industry. Last month, two Communist Party officials from the coal-rich Shanxi province were charged with corruption and abuse of power, signaling that Shanxi may well move to the forefront of President Xi Jinping’s quest to eliminate entrenched corruption in the Party’s ranks. As Gao Qinrong, a former journalist from Shanxi, recently described the province, “It has coal; coal brought money; that brought corruption.”

These stories highlight a simple truth: Where the coal industry operates, bribery and venality are likely to be rampant. But this does not have to be the case. In order to reduce – if not eliminate – such corruption, several fundamental weaknesses in the regulation of how mining contracts are allocated must be addressed.

Then there are obvious ideas on how to limit corruption by increasing transparency. The natural resources if not managed well end up being a curse. I mean if places like Aus cannot manage, it is really difficult for others as well. So what to do? Make corruption legal in such cases?


Economics of Parenting…linking inequality with parenting styles

October 17, 2014

Pikeetymania all over… Inequality is being linked to all kinds of things and this time on parenting styles.

This this post, Matthias Doepke and Fabrizio Zilibotti connect the two things.  They say in societies where equality is high, parents allow children to be more imaginative and be carefree. In societies, where the ineq is high, parents are more demanding and strict:

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Maximising happiness does not maximise welfare…

October 16, 2014

Well, one cannot do anything  in excess. Earlier we said growth alone is enough. Now we just want to push happiness. The idea is be balanced. Both are important in their own ways.

Edward Glaeser, Joshua Gottlieb and Oren Ziv point why maximising happiness is not enough.

Governments are now measuring happiness, or subjective wellbeing, and some have begun trying to maximise it. This column discusses recent research showing that happiness is not the same thing as utility. The choices people make suggest that they have desires and objectives other than happiness. It is therefore possible to make people worse off while increasing their reported subjective wellbeing.

The authors show why people stay in cities which are not as happy:

In Glaeser et al. (2014), we measure subjective wellbeing across US regions using a large national survey. We use responses to a question in the Behavioral Risk Factor Surveillance System (BRFSS) conducted by the US Centers for Disease Control and Prevention (2005–2010), which asks,

“In general, how satisfied are you with your life?”

Possible answers are “very dissatisfied”, “dissatisfied”, “satisfied”, and “very satisfied”. We adjust the responses for demographic characteristics and sampling error.1 We can then determine each area’s subjective wellbeing for a comparable person.

We map these adjusted measures for each US metropolitan area and non-metropolitan region in Figure 1. (The Washington Post has produced another version of this map here.) We see that the Rust Belt, which includes areas such as Detroit and much of the Midwest, generally has lower subjective wellbeing than the rest of the country. From the mid-19th century the Rust Belt developed extensive manufacturing, but it declined significantly during the second half of the 20th century. New York City and much of California also have lower reported happiness, while the happiest areas are concentrated in the West, Upper Midwest, and rural South.2

When we examine relationships between life satisfaction and a range of area characteristics, the most striking fact relates to urban decline. As Figure 2 shows, cities experiencing the lowest population growth rates from 1950 to 2000 report significantly lower life satisfaction. This pattern shows up in our regressions with very strong statistical significance. It is robust to numerous specification checks and different assumptions about functional forms.

The welfare consequences of these differences depend on whether people are actively choosing where to live. If people are choosing to live in less happy areas when they have other options, this would suggest that they are making a conscious choice in favour of an area despite its low happiness. Figure 3 shows the distribution of population based on the happiness of the area where each person lives (as measured above). We show two distributions, one for people who moved between metropolitan areas from 2010 to 2011, and one for non-movers. For the movers, we use the adjusted life satisfaction of the new areas where they chose to live after the move.

The idea is less happy places are compensating you for the same.

Given that areas have different happiness levels, and some movers nonetheless migrate towards less happy locations, they appear to be looking for something other than pure happiness. Otherwise we might expect everyone to move to Charlottesville, Virginia – the happiest metropolitan area according to our measure. What are less happy areas offering to offset their sadness?

Our paper presents evidence that unhappy areas can compensate their residents with higher real incomes. We use historical survey data to show that larger, more productive cities were unhappy even during their more successful days. Residents were compensated for this unhappiness with better job opportunities and higher incomes. During the Rust Belt’s heyday, firms located in these cities for their natural advantages, such as access to waterways, that made up for the loss in happiness.

When the value of these natural advantages fell, and the cities became less productive, their populations declined significantly. These areas remain unhappy, but the population decline drove significant decreases in housing prices. This lowers the cost of living, so declining cities can offer surprisingly high real incomes to partly compensate for their lower reported wellbeing. This tradeoff is consistent with a model in which happiness is one component of utility. It is harder to reconcile with the idea that happiness is equivalent to utility, or is individuals’ ultimate objective.


Well, the idea behind happiness research is to show growth alone does not matter. One should not say that happiness alone matters..

How did history forget its role in public debate and the History manifesto

October 16, 2014

I had pointed to this book review of History Maifesto. The book is written by  and Jo Guldi.

Interestingly, the book is put up for free and looks like a great read. The conclusion chapter says:

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