Does Tourism lead to growth?

This IMF econ paper says it does:

 

 

We find that there is a positive relationship between the extent of tourism specialization and economic growth. An increase of one standard deviation in the share of tourism in exports leads to about 0.5 percentage point in additional annual growth, everything else being constant.

They use World Heritage Indicators as a instrument to measure impact of tourism. I didn’t understand much of the ecotrics methodology but liked this application of World Heritage Indicators.

However, tourism can never become a growth strategy and at best complement the main growth strategy:

 

 However, one has to think about the opportunity cost of a tourism based strategy given other paths for development, most noticeably the “Asian miracles”. On one hand, it is  likely that developing tourism requires less capital, infrastructure and skilled labor when compared to a manufacturing, export oriented strategy. On the other hand, it seems to rule out the type of growth record in the Asian miracles (on the order of 6 percent per year over 20 years). To illustrate this point, let us consider the “typical” developing country in the sample. It would have about 1 percent expected annual growth and an 8 percent tourism share of exports of goods and services. To reach growth of 6 percent per year, it would need to increase tourism receipts as a share of exports by more than 70 percent, or 10 times the standard deviation. It is, to say the least, very unlikely to achieve such a target for most countries.

What all economists keep doing? Amazing… Next time you visit any of the heritage sites, think about its contribution to economic growth as well.

Valuable lessons from Colgate on finance and globalization

Columbia Business School Journal (you can subscribe to it) has a nice account of how Colgate managed its risks in this crisis. Hans Pohlschroeder, Vice President of Treasury had spoken at the School.

He says:

Although many people might think of Colgate-Palmolive as an American company, this is far from the case. Although Colgate-Palmolive is headquartered in New York, it operates in 218 countries. Colgate-Palmolive is perhaps one of the most international U.S.-based companies Originally, the company had full-scale manufacturing operations in many different countries around the world, because high tariffs made it more cost-effective to produce locally.

However, trade liberalization over the past few decades has lowered the barriers to trade and created an environment where it is more cost-effective to centralize manufacturing and production. This trend has been augmented by technological increases that make it easier to produce large quantities of product in one manufacturing location. As a result, Colgate- Palmolive has transformed itself into an integrated global manufacturing chain, which in turn has helped lower costs and keep Colgate-Palmolive competitive and profitable. 

On Financial Risk Management he says:

the basic objective of financial risk management, which is to minimize the cost of capital and the impact of currency, commodity and interest-rate fluctuations on the operating cash flow of a company. He credits the success that Colgate-Palmolive has had in managing this risk successfully to a few basic principles that have allowed the company to avoid many of the pitfalls of the recent recession.

First, Colgate-Palmolive maintains a high credit rating (AA-) and prefers to perform hedges, such as swaps, with companies that have a similar or better credit rating. Second, all hedges must relate to specific, identifiable exposures. Third, it is important to remember that the treasury is not a profit center. Fourth, because of the previous principle, speculative and leveraged transactions are prohibited. Fifth, once established, hedges should not be traded, and hedges should be diversified over time. Sixth, it is useful to structure natural hedges with currencies and interest rates, and to maximize netting by directing all settlements to one day to save the spread (multilateral netting). Finally, implement institutional oversight to ensure that these policies are followed and that they are in line with the overall objectives of the organization.

Out of the six principles, it is 3rd and4th principles which were really forgotten in this crisis.  Treasuries became profit centres amidst high liquidity, low interest rates, easy profits etc. RBI had pointed Indian corporates other incomes as a % of total incomes had increased significantly. Most of them then burnt fingers via derivative losses etc. Banks also played a role by showing mostly the rosy side of these deals.

Treasury like finance is a facilitator, It should never override the main objective of the firm.

30 years of World Development Report

There was a time when World Bank’s World Development Report was a highly recommended reference for anything and everything under the sun of economics. It was supposed to be the most awaited publication as it took up topical development issues and covered it extensively. For instance its 1994 report on Infrastructure still remains one of the best on the subject. Then 1990 report on poverty, 1996 on markets, and then the 2006 report  bought inclusive growth to the forefront (highly controversial as well as till then it was assumed in WB – high growth led to inclusiveness).

However, now WDR has lost much of its shine. It comes and goes without creating any major news. The leading Blogs also give it a miss. It could be because of the crisis or simply because we have so much more to read thanks to explosion of eco research on the internet.

Anyways, WDR has completed 30 years and Shahid Yusuf has written a book looking at the WDR for 30 years. His speech covering the broad ideas the same is here. He asks whether WDR has helped economies get hold of key development issues – growth, poverty, inequality, role of government etc. He says not much and may be it has added some tiny decimal points to growth rate.

Joseph Stiglitz also chips in sharing his experiences working on WDR while he was WB Chief economist.  Stiglitz looks at key development issues in which WDR stretched the boundary and went beyond the norm.  He also tells account of how WDR clashed with US Treasury over several issues (poverty focused on income, capital market liberalisation etc), even leading to resignation of key person working on the reports.

Good fodder on development economics.

 

also It may be because