Bryan Kelly, Lubos Pastor and Pietro Veronesi have this interesting piece in voxeu.
The authors develop a measure of political uncertainty and see its impact on fin markets:
Prof. Ricardo Hausmann is in top form given the articles he generates at Proj Synd. Really top stuff.
The recent one on what makes democracies tick is a reallyold one. But he conveys the message really effectively:
He begins quoting Adam Smith and then goes to the most current event of missing airplane in Maalysia:
When Adam Smith was 22, he famously proclaimed that, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” Today, almost 260 years later, we know that nothing could be further from the truth.
The disappearance of Malaysia Airlines Flight 370 shows how wrong Smith was, for it highlights the intricate interaction between modern production and the state. To make air travel feasible and safe, states ensure that pilots know how to fly and that aircraft pass stringent tests. They build airports and provide radar and satellites that can track planes, air traffic controllers to keep them apart, and security services to keep terrorists on the ground. And, when something goes wrong, it is not peace, easy taxes, and justice that are called in to assist; it is professional, well-resourced government agencies.
All advanced economies today seem to need much more than the young Smith assumed. And their governments are not only large and complex, comprising thousands of agencies that administer millions of pages of rules and regulations; they are also democratic – and not just because they hold elections every so often. Why?
He goes back to Smith and invokes the invisible hand. Just like we have one for markets there is another one for political system as well:
This is an information-rich problem, and, like the social-coordination challenge that the market addresses, it does not allow for centralized control. What is needed is something like the invisible hand of the market: a mechanism for self-organization. Elections clearly are not enough, because they typically occur at two- or four-year intervals and collect very little information per voter.
Instead, successful political systems have had to create an alternative invisible hand – a system that decentralizes the power to identify problems, propose solutions, and monitor performance, such that decisions are made with much more information.
To take just one example, the United States’ federal government accounts for just 537 of the country’s roughly 500,000 elected positions. Clearly, there is much more going on elsewhere. The US Congress has 100 senators with 40 aides each, and 435 representatives with 25 aides each. They are organized into 42 committees and 182 subcommittees, meaning that there are 224 parallel conversations going on. And this group of more than 15,000 people is not alone. Facing them are some 22,000 registered lobbyists, whose mission is (among other goals) to sit down with legislators and draft legislation.
This, together with a free press, is part of the structure that reads the millions of pages of legislation and monitors what government agencies do and do not do. It generates the information and the incentives to respond to it. It affects the allocation of budgetary resources. It is an open system in which anybody can create news or find a lobbyist to make his case, whether it is to save the whales or to eat them.
So it is not about just elections. There is an entire process which is at place. Most developed countries seem to have understood and developed this process. Hence they are developed too:
Without such a mechanism, the political system cannot provide the kind of environment that modern economies need. That is why all rich countries are democracies, and it is why some countries, like my own (Venezuela), are becoming poorer. Although some of these countries do hold elections, they tend to stumble at even the simplest of coordination problems. Lining up to vote is no guarantee that citizens will not also have to line up for toilet paper.
Not sure whether we can ascribe this reason alone for development. But is a worthy reason.
The invisible hand should be as effective in the political arena as it is supposed to be in the economic arena. Alas this is seldom the case. Moreover, we usually ignore the polity and remain focused on economy. We just don’t realise that it is former that drives the latter. Both are neither independent nor is it the case of latter driving the former. But we just don’t care and keep missing the lessons over and over again. Only when the invisible hand of politics becomes visible via poor governance and malaise do we realise the importance..
But a really good article. Read the comments too..
HBS Professors William C. Kirby (along with Regina Abrami and F. Warren McFarlan) has written this book – Can China Lead?: Reaching the Limits of Power and Growth.
HBSWK does a review of the book. The similarity to India is too good to rule out:
Inequality trends has taken over the world economy and captured the interests of economists.
Tony Atkinson and Salvatore Morelli introduce to this superb chartbook on inequality in this voxeu piece. The chartbook captures trends for more than 100 years across twenty-five economies including India.
Even better is it has this common set of questions for all the countries which help understand the trends.
Sometimes I feel like rejecting all economics related stuff and get onto figuring technology. After all much depends on how the latter can generate economic growth and future opportunities. The action always has been in new emerging technologies and how they can change things..
Edward Jung (earlier at Microsoft and now at Intellectual Ventures) argues why it is time to look at new metrics for economic growth. The problem is much of economic activity is getting centred around digital technology but latter is not being measured properly in traditional indicators:
Apparently US Senate’s Committee on Finance organised a hearing titled – Innovative Ideas to Strengthen and Expand the Middle Class.
Fiscal Times summarises the suggestions. Most experts cited to reform taxes:
No guesses for saying which one the blogger liked the most:
Of all the economists on the panel William C. Dunkelberg, chief economist for the National Federation of Independent Businesses, seemed least excited about the search for innovative answers to the problems of the middle class.
“My suggestion is that we get back to basics first, fixing what we know is wrong before we try to overlay new “innovative” policies on the economy,” Dunkelberg said in his prepared testimony. Most of his organization’s members he reported, citing an NFIB survey, are concerned about taxes and government regulations.
“Small businesses are a major source of economic activity and job creation in the economy, but small businesses have struggled to recover from the recession,” he said. “The ‘middle class’ includes millions of small business owners who compete with each other for the business of consumers. And most of the 6 million employer firms provide tens of millions of jobs to the ‘middle class,’ people who want a job and want to earn a living. The best way to help the middle class for those who want to join it is to provide job opportunities in the private sector where they earn their way by producing value.”
I guess this applies to Indian middle class too. Not so sure of taxes as most hardly pay taxes. Though paying taxes is getting highly cumbersome in India too and needs to be simplified without a doubt.
With surging populations and aspiration levels, income and jobs take precedence over everything. But then in India’s case we need even more basics in place, so called basic public services – roads, water, electricity, education, health and so on.
Should be interesting to read the testimonies of the various experts.
High time India moved to such a model of debate and discussion. Our Parliament has committees on everything under the sun but we really do not get exposed to these debates. Experts should be called to present their views on certain topics and they should be displayed on a dedicated website. This will give exposure to the academics and help one learn and figure different perspectives on variety of topics.
May be we already have a website looking at this but am unaware. So, in case visitors know of such a thing, let me know..
Being a cricket follower, interest in Caribbean region remains high. One keeps hoping that West Indies team of yore comes back and we again get to see battery of pace bowlers. Cricket has become too much of a batters game as of now..
So, this paper by Matthew Clair, Peter Blair Henry and Sandile Hlatshwayo on the two countries within Caribbean is pretty interesting. They show economic outcomes for Jamaica and Barbados differed post 1973. Both regions had near similar kinds of institutions and structure but different economic policies changed the outlook in the two places. There was an earlier paper as well by Peter Henry on similar lines but it did not specifically look at the year where the two countries differed. (Plus another paper on Barbados vs Guyana which emphasises on the institutions).
The children are often told in India (atleast) to practice as much as possible before exams. It helps one understand the subject and also the approach to exams. This is especially the case in math oriented subjects where practice is the key as steps are quickly forgotten and then there are mistakes. The entire ancillary education industry has mushroomed in India based on this logic. There are coaching classes for all things under the sun where they prepare you for “the exam” taking many retakes..
There is this paper by four econs which look at this learning experiment in Turkey. They find allowng students to retake exams leads to better learning:
The tide has turned and how. After decades of lecturing the developing world, time for developed world to get some advice.
Anusha Chari and Peter Blair Henry point to the importance of discipline for advanced economic policy guys. They should learn these lessons from the developing world:
From 1980 to 1992, emerging and developing countries grew by 3.4 percent per year. Their annual rate of growth increased to 5.4 percent between 1993 and 2012. No such increase occurred for advanced nations, whose average growth from 1980-2012 was roughly constant (excluding the impact of the 2008-09 Recession). Developing nations turned themselves around by embracing discipline—sustained commitment to a pragmatic and flexible growth strategy. Three illustrations of discipline through the lens of trade, fiscal, and debt reforms in the developing world offer relevant, practical lessons for recovery in advanced economies and continued catch-up growth in developing nations.
Today is a day for Latam economies.
Mexico, US and canada signed NAFTA in 1994 which was pitched as a win-win agreement by trade experts. It has been 20 years since the agreement. What is the evidence?
Overall, Guillen states, “NAFTA has been great for Mexico. The only doubts are about whether it has been good for the United States. I believe it has been, but there is more of a mixed balance between losers and winners [in the U.S.]. For Mexico, it is a total success. The problem in Mexico, though, is that the export industry there has not been big enough to employ everybody in a large population…. Inequality has been produced, not because the wages of low-wage workers got lower, but because a significant number of workers are now receiving higher wages.
“It is obviously good, but it would be even better if, instead of only 30% of Mexican workers earning those very high wages for Mexico, you could get 70% of the workers.” For that to happen,Mexico will have to overcome its shortage of capital, he adds.
Despite such imperfections, Kemmsies believes that “NAFTA is on the cusp of being a great success,” but he also worries that “Mexico will kill the golden goose before it lays an egg” by imposing export taxes on foreign firms doing business there before those firms are fully convinced they should be in Mexico for the long haul. “Mexico has to worry about overplaying its hand” before the global automakers and other foreign investors have sunk their roots more firmly into Mexican soil.” Given the fragile state of the global economy – and the uncertainties surrounding Mexico’s ambitious reform efforts — many foreign companies “are still scared and risk averse. We are not [yet] past the start-up stage in Mexico.”
As was well known at the time of NAFTA’s passage, the main purpose of NAFTA was to lock in a set of economic policies, some of which were already well under way in the decade prior, including the liberalization of manufacturing, foreign investment and ownership, and other changes.26 The idea was that the continuation and expansion of these policies would allow Mexico to achieve efficiencies and economic progress that was not possible under the developmentalist, protectionist economic model that had prevailed in the decades before 1980. While some of the policy changes were undoubtedly necessary and/or positive, the end result has been decades of economic failure by almost any economic or social indicator. This is true whether we compare Mexico to its developmentalist past, or even if the comparison is to the rest of Latin America since NAFTA. After 20 years, these results should provoke more public discussion as to what went wrong.
No wonder eco is called dismal science..One just does not know what has worked and what has not..
Apparently Simon Kuznets seems to have said these wonderful quote. I mean the quote is so good that one has to keep remembering it and repeating it. He meant nothing really changes with respect to these countries. Though Japan really pushed itself out of the quote developing really fast till the 1990 crisis. But Argentina remains in the list perennially.
In the 43 years leading up to 1914, GDP had grown at an annual rate of 6%, the fastest recorded in the world. The country was a magnet for European immigrants, who flocked to find work on the fertile pampas, where crops and cattle were propelling Argentina’s expansion. In 1914 half of Buenos Aires’s population was foreign-born.
The country ranked among the ten richest in the world, after the likes of Australia, Britain and the United States, but ahead of France, Germany and Italy. Its income per head was 92% of the average of 16 rich economies. From this vantage point, it looked down its nose at its neighbours: Brazil’s population was less than a quarter as well-off.
It never got better than this. Although Argentina has had periods of robust growth in the past century—not least during the commodity boom of the past ten years—and its people remain wealthier than most Latin Americans, its standing as one of the world’s most vibrant economies is a distant memory (see chart 1). Its income per head is now 43% of those same 16 rich economies; it trails Chile and Uruguay in its own back yard.
The political symptoms of decline are also clear. If Argentina appeared to enjoy stability in the pre-war era, its history since then has been marked by a succession of military coups. The first came in 1930; others followed in 1943, 1955, 1962, 1966 and 1976. The election of 1989 marked the first time in more than 60 years that a civilian president had handed power to an elected successor.
It goes on to say how Argentina keeps making mistakes and never learns. I mean despite all this reading one fails to figure why it is a place full of ideas that dont’ work? As Tyler Cowen says:
Yes of course there was bad policy, but how did the country get into such a bad idea trap to begin with?
The same mistakes over and over again. Political economy of the country does not allow the country to rise..
Because we thought this time is different.
Dani Rodrik says decline of emerging economies is on expected lines:
This is not the first time that developing countries have been hit hard by abrupt mood swings in global financial markets. The surprise is that we are surprised. Economists, in particular, should have learned a few fundamental lessons long ago.
There are several answers to this question. Some say it is labor market reforms in 2000s which made Germany’s labor markets more flexible. Then there are others that say it was the export markets. Some more say much was because of Germanyjoining EZ as with D-Mark , currency would have appreciated leading to lower exports. And so on..
This piece in voxeu comes with a new evidence. It says what mattered was this decentralisation of wage bargaining process post Germany reunification. It pushed workers into accepting lower wages as otherwise firms would have shifted to cheaper locations. This led to so called lower unit costs for the country:
Carl Kitchens (of University of Mississippi) explains how rural electrficiation in 1930s helped US economy:
It is a result which would be really surprising if it did not happen:
Economists have found that large-scale infrastructure investments tend to increase economic growth and reduce poverty. However, there has been relatively little research on the effects of smaller, more targeted investment projects. This column discusses recent research on the effects of the US Rural Electrification Administration, which provided subsidised loans for connecting farms to the electric grid. Counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity than similar counties that did not.
Subsidised loans? Did I read that correctly?
While large-scale projects have demonstrated benefits, often at a large expense, the literature has neglected smaller, more targeted, less expensive projects. In new research (Kitchens and Fishback 2013), we focus on electrification projects that directly connect rural consumers to the electric grid. In 1935, the Rural Electrification Administration (REA) was created in the US. In a five-year period, the REA provided $3.6 billion in subsidised loans to newly established cooperatively owned utilities. With these funds, rural utilities doubled the number of farms receiving electric service, and constructed more rural distribution line than private companies had constructed in the previous 50 years.
Using a sample of approximately 1,400 rural counties in the US from 1930 to 1940, we estimate the relationship between changes in access to electricity via the REA and agricultural outcomes such as crop values, livestock values, farm size, and land values. We are interested in how counties that received access to electricity from the REA changed relative to similar counties that did not receive REA electricity.
Our empirical findings suggest that access to electricity improved outcomes in agricultural counties. While agriculture was in decline everywhere at the peak of the Great Depression, counties that received electricity through the REA witnessed smaller declines in agricultural productivity, smaller declines in land values, and more retail activity relative to counties that did not obtain electricity from the REA.