Archive for the ‘Growth and development’ Category

US economy performs better under Democratic presidents…. Why?

September 5, 2014

Profs Alan S. Blinder and Mark Watson have this interesting post. They say it is always the case that US economy does better under Democratic President compared to Republicans.

Why is this?


Importance of studying humanities/liberal arts for economic development..

September 3, 2014

Prof. Ned Phelps points to the importance of encouraging students to take up humanities.

He says it is wrong to think of bridging education gap via  education in STEM (science, technology, engineering, and mathematics) courses:


Time for India to use its soft powers in China…

September 2, 2014

Prof Vaidyanathan of IIMB has this interesting post on how India can widen its base in China (and other places as well).

First he says China’s ascendancy is not just about economics. There is a huge role of culture and religion as well:

The major change that is taking place in China is not related to their growth rates and Three Gorges Dam and the shopping malls and Olympics stadia. That is a typical Western way of viewing China. The main change is in religious affiliation and assertion of Islamic followers and development of large scale underground Church. The middle classes have given up rice [perceived to be for the illiterate poor] and are embracing Christianity since it also helps in job mobility particularly in global companies where the heads could belong to the same Church. The Muslim population is less dispersed and more concentrated in specific locations like western part But there is also a growing interest in China about its past. The Ming dynasty tombs in Beijing which are made in marble were painted in red color during the great cultural revolution of the sixties and even today laborers are washing it to make it back in to white color without success. The guides are not reluctant to talk about it. The ten handed Buddha in the Summer Palace of Ching dynasty near Beijing has significant relationship with our idea of Lord Vishnu who destroys evil and even this is mentioned clearly. More importantly, China is opening what are called Confucius Institutes in more than fifty countries which is similar to British Council efforts but more focused on China’s ancient wisdom. . The first thing we should learn is to stop looking at China with Western glasses.

The economic boom in China has given rise to issues related to their faith/religion and associated things. First and foremost, China is facing a severe separatist [called splitters by Chinese] in their western region namely Xinjiang by Uighurs. The region is populated by followers of Islam religion and seeing unrest for the past two decades. But recently it has reached violent proportions. For instance, early last week Chinese claimed that at least 100 have been killed in disturbances in that region2. Not only that, some portion of the Uighurs has carried the battle to Beijing itself. In other words, one form of regional separation combined with Islamic terrorism has become a major problem in China. There are also reports that the Islamists are taking shelter in the Pakistan occupied Kashmir (PoK).

On the other hand, China is also waging a battle with “unrecognized” Church in its territory. Once a hub of Christianity, worshippers in Wenzhou fear their faith is facing its biggest threat since the Cultural Revolution3. The recent visit of the Pope to South Korea as part of his engaging Asia has fuelled concerns in China since China has its own church and does not recognize Papal authority.

“By my calculations China is destined to become the largest Christian country in the world very soon,” said Fenggang Yang, a professor of sociology at Purdue University and author of Religion in China: Survival and Revival under Communist Rule.4 But for China, both the Abrahamic religions are alien to its culture going back several thousand years. So they are trying to revive “Confucianism” by encouraging the study of it as we’ll as opening several centers to propagate it. Buddhism is their ancient religion and Hindu influences are significant.

So what should India do?

Thus, a significant change that is taking place in China pertains to religion. The economic growth bereft of spiritual underpinnings in the context of death of Marxism is going to be a great challenge for China and India as an elder brother should facilitate orderly transformation based on our common shared ancient wisdom. Let us remember that China is also a multi-cultural and multi religious society but interested in our shared past. In the words of Hu Shih, former Ambassador of China to USA [1938-1942] “India conquered and dominated China culturally for 20 centuries without having to send a single soldier across her borders.”Ship loads of Sanskrit and Pali original works taken away by Chiang-Kai-Shek from mainland to Taiwan bear testimony to it. These are exhibited in the Taipei museum even today.

Hence, India should be sending Sri Sri Ravishankar/Mata Amirtanandamayi / Swami Ramdev/ Pramukh Swami/Sankaracharyas/Vaishnavite Seers and other spiritual leaders, Bharatha Natyam experts, musicians, other artists in hundreds to China to “ Conquer and Dominate” by our soft power. We need to print millions of copies of Ramayana and Mahabharata and our Puranas and Gita and Jataka stories in all modern Chinese languages and widely make them available. The CDs of Mahabharata and Ramayana etc. can also be given free. We should start some fifty Bharatiya Vidya Bhavans in China. Actually China needs this more than USA even though all our soft power is currently on show in the USA. We should create a fund of at least Rs.1000 crore for this effort. There is a statue of Kalidasa in the Shanghai theatre unveiled by the theater academy. I do not think of any metro in India including the so called “cultural capital” Kolkata, having a statue of Kalidasa. At Kolkata, the Theatre street became Shakespeare Sarani and not Kalidasa Marg!

We should strategically recognize the weak point of China and also the need of its masses in the absence of Communism. Many a Chinese even today believe that their next birth should be in India to reach salvation. Culture and religion are not taboos any more.

….The strategy should be to envelop China with music, dance, art, Yoga. Ayurveda, spiritual texts like Ithihasas, Gita, Puranas etc and capture the hearts of the middle classes as we have done for centuries.

The second issue is related to our own mind-set. We tend to look at China either through the Western spectacles or through local Marxist spectacles—which have more thick glasses. We need to come out of it. Even when invitations come to Indian spiritual leaders, the Government of India remains unenthusiastic and indicates its dis-interest in the false assumptions regarding China’s political orientation. The policy formulators are still living in the sixties and seventies while as China is undergoing a gigantic social crisis due to material prosperity and spiritual vacuum. Unfortunately, as a Chinese colleagueof mine at Shanghai University commented last year, “both our countries are ruled by rootless deracinated foreign educated wonders that do not have any idea of the civilizational roots or the cultural richness of our lands.” Hopefully now it should have changed!!

China is enthusiastically waiting. To quote late B K S Iyengar, the doyen of yoga, “Mr. Iyengar told The Hindu during a visit to Beijing that he saw China as a future home for yoga. When he travelled to Guangzhou to give a lecture, he was stunned to find that organisers had rented out a stadium – more than 1,300 students had come to listen to him”.8

Have not really read anything on this. So can’t say.

But yes why send all this culture and music to China? We should first encourage and promote it in India.  How many of today’s youth identifies with Indian music/culture/historic texts? Most of us are far well versed with western literature and stories than Indian ones. We should promote  and encourage our children to know about all these really important Indian things. Unless we develop expertise here and have large numbers knowing the game, we shall not be able to sustain this export of soft powers.

When a hamburger becomes a doughnut and other lessons about globalization…

August 27, 2014

There are two views on US economy. One it is on a perennial decline and other it shall recover given its strong institutions etc.

Daniel Inkenson belongs to the first kind and shows how US is on a perennial decline. Companies are quitting US and locating elsewhere. Reason – taxation issues, infra issues and so on.

He points how Burger King wishes to buy a Candian doughnut maker Tim Hortons and move to Canada:


Which economies are expected to decline? Lessons from India’s history

August 26, 2014

It is not often that Indian economy is quoted/referred by econs for comparisons across the world except for poverty etc.

Tyler Cowen asks this question of  Which countries are expected to decline and refers to India’s history. Though, his quoting India is not for anything positive as well. He says few economies in Europe are expected to decline Once the decline sets in, difficult to grow back. Look at India as one such example:

Who are some of the possible losers in this radical transformation in the global economy?

These economies have a few features in common: They try very hard to preserve old jobs at high real wages, they are not very flexible at adjusting, and they have not engaged in a major economic restructuring. While China is not the main problem of these economies, Chinese export growth and wage competition may have been a kind of final straw that made old ways unsustainable.

If either France or Italy, much less both, is in for 15 or 20 years of economic stagnation, it’s hard to see how the eurozone will avoid another major financial crisis. Portugal and Greece, both of which have been de-industrialized over the last few decades, are also possible candidates for continuing, rather than temporary, retrogression.

n Asia, the most likely future candidate for this problem is Taiwan, where real wages were largely stagnant from 2000 to 2011. In 2012, Taiwan’s trend was even more disturbing: Its economy grew 1.3 percent, but real wages fell 1.6 percent, both adjusted for inflation. Taiwanese capital has flowed into China, creating a new class of Taiwanese millionaires but hollowing out the country’s manufacturing base as capital was reallocated to the mainland.

What about the United States? The chance of an overall economic reversal here is very slim. The American economy is relatively flexible, and various candidates for future growth are strong: technology, health care research, energy and higher education. Despite its slow recovery, the United States probably still has the best fundamentals of any major economy.

Italy, which is producing less today than it was in the middle of 2000, is undergoing a triple-dip recession. Croatia is in its sixth consecutive year of recession — and joining the European Union didn’t help it much. In France, the economy has slowed to a crawl, but because taxes there are already high, there isn’t much room for further budget adjustment. French citizens expect a great deal from their government, and strikes are a common response to reduced wages or benefits.

The India story:

we might look at a different exemplar for modern times, 18th- and 19th-century economic history  India. That country’s economic retrogression during that era may help us understand the quandary that some parts of the world face today.

In 1750, India accounted for one-quarter of the world’s manufacturing output, but by 1900 that was down to 2 percent. The West became more productive as a result of the Industrial Revolution, and India lost much of its leading export sector, textiles. While the data is fragmentary, the best estimates show that India’s living standards declined through the middle of the 19th century and that its economy retrogressed, even as it borrowed some technological improvements from the West. India just didn’t do enough to move toward production on a larger scale or with better machines.

This story of India’s loss to foreign competition is documented in “Deindustrialization in 18th and 19th Century India,” a paper byDavid Clingingsmith, an economics professor at Case Western Reserve University, and Jeffrey G. Williamson, an emeritus professor of economics at Harvard.

Economists are accustomed to emphasizing the benefits of international trade, and these arguments are largely correct. But in India, internal regulations and underdevelopment, combined with British colonial depredations, prevented Indian resources from being redeployed productively. The lesson is that a sufficiently large international trade shock can lead to decades of economic decline in a major economy, especially if that economy isn’t geared to mounting a flexible response.

The world economy going in circles..

Forever recession in Europe and how to jumpstart the Eurozone economy

August 22, 2014

Two articles on Europe. One saying how the economy is in a kind of a forever recession. Two, how to jumpstart it.

As the recovery takes hold in the US, Europe appears stuck in a never-ending slump. With the ECB systematically undershooting its inflation target and recent signs that inflation expectations could become de-anchored, the bulk of commentators in the blogosphere are again calling for more monetary actions. Noticeably, some have completely lost hope in the ability of the European institutions to turn this situation around and are now calling for countries to simply break away from the EMU trap. 

The stagnating Eurozone economy requires policy action. This column argues that EZ leaders should agree a coordinated 5% tax cut, extension of budget deficit targets by 3 or 4 years, and issuance of long-term public debt to be purchased by the ECB without sterilisation.

Europe is going through debates which US was going through in 2008/09…


Using game of Scrabble to explain how countries grow..

August 21, 2014

Prof Ricardo Hausmann remains in top thinking and writing form. In this recent piece, he looks at convergence in incomes across countries and how certain countries have bridged the gap. Then he uses Scrabble as an analogy to explain convergence.


Why good economic reforms could actually be bad news for ruling party…

August 12, 2014

There is large literature on political economy of reforms. Whether the ruling party wins on economics reforms? What kind of reforms? Should it highlight the reforms/growth or remain quiet? How should the reforms be sequenced? etc etc.

This paper is an addition to the literature giving contrary ideas. It is written by Sweder Van Wijnbergen of Universiteit van Amsterdam and Tim Willems of University of Oxford. They show why some reforms that begin well, lose public support. They say such reforms are like sampling without replacement..once out of the sampling bag they cannot go back into the bag. Overtime, people lose confidence and as a result lose out:


The unintended consequences of public policy..

August 12, 2014

Thomas Hall of Miami University in Ohio has written what looks like a book to read — Aftermath: The Unintended Consequences of Public Policies. I was hearing a talk by Dr. Arvind Mayaram,Finance Secretary who said the troubles start whenever a policy becomes a public policy. And what he meant was as this book says — no matter how hard you try,there are always some problems with most public policy. It has these unintended causes which are not part of the original plan to stump the authorities.

In this article, there are a few such examples from the book:


Two New York – a tale of 2 cities, one for rich and other for poor …(much of our cities are similar)

August 11, 2014

A nice detailed piece by Steven Malanga of City Journal. He quotes NY’s Mayour Bill de Blasio who lamented that there are 2 NYs – one for rich and other for poor.

Why is this so? He says Blasio does not point to the factor for this kind of development. The reason is obvious  as the culprit is excessive government in NY:


How Political booms lead to financial instability…(any lessons for India??)

August 7, 2014

This is a pretty timely paper given the state of Indian politics and economics. It is by this trio of econs – Helios Herrera, Guillermo Ordoñez and Christoph Trebesch.

The kind of hype and expectations our financial markets have generated from the new govt is immense. Govt too is responsible making giving signals that things are going to be change as they are sworn in power. They are getting some reality check but our markets don’t care. One ought to be worried given how precarious the world economy is in. The earlier 9% times were when global economy was doing really well itself.  But currently it is at a precarious situation.Anyways, who cares.

So the paper look at this thing called political boom and how it eventually leads to financial crisis. It is even a better predictor than several sophisticated early warning indicators:


Political economy of bad data..How it leads to difficulty in policymaking?

July 30, 2014

Justin Sandefur and Amanda Glassman of CGDEV have this interesting paper.

We all know how bad data leads to problems in econ decision making. And then the blame comes to policymakers. So if you don’t know the right inflation levels one is never sure how much to tighten or ease. Same is the case with data on poverty, health etc.

Most research misses the political econ connections for this bad data. Basically many a times bad data remains as political forces are able to reap benefits from misreporting.


Why growing via value addition is not enough?

July 28, 2014

Ricardo Hausmann again questions the prevailing wisdom with respect to growth.

He says one of the standard growth mantras is value addition. Take a raw material and add value to it. But growth comes from identifying innovation around those raw materials.

Poor countries export raw materials such as cocoa, iron ore, and raw diamonds. Rich countries export – often to those same poor countries – more complex products such as chocolate, cars, and jewels. If poor countries want to get rich, they should stop exporting their resources in raw form and concentrate on adding value to them. Otherwise, rich countries will get the lion’s share of the value and all of the good jobs.

Poor countries could follow the example of South Africa and Botswana and use their natural wealth to force industrialization by restricting the export of minerals in raw form (a policy known locally as “beneficiation”). But should they?

Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues – say, the availability of raw materials – and blinds societies to the more promising opportunities that may lie elsewhere.

He discusses the case of Finland:

Consider Finland, a Nordic country endowed with many trees for its small population. A classical economist would argue that, given this, the country should export wood, which Finland has done. By contrast, a traditional development economist would argue that it should not export wood; instead, it should add value by transforming the wood into paper or furniture – something that Finland also does. But all wood-related products represent barely 20% of Finland’s exports.

The reason is that wood opened up a different and much richer path to development. As the Finns were chopping wood, their axes and saws would become dull and break down, and they would have to be repaired or replaced. This eventually led them to become good at producing machines that chop and cut wood.

Finnish businessmen soon realized that they could make machines that cut other materials, because not everything that can be cut is made out of wood. Next, they automated the machines that cut, because cutting everything by hand can become boring. From here, they went into other automated machines, because there is more to life than cutting, after all. From automated machines, they eventually ended up in Nokia. Today, machines of different types account for more than 40% of Finland’s goods exports.

The moral of the story is that adding value to raw materials is one path to diversification, but not necessarily a long or fruitful one. Countries are not limited by the raw materials they have. After all, Switzerland has no cocoa, and China does not make advanced memory chips. That has not prevented these countries from taking a dominant position in the market for chocolate and computers, respectively.

Interesting bit as always from Prof Hausmann..

Relationship between trust and the size of the welfare state…

July 18, 2014

An interesting piece by Yann Algan, Pierre Cahuc, Marc Sangnier, all three based at France’s economic schools. French econs are really getting popular these days.

They say the relationship between trust amidst citizens and size of welfare state  isn’t as linear as imagined. The higher the trust and higher the size of welfare is not really true. What we see is twin peaks. Both states with high and low trust can have higher welfare spending:


Importance of framing questions – an interesting example..

June 17, 2014

There is another interesting debate over whether the western world has run out of major innovations and are now going to be on a steady decline. Robert Gordan has been making this argument for a while. Ofcourse, there are people who disagree and say innovation likely to continue and generate future growth. Here are the debates — one, two, three.

Coming to the title of the post. Prof Gordon often asks this question which innovation do you value most – A toilet with piped water or a smartphone?

Are all of mankind’s best inventions behind us?

Economist Robert Gordon thinks so. When giving speeches, the Northwestern University professor often flashes a photo of a smartphone and a toilet on a screen and asks his audience what they would do if they had only two options: Keep everything invented up until 2002, or keep everything invented up until today—but give up running water and toilets. The answer to him is obvious: Indoor plumbing changed how people live, he says, smartphones are just a handier form of what already exists.

Which would you choose?

The answer here most likely (atleast for me) is toilets. Here there is a case of lack of supply as well. Much of India does not have toilets but phones have become too common.

But the same post takes a poll but frames the question differently:

Which invention of the past would you rather live without?

Here the choice is smartphones not toilets. But unknowingly you end up ticking on toilets!

Importance of framing the questions and nudging people into making choices.


A conversation between Ministry of Energy and Ministry of Finance…

June 12, 2014

IMF Blog has this interesting post on how Minister of energy calls up MoF over  discovery of some natural resource.

MoF who understands a bit of economics is not too thrilled given the experiences of countries with such resources. So what does he/she do? One idea is to distribute the revenues to people and then clawed back via taxation:

The Minister remembers reading a paper by Sala-i-Martin and Subramanian that argues citizens of an oil-rich country such as Nigeria—where institutions are weak—would be better off if all oil revenues were directly distributed to the citizens themselves. The authors’ main argument is that mechanisms of direct distribution circumvent inefficient or corrupt budget institutions and foster public demand for government accountability. If resource revenues are distributed to the public and clawed back through taxation, the argument goes, the public will demand accountability for the use of the resources.

MoF then floats a study to figure the pros and cons of direct distribution:

As a first step, the advisor looks at how other countries have responded in similar circumstances. To his surprise, he finds only one instance in which resource revenues are distributed directly, that is, in Alaska. However, the Alaskan approach is underpinned by strong budget institutions and official oversight, and the amount distributed is relatively small—only 3 to 6 percent of per capita income—and the direct distribution is made out of income earned from saved resource revenues.

To be thorough, the advisor also looks at the experiences of countries where governments provide cash or in-kind transfers to their populations—including conditional cash transfers, subsidies, and income support programs. He finds that these transfers have proven effective in reducing inequality, but that larger transfers to wealthier recipients might have the unintended effect of encouraging withdrawal from the labor force. He also learns that income support programs have tended to narrow their coverage in order to address the perception that they discourage recipients to work. He studies how entrenched energy subsidies are—despite being inefficient, inequitable, and bad for growth—as citizens see them as a way to reap benefits from resource abundance. Finally, he learns that the use of resource revenues outside the budget process can also fall prey to rent-seeking.

Nice bit..

How Centre and States share taxes in Brazil?

June 12, 2014

This whole idea of sharing taxes between centre and states is a fascinating project by itself.

This note by World Bank econs gives some perspective on how Brazil shares its taxes (and other resources) amidst Centre and States. It also discusses proposed reforms on the matter:


Fixing city finances and governance post Detroit…

June 6, 2014

Chicago Fed conducted a forum to discuss several issues post Detroit bankruptcy. The main q was what is the way forward post Detroit? There are some interesting presentations particularly this one which shows how Washington DC managed to resolve its city crisis. This one by Robert Inman of Wharton also sets the entire agenda for cities..

The discussions are explained in this short note. The key points were make sure there is accountability, to have a fiscal watchdog even at city level, making sure basic public services are not disrupted even during crisis, pricing these services properly and so on..

Our cities are far off from this kind of discussion. But the idea of ensuring basic governance is valid wherever you are on the graph of devleopment

Why not go for Surface Rail public transport instead of Metros/Rapid Bus system?

June 4, 2014

The blogger has always wondered why we don’t go for Mumbai Local train system in Indian cities instead of fancy metro? Mumbai local may not be as elegant but carries far larger number of passengers. Moreover, in some cities the existing train lines could be used to atleast connect some points in the city. This will save both costs and time.

Anyways, here is an interesting paper by experts in the matter making a case for surface rail. It is written by M Ravibabu of  Ministry of Railways and V Phani Sree of Jawaharlal Nehru Architecture and Fine Arts University:


A Reading List – Understanding Economic Development

June 4, 2014

Arvind Subramainan taught a course on econ development recently. He has put up his reading list and is quite a comprehensive one. It is spread across  14 topic with each topic having multiple things to read..

A nice way to read on different perspectives of development..


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