Archive for the ‘Growth and development’ Category
Got this interesting press release from IMF in my mailbox today.
The International Monetary Fund’s Executive Board met today to consider the Managing Director’s report on Argentina’s progress in implementing remedial measures to address the quality of the official data reported to the Fund for the Consumer Price Index for Greater Buenos Aires (CPI-GBA) and Gross Domestic Product (GDP).
While noting that Argentina has not adopted the measures called for by the Fund to address the inaccurate provision of CPI-GBA and GDP data, the Executive Board recognized Argentina’s ongoing work and intention to introduce a new national CPI in early 2014. The Board also noted that Argentina is working to address the shortcomings in its GDP data.
In light of these developments, the Executive Board adopted a decision calling on Argentina to implement specified actions to address the quality of its official CPI and GDP data according to a specified timetable. The decision calls on Argentina to implement an initial set of specified actions, including the public release of a new national CPI and revised GDP estimates, by end March 2014.
Prof. Ricardo Hausman of Harvard and former minister of planning of Venezuela has this really nice piece on the topic. each time you think this is different, the reality is it isn’t..
It is often difficult to understand how countries that are dealt a pretty good economic hand can end up making a major mess of things. It is as if they were trying to commit suicide by jumping from the basement.
Two of the most extreme cases (but not the only ones) are Argentina and Venezuela, countries that have benefited from high prices for their exports but have managed to miss the highway to prosperity by turning onto a dead-end street. They will eventually have to make a U-turn and backtrack over the terrain of fictitious progress.
The puzzling thing is that this is not the first time either country has veered into an economic cul-de-sac. It has been said that only barbers learn on other people’s heads, but some countries seem unable to learn even from their own experience. The ultimate reason for such self-destructiveness may be impossible to identify. But it is certainly possible to describe how the road to hell is paved, whatever the intentions.
He says the troubles begin whenever the govt. tries to put controls to keep inflation and exchange rate under control:
It all starts when some imbalance causes overall inflation or some key price – typically the exchange rate, but also power, water, and gasoline – to come under upward pressure. The government then uses its coercive power to keep a lid on price growth. For example, Brazil has wreaked havoc on the financial health of its national oil company, Petrobras, in order to keep gasoline prices low. Argentina destroyed its natural-gas sector with price controls. Many countries have kept power and water prices too low and have ended up with shortages.
But things become really nasty when the government opts for foreign-exchange controls. The usual story, nicely summarized by the late Rüdiger Dornbusch and Sebastian Edwards, is that lax fiscal and monetary policies cause a flood of freshly printed currency to chase more dollars than the central bank can provide at the going exchange rate. Rather than let the currency depreciate, or tighten its policies, the government opts for foreign-exchange controls, limiting access to dollars to those who “really” need it and thus preventing “speculators” from hurting “the people.”
Foreign-exchange controls, typically accompanied by price controls, give the government the sense that it can have its cake (lax policies) and eat low inflation. But controls lead to a parallel exchange rate, which can be either legal, as in Argentina, or illegal and even unpublishable, as in Venezuela.
But having two prices for an identical dollar creates enormous arbitrage opportunities. A dollar purchased at the official rate can be sold for almost twice as much in the “blue” market in Argentina and a whopping ten times more in Venezuela. Repeat that game a few times and you will be able to afford a corporate jet. Nothing becomes more profitable than over-invoicing imports and under-invoicing exports. In Venezuela, importing spoiled food and letting it rot is more profitable than any investment anywhere else in the world (disregarding, of course, the bribes needed to make it happen).
The dual-exchange-rate system ends up distorting production incentives and causing the effective supply of imported goods to decline, leading to a combination of inflation and shortages. But here things turn interesting. Public spending tends to rise with inflation more than government revenues do, because revenues depend on the tax on exports, which is calculated at the pegged official exchange rate.
So, over time, fiscal accounts worsen automatically, creating a vicious circle: monetized fiscal deficits lead to inflation and a widening gap in the parallel exchange-rate market which worsens the fiscal deficit. Eventually, a major adjustment of the official rate becomes inevitable.
He points how Venezuela continues to suffer from this choice of policies. Why does this happen all the time?
Why do countries opt for such a strategy? Any system creates winners and losers. In Argentina and Venezuela, the winners are those who have preferential access to foreign exchange, those who benefit from the government’s profligacy, those who can borrow at the negative real interest rates that lax policies create, and those who do not mind waiting in long lines to buy rationed items.
Such a system can generate a self-reinforcing set of popular beliefs, which may explain why countries like Argentina and Venezuela repeatedly drive down dead-end streets. Because so many businesses make money from the rents created by the rationing of foreign exchange, rather than by creating value, it is easy to believe that markets do not work, that entrepreneurs are speculators, and that governments need to control them and impose “fair” prices. All too often, this allows governments to blame the car, and even the passengers, for getting lost.
It looks at political economics of why wheeled transport was not introduced in West Africa in colonial times. More interestingly, it shows how railways could have created a visible impact in these economies:
Henrik Valeur (Danish-born architect-urbanist and an independent researcher) has this interesting case-study in recent EPW edition.
The case study points to how a particular area in these two cities is trying to become car-free zones. In Bangalore it is IISC campus and in Chandigarh it is sector-17:
Apologies to turn this debate on again. But you see this debate not just in India but all across the world. More than anything else it tells you how difficult it is to develop in a sustained fashion.
Some econ will point to the surge in a particular economy/economies (much like Bhagwati camp) and the other one would point out the missing social development (much like Sen camp). The latter would add that this growth will not last long and is usually And vice-versa too applies.. One econ showcases the social development model of a particular econ/region whose growth etc is questioned by the second group.
And when it comes to Latam one has to be really careful. You never know when the story taken an unexpected turn. As the crisis struck in 2008, people were suprised how nothing happened in Latam. Barring Argentina, one usually heard how the crisis escaped the Latam region.
Jeffrey Gedmin CEO of the Legatum Institute has this nice piece in proj syndicate.
Econs never give up on the famous four word line – it is economics stupid. Hyped by the Clinton campaign it just trumped everything else. This was followed by good economics is good politics. Economic imperialism triumphed over everything else. Just fix economics and rest all is well.
What is seldom understood is that it is basically politics which drives everything. If politics is not right it shows up in everything. Good politics leads to many other good things including economics. Political system is the supreme thing and just like all important things are removed from economics, so is politics. For some time till there was Great moderation econs believed they were right. However, the recent crisis again shows the importance of politics.
Anyways, Gedmin shows how the recently released Legatum Prosperity index adds governance and rule of law to development:
Traditional Economics ignores quite a bit of real world. We study financial markets without the frictions, international trade without the borders etc. One another miss in terms of development is role of location. Most policies on development are made without any mention of role of location.
Edward Glaeser and Abha Joshi-Ghani write in this interesting piece on rethinking on the role of cities in development: