The other side of financial globalization of football

August 27, 2014

Usually we celebrate how globalisation and finance has transformed football across the world.

Akash Bhattacharya provides the other side of this development:

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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:

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How reliable are companies’ credit ratings?

August 27, 2014

Krishna Kant  of BS points to an internal study which looks at rating agencies of some 250 odd companies.

The ratings are same for companies which appear to be different on fin ratios:

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Competition Commission of India slaps fine om 14 car makers..

August 27, 2014

One day old news but an important one. Competition Commission of India slapped fine of Rs 2500 cr on 14 automakers for not allowing competition in the auto components market. CCI gradually gaining teeth and understanding what is going on in Indian economy. This is a body which should have been formed long back as we have had all kinds of practices in the name of competition and private ownership.

I mean how do 14 players prevent competition? We are told in textbooks that large number of players ensure there is competition. But it is not the case here. These 14 car players have sort of formed a cartel and not allowed other players to sell auto components/parts of their brands:

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Ricardo on Orissa-West Bengal potato/vegetable trade..

August 27, 2014

India and its politics is interesting and bizarre at most times.

I am not sure how many of us are following the Orisaa/West Bengal crisis on trading of potatoes and vegetables.

Apparently. Orissa supplies veggies to WB and latter supplies potatoes to Orisaa. Just like Ricardo’s example, it seems WB has comparative adv over potatoes and Orissa over veggies. The two states specialise in their comp adv and trade with each other. Win win for both as our text-books suggest.

Alas, the reality is not as simple. There are lot of other considerations which influence trade and it is not just economics.

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Shouldn’t our Hon’ble President/SC (or someone more important) explain the sacking/transfer of so many State Governors?

August 26, 2014

This is getting really really nasty. I am no political expert but all this random sacking/transfering of so many State governors is just preposterous.

It is true that ruling party is paying back to Congress as latter did the same in 2004 or so. Infact, it is like tit for tat. But after the 2004 sacking Hon’ble Supreme Court said such sacking should not be allowed. Or we don’t believe in SC anymore? The crazy amount of politicisation of everything in this country is reaching an alarming level. The executive is becoming way too powerful.

It is also true that all these State Governors are just used by Centre to sent their cronies/ministers. But then with ruling party replacing these State Governors with their own people instead of looking at capabilities/expertise does not take us anywhere. It is one party spokesperson replacing the other. The transfer of some Governors to NE States and they resigning on the pretense that NE States are not important speaks volumes about our so called focus on development of NE region.

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Is fiscal stimulus any useful ? Some evidence from US States spending on roads..

August 26, 2014

Sylvain Leduc and Dan Wilson get into one of the oldest debates on importance of fiscal stimulus.

They look at the evidence of whether and how US states used the fiscal stimulus given to them by the Federal Govt:

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NGDP targeting is more suited to developing economies..

August 26, 2014

Pranjul Bhandari and Jeffrey Frankel make a case for NGDP targeting in developing economies.

They say NGDP is more suited to developing world:

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Economists beg Arun Jaitley for a ‘job’…

August 26, 2014

Gursharan Dhanjal of Inclusion takes a dig at several Indian econs looking for a job at the Indian govt.

Ever since the new govt has come,the amount of positioning one is seeing has never been seen before. Econs who benefited much from the previous UPA govt via several positions in govt have conveniently switched sides blaming all ills of Indian economy on the UPA govt.  There are only a handful of such econs/experts who acknowledge of their alliance with previous govt bodies. Rest have just conveniently switched tracks.

Those who are already sitting on several policy positions appointed by UPA govt are just plain lucky. Rest are shuttling around for benefits. It is all amazing and shameless really.

But NDA govt is not relenting so far. It is enjoying all the publicity given by these econs in the name of change but not interested in giving back the favors.

The author calls these econs as India’s new trade union..:-)

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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..

Roots of gender inequality in developing countries…

August 25, 2014

A pretty hit topic across developing economies is continued presence of gender dominance and inequality.

Seema Jayachandran looks at the toot causes of this inequality:

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Definition of real estate in India and connecting realty to reality…

August 25, 2014

RBI DG R.Gandhi gives a speech on real estate sector in India titled as ‘Real estate and housing – a sensitive sector or Samvriddhi sector? Samvriddhi means growth..

He gives this interesting definition of real estate as per 10th Plan Com document (wonder whether Plan Com docs will be referenced in future):

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Understanding better how people really make choices..

August 25, 2014

Prof Daniel McFadden in his new research discusses how people make choices. He says the traditional rational school does  not help understand the real behavior:

The way our brains work is key to understanding how consumers really make choices, argues Nobel Laureate Daniel McFadden.

Some consumers suffer from “agoraphobia” or a fear of markets according to new research presented by Nobel laureate Daniel McFadden that throws doubt on the classical idea that people are driven by relentless and consistent pursuit of self-interest to maximise their well-being. Professor McFadden entitled his paper The New Science of Pleasure, to purposefully play on a phrase coined by Anglo-Irish political economist Francis Edgeworth some 130 years ago.

He told the audience of young economists and fellow laureates at the 5th Lindau Meeting on Economic Sciences on 22 August that new studies of consumer behaviour that drew on psychology, sociology, biology and neurology gave economists a deeper understanding of how consumers made choices. 

Rational analysis says that we should relish choice and the opportunities offered by markets. “Yet we are in fact challenged by choice and we use all kinds of ways such as procrastination to avoid having to make choices. One of the reasons is that there are risks associated with making choices,” he said.

…Interestingly pleasure and pain are in different circuitries in the brain while decisions involving gains or losses take place in separate parts of the brain. The net result is that there is therefore a physiological basis for the cognitive anomalies such as loss aversion, the endowment effect and hyperbolic discounting that psychologists have identified.

The classical economic of choice is therefore far too simple as it does not capture what goes on in people’s brain when they make choices. “It is also much too static to capture the sensitivity and dynamics of the process,” he said.

However he said that welfare economists based on neurological measures of utility and brain functioning was coming. “But we are not there yet. Wait for it – but even better get involved in the types of research and the bridge between economics and other disciplines and play a role in making this come true.”

Behavioral economics is gradually and slowly gaining respect amidst mainstream economists..

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…

 

The role of capital controls in Great Depression…

August 22, 2014

Kris James Mitchener and Kirsten Wandschneider  look at the role of cap controls in crises. There have been suggestions that to dampen fin cycle one could also use capital controls.

The authors see how authorities used these controls in Great Depression. The find that these controls were just used for trade purposes:

Capital controls appear not to have been successfully used as tools for rescuing banking systems, stimulating domestic output, or for raising prices. Rather they appear to have been maintained as a means for restricting trade (working alongside or in lieu of restrictions on imports) and repayment of foreign debts. While our analysis suggests capital controls provided little macroeconomic benefit relative to other policies that were implemented in the 1930s, it would be difficult to conclude that they would have no ameliorative effects in other crises if employed with that purpose in mind. On the other hand, the experience of the 1930s suggests capital controls are often implemented with very short-run objectives in mind – to prevent capital flight. If kept in place, however, macroeconomic objectives can end up sharing the stage with other goals of policymakers.

Research on depression and related events continues to be engrossing…

You can’t run an economy using spreadsheets…

August 22, 2014

Well, one thought this is how economy is run really. And why just using spreadsheets..it is run on using softwares like Stata, R, SAS etc. All that is needed is data which you keep feeding in which tells you about economies. One can be an expert just like this.

Nicolás Cachanosky of Metropolitan State University of Denver reacts to recent remarks from an Argentina minister. Latter said one can run economies these days using spreadsheets:

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How money is made?

August 21, 2014

Not money as in earnings but money as in money supply.

 and Richard A. Werner say it is mainly created by banks. We usually think it is central banks who create money but that is a fraction of the overall money supply.

Last month, the BRICS countries (Brazil, Russia, India, China, and South Africa) announced the establishment of their own development bank, which would reduce their dependence on the Western-dominated, dollar-focused World Bank and International Monetary Fund. These economies will benefit from increased monetary-policy agency and flexibility. But they should not discount the valuable lessons offered by advanced-country central banks’ recent monetary-policy innovation.

In June, the European Central Bank, following the example set by the Bank of England in 2012, identified “bank credit for the real economy” as a new policy goal. A couple of weeks later, the Bank of England announced the introduction of a form of credit guidance to limit the amount of credit being used for property-asset transactions.

Before the financial crisis hit in 2008, all of these policies would have been disparaged as unwarranted interventions in financial markets. Indeed, in 2005, when one of us (Werner) recommended such policies to prevent “recurring banking crises,” he faced vehement criticism.

This March, however, the Bank of England acknowledged the observation that he and others had made – that, by extending credit, banks actually create 97% of the money supply. Given that a dollar in new bank loans increases the money supply by a dollar, banks are not financial intermediaries; they are money creators.

They should have looked at India’s monetary policy. We always had credit playing an important role in mon pol.

Further, govt should stop issuing bonds and instead borrow from banks:

In general, economic growth depends on an increasing number of transactions and an increasing amount of money to finance them. Banks provide that finance by extending more credit, the impact of which depends on who receives it. Bank credit for GDP transactions affects nominal GDP, while bank credit for investment in the production of goods and services delivers non-inflationary growth.

The problem lies in bank credit-for-asset transactions, which often generate boom-bust cycles. By extending too much of this type of credit, banks pump up asset prices to unsustainable levels. When credit inevitably slows, prices collapse. As the late-coming speculators go bankrupt, the share of non-performing loans on banks’ balance sheets rises, forcing banks to reduce credit further. It takes only a 10% decline in banks’ asset values to bankrupt the banking system.

With an understanding of this process, policymakers can take steps to avert future banking crises and resolve post-crisis recessions more effectively. For starters, they should restrict bank credit for transactions that do not contribute to GDP.

Moreover, in the event of a crisis, central banks should purchase non-performing assets from banks at face value, completely restoring banks’ balance sheets, in exchange for an obligation to submit to credit monitoring. Given that no new money would be injected into the rest of the economy, this process – which the US Federal Reserve undertook in 2008 – would not generate inflation.

In order to stimulate productive bank credit – and boost the effectiveness of fiscal policy – governments should stop issuing bonds, and instead borrow from banks through loan contracts, often available at lower rates than bond yields. This would bolster bank credit and stimulate demand, employment, GDP, and tax revenues.

Some lessons from history:

During the Great Depression of the 1930s, Michael Unterguggenberger, the mayor of the Tyrolean town of Wörgl, performed an experiment. In order to reduce unemployment and complete much-needed public-works projects, he hired workers and paid them with “work receipts” that could be used to pay local taxes. With the local authority effectively issuing money for work performed, the local economy boomed.

The central bank, however, was not pleased, and decided to assert its monopoly over currency issuance, forcing Unterguggenberger to scrap the local public money and causing Wörgl to fall back into depression. Some 80 years later, the English city of Hull has begun to implement a similar scheme, using a digital crypto-currency that is, so far, not prohibited by law.

The unfettered creation of money by large private banks has generated overwhelming instability, undermining the fundamental principle that money creation should serve the public good. This does not have to be the case. By implementing safeguards that ensure that credit serves productive and public purposes, policymakers can achieve debt-free, stable, and sustainable economic growth.

Broadly the idea is the same. Throw the money at the economy. Just that agency throwing it can differ. It can be govt., central banks or in this case as authors suggest banks can do the job better..

No new organisation to replace Plan Com, please..

August 21, 2014

Prof R. Vaidyanathan of IIMB makes a case for not having a replacement for Plan Com.

His idea is simple:

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RIP Planning Commission….. Was Plan Com not central to the policymaking since the mid-1960s?

August 21, 2014

Nitin Desai has this piece in BS where he bids adieu to Plan Com. The website is still functional and will be interesting if it is archived in similar manner as PMO’s twitter account. If it is indeed archived,  it is something the outgoing political party will just not like  but the ruling party will surely like. Also whether Yojana Bhawan will remain/converted into a museum?

So what does Mr. Desai say? He says PC played a crucial role in 1950s and 1960s:

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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.

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