20 years of Euro: a glass half-full or half-empty?

January 21, 2019

My new piece in moneycontrol.



Examining the trade-off between price and financial stability in India

January 21, 2019

Ila Patnaik, Shalini Mittal and Radhika Pandey of NIPFP in this recent paper find trade off between price and fin stability:

In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis,
there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical
approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and
financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial
stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging
economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with
monetary policy instrument.


Turkey’s central bank pays early interim dividend…

January 21, 2019

Turkey’s central bank pays an early dividend worth 33.7 billion Lira (HT: Centralbanking.com).

Apparently, the dividends are paid annually in April as per the law. But the law was amended to allow an interim dividend..



How and why did we start collecting economics statistics (such as inflation, GDP etc.): Case of US

January 21, 2019

A really nice paper by Prof Hugh Rockoff of Rutgers Univ.

He discusses an area which is seldom discussed in economic research which is origins of statistics/data which help us understand the trends in an economy. How and why did we start collecting data on things like inflation, employment and output? He discusses the US case:

Although attempts to measure trends in prices, output, and employment can be traced back for centuries, in the main the origins of the U.S. federal statistics are to be found in bitter debates over economic policy, ultimately debates over the distribution of income, at the end of the nineteenth century and during the world wars and Great Depression. Participants in those debates hoped that statistics that were widely accepted as nonpolitical and accurate would prove that their grievances were just and provide support for the policies they advocated.

Economists – including luminaries such as Irving Fisher, Wesley C. Mitchell, and Simon Kuznets – responded by developing the methodology for computing index numbers and estimates of national income. Initially, individuals and private organizations provided these statistics, but by the end of WWII the federal government had taken over the role. Here I briefly describe the cases of prices, GDP, and unemployment.

Most of the time the origins of these stats was due to some or the other crisis. How some people (economists/statisticians) responded to calls from the polity to develop these numbers is quite a story…

Central Bank of Brazil looks through its 54 year histiry

January 21, 2019

Nice bit from the Central Bank. It is all in Portuguese so do press the translate option.

The Central Bank of Brazil is more than 50 years old. The conduct of oral interviews with personalities who contributed to its construction is part of the memory of this institution, which is so closely linked to the economic trajectory of the country.

The interviews allowed not only a tour of history, but also to experience the crises, conflicts, choices made and the opinions of those who gave a period of their lives for the construction of Brazil. At the same time, they constitute complementary material to traditional historical sources.

The set of statements clearly demonstrates the process of building the Central Bank as a state institution, persistent in fulfilling its mission. The concern with the construction of an organization with technical profile pervades all the interviewees. At the same time that they were building the structure, they sought to adopt the necessary economic policy measures to achieve their mission.

Our expectation with the publication of these interviews is to contribute with a better understanding about the evolution of the Institution and its performance and stimulate the search for knowledge about the economic history of the country and about how the Central Bank pursues its objectives of guaranteeing the stability of the power of purchase of the currency and the soundness and efficiency of the financial system.

One just gets profiles of the interviewed personalities in English. The interviews remain in Portuguese and one hopes the central bank translates them to share it with the wider audience.



Gross National Happiness and Macroeconomic Indicators in the Kingdom of Bhutan

January 18, 2019

Sriram Balasubramanian (World Bank) and Paul Cashin (IMF) in this interesting paper:

This paper examines the origins and use of the concept of Gross National Happiness (or subjective well-being) in the Kingdom of Bhutan, and the relationship between measured well-being and macroeconomic indicators. While there are only a few national surveys of Gross National Happiness in Bhutan, the concept has been used to guide public policymaking for the country’s various Five-Year Plans. Consistent with the Easterlin Paradox, available evidence indicates that Bhutan’s rapid increase in national income is only weakly associated with increases in measured levels of well-being. It will be important for Bhutan to undertake more frequent Gross National Happiness surveys and evaluations, to better build evidence for comovement of well-being and macroeconomic concepts such as real national income.

Some history:

The most important element of the Bhutanese model of development has been the concept of Gross National Happiness (GNH), and the GNH index and tool which has been formulated alongside this philosophy. GNH was in Bhutan in 1972 by the Fourth King of Bhutan, Jigme Singhye Wangchuk, the father of the current king, Jigme Khesar Namgyel Wangchuck (see Government of Bhutan, 2015). He declared that “Gross National Happiness is more important than Gross Domestic Product”. The King had envisioned an economic development model which was based on the tenets of Buddhist philosophy and holistic development, which had its core functions preserving the environment and emphasizing the role of happiness and collective well-being in the lives of people.

This emphasis on happiness was to override the role of monetary incomes which was at the heart of the GDP driven global development model. With assistance from international organizations and bilateral development partners, the government also incorporated major development related
issues into its agenda such as sustainability, climate change and inequality. While GNH has evolved over time, in its quest to stay relevant, the role of GDP in Bhutan has also changed through the years. In the decades of the 1980s and 1990s, GDP was primarily used as a tool for Bhutan’s financial indicators and as a benchmark for access to international grants and loans from multilateral agencies. Even though publicly the primacy of GNH is being advocated by Bhutan, GDP measurements have thus also played a substantive role in the country’s development.

In this context, this paper will look at the relationship between the evolution of GNH and the evolution of GDP and other macroeconomic indicators.

Should read the whole thing..

India’s Corporate Bond Market: Issues in Market Microstructure

January 17, 2019

Nice piece by Shromona Ganguly of  RBI in the January Monthly Bulletin.

Development of corporate bond market in India remains crucial for meeting the financing requirement of industry and infrastructure sector. Despite various initiatives undertaken in the past, there is little change in the overall market microstructure of the corporate bond market in India. At this backdrop, this article explores the available statistics on corporate bond market in India during recent times (2010-18) to analyse the various demand and supply side factors, which impede the growth of corporate bond market in India. It is found that the gradual increase in proportion of market-based sources in total debt financing by non-financial companies is confined only to the larger-sized firms. Though finance and infrastructure companies dominate the corporate bond market, mutual funds are playing an important role in diversifying the issuance base of the market. Empirical analysis suggests significantly higher risk-premia associated with lower-rated bonds in the private placement market.

Economics helps explain why suicide is more common among Protestants…

January 16, 2019

Profs Sascha Becker (Univ of Warwick) and Ludger Woessmann (Univ of Munich) in this piece:

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Brexit: Blame it on the 2008 banking crisis

January 16, 2019

Prof Nicholas Crafts of Univ of Warwick:

Brexit in 2019 and the banking crisis in 2007 to 2009 are usually seen as unrelated events. This column argues that they are in fact closely connected. The austerity policies embarked on in response to the fiscal damage resulting from the banking crisis triggered the protest votes of left-behind voters, which at the margin allowed Leave to win the referendum vote. The implication is that the economic costs of the banking crisis are much larger than is usually supposed.


International remittance through block chain technology: Case of Pakistan

January 16, 2019

Interesting to note that State Bank of Pakistan (their central bank) is promoting international remittances to Pakistan through blockchain technology.

SBP Governor Tariq Bajwa remarked on the inaugural ceremony:

1. It is indeed very exciting for me to launch this initiative by Telenor Pakistan that would enable the transfer of cross border remittances using BlockChain
technology in near real time. This would bring convenience and efficiency for both remitters and their beneficiaries. For this, I would like to congratulate
ANT Financial, Telenor Microfinance Bank and other key stakeholders such as Standard Chartered Bank for being the pioneers in the adoption of new
technologies for providing a payment solution, which many other market players have only been thinking of. This puts Pakistan on the map of few
countries in the world that have launched International Remittance using Block Chain Technology.

2. Though this initiative, Valyou in Malaysia and Easypaisa in Pakistan will facilitate cross-border remittance service through e-wallet platforms, which is
based on block chain technology developed by Alipay, a subsidiary of ANT Financial. This block chain based wallet-to-wallet remittance service provides
instant and secure way for Pakistani emigrants to transfer money from Malaysia to Pakistan and will significantly improve the current amount of USD
1 billion received from Malaysia in home remittances.

Remittances play a crucial role in Pakistan: and are equal to 6% of GDP:

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Vijaya Bank Merger: Protests over losing history and community identity

January 15, 2019

The Government recently cleared the merger of three public sector banks: Vijaya Bank and Dena Bank with Bank of Baroda. As per the share exchange ratio, the Bank of Baroda will issue 110 shares of Rs 2 each for every 1000 shares of Dena Bank and 402 shares of Rs 2 each for every 1000 shares of Vijaya Bank.

The merger announcement has led to discussions over viability of the merger. Bank of Baroda and Dena Bank have been under RBI’s Prompt Corrective Action framework on account of high NPAs and losses. Thus, people have questioned why two loss making banks have been merged with profitable Vijaya Bank?

Given the financials aside, the choice of Vijaya Bank has hurt emotions in a certain corner of Southern India.  The concerned corner is city of Mangalore on the western coast of Karnataka (see this as well)

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Reflections from a Nobel winner: Scientists need time to make discoveries

January 15, 2019

Nice piece from Prof Donna Strickland  of University of Waterloo who received the Physics Nobel for 2018:

In many cases, the practical applications lag several years or even decades behind the original findings.

Albert Einstein created the equations for the laser in 1917, but wasn’t until 1960 that Theodore Maiman first demonstrated the laser. Isidor Rabi first measured nuclear magnetic resonance in 1938. He received the Nobel Prize for Physics in 1944 for his research, which led to the invention of magnetic resonance imaging, or MRI. The first MRI exam on a human patient took place in 1977.

Certainly, applications deserve a lot of attention. Before you can get to them though, researchers first have to understand the basic questions behind them.

The term fundamental science may give some the false impression that it doesn’t really affect their lives because it seems far removed from anything relatable to them. What’s more, the term basic has the non-scientific definition of simple that undermines its importance in the context of basic science.

We must give scientists the opportunity through funding and time to pursue curiosity-based, long-term, basic-science research. Work that does not have direct ramifications for industry or our economy is also worthy. There’s no telling what can come from supporting a curious mind trying to discover something new.

Perhaps applies to all subjects…

Remembering CD Deshmukh on his 123rd Birth Anniversary…

January 15, 2019

Nice tribute from Remya Nair:

In 1943, the Reserve Bank of India got its first Indian governor in Chintaman Dwarkanath Deshmukh, a civil servant luminary who went on to do a great many things for the country in the early years after Independence.

Deshmukh’s appointment to the independent regulatory body came at a time when India was ruled by the British, and predictably in the face of opposition from various sections of the government who wanted the tradition of a European helming the central bank to continue.

But he battled all these odds to become the third governor of RBI.

What worked in his favour was his long association with the bank. Deshmukh was appointed as a government director on the bank’s board and subsequently held the posts of secretary and deputy governor before being elevated to become a governor.

His association with the central bank did not cease after he demitted the Governor’s office in 1949. Deshmukh was later appointed as the union finance minister marking a 17-year long association with the central bank.

On his 123rd birth anniversary, ThePrint takes a look at the life of the civil servant who served the country in various capacities.

We need more and more biographies of people like Mr Deshmukh…

Italy’s writing on the wall

January 14, 2019

Prof Harold James in this piece:

It is often said that Italy’s divergence from the rest of Europe (in terms of per capita income) started either with the ratification of the Maastricht Treaty in 1993 or with the adoption of the euro in 1999. But this chronology masks a more profound transformation in modern Italy. The early 1990s, after all, is also when the old Italian two-party system disintegrated, with both the center-right Christian Democrats and the center-left Socialists succumbing to the Tangentopoli (Kickback City) corruption scandal.

Behind the headlines about corruption was the fact that older ideas about shared responsibility no longer applied. Thus, the dissolution of Italy’s two main parties led to even more – and more institutionalized – corruption, embodied by former Prime Minister Silvio Berlusconi. A real-estate developer cum entertainment and media tycoon, Berlusconi combined the spectacle of serial infidelity and glamorous young women with a populist politics based on tax cuts and sympathy toward autocratic petro-states like Russia. Berlusconi’s political style – a combination of buffoonish narcissism and unbridled venality – was Trumpism avant la lettre.

Italy’s political revolution was due not to chance, but to specific social developments dating back to what Italians call the “Years of Lead” of the 1970s. That period and its implications for the present are the subjects of Edoardo Albinati’s long, meandering, but stunningly successful novel La scuola cattolica, which will be published in English this year.

Albinati combines pointillist description with far-reaching social analysis. As a former prison teacher in Rome, he is able to draw on a wealth of first-hand encounters with a wide cross-section of Italian society. In fact, the novel is semi-autobiographical, because it revolves around the 1975 “Circeo Massacre,” a brutal rape and murder that involved some of the author’s upper-middle-class schoolmates.

Albinati uses this shocking historical episode to analyze the disintegration of the Italian bourgeoisie and the decline of traditional religion. His is a story about the uselessness of men in modern society. For most of human history, men’s superior physical strength, aggression, and prowess in combat translated into unchallenged social and political dominance. But in the new world of office politics, those with creativity and the ability to navigate complex social relations have the upper hand.

This profound social transformation left men feeling constantly under attack, as well as desperate to demonstrate their masculinity. Having grown up with the social privileges of the post-war era, they found themselves suddenly condemned to irrelevance – a useless gender, comparable, in Albinati’s telling, to a lizard’s tail that twitches for some time after being severed. Many reacted with rage and violence. Some sought the community of neo-fascist movements channeling an aggressive form of masculinity, while others joined far-left groups with their own cults of violence.

In the world Albinati describes, money assumes a special importance. The extension of new freedoms to a wider class of people suggests that anything is possible, but only if one has the means. Albinati admits, grudgingly, that the “spores of Marxism” have led him to this conclusion. But it is nonetheless inescapable: money creates the illusion of more freedom, and thus increasingly has come to define the modern world. Though Albinati’s novel is set in Italy, that world is its subject, leaving open the question of whether there can be any escape from the unchecked pursuit of personal gain that underlies today’s prevailing social and political malaise.

The Roman Empire was unsalvageable after its fall, and it took the Italian Peninsula almost a thousand years to rediscover its classical heritage. Albinati’s message, which deserves to be taken seriously, is that to bring about a new Renaissance today will require demystifying the cult of freedom and strengthening norms of shared responsibility in politics, economics, and social life.

Cleaning up Indonesia’s Citarum river dubbed as ‘the world’s dirtiest river’…

January 11, 2019

Interesting and disturbing piece. How humans across the world have polluted rivers so extensively and now are making dire efforts to revive these rivers.

The piece on Indonesia’s Citarum river is no different..

Will SEBI celebrate its 40th birthday? Reflecting on its silent transformations

January 11, 2019

This post is coauthored with my colleague Prof Parag Patel of Ahmedabad University.


Many a times, transformations begin with small words and little attention. Such is the case of Securities Exchange Board of India (SEBI) which started in 1988 amidst high political and financial turbulence, but gradually took control and shaped Indian capital markets like never before.

As SEBI turned 30 in 2018, we should reflect on its amazing journey, both by drawing lessons from its history and suggesting a way going forward. Post-1991, we have made tremendous progress in financial markets but role of SEBI has been largely unnoticed and underappreciated.

First some history. On 28th February, 1987, Rajiv Gandhi who was doubling as both Prime Minister and Finance Minister in his budget speech proposed establishing a regulator for securities markets:

“The capital markets in India have shown tremendous growth in the last few years. Approvals for capital issues have exceeded Rs.5,000 crores in 1986-87. They were only about Rs.500 crores in 1980-81. For a healthy growth of capital markets, investors’ rights must be fully protected. Trading malpractices must be prevented. Government have decided to set up a separate Board for the regulation and orderly functioning of Stock Exchanges and the securities industry.”

What must have read as another budget promise, was going to turn out to be a change agent. The Finance Minister would himself have not realized that this was about to change the landscape of Indian financial markets forever.

A year later, on 29 Feb 1988, then FM ND Tiwari in subsequent Budget speech added that “Necessary legislation in this regard is under preparation and the Board is expected to become operational soon.” Eventually, SEBI was formed in 1988 as a non-statutory body for regulating the capital markets.  It took four years for SEBI to get statutory status which was accorded by then FM Manmohan Singh in his landmark Budget speech on 24 July 1991.

SEBI started with a three-fold mandate. First was protection of interest of investors which was shaken during the 1992 scam. Second was development of securities markets which is interesting as India was home to several regional stock exchanges including the oldest in Bombay in 1875. However, the opportunities to invest were limited to a few people and funds available to a few companies. Both ownership and investment had to be made accessible to a larger pool. Third, was obviously regulation of securities markets. The Indian markets so far were governed by Controller of Capital Issues which was seen as inadequate and cumbersome and done away with as specified in the 1991 Budget above.

The timing of starting SEBI could not have been worse as the country was going through high political uncertainty and was about to witness an economic crisis coupled with a major scam in equity markets. However, one could take this more positively as crisis provides a steep learning curve. Fortunately, both the Government and SEBI took the second option. What we saw in the next two and a half decades is nothing short of extraordinary. The IPO pool has been widened to a large set of companies, small investors have much more opportunities to invest in capital markets especially via the mutual fund route, foreign investor participation has increased manifold and so on. SEBI also had a unique structure wherein it was given judicial powers as well. SEBI Act also went through multifold changes since inception.

Realising the strong control of Bombay Stock Exchange on Indian equity markets, the Government and SEBI first decided to break this monopoly. They nurtured National Stock Exchange (NSE) in 1993 which was demutualized and used state of the art technology right at inception. The regulator is often criticized for favoring NSE over other exchanges but the times demanded a stern action else all would be lost. NSE over the years has not just used best global best practices but has itself become a global benchmark in many parameters.

This was followed by action across all aspects of capital markets from trading to settlements to investments to corporate governance and so on. The trading and settlement cycle has been brought down from t+5 to t+2, all the trading has moved to screen based providing both transparency and investor comfort, ensuring retail participation in IPOs etc. One of the biggest changes have been the way mutual funds have been marketed to small investors allowing them to participate and diversify their savings. Equally important has been the way we moved from a paper based share system to an electronic demat system. The role of NSDL was also central to this transition.

One of the best moments in history of Indian capital markets was seen during the 2008 crisis. The crisis saw a few regulators in developed countries ban short-selling of stocks. SEBI which had just turned 20 showed remarkable and confidence and did not execute any such bans despite pressure from markets. This strategy of developing markets yet allowing markets to find their own trajectory is perhaps the best way to sum the tenure of the regulator.

The agenda is not to keep listing SEBI’s achievements. Instead, we need to learn how institutions develop and shape behaviors overtime. Late Douglass North, Nobel laureate in economics, defined institutions as humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights).

SEBI has clearly contributed in shaping both formal rules and informal constraints in Indian securities markets. Yet, it remains the unsung hero of India’s reform story since 1991. How else does one explain that there has been barely any coverage of the institution touching this milestone of 30 years? This is a kind of history which should not just be reflected upon (time & again) but also told across the world. It is not very often that a developing country builds a world class institution for the world to emulate. SEBI is clearly in that league.

We also need to reflect on SEBI’s future going ahead as perhaps it will not celebrate its 40th year. The FSLRC and India Finance Code has recommended merging SEBI with all three other financial regulators (SEBI, FMC, IRDA and PFRDA) into a new unified agency. The idea is that a unified regulator will cover the gaps which exist in current financial product space where insurance funds can be sold as investment products and vice –versa.

We do not know the current status of FSLRC but its suggestions have been implemented in piece-meal form. RBI has adopted inflation targeting regime and devolved the powers of setting interest rates from RBI Governor to a Monetary Policy Committee. SEBI and FMC (Forward Markets Commission) have already been merged. We have to wait and watch whether the higher authorities do go ahead and merge all the four regulators into one single agency or not. Given SEBI’s success, we could even merge the remaining two with SEBI but this will require fighting turf wars and political capital.

Till then, let us step back and congratulate SEBI for its achievements and shaping Indian equity markets. We could obviously also make a case of SEBI’s misses and argue for its glass being half empty. Even then, the achievements in glass half full needs to be complemented and appreciated..

A Reflection on the 50th Anniversary of Hardin’s Tragedy of the Commons: What about digital commons?

January 11, 2019

Interesting paper by Frank Nagle of HBS.

On the 50th anniversary of Garrett Hardin’s “The Tragedy of the Commons,” this article considers the benefits and potential downsides of the digital commons, which emerged well after Hardin wrote his seminal article. Unlike the physical world Hardin wrote about, the digital world is essentially infinitely abundant, which leads to a very different tragedy and many new opportunities.


In particular, as the digital commons leads to more firms structured as platforms whose business models result in the gamification or leisurification of work, people are increasingly doing work without getting paid for it (or at least getting massively underpaid). A deeper understanding of this phenomenon may
help to explain puzzles related to wage inequality and the wealth gap, which could inform regulatory policies to help better address these concerns. Relatedly, as value creation, innovation, and production increasingly move outside the boundaries of the firm, the role of firms in society may begin to change. Given that firms have provided the social safety net (healthcare, retirement, etc.) in the United States for the last century, policies will need to address the increasing number of people that are not directly employed by a firm and therefore have no firm provided safety net. Similar questions could arise as to the functions
of government and financial systems in the face of the opportunities the digital commons presents for true democratization of traditional institutions. However, such a society would still need policies to protect individual citizens from being exploited. 


Agricultural Loan Waiver: A Case Study of Tamil Nadu’s Scheme

January 10, 2019

Deepa S. Raj and Edwin Prabu of RBI have this interesting and timely paper:

This paper examines the impact and implications of Tamil Nadu’s agricultural loan waiver scheme of 2016, based on data collected through a field survey of seven districts of the state as well as farm loan transactions data obtained from select primary agricultural co-operative credit societies. The state government’s loan waiver scheme was applicable only to agricultural loans availed by small and marginal farmers, while other farmers with land holdings of above 5 acres were not eligible for the waiver benefit.

Empirical findings using Regression Discontinuity Design (RDD) suggest that in the immediate post-waiver period near the cut-off acreage of 5 acres, the probability of obtaining credit was higher for non-beneficiary farmers than for beneficiary farmers. However, the differentiation in post-waiver access to credit to the beneficiary farmer and the non-beneficiary farmer comes down as the supply of funds for agricultural loans normalises.

The paper also has a summary of the previous debt waiver schemes and their impact….

Why Adam Smith favoured public education?

January 10, 2019

Prof Alex Thomas of APU in this piece says Smith was hardly a one idea or one phrase economist. His canvas was much wider than believed:

The authority of Adam Smith is frequently invoked by supporters of the free market, who argue for extending the market forces to all conceivable goods and services and eliminating any kind of government intervention in markets. However, Smith’s The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations make it clear that he was not a laissez faire or free market capitalism apologist.

Smith favoured liberal capitalism over the extant socio-economic arrangement (elements of feudalism and mercantilism). While feudalism was characterised by the rule of the nobility/landowners, mercantilism was characterised by state monopoly over trade. The East India Company was an example of the latter. It is in this historical context that Smith called for the state to withdraw its monopolistic interventions in both external and internal commerce.

Contrary to public opinion, Smith presupposed the government provision of legal infrastructure, defence, transport infrastructure and education for the proper functioning of liberal capitalism. For him, the responsibility of providing institutions “for promoting the instruction of the people” is one of the chief duties of the state. The state, he said, must undertake this responsibility just as it accepts responsibility “for protecting society from the violence and invasion of other independent societies”.

The appropriators of Smith also forget his telling commentary on the role of power in society. One aspect of this relates to the power employers have over workers. The second aspect relates to the inequality of power, expressed in the form of status and ranks.

Modern appropriators of Smith also make abundant use of the “invisible hand” metaphor. But Smith used this metaphor only once in Wealth of Nations, and twice in his other writings in different contexts.

His views on public education:

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Should policymakers create towns artificially?

January 10, 2019

Alexandra L. Cermeño and Kerstin Enflo in this piece look at evidence from Swedish towns:

Urban growth is crucial for modernisation, and the wave of new towns in China since the 1980s is one example of a strategy employed by policymakers to encourage the process. This column analyses the long-run success of a town foundation policy in Sweden between 1570 and 1810. While the ‘artificially’ created towns failed to grow in the short term, they eventually began to grow and thrive, and today are as resilient as their medieval counterparts. 

We stress that credible coordination efforts based on investments may substitute for agglomeration economies and natural advantages when creating a new town, as long as any natural constraints to population growth have been removed. However, by demonstrating the initial failure of the town foundation policy, we underline the importance of overcoming any natural constraints to urban growth. Finally, and in relation to the debate about the Chinese ‘ghost towns’, our paper shows that ‘artificially’ founded towns may take time to thrive.

In light of our findings, and the examples of the Swedish kings, policymakers should consider how to signal to potential migrants and investors that they’ve committed to improving an area. Simultaneously, they must identify the potential constraints for growth in a post-industrial world. Finally, policymakers should be aware that their choices may trap populations in ‘sub-optimal’ locations for centuries.

Nevertheless, we note that the founded towns have persisted until today and appear neither better nor worse than their medieval counterparts in terms of long-run resilience. Thus, while kings may not be able to create towns that thrive, path-dependency forces certainly can. 


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