Archive for October 11th, 2007

Revisiting Employment situation in India

October 11, 2007

Dr. C. Rangarajan and his team in Prime Minister’s Economic Advisory Council have written a paper on India’s (un) employment situation. I had expressed my frustration earlierthat EAC in its outlook has not expressed anything on unemployment situation especially after reading this paper from Jeemol Unni et al.

Finally we have some analysis on the topic from the team. The findings are largely similar to what Unni et al said which is Although employment has risen in the country, the increase has happened in informal sector and agriculture.

NSS (61 round) survey….. shows a reversal of the declining trend in employment growth rate which increased from an annual 0.98 per cent in the period 1993-94 to 1999-00 to 2.89 per cent in the period 1999-2000 to 2004-05. Interestingly there was also a sharp acceleration in the rate of growth of labour force from 1.03 per cent to 2.93 per cent.

This unprecedented growth in labour force is above the population growth rate…But the real story is:

However the Survey and the projections indicate that a large proportion of the increase in employment is happening in the informal sector and agriculture. This trend is a cause for concern as the relatively low wages and lack of social security here translate into the phenomenon of ‘working poor’ i.e. workers in the BPL households. The new challenge is one of improving the total factor productivity in the informal sector and in agriculture so that there is a significant improvement in the emoluments of those who are employed, that is, in the quality of employment.

The paper analyses the trends in detail but does not offer enough suggestions on how best can we avoid this low skill employment. In other words, how can we move people to more value add jobs in manufacturing and services.

The problem is quite a difficult one to address. Paper by Rajan et al saysIndia has so far focused at capital intensive industry. Hence agri/low skilled labour could not migrate as capital intensive sector needs some skills.

However, all is not lost as some people are looking at solutions. Arvind Panagriya offers his advice on transforming India. Keep watching this space for further developments.

Mervyn King defends

October 11, 2007

Most commentators (including me) had criticised the Bank of England move (here and here) to provide help to Northern Rock and the financial system in the current turmoil.

Mervyn King, Governor of BoE has given a speech explaining the move.

 First his analysis on why did this crisis take place? The savings in emerging marklets increased (after South East Asian crisis) and this led to low interest rates worldwide (supply of savings increases implies interest rates fall) . As interest rates remained low for a while, the investors started to search for high yields which meant complex products and finally the fall. He refers (does not mention it though) to BNP Paribas stating in its press release that it can’t value the funds it was running.

Then he goes on to say what went wrong with Northern Rock and how BoE offered help.

First, we did our routine work in the money markets of lending to the banking system against high quality collateral, such as government debt, and at Bank Rate set each month by the Monetary Policy Committee.

We were, however, pressed to do more than our routine job and to lend in exchange for other collateral, including the financial assets for which the markets had virtually closed. Banks, in particular, said they wanted us to help them turn illiquid assets into cash.

Well, it seems there was a lot of pressure. So BoE extended liquidity only at a penalty rate to reduce moral hazard.

The problem was not with the help, the problem was that King always mentioned no help would come from BoE in this crisis.

He takes a dig at Larry Summers comment:

Some commentators have taken issue with these concerns about moral hazard, arguing, by analogy, that fire departments put out fires started by people who smoke in bed. I agree that we have fire services to do precisely that. And if a fire starts in the financial system, the central bank will put it out if it threatens to spread. But fire services do not offer free insurance for people who smoke in bed or set fire to their own house, thereby encouraging them to take risks that endanger others.

Summary: Summers does not believe in Moral Hazard, but King does.

He explains how cases of Northern Rock and Countrywide (a US home mortgage company) were different. Latter could rescue itself as its deposits were well insured and US itself has a well developed insurance scheme for depositors.

What are his lessos?

1) Bank Regulation should focus on liquidity as well. So far the focus is on capital not liquidity. Superb insight. Economist also points this aspect.

2) Authorities in UK should be allowed to pre-emptively take action in case of Banks (it is allowed in US)

3) Central banks should operate as lenders of last resort.

Then he discusses Bank of England stance on inflation, economy etc.

Excellent speech from King. Highly recommended reading, 

Assorted Links

October 11, 2007

1. TTR says biggest factor in the improved performance of the Indian economy is the increase in savings and investment rates. He also has a nice point about to changing fashion in bank regulation.

2. MR pointsthat this year’s Physics Nobel Prize is what has led to devices like i-pod.

3. WSJ Blog points to a speech from Boston Fed President who says sub-prime lending should continue.

4. New Economist points to new book on Economics and Psychology.

5. Mankiw points to a useful service from Cleveland Fed.

6. EPSA Blog onB’Desh paradox.

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