Archive for January 9th, 2008

Second Best Institutions work equally well

January 9, 2008

Reading Dani Rodrik’s work is like walking in windy conditions with wind direction not in your favor. The difference is he does it quite well where most stumble.

When most talk about free markets, he suggests the importance of industrial policy, when most talk about flexible exchange rates he suggests importance of undervalued exchange rates, when most talk about virtues of free trade he emphasises that social safety net is equally important, when most favor financial globalization, he is sceptical etc.

This time he talks about second best institutions, when most talk about getting best institutions (also called first best). He has written about the same few times in his blog and this time he writes a short paper on the same.

What does first best mean?

The type of institutional reform promoted by multilateral organizations such as the World Bank, IMF, or the World Trade Organization is heavily biased towards a best-practice model. It presumes it is possible to determine a unique set of appropriate institutional arrangements ex ante and views convergence towards those arrangements as inherently desirable. One of its apparent virtues is that it enables cross-national comparisons and benchmarking: institutional performance can be measured by, say, counting the number of days it takes to register a firm in different countries or settle a commercial dispute in courts.

And what are second best? 

I shall argue that dealing with the institutional landscape in developing economies requires a second-best mindset. In such settings, a focus on best-practice institutions not only creates blind spots, leading us to overlook reforms that might achieve the desired ends at lower cost, it can also backfire. I will elaborate on this point using illustrations from four areas: contract enforcement, entrepreneurship, trade openness, and macroeconomic stability.

Read on to understand his perspective in the four areas. The paper is bound to create controversy as most of his work does. I would be looking forward to application of his ideas.

However, whenever I read on development economics, this and this comes to my mind 🙂




Uncertainity about asset values may ultimately be worse than losses

January 9, 2008

Eric Rosengren of Boston Fed says so in his recent speech(WSJ Blog also covers the same).

It is a good talk on housing markets and draws experience from events in New England and Japan. He then applies the learnings from these events in the recent crisis.

He begins like this:

On your list of New Year’s resolutions, I would include not listening to pundits who claimed:

 1)  …that housing prices could not go down, nationally;
 2)  …that triple-A ratings meant no default risk;
 3)  …that calculating fair market value was easy for mortgage products.


Finance Ministry’s Working Paper series

January 9, 2008

Thanks to this article from Suman Bery I realised that Finance Ministry (of India) has started its working papers series.

The papers are available here. There are just two of them as of now. On a quick glance, both look quite good. The first one on services is a detailed analysis of the sector and second one from Arvind Virmani looks at the problems going ahead for Indian economy.

An excellent initiative from Finance Ministry to research and publish the papers. I hope to see more papers in future.

Another thing is it could have added the working paper link as a new feature at the top of the homepage. It would have led to better visibility.

1. Here is Planning Commission’s working paper series.

Assorted Links

January 9, 2008

1. WSJ Blog points to dispersion of views in Fed. It also pointsto speeches from Possner (of Philadelphia Fed) and Rosengren (of Boston Fed).

2. WSJ Blog also points to a new OECD report that says inflation has been rising in the 30 member countries. Its assorted links post is also quite good

3. MR points to number of foreclosures in counties. MR also says fiscal policy would not help in spurting the economy

4. Rodrik’s new paper

5. EPSA Blog on role of foreign aid.

6. TTR on anti-business textbooks in Europe. Interesting article. Mankiw also points to the same and provides a free link as well.

7. Menzie Chinn covers a few papers presented at AEA conference

8. Ajay Shah updates the critical appointments list

9. Suman Bery on Indian economy

10. Stigilitz warns of stagflation cometh.

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