Archive for August 20th, 2009

Stiglitz view on Capital Account Liberalisation

August 20, 2009

Stigilitz opposition on capital market liberalisation for developing economies is well known. Here is a oldish research paper where he explains his view. Good stuff.


Am not sure how many people have seen Stiglitz’s website. The number of economics subjects he covers is just amazing. Within each subject he has equally amazing number of papers. He is easily the Hercules of Economics. WSJ Blog points his CV runs in 58 pages!!

Why India is not in a crisis despite high debt levels?

August 20, 2009

I was just reading this excellent paper by Ricardo Hausmann and Catriona Purfield on politicaleconomy of India’s fiscal deficit (HT: This IMF paper whose reference list led me to this paper). The paper was written in 2004 and looks at India’s FRBM architecture.

Its main suggestion is that as India is a federal country, Indian states need to join the FRBM as well in order to make it more meaningful. As the same IMF paperpoints only 2 states (West Bengal and Sikkim) have not adopted some version of FRBMand rest have joined in. His other suggestion is to have a central scorecard-keeper (just like CBO) tracking govt’s deficits and reporting the developments.

However what I like most about this paper is an answer to a puzzle which has been bugging me for a while now- Why are we so less concerned about fiscal deficits in India? Why and how India has avoided a crisis till now?  It was vouched as the biggest reform in India in 2000s but has hardly moved forward. Shankar Acharya, a noted Indian economist in his review of Indian economy post 2000s says:


Budget Gimmcks: Any difference between US and India?

August 20, 2009

PFM Blog has another useful post on the budget gimmicks in US. The post informs about a paper on the same by Cheryl D. Block, Law Professor at Washington University in St Louis.

Budget Gimmicks is about presenting budget information and (hopefully) not getting caught. Despite increasingly sophisticated modeling techniques, budget forecasters are of course always subject to sometimes getting the numbers for future years wrong, just because the future is inherently uncertain. Forecasters will get it wrong even without deliberate attempts to manipulate or deceive. In some cases though, and surely not only in the US, deliberate manipulation of numbers or other budget tricks are used in pursuit of a particular political agenda.

In the US the reason is perhaps that taxpayers and the politicians who represent them suffer from the same budget pathology, namely they want to increase spending for favored government programs, decrease tax burdens, and also achieve a budget surplus. That trinity of objectives is hard to attain, even in the most favorable economic circumstances. Budget gimmicks can help us convince ourselves that “one can have one’s cake and eat it”.

Impossible trinity of public finances!! As I explained in my papers on impossible trinity (here and here) that despite the name it is being managed. Though unlike  the case for public finances where gimmicks are used to manage impossible trinity, the monetary version of impossible trinity is because of certain compulsions faced by policymakers.

Google serach led me to the paper by Block. The abstract points to 3 kinds of budget gimmicks:

This chapter seeks to explain and highlight the most prevalent budget games. It classifies budget gimmicks as falling into three general categories: 1) games with numbers; 2) games with timing; and 3) procedural gimmicks.

The first category involves manipulation of economic data or methodology used to estimate the cost or “score” for proposed legislation as well as the economic “baseline” used to project increases or decreases in revenue that would result from enacting such legislation. Although there can be reasonable differences of opinion regarding such economic assumptions and methodologies, the budget process offers temptations to pick and choose the economic data or methodology that portrays legislative proposals in the best budgetary light or to suggest inconsistent use of such data or methodologies in pursuit of a particular political agenda.

Timing gimmicks, on the other hand, involve manipulation of the budget year in which projected revenue increases or savings are reported. One such potential game is manipulation of the “budget window.” Revenue estimates over a five-year period will look very different from those reported over ten-years. Timing gimmicks also include the use of delayed payments, accelerated receipts, and phased-in or expiring statutory provisions designed largely or solely for purposes of “budget appearances.”

Finally, the chapter looks at the increasing use of “reconciliation bills” for tax and other budget-related legislation. The optional budget reconciliation procedure, originally designed for deficit control, offers opportunities to include controversial provisions, often including major tax cuts, in legislation subject to debate under streamlined, limited-debate procedural rules accompanied by rigid numeric requirements regarding revenue to be raised or saved.

Governments are same everywhere it seems. This is just like reading India’s case or any other economy. I have had discussions with quite a few people on the Indian Budget. It is difficult to reconcile the figures across statements. And one often sees overestimating growth and tax revenue potential and underestimating expenditure growth.

The spirit of controlling and managing Public Finances is as critical than the action. Only the government knows the true nature of the finances and should disclose it properly.

The paper is too tempting for an immediate read.

Difference between East Asian 1997 Crisis and East Europe 2008 crisis

August 20, 2009

Ajai Chopra of IMF has a superb post comparing the East Asian Crisis 1997 and East Europe Crisis 2008.

When the global financial crisis spread to emerging Europe in the last quarter of 2008, memories of the Asian crisis of the late 1990s sprang back to life. Would emerging Europe face the same chaotic currency depreciations, mass defaults of banks and companies, double-digit output losses and social unrest that beset many Asian countries back then? 

Nine months into the crisis, it is clear that emerging Europe as a whole is not following Asia’s script. But it is also clear that the crisis is evolving differently across countries. 

The Baltic countries (Estonia, Latvia and Lithuania) are suffering output declines that already exceed those of the Asian crisis (see chart below). 

By contrast, a milder version of the crisis is unfolding in central Europe (by which I mean the Czech Republic, Hungary and Poland, commonly referred to as the CE3) despite a much deeper global downturn than what we saw during the Asian crisis.

He then explains why Baltics have declined sharper than CE3 (better macro fundamentals what else) and how CE3 were saved (floating exchange rates, west Europe banks continued with credit lines, external assistance).

It gives you a snapshot on East Europe economies in one go.

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