Archive for March, 2010
It is pretty well know now that there were two periods of globalization/ financial globalization. First from 1870 to First World War and second from 1970 onwards. An interesting paper looks at whether the crisis problem was more severe now or then.
In another interesting paper, Moritz Schularik of University of Berlin shows the flows of capital flows in the two eras. Ideally, we would expect capital to flow from developed to developing. But this has not been true atleast in this era. Lucas pointed in his 1990 lecture – Why Doesn’t Capital Flow from Rich to Poor Countries? This was followed by huge research on the subject which looked at possible reasons. (See a summary here).
But What about the previous era? Did we see the same trend?Schularick answers the question in this paper:
In this paper we take a comparative look at the patterns of capital flows from rich to poor countries in two eras of financial globalization. The paper extends recent research on the developmental effects of international financial integration, long-term trends in capital mobility and ‘globalization in historical perspective’.
Analysing the patterns of international financial integration in the three decades of the classical gold standard and after 1990 we show that investment in developing countries was a central element of 19th century financial globalization, but plays only a minor role today.
The Lucas paradox of capital failing to flow from rich to poor has grown much stronger. In historical perspective, today’s financial globalization is marked by massive diversification flows between high-income economies and a relative marginalization of less-developed economies.
He adds that developed countries were indeed bankers to the world then and led to growth in emerging economies. The same evidence does not show now for the current period.
The paper has two other findings:
First, a secular increase in international financial integration has taken place in the course of the 20th century. Relative to world output, cross-border investments are considerably larger today than ever before. Yet, this increase has not been transmitted to developing countries. A long-term historical perspective on global investment patterns shows a relative disintegration of developing economies. So far, only mutual investments between rich countries have increased dramatically, rich–poor capital flows remain far below historical levels. In 1913, British investors had placed less of their foreign investments in France and Germany combined than in a country like Uruguay. Today, British investments in France are larger than all British emerging markets investments together.
Second, already a hundred years ago, investors found it more attractive to invest in rich economies than in poor countries. Nonetheless, different forces seem to be at work in both eras: back then, the wealth level of an economy was a much weaker predictor for the amount of capital inflows than today.
He adds financial globalization can deliver in this era as well, but for that capital flows have to goto developing/emerging economies.
Financial globalization is back, but with a very different face. The patterns of international investment in both ‘globalizations’ suggest that – atlooking at the hopes that were associated with the integration of poor countries into the global capital market the glass is half-empty rather than half-full.
The historical lesson that emerges from the comparison is that financial globalization can be and has been a benign force for development. However, the contemporary world economy has a long way to go to capture the potential benefits of international financial integration. These findings call for a better understanding of the circumstances under which large-scale development finance became possible in the first era of financial globalization. Financial history might have more important lessons to teach
Another exciting paper on eco history.
I was not aware that Canada is suffering from low productivity. Well, when most economists are singing praises of Canada’s banking system it is surprising to learn this development.
Mark Carney Governor of the Bank of Canada speaks on the issue of low productivity in Canada:
We have a problem: demographic drag will increase in coming years. As the boomer generation ages, labour force participation rates will decline and hours worked will fall. The question is merely one of degree. For some age groups, there is a possibility that participation rates will be higher than currently anticipated, particularly since participation rates of older workers have risen since 1996. Moreover, there is a role for policy to reduce further disincentives for participation in the labour market. Nevertheless, it will not be able to reverse longer-run demographic pressures.
We have a second, much bigger problem: our abysmal productivity record. Over the past decade, it has averaged a paltry 0.7 per cent, about half the rate recorded over the 1980-2000 period.
The combination of slower productivity growth and demographic shifts could well mean that the average rate of potential growth for the Canadian economy will be closer to 2 per cent going forward than the more than 3 per cent we enjoyed in the first half of the past decade and the latter half of the 1990s.
If this differential were to persist over a decade, the cumulative loss of income would be almost $30,000 for every Canadian. Given Canada’s demographic trends, the principal way to avoid this loss is by improving our productivity.
He looks at Bank of Canada research which has looked at decline in productivity:
I will sketch out three types of explanations based on the research done at the Bank of Canada and by many of you in this room.
First, measurement challenges for both output and prices in the resources and service sectors could explain some of the shortfall.
Second, lags associated with the economy’s adjustment process could be obscuring otherwise strong performance. These include:
- longer-tailed resource investments that require substantial upfront expenditures before natural resources can be turned into output, all the while drawing on more marginal reserves; and
- the large-scale restructuring of industries and the reallocation of capital and labour to new industries, which naturally dampen productivity as they take place.
Third, there appear to be deeper structural determinants that will require more concerted efforts on the part of business and government to address:
- Canada under-invests in machinery and equipment (M&E), training, and innovation–in fact, all of the underlying drivers of productivity.
- Canadian workers have about half the amount of information and communications technology (ICT) of their American counterparts. ICT capital has been linked to stronger multifactor productivity growth in many countries.
- With its highly educated workforce, flexible labour markets, and high rates of firm entry and exit, Canada appears to have all the ingredients needed to be an innovation leader. However, it is only 16th among the OECD countries in the intensity of business research and development.
- Our dismal multifactor productivity growth indicates that Canadian firms do not effectively use the capital that they purchase.
Some possible explanations for why we both under-invest and appear to use capital so poorly include:
- the wrong skills mix: Canada has a well-educated labour force but, perhaps as the structure of the economy shifts, not in the areas required;
- small firms: Compared with the United States, Canada has proportionately more small firms that are significantly less productive than large firms; and
- in particular, inadequate competition in some sectors, especially network industries that have spillovers throughout the economy, including telecommunications, electricity, and retail.
Productivity is at the centre of most growth stories. Be it company or country, decline in productivity is a recipe for disaster. What is also important is to understand the factors of productivity. As Krugman pointed out (via this paper), before the crisis it was believed and shown in research that US is more productive than US. But 50% of productivity difference was attributed to financial services sector. And after this crisis the advantage just vanished.
For analysing the crisis in Europe, it is useful to divide it into three kinds of regions.
ECB has an annual research digest which looks at key issues and the various ECB (and other) research on the same. It is issued in March of every year. I think they should make it more frequent. It is quite good and serves as a nice literature survey of the issues.
In the March 2010 issue, following topics are covered:
- The forgotten markets: how understanding money markets helps us to understand the financial crisis – Long quiescent and largely ignored by researchers, stress in money markets was central to the global fi nancial crisis. In this article, a number of important research insights into bank behaviour in a context of money market turmoil are reported, largely based on the work of ECB
staff. Some directions for future work to address pressing policy issues are explored.
- Bank lending standards and the origins and implications of the current banking crisis – This article analyses some contributing factors of the current fi nancial crisis, which was mainly originated by the accumulation of risks in banks’ loan portfolios. Once the bank risks materialised, banks reacted by tightening their lending standards, thereby reducing the supply of bank loans to the private sector for investment and consumption. This has been one of the factors contributing
to the economic downturn.
- Financial conditions and monetary policy – he global fi nancial crisis raised a number of novel questions concerning the most appropriate monetary policy response to fi nancial market developments. This article surveys a few ECB research papers which provide answers to some of these questions in the context of simple general equilibrium models.
- Incorporating financial frictions into new-generation macro models – Recent work extends the New Area Wide Model to include “fi nancial frictions” in housing and investment. This article describes the model, its data and simulation properties and shows that extending the model in this fashion offers additional perspectives of the reaction of the model to shocks.
All four are pretty topical. The last two issues in particular are going to be a big the hot topics going forward.
Economix Blog has a super post on how Chinese economy is making a comeback on its share in World GDP.
The chart above shows the percentage of the world’s economy contributed by China during the last two centuries. As you can see, China held a far bigger share of the world’s economy in 1820 than it does today. From the early 19th century until the mid-20th century, China’s share of global output fell steadily, troughing at about 4 percent of world G.D.P. in the 1960s.
The United States, on the other hand, constituted a mere pittance of world output in the early days of the republic, and then grew steadily up until the Great Depression. It shot up during World War II, and then began to decline and eventually flatten out over the subsequent decades.
How to explain these trends?
As the O.E.C.D.’s Jérome Cukier notes, a country’s share of world output was, until about 200 years ago, strongly correlated with a country’s population size. This partially explained why China, with its huge population, took up so much of the world economy for so long.
But then factors like “colonization, innovation and openness to trade and capital flows” helped change things, Mr. Cukier writes, and economic size began to divorce itself from population size. Western countries shot ahead of China in their share of global economy through much of the last century. Until, that is, China began to catch up and eventually outpace its competitors in the development game more recently.
In other words, China’s plentiful and cheap labor is only part of the key to its rapid growth in the last few decades; what appears to have really made the difference, not surprisingly, is its greater economic interaction with the rest of the world.
I was not aware of this.
IMF Survey has an interview with Poul Thomsen IMF’s mission chief for Poland. In this interview he discusses how Polish economy fared so much better than other EU members.
IMF Survey online: Looking back to the crisis, what were the key factors that enabled Poland to avoid a recession?
Thomsen: First, Poland is a fairly big economy with a large domestic market, which makes it less dependent on exports. During the crisis, this meant it was less exposed to negative spillovers through the trade channel than other countries in central and eastern Europe, for instance Hungary and the Czech Republic.
Second, Poland has a well capitalized and profitable banking system. That also helped mitigate possible contagion through the financial channel.
A third factor is that policymakers had considerable room for countercyclical monetary and fiscal policy, because Poland did not have any severe macroeconomic imbalances on the eve of the crisis.
Finally, the country has clearly been helped by its flexible exchange rate. Overall, the fact that Poland did so well speaks not only to its strong economic fundamentals, but also to good policy management and sound economic policies.
Hmm. So, Poland had a flexible exchange rate unlike other East Europe economies. Another IMF research article pointed to the importance of flexible exchange rates in the crisis. Another interesting aspect is Poland is not really hurrying into joining exchange rate.
IMF Survey online: Poland’s flexible exchange rate helped the country adjust during the crisis. How quickly should Poland seek to adopt the euro?
Thomsen: The authorities have never set an official date, although at some stage there was an unofficial target date of 2012. Given the adjustment effort that lies ahead for Poland in the next couple of years, one should not set an early date for ERM II entry.
More generally, in determining when to adopt the euro, policymakers should be mindful of how well their country has been served by the flexible exchange rate policy. That said, there is no doubt that euro adoption remains an important goal for Poland.
This is completely different from the other East Europe economies that want to be part of the EMU asap.
There are lots of speeches by Fed officials recently. Apart from main Fed, regional Fed presidents have also given number of speeches.
WSJ has prepared a nice snapshot of the summaries of the various speeches with growth and inflation outlooks and memorable quotes.
I have just started reading the report. It looks really good with great graphs, charts and analysis. We don’t have anything like this on Indian financial markets. As this is the first report, it looks at India’s financial markets, various institutions and policy framework in a detailed fashion. So it gives you good understanding of Indian financial markets as well. And provides useful data as well.
I am still reading the report and would add comments if any. I had just pointed a while back that RBI does not issue financial stability reports.
As I said in y’day’s post, RBI is in top gear. Dr. Subbarao leading many interesting changes/developments at RBI.
RBI is doing many things on these two key policy areas.
Both these issues of financial inclusion and financial literacy are used interchangeably but are very different. RBI Governor D. Subbarao explains these ideas in a recent speech on financial education. The speech was given in a RBI-OECD workshop on the same issues.
Christopher Crowe and Ellen Meade have written a nice paper on the topic.
In this article, we survey and quantify the trends in two major areas of central bank governance: independence and transparency. We document the steady number of industrial and developing countries over the past 10 to 15 years and discuss the effects of these aspects of governance on inflation. We also touch on another aspect of governance that has received attention more recently in key industrial countries: committee structure and decision making.
Bank of Korea has invited research proposals on macroprudential policy.
The subject for the competition is “designing a structure for macroprudential policy implementation” aiming at enhancing the stability in the global financial system, with a specifical focus on the heightened role of a central bank of a small open economy in stabilizing the financial system and on the promotion of international coordination. Both English and Korean versions of the research paper should be submitted.
The competition is open to university/college professors, senior lecturers and experts in the area of macroprudential policy. However, each research team of three or more must include at least one internationally well-known scholar who has published a number of research papers on strengthening macroprudential supervision and regulation in connection with issues that have arisen since the recent global financial crisis.
A Korean specialist may prepare and submit the application on behalf of the research team.
It will be interesting to see research on the hot topic. We still don’t know so much about the idea. It needs to be implemented and country specific contexts would matter.
Pass it on to interested people.