Archive for April, 2011

Puzzles of Poverty and its estimation

April 29, 2011

An amazing article by Abhijeet Banerjee and Esther Duflo. They look at many myths (atleast in their eyes) and facts in area of poverty and estimation. It is lot more complex than people make it out to be.

They explain many concepts as well along the line. Must weekend read…

Government should report “pension-adjusted” budget/fiscal balance

April 29, 2011

IMF economists in a new research argue for the same. The idea is that governments should show fiscal numbers adjusting for pensions. This could lead to two things. First, governments having higher pension bills will be under pressure to reform. Two, it incentivises those govts which undertake pension reforms and asking the countries in first category to follow.

This is all the more important as we have so many countries which such dire pension liability concerns.

 Benedict Clements discusses the paper in IMF Blog.

The first problem is that good fiscal policy hasn’t always ruled the day, to put it mildly. Today, pension reform is a priority for the advanced economies as current trends are unsustainable—see Commandment V—and for many emerging and low-income economies that need “to improve coverage of health and pension systems in a fiscally sound manner.”

The second problem is that traditional deficit and debt indicators focus on the health of public finances today, but fail to capture the future impact of pension promises. This means that pension reforms, which often strengthen the fiscal position down the road, might not necessarily improve—and sometimes worsen—traditional fiscal indicators today. The risk is that assessments of pension reforms based on traditional deficit and debt indicators could create incentives to delay or even reverse reforms.

The paper says:

This underscores the need for a fiscal indicator that gives governments credit for pension reforms that improve long-term fiscal health, but also correctly points out when they are moving in the wrong direction.

In a recent Staff Discussion Note, we propose a new indicator—the “pension-adjusted” budget balance—that takes into account the long-term nature of pensions. It focuses on the fiscal sustainability of pensions and provides a level playing field for evaluating a country’s pension policies. The new indicator achieves this by recalculating the traditional budget balance to take into account the intertemporal pension balance (that is, future pension imbalances), rather than the current pension balance.

In other words, and simplifying a little, this means taking account of the difference between the current value of future pension contributions and the current value of all future benefits, from today to a certain date in the future, say 50 years. And not just the difference between pension contributions and benefits today.

Policy lessons:

This indicator can help measure when changes in pension policies are improving or worsening long-term fiscal health. One advantage is that it eliminates incentives to adopt or dismantle particular systems to improve current-period indicators. Of course, overall balances remain key for evaluating the risks surrounding short-term financing needs.

We draw three main implications for fiscal policy design:

  • We should take account of the future impact of pension reforms, or other public programs such as health care, when we analyze fiscal sustainability.
  • To do that, we should look at the sum of future pension balances, the intertemporal pension balance.
  • The “pension-adjusted” budget balance should be viewed as a complement, rather than a substitute, for traditional fiscal indicators.

Profile of Keynes – Why search for a new Keynes?

April 29, 2011

Soros Institute for New Economic Thinking held a massive conference lately to discuss the economic thinking agenda ahead. And what better place than Bretton Woods which hosted a similar meeting in 1945 leading to much of the ideas we have now. The conference has so many economists, papers, ideas etc. Some economists have even criticised that Soros has assembled economists which believe in his ideas and are trying to force them on to the world.

Surfing through these ppts and papers, I came across this superb piece on Keynes by John Cassidy of New Yorker. It was written in 1998 after the SE Asian crisis and we were discussing same things as we were discussing then as well. The SE Asian crisis became an international economic crash and many economies came under stress. There were calls then to create a new bretton woods system and reform the international monetary system. People were looking for a new Keynes to set in the agenda.

Cassidy goes back to what Keynes had proposed way back in 1945 which was not implemented as US opposed it. He says do not look for a new Keynes and instead read and implement what he suggested then.

He then reviews the meetings at Bretton Woods in 1945 and how Keynes and White laid the path for future economic systems. Keynes even then wanted some system to check current account surplus economies but was not agreed by US as they were the surplus economies. Keynes agreed as US was key to the BW agenda and would be required to invest in war-torn economies. Thes there were his proposal to create an international currency Bancor issued by a Global Central Bank (International Clearing Union) which was vetoed by US as i would have to contribute maximum towards the bank and replace US Dollar as world currency.

Superb article.  Discusses Keynes life and how he became an economist as well.

Amazing how similar arguments are made now and nothing was done to reform IMS in 1998. And now we are going through similar set of arguments.  

Superb essay. It is a pity we associate Keyesianism only with givernment spending and intervention. He had many more contributions which should do monetarists proud as well. And then we must r’ber his sugegstion for govt. spending was to get out of great depression. He was not really talking about government spending in normal times which was extended by Keynesians later. But then that is how history is. You cannot really correct it.

How Estee Lauder built its beauty products company

April 29, 2011

K@W  has a nice interview of William Lauder, executive chairman of Estee Lauder – beauty and cosmetics company.

He discusses the benefits and challenges of working in a family-owned business, the company’s global growth aspirations and why, in the words of his grandmother, they key to success for Estée Lauder is “getting women to put their hands together.

Some international marketing lessons – Know the local language and context properly:


Robert Fogel linking height with human development

April 28, 2011

Patricia Cohen of NYT reviews the upcoming book of Robert Fogel -The Changing Body: Health, Nutrition, and Human Development in the Western World Since 1700 (his paper based on ideas here) . Fogel was a 1993 Nobel winner for his work on economic history (in particular cliometrics).

He has lately been looking at health, human development issues from a historical perspective and the book has amazing findings:


Fed needs to prepare donuts like Charles Ponzi…

April 28, 2011

Pimco’s Global Central Bank Focus research notes are always a fascinating read.

The recent Apr-11 issue is another superb read. It has Anthony Crescenzi and Ben Emons writing on Fed, Andrew Bosomworth on ECB and Lupin Rahman on Emerging economies central banks.

The one on Fed is startling. First some bit on Ponzi scheme:


How schooling investments facilitated the Middle East uprisings

April 28, 2011

I had pointed to this interesting articlefrom Mwangi Kimenyi of Brookings. He said the uprising was not because of poor economics/development failure. Infact these regions have shown decent performance in human development. The high social development was not in line with dictatorial regime.

Now, there is some empirical evidence backing his article. Filipe R Campante and Davin Chor of Harvard and Singapore University respectively have done some research looking at the relationship – Schooling, Political Participation, and the Economy ; The People Want the Fall of the Regime”: Schooling, Political Protest, and the Economy.

As always voxeu has good summary. In sum, Middle East autocrats themselves contributed to their own downfall by investing in education:


Should economists be seen as biologists instead of wannabe physicists?

April 28, 2011

Renee Courtios Haltom of Richmond Fed writes a superb paper/article on the intellectual crisis in economics. Like Krugman’s amazingly candid piece – How Did Economists Get It So Wrong? this one is as refreshing and candid as well.

Haltom says the crisis in economics is not accepted by all:

The sense is not unanimous, mind you, or probably even the majority view. But there is the uncomfortable fact that the profession was largely surprised by the largest economic event in several generations. Some have taken it as a sign that economists are, decidedly, studying the wrong things. The specific complaints are varied: Economists were so focused on unrealistic, highly mathematical models that they missed the problems developing before their very eyes.  They were so complacent with the idea that markets usually get things right that they ignored a housing bubble and  securitization mess in the process. Overall, critics say,  policymakers shouldn’t listen to a profession so lacking in consensus and out of touch with reality.

Did the research and beliefs of economists leave them ill-equipped to foresee the possibility of a major financial crisis? And if so, what drove the profession to such a myopic position?

Haltom then wonderfully (rather magically) presents the evolution of economic thought from Smith to Ricardo to Keynes and to current Lucas/Chicago School thoughts. (Though she misses out Friedman!)


Which Measure of Inflation: Headline, Core or Trimmed?

April 28, 2011

This is the title of my new paper. It looks at how central bankers look and prefer these measures of inflation. Looks at case studies of Fed, ECB and BoE and the divergence in central bamker views.

I remain surprised that despite wide divergence amidst Fed members, I see no dissent in Apr-11 FOMC meeting. This is something I have been noting whenever Regional Fed Presidents don’t talk in lines with FOMC views (see this and this). Why just talk?

Interview of Dean Karlan

April 27, 2011

Dean Karlan of Yale University and a researcher on Poverty and Development has released a new book – More than Good intentions (co authored with Jacob Appel).

Economix has an interview of the duo. Karlasn says micro credit does not really help small/poor entrepreneurs. It actually helps the employed more than the employers:


Better education through improved eyesight

April 27, 2011

Stephen Dubner from Freakonomics has this superb coverage of how researchers raised test scores in rural China with the help of new spectacles for every kid in need.

It is basically a transcript of radio interview between Dubner and Researchers who worked on the problem.


World Bank blog on impact evaluations

April 27, 2011

World Bank has another useful blog – Development Impact . The blog looks at News, views, methods, and insights from the world of impact evaluation. So you get loads of information here on latest studies etc.

The first post says:

Welcome to our new blog about impact evaluation. The number of impact evaluations both within and outside the World Bank have increased dramatically in recent years (see Figure below). The World Bank’s DIME initiative reports the number of active impact evaluations at the World Bank has increased from a couple of dozen in 2004 to over 250 in 2010. As a result, there are more producers and more consumers of impact evaluations than ever before – and more questions about how to conduct evaluations, what we are learning from these evaluations, and what can be done to learn more from them.

This blog has been set up by members of the Development Research Group at the World Bank to provide a forum for discussing these issues.

Our goal is to cover a broad range of issues relating to impact evaluations, including:

  • Summaries, critiques,  and discussions of new research papers
  • Discussions of ongoing and planned evaluations
  • Methodological issues in doing experimental and non-experimental evaluations
  • Stories and puzzles from fieldwork

We want this blog to be something that is useful to both producers and consumers of impact evaluations, which can provide an opportunity for serious discussion and sharing of experiences. We hope to have a range of guest bloggers from both inside and outside the World Bank.  We encourage all readers to not only participate in the discussions by commenting on blog posts, but also sending ideas and materials for blogs, as well as for guest blogging.

Please let us know in the comments any ideas you have for pressing issues to discuss, or topics you would like to see covered in future posts.

It started on 1st April 2011 and there are already 18 posts. Most posts have some good insights/discussions/challenges. Must add to the favorites list..

State of education in Pakistan….

April 26, 2011

I am really late on this story but was too tempting not to write on it. This article from Rebecca Winthrop of Brookings leads me into many articles and findings on a failed (supposedly fraud) development project. I will come to the article later. First the backdrop.

Greg Mortenson, a mountaineer wrote a book called Three Cups of Tea and Stones into Schools ( i just discovered the book now). In this book he tracks his journey of a failed mission in 1993 of climbing K2 which led him to a village in Pakistan. The villagers took care of him and on his recovery he realised there were no schools there. He decided to come back and build schools. 

This book connected with people emotionally leading to it becoming NY Times bestseller. who piled on aid leading to Mortenson setting a organisation called Central Asia Institute. And since then he has been going around the world sharing his story, collecting aid and building schools in Pakistan and Afghanistan. In 2009, Mortenson received Pakistan’s highest civil award, Sitara-e-Pakistan (“Star of Pakistan”) for his dedicated and humanitarian effort to promote education and literacy in rural areas for fifteen years. 

As of 2011, Mortenson has established or significantly supports 171 schools in rural and often volatile regions of Pakistan and Afghanistan, which provide education to over 68,000 children, including 54,000 girls, where few education opportunities existed before. He even claims to be kidnapped by Taliban in 1996 for his efforts leading to further sympathies for his cause. Obama gave USD 100,000 from his Nobel Peace Prize money to his organisation.  

So far so good. Till this this CBS investigation showed most of his story is a lie!


Are local governments on the brink?

April 26, 2011


Richard Mattoon of Chicago Fed has this nice short article on state of local governments (municipalities etc). He says there is no doubt  that finances have worsened but they filing for bankruptcy etc are overstated.

There have been very few cases of local government bankruptcies in the past. Even in Great Depression there were just 1.8% of local governments defaulting in 1935. By 1937 most such cases had been resolved with average recovery at 97%.


Nassim Taleb on Living with Black Swans

April 26, 2011

Here is a superb interview of Nassim Taleb (interviewed by his professor at Wharton). He explains how people have misunderstood the concept of black swans.

People think they can predict black swan events which is plains false.

Most people think that they can predict the black swan, that with quantitative sophistication they can get answers. They don’t get the idea that because we can’t predict black swans, then we need to restructure institutions and rethink strategies to be more robust in the face of uncertainty.

People should instead be looking at sources of fragility and make them robust:


Thinking about capital flows as a Big Fish Small Pond Problem

April 25, 2011

Andrew Haldane of Bank of England is in top form. He along with Lorenzo Bini Smaghi of ECB have emerged as the finds of the crisis amidst policymakers. Their speeches/papers are insightful and force you to think. You may not agree with Smaghi as he has strong pro-European ideas, but still takes you through issues with Europe which no one does.

There are few such problems with Haldane. His speeches have loads of data, graphs and ideas.

In his recent speech he says we need to think about this capital flows issue as Big Fish Small Pond Problem.

  • Big fish is developed econs which are looking to diversify their portfolios. The home bias (investors investing in home countries) has declined over the years
  • Small Pond is developing economies which are looking to deepen their financial markets but this would take time.
  • As big fish moves into small pond, ripples and bubbles are bound to be there. This is what is happening in developing economies which are trying to prevent these fallouts.

His paper looks at this BFSP issue:


How and Why Does History Matter for Development Policy?

April 25, 2011

Michael Woolcock, Simon Szreter and Vijayendra Rao write this paper exploring how historians/history have basically been ignored in the development process.

They say this idea that history matters for development came to light when people realised institutions matter for development. And as instis depend on historical outcomes hence its importance. However, this is too limited and myopic a view:


Iron fortified Iodized Salt to be promoted to battle malnutrition

April 23, 2011

From a  PMO press release:

A meeting was held in the Prime Minister’s Office on the promotion of consumption of Iron fortified Iodized Salt as a measure to deal with malnutrition in the country. The meeting held on 18.4.2011 was chaired by the Principal Secretary to the Prime Minister and was attended by the officers of Ministries of Health, Women and Child Development, Department of Industrial Policy and Promotion, Director of National Institute of Nutrition and a Member of the Prime Minister’s National Council on India’s Nutrition Challenges. 

The following points were noted and discussed : 

i. The prevalence of anaemia in majority of India’s population, particularly among adolescent girls, women and children, is a major public health challenge and it should be tackled urgently. Anaemia is caused by inadequate intake and poor absorption of iron. Anaemia can be prevented and cured by promoting consumption of iron rich foods and iron supplements. One cost effective way of increasing the intake of iron is fortification of salt with iron in addition to iodine. 

ii. The National Institute of Nutrition, Hyderabad, has developed technologies for the double fortification of salt with iodine and iron. The Ministry of Health & Family Welfare has issued gazette notification prescribing the legal standard for double fortified salt. The NIN has also shared the technology with some of the salt manufacturers by signing MoU with them. 

iii. Before moving towards mandatory double fortification of salt, which is a desirable goal to aspire for in future, Government, may promote the consumption and production of DFS through effective communication campaign, mandating its use in Government sponsored food and nutrition programmes like ICDS, Mid-day-Meals, etc., and by supplying DFS through the Public Distribution System. The Government could also encourage salt manufacturers to invest in technology by making a clear policy statement about the Government’s intent of promoting the use of DFS. 

Actions on the following lines were agreed upon:


RBI asks banks to set up countercyclical provisioning buffer

April 23, 2011

RBI in its recent notice notes some banks  have higher  provisions than required for meeting non-performing assets.

RBI asks such banks to move these surplus funds towards setting a countercyclical provisioning buffer to be used during downturns.


Governance issues in Euroarea

April 22, 2011

A nice review of governance issues in Euroarea from ECB President Trichet.

He looks at all three time frames- short term (, medium term and long term. He says all these are interlinked and short-term issues influence long term issues.


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