Archive for October, 2011

Karl Marx vs Max Weber: Does religion affect politics and economy?

October 31, 2011

I haven’t read this paper  fully but found it really interesting.

Marx said economy influences culture but it is not the other way round. Weber said both influence each other.

Does culture, and in particular religion, exert an independent causal e ect on politics and the economy, or is it merely a re ection of the latter? This question is the subject of a long-standing debate in the social sciences, with Karl Marx and Max Weber among its most famous proponents. The former famously opined that while the economy did influence culture, the reverse was not true. The latter, on the other hand, rejectedthat view and insisted that causality runs both ways. In particular, in The Protestant ethic and the Spirit of Capitalism”, Weber claimed that Reformed Protestantism, by nurturing stronger preferences for hard work and thriftiness had led to greater economic prosperity.

This paper looks at a natural experiment in Swiss economy in 16th century to see Marx vs Weber:

Our paper provides new evidence on this fundamental question, exploiting a quasi-experiment in Switzerland. Switzerland is well suited to study how religion a ects politics and the economy as it is one of the few countries exhibiting genuine within-country variation in religion. Early in the 16th century, some cantons adopted the Reformation whereas others did not, which leaves us with both a treatment and a control group. But Switzerland is also a geographically and institutionally diverse country and the decision to adopt the Reformation was indeed correlated with geography and institutions. Most of the urban Confederates adopted the Reformation whereas the rural and mountainous center remained Catholic. To address this issue we focus on an institutionally and geographically homogeneous subset of the Confederation: the area in western Switzerland that is comprised of the present day cantons of Vaud and Fribourg.

What are the findings? It shows Weber’s viewpoint wins:

We have shown that in a 100% Reformed Protestant municipality, support for more leisure is predicted to be about 13 percentage points or more than 1.5 standard deviations 
lower than in a 100% Roman Catholic municipality. This lends empirical support to Max Weber’s famous hypothesis of a ”Protestant work ethic”, thus deviating from earlier work in this literature such as Becker and Woessmann (2009) or Cantoni (2009). A plausible explanation for these differences is that the latter two papers looked at Lutheran Protestantism, whereas we focus on Reformed Protestantism.

Looking beyond the “work ethic” literature, we have argued that the works of MaxWeber as well as the more recent literature in sociology can be seen to imply also predictions
whereby Reformed Protestantism nurtures preferences for smaller government, and our empirical results confirm such predictions. Correspondingly, we also find Protestantism
to lead to greater income inequality.

On a more general level, our results imply that religion is not just, as Karl Marx would have us believe, “People’s Opium”, but can, by its own force, significantly change people’s preferences, both self-regarding and social ones. To what extent such different preferences do then also translate into different economic outcomes will certainly depend
on the framework of political institutions.

Hmmm.. I am really clueless about all this religion, beliefs etc. Liked this deep dive into history and run a natural experiment to understand what leads to what…


Civil Service and Military Pensions in India

October 31, 2011

This blog is really interested in research work on pensions as it connects so many areas of economics – microeconomics, behavioral economics, macro, financial economics etc.

In this superb paper Ajay Shah and Renuka Sane, review the pensions in India’s civil and military sectors. The paper tells you the pension system in each of these two areas and how the system is being moved to New Pension System. The transition has been easier in civil services compared to military services.


Want to limit role of unions …invite more FDI…

October 28, 2011

Andreas Haufler &  Ferdinand Mittermaier write this nice post.

They say it is ironical that more unionised countries get more FDI:

In the international competition for FDI, countries and regions with strong trade unions and relatively high wages are often surprisingly successful. Theoretical economic reasoning would typically suggest that unionisation, which tends to increase the level of wages, will act as a deterrent to FDI (Naylor and Santoni 2003; Munch 2003). Nevertheless, several empirical studies find instead a surprising positive effect of unionisation on direct investment (e.g. Friedman et al. 1992).

Why so? Well FDI helps policymakers negotiate with Unions for more jobs and lesser wage raise:

In recent research (Haufler and Mittermaier 2011) we show that high subsidy payments can be a rational policy for governments, as they give trade unions an incentive to exert wage restraint in exchange for additional jobs that are created in the newly-attracted firms. A government that acts in the best interest of its citizens will therefore be willing to offer multinational firms a subsidy that more than compensates the firm for the higher wage cost in that region. These subsidies not only induce the multinational firm to locate in the unionised country, but they also ensure that the union prefers a situation with lower wages and FDI to the alternative of setting a high wage but accepting low employment (which then occurs only in domestic firms). As a result, the unionised country or region is able to “win” the competition for FDI over its less-unionised neighbour. The subsidisation policy benefits the high-wage country in the aggregate, because union power is effectively curbed and wages are lower than they would be in the absence of the successful bid for FDI.

This does not mean unionisation is good for a country. Infact countries which want to limit the power of unions should invite more FDI:

The results of this research do not imply that unionisation is “good” for a country. In fact the high-wage country remains worse off than its lower-wage neighbour because of the high subsidies it has to pay to attract FDI. However, if the unionised country is not able to control wages directly (for example, because they are determined in a bargaining process between employers and employees, with no government involvement), then attracting multinational firms is an attractive solution for governments, in order to mitigate the effects of union power.

Superb. Some lessons for India possibly?

All such write-ups take you to micro classes in college as one really does not talk/read about unions/collective bargaining power much…

RBNZ Governor’s amazing forecast

October 28, 2011

I hardly watch Rugby. But on knowing that  NZ (or Black Caps) won the rugby WC 2011 (after 24 years of wait), could not stop pointing about this prediction.

RBNZ Governor in a Jan-11 speech predicted/forecasted:

How likely is it that New Zealand will win? We have asked our expert team of forecasters to answer this question. They have pointed out several solid facts: we have always won the World Cup at home; we will have a Cantabrian leading the team and another directing the back-line. Our expert team of forecasters predict that on average, the All Blacks will beat Australia in the final at Eden Park, by 23.9 to 15.6.

🙂 The final was instead between NZ and France and was a much closer score line of 8-7.

Hope we could get our economics forecasts somewhat closer….


Why don’t economists blog in Italy? (Same could be applied to India as well..)

October 28, 2011

Paolo Manasse, Econ Professor at the University of Bologna ponders over this issue.

He points to this new paper by McKenzie and Özler which looks at economics of blogs. They say blogs help in three things:


The fudging from European policymakers continues

October 28, 2011

I read a paper (even posted on this blog, can’t locate it now) which said though Americans are blamed for all the financial jazz, it is Europeans who are masters at the art of financial creativity. This is what you see in the crisis solutions from EU policymakers.

I think Henry Farrell just nailed it by saying the instinct of EU policymakers is to fudge. The solution from policymakers looks innovative at first and markets think crisis is over. Then they look at the details and realise all is just a mask and the face behind is the same.

The so-called Europe Summit produced another of such financial jazz solutions. They released a statement of their new measures. The shorter version is here. A nice report from Citigroup is here

The broad proposals are (from whatever I could understand):


The impact of 2007 recession on youth

October 28, 2011 has compiled this collection of articles which looks at the impact of  the US recession on its youth.

Here are the 20 impacts:


India’s long-term growth potential and the implications for Australia

October 28, 2011

Ben Ralston, an economist at Australian Treaury alerts me to this paper.

The Central bank of Australia keeps telling us  about the importance of China to Aus economy (RBA even opened an office in China). Here is an Indian flavor as well.

The paper suggests India has strong growth prospects. Demographics is in place with a much younger age population compared to other countries. The authors point two challenges with this – food security and education. Growing incomes would demand higher food and need higher productivity. To realise  demographic dividend, education and training takes center stage. Surprisingly it says education is a challenge India is winning:


Choosing where to locate Forex counters at the airport

October 27, 2011

I came across this interesting notification from RBI.

Just to point what all RBI has to look in:

On a review relating to compliance of the Foreign Exchange Counters (full-fledged branches/ extension counters) opened by Authorised Dealer Category-I banks, Authorised Dealers Category-II and Full Fledged Money Changers beyond the Domestic Tariff Area in international airports in India, it has been decided as under :

(a)  Foreign Exchange Counters in the arrival halls in international airports in India shall ideally be established after the Customs Desk (Green Channel/Red Channel). However, Foreign Exchange Counters may also be established between the Immigration Desk and the Customs Desk in international airports in India, subject to the condition that these counters shall only purchase Foreign currency and sell Indian Rupees (INR) and “Encashment Certificates” shall invariably be issued by the money changers to the customers.

(b) Similarly, Foreign Exchange Counters in the departure halls in international airports in India shall be established only before the Customs Desk or the Immigration Desk, whichever comes first. Putting up suitable display at these counters, reminding the passengers that the area is the last point for non-residents to possess Indian Rupees (INR) may be followed up with the Airport Authorities.

Some forex dealers seem to be violating these locational rules and hence the notification. I am wondering how was it allowed at the first place to have forex counters after custom  desks.

Amazing how basic rules get violated here…Also what all things RBI has to look into…Central Banking in India is full of challenges and issues.

RBI should also look into the spread the forex counters charge for conversion. They just fleece you left right and centre…

Interesting case of central bank cooperation..

October 26, 2011

This is an interesting developmemt and points how globalized the world is getting.

Bank of Thailand and Bank of Japan have entered into this agreement (BoJ press release).

Thailand has faced severe floods and has effected operations. It also has large number of Japanese firms and Banks. Hence, to provide stability, Bank of Thailand will provide liquidity to Thailand based institutions against Japanese Govt. securities.

Mr. Prasarn Trairatvorakul, Governor of the Bank of Thailand, announces that in order to enhance the stability of Thai financial markets and expanding the range of liquidity provisioning measures in Thailand, the Bank of Thailand is collaborating with the Bank of Japan to implement an arrangement for liquidity provision by the Bank of Thailand in Thai Baht utilizing Japanese Government Securities as collateral.

One aim of this measure is to facilitate the funding of financial institutions operating in Thailand including Japanese banks, which provide financial services to firms, including Japanese firms operating in the flood-affected areas of Thailand. Thailand has long been a recipient of Japanese investment, which has contributed to integrating Thai manufacturing into the global production chain, enhancing the quality of Thai products, research and development (R&D), and employment, as well as accelerating the economic development of the country.

An interesting arrangement..

Central Banks cooperated greatly in this crisis and even during 9/11. To see them cooperate in case of floods and accepting collateral of some other country is a nice development. Cooperation of central banks because of  globalization of financial markets…A nice case study..

Happy Diwali to all of you

October 26, 2011

Wishing all Mostly Economics visitors, subscribers and well-wishers a Very Happy and Prosperous Diwali.

Have a blast..

RBI’s Second Quarter Review of Monetary Policy 2011-12

October 25, 2011

RBI announced the Q2 review of mon policy 2011-12

Here is my review of the policy. Here is  the expectations paper from the policy which was done on 21 Oct 2011. The policy was in line with expectations except that RBI was far more dovish than I thought. Also the deregulation of savings bank account rate was a major surprise.

This statement should be read with the discussion paper on savings rate deregulation which explains the pros and cons. Now only small savings schemes deregulation remains. Banks will be in for a tough time with already rising NPAs and now the rise on cost of these deposits. Yes Bank has already upped the savings rate from 4% to 6%. More action to follow…

Argentina lessons for Greece/EMU and India??

October 25, 2011

CEPR economists have been going pretty aggressive to suggest Argentina is a good success story. They  suggest the growth reforms since 2001 crisis has lessons for EMU economies (and others).  They also predicted that incumbent President Cristina Fernandez de Kirchner likely to be reelected given the positive developments in economy.

In this paper, the authors point Argentina is a success story for follwing reasons:


Comparing IT industries in India, China and Philipines

October 24, 2011

F. Ted Tschang of Singapore Management University writes this nice paper on the topic.

He looks at how IT industry  has developed in the 3 countries:


Banks are global in life and national in death

October 24, 2011

Mervyn King gave this memorable quote and is mentioned in this superb speech by Andrew Sheng.

The speech looks at how badly things have become with respect to financial sector and its rescues.

He says things have changed greatly since 1971 when B-Woods broke and we have the current System:


4 Lessons from 4 economies – France, Greece, Japan and Zimbabwe

October 24, 2011

This is a superb article from Greg Mankiw.

What are the lessons from these four countries? The objective of the article is to understand lessons for US economy. He connects the lessons superbly. First the lessons:


C40 – a group of the world’s 40 largest cities..

October 24, 2011

A recent HBS articles alerts me to this group called C-40, a group where cities look at climate change challenges and solutions.

I was not aware of a group like this.  C-40 website says:


Reviewing core inflation measures in India

October 21, 2011

Janak Raj & Sangita Misra of RBI write this nice paper on the topic.

They look at a number of core measures of inflation in India and say current core inflation  measure of non-food manufacturing works the best.


How end of American Civil War in 1860s led to formation of BSE/Dalal Street etc..

October 21, 2011

This is a fab speech by SEBI’s former chairman GN Bajpai. It is a superb short historical preview of how securities markets came up in India. A must read for all finance students and practitioners.

He divides the speech as a meal:


How India’s fiscal policy continues to dominate monetary policy?

October 20, 2011

Another nice paper from RBI econs. This has always been the case but with FRBM you thought the dominance would reduce. Biut nothing like that ha happened:

This study analyses the behaviour of monetary and fiscal policies interaction in India using quarterly data for 2000Q2 to 2010Q1. It finds that, even after the elimination of automatic monetisation of fiscal deficit in 1997 and prohibiting RBI from buying government securities in the primary market under the FRBM Act from April 2006, fiscal policy continues to substantially influence the conduct of monetary policy.

Specifically, the reaction of the two policies to shocks in inflation and output is mostly in the opposite direction. While monetary policy reacts in a counter-cyclical manner, fiscal policy reaction is primarily pro-cyclical in nature. The positive impact of expansionary fiscal policy on output is highly short-lived, while there is a significant negative impact in the medium to long- term.

Read the paper for more details..

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