Archive for June, 2012

Small Farmers in India: Challenges and Opportunities

June 29, 2012

S. Mahendra Dev of IGIDR has this useful paper on the subject:

This paper examines the roles and challenges of small holding agriculture in India. It covers trends in agricultural growth, cultivation patterns, participation of small holding agriculture, productivity performance of small holders, linking small holders with markets including value chains, role of small holders in enhancing food security and employment generation, differential policies and institutional support for small holders and, challenges and future options for small holding agriculture including information needs.  It also provides lessons from the experience of India on small holding agriculture for other countries.

What makes the paper more  special is tons of data on the subject.

Shadow Banking Crisis of 1763..Amazing similarities with Lehman crisis of 2008

June 29, 2012

The more you think times have changed, the more they remain the same. Amazing econ history is..

I came across this paper by Atlanta Fed econs — Stephen Quinn and William Roberds.  It is  just amazing to note how similar things were way back in 1763.  One had pretty similar financial instruments in 1763 whose drying up led to the crisis. And yes you had pretty similar instis like  Lehman Brothers which did not have access to retail deposits but relied on a form of wholesale financing.


Optimal Currency Area Simplified..

June 28, 2012

Whether we may agree to his views or not, no one really comes near Paul Krugman when it comes to simplifying economics.

In his recent post, he helped understand Optimal Currency Area  on which Euro was supposed to be based.

Must read..

Using behavioral economics to limit alcohol consumption

June 28, 2012

A nice paper by Henry SafferDhaval DaveMichael Grossman.

The rational/neoclassical model on understanding alcoholic behavior treats both heavy and light drinkers as one. As a result the analysis does not show the right results. In this paper, the use the behavioral economics idea of treating heavy and light drinkers as two different types.


What babysitting coops can teach economists…

June 27, 2012

Paul Krugman created a stir with this magical piece on how baby sitting coops can help understand economics. The article was based on this piece written in 1977

Tim Harfort revisits the Krugman piece. He says Krugman does not mention how the original story ends. As too much crip is printed there is  inflation and again the coop fails..


RBI’s recent move to raise export credit refinance limits – an analysis

June 27, 2012

I should have expanded on this measure at the time of RBI decision.

In its mid-quarter policy on Jun-12, RBI increased the limit of export credit refinance facility from 15% to 50%. This was listed as a measure to augment liquidity conditions:


Anatomy of legal corruption in India: Honest graft by politicians..

June 27, 2012

A fab must read paper by Abhay Pethe, Vaidehi Tandel and Sahil Gandhi of Mumbai University. I had posted about this forthcoming paper earlier. Finally it has been released. It was released earlier in EPW (May-12) but missed it.

The paper talks about this issue of legal corruption in India. Illegal corruption if found is  punishable (though this is rare in India) but what about legal corruption? This is a form of corruption which politicians indulge in via  information asymmetry.


The death of Inflation Targeting..

June 26, 2012

A food for thought column by Jeff Frankel. The title is questionable though. We keep saying things like inflation is dead, business cycles are dead, beta is dead, etc. Most of the time  dead things to come back with a vengeance.

And now claims of Inflation targeting is dead.

He starts with how IT came up and has performed over the years. The real challenge came in 2008 crisis.


Society, economic policies and the financial sector

June 26, 2012

Dr. YV Reddy emerged as one of the star central bankers from the crisis.

He spoke at the 2012 Annual Per Jacobsson Lecture hosted by BIS. And as always terrific stuff from the much sought policymaker.


India: The Incredible Investment Destination…

June 25, 2012

It is amazing to see how much confidence our politicos have on Indian economy. Either we are too pessimistic and they too optimistic. The rift is widening with each passing day. The latest announcement on Rupee just shows the same. People expected something and what we got was  something very low-beat.

Here is a ppt put on FinMin website called India Factbook and the title of the post (huge 11 MB file) . It looks like this ppt is being used for roadshows to sell India growth story.

It is full of those glorious looking stats on India economy. It talks about how India is better placed than its emerging market peers on several fronts (yes doing business is one of them). It has all the fancy metrics and ignore mostly all the things which matter to people in India. It has some laughable stats on education etc. Clearly the glass is full!

I am really not sure. What is instead needed is a roadshow across the country! At a time when things look dodgy in India’s growth story with so much distress in citizens, we are wooing investors abroad. Amazing things happen in this country.


Recent measures to boost rupee — some comments

June 25, 2012

From Saturday we are being told by news channels of the upcoming reforms on Monday. The expectations had reached a crazy frenzy with news channels asking experts on what the measures would be and the possible impact.

The Rupee had appreciated by almost a rupee from Rs 57.3 to 56.5 levels. Equity markets were more guarded and up by 120-130 points. All were waiting for the so called killer app to take equity markets up by 1000 pts or so. The wait in dealing rooms was getting irritating as each time the newswires flashed the reforms in an hour or so..

And then came the announcement around 2.20 or so. And what does it say? Just 2-3 things:


Why devaluation won’t work for Greece..

June 25, 2012

DeLisle Worrell Governor, Central Bank of Barbados created waves in his previous speeches on state of economics.

In a post on voxeu,he argues devaluation will not work for Greece. And his idea is being a small open economy, Greece will face huge challenges in case it exits from Euro and lets Drachma devalue:

If Greece leaves the euro, it can devalue its currency and start an export-led recovery – or so the popular argument goes. This column provides some hands-on insights from another small open economy, Barbados. It argues that for these economies that rely heavily on imports, devaluation will never be a viable option.

The central idea is import demand is huge and with depreciation this leads to inflation. And being a small economy, they cannot really gain much from depreciating currency as their exports a fraction of world export demand.

In reality, exchange-rate depreciation always depresses output in small open economies, because there is zero elasticity of substitution between internationally traded goods and services and domestically produced goods and services, either in consumption or in production. There are no expenditure switching effects of a devaluation; devaluation “works” by depressing real income and imports, by enough to eliminate the excess demand for foreign exchange.

There are well over a hundred countries in the world that are smaller than Greece by population or similar measure, including Barbados where I am Governor of the Central Bank. It is now reluctantly accepted at the IMF, the World Bank and in international policy circles, that these small open economies are disproportionately affected by global shocks that raise import prices and cut demand for their exports, and it is costly for them to build resilience to adverse influences from abroad.

What is still not fully acknowledged in the debate on the current Eurozone crisis, a debate largely driven by those in large economies, is that small open economies cannot make up for lost export demand in an international recession by switching to local demand, through currency depreciation. That is because the range and scope of their imports vastly exceed those of the exports of small economies. Economies of scale and scope in information and communication are universal and these economies have found that they have the human and material resources to be internationally competitive in only a handful of activities (see Carter 1997).

Small open economies are price takers:

We should bear in mind that the small open economy is a price taker in the international markets in which it sells, so it cannot increase its competitiveness by reducing its prices, only by increasing capacity and productivity. What is more, currency depreciation tends to reduce the growth potential of the economy, because it introduces an additional uncertainty which acts as a deterrent to the investment needed to build production capacity.3  Much is made of the fact that currency depreciation increases the profitability of exporters by reducing the real cost of domestic value added, without acknowledging that this is an miserable strategy – the country may sell more abroad, but it earns less real income by doing so.


These econs are different:

The essential point missing from the recent debate, is that small open economies are different: international economic shocks hit them especially deep and hard, and in the short term they have little choice but to absorb the blows and try to remain on their feet. Above everything, they should protect the value of the currency, by allowing the shock to feed through to a fall in real income. If there is to be active fiscal management, it should be in the service of maintaining the exchange rate anchor by matching import spending to foreign exchange inflows. Targeting the money supply or inflation, with a flexible exchange rate – the conventional policy prescription – produces a worse result. There is no additional foreign exchange earned or saved, real income falls by as much as is necessary to balance the external accounts in any event, and exchange rate depreciation imposes an avoidable inflation penalty that becomes entrenched in expectations.

Strategies for sustained growth are possible for small open economies, whatever the state of health of the international economy, precisely because their share of demand is so small, and they can market selectively in the areas where demand is least cyclical. To be sustainable, growth strategies must be crafted on the basis of the comparative advantages which human and material endowments offer to each small economy, and should include exploiting of market niches and moving up the value chain.

Governor Worrell made these points earlier as well.

His ideas may be worth looking at for small open economies, but Greece is different. Whatever little I have read, Greece is hardly a small open economy as we understand the term. Greece and even Eurozone is just such a crazy idea..

The Political Economy of Roads in Kenya

June 25, 2012

Four econs in this interesting paper look at political economy of road development in Kenya.

They show how road development in a region depends political party in power. There are two factors –  community (belonging to the same community as leaders of the ruling party) or geography (living in a place where the current leaders once lived):


Bank of England and Titanic Connection

June 22, 2012

The sinking of the great ship marked its 100th anniversary recently.

BoE website has some nice trivia on its connection with Titanic:

The ceremonies and events to mark the 100th anniversary of the sinking of the Royal Mail Ship Titanic can hardly have escaped the attention of many but probably few know of the connection between the Bank and the ill-fated White Star liner.

After the disaster the Bank received claims for the replacement of Bank of England notes lost when the liner went down. The majority of claims came from those whose letters containing banknotes had been in Titanic’s post room. Other claims were from the relatives of those who had perished, and some from survivors. The documentation surrounding some of these claims can be seen until 10th November. None of these documents has been on public display before.
Three days after the disaster the Bank donated 250 guineas to the Titanic Disaster Relief Fund for the welfare of the relatives of those who had perished..

The Rocky Balboa recovery

June 22, 2012

Well most people must have read this superbly titled piece. Those who have not should.

This is just an amazing way to talk about recovery in US markets. Despite some serious knocks, recovery keeps coming back like  Rocky Balboa:


Does accelerating Algebra in primary schooling help?

June 22, 2012

I had earlier pointed a paper by Lant Prichett on why most there is so little learning despite spending many years in school. Instead of blaming the students for not making efforts, Pritchett says the fault is with overambitious curriculum. Once curriculum moves ahead of students capability, latter lag behind and the problem gets compounded in each higher class. Students learn less and less and what we have is flat learning.

In a new paper (free version here) by Charles Clotfelter, Helen Ladd, Jacob Vigdor we get precisely the same lessons.

The paper is based on an experiment where attempts were made to accelerate learning of Algebra. Earlier only good students who thought could cope with Algebra took the course and others enrolled over a period of time. This % was increased through rules and the result was a disaster:


RBI’s new initiative of WLA Teller Machines – a policy from 1980s?

June 21, 2012

First an explanation of acronym called WLAs os White Label Automated Teller Machines. Basically these are ATMs run by non-bank entities.

In Feb-12, RBI issued draft guidelines to allow WLAs. Yesterday,  RBI allowed WLAs to function:


The Indian Miracle Lives…Really?

June 21, 2012

I was not sure how to react to this article by Shashi Tharoor. In his typical style he does not agree to all the questions being raised on Indian economy.

But then he uses just the right word. Going by how things are currently, one can safely say 2003-08 India growth phase was indeed a miracle. However, he thinks it is still living on:


Why nations fail? 10 nations..10 different reasons

June 21, 2012

Daron Acemoglu and James Robinson condense their blog and book into a superb article.

They points to really brief case studies of 10 failed states:


India Macroeconomic Situation — Cause for Concern?

June 20, 2012

RBI Governor Dr Subbarao explains the Indian economy outlook. He even defends the recent policy decision to hold rates against market expectations to cut rates.

The PPT should be seen with his comments and explanations (given at the add notes section).

It is pretty comprehensive and covers many aspects of Indian economy. On Comparing 2012 with 1991: