Inverted yield curve in India..

As always huge commentary has flown post RBI’s Q1 2013-14 monetary policy.

A. Seshan in Businessline points to this known but seldom reported trend ongoing in India –  inverted yield curve in G-sec markets:

Giffen behaviour in Irish famine markets: textbooks giving a wrong example??

A really interesting paper. Normal goods are those whose demand declines when price rises. GIffen goods are those goods whose demand rises when price rises. Econ textbooks usually cite potato in Irish famine as an example of Giffen good.  Interestingly, not many examples have come  from historical examples so far.

This paper shows potato is not really the right example for Giffen good. It is Pork actually:

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Impossible trinity’s love affair with RBI…

RBI’s Q1 2013-14 monetary policy was pretty much on expected lines. The rates were kept unchanged and there was hardly any surprise. Much of the policy decisions were taken earlier. Only change was RBI lowering its GDP growth projection from 5.7% to 5.5%.

However, the forward guidance was really interesting:

Why Is there no Milton Friedman today?

I just missed this really interesting symposium hosted by EJW. It asks this question to select econs: Why Is there no Milton Friedman today?

Imagine that someone with all the endowments of a Milton Friedman were born in the 1960s or 1970s. Is it conceivable that such a person would develop into a ‘Milton Friedman’ like we know the actual Friedman to have been, including his academic eminence and his eloquent and influential advocacy of classical liberalism? Here leading economists address the question: Why is there no Milton Friedman today?

• John Blundell
• David Colander
• Tyler Cowen
• Richard Epstein
• James K. Galbraith
• J. Daniel Hammond
• David R. Henderson
• Daniel Houser
• Steven Medema
• Sam Peltzman
• Richard Posner
• Robert Solow

Nice short articles sharing anecdotes, personal experiences and ofcourse giving their perspectives on the main question in the symposium..

Avoiding the “resource curse” in Mongolia

It is always interesting to read on resource curse cases.

Here is another such case on Mongolia by Theodore H. Moran of PIIE.

Taking a look at RBI Governor D. Subbarao’s report card..

A nice BS piece comparing performances of RBI Governors since 1990s across various macro parameters. This blog compared the performances across inflation a while ago.

By just looking at these macros, clearly Dr Subbarao’s performance is worse than his peers. The averages which should be up (GDP, forex reserves) are down and which should be down (inflation) are up. As BareTalk mentioned in his column — Subbarao has had the misfortune of having to serve under a government that has been the most incompetent

Though, I could not understand the interest rate used in the BS piece:

Some honest remarks from India’s PM on need for economics..

Blogging is the last thing on my mind on a lazy Saturday evening.  However, when one sees comments/speech iike this one cannot control, Thanks to    Nitin Pai for pointing on his very active twitter handle.

In his recent comments at NCAER”s new foundation stone, India’s PM said:

Why economics needs economic history..

Another request from an econ to consider teaching economic history as part of economics pedagogy. This one is from Kevin H O’Rourke, Professor of Economic History, University of Oxford.

The exit of India’s middle class..

A food for thought article by Sandipan Deb. It printed about a fortnight ago but I missed it somehow.

It sums up much of what this blog has been trying to say through several posts based on experiences in Bangalore. Middle class is exiting from public life and does not care on what is going on in the country. Fed up of the government’s failure to deliver basic goods, it has created its own systems. The government policies for years has had nothing for middle class. High inflation, poor infra, sick governance are the things which has led to this  exit

The article picks from the works of  late Prof Albert Hirschman who is deemed as one of the most deserved not to get The Prize.  The current hot economic debate in India is whether India should follow Sen’s econ model vs Bhagwati’s econ model.  This debate has become more hype than substance now. Hirschman’s exit theory is  a much bigger and ignored problem. Moreover, it can just be noticed around you as there is no research which shows this development:

It has now become the rule. Any conversation with friends, when it turns to the state of Indian polity and governance, quickly degenerates into either despair or derision.

Of course, middle-class disenchantment is hardly new. But in recent times, I do believe it has grown to fierce proportions. Government corruption, subversion of democratic institutions, a slew of supposedly populist but financially ruinous measures, shameless pandering to vote banks, mismanagement of the economy…in the last few years, if my friends are a representative sample, the Indian middle class seems to have just had enough. In fact, it is exhibiting classic signs of what economist Albert Hirschman observed in his seminal 1970 book Exit, Voice and Loyalty. Circa 2013, large sections of the Indian middle class are Exiting.

In the 1960s, free market champion Milton Friedman came up with a novel idea to rejuvenate the ailing American public school system. If the private sector is kept on its toes by the possibility of Exit—of shareholders, employees, customers—the same principle should work in the public sector too, he argued. Friedman suggested that parents be given vouchers that allowed them to take their tax money away from bad schools to good schools. But, Hirschman found that this Exit option (he extended it from schools to any sort of human grouping—firm, organization, nation-state) had several important drawbacks. In the words of political scientist Francis Fukuyama: “The freedom to Exit was often used by the most ambitious, educated, or well-to-do users of a particular service, and once they exited, those remaining were even poorer, less educated, and less demanding. Moreover…the possibility of Exit weakened the effectiveness of Voice, that is, the ability to directly change the management’s behaviour through feedback, discussion, and criticism.”

I have just started to read Hirschman having read so much about him.

He says earlier middle class was exiting physically. Now mentally:

In the 1970s and 1980s, India lost large numbers of its best and brightest young men and women, who went to the US for higher studies with the express intention of never coming back. This, with the active support of their parents, who saw only a bleak depressing future for the middle class in India. In the 1990s and the 2000s, this migration—the most unambiguous form of Exit—has been tempered to a large extent, but Exits need not only be physical. The collapse of Communism was brought about by the Mental and Emotional Exit of people (Physical Exit was almost impossible, unless you were willing to risk your life).

In India currently, we are seeing a Mental Exit of the middle class, and a Physical Exit of the cream of the next generation, like in the past, may be imminent. Look around: the number of middle class parents taking on huge financial burdens to send their children abroad right after they finish school is rising by the year. The brain drain of yesteryears comprised graduates. Today, the process starts at a younger age. Exit has to be made at the earliest.

The Mental Exit—a rejection of the state while residing within its geographical boundaries—is typified by Indian resourcefulness. So the middle class uses every means it can think of to avoid or evade taxes. It is also increasingly insulating itself. Consider Gurgaon, aka Millenium City, or the townships burgeoning around our metropolises. Gurgaon gets only a fraction of the services that are its due from the Haryana government: power, security, transport infrastructure. So the city is a collection of countless gated communities—self-sufficient units with their own security, power and water backups, and recreational areas. The condominium dwellers can do little about the pot-holed roads or the law and order situation, so they shrug and once they are back home, they switch off from India. They are now well-ensconced in the Republic of Gurgaon. This is being replicated all over the country.

Bang on..This exit leads to decay:

According to Hirschman, Exit extinguishes Voice, and this causes organizational stasis and finally decay. Evidence that a large part of the Indian middle class is exiting reluctantly and still cares enough to have its Voice heard lies in the popular participation in Anna Hazare-led anti-corruption movement, and in the spontaneous public outrage over the gangrape and death of a young women in Delhi in December (But the less-than-sensitive handling of that Voice by the administration perhaps strengthened the Exit impulse). We should also not find it surprising that Narendra Modi, with his talk about a New India, a new energy, is so popular on social media, which is packed with middle class people who have mentally exited India but yearn to return. They retain Loyalty—Hirschman’s third concept—to some idea of India. That idea—at best hazy and amorphous—is powered by a bitter sense of betrayal.

What should worry the people who govern India is that it is always the more intelligent, the more valuable people who exit. Alienation is not a mental condition fools are familiar with. Also, when you Exit a place, you enter another. Circa 2013, the Indian middle class may be believing that wherever it enters, it can’t be worse than the place it exited.

Who cares…

Controlled dismantlement of the Eurozone : A proposal

Quiet a few people have written on undoing Eurozone and how to go about it. Likes of Barry Eichengreen warn against any such approach as it will lead to mother of all financial crisis.

This paper by National Bank of Poland econs — Stefan Kawalec and Ernest Pytlarczyk is an addition to the first camp. It was surprising to see a apper from NBP econs not just critcising the Euro project but also suggesting to dismantle it. Their suggestion is to allow the strong countries to move out of the currency block and the weaker economies to remain till the crisis eases:

In Kawalec and Pytlarczyk (2013), we argue that the single European currency constitutes a serious threat to the European Union and the Single European Market, and we propose a controlled dismantlement of the Eurozone. In this paper, we undertake a deeper analysis ofthe measures which would minimize the risks throughout the process of the Eurozone dismantlement and contribute to rebuilding confidence in the future of Europe.

The dismantlement should be the result of a consensual decision to replace the euro with an alternative system of currency coordination.  The dismantlement should start with the exit of the most competitive countries. In the meantime, the euro should remain the common currency of less competitive countries.

The European Central Bank (ECB) should be preserved as the central bank for all 17 Eurozone member countries, even after some of those countries have replaced the euro with new currencies. In this capacity, the ECB should be in charge of designing, preparing, and implementing the segmentation of the Eurozone as well as managing the new currency coordination system– European Monetary System 2.

 The forthcoming EU – USA free trade agreement would build new momentum for economic growth and contribute to restoring confidence in the future of Europe. As of today, neither the member states of the Eurozone nor European institutions such as the European Commission or the ECB have been able to come up with a game-changing proposal such as the Eurozone dismantlement. However, this may change as a result of adverse economic and political developments.One of the potential triggers could be the situation in France.

Nice bit..

RBI takes further measures to support rupee

Chaos continues to build in India’s policies. After taking measures last week to restore value of rupee, RBI takes additional measures. 

Some measures have been unwound and some new measures have been taken. 

Sen vs Bhagwati debate getting nastier…

Started by Niranjan, it has led to some interesting and some nasty pieces. It is all being covered here.

The latest piece is by the one of the protagonist of the debate  – Prof Jagdish Bhagwati. Just like several Krugman vs Others debates, this one is getting pretty vitriolic as well..

Waking upto Bangalore’s water woes and economics of RO water purifier..

Relocating to Bangalore has been a wakeup call on many fronts. The blogger can easily see the huge urbanisation emergency facing India if things continue this way. The tragedy has already stuck our main cities and more cities are going to be added to the list. Some experts call India’s urbanisation a huge opportunity but this is ridden with huge assumptions and out of touch with reality. Or may be they are living in cities where these problems have not really come about. In that case they should name the cities hey live in, which will help people relocate to their city (and make it worse!).

Ok to the blogpost. Today I got another wake-up call on Bangalore’s deep water woes. Earlier one would read it but now it is time to face the music. This blog has lamented on the fact that all one sees around Bangalore is water tankers. So much so, middle class has got so used to them, that no one cares. All this in a city which bought India most of  the fame. Now, I realise how poor the quality is of whatever little water people get.

Varieties of state capitalism and their implications for economic performance

Interesting paper by Aldo Musacchio (of HBS) and Sérgio G. Lazzarini.

They compare state capitalism as a leviathan and show how state capitalism has evolved over the years. State holds stakes in companies in 2 forms: as majority investor and a minority investor. If former form has declined, States have overcome that by gaining in latter.

Bubbles Forever…

Robert Shiller in his recent column at PS. He says he hears talks of bubbles everywhere:

You might think that we have been living in a post-bubble world since the collapse in 2006 of the biggest-ever worldwide real-estate bubble and the end of a major worldwide stock-market bubble the following year. But talk of bubbles keeps reappearing – new or continuing housing bubbles in many countries, a new global stock-market bubble, a long-term bond-market bubble in the United States and other countries, an oil-price bubble, a gold bubble, and so on.

Add India’s housing bubble as well which refuses to burst..

He says bubbles are different from the usual soap bubbles we think about:

One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.

It would seem more accurate to refer to these episodes as speculative epidemics. We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.

Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

Read more at http://www.project-syndicate.org/commentary/the-never-ending-struggle-with-speculative-bubbles-by-robert-j–shiller#1IukOXsx5GkkxG5c.99

 

 

Economics is no objective science, its a religion ridden with value-judgments

An interesting piece in today’s ET by Mark Buchanan, a physicist.

He questions the rising economic imperialism. He says much of policy economics is based on values held by economists. In a way it is a religion:

Is economics a science or a religion? Its practitioners like to think of it as akin to the former. The blind faith with which many do so suggests it has become too much like the latter, with potentially dire consequences for the real people the discipline is intended to help.

The idea of economics as religion harks back to at least 2001, when economistRobert Nelson published a book on the subject. Nelson argued that the policy advice economists draw from their theories is never “value-neutral” but foists their values, dressed up to look like objective science, onthe rest of us.

Take, for example, free trade. In judging its desirability, economists weigh projected costs and benefits, an approach that superficially seems objective. Yet economists decide what enters the analysis and what gets ignored. Such things as savings in wages or transport lend themselves easily to measurement in monetary terms, while others, such as the social disruption of a community, do not. The mathematical calculations give the analysis a scientific wrapping, even when the content is just an expression of values.

Similar biases influence policy considerations on everything from labour laws to climate change. As Nelson put it, “the priesthood of a modern secular religion of economic progress” has pushed a narrow vision of economic “efficiency,” wholly undeterred by a history of disastrous outcomes.

Nice bit..

 

The end of the financial sector dictatorship?

Christoper Noyer of Bank of France reviews reviews the criticism around financial sector.

Firstly, is finance really a dictatorship? This question isn’t new: already Petronius, in Roman times, at the start of our modern era, asked: “What use are laws when money is king?” The question seems rhetorical, and you can sense in its resignation that the Latin writer (who, incidentally, was born in the nearby city of Marseille) was already worried about the difficulties of establishing the primacy of politics over finance. 

Like most policymakers, he thinks there is much criticism on financial sector but it does play a useful role in the economy. Yes there were excesses but there have been measures to control the excesses..

Sporting Mega-Events: What the Protesting Brazilians Learnt from their BRICS Compatriots

Brilliant piece by one of my favorite sports journos – Sharda Ugra. She points how these mega-sporting events are turning out to be disasters:

The legendary Pele got an earful from the hundreds of thousands of protestors on the streets of Brazil who refused to heed his appeal to “forget” the protests and support the national football team.  Unthinkable as it is, does it indicate that popular protests have finally overcome their inability to challenge the sporting mega-event, that the modern day “circus” is now seen for what it is: a scam of massive proportions? 

She points how LA Olympics in 1984 was the last of such event which was profitable. Rest have been curses on the respective economies with Brazil likely to add to the cursed list.

Cato Institute’s Project on troubled currencies and underreporting of inflation

A very interesting research by Prof Steve Hanke of Cato Insti.

He shows how some countries are underreporting inflation using exchange rates from black markets:

For various reasons — ranging from political mismanagement, to civil war, to economic sanctions — some countries are unable to maintain a stable domestic currency. These “troubled” currencies are associated with elevated rates of inflation, and in some extreme cases, hyperinflation. Often, it is difficult to obtain timely, reliable exchange-rate and inflation data for countries with troubled currencies.

To address this, the Troubled Currencies Project collects black-market exchange-rate data for these troubled currencies and estimates the implied inflation rates for each country. The data and estimates will be updated on a regular basis. A current snapshot is presented in the table below. 

It show Argentina’s actual inflation is 25% but reports 10.3% and so on. Six economies have troubled currencies..

Redesigning the ECB with regional rather than national central banks…

An interesting suggestion by Prof Michael Burda.

He says European System of Central Banks (ECB plus NCBs) should be redesigned like Fed:

Eurozone national central banks that take a national perspective risk politicising the ECB’s monetary policy. This column argues that this is a significant risk that should be overcome with a fundamental overhaul of the Eurosystem. A central element would be to take the ‘national’ out of the EZ’s national central banks. Just as US regional Fed banks encompass more than one US state, EZ ‘national’ central banks area of responsibility should be redrawn along economic geography lines rather than nation lines. An example of such a proposal is provided.

Nice bit. He even redesigns the EMU area into five regions…

Though, I wonder how the fundamental flaws of the union can be addressed by this re-design..