Archive for February, 2014

Two world growth outlooks – Stagnation vs high growth..

February 28, 2014

Jena Pisane Ferry of Bruegel points to these two orthogonal outlooks on world economy.

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Economics of European Soccer

February 28, 2014

A really nice article by Stefan Szymanski Professor of Sport Management at the University of Michigan.

He explains how this origins of European Soccer club culture came about and how it has changed over the years from an economics lens. There is a bit of everything in the article – history, competition, regulation, deregulation, labor markets, labor mobility etc etc.

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India’s government is increasingly for, of and by its biggest businessmen

February 27, 2014

Mihir Sharma writes this scathing criticism of the way government runs in this country.

It is all for oligarches for whom bulk of the decisions are made..

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Should we allow economics to run our temples?

February 27, 2014

Happy Shivratri to ME viewers..

I have been wanting to write this post for a while but kept missing it. Today is perhaps the right time given the day. One usually goes to the temple on this day and the experience strikes you. These are just random thoughts and comments/suggestions welcome.

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How grocery bags manipulate your mind…

February 27, 2014

Be careful while taking your own bags for shopping. There is a probability that you will either binge on extra calories via ice-cream/chocolates etc.

HBSWK has this superb summary of research by Uma R. Karmarkar and Bryan Bollinger on the topic.

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Forecast bias of government agencies – CBO and OMB (along with bluechip)

February 26, 2014

Robert Krol of California State University in the recent Cato Journal has this interesting paper.

There is always criticism over GDP forecasts by govt agencies. They are usually seen as upward biased in terms of growth and downward biased for inflation.

The author looks at GDP projections given by two US agencies – CBO and OMB:

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Why Does India’s Economic Growth Process Falter?

February 25, 2014

M H Bala Subrahmanya of IISc Bangalore in this article says the problem for Indian economy lies in missing the industrial bus. This keeps putting pressure on Indian economy leading to falter in growth process:

It is imperative that the Indian economy strives to achieve a structural transformation of industry by building up the capital goods industry base and acquiring the technological competence to boost the share of high-tech goods in merchandise exports. In the long run, this is the only sustainable way of achieving a trade surplus. This alone will lend strength and stability to the rupee.

The author looks at the performance of Indian industry. first before 1991:

Indian economic policymakers intended to pursue this path of development when they launched the Industrial Policy Resolution of 1948 and the Industrial Policy Resolution of 1956, followed by a series of industrial controls and regulations, supplemented by five-year economic plans. In the process, agriculture developed in certain pockets, if not across the country, organised industrial development progressed with a shift from consumer goods to the capital goods, intermediate goods, and basic goods industries, which also led to the development of an organised service sector. The share of consumer goods industries in MVA decreased from 49% in 1960-61 to 27% by 1991, whereas the share of capital goods industries in MVA increased from about 12% to almost 22% during the same period (Bala Subrahmanya 2009). Organised sector employment grew from 20.63 million in 1977 to 26.73 million in 1991, an annual average growth rate of about 1.9% (Ministry of Finance 1992, 1998). But the organised sector employed only about 8% of the total workforce in 1991. The export basket shifted from agro and processed goods towards manufactured goods, particularly light manufactured goods. Agro and allied products, which accounted for about 44% of the total exports in 1960-61, contributed 19.40% in 1990-91. The contribution of manufactured products, which was about 45% in 1960-61, increased to more than 79% in 1990-91 (Ministry of Finance 1998). Of course, manufactured exports primarily comprised light manufactured goods. However, the overall progress and the shift from the early 1950s to the late 1980s were on the desired path of economic development.

Post 1991:

The launching of broad-based economic reforms in 1991 had the objective of making the Indian economy (in general and industry in particular) achieve international competitiveness. In the process, several key policy reforms were introduced to enable the integration of the economy with the global economy at large. The expectations were high. Freer trade and freer investment laws were expected to accelerate achieving the desired path of economic development. How far have we come on the path of economic development since 1991?

The figures are dismal and disappointing. Organised sector employment increased from 26.73 million in 1991 to 28.99 million in 2011, or at the rate of 0.41 million per annum. During the same period, public sector employment declined absolutely from 19.05 million to 17.54 million. Given the “much sought-after” “opening up” and “gradual withdrawal” of the public sector from various economic and industrial spheres, this development may be natural and therefore justifiable. However, the growth of organised private sector employment (from 7.67 million in 1991 to 11.42 million in 2011, or at the rate of 2% per annum) cannot be considered significant. The organised sector, which employed about 8% of the total workforce in 1991, employed less than 7% of the total workforce in 2011. This brings out clearly that a large chunk of the growing workforce has been absorbed by the unorganised sector and the growth of the organised sector has failed to make any “dent” on the unorganised sector. The composition of the GDP has changed – agriculture’s contribution declined from 33% in 1990-91 to 16.17% in 2011-12 and industrial contribution hardly improved (from 24.15% to 25.45% during the same period), implying that the fall in agriculture’s share has been compensated for by the growth of the service sector (Ministry of Finance 2013).

What is more alarming has been the change that has occurred in the composition of MVA as well as the export basket. In the industrial sector, the relative share of consumer goods industries is growing, with non-durable consumer goods industries acquiring a dominant share and the base of the “much-needed” capital goods industries shrinking. The share of consumer goods industries in MVA increased from about 27% in 1991 to about 32% in 2007, whereas the share of capital goods industries declined from about 22% to about 19% during the same period (Singh 2013). The disturbing change in the structure of MVA is also reflected in the changing weights of sectors in the use-based classification of Indian industry (Ministry of Statistics and Programme Implementation 2013).

Similarly, diversification in the export basket has not taken place at all. The share of agro and allied products increased from 19.40% in 1990-91 to about 24% in 1996-97 but declined to about 15% in 2011-12. On the other hand, the share of manufactured goods in total exports declined from 79% in 1990-91 to about 74% in 1996-97 and further to about 61% in 2011-12 (Ministry of Finance 

The more things change/reformed, more they remain the same/or get worse..

What explains this decline? The space was vacated by public sector but not filled by private sector..

These macroeconomic indicators bring out that India’s economic growth experience since 1991 defies established economic growth theories. Why? The reasons for this development are not far to seek. The space vacated by the public sector (which spearheaded the role of transforming the Indian economy on the desired path of economic development till 1991) was expected to be filled by the organised private sector (domestic and foreign) when we launched broad-based economic reforms in 1991. The New Industrial Policy in July 1991 claimed, among others, that “Indian private entrepreneurship has come of age” (Ministry of Industry 1991). It was anticipated to give a fillip to industrial growth of the country and thereby transform the economy at an accelerated pace (than during 1951-91).

However, that did not happen. This can be attributed to two factors. One, FDI and multinational corporations (MNCs) have entered the service sector much more than the industrial sector, thanks to the favourable climate in the country for knowledge-intensive industries, housing and real estate, and consultancy and financial services (DIPP 2013). And two, the domestic private sector also entered the service sector, covering wholesale and retail trade, and communications and personal services, among others. This is reflected in that organised private sector employment grew by a meagre 0.93% per annum in the manufacturing sector during 1991-2011, whereas it grew by 4.15% per annum in the service sector during the same period (Ministry of Finance 2013).

India’s private sector should gear up and fill the gaps:

It is high time the captains of Indian private industry take the responsibility for driving industrial growth of the country towards maturity, with a renewed growth of capital goods industries to ensure that industry acquires its own technological competence. The apex chambers of industry should take the lead in the interests of both industrial growth and national economic growth. This should result in tilting the country’s export basket towards medium-tech and subsequently high-tech products, and favourably balance the trade and current accounts to offset the ever-growing import bill and strengthen the currency. (In this context, it is important to emphasise that fiscal incentives and monetary policy actions will only provide short-term relief but not long-term solutions.)

To conclude, it is imperative that the Indian economy strives to achieve a structural transformation of (manufacturing) industry by building up the capital goods industry base and acquiring the technological competence to lead to a growing share of high-tech goods in the composition of exports. In the long run, this can be the most sustainable way to achieve a trade surplus and thereby a current account surplus. This alone will lend strength and stability to our currency in the international market. Unless and until we achieve this, our economy will continue to experience a trade deficit leading to a current account deficit and remain vulnerable to even “minor external vibrations” turning into “shocks” more often than we can afford.

Till some time India skipping the industry bus was celebrated and did not cause much of a concern. The pains had to be seen overtime..A country with such a large population cannot afford to miss the industry bus…Lots of work needs to be done..

How brilliant blunders lead to progress in science..

February 25, 2014

It is nice to have such articles in Project Syndicate.

Mario Livio an astrophysicist at the Space Telescope Science Institute in Baltimore says some blunders turn out to be brilliant as they lead to real progress in science.

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if finance continues to take a disproportionate number of the best and the brightest…

February 25, 2014

Howard Davies (Prof at Sciences Po in Paris) reflects on the continued growth in jobs at finance sector in UK.

Despite the crisis, policymakers continue to expect London to grow as a financial centre and absorb more jobs:

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P Chidambaram’s last budget pays tribute to the rating agencies…

February 24, 2014

EPW edit in the latest edition says the Interm budget 2014-15 was a tribute to the rating agencies.  Well the previous budget was a tribute to the rating agencies as well. In his book Lexus and Olive Tree Thomas Friedman starts it by showing the importance of rating agencies. The book was written way before the crisis but the power of CRAs continues.

What has mattered in the last two years is achievement of the fiscal deficit target and not the mechanics of how it is achieved. Just do it the rating agencies seem to say and Finmin seems to oblige.

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Lessons for Asia from Europe’s History with Banking Integration…

February 24, 2014

One would imagine that post EZ crisis, experts would stop talking about economic/financial integration of neighboring countries. But this is not the case.

Douglas Elliot of Brookings in this paper looks at lessons for Asia from Europe’s banking integration history:

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Why (Some) Downtowns Are Back…

February 24, 2014

A nice essay by Prof. Mario Polèse (of Montreal’s Institut National de la Recherche Scientifique).

The author  points how downtowns have again sprung back in action after losing glory to suburbs in recent years..

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How deflation/low inflation situations are different in US, Japan and Europe..

February 21, 2014

Mickey Levy, Chief Economist of Bank of America explains the topic in voxeu.

He says there are no real reasons for worry with respect to US. Though Europe has to prevent itself from becoming another Japan. For Japan, it has to continue to make efforts to come out if its nearly 25 year mess:

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Will education vouchers work in India?

February 20, 2014

Kudos to Mint for agreeing to publish this interesting piece by Anurag Behar. He actually disagrees with recent Mint pieces which support education vouchers and says this is Mint’s case of politics trumping its economics!!

On 3 February, Mint’s main editorial suggested that “school vouchers” will help solve India’s problems in school education. To use a distinction thatMint often makes, this is Mint’s politics trumping its economics. The reality is that school vouchers will make things worse, both in terms of quality and equity in the Indian education system.

A mere Web-search on research evidence on the effectiveness of school vouchers, will tell you that this is perhaps one of the most investigated issues in education in the past 20-odd years. There are many studies from Chile, which started a voucher system in 1980, from the US where some kind of voucher system has been used in three places from the 1990s, and from some other countries. You will see that a large number of these conclude that vouchers are ineffective in improving learning outcomes (quality), and that they increase inequality in the education system. You will also find studies that will say that vouchers are effective.
It will also be apparent that most studies that conclude that vouchers are ineffective do so unambiguously. Most studies that conclude that vouchers are effective do so with caveats, and under special conditions. To make sense out of this maze one could actually look at some reports that survey the overall status on this matter. 

He says we need to stick to basics of education and not look at fancy solutions (which have not even worked in the west..):

We need to work on the fundamental issues in school education instead of focusing on such superficial, counter-evidential, and misleading ideas. Some of these fundamental issues are: grounds-up reform of our teacher education, cultural changes in the system—including empowerment of schools and teachers, examination and text-book reforms, etc.

The only sustainable solution for India, as for any other society, is a good public education system—and politico-ideological rhetoric won’t change that reality.
Nice bit…

How some companies are trying to manage their pension ..

February 20, 2014

Pensions is an area which requires deep knowledge of many things. It is a hugely fascinating sub-area in finance on which there is little research. 

HBSWK discusses this interesting case study on how GM has tried to pass its management of pension liabilities to a different company. Importantly, it says that despite defined benefit plans becoming history, they are still not dead as those liabilities still have to be paid. With interest rates at record low levels, they have to pump more funds in these funds. 

companies are still on the hook for paying benefits to those employees who have already been promised them. As their workers age, employers face the difficult question, How are we going to make good on those promises?

The question is particularly urgent now, says Viceira, who teaches in the area of investment management and capital markets. For starters, the financial crisis depleted many pension plans by dramatically reducing the value of investments, even while companies were still responsible for paying predetermined benefits.

Increasing the pressure are two other factors. Life expectancy has increased, adding to the length of time corporations are required to pay. And interest rates have fallen to historic lows, increasing the funding that companies must set apart to make up for the lower yield on the assets already in place.

“Companies have had to increase their contributions exponentially as interest rates declined,” says Viceira. That strain was a major factor in bankruptcies in the steel, airline, and car industries. More and more, companies are looking for a way out of pension plans, while still making good on their obligations.

They have three choices, says Viceira. The first is to do nothing and continue to invest in equities, hoping the numbers will work out. The second is to work a deal with employees for a lump-sum payment covering the value of their pension, walking away without further obligations. That number can be large, however, and few companies can afford to pay out all that money at once.

Third is to give the pension management to a professional firm:

The final option is for companies to “de-risk” their pension plan by putting assets into more predictable investments that generate enough income while still reducing the risk due to market or interest rate volatility. To do that, some companies are turning to the experts in evaluating risk: insurance companies.

In the HBS case study Prudential Financial-General Motors Pension Risk Transfer: Back to the Future?, Viceira, with Emily A. Chien, wrote about the historic de-risking of GM’s pension plan for salaried employees, a $25 billion deal negotiated last year. GM transferred its assets to Prudential, which then promised to make good on the benefit payouts in the form of guaranteed annuities.

Hmm..

Was NAFTA useful for Mexico?

February 20, 2014

Today is a day for Latam economies.

Mexico, US and canada signed NAFTA in 1994 which was pitched as a win-win agreement by trade experts. It has been 20 years since the agreement. What is the evidence?

K@W argues that NAFTA was largely beneficial for Mexico. CEPR has this policy report which argues the opposite and says there have been no gains whichever indicator one looks at.

First K@W:

Overall, Guillen states, “NAFTA has been great for Mexico. The only doubts are about whether it has been good for the United States. I believe it has been, but there is more of a mixed balance between losers and winners [in the U.S.]. For Mexico, it is a total success. The problem in Mexico, though, is that the export industry there has not been big enough to employ everybody in a large population…. Inequality has been produced, not because the wages of low-wage workers got lower, but because a significant number of workers are now receiving higher wages.

“It is obviously good, but it would be even better if, instead of only 30% of Mexican workers earning those very high wages for Mexico, you could get 70% of the workers.” For that to happen,Mexico will have to overcome its shortage of capital, he adds.

Despite such imperfections, Kemmsies believes that “NAFTA is on the cusp of being a great success,” but he also worries that “Mexico will kill the golden goose before it lays an egg” by imposing export taxes on foreign firms doing business there before those firms are fully convinced they should be in Mexico for the long haul. “Mexico has to worry about overplaying its hand” before the global automakers and other foreign investors have sunk their roots more firmly into Mexican soil.” Given the fragile state of the global economy – and the uncertainties surrounding Mexico’s ambitious reform efforts — many foreign companies “are still scared and risk averse. We are not [yet] past the start-up stage in Mexico.”

CEPR says:

As was well known at the time of NAFTA’s passage, the main purpose of NAFTA was to lock in a set of economic policies, some of which were already well under way in the decade prior, including the liberalization of manufacturing, foreign investment and ownership, and other changes.26 The idea was that the continuation and expansion of these policies would allow Mexico to achieve efficiencies and economic progress that was not possible under the developmentalist, protectionist economic model that had prevailed in the decades before 1980. While some of the policy changes were undoubtedly necessary and/or positive, the end result has been decades of economic failure by almost any economic or social indicator. This is true whether we compare Mexico to its developmentalist past, or even if the comparison is to the rest of Latin America since NAFTA. After 20 years, these results should provoke more public discussion as to what went wrong.

Phew..

No wonder eco is called dismal science..One just does not know what has worked and what has not..

There are four kinds of countries in the world: developed countries, undeveloped countries, Japan and Argentina

February 20, 2014

Apparently Simon Kuznets seems to have said these wonderful quote. I mean the quote is so good that one has to keep remembering it and repeating it. He meant nothing really changes with respect to these countries. Though Japan really pushed itself out of the quote developing really fast till the 1990 crisis. But Argentina remains in the list perennially.

The economist has this superb article ( Ht MR Blog) on woes of Argentina from a historical perspective:

In the 43 years leading up to 1914, GDP had grown at an annual rate of 6%, the fastest recorded in the world. The country was a magnet for European immigrants, who flocked to find work on the fertile pampas, where crops and cattle were propelling Argentina’s expansion. In 1914 half of Buenos Aires’s population was foreign-born.

The country ranked among the ten richest in the world, after the likes of Australia, Britain and the United States, but ahead of France, Germany and Italy. Its income per head was 92% of the average of 16 rich economies. From this vantage point, it looked down its nose at its neighbours: Brazil’s population was less than a quarter as well-off.

It never got better than this. Although Argentina has had periods of robust growth in the past century—not least during the commodity boom of the past ten years—and its people remain wealthier than most Latin Americans, its standing as one of the world’s most vibrant economies is a distant memory (see chart 1). Its income per head is now 43% of those same 16 rich economies; it trails Chile and Uruguay in its own back yard.

The political symptoms of decline are also clear. If Argentina appeared to enjoy stability in the pre-war era, its history since then has been marked by a succession of military coups. The first came in 1930; others followed in 1943, 1955, 1962, 1966 and 1976. The election of 1989 marked the first time in more than 60 years that a civilian president had handed power to an elected successor.

It goes on to say how Argentina keeps making mistakes and never learns. I mean despite all this reading one fails to figure why it is a place full of ideas that dont’ work? As Tyler Cowen says:

Yes of course there was bad policy, but how did the country get into such a bad idea trap to begin with?

The same mistakes over and over again. Political economy of the country does not allow the country to rise..

Melting ice caps and the economic impact of opening the northern sea route..

February 19, 2014

Blind focus on just macro and econ stuff and ignoring things like geographical changes (which then impact economics),makes the discipline so narrow. Lot of economics is driven by geographies after all whether it is economies or people, they belong to a certain geography. But the textbooks (and research) hardly mention the role of geography. So hardly things are covered in this space.

So got this newsletter from CPB Netherlands about this seminar (paper here) on the topic of Northern Sea Route. NSR apparently is a sea route along the coast of Russia which is open just for two months as it is remains frozen in rest. Now the ice seems to be melting in the region due to global warming and this means the route can remain open for most part of the year.

The paper looks at the econ implications:

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Of dentists and economists – the importance of a consistent economic policy framework..

February 19, 2014

A nice speech by Jens Weidmann, President of the Deutsche Bundesbank.

It is obviously based on the famous Keynes quotes on how econs would be seen doing a good job if they are as respected as dentists:

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While the RBI has moved to CPI, FinMin remains on WPI..

February 18, 2014

Finance Minister in  his 2014-15 interim budget speech says:

Last year, when I read the Budget speech, WPI headline inflation stood at 7.3 percent and core inflation at 4.2 percent. Through the year, inflation saw its ups and downs. At the end of January 2014, WPI inflation was 5.05 percent and core inflation 3.0 percent. Both the Government and the RBI have acted in tandem. While our efforts have not been in vain, there is still some distance to go. Food inflation is still the main worry, although it has declined sharply from a high of 13.6 percent to 6.2 percent.

One may question whether RBI and FinMin have acted in tandem to tame inflation as latter was more into growth issues. But the differences over which index to use – WPI or CPI-  remains.  And this is not the usual FinMin RBI fight (as they have stopped for the wrong reasons) but has much deeper ramifications.

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