Archive for February 20th, 2014

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.


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.


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..

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