Archive for July, 2014

Can 21st century economic problems be solved with 20th century modes of analysis?

July 31, 2014

There is a lot of commentary on state of economics education but nothing happening other than words.

TCA Srinivasa Raghavan joins the debate asking can 21st century economic problems be solved with 20th century modes of analysis?

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Why killing cash is MasterCard’s main strategy…

July 31, 2014

Ajay Banga. chief of Mastercard gives a nice interview of MasterCard’s strategy.

He says usage of cash is bad economics:

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Understanding Argentina’s Debt Default..

July 31, 2014

Argentina’s affairs with crisis continues. It is like a perennial story. The talks have failed and yet another default is looming. Wondering which courts will act on this

 of Metropolitan State University of Denver explains what led to this crisis and way ahead. His main idea is the crisis has its origins in Arg’s history. They have always resorted to debt financing and never really learnt the lessons.

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Learning economics lessons from Football world cup…case of Germany

July 30, 2014

Well the idea is to always connect to the winning team. Wondering what would have been said if Germany lost and Argentina won.

Anyways. Harold James the Princeton historian says world cup shows individual brilliant performances can only take you that far. What matters is team work and deeper reforms even if it means some years of pain. This is shown by Germany in both its economics and its football:

Germany’s World Cup performance was a brilliant demonstration of the importance of deep, long-term reforms. In the early 2000s, German soccer was boring. Germany’s heroes were from the distant past.

It was easy to draw an analogy between ineffective and mundane performance in the stadium and the general state of the country. At the time, Germany was regarded as the sick man of Europe, with a proclivity for highly protected labor markets. Something needed to be shaken up.

In 2004, the German national team’s new trainer, Jürgen Klinsmann, did just that. Beyond more aggressive tactics, his radical new strategy entailed a fundamental revolution in sports education and training, with programs that identified and propelled promising young players through the teams in Germany’s domestic league. In other words, it was a long-term strategy.

Fortunately, the team’s management understood this and persevered, despite the lack of a short-term payoff. Klinsmann’s assistant trainer, Joachim Löw, succeeded him, and became the architect of the 2014 championship bid.

Germany’s soccer revolution was mirrored in the economy. Beginning in 2003, Chancellor Gerhard Schröder, a Social Democrat, launched a series of reforms aimed at increasing labor-market flexibility and, more generally, laying the foundations for long-term prosperity.

But this future-oriented approach had serious short-term political consequences, with Schröder losing the next election and his party’s popularity diminishing considerably. Neither Schröder nor Klinsmann attained superstar status, but they carried out the reforms that mattered.

But yeah nothing can take away from the fact that despite having many superstars Germans kept themselves grounded. No one was really hyped.

Another lesson Prof James points to is allowing foreign players to play. Well this is something most European teams have allowed. One can hardly call most sides as truly national ones these days.

The main idea is to keep things simple. Superstars both in economics and soccer do more damage over the long run. One should always be looking at long term gains over short term losses (provided shirt term does not get too long!):

But the most important lesson is that there are no quick fixes or magic bullets. An exceptional performance by a superstar soccer player can be beautiful – even inspiring – just as rescue mechanisms and stimulus packages can rally markets and raise hopes. But their impact is fleeting.

Consistent, reliable, long-term success requires forward-thinking measures that focus on building strong fundamentals. Europe needs such an approach, one that includes microeconomic adjustments and programs that encourage mobility, flexibility, and innovation. If other Europeans emulated the German model, Europe would begin to look – and play – like a championship team.

Change of fortunes for Germany. One still hears/reads how Germany has damaged the European system by pushing its agenda to EMU. It seems the win in soccer world cup seems to have changed some minds…

Political economy of bad data..How it leads to difficulty in policymaking?

July 30, 2014

Justin Sandefur and Amanda Glassman of CGDEV have this interesting paper.

We all know how bad data leads to problems in econ decision making. And then the blame comes to policymakers. So if you don’t know the right inflation levels one is never sure how much to tighten or ease. Same is the case with data on poverty, health etc.

Most research misses the political econ connections for this bad data. Basically many a times bad data remains as political forces are able to reap benefits from misreporting.

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The world is ready for a global economic governance reform, are world leaders?

July 28, 2014

An interesting piece on Bruegel blog on global governance. They point to results from a survey amidst G20 leaders.

Bottomline:

A survey of G20 practitioners reveals how, notwithstanding the post-crisis loss of momentum, the G20 is still considered a useful forum of discussions. While changes to its composition and workings would be accepted (to varying degree), major revisions in global economic governance are ruled out, bar in case of another major crisis. Our claim is that, at a time of major rebalancing in world economic weight, intransigence by the detainers of power in (what now looks like) an old global governance framework will imply a fade in relevance of the Bretton Woods institutions and G-fora, and their replacement by new avenues of coordination and discussion.

 

How India managed its economy post-taper shock?

July 28, 2014

RBI’s ED Deepak Mohanty does a nice summary of the events in India economy post Bernanke’s May taper talk.

He sums up the talk at the end:

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Why growing via value addition is not enough?

July 28, 2014

Ricardo Hausmann again questions the prevailing wisdom with respect to growth.

He says one of the standard growth mantras is value addition. Take a raw material and add value to it. But growth comes from identifying innovation around those raw materials.

Poor countries export raw materials such as cocoa, iron ore, and raw diamonds. Rich countries export – often to those same poor countries – more complex products such as chocolate, cars, and jewels. If poor countries want to get rich, they should stop exporting their resources in raw form and concentrate on adding value to them. Otherwise, rich countries will get the lion’s share of the value and all of the good jobs.

Poor countries could follow the example of South Africa and Botswana and use their natural wealth to force industrialization by restricting the export of minerals in raw form (a policy known locally as “beneficiation”). But should they?

Some ideas are worse than wrong: they are castrating, because they interpret the world in a way that emphasizes secondary issues – say, the availability of raw materials – and blinds societies to the more promising opportunities that may lie elsewhere.

He discusses the case of Finland:

Consider Finland, a Nordic country endowed with many trees for its small population. A classical economist would argue that, given this, the country should export wood, which Finland has done. By contrast, a traditional development economist would argue that it should not export wood; instead, it should add value by transforming the wood into paper or furniture – something that Finland also does. But all wood-related products represent barely 20% of Finland’s exports.

The reason is that wood opened up a different and much richer path to development. As the Finns were chopping wood, their axes and saws would become dull and break down, and they would have to be repaired or replaced. This eventually led them to become good at producing machines that chop and cut wood.

Finnish businessmen soon realized that they could make machines that cut other materials, because not everything that can be cut is made out of wood. Next, they automated the machines that cut, because cutting everything by hand can become boring. From here, they went into other automated machines, because there is more to life than cutting, after all. From automated machines, they eventually ended up in Nokia. Today, machines of different types account for more than 40% of Finland’s goods exports.

The moral of the story is that adding value to raw materials is one path to diversification, but not necessarily a long or fruitful one. Countries are not limited by the raw materials they have. After all, Switzerland has no cocoa, and China does not make advanced memory chips. That has not prevented these countries from taking a dominant position in the market for chocolate and computers, respectively.

Interesting bit as always from Prof Hausmann..

Doing Business Indicators: The Case of Singapore

July 25, 2014

There is huge clamor in Indian media over improving India’s rankings in Doing Business rankings.

Here is an interesting paper which looks at how Singapore goes around doing its business. And how that reflects on its rankings. The paper is nicely balanced as it clearly says one should not really make this the main objective of economic policy. The rankings have serious limitations (like many such rankings).

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How Lithuania’e entry changes the ECB’s voting system

July 25, 2014

This blog had pointed to how ECB will now change its MPC voting pattern as Lithuania becomes its 19th member. Earlier it was one person one vote and all 18 members voted. Now it will be 15  against 19 members (18+1 Lithuania).

 

Bruegel just puts all the facts on the table and tells you what is going to happen:

….Votes will not be completely independent on the size of the countries anymore. The member of the Governing Council will in fact be assigned to groups, depending on the respective weight of their countries in the euro area economy (GDP at market prices, weighted for ⅚) and financial sector (MFIs’ aggregated balance sheet, weighted ⅙). The aggregate reference measure will be adjusted either every five years or when the number of EMU member states changes. Based on this ranking and as long as the number of governors does not exceed 21, the groups will be as follows (figure 1):

Group 1: will comprise the governors of the NCBs of the 5 countries with the largest weight in the euro area. At present, members would be Germany, France, Italy, Spain and the Netherlands. This countries will  share 4 votes, so each country will miss one vote every five.

Group 2: includes the rest of the world, i.e. the governors of the NCBs of the remaining countries. These are 14 countries and will share 11 votes.

The post then figures out what will happen to the voting patterns. Say what happens when members will be 21, 22 etc. In sum, not much changes as biggies maintain their status:

First, the power of the Executive Board will potentially rise, since it will have 29% of the votes at each session and in a permanent way.

Second, in terms of voting rights balance, not much changes. The 5 biggest countries will have under this system 19% of the voting power against 20% in the non-rotating system. The small countries will instead have 52% of the votes against 56% at present.

Third, the influence of biggest countries will be maintained – the period of rotation is one month, so no one will be excluded for a long period of time –  and most importantly it will be secured in the long term, as they the voting frequency within the group of five will always be 80%. Moreover, since all governors (also those who cannot vote in a given section) are present to the discussions and since this voting is by definition a sort of repeated game, it seems unlikely that decisions will be taken “behind the back” of any big country.

Last but not least, after explaining how it works, there is another “small” issue to point out. This system of rotation is built with a monthly frequency, with rotation occurring at the beginning of the month. The ECB in its Monthly bulletin of July 2009 clarifies that “as a rule, two physical Governing Council meetings take place every month. The first is dedicated exclusively to monetary policy decisions, and the second generally deals with all other issues to be decided by the Governing Council.

The one month rotation period allows governors to exercise their voting rights in both types of meeting.” But ECB President Draghi recently communicated that from January 2015 onwards the Governing Council will make monetary policy decisions once every six weeks rather than once every month. Which means that the length of each “voting-right cycle” would be not match (will be shorter) than the “monetary policy decision cycle”. 

Unless the ECB wishes to change the rotating voting system again, of course..

Interesting changes at ECB..

Thinking about multilateral DFIs…just too many and all doing similar things..

July 24, 2014

Prof. Robert Wihtol of Asian Institute of Management writes this very useful and timely paper on state of Multilateral Development Finance Institutions. The title of the paper is Whither Multilateral Development Finance? which resonates with Whither Multilateral Trade. All things multilateral seems to be on their way down

Wihtol gives a good overview of the several MDFIs we have and then looks at the latest one BRICS Bank:

Multilateral development finance is at a critical juncture. In the past 70 years, it has developed through four distinct stages. The Bretton Woods conference established the World Bank and the International Monetary Fund in 1944 to finance post-war reconstruction and stabilize the global economy. The second stage saw the establishment of regional development banks in the 1950s and 1960s. This was followed by the emergence of subregional banks.

In the fourth stage, from the mid-1970s to the 2000s, specialized vertical funds were established to address global issues, and private development finance expanded. The multilateral financial architecture now has a multitude of development banks and funds. As the architecture enters the next stage, the development agenda is changing rapidly. Financially constrained traditional donors are unwilling to recapitalize the existing banks, while emerging donors want to reduce the role of traditional donors and increase their own funding. Emerging-economy bilateral programs are expanding. At the same time, new multilateral initiatives are advancing fast.

The BRICS countries’ New Development Bank and related contingent reserve and the PRC’s Asian Infrastructure Investment Bank initiative have added to the pressure for reform, and to the risk of fragmentation. An alternative financial architecture may take shape led by emerging economies, playing down coordination and well-established development, safeguard, and governance criteria. However, there is also an opportunity for genuine reform to ensure a new and innovative multilateral architecture.

Nice stuff and bit of history of all these MDFIs. I liked this one on ADB:

The Asian Development Bank (ADB) was established in 1966 and benefitted from the experience gained in establishing the other regional banks (Watanabe 1977: 1–14). ADB had the strong support of two key donors, the US and Japan. In the negotiations on establishing ADB, it was agreed that the president would come from Japan and the headquarters would be located in the Philippines, a strategic ally and former colony of the US. Given ADB’s modest resource base compared with the World Bank, it was initially agreed that India, whose vast financial needs would have overwhelmed ADB, would continue to borrow only from the World Bank. India and the PRC, which joined ADB only in 1986, started to borrow only in the late 1980s.

Interesting to note this trivia..

I think there are just toomany of these institutions and there is a need for a merger of sorts. China is building another infra bank alongwith the BRIC Bank whose focus is also going to be on infra just like BRIC Bank. How many do we need?

These multiple multilateral instis have created their own kind of elite bureaucracy and it is really ironical when they ask developing countries to reform their bureaucracy. We get a lot of commentary from these institutions over this and that reform in their member econs. High time they introspect on their side of the reform story too. ..

How about having a magician teach a class on innovation (would do for economics too!)…

July 24, 2014

An interesting article in HBSWK.

It talks about this HBS Prof Stefan Thomke who actually teaches a course on innovation with Jason Rendel a top magician. Both innovation and magic are connected in their own ways. Both are interested in creating the wow moment:

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How do we reform the Fed (and other central banks)?

July 24, 2014

Troubles don’t end for adv eco central banks. The trouble is acute for fed ion particular where politicians have taken special interest in the already huge and growing power of Fed.

The House financial services committee recently heard experts on what is the way ahead for Fed. The proposed rulebook suggests Fed to follow Taylor rule and stick to it. This has led to obvious reactions from Fed which believes this will undermine its independence (nearly sick of this word).  The committee also had John  Taylor of the Taylor rule speaking. So what to expect.

But what is this deal about independence? What is central bank independent of? Martin Feldstein provides some clarity:

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The Political Economy of the Telephone in the Gilded Age..

July 23, 2014

Looks like a terrific book by Robert MacDougall. It is reviewed here and that is how I got to know of the book too.

This book seems to have bit of everything:

In 1908, G.W.H. Kemper, a prominent resident of Muncie, Indiana, had two telephones. One telephone connected him to the local Bell affiliate, which in turn connected him to a huge network encompassing four million telephones east of the Rocky Mountains. The other telephone, leased from a so-called “Independent” company, connected him to only about 1,500 telephones in and around Muncie. Robert MacDougall wants to understand what this turn-of-the-century competition between the two systems meant for U.S. and Canadian history. Doing so allows MacDougall to explore a key insight knitting together business history and the history of technology — that “the most important fact about electrical communication” in the nineteenth and early twentieth centuries was not “the separation of communication and transportation, but the marriage of communication to capital” (p. 62).

This is an excellent book for several reasons. As the title suggests, it is foremost about the political economy of the telephone. As such, it is a model of how to write the history of a technology, particularly a technology as it matures and coalesces around competing visions and organizational structures. Robert MacDougall’s book weaves together corporate strategy, regulation (from municipal to federal levels of the state), the issue of local versus central control, and the scope and influence of consumers’ choices. The heart of MacDougall’s story is the battle between the Bell System and the Independents in the United States and Canada. This battle took place between the expiration of Alexander Graham Bell’s key telephony patents in the mid-1890s and about 1920 when the Bell System accepted state and federal regulation in the U.S. in exchange for a de facto monopoly of the nation’s telephone network.

Superb. Just a bit expensive currently on Amazon. Hopefully there will be an Indian edition soon..

Is owning cows/buffaloes a cost or a benefit? Do things differ across UP and AP?

July 23, 2014

The value of cows/buffaloes is spilling over to economics (not just about spilling milk) as well. We are having some interesting econ research papers on ownership of cows/buffaloes.

There was this interesting paper by Karlan et al which looked at the returns on owning cows/buffaloes. They found highly negative returns:

Our main finding is that, on average, households earn very low returns on their investments in cows and buffaloes. Excluding the value of household labor (i.e., valuing it at zero), we estimate  returns on the order of -6% for cows and 12% for buffaloes. Including the value of household labor, we find average returns of -64% and -40% for cows and buffaloes respectively. 

Number of reasons were cited for why people still own them despite such negative returns.

Now in a reply of sorts, Orazio Attanasio & Britta Augsburg (UK based scholars) dispute the idea. They say previous paper just look at one year returns. In a dataset of AP farmers for 3 years they see cows/buffaloes  give positive returns as well:

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Impact of change in Indian government in 2004 on disinvestment outcomes…lessons for today?

July 22, 2014

I have been reading this paper by Profs. Siddhartha G. Dastidary & Raymond Fismanz of Columbia University and Tarun Khanna of HBS. It is quite an interesting paer given its relevance today.

This paper looks at the event when NDA was voted out suddenly by UPA in 2004. The former was pro-privatisation and latter not as much given the coalition compulsions as well. So, the authors look at the returns on share prices of these PSU companies which are to be disinvested. The performance is seen in a 4 trading day window from May 13 to May 18 2004.

The authors divide the disinvest companies into 4 types based o  a classification made by NDA then:

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Should we close down the Planning Commission…a counter view

July 21, 2014

It is difficult to support the cause of Planning Commission in these times. But it is important to have people on both sides of the debate.

Prof. Prabhat Patnaik of JNU in his typical style argues why  the Planning  Commission must continue. Infact it needs to be redefined to fight the neo-liberal capitalism we are facing.

The National Democratic Alliance government is reported to be considering an end to the Planning Commission. Whether or not this actually happens, we are likely to see a further enfeeblement of the Planning Commission, a process that has been going on for quite some time.

Why should there have been such a process of enfeeblement at all? Some would answer this question by asserting that a Planning Commission simply cannot have any role in a neo-liberal regime. The country has moved away from the “Nehru-Mahalanobis strategy”1 which visualised substantial public investment, and hence the need for a “plan” to effect such investment. With the public sector displaced from its leading role, any particular “public” engagement in development projects that may still be required in a neo-liberal regime (through public-private partnerships for instance) can be planned and executed by the concerned departments. There is no longer any role for an overarching body like the Planning Commission.

But this is not a compelling argument. There can still be a role for a Planning Commission even under the new dispensation, but a role different from the one it had earlier. This new role can be to provide a counterpoint to neo-liberalism. Paraphrasing Bertolt Brecht’s famous line: “In the dark times will there also be singing? Yes, there will also be singing about the dark times”, one can say: “Can there also be planning in the neo-liberal times? Yes, there can also be planning for coping with the neo-liberal times”.

In other words, even a government that lacks the will to take the country out of the vortex of globalisation, and hence willy-nilly has to pursue a basically neo-liberal policy trajectory can still have a national planning body that provides a counterpoint to neo-liberalism. Such a Planning Commission can be concerned with working out ways of preserving what remains of the public sector, with preventing the decimation of peasants and traditional petty producers that neo-liberalism brings in its wake, and with providing amelioration, by formulating welfare schemes, against the immiserisation of the people through inflation and unemployment.

He says Planning Commission stopped being the agency for development and just pushed the neo-liberal agenda as done by other agencies. He also takes on India’s elite econ policymakers:

Such a full-fledged neo-liberal state is characterised not just by a set of policies that fall under the rubric of neo-liberalism. It has a set of specific institutional features as well. These include: the “autonomy” of the central bank; the elevation of the Ministry of Finance to the status of a super ministry dominating all others; the manning of the central bank and of the finance ministry by ex-employees of the International Monetary Fund (IMF) and the World Bank, or of certain other global financial institutions (who usually go back to their parent bodies at the end of their tenures with the government); the organisation of training programmes for the bureaucracy, especially of the home-grown segment of the financial bureaucracy, by these multinational institutions or by universities in the metropolis acting on their behalf; and a general increase in the power of the bureaucracy over the elected political representatives of the people on the grounds that the latter are corrupt and cannot be trusted with key economic decision-making (which is often enough true, except that the “corruption” itself is usually a consequence of the privatisation spree unleashed by the neo-liberal regime, and tacitly acquiesced in by the very members of the global financial community manning the government, who then use it to discredit the “politicians”).

The transition from a postcolonial Nehruvian state to a neo-liberal state is not easy to effect within a political framework characterised by universal adult franchise. But the problem of negotiating such a transition is typically sought to be resolved through at least two means. One is the insulation of economic decision-making from the domain of politics, so that no matter who comes to power the same policies continue to be pursued in the realm of the economy.

This insulation is achieved partly by putting in institutional arrangements of the sort I mentioned above, which shift decision-making from elected political representatives of the people to employees and ex-employees of the World Bank, IMF, and other global financial institutions. And it is achieved partly by the need to ensure that capital does not fly away from the economy in question: if the nation state confronting globalised capital pursues economic policies – such as expansionary fiscal policies – which are different from those demanded by such capital, then it runs the risk of exposing the economy to debilitating capital flight, which can erode in no time the political support base of the ruling government; this serves to prevent any bourgeois political formation from nurturing ambitions of having an economic agenda of its own which is at variance with what is demanded by globalised capital. The possibility of a relatively autonomous nation state negotiating with globalised capital via a Planning Commission under these circumstances (when the economy is not delinked from globalisation through restrictions on cross-border movements of goods and capital) is then snuffed out.

Given the policy failures of IMF in multiple countries, one is not sure why we care so much for its trained economists. If we question Planning Commission, shouldn’t we question IMF’s role as well? But then anything goes as long as certain mainstream agendas are promoted.

Further:

It is not surprising that the process of enfeeblement of the Planning Commission, which is apparently reaching a denouement now, began long ago, when the Planning Commission, instead of being assigned the role of providing a counterpoint to neo-liberalism, was simply made into an instrument for promoting neo-liberalism.

Over the decade of the 1990s we find a bizarre phenomenon: while the tax-gross state domestic product (GSDPN) ratio of the states was higher than that of the centre on average, and even held up well, the states were caught in a debt trap at the end of the decade, which was then used by successive Finance Commissions, at the behest of the centre, to force “neo-liberal reforms” upon them. (This was a blatantly unconstitutional course for Finance Commissions to follow, against which Amaresh Bagchi, a member of the Eleventh Finance Commission, had given a dissenting note.)

An extremely important reason why the states got into a debt-trap was the high interest rates charged by the centre on the loans it made to them, rates whose weighted average for individual states exceeded in many cases the nominal growth rate of that state’s GSDP (which was a recipe for a debt-trap). And the rates charged on central plan assistance to states, instead of breaking this high-interest-rate regime, contributed to it. The Planning Commission in short was used as an instrument for making the states fall in line behind neo-liberal policies.

When the United Progressive Alliance (UPA)-I came to power, corresponding to the duality of thinking within the ruling circle, there was a peculiar duality that developed in the realm of institutions: while the Planning Commission continued to be used for promoting the neo-liberal agenda (through its insistence, for instance, on public-private partnerships), an altogether different body was created in the form of the National Advisory Council to formulate welfare programmes. True, the Planning Commission during this period, when Left support was needed to prop up the government, did have a diversity within it, which prevented its complete collapse into neo-liberalism, and gave rise to some striking initiatives like the Rashtriya Krishi Vikas Yojana; but with UPA-II little space remained for such initiatives and the process of enfeeblement gathered momentum.

Does the argument which I have been putting forward, namely, that a process of enfeeblement of the Planning Commission is embedded within the unfolding political economy of a neo-liberal regime, imply that it is an inevitable phenomenon? This question is both pertinent and topical at this moment. There is currently a debate among progressive economists in the United States (US) on whether increasing income and wealth inequality among people is a matter of pursuing particular policies or whether it expresses an immanent tendency of capitalism.

I think there is a need for a broader debate on the role of certain institutions. We have seen the whole world turn around in the last 5-6 years. One cannot say that planning kind of institutions alone have failed. The market savvy ones have failed and miserably too. We forget that by doing away with Planning Commission kind of places on the basis of them being too centralised, we make the finance ministry even more centralised. We need some distribution of powers. And who knows just like UPA created NAC for the role of Planning Commission, current govt might created another planning commission kind of agency.

Much of policy work too goes around in circles..

A unique informal banking system for rickshaw drivers in Delhi

July 18, 2014

An interesting post by group of researchers based at Delhi.

They figure an arrangement amidst rikshaw drivers in Delhi to tansfer money to homes:

Seasonal, rural migrants that drive rickshaws in cities have little or no access to formal financial institutions. Based on a survey of over 100 rickshaw drivers in Delhi, this article highlights a unique mechanism used by the drivers for remitting earnings to their families back in villages, obtaining short-term loans, and managing their savings.

What is the system?

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What is behind Latin America’s declining income inequality?

July 18, 2014

Well, in case the topic surprises don’t you worry. It is expected to surprise most. I mean how can income inequality decline of all places in Latam when it is rising everywhere?

But then the catch is despite the decline, it still has the highest inequality across the world. This paper by IMF econs  looks at reasons for this decline:

Income inequality in Latin America has declined during the last decade, in contrast to the experience in many other emerging and developed regions. However, Latin America remains the most unequal region in the world. This study documents the declining trend in income inequality in Latin America and proposes various reasons behind this important development. Using a panel econometric analysis for a large group of emerging and developing countries, we find that the Kuznets curve holds. Notwithstanding the limitations in the dataset and of cross-country regression analysis more generally, our results suggest that almost two-thirds of the recent decline in income inequality in Latin America is explained by policies and strong GDP growth, with policies alone explaining more than half of this total decline. Higher education spending is the most important driver, followed by stronger foreign direct investment and higher tax revenues. Results suggest that policies and to some extent positive growth dynamics could play an important role in lowering inequality further.

Nice paper. Looks at income inequality in most (if not all) Latam economies. And yes one sees it declining in most!

Relationship between trust and the size of the welfare state…

July 18, 2014

An interesting piece by Yann Algan, Pierre Cahuc, Marc Sangnier, all three based at France’s economic schools. French econs are really getting popular these days.

They say the relationship between trust amidst citizens and size of welfare state  isn’t as linear as imagined. The higher the trust and higher the size of welfare is not really true. What we see is twin peaks. Both states with high and low trust can have higher welfare spending:

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