Archive for February 20th, 2019

How do people fall to Ponzi schemes in Ahmedabad of all places?

February 20, 2019

I had earlier blogged about how West Bengal continues to be a thriving place for raising money through illegal ways.  Former SEBI chief UK Sinha had then remarked:

U K Sinha, chairman of the Securities and Exchange Board of India (Sebi) expressed surprise at the number of firms raising unauthorised deposits from West Bengal, a state where the new Bandhan Bank is based.

“Unauthorised money-raising is a major issue in east India. West Bengal is also the place where such mushrooming of firms has come up. The story needs to go much deeper as how such a large number of people get duped there,” Sinha said, adding the capital markets regulator has already shut down about 250 such illegal entities, with one crossing deposits worth more than Rs 50,000 crore.

“Perhaps in eastern part of India, the economic activity, job opportunity (and) growth have not been in an egalitarian or disbursed way. This has been one of the primary causes (for chit fund scams),” he said here.  Sinha added that even though one can argue that deepening of network could have been helpful, the “story goes much deeper”.

Surprisingly, there is a long history of connivance and ignorance in West Bengal when it comes to money. My post looks at the issue.

Recently, I came across this news on how people were tricked in Ponzi schemes in heart of finance- Ahmedabad. It said around 876 people have lost nearly 9 crore to 7 ponzi schemes in last 2 years. These are the official numbers as of now and actual numbers could cross Rs 260 crore.

One can understand people designing schemes to cheat people all over and people falling in those traps. But to imagine people in Ahmedabad get duped on such schemes is puzzling where understanding of finance is expected to be much better . The designers are perhaps smarter here. But even then…

Should Denmark ban EUR 500 note? ECB thinks otherwise…

February 20, 2019

Nice bit on ECB website.

Denmark is proposing to ban the usage of EUR 500 note as they believe it is used mainly for criminal and money laundering purposes. It seeks ECB’s advise and the central bank expressed caution against the move. Couple of points here. First, Denmark is part of the Union but does not use Euro as its currency. However, Euro is accepted as a means of payment especially in tourist places. Second, ECB has already stopped printing of Euro 500 note but it remains legal tender.

Given this, ECB says to refrain from any such ban:


Inside the 18th-century contest to build the White House

February 20, 2019

Fascinating essay by Noel Grove, William Bushong, and Joel Treese. They track the history of White House architecture and its architects.

In 1792, leading architects entered a competition to build the President’s House, George Washington judged it, and the winner built an American icon.


Poland is Europe’s growth champion. What explains its success and can it continue?

February 20, 2019

Marcin Piatkowski has recently written a book on Poland growth story.

In this column he writes on the Poland growth story and gives a preview of his book.

Amidst all the current political hoopla, the key story concerning Poland’s path over the past 30 years is not receiving the attention it deserves. The country has been recording high levels of growth since 1989 and is making strides in catching up with Western Europe.

The Polish economy has become a key European success story. Since 1995, Poland has also become the fastest-growing large economy in the world among large countries at a similar level of development. It is beating even the Asian tigers such as South Korea, Singapore and Taiwan.

Historically, Poland has always done badly:

To get a sense of the historic achievement, it is worth recalling that, for most of more than a thousand years of its history, Poland (along with the rest of Central and Eastern Europe) was a perennial economic underachiever.

The country was essentially stranded on the periphery of the European economy. Internally as well, Poles never managed to pull together enough social consensus to create a dynamic economy.

Adam Smith, the venerable voice of market thinking, had derided 18th century Poland for not being able to produce “any manufactures of any kind, a few of those coarser household manufactures excepted, without which no country can well subsist.”

It is no surprise under those circumstances that Poland’s per capita GDP, measured on a purchasing power parity basis, from the start of the 17th century until very recently, almost never exceeded half of the average level of Western Europe.

And as recently as 1991, at the bottom of the post-communist recession, the average income of Poles plummeted to less than one-third of the real income of an average German (and to less than one-tenth in nominal terms).

At the time, Poles even earned less than the citizens of Gabon, Ukraine or Suriname. In 1989, there were hardly any experts who would bet any money on Poland’s future economic success.

And yet, almost 30 years later, Poland has become by far the most successful economy in Europe. Since 1989, it has increased its GDP per capita by almost 150%, more than any other country on the continent.

By comparison, per capita incomes in the Czech Republic increased by only three-quarters, in Hungary by barely half, while the Eurozone’s performance improved by less than 40%. In purchasing power terms, Poland’s GDP per capita grew even faster from $10,300 in 1990 to more than $28,000 in 2018 (in 2011 constant dollars).

In 2018, the average level of income in Poland exceeded two-thirds of the average level of the Eurozone. That is an impressive achievement for a country that only entered the EU in 2004 and had to shed the painful legacy of decades of Communist rule (See Figure 1 below).

What explains Poland’s success? Good economic policies!

In a new book, I argue that after 1989 Poland was successful for the first time ever because it adopted good economic policies, including a deep economic reform in 1990-91, fast institution building, foreign debt restructuring, a boom in education as well as an open and transparent privatization process.

Crucial as well has been the fact that Poland, unlike most other Central and East European economies, did not produce oligarchs. At the beginning of the post-communist transition, it did not matter what last name one had, where he or she was from or what parents someone had. All of today’s billionaires in Poland are market-based and self-made.

What drove good economic policies? Good economists as policymakers.

Of course, the key question is this: If good economic policies drove good economic outcomes, then what drove good economic policies?

For most of its history, Poland was a perfect illustration of an extractive society. It was the Second World War and – above all – the shock of communism that demolished the old, feudal, pre-modern and harmful social structures, opening up society.

This newly emerged, socially inclusive society was not visible until 1989. It was buried under the distortions, dysfunctions and absurdities of a planned economy. But when real socialism collapsed, it established the foundations for the subsequent economic miracle.

And yet, this element should not make Poland’s performance so different to that of similar countries like the Czech Republic and Hungary, where people had been better off than Poland in Communist times.

Needless to say that all these countries, as well as the other ex-Warsaw Pact countries, shared a strong social consensus that their respective country should become like Western Europe and meet all the conditions to accede to the European Union as quickly as possible.

This is where the second – and perhaps decisive – element explaining Poland’s success comes in. Almost the entire transition period, including those 17 different governments, was based on the high quality of policymaking elites, especially finance ministers and central bankers.

Unlike their Eastern peers in Ukraine or Russia, for instance, Polish officials, even while representing quite different parties, knew exactly where they needed to be going.

It helped that almost every single economic policymaker in Poland after 1989 had studied in the West, learning modern economics. In contrast, until 2002, no Bulgarian minister of finance even spoke English, to give but one example.

Hmm…This reads too simple.

Will it continue?

In many ways, key elements of the Polish success story resemble that of the German post-war economic story, especially if one thinks of social and economic inclusiveness as a key driver of economic success.

Thankfully, the dynamics of economic history do not just move in one direction. For that reason, it is relevant to ask what lessons Poland’s recent experience and current performance now holds for the German and the Western European economy.

One key lesson is the importance of education: Today’s 15-year old high-school students in Poland are as well educated as their German peers, even though Germany spends more than 60% more on each student (in PPP terms, see Figure below).

Over the last 20 years, more young Poles have also studied at the university level than in Germany (see Figure 3 below).

The other lesson is the importance of investment in modern infrastructure: The level of Poland’s mobile broadband penetration, for instance, is higher than in Germany (Figure below) and the speed and the costs are lower, too.

The third lesson is the importance of open markets: Poland’s economic success is a blueprint for the win-win benefits of the EU single market. German exports to Poland are now more than twice as high as exports to Russia.

The benefits of open markets, supported by good economic policies, are also larger than the benefits of public subsidies: Eastern Germany, despite having received more than one trillion euro since the unification, has caught up on Western Germany less than Poland did with much less money (since its EU accession, Poland has received slightly more than 100 billion euro from the EU funds).

Hmm.. Impressive.

Risk? EU

But the key risk to Poland’s future is the weakening of the European Union. Without the EU, Poland would revert back to the dark periods of its history and be relegated again to the periphery of the European continent, where it has languished for long centuries in the past.


Capitalism with Scandinavian Characteristics

February 20, 2019

Nice piece by Prof Timothy Taylor on Scandinavian economies:

It is a truth universally acknowledged that arguing about the definitions of terms like “capitalism” and “socialism” is a waste of time. So I will simply assert that the world has many flavors of capitalism — U.S./British, Japanese, Scandinavian, German, French/Italian/Southern European and others.

I’ve known some genuine socialists who favor outright government ownership and control of the means of production, which necessarily means government making all the decisions about what is produced, where it is produced, how it is priced, who gets hired and how much workers get paid.

But most people who talk a socialist game, when asked for real-world examples, tend to sidestep the more extreme (and less attractive) possibilities and point to European countries — in particular, to Northern European countries like Sweden, Denmark, Norway and sometimes Finland. The genuine socialists I know view these countries as sellouts to capitalism. The Scandinavians themselves are quick to deny that they are socialists, too. 

There are higher taxes and more equality in lower income percentiles compared to US:


Euro at 20: Ensuring legitimacy is an ongoing process

February 20, 2019

Interesting speech by ECB Vice-President Luis de Guindos. It gets to core of any institution in a democracy – legitimacy. What makes an institution like central bank legitimate for citizens? Or how does it earn its legitimacy?


The accounting and economics of RBI’s interim dividend

February 20, 2019

My piece in

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