Archive for April 10th, 2019

Foreign banks in Central and Eastern Europe becoming easy prey for the populists…

April 10, 2019

Erik Berglöf, a former chief economist of EBRD in this Proj Syndicate piece:

After socialism collapsed, a small number of banks based in the European Union invested heavily in retail networks, helping to build these countries’ financial systems from scratch and massively increasing citizens’ financial access. And these strategic retail banks stayed put during the crisis when other capital flows dried up.

They stayed thanks to the Vienna Initiative, an ambitious coordination effort involving home- and host-country regulators and supervisors, finance ministries, international financial institutions, and, most importantly, the strategic banks. On March 27, veterans of the crisis gathered in the Austrian capital to mark the initiative’s ten-year anniversary. There is much to celebrate: it saved Europe from a devastating banking collapse, and helped to manage risks during the eurozone crisis.

But the Western European banks that the initiative saved now face an uncertain future in Central and Eastern Europe. Their investments in the region have become stranded assets ready to be picked off by local populists. And, unsurprisingly, Hungarian Prime Minister Viktor Orbán has led the attack.

Foreign banks in Hungary and elsewhere became objects of hate and loathing during the financial crisis. Urged on by the banks’ over-eager financial advisers, citizens rushed to take out loans in euros, dollars, and even yen, and suddenly found themselves with crushing debts when the crisis caused domestic currencies to tumble. When repayments lagged, banks were quick to foreclose on homes, cars, and companies. Taxing the banks, as Orbán did, seemed only fair.

Furthermore, Orbán’s taxes allowed OTP, Hungary’s own cross-border bank, to rebuild its balance sheet and strengthen its domestic franchise after it had itself become overextended before the crisis. Foreign banks in Hungary had to redefine their strategies radically, and in some cases seek support from international financial institutions. Many simply pulled up stakes and left.

This is part of a broader pattern across emerging markets. Most foreign banks intend to continue withdrawing, and those that stay increasingly fund themselves through local deposits. Although there are fewer foreign banks, some – especially Russian and Chinese banks – have increased their presence through acquisitions and growth, resulting in greater market concentration. (And Russian banks would have had a much greater presence were it not for international sanctions.)

Foreign banks’ ongoing retreat from emerging Europe is all the more remarkable given that the regulatory framework within the EU has improved massively over the past decade. Although the EU’s banking union is certainly not perfect, cross-border banking is now supported by institutions and instruments that those leading the Vienna Initiative could only have dreamed about.

Redesign of banknotes in Japan

April 10, 2019

Japan is redesigning its banknotes, for the first time in two decades:

Japanese banknotes will be redesigned for the first time in two decades in 2024 with one of them featuring possibly the country’s most iconic art piece in the world — ukiyo-e master Katsushika Hokusai’s “The Great Wave off Kanagawa,” the government said Tuesday.

The famous woodblock print from the “Thirty-six Views of Mt. Fuji” series by Hokusai (1760-1849) that depicts a large frothy wave with Japan’s highest peak in the background will be printed on the reverse side of the 1,000 yen bill, Finance Minister Taro Aso said in a news conference.

In the first design overhaul since 2004, Japan will also introduce new 10,000 yen and 5,000 yen bills with cutting-edge anti-counterfeiting protections.

All of the three bills will be with portraits of well-known figures in Japan’s modern history. In order of value, they are industrialist Eiichi Shibusawa (1840-1931), who is widely known as the “father of Japanese capitalism,” educator Umeko Tsuda (1864-1929) and physician and bacteriologist Shibasaburo Kitasato (1853-1931).

Illuminating economic growth using nighttime lights

April 10, 2019

Yingyao Hu and Jiaxiong Yao of IMF in their new research:

This paper seeks to illuminate the uncertainty in official GDP per capita measures using auxiliary data. Using satellite-recorded nighttime lights as an additional measurement of true GDP per capita, we provide a statistical framework, in which the error in official GDP per capita may depend on the country’s statistical capacity and the relationship between nighttime lights and true GDP per capita can be nonlinear and vary with geographic location. This paper uses recently developed results for measurement error models to identify and estimate the nonlinear relationship between nighttime lights and true GDP per capita and the nonparametric distribution of errors in official GDP per capita data. We then construct more precise and robust measures of GDP per capita using nighttime lights, official national accounts data, statistical capacity, and geographic locations. We find that GDP per capita measures are less precise for middle and low income countries and nighttime lights can play a bigger role in improving such measures.


Figure 1 in the paper explains further:

To illustrate such issues, Figure 1 compares satellite images of nighttime lights for mainland China, the lower 48 states of the United States, and Africa between 1992 and 2013. While all of them became brighter at night in 2013, China’s transformation was most visible. Variation in nighttime lights may thus contain useful information on China’s real economic growth. In contrast, the United States was already bright enough in 1992. The small change in the intensity of lights over this period may not correspond well to economic growth, most of which likely happened on the scientific and technological frontier rather than on infrastructure development. While the latter was captured by satellite, the former was certainly not. Most countries in Africa, despite their fast growth, started from low levels of income and inadequate access to electricity.

As a result, they were still mostly dark in 2013 and the information contained in nighttime lights may be insufficient for accurately assessing economic growth. Figure 1 highlights that the relationship between nighttime lights and real GDP may be nonlinear, that the relative accuracy of nighttime lights to real GDP may change, and that the extent to which nighttime lights are useful as proxy for real economic activity may differ over time and across countries.


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