Archive for May 1st, 2019

100 years of Keynes Economic Consequences of Peace: Lessons for today?

May 1, 2019

Mark Carney, Governor Bank of England revokes Keynes (who else) to drive home gains from technology:

A century ago, John Maynard Keynes resigned as a delegate to the Paris Peace Conference over his concerns about the scale of reparations in what would become the Treaty of Versailles. He returned home to write The Economic Consequences of the Peace. In that seminal work, Keynes marvelled that before the war:

“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth… [or] adventure his wealth in the natural resources and new enterprises of any quarter of the world that fancy or information might recommend.”

Such global trade and portfolio management were made possible by new technologies ranging from the telegraph to the first transatlantic cable.

Replace “telephone” with “tablet” and “tea” with “turmeric latte” and you have not the start of the Twentieth Century but of the Twenty First. The second great wave of globalisation is cresting. The Fourth Industrial Revolution is just beginning. And a new economy is emerging driven by immense changes in technology, the reordering of global economic power, and the growing pressures of climate change.

Carney believes gains from technology would be better distributed this time:


The persistence of caste in Indian business

May 1, 2019

Mint edit points how caste continues to matter in Indian business, The edit is based on this paper by team of 4 economists.

A research paper titled Firms Of A Feather Merge Together: Cultural Proximity And Firms Outcome by scholars of Indian Institute of Management Bangalore and Pomona College, Claremont, California, has revealed that a disproportionate number of mergers and acquisitions (M&A) occur between businesses whose directors belong to the same caste group. The report, which took up 1,200 M&A deals in the country for analysis, also delves into the mechanism that makes endogamous deals more likely. Not only is information shared more smoothly between caste-proximate firms, their directors tend to place a higher value on the outcome of such a merger. To those who see business as a caste-neutral meritocracy, this is an eye-opener.

A crucial point made by the study is that caste-proximate deals see a significant reduction in value compared to caste-distant ones. In other words, businesses are harmed by in-group mergers. That a policy of caste diversity is always better for profits, however, cannot quite be inferred from this. It could well be the case that identity blindness, which ought to bring about diversity, holds the key. Several observers had expected the forces of private enterprise and free market competition unleashed by liberalization to loosen the hold of caste on commerce. Indeed, millions of Indians found work beyond the traditional occupations ordained by their lineage, but even a cursory look at any list of India’s business elite since 1991 shows the sustained dominance of a caste group that has been in this profession down the ages. This is so even of new-age markets to an extent. The role of nature versus nurture in this remains contested, though the latter seems far better backed by academic research.

What’s woefully underexplored by economists is what the prevalence of caste implies to the Indian economy. A basic premise of the free market model is the absence of entry barriers—not just for firms keen to enter markets for goods and services, but also for people pursuing career options. In theory, companies that are under the pressure of competition to perform would want to hire workers in a way that maximizes the productivity of their workforce; a caste bias would probably stymie the cause of corporate efficiency. None of it may be overtly or even consciously done, but the effects of such a tendency could add up. Caste, thus, would result in an inefficient allocation of human resources across the economy. On this reading, the expectation that a shift towards capitalism would dissolve the unofficial rigidities of our labour market may have been wildly optimistic. For India to achieve its economic potential, the identity of individuals needs to matter less and less.



Estimating forecasting errors in Kerala budgets

May 1, 2019

Research by Ruzel Shrestha and Lekha Chakraborty of NIPFP:

Our paper analyses the subnational public finance practices in one of the States in India –Kerala- and estimate the fiscal marksmanship. Fiscal marksmanship is the analysis of fiscal forecasting errors. Kerala, though well known for its achievements in human development outcomes, is facing fiscal stress within the rule-based fiscal framework and innovating policy tools to achieve a revenue-led fiscal consolidation.

We have examined the Budget Estimates, Revised Estimates and Actuals for the macro-fiscal variables from Kerala State Budgets, for the period from 2011-12 to 2016-17 to analyse deviations between the projections and actual realizations. We found that the magnitude of forecasting errors
was significant in case of tax revenue.

While partitioning the sources of errors in the budgetary forecasting in Kerala, we observed that the random components of the error were larger than the systematic components for all the macro-fiscal variables, except for grants, own revenue and capital expenditure. This has three macro policy implications.

One, the volatility in intergovernmental fiscal transfers can affect the stability of finances at subnational level. Two, the State needs to identify innovative policy tools for Additional Resource Mobilisation (ARM) to maintain the human development achievements.

Three, within the rule-based fiscal framework, State has to innovate financing strategies for strengthening growth-inducing capital infrastructure formation.


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