Icrier: Two decades of health policy research

Interesting summary of 20 years of research done by ICRIER researchers on health policy in India

Major Financial Centers Face a Reckoning

Claude Baumann in this article:

An urban exodus, perplexed bankers, political vagaries and ruthless competition are taking their toll on financial centers. The pandemic is an accelerator of an epic, irrevocable structural shift.

Some bankers have no intention of returning to physical office space, others don’t know whether their roles will survive the forthcoming cull, while banks are moving whole divisions from one country to another – the coronavirus has cast a pall over the continent’s and the U.K.’s once-dynamic financial centers, as images show.

The emptiness comes against the backdrop of surging credit defaults as well as higher spending, as finews.com reported. The pandemic is playing out alongside ongoing digitization in the banking industry. The changes come at the expense of traditional financial centers – including Switzerland’s storied banks and wealth managers.

On Switzerland financial centre model:

The coronavirus is providing digitization the biggest surge of momentum possible – laying bare that physical presence is often superfluous. What does that mean for Switzerland?

The alpine nation’s strengths are political stability and neutrality, rule of law, an unpegged currency, a highly-skilled labor force, internationally competitive higher institutes of learning, an environment that is very business-friendly, and an easily accessible location in the heart of Europe (but outside the bloc). This framework is rounded by soft factors like widespread bilingualism and a very high quality of life.

This won’t be enough for a financial center to stand out in the future – new, more innovative advantages will be needed (finews.com outlined a few). These include data security or virtual assets and other technological advances like blockchain. A «trusted counterparty» in a digital age is worth at least as much as a secure banking relationship, Swiss finance professor Sita Mazumder told finews.com.

In general, Switzerland can only survive as a financial center of the future if it manages to convert banking into an «experience» – using its expertise and existing quality standards as well as fostering a hub for sustainable investing. Demand for this type of vehicle is surging since the pandemic, which represents a massive opportunity for Switzerland.

Hmm..

Bahamas first to issue CBDC..

I had pointed out how the balance sheet of Central Bank of Bahamas already includes digital currency as a liability. It is the first central bank.

Taking further steps, the central bank has announced that CBDC will be available via its banking system from 20th October:

The Central Bank of The Bahamas will gradually release a digital version of the Bahamian dollar nationally, outside of the pilot regions of Exuma and Abaco, through authorised financial institutions (AFIs), beginning on 20th October, 2020. This initiative has acquired the name Project Sand Dollar, with the sand dollar also being the name assigned to the central bank digital currency (CBDC).

Project Sand Dollar is a continuation of The Bahamas’ Payments Systems Modernization Initiative (PSMI), which began in the early 2000s.

The first phase of the national rollout, focused on the immediate readiness within the private sector, will cover all three tiers of authorised accounts. These account tiers are each subject to risk-based customer due diligence or “KYC” requirements. These are low-value personal wallets with the least demanding account opening requirements but with more restricted transaction limits; regular personal accounts in line with the established, flexible customer due diligence for existing banking and financial services; and business or enterprise accounts, subject to further KYC rigour and with higher limits for transactions and holdings of the digital currency.

Engagement and outreach with key private stakeholders will intensify in the months ahead, extending into the first quarter of 2021.

The second phase of national engagement will target Government services and public utilities, becoming more intensive over the course of the first and second quarters of 2021.

Will be interesting to see the rollout…

Swiss reject British virus of Brexit…

Denis MacShane, former UK Minister for Europe in this piece:

Switzerland seems to have rejected the other virus stalking Europe – Britain’s chaotic approach to links with its continental neighbours. The mountain state’s 27 September referendum rebuff to ending freedom of movement with the European Union underlines a strong Swiss streak of pragmatism – a reassuring signal for the rest of the continent.

Britain’s EU withdrawal vote in 2016 sparked fears among European leaders that the Brexit virus might cross the Channel and introduce anti-European infections into the europolitical bloodstream. In fact, as the UK battles against both the coronavirus outbreak and the trials of agreeing an EU trade deal by the end of the year, deintegrationist elements have been held at bay across Europe.

…..

This summer’s decisive move to construct a multitrillion-euro Covid rescue package in Brussels stands in contrast to budgetary orthodoxy quickly reinstated after the 2008 financial crisis. A decade later, even with groans and protests from some, Europe is preparing to put serious money into reinvigorating the damaged Greek, Italian and Spanish economies.

The Swiss change of mind on freedom of movement underlines the country’s homespun priorities. The down-to-earth money-making Swiss – outside the EU, the European Economic Area and the euro – are not going to cut their own throats by ending market access to Europe, even if it is based on EU rules.

In 2014, in a forerunner of the UK referendum which turned largely on anti-immigrant feeling, the Swiss voted to reject freedom of movement for EU citizens, a condition for Switzerland’s continuing access to the EU’s single market. On 27 September, 60% said no to a proposal to close frontiers open to EU citizens. The referendum was proposed by the Swiss People’s Party, a right-wing but not extreme populist party which over 30 years has grown in support based on anti-EU and anti-migrant hostility. The setback marks the party’s biggest-ever defeat.

 

Targeting gender imbalances in economics and central banking

Isabel Schnabel of the ECB in this speech speaks about gender imbalances in economics and central banks. She draws lessons from ECB which has had large imbalances and is trying to lower them with targeted policies:

The gender imbalance in economics is a long-standing and persistent phenomenon. A growing body of academic research substantiates the claim that this gender imbalance is caused by both overt and covert barriers that limit the career progression of women. If left unaddressed, these barriers will continue to culminate in self-fulfilling expectations, perpetuating the flawed belief that women are less suited to succeeding in the profession than men.

However, the ECB’s experience clearly shows that these barriers are not insurmountable. The ECB’s announcement of an explicit diversity policy in 2010, as well as the introduction of gender targets in 2013, had a marked impact, closing the observed promotion gap between men and women. The institution has also moved towards a more balanced representation of men and women across the ECB’s organisational hierarchy. Progress has been notable, albeit slow and imperfect.

As in other academic disciplines, the gender imbalance in economics and its associated professions has deep-rooted, systemic causes. Concerted efforts to encourage women to pursue a career in the profession at an early stage, combined with concrete steps to retain and encourage those that have already started a career, are likely to bolster the share of women in the discipline.

The ECB is doing its part in pursuing ambitious initiatives that support the career progression of women within the institution. However, our internal promotion guidelines do not address the gender imbalance in economics at its root. The pool of applicants from which the ECB recruits remains lopsided in favour of men, with a very low share of female graduates in sub-fields related to our core policy areas, an issue to be tackled at universities.

The systemic nature of women’s underrepresentation implies that the ECB’s gender strategy can only be one element of broader institutional and societal changes that are needed to ensure the sustained advancement of women and to encourage diversity more generally.

Fintech and big tech credit: complement or substitute for bank credit?

Giulio Cornelli, Jon Frost, Leonardo Gambacorta, Raghavendra Rau, Robert Wardrop and Tania Ziegler of BIS in this paper:

Fintech and big tech platforms have expanded their lending around the world. We estimate that the flow of these new forms of credit reached USD 223 billion and USD 572 billion in 2019, respectively. China, the United States and the United Kingdom are the largest markets for fintech credit. Big tech credit is growing fast in China, Japan, Korea, Southeast Asia and some countries in Africa and Latin America.

Cross-country panel regressions show that such lending is more developed in countries with higher GDP per capita (at a declining rate), where banking sector mark-ups are higher and where banking regulation is less stringent. Fintech credit is larger where there are fewer bank branches per capita.

We also find that fintech and big tech credit are more developed where the ease of doing business is greater, and investor protection disclosure and the efficiency of the judicial system are more advanced, the bank credit to- deposit ratio is lower and where bond and equity markets are more developed. Overall, alternative credit seems to complement other forms of credit, rather than substitute for them.

 

Rescheduling MPC meeting as external MPC members not appointed

The RBI announced rescheduling of MPC meeting to be held on 29 Sep-1 Oct 2020.

This is just such an unnecessary event.

The authorities have neither extended the tenure of the current MPC members nor appointed new ones despite knowing the vacancies well in advance. With so much uncertainty around, this extra factor could have been avoided.

 

Using insights from history to answer central questions in urban economics

W. Walker Hanlon and Stephan Heblich in this new NBER WP:

This article reviews recent literature using insights from history to answer central questions in urban economics. This area of research has seen rapid growth in the past decade, thanks to new technologies that have made available increasingly rich data stretching far back in time. The focus is to review innovative methods to exploit historical information and discuss applications of these data that provide new insights into (i) the long run growth of cities or regional economies and (ii) the spatial organization of economic activities within cities. The review also surveys the growing literature outside urban economics that uses the historical urbanization as a proxy for economic growth, discusses differences between how economic historians and urban economists think about the relationship between urbanization and growth, and considers how these views might be reconciled.

 

Corporate irresponsibility in the shipping industry: A dark side of global trade

Prof Guillaume Vuillemey  of HEC Paris in this voxeu piece writes on the dark side of shipping industry:

The maritime shipping industry has been the backbone of globalisation, carrying 80% to 90% of global trade flows. This column shows that over the past four decades, shipping firms are being systematically structured to evade corporate responsibilities. Potential tort liabilities, for example in case of an oil spill, are evaded by registering each ship in a different subsidiary; regulatory standards are evaded by using flags of convenience; and long-term responsibilities related to ship recycling are evaded using so-called last-voyage flags.

…

These findings highlight a downside of globalisation: the drop in transportation costs over the past decades was partly achieved via the evasion of shipowners’ responsibilities, including environmental liabilities. Importers and exporters may not have been paying the true cost of their activity. Using the terminology by Rodrik (1997), globalisation may have gone ‘too far’.

My results also raise questions about the use of limited liability in parent-subsidiary relationships, particularly for tort liabilities. Indeed, limited liability enables group owners to externalise damages to society. The associated costs are more severe than those generated by standard risk-shifting (Jensen and Meckling 1976) since tort creditors are not contractual creditors and so cannot take action to protect themselves. Based on similar reasoning, some legal scholars have challenged the use of limited liability for torts (Hansmann and Kraakman 1991) or for fully-owned subsidiaries (Blumberg 1986). In general, limited liability and corporate responsibility may be much more closely linked than previously thought.

Hmm..

I sent this article to a friend in shipping industry. His comment:

Well there is truth in that, but that assessment is without context. If an upright shipping company, wants to take on all the responsibility then it will not be able to compete, as freight is highly commoditized. Will any company pay more on sea freight if I told him I am higher on the corporate responsibility ?

So to make a level playing field, you need a rules based ‘global body’.

That is the IMO (International Maritime Organization), which sets rules for safety, environment, and labor reform.  One may argue that IMO is moving too slowly, and I would personally agree.

But again remember IMO is made up of member states, with the most powerful members being China, EU, Japan, and US.

So in the end, these member states need to move, to make shipping, or for that matter any industry/issue that has global (and not just sovereign) jurisdiction.

Oliver Williamson: The Man Who Reduced the Transaction Cost of Economics

Nice tribute to Prof Oliver Williamson by Ranjan Kumar Ghosh and Yugank Goyal:

On May 21st, one of the most cited economists of all time and a key contributor to organizational studies, Professor Oliver E. Williamson passed away. Despite being ubiquitous across economics, management, law and social sciences, he remains underappreciated in mainstream development and policy discourse in developing countries. In this article, we demonstrate his ideas; and their tenacity, versatility and simplicity. We show that his intellectual apparatus of transaction cost economics is indeed a powerful tool to explain a range of real-life phenomena across a variety of disciplines with impeccable practical implications. We also examine his methodological approach and integrity that will guide substantive and pragmatic inquiry for generations to come.

 

Lebanon’s monetary meltdown tests the limits of central banking

Patrick Honohan and Adnan Mazarei of Peterson Institute in this paper write about Lebanon economy.

In particular, how Lebanon central bank and its banking system managed to keep the economy going despite macroeconomic problems. However, multiple random shocks have exposed the problems and central bank cannot really do much:

Lebanon has spent the last 20 years juggling an excessive level of debt and current account deficits. Apparent financial wizardry by the central bank (Banque du Liban) helped keep the exchange rate fixed, inflation low, and debt service flowing until 2020. But these efforts merely postponed the inevitable, at a high cost.

Repeated shocks to the Lebanese economy and governance weaknesses pushed the financial contraption over the cliff before the COVID-19 outbreak. The explosion that ripped through the Port of Beirut in early August added to the disarray. The Lebanese pound has crashed, the government has defaulted on some of its debt, and restrictions have been placed on deposit withdrawals and access to foreign exchange.

Lebanon faces an uncertain future of uneven suffering. It will need foreign assistance, but such assistance will not extend to covering the losses of the banking system. How the losses are distributed will set the scene for Lebanon’s future development. Policymakers should aim for fairness, predictability, and stability without overindebtedness.

So should Lebanon have addressed these problems earlier or postponement was the right strategy? What are the lessons?

Lebanon has spent the last 20 years juggling an excessive level of debt and current account deficits. Apparent financial wizardry by the BdL helped keep the
exchange rate fixed, inflation low, and debt service flowing until 2020. But these efforts merely postponed the inevitable, at a high cost. Repeated shocks to the Lebanese economy and governance weaknesses pushed the financial contraption over the cliff before the COVID-19 outbreak, and the Beirut port explosion added to the disarray.

During much of this period, the BdL was seen as the most credible of Lebanon’s official entities. It did what it could to maintain monetary stability and enable the government to service its debts to the banking system and other creditors. Although tactically impressive, this achievement can by questioned at a strategic level. We will never know whether Lebanon would have weathered a debt restructuring better if it had been engineered 20 years ago. The banking
system would have suffered, but might the economy not have performed betterwithout the overhang of an unsustainable debt that necessitated a high cost of
capital? This question is likely to be long disputed.

In any country, the underlying causes of elevated national financial market risk premia, whether they relate to currency risk or credit risk, need to be
addressed sooner rather than later. Even if the market is wrong in its pessimism (and in Lebanon’s case in the end it was not), these premia erode confidence and undermine the incentive for innovation and capital formation. Absent removal of the underlying causes of pessimism, central banking attempts to put off the day of reckoning through financial engineering are doomed to ultimate failure. What starts out as ingenuity all too easily acquires some of the attributes of a Ponzi scheme.

…..

Central banks, especially in emerging markets, that are beginning to use experimental monetary management techniques should bear such lessons in
mind. These techniques can be used safely only in the context of a sustainable long-term prospect for the exchange rate and government debt. Absent such
prospects, collapse may only be postponed, possibly at a much higher cost. 

As was widely said of central banks during the global financial crisis, the BdL came to be thought of as “the only game in town” over the past two
decades. Technical effectiveness is not the only requirement of a central bank when it steps to the center of an economic crisis to that extent. In such times,
the technocratic central bank also needs to maintain its democratic legitimacy through mechanisms of accountability and transparency.

Hmm.. What is wrong will eventually show up in much uglier manner.

How to Share waters of River Nile: Lessons from South America

Interesting Proj Syndicate piece by Biniam Bedasso and Maria A. Gwynn.

Ethiopia and Egypt have again failed to reach an agreement on the Grand Ethiopian Renaissance Dam on the Blue Nile, raising fears that the entire region may be plunged into conflict. But a similar dispute in South America in the 1970s shows how this outcome can be avoided.\

…..

In the 1970s, Brazil and Paraguay initiated a binational effort to construct a massive hydroelectric dam on the Paraná River, located on their shared border. The Itaipu Dam –completed in 1984 – today generates around 88% of Paraguay’s electricity and over 11% of Brazil’s supply, making it a world leader in renewable-energy production capacity.

But the Itaipu Dam project faced considerable resistance from Argentina, a downstream country that, like Egypt today, worried about its water supply. Owing to its objections, international financial institutions initially refused to finance the dam’s construction.

The problem was resolved with the conclusion of the Acuerdo Tripartito between Argentina, Brazil, and Paraguay, which all three signed in 1979. The agreement established acceptable changes in water levels, as well as environmental protections and water-quality standards. To monitor compliance, the agreement established a mechanism for the three countries to exchange information on hydrological conditions. Moreover, an institutional framework for cooperation and transboundary water management was created for the Paraná Basin.

The instruments and institutions established at the Itaipu Dam’s inception continue to support dispute resolution. Today, extreme drought has severely reduced the Paraná River’s water flow, reducing Argentina’s water supply and making it difficult in landlocked Paraguay to navigate the river, which is essential for its agricultural export industry.

While no independent arbitration body is in place to manage this crisis, the affected countries have negotiated an amicable solution, based on the 1970s treaties and international law. The binational council managing the Itaipu Dam agreed to release just enough water from the reservoir to ease the drought’s effects for downstream countries, without compromising energy production. 

Are Food Prices Really Flexible? Evidence from India

New RBI WP by GV Nadhanael:

The paper looks at the price setting behaviour in food sector in India using a novel micro level dataset. The paper reaffirms that contrary to the conventional notion of flexible prices, food prices in India exhibit varying degrees of price stickiness, documenting evidence for heterogeneity in price stickiness being driven by product group characteristics and spatial variation of price stickiness. The paper also shows that the price setting behaviour in food sector broadly matches predictions of sticky price models.

A calibrated menu cost model for Indian food prices shows that differences in productivity processes, market power and menu costs could account for the differences in price stickiness across product groups.

The paper computes a measure of sticky food inflation – based on a stickiness re-weighted food price index – to show that it does not perfectly align with the conventional measure of core inflation (i.e., CPI excluding food and fuel). This highlights why paying attention to the sticky component of food inflation – besides core inflation – is important for the conduct of monetary policy in India.

 

Special Drawing Rights back on the agenda during the coronavirus pandemic

Cometh a crisis and cometh need for a global currency. IMF started a neutral global reserve currency named Special Drawing Rights (SDR) in 1969. However, the idea barely took off.

In each crises, the discussion over having a neutral global currency picks up but is soon forgotten. This time is not any different.

Marushia Li Gislén and Maria Kangas in this paper review history of SDR and what could be done to increase its usage in global economy:

“Buy British”: UK efforts to turn a slogan into government policy in the 1970s and 1980s

Profs. David Clayton, David Higgins in this voxeu piece

After Brexit, the UK government will enjoy greater freedom to encourage domestic consumers to “Buy British”. But as this column explains, attempts by successive UK governments in the 1970s and early 1980s to initiate such import substitution policies were fraught with economic and legal difficulties. Indeed,  accelerating globalisation and the rapid growth of imports in intermediate products for assembly into ‘British’ goods raise significant problems in defining a ‘national’ product – and the growth of tradable services (such as insurance, education and healthcare) presents an even more intractable problem.

Ask not what the economy can do for insurers – ask what insurers can do for the economy

Anna Sweeney, Executive Director, Insurance Supervision Division at Bank of England in this speech brings back the famous JFK words: ask not what your country can do for you — ask what you can do for your country.

She highlights how despite the economic crisis, insurance sector is quite suited to help the economy:

I began these remarks by highlighting three things that insurers do for the wider economy:

• Provide protection for significant financial losses;
• Channel investment into a wide range of assets; and
• Provide security of retirement income in the form of savings and annuities, facilitating stable demand for goods and services.

On the first, there is a critical role for insurers to adapt and ensure they are able to meet customers’ insurance needs, particularly during the transition out of the crisis and also into the longer term. Firms should take early steps to assess what this could mean for their current business models. It would be in no one’s
interests for the experience of the Covid-19 crisis and responsiveness of business interruption cover to reduce consumer confidence in the value provided by insurance for financial protection.

In the life insurance sector there is an opportunity for firms to leverage their position as long-term investors in a wide range of assets and productive investment, to support our economic recovery but this must not come at the expense of policyholder protection and the provision of secure retirement income. We would expect to preserve the current, adequate level of capital in the sector whilst seeking to reduce complexity and frictional costs within the regime.

A financially resilient, competitive and productive insurance sector not only ensures that individual policyholders are protected, but signals an industry that is able to support the recovery of the wider economy whilst maintaining high prudential standards.

Ontology and the History of Economic Thought: An Introduction

Paul A. Lewis, Mário da Graça Moura and Jochen Runde in this paper:

This paper is the introduction to a special issue of the Cambridge Journal of Economics on the topic of ontology and the history of economic thought. It explains what is meant by social ontology and why ontological issues should be taken seriously by historians of economic thought. It then goes on to introduce the contributions to the special issue.

The Making of Reston and Columbia towns

Emily Wavering Corcoran writes an interesting piece on how towns of Reston and Columbia were developed in the 1960s  with similar visions for inclusive, connected communities.

Reston and Columbia illustrate the economic complexities that exist within a large-scale planned community, and they share some commonalities that may have contributed to their relative success. These include the early establishment of core values, innovative zoning, and prioritization of profitability. Simon and Rouse’s clear and public core values defined standards by which all design and business decisions could be assessed and simultaneously attracted like-minded residents who helped make those values a deep-rooted part of the community culture.

Reston and Columbia were pioneers in mixed-use zoning; today, mixed-use zoning and transit-oriented development are priorities for many localities across the United States, particularly those seeking to increase density and provide accessible amenities. The examples set by Reston and Columbia — including their more recent and ongoing conversations about transit design and the appropriate mix of residential and commercial development — have helped inform the development of mixed-use zoning nationally.

Finally, Reston and Columbia indicate the importance of the “mix” in mixed-use development — Goudie in Reston and David Stebenne in Columbia both note that commercial development provided critical income to help maintain economic viability. Even with the changes that Reston and Columbia have seen over the decades, it seems clear that their conversations about community, diversity, quality of life, and economic viability may never be over — they will simply evolve.

 

Amul’s B2C and C2C marketing mantra: Buffalo to Consumer and Cow to Consumer!

In its Conversation Series Ahmedabad University had the privilege to hear Mr R.S. Sodhi, the Managing Director of Amul.

The conversation video is here. I wish the internet connectivity was a little better. But still Mr Sodhi made some really interesting observations and shared insights on what makes Amul tick.

The house was in splits when he said Amul’s marketing mantr was B2C and C2C: Buffalo to Consumer and Cow to Consumer!

Do people understand Fed’s new policy of Average Inflation Targeting?

Olivier Coibion, Yuriy Gorodnichenko, Edward S. Knotek II, Raphael Schoenle analyse the early impact of Fed’s new policy of  Average Inflation Targeting. As expected. not many people understand the difference between AIT and IT:

Using a daily survey of U.S. households, we study how the Federal Reserve’s announcement of its new strategy of average inflation targeting affected households’ expectations. Starting with the day of the announcement, there is a very small uptick in the minority of households reporting that they had heard news about monetary policy relative to prior to the announcement, but this effect fades within a few days.

Those hearing news about the announcement do not seem to have understood the announcement: they are no more likely to correctly identify the Fed’s new strategy than others, nor are their expectations different.

When we provide randomly selected households with pertinent information about average inflation targeting, their expectations still do not change in a different way than when households are provided with information about traditional inflation targeting.

Fed surely has a big challenge to explain the difference to the general public…