Archive for the ‘Growth and development’ Category

Pakistan’s privatisation dilemma as it seeks IMF bailout: Lessons from its privatisation history

December 20, 2018

Interesting piece from Prof Kamal Munir (Strategy and Policy) of Cambridge Judge Business School.

Reluctantly seeking an IMF bailout for its balance-of-payments crisis, Imran Khan’s nascent government in Pakistan has already devalued its currency, hiked utility rates and imposed new taxes in an effort to be “ready” for IMF reforms. As if these measures were not enough to make the government sufficiently unpopular, it now faces demands to immediately privatise large loss-making state-owned enterprises.

For a few reasons, the government has so far been reluctant to sell these off. Two reasons stand out in particular. First, selling of these state-owned enterprises is likely to generate significant unemployment. Politically speaking, this would be a highly unpopular move, as Khan’s new government promised to create millions of jobs within five years. Second, given the outstanding debts of Pakistan’s state-owned enterprises, there will be few takers unless the government clears up the balance sheets first.

Whichever course the government takes, it would be foolish to ignore the lessons from Pakistan’s troubled history of previous privatisations – three spring to mind.

He points how the previous three privatisations – telecom, energy and banking – backfired. As there was limited competition in telecom and energy, all it did was to transfer a public monopoly to becoming a private monopoly. In banking, the banks made gains mainly by lending to government and not to other sectors.

The key lesson:

consistent with the general history of privatisation in Pakistan, banking privatisation was great for the new owners. Many got bargain basement deals – while doing little for the cause of national economic development.

Above all, the government should realise that in the absence of a broader national development policy, privatisations are not going to yield the desired benefits. Before contemplating any sell off, the government needs to first figure out the roles it needs various institutions to play and devise appropriate regulatory and monitoring frameworks.

Goals such as maximising the value of an enterprise before its sale or enhancing its profitability, should be supplanted by aims that are in line with a larger development plan. In order to avoid the mistakes of previous governments, longer-term goals must be prioritised.

Hmm..

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Figuring the roots of French “Yellow Vest” movement…

December 10, 2018

Olivier Blanchard on the yellow vest movement.

He says one has to go back in history to figure the roots of this movement:

…with the end of communism, it became clear that there was no alternative, only a muddle between market intervention and free markets. So long as growth was strong, and all boats were indeed lifted, the problem was manageable. Then growth slowed down, and inequality and insecurity became more salient, with no simple solution in sight.

The center-right and center-left parties tried their best to manage, but their efforts were not good enough. Sarkozy tried reforms but failed. Hollande, his successor, had a more realistic agenda but did not achieve much. Unemployment remained high and taxes increased. People increasingly felt that the traditional parties did not improve their lot, nor did they represent them.

Then came Macron, who correctly pointed out that the left/right distinction did not make much sense anymore, and he won by occupying the large middle. In doing so, he tore the traditional center left and right parties to pieces, leaving only the extreme right and the extreme left as alternatives.

In the process, he may have made the political system worse. As the economy has not improved much yet, people, unhappy with the lack of results, do not have the traditional parties to turn to. Some have joined the extreme left or the extreme right. More have become skeptical of any representation, be it parties or unions, and have taken to the streets. Thus the gilets jaunes was born, a spontaneous and unorganized response, a form of direct democracy.

But unorganized direct democracy does not work. In a country of 65 million people, ancient Athens’ agora-style democracy cannot work. We have seen this in the last three weeks. There is no coherent voice or message emerging from the movement: The state cannot provide more public services and simultaneously lower taxes. In the streets, the movement cannot avoid being hijacked, to its dismay, by anarchists or vandals. It is going nowhere.

The challenge to the government and the political class is immense. If I am right, the sources of the problem are old and deep. The government must convince people that it is hearing them, while making clear that it cannot deliver the impossible. And the opposition must avoid playing with fire: Unorganized anger can lead to chaos.

Interesting bit..

Why did France lag England (and much much more)..

November 23, 2018

This is a fascinating interview of Prof John Nye. It is done by Tyler Cowen (who else).

Is John Nye the finest polymath in the George Mason economics department?

Raised in the Philippines and taught to be a well-rounded Catholic gentleman, John Nye learned the importance of a rigorous education from a young age. Indeed, according to Tyler he may very well be the best educated among his colleagues, having studied physics and literature as an undergraduate before earning a master’s and PhD in economics. And his education continues, as he’s now hard at work mastering his fourth language.

On this episode of Conversations with Tyler, Nye explains why it took longer for the French to urbanize than the British, the origins of the myth of free-trade Britain, why Vertigo is one of the greatest movies of all time, why John Stuart Mill is overrated, raising kids in a bilingual household, and much more.

He is quite a Polymath..

France vs England:

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How railways shaped a modern metropolis: Evidence from London

October 17, 2018

Stephan Heblich, Stephen Redding and Daniel Sturm write on how Railways shaped City of London:

In new research, we use the mid-19th century transport revolution from the invention of steam railways, a newly created, spatially disaggregated dataset for Greater London from 1801-1921, and a quantitative urban model to provide new evidence on the contribution of the separation of workplace and residence to agglomeration (Heblich et al. 2018). The key idea behind our approach is that the slow travel times achievable by human or horse power implied that most people lived close to where they worked when these were the main modes of transportation. In contrast, the invention of steam railways dramatically reduced the time taken to travel a given distance, increasing average travel speeds from around 6 mph for horse-drawn vehicles and 3 mph for walking to around 21 mph, which permitted the first large-scale separation of workplace and residence. This separation enabled locations to specialise according to their comparative advantage in production and residence. Using both reduced-form and structural approaches, we find substantial effects of steam passenger railways on city size and structure. We show that our model is able to account both qualitatively and quantitatively for the observed changes in the organisation of economic activity within Greater London.

London during the 19th century is arguably the poster child for the large metropolitan areas observed around the world today. In 1801, London’s built-up area housed around 1 million people and spanned only five miles East to West. In contrast, by 1901, Greater London contained over 6.5 million people, measured more than 17 miles across, and was on a dramatically larger scale than any previous urban area. By the beginning of the 20thcentury, London was the largest city in the world by some margin (with New York City and Greater Paris having populations of 3.4 million and 4 million, respectively, at this time), and London’s population exceeded that of several European countries. Furthermore, London developed through a largely haphazard and organic process during this period, which suggests that both the size and structure of the city responded to decentralised market forces. Therefore, 19th century London provides a natural testing ground for assessing the empirical relevance of models of city size and structure.

……

The results show Greater London’s population would have been 30% lower in 1921 without the railway network. The findings and the quantitative urban models employed highlight the role of modern transport technologies in sustaining dense concentrations of economic activity.

Must be the same for most other metropolis as well such as New York, Mumbai, Calcutta and so on. But then as Fogel showed in case of US, impact of railways was overstated.

What is also interesting is what explains the decline of some of these metro/megapolis as in case of Calcutta?

Exploring the agora and learning some economic history from Greeks…

September 11, 2018

Nothing better than seeing a German visiting Greece and reviewing latter’s economy. Also drawing econ history lessons from Greece which have obviously been forgotten.

Jens Weidmann of Bundesbank does both these tasks in this speech. He first mentions Agora:

Greece is often said to be the cradle of Western civilisation, and rightly so. One could say that the Greeks invented the way we think. Or, in the words of the English poet Percy Shelley: “We are all Greeks. Our laws, our literature, our religion, our arts have their root in Greece.”1 The lasting impact becomes obvious when one considers the many words of Greek origin in our modern-day languages: words like “policy”, “democracy”, “economy”, but also “idea”, “theory” and “dialogue”.

Austrian thinker Karl Popper observed once – and I quote: “The war of ideas is a Greek invention. It is one of the most important inventions ever made. Indeed, the possibility of fighting with words and ideas instead of fighting with swords is the very basis of our civilization, and especially of all its legal and parliamentary institutions.”2

How could this kind of discourse have been invented? A key step may have been that ancient Greeks created a public meeting place in the very heart of the city-state: the “agora”. Here, citizens exchanged views, discussed politics and celebrated cultural events. The best-known example of an ancient agora is situated not far from here.

Just a few years ago, Joachim Gauck, then Federal President of Germany, said in a speech that Europe would need an agora in order to develop a common European civic spirit.3 So this idea of a forum for public discourse is still with us today. And, indeed, a culture of open debate and a lively democracy are hallmarks of present-day Greece.

Yet the ancient agora not only allowed an exchange of views, but, more tangibly, also defined the marketplace of a city (as it still does in modern Greece). Here, merchants and craftsmen sold their products. In this respect, it set an essential foundation for prosperity.

The link between the economic and political spheres also provides the blueprint for my speech this evening. In particular, I am looking forward to sharing some thoughts on the Greek economy and my view on European integration with this distinguished audience.

Hmm..

He then reviews Greek situation which despite some progress has a long way to go. He brings agora back in discussion:

As a matter of fact, European policymakers learned from past mistakes and did things better. However, the achievements seen so far are not enough. There is consensus among experts that additional reforms are needed to further reduce the euro area’s vulnerability to crises. Yet it is not clear which path to choose going forward. For some time now, an intensive debate has been taking place on the future structure of the monetary union. A number of concepts and proposals are on the table. They differ over the weight they each accord to risk sharing and joint liability on the one hand, and to individual responsibility, a rules-based regime and the avoidance of false incentives on the other.

Either way, however, it is crucial for the stability of monetary union that the liability principle is complied with. In a nutshell, it stipulates that whoever decides on an action must also bear the consequences of that decision – by reaping the benefits or suffering any disadvantage or loss. It would be neither fair nor sustainable if decisions could be made at the expense of others. Wrong incentives would be created.

For example, insurance can encourage the policyholder to take on more risks. This is the essence of moral hazard. And again, the ancient Greeks provide us with an illustrative example since they may have been the first to come up with a commercial insurance scheme.

Back then, unpredictable weather conditions and piracy rendered maritime trade a highly dangerous venture. But the ingenious Greeks invented rather complex contracts for a loan which could be used for equipping or repairing a ship and which would not have to be repaid if the ship was lost on its journey. If the ship made a successful return, the creditor received its principal plus massive interest on top, reflecting the risks involved and the insurance premium. However, if the loan exceeded the value of the ship, there was an incentive for the ship-owner to simply keep the loan and make off with it.

Thanks to a speech ascribed to the Athenian orator Demosthenes, we know of a certain Hegestratos.6 He is said to have planned to sink his own ship during the journey – with all passengers and cargo on board. Unfortunately for him, he was caught in the act, jumped overboard and was not seen again. Nevertheless, the incident, which may have been the first case of insurance scam in history, led to a complicated legal dispute between an alleged co-conspirator and a creditor.

Fast-forward more than 2,300 years, the Maastricht framework was based on a clear understanding of the liability principle. Member states would remain autonomous in terms of their economic and fiscal policies. The flip-side then was the “no bail-out” clause. Both actions and liability were located at the national level and, thus, aligned.

Today, many Europeans call for greater risk sharing. If such a joint liability were established, corresponding sovereignty rights would need to be transferred to the European level, too. Otherwise, the set-up could contribute to a possible resurgence of unsound developments. However, my impression is that the willingness to cede sovereignty rights to Brussels is rather limited in most of the euro area member states. For the time being, therefore, reforms must fit within the existing Maastricht framework.

But that does not wholly rule out elements of joint liability. I concede, for example, that a common deposit insurance could contribute to a more stable financial system, as it would reduce the risk of bank runs.

However, the balance between actions and liability requires that risks that arose under national responsibility cannot be mutualised. They would have to be reduced before the scheme is established. If not, a common deposit insurance would lead to a redistribution of inherited risks.

Hmmm.. Nice way to link history with current developments.

The Toll of Tariffs: Protectionism, Education and Fertility in Late 19th Century France

August 22, 2018

Research paper by Bignon Vincent and Garcia-Peñalosa Cecilia of Banque de France:

Vincent Bignon and Cecilia García-Peñalosa examine a novel negative impact of trade tariffs and the costs they induce by documenting how protectionism reversed the long-term improvements in education and the fertility transition that were well under way in late 19th-century France. The Méline tariff, a tariff on cereals introduced in 1892, was a major protectionist shock that shifted relative prices in favor of agriculture and away from industry. In a context in which the latter was more intensive in skills than agriculture, the tariff reduced the relative return to education, which in turn affected parents’ decisions about the quantity and quality of children. They use regional differences in the importance of cereal production in the local economy to estimate the impact of the tariff. Their findings indicate that the tariff reduced enrollment in primary education and increased birthrates and fertility. The magnitude of these effects was substantial. In regions with average shares of employment in cereal production, the tariff offset the (downward) trend in birthrates for 13 years; in those with the highest cereal employment shares, there was a delay of up to 22 years.

Hmm..

When economic history improves with time (as macro data is revised)

August 7, 2018

Carmen and Vincent Reinhart in this article point that US macroeconomic data has been revised upwards. This makes economic history improve with time:

 Seldom does a dense report from a statistical agency take your breath away, but the latest publication on the United States’ national income accounts from the Bureau of Economic Analysis (BEA) is the exception that proves the rule. The publication, after all, is the BEA’s comprehensive, bottom-up quinquennial reassessment of income, output, and prices going back to the Model-T days of economic activity.

Wading into the review’s details, one finds a slightly improved outlook for medium-term growth. Moreover, the data on personal saving suggest somewhat fewer vulnerabilities and more resilience in the household sector. On the other hand, the review changes nothing concerning the two yawning holes – the twin fiscal and external deficits – in the national accounts.

……

The large increase in saving was offset by smaller increases in investment, inventory accumulation, and the statistical discrepancy. Nothing changes the grim reality that America’s current-account deficit is headed to more than 3% of nominal GDP, implying increased reliance on foreign investors. The US is manufacturing the dollars that foreigners crave, but that is it for now.

Moreover, there was no wand that the BEA magicians could wave to alter the dominant feature of the economic landscape: spending by the federal government outstrips its revenues by a wide margin before and after the data revision. The budget deficit will surpass $1 trillion this year, and, with growth already above its potential rate and unemployment well below its natural rate, the cyclical argument for such stimulus is weak. The concomitant accumulation of debt will weigh on future economic activity and exacerbate financial vulnerabilities.

But not now. We have learned that the economy is expanding slightly faster and households were more thrifty than previously thought. Count this as another case of history reading better than it was lived.

Interesting way to term these upward revisions of macro data..

DBS (Development Bank of Singapore) celebrates 50 years…

August 6, 2018

2018 is just full of anniversaries especially pertaining to banking and finance.

Development Bank of Singapore or DBS completes 50 years of its journey (nice chronology of its history).

An event was organised to commemorate the occasion:

DBS played a crucial role in Singapore’s early industrialisation, taking risks and absorbing downsides to benefit the country but not necessarily the bank itself, Prime Minister Lee Hsien Loong said on Saturday night (Aug 4).

In a speech at a gala event to celebrate the bank’s 50th anniversary at Capitol Theatre,  Mr Lee noted that the year the bank was formed – 1968 – was a period of great uncertainty and anxiety for Singapore. 

It had separated from Malaysia three years earlier and had lost its Common Market and hinterland. 

One of its earliest projects was persuading Rollei, a German camera company, to shift its production facilities to Singapore in 1971.  Rollei was well known for making the best cameras in the world. But it was facing steep competition from Japanese camera manufacturers and was looking to  shift its factories out of Britain.  DBS took a risk on Rollei, offering attractive financing and investment terms to get Rollei to set up operations in Singapore. Rollei eventually folded 10 years later and DBS took losses on the deal.  “But Rollei created much needed skilled jobs for Singaporeans, and …helped us build up a cadre of highly skilled workers in precision machining and manufacturing,” said Mr Lee.  “Years later they would become invaluable when we got into hard disk manufacturing and wafer fabrication.”

When Singapore was striving to become an international financial centre, DBS was one of its anchors. It was the first local bank in 1971 to seek long term financing through an Asian Dollar Bond Issue of US$10 million. 

Hmm..

How it started?

The story of DBS was also captured in a 50th anniversary book that was presented to Mr Lee at the Capitol Theatre on Saturday. Called The 50 Years, the book chronicles the former Development Bank of Singapore’s heritage through reflections written by pioneers and other s from the bank. 

The book includes the story of how a small counter staffed by two cashiers at the entrance of its rented premises in Shenton Way marked the start of commercial banking at DBS.  When the bank set up its first branch in Jurong in 1972, fishmongers and stallholders would arrive wearing clogs and carrying paper bags of cash to bank in the morning.

Two staff set up a desk at shipyards and factories to open personal accounts for factory workers and enable direct salary crediting. 

In the book, Mr S Dhanabalan, part of the original team that left the Economic Development Board to set up DBS, wrote about the entrepreneurial spirit that in 1975 drove the bank to build the tallest building in Singapore at Shenton Way – the 50-storey DBS building. 

Fellow pioneer Mr Ang Kong Hua, shared his memories of bringing German camera maker Rollei to Singapore through financing, creating thousands of jobs and training local workers. The book will be available for download from Aug 15 at: go.dbs.com/ourjourney

Looking forward to reading the book.

Getting closer or falling apart: Euro countries after the crisis

August 1, 2018

Massimo Bordignon, Nicolò Gatti and Massimiliano Onorato review the economic conditions in Euro countries:

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The opposite of populist nationalism is not globalist elitism; it is economic realism.

June 27, 2018

Hard hitting piece by Anatole Kaletsky.

He says populist waves usually meet with economic realism which is usually unpleasant

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Getting to Denmark: The role of elites in development

June 15, 2018

A group of scholars (Peter Jensen, Markus Lampe, Paul Sharp, Christian Skovsgaard) try figure the history behind the Dane model. The picture is hardly as rosy as it sounds.

There is this belief that Denmark grew via cooperating peasants. It misses the role of elites in the process:

How governments pass off politics as economics…

May 31, 2018

Interesting piece by Puja Mehra. She questions the recent government’s economic policies and says much is just politics.

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We voted to keep the bullet train out: Palghar tribals

May 29, 2018

The usual research on infrastructure projects keep the crucial human displacement factor out of their analysis. Most are not even aware of any such issue.

Yesterday there was bypoll in Palghar and this piece says tribals of the region voted to keep Bullet train out:

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Why dictators love development statistics?

April 27, 2018

Alex Galdstein of Oslo Freedom Forum in New Republic has an interesting piece. The usual feeling is dictators dislike all development stats but actually they like these numbers as they can be spinned to suit the regime. More importantly, the regime itself produces these stats:

Exchanges at the Organization of American States usually don’t do well on YouTube. But when the Honduran Minister of Foreign Affairs brought up Venezuela’s crackdown on dissent last summer, Venezuelan representative Delcy Rodríguez scored surprise points with a rebuttal citing the United Nations’ 2016 Human Development Index, which ranks Venezuela 59 spots higher than Honduras. Crackdown or no crackdown, “Venezuela does not demonstrate such terrifying statistics,” she said, in an exchange that soon went viral on Spanish-speaking social media. It was a win for the Maduro regime, and the key to victory was trusted U.N. data.

For those of us working to advance human rights, such episodes are becoming frustratingly familiar. From the development initiatives of Jeffrey Sachs and Bill Gates, to Tony Blair’s despotic partnerships or Tom Friedman championing Chinese autocracy in The New York Times, the last two decades have seen political concerns repeatedly sidelined by development statistics. The classic defense of dictatorship is that without the messy constraints of free elections, free press, and free protests, autocrats can quickly tear down old cities to build efficient new ones, dam rivers to provide electricity, and lift millions out of poverty.

The problem with using statistics to sing the praises of autocracy is that collecting verifiable data inside closed societies is nearly impossible. From Ethiopia to Kazakhstan, the data that “proves” that an authoritarian regime is doing good is often produced by that very same regime.

 

On Roman roads and the sources of persistence and non-persistence in development

April 10, 2018

Carl-Johan Dalgaard, Nicolai Kaarsen, Ola Olsson and Pablo Selaya research on the topic: Do roads matter?

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The Guatemalan economic miracle and the man who helped it happen: Manuel Ayau

March 20, 2018

Interesting article and had no idea about this. We barely know anything about small economies, leave people who tried shaping/changing them.

It talks about Manuel Ayau who believed in free and prosperous Guatemala:

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Comparing Japan’s Lost Decade with the U.S. Great Recession

March 7, 2018

Guillaume Vandenbroucke of St Louis Fed has a nice piece.

He says that in Japan growth rate of GDP per capita slacked whereas in US the levels of GDP per capita declined:

Japan’s economy began its “Lost Decade” in the 1990s, with persistent slow growth and low inflation. One could argue, however, that the Lost Decade has persisted for nearly three decades.

In 2008, the United States entered into what is now called the “Great Recession.” The Great Recession was also characterized by slow growth and low inflation. These similarities between the Lost Decade and the Great Reces­sion have led many analysts to wonder whether the United States is in for the same persistent economic slump as Japan. 

In this analysis it is critical to draw a distinction between a change in the growth rate of gross domestic product (GDP) per capita and a change in its level. For instance, a country can experience a sudden decline in the level of its GDP per capita after a major recession, but its growth rate can remain constant. Conversely, a country’s rate of growth can decline without any sudden drop in the level of its GDP per capita. The Japanese data reveal that the Lost Decade is clearly a case of slow growth rather than of a sudden negative shock to GDP per capita. The U.S. data, slightly varied, reveal that the Great Recession is the opposite case.

The difference is that Japan will take much longer to double its income compared to US:

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Why Greece is banking on China’s modern-day Silk Road to help its economic recovery

December 27, 2017

Interesting bit of news.

How one of the Greek ports which was used in earlier Silk Road is going to be used again in the modern day silk road:

Greece hopes to transform its ancient port of Piraeus into the entry point for an extensive network of roads and railways that will allow China to penetrate into the heart of Europe, its ambassador to Beijing has said.

China’s ambitious push to build a modern-day Silk Road through Asia and Europe has suffered a number of rebuffs in recent weeks after Pakistan, Myanmar and Nepal cancelled put on hold a number of major infrastructure projects funded by Chinese investment.

But Greece, a key point along the route of the ancient Silk Road, will once again serve as the hub connecting Asia, Europe and Africa, according to Leonidas C Rokanas.

“Eventually, Piraeus will become the main entry point for Chinese exports to southern, eastern and central Europe,” Rokanas told the South China Morning Post. “To use a Chinese metaphor, Piraeus will form the “head of the dragon” of the so-called land-sea express route, leading to the heart of Europe through Greece.”

Hmm.

This is a superb visual explainer of what the modern day Silk Road (called One Belt One Road) is proposing to do..

The changing geography of US manufacturing during the 20th century

December 13, 2017

Fascinating research by Profs Nicholas Crafts and Alex Klein.

They look at how economic geography has changed in US manufacturing from 1880-1997:

Religious faith can help people to build better cities?

December 12, 2017

Prof. Chris Ives and and PhD candidate Andre Van Eymeren think so and here is how.

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