Archive for the ‘Growth and development’ Category

The Transportation‐​Communication Revolution: 50 Years of Dramatic Change in Economic Development

March 19, 2020

Paper in Cato Winter 2020 Journal:

The Industrial Revolution transformed subsistence living into sustained growth, but only for about 15 percent of the world’s population. Throughout the rest of the world, change was minimal. In 1950, the real per capita income for developing countries outside of Africa was slightly less than $4 per day, approximately the same as that of the high‐​income, developed countries at the onset of the Industrial Revolution. But income levels in the developing world have increased dramatically during the past half century, particularly for the 70 percent of the world’s population living in less geographically disadvantaged developing countries.

The huge reductions in transportation and communication costs over the past half century provided the foundation for the remarkable increases in economic development and worldwide income. The Transportation‐​Communication Revolution triggered four changes that have altered life in the developing world: gains from large increases in international trade; gains from higher rates of entrepreneurship and expanded opportunities to borrow successful technologies and business practices from high‐​income countries; improvement in economic freedom; and the virtuous cycle of development.

Our empirical analysis of the annual growth rate of real per capita GDP since 1960 indicates that the expansion of international trade, higher rates of economic freedom, and increases in the share of the global population in the prime working‐​age category have exerted a strong and highly significant impact on economic growth. Due to the sharp reductions in transportation and communication costs, the volume of international trade has risen sharply in recent decades. The growth of trade in less geographically disadvantaged developing countries has been particularly remarkable. Measured in real dollars, the size of the international trade sector in these countries was 44 times higher in 2017 than it was in 1960. This astonishing rate of growth in international trade was approximately 2.5 times higher than it was in high‐​income and more geographically disadvantaged countries over the same time frame. Propelled by the growth of trade, the real per capita GDP of the five billion people living in the less geographically disadvantaged developing world has grown at nearly twice the rate of high‐​income countries in recent decades. The historically high rates of economic growth have transformed these developing countries even more rapidly than the Industrial Revolution transformed the West between 1820 and 1950.

While the Industrial and Transportation‐​Communication Revolutions exerted a similar impact on the lives of those most affected, they differ in three major respects. Compared to the earlier economic revolution, the more recent revolution has been broader, generated more rapid rates of economic growth, and reduced income inequality rather than enlarged it. Both the general populace and the academic literature show an appreciation of the human progress that accompanied the Industrial Revolution. It is now time for both groups to recognize the remarkable human progress brought about by the Transportation‐​Communication Revolution.

 

Capital market integration can reduce misallocation: Evidence from India

March 16, 2020

Interesting research by Natalie Bau and Adrien Matray. They try and find out whether India’s capital market reform has helped firms increase output and productivity:

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From crony capitalism to crony communism

February 26, 2020

Capitalism is often criticised for promoting growth amidst select club of industrialists/business persons.

This voxeu post by Artjoms Ivlevs, Milena Nikolova, Olga Popova shows how similar cronysim flourished in erstwhile communist countries:

50 years of Norway discovering oil

February 20, 2020

Nice speech by Norges Bank Governor Øystein Olsen:

“We are now moving into the final phase of a period where domestic raw materials and energy sources have provided an essential basis for economic expansion. Hereafter, growth must increasingly rely on the production of finished goods in areas where we do not have a natural advantage.”[1]

The same could be said about the challenges facing the Norwegian economy today. But this quote is from 50 years ago – from the annual address by central bank governor Erik Brofoss on 16 February 1970.

The 50th anniversary of the first oil discovery on the Ekofisk field was commemorated in October last year. Aptly enough, this took place on the same day as the Government Pension Fund Global (GPFG) topped NOK 10 000 billion.

In the governor’s address on the economic situation, there was no mention of what was to become Norway’s main revenue source over the next half-century.

In hindsight, it can be said that what was to be his last annual address may not have been the most prescient. To be sure, it was still highly uncertain at that time how much oil and gas were actually hidden under the ocean floor 320 kilometres southwest of Stavanger. Not to mention, the value of that natural resource was much lower than today.

……

In the quote from 1970, Erik Brofoss predicted a shift away from a resource-based economy. Fifty years later the structural shift is underway. Brofoss was optimistic about the way ahead, and he was clear about what the main source of progress is as he formulated in his speech:

“Now is the time to reap the fruits of our efforts in general education and vocational training to boost human capital.”

Brofoss had high hopes for the coming generations of well-educated young people.

The young workers in Brofoss’ day are now retired, or close to retirement. In the coming years, the dependency ratio will increase. The aim must therefore be to make structural changes without further declines in labour force participation.

We also have reason to be optimistic despite an ageing population. We still have a highly skilled workforce. We have an economic policy framework that has served us well for nearly 20 years. In addition, our room for manoeuvre puts us in an enviable position. Last, but not least, we have a business sector that has already proved its adaptability, which can now also build on the expertise gained in oil production and services.

The Norwegian economy has fared well through the first phase of the structural shift away from an oil-driven economy. The sharpest downswing in oil activities may be behind us. The overall downward potential is smaller than a few years ago, and the business sector is less dependent on oil.

But structural changes take time. Companies have to seek out new markets, new businesses need to be established and workers have to move into new jobs. As long as the transition to a less oil-dependent economy is gradual, the business sector will have the chance to adapt. The challenges will be much greater if there are abrupt changes in operating conditions or policies.

Brofoss was mistaken about one point. The final phase would come many decades later than he anticipated, but is now drawing near.   

Central bank governors tend to get it right, sooner or later. Come what may!

Hmm…

Though, not applicable to Norway’s case but if central bank governor get things right later, fair bit of damage is done by then!

Evaluating the Success of President Johnson’s War on Poverty

February 20, 2020

Did not know that US President Johnson (1963-69)  had declared war on poverty in US .

In this Federal Reserve paper Richard V. Burkhauser, Kevin Corinth, James Elwell, and Jeff Larrimore analyse the war and its impact:

We evaluate progress in President’s Johnson’s War on Poverty. We do so relative to the scientifically arbitrary but policy relevant 20 percent baseline poverty rate he established for 1963. No existing poverty measure fully captures poverty reductions based on the standard that President Johnson set. To fill this gap, we develop a Full-income Poverty Measure with thresholds set to match the 1963 Official Poverty Rate. We include cash income, taxes, and major in-kind transfers and update poverty thresholds for inflation annually. While the Official Poverty Rate fell from 19.5 percent in 1963 to 12.3 percent in 2017, our Full-income Poverty Rate based on President Johnson’s standards fell from 19.5 percent to 2.3 percent over that period. Today, almost all Americans have income above the inflation-adjusted thresholds established in the 1960s. Although expectations for minimum living standards evolve, this suggests substantial progress combatting absolute poverty since the War on Poverty began.

Hmm..

 

 

Did education play a role in England’s industrial revolution?

January 30, 2020

Joel Mokyr, Assaf Sarid and Karine van der Beek in this superb econ history piece looks at relationship between human capital and industrial revolution.

So far the idea is that school system did not play a role in industrial revolution. Mokyr et al present an alternative evidence:

Improving European economy: Draghi’s three Ps of mon policy, Summers’s three Ts of fiscal policy and Buti’s three Fs for structural reforms

January 27, 2020

Marco Buti of European Commission in this voxeu piece:

The current slowdown and lacklustre medium-term growth prospects also indicate that the fiscal, monetary and structural policy mix needs to be changed. As Mario Draghi stated in his speech in Sintra (2019), monetary policy needs to remain patient, persistent and prudent. Fiscal policy needs to fulfil the three Ts as identified first by Larry Summers (2008): timely to be effective, targeted by focusing on high multipliers expenditure and – possibly – temporary. While the jury is still out on the desirable fiscal trajectory in presence of ultra-low interest rates, there is little doubt that a long-lasting boost of public investment should be undertaken. One such example would be quality-investment to ease the environmental transition. Complementing Draghi’s three Ps for monetary policy and the three Ts from Summers, I propose three Fs for structural reforms: they should be feasible to be effective in the short term instead of aiming for unrealistic goals; forward-looking, for instance regarding environmental issues; and fair, by incorporating distributional concerns and moving away from the perception of reforms as ‘blood and tears’.

Joining the letters, they spell TFP, a fitting acronym to capture today’s economic and policy predicament in Europe.

Phew! This is all encompassing. Add these adjectives to Prof Sashi’s flowchart of reforms and you have a good template of putting every macro policy/reform under the sun..

The next development challenge: go indigenous and not copy Western institutions….

January 27, 2020

Arvind Submramanian and Josh Felman in this Proj Synd piece:

What is clear is that solutions to the new growth and development challenges in emerging markets will have to be indigenous, rather than coming from Western institutions. Building and maintaining among national policymakers the sort of open, self-confident intellectual capacity that Gandhi espoused could well be the next development challenge.

Really? Given both worked at IMF where you pushed western institution ideology over indigenous ideas, it is quite something.

For foreign investments, the govts need to go beyond Adam Smith’s maxim of peace, easy taxes and justice

January 2, 2020

Prof Ricardo Hausmann in this piece says governments need to do three more things than Adam Smith’s maxim.

First why Doing Business Rankings does not translate into foreign investments:

The scenario is all too familiar. A reformist government wants to boost economic growth and employment by implementing market-friendly reforms designed to make the country more attractive to (often foreign) investors. Policymakers understand that these investors possess the technological prowess, organizational capability, and market reach that the country desperately needs. Committees are created to improve the country’s performance in the World Bank’s Doing Business index, the World Economic Forum’s Global Competitiveness Report, or other beauty contests promoted by a sprawling array of international rankings.

The reformist government overcomes grueling fights with legislators and civil society, who accuse it of putting investors’ interest ahead of those of its own people. But with perseverance, it successfully adopts reforms that improve the country’s rankings and gets glowing coverage in the international press. The learned world’s impression of the country (and even that of money managers) changes significantly for the better. And then the government waits for foreign investment to arrive. And waits. And, as in Samuel Beckett’s famous play, the anticipated inflows, like Godot, never show up.

This problem stems in part from assuming that what needs fixing is captured in international rankings. Too often it is not: worldwide, there is zero correlation between improvements in the Doing Business and Competitiveness indexes and growth or investment performance.

Often, the focus of such rankings is on reducing red tape, which assumes that investors stay away because of some sin of commission, which, if stopped, would release the floodgates. But the world is more complicated than that. Most people who could potentially do well by investing in your country know a lot about their business but probably know very little about your country – particularly the things about your country that matter for their business, including the ones you just reformed. More important, their business usually depends on things you should be doing but aren’t – your sins of omission.

Three things to be done:

To avoid this predicament, governments need organizational capabilities that go beyond Adam Smith’s maxim that they must do no more than ensure “peace, easy taxes, and a tolerable administration of justice.” They need to do at least three additional things.

First, the government needs to engage with existing economic activities to identify what it can do to improve their productivity, whether by changing rules, infrastructure, or other publicly provided goods and services. 

Second, the government should mobilize society and domestic and foreign firms to explore the “adjacent possible”: activities that do not exist but for which the requisite ecosystem is almost in place. This requires people in and out of government to imagine what is not yet there, figure out what is needed to establish it, and determine whether it would be both feasible and valuable to society. This exploratory process is both costly and risky, although recent advances such as the Atlas of Economic Complexity make it less of a crapshoot, by revealing relevant information for assessing the feasibility and the attractiveness of potential new industries. 

Third, and most controversially, governments often need a corporation to facilitate investment in new strategic areas and manage the activities generated by previous strategic investments. These corporations may be set up as holding companies for already existing state-owned enterprises that currently report to their respective line ministries. The ministries should focus on their regulatory functions, leaving the holding company to provide close financial and operational oversight and exercise shareholder rights on behalf of society. The holding company can also be capitalized with assets that the government already owns.

How some of this policy advisory has changed over the years!

The WTO at 25 years: achievement and challenges

January 1, 2020

On 1 Jan 1995 WTO came into being. There cannot be a better way to start this year’s blogging than to reflect on these 25 years.

WTO  Director-General Roberto Azevêdo on the 25 years of WTO:

Over this past quarter century, the WTO has helped transform international economic relations.

Binding rules for global trade in goods and services have facilitated dramatic growth in cross-border business activity. Since 1995, the dollar value of world trade has nearly quadrupled, while the real volume of world trade has expanded by 2.7 times. This far outstrips the two-fold increase in world GDP over that period.

Average tariffs have almost halved, from 10.5% to 6.4%. For the dozens of economies that joined the WTO after its creation, accession involved far-reaching reforms and market-opening commitments that research suggests have been associated with a lasting boost to national income.  

The predictable market conditions fostered by the WTO have combined with improved communications to enable the rise of global value chains. Confident in their ability to move components and associated services across multiple locations, businesses have been able to disaggregate manufacturing production across countries and regions. Trade within these value chains today accounts for almost 70% of total merchandise trade.

The rise of GVCs has been a key factor in enabling rapid catch-up growth in developing economies, while facilitating increased purchasing power and consumer choice in all countries. It is not a coincidence that the past 25 years have seen the fastest poverty reduction in history: in 1995, over one in three people living around the world fell below the World Bank’s $1.90 threshold for extreme poverty. Today the extreme poverty rate is less than 10%, the lowest ever.

 In recent years, WTO members have agreed to streamline border procedures through a landmark agreement on trade facilitation projected to lift trade by over $1 trillion per year. They have also liberalised trade in information technology products and abolished harmful farm export subsidies.

Despite these considerable achievements, it is no exaggeration to say that the WTO faces challenges today that are unmatched in our relatively short history. Over the past two years, governments have introduced trade restrictions covering a substantial amount of international trade — affecting $747 billion in global imports in the past year alone. The rising uncertainty about market conditions is causing businesses to postpone investment, weighing on growth and the future potential of our economies. How WTO member governments face up to these challenges will shape the course of the global economy for decades to come.

On balance though there is no doubt that the WTO and the trading system we oversee are regarded by our 164 members as a public good worth preserving and strengthening. This may explain the quiet dynamism in the WTO’s corridors. This energy is palpable, and it suggests profound changes are in the works. 

The WTO’s negotiating functions are now seeing a phase of experimentation that promises to give rise to new rules of direct relevance to the 21st century economy and contemporary sustainability concerns.

As 2019 drew to a close, we saw a reset in the critically important negotiations aimed at slashing the most harmful fishing subsidies which are depleting our oceans. Members know that we must have an agreement by June at our 12th Ministerial Conference in Nur-Sultan, Kazakhstan, or we will have to collectively shoulder the blame for missing a critical target for the Sustainable Development Goals. Agriculture negotiations have been reenergised with members taking pragmatic steps to identify where agreement on vitally important issues may be reached.

Groups of members are also working towards new rules on a range of issues — electronic commerce, investment facilitation, domestic regulation in services — that aim to make trade more efficient and predictable in cutting-edge sectors of the economy. Members are seeking, as well, to make it easier, safer and more viable for women and smaller businesses to participate in global trade. This would help make trade more inclusive.

It is true that in dispute settlement we suffered a setback at the end of 2019 when members could not agree on reforms for the Appellate Body. But I have already started consultations with members to explore all aspects of dispute settlement reform and will engage at high political levels both in Geneva and in capitals to identify potential solutions. At the same time, many members are weighing an array of creative interim options to keep two-stage dispute settlement operational while we search for a permanent arrangement.

I continue to believe that the WTO is more important than ever before for the global economy, for job creation, for growth and for development. And despite the uncertainties around trade today, I think 2020 has real potential to deliver meaningful results. There is a good chance that negotiations percolating in Geneva will bear fruit in Nur-Sultan, in the shape of new agreements or frameworks. In fact, it’s conceivable that MC12 could produce one of the most impressive clusters of agreements in our history.

If the last 25 years have taught us anything about the WTO, it is that this organization is resilient and resourceful. We have served our members well over this past quarter of a century and we will continue to do so in the future.

Hope to read more on the anniversary during the year. Last year, Marrakesh agreement which led to WTO also had its 25th anniversary.

Meanwhile, WTO is obviously struggling as an international organisation.

 

The constitution won’t save American democracy, only its people can..

September 26, 2019

Daron Acemoglu and James Robinson write a timely piece. Fair bit of world leaders are justifying their actions saying they are doing things as per Constitution. Any Constitution for all you know is a human creation and has many gaps. It requires the leadership to understand the gaps and not exploit them, but we are hardly seeing this.

A & R write:

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Philippines economy: Weaving an unprecedented 20 year growth story (without much hype)

August 21, 2019

There is much hype around Indian economy and how high its growth has been all these years. There are some others who manage it without much hype.

Mr Benjamin E Diokno, Governor of Bangko Sentral ng Pilipinas (their central bank) in this speech highlights how Philippines economy has been growing for 20 years:

Let me begin with our growth story thus far in the Philippines. Our economy has experienced uninterrupted growth for over 20 years since 1999 despite challenges such as the 2004 fiscal crisis and the 2007 global financial crisis-that is 81 consecutive quarters of continuous growth, with annual growth averaging 6.4 percent in the past five years (2014-2018).

Growth in recent years has become more broad-based.

On the demand side,  private consumption remained robust in the first quarter of 2019, as in the previous quarters through the years. This is further supported by rising contribution from investments from 2010 up to present.

On the supply side, services remain the main driver of growth-but the industry sector has also stepped up in recent years.

Meanwhile, the government’s economic managers remain optimistic about achieving our GDP growth target of 6 to 7 percent this year despite the lower than expected 5.6 percent growth in the first quarter of this 2019.

Private consumption is expected to remain robust, aided by remittance inflows and sustained “cooling” inflation. Private capital formation, on the other hand, should likewise contribute more significantly to economic growth, with construction and investments in durable equipment expected to remain solid in light of the government’s projects and other infrastructure programs.

The International Monetary Fund (IMF), World Bank (WB), and Asian Development Bank (ADB) share these expectations. In fact, all three forecast that the Philippine economy will grow by about 6.2 to 6.5 percent this year.

This has been due to three measures:

The bold reforms and initiatives in the past three years have prompted the government to capitalize on and sustain these gains. It is because of this that we believe the Philippine growth momentum will be sustained moving forward.

First is the government’s ambitious infrastructure program-“Build, Build, Build” which aims to boost the economy’s mobility and connectivity, enabling equitable growth and development. At present, there are 75 high-impact national government infrastructure, with 46 projects (61 percent) already in the implementation stage. 

The government is expected to invest over PhP 4.6 trillion (or US$90 billion at PhP52:USD1) in public infrastructure from 2019 to 2022.

Second, is the recent passage of reforms aimed at strengthening our investment climate. The Ease of Doing Business and Efficient Government Service Delivery Act, the revised Corporation Code, and the Philippine Innovation Act support the government’s agenda of improving competitiveness and ease of doing business in the country, promoting transparency and cutting red tape in the government for a more conducive business environment.

At present, the Philippines’ current standing has improved based on different third-party assessors. For instance, the Philippines’ ranking rose from 68th to 56th place under the 2018 Global Competitiveness Report.

It also received an upgrade in its sovereign credit rating from Standard & Poor’s to “BBB+” from “BBB.” These favorable standings are also boosted by the improved business sentiment and the stable consumer outlook based on the BSP’s latest round of expectations surveys.  

Finally, the continued demand for Philippine skills locally and abroad are evident in the growth of our BPO industry and strong remittance inflows. This further highlights the importance of our country’s most prized resource-our labor force. Based on our estimates, production efficiency has improved over the years with the incremental capital-output ratio (ICOR) declining steadily. As you know, the higher the ICOR, the less efficient the production process is.

Recognizing the skills of our workforce, the government has invested heavily in various social programs such as the Universal Health Care Act and the Access to Quality Tertiary Education Act (RA No. 10931).

You may not know this but 40% of our budget goes to social services.

He goes on to highlight the role central bank has played and is playing to maintain the momentum.

India and its policymakers make much noise about how growth rates have been higher during their tenure and getting into a lot of mud slinging. They make it look as if India is the only country growing and they are the sole reasons for this growth. Examples from smaller countries such as Philippines tells us none of this is needed really.

Locating Equality: Real estate the main driver of rising inequality?

August 9, 2019

Harold James has a fascinating piece:

For years, wealth and income inequalities have been rising within industrialized countries, kicking off a broader debate about technology and globalization. But at the heart of the issue is a fundamental good that has been driving social and economic inequality for centuries: real estate.

Inequality is the leading political and economic issue of the current era, yet debates about it have long suffered from a degree of imprecision. For example, the standard measure of inequality, the Gini coefficient, reduces a country’s entire income distribution to a single number between zero and one, and is thus highly abstract. Similarly, while inequality is rising in many parts of the world, there is no simple correlation between that trend and social discontent or unrest. France is much less unequal than the United States, and yet it has similar or even greater levels of social polarization.

Today’s inequality debate effectively began in 2013 with the publication of French economist Thomas Piketty’s Capital in the Twenty-First Century, which found that the rate of return on capital tends to outpace the rate of growth, thereby causing inequality to increase over time. Specifically, appreciating real-estate values seem to be a fundamental driver of rising inequality. But here, too, one encounters a degree of imprecision. Real estate, after all, is not a homogenous good, because its value famously depends on “location, location, location.” There are elegant castles and palaces that now cost less than small apartments in major cities.

Wealth stirs the most controversy where it is most tangible, such as when physical spaces become status goods: the corner office is desirable precisely because others cannot have it. More broadly, as major cities have become magnets for a global elite, they have become increasingly unaffordable for office workers, policemen, teachers, nurses, and the like. While the latter must endure long, tiresome commutes, elites use global cities as they see fit, often hopping around from place to place. Large swaths of Paris and London are eerily shuttered at night. Manhattan now has nearly a quarter-million vacant apartments.

Whenever violence and revolution have  unequal societies, real estate has been a focus of discontent. 

Hmm..

Was Mr Say the ultimate nemesis of Lord Keynes?

August 6, 2019

Profs. Alain Béraud and Guy Numa in this piece says we usually think that Keynes and Say were at opposite ends of each other. However, they are far more proximate than it is imagined:

In economics we love this comparison of this vs that. But if we analyse closely, there are more similarities than differences.  

Are some dictators more attractive to foreign investors?

July 29, 2019

Abel François, Sophie Panel and Laurent Weill in this Bank of Finland working paper:

Since political uncertainty is greater in dictatorships than in democracies, we test the hypothesis that foreign investors scrutinize public information on dictators to assess this risk. In particular, we assume they use five suitable dictators’ characteristics: age, political experience, education level, education in economics, and prior experience in business. We perform fixed effects estimations on an unbalanced panel of 100 dictatorial countries from 1973 to 2008 to explain foreign direct investment (FDI) inflows.

We find that educated dictators are more attractive to foreign investors. We obtain strong evidence that greater educational attainment of the leader is associated with higher FDI. We also find evidence that the leader having received education in economics and prior experience in business is associated with greater FDI. By contrast, the leader’s age, and political experience have no relationship with FDI. Our results are robust to several tests and checks, including a comparison with democracies.

Hmm..

 

The impact of the Transcontinental Railroad on Native Americans

June 5, 2019

Nice interview of Dr. Manu Karuka, American Studies scholar and author of Empire’s Tracks: Indigenous Nations, Chinese Workers, and the Transcontinental Railroad, about the impact of the railroad on Indigenous peoples and nations.

The author calls railways as an imperialism project across colonies:

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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.

The return of the policy that shall not be named: Principles of Industrial Policy

March 27, 2019

What a title of a research paper: The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy!

IMF economists Reda Cherif and Fuad Hasanov in this research paper:

Industrial policy is tainted with bad reputation among policymakers and academics and is often viewed as the road to perdition for developing economies. Yet the success of the Asian Miracles with industrial policy stands as an uncomfortable story that many ignore or claim it cannot be replicated. Using a theory and empirical evidence, we argue that one can learn more from miracles than failures. We suggest three key principles behind their success: (i) the support of domestic producers in sophisticated industries, beyond the initial comparative advantage; (ii) export orientation; and (iii) the pursuit of fierce competition with strict accountability.

Hmm.. Looks like a good read.

Gulzar had earlier posted that industrial policy is coming back:

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Italy joins China’s Belt and Road Initiative – here’s how it exposes cracks in Europe and the G7

March 25, 2019

Winnie King, Teaching Fellow at University of Bristol explains:

While the current Italian government has not been fully unified toward China, a severe economic downturn has made the world’s second largest economy look more appealing to it. Alberto Bradanini, Italy’s former ambassador to China, has stressed that Europe’s own indecision and inability to tackle trade deficits with China (of which Italy contributed approximately €176m, or an eighth of the EU’s total trade deficit) is a key motivator behind this decision.

Italy wants to enhance its “Made in Italy” brand through increasing trade – especially in the form of exports – to China. The BRI is seen as a vehicle to achieve this. Italy offers goods (in particular luxury goods and foodstuffs) that are attractive to China’s growing middle class and increasingly affluent population.

China is also interested in investing in Italian firms. More significant, however, are Italy’s key infrastructure assets. This would enhance the transport and trading network of the BRI, giving it strategic access to Europe. Less than 2% of Italy’s sea imports come from China so there are substantial prospects for growth in that area.

A deal between Genoa’s port authority and shipping firm China Communications Construction Company (CCCC) has already been approved by the Italian government. And the port city of Trieste hopes for something similar. This would offer China and the BRI a more direct route to move goods onto the European continent and an ideal hub for accessing new rail lines and transport networks to Germany, Austria, Slovenia and other regional economies. By giving China access to its ports, Italy is hoping for infrastructure investment from China’s Asian Infrastructure Investment Bank (AIIB) – something the Italian government is trying to link to its role in the BRI.

Interesting! The game of power ensures there are no permanent allies and enemies.

Italy’s status as a G7 country is a coup for the Chinese leadership and the legitimacy of the BRI. While the prospect of Italy’s participation underscores growing fault lines in the EU’s joint approach to China, China has also been effective at dividing and conquering EU member states by targeting them individually.

So Italy’s decision to join the BRI is significant. But four years ago we saw Italy, France and Germany join China’s AIIB, contrary to US wishes. Therefore, Italy is neither the first, nor will it be the last European economy that will “go rogue” and follow its own national interest with regard to China.

 

Bretton Woods at 75: History and current relevance

March 25, 2019

In July 2019, BW will mark its 75th anniversary.

Arminio Fraga, a former president of the Central Bank of Brazil (1999-2002) has a piece on its history and current relevance:

So, what can we say about Bretton Woods in a world in transition?

First, with the US less dominant and less willing to provide global economic and financial leadership, systemic instability is likely to increase. As the American economic historian Charles Kindleberger famously warned, this typically occurs in transitional moments when a global hegemon is absent. Some signs of this are already visible in trade and regional tensions, growing leverage, and rising nationalism.

Second, “Bretton Woods” should now be seen to include not only the original institutions, but also more recently established global forums and regional arrangements. These mechanisms of cooperation constitute a realistic practical response to current challenges.

Third, one must ask whether developing countries will continue trying to converge with more advanced economies, and whether the expanded Bretton Woods family of institutions can remain meaningful stewards of global progress. My answers tend toward yes to both, if one takes a long-term view. Developing countries will aim to emulate the earlier successes of the Asian Tigers and Eastern Europe. And countries will prefer dialogue and cooperation to the failures of those such as Venezuela and North Korea that opted out of the global system.

Lastly, this hopeful vision may now be under threat from the disturbing shift toward illiberal and populist political regimes around the world. But history shows that liberal politics and economic policies have undoubtedly delivered more progress and peace than any other system.

Seventy-five years ago, economic policymakers gathered at Bretton Woods to create a new financial order for the postwar world. Today, their successors can still draw on some of these achievements in designing a global economic governance system for the twenty-first century.

Hmm..


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