Economics to Blame?

Today's Business Standard has an article by Pranab Bardhan 'Economics to blame?'

He ends it well,

Our courses and research seminars are often steeped in a kind of technique fetishism, and marked by a deplorable oversight of history and systemic issues. The latter, for example, made many economists in their zeal for financial deregulation in the US oblivious of the corrupt influence of the financial oligarchy (described in vivid terms by Simon Johnson, the former chief economist of the IMF, in a widely noted article, ‘The Quiet Coup’, The Atlantic, May 2009). One can detect similar systemic obliviousness among the over-enthusiastic liberalisers in India of the corrupt grip of the industrial oligarchy in the political life of the country.

The complicity of the academia is reinforced by the fact that the beginning courses in major graduate schools of Economics in the US often succeed in weeding out students with lively minds still curious about general structural problems of an economy in the larger context of history and society, and mainly allow those who have the stamina and the manic perseverance to follow the current technical fads in their narrow groove. The premium is on cleverness, not on balanced judgment or wisdom. We can serve our profession (and the policy world) better if we don’t take our findings and formulae too seriously or lose sight of the big picture, which historians and sociologists grapple with in a less precise, but often more insightful, fashion.

Peak Oil and Risk

Got a mail yesterday from Suyodh about an article in NYT debunking the Peak Oil theory. As a risk analyst looking at Economy, Ecology and Energy, his comments below are enlightening to get a perspective on how humans perceive risk.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says, "Morning, boys. How's the water?"

And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, "What the hell is water?"

...

The most obvious, ubiquitous, important realities are often the ones that are hardest to see and talk about. - David Foster Wallace

For the young fish if it is water, for us humans today, it is energy that we are largely blind about, and in effect, take for granted. Every organism's existence is about energy exchanges. We surely know what energy is, but as a species, do we give it the amount of thought that it deserves?

Simplistically:

Energy flows into -----> ORGANISM ---------> Tissue build-up; Work and Waste flows out (+energy diffusion in conversion process)

That said, 'Peak Oil Is Heresy' advocates will not find a much better qualified spokesperson than Michael Lynch, the writer of the below NYTimes article.

What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so. --Mark Twain

Check out: www.theflatearthsociety.org/forum

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Suyodh has not commented on the article as – Peak Oil is a Waste of Energy :)

The article itself by Matthew Lynch, former director for Asian energy and security at the Center for International Studies at the Massachusetts Institute of Technology and energy consultant, is worrying to say the least – apart from misleading arguments, the final policy conclusions contradict his stand:

This is not to say that we shouldn’t keep looking for other cost-effective, low-pollution energy sources — why not broaden our options? But we can’t let the false threat of disappearing oil lead the government to throw money away on harebrained renewable energy schemes or impose unnecessary and expensive conservation measures on a public already struggling through tough economic times.

As always, in contentious articles, readers’ comments are the most enlightening, and thankfully the more than 100 comments left on NYT all contest Lynch’s arguments.

Meanwhile a debate goes on at the Economist Free Exchange

Models, realism and the Malaysian ringgit

Today's Mint has a nice article by Anantha Nageswaran on currency models and realism. One excerpt:

...the cause of disagreement between the International Monetary Fund (IMF) and Malaysia as the former conducted its Article IV consultation with the latter this year. IMF said the Malaysian ringgit was undervalued and needed to appreciate while Malaysian authorities demurred on the timing and perhaps on the magnitude of the suggested undervaluation itself.

There has to be certain sympathy for the Malaysian point of view. In Asia, it is hard to see many countries allowing their currencies to strengthen against the US dollar unless China sends a strong signal that it is about to let market forces dictate the value of the renminbi against the US dollar. That is not on the horizon and is unlikely to materialize any time soon.

Failed, Failing and Fragile States

How to restart growth in failed, failing and fragile states? How do we alleviate poverty in a sustained manner?What has been going wrong in development policies in recent years, compared to successful strategies in the past?

Reinert and Kattel's paper , part of the Tallinn University of Technology's Working Papers in Technology Governance and Economic Dynamics, documents the historical record across the world : Korea in 1950 was poorer than Somalia - what changed the growth trajectory for the two?

They argue that the root causes of poverty lie in a certain type of economic structure that fails to produce the virtuous circles of economic growth that need increasing returns and sufficient diversity and diffusion of economic activities in order to become self-sustainable

Six main differences distinguish today’s approach to economic development – as represented by the Washington Institutions – from previous theories of development process (Renaissance to Marshall Plan). Today’s theories fail:

1. To approach economic development from a multidisciplinary stand point, as was done in the German tradition of Staatswissenschaft;

2. To study and tailor-make policy-recommendations to the specific context in which a nation finds itself (insisting that ‘one size fits all’);

3. To observe and classify qualitative differences between economic activities (e.g. increasing or diminishing returns, perfect or imperfect competition, etc.);

4. To investigate differences between the productive structures of nations;

5. To conceive of development as a dynamic synergetic phenomenon propelled by self-reinforcing mechanisms (e.g. Collier’s static development ‘traps’ compared to the dynamic virtuous and vicious circles of classical development economics);

6. To understand the role of the state in economic growth from any standpoint other than ‘market failure’.

Education and growth

A recent paper by Hanushek and Woessmann titled 'Poor student learning explains the Latin American growth puzzle' looks at why Latin America has performed badly, despite good educational levels. The answer lies in the quality of schooling and improvement in cognitive skills. They have put up an interesting graph linking skills to growth and not surprisingly Asia come out at the top, with Latin America and Sub-Saharan Africa at the bottom of the line.

Though this graph puts Asia at the very top, for us in India, the need for education reform and raising skills is well known. I had written a piece in the Financial Express last month, excerpts below:

As the accompanying table shows, in India unemployment is largely a problem of the youth. Experience counts more than education as labour stays in low skill jobs, learning as they go along. Just 2% of population in the age group 20-24 has had vocational training, while this percentage is more than 50% in developed countries, even Mexico and Peru are higher than India at 28% and 17% respectively. This shows up in a severe productivity problem, with low incomes for the earners, while industry faces a shortage of skilled labour.

	Unemployment rates (%) for various age groups using Usual Principal Activity Status
		Age Group
Educational Level	15-20 years	21-25 years	26-30 years
Not literate	3.1	1.3	0.5
Literate w/o formal school	6.0	1.6	1.6
Total Literacy Campaign	4.5	1.8	1.6
Others	7.6	4.0	2.4
Literate below primary	4.7	2.5	1.2
Primary	6.5	2.2	1.2
Middle	9.0	5.6	2.6
Secondary	18.9	11.2	5.1
Higher Secondary	30.8	17.3	6.2
Diploma/Certificate course	36.6	27.5	16.1
Graduate	-	31.7	12.4
Postgraduate and above	-	35.8	15.4
Total	8.7	8.1	3.5
Source: Indicus Analytics estimates from NSSO 61st round, 2004-05

As the India Labour Report 2008 pointed out, a three strand approach is needed in India:

The first strand, employment reform (to match labour supply to demand) should include changing labour laws to simplify definitions, compliance etc, that currently hinder expansion of organized employment, converting Employment Exchanges into Career Centers that offer assessment, counseling, apprenticeships, jobs and certifications etc.

The second strand is employability reform, which has already begun, to some extent, with the National Skill Development Policy 2008 and the PPP model for ITIs. Much more needs to be done though, e.g the NREGA could be used for providing apprenticeships and funding skill development.

The third strand in the strategy would be to prepare the supply for demand – education reform – which requires a policy shift from accreditation and regulation of capacity to measuring and publicizing outcomes and quality. Government financing has to be separated from delivery, which can be done through a broad based voucher programme. The list of change would include greater autonomy and governance reform in institutions, creating a performance management system for government school teachers with rewards and punishments for attendance and learning outcomes, creating a National Qualification Framework to allow two-way fungibility between vocational, college and school education with appropriate transfer of credits etc.

All this may seem a tall order, but without it, the country is destined to plod along slowly, developing internal fissures that may be beyond repair.

Climate change and fiscal policy

Here is a paper by Lis and Nickel under the ECB Working Paper series that studies the impact of climate change on public finances. Taking the occurence of large scale extreme weather events as a given in the future is a good assumption that should be built into the systems by policy makers.

Abstract

This paper explores implications of climate change for fiscal policy by assessing the impact of large scale extreme weather events on changes in public budgets. We apply alternative measures for large scale extreme weather events and conclude that the budgetary impact of such events ranges between 0.23% and 1.1% of GDP depending on the country group. Developing countries face a much larger effect on changes in budget balances following an extreme weather event than do advanced economies.

Based on these findings, we discuss implications for fiscal policy and publicly provided disaster insurance. Our policy conclusions point to the enhanced need to reach and maintain sound fiscal positions given that climate change is expected to cause an increase in the frequency and severity of natural disasters.

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Country role models for development success

Discovered the UNU-WIDER project on Country Role Models for Develoment Success. Covers reports from various countries, worth a read.

Publications:

• The Mauritian Success Story and its Lessons
• Botswana as a Role Model for Country Success
• Can Norway Be a Role Model for Natural Resource Abundant Countries?
• Country Role Models for Development Success: The Ghana Case
• The Czech Transition: The Importance of Microeconomic Fundamentals
• The Danish Model and the Globalizing Learning Economy: Lessons for Developing Countries
• Developing Ireland: Committing to Economic Openness and Building Domestic Institutional Capabilities
• The Disinterested Government: An Interpretation of China's Economic Success in the Reform Era
• The Finnish Developmental State and its Growth Regime
• How Can Korea be a Role Model for Catch-up Development?: A ‘Capability-based View’
• Hungary: The Janus-faced Success Story
• India's Development Strategy: Accidents, Design and Replicability
• Japan’s Model of Economic Development: Relevant and Nonrelevant Elements for Developing Economies
• Lessons from the Transition Economies: Putting the Success Stories of the Postcommunist World into a Broader Perspective
• The Omani and Bahraini Paths to Development: Rare and Contrasting Oil-based Economic Success Stories
• Switzerland’s Rise to a Wealthy Nation: Competition and Contestability as Key Success Factors
• Three decades of Neoliberal Economics in Chile
• Tunisia's Development Experience: A Success Story?
• A Two-thirds Rate of Success: Polish Transformation and Economic Development, 1989-2008
• Vietnam as a Role Model for Development

Lucas roundtable

Questioning the dismal science has so many interesting posts from economists..here is Mark Thoma on asking the right questions, which reiterates my previous post on pluralism in economics...

We need to take a close look at how the sociology of our profession led to an outcome where people were made to feel embarrassed for even asking certain types of questions. People will always be passionate in defense of their life's work, so it's not the rhetoric itself that is of concern, the problem comes when factors such as ideology or control of journals and other outlets for the dissemination of research stand in the way of promising alternative lines of inquiry.

The full debate can be followed here:

http://www.economist.com/blogs/freeexchange/2009/08/lucas_roundtable.cfm

Global Financial Crisis: Questioning the questions

How has the crisis changed our thinking? Are we still asking the wrong questions? What implications does this have for policy making? RBI Governor sets out the right questions to ask in a lecture titled 'Global Financial Crisis: Questioning the questions':

Some excerpts:

Notwithstanding reams being written about resolving the present crisis and preventing another like this, global imbalances are not on the radar screen of policy debate. This is both perplexing and disturbing. Indeed, once the immediacy of the crisis is behind us, it will not be surprising if we head for another round of destabilizing global imbalances.

Resolving the problem of global imbalances does not mean eliminating them. As long as there is world trade, certain countries will have surpluses and certain others will run deficits. Global imbalances have been, are, and will continue to be inevitable.

So, to ask how we can eliminate global imbalances is clearly the wrong question. The right question is this: given that global imbalances are inevitable, how do we ensure that they do not build up to destabilizing levels?

***

The current monetary and fiscal stance is, however, not the steady state. The Reserve Bank needs to roll back the special monetary accommodation. For this to happen, there are two necessary conditions. First, the government will have to show a firm and credible commitment to fiscal responsibility by fleshing out the road map for fiscal consolidation. Second, there will have to be more definite signs of recovery. The Reserve Bank will maintain an accommodative stance until demand conditions improve and credit flow takes hold, but reversing the expansionary policies is definitely on the agenda on the way forward.

…there will need to be increasing coordination between monetary and fiscal policies. Central banks will have to take into account fiscal compulsions in their monetary stance while governments will need to commit to strict fiscal responsibility. To ask therefore how monetary and fiscal policies can go their separate ways is the wrong question. What is the right question? I submit the right question is: how can we coordinate fiscal and monetary policies to achieve the planned outcomes?

**

In a more global context, given the fall out from the crisis, to ask how central banks should revert to their sole inflation targeting mandate is the wrong question. The right question is this: what are the specific roles and responsibilities of governments and central banks in ensuring price stability, financial stability and macroeconomic stability?

***

The magic of the financial sector gave it such a larger than life profile that we began to believe that for every real life problem, no matter how complex, there is a financial sector solution. Now, of course, we know better – for every real life problem, no matter how complex, there is a financial sector solution, which is wrong...

.... However, our problem is a little different since we must regulate markets in a way that does not hamper development. But whose development do we focus on? As I have argued, what is important is the development of the real sectors not of the financial sector. To the extent that the financial sector helps deliver stronger and more secure long-term growth, its development is important. And our regulatory framework should be premised on this underlying argument. So, as we change or review our regulatory framework, the question we need to answer is whether an existing practice or a change in rule delivers higher and more secure real economy growth; not whether it develops the financial sector or accelerates its expansion.

All in all, this crisis has dealt a harsh blow to our confidence in the financial sector. But are we asking the right question? The question we are asking is how to put the financial sector back on the high growth trajectory. I believe we must be asking a different question, so that we can come up with effective and lasting solutions. That question is: how can we keep real sector growth on a high trajectory? And only in this connection, should we ask what the financial sector can do to help.