26 February 2010

Trade and politics: the case of Madagascar

Aidwatch blog post by William Easterly and Laura Freschi on the US imposing trade sanctions to force President  Andry Rajoelina to hold elections brings out the issues relating to sanctions, politics, impact on the vulnerable and on the macro-economy.

The US pulled the plug on AGOA at the end of December and import duties of up to 34 percent were reintroduced. Now we are starting to see the effects in the formal and informal economy:
Factories closing and factory jobs lost: “As lead times [expire] on orders placed before the agreement [came to an end], factories are laying off workers and we are seeing an explosion in the numbers of unemployed,” said the director pf the Association of Free Trade Business in Antanarivo.
Increased competition among street traders now that former factory workers are pushed out to sell goods in overly crowded street markets (and lower wages now for both): “‘I used to be able to earn 20,000 ariary ($9.30) a day,’ said Soloniaina Rasoarimanana, who has been selling clothes from a pavement stall for 10 years. ‘Now, with the political crisis and more competition, I earn around 5,000 ariary ($2.30) a day.’”
Knock-on effects in neighboring countries (Mauritius, Swaziland, Lesotho, South Africa) which made inputs like zippers to Madagascar’s factories.
Among the effects we are NOT seeing: signs of increased interest in arriving at a power-sharing agreement or instating democratic governance on the part of Rajoelina’s government.

Ineffective sanctions, effective job destruction.  An unaccountable branch of the US government hurts poor people far away who have no voice in US politics. Deeply saddened…we don’t know what more to say.

Some comments at the end of the post:

akatsuki wrote:
Perhaps it is just realizing that the US’s own “sunshine policy” towards oppressive regimes regarding trade has its limits far sooner than we expected – that the empowered middle classes won’t scream for democracy. We are too intertwined with China to back out now, but we can do so in other countries.
Jeff says:
This case just shows how aid is hostage to the world of diplomacy and how diplomacy does not employ evidence based decision making. The evidence clearly shows that instituting trade restrictions will not convince an undemocratic regime. And yet in the logic of diplomacy the US is compelled to do this because it said it would and to remain credible, it has to follow through. It is indeed sad that US credibility becomes more important than the livelihood of so many poor people, including women who Hillary purports to care so much about.

22 February 2010

The eternal cycle of bubbles

Excerpts from a Mint interview with William White of BIS, now with the OECD:
From his perch as the former chief economist at the Bank of International Settlements in Switzerland—the “central bankers’ central bank”—he warned that central banks, his very clients, were dangerously creating too much credit. But up against US Federal Reserve chairman Alan Greenspan, the “Maestro” who had ensured years of stable growth, he sounded like a rabble-rouser. At the 2003 Fed symposium at Jackson Hole, Wyoming, White went against every grain of the zeitgeist, arguing that monetary policy could prick bubbles before they burst; Greenspan remained impassive.

In his own words, RBI is a “full-service central bank”. That description resonates with the Canada-born White, in part because he served for 22 years at the Bank of Canada, another conservative central bank. “I was struck when I was listening to (Subbarao)…it reminded me of the Bank of Canada” which also calls itself “a full-service central bank”.
“When (Subbarao) says that you are where you are, and this is the way we have to behave, he’s right.” And in the real world where India’s economic constraints demand more of RBI, there’s no point in arguing with practicalities. Still, at the back of his mind, is he concerned about what a central bank’s mandate means for its independence?
That’s the elephant in the room: A central bank trying to do too much will inevitably bring it into conflict with political forces, as is already happening in the US. “You can get drawn into politically sensitive issues: You bailed out this guy because he’s your friend, you go to the same golf club… This is the kinda thing that happens,” White says. That invites scrutiny on central banks such as RBI, where monetary and regulatory policy—setting interest rates and overseeing banks—are two legs of the same stool.
To White, though, the world needs to go through a painful “process of adjustment”. Cheap credit last decade created “false demands… So, you have many industries in the advanced countries which are too big. And they are going to have to get smaller,” a process that “is not going to be easy”. If eternal recurrence itself is so amazing a phenomenon, breaking out to attain nirvana sounds too mythical.

18 February 2010

Walk the talk with Steve Keen

Steve Keen is off to walk
On April 15th 2010, I will commence a walk from Australia’s Parliament House to Mount Kosciousko. Below I explain how this event came about. Though it has been triggered by me losing one part of a two-part bet on house prices, its genesis goes back much further–to when I, along with a handful of other non-orthodox economists, predicted that a serious financial crisis was just around the corner.

This is the classic “hair of the dog” cure for a hangover–avoid the consequences of drinking too much one night by getting drunk again the next morning. It worked in the 1970s and 1990s because debt levels were substantially lower than today (45% in the 1970s; 90% in the 1990s; over 150% today) and because there was another group to whom lending could occur. However, now both households and businesses are carrying record levels of debt, and businesses are still rapidly deleveraging while mortgages are the only source of rising debt. I don’t believe that the “hair of the dog” will work this third time: instead debt growth will falter once the impact of The Boost wears off, and Australia will feel the painful effects of debt-deleveraging. I expect this will renew the fall in Australian house prices that The Boost interrupted.
But that’s in the future. For the present, I will be walking to Kosciousko between April 15th and 23rd of this year.
I intend using this event as a way to highlight the absurdity of the economic situation Australia has locked itself into, where continued prosperity is dependent upon house prices forever rising faster than incomes–an outcome that is only possible if debt rises faster than both incomes and prices.
If you agree with me that this situation is absurd, then join me on the walk for an afternoon (or more).
Also consider donating to Swags for Homeless, to help make life slightly less difficult for the homeless. RP Data, who offered to give $1,000 to the charity chosen by whichever of us (myself or Rory) lost the bet, is the first corporate sponsor, and their donation will enable 16 homeless people to sleep more easily in future.
As Keen says, ' “The main bet, over whether house prices here would fall by about 40% over 10-15 years as they did in Japan, is still alive and well”, he noted. “Rory may yet have to follow in my footsteps.”

17 February 2010

Farming..the cost of subsidies

Excellent article in the Mint 'Farming is dead; long live subsidies' about farming in India and the skewed production processes, thanks to fertilizer subsidies, political pressures and pricing policies.

The costs, of course, are staggering. Food and fertilizers subsidies alone accounted for Rs1.02 trillion. As for the ecological costs, they simply cannot be calculated.
“Our land had 24 elements/micronutrients when intensive cultivation (had) begun in 1962-63. There was shortage of only one or two such elements. Today, excessive subsidization of chemical fertilizers has ensured that very few farmers use natural fertilizers. The result is that in many parts of Punjab, soil is deficient in as many as 16 micronutrients. You can see the ecological costs for yourself,” says Sucha Singh Gill, an agricultural economist and former professor of economics at Punjabi University in Patiala.

16 February 2010

Thoughts on financial liberalisation

Lord Turner's speech at the 14th CD Deshmukh Memorial Lecture in Mumbai examines the costs and benefits of financial liberalisation. The concluding section highlights the practical problems facing policy makers:
And more generally, the sensible conclusion on the overall benefits of financial intensity and financial liberalisation, would seem to be that it is valuable up to a point in some markets, but not in all markets and not limitlessly   There is a strong case that the development of a modern financial system, combining banks and corporate bond and equity markets, retail and wholesale insurance services is strongly favorable for economic growth. Walter Bagehot argued in Lombard Street that the sophistication of the nineteenth century British banking system enabled the UK more effectively than some continental European countries to mobilize savings which might otherwise have lain dormant, and there are a number of studies which illustrate either cross sectional or time series correlations between the development of basic banking and financial systems and economic growth.26  It is highly likely that in India financial deepening, in the sense of the extension of basic banking services and sound credit extension to sectors of the population currently largely outside the banking system, would be positive for welfare and growth.

Well developed corporate bond markets which enable non-bank debt finance to flow in a simple transparent form to corporate borrowers and can play a major beneficial role in financing investment. And competition in basic banking services, including competition by global banks with transferable skills and willing to make long term commitment to a country is likely to prove a beneficial form of liberalisation.

But we cannot extrapolate from the beneficial impact of financial deepening and sophistication up to a point, and assume that still more financial deepening, innovation and complexity is limitlessly beneficial. That if a good basic banking system benefits a country so too does ever more active trading in all categories of derivative. And it is possible that beyond some point, increased financial intensity, measured by the many sorts of indicators which I considered earlier, may cease to deliver positive benefits or indeed have negative effects. 

We do not know for sure and the truth is likely to differ between different markets. The problem for regulators and central bankers is that this conclusion does not provide us with nice easy answers on which to base policy. It might be optimal simultaneously to seek to make one market (say spot equities) more liquid and more efficient in a technical sense, while in another market (eg, complex bi-lateral CDS contracts) to be indifferent if capital requirements and collateral management rules result in the market dwindling in size.  Such a complex conclusion will make many people uneasy. It is much easier to proceed in life on the basis of a clearly defined and simple credo which provides the answer to all specific issues. But it is more likely to produce good results if we live in the real world of complex trade-offs and of relationships which are true up to a point.

12 February 2010

Ormerod on how economics should be taught

Paul Ormerod's lecture at the LSE debate is available here

Some highlights:

I think that a serious problem with the way much economics is taught is that theorems are presented as if – that’s one of our favourite phrases, as if, so I can’t resist getting a mention of it in early – as if they had the same standing as, say, propositions in engineering textbooks. This is very far from being the case. Economics is much more a way of thinking about the world than learning about undisputed, scientifically settled theorems.

We should be teaching much more about empirical evidence on agent behaviour from the discipline of psychology instead of insisting on a single approach which is everywhere applicable or whose assumptions can only be ‘relaxed’ at a later stage.
the fundamental points that, first, economics is a way of thinking about the world and not a set of theorems. Second, it must be empirically based. We must be teaching students to think about the appropriate assumptions on agent behavior in different contexts.
when the American authorities saved the world in September 2008, they didn’t do so by consulting rational expectations and dynamic stochastic general equilibrium models. They acted, in conditions of great uncertainty, relying to a large extent on the economic history of the 1930s and hoping that it had something to teach them.

This is the one point I think it is essential to teach students. Tastes and preferences are in general not fixed, but can be altered by the behavior of others, not just indirectly via the price mechanism, but directly. We have only to look at the modern world to see how pervasive this phenomenon is. As a result, for example, market demand and supply functions become non-additive.
In the past 10 to 15 years there has been an explosion of work in other disciplines, physics, mathematical sociology, computer science, anthropology, on social networks, both in theory and in practice. And in particular on how cascades of behavior either spread or are contained across such networks. Economists in general have only the haziest idea, if they have heard of it at all, about such work. Yet it is fundamental to understanding how the modern social and economic world works.

10 February 2010

Bt Brinjal

The Indian Government has put a hold on granting permission for cultivation of Bt Brinjal in the country - the Minister for Environment has been holding discussions across the country to get different opinions -

(The Hindu): The Minister’s decision comes after a month of public consultations in seven cities, which were attended by approximately 8,000 people. They were organised after widespread protests against the Genetic Engineering Approval Committee’s (GEAC) recommendation of approval of Bt brinjal in October 2009.
Mr. Ramesh attributed the decision to several factors: lack of clear consensus among the scientific community; opposition from 10 State governments, especially from the major brinjal-producing States; questions raised about the safety and testing process; lack of an independent biotechnology regulatory authority; negative public sentiment and fears among consumers and lack of a global precedent.
“My decision is both responsible to science and responsive to society,” he said adding he did not come under pressure from any quarter in arriving at the decision.

This has come under much criticism, see edit in Indian Express, 'By playing to the gallery, Ramesh has not only withheld from the farmer an option that could increase productivity and drastically cut pesticide use. He has also undermined the institutional mechanism that has sustained this country’s cautious introduction of GM seeds like cotton and that is in the process of clearing other food crops like rice, okra and tomato.'

Clearly there is no consensus on this issue. An article in the Indian Journal of Medical Ethics raised another point, that is usually not mentioned in the public discussion:
The gene transfer in Bt brinjal involves two antibiotic resistance marker genes for resistance to Kanamycin and Streptomycin. These are important drugs among the very few that we have in our armamentarium against tuberculosis. Mahyco states that these genes need a bacterial promoter for their expression, which would not be present in Bt brinjal. However there is a possibility that these genes can spread to other pathogenic bacteria by horizontal gene transfer and become active
The testing requirements for GM crops are more lax than those for drugs. Drug trials are conducted in five stages, with the first stage, known as pre-clinical studies, involving only animals. Safety and efficacy issues in humans are addressed in the remaining phases. Government guidelines for research in transgenic seeds or plants only require toxicity (with testing periods of 14 to 90 days) and allergenicity tests (with testing periods of 14-37 days).
It is surprising that regulations for a product meant predominantly for human consumption do not insist on human trials. Though the guidelines state that information related to toxicity and allergenicity to both humans and animals must be generated by the developer, Mahyco's toxicology studies have been performed only on animals and are therefore equivalent only to the pre-clinical studies that are prescribed for drug trials. Save a test that demonstrates that the toxin is undetectable within one minute of cooking, there are no other tests that demonstrate the safety of Bt brinjal for human consumption. It must be noted that Bt tomatoes and Bt cabbage (currently under development) would often be eaten raw. It is estimated that a kilogramme of Bt brinjal would contain 5-47 mg of the toxin, 100 times the minimum inhibitory concentration (MIC95) for the pest larvae .
The safety assessments done so far cannot exclude the possibility that humans may develop resistance to antibiotics, allergies or biochemical abnormalities due to the toxin. A number of reputed scientists have expressed concerns about GM foods. Jeffrey M Smith's Genetic Roulette(23) has a long, fully referenced list of the health risks of genetically engineered foods.

08 February 2010

Gender imbalance and high savings rate in China

A new angle to the high savings rate in China comes from Shang-Jin Wei ' The mystery of Chinese savings'.
Given its far-reaching effects, both private sector analysts and policymakers have attempted to trace the causes of China’s high savings rate and to predict how long it will last. Some have attributed the savings primarily to Chinese corporations. Others point to a precautionary savings motive – as Chinese are worried about costs of healthcare, education, and old-age pensions and are unsure about how much these costs might change over time, they save more.
In my recent research paper with Xiaobo Zhang (Wei and Zhang 2009), we hypothesised that a social phenomenon is the primary driver of the high savings rate. For the last few decades China has experienced a significant rise in the imbalance between the number of male and female children born to its citizens.
There are approximately 122 boys born for every 100 girls today, a ratio that means about one in five Chinese men will be cut out of the marriage market when this generation of children grows up. A variety of factors conspire to produce the imbalance. For example, Chinese parents often prefer sons. Ultra-sound makes it easy for parents to detect the gender of a foetus and abort the child that’s not the “right” sex for them, especially as China’s stringent family-planning policy allows most couples to have only one or two children.
Our study compared savings data across regions and in households with sons versus those with daughters. We found that not only did households with sons save more than households with daughters on average, but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed gender ratio. Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households.
While the conventional explanations for the high savings rate all play a role, this new research indicates those explanations are not as important as people previously thought. While sociologists and other social scientists have looked at the gender ratio imbalance as a social problem, they have not looked at it in relation to the high Chinese savings rate. Similarly, as economists and policymakers have looked with concern to the large Chinese current account surplus and large US current account deficit, or global imbalances, much of their discussion has focused on changing exchange rate policy.
None of the discussion about global imbalances has brought family-planning policy or women’s rights to the table, because many do not see these issues as related to economic policy. Our research suggests that this is a serious omission. You can only implement the right policy when you have the appropriate diagnosis, and fruitful policy dialogue has to include discussion on these issues.
A fascinating and thought-provoking paper indeed.