Rethinking Development Economics

Growth and Poverty-the great debate

2011-07-22T13:33:00.000+05:30

CUTS-International has brought out a compilation of the various views on growth and poverty, sparked off by Jagdish Bhagwati's lecture posted in the group forum in January. The discussion online did get quite heated and involved many noted economists, CUTS has made this available to everyone through their website - enjoy!

Some Reflections
I believe that the differences between Sen and Bhagwati are less substantive than what is popularly made out to be. On a variety of important policy matters, they use different languages but say very similar things. My only worry is that even on this Sen and Bhagwati will agree that I am wrong.
Kaushik Basu, Chief Economic Adviser, Ministry of Finance, Government of India
There is a case for land reforms that make the conversion of land into industrial use less fraught; there is a case wide-ranging educational reform which makes it easier for the poor to access quality education; and there is a case for revamping primary healthcare to make it much more functional.
Abhijit Banerjee, Department of Economics, Massachsetts Institute of Technology, US
Obviously, higher incomes are a necessary condition for better state-funded welfare, better jobs and so forth. This is simply not debatable. Indeed, only in India, do serious intellectuals dream of debating these issues.
Martin Wolf, Chief Economics Commentator, Financial Times, London

Famine and food security

2011-07-20T07:09:00.001+05:30

As the UN declares the first famine in Africa in three decades, Cambridge University has a whole section in its research page profiling food security looking at all aspects of food security, including the environment.
Whose fault is famine?What the world failed to learn from 1840s Ireland by David Nally makes the important point of 'structural violence':

a term used to describe how certain institutional arrangements can render entire communities vulnerable to famine and at the same time impede alternative reforms that nurture local resiliencies. For Nally, the current emphasis on increasing food production through market integration and technological fixes, ignores the well-established fact that there is enough food to feed the world’s present population – in fact recent estimates suggest that there is 20 per cent more food than the world needs. The relationship between food supply and starvation has long been a contentious issue and the Irish Famine is no exception. Contemporary accounts describe ships carrying relief from England passing ships sailing out of Ireland with cargos of wheat and beef to be sold for prices out of reach to the starving population.

“In the analogous way,” Nally suggests, “Africa, a land synonymous with disease and starvation, is a major supplier of raw materials including diamonds, gold, oil, timber, food and biofuels that underpin the affluence of Western societies. The current focus on food availability and supply effectively masks how resources are unevenly distributed and consumed.”

“At present, the problem of ‘food insecurity’ – to adopt the modern, sanitised term for widespread starvation – is generally conceptualised as a scientific and technical matter: geneticists and plant scientists will engineer harvests that produce more efficient, more abundant crops that are more tolerant of climatic stress, more resistant to attacks by pathogens, and so on. This, we are told, will be the basis for ending global hunger. While the physical sciences do have an important role to play, it is wishful thinking to believe that hunger can be avoided by simply ‘turbocharging’ nature – that we can, if you like, engineer our way out of scarcity,” he argues.

What is the future of the world when the solution of distribution of resources remains unresolved?

Interoperability for financial inclusion

2011-07-13T10:21:00.002+05:30

My article on interoperability in today's Hindu Business Line makes the point:
'Both banks and MNOs need to recognise that financial inclusion can be a win-win situation and learn to work together in an environment that is co-operative and competitive. While there will be stumbling blocks along the way, with regulators and governments across the developing world bent on achieving financial inclusion, such a scenario of what is termed ‘co-option' is not as improbable as it sounds'

The point that telcos need to cooperate has been stressed in a speech by RBI Dy Gov KC Chakrabarty
'as regards MSPs (mobile service providers) acting as BCs reports reaching us still suggest that the true spirit of co operation is yet to stabilise with each still trying to destabilise the other. The entire world is looking at this experiment in India and I would urge all of you to get your acts together.'

Anecdotal evidence actually shows that the RBI was making the point rather mildly! Can telcos learn to share the space and infrastructure or will they have to be made to do so?

Manufacturing and development

2011-06-28T17:59:00.000+05:30

A live debate begins in the Economist..'The house believes that an economy cannot succeed without a large manufacturing base' Ha-Joon Chang, University of Cambridge is for the motion while Jagdish Bhagwati, Columbia University is opposing it.
As Moderator Patrick Lane writes in his opening remarks:
This promises to be a lively debate. There are conceptual arguments to be played out. How, for example, is manufacturing defined? What constitutes a "base": having factories on home soil, or keeping hold of intellectual property? What difference does it make if supply chains are spread around the world? And in a debate with such a long history, there are surely plenty of data to be brought to bear too. These are not just questions for Mr Chang or Mr Bhagwati, or for the guest commentators who will contribute later. They are questions for you, too, the readers on the "floor" of our virtual debating chamber. I do hope that you will join in—and that you enjoy the debate.

Your views?

Financial inclusion

2011-06-01T15:21:00.000+05:30

Haven't blogged in quite a few months as we have been working on financial inclusion, here is my latest article, published in today's Hindu Business Line that talks of the new payment system coming into place in India, the Inter-Bank Mobile Payment Service or IMPS There is a lot happening in this space recently, and along with the spread of business correspondents in the country, finally we are working towards bringing the fruits of technology and growth to every section of the society.

Food prices up again...

2011-01-27T16:59:00.001+05:30

Food prices are once again posing problems for monetary policy, across the globe. A recent article by Luis AV Catão and Roberto Chang 'Global food prices and inflation targeting' gives an overview of the issues at hand, arguing that 'food tends to have stronger predictive power on global inflation cycles than oil. The problem is more severe in emerging markets where consumption basket weights for food are two or three times larger than in rich nations. Central banks should pay close attention.'
The Reserve Bank of India had flagged this issue sometime back, looking at the structural reasons and a speech by Deputy Governor Subir Gokarn had focused on the changing consumption patterns that had raised the price of proteins, 'Persistent price increases in commodities for which there are no effective substitutes will, other things remaining equal, raise the potential rate of inflation over a period of time. This means that either actual inflation or interest rates will be higher than they would be in the absence of such increases.' Further, 'Rapid economic growth is contributing to the emergence of persistent demand-supply imbalances which, in turn, are making proteins more expensive. In the absence of a significant positive supply shock, this might result in the weakening of the economy's most productive resource - its people.'
Going ahead, the FAO Food Price Index can provide valuable cues to the prices, meanwhile as the FAO points out in the case of food, and Catao and Chang point out in the case of monetary policy response, short term policy actions can disrupt long term stability and coordination across the key players will be crucial to avoid aggravation of the problem world-wide.

Guest Post- Financial Inclusion in India

2011-01-19T09:34:00.000+05:30

Swabhiman: The Grand Financial Inclusion plan

Swabhiman (pronounced as swaa-bhi-maan) meaning self-respect comes from Swa-(meaning Self) and -abhiman (meaning Respect or Pride) in Sanskrit language.

Swabhiman is the new Financial Inclusion Program that Government of India is planning to roll in the year 2011. The program targets opening of 5 crores no-frills accounts by March 2012 spanning over select 73,000 villages. The plan is not just to open accounts, but to keep them active by regular transactions. The basic idea here is to spread financial literacy while achieving financial inclusion. Government plans to use handheld computers and banking correspondent model to achieve scale and efficiency in the program.

In an interview about Swabhiman, Shri K.V. Eapen, the joint finance secretary of India told media that banks are expected to popularize the electronics benefit transfer (EBT) scheme for efficiency of the program. EBT is mode through which the government currently makes payments to the workers involved in various public welfare schemes. Thus, Swabhiman will provide a platform for banks to launch their products and services like small overdraft facility, remittance, small loans and small deposits to the rural poor.

Swabhiman, though is in planning stage, has some assured benefits for the common man. A common man can now be included in the organized financial sector without the tedious paperwork. It will not only ensure availing of a variety of financial services at doorstep but also easy enrolment to all public welfare schemes.

Reaching out at such a grand scale can face a number of challenges that are meticulous in nature. Ranging from connectivity of handheld devices, geographical connectivity to literacy rate of the population can raise issues in smooth implementation of the program. But, tackling these challenges and bottlenecks is now expected from Indian Government.

Government has surely come a long way since the days of implementing public welfare schemes without proper consideration of ground level realities. This means, the earlier top down approach of govt. towards development is now becoming more and more area specific approach. Increase in variety of work in MG-NREGA, implementation of SGSY- Special plan, launch of RIDF from NABARD et al are examples of the recent changes that can be seen regarding change in approach of the govt.. These kind of changes are a proof to Governments increased concern and involvement in solving the individual ground level problems which were earlier oblivious at the centre level.

Thus, with a fool proof plan, GoI is all set to launch Swabhiman that will ensure smiles on the faces of those who are still unbanked.

By Chitra Nayak (chitra.nayak@fino.co.in)

About Chitra Nayak: Currently a member of business strategy team at FINO, Chitra Nayak is fond of reading and writing whenever possible. She has done her post graduation from XIMB in rural management and believes that achieving a stabilized bottom of the economic pyramid will ensure a sustained growth of the country.

Impunity to Accountability

2010-09-25T11:47:00.001+05:30

Was it just a coincidence that after hearing so much about accountability, or rather the lack of it, when it comes to the CWG in Delhi, I get a mail announcing a conference on a very similar theme for Africa - FROM IMPUNITY TO ACCOUNTABILITY: AFRICA’S DEVELOPMENT IN THE 21ST CENTURY - organised by Dr. Arien Mack in collaboration with Dr. Befekadu Degefe, an eminent Ethiopian economist. The impulse for the conference?
"While the region’s problems and constraints are varied, we believe the relationship between the people and their government to be one of the most critical. In many of these countries, governments remain unresponsive to the needs of their people, and are accountable to their own interests rather than their people. In the special issue of Social Research on which this proposed conference is based, we will bring the relationship between the governors and the governed into the spotlight once again. By bringing some of our authors together for frank discussion with each other and the public, we hope to generate a productive debate among social scientists and other experts that might serve to prod policy makers and the international community to take more appropriate actions than those they may be currently engaged in."
In the case of India, could we be going the other way - from accountability to impunity? If you read the interview with former Central Vigilance Commissioner, Pratyush Shah, in the Mint, this appears to be the case- a worrying trend indeed.
"Two things bother me greatly. One is the social attitude towards corruption. In India, the most unfortunate part is that the society is no longer seriously concerned about corruption and there is social acceptance. When we were growing up I remember if somebody was corrupt, they were generally looked down upon. There was at least some social stigma attached to it. That is gone. So there is greater social acceptance. This is a kind of paradox. On one side, civil society has become more active in exposing corruption; people are filing PILs (public interest litigations) and various other ways of highlighting corruption, trying to do something about it. On the other hand, in society, there is a general acceptance of corruption. If somebody has a lot of money, he is respectable. Nobody questions by what means he has got the money. Second, the final punishment is becoming increasingly difficult. I am not saying that everything is right with CBI, but there are times they are blamed for things for which they are not responsible.
Look at an average case in the special judge’s court, which is the first court where a chargesheet of CBI is filed—(it) is taking 10 years. We got a survey done for a small pocket of CBI in one of their zones; only 4% people out of all those who were finally convicted actually went to jail. On some ground or the other they went in appeal. One appeal after another, on one ground after another. Same is happening with the departmental proceedings… they take years and hardly any punishment is given. Let me make it more mathematical for you. There would be 20% people in India even today who would be honest, regardless of the temptations, because this is how they are. They have a conscience, they would not be corrupt. There would be around 30% who would be utterly corrupt. But the rest are the people who are on the borderline."
We have to wait to see what action is taken post-Games, whether the CVC report expected by the end of this year will be acted upon or not. Meanwhile developments and debate in Africa should be followed, they remain relevant to India as well.

Expanding rural health care

2010-09-20T09:57:00.000+05:30

My article in the Financial Express today takes up the point that we need a multi-pronged strategy to address the shortage of doctors, especially in rural areas. The new BRHC course is a positive move, because it brings with it government and Medical Council accreditation. The Chhattisgarh course ran into deep trouble just because this backing was not available, but those who graduated and placed in the primary health centres have proved to be a boon for rural health care in the state where the socio-economy and geography have been limiting factors in expanding health services. Tamil Nadu has cracked the model with sufficient medical colleges, good infrastructure in rural areas etc. but other states have not got that far yet.
The BRHC course cannot be a one-point solution to healthcare. The point is that there is no need for a new course, if, and this is the big if, there is sufficient supply of doctors coupled with good infrastructure and incentives in the rural areas. Meanwhile, the course needs to be integrated with the general medical degrees to allow BRHC graduates to move into the mainstream over time. Hopefully the proposed National Commission for human resources in health will do a complete overview of the system and create a complete solution to meet the challenge of providing healthcare services to our large and diverse population.

To each his own!

2010-09-16T09:42:00.000+05:30

More news from the US against outsourcing in particular, clearly the times are bad. Bangalore meanwhile does not appear unduly ruffled by these growing protectionist trends, 'He (Obama) has his own concerns for his own country, but nothing will stop India from emerging as a superpower not only in IT but in other areas also. I have no concerns on this," said P Radhakrisnan, from Infotech, quoted on NDTV.

The problem of course has much wider ramifications, as this article in the Knowledge@Wharton series points out, its not just China, but also Germany that needs to be included in the list of countries causing the global imbalance, and of course the US stands at the other end. There are no easy solutions.

Meanwhile, Wharton legal studies and business ethics professor Philip Nichols advises U.S. manufacturers to ignore the politics and "populist aversion" around today's trade imbalances, "Political borders don't reflect the commercial reality," he notes. Economies today are so intertwined that "a trade war is really a war on ourselves." This intertwining has also been noted by Richard Baldwin in the debate on the future of EU Trade Policy on Voxeu. The fact that production has been unbundled and there has been internationalisation of the supply chain must be kept in mind, he says, while fashioning trade policies.

For two others who have left comments on the debate so far - Tim Worstall and Jeff York- the answer is simple - keep politicians out and let businessmen handle business.
Unfortunately, the simplest strategy is often the most difficult to implement in practice.

The world's biggest free school?

2010-09-15T11:36:00.000+05:30

Just discovered Khan Academy, what is in all probability the world's biggest free school..this is an open source project and has the potential to bring learning to children across the world as more videos are added on.

What is really interesting is his motivation for leaving a hedge-fund job to do this work full time as he talks of getting the highest possible social return per dollar invested:

Are you interested in turning this into a business? Maybe with some VC funding?

I've been approached several times, but it just didn't feel right. When I'm 80, I want to feel that I helped give access to a world-class education to billions of students around the world. Sounds a lot better than starting a business that educates some subset of the developed world that can pay $19.95/month and eventually selling it to some text book company or something. I already have a beautiful wife, a hilarious son, two hondas and a decent house. What else does a man need? With that said, if you are a social venture capitalist and are looking to deploy capital with the highest possible social return per dollar invested, we should talk. I think you'll find that there is no more measurable, scalable and high impact way to educate the world.

Hear from Salman Khan in person here

China, India and industrial policy

2010-08-26T18:44:00.000+05:30

Latest paper on Voxeu by Felipe, Kumar and Abdon from the ADB analyses export data to show that China and India are two outliers, with more sophisticated and diversified export baskets, given their income levels- the paper argues ' that the capabilities that both China and India accumulated before reforms started are vital to understanding their growth later on. While we agree that planning led to mistakes, inefficiencies, and to the mis allocation of resources in both countries, we argue that, given their income per capita, China’s and India’s export baskets are more sophisticated – as measured by the income content of the export basket – and diversified – as measured by the number of products exported with revealed comparative advantage – than might otherwise be expected. Both are far ahead of countries at similar levels of development. This could have been achieved only through planning, industrial policy, and sector targeting.'
Going ahead, this calls for more support from the governments to exploit the advantages in place.

Natural resource or political resource curse?

2010-08-25T15:08:00.000+05:30

With Vedanta not getting an environmental clearance for its project in Orissa, one issue that the environment ministry has sidestepped on is the involvement of state and central government officials in granting favours. “The Saxena committee made a number of observations on state officials. I don’t agree with that and believe that they were acting to the best of their ability. There will not be any witch-hunt,” said Jairam Ramesh the Environment Minister. According to Mr. NC Saxena, whose Report forms the basis of the decision by the government to scrap the project, “I have not given clean certificate to the Union environment officials who too ignored various violations at the site at various times. The report has clearly stated that the State government officials were hand-in-glove with the company in 2005 by ignoring Forest Rights Act,” he told PTI. Whose responsibility is it now to see that the corruption pointed out by the Saxena Report is dealt with and cleaned up?

This is of course not an issue that is just Indian in nature, it affects countries across the globe, documented in Africa, in South America.. the term 'natural resource curse' has come up precisely because of this. While more than 40% of the resource rich countries are autocracies, and democracy is preferred to autocracy when it comes to benefiting from resource windfalls, data from Brazil examined by Brollo et al. finds that a 10% windfall in government revenues leads to a 12 percentage point increase in corruption and a 3 percentage point reduction in the probability that politicians have a degree. The chance that an incumbent is reelected raises by over 4 percentage points.They call this the political resource curse. So democracies do provide the necessary checks and balances, compared to autocracies, but there are pitfalls here too.
What about the corporates? As Sudeep Chakravarti says, If the corporation had cared, protests would not have happened. ...,(Perhaps the flaw in the concept of human resource has always been that, it is practised with those under a corporate umbrella, rarely with those adversely affected on account of a company’s activities.) In an earlier column, he writes, Businesses ought typically to be more far sighted, less prone to believing in hype, and more aware of liability.

Here, the problem is compounded because the crucial issue, as Sunita Narain points out, is that the poorest people in India live on its richest lands. For governments and corporates to rethink the way they manage resources, there has to be a review of growth and development plans, because without understanding and integrating this basic point into our plans for the future, social conflict is inevitable.

Random thoughts on mosquitoes

2010-08-20T15:13:00.000+05:30

With dengue in the family, here are some totally random thoughts generated by mosquitoes on the mind.

Come monsoon and dengue is hitting the headlines once again, along with malaria in Delhi, Mumbai, and abroad too..near Manila.
There is no vaccine and no cure for dengue, and one can be cynical and wonder whether the H1N1 vaccine came out so quickly precisely because it affected the richer countries too.
Dengue is in fact a part of the list of Neglected Tropical Diseases with the WHO, diseases that affect low income countries the most. Within these countries, the burden of course falls disproportionately on the poorer sections of society, who have to grapple with loss of daily income, low productivity, extra healthcare expenses, family support issues etc.
But it is true that research in tropical diseases barely gets the kind of attention it deserves. An article by Sandeep Kishore, Gloria Tavera and Peter Hotez talks of the innovation gap in the 'diseases of poverty' asking for universities to step into the breach and work in this area: 'Devising and developing therapies for the diseases of poverty is not profitable, but the dividends of developing life-saving therapies are priceless. If our universities won't deliver, who will?'
Of course a large part of the problem stems from lack of sanitation and this requires community education and more emphasis on general hygiene, especially in congested urban areas.
And last but not the least, what part do mosquitoes play in the ecosystem? This article in Nature debates these points, concluding " And so, while humans inadvertently drive beneficial species, from tuna to corals, to the edge of extinction, their best efforts can't seriously threaten an insect with few redeeming features. "They don't occupy an unassailable niche in the environment," says entomologist Joe Conlon, of the American Mosquito Control Association in Jacksonville, Florida. "If we eradicated them tomorrow, the ecosystems where they are active will hiccup and then get on with life. Something better or worse would take over." There are however quite a few many comments at the end of that article left by readers pleading for the right of mosquitoes to live and asking for the eradication of homo sapiens instead, which reminded me of James Thurber's Interview with a Lemming.

PS. For those who are wondering why a post on mosquitoes should appear in a blog on rethinking development economics, it's because health is by far the most neglected aspect in development and by economists, even though it is so obviously linked to productivity.

Dead end ahead?

2010-07-26T09:16:00.000+05:30

Ramchandra Guha's article in the Telegraph about the IRMA assessment of the PESA:
..the Panchayat (Extension to Scheduled Areas) Act. Passed in 1996, PESA conferred on tribal communities the ownership of non-timber forest produce, the power to prevent alienation of land to non-tribals, the power of prior recommendation in granting mining leases, and the right to be consulted in land acquisition by the government. Assessing the impact of the legislation a decade later, the report found that “in most states, the enabling rules for the gram sabha’s control over prospecting of minor minerals, planning and management of water bodies, control and management of minor forest produce, [and] dissent to land acquisition are not yet in place, suggesting reluctance by the state governments to honour the mandate of PESA”.
..
In the past decade, it is in tribal districts that the Maoists have made the greatest gains, in good part because of the State’s own short-sighted and exploitative policies. The IRMA researchers are no sympathizers of the methods of the Naxalites. They see them (in my view, rightly) as a threat not just to Indian democracy, but to democratic values in general. They quote an activist who notes that while the Maoists might have, in the beginning, fought for greater economic and social rights for tribals, over the years they have “become corrupt, power hungry and intolerant of any difference[s]”. The insurgents are also deeply hypocritical; thus “while denouncing the ‘loot of adivasi resources’, the Party takes money from the mining industry to fund its operations”.
..
Ironically, although it had commissioned this assessment of PESA, the ministry of panchayti raj has thus far refused to allow it to be printed. If the ministry is sincere about its mandate, it should have this study read by all its officials. The officials of the home ministry and the prime minister’s office would profit from reading it too. Perhaps four people in particular should closely read and digest its contents: the prime minister, the home minister, the Congress president, and the youngest of the Congress general secretaries.

As Guha writes:

The IRMA study quotes an activist saying, “The government might not be interested in talking to the Maoists without certain pre-conditions. But what stops it from talking to its own people and understanding their pain?” Mahatma Gandhi once walked through the riot-torn districts of Bengal and Bihar — it may be too much to ask the leaders of today to walk through Dantewada, or Koraput, or Narayanpur, or Gadchiroli, or any of the other areas of tribal suffering and discontent.

The report can be read at Tehelka's website here and concludes:

But PESA—if honestly honoured—might help us as a democracy, to begin rewriting this tragic story. Incidentally, this may be the last opportunity
that the State may have to retrieve PESA. The alternative is too horrific even to contemplate for
the Tribal Areas.

Step on the gas.. with care!

2010-07-22T12:39:00.000+05:30

Excellent post by Suvrat Kher, geologist, on the implications of using shale gas as an energy source in India:
Over the last few months, several articles and papers have emphasized the potential role shale gas will play in India's hunt for energy. Shale gas is natural gas trapped in fine grained sediment.
I don't know how much shale gas resources India has because there has not been a systematic evaluation of shale gas. India's current energy policy prohibits exploitation of shale gas and coal-bed methane. The sooner that policy changes the better for energy starved India.
Still, there is one aspect of exploiting these resources that has not been touched upon by any of the articles I have come across and that is the environmental costs of extracting shale gas.
He goes on to point out the social and environment costs, the regional implications as well that need to be carefully dealt with.

What's wrong with economics?

2010-07-21T14:42:00.002+05:30

A great speech by a Central Banker, Dr DeLisle Worrell, Governor of the Central Bank of Barbados that talks of the problems with economics today, about complexity economics, about looking at data and understanding its details rather than going in for models that hide such detail at the aggregate..and lots more.

Our theories can’t deal with reality, so we ignore the real world and spend our time “testing” our theories. If economics is to have any advice to offer which is useful for the management of real economies, we must speak to the reality in all its rich complexity, using all the data we have, all the methodologies we can devise, and all the sources of insight we can borrow. We must dig as deeply as we can, and become sleuths in pursuit of deeper understanding of our economies, even if our search leads us into paths that are dark and uncertain.

So when central bankers talk of going back to the drawing board and making theory more realistic, what does that mean for policy?

Agents of change

2010-07-15T09:55:00.001+05:30

A recent news item about the Finance Minister to tell CEOs to tone down their lavish lifestyle, had a quote from Tarun Das of CII :
"People in India think the corporate sector is not doing enough for the society,” he said. It was time, for instance, that the top 10 Indian corporates set aside Rs 1,000 crore each for providing safe water, good quality education and medical facilities for the poor, he said.
“More than money, the corporate sector has the management skills to execute programmes without leakages. They must join the government in its efforts,” Das said.

Perception-wise this is correct, the general feeling is that the corporate sector can do much more. Yet public perception of the government not doing enough either is also very strong.
However, mandating limits is not the right way to go about it, it is in fact a rather bureaucratic solution and it is doubtful whether public perception will change much even if such amounts are spent.
What would prove more useful would be to see how much does the corporate sector actually do, and here a study by the CII would be valuable as a benchmark.

More interesting though was his second point, that the corporate sector should join the government in its efforts and help execute programmes without leakages - now that will be a big step ahead. There are of course instances where this is already happening, e.g the UID project - Nandan Nilekani has opened the doors to volunteers :What we are finding in many companies there are a lot of youngsters who want to do something meaningful for a couple of years in the social world. So we have volunteer sabbatical programme. We generally want this to be a public participative project because it is not limited to a few people. It is about getting everybody energized. So anyway they can help we’ll be happy.

Another example of the corporate sector aiding the government in raising efficiency is TeamLease Services, which has tied up with the Karnataka government to revamp the defunct employment exchanges in the state:
According to TeamLease, India currently runs about 14,000 government employment exchanges with about four crore registered candidates. Only two lakh jobs were created last year. Under the new public-private model, TeamLease would set up the building and infrastructure to run the service, and government would contribute to the training costs. This means registered candidates will get trained for free.
Small steps maybe but in the right direction.

And then there is the news that Aruna Roy and Jean Dreze are back with the National Advisory Council. What is heartening is that 'Both see the state as part of the problem, not the solution. Dreze frankly says he continues to find the government and its functionaries “elitist” and “repressive”; Roy, that ordinary people and their concerns are far away from the priorities of those in power in Delhi' Yet, there they are, working with the government, doing their bit to get a better system worked out.

Of course, all these efforts will work only if the government is open to such assistance and is willing to work out change in its own functioning. As PK Dubashi points out in a piece on dealing with the Naxal challenge,'Dedicated leaders and selfless people like Baba Amte and his sons, Vikas and Prakash, spent years in tribal areas, providing them medical service. So do the couple, Abhay Bang and Rani Bang. They are respected by the tribal society but the government does not feel it necessary to consult them and take their guidance. Instead selfish leaders from the tribal communities rule the roost and instead of helping their own community they promote their own interests and those of their families.'
His solution: 'We will have to refashion our administration of the tribal areas. A large number of young people with dedication and idealism, conversant with tribal language, culture and way of life, would have to be put in service in administrative positions in the tribal areas. The sooner such a new approach is adopted, the better.'

There is no dearth of such people, but the question again arises, will the current administration allow such a change..or rather to phrase the question more constructively - what will it take for the current administration to allow such a change? If we look at the examples of currently successful efforts like the UID, the change has to come from within, whether it is the corporate sector, social activists or volunteers ready to work, they cannot work with the government unless the government works with them. It is when the hand of help is accepted that public perception will change, for both the government and the corporate sector.

This time for Africa!

2010-07-01T14:25:00.006+05:30

Read about a very interesting project in Africa, under the Millennium Project initiative, a new health application based on mobile phone Child count+ which allows community health centres to monitor every single child in their area and follow up on the progress. With networks now all in place, such ICT initiatives are set to explode all over the continent. For more particulars check this.
Matt Berg, Director of ICT for the Millennium Villages project, indicated that, as of this year, all MVs are wired for Internet and mobile phone service, thanks in large part to partners Zain and Ericsson. These systems are connected to the larger fiber networks now in place through much of Africa. “The infrastructure is in place,” Berg said, and “Africa is ready to code.”
The ChildCount+ Goals

Register every child – Create a “living” registry of all children under five in a community. This list provides the basis for CHWs to monitor the health status of their children.
Screen for malnutrition every 90 days for children from 6 months to 5 years. When a child with acute malnutrition is detected, the program provides support for Plumpy’nut based malnutrition treatment.
Monitor for malaria and diarrhea – track and treat the two major preventable causes of death in children under five. ChildCount+ provides support for home based malaria RDT testing and ACT dosing, and oral rehydration salt (ORS) usage.
Full child immunization support - Group all children in monthly age groups to know when a particular immunization is due. Record all immunizations and follow up with all children who are behind with their immunization schedule. Help manage vaccination campaigns.
Register all newborns and record when child deaths occur to enable local CHWs and communities to understand why.

The system can even be used to transfer wages to CHWs and monitor their productivity.

It shouldn't be too hard to get similar programmes underway in India.Though the Minister of State for Health Dinesh Trivedi just went on television complaining about the red tapism in his own ministry -

"Roadblocks are that these people (bureaucrats) are not innovative. They don't understand technology. Young people fresh out of college would be able to run the Health Ministry better that these bureaucrats," he said.
So will we catch up with Africa someday on public health programmes?

Finance and fisheries

2010-04-15T17:42:00.004+05:30

The Economics of Ecosystems and Biodiversity (TEEB) workshop organised by the Indian Institute of Technology (IIT), Mumbai, the Conservation Action Trust (CAT), the Bombay Natural History Society (BNHS) and the Green India States Trust (GIST) was inaugurated by an unlikely candidate for this task, RBI Deputy Governor, Usha Thorat. I wonder why someone from the RBI, a 'layperson who needed to learn the jargon', as she put it, was chosen for this seminar - all I could find was that the TEEB Study Leader, Pavan Sukhdev, has extensive connections with the finance world and the RBI.
Whatever the reason, it was good to see this speech on biodiversity on the RBI website. Her speech makes for an interesting read and took me onto Haldane's paper, linked below.
Excerpt from her speech:
In a speech at the Financial Student Association, Amsterdam, on 28 April 2009, Andrew G Haldane, Executive Director, Financial Stability, Bank of England, drew an interesting parallel between the recent global crisis and ecosystems. He cited the collapse of fisheries that came to a head during the 1970s. and 1980s, leading to the imposition of fishing quotas for various species. In setting quotas, no account was taken of interaction between species and the surrounding eco-system. Relating this to the global crisis, he observed that the existing regulatory rules for financial institutions echoed the fisheries management of the 1970s. Risk quotas are calibrated and applied node by node, species by species approach, which takes no account of individual nodes’ system-wide importance – for example, arising from their connectivity to other nodes in the network or their scale of operations. Apart from interconnectedness, Mr Haldane also uses the natural relationship between diversity and stability to show how lack of diversity was a reason for collapse of the financial system. Studies of coastal eco-systems, he said, reveal some dramatic patterns. For around 800 years, between the years 1000-1800 AD, fish stocks and species numbers were seemingly stable and robust. Since then, almost 40% of fish species across the world’s major coastal eco-systems have “collapsed” - defined here as a fall in population of greater than 90%. That is systemic by any metric. There appear to be many environmental reasons for this collapse, some natural, others man-made. The financial system, Mr. Haldane observed, has mirrored the fortunes of the fisheries, for many of the same reasons. Since the start of crisis many banks have seen their market capitalization fall by a significant amount- the fisheries equivalent of collapse. But what took marine eco-systems two hundred years to achieve has been delivered by financial engineers in two!! In explaining the collapse in fish and finance, lack of diversity seems to be a common denominator

The speech by Haldane cited by her is fascinating:
It considers the financial system as a complex adaptive system. It applies some of the lessons from other network disciplines – such as ecology, epidemiology, biology and engineering – to the financial sphere. Peering through the network lens, it provides a rather different account of the structural vulnerabilities that built-up in the financial system over the past decade and suggests ways of improving its robustness in the period ahead.

The financial system evolved in a way that by 2007 showed more complexity and less diversity. As Haldane says:
But in just about every non-financial discipline - from ecologists to engineers, from geneticists to geologists - this evolution would have set alarm bells ringing. Based on their experience, complexity plus homogeneity did not spell stability; it spelt fragility. In understanding why, it is useful to explore some of the wider lessons from
those disciplines, taking in turn the effects of complexity and diversity on stability.

The tentative policy prescriptions he puts forth:
The experience of other network disciplines suggests a rather different approach to managing the financial network than has been the case in the past, if future systemic dislocations are to be averted. Three areas in particular are discussed:
• Data and Communications: to allow a better understanding of network dynamics following a shock and thereby inform public communications. For example, learning from epidemiological experience in dealing with SARs, or from macroeconomic experience after the Great Depression, putting in place a system to map the global financial network and communicate to the public about its dynamics;
• Regulation: to ensure appropriate control of the damaging network consequences of the failure of large, interconnected institutions. For example learning from experience in epidemiology by seeking actively to vaccinate the “super-spreaders” to avert financial contagion; and
• Restructuring: to ensure the financial network is structured so as to reduce the chances of future systemic collapse. For example, learning from experience with engineering networks through more widespread implementation of central counterparties and intra-system netting arrangements, which reduce the financial network’s dimensionality and complexity.

Ostrom again, and the management of commons

2010-04-06T09:23:00.007+05:30

Excerpts from Ostrom's recent interview :

I don’t see the human as hopeless. There’s a general tendency to presume people just act for short-term profit. But anyone who knows about small-town businesses and how people in a community relate to one another realizes that many of those decisions are not just for profit and that humans do try to organize and solve problems.

We tend to want simple formulas. We have two main prescriptions: privatize the resource or make it state property with uniform rules. But sometimes the people who are living on the resource are in the best position to figure out how to manage it as a commons.

Fran: Is there a role for government in those situations? Elinor: We need institutions that enable people to carry out their management roles. For example, if there’s conflict, you need an open, fair court system at a higher level than the people’s resource management unit. You also need institutions that provide accurate knowledge. The United States Geological Survey is one that I point to repeatedly. They don’t come in and try to make proposals as to what you should do. They just do a really good job of providing accurate scientific knowledge, particularly for groundwater basins such as where I did my Ph.D. research years ago. I’m not against government. I’m just against the idea that it’s got to be some bureaucracy that figures everything out for people.
Fran: How important is it that there is a match between a governing jurisdiction and the area of the resource to be managed? Elinor: To manage common property you need to create boundaries for an area at a size similar to the problem the people are trying to cope with. But it doesn’t need to be a formal jurisdiction. Sometimes public officials don’t even know that the local people have come to some agreements. It may not be in the courts, or even written down. That is why sometimes public authorities wipe out what local people have spent years creating.

The following is almost Gandhian in concept: The need to get people away from the notion that you have to have a fancy car and a huge house. Some of the homes that have been built in the last 10 years just appall me. Why do humans need huge homes? I was born poor and I didn’t know you bought clothes at anything but the Goodwill until I went to college. Some of our mentality about what it means to have a good life is, I think, not going to help us in the next 50 years. We have to think through how to choose a meaningful life where we’re helping one another in ways that really help the Earth.

What we need is a broader sense of what we call “social ecological systems.” We need to look at the biological side and the social side with one framework rather than 30 different languages.
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This interview reminded me of this case study done of Bhutan, where the forest resources, traditionally managed by the communities, was faced by outside commercial interests - the govt response, the impact and the evolution of the current system where communities share in the management are all detailed in this study.

The Royal Government of Bhutan has taken a very strong stance on conserving their rich natural resources base, and were very successful in doing so. However, some of the conservation measures had negative side-effects on the quality of some CPRs. The most prominent example is the nationalisation of all non-private land into ‘Government reserved forest’. This took away the control and responsibility away from the local communities. As monitoring was limited (especially for non-timber resources), open access was created, which led to ‘tragedy of the commons’.

On the other hand, during the last 5 years, several government initiatives had sprung up to facilitate CPR management and commercialisation in close cooperation with local communities. A few success stories are emerging. Moreover, new legislation to encourage community participation in common resources management is coming up.

The fight over land

2010-03-31T06:34:00.000+05:30

ArcelorMittal, the world's biggest steel company, is having it tough finding land for its projects in India. This news item talks to the latest developments where the company has been negotiating with farmers successfully so far, the landowners have put up a list of 20 demands that the company has apparently agreed to. The news item is one of the few that explain why some landowners give up land and why others dont - the quality of land is an important issue here.

Jobs are what everyone is eyeing in Petarwar. “Our family will give land for the project. You can see this land, it does little to support our livelihood. If ArcelorMittal gives us jobs, we will all give land,” said Bindeswar Mahato, whose family has 30 acres.

And it’s not just for themselves. ArcelorMittal has agreed to support land losers for up to three generations, as part of a rehabilitation package being discussed with the land owners. Apart from employment, land losers will also get a pension till the plant becomes operational. Schools, colleges, hospitals, peripheral development are all being discussed.

An ArcelorMittal spokesperson says the company has held multiple discussions with landowners and residents of Petarwar. “This ongoing dialogue of exploring ways to address local needs and aspirations will help us devise a sustainable package for both sides,” he said.

Moreover, the people have been made to understand that they would not be losing land to the project. Lakhanlal Mahato said, “The land will belong to the company as long as the smoke comes out of the furnace in the plant. The day it stops, the land will be returned to us.” In other words, if the plant stops functioning the land would be returned to the people."

ArcelorMittal has learnt doing business in India the hard way. The company signed a memorandum of understanding (MoU) with the Jharkhand government in 2005, but land agitation prevented it from making any headway. The situation in Orissa is no better.

Why are residents here so willing to give up what their counterparts just 100 km away were not.

First, unlike Petwarwar, Khunti-Gumla is fertile with the double-crop and multi-crop land in places. Also, in Petarwar's case, proximity to the Bokaro steel city, 40 km away, would have also made the environment more conducive to industrialisation.

Even though 90 per cent of the people are willing land losers in Petarwar provided the company accepts their 20-point charter of demands, ArcelorMittal is taking a cautious approach. The company’s original land requirement was 11,000 acres. Now, the requirement in the first phase of six million tonnes is about 2,000 acres. “The plant will be built in phases,” the company spokesperson said.

That’s not to say that there is no resistance to the project. The project site covers essentially five villages : Kojram, Lukaiya, Jarwatar, Bendotar and Hanslata. Residents of Kojram, the smallest of the villages, are resisting the project.

They have strong support from tribal activist, Dayamani Barla, who spearheaded the agitation in Gumla. “The public meeting went off well for the company because it was attended by middlemen. The adivasis called me, for support,” said Barla.

Barla is not against development. “Around 8 million tribals have been displaced so far in Jharkhand, of which only 3-4 per cent has been rehabilitated.”

But it seems that ArcelorMittal has more people on its side, for now. If the company manages to bag 70 per cent of the land through direct purchase, then the Jharkhand government could step in to acquire the rest, says N N Sinha, industry secretary.

Still, in east India, land acquisition is an emotive issue and the tables can turn any moment.

Consider this: Bokaro Steel Plant’s (BSP’s) expansion to seven million tonnes is held up because people displaced from the 32,000 acres of land way back in the 1960s are demanding jobs. The number of displaced families has grown from 3,000 back then to 30,000 now. The steel plant has already accommodated 15,000, but the list is open-ended and the backing, more so. There are about 30 political groups representing them.

The industrial scenario is also a reflection of the states’ politics. Carved into a separate state in 2000, the state has had seven governments since then, making continuity in policy an impossible task.

The piece says, land acquisition is an emotive issue, True, it's the life and blood of those who own it, but at the bottom of the conflict is the question of control over resources - water, forest, land - that drives the emotions...the struggle from the other side can be found in this blog, which isnt updated very often but still gives a good idea of the concerns of the tribal owners.

In India, land is being acquired for industry, but in Africa, it is being taken away for food..by foreign investors, raising another set of issues. The FAO's report on International Land Deals is a comprehensive study and points out the key lacunae in these deals:

Virtually all the contracts analysed by this study tend to be strikingly short and simple compared to the economic reality of the transaction. Key issues like strengthening the mechanisms to monitor or enforce compliance with investor commitments, through monitoring and sanctioning, maximising government revenues and clarifying their distribution, promoting business models that maximise local benefit, as well as balancing food security concerns in both home and host countries are dealt with by vague provisions if at all.

There are many recommendations to fix the concerns, e.g

innovative business models that promote local participation in economic activities may make even more
commercial sense. These include outgrower schemes, joint equity with local communities and local content requirements.

On many counts, the recommendations seem a set of ideals of attain, they should form a charter of sorts for all stakeholders. In the end, given the focus on returns in the short-term, as the FAO suggests, it is important that world bodies deliberate the implications of these deals for food security, human rights etc. The questions raised for African agriculture actually need to be addressed the world over, for instance, in India it is the clash between large industry and small land owners (last post on water, this one on land)..the closer we are to attaining some parts of the ideal, the better...

What should African agriculture look like in 30 years’ time? What place should large investment and smallholders play within that, and why? These basic questions should frame decision-making. Public deliberation is essential to ensure that this question is properly addressed and factored into choices between different options.

Conflict and development

2010-03-24T15:21:00.001+05:30

South Asia is the second most violent place in the world, after Iraq. Not just Afghanistan and Pakistan that are in the world news, but parts of India, Lanka and Nepal have been reeling under the impact of conflict for decades.
Ghani and Iyer present research on South Asia:
Given the inverse association between conflict and per capita income, we would expect that conflict rates should be much higher in lagging regions within countries – i.e. those regions that have lower per capita income compared to national average? Indeed, this is exactly what we find – conflict is concentrated in lagging regions within countries.
Lagging regions have experienced more than three times the number of terrorist incidents per capita, compared with leading regions, and almost twice as many deaths per head of population in such incidents.

Reducing conflict is a prerequisite to political stability, which, in turn, is the prerequisite for implementing pro-growth policies. Even in a best-case scenario, the presence of low-level conflict constrains the policies governments can implement to promote growth.
Policymakers in South Asia have tried various policies to reduce conflict. The most common approach to deal with insurgencies, terrorism, or internal violence is to use the police forces to establish law and order in the affected areas. The police forces in South Asian countries, however, tend to be understaffed and underequipped. In cases where police forces are insufficient, the armed forces are called in to deal with the insurgency. In most cases, this has not been a successful strategy. Even when these measures are successful in defeating the insurgents, as in Sri Lanka, the human cost associated with military operations is very high.
A different approach to dealing with insurgencies is to conduct negotiations and sign peace agreements with the insurgents. To be effective, this approach needs two conditions:

the government must negotiate in a coordinated way and fulfil at least some of the insurgents’ demands; and
the insurgent group must be genuinely interested in joining the political mainstream

This approach has been tried in some areas of South Asia. For instance, the Indian government has signed peace deals with several separatist groups in the northeastern states, granting them a higher degree of local autonomy in some cases. Similarly, negotiations with some Tamil groups such as the EPRLF have resulted in their integration into mainstream politics.
At the same time as the security-based solution, there are economic solutions. These involve the government expanding welfare programmes to reduce poverty in the conflict-affected areas as a means to undercutting the support for the insurgency. This approach is consistent with economic backwardness as a cause of conflict and has been tried in some conflicts in South Asia, but it has failed because of poor choices of economic policies and poor implementation in conflict regions.

Connected to the above resolution of conflict is Amartya Sen's article in the Guardian

..take Steve Biko's remarks on "powerlessness" in the apartheid-based South Africa in the 1970s. "Powerlessness breeds," Biko said, "a race of beggars who smile at the enemy and swear at him in the sanctity of his toilet; who shout 'Baas' willingly during the day and call the white man a dog in their buses as they go home." If capability failure of any kind is a matter of concern, those related to people's inability to act freely or speak openly because of the power of others have special urgency. This is an important concern in the advancement of freedom and capability, since societies involve conflicts as well as togetherness and mutual support. The pursuit of justice in enhancing freedoms and capabilities in peoples' lives has to be alive to both.

There are no easy solutions, though the past has proven that change is possible. Read this piece in the paper today about an Indian army officer who went back to Manipur after 16 years, and met the militant who had shot him, and the girl he had rescued during the shoot out. The problems in Manipur are far from resolution but stories like this hold out some hope.

Cola companies and groundwater

2010-03-18T14:37:00.002+05:30

The Pepsi plant in Kerala has come under censure from the state government for 'overextraction' of ground water, the 'Panel Chairman and state Water Resources Minister N K Premachandran said the key suggestion was to impose restrictions on water extraction by Pepsi at 234,000 litres per day from the current average of 700,000 litres a day.' Palakkad district where the plant is located has been declared a drought-hit area this year.

While the spokesperson for Pepsi said that they were using innovative recycling and recharging techniques and had been able to save about 200 million litres of water in the last four years and has also brought down the water usage by 60 per cent, the point is that usage of groundwater by industrial units, especially for 'nonessential' uses is coming under scrutiny across the world,cola companies are the first to get struck.
In 2004 the Central Ground Water Board in Kaladera, Rajasthan, had held Coca Cola responsible for depleting ground water level in the region.

As the report 'Watching Water' by JP Morgan put it, 'As water becomes more precious, companies’ real and perceived behavior with respect to water consumption and discharge is also likely to have greater consequences in the marketplace, with an increased risk of consumer backlash against companies judged to be profligate or irresponsible.

Rikki Stancich's article pointed out in 2008,
The need for water mapping and for companies to take the initiative on water management has arisen largely from failure on governments’ part to effectively price water.
But this is likely to change, says Jacob Tompkins, director of WaterWise. “At present, the price of water isn’t representative of its cost – the environmental damage associated with its extraction or its contamination. But the price of water will continue to go up, globally. There will be more regulation and we are likely to see the emergence of voluntary trading of water rights and pollution rights within the next decade,” he says.
In the UK, the Federation House Commitment, coordinated by the Food and Drink Federation, an industry organisation, and Envirowise, a government agency, aims to reduce the water consumption of participating companies by 20% by 2020 (compared to a 2007 baseline). Such schemes are creating a framework for future regulation, says Tompkins.
Water regulation moved up a gear in Australia earlier this year when the Council of Australian Government set the first ever sustainable cap on ground and surface water usage for the Murray-Darling Basin, a land area spanning over one million square kilometres and five jurisdictions. “It’s likely that the rest of the world will not be far behind Australia’s lead,” notes Mattison.

Cola companies will be picked up first as an example and will in all probability take up a lot of media attention; however, watch out for sweeping changes in the way the world uses water in the years ahead.

Capital controls back in favour!

2010-03-13T09:10:00.000+05:30

Well well, the IMF has reversed its policy on capital controls last month..read Dani Rodrik on Project Syndicate on this

In the world of economics and finance, revolutions occur rarely and are often detected only in hindsight. But what happened on February 19 can safely be called the end of an era in global finance.
On that day, the International Monetary Fund published a policy note that reversed its long-held position on capital controls. Taxes and other restrictions on capital inflows, the IMF’s economists wrote, can be helpful, and they constitute a “legitimate part” of policymakers’ toolkit.
Rediscovering the common sense that had strangely eluded the Fund for two decades, the report noted: “logic suggests that appropriately designed controls on capital inflows could usefully complement” other policies. As late as November of last year, IMF Managing Director Dominique Strauss-Kahn had thrown cold water on Brazil’s efforts to stem inflows of speculative “hot money,” and said that he would not recommend such controls “as a standard prescription.”
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Copyright: Project Syndicate, 2010.
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This is a major shift in thinking. Rodrik points out that the combination of economists ideas and political power with the banks made finance lethal in the past. This is set to change, even though political power remains, the intellectual climate has changed significantly.

Earthquakes and governance

2010-03-09T11:56:00.000+05:30

Suvrat's post bringing out the link between governance and earthquake impact talks of how building codes and safety regulations are routinely violated in India, making governance, especially at the municipal level a key variable in understanding disaster management.
Kaufman and Tessada's review of natural disasters and national diligence delves into this issue in depth:

Chile’s good governance played a significant role in limiting the death toll resulting from this earthquake. In particular, two dimensions of governance stand out—government effectiveness (the efficacy of the public sector), and control of corruption. Over the years, Chile’s effective institutions succeeded in designing and adopting better building codes, which have been periodically upgraded, to take into account previous earthquake experience, innovations in preventative technologies and the country’s growing wealth (made possible in part by good governance).
Equally noteworthy is that these building codes are enforced. The media has brought to international public knowledge a new high-rise that has collapsed in Concepción and an apartment building near Santiago that has been rendered inhabitable since it is leaning more than the Tower of Pisa. Notably though, these examples indicate that non-compliance with building codes (and possibly corruption) is likely individualized, rather than systemic. Naturally, there are many damaged structures, particularly (but not exclusively) those built long ago. Even though there are many people close to the epicenter who are now homeless, the overall stock of houses was not decimated and the number of fatalities due to buildings collapsing was limited. In fact, a very large portion of deaths resulted from the tsunami instead.

Undoubtedly, as with past earthquakes, lessons will be drawn from damage assessments and building codes will be improved; but overall the existing system did work. In contrast with the devastating effects that corruption in the construction sector had on the cities affected by the earthquakes in Turkey (where many new residential buildings collapsed) and China (where many schools full of pupils collapsed), the low levels of corruption in Chile, coupled with effective institutions, help explain why building codes were largely enforced.
ore broadly, empirical evidence, such as that presented by Kahn’s study on natural disasters (gated, ungated), suggests that among other factors, governance and corruption control are determinants of the death tolls A review of recent earthquakes, as shown in Table 1, and of the quality of governance (in terms of governance effectiveness and control of corruption) is also suggestive, as depicted in Chart 1.

See the article for more details.

Award time again!

2010-03-03T10:40:00.000+05:30

Real World Economics Review blog is calling for nominations for the Revere Award
The economics establishment has attempted to evade responsibility for the Global Financial Collapse by calling it an unpredictable, “Black Swan” event. But in fact some non-neoclassical economists foresaw the crisis and warned the public of its approach. The Revere Award aims to give these economists the professional and public recognition that they deserve, to encourage others to utilize their methods, and to increase the likelihood that, for the benefit of humankind, empirically responsible economists will be listened to in the future

Greenspan, Friedman and Summers won the Dynamite Prize
Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers, have won the first–and hopefully last—Dynamite Prize in Economics.
They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.
Most than 7,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review. With a maximum of three votes per voter, a total of 18,531 votes were cast. The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting.
Dynamite Prize Citations
Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.
Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.
Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.

Fuel prices again

2010-03-02T12:19:00.001+05:30

The Budget presentation saw the opposition walk out of the Parliament for the first time in India's history. This was over the government's raising fuel prices by increasing duties.
There are a number of problems with the fuel pricing policy in the country, see this article on the 'dieselisation' of the economy thanks to differential pricing.
For the long term view, though there appears to be little alternative to rational pricing. Suyodh's piece in the Express explains
We cannot run away from reality: we are talking here about pricing non-renewable natural resources. Feynman had once said: “for a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.” The technology that has been built upon fossil fuel-based energy has to be transformed. The only way the market will do that is if it is confronted with higher prices.:

Trade and politics: the case of Madagascar

2010-02-26T08:47:00.001+05:30

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.

The eternal cycle of bubbles

2010-02-22T09:25:00.001+05:30

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.
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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.
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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.

Walk the talk with Steve Keen

2010-02-18T11:03:00.002+05:30

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.”

Farming..the cost of subsidies

2010-02-17T09:21:00.000+05:30

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.

Thoughts on financial liberalisation

2010-02-16T14:14:00.000+05:30

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.

Ormerod on how economics should be taught

2010-02-12T09:07:00.000+05:30

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.

Bt Brinjal

2010-02-10T09:23:00.000+05:30

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.

Gender imbalance and high savings rate in China

2010-02-08T10:42:00.001+05:30

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.

Happy peasants and miserable millionaires

2010-01-30T11:45:00.000+05:30

Carol Graham looks at the issue of happiness across societies/economies in an article in Voxeu ' Happy peasants and miserable millionaires'

This capacity to adapt – and the mediating role of norms and expectations – poses all sorts of measurement and comparison challenges, particularly in the study of the relationship between happiness and income. Can we really compare the happiness levels of a poor peasant in India, who reports to be very happy due to low expectations or due to a naturally cheery character, with those of a successful and very wealthy CEO, who reports to be miserable – due to his or her relative rankings compared to other CEO’s, or to a naturally curmudgeonly character? This is something that I have called the “happy peasant and miserable millionaire problem” (or the happy peasant and frustrated achiever problem). On one level it suggests that happiness is all relative. On another it suggests that some unhappiness may be necessary to achieve economic and other sorts of progress. The examples of migrants who leave their home countries – and families – to provide better futures for their children, or revolutionaries who sacrifice their lives for the broader public good, come to mind. This also raises more difficult questions, such as whether we should tell a poor peasant in India how miserable they are according to objective income measures in order to encourage that peasant to seek a “better” life; or whether we worry more about addressing the millionaire’s misery or increasing the peasant’s happiness.

This happy peasant and miserable millionaire paradox also raises the question of the appropriate definition of happiness. What makes happiness surveys such a useful research tool is their open-ended nature. The definition of happiness is left up to the respondent, and we do not impose a US conception of happiness on Chinese respondents, or a Chinese definition on Chilean ones. The open-ended nature of the definition results in the consistent patterns in the basic explanatory variables across respondents worldwide, in turn allowing us to control for those variables and explore variance in the effects of all sorts of other things on happiness, ranging from crime rates to commuting time to the nature of governing regimes.

Fulfilment or contentment?

At the same time, as we think about happiness as a measure of welfare with relevance to policy – something that is increasingly in the public debate – then the definition does matter. Are we thinking of happiness as contentment in the Benthamite sense, or as a fulfilling life in the Aristotelian sense? There is still much room for debate. My studies of happiness around the world suggest that respondents’ conceptions of happiness vary according to their norms such as expectations and ability to adapt. Our priors as economists and policymakers likely suggest that some conceptions of happiness – such as the opportunity to lead a fulfilling life – are worth pursuing as policy objectives, while others – such as contentment alone – are not. Yet that choice entails normative judgements and a debate which we have not yet had.

At the very least, this conundrum will give economists food for thought – about happiness and income, and beyond – for several years to come. Moreover, despite the difficulty it poses for both method and economic philosophy, it will also force us to think deeply about what measures of human well being are the most accurate benchmarks of economic progress and human development.

What works..small is beautiful

2010-01-30T11:40:00.000+05:30

All efforts at improving development indicators need not be scalable to make a difference. Anantha Nageswaran on how small is beautiful :

Anil Gupta of India’s National Innovation Foundation reinforced the case for small efforts in his characteristic forthright manner in a recent Wall Street Journal interview (http://online.wsj.com/ article/SB125376926792036847.html). He said that scale should not be made the enemy of sustainability.
What he said further is important: “In other words, if some solutions don’t diffuse, do they become less legitimate? Are problems of small communities less important than problems which affect a large number of people? Sustainability doesn’t mean that the same solution applies everywhere, because nature is essentially diverse. But we are trying to remove diversity by scaling up solutions… By treating it as such, it creates more problems because what was not uniform is being treated as uniform, which means the dissimilarities and variabilities became more manifest.”
This is important for public policymakers and thinkers. India’s size and the scale of poverty that remains to be tackled, combined with a Western fascination with scale efficiencies, make many of us suggest blanket nationwide efforts and interventions. They might make for neat Power Point presentations, but they mostly do not work. That is what many consumer marketing companies discover when their national marketing campaigns boomerang in some locations.
Many non-governmental organizations (NGOs) that work on a pan-India basis confirm that small and context-relevant interventions work. Such interventions help to build evidence on what works and what does not. The recognition of this reality gave birth to Poverty Action Lab (www.povertyactionlab.org), housed at the department of economics at the Massachusetts Institute of Technology.

What Aid?

2010-01-23T10:12:00.003+05:30

Today read another angle to the Haiti tragedy..Ben Ehrenreich in the Slate on why did the US aid focus on troops rather than on supplies of food and medicines.

The U.S. military did what the U.S. military does. Like a slow-witted, fearful giant, it built a wall around itself, commandeering the Port-au-Prince airport and constructing a mini-Green Zone. As thousands of tons of desperately needed food, water, and medical supplies piled up behind the airport fences—and thousands of corpses piled up outside them—Defense Secretary Robert Gates ruled out the possibility of using American aircraft to airdrop supplies: "An airdrop is simply going to lead to riots," he said. The military's first priority was to build a "structure for distribution" and "to provide security." (Four days and many deaths later, the United States began airdropping aid.)
....
The guiding assumption, though, was that Haitian society was on the very edge of dissolving into savagery. Suffering from "progress-resistant cultural influences" (that's David Brooks finding a polite way to call black people primitive), Haitians were expected to devour one another and, like wounded dogs, to snap at the hands that fed them. As much as any logistical bottleneck, the mania for security slowed the distribution of aid.
...
This leaves the more disturbing question of why the Obama administration chose to respond as if they were there to confront an insurgency, rather than to clear rubble and distribute antibiotics and MREs. The beginning of an answer can be found in what Rebecca Solnit, author of A Paradise Built in Hell, calls "elite panic"—the conviction of the powerful that their own Hobbesian corporate ethic is innate in all of us, that in the absence of centralized authority, only cannibalism can reign.
But the danger of hunger-crazed mobs never came up after the 2004 Pacific tsunami, and no one mentions security when tornados and floods wipe out swaths of the American Midwest. This suggests two possibilities, neither of them flattering. The first is that the administration had strategic reasons for sending 10,000 troops that had little to do with disaster relief. This is the explanation favored by the Latin American left and, given the United States' history of invasion and occupation in Haiti (and in the Dominican Republic and Cuba and Nicaragua and Grenada and Panama), it is difficult to dismiss. Only time will tell what "reconstruction" means.
Another answer lies closer to home. New Orleans and Port-au-Prince have one obvious thing in common: The majority of both cities' residents are black and poor. White people who are not poor have been known, when confronted with black people who are, to start locking their car doors and muttering about their security. It doesn't matter what color our president is. Even when it is ostensibly doing good, the U.S. government can be racist, and, in an entirely civil and bureaucratic fashion, savagely cruel.

When I did the post on culture, this aspect did not cross my mind at all. Security is just as important as getting supplies to the people, true. Which of Ben's possibilities is correct? Even if we go for the politically palatable first option, all it means is this is just one more example adding to the many the world over that point to the connections between geo-politics and development/growth/aid....The second would tell us that 'culture' can mean so many more things than Brooks talked about.

Links to LSE public podcasts

2010-01-22T10:31:00.001+05:30

Just found out that LSE public lectures and events are available on podcasts here
This is an amazing resource with a wide range of very relevant subjects..
Below is a list of January's events so far, which can be accessed through the previous link...happy listening!

What kind of economics should we teach?
Speaker: Professor Geoffrey Hodgson, Professor Albert Marcet, Paul Ormerod, Professor John Sutton
Chair: Professor Tim Besley
This event was recorded on 20 January 2010 in Sheikh Zayed Theatre, New Academic Building
The recent global crisis has lead to questions being asked about whether the kind of economics being taught to students in leading economics departments was responsible for the widespread failure to predict the timing and magnitude of the events that unfolded in 2008. Critiques range from an absence of historical context in mainstream teaching of economics to excessive reliance on mathematical models. This panel brings together four leading economists to debate this issue and to discuss what changes in the economics curriculum and the way that it is delivered are desirable.

Europe after the European Age: historical reflections
Speaker: Professor Mark Mazower
This event was recorded on 20 January 2010 in Hong Kong Theatre, Clement House
What forces have shaped Europe's place in the world over the past two centuries? And how do the challenges of the two 'post-European' epochs – after 1945 and 1989 – compare? Mark Mazower is Ira D Wallach Professor of History at Columbia University.

Beyond the "Berlusconi Common Sense". A New Model of Politics for the 21st Century
Speaker: Professor Paolo Mancini
Chair: Professor Terhi Rantanen
This event was recorded on 19 January 2010 in Sheikh Zayed Theatre, New Academic Building
Mostly outside Italy, there is a widespread common sense about Berlusconi and his political adventure: he has been able to enter successfully the political arena because of his television empire and because of his unclear links with illegal groups and business. This interpretation is undoubtedly true but it is also a limited one as it is not able to point out all the novelties that Berlusconi may represent. Indeed, the paper argues that the political adventure of the Italian tycoon may be interpreted as a signal of the end of the forms of politics that featured the last two centuries in Europe and that was constructed on the role of the mass parties and their ideological nature. This is not just an Italian phenomenon as many other European leaders underline striking similarities with the Italian Prime Minister. In particular three main features of the new forms of politics that these leaders represent are discussed: 1) commodification of politics; 2) life style politics; 3) televised politics. Examples from other political leaders and theoretical frameworks are provided.

Child Under-nourishment as a Social Predicament
Speaker: Professor Amartya Sen
Chair: Professor Lord Stern
This event was recorded on 19 January 2010 in Old Theatre, Old Building
This lecture is in honour of Dr Indraprastha Gordhanbhai (I.G) Patel who was the ninth director of the London School of Economics from 1984 to 1990.

The War on Drugs: an upper or downer for development?
Speaker: Misha Glenny, Michael Hartmann
Chair: Professor James Putzel
This event was recorded on 18 January 2010 in Sheikh Zayed Theatre, New Academic Building
The panel will discuss the impact of legalising and regulating the international trade in illegal drugs. They will look at whether it would curb crime and war financing, and if it would promote development in fragile states. Misha Glenny is a journalist and author of McMafia: seriously organised crime. Michael Hartmann is manager and senior adviser of the Criminal Justice Programme at the United Nations Office on Drugs and Crime.

Modernity and the Meaning of Life
Speaker: Dr Simon Glendinning, Dr Edward Skidelsky
This event was recorded on 18 January 2010 in Wolfson Theatre, New Academic Building
This dialogue will examine the resources left to us to find meaning in our modern day lives. Simon Glendinning is a reader in European philosophy at the European Institute, LSE, and director of the Forum for European Philosophy. Edward Skidelsky is a lecturer in the Department of Sociology at the University of Exeter.

Crisis as Motivation? The Challenges of Sustaining Growth in Southeast Asia
Speaker: Professor Richard Doner
Chair: Howard Davies
This event was recorded on 14 January 2010 in Sheikh Zayed Theatre, New Academic Building
Can the dynamic, export-oriented economies of Southeast Asia sustain their growth in light of the global economic crisis? Professor Doner will consider the questions economists typically overlook. Richard Doner is professor of political science at Emory University in Atlanta, Georgia.

Positive Deviance: the only strategy left for sustainability leadership?
Speaker: Sara Parkin
Chair: Andy Farrell
This event was recorded on 14 January 2010 in Hong Kong Theatre, Clement House
In the absence of an adequate response to unsustainability by political leaders, it is up to the rest of us to lead the way. Sara Parkin is a founder director of Forum for the Future.

Getting fiscal consolidation right: Lessons from Sweden
Speaker: Anders Borg
Respondent: George Osborne MP
This event was recorded on 14 January 2010 in Old Theatre, Old Building
Faced with a record deficit and an accelerating debt, the UK will have to embark on a process of massive fiscal consolidation in order to bring public finances back to sustainability. How is this best done and what lessons can be learned from the Swedish experience of fiscal consolidation in the 1990s? Anders Borg is Minister for Finance in Sweden and has chaired the ECOFIN Council during the 2009 Swedish EU Presidency. He has previously worked as an advisor on monetary policy issues at the Swedish Central Bank and as chief economist at several Swedish banks.

When China Rules the World
Speaker: Martin Jacques
Chair: Professor Michael Cox
This event was recorded on 13 January 2010 in Old Theatre, Old Building
The years immediately following the end of the Cold War gave rise to the notion that the world was entering yet another American Century. But the next century will be decidedly Chinese and the rest of the world needs to adjust to this fact fast. Martin Jacques is a visiting senior fellow at LSE IDEAS. This event celebrates the publication of his book When China Rules the World: the rise of the middle kingdom and the end of the western world.

Muslims in Modern Europe
Speaker: Professor Gilles Kepel
Chair: Professor Fawaz Gerges
This event was recorded on 12 January 2010 in Old Theatre, Old Building
This lecture will look at the complex character of the Muslim population in Europe and explain the many different ways in which they see the world around them. Gilles Kepel is the Philippe Roman Chair in History and International Affairs at LSE IDEAS.

Does the resource curse exist?

2010-01-21T09:44:00.000+05:30

A new paper on Voxeu titled 'Oil windfalls and living standards: New evidence from Brazil' by LSE economists Francesco Caselli and Guy Michaels looks at whether the resource curse exists, using evidence from Brazil.
Their finding:
Municipalities that receive oil windfalls report significant increases in spending on infrastructure, education, health, and transfers to households. However, the windfalls do not trickle down and much of the money goes missing. Indeed, oil revenues increase the size of municipal workers’ houses but not the size of other residents’ houses.
Their conclusion? - Increased transparency, but going beyond mere transparency in accounting.

But our findings do suggest that it may be somewhat unwise to channel revenues from oil operations directly to local governments, at least if the officials are not properly monitored and accountable. For Brazil, this may be an especially important consideration as the system of property rights and royalties will probably be overhauled in response to the recent discovery of huge new offshore fields.

Indeed, the issue is clearly of political relevance, with several major federal legislative proposals to reform the royalty system currently pending. Most proposals tend to reduce both the share of royalties going to local governments and the discretion that these governments have in using the revenues. In the summer of 2009, the federal government issued its own proposals for the property rights regime of the newly discovered "pre-salt" giant oilfields.

More generally, our results may inform the debate about increasing transparency requirements both in poor, resource-abundant countries and in countries that receive aid. In particular, it is increasingly common for conditionality-based programmes to feature stringent reporting requirements from multinational oil companies and recipient governments.

Our results suggest that accounting transparency per se may be insufficient. Reporting schemes should document the actual effective disbursement of sums, and not merely their recording on balance sheets.

Culture again!

2010-01-18T16:26:00.001+05:30

In a column in the New York Times, David Brooks takes up the issue of poverty in Haiti. Unfortunately, he takes off on the issue of 'culture'.

It is time to put the thorny issue of culture at the center of efforts to tackle global poverty. Why is Haiti so poor? ....Lawrence E. Harrison explained in his book “The Central Liberal Truth,” Haiti, like most of the world’s poorest nations, suffers from a complex web of progress-resistant cultural influences. There is the influence of the voodoo religion, which spreads the message that life is capricious and planning futile. There are high levels of social mistrust. Responsibility is often not internalized. Child-rearing practices often involve neglect in the early years and harsh retribution when kids hit 9 or 10.
We’re all supposed to politely respect each other’s cultures. But some cultures are more progress-resistant than others, and a horrible tragedy was just exacerbated by one of them.

Voodoo? Well, my antipathy to the 'culture' argument comes from reading staunch defences made by Indian economists in the early 1900s to the British argument of why India was poor - the Brits chose to look at the religious and spiritual other-worldiness of the Indians, rather than at their own industrial and trade policies as the root cause of under-development in the country.
Sure enough, there are enough of reader comments below that piece refuting what Brooks is saying.

On a more academic note, there is Ha-Joon Chang's Chapter 9 in his book Bad Samaritans. The chapter titled ' Lazy Japanese and Thieving Germans - are some cultures incapable of economic development?' has a good historical account of cultures that were 'resistant' to change.

Announcement: Poll Real-World Economics Review Blog

2010-01-13T13:21:00.001+05:30

The Real-World Economics Review Blog is holding polls to determine the awarding of two prizes:

The Ignoble Prize for Economics , to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC), and
The Noble Prize for Economics , to be awarded to the three economists who first and most cogently warned of the coming calamity.

It is accepted fact that the economics profession through its teachings, pronouncements and policy recommendations facilitated the GFC. We also know that danger signs became visible long before the event and that some economists (those with their eyes on the real-world) gave public warnings which if acted upon would have averted the human disaster.

With other learned professions entrusted with public confidence, such as medicine and engineering, it is inconceivable that their professional bodies would not at the very least censure members who had successfully persuaded governments and public opinion to ignore elementary safety measures, so causing epidemics and widespread building collapses.

To date, however, the world’s major economics associations have declined to censure the major facilitators of the GFC or even to publicly identify them. This silence, this indifference to causing human suffering, constitutes grave moral failure. It also gives license to economists to continue to indulge in axiom-happy behaviour. Nor has the economics establishment offered recognition to those economists who were not taken in by fads and fashion and whose competence, if listened to, would have prevented the collapse.

These two silences reveal a continuing moral crisis within the economics profession . The Ignoble and Noble Prizes for Economics are being offered as small first steps towards a cure.

Poll Procedures for the Ignoble Prize for Economics

Stage One: Nominations and Evidence

Nominations for both prizes are open to the international community of economists, rather than limited to a closed and secret shop. For each nominated economist an evidence page will be opened on http://rwer.wordpress.com/ to which people can leave evidential comments. In this way a documented case for (and against) each candidate will be built up.

There are two ways, one direct and the other indirect, by which you can nominate and post evidence.

Direct Method

You can nominate economist X or economists X and Y, or X, Y and Z (maximum of three) by leaving a comment on the Nominations for the Ignoble Prize for Economics page for which there is a link near the top of the blog’s home page’s right hand column. Your comment needs only to say “I nominate X . . . for the Ignoble Prize for Economics.”

You can post evidence regarding a nominated economist by leaving a comment on their evidence page, which in most cases will be opened within 24 hours of their nomination. These pages are sub-pages of the “Nominees and Submission of Evidence” page and will be link-listed in a box near the top of the home page’s right hand column.

Indirect Method

Because of the current nature of the economics profession, some economists will fear that going public with their professional views on these matters could jeopardize their careers or those of people associated with them. Therefore nominations and evidence can be put forward anonymously by emailing them to pae_news@btinternet.com , preferably with the subject heading “Nominations and Evidence”. The editor will then post the material on the relevant pages. Strict confidentiality will be maintained.

Stage Two: Short List

After an appropriate interval, most likely one month, nominations and the submission of evidence will be closed. Through consultation, authors of the Real-World Economics Review Blog will compile a short list of the strongest nominees, probably 10 or 12. At this time a final dossier, based on the evidential comments posted on the blog, will be compiled and posted for each short-listed candidate. Voting will then open.

Stage Three: Voting

The voting will be conducted using PollDaddy. Its system uses cookies to prevent repeat voting. A voting box showing the short-listed candidates will be displayed prominently on the home page of the Real-World Economics Review Blog. Close by will be links to each candidate’s final dossier. Voting is open to all interested parties. Each voter can vote for up tothree of the listed candidates. The ballots are secret. Voting will remain open for several weeks. No results will be announced before closing the poll.

Stage Four: Results

Within 24 hours of the closing of the poll, the results will be announced. The three economists receiving the highest number of votes will be declared the joint winners of the prize.

General Rules

Only economists may be nominated, and they must have been active during part of the last quarter century. Joke nominations (e.g., Baker, Keen or Roubini for the Ignoble Prize) or ones suspected of being motivated by malice or for which no supporting evidence is forthcoming will not be accepted or allowed to stand. Likewise evidence submitted must be substantive, accurate and presented in good taste.

Poll Procedures for the Noble Prize for Economics

These will be approximately the same as for the Ignoble Prize, but may be adjusted in view of lessons learnt. It is expected that nominations and submission of evidence for this prize will commence when voting for the Ignoble Prize begins.

Nominations and submissions of evidence for the Ignoble Prize for Economics are now open at http://rwer.wordpress.com/

Industrial Policy and Comparative Advantage

2010-01-13T10:45:00.000+05:30

Justin Lin of the World Bank and Ha-Joon Chang of Cambridge University debate whether industrial policy in developing countries should follow the principle of comparative advantage or defy it.
The debate is the first in a series in Development Policy Review

...focuses on the question of whether policies to encourage industrialisation and industrial upgrading should conform to current comparative advantage or aim to miss out steps on the ladder: textiles first or mobile phones? The first position might be thought to be associated with neo-liberal theory which eschews intervention, the second with more structuralist policies which favour government support and extended infant-industry protection. The debate is more subtle than that, however. Both protagonists favour government intervention, but in different ways and for different purposes.

Trust and Climate Change

2009-12-29T10:10:00.001+05:30

Niranjan Rajadhyaksha has a good piece in the Mint on the reasons why Copenhagen failed to deliver, taking up a fitting example of the water crisis in Mumbai and how difficult it is to cooperate even within his housing society on ensuring rules, despite the following reasons why this should be easier than creating a global consensus.
It is easier to build this consensus in a small housing colony than on a global scale. Consider some possible reasons.
1. There is a high level of trust and even affection in a housing colony set up by a group of Marathi writers while international relations are cursed with deep divisions based on history, geography and culture. Getting the rich and poor countries to accept a common timetable to cut carbon emissions is a tough task.
2. The people who stay in our housing society are a homogeneous lot, coming from similar backgrounds and with similar incomes; climate change talks involved countries with different cost-benefit calculations. For example, the Maldives can do almost nothing to mitigate climate change but will surely be the first nation to bear the full brunt of its effects.
3. There is an incentive to protect your reputation in a housing colony or small community, since residents depend on each other for a variety of reasons. A nation at the bargaining table is more concerned about domestic pressures than protecting its international reputation.
4. A related disciplining catalyst is that people who stay in a small community have a long history of cooperation. Our housing colony is 40 years old and people have memories of cooperation and altruism. There is also the risk that reneging on a water deal right now would affect future behaviour of other residents. None of this is true in global climate change talks.
5. While water is not priced and hence market-based incentives cannot be used to curb usage, the city authorities have already imposed caps on our water usage. This is some sort of external enforcement that can cement a deal. In another context, the World Trade Organization does this for global trade. There is no such external enforcement institution as far as climate change commitments go.

Some political theorists and game theorists say that people are conditional altruists, standing between the cold utility maximizers of economics mythology and the saintly altruists of neo-Gandhian mythology. Conditional altruists do have an inbuilt concern for fairness but will follow selfish strategies because they fear that others will take a free ride on their commitments to good behaviour. They behave altruistically only when they are convinced that there are enough others who they can trust to behave similarly.
Such levels of trust take a lot of hard work, a history of reinforcing behaviour and credible assurances. It does not take much to realize that much of this was absent at the Copenhagen talks, which came close to being a morality play between the good guys and the bad guys.

The paper he has based his piece on is available at Partha Dasgupta's website here : Trust and Cooperation among Economic Agents, June 2009
Abstract

The units that are subject to selection pressure in evolutionary biology are "strategies", which are conditional actions ("Do P if Q occurs"). In contrast, the units in economics select strategies from available menus so as to further their projects and purposes. As economic agents don't live in isolation, each agent's optimum choice in general depends on the choices made by others. Because their projects and purposes involve the future, not just the present, each agent reasons about the likely present and future consequences of their respective choices. That is why beliefs, about what others may do and what the consequences of those choices could be, are at the basis of strategy selection. In this article I construct a catalogue of social environments in which agents not only promise one another cooperation, but rationally believe that the promises will be kept. Unfortunately, non-cooperation arising from mistrust can be the outcome in those same environments: societies harbour multiple "equilibria" and can skid from cooperation to non-cooperation. Moreover, a pre-occupation among analysts with the Prisoners’ Dilemma game has obscured the fact that cooperative arrangements can harbour not only inequality, but exploitation too. The analysis is used to discuss why international cooperation over the use of global public goods has proved to be so elusive.

------------
Wishing all readers a healthy and productive year ahead in 2010!

Environment and COP 15

2009-12-19T16:51:00.000+05:30

Environment Decade - the Guardian puts the milestones across the years since 2000:

Ten years ago, Kyoto was on the rocks; Bush ruled the roost, and the New Orleans levee and Antarctic ice sheet were still intact. As the decade draws to a close, we look back on the biggest environmental stories milestones of the noughties

The Guardian also gives a roundup of what was achieved and how we failed in COP 15

And this is the clearest blog I have found explaining COP 15 issues:
Instead the overwhelming evidence points to a deal that, no matter what our leaders say, is a total failure to address the severity of the climate problem.

Argentina - positive natural resource shocks and domestic adjustments

2009-12-05T11:03:00.002+05:30

Leandro Serino, CAPORDE colleague, has a paper out on the 'Positive natural resource shocks and domestic adjustments in a semi-industrialized economy: Argentina in the 2004-2007 period'

Abstract

This paper evaluates the domestic adjustment to recent positive external shocks in Argentina's natural resource sectors. Although there is no single, exclusive determinant of Argentina’s fast economic growth in the period 2003-2007, the paper illustrates the favourable contribution of certain economic policies to this outcome.

According to counterfactual simulations performed with a dynamic Computable General Equilibrium (CGE) model especially designed to capture structural features of the Argentine economy, export taxes on natural resource products and Argentina’s competitive exchange rate policy have counteracted Dutch disease adjustments associated the positive terms of trade shock (which may be contractionary in the medium-term if no economic policies are implemented) contributing to productive and export diversification and to bring about output growth.

The analysis also shows that in a context of strong demand impulses spending the income collected with export taxes may not be beneficial for the overall competitiveness of the economy, hence counteracting one of the purposes of the tax policy. This implies, first, that subsidies to producers of wage-goods may be ineffective to control overall price increases, and second, that optimizing the contribution of public investment in infrastructure to improve the competitiveness of the economy requires special attention to the timing of public investment.

Click here to download the full text of the working paper

About the author

Leandro Serino has recently obtained his PhD in Development Studies from the International Institute of Social Studies (ISS) of Erasmus University Rotterdam, The Netherlands. His thesis is entitled: 'Productive diversification in
natural resource abundant countries: limitations, policies and the experience of Argentina in the 2000s'.

He graduated as an economist at the University of Buenos Aires (UBA) and completed a M.Sc. in Development Economics in 2003 (jointly dictated by the ISS, Free University Amsterdam and Wageningen University).

Until recently, he worked at MECON as an adviser to the Secretary of Economic Policy and coordinated a research unit. In addition, Leandro has been consultant for ECLAC Argentina, where he developed the demo of an encyclopedia on development economics (http://www.cepalnacionesunidas.com.ar). He was also involved in teaching and research at the University of General Sarmiento and UBA in Argentina.

At present Leandro is working as a lecturer at the University of General Sarmiento (UNGS) and is participating in a project to update Argentina’s Social Accounting Matrix at the Ministry of Economy and Finances - MECON (Argentina) .

Source: ISS

Labour employability and global movements

2009-12-03T09:25:00.001+05:30

An article of mine in the Financial Express this week highlighted the issue of Indian firms employing Chinese workers due to paucity of suitable skilled workers in India.
The government has 'fixed' the problem by insisting that all foreigners enter only on business visas—there are no visas to be given for unskilled/low-skill work, for which Indians are available—the problem actually lies in how ‘skill’ has been defined. Skills are defined typically as occupational skills where workers have the requisite training/qualification for a particular job description. If we look at the problem from the employer’s point of view, it is not a question any more of whether there are Indian electricians or welders, etc in abundance. As an Indian company executive employing Chinese labour noted, the Chinese would complete the job in 15 months while the Indians would take 8 years. The minute the time dimension enters, and therefore cost overruns loom, skill takes on a different meaning. Of course there is the added aspect of quality of output. In short, efficiency and productivity are not a part of the skill sets defined. The sad reality is that even while on paper many Indian workers have the requisite skills, they are just not employable.

My article spoke of the problem of employability in the Indian workforce:
Skill deficits have heavy social and political consequences, which are already being reflected every day on the news.As the India Labour Report 2007 , authored by TeamLease Services and Indicus Analytics, put it, “We believe that the skill deficit is more dangerous than the infrastructure deficit because it not only reinforces inequality but also amplifies it.” The longer it takes for the government to get its act together, the worse the situation will become.

I had not spoken about the migration of skilled labour from the country, given the constraints of the length of the article. The rate at which the country has lost quality work force is a function of the lack of opportunities within the country. This has been changing in recent times with many Indians returning to take part in the 'Indian growth story'., even as other parts of the world seem less attractive. The latest : the fallout of the Dubai crisis has meant that skilled workers that India had 'exported' are now returning, at a time when the country needs them badly.
The ongoing crisis in Dubai may just prove to be a boon for the Indian infrastructure sector that is on a hiring spree and scouring the world for top and middle-level talent. The infrastructure sector, which includes construction of roads, highways, ports, airports, real estate, transportation, mining, steel, power and telecom, is witnessing a manpower shortage. “The infrastructure sector in India is in dire need of people who can manage projects and ensure their timely implementation. Such skill sets are hard to find here,” said Sanjiv Sachar, partner at Egon Zehnder International.

However, for the Indian government, this does not detract from the responsibility of creating an environment where employability of the Indian labour force is raised across the board, in all regions.

Messages from Dubai

2009-12-02T09:44:00.003+05:30

Two articles about the lessons from the Dubai debt issue stand out here:

The first by Anantha Nageswaran talks of the underlying problem - a mindset that demands instant gratification - and its implications for the developing world.

Amid all the hand-wringing over Dubai, what is being forgotten is that what has happened in Dubai over the last several years is only a manifestation of a global phenomenon. That is the problem of instant gratification. This affliction lies behind the global financial crisis. ....
Cities cannot be built in half a decade. Cities are not about tall concrete, steel and glass structures. They are breathing, living organisms with culture. Culture is historical. It takes time. Similarly, economic growth has to occur at a sustainable pace. Debt seduces us into thinking that we can have more of it than what is good for us.
If the hubris about breaking speed limits to growth and the achievement of permanent great moderation in economic cycles has brought the severest test yet of the US’ global supremacy, the prevalence of the same mindset in the developing world does not augur well for the great decoupling that some have taken for granted and some await with bated breath.
Hence, to be generous to today’s wannabe leaders in the developing world, the 21st century might ultimately be viewed as the period of transition for the hitherto poor nations but, on current evidence, it may not be the century of their arrival.
All this might be good for op-eds. But investors would be questioning its relevance for their actions. The answer is the same. Mind the risk and mind the price one pays for assets, and those are the equivalent of accepting delayed gratification in life.
On behalf of all of us, praying for a year of learning to accept delayed gratification.

The second article by Simon Johnson 'Does Dubai matter?Ask Ireland' highlights not just the interconnectedness of the world in the matter of flows of activity, but also the impact of responses taken by certain regions to combat crises in other parts of the world:

The thinking is that a partial bailout – with creditor losses – for Dubai from Abu Dhabi implies something about how Ireland will be treated within the European Union (and the same reasoning is also more vaguely in the air for Greece). ...

The main effect will be to strengthen the hand of Ben Bernanke in Fed policymaking discussions – so US interest rates will stay low for a long while. If financial intermediaries draw the appropriate lessons from Dubai, Ireland, and Greece (and Iceland, the Baltics, Hungary, etc), they will be more careful about extending credit to places that are becoming overexuberant – even when it is cheap to increase debt levels.

But an outbreak of caution and care on the part of our biggest banks (and other investment managers) does not seem likely.

Both these articles point to greater issues of unsustainable/unwarranted debt levels, but both appear to be pessimistic over the question whether better sense will prevail.

New Economics as Mainstream Economics

2009-11-25T18:49:00.000+05:30

The Cambridge Trust for New Thinking in Economics has organised a conference in January 2010 - details available here.

New thinking in economics is an interdisciplinary approach to economic problems that acknowledges and respects the insights and analysis from other disciplines, especially those from ethics, history and engineering as well as complexity and evolutionary theory. Four issues can be highlighted, each of which has been either ignored by traditional economic modelling of the problem or treated in a misleading way that discounts the insights from heterodox economics and other disciplines.

The economy is a complex, non-linear dynamic system with technological change inherent in economic growth. Many economic policy issues are potentially non-marginal changes to the system in the context of strong uncertainty.
Many issues of economic policy (traditionally called “welfare economics”) are primarily ethical-economics in nature, and should be informed by moral philosophy rather than economics in isolation. Traditional economic models adopt an extreme form of utilitarianism, with a questionable choice and use of discount rates, ignoring the philosophical literature and the concept of justice.
Engineering and history inform economics through studies of the production processes involving the supply and demand of materials, energy, skills and entrepreneurship. Economic history is critical in understanding the relationship between economics and technological change because the technologies evolve in response to economic conditions, e.g. carbon-price signals. Traditional models assume continuity and path independence.
The politics of mitigation implies unstable alliances and trade-offs between governments and political parties. By the use of the social welfare function (required for the calculus), traditional economists simplify social choices and pre-empt political negotiation, claiming an optimality for their subjective assumptions and market interpretations

What I appreciate best are the principles governing the work in the Trust:

(a) that economic behaviour is primarily social rather than individual;
(b) that economic behaviour is influenced by aesthetic and ethical values as well as economic values: and
(c) that the pursuit of self-interest in economic behaviour can impact adversely on both society and the environment.

Looking forward to reading more of their work.

Empowerment and RTI

2009-11-24T12:17:00.000+05:30

The Right to Information Act in India has managed to do wonders in ensuring that benefits of govt. programmes and policies reach the intended targets:
In an interview with Wall Street Journal, Aruna Roy, activist (former administrative officer and Magsaysay Award winner) explains how:

WSJ: On the Right to Information (RTI) Act, with which you've been closely associated since its inception 4 years ago, what is the progress so far?

AR: The RTI has become a lifeline for democracy in our country. Despite the failures of various state commissioners or government to implement Section 4. (This mandates the government to publicly disclose as many as 17 bits of information, including its budget, personnel, areas of work, etc.) That's why today the government can't touch the RTI without touching the whole of India. Because it's been used by a variety of people for a variety of reasons, with reasonable success. Sharing information is sharing power and nobody understands this better than the bureaucracy and the politicians, in that order.

But the people are now asking for their, for our share of governance, our share in decision-making, in fact if the tribals of India had had RTI 40 years ago, the situation that we face today wouldn't have happened. Wherever I travel, people feel the RTI is their Act and they own it. This is a fundamental change from what existed years ago.

Of course, a number of problems remain, of infrastructure, non-delivery, of systems not being in place, information commissioners not being trained, etc. But on the whole, the Act has worked.

WSJ: But despite its success, the government wants to amend it. Why?

AR: The government wants to put all file notings under wrap. Meaning, all discussions, consultations, all reasons for decision-making should become secret. Which means you'll know nothing about the process, just the end decision.

WSJ: But so far the process has been open?

AR: Yes, so far the process has been open, although they now want to close that. The Department of Personnel & Training which comes under the Prime Minister's Office, which is responsible for the functioning of the RTI, is now saying that the "consultative process" as well as anything that protects the "candour" of people expressing their opinion, will not be revealed. Behind this move to amend the Act and to kill its spirit, is the bureaucracy.

WSJ: So the government which gave the RTI to the people four years ago is now taking it away?.

AR: Equally horrifying is that all applications which are "frivolous or vexatious" will be disallowed. Now who is going to decide what that is? Possibly, the policeman or the 'patwari' (village revenue official) or the 'sarpanch' (village headman)… Naturally, everything will be "vexatious"…The move undermines the entire Act itself.

WSJ: You've been involved with the NREGA on the ground, how well do you think it has worked?

AR: I will say that this is the first rural development service where people know what they are receiving so they can monitor it, where there has been concurrent evaluation, where we know what the losses or gains are. So, every time I read about corruption in the NREGA I am thrilled, not because there is corruption but because for the first time, so many people are protesting against waste of public money. India should be proud.

WSJ: Give me an example…

AR: A women's group in Sitapur, Uttar Pradesh, has got 1400,000 rupees ($29,710) as unemployment allowance because they applied for work and didn't get it. According to the Act, you have to get work in 15 days within five kilometers of your village, and if the government can't give you work, it has to pay you unemployment allowance…Could you ever think of something like this before?

WSJ: But what about the enormous leakages and lakhs of rupees down the drain…

AR: For the first time, we know where the money has gone, even if its down the drain. We know who's swindled it and how it has been swindled. In Bhilwara, in Rajasthan, we have just completed a social audit. We used RTI to access public records and bring them out into the public domain, share it with people whose names are on the records and took a public meeting to testify whether their names were rightly or wrongly there.

You see, RTI is a mandatory provision in the NREGA, which means transparency and accountability on the part of government functionaries is now mandatory. That's how you find out what's going on, because now the people can't be refused information. It's mandatory for every 'panchayats' to do a social audit before the next installment of money is released by the government.

Read more about social audits and government-public relations in the interview.

While the RTI amendment is being fought, it is not being given enough prominence in the media. Peeyush Bajpai's blog post points to the role of media and RTI :

The power of RTI lies in the hand of the citizen- the “aam-aadmi”, it gives him the power to get the information. In nine out of ten cases the information would concern specific issues to an individual or a small community.

Unfortunately, these amounts and issues are 'too small' to 'merit' national attention and reports fall by the wayside, even though there is so much happening on this front.

As Peeyush points out:

The media houses have always prided on their role as custodians of impartial information dissemination. This is thus a challenge for the media to evolve a mechanism of disseminating such specific information in a focussed manner.

Meanwhile, we hope that blogs carry these stories forward.

Stabilities and instabilities in the macroeconomy

2009-11-23T10:58:00.000+05:30

Axel Leijonhufvud's latest piece in Voxeu concludes:
(I have put some sentences in bold font to emphasise the most pertinent points being made)

There are four issues to watch for:

Twin dangers looming ahead are Japanese-style stagnation on the one hand and Latin-American-style high inflation on the other. In more normal times, we would regard these prospects as both unlikely and very far apart on a spectrum of eventualities. High levels of public debt, large unfunded liabilities, and large current deficits mean that they are not at all far apart in the current situation. The apparent political difficulties in decisively remedying the public finances are likely to mean that this is not just a temporary predicament. The navigable channel between Scylla and Charybdis has become quite narrow.
One overwhelmingly important fact should guide policy over the near-term future – since current bailouts and stimulus policies have stretched public finances to the utmost, governments do not have the fiscal resources to handle another bubble bursting. Policy, therefore, should be conducted in a fail-safe mode. The current policies of extremely low interest rates are not fail-safe. They are aimed at reflating asset prices just enough to stave off a deeper recession. This is a delicate operation, not a robust, fail-safe move. It is creating strong incentives for the banks to return to the tables and resume the game of maturity transformation at high leverage that got us into our current troubles in the first place. It is evident that the banks are responding promptly to those incentives
High leverage has been the big culprit in the current disaster. To reduce the risk of another crash, we must curb leverage. But governments do not want the financial sector to deleverage now because the requisite falling asset prices and curtailed credit would deepen the recession. The question, of course, is: If not now, when?
The central banks are planning “exit strategies” by which they mean returning their balance sheets, which are presently bloated beyond recognition with a mix of strange assets, to a condition more resembling that normal to central banks. This will not be easy. If they succeed, however, they will still face the prospect of having to engage in many of the same desperate, unconventional policies in a future crisis. Under present arrangements, the responsibilities of central banks have no well-defined limits. This problem can only be solved by regulation of the financial sector. At present, it does not seem that we know how to do it.

Whats wrong with modern macroeconomics?

2009-11-13T10:05:00.001+05:30

Mark Thoma points to the conference on the theme 'Whats wrong with modern macroeconomics' at Munich last week.
Some excerpts from the comments on that
THOMA: One thing I learned from it is that I need to read the old papers by Sonnenschein (1972), Mantel (1974), and Debreu (1974) since these papers appear to undermine representative agent models. According to this work, you cannot learn anything about the uniqueness of an equilibrium, whether an equilibrium is stable, or how agents arrive at equilibrium by looking at individual behavior (more precisely, there is no simple relationship between individual behavior and the properties of aggregated variables - someone added the the axiom of revealed preference doesn't even survive aggregating two heterogeneous agents).

Roberto Cruccolini said... I think, this phenomenon of forgetting and/or neglecting former knowledge, e.g. the whole discussion and aspects of aggregation, which is really central to the methodology of modern macro, as the notion of microfoudations via optimizing agents was one of the core-arguments of New Classical Makro Revolution, is deeply unsettling. You could also add the oblivion of coordination & interaction problems, of discontinuities & emergence as probably central aspects of makroeconomics, which seem to be the reasons, why macro was once thought to be necessarily a different approach than micro.
There seem to be two ways to deal with this finding. One is to complain about the way modern macro has developed, and to suggest other/better solutions; this is, what we see most of the time right now.
That is of course worthwhile and understandable, but there remains a strange aspect: nearly all of nowadays criticisms were already mentioned 20 or 30 years before (recall Solow 1978 at the same conference as Lucas & Sargent, or Summers 1986 in response to Prescott, or Blinder 1987, or, which is sort of funny, Kirman 1989 & 1992 and - again - 2009,...)
And this leads to the interesting question, why modern macro/new classical methodology & thinking was so successful in conquering the field:
why did economists think, that Lucas 1976 said something new, given the reflections of Marshall how to theorize given ever changing structures, given Haavelmos ideas on the autonomy of economic relations, given the debates between Keynes and Tinbergen of econometrics and structural instability, and so on?
And why did they follow him in applying a Walrasian program using the representative-agent methodology given all these challenging aggregation results (see for the makro-production-function Fisher 1969 or Fisher&Felipe 2003 & 2006 and the bunch of literature to the Cambridge Capital Controversies and of course the literature interpreting the Sonnenschein-Mantel-Debreu results, f.e. Rizvi 1994 or 2006)
And in what sense does it make sense to describe modern macro models as "microfounded", if at the same time, you need some Friedman-1953-as-if argumentation to justify & make plausible your way of modeling, which is often referred to, that the inner functioning of your model is a black box and unknown, only built to generate predictions, not less. but certainly not more, in the sense that we think the way of modeling is reasonably realistic and corresponding to some mechanisms in the real world. Why should we, or why is this commonly called "microfoundations"??

Gallagher and Chang on Globalisation

2009-11-13T09:42:00.000+05:30

There's a video interview up on Real-World Economics Review Blog:
Ha-Joon Chang and Kevin P. Gallagher talk about the central theme of their books:

Chang demolishes some of the myths on free trade and points to the need for asymmetrical protectionism benefiting the developing nations, for poorer nations to break the model of low return primary commodity based production etc.

Bad Samaritans; The myth of free trade and the secret history of capitalism. Bloomsbury.

Gallagher focuses on Mexico and NAFTA and talks of the US-Mexico policy, the need for developing countries to move away from attracting FDI, for the sake of inflows, and to look at the integration of these flows into the economies, rather than creating enclaves within.

The Enclave Economy Foreign Investment and Sustainable Development in Mexico's Silicon Valley by Kevin P. Gallagher and Lyuba Zarsky, The MIT Press

On the Berlin Wall

2009-11-10T09:04:00.003+05:30

Three papers up on Voxeu examining the impact of the fall of the Berlin Wall, 20 years on.
Michael Burda's article Half-empty or half-full?East Germany two decades later concludes:
It’s my guess that East Germany in the 21st century will reproduce the existing north-south divide in the West. This is because convergence is not only about equating East and West Germans’ levels of physical and human capital but also endowing them with the same level of social, institutional, business and marketing infrastructure. On this metric, the Eastern German economy looks like a mixed bag, like much in life, a glass half-empty and half-full at the same time.

This is an important paper, its conclusion has interesting implications for all states with wide regional disparities

Volker Nitsch and Nikolaus Wolf's paper Tear down this wall:on the persistence of borders in trade reports:
Notably, it makes hardly any difference whether we analyse data for 101 regional units and 10 industry groups or 27 regional units and 24 industry groups: the trade effect of the former Iron Curtain across Germany continued to be highly significant throughout the period under investigation, although this effect clearly declined over time. Given that we can extrapolate the results, we estimate that it would take between 33 and 40 years, or roughly one generation, to remove the effect of the former political border entirely.
These findings are difficult to square with the “political barriers” or the “artefact” explanation of border effects but strongly suggest that some fundamentals are driving the effect. We conclude that the biggest challenge to globalisation is neither technological nor political barriers to trade, but barriers stemming from economic fundamentals. While we can change infrastructure and even remove political borders, it takes at least a generation to tear down the wall in our heads.

Gerlinde Sinn and Hans-Werner Sinn's Muffed jumpstart puts their conclusion baldly:
Germany’s political unification has succeeded; its economic unification has not....
The failed unification of the East and West German economies has also dragged down West Germany in an international comparison. Until German unification, West Germany had grown properly and in terms of per capita national income had held a top position in Europe, at about the same level as Denmark. Under favourable conditions, it could have maintained this growth thereafter and Germany as a whole could have grown much faster than the rest of Europe due to the convergence of East Germany to the Western European level. But this is not what happened. Since 1995, both parts of the country have crept along in step and have taken turns with Italy for the lowest rung on the European ladder. Things turned out worse than we had expected.
The economic crisis has enforced a new realism in Germany. Net transfers to East Germany have been declining for a few years, wage increases have become more modest, and the constitution prohibits East German states to continue their policy of rising indebtedness from 2020. The times of easy money are past, and that is why a phase of growth may start now. Unfortunately, it is twenty years late.

'Cheap Money Mischief' False sense of comfort

2009-11-05T18:27:00.001+05:30

This is a mail from Suyodh Rao who points to two articles:
The first by Gillian Tett Financial Times 'Rally fuelled by cheap money brings a sense of foreboding'
The second by Roubini also in the FT 'Mother of all carry trades faces an inevitable bust'

The two put together answer some questions as to why asset prices are rising even though things dont 'feel' so good. Companies are reporting decent results no doubt. I have not looked at Market PE Ratios, that will give a better idea whether equities are reasonably or otherwise priced.
The factor that cannot be ignored is where the money that is being pumped in by govts is finally ending up. One chunk of stimulus money obviously went to shore up financial institutions balance sheets. Leftovers of that stimulus will find its way into either consumer prices or asset prices.
What the articles talk about is how the loose monetary policy & the fiscal stimulus of the US are both fueling worldwide asset price inflation. Realty prices world-over are still on the higher side when one compares them to trend-line relationship with incomes. Incomes (real) are down if anything and should push house prices even lower. As for stock prices, one will have to look at PEs.
The current crop of policy-makers seem to have not read their Economic History texts, or have forgotten them. While that may sound like an audacious statement, I take the support of two statements of two individuals (quoted below) who, in most respects, have had the most impact on economic policy-making in the 20th century (and onwards). In the days when these were written, there weren't the fancy hedge and fence funds of today. Nor was the stock market hogging newsprint. That may have allowed them to give Money Supply the respect that was due to it. There were three variables that they focused on - Employment, Output & Price Level. Today the financial sector employs tens of times more folks (percent of workforce), and that has changed the focus of policy. In my opinion, that is an unwelcome change. But then, the counter-tautological statement would be that if the financial sector goes down the drain, then the real sector is doubly hurt. That statement has its merits. But, since the financial sector doesn't matter, let us tinker with it. Therein lies our mistake.

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
John Maynard Keynes, 1920

My own studies of monetary history have made me extremely sympathetic to the oft-quoted, much reviled and as widely misunderstood, comment by John Stuart Mill. "There cannot ....," he wrote, "be intrinsically a more insignificant thing, in the economy of society, than money; except in the character of a contrivance for sparing time and labour. It is a machine for doing quickly and commodiously, what would be done, though less quickly and commodiously, without it: and like many other kinds of machinery, it only exerts a distinct and independent influence of its own when it gets out of order".

True, money is only a machine, but it is an extraordinarily efficient machine. Without it, we could not have begun to attain the astounding growth in output and level of living we have experienced in the past two centuries - any more than we could have done so without those other marvelous machines that dot our countryside and enable us, for the most part, simply to do more efficiently what could be done without them at much greater cost in labor.

But money has one feature that these other machines do not share. Because it is so pervasive, when it gets out of order, it throws a monkey wrench into the operation of all the other machines. -
Milton Friedman, 1968

PS The above has been written on the fly, may miss some connections, but seems to make sense. Hope it does the same when it meets the reader's eye :) If my last para above doesn't make sense at first, read the quote of Friedman and then re-read my para.

What I am saying in essence is that Money Supply increases take time to show their impacts. Asset-price inflation and/or consumer price inflation will follow Money Supply increases. Asset prices have to revert to their historical trend-lines and relationships with other economic variables such as income etc. The reversion will be in Real terms, and very likely in Nominal terms too. When that correction comes, it is not going to be pretty. When the economic history of the first decade of the 21st century is written, the rally of 2009 may not occupy more than a square inch.

Revisiting the orthodoxy: the experience of emerging economies

2009-11-04T09:16:00.000+05:30

An edit in the Business Standard today highlights the changes in thinking with regard to forex reserves and cross-border flows:

This episode has clearly highlighted the need for re-assessing the benefits of accumulating large foreign exchange reserves. Once viewed as inefficient by the orthodoxy, “self-insurance” is now being seen as a legitimate crisis-management strategy.

Alongside this, the orthodoxy about the desirability of capital inflows is also being questioned. Brazil is a prominent example of having recently imposed a tax on short-term portfolio inflows, a variant of the class of instruments generally known as Tobin taxes.
Contrary to the orthodox view that Tobin taxes will queer the pitch for foreign capital, a clear delineation of the transactions on which they are to be levied may actually incentivise more desirable long-term portfolio and direct investment inflows because they promise a more stable balance-of-payments and exchange-rate environment.

RBI Deputy Governor's speech at the FSA Turner Review Conference also deals with the space for unorthodoxy

Much of the current debate on many issues centres on the epicenter of the crisis, the developed economies with relatively advanced financial systems. The emerging markets, though, can bring a different perspective from their own past experience. Many of the emerging countries, including India, are part of the global effort in search of a harmonized framework but certain key differences in perspectives in these two sets of economies need to be appreciated. The status of the financial sector of the emerging economies is different from that of the advanced economies with different set of imperatives having different implications for the trade off between financial stability on the one hand and financial development, financial inclusion and growth, on the other. For instance, with regard to identification and mitigations of sources of systemic risk, the emerging market concerns are heightened because of the fact that many sources of systemic risk lie outside their jurisdictions. There could also be the issue of negative externality of larger than warranted capital requirements without careful calibration which could adversely impact the flow of credit to productive sectors, particularly in bank funding based financial systems. Emerging economies are faced with the challenge of managing volatile capital flows which is not a source of systemic vulnerability for developed economies,

Clearly the experience of the developing/emerging economies has much to offer in reshaping the prevalent ideology.

Soros asks for a 'New Economics'

2009-11-03T08:42:00.000+05:30

Frustrated with the inability of economics to develop realistic thinking, fund manager and global investor George Soros has decided to set up an institute 'New Economic Thinking'

The group, to be called the Institute of New Economic Thinking, will gather luminaries in the field of economics to reflect on the ideas that allowed the latest economic crisis to transpire and to bring new ideas to a profession that some argue has become too deeply entrenched in free-market ideology.

The group’s advisory board will be studded with economists such as Jeffrey Sachs, George Akerlof, Kenneth Rogoff and Joseph Stiglitz as well as public commentators such as Anatole Kaletsky and John Kay, a Financial Times columnist. Mr Soros is pledging $5m a year for 10 years.

While we wait for output from that institute, realistic academic economic thoughts can be found at the new Real World Economic Review Blog

US Dollar shortage and global policy response

2009-10-23T11:03:00.001+05:30

BIS Working Paper No 291 titled 'The US dollar shortage in global banking and the international policy response' by Patrick McGuire and Goetz von Peter deals with the international policy response to the stresses in the banks balance sheets last year.

An important point noted by the paper:

Beyond addressing the immediate exigencies, however, the international swap arrangements are of broader interest from an institutional perspective. The structure of the arrangements appears to overcome two challenges commonly associated with international lending of last resort. First, the Federal Reserve and its foreign counterparts have the power, in principle, to create any amount of money, in contrast with international financial institutions administering limited resources. Demands in other currencies can similarly be met by including the respective currency-issuing central banks in the network of swap lines. Second, the swap network does not compound the informational problems that can give rise to moral hazard. By lending against collateral to foreign central banks that intermediate those funds to banks in their jurisdictions, the Federal Reserve assumes no credit risk vis-à-vis the ultimate borrowers, and delegates the task of monitoring the banks (or collateralising the loans) to the national authorities closer to the bank supervision process.

Conclusion of the paper:

The recent financial crisis has highlighted just how little is known about the structure of banks’ international balance sheets and their interconnectedness. The globalisation of banking over the past decade and the increasing complexity of banks’ international positions have made it harder to construct measures of funding vulnerabilities that take into account currency and maturity mismatches. This paper partially fills this void, investigating how banks funded their international positions across currencies and counterparties. The analysis shows that between 2000 and mid-2007, the major European banking systems built up long US dollar positions vis-à-vis non-banks and funded them by interbank borrowing, borrowing from central banks and FX swaps. We argue that this greater transformation across counterparties in fact reflected greater maturity transformation across these banks’ balance sheets, exposing them to considerable funding risk. When heightened credit risk compromised sources of short-term funding during the crisis, the chronic US dollar funding needs became acute, particularly in the wake of the Lehman Brothers bankruptcy.

In contrast to many previous international financial crises, it was banks’ international exposures to other industrialised countries that deteriorated, and the global interbank and FX swap funding structure which seized up. The build-up of such stresses at the global level can only be identified by tracking the extent of cross-currency funding, and by implication, banks’ reliance on short-term interbank and FX swap positions. What pushed the system to the brink was not cross-currency funding per se, but rather too many large banks employing funding strategies in the same direction, the funding equivalent of a “crowded trade”. Only
when examined at the aggregate level can such vulnerabilities be identified. By quantifying the US dollar overhang on non-US banks’ global balance sheets, this paper contributes to a better understanding of why the extraordinary international policy response was necessary, and why it took the form of a global network of central bank swap lines. A broader message of this paper is that vulnerabilities in the international financial system are best measured along the contours of banks’ consolidated balance sheets, rather than along national borders. ....
The macroprudential perspective afforded by these data shows that (i) stresses can build up in a national banking system that cannot be identified with the home country’s residencybased statistics alone, and (ii) banks’ cross-border positions are large relative to countries’ external positions, clouding the interpretation of what the “national balance sheet” implies for domestic residents.

Food Security and Poverty

2009-10-19T16:05:00.000+05:30

My article on the proposed Food Security Act in India is in the Financial Express today. The Government's proposal in principle extends the right to food to all citizens in India but limits the legal binding on it only for the population that lies below the poverty line (BPL) - and here there is a wide range of the estimates of poverty in the country - ranging from 38% according to the Tendulkar committee set up by the Planning Commission recently to 77% set by the 2007 Arjun Sengupta Committee. The NC Saxena Expert Group for the 2009 Census of BPL households in rural areas puts the estimate at 50%, but says that 80% of rural households would be more appropriate if the calorie consumption is to be 2,400 calories in rural areas

Read the Report of the committee on the methodology for estimating the population in India below the poverty line, particularly the dissent note by P. Sainath for a compelling argument on why coverage of the food security act should be universal.

My conclusion in the article:

The reason behind limiting coverage of the Act has to be fiscal, and the Centre should admit that outright. Under the present Public Distribution System (PDS), the higher estimates of BPL population can raise the food subsidy bill by 25% to 140%, depending on which estimate is used. However these estimates assume that the PDS continues in its present form. Instead of looking at the high subsidy costs as a deterrent, the Centre should keep the spirit behind a Food Security Act foremost in mind—systems set up should be decentralised and allow greater flexibility to the states with the idea for organisational cost savings. A simple example is to distribute coarse cereals, pulses, fruits and vegetables suited to the local conditions through a revamped, new PDS, rather than use rice or wheat transported long distances from other states.

In fact, if the primary responsibility of providing food security is to lie with the state governments, as the Act proposes, why not minimise the role of the Centre to being a facilitator, rather than a controller of the whole food stock trade and distribution? There is much to be said for making the right to food a universal right and there is ample evidence to show that targeted systems increase the scope of corruption. Clearly, the Food Security Act is an important step forward, but it should not narrow its focus and result in two steps back in the battle against hunger in this country.

Elinor Ostrom and Economics

2009-10-13T09:32:00.007+05:30

Good to see the 'Nobel' Prize going to a 'non-economist'..Elinor Ostrom is a political scientist.
Read a list of her work here

Here is her CV
For those who want to debate whether she 'deserved' the Prize at all, like the big discussion that raged over the weekend on Obama, you can put in your comments at this site.. Some comments are pretty low level here, showing that a lot more effort will be needed to get economics to accept a multi-disciplinary approach. So whether she 'deserved' the prize or not, whether there are others who 'deserve' it more or not, discussion is endless..still, this is a step in the right direction on bringing plurality back into focus. A refreshing change from the market vs. government arguments, she stresses on cooperation e.g farmer managed irrigation systems etc..

In an interview,
The first woman to win a Nobel economics prize, announced today, emphasizes in her work, for example, how pools of users manage natural resources as common property, such as how lobster fishermen in Maine in the 1920s came together to self-police the industry due to too many of the sea creatures being captured threatened their extinction

"They regrouped and thought hard of what to do, and over time developed a series of ingenius rules and ways of montoring that have meant the lobster fishery in Maine is the most successful in the world," she said today, in a wide-ranging interview with Adam Smith, editor-in-chief of the Noble prize group's Web site, Nobelprize.org. "There are many other small- to medium-size groups that have taken on the responsibility for organizing the source governance."
She agreed her award might catch on with the public in more broad ways, arguing that government oversight isn't the only way to solve a problem.
"I hope," she said. "That's what I've been working on for all my life. Humans have great capabilities, and somehow we had sense that the 'officials' have genetic capabilities that the rest of us didn't have. I hope we can change that."

You can hear the whole interview here

UPDATE: Here is Paul Romer on Ostrom's significance:

Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.

Here is Ostrom on climate change (Thanks Suvrat, for this link)

The first part of the discussion moves from a review of systems thinking to focus on social-ecological systems and their resilience, to the challenge of managing these systems so they can be resilient: How will they best cope with change? In the second part of the conversation, Ostrom elaborates on the framework she’s been developing, which she describes as “a step toward building a strong interdisciplinary science of complex, multilevel systems that will enable future diagnosticians to match governance arrangements to specific problems embedded in a social–ecological context.” In wide-ranging observations, she also discusses how people self-organize successfully; the role of trust and reciprocity; and the preservation of ecological knowledge.

Rate hikes again

2009-10-08T10:22:00.001+05:30

The RBA is the first off the block raising rates this week. In a speech at the Istanbul conference on 'Where is Global Finance heading?', Mr Durmuş Yilmaz, Governor of the Central Bank of the Republic of Turkey made some key points about the role of central banks. It is important that the public and analysts appreciate what is behind the actions of central banks. And also to remember that each country faces a different set of conditions and priorities, timing and pace of rate decisions will necessarily differ.

Almost all economists agree that we are heading to a slow, gradual and painful recovery. And as a central banker who has spent almost 30 years in this profession, I can tell you that it is a miracle itself to have so many economists agree on one issue with so much vigor and conviction.
It is clearly understood that the only way to prevent future crises at the global scale is multilateral cooperation. However to establish and sustain multilateral cooperation is not an easy task. As (John Maynard) Keynes once said, “The biggest problem is not to let people accept new ideas, but to let them forget the old ones.“ It is very likely that economic agents will try to hold onto their old habits when the effects of the crisis subdue.
Appeals on regulators will pile up for a more lenient implementation of rules, regulations, and policies. Politicians will face pressure from their constituents to give priority to local concerns at the expense of global coordination. Dominant academic paradigm may restrict those who radically incorporate lessons of these days into their studies. And of course, central banks, as always, will be criticized for spoiling the party at its hottest moment by taking away the punch bowl. We should be aware that keeping the old habits will only give us a new and may be more severe crisis in the near future.

Of course, as a central banker, I am fully aware that identifying asset bubbles is not an easy task and it may also be challenging to convince the public and politicians about the necessity of raising policy rates at a time when economy is booming but the prices of goods and services are stable. However, the recent crisis has demonstrated that central banks may ignore imbalances in financial markets at their own peril.

Financial crisis and central banking

2009-10-06T09:35:00.002+05:30

Marc Faber in an interview recently praised the RBI for being amongst the best central banks in the world - mainly from the point of view of keeping an eye on financial stability:
The RBI has one of the best monetary policies in the world because they supervise the financial sector very closely. They have maintained relatively tight monetary policies and also they pay attention not only to core inflation which is not representative of the cost of living increases and is not representative of inflation in the system but the RBI also pays attention to rising and falling asset prices. So, I have to give them credit for being actually one of the best Central Banks in the world.

That's the view from the investment world, yet the RBI has often been criticised by economists for being ultra-conservative. Shankar Acharya talks of the good performance of the RBI in his article dealing with policy continuity at the RBI

But the conventional wisdom attributes this to an instinctively conservative and cautious approach of the RBI and its leadership, especially then governor Y V Reddy and deputy governor Rakesh Mohan. At best this is a partial truth and, at worst, it’s quite misleading. Let me explain. Reddy and Mohan should certainly get a lot of credit, but for much more than being instinctively conservative.

To begin with, maintaining a cautious stance in the boom years of 2003/4-2007/8 was itself quite a feat in those exuberant times when the financial community, the media and even the government were pressing for rapid progress on conventional, financial liberalisation.

But the Reddy-Mohan RBI did much more than just preserve key elements of the policy/regulatory framework. Over the boom years, as the perceived scale and risks of global financial excesses mounted inexorably, the RBI evolved a diverse set of heterodox policy responses to deal with the problem. These included:

The inclusion of “financial stability” as an explicit objective of monetary policy;
Active management of surging and volatile capital inflows through partial “sterilisation” by market stabilisation scheme (MSS) security issues, cash reserve ratio (CRR) hikes and liquidity adjustment facility (LAF) operations, thus retaining substantial, discretionary control over monetary and exchange rate policies;
Moderation of bank exposure to asset bubble-prone sectors such as real estate and equity markets through countercyclical provisioning requirements and differentiated risk weights for bank lending to such “sensitive” sectors;
Extension of stronger regulation to systemically important non-bank finance companies;
Enhanced supervision of financial conglomerates;
Bringing bank exposure to non-banks within the prudential framework;
Tighter guidelines for securitisation and a sceptical stance towards complex financial products.

After a challenging year of crisis management, Governor Subbarao has explicitly endorsed the key elements of the Reddy-Mohan heterodoxy. It has probably helped that mainstream, international thinking on these issues has been driven much closer to the Reddy-Mohan positions by the global financial crisis. For those, like me, who backed the Reddy-Mohan approaches to monetary and regulatory policies, the continuity shown by Subbarao’s RBI is very heartening. For earlier critics of these approaches there may be some disappointment and discomfort.

So true! For those who are looking for a short roundup of the issues plaguing EMEs today, Subbarao's latest speech on the crisis and EMEs is worth reading. His conclusion:

It needs to be recognized that after a crisis, with the benefit of hindsight, all conservative policies appear justified. But excessive conservatism in order to be prepared to ride out a potential crisis could thwart growth and financial innovation. The question is what price are we willing to pay, in other words, what potential benefits are we willing to give up, in order to prevent a black swan event? Experience shows that managing this challenge, that is to determine how much to tighten and when, is more a question of good judgement rather than analytical skill. This judgement skill is the one that central banks, especially in developing countries such as India, need to hone as they simultaneously pursue the objectives of growth and financial stability.

Carbonate Surprises

2009-09-30T11:59:00.000+05:30

Suvrat Kher, geologist, interviewed on the Reef Times
One excerpt:

Tell me about some of the “water crises” you’ve blogged on (like India) and why they are happening.
India is facing a multitude of water problems. First there is the problem of water quality. Environmental regulation is new to India and is weakly implemented and that means that almost all the major rivers and lakes are polluted to unacceptable levels. Wetlands are disappearing through uncontrolled and unplanned development. Even an iconic wetland like the famous Bharatpur Bird Sanctuary is threatened.
Second is the impact of climate change on surficial water. If trends observed in the decline of Himalayan glaciers hold over the next couple of decades it would affect the summer runoff of Himalayan rivers that are a lifeline to hundreds of millions of people in northern India.
Finally there is the crisis facing groundwater. Unregulated extraction of this resource has lead to aquifer overdraft in many regions. This is a catastrophe in the making since groundwater irrigates over two thirds of arable land in India.

Korea 'A militant tendency': A critique

2009-09-25T09:24:00.004+05:30

This post has been sent in by Hee-Young Shin of New School for Social Research, who has also sent it to the FT as a comment.

In a recent article featured on Financial Times ("A militant tendency," September, 18, 2009), a longtime Financial Times' Korean correspondent, Christian Oliver completely distorted the image of legitimate Korean trade union activities. He argued that militant trade union activists had been the number one obstacle to foreign investments in Korea. In addition, he cited recent tragic incidents and other anti-government protests as if they were stirred by a number of radical trade union activitists behind the scene.

But as any astute observer of social issues in Korea quickly recognizes, the example that Mr.Christian Oliver enumerated had nothing to do with trade union activities. First, a recent tragic accident that killed 6 urban poor was the result of brutal police suppression of those who struggled to protect their basic human rights in the face of terrifying urban gentrification.

Second, the massive protest against American beef import was also unrelated with what Christian Oliver called 'militant trade unionism.' The protest against the government decision to import American beef originated from some female high school students' peaceful candle light vigil. Their silence campaign performance turned into massive political protest against the incumbent President, Lee Myung-Bak, and other government officials because students' message and legitimate concerns for the food safety issue resonated among many ordinary Korean peoples including babycarrying house-wives. Thus, citing these examples as if they were incited or plotted by militant trade unionists' activities in some systemic ways is a complete distortion of the basic facts, and renders the credibility of this journalist's argument in serious doubt.

Even when we put aside this type of distortion of recent social issues, the remaining article only shows how Christian Oliver lacks of sufficient knowledge of Korean economic development and related social history.

First of all, a relative low record of Foreign Direct Investments (FDIs) in Korea was not due to what he called 'militant' tendency of labor unions but to historical path dependency in which FDIs had played a substantially minimal role from Korea's early industrialization. From the beginning, the rapid industrialization in Korea was not driven by FDIs but by 'induced investment' guided by the State's industrial and trade policy financed by high domestic saving. Thus, citing 'militant union' activities as if they were the root cause of relatively low FDI flows is completely misleading.

Second, unlike the article's claim, foreign portfolio and equity investment have been incredibly high, causing huge volatility in currency and asset markets. Many economists including Nobel Laureate Joseph E. Stiglitz, Paul Krugman once correctly pointed out that this volatile capital flows, its sudden stop, and subsequent rapid reversal caused the Asian Financial Crisis, with Korea being the latest victim a decade ago. The problem associated with this unregulated financial capital flow was later acknowledged even by the then Managing Director of the International Monetary Funds (IMF) Michel Camdessus and the then US Treasury Secretary Robert Rubin who vehemently advocated capital market liberalization in Asia during the early 1990s and end up with prescribing the failed Latin American type of structural adjustment program. After the financial crisis, Korea's capital market was further liberalized by a series of policies imposed by the IMF as parts of its loan conditionality. Since then foreign equity flows substantially rose, potentially increasing the vulnerability of the economy to the vagary of foreign investors. Thus, if Christian Oliver meant portfolio and speculative equity flows by indicating 'foreign investors being shy away from Korea because of militant unionists,' the trend has been completely opposite to what he seems to worry. The problem in Korean economy is not lack of foreign investors but rather too much speculative inflows of portfolio investment.

Third, the seeming 'radical' or extremely violent resistance on the part of Korean trade unionists (even if it were true) was a deplorable result of the authoritarian government's – long-lasting military dictatorship during the 1970s and 1980s, which was ideologically backed by Milton Friedman type of Chicago School at that time and incumbent right-wing conservative Lee government's overwhelmingly brutal suppression of basic union activities. How can socially marginalized trade unionists with less than 15 percent of union membership record nationwide become such a destabilizing force in Korean economy? The journalist simply failed to recognize the apparent fact that the root cause of the radicalization of unionists lies in the authoritarian government's mismanagement of labor relation and brutal suppression of basic trade union activities, something that should not happen in most OECD countries and Western European context.

Finally, the article shows how Christian Oliver naïvely think about the controversial issue such as the labor market flexibility in Korea. Unlike the incumbent Korean government's propaganda, the policy targeted toward improving labor flexibility simply has meant increasing the number of workers who can be easily fired and dismissed without having necessary social safety net. These 'nonregular' workers have had to face explicit discrimination in terms of wage compensation and job security. Even though they work the same working hours engaging in the same skilled task, their wages and salaries have been less than two third of their 'regular' counterpart. The increasing number of non-regular workers, which was a byproduct of drastic corporate restructuring during and after the Asian financial crisis, already soared to near 60 percent out of total workforce as of 2005. In addition, since most of these workers are women and young college graduates, the wage discrimination and increasing job insecurity sorely borne by them are no longer simply a matter of minor reservation of labor rights amid emergent economic crisis but became a serious infringement of basic human rights.

Considering all of these facts, it is certain that the journalist failed to convey accurate information about Korean labor relation today. In doing so, he selected a handful of extremely conservative government officials or those who represent the exclusive interest of Korean conglomerates for his interview, without even mentioning that some of them explicitly argued that the basic labor rights provisions should be dropped from the Constitution. Ironically, that interviewee, whose name is Park Ki-Seong, is the guy who is now heading Korea Labor Institute, a government-funded institute, which is supposed to engage in various researches for improving backward labor conditions and advancing labor relation in Korea. On balance, any journalist has a freedom to choose to have a certain ideology and perspective. But it is too sad to see a foreign-born journalist residing in Seoul Korea blindly swallowed what mistrusted government officials propagandized, without paying due attention to what other stakeholders demand and what basic facts reveal.

Hee-Young Shin

Ph.D candidate in Economics

New School for Social Research

New York, USA

Slack and disruptions in the ecosystem

2009-09-21T15:40:00.001+05:30

A mail from Suyodh:

The idea of this mail is to show how production systems can behave in erratic ways when something like oil gets erratic. Keep in mind that production systems have lags - meaning they take time to adjust to new levels of prices. When oil prices are oscillating as wildly as $147 in July 2008, $ 34 in Feb 2009 to $70 today - other systems too will behave weird.

Japan and Belgium are a continent removed; but, do not underestimate the disruptive power of such swings in oil prices. Climate change also chips in. Reduced European milk products/derivatives demand due to the recession will also be chipping in.

An economy cannot be immune to the constraints imposed by the ecosystem that it dwells within. As long as there was slack within the various sub-systems of the ecosystem, disruptions did not manifest; as we are
reaching a point of almost no slack, the disruptions will manifest more frequently.

We live in interesting times for sure :)

The first link below is a video on Belgium in 2009 and the second on Japan in 2008
Three million litres of milk sprayed on the field
Belgian milk producers pour about 3 million litres (793,000 gallons) of milk on a field near Ciney, September 16, 2009, in protest over a growing industrial dispute over low prices. Low milk prices they say are bankrupting farmers. Source: REUTERS

Japan's Butter Meltdown

By COCO MASTERS/TOKYO Saturday, May. 03, 2008

The world's second largest economy is now crying over spilled milk — and its delicious by-product, butter. Japan, insulated from rice shortages that plague other parts of Asia, is experiencing an unprecedented shortage of the household staple — and discovering that it is not as immune from the growing global food crisis as it wants to be.

The butter shortage results from a chain of events. When the country suffered an overproduction of milk in 2006, the government ordered about 1,000 tons of raw milk poured down the drain and dairy cows slaughtered to prop up prices and defend local milk farmers. Dairy prices were then managed to retain their advantage to imported milk and butter, whose prices were inflated by tariffs. (To protect domestic butter, the tax on imported butter went up twice last year. There is a nearly 30% tariff on butter imports.)Butter has a strange status in Japan. Historically, butter is a reminder of Japan's first contacts with the West — the islanders complained that the foreigners were bata-kusai , that is, "butter-stinkers." But since the 1960s, local butter making and consumption has been seen as a symbol of Japanese self-sufficiency in and mastery of an originally Western product. The shortage is a blow to that independent self-image.

But now grain-feed prices have risen as a result of a drought in Australia as well as the accompanying use of corn for ethanol, which has reduced the amount available for feed for Japan's cows. The drought has also cut back on milk that would have been imported to supplement the Japanese market. Combined with competing demand for milk and milk products from emerging markets in China and Russia, the result is a collapse of the local butter production in Japan.

Borlaug and the Green Revolution

2009-09-18T11:59:00.003+05:30

Norman Borlaug passed away on 12^th September. Newspapers have carried eulogies and criticism for his work towards ensuring food self sufficiency in India in the sixties.

From the Hindu

Norman Borlaug’s association with India began in the late 1960s. India was then importing 10 million tonnes of wheat and “we lived a ship-to-mouth” existence. The introduction of the dwarf variety of wheat developed by him in Mexico was a turning point in India’s food production pattern.

And the Hindustan Times carried this piece on ‘The American who helped India conquer hunger’

Borlaug had been criticised by environmentalists for his innovation of genetically modified food (food developed by altering gene structures) and advocating the use of fertilisers, insecticides and pesticides. “It is better to die eating genetically modified food instead of dying of hunger,” he remarked at PAU.

There is a sharp attack in the Business Standard by Sadanand Menon

Within three decades, the pattern was to lead to a new kind of devastation — extreme rural indebtedness on the one hand and high levels of soil salinity on the other. The unprecedented levels of rural migration to urban areas in the 1990s, was only one of the consequences. The other was the rapid decline in the productivity of cereal farming and a wholesale turnaround to cash crops. Cotton, sugarcane, tobacco, bananas, coconuts, etc. replaced rice, wheat and millets in many pockets. This was to lead to further experiments in hybridisation of production and an invasion of Indian agriculture by multinational giants like Monsanto, who could exercise long-distance control over the entire process.

And a defence of Borlaug in the Mint

To be sure, agricultural productivity has declined, but that drop is due to a complex set of reasons: Nothing, not even population, rises at the same rate over a period of time. The drop in the size of a farm due to inheritance leads to a drop in productivity. Politicized subsidies encourage waste of water and power, as well as overuse of fertilizers and pesticides by the well-connected farmers, skewing distribution of resources. Warehouses are poorly managed, and a chunk of what is produced gets wasted in transit, or consumed by rats. Insufficient and inefficient irrigation means Indian agriculture remains a gamble with monsoon. Borlaug wanted poor farmers to be paid remunerative prices; governments avoided that, in order to placate the influential urban constituencies.

There is a lot that needs to be fixed in Indian agriculture. But don’t blame Borlaug for these problems. His legacy is the gift of life for millions.

It is true that our problems as they exist today need an overhaul in many existing systems and Borlaug is not responsible for them. However, one of Menon’s points needs to be stressed:

The Vishnu Mitter Institute of Paleo-Botany in Lucknow, for example, has studies showing that while there were over 127 varieties of rice alone being cultivated in the Indian subcontinent during the first two decades of the 20th century, these were steadily dropping and had reduced to 18 within the first two decades of the Green Revolution period. Along with everything else, the idea of agricultural and food diversity too was receiving a knock. Mono-culture and the idea of single-point control systems, so important for designing market strategies, became the norm.

Even as we continue to wage the battle against hunger in India today (another post on that later) somewhere along the way the ecological balance has been lost and we are all the worse off for that.

CJE Global Financial Crisis

2009-09-14T16:40:00.001+05:30

The Cambridge Journal of Economics is offering free online access to its July issue, valid till 16th October. The list of articles reads quite like a CAPORDE lecture schedule, some of them are as follows:

Stephanie Blankenburg and José Gabriel Palma Introduction: the global financial crisis

Robert Wade From global imbalances to global reorganisations

James Crotty Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’

Jamie Morgan The limits of central bank policy: economic crisis and the challenge of effective solutions

Fiona Tregenna The fat years: the structure and profitability of the US banking sector in the pre-crisis period

Roberto Frenkel and Martin Rapetti A developing country view of the current global crisis: what should not be forgotten and what should be done

José Antonio Ocampo Latin America and the global financial crisis
Axel Leijonhufvud Out of the corridor: Keynes and the crisis
Tony Lawson The current economic crisis: its nature and the course of academic economics

Carlota Perez The double bubble at the turn of the century: technological roots and structural implications

L. Randall Wray The rise and fall of money manager capitalism: a Minskian approach

*****
P.S. Thanks to Marek for flagging this.

Maths and Economics

2009-09-12T09:15:00.001+05:30

Once again the debate on the use of maths in economics..Krugman has a very good and balanced piece on this.

Some of the comments left behind on that article are also worth reading:

We often forget that when studying humans, which is the root of economics, hypothesis precedes calculation. If your hypothesis is based upon the calculation, you’re missing something.

The problem with math in economics is that most economists are amateur mathematicians trying to fake it.

Learning that some people may have understood your magazine article as “downplaying” maths in economics, confirms my view on how there is a trend on large part of the world to come up with black and white viewpoints on almost everything (regardless of whether there is math in the process). And that they believe deterministic outputs are scientifically correct. If I understood you right, your point was that economics is a grey system with hard to predict dynamics.

I don’t think you explained this well. What you need to explain is that mathematics can be used to describe an enormous number of worlds, only one of which is reality. The trick is to recognize whether your mathematics is close to reality or whether it describes some imaginary world.

suppose someone needs to quote Marshall: “(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often.”

No amount of mathematical modelling will provide a solution to the social functioning of bureacracy, professionalization and hierarchy, the nature of health itself and issues of communal and individual responsibility.You need to start asking from whence your basic intuitions of community and social justice are derived.This should take you at the least into a confrontation with the saint of rightwing individualism, Hayek, and an examination of symbolic economics.A confrontation with culture should force the insight that consumption, growth and GDP are not technical questions but emerge out of historical and semantic questions of value and productivity that relate economics to philosophy.

Read more at the website itself..There is also a petition in case readers are interested in signing up, asking for Revitalizing Economics After the Crash.

Economics and climate change

2009-09-09T09:15:00.001+05:30

Today's Express has a piece by Mihir Sharma - the biggest failure of economics is not the finance theorists and their belief in rational, efficient markets, but is on climate change

we scoff at “exaggerated” future costs from warming. For years mocked as dismal killjoys by everyone else, we have picked on solemn, doom-prophesying climate scientists like the second geekiest kid at school sneers at the geekiest. A profession central to which is working out the cost of the opportunity foregone has a massive failure of imagination when it comes to climate change costs.

There are other examples of a deeply-ingrained fanaticism getting the better of common sense. Take the furore surrounding the Stern Report, a big cost-benefit analysis that argued acting now on climate change was economically wise.

But economists undermined the report politically by attacking Stern’s choice of the “rate of time preference” — how much we in the present value the future. In particular, they said Stern committed the cardinal sin of not using the rate at which the markets valued the future, because the financial markets are efficient about information like that. (Seriously. This is true.)

Arguing about macro-costs and benefits and growth paths won’t help. Get micro-economists on the job instead.