Saturday, September 10, 2005

The biggest consequence of Hurricane Katrina

Will be political. "Impeach Bush" is the number one search on Technorati...and take a look at the blogpulse trend.

I can't imagine that a cornered president and republican-controlled congress will be tightening the purse strings in the future, so a supply shock will be met with a demand shock. I can't imagine this is good for the price level.


Tuesday, May 24, 2005

Fed governors are people too

I found this part of the FOMC's latest minutes amusing. Apparently, some governors are basing their monetary policy decisions because you just can't bet against the US economy.
Although downside risks to sustainable growth had become more evident, most members regarded the recent slower growth of economic activity as likely to be transitory. In this regard, the ability of the U.S. economy to withstand significant shocks over recent years buttressed the view that policymakers should not overreact to a comparatively small number of disappointing indicators, especially when economic fundamentals appeared to remain quite supportive of continued solid expansion.
Well, at least we have reason to be optimistic that the current soft spot will be short-lived.

Monday, May 09, 2005

India flies into budget air travel era

Budget airlines are starting to appear in many different countries in the developing world. The results are incredibly positive for millions of people who are suddenly finding it affordable to fly. In most places, travel that once took several days on a bus is being reduced to just a few hours. It's a brand new transportation revolution.

BBC NEWS | World | South Asia | India flies into budget air travel era

Sunday, May 08, 2005

West Africa's Petroboom

The IMF just finished its article IV consultations with Equatorial Guinea and the press release has some interesting facts. Growth is booming thanks to the dramatic increase in oil production, but unfortunately the boom isn't easy to handle. The real exchange rate is appreciating substantially, and the inflows of foreign exchange are generating an explosion in the money supply. Unbelievably, international reserves are set to reach US$1.6 billion this year, and they were less than 100 million dollars just four years ago. Talk about an oil windfall! Unfortunately, the government spending that is resulting isn't exactly transparent, the document alludes.

Here is a snippet about the good things that are happening.
Hydrocarbons dominate economic developments in Equatorial Guinea and will continue to be the engine of growth in the foreseeable future. Since oil production began in 1995, hydrocarbon production has increased from 6,000 barrels of oil equivalent per day (boe/day) to 282,000 boe/day in 2003, supporting an average annual growth of 31 percent. In 2004, real GDP grew by 34 percent, reflecting a sharp increase in oil production. Non-oil GDP increased by 13 percent fueled by growth in the infrastructure and construction sectors, driven by increasing government capital expenditure. However, the primary sector remained sluggish as labor migration from rural to urban areas continued in search of higher earnings and the enforcement of sustainable logging program was maintained. Although inflation has decelerated to 5 percent in 2004, the inflation differential between Equatorial Guinea and its trading partners and the appreciation of the euro have led to the appreciation of the real effective exchange rate by 5 percent in 2004, for an accumulated real appreciation of 32 percent since 2000, further undermining external competitiveness.
Another rather predictable problem is that there hasn't exactly been a trickle-down effect from the massive oil windfall.
Unfortunately, the country's oil and gas wealth has not yet let to a measurable improvement in living conditions for the majority of the population. Against that background, the authorities have assessed their National Development Plan for 1997-2001 and have recognized that the objectives poverty reduction has not been achieved. They therefore intends to prepare an Interim poverty reduction strategy paper (PRSP) that could serve as a roadmap for the provision of donor's technical support.

Thursday, May 05, 2005

Colombia hands over US soldiers

This news is really depressing. That's all I have to say.

Colombia has handed over to the US two American soldiers suspected of trafficking weapons to paramilitaries.

The United States said the allegations were "extremely troubling" and would be investigated fully.

Colombian authorities said they found 31,000 rounds of ammunition when they arrested the two men at an apartment near Bogota on Tuesday.

Hundreds of American soldiers are in Colombia to help in the fight against paramilitary groups and the drug trade.

BBC NEWS | World | Americas | Colombia hands over US soldiers

Update: The LA times mentions that this is not the only trouble that US soldiers have caused.
The arrests come on the heels of the March 29 detention of five GIs suspected of smuggling 35 pounds of cocaine to El Paso on U.S. military aircraft from the Apiay military base in Colombia's Meta province.

That episode touched off a political firestorm in Colombia because the five soldiers have diplomatic immunity and will be prosecuted in the United States rather than here. One soldier has been released for lack of evidence; the other four remain in U.S. custody.
The NY times chimes in with a third incident:

Colombians are still seething that James C. Hiett, the former Army colonel who ran the American military mission here, was sentenced to just five months by a Brooklyn court in 2000 for failing to report that his wife had been smuggling heroin from Bogotá to New York in diplomatic pouches.

Wednesday, May 04, 2005

Another example of overflowing global liquidity

Real interest rates in the developed world are low or negative, and this probably reflects a very low return on capital. This, and the abundance of savings just about everywhere except for the US, is driving capital to places where it used to be very scarce. Case in point: a dam gets built in Laos, a country with GDP per capita of less than $400, and where 70% of the population earns less than $2 a day.

This dam, mind you, will be a 1.6 billion dollar investment in a country where GDP is $9 billion. That's 17% of GDP, one project. That's a whole lot of risk, it seems to me.

I see two possibilities: either this dam will help to increase the productivity of Laos, or otherwise it will just generate a huge debt which may or may not be serviceable with revenues from selling electricity to Thailand. I can imagine a scenario in which the capital inflows resulting from the project, along with the job creation, stimulate consumption beyond Laos' means, which could lead to a string of unsustainable current account deficits culminating in financial crisis.

Talk about the glass half empty... But that's actually what happened in the 1970s, the last time real interest rates were systematically negative in the developed world, and when surging oil prices resulted in an overflow of petrodollars that were in turn recycled into loans for developing countries. The consensus around 1981 was that the debt that developing countries (in particular Latin America) had built up was perfectly sustainable, as the proceeds had (supposedly) been used to finance investment projects, like dams and such things. You can see how a person could get cynical about these things... but, as they say, maybe this time it's different.

What do you think?

BBC NEWS | Business | Banks put $1.6bn behind Laos dam

Open Source Wedding

Open source software is taking hold in Brazil, and I suppose it could help reduce the extraction of monopoly rents (at least it will be an interesting experiment in what happens when open source is given an artificial boost., far from Brazil, I find an open source wedding. Interesting concept...

Brian & Ruby's Wedding

Tuesday, May 03, 2005

Economic Planning Gone Wrong

The BBC news is reporting on environmental havoc being caused by a plague of beavers.
Yet beavers are not native to South America. Around 50 of them were introduced here from Canada in the 1940s. Argentina's then military rulers hoped that they would multiply and create a fur industry - in earlier centuries beaver pelts were among the most valuable in the world.

Monday, May 02, 2005

China fact of the day

QQ, one of the most popular instant messaging client in China, has added the word “march” (游行) to their list of banned words, preventing users from sending any messages that contains the prohibited word.
This from a post on Chinese bloggers' reactions to the recent anti-Japanese protests from Global Voices Online.

Where are the developing world's external savings going?

The Asia Times has an interesting article about multinationals from developing countries.
Companies from India, China, Brazil and Malaysia are among those busily investing around the world. According to the annual World Bank report titled Global Development Finance released recently, their reach is fast spreading. Developing countries (as defined by the World Bank, which includes middle-income countries such as Malaysia, but not richer ones like Taiwan, Singapore, Hong Kong or South Korea) made US$16 billion of foreign direct investment (FDI) in 2002. Last year, according to the bank's estimates, companies from these countries invested around $40 billion. Not all of these investments, though, went to the rich world. The bank's economists estimate that by the end of the past decade, more than a third of the FDI going to developing countries came from their peers.
As the developing world's external balance improves (it's not just Asia that runs a current account surplus, but also countries like Brazil), these countries are becoming important sources of capital for each other and also for the developed world. Thus, you have Indian companies investing in Brazil, Mexican companies investing in Indonesia, and Chinese companies investing in the US.

Saturday, April 30, 2005

Is the recent reserve accumulation by developing countries excessive

Holding international reserves has benefits for countries, as they serve as pledgeable collateral for international borrowing. Deciding the appropriate level of reserves is, for a country, akin to the process a company goes through when deciding its level of cash. There are benefits in that creditors will demand a lower risk premium to more liquid companies. There are costs, most importantly the opportunity cost of investing the money in more risky and less liquid alternatives. For countries, there is an additional problem. The higher the level of reserves, the more exposed they are to capital losses that would happen if the exchange rate were to appreciate.

So, what is the appropriate level of reserves, and has the recent surge in reserve accumulation by developing countries been a good thing or a bad thing?

This IMF paper tackles the issue:

This paper examines the (quasi-)fiscal impact of the (opportunity) cost of international reserves. It proposes a conceptual framework, with particular emphasis on two hitherto somewhat neglected aspects: a more appropriate measure of gross opportunity cost, and potential savings from lower external debt spreads that countries "buy" by holding reserves. The framework is then applied to 100 countries over 1990-2004. The results suggest that a turning point has been reached in recent years: while most countries made money on their reserves during 1990-2001, most have been losing money during 2002-04.

Thursday, April 28, 2005

Education and development

The Washington Post has a nice story about how free meals offered at schools are encouraging parents to send children to school.
In Dataan, in the northwestern state of Rajasthan, 59 percent of girls drop out of school before finishing fifth grade, according to government statistics. But school records in Dataan show a 23 percent increase in girls' enrollment and attendance since the program began three years ago. Six older girls have also returned to Munni's school because of the program.
I wonder whether this will work. I am agnostic. Yes, more children go to school, but then what happens? Does education miraculously create development out of thin air? Lant Pritchett has shown some evidence that this is not the case.

Schooling is perhaps a necessary, but by no means sufficient, condition for development. Moreover, if there is hope for development, the returns to schooling will be high, and so parents will want their children to go to school. A chicken-and-egg problem here.

A Meal and a Chance to Learn

How not to fix the US current account deficit

I won't claim to know how to ensure a soft landing, but I am sure that tax cuts are not the way to turn around the current account.

Republicans Reach Deal on $2.6 Trillion Budget Plan

Wednesday, April 27, 2005

Brazil's monetary policy dilemma

Brazil's central bank is trying to meet its inflation target of 5.1% this year, but there are plenty of obstacles. Not only are oil prices pressuring inflation, but the currency keeps wanting to appreciate, in part thanks to the great balance of payments situation in which the country finds itself.

There can also be too much of a good thing. The new-found economic stability, microeconomic reforms such as a new bankruptcy code, and a new program that allows consumers to borrow and have installment payments deducted from pay are all working together to create a lending boom. Sales of durable goods are sky-rocketing.

All this means the central bank might have to keep policy tight for longer than people expect.


Tuesday, April 26, 2005

Symbolic industries?

Yes, we live in an era of global imbalances. Fortunately, there are plenty of selfless Japanese businessmen that will help to close the current account deficit.

# posted by S : 4/26/2005 09:02:00 PM |

Politics and religion in India

Shiv Sena is a hindu nationalist party named after a seventeenth century Maharashtrian warrior king. It was formed during a time when immigrants from South India were taking jobs away from the Maharashtrian youth. It has been accused of instigating anti-muslim riots during 1992 and 1993.

They can be pretty backward. To give you an idea, here is a piece from the front of the Times of India's online edition.

Sena splits rape opinion halfway- The Times of India
# posted by S : 4/26/2005 08:12:00 PM |

Monday, April 25, 2005

All that, and no bank run

Ecuador's president sacked the supreme court, then took it back, and then congress sacked the president. The constitution says the vice president must serve out the rest of the term, but the public is demanding new elections. Talk about a constitutional crisis.

Oh, and the new minister of finance has pulled the country out of trade negotiations and wants to restructure the country's external debt. It seems clear that spending on everything but debt service is the priority of this interim administration, intent on making itself as popular as possible before it has to exit.

...but no devaluation, and no bank run. Perhaps dollarization wasn't such a bad idea. If this had happened six years ago, the private sector and the government would have liabilities in hard currency and earnings in sucres, and the public would be rushing to get their savings into dollars. The banks, no different, would have currency exposure that would cripple them, and in anticipation the public would rush to get their money out.

It's too early to tell whether or not Ecuador will avoid financial armageddon this time. Things look dire, and the new government's policy initiatives are a nightmare, but at least there are no currency mismatches to worry about...

BBC NEWS | Americas | Ecuador president defends sacking
# posted by S : 4/25/2005 08:42:00 PM |

Sunday, April 24, 2005

China's exchange rate gets on Europe's nerves

It looks like the removal of textile quotas will be too much change all at once for the global economy. Not only is there backlash in the US, but also in Europe, not to mention a great deal of fear in other places like Central America, Colombia, Peru, Turkey, and other nations with significant textile industries. Unfortunately, China's reluctance to revalue could bring momentum behind the drive to bring back significant barriers to global trade.

The New York Times > Rise in Chinese Textile Imports Prompts Inquiry in Europe
# posted by S : 4/24/2005 09:40:00 PM |

Bizzarre coexistence of technology and tradition

Indicative of changing times, a traditional Muslim family in this Uttar Pradesh capital arranged their daughter's nikaah ceremony over the Internet.

Shabnam, the 26-year-old bride, said Qubool hai (I accept) to groom Abdul Kalaam in front of a web camera Friday.

While Shabnam was sitting in a cyber cafe in Lucknow's walled city, Kalaam positioned himself before a webcam thousands of miles away in Makkah in Saudi Arabia.

And it was not as if the two had struck a chord while accidentally browsing the net.

Shabnam's brother Hazrat Ali said his mother and elder brother had finalised the nuptials with Kalaam, who hails from Tamil Nadu. "The marriage was arranged by us and my sister and Kalaam have never met before. She will soon join her husband."

Muslim bride says 'I do', online- The Times of India:
# posted by S : 4/24/2005 09:59:00 AM |

Saturday, April 23, 2005

China, capitalism, and democracy

Henry Blodget actually makes some interesting observations about the coexistence of democracy and capitalism in China. China's growth miracle is an uncomfortable rhynoceros in the living room for those people who argue that strong competition and capitalism can only exist in the context of a democratic state. Indeed I know a few people who would welcome a collapse in the Chinese economy as vindication of their belief that only unfettered capitalism could possibly allocate resources in an efficient way. Overinvestment and unproductive investment, they argue, must be the product of state controls on the economy and on the system of credit allocation.

I am somewhat agnostic on this issue. I wouldn't be surprised in China were to experience an economic "crisis" in the near-term, but I would be very surprised if its effects were to linger for longer than a few years. I would expect that a Chinese crisis would simply be a period of writing off some of the excess of the investment bubble, but that once the dust settles China would find itself endowed with a world-class manufacturing and technology profile. China's economic path, in other words, will not likely be a straight line, but dotted with accidents along the way, much like the history of any other capitalist economic miracle. Much like the US.

China's Biggest Gamble - Can it have capitalism without democracy? A prediction. By Henry Blodget
# posted by S : 4/23/2005 07:00:00 PM |

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