Monday, February 28, 2005
India starts to reverse its ridiculous land policies
The liberalization is a step in the right direction, but obviously there is a lot to be done. Investors are not exactly free to do whatever they want with the land, and they cannot sell without having developed the land first, which means buying implies a great deal of risk.
Most importantly, India needs to work on its protection of property rights, and that is much more complicated than just passing a law that liberalizes investment.
Competitive pressure makes great exporters
Many of my Latin American friends argue that free trade is not a good idea because Latin American industries are not competitive enough. I couldn't disagree more. In order to make Latin American industries competitive, competition is what the doctor ordered. After all, Latin America enjoyed protection for almost half a century following the great depression and WWII, and protection didn't quite result in world-class manufacturers. I don't see how a return to those policies would work now.
This IMF paper shows some compelling evidence that as the state got out of the way, Indian exporters actually got more competitive. This in turn helped to bring about the exporting miracle that India is now witnessing.
India's exports nearly tripled in the 1990s. Decomposing export growth shows that it has been driven by incumbent firms rather than the entry of new firms. By using a new panel on Indian firms and estimating a dynamic discrete-choice model of the firm's decision to export, we find evidence that economic liberalization has led to greater domestic competition, spurring firm efficiency and increasing Indian firms' competitiveness and ability to export. We show that export growth has been an outcome of local firm innovation which has come about due to increased competitive pressure from FDI entry.
Bombay's people problem
Numbers. That is reason number one for my discomfort with the city. Metropolitan Mumbai has about 12 million to call its own. There are European countries with fewer people than Mumbai. Indeed, about 60 percent of Mumbai's population lives in an estimated 37,000 slums. That is, 7.5 million people live in Mumbai slums, about one and a half times the population of Finland. Finland, a country that I have a very soft corner for, has around 5 million people living in about 384,000 square kilometers. Mumbai's 7.5 million people are not as fortunate; Slum dwellers occupy only 14 percent of the residential land in Mumbai, which I estimate amounts to about 140 sq. km. Imagine that: a piece of land about 12 kilometer square and then pack one and a half times the population of Finland into it.
I find it absolutely unbelievable. There are more people living in slums in Mumbai than there are people in Finland. A rough calculation leads me to figure that the population density of Mumbai slums is about
50030,000 times that of Finland. And the income of a Finn is perhaps about 100 times that of a Mumbai slum dweller.
The next bit is from Suketu Mehta's Maximum City.
Greater Bombay's population, currently 19 million, is bigger than that of 173 countries in the world. If it were a country by itself, it would rank at number 54. Cities should be examined like countries...It is unbelievable that people will put up with such miserable conditions, especially in an area of the world where it gets so hot. It is a testament to just how bad things are in the countryside that anyone would choose to live in Bombay...
India is not an overpopulated country. Its population density is lower than that of many other countries that are not thought of as overpopulated... It is the cities of India that are overpopulated. Singapore has a density of 2,535 people per square mile; Berlin, the most crowded European city, has 1,130 people per square mile. The island city of Bombay in 1990 had a density of 17,550 people per square mile. Some parts of central Bombay have a population density of 1 million people per square mile. This is the highest number of individuals massed together in any spot in the world. They are not equally dispersed across the island. Two-thirds of the city's residents are crowded into just 5 percent of the total area, while the richer or more rent-protected one third monopolize the remaining 95 percent.
Sunday, February 27, 2005
The slums of Bombay
Housing does not get built because it is simply not a worthwhile proposition. There are obsolete rent control laws that keep some prime apartments and office buildings at less than $1 per month, an extremely inefficient bureaucracy, and the extremely short supply of property with clear title. A third of all land titles in India are under dispute, and that figure is probably a lot higher in Bombay.
Ironically, good intentions are mostly to blame for the tragedy that almost half of Bombay's people are homeless.
Lies in Venezuela
Saturday, February 19, 2005
I'll be travelling for a week...
Thursday, February 17, 2005
Would Jesus privatize social security?
I've always had a hard time listening to religious conservatives, mainly because of that camel and the eye of the needle thing.
The problem with religious conservatives is not that they invoke religion too much, but that they practice "bad theology,"... He notes that although religious conservatives focus on homosexuality and abstinence, Jesus and Isaiah and Micah had much more to say about poverty and economic justice than sexual impropriety. Therefore, he writes, the Bush administration's tax policies reflect a "religious failure." And also: "An enormous public misrepresentation of Christianity has taken place. . . . [M]any people around the world now think Christian faith stands for political commitments that are almost the opposite of its true meaning. How did the faith of Jesus come to be known as pro-rich, pro-war and only pro-American?"On Iraq...
Wallis challenges religious conservatives to view Abu Ghraib through the lens of their own views about the sinful nature of man: "The Christian view of human nature and of sin suggests that we are fallible creatures and thus not good at empire. We cannot be trusted with domination, becoming too easily corrupted by its power and too often succumbing to repression in defending it." In other words, good Christians should be wary not only of war but of imperialism as well.
More on Chavez
Adding insult to injury, Caracas has entered into a widely publicized agreement for a team of sales representatives from the Venezuelan state oil company PDVSA (Petroleos de Venezuela) to be trained by Iranian advisers on strategies for penetrating the Asian market. While Iran has long been one of Venezuela's closest allies in OPEC, Chávez has decided to tighten economic links with Tehran precisely as the Bush administration attempts to ratchet up the pressure on Iran to abandon its nuclear ambitions and intensifies its rhetoric regarding that country’s violations of human rights and democratic principles. This must be seen as a brash and potentially dangerous challenge to Washington. For the United States, it is a challenge that mostly will, in some form or other, be met: Venezuela conspiring with one of President Bush's self-declared archenemies--and a charter member of the "Axis of Evil"--in order to more effectively sell oil to the world's rising economic power, China, is no small matter. Moreover, oil destined for China will likely be diverted from the U.S. market just when high fuel costs threaten to swell this country's current account deficit even further beyond the point of sustainability, likely driving the now vulnerable `economy into a renewed recession.Read More...
China's really big
64m tons of meat were consumed in China in 2004 compared to 38m tons in the US
- 258m tons of steel were used in China in 2003 compared to 104m in the US
- China's factories and homes burned 40% more coal than in the US
- The number of PCs in China is doubling every 28 months.
Wednesday, February 16, 2005
What a complex world
Russia, it appears, sells two things: oil and weapons. It is quite indiscriminate about its customers, and in addition to Venezuela, Russia is selling weapons to Syria.
...and also yesterday, Iran and Syria announced an alliance. Rapidly the international political environment is changing. India and China are making deals with Iran to buy oil and gas.
Ukraine sells missiles to Iran?
All of these new relationships put us in unchartered waters...
These types of situations can end in tears. After all, it was a complicated set of alliances and relationships that led to World War I, despite the fact that most observers at the time dismissed the possibility.
Monday, February 14, 2005
Economic change at the deepest level
I’ve just found one that I really like and it comes from Douglass North, naturally. This is the beginning of a survey article he wrote for the Journal of Economic Perspectives. Anyway, without further ado:
Institutions are humanly devised constraints that structure political, economic, and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights).He goes on…
Throughout history, institutions have been devised by human beings to create order and reduce uncertainty in exchange. Together with the standard constraints of economics they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity. They evolve incrementally, connecting the past with the present and future; history in consequence is largely a story of institutional evolution in which the historical performance of economies can only be understood as a part of a sequential story. Institutions provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline.If institutions are the key to economic performance, then what are we to do? Where do we start?
I found a pretty inspiring lesson in the work of former Bogota mayor Antanas Mockus. Mockus' approach, quite unconventional, has the best chance I know of to actually change institutions for the better.
Another innovative idea was to use mimes to improve both traffic and citizens' behavior. Initially 20 professional mimes shadowed pedestrians who didn't follow crossing rules: A pedestrian running across the road would be tracked by a mime who mocked his every move. Mimes also poked fun at reckless drivers. The program was so popular that another 400 people were trained as mimes.More...
When there was a water shortage, Mockus appeared on TV programs taking a shower and turning off the water as he soaped, asking his fellow citizens to do the same. In just two months people were using 14 percent less water, a savings that increased when people realized how much money they were also saving because of economic incentives approved by Mockus; water use is now 40 percent less than before the shortage.
"The distribution of knowledge is the key contemporary task," Mockus said. "Knowledge empowers people. If people know the rules, and are sensitized by art, humor, and creativity, they are much more likely to accept change."
Mockus taught vivid lessons with these tools. One time, he asked citizens to put their power to use with 350,000 "thumbs-up" and "thumbs-down" cards that his office distributed to the populace. The cards were meant to approve or disapprove of other citizens' behavior; it was a device that many people actively - and peacefully - used in the streets.
He also asked people to pay 10 percent extra in voluntary taxes. To the surprise of many, 63,000 people voluntarily paid the extra taxes. A dramatic indicator of the shift in the attitude of "Bogotanos" during Mockus' tenure is that, in 2002, the city collected more than three times the revenues it had garnered in 1990.
Another Mockus inspiration was to ask people to call his office if they found a kind and honest taxi driver; 150 people called and the mayor organized a meeting with all those good taxi drivers, who advised him about how to improve the behavior of mean taxi drivers. The good taxi drivers were named "Knights of the Zebra," a club supported by the mayor's office.
4,935 years of retirement
The article also hits on the immediate question that pops into my mind: how do you fund retirement when the lifespan is so uncertain, not to mention long? Will a privileged class be able to live these exorbitant lifespans, while an underclass of mortals cleans up their mess, generation after generation? How will the overpopulation problem be dealt with? (I don't usually think there will be an overpopulation problem, but 5000 years is a long time to be alive)
I think the types of surprises that we will see in our lifetimes will be just astonishing. Let's hope that society's institutions can keep up with the implications of advancing science.
Via Arts and Letters Daily
Productivity in the illegal drug industry
in the United States a gram of cocaine wholesaled for $38 in 2003, down from $48 in 2000 and from $100 in 1986, with no fall in purity. In Britain, cocaine is cheaper than ever: in 2003 it retailed for about £46 per gram ($75), down from £57 ten years agoSpraying coca cultivations has reduced the area that is being planted with coca, but traffickers, thanks to progress in genetic engineering, are breeding more productive plants, and plants that can grow in the shade. Given the dramatic decline in nominal prices (not to mention the fact that there's been inflation), traffickers have also gotten better at getting the stuff across borders, something that I really can't fathom how they did.
Anyway, it's really amazing that, in the face of such stark evidence, the answer from governments always seems to be more of the same... where is the externality that leads to this choice?
Sunday, February 13, 2005
Hemingway's economic and political wisdom
The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.
- Ernest Hemingway
Interest rates, crime, and disease
I have observed during the whole time I have been in Lanarkshire that any rise in the rate of discount at the Bank of England has been immediately, or at least shortly, followed by an increase both of crime and of civil suits and, if it continues long, or mortality and typhus fever. So much so, that, as I am an official member of the prison board and of most of the Charities I have always made it a rule to say … “Gentlemen, the Bank of England have raised their discounts, you had better take measures for enlarging the prison accommodations and for extending the infirmaries and Poor houses.”Quoted in W.W. Rostow, "Business Cycles, Harvests, and Politics: 1790 - 1850" Journal of Economic History, Nov. 1941
- A. Alison, Sheriff of Lanarkshire, 1848
Venezuela to take the next slot in the axis of evil?
Carlos Alberto Montaner asks whether war is possible in the next few years between Venezuela and Colombia, or between Venezuela and some other Latin American state. He wonders, for example, why Chavez wants a fleet of Mig airplanes, which are not very useful for the guerrilla-type conflicts that Venezuela is likely to face, but rather for wars with neighboring states. The US was rather blunt on its policy. "We shoot migs down" said a spokesman.
Chavez doesn't seem too worried. He sent a peculiar message to Condoleeza Rice after she blasted Venezuela at her confirmation hearings.
Meanwhile, Brazil's Lula has taken a very peculiar approach toward all this. After failing to resolve the recent stand-off between Venezuela and Colombia (which Castro actually resolved), he seems to have decided: "well, if you can't beat'em, join'em" and is now trying to sell combat airplanes to Chavez.
This all seems to be the stuff of Banana Republics, and on the surface might be comic, but it seems to me that, unfortunately, Mr Chavez's rantings are quite serious indeed. His desire to make the region in his image could bring some nasty times ahead for the Andean region, and if Lula wants to stick his head in the sand he is just making things worse.
Saturday, February 12, 2005
Saturn's moon is Death Star's twin
Saturn's diminutive moon, Mimas, poses as the Death Star - the planet-destroying space station from the movie Star Wars - in an image recently captured by NASA's Cassini spacecraft.
A giant crater 138 kilometres across dominates the landscape of Mimas and represents almost one-third of the moon's diameter.
Scientists first noticed Mimas's resemblance to the Death Star when the twin Voyager spacecraft flew past Saturn in 1980 and 1981. The second film in the movie series - The Empire Strikes Back - had just hit movie theatres, recalls Cassini deputy project scientist Linda Spilker.
Argentina deals with time inconsistency
Right now, the Argentine government is trying to get its creditors to accept a skimpy offer to restructure its current defaulted bonds. The government is offering roughly 30 cents on the dollar, and a group of bondholders are trying to organize creditors in order to reject the offer. The creditors make a very good argument that Argentina can pay more.
The problem is one of externalities. Individual bondholders have an incentive to accept the offer that Argentina has made if they expect that this is the best that they can get, at least for a long time. As a group, however, bondholders would probably be best off if they could present a credible threat that they will not accept the current offer. In order to do so, they could use a good commitment mechanism. Something that could give credibility to the threat that they will not accept the government's offer.
The government, on the other hand, has a problem of time inconsistency. It has an incentive to promise that the current offer is the best it will ever do, and that those bondholders that do not accept the offer will simply be stuck with worthless pieces of paper forever. Later on, however, after the offer has been made, the government will have an incentive to renegotiate with those recalcitrant bondholders that did not accept the offer in the first place.
And thus we have the negotiation playing field. Bondholders want to show that they will not accept the offer as a group, but individually they have an incentive to accept. The government wants to credibly promise that this is the final offer, but ex-post has an incentive to improve the offer. Whoever can be more credible in its weak promises will win.
Well, it turns out that the government has found a commitment mechanism to help it. It has submitted a law before congress (and congress has approved it) that will make it illegal to negotiate with holdouts, and that will delist all of the debt that is not tendered into the negotiation.
Thus, the government has a very good shot at winning this game, because its effectiveness at beating the time inconsistency problem is better than the bondholders' ability to deal with the limits of collective action.
Friday, February 11, 2005
The next Mexican President will be corrupt
Mr. Madrazo's reputation, like his party's, is tarnished by accusations of fraud and betrayal. In 1995, he was accused of spending more than 60 times the legal campaign limit - an estimated $70 million to win the election for governor in his home state, Tabasco.
A chorus of political analysts, like Denise Dresser of the Autonomous Technological Institute of Mexico, warn that he is exactly what he says he is not: an old-school "antidemocrat" who draws power from desperate masses more concerned about jobs, schools and hospitals than malfeasance. And at least seven current and former governors from Mr. Madrazo's own party - most of them from the industrialized north - formed an alliance to stop him from becoming the PRI candidate, saying he represents the hard-line party bosses known here as "dinosaurs."
This reminded me of a vastly more entertaining account of Mexican politics, in particular the recent videoscandals that have rocked the nation. It also reminded me that the other man who might be president is really not much better than Mr. Madrazo.
Four years into Mexico's newly minted electoral democracy, all is not as it should be with the body politic. One indication is that the host of the most influential news show in the capital is a clown. Another is that the clear front-runner in the unacknowledged race for the next presidential elections in 2006, Andrés Manuel López Obrador, the mayor of Mexico City, is currently embroiled in a scandal that first saw light with a secretly filmed video released in March.Lopez Obrador, by the way, is still the front-runner for the presidency, and if he doesn't get it, it looks like Madrazo will. What a choice, for a country that supposedly graduated into the ranks of modern democracies with its historic election of current President Vicente Fox.
But on to more juicy stuff. Brozo, the clown of the influential news show mentioned above actually broke the scandal in a brilliant way. Here is the story of how the video, starring René Bejarano, the Karl Rove of Mexico city's mayor, was shown:
By a most unusual coincidence, René Bejarano himself was being interviewed that morning, in his role as Legislative Assembly leader, in the Televisa studio next to Brozo's. Bejarano was asked to step over to Brozo's set, and then in some perplexity sat down to watch what the clown warned him would be "a missile." The tape was then played all over again.
A small picture inset on the screen allowed us to peep in real time at Bejarano, poker-faced, realizing that he had been set up, first by the man who was being shown handing him money, and now by Brozo. We saw him watching himself stuffing money into his pockets, watching his career, his life, his reputation, go up in flames. "What is this, René, what is this?" Brozo roared at Bejarano, his wig waggling, a finger aloft. Live, Bejarano identified the man with the blacked-out face as the businessman Carlos Ahumada Kurtz—a darkly handsome Argentine-born businessman, we would find out later. He declared that the money was not a personal bribe but a campaign contribution offered by Ahumada. "Don't make an asshole out of me, René, please!" an angry Brozo interrupted. Bejarano mumbled a few other wobbly explanations, offered several times over to renounce his right to congressional immunity, and then we went to the station break.
Well, at least it isn't boring...
Thursday, February 10, 2005
Trade between India and China is exploding
Read more here
Tuesday, February 08, 2005
A defense of social security privatization that really makes sense
Paul Kasriel puts it very well:
I strongly am advising my adult children, Marisa and Matt, to urge their congressmen and senators to not only support President Bush’s partial privatization of social security, but to go for the full Monte. Why? First and foremost, there is no way they will receive the benefits “promised” to them under the current system. So, rather than having the federal government dictate what their benefits will be, they will likely be better off investing their own and their employers’ contributions.This seems to me a brilliant reason to support social security privatization.
But there is another reason why Marisa and Matt should push for total privatization of social security. That reason is to protect them from future presidential administrations like the current one. President Bush’s desire to privatize social security almost could be construed as a plea to stop him from spending my kids’ pensions.(Italics mine)
Kasriel makes another, very important point. It is one about sunk costs. He points out something that almost any economist would find hard to deny:
If there were no social security system in this country and the body politic decided that it wanted one now, it is unlikely the model we currently have would be the one chosen. The current social security model, where each succeeding generation of workers pays the benefits of its predecessors, was adopted during the Great Depression as a welfare program for the aged. During the Great Depression, those senior citizens who were able to work could find little employment. And many of those seniors who had saved for their retirements or had pensions found their nest eggs greatly reduced because of the depressed economy and the stock market crash of 1929. So, a welfare program for the aged, established during the Great Depression, persists today. Talk about the tyranny of the status quo!
If we were starting from scratch today to establish some kind of government-forced retirement saving program, it would undoubtedly be one in which employees and employers would be required to contribute a certain percentage of the employee’s salary into an account “titled” to the employee. The employee would have investment options – index stock funds, index bond funds and a money-market fund. The retirement benefit received by the employee would be the value of the fund at retirement. The employee would not have access to the fund until retirement. In the event the employee died prior to retirement, his or her heirs would receive the accumulated value of the fund. This would be the basic framework of a social security system if one were being created today. It has the elements of President Bush’s partial reform of the current system.
Mexico doesn't have enough inflation to satisfy investors
Strange... I can hear the investors now "gee, what a disappointment, the central bank is actually being successful in bringing down inflation. Interest rates might go down, stock prices might go up, and bond prices might go up. Let's just get out of the way."
It doesn't stop there. Recently, Russia and Argentina have reported higher than expected inflation and witnessed their currencies appreciate. The logic is that the central bank will let the currencies appreciate rather than intervene by accumulating reserves. Still, since when was the big problem of developing countries having too much reserves?
Something must be going on...
India: A reality lesson in institutions
...emphasizes the importance of social variables: (non-physical) factors influencing behavior that are social in being man-made, yet are exogenous to each individual whose behavior they influence. Among these social variables are shared beliefs, expectations, and internalized norms, cognitive systems, socially articulated and distributed rules, and informal and formal social structures (organizations)...an institution is defined, roughly speaking, as a system of social variables (institutional elements) which conjointly generate a regularity of behavior.This really came to mind when I read what Mehta writes. The social customs in India are complex and, to the outsider, very difficult to understand. These same social customs have very important implications for economic efficiency and productivity. Take this bit, for example:
We learn the caste system of the servants: the live-in maid won't clean the floors — that is for the "free servant" to do. Neither of them will do the bathrooms, which are the exclusive domain of a bhangi, who does nothing else.
The driver won't wash the car — that is the monopoly of the building watchman. The flat ends up swarming with servants. We wake up at six every morning to garbage, when the garbage lady comes to collect the previous day's refuse...
...Most people who can afford it have two lines, because one is always going out. Then the phone department has to be called and the workmen bribed to repair it. It is in their interest to have a lousy phone system.
As a result, in the "Country of the No" nothing is fixed the first time around. You don't just call a repairman — you begin a relationship with him.
And how do institutions affect economic outcomes? Here is one way:
"Can I rent a flat at a price I can afford?" Coming from New York, I find that I am a pauper in Bombay. The going rate for a nice two-bedroom apartment in the part of South Bombay where I grew up is $3,000 a month, plus $200,000 as a deposit — interest-free and returnable in rupees. This is after the real estate prices have fallen by 40%.
"Can I rent a flat at a price I can afford?" Coming from New York, I find that I am a pauper in Bombay.
The going rate for a nice two-bedroom apartment in the part of South Bombay where I grew up is $3,000 a month, plus $200,000 as a deposit — interest-free and returnable in rupees. This is after the real estate prices have fallen by 40%.
Monday, February 07, 2005
Chinese Economic Imperialism?
This makes sense to me, as China needs to recycle the massive inflows that are threatening monetary policy, and China needs access to commodities.
More Economic Liberalization in India
The more transforming move will probably be the liberalization of the retail sector, which has been plagued with glaring inefficiencies due to the inability of any retailer to gain sufficient scale.
I have posted before about how supermarkets are transforming the food industry in Latin America. India is next.
Sovereign Borrowing in Latin America: A Lesson from the 1820s
This was a time of potentially fortuitous coincidence of wants. The borrower was capital scarce, with funds needed for nation-building and economic development. The lenders were increasingly capital abundant, as modern economic growth generated increasing savings, accumulation, and diminishing returns at home.Investors were very excited about these "emerging markets" that would grow very fast because they were capital-scarce. The lending was indiscriminate, and investors didn't care if the name of the country was Colombia or Brazil or Poyais.
Poyais? Yes. This was a country that was invented by Sir Gregor MacGregor in an amazing fraud. MacGregor actually convinced investors to buy bonds in his mythical country! You can find a copy of the actual document here, and a book about it here.
From the former link:
Gregor MacGregor (he was not a general in any recognised army, nor had he been knighted in Britain) sold similar stock certificates and other Poyaisian material in both Britain and France during the 1820s and 1830s. Despite the clearly fraudulent nature of his promises, Mac Gregor was never convicted of any crime - although he served a short jail term in France awaiting a trial that never came about - and eventually retired to Venezuela where he wrote his autobiography (handwritten notes for which are also in the National Archives of Scotland, reference GD50/112).
China Moves to the Forefront of Technology
Sunday, February 06, 2005
The US has no balance of payments constraint
Under a dollar standard the United States would, unlike other countries, have no balance of payments constraint. It would be in the same position as any country that ignored its foreign exchange rate, except for the fact that other countries would accumulate dollar balances as reserves. Whereas other countries would have to allocate their monetary policies to preserve balance of payments equilibrium, the US could direct its monetary instruments solely to the achievement of domestic stability. This is consistent with the fact that, in an n-country world, there are only n-1 exchange rates, and only n-1 countries need to pursue independent balance of payments policies, leaving monetary policy in one country free to pursue domestic objectives.Of course, the exorbitant privliege is not infinite. If foreign countries lose confidence in the US dollar, the result will be an incredibly intense inflationary pressure in the US, much like what happened in the 1970's.
Robert Mundell Wouldn’t be Surprised
It is, I believe, no accident that the two leading advocates of variable exchange rates – Keynes in the 1920’s and Friedman in the 1950’s – should be residents of dominant currency countries. Keynes changes his mind on the issue in the 1930’s as he recognized, after Britain abandoned gold in 1931, that Britain could no longer hope to be top dog in the international currency competition.*“Toward a Better International Monetary System” Journal of Money, Credit and Banking, Vol. 1 No 3 (Aug, 1969)
It was just a coincidence...
The Chinese now claim the had nothing to do with the sale of Yuganskneftegas.
Rosneft issued a qualified denial, saying on Wednesday that it received a $6 billion prepayment as part of a long-term oil supply contract with the Chinese National Petroleum Corporation, but that the money was not intended to buy Yuganskneftegas.
"Rosneft in fact agreed to supply oil to China through 2010 for an advance payment of $6 billion, and the transaction in fact involves Russian and Chinese financial institutions, including Vneshekonombank," Rosneft said in an e-mail statement. "But this money, which has been received already, isn't linked to the Yuganskneftegas acquisition."
Saturday, February 05, 2005
India: Money Magnet
The FDI is a sign that foreigners are quite pleased with India's economic management, and more importantly of the continued deregulation that is going on. For example, the Indian government just raised the limit on foreign participation in the telecommunications sector.
The IMF has just signed off on most of India's economic policies, noting that:
Financial market confidence in India remains strong. After posting one of the highest returns among emerging markets in 2003/04 (83 percent), the stock market experienced a short period of turbulence at the start of the fiscal year, reflecting election-related uncertainty and expectations of interest rate tightening in the United States. However, buoyed by renewed foreign investor inflows, the stock market more than regained the ground lost, rising by close to 30 percent between June and mid-January.The IMF also praised India's fiscal management, sort of...
The deterioration in central government finances appears to have been reversed. For the first time since the mid-1990s, the central government deficit (IMF definition) came in below target in 2003/04 at 5.1 percent of GDP reflecting strong revenues and economic growth.That said, it did note that India's fiscal situation is the biggest concern to growth. India's consolidated fiscal deficits have been around 10% of GDP for almost a decade now, and
Directors emphasized that India's large fiscal deficits and public debt remain a key constraint on sustained rapid growth. Directors noted that, with credit to the private sector on the rise, the government's large financing needs can increasingly crowd out private investment. Moreover, they underlined that, without enhancing tax revenues and reducing lower-priority spending, it will be very difficult to adequately address India's large infrastructure needs.Not to be outdone, ratings agencies are joining the fray, starting a race to see who can upgrade India the most in the least amount of time.
Friday, February 04, 2005
How to tell Bretton Woods from the Dollar Standard, part 2
Here is the post I promised describing Ronald McKinnon's view on the current international monetary dilemma.
McKinnon argues that the conventional wisdom that “china must revalue” in order to correct the US trade imbalance is plain wrong. Not because china isn’t big enough, but rather because currency revaluation will not do anything to reduce China’s trade surplus with the US. McKinnon argues that the only way to get the US current account deficit down is to reduce the budget deficit or somehow convince US consumers to save more. The story of Japan is a useful example here. Despite Japan’s chronic currency strength, the Japanese trade surplus has never disappeared. Japan is a chronic creditor.
Because the fall in exports is coupled with a fall in imports, the net effect on their trade balances is unpredictable (McKinnon and Ohno 1997, chs 6 and 7). The ever-higher yen from 1971 to 1995 led to even bigger Japanese trade surpluses.
And there is no way around this for countries like China. If Asia decides to form a currency union and thus the world’s currencies appreciate jointly against the dollar, this will only create an unacceptable inflation in the US, much like happened in the 1970’s.
So, what is the method of adjustment? Here McKinnon argues that, if the currency of the high productivity country (China, in this case) is credibly fixed, then wages will naturally rise in line with the productivity growth, so that there will be no competitiveness differential.
To me, this sounds very nice in theory, but in practice relative wage adjustment tends to be painful. In particular, not only do wages tend to rise faster in China, but there also tends to be dislocation of employment in the low productivity growth countries. This bleeding of manufacturing jobs in the US is what has created the political pressure for the government to just let the dollar go. Frankly, I agree that it would be best to let the adjustment take place through prices other than the exchange rate, but I find that politically infeasible.
The Pressure's On
Like most people in China, Allen Huang will ring in the Lunar New Year next week by visiting with relatives, handing out red envelopes of money and indulging in a weeklong festival of foods. He'll also take part in what's become another tradition among Taiwanese here: loading up on mainland Chinese currency.
Huang plans to change $6,300 of Taiwan's money into Chinese yuan, 10 times more than he usually does every month.
"Many of my friends are doing the same thing," the 32-year-old business development manager said. The reason? "The yuan will be going up."
Although the government in Beijing says it has no immediate plans to let its currency rise in value, speculation is running high among investors and economists that such a move could happen this year.
Thursday, February 03, 2005
How to tell Bretton Woods from the Dollar Standard, part 1
The conference begins with some very influential papers by Michael Dooley and others, who suggest that the current international monetary system is quite stable, because the Asian countries depend on cheap exchange rates for growth, so they will finance US current accounts infinitely (in market time, that is). This is like a revived Bretton Woods system, they say. This is, in my opinion, the best exposition of the view.
Barry Eichengreen has an interesting response. He says that Dooley and others are wrong in that they mistake the interests of individual countries with those of groups of countries. In the current system, cooperation is difficult because there is always an incentive to cheat. He also says that Dooley and others are confusing the Bretton Woods system with the dollar standard. The distinction between the two is something that I plan to explore more carefully in future posts.
Maurice Obstfeld presents The Unsustainable Current Account Position Revisited, on which I've commented in an earlier post.
Nouriel Roubini tells us that the end of the world is near, surprise, surprise. Well, if the international monetary system is really as unstable as Roubini suggests, I'm sure glad most countries have flexible exchange rates.
By far, I think the most interesting paper is Ronald Mckinnon's, and I plan to devote an entire post to its discussion. I also want to discuss Mckinnon's concept of conflicted virtue, kind of like Ricardo Haussmann's idea of original sin, except backward.
Tomorrow, that is.
p.s. I shouldn't neglect this paper just because I haven't read it.
Wednesday, February 02, 2005
Fun with the IMF's WEO database
Pictures would be nice on the blog... this is the first try. I just made this chart with the IMF's World Economic Outlook database online.
Public Provision of Health Care, Part 2
Here is another real dilemma. The state of Massachusetts has just released a report that details how employers have an incentive to rely on the state for the provision of health care benefits. It turns out that about 35 percent of the uninsured in the state work full time, and should be receiving health care benefits, but do not. Why not? Cost is named as the number one reason. Other employers, like Wal-Mart, make it very difficult for employees to work full time, so that they don't have to provide benefits.
In any case, employers have a strong incentive to free ride on the state's provision of health care benefits and, of course, they do. I don't see a clear solution.
India's Health Care System (or lack of it)
when patients go to many of the primary health centres, they find no one there. Sometimes, when they find someone, they will be referred to private doctors. Also, the medical system in the public sector offers no diagnostics, even of basic illnesses like malaria or TB. Patients are usually told to go to private practitioners for testing. Sometimes the testing isn't very good and, in any case, the economic cost could be ruinous.
On top of that, the care that is often provided by the private sector comes from quacks. We found an incredible proportion of quacks in Jharkhand, particularly, but a significant proportion even in West Bengal, who provide almost no serious medical attention and instead give saline injections for malaria, which is not really known anywhere in the world as a cure.
How do you fix the problem? More spending, says Sen, but that is only part of the solution.
there are a number of things that have to be done, and if you look at the health sector, yes, I would strongly recommend that we spend a lot more on public healthcare. But along with that, we have to introduce a better monitoring system for the delivery of public health services, and we also have to introduce a system of weeding out quackery.
I think the combination of quackery and crookery which takes place in the form of private medicine in some of the poorest areas of India and which mainly has the effect of making poor people part with whatever little money they have, rather than providing a cure, is something which has to stop. So if one just puts in more money, without making any other change, we would be caught in a very sticky ground, but we have to do these things together, and yes, along with the other changes, there is a case for a very dramatic increase in public health expenditure.
Sen also takes a shot at the extravagantly high tech medical centers that are competing (unfortunately successfully) for public funds. The divide between rich and poor in India is phenomenal, and yet the rich get subsidized. Alongside the health care tragedy that Sen describes in his interview, there are world-class hospitals like this one. That said, perhaps there is a role for world class private (emphasis on private) medical institutions, as they could help to bring foreign exchange revenue. Indeed India is trying to promote itself as a health care destination, and is being successful at this.
Tuesday, February 01, 2005
Pragmatism at an extreme
"They [the Chinese] understand property rights in Russia are not the most important rights, and they are more interested in guaranteeing supplies."A Russian analyst quoted in a BBC story on the role of China in the sale of a unit of Yukos. China (Chinese state-owned banks, actually) provided the financing for little known Rosneft to purchase the Yukos unit. In return, China has been assured of a steady flow of oil. In short, China has pre-paid for $6 billion worth of oil, and in return for the privilege has helped the cronies of Putin to take control of the assets of a political rival.
This transaction speaks volumes about the reality of politics and the importance of democracy and property rights in China and Russia.
Putin has made it clear that property rights and the respect of institutions are secondary to keeping a strong grip on power, and the Chinese not only understand this, but seem to be fine with it as long as they get what they need.
China as an Economic Engine
But there is more to this story. The Chinese economy is growing very fast, so there is plenty of demand for imports, and a lot of them are coming from the US.
This article from the Seattle Times tells the story of US exports to China.
U.S. shipments to China probably rose to 4.2 percent of all exports last year, up from 2.2 percent in 2000, says Primosch. Increased sales to China contributed to a shift in momentum between 2003 and 2004, with overall U.S. exports showing faster acceleration than the larger import figures. According to Commerce Department figures, total exports rose 12.4 percent on average for last year's first 11 months, almost three times as fast as in 2003.