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 |

Tuesday, April 19, 2005


The New York Times > Financial Times > Business > Oil-rich Gulf investors flex their muscles in Europe
# posted by S : 4/19/2005 09:53:00 PM |

What Happens When The Government Sets Oil Prices

The government of Brazil keeps a lid on fuel prices in order to control inflation. Petrobras, the state oil company, absorbs the loss, so the subsidy is shared between the government and private shareholders.

Prices are far enough from competitive now, and private oil companies are suffering.

# posted by S : 4/19/2005 09:07:00 PM |

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