Truck and Barter

That'll Work

Spitzer's idea on how to boost New York's economy:

New York Governor Eliot Spitzer, in his first address to a joint session of the Legislature, asked lawmakers to strengthen the state's economy by such measures as boosting spending for transportation projects and a $2 billion bond proposal for stem-cell research.

Anyone want to bet on how effective this will be in boosting the economy? I'll take the under.

In all seriousness, upstate New York economy is pretty bad by national standards. The city of New York survives because the costs imposed by the state and local officials are small when you're employing investment bankers and lawyers. The story is different in other sectors of the economy and the rest of the state suffers. Good luck Mr. Spitzer with your program, You need it.

The price of delaying democratic reform?

Jonathan at The Head Heeb has interesting analysis of recent riots in Tonga;

“It looks like Tonga will finally have its democracy, but at staggering economic and social cost. And the price of withholding democratic reform for so long may in fact be even greater than it first appears; during the past three years of turmoil, Tongans have become used to revolutionary protest, and the effect on national politics and governmental legitimacy may remain with the country for a long time.”

Related;
Trouble in Tonga (Radio National Podcast)
NYT new blog The Lede has more on the Tonga riots
Information hub on the Kingdom of Tonga
Country profile: Tonga

Podcast of Day- Boyer Lectures

Lecture 2: From Golden Age to Stagflation
For the world's developed economies, the end of the second world war was the trigger for almost 30 years of sustained growth. Ian Macfarlane says the Keynesian system of economic management had served policy-makers well, but asks had Keynesian policies been pushed too far, beyond their natural limits? Inflation began to rise in all countries in the late 1960s and early 1970s. When the first OPEC oil shock occurred it would bring the post-war boom to a sudden close, and give rise to a new condition—stagflation. Some excerpts below;

“These economic developments and macroeconomic debates occurred in virtually all the developed countries. Nowhere were they more prominent than in the United Kingdom, where inflation had two peaks in excess of 20% per annum, during the 1970s and where the UK government finally had to go, cap in hand, to borrow from the IMF in 1976. Perhaps therefore it is fitting that former British Prime Minister, Jim Callaghan, be given the last word to sum up what he had learned from the economic turbulence of the 1970s. Callaghan said, and I will quote:

What is the cause of high employment? Quite simply, and unequivocally, it is caused by paying ourselves more than the value of what we produce. There are no scapegoats. That is as true in a mixed economy under a Labour government as it is under capitalism or communism. It is an absolute fact of life, which no government, be it left or right, can alter. We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I tell you in all candour, that that option no longer exists, and that insofar as it ever did exist, it only worked on each occasion since the war, by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. Higher inflation, followed by higher unemployment; we have just escaped from the highest rate of inflation this century has known; we have not yet escaped from the consequences, high unemployment. That is the history of the last 20 years.

To an economist, Callaghan's eloquent lament sounds very much like a lay-man's version of the dynamic instability engendered by attempts to exploit the Phillips Curve.”

The Chile Story

The secret behind Chile’s macro-economic stability and robust growth over the past 20 years.

- Strong fiscal discipline. Over the last two decades, only in Chile were years of fiscal deficits roughly offset by years of surpluses; most other Latin American countries displayed a bias toward deficits. Fiscal discipline was reinforced by the introduction of the structural surplus rule in 2000. The reward has been a vastly lower debt-servicing burden, as fiscal discipline resulted not only in lower government debt but also in lower real interest rates.

-A credible inflation targeting framework has helped anchor inflation expectations at a low level. Under this framework, the central bank aims at keeping inflation within a 2–4 percent target range. In recent years, the central bank has also let the peso float freely.

-The financial system was strengthened and capital markets deepened. Financial liberalization was a mainstay of policy reform in Latin American in the 1990s, mainly focusing on deregulation and privatization. Chile took strong actions to strike the right balance of market discipline and sound banking supervision, while its capital market rapidly deepened.

- Trade integration, in conjunction with a broad financial opening, was significant. Chile’s export sector, one of the most open and diversified in Latin America, has proven an important buffer against current account shocks, while also boosting Chile’s growth potential.

- Institutional arrangements were set to create a more certain macroeconomic environment. Sound economic policies and reforms have been carried out within a stable institutional framework to avoid reversals. These institutional arrangements have helped reduced the incentives problems that have led to a lack of fiscal discipline, complex and distorted trade polices, and moral hazards in the financial system see elsewhere in the region.

Source;
Sustaining Latin America's Resurgence: Some Historical Perspectives, Singh, Anoop | Cerisola, Martin D (IMF Working Paper), p.8

Related
Macroeconomic Volatility: The Policy Lessons from Latin America, Singh, Anoop

Occasional Paper No. 231 Chile - Institutions and Policies Underpinning Stability and Growth (June 2004)

The Four Big “I”s needed to achieve growth in Africa

Haiti Fact of the Day

“Haiti’s income distribution is among the world’s most inequitable with a Gini coefficient of 0.66. Nearly half of Haiti’s households are trapped in absolute poverty and live on less than a dollar a day. Social indicators such as literacy, life expectancy, infant mortality, and child malnutrition show that poverty is extensive. About 40 percent of people cannot read and write; some 20 percent of children suffer from malnutrition; nearly half the population has no access to healthcare; and more than four-fifths have no clean drinking water. However, indicators suggest that non-income poverty has declined in recent years. Access to assets such as education, infrastructure, and basic services is highly unequal and strongly associated with poverty.”

Source; En Breve No. 94 - Social Resilience and State Fragility in Haiti: Breaking the Conflict-Poverty Trap (NewsletterIssue), World Bank

Related;
Online game about struggling to survive in Haiti-
Have a look at the comment made by one;
"What an interesting concept! Though, the game is amazingly difficult... Is it really this tough out there in the developing world?

Haiti- Data Profile

How Egypt implemented a flat tax

"Since 2005 all businesses have paid a 20% corporate income tax – rather than 32% or
40%, depending on the sector. All sector-, location- or business-specific tax holidays and exemptions were eliminated, about 3,000 in all. Businesses can file and pay taxes electronically. As a result two million Egyptians filed taxes in 2005, double the number in 2004."

- Paying Taxes- The Global Picture

Related;
Tax reform: a holistic view

How to Reform the Business Environment
Mahmoud Mohieldin, Minister of Investment for Egypt, spoke on the economic reforms currently being undertaken there. He noted that changes had overcome resistance by proceeding on many fronts, including exchange rates and privatization, with the end result of streamlined business processes and removal of delays.

The Egyptian Center for Economic Studies

Egyptian Investment Portal

Thinking of a deposit insurance system- delay it!

A World Bank working paper surveying deposit insurance schemes;

Deposit insurance design and implementation: policy lessons from research and practice- This paper illustrates the trends in deposit insurance adoption. It discusses the cross-country differences in design, and synthesizes the policy messages from cross-country empirical work as well as individual country experiences. The paper develops practical lessons from this work and distills the evidence into a set of principles of good design. Cross-country empirical research and individual-country experience confirm that, for at least the time being, officials in many countries would do well to delay the installation of a deposit insurance system.

Via Spontaneous Order

Related;
What Deposit Insurance Can and Cannot Do
Protecting Bank Deposits
Deposit Insurance Around the Globe: Where Does it Work? ," (with Asli Demirguc-Kunt) Journal of Economic Perspectives
Financial Development and Economic Growth: Views and Agenda." Journal of Economic Literature, June 1997
Does Deposit Insurance Increase Banking System Stability?
Deposit Insurance - A Survey of Actual and Best Practices
Deposit Insurance - Obtaining the Benefits and Avoiding the Pitfalls
Deposit Insurance -Actual and Good Practices

Multimedia
Global Dialogues: Pricing of Deposit Insurance

Trying hard to be a darling of IMF/World Bank

News from Sri Lanka;

“Sri Lanka said Tuesday it was moving towards eliminating oil subsidies that are threatening to blow a hole in the nation’s budget and asked lenders for financial help to tide over oil shocks.

Public Administration minister Sarath Amunugama said the government “has responded appropriately to the sustained sharp rise in oil prices,” by adjusting domestic prices and moving towards oil futures to hedge future risks.

“Oil subsidies, which had been an enormous burden on the budget, have been eliminated,” he told delegates during the IMF World Bank annual meetings here.

Sri Lanka consumes around 30 million barrels of oil a year, buying 2.2 million metric tones oil light crude from Iran, Saudi Arabia and Malaysia.

The country’s oil bill is expected to climb to about 2.0 billion dollars this year, up from 1.6 billion dollars in 2005, due to surging global fuel prices.

“We reiterate our call for the creation of a special medium term oil facility to assist countries that have been adversely affected by the sharp increases in oil prices,” he said in an appeal to some of the world’s biggest financial backers…”

Related;
World Bank hates Philippines
Sri Lanka to lead South Asian initiative to study impact of oil prices
The boom in bank deposits (India)
Port Infrastructure, High Costs Seen Hampering India's Progress
South Asia conference to address sanitation
Weathering the Storm So Far: The Impact of the 2003-05 Oil Shock on Low-Income Countries

Angry Arab on Thailand coup

“There was a coup in Thailand. I am jealous. Very jealous. When was the last time we had a coup in the Arab world? Wait. We had one in Mauritania and it was pretty lousy. Never mind. Just day dreaming.”

-Angry Arab

IMF Statement on the Thai coup;

"We are following the situation closely. Thailand's economy is fundamentally strong and financial market reactions have been limited. Regional financial markets have also been little affected thus far.

"On the whole, Asian economies are resilient to external shocks, having strengthened their macroeconomic frameworks, increased exchange rate flexibility, and reduced external vulnerabilities in recent years."

Related;
Thailand in crisis
Like Old Times in Bangkok
Thai coup leader unveils PM plans
Thai king 'endorses coup leader'
Q&A: Thailand's coup impact

Multimedia
Postcard: Thailand Coup (podcast)
Politics of economic reform in Thailand- Tarrin Nimmanahaeminda, Chairman of Siam Pithiwat and former Thai Minister of Finance

What is effective aid?

A working paper by Charles Kenny, “What is effective aid? How would donors allocate It?”

"Abstract: There are significant weaknesses in some of the traditional justifications for assuming that aid will foster development. This paper looks at what the cross-country aid effectiveness literature and World Bank Operations Evaluation Department reviews have suggested about effective aid, first in terms of promoting income growth, and then for promoting other goals. This review forms the basis for a discussion of recommendations to improve aid effectiveness and a discussion of effective aid allocation. Given the multiple potential objectives for aid, there is no one right answer. However, it appears that there are a number of reforms to aid practices and distribution that might help to deliver a more significant return to aid resources. We should provide aid where institutions are already strong, where they can be strengthened with the help of donor resources, or where they can be bypassed with limited damage to existing institutional capacity. The importance of institutions to aid outcomes, as well as the fungibility of aid flows, suggests that programmatic aid should be expanded in countries with strong institutions, while project aid should be supported based on its ability to transfer knowledge and test new practices and support global public good provision rather than (merely) as a tool of financial resource transfer. The importance of institutions also suggests that we should be cautious in our expectations regarding the results of increased aid flows."

Related;
Aid: Can It Work?
Owen’s posts on aid

Deepak Lal on the World Bank

“The major benefit the developing countries derive from the operations of a number of the multilateral aid institutions, such as the World Bank, is the technical assistance built into the process of transferring the aid money to the recipient countries. Though often sound on general economic grounds, their advice is nevertheless resented for political or emotional reasons. In many instances it would not even have been heard, let alone acted upon, had these institutions been unable to provide the recipient governments with a sweetener in the form of financial resources on more favourable terms than were on offer in commercial financial markets. The grant element in the capital transfers classified as official development assistance seems a derisory sum to pay for the opportunity to carry on this form of international dialogue with those responsible for the design and execution of public policies in the Third World. When heeded, the advice has done some good, at the very least in changing the perceptions of bureaucrats and politicians; in some instances it may have had an appreciable effect in making public policies more economically rational.”
-The Poverty of Development Economics, by Deepak Lal, p.108, (the book is online at Institute of Economic Affairs)

Via Catallaxy

Related;
Reviews of some of Lal’s books- at Stumbling and Mumbling, and at Social Affairs Unit

Culture, Democracy, and Development

Multimedia
A Classical Liberal Defends Globalization- interview with Lal

Two Views on Global Development: Revive the Invisible Hand or Strengthen a "Society of States"?- Featuring Deepak Lal, University of California at Los Angeles, Author, Reviving the Invisible Hand: The Case for Classical Liberalism in the Twenty-first Century (Princeton University Press, 2006), and Ethan Kapstein, Center for Global Development, Author, Economic Justice in an Unfair World: Toward a Level Playing Field (Princeton University Press, 2006).
The current era of globalization is only a partial return to a liberal economic order. Renowned development economist Deepak Lal will explain why minimal government intervention, free trade, free capital flows, and the abolition of international organizations such as the World Bank offer the best path for growth and healthy international relations. In his view, attempts to ameliorate the impact of the market threaten global economic progress and stability. Ethan Kapstein believes that countries will shape their own destinies only in an international system that emphasizes the central role of states and the diverse social contracts they represent. Can these two views be reconciled?

The Commonwealth on World Bank

The annual meeting of finance ministers of the Commonwealth countries were recently held in Colombo. Their views on the World Bank and IMF from the final communiqué;

- recognised the need to increase the voice and representation of developing and poor countries in the IMF and World Bank, and urged a time-bound conclusion to a process of fundamental reform in a way that would increase the institutions’ credibility and legitimacy;

- welcomed and encouraged rapid further progress in the joint efforts of the Bank and Fund to identify opportunities for significant scaling up in assistance and reforms to help countries meet the MDGs;

- recognised the importance of good governance for development and encouraged the Bank and Fund to support moves to strengthen the various dimensions of governance as an aspect of their support for countries’ development. Emphasised that the current focus on governance should not obscure the Bank’s core focus on poverty elimination. In this context, Ministers stressed the pre-eminent role of states in promoting good governance; the need for the development community to help build countries’ own capacity and to find ways to engage with poor countries even where governance is weak; and the mutual responsibilities of industrial countries to ensure responsible behaviour in this context by their citizens and companies;

- welcomed the Bank’s current emphasis on infrastructure development.

- looked forward to the conclusions of the current external review of Bank-Fund collaboration and called for continued efforts to strengthen this collaboration and to increase the combined efficiency and effectiveness of the two institutions in their support for low and middle income countries;

- stressed the importance of sustaining the Fund’s financial resources so as not to compromise its role, including its role in low-income countries;

- welcomed the creation of the Fund’s new Exogenous Shocks Facility and encouraged flexibility in its scope and use to facilitate timely disbursement of concessional finance;

- welcomed the World Bank’s proposals to become more responsive to the needs of its middle-income country clients, including MDG related needs; to provide more customised and flexible financial and advisory services such as through blending; and to accelerate moves to use country systems and to find other ways to reduce the costs to member countries of doing business with the Bank; and welcomed the Bank’s work on the Clean Energy Investment Framework and urged its rapid implementation, working with other IFIs.

-Urged the parties involved, including the African Development Bank and World Bank, to accelerate progress in implementing the recently established African Consortium for infrastructure development.

Related;
India asks Commonwealth finance ministers to make united push for reform at IMF
Deputy Secretary-General Urges World Bank to Create Youth Investment Fund
Commonwealth Finance Ministers seek new answers to old questions

Some of the papers from the agenda;
Current World Economic Situation and Prospects
Review of IMF and World Bank Issues
An Agenda for Growth and Livelihoods: Public-Private Partnerships for Infrastructure
Toward and Outward Oriented Development Strategy for Small States: Issues Opportunities and Resilience Building
Promoting Investment into Economies with "Endowed" Handicaps: Progress Report
Reform of the International Aid Architecture: A Role for the Commonwealth?

The Road Less Traveled of Business Regulatory Reform

According to the World Bank's Doing Business 2007, the four steps to successful business regulatory reform;

• Start simple and consider administrative reforms that don’t need legislative changes.
• Cut unnecessary procedures, reducing the number of bureaucrats entrepreneurs interact with.
• Introduce standard application forms and publish as much regulatory information as possible.
• And remember: many of the frustrations for businesses come from how regulations are administered. The internet alleviates these frustrations without changing the spirit of the regulation

More on the report from the preface;

“Regulations affecting 10 areas of everyday business are measured: starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. The indicators are used to analyze economic outcomes and identify what reforms have worked, where and why.

The methodology has limitations. Other areas important to business—such as a country’s proximity to large markets, quality of infrastructure services (other than services related to trading across borders), the security of property from theft and looting, the transparency of government procurement, macroeconomic conditions or the underlying strength of institutions—are not studied directly by Doing Business. To make the data comparable across countries, the indicators refer to a specific type of business—generally a limited liability company operating in the largest business city.

The methodology for 4 of the Doing Business topics changed in this edition. For paying taxes, the total tax rate now includes all labor contributions paid by the employer and excludes consumption taxes. For enforcing contracts, the case study was revised to reflect a typical contractual dispute over the quality of goods rather than a simple debt default. For trading across borders, Doing Business now reports the cost associated with exporting and importing cargo in addition to the time and number of documents required. And for employing workers, nonwage labor costs are no longer included in the calculation of the ease of employing workers. For these reasons— as well as the addition of 20 new economies—last year’s rankings on the ease of doing business are recalculated using the new methodology and reported in the Overview.”

Singapore is the number one in the rankings- coincidently the World Bank-IMF annual meetings are also being held in Singapore this month. It is interesting that Singapore (not a democratic country according to Acemoglu) beat more deomcratic countries like Australia in the rankings.

As for a lot of the other poor countries, there is a sense in these countries that a lot of the wealth has been generated through either corruption or unfair competition. May be one need to take a hard look at some of the local partners of the Doing Business survey for their independence.

Quick Links;
The Doing Business Law Library
Create their own custom dataset of main indices
Local Partners
Economy Rankings
Explore Economies
Economy Characteristics

Related;
Blog coverage of the report- PSD Blog, New Economist, Greg Mankiw, Econlog, Pienso.

Doing Business and Poverty Reduction

Does Doing Business suck?

Business Regulation measure

Measuring Labor Market Flexibility

MI Indexes

Doing Business in 2006: Creating Jobs-online discussion

How Should States Encourage Entrepreneurship?
"At the heart of this public policy issue are two competing views of how to facilitate entrepreneurship. For some policymakers encouraging entrepreneurship involves improving the entrepreneurial climate through the lowering of tax and regulatory burdens. This view is consistent with a large body of academic literature showing that a good way to encourage entrepreneurship is to provide individuals with the freedom to pursue their dreams. Other policymakers focus on the financial constraints facing would-be entrepreneurs and how public policy can mitigate the financial hurdles to entrepreneurship. State financing of venture capital firms is consistent with this view."

Multimedia
Podcast of news from the World Bank on the Doing Business 2007
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else; I would also highly recommed de Soto's book, 'The Other Path'
How to Reform the Business Environment ; highly recommended especially comments by Egyptian minister.
Doing Business in 2006: Creating Jobs- Book Event at Cato
Doing Business in India Today: McDonalds Experience Entering the Indian Market

Related Bank Publications
Doing business in 2006 - creating jobs
Doing Business in 2005
Doing business in 2004 : understanding regulation
Doing business in South Asia in 2005
Doing business in 2005: comparing the Cambodian business environment with the world
Doing business in 2005 : India regional profile
Ukraine - Cost of doing business survey, 2002
Latvia : self-assessment report on administrative barriers to doing business
Perceived obstacles to doing business: worldwide survey results
Doing better business through effective public consultation and disclosure : a good practice manual
Doing business in Brazil
Doing business in Mexico
Despite many reforms, doing business is still not easy in Vietnam
Institutional obstacles to doing business : region-by-region results from a worldwide survey of the private sector

*updated 8th September, 2006

Podcast of the Day-Crisis of Abundance

Crisis of Abundance: Rethinking How We Pay for Health Care- Arnold Kling’s book presentation at Cato;

“If you follow the video or audio all the way through to the Q&A, you will hear a Congressional aide's rant against economic analysis of health care. I chose not to respond, and I think that was the right choice. The book explains why health care is an economic issue, and I would leave it at that. Frankly, I thought that the audience Q&A did not add much. Just as with comments on blog posts, the first one often sets the tone, so that it's important to get a good question first.”

Listen to the podcast. Here is a discussion of the book at Tech Central Station. Also a Cato interview Arnold Kling.

Related:
Podcasts; Cogan on Improving the Health Care System, The Economics of Medical Malpractice
Sylvia Allegretto, an economist at the Economic Policy Institute and author of "The State of Working America," talks with Bloomberg's Tom Keene from Washington about her analysis of the U.S. labor market. Listen to the podcast.

Dead Meat is a 25 minute short film which shows the reality of health care under Canada's socialized medical system
Economics of Obesity
In praise of US health care
Unhealthy America
Charlie Rose interview with New York City Commissioner for Health & Mental Hygiene, Thomas Frieden
Economics of Health Care posts at Econlog, Economist’s View, Café Hayek, Marginal Revolution
Healthcare Economist blog
Health Courts: Exploring the Concept
The Health Report- podcasts from Radio National.
Voluntary C-Sections Result in More Baby Deaths
Health Care Costs

Health Financing Revisited: A Practitioner's Guide
Health Insurance in Francophone Africa

GAO reports;
Hispanic Access to Health Care: Significant Gaps Exist
Preventive Health Care for Children: Experience From Selected Foreign Countries
Canadian Health Insurance: Lessons for the United States
Health Care Spending Control: The Experience of France, Germany, and Japan
Health Insurance: Bibliography of Studies on Health Benefits for the Uninsured

India - Five-year roadmap to fuller rupee convertibility

The Hindu reports;

“The Reserve Bank of India (RBI) Committee, headed by S. S. Tarapore, on Fuller Capital Account Convertibility has recommended that the scheme should be implemented in a five-year period in three phases and at the end of the five-year period ending in 2010-11, "there would be a comprehensive review to chalk out the future plan of action".

The committee, whose report was submitted to the RBI on July 31 and which was made public on Friday, recommended that the annual limit of remittance by individuals to open foreign currency accounts overseas be raised to $50,000 in phase one from the current level of $25,000 and further raised to $100,000 in phase two and $200,000 in phase three. Difficulties in operating this scheme should be reviewed, it observed. Since this facility straddles the current and capital accounts, the Committee recommended that "where current account transactions are restricted, that is, gifts, donations and travel, these should be raised to an overall ceiling of $25,000 without any sub-limit".

"All individual non-residents should be allowed to invest in the Indian stock market through SEBI registered entities including mutual funds and portfolio management Schemes who will be responsible for meeting Know-Your-Customer norms and the money should come through bank accounts in India". It recommended allowing non-resident corporates also to invest in Indian stock markets in the same manner the RBI allowed non-resident individuals...”

Related;
Fuller Capital Account Convertibility Report. See also the ‘Dissent’ piece by Surjit Bhalla in the report.
Ajay Shah's blog- has a roundup of the report
A Monetary Policymaker's Passage to India

India's RBI to Consult Government on Rupee Conversion
The rupee; fear of freedom
Are free capital movements a good idea?
India: Selected Issues- IMF February 2006
India Development Policy Review 2006
India: Country in Brief
Should India go for Capital Account Convertibility?
India-Research Publications from World Bank
How to solve the RBI problem
Subsidizing inefficiency
Doing Business India-Dealing with Licenses-The steps, time, and costs of complying with licensing and permit requirements for ongoing operations in India- It takes 20 steps and 270 days to complete the process, and costs 678.5% of income per capita.

Recent edition of Foreign Exchange TV show with focus on India- Arvind Panagariya interviewed in the show.
Time for India to reduce inequality
Economic and Political Weekly
Mukherji, Joydeep. "Economic Growth and India's Future."
New Economist posts on India

Analysis of Possible Oil Industry Ownership Structures in Post-War Iraq

An undergraduate honors thesis on Iraq;

“This thesis, an “Analysis of Possible Oil Industry Ownership Structures in Post-War Iraq” explores the various forms of ownership that could potentially be employed in the oil industry of Iraq. At a time when rapid change is occurring in the country, this thesis discusses the implications of different ownership structures, and how they might relate to the economic recovery of the people of Iraq. As a valuable natural resource, oil has proven to be a significant source of revenue in the past, and could provide an excellent vehicle for economic recovery of the country. Using standard texts, past industry trends, examples of other countries, and the most current statistics available, this thesis attempts to highlight the best possible ownership structure in order to enhance the economy in the foreseeable future.”

Linked to some recent Iraq related news;
Oil Workers Strike in Iraq-Inflation Rate hits 70% amid stagflation
In Baghdad, street kids live on petrol smuggling

Iraq war horrors soothed with Koran and herbs
IRAQ: Threatened teachers fleeing the country
Looters Ransack Base After British Depart
Saviour of Iraq's antiquities flees to Syria
Saving Iraq
Sadr's Militia and the Slaughter in the Streets
US Army reviewing combat deaths
Baghdad bikers shrug off sectarian violence
US using space hi-tech to fight in Iraq, Afghanistan
In Iraq, anyone can be policeman for few dollars

"With shirts available for 3.25 dollars (2.55 euros), pants at 5.50 dollars and an "IP" armband for one dollar, a hypothetical kidnapper would only have to spend 10 dollars for his disguise."

IRAQ INDEX ARCHIVE

Doha Misconceptions

IMF has released a policy discussion paper clarifying what it sees as misconceptions on trade issues; “Trade Issues in the Doha Round: Dispelling Some Misconceptions”- it addresses the following four issues-

- Developing countries would benefit more from liberalization by rich countries than they would from their own liberalization. In fact, research shows that developing countries have much to gain from their own trade reforms.

- Tariff reductions on a multilateral basis could wipe out a large portion of trade between rich countries and developing countries as a consequence of preference erosion. On the contrary, research shows that the magnitude of any erosion is small in aggregate and is of concern for only a few countries and products.

- Agricultural subsidies in many Organisation for Economic Co-operation and Development many (OECD) countries are more damaging than other types of policies, such as tariffs. Actually, import tariffs in OECD countries harm developing countries much more than either production or export subsidies, with the exception of subsidies on cotton. Export subsidies in OECD countries actually benefit developing countries that are importers of subsidized products because they reduce the price of imported goods.

-The recipients of agricultural subsidies in rich countries tend to be small, lowincome farmers. The facts, based on data for both the United States and the European Union, are that a disproportionately large share of government support goes to wealthy farmers.

The Jordanian Stock Market—Risk Diversification versus Performance?

“Thriving capital markets are the lifeblood of capitalism, with all of that economic system's attendant benefits. Capitalism is the best method yet devised of generating growth, raising living standards and reducing poverty.”
-Anne O. Krueger

A recent working paper from IMF on the “The Jordanian Stock Market--Should You Invest in it for Risk Diversification of Performance?” concludes;

“This study finds that the Amman Stock Exchange is integrated with Arab markets but not with other emerging and developed stock markets. We used both bivariate and multivariate cointegration approaches in our analysis. The multivariate approach shows that Arab stock markets are cointegrated and that they share one long-term equilibrium relationship. The bivariate approach shows that the Jordanian market is individually cointegrated with most Arab markets with the exception of Tunisia and Morocco. However, the results also show that the ASE is not cointegrated with other emerging and developed stock markets.

From this, we conclude that the Arab stock markets are integrated in an economic sense but that the integration is incomplete. The analysis found that there are five common stochastic trends driving the six stock markets. The five common stochastic trends could be attributed to outside factors determining the stock markets or to barriers to investment and trading among the countries. The countries in the study have common cultural characteristics; they also have implemented several deregulation and privatization projects, and have intensified trade and financial relations. All of these factors may have contributed to existing market integration. As cooperation among these countries increases, it is likely that the number of outside common trends will decrease and that the stock markets will become even more integrated.

Our findings have some implications for international portfolio diversification. Overall, the results suggest that investing in several Arab stock markets may offer limited opportunity for further long-term risk diversification. Investors desiring to diversify their portfolios vis-à-vis developed and other non-Arab emerging stock markets may be able to achieve additional diversification by investing in Jordan. The ASE compares favorably with many other Arab markets in terms of investment restrictions, transparency, and the regulatory environment, and has had relatively low historical price volatility. The study also shows that the Jordanian market is Granger-caused by the markets in Saudi Arabia and Kuwait. Thus, outside investors could get indirect exposure to these markets by investing in Jordan.

Our results also have important policy implications for Jordan. The fact that the ASE is cointegrated with the other Arab markets could be due to the fact that global investors see these markets as close substitutes, and the analysis shows that they are. Jordan should thus continue enhancing the transparency and the effectiveness of regulation and supervision of its capital markets so as to distinguish itself further from other markets. This would be important, as Jordan will likely rely on foreign capital inflows in the foreseeable future. Moreover, it would tend to reduce any potential contagion from adverse regional developments.

Finally, there are areas where future research might be useful. One issue that could be investigated is when the Jordanian stock market became integrated with Arab markets under study and why. Another topic could be the role of banks in the Jordanian market, and Arab Bank, in particular.”

For Comment; The more we can tie the countries in the Middle East economy, the better chances for peace in the region. One possible area is tourism. What are other possible areas for cooperation? And western media are very fond of people like Queen Rania inviting them to forums and discussions ranging from middle east politics to Islamic reformation. How does the average Arab view this or are they reflecting the view of the general Arab population or not?

Related;

Counterterrorism and stockmarkets

NEW WORLD BANK ECONOMIC PLAN FOR JORDAN

The 30 most influentional people in Jordan

Creating Incentives for Israeli-Palestinian Peace

“Suppose all government tourist-generated revenues from all of Jerusalem were divided according to a fixed formula between the two sides. For instance, Israel's current population is about 6.3 million. The populations of Gaza and the West Bank are 2.9 million. Proportionality argues that about 31 percent of tourist revenue go to Palestine and 69 percent to Israel. This division is only one possible allocation. The key is that this pooled revenue be shared according to a prearranged fixed formula.

A revenue-sharing arrangement ties the wealth flowing to the Palestinians to their ability to enforce a tourist-friendly atmosphere. Tourist income ebbs and flows with violence. As the record low tourism in Bethlehem over the recent Christmas holiday makes clear, when peace is lacking, tourism declines. In an arrangement that ties revenue to tourism, both Palestinians and Israelis have incentives to minimize violence. Because tourism is currently so much weaker in Palestinian areas, the incentive is asymmetric. A fixed revenue-sharing arrangement, regardless of where the tourist income is generated, gives both sides an interest in seeing the pie expand and gives the Palestinian leadership reasons to control the Intefada and terrorism.”

Jordan - Development policy review : a reforming state in a volatile region

Amman- the most expensive city in the Arab World

Economy of Jordan according to Wikipedia version, and according to the King

Reform in Muslim Societies- featuring Queen Rania (video)

Discussions with King Hussain- Charlie Rose and at World Affairs Council

Doing Business – Jordan; Starting a business-
“The challenges of launching a business in Jordan are shown below. Entrepreneurs can expect to go through 11 steps to launch a business over 36 days on average, at a cost equal to 45.9% of gross national income (GNI) per capita. They must deposit at least 1011.6% of GNI per capita in a bank to obtain a business registration number.”

Compare with Israel;
“Entrepreneurs can expect to go through 5 steps to launch a business over 34 days on average, at a cost equal to 5.3% of gross national income (GNI) per capita. There is no minimum deposit requirement to obtain a business registration number.”

Some Stock Exchanges in the region; Israel, Palestine, Egypt, Saudi Arabia, UAE

Arab Monetary Fund

A Central Banker in a time of war

There is an interesting discussion with the Governor of Central Bank of Israel, Stanley Fischer at Bloomberg. The interview illustrates the difficulties for economic policy makers at a time of war; though the country’s finance minister allocated additional money for the war effort, it will come from reductions in other programs. Fischer also increased interest rates recently. Fischer deserves lot of credit for the resilience of the Israeli economy.

I think the quality of a country’s central bank website gives an indication of the state of development of a country and an assessment of the capacity and expertise of the country’s economic policy makers. On that account Israel does an excellent job, and the neighboring Arab countries have a long way to go.

For comment; What’s the equivalent in the US, of Bank of Israel’s the State of the Economy Index?

Related;
The Governor, Stanley Fischer - "Reflections on One Year at the Bank of Israel"
Stanley Fischer - The Role of the Central Bank: The Israeli Case

Other interesting papers from Bank of Israel;
Studying Texts: A Gemara of the Israeli Economy
The Interaction Between Fiscal and Monetary Policy in Israel
Bank of Israel Annual Report - 2005 (highly recommeded)
Wicksell's Classical Dichotomy: is the Natural Rate of Interest Independent of the Money Rate of Interest?
Targeted Killings: Evaluating the Effectiveness of a Counterterrorism Policy
New Horizons: Telecommunications Policy In Israel In The 21st Century
The Development in Israel of the Concept of Economic Independence
The State-of-The-Economy Index and The probability of Recession: The Markov Regime-Switching Model

Some of Fischer's Work at the IMF
Farewell Dinner Speech
Exchange Rate Regimes: Is the Bipolar View Correct?
International Economic Policy Under the Clinton Administration
Capital Account Liberalization and the Role of the IMF
REFORMING WORLD FINANCE;A Commentary Lessons from a Crisis
Exchange Rate Regimes: Is the Bipolar View Correct?
The Asian Crisis and the Changing Role of the IMF
IMF Response to the World Gold Council
In defense of the IMF: specialized tools for a specialized task
Is MENA a Region? The Scope for Regional Integration
From Transition to Market - Evidence and Growth Prospects
Africa - Is This the Turning Point?
The Transition Economies After Ten Years
Israeli Inflation from an International Perspective
Modern Hyper- and High Inflations
Stabilization and Growth in Transition Economies - The Early Experience

Interviews with Fischer; The Region, PBS, CitiGroup

The interesting odysseys of Stanley Fischer
The young Stanley Fischer problem

Some World Bank work of Fischer;
Currency boards and external shocks : how much pain, how much gain?, Volume1
Inflation and the poor, Volume1

Issues in medium-term macroeconomic adjustment,
Economic development and the debt crisis
The economics of the government budget constraint
Policies for economic development,
Issues in socialist economy reform
The Soviet economic decline : historical and republican data,
Moderate inflation,

Miscellaneous
The Price of Occupation
A Brief Economic History of Modern Israel, (book review)
IMF reports on Israel
Israel's stabilization program (1988)
Macroeconomic performance before and after disinflation in Israel
Berkshire Hathaway and Iscar- Israel over-enthuses at Warren Buffett's latest deal
Erel Margalit, an Israeli venture capitalist, dreams of using his dealmaking skills to revitalise Jerusalem
Economy of Israel (wikipedia)
Globes - business magazine

Randomized Trials Do Work

An example of randomized control trial used for a program evaluation;

“Career Academies is an educational program that enrolls middle and high school student applicants in academic and technical courses in small learning communities with a career theme and partnership with local employers. Participants’ high school graduation rates are one of the outcome measures of interest. A well-designed RCT of over 1,700 students that randomly assigned student applicants into an Academy or into a non-Academy control group that continued regular schooling found that the intervention did not result in increased graduation rates at the eight year follow-up. By contrast, if the evaluation had used a comparison group design comprised of like students from similar schools, the evaluation would have concluded erroneously that Career Academies increased the graduation rate by a large and statistically significant 33 percent.”

-Source; What Constitutes Strong Evidence of a Program’s Effectiveness?

Related;

Why Do Impact Evaluations?

Instrument Variables and Randomized Experiments

Better than Trial and Error

Benefit Cost Analysis Guide

Decision-Making in Government: The Role of Program Evaluation

Influential Evaluations: Evaluations that Improved the Performance and Impacts of Development Programs

Efficient Rent Seeking and Economic Development

I recently asked a South Korean professor about the reason for the economic success of Korea. He said efficient rent-seeking and suggested the following book;

Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia by Mushtaq H. Khan (Editor), Kwame Sundaram Jomo (Editor)

Related; Chapters 1 and 2 are online.

US Foreign Aid Reform- Follow UK

A major study by Brookings on reforming the US foreign assistance had the following recommendation amongst many others;

“The establishment of the U.K. Department for International Development (DFID) in 1997 has proven a successful reform. DFID combines in a single cabinet agency the delivery of all overseas aid and has responsibility for analyzing the impact on developing countries of policies on trade, the environment, and conflict prevention.”

Here is report- Security by Other Means: Foreign Assistance, Global Poverty, and American Leadership

And a transcript of a conference discussing the report.

Related; How comprehensive is the new U.S. foreign assistance framework?

Some Facts about Bollywood

“Although Bollywood's budgets and box-office takes still do not compare to Hollywood's, the scale of the business is not trivial. According to a PricewaterhouseCoopers report, India's film business earned $1.12 billion in 2004, up from $617 million in 2001, though that would not cover the takings from one Harry Potter film. In 2003, the industry earned more than $703 million. Much of this success is driven by global popularity. An average Indian movie's budget is $500,000 (though the major titles can budget more than $10 million), far below the average $14 million spent in the US.

PricewaterhouseCoopers believes that Bollywood will double its turnover by 2009. Since 2001, the government has allowed financial institutions to finance up to $1 million of a picture's budget or up to about 40% of the total production cost. A Rabo India study indicates that the number of films financed through organized sources last year went up 200% against 2002, though the total corporate finance into films is still quite low and was a little more than $150 million in 2004.

According to a study by KPMG, although India produces more films than any other country, its share of global cinema revenue is a lowly 1%. The US leads with 60%, and India is far behind Japan, the UK and France as well. However, KPMG projects that the revenue of the Indian film industry will cross $2 billion next year and $3.5 billion by 2010.”

- Foreign shoots spread Bollywood's reach

More on India

India: The New Star of Asia

What Detroit Can Learn From Bangalore

India Awakens

India: A Tale of Two Worlds

The India Model

On Bollywood; Welcome to Bollywood and two earlier posts about Bollywood- Bollywood Sarukar and thought of the day.

Access Bollywood;behind the scenes with Bollywood actor Tom Alter.

‘Crackdown on Sugar Hoarders to be Launched’

Breaking news from Pakistan;

“Monopoly Control Authority (MCA) said Saturday stock 1.2 million ton sugar was available with sugar mills by May 31, 2006, which they didn’t release in the market. However, action on this count would be taken against the hoarders.

A total stock of 2.97 million ton sugar was reported by May 31, 2006 of which 1.738 million ton sugar was sold out and the sugar mills 1.169 million ton sugar amassed in their godowns instead of releasing it in the market, according to Authority.

MCA told a crackdown would be launched on those involved in the sugar hoarding, which skyrocketed the sugar prices in the market.”

Related;

World Bank to double aid to Pakistan -- Will the money help?

Inflation in Pakistan: Money or Wheat?
Summary: This paper examines the relative importance of monetary factors and structuralist supply-side factors for inflation in Pakistan. A stylized inflation model is specified that includes standard monetary variables (money supply, credit to the private sector), the exchange rate, as well as the wheat support price as a supply-side factor that has received considerable attention in Pakistan. The model is estimated for the period January 1998 to June 2005 on a monthly basis. The results indicate that monetary factors have played a dominant role in recent inflation, affecting inflation with a lag of about one year. Changes in the wheat support price influence inflation in the short run, but not in the long run. Furthermore, the wheat support price matters only over the medium term if accommodated by monetary policy.

Lahore School of Economics blog

Removing binding constraints to growth?

I learned via P&G blog that the World Bank has launched a new fund called Africa Catalytic Growth Fund. One of the Fund’s targets is removing binding constraints to growth;

“Binding constraints to growth are removed through the ACGF framework for systematically targeting high performing and transformation countries, as well as regional integration initiatives that demonstrate evidence of specific constraints. Increased targeted aid for these countries can enable them to solve immediate problems that present barriers to their development, to implement critical reforms and provide them with the technical and financial assistance to give them the opportunity to break existing barriers, leading to higher sustained rates of growth.”

For Comment: I would like to hear your response after reading the above ‘humble’ objective of the program.

Related Podcast; Two Views on Global Development; Revive the Invisible Hand or Strengthen a "Society of States"?

John Taylor on Iraq

Region: Thinking about international work, some of the most arduous efforts you have undertaken were in Iraq, where you helped to reestablish the central bank. How do you go into countries where the financial infrastructure has been torn apart and begin to rebuild? And are you optimistic?

Taylor: Oh, yes, I'm optimistic about both Iraq and Afghanistan, where I also worked to rebuild financial systems. I think the progress made on the financial side in Iraq was unbelievable. It was amazing how successfully it all went. A whole new currency was put in place in just a matter of months. A new central bank was established; central banking law was developed. There was no financial chaos, which was really a major concern when the Saddam government fell. We prepared for months in advance.

So I think the way I would answer your question is just to be prepared and have some plans that you've worked out even though you don't know precisely what the circumstances will be. This is a management and leadership question. We had to have knowledgeable people on the ground who could talk to the career people in the central bank or the finance ministry after the government fell. Brave people, experienced people, they have to know to report back to Washington if there are changes in the plans. We set up what I called a “reach-back” operation in Washington to provide that capacity. You also have to have communication up through the chain of command in Washington. And you need the best experts you can find. Fortunately, we had Tom Simpson from the Fed Board staff come to Treasury to help us, and he just did a terrific job. Former Fed economist Bill Dewald spent several months in Baghdad under difficult conditions and made an enormous difference. So, good expertise is essential.

And good basic monetary theory came into play. How much of the new currency are people going to demand? How much new currency needs to be printed? And how fast would it be printed? We had to print so much currency that it took 27 747 planeloads to fly it into Iraq. It was printed at seven locations around the world. And then it had to be shipped to 250 distribution points around the country.

Region: A huge helicopter drop of money.

Taylor: It was indeed. It was much more than an economic issue. It was also a security issue and a logistical issue. You have to assemble all the things you need to run an organization, keep it running like clockwork, and even then things can go wrong. I was just so thankful that nothing went wrong in the currency exchange.

See the whole interview in the June edition of the Region.

See also the article related to the chart above ‘Interchange Fee Debate; Merchants are seeking relief from rising credit card fees, but the economics are complex and near-term resolution seems unlikely.

Ten Reforms to Make the World More Conducive to Development

1. A “development box” in the WTO that legitimizes the use of trade and industrial incentives (including export subsidies) for developmental purposes (with burden of proof on those that argue the intervention is not developmental.

2. A recognition by the US, in particular, that prudential restrictions on capital flows (“capital account management”) in the developing world is an integral part of a development agenda.

3. Preparation of a “developmental impact statement” as a necessary requirement for any international agreement (including the costing out of the financial implications for LDCs, and laying out the modalities of how these will be financed).

4. Adoption of the “odious debt” notion, whereby debt contracts signed by oppressive regimes are no longer enforceable in Northern courts.

5. A 0.10% financial transaction tax on foreign currency transactions, with proceeds spent on global public goods.

6. Willingness to share information with LDC governments on Northern bank accounts held by LDC residents.

7. A temporary work permit scheme that allows workers from developing nations to spend 3-5 years in the advanced countries. (Revolving pool of workers; low and high skill; return important)

8. A multilateral agreement that disciplines the subsidization of DFI. (The only significant form of industrial policy that (a) is not banned; and (b) clearly transfers resources from developing to developed countries.)

9. Ending the monopoly of the World Bank in generating and disseminating policy ideas, particularly in the lowest income countries, by breaking it up into a number of competing agencies.

10. Moving the IMF’s Policy Development and Review (PDR) Department (and its staff) to a developing country, and rotating it in, say, among different African capitals every five years.

Those are list from Dani Rodrik.

See the rest of papers from the conference- Equality and the New Global Order, especially the one by Branko Milanovic.

Summary of Milanovic’s presentation by Jon Mandle at Crooked Timber;

“Does concern with global inequality require a different approach to international aid?
This presentation was very heavily empirical and gave an interesting insight into the theoretical difficulties of measuring inequality. He began by talking about the significance of the Gini coefficient and the extent of global inequality in income. But, he observed, any such measurement involves aggregation. So, if members of a wealthy country contribute to a poor country, it might turn out that some poor members of the wealthy country are subsidizing wealthy members of the poor country who are better off than they are. (See Rodrik’s example, above.) For many pairs of countries, this would be very unlikely to happen – there are few people in the poor country that have higher incomes than anyone in the rich country. But sometimes it might. For example, the wealthiest 15% of Chinese have a higher income than the poorest 5% of Germans. If we want truly progressive redistribution, we should have a way of measuring this likelihood. So, we need to take the internal distribution of a country into account. A progressive redistribution between countries should minimize the likelihood of regressive transfers. Furthermore, such redistributions should not make the national distribution more unequal. For example, even if the poor in a rich society are better off than the rich in a poor society, transferring from the former to the latter, although progressive, would increase the inequality within each country. The bottom line is that not only the richer, but also the more unequal a country is, the more it should contribute to the relief of global poverty.”

Related: World Inequality in the Second Half of the 20th Century

A Shocking Fact about Sub-Saharan Africa

Mankiw declares the war on poverty is being won citing Xavier Sala-i-Martin. Harry Clarke earlier cited the same paper.

But we have a long way to go. I was shocked to see the accompanying chart about Sub-Saharan Africa ( in most recent Global Monitoring Report). The report quotes, ‘Africa has been at the forefront of innovation in water and sanitation for the last 20 years by replacing central planning approaches with community-based management of village water supplies and by implementing technologies like easy-to-maintain hand pumps and low-cost pit latrines” (p.40).

Over 30 percent having no access to any form of sanitation is quite shocking.

Related Multimedia;

Is Global Inequality Rising? – an economic forum at IMF

What Are the Major Advances in Growth Theory since Solow?

Perspectives on Growth, Inequality and Poverty

Understanding the Growth, Poverty, and Inequality Nexus

Easterly Urges Independent Evaluation of Foreign Aid

Robert Bates on Governance Systems and Political Effectiveness

A couple of blogs discussing similar themes; Africa Unchained, Poverty and Growth blog, The World Economic Forum blog- they have got a new 'white papeer' on Strengthening Healthcare Systems in Sub-Saharan Africa.

European Engine is Sputtering

“The pressures from intensified global competition were mainly felt in two interconnected macroeconomic areas: output growth and unemployment. Output growth in the core of Europe, the Euro-area, has been well below that of the U.S. and Asia for some time now, including on a per-capita basis. This reflects especially slow growth in domestic demand where neither household consumption nor fixed investment have made a significant recovery. The flip-side of this weak growth, of course, has been high unemployment—in the 8-percent range in recent years, with only moderate improvement in sight. The picture looks even dimmer when one considers the related but more economically relevant concept of labor utilization, where the core of Europe is showing a steady decline in the number of hours worked per person, both in absolute terms and relative to the other two engines of world growth—the U.S. and Asia.

And there is some concern that Europe may respond to these pressures in the wrong way. Protectionism is an ever-present threat that comes in many guises. European agricultural and trade policies have not opened up sufficiently rapidly to the rest of the world, and the tribulations in the Doha round do not promise a significant turnaround in this respect. Stubborn restrictions on the free movement of labor is another example. Indeed, despite recent progress, the free movement of labor is not yet present throughout the European Community itself. This is clearly evident in the very difficult and protracted special arrangements remaining for workers from the new Eastern European member states. The fact, however, is that protectionism eventually is a self-defeating policy. In the case of labor protection, the more Europe is successful at preventing competitive labor from coming in, the more successful it will also be in motivating expensive capital to move out. Capital is increasingly mobile and will go where markets are most dynamic and where labor is relatively inexpensive. By erecting barriers in various ways (this could be for labor, goods, or services), domestic investment will remain weak and output growth will remain low.”

Takatoshi Kato, Deputy Managing Director of the International Monetary Fund at the 36th St. Gallen Symposium: Inspiring Europe

Related Links:

The podcasts from the symposium.

Radioeconomics interview with Francesco Daveri, Professor of Economics, University of Parma (Italy), onthe causes of productivity growth across industries in countries in Italy and Western Europe ($ required).

Europe's future; What is wrong with Europe? The main answer is, as it has been for some years, the economy. Especially but not only in the core euro countries of Germany, France and Italy, growth has been sluggish, at best. In many countries unemployment seems both high and stuck. The morosity that underlay the French and Dutch noes was primarily about growth and jobs.

Two working papers on intergenerational mobility-
American Exceptionalism in a new light: a comparison of intergenerational earnings mobility in the Nordic countries, the UK and the US and Nonlinearities in Intergenerational Earnings Mobility: consequences for cross-country comparisons; New research led by economists at the University of Warwick reveals that many Western societies that pride themselves on being lands of opportunity are anything but. The reality is that most countries show a strong connection between a father and son's earnings and this factor is more important in the United States than in any of the other country studied. Yet the curious thing is that European society—at least in the Nordic countries—is far less stable than America's. Two new research papers confirm that, if one compares the incomes of children with those of their parents, or considers how long people in one income group stay there, Nordic countries emerge as far more mobile than America. Britain shows more class stability than its northern neighbours, but it is still a lot closer to them than it is to America

Is the European Union Constitution Dead? Gianfranco Pasquino, professor of political science, University of Bologna

Intellectual Trespassing and Socratic Humility

Pablo points out that David Ellerman has published a new book; Helping People Help Themselves; From the World Bank to an Alternative Philosophy of Development Assistance.

In the forward Albert Hirschman writes;

“It is important to note the difference between help and perverse, dependency-creating alternatives to self-help. The task is to find forms of help that enable self-reliance and autonomy to come forward. It is time for deep organization experimentation in the ways of development assistance. This can be done by reflecting on the ideas and proposals of the following people:

• Saul Alinsky, with regard to the community organization and the community;
• Paulo Freire, with regard to the relation of the educator and the peasant (or urban poor) community;
• John Dewey, with regard to the relation between teachers and learners;
• Douglas McGregor, with regard to the relation between managers and workers;
• Carl Rogers, with regard to the relation between therapists and clients;
• Søren Kierkegaard, with regard to the relation between teachers and learners;
• E. F. Schumacher, with regard to the relation between the development agency and the country; and
• my own work with regard to the relation between the development advisor and the government.”

In the following piece Ellerman gives advice to the World Bank; Mixing Truth and Power; Implications for a Knowledge Organization ( discusses the issue of World Bank and its dealings with internal critics including the Easterly saga);

“On observing these exits, outside critics might compare the Bank more to the Catholic Church at the time of the Spanish Inquisition than to an open learning organization dedicated to the promotion of learning about development. Sophisticated insiders, however, point to the positive contrast with the IMF, where none of the above apostates would have gotten a foot in the door in the first place. Compared to the IMF, the Bank is a raucous debating society, and, in their view, the exits were unnecessary—particularly if the transgressors had shown a little more decorum and restraint….

Finally, on the complex questions of development where intelligent and knowledgeable people differ, alternative approaches should be allowed to compete and to be implemented within the confines of the same open learning organization. There is no royal road to learning, no road that bypasses real competition and local experimentation—even within the organization itself. One of today’s preeminent thinkers on development, Albert Hirschman of the Institute for Advanced Study, has often ridiculed the “rage to conclude” that tends “to cut short that ‘long confrontation between man and a situation’ (Camus) so fruitful for the achievement of genuine progress in problem-solving.”

Those in power in the organization should harken to the admission and admonition of John Maynard Keynes (the principal founder of the World Bank): “But we all hate criticism. Nothing but rooted principle will cause us willingly to expose ourselves to it.” Instead of aspiring to Official Truths, the organization should aspire to a self-critical falliblism or Socratic humility of knowing that one does not know, and then on the basis of “rooted principle” to promote the knowledge processes shown to be “so fruitful for the achievement of genuine progress in problem-solving.”

Related;

Helping people help themselves - toward a theory of autonomy-compatible help- a working paper by Ellerman

David Warsh discusses the book

The Rhetoric of Reform

-The cartoon is by this well known Kenyan Cartoonist

Is there such thing as an Australian Model?

Via Economist’s View comes a recent column at FT on the Australian economic success;

“It is a developed country that enjoyed faster economic growth than the US over the past decade. Yet it also offers universal healthcare and other social welfare benefits that the US does not. Unemployment is similar to America’s, but without the glaring income disparities that characterise US growth. It is a country that seems to have achieved a sweet spot, combining the vigour of American capitalism with the humanity of European welfare, yet suffering the drawbacks of neither. And it manages this while keeping a consistent budget surplus. That country, rolling into its 16th year of uninterrupted growth, is Australia.

“In the last decade of the twentieth century, Australia became a model for other OECD countries,” wrote the 30-nation club of rich economies in its latest annual assessment of the country. Australia, which started life as a dump for Britain’s criminal effluent, was such an unlikely candidate to be any sort of economic role model that it should give hope to others. Australia’s economic development in the twentieth century seemed to be arrested at the quarry-and-farm phase. And when the founder of modern Singapore, Lee Kuan Yew, forecast in the 1980s that Australians were destined to become “the poor white trash of Asia”, he seemed to know what he was talking about. In 1970, Australian per-capita incomes were the fourth highest in the world. In the 20 years that followed, its ranking fell inexorably. By 1991, Australia was placed 19th. Other countries surged. Australia stagnated.”

Australian has another lesson for the US; the so called Pacific Solution.

Related; Harry Clarke has interesting comments on the Australia’s savings rates. The major obstacles to growth may be from the supply side; so the need for more immigration.

- Doing Business in Australia

Recommended; the most recent monetray policy statement from RBA, espcially the bit about the Capital Gains and Measures of Household Savings;

“The most frequently-cited measure of household saving is the net saving rate, which is measured as a residual by subtracting consumption and depreciation from household disposable income. On this measure, the saving rate of Australian households has been declining, and in recent years has been negative (Graph D1). This is lower than in many other developed countries, though not dissimilar to developments in the US. Adding back the amount deducted for depreciation (most of which is on housing) lifts the saving rate, though the position of Australia and the US remains below average. These conventional measures of saving are calculated from the household income account in the national accounts and do not include in income (and therefore saving) that part of the return on investments that comes in the form of capital gains. In the case of equity investments, for example, only the return that is in the form of dividends is included as income even though historically this has accounted for only about one-third of the overall return on equities.

In countries such as Australia where the composition of household investments has shifted from bank deposits and fixed income to equity holdings, this measure of saving has increasingly understated the true extent of household saving. In such countries a more meaningful measure of household saving is the change in household net financial wealth, defined as household financial assets (bank deposits, bonds, equities and unit trusts) less non-housing debt. This measure, which can be directly measured using fi nancial data, focuses only on financial wealth and abstracts from wealth in the form of dwellings and the household debt used to fund that investment in dwellings. To the extent that households borrow against dwellings to buy fi nancial assets (i.e. engage in housing equity withdrawal) the measure of financial wealth used here would be overstated, but on average over the 1990s the impact of this has not been very significant…”

Budget Support – Another Passing Fad in the Development Community?

OECD has made an ‘independent’ evaluation of development aid delivered in the form of ‘budget support’ (currently some $5 billion or 5 % of all aid)- as opposed to project aid;

“The evaluation points out that when a developing country’s government has the political will to reduce poverty, budget support can be an effective way for donors to deliver aid. Overall, it has helped to strengthen the relationship between donors and developing country governments, and encouraged better coordination between different donors. It has helped to strengthen planning and budget systems, making them more transparent and therefore accountable. It has also helped to prioritise areas of expenditure that target the poor like health and education.

The team of evaluators found no clear evidence that budget support funds were, in practice, more affected by corruption than other forms of aid.

They noted however, that donors should be prepared to better analyse political risks and gauge support for poverty reduction by a government. In some cases, the evaluation found that political risks had been under-estimated by donors.

While there were increases in expenditure in areas such as health and education, any increase in the incomes of the very poor is not yet evident.”

My Take; Every now and then development practitioners need compelled to reinvent themselves and delivering aid through ‘budget support’ may be fashionable way to fight poverty with the rhetoric of country ownership and predictability of aid. My worry is that this might be pushed too far without realizing that budget support is not a panacea to the deep rooted problems of the developing world. People in international institutions will find justification for anything their bosses tell them with fancy equations and econometric jargon. Look at this publication- Budget Support As More Effective Aid?. This book reminded me of Steven Pinker’s book Words and Rules- where he looks at irregular verbs from every imaginable angle of scholarship. The publication looks at budget support from every imaginable angle available to an economist. Then there is also the issue of fungibility which will always remain in the closet.

Related Links;

- Owen has a related post at CGD

- Managing Volatility and Crises: A Practitioner's Guide

- Are donors to Mozambique promoting corruption?

- Earlier related posts; World Bank and Dictators, Fighting Poverty with the Espresso Book Machine, From the Coffee House to the World Bank - Institutions and Development, ‘Fearful Pig’ is resigning as the President

Politician Proof Policy

Given the nonsense that you often hear in the development circles, the following paper by James Robinson is a breath of fresh air.

“In this paper I discuss the nature of the political constraints that the World Bank faces in delivering basic services to the poor. The main problem arises because the Bank has to work through domestic governments which have political aims different from helping the poor. The conceptual approach attractive to economists and central to the WDR 2004 is the notion of politician proofing. Given that political incentives derail good policies, how can those policies be politician-proofed? I argue that evidence and theory suggests that such an approach is ultimately futile, basically because we simply do not understand the relevant political incentives. I discuss alternative policy strategies and conclude that what is required is a much more fundamental assessment of what type of political equilibria deliver services to the poor. As I illustrate with the case of Botswana, once the political equilibrium is right, everything goes right and politician proofing is redundant.”

As Robinson says;

"It's basically all a matter of politics, which is something that most economists can't see. There's a tradition in economics of thinking of politics as a kind of irritation, which is fundamentally misleading as a vision of society. You can't have a politics-free economics. Of course, political scientists would like to have an economics-free political science, which is not very interesting either."

Robinson has co-authored a book with Daron Acemoglu, ‘ECONOMIC ORIGINS OF DICTATORSHIP AND DEMOCRACY: Economic and Political Origins’ in which they argue;

“..democracies often collapse in highly polarized societies in which a pronounced gap exists between rich and poor. When the wealthy control the government, they enact policies that perpetuate their own dominance, but when the poor gain power they tend to put extremely radical programs in place such as land reform or income redistribution, arousing violent resistance on the part of opposition groups.

The United States avoided this problem because there was egalitarian access to land and economic opportunity, and thus less incentive for one group to try to monopolize political power. But in Robinson's view, the stability of the American government was achieved as the result of a trade-off, rather than through any superior moral qualities….The United States solved some of the problems that Latin America faced by disenfranchising African Americans, who had almost no political power in the South until the Voting Rights Act of 1965,"

Unlike in Botswana, look at what’s happening to the neighbor Zimbabwe where an ageing dictator is bringing the country down the drain; inflation is now close to 1000 percent and 80 % unemployment. Imagine politician proofing policy in Zimbabwe.

Related; Acemoglu talk discussing institutions and development.

Don’t Worry, Everybody will get a chance to be rich

World Bank blogger Ignacio comments on a speech of Edward Prescott, 2004 Noble laureate in economics.

“…economic integration would be the main driver for growth and development.

For example, according to Prescott, the original European Community countries were able to catch-up with the US in the second half of the 20th century because they became a free trade club, as the US had done before. The reason why Latin America is not catching up would be that it has not adopted this US/EU type free trade club.

In his optimistic conclusion, Prescott forecasts that in the long term the whole world will catch up with rich countries, which will continue to double their living standards every generation. This forecast is conditional on all countries becoming economically integrated, and on all of them maintaining economic sovereignty. He sees the European Union expanding (including Turkey), and a functioning NAFTA, with India and China being big enough to constituting a trading club in themselves and the rest of Asia maybe becoming a trading club.”

Prescott has been talking of about wealth of nations for some time; see the paper Changes in the Wealth of Nations. In an interview, Prescott says;

“I think the question, "Why isn't the whole world rich?" is the most important question facing economists. I think we've learned that just accumulating more capital—that is more machines, factories, and roads—is not sufficient to become rich. Accumulating more human capital, as well, is not sufficient either. Both are important and essential but, given the economy wide productivity parameter, these factors of production will be accumulated. As I see it, what we need is a theory of this parameter, and I expect that the rules of the game a country sets up will account for the big difference in this number across countries.”

Related Links

- Time Inconsistency

- A Nobel for Real Business Cycles

- The Transformation of Macroeconomic Policy and Research-Nobel Lecture

- A Brief on the 2004 Nobel Prize Winners from the Economist

Aid Olympics

Other Free Reads from the latest Economist;
- A guide to womenomics
- Top Exporters
- Quality of Living
- Profile of Alan Lafley, Head of Procter & Gamble
- Islam in Europe
- Race and Medicine
- The language business in China
- The last conquest of Jerusalem
- The perils of literary realism in the United States
- The return of populism in Latin America

Going to Harvard Can Lead to Rising Inequality

There is a great webcast of a discussion on the Challenges to the American Prosperity at Harvard; Lawrence Summers moderated the discussion between Gregory Mankiw and Gene Sperling. I have tried to give an ‘index’ for the issues discussed below.

Just a couple of observations;
- Sperling was very emotional on the issues discussed where as Mankiw appeared a little bit of ‘don’t worry be happy’ type.
- Mankiw’s point of assistance to be focused on the person rather than place is a very important issue often politicians fail to accept, most of the time willingly
- Sperling urged for the need for political compromise in the light of the value choices we need to face and accept the fact that money is fungible.
- As usual Summers was at his best, posing difficult questions for the both of them
- On global poverty issues, Sterling's point about resources do matter (for eg. in education) was important and we tend to forget too often while getting carried away with Easterly type discussion on incentives, institutions and corruption.

I would have liked them to have discussed the thesis put forward by Benjamin Friedman in his recent book, Moral Consequences of Economic Growth;

..the idea that I advance is that when the broad bulk of a society's citizens are enjoying an improvement in their material standard of living, that is the circumstance under which the society is also able and likely to make progress in other dimensions of its life, and dimensions that Western thinking, at least since the Enlightenment, has regarded not only positively, but positively in explicitly moral terms…

If what matters for these purposes is not just how rich a society is but the sense of forward progress, or lack thereof, of the broad bulk of the citizenry, then no society, no matter how rich, is ever immune from seeing its basic democratic values at risk.

Now this is a very sobering thought today, especially for Americans. As I hope people are aware, we have just finished what I think will turn out to have been the sixth year in a row in which the median income in the United States failed to keep pace with inflation. The total GDP of course is expanding very nicely. But the fruits of the gains from that increased production have been sufficiently skewed over this period that the average American's living standard is not even keeping pace with inflation. We know that that was true through 2004….

Now this is a very daunting and, as I say, sobering thought, because not just in the United States but in many of the advanced democracies in the past, periods when people have lost the sense of forward progress have translated into either no progress or real retreat, often with disastrous consequences, in many of the dimensions of moral character that I have just described

An Incomplete Index to the Forum;

The Crimson / 'The Fearful Pig' / The Pro-Growth Progressive or 'Growing Together’ / discounting pain game / trade overblame game / sky is falling party / don't worry be happy party / humility Party / Graduates vs. Oligarchs / Dividing the Pie / Social Security / Mankiw / Ricardo's Difficult Idea / assotative mating / Pigovian tax / Edward L. Glaeser / Global Poverty/ White Man's Burden/ Global Campaign for Education/ Centre for Universal Education /
World is Flat/ EITC and Sperling

By the way the title refers to the issue of assotative mating that Mankiw highlighted in the discussion; people come to Harvard and get married to someone who studied at Harvard (both Mankiw and Summers are married to Harvard graduates) and both get very high wages, thereby rising the income inequality as a whole.

Multi-media Links;

-A discussion with Sperling and Friedman at Centre for American Progress.
- Book forum web cast on the book Moral Consequences of Growth at IMF
- The recent Harvard discussion

From the Coffee House to the World Bank - Institutions and Development

Over the weekend I watched a conference series held at Princeton University in honour of Peter Bauer, a pioneer in the field of development economics. His view of development could be characterized as;

I regard the extension of the range of choice, that is, an increase in the range of effective alternatives to the people, as the principal objective and criterion of economic development; and I judge a measure principally by its probable effects on the range of alternatives open to individuals.

(quoted in Amartya Sen, Development as Freedom, p.290)

I liked his critique of the prevailing economic development theories and highlighting the significance of non-economic variables for development. His colleague and friend Basil Yamey explained;

Peter emphasized the importance for economic advance of the attributes, attitudes, and mores of people and groups. He had observed this at first hand in his studies of the multiethnic societies of Malaya and West Africa…

Peter often spoke about a small but telling example. In Malaya he examined the records of the output of individual rubber tappers on a number of plantations. He found reliable records for several estates running over longish periods. He found, consistently, that Chinese tappers produced more tapped latex than their Malay and Indian counterparts. Yet, apart from their ethnic origin, the tappers were otherwise about as identical as one could hope to find for a sort of laboratory experiment in economics. They all used the same simple tools; and the co-operant factors of production were the same. They had virtually no formal education.

In the same context, Peter also sometimes mentioned a rather different example, with the same implications. During the troubles in Malaya, Chinese bandits betrayed their ethnic affiliation when they sacked a village. They were far more thorough and efficient than other bandits when they carried out their work. The difference in performance was visible.

On foreign aid, Peter declared “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.” And he was very critical of population control; worries about population growth reflect a patronising view that the poor are incapable of making sensible choices about having children.

Chris at The Austrian Economists blog who attended the session has some advice for budding Austrian economists;

If the opportunity presents itself, the younger generation of Austrians should observe the way Kirzner carries himself. He is the consummate scholar. Kirzner's ability to articulate Austrian ideas and engage the likes of Amartya Sen on these issues serves as an important example of how to interact with those in the profession who aren't necessarily sympathetic to Austrian insights. I have had the opportunity to see Kirzner on several occasions and have learned important lessons each time from simply observing how he presents his ideas and interacts with others.

Some links to best of the sessions from the conference (requires broadband, 300K);

Basil Yamey: "Peter Bauer and Development Economics"

Chairman: James Buchanan; Speakers: Basil Yamey, Amartya Sen, Israel Kirzner: "SESSION 1: Resources? Institutions? Attitudes? - How Does Development Happen?"

Chairman: Amartya Sen; Speakers: Speakers: James Buchanan, Douglass North, John McGinnis; Discussant: Mary O'Grady: "SESSION 3: From the Coffee House to the World Bank - Institutions and Development"

Chairman: Herbert London; Speakers: Allan Meltzer, Enrique Ghersi, Razeen Sally; Discussant: William Niskanen: "SESSION 2: 'Seek Ye First the Political Kingdom' - Democracy, Equality and Development"

Milton Friedman and Thomas Sowell: "Peter Bauer and his Ideas"

Related Links; A Tribute to Peter Bauer at Institute of Economics Affairs, Pioneers of Development, Frontiers of Development Economics, An interview with Peter Bauer and Israel Kirzner.

Accounting and Condoms from the World Bank

The World Bank likes to call itself the Knowledge Bank. The wealth of material on its website is truly amazing. From accounting to sustainable development to condom procurement you will find material on its website. Below you will find some links from the World Bank to prove to you it truly is a Knowledge Bank.

International Accounting Standards - A Practical Guide

In response to the global financial crisis in 1998, an initiative was launched to strengthen the global financial structure, and, although the International Accounting Standards (IAS) have been in existence for some time, it is believed such initiative will help promote transparency in financial reporting, and acceptance of its wide range of international best practices. This publication provides guidance, and summarizes each IAS, while each chapter contains a simple case study, emphasizing the practical application of key concepts in a particular standard.....A conscious decision has been taken to focus on the needs of the executives and financial analysts in the private and public sectors who might not have a strong accounting background...

Beyond economic growth : an introduction to sustainable development

This book is designed primarily to help readers broaden their knowledge of global issues, gain insight into their country's situation in a global context, and understand the problems of sustainable development--both national and global. Because development is a comprehensive process involving economic as well as social and environmental changes, this book takes an interdisciplinary approach. It attempts to describe and explain the complex relationships among various aspects of development, including population growth, economic growth, improvements in education and health, urbanization, and globalization.

Condom Procurement Guide, Vol. 1 of 1
I don�t know why it is identified in the working papers section.

Related Links: Tyler Cowen commented recently about Sebastian Mallaby's book on Wolfensohn referring to it as the best book on World Bank. See also these two reviews of Wolfensohn�s legacy; one by Kenneth Rogoff and the other by Jagdish Bhagwati.

More of This? No, thanks.

Instapundit has a link to an "amazing" story about the IRS:

"In a program intended for employee development, administrative costs exceeded tuition paid by almost two to one," said Max Baucus (Mont.), the ranking Democrat on the Senate Finance Committee, which oversees the IRS. "As Congress considers the IRS budget for the upcoming year, we must be confident that the IRS is using its money responsibly."

(I say "amazing", since I don't find this kind of waste out of line with my expectations, but simply fascinating in the numerous and varied ways that the government can find to make a mess of even basic functions.)

An internal employee program of the IRS spent 60% of its funding on administering the program, turning away people seeking to use the benefit because of a lack of funds. Of course, these benefits are often considered part of an employees's overal compensation package -- something they consider having when weighing the value of a federal job versus, possibly, the private sector.

This should be a reminder for those who suggest that the key to fixing efficiency problems in the private sector is...more government.

The fact is that in health care, the private sector is often bloated and bureaucratic, while some government agencies - notably the Veterans Administration system - are lean and efficient.

I think it wouldn't be a stretch to believe that the efficiency of a governmental organization decreases as the number of people it is required to serve increases. In fact, I might suggest that this is one of the reasons that the VA can be considered "efficient' (relatively speaking). What I find more interesting, however, is that the VA is the third largest civilian consumer of energy in the federal government. They are behind the USPS, which delivers mail to everyone (ostensibly) in the US, and the DOE, which is the central agency for energy matters and thus concerns everyone again. The VA used 48.6 billion Btus compared with the USPS's 78.5 billion in 2002; this loosely compares the hospitals caring for those who fall under the VA's purview versus delivery vehicles to get mail across the 50 states . How would that ratio change if the VA suddenly had the role of administrating the health care for everyone in the US? Or even if their current number tripled?

The fact is that in health care, to avoid the loss of clients fed up with bad service, the private sector would have motivations to monitor its effciency, even if it wasn't perfect at it, while no government agency -- saddled with the potential care of every person in the US -- would have any reason to count "efficiency" among its primary concerns.

Bono Yet to End Poverty, Still Wears Sunglasses Indoors

Despite credentials clearly polished enough to have been considered for the World Bank's top post, not everyone agrees that his view of free trade economics and countries like, say, Ghana, are the best for all involved. Including someone from Ghana:

Rock stars and charities can be powerful advocates for good causes, and they generally have good intentions - but in many cases their lyrics do not genuinely rhyme with the silent hum of the very poor they seek to protect. Their economics are just plain wrong. They ignore history, peddling the misguided belief that poverty, famine and corruption can be solved with foreign aid, debt relief and other policies that have already failed Africa.

One pillar of their current campaign is to eliminate farm subsidies in western countries, a noble goal which indeed would help to achieve a level playing field for agricultural producers around the world. Yet this view is rife with hypocrisy: the same organisations promote subsidies (what they call "fair trade") for farmers and businesses in poor countries to shield them from the effects of competition.

Coldplay frontman Chris Martin has said that Ghana's rice, tomato and poultry farmers need to be protected from cheap imports. Yet the problems of Ghana's farmers lie elsewhere: they and other entrepreneurs are stifled by punitive tax regimes and the high cost of capital, not to mention our disarrayed land tenure systems which lead to low crop production.

Here's a particularly interesting bit:

Protection for local producers also means that African countries trade very little with each other, as illustrated by the World Trade Organisation's 2001 statistics. Africa's share of intra- and inter-regional trade flows to western Europe alone was 51.8pc, while it was a paltry 7.8pc within Africa.

The author's suggestions for change?

The solution to all that ails us is not aid, debt relief or "fair trade". It is to adopt institutions to harness the entrepreneurial spirit that exists in every African country, to enable Africans to trade with each other and anyone else in the world.

Establishing property rights would be an important first step; an effective, transparent and accountable legal system is another. Combined with respect for private property and the rule of law, these broad reforms would encourage entrepreneurship, trade, innovation and even environmental protection because they empower people - rather than the politicians.

Choice Under Uncertainty: Policy Selection

Edmund S. Phelps of Columbia writes in the Bangkok Post:

There is a movement in medicine to require that applications for licences to sell a new drug be evidence-based. By contrast, trained economists view their discipline as having already achieved this scientific standard. After all, they express their ideas with mathematics and arrive at quantitative estimates of implied relationships from empirical data.

But economics is not evidence-based in selecting its theoretical paradigms. Economic policy initiatives are often taken without all the empirical pre-testing that could have been done.

I'd suggest extending it even further. A good deal of all policy is put into place without sound evidence to suggest that it really might work. I think it comes from a tendency to believe (rightly or wrongly) that some initiative is "unique", or at least very unlike anything that has gone on in the past. Further, explaining that generazliations from a similar, though not perfectly analagous, policy enacted elsewhere are applicable despite cosmetic differences would be, for most people, less thrilling than whatever's on CSPAN-3 at 4am.

I've remained rather agnostic on the whole Social Security reform debate because I've heard a good deal of sound arguments from both the pro- and anti- camps. I have to balance my own preference for returning decision making back to the individual with the reality that making personal accounts "add-ons" is really just another expansion of a system I have grave concerns about already. That said, neither side is swaying me with actual evidence supporting its theoretical arguments (or refuting the other side's).

My suspicion is that this is where status quo bias in most policy decisions gains a good deal of strength. No matter how messed up a system or program is now, the chance that it could be made even worse will bring out in force those people for whom things are "not too bad". It's hard to get people into the streets when a lot of the beneficiaries of a change either don't understand the change, aren't convinced of the change, or, frankly, don't exist yet. Why, to some people, are future benefits of intangibles enough to cover the present costs of things like war when the potential, tangible future economic growth of generations is not enough to restrain economic interference and protectionism?

Just Putting a Toe into the Social Security Water...

I'm four-sqaure behind Kevin's policy prescription. (And I'll here note that a similar notion was advanced over at Division of Labour some days later. Advantage, Kevin!) I also, unfortunately, agree that the idea simply has no political legs. Seems to me there's going to be some tiny marginal change coming, one side claiming it a resounding victory for the ages, the other side calling it the onset of national collapse. And the world will go on.

That said, I did want to toss out one notion that I think is pertinant. Whenever the idea of SocSec comes up, someone invariably jumps to point out that the real problem is, of course, US national savings rates for individuals. Here's an example from Steven Landsburg:

In other words: If you want to address the Social Security crisis of the future, you must adopt laws that encourage saving in the present. There's nothing else you can do.

Well put, Steven. And a fair point. But how do we address the fact that SocSec itself seems to be a considerable contributing factor to the reduction in private savings? Might I suggest, it this case, that a reduction in government control, rather than a reliance on ever-accreting legal regulation might be a sound policy choice?

LATER... Just to clarify, this is an example of the "history provides no counterfactuals" kind of argument. It seems odd to me to argue that the low savings rate of people in the US is of primary concern, knowing that the very presence of guaranteed retirement income almost certainly reduces people's incentives to put additional money aside on their own. If we are interested in having a system that provides a measure of safety for those who were unable to save adequately, or face a circumstance that forces expenditures at a rate faster than they -- or anyone -- had anticipated (catastrophic health care issues, for instance), then perhaps the fact that this system drive people towards under-savings should be addressed at the source, rather than looking elsewhere for ways to correct the problem.

Restaurant Prices and the Minimum Wage

Just received notice about an interesting Chicago Fed working paper, and thought I'd pass it along."The Minimum Wage and Restaurant Prices" by Daniel Aaronson, Eric French, and James MacDonald has the following abstract:

Using both store-level and aggregated price data from the food away from home component of the Consumer Price Index survey, we show that restaurant prices rise in response to an increase in the minimum wage. These results hold up when using several different sources of variation in the data. We interpret these findings within a model of employment determination. The model implies that minimum wage hikes cause employment to fall and prices to rise if labor markets are competitive but potentially cause employment to rise and prices to fall if labor markets are monopsonistic. Therefore, our empirical results appear to provide evidence against the hypothesis that monopsony power is important for understanding the small observed employment responses to minimum wage changes.

I'll reserve judgment until I can read the whole thing.

North Korea Free Trade Zone

Marmot's Hole has tranlated an article about North Korea's free trade zone:

The Chinese tourism bus passed over the border bridge. �I�ll have to give North Korean girls a look tonight,� said a Chinese from Shanghai by the name of Kong. The middle-aged Chinese men who made up most of the tour group looked like they were enjoying themselves. After the bus out of Yenji, China entered North Korea, it followed a rough road for about two and a half hours. Along the way, we passed haggard-looking farmers and half-dilapidated wood-board houses. Our destination was the Rajin-Sonbong Free Economic and Trade Zone�s Emperor Hotel.

There more in his post. For those of you who want non-work safe material, check out his post on Japan.

Computers for Free & No Accountants!

Looking up a quote from Marx, I came across worldsocialism.org's proposals for economic reform. And not a moment too soon, because now I know the truth:

The time has come in the history of our species when it can get everything it wants for free. Yes, you heard me right, for free!

Technology has evolved to the point where there is no reason why food, clothes, housing, medical care, education, transportation, computers, books, CDs, digital connections, cannot be freely available to all human beings on the planet. It is time for such a change.

You say that, given their current human capital, billions and billions of people cannot possibly afford all these goodies? Why, didn't you know that capitalists maximize their profit by wasting resources coordinating private plans? Why, all we have to do is eliminate the coordinators!:

There are many other examples of employment which is necessary for the profit system but would be immediately redundant in a socialist society of common rather than private ownership and production for use instead of for market sale. The list is a long one - legal workers, chartered accountants, cost accountants, estimators, valuers, claims assessors, underwriters, brokers, taxation workers, marketing and sales personnel, advertisers, social security workers, cashiers and check-out assistants, police, prison workers, security guards, charities, armies, navies, air forces, armament workers, defence establishments etc.

Thankfully, I do not have to live in a world where these views are serious contenders for popular ideology.

Russia's Putin-Duma: Welfare to be Paid in Cash

One of the major barriers to economic reform in Russia is the in-kind welfare benefits given to veterans, who are generally perceived as deserving. These in-kind benefits are housing, medical care, public transportation passes, etc.

The Russian system is geared not just to finance such welfare benefits but to directly allocate and provide them. One result is a two-tiered system: 1) a privately-run Western system of medicine ("American doctors"), new apartment buildings, and Mercedes for those young, adaptive, and perhaps unscrupulous, and 2) a publicly-run network of 1930's-1970's quality medical system, decrepit apartment houses, and creaky transportation options available to the State-dependent. In my opinion, almost everybody tacitly recognizes that the latter are horrendously inefficient and welfare-reducing (subject to bribery, graft, fraud, ineptitude, rudeness, dirtiness, etc.). But these systems are not wholly independent; you can't sustain a sea of prosperity within a ghetto, and the public systems are holding back the advance of the private system...

Hence, I applaud the Putin-Duma's initial attempt to create a schism between finance and production in welfare, in the hope that the public systems can eventually be absorbed into a quasi-private sector:

The new system will also increase transparency, and crack-down on those who use fake ID to abuse the system.

But many genuine claimants see losing their automatic benefits as an insult. Millions of Russians are entitled to state help in recognition of their role fighting or working for their country. They see that as a mark of respect.

Some pensioners say they will suffer serious financial implications...

''Our benefits have been paid for by the blood of our fathers - by our own hard labour," her letter read.

"Keep your paws off them, or face the curse of the nation. You still have time to change your mind - use it! Signed - Lidiya Malokeeva, Murmansk, a victim of your repressions."

Analyst Stanislav Belkovksy believes opposition to the reform is as much emotional as economic - a hangover from Soviet times.

''For this nation, the role of the state as a father and mother is of paramount importance," he explains.

"It's much more important than any money, and especially in the sort of amounts suggested by the new law."

I tend to perceive such moves as sacrificing Russia's poor at the altar of hope for its future generations. Russia's government is no longer letting them get in the way. Some--probably many--invalids, veterans, etc. will find their purchasing power severely eroded, as has happened with the disproportionate increases in the regulated prices of public transportation. As a result, how will the poor respond? Nobody is suggesting that they will starve to death, but only those with children and grandchildren they haven't alienated will probably see little difference in living standards.

Congressman Moran: CUT SPENDING!

As a resident of the district represented by Democratic Congressman Jim Moran, I've just received an email from his office. The email includes a survey with the following multiple choice question:

1-Which statement best fits your views on our country's fiscal situation?

The President's tax cuts should be fully repealed in order to reduce the deficit and pay for the war on terrorism.

The portion of the President's tax cuts that benefit the wealthiest two percent of Americans should be repealed in order to reduce the deficit and pay for the war on terrorism.

We should keep the current tax cuts intact and continue deficit spending required by the war on terrorism.

We should cut taxes further and continue even more deficit spending required by the war on terrorism.

Notice the missing option: I would like for you to cut federal spending on everything but defense issues.

Iran Learning Lessons From China?

Interesting read from Global Insight on the potential reforms in Iran.

Some prominent conservative leaders not only support domestic economic reforms, but are also interested in increasing Iran�s economic ties with Europe. There are also indications that �pragmatic� conservatives are interested in reducing the tensions between Iran and the United States. To the extent that these initiatives will help improve economic conditions and boost living standards, they can help the Islamic regime enhance its domestic popularity. These developments give some merit to the economic thrust of Iran�s pursuit of the China model.

Is it possible to sustain an authoritarian regime with a liberal economy? Uncle Milty Friedman didn't think so. And I'm not sure China's really proving him wrong. That the political reforms are slower than the economic ones in China doesn't seem, to me, a refutation of the idea that economically free people won't ultimately start pushing hard for political freedoms as well; only that concentration on solidfying economic gains is often time-consuming and important enough that they take precedence. As people progress, and the ability to take some time away from working, I'd wager that we'll start seeing more pressure for reform in the political sphere in China (and, possibly, Iran).

Westernized Saudi Women at Work

Al-Ahram Weekly tells us that some Saudi women are overcoming rather high startup and transactions costs, and are heading into the workforce:

How does a man meet a woman at work in a country in which women are not permitted to drive; where women can only apply for an identification card with the permission of a father or brother; where women are required to remain covered from head to toe in public; and where the law prohibits unmarried women from sharing a room with people other than relatives?...

Salwa appears around the corner, hand outstretched, a 26- year-old Saudi Arabian woman, unveiled, relaxed and professional. Registering the baffled look on my face at her uncovered state, she rushes to explain: "As you can see, all windows and doors are made of glass; it would be ridiculous to spend the day taking your abaya on and off depending on who comes into the office," she explained...

Her initial fears of not being accepted at work turned out to be unfounded. "The opposite turned out to be the case, in fact; my most conservative, bearded colleagues -- the ones whose abaya -wearing wives walk behind them on the street -- are the ones who appreciate my work the most."

Women like Salwa are still an exception in the conservative kingdom. Women make up half of the population, and more than half of all high-school graduates are girls, yet women represent only five per cent of the workforce, most of whom work in the teaching profession. But this trend is increasing...

This month, the Chamber of Commerce in Riyadh launched a special women's department, the aim of which is to provide support for Saudi Arabian business women....

During the time of the petro-dollars in the 1970s and 1980s nobody had to work. But today, where even the land of the black gold is in the grips of unemployment and wages are sinking, more and more women are forced to work to support their families....

As they say, read the whole thing. Even with recent cultural adaptations, this all sounds too optimistic to me... but one can hope.

Slovakia's Economic Reforms

This morning, while watching the market absorb the latest employment numbers, I perused some recent issues of Institutional Investor. The February edition talked about some of the reforms coming out of Slovakia recently. The list is fairly impressive. From what it says in the article, other countries in the region have taken notice and Slovakia's actions may drive reforms in the region. The results have been good so far:

An economic turnaround is now evident. In 2002, GDP grew by 4.4 percent--twice the rate of that in the Czech Re public--and expanded by an estimated 4 percent in 2003. In 2002, Slovakia drew $3.7 billion in foreign direct investment--six times more than Hungary. From 1998 to the end of 2003, foreign investment totaled an estimated $9.3 billion. A hefty share of this investment is going into auto manufacturing, an industry in which Slovakia is emerging as the regional powerhouse, much to the chagrin of Czechs, Hungarians and Poles (see box, page 70). "Slovakia is becoming the biggest recipient of FDI per capita in the region," says Nora Szentivanyi, a London-based economist for J.P. Morgan Europe.

Most noted here in the U.S. has been the introduction of the 19% flat tax on individuals and corporation. Some of the others haven't received the same attention but are just as important. One is pension reform:

Yet another key economic shift under way is pension reform. Up until now, the pension system has operated as a state-run, debt-ridden, pay-as-you-go scheme, with all retirees receiving the same income. "Over the next three years, the system will basically reflect what a contributor puts into it," says Bank ING economist T6th, who follows pension reform closely. Moreover, the retirement age, which was 55 for women and 60 for men, has been raised to 62 for both sexes.

Beginning in January 2005 the state-run system will be supplemented by a second pillar--a privately funded system administered by foreign and domestic asset management companies, including financial firms and insurers. Of the 19 percent of an employee's income slated for pension contributions, half will go into the state-run system and the other half into the private system. Under the private system, money will be invested in three types of portfolios, ranging from a stock-heavy one more appropriate for younger contributors to a government-bond-dominated one for older people, with a more balanced mix of equities for those in between. Initially, at least, half of all funds must be invested in Slovak stocks and bonds, says Economy Minister Rusko, "because we want to strengthen the local capital markets."

To help pay for the transition, they have sped up privatization of state-owned industries. This aspect is particularly impressive, that is if they follow through, in that there are few restriction placed on minimum bids and country of origin of the bidders:

The government is spending about half the revenue from the privatization of state companies, or about $1.6 billion thus far, to help cover the transitional costs of pension reform. Privatization revenue is expected to rise sharply in the next few years because of the passage in August of yet another key economic reform. Previously, the government had to maintain at least a 51 percent interest in strategic enterprises, such as the fixed-line telephone, gas and electricity monopolies. Now up to 100 percent of those companies can be sold to the private sector.

The most closely watched prospective privatization involves electricity monopoly Slovenske Elektrarne, or SE. Slovakia has approached the sale of this strategic industry with more flexibility than its neighbors. For example, in the Czech Republic the privatization of electricity monopoly CEZ has stalled because the government was dissatisfied with the bids. "But there is no insistence by the Slovak government on a minimum price for SE," says Peter Mitka, the Prague-based lead manager for PricewaterhouseCoopers, which has been hired as the consultant for SE's privatization. "And most important, the government is neutral with respect to any bidder--whether Russian, German, French or even Czech."

These are great reforms to get through especially considering that the ruling government has such a small coalition:

The wonder is that the government has encountered so little opposition as it steamrolls ahead with painful reforms. The coalition of four center-right parties barely has a working majority in Parliament--only 78 out of 150 seats, including three fence-sitters who say they will support the coalition on a case-by-case basis. Issues such as abortion rights and the wiretapping scandal have threatened to tear the coalition asunder. "But most tensions in the government coalition have been due to noneconomic issues," says J.P. Morgan's Szentivanyi. "On the economic reforms all four parties strongly agree."

At the same time, the opposition parties are even more divided than the ruling coalition. The Movement for a Democratic Slovakia, the party of authoritarian former prime minister Meciar, still holds the largest parliamentary bloc--36 seats. But it is in decline, having fallen from 27 percent of the popular vote in 1998 to 19.5 percent in 2002. The center-left Smer, the party with the most public support in recent opinion polls, is uncomfortable with the notion of forming a government with Meciar and rejects outright an alliance with the Communists. Smer officials offer only tepid criticism of the economic reforms. Legislator Igor Sulaj, Smer's leading economic expert, worries that pension reform will force pension savings abroad because local capital markets are too underdeveloped. He calls for public projects to provide jobs in regions where unemployment is high. And, turning to the most controversial of the economic reforms, he decries the unfairness of the flat tax rate for allegedly benefiting only the affluent, but then adds, "We would like to see the flat tax rate introduced more gradually."

Hilton Root was a visiting professor last year at Pitzer College and, unfortunately, I missed the talk he gave us one afternoon on his work. However, somebody summed up an idea he presented which is interesting; the size of the winning coalition is important to economic reform. The Slovokian experience runs counter to this argument especially when one considers that the coalition is shrinking and not growing. I couldn't find any of his articles where he talked about this, but did find an interview with whom he worked to develope the idea, Bruce Bueno de Mesquita. He can explain it better than I:

Q: Why is that so?
A: To understand why countries reform their policies and institutions, we must understand the institutional context of political competition within sovereign nations. The rules by which a country determines its leadership will also determine how the economy is managed and in whose interests it is managed. The key to governmental responsiveness lies in part in the relationship between the selectorate - the subset of the population that chooses the country's political leadership - and the size of the winning coalition that keeps the incumbent in office. The size of the governing coalition will affect how different are the interests of the country's political leadership from those of citizens at large.

Incumbent leaders select and implement public policies that have public or private components. They can put everything into public policy that benefits everyone or into private goods consumed only by members of the winning coalition. They can also provide any mix of public and private benefits to their followers and to the citizens at large.

Q: What happens when the winning coalition grows in size?
A: Then the incumbent is able to offer less in the way of private benefits to particular members of the coalition. To ensure a focus on public policy, the winning coalition must be so large that its members can gain very little from private allocations because those allocations would have to be spread too broadly to be financially attractive. Challengers may come along to offer alternative policies in order to attract voters. Leaders must compete by offering the majority of the selectorate better policies. Policy-based competition in which ideas matter is characteristic of polities dominated by large winning coalitions.

Going back to the original article, it seems like the government had little choice than to enact reforms. More than anything, they were probably pushed into them by desperation than anything. Wages are below any of their neighbors and the countries has a corruption problem. This is something that often pops up when reform occurs; they had no choice; circumstances forced their hand. My guess is that Root and Bueno de Mesquita would argue that 'size of the coalition' enables a government to enact the needed reforms before the siutation gets to the point of pain.