Dutch Economist

Dutch Politics 2010-2012: Will the minority coalition weather the storm?

2012-01-31T14:07:00.000-08:00

Dutch politics hinges on compromise, consensus, and, courage. Now, in the Netherlands the political divide is worsening at an alarming rate. With the euro crisis shattering the European continent, and new budget cuts awaiting in the Netherlands, will the coalition weather the storm? Time or not the time for general elections?

On October 14, 2010, less than four months after the general elections, a new minority government took office in a country which at that time looked as politically divided as the Belgium neighbors; the Belgians voted that same week in June 2010, but only last month installed a new coalition after a record breaking formation time of 536 days. Dutch compromises on delaying reforms in pensions and the housing market brought quick consensus based on courage to team up with the big election winner on the far-right.

In the Netherlands, the current minority government, led by prime minister Mark Rutte, has only 34.7 percent of the seats in the Parliament. 20.6 percent comes from his conservative-liberal party VVD, and the other 16 percent from the centre-right Christian party CDA. Power depends decisively on support of Geert Wilders' far-right party PVV, which holds 16 percent of the votes. Taken together, the three parties have 76 of the 150 seats in Parliament, the smallest "majority" in Dutch political history.

Wilders' PVV made a Pact - Het Gedoogakkoord - with the coalition parties VVD and CDA to agree on core government proposals including 18 billion in austerity measures in return for stricter immigration laws. The Pact caused deep agony and almost led Members of Parliament of the CDA to become "dissidents" to blow up the coalition due to anti-islam stances. They kept their seats, but the ideological cleavages remained deeply seated. CDA chose to rule "for the country" to avoid an ungovernable situation (as in Belgium) which would hurt the economy and society at large. The political tides turned further on May 23, 2011 when the Provincial elections were held. The Pact lost the fabricated majority in the Senate, hence requiring more compromises with the opposition. After shrinking in half during the 2010 election, the centre Christian party was punished even further for the Devil's Pact.

Now the most interesting part comes. Because of the euro-crisis, this minority Pact may be broken in the face of new austerity measures. Will the minority coalition weather this storm after the quickly fabricated agreement in 2010 which left deep scars? VVD, CDA and PVV need to renegotiate and find compromises soon; if they fail, new elections may come.

In a nutshell, this is what is at the table these upcoming weeks. Prime-minister Rutte of the VVD is optimistic to slash the size of the government, freeze salaries, seek labour market reforms and avoid tax increases. CDA wants more social security, taxes for the rich, and keep spending on foreign aid and education programs. PVV tries to delay pension reforms and aim to stop any spending related to religion or to fund projects outside the country.

In the most recent polls, the 'communist' or far-Left, anti-bankers SP party may turn out to be the big winner, and could even become the biggest party. It has never been part of the government - this job often left to the centre Socialist PvdA - and to most supporters of the current government, the SP is a nightmare. Hence, the VVD cannot risk losing the prime-minister and hates the idea of more power to the left; the CDA, without a leader, is crushed, stands at a historical low in the polls and needs time to recover; the PVV and Geert Wilders also lost voter's confidence due to misunderstandings about giving-and-taking in the Pact.

No, storms pass and can leave some wounds - mostly from theatrical quarrels - but new elections at this moment are catastrophic for the government supporting parties, and "for the country", and the anti-bankers of the SP may then occupy the government - which in official forecasts will destroy jobs and increase the government debt. Whatever happens, the occupiers have to wait much longer and hit the streets sooner than later if they want change. Wait and see how strong the minority really is. We think the coalition is here to stay.

Dutch export is falling... recession looms

2011-12-12T02:40:00.000-08:00

Export volumes from the Netherlands declined in October by 2 percent compared to last year. According to the Central Bureau of Statistics this is the first fall in exports in two years. Moreover, import volumes dropped 3 percent. Especially trade outside the EU was hit hard. Again, as we argued last month already, these are just other signals that Holland is in a new recession.

In addition to the fall in trade volumes, the terms of trade in Holland are weakening. Prices for exports and imports rose by 4.2 and 5.2 percent respectively compared with last year. This is one of the sharpest falls in the last decade. In the meantime, the number of bankrupcies is rising and approaching also a decade high, although in relative terms the absolute numbers are very small (e.g. 610 in November 2011).

Finally, due to the lower growth prospects (well, we don't expect growth actually), the government which is already cutting 18 billion euro is expected to cut an additional 5-10 billion euro. Rumours say that the mortage tax benefits are at stake (which would have a dramatic impact on the housing prices), health premia may rise (which could lead to protests, because they are already very high and affect the poor the most), unemployment benefits will be shorter or maybe foreign aid and the cultural sector see some declined in the subsidies, something we forsaw in April, in how to cut your budget deficits.

Time to legalize?

2011-12-07T04:48:00.000-08:00

"Clearly, prohibition does not work" is the key message of Dutch Economist Jan van Ours. His article "Time to legalise cannabis" featured this week on VOX, a policy portal of the highly regarded Centre for Economic Policy Research. In the Netherlands alone, net income gains for the government are estimated between 400-850 million euro a year (Ministry of Finance 2010, Boermans 2010).

Imagine now if the EU legalizes cannabis and tax it like cigarettes...

To highlight some points made by Prof. Van Ours, cannabis use seems not very addictive. Many people around the world have tried it, only few use it regularly. Moreover, health effects of cananbis usage are modest and appear only negative among heavy users.

Although smoking cannabis is prohibited (and is severly penalized in many countries), people continue using it. If we legalize cannabis then it would 1) raise tax income, 2) elimnate arrests (no more "innocent" people behind bars, 3) remove the black market and its associated harms (e.g. voilence and corruption), 4) reallocate criminal justice resources, new priorities, 5) improve quality and choice for consumers and, 7) better control (e.g. youth prevention) (see Caulkins et al., 2012). Still, one big worry is that under legalization, cannabis prices drop which is likely to increase consumption...

There are two responses. First, the above arguments clearly show that legalization benefits outweight the costs (possible health problems). Second, increased consumption levels are mitigated by two factors: elasticity and taxation. The good news is that cannabis consumers appear not very price sensitive, meaning that a drop in prices will not affect demand too strongly. In addition, the drop in price leaves much room for a value-added tax, so the goverment can profit.

AAA status for Rabobank is history: no superbanks left today and nothing is risk free anymore

2011-11-30T05:00:00.000-08:00

Today Standard & Poors announced their new ratings for financials. The Dutch cooperative bank Rabobank was the only bank in the world with a triple A status and now has lost this status. Rabobank now has a AA status. Other Dutch banks like ABN Amro and ING have an A rating.

Still, Rabobank is world's highest rated bank. Moody's still gives the bank a "AAA" status, and at S&P, Rabobank is the only bank in world with an AA status. However, it was the only bank that was downgraded today by two notches, a painful gesture.

The CEO of Rabobank, Bert Bruggink reacted mildly to the news: we saw this coming, they simply changed the rating system in such a way that its impossible for financials to receive a triple A status. S&P does not only look at the bank itself but also at its location/environment (euro zone). "Nothing is risk free. Even the best countries prove not to be risk free. In that respect I think S&P's conclusion is a right one," Bruggink said. So, it seems S&P acknowledges the deep troubles in the euro zone and is adjust bank ratings for the well-being of other local banks. As Reuters explains: "[The'] S&P's new ratings method puts more emphasis on the health of the banking industry in the countries where the banks operate and reduces the implicit support they get, as countries have said they are less likely to bail out banks in the future."

37 banks got downgraded in a single day. Big American financials like Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo were hit. Other big fishes like Bank of China, Barclays, HSBC and Royal Bank of Scotland also dropped in status at S&P...

Completely save banks are history and there are no superbanks left today. Risks in the financial sector are higher than ever before and the rating agencies fear contagion. Nothing is risk free anymore, not even your savings at the former Dutch "superbank" ... Actually, according to S&P Rabobank has a "very strong capacity to meet financial commitments" and its implicit median probability of default over the next five years is 4.2 percent; save enough?

Is the Euro really doomed or are new Eurobonds an answer? Surprise!

2011-11-29T04:22:00.000-08:00

This week The Economist’s leader asks: “Is this really the end?” In the article they were refering to the inaction of European politicians that may cause a break-up of the euro and a subsequent global recession. So, is the Euro really doomed, is this fear justified or are there new solutions? What about a new type of Eurobond?

Germany, France, Italy, Spain and the Netherlands will benefit most!

Basically, the euro area is suffering from three illnesses at once, and the symptoms are connected to one underlying pain that is hard to measure: fear. First, interest rates on government bonds of various European government have spiked over the past months, reaching levels around “magic” 7 percent where debt payments may become unsustainable. Second, great fiscal austerity measures depress economic growth and destroy business and consumer confidence. Third, the access to wholesale funding market is drying up rapidly, almost at the pace we have witnessed during the Lehman Brothers collapse (when liquidity stop flowing). This increases stress on European banks who refuse to lend to each other and pulling away deposits from the peripheral countries’ banks. So, the financial institutions are under severe pressure to hold more capital and so liquidity is evaporating.

How to save the euro area? Well, one suggestion is a new type of Eurobond that may get the blessing of Germany... The German Council of Economic Experts proposed to “mutualise all euro-zone debt above 60% of each country’s GDP, and to set aside a trance of tax revenue to pay it off over the next 25 years.” Basically, as The Economist explains, this would mean a transfer union or nearly a fiscal union in Europe. Let us calculate what this plan really means and how it can be a solution to the euro zone crisis.

According to the IMF Statistics, in 2011 the total government debt as a share of total GDP in the euro zone stands at 78 percent (not bad after all in comparison to e.g. Japan or the United States with debt ratios of respectively 234 and 99 percent). In other words, the new Eurobonds will cover a package of debt obligations for various euro countries that total around 19 percent of the euro zone’s GDP.

Now the Dutch Economist calculates how the new Eurobond debt package actually looks on per country basis: What is interesting about this proposal is that using the IMF statistics, cui bono? Well, the countries that benefit the most are:

1. Spain

2. Italy

3. Germany

4. the Netherlands

5. France

How can this even be possible? Aren’t countries like Greece, Portugal and Ireland very excited about such a plan? Well, the difference lies in the size of the economy (overall GDP) and relative official debts. Surely, these peripheral countries have above average debt levels and will receive a nice mix of their debts with other countries where they will be proportionally overrepresented. However, given the that the listed countries (Germany, France, Italy, Spain and the Netherlands) have the largest GDP and debt levels above 60 percent, they will benefit the most in net terms.

Still, apart for who benefits there are many problems with a transfer union with combined Euro-debts. Just think about the moral hazard it may impose (but, this can be captured with direct taxing). Or, think about how unfair it is if Austria and Finland need to pay for Spanish and Italian woes. Maybe countries should be dropped before we impose the plan (e.g. Greece, who's offical and unoffical debt stats don't match). A long way to go, but the Dutch Economist consider it good news new plans are on the table...

Public Letter: The global war on drugs has failed

2011-11-24T05:08:00.000-08:00

To mark the 50th anniversary of the 1961 UN Single Convention on Narcotic Drugs, the Beckley Foundation published a public letter calling for a new approach in drug policy. Signed by a group of 60 major thinkers, this letter calls on members of the public and of Parliament to recognize that "improving our drug policies is one of the key policy challenges of our time."

See: http://reformdrugpolicy.com/partner/public-letter/

Dutch Economist translated the letter in Dutch/ Nederlands

http://reformdrugpolicy.com/wp-content/uploads/2011/11/Public-Letter-Dutch-version.pdf

A new recession in Holland?

2011-11-17T02:52:00.000-08:00

The Dutch economy is faltering. Entrepreneurs and business expect unemployment to rise and they have not been so pessimistic about this in decades. Now the Central Bureau of Statistics also shows that GDP fell 0.3 percent in the third quarter compared to the previous period. Are we moving towards a new recession?

In October 2011 unemployment was rising with 17.000 persons, which means now about 5.7 percent of the workforce is sitting at home looking for a job. Ironically, there are 133.000 vacancies waiting to be fulfilled, but this number is steadily declining and down from 206.000 a year before. Exports, the main driver of the Dutch economy, are hampering: the growth of exports is getting less, but still, the Dutch have one of the world's largest trade surpluses. On a yearly basis, the GDP grew 1.1 percent. So, unemployment is low, exports (and GDP?) grow, why all this trouble?

The euro crisis and complete loss of confidence. Add to this the minority government supported by the PVV of Geert Wilders who wants to re-introduce the gulden. Add to that the slow-down in growth which cuts into the government budget (less tax income) which means even harsher budget cuts (while they are already cutting strongly). Aging of the population exaggerates the government debt because health care spendings went mayhem. Add to this the very high household debt levels because of subsidies on housing loans; yes, Dutch citizen take advantage of this and overborrow. Add to that the deep problems in the education system (bad teachers, large classes etcetera) which are pushing productivity levels down in a slow, but painful pace.

Overall, although the statistics officially do not say so (tweaking stats is dangerous, see some dark magic in the US in 2008-2009, were two years later the recession turned out a few full percentage points worse, and came about one full quarter earlier than previously reported... oops) but the Netherlands is already in a recession

Clustering Statistics and Visualized Factor Analysis

2011-06-26T05:44:00.000-07:00

OK, here is a post that may dazzle you

Dutch weed banned for foreigners: Social clubs, Dutch Only?

2011-05-30T08:44:00.000-07:00

On 27 May the Minister of Justice and Security, Ivo Opstelten, launched his 'long awaited' plan to restrict foreigners from buying products at Dutch coffeeshops. The idea is briefly as follows:

Only Dutch residents can buy cannabis at a local coffeeshop only if they have a 'club pass'.

The idea sounds wonderful because it restricts the infamous Drug Tourists to visit the Netherlands and at the same time it limits the Dutch consumers to buy weed locally, so it would in theory cause less public nuisance. Yet, there are some decisive flaws in the proposed social club plan. These are philosophical, practical with respect to the implementation of the pass system and fundamental, in the sense that the policy sounds racist.

First of all, at a fundamental level, selling cannabis products in the Netherlands is illegal (red: yes it is) so who would want to have a personalized pass that informs the government that you buy such illegal products. Ontologically speaking, the pass system is inconsistent in two ways. The government explicitly does not enforce the law, what we call gedogen. With the pass system is seems 'legal' to buy weed. Also, the government is at war with the supply side (producers), so why now officially license consumers to buy illegally produced substances (a non sequitur) that are actively wiped out by the Cannabis Taskforce (DEA type?). Shouldn't they not also give certain producers a free pass to produce as a consequence?

More practically, how will this pass system look? The Minister said each shop can have a maximum of 1,500 members. This can destroy a large part of a shop's current customer base, hence, the new regulation may directly cause bankruptcy of several coffeeshops. Moreover, the shops that belief they can survive with a fixed max of 1,500 customers must incur fixed costs related to the pass system. This hassle is not only inconvenient, but costly, so will there be any government compensation to the shop owners?

A related issue is that currently the consumers do not want to end up in a government database where they are being marked as cannabis consumers. If there is no central storage location of the memberships of each shop, how can the government ever control the number of club passes handed out by each shop? Without centralized storage, a shop owner can easily claim to have only 1,500 members, but in reality have many more. Also, consumers can simply ask for a pass at each visit of a certain shop as long as there is no central registration (albeit this would in theory work only 'locally'). Here comes the kicker: would central registration of cannabis club members be legal once we account for privacy laws?

Once a coffeeshop has an established membership base, they cannot accept new customers. So, what selection theory would predict is that certain shops may attract very good customers whereas others attract bad customers. What this means in practice is that people living around certain coffeeshops may be better off, while other people living close to the bad coffeeshop will experience more nuisance. Outside the doors of the shops people can become anger by being discriminated against, because they are not allowed access to the "good shop".

Finally, the most frequent objection is now being handled at the Dutch Counsel of State, that is, the policy is inherently racist. A Belgium living close to the border and a few miles away from Shop A cannot buy there, but his Dutch neighbour can because he can lobby for a weed pass (in Dutch: wiet pas). The whole philosophy of the European Union is that everyone should have equal access to goods and labour opportunities, but now this idea will be scattered. The consequence is that A Tourist in Holland will now have to ask a certain Dutch person with a "wiet pas" to buy cannabis form him, because this good is already available at the local Dutch market. The latter will give an immense rise to local distribution networks (read: CRIME). Even more wasted money will have to be spend not only as we do now on the supply side, but then also at the newly created foreign demand side. The ban on foreign demand will not only take away a lot of business for the coffeeshops, but it will create a lot of business outside the shop.

As argued before, legalization would take away all concerns and even generate income for the government, up to 850 million on yearly basis.

How to cut your budget deficit

2011-04-13T13:06:00.000-07:00

How to cut your budget deficit and... how the Dutch try to do so with education

Today the Minister of Education, Maria van Bijsterveldt, announced that she will not impose a controversial raise of college fees. The plan was to raise the price of education for so-called "long term students", a plague in the Dutch university system.

Running a deficit means that money must be borrowed. The greater the deficit, the more the interest payments will be with increasing interest rates. When a government wants to cut the deficit, it can do so in various ways: a) reduce spending, b) raise tax income, c) stuctural adjustments, d) inflation and, the least painful of all: growth.

The Dutch government wants to get the finance in order and cut the deficit to the Maastricht Treaty's golden rule of maximum 3 percent of the government budget balance, even in times of Post Great Recession. Already, 6000 military employees will be fired, other government employees also face the Sword of Damokles, culture and as last month explained by the Dutch Economist Dutch Aid spendings are cut (only a minor slice of the cake), but now, like the police and the heatlh sector, education is saved. No, it isn't...

What the government did was to delay a penalty for students how are studying much longer than they are supposed. The poena for the so-called "langstudeerders" was rejected by the Parlement, so the minority government faced a loss and did not change any intended policies. Now it must stop pricing the long term students in untill 2012... At the same time, special education for adolescents with learning difficulties will remain untouched, untill 2012...

It seems that given the aims of the Dutch government to cut the deficit to a reasonably low range, pains must go elsewhere. It will a) not surprise with new cuts, b) not increase taxes, although it lifted the retirement age to 67, c) not make structural adjustments e.g. to labour market rigidities, d) want inflation (nor control it as that is the ECB task), or maybe the government already anticipate this and now hopes for higher growth projections, lets keep waiting, and hoping... and continue growth

A flexible euro and Portugal's bail out

2011-03-24T14:21:00.000-07:00

Today the prime minister of Portugal, Jose Socrates, resigned. The collapse of Portugal's government will initiate a third Euro-Member to reach for Báil O Fundin' but will also proof the flexibility of the euro...

The Bail Out Fund, although it may sound Irish, is actually the European Financial Stability Facility (EFSF) which was established on May 9th 2010. At that moment the Dutch Economist explained that "Europe needs to develop the collective discipline to stop their reserve fund being abused and that a flexible euro was the preferred option. It means that if countries that receive money do not make budget adjustments, it is in all countries interest (in the long run) to exit the euro (temporarily)."

At that moment of writing, 1 Euro was worth 1.26 US Dollar, and, as predicted, it has been climbing ever since to 1.42 today... now it may fall again!

The rise (and fall...?) of the Euro (against the Dollar)

Since Portugal joined the Euro its growth been among the slowest-growing economies in the Euro zone, despite being its poorest member. Many call it Portugal's "lost decade”. Maybe its really time for a flexible euro.

If countries like Greece, Ireland and Portugal do not reform quickly and continue with stikes, the Bail Out Fund must stop and not be enlarged to signal that moral hazard cannot continue and that bad behaviour is not rewarded.

Recently, the Bail Out Fund forced the Irish government "to call (and lose) an early election" as The Economist on March 24, 2011 nicely puts it. In reverse, "in Portugal an early election may force the government to accept a bail-out." In mid-March Moody’s, a rating agency, downgraded Portuguese debt. The former prime minister Socrates predicts that a Bail Out Fund (IMF/EU) will result in even harsher measures than those that he had tried to push through parliament, and he is correct.

Dutch Aid, Dead Aid

2011-03-23T14:37:00.000-07:00

Last week the Dutch government announced its new list of 15 donor countries, down form 34... The budget cuts total 1.9 billion euro on annual basis. Aid spending remains 0.7 percent of GDP.

Aid flows from the Netherlands will be directed to three types of countries: these are the "lucky 15":

- the poorest (Benin, Ethiopia, Mali, Mozambique, Rwanda, and Uganda)
- the most fragile (Afghanistan, Burundi, "Palestina", Sudan, and Yemen)
- the special - those require Dutch expertise or have a special historical link (Bangladesh, Ghana, Indonesia, and Kenia)

Of course, the list is not only political, but also very random. Here some drop-outs:
- the poorest: the drop-outs include e.g. Burkina Faso, Tanzania, and Zambia
- the most fragile: the drop-outs include e.g. Dr Congo, Egypt, and Pakistan
- the others: Bolivia, Georgia, Guatemala, Kosovo, Moldavia, Mongolia, Nicaragua, Senegal, and Suriname
- the special others: Colombia, Vietnam, and South Africa will receive a temporary aid program

The aid budget is cut by 1.9 billion, down from 0.8 to 0.7 percent of GDP. The reasons are i) what Moyo calls "Dead Aid" - the idea that most of the money is not only ill-spend, but corrosive to the entrepreneurial spirits - people have to act themselves (without means?), ii) the government's austerity measures include a cut of 18 billion euro, so it must come from somewhere, and iii) the unproven idea that focus (in countries) is better and more effective...

Ranking universities

2011-03-11T21:03:00.000-08:00

MBS, March 11, 2011

The Times released a new and influential list on the rankings of the world's universities. In the 2011 Times Higher Education World University Rankings the top three places to study are Harvard, MIT and Cambridge.

The US and the UK harbour world's leading universities. In the top 100, 45 are from the US, 12 are from the UK. Japan has 5 top 100 universities, Australia, Canada, Germany, and the Netherlands all have 4 top 100 universities.

Four Dutch institutions made the top 100, including Delft University of Technology (#49), Utrecht University (#71), Leiden University (#81), and the University of Amsterdam (#90).

Doing Business 2011 in Egypt?

2011-02-22T18:33:00.000-08:00

MBS, 22 February, 2011

Each year the World Bank's Doing Business Reports offer a good overview of the business environments around the world. In particular, its methodology allows us to see how the fundamentals surrounding the private sector are changing. One may wonder how doing business was, is and will be in Egypt; lets us follow the official (dated?) statistics...

Before moving to Egypt, the Doing Business 2011 Report focuses on Making a Difference for Entrepreneurs. It notes that Kazakhstan has improved its business regulation for local entrepreneurs most strongly in 2010. This year’s list of the 10 most-improved economies also featured Rwanda (a consistent reformer of business regulation), Cape Verde, and Zambia among others.

In the years before Doing Business 2011, top-ten lists usually centered around Eastern Europe and Central Asia and the Middle East and North Africa. Egypt has been a case in point, as it was a top global reformer in four of the past seven years, but was kicked off the 2010 short-list.

Taken over the past 5 years, Egypt ranks 13th on the world list of reformers. The improvements and reforms in the private sector stem from a wide range of good policies. For instance, Egypt recently launched a system to establish a firm electronically. It also introduces so-called time limits (on part of the bureaucracy) such that the entrepreneur knows that after submission of his business registration, he knows when the process is due. Moreover, starting-up has become much cheaper...

Now that Mubarrak is out of power, what can be expected on Egypt?

Out of 182 countries, Egypt ranks 94, up from 99 in the Doing Business 2010. It is highly unlikely that a new, to-be-formed goverment can follow this pace. Egypt may have different priorities now.

Overall, doing business in Egypt was rather cumbersome before February 2011, and is likely to remain so for the years to come, with or without the revolution.

Global supply chains

2011-02-11T16:00:00.000-08:00

MBS, Feburary 11, 2011

Global supply chains explain why the financial crisis released a global recession through a global supply chain. A more provocative argument is that the global recession of 2008-2009 was caused by a trade collapse caused by international global supply chain multipliers...

Here is a piece of a recent WTO report on trade volatility:

"Data in real terms show that world gross domestic product (GDP) and world merchandise exports not only move in tandem, but that export growth exceeds GDP growth. Growth of world GDP is associated with an even higher growth in international trade. ... The income elasticity of manufactured exports is higher than that of total merchandise exports. In other words, trade in manufactured goods responds more than merchandise exports to changes in income. From 1960 to 2008, the average elasticity for total merchandise was 1.7, but for manufactured goods it was 2.1." WTO International Trade and Statistics 2009, page 1.

What this report implicitly says is that international trade is extermly risky, since its much more volatile (sudden shocks) than income and because it is prone to protectionism.

The WTO even admits that the results are biased because trade is a component of income: "intermediate goods are counted at full value each time they cross the frontier. A higher number of cross-border movements in the case of intermediate manufactured goods may therefore result in a higher growth of merchandise trade compared to GDP. The emergence of international supply chains increases this phenomenon."

See also Escaith et al (2010) who explain that the expansion of international supply chains determined an apparent increase in trade elasticity. They argue that these chains has resulted in the overshooting of trade elasticity that occurred during the 2008-2009 trade collapse. In other words, global supply chains increase risks and volatility of trade further.

So the take away is that free trade is good, but that new risk such as trade relations have to be organized: maybe a new WTO direction? Or, a new Institution?

Axis of culture?

2011-02-10T15:21:00.000-08:00

MBS, February 10, 2011

Human societies are defined by culture. How to define it is a matter of taste.

According to Geert Hofstede there are five defining cultural aspects: individualism, long-term orientation, masculinity, power distance, and uncertainty avoidance. Following these dimensions, we can rank countries on an index from 0 to 100. For instance, take Germany, Sweden and the US.

Germany scores highest on individualism, followed by masculinity and uncertainty avoidance.
Sweden scores highest on individualism, followed by long term orientation and uncertainty avoidance
The US also scores highest on individualism, followed by masculinity and uncertainty avoidance
Following Hofstede, the Dutch culture is most related to the Swedish

Thereafter, we would conclude that Germany, Sweden and the US (and Holland) have similar cultures... But according to Bagehot, who wrote in the nineteenth century, they are not:

Americans favour a Family-Individual axis... suspecting the state as a threat to liberty. Germans revere an axis connecting the family and the state, with a smaller role for individual autonomy. In the Nordic countries... the state and the individual form the dominant alliance.

A new global currency?

2011-02-01T15:59:00.000-08:00

MBS, February 1, 2011

A new global currency?
No, China is not the new global currency. Also, the IMF Special Drawing Rights (SDRs) are clearly a non-starter - SDRs are currently worth about $ 320 billion. In terms of economic growth. Looking at China's Random Big Numbers in relative terms, China is a new global currency, inter alia.

Can the Yuan replace the dollar?
No, the Chinese currency will not replace the dollar - or even outrun the euro. True, China is the world's second largest economy and keeps the yuan tightly governed. Because many dollar bonds are owned by China, a currency war is in nobody's interest - isn't that ironic. Superpowers US and China need each other.

Fact: China is world's largest exporter.
Fact: In 2010, Chinese total inflows of foreign direct investment (FDI) increased to $100 billion. Notice that this is also offset by $59 billion Chinese outward FDI.
Fact: To get some perspective, the Dutch are ranked sixth on the list of largest FDI recipients in the world with over $600 billion, could the guilder be a new global currency too?

What are the other global currencies?
The dollar, euro, and, the yen (and, pound) - all are included in the SDRs.

As long as the yuan is "too low" other currencies are overvalued. This explain why China is the world's largest exporters, because their products are relatively too cheap. If one assumes that the yuan is overvalued, then if China will invest abroad it may better wait until this yuan rises. As long as China keeps capital controls appreciation of the yuan against the dollar waits too...

This is why China has a new global currency, among those others in the SDRs. Finance Minister Lagarde of France said that China should join the SDRs at the Davos World Economic Forum on Janaury 28, 2011.

Hybrids are selling

2011-01-29T09:23:00.000-08:00

MBS, January 29 2011

Its the year 2010 and there are 40 thousand hybrid cars driving in the Netherlands. Is that a lot? Less depressing is that this number is four times as much compared to only 2008. Hybrid vehicles are selling massively, and who knows where this growth market may stop.

Hybrid car sales increased 70 percent over the year 2009. Part of the increase in sales can be ascribed changes in tax laws in January 2009 which effectively lower taxes on Green Cars for consumers and businesses. Still, to many it remains depressing that in modern country like Holland only 1 in 200 automobiles is a hybrid.

Signalling effects of dividend policy?

2011-01-28T11:38:00.000-08:00

MBS, 27 January 2011

Dividend payments made by Dutch stocklisted firms in the year 2010 increased 10 percent compared to 2009. This represents an increase of 1 billion euro according to the recently released figures by the Central Bureau of Statistics. According to signalling theory, this increase may be a sign that managers belief in a fundamental improvement of firm performance.

However, if one takes this signalling wisdom in the same way, then we must look at the banking sector. In 2010 the total dividend payments made by Dutch banks was a miserable 200 million euro, or 2 percent of the economy. The same low dividend figures are recorded for 2009.

Okay, this represents the Credit Crisis Consequences. Yet, in 2008 Dutch bank dividend payouts totalled a massive 6 billion euro, or about 30 percent of the economy. So, the fact that none of the banks are paying out dividend and other companies are, suggests that the Dutch economy either lifts their banks out of misery (e.g. ING, ABN AMRO) and prosperes, or, that the key problems in the financial sector continue (e.g. money market, debt market, currency market) and reverts back to crisis.

Let us say that from a "scientific point of view" the Dutch dividends signal that what is in the eye of the beholder.

Tanzania will elect Kikwete again...

2010-10-28T15:18:00.000-07:00

29 October 2010

Tanzania, a poor country in Eastern Africa is about to show the world that democracy in Africa can work. However, everybody already knows who will win the election: the current President Kikwete. What will these next elections bring Tanzania, and the rest of Africa?

These elections are very important not only for Tanzania itself, but also for the wider continent. As a donor-friendly country it is a democratic country; Kikwete might not be such a bad choice... He will try to further improve education and continue several health inititiatives. He also will try to connect the south with the north by provision of insfrastructure and a stimulus of the service sector. In his expected second term, Mr Kikwete is likely to promote gas exploration in the south, expand mining, and try, as ever, to improve services.

On 28 October 2010 The Economist said about Kikwete: "Fond of technology and foreign travel, he is known among his ministers as “Mr Beep” for his habit of texting them to show he cares. But he has seemed wary of radical reform. He is sentimental about Tanzania’s socialist past. Most foreign aid-givers, on whom the country still depends for half its budget, are still prepared to give him the benefit of the doubt."

What has gone unmentioned is that he will also build a large highway straight though the Serengeti (world's largest wild-life reservation) and that his party is full of corrupt practices, and has started a greater divide between rich and poor (although the party claims to uphold socialistic appeals). If the President cannot unite the rich northern Christians and turns his eyes away from Zanzibar, things could get nasty. Lets hope all the mining does not give rise to another example of a resource curse.

The first elections in Tanzania were held only in 1995. Tanzania is a country with over 40 million people, where many survive on less than $2 a day and average income is $ 1500 per year. The economy depends heavily on agriculture, which accounts for more than one-fourth of GDP, provides 85% of exports, and employs 80% of the work force.
Under Kikwete Presidency the East African Community was installed which later might be remembered as a sort of European Community, which has led to peace and better economic performance of backward regions. Kikwete also wants Tanzania to enter the world market.

Legalize Cannabis?

2010-10-27T03:25:00.000-07:00

27 October 2010

The legalization of marijuana can lead to some important benefits. Apart from tax revenues it may significantly decrease criminal activity and even improve the health of consumers of "soft drugs". Moreover, with strict regulations steet sellers disappear and that can cause more restricted access to adolescents. Finally, taxation policy not only reduces consumer harm but may even lead to fewer consumers... and fewer police, law enforcement and judges to 'waste' money on mere possession of soft drugs.

In the state of California the yearly "net" benefits are estimated to be 1.4 billion dollars per year (RAND, 2010).
In the Netherlands the Dutch government estimated yearly "net" benefits of 450 million euro per year (Ministry of Finance). In a recent study in the Amsterdam Law Forum yearly benefits between 300 and 850 million euro were derived .

Note the all of the above estimations include health and crime implications as well as savings on enforcement and increased public campaigns and educational reviews.

On 2 November 2010 California votes on the legalization process...

Trading Resources and the Dutch Disease (Part I)

2010-09-22T04:59:00.000-07:00

MBS, 22 September 2010

With the global recession, the world witnessed the largest drop in trade in more than 70 years. The contraction of trade in US dollar terms of 22.6 percent in 2009 is without precedent in recent history. At the same time, trading natural resources is on the rise. As the WTO (2010) notes trading in natural resources creates a great challenges both for importing and exporting countries now that natural resources represent a growing share of world trade. It amounted to some 24 percent of total merchandise trade in 2008.

Many opponents of free trade say that rich countries are extracting other countries' resources at a heavy cost for the home country. One particular sector involves natural resources. Even the recent WTO report provides warning against trade between "North and South" in natural resources given local weak institutions. The WTO report is a cry for more intense intergovernmental cooperation.

Some say that spur in trading resources will bring the Dutch disease while the WTO suggests regulation will suffice to let countries benefit from their resources. Brunnschweiler and Bulte (2006, Science) explain that the convention since the 1990s has been reached that trade in resources i) slows growth and ii) bring civil conflict. So, we emphasize the role of institutions in the management against the i) Dutch disease, where resource rich countries will experience negative effects from their stock of resources on economic growth and ii) why natural resources may or may not cause institutional breakdown.

In the academic circles it has been stressed that countries who export goods from the natural resource industries can become under severe pressure: "easy riches lead to sloth". A famous study by Sachs and Warner (1996, NBER) finds that "resource poor economies often vastly outperform resource-rich economies in economic growth."

One explanation is that trade in resources makes rent-seeking or grabbing more likely, such that resources become a curse for the country. Another is that promotion of trading resources replaces economic acivity away from more productive sectors and hence causes de-industrialization. In terms of foreign exchange rates it is shown that holding resources appreciates the value of the currency, hurting the non-resource export sector. Related to this, prices of natural resources tend be relatively volatile, which could hamper investment.

source: World Trade Report 2010 by WTO. This release highlights "Trade in Natural Resources". It summarizes trade flows in resources and links them to the sustainablility of resources as well as the broad impact of extraction and trade on the environment. According to the WTO most trade in natural resources consists of fish, forestry, fuels and mining - alphabetically.

China's Random Big Numbers

2010-09-14T14:03:00.000-07:00

MBS, 15 September 2010

China has world's largest cities, buys most Mercedes, it already consumes twice as much steel as the US, EU and Japan combined and its biggest stock listed firms are state-owned (link). At the same time it is responsible for half of the world counterfeit products and is the largests CO2 producer. It has an army of more than 3 million soldiers (compare this to 1.4 US soldiers) and meanwhile executes more prisoners per day than the US in a year... but the economic figures are even more remarkable

1. decades of miracle's growth (also in per capita PPP terms)

2. booming export sector (and trade balance)

3. persistent low inflation (with 'cheap currency')

4. soaking in credit

Reminder: MDGs and Trade

2010-08-21T11:00:00.000-07:00

Reminder: the eight United Nations 'Millennium Development Goals' (MDGs) - as pictured - are failing to become realized. Time is ticking 2015.

The MDGs are known for fighting poverty, bring health care and education, yet trade (and the private sector) may boost these means. Empirically there is much evidence to back the argument that international trade and economic growth go hand in hand. What is less clear, as e.g. Winter et al (2004, JEL) point out, is whether more trade with poor countries helps the poor.

The World Trade Organization (WTO) argues that it is mainly concerned with goal eight, building of global partnerships for develpment. On their website they list a number of supposedly achievements. Although the Doha Round is stuck, the WTO is hopefull and beliefs they bring "technical and financial assistence from the international community". Another important measure is the Aid for Trade program (see our comments here) of which the achieved results remains unclear.

The Liberalization Process of Drug Markets

2010-08-12T13:01:00.000-07:00

MBS, 12 August 2010

Would you like to see your childern on drugs? Have you ever dared to use some yourself? These are the type of questions opponents of drug legalization like you to consider. What is interesting about such statements is that they are most applicable to markets where drugs are prohibited. Why? Because kids seem more likely to take drugs when they are illegal and you don't dare to look at the consequences of unregulated, underground drug markets: the process of liberalization is just about to begin and requires a fresh look.

Drug legalization is a thought provoking topics for obvious reasons. Most of us do not like to advertise drug usage and most of use tend to look a bit down on those who dare to consume it (especially when consumption becomes addictive). Milton Friedman wants us to let these feelings to be real and look at what prohibition is providing us.

Underground drug markets are created due to high enforcement (war on drugs). Because some consumers like these products, producers try to do everything to make a profit and even protect their business against competitors, and the government. The consequences are that drug prices have increased, as well as the shootings (think of Al Capone for a second, economist call him an externality). The unintended result is that people still consume drugs (and some create troubles because of usage) but even worse is that society spends on enforcement and directly give rents to producers.

In a legalized markets, as Becker et al. (2006, JPE) show, producers loose this rent and prices drop to a competitive level. In order to balance the possible rise in consumption, government can apply a Pigouvian tax system to raise prices, lower consumption and obtain income transfered from consumption, just up to the point where externalities from consumption can be paid back for. Hence, under legalization the government earn some income (and saves even more by ceasing the war on drugs), consumers are better off and producers cannot profit.

What do you prefer? Your childern buying drugs at the street corner or for a friend in school? Or do you really belief you can stop them by all means? That is what the war on drugs has shown us, this is a false choice. People can consume drugs regardless of the government policies. Becker and others refer to this a price inelastic demand. The implication is that the money pumped into enforcement is always wasted compared to expenditures targetted at e.g. age controls (like with alcohol and tabacco) and public campaigns etc. This money can be raised from taxation, which also discourage consumption (just a little bit).

Legalize anything?

This is not to say we should liberalize each drug market. Some substances (think of cocaine and heroin) can be so addictive that the social costs of consumption outweigh the benefits of individual consumption. According to MacCoun (2010) from the RAND Corp. only innocent substances like marijuana and extascy (e.g. MDMA) would qualify.

SEE UPDATED COMMENT HERE

Europe’s Stress Test: Dutch banks pass, and the others?

2010-07-23T16:16:00.000-07:00

MBS, July 23, 2010

Tonight the Committee of European Banking Supervisors (CEBS) released the results of the stress tests. A passing score implies a bank can easily cope with an economic shock. The Dutch banks, ABN Amro/Fortis, ING, Rabobank and SNS were marked to be fit for the future. But what have regulators done and what does it hold for the rest of Europe?

And their scores?

Of the 91 banks, the aggregate core capital ratio during a shocks would fall to 9.2 percent in 2011 in the most adverse scenario compared to the regulatory minimum of 4 percent. Good news so far.

Also, all Dutch banks representing 65 percent of the total market passed the test with the following “grades for 2011”:

ABN Amro/Fortis: 9.9 percent
ING: 8.8 percent
Rabobank: 12.5 percent
SNS: 10.5 percent

On average, Dutch banks score 10.3 percent on core capital, far above European average. Good news again. In addition, the Belgian and French banks all passed. Get me champagne?

Troubles elsewhere in Europe?

Out of 91 banks, only 7 failed, and include the following “Seven Failed Banks”: Hypo Real Estate Holding (Germany), ATEBank (Greece) and five Spanish banks Unnim, Diada, Espiga, Banca Civica and Cajasur.

In case of an emergency, 16 euro turns out to be held against less than one euro…

Compared to last year’s US stress tests, European banks did very well. Out of the 19 US banks, only 9 passed while the others needed to raise capital of an additional 60 billion euro. However, on May 10, 2010 the EU and IMF already initiated a massive stability net for the financial sector with world’s biggest ever offer [see article here]. They pledged 750 billion euro to guarantee the sovereign debt of member nations. In the past 18 months European banks have raised their capital levels significantly with more than 220 billion euro through bail-out money and retained earnings. Consider this carefully: the CEBS stated that the “Seven Failed Banks” needed to raise their core capital with 3.5 billion euro, a laughable amount… Constancio, a Director at the ECB, even said: “we have always said so, the European banking sector is generally in good shape.”

For example, the Seven Failed Banks already are on insulin. The Spanish bank Banca Civica agreed with J.C. Flowers - a buyout fim - on a 450 billion euro placement of convertible bonds. Likewise, Hypoe Real Estate has already been dumping toxic assets to a bad bank vehicle set up by the German government.

Transparency vs Trouble (or Temporarily!)

Tests are Tricks. The big disappointment of the tests is the lack of transparency given by the regulators. If they simply provided the back-of-the-envelope calculations we could have redone them under different assumption, e.g. increasing the stress rate to 8 percent, but under conditions of 5 percent less growth, or an asset drop of 30 percent, etc. but that is now impossible to do.

In order to rebuild trust, banks are encouraged to provide the numbers to the public, since it is mainly their responsibility. In Spain, most information has already been released on holdings of European government debt. In contrast, Germany had not disclosed any details because they say it is confidential bank information. The Landesbank Baden-Württemberg bank did open their books, so will others follow to restore trust through transparency or is there something still hiding?

Another scenario to be scared off?

There are another eleven banks that hit between 6 and 6.5 percent, so they passed the test with eyes wide shut. Moreover, another eight banks score between 6.5 and 7 percent. This implies that if we lift the core capital requirement to a mere 7 percent, then 24 of 91 banks Fail, and stress is back in banking…

Consider again the German woes (see article here). Two other German banks are shortlisted as Failed in the seven percent group, including Postbank which represents one of the biggest publicly traded German financial institutes. A systemic risk maybe, maybe not.

What is “the stress test” for banks?

2010-07-23T16:11:00.000-07:00

MBS, July 23, 2010

The stress test of the European banking sector included a sample of 91 European banks from 20 countries, representing 65% of the European market in terms of total assets. To pass the stress test, the CEBS assumes that if a bank holds six percent core capital of total assets then the bank’s balance sheet is sound.

Core capital - or as banker’s say: Tier 1 capital - consists of common stock (equity) and reserves as percentage of (risk-weighted) assets. A passing bank’s core capital will not drop below 0.06 when face with a negative shock, in particular a new recession or a sovereign debt crisis. What happens if economic growth drops more than 3 percent or if banks face significant haircuts (drops in sovereign debt values of 20 percent) or if stocks and other assets plunge?

The official report says:

“The overall objective of the 2010 exercise is to provide policy information for assessing the resilience of the EU banking system to possible adverse economic developments and to asses the ability of banks in the exercise to absorb possible shocks on credit and market risks, including sovereign risks.”

Hence, it implies that a stable and sound banks can pay back only 1 euro of the 16.66 it supposedly is guarding. Yet we are all lucky in Europe. First, most banks hold large amounts of long term debt obligations, such that in short term events, like a run, they have a bit more to offer their ‘customers’. Likewise, some of the bank’s assets are penalized because they carry risk and therefore may lose value in a negative short term event. Finally, the committee is eager to note: “this [6 percent] threshold should by no means be interpreted as a regulatory minimum.”

German woes?

2010-07-11T06:25:00.000-07:00

MBS, July 11, 2010

This week The Economist argues in the article "Lemon Aid" that: "Germany's exporting prowess is leaving the rest of the euro area behind."

The newspaper even presents - without source - a growth estimate of 2 percent for the biggest EU economy. A slip of tongue? In stark contrast, judging from the OECD statistics, we see the Germans staggering. So, we ask, what is the lemon aid story of this export gaint really? 'Its the euro, stupid.'

Silient growth figures

Last year Germany came out of the recession. In 2009, respective growth rates were -3.5 in Q1, 0.4 in Q2, 0.7 in Q3 and 0.2 in Q4. In the first quarter of 2010 growth humbled at 0.2 percent. Well, the source was the Minister of Finance Schaeuble who said on July 8 that forecasts show that "we have a real chance to reach 2 percent growth." He replied to economists who were fearing that austerity measures were in fact hurting the German economy. The politicians seem to hold different expectations, as echoed by The Economist.

Its true that exports in May grew by 9.2 percent, while supposedly non-thrifty Germany experienced a rise in imports of 14.8 percent. On a yearly basis, exports surged 28.8 percent. The explanation for is the lemon aid is the as we argued in May, the flexible euro. The continued rise of emerging Asia did the rest. As the newspaper said: "China is now the main market for the Mercedes S-class." We belief we shouldn't thank them, but the Greek Gods, which led to the flexible fall of the terms of trade with the East.

A joke by Nobel Laureate

As Solow said last month at a conference: "If I were God and look back on this world, I saw the West consume and the East produce, that is not fair..." So looking at the future, maybe we see more Volkswagens in China soon too.

A Flexible Euro: Revisited?

2010-07-08T15:56:00.000-07:00

MBS, July 8, 2010

In May we reported on the European Union's bail-out package of the Greece (together with IMF). It was not about its massive size of 750 billion, but about its effect on the euro, then 'down' to 1.26 against the dollar. see: http://dutcheconomist.blogspot.com/2010/05/flexible-euro-is-what-is-needed.html

What can we find today?

1 euro = 1.26 dollar

3 month change April-July 2010

The ECB has initiated a three-month tender which as ActionForex, an online foreign exchange portal, explains "one day prior to the maturityof the large volume one-year tender, banks sought only 126 billion" so "tension on the euro money market was much lower than had been assumed." The euro had just 'rebounded' to 1.26n against the dollar.

A different picture

One problem with most of the currency analyses you read are what economist can "biased." The reason is that our intuition compares a euro 'only' against, for example, a dollar. In reality, other currency comparison often present a different picture for the development of the euro.

five year rise against the pound

Still, like in May 2010: the euro is stable. Yet, some euro zone countries like Greece and Spain are shaky... My bet would be "pro-euro"

What will be the next crisis?

2010-07-04T09:48:00.001-07:00

Epilogue: Economists have a bad track record when it comes to prediction of crises. A bit arrogantly they have a thought-through reply: we cannot predict events with certainty. Even worse, their models incorporate already all information about the future, so if a future crisis is about to occur, this 'should' have happened. So, if we have a time-traveling machine and ask the Dutcheconomist "what will be the next crisis?" you should not listen, but read.

Crisis, when?

Before people make predictions they tend to look for patterns from the past. Economists therefore have studied causes of prior crises and have drawn the following conclusion - the good part: all economic crises have identifiable causes, yet we cannot predict future crises because there is no complete information about the present.

Explaining what the next crisis will be is a question about the timing of events - the bad part. Within some fuzzy range of confidence economists can pinpoint to the next "could be" crisis, yet there will be always infinitely many other possible candidates, and their order continiously evolves over time. Well, lets skip the philosophy and arguments against time-travel and handreading, but we all agree that looking back in time is meaningful.

So, over the last three years we witnessed several economic crises:

1. commodity crisis

2. credit crisis

3. financial crisis

4. fiscal crisis

5. currency crisis

The good news is that there is a large body of empirics available to explore similar events are different moments. We could look at the causes of the collapse of credit in 1929 and the following Great Depression, the 1970s oil crisis, the 1994 Mexican peso crisis or the 1997 Asian crisis. In all crisis examples could easily have been replaced with others, yet the underlying mechanism that tipped the state of the economy into a crisis has often been unique and unexpected - the bad news. It was already Keynes who argued that economies are inherently unstable, reigned by animal spirits and are non-linear in nature (as his famous multiplier theorem shows).

So, consideration of the good and the bad, we have come to the ugly: the next crisis. If one remembers the Fall of the Berlin wall in 1990 that marked a unique moment in unification of Western and Eastern Europe: it was a cry for democracy. Maybe twenty years later again the East gets a true voice of People. I am talking here about an unpredictable crisis in China. It can also be a crisis in Iran, or even India, since these countries are all considered East. Let me be explicit, given that the world economy is slowly getting out of a recession, a political crisis is reasonable likely.

Last week Krugman predicted a Long Depression, with persistent high unemployment and budget deficits, as witnessed in 1873 (a little long ago for any kind of reasonable comparison...). A Keynes would have predicted, confidence is low and government expenditures are high, yet this is only a one-sided story of a two-sided world. Solow said last week that if he were God he would look at this world and see the West consume and China produce, that looks unfair. It is time that Eastern consumer step in and subsequently let the production in the West rise. Where are the voices of the East, consumers or citizen?

Final prediction on the next crisis

The next crisis will be political, depending on the time frame and severity of the definition of crisis... most likely a big one in the East, depending on where you are in the world. One could say this with a high amount of certainty, at any time.

Before Krugman proclaims himself a prophet (http://www.hogueprophecy.com), never waste a crisis moment. We are far away from a Depression (actually, the growth is rapidly growing), but he is right - as always - the next crisis awaits.

A Flexible Euro is what is Needed

2010-05-19T15:23:00.001-07:00

MBS, 21 May 2010

The Euro zone is in danger. This week the Euro Member States announced a collective insurance and provide 750 billion Euro to troubles countries like Greece. As The Economist (May 15th 2010) argues "Europe needs to develop the collective discipline to stop their reserve fund being abused."

We give two proposal for a "flexible Euro", since that is what is needed. But, first, is the euro really losing its value?

Do the Euro Math
1 Euro equals 1.26 US Dollar.

The math behind the Euro isn't that bad after all. Sixs months ago the Euro was $ 1.51, which means a massive drop of 17 percent. In other words, we are simply back to the level of last year March 2009 when a Euro was also worth $ 1.26. Since the Euro's existence (1999) we are now at a level far above average. Actually, only in the end of the years 2008 and 2009, two out of ten, was the Euro's year closing higher than the current value. Yes, we lost value over the last six months. Yes, we are on a near four year low. But, have a second thought about these figures...

Entry and Exit
In times of crisis the 'rules of the game' change. The current monetary union needs to adapt. A new financial architecture requires a more flexible composition of Euro Member States. The Dutch Economist wants a new policy that explicitly states "rules" about entry and exit into and out of the Euro. If countries do not obey the rules then the zone's constitution is allowed to kick out that State. If a country meets the entry requirements, it is included. In this draconic setting the Euro is not only flexible but can prosper. Countries benefit from a common exchange rate and shared monetary policy. Countries that are hurt by fixed exchange rates or seek independent monetary policies to boost their domestic economy can drop out at will or command.

We need a flexible Euro. Forget the no-bail outs (red: what happened this week?) or a superstitious Stability and Growth Pact. If "bad" countries are punished by temporary removal from the currency then it is easy to show the rule and requirements for the road back into the zone. This provides an indirect disciplinary system since "bad" countries either seek preventive measures or they are kick out and then try their best policies to get back in.

Supra-national control
Another nucleaire option to restore the safety of the euro is to install something like a Euro Zone Budget Counsil. The Euro needs better supervision of its Member's budgets and the Euro needs to control sovereign governments fiscal policies. This alternative creates a supra-national governance system to prevent negative externalities (like the European 750 billion defence plan).

The creative accounting practices of the Greeks have made it mandatory for the stability of the euro that the budgets match the Maastricht Treaty, which unfortunetaly mostly applies to new entrants and does not give sovereign states combined (like in the Euro) the power to change the plans of other national government. The punishment mechanisms in the current framework of the Euro zone are too soft and encourages a strong moral hazard problem. The German citizens correctly claim that they are subsidizing the Greek mess and rewarding bad behaviour. "The Euro Zone also needs to think about political tools - denying profligate countries a vote in any euro decisions... and it needs mechanisms for dealing with failure."

Option won: a flexible euro
We need a flexible euro, either by control of countries which means countries are handing over one of their most souvereignity rights to a supra-national power, or, entry and exit rules which lead to countries tuning in and dropping out of the currency such that the monetary union's cohesion will endanger. It now seems the Greeks "welcome" the EU and IMF with strikes because other countries interfere in "local" country politics, maybe a flexible euro allows the Greeks a way out...

Can Microfinance Help the Poor?

2010-04-17T13:28:00.000-07:00

MBS, 17-04 2010, Dar es Salaam

Microfinance has received a lot of buzz throughout this recent decade. In 2006 Mohammed Yunus received a Nobel Peace Prize for his efforts in making the Grameen Bank a reality, yeah, in those days bankers could obtain such honours. Suffice it to say, that particular bank has done a tremenous job in assisting the poor in Bangladesh, however, the Dutcheconomist is somehow skeptic on this "Nobel" enterprise...

First of all, poor people face severe credit constraints which traps them into subsistance farming or other low-capital intensive jobs. microfinance, or, what we today prefer to call "inclusive finance" aims to give money to the poor such that they can (group-wise) fuel their entreprises with capital and improve porductivity and their respective incomes. As financial development is often regared as an engine to growth, it can still be debated if inclusive finance drives us in the right direction.

There are many problems with inclusive financing. Instead of using the money on investment opportunities much of the creit goes directly into consumption. While this may indeed improve the "lifes of the poor" as MIT Professors Banerjee and Duflo put it, in the long run this is unsustainable for three big reasons:

i) micro-credit requires high interest rates which the "poor" have to "pay" (although, arguably below the market rate, however, since the poor are "bad" clients - as Nobel Laureate Stiglitz would accomodate - this is an unfair comparison, moreover, the poor are often found in poor countries that suffer from instability and high inflation, creating very high market interest rates...)
ii) micro-credit is "all inclusive" by which we mean that it is often done group-wise. Many people in poor communities see micro-financing institutions coming in their communities with big promises for money and if one person wants to join, he (or actually, mostly "she") will convince others to join in, what the literature 'nicely' dubbed "social pressure". Hence, although many poor people are badly educated and do not foresee the consequences of joining in, why wouldn't they opt for the all-inclusive option and receive "free" money just like their neighbours?
iii) it is exactly the combinantion of the two above points that make the pyrimid scheme so dangerous. If a person in the group cannot repay (incl. interest) then others of the group will have to contribute even more, which can easily tear up whole community lives. A large share of the micro-credit that is subsidized (Foreign Aid) actually flows into the pockets of the managers of the micro-finance institutions, as well as the consultants and researchers that get the opportunity to evaluate the programs. In the end, the "poor pay all-inclusive premia"

OK, these three points are harsh, sticky and not 100 percent fair. Some micro-finance institutions really reach poor entrepreneurs and assist with incubation programs to increase productivity, incomes and quality of life.

I Save, Dutch Loose

2010-01-06T03:46:00.000-08:00

MBS, 6 January 2010

Yesterday Iceland announced they do not want to pay back teh Dutch and Brittish governments, after the collapse of their Landsbank. A referendum will determine if future generations of Iceland or Dutch and Brittish will pay the bill.

So the day IceSave collapsed, the central banks in Europe garanteed 20.000 euro to each saver. Although the bank operated in the Netherlands, still the regulators in Iceland warrented the savings, not the Dutch Central Bank. But, the Dutch Central Bank was so nice to garantee an additional 20.000 euro, since all Dutch deposit holders were at that time actually garanteed 20.000. Now in order not to cause panic after the collapse, Wouter Bos even extended the garantee a few days after Landsbank bankrupcy to a massive 100.000 euro.

Now to redo the math. 1.5 billion had to be paid by the Icelander's garantee scheme under the Icelandic Central Bank, but Bos "lended" this money to help Dutch savers directly. In addition, the Dutch Central bank had to pay almost 1.5 billion out of the second layer garantee up to 40.000 euro (which is in reality paid by Dutch banks, not the Central Bank!). Then almost another billion was paid to deposit holder who had between 40.000 and 100.000 euros, totalling a massive 4 billion euros in costs to the Dutch society, of which 1.5 should have been paid back by debt-burdened Iceland.

Obviously, Iceland cannot afford such a bill, and if they are smart they VOTE YES FOR PAYING the Brittish and Dutch, because we already know they cannot do so. Why should they "say to pay"? Because that is good for their current credit rating (which was revised downwards after yesterdays news.) The interest paid on their debts depends on their rating, so a YES FOR PAYING is saying: I Save, and the Dutch will loose anyway.

Happy new decennium!

2009-12-31T08:09:00.000-08:00

Dear Reader,

Our wishes are a happy, peaceful decennium and a good 2010.

btw. a baby born today is highly likely to be able to read these words next century in 2100, with a life expectancy of over a 100 years!

Sector Update: PC market

2009-11-23T13:13:00.000-08:00

MBS, 23 November 2009

The Great Recession of 2007-2009 was all about the financial sector and how it led to the huge decline in the manufacturing sector. But what do we know about the hardship in the computer business? What are the recent market trends and the estimations for the PC market in 2010?

Let us start with today’s news. In 2009 the worldwide sales of PCs is estimated to have risen nearly 3 percent compared to 2008. Almost 300 million PCs are predicted to have been sold in 2008 according to Gartner Inc, a research group. A brief reflection one these facts about the PC market shows that conditions have improved and that the market is growing. Gartner estimates that next year the sales of PCs continue to rise, topping about 335 million computers in 2010, a predicted rise of more than 12 percent compared to this years sales.

SWOT Analysis: High volumes, weak revenues, Asia and Acer...
However, a deeper investigation presents a much gloomier picture of the PC market. Actually, total sales in dollar terms (price effect) and not in mere volumes (quantity effect) shows that in 2009 net sales are € 145 billion and declined with more than 10 percent compared to 2008. The volume of sales in desktop PC also declined with 9 percent. How can we explain this apparent paradox that sales numbers of PCs have grown (except for desktops) but the total worth of the PC revenue has declined?

The rise in PC sales volume is mainly because more people started buying cheap netbooks and mini laptops. The popularity of mobile computers is unrecognisable. Next years sales are predicted to rise more than 15 percent, and it can even be that after the current early adopters, the new buying might be willing to pay more for these innovative PC devices.

Looking further at the PC market’s in terms of regions we see that Asia shows that steepest growth in PC sales. In 2009 East Asians were most eager to buy new computer devices. Consumers of the PCs are shifting more and more away from the West, heading to the East. The relative decline of market share in Europe compared to Asia is stunning. Greater volumes are recorded in the East. In 2009, the number of sold PCs in the US also grew but with lower net revenues. The greatest decline in PC sales was in Europe, The Middle East and Africa, where total sales declined with more than 10 percent. On the bright sight, now that these regions no longer face a severe recession PC sales are likely to take up in these areas.

Lets consider the three biggest players in today’s PC market. Market leader is Hewlett-Packard. The total market share of HP in 2009 is nearly 20 percent. Over the last few years, the undisputable market leader experienced a relative decline in its position in the PC market. Acer’s market share now stands at 15.4 percent. Acer has grown very rapidly this decade and its strategy is to become an even more dominant player. Other companies are struggling. For example, Dell has been surpassed by Acer and started a relative decline in market share for the first time in its history.

News: End of the Great Recession

2009-11-13T06:25:00.000-08:00

MBS, 13 November 2009

Today, the Dutch Central Bureau for Statistics officially announced that in the Netherlands the recession has ended. The official decline started “only” in October 2008. In the third quarter of 2009 GDP growth was 0.4 percent compared to the second quarter. This means we are “out of recession” as growth has returned.

The primary reason for this growth is the surge in exports. The government expenditure also grew, whereas consumer spending declined with 2.6 percent. In total, the Dutch economy shrunk 3.7 percent in 2009 compared to 2008’s output. The major problems are lack of consumer spending (especially in housing inventory, cars, and other consumer durables like electronics), low investment levels by firms (chiefly machines) and the rising unemployment (although it still below 5 percent).

In December 2007 the US economy officially dived into a recession. On September 15 2009 we already quoted Bernanke saying that the US was “very likely” out of recession. (click here). In the third quarter US economic growth was 0.9 percent compared to the second quarter.

The costs of holding various auctions

2009-11-12T16:36:00.000-08:00

MBS, 13 November 2009

If you sell things at an auction, what are your costs? Ever went on buying a good at an auction? Think of EBay or the events at auction house Christies. People put things up for sale that by some construction will hopefully be sold.

For example, at a so-called Dutch auction people buy things not by bidding higher prices than others until they win. In a Dutch auction the auctioneer starts announcing a high “ask” price which will move lower until a point is reached where a person is willing to pay the asking price. Usually, if you like to sell something in this manner, you will set a reserve price, which is the minimum price you want for your good or service.

So if you like to sell your guitar and post it on EBay, you can hold a Dutch auction and start with say € 2500 and see where lowering the price step by step leaves you. Since you brought the guitar years ago for € 750 and its still worth that to you, you set a minimum of € 750; otherwise, you would not like to sell the guitar. The winning bidder will pay the last announced price which will always be above the minimum given you sell the guitar.

The interesting thing is that if you sold the guitar in a different manner, you might have gotten a different price for it. In this sense, if another selling construction would yield you less than the Dutch auction, then we can say that the costs of a Dutch auction are lower than the alternative.

We can have the following alternative: we ask each person interested in the guitar to submit a price they like to pay for it in a concealed fashion. This means that each person writes a price he likes to pay on a closed envelope. All submitted bids are revealed and by the “first price sealed-bid” auction the one with the highest bid wins the auction. In the end, a person will be willing to pay the amount the guitar is worth to him or her individually. The point is the following: in both constructions (Dutch auction and this alternative “Vickrey” auction) bidders cannot see what the other bidders will be bidding for the guitar. Selling product in this manner yields a similar price even compared to a “normal” (English/ open outcry) auction where people directly bid against each other and raising prices (as can be shown, bidder will bid their true value for the guitar in a Vickrey and Dutch auction, as well as in a competitive environment (technically, this is because all three mechanisms involve dominant strategies).

If we replace the guitar with a dollar bill (or, as I did in my classes, with a five euro bill) and slightly changes the bidding rules, we might actually be able to get more money for the guitar than in these other (simpler) auction. Click here for a nice YouTube video of a tricky auction mechanism that seems to always yield more than it costs!

Gold Fever

2009-11-12T05:21:00.000-08:00

MBS, 12 November 2009

The price of gold hit another historical record reaching above $ 1,100 a troy ounce. Where does this gold fever come from and where will it go?

The primary reason for high gold prices is the dollar weakness. The low US currency (the dollar is at a 15 month low to be exact) makes gold in dollars terms less expensive for holders of other currencies. Actually, a funny fact is that in euro terms, the gold price is not at it peak.

Another often cited reason is that some investors are betting on rising inflation as the world economy is recovering pushed by central banks accommodative policies and government injections. The sharp rise in government investment and quantitative easing (printing money) might translate in higher prices over the upcoming years, although other indicators clearly show the opposite. Many OECD countries are facing modest deflation and there are no signs for abrupt shifts. Also, since the interest rates are so low, fighting inflation has become much easier these days than in other times.

Supply side arguments can be important as gold harvests might come under pressure the upcoming decades. Yet, there are more interesting factors that explain high gold prices... Investors might think that stocks have become to volatile and are betting on gold as a safe haven since it is a hedge against any economic, political or currency-based crisis. Now that bond returns are low, gold is a good alternative. We also see that some governments think the same way in developing countries like India. In an effort to diversify the foreign reserves it accumulated, India brought a massive 200 tonnes of gold in October. From this demand side with could witness a shift in preferences as new emerging market’s consumer like to have gold as a sign of their new reach richness. If we look at the top ten countries holding gold, we get the following list (from the World Gold Council): 1. US; 2. Germany; 3. Italy; 4. France; 5. China; 6. Switzerland; 7. Japan; 8. the Netherlands; 9. Russia; 10. India. btw. the IMF also holds a large chunk. The Dutch rank pretty high, but what is more interesting is the fact that China, Russia and India have witness large increases in their gold holdings.

If the trend continues, gold prices might stay high for a long time. However, considering two very likely scenarios [prediction!]: if the US recover continues (taking its currency up again), and if inflation expectations turn out to be flawed, then we could easily find gold prices below $ 1.000 soon.

Book Review: Is Informal Normal?

2009-10-24T07:41:00.000-07:00

MBS, 24 October 2009

On 31 March 2009 the OECD released the “Is Informal Normal” Development Centre Studies Report. The main argument is that in most developing areas informal employment is the norm. More than half of the world’s workforce is active in the informal sector in developing countries. We propose some policies to tackle the problems associated with informal activities that supplement the views expressed by the OECD.

What is informality all about?
“Informal employment is the norm, not the exception.” As argued by the OECD, prevalence of informal employment in the developing world is striking. About two-thirds of the world’s employees are active in the informal economy, with over 80 percent holding informal jobs in Sub-Saharan Africa and South Asia. Moreover, the share of informal production is increasing, most notably in Latin America and Southeast Asia.

The thriving informal economy is characterized by the production of legal goods but it does not conform to regulations. Informal activities refer to not-registered work, production and other business activities that do not comply with government legislation. Additionally, informal firms avoid tax. Informal employees are excluded from social security benefits and the protection afforded by formal labour contracts. Because workers in the informal sector have no access to social benefits they are highly vulnerable and face severe risks. In general, the quality of jobs in the informal sector is low, as can be seen by lower pay and skill requirements, and bad working conditions.

Trade-offs
Informality can be viewed as a chose. The benefits from the informal economy include the avoidance of the costs of formality created by inefficient governmental institutions, cumbersome registration procedures, complex tax laws and a general distrust of the public enforcement, property rights and the rule of law. These regulatory burdens add significant costs to formal firms. Not surprisingly, higher levels of income are associated with smaller informal sectors.

Nonetheless, the OECD points to a much more serious problem. In some instances, informality is driven by necessity. For many people, informal jobs are a survival strategy and play a critical role in alleviating poverty and social hardship. However, informality leaves people without adequate social protection and traps them in unproductive and precarious jobs. In these cases, the lack of formal structures is a reason for, not the solution to, lagging economic development.

“For society as a whole, pervasive informal employment undermines the ability of the state to ensure that workers have fair working conditions, including appropriate working hours and safety regulations, and that they receive adequate pay. Persistently high levels of informal employment reduce fiscal revenues and the ability to develop social security systems based on taxes and contributions. They also imply an inadequate use of available human resources as informal jobs are believed to be associated with a loss of efficiency and productivity.”

Informality in Times of Crisis
According to the OECD the size of informality tends to increase during economic crises. Informal employment can act as a buffer when people are laid off in the formal sector. “Their numbers are likely to grow in times of economic crisis, as informal employment plays the role of buffer. (…) In times of crisis, informal workers are exposed to a likely depression of wages due to the inflow of laid-off workers from the formal sector and return migrants.” Despite many arguments, there is not much evidence to support the hypothesis that informal economies are a buffer in times of crisis, nor that wages are forced to decline. To the contrary, the OECD points out that even without minimum wages, the payments to informal workers do not differ considerably from the reference wage set by the government: “the legal minimum wage seems to be a reference in most countries in that the average wage in the informal sector is very often quite close to the minimum.” (p.46). (for views on informality and gloabilization, click here)

Recommendations for a New Normal
The OECD report stipulates three objectives:
i) creation of more and better job in developing areas,
ii) better incentive to work formally,
iii) protecting and promoting informal workers.

We have seen that the informal economy is "normal" and possibly still growing. “Most workers in the developing world are employed informally… Informal employment is the norm, rather than the exception… Growth has not reduced the proportion of people working informally.” (p.9). Then, if informality is normal, how can we get to a "new normal"?

We support the main conclusions of the book. Combating informality is painful. Yet, combating informality via increasing formalities within the informal sector e.g. better contracts and incentives to comply is fruitful. We dislike the increased enforcement proposals set out in the report. People working informally indeed have a chose, but given the red tape and other complications to work formally, they have chosen informality. There is a lot of fruitful entrepreneurial activity within the informal sector, and stringent enforcement is like asking a baby to swim. “If cumbersome registration procedures and other administrative red tape undermine the creation of formal businesses, for example, informal working conditions may help to encourage entrepreneurial behaviour.” If we simply forget about the crisis and focus on common determinants of informality, the biggest suspect is red tape, which we defined as the rigid application of regulations and inefficient forms of bureaucracy targeted at formal firms. Cutting red tape is very likely to be associated with the creation of a stronger economy, with better jobs and more entrepreneurship.

Source:
Jütting, J. and Laiglesia, J. R. De (2009), Is Informal Normal? Towards More and Better Jobs in Developing Countries, OECD Development Centre, ISBN 978-92-64-05923-8.

DSB bank failure

2009-10-16T09:39:00.000-07:00

MBS, 16 October 2009

Dutch bank DSB with about 1.3 million clients, 1800 employees, and about $ 12 billion in assets got into serious troubles after a bad publicity stunt: was the subsequent bank run a typical example of self-fulfilling prophecy?

Risky, filthy business
In 1975 the charismatic figure Dirk Scheringa set up his own banking institution, the Dirk Scheringa Bank (DSB). The subsidiaries of the DSB include Becam, Postkrediet, lenen.nl and Frisia Financieringen. The bank was well-known in the Netherlands because of its aggressive advertising policies for loans with obscurely attached expensive up-front insurance policies. The commercials made it seem as if everyone could borrow unlimited amounts of money to finance new cars or housing repairs. The Treasury Secretary Wouter Bos called many of the financial products sold by DSB and consorts “idiotic” in the beginning of October 2009, since they involved provisions up to 80 percent. In July 2009 the Dutch SEC (AFM) even charged the bank guilty of selling fraudulent products and fined DSB with $ 180,000 for their credit activities. Corporate governance had failed as the employees had perverse incentive to sell risky loans.

According to the Dutch newspaper NRC: “For years DSB has been criticised for the way it sold loans, sometimes to customers unable to carry the interest burden. The catch with loans and mortgages taken at DSB was they came with expensive single-premium insurance policies. DSB received high provisions for the policies, while its customers were forced to loan more money than their homes were worth in order to pay for them.”

Bank run, bank ruined...
On Monday 12 October 2009 a court order placed DSB under administration of the Dutch Central Bank, after a run on the deposits. A series of events that led to the run started in the beginning of 2009 with growing dissatisfaction of many customers who got fed up with the terms of their loans. After gaining momentum and as it became apparent that the employees used malpractices to sell mortgages, the CEO Scheringa even made public apologies and in September 2009 DSB withdrew many of its notorious products.

Nonetheless, Pieter Lakeman stated on 1 October 2009 that he thought that bankruptcy of the bank was the best option for the people who took out excessive lending, which is the likely catalyst for the bank run. The media took notice and questioned the financial position of the highly leveraged bank.

In reply argued it had $ 2 billion in cash, which forms a sufficient buffer to withstand a run on its $ 6 billion in deposits. In the first half of 2009 DSB net profits were relatively solid with $ 60 million, down about 20 percent. Total assets were almost $ 12 billion.

According to the court review, after Lakeman’s announcement about the “bad bank” people withdrew about $ 120 million on the same day. The days following saw a subsequent run of more than $ 400 million within that week. By Monday 12 October 2009 more than $ 1 billion was taken out of the bank, even though the pace of the run slowed, despite continuous rumours of possible failure. Yes, we have a typical media hyped self-fulfilling prophecy.

The Dutch Central bank and the government (headed by Wouter Bos) clearly failed. The former could have been more though over the past years. The people at the regulatory authorities also watch television, listen to the radio and receive mail. Clearly, the products of DSB persuaded people with unstable income to borrow, and the AFM let this happen. Also, Bos remarks on the bank were stupid. During the run he even added: “This is an individual, relatively small bank that got into trouble because of its management, alarm amongst customers, unclear communication and the uncertainty thus created.” Although the bank by now seems technically insolvent, the run could have been prevented. The bank seriously flawed reaction to Lakeman’s accusations did not help either to prevent a bank run that later would ruin the bank. If they immediately went to court to let Lakeman soften his statements, DSB might still be active today. According to the Dutch Central Bank no other banks wanted to takeover DSB “owing to uncertainty surrounding possible claims.” Now the authority estimates that the total costs for the other banks will be $ 5 billion at maximum, isn’t that ironic.

Rajan on the crisis

2009-10-09T17:07:00.001-07:00

MBS, 9 October 2009

Today at Harvard Prof. Rajan from Chicago University (and in our opinion one of the best "gurus" in Finance alive nowadays) gave some interesting remarks on "rethinking regulation" on the financial sector. He compared the US banking sector to that of a developing country with weak institutions and sees the recent crisis as a complete meltdown - which can be solved...

Three main causes of the crisis according to his hunches (which are actually widely accepted) are that first of all accomodative monetary policy made financial funding available to too many, especially in the housing market. Basically, when central banks (under Greenspan) keep interest rates low, credit becomes cheap, and hence more widely accessible. The second reason is that banks anticipated the cheap money and made complex vehicles to maximize the selling of loans. They extended the lending activities via securitizations (like MBS, CDOs and CDS). The problem was that with the originate and distribute model, banks effectively sold loan products without directly bearing the risks. The real problem were thus the corrosive incentives the sellers at Wall Street and The City had.

More debatable is Rajan's stance on the third cause. He blames "inadeqate global demand" by which he means countries like China for saving to much and spending too little at home. This causes what the current chairman of the FED (the US central bank) Bernanke dubbed the "savings glut". As some countries were only exporting products, others (like to US) could consume them (the demand) but also got the bill.

As a response to banks that made use of this situation of excessive lending, they also took large risks, which made sense in the short term, but would lead to explosive reactions in the long run (as we have wittnessed). Rajan's main solution relies on a new type of buffers for financial institutions because as he worryingly said:

"We cannot rule out disaster. Thus, we must put effort to prepare the system for disaster."

For example, he argued that it is a massive problem that big banks are considered too big to fail. He even went further and said that politicians led Lehman Brothers to collapse just because they needed an obvious reason to pass the stimulus bill at Congress. Now, instead of relying on tax payers, rethinking regulation of finance required bigger buffers to prepare banks for new upcoming and inevitable disaster. No bank can be too big to fail, yet a bank can reach any size it wants, but has to by contingency claims to make it ready for disaster. If bankers know that when a crisis hits and they will need to cover for the pain, then it is rational for them to do so... lets hope the Sweet Lake economics logics works that simple.

Dutchies use internet the most among Europeans

2009-10-04T13:57:00.000-07:00

MBS, 4 October 2009

The average share of households with internet access in the EU27 in 2008 was 60 percent. Lowest internet access rates are found in Bulgaria and Greece, followed by regions in Spain, Romania, Czech Republic and Italy. The Netherlands is by far the most connected country in the EU, with access rates of about 90 percent.

New Eurostat data shows that the Dutch regions have the highest share of households with internet access. In particular, Noord-Holland, Groningen en Utrecht have about 90 percent of the homes connection to the world wide web. The Dutch also have the honour the see Overijssel and Flevoland on place 4 and 5 with 88 percent respectively. The Netherlands is biggest online user, followed by UK, Germany, Denmark and Sweden, which all have regions with over 75 percent of the households with internet access.

News: Brazil heads 2016 Olympics

2009-10-02T15:17:00.000-07:00

MBS, 2 October 2009

Brazil will be the host of the Games in 2016; the first time the event hits the South American continent. This will have economic benefits to one of the strongest performing emerging market, and generally to the region. The members of the International Olympic Committee decided on 2 October 2009 that the host city for the 2016 summer games will be Rio de Janeiro; and they know how to organize festivals and parties!

Some economic benefits include high investments and more employment. New infrastructure projects are proposed, making the market ready for a new stage of globalization. Inequality rates (e.g. Gini) have rapidly decreased as the general population benefits from the high economic growth. Tourism is also an important factor.

Olympic uncertainties
Upgrading Rio can lead to troubles elsewhere. City preferential government expenditures may increase wages and prices, or worse, crowd out investment as interest rates (and inflation?) can increase. Hurrying up building projects raises costs. The Dutcheconomist predicts that this channel is irrelevant as spending in infrastructure is supported by foreign investment. A good related case is China, which hosted the 2008 Olympics.

However, Rio is also characterized by huge favellas, which might post security issues. Look at the problems in South Africa related to the townships and 2010 World Cup. Ironically, Brazil hosts in 2016 the World Cup. As The Economist explains "the Brazilian city’s high crime rate may have counted against it with some delegates, but most will have concluded that Rio’s vibrancy will add to the allure of the games. And Brazilian enthusiasm for sports other than football will not have gone unnoticed—beach volleyball, a relatively new Olympic sport, is a Brazilian favourite." The Dutcheconomist agrees and again predicts: "Brazil will be an excellent host of the Olympics". A good related case is Barcelona, which experience by growth rates since its 1992 Olympics.

News: The Dutcheconomist joined Twitter!

2009-10-02T15:05:00.001-07:00

MBS, 2 October 2009

After giving the idea of Anderson's "Free" and the MarginalRevolution blog on Tweet (click here) an afterthought, we will use it!

You can now finds the Tweets on (surprisingly): http://twitter.com/dutcheconomist

Special Drawing Rights and $$$

2009-10-01T13:06:00.000-07:00

MBS, 1 October 2009

The G20 meeting has given the International Monetary Fund (IMF) more power to influence the world’s financial stability. One interesting aspect is the so-called Special Drawing Right (SDR), which might bring a new world currency to replace the dollar.

In 1969 the IMF set the SDR value equivalent to 0.89 grams of gold, or, simply then one dollar. In 1973 the SDR was redefined as a basket of currencies including the dollar, euro, yen and pound. Now SDRs are composed 44 percent of dollars, 34 percent of euros, 11 percent of yen and 11 percent of pounds. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.

The IMF states that "with a general SDR allocation since August 28, 2009, and a special allocation on September 9, 2009, the amount of SDRs has increase from SDR 21.4 billion to SDR 204.1 billion". SDRs are currently worth about $ 320 billion. The current increase of $ 283 billion consists of more than $ 100 billion coming from emerging markets and developing countries’s existing reserve assets, as the official G20 Pittsburgh statement informs.

Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions (e.g. China) to purchase SDRs from members with weak external positions (e.g. US). In addition to its role as a supplementary reserve asset, the SDR, serves as the unit of account of the IMF and some other international organizations.

SDRs are a bundle of currencies which central banks around the globe hold as assets, or reserves. Global reserves currently consist of more than 70 percent US dollar holdings, so this is a big economic issue. China, India, Brazil and Russia (BRIC) this year already called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability. As you can understand, the same group of countries is now pushing to obtain a new bundle of currencies, in which the BRIC’s foreign exchanges obviously are likely candidates…

ps. the Dutcheconomist felt reason to explain what SDRs are. Actually, SDRs are still peanuts and just a way of accounting at the moment, but as always, crises open windows of opportunities, and the push for a stable world currency is a likely given the already existing SDRs.

The world currency: SDR?

2009-10-01T05:51:00.000-07:00

MBS, 1 October 2009

Three recent events have given an opening to a new world currency.

First, the financial crisis undermined the stability of the current global reserve currency, the dollar. Currently, the IMF estimates that about 70 percent of the world reserves are kept in the US green bags. The IMF now started to propel countries to diversify their stock holdings to circumvent high risks related to possible collapse of the dollars. During the recent crisis the US economy has been hit hard and it is forecasted to run large budget deficits for the upcoming decade.

Secondly, the latest meeting of the UNCTAD (UN Conference on Trade and Development) urged large institutions to give more power to developing countries. Also, the World Bank President Zoellick last week recognized that the crisis implies a shift in the balance of influence over the world economy. Maybe in this fastly changing globalized world, floathing currencies and the supremacy of the dollar cannot continue.

Finally, the latest G20 meeting’s official statements show that a supranational body is required to mitigate the differences between the current account surplus countries like China and the deficit countries like the US. A global currency would meet this target instantaneously. Have you ever heard of the current account deficit of New York, or that of Berlin?

Article: Globalization and (financial) development

2009-10-01T01:07:00.000-07:00

MBS, 30 September 2009

Sometimes people still belief that hard work is the key to development. However, workers in poor countries do work hard, longer hours, and get lower wages. In the “Protestant ethics” by Weber (1905) the key to development are communities working hard via unplanned competition and mass action. These entrepreneurs then build the required capacities the economy needs to spur growth through moderation (the spirit of capitalism is not greedy). So, we ask why so many developing countries are now failing to implement a similar path to economic prosperity.

Institutions rule
Recently, Mishkin (2009) also finds the paradox of hard work without opulence appealing. Following Nobel laureate North (1990) the real problem in many developing areas is the lack of institutions, such as those that came about with the Protestant ethics. Hard work is not a sufficient condition to growth, yet institutions are a necessary condition for it.

Important ingredients of institutional reform focus on the “rules of the game in a society, or, more formally, humanly devised constraints that shape human intervention” (North, 1990:3). Mishkin (2009:165) summarizes six elements, including property rights, rule of law, corruption, corporate governance, and, last but not least, the financial system including transparency and quality of information and bank regulation and supervision. As long as societies work hard but do not place the moral emphasis needed on these elements, development is hindered.

Institutional reforms and globalization
The question then lies how mass (global) action in developing areas can bring the proper institutions. Mishkin (2009:166) argues that “one of the most powerful weapons for stimulating institutional development is globalization.” As poor countries welcome rich countries in, they can mimic and learn about the necessary reforms as foreigners push for development of institutions.

Opening up the financial markets has two direct effects. First, as foreign capital flows in there is a greater access to capital which lowers the costs of doing investments. Based on factor differences in (human) capital and labour, many poor countries have cheap labour so that capital can be very productive in these locations. Secondly, globalization will promote reform to improve the financial system. As Mishkin argues: “Allowing foreign financial institutions to operate in an emerging-market country brings in expertise and best practices, such as those designed to screen good from bad credit risks and to monitor borrower activities to reduce the amount of risk they take.” Foreign presence can put pressure on government reform of the financial architecture in the right direction. However, others have argued that foreigners increase the volatility of capital flows, which can have detrimental effects.

Opening up to trade in goods (e.g. via tariff reduction) can also facilitate institutional development. Just as Weber emphasized, increased competition breaks down some vested interests that can be related to political powers, entrenched business interests and corrupt institutions. Mishkin says that governments can provide better infrastructures like ports and roads to make international transactions easier. Sure, but he does not answer how this prosper ethic can start… many African countries still have export and import restrictions, currency controls as well as high tariffs and restrictions on foreign ownership. Ultimately, developing areas seem preoccupied with hard work without the proper institutions, so next time we should focus on the transition instead of explaining the destination.

What about informality?
These specialists seem to forget that in these countries most people are employed informally. If foreigners come in and raise the regulatory burden for formal businesses, then it is likely that even more people mitigate the reformed institutions and fall back on their own; informality. The real question for most workers in developing areas is whether globalization has a positive impact on informal firms, so far the results remain mixed.

Source

Mishkin, F. (2009). Globalization and Development. Journal of Development Economics 89 (2). (click here)

Link: why didn't econs predict the crisis?

2009-09-19T11:29:00.000-07:00

MBS, 19 September 2009

"Let us talk more seriously about the supposed failure of the economics profession. You say [Krugman] that few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems...

The predictive failure is not a problem of the field - it is a problem for those who are under the impression that we should be able to predict crises. Do you number yourself in this bunch? Do physicists get it wrong because their theory says that they cannot predict where a photon shot through a sufficiently narrow slit will land? Economic models are like models of photons going through slits. Just as those models predict only the statistical distribution of photons, so our models only predict the likelihood of downturns - they do not predict when any particular downturn will occur. Saying "most economists failed to predict the downturn" is exactly like saying most physicists failed to predict the impact of the twelfth photon passing through the slit. Read more at: http://www.huffingtonpost.com/david-k-levine/an-open-letter-to-paul-kr_b_289768.html

News: Doing Business Report 2010

2009-09-17T13:06:00.000-07:00

MBS, 17 September 2009

This month the Doing Business Report for 2010 was released. The most important conclusion is that most countries have continued pushing their ease of doing business in the right direction. Despite the challenges presented by the financial crisis, the number of reforms hit a record level this year.

Much of the improvements in the business environment occurred in low- and lower-middle income economies. Rwanda is the top reformer, followed by Kyrgyzstan and Macedonia. The reformers focused on making it easier to start and operate a business, strengthening property rights and improving the efficiency of commercial dispute resolution and bankruptcy procedures. Here is the top ten countries of the doing business report 2010:

1. Singapore
2. New Zealand
3. Hong Kong
4. United States
5. United Kingdom
6. Denmark
7. Ireland
8. Canada
9. Australia
10. Norway

The Netherlands ranked 30, just before France. The Dutch score particularly low in “dealing with construction permits”, “employing workers” and “protecting investors”. The first can be explained by fraudulent construction tenders over the last decade and the extreme slow implementation of projects. The low score on hiring labour is due to the high protection workers face in terms of social security and pension benefits, but also protection from lay-offs. According to the Doing Business Report this is bad for the business environment, since it makes economies less flexible.

Maybe the most interesting remarks in the report are not that doing business ease has improved despite the economic crisis, but that there is a high spatial correlation in the reforms. It seems that countries learn how to reform from their neighbouring countries.

“Reformers were particularly active in 2 regions, Eastern Europe and Central Asia and the Middle East and North Africa. In both, competition among neighbors played a part in motivating reforms.”

Discussion: Purgatory recession

2009-09-16T14:18:00.000-07:00

MBS, 17 September 2009

New terms in economics tend to be adopted fast. Just within weeks the word "purgatory" seems to be among the common vocabulary of The Economists. We - as economists - all know what words like recession, unemployment (and money supply) really mean. Fancier terms like green shoots or V and W shaped recessions (what about brown weeds? red.) are also pretty well spread (by now, red.) - but lets define them later.

Purgatory was recently coined by Nobel laureate Paul Krugman. As he argued about the pessimitic outlooks of the economy, he explained that we are now in a purgatory recession. Instead of something black or white like "in" and "not in" (or out of) recession indeed seems vague. Economist therefore also like to talk in second order (actually, Dutcheconomist's phase out recession click here). Krugman has expanded this recession vocabulary to the volatility of the phase out recession terminology:

"We've got a problem with terminology because we usually say either the economy is in recession or the economy is recovering. Either you're in hell or you're in heaven. And the trouble is we're actually in purgatory. We're actually in a situation almost for sure GDP is growing; almost for sure the business cycle leading committee will eventually decide the recession ended this summer. But almost surely also we're still losing jobs. The unemployment rate is going to continue to rise. So we're in that infamous jobless recovery state.”

What is new about purgatory recessions?

The purgatory recession is related not to the output dimension, but to the employment side of the economy. During a purgatory recession we have growth in terms of output and GDP yet we also see growth in unemployment rates. Therefore, this jing and jang of output and employment in the economic figures since September 2009 indicate we have jobless recovery. What is new about the purgatory recessions is that in theoretical sense unemployment is not a lagging indicator. As soon as the economy is recovering from very low levels it is easier to grow in output than it is to let unemployment decrease. Therefore, returning economic growth does not imply employment growth to tackle market problems and job frictions. The Dutcheconomist therefore argees that continued government stimulus is needed since, as in the Brittian's Phase Out Recession, the economy remains fragile and can be fixed with proper policies (well, monetrary policies have worked - low interest rates - and fiscal policy has worked too - eg. car industry).

For more information on purgatory by Krugman, see blog

News: Nout Wellink says "large probability of economic downfall"

2009-09-16T14:00:00.000-07:00

MBS, 16 September 2009

The chair of the Dutch Central Bank Nout Wellink is still cautions about the state of the whole economy. He said that the recent recovery will be very slow.

A few reasons for pessimism about the fundemantals of the economy can be that interest rates cannot remain low or that the fiscal policies are discontinued, yet Wellink does not mention his reasons behind this strong statement. He even went further and let the Cartesian evil demon say "there is certainly a large probability of economic downfall."

Maybe the real reasons is that we are in a purgatory recession, and, just as the Great Depression from 1929 to 1939 (not speaking of the war) lasted long. Well, current policies must continue to focus on job market and make sure to get unemployment levels down as well, now the economy is out of recession and recovering fast. As argued, "a phase out recession is a nasty purgatory one..."

News: Bernanke says recession ended

2009-09-16T13:53:00.000-07:00

MBS, 15 September 2009

Today Bernanke remarked that we are “very likely” out of a 'recession'. Actually this term recession seems outdated. The chairman of the Federal Reserve was signalling is that US output probably will grow again, that is, GDP is increasing. However, after massive lay-offs, cuts in inventory levels, government (car) subsidies, etc, this is not as “good” as it seems.

News: Costs of Migration and (Not Measured) Benefits

2009-09-07T16:20:00.001-07:00

MBS, 8 September 2009

Recently, Dutch politicians have become interested in measuring the costs of immigration. One should wonder about this question carefully. Actually, the far right-winged Geert Wilders attacked the government for not delivering: specifically he asked: "what percentage of the police enforcement is dedicated to fighting non-Westerners". Intuitively, it sounds reasonable to have transparent informations on immigration issues like who is receiving welfare benefits (the young, the low-skilled, which sector, or other characteristics...).

The real problem is that these implicit costs of immigration are more visible than the benefits. It is necessary to revisit current right-winged and FRAMED estimates on the costs of immigration. Migrants bring something special and needed to your country, and many of them leave their home and are enabled to fullfil their dreams (e.g. American Dream). Immigration definitely has its downsides, but it is only fair to weight this against the enormous indirect benefits.

The core problem of the framed discussion on costs is that the benefits are hard to measure, but we should try to measure the hard to measure fast, before the statistics provided (e.g. see Syp Wynia) are taken for real... when investigating the costs of immigrants, simple saldi are insufficient. Lets see what happens on "Prinsjesdag" on September 15, the moment where the Dutch cabinet presents their budgets and forecasts for the next year... I hope to follow my advice and include a passage for the Queen: "Immigration is an important element of Dutch society." and then: 'lets now focus on the benefits'!

Discussion: How to sell your car with profits

2009-09-01T05:17:00.000-07:00

MBS, September 1, 2009

One trick by accountants is the profit statement. Although the GAAP and other conventions have tried to make profits transparent, in theory accountants are able to cook profits whenever they are hungry. Here is how you can sell you car with profits.

First, let’s buy a nice car with borrowed money for $ 40,000. Because my personal bookkeeping is not under e.g. GAAP I can choose how to write-off my automobile; that is, I can pick any depreciation scheme and that is the whole accounting trick.

Because cars (generally) loose value over time, I consider taking this into account by arguing it is worth half of its original value after one year, and that after two years its worth nothing to me; that is, I let the car depreciate to a book value of zero within two years. Well, the way I can always sell my car with profits is simply by waiting either one year and find a person that is willing to pay more than $ 20.000 or, even more easily, wait two years and find any person willing to pay be more than nothing! That how I can always sell a car with “profits”.

News: stock market high: AEX above 300

2009-08-29T13:28:00.000-07:00

MBS, 30 August 2009

AEX index above 300

The Dutch stock market index AEX closed above 300 point, reaching a yearly high. In October 2008 the Dutch leading index fell below the 300 points, even reaching below 200 point in March 2009 in the midst of the credit crisis.

DJ Index at yearly high: +9500

This week the Dow Jones Index also managed to keep at its yearly high at above 9,500 points.

Prediction: According the Dutcheconomists markets continue to rally in a turbulent environment. The DJ index will be reaching 10,000 and the AEX will be reach between 320 and 360 points. Lets (act) wait and see...

News: Bernanke stays at the Fed

2009-08-29T13:04:00.000-07:00

MBS, 29 August 2009

Bernanke will be nominated for a second term as chairman at the Federal Reserve on 1 September 2009. Let me explain first why his stay is surprising, and then why everyone has expected President Obama's decision.

Bernanke was appointed by former President Bush while Bernanke served at the President's Counsil of Economic Advisors that had a double role in todays economic crisis.

On the one hand, Republican spirits pushed for liberated markets and applauded hedge funds and the spread of credit, while at the same time dealing with accounting fraud and initiating the Sarbanes-Oxley Act and pulling the US economy an a firm growth path after the September 11th 2001 attacks. Bernanke is very Republican.

The reason Bernanke was expected to stay is ironic. Bernanke was as a scholar or Princeton seen as one leading specialist on the Great Depression, as proofed by his distinctive work on contagion in the banking and financial sector. He has held the world economy while on the edge, yet the recovery still needs proof of good monetary policy. As long as inflation remains low, interest rates must be kept low, untill there are sings of productivity increases that translate into labour costs increases and rising output. Bernanke knows how to handle Democrats spending drift and keep price levels steady and as in 2001, bring the economy back on the long run growth path.

News: Dutch Unemployment Part II

2009-08-29T12:50:00.000-07:00

MBS, 29 August 2009

see previous blog of 22 July 2009

http://dutcheconomist.blogspot.com/2009/07/news-dutch-unemployment-figures.html

News: Dutch welfare assistance increases

The Central Bureau of Statistics (CBS) released new figures on the change in this half-years welfare benefits program: de bijstand (or leefloon in Flemish). The idea of the Dutch welfare assistance is to support an individual with a “salary” in order to support the person finding a job. Persons are eligible if have no income and do not receive unemployment or incapable to work benefits, or pension (see WWB law). The application process for a job is done by a special employment agency (UWV) that helps with the interviews.

Welfare assistance has increased more than 4 percent for two subsequent quarters in 2009. Since July 2009 the welfare benefit program assists 270 thousand persons. It increased with 11 thousand over the last two quarters. It are mainly men and singles that have been affected. Under adolescents up to 24 years old the welfare assistance had increased more than 21 percent. The largest increases were in Haarlemmermeer, Enschede and Emmen.

Discussion: Dutch unemployment figures

In part one of the Dutch unemployment figures on 22 July 2009 discussion we showed why first of all the Netherlands has few unemployed workers: high level of incapable or disabled to work registrants, and keeping labourer on the payroll of their employers while the government subsidizes their income, while the employee sits at home waiting.

1. labour disabled income

Previously we argued that:
“A group of almost 1 million ‘Dutchies’ is registered as “labour disabled”, which is an awful lot. Fortunately this number has been declining steadily over the last five years.”
Actually, the number has reached 836 thousand in the first quarter of 2009 (CBS).

2. government ‘waiting at home’ income

Previously we argued that:
“Dutch government pays factories to keep (blue collar) "employees" on the pay roll, effectively subsiding these workers to stay at home without being unemployed. Obviously, these policies were meant to be temporary, yet they have been extended for long periods.”
Actually, since August 2009 the budget for the program has been aggressively emptied by employers, causing a debate on whether with rising unemployment, the policy is effective or not, considering the costs of hiring worker that … blablabla cannot do any work, because of frictions due to temporary output falls in certain sectors, but they hold special talents that the market must preserve and which is in demand with the pickup, yet many blue-collar workers need scholling… blablabla right: its just not working, and just like the labour disability income, this program sucks in lazy workers and lazy employers that are afraid to actually sack people during recessions… yeas, life is hard, but we have a government to take care, right?

Article: Roubini and magic

2009-08-24T10:43:00.000-07:00

MBS, 24 August 2009

During the financial turmoil since September 2008, everyone’s eyed turned to those who had predicted it explicitly. Markets are irrationally inflated, cried Roubini from 2006 onwards. And then, almost like September 2001, in September 2009 the financials were hit by something that came almost from the sky. The financial meltdown of the market since did turn the tables: bankers became evil, regulators were bashed, and economists seemed stupid. Since that period to March 2009, stock markets bleed. Even the renounced magazine The Economist devoted much attention to the demise of the economic science: nobody predicted I, except for Roubini, Dr Doom!

Dr Doom is predicting the economic crisis will worsen

Today, Roubini revoked his pessimism: we will hit another bottom soon… another round of Bearn Stears clones, rising debt, and fall of oil?

Meet Dr Doom

In New York at Stern School of Business (NYU) they call him Dr. Doom, or actually, more cosily Cassandra, after the Greek figure who was cursed because of her predictions. Nouriel Roubini is well-known for his correct prediction of the global economic slump, especially that the banks at the time before 2007-2008 were heated up, took off, and would fall deep as a result.

Dr Doom was correct. In the midst of his foreseen crisis with massive fire-sales up to January 2009, he reloaded his ammunition and forcefully argued that the markets might collapse because the banks are virtually insolvent or worse: the government gets the burden via TARP and other rescue funds cq. bail-outs (e.g. Bank of America, AIG, Citigroup) and Chapter 11 spooks (GM). He even suggested that as the recession was worsening to nearly unthinkable levels that he favourite subject oil would burn. “Oil prices will trade between $ 30 and $ 40 a barrel all year”, and so he was both wrong and right.

Was Dr Doom really right?

If we revaluate his opinions since January 2009 we get the following picture of Dr Doom. Since that time Roubini’s deep felt pessimism about the fundamental of the economy worsened dramatically, Bearn Stearns collapsed and took markets with it. Roubini was correct that the pains at that time were deep, and the upcoming months the stock markets declined. But, gosh was he wrong (so far) about the fundementals during the 2007-2008 period. Government are not under severe tread, depressing its citizen and their hunger for energy (oil). Cassandra seems to be killed by the revamp of growth, just as she was by Apollo.

In July, after a steep stock rally after recession becoming less severe, he had to adjust his opinion: “the worst behind us but more stimulus needed” as last month he forsaw unemployment above 10 percent. With Cassandra dead (when Roubini was signalling a Depression), Dr Doom is still alive (as he signed Lehman’s fall as systemic, with the fall of Bearn Stearns in March 2009). Yet again, since March 2009 he has showed completely wrong: figures this month showed that US unemployment actually fell for the first time, from 9.5 to 9.4 percent. Yet he said in March 2009: "despite those reports my views expressed today are no different than the views I have expressed previously. If anything, my views were taken out of context."

In July ABC referred to Roubini as permabear. Dr. Doom has repeatedly argued, as shown, up to July 2009, and again today (sic), as his card goes: markets will deteriorate.

Playing card tricks as predictor

The very friendly, not grumpy Mister Roubini continues his gloom, which is scary to some, but strange: Roubini’s is apparently inconsistent as he today opinionated instead of proposing “second rounds” filled with government stimulus worldwide as recession worsens, he now argues again government insolvency are the biggest treat: high taxes and low spending, and the return of output decline.

According to the Dutcheconomist he is playing a deck with 53 cards. Mister Roubini is holding two cards, both predicting traumatic events, yet always changing targets. You can always point at oil as a concern, and that is also the topic of Roubini’s second card. He was completely right to predict the bust of oil prices at their peak of nearly $ 150, saying as they declined to $ 50 rapidly at that time they would even fall further (his first card), quoting his long run estimation of $ 30 to 40, where it is now $ 74. This is easy stuff, at the top of the oil peak, the vast majority of economists expressed their concerns about irrational exuberance in the commodity boom of 2008.

Today Roubini argues that if oil remains at about $ 75, his first card comes into play saying that high prices pose a treat to inter alia government, employment and growth, and that there remains financial fragility.

So, with hindsight, the real problem lies on perspective, especially on timing referrence. I guess it is now again not the time to listen to his words, since the majority of economists were right that injections would revoke growth rates and it seems that their policy predictions during the crisis are returning its fruits. Economists like to play poker, and the crisis was something nobody could bluff his way out, but they played fair and sticked to the rule, something we might also expect from wizards of the discipline like Roubini. I wonder when he plays it fair and square and argued that most likely growth rates will continue the upcoming decade.

ps. I personally wonder if Mr Roubini put his words into action and has put his money where his mouth (correctly) was: economic failure, even we was loaded with put opions, he could have been rich (ironically, just as long as he has been playing by the rules since March 2009).

Dicussion: Overview of crisis this year’s period

2009-08-24T08:55:00.000-07:00

MBS, August 24 2009

Here we describe the behaviour of stocks over the last year's crisis related to event that took place at that time.

August 2008: onset of consequences of subprime crisis and credit crunch, banks start to become shaky.
September 2008: taking hits, and the market collapses, especially financials (e.g. Lehman, AIG, Washington Mutual).
March 2009: hitting the bottom of the crisis after signs of “Recession turning Depression” improve with the collapse of Bearn Stearns and sharp falls in output globally, making world growth negative for the first time since the 1930s.
June 2009: strong signs that massive injections in the economy (bail-outs) by governments are effective and that the financial sector is stabilizing, output declines are decreasing.
August 2009: recession officially has ended, growth returned and financials are again making profits, but caution remains.

Prediction December 2009: what markets do as signs of stabilizing growth rates and returning profits remain; either they remain volatile at current levels (concerns of government burden) or continue the rally at the pace of return GDP growth worldwide.

Discussion: Nucleair Global War(ming)

2009-08-06T13:47:00.000-07:00

MBS, 7 August 2009

I once explained during a lecture Statistics to my class that “if” there is a small probability that Saddam Hussein had a nuclear bomb at its disposal (including his bad intentions that came with it), then that would be a “good” reason to start a war! Now, as some people doubt the consequences of climate change, there is strong justification to fight it!

Here is how the argument runs. First, assume that there is imperfect information. At that time, if Saddam managed to send off his bomb, it would cost approximately $ 1.000 billion, depending on the target. Given the 9/11 attacks and the poor information about Iraq in 2003, assume that the chance of nuclear “war” is, say, five percent. Then, actually, the opportunity costs become (at least) $ 50 billion for dismantling. As long as the expected costs of the Iraq war were below this (then we need to presume it’s a rather quick and easy fight), then this could surely “justify” the war, only because somebody (such as former President Bush) might fear a nuclear impact.

Now, let’s apply this to global warming. I assume that the probability that climate change is true is a mere 5 percent. The costs of global warming are approximately a mere $ 1.000 billion, then it would be wise to invest at least 50 billion, because of option value.

This also applies to e.g. having a SEC (at some costs) because there is a chance of rough trading, or, building expensive dykes because there is a chance of a flood, or, to vaccinating for H1N1 because there is a chance of a pandemic, or, to searching for alien life forms because there is a chance of finding them. Please note that this is statistically sarcasm.

News: Brittian Recession “Phase Out”

2009-08-06T12:24:00.000-07:00

MBS, 6 August 2009

Brittian is in recession. 1) Stock markets, 2) housing prices, 3) banks and other financial institutions collapsed, 4) output declined, especially due to manufacturing, and, 5) unemployment reigned… and the rest is history, its time for a new phase.

What I refer to as “Brittian Recession Phase Out” is the final time period of this harsh economic downturn. Paul Krugman’s August 5 2009 blog was titled “Bouncing Brittain”. The Nobel laureate predicted a “hint of relatively quick economic turnaround” or the “Phase Out”. Will it really be quick? Can it be quick and painful at the same time?

Economists call certain events turnarounds because, recently, the main UK economic indicators obtained what’s called a positive second derivate. Intuitively, it means that in this case the worsening of the UK economy has ended. The recession continues but is weakening is in a speed of decline. ”. The decrease in output went from 2.4 percent in the first quarter of 2009 to 0.8 percent in the second quarter. Now that is coined the “Brittian Recession Phase Out. Isn’t that a great sign?

In the words of Krugman all this ‘good news’ can be ascribed to “aggressive monetary policy and the depreciation of the pound”. Well, as the Dutch Economist of August 5 2009 replied:

Dear Prof. Krugman,

Let me hope you are NOT saying that Brittian is actually “doing good” recently… I mean to say, the financial mess remains a burden on the government (which partly reflects the weak pound)

The point Krugman made was that there is a turnaround and that the recession ends soon (as in, quick). I agree with the “turnaround” and recall this as the “phase out”. But, unlike in music where a “fade out” goes smoothly, the “Brittian Recession Phase Out” will be just as harsh as the fade in of the recession itself. True, the government has injected heavily and took a 12.4 percent budget deficit (fiscal policy). Krugman points out that ‘the market believes’ Brittian is not insolvent since “the CDS spread [a UK government default measure] … was not too bad a month ago at 71, is now down to 50”. True, at the same time The Bank of England (BOE) has initiated a debt purchase program of 175 billion pounds after it let interest rates (monetary policy) plummet to its historically low point since 1694!

Ironically, Premier Brown said on July 22 2009 that the BOE’s so-called quantitative easing policy and interest-rate cuts have “made a difference” – sure is has, otherwise the word depressing is understated - but forgot about the costs… and can Brown be saved?

Some quick (and painful) facts about the UK recession

1. Stock makets jumped since the end of the first quarter 2009 (but remain low). Over the last 5 years, the market did not move and remains between 4500 and 5000, after peaking above 6500 in the pre-crisis period.

2. Housing prices stabilised and increased 1.3% in July 2009 (but remain low). As can be seen in the graph, mortgage lending approvals have increased in the second quarter of 2009, relative to the three months before. Although this second derivate is highly postive (with the rate of change hitting a historic more than 10 percent), mortgage approval levels are low and depressed.

3. UK banks did better? It a mixed (and unknown) picture... This first half year of 2009 in pounds Brittain’s banks were indeed bouncing: Barclays and HSBC made profits of 3 and 5 billion pounds, while Lloyds lost another 4 … tomorrow its RBS its turn to reveal their “profits”…

4. Output declined, just much more slowly (phase out). As can be seen in the graph, the recession is deep and output has declined heavily, although its pace weaken

ed too. Still, it looks rather dramatic at face value.

Markit comments that the contraction was also steeper than implied by the PMI surveys. The weighted combination of the output indices from the UK PMI surveys averaged 49.4 in the second quarter of 2009, up from 40.8 in the first quarter.

5. And unemployment still reignes as never before...

What about UK inflation?

Yeah, what about it. Inflation, unless a monetary phenomenon, is actually something good - yet it’s lacking. Inflation can be the cause of a rapid increase in demand, or can come from a strong currency such that imports become expensive. The weak pound reflects Brittian’s WEAK position.

Today, the BOE expanded their bond buying program with a thrilling 50 billion pounds because according to the BOE’s statement UK’s recession “appears to have been deeper than previously thought” and the threat of deflation remains as unemployment rises, retail sales are sluggish and banks still restrict access to credit. So, then again, what did the Professor have to say about Brittian? He agrued that “definitely an easing crisis, though probably not enough to save Gordon Brown” and lets bet on both a “phase out” and “Brown out”, yet it will not be quick, but painful.

News: Temporary Protectionism

2009-08-05T05:10:00.000-07:00

MBS, 5 August 2009

Economists have a general tendency to refute any form of protectionism. That is, any government should abstain from impeding free trade between countries, e.g. using tariffs on imports. The World Trade Organization (WTO) embodies this belief and encourages its 153 member countries to set trade policies in accordance. However, if you thought that financial trading with the use of engineers in derivatives and hedgers was difficult, I welcome you to the world of trade negotiations in times of crisis and the concept of “contingency measures”.

On 22 July 2009 the yearly WTO World Trade Report “Trade Policy Commitments and Contingency Measures” was released. It covers “the design, use and effects of contingency trade measures and the place of such provisions in international agreements.” Basically, under special circumstances – read: times of crisis – trade agreements allow countries to deviate and make movements towards more protectionism.

Forms of temporary protectionism as I will refer to include anti-dumping, countervailing duties and safeguards like higher tariffs or export subsidies. A distinguishing feature is their strictly short-term nature backed up by a credible threat of retaliation from trading partners.

Officially, contingency measures (or, escape clauses) are allowed to cope with ‘unanticipated market situations’, and that is a good thing. They offer flexibility to governments, or in terms of financial engineers, option value. In their various guises, they can be thought of as safety valves, a form of insurance, an instrument of economic adjustment or as a deterrent against the trade-distorting policies of others.

For example, China’s big stimulus includes export subsidies in the garment industry. In turn, Indonesia has restored to an import quota on garments, and (as retaliation or, because of ‘unanticipated market situations’) also on electronics, shoes, toys and food, precisely the products with which it competes with China. So the real problem with the fancy contingency measures is to justify them in the framework of free trade and identify the temporary circumstances to allow for them anyway.

All these provisions are just “temporary protectionism” in disguise, something the report does not dare to mention. Any financial engineer can see that if Ireland is protecting its depositors more than in Brittan, then the effective subsidy by the Irish provides an incentive to move deposits away from one island to the other. The same with trade: if unanticipated circumstances lead any country to subsidize an “infant industry” then the rest of the world suffers, and as we know, government subsidies are a distortion and lower general welfare. Unless you can point to me extraordinary situations, the same holds with temporary protectionism: they destroy welfare.

“Contingency measures seek to strike a balance between commitments and flexibility…. If a trade agreement allows too much leeway to modify obligations, the underlying value of the agreement is reduced, but too little may render the rules unsustainable.”

BUT: The only “good” argument for the inclusion of temporary protectionism in trade policy is the following: if flexibility provisions are too restrictive, an agreement will be less stable because signatories may be more inclined to renege on their commitments. Flexibilities are not costless in relation to the benefits of an agreement, since they undo part of what the agreement achieves in terms of trade cooperation. Moreover, relaxing trade commitments may harm a government’s credibility and result in a reduction of global welfare. The same with the abolishment of short-selling: without insurance everyone is worse off, yet ironically, temporary protectionism provide just that form of insurance.

Article: Democracy and growth?

2009-08-03T11:49:00.000-07:00

MBS, 3 August 2009

Democracy is something almost anyone would nourish. Surprisingly, some economists seem to think that dictators are not always as bad a portrayed.

Democracy provides individuals the freedom to vote and lets them decide on the rule of law and installs personal property rights. Lipset (1959) classical argument is that social economic development in the form of increased wealth and chiefly changes in class structures would “cause” democratic institutional shifts in society. As popular interpretation of his work has it: economic prosperity produces a middle class and gives rise to stable democracy.

In contrast, real dictators take way individual freedoms and choose their own course of actions without real counterbalancing powers. Indeed, the list of countries that have suffered under dictators is very long. Nevertheless, dictators can be good for economic development. They can even be better at producing growth than democracies…

Fortunately it’s not that simple. One fact is that as an economy develops, the propensity to become a democracy increases just as Lipset proposed. Living in a rich country makes it more likely that you enjoy the fruits of democracy too. However, a democracy is no guarantee to benefit from economic growth. The belief that democracy can only exist in rich countries is a myth.

Barro (1996) seminal work “Democracy and Growth” (which initiated the now famous “Journal of Economic Growth”) found: “the overall effect of democracy on growth is weakly negative. There is a suggestion of a nonlinear relationship in which more democracy enhances growth at low levels of political freedom but depresses growth when a moderate level of freedom has already been attained. Improvements in the standard of living--measured by GDP, health status, and education--substantially raise the probability that political freedoms will grow.”

In their paper “Do Institutions Cause Growth?” Gleaser, La Porta, Lopez-de-Silanes and Shleifer (2004) show that “economic growth and human capital accumulation cause institutional improvement, rather than the other way around.” Additionally, they argue that initial levels of schooling are a “strong predictor” democratic stability. Likewise, education is considered good for growth.

In related work "Income and Growth" by Acemoglu, Johnson, Robinson and Yared (2008) it is shown that the relationship between democracy and high income is false, since there are no control factors included that simultaneously affect both variables. They move one step further than the findings of Gleaser and colleagues. They suggest that there is “no causal effect of income on democracy”, thereby refuting Lipset’s idea.

While nearly every poor nation in 1960 was governed by a dictatorship, some have remained in poverty while others have managed to grow. This evidence by Glaeser and colleagues implies “that it is the choices made by the dictators, rather than the constraints on them, that have allowed some poor countries to emerge from poverty.”

They state that a) human capital is a more basic source of growth than are the institutions, b) poor countries get out of poverty through good policies, often pursued by dictators, c) poor countries ruled by benevolent dictators subsequently improve their political institutions towards democracy.

Dictators after all?
Dambisa Moyo (2009) makes the controversial suggestion that what Africa actually needs is a “decisive benevolent dictator to push through the reforms required to get the economy moving.” As we have seen, her suggestion is not as strange as it might have seen. Dictators in the past have been able to pursue good policies. Nonetheless, actually installing dictators to push for development is far-fetched. Firstly, how likely is it that a dictator would cede power to a democratic system once economic growth has taken off? Few, if any, examples exist of a peaceful and successful transfer of power from dictator to democracy. Furthermore, dictators are generally a killer for domestic entrepreneurs who want to set up small business to gain economic freedom.

Source
Barro, Robert J. (1996). Democracy and Growth. Journal of Economic Growth, 1, 1-27.

Glaeser, Edward L., Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer (2004). Do Institutions Cause Growth? Journal of Economic Growth, 9 (3), 271-303.

Acemoglu, Daron, Simon Johnson , James A. Robinson and Pierre Yared (2008). Income and Democracy. American Economic Review, 98 (3), 808-842.

Discussion: Historical US Tax Detail Inequality

2009-07-31T17:09:00.000-07:00

MBS, 31 July 2009

Yes, U.S. tax rates are burdensome some say. The latest blog of Greg Mankiw showed an interesting fact from the US Internal Revenue Service (IRS). The IRS is the governmental agency in charge of tax collection and enforcement. Their most recent data presents the following “tax detail” which tackles the historical discussion: do the rich pay to little or too much tax?

In 1987 the top 1% of tax payers paid almost 25% of total income taxes collected by the US government
In 2007 the top 1% of tax payers paid over 40% of total income taxes collected by the US government.

In words, just 1.4 million Americans pay 40% of income tax for a population of 307 million. The massive rescaling of tax burden towards the rich in an interesting historical fact for two reasons: it reflects identifiable changes in tax policy and reshaping of distribution of US income.

In 1987 the bottom 95% of tax payers paid 58% of total income taxes collected by the US government.

In 2007 the bottom 95% of tax payers paid less than 40% of total income taxes collected by the US government.

So, 1.4 million taxpayers pay a larger share of income tax burden than the bottom 134 million bottom 95% taxpayers combined. According to the OECD the US ranks highest in having a progressive income tax system. The devil is in the details.

20 years of income tax
The facts (see graph) imply that either low income labour is not heavily taxed – true – or that high income labour is heavily taxed – not true. Yes, the US has a progressive tax system where the marginal tax rate for high incomes is higher. Yes, relatively speaking compared to low income individuals the rich Americans pay much. But, top income tax rate are merely 35 percent, compared to 47.5 in Germany, 40% in France and Japan, and 52% in the Netherlands. Not that the rich pay a high income tax. The data signify that in the US either low income labourers earn little, or high income individuals earn loads of money - in facts, its both.

The “tax detail” above suggests to some that high income individuals suffer a high tax burden, however, it seems to identify the worrying fact that the income distribution is now extremely skewed in historical terms: US inequality is very high. The Gini of the US is 45! Compare this to 27 in Germany, 32.7 in France, 38.1 in Japan and 30.9 in the Netherlands…

The

"tax detail" demonstrates historically high inequality between rich and poor, not burdensome rich.

Discussion: Ageing

2009-07-24T15:50:00.000-07:00

MBS, 25 July 2009

It seems like a paradox: economists frown old people - so it seems - and at the same time they offer policies to enhance wealth, which certainly is translated by most people in living longer under better health conditions. Why do economists appear to bleach ageing?

Ageing crisis? Pension & care
Bluntly stated, the elderly do not contribute much in economic terms. As populations get older, growth cools down and productivity slows, public spending rises and labour gets scarcer. Recent predictions show that in 2050 one in three persons is a pensioner in rich countries, including one in ten above their 80s. Its obnoxious that many governments still embrace “pay-as-you-go” systems, where today’s workers pay today’s pensioners. In Western Europe, about 10% of GDP flows to public pensions. Additionally, gigantic new streams of money need to be directed to hospitals and long term care. Currently, about 30-40% of health-care spending in the EU is directed to elderly. Hence, gerontology denotes crisis, far bigger than the current global economic crisis. The IMF even estimated that “for advanced countries, the fiscal burden of the crisis is about 10% of the ageing–related costs.”

Origins of ageing

People live longer, thanks to economic growth, more stable environments and technological advances. In 1900 average life expectancy was about 30 years; in rich countries the figure reached below 50 years). Currently, these numbers are 67 and 78, and are still rising.
People have fewer children (and fertility rates have plummeted – in many rich countries its below 2, the replacement level). Women get children at older ages.

What can we (and governments) do about ageing?
As the labour force retires much quicker than it receives newcomers, it means that worker share a greater burden to pay for old workers. On the other hand, as labour becomes scarcer, salaries need to increase. As long as governments do not have to compensate too much of the ageing population and retired workers hold private pensions, it could actually profit the new young ones. In other words, current policies must make the labour force aware that the government cannot afford to subsidize their retirement, and workers need to “insure” their old age according to their preferences (and beware of stock market crises). Spend now, or save for later.

Above this, like in Denmark, the retirement age can become variable, implying that those who save a lot can enjoy their old days earlier while those that consumed a lot when working, must work longer (or harder) to compensate their retirement. According to McKinsey, people are making bad decisions when it comes to retirement: the two-third of the baby-boom generation failed to make sufficient financial provisions to keep up living standards for their old days. All this implies that “final-salary schemes” are dead and unaffordable. Governments should explicitly quit pension policies and make private pension schemes more transparent and attractive via tax incentives. It can also set mandatory minimum number of working hours (or years) before a persons becomes eligible to public pension support. In effect, abandon the idea of retirement age!

Radicals
Three more ‘radical’ approaches would be to i) stimulate immigrant competition, ii) encourage (fiscally) having more babies, or iii) force workers to work more hours (and weekends, and longer). Easier would be to have higher female participation in the labour markets, which would in most countries already mitigate the combined effect of these three radical proposals. Given that mothers have less children, their work participant becomes even easier to accomplish than ever before.

A study by the OECD even shows, as The Economist’s “Special Report on Ageing Populations” summarizes: “strong connection between high female employment rates and large government transfers to families, generous replacement pay during parental leave, the availability of plenty of part-time work and lost of formal child care”

Ageing is not an economic problem an sich, but requires goals and may provide opportunities: new businesses can flourish related to the old-aged sector, feminism can be a good thing and insurance companies can compete for most lucrative pensions, and funerals. Welcome to a new world with many old people.

Source

The Economist, see http://www.economist.com/specialreports/

News: Least Developed and Strong States

2009-07-24T03:24:00.000-07:00

MBS, 24 July 2009

On 16 July 2009 the UNCTAD, an acronym for United Nations Conference on Trade and Development released their “Least Developed Countries Report” which reviews 49 countries characterized by low income, poor humanitarian conditions and economically vulnerable. The report focuses especially on the global crisis in relationship to governance issues. Although interesting, the report does not really add anything new: it is riding the current wave away from Friedman and towards Keynes. So let’s restate this modern conventional wisdom:

1. The global economic crisis hits the least developed countries (LDCs) severely, which comes on top of the recent energy and food crisis.
2. LDCs are very prone to external shocks, have high exposure and weak resilience.
3. LDCs are highly indebted, chronic deficits in trade and current accounts will persist.
4. Official development assistance (ODA) and foreign direct investment (FDI) are likely to decline. In addition exports by and remittance to LDCs are likely to fall.
5. Other important weaknesses are the unproductive production structures (feeble private sector – red.) and the strong specialization in commodity exports in general.

The main argument of the report is that LDCs need to build “new developmental States” that seriously attempt to deploy their administrative and political resources to the task of economic development. That is much easier said than done, as the last decades have proofed.

Industrial policy: window of opportunity?

Many governments around the world have deployed large Keynesian fiscal stimulus packages, which “most LDCs simply cannot afford.” The report argues that the state can make a difference in providing strong industrial policy, supporting a stronger macroeconomic environment, setting the agenda for agricultural development and encouraging the private sector.

a. policies should be oriented towards stimulating productive investment, building technological capabilities, and strengthening linkages within and across sectors and between different enterprises. Strengthening domestic productive capacities should also be aimed at producing a wider range of more sophisticated products.
b. stronger State: such development governance would be founded on a strategic collaboration between the State and the private sector, that will encourage the structural transformation of LDCs from agrarian to postagrarian economies.
c. multilateral support, including regional integration: improvements in the economic performance of LDCs will require effective industrial policy that includes public investment (e.g. infrastructure) and strategic coordination of private actors (cutting red tape). Simultaneous efforts to raise investment levels, build new economic links, and upgrade technological capacity - which is at the heart of industrial growth - are the surest ways of promoting diversification and economic growth in LDCs.

“The recent financial and economic crisis has exposed the myth of self-regulating markets.” Coping with the crisis requires “innovative and informed policy design response” and can ironically be a “turning point in the development path of LDCs.”

In short, the new approach is asks for a strange mixture between the top down view of strong governments and the bottom up perspective of strong business initiative. Although I belief the former has failed and cannot work without the latter, the UNCTAD seems to be optimistic in pessimistic times and tends to favour Strong States above Private Initiative…

Source

UNCTAD (2009): see http://www.unctad.org/Templates/webflyer.asp?docid=11721&intItemID=2068&lang=1

News: Dutch Unemployment Figures?

2009-07-21T15:13:00.000-07:00

MBS, 22 July 2009

The Netherlands is a small, rich, flat and crowded country located in the heart of Western Europe. What is surprising to many economists are the low unemployment figures that Dutch society is able to cook up. From 2005 to 2008 unemployment levels fell sharply from low 6 percent to below 4 %. On 21 July 2009 the Central Bureau of Statistics (CBS) published new Dutch unemployment figures. In June 2009 unemployment levels reached 4.8% compared to 9.8% in the euro area.

How does a country with loads of government interference, high income taxes and tight labour market regulations accomplishes this? Well, the trick of low unemployment comes exactly from the large government.

Heritage Economic Freedom of the Dutch

According to the Heritage Foundation the total government expenditures, including consumption and transfer payments equaled 46.1 percent of GDP in 2008 (government size score is a dramatic 36.2). Overall tax revenue as a percentage of GDP is high, 39.5 percent (leading to a weak score on fiscal freedom of 50.9). The Netherlands also has relatively rigid labor regulations that “hinder employment and productivity growth”. The non-salary cost of employing a worker is high, and dismissing a redundant employee is relatively costly and difficult (labor freedom is moderate with a score of 63.3).

Cooking (un)employment: two tricks

1. Many people that do not have a job are not counted as unemployed. A group of almost 1 million ‘Dutchies’ is registered as “labour disabled”, which is an awful lot. Fortunately this number has been declining steadily over the last five years. Compare this number to the 370.000 thousand that were officially unemployed in June 2009 and you can grasp why Dutch unemployment figures are so low, but there is more...

2. In the face of the global economic crisis, labour productivy must increase as "redundant" workers are laid off. The slack created at some companies must be removed. Instead, the Dutch government pays factories to keep (blue collar) "employees" on the pay roll, effectively subsiding these workers to stay at home without being unemployed. Obviously, these policies were meant to be temporary, yet they have been extended for long periods. The reason to do this is because the government is afraid that these workers will be badly needed as inventories get depleted and demand starts growing. Well, rigid labour market indeed make companies shy away from starting to hire these workers, so the government should not subsidize workers, but make it easier to sack people even in times of crisis - only then will companies "start" hiring people and create employment. There are no magic tricks - its a fact that unemployment "is" and will remain relatively low in Holland.

The Age of Milton Friedman

2009-07-20T14:27:00.000-07:00

MBS, 21 July 2009

The last quarter century the world experienced remarkable growth. Per capita income grew steadily with two percent per year from $ 5.400 in 1980 to $ 8.500 in 2005. Life expectancy increased, infant mortality declined, education standard have risen and democracy spread fasten than ever before.

In recent work in the Journal of Economic Literature the currently most-cited academic economist Andrei Shleifer (2009) coins this period The Age of Milton Friedman. The reason is simple: “the last quarter century also saw wide acceptance of free market policies in both rich and poor countries” – exactly as Friedman has preached.

He nicely reviews two opposing books to make his argument more clear. He asks if the “remarkable progress of mankind” and the wide adoption of free market capitalism is a “coincidence”.

Book Reviews

Living Standards and the Wealth of Nations: Successes and Failures in Real Convergence
Balcerowicz and Fischer (2006) in Living Standards and the Wealth of Nations outline why market reforms led to prosperity. They say: “reliance on market forces within an open economy in a stable macroeconomic environment, with assured property rights, are key to economic growth.” Their book contains essay by various writers on reform “miracles” such as China, Chile, Eastern Europe, Spain and Ireland. In Shleifers words “nearly all the essays in the volume note roles of fiscal restraint and low inflation in encouraging economic growth.”
Stability and Growth: Macroeconomics, Liberalization, and Development
Stiglitz and colleagues (2006) in Stability with Growth presents a gloomier picture of the world’s last decades and criticises free-market policies. The main point is that capital controls and low inflation are prerequisites of economic growth. This book contrasts Keynesians, neoclassical and heterodox economists (the latter “bridge the gap by building a coherent model of the economy, based on realistic micro-foundations, which recognize that information and markets are imperfect.”). Shleifer clearly dislikes the categorization and refutes the main arguments on price stability and the attack on capital market reforms, nicely contrasting Malaysia and South Korea.

Shleifer explains that Friedman’s Age is seeded in the 1980s by three main events involving market reformers Deng Xiao Ping, Margaret Thatcher and Ronald Reagan. “All three of these leaders professed inspiration from the work of Milton Friedman. It is natural, then to refer to the last quarter century as the Age of Milton Friedman.”

Shleifer’s Time
Worldwide improvements can be attributed to free market policies, yet much more than Friedman proposed needs to be done. The real challenges lie in the private sector. “Transition has taught us that economic and political disorganization, combined with obsolete human capital of both economic agents and politicians can sharply slow down economic turnaround.” The refers to Latin America and the Asian crisis to stipulate the centrality of solid financial markets which are currently under siege. The real challenge lies in the stagnation in Africa which is according to Shleifer “obviously” caused by “the lack of new businesses and investment.” “It seems obvious that the centreal challenges have to do with the shortages of human capital, and with predatory regulatory and tax policies conducted by African and Latin American states.” He conclusions are vested in the World Bank Doing Business reports that might form the basis for the New Age of Andrei Shleifer.

Source
Andrei Shleifer (2009). The Age of Milton Friedman. Journal of Economic Literature, 47:1, p 123-135

Balcerowicz, L. and Fischer, S. (2006). Living Standards and the Wealth of Nations: Successes and Failures in Real Convergence. Cambridge and London: MIT Press.

Stiglitz, J.E., Ocampo, J.A., Spiegel, S., French-Davis, R. and Nayyar, D. (2006). Stability and Growth: Macroeconomics, Liberalization, and Development. Oxford and New York: Oxford University Press.

Article: EU Entrepreneurs and Employment

2009-07-20T04:01:00.000-07:00

MBS, 20 July 2009

In a simple study, Fonseca, Lopez-Garcia and Pissarides (2001) in European Economic Review explain how start-up costs for entrepreneurs and search fictions for work affect employment rates. Based on plain empirics, cross-section data shows that OECD countries with higher entry costs have a lower equilibrium employment rate. Their preliminary results support active labour market policies to stimulate entrepreneurship in order to create more jobs.

Modelling entry costs
Higher start-up costs discourage entrepreneurship but does not influence the job creation market directly. Yet, there are fewer entrepreneurs and fewer job vacancies for each unemployed worker. The unemployment rate is higher for two reasons. Because entrepreneurs have higher employment rates than workers, the shift from entrepreneurship to worker status increases unemployment (composition effectt). In addition, with fewer entrepreneurs, job creation is lower, so fewer workers find jobs (job creation effect). Intuitively, when there are more entrepreneurs, there is more job creation and fewer workers applying for the jobs, so tightness is higher.

Main results

First, the movement between employment and self-employment seems to be negatively correlated with start-up costs. Second, higher start-up rates are associated with higher employment growth. Finally, higher start-up costs are associated with lower employment rates across all the countries in the sample.

The EU failed to create jobs is not in traditional manufacturing or public sector jobs but in
services and the especially in the “new economy” where job creation is more in the hands of small entrepreneurs than in the hands of large corporations. Related to this, small business do not thrive in the EU which might explain the employment gap in the service sector.

Source
Fonseca, R., Lopez-Garcia, P. And Pissarides, C.A. (2001). European Economic Review 45, p 692-705.

News: People Move and Send Money Back

2009-07-19T10:32:00.000-07:00

MBS, 19 July 2009

From 13 to 15 July 2009 the International Conference on Diaspora and Development was held, organized by the Development Economics and Prospects Group (DEPG) of the World Bank to discuss the impact of the global economic crisis on migration and remittances.

In 2008 the total remittances flows to developing countries were $328 billion, up 15 percent from $285 billion in 2007. However, in 2009 they are expected to drop by 7 to 10 percent. Paradoxically, remittances have become a more important source of external financing in many countries, as foreign direct investment (FDI) has dropped by up to 50 percent. As Ratha and colleagues (2009) note in the Outlook for Remittance Flows 2009-2011:

“The predicted decline in remittances is far smaller than that for private flows to developing countries. The resilience of remittances arises from the fact that while new migration flows have declined, the stock of migrants has been relatively unaffected by the crisis.”

Remittance facts and forecasts 2009

South Asia registered a 33 percent growth in remittance flows as India reported $52 billion in 2008. Remittances to East Asia and the Pacific rose 20 percent as China and the Philippines reported strong growth. In contrast, flows to Latin America and the Caribbean grew by a modest 2 percent in 2008.
India, China and Mexico retain their position as the top recipients of migrant remittances among developing countries. The top 10 recipients list also includes Philippines, Poland, Nigeria, Romania, Egypt, Bangladesh, and Vietnam.

“Europe and Central Asia is expected to experience the largest decline (15 percent) among all developing regions in 2009. Remittance flows to Latin America and the Caribbean are expected to decline by 7 percent, those to the Middle-East and North Africa by 6 percent, and to Sub-Saharan Africa by 8 percent. Remittance flows to South Asia are expected to decline more modestly by 4 percent. These flows are expected to return to positive growth in 2010 and 2011.”

Source

http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1110315015165/Migration&DevelopmentBrief10.pdf

For the impact of the crisis on aid, see: http://dutcheconomist.blogspot.com/2009/07/newsaid-for-trade-or-trade-as-aid-wto.html

News: Aid for Trade or Trade as Aid?

2009-07-15T10:22:00.000-07:00

MBS, 15 July 2009

In 2005 the WTO agreed at the Hong Kong Ministerial Conference to initiate “Aid for Trade”. Aid for Trade aims to help poor countries creating the capacity and institutions needed to compete in the global economy (as part of the Doha Development Round). The question is what has been accomplished and what can the future bring?

Maintaining Momentum: WTO Aid for Trade Global Review 2009

On 11 July 2009 President Obama – while in Ghana – urged: Western aid must be matched by good institutions. He said: “Development depends upon good governance.” He directly noted that developing countries need to take more responsibility in managing the region.

Like the Aid for Trade program, the best way forward for poor countries would be the establishment of a strong supply side (see also: OECD “Africa’s Private Sector” http://dutcheconomist.blogspot.com/2009/07/book-review-africas-private-sector.html).

WRONG!? These approaches suggest to reward countries that have made good efforts, yet as Easterly (2008) in his study “Can the West Save Africa” notes, many aid programs even in regions with improving governance structure have failed. As Moyo (2009) forcefully argued: “Aid is Dead”.

The WTO has good reasons to focus on deeper regional integration and capacity building in the poorest regions, yet it needs emphasis that the supply side is only one side of the coin...

On 16 July 2009 the second review of the Aid for Trade initiative will be released. Its focus is the global financial crisis and the sustainability of aid and trade flows. Given that there are large aid flows, that account for about 10% of output for poor countries, they need to become more predictable. “How can developing countries maintain aid flows in difficult times? What impact will the global economic downturn have on Aid-for-Trade flows? How can OECD donors be persuaded to engage long term through additional and predictable financing? What role can emerging South-South donors play in Aid for Trade? What is the accomplished by Aid for Trade and can it move to implementation at the regional level? What are the obstacles encountered by partner countries in mainstreaming trade into national and regional development strategies? How can this mainstreaming process be encouraged?" What about demand side orientated trade initiatives? Or are there Tigers and Miracles in Africa?

The OECD (2006) concludes: "When attempting to measure the amount of aid spent on trade, the key issue is where to draw the line, e.g. how to distinguish between assistance focused on improving trade capacity in particular and support to promote economic growth in general. Technical assistance to build trade negotiating capacity is at one end of the spectrum. At the other end, building supply-side capacity could include expenditures on education, health and environment all of which are critical elements in shaping a country’s competitiveness. Infrastructure is clearly essential to build export capacity."

Source
OECD (2006). http://www.oecd.org/dataoecd/27/14/37198197.pdf
WTO (2009). http://www.wto.org/english/tratop_e/devel_e/a4t_e/global_review_e.htm

Article: The American Dream?

2009-07-14T04:19:00.000-07:00

Working hard and becoming entrepreneur?

MBS, 14 July 2009

In America working hard gets paid: the American Dreams even tells us that anyone might make it if he or she puts in enough efforts. In developing areas many people cannot live their dreams. People do not have access to credit to set up their dreamed off business and this, in contrast to the US, limits their upward mobility. The credit constraints are seen as a poverty trap (Banerjee and Newman, 1993). However, in a rather technical paper Ghatak, Morelli and Sjöström in the Review of Economic Studies (2001) argue that this is an incomplete representation. If it is costly to set up a business in these regions - because difficulties in funding - then there are rents for entrepreneurs. In other words, credit market imperfections can direct incentives such that young people will work harder and try to become an entrepreneur later.

In a dynamic setting, people can work hard when young and save to overcome the borrowing constraint. When old, they shift occupation and can become entrepreneur. The incentive to save is determined by the expectations of the future labour contract and the imperfections in the credit market.

In equilibrium, the size of the entrepreneur’ profits determine the agent’s efforts, which subsequently determines wages. Hence, credit market imperfections have beneficial effects due to dynamic incentives for the agents.

Ghatak and colleagues set up a principal-agent model with overlapping generations. Young agents work at the principal (entrepreneur) who owns productive assets. Agents can earn a wage when young an earn rents as self-financed entrepreneurs when old. This channel motivates young agents to work harder. The more difficult it is to obtain funds the higher the expected entrepreneurial rents. Fewer imperfections will increase agents’ equilibrium wages and induce higher effort from old workers. The problem is that the concurrent fall in entrepreneurial rents reduces the shadow value of earnings of young workers, which decreases the dynamic incentive to work hard and save. Ex post inequality is a motivation for the young to work hard, which raises profit of the current old principals. Thats what economists refer to as dynamics...

"In a dynamic market economy, current hard work is motivated by expected future rewards. If the credit market is imperfect, rents will be available in occupations involving capital. When there is moral hazard in the labour market, these rents perform a socially useful function by encouraging individuals to work hard and save."

The unique findings of the model stems from the joint presence of incentive problems in the labour market and imperfections in the credit market. There is an interaction between equilibrium profit rates and competitive wages which relates to the “career concern models”. The research focus is on a life-cycle aspect of effort related to becoming entrepreneur whereas prior literature remains largely static.

Source
Ghatak, M., Morelli, M., and Sjöström, T. (2001). Occupational Choice and Dynamic Incentives. Review of Economic Studies, 68 (4), 781-810. http://www.jstor.org/stable/2695909

Book Review: Africa's Private Sector

2009-07-13T04:55:00.000-07:00

Africa's Private Sector

What's Wrong with the Business Environment and What to Do About It

Authors: Vijaya Ramachandran, Alan Gelb, and Manju Kedia Shah

Publication: Center of Global Development (CGD), Washington.

Date: 23 March 2009

MBS, 13 July 2009

Africa’s private sector is characterized by many obstacles in the business environment. Ramachandran and colleagues of the Center of Global Development argue that Africa’s infrastructure and weak institutions are the main problems.

The book summarizes the outcomes of thousands of business interviews with managers and entrepreneurs in Africa and provides details of the day-to-day business practice in African economies. The results are based on the World Bank Enterprise Surveys which show that unreliable electricity supplies and bad roads are the most frequently cited constrains to business in the poorest countries.

Low and middle income economies suffer mostly from burdensome regulations, such as red tape and corruption. In addition, sparse and fractured markets impede firms to grow and gain from economies of scale. These “wrongs with the [African] business environment” are framed as challenges to stimulating Africa’s private sector.

The main policy implications for the donor community are set out which focus on large scale investment projects made under regional cooperation agreements. "More open borders and less onerous regulatory environment ... will help small entrepreneurs become succesful."

To order the book:

http://www.cgdev.org/content/publications/detail/1421340/