Tuesday, December 22, 2009

Debate on the future of Poland

On November 23, 2009, I was invited to discuss of a paper by prof. Kuklinski on "Polonia Quo Vadis" in the seminar series of the Forum on Strategic Thinking organized by the Polish Economic Association.

There was a pretty interesting discussion on the past, present, and future growth prospects of Poland until 2050. Worryingly, most people in the audience looked like they would not make it till 2050 - the average age was above 60. Are there no younger people interested in discussing their future?

Here is the transcript of what I said.

The science of economics needs to change

Here two interesting articles on how economics will need to change to prevent future crises:

First, a review of two most recent books on Keynes, who said that an economist should be “mathematician, historian, statesman and philosopher . . . in some degree" rather than--as I would argue--only an economic mathematician.

Second, an article by William White, the former chief economist of BIS, one of those who predicted the crisis, arguing that "Modern macroeconomics is on the wrong track".

Monday, December 21, 2009

Why is there so much less populism in economic policymaking?

FT's Martin Wolf argues in his December 15 op-ed on "Cold war victory was a start and an end" that "transition countries have made few reversals of reforms. As the EBRD report notes, "government changes since early 2008 have either led to no change with respect to the reform stance, or indeed favoured pro-reform parties". This is quite consistent with what is happening in the emerging world, more broadly."

He explains that decline in economic populism is due to the fact that "the absence of a credible alternative economic model is evident. Populist adventurism also seems unattractive".

A big question, which I have raised in my paper on "The Coming Golden Age of New Europe", is what explains such relative lack of economic populism. Is lack of an economic alternative a sufficient explanation? This smacks of Fukuyama's end of history, which didn't happen. And why is populist adventurism suddenly unattractive? it is because of intellectual trends, globalization, the power of global financial markets which force countries to "behave"? Is it really different this time?

Another important question is whether such economic nirvana will last. I have serious doubts. Human nature doesn't change. Crises will happen, and soon, particularly in emerging markets. Extrapolation of the last decade of superpowered global economic growth into the future may make as much sense as extrapolating the future of the world in 1989. I argue in the Golden Age paper that New Europe will be much more resilient to economic populism than other emerging markets, owing to the EU straitjacket of institutions and the rule of law. Other emerging markets don't have it and have not much to rely on. Yet, I am yet to prove it, but can feel it in my gut that good times in the emerging markets, including BRICs, will not last...

State capitalism in the banking sector

Piergiorgio Alessandri and Andrew Haldane of the Bank of England published a cool paper on "Banking on the state" where they estimate that the total gross value of state interventions on behalf of banks has been $14,000bn. Michael Wolf of the Financial Times calls it "state capitalism".

Saturday, December 5, 2009

TVN CNBC debate on economic prospects for 2010

On November 28, 2009 I participated in a 45 min debate transmitted live by TVN CNBC on the economic prospects for Poland and the European economy in 2010. More info below (in Polish)

TERMIN: 28.11.2009, godz. ok. 18.15-19.00 PM (tuż przed uroczystością wręczenia nagród, która też będzie będzie transmitowana - dodatkowo także przez TVN24), Centrum EXPO XXI przy ul Prądzyńskiego 12/14 w Warszawie
PANEL 45 minut.
TEMAT: Budżetując 2010 rok. Czy kryzys na pewno się skończył?
6 PANELISTÓW: Marcin Piątkowski, Leszek Czarnecki, Jan Krzysztof Bielecki, Andrzej Czernecki (HTLStrefa), Janusz Filipiak (ComArch), Łukasz Zalicki Partner EY.
ZAŁOŻENIA PANELU: według coraz większej liczby ekonomistów polscy konsumenci nie będą w stanie podtrzymywać dłużej wzrostu gospodarczego swoimi pieniędzmi. Impuls wzrostowy musi się pojawić z innej strony. Na inwestycje przedsiębiorstw w środki trwałe nie bardzo jest co liczyć. Pozostaje eksport… ale czy kryzys ma ochotę się skończyć na Zachodzie (około 11% polskiego PKB pochodzi z eksportu do Niemiec). A jeśli kryzys na zachodzie się nie kończy, w Polsce co najmniej nie nastąpi przyspieszenie gospodarcze. Jak uwzględnić to w planach sprzedażowych i kosztowych na przyszły rok? Spróbujmy wspólnie zaplanować budżet 2010.

Thursday, December 3, 2009

How ideology shapes economic policy choices

Alex Cukierman argues here that:

"Ideology, institutions, political, and accepted economic wisdom shape economic policy choices. This column explores how political ideologies and academic conclusions shaped US policymakers’ responses to the global financial crisis. It says that forecasting macroeconomic developments necessarily involves forecasting the role of such beliefs."

Post-crisis changes in economics

Paul de Grauwe presents an interesting view here

Alex Cukierman in turn discusses "The Great Depression, the Current Crisis and Old versus New Keynesian Thinking –What have we Learned and
What Remains to be Learned?", available here

Tuesday, November 24, 2009

Soros on the New World Order and his Philosphy

The video and transcripts of his lectures at the CEU in Budapest on Oct 27, 2009 are available here

A couple of interesting articles from Project Syndicate

Students of my elective on "The Global Economy after the Crisis" might be well served by reading Project Syndicate columns available here

A couple of particularly interesting articles:

Dani Rodrik on capital controls and the IMF

Erik Berglof on whether transition is in crisis

Nouriel Roubini on the state of the US economy

Akerloff and Stiglitz on the need to be pragmatic about economic policy

There is many more, so keep reading!

Sunday, November 22, 2009

Conference on "Return of History: From Consensus to Crisis"

The Warsaw-based think-tank CASE organized an interesting conference, with interesting contributions from a number of experts. Among the most interesting, Istvan Szekely talks about the crisis and the fiscal future of the EU.

Jeronim Zettelmeyer from the EBRD wonders whether the CEE growth model needs to be changed. It is based on the EBRD 2009 Transition Report, whose presentation is also available.

Susan Schadler talks about the factors that contributed to the crisis.

Anders Aslund talks about the lessons from the crisis.

Monday, October 26, 2009

New Asian growth model; BRICs and Indonesia

Here is a link to a conference on "Beyond the Global Crisis: A New Asian Growth Model?". Here is another link link to an interesting OECD seminar on growth prospects for Brazil, China, India, Indonesia, and South Africa (Russia is missing).

Monday, October 19, 2009

IMF's "Finance and Development" journal on the post-crisis world

A number of very interesting articles in this edition of "F&D". There is Blanchard, IMF's Chief Economist, on "Sustaining Recovery", Giavazzi on "Growth after the Crisis" and an interesting text on "Anticipating the Next Crisis"

Videos from panel discussions during the IMF/WB meeting in Istanbul, October

The World Bank provides a pretty amazing website with video recordings of most panel discussions taking place during the early October IMF/WB Annual Meeting. A sample of panels below:

Special Event: What Now? The World Beyond the Crisis - October 2, 2009

10:00 AM - 11:15 AM BBC World Debate: Global Financial Crisis: Can We Afford the Future?

11:30 AM - 01:00 PM Financial Sector Policies in the Crisis
11:30 AM - 01:00 PM Fiscal Policies for the Crisis and Recovery

01:30 PM - 03:00 PM Financial Crisis and the Poor

03:15 PM - 04:45 PM Development Finance in Light of the Crisis
03:15 PM - 04:45 PM Impact of the Global Financial and Economic Crisis on Fragile and Conflict-Affected Countries

How different is the current crisis from the Great Depression?

Barry Eichengreen and Kevin H. O’Rourke track the data in their useful text on www.voxeu.org. They argue (as of September 1) that "World industrial production, trade, and stock markets are now showing signs of recovery. Still – today's crisis remains dramatic by the standards of the Great Depression"

European Comission's report on the crisis in the EU

My friend at the European Commission, Istvan Szekely, has co-authored a very interesting report on the "Economic Crisis in Europe: Causes, Consequences and Responses". . A brief summary is available here on www.voxeu.org

Sunday, October 18, 2009

Fiscal multipliers- how big are they?

See what Krugman and the Economist have to say about it.

Krugman answers questions on the economy

From Krugman's blog an overview of his definitions on everyting from stimulus money to reading lists. Check it out!

World Knowledge Forum 2009 in Korea

Very interesting conference with a panoply of exciting presentations from the likes of Krugman, Roach, Porter etc. There are also presentations on the future of business after the crisis. Recommended to my students!

Larry Summers' speech on the financial sector's reform

There is a video with his speech on The Economist website.

BTW, I am amazed with how far knowledge sharing has com: you can watch and listen to the top global economists (and, of course, not only) and the knowledge they impart from any place in the world. One just needs a computer, Internet, and knowledge of English. Isn't that amazing? This knowledge sharing has to contribute to global growth in the future. One only wishes that there would be some diversity in the speakers, not only Americans (all US-educated economists) please!

How things changed: in the 1970's no one really smart wanted to go into banking

Krugman in his post on October 15 says the following:

"Smart guys and Wall Street
I’m a little late on this great Calvin Trillin piece, but it accords with my own more specialized memories from grad school. The year I got my PhD (1977), there was a very clear ranking of desirable career paths. The best economics grad students went into academic jobs; the middle went to the Fed or the IMF; the bottom went, poor souls, to Wall Street.

Even then this meant an inverse relationship between academic ranking and income, since new assistant professors were paid only around $15,000, equivalent to a bit more than 50K today. But the prestige differences more than offset the pay differentials, at least as we saw it then. And one thing that’s hard to convey is how boring business seemed in the 1960s and 1970s. (”I’ve got just one word for you: plastics.”)

But even a decade later, it was the guys who went off to investment banks who were buying the third homes, while the top students were trying to eke out their incomes with an occasional consulting gig. And it wasn’t just the money: business stopped being so boring, and was even getting to be fun for some people. The old conviction that the academic life was the ideal definitely began to fray at the edges"

G-20 conference in Pittsburgh, youtube video

I participated in a conference on "Renewing Globalization and Economic Growth in a Post-Crisis World: The Future of the G-20 Agenda" which was organized on September 23 ahead of the G-20 Summit in Pittsburgh by the Carnegie Mellon University and Atlantic Council. I participated in a first conference panel on innovation and contributed a text on "The Post-Crisis World and the New Growth Agenda for New Europe" which was published in the conference report.

The whole panel is on youtube here

IV Kongres Obywatelski; article on the Golden Age of Poland (in Polish)

Yesterday I spoke on a panel on "The priorities for Poland's economic development until 2030" which was part of a big IV Citizens Congress. My speech was based on a article published by the Polish daily Dziennik/Gazeta Prawna on October 8 "To moze byc nowy zloty wiek polskiej gospodarki".

The moderator of the panel, Krzysztof Rybinski, also published a very interesting article.

The Coming Golden Age of New Europe

Washington DC based think-tank CEPA (Central European Policy Analysis) has just published my paper on the Coming Golden Age of New Europe. I am still hoping that I can turn this paper into a book soon. It seems that while there are quite a lot of books on the growth prospecsts in Asia and Latin America, there is very little about New Europe comprising new EU member states.

Thursday, August 6, 2009

Europe under stress and what to do about it

The current issue of the IMF's Finance and Development has a very interesting article by Marek Belka, Director of the European Department and a former Prime Minister of Poland, on "Europe under stress". I like the article a lot, particularly for its sincerity, freshness, and boldness, heretofore not the hallmarks of IMF's writing. Belka argues, for instance, that euro area entry criteria should be changed (he read my FT oped on this issue and sent me some interesting comments. happy to see that he now agrees officially) and that EU economy acts as one as therefore requires even more integrated finacial, product and service markets.

Sunday, July 19, 2009

Krugman: Deficits saved the world!

All those (in the US, Western Europe, and in Poland) who argue that budget deficits have made the recession even worse should read this post on Krugman's blog. He quotes Jan Hatzius' (GS) report arguing that the recent increse in private savings in the US was larger than even during the Global Depression and that without offseting increases in budget deficits we would have ended up really badly.

Wednesday, July 1, 2009

IMF says that CEE currencies are undervalued

I have just read an interesting IMF Working Paper on "Competitiveness in Central-Europe: What Has Happened Since EU Accession?" by the Tango-dancing IMF economist Celline Allard. She argues that (i) the rise in CEE exports post-EU accession was largely driven by improving non-price competitiveness, (ii) that CEE countries rely too much on export demand, particularly from Western Europe, and (iii) that current exchange rates are way undervalued.

Here is the abstract:

Summary: Since EU accession, trade flows have exhibited strong dynamics in Central-Eastern Europe (CEE). During the period leading to the current global turmoil, the region has also experienced continuous exchange rate appreciation and rapid FDI inflows, both likely to have affected these countries' competitiveness. This paper describes how the determinants of exports and imports have evolved in CEE countries over 2002-07 and econometrically derives their contribution to trade, with a view to assessing competitiveness developments. The analysis reveals that the global and domestic upswings, along with rising trade market shares, go a long way toward accounting for trade developments in CEE countries until 2007, pointing to continuous nonprice competitiveness gains. It also finds that exchange rate appreciation did not unduly weigh on export and import growth, suggesting that most of it reflected an upward movement in its equilibrium value. While the region entered the current period of global slowdown from a strong competitiveness position, the crisis also exposed the vulnerability of its heavy reliance on global demand to a trade shock.

Saturday, June 27, 2009

The Economist on global population ageing

The Economist has a very interesting briefing on the global population ageing. It is worth reading. It says, for instance, that the fiscal cost of the global crisis represents only 10% of the future cost of ageing. There are a number of interesting paper in the sources, too, including an OECD paper on "Trends and Determinants of Fertility Rate in the OECD countries: The Role of Policies.

Friday, June 26, 2009

The impact of ICT on growth in the EU - conference "Cities on the Internet" in Zakopane

I have just come back from a conference on ICT in Zakopane (Polish premier ski resort - really nice), where I presented slides--based on my past research--on the impact of ICT on growth in the old and new Europe.

Let's roll out the euro to the whole Union!

Financial Times on June 11 published my second op-ed (in pdf; in Polish; the first op-ed from December is here), this time co-authored by Krzysztof Rybinski, on "Let's roll out the euro to the whole Union". The text is pretty historical, at least for me:-): we call on the EU leaders to show vision and leadership and allow all the willing eurozone candidate countries to enter the euro zone by 2012.

Saturday, June 6, 2009

My interview in Belgian "Forward" business magazine on euro entry criteria

Forward, a Belgian business magazine, published an interview with me on the need to change euro entry criteria. The original text in English is available below ("Forward" is in French and Dutch only).

“It should not be the case that some countries are more equal than others”

Some plead for the softening of Maastricht criteria. What is your position on this matter?
“I am convinced that Maastricht criteria should be made more flexible. The crisis has shown that the criteria do not fully fit the current circumstances. Fiscal policy is a case in point: euro zone members will substantially exceed the 3 percent budget deficit limit this year, which - at least in the short-term - will strengthen, not weaken their economies. Maastricht criteria also need to be applied even-handedly: it should not be the case that some countries are more equal than others. While euro zone members have flexibility in meeting the criteria, new EU member states are made to follow the strict interpretation of the rules. This weakens confidence in the rules.”

Eastern European countries awaiting their adhesion to the Euro argue that current conditions are neither fair nor practicable. What are the problems?
“Maastricht criteria were developed in the early 1990s, when Eastern enlargement was only a fanciful idea. As a result, the criteria do not fit the fast growing new EU member states. What should be done? The inflation criterion should be relaxed, while budget deficit and public debt limits could be tightened. In addition, the requirement to stay at least two years in the ERM2 (the exchange rate mechanism of the Economic and Monetary Union) should be eliminated or made more flexible. This is because exchange rates, nowadays primarily driven by global speculation, can hardly be used as a test of a quality of a country’s economic policies. In addition, it is almost impossible for any country to ensure stability of its exchange rate. Given that the euro itself would not pass the stability test against the US dollar, why demand it from euro zone candidates?”

An accelerated adhesion of Eastern European countries to monetary union might also reduce the effects of global crisis in these countries…
“I agree that putting new EU members states on a fast track to euro accession would limit the impact of the global crisis on their economies by increasing investors’ confidence and providing a reform anchor for policymakers. Strenghtened confidence would have multiple positive implications, from easier refinancing of external debts to increased consumer spending and business investment.”

The benefits of an accession are according to you larger than the costs?
“Yes, since many CEE countries are better prepared to join the euro zone than some founding euro zone members: their trade, financial sector, and labour markets are more integrated with the euro zone, their labour and product markets are more flexible, and their business cycles are fully synchronized with the euro zone, as the crisis has unfortunately shown. In addition, their fiscal policy is more responsible: budget deficits and public debt levels are much lower than in the euro zone. Finally, inflation is projected to be only one percentage point higher. The crisis has made the distinction between benefits and costs even sharper: benefits are higher, while costs such as higher inflation or risks of asset bubbles are lower. That said, new EU member states will have to ensure that such costs are contained in the future.”

In a leaked recent internal report of IMF it has been proposed that Eastern European countries should use Euro as national currency without participating in Euro zone. What was your reaction?
“That’s a good idea for some countries in the region, particularly those that fixed their currencies to the euro, but bad for countries like Poland or the Czech Republic with flexible exchange rates. In general, however, unilateral euroisation should be contemplated only when entering the euro zone on normal terms would prove impossible. New EU members still believe that Western Europe truly wants them to enter the euro zone soon. But they have increasing doubts, which are undermining not only their euro adoption plans, but - more importantly - their faith in the whole European Union project.”

Friday, May 29, 2009

Strategic options for how to use the crisis to Poland's benefit

In this week's edition, The Economist runs two stories on how Indian and Chinese companies use the crisis to expand abroad through acquisitions. These stories dovetail with what I have been saying for a long time (see for instance my article in Rzeczpospolita from September of last year) that Poland's government should take advantage of the crisis to promote foreign expansion of public and private companies. It, of course, can do much more for state-owned entreprises such as PKO BP, KGHM or Orlen. PKO BP is a particularly good example: using the historical weakness of foreign banks, it could cheaply buy banks in Poland, CEE region, and even in Western Europe. The latter option would actually be the best: it would give PKO BP the needed know-how, expertise, brand name, access to markets etc, and serve as a a platform for further expansion.

What needs to be done: first, the government should forgo dividends from large state-owned companies (particularly from PKO BP). second, when profits are not enough, the state should increase equity in selected companies, even if it required increasing budget deficit (although it could be done through BGK, the state-owned bank). third, it should ensure that management boards of the state-owned institutions are as professional as they can be (which is largely the case, but not always). lastly, it should clearly state that it would not punish state-owned companies for being ambitious (it is risky, I know, but there is never a free lunch).

State ownership should not be, however, a long-term option: PKO BP and others should at some point be privatized to long-term domestic investors, such as the pension funds. Let Polish citizens benefit from international expansion of our companies...

Eurobond market would help resolve global imbalances

Barry Eichengreen in his Project Syndicate column talks about what could prevent global imbalances from reemerging in the future. He says the following:

"The other view is that China contributed to global imbalances not through its merchandise exports, but through its capital exports. What China lacked was not demand for consumption goods, but a supply of high-quality financial assets. It found these in the US, mainly in the form of Treasury and other government-backed securities, in turn pushing other investors into more speculative investments. Recent events have not enhanced the stature of the US as a supplier of high-quality assets. And China, for its part, will continue to develop its financial markets and its capacity to generate high-quality financial assets internally. But doing so will take time. Meanwhile, the US still has the most liquid financial markets in the world. This interpretation again implies the re-emergence of global imbalances once the recession ends, and their very gradual unwinding thereafter. One development that could change this forecast is if China comes to view investing in US financial assets as a money-losing proposition. US budget deficits as far as the eye can see might excite fear of losses on US Treasury bonds. A de facto policy of inflating away the debt might stoke such fears further. At that point, China would pull the plug, the dollar would crash, and the Fed would be forced to raise interest rates, plunging the US back into recession."

Should we not try to provide an alternative for Chinese investment. mitigating the risk of continued global imbalance, through developing a eurobond market?

Thursday, May 28, 2009

Live debate on TVP1 on the Polish economy

On May 21 I debated the current state and prospects of the Polish economy in a live program on the main channel of the Polish TV - TVP1. There were four other participants: one additional economist and three politicians. I argued that the governments needs to present asap a full fiscal reform plan what would let public finances survive the next 2-3 years of slow growth.

Taylor on "exploding debt threatens America"

A stimulating op-ed by John Taylor (the one who developed the Taylor rule) in FT on the risks that US's might be downgraded owing to the quickly rising public debt. I tend to disagree with him -- debts can be paid back in the future when the economy recovers -- but like his original arguments.

Sunday, May 17, 2009

Monti on the need to coordinate taxes in the EU

Former EU competition commissioner Mario Monti recently argued that EU should use the crisis to re-start talks on tax harmonization. It should seek a great compromise between Anglo-Saxon and continental values.

Agree with this, although it would make more sense for New Europ to keep lower taxes than in Western Europe to offset disadvantages in the overall quality of the economic environment.

Tuesday, May 12, 2009

Nothing will change Balcerowicz's neoliberal mind

There is an interesting interview with prof. Leszek Balcerowicz in Gazeta Wyborcza (Monday, May 11, 2009) entitled "Leave my capitalism alone". It seems that nothing will change prof. Balcerowicz's neoliberal mind. In essence, he argues that the global crisis is due to state interventon and loose monetary policy. The private sector is not to blame (maybe only partly) He does not mention laisser faire approach to financial sector regulation, tax cuts, financial innovation going astray or weak financial risk managament as sources of the crisis.

I think that he is wrong. Let me just quickly take up his main two arguments:

1. On state intervention - he is yet another guy who erroneously maintains that the growth in the subprime market was due to government's intervenion. First, the law promoting lending to poor households was introduced in 1979, so it can't be blamed for the crisis in XXI century. Second, Fannie Mae and Freddie Mac financed not more than 20% of the subprime market - the rest was financed by the private sector, with no support from the government whatsoever, expect for lack of regulation...

2. Loose monetary policy - he is wrong here, too, although less. Loose monetary did contribute to the crisis. But even if interest rates were higher (if FED followed Taylor rule, inteest rates would not go down to 1% but perhaps to 2-3%), it would not prevent the crisis: financial sector would continue to give money to ninjas no matter what the interest rate and sell it on to all these gullible global investors. The crisis would probably have been slightly smaller (real estate prices would have slightly less space to fall), but it would happen anyway.

Here is my view on the sources of the crisis, in slides.

Thursday, May 7, 2009

How to restructure public finances in Poland

Today I was on the radio TOK FM (recording available) discussing, inter alia, the issue of how to restructure Polish public finances. One of the debaters, Mr. Andrzej Sadowski from the Adam Smith Center, argued--populistically--that most public money is being wasted, but couldn't provide any specific example of what public expenditure needs to be cut except for his favorite topic of public subsidies to Ochotnicze Hufcy Pracy/Voluntary Labor Corps of PLN 200 million, which, however, represents less than 0.1% of total central budget expenditure. When asked to provide more examples, he said that there wasn't enough time...:-)

I think this provides an illustration of how many populists, like Mr. Andrzej Sadowski (and I am trying hard not to get myself started on discussing his persona... I doubt whether he even has a Master's degree in economics --couldn't find his bio-note anywhere, which looks fishy to me... How such a guy, who never wrote a single economic paper, can continue to be invited to serious economic discussions escapes me..), who come up with various weird examples and ideas on how to save public finances without any economic rationale to back it up. That's just nuts.

So, below is my list of what needs to be done in the medium-term (in the short term, as I was arguing before, we should try to increase spending, subject to available financing, to offset falling private demand):

On the expenditure side:

1. Raise retirement for men (65 years now) and women (only 60 years). Equalize both retirement ages (because currently women's pensions end up being much lower than men's) and link the retirement age to life expetancy (like the UK and other countries did): any increase in life expetancy should 1 to 1 increase the official retirement age for both sexes. In time, we would gradually reach 70 years for retirement. This would save billions in spending on pensions and in all kinds of pre-retirement benefits and provide additional tax and social security revenue (that said, the government should help older people find/retain jobs, but this is a different topic). In addition, eliminate or reform priviliged pension systems for the military (one can retire when only 35 years old after 15 years of service, often behind a desk!)

2. Cut the number of extra-budgetary funds and agencies and move their functions to local government (and responsible central government's ministries, where necessary). Which agencies to cut? Check out Kolodko's fiscal reform program for 2003, to which I contributed back then.

3. Eliminate automatic indexation to tens of various social entitlements, such as a funeral allowance (Polish state subsidizes funerals with some PLN 5000, which is indexed to inflation and a couple of other things..). Decrease indexation of pensions and disability allowances to inflation only (now it is indexed to inflation and 20% of the increase in wages), at least temporarily until we come out from the crisis.

4. Implement fully centralized cash management - today some public sector insitutions maintain their accounts with commercial banks rather than--like the rest of the public sector--at the National Bank of Poland. As a result, various public funds and agencies have billions of PLN sitting on their accounts, while the central budget struggles to sell new bonds...

5. Cut spending on the military -there is no need to spend 2% on GDP on it. A lot of this money is being wasted on feeding temporarily drafted soldiers, buying tanks and imported anti-aircraft missiles to defend the sea coast, on procurement which is prone to corruption. We need the military (for many reasons, from the need to comply with promises to NATO to strenghtening our international role through engagement in peacekeeping operations), but we don't need to spend so much on it during the crisis. In the future, armies will be much smaller, more agile, fighting with joysticks directing unmanned aircraft than with boots on the ground (I read it in Friedman's "The Next 100 Years: A Forecast for the XXI Century" )

6. Introduce target-oriented budgets to monitor the efficiency of public spending (and cut spending where it is being wasted).

On the revenue side:

1. Temporarily increase PIT rates for the richest (up from current 32% to 40% from 2008) and increase or eliminate the social security treshold (30 times average monthly wage) over which the richest stop paying security contributions (leading to a tax system which is more or less flat rather than progressive.. more on it in a separate post).

2. Introduce real estate tax asap, based on market values. We have been trying to do that for more than a decade now, with no success. I wonder why???

3. Reform KRUS by increasing social security contributions of the richest farmers to that of people with equivalent incomes in ZUS. This will not only be a source of revenue, but will also help accelerate restructuring of the farm sector: today it doesn't pay for farmers to leave farms and get (much more productive) jobs elsewhere.

that's the list for now.

Sunday, May 3, 2009

Japan shows for the way for the ECB on how to help New Europe

Financial Times's article on "Japan pledges $100bn for struggling Asian economies" talks about Japan providing $100bn in the form of currency swaps and bond guarantees to other Asian nations struggling to cope with the world economic crisis. Part of the money will be allocated within the framework of the Chiang Mai initiative, the equivalent of a regional IMF (without strings attached). Japan is also offering Y500bn in guarantees for potential Asian issuers of yen-denominated, samurai bonds. The Japanese finance minister said that “Japan is at the moment willing to do whatever we can within our limited capacity.”

I want to ask: What is the ECB doing to help its fellow New Europeans (aside from a paltry EUR 15 billion credit line to Poland and Hungary)???

The ECB could more or less solve the crisis in Central and Eastern Europe by (i) commiting itself to support CEE economies with euro financing, if needed and (ii) making it feasible for CEE countries to enter the euro zone in the near future (in essence, promising that it will not cheat CEE countries the way it cheated Lithuania back in 2006).

For now, the ECB is doing neither. In effect, it is dividing the EU into first and second category members, those in and outside the euro zone, undermining the future of the EU.

Yes, yes, I know the excuse: the ECB should be responsible only for the euro zone members. However, (i) ECB would help euro zone countries by helping CEE countries (through, for instance, the banking channel), (ii) the ECB already made a precedent by providing credit lines to Poland and Hungary (why not other countries then?), and (iii) the ECB's credibility would not be undermined (it always shocks me when hard-core macroeconomists suddenly transform into amateur market psychatrists and try to figure out what the markets will think. Do they have any skills whatsoever do to it? Any models or at least some empirical evidence? Do the markets actually "think"?)

A digression on an interesing idea for the EU (or New Europe alone) to set up a trust fund to guarantee corporate bonds: "The 13 countries also agreed to put $500m as initial capital into a new trust fund to guarantee bond issues by Asian corporates. Asian companies have been facing high borrowing costs because of investors’ low risk appetite for emerging markets and this credit guarantee mechanism will be of substantial benefit"

Politics matters: Evidence of rising inequality in the US

I have stumbled upon a very interesting article by Emmanual Saez, this year's recipient of the Clark Bates medal, the so-called Nobel prize for economists below 40.

Saez et al show that "...top 1 percent incomes captured abouthalf of the overall economic growth over the period 1993-2006."

They also show that politics matters: during Clinton growth has lifted all boats (although inequality still increased), while during Bush II practically only the richest benefitted:

"The 1993–2006 period encompasses, however, a dramatic shift in how the bottom 99 percent of the income distribution fared. Table 1 next distinguishes between the 1993–2000 expansion of the Clinton administrations and the 2002-2006 expansion of the Bush administrations.
During both expansions, the incomes of the top 1 percent grew extremely quickly at an annual rate over 10.1 and 11.0 percent respectively. However, while the bottom 99 percent of incomes grew at a solid pace of 2.4 percent per year from 1993–2000, these incomes grew less than 1 percent per year from 2002–2006. Therefore, in the economic expansion of 2002-2006, the top 1 percent captured almost three- quarters of income growth. "

What explains rising inequality over the last thirty years? The change of intellectual trends driven by Reaganomics and Thatcherism seems to have mattered.

"The labor market has been creating much more inequality over the last thirty years, with the very top earners capturing a large fraction of macroeconomic productivity gains. A number of factors may help explain this increase in inequality, not only underlying technological changes but also the retreat of institutions developed during the New Deal and World War II - such
as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality"

Thursday, April 30, 2009

Financial sector bubble and tax competition

John Kay's article in Financial Times (April 24, 2009) talks about how virtual profits of the banking sector in the UK in the last decade generated substantial revenues from corporation tax and income tax on bonuses.

It reminded me of what I have been arguing in the recent presentation (April 24) at the Polish Economics Association. In essence, I said that the collapse of the financial sector's profits bubble will help dispel the myth that international corporate tax competition resulting in ever lower CIT rates is nothing to worry about because corporate tax revenues have not been declining. Now we know that revenues have so far been artificilly inflated by taxing financial sector's profits. CIT revenues will finally feel the pull of gravity. The benefits of tax competition and supply-side response ("lowering CIT rates will always pay for itself") will deservedly lose some of its credibility. This in turn will help start in earnest the debate on the need to coordinate taxes.

I believe that tax coordination would make a lot of sense for new EU member states (benefits for the EU as a whole would be smaller). I wrote about it (although in a roundabout IMF style) in an IMF Working Paper written in August 2008 together with Mariusz Jarmuzek.

The Coming Golden Age of New Europe?

I presented a paper on "The Coming Golden Age of Europe?" at an international conference on "1989-2029: 20 Years of Transition and Perspectives for Development of Post-socialist Economies", April 3-4 2009, Kozminski University in Warsaw (here is the shorter version in Powerpoint slides.

I got really excited about the subject (thought about it for some time already and finally found an excuse to write about it) and now am thinking about turning it into a book. I have a feeling that New Europe is underappreciated, particularly now during the crisis, by both the West and New Europeans themselves.

This is research in progress. Any comments/suggestions are very much welcome, either on the blog (preferably) or directly to my email mpiatek@kozminski.edu.pl

Here is an abstract of the paper:


New Europe has never had it so good before. Its income, quality of life, and level of happiness have never been closer to that of the developed countries in Western Europe. Despite the crisis, New Europe will continue to grow faster than Western Europe for decades to come, continuing its catching-up. By 2050, New Europe’s income per capita is likely to be almost equal to that of Western Europe, the highest level ever recorded in the history of the region. Moreover, the overall quality of life will be practically indistinguishable from that in Western Europe. New Europe’s true Golden Age will finally arrive.

By 2050, New Europe is also likely to achieve a higher level of income per capita than most emerging market countries. New Europe not only has stronger economic fundamentals, but is also less vulnerable than other emerging markets to political, social, and economic Black Swans, catastrophic events which could wipe out much of the achieved economic progress.

The Golden Age, however, will not arrive without help from policymakers. The crisis has shown that the current development model based on a rapid financial deepening fueled by imported savings intermediated by foreign-owned banks has lost some of its credibility. New development models are needed that would lessen reliance on financial deepening in favor of productivity growth, euro adoption, open borders to immigration, and further EU integration. The crisis provides a good opportunity for the needed change.

Entering the euro zone during the crisis - debate at KUL, Lublin, May 5

I speak on the panel "Szanse i zagrożenia wynikające z wprowadzenia waluty Euro w Polsce w czasach kryzysu gospodarczego" with, inter alia, Prof. Zyta Gilowska, former minister of finance 2006-08.

Below an abstract (in Polish) of my speech:

Polska powinna jak najszybciej zamienić złotego na euro jeśli chce zostać regionalną potęgą i jednym z liderów Unii Europejskiej. Za wejściem do strefy euro przemawia wiele: od eliminacji kosztów transakcyjnych, ryzyka kursowego, przez wzrost handlu i inwestycji po spadek stóp procentowych i—co dobitnie uwidacznia kryzys—zapewnienie gospodarce stabilnych warunków działania. Badania NBP i międzynarodowych instytucji wskazują, że korzyści z wejścia do strefy euro przewyższają jego koszty. Korzyści są dodatkowo tym większe, im większa początkowa różnica w poziomie rozwoju. Nie warto więc czekać, aż dokona się proces realnej konwergencji: wejście do euro ma być środkiem na przyspieszenie procesu doganiania Europy Zachodniej, a nie jego uwieńczeniem.
Do szybkiej akcesji do strefy euro trzeba się jednak przygotować. Przede wszystkim do strefy euro trzeba wejść po konkurencyjnym kursie. Przykład Portugalii, Grecji czy ostatnio Słowacji pokazuje jak szkodliwe dla wzrostu gospodarczego może być jego przewartościowanie. Kryzysowe osłabienie złotego daje nam szansę uniknąć ich błędów. Trzeba ponadto zacieśnić politykę budżetową, bo przed i po wejściu do euro to ona będzie głównym amortyzatorem szoków, wzmocnić nadzór nad rynkiem finansowym, żeby uchronić się od przyszłych baniek spekulacyjnych, oraz podtrzymać wysokie tempo wzrostu wydajności pracy poprzez inwestycje w infrastrukturę, edukację i innowacje i pełne otwarcie rynków pracy dla wysokowykwalifikowanych imigrantów. Kluczowe będzie uzyskanie politycznego i społecznego konsensusu.
W procesie akcesji do euro powinniśmy pytać nie tylko o to co my możemy zrobić dla strefy euro, ale również o to co jej obecni członkowie mogą zrobić dla nas. Trzeba bowiem uelastycznić kryteria wejścia do strefy euro. Kryzys pokazał, że kryterium inflacyjne i korytarz walutowy ERMII, wymyślone prawie dwadzieścia lat temu, kiedy rynki finansowe były o wiele mniej rozwinięte, a o rozszerzeniu Unii nikomu jeszcze się nie śniło, w obecnej postaci mają mało ekonomicznego sensu. Kurs walutowy jest przede wszystkim przedmiotem globalnej gry spekulacyjnej, na którą rodzima polityka gospodarcza ma niewielki wpływ. Skoro samemu euro nie udaje się utrzymać stabilnego kursu, to jak można tego wymagać od Polski?
Razem powinnyśmy pracować, aby euro wzmocnić. Celem powinno być zastąpienie przez euro amerykańskiego dolara jako wiodącej waluty świata. Trzeba będzie ujednolicić politykę fiskalną, zintegracować rynki finansowe, scentralizować czuwające nad nimi nadzory oraz stworzyć płynny rynek euroobligacji. Nie uda się tego zrobić bez wzmocnienia politycznej siły Unii.
Akcesja do strefy euro będzie zwieńczeniem sukcesu polskiej transformacji oraz historyczną cezurą nadejścia nowego Złotego Wieku dla Polski i Nowej Europy. W zeszłym roku dochód na głowę mieszkańca w naszym regionie osiągnął najwyższy poziom w stosunku do Europy Zachodniej od 1500 roku. Po ustaniu kryzysu dochód będzie dalej rosnąć. Z euro Złoty Wiek nadejdzie szybciej.

Sunday, April 26, 2009

Maastricht criteria: all about politics, not economics

Paul de Grauwe in a brilliant post in Voxeu.org argues the following: "Thus, the Maastricht convergence criteria are instruments that are used in arbitrary ways to pursue political objectives. In the past, they were set aside to achieve the political objective of monetary unification. Today, they are strictly applied to pursue a political objective of slowing down the enlargement of the Eurozone".

Couldn't agree more: Western Europeans simply don't want New Europeans to join the euro and they are using the Maastricht euro criteria as their excuse.

Why do they do it? It is probably a mixture of (i) reluctance to share power in the euro zone, (ii) concern about increasing competitive pressure, particularly if New European countries join the euro zone at competitive rates (Slovakia, however, didn't), (iii) dogmatism, (iv) and (deeply secreted) view that New Europeans are just still too barbarian to be trusted to be let into the exclusive euro club (here, alas, some of new EU member states are not helping).

As to the crisis, euro zone authorities seem to share a view that New Europe "had it coming" and they have themselves to blame for being so exposed to the crisis. New Europeans, like me, would argue instead that ECB and EC are partly to blame for the crisis in New Europe: rejecting Lithuania's application for entry in 2006 over a trivial rounding error in inflation was a clear signal that Eastern Europeans are simply not welcome. This removed the euro reform anchor for the whole region, contributing to more relaxed macroeconomic policies and later a bigger crisis (particularly in the Baltic States). One wonders how things would have been different if ECB/EC let Lithuanians in (I don't buy the argument that EC was right that inflation in Lithuania would rise because it did rise not only in Lithuania but in most euro zone countries. and so what? Even with higher inflation, Lihuania's contribution to euro zone inflation would be something around 0.05 pp. Really scary!!!!:-)). By now, Estonia would probably also be in, joining together with Slovakia in Jan 2009. Poland and other countries in the region would be pretty close too. The whole region would have been much more insulated from the crisis, saving thousands of jobs and strengthening the only region of the EU that ever has chances of growing at Asian rates (which supposedly is the goal of all these EU programs, starting from the Lisbon agenda). Instead the whole region is deeply mired in crisis, on the brink of collapse...is this what Western Europeans had in mind???

BTW, here is my op-ed in Financial Times (December 2008) on the need to change euro entry criteria.

Poland spends a lot on tertiary education

Figure taken from the Economist's article on the success of the Bologna process aiming to standardize education in the EU. Poland, surprisingly, is ranked among countries spending on tertiary education the most. Promising, I guess (all the usual complaints about the quality of Polish education notwithstanding), particularly as the outcomes of all this spending are pretty good: Poland and other New European countries, especially the Czech Republic and Estonia, score high on OECD PISA rankings, well above what their level of income per capita would suggest. To say it differently, New Europeans get roughly the same educational outcomes despite spending in $ per capita about half as much as developed countries. Quality of education seems to one of the few good legaceis of communism...

Original article here: http://www.economist.com/world/europe/displaystory.cfm?story_id=13527558

My quote in the Economist article on the Polish economy

The article argues that Polish economy is in a better shape that other countries in the region, but that it doesn't mean that the authorities should be complacent. I am quoted as saying that the government has "brilliant PR", but doesn't really do much to help the economy.

What I am not quoted on is what I have written about in my articles in the Polish edition of Wall Street Journal: monetary policy doesn't work, fiscal policy is procyclical (by cutting public expenditure makes the crisis worse) and there are no structural reforms to speak of (except for last year's big change in the early retirement benefits - here congratulations are due). More on this topic soon.

Thursday, April 23, 2009

Debate on the crisis organized by Krytyka Polityczna, April 24, Poznan

I will take part in the second debate organized by Krytyka Polityczna, this time in Poznan.

Poznań: Wokół „Kryzysu”
Goście: Ryszard Bugaj, Tomasz Wróblewski, Marcin Piątkowski. Prowadzenie: Adam Leszczyński.24 kwietnia, piątek, godz. 17.00, Gmach Główny Uniwersytetu Ekonomicznego, ul. Niepodległości 10, sala 111

Details here: http://www.krytykapolityczna.pl/Poznan/Poznan-Wokol-Kryzysu-/menu-id-174.html

Thursday, April 16, 2009

"Poland - Key to Europe" by Buell

Now reading a book on "Poland - Key to Europe" by Buell published in 1939.

The book is fascinating. The main message I am getting so far is that Poland today is in unbelievably better political, social, military, and economic position than before 1939.

There is a couple of cool historical quirks that I like so much. For instance, in 1927 Poland, in return for a stabilization loan from the US, had to appoint a foreign financial advisor to the Council of the Bank of Poland, apparently to "watch over us". Charles Dewey, an American assistant secretary at the Treasury, assumed the position for three years. Sounds like a banana republic...

Debate on the crisis organized by Krytyka Polityczna, April 9

Materiał audio i fotorelacja z debaty wokół książki Kryzys. Przewodnik Krytyki Politycznej.Spotkanie odbyło się 8 kwietnia 2009 na Wydziale Nauk Ekonomicznych UW. Goście: Witold Gadomski, Piotr Kuczyński, dr Marcin Piątkowski, prof. Jan Jakub Michałek. Prowadzenie: Jacek Żakowski.


My presentation at PTE (Polish Economics Association) on April 23, 16:30

It will talk on corporate tax competition and its implications for Central and Eastern Europe based on the IMF paper I co-authored wih Mariusz Jarmuzek back in 2008: http://www.imf.org/external/pubs/ft/wp/2008/wp08203.pdf

Here are the slides and the transcipt of the panel discussion (in Polish), which also featured Dr. Maciej Grabowski, deputy minister of finance responsible for taxes, and Dr. Jaroslaw Neneman, former tax deputy minister of finance.

Simon Johnson's tour de force on financial sector's capture of the US administratin

This is a must read: http://www.theatlantic.com/doc/200905/imf-advice

I agree with practically everything that Johnson says. It wil be extremely hard to change the way the financial sector works without a forceful state intervention, including nationalization.

Martin Wolf from FT also noticed the article: http://www.ft.com/cms/s/0/09f8c996-2930-11de-bc5e-00144feabdc0.html

I am back after a long break...

Ready to blog again. This is a great a way of organizing my thoughts, presentations, articles, and agenda. Readers welcome!