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Wednesday, December 29, 2010
IMF's Fiscal Monitor November 2010
The IMF has come up with another useful "Fiscal Monitor". There is a wealth of interesting data, including on financial sector and carbon tax. Worth reading, including the accompanying slides.
Tuesday, December 28, 2010
Why it pays to be combine Wall Street with politics
Rajan's book on "Fault Lines", which I have just been reading, reminded me of Robert Rubin, former US Secretary of Treasury, earlier the CEO of Goldman Sachs and later the Chairman of Citibank. In December 2008, the Wall Street Jounal had a tasty story of how Robert Rubin helped run Citibank into the ground and later be bailed out by the US taxpayer while in the process being paid US$115 million for "his services". Just read the quotes from the article below, which I leave without any comment:
"The virtue of this arrangement for Mr. Rubin has become manifest during the current panic. While Mr. Rubin has acknowledged that he promoted the disastrous idea of exposing the bank to greater risk to boost profitability, his "no line responsibilities" job description now allows him to blame the line managers for the consequences of his ideas.
Citigroup shareholders have suffered losses of more than 70% since Mr. Rubin joined the firm. To this day, he appears unable to say what exactly he did for the $115 million that he took out of Citi. "I think I've been a very constructive part of the Citigroup environment," he recently told the Journal, in defense of his tenure. Try selling that line at your next annual performance review, especially when asking for an eight-figure salary.
What is clear is that Mr. Rubin encouraged changes that led Citi to the brink of collapse. Which brings us to his best (only?) argument to shareholders. Mr. Rubin was reportedly critical to securing the latest federal bailout of Citi -- $20 billion in preferred shares plus taxpayers taking on most of the risk in a $306 billion portfolio of dodgy assets. This is on top of the $25 billion in Citi preferred shares that taxpayers bought in October. Giving Mr. Rubin the benefit of the doubt that he is the fixer who delivered the federal cash, this could make his paycheck appear more reasonable to many shareholders."
Or perhaps Mr. Rubin will be a victim of his own Beltway success. The U.S. government, with a 7.8% stake, is now a major Citi shareholder. The activist investors known as American taxpayers might just decide that they have no more dollars to spend on "constructive parts of the environment" with "no line responsibilities."
"The virtue of this arrangement for Mr. Rubin has become manifest during the current panic. While Mr. Rubin has acknowledged that he promoted the disastrous idea of exposing the bank to greater risk to boost profitability, his "no line responsibilities" job description now allows him to blame the line managers for the consequences of his ideas.
Citigroup shareholders have suffered losses of more than 70% since Mr. Rubin joined the firm. To this day, he appears unable to say what exactly he did for the $115 million that he took out of Citi. "I think I've been a very constructive part of the Citigroup environment," he recently told the Journal, in defense of his tenure. Try selling that line at your next annual performance review, especially when asking for an eight-figure salary.
What is clear is that Mr. Rubin encouraged changes that led Citi to the brink of collapse. Which brings us to his best (only?) argument to shareholders. Mr. Rubin was reportedly critical to securing the latest federal bailout of Citi -- $20 billion in preferred shares plus taxpayers taking on most of the risk in a $306 billion portfolio of dodgy assets. This is on top of the $25 billion in Citi preferred shares that taxpayers bought in October. Giving Mr. Rubin the benefit of the doubt that he is the fixer who delivered the federal cash, this could make his paycheck appear more reasonable to many shareholders."
Or perhaps Mr. Rubin will be a victim of his own Beltway success. The U.S. government, with a 7.8% stake, is now a major Citi shareholder. The activist investors known as American taxpayers might just decide that they have no more dollars to spend on "constructive parts of the environment" with "no line responsibilities."
Tuesday, December 21, 2010
Presentation on "The Coming Golden Age of New Europe" in Istanbul and Vienna
On December 10, I delivered a lecture on "The Coming Golden Age of New Europe" at the Management Faculty of ITU in Istanbul, the Turkish equivalent of the American MIT. The lecture slides are here
On November 25, I delivered a similar lecture at the 3rd GROW EAST CONGRESS "Restarting Growth in Central Europe and South-Eastern Europe" held at the Wiener Konzerthaus in Vienna, Austria. More info: http://www.groweast.at/.
Wirtschaftsblatt, the leading Austrian business daily, published an interview with me on "Osteuropa ist besser als die BRIC-Länder" (Eastern Europe is better than BRICs). The article in German is here.
On November 25, I delivered a similar lecture at the 3rd GROW EAST CONGRESS "Restarting Growth in Central Europe and South-Eastern Europe" held at the Wiener Konzerthaus in Vienna, Austria. More info: http://www.groweast.at/.
Wirtschaftsblatt, the leading Austrian business daily, published an interview with me on "Osteuropa ist besser als die BRIC-Länder" (Eastern Europe is better than BRICs). The article in German is here.
Why Americans have it easy and why they should be more humble
The Economist has an interesting debate on whether "the language we speak shapes how we think". The conclusion seems to be that this is indeed the case, at least to some extent.
If so, English-speakers have it so much easier to succeed in today's world since it monopolized by English and--perhaps even more importantly--by the English-language, Anglo-Saxon media (The Economist, Financial Times, WSJ, NYT plus all the movies, music etc etc).
English-speakers, mostly Americans, have shaped the world and the global debate in their own linquistic, cultural and philosophical terms. This gives them an unprecedented advantage over other nations, whose citizens need to not only learn to speak English as well as native speakers do, but additionally they also need to change the way they think to be understood properly in the new language.
The bottom line is that I understand the frustration of the French, who struggle to "express themselves" in so many ways. Americans, in turn, should acknowledge that some of their global achievements are not due to their inherent "genius", but simply to that fact that the world is stacked in their favor, including in linguistic ways.
If so, English-speakers have it so much easier to succeed in today's world since it monopolized by English and--perhaps even more importantly--by the English-language, Anglo-Saxon media (The Economist, Financial Times, WSJ, NYT plus all the movies, music etc etc).
English-speakers, mostly Americans, have shaped the world and the global debate in their own linquistic, cultural and philosophical terms. This gives them an unprecedented advantage over other nations, whose citizens need to not only learn to speak English as well as native speakers do, but additionally they also need to change the way they think to be understood properly in the new language.
The bottom line is that I understand the frustration of the French, who struggle to "express themselves" in so many ways. Americans, in turn, should acknowledge that some of their global achievements are not due to their inherent "genius", but simply to that fact that the world is stacked in their favor, including in linguistic ways.
Sunday, November 28, 2010
The French during the IIWW
An interesting NYT review of a new book on "AND THE SHOW WENT ON. Cultural Life in Nazi-Occupied Paris" by Alan Riding, documenting how French artists had no problem with accomodating the Nazis during the occupation.
As the author says "writers and artists simply carried on as if nothing had happened. German musicians visited Paris, French musicians toured Germany, and French artists too, Derain and Vlaminck among others. Picasso’s record was fairly contemptible throughout, though he got away with it afterward".
And "back in Paris, theaters and nightclubs did a roaring trade, eager to amuse the large contingent of German soldiers. The list of writers and artists who did their bit for cultural fraternization is a roster of French culture and popular entertainment at the time, from Jean Cocteau and Jean Giraudoux to Edith Piaf, Maurice Chevalier and Django Reinhardt. The ardor with which some actively collaborated is almost less chilling than the sheer cynicism and amorality of many more. "
Just compare this with the fate of Central Europeans, primarily Polish artists and intellegentsia, who were shot on principle (See me previous blog entry of the book "Bloodlands"). As Czeslaw Milosz wrote in "The Captive Mind" - "What does Western Europe know about suffering?"
As the author says "writers and artists simply carried on as if nothing had happened. German musicians visited Paris, French musicians toured Germany, and French artists too, Derain and Vlaminck among others. Picasso’s record was fairly contemptible throughout, though he got away with it afterward".
And "back in Paris, theaters and nightclubs did a roaring trade, eager to amuse the large contingent of German soldiers. The list of writers and artists who did their bit for cultural fraternization is a roster of French culture and popular entertainment at the time, from Jean Cocteau and Jean Giraudoux to Edith Piaf, Maurice Chevalier and Django Reinhardt. The ardor with which some actively collaborated is almost less chilling than the sheer cynicism and amorality of many more. "
Just compare this with the fate of Central Europeans, primarily Polish artists and intellegentsia, who were shot on principle (See me previous blog entry of the book "Bloodlands"). As Czeslaw Milosz wrote in "The Captive Mind" - "What does Western Europe know about suffering?"
Five favorite books on the euro by Barry Eichengreen
Here is the website with Barry Eichengreen's commentary on each of the books. Worth reading, especially from such a good American, who actually believes (unlike most of his American colleagues) that the euro was a good idea.
I agree with him that "Europe will be forged in crises":
"I’d say that each time that Europe has reached a crisis and had to decide whether to go forward or go back, it goes forward toward deeper integration. Angela Merkel’s personal preferences notwithstanding, I think there will be strong pressure on her to do likewise. Jean Monnet, the father of European integration, once said something to this effect: ‘Europe will be forged in crises.’"
I have tried to explain it two days ago to an incredulous EC bueraucrat, who found it hard to believe that the current crisis was a good thing for Europe, both short-term (depreciating the euro and other EU currencies, such as the Polish zloty) and long-term (strenghtening the euro infrastructure, something that would not have happened without the crisis).
I also concur that the euro zone will not break up:
"The commission forced me to sit down and think hard about scenarios. The conclusion I reached was that countries with serious financial problems, like Greece, and, equally, countries fearing that they would have to pay for those financial problems, like Germany, would both be extremely reluctant to abandon the euro. Doing so would be equivalent to abandoning the whole European project, which, for political reasons, I regard as bordering on the inconceivable.
Also, if a crisis country abandoned the euro in order to reintroduce its own national currency with the goal of restoring its competitiveness, it would be creating more problems for itself than it solved. The more I contemplated scenarios of possible exits from the euro, the more I concluded it wouldn’t happen.
Finally, on a somewhat different topic, I also very much agree with this:
"Americans, especially, are inclined to be critical of Europe’s long holidays, inflexible labour markets, and so on. The Hall and Soskice book is an articulate statement of the view that there are different ways of cracking the same nut. There are different ways of organising market economies – different constellations of social and economic institutions that, in combination, can be equally efficient. Europe has very significant strengths in precision manufacturing. It has apprenticeship training programs and employment stability that facilitate the acquisition of skills on the job. It has patient banks to fund the operations of firms investing in their workers. It’s not obvious that this constellation of institutions is inferior, from the point of view of growth and competitiveness, to that of the United States. Ten years ago, the so-called experts would have been unanimous that the US had a leg-up on Germany in terms of innovation and export competitiveness. Now, to put an understated gloss on the point, this is no longer obvious"
I agree with him that "Europe will be forged in crises":
"I’d say that each time that Europe has reached a crisis and had to decide whether to go forward or go back, it goes forward toward deeper integration. Angela Merkel’s personal preferences notwithstanding, I think there will be strong pressure on her to do likewise. Jean Monnet, the father of European integration, once said something to this effect: ‘Europe will be forged in crises.’"
I have tried to explain it two days ago to an incredulous EC bueraucrat, who found it hard to believe that the current crisis was a good thing for Europe, both short-term (depreciating the euro and other EU currencies, such as the Polish zloty) and long-term (strenghtening the euro infrastructure, something that would not have happened without the crisis).
I also concur that the euro zone will not break up:
"The commission forced me to sit down and think hard about scenarios. The conclusion I reached was that countries with serious financial problems, like Greece, and, equally, countries fearing that they would have to pay for those financial problems, like Germany, would both be extremely reluctant to abandon the euro. Doing so would be equivalent to abandoning the whole European project, which, for political reasons, I regard as bordering on the inconceivable.
Also, if a crisis country abandoned the euro in order to reintroduce its own national currency with the goal of restoring its competitiveness, it would be creating more problems for itself than it solved. The more I contemplated scenarios of possible exits from the euro, the more I concluded it wouldn’t happen.
Finally, on a somewhat different topic, I also very much agree with this:
"Americans, especially, are inclined to be critical of Europe’s long holidays, inflexible labour markets, and so on. The Hall and Soskice book is an articulate statement of the view that there are different ways of cracking the same nut. There are different ways of organising market economies – different constellations of social and economic institutions that, in combination, can be equally efficient. Europe has very significant strengths in precision manufacturing. It has apprenticeship training programs and employment stability that facilitate the acquisition of skills on the job. It has patient banks to fund the operations of firms investing in their workers. It’s not obvious that this constellation of institutions is inferior, from the point of view of growth and competitiveness, to that of the United States. Ten years ago, the so-called experts would have been unanimous that the US had a leg-up on Germany in terms of innovation and export competitiveness. Now, to put an understated gloss on the point, this is no longer obvious"
Friday, November 26, 2010
Poland's first report on tax expenditures
Yesterday, the Polish Ministry of Finance published its first, comprehensive tax expenditure report, which estimated that various tax privileges across PIT, CIT, VAT, excise and local taxes cost the Polish taxpayer about PLN 60 billion or 4.9% of GDP a year, a staggering sum.
This is a very good report and is worth reading. One can only hope now that the report will not only raise the profile of the public debate on tax expenditures, but also lead to concrete actions aimed at eliminating the most egregious tax expenditures, which fail to meet any economic and social objectives, and are also grossly regressive, benefiting the richest households only. Eliminating tax expenditures would also help mitigate the need for further tax hikes.
I mention the report also because I have contributed to it (on behalf of the World Bank), which the MoF's deputy minister kindly acknowledged in his foreword. I have also helped co-organize an international conference held on Nov 25, which provided the venue for the launch of the report.
This is a very good report and is worth reading. One can only hope now that the report will not only raise the profile of the public debate on tax expenditures, but also lead to concrete actions aimed at eliminating the most egregious tax expenditures, which fail to meet any economic and social objectives, and are also grossly regressive, benefiting the richest households only. Eliminating tax expenditures would also help mitigate the need for further tax hikes.
I mention the report also because I have contributed to it (on behalf of the World Bank), which the MoF's deputy minister kindly acknowledged in his foreword. I have also helped co-organize an international conference held on Nov 25, which provided the venue for the launch of the report.
Tuesday, November 23, 2010
My quotes in the Warsaw Business Journal's article on privatization
I gave an interview to the Warsaw Business Journal, which is featured in the article on privatization in Poland entitled "Good as gold"
Monday, November 22, 2010
Why nothing changed in regulating US banks
A nice article by John Cassidy in the New York Review of Books on why nothing has changed after the crisis in the US financial sector. Worth reading. A couple of interesting quotes below:
"The other losers in this game were those who had cash stashed in a savings account or money market mutual fund. “What we have right now is a situation where every saver in the country is, essentially, paying a huge tax to bail out the banking system,” noted Raghuram Rajan, the University of Chicago economist who, back in 2005, had issued a fateful warning about the dangers of a financial blowup. “We are all getting screwed on our money market accounts—getting 0.25 percent—and the banks are making a huge spread on nearly every asset they hold, because they are financing them at pretty close to zero rates.”
"From an economic viewpoint, the most serious problem with the rescue programs was not that they further enriched the loathed bankers but that they exacerbated some serious incentive problems at the heart of the financial system. By extending trillions of dollars in loans, capital injections, and debt guarantees to troubled firms, the US government and its counterparts overseas had greatly extended the public safety net for banks and other financial entities. Left unchecked, this expansion will surely lead to more blowups, followed by even bigger bailouts".
"Taken overall, the reform effort amounts to tinkering with the existing system rather than fundamentally reforming it."
"A significant but undetermined amount of derivatives trading is exempt from the new regulations, and the issuance and trading of naked credit default swaps—bets that a certain company or country will go bankrupt—remain perfectly legal."
"The other losers in this game were those who had cash stashed in a savings account or money market mutual fund. “What we have right now is a situation where every saver in the country is, essentially, paying a huge tax to bail out the banking system,” noted Raghuram Rajan, the University of Chicago economist who, back in 2005, had issued a fateful warning about the dangers of a financial blowup. “We are all getting screwed on our money market accounts—getting 0.25 percent—and the banks are making a huge spread on nearly every asset they hold, because they are financing them at pretty close to zero rates.”
"From an economic viewpoint, the most serious problem with the rescue programs was not that they further enriched the loathed bankers but that they exacerbated some serious incentive problems at the heart of the financial system. By extending trillions of dollars in loans, capital injections, and debt guarantees to troubled firms, the US government and its counterparts overseas had greatly extended the public safety net for banks and other financial entities. Left unchecked, this expansion will surely lead to more blowups, followed by even bigger bailouts".
"Taken overall, the reform effort amounts to tinkering with the existing system rather than fundamentally reforming it."
"A significant but undetermined amount of derivatives trading is exempt from the new regulations, and the issuance and trading of naked credit default swaps—bets that a certain company or country will go bankrupt—remain perfectly legal."
Monday, November 15, 2010
Friday, November 5, 2010
The (in)visible hand of the world of finance in the world of politics
I like to explain to my students that the world of finance has an invisible stronghold on the world of politics. Check out then the below text from the Globalist on Larry Summers, who was paid millions just before joining Obama's economic team in the White House. Can this explain why he was against temporarily nationalizing American banks during the crisis? I wonder what new job he is going to get now... Goldman Sachs anyone?
"In 2008, the year before he joined the Obama Administration, Mr. Summers made more than $5 million in compensation from the D.E. Shaw hedge fund and received more than $2.7 million in speaking fees from Wall Street companies that received bailout money.
Now, at that pay level, there were always legitimate concerns about this being "pre-pensation" rather than compensation for actual services.
It was as if to say with a wad of dollars: "Once you're at 1600 Penn, we know you'll keep a watchful eye out for the interests not just of the firm or hedge funds, but the big players in the financial industry more generally.”
And that, in his two-year stint in the White House, he certainly did."
"In 2008, the year before he joined the Obama Administration, Mr. Summers made more than $5 million in compensation from the D.E. Shaw hedge fund and received more than $2.7 million in speaking fees from Wall Street companies that received bailout money.
Now, at that pay level, there were always legitimate concerns about this being "pre-pensation" rather than compensation for actual services.
It was as if to say with a wad of dollars: "Once you're at 1600 Penn, we know you'll keep a watchful eye out for the interests not just of the firm or hedge funds, but the big players in the financial industry more generally.”
And that, in his two-year stint in the White House, he certainly did."
Sunday, October 31, 2010
From "the Bloodlands" to "New Europe"
Anne Applebaum has written an interesting review of a new book by Timothy Snyder on "Bloodlands: Europe Between Hitler and Stalin", which talks about inter alia the fourteen million people in Poland, Belarus and Ukraine, who have been deliberately killed by Hitler and Stalin during their reign.
What a far cry from a situation today, where Germans pay for the Polish highways... I think that Poles and the West still do not appreciate how far we have come since those disastrous times...
What a far cry from a situation today, where Germans pay for the Polish highways... I think that Poles and the West still do not appreciate how far we have come since those disastrous times...
Wednesday, October 20, 2010
The Prague Post quotes me on the Polish privatization program
The Prague Post quotes me on the privatization process in Poland and the sale of the Warsaw Stock Exchange.
What's new in economic research
Below a selection of a couple of interesting articles from the most recent vox.eu column:
Martin Ravaillon cautions about the overuse of various rankings and indexes.
Olivier Blanchard, Chief Economist of the IMF, talks about the need to rebalance the global economy. He argues that "the [global economic] recovery which is neither strong, nor balanced, and runs the risk of not being sustained"
Willem Buiter and Ebrahim Rahbari analyze the sovereign debt crisis in the Eurozone and the response of the national authorities, EU institutions, and IMF (full paper here). They find Greece’s debt burden to be unsustainable, with or without the support package, with which I strongly agree: bankruptcy of Greece is inevitable, although you will never hear the "b" word. Instead, Greece will restructure its debt through what will be called "An Enhanced Market Friendly Debt Swap" or something similar.
Finally, Francesco Giavazzi and Luigi Spaventa argue that the EC's new proposals for strengthening fiscal discipline are "empty and useless".
Martin Ravaillon cautions about the overuse of various rankings and indexes.
Olivier Blanchard, Chief Economist of the IMF, talks about the need to rebalance the global economy. He argues that "the [global economic] recovery which is neither strong, nor balanced, and runs the risk of not being sustained"
Willem Buiter and Ebrahim Rahbari analyze the sovereign debt crisis in the Eurozone and the response of the national authorities, EU institutions, and IMF (full paper here). They find Greece’s debt burden to be unsustainable, with or without the support package, with which I strongly agree: bankruptcy of Greece is inevitable, although you will never hear the "b" word. Instead, Greece will restructure its debt through what will be called "An Enhanced Market Friendly Debt Swap" or something similar.
Finally, Francesco Giavazzi and Luigi Spaventa argue that the EC's new proposals for strengthening fiscal discipline are "empty and useless".
Wednesday, October 6, 2010
Brazil - a power of the present and of the future?
There is a new text on vox.eu arguing that Brazil has become the the power of the present (and an interesting book by the same author is available here)
I agree with it, with some qualifications.
But am not sure about the future. Ten years of fast development does not yet mean that fundamental changes in the long-term growth outlook have occurred. For now, the markets' superoptimism about BRICs may soon lead to an ever growing financial bubble, which will burst sooner or later, miring these countries in yet another crisis...
Goldman Sachs, however, continues to foment the optimism in his 2009 update on the growth prospects of the BRICs and N-11.. After all, optimism, even if unwarranted, is good for business.
More on GS's research on BRICs is here
I agree with it, with some qualifications.
But am not sure about the future. Ten years of fast development does not yet mean that fundamental changes in the long-term growth outlook have occurred. For now, the markets' superoptimism about BRICs may soon lead to an ever growing financial bubble, which will burst sooner or later, miring these countries in yet another crisis...
Goldman Sachs, however, continues to foment the optimism in his 2009 update on the growth prospects of the BRICs and N-11.. After all, optimism, even if unwarranted, is good for business.
More on GS's research on BRICs is here
Tuesday, October 5, 2010
Macroeconomics from the MIT
The internet is the global public good par excellence: the MIT has put a lot of its lectures online, including in a video format.
There are courses in economics, including full lecture notes, exams and solutions for Principles of Macroeconomics. Alas, there are no videos available for lectures in economics.
There are, however, a couple of video courses in business and management, including "Dynamic Leadership: Using Improvisation in Business" and How to Develop "Breakthrough" Products and Services
There are courses in economics, including full lecture notes, exams and solutions for Principles of Macroeconomics. Alas, there are no videos available for lectures in economics.
There are, however, a couple of video courses in business and management, including "Dynamic Leadership: Using Improvisation in Business" and How to Develop "Breakthrough" Products and Services
Monday, October 4, 2010
Organizations would become more efficient if they promoted people at random
The 2010 spoof IG Nobel has been awarded to a paper below demonstrating mathematically that organizations would become more efficient if they promoted people at random.
Not only is it interesting, but has potentially many implications for our business and economic life, starting from salaries of CEOs (should they really receive 1000s mulitples of salaries of average worker for --as Laurence Peter described it--climb the hierarchy until he/she reaches his/her level of maximum incompetence?) to the way companies' mnagement and public administration is organized..
REFERENCE: “The Peter Principle Revisited: A Computational Study,” Alessandro Pluchino, Andrea Rapisarda, and Cesare Garofalo, Physica A, vol. 389, no. 3, February 2010, pp. 467-72.
Abstract:
In the late sixties the Canadian psychologist Laurence J. Peter advanced an apparently paradoxical principle, named since then after him, which can be summarized as follows: {\it 'Every new member in a hierarchical organization climbs the hierarchy until he/she reaches his/her level of maximum incompetence'}. Despite its apparent unreasonableness, such a principle would realistically act in any organization where the mechanism of promotion rewards the best members and where the mechanism at their new level in the hierarchical structure does not depend on the competence they had at the previous level, usually because the tasks of the levels are very different to each other. Here we show, by means of agent based simulations, that if the latter two features actually hold in a given model of an organization with a hierarchical structure, then not only is the Peter principle unavoidable, but also it yields in turn a significant reduction of the global efficiency of the organization. Within a game theory-like approach, we explore different promotion strategies and we find, counterintuitively, that in order to avoid such an effect the best ways for improving the efficiency of a given organization are either to promote each time an agent at random or to promote randomly the best and the worst members in terms of competence.
Not only is it interesting, but has potentially many implications for our business and economic life, starting from salaries of CEOs (should they really receive 1000s mulitples of salaries of average worker for --as Laurence Peter described it--climb the hierarchy until he/she reaches his/her level of maximum incompetence?) to the way companies' mnagement and public administration is organized..
REFERENCE: “The Peter Principle Revisited: A Computational Study,” Alessandro Pluchino, Andrea Rapisarda, and Cesare Garofalo, Physica A, vol. 389, no. 3, February 2010, pp. 467-72.
Abstract:
In the late sixties the Canadian psychologist Laurence J. Peter advanced an apparently paradoxical principle, named since then after him, which can be summarized as follows: {\it 'Every new member in a hierarchical organization climbs the hierarchy until he/she reaches his/her level of maximum incompetence'}. Despite its apparent unreasonableness, such a principle would realistically act in any organization where the mechanism of promotion rewards the best members and where the mechanism at their new level in the hierarchical structure does not depend on the competence they had at the previous level, usually because the tasks of the levels are very different to each other. Here we show, by means of agent based simulations, that if the latter two features actually hold in a given model of an organization with a hierarchical structure, then not only is the Peter principle unavoidable, but also it yields in turn a significant reduction of the global efficiency of the organization. Within a game theory-like approach, we explore different promotion strategies and we find, counterintuitively, that in order to avoid such an effect the best ways for improving the efficiency of a given organization are either to promote each time an agent at random or to promote randomly the best and the worst members in terms of competence.
Friday, September 24, 2010
Forget BRICs, bring in New Europe!
Finally found it: this paper on on "Policy Volatility, Institutions and Economic Growth" shows that political volatility negatively affects growth.
This is a piece of evidence that I have been really looking for: it confirms my hypothesis from the Golden Age paper that New Europe will be growing faster in the long term than BRICs and other overpublicized emerging markets because of lower political volality and lower risks of political reversals.
One should not extrapolate the last decade of robust economic growth in emerging markers because if there is one thing certain about the future it is that it will be different than what we imagine it to be today. In 8 out of 10 cases the future is much diffferent than the baseline scenarios of the past.
Today the baseline scenario is the rise of Asia and BRICs and the shift in the global balance of power. I do not dispute that the shift in the global balance of power will happen - it will, mostly because of China, which will go back at some (distant) point in the future to its global role that it has had throughout its thousand years' of history (until 1820 in fact). What I dispute though is the pervasive optimism about the speed of this process, in China, but also and especially in other emerging markets such as BRICs.
I do not share this optimism. I see no reason why we should extrapolate the recent past in the future. BRICs are inherently unstable politically, socially, militarily, ethnically, and religiously. Sooner or later these ultimate drivers of history will rear their (ugly) head again and for BRICs it will not be pretty.
Is Brazil really different this time even though since 1808 it has had intermittent political and economic crises? Will China really be able to deal with economic, political, and social changes brought about by the unprecedently fast and long economic growth? Why are we so optimistic that it will continue to develop at such a fast pace even though the historical experience of other countries throughout centuries suggests otherwise (just take Japan...)? Will Russia really develop now, even though it has not really ever developed economically throughout its long history? Why would it change now? Why are we so optimistic about India after barely 20 years of faster growth when compared with centuries of economic stagnation?
This is a piece of evidence that I have been really looking for: it confirms my hypothesis from the Golden Age paper that New Europe will be growing faster in the long term than BRICs and other overpublicized emerging markets because of lower political volality and lower risks of political reversals.
One should not extrapolate the last decade of robust economic growth in emerging markers because if there is one thing certain about the future it is that it will be different than what we imagine it to be today. In 8 out of 10 cases the future is much diffferent than the baseline scenarios of the past.
Today the baseline scenario is the rise of Asia and BRICs and the shift in the global balance of power. I do not dispute that the shift in the global balance of power will happen - it will, mostly because of China, which will go back at some (distant) point in the future to its global role that it has had throughout its thousand years' of history (until 1820 in fact). What I dispute though is the pervasive optimism about the speed of this process, in China, but also and especially in other emerging markets such as BRICs.
I do not share this optimism. I see no reason why we should extrapolate the recent past in the future. BRICs are inherently unstable politically, socially, militarily, ethnically, and religiously. Sooner or later these ultimate drivers of history will rear their (ugly) head again and for BRICs it will not be pretty.
Is Brazil really different this time even though since 1808 it has had intermittent political and economic crises? Will China really be able to deal with economic, political, and social changes brought about by the unprecedently fast and long economic growth? Why are we so optimistic that it will continue to develop at such a fast pace even though the historical experience of other countries throughout centuries suggests otherwise (just take Japan...)? Will Russia really develop now, even though it has not really ever developed economically throughout its long history? Why would it change now? Why are we so optimistic about India after barely 20 years of faster growth when compared with centuries of economic stagnation?
Balcerowicz's defense of neoliberalism
One should not miss Prof. Balcerowicz's article in Rzeczpospolita in defense of neoliberalism and against depiciting it as the root cause of the global crisis. To him, the public sector is responsible.
I totally disagree with his assessment, but am happy for him to have written this text. There is nothing better than the pleasure to know better.
I totally disagree with his assessment, but am happy for him to have written this text. There is nothing better than the pleasure to know better.
IMF's new toolkit for predicting next crisis
IMF has just published a paper on "The IMF-FSB Early Warning Exercise - Design and Methodological Toolkit". It is a good read and a useful early warning model, although I remain sceptical that it will work.
Wednesday, September 22, 2010
Asset management makes money, but only for the managers
There is an interesting ranking in Maciej Samcik's blog, a journalist from Gazeta Wyborcza, which shows statistically credible rates of returns on managed assets of Polish clients in the last decade.
The conclusion is that in the last decade half of Polish asset managers earned less than average return on money market funds! In other words, managers charged 3-4% of other people's money every year for delivering results not different than putting one's money on a bank deposit!
I wonder how the ranking would look like if the returns of all funds were risk-weighted to see whether asset managers created any alpha, that is additional profit above risk-adjusted returns. I bet that there would be hardly any! This is reflected in another text on Samcik's blog documenting that since the bottom of the crisis only one third of asset management funds have beat the market.
It should therefore not be much of a surprise that I very much welcome the arrival of the first ever ETF fund traded on the WSE: it will manage people's money much better than asset managers, with only a 0.5% fee...
The conclusion is that in the last decade half of Polish asset managers earned less than average return on money market funds! In other words, managers charged 3-4% of other people's money every year for delivering results not different than putting one's money on a bank deposit!
I wonder how the ranking would look like if the returns of all funds were risk-weighted to see whether asset managers created any alpha, that is additional profit above risk-adjusted returns. I bet that there would be hardly any! This is reflected in another text on Samcik's blog documenting that since the bottom of the crisis only one third of asset management funds have beat the market.
It should therefore not be much of a surprise that I very much welcome the arrival of the first ever ETF fund traded on the WSE: it will manage people's money much better than asset managers, with only a 0.5% fee...
Friday, August 27, 2010
Principles of Economics translated - a must watch!
Check out this hilarious movie about Principles of Economics. Something for my macro students to watch!
Thursday, August 26, 2010
International ranking of the most cited Polish economists - I am in the 15th place
By pure chance I have just come across an article in the Polish local daily Dziennik Gazeta Prawna about the 30 most cited Polish economists in the international Ideas/Repec ranking. To my surprise, I am now ranked 15th in Poland, which is not too bad at all.
Monday, August 23, 2010
The world's best countries by Newsweek - Poland is No. 1!
In the Newsweek's ranking of the globall well-being, Poland is in the No 1. spot among middle-income countries (and 29th overall). Not bad at all (although my friend Krzysztof Rybinski disagress in this week's Newsweek editorial. But I think this is for encouraging Poles to do even more).
What makes nations happy - it is not only about being rich
Interesting research on Vox.eu. Below an abstract:
"What accounts for life satisfaction differences across countries? This column presents new findings from the Gallup World Poll of more than 140,000 respondents worldwide. It suggests the happiest nations are those with strong social support from family and friends, freedom in making life choices, and low levels of corruption."
This paper, however, presents a somewhat different perspective, arguing that absolute income increases happinness forever and that relative income comparisons in determining happiness play a limited role. This means, inter alia, that Poland and EU-10 must have now reached the highest level of relative well-being and happinness in their history, given that their absolute and relative incomes are the highest on record.
"What accounts for life satisfaction differences across countries? This column presents new findings from the Gallup World Poll of more than 140,000 respondents worldwide. It suggests the happiest nations are those with strong social support from family and friends, freedom in making life choices, and low levels of corruption."
This paper, however, presents a somewhat different perspective, arguing that absolute income increases happinness forever and that relative income comparisons in determining happiness play a limited role. This means, inter alia, that Poland and EU-10 must have now reached the highest level of relative well-being and happinness in their history, given that their absolute and relative incomes are the highest on record.
Thursday, August 19, 2010
Why the euro zone will survive
Finally some European has taken up the defense of the euro zone against the merciless agression of the misinformed global markets.
Lorenzo Bini Smaghi (at least his arrogance, which I have personally witnessed, is put to a good use) argues in the article in the Foreign Affairs on "The Future of the Euro. Why the Greek Crisis Will Not Ruin Europe’s Monetary Union"
that the euro zone has done pretty well in dealing with the crisis.
I agree. As I wrote in a previous post, the euro zone will come out stronger from the crisis. As we say in Polish "what does not kill you, will strengthen you".
He also rightly points out the stupidity of the overpaid global financiers, who until the last moment continued to finance Greece at extremely low interest rates.
I disagree with him though that Greece will not have to go through a debt restructuring - for me, it is a given.
Lorenzo Bini Smaghi (at least his arrogance, which I have personally witnessed, is put to a good use) argues in the article in the Foreign Affairs on "The Future of the Euro. Why the Greek Crisis Will Not Ruin Europe’s Monetary Union"
that the euro zone has done pretty well in dealing with the crisis.
I agree. As I wrote in a previous post, the euro zone will come out stronger from the crisis. As we say in Polish "what does not kill you, will strengthen you".
He also rightly points out the stupidity of the overpaid global financiers, who until the last moment continued to finance Greece at extremely low interest rates.
I disagree with him though that Greece will not have to go through a debt restructuring - for me, it is a given.
Tuesday, August 10, 2010
More unequal societies are more deficit prone
The European Commission's guys have published an interesting paper on "Fiscal performance and income inequality: Are unequal societies more deficit-prone? Some cross-country evidence" where they find that indeed more unequal societies tend to have higher budget deficits.
Wednesday, July 28, 2010
"The Spirit Level: Why Greater Equality Makes Societies Stronger"
That's the title of a remarkable new book by Richard Wilkinson and Kate Pickett, which presents a wealth of data on why more equal societes do better than less equal ones.
Here is the Guardian's review of the book and the authors' own presentation of some its results.
Here is the Guardian's review of the book and the authors' own presentation of some its results.
New book on "The Future of Finance: the LSE Report"
The London School of Economics has just published an interesting e-book on "The Future of Finance". Truly recommended, particularly the last chapter by Peter Boon and Simon Johnson explaining why we are likely to experience more financial crises in the future.
Also check out the newly founded Soros' economic think-tank INET for more on the world after the crisis, including papers and presentations from its amazing inaugural conference.
Also check out the newly founded Soros' economic think-tank INET for more on the world after the crisis, including papers and presentations from its amazing inaugural conference.
Monday, July 26, 2010
The fallacy of supply-side economics
Martin Wolf and Paul Krugman present (yet again) convincing evidence that cuts in taxes do not pay for themselves: they only result in a permanently lower tax revenue relative to what would have been achieved with higher taxes.
Martin Wolf quotes Greg Mankiw, chairman of the Council of Economic Advisers under George W. Bush, who "has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”".
Martin Wolf quotes Greg Mankiw, chairman of the Council of Economic Advisers under George W. Bush, who "has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”".
Tuesday, July 6, 2010
My quotes in the FT on Doing Business in Poland
Financial Times ran an article on June 14 on "New focus on central Europe’s business opportunities".
It has my following quotes:
“Poland is moving forward, but parts of the region are moving even faster, so Poland is no further ahead,” says Marcin Piatkowski, senior economist at the World Bank office in Warsaw. The office has been hired by the government to try to improve Poland’s business environment.
Changing the way value added tax is administered, or making it possible to register a company in a single office, may seem like dry subjects, but these changes are key to boosting the region’s productivity and returning to the faster growth rates seen before the economic crisis, says Mr Piatkowski.
It has my following quotes:
“Poland is moving forward, but parts of the region are moving even faster, so Poland is no further ahead,” says Marcin Piatkowski, senior economist at the World Bank office in Warsaw. The office has been hired by the government to try to improve Poland’s business environment.
Changing the way value added tax is administered, or making it possible to register a company in a single office, may seem like dry subjects, but these changes are key to boosting the region’s productivity and returning to the faster growth rates seen before the economic crisis, says Mr Piatkowski.
Monday, May 31, 2010
The zloty’s loss is Poland’s gain as exports surge
I was quoted in the Financial Times' article under the above title:
"Marcin Piatkowski, senior economist at the World Bank’s Warsaw office, even says that the new EU member states are going to make life more difficult for the troubled PIIGS of the eurozone, as they have to compete against aggressive countries trying to catch up to western Europe, who also have the advantage of still having their own currencies."
"Marcin Piatkowski, senior economist at the World Bank’s Warsaw office, even says that the new EU member states are going to make life more difficult for the troubled PIIGS of the eurozone, as they have to compete against aggressive countries trying to catch up to western Europe, who also have the advantage of still having their own currencies."
Wednesday, May 26, 2010
If we didn't have Greece, we would have to invent one.
Was just thinking about the blessing that the Greek crisis is turning out to be for the euro zone, Polish and the whole European Union economy.
Two arguments. First, with stagnating private demand and prospective fiscal tightening (now likely to be much faster and deeper than previously expected) a weak euro is the only chance for the euro zone to entrench economic recovery and strengthen debt sustainability. American, Asian and Latin American consumers will pay the bill. The whole European Union will benefit, including Poland and other EU-10 countries who heavily rely on the strenght of the German recovery, which is mostly based on exports. At the current exchange rate Poland is "the China of Europe" - there is no other EU country that would be so competitive, given that the zloty has depreciated the most among all EU currencies (ULC based, increased productivity included).
Second, the Greek crisis has given rise to euro zone institutional reforms which were needed in the first place, but were not likely to be implemented without the Greek shock. So, thanks to the Greeks we are moving closer to fiscal, supervisory and labor market federalism. As the Polish saying goes: "what does not kill you, where strenghten you". seems to fit the current euro zone crisis perfectly well. Americans would just say that "every cloud has a silver lining".
Two arguments. First, with stagnating private demand and prospective fiscal tightening (now likely to be much faster and deeper than previously expected) a weak euro is the only chance for the euro zone to entrench economic recovery and strengthen debt sustainability. American, Asian and Latin American consumers will pay the bill. The whole European Union will benefit, including Poland and other EU-10 countries who heavily rely on the strenght of the German recovery, which is mostly based on exports. At the current exchange rate Poland is "the China of Europe" - there is no other EU country that would be so competitive, given that the zloty has depreciated the most among all EU currencies (ULC based, increased productivity included).
Second, the Greek crisis has given rise to euro zone institutional reforms which were needed in the first place, but were not likely to be implemented without the Greek shock. So, thanks to the Greeks we are moving closer to fiscal, supervisory and labor market federalism. As the Polish saying goes: "what does not kill you, where strenghten you". seems to fit the current euro zone crisis perfectly well. Americans would just say that "every cloud has a silver lining".
A European Monetary Fund? We already have one!
Recently there has been all this discussion about potentially creating a new institution--a European Monetary Fund--whose objective would be to replace the IMF as the lender of last resort to euro zone countries. The idea did not catch on and in the end the IMF has been invited to do its job in Greece (and probably soon elsewhere too).
I have just understood why European have given up on the EMF idea - I think this is because the IMF has become de facto EMF, without many people noticing.
How else to explain that the IMF decided (or rather it was decided by the IMF's French Managing Director, DSK) to contribute EUR 250 billion to the new European EUR 1 trillion stability mechanism without even formally asking the IMF's Executive Board for approval?
There was a lot of grumbling before about the Europeans not being able to use their muscle at the IMF because of unconcentrated voting power. There were calls for creating a single euro zone seat or even a single EU seat.
Now without any changes to the voting structure, the IMF has suddenly become a European piggy bank, where European, but also US and Asian money is unexpectedly supporting Greece and the euro zone.
It now turns out that Europeans were right to insist on appointing their own guy as the head of the IMF after all. It will be now much harder for them to let the position go when DSK retires.
I have just shared these thoughts with Prof. Eisuke Sakakibara, Waseda University, a Japanese guy who originated the idea of creating an Asian Monetary Fund following the Asian crisis in late 1990s (and who participated in today's NBP conference on the future of the international monetary system). He could not agree with me more.
I have just understood why European have given up on the EMF idea - I think this is because the IMF has become de facto EMF, without many people noticing.
How else to explain that the IMF decided (or rather it was decided by the IMF's French Managing Director, DSK) to contribute EUR 250 billion to the new European EUR 1 trillion stability mechanism without even formally asking the IMF's Executive Board for approval?
There was a lot of grumbling before about the Europeans not being able to use their muscle at the IMF because of unconcentrated voting power. There were calls for creating a single euro zone seat or even a single EU seat.
Now without any changes to the voting structure, the IMF has suddenly become a European piggy bank, where European, but also US and Asian money is unexpectedly supporting Greece and the euro zone.
It now turns out that Europeans were right to insist on appointing their own guy as the head of the IMF after all. It will be now much harder for them to let the position go when DSK retires.
I have just shared these thoughts with Prof. Eisuke Sakakibara, Waseda University, a Japanese guy who originated the idea of creating an Asian Monetary Fund following the Asian crisis in late 1990s (and who participated in today's NBP conference on the future of the international monetary system). He could not agree with me more.
Tuesday, April 13, 2010
Hilarious video on the banking sector's role in the financial crisis
This is a true must see: John Bird and John Fortune, two British comediants, stage a fake interview with a City London investment banker. Part I here (other parts follow on youtube.com)
Futures on GDP growth and real estate prices
I have always been a fan of Robert Schiller's idea for increasing social efficiency of financial innovation by providing ways to hedge households against changes in GDP (as proxy for unemployment) and real estate prices. Futures and options based on the Case and Shiller's house price index have been traded by the CME in Chicago since 2006.
I hope that these instruments could also be used more widely in Europe, including Poland. Some useful papers to read are here: 1, 2, 3.
I hope that these instruments could also be used more widely in Europe, including Poland. Some useful papers to read are here: 1, 2, 3.
Friday, March 26, 2010
Why were American economists jealous about the Euro?
Two economists in the European Commision published a nice paper on "The euro: It can’t happen, It’s a bad idea, It won’t last. US economists on the EMU, 1989-2002" arguing that:
"The study of approximately 170 publications shows (a) that US academic economists concentrated on the question "Is the EMU a good or bad thing?", usually adopting the paradigm of optimum currency areas as their main analytical vehicle, (b) that they displayed considerable scepticism towards the single currency, (c) that economists within the Federal Reserve System had a less analytical and a more pragmatic approach to the single currency than US academic economists, and (e) that US economists adjusted their views and analytical approach as European monetary unification progressed. In particular, the traditional optimum currency approach was gradually put into question"
"The study of approximately 170 publications shows (a) that US academic economists concentrated on the question "Is the EMU a good or bad thing?", usually adopting the paradigm of optimum currency areas as their main analytical vehicle, (b) that they displayed considerable scepticism towards the single currency, (c) that economists within the Federal Reserve System had a less analytical and a more pragmatic approach to the single currency than US academic economists, and (e) that US economists adjusted their views and analytical approach as European monetary unification progressed. In particular, the traditional optimum currency approach was gradually put into question"
The Impact of Population Ageing in the EU until 2060
I highly recommend to read the the European Commission's report on "The 2009 Ageing Report : Economic and budgetary projections for the EU-27 Member States (2008-2060)".
Poland is looking good, thanks to the pension reform, but otherwise the picture for the whole EU is pretty gloomy.
Essential reading for all current politicians and future pensioners (like me).
Poland is looking good, thanks to the pension reform, but otherwise the picture for the whole EU is pretty gloomy.
Essential reading for all current politicians and future pensioners (like me).
Friday, March 19, 2010
Win-Win Scenario for the Eurozone: Expel Greece, Invite Poland
I am increasingly convinced that it would make a lot of sense for the euro zone to do a quick barter trade and replace Greece with Poland. It would be a pure win-win, a Pareto-efficient solution for everyone:
(i) Greece would have a chance of restoring its competitiveness owing to a new depreciated currency (otherwise it will have to go through a grinding, painful and long-term internal devaluation, which I think the Greeks--unlike Latvians, Estonians, Lithuanians, and Bulgarians--have no stomach for);
(ii) Poland would achieve the macroeconomic stability that it craves and accelerate the speed of convergence (particularly if it joins the euro zone at roughly the current exchange rate)
(iii) euro zone would get a new powerful member, whose low inflation (projected to decline below 2% later this year) and relatively low public debt (at least compared to Western Europe) would not complicate euro zone policy making, while its strong competitive position would provide the much needed stimulus to the sclerotic eurozone economy.
I will give this idea some more thinking and report again soon.
(i) Greece would have a chance of restoring its competitiveness owing to a new depreciated currency (otherwise it will have to go through a grinding, painful and long-term internal devaluation, which I think the Greeks--unlike Latvians, Estonians, Lithuanians, and Bulgarians--have no stomach for);
(ii) Poland would achieve the macroeconomic stability that it craves and accelerate the speed of convergence (particularly if it joins the euro zone at roughly the current exchange rate)
(iii) euro zone would get a new powerful member, whose low inflation (projected to decline below 2% later this year) and relatively low public debt (at least compared to Western Europe) would not complicate euro zone policy making, while its strong competitive position would provide the much needed stimulus to the sclerotic eurozone economy.
I will give this idea some more thinking and report again soon.
What Old Europe Can Learn from New Europe
This week's The Economist features two articles on Eastern Europe or--as I prefer to call it--New or Central Europe (geographically speaking the notion of Eastern Europe is just plain wrong, given that most countries in the region are smack in the center of the continent. I am also loath to propagate the ill-conceived Western European bias, where any country beyond Germany is considered "Eastern").
Both articles argue that Old Europe, and in particular Spain, Portugal, Italy and Greece, could learn a lot from New Europe as to how to take hard economic decisions and move forward. I could hardly agree more.
The Economist also talks about how quickly the mood about New Europe can change - it was only a year ago when Financial Times ran a famous headline "Eastern European Subprime". Now, New Europe is hardly a problem anymore and some of the countries in the region, primarily Poland, are perceived as unmitigated economic stars.
Back in early 2009 some people saw the irrational hysteria and argued against it. That includes Prof. Rybinski and me, when at the height of the crisis in February of last year we argued that "there was irrational exuberance about Central and Eastern European sovereign risk". As it turned out, we were 100% right.
Interestingly, neither Financial Times nor Wall Street Journal wanted to publish our text then (we ended up publishing it in Eurointelligence). Was it because it was just not in line with the gloomy editorials?
Both articles argue that Old Europe, and in particular Spain, Portugal, Italy and Greece, could learn a lot from New Europe as to how to take hard economic decisions and move forward. I could hardly agree more.
The Economist also talks about how quickly the mood about New Europe can change - it was only a year ago when Financial Times ran a famous headline "Eastern European Subprime". Now, New Europe is hardly a problem anymore and some of the countries in the region, primarily Poland, are perceived as unmitigated economic stars.
Back in early 2009 some people saw the irrational hysteria and argued against it. That includes Prof. Rybinski and me, when at the height of the crisis in February of last year we argued that "there was irrational exuberance about Central and Eastern European sovereign risk". As it turned out, we were 100% right.
Interestingly, neither Financial Times nor Wall Street Journal wanted to publish our text then (we ended up publishing it in Eurointelligence). Was it because it was just not in line with the gloomy editorials?
Thursday, March 18, 2010
Global Crisis versus Great Depression: Comparison
Barry Eichengreen and Kevin O’Rourke update their charts until February 2010 comparing the current global crisis with the Great Depression. Interesting read. The conclusion is that "while there is cause for optimism, there is no room for complacency".
Monday, March 15, 2010
IMF on Poland: "Fiscal easing saved Poland"
The IMF has just published its Concluding Statement after a 10 day mission in Warsaw (in which I have also participated on an ad hoc basis).
I was shocked to read in the IMF statement that "A large and timely fiscal stimulus was particularly helpful". This is a very courageous statement on the part of the IMF given the prevailing domestic propaganda maintaning that Poland has done so well in the crisis because it has been "fiscally disciplined" and "resisted other countries' ill-considered policy of fiscal stimuli".
IMF knows better: it says that "Discretionary fiscal relaxation of an estimated 1¾ percent of GDP in 2008 and 2½ percent of GDP in 2009, together with a fall in revenues due to the economic slowdown, increased the general government deficit from under 2 percent of GDP in 2007 to over 7 percent of GDP in 2009. While the Government initially intended to offset revenue shortfalls to the extent needed to maintain the state budget deficit below the limit of Zloty 18 billion in 2009—through what would have been highly pro-cyclical expenditure cuts—it appropriately changed such plans at mid-year, when it increased the deficit limit to Zloty 27 billion. Thus, fiscal policy—through a combination of discretionary relaxation and the work of automatic stabilizers—has provided a much welcomed counter-cyclical stimulus in 2008-09."
It concludes that "fiscal relaxation was was one of the key factors preventing Poland from falling into recession"
Wow, that's impressive!
The IMF stance is very much in line with what I (co-) wrote more than a year ago in a series of articles in the Polish press (, here, , here , here , here and here), arguing that fiscal relaxation is needed to prevent Poland from falling into a recession. At that time the Ministry of Finance was still arguing, as the IMF documents above, that Poland needed to keep general government deficit below 3 percent of GDP to enter the ERMII and then euro zone in 2012. This amounted to conducting a very pro-cyclical policy. Had the MoF kept its position, Poland would have not escaped a recession for sure.
Luckily, the MoF changed its mind later in the year (allowing a deficit of almost 7% of GDP in 2009 and 2010), albeit it did not change its rhetoric.
Interestingly, the Polish press has not picked up ANY of this in their review of the IMF statement. Just see this and this text in Wyborcza and this one in Rzeczpospolita...
IMF is courageous not only in its fiscal assessment. For the first time ever it talks about FX intervention and reduction in interest rates to stop excessive FX appreciation (sic!), argues against cutting contributions to OFE, recommends against too fast fiscal tightening ("reducing the deficit to 3 percent already by 2012 would, in our view, be too ambitious, considering that the economic recovery is incipient and still uncertain"), and talks about a forceful action by the government to prevent too rapid increase in FX lending. Finally, in a stark reversal of its earlier position, the IMF recommends to delay Euro adoption.
I was shocked to read in the IMF statement that "A large and timely fiscal stimulus was particularly helpful". This is a very courageous statement on the part of the IMF given the prevailing domestic propaganda maintaning that Poland has done so well in the crisis because it has been "fiscally disciplined" and "resisted other countries' ill-considered policy of fiscal stimuli".
IMF knows better: it says that "Discretionary fiscal relaxation of an estimated 1¾ percent of GDP in 2008 and 2½ percent of GDP in 2009, together with a fall in revenues due to the economic slowdown, increased the general government deficit from under 2 percent of GDP in 2007 to over 7 percent of GDP in 2009. While the Government initially intended to offset revenue shortfalls to the extent needed to maintain the state budget deficit below the limit of Zloty 18 billion in 2009—through what would have been highly pro-cyclical expenditure cuts—it appropriately changed such plans at mid-year, when it increased the deficit limit to Zloty 27 billion. Thus, fiscal policy—through a combination of discretionary relaxation and the work of automatic stabilizers—has provided a much welcomed counter-cyclical stimulus in 2008-09."
It concludes that "fiscal relaxation was was one of the key factors preventing Poland from falling into recession"
Wow, that's impressive!
The IMF stance is very much in line with what I (co-) wrote more than a year ago in a series of articles in the Polish press (, here, , here , here , here and here), arguing that fiscal relaxation is needed to prevent Poland from falling into a recession. At that time the Ministry of Finance was still arguing, as the IMF documents above, that Poland needed to keep general government deficit below 3 percent of GDP to enter the ERMII and then euro zone in 2012. This amounted to conducting a very pro-cyclical policy. Had the MoF kept its position, Poland would have not escaped a recession for sure.
Luckily, the MoF changed its mind later in the year (allowing a deficit of almost 7% of GDP in 2009 and 2010), albeit it did not change its rhetoric.
Interestingly, the Polish press has not picked up ANY of this in their review of the IMF statement. Just see this and this text in Wyborcza and this one in Rzeczpospolita...
IMF is courageous not only in its fiscal assessment. For the first time ever it talks about FX intervention and reduction in interest rates to stop excessive FX appreciation (sic!), argues against cutting contributions to OFE, recommends against too fast fiscal tightening ("reducing the deficit to 3 percent already by 2012 would, in our view, be too ambitious, considering that the economic recovery is incipient and still uncertain"), and talks about a forceful action by the government to prevent too rapid increase in FX lending. Finally, in a stark reversal of its earlier position, the IMF recommends to delay Euro adoption.
Friday, March 5, 2010
Are real estate prices in Poland too high?
Hungarian Central Bank published an interesting paper showing that while real estate prices in practically all EU countries have decreased since the onset of the crisis in 3Q 2008, sometimes drastically, real estate prices in Poland have actually increased.
I am not sure whether this is true that real estate prices in Poland have recently increased - all other data show they they actually declined by about 10-15%, at least in large cities - but it is surely true that they have declined much less than elsewhere.
Importantly, real estate prices in Poland have increased the most among all new EU member states since 2000, as shown in this World Bank's focus note, which I have co-authored (p. 52) and in a paper by other Polish economists talking about a real estate price bubble here
Time for a correction in real estate prices? Probably so, although it will most likely happen through real price correction, with nominal prices staying more or less where they are now (alas and paradoxically, declining inflation will not help the process and markets will clear later than needed).
Overvalued property prices also beg a question whether the state should continue to support real estate purchases for middle income families, which in effect contribute to the real estate bubble (in Warsaw state support is available for property prices of up to some 7,500 PLN per square meter, which pretty much covers most of the market, except for high-end apartments).
I am not sure whether this is true that real estate prices in Poland have recently increased - all other data show they they actually declined by about 10-15%, at least in large cities - but it is surely true that they have declined much less than elsewhere.
Importantly, real estate prices in Poland have increased the most among all new EU member states since 2000, as shown in this World Bank's focus note, which I have co-authored (p. 52) and in a paper by other Polish economists talking about a real estate price bubble here
Time for a correction in real estate prices? Probably so, although it will most likely happen through real price correction, with nominal prices staying more or less where they are now (alas and paradoxically, declining inflation will not help the process and markets will clear later than needed).
Overvalued property prices also beg a question whether the state should continue to support real estate purchases for middle income families, which in effect contribute to the real estate bubble (in Warsaw state support is available for property prices of up to some 7,500 PLN per square meter, which pretty much covers most of the market, except for high-end apartments).
Wednesday, March 3, 2010
The fallacy of the American Dream?
OECD in its news study on social mobility argues that "It is easier to climb the social ladder and earn more than one’s parents in the Nordic countries, Australia and Canada than in France, Italy, Britain and the United States, according to a new OECD study. Intergenerational Social Mobility: a family affair? says weak social mobility can signal a lack of equal opportunities, constrain productivity and curb economic growth.
It also says that "social mobility between generations tends to be lower in more unequal societies. It says redistributive tax and benefit policies aimed at providing income support or access to education for disadvantaged families may reduce the handicaps of a poorer or less well educated background. However, any growth-enhancing impact of redistributive policies via increased social mobility would need to be weighed against other, well-established negative effects on growth via reduced labour utilisation".
More progressive taxation anyone?
It also says that "social mobility between generations tends to be lower in more unequal societies. It says redistributive tax and benefit policies aimed at providing income support or access to education for disadvantaged families may reduce the handicaps of a poorer or less well educated background. However, any growth-enhancing impact of redistributive policies via increased social mobility would need to be weighed against other, well-established negative effects on growth via reduced labour utilisation".
More progressive taxation anyone?
Monday, March 1, 2010
Does financial innovation boost economic growth?
The Economist provides a forum for an interesting debate on the above question between Ross Levine and Joseph Stiglitz. I tend to agree more with the latter based on the belief that traditional banking seems to provide much higher social returns than most forms of innovation. It is much less risky too.
Thursday, February 25, 2010
Well-being and social welfare is more than just GDP
Bloomberg: "Joseph Stiglitz, the Nobel Prize- winning economist, urged world leaders to drop an obsession with examining gross domestic product and focus more on broader measures of prosperity.
“GDP has increasingly become used as a measure of societal well-being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said in an interview today in Paris".
The remarks reflect Stiglitz’s study of the issue for French President Nicolas Sarkozy, who commissioned a report at the beginning of 2008 after the onset of the financial crisis. Stiglitz and other contributors to the report will present their results tomorrow in Paris at a daylong conference hosted by Sarkozy and attended by Finance Minister Christine Lagarde.
Check out the full report here
“GDP has increasingly become used as a measure of societal well-being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said in an interview today in Paris".
The remarks reflect Stiglitz’s study of the issue for French President Nicolas Sarkozy, who commissioned a report at the beginning of 2008 after the onset of the financial crisis. Stiglitz and other contributors to the report will present their results tomorrow in Paris at a daylong conference hosted by Sarkozy and attended by Finance Minister Christine Lagarde.
Check out the full report here
Wednesday, February 24, 2010
Cross-country data on happiness
Tuesday, February 23, 2010
IMF rethinks macro policy - revolutionary!
What a difference a personality makes on global policy making!
For sixty plus years IMF was dead against capital controls and was painfully orthodox on low inflation (the lower, the better, around 2%). Still in July 2007 the former IMF Managing Director, Rodrigo de Rato was quoted saying that capital controls were "rapidly becoming ineffective" and were easily circumvented.
Now, in just two years, the new MD Dominique Strauss-Kahn has changed the IMF beyond recognition. Capital controls are back, countercyclical fiscal policy is de rigeur, printing money (so called quantitative easing) is OK, and slightly higher inflation than the 2% dogma is not necessarily bad. Just read this by Olivier Blanchard, IMF Chief Economist (original paper.) as well as this this paper on the benefits of capital controls and this one on lessons and policy implications from the global financial crisis.
The same people (and I know what I am saying - I have worked at the IMF myself) who proselitized the dogma for all their careers suddenly change their view 180 percent. Have they been persuaded by the crisis that new policies were needed or have they simply been lying to themselves most of the lives for the convenience of a cushy IMF job?
I challenge all those who say that personalities don't matter!
For sixty plus years IMF was dead against capital controls and was painfully orthodox on low inflation (the lower, the better, around 2%). Still in July 2007 the former IMF Managing Director, Rodrigo de Rato was quoted saying that capital controls were "rapidly becoming ineffective" and were easily circumvented.
Now, in just two years, the new MD Dominique Strauss-Kahn has changed the IMF beyond recognition. Capital controls are back, countercyclical fiscal policy is de rigeur, printing money (so called quantitative easing) is OK, and slightly higher inflation than the 2% dogma is not necessarily bad. Just read this by Olivier Blanchard, IMF Chief Economist (original paper.) as well as this this paper on the benefits of capital controls and this one on lessons and policy implications from the global financial crisis.
The same people (and I know what I am saying - I have worked at the IMF myself) who proselitized the dogma for all their careers suddenly change their view 180 percent. Have they been persuaded by the crisis that new policies were needed or have they simply been lying to themselves most of the lives for the convenience of a cushy IMF job?
I challenge all those who say that personalities don't matter!
Which institutions matter most for growth?
Voxeu.org has an interesting paper on it here. It argues that "How much do institutions matter? This column provides a new insight into measuring their effects, suggesting that a survey of managers’ perceptions of the impact of institutions should be used as an estimate of the effect. It finds that the combined impact of improving public inputs in low-income countries to their level in high-income ones is equivalent to raising output by about 20%".
Friday, February 19, 2010
What can governments do to make people happy
An interesting NYT review of a new book on "THE POLITICS OF HAPPINESS - What Government Can Learn From the New Research on Well-Being" by Derek Bok.
Thursday, February 18, 2010
Problems with measuring the price level and output correctly
See Paul Krugman's entertaining article on "Viagra and the Wealth of Nations" here
Monday, February 15, 2010
What is responsible for the crisis? Lack of sex!
Shang-Jin Wei explains in his text on "The Mystery of Chinese savings" on voxeu.org that high rate of Chinese savings, which led to global imbalances and too low interest rates in the US before the crisis were due to the surplus of Chinese men over women (122 to 100) which has produced a highly competitive marriage market. One in five Chinese men is unlikely to find himself a wife. To increase chances of finding a suitable bride (or any bride for that matter) and yes, have sex with them, Chinese men (and their parents) save like crazy (there is an implicit assumption here that women seem to like men with money more than average, which I think is a credible assumption). Are there any policy recommendations to lower the savings rate? I have some ideas, but will leave it to the readers for now to ponder.
Saturday, February 13, 2010
Intergenerational conflict in Poland: pensioners have it too good?
The text from Wyborcza is self-explanatory (in Polish):
Przywykliśmy współczuć emerytom, bo w pierwszej połowie lat 90. dostawali grosze z tzw. starego portfela. A dziś? Nigdzie w Europie, sytuacja osób powyżej 65 r. życia nie jest tak korzystna. Spośród 27 państw UE, jedynie w Polsce ich dochody są wyższe (!) od średnich dochodów całej reszty społeczeństwa (104 proc.). Sprawia to, że na tle naszych, aż dwukrotnie więcej niemieckich i trzykrotnie więcej brytyjskich emerytów zagrożonych jest ubóstwem (odpowiednio 10, 18 i 29 proc). Aż dziwne, że ZUS jeszcze tego nie roztrąbił.
Co innego osoby do 17 r. życia - bieda zagląda w oczy niemal co czwartej. Mocno zawyżoną przez Rumunię 20-proc. średnią przebijamy o 2 punkty, co definitywnie wyjaśnia przepełnienie niektórych domów dziecka. - A wie pan, gdzie w ogóle takich domów nie ma? W państwach islamskich - podpowiada Tarkowska, która sama jest muzułmanką. - A wystarczyły dwie rzeczy: prohibicja i nakaz Koranu, by wspierać sieroty.
On the same topic, the Economist has reviewed a new book on "The Pinch: How the Baby Boomers Took their Children’s Future—and Why They Should Give it Back"
Przywykliśmy współczuć emerytom, bo w pierwszej połowie lat 90. dostawali grosze z tzw. starego portfela. A dziś? Nigdzie w Europie, sytuacja osób powyżej 65 r. życia nie jest tak korzystna. Spośród 27 państw UE, jedynie w Polsce ich dochody są wyższe (!) od średnich dochodów całej reszty społeczeństwa (104 proc.). Sprawia to, że na tle naszych, aż dwukrotnie więcej niemieckich i trzykrotnie więcej brytyjskich emerytów zagrożonych jest ubóstwem (odpowiednio 10, 18 i 29 proc). Aż dziwne, że ZUS jeszcze tego nie roztrąbił.
Co innego osoby do 17 r. życia - bieda zagląda w oczy niemal co czwartej. Mocno zawyżoną przez Rumunię 20-proc. średnią przebijamy o 2 punkty, co definitywnie wyjaśnia przepełnienie niektórych domów dziecka. - A wie pan, gdzie w ogóle takich domów nie ma? W państwach islamskich - podpowiada Tarkowska, która sama jest muzułmanką. - A wystarczyły dwie rzeczy: prohibicja i nakaz Koranu, by wspierać sieroty.
On the same topic, the Economist has reviewed a new book on "The Pinch: How the Baby Boomers Took their Children’s Future—and Why They Should Give it Back"
Tuesday, February 9, 2010
How Goldman Sachs Helped Greece Hide Its Debt
Back in 2002-03, when I was advisor to the Polish Deputy Premier and Minister of Finance, we were bombarded with calls from London-based investment banks about ingenious ways of hiding budget deficit and public debt. The investment bankers already then were extolling the "success" of Italy and Greece in using their products. We never went for it.
Now the truth is coming out: read the Spiegel's coverage.
Stay tuned for more innovative "hide public debt" products in the near future, including the UK...
Now the truth is coming out: read the Spiegel's coverage.
Stay tuned for more innovative "hide public debt" products in the near future, including the UK...
Saturday, February 6, 2010
The Power of Demography
Foreign Affairs has an interesting article on "The New Population Bomb". It argues that "A series of looming demographic trends will greatly affect international security in the twenty-first century. How policymakers adjust to these changes now will determine the course of global political and economic stability for years to come". The author also say that " twenty-first-century international security will depend less on how many people inhabit the world than on how the global population is composed and distributed: where populations are declining and where they are growing, which countries are relatively older and which are more youthful, and how demographics will influence population movements across regions".
And "Indeed, the same UN data cited by The Economist reveal four historic shifts that will fundamentally alter the world's population over the next four decades: the relative demographic weight of the world's developed countries will drop by nearly 25 percent, shifting economic power to the developing nations; the developed countries' labor forces will substantially age and decline, constraining economic growth in the developed world and raising the demand for immigrant workers; most of the world's expected population growth will increasingly be concentrated in today's poorest, youngest, and most heavily Muslim countries, which have a dangerous lack of quality education, capital, and employment opportunities; and, for the first time in history, most of the world's population will become urbanized, with the largest urban centers being in the world's poorest countries, where policing, sanitation, and health care are often scarce.
Some striking statistics::" The portion of global GDP produced by Europe, the United States, and Canada in 2050 will then be less than 30 percent -- smaller than it was in 1820". And: "An overwhelming proportion of the world's GDP growth between 2003 and 2050 -- nearly 80 percent -- will occur outside of Europe, the United States, and Canada. By the middle of this century, the global middle class -- those capable of purchasing durable consumer products, such as cars, appliances, and electronics -- will increasingly be found in what is now considered the developing world. The World Bank has predicted that by 2030 the number of middle-class people in the developing world will be 1.2 billion -- a rise of 200 percent since 2005. This means that the developing world's middle class alone will be larger than the total populations of Europe, Japan, and the United States combined.
Agree. In the context of Poland, given the increasing importance of demography in the global balance of power, I came up with a slogan "50 for 50", that is for Poland to achieve a population of 50 million by 2050 (from current 38), mostly through opening up for immigration. I have talked about it already in the "Golden Age" paper, but will follow up again soon.
And "Indeed, the same UN data cited by The Economist reveal four historic shifts that will fundamentally alter the world's population over the next four decades: the relative demographic weight of the world's developed countries will drop by nearly 25 percent, shifting economic power to the developing nations; the developed countries' labor forces will substantially age and decline, constraining economic growth in the developed world and raising the demand for immigrant workers; most of the world's expected population growth will increasingly be concentrated in today's poorest, youngest, and most heavily Muslim countries, which have a dangerous lack of quality education, capital, and employment opportunities; and, for the first time in history, most of the world's population will become urbanized, with the largest urban centers being in the world's poorest countries, where policing, sanitation, and health care are often scarce.
Some striking statistics::" The portion of global GDP produced by Europe, the United States, and Canada in 2050 will then be less than 30 percent -- smaller than it was in 1820". And: "An overwhelming proportion of the world's GDP growth between 2003 and 2050 -- nearly 80 percent -- will occur outside of Europe, the United States, and Canada. By the middle of this century, the global middle class -- those capable of purchasing durable consumer products, such as cars, appliances, and electronics -- will increasingly be found in what is now considered the developing world. The World Bank has predicted that by 2030 the number of middle-class people in the developing world will be 1.2 billion -- a rise of 200 percent since 2005. This means that the developing world's middle class alone will be larger than the total populations of Europe, Japan, and the United States combined.
Agree. In the context of Poland, given the increasing importance of demography in the global balance of power, I came up with a slogan "50 for 50", that is for Poland to achieve a population of 50 million by 2050 (from current 38), mostly through opening up for immigration. I have talked about it already in the "Golden Age" paper, but will follow up again soon.
Thursday, February 4, 2010
Why is it so hard to explain the sources of economic growth?
Here is an interesting paper (in Polish) by Prof. Malaga from the Poznan University of Economics on "O niektórych dylematach teorii wzrostu gospodarczego i ekonomii" (Some dilemmas about the theory of economic growth and economics". It nicely lays out the multiple "known unknowns" about the true sources of economic growth.
I wonder though about the "unknown unknows" - all factors, seemingly irrelevant to economic growth, which ultimately prove to be key to explaining past economic performance. One factor, which comes to my mind, is the power of nationalism, which I think could explain the rapid rise of most of Asia (Japanese Meiji reforms had a deliberate objective of strenghtening Japan against Western European and American imperialism; Korean reforms were in turn a response to Japanese imperialism, with Japan occupying Korea in the first part of the XX century; finally, Chinese reforms could be construed as a response to a 150 year long political and economic decline of China) or that of the Baltic States (unprecedented economic reforms implemented in early 1990's were widely seen as fundamental to limit/eliminate the countries' vulnerability to Russia).
This brings me to a question of whether countries in the EU can develop quickly enough in the future, given that nationalisms are on the decline... Could national safety a debilitating factor in development as long as it minimizes the need for growth enhancing reforms? This idea is a long shot, but something important to ponder.
I wonder though about the "unknown unknows" - all factors, seemingly irrelevant to economic growth, which ultimately prove to be key to explaining past economic performance. One factor, which comes to my mind, is the power of nationalism, which I think could explain the rapid rise of most of Asia (Japanese Meiji reforms had a deliberate objective of strenghtening Japan against Western European and American imperialism; Korean reforms were in turn a response to Japanese imperialism, with Japan occupying Korea in the first part of the XX century; finally, Chinese reforms could be construed as a response to a 150 year long political and economic decline of China) or that of the Baltic States (unprecedented economic reforms implemented in early 1990's were widely seen as fundamental to limit/eliminate the countries' vulnerability to Russia).
This brings me to a question of whether countries in the EU can develop quickly enough in the future, given that nationalisms are on the decline... Could national safety a debilitating factor in development as long as it minimizes the need for growth enhancing reforms? This idea is a long shot, but something important to ponder.
Tuesday, February 2, 2010
The unintended consequences of past financial reforms
The Economist has an interesting article on it. It argues, for instance, that changes in Basel rules created an incentive for banks to hold AAA-rated securities, which require less capital to be held against them, which in turn created demand for AAA-rated bonds, such as collateralised debt obligations (CDOs). Worth reading.
Monday, February 1, 2010
"The 'Secret' of Poland's Success" by Jacek Rostowski
Poland's Minister of Finance, Jacek Rostowski, has written an op-ed for Wall Street Journal Europe (excerpts below). The text follows an earlier op-ed published in the Financial Times on January 14, 2010 on the sources of the global crisis.
Irrelevant of whether I agree or disagree with Rostowski (I am not sure why, given that the general government deficits increased to 7% of GDP in 2009 and 2010, the author does not mention that Keynesian fiscal easing has helped cope with the crisis), I have to admit that he is doing an amazing job in advertising Polish economic success. For that, chapeau bas!
The 'Secret' of Poland's Success
February 1, 2009
By Jacek Rostowski
Warsaw -- Poland is the only country in Europe to have come through 2009 without recession. What is more, growth was about 1.5%, which is the trend rate of the euro-zone countries, though well below Poland's own potential. How can we account for Poland's success, and what lessons should we draw from it?
Several factors account for the country's performance: strong institutions, a resilient economic structure, and well designed economic policy during the crisis. High levels of trust in the government ensured that statements by politicians about the strength of economic fundamentals and of the financial system were believed. This trust was partly based on the success of Poland's institutions and economy over the last 20 years, during which time the country has had the highest sustained growth in the region -- real GDP has doubled over this period, while increasing only 70% in Slovakia, 45% in the Czech Republic, Hungary and Estonia, and not increasing at all in Russia and Bulgaria.
[....]
What makes Poland stand out is the economic policy it pursued.
That policy was based on a profound belief in free market economics. Fiscal policy is a good example of this approach. Most countries instituted stimulus programs at the beginning of the crisis. Those that did not were generally ones that could not obtain the necessary financing, such as Hungary or the Baltic states. Poland was probably the only country in Europe which could afford to finance a stimulus program, but decided not to. Indeed, we did exactly the opposite, cutting expenditure at the height of the crisis (in December 2008 and January 2009) by the equivalent of 1% of GDP. We also took additional revenue measures in July 2009 amounting to 0.8% of GDP.
The aim of these highly orthodox (but at the time atypical) measures was to re-establish investor confidence in the country, at a time when central and eastern Europe was (wrongly, as it turned out) viewed as highly crisis-prone. This lack of confidence was leading to an uncontrolled depreciation of the region's currencies, and runaway depreciation was the only serious threat to the stability of the banking system (which had a moderate, though significant, amount of foreign currency exposure).
[....]
At the same time, the Polish government realized that only free trade would allow Poland to get through the crisis successfully, and allow Europe to avoid a repeat of the economic horrors of the 1930s. [....] Poland also believes that international solidarity is a key to successfully overcoming the crisis. That is why we have contributed to international financial support for Iceland, Latvia, and Moldova.
Poland has stuck to its belief in free market principles during the crisis. Instead of a stimulus package, it enacted an effective savings program, as well as implemented several key structural reforms. That is the "secret" of Poland's success.
Irrelevant of whether I agree or disagree with Rostowski (I am not sure why, given that the general government deficits increased to 7% of GDP in 2009 and 2010, the author does not mention that Keynesian fiscal easing has helped cope with the crisis), I have to admit that he is doing an amazing job in advertising Polish economic success. For that, chapeau bas!
The 'Secret' of Poland's Success
February 1, 2009
By Jacek Rostowski
Warsaw -- Poland is the only country in Europe to have come through 2009 without recession. What is more, growth was about 1.5%, which is the trend rate of the euro-zone countries, though well below Poland's own potential. How can we account for Poland's success, and what lessons should we draw from it?
Several factors account for the country's performance: strong institutions, a resilient economic structure, and well designed economic policy during the crisis. High levels of trust in the government ensured that statements by politicians about the strength of economic fundamentals and of the financial system were believed. This trust was partly based on the success of Poland's institutions and economy over the last 20 years, during which time the country has had the highest sustained growth in the region -- real GDP has doubled over this period, while increasing only 70% in Slovakia, 45% in the Czech Republic, Hungary and Estonia, and not increasing at all in Russia and Bulgaria.
[....]
What makes Poland stand out is the economic policy it pursued.
That policy was based on a profound belief in free market economics. Fiscal policy is a good example of this approach. Most countries instituted stimulus programs at the beginning of the crisis. Those that did not were generally ones that could not obtain the necessary financing, such as Hungary or the Baltic states. Poland was probably the only country in Europe which could afford to finance a stimulus program, but decided not to. Indeed, we did exactly the opposite, cutting expenditure at the height of the crisis (in December 2008 and January 2009) by the equivalent of 1% of GDP. We also took additional revenue measures in July 2009 amounting to 0.8% of GDP.
The aim of these highly orthodox (but at the time atypical) measures was to re-establish investor confidence in the country, at a time when central and eastern Europe was (wrongly, as it turned out) viewed as highly crisis-prone. This lack of confidence was leading to an uncontrolled depreciation of the region's currencies, and runaway depreciation was the only serious threat to the stability of the banking system (which had a moderate, though significant, amount of foreign currency exposure).
[....]
At the same time, the Polish government realized that only free trade would allow Poland to get through the crisis successfully, and allow Europe to avoid a repeat of the economic horrors of the 1930s. [....] Poland also believes that international solidarity is a key to successfully overcoming the crisis. That is why we have contributed to international financial support for Iceland, Latvia, and Moldova.
Poland has stuck to its belief in free market principles during the crisis. Instead of a stimulus package, it enacted an effective savings program, as well as implemented several key structural reforms. That is the "secret" of Poland's success.
Sunday, January 31, 2010
Books read in 2009
I have finally found some time to write down a list of most of the books I read last year. Instead of writing reviews for which of them, I graded each of the books with "*" - from * (useless) through ** (OK to read) to *** (superb). So, here is the (almost complete) list:
1. Development as Freedom by Amartya Sen**
2. The Girl with the Dragon Tattoo (Vintage) by Stieg Larsson***
3. Economic Development in East Central Europe in the Nineteenth andTwentieth Centuries (Institute on East Central Europe Series) by Ivan T. Berend and Gyorgy Ranki**
4. Successes of the International Monetary Fund: Untold Stories of Cooperation at Work by Eduard Brau and Ian McDonald**
5. The Audacity of Hope: Thoughts on Reclaiming the American Dream (Vintage) by Barack Obama **
6. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof and Robert Shiller**
7. The Return of Depression Economics and the Crisis of 2008 by Paul Krugman***
8. The Chamber by John Grisham**
9. The Associate: A Novel by John Grisham***
10. Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein**
11. One Economics, Many Recipes: Globalization, Institutions, and Economic Growth by Dani Rodrik***
12. The Miracle: The Epic Story of Asia's Quest for Wealth by Michael Schuman***
13. The Ascent of Money: A Financial History of the World - Niall Ferguson**
14. The Next 100 Years: A Forecast for the 21st Century - George Friedman**
15. Imagining India: The Idea of a Renewed Nation by Nandan Nilekani*
16. “Zywina” by Rafal Ziemkiewicz**
17. “Cialo Obce” by Rafal Ziemkiewicz**
18. “My, Narod” by Tomasz Lis*
19. „Czy globalizacja musi być irracjonalna?” Władysław Szymański***
20. Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It by Chris Edwards and Daniel J. Mitchell*
21. „Konkurencja podatkowa i harmonizacja podatków w ramach Unii Europejskiej, implikacje dla Polski” by Leokadia Oręziak*
22. „Podatki w Unii Europejskiej. Harmonizacja czy konkurencja podatkowa?” Slawomi Bukowski, Marek Pypec*
23. The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It by Robert J. Shiller**
24. Hoodwinked: An Economic Hit Man Reveals Why the World Financial Markets Imploded--and What We Need to Do to Remake Them by John Perkins**
25. “Capital Ideas Evolving” Peter L. Bernstein**
26. „Dlaczego nie jesteśmy bogaci. Dystans gospodarki polskiej do zachodnioeuropejskiej” by Wójtowicz Grzegorz, Wójtowicz Anna**
27. „Polska przedmurzem Europy” by Janusz Tazbir*
28. „How It All Happened” by Andrzej K. Kozminski**
29. “Zupełnie normalna historia” by Marcin Kula*
30. The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It by Paul Collier***
31. „Świat Według Mellera. Życie i Polityka: Ku Przyszłości” by Michal Komar**
32. „Władysław Bartoszewski. Wywiad rzeka” by Michal Komar**
33. Predictably Irrational: The Hidden Forces That Shape Our Decisions (Revised & Expanded Edition) by Dan Ariely**
34. Świat, który oszalał czyli poradnik na ciekawe czasy Witold M. Orłowski**
35. White Eagle, Red Star: The Polish-Soviet War 1919-1920 and "The Miracle on the Vistula” by Norman Davies**
36. Intellectuals: From Marx and Tolstoy to Sartre and Chomsky (P.S.) by Paul Johnson*
37. “Heroes: From Alexander the Great and Julius Caesar to Churchill and de Gaulle” by Paul Johnson*
38. “The Post-American World” by Fareed Zakaria**
39. Rivals: How the Power Struggle Between China, India, and Japan Will Shape Our Next Decade by Bill Emmott***
40. Everyman by Philip Roth**
41. The Logic of Life: The Rational Economics of an Irrational World by Tim Harford**
1. Development as Freedom by Amartya Sen**
2. The Girl with the Dragon Tattoo (Vintage) by Stieg Larsson***
3. Economic Development in East Central Europe in the Nineteenth andTwentieth Centuries (Institute on East Central Europe Series) by Ivan T. Berend and Gyorgy Ranki**
4. Successes of the International Monetary Fund: Untold Stories of Cooperation at Work by Eduard Brau and Ian McDonald**
5. The Audacity of Hope: Thoughts on Reclaiming the American Dream (Vintage) by Barack Obama **
6. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof and Robert Shiller**
7. The Return of Depression Economics and the Crisis of 2008 by Paul Krugman***
8. The Chamber by John Grisham**
9. The Associate: A Novel by John Grisham***
10. Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein**
11. One Economics, Many Recipes: Globalization, Institutions, and Economic Growth by Dani Rodrik***
12. The Miracle: The Epic Story of Asia's Quest for Wealth by Michael Schuman***
13. The Ascent of Money: A Financial History of the World - Niall Ferguson**
14. The Next 100 Years: A Forecast for the 21st Century - George Friedman**
15. Imagining India: The Idea of a Renewed Nation by Nandan Nilekani*
16. “Zywina” by Rafal Ziemkiewicz**
17. “Cialo Obce” by Rafal Ziemkiewicz**
18. “My, Narod” by Tomasz Lis*
19. „Czy globalizacja musi być irracjonalna?” Władysław Szymański***
20. Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It by Chris Edwards and Daniel J. Mitchell*
21. „Konkurencja podatkowa i harmonizacja podatków w ramach Unii Europejskiej, implikacje dla Polski” by Leokadia Oręziak*
22. „Podatki w Unii Europejskiej. Harmonizacja czy konkurencja podatkowa?” Slawomi Bukowski, Marek Pypec*
23. The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It by Robert J. Shiller**
24. Hoodwinked: An Economic Hit Man Reveals Why the World Financial Markets Imploded--and What We Need to Do to Remake Them by John Perkins**
25. “Capital Ideas Evolving” Peter L. Bernstein**
26. „Dlaczego nie jesteśmy bogaci. Dystans gospodarki polskiej do zachodnioeuropejskiej” by Wójtowicz Grzegorz, Wójtowicz Anna**
27. „Polska przedmurzem Europy” by Janusz Tazbir*
28. „How It All Happened” by Andrzej K. Kozminski**
29. “Zupełnie normalna historia” by Marcin Kula*
30. The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It by Paul Collier***
31. „Świat Według Mellera. Życie i Polityka: Ku Przyszłości” by Michal Komar**
32. „Władysław Bartoszewski. Wywiad rzeka” by Michal Komar**
33. Predictably Irrational: The Hidden Forces That Shape Our Decisions (Revised & Expanded Edition) by Dan Ariely**
34. Świat, który oszalał czyli poradnik na ciekawe czasy Witold M. Orłowski**
35. White Eagle, Red Star: The Polish-Soviet War 1919-1920 and "The Miracle on the Vistula” by Norman Davies**
36. Intellectuals: From Marx and Tolstoy to Sartre and Chomsky (P.S.) by Paul Johnson*
37. “Heroes: From Alexander the Great and Julius Caesar to Churchill and de Gaulle” by Paul Johnson*
38. “The Post-American World” by Fareed Zakaria**
39. Rivals: How the Power Struggle Between China, India, and Japan Will Shape Our Next Decade by Bill Emmott***
40. Everyman by Philip Roth**
41. The Logic of Life: The Rational Economics of an Irrational World by Tim Harford**
A Country is Not a Company
and why businesspeople don't necessarily make great economists. A pretty entertaining and illuminating article from no other than Paul Krugman writing in 1996 in the Harvard Business Review. Here is the article
However, to understand why businessmen (like my students at Kozminski University) should know macroeconomics, read this.
However, to understand why businessmen (like my students at Kozminski University) should know macroeconomics, read this.
Friday, January 29, 2010
The Economist on "Poland's strong economy"
This week's The Economist features an article on Poland, written by my friend Edward Lucas, the CEE correspondent, quite poignantly entitled "From horse power to horsepower". Recommended.
Thursday, January 28, 2010
World Bank's "Global Economic Prospects 2010"
The World Bank, my employer, has just published its flagship "Global Economic Prospects 2010" report. It is worth reading, particularly that the WB seems to be more worried about a potential double dip in the global economy than the IMF and the global markets.
America is more socialist than Poland!
at least in personal taxation: a presentation from the OECD shows (p. 9) that personal tax progressivity in Poland is lower than in the US! In other words, richer Americans are taxed more heavily than richer Poles relative to their poorer compatriots!
Given that richer Poles stop paying social security contributions when their annual income exceeds 30-times the monthly average income, Poland's tax wedge (combining PIT and social security contributions) is probably one of the least progressive in the whole OECD and the EU.
Given that richer Poles stop paying social security contributions when their annual income exceeds 30-times the monthly average income, Poland's tax wedge (combining PIT and social security contributions) is probably one of the least progressive in the whole OECD and the EU.
Thursday, January 21, 2010
How fast will the global economy grow after the crisis?
Reinhart and Rogoff have a new interesting paper on "Growth in a Time of Debt". Abstract below:
We study economic growth and inflation at different levels of government and external
debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face
lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
We study economic growth and inflation at different levels of government and external
debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face
lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.
Tuesday, January 12, 2010
Lower potential growth in Europe
Gert Jan Koopman and (my friend) Istvan Szekely from the European Commission published a pretty interesting note on the potential growth rate in the EU after the crisis. They come to the conclusion that without the potential growth is likely to slow significantly and only a forceful policy response, particularly as regards the financial sector, can help to mitigate the expected slowdown
Monday, January 11, 2010
Paul Krugman praising Europe
Paul Krugman has a very interesting op-ed in today's New York Times on "Learning from Europe", where he argues that Americans don't appreciate Europe enough. He goes on to argue that "the story you hear all the time — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works". Worth reading.
Sunday, January 3, 2010
Radio TOK FM EKG
On December 30 I participated in a radio program EKG, which deals with current economic affairs. The audio of the program is available here
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