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

Wednesday, February 24, 2010

Cross-country data on happiness

There are two websites worth looking at to see how happy your compatriots are relative to other nations: this one and this one

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!

Which institutions matter most for growth? 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 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"

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...

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.

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.

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.