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?

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.

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...