Thursday, January 27, 2011

PWC's "The World in 2050"

Following HSBC, PWC published its own economic predictions in the report on "The World in 2050"

All my objections to the HSBC report equally apply to the PWC report (see the previous post).

I am getting tired of this baseline and standard thinking, which is condemned to be wrong.

Wednesday, January 26, 2011

"Financial Crisis Was Avoidable" - a new US report

The NYT carries a story on the conclusions of the yet-to-be-released US inquiry into the causes of the crisis. This promises to be a fascinating read.

Below some interesting excerpts from the NYT article:

The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.”

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”
The report could reignite debate over the influence of Wall Street; it says regulators "lacked the political will" to scrutinize and hold accountable the institutions they were supposed to oversee. The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions".
"The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

P.S. Here is the by now released report

Friday, January 21, 2011

Open world's databases to everyone!

The World Bank has just opened its vast database to the public, creating an ultimate global public good (youtube movie).

All countries in the world should do the same. There is no reason to hide anything. In Poland, the infamous GUS, the national statistical office, should take the lead.

Tuesday, January 11, 2011

Are long-term economic projections all rubbish?

My post on HSBC's forecast for 2050 received an interesting comment from Andreas Foster, who basically said the report was all  nonsense and rubbish.

In response to Andreas:

I agree with his point that indeed "the unexpected and unpredictable shapes the world". That said, there is still value in projecting into the future, to the extent that you can shape future events and/or change the probabilities of some events happening. For instance, to give an obvious example, countries like Poland could start doing something about demographics, introducing pro-family legislation and--above all--opening doors to/promoting immigration.

Also, projections on their own shape reality. Just take the BRICs, a PR idea developed by Goldman Sachs back in 2001, which then took a life of its own. The leaders of BRICs now meet for BRICs forums (sic!) and markets seemingly can't get enough of investing into BRICs. This may be silly, and it is, but it is nonetheless the reality. The tail wags the dog.

I myself talk about the weaknesses of long-term projections in my Golden Age paper, arguing a similar point that it would not make much sense to predict where the world was going in 1968 or--above all--in 1989. Or that Asia today looks very much like XIX century Europe, a huge powder keg ready to explode, spurred by the rising enmity between China, Japan, Korea, India, Taiwan and Pakistan. All economics will not matter if you have a war (to be fair, HSBC report mentions this). In addition, I think Europe may unexpectedly and paradoxically become the big winner of the XXI century, despite the current consensus arguing the opposite. This is because the axis of future global conflicts will permanently move away from Europe, where for the last 500 years it has led to innumerable conflicts, including two largest global wars, to the Pacific Ocean, mainly between China and the US. Europe will clearly benefit from it. Others will lose, perhaps even big time. As the Polish proverb says: "when the two fight, the third benefits".
See more in my forthcoming Chimerica paper (will put it on the blog)

Wednesday, January 5, 2011

HSBC's forecast for "The World in 2050"

Jealous of Goldman Sachs, HSBC has just published its own sweeping report on "The World in 2050"

The report is quite good, well written and argumented and based on a broadly correct model.

Alas, the report, like many others, is wrong about Poland and New Europe.

It projects that in 2050 Poland's economy will be ranked only in the 24th place globally in terms of its size, no change relative to today, behind Egypt, Argentina, Malaysia, Thailand and even the Netherlands.

The projections are based on a Barro-inspired macro model, which takes into account the starting level of GDP per capita (since it is easier for poorer countries to grow faster than it is for richer ones) and assumptions as to the demographic trends, the quality of human capital and economic governance.

Let me explain why these projections for Poland are wrong.

The main reason why Poland is projected not to do too well in the future is the expected demographic decline. The model assumes that the fertility rate in Poland will remain low at 1.3 and that there will be no immigration. Both assumptions are incorrect.

First, the fertility rate in Poland is already increasing, exceeding 1.4 in 2009, up from 1.3 in 2003. What is more important, pressed by the society and rising future pension costs, the Polish government will have no choice, but to enhance its pro-family policy (I admit though that some serious pushing will be needed). It is already happening, with, for instance, the new law on infant care, but much more is to come soon. As a result, fertility rates will increase, although I am convinced that for social reasons (the fact that the social role of women in Poland has permanently changed), the fertility rate will never exceed 2.0 again.

Second, Poland is set to become a big recipient of immigrants, reversing the 300 year old trend. This is because with rising income Poland will become more and more attractive. When Poland's GDP per capita rises above 70% of the EU average, similarly to Spain in the mid-1990s and the Czech Republic recently, it is likely to start receiving substantial immigration flows. I bet that by 2030 at least two million immigrants will have arrived to stay. More immigrants will come later, legal or illegal.

As a result, the projected demographic decline in Poland will not happen.

There are also other reasons why the projection for Poland is too pessimistic.

First and foremost, HSBC model understates the historically unprecedented increase in the quality if human capital in Poland and the permanent improvement in the quality of governance, owing to the EU accession.

As to the former, the model ignores increasing returns from the fact that already today almost 20% of population has a tertiary education degree, up from 7% in 1989, and that the ratio will steadily increase as Poland continues to churn out 2 million of graduates a year (maintaining 18-24 scholarization ratio above 50%). These millions of newly educated people only now enter the labor market; and they will be there for another 50 years to come, producing the Polish growth miracle and its real XXI century Golden Age. Separately, I also think that the used data on average years of male schooling taken from Barro and Lee database are off the mark (mostly outdated). It would be better to take the most recent PISA OECD data, measuring educational outcomes rather than inputs, which shows that functional literacy of Poland’s 15-year olds is higher than the OECD average, despite Poland’s GDP per capita and educational spending being at the very bottom of the group (you could say that we are producing pretty intelligent young people on the cheap).

As to the latter, the quality of economic governance (including rule of law etc), the soulless HSBC model does not take into account the much lower risk of policy reversals in Poland relative to other emerging markets, courtesy of the EU straitjacket (just see what happens to Orban’s Hungary...). The historical, structural and permanent break in governance scores is ignored, understating the projected growth rates for Poland and overstating these for other emerging markets. Finally, it is simply wrong for HSBC to crunch numbers based on the assumption that Poland’s rule of law is of the same quality as in Turkey and that it is weaker than in Saudi Arabia or China (really?). But this is a minor quibble relative to all other objections, which--granted--would apply to most/all long-term macroeconomic models (with the HSBC model likely being one of the best).

See more arguments in my Golden Age paper. I will also write more about it in the upcoming sequel soon.

Tuesday, January 4, 2011

Emoticon diplomacy in Europe

Edward Lucas, CEE correspondent for The Economist, has come up with a thrilling video on "Emoticon diplomacy in Europe". Funny, intriguing and insightful. A must watch!

Kolodko's forecast for 2011 and beyond

Prof. Grzegorz W. Kolodko, my boss at TIGER economic think-tank and Poland's former Deputy Premier and Minister of Finance (1994-97 and 2002-03) gave an interesting video interview to "Puls Biznesu", a Polish business daily. Recommended for the Polish readers of the blog.

He talks about the prospects for Poland's accession to the euro zone, the turbulence in Western Europe, growth prospects for Poland, Europe and the world, the inevitability of tax increases in Poland and the virtues of Wikileaks.