Tuesday, July 19, 2011

What do you mean by "the government is too big"?

I have just read this interesting text by James Kwak in The Atlantic on the fallacy of measuring the government's spending to decide whether "it is too big". It all depends, as James documents.

Friday, July 15, 2011

Interview on innovation and Poland's growth prospects

Here is my interview on "Europa 2020 a wzrost PKB" (in Polish) published by Portal Innowacji, an online publication of the Polish Agency For Entreprise Development (PARP).

Thursday, July 14, 2011

OECD's paper on structural reforms to raise growth

I have just come across a new and interesting paper by the OECD on "Raising Potential Growth
After the Crisis. A Quantitative Assessment of the Potential Gains from Various Structural Reforms in the OECD Area and Beyond", which projects how much OECD countries could benefit in terms of higher GDP levels after introducing product and labor market reforms.

The conclusion is that "The overall potential GDP gain for the average OECD country from undertaking the full range of reforms considered here might come close to 10% at a 10-year horizon, indicating the presence of ample room for structural reforms to offset the permanent GDP losses from the recent crisis".

This is a useful exercise, although results for Poland are quite doubtful: it is projected to benefit from product and labor market reforms to the tune of almost 18 percent of GDP within the next ten years largely through reforming the supposedly very rigid product market regulations.

But when you look closer, Poland's low position in the product market regulation (in fact, the last one in the ranking) is largely due to to a slightly larger share of state ownership in the economy than elsewhere. The underlying assumption is that state ownership by definition has to always be worse/less efficient than private ownership and by simply privatizing these companies Poland would develop much faster. I am not so sure: private ownership in the long run is indeed more efficient than state ownership, but in a short run and under additional assumptions, partial state ownership (as is the case in Poland for most state-owned firms) may be equally efficient.

OECD's projections for the impact of PMR reforms on Poland's GDP are therefore overestimated. The PMR index on its own has also be taken with a grain of salt, as most international rankings for that matter.

Wednesday, July 13, 2011

IMF's annual assessment of the Polish economy

The IMF has just published its annual report on the Polish economy (the so-called Article IV). It is a useful read, replete with the usual high-quality analysis, but somewhat marred by an arcane language, which makes it hard to read for anyone outside the narrow economists’ circles.

(A digression: as IMF desk economist for Moldova, I was writing staff reports myself – I needed to quickly learn how to use the same undecipherable language to relay the right message without disturbing the audience and the markets. To my great surprise, chiseling the text was taking more time for everyone than the underlying economic analysis!).

There are plenty of things I would broadly agree with:

- maintaining fiscal discipline (in my view Poland should aim for a balanced central budget by 2016, reduce publid debt to closer to 40 percent of GDP and establish a Fiscal Council to increase credibility and transparency of public finances),
- increasing labor participation (more than 1.5 million Poles more should be working when compared with Western Europe, there is another million working in low-productivity farming, which should be moved to industry and services, there is a substantial scope for increasing immigration, especially the high-skilled type)
- streamlining bureaucracy (there is nevery enough of it)
- stimulating further business climate reforms (some of it is happening and Poland is likely to improve its position in this year's Doing Business rankings)
- and continuing privatization (although it is somewhat irritating to read the banalities about the permanent advantage of private vs. public ownership. This is simply not always true; vide the fact that many Polish partially state-owned firms, PKO BP, KGHM, Orlen, Lotos etc, have recently performed better/equally well as their private sector competitors and—above purely private returns—have also provided substantial social returns by maintaining operations and profits in Poland and—as in the case of PKO BP—increasing lending were needed. The usefulness of maintaining some sort of public control over the most important enterprises is even higher during uncertain times: for instance, in a scenario of further worsening of the euro zone crisis, we might need to use PKO BP again to support lending and/or buy out foreign banks, if needed) The key is not ownership per se, but the existence of competitive pressures and commercial orientation).

However, I disagree with IMF’s view that foreign exchange reserves are too low and that they should be increased. This is for three reasons:

- First, FX reserves may be lower than the total value of short-term debt, but a large part of this debt is short-term only by name, as it includes inter-company financing from foreign banks and companies for their Polish subsidiaries. This type of funding has proven to be extremely stable in the past. Even during 2008-2009, at the bottom of the first wave of the global crisis, foreign banks, for instance, have actually increased, not decreased their financing for Polish subsidiaries. This is likely to be the case in the future too, implying that the FX reserves do not have to inordinately high.

- Second, Poland maintains access to the $30 billion Flexible Credit Line from the IMF (for which it is paying about $50 million dollars a year in commitment fees), which could be used at any time to bolster reserves. Maintaining the same $30 billion on NBP’s balance sheet would cost us $1.2 billion a year in opportunity costs (see below). So, it is better to further increase the FCL than to build up reserves.

- Third, and above all, FX reserves are one of the most inefficient ways of investing public money: while NBP invests $100 billion worth of dollars and Euros in US and euro bonds yielding 1-2% a year, at the same tiem the Ministry of Finance borrows the same dollars and Euros from the global financial markets at 6% a year. As a result, the poor Poles are subsidizing rich Americans and Western Europeans to the tune of some $4 billion a year! Does that make any sense?

In an ideal world, NBP should not have to accumulate any FX reserves and rely instead on the ECB and/or IMF-like insurance policies guaranteeing payment in case of a crisis. The accumulated reserves should be used to pay back the burgeoning public debt (reducing the total outstanding public debt by one third). Poland will come close to this ideal situation when it enters the euro zone around 2020: as part of the euro zone, there will be no need any more to maintain FX reserves (except for our contribution to ECB and small reserves for technical reasons). One more reason to enter the euro zone at some opportune moment and at a competitive exchange rate.

Thursday, July 7, 2011

"Europe needs the solidarity of self-interest"

I like today's comment in the FT by Poland's Minister of Finance Jacek Rostowski on "Europe needs the solidarity of self-interest".

He argues for (i) lower interest rates on the EU support facilities for Greece, Portugal and Ireland to ensure that they have a fighting chance of growing out of the crisis (although less so for Greece), (ii) voluntary debt restructuring and Brady bonds (for Greece) and (iii) structural reforms.

All quite sensible and a nice article overall (am wondering however why it has not been published on the main op-ed page rather than as a comment: isn't a text by the EU Presidency's minister of finance on the euro zone problems more important than, for instance, a large text on the US defense spending on the op-ed page? I seriously question FT's priorities here).

As to structural reforms, these are crucial in the long-term: aside from every more stringent austerity packages, struggling euro zone countries need to convince investors that they can start growing again. This requires far-reaching educational reforms, liquidition of domestic product and service market monopolies, higher supply of labor etc. Some reforms will take time, some others--like raising the retirement age or opening domestic markets to competition--could be implemented quite quickly.

One thing is for sure: Time is not on our side and we need to move quickly.

Tuesday, July 5, 2011

The UK is almost as socialist as Sweden is!

A chart above taken from the Economist's recent article on the Swedish economy, fittingly entitled "The North Star", shows that the size of the UK's public sector as measured by the share of public spending in GDP is virtually indistinguishable from that in Sweden and much higher than in Poland (not on chart - in 2010, public spending represented only about 45% of GDP).

The message? First, there has been an unbelievable convergence of economic models in the past 10 years: liberal countries became more socialist, while socialist countries became more liberal. Second, a larger role of the state in the economy has not prevented the world's economy (both developed and developing countries) from growing faster than in previous decades, the global crisis notwithstanding. Finally, it seems that modern societies, which live not only on GDP, but increasingly care about well-being and standards of living going beyond GDP, need relatively significant public intervention to fulfill the new social needs. Large public sector (which doesn't mean that it necessarily needs to be inefficient) is likely to stay.

Friday, July 1, 2011

Reverse migration - the beginning of the story

The new York Times has this wonderful article on "A Polish Lifeline for an Ailing German Town" discussing how Poles are settling in Eastern Germany, largely because of cheaper real estate (sic!), and giving these lands a new lease of life.

Isn't this shocking? Who would have predicted it 20, 10, or even 5 years ago?

And this is only the beginning: Poland and other EU-10 countries will soon experience, for the first time in many centuries, a halt of outbound emigration (settling in German borderland notwithstanding) and growing inflow of immigrants from abroad.

Yet, like with the Polish-German story from the NYT, hardly anyone is predicting it, hardly anyone is thinking about it, hardly anyone is getting prepared. Will we be shocked in 2020 again?