Dr. Marcin Piatkowski

Taxes on the rich and economic growth

2012-01-03T06:34:00.000-08:00

A very interesting paper on "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities" by Piketty et al. argues that:

"There is a strong correlation between cuts in top tax rates and increases in top 1% income shares since 1975, implying that the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed."

which in plain English means that (i) cuts in personal taxes in the past thirty years have led to higher income inequality without accelerating economic growth and that (ii) higher personal taxes might not necessarily stymie growth.

Controversial, no?

New books read recently

2011-12-22T07:58:00.000-08:00

Ranked from * (boring) to *** (smashing):

The Quest: Energy, Security, and the Remaking of the Modern World by Daniel Yergin **
Confidence Men: Wall Street, Washington, and the Education of a President by Ron Suskind ***
God is not Great by Christopher Hitchens***
Brandwashed: Tricks Companies Use to Manipulate Our Minds and Persuade Us to Buy by Martin Lindstrom ***

TIGER seminar on Doing Business in Poland

2011-12-22T07:52:00.000-08:00

On December 14, 2011, I delivered a presentation on "Doing Business in Poland" within the TIGER Seminar Series.

Conference "The World and Europe in 2030"

2011-12-20T05:54:00.000-08:00

I gave a speech on "The Inexorable Rise of Chimerica and its Implications for the Global Economic Order" as part of a conference organized by TIGER on December 8, 2011 within an EU-funded project AUGUR.

The background paper is available here. An updated paper will be available online soon.

Misleading information in the media on EU tax harmonization (in Polish)

2011-11-30T03:41:00.000-08:00

I have just read an article in the Polish Gazeta Wyborcza on "Takie same stawki podatków w Unii? Zbyteczne" (The same tax rates in the EU? Not needed), which provides a sweet example of media misinformation.

First, the title of the article is not congruent with its content: one of the surveyed economists (in fact, Dr Ozog is not an economist, but a tax lawyer) is in favor of harmonizing tax bases within the EU and introducing a range of tax rates for CIT, ie a minimum and a maximum tax rate allowed. This is as close to tax harmonization as it can possibly get, short of having the same CIT rate for everyone.

Second, the way the article is written makes it really hard to understand Ozog's views: it first says that she is against one CIT rate for everyone, but then at the end adds that "it could be useful to think about introducing ranges", which goes against the main message coming from the text. Readers are left believing that there is something wrong with harmonizing taxes.

Third and finally, the article only asks for opinion two selected economists, without trying to talk to someone, who has strong arguments in favor of tax harmonization. Biased selection biases the results.

On the whole, the title of the article should have read something like "Tax Harmonization in Europe? A qualified yes for harmonizing bases and minimum tax rates", which would have fit the content much better. Otherwise, it is a great article!:-)

A remarkable speech by the Polish MFA Radek Sikorski in Berlin

2011-11-29T03:54:00.000-08:00

Radek Sikorski's speech in Berlin is a bombshell - I have hardly read anything more powerful ever before coming from a Polish Minister of Foreign Affairs or a Polish policy maker. This is a true tour de force, which is likely to earn its place in the Polish and European history.

I agree with Sikorski's whole message, except on taxes, which I believe--like in most other areas--should also be harmonized within the EU.

"2021: The New Europe" by Niall Ferguson

2011-11-28T08:22:00.000-08:00

Niall Ferguson, my favorite historican, peers into the future of Europe, now in its critical moment.

The bottom line: the euro is still circulating, the euro zone is replaced by the United States of Europe, UK is no longer in the EU, unlike Poland, which stayed and adopted the euro (and is led by Prime Minister Radek Sikorski), with the accession of the six remaining former Yugoslav states—Bosnia, Croatia, Kosovo, Macedonia, Montenegro and Serbia—total membership in the U.S.E. rose to 28 (29 with the separation of Flanders and Wallonia); in 2021 the euro is being used by more countries than before the crisis.

Euro Area Is Coming to an End?

2011-11-28T02:32:00.000-08:00

Peter Boone and Simon Johnson, a former IMF Chief Economist, have just published an op-ed on Bloomberg, which predicts that the "euro area is coming to an end" (although, unlike the title of the article, no doubt imposed by the editors, the authors merely say that the euro zone is likely to change its membership, not collapse as a whole. Talking about misleading information..).

I agree with the risks, but still believe that a concerted action by the ECB/EC/IMF can save the euro zone. It is becoming increasingly difficult, but is still possible.

Why China will dominate the world sooner than we expect

2011-11-23T03:45:00.000-08:00

Arvind Subramanian wrote an excellent book on "Eclipse. Living in the Shadow of China’s Economic Dominance", which is available in electronic form for free, where he argues that, contrary to common belief, China's economic dominance is much closer to become a reality than we expect. That includes the renminbi's takeover of the dollar as the world's reserve currency in the next decade or so. He discusses what impact these changes would have on the global economy.

A good review of the book is here.

Workshop in Seville on "Investigating Industrial and Innovation policies for Growth"

2011-11-23T03:30:00.000-08:00

On November 2-3, 2011, I participated in an international workshop on "Investigating Industrial and Innovation policies for Growth: Contrasting experts views" organized by the European Commision's IPTS in Seville, Spain.

I spoke on "The 10 billion euro question': how to most effectively support innovation in Poland". The slides are here

Belka in Financial Times on two-speed Europe

2011-11-21T08:15:00.000-08:00

Marek Belka, Governor of the Polish central bank, published a very interesting op-ed in Financial Times (November 17) on "Europe cannot endure a rift between ins and outs". He argues for further European integration and reforms, both of which I strongly support.

His bottom line is the following:

"Now that the eurozone has approved greater financial firepower, it should effect debt restructuring for Greece and take measures to prevent spillover to other countries. Fiscal and financial supervision needs to be exercised as much as possible at the European level. It cannot be left as an almost exclusively national competence. Tough macroeconomic policies are crucial. Improving competitiveness may prove extremely difficult with rigid employment procedures, high costs of production and onerous taxation. Europe has to boost the quality of its export products and services compared with what Asia can offer. Non-eurozone countries have shown exemplary policies in all these fields. In the interests of EU cohesion, but also as regards their own economic objectives, euro members would be foolish to allow new barriers to grow between the eurozone and those outside. Eurozone strategies for higher growth and stability are welcome. They are far more likely to succeed if they embrace the whole EU"

U.S.-Central Europe Strategy Forum in Prague

2011-11-21T06:45:00.000-08:00

On October 26-27, I spoke on a panel on "The EU After Greece: Toward a Two-Tiered Europe?" during a conference organized by the DC-based Center for European Policy Analysis (CEPA), where I published my two recent papers on New Europe's Golden Age and on the Warsaw Consensus, the new growth model for New Europe.

More info from CEPA's website:

"CEPA convened the third meeting of The U.S.-Central Europe Strategy Forum in Prague, Czech Republic. The Forum brought together a wide range of policy experts from both sides of the Atlantic, along with numerous mid-level policy professionals and leading authorities on U.S.-Central European relations, for a sustained dialogue on the state of America’s relations with its allies in the region."

Doing Business 2012 launch in Warsaw and Riga

2011-11-21T01:37:00.000-08:00

On November 20 and 21, 2011, I presented the new World Bank's "Doing Business 2012" report in Poland and Latvia.

The Latvian Doing Business launch was particularly memorable, given that Latvia was included in this year's Top 10, global's ten best performing countries in regulatory reforms, and that at the press conference I was flanked by the Prime Minister Dombrovskis, minister of finance and minister of economy.

Pictures from the Warsaw and Riga presentations are here and here. There is also a video from the press conference in Riga.

New books read in the last month

2011-11-06T12:38:00.000-08:00

As always, ranking starts from * to ***.

1. Adapt: Why Success Always Starts with Failure by Tim Harford (May 10, 2011)***

2. Civilization: The West and the Rest by Niall Ferguson (2011)***

3. „Trans” by Manuela Gretkowska*

4. „Koźmiński Reaktywacja”, group authorship***

5. “Zgred” by Rafal Ziemkiewicz**

6. “Swiat do przerobki. Spekulanci, bankruci, giganci i ich rywale” by Witold M. Orlowski***

Stiglitz on the state of the global economy and possible solutions

2011-10-03T01:48:00.000-07:00

Here is a link to Stiglitz's interesting presentation (video recording) held last week at the World Bank.

This is what he said (quoted at lenght from the World Bank's page):

"Stiglitz made no bones about the sobering message he came to deliver: government efforts to fix US and European banks are urgently needed, but won’t be enough to rekindle growth. Rising inequality, high oil prices, globalization and excessive savings in certain countries hint at structural problems that run much deeper.

But most importantly, the US and global economy are undergoing a massive transformation from manufacturing to services, said Stiglitz, and so long as Americans don’t have the skills needed in the new services-driven world, unemployment will persist.

Stiglitz pointed out that productivity gains in manufacturing have outpaced overall demand for labor in the sector, which means jobs will need to be shed and workers are facing long-term joblessness. The US no longer has a comparative advantage in manufacturing, said Stiglitz, so manufacturing jobs will certainly move to other countries.

“A similar thing happened during the Great Depression in the US,” said Stiglitz. “In the late 19th century, agricultural productivity increased, and so, a smaller percent of the population was needed to feed the rest of the country.” As a result by the 1930s, many agriculture workers were “trapped” in a declining sector. This triggered an economic downturn, and a massive banking and financial crisis soon followed.

More than the New Deal, the demand-inducing role of the US government during the Second World War ultimately pulled America out of the depression. During this period, the government stimulated the economy by spending massive amounts in numerous priority areas, including training workers and preparing service men and women for the workforce of the future through incentives like the GI Bill.

Since this stimulus was huge, and designed to tackle underlying structural problems, the impact on the economy was positive for the long-run.

Stiglitz believes a similar intervention by the government is needed now. Put simply, government needs to increase demand by tackling underlying structural issues. This includes raising taxes on the very rich (those who make over $1 million a year) and encouraging a shift within the labor force from manufacturing to services by increasing support for the health and education sectors.

Well-designed tax and expenditure programs that keep the US budget balanced could also drive economic growth, said Stiglitz. By encouraging, or “crowding in” private investment, public sector projects can provide an urgently needed boost at a time of sagging demand and the threat of recession.

This is particularly the case now, with the Federal Reserve committed to keeping interest rates at close to zero and US unemployment remaining persistently high. Today, one in six Americans can’t get a full time job.

Stiglitz laid out other proposals for designing an effective government-led stimulus plan:

Finish fixing the financial system by bringing it back to its core mission – lending rather than dealing with complex derivatives in secondary markets.

Promote investment in public sector projects.

Channel savings from East Asian and other “surplus” countries to those countries that need to undertake investment projects.

Pursue a green-growth strategy.

Despite this list of options, Stiglitz remained dubious about the likelihood of any of them being implemented.

“These are a few things I would do if I was running the government without a Congress, but what I am suggesting is what I think we could do, not something that is politically likely.”

Confession of a trader - all that matters is making money, even if the markets crash

2011-09-29T05:54:00.000-07:00

Check out this video on youtube with Alessio Rastani, an independent trader, who dreams of another recession and argues that Goldman Sachs not governments rules the world.

Caveat: the guy is not too credible, but what he says is.

Rodrik on the future of economic convergence

2011-08-31T06:39:00.000-07:00

Dani Rodrik from Harvard has just published a really interesting paper on "The Future of Economic Convergence", where he argues--against very optimistic expectations of other pundits--that emerging markets are not likely to grow as fast as expected and--fully in line with what I have been arguing before--that predictions of high future growth rates for emerging markets "are largely extrapolations from the recent past and they overlook serious structural constraints"

Some useful quotes from the paper (a long list):

“Yet I find much of the optimism regarding the prospects for rapid convergence misplaced. In practice most of the convergence potential is likely to go to waste – just as it has since the world economy first got divided into a rich North and a poor South. As the empirical literature on growth has documented, convergence is anything but automatic. It is conditional on specific policies and institutional arrangements that have proved hard to identify and implement. Indeed, the recipes seem to vary from context to context. The experience of highly successful Asian countries is difficult to transplant in other settings”.

“It is true that the policy and institutional setting has improved across the developing world – at least as judged by conventional criteria. Developing countries have opened up to the world economy, place greater emphasis on macroeconomic stability, and are for the most part better governed. These changes have led many observers to think ―this time will be different.‖ My reading of the evidence is that these are improvements that serve mainly to enhance these economies‘ resilience to shocks and help avert crises, which often interrupted economic progress in the past. They do not necessarily stimulate ongoing economic dynamism and growth.”

“So generalized, rapid convergence is possible in principle, but unlikely in practice. Our baseline scenario has to be one in which high growth remains episodic. Sustained convergence is likely to remain restricted to a relatively small number of countries.”

“Easterly‘s bottom line is that empirical evidence gives little reason to have confidence that moderate changes in policies will yield systematic or sizable growth effects. Another way of putting the same result is to repeat the point made above: avoiding truly awful policies can prevent a country from turning into an economic basket case, but ―good‖ policies of the conventional type do not reliably generate high growth”

“In other words, the economy may be a mixture of activities that are already on the escalator up and activities that are going nowhere. Economies that grow rapidly are those that are able to push their resources into the escalator sectors. And those that grow in a sustained fashion are those that can accomplish this on an ongoing basis.”

“In other words, once a country begins to export something, it travels up the value chain in that product regardless of domestic policies or institutions.

“So convergence can be easy if an economy is able to push its resources (labor in particular) into the ―convergence sectors‖ – the industries on the automatic escalator up.”

“Why then do the conventional policies of macroeconomic stability, liberalization and openness not do the trick? After all, their objective is precisely to ensure that markets can work better and generate the requisite incentives. As a practical matter, however, creating well-functioning market economies requires considerably more than tinkering with specific policy instruments. It is a process that involves deeper institutional transformation measured in decades rather than years. Laws and regulations can be rewritten quickly, but that is not by and large where a nation‘s institutions reside. The rules of the game that we call ―institutions‖ are cognitive constructs that shape expectations about how other people behave (North 1990, Pistor 2000). These expectations are difficult to modify and replace, short of wars, occupation, revolutions, or other cataclysmic events. Furthermore, as long as the beneficiaries of the established order remain politically strong, they can easily circumvent reforms that undercut their privileges. As Daron Acemoglu and James Robinson have emphasized in their various writings, sustainable economic growth ultimately requires political change (Acemoglu and Robinson, forthcoming).”

“Consequently, structural change can remain too slow even when markets are liberalized, opened up, and made to work ―better‖ in the conventional manner. Growth requires remedies targeted at these ―special‖ sectors rather than general policies.”

“Of all methods of subsidizing modern tradables, perhaps the most effective is currency undervaluation. Growth-promoting structural change is greatly assisted by a highly competitive real exchange rate. In Rodrik (2008b) I show that there is a systematic and robust association between undervaluation and economic growth, a relationship that seems to work through undervaluation‘s positive effects on industrialization.”

“In fact, it is rather difficult to identify instances of nontraditional export successes in Latin America and Asia that did not involve government support at some stage”

“Currency undervaluation is often preferred for its non-selective nature, but that is actually a big problem in this context: undervaluation ends up subsidizing a lot of activities – traditional commodity exports, in particular -- that do not need to be subsidized while also unnecessarily taxing imports across the board.”

Here is also Rodrik's op-ed in FT on the same subject.

Krugman on the euro zone: "can it be saved?"

2011-08-25T06:07:00.000-07:00

Check this out this article by Paul Krugman on "Can Europe Be Saved?", where he discussed the chances for the euro zone to survive the current crisis. The verdict? Not likely, really, unless the euro zone builds a true fiscal transfer union.

I agree. In the meantime, this is not going to look pretty.

Warren Buffett: "Stop Coddling the Super-Rich"

2011-08-16T02:04:00.000-07:00

Check out this op-ed in the New York Times by Warren WE. Buffett, the eponymous investor, who argues that taxing the rich in the US more would not discourage investment.

Some useful quotes below:

"OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched."

"Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent."

"I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation."

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

2011-07-19T04:06:00.000-07:00

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.

Interview on innovation and Poland's growth prospects

2011-07-15T03:01:00.000-07:00

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).

OECD's paper on structural reforms to raise growth

2011-07-14T03:59:00.000-07:00

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.

IMF's annual assessment of the Polish economy

2011-07-13T05:43:00.000-07:00

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.

"Europe needs the solidarity of self-interest"

2011-07-07T03:11:00.000-07:00

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.

The UK is almost as socialist as Sweden is!

2011-07-05T07:02:00.000-07:00

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.

Reverse migration - the beginning of the story

2011-07-01T00:48:00.000-07:00

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?

Workshop in Rio on Development Impact Evaluation

2011-06-29T02:37:00.000-07:00

On June 6-10, 2011, I participated in a World Bank seminar in Rio de Janeiro on "Development Impact Evaluation in Finance and Private Sector", where I gave a presentation on "Public Support for Entreprise Innovation Policy" based on the innovation project that the World Bank is working on together with the Polish Ministry of Economy.

The workshop itself was surprisingly productive too, not only because it was held in Rio: it presented the state-of-the art methods for evaluating impact of policies using randomization and control group framework.

The take away from the workshop is that countries do not do enough of proper impact evaluations, which are needed to establish the true effect of policy interventions as well as the direction of causality. Without the new impact evaluations methods, policy interventions are likely to be much less informed/less efficient/and even plainly harmful.

For Poland, rigorous impact evaluations, subject to the availability of data, would be desperately needed to properly assess the efficiency of hundreds of public and EU-supported spending programs, worth billions of euros a year, whose efficiency is likely to leave much to be desired (to put it mildly)

Books read in 2010

2011-06-29T01:21:00.000-07:00

Here is a list of (most) books I read in 2010, together with the assessment of their quality ranging from "*" - don't bother to "***" - you can't miss it!

1. The Beijing Consensus: How China's Authoritarian Model Will Dominate the Twenty-First Century - Stefan Halper*
2. The War of the World by Niall Ferguson***
3. I'm a Stranger Here Myself: Notes on Returning to America After 20 Years Away by Bill Bryson***
4. Paris 1919: Six Months That Changed the World by Margaret MacMillan***
5. Mismeasuring Our Lives: Why GDP Doesn't Add Up by Joseph E. Stiglitz, Amartya Sen and Jean-Paul Fitoussi***
6. The Long Walk: The True Story of a Trek to Freedom by Slavomir Rawicz**
7. Freefall: America, Free Markets, and the Sinking of the World Economy by Joseph E. Stiglitz**
8. Wrong: Why experts* keep failing us--and how to know when not to trust them *Scientists, finance wizards, doctors, relationship gurus, celebrity CEOs, ... consultants, health officials and more by David H. Freedman***
9. Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan***
10. The Spirit Level: Why Greater Equality Makes Societies Stronger by Kate Pickett and Richard Wilkinson***
11. Prosperity without Growth: Economics for a Finite Planet by Tim Jackson **
12. The Plundered Planet: Why We Must--and How We Can--Manage Nature for Global Prosperity by Paul Collier**
13. The Big Short: Inside the Doomsday Machine by Michael Lewis***
14. Truth, Errors, and Lies: Politics and Economics in a Volatile World by Grzegorz W. Kolodko***
15. Bloodlands: Europe Between Hitler and Stalin by Timothy Snyder***
16. Ill Fares the Land by Tony Judt**
17. When Markets Collide: Investment Strategies for the Age of Global Economic Change by Mohamed A. El-Erian**
18. By Force of Thought: Irregular Memoirs of an Intellectual Journey by János Kornai**
19. W Pogoni za Straconym Czasem Wzrost Gospodarczy w Europie Środkowo-Wschodniej by Orłowski Witold M.***
20. Stulecie Chaosu. Alternatywne Dzieje XX Wieku by Orłowski Witold M.**
21. Czas Wrzeszczących Staruszków by Ziemkiewicz Rafał A.**
22. Świat na Wyciągnięcie Myśli by Kołodko Grzegorz***
23. Globalizacja, Kryzys – i co Dalej? by Kołodko Grzegorz (eds)***
24. 20 Lat Transformacji. Osiągnięcia Problemy Perspektywy by Kołodko Grzegorz and Jacek Tomkiewicz (eds)***
25. On Economic Transformation in East-Central Europe: a Historical and International Perspective by Andres Solimano*
26. Cień Wiatru by Zafon Carlos Luis**
27. Koniec świata menadżerów? By Koźmiński Andrzej K.***
28. Trzecia Strona Medalu By Baliszewski Dariusz*
29. Transformacja Nieoczywista. Polska jako kraj imigracji by Agaty Gorny and others*
30. W Pogoni za Europą by Tazbir Janusz***
31. Protokóły Mędrców Syjonu by Tazbir Janusz*

Panel in Wroclaw on "Social Europe and the Economic Crisis", May 14

2011-05-19T02:32:00.000-07:00

Last Saturday, May 14, I spoke on a panel during a conference on "Social Europe and the Economic Crisis" organized by the Ferdinand Lasalle Center of Social Thought in Wroclaw. More info here

FX interventions can work

2011-05-19T02:22:00.000-07:00

IMF admits that FX intervention can be effective (a significant change in Fund's views - heretofore FX interventions were anathema), as argued in an interesting paper and an accompanying article on the efficiency of FX interventions in Latin America published on the IMF's blog.

The article's conclusions are that while "results do not detect an immediate impact of interventions on the rate of appreciation, but do find statistically significant effects on the pace of appreciation: on average, increasing interventions by 0.1 percent of GDP will produce—in one week and in comparison to a country that does not intervene—a 0.3 percent slowdown in the pace of appreciation."

In addition, authors find that FX "effectiveness is not dependent on the use of rules or discretionary frameworks, or on the degree of transparency. However, greater financial integration may significantly reduce the effectiveness of interventions. In fact, intervention is more effective in Asia than in Latin America, which is consistent with the differences in financial integration across the two regions" and that "interventions are most effective when there are signs of the currency being overvalued compared to its recent history. This is especially noticeable in Latin America and highlights the importance of intervening “when the time is right,” and never “too early”."

Something for our policymakers to ponder?

IMF sees bright economic spots in New Europe

2011-05-18T09:40:00.000-07:00

The IMF has just published its Regional Economic Outlook for Europe. It emphasizes the resilience of New Europe (EU-10) and its strengthening economic recovery. It summarizes the message in a text on the blog.

I could not agree more - this is what I have been saying all along (see my recent CEPA paper), ie that the global crisis has hardly weakened the sound long-term growth fundamentals of New Europe and that it will continue fast convergence with Western Europe, heralding the arrival of New Europe's Golden Age.

On happiness and GDP

2011-05-18T08:03:00.000-07:00

Samuel Brittan, a columnist at the Financial Times, has an interesting take on the issue of happiness and the role of economic growth. Worth reading. Conclusions below:

What then is the alternative? It might come as an anti-climax; but I still think it is the choice utilitarian one of maximising the range of opportunities open to each individual. And I see the task of policy largely in negative terms; to remove obstacles to the exercise of individual choice rather than lots of fussy interventions on our behalf. But I must be frank and say that even such negative policies involve in my view a degree of income transfer towards the poor and less fortunate, which not everyone in this audience might welcome.

For about three quarters of the world's population a measure of success will still be real GDP per head, corrected for the worst absurdities, and supplemented by a few simple social indicators. But for the more affluent populations of North America and western Europe, economic growth in this sense is no longer a sensible objective of policy. It is much better that the growth rate should emerge from peoples own choices. So it would not be a disaster if after the recent traumatic events Americans adopted a quieter lifestyle with more emphasis on leisure and reflection, and working to live rather than living to work.

We should not throw out the baby with the bath water. GDP statistics will still remain useful for economic management and for looking at the way the national product is divided between different activities and different groups. Information on these matters should not take us along the road to serfdom. Indeed I have heard American friends observe that the social scientists who have been least tempted by collectivism are those who have the most detailed knowledge of the relevant facts and figures.

My conclusion is that the pursuit of happiness is and should remain a personal matter; and the people most likely to achieve this are not those who keep on asking themselves whether they are happy or unhappy, but who find worthwhile purposes and activities and concentrate on them. By all means make use of attitude surveys and similar devices; but let us do so first and foremost to satisfy our curiosity and not imagine that we have found the magic lodestar which has eluded thinkers of the past.

"Europe and the World in 2030" workshop in Rome

2011-05-10T00:04:00.000-07:00

This is to note that I presented a paper on "The Inexorable Rise of Chimerica: The Long Term Scenario" during a workshop in Rome on May 3-5, 2011, organized within an EU-funded multi-institutional AUGUR project on "Europe and the World in 2030".

Presentation in Brussels on May 11

2011-05-07T12:54:00.000-07:00

On May 11, 10am, at the European Policy Center in Brussels, I am presenting a focus note on "Fueling Growth and Competitiveness through Employment, Skills, and Innovation", a note which I have co-authored, as part of the launch of the new World Bank's "EU10 Regular Economic Report", April 2011.

Here is a (somewhat misleading, since I did not mention the Soviet institutions in such a context) press article on the presentation.

More details below:

Wednesday, 11 May 2011 - 10.00 to 12.00
Policy Dialogue
The EU10 economic recovery and beyond - What scope for skills-driven growth?Speaker(s):
Kaspar Richter, Senior Economist, World Bank
Marcin Piatkowski, Senior Economist, World Bank
Grzegorz Radziejewski, Financial Counsellor, Head of the Budget and Finance Section, Permanent Representation of Poland to the EU

My quotes in The Economist

2011-04-29T14:13:00.000-07:00

The Economist has just published three articles on Poland's politics and economic situation.

I am quoted in the economic section in: “Germany helped save Mitteleuropa” and "Mr Piatkowski speaks of a “New Golden Age”, with Poland converging on west European levels of well-being soon after 2020".

The full text of this insightful article is available online.

CSR - Corporate Social (Ir)responsibility?

2011-04-20T06:19:00.000-07:00

I have recenttly come across a number of publications/conference/seminars enthusing over the idea of CSR.

Now, I am in favor of any corporate actions that improve social welfare. But I have doubts at the same time whether by focusing on CSR we are not actually losing track of something else.

Specifically, can companies be considered "socially responsible" when they "optimize" taxes, thus reducing tax revenue, undermining productive public spending (roads etc) and--ceteris paribus--increasing tax rates for consumers, who need to pay more because of lower CIT revenue? Just read this shocking NYT's story on General Electric, which despite having earned almost $15 billion dollars in profits in 2010 have not only paid nothing to the US Treasury, but even claimed a $3.2 billion refund! Given the nominal 35% CIT rate in the US, GE should have paid some $5 billion of taxes on its worldwide income. This compares with $160 million that GE spends on CSR per year, that is 3% of the amount that it should have paid in taxes. How socially responsible is this?

And what about companies that may be spending on a lot on CSR but focus their business on selling overpriced products that consumers do not need, often on the basis of misleading information? Let's take Danone, a French food company and one of the global CSR leaders. It produces Actimel and Activia, dairy products with added bacteria, which cost a multiple of a price of regular milk and yoghurt and--against the claims of the company--have no proven impact on health whatsoever? The company recently lost a case in the US and had to pay $21 million in damages (read this and that). How socially responsible is this?

I leave it to you to decide.

The New World Bank EU10 Economic Report

2011-04-20T02:57:00.000-07:00

The World Bank has just published its useful and comprehensive "EU10 Regular Economic Report", April 2011, which covers the recent economic developments in the EU-10 area. Worth reading, not only because I have contributed to it, including on the EU 2020 focus note:-)

The new growth model - the Warsaw Consensus!

2011-04-03T16:18:00.000-07:00

The DC-based Center for European Policy Analysis has just published my paper on the "Post-Crisis Prospects and a New Growth Model for the EU-10", where I analyze the growth prospects of the EU-10 countries (New Europe), argue that the global crisis has undermined the credibility of the current growth model, and offer a set of policy recommendations for a new growth agenda for the region - the Warsaw Consensus.

This is an important paper for me, particularly as I introduce the concept of the Warsaw Consensus as the strategic growth model for Central Europe.

All comments are warmly welcome!

Lecture at CEPA in Washington DC, April 6, 9am-10.30am

2011-03-28T12:12:00.000-07:00

I will deliver a lecture on "Central Europe: New Growth Model Needed?" at the Center for European Policy Analysis (CEPA).

The lecture will be based on my 2009 paper "The Coming Golden Age of New Europe" and the 2011 paper on "Post-crisis Prospects and a New Growth Model for the EU-10" (both published by CEPA).

Books on being wrong

2011-03-26T10:15:00.000-07:00

I have just read/am in the process of reading a couple of excellent books on why experts tend to be wrong (they are actually more often wrong than right), why we find so hard to know whenever we make errors, why our memory fails ("it fades over time and is distorted by our beliefs, desires and interests) and why "If being wrong is so natural, why are we all so bad at imagining that our beliefs could be mistaken – and why do we typically react to our errors with surprise, denial, defensiveness and shame?". And "what if I am wrong?"

In addition, you can read some truths about the way our minds really work: "first, we are subject to powerful illusions about how our minds work. Second, these illusions are difficult to shake, even when they are pointed out to us in books like this. Third, technology may hurt more than it helps, since new inventions often tax our mental capacities even further."

Read the helpful reviews below and the books themselves (now available on everyone's laptop, just download Kindle software)

http://www.nytimes.com/2010/07/25/books/review/Gilbert-t.html

http://www.nytimes.com/2010/06/11/books/11book.html?ref=review

http://www.nytimes.com/2010/06/06/books/review/Bloom-t.html

Supervision of SKOKs/credit unions in Poland

2011-03-24T02:05:00.000-07:00

In February we launched a World Bank report on "Credit Unions in Poland: Diagnostic and Proposals on Regulation and Supervision", which I have co-authored.

The press release and the full report in English are here

"Doing Business" reforms in Poland

2011-03-24T02:02:00.000-07:00

I forgot to write about it before, but in January we finally published the World Bank's "Doing Business Reform Memorandum", whose preparation I have coordinated. The report was completed already in June 2010, but it took some time to publish it.

The main message of the report is that there is scope for substantial improvement in the business climate in Poland by streamlining five key areas measured by the Doing Business Report: starting a business, obtaining construction permits, paying taxes, protecting investors and registering a property.

If the recommended reforms were to be implemented, I am convinced that Poland could become the Top 10 Reformer in the next edition of the Doing Business Report and advance to the first 50 in the global report from 70th place now.

World Bank report on "Fueling Growth and Competitiveness in Poland"

2011-03-24T01:55:00.000-07:00

I have co-authored a new World Bank report on "Europe 2020 Poland: Fueling Growth and Competitiveness in Poland through Employment, Skills, and Innovation" launched last Monday.

The main message is this:

“Poland weathered the recent crisis very well, but there is uncertainty about whether it will be able to return to high growth rates, which exceeded 5 percent a year before the crisis, or, for that matter, to develop at a similar speed as a number of other high-achieving upper-middle-income countries such as Chile, the Republic of Korea, or Malaysia,” said Marcin Piątkowski, World Bank Senior Economist and one of the authors of the report. “Poland has already undertaken important reforms in many areas, but it needs to go further to sustain its impressive pre-crisis growth rates and meet the new targets on which Poland still lags behind.”

The press release and the report are here

Economic Policy Seminar in Budapest

2011-03-24T01:49:00.000-07:00

I will deliver a lecture on "Growth Enhancing Structural Reforms" during the upcoming Hungarian Presidency High Level Economic Policy Seminar in Budapest on March 30 on "Economic Growth and Fiscal Consolidation". The program is here. My slides are here

IMF debate on the lessons from the crisis

2011-03-09T08:14:00.000-08:00

Here is a link to a summary of a recent IMF conference on the lessons from the crisis featuring the luminaries of global economics, Blanchard, Stiglitz, Spence, Romer, Rodrik and others.

Here is the conference program, with video recordings.

Finally, here is Blanchard's, IMF Chief Economist, view on what we should learn from the global crisis going forward.

Panel on the future of the euro in Bratislava

2011-03-07T06:29:00.000-08:00

Last Wednesday I spoke on a panel on "EURO: SHIFTING FROM SURVIVAL TO REVIVAL? "during a Globsec2011 conference in Bratislava. I was joined on the panel by H. E. IVAN MIKLOŠ - Deputy Prime Minister, Minister of Finance of the Slovak Republic, AMB. IVAN KORČOK - Permanent Representative of the Slovak Republic to the European Union, Brussels and SIMON TILFORD - Chief Economist, Centre for European Reform, London.

On the whole, it was quite an interesting panel, with a refreshing divergence of views, mainly thanks to Minister Miklos, who likes to be somewhat extreme in his perspective (including his support for Slovakia's recent decision to give a short shrif to European solidarity and not participate in the Greek bail-out).

I have prepared some notes on the euro (like the fact that the global crisis was a blessing for the euro zone and if we didn't have the crisis we would have to invent it) and hope to be able to publish it soon.

M. Gandhi - perceptions vs reality

2011-03-07T01:21:00.000-08:00

A friend of mine suggested reviewing a riveting article by Sulman Rushdie on Mahatma Gandhi. What a joy to read for such a contrarian like me! You will know why when you read it, but just let me give you a couple of more saucy quotes below for you as a foretaste:

"He believed passionately in the unity of all the peoples of India, yet his failure to keep the Muslim leader Mohammed Ali Jinnah within the Indian National Congress's fold led to the partition of the country"

"His entire philosophy privileged the village way over that of the city, yet he was always financially dependent on the support of industrial billionaires like Birla. His hunger strikes could stop riots and massacres, but he also once went on a hunger strike to force one of his capitalist patrons' employees to break their strike against the harsh conditions of employment."

"The creator of the political philosophies of passive resistance and constructive nonviolence, he spent much of his life far from the political arena, refining his more eccentric theories of vegetarianism, bowel movements and the beneficial properties of human excrement."

"Forever scarred by the knowledge that, as a 16-year-old youth, he'd been making love to his wife Kasturba at the moment of his father's death, Gandhi later forswore sexual relations but went on into his old age with what he called his "brahmacharya experiments," during which naked young women would be asked to lie with him all night so that he could prove that he had mastered his physical urges. (He believed that total control over his "vital fluids" would enhance his spiritual powers.)"

"It is probable, in fact, that Gandhian techniques were not the key determinants of India's arrival at freedom. They gave independence its outward character and were its apparent cause, but darker and deeper historical forces produced the desired effect."

The BRICs success can't survive for too long

2011-03-07T01:16:00.000-08:00

I am increasingly confident that we are witnessing another boom-and-bust cycle, this time involving BRICs.

There is so much group-think, herd behavior, "this time is different" thinking related to BRICs that it the whole story must at some point come crashing down. If you believed media, their hired experts and international banks, for whom promoting the BRIC story is just good business that is nothing wrong that could happen to BRICs until 2050, despite their centuries-old history of political upheaval and economic instability.

Glaring weaknesses are papered over, redolent of many crises before - Japan in the 1980's, East Asia Tigers before the 1997 crisis, the New Economy before 2000, the global financial crisis.

Just take Brazil - it has the lowest TFP growth rates among comparable countries, its growth is largely based on agriculture and raw materials (since when do they represent modern sources of growth?), rule of law is weak, business environment is abysmal (127th place in the World Bank's Doing Business report), saving and investment rates are unprecedently low, education outcomes are poor (see latest OECD PISA results), innovation level is nothing to be proud of and--last but not least--social inequality, despite the recent improvements, is still sky-high, leading to waste of millions of talented youngsters in favelas. (And, BTW, it makes me smile when I hear liberals extol the virtues of Embraer, the plane manufacturer, which is an outgrowth of state-led industrial policy and decades-long state subsidies).

The long list could go on for Brazil and the three remaining BRICs (just don't start me on Russia...)

As in any boom, for a while BRICs will continue to develop fast, bringing in ever more speculative foreign capital (with the FED obligingly continuing to print money, ooops, sorry "engage in quantitative easing") and strenghtening the "this time is different" theory until it all crashes down under the weight of falling prices of raw materials ("what goes up, must go down"), Dutch disease of overvalued exchange rates, stretched supply of resources and human capital, ever stronger corruption, hubris, overconfidence and mismanagement.

In a parable to to the Minsky moment, where stability in financial markets inevitably leads to more risk taking leading eventually to a bust (vide the recent global financial crisis after 20 years of "Great Moderation"), success of the BRICs will lead to more risk taking and oversized expectations which in turn will lead to a crisis when the expectations are not met and risks turn out to be outsized (call this the "Piatkowski moment":-)

I don't wish the BRICs any ill - don't get me wrong, their growth will benefit everyone--but I truly think that it would better for them not to get carried away by the golden PR and overconfidence, which can eventually hurt them.

Nationality of banks matters; the IMF's psychodrama

2011-02-16T10:08:00.000-08:00

Vox.eu has published two interesting articles.

The first one argues that nationiality of foreign banks matters, something which only now after the crisis is closer to mainstream thinking.

The second one provides a nice overview of the recent report by the Independent Evaluation Office on why the IMF failed to anticipate the crisis. Fascinating read. As former IMF staff member, I couldn't agree more.

PWC's "The World in 2050"

2011-01-27T06:12:00.000-08:00

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.

"Financial Crisis Was Avoidable" - a new US report

2011-01-26T05:08:00.000-08:00

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

Open world's databases to everyone!

2011-01-21T04:38:00.000-08:00

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.

Are long-term economic projections all rubbish?

2011-01-11T00:34:00.000-08:00

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)

HSBC's forecast for "The World in 2050"

2011-01-05T05:59:00.000-08:00

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.

Emoticon diplomacy in Europe

2011-01-04T13:10:00.000-08:00

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

2011-01-04T12:56:00.000-08:00

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.

IMF's Fiscal Monitor November 2010

2010-12-29T04:27:00.000-08:00

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.

Why it pays to be combine Wall Street with politics

2010-12-28T01:56:00.000-08:00

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."

Presentation on "The Coming Golden Age of New Europe" in Istanbul and Vienna

2010-12-21T07:02:00.000-08:00

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.

Why Americans have it easy and why they should be more humble

2010-12-21T05:25:00.000-08:00

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.

The French during the IIWW

2010-11-28T08:10:00.000-08:00

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?"

Five favorite books on the euro by Barry Eichengreen

2010-11-28T05:31:00.000-08:00

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"

Poland's first report on tax expenditures

2010-11-26T02:16:00.000-08:00

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.

My quotes in the Warsaw Business Journal's article on privatization

2010-11-23T02:40:00.000-08:00

I gave an interview to the Warsaw Business Journal, which is featured in the article on privatization in Poland entitled "Good as gold"

Why nothing changed in regulating US banks

2010-11-22T14:02:00.000-08:00

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."

In Vienna on "The Coming Golden Age of New Europe"

2010-11-15T09:03:00.000-08:00

Am going to Vienna on Thursday to deliver a speech at the 3rd GROW EAST CONGRESS “Restarting Growth in Central Europe and South-Eastern Europe” November 18, 2010, Wiener Konzerthaus. More info here: http://www.groweast.at/home/

The (in)visible hand of the world of finance in the world of politics

2010-11-05T06:19:00.000-07:00

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."

From "the Bloodlands" to "New Europe"

2010-10-31T06:15:00.000-07:00

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...

The Prague Post quotes me on the Polish privatization program

2010-10-20T00:47:00.003-07:00

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

2010-10-20T00:47:00.001-07:00

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".

Brazil - a power of the present and of the future?

2010-10-06T01:35:00.000-07:00

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

Macroeconomics from the MIT

2010-10-05T02:00:00.000-07:00

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

Organizations would become more efficient if they promoted people at random

2010-10-04T01:13:00.000-07:00

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.

Forget BRICs, bring in New Europe!

2010-09-24T06:19:00.000-07:00

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

2010-09-24T02:05:00.000-07:00

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

2010-09-24T02:00:00.000-07:00

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.

Asset management makes money, but only for the managers

2010-09-22T04:48:00.000-07:00

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...

Principles of Economics translated - a must watch!

2010-08-27T03:35:00.000-07:00

Check out this hilarious movie about Principles of Economics. Something for my macro students to watch!

International ranking of the most cited Polish economists - I am in the 15th place

2010-08-26T01:13:00.000-07:00

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.

The world's best countries by Newsweek - Poland is No. 1!

2010-08-23T02:44:00.000-07:00

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

2010-08-23T02:21:00.000-07:00

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.

Why the euro zone will survive

2010-08-19T01:17:00.000-07:00

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.

More unequal societies are more deficit prone

2010-08-10T01:44:00.000-07:00

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.

"The Spirit Level: Why Greater Equality Makes Societies Stronger"

2010-07-28T02:08:00.000-07:00

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.

New book on "The Future of Finance: the LSE Report"

2010-07-28T01:58:00.000-07:00

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.

The fallacy of supply-side economics

2010-07-26T08:05:00.000-07:00

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”".

My quotes in the FT on Doing Business in Poland

2010-07-06T08:15:00.000-07:00

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.

The zloty’s loss is Poland’s gain as exports surge

2010-05-31T05:35:00.000-07:00

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."

If we didn't have Greece, we would have to invent one.

2010-05-26T05:54:00.000-07:00

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".

A European Monetary Fund? We already have one!

2010-05-26T05:32:00.000-07:00

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.

Hilarious video on the banking sector's role in the financial crisis

2010-04-13T07:12:00.000-07:00

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

2010-04-13T05:13:00.000-07:00

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.

Why were American economists jealous about the Euro?

2010-03-26T06:07:00.000-07:00

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 Impact of Population Ageing in the EU until 2060

2010-03-26T03:31:00.000-07:00

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).

Win-Win Scenario for the Eurozone: Expel Greece, Invite Poland

2010-03-19T02:12:00.000-07:00

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.

What Old Europe Can Learn from New Europe

2010-03-19T02:00:00.000-07:00

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?

Global Crisis versus Great Depression: Comparison

2010-03-18T01:56:00.000-07:00

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".

IMF on Poland: "Fiscal easing saved Poland"

2010-03-15T10:59:00.001-07:00

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.

Are real estate prices in Poland too high?

2010-03-05T02:58:00.000-08:00

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).

The fallacy of the American Dream?

2010-03-03T05:36:00.001-08:00

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?