Papia! Development Perspectives

Moral hazard...a way out

2010-03-18T10:25:00.002-03:00

I think Dodd's mechanism is a good way to get the non-FDIC banking system under an umbrella that would pay for the "insurance" in case of a large bankruptcy. In other words, creating a fund to pay for "bailouts" from the banks themselves. This shifts the costs from all taxpayers and into the consumers of these institutions.

Dodd's proposal

Lets pass this.

Renmibi wars

2010-03-16T23:29:00.002-03:00

Krugman posts an explanation of the renmibi-dollar issue that is one of his best.

Capital Export, Elasticity Pessimism, and the Renminbi

I think he is right on. China is pursuing a "beggar thy neighbor" policy against the world, and no one is willing to engage in what we all expect such policies to lead to: competitive devaluation.

If China insists on promoting capital exports, they cannot defend the point that they are not influencing the markets.

Krugman's tariff scenario is also a plausible one, but politically I don't see how Obama would get this done with the dysfuncional Senate. I can already hear the Republicans (and a good number of Democrats) accuse him of being anti-trade.

One thing is sure, though. This is not sustainable for the other large economies.

Credit crunch?

2008-12-12T14:18:00.003-03:00

As we look at how to define the history of this crisis (read the Stiglitz piece in Vanity Fair, Capitalist Fools), we must question all our assumptions. An interesting question to answer is, was there a credit crunch?

I guess one could argue that credit is there for the taking and, beyond the original *confidence* crisis (where companies didn't trust each other's balance sheets), there is not broader credit crunch. Part of me says that banks must have retrenched to protect their balance sheets, but the other part says that if banks need to increase profitability, they need to take more risks and lend more. The evidence here suggests that there is credit available, and thus credit cannot be blamed for the crisis. The financial aspects of the crisis looks more and more like a bunch of bad acts by poorly regulated actors which have exploded in all our faces.

Pheonix rising (eventually)

2008-12-12T14:01:00.003-03:00

A quick thought: as I read more and more of the continuous flow of bad news at the company level and of some investment funds, I keep thinking of how much better the system will be after the crisis is over. One hopes that the fraudulent investment funds, the poorly run companies, and the weaker business plans will all fall by the wayside. This crisis could see strong companies emerge, as a pheonix does, from the ashes of the current inferno. Of course, many bad companies will simply be bailed out, but I don't think that the government will save investment funds.

Who defines whether the recession is "mental"?

2008-12-01T15:29:00.003-03:00

Does Phil Gram get to officially say if the US is a nation of whiners and that this recession, while official, is just mental?

Recession

2008-12-01T15:09:00.002-03:00

As expected, the US recession started in December 2007.

The NBER's Business Cycle Dating Committee has announced that the US economic cycle has entered into what they define as a recession. I had posted about this before ("You know this but do you feel it?"). The data from end-2007 all pointed to a recession.

Please now that the "traditional definition" is no such thing. 2 consecutive quarters of decline are not the definition of a recession, at least not in the US economy. The NBER defines it as:

“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators”

Talking about the elephant...

2008-11-28T19:46:00.003-03:00

Krugman, again, provides sane and measured advice. Here is what I think is key (see previous posts):

What we're going to have to do, clearly, is relearn the lessons our grandfathers were taught by the Great Depression. I won't try to lay out the details of a new regulatory regime, but the basic principle should be clear: anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn't a crisis so that it doesn't take excessive risks.

(my emphasis)

Succeed in doing this and you can greatly mitigate the public cost of the crisis. The problem is that regulating the companies that are big (and too big to fail) during prosperous times is difficult politically. It goes to the heart of the small government versus big government debate. Republicans would take chainsaws to the regulations, and democrats have a hard time winning elections on a platform of more regulation, particularly as the memory of the previous bubble fades.

FT.com / Comment / Opinion - Ways to avoid another stampede

2008-11-17T09:14:00.003-03:00

The Financial Times has a few tips on how to regulate the financial markets to counteract the more perverse incentives that exist.
FT.com / Comment / Opinion - Ways to avoid another stampede

These are welcomed, particularly the variable leverage ratio. But "financial innovation" is precisely learning how to get around these, and creating new rules are often only effective until the next GOP admnistration takes a chainsaw to them.

Consider the press conference held on June 3, 2003 — just about the time subprime lending was starting to go wild — to announce a new initiative aimed at reducing the regulatory burden on banks. Representatives of four of the five government agencies responsible for financial supervision used tree shears to attack a stack of paper representing bank regulations. The fifth representative, James Gilleran of the Office of Thrift Supervision, wielded a chainsaw.

There needs to be a breakthrough in the issue of moral hazard.

Reviews of "The Bottom Billion"

2008-11-15T20:30:00.002-03:00

Easterly has written a couple of good pieces on Foreign Affairs and on the New York Review of Books (pdf link).

someone else’s fault

2008-11-14T11:27:00.000-03:00

The End of Wall Street's Boom

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

What to do about this?

Liar's Poker...4Evar!!!11!1

2008-11-14T10:13:00.001-03:00

In a fascinating piece about Wall Street, Michael Lewis points to the elephant in the room. Wall Street is built upon a perverse set of incentives. No, greed isn't bad. It is the lack of accountability.

Trouble in paradise?

2008-11-14T09:37:00.000-03:00

A New York Times report talks about the troubles brewing in China's export industries. What struck me about the piece was that this is the kind of crisis (and opportunity) that opens doors for the future giants. I suspect that in aftermath of the crisis, there will be a consolidation of the Chinese export sector and a flourish of M&A activity.

Too big to fail

2008-11-13T09:23:00.000-03:00

Atrios makes another good point that touches on a topic I mentioned a few days ago. The incentives that exist in our "market" system are perverse in that they allow companies to take excessive risk while relying on their economic importance. They are considered "too big to fail", leading to the issue of moral hazard. Until this is tackled head on (somebody want a Nobel?), other bubbles will come and go.

US policies and impact on Latin America

2008-11-12T09:41:00.003-03:00

Mariano once again makes a good point. Latin American countries shouldn't only be concerned over US policies that directly affect them, but also about US policies that change the geopolitical and global economic conditions.

Latin America needs to stop and think about the future of the region. Mercosur needs a new push, and the continent's energy policies need cohesion and a direction. Brazil likes to think of itself as the region's natural leader, but in the last few years, it has little to show for it.

The hazardous and morally-challanged elephant

2008-11-10T17:25:00.002-03:00

So the web is lit with talk of proposals for rescue packages, China, G20 meetings (both of them), a giant IMF, Bretton Woods II, etc. But nobody is addressing the cause of this and all the bubbles: moral hazard. The market has failures. Legislation and regulators must exist, but so far there has been very little mentioned about the droll issue of new regulatory tools and expanded powers of surveillance.

It feels nice to have hope that some huge bailout package (if you ignore the fact that you are paying for them) will swoop in and save the day. It is sexy, and it makes headlines. It is also necessary to minimize the current crisis. But if you want to look at the future, a new structure that works hand in hand with the market to create counter-bubbly incentives is required. If this is not given the importance it deserves, the next bubble will also take us by "surprise".

No one could've predicted that history would, and will repeat itself...

It's time to call in the big guns

2008-11-07T12:40:00.003-03:00

Today's job report is dismal indeed;

Here is a chart showing the monthly numbers and consumer confidence:

And Krugman points out that:

Monetary policy obviously isn’t enough. It’s time to raise Keynes: we need big fiscal stimulus, now now now.

I agree with this. Financial stability is a necessary, but not sufficient condition for economic growth. The government needs to step in and provide real stimulus to the working class and the unemployed.

We are in for a lot of pain. Quoting Krugman again:

So the “worst recession in 25 years” thing is now baked in. The only question is whether we hit “worst slump since the Great Depression” territory.

The end of the permanent republican majority

2008-11-05T23:23:00.005-03:00

From the NYT: Electoral Shifts

Where McCain performed better than Bush in 2004:

...and where Obama outperformed Kerry.

How is history made?

2008-11-05T15:05:00.001-03:00

Newsweek tells you: Barack Obama: How He Did It

The point of production is ultimately consumption

2008-11-04T22:58:00.003-03:00

Don't forget that the point of doing the work is to produce output. In this vein, the ability to show off data in a coherent and clear way is very important in this profession. I try to always improve my ability to visualize information, and I am always looking for great examples.

It is refreshing to see a mainstream publication like the New York Times spend so many resources in making sure they have top notch visuals. They are the best way to follow the results of their election, and their economic and other charts are always incredible.

For other samples, look here:

Visual complexity
Information aesthetics

There are many others, but you can see how there are some great ideas and tools out there. What is needed is for our profession to catch up, and for that the tools need to get better and easier (I'm looking at you, MS Office!)

Shhhh!! don't say the "R" word!!

2008-11-04T10:50:00.000-03:00

Economist's View: Fed Watch: Ugly Numbers

Bottom Line: Incoming data are dismal, and will keep the Fed on the road to additional easing. There is room to cut rates further, at least another 25bp, and ongoing liquidity injections point to further swelling of the Fed’s balance sheet. But supporting growth in the near term is no longer within the Fed’s ability – the baton will be passed back to fiscal stimulus early next year

Tighten your belts!

Lets see what Obama will do and how fast he will be off the gates.

Is there any good news out there?

2008-11-04T10:45:00.000-03:00

China:
Marginal Revolution: China Worry of the Day

It may already be too late, however, to shift smoothly from export to domestic consumption

I don't think that a shift from export to domestic consumption would do much for China. Exports only account for 1% of GDP growth in China, with the bulk coming from domestic consumption and investment.

Keep an eye on the ball

2008-11-03T11:31:00.003-03:00

From the Dallas Fed, an interesting chart: International Economic Update, October 2008 - Globalization & Monetary Policy Institute - FRB Dallas

It shows what can clearly be seen as the start of the crisis (or when people noticed), but more worrisome is the aggravation that has occurred since the fall of Lehman.

I also should remind people against designing policy based on daily fluctuations of financial markets. It is tempting because detailed information on the health of financial markets is difficult to parse (which is why we let "the market" interpret it for us). So lets not be overly optimist, and rather be sober and professional in addressing the weaknesses that exist. /lecture

PS: can we please focus more on the crisis in the real economy? The consumer sector (~70% of US GDP) fell by 3.1%!! And as the rest of the world follows suit, what do you think will happen to US exports (the sole good news in the past few NIPA tables)?

The hazards of Moral

2008-10-28T12:54:00.002-03:00

A friend has just started an interesting blog about economics with a Latin American bent. He writes in Spanish but I can vouch for his curiosity, open mindedness, and great work habit. Watch for him. Una Mente en Interdependecia

He brings up the issue of moral hazard and what to do about it. Of course, this is a topic where the discussion can easily turn to philosophy, but it is still a topic we must tackle for every major crisis has included this component. Investors price risks according to the possibility of being bailed out. "Too big to fail" etc. See Enron, S&L crisis, and today.

I don't think there is a way around it without regulation. I think this is the largest failure of the markets (benefits accrue to individuals while losses are socialized) and the greatest argument for regulation. In this sense, the price of deregulation, and the benefits of proper rules and enforcement must be included in any talk about the market. There is no such thing about public/private divide. The public sector is an actor, via policy and regulation, in the private sector. And the private sector is a strong influence on the public sector (sometimes vie large crises).

Back to your regularly scheduled crisis...

2008-10-28T09:40:00.001-03:00

RGE - New recommendations to solve our financial crisis (and I admit that I was wrong)

One advantage we have over the folks of 1930: we know this song. The response of government leaders since the crisis started in December 2006 (when the mortgage brokers began collapsing) has been slow, reactive, and incremental. In many ways similar to that of President Hoover’s administration between 1929 and 1932. While recognition of the danger has been slow, action following recognition will be fast.

Also, we understand economics better. Keynes wrote The General Theory of Employment, Interest, and Money in 1936 (although the ideas it presents we in circulation much earlier). Plus we have the work of others during the past 70 years, such as Hyman Minsky and Milton Friedman. The gross policy errors made during the 1930’s — such as raising taxes and trade barriers — are far less likely today.

I made a comment to a coworker who asked me if I thought we had turned around after the latest round of announced stratospheric bailouts that I don't think we are near the end. I also said that the financial system won't collapse. Governments will pull out all stops to prevent it. There is no other option. My biggest worry wasn't in this troubling but needed market crisis, but rather on the impact on the real economy. Economic indicators have been pointing to a recession for some time now (see You know this but do you feel it) and lost production is a permanent loss in economic welfare.

I think we are or have been in a recession, but I don't much care about the label. Consumers have been feeling the pain for many years in the form of stagnating wages and wealth. Class warfare is very real in today's US economy (whether it is desired or not is up to another post). The ones who will need the greatest help will be the middle and lower classes. The ones loosing the most from the financial crisis are also the ones getting the huge bailouts, meaning they benefited from the risks without paying the consequences. But bailing them out won't help the real economy and if anyone thinks that consumers will borrow their way out of their slump, they are mistaken.

New recommendations to solve our financial crisis (and I admit that I was wrong)

2008-10-28T09:31:00.001-03:00

This post was in my drafts, so I'll release it to clear the list.

From the RGE:RGE - New recommendations to solve our financial crisis (and I admit that I was wrong)

One advantage we have over the folks of 1930: we know this song. The response of government leaders since the crisis started in December 2006 (when the mortgage brokers began collapsing) has been slow, reactive, and incremental. In many ways similar to that of President Hoover’s administration between 1929 and 1932. While recognition of the danger has been slow, action following recognition will be fast.

Also, we understand economics better. Keynes wrote The General Theory of Employment, Interest, and Money in 1936 (although the ideas it presents we in circulation much earlier). Plus we have the work of others during the past 70 years, such as Hyman Minsky and Milton Friedman. The gross policy errors made during the 1930’s — such as raising taxes and trade barriers — are far less likely today.

Mexico trade volume data

2008-10-21T15:48:00.001-03:00

I'm struggling with a mystery in Mexico export data. Their national accounts show a healthy growth in real exports (~5.5% YoY growth) while US import data from Mexico deflated by their import price index for Mexico shows a real decline of around 9%. Given that the US is about 80% of Mexico's total exports, this difference is hard to believe. I've so far looked at all possible culprits and haven't found an answer (maquila, deflators, etc).

FDI Performance and Potential Index

2008-10-21T15:38:00.001-03:00

Based on UNCTAD data. This was prepared by me for a work that will no longer use it, so I'm putting it here for whomever is interested. It would actually be interested in seeing this in motion over time.

Those who ignore history....

2008-10-16T14:06:00.001-03:00

...are doomed to make everyone else pay for their mistakes.

What (was) the matter with Sweden | Free exchange | Economist.com

If you read this account of the Scandinavian crisis it reads like the mini-version of what is currently happening in the US and the rest of the world. It is important that everyone understand that this is not a case of "no one could have predicted that...". There are people who warned about the crisis (the most visible one was Noriel Roubini), there are emails from Wall Street firms mentioning the incredible risk to the entire system ever two years ago, and there is the Scandinavian crisis that came on the heels of a boom-bust cycle in the housing market.

It is also interesting that under Gordon Brown's plan, the implementation in the UK involved the resignation of the heads of many institutions. Nothing like this is happening in the US. The heads of these institutions are being given ample protection (don't be fooled by "limits on compensation", they are nil) and are being given taxpayer money.

Want to know the end game? The US will come out of this crisis licking its wounds, but it will emerge. The taxpayer will foot the enormous bill, and the financial companies will profit immensely through fire-sale mergers and acquisitions as well as off-loading their losses to the taxpayer while pocketing all of the gains from the last few years.

Rinse and repeat...

The banks got into trouble in all-too-familiar ways. Financial deregulation gave them greater freedom to lend, which they exploited unwisely. Scandinavian property went through a nasty boom-and-bust cycle. And recession (especially severe in Finland when trade with the former Soviet Union collapsed) led to mountains of bad debts.

What to do and how to stay sane

2008-10-10T17:36:00.002-04:00

If you are interested in macroeconomics at all you have surely been following the developments in global financial markets and the debacle that the last 15 years have caused. As everyone is adding their opinion, here are some of my own thoughts.

It is clear that this is not the fault of individual companies or people. Nor is it the fault of the market. Their behaviour has been a rational set of actions dictated by what we all know their incentives to be. Companies want to profit and individuals want value. No, I don't blame them for doing what is obvious they would do. Much like previous crises, this is a severe failure of regulators and legislators to ensure that the incentives were balanced with safeguards. There is a reason why regulation exists at all, isn't there? So why wouldn't people think that there is such as thing as not enough (or too much) of it? And if the debate is on the degree of regulation, isn't it pretty clear that the current events are proof that there hasn't been enough?

The crisis occurred because there were lax regulation on the origination of loans and on the ability of companies to leverage this risk. Now, I also blame pure ignorance (of the good kind: now knowing something that hasn't been discovered). You see, the creation of new instruments based on mortgages on paper sounded like, and still does, like a good idea. I can't see why the risk mitigation scheme doesn't work beyond the fact that it does. Perhaps it is simply a measure of optimism (see my post below on "the making of a mortgage CDO". I guess they shouldn't have expected to loose only 10% to defaults, and should instead have priced it much higher. I suspect this is the big failure in the model.

I haven't seen an analysis of how the CDO structure fell (with numbers) to see how wrong they were. It would be nice to see that.

There is also the issue of the procyclical nature of leveraging. As the SEC waived rules that limited the amount of leveraging that some companies could do, they gave them the rope with which to hang themselves. I don't believe for a minute that these people didn't understand what the risks were. Just that they didn't care (remote risks against immediate gratification - like me with chocolate).

There must be mechanisms in place to act counter-cyclically. But before talk of reform can be started, we have to get through the worse. And we are not there yet. Emerging markets (China!) has not really seen a strong impact on the real sector (I don't much care for stock market indices aside from their effect on pensions and such, as as indicators of sentiment once you discount the bubbles).

So brace yourselves and buy government bonds.

The crisis will eat us all

2008-10-10T17:19:00.003-04:00

So today we had a bloody day in the markets, and as my job deals with trade and integration, I became very interested in the impact on commerce. I've been following the volume data on trade and have seen the deceleration, even if the values are steady or growing. Now this could mean that elasticities are acting in such a way to offset quantities and value, but there could be other issues at play.

I will look into this more carefully, but to start I would like to point out the reports that the Baltic Dry Goods index is down

The Baltic Dry Goods Index, the main measure of shipping rates, is down 74% from its high back in May when trade with China was still strong.

and that there are reports that a lack of letters of credit are having an effect on trade from South America and the US (h/t to free exchange.

Much like this silly discussion about whether we are in a recession, if it quacks like less trade and it walks like slow trade, then we have a problem for exporters.

The crisis and other agenda

2008-10-09T22:42:00.004-04:00

So I'm interested in doing an analysis of the impact of previous financial crises on commercial flows around the world. It would be interesting to see if the channels of transmission have changed as much as I think they have.

I suspect that I will find that the rise of leveraged institutions such as MNCs has made contagion a much bigger monster that is harder for goverments to control. In the past it was probably more true that government policy that impacted FX rates and capital flows could do a great deal, but today this is less likely to work.

I'm also working on a product-level view of FX competitiveness, whereby I try to isolate the changes in competitiveness that occur from FX variations according to competitors for a third market. If that isn't clear, think of Brazil competing for the Chinese market against other Asian economies. How does the marketshare for each product (at 6 digits) and FX changes affect competitiveness for the companies involved.

I also have a long list of thoughts. Now to find time to get them into paper.

Becoming a father turned me into a feminist

2008-10-09T19:41:00.002-04:00

Amen to this

So for the record: I think virginity is fine, just as I think having sex is fine. I don't really care what women do sexually, and neither should you. In fact, that's the point. I believe that a young woman's sexual choices - no matter what they be - shouldn't have a bearing on how they're seen as moral actors. I also believe that slut-shaming and fetishizing virginity is not just about only valuing women for their sexuality (or lack thereof), but that it's also part of a larger agenda that seeks to regress women's rights and return to traditional gender roles. But if you want to know more about that, you'll have to read the book.

Education is the best tool for anyone to have safe sex and to make responsible choices about when to do it. The fearmongering is a relic of our religious side, and it is just one of these things that seem like would work, but doesn't.

When younger people have sex despite being warned about eternal damnation, it is blamed on everything else (tv, music, etc). But not one do they consider that it is probably due to a combination of natural desires/instinct and a lack of guidance about what it entails physically and emotionally.

I'm also convinced that this is one of these issues which defines people, so no minds will ever be changed. The only hope is that young people learn this through exposure to different worldviews prior to making any mistakes.

end of personal rant.

as a note, this blog will start to be updated more often from now on.

You know this, but do you feel it?

2008-06-29T20:16:00.002-04:00

I've been looking at global economic events for work and have this puzzle that I can't solve. First we know that the fallout of the US financial crisis is affecting the real economy not only in the US, but around the world. But the impact hasn't shown up in consumer spending, which is about 70% of the US GDP. This is in light of record oil prices, which is mirrored in many other commodities (for many reasons). So why hasn't the US consumer taken a bearish attitude and started saving for a rainy day, if the thunder claps are all around?

It's been obvious that the boom in consumer spending from 2002-2007 is largely due to credit expansion (lower rates, mortgage-backed debt refinancing, etc) since real incomes and employment has not improved significantly over that period. But now that the refinance "credit card" is running out and lending standards are up (while consumer demand is down), what is financing continued consumer activity? And will this financing dry up soon, impacting GDP growth?

My bet is that GDP forecasts for 2008 are still optimistic at around 1-2% growth. I think the year will be at the lower end of this.

PS: looking at the data for a lot of indicators, almost all seem to fit the pattern in every other recession (save for the one in 2001). If it quacks like a recession....

An inverted Ponzi scheme?

2007-12-27T17:55:00.000-03:00

The WSJ has a wonderful piece on a particular type of CDOs and how they concentrated the risk which is creating problems for the US economy. Remember the lesson of diversification? Well, if you follow their graphic, you'll see that these CDOs actually served to concentrate risk that was diversified in the Mortgage Backed Securities (which purchase individual mortgages and pools them into one instrument). You see, the CDOs would buy pieces of these securities that were all subject to similar default risks, thereby eliminating the advantage of diversification. Geniuses!

The reasons they were doing this was to generate transaction fees, and with the sorry state of the rating agency industry, information on the true nature of the risk was lacking. As these instruments were repackaged and resold, all based on the same underlying securities, you can start to see a analogy to a classic Ponzi scheme, where incoming investors pay the returns of existing investors, without any growth in the underlying security. Kinda like a bubble...

So the current crisis smells of a "reverse" Ponzi, where new investment instruments are created and sold based on existing instruments, all of which share the same underlying asset, and the same risk. The incoming instruments are paying for the returns of the previous instruments (not strictly though).

If it smells fishy, it probably is a big, rotten fish, or a big pile of shit!

Three sources on the risks to the US Economy

2007-12-14T10:59:00.000-03:00

Read these three:

Martin Wolf - Why the credit squeeze is a turning point for the world

Paul Krugman - After the Money is Gone

Nouriel Roubini - Coordinated Central Banks Liquidity Injections: Too Little Too Late To Address the Fundamental Problems of the Financial System

I don't think people really get how serious the problems are. The recent decision by the Fed to make available $40 billion is amazing. When Brazil still had its hard peg currency system, it pointed to reserves of $41 billion as their insurance that they would weather a crisis. That wasn't enough.

Part of me blames what can only be seen as a desperate attempt to shore up the system on politics. If a recession hits, there is no saving the Republican party in the coming elections. I would bet that whips are being cracked in Washington, but I agree with Roubini that this will get a lot worse.

Economist's View: "Productivity vs. Employment Growth: A Zero-Sum Game?"

2007-12-12T12:16:00.000-03:00

Economist's View: "Productivity vs. Employment Growth: A Zero-Sum Game?"

I've had arguments about my dad about "productivity". I think the term is often used as an instrument, when it is actually a goal (productivity being output/worker over a period of time). Want to boost productivity, then you have to increase the output/worker ratio. When you hear news that "productivity is up 3.3%", you have to ask if the workers are working harder/smarter, or there is some new technology involved (hi Solow!). I think it is obvious than in any optimized production system (where marginal returns to labor at at their peaks), an increase in employment will decrease productivity and vice-versa, unless there is also a technological or administrative change. This is why I find it curious that economists laud productivity gains at the same time that we see employment (and compensation) losses without looking at the overall effect (and the distributional problem).

It's one of these discussions that I like to have over some beers.

Logistics Performance Index

2007-12-03T09:32:00.001-03:00

From the World Bank's Logistics Performance Index:
Latin America needs better logistics for commerce

Correlation (not causality) of income and logistic performance:

Chavez

2007-12-03T09:29:00.001-03:00

At my previous job, I once told someone that I thought that Chavez would lose once he overreached. Thankfully, it seems that Venezuelans thought that trying to be an emperor was overreaching, and voted to reject his reforms. I'm still dismayed that it was this close.

Topics

2007-12-03T09:26:00.000-03:00

Some things I will be working on:
-A newsletter for CEPAL identifying the major topics/risks for commercial activity in Latin America
-The role of commerce on growth and development
-Take a look at cascading tariff structures and their impact on protection rates
-Innovation and commerce. I would love to have enough data to work on product space dynamics in Latin America
-Better visual presentations for the division

Personal update

2007-12-03T09:15:00.000-03:00

In the last two months, a lot has changed in my personal and professional lives. I changed jobs, from being a country risk economist at the US Exim Bank, to being an economist with CEPAL - ECLAC in Chile, and doing commerce and integration work. This change will allow me to work in topics that are more germane to "development", as I look at the interaction of commerce and social indicators of development. But this will be an uphill battle.

Some observations on my first month here: Chile is a "westernized" country (at least the capital is). I haven't found any good restaurants yet. Despite its modernized facade, the bureaucracy is immense and stifling. Competition seems to exist mainly in the marketing side of commerce, not in actual value.

CEPAL can improve how it presents information. The culture of PowerPoint is deeply ingrained here, and a lot of the workload involves created these presentations, instead of conducting original and rigorous research. Part of this seems related to lack of funding for some projects, and the need to constantly hire consultants as opposed to using the existing staff. This is particularly acute given the influx of new hires in the last year or so, and the need for a more dynamic management of their duties.

But the people here are brilliant and dedicated. I'm going to like it here.

Thoughts on regulation

2007-12-03T09:07:00.000-03:00

In his recent Oped at the NY times, Krugman makes the point that the lack of sufficient regulations in the face of agressive "financial innovation" has allowed for the current confusion in financial markets. I agree entirely with his point. But before anyone accuses me of defending excessive regulation, let me clarify my position on the topic. I believe that regulation exists to enable the flow of information to market players. I don't think that government should be telling the markets what to do (beyond a limited role as a social agent). To the extent that markets can create conditions whereby information is not available, the system will lead to situations like the current "subprime crisis".

Enron, the current (housing) crisis, the Great Depression, etc all have roots on a similar dynamic: the lack of available information created a misalignment between expectated risk/return and the revealed risk/returns. You can argue for caveat investor, but that is just a recepie for volatility.

Economist's View: FRB Dallas: Is Latin America Saying Adios to Market-Friendly Reforms?

2007-08-01T09:52:00.000-04:00

Economist's View: FRB Dallas: Is Latin America Saying Adios to Market-Friendly Reforms?

We need to separate out the term "leftist" and the term "anti-market". Just as government intervention can be anti-competitive, the lack of regulation in the face of strong market power also has a detrimental effect on competition.

Dani Rodrik's weblog: Asian growth versus African growth

2007-07-26T10:39:00.001-04:00

Dani Rodrik's weblog: Asian growth versus African growth

2007-06-22T11:38:00.003-04:00

In a recent email exchange, I was reminded of a post by Rodrik on his blog where he points to a study by Imbs and Wacziarg that shows that economic specialization occurs as a country grows out of poverty.

Here is Rodrik:

What's the big deal, you might say. Well, it is a big deal if you have been brought up on the idea that the key to economic growth for poor countries lies in specialization according to comparative advantage. If that simple recipe were true, countries that are getting richer would be producing a narrower range of goods, not a broader range. It takes a lot of mental gymnastics to square this stylized fact with the standard comparative advantage arguments. A far simpler interpretation is that the key to growth is the acquisition of production capabilities in an increasing range of goods, in a way that is often in tension with what comparative advantage would dictate. Here is a paper that tries to make these ideas more precise.

Now this sent alarm bells in my head when I first read it. First, I don't remember being taught that the key to development is comparative advantage. Only that comparative advantage can explain how a country that is less productive at everything, can still focus on a subset of products and gain from trade. I have always thought of comparative advantage as a tool to improve economic wellfare, not as the key to development.

Also, the point Rodrik is making doesn't include the case of countries growing as they produce a broader set of goods simply because they have better access to capital and can improve labor productivity. Sure enough, this point is made more eloquently by a commenter in Rodrik's site:

UPDATE: Roberto Porzecanski's comment below provides an opportunity for clarification. Roberto says the Imbs-Wacziarg result is consistent with trade models, insofar as countries that are growing through capital-deepening may end up producing a broader menu of goods as a result.

Comparative advantage and growth

2007-06-22T11:38:00.002-04:00

In a recent email exchange (h/t Marco Llinas and Jim LaFleur), I was reminded of a post by Rodrik on his blog where he points to a study by Imbs and Wacziarg (available in the American Economic Review 2003) that shows that economic specialization occurs as a country grows out of poverty.

Here is Rodrik:

What's the big deal, you might say. Well, it is a big deal if you have been brought up on the idea that the key to economic growth for poor countries lies in specialization according to comparative advantage. If that simple recipe were true, countries that are getting richer would be producing a narrower range of goods, not a broader range. It takes a lot of mental gymnastics to square this stylized fact with the standard comparative advantage arguments. A far simpler interpretation is that the key to growth is the acquisition of production capabilities in an increasing range of goods, in a way that is often in tension with what comparative advantage would dictate. Here is a paper that tries to make these ideas more precise.

UPDATE: Roberto Porzecanski's comment below provides an opportunity for clarification. Roberto says the Imbs-Wacziarg result is consistent with trade models, insofar as countries that are growing through capital-deepening may end up producing a broader menu of goods as a result.

Think of low-hanging fruit.

Now, Rodrik also goes on to agree with this point but disagree that it explains the questions that arise as to the causality of specialization and growth: "If countries that are growing are those that are making use of comparative advantage while those that aren't are not, then you should see the growing group of countries becoming more specialized".

By this point assumes that the dataset includes countries that have pursued trade policy according to comparative advantage. I have never seen any policymaker pour over an analysis of the value-added chain or the factors of production for the country's commodities and use the results to formulate policies. Heck, I haven't even seen policymakers argue for a zero-tariff system given global and local realities.

Trade policy, in reality, probably has no relation to comparative advantage. It is the combination of economic interests and political power, as well as fiscal necessities, that push a government (particularly one in a poor country) to enact export taxes, cascading tariff structures, subsidies, etc.

My point is that there is a false dichotomy in the argument that since countries are growing without specialiation, comparative advantage is not important to growth. There are a number of potential "engines" of growth, and in the presence of market dynamics (the absence of strong central control), the economic agents will not be coordinated around a specialized good. I think the growing specialization that we beyond the inflection point is fascinating, and actually serves to bolster the argument for comparative advantage. But Rodrik is right that it begs the question of how does the economy benefit from greater diversification before settling in a specialized role? Rodrik's paper offers a model for this, with entrepreneurs engaging in economic innovation and information being disseminated, eventually leading to specialization.

Zimbabwe in need of basic economic development

2007-03-30T16:38:00.000-04:00

ZIMBABWE: Agriculture sector can recover, say analysts

Zimbabwe went from being one of the powerhouses of agriculture in the region to a collapsed and ruined shell. 2000 marked the year when policies targetting white farmers were enacted, and resulted in the current economic crisis. Since then, farmers and investment have moved to neighboring countries (Zambia, South Africa, and others) in search of better environment.

But despite the obvious culpability of a government that has traded immediate political support (land redistribution under the auspices of racial justice is a very populist theme) for the country's economic viability, the problem of Zimbabwe's newfound need for development efforts is very real.

Given that the country's agricultural sector was organized around large farm holdings and relatively capital-intesive practices, and the investment will be hard to materialize in the current political climate, what are the best strategies for development and poverty alleviation? As is always the case in the region, the question is closely tied to "food security" (which I find highly myopic, but more on that in the future"). Is there a way to leverage the new efforts into a better model that addresses "food security" without creating an economic dependent on one single terrible crop (such as maize?) Or is the expected demand for corn from the US likely to drive prices high enough to make this crop attractive as a poverty reducing tool?

Lots of good questions. I'm going to post a more pointed version for discussion over at the Development Talk forum.

The importance of language: words have meanings

2007-03-19T09:53:00.000-04:00

Goerge Orwell, writing in 1946 about language and politics. As always, his thoughts ring true today. As professionals in an important field, we are obligated to remain precise.

Politics and the English Language

In our time, political speech and writing are largely the defence of the indefensible. Things like the continuance of British rule in India, the Russian purges and deportations, the dropping of the atom bombs on Japan, can indeed be defended, but only by arguments which are too brutal for most people to face, and which do not square with the professed aims of the political parties. Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness. Defenceless villages are bombarded from the air, the inhabitants driven out into the countryside, the cattle machine-gunned, the huts set on fire with incendiary bullets: this is called pacification. Millions of peasants are robbed of their farms and sent trudging along the roads with no more than they can carry: this is called transfer of population or rectification of frontiers. People are imprisoned for years without trial, or shot in the back of the neck or sent to die of scurvy in Arctic lumber camps: this is called elimination of unreliable elements. Such phraseology is needed if one wants to name things without calling up mental pictures of them. Consider for instance some comfortable English professor defending Russian totalitarianism. He cannot say outright, ‘I believe in killing off your opponents when you can get good results by doing so’. Probably, therefore, he will say something like this:
‘While freely conceding that the Soviet regime exhibits certain features which the humanitarian may be inclined to deplore, we must, I think, agree that a certain curtailment of the right to political opposition is an unavoidable concomitant of transitional periods, and that the rigors which the Russian people have been called upon to undergo have been amply justified in the sphere of concrete achievement.’

The inflated style itself is a kind of euphemism. A mass of Latin words falls upon the facts like soft snow, blurring the outline and covering up all the details. The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink. In our age there is no such thing as ‘keeping out of politics’. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia. When the general atmosphere is bad, language must suffer. I should expect to find — this is a guess which I have not sufficient knowledge to verify — that the German, Russian and Italian languages have all deteriorated in the last ten or fifteen years, as a result of dictatorship.

If you want to chat about development

2007-03-13T21:53:00.000-04:00

Check out our list group, Development Talk. Feel free to post and contribute to the discussion.

The Policy is Wrong!

2007-03-13T21:36:00.000-04:00

Jim, in response to Rodrik et. al's paper on the cashew industry in Mozambique

Mozambique's cashew policy must be considered a national failure, while Guinea-Bissau's policy (really the lack of a government policy until recently has been the reason for the success) has been a success.
Production has gone down from over 200 thousand tons in 1972 in Mozambique to about 50 thousand tons in the last ten years. Over the same time period Guinea-Bissau has gone from almost nothing to over 110 thousand tons at present.
The Rodrik paper misses what is happening in the present cashew industry in Mozambique and why. There is at present a 18% export tax on raw cashew nut in order to subsidies the processing industry and increase government revenue. The authors defend this tax. They and the government of Mozambique are wrong.
The first idea behind the export tax on the producers (some of the lowest income families in Mozambique) is to support a processing industry. If all of the added value from processing went to the labor for processing it still would be much less than the income that is being taken from the labor for production . The number of labors in the processing factories (estimated at between 4,500 and 6,000) is less that 1% of the number of families producing cashew.
The second idea for the tax is that the government revenue will produce more value for the producers that the cost of the tax. There is a missing study (not published) that was done by the Ministry of Agricultural and Rural Development that shows the opposite.
Another issue made by some defenders (Rodrik & others) of the export tax is that it is not an important cost to the producers. For these defenders it represents a small part of producer income. They compared the total cost of the tax per producer to the minimum wage (Approximately 2% of the rural work force is formally employed and would be illegible for the minimum wage).
The average per capital earnings for a small holder family in either cashew or cotton was $44 in 1996 or less than $4 per month. The average value added per agricultural worker was $117 in 1989-91 and $136 in 2001-3; this is equal to $11.33 per month (World Development Reports 2003 and 2006, World Bank). With average family production of less than 100 kilos per year and with producer prices approximately 32 US cents per kilo family incomes are less than $32 a year. These are averages and the numbers vary year to year based on corps size and world prices but they are in the general range of reality. A tax that takes between 25% and 30% of the family's annual main cash income can be considered to be important at these levels of income for these families.
Mozambique in 1972, its best year for cashew, produced 216 thousand tons of raw nuts. It had 46 million trees with an average productivity of 4.7 kilos per tree. In 1998 its production was 51 thousand tons and the average for the last ten years has been 57 thousand tons. This is a drop of 74%. There were an estimated 26 million trees with a productivity of 2.2 kilos per tree in 1998 a drop of 43% in the stock of trees and a drop of 53% in productivity. From anecdotal observation there is little new planting of trees. While there can be a good crop because of the weather conditions or higher prices cause the farmers to gather more nuts there seems to be little increase in the total stock of tress or increase in productivity.
The present low producer price has contributed to the cashew industry going from a cultivated crop to an extractive activity. The present prices are not enough of an incentive for producers to care for their trees or invest in new trees in order to expand production.
One widely held belief about the cashew tax is that if it was lowered or eliminated the producers would not benefit from the lower cost of exporting. This allegation holds that the traders can collude between themselves to control the price they pay to the producers. This allegation has no empirical bases nor does it conform to the market structure of the trade.
There are hundreds of thousands of producers selling into a large number of buyers. Mostly they sell to the hundreds of local buying stations and buyers in trucks that come through periodically. These in turn sell to more centralized traders. And finally at the other end of the market chain there are the exporters (over 10 in 1999) and the 15 processing factories. Some of these have their own direct buying operations with agents, trucks and warehouses.
The data on prices clearly show that as the FOB prices change so too do the producer prices. A simple observation of the FOB prices changes and the producer price changes show a high degree of positive correlation (84.0%).
If the buyers controlled the prices they would not pass on the higher export prices to the producer. The producer price would be based on a minimal price that the buyers would offer. This is not the case the producer price changes during the season and from season to season as the export prices change.
Also as the export tax has changed over time (from 30% to 20% than to 14% and finally back to 18%) so too has the producer price as a percent of the FOB price but the in the opposite direction with a one year lag. There is a negative correlation of 97.6%.
While there are seasonal price variations these are a function of available supply of nuts and the demand from India over the season and mostly the price processed cashew kernels.
India many private sector importers and not India the country or the government are the buyers of raw cashew nuts. And there is real competition between them. This can be seen when the world price changes there is a high positive relationship to the producer price changes in Mozambique.
The best extension agent does not work for the Ministry of Agricultural. The world best extension agent for Mozambican farmers of cashew is good farmer prices.
The present Mozambican cashew policy of taxing small holder cashew farmers is one of the causes of low producer prices and therefore low family income. It is also one of the reasons that the farmers do not invest and again the national cashew industry is not growing.

The policy is wrong.

Cashews and poverty

2007-03-03T00:10:00.000-03:00

Back in mid 2006, IRIN ("the humanitarian news and analysis service of the UN Office for the Coordination of Humanitarian Affairs") published a report on the potential of cashews as a tool to fight poverty in Guinea-Bissau ("GUINEA-BISSAU: Diversification from cashew nuts essential". As my father (and to a small extent myself) worked on exactly this problem in exactly this country, I submitted the article to him. Here is his response:

Interesting but with misinformation. India does not import cashews. India is a country and not an importer. There are many private companies that import that are from India and there is lots of competition. The government of Guinea-Bissau still has an export tax on cashew, and they also restrict who can buy. The production of cashew wine, which has the same return as the nuts on a per tree bases, was not even mentioned.

What is needed is more competition from buyers, freer markets, no taxes, and less FAO.

The average small farmer family produces 1,100 kilos of cashew. (100,000 farmers households produce 110 thousand tons). Their income is at least $220 plus an equal amount from the wine. That means that a family has an cash equivalent of $440 per year. Mozambican cashew farmer make less than $50 per year.

The farmers have already voted on what is most important to them. Cashew production has gone from less than 15 thousand tones in 1990 to 110 thousand tons today (with no rural extension, no credit and no government or FAO support). Rice production is going in the opposite direction. The farmers can only make about $100 a year from rice and it takes about the same time to produce as cashew. Cashew is a perennial tree crop that once planted can last decades. Rice has to be planted every year and in Guinea-Bissau the capital cost and labor for building and maintaining barriers and channels for rice are huge. Why can’t FAO learn from those that know ie the farmers.

The world wants cashews, while rice producing countries subsidies their exports. Guinea-Bissau is producing and exporting a high value international commodity while getting a subsidy on its rice imports.

FAO’s ideas on rice could do more harm to Guinea-Bissau than the last conflict.

Jim

Food security is $100 in your pocket.

War and Death

2007-03-02T23:56:00.000-03:00

The website (click on the title of this post) has a set of maps that adjust the country's size according to different criteria (HIV, military spending, war, wealth) is a great visual. I particularly like the maps on wealth on 1500 and 2002.

It's all about perspective.

Kuma! What this blog is about:

2007-03-02T14:33:00.000-03:00

I've been getting in to discussions with many people I know in the development field about books, articles, current events, and anything relevant to development professionals. I know that there are lots of sources of information on development. But I haven't found many that specialize in getting the opinions of a diverse group of professionals and academics and creating a round-table collegial atmosphere that aims to disseminate information and perspectives.

I aim for this blog to provide just such a meeting place. As always, please let me know of any suggestions for improvements.

Brazuca.