Friday, 12 August 2011

All sweet Zurich, you darling!

If you're looking for an example for the kind of global economic uncertainty we live in, the Swiss central banks announcement about plans to pack the Swiss Franc to the Euro must be a perfect one. Coming from a decidedly non-random process (just imagine the meeting that finally decided on this), and totally unforeseen by most bar the insiders. Made my day.

Wednesday, 10 August 2011

What ho Global Economics!

This post argues (again) that there is no way ahead for the global economy without theoretical innovation.

The trouble is that the wave of innovations that has been sparked by the 2008 meltdown, still assumes that the world economy is built from discernible building blocks: the national macro economies. There are brill new models that incorporate the national financial sectors into the monetary models. These will almost certainly help avoid a crisis triggered in the similar vein, but perhaps you could argue that any model that aims explain the crisis, also needs to go beyond the triggers and explain why policy did not work for such a long time (if at all). We are yet again in the dark about even the short term future of the global economy, and the finance upgraded new macro models do not give us much extra light.

True, we have increasingly sophisticated global financial network models (sometimes even combined with trade networks). These make important structural points about the global economy. However, so far, they have remained the tools of the banking regulators, without any spill over into macroecomomics proper.

Perhaps, the problem is not with modelling one sector (finance), but rather that in the old macro framework, we are trying to explain the behaviour of a system on an organisational level (national economies) that has long been outgrown by another level (global). Perhaps, the solution is a global economy level description. (Discloser: I have been riding this horse since 2007, but -- obviously -- without anyone noticing. Not that there was a chance for the latter now.) There are some immediate obstacles.

For one, although we have fantastic national level data, there is no truly global dataset. This is a bigger problem as it sounds, for some of the new dynamics are coming from emerging markets that do not publish (and often do not even have) the kind of data that would be needed for proper modelling.

Two, any macro, should it be national or global, assumes the presence of a policy maker. And that -- here I would agree -- indeed does not exist on the global level.

Neither of these is beyond amend.

It is embarrassingly obvious (and way too often repeated on this blog) that the first step towards a credible policy 'solution', recognised as such by the markets, is a global macro model with empowered global policy institutions. Just pretend that the different countries of the world are mere provinces of the all-encompassing global economy.

Off to work...

Pip pip!


(Links: return of the bear, and yet another piece of how blind the rating agencies are.)

Wednesday, 3 August 2011

The Long Minute of the Global Economy

Th global economy's outlook: as if the 24 months since the summer of 2009 have flown by in one minute. Not much changed.

The future of the global economy is as uncertain as it was 2 years ago. (Would any self-respecting macro analyst dare to stand by a mid-term forecast of global GDP, oil prices, or even policy stance?) We still lack any coherent global institutional framework that could offer even a remote chance to project a credible global economic policy. Hence there is still no anchor that could fill the credibility void. To top it, the policy toolbox seems as inadequate as ever. True, there has been some policy innovation (though, much of it was more renaming of old -- and banned -- policies than real novelty), but those are running out as well. Can you imagine a QE3 which is more than mere verbal intervention?

We thought -- foolishly it seems -- that the crisis that would eventually force the rise of meaningful global institutions could be postponed by a decade. Maybe the delay will turn out to be measured in months.

Links to the empty toolbox, and global macro uncertainty.

Tuesday, 2 November 2010

Apropos Quantitative Easing

What passes these days as monetary policy in the US and in the Eurozone is going to be a complete disaster for developing countries. Just think for a second what the taboos are is that emerging markets politicians cannot touch when it comes to monetary policy. Surely, the independence of the central bank is going to be top of anyone's list.

How do you build an efficient central bank in a developing country? First you push through some laws that make sure that a legal framework is in place that ensures–at least in principle–the institutional independence of the central bank. Then you select a few, talented, young local economists, and ferry them away to good university somewhere in the West and teach them macro, monetary theory. (I was probably one of these guys.) Then you lure them home, and they start filling in the institutional space you created at the beginning. If at the same time the country is going through a development phase, then probably the banking sector is growing up, the financial markets are emerging. Thus you not only have a central bank, with some people who know what monetary policy means, but you also have a monetary transmission mechanism of sorts. If you throw in and able IMF rep, then probably the country is on the right track.

The point here is that at the heart of this process is the taboo that stops politicians meddling with the centre bank. Developing country politicians will always want to meddle with the central bank. In fact every politician will always want to meddle with the central bank. But in developing countries the checks and balances that would stop them from doing so are not there. Hence the taboo.

It will be very difficult to convince governments facing elections in difficult economic circumstances that they should respect the independence of the centre bank, and not expect monetary policy to find its raison d'être in financing pre-election fiscal expansion, while at the same time the Fed and the ECB store up on government bonds.

A whole decade of capacity buildup in developing countries is being thrown into the rubbish bin these days.

Thursday, 23 September 2010

The Ancient Future of Finance

(Book review of ‘The Future of Finance. The LSE Report’ -- you can download it here)

Hmm. What a perfect moment! An near-perfect crisis over (well, just, and perhaps), and one very much triggered and spread by the financial sector, offering a lab-like insight into the mechanics of global banking. The complexity of the structure, the proportion of what is global to what’s local, and the sophistication of the tools all would scream for a renewal of what we think about managing the global financial system. Or even what we think about what finance is.

New era. New finance.

Instead….

… if you want to read what the end-of-20th-century economics would have answered to the same question, read the new book from the LSE on the future of finance. Going through this book reminded me of the Bush administration's ‘solution’ of dealing with the anti-Americanism of the Arab world: send out a PR professional to ‘explain better’. Incidentally, this is exactly what the authors of The Future of Finance think: finance is fine as it is, all that’s needed is explaining it better. Perhaps a little fine-tuning here or there, but that is it.

The furthest you can get in terms of innovation is the call for ‘new thinking’. However, there is not much proposed what the desired novel framework would be. If this is going to be the future of finance, well, it will consist of some rather dark clouds. (Ironically, some chapter authors point out this controversy.)

Apart from the lack of promised ‘new finance’, there is merit to this book. It is a good summary of most debated points of the crisis: the role of banks is explained well, the obvious list of current regulatory choices are discussed in a coherentish framework, and the crisis’ impact on the policy toolbox is touched upon at least to some extent. So, if you are a new student of macroeconomics, and this recent crisis is new to you, then this book may be a good starting point.

But it is nothing more beyond that. You cannot pretend that the only thing that happened to us the past decade is more data.

Friday, 20 August 2010

A Tragedy Of The Global Policy Commons

Two global economics observations about the ineptitude of economic policy.

First, we knew about the credit crunch for at least a 15-18 months before the September 2008 meltdown. Yet, the crisis was not only not averted, but perhaps not even slowed down. The months after the collapse of Lehman were spent in a frantic search for new policy solutions. Nothing seemed to have worked. The nature of the crisis eliminated the most powerful tool of the central bank: the financial transmission channel. And thus a surprising policy void followed. The extent we did not know what was going on is illustrated well by the widening of economic forecast range at the time (and the collapsing predictive power of the mean), as well as the jitters that followed the drastic fiscal expansion everywhere. Arguably, it was not the lack of data, but more our lack of knowing what to do with it that caused the problem. Even when the packages started to work in the summer of 2009 (or at least something caused the numbers turn better), it came as a surprise.

Second, there is an eerie ‘dunno what’s going on’ in the air again. The ‘good’ data tends to signal export led growth (Germany, China). The countries that keep importing are still and again showing signs of the malaise (US, much of rest of Western Europe, Japan). Nobody can come up with even a half credible forecast for for any period beyond the next few months. The lesson we seem to have learned from the 2007-8-9 forecast fiascos is not even try that hard…

Why is this? Why are we unable to provide even the basic level of forecasts? And in any case, if there is a double dip, why is it here? If the ‘global policy maker’ has been dealing with this crisis for three years straight, why has it not been sorted?

Well, one possible answer is that the global economy behaves very differently to how the national level economies do. This blog has argued in the past that the future of economics will certainly have to deal with the fact that the global macroeconomy cannot take for granted a series of assumptions that the national level ones could. Ecological buffers, and socio-cultural homogeneity can be assumed only if they tend to be there. Global economics, will have to come up with some very different notions.

Yet, the need for a new organisational level in our models is perhaps a problem for later years. For it is not hitting the ecological carrying capacity, or having dysfunctional societies that seem to be the reason for the lack of efficient management of the global economy.

It is the lack of global policy institutions.

Imagine that you take any well functioning national economy: the US or Sweden, New Zealand or Thailand. Eliminate the national government, leave the local municipalities in place. Then boost the locals’ finances, give them local currencies, and strong local economic policy institutions: a taxation, budget, central bank, regulators. What would that world be like? Would this world be just as good as the current one? Or would these local institutions start altering their policies to take the maximum benefit from what had been the ‘national economy’? Would this inevitably lead to meltdown? A macroeconomic tragedy of commons.

And what would happen to economic forecast? In good times, the self movement of the system would give you a good basis for efficient prediction. But in bad times, you would need to know the reaction of the economy to the net effect of the multitudes of those municipality-level policies. You would need to assume some form of quasi-national-level policy, and build the model on that. But how could you derive that from the local ones, especially if those were playing against each other?

The global economy is not as integrated as most national economies. But, it is on the way. Today's version is not unlike an emerging economy, going through rapid structural change, within an environment characterised by weak and mostly brand new policy institutions. The funny thing is that if you were to put it that way, we would know immediately what to do.

The ineptitude of policy and forecasting professions points to the same direction. The direction of global economic policy institutions.

Thursday, 13 May 2010

The Three-Layered Chess Box

A central question of global economics concerns the architecture of policy institutions. If you regard the global socio-economic system as a single unit -- a not entirely unreasonable assumption, perhaps -- then it is strikingly obvious that the system's optimal management would call for much stronger global governance functions than existing today. Global economics calls for efficient global monetary and fiscal policy, global financial regulation, enforceable global solutions to the global climatic issues, the rapid loss of biodiversity, overfishing, and so on. This just does not happen. The 2007-2009 crisis of the global economy was perhaps the best chance so far to create on overarching economic policy umbrella for the world economy, an opportunity left unused despite the multitude of summits ending with the Great Leaders' press conferences, which in turn were followed by uniformly unilateral action. The failure of Copenhagen, with the outlook of 'perhaps' Cancun forming the basis of an agreement to be reached in South Africa in the third step, speaks of similar inaptitude when it comes to managing the climate.

Why is this? Why are sovereign states so reluctant to coordinate policy, let alone give up power for the protection of the shared economic and ecological commons?

Tuesday I got to meet an international relations thinker, Joseph Nye. He, as an extension of his earlier innovation smart power, suggests that the traditional two-dimensional chess board of the power game among states should be replaced by a three-dimensional, three-layered box, in which the traditional hard power layer is accompanied by one where the dynamics among economies take place, and another one where transnational sociopolitical processes dominate.

From a global economics point of view this model is strikingly state-centered. If the main focus of the analysis is military power, compared to which other forms of inter-state persuasion can be softer or alternative, then the natural unit of analysis is of where the military is: the sovereign state. Yet, there seems to be something wrong with this picture.

The economy layer of Joseph Nye’s analysis has changed tremendously in the past hundred years. While even a few decades ago each national economy more or less corresponded to a state, we are hard-pressed to find truly local economic processes today. Finance is global wherever you go. Manufacturing systems that used to be local, then became regional, are now predominantly global. The pharmaceutical market is global. Raw materials are global. The transportation system is global. Even the ultimate local product, that of farming, has gone global. Therefore, perhaps it can be argued that there is no layer that is formed by national economies. Although it’s tempting to talk about the Chinese economy, the Indian economy, the American economy, or even the European economy, these are increasingly useless categories. Their borders became fuzzy. Integration into one large economic system, the emergence of a truly global economy seems to be a more appealing model.

The trouble is that the rise of the new, global organisational level has not been accompanied by governance institutions with the same scope. We are trying to manage what is essentially a global process using national level economic policy institutions.

The transnationals, that is, the third layer that Joseph Nye suggests as a building block of the three-dimensional global power structure, has similar problems. For what a decade ago might have been somewhat negligible side phenomena, such as NGO efforts in international reaction of the Haitian earthquake, or the anti-malaria activities of the Gates foundation, or the PR exercises of Greenpeace, is now giving way to a global movement. The trigger, it seems to be increasingly obvious, is a major ecological catastrophe that is to dominate the coming decades. The rapidly changing climate, and the collapsing biodiversity is creating a strong demand for collective global action. Just as in the case of the global economy, we are trying to meet this demand using state-level governance tools, and hence are predictably falling short.

And thus one might turn the logic around, and ask if it is the location of the hard power, the fact that it is anchored to the bureaucracy of the sovereign state which stops the formation of the global governance institutions. In other words, is it possible that the failure of Copenhagen, the never-emergence of a global financial regulatory system, or the we-have-not-even-got-done-to-tackle-it overlogging and overfishing problems stay unresolved because of states that mistake their hard power for global omnipotence.

To pick an example, do you think that should the size of the US military spending be not the half of the world’s total, but just a quarter, the same as its economic share, would the US have signed up for Kyoto? Or for a global consumer protection standard? Or a global financial regulation? Or globally harmonised economic policy? Or the ICC? Is the fact that the US is a military superpower stopping it from taking part, or even a lead, in building the global policy architecture that would offer to deal with global problems unrelated to security issues? Or, perhaps, could there be a general link between the hard power of a state and its unwillingness to to hand over governance functions to transnational institutions?

If you were to find evidence supporting the relationship between hard power and attitudes towards global collective action, how would you go about doing it? I tried using SIPRI’s military spending data, but it seemed too messy due to countries being in active conflict. The world values survey offers questions like “willingness to fight for one’s country”, but these seem to reflect personal values rather than the values projected onto the state. Similarly, what would capture a country’s attitude towards global action? If you look at ecological footprint it is going to be dependent on the country’s economic development level. If you take measures of environmental sensitivities, then you might merely pick up a transition towards post-materialist values.

What we need is measure of attitude towards the military might of one’s country and some measure of the recognition that global environmental problems need different solutions than local ones.

Consider the following graph:


The x-axis of the above graph shows the level of anxiety about the environment from 'very serious' to 'not serious at all'. The y-axis shows the percentage of respondents who name the 'strong defence force' as first or second choice as 'the aim of state' of their country. The three red curves correspond to three local environment questions (water, air, sanitation); the three blue curves correspond to three global environment questions (global warming, biodiversity, pollution of oceans).

It seems that the trend is very clear: those who are worried about the global versus the local environment also tend to be less in favour of a strong national military. And vice versa: those who think the global environment is not that a serious issue tend to like the idea of their country's defence might.

The data thus seem to support the hypothesis that state level hard power stands in the way of common global action, yet arguably individual attitudes does not necessarily translate into state action.

However, it is impossible to tell the direction of causality, at least based this data. Unfortunately, these are questions asked only in the last, fifth round, of world values survey, and hence there is no time series to offer a causal direction. One can only speculate that if there really is a relationship between the two, the more recent global environment worry would follow from the historical preference for military power (in line with the hypothesis) rather than the other way around. This is, though, obviously just a speculative answer.

Still.

Thursday, 22 April 2010

Kenya on the edge

(Report from my friend, Balazs Szendroi)

"Knowledge Is Power"
(Motto painted on the walls of thousands of schools around rural Kenya)

"In case of accident, do not admit liability"
(Advice printed on all Kenyan car insurance certificates)


Kenya is a beautiful country. The breathtaking views along the descent into the Rift Valley, the sounds and colours of hundreds of thousands of flamingos on Lake Elementeita, the picturesque herds of wildebeests, gazelles, zebras and giraffes in the National Parks, whose movements are closely monitored by lions resting in the shade, and the calls of Colobus monkeys hiding in the trees in Kakamega Rain Forest make an instant impression on the traveller.


But there is more that impresses in Kenya: its people. With a population well over 35 million, many living on subsistence agriculture in mud-huts or tiny tin houses glued onto each other, Kenya is unmistakably "third world". But there is enormous vitality around: commerce is booming, Matatu taxis shift men and women around at breakneck speed with casual disregard to the Highway Code, and people are loudly discussing business and politics (as well as the Premiership) in bars and restaurants. And anywhere one goes, one immediately sees signs of two further factors that hold out hope for the future: education and modern telecommunications.

Many Kenyans take the job of educating their children very seriously. Fathers work in Nairobi, hundreds of miles away from their families, so that they can make enough money to pay for a better school. There are colourful billboards everywhere that advertise evening courses, colleges, universities public and private, and all manner of other educational institutions. The level of tuition is, to be sure, enormously variable, but there are ambitious examples of good educational practice.
One is Starehe School, where Kenyan youngsters from all walks of life are taught in wonderful surroundings by a dedicated staff, pupils being selected purely on the basis of academic performance. With almost 100 applicants to every place, it is perhaps not surprising that Starehe tops the KCSE (Kenyan Certificate of Secondary Education) tables. At the next level, there is Strathmore University, rapidly rising to the top of the league table of Kenyan universities. This Catholic institution, with a soft-spoken, thoughtful and very impressive Vice Chancellor, started life as a college of accountancy, but has now different programmes in Business, IT and Hospitality as well, with a Law School and a Mathematics Institute opening soon and a Medical School in preparation. One can only wish them well.


Kenya is of course but one of many developing countries completely transformed by the ascent of modern telecommunications. But there is a local twist, which is rapidly turning into a global phenomenon: M-pesa, the mobile phone based money transfer system. At a fraction of the cost of other money transfer schemes, and with a local agent in every village, collection of mud-huts and by every roadside, M-pesa is truly available to all. First banks tried to outlaw it; now they have to live with it, allowing direct transfer from bank accounts into M-pesa. Never mind politicians and their taxes: as a bank director confirmed to me, this is a real challenge to local banks.

A propos politicians. It was repeated all over, by many different people, that politics and especially politicians is where the problem of Kenya really lies. Since Independence, the country has seen a succession of presidents with a dictatorial streak, divide-and-rule mentality, and a liking for personally owning huge swathes of the countryside. A succession of coalitions was formed and then disowned, often along tribal lines. The most recent incumbent, Kibaki, was elected President in 2002 on the promise of clearing up the political mess, only to be uncovered as the true mover of many of the latest major corruption scandals. He strengthened the power of the largest tribe, the Kikuyus, at the expense of others. It is universally acknowledged, and gradually also proven in court, that he held on to his presidential seat in 2007 only by rigging the election. This lead to by far the worst tribal violence that the country saw since Independence, not on the scale of Rwanda, but still killing over 1000 people, and seriously damaging the social and economic fabric of the country.


Tribalism is rife, and its role cannot be underestimated. Kibaki's opponent in 2007 was Raila, who comes from the Luo tribe, from the west of the country. His supporting coalition includes a medley of corrupt politicians riding different tribal tickets. He is now Prime Minister, as a result of a compromise reached after the 2007 violence, and he has established a power centre somewhat independent of the President's office, even though the present Constitution does not make this easy.

There is now a proposed new Constitution on the table, which would in particular clearly separate out the powers of President, Government and Parliament. The proposal appears not to have taken on a tribal dimension, and it is supported by both President and Prime Minister. There are signs that, despite protests from the Catholic Church, this new Constitution will be accepted in a referendum in the summer; this would move the politics of Kenya in a very positive direction.



One actor who may yet play a role in the future of Kenya is the President of the United States. Obama looms large in the country; it is not hard to find restaurants where the obligate picture of President Kibaki is dwarfed by an enormous Obama poster. Obama's father is a.Luo, putting him in an interesting position with regard to the tribal aspect of Kenyan politics. His administration has so far refrained from getting too involved, restricting itself to denying visas to the most obviously corrupt Kenyan political leaders. But it is rumoured that Obama's next visit to Africa will be to Kenya; at that point, he cannot but get drawn in, with possibly very exciting consequences.

Obama's first Africa appearance, his speech in Ghana in July 2009, spells out his likely approach: an emphasis on good governance, and a strengthening of institutions at the expense of individuals.

Modernization, improving human capital via education, leading to steadily improving living standards, or further descent into corruption, unaccountability and tribal violence. Whither then, Kenya?

Thursday, 25 March 2010

Obama’s health reform success hands global financial regulation to Europe

And now onto financial regulation? Europe is poised to win from stalemate of the US Senate.

The fallout from the success of the US health care reform bill might just determine the fate of the emerging global regulation. The Volcker-Obama-Dodd initiative will never see daylight as a law without all the teeth are pulled out: the Republican’s strategy of obstruction makes any meaningful financial reform rather unlikely. The consequences for the global capital markets may be far reaching.

First, obviously, the US market staying relatively regulation loose will make the domestic banking sector super-profitable again. Score one for the US.

Second, this will also turn the battle over the emerging global financial regulation to a European victory. Score one hundred for Brussels.

The reality is that there is no truly global regulatory framework emerging: the much promised intergovernmental cooperation towards creating such an umbrella is all but dead. The only two initiatives that have any chance of manifestation are that of the EU, and that of the US. Clearly, you cannot have global financial regulation without these two. More importantly, if the US and EU settled on a solution, that would be it. In practice that would be the global framework from its first hour.

The battle over the regulation dominance between Brussels and Washington has its core at radically different approaches to the problem. In philosophy, in ideology, in fundemantal beliefs about the role of economy in the society.

(Onegin and Lensky's Duel by I.Y. Repin. Pushkin Museum, St. Petersburg)

US. The US is pushing for a market self-regulation, where the authorities’ job is to ensure that the self-management works. This solution is rooted in the belief that market solutions tend to outperform bureaucratic rules, and while there clearly were market failures in the crisis, these were due to the information bottle-necks, rather than anything inherent in the system. Thus most elements of a would-be US solution are aimed either at increasing transparency or enhancing market competition.

EU. The European approach is the opposite. The solution pushed by Brussels is based on the belief that markets, and financial markets especially, tend to yield socially suboptimal outcomes whatever the transparency is, whatever the market structure is. The assumption or observation (depending on which side of the debate you are) is that self-regulated financial markets will reduce the systemic risks for the sector given the systemic buffers of the rest of the economy. Hence, the self-managed banking sector will always be too risky, and it is the job of the government to manage the market directly.

As a consequence of the opposing philosophies, although many of the elements of the two alternative would-be global reform approaches are similar, the devilish details are radically different.

The early row between the two regulators (some of it played as a proxy fight between the City of London and the Brussels bureaucracy) led to a regional limitations: if we can't agree, no problem, we will just focus on European / American only regulation. For what is better than an isolationist solution right after what was the first truly global financial crisis...

Yet, separate rule may work for local banks. However, for global ones -- if the past is any guidance here -- it will not. Historically, there have been areas where international behaviour of financial companies has been regulated differently in the EU and the US: the prohibition of bribery of foreign officials was one, for instance. Surprisingly, the US laws have been stronger than that of the EU in this area. If you were a Europe-only player, then you’d have to abide by the weaker regulations only. But, if you wanted to be international, there was no other way than follow the rules of the stronger US rule. It is unlikely to be different in the case of upcoming financial regulation reform: local US financial companies will operate within the weaker US framework, but one with global presence will have to follow the toughening EU rules. (If you want to know what this feels like, just ask Microsoft...)

The extent to which Obama will be able to achieve anything in terms of financial regulation in the coming months will determine where the balance between the European and US regulation will end up. Despite all the sovereign-will-always-dominate-the-global speak, the local politics and institutional constraints of two regulatory superpowers have become global politics global and constraints.

Monday, 22 March 2010

Obama’s Global Health Care Impact

Finally Obama might have some global consequences...

The crisis offered hope about the global reform. Although we are still struggling with understanding how the global economy works, the eventual development of some kind of global economic policy umbrella has become increasingly inevitable. As this blog pointed out before, Barack Obama had a unique opportunity to design and push through such a global institutional architecture, and it has been disappointing that he decided not to do so.

Yet, the health care reform that he finally pushed through the US Congress yesterday could have global impact.

First, it will have an effect in a host of developing countries. Consider the immediate news coverage, for instance: Khaleej Times in Dubai, or O Globo in Brazil, or The Times of India. In these markets, Obama is still their own, as a leader and as a member of their virtual social reality. His actions, healthcare reform among them, set benchmarks for expectations about their own countries’ policy reform.



The idea of universal healthcare, alien in most developing countries, will become the norm. Obama’s reform will boost local constituencies for healthcare reform in these countries. The details of the reform (which is not bad despite the bickering and ridiculous length) will enter the local healthcare debates. Maybe not the mechanics, but definitely the philosophy: healthcare is a right not a privilege, kids should be covered whatever the country's circumstances, one population translates ultimately as one insurance pool. The attention to Obama alone might just make local reforms more likely. 



From now on, every would-be local Obama will want to consider putting healthcare reform on his or her billboard

(An election campaign billboard, Jayapura, West Papua, autumn 2008. Notice the halo above Obama's head...)

Second, perhaps almost as important as helping the local healthcare causes is the return of Obama to the global political scene. He wasted his global political capital -- a narrow window of a few months to build global economic policy institutions after his election and taking office. The best we have now in terms of emerging global policy architecture is a few half-hearted attempts towards globalish-looking financial regulation, although even this is turning into a clash between the etatist solution coming from Brussels and the ‘market-friendly’ solution coming from Washington. Much of the world is left out of this fight: no other region of the world has a large enough financial market to matter globally, and in any case, no population really understands - or cares - about the details.

The rest of the global umbrella has been left off the table. The recovery came too soon. (This time.)


But the opportunity might yet be revived. The next item on Obama’s agenda is financial regulatory reform, which will inevitably go global. And you cannot do global regulation without some form of deeper harmonisation of the rest of the policy mix.

The coming months might just reset the probabilities about the next crisis.

Wednesday, 27 January 2010

Obama Freeze

(The past two months I have been working on some exceptionally interesting problems, and hence the absence from the blog. Here is one to the 'dear readers' who bugged me to return.)

Fascinating it is to see the way our thinking evolved about the 'optimal' policy behaviour in a crisis. You could argue that before the meltdown of September 2008 we all thought that the way to deal with recession was to tighten fiscal policy quite a lot and loosen monetary policy a bit. Surprise came when this crisis unfolded in a way that made the monetary transmission mechanism disappear and thus apart from some unorthodox (aka we have no idea what will happen) liquidity moves, the central banks were out of the picture. Predictable policy panic followed. In an economics universe where Ricardian equivalence rules, fiscal expansion would only make things worse. (Footnote: some qualifications remain. As always...) So we all got terribly surprised when the panicked fiscal stimuli of spring 2009 seemed to have worked.



Hooray.

Except, that we’re not quite sure whether it was the fiscal stimuli that worked. In fact we are not even sure that something worked. The global economy seems to be coming out of recession in a way that could be easily interpreted as a short lull.

However while we don’t really know what is going on with the real economy in any country that might matter for the global dynamics, should it be the US, Germany or China, there is one piece of good news that seems fairly certain. The banking sector that was (or: happened to be) the trigger of the recession has been sorted out. Well, at least domestically, and at least it is some of the countries …

The upshot is, that the banking sector is back into the business of channelling the central bank’s will. It might thus make sense to go back to the bit of economics that worked before the crisis, and probably would have worked during the meltdown. Stimulate the economy via a low interest rate environment, and at the same time make space for looser monetary policy by tightening the government budget. In other words, Obama’s proposal -- attacked by many US analysts as a mere political move -- might make a lot of sense.

(It is especially funny to see the Obama move being attacked by the very same people who despised the fiscal stimuli at its birth. The conservative mindset combines well with a short memory span...)

This is not to say, that if the banking crisis was not the illness, but only a symptom of the underlying problems, the global economy would still be out of water. The argument suggesting that the lack of global action will lead to even higher tension and thus possibly even more severe crises still holds. But the day of that Great Meltdown might just be postponed. And, if other governments follow suit, you might even regard that as a somewhat harmonised global fiscal policy stance.

(For a brilliant comparison between the global pickle we are in now, and the Japanese pickle a decade ago, have a look at the paper Lost Decade in Translation: What Japan's Crisis could Portend about Recovery from the Great Recession. The bottom line: no amount of fiscal and monetary policy wizardry will work as long as the underlying structural causes of the malaise are around. -- We just need to agree about those then...)

Friday, 20 November 2009

Recovery Doubts

(The Green-Shoot Worm And The Abracadabra Herd)

It is almost as interesting to follow the way the commentators of the global economy keep moving in odd herds, as it is to watch this wannabe recovery itself. A few days before the meltdown most of the people -- now famously -- thought things would be just fine. Then suddenly the lightning struck and the entire herd changed direction. But it turned out that in policy we believed. The herd changed direction again. Then a lull. Then lightning again. Etc etc etc. My favourite bit in this is the lull. You feel that another rampage is going to happen, you already can smell the change in the air.  But, usually you have no idea which way the herd is going to go.

From the end of spring, we have been wondering whether the recovery was really there. We, The Herd, convinced ourselves that this is going to be a short trough. Perhaps a deep, but definitely short one we were telling ourselves.

Occasionally the herd turned south again and again, mostly rather not on news, but on the observation that if the picture we saw was in the frames of our macroeconomic models, then we would have to worry a lot. Fortunately, we could always remind ourselves that the crisis proved that none of our models had anything to do with reality, and hence unconstrained optimism always won the day.

Now consider the comparison between the current “post a crisis” rally, and other similar one in 27 years ago. Although, it is only concerning the US markets, the table is a vivid illustration of how we are in a very different trouble. The past behaviour of any national economy during recovery from their respective crises is not going to tell us much.

It may be added, that this crisis was the first known truly global crisis. Although there were some economies less impacted than others (Poland, Brazil, Indonesia seem to have benefited nicely), all countries were affected in a significant way. As this blog has pointed it out before, we do not exactly have a model of the global economy anywhere near the quality of macroeconomic models. (And -- khm -- the public's trust in the latter is somewhat ... whatstheword, whatstheword, er, er... ah! disappeared without traces.)

And thus the only hope left is hope itself. (Oh, poetry!) If everybody gets excited about how amazing the future is going to be, by definition the future is going to be great. Square that, you rational expectations theory... (Imagine, along these lines, we could want an Anything!)

Which takes us to these wonderful green shoots that have been popping up Absolutely Everywhere. Consider the following graph (from the St Louis Fed's research page) :



That little wormy thing on the bottom right is the green shoot...

Or look at the retail spending dynamics in Europe (figure 2 in the Eurostat's Recession in the EU: its impact on retail trade). While the overall picture of the European economy is turning much less negative than the abyss looked, hunger for consumption is not exactly here.

It seems that the economic abracadabra herd is just about to go on a rampage on how long the to real recovery will take. This will get really boring after a while...

Monday, 16 November 2009

Copenhagen, Barack Obama, and Global Economics

"Obama damps hopes for final treaty on climate change at Copenhagen"

Grrrrrr.

The week starts with yet more global procrastination.

This blog has had a critical, but hopeful attitude towards Barack Obama's global policies. The global economics observation that the 2007-2009 crisis was an evidence of the failure of pre-existing institutions led to the expectation of a global economic policy framework emerging in earnest. (The view of this blog is that what we have seen so far as recovery is the result of a set of random policy measures, mere stabs in the dark. And in any case, the jury is still out on whether there really is a recovery out there.) Thus the obvious need for global economic policy institutions accompanied the even more obvious need for global environmental institutions.

It shouldn’t have been a far fetched assumption that the newly elected global-citizen-looking, not exactly ignorant US president would be a good candidate to lead the way. This weekend’s disappointing news about scaling down the Copenhagen ambition is the latest reminder of his failure to match these expectations.



The sad truth is that the carbon, or in general the global warming trouble is the easy problem. Or, at least, it should be. In the case of the carbon imbalance, we seem to understand what goes on. We know what should be done, and it would be our global leaders' job to sort the burden sharing out. Clearly, they are failing.

This is very bad news for the global problems that have much less straightforward solutions than the carbon trouble. The easier of these will be the future economic instability. For even if the price of the current inaction will be a trough way deeper than what we have seen now, the effect will be only temporary. Not so in the case of the global ecological crisis. By the time the human societies will be impacted enough to register the catastrophe, the long term damage will be done and irreversible. If the global society is unable to sort out such a -- relatively -- clear cut problem as carbon emissions, there is no hope for the more complicated and less understood dangers.

Barack Obama commented that

"we should not make the perfect the enemy of the good"

Which is a good soundbite. The trouble is that the truthful sentence should have been something like this: by scaling down the Copenhagen agreement we might manage not to make the barely-acceptable-already-far-too-late measure the enemy of the disastrous inaction.

Friday, 6 November 2009

The Honey Trap

(Notes from the Papuan Highlands, from about a year ago)


Imagine that globalisation had turned out differently. It had been not European cultures that somehow got spread and dominated the world, in fact created the ‘world’, but it would have come from the other end of the massive Eurasian continent. Imagine that Augustus, Kepler, Darwin, John von Neumann were actually Papuan highlanders, from New Guinea. Imagine that Papuan armies colonised much of the Globe, then turned them into subordinated states. Then left them, and coerced all into a global economic project.

Then imagine that some Papuan guys would have realised that there were tiny little parts of the world that are still left ‘untouched’. Say, a place called Oxford. Imagine then that they would set up a global institution that would aim to help the ‘poor’. A concept very much defined in their global, that is, Papuan culture and framework. Then imagine that this global help-the-poor organisation was to decide to elevate the people of Oxford from utter poverty. “You know, there 80% of the people are under the poverty line.” Thus a bunch of Papuan gals and guys would descend on the unsuspecting population of our land. What would we think?

In other words: who the hell are we even to attempt to provide a ‘strategic vision’ for the people of Papua?

The Western goodies, like metal axe, machetes, mobile phones, new crops, as well as the occasional electricity and satellite antenna connected television sets are as much a draw here as anywhere else. But, they are real honey traps. They come with the bible, with pressure to get ‘civilised’, dress up, as well as alcohol, drugs, and HIV.

And it is all internalised. “You know, our people here are very poor. They are still running around naked.” (Which in itself ignores the fact, that people here have never actually been naked, just had different, and often much smaller clothing items. But they can be beautiful and very sophisticated. These words are of course for our consumption only. What a dismal line of Westerners must have come before us!)



Five decades of being told off for their own heritage, as rich as any other in the world, and unique in every sense of the word, have led to a desperate attempt to assimilate. We have seen gold painted, enormous glass coffee tables with Roman motifs on them: huge pieces of inadequate furniture that had to be flown into the Highlands as there are no roads leading in. Wasting precious resources and flight space. We are fed melons, watermelons, rice, and chicken. Hardly indigenous food here. While not once have we been given sweet potatoes, the Highland staple. (On one occasion, our lunch, in the very middle of the Highlands was flown-in especially from the coast, in fast food like packets!) Most of the new buildings try to imitate western styles or other, wealthier parts of Indonesia. There is hardly any architectural reference among the housing of the well-to-do to the local heritage.

In other words, our cultural intrusion is screwing up a 45,000 year old society; or more precisely, a system of small societies. (There really are 253 languages for some 2.5 million people.) An now we will bring more roads, and ports, and airports, and a lot of hydro plants, and electrical grid, and water supply.

Which takes me back to a previous point. Who the hell are we to do this?

What is the justification for us to think about the “place of the Papuan society in the global economy”? Our intellectual toolbox is very much the product of the European cultures. Economics, is a western society-management engineering discipline, that is coming from, with its assumptions, questions-to-be-answered, and methodology, from West European socio-economic systems. Our values that we project onto the ‘objectives’ of economic development are themselves of European origin, even if in that case the net goes a little bit wider.

Opposed to that, the de facto European-in-origin global culture split from what is now Papuan Highlander, maybe around 40-50 millennia ago. There was no intermingling whatsoever until 1956.

I probably should have stayed at home, and let others do the destruction. In my value system, you don’t screw up others’ cultures. Unless you haven an excuse.

So I made up one: global impact community.

Thursday, 15 October 2009

Nature's Planetary Boundaries

A fantastic Nature page on Global Boundaries. The only missing item is the human society and global economics...

This Nature publication is a great overview of the boundaries that humanity should not cross, if it wants to ensure its survival. However, you can really not do this well, unless you deal with the nature of human society itself. You cannot treat the global society as being separate from the earth-systems. Albeit there certainly are plenty of special human phenomena that are so distant from the environmental issues that no linkage makes any sense (the financial crisis that we just have experienced is one of these), the relationship between the two is not unidirectional.

Economic inequality can create migration, for instance. Migration tends to create environmental pressures. These often manifest in chopping down forests, burning the wood, releasing the carbon from the peatsoil into the atmosphere, the collapse of local ecosystems. These in turn tend to worsen the economic conditions, especially in a development setting, generating more migration. -- In this example, where is the boundary? There is none, for the social and environmental dynamics are interconnected.

The need for a common approach is trivial. It seems, though, it is not happening fast enough.

Friday, 9 October 2009

Global Economics On Ecological Diversity

(Two notes on diversity.)

Note one. The we are making a mistake by focusing on carbon. Carbon is easy.

The claim that the carbon problem, or in general the problem of global warming, is easily solved might strike you as an odd statement if you are involved in the effort to curb the release of greenhouse gases into the atmosphere. Clearly, getting the global society to recognise the problem and act accordingly is very difficult. However it is difficult only because at the same time that we are trying to limit the total amount of greenhouse gases that are sent up into the air, the global society is also in the process of learning to think about global processes, and setting up institutions that could generate, implement, and enforce common, global action. Still, the problem of carbon, the phenomenon itself, is quite simple. At least in the short run, and that is where the focus is now.

Compared to that, there is another global problem, also of environmental nature, which is pressing, and harbours big dangers for us, humans. This one we could also do something about, but it is devilishly difficult to figure out what. In other words, not only getting our act together is problematic but also knowing what to do.

This problem is the threat to biodiversity.



What makes biodiversity so difficult a question has to do with two quite different reasons: the meaning of diversity is localised in specific ecosystems, and we know very little about it.

First, biodiversity, it seems from the outside at least, is really just a cover word, referring to there being a high level of variation in an ecological system. When you get down to the problem of actual ecological diversity in the Amazonas or in New Guinea or in the Congo, very different geographical conditions and evolutionary history would yield very different systems that have nothing to do with each other.

This is of course trivial, but my suspicion is that not only the species and the ecosystems in different parts of the world have nothing to do with each other, but also the problem of diversity is very different in its different particular manifestations. Models work in abstraction, but in practice you need to take the local reality into account. (This is not so different from the problem of economics, where we have some more or less well functioning models of an abstract economy, but anyone who tries to apply them to a new economy, plugging the data in, would not gain the first idea what that place was about. You really need to go there and dig yourself into the economy anthropologist-style to have any kind of meaningful insight.)

However, all these local ecosystems with their local manifestation of diversity make up the global ecological system, the Biosphere. A local collapse of ecosystems can devastate local human societies. So we suspect that a similar process on a global level may turn the Earth into an uninhabitable place, at least for humans. But we do not know. In other words, the local ecosystems may form a global ecosystem, but we know very little about how that global system works. Diversity probably has something to do with the stability of the Biosphere, but perhaps diversity is just a characteristic of a system, a measure, with a lot of different mechanisms behind it.

Second, we are so incredibly ignorant about the real diversity out there. This in itself would not necessarily pose an urgent problem, had our actions not resulted in a rapid destruction of this diversity. It seems that there is no other way to get ourselves together and stop those actions, than learning first about the variety of life, and also what it means. Yet while we are in the process of slowly convincing ourselves that preservation of wildlife, the halting of deforestation, or the protection of coral reefs are good ideas in general, we keep on doing the stuff that leads to the depletion of ecological systems in practice. It seems that the past 20 or so years of environmentalist activism has led to the more or less general acceptance that extinction is bad, yet we still focus on individual species and not on systemic effects, which we just do not know enough about.

One of the preparatory materials that I sought to acquire before going to West Papua was a list of endangered species. I could not get one. After having talked to a relatively large number of naturalists who work on western New Guinea, I realised that such a list did not exist (if you have it, please let me know). Even more of a shock was to learn how rudimentary our understanding is about the ecosystems of that part of the world. Not only do we have enormous gaps in our list of species, and can only suspect that there are many more than we know about, but our current description of all but a few species is extremely basic: a name, and some brief description about how it looks. (This was truly a shock. I was nurtured on the ethological approach, in which you think you know the behaviour of a species if you have annotated notes for 2000 hours of observation. An expectation that was combined with my experience with the developing countries I covered, where there was always a history to read first, all those fantastic museums to go to, and if you ran out of other options, you could always just ask them. Well, this luxury is not there if you’re into biodiversity.)

We know that the current rate of extinction, directly linked to human action at a very high probability, is comparable to the previous five big extinction events in the history of life on Earth in magnitude. Alarmingly, it seems that this one is also much faster. The ecological models suggest that a global level extinction event will have catastrophic consequences for the environment in which human societies exist.

So there is my first rant. We, as a global society are targeting the easy problem, by putting almost all our energy into carbon and global warming. In two months, we might even have a major step towards sorting it out -- which is / would be great. However, we have taken our eyes off the ball. The rapid loss of biodiversity is a much harder problem to crack. Not cutting down forests is probably a first step. But almost certainly learning about it, that is going out there and mapping what is out there, would be the most important and urgent move on our side.



Note two. On the narrow-mindedness of naturalists when it comes to the human society and cultural diversity.

There was a very particular phenomenon that I observed as I chatted about West Papua and its development problem with biologists. While the quest for a sustainable development pattern was the focus of every social scientist, all the biologists without exception had a suspicious side look at me as I told them that I was a World Bank hired development economist on a West Papua infrastructure mission. One question always followed: why don’t you just let them be as they are? Why do you have to go there and change their lives? Wouldn’t they obviously be better off without the kind of development you bring, and without their resources being exploited by foreign companies?

The first part of the answer is that these tribes have already been opened up. They have already started a path to globalisation and global integration, a path that is almost certainly irreversible.

But this is not the point I am trying to make here. Instead, it was striking how homogeneous the biologists’ approach to the economic development problem was. I realised that these researchers were so entrenched in studying and protecting ecological diversity that they did not understand cultural diversity. It seems, that ecologists see all human action, at least since the arrival of agricultural technologies, and definitely since industrialisation, as devastating for the environment. The best way to protect the forests from being felled, the fish stocks from being over-harvested, the coral reefs from being disturbed, is to let the people who have been coexisting with these ecosystems in relative balance for millennia just go on in the way they have always lived.

This is fine as long as you’re not talking about human beings. Unfortunately, unlike other animals, people invent technology. If it works, they adopt it. Then they learn it from one another and the technology spreads. The ecologists’ view of how the global society should treat indigenous people is not very different to that of building a reservation. I sometimes point this out suggesting that their approach is nothing short of a human zoo. The indignant naturalist at this point usually refers to the fact that these ancient cultures managed to survive for a very long time and thus have proven to be well-equipped with adequate technology without Western intervention; and claims that at any rate these tribes do not want to open up.

I was very much part of this paradigm before I had went to Papua. My poor wife, friends and relations can attest that I was harassing anybody who was willing to listen about the moral problem of us going there in the first place. Exactly the same set of questions were bugging me: why are we there and who are we to interfere with the Papuans’ future anyway. My preliminary answer to this question was also the same: let the Papuans decide. (I felt that that there was a caveat to this answer, for you cannot expect indigenous New Guinea Highlanders to be able to judge without the kind of global experience that you might want to shelter them from. But, I had decided that the mission was too interesting for me to miss for some lousy moral concerns…)

It didn’t take long to realise that this entire argument is false. The New Guinea Highlanders did not choose to live in closed cultures, in closed societies, but rather were forced to do so by their environment. As any anthropologist will attest, indigenous life in the rainforest is extremely tough. Add to this a 600 km long mountain range, much of it rising above 4000 meters. You do not have shoes, you do not have metal, you do not have pottery, you do not have much control over your environment, and -- worst of all -- your little family and group is surrounded by others who will kill you or harm you if they can. You may be living in a long-term balance with the forests, but it definitely is not the way you would prefer to do it. Unless you are a weirdo. (For my first lesson in in this, see a previous note on the pilot of the Nduga)

The trouble is that in abstraction, the ecological and cultural diversity problems are not that different. In practice, however, they often go against each other. Thus, we have another diversity problem on our hands, and this, the cultural one, is probably even more difficult than that of ecological diversity.

It seems to me, that we, social scientists, are increasingly aware that there is an ecological lesson to be learned. At the same time, naturalists still seem to have 19th century ideas about human society.

Thursday, 1 October 2009

Global Economics And Global Government

(Funny how an idea that looked so strange and impossible even a few years ago, is self evident now.)

A very odd thing is going on in the world. The rise of the global market led to unprecedented global flows of products and services, technology and capital, people and resources. International economics is giving way to global economics. It has become clear that there can be no national stability without taking into account global systemic risk. And there can be no - or at least little - national economic development without being integrated into the global economy. We are living, in other words, in a global socio-economic system with global stability risks, global environmental problems, and global resource constraints.

But we do not have a global government.

If we look back to the way we thought about the world even ten years ago, it is striking how much more global our problems have become. The economic crisis (arguably one of the two largest in the Western world ever, and probably the first truly global crisis) has highlighted the cost of not having a global financial regulatory framework. The panic and despair of policy-makers as they have tried to react to the meltdown has made us painfully aware of the necessity of a global economic policy framework.

At the same time - and independent of the crisis - economic inequality and the lack of a global cultural framework bring serious instability issues.



And if that was not enough, the world, or to be more precise the global society, is learning how to live with an ecological system that has run out of buffers. The climate is warming as a direct effect of human action, the Earth is going through its sixth major extinction period (and all signs show that this is also the fastest), fish stocks are almost certain to collapse in the foreseeable future as a consequence of overfishing, and our short-termist exploitation of resources is set to make a large part of the global population destitute in the coming decades.

To top it all, the threat of nuclear proliferation has returned, a situation which is certain to worsen thanks to easier access to technology and a renewed interest in nuclear power, both of which we otherwise see as positive developments.

Imagine that the above list of functions and problems was not about the global society and the global economy or the biosphere or the global climate, but were characteristics of just one country. It would be obvious that this country needed country-level rules to prevent financial meltdown. It would need institutions able to manage the economy and solutions that would ensure internal systemic stability, whilst preventing self-destructive, unnecessary weapons from spreading. We have known for quite some time now that there is no other solution to the tragedy of commons problem than a communally accepted and enforced set of rules. These are all government functions. Obviously.

The funny thing is, that the above reasoning is a technocratic argument and not a political one. There is no need for any other values than the value of human survival and common sense (in economics terms, a not very high discount rate of the future, and a minimum efficiency requirement when managing socio-economic systems). There are no other norms at play here. It should not matter whether you are socialist, conservative, or liberal, or any other flavour, as long as you agree on the value of human survival and common sense. And, apart from some fringe movements, these values are rarely questioned. The rest should be straightforward.

But it is not.

The global society is now learning to think hard about itself. Our record in creating knowledge about our global self is not bad at all. Global climate models were extremely rudimentary 20 years ago, and did not exist 40 years ago. Global economics was still international economics five years ago, and there were no global economic models whatsoever 30 years before that. Even a few decades back we did not understand the first thing about ecological systems or the role of human societies in them.

The trouble is that we are not learning fast enough. We understand short-term climate change well, but our understanding of the long-term climatic cycles is very limited. Thus we know that it is getting warmer but not compared to what. We have unprecedented quality and quantity of economic data collected in publicly available data sets, combined with computing capacity that we only dreamt about a few years back. Still our economic models can predict the behaviour of the global economy only a few months or perhaps a year ahead, at the best of times. Worst of all, although we increasingly understand the fragility of the ecological systems that we are part of, our understanding of the details and thus our ability to intervene is extremely limited.

We need some serious thinking about the global socio-economic and ecological system, and we need to get down to building those global institutions earlier than later.

Tuesday, 15 September 2009

Global Policy Options Open Up Again

(Two boats, a lot of waves, and one Mount Fuji)

There’s a new law of global economics: the deeper you are in a crisis, the emptier the policy tool box becomes. And the emptier the policy toolbox is, the more similar the measures become in practice. (Global economics starts its life in a very odd way…)

Before the credit crunch, we all thought that monetary policy was rapidly converging towards flexible exchange rate based inflation targeting, while fiscal policy keeps being all around the place. The size of the state relative to the economy, the structure of the tax system, the principles governing the government’s actions, as well as the source of legitimacy and relationship with the population, all varied tremendously. It was not only that the mature economies were following very different paths, the US and Sweden being the two different poles, but also emerging markets started to display a very varied set of behaviour. The logic of high resource revenue - weak manufacturing wealthy emerging markets is drastically different from the logic of manufacturing export-based rapid structural change countries, or even from the logic of commodity exporting but poor economies. The world of the mid-2000‘s was dominated by monetary policy convergence and fiscal policy divergence.

This picture changed dramatically a year ago. As the monetary transmission mechanism disappeared, suddenly central banks were at a loss, and governments found themselves in shock, imagining the picture of total collapse. And there came the surprise: there was more homogeneity among the panic policies than any time during the past two decades. As the world economy was nosediving towards the abyss, the fiscal solutions employed around the world were all being read from the same book. In the course of the past two years, for example, the average budget deficit of the advanced economies shrunk from -0.5% to the the staggering -4.5%. As a consequence, the average OECD gross debt per GDP measure, for instance, is jumping 26 percentage points to 100% between 2007 and 2010.

Which is funny, for probably, the way governments started to spend as well as the magnitude of the fiscal stimuli was far from optimal. However, wanting to appear as proactive during the crisis, most governments ended up doing the same as others, and against their best protectionist wishes they ended up providing the world economy with a decent fiscal push. As an example, the total increase in budget deficit of the advanced economies (using the IMF’s categorisation), amounts to 5.2 percent of the global GDP. Add to these the gigantic government boost in a host of emerging markets, China, India, Brazil being the prime examples.

Curiously enough, now that the recovery seems to be under way, the policy space seems to be opening up again. Some of the badly hit countries, like Japan (expected to reach 197% in 2010 from 172% in 2008), Italy (to 127% from 112%) or Hungary (to 82% from 73%) were already in a tight spot, while Iceland (to 62% from 34%) or the UK (to 91% from 54%) or Ukraine (to 35% from 20%) had started off from relatively good debt positions (although the premia varies tremendously of course). Clearly, some will find it easier to restart their economies than others.


The variation in the upcoming fiscal constraints does not stop with countries in trouble. While Germany and France already see the signs of recovery, they are way out of the Maastricht bounds, and thus they will have to combine the management of slow recovery (and possibly a jobless one, see previous posts on jobless recovery and the role of technology dynamics in jobless recovery) with getting back into the limits they never supposed to have left. Compare that to Sweden’s 46.6% that was virtually unchanged from 44% in 2008, which -- combined with the fact that they reduced it from 80%, where it was a decade earlier -- shows real discipline. (Or take the Czechs, Denmark, Finland, all expected to be under 40% in 2010.) -- Check out the OECD's "Beyond the crisis" report.

The consequence of this might shape the global economy’s dynamics the post-crisis years. We might find that the combination of the new primacy of fiscal policy and the variation of fiscal capacities might have a long-lasting effect. If the 2000’s can be taken as an indication, the next decade we’ll see new global structures emerging, and activist governments might just give a crucial competitive edge.

Thursday, 10 September 2009

Reinventing the BRICs Amidst The Global Recovery

The silly talk is returning about emerging markets as the global economy is turning into a full-blown recovery mode. In particular, there is a renewed hype about the non-existent group formed by Brazil, Russia, India and China: the BRICs.

The reality is that the term BRICs has never made sense in either the International macroeconomics, or the global economics framework. For much of the 1980’s and 1990’s, emerging markets formed a marginalised asset class. Although global finance was itself materialising, most of the action took place in the mature economies, while the developing nations with their backward economies and underdeveloped financial markets entered the headlines only in times of crisis. When in 2001 Goldman Sachs started to use the term BRIC, it was a mere shorthand for the four largest emerging markets that could not be ignored any more. (See how the future of the BRICs was imagined in 2003. Or read the Goldman Sachs 2007 book 'BRICs and Beyond', which is a good book, apart from using the obsolete national economies framework -- it is also a brill reminder how rosy the pre-crisis outlook was. We are rapidly returning to the same dreams and myth now...)

However, apart from size, there never was much commonality among the BRICs. Russia and Brazil are commodity exporters. India, and especially China are commodity importers. China and Brazil are becoming important manufacturing bases of the world economy, and India a specialty exporter. In opposition to these, Russia has no manufacturing exports of importance whatsoever, almost all of its domestic dynamics is based on the raw material revenues the country is collecting. Brazil and India are full-blown democracies, Russia and China less so. India and Brazil have sheltered capital markets, unlike the wild waters of China and Russia. Furthermore, the term BRIC has never really taken off as an analytical notion, and stayed merely as an investment banking sales concept only. And, all attempts by the four governments to harmonise any of their international stances yielded empty rhetoric, no real action (see for instance the official BRIC summit website).



The height of the BRICs hype came in the middle of the credit crunch, when people had started to argue -- notably people who were not emerging market experts -- that the crisis will decouple the largest developing economies from the mature economies. This is based on the observation that while in 1992 only 5% of the global GDP was produced by these four countries, their combined share grew to 15% by 2008. In this process, they achieved breakneck growth speeds, and one could easily imagine how a small dip in their growth would still leave enough momentum to provide an effective demand a bridge during the crisis of the developed economies. A dream, as it turned out.

(The funny thing is that for most emerging market analyst crowd this argument never really made sense. The origin of the difference in the emerging market decoupling expectations might be in the difference of experience emerging economies had compared to the mature one. While the history of the developed economies, at least post-war, is mostly about the rise of their domestic demand followed by their opening up, the history of the emerging economies is more about external dynamics. In the case of the former, structural change tended to originate in processes generated by entities at home. In the case of the latter, almost without exception, the source of the change has always been outside the country. For the Asian tigers, it was Japan, then the US, then the world economy. For the resource rich developing countries, e.g., South Africa, or the Gulf, or Central Asia, it was the global demand for raw materials. For Central European transition economies, it was the West European economic dynamics. The point is that although the rise in exports tended to generate “rapid structural change”, which in turn creates domestic demand, it is a long time down the line of the development before their domestic dynamics takes over the export engine. Supporting this, the experience has always been that at the time of crisis not only exports fall, but so does the previously genuine domestic demand looking stuff as well.)

Thus there is no reason to group these four countries together now any more than before the crisis. However …

The mid 2000‘s, the category of emerging markets had been falling apart, giving space to a completely new grouping of developing economies. However, as the global economy was melting down, emerging markets started to behave like coherent group again. While, their rise was differentiated, they are plunged was synchronised. We were back to the old world.

Yet, now they are coming out of the ditch, and some are rising more unscathed than others. Early calculations even suggests that unlike the BRIC’s, there are some emerging markets that did even contribute to the global recovery. Indonesia and Turkey might be two candidates for this role. (But it is far too early, as the data for the summer is not out yet.) The pecking order, to say the least, has changed. If there is going to be a table at which the new global regulatory framework, or even a currency framework, will be set, some emerging markets will want to have a seat there. And it will be the large ones and the healthy ones only to have a chance to get it. (Ukraine, Hungary, Argentina need not apply.) And thus, even if neither the old term BRIC, nor its new versions would make any more analytical sense than any time before, a global politics shorthand to the new guys at the table might be handy.

If so, we surely have some better name for them than the one that sounds like the “rectangular-shaped, heavy clay object”.

Tuesday, 8 September 2009

Global Economics’ Disappointment In Barack Obama


Once upon a time there lived a very very large dragon. This beast was the scariest of all creatures ever lived. It was taller than a house, and its mouth was big enough to gobble down six little children at once. Its teeth? Oh those giant, yellow teeth were the largest, sharpest, spikiest in the whole wide world. There were all kinds of princes, kinglets, knights, and quite a few of the smallest and cleverest sons of men with agricultural occupations trying to fight off the fearsome dragon. But to no avail. The world was getting darker by the day. Even some very brave princesses had a go at the beast, but they failed too. Everyone who had gone up to the firebreathing basilisk, either got a bit burned and went home, or died the most horrifying of deaths, deep in the dark lair of the monster.

There was only one who could stop it.

But he didn’t.

And that’s the end of the story. Goodnight.


Obama is disappointing the global economics crowd again. As the crisis went into full swing around a year ago, the global nature of the meltdown became undeniable. "Sweeping global actions needed", went the empty words at every summit. But, there was a problem. The global policy that could have dealt with the root causes of the crisis and stopped the spiral would have required more than just a few one-off actions. Rather, a lasting institutional framework on the global level with powers to set, implement, and enforce policy would have been needed. However, there were no political leaders that could’ve led the transformational action. The US was amidst its presidential election, and unlike Clinton eight years earlier, the Bush administration lacked the global clout, as well as the will to rise to the challenge. The new Obama administration was, obviously, nowhere in sight. After its lost decade, Japan was not in shape, either. And the Chinese government was still well before its change of tack with regard to global institutions. The most likely candidate alternative to the US, the EU, failed yet again to come up with a common idea about what to do with the global economy, or even to put forward one person to represent it on the world scene.

Granted, the leadership should have been intellectual as much as political. Despite the pretence of the macro economics profession, neither analysts, nor policymakers had the first idea about what was going on.

This blog has argued the need for theoretical innovation: a new global economics. The main argument against it was that you should not use untested theories for policy-making. (Which is rather funny in retrospect having seen the random policy “innovation” to which politicians turned in their utter panic.) In any case, the global economics policy argument in its current form is not necessarily pushing for a new theory, rather the recognition that the subject matter of our research, as well as, our policy problem has moved from the national level to the global level. Thus, we end up with the same conclusion: irrespective of whether the world economy will end up being modelled in an international macroeconomics framework, or a new global economics framework, the rise of global economic policy institutions is inevitable.

Barack Obama, as the new president of the US, came to power with unprecedented global political capital. Not only was he seen as a possible, legitimate leader for the entire world, but the Bush administration’s policies, as well as the failure of the governments of the developed economies to stop the crisis, had left a political vacuum. Obama was seen as the only one who could become the leader the global economy needed. He combined credibility and trust, the hope of a fresh start, and the power to act.

It is unfortunate, at least from a global economics point of view, that he did not use this opportunity. His domestic economic policy hardly contains any new vision, most of it is a mix of traditional economics and policy solutions already tested in other countries, mostly Europe. And his global economic policy … Well, there is none.

Just as we did not understand what was really happening as the global economy was spiralling into recession, we do not understand how it is coming out now. If it is coming out, at all. But assuming that recovery is on the way, it is nothing but the lucky, unplanned, undesigned outcome of a set of spur of the moment, short-termist policy actions. Bar another stroke of luck, the next crisis will bring much scarier pictures than those we have seen this time. History, I fear, will be harsh on Barack Obama.

Monday, 7 September 2009

G20 In Yet Another Fake Action

Is that very funny how the G20 is doing it again? As the crisis unfolded, some 'out of line' people suggested that banks should perhaps be treated as utilities. They were wiped off the table. Now, that it is becoming clear that the largest economies of the world will again fail to harmonise real policy action, they are pledging to clamp down on the banks together instead. The previously marginalised view of regarding banking services as utilities is returning via plans to increase capital requirements. Banks will be asked to put down more money to back their actions.

The trouble with all of this, is that there is no distinction being made between banking services that aims at the domestic market and banking services that are essentially international in nature: global financial hubs. While there is merit to the idea that domestic economy focused banking provides general services not dissimilar to some characteristics of utilities, it would not be too difficult proposition to defend that the regulations around that part of the industry were in most countries in not too bad shape. Arguably, the US and the UK perhaps were exceptions, but their troubles would not have necessarily translated into a global recession. It was the second form of banking, namely that with global coverage and global reach, that caused the negative spiral. There is no reason for us to believe that this bit of finance has anything to do with being a utility. (Perhaps far in the future, this may change, but it is definitely not the case now.)

It seems, another opportunity is being missed.

Thursday, 30 July 2009

Discriminating Against Women in the Job Market

(off global economics)

At the apropos of an FT article about the small rise of the gender pay gap in Britain, I thought I would share an anecdote.

After my years in Cambridge I took a gap year from academia, which turned out to be a gap decade. I was running a smallish research consultancy, seated in Hungary, but covering the macroeconomics and fixed income markets of many emerging markets. Our main client and almost all our smaller clients were in Western Europe. The size of the unit, at its peak, was 25 people. All our admin personnel were local Hungarians, but the analysts were not, we always tried to hire people from countries that we were covering. That gave me an insight into both how the labour market works in a host of emerging markets, but also the kind of decisions an entrepreneur has to face.

One of these was about discrimination.

We tried to be an equal opportunities employer. It so happened that as the research team grew it was entirely made up of white men. The two admin personnel were women, and the IT guys were, well, guys. Very traditional indeed. So, at one point, I thought that we should do something about this. We tried to hunt down a Roma analyst, but the market was illiquid, to say the least. We also decided to hire a female analyst. At the time, we were looking for someone from Turkey, and thus we advertised an analyst position in the Turkish media. We had a lot of applications, but all of them were men. Damn it! After some internal debates, we re-ran the ads, but with the line added that women are especially encouraged to apply. Now we got fewer applications, but all of them were women… (This probably is telling about Turkey as well…) We hired a well qualified woman, a really nice person.

But the story does not end there. In our business, our human resources model was that we were aiming at young macroeconomists or finance professionals who had a couple of years of work experience. Then we’d train them in-house, which was mostly on the job training. We had a rule of thumb that a new analyst would take one and a half years on average to become a fully functional, ‘useful’ part of the team. That took a lot of investment, and obviously only made sense if then our colleague would stay on after that period (which most of them did). Except that the nice Turkish lady started to try to get pregnant right after having moved to Budapest with her, also rather nice, husband. We discussed this, she was forthright about it, and Liz and I gave her advice (we just had our first baby a bit before) with regards to doctors and hospitals. It was all fair and fine.

Except for the fact that at the same time, our small company was pouring resources into her. Her, as an analyst. There was no way that we would ‘punish’ her for having a baby by not teaching her. But she ended up having a complicated pregnancy, and was away a lot from her job. And, after the baby was born, she decided to be with the baby a lot, and not to follow up on the previous plans of becoming a professional investment banking analyst. In other words, she made a set of personal choices: getting pregnant, long absence after the birth, and eventual departure from the career path, coupled by some uncertainty linked to her medical difficulties linked to the pregnancy. All of these were her decisions, and all of these bore costs for our research company. Part of the cost was personal: we had to fill in for the unexpected time she was not there, and thus some of us had to cut down on our holidays. One analyst, and good friend, in particular did not have a summer holiday that year, at all, as a direct consequence. Furthermore, her costs both in terms of her wage, taxes, the relevant overhead, and the time we had spent on teaching her were all lost, as well as the search cost that we had spent on a replacement. In a small company this is a lot. There was considerable amount of tension. We did hire an other female analyst from Turkey afterwards, but only because we could not live with the idea of not doing so. We knew however, that if she was to become pregnant too, our company would be in serious trouble.

I have recounted this story here to highlight an issue that is a taboo when talking about the pay gap. We like the fact that women can chose if and when they have babies. We also like the idea of equal pay. The two are in contradiction, and the cost of this contradiction is being forced onto the companies by our societies. In our story above everybody was a nice person, and all of them I count as my friends still now, six years later. But I cannot deny the fact that it would have made business sense to either hire a man for the same cost, or hire a women at a lower cost instead.

Most of my friends would throw hard objects at me at this point…

There are two observations on top of this. One. Obviously, there will be substantial variation among sectors. Some of this will come from economic rationality along the lines we faced, that is, long on-the-job training period of employees, and some along plain misogyny. One would expect that there would be sectors typically female or male due to economic reasons, and others due to ‘tradition’. When the society forces every employer, in every sector to offer exactly the same conditions for young men and young women, it may effectively counter some prejudices, but may, at the same time, force some good guys and gals into an awfully tricky situation.

Two. Perhaps part of the problem is that the feminist movement that highlighted the gender gap issues tends to have an ideological, political agenda. It seems that it is all too tempting for some proponents of the women’s issues to pour an anti-capitalist, anti-market sauce on labour market discrimination. However, unfortunately, this might weaken rather than strengthen the attack.

A solution suggested. I would think that there are two real questions here. First: who should pay for the kids, and second, how to reduce the cost of the inevitable uncertainty, by insuring the risk.

The current solution seems to be partial cost sharing, and coverage of a part of the risk. In the developed world, it does not make economic sense for the individual to give birth to babies, a marked departure from the past. Therefore, some of the cost is being born by the ‘pleasure parents’ who enjoy having kids. Some cost is being covered by the society, by providing education, playgrounds, healthcare, etc., when it does. There is a host of arguments why it may make sense for the society to invest into the future generation. But some costs fall on the employers. They do not get anything in return. Thus they discriminate. Once there are laws against discrimination, I suspect that there will be silent discrimination. The kind of pay-gap that we see, perhaps. (By the way, it is interesting that the gender pay-gap rises during a recession, perhaps a signal that the policy, at least in its current form, is a societal luxury.)

I would think that an insurance scheme to which everybody contributes up until the end of fertility (mid 40’s), or pension age (if you want to take into account that men have a longer period of fertility), which then compensates the companies once their employees go on a maternity or paternity leave, and then which gives a return of funds to those who did not have kids, would be a much fairer system. Companies would not feel an economic need to discriminate, thus real prejudice-based discrimination could be outed, and people who opted (or were unfortunate enough) not to have kids would not have to pay for them. If the society wanted to ensure future generations, then the investment into public education, health care, and child care in general should be increased (by the way, that is the model that seems to have worked for the Scandinavian countries).

You might think that this solution would essentially punish people for having children. You are right, in a way. It is a personal choice with cost consequences, and as long as I should have a control over it, I should pay for it. If you think that this is silly for then people will not have any kids, then your worry is probably about the future generations, and thus a societal function. You can solve this by increasing the state investment into kids.

However, for this, or any other solution to the opposing values of equal opportunity, personal liberty, and social fairness, to work, one needs to accept that the problem is much more complicated than just traditional prejudice lingering on. And talking about it should be a taboo no longer.