Economic Consulting | Sudesh Kumar Group -

Economics of the Blonde Women

2010-04-04T12:49:00.001-07:00

Blonde-haired women, who are often stereotyped as carefree and ditsy, earn seven per cent more than women with hair of other colours, researchers claim.

And in addition to their preferential pay packets blondes also marry wealthier men, who earn an average of six per cent more than the husbands of other women.

A study in the journal Economics Letters reported that having blonde hair boosts pay by £1,600 a year for a woman earning £22,000 a year – the average salary in Britain.

Researchers at the University of Queensland, who surveyed 13,000 women, said that the difference in pay remained the same even when other factors such as height, weight and education were removed.

They could not explain why blonde-haired women enjoy more financial success, but said no other hair colour produced similar results.

Dr David Johnston, who led the study, said: "Blonde women are often depicted as being more attractive than other women, but also less intelligent.

"But it seems the association between blondes and beauty dominates any perception that they have low intelligence.

"This could explain why the 'blondeness effect' is evident in the marriage market."

Olga Uskova, president of the International Blondes Association, told the Mail on Sunday: "Blondes have wealthier husbands because we are more fun and outgoing, and men are more attracted to us.

"We also do better in the workplace because when we make a mistake we can say, 'Oh, sorry about that, it's because I'm blonde' and get away with it."

Sourced: telegraph.co.uk / 04 Apr 2010

Sudesh Kumar

sudesh.kumar@economics.org.in

Who says you can’t buy friends?

2009-09-07T21:39:00.001-07:00

An Australian online marketing company is selling friends and fans to Facebook members after offering a similar service to Twitter users.

Advertising, marketing and promoting company uSocial said it was targeting social networking sites because of their huge advertising potential. "Facebook is an extremely effective marketing tool," Leon Hill, uSocial CEO, said in a statement.

"The simple fact is that with a large following on Facebook, you have an instant and targeted group of people you can contact and promote whatever it is you want to promote," he added. "The only problem is that it can be extremely difficult to achieve such a following, which is where we come in."

The company offers packages for Facebook, the world's number one social networking site, that start at 1,000 friends up to 10,000 friends at costs ranging from $177 to $1,167.

"All we do is send them a welcome message or friend request from the client. If they decide to go ahead and add that person as a friend or a fan then they will; if not, then they won't," Hill told Australian media.

Facebook is now the world's fourth-most visited website. The company, which counts venture capitalist Peter Thiel, Accel Partners, Microsoft Corp and Russian Internet investment firm Digital Sky Technologies among its investors, has more than 250 million registered users.

But uSocial's packages are not without controversy. According to some Australian websites, Twitter tried to shut uSocial down, accusing it of spamming members, while the Los Angeles Times reported that Digg has also tried to shut down uSocial because it sells votes.

Marginal Revolution

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Sudesh Kumar
sudesh.kumar@economics.org.in

International Economics: World Recession and Recovery

2009-04-15T12:39:00.001-07:00

By Michael Mussa

The world economy collapsed into steep recession in the final quarter of 2008 with global
real GDP dropping at a 6 percent annual rate. This was undoubtedly the sharpest decline in
world output and especially in world industrial production and world trade of the postwar
era, with virtually all countries participating in the downturn and many registering record
quarterly declines in real GDP.

Incoming data indicate that the global economic contraction continued through the
first quarter of 2009, although perhaps at a somewhat slower pace than the preceding
quarter. Downward momentum will likely continue at least through the spring. A number of
forecasters and pundits foresee a global recession lasting through this year and perhaps well
into 2010. However long the recession may last, the common expectation is that the
recovery will be quite sluggish—the forecast of an L-shaped global recession and recovery.
Despite a huge write-down in my global growth forecast from last September, I am
more optimistic. Aided by substantial policy stimulus, growth in the Chinese economy
should begin to accelerate in the first half of 2009 and the US recession should bottom out
around mid-year with recovery accelerating to about a 4 percent annual rate by the fourth
quarter. Recoveries in other countries will likely lag a little behind those in China and the
United States. But, aided by a bounce-back in global trade from its recent extraordinarily
sharp decline, the world economy generally will be in recovery by year-end. Then we will
observe, as we have many times before, the Zarnowitz rule: Deep recessions are almost
always followed by steep recoveries.

Before this recovery starts the world recession will become the deepest of the
postwar era, with global real GDP falling about three-quarters of one percent on a year-over-
year basis—the first significant decline of world real GDP in six decades. Output declines in
the advanced economies (the traditional industrial countries plus Hong Kong, Israel,
Singapore, South Korea, and Taiwan) will average 3 percent. Many emerging-market and
developing countries, notably those in Central and Eastern Europe, will also see their real
GDPs fall, but significantly positive year-over-year growth in China, India, and some other
countries will keep growth for this broad and diverse group at about 1½ percent plus.
For 2010, global growth is projected to strengthen to 3.7 percent—a sharp rise from
the preceding year but still somewhat below the potential global growth rate of about 4
percent. For the advanced economies, growth is expected to bounce back to 3 percent—
enough to begin to narrow the margins of slack that developed during the recession. For
emerging-market and developing countries, growth in 2010 is expected to rise to 4.7 percent,
on its way back up to a potential growth rate above 6 percent.

At the world level, consumer price inflation peaked in the summer of 2008 with 12-
month rates reaching 6 percent. By the fourth quarter, sharp falls in commodity prices
(notably oil prices) took monthly measures of overall consumer price inflation negative and
brought 12-month rates down to 4 percent. Disinflation continues and it now appears likely
that 12-month rates for consumer price inflation will get down to 1 percent or less during
2009. Core rates of consumer price inflation did not rise as high as overall rates during the
upsurge from 2003 to mid-2008, and their decline in the past nine months has been less
spectacular. At the world level, core consumer price inflation appears likely to decline to
about 1½ percent this year. While the details differ across countries, the general decline in
both overall and core rates of inflation since mid-2008 is a universal phenomenon.
Prices of several commodities have already strengthened from their lows of last
autumn and winter, with world oil prices rising from lows of about $30 per barrel to around
$50 per barrel. If global recovery proceeds as envisioned in this forecast, world commodity
prices should be expected to strengthen further over coming quarters, and this will add a
little upward impetus to overall rates of consumer price inflation. With considerable slack
now existing in the capacity to supply many commodities (including oil), however, a
resurgence of commodity prices and general inflation rates to near their recent peaks is
unlikely anytime soon.

Accordingly, monetary policy in most countries will be able to maintain, through
2009 at least, a stance of aggressive ease in order to combat recession and promote recovery.
With margins of slack likely to remain substantial, relatively easy stances of monetary policies
are likely to be appropriate for some time. Monetary policy, however, needs to be forward
looking about threats of rising inflation. Hence, once recovery is solidly under way during
2010, monetary authorities will need to consider dialing back on extreme measures of
monetary easing in order to prepare the way for eventual moves to more neutral monetary
policies.

The present forecast envisions a world recession that is somewhat shallower and
shorter than many other forecasts. More controversially, it envisions a V-shaped recovery
that is considerably more vigorous than commonly thought to be likely. This is especially the
case for the present forecast for the US economy, where the forecast for the real GDP this
year (a decline of 2 percent) is toward the top of most forecasts and where the forecast for
2010 is a little above the top of the range of the 50-some forecasts reported by Blue Chip. In
this paper I explain the reasons for this relative optimism concerning the US economy.
Before that, I turn to some brief observations on the causes of the present global recession
and on economic performance and prospects for the rest of the world.

Causes of the Present World Recession

The standard story of the present global recession and financial crisis emphasizes the
centrality of developments in the United States—especially the expansion and subsequent
collapse of the real estate and real estate financing bubble and its impact on an overleveraged
US and global financial system. Others point more broadly to persistently easy monetary
policies, very low interest rates and interest rate spreads, and general disregard of growing
risks in the financial system as key causes. Some, especially among present and former US
officials, point to the "global savings glut," particularly the part emanating from China's
massive current account surpluses and reserve accumulation, as a key underlying cause of
present travails.

All of these explanations harbor a degree of truth, especially the first two. However,
to understand both the sudden sharp deepening of the global recession and financial crisis
last autumn and the reasons to anticipate recovery, it is important to look to a broader set of
causes of present difficulties.

While it seems like a distant memory, it is important to recall that from mid-2003
through early 2008, the world economy enjoyed a boom of broad scope and exceptional
vigor, with average annual growth of global GDP approaching 5 percent and with virtually
all countries participating in the boom. As reflected in a deteriorating balance of real net
exports, through the end of 2005, growth of domestic demand in the US economy in excess
of US real GDP growth contributed to the boom in output in the rest of the world. The
upsurge in residential investment in the United States and the impact of increasing
household net worth from rising home and equity prices on US consumption contributed to
this phenomenon. In 2006 residential investment turned downward, and growth of US
domestic demand slowed. With the aid of a weakened dollar, US real net exports began to
improve. Indeed, from the end of 2005 through mid-2008, the improvement in US real net
exports slightly more than offset a very large decline in real residential investment. This kept
US real GDP growing, albeit at a reduced pace, despite a considerable slowdown in real
domestic demand growth. Thus, the rest of the world helped to cushion the slowdown in the
United States.

This was fortunate from the perspective of the rest of the world as well. Rising
inflation, not weak output growth, was the key macroeconomic problem for the rest of the
world. This is evident both in the actual rise of inflation and in the fact that many countries
were tightening their policies in order to combat rising inflation. Indeed policy tightening
was undertaken in virtually all industrial countries, except the United States, until the
summer of 2008, and many emerging-market countries (notably China, India, and Brazil)
were also tightening their policies. From their perspective, the slowdown of demand growth
in the United States and the improving US real trade balance were helping in the battle
against inflation.

The stress and turbulence that began to develop in world financial markets in early
2007—linked to worries about US subprime mortgages and complex financial instruments
based on such mortgages—was not such a mutually beneficial development. The deepening
of these troubles in August 2007 was similarly unwelcome. The United States was clearly a
key source of these difficulties, but it was not the exclusive source. The United Kingdom
had its own problems related to mortgages as reflected in the need to nationalize Northern
Rock. Difficulties with mortgage finance in Ireland and Spain also had domestic origins.
And, for those financial institutions whose problems stemmed largely from assets based on
US mortgages, it is noteworthy that they purchased these assets of their own free will.
During 2008, stress in world financial markets deepened and broadened, led by
developments in the United States. The near failure and emergency rescue of Bear Stearns in
mid-March increased concerns about wider classes of assets and financial institutions.
Deteriorating conditions in markets for mortgages and related financial instruments induced
the US government to take over Fannie Mae and Freddie Mac. In mid-September, the
outright failure of Lehman Brothers and emergency rescue of AIG (or, more accurately, of
AIG's counterparties) began an unprecedented disruption of world credit markets.
This extreme disruption of key credit markets in the United States and worldwide
continued through October and into November and only partially abated by year-end. The
negative impact on economic activity and on trade was severe and virtually immediate. This
explains at least an important part of the sudden economic collapse in the final quarter of
2008 and the first quarter of 2009.

The source of the extreme stress in financial markets was not exclusively in the
United States. Severe problems in the banks of Britain (especially the Royal Bank of Scotland
and Lloyds), Ireland, Belgium, the Netherlands, and tiny Iceland were primarily of their own
making. Despite their generally sound management, Spanish banks faced difficulties linked
to the inevitable collapse of the domestic housing boom. Other Western European banks
were vulnerable because of overleveraging and due to their excessive exposure to affiliates in
Central and Eastern Europe.

Beyond the stress in financial markets, the world economy also suffered important
negative shocks late last year from several other sources. The upsurge in world commodity
prices, especially in world oil prices to $147 per barrel in July 2008, was a significant negative
shock to users of these commodities. This shock was clearly not the consequence of
financial stress, in the United States or elsewhere; but allowing for a slight lag, its economic
impact hit at the same time as extreme credit market turbulence. More recently, the collapse
of many commodity prices has clearly begun to undermine growth in exporting countries.
Policies to combat rising inflation undertaken through mid-2008 probably also operated with
somewhat of a lag, reinforcing the downturn in the world economy in late 2008 and early
2009. The slowdown in China's growth late last year probably owes more to the earlier
tightening of Chinese policies and the wind-down from the Beijing Olympics than to global
financial turmoil, and the Chinese economic slowdown has affected its trading partners
especially in Asia. Other emerging-market countries that earlier had tightened their policies,
including India and Brazil, found the effects inconvenient by year-end. The slowdown in the
euro area during the second and third quarters of last year was at least partly the
consequence of policy tightening to combat inflation. By the fourth quarter, this effect was
adding unexpectedly and undesirably to a precipitous decline in output. In the United States,
the 2008 tax cuts provided a modest boost to demand in the second and third quarters, but
the wearing off of this effect added to the pace of decline in the fourth quarter. In sum, the
extremely sharp declines in global economic activity and world trade in late 2008 and early
this year reflect several important negative shocks, with the stress and turbulence in world
financial markets playing the leading role.

Other Advanced Economies

The other advanced economies are all in recession, with year-over-year declines in real GDP
for 2009 forecast to range from about 1 percent for Norway to 5 percent for Japan and 6
percent or more for Hong Kong, Singapore, South Korea, and Taiwan. The particularly
steep output losses for these Asian countries all reflect severe collapses of exports that are
already in the data for the fourth quarter of 2008 and initial data for 2009. Domestic
demand, especially investment, may be expected to weaken further in the light of very weak
exports, but I do not expect the decline in exports to become much worse. Rather, I believe
that we have seen a very severe one-time disruption of world trade that has overshot to the
downside and will be partly reversed during 2009 as growth picks up in China and the
United States. Reflecting my relative optimism, these forecasts for the advanced economies
of Asia (including Australia and New Zealand) are above most other forecasts. For 2010,
substantial positive growth in the advanced Asian economies is likely on the back of more
vibrant expansion of world trade.

Growth of 2 percent for Japan, 4½ percent for the newly industrialized Asian economies,

and 2½ percent for Australia/New Zealand are a reasonable prospect.

In Western Europe, the recession is likely to last a little longer than in the United
States, and real GDP is forecast to decline by 2½ percent for 2009. Reflecting the relatively
high importance of both manufacturing and exports for Germany, real GDP is forecast to
decline by 3 percent this year, while the output decline for France is likely to be closer to 2
percent. Italy is suffering from very weak domestic demand, as well as severe problems with
exports, and has little room for discretionary fiscal expansion. An output drop of about 3
percent this year is likely. In Britain, output is also likely to fall about 3 percent. This reflects
the negative impacts of problems in housing and in the very important financial services
industry. British manufacturing should get somewhat of a boost from the depreciation of
sterling, especially against the euro, but this impact is likely to be felt more in 2010 than this
year. For Spain, the long-anticipated retrenchment of residential investment, along with
more general weakness in domestic demand, implies about a 3 percent output decline this
year. Most of the smaller Western Eur opean countries are likely to see declines in real GDP
in the neighborhood of 2 percent.

Economic policy in Western Europe is working to limit the recession and promote
recovery, but the combined effect of monetary and fiscal policy is likely to be significantly
less than in the United States. This lack of fully equivalent policy response r eflects both a
somewhat less dire economic situation and a tendency toward less active use of discretionary
policy in the euro area than in the United States. On the first score, it is noteworthy that in
the euro area, the increase in the unemployment rate through February 2009 from the low
reached in the recent expansion (which was itself about ½ percentage point below the low in
the previous expansion) is only 1 percent, versus a 3.7 percentage point increase in the US
unemployment rate through February from its low of 4.4 percent in the recent expansion.
There is presently a good deal more slack in the United States than in the euro area, and this
is still likely to be the case a year from now despite the forecast of slightly more output
decline in the euro area than in the United States for 2009.

On the second score, monetary policy makers in Western Europe generally place
somewhat greater weight on keeping overall consumer price inflation low than does the
Federal Reserve. Moreover, the admitted weaknesses on the balance sheets of Western
European banks is probably more limited than the weaknesses so far admitted on the
balance sheets of their US counterparts, especially if account is taken of the exposures of
Western European banks to financial problems in Central and Eastern Europe. On fiscal
policy, the automatic stabilizers operate significantly more forcefully in Western Europe than
in the United States. This should help to cushion the recession but will symmetrically tend to
weaken the recovery. In view of both the constraints of the Stability and Growth Pact and
the generally higher level of government deficits and debt levels relative to GDP, European
governments are rightly reluctant to use discretionary fiscal policy with quite the wild
abandon now in evidence for the United States. Combined with other factors, the result is
likely to be that recovery in Western Europe will lag a little behind that in the United States;
and, especially with potential growth rates somewhat lower than in the United States, the
pace of subsequent recovery is likely to be more subdued.

Nevertheless, the Zarnowitz rule assures us that once recovery starts in Europe, the
pace of that recovery will surprise on the upside. Year-over-year growth rates for 2010 will
likely exceed 2 percent in most countries and will probably reach at least 3 percent in some,
probably including Germany. So long as oil and other commodity prices remained exceptionally strong,

the Canadian economy enjoyed an important degree of insulation from the slowdown in the
United States and in the world economy more generally. With the drop in world oil and
other commodity prices, the Canadian economy is now falling into recession, and a real
GDP decline of about 1½ percent is forecast for this year. With strong ties to the US
economy (including through the highly integrated automobile industry) and continuing links
to world oil and other commodity prices, the forecast of a stronger than expected recovery
in the United States and in world commodity prices beginning around mid-2009 implies a
relatively optimistic forecast for Canadian economic growth for 2010—likely on the order of
3 percent.

Emerging-Market and Developing Economies

By itself, the Chinese economy accounts for more than one-fifth of the economic weight of
all emerging-market and developing economies (using PPP-based exchange rates to
aggregate national GDPs). The imputed decline in China's annualized real GDP growth for
fourth quarter of 2008 to barely more than 1½ percent, from a 13½ percent annualized rate
two quarters earlier is, therefore, an important part of the explanation for the precipitous
decline in real GDP growth late last year for all emerging-market and developing countries.
This arithmetic effect was undoubtedly enhanced by the sizeable impact of slowing Chinese
economic growth on exports from many of China's trading partners, especially in Asia.
Looking ahead, the response of Chinese policymakers to a greater than desired
slowdown in economic activity has brought forth both serious measures of fiscal expansion
and very substantial easing of credit conditions (more than reversing their earlier tightening).
It is reasonable to expect that the Chinese economy will respond to these new policy
measures with a resurgence of growth, yielding 7½ percent growth year-over-year for 2009
and better than 8 percent growth for 2010. The pick up in Chinese growth after slowdown in
the second half of 2008 will help to boost growth in China's trading partners, especially in
Asia.

India carries a little less than half of the weight of China in world GDP (using PPP-
based exchange rates). After five years with average annual growth above 8 percent, India is
forecast to deliver somewhat slower but still significantly positive output growth this year
with an annual rise in real GDP of about 5 percent. The Indian economy is feeling the
impact of the global recession and financial crisis but is less strongly linked to the rest of the
world economy through both trade and finance than most of Asia. Reasonably solid growth
of domestic demand and the effects of a favorable monsoon on India's important
agricultural sector will keep growth positive. Monetary policy, which in the first half of 2008
was oriented toward combating rising inflation, has shifted toward an easier stance. The
upcoming elections have not been a force for fiscal restraint.
The smaller Asian emerging-market economies are being more seriously affected by
the global recession and collapse of world trade. Disruptions of trade financing for
emerging-market economies are also having some negative effect, but Asian countries
generally do not need to finance significant current account deficits and most have adequate
reserves. Some countries, such as Malaysia and Thailand, which are heavily dependent on
manufactured exports, are likely to see output declines this year. The group as a whole,
however, will probably post slightly positive growth for 2009 and return to substantially
positive growth for 2010.

Recently released data indicate that Brazil, Latin America's largest economy, will
probably see real GDP decline this year (by about 1 percent) for the first time in a decade.
The generally sound state of the public finances, a favorable trade balance and modest
current account deficit, ample foreign exchange reserves, and limited foreign currency
indebtedness (of the government), however, provide confidence that Brazil will weather the
current global economic storm without serious damage. For 2010 a return to growth of 3
percent or better looks like a reasonable prospect.

Argentina is in more serious economic difficulty, for domestic reasons as well as
because of spillovers from the global crisis. The government hopes to prop things up until
the elections, but a real GDP decline of about 3 percent is likely this year, with considerable
uncertainty about the pace of recovery in 2010.

As the fourth quarter real GDP results again testify, Mexico remains tightly linked
economically to its northern neighbor. Fortunately, substantial but orderly depreciation of
the peso's exchange rate against the dollar over the past year and the availability of ample
external financing and Mexico's generally sound fiscal policy provide important protection
against the type of crises that have hit Mexico in previous steep global recessions. Following
developments in the United States, Mexico's output this year is likely to decline about 2½
percent and then recover smartly by 3 percent or better in 2010.

Elsewhere in Latin America, the picture is mixed with most countries likely to record
at least modest output declines this year followed by recoveries of varying strength in 2010.
Venezuela and Ecuador will be hit fairly hard by the drop in world oil prices, while Chile and
Peru fair somewhat better despite considerable declines in the prices of their primary
exports. Altogether, Latin America's real GDP will probably shrink by about 2 percent this
year and grow about 3 percent in 2010.

In Central and Eastern Europe, several countries (including the Baltic States,
Hungary, Romania, and Bulgaria) are in deep difficulty because of the collapse in external
financing for their large current account deficits, as well as the general economic impact of
the world recession. Turkey is discussing a possible resumption of International Monetary
Fund (IMF) support and will see output decline this year by 2 percent or more. Poland and
Slovakia are in better shape and might scrape by with little or no growth. For the region as a
whole, a decline in real GDP of about 3 percent is likely this year. Assuming that Western
Europe stages a moderate recovery in 2010, the Central and Eastern Europe region should
follow in its wake.

In the Commonwealth of Independent States (CIS), the Russian economy is
suffering from the collapse of oil prices and from some of the poor policies that high oil
prices made possible. Real GDP this year is likely to decline at least 2 percent. The Ukraine
is a mess, economically and politically. Despite financial support from the IMF and Western
Europe, economic activity will shrink this year, perhaps by as much as 10 percent. Belarus is
also in trouble and amazingly even admits it. Even more amazing, Belarus has negotiated a
program with the IMF. It will be interesting to see how that turns out. Elsewhere in most of
the CIS economic conditions are better—if one believes the data. Nevertheless, with the
largest economies clearly in difficulty, the CIS will likely see a decline in real GDP of at least
3 percent this year, and prospects for recovery in this region in 2010 are highly uncertain.
The Middle East region is suffering a large decline in export revenues from the fall in
world oil prices, but this does not show up directly in volume measures of real GDP. Cuts in
oil production to meet OPEC's reduced output quotas, however, do negatively impact real
GDP. Also, for a number of countries where oil export revenues are an important driver of
domestic economic activity (such as Dubai), the drop in world oil prices is an important
negative development. All told, I expect that real GDP growth in the Middle East region will
decline from about 6 percent in 2008 to 2½ percent in 2009. Assuming that we see
significant recovery of world oil prices (to about $80 per barrel) as the global economy
recovers, growth in the Middle East region should strengthen to 4 percent in 2010.
The IMF remains relatively optimistic about growth prospects in Africa. Their
forecast released in January envisioned 3.4 percent growth this year, rising to 4.9 percent
in 2010. In the face of the collapse of world trade and in the prices of many primary
products exported by African countries, I find the IMF's optimism a little overdone.
Africa will be fortunate if it can sustain 2 percent growth this year and then stage a
recovery to 4 percent growth for 2010.

Recession and Recovery in the United States

With the sharp drop in real GDP in the fourth quarter, –6.3 percent at an annual rate, the
US economy has clearly fallen into a steep recession. Preliminary data for the first quarter of
2009 indicate that real consumption spending has stabilized, at least tempor arily, after two
quarters of sharp decline. Other data, especially for the labor market, indicate that the
economy is still contracting at a rapid pace. All major categories of real gross private
domestic investment (business fixed investment in nonresidential structures and in
equipment and software, residential investment, and inventory investment) are probably
contracting, and real US exports are probably shrinking faster than US real imports. There is
no clear sign yet that this process of economic contraction is about to come to an end.
The task of an economic forecaster, however, is to forecast even when the hard
data do not provide a clear guide to what is about to happen. I first seriously confronted
this problem 27 years ago when I was asked to join the forecasting panel for the Graduate
School of Business of the University of Chicago, replacing my future boss at the US
Council of Economic Advisers, Beryl Sprinkel. I asked my colleague Victor Zarnowitz, a
distinguished scholar who specialized in business cycle analysis and who sadly died just
last month, for his advice. Victor explained that forecasters had never been very
successful in forecasting business cycle turning points: when an expansion would end and
a recession would begin, how long or how deep a recession might be, or when expansion
would resume. Long expansions did not appear to die of old age and were not necessarily
followed by deep or long recessions. Indeed, Victor noted that there was only one reliable
regularity about business cycles and business cycle forecasts: Deep recessions are almost
always followed by steep recoveries, and forecasts generally fail to take account of this
regularity in consistently underpredicting the initial strength of many economic expansions.
In deep recessions, such as those in the mid-1970s and the early 1980s, there is
usually a growing sense of gloom as the recession deepens, and few can see any reason for
hope that the recession might end. As employment and income fall, demand for
consumption and investment declines, bringing on more declines in employment and
income, in a downward spiral that appears to be without end. However, recessions do end
when the negative shocks that have created them are absorbed and dissipated and the natural
processes of economic recovery, often aided by stimulative economic policies, begin to
operate.

I sense that we are nearing that point in the present recession. Last autumn, when
the US economy was already quite weak, it was hit hard by the turmoil in financial markets
and the other factors that have already been explained. The economy is absorbing the
negative impact of those shocks in its present steep downturn. But shocks are dissipating
and we are approaching the plausible limits on how much the economy needs to adjust
before a natural rebound will begin. Meanwhile, extremely aggressive policy actions have
been taken by the monetary and fiscal authorities to blunt the shocks that have already
occurred, to guard against any important new shocks, to help bring an end to the downturn,
and to promote a more vigorous recovery. Experience suggests that all of this should
work, and I believe that it will.

In a nutshell, I expect that real GDP has declined at an annual rate of about 4
percent in the first quarter of 2009, with inventory investment falling more into negative
territory. The pace of decline is expected to moderate in the second quarter as the effect of
past shocks wears off and policy stimulus begins to work. The cyclical turning point will
occur about mid-year, with real GDP posting a modest advance in the summer quarter. By
the autumn, the recovery will be firmly under way, supported by strong policy stimulus.
Growth during 2010 will proceed at better than a 4 percent annual rate (on a fourth-quarter-
to-fourth-quarter basis).

Find complete paper on world_recession.pdf, 127 KB

Warm Regards,

Sudesh Kumar

London, UK

sudesh.kumar@economics.org.in

The big emerging market economies will weather the storm

2009-04-14T03:38:00.000-07:00

By Markus Jager

The IIF forecasts net private capital flows to emerging markets will decline dramatically from $930 billion in 2007 and $470 billion in 2008 to a paltry $170 billion in 2009. Commercial bank lending is forecast to turn negative this year. This "sudden stop" has already forced several emerging markets to request IMF programmes. In addition, exports are collapsing on the back of the global recession. The six largest emerging markets or EM-6 (Brazil, China, India, Korea, Mexico and Russia) have been hit hard. However, they are in a sufficiently strong position to fend off an external solvency and a systemic banking sector crisis (the hallmarks of most of the emerging markets crises of the past 15 years) thanks to manageable foreign currency and foreign liquidity mismatches.

Manageable foreign currency exposures

The six largest emerging economies have no or very manageable foreign currency mismatches.¹ Previously, extensive foreign currency mismatches induced a "fear of floating", which was among the main causes of the financial crises in Mexico (1994/95), Korea (1997), Russia (1998), and Brazil (1998/99). Due mainly to foreign exchange reserve accumulation and domestic de-dollarisation, today the EM-6 have either no aggregate foreign-currency mismatch (China, India) or only limited ones (Brazil, Korea, Mexico and Russia).

For example, domestic fixed income markets have been almost fully de-dollarised (e.g. Brazil after 2002 crisis) and banking sector deposit dollarisation is low. In Russia, the big emerging economy with the highest degree of deposit dollarisation, total foreign-currency deposits in the banking sector as a share of foreign exchange reserves and domestic banks' foreign assets amounted to a mere 10% at the end of last year, according to Moody's. The absence of a significant aggregate foreign-currency mismatch will allow these economies to let their currencies depreciate in response to a balance-of-payments shock without undermining their economy's solvency.

External liquidity risks

External liquidity risks are manageable in all six economies due to rapid foreign exchange reserve accumulation (Figure 1). Official foreign exchange reserves more than cover 2009 external financing requirements (current account plus short-term debt plus longer-term debt amortisations). Historically, external financing requirements of less than 100% have proven comfortable in terms of preventing a liquidity crisis. Of course, this crisis is especially severe. On the other hand, external financing requirements overestimate the potential pressure on a country's external liquidity position, as this metric excludes less fickle financing flows (e.g. official funding, FDI) as well as private sector external assets. Barring concerns about an imminent sovereign default or banking sector insolvency, other potential outflows (e.g. non-resident equity and long-term fixed income security holdings, resident deposits) should be self-limiting – provided the authorities allow the currency to adjust. Last but not least, the big six benefit from bilateral central bank swap lines (Brazil, Korea and Mexico) and/or may be eligible to tap the newly created IMF short-term liquidity facility. In short, a country that can afford to let its currency depreciate without undermining its solvency and whose official foreign exchange reserves cover 12-month-forward financing requirements is very unlikely to run into serious external financing difficulties.

Figure 1. External financing requirements in 2009

Private sector vulnerabilities

Although the aggregate foreign-currency and liquidity mismatches are manageable, the private sector is clearly vulnerable to a "sudden stop". The public sector may not suffer any more from a "fear of floating", but parts of the private sector are terrified by it. This may explain why most of the six largest emerging economies have attempted – with varying degrees of intensity – to prevent an "under-shooting" of the exchange rate by intervening in the foreign exchange market. Nonetheless, sovereign balance sheets remain strong enough to support the private sector (e.g. Brazilian central bank programme to re-finance private sector debt amortisations). The ability to do so is especially critical in cases where the banking sector has incurred large amounts of short-term foreign-currency debt (Korea and, less so, Russia).

What if the credit crunch lasts for more than a year? Will foreign exchange reserves be large enough to support the private sector? A back-of-the-envelope calculation suggests that external financing requirements will remain at acceptable levels in 2010, even under conservative roll-over assumptions and current account forecasts. Naturally, where governments provide foreign-currency liquidity to the private sector, they retain the option of reducing the pressure on foreign exchange reserves by withdrawing support from private sector debtors whose potential default does not pose any systemic financial and economic risks.

Two sources of concern

Two caveats are in order.

First, foreign exchange reserve positions could be hit by the need to bail out the banking sector.

The very severe economic downturn and, in some cases, significant sectoral foreign-currency mismatches will put sizeable downward pressure on banks' asset quality and capitalisation ratios. However, the emerging economies' governments look like they are in a position to support systemically important domestic banks (e.g. Korea's 30 trillion won re-capitalisation fund) by issuing domestic debt instead of drawing on their foreign assets (over and above what is required to cover banks' foreign-currency liabilities). This is what a cursory look at government debt levels and potential credit losses would suggest (Table 1). To make this point more persuasively, it would be necessary to estimate potential banking sector losses and re-capitalisation needs (if any) in a methodical manner, including banks' market-related losses.

Table 1. Government debt and credit

Second, governments could draw down foreign exchange reserves for budget deficit financing purposes.

This appears especially relevant in Russia, where the government has announced its intention to draw on its two sovereign funds (whose assets are included in the foreign exchange reserves currently worth $380 billion). Barring a major change in projected balance-of-payments dynamics or fiscal policy stance, Russia's foreign exchange reserves could fall to less comfortable levels of $200 billion by end-2009 and even lower than that by end-2010. This "dual use" of foreign exchange reserves for balance-of-payments and budget financing may explain why Russian CDS spreads are substantially wider than its peers (Figure 2).

Figure 2. Sovereign CDS spreads

But the exchange rate must be allowed to adjust

Manageable foreign currency and maturity mismatches, combined with solid public sector solvency positions, sharply limit the risk of an external payments default and a systemic banking sector crisis in the six largest emerging economies. This call is premised on the assumption that policymakers will allow the exchange rate to adjust (where necessary) and refrain from running outsized fiscal deficits geared towards propping up economic growth, especially where deficits are financed by drawing down sovereign foreign exchange assets. Economic growth will be hit very hard in all six countries, but they won't suffer a systemic financial breakdown. The EM-6 will be battered, but the global crisis won't sink them.

Footnotes

1 Following Morris Goldstein and Philip Turner, a currency mismatch "occurs when residents of the country are not adequately hedged against a change in the exchange rate so that a large depreciation generates a large fall in the economy's net worth". A "long" foreign currency position is also technically a mismatch, but it is of less relevance from a crisis susceptibility point of view. I use "currency mismatch" as meaning "net short foreign currency".

--
Warm Regards,

Sudesh Kumar
London, UK
sudesh.kumar@economics.org.in

G 20 DECLARATION ON STRENGTHENING THE FINANCIAL SYSTEM - LONDON, 2 APRIL 2009

2009-04-02T23:47:00.001-07:00

We, the Leaders of the G20, have taken, and will continue to take, action to strengthen regulation and supervision in line with the commitments we made in Washington to reform the regulation of the financial sector. Our principles are strengthening transparency and accountability, enhancing sound regulation, promoting integrity in financial markets and reinforcing international cooperation. The material in this declaration expands and provides further detail on the commitments in our statement. We published today a full progress report against each of the 47 actions set out in the Washington Action Plan. In particular, we have agreed the following major reforms.

Financial Stability Board

We have agreed that the Financial Stability Forum should be expanded, given a broadened mandate to promote financial stability, and re-established with a stronger institutional basis and enhanced capacity as the Financial Stability Board (FSB).

The FSB will:

â€¢ assess vulnerabilities affecting the financial system, identify and oversee action needed to address them;

â€¢ promote co-ordination and information exchange among authorities responsible for financial stability;

â€¢ monitor and advise on market developments and their implications for regulatory policy;

â€¢ advise on and monitor best practice in meeting regulatory standards;

â€¢ undertake joint strategic reviews of the policy development work of the international Standard Setting Bodies to ensure their work is timely, coordinated, focused on priorities, and addressing gaps;

â€¢ set guidelines for, and support the establishment, functioning of, and participation in, supervisory colleges, including through ongoing identification of the most systemically important cross-border firms;

â€¢ support contingency planning for cross-border crisis management, particularly with respect to systemically important firms; and

â€¢ collaborate with the IMF to conduct Early Warning Exercises to identify and report to the IMFC and the G20 Finance Ministers and Central Bank Governors on the build up of macroeconomic and financial risks and the actions needed to address them.

Members of the FSB commit to pursue the maintenance of financial stability, enhance the openness and transparency of the financial sector, and implement international financial standards (including the 12 key International Standards and Codes), and agree to undergo periodic peer reviews, using among other evidence IMF / World Bank public Financial Sector Assessment Program reports. The FSB will elaborate and report on these commitments and the evaluation process.

We welcome the FSBâ€™s and IMFâ€™s commitment to intensify their collaboration, each complementing the otherâ€™s role and mandate.

International cooperation

To strengthen international cooperation we have agreed:

Â· to establish the remaining supervisory colleges for significant cross-border firms by June 2009, building on the 28 already in place;

Â· to implement the FSF principles for cross-border crisis management immediately, and that home authorities of each major international financial institution should ensure that the group of authorities with a common interest in that financial institution meet at least annually;

Â· to support continued efforts by the IMF, FSB, World Bank, and BCBS to develop an international framework for cross-border bank resolution arrangements;

Â· the importance of further work and international cooperation on the subject of exit strategies;

Â· that the IMF and FSB should together launch an Early Warning Exercise at the 2009 Spring Meetings.

Prudential regulation

We have agreed to strengthen international frameworks for prudential regulation:

Â· until recovery is assured the international standard for the minimum level of capital should remained unchanged;

Â· where appropriate, capital buffers above the required minima should be allowed to decline to facilitate lending in deteriorating economic conditions;

Â· once recovery is assured, prudential regulatory standards should be strengthened. Buffers above regulatory minima should be increased and the quality of capital should be enhanced. Guidelines for harmonisation of the definition of capital should be produced by end 2009. The BCBS should review minimum levels of capital and develop recommendations in 2010;

Â· the FSB, BCBS, and CGFS, working with accounting standard setters, should take forward, with a deadline of end 2009, implementation of the recommendations published today to mitigate procyclicality, including a requirement for banks to build buffers of resources in good times that they can draw down when conditions deteriorate;

Â· risk-based capital requirements should be supplemented with a simple, transparent, non-risk based measure which is internationally comparable, properly takes into account off-balance sheet exposures, and can help contain the build-up of leverage in the banking system;

Â· the BCBS and authorities should take forward work on improving incentives for risk management of securitisation, including considering due diligence and quantitative retention requirements, by 2010;

Â· all G20 countries should progressively adopt the Basel II capital framework; and

Â· the BCBS and national authorities should develop and agree by 2010 a global framework for promoting stronger liquidity buffers at financial institutions, including cross-border institutions.

The scope of regulation

We have agreed that all systemically important financial institutions, markets, and instruments should be subject to an appropriate degree of regulation and oversight. In particular:

Â· we will amend our regulatory systems to ensure authorities are able to identify and take account of macro-prudential risks across the financial system including in the case of regulated banks, shadow banks, and private pools of capital to limit the build up of systemic risk. We call on the FSB to work with the BIS and international standard setters to develop macro-prudential tools and provide a report by autumn 2009;

Â· large and complex financial institutions require particularly careful oversight given their systemic importance;

Â· we will ensure that our national regulators possess the powers for gathering relevant information on all material financial institutions, markets, and instruments in order to assess the potential for their failure or severe stress to contribute to systemic risk. This will be done in close coordination at international level in order to achieve as much consistency as possible across jurisdictions;

Â· in order to prevent regulatory arbitrage, the IMF and the FSB will produce guidelines for national authorities to assess whether a financial institution, market, or an instrument is systemically important by the next meeting of our Finance Ministers and Central Bank Governors. These guidelines should focus on what institutions do rather than their legal form;

Â· hedge funds or their managers will be registered and will be required to disclose appropriate information on an ongoing basis to supervisors or regulators, including on their leverage, necessary for assessment of the systemic risks that they pose individually or collectively. Where appropriate, registration should be subject to a minimum size. They will be subject to oversight to ensure that they have adequate risk management. We ask the FSB to develop mechanisms for cooperation and information sharing between relevant authorities in order to ensure that effective oversight is maintained where a fund is located in a different jurisdiction from the manager. We will, cooperating through the FSB, develop measures that implement these principles by the end of 2009. We call on the FSB to report to the next meeting of our Finance Ministers and Central Bank Governors;

Â· supervisors should require that institutions which have hedge funds as their counterparties have effective risk management. This should include mechanisms to monitor the fundsâ€™ leverage and set limits for single counterparty exposures;

Â· we will promote the standardisation and resilience of credit derivatives markets, in particular through the establishment of central clearing counterparties subject to effective regulation and supervision. We call on the industry to develop an action plan on standardisation by autumn 2009; and

Â· we will each review and adapt the boundaries of the regulatory framework regularly to keep pace with developments in the financial system and promote good practices and consistent approaches at the international level.

Compensation

We have endorsed the principles on pay and compensation in significant financial institutions developed by the FSF to ensure compensation structures are consistent with firmsâ€™ long-term goals and prudent risk taking. We have agreed that our national supervisors should ensure significant progress in the implementation of these principles by the 2009 remuneration round. The BCBS should integrate these principles into their risk management guidance by autumn 2009. The principles, which have today been published, require:

Â· firms' boards of directors to play an active role in the design, operation, and evaluation of compensation schemes;

Â· compensation arrangements, including bonuses, to properly reflect risk and the timing and composition of payments to be sensitive to the time horizon of risks. Payments should not be finalised over short periods where risks are realised over long periods; and

Â· firms to publicly disclose clear, comprehensive, and timely information about compensation. Stakeholders, including shareholders, should be adequately informed on a timely basis on compensation policies to exercise effective monitoring.

Supervisors will assess firmsâ€™ compensation policies as part of their overall assessment of their soundness. Where necessary they will intervene with responses that can include increased capital requirements.

Tax havens and non-cooperative jurisdictions

It is essential to protect public finances and international standards against the risks posed by non-cooperative jurisdictions. We call on all jurisdictions to adhere to the international standards in the prudential, tax, and AML/CFT areas. To this end, we call on the appropriate bodies to conduct and strengthen objective peer reviews, based on existing processes, including through the FSAP process.

We call on countries to adopt the international standard for information exchange endorsed by the G20 in 2004 and reflected in the UN Model Tax Convention. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of information. We welcome the new commitments made by a number of jurisdictions and encourage them to proceed swiftly with implementation.

We stand ready to take agreed action against those jurisdictions which do not meet international standards in relation to tax transparency. To this end we have agreed to develop a toolbox of effective counter measures for countries to consider, such as: â€¢

Â· increased disclosure requirements on the part of taxpayers and financial institutions to report transactions involving non-cooperative jurisdictions;

Â· withholding taxes in respect of a wide variety of payments;

Â· denying deductions in respect of expense payments to payees resident in a non-cooperative jurisdiction;

Â· reviewing tax treaty policy;

Â· asking international institutions and regional development banks to review their investment policies; and,

Â· giving extra weight to the principles of tax transparency and information exchange when designing bilateral aid programs.

We also agreed that consideration should be given to further options relating to financial relations with these jurisdictions

We are committed to developing proposals, by end 2009, to make it easier for developing countries to secure the benefits of a new cooperative tax environment.

We are also committed to strengthened adherence to international prudential regulatory and supervisory standards. The IMF and the FSB in cooperation with international standard-setters will provide an assessment of implementation by relevant jurisdictions, building on existing FSAPs where they exist. We call on the FSB to develop a toolbox of measures to promote adherence to prudential standards and cooperation with jurisdictions.

We agreed that the FATF should revise and reinvigorate the review process for assessing compliance by jurisdictions with AML/CFT standards, using agreed evaluation reports where available.

We call upon the FSB and the FATF to report to the next G20 Finance Ministers and Central Bank Governorsâ€™ meeting on adoption and implementation by countries.

Accounting standards

We have agreed that the accounting standard setters should improve standards for the valuation of financial instruments based on their liquidity and investorsâ€™ holding horizons, while reaffirming the framework of fair value accounting.

We also welcome the FSF recommendations on procyclicality that address accounting issues. We have agreed that accounting standard setters should take action by the end of 2009 to:

Â· reduce the complexity of accounting standards for financial instruments;

Â· strengthen accounting recognition of loan-loss provisions by incorporating a broader range of credit information;

Â· improve accounting standards for provisioning, off-balance sheet exposures and valuation uncertainty;

Â· achieve clarity and consistency in the application of valuation standards internationally, working with supervisors;

Â· make significant progress towards a single set of high quality global accounting standards; and,

Â· within the framework of the independent accounting standard setting process, improve involvement of stakeholders, including prudential regulators and emerging markets, through the IASBâ€™s constitutional review.

Credit Rating Agencies

We have agreed on more effective oversight of the activities of Credit Rating Agencies, as they are essential market participants. In particular, we have agreed that:

Â· all Credit Rating Agencies whose ratings are used for regulatory purposes should be subject to a regulatory oversight regime that includes registration. The regulatory oversight regime should be established by end 2009 and should be consistent with the IOSCO Code of Conduct Fundamentals. IOSCO should coordinate full compliance;

Â· national authorities will enforce compliance and require changes to a rating agencyâ€™s practices and procedures for managing conflicts of interest and assuring the transparency and quality of the rating process. In particular, Credit Rating Agencies should differentiate ratings for structured products and provide full disclosure of their ratings track record and the information and assumptions that underpin the ratings process. The oversight framework should be consistent across jurisdictions with appropriate sharing of information between national authorities, including through IOSCO; and,

â€¢ the Basel Committee should take forward its review on the role of external ratings in prudential regulation and determine whether there are any adverse incentives that need to be addressed.

Next Steps

We instruct our Finance Ministers to complete the implementation of these decisions and the attached action plan. We have asked the FSB and the IMF to monitor progress, working with the FATF and the Global Forum, and to provide a report to the next meeting of our Finance Ministers and Central Bank Governors.

http://www.g20.org/Documents/Fin_Deps_Fin_Reg_Annex_020409_-_1615_final.pdf

--
Warm Regards,

Sudesh Kumar
London, UK
sudesh.kumar@economics.org.in

What is the Group of Twenty (G-20)?

2009-03-10T13:00:00.001-07:00

The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy. The inaugural meeting of the G-20 took place in Berlin, on December 1516, 1999, hosted by German and Canadian finance ministers.

Mandate

The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe.

Origins

The G-20 was created as a response both to the financial crises of the late 1990s and to a growing recognition that key emerging-market countries were not adequately included in the core of global economic discussion and governance. Prior to the G-20 creation, similar groupings to promote dialogue and analysis had been established at the initiative of the G-7. The G-22 met at Washington D.C. in April and October 1998. Its aim was to involve non-G-7 countries in the resolution of global aspects of the financial crisis then affecting emerging-market countries. Two subsequent meetings comprising a larger group of participants (G-33) held in March and April 1999 discussed reforms of the global economy and the international financial system. The proposals made by the G-22 and the G-33 to reduce the world economy's susceptibility to crises showed the potential benefits of a regular international consultative forum embracing the emerging-market countries. Such a regular dialogue with a constant set of partners was institutionalized by the creation of the G-20 in 1999.

Membership

The G20 is made up of the finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States of America and The European Union who is represented by the rotating Council presidency and the European Central Bank. To ensure global economic fora and institutions work together, the Managing Director of the International Monetary Fund (IMF) and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an ex-officio basis. The G-20 thus brings together important industrial and emerging-market countries from all regions of the world. Together, member countries represent around 90 per cent of global gross national product, 80 per cent of world trade (including EU intra-trade) as well as two-thirds of the world's population. The G-20's economic weight and broad membership gives it a high degree of legitimacy and influence over the management of the global economy and financial system.

Achievements

The G-20 has progressed a range of issues since 1999, including agreement about policies for growth, reducing abuse of the financial system, dealing with financial crises, and combating terrorist financing. The G-20 also aims to foster the adoption of internationally recognized standards through the example set by its members in areas such as the transparency of fiscal policy and combating money laundering and the financing of terrorism. In 2004, G-20 countries committed to new higher standards of transparency and exchange of information on tax matters. This aims to combat abuses of the financial system and illicit activities including tax evasion. The G20 also plays a signficant role in matters concerned with the reform of the international finacial arcitecture.

The G-20 has also aimed to develop a common view among members on issues related to further development of the global economic and financial system and held an extraordinary meeting in the margins of the 2008 IMF and World Bank annual meetings in recognistion of the current economic situtation. At this meeting in accordance with the G20s core mission to promote open and constructive exchanges between advanced and emerging-market countries on key issues related to global economic stability and growth, the Ministers and Governors discussed the present financial market crisis and its implications for the world economy. They stressed their resolve to work together to overcome the financial turmoil and to deepen cooperation to improve the regulation, supervision and the overall functioning of the worlds financial markets.

Chair

Unlike international institutions such as the Organization for Economic Co-operation and Development (OECD), IMF or World Bank, the G-20 (like the G-7) has no permanent staff of its own. The G-20 chair rotates between members, and is selected from a different regional grouping of countries each year. In 2009 the G-20 chair is the United Kingdom, and in 2010 it will be South Korea. The chair is part of a revolving three-member management Troika of past, present and future chairs. The incumbent chair establishes a temporary secretariat for the duration of its term, which coordinates the group's work and organizes its meetings. The role of the Troika is to ensure continuity in the G-20's work and management across host years.

Former G-20 Chairs

1999-2001 Canada
2002 India
2003 Mexico
2004 Germany
2005 China
2006 Australia
2007 South Africa
2008 Brazil
2009 United Kingdom

Meetings and activities

It is normal practice for the G-20 finance ministers and central bank governors to meet once a year. The last meeting of ministers and governors was held in São Paulo, Brazil on 8-9 November 2008. The ministers' and governors' meeting is usually preceded by two deputies' meetings and extensive technical work. This technical work, takes the form of workshops, reports and case studies on specific subjects, that aim to provide ministers and governors with contemporary analysis and insights, to better inform their consideration of policy challenges and options.

Towards the end of 2008 Leaders of the G20 Countries meet in Washington. See the Declaration and action plan from the Washington Summit (PDF 72KB) . This meeting remitted follow up work to Finance Ministers. In addition to their November meeting in order to take forward this work in advance of the Leaders summit in London on 2^nd April Finance Ministers and central Bank Governors will also meet in March 2009. A deputies meeting will be held in February 2009 to prepare for the Ministers meeting.

G-20 Events

Deputies meeting 1^st February 2009

Officials Workshop Financing for Climate Change 13^th & 14^th February 2009

Deputies meeting 13^th March 2009

Finance Ministers and Central Bank Governors Meeting 14^th March 2009

Officials Workshop on Global Economy 25^th 26^th May 2009

Officials Workshop on Sustainable Financing for Development June 2009

Deputies meeting September 2009

Finance Ministers and Central Bank Governors Meeting 7^th & 8^th November 2009

Interaction with other international organizations

The G-20 cooperates closely with various other major international organizations and fora, as the potential to develop common positions on complex issues among G-20 members can add political momentum to decision-making in other bodies. The participation of the President of the World Bank, the Managing Director of the IMF and the chairs of the International Monetary and Financial Committee and the Development Committee in the G-20 meetings ensures that the G-20 process is well integrated with the activities of the Bretton Woods Institutions. The G-20 also works with, and encourages, other international groups and organizations, such as the Financial Stability Forum, in progressing international and domestic economic policy reforms. In addition, experts from private-sector institutions and non-government organisations are invited to G-20 meetings on an ad hoc basis in order to exploit synergies in analyzing selected topics and avoid overlap.

External communication

The country currently chairing the G-20 posts details of the group's meetings and work program on a dedicated website. Although participation in the meetings is reserved for members, the public is informed about what was discussed and agreed immediately after the meeting of ministers and governors has ended. After each meeting of ministers and governors, the G-20 publishes a communiqué which records the agreements reached and measures outlined. Material on the forward work program is also made public.

FAQ.

1. When was the G-20 set up?

The G-20 first meeting was held in Berlin on December 1516, 1999.

2. Why was the G-20 set up?

The G-20 was created as a response both to the financial crises of the late 1990s and a growing recognition that key emerging-market countries were not adequately included in the core of global economic discussion and governance. Prior to the G-20 creation, similar groupings to promote dialogue and analysis had been established at the initiative of the G-7. The G-22 met at Washington D.C. in April and October 1998. Its aim was to involve non-G-7 countries in the resolution of global aspects of the financial crisis then affecting emerging-market countries. Two subsequent meetings comprising a larger group of participants (G-33) held in March and April 1999 discussed reforms of the global economy and the international financial system. The proposals made by the G-22 and G-33 to reduce the world economy's susceptibility to crises showed the potential benefits of a regular international consultative forum embracing the emerging-market countries. Such a regular dialogue with a constant set of partners was institutionalized by the G-20 creation in 1999.

3. How does the G-20 differ from the G-7?

The G-7 was established in 1976 as an informal forum of seven major industrial economies: Canada, France, Germany, Italy, Japan, the United Kingdom and the United States of America. The G-7 conducts dialogue and seeks agreement on current economic issues on the basis of the comparable interests of those countries. The G-20 was established in 1999 and reflects the diverse interests of the systemically significant industrial and emerging-market economies. (see. About the G20). It has a high degree of representativeness and legitimacy on account of its geographical composition (members are drawn from all continents) and its large share of global population (two-thirds) and world GNP (around 90 per cent). The G-20's broad representation of countries at different stages of development gives its consensus outcomes greater impact than those of the G-7.

4. Can all member countries exert equal influence?

Achieving consensus is the underlying principle of G-20 activity with regard to comments, recommendations and measures to be adopted. There are no formal votes or resolutions on the basis of fixed voting shares or economic criteria. Every G-20 member has one 'voice' with which it can take an active part in G-20 activity. To this extent the influence a country can exert is shaped decisively by its commitment.

5. What are the criteria for G-20 membership?

In a forum such as the G-20, it is particularly important for the number of countries involved to be restricted and fixed to ensure the effectiveness and continuity of its activity. There are no formal criteria for G-20 membership and the composition of the group has remained unchanged since it was established. In view of the objectives of the G-20, it was considered important that countries and regions of systemic significance for the international financial system be included. Aspects such as geographical balance and population representation also played a major part.

6. How is the G20 connected to the meeting of Leaders Summit to be held in London on 2nd April?

The G20 is carrying out the preparatory work for the Leaders summit in London on 2nd April. This includes taking forward work Leaders remitted to Finance Ministers at the meeting held in Washington DC on 15th November 2008.

7. How are the G20 taking forward work remitted to Finance Ministers by Leaders.

The G20 Finance Ministers were tasked from the Washington summit to forward work in the following five areas;

Strengthening transparency and accountability Enhancing sound regulation
Promoting integrity in financial markets
Reinforcing international cooperation
Refoming the internatiola Financial Institutions

publications

Communiqués

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Warm Regards,

Sudesh Kumar
London, UK
sudesh.kumar@economics.org.in

Macro Economics of the World: Nobody talks about decoupling any more.

2009-03-05T05:41:00.001-08:00

NOBODY talks about "decoupling" any more. Instead, emerging economies are sinking alongside developed ones. In 2008 emerging stockmarkets fell by more than those in the rich world, and financial woes forced countries such as Hungary, Latvia and Pakistan to go cap in hand to the IMF. Taiwan's exports have plunged by 42% over the past year, and South Korea's by 17%; even China's have shrunk. Singapore's GDP fell by an annualised 12.5% in the fourth quarter of 2008, its biggest drop on record. Is this the end of the emerging-market boom?

Over the five years to 2007, emerging economies grew by an annual average of more than 7%. But in the past three months their total output may have fallen slightly, according to JPMorgan, as the fall in exports was exacerbated by a sudden drying up in trade finance. For 2008 as a whole, average growth in emerging economies was still above 6%, but recent private-sector forecasts suggest that this could slip to less than 4% this year. That is grim compared with the recent past, though still robust set against an expected 2% decline in the GDP of the G7 countries.

Short-term pain is only to be expected. But some economists argue that emerging markets' longer-term prospects have been badly hurt by the global financial crisis. From Brazil to China, they claim, the boom was driven largely by exports to American consumers, easy access to cheap capital and high commodity prices. All three props have now collapsed. In particular, as America's housing bust causes households to save more, they will import less over the coming years. This could reduce emerging economies' future growth rates.

Yet emerging economies' reliance on America is often exaggerated. The surge in their total exports as a share of GDP since 2000 might, on the face of it, suggest that their boom was powered by rich-world demand. But their dependence on exports to developed countries has barely budged, at just under 20% of GDP (see chart 1). Most of the growth in exports has been within the developing world.

For sure, emerging economies will not return to their exceptional growth rates in 2007 (no bad thing either, since many of them were overheating). But it is equally wrong to assume that they cannot recover until America rebounds. There are good reasons to believe that emerging markets' share of world growth will continue to climb (see chart 2).

Gerard Lyons, chief economist at Standard Chartered, argues that most emerging economies are not plagued by America's deep structural problems, such as an overhang of debt, which could cramp growth for several years. Although 2009 will be a painful year for poorer countries, those with high savings and modest debt could recover fairly quickly. On many measures, such as government and external balances, emerging economies look much sounder than the big rich ones.

Unfortunately, aggregate numbers conceal many horrors, most notably in eastern Europe. Countries such as Hungary, Estonia, Latvia and Turkey have huge current-account deficits and foreign debts. Between 2000 and 2008, the ratio of foreign debt to GDP dropped from 37% to 20% in Latin America and from 28% to 17% in emerging Asia, but jumped from 45% to 51% in central and eastern Europe.

As foreign capital dried up, GDP fell by 4.6% in Latvia and by 3.5% in Estonia in the year to the third quarter of 2008. Capital Economics, a research consultancy, expects another 5% drop this year. Hungary's economy is expected to contract in 2009. Turkey may also be heading for trouble. Its debt-service payments due in 2009 amount to 80% of its foreign reserves, the highest ratio of any big emerging economy.

Russia has run current-account surpluses for many years, yet it has also been badly hit by an outflow of capital and a credit freeze. Banks and companies are finding it hard to roll over their foreign debt. Official reserves have fallen by $160 billion, or 25%, since August. As a result of lower oil prices, Russia is likely to run its first current-account and budget deficits in a decade, and its economy may well contract in 2009.

Asia's export-led economies have been hurt by the collapse in global demand. Output is already falling in Singapore, Hong Kong and Taiwan. However, current-account surpluses and modest domestic debts mean that most of the region is much less exposed to the credit crunch than eastern Europe is. Asia has two other advantages. First, as a large net importer of raw materials it will benefit from the plunge in commodity prices, unlike Latin America. And second, with the exception of India, Asian countries have low public-debt-to-GDP ratios, giving them more room for fiscal stimulus than other emerging economies. Such policies take time to work, but after a nasty 2009, Asia is well placed to be the first region in the world to recover.

China is crucial to Asia's fortunes. Many economists expect GDP growth to slow to around 7% in 2009, down from almost 12% in 2007 and its slowest rate for almost two decades. Thousands of factories have closed in southern China, triggering concerns that rising unemployment will cause social unrest. This prompted the government to unveil a large fiscal stimulus in late 2008, which should help to boost growth in the second half of this year. With debts of only 18% of GDP, the government has plenty more room to boost spending. And if China has to rely more on domestic demand, this will help to steer it onto a more sustainable path.

A comparison of China with India in any case shows that exports are not the main thing that determines how vulnerable economies are to the global crisis. India's exports as a share of GDP are much smaller than China's, so one might expect it to be holding up better. But a big chunk of Indian investment—the main driver of recent growth—has been financed by overseas borrowing or new equity issuance. Both have dried up. The government's huge budget deficit also limits its room for fiscal easing. On January 2nd India announced its second monetary and fiscal stimulus package within a month, but the extra spending is tiny. Standard Chartered thinks that GDP growth will dip to 5% in 2009, well below its recent 9% pace.

Latin America's prospects lie somewhere between those of Asia and emerging Europe. Weak commodity prices could push the region into running a large current-account deficit, just as private-capital inflows decline sharply. Latin America also has less scope for fiscal stimulus than Asia, because many governments (including Argentina and Brazil) used the windfall from higher commodity prices to boost spending rather than cut debt. Goldman Sachs forecasts that Brazil will grow by only 1.5% in 2009, whereas Mexico's GDP could fall by 0.5% because of its stronger trade links with America. The bank reckons that both should recover fairly quickly. Argentina is another matter. Credit-default-swap spreads on its government debt have surged to horrifying levels, signalling that investors see a high risk of default.

During the past five years virtually all emerging economies boomed. Now their fortunes will diverge much more. The most important factor determining how they cope with the recession in the rich world will be whether they are high savers, able to stimulate their own economies, or big borrowers. If international investors continue to shun risk and rich-world governments swamp markets with their own borrowing, it will be hard for emerging-market governments to issue bonds and for banks and firms to roll over debts. Some developing countries will therefore remain sluggish for longer than others.

Overall, however, their long-term prospects remain good, thanks to structural reforms and better macroeconomic policies over the past decade. In December the World Bank forecast that GDP per head in poorer countries would rise at an annual pace of 4.6% during 2010–15, similar to that during the past decade, and more than twice as fast as in the 1990s. That word "decoupling" may yet get dusted off again.

Jan 8th 2009 | HONG KONG
From The Economist print edition

--
Warm Regards,

Sudesh Kumar
London, UK
sudesh.kumar@economics.org.in

GOI Competition for design of the ‘Symbol for Indian Rupee’ like Major currencies of the world e.g. US Dollar, Pound Sterling, Yen and the Euro have an Identification symbol.

2009-03-04T06:58:00.001-08:00

Major currencies of the world e.g. US Dollar, Pound Sterling, Yen and the
Euro have an Identification symbol. The Government of India also proposes to have
a symbol for the Indian rupee to be selected through public competition.
Accordingly, all Resident Indians (both Professional artists and Non-professionals)
are hereby invited to participate in a Competition for design of the 'Symbol for Indian Rupee'.

Submission of Entries:

Interested persons may send their entries, along with a bank draft of Rs.500/-
(Rupees five hundred only) in favour of the Pay & Accounts Officer, Department of
Economic Affairs, New Delhi, drawn on a scheduled commercial bank/nationalised
bank at New Delhi as registration fee, to the Under Secretary (Currency),
Department of Economic Affairs, North Block, New Delhi – 110 001 to reach him
latest by 1300 hours on 15th April 2009. Entries received after the stipulated time
shall not be entertained and returned unopened. The Department shall not be
responsible for delay by postal services, courier agencies etc. The entries can also be
deposited personally at the Information & Facilitation Counter of the Department,
near gate No. 8, North Block, New Delhi.

The entries should be sent in a properly sealed envelope labelled "Entry for
Symbol for the Indian Rupee". The entry should be accompanied by a brief
explanation of the Design and how it best symbolizes the Indian Rupee and also the
bio-data of the applicant with a passport size photograph affixed on the top right
hand corner.

Guidelines for preparing entries:

1. The symbol should be sent only on an A-4 size paper in black and white print.

2. A graphical construction of the symbol design in exact proportions in a bigger
size, along with final design, Theme synopsis and concept is required to be
submitted.

3. The symbol should represent the historical & cultural ethos of the country as
widely accepted across the country.

4. The size of the final design should not be smaller than 232 square cm (36 sq
inches). It is to be submitted along with minimum TEN different proportionally
smaller sizes up to 4 points font size of the text matter.

5. The symbol should be applicable to standard keyboard. The symbol has to be
in the Indian National Language Script or a visual representation.

6. The symbol should be original work of the participant and must not infringe
the Intellectual Property Rights of any third party.

7. A participant can send a maximum of two entries.

8. The entry could be an individual project or a team project.

9. The entries received without the requisite fee shall be out rightly rejected.

Other Conditions:

1. The entries sent once shall not be returned.

2. The final selected symbol shall become the intellectual property of the
Government of India and the designer shall not have any right over the same.

3. The responsibility to comply with the guidelines and other conditions fully lies
with the participant and the Government of India shall not be liable for any
dispute raised by a third party.

Selection Process:

a) All the entries received by the stipulated date and time and found in order,
shall be evaluated by a Jury of Examiners comprising seven members drawn
from Art Institutions of repute (such as Sir JJ Institute of Applied Art, National
Institute of Design, Lalit Kala Academy, Indira Gandhi Centre for Art &
Culture) – three members, Government of India – 2 members and Reserve
Bank of India – 2 members.

b) Five entries shall be shortlisted for final selection. The shortlisted Designers
would be required to make a presentation to the Jury and would be awarded
a prize of Rs.25,000/- each. The date, time and venue of the presentation
shall be communicated separately to the shortlisted designers.

c) The Designer of the finally selected design will get a prize of Rs.250, 000/-
and would be required to surrender copyright of the design to the government of India.

(No.10/8/06- Cy.II)
(B S Rawat)
Deputy Secretary to the Government of India

http://economics-society.ning.com/profiles/blogs/govt-of-indias-competition-to

Regards,

Sudesh Kumar
London, UK
sudesh.kumar@economics.org.in

The History and Economics of New Year's Resolutions

2009-01-01T19:06:00.001-08:00

Dear Friends,

I would like to wish you a very great year ahead!!!

Have a good 2009!

Sudesh

Sudesh.Kumar@economics.org.in

The History of New Year's Resolutions

By Ryan Blair

The tradition of the New Year's Resolutions goes all the way back to 153 B.C. Janus, a mythical king of early Rome was placed at the head of the calendar.

With two faces, Janus could look back on past events and forward to the future. Janus became the ancient symbol for resolutions and many Romans looked for forgiveness from their enemies and also exchanged gifts before the beginning of each year.

The New Year has not always begun on January 1, and it doesn't begin on that date everywhere today. It begins on that date only for cultures that use a 365-day solar calendar. January 1 became the beginning of the New Year in 46 B.C., when Julius Caesar developed a calendar that would more accurately reflect the seasons than previous calendars had.

The Romans named the first month of the year after Janus, the god of beginnings and the guardian of doors and entrances. He was always depicted with two faces, one on the front of his head and one on the back. Thus he could look backward and forward at the same time. At midnight on December 31, the Romans imagined Janus looking back at the old year and forward to the new. The Romans began a tradition of exchanging gifts on New Year's Eve by giving one another branches from sacred trees for good fortune. Later, nuts or coins imprinted with the god Janus became more common New Year's gifts.

In the Middle Ages, Christians changed New Year's Day to December 25, the birth of Jesus. Then they changed it to March 25, a holiday called the Annunciation. In the sixteenth century, Pope Gregory XIII revised the Julian calendar, and the celebration of the New Year was returned to January 1.

The Julian and Gregorian calendars are solar calendars. Some cultures have lunar calendars, however. A year in a lunar calendar is less than 365 days because the months are based on the phases of the moon. The Chinese use a lunar calendar. Their new year begins at the time of the first full moon (over the Far East) after the sun enters Aquarius- sometime between January 19 and February 21.

Although the date for New Year's Day is not the same in every culture, it is always a time for celebration and for customs to ensure good luck in the coming year.

Ancient New Years

The celebration of the New Year is the oldest of all holidays. It was first observed in ancient Babylon about 4000 years ago. In the years around 2000 BC, Babylonians celebrated the beginning of a new year on what is now March 23, although they themselves had no written calendar.

Late March actually is a logical choice for the beginning of a new year. It is the time of year that spring begins and new crops are planted. January 1, on the other hand, has no astronomical nor agricultural significance. It is purely arbitrary.

The Babylonian New Year celebration lasted for eleven days. Each day had its own particular mode of celebration, but it is safe to say that modern New Year's Eve festivities pale in comparison.

The Romans continued to observe the New Year on March 25, but their calendar was continually tampered with by various emperors so that the calendar soon became out of synchronization with the sun. In order to set the calendar right, the Roman senate, in 153 BC, declared January 1 to be the beginning of the New Year. But tampering continued until Julius Caesar, in 46 BC, established what has come to be known as the Julian Calendar. It again established January 1 as the New Year. But in order to synchronize the calendar with the sun, Caesar had to let the previous year drag on for 445 days.

Chinese New Year

Except for a very few number of people who can keep track of when the Chinese New Year should be, the majority of the Chinese today have to rely on a typical Chinese calendar to tell it. Therefore, you cannot talk of the Chinese New Year without mentioning the Chinese calendar at first.

A Chinese calendar consists of both the Gregorian and lunar-solar systems, with the latter dividing a year into twelve month, each of which is in turn equally divided into thirty- nine and a half days. The well-coordinated dual system calendar reflects the Chinese ingenuity.

There is also a system that marks the years in a twelve-year cycle, naming each of them after an animal such as Rat, Ox, Tiger, Hare, Dragon, Snake, Horse, Sheep, Monkey, Rooster, Dog and Boar. People born in a particular year are believed to share some of the personalities of that particular animal.

The Sounds of Happy New Year

With the holiday season upon us, here's a list that's sure to be a tongue twister. See how Happy New Year is pronounced around the world.

Arabic: Kul 'aam u antum salimoun

Brazilian: Boas Festas e Feliz Ano Novo means "Good Parties and Happy New Year"

Chinese: Chu Shen Tan

Czechoslavakia: Scastny Novy Rok

Dutch: Gullukkig Niuw Jaar

Finnish: Onnellista Uutta Vuotta

French: Bonne Annee

German: Prosit Neujahr

Greek: Eftecheezmaenos o Kaenooryos hronos

Hebrew: L'Shannah Tovah Tikatevu

Hindi: Niya Saal Moobarak

Irish (Gaelic): Bliain nua fe mhaise dhuit

Italian: Buon Capodanno

Khmer: Sua Sdei tfnam tmei

Laotian: Sabai dee pee mai

Polish: Szczesliwego Nowego Roku

Portuguese: Feliz Ano Novo

Russian: S Novim Godom

Serbo-Croatian: Scecna nova godina

Spanish: Feliz Ano Neuvo or Prospero Ano Nuevo

Turkish: Yeni Yiliniz Kutlu Olsun

Vietnamese: Cung-Chuc Tan-Xuan

Auld Lang Syne

The song, "Auld Lang Syne," is sung at the stroke of midnight in almost every English- speaking country in the world to bring in the New Year. In spite of the popularity of 'Auld Lang Syne', it has aptly been described as the song that nobody knows. Even in Scotland, hardly a gathering sings it correctly, without some members of the party butchering the words.

Written by Robert Burns in 1741, it was first published in 1796 after Burns' death. "Auld Lang Syne" literally means "old long ago," or simply, "the good old days."

Auld Lang Syne by Robert Burns

Should auld acquaintance be forgot,
and never brought to mind?

Should auld acquaintance be forgot

and days of auld lang syne?

For auld lang syne, my dear,
For auld lang syne,

We'll take a cup o' kindness yet

For auld lang syne

We twa hae run aboot the braes
And pou'd the gowans fine;

we've wander'd mony a weary foot

Sin' auld lang syne

We two hae paidled i' the burn,
Frae mornin' sun till dine;

But seas between us braid hae roar'd

Sin' auld lang syne

And here's a hand, my trusty friend,
And gie's a hand o' thine;

We'll take a cup o' kindness yet

For auld lang syne

Should auld acquaintance be forgot,
and never brought to mind?

Should auld acquaintance be forgot

and days of auld lang syne?

For auld lang syne, my dear,
For auld lang syne,

We'll take a cup o' kindness yet

For auld lang syne

The Economics of New Year's Resolutions

Most of New Year's resolutions tell a same story. Time Element and preference, the principle that people, to varying points, tend to prefer satisfaction now over satisfaction later. Here, I am compiling two short articles on same.

First Part by Mike Moffatt (About.com) and 2^ND is from CNN news dated 31 Dec 2008.

Sudesh

1^st Part –

One of concepts in game theory is the idea of a "strategic precommitment". A strategic precommitment is a commitment to a typically unpleasant action or ouctome unless a specific objective is reached. Strategic precommitments can often be very dramatic:

A man walks into a bank and shows the teller that he's strapped with dynamite. He announces that if he does not receive $10,000 in cash that he'll detonate the explosives, killing himself and everyone else in the bank.

In this example the man has committed himself to a rather unpleasant act, in order to increase his bargaining power and his chances of receiving his desired outcome. For any such strategic precommitment to work, the following two factors must be in play:

1.      There must be a set of actions that the actors can take in order to make the desired outcome happen. In our example, there must be a way in order for the bank to give this man $10,000.

2.      The threat, in this case the threat to explode the dynamite, must be credible. If the bank does not believe that the robber will carry through with his threats, then the strategic precommitment will fail. In this instance, the robber may have to work to convince the bank that he really will blow himself up if he does not receive the money.

What does any of this have to do with New Year's? Virginia Postrel's A Nobel Winner Can Help You Keep Your Resolutions shows the link between game theory and New Year's:

WHY make New Year's resolutions? If you need to start a diet or get up earlier in the morning, why wait until Jan. 1? Why not do it today? New Year's resolutions do not make any rational sense.

While perfectly logical, that analysis misses the point. New Year's resolutions help people cope with some of the most difficult conflicts human beings face.

So argues one of the economics profession's greatest experts on conflict, Thomas C. Schelling, who shared this year's Nobel in economic science for, in the words of the citation, "having enhanced our understanding of conflict and cooperation through game-theory analysis."

Professor Schelling, now a professor emeritus at the University of Maryland, is famous for his work on conflicts between nation-states, particularly those with nuclear weapons.

One of his best-known ideas is "precommitment." One party in a conflict, he demonstrated, can often strengthen its strategic position by cutting off some of its options to make its threats more credible. An army that burns its bridges, making retreat impossible, is a classic military example.

Others involve strong diplomatic commitments. By passing a law saying the United States will defend Taiwan if it is attacked, for example, Congress gives future administrations less flexibility in dealing with a crisis, but the threat makes an attack less likely.

In the early 1980's, Professor Schelling applied similar analysis to individuals' internal struggles, seeking to develop what he called "strategic egonomics, consciously coping with one's own behavior, especially one's conscious behavior."

The Moffatt System for New Year's Resolutions

1.      Pick a few resolutions you absolutely want to keep. They can be as many or as few as you'd like, but I'd try to keep it as small as possible. I picked 10, which is probably excessive; I'd recommend 5 or less if this is the first time you've done it.

The resolutions can be anything you want, but they all must have one key property: They all must be something you can measure. "I'll go to the gym more often" is not an acceptable resolution under this system, but "Go to the gym at least 10 times every month" is. Half of my 10 resolutions are fitness related goals, such as "At some point in 2006, I will run 10K in under 50 minutes".

In every article or book on resolutions, psychologists always recommend having goals where you can tell if you are suceeding or not. Under this system, knowing if you've succeeded or not is crucuial, as we will make a strategic precommittment which will be used if the goal is not met.

2.      Pick a sum of money you will pay for each goal that is not met. It must be something that is painful to give up (in order to inspire you to meet your goal), but it must at the same time be plausible. In my case, I will pay $400 for each goal that is not met. This is a painful amount of money for me, particularly if I miss all my goals, but is one that could be given up without dire consequences to my family.

3.      Make a list of friends that you are comfortable sharing your goals with.

Divide the amount of money by the amount of friends. In a case, $400/20 = $20 per person. You may want to adjust the number of dollars or the number of friends so this works out to a round number. Then send a personal letter to each of those friends announcing that you will pay each of them the dollar amount you calculated for each goal that is missed. You'll also want to add a few conditions under which such a promise becomes void

If you follow this system based on strategic precommitments you will have more successes than if you do not. The strategic precommitment works here since I picked goals for myself which are attainable and that my threat is credible; keeping my word is more valuable to me than the money involved and my friends know that. There are couple of positive side effects to this plan as well:

1.      It makes your resolutions far more realistic. Perhaps the biggest problem we have when we make New Year's Resolutions is that we pick things we cannot possibly achieve then get upset with ourselves when we do not meet those goals. Since we're paying money if we do not meet our goals (though I like to think of it as getting rewarded for success!), we're far more likely to make goals that we can actually accomplish. There's no better feeling that accomplishing something you set out to do; such successes do not happen when you set unrealistic goals.

2.      It gets your friends involved. I've found that while my friends might joke or laugh about getting $20 (or whatever sum you set), they are really interested in seeing you succeed. But they will constantly remind you of your goals and the money, which will help you stay focused with all of life's other distractions.

2^nd Part -

Putting a price on procrastination

CNN) -- David Laibson knows that when he procrastinates, mere deadlines are not always enough to get him going. So, when this Harvard economics professor collaborates on a major project, he'll sometimes promise to deliver a finished product by a certain date -- or else pay his co-authors $500.

"There are a lot of behavioral economists who really do say that, and really do pay," says Laibson, who studies the psychological factors that play into economic decisions.

It's not just academics who set up monetary contracts to fight procrastination. StickK.com, founded by Yale University economics professor Dean Karlan and two colleagues, helps people fulfill their goals by allowing them to risk their own money -- if they don't complete their self-described objectives, they lose the money.

"It's a contract to make slothfulness more expensive," said Karlan, who has personally put up to $50,000 at stake to help himself lose or maintain his weight.

The site will soon have its first New Year's week, when people are making their resolutions for 2009. StickK.com, which launched at the end of January 2008, has about 30,000 registered users, Karlan said.

Goals on StickK.com range from the practical "stop biting nails" to the ambitious "successful startup" to the competitive "lose weight faster than Nate" to the creative "speaking more slowly to foreigners in NYC."

Why do we keep putting things off?

Economists say there is substantial evidence that humans naturally procrastinate because of inherent impulsiveness.

More specifically, says Laibson, people perceive rewards and costs as having only half the weight tomorrow that they have today. In other words, unpleasant chores feel only half as bad when we imagine doing them tomorrow, versus actually doing them today.

"Pushing costly, unpleasant tasks into the future is like a getting a 50 percent discount on them, psychologically," Laibson said. "When you actually arrive at that future date, you'll once again face the same problem."

How, then, can we fulfill our sometimes-unpleasant New Year's resolutions, such as losing weight or kicking a bad habit? The economists answer: Put a price on it.

StickK.com came about as a result of the theoretical work of Laibson and others on commitment contracts, Karlan said. The idea is that many people, such as Laibson with his $500 wager, will follow through with their goals if they are risking their own money.

StickK.com users set up whatever goals they like, and have the option of putting as much money as they want at stake. They can also designate a "referee" who receives e-mails when users report they've made progress. The second "k" in the name stands for "contract."

Forfeited money from unfulfilled promises goes to a charity or, depending on the user's preference, an "anti-charity" -- one the user doesn't support. For example, a person who feels strongly against abortion can designate the NARAL Pro-Choice America Foundation as the recipient of the money if he or she does not meet a personal goal.

About 85 to 90 percent of users fulfill their contracts, but Karlan cautions that each person's progress is self-reported. He also noted that some people may feel better about not making good on their promises if they opt to send their forfeited money to a good cause.

The company will soon be giving forfeited money to a nonprofit that works with families whose houses have been foreclosed, he said.

Why laziness means less money

Apart from these explicit contracts, research shows that people often lose money because of procrastination and self-control issues.

Delaying things such as opening a savings account or putting money into a 401(k) can have long-term consequences that could be avoided by acting earlier. A slew of economic literature suggests that small interventions -- such as having a portion of your paycheck automatically put in a retirement account -- can result in large long-term benefits. And you're more likely to have a retirement account in the first place if it's the default and you don't have to opt in.

"It's clear that people delay choices that are beneficial to them ... if they're not the default," said Stefano DellaVigna, associate professor of economics at the University of California-Berkeley.

In a study on gym attendance, published in the American Economic Review in 2006, DellaVigna and colleagues looked at people who chose $80 monthly gym memberships over paying $10 a visit. These monthly members actually went to the gym only once a week, meaning they wasted $40 a month because of excessive optimism about how often they'd go.

Moreover, DellaVigna found a spike in gym enrollments around the start of the new year, but the dedication didn't last -- the new subscribers tended to go to the gym more than others for a month or two, and then their attendance dropped off to the lowest.

The bottom line is that people are overly optimistic, he said. If you're going to try to go to the gym more often, he recommends asking your gym of choice if it has the pay-per-visit option so you can monitor your own attendance before committing to the monthly contract.

Finally, you can override your short-term impulses by committing yourself to something a week ahead of time, said Laibson.

"Don't try to talk yourself into being a better person. Simply commit yourself in advance," he said.

cnn.com/2008/HEALTH/12/30/procrastination.economics/index.html?iref=mpstoryview

Sudesh Kumar | sudeshkumar.com | Tel: +44 (0) 2031180680  | Cell: +44 (0) 7981743648

John Taylor talk on Monetary Policy

2008-11-10T19:18:00.001-08:00

What should an educated person know understand what the Federal Reserve (Fed) is actually doing and trying to do? Main mission: keep the purchasing power of the dollar stable, prevent inflation, make sure we don't have a Great Depression again or high inflation as in the 1970s, mainly by keeping inflation low. Set up in 1914. Keep price level stable and avoid catastrophe like the Great Depression. Newspaper business sections would seem to think the job of the Fed is to steer the economy, stimulate it but not too much. Goal of price stability is consistent with keeping the economy stable. Can see that historically, macroeconomic models or just common sense. Late 1960s, early 1970s, inflation got into double digits, Fed would put on the brakes, boom and bust. Roughly 5 recessions, one every three or four years. Look at years started in the early 1980s, Volker followed by Greenspan, lower and steadier inflation rate. Had a huge reduction in the volatility of GDP; since 1982 only 2 recessions in a span of 25 years, and both very mild. Newspaper says you can either have price stability or growth. Very short term. Need long term perspective. Short term seems to have this trade-off, but it's a false tradeoff.

To keep inflation down you have to keep the growth of the money supply down, but the way the Fed talks about its policy is through interest rate changes. Average person has the following story in mind: When the economy is slowing, the Fed needs to cut interest rates to stimulate the economy, and that in turn should stimulate monetary expansion, encouraging more borrowing, which in turn should raise prices. What is right way to think about what the Fed says in talking about interest rates? If you want to control inflation, control the money supply, more money causes higher prices. That is a fundamental aspect of monetary theory. But measuring money has become more difficult because of all the different ways people can pay for things, AMTs, credit cards, savings. What has happened is the use of the interest rate rather than money to control inflation. Now when they meet they debate what the Federal Funds rate should be. [Recorded Aug. 4, 2008.] Federal Funds rate is the rate that banks charge each other when they borrow overnight. Currently 2%, average; market rate, banks can charge anything they want. Fed affects it not by setting it directly but by supplying more or less funds to the market. If they withdraw funds from the market it makes money tighter and raises the Federal Funds rate. Same idea as if you were trying to affect the price of corn: supply more corn drives the price of corn down. What's the Fed doing? It's got to buy something. They could in fact buy ketchup. But what they do buy is Treasury Bills. If they want to raise the rate from 2% to 2.25%, they sell T-Bills and extract money from the economy. They watch the rate, not trying to pinpoint it exactly but try to keep it roughly around their target.

At a time when they are injecting money into the economy and cutting the Federal Funds rate rate, why isn't that inflationary? Why won't that lead to a conflict between the stable price level and the healthy economy? Can be inflationary if overdone. Question is: how much? Benchmarks. Does require judgment. What they want to do is lower interest rates if inflation seems to be falling; if inflation starts to rise they should be raising interest rates, putting money out of the system. Want an even keel of price stability. Taylor Rule; distinction between what the Fed should do and what it actually does. What is the Taylor Rule? Both a guide and a description, both normative and positive. In the 1980s when Fed was moving away from money to interest rates as a guideline. Researchers were trying to build on the work of Milton Friedman, who emphasized transparency, policy rule for the money supply. Economists wanted to try to replace that rule with a guideline for the interest rate, normative, what the Fed "should" do. Taylor Rule: Fed should look at inflation and also state of the economy, GDP. If inflation rises by say 1 percentage point, Rule says the Fed should increase the interest rate by 1.5 percentage points. Important that the change should be larger than the change in the interest rate to get enough of a response by the system to bring inflation rate down. If GDP starts to fall, say by 1 percentage point from its growth page, Rule entails cutting the interest rate by ½ a percentage point. There the coefficient is .5, arrived at by trying different rules out within the model. And we had some natural experiments in history. Simulation within models, came up with Rule in the late 1980s, early 1990s. Soon after publishing that work, 1992, Federal Reserve policy turned out to be very closely described by that Rule; that it, it was a positive description, what actually was done. Throughout most of the 1990s till recently, closely describes Fed, though sometimes off. If you go back to the bad old days of the late 1960s and early 1970s, the Fed could not be described by this simple policy rule, and economy was doing poorly. Same story holds for many other countries. If they follow the Rule things are pretty good and if they don't follow the Rule things are pretty awful.

One response: 25 years is a small drop in the bucket, maybe just random correlations. Is it more than just a coincidence? Nothing lasts forever, financial system or technology could change. Discussions frequently happen as to whether the Fed should engage in different policies. Happens sometimes. Looking back at 2000-2004, Fed had a rate lower than predicted by the Rule; now we have a crisis, which again suggests that going off the Rule was not a good idea. Emerging market countries, worried about exchange rates, Central Banks are getting off the Rule, maybe because exchange rates are becoming more of a factor. Glass half-full aspect: it's working. Benchmark, not meant to be mechanical, need to have people making judgments. But when you've seen deviations it's led to events we'd rather not have. 1987, stock market crash; 1998, Fed went under what was predicted by the Rule, ultimately required tightening the monetary policy; recession, though after revisions it was not a recession because there weren't two consecutive quarters of GDP growth decline. Labor markets acted like they were in a recession, similar to current situation: GDP growing but jobs declining. Surprising how long it took the labor market to look like it was a healthy economy. We've had 25, even 50 good years though the 1960s and 1970s weren't great. Is that true relative to the 19th century when we didn't have a Federal Reserve? And: how ought we structure the Fed and maybe chastise the Chair down the road if the Rule is not followed? Look back, Great Depression was terrible performance, double-digit, 25% unemployment rate, Friedman and Anna Schwartz, Fed didn't keep money growth up, can blame the Fed. In last 25 years we've avoided those kinds of catastrophes, under the leadership of very skilled people, Volker, Greenspan, really tremendous. How can you prevent people from doing the wrong thing fo political reasons? True of all kinds of public policy, have vested interests, earmarks, corrupt officials. We can rely on our democracy to get the best people whether it's tax policy or monetary policy, recordings like this podcast so people can debate these policies. Giving some independence to the leadership so they are not tied to political policy; though that can go the wrong way.

Artfulness of the job; might we not have been better off if we had implemented Milton Friedman's steady rule, say, mechanically run by a computer? Didn't go very far politically. Disadvantages of deviating. Deviation of 2002-2003 period; if they deviate again it will get them back on track. Friedman podcast: they talk about it but they really follow a steady money growth rule. What he's saying here: Take the Taylor Rule, increase interest rates when inflation rises, so you are really pulling back on the money supply, like keeping the money growth rate constant. Good sign of robustness of the Taylor Rule is that it has features like a fixed money growth rule. With a fixed money growth rule if inflation picks up then real money balances decline, amount of money compared to prices, purchasing power of money, which automatically causes interest rates to rise. Magnitudes might not be the same as with Taylor Rule, but similar results. But a fixed money growth rule is not how Central Banks think about it.

Risks currently in place in our economic system. Barro, disasters, still low but increased risk now. Economy grew last quarter, though not as much as we'd like; job growth is negative but relatively small compared to past downturns. But people wave around frightening scenarios. Under the surface, some unusual happenings that would make anyone worry. Look at financial system, at 3-month bank lending to each other, unusually high. Suggests banks are worried about lending to each other, unusual risk factor. Due to the fact that there are unusual securities out there, mortgage obligations that people don't know how to assess their value. If housing prices continue to fall, those securities will seem even more suspect. But how will that spread to the rest of the economy? So far, though economy is weak, it could be worse. Three players in the financial market situation: Fed and Treasury have both acted unusually. Bear Stearns, Freddie Mac, and Fannie Mae. Couldn't let them fail, Fed orchestrated rescue of Bear Stearns, forcing it into a salvage operation; about to bail out Freddie Mac and Fannie Mae. If Bear Stearns made poor decisions, shouldn't it just go out of business, creditors should have paid the full price? What was Fed worried about? Hard to assess from the outside, spillover. Creditors would get stuck with the collateral of Bear Stearns's loans. Some of those creditors were mutual funds, money market mutual funds; they would be obligated to sell that, could put money market mutual funds at risk. Moral hazard, encouraging people to take risk. Have to find a way to clarify what will happen in the future. What about a hedge fund? Crucial for the Fed, Treasury, and Government to clarify. Public officials have not yet articulated it. Guidelines: when will an intervention like that take place. Reporting system, so when you do intervene there is a follow-up report. People who made these bad decisions have to have better accountability in the financial systems.

Head of Bear Stearns lost about $100 million, pretty high price, pretty accountable. Subprime, people bundle a lot of junk together and sold it to someone who was expected to sell it to someone else. A smart person, any person should realize that prices could come down. A lot of people who took the risks are accountable, losing their houses, money. Some of the interventions have reduced accountability. People who lent money to Bear Stearns were bailed out. They made unwise decisions but they are being left alone. Danger here is that by trying to prevent the spillovers you reduce the effective risk people are holding which results in more risk. Financial sector does have spillovers. Liquidity in the U.S. system. Good in general that institutions lend to each other but not good if you don't look too closely. Value of all the financial instruments is tremendous but the complexity creates more risk. Transparency; rating agencies did a terrible job. Possible to limit spillover to people who were not involved in taking the risks. High leverage ratios, market place should do a good job to limit that risk without bailouts, but with bailouts it encourages people to take more risks, run into the spillover problem all over again. And people blame it on the markets. Step back, look at the whole deal, can't help but be optimistic about the future. Low risk, whole world has capitalism and markets spreading, billions of people coming from poverty to the middle class. What's happened in China could happen in Africa. Will look back on current experience as a learning experience.

Sudesh Kumar
London, UK
sudesh.kumar@economics.org.in

How Low Can Official Interest Rates Go?

2008-11-10T17:40:00.001-08:00

Interest rates are being cut aggressively around the world as economic growth slows and as price inflation either falls back from recent peaks or is set to fall sharply in the months ahead. A worsening of the credit crisis since the failure of Lehman Brothers two months ago, has noticeably hit expectations for growth and inflation. In many countries, prospects for price inflation are helped by the fact that wage inflation is well-behaved, meaning that it is well below price inflation. How low can interest rates go in some of the major economies? One starting point is the approach used in the so-called 'Taylor rule', which calculates the extent to which inflation and growth deviate from their long run averages, subtracts this from long run real interest rates and then adds expected inflation to get an estimate of what the short term official interest rate should be. We have calculated these rates for the US, UK and eurozone. What do they show? The answer is that overall they show that interest rates in the advanced economies have a further 1 to 2 percentage points to fall.

An analysis of the results from calculating Taylor rule rates for the US reveals an official rate of 3.75%, well above the current interest rate of 1%, see chart b. But central banks set short term interest rates in a forward looking way and, if this is taken into account, then it explains why there is such a large gap between the two rates. But in order for that calculation to work, we have to assume that price inflation falls well below its long term average, and that the economy weakens further, so that a big negative output gap opens up. This is, of course, exactly what forecasts are suggesting and so doing this largely explains the gap between the actual central bank base rate and the Taylor rule rate. IMF forecasts now show that growth in the advanced economies will be negative in 2009, the first synchronised decline since the second world war.

... analysis using the 'Taylor rule' suggests that interest rates can be cut further...

So assuming more negative forecast outcomes for economic growth and inflation into a Taylor rule framework supports the current 1% level for US interest rates. Interestingly, official short term interest rates could even be cut below the levels seen so far, if growth and inflation weaken further. This is instructive, as the history of the Taylor rule set against the official actual central bank rate shows that it has generally been a good guide to actual rates. In addition, market interest rates are still well above the official rate in the US, UK and euro area, see chart a, even though they have come down in the last few days. If this is allowed for, then it too suggests that the Fed funds rate should be 1%, in order to get market interest rates to a level implied by the Taylor rule, based on the traditional spread between official rates and market rates.

...in the case of the UK, to 1½% in 2009, if the economy experiences a downturn as severe as in 1990, and to zero if recession carries over into 2010

For the UK, what does the Taylor rule suggest? Chart c shows that the rule suggested that Bank rate should be cut to 3%, though in early 2009. But this does not take into consideration the fact that market rates are well above the official rate. If this is taken into account, then it suggests that UK rates should be cut to 2% in the near future. Our forecast is that rates will be cut ½% in December to 2.5% and then in February 2009 to 2%, but it could happen sooner. They could then stay at 2% throughout 2009. The fiscal policy response may well play a key role in whether this becomes the actual outcome. If tax cuts and spending increases are large enough to promote economic recovery, then Bank rate may not be cut as aggressively as we currently expect. We have also calculated where UK rates may have to be cut to, if the economy slips into a deep recession, see chart c. This would open up a wide enough output gap for price inflation to turn negative, which is a view held by some. In this case, UK interest rates would fall to 1½% by mid 2009 and, if the recession persists into 2010, to zero by the end of that year.

It looks as if interest rates in many of the major advanced economies will fall to new lows

In the case of the eurozone, the Taylor rule suggests that the ECB was right to cut rates to the current 3.75%. However, given market dislocation and the spread of market rates over the ECB repo rate, euro zone rates will need to come down by another 1.25 percentage points to 2.5% to get money market rates down to about 3½%.

The Taylor rule approach highlights that there are further cuts in short term interest to come, even though they have already been cut to historically very low levels in all three of the economies looked at in this analysis. Another factor encouraging cuts in nominal interest rates is that if inflation falls and interest rates are not cut, that translates into a rise in real interest rates at a time when the economy is in recession. To avoid this, Central banks in the advanced economies are willing to cut interest rates to below inflation, at least in terms of backward-looking past measures of inflation. In terms of forward looking real interest rates, lower nominal interest rates now are still needed to prevent too sharp a rise in future real interest rates.

Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com

Source: http://www.actionforex.com/fundamental-analysis/weekly-forex-fundamentals/economics-weekly:-how-low-can-official-interest-rates-go?-2008111067794/

Sudesh Kumar

Email: sudesh.kumar@economics.org.in

Why Krugman got the Nobel Prize: Economics, not polemics

2008-10-26T11:18:00.001-07:00

Why Krugman got the Nobel Prize: Economics, not polemics by Avinash Dixit

Krugman the columnist offers strong views, attracting adulation and hatred. His newspaper-reading fans delight in his Nobel Prize; his foes are shocked and dismayed. Both are mistaken. His prize has nothing to do with his popular writing. Here one of the world's most influential theorists explains that the prize celebrates Krugman's achievements in science, not in the policy arena. This column clarifies exactly what those achievements are.

I concluded my appreciation of Paul Krugman's research on the occasion of his winning the Clark Medal by saying: "I am sure the Clark Medal is but one milestone of many to come in his career." Now I can write this short article of continued appreciation on the occasion of his winning the Nobel Prize with the confidence and delight of a man whose forecast has come true.

The main new theme in Paul Krugman's scientific contributions since the Clark Medal is of course the fulfilment of what was then a promising start of research on economic geography. This work has now transformed that subject from a somewhat arcane sideline into a flourishing research field.

In the last 10 years, Krugman has achieved fame in a much larger arena with his columns in the New York Times. These offer strong views on economics and politics, and they have been harshly critical of the Bush administration on most issues. It is no wonder that they attract adulation from readers who share his views on these matters and hatred from the other side. The former delight in his Nobel Prize, and the latter are shocked and dismayed by it, but both these reactions are mistaken. The prize has nothing to do with the Op Ed columns and would have come to Krugman just the same if he had never written a single one of them. The prize celebrates his achievements in science, not in the policy arena. It is therefore important to summarise and clarify exactly what those achievements are.

The traditional theory of international trade was cast in the traditional framework of microeconomic theory, namely perfect competition. Differences among countries in their endowments of factors of production and in their technologies explained trade. A relatively labour-abundant country would have a comparative advantage in producing goods that required relatively more labour in their production, and would export these goods so long as the country did not have an even greater bias toward consuming exactly the same goods. The outcome, as so often with perfectly competitive markets, was efficient resource allocation; each nation stood to gain from trade.

By the early 1970s, this picture was increasingly thought to be anachronistic. Trade in perfectly competitive markets, where thousands of producers of cloth in England and wine in Portugal traded their goods, seemed a poor model of trade with two or three giant firms making aircraft or computers. Voices for protectionism are always looking for arguments they can voice; they could now claim that traditional theorems on gains from trade did not apply to this modern reality. A new theory for this new world was needed.

Krugman was the undisputed leader of the group that took on this task. To quote and paraphrase Stephen Jay Gould (The Flamingo's Smile, pp. 335, 345), Krugman has won his just reputation because he grasped the full implication of the ideas that predecessors had expressed with little appreciation of their revolutionary power. He had the vision to make the idea work in two ways, using it to make new discoveries and by recognising its implications as a far-reaching instrument for transforming general attitudes.

Too much has been transformed to allow a full explanation in this short article. I will merely touch upon three highlights, leaving interested readers to explore the details in my earlier appreciation (Journal of Economic Perspectives vol. 7, no. 2, Spring 1993, pp. 173-188), and the Nobel award committee's scientific background statement.

The main new feature of all these models is the existence of economies of scale in production. The importance of this was recognised going back at least two centuries to Adam Smith, but economists lacked the technical apparatus to include this feature, and the imperfection of competition it brings, into their models so they could quantify and formalise the idea and derive all its implications. In the last three decades we have seen the rich results of modeling scale economies and imperfect competition, not only from Krugman's work in international trade and economic geography, but also from work in macroeconomics by Blanchard, Kiyotaki and others, and on economic growth by Romer, Grossman, Helpman, and others.

Monopolistically competitive trade: This model is relevant to situations with moderate scale economies and consumer preference for product variety, thereby allowing several firms, each with some market power, to coexist in the market. The world auto industry is the prime example. This model provides a ready explanation for the seemingly puzzling rise in intra-industry trade. If as in the traditional theory countries use their advantages of technology or factor endowments to produce some goods at lower cost and export them, how can it be that France and Germany simultaneously export cars to each other? The answer is that the two types of cars are not identical in consumers' evaluation, and the economies of scale make it less costly to produce each type in only one of the countries. In this situation the old presumption of gains from trade is generally strengthened by the new theory. Each country benefits because of the better exploitation of economies of scale, and both gain further by having access to a larger variety of types of cars.

Oligopoly and strategic trade policy: If economies of scale are so large relative to the market that only a very small number of firms can coexist, they have substantial market power and can make super-normal profits. The large commercial aircraft industry, with Boeing and Airbus, is often cited as the paradigmatic example (but depending on the market conditions the profit may be eroded by fierce competition between the two). Now each country might benefit by strategically promoting its firm so it can seize this profit as a part of its own national income. Krugman, along with Brander and Spencer, developed models where such policy could in principle work, although later empirical work by Baldwin and Krugman, Dixit, and others found that the size of the gain was usually small even in the absence of retaliation by other countries. Thus this line of research gave some logical comfort, but not realistic support, to those who advocated protectionism in the new world of imperfectly competitive trade.

Economic geography: Others had argued that scale economies bring an element of historical accident to firms' location choices. Krugman went further and explored some important new mechanisms of economic interaction. A more populous region can enjoy lower costs and therefore higher real wages by carrying economies of scale farther. It can then attract more migration from other regions. The higher wages also create demand for the products of other firms; this is a positive externality supplementing the economies of scale within each firm. This tendency for concentration of production in a region is checked by transport costs across regions. The balance of all these forces determines the overall pattern of location of production. These ideas have led to a revolution in the field of economic geography, transforming it from a primarily descriptive endeavor into an analytic discipline.

I have not said anything about Krugman's popular writings, most importantly because they are not the reason for his "ennobelment," but also to a small extent because I sometimes dislike his polemical and combative style of writing at the same time as I agree with the substance of his criticisms. But my delight at the recognition of the scientific achievements of this friend and colleague of over three decades is great. In fact it is doubled by the joy of my having played a part in creating the tools that are proving their worth – models of monopolistic competition and product diversity, and of entry deterrence. With that in mind, here is my nomination for next year's prize: Romer, Grossman, and Helpman for endogenous growth theory.

--
Warm Regards,

Sudesh Kumar

London, UK
Cell: +44 (0) 79-817-43648
Tel: +44 (0) 20-328-60832
sudesh.kumar@economics.org.in

IT Execs Marriages (Arranged) are on hold due to recent job loss in India

2008-10-16T01:02:00.001-07:00

Clipping from Economictimes: The global recessionary trends have affected the young employees of the Indian software industry in Hyderabad in more than one-way.

While on one hand it is has spelt job loss fear, on the other hand, the parents of brides-to-be are no longer in search of IT grooms for their daughters.

The global recessionary trends have certainly scared the parents of would be brides who have apprehensions about the fluctuating signs in the information technology sector.

A mother of a would-be bride said she would prefer non-IT professionals for her daughter seeing the latest trend.

"It fluctuates. Day-to-day it can change. What is happening now could be a short phase," said Sharda Singh, mother of a would- be bride.

A father of a would-be bride expressed his concern too saying these ups and downs are bound to take place in any economy.

"There will be some ups and downs in anybody's life like that any sector in a country or the world can also have its ups and downs," said Rama Rao, father of a would be bride.

Some parents said they did not want to take interest in the marriage proposals of IT professionals any more as they were too scared of recessionary trends.

"I am very afraid of its effects," said S Krishna , father of a would- be bride.

India's IT export growth could be slower than its July forecast of a 21-24 per cent rise to about 50 billion dollars in the year to March, lobby group National Association of Software and Service Companies said last month.

Europe and Asia are big clients of Indian IT companies such as Tata Consultancy, Infosys Technologies, Wipro and Satyam Computer.

Some outsourcers may cut their dollar revenue forecasts due to a downturn in the US market, which contributes more than half their revenue, analysts said.

Indian IT firms have also been expanding in Europe and elsewhere to cut their dependence on US. But the risk of global recession is a worry for the sector, which was used to a scorching pace of growth.

economictimes.indiatimes.com/Infotech/Slowdown_IT_execs_marriages_on_hold/articles how/359835.cms

Sudesh Kumar

Email: sudesh.kumar@economics.org.in

Depression of 2008: Are we heading back to the 1930s?

2008-10-07T01:11:00.001-07:00

By Economics Editor, The Sunday Times October 5, 2008

It was an era that brought some of Britain's finest writers to a flurry of indignation. One railed against the "greedy, profit-grabbing system" and hoped to see "the people in the City all shoddy, bewildered, unhappy". Does that sound familiar? Polly Toynbee, perhaps, turning her righteous fury on the financial masters of the universe who have pushed the banking system over the brink?

No, it was JB Priestley and the era was the Great Depression of the early 1930s, which shaped the 20th century more than any other economic event, creating the conditions for the rise of fascism in Europe.

During the financial tumult of the past three weeks a shocking question has been hanging in the air. Despite all the economic advances of the past half-century, is 2008 the start of another Great Depression? To understand the implications, one has to realise what happened nearly 80 years ago.

In depression Britain, a fifth of the workforce was on the dole. A quarter of workers in the north of England and Scotland and more than 30% of those in Wales were unemployed. Iron output fell by more than 50% and steel production by 45% between 1929 and 1932.

Britain may have been the workshop of the world but there was no world economy to sell to.

Unemployment among shipyard workers reached 60% and among miners 35%. When workers clocked off at Palmer's yard in Jar-row after completing HMS Duchess, the owners closed the yard without notice, creating 80% unemployment in the town.

George Orwell, en route to Wigan pier, watched women and children on a slag heap "scrabbling with their hands in the damp dirt and picking out lumps of coal the size of an egg or smaller".

"Meanwhile," he wrote, "all around, as far as the eye can see, are the slag heaps and hoisting gear of collieries, and not one of those collieries can sell all the coal it is capable of producing."

Yet, however searing the experience of the depression for a generation, Britain got off relatively lightly. The eye of the storm, then as now, was in America. Between the Wall Street crash of October 1929 and the end of 1933, 9,000 US banks failed. The economy shrank by 33%, an unprecedented slump in peacetime. Britain's economy, along with others in Europe, dropped by a relatively modest 5%-6%. In Germany it suited Hitler's political ends to call it "the Wall Street Depression".

That was not how Herbert Hoover, America's beleaguered president, saw it, insisting that "the European disease had contaminated the United States". Americans faced not just unemployment but starvation and poverty, becoming economic refugees in their own country, as John Steinbeck memorably described in the great migration on Route 66 from the Oklahoma dust bowl to California. "[Route] 66 is the path of a people in flight," he wrote, "refugees from dust and shrinking land, from the thunder of tractors and shrinking ownership, from the desert's slow northward invasion, from the twisting winds that howl up out of Texas, from the floods that bring no richness to the land and steal what richness is there."

How did it happen and what are the similarities with the crisis of 2008?

The Great Depression was an economic crisis built out of a global financial crisis, not only the 1929 Wall Street crash but also the powerful shockwaves that knocked the international monetary system off its axis in 1931.

The failure of Credit-Anstalt, Austria's biggest bank, produced something akin to the current scramble by banks to hoard cash. Sir Montagu Norman, the Bank of England governor, had to shore up Lazard's, one of the City's most blue-blooded merchant banks. Panic spread.

"All over Europe, banks rushed to safeguard their assets," writes Selwyn Parker in a new book, The Great Crash, published by Piatkus. "If they could, foreign depositors withdrew funds from Austrian and European institutions, albeit too late in many cases.

"In a bid to shore up the public finances, a panicking Austrian government blocked all but essential gold and foreign exchange transactions, locking £300m of foreign deposits inside its borders. Just as had already occurred in the United States, Europe was starting to hoard capital. The fire was spreading."

Every country looked after itself.

Britain led the departure from the gold standard, not only devaluing the pound but also precipitating the collapse of the international monetary framework that had held the global economy together.

Washington had already passed the Smoot-Hawley Tariff Act, adding protectionism to the down-draught facing the world economy.

Governments, then as now, stepped in, with Roosevelt's New Deal, Hitler's autobahns, and public works programmes in Britain. A degree of prosperity returned to some parts of some countries. House-building and a consumer boom brought Britain's south back to life.

But for many, the miseries of the Great Depression lingered until the 1950s. The old certainties were gone. The financial system had to be torn up and recreated and it took time. And it was painful and disruptive.

Could it happen again?

The man who can most lay claim to having seen the present financial crisis coming, and warned about it, is Bill White, former economic adviser to the Bank for International Settlements (BIS), the Basel-based central bankers' bank.

White – a genial Canadian who spent time at the Bank of England as well as more than 20 years with his own country's central bank – joined the BIS in the mid1990s. Almost immediately he and his colleagues began to be worried about what was happening. Global stock markets, in particular, appeared to be too strong in relation to underlying economic developments, and property prices were soon to follow.

It may have been a time of low inflation but it was also a time of strongly rising optimism, reflected in soaring share prices – "the Roaring Nineties" – and increased risk-taking by the banks.

Fortunately, it seemed, policy-makers had got the message. White and his colleagues were relieved when, in 1996, Alan Greenspan, then the powerful chairman of the Federal Reserve, America's central bank, began singing from their hymn sheet. Famously, Greenspan warned of "irrational exuberance" that had "unduly escalated asset values". These, he warned, could become "subject to unexpected and prolonged contractions as they have in Japan over the past decade".

The bursting of Japan's "bubble economy" in the late 1980s was the nearest modern equivalent to the depression era. An economy that had been bounding ahead and was tipped in the 1980s to challenge America for global economic dominance suddenly hit the buffers.

Tumbling property and share prices destroyed Japanese wealth, leading to three recessions in the space of little more than a decade. The big difference was that, thanks to the four decades of rising prosperity that had preceded the downturn, there was relatively little evidence of 1930s-style distress in modern Japan.

Greenspan appeared to be aware of the danger. But White watched with alarm as, each time the debt bubble threatened to burst, the Fed chairman and his fellow central bankers around the world, rather than accepting a temporary downturn in their economies, pumped up the bubble even more by cutting interest rates.

"What amazed me was how each time they managed to rejuvenate the system by reducing interest rates," he said last week. "But in the end, if the fundamental position is that there is too much credit in the system, something has to give."

The crunch of 1998, when financial crises in Asia, Russia and the hedge fund industry came together, was met with lower interest rates. So was the bursting of the dotcom bubble in 2000 and the crisis of confidence that followed the 9/11 attacks on America. When global share prices tumbled and economies weakened in the run-up to the Iraq war, central banks cut interest rates again: the Federal Reserve to just 1%, the Bank of England to a 50-year low of 3.5%.

Something, as White says, had to give. In June last year, two months before the present global financial crisis broke into the open with devastating effect, White warned in the BIS's annual report that, just as "no one foresaw the Great Depression of the 1930s", so it was possible that mainstream economic opinion was understating the dangers from toxic debt.

Nobody knew where all the bad loans were buried and there was a "high probability" of large losses.

It was a common view that "busts" could be swiftly tackled by central banks cutting interest rates, White noted. But just because that had worked in the recent past did not mean it would in the future.

Japan had cut interest rates when its bubble burst, as did America in 1930, but with limited effect. Sometimes the downward forces are just so big that even ultra-low interest rates – zero in Japan's case – will not do the trick.

White's views were prescient but were ignored. Parker, writing his book on the Great Crash and its consequences, questioned many senior bankers about parallels with the 1930s "but they didn't see it at all".

The closest parallel with that era, he thinks, has come in the past few weeks with a "domino" series of events, including the US government's rescue of Fannie Mae and Freddie Mac, the failure of Lehman Brothers, the forced merger of Mer-rill Lynch, the rescue of HBOS and nationalisation of Bradford & Bing-ley, the bailouts of the European banks Fortis and Dexia and the struggles over America's $700 billion "troubled asset relief programme".

"It is when the unthinkable becomes routine that the parallels become strongest," he says. "That happened in the early 1930s and it has happened time and again in the past two to three weeks."

Nick Crafts, a professor at War-wick University, is one of Britain's most distinguished economic historians. Banking crises, he says, are an ever-present risk that typically result from weak regulation.

After the banking collapse of the early 1930s, the Roosevelt administration's eventual response was a "bank holiday": the introduction of Federal Deposit Insurance (just as Ireland last week guaranteed all its banks' deposits), the reregulation of the banking system and its recapital-isation with taxpayers' money.

"Until very recently I would have definitely said yes to the question of whether we can avoid a repeat of the Great Depression," Crafts says. "The trouble is that these things can go horribly nonlinear."

What he means is that initial problems in the banking sector can trigger reactions throughout the economy. An initial drop in the supply of credit spooks businesses and consumers and makes them draw in their horns. Research in recent years has uncovered a typical drop of 6% in gross domestic product as a result of a banking crisis – equivalent to the depression-era fall in Britain's GDP.

George Magnus, a veteran City economist with UBS, sees this financial crisis as a classic "Minsky moment", as described by Hyman Minsky, an American economist who died in the year Greenspan first warned of irrational exuberance.

A Minsky moment occurs when investors reach the point of having taken on so much risk that the returns generated on their assets are no longer enough to pay off or even service the debts they have taken on to acquire them. When that happens, lenders call in their loans and investors are forced into a fire sale of their assets.

As Magnus puts it: "For me a Minsky moment is the point at which normal lending and borrowing behaviour is interrupted or compromised such that it threatens systemic risk and leads directly to the intervention of the central bank, whose function is to restore normal-ity and ensure that sound creditors and borrowers are not sucked into a maelstrom of credit retrenchment."

The worrying thing about the present situation, he says, is that normal lending behaviour has stopped, affecting businesses and individuals throughout the economy. "It wasn't the stock market crash that did the damage in the 1930s," he says. "It was the banking collapse."

What would a modern-day depression look like? As Japan has discovered over nearly two decades, a long period of negligible economic growth and rising unemployment is not the same now as it was in the 1930s. Welfare safety nets are in place, although they can have a devastating effect on government finances.

Britain went through a long period of rising mass unemployment in the 1970s and 1980s and suffered three big recessions between 1973 and . It may not have been a depression, but at times, particularly in the 1970s and early 1980s, it felt like one.

The structure of the economy has changed. No longer would a prolonged downturn mean men on street corners in industrial towns smoking Woodbines, or marches to London from the northeast of England. Modern, service-based economies show their pain more discreetly.

A depression, though, if it followed anything like the 1930s pattern, would be accompanied by deflation – falling prices. That, given the high inflation Britain is currently experiencing – the rate on the government's measure is set to hit a new high of 5% this month – sounds like good news. But the combination of high levels of company and household debt and falling prices is potentially very dangerous.

Falling prices would raise the "real" level of that debt, making the true amount that people and businesses have to pay off larger. Faced with stagnant or falling incomes, weak profits and high unemployment, many would be forced to default. What started off as a financial crisis for the banking system would become one where the economic feedback effects were dangerous and uncontrollable.

So far we have merely seen the early stages of what could be a pro-longed credit-in-duced downturn, but the effects are already dramatic. The number of new mortgages being granted has dropped by 70% over a year, bigger than the cumulative four-year fall in the housing recession of the early 1990s. On the measures produced by the Halifax and Nationwide, house prices are falling faster now than then.

Before now Britain had experienced only two periods of big house price falls: in the 1930s and the early 1990s. The economy suffered its longest postwar recession in the early 1990s but the banks came through it relatively unscathed. CAN a modern-day depression be avoid-ed? This week the International Monetary Fund and World Bank will hold their annual meetings in Washington. Ahead of that meeting, the IMF issued research on Thursday emphasising the risks.

The IMF – whose managing director, Dominique Strauss-Kahn, has already warned that this is the worst financial shock since the Great Depression – said it was alarmed by the intensification of the banking crisis.

"The current financial market meltdown being witnessed in the United States and other advanced economies will likely lead to longer and deeper economic downturns in some of these countries," it said.

Officials pointed out that the current combination of events was unprecedented, but that there was no known precedent in history of countries suffering banking system failures without serious economic consequences later.

If knowing the nature of the problem is part of the way to finding a solution, though, the global economy is well placed. Ben Bernanke, Greenspan's successor at the Fed, has devoted a life of study to examining and researching the causes of the Great Depression. Understanding it, he has written, is the "holy grail" of economics.

He knows, from his research, that what caused the problem in the early 1930s was the fact that the normal credit channels closed down; and, as Milton Friedman first pointed out, the effect of massive bank failures was a devastating collapse in the money supply.

That is why Bernanke put his weight behind Hank Paulson's $700 billion bailout plan for the banks and it is why, if he is honest, he will know that taxpayers will need to do even more.

"When you get to the stage that investors have disengaged from the market, governments have to step in," says George Magnus of UBS. "That means we will have to have capital injections by the government and a wider use of government guarantees."

The lesson for Bernanke is not just what got America into the Great Depression, but what got it out. By the end of the process, taxpayers owned a big chunk of the US banking system. That will probably have to happen again – beyond the $700 billion bailout – and the sooner it does, the better the chance of avoiding depression.

Most economists do not like predicting a repeat of the Great Depression, even those who have warned of the dangers.

"We've got to start by cleaning things up as best we can, and it isn't going to be easy," says Bill White. "What we have learnt is that it gets harder and harder to clean up afterwards. This is a time when we have to go to back to the prewar literature."

Robert Shiller, a Yale University professor who took Greenspan's "irrational exuberance" as the title for one of his books, has also consistently warned of the dangers.

"It is impossible to predict the nature and extent of the damage that the current economic and social dysphoria and disorder will create," Shiller writes now. "But a good part of it will likely be measured in slower economic growth for years to come. We may experience several years of a bad economy."

What applies to America may also be true here. Forecasters have already pushed out predictions of recovery to 2010 or 2011. After 16 years of economic growth, it looks like at least two to three years of cold turkey. '

The economy could stay in the doldrums for years'

A simple repeat of the recession of the early 1990s would see two years of a shrinking economy, a doubling of unemployment, a fall of more than a third in house prices, after inflation, and the failure of tens of thousands of small businesses. When the clouds lifted, taxpayers would be hit with higher taxes as the government scrambled to fill the black hole in the public finances.

A depression would be worse. After the initial slide into recession, the only light at the end of the tunnel would be turned down very low. Rather than bouncing back, the economy could stay in the doldrums for years, with mass unemployment again becoming the norm.

None of this is inevitable but the dangers have increased. Modern economies run on credit, much more so than in the 1930s. If the flow of credit stops, it is the economic equivalent of switching off the power supply. Nothing works. It is vital that this supply is turned on again.

Fortunately it is not all grim for the global economy. In the 1930s America, Britain and Europe were its mainstays. Now the world has become "multipolar".

The International Monetary Fund, despite its deep worries about the financial crisis, will still predict this week that world economic growth this year and next will be not far short of 4%, nearly double the usual definition of global recession.

The G7 countries – America, Britain, Japan, Germany, France, Italy and Canada – are hamstrung by the credit crisis and will not grow much, if at all.

However, the "emerging" world, led by China, is still strong. China is slowing, but from a growth rate of 11% to something like 9%. Economies such as India, Russia and Brazil still have plenty of momentum, despite recession or near recession in the West.

We may look back on this period as the moment when China took on the economic baton. Or, at least, when a communist country that had embraced its own controlled form of capitalism kept the world afloat.

That, viewed from the glass towers of Wall Street or Canary Wharf, where the risk-taking went much too far, would be the ultimate irony.

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Sudesh Kumar
sudesh.kumar@economics.org.in

Surrogacy Economics and Indian Law

2008-08-28T13:32:00.000-07:00

In this day and age where capitalism rules the world, there has been much debate over the commoditization of numerous once-sacred activities such as child birth. For a fixed price tag, you can now implant your spouse's and your gametes into a third-party's womb and receive your child 9 months later. However, opponents of surrogacy view the advent of surrogacy as the beginning of a slippery slope. By allowing couples to pay for the birth of healthy babies from the womb of a surrogate, some have felt that it is similar to selling the baby in the end as money is transacted and what the couple receives is the baby. Others have argued that surrogate mothers undergo mental trauma as they are expected to give up the baby that has lived in their wombs for the past 9 months because of a bond formed between them. This moral dilemma has also highlighted the legal problems surrounding surrogacy especially if the surrogate mother decides to lay claims on the baby after its birth. There is debate too on the claim that surrogacy exploits the poor as only those in need of money would so willingly give up their wombs for others, subjecting themselves to the risk of maternal deaths may be a problem in countries with poor or inadequate health care facilities. More extreme feminists even argued that surrogacy is similar to prostitution as women in both instances are sexually exploited for money.

I would like to debunk some of these myths as I feel that there is a need and a place for surrogacy to exist in society. Firstly, it is important to note that as couples are becoming more educated, some put off procreation and settling down to start a family because they want to pursue their dreams or that high flying career, thus they tend experience fertility problems which becomes increasingly common with age. This creates a gapping difference between wants and ability. The couple who are financially stable have decided to start a family, but they are unable to because of biological reasons. This is where surrogacy fills the gap by enabling couples who have given up their childbearing years for financial security, a real chance at having a family of their own. Although some may argue that there is always adoption to meet such a gap, it is undeniable that there is a preference for raising one's own flesh and blood instead of someone else's.

Secondly, surrogacy should not be seen as the commoditization of infants even though the end product of the whole surrogate pregnancy is the baby. In economics, a commodity is a unit that can substitute for another at all points, so each unit has no special intrinsic value. Thus, one cannot argue that the baby has become a commodity in surrogacy as the baby is unique. In fact, the babies would not even exist, if not for the surrogacy. Surrogacy, should be instead, viewed as the payments to the individual for the gestational services provided to bring the client's bloodline into this world. Surrogate mothers are respected for such services as surrogacy is a tedious and dangerous job which puts their life on the line, so they should be fairly compensated. This brings us to the point on the mental trauma experienced by surrogate mothers after birth. Rather than to accept the common misperception that surrogates feel traumatised after relinquishment of their rights over the child, it has been challenged that an increasingly majority feel empowered by their surrogacy experience.

Thirdly, clients would definitely choose healthy surrogates to bear their children so the claim that surrogacy exploits the poor usually does not hold as clients are likely to decline a surrogate in abject poverty due to unstable environment she is living in. Feminists who make the comparison to prostitution are preposterous as the underlying aim of both activities are different and should never be seen as a single entity together.

However, we do admit that there are thorny issues that have to be resolved her before we can fully embrace surrogacy. Although medical health care is becoming increasingly commonplace and advanced, there is always this risk which surrogates undertake to bring life into this world. In the event that something unfortunate does occur, will insurance policies cover the costs incurred or will they choose to argue that they are allowed to forgo the compensation as the surrogate chose to bear child themselves and hence created the opportunities for such mishap to occur, where the risk was not initially calculated into the previous insurance premiums they were paying. There is also a problem of ownership over the baby who arises due to the complexity and possibilities that may occur during the entire process. These include concerns like what happens if the surrogate fails to relinquish their rights over the child after the birth. In this respect, I feel that the surrogacy contract laws should be reviewed to enforce a mandate that the contracts may not require the woman who carries the baby to surrender it regardless, but in choosing to do so, she has to compensate the parents fairly. This should only be undertaken as a last resort as frequent occurrences of such would only serve to discredit surrogate mothers in general. Hence, rigorous counselling should be provided to both client and surrogate before legalising the transaction.

More complex situations may arise in a situation where the clients pass away during the course of the pregnancy. Should surrogates be allowed to abort the foetus then as it is technically not theirs and it would have perished together with the mother should the pregnancy have been borne by her. Yet, this is clearly not an option as such actions would be inhuman as it literally devalues and insults the sacredness of life. The infant may also be orphaned if the couple divorces each other and decided that neither is interested in taking care of the baby they once planned to have together, for example, the recent case where a baby girl is abandoned in India. She is the first surrogacy orphan after her parents divorced weeks before she was born and her mother refused to take her. The custody of the child born to an Indian surrogate mother and intended for a Japanese couple, hangs in limbo after the pair divorced. Also, should the couple be allowed to terminate the pregnancy if the surrogate accidentally violates the terms and conditions of the surrogacy contract, resulting in unintended consequences on the wellbeing of the child? For example, is the couple paying for the surrogacy allowed to request for an abortion should the surrogate mother contract a disease like AIDS where there is an extremely high chance that it is directly passed to the infant? While this is an unfortunate situation, there is a huge conflict between all involved parties as everyone is impacted by the final decision undertaken. Thus, it is favourable to consider how to keep ourselves out of such problems first, before embracing surrogacy.

The infinite number of possibilities only compound the ethical and moral dilemmas encountered during the implementation of surrogacy as a primary means of enabling couples who wish to have children but are unable to do so. Even though to some, the ends may not justify the means, we should look towards greater compromise in society and the creation of social safety nets to minimise such tragedies from happening in our search for other ways to taste the joy of having a family.

Sudesh Kumar

Email: sudesh.kumar@economics.org.in

Financial autonomy from dollarization

2008-08-25T06:37:00.001-07:00

Super Imperialism by Michael Hudson Extract world's need for financial autonomy from dollarization.

The Washington Consensus would not be so problematic if America used its free ride to invest in productive capital that yields future profits by putting capital in place.

Unfortunately, it has pursued for the less productive policy of maintaining an imperial military and bureaucratic superstructure that imposes dependency rather than selfsufficiency on its client countries. This is what makes the international system parasitic, in contrast to the implicitly productive and profitable private-enterprise imperialism depicted prior to World War I by critics and advocates alike. Far from being the engine of development that Marx, Lenin and Rosa Luxemburg imagined the imperialism of Europe's colonialist powers to be in their day, the United States has drained the financial resources of its industrial Dollar Bloc allies while retarding the development of indebted third world raw-materials exporters and, most recently, the East Asian "tiger economies" and the formerly Soviet sphere. The fruits of this exploitation are not being invested in new capital formation, but dissipated in military and civilian consumption, and in a financial and real estate bubble.

The early system was supposed to grow stronger and stronger until it culminated in armed conflict, but economically developing the periphery in the process. But the tendency of today's Washington Consensus is to retard world development by loading down the economies of almost every country with dollar-denominated debt, and to require America's own dollar-debts as the medium to settle payments imbalances in every region.The upshot is to exhaust the system until local economies assert their own sovereignty and let the chips fall where they may.

In today's world the form of breakdown is likely to be financial, not military. Vietnam showed that neither the United States nor any other democratic nation ever again can afford the foreign-exchange costs of conventional warfare, although the periphery still is kept in line by American military initiatives, most recently in Yugoslavia and Afghanistan.

The lesson is that peace will be maintained by governments refusing the finance the military and other excesses of the increasingly indebted imperial power. Yet Europe, Japan and some third world countries have made only feeble attempts to regain control of their economic destinies since 1972, and since 1991 even Russia has relinquished its fuels and minerals, public utilities and the rest of the public domain to private holders. Its overhead in acquiescing to the Washington Consensus has been to sustain a capital flight of about $25 billion annually for the past decade.

Asian and third world countries have permitted their domestic debts to be denominated in dollars, despite the fact that domestic revenues accrue in local currencies. This creates a permanent balance-of-payments outflow as a result of the privatization selloffs that provided governments with enough hard currency to keep current on their otherwise bad dollarized debts, but demand future interest and dividend remittances, while the state must tax labor,not these enterprises. This is a system that cannot last.

But what is to take its place?

If foreign economies are to achieve financial independence, they must create their own regulatory mechanisms. Whether they will do so depends on how thoroughly America has succeeded in making irreversible the super imperialism implicit in the Washington Consensus and its ideology.

Financial independence presupposes a political and even cultural autonomy. The economics curriculum needs to be recast away from Chicago School monetarist lines on which IMF austerity programs are based and the Harvard-style economics that rationalized Russia's privatization disaster.

Money and credit always have been institutional products of national economic planning not objective and dictated by nature. The pretense that monetarist policies are technocratic masks the degree to which the financial austerity programs enforced by the IMF and World Bank serve U.S. trade and investment objectives, and incidentally those of Western Europe and East Asia with regard to the terms of trade between creditor and debtor economies.

A great help to promoting the Washington Consensus has been its control over the academic training of central bankers and diplomats so as to remove the dimension of political reality from the analysis of international trade, investment and finance. Economists assume, for instance, that the gains from trade are shared fully and equally.

But in practice the U.S. Government has announced that its economy must get the best of any bargain, just the opposite of the situation portrayed by academic trade theorists and the idealistic assumptions of international law. Although the preambles to most international agreements contain promises of commercial reciprocity, the U.S.Government has pressed foreign countries to reduce their tariff barriers while increasing its own non-tariff barriers, getting by far the best of an unequal bargain.

The trade theory promoted by the monetarist Washington Consensus neglects the degree to which countries that have let their development programs be steered by the World Bank have fallen into chronic deficit status. Economics students seeking to explain this problem get little help from their textbooks, whose logic ignores the defining characteristics of global affairs over the past thirty years.

This hardly is surprising, as the criterion by which the economics discipline calls theories scientific is simply whether their hypothetical and abstract assumptions are internally consistent, not whether they are realistic.

The tactics by which global credit flows are controlled are a secret that U.S. financial diplomats are not interested in broadcasting. But without such a study being given a central place in the academic curriculum, the minds of central bankers and money managers throughout the world will be inculcated with a narrow-minded view of finance that misses the dimension of national geo-economic strategy, the failures of IMF austerity programs, the dangers of dollarizing foreign economies, and the free-ride character of key-currency standards.

The required study would show that in place of the competing national imperialisms that existed before World War I, only one major imperial power now exists.And instead of disposing of financial surpluses abroad as in Hobson's and Lenin's day, the U.S. Treasury draws in foreign resources, even as its American investors buy up controlling shares of the recently privatized commanding heights of French, German,Japanese, Korean, Chilean, Bolivian, Argentinean, Canadian, Thai and other economies, capped by that of Russia.

The above view of American financial imperialism differs not only from the traditional economic determinist view, but also from the anti-economic, idealistic "national security") rationale. Economic determinists have tended to neglect the full range of economic and political impulses in world diplomacy, and have limited themselves to those drives directly concerned with maximizing the profits of exporters and investors.

This view by itself fails to note the drive for national military and overall economic power as a behavioral system that may conflict with the aim of promoting the wealth specifically of large international corporations. On the other and, "idealistic" writers (Bemis, A. A. Berle and so forth) have satisfied themselves simply with demonstrating the many non-economic motives underlying international diplomacy. They imagine that if they can show that the U.S. Government often has been impelled by many non-economic motives, no economic imperialism or exploitation occurs.

I elaborate these points in Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy (London: Pluto Press, 1992, 2 vols.) and, more generally, "The Use and Abuse of Mathematical Economics," Journal of Economic Studies 27 (2000):292-315.

But this is a non sequiter. It is precisely America's drive for world power and to maximize its own economic autonomy (whether viewed simply as an expression of "national security" or something more expansionist in character) that led it to innovate its parasitic tapping of the world economy through such instrumentalities as the IMF and World Bank. Its military-induced payments deficit led it to flood the world with dollars and to absorb foreign countries' material output, increasing its domestic consumption levels and ownership of foreign assets – the commanding heights of foreign economies, headed by privatized public enterprises, oil and minerals, public utilities and leading industrial companies. This again is just the opposite of the traditional view of imperialism, which asserts that imperialist economies seek to dispose of their domestic surpluses abroad.

The key to understanding today's dollar standard is to see that it has become a debt standard based on U.S. Treasury IOUs, not one of assets in the form of gold bullion.While applying creditor-oriented rules against third world countries and other debtors, the IMF pursues a double standard with regard to the United States. It has established rules to monetize the deficits America runs up as the world's leading debtor, above all by the U.S. Government to foreign governments and their central banks. The World Bank pursues its own double standard by demanding privatization of foreign public sectors,while financing dependency rather than self-sufficiency, above all in the sphere of food production. While the U.S. Government runs up debts to the central banks of Europe and East Asia, U.S. investors buy up the privatized public enterprises of debtor economies.

Yet while imposing financial austerity on these hapless countries, the Washington Consensus promotes domestic U.S. credit expansion – indeed, a real estate and stock market bubble – untrammeled by America's own deepening trade deficit. The early 21st century is witnessing the emergence of a new kind of centralized global planning.

It is not by governments generally, as anticipated in the aftermath of World War II, but is mainly by the U.S. Government. Its focus and control mechanisms are financial, not industrial. Unlike the International Trade Organization envisioned in the closing days of World War II, today's WTO is promoting the interests of financial investors in ways that transfer foreign gains from trade to the United States, not uplift world labor.

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Sudesh Kumar
sudesh.kumar@economics.org.in

Can Exchange Rates Forecast Commodity Prices?

2008-08-11T07:29:00.001-07:00

Can Exchange Rates Forecast Commodity Prices? (NBER Working Paper No. 13901) -- demonstrates that exchange rates can be used to help predict commodity prices. This is a quite a surprising and "out of the box" result, Rogoff points out, but it flows naturally from the fact that exchange rates are asset prices that embody expectations of future movements in macroeconomic fundamentals. Given that commodity prices are extremely volatile and difficult to predict -- and that commodity price futures are notoriously bad predictors of future commodity prices -- this new approach to predicting commodity prices has important potential practical value, the authors argue.

The authors also uncover some evidence that commodity prices help to predict exchange rates, but the evidence is much weaker -- the reverse forecasting regression does not survive out-of-sample testing. They argue, however, that it is quite plausible that exchange rates will be better predictors of exogenous commodity prices than vice-versa, because the exchange rate is fundamentally forward looking, whereas asset prices tend to be very sensitive to small perturbations in current demand or supply.

The basic point -- that forward looking asset price models can be inverted to predict fundamentals -- has been developed in earlier papers by Campbell and Shiller (1987) and Engel and West (2005). Those earlier efforts, however, were stymied by the fact that the fundamental variables being used (for example savings, interest rates, outputs, money supplies) are themselves endogenous, making it difficult to draw any structural inferences. In contrast, world commodity prices for the exports of certain small countries can legitimately be considered independent of their exchange rates, making the commodity currencies an ideal testing lab.

In their paper, Chen, Rogoff, and Rossi analyze quarterly data, gathered over one to three decades, relevant to the "commodity currencies" of Australia, Canada, New Zealand, South Africa, and Chile. These countries produce a variety of primary commodity products, from agricultural and mineral to energy-related goods. Together, commodities represent from one quarter to well over one half of each of these countries' export earnings.

Each of the five countries has a long history of market-based floating exchange rates. Because they are relatively small players in the overall global commodity market, these countries are "price takers" for the vast majority of their commodity exports. As such, global commodity-price fluctuations serve as easily observable terms-of-trade shocks to these countries' exchange rates and affect a significant share of their exports.

For each country, the researchers aggregated the relevant dollar spot prices in world commodity markets to construct country-specific, export-earnings-weighted commodity price indexes. In addition to dollar rates, the authors also considered cross rates relative to the Japanese yen and the British pound as a robustness check. In addition, they used the IMF's "All Commodities Index" -- a world export earnings-weighted price index for over 40 commodities traded on various exchanges -- in U.S. dollars to measure movements in the overall aggregate world commodity markets.

Authors add that their results are sufficiently robust to be applied to alternative benchmark currencies, forecast combinations, and long-horizon predictions. "One might eventually extend the approach," they suggest, "to look at countries that have few or no commodities, such as most of Asia, to see if commodity prices affect the value of their currencies, and if their currency fluctuations may offer predictive power for, say, oil prices."

Sudesh Kumar

sudesh.kumar@economics.org.in