Saturday, May 26, 2007

Mundell-Fleming Model/Open Economy

The book from class International Finance by Keith Pilbeam has a slightly different IS curve equation:
S + M = I + G + X
Leakages = Injections (Absorption)

S = S(a) + sY
Savings equals autonomous savings plus a function of the income level (Y).
M = M(a) + mY
Imports equals autonomous savings plus a function of the income level (Y).
I = I(r)
Investment is solely a function of interest rates (r).
The IS curve is downward-sloping from left to right...
This is because high levels of income generate higher levels of leakages requiring a fall in the interest rate to generate increased investment to maintain equality of injections to leakages.

And the LM curve...
The LM schedule is upward-sloping from left to right because a high income levels require relatively large transaction balances, which for a given money supply can only be drawn out of speculative balances by a relatively high interest rates.

Factors shifting the LM Schedule:
Shift to the right with an increase in MS.
A depreciation of the exchange rate will shift the LM schedule to the left.

The IS curve:
"The marginal propensity to import (m) influences the slope of the IS curve. The second new element of aggregate demand is exports, which are treated as exogenous; the exogenous volume of exports influences the position (but not the slope) of the IS curve."

Pilbeam notes two changes to the LM curve but the study book notes:
Net holdings of foreign exchange are an element in the supply of money; the supply of money increases if there is an inflow of foreign exchange because eithe it is deposited in banks in exchange for domestic deposts, or the central bank buys the foreign exchange with domestic currency which increases the total stock of the latter.

Factors shifting the IS Schedule:
Right ward shift in there is an increase in investment, government expenditures or exports also if an autonomous fall in savings or imports.
Another important factor that causes a rightward shift of the IS schedule is a depreciation of devaluation of the exchange rate, provided that the Marshall-Lerner condition holds; this is because a depreciation of the exchange rate leads to a reduction of import expenditures and an increase in export sales, so that injections then exceed leakages requiring an increased level of income to bring them back into equality.

The BP curve:
Every point on the BP schedule shows a combination of domestic income and rate of interest for which the overall balance of payments is in equilibrium. At points to the left of the BP schedule the overall balance of payments is in surplus because for a given amount of capital flows the current account is better that that required for equilibrium as the level of income is lower. Conversely, to the right of the BP schedule the overall balance of payments is in deficit as the income level is higher than that compatible with overall equilibrium.

At this point it is worth noting that the slope of the BP schedule is determined by the degree of capital mobility internationally. The higher the degree of capital mobility then the flatter the BP schedule.

Perfect capital mobility: horizontal flat curve. Perfectly immobile capital: vertical curve.

Factors shifting the BP schedule:
An autonomous increase in exports or an autonomous decrease in imports will lead to an improvement in the current account requiring arightward shift of the BP schedule.
And a depreciation/devaluation of the exchange rate.

Monetary Policy:
Expansionary monetary policy (open market operations) leads to a fall in domestic interest rates, investment and thus Y goes up. This will lead to a deterioration of the CA by increased capital flight and as Y goes up imports increase.

Fiscal Policy:
The increased expenditure shifts the IS schedule to the right but the rise in domestic interest rates will partially offset expansion in output. Thus the precise effect is indeterminate since expansion of output will worsen the CA and the rise in interest rates will improve CA-more inflows.

4.9 Sterilized and Non-Sterilized Intervention:
With sterilized intervention the authorities offset the money-base implications of their exchange market interventions to ensure that the reserve changes due to intervention do not affect the domestic money base.

1. Monetary expansion
2. LM shifts to the right, thus interest rates fall and Y is increased.
3. BoP deficit-new equilibrium to the right of BP schedule.
4. Excess supply of domestic currency on the world market.
5. Purchase home currencies with reserves.
6. So to "sterilize" the effects of reserve changes that reduce the money supply.
7. The exact amount of reductions in money supply is offset by a further expansion of the money supply-so that LM schedule remains at the new equilibrium.
A clear problem with a sterilization policy is that by remaining at (the new higher equilibrium) the authorities will suffer continuous BoP deficits and a continuous fall in reserves.

Fiscal Expansion Under Floating Exchange Rates
BP schedule is steeper than the LM schedule, which means that capital flows are relatively insensitive to interest-rate changes, while money demand is fairly elastic with respect to the interest rate.

1. Expansionary fiscal policy shifts the IS schedule to the right.
2. Rise in domestic interest rate and domestic income.
3. Opposite effects on the BoP; expansion in real output-deterioration of CA, rise in interest rate improves capital account.
4. Capital flows are relatively immobile then CA is larger effects and thus BoP moves into deficit.
5. Deficit leads to depreciation of the exchange rate.
6. BP shifts to the right.
7. LM shifts to the left.
8. IS shifts further to the right.
9. Thus higher interest rates, higher output but a depreciation of the exchange rate.

LM schedule is steeper than BP schedule.
1. Expansionary fiscal policy shifts the IS schedule to the right.
2. Rise in interest rates (but less rise since of capital mobility is higher-BP flatter) and domestic income.
3. BoP moves into surplus since increased capital inflow more than offsets the deterioration in the CA due to increases in Income.
4. Appreciation of exchange rate moves the LM to the right.
5. IS shifts to the left.
6. Thus higher output, higher interest rate and exchange rate appreciation.
Hence a fiscal expansion can, according to the degree of international capital mobility, lead to either an exchange-rate depreciation or an exchange-rate appreciation.

A Small Open Economy with Perfect Capital Mobility (BP schedule is flat)
With perfect capital mobility, any attempt to pursue a sterilization policy leads to such large reserve losses that it cannot be pursued. Hence, with perfect capital mobility and fixed exchange rates, monetary policy is ineffective at influencing output.

Floating Exchange Rates and Perfect Capital Mobility
...with perfect capital mobility and floating exchange rate, fiscal policy is ineffective at influencing output.
The result that fiscal policy is very effective at influencing output under fixed exchange rates and monetary policy is very effective under floating exchange rates with perfect capital mobility.
Monetary policy is ineffective at influencing output under fixed exchange rates, while it alone can influence output under floating exchange rates. By contrast, fiscal policy alone is effective at influencing output under a fixed exchange rate, while it is ineffective under floating exchange rates.

Limitations of the Mundell-Fleming Model
1. The Marshall-Lerner condition is assumed to be correct even though in the short-term it is least likely to be true. (MF model is that absolute values of elasticities of demand for exports and demand for imports is >1.
2. Interaction of stocks and flows. Capital inflows does mean at some time that repayments plus interest must be paid back. Can not count on the world to continue indefinitely financing the national debt through capital inflows.
3. Neglect of long-run budget constraints. The government over time has to balance it budgets eventually.
4. Wealth effects, fall in foreign assets associated with a current account deficit.
5. Neglect of supply-side factors. There is an implicit assumption that supply adjusts in accordance with changes in demand.
6. Treatment of capital flows. inflows are a function of the change in the interest differential rather than the differential itself. Portfolio allocation changes but does not continually change unless the interest rates changes again to change the portfolio allocation.
7. Exchange-rate expectations assumes that "static exchange-rate expectations" are zero.
8. Flexibility of policy instruments.

Exchange Rate

The Asset Approach
Exchange Rates and the Trade Balance
Overshooting Exchange Rates
Currency Substitution
The Role of News
Foreign Exchange Market Microstructure

Labels: ,

FE201-Q 6|FE102-Q 4

FE 201 Question 6
"In conditions of perfect capital mobility and a floating exchange rate, fiscal policy is likely to be ineffective, while monetary policy may be effective in achieving both internal and external balance." Discuss this statement with reference to the Mundell-Fleming Model.
Fiscal Policy expansion.
Suppose, instead the authorities attempt to expand output by an expansionary fiscal policy. The increased government expenditure shifts the IS schedule to the right, but the bond sales that finance the expansion lead to upward pressure on the domestic interest rate resulting in massive capital inflow and a appreciation of the exchange rate. The appreciation of the exchange rate results in a reduction of exports and an increase in imports, and thus forces the IS schedule back to its original position.

Monetary Policy expansion.
A monetary expansion shifts the LM schedule to the right, leading to downward pressure on the interest rate, a capital outflow and a depreciation of the exchange rate. The depreciation leads to an increase to an increase in exports and reduction in imports so shifting the IS curve to the right and the LM schedule to the left, so that final equilibrium is obtained at a higher level of income.

FE102-Q 4
4. Using the Mundell-Fleming model, explain the effect on internal and external equilibrium of a change in exchange rates. Explain and discuss the role of capital mobility in the model.
Let me start with the second part of the question, in a perfectly mobile capital then the BP curve would be horizontal and any change in interest rates would either cause capital flight or capital coming in that would be beyond the capacity of the Central Bank to control beyond the very limited short-run. But even if this is true in the short run we have to conclude that at some time capital can not just keep coming. As in:
Interaction of stocks and flow increases the stock of foreign liabilities owed by the country to the rest of the world.
Neglects the long-run budget constraints.
Treatment of capital flows/portfolio-balance approach. After allocation of the portfolio to changes in interest rates, then to get a further influx of funds then the rates would again have to change to again create a change in portfolio allocations.
Thus the model assuming short-run nature but is based n the Marshall-Lerner condition which is essentially a short-term model.

If there was an autonomous increase in exports or an increase in domestic consumption, the BP schedule will shift to the right, thus creating a surplus in BoP. There then would actually be a shortage in the domestic currency so the LM curve would be shifted to the right with an increase in Money Supply. And the IS curve will shift to the right with an increase in the absorption in the economy. Income will rise but interest rates may fall or rise depending on the BP/LM slope differential.

International Economics, Robert A. Mundell, New York: Macmillan, 1968, pp. 250-271

Labels: , ,

Friday, May 25, 2007


What role does the IMF play in low-income countries? Discuss with reference to country examples.

The title link has a good review of this question for the final also but let me make a couple of notes here.

Steps in the process for LICs to get help.
1. Creation of Poverty Reduction Strategy (PRS) which was defined as PEAP (Poverty Eradication Action Plan) in Uganda.
2. Submitting the Poverty Reduction Strategy Paper (PRSP) or 'Interim PRSP' as a satisfactory initial step for access to the...
3. Poverty Reduction Growth Facility (PRGF). Which is the concessional loans that the IMF lends to LIC (Low Income Countries).
4. Then after showing a commitment to maintaining a stable economy with an emphasis on poverty reduction they become eligible for Heavily Indebted Poor Country that were obliged to wait 3 years. Now with the 'Enhanced' HIPC the can debt relief by the concept of 'floating Completion Points'. This of course now depends on how quickly the country can formulate its won poverty reduction strategy.
5. HIPC initiative was not to eliminate debt by to reduce it to a manageable level of 150% of the LICs yearly exports or 250% of its government revenue. The concern was of creating a moral hazard if complete forgiveness occurred.
6. Since the class was produced it looks that Policy Support Instrument (PSI) has been added to the IMFs list of Technical Assistance (TA) that it provides LICs.
“PSIs are designed to address the needs of low-income members that may not need Fund financial assistance, but seek Fund endorsement and assessment of their economic policies. A PSI will be available only upon request of a member and will add to the toolkit of instruments from which low-income countries can choose their desired form of engagement with the Fund.”

Types of Technical Assistance (TA)
Monetary and Exchange Affairs Department(MAE)
Fiscal Affairs Department
Policy Development and Review Department
Statistics Department
Legal Department
Treasurer's Department
Bureau of Computing Services

James Levinsohn 'The Poverty Reduction Strategy Approach: Good Marketing or Good Policy?'

Debt and The PRSP Conditionality: The case for Kenya
Kenya’s problems are typical; when the economy was growing fast, it was possible for the government to fund new priorities while retaining the old ones but once growth stagnated and donor funding petered out, resource allocation became fixed and priorities failed to change in line with circumstances
Kenya received nineteen structural adjustment loans during the reform period.
Under the new HIPC initiative it is expected that debt to exports ratio in present value terms will be reduced to a sustainable level of not more than 150 percent of exports reduced from 250% under the original initiative.
Debt service to [government] revenue is projected to fall from 49% to 42% while debt to GDP ratio is projected to decline from 71% to 58%.
The poverty reduction strategy was introduced following the recognition that growth is necessary but not sufficient for poverty reduction. Therefore the need to put in place measures targeted to poverty reduction. The Interim PRSP had no pro-poor growth strategy and that this proved to be a major weakness. In order to address this weakness, the government commissioned work on Pro-Poor Growth Strategy.
Hanmer and Naschold (2000) as quoted in Ndung’u et al (forthcoming) conclude that
elasticity of poverty reduction with respect to growth is around 0.3 in highly unequal economies like Kenya.
The National Poverty Eradication Plan (NPEP) outlines the goal as poverty reduction by 50% by the year 2015.[...] Using this elasticity in the table above, it indicates that the economy needs to grow at 8% if the NPEP goal is to be achieved in the next fifteen years.
Another shortcoming in the introduction of the process in Kenya is that some useful
stages were left out of the budget process; the Project Investment Appraisal, (PIP), for instance has been omitted from the budget process. The PIP was useful in prioritisation of capital projects for inclusion in the budget. The interfacing of the development plan and the PRSP/MTEF is also not clear. The PER, which is useful in identifying implementation constraints, has not been undertaken for three years.
Investigating the growth-poverty relationship, Dollar and Kraay (2000) found standard
macro-pro growth policies—reducing government consumption, stabilizing inflation,
macro stability, openness to trade and secure property rights—to be good for the poor. They conclude that such policies raise mean incomes without significant adverse effect on the distribution of income.

Labels: ,

Monday, May 21, 2007

Kuwaiti Dinar

This seems to be a tempest in a teapot, but wanted to see what others here think about the situations with the Kuwaiti Dinar and maybe more broadly in the GCC union.
Kuwait abandons US dollar currency peg

Kuwait on Sunday removed its currency peg to the US dollar, throwing plans for a Gulf currency union by 2010 into doubt and raising the prospect that other oil-producing states might abandon long-held dollar pegs.

Sheikh Salem Abdelaziz Al Sabah, governor of the Central Bank of Kuwait, told the official Kuwait news agency that the decision had been made owing to the "detrimental effects of the pegging system to the national economy".

Since late last year, Kuwaiti officials have hinted that the country would revert to a basket of currencies to prevent the sliding dollar increasing the cost of imports, which has stoked inflation to more than 4 per cent, double the historic average. This has encouraged speculators to plough billions of dollars into the dinar over the past few months, betting that the central bank would allow the dinar to appreciate.

On Sunday, the dinar traded up 0.4 per cent as the central bank replaced the peg with a basket of undisclosed currencies. The central bank had allowed the currency to vary up to 3.5 per cent from the peg, but the dinar had been at the top end of the approved trading band for a year owing to the continuing weakness of the dollar and the strength of Kuwait's oil-driven economy.

The dollar is expected to make up about 75-80 per cent of the new basket, reducing the third largest Arab oil exporter's exposure to the weakening dollar.

Kuwait dropped its currency basket in 2003, adopting a dollar peg as part of the Gulf Co-operation Council countries' drive to create a unified economic block with a single currency by 2010. But doubts over the ability of the GCC economies to harmonise have arisen, with one member of the six-nation council, Oman, saying it would not meet the convergence criteria.

"There have already been a lot of question marks over currency union taking place; this raises an additional one," said Simon Williams, an economist with HSBC in Dubai.

Kuwait's move may come as a surprise to other GCC states, such as Saudi Arabia and Bahrain, which have been repeating their commitment to the peg in recent weeks, saying that any revaluation should be agreed collectively by the GCC.

Mr Williams did not believe other GCC states would follow suit on revaluation quickly, as these countries have clung to dollar pegs since the early 1980s.

But other GCC states - Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Oman - are studying the move as an option to mitigate dollar weakness.

Really nothing of major ground-breaking stuff.
Pegging a nations currency eliminates or so severely restricts monetary policy to make it nearly ineffective, thus exposing the country to the whims of the world wide economic fluctuations-especially with respect to inflation.

So 0.4 percent is really nothing. And even after the basket is changed it will still contain 75-80% US dollars. So a little less trading in dollars to maintain its basket equilibrium.

But a country of Kuwait should not peg its currency unless it is trying to join a monetary union. It might be interesting looking more into the GCC. As I remember a monetary union has a lead country that pegs its currency to another stable currency (US Dollar) or a basket and all others countries peg to that lead country.
Kuwait reviewing exchange rate, dollar peg
“Inflation is one of the drivers,” Humaidhi said, adding the government expected annualised inflation in 2007 to match the 3.1 per cent recorded last year. “Kuwait moved from a basket (of currencies) to the dollar. We are considering whether this is the right idea and what benefits we are from getting this,” he said.

Kuwait switched the dinar’s peg from a basket of currencies to the dollar in 2003 to prepare for monetary union with Saudi Arabia, the United Arab Emirates and three other Gulf oil producers. With the monetary union timetable in doubt after Oman, one of the six, opted last year not to meet the 2010 deadline, speculation has grown that some Gulf states would revalue their currencies. Kuwait was named as the top candidate for a revaluation in a Reuters poll of analysts in March. Standard Chartered’s Brice said he expected Kuwait to revalue the dinar by 1 per cent. Deutsche Bank expects the currency to appreciate 3 per cent in six months.

Speculators piled pressure on the dinar in the runup to a Gulf central bankers meeting in April that was expected to hammer out a deal to revive the monetary union plan. The talks ended inconclusively. In March Kuwait’s central bank warned speculators against betting on an appreciation of the dinar and followed up by cutting key interest rates to make dinar-denominated assets less attractive.

But the one thing about having a peg or in this case a trading band, speculators such as George Soros have a one way sure bet. This does not look to be much of a reward though at 4% for a 6 month span. Now it becomes a question if the real interest rates are higher than the rest of the world.

And the last sentence is funny since cutting interest rates could lead to inflation and defeating the purpose of changing the exchange regime.

And what does the IMF think:
"Significant progress toward regional integration has already been achieved through elimination of barriers to free movement of goods, services, capital, and national labor; and a common external tariff. All GCC countries continue to have strong macroeconomic fundamentals characterized by large surpluses in the fiscal and external current account positions, credible pegged exchange regimes, and low nominal interest rate environments. I continue to strongly support the objective of establishing a GCC monetary union by 2010. Achieving this important objective within the agreed timeframe will however require accelerating the preparatory work to put in place the necessary institutional framework and infrastructure. The Fund stands ready to assist by providing policy advice and technical assistance in our areas of its expertise." IMF Managing Director Rodrigo de Rato Welcomes the Large Investment Programs in the GCC Countries and Highlights the Importance of Planned Monetary Union

A very nice review of the economy of Kuwait is from the IMF of course:
Kuwait: 2006 Article IV Consultation—Staff Report;

Labels: , ,

Tuesday, May 15, 2007

Neoliberalism Part 1|(global social pathogen)

I had the following list of Neoliberalism traits presented to me recently and it is derived from an article entitled: What is Neoliberalism? A Brief Definition for Activists. So let me go through them one at a time and express my thoughts:
1. THE RULE OF THE MARKET. Liberating "free" enterprise or private enterprise from any bonds imposed by the government (the state) no matter how much social and environmental damage this causes.

Yes, liberating but not completely "Free" but more like "Freer" as Jagdish Bhwagwati would say. And NO-ONE wants no bonds, only sensible ones vs. like financial repression.

Strange nothing I read indicates that sort of intentions. Now of course the IMF denies that it supports Neoliberalism but it opponents seem to say that they do, but...
Social Issues
The program seeks to protect the living standards of the most vulnerable social groups. Spending on social safety net programs will be increased by 1 percent of GDP in 1996. A transportation subsidy was introduced to avoid an immediate increase in public transportation fares resulting from the rise in gasoline prices, and the social safety net will be improved further with the assistance of the World Bank and the Inter-American Development Bank.Press Release: IMF Approves Stand-By Credit for Venezuela

Now of course this is just one example but the IMF has shown an interest in the social safety net as soon as 96 as this shows.
3. DEREGULATION. Reduce government regulation of everything that could diminish profits, including protecting the environment and safety on the job.

Yes, it is true that many of the policies are aimed at reducing regulation not necessarily the elimination of regulations. It may be that we can not explain what bad regulation is but we sure can tell what it is when we see it-again like Financial Repression.
4. PRIVATIZATION. Sell state-owned enterprises, goods and services to private investors.

Yes, but under a realization that there needs to sold at a decent price. And no where have I seen that all state owned enterprises must go, mostly ones that are draining resources from the government that could actually help the poor more effectively.
5. ELIMINATING THE CONCEPT OF "THE PUBLIC GOOD" or "COMMUNITY" and replacing it with "individual responsibility."

No, public good or the commons is there in every society. And I do not see anyone advocating these points.

And now let us see what the Policies Advanced by Neoliberalism are.
The definitive statement of the concrete policies advocated by neoliberalism is often taken to be John Williamson's[3] "Washington Consensus" , a list of policy proposals that appeared to have gained consensus approval among the Washington-based international economic organizations (like the IMF and World Bank). These reforms are described by Dani Rodrik[4] as:

* Fiscal rectitude, meaning that governments would cut expenditures and/or raise taxes to maintain a budget surplus

OK, so sound Fiscal discipline. And no mention about where and how cuts to expenditures are to be made. Silva when he came into office cut the defense spending budget. The IMF also helps with devising tax schemes that will be the least distorting to the market and at the same time widen the tax base.
# Competitive exchange rates, whereby governments would accept market-determined exchange rates, as opposed to implemented government-fixed exchange rates, as had prevailed under the Bretton Woods System

Yes the IMF has been promoting this, and many do not follow their advice (Venezuela). But it must be pointed out that the BWS or more specifically the IMF was established primarily to establish the Fixed Exchange regime tied to a stable US dollar. Without fixed exchange rates then much of the reasons for the IMF also disappears.
In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members. (Article I - Purposes IMF)

No balance of payment problems if a country is on a floating exchange rate.
Free Trade, which means the removal of trade barriers, like tariffs and regulatory trade barriers

Yes, that sounds good, but must be realized that gradualism is probably the better option than shock therapy. Isolationist Ignorance in Action summarizes some of what I feel about isolationists especially Lou Dobbs.
Privatization, which means the transfer of previously-public-owned enterprises to the private sector.

Again this can be very good for the government, especially money losing enterprises that free markets can handle better.
Undistorted Market Prices, meaning that governments would refrain from policies that would alter market prices

For example Financial Repression, but again drastic changes overnight can disrupt the market, so gradualism and sequencing may be more important than getting there the fastest.
Limited Intervention, which the exception intervention designed to promote exports, education or infrastructural development.

Yes, and most include also a safety net for those displaced and/or are poor.

Well nothing to me indicates a "Global Social Pathogen".


Saturday, May 12, 2007

In Defense of Globalization/Jagdish Bhagwati

At the same time, the evidence against an inward-looking or import substitution trade strategy is really quite overwhelming. In the 1960s and 1970s, several full-length studies of the trade industrialization strategies of over a dozen major developing countries, including India, Ghana, Egypt, South Korea, the Philippines, Chile, Brazil, and Mexico, were undertaken at the Organization for Economic Cooperation and Development (OECD) and the National Bureau of Economic Research, the leading research institution in the United States. These studies were very substantial and examined several complexities that would be ignored in a simplistic regression analysis across a multitude of nations. Thus, for instance, in examining whether the 1966 trade liberalization in India worked, T.N. Srinivasan and I wrote a whole chapter assessing whether, after making allowance for a severe drought that blighted exports, the liberalization could be considered to ahve been beneficial compared to a decision to avoid it. Only after systematic examination of the actual details of these countries' experience could we judge whether trade liberalization had truly occurred and when; only then we could shift meaningfully to a limited regression analysis that stood on the shoulders of this sophisticated analysis. The result was to over-turn decisively the prevailing wisdom in favor of autarkic policies. Indeed, many of us had started with the presumption that inward-looking policies would be seen to be welfare-enhancing but the results were strikingly in the opposite direction, supportive of outward orientation in trade and direct foreign investment instead. Why? (Page 61)

* The outward-oriented economies were better able to gain from trade. The layman finds it hard to appreciate this because, as the Nobel laureate Paul Samuelson has remarked, perhaps the most counterintuitive but true proposition in economics has to be that one can specialize and do better.

Third, consider the contrasting experience of India and the Far East. From the 1960s to the 1980s, India remained locked in relatively autarkic trade policies; the Far Eastern countries--Singapore, Hong Kong, South Korea, and Taiwan, the four Little Tigers--shifted to outward orientation dramatically. The results speak for themselves: exports and income grew at abysmal rates in India, at dramatic rates in the Far East. India missed the bus. No, it missed the Concorde!

Of course, the trade strategy has to be put into the full context of other policies that enabled it to translate into gigantic growth-enhancing outcomes for the Far East and into tragic shortfall for India. To see this, consider the East Asian "miracle," as economists christened it: it is not surprising that the practitioners of the dismal science call a splendid economic performance a miracle! This spectacular performance was, it is widely recognized now, due to very high rates of productive investment almost unparalleled elsewhere. Sure enough, the Soviet-bloc countries had experienced similar rates of investment, but it had all turned out to unproductive investment. The "blood, seat, and tears" strategy of getting Soviet citizens to forgo consumption in the interest of investment and growth of income had proven to be a failure. (Page 63)

Writing in regard to historian E.H. Carr on the Soviet dilemma of "socialism in one country":
If a single nation, even if the government is popularly elected, shifts to radical policies, financial capital may leave; even the bourgeoisie ("human capital") may emigrate, voting with its feet. At the same time, fresh foreign funds may dry up, exacerbating the crisis. Government, contemplating such an outcome, may shun leftward policy shifts, or if they try them, they may be forced to retrace their steps amid chaos. Evidently, if socialism obtains everywhere, rather than just in just one country, the prospects are better for it to manage a sharp lurch to the left since there is no capitalist safe haven to worry about. Page 97

From the Economist:
If any cause commands the unswerving support of The Economist, it is that of liberal trade. For as long as it has existed, this newspaper has championed freedom of commerce across borders. Liberal trade, we have always argued, advances prosperity, encourages peace among nations and is an indispensable part of individual liberty. It seems natural to suppose that what goes for trade in goods must go for trade in capital, in which case capital controls would offend us as violently as, say, an import quota on bananas. The issues have much in common, but they are not the same. Untidy as it may be, economic liberals should acknowledge that capital controls-of a certain restricted sort, and in certain cases-have a role. (Page 207)



Social safety nets are the IMF's response to the failure of IMF stabilization policies in low-income countries. Discuss.
As a result of some of the IMF financial programming approach then a significant increase in poverty resulted.
...Kanbur shows that with a given relative distribution of income among income groups, the initial percentage decline in total domestic expenditure can result in a six-fold increase in poverty.
The structural adjustments are managed mostly through the demand management process that entails demand compression. And one place this played out was in reducing Fiscal Deficits by curbing government expenditures that in many cases curtailed social expenditures.

Two things over the past decade changed some of the emphasis in the IMF:
1. The East Asian Crisis was blamed on the IMF for causing widespread increases in poverty through the Fiscal Deficit reductions.
2. The growth of the Poverty Reduction Strategy Process and the Poverty Reduction and Growth Facility.

Social Funds (SF)
Many of them were formulated with the political objective of reducing domestic opposition to the adjustment process. Greater impact on poverty would have required increased resources, more permanent relief structures, improved planning and targeting and, especially, better timing in relation to the fiscal cuts entailed by macroeconomic adjustment.

Social Emergency Funds were developed for the 'adjustment poor' but then on other stages this distinction from 'chronic poor' that did not benefit from growth and welfare programs. Third phase was the creation of Social Investment Funds (SIFs) which was called "a programmatic shift from income maintenance to community-based provision of social services".
Social Protection Systems in the Pre-Adjustment Era
1. Formal, Insurance-based, Social Security Programs
2. Employment-based Safety Nets (Chile)
3. Consumer Subsidies.

The Social-Funds Introduced During the Adjustment-Transition Era
1. Social Emergency Funds (SEF) introduced in the wake of mounting criticism about the 'social cost of adjustment'.
2. Social Investment Funds (SIF) as economic recovery took hold, SEFs were to be replaced by SIFs.
3. Social Action Programs (SAP) less frequently used and are generally very flexible and less easy to characterize neatly.
All in all, SFs (especially SEFs and SIFs) distinguished themselves from traditional social programs because they had a strong short-term anti-cyclical component; were mostly multi-sectoral (as opposed to the 'vertical programs' of line ministries); emphasized employment generation through public works and human capital formation (and less food subsidies), and the expansion of social insurance and assistance; often exhibited high cost per capita for both wage and non-wage items,

Rationale for the Introduction of Social Funds:
1. Compensating the poor for the social cost of adjustment.
2. Compensating the poor for the costs of non-adjustment.
3. Political economic factors. Without having popular support for adjustment policies then in the end the poor could have suffered even more because of a return to unsound macro policies.
4. Surrogatory approach and institutional innovation.
Even under normal circumstances, most branches of public administration suffered from low efficiency and inertia, and were unable to develop autonomously, 'new approaches to the delivery of social services'...

5. Removal of structural causes of poverty. In many developing countries, poverty is visibly related to lack of human capital. appears that SFs have been extremely common in Latin America, very common in Sub-Saharan Africa and rare, but becoming more common in South Asia.

Interesting note:
In industrialized countries, recessions have a greater impact on profits than wages because of the stickiness of the latter, and because well-developed social safety nets cushion most of the loss of wage income.

And the developing countries are opposite where wages are downwardly flexible and not much social safety nets thus labor share in total income falls and income concentration rises. (Pastor 1987)
Indeed, unsurprisingly, the new SFs have worked best where such institutional frameworks already existed. This conclusion emphasizes the urgency of building, in normal times, permanent and cost effective social security systems...

...further efforts to address poverty and distributional concerns in future adjustment programs need to take into consideration the following points:
1. Adjustment programs should strive to avoid overly large initial social expenditure cuts.
2. It is essential and urgent to overhaul and develop during normal times permanent and cost-effective social security systems.
3. During periods of crisis and adjustment the anti-cyclical components of the social safety nets need to be allocated adequate domestic resources.
4. The sequencing and administration of SFs also requires attention.
5. Finally, the targeting of the social protection programs should also be considered.

Buira, Ariel (2003), 'Challenges to the World Bank and IMF-Developing Countries Perspective', London: Anthem Press

Kanbur, Ravi (1998) "The Implications of Adjustment Programs for Poverty: Conceptual Issues and Analytical Framework", Ke-young Chu and Sanjeev Gupta
RAVI KANBUR-Recent Papers:

Cornia, Giovanni (1999) "Social Funds in Stabilization and Adjustment Programs: Studies on International Monetary and Financial Issues" G24 Technical Group Meeting, Sri Lanka.

Can the Voices of the Developing World be Heard? Calling for Deep Reforms to the International Financial Institutions-Review of above book.


The International Aid System 2005-2010:
Forces For and Against Change

Intra-household inequality is not measured at present?
Poverty line drawn based on nutritional standards in India and Sri Lanka.

Labels: ,

Wednesday, May 09, 2007

Why Should We Even Teach Statistics?

The title link is to a PDF with the following front portion:
1. Who Is Better Off?
The English weekly newsmagazine The Economist once showed Figure 1 in an article
as part of a series on statistics:

Figure 1. A comparison of wages for bosses and workers. (Source: The Economist, May 16, 1998, p. 79)
The purpose of the graph was to make a comparison between the wages of Bosses and
Workers. The comparison was made with time-series data over a ten-year span, and the
graphs plot three aspects of wages against time.

And then on the other side is a place that takes random factors and tries to see a correlation as in: Order From Randomness. I love the place but it is exactly what the above article is questioning? The last one I saw was that they tried to correlate between having low percentage of births of mothers over 35 with low number of 4 year degrees. I guess this is suppose to show that to get a degree you need to wait till you are old to have babies. Of course they use the red/blue state divide that did show the lower percentages for Republican states. But even here this is based on only one vote and thus not really a reliable indicator of political leanings that can change very rapidly. I do question using stats that are on a state wide basis. It tends to be very lumpy and not really a good practice to compare such diverse population samples. I think district break downs would be better.