Friday, June 27, 2008

The lifecycle model of consumption and saving

Tuesday, June 17, 2008

Intertemporal Consumption and Savings with Interest Rates Not 0

Intertemporal consumption and Savings with Interest Rates Not Zero, or that Intermediation performed by banking is not Zero costs...

This was in response to one of my assignments in Developing Finance class and wanted to at least post the graphs for other stuff.

This is response to a question you raised on my first assignment.

A side point I want to make is: when interest rates rise this will lead some creditors to become debtors. But considering that the transaction cost whether on the supply side or the demand side is greater than zero then the slope of the interest rate line (-(1+r))should be ‘kinked’. Illustrate?

The above diagram is an approximate drawing of the A. Debtor on page 11, unit 1 in handbook. Let me try to label the points in words. The left indifference curve is if the person did not borrow or save and consumed what his endowment was at present horizontal axis and future of the vertical axis. The right indifference curve is what he desires to be at if allowed to borrow at r rate of interest. The left indifference curve should be left and below the right one even if it does not show that way. If the debtor decides to consume less than his present endowment then the line of (-(1+r)) is correct to the left of the left indifference curve. But if the debtor decides to borrow and thus change his consumption to the right indifference curve and we assume he has a transaction cost even if just in time, then the slope would be the same but shifted to the left as illustrated.

In the above I assumed that there was no transaction cost for being a creditor. But if we loosened that theory then the creditors may be facing a disjointed interest rate line also. This is by either transaction costs in savings at least with regard to time and bonuses for becoming savors with one time gifts such as toasters.

Above I am showing a kinked interest rate line for a creditor. As the creditor saves more and more of his present endowment he receives a higher rate of interest.


Tuesday, June 10, 2008

The Marx Economist: Justin Yifu Lin and the World Bank

Justin Yifu Lin's life seems unusual from my perspective. But anyone that is making and promoting theories in Determinants of Development (Developing Economics) I must take an interest in understanding their theories and analysis. First I was introduced to the following article from the normally Marxist on-line pseudo economics from "Portland Independent Media". So first I want to discuss this article for any points that seem salient, entitled: The Marx Economist: Justin Yifu Lin and the World Bank.
"In Chicago I learned the market has the best solutions in an ideal world without distortions. In reality there are a whole series of distortions, above all in developing countries. The quality of institutions and historical inheritance must be understood."
Yes, overall I can agree with that. The problem is that many times governments end up distorting the market more than actually solving the initial problem. Since Lin studied under Theodore Schultz even if in the Chicago School of Economics, I wonder if he "learned the market has the best solution". And yes there is even more distortions in smaller and developing countries, so structural analysis of the economy may need consideration.
DIE ZEIT: What a remarkable career! You studied in Marxist Peking and in liberal Chicago, advised the Chinese government and now are chief economist at the World Bank. What are you now, a free enterprise advocate or a Marxist?

Justin Yifu Lin: A combination. In Chicago I learned the market has the best solutions in an ideal world without distortions. In reality, however, there is a whole series of distortions, above all in developing countries. I am a Marxist insofar as I believe these factors, the quality of institutions and historical inheritance, must be considered. We must understand these things before we press for introducing the market economy.
At least it seems that he is honest about his ideologies, which from watching his speech, he shown his Marxist ideology by talking about "people" too much and in class distinctions aspects of the economy. I am sure he has some points but I reject most of those paradigms.
ZEIT: Is that a new development model for the World Bank?

Lin: I do not go to the World Bank with a model. Rather I believe in a diagnostic approach in development policy. Every country has its special development chances and obstacles that we must identify. As an international institution, we can help with our resources. It would be wrong to say: we have the solution for your problems.

ZEIT: But the World Bank did just that in the past. The World Bank aggressively enforced neoliberal economic reforms.

Lin: When I came to China from Taiwan in 1979, there was a great upheaval...

ZEIT: The policy of opening- and reform under Deng Xiaoping began in 1979.

Lin: Yes. I believe I now come to the World Bank in a similar phase. As you say, the World Bank oriented its earlier policy in a few basic convictions. Now more and more persons in Washington understand a diagnostic approach is necessary.
Yes, as I said above a more structuralist approach to each country is needed, but ultimately there is only so much resources that can be devoted to analysis. Luckily with better data gathering and more sophisticated models, the IMF and World Bank can get more country specific in its advice and analysis. But many anti-globalization freaks will not be happy even that Marxist doctrine is influencing the World Bank. They want to destroy the organization instead of seeing the good that can come from it. Although this same group seems to put faith in the United Nations. Go figure, all I can conclude is that they are afraid of Economists and the science of Economics. I guess one reason that so many try to claim that economics is not a science but Sociology and Psychology is.
ZEIT: Some things in the Chinese development model are hard to copy because of the gigantic costs for other countries. Your land violates intellectual property rights. It keeps its currency artificially low to stimulate exports.

Lin: First on the theme intellectual property. The Chinese government has already taken on the problem in its own interest. From a specific stage of development, investments in research and development are necessary. These investments would not pay without a certain protection of intellectual property. In industrial states, there are also cases where property rights are violated.

ZEIT: However violations of property rights are especially widespread and aggressive in China.

Lin: I don't see it that way.
Yes, well take the blinders off. Maybe it is the internet censorship that is blocking Jin from seeing. While I admit that he has presented some important points, this portion is nothing more that the CCPs (Communist Party of China) excuse for everything. We kill a million people and you kill a few-just call it even. We support the brutal dictators of Burma and you invaded Iraq-just call that even. Shouldn't the government of China do more than what is in its interest? I mean if they want to be a global player then violating the property rights of other countries citizens is not a way to ingratiate others.
ZEIT: What about the reproach of Chinese exchange rate dumping?

Lin: The matter is more complicated. When developing countries recover economically, they invest intensely in industries that are very important for modernization. More is produced than is needed in their own countries. The rest is exported. That was true in China and also in Korea, Japan and Germany after the Second World War. Promoting key industries was central. Export is a side-effect.

ZEIT: Doesn't the exchange rate play a role? Devaluing the currency stimulates export.

Lin: The role of exchange rates is exaggerated. If you have overcapacities, you will export.
The question I have, is how did China create overcapacities? While the issue is more complicated, just because others did it does not mean that this should be the same way to development. If we talk about capital utilization then I would be skeptical about his assertions. While it is true that a developing country promotes its export sectors, it is usual for the currency to be undervalued on purpose rather than the net result of development that the current account is positive.
ZEIT: China invests vast sums in Africa. The West looks upon this with suspicion.

Lin: There are two kinds of Chinese engagement in Africa. One is connected with mineral resources, e.g. oil. Business interests and assuring supply are paramount here. These engagements must be good businesses. Then there are projects financed by the Chinese development bank. Infrastructure and the like are primary here.
It is usually called imperialism when the West does it, when China does it it, it is glorious Marxist doctrine. Stuck in the Marxist paradigms.
ZEIT: China gives its money without insisting on minimum social, legal or ecological standards. Is it wrong to set these conditions?

Lin: When countries become richer, they also become more liberal. When we contribute to the growth of the economy with our projects, we enable governments to do what is right for their people and the nations.

ZEIT: A different understanding of state and society prevails in China compared to the West.

Lin: The more development advances, the more individual freedom rights people will have. They will be able to decide where they want to live and how they participate in the social, political and economic process. When I went to Chicago in 1982, it took six months until I received my passport. I had to fill out many forms. Today this is no longer a problem. People receive their passports in six days.
That would be nice if that was true. But often development assistance has been used by authoritarian regimes to subjugate their citizens and thus end up with less development. The question is how to promote development. I do not believe that supplying arms to Zimbabwe will help development or helicopters to Sudan or supporting the military dictators of Burma.
ZEIT: Will there be a democracy at the end according to the Western model?

Lin: There are different forms of democracy in the West. German democracy is different from the British or the American. I am sure we will have a democracy but it will be a democracy with Chinese features.
True, but liberal democracy is broadly enough defined to know that China does not have that now even if the CCP claims it is a "Peoples' Democracy".
ZEIT: At the end let us speak about the current world economy. Many in the US fear a recession. Will that endanger the boom in Asia?

Lin: It depends on the intensity of the decline. A deep and severe recession would impact China but I don't believe that will happen. Political instruments can avert this. Our exports do not depend so intensely on the ups and downs of the business cycle as the exports of other countries. Unlike cars, textiles are in demand even in bad times.

ZEIT: When will China replace the US as the greatest economic power?

Lin: In 20 to 30 years or 15 to 20 years if one considers the different purchasing power of the currencies.
Notice that he says on a PPP basis. Thus sure they could end up with a higher GDP on PPP basis since 1.3 billion Chinese getting haircuts might be a lot more than 300 million US citizens.

True on textiles, but even that market may be elastic and especially for finer quality products,that is Nike shoes for example.

From Lecture:
Deep, Fundamental Causes/Competing Hypothesis:
1. Luck
2. Geography
3. Institution
4. Culture
5. Openess
Most economists now agree that the institution is the key.

Has worked on Fiscal Decentralization, Enterprise Reform, Urban and Rural Modernization, and Agricultural Modernization and Reform.

Conflicts of vested interest groups

Olson: duration of stability and distributional coalition

Grossman and Helpman: protection for sale

Acenioglu, Johnson and Robinsion: extractive institution vs. Neo-European Institutions

Engerman and Sokoloff: endowment, production pattern, and equal or unequal distribution of income, human capital and power

Lin: The Key is Ideas not the vested interests.
But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 24.

Changing Social Thought and Washington Consensus:
1. The failure of CAD strategy led to the Capitalist triumphalism.
2. The new social thought is capitulated in Washington Consensus, which intends to build up the necessary institutions for a well-functioning market economy.
3. Shock therapy is a version of Washington Consensus.
A. Market liberalization
B. Privatization
C. Fiscal discipline
The Failure of Washington Consensus:
1. Socialist countries adopting the shock therapy encountered "L" curve instead of "J" curve in their transition path.
2. Other developing countries following the Washington Consensus encountered lost decades in the 1980s and 1990s.
3. China and Vietnam did not follow the shock therapy.
What's Wrong with Washington Consensus:
1. The WC and the shock therapy treat the existing distortions in the socialist and developing countries as exogenous.
2. In fact, those distortions are second-best arrangements for protecting large number of nonviable firms in the countries.
Shock Therapy's Triangle of Impossibilities:
Privatization worsened Soft Budget Constraints.
1. Firms in the priority sectors still encountered policy burdens.
2. The government is responsible for those policy burdens and is obliged to provide policy supports.
3. The privatized firms have higher incentives to ask for higher protection and subsidies.
A. Privatization weakened taxation capacity.
B. {Thus} It is impossible to achieve market liberalization, privatization and fiscal discipline simultaneously.
C. The ST led to rampant inflation in Russia and other transition economies in the FSU and EEC.

China's take from the eyes of: Deng Xiaoping on Approach to Transition:
* No matter it is a white cat or a black cat, as long as it can catch a mouse it si a good cat.
* Cross the river by groping the stones.

Summary of Main Ideas:
1. Technology upgrading is the most important driving force for long-term dynamic growth.
2. The government is the most important institution in a developing coutry as its policies determine the quality of other institutions in the country.
3. Idea is the most important determinant of the qualities of a country's policies and institutions.
4. The endowment is the most important binding constraint in a country's choice of technologies and industries.
5. The comparative advantage is the most important guiding principle for forumlating development policies.
6. The viability is the important concept for understanding the cause of distortions in an economy.
7. The pragmatism is the most important policy guidance for economic transition.

Knowledge is the Foundation of Freedom;
"Freedom of the will...means nothing but the capacity to make decisions with knowledge of the subject." Friedrich Engels, 1877

The Marx Economist: Justin Yifu Lin and the World Bank

Lin Yifu-Vitae

Theodore Schultz was his mentor from the infamous University of Chicago.

World Bank Chief Economist: Justin Yifu Lin

Information about: Justin Yifu Lin

Details about Justin Yifu Lin

Misc. Thoughts:
Prebish-Singer thesis
CAD-Comparative Advantage Defying Strategy
CAF-Comparative Advantage Following Strategy

Paper: Collectivization and China's Agricultural Crisis in 1959-1961

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