inflation determination

In a recent economic focus, the Economist says that in the present era of globalisation, inflation is increasingly determined by global rather than local economic forces

....average inflation rate in the G7 economies rose to an estimated 3.2% in September, its highest for 13 years....reason...is...oil has become a lot more expensive; “core� inflation rates, which exclude oil and food, remain much lower in all countries....fears are mounting that higher oil prices will feed into other prices throughout the economy, pushing inflation higher still.

This is...worrying for America..... companies' unit labour costs rose by 4.2% in the year to the second quarter, mainly thanks to slower productivity growth. ...With energy and labour becoming conspicuously dearer, any inflation model based on a mark-up of prices over costs should be flashing red. Yet in the past year core inflation has not budged....thanks to globalisation, the inflation process has changed over the past three decades in a way that has significantly weakened the link between domestic cost pressures and inflation.... global forces have become more important relative to domestic factors in determining inflation in individual countries.

....the correlation between core inflation and the growth in unit labour costs in America fell to only 0.3 in 1991-2004, from nearly 0.8 in 1965-79. The link between inflation and labour costs also faded in other developed economies (see chart).... probably reflects two things. First, the integration into the world economy of China and other emerging economies with vast supplies of cheap labour has curbed the bargaining power of workers in developed economies. These workers... find it harder to secure higher wages when inflation picks up. And second, fiercer global competition has made it more difficult for firms to pass increases in wages through to prices. Instead they must absorb them in their profit margins.

....further...firms are less able than they were to hand cost increases on to their customers, .... fluctuations in import prices also have much less impact on core inflation than they once did.....link between movements in exchange rates and import prices has sharply diminished. Standard economic theory has it that a fall in the dollar against the euro should push up the dollar prices of European exports to America, raising America's inflation rate. But the proportion of exchange-rate changes passed through to import prices has fallen everywhere; in America, it has been 60% lower since 1990 than it was in the previous 20 years. Today, exporters set their prices for a local market and then either hedge their currency risk or absorb currency changes in their margins.

Increased global competition has... limited the room for firms to pass on higher costs. This makes a nonsense of traditional economic models of inflation, which virtually ignore globalisation and assume that companies set prices by adding a mark-up over unit costs, with the size of the margin depending largely on the amount of slack in the economy.....when setting prices firms are increasingly likely to be constrained by global competition. Given the price the market will bear, they design and make their products as profitably as they can. As a result, domestic cost pressures, whether in labour or energy, no longer lead automatically to higher inflation, but are more likely to show up as swings in profit margins.

....suggests....in forecasting inflation central banks now need to pay less attention to domestic shifts in unemployment and capacity utilisation and much more to the global balance between supply and demand.....since 1990 the core rate of inflation has become less responsive than it used to be to changes in the output gap (a measure of economic slack) in all the main developed economies except Britain. The ups and downs of inflation increasingly reflect the global balance between supply and demand.

The nature of inflation has... changed. But it has not died, although the forces of globalisation have helped to combat it. Policy blunders by central bankers could still allow it to break out again. Indeed .... the impact of China and other newly industrialising economies on inflation is often exaggerated. ...Fed study...concluded that the direct impact of cheaper Chinese imports on American inflation was modest. However, this...ignored the indirect effects of China on wages and the fact that cheaper Chinese goods do not just reduce the price of imports from China but, through competition, the price of all goods sold worldwide.

....more important for policymakers today is its future effect. ...the emergence of new industrial giants has increased not only global supply but also demand, particularly for oil and other raw materials. By running large current-account surpluses these economies are currently adding more to supply than to demand, so their net effect is disinflationary. But this could change. If their exchange rates rose and their domestic demand increased....downward pressure on prices would ease, and might one day be reversed.

Even though globalisation has helped to hold down inflation so far, capacity constraints will eventually appear in the global economy, just as they always have at the national level. Globalisation does not relieve central bankers of their responsibility for maintaining price stability....it may require them to steer policy by a different compass: one that takes much more account of developments abroad.

productivity measurement

Diewart and Nakamura said, “Productivity is like love. Volumes of literature have been poured in to talk about the benefits of having more of it, but disagreement reigns on how best to achieve this. One reason for this is a lack of consensus on what “it� really is.� Ever since Solow (1957) decomposed output growth into the contribution of input growth and a residual productivity term, the concept has increased in popularity. Productivity growth forms the basis for improvements in real incomes and welfare, and has generated lot of interest in its own right and is used as a benchmark to rank firms or countries. This has spurred great interest in trying to obtain better and more accurate productivity growth estimates.

A three day OECD workshop on productivity measurement is taking place in Madrid, Spain.

fixing up China's banking system

China began the structural reform of its banking system in 1978 with the creation of state owned specially banks (SOSB) from the monobanking structure. Over time, these SOBS grew to be among the largest 50 banks in the world. However, as owner, the government dictated the terms of lending, so that these large four SOSB, together having 80% of market share, were financing the state owned enterprises (SOEs) More than two and half decades of policy lending has left the SOSBs burdened with bad debt on loan portfolios. The government has recognized the need to restructure these insolvent banks by setting up bad debt agencies with a narrow purpose to work out or sell bad debts. China's newly appointed governor of the central bank, Zhou Xiaochuan, recently told that China would take a "gradualist" approach to reforming its banking system, which means one step at a time, although the pace of change is anything but slow.

In a recent McKinsey Quarterly report Matthias M. Bekier et al. suggested the way to fix the China’s banking system. See also The Economist's View.

I think, China's window of opportunity for bank reform is closing rapidly. Recapitalizing the banks, identifying the bad loans, and spinning them off to the AMCs is the easy part of reform. But these moves are not sufficient to cure the banking sector's ills. As an exit strategy for recapitalizing the banks, Beijing must also act decisively to create an environment in which AMCs can sell off bad loans to recoup their losses. All this will involve fundamental reforms to the legal system, institutional framework, and corporate culture. Again at the same time, China needs to reform the capital market both to fuel the growth of the private sector and resolve the political ownership of the banking sector. With less political intervention and more credible financial data, banks will have a better chance to run loan books on a commercial basis. Such market discipline is a prerequisite for the ultimate success of banking reform.

who cares about human rights?

Behind a dilapidated store in a dusty field at Athi River, an export processing zone (EPZ) on the outskirts of Kenya's capital, Nairobi, a group of textile factory workers has gathered for a mid-afternoon break. The heat is searing, and the hastily purchased cool drinks quench thirsts.

Read a piece by Darren Taylor for the complete story

some moral lessons of life

One of my friend has forwarded this moral lesson to me, which I find worthy to post on this blog.
...There was a man who had four sons. He wanted his sons to learn not to judge things too quickly. So he sent them each on a quest, in turn, to go and look at a pear tree that was a great distance away.
The first son went in the winter, the second in the spring, the third in summer, and the youngest son in the fall. When they had all gone and come back, he called them together to describe what they had seen.

The first son said that the tree was ugly, bent, and twisted. The second son said no it was covered with green buds and full of promise.

The third son disagreed; he said it was laden with blossoms that smelled so sweet and looked so beautiful, it was the most graceful thing he had ever seen.

The last son disagreed with all of them; he said it was ripe and drooping with fruit, full of life and fulfillment. The man then explained to his sons that they were all right, because they had each seen but only one season in the tree's life. He told them that you cannot judge a tree, or a person, by only one season, and that the essence of who they are and the pleasure, joy, and love that come from that life can only be measured at the end, when all the seasons are up. If you give up when it's winter, you will miss the promise of your spring, the beauty of your summer, fulfillment of your fall.

Moral of the story:

• Don't let the pain of one season destroy the joy of all the rest. Don't judge life by one difficult season.

• Persevere through the difficult patches and better times are sure to come some time or later.

viability of export-driven economy????

The recent issue of The Economist discusses the feasibility of the export driven South east Asian economy.

…South-East Asia's economic performance tend to revolve around trade. A double-digit surge in exports helped to lift the region's growth to 6.3% last year. This year, a slowdown in exports, along with a bigger bill for oil imports, will cut growth to 5% or so. Economists hope that growing demand for electronic components and other exports will put growth on a rising path once more next year. But one thing is clear: “The region remains export-driven.�

It was not supposed to be this way….the Asian crisis of 1997, when plunging currencies, free-falling asset prices and bankrupt banks had brought regional economies to a standstill, various national leaders—most notably Thaksin Shinawatra of Thailand—declared that South-East Asia should not look solely to exports to resuscitate its economic fortunes. Instead, Mr Thaksin argued, governments should try to revive domestic consumption, which would help insulate the region from the vagaries of the world economy….attempted to put this theory into practice by suspending farmers' debts, instituting cheap universal health care and handing out loans to villagers, small businesses and home-buyers….began subsidising all manner of goods, from computers to cows, to increase Thais' spending power…“the grassroots economy�…

…Jesus Felipe of the Asian Development Bank…recently published a study showing that the economies of various Asian countries performed best, naturally enough, when both exports and domestic demand were buoyant. Last year, for example, domestic consumption and investment grew in tandem with exports in much of South-East Asia, propelling the region to its fastest growth since the crisis…he argues that domestic demand tends to grow incrementally, in line with the economy as a whole. His study found that from 1993 to 2003, exports grew more than three times faster than consumption in Thailand, and accounted for over 70% of economic growth. This trend continued after Mr Thaksin came to power in 2001 and began implementing his policies designed to boost domestic demand.

The only country in Mr Felipe's study where exports did not make a significant contribution to growth was the Philippines, where almost all growth was attributable to domestic demand. But this is a sign of the Philippines' economic weakness, rather than strength. Consumer spending in the Philippines is particularly robust thanks to the billions of dollars of remittances that Filipinos working overseas send home to their families. But those workers are overseas in the first place only because the Philippine economy does not grow fast enough to provide jobs for them.

…in South-East Asia, the richer the country, the higher the share of exports in the economy….. exports as a share of output are still rising steadily throughout the region (see chart), despite all the rhetoric about boosting the domestic sector. In the region's richest country, Singapore, they reached 168% of GDP last year. (Exports can be more than 100% of GDP because most of the components used to produce them are imported.) Net exports doubled their share of output in East Asia's richest countries between 1993 and 2003, from 5% to 10%.

….Thailand sells both manufactured goods (cars) and agricultural ones (rice) to both rich countries (America and Japan) and poor ones (the other members of the Association of South-East Asian Nations). Much the same applies in the rest of the region. Malaysia exports palm oil as well as electronic components; the Philippines computer chips and fruit, and so on. Booming China is the region's fastest-growing export market.

Consumption, meanwhile, has faltered throughout South-East Asia in the face of rising fuel prices, which have fed inflation and prompted higher interest rates. Drought and bird flu have taken a toll on farming. Last year's tsunami and the recent terrorist attack in Bali have dented tourism. Governments have cut back spending, trying to balance their budgets. Consumer confidence in Thailand, for one, fell to its lowest level in three years in August. If oil prices started falling, and inflation and interest rates with them, consumption would doubtless improve. But that would also give the world economy a shot in the arm, and boost exports even more.

The question that emanates from the discussion is whether Asian countries can, today, generate enough domestic demand-led growth so as to shift from export growth. And, does this demand process require an active role of the government?

poverty in america

The World Bank defines, “poverty is powerlessness, lack of representation and freedom�. Thus poverty is an important and emotional issue. The ubiquitous presence of poverty in the developing world is nothing unique. What is unprecedented is the incidence of poverty in USA; the recent paper by Hoynes et al. examines the issue.

They scrutinize the trends of poverty rates in the last three decades in America. Relative to the large decline that was experienced during the 1960’s, poverty rates have changed very little over the past three decades. They find a weak relationship between poverty and the macro-economy over time. However, in spite of this, changes in labor market opportunities predict changes in the poverty rate rather well. Holding all else equal, they found, changes in female labor supply should have reduced poverty further, but an increase in the rate of female headship may have worked in the opposite direction.

They raise some further research questions, what are the relationships between women’s labor force participation, female headship, and labor market opportunities for women, and poverty rates? Many analyses have linked two or three of these factors, but there may be important interactions between all of these that help determine the evolution of poverty rates. A related question is why rising women’s labor force participation prior to 1980 does not push down poverty rates. Finally, what explains the change in the responsiveness of poverty to macroeconomic indicators starting in the 1980s?

nobel prize for game theorists

An octagenarian political economist, Thomas C. Schelling, 84, an emeritus professor at University of Maryland and Harvard University, and a septugenarian mathematician Robert J Aumann, 75, an emeritus professor at Hebrew University Jerusalem, were awarded the Nobel Memorial prize in Economics for fostering the understanding of conflict and co-operation- in matters such as nuclear arms race, trade battles and price wars. Working separately, they used 'game theory' as a way to explain social, political and business interactions.
More on this please see Marginal Revolution.

G B Shaw once said, "Nobel Prize money is a life belt thrown to a swimmer who has already reached the shore in safety".

labour scourge

Continue with the previous post (missing link in globalisation:labour), policy makers and economists supporting neoliberal globalization have always argued that low wages of poor countries represent an excellent opportunity for these countries to compete in the global market. However, competition has also brought down wages in rich countries, accelerating the race against the bottom on a global level and making it harder for all workers to afford a decent life. Focusing on the US workers' situation, Thomas Palley, the chief economist of the US - China Economic and Security Review Commission, calls for the establishment of "fair and just rules that make the economy work for all."

If the United States were to add two billion low-wage workers, you'd expect that wages would fall across the board, right?…. famous theorem in international economics - the Stolper-Samuelson theorem - …says when a rich capital-abundant country (such as the United States) trades with a poor labor-abundant country (such as China), wages in the rich country fall and profits go up…. economic logic is simple. Free trade is tantamount to a massive increase in the rich country's labor supply, since the products made by poor country workers can now be imported. Additionally, demand for workers in the rich country falls as rich country firms abandon labor-intensive production to the poor country. The net result is an effective increase in labor supply and a decrease in labor demand in the rich country, and wages fall.

The relevance of the Stolper-Samuelson theorem is clear. For the last two decades, US policy makers….. have worked assiduously to create a global market place in which goods and capital are free to move. Over the same period, two and a half billion people in China, India, Eastern Europe and the former Soviet Union have discarded economic isolationism and joined the global economy. Now, these two tectonic shifts are coming together in the form of a "super-sized" Stolper-Samuelson effect, and they stand to have depressing consequences for American workers.

Much attention has been devoted to the adverse impacts of the US trade deficit, …. no one in Washington is talking about the deeper question of what happens to wages when two billion people from low-wage countries join the global labor market.… In the past, countries joined the international economy through a slow evolutionary process. Initially, they would export a few goods in which they specialized and had natural competitive advantage. Thereafter, countries would gradually deepen their involvement in international trade. The process was one of gradual integration, and production was largely immobile across countries.

Globalization has changed this by accelerating the process of international integration…..made capital, technology and methods of production mobile, marking a watershed with the past. The new order…exemplified by China's recent experiences….through massive foreign direct investment and technology transfer. The impact of this transformation on the US economy is seen in the trade deficit, the loss of manufacturing jobs and downward pressure on wages. Whereas classical free trade connected goods markets across countries, globalization creates a global labor market and moves jobs. Previously trade arbitraged goods prices, now it also arbitrages wages through job shifting.

….the emergence of China, India and Eastern Europe, the dam of Socialism that held back two billion workers has been removed. If two swimming pools are joined, the water level will eventually equalize. That is what is happening with globalization. Manufacturing has….been placed in competition across countries, with dire consequences for manufacturing workers. The internet promises to do the same for previously un-tradable services, and higher-paid knowledge workers will start feeling similar effects. Not since the industrial revolution has there been a transformation of this magnitude, and that revolution took one hundred and fifty years to complete. ….the new revolution is a mere 25 years old. These developments have a significance that goes far beyond the currency manipulation and WTO rules violations that have been the focus of trade deficit policy discussions. There is no reason to think the end is in sight, and American workers can look forward to the international economy exerting downward pressure on wages and work conditions for the next several decades.

….workers have understood the new reality long before economists and policymakers. …realize that trade is no longer a matter of exchanging exotic commodities for manufactured products, and that the new system involves trading their jobs and arbitraging wages. Especially bitter is the fact that the process of globalization is being driven by large American multinational corporations that American workers helped build. US policymakers have also abandoned American workers by promoting free trade agreements that have de facto created a global labor market that threatens workers' livelihoods and economic security.

Globalization demands ….the task of establishing fair and just rules that make the economy work for all. This challenge is the same as that faced by American workers at the beginning of the 20th century. Unions, minimum wages, and fair labor practices were essential to meeting that challenge, and they are essential again. But such tools are no longer sufficient when applied nationally. They must be applied globally. That means China, India and other industrializing developing countries must agree to, and enforce, core labor standards and worker rights. Trade cannot be free without worker freedom and the right to share in the wealth created….

missing link in globalisation: labour

Contrary to the earlier form of globalisation,where labour mobility was the driving force, the present one is governed by mainly capital mobility. The recent issue of the Economist (Oct6th 2005) acknowledges this missing link of globalisation.

....The flow of workers across borders is heavily impeded, leaving the global market for labour far more distorted than those for capital and commodities. The world price of capital may be set in America, and that of oil set in Saudi Arabia....there is no such thing as a world price of labour. Wages can differ by a factor of ten or more depending only on the passport of the wage-earner.

Relaxing the movement of labour even a little would thus generate large efficiency gains.... letting poor workers into rich countries, in modest numbers (equivalent to 3% of the hosts' labour force) for a limited period, could reap benefits to the developing world worth $200 billion a year. With numbers like that...(one) wonder why so much energy is spent freeing trade and capital, and so little expended freeing labour.

....Kofi Annan, the secretary-general of the United Nations, set up the Global Commission on International Migration almost two years ago. The commission, 19 members of the great and good from around the world plus a secretariat in Geneva, was charged with inspiring debate and reflection on all aspects of international migration and policy....Of its 33 recommendations, the most consequential is indeed a call for more temporary migration from poor countries to rich ones. Guest-worker programmes would realise some of the efficiency gains...Opening up new avenues of legal migration might also help reduce the flow of illegal migrants, the report hopes.

...history lends little support to their optimism. The Gastarbeiter programme in Germany—which invited Turks, Yugoslavs and others needed at the time to fill the factory jobs created by the country's post-war economic miracle—failed, at least on its own terms. Many of Germany's “guests� never left, and their families soon arrived. The bracero programme in America—which, from 1942 to 1964, recruited Mexican field hands to pick cotton and sugar beets in Texas and California—fared no better. The entry of hundreds of thousands of farm workers provided camouflage for a substantial flow of undocumented labour.

....the logic of temporary migration appears irresistible. Rich countries want migrants' labour, but do not want to look after these newcomers when they grow old. Ideally, rich countries would like a constant rotation of workers, arriving while they are young and active, leaving before they grow old and dependent.... “temporary and circular migration� is also better for poor countries. One reason is remittances: the longer an immigrant stays away from home, the smaller the share of his wages he sends back.

If temporary worker programmes make a comeback, how should they be designed? ...Some countries set a simple quota, filled on a first-come, first-served basis. The British government is more calculating, allocating visas to specific sectors, such as food processing, that express a need for cheap labour. Singapore is the most ambitious....“foreign worker levies� that employers must pay to hire an immigrant. The levies differ by industry and by skill. To hire a skilled foreigner in construction, for example, an employer must pay S$80 ($47) a month. To hire an unskilled migrant, the employer must pay S$470. With these levies, the ministry can fine-tune the demand for immigrant labour.

In Germany, ...the availability of cheap guest-workers in German factories slowed the adoption of new labour-saving technology. As the saying went at the time: Japan is getting robots while Germany gets Turks.

Some economists argue that governments should simply set a quota of visas and auction them..... they could set a price for the permits designed to achieve more or less the same number of sales. The principal virtue of both schemes is that they allocate visas according to private perceptions of their worth, not government guesses about need.

How can governments ensure that guest workers do not overstay their welcome? In South Korea, temporary workers contribute to a special account that is refunded to them if they leave on time and forfeited if they linger. The British government is thinking of asking some migrants to post a bond, like a defendant on bail, which they will lose if they choose not to return.

...the market forces and demographic pressures that make temporary migration worth considering anew.

The following chart gives an idea of destination of immigrants.

Net Migration Flow per Region 1995 – 2000, Source: UN Population Division

rising fuel price

One of my friend has forwarded the following images, interesting one!!

FDI in china

Foreign direct investment (FDI), which refers to the inflow of foreign capital into a country, also entail investments through cross-border mergers, and "greenfield investments" – such as the setting up of a completely new factory by a foreign company. There are some problems with the FDI data that have to be kept in mind when interpreting them, as noted by UNCTAD in its latest World Investment Report. FDI is an investment involving a lasting interest by a home-economy entity in an enterprise in a host economy. For data collection purposes, FDI has been defined as involving an equity stake of 10% or more in a foreign enterprise. FDI has three components: equity capital, intra-company loans and reinvested earnings. Different countries have different recording practices relating to these three components. Some countries deviate from the suggested 10% threshold value for foreign equity ownership. Most countries report long-term intra-company loans, but not all countries record short-term loans and trade credits. Some countries are still not able to report reinvested earnings, as the data are not easily available from company reports or balance-of payments surveys; those that report often do so with a considerable time lag. UNCTAD stressed that FDI figures are very volatile, and they can easily give a distorted picture by the impact of single transactions or by statistical effects. Differences in how countries measure and report FDI complicate the interpretation of FDI trends for the following reasons:

• Bilateral discrepancies between FDI flows as reported by home and host countries can be quite large. The following table on FDI flows to China as reported by China (the host) and by a number of the investing (home) countries highlights this problem and thus claimed by the country are far in excess of those reported by investors (see table). Thus global FDI inflows and outflows differ. In 2004 for example, global FDI outflows were 13% higher than global FDI inflows. This imbalance is due to various factors such as: different methods of data collection by host and home countries, different data coverage of FDI (i.e. all three components of FDI may not be included), different time periods used for recording FDI transactions, and different treatment of round-trip investments and of FDI in special-purpose entities.

• As recording practices change over time, time series data on FDI flows have structural breaks. For example, Japanese data on FDI flows started to include reinvested earnings (in addition to the other components) only in 1996, the same year German FDI flows began to cover short-term, intra-company loans. Furthermore, to facilitate a comparative analysis of worldwide FDI, data on flows in various currencies are converted into a single currency, the United States dollar, and growth rates of dollar denominated FDI flows may diverge from growth rates of FDI flows in national currencies. In 2004 for instance, the United States dollar depreciated against most currencies of the developed countries. Therefore the 9% decline in the dollar value of FDI inflows into developed countries using constant exchange rates was smaller than the decline in FDI inflows calculated with current exchange rates. Similarly, as FDI flows are expressed in nominal or current prices of a country, the conversion of these flows into constant prices yields different results.

The recent paper by Benoît Mercereau is also important in this regard.

intellectuals opposition to capitalism

Although this is a little bit older piece written by Rober Nozick of Harvard University, but its worth reading. Nozick argues that intellectuals are skeptical of markets and capitalism because they are habituated to expect greater remuneration for their accomplishments and efforts than they actually get, and less than they could expect to get in a centrally planned meritocracy.

Adam Smith once said, "All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind."

mike mussa's quotable quotes

This special issue IMF Staff papers September 2005 contains a collection of 10 papers presented at the IMF Conference in Honor of Michael Mussa (MussaFest) in June 2004. Michael Mussa has been an outstanding communicator, apart from a successful professor and prominent IMF official. The Top 10 Quotable Quotes from Mike Mussa is a pointer to that.

Quote Number 10—Mike Mussa’s Definition of Economics

Economics, of course, is not only science; it is also an art—some would say, a black art. Indeed, a man I had the privilege to serve for some years in Washington was widely accused of ‘voodoo economics.’ Then and now, the only appropriate reply to that accusation comes from an old song, ‘Please do that voodoo that you do so well.’

Quote Number 9—Mike Mussa’s Strong Opinion on Statism

The fundamental tenets of statist economics are as dead as the Russian monk Rasputin—whom you may recall was poisoned, strangled, stabbed, shot, cut into pieces, burned to ashes, and fired through a cannon.

Quote Number 8—The Story of the Three Little Pigs and the Big Bad Wolf, and Its Applicability to Economic Policies

The moral of the story on the three little pigs and the big bad wolf is that you need to build a brick house in order to be able to withstand the huffing and puffing of the big bad wolf. So there is a key message for most of the economies around the world: that your economic policies and your financial institutions need to be sufficiently strong so that if the big bad wolf comes huffing and puffing, you can survive the incident.

Quote Number 7—On Human Race, Fire, and Capital Account Liberalization

I like to think of the issue of whether capital account liberalization is good or bad, and how we should deal with it, as similar to the issue of how the human race should make use of fire. Fire warms our homes. It cooks our food. It powers our automobiles and trucks and our turbojets. It powers our airplanes. No doubt, fire is very useful, and we are not going to give up its manifold benefits. On the other hand, fire can also burn you down and do a great deal of damage, and that seems to me to be the main concern with capital account liberalization, that it does have important benefits, and few of us would want to give up the benefits of living in an economy that has both a fairly liberal domestic financial order and a fairly liberal international financial order. On the other hand, liberalization in the financial sector—and I would emphasize here both domestically and internationally—has far too often in far too many countries around the world been associated with a variety of economic disasters.

Quote Number 6—Mike Mussa on Globalization

To be clear, my grandfather’s move to America in 1907 was not motivated solely by narrow economic considerations. As a teenager, he witnessed the siege of Paris by the Prussian army in the winter of 1870–71. By 1907, he had three sons. He understood the significance of the words of the French national anthem—Arise sons of France, the day of glory is here, form your battalions. Expecting that war would come, sooner or later, departure beyond the grasp of French conscription seemed prudent. Viewing this aspect of my grandfather’s decision as an economist and thinking of the military draft as a form of taxation in kind, one could say that the move to America was partly motivated by tax avoidance. Again, there is a general lesson here—indeed two of them. First, economic globalization does tend to put limits on the ability of governments to enforce taxes and other policies. . . . Second, it is not necessarily a bad thing that globalization places some limits on the power of government.

Quote Number 5—Mike Mussa on ODA

Well I guess to correct the downtrend in official development assistance, the action that is clearly required is action by the advanced industrial countries, and I think particularly the United States. So I guess the specific advice I would give is that all the demonstrators who are planning to be outside the Fund and the Bank should instead go up to Capitol Hill.

Quote Number 4—Economists as Forecasters

We’ve been forecasting a slowdown in the U.S. economy for a while now, and we’ll continue to forecast a slowdown until it happens.

Quote Number 3—Titanic 101, or the Value of not Defending the Indefensible

The argument that the real exchange rate appreciation of the Mexican peso and the size of the current account deficit are irrelevant in explaining the Tequila Crisis has the same credibility as if the captain of the Titanic, on being questioned about the iceberg that brought the ship down, would have answered: ‘An iceberg? What iceberg?’

Quote Number 2—Titanic 102, or Is There an Optimal Amount of Moral Hazard?

If we hadn’t rescued the 800 people we rescued from the Titanic, we would have taught an even more valuable lesson about people being careful about getting on ocean liners. But there is a trade-off here: if every time national default threatens, we say, ‘Let’s force it,’ then we are not only going to get the creditors; we are also going to do a lot more damage to a lot of innocent victims. The objective is not to make a crisis as large and costly as possible so that we can discourage all risk taking. . . . Some amount of moral hazard is almost inevitably a consequence of international support packages. But the issue is a balancing one. As President Abraham Lincoln put it, ‘There are few things wholly evil or wholly good.’

Quote Number 1—Mike Mussa’s Bottom Line

This is how Mike Mussa concluded a convocation address at the University of Chicago in August 1991: To conclude on a personal note, next Tuesday, I shall take leave of the university to assume the duties of Economic Counsellor and Director of Research at the International Monetary Fund—an institution that has helped to shape the economic policies of many countries around the globe. Important as that institution may be, however, its influence pales in significance to the power of an idea. Free people, guided by their self interest in building better lives for themselves, their families, and their communities—disciplined by the forces of competition of a market oriented economy within a law-abiding society—are the fundamental engine of economic progress. This is the foremost practical lesson of economic science.

roars and whispers of socio-economic issues

The tenth Social Watch Report analyzes and measures nations' pledges to achieve gender equality and eradicate poverty. The 2005 edition pays special attention to the appalling gap between promises and action. Based on current trends, the report says that the states will not achieve the Millennium Development Goals. “The Social Map� of the world that accompanies this report seems doomed to be painted mostly in red, orange and yellow, the colours that symbolize different degrees of deprivation, when by 2015 the “social planet� should be entirely blue to indicate that the minimum level of social services has been met. This publication calls for immediate action by the international community. The time has come for bold and decisive action. Anything less is irresponsible.

progress of development in last 25 years

Mark Weisbrot, Dean Baker, and David Rosnick in a recent work in Center for Economic and Policy Research (CEPR) prepared the scorecard on development for the last 25 years (1980-2005). And contrary to the popular belief, the results, they got, are dissatisfactory. There has been seen a sharp decline in the rate of growth for the vast majority of low- and middle-income countries, China and India are notable exceptions (see the recent musings by Acharya and Rodrik). Accompanying this decline has been reduced progress for the almost all of the social indicators that are available to measure health and educational outcomes.

The methodology, they adopted, precludes the possibility that this reduced economic and social progress was a result of “diminishing returns,� i.e., the increased difficulty of progressing at the same rate from a higher level. It is therefore likely that at least some of the policy changes that have been widely implemented over the last 25 years have contributed to this long-term growth and development failure. In some of the financial and economic crises that took place in the late 1990s — for example in East Asia, Russia, and Argentina — it seems clear that policy mistakes contributed to severe economic losses.

However, it is difficult to show a clear relationship between any particular policy change and economic outcomes, especially across countries. There are many changes that take place at the same time, and causality is difficult to establish. It is certainly possible that the decline in economic and social progress that has taken place over the last 25 years would have been even worse in the absence of the policy changes that were adopted. But that remains to be demonstrated. In the meantime, a long-term failure of the type documented here should at the very least shift the burden of proof to those who maintain that the major policy changes of the last 25 years have raised living standards in the majority of Developing countries, and encourage skepticism with regard to economists or institutions who believe they have found a formula for economic growth and development. Indeed, some economists^# have recently concluded that more “policy autonomy� — the ability of countries to make their own decisions about economic policy — is needed for developing countries. Most importantly, the outcome of the last 25 years should have economists and policy-makers thinking about what has gone wrong.

# Nancy Birdsall, Dani Rodrik, and Arvind Subramanian. (“How to Help Poor Countries,� Foreign Affairs, New York:Jul/Aug 2005. Vol. 84, Iss. 4, p. 136-152)