India’s economy has run out of steam. Years of dithering and inaction by India’s government has finally caught up. As I discuss in this piece, the policy paralysis won’t be cured anytime soon.
Unfortunately, the situation isn’t likely to improve anytime soon. In the parliament no single party has a clear mandate and the largest party, Congress, is beholden to smaller regional allies for majority. Welfare programmes and populist policies that appeal to their base guarantee the support of these parties. As the government is more concerned with short-term survival, any difficult decisions are put on the back burner.
That is a shame. Continued growth promises to lift millions of Indians out of poverty. But this requires the country’s leaders to take a long view and think beyond the next election cycle. Under the current electoral arithmetic, that seems unlikely.
The full text is here.
In which I evaluate the impact of technology-based development projects. Despite best intentions and smart engineering, the results aren’t encouraging. The problem, as it turns out, is that we are too focused on the technology and not enough on how people interact and integrate with technology.
There is also a big difference between well-controlled field trials and real world usage. As engineers and scientists, it is easy to fixate on the technology. It is a lot harder, however, to predict human behaviour and how that interacts with technology. With the clean stoves, Ms Hanna and her colleagues found that previous evaluations of the programme relied on trained fieldworkers to inspect and repair the stoves regularly. Not surprisingly, households readily switched to the newer stoves and the results were positive. But in cases where owners were responsible for the upkeep and proper use of the stoves, take-up of the programme was slow. What’s more, in households that did make the switch, use of new stoves declined over time, broken stoves weren’t repaired and households ultimately reverted to the polluting cooking fires.
A longish post, the full text of which can be found here.
The post crisis economy - tentative and risk-averse.
A firm’s aversion to capital markets can persist for decades after a recession. A recent paper by Antoinette Schoar and Luo Zuo, from MIT’s Sloan School of Management, concludes that managers who begin their career during a recession have a conservative management style when compared with their non-recession peers. The authors find that early career experiences are important and can influence firm-level decisions even decades later, when the “recession manager” becomes a CEO. The companies headed by these managers are reluctant to access public markets, have lower capital budgets and pay higher effective tax. If the pattern from previous downturns holds, then we can expect the next generation of business leaders to eschew capital markets in favour of self-sufficiency. Firms will invest less in capital-intensive projects and in research and development (R&D) to tightly control finances.
This strain of financial conservatism could also impact start-ups that seek to commercialise innovative technology. Typically, in the aftermath of a recession, the flow of money to early-stage companies is reduced. This may not be a bad thing. It is possible that during boom times, excess capital dents financial discipline, and leads investors to fund mediocre ventures. In contrast, during a recession, investors are more diligent about their investment. In fact, a study by the Kauffman Foundation found that more than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market.
My full post is here.
The challenge with modernizing India’s retail sector.
Opening up the retail space to foreign investment would help in overhauling the country’s antiquated supply chain. Shortcomings in the distribution systems have created huge differences between wholesale and retail prices. Inefficiencies are common. The government estimates that 40% of the fruit and vegetable production in country is lost due to inadequate storage and transport infrastructure. Waste of this magnitude, troubling in the best of times, is appalling as the country battles double-digit inflation.
Yet, despite a consensus among policymakers that opening up of the retail sector to foreign investment has benefits both in the near and long term, the government shied away from reaching a decision. The reason behind the hesitation is the political clout of existing traders. An estimated 35m people or 7.3% of India’s workforce, are employed in the unorganised retail sector. The traders have been very vocal about their opposition to any form of organised retail and have regularly conducted mass protests and ransacked supermarkets to make their sentiments known. They fear that the arrival of big-box retailers will price the corner grocery stores out of business. There is some truth to this. As this article notes, the advent of an organised retailer can lead to reduced sales in the first year. But after a few years the stores are more or less back to where they started.
My full post is here.
High-speed traders set their sights on Asia and Latin America
Will robots take over exchanges in the emerging markets?
There are hurdles to the spread of HFT, however. Emerging-market governments are wary of encouraging short-term foreign investors. HFT firms which seek to exploit currency movements or arbitrage price differences between local-currency and foreign-currency bonds want to move funds in and out of a country with minimal friction. The presence of capital controls makes this hard. Brazil’s 2% tax on foreign equity and debt investments in 2009 did not deter existing HFT firms but did discourage new ones.
My piece in the magazine is here (subscription needed).
What’s behind the recent round of food inflation?
A look at the reasons behind the price movements of each of the commodities suggests that the rally on some of the commodities may be overdone. First, unlike the food crisis two years ago, this time around inventories of rice, corn and other commodities are at healthy levels. The Food and Agriculture Organisation estimates that after two consecutive years of record crops, world wheat inventories have been replenished sufficiently to cover the production shortfall. Crude oil prices are also lower than in 2008, suppressing the demand for biofuels, which drove the rise in corn prices last time around. Finally, one only has to look at the divergence between the wheat futures and the physical cash market to understand that the futures surge is probably an overreaction to the drought.
My full post is here.
Identifying and measuring systemic risk isn’t easy. But complexity of a problem shouldn’t be a barrier. Why can’t economists use advances in network theory and computational mathematics to refine their models?
A new NBER paper by Mila Getmansky, Andrew Lo and Loriana Pelizzon attempts to identify some early warning indicators that can be a useful for assessing future vulnerabilities. Instead of using financial information such as leverage and asset size, which may not be publicly available, the paper relies on econometric techniques to tease out systemic risk. The actual analysis is very mathematical, but essentially the authors first create a map of the connections among the four major groups of financial institutions. (The groups are hedge funds, banks, brokers and insurance companies.) Next, they identify the causal relationships among individual firms to create a web of statistical relations among individual firms.
Such an analysis is long overdue. For too long macroeconomics has relied on simplistic models to explain an ever more complicated world. As the authors in the paper point out, the severity of a financial crisis depends on the correlation between assets of different financial institutions, the sensitivity of these assets to market conditions and linkages between the financial institutions and the rest of the economy. Current economic models cannot process so many variables. The ideas presented in this paper are a good start, as are discussions around agent-based models or econophysics.
My wonkish post here.
Trying to make sense of the RBI’s multiple targets for India’s economy.
Unlike central banks around the world, the RBI doesn’t have a clear inflation or unemployment mandate; instead it targets multiple indicators that are known only to officials within the bank. At any given point it is not clear whether the bank is monitoring inflation, exchange rates, financial stability or some other metric. This uncertainty has made guessing the RBI’s policy statements a favourite game amongst analysts.
The RBI’s rejection of inflation targeting is now increasingly at odds with the central government, which is finding its fiscal policy hampered by the RBI’s inability to get prices under control.
My full post is here.
Can Asia ever decouple from the West?
There is some evidence to support this. The bank’s data show that the Asian recovery has been driven by the region’s own economic demand - there has been a rebound in intra-regional trade. The region is also less dependent on foreign capital than before. The impact of the European debt crisis has been minimal, with bond yields falling as capital continues to flow in.
Yet the region is still vulnerable to shocks from the West. Despite an increase in domestic demand, Asia depends heavily on exports. Most countries in the region continue to undervalue their currencies, making it difficult to move away from developed-world demand and toward domestic consumption. Stimulus spending has driven much of Asia’s blistering growth this year, but if America and Europe continue to face sluggish growth, no amount of fiscal or monetary pump-priming can prevent a slowdown.
My full post is here.
The latest Big Mac index suggests the euro is still overvalued
Covering the annual movement in the Big Mac index has to be one of the most fun topics to write about. Where else can you “chomp” at over valued currencies, attract “yield-hungry investors” and ask readers to take your analyses with a “generous pinch of salt”?
Other currencies are dearer still. Investors looking for a safe place to put their money have sought refuge in the Swiss franc. Despite attempts by the Swiss central bank to stem the appreciation, the Swiss franc is overvalued by 68%. Those on the hunt for a value meal should also steer clear of Scandinavia. In Norway a Big Mac would set you back by 45 kroner or $7.20, nearly twice the cost in America.
Place an order for my full piece here (subscription needed).
Interesting research which shows that central banks are not helpless when short-term rates reach zero.
When the Fed announced its intention to buy large portions of long-term Treasuries, which are in limited supply (in theory), the price of the bonds increased and their yields decreased. If investors were able to substitute Treasuries with comparable bonds from other countries the effect should have ended there. But sovereign bonds are imperfect substitutes, and American yields fell more than those of other countries. The change in relative yields caused the dollar to depreciate immediately due to undershooting, but led to expectations of appreciation over a long horizon.
The full text of my post is here.
Exactly how big was the shadow banking system, in the run up to the crisis?
First, as the graph below shows (figures in trillions of dollars), the volume of credit intermediated by the shadow banking system is larger than that of the regular banks. Prior to the crisis, shadow banks had liabilities of $20 trillion compared with $11 trillion for regular banks. Today, the figures are $16 and $13 trillion, respectively.
The subprime crisis may have started the fall, but the financial crisis was precipitated by a run on shadow banks. As this paper shows, there is an inherent weakness in the shadow banking system that makes it vulnerable to future bank runs.
In traditional banks, deposit insurance acts as an official put, limiting any losses suffered by retail investors. For shadow banks, the bulk of the deposits are provided by money market funds. These funds expect their deposits to be available on demand and at par. But the implicit put option, at par value, is not backed up by any capital or official enhancement whatsoever.
My full post is here.
A short post on how a small set of banks soaked up most of the government bail out money.
Between 37 and 63 percent of the support extended under capital, guarantee and asset protection schemes has been absorbed by the largest three recipient institutions. For each individual measure, the three largest recipients account for 3 to 9 percent of total euro area banking assets.
The full post is here.