How Can Sovereign Wealth Funds Mitigate Natural Capital Depreciation in Developing Countries?Key indicators of economic performance for resource-rich developing economies are net national income and savings that are adjusted for natural capital depreciation. These indicators vary inversely with the reliance of developing countries on primary product exports, suggesting that highly resource-dependent economies are not expanding physical and human capital sufficiently to compensate for declining natural capital. Natural resource-based sovereign wealth funds can mitigate the impacts of natural capital depreciation on the economic performance of resource-dependent developing economies. But to do so, the overall management practices, governance and transparency of these funds must improve.
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Leveraging the African Private Sector to Enhance the Development Impact of the African Continental Free Trade Area AgreementBy July 2018 the African Continental Free Trade Area had been signed by 49 African governments, accounting for over 86% of total African trade and 77% of combined GDP, and a total population of 1.2 billion. The Agreement has the potential to accelerate the process of diversification of sources of growth and trade, but it is a necessary, not a sufficient condition for transforming African economies. The transformational power and development impact of the Agreement depend on the capacity of African governments to leverage the African private sector to address supply-side constraints. Success also depends on regional cooperation and symbiotic nature of public-private partnerships in a region where adverse global shocks and market fragmentation have undermined economic integration and weakened the trade bargaining power of countries.
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Analysing Intra-African TradeIn March 2018, most African heads of state gathered in Kigali to sign the African Continental Free Trade Agreement (AfCFTA), marking the culmination of intense negotiations. A number of central issues remain unresolved: it is an agreement with a substantial sensitive/exclusion list for tariffs on goods, with strict product-specific rules of origin and institutions for remedying trade that could be abused to protect domestic lobbies. The regulatory content of the AfCFTA could be described as ‘WTO-minus’, although it does bring non-members of the World Trade Organization into the fold. The level of ambition in the services negotiations seems to be low so it is likely that further liberalisation will be pursued over time, encompassing new areas such as e-commerce.
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Growth in Oil- and Non-Oil-Producing CountriesUsing data for a sample of oil- and non-oil-producing countries this article studies determinants of growth to assess the relative importance of domestic policies and external spillovers. For net oil exporters, a higher price of oil helps increase resources for spending and available liquidity to support real growth. For net oil importers it increases the cost of imports and government spending on fuel subsidies with a negative effect on real growth. The mechanism transmitting the oil price shock is more evident in developing countries than in advanced oil-producing countries, attesting to less diversified economies in the first group. Across the samples of countries under investigation, advanced and developing oil- and non-oil-producing countries, domestic policies have considerable ability to counter the spillover effects of external shocks.
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Designing a Global Financial Safety Net It often is neither possible nor sensible to immediately correct the underlying macroeconomic disequilibria that a financial and economic crisis reveals. To cushion the process of adjustment a global financial safety net is needed: owned reserves, regional financing and borrowing from the International Monetary Fund. Since the Asian crisis of 1997/98 there has been an accumulation of owned reserves amongst emerging economies as a form of self-insurance, along with the development of regional financing arrangements. There are advantages and disadvantages of the various components of all these arrangements and reform needs to take these into account.
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CryptoRuble: From Russia with LoveA large number of decentralized cryptocurrencies has emerged since the inception of Bitcoin in 2009, with a total market size exceeding $170bn. Recent reports suggest that Russia will issue its government-backed cryptocurrency, CryptoRuble, in the middle of 2019. Russia’s primary goal in issuing a government cryptocurrency is to free its monetary system from the controls exerted by the Federal Reserve and their allied central banks. Government-issued cryptocurrencies will increase: Large sovereign states have the technological know-how and means to do this, but small and/or developing countries may be forced to outsource issuance of their government-backed cryptocurrencies to larger states.
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US-China Trade War Data: Truth and Post-TruthData on the importance of US–China trade and fundamental trade theory suggest that the USA is in a relatively weak position in its trade war. Not only will the protectionist measures of the Trump administration reduce the welfare of American citizens (theory of competitive advantage) but they also pose a threat of triggering an inflationary cycle. The imposition of tariffs on soybeans by China has strategically hit core Republican voters in states like Iowa, risking the political prospects of Republicans in future elections. Thus, the current administration should reconsider the feasibility of continuing the trade war against China given the economic and political risks.
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An Economic Comparison of Greece and ItalyIn Greece and Italy, populist parties have taken power in recent years, a result of coalition between radical left and far-right parties. Both countries are of concern to the European Commission—Greece’s ‘enhanced surveillance’ could end in another bail-out program; Italy is pursuing its budget deficit dispute. Greece and Italy share many economic structural weaknesses in the size of public sector deficits, in the taxation of labour, corporate taxes, and high levels of regulation. Finally, the current and future growth rates of both Greece and Italy are inadequate and the political climate is highly polarized, radical, with no culture of compromising.
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David Henderson: 1927-2018David Henderson was both a scholar and a practising economic adviser. He was always concerned with what was going on in policy analysis and in the technical economics, or other thinking, which lay behind economic policy. He was widely and deeply read, not only in economics: he published many books, was a prolific contributor to policy journals and gave many lectures, including the Reith Lectures of 1985. He was an active networker, always reaching out to those who could help him or those he wished to influence. I have first written about the man I knew and second about the contribution to policy advice contained in his writings.
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Data, Deceit, and the Defence of TruthAttacks on experts and professionals using available facts, are rising in the USA, with troubling implications for economics, for the collection of statistical data, and for the future integrity of the policymaking process. The Trump Administration is undermining fact-based decision making in a number of discreet interventions: Citizenship questions for the upcoming decennial census and in attacks on the work of an economist in the US Congressional Budget Office on healthcare costs. In Argentina from 2002 until 2015 the Kirchner government twisted the output of the official statistical agency to their own aims, publishing bogus data on inflation, GDP, and poverty. In Greece the efforts of Andreas Georgiou from 2010 to 2015 to correct the biased output on GDP and government expenditure data at the Greek Statistical Agency led a judicial persecution all the way to the Greek Supreme Court.
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A Critical Review of Thomas Piketty’s Capitalism in the 21st CenturyPiketty claims that capital rises faster than income which assumes that capital and income are independent variables. The evidence shows they are not and that the ratio of income to capital is probably stable over time. Piketty’s mistake appears to come from confusing depreciation with the cost of maintenance. Piketty uses misleading data to support his claims by confusing wealth with capital and income with output.
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Measuring Macroeconomic Performance Using a Composite IndexLarge quantities of economic data, varying in accuracy and reliability and subject to later revision, are continually produced and published so interpretation using only one data source is subject to risk. The complex world of data can be simplified by combining different measures of economic performance—economic growth, unemployment and inflation into a single composite index. A composite index of cross-sectional data relating to the economic performance of all of the European Union in 2017 puts Ireland, Romania and Malta in the top three positions, while Germany is ranked 12th. Tracking the UK with the composite index using time-series data shows the impact of the financial crisis in 2008–09 with a gradual improvement in performance which peaks in 2015.
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The Seemingly Underappreciated Role of Panel Data in Measuring Poverty and Economic TransformationPanel survey data play a crucial role in producing estimates on welfare dynamics as well as insights into transformation processes in developing economies. Panel survey data are indispensable for effective policy advice for poverty reduction and growth. Fielding and maintaining a good-quality panel survey requires investment in financial and technical resources as well as careful planning, especially in developing countries. Statistical techniques can also be employed to produce estimates on poverty dynamics as an alternative methodology, but a new hybrid approach can combine the advantages of both methods.
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Measuring Greek Debt: The Difference between Market and Credit PerspectivesIt is likely to be several decades before data on government assets, off-balance sheet and contingent liabilities are consistently available across a wide range of countries. In the absence of data, GDP is a readily available scaling factor, but official sector agencies such as the IMF and private sector analysts recognise the insufficiency of debt–GDP ratios. Some commentators claim that, using international standards, Greek government debt could be only around 75% of GDP, compared with official figures of around 180%. Fundamentally, such discrepancies reflects debt valuation variations related to the difference between market risk and credit risk.
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On Microfinance-led Socioeconomic Change: Inferences from Field DataGovernment and non-government agencies in India are working towards empowering people at the grassroots through the provision of microfinance. Self-help groups have emerged as instruments of change for poor people (women in particular) trying to solve their problems collectively with financial assistance or through commercial activities. Detailed data are examined on the impact of microfinance-led inclusive socioeconomic change based on the social systems in the state of Gujarat. Microfinance plays an important role in sustainable economic development in India.
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Trade Wars and African Growth ProspectsAfrican economies are back on a path of economic expansion which has been broad-based driven by both commodity-dependent and non-resource-rich economies. The region is forecast to achieve an average economic growth rate of 4 per cent in 2018 and grow by as much again the following year. A challenging global economic environment with the escalation of trade tensions and an accelerating pace of normalization of monetary policy pose major medium-term risks to African and global growth. The African Continental Free Trade Area will deepen the ongoing process of economic integration and will mitigate the exposure of the region to recurrent adverse external shocks.
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China’s Economic Growth and Foreign Direct Investment FlowsEconomic reforms implemented since 1978 have contributed to economic growth and prosperity in China. China has emerged as the largest host country for foreign direct investment, in that it receives enormous inflows and has concurrently become one of the largest suppliers of outward foreign direct investment projects. The institutional background of China’s investment and economic policies provides an understanding of the influence of foreign direct investment on economic development. Well-designed policies can attract more FDI inflows and contribute to greater outbound investment.
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Measuring the Performance of the Bombay Stock Exchange: The Impact of DemutualisationThe literature on the impact of the demutualization of stock exchanges on performance is growing since the percentage of demutualized exchanges has risen from 10% in the mid-1990s to 63% in 2002. The Bombay Stock Exchange, established in 1875, demutualised in 2005 to follow the “for profit company” model of the National Stock Exchange incorporated in 1992. The performance of the Bombay Stock Exchange is analysed using data from 1998 until 2016 to cover pre and post demutualization, but a significant relation between demutualisation and performance could not be found. Comparing the Bombay Stock Exchange with performance data from the National Stock Exchange showed the latter having a significantly higher performance implying that the value enhancing effects of demutualisation is yet to be fully achieved.
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Using the World Bank’s Bank Data to Assess Changes in Financial Regulation and Supervision since the Global Financial CrisisThe World Bank’s Bank Regulation and Supervision Survey (BRSS) data can be used to gain insights into bank regulatory/supervisory styles across countries. The data illustrate the differences in regulation/supervision among crisis, non-crisis and BRICS countries, and highlight changes in regulation and supervision during the crisis period. The results indicate that the crisis countries had weaker regulatory and supervisory frameworks than those in emerging countries during the crisis. As a distinct block BRICS countries demonstrated uniqueness in their regulatory/supervisory styles, which are similar neither to those in the crisis countries nor to those in the non-crisis countries.
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The Ten-Year Crash AnniversaryThe ten-year anniversary of the 2008 crash and the unprecedented length of the bull (stock) market since then is an opportunity to reflect on the crash’s roots. A result of the bear market between 2000 and 2002 was the Sarbanes–Oxley Act that separated the business of consulting from the conflicting one of auditing. Unfortunately regulators and politicians have not learned their lessons from 2008 in order to correct the real causes of that catastrophe. The aftermath of the 2008 crash has not led to the separation of the ‘one-stop financial shop’ banks, servicing both buying and selling clients.
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Measuring Illegal Activities in the National AccountsUntil 2014 the only illegal activity measured in the UK National Accounts by the Office of National Statistics was the smuggling of alcohol and tobacco. The European System of National Accounts 2010 requires statistical bodies to measure consensual illegal economic activities such as drug consumption and prostitution. In 2014 the first estimates measured the contribution of illegal drugs and prostitution at 2009 prices to UK Gross Domestic Product (GDP) at just under £10 billion. The estimates are based on a flawed methodology using survey data while private sector figures suggest that the contribution of the cannabis market alone to GDP may be over three times the official value of £828 million .
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Cash, Demonetisation and the Informal Economy in IndiaIndia took a demonetisation step in November 2016 by banning 500 and 1000 rupee notes as legal tender benefiting banks but hurting the poor and the under banked. The shadow economy was badly affected and even measured GDP growth rate slumped, but demonetisation proponents argued that the dip will reverse and the growth rate will reach 7.7% in 2019. A cashless economy would accelerate economic activities, curb corruption and protect consumers from fraud, frequent physical transactions and it has been estimated that it would save the Indian exchequer (and taxpayers) an amount equal to approximately 0.25% of GDP. The note withdrawal was a botched up job and demonetisation in India will only succeed if the Government can channelize it as a leverage point for a larger tax base, increased digitisation along with a more transparent, fluid and measurable Indian economy.
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Debt, Economic Growth and Data AdequacyThe effects of government debt on economic growth has become of immense importance in the backdrop of the Eurozone sovereign debt crisis and Reinhart & Rogoff’s related research. This study is based on a sizeable dataset which extends the horizon of analysis to country groupings and makes it inclusive of economic, political, and regional diversities. The study overcomes issues related to data adequacy, coverage of countries, heterogeneity, endogeneity, and non-linear relationships by conducting a battery of robustness tests. An increase in the debt-to-GDP ratio is found to be associated with a reduction in average growth, but the relationship is nonlinear.
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Error in Demographic and Other Quantitative Data and AnalysesStatistical data consumed, analysed and produced contain errors from more sources than is often recognised and the commercialisation of survey and other statistical research and ‘inventions’ such as ‘big data’ has led to naïve and faulty analysis and propaganda. Oskar Morgenstern has noted that, in contrast to physics, there is no estimate of statistical error within economics and the various sources of error that come into play in the social sciences suggest that the error in economic observations is substantial. It is important to recognise the phenomenon of the propagation of errors; errors in our results may be disproportionate to errors in our input data. Despite documented problems social scientists cannot give up on quantitative data since many of the most important questions in social science are matters of more or less, not either/or.
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Exchange Rates as a ‘Veil’ The effectiveness of exchange rates as an adjustment mechanism in a given country depends on the role played by domestic financial markets. With floating exchange rates and full integration into global financial markets, policy-making space is determined by the size of public debt and the degree of policy credibility. A large debt and weak policy credibility inhibit the power of floating rates to insulate the economy from shocks and to grant independence to its policymakers. When a country’s financial stocks are of significant size, market expectations are the fundamental determinant of equilibrium exchange rates and purchasing power parity.
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Free Trade, Protectionism, and the Global EconomyFree trade benefits consumers, but has harmed less-skilled workers in western countries fuelling polarization and the rise of nationalistic populism. Despite U.S. President Trump’s contradictory stance on tariffs, trade policy is closely connected with the level of the dollar as well. Policy actions which reduce the value of the dollar might fuel a currency war and a global trade backlash with serious negative consequences in living standards. A Court of International Trade for dissolving disputes among countries could help avert race-to-the-bottom tariff war or even prevent a currency war?
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Rare Earth ElementsRare Earth Element Reserves are estimated at 130 million metric tons while global production/processing capacity was approximately 126,000 metric tons in 2016, 95% controlled by China The US authorities and academics mistakenly treat Rare Earth Elements as “one group, one product”, but final high-tech products only use the appropriate elements providing desired characteristics. Disaggregation reveals that the U.S, the EU’s and Japan’s economies and national securities are 100% dependent on 30% of the naturally occurring elements on the Periodic Table of Elements and Chemistry. A comparative review between 1980 and today shows that the conditions are in place which will lead to the manipulation of the Rare Earth Elements market by the dominant player, China.
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Commonwealth and EU GrowthThe Commonwealth of Nations is growing rapidly in comparison to the ailing Eurozone Measured by share of world GDP, the Commonwealth overtook the (1973) European Union in 2004 By the same measure, the Commonwealth is slightly larger than the current Eurozone In 2017, the Commonwealth accounted for 4.1% more than the Eurozone in terms of world GDP share.
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Measuring the Impact of TerrorEvents observed in Israel include terror attacks, controversial elections and unexpected wars, the impact of which can be analysed on the Tel Aviv Stock Exchange in terms of abnormal returns. Results show that defence and high-tech industries react positively to these events while other industries have a negative reaction. Recent data demonstrate that these events create positive abnormal market reactions when Israel is at war with Palestine and Lebanon because of the high number of defence and high-tech companies listed on Tel Aviv Stock Exchange. A phenomenon of the ‘normalisation of terror’ can be observed in the stock exchange, as the market reacted negatively to events in 2002 but has become more resilient to recent events.
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Commercial Real Estate Data - New Demands, Old ChallengesThe global financial crisis, followed by a global portfolio shift towards commercial real estate, has reinforced the demand for timely, consistent and transparent valuation metrics and transactions data. Current initiatives at global, country and market level are addressing shortcomings in this area; nevertheless commercial real estate markets pose unique data collection and presentation challenges. While users of these data should be aware of the difficulties and qualifications inherent in the collection and compilation process, enforcing uniformity of processes and definitions across markets and sub-sectors may come at a cost. Propositions that more data are always better than less and that market transparency is always better than opacity are fruitful topics for debate in the context of commercial real estate markets.
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Using Price-Adjusted Income Data to Measure Regional Income Inequality Across the UKData for gross disposable household income for each region of the UK are published annually by the Office for National Statistics. The latest provisional data available are for the year 2015. The annual data for household income are in nominal terms only—i.e. they do not allow for differences in prices between regions of the UK, which distorts the results. A reliable deflator to correct the nominal data for differences in inter-regional price levels was derived from the regular survey of prices for calculating the Retail Prices Index, augmented by a special survey of prices of goods and services. When allowing for price level variations between nominal and real household income in different regions the greatest impact is on London. In real terms, household incomes in London are 6% lower than in nominal terms, amounting to a reduction of about £12.4 billion.
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Cultural Data Mirror International Structural Economic DifferencesData on cultural differences between countries based on the definitions developed by Geert Hofstede are now available for more than 80 countries. Data on six structural economic indicators published by the World Bank—ease of doing business, enforcement of contracts, control of corruption, government effectiveness, rule of law and political stability—are available for the same set of countries from 2000 onwards. Significant correlations between cultural factors and structural economic conditions suggest that differences across countries may persist for many years and that convergence is likely to be a very slow process. In Europe the single currency is a political project, but the extent to which cultural and structural economic differences remain suggests that the tail risk of euro fragmentation or break-up could persist for many years.
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The Knowledge Economy in Historical PerspectiveThe knowledge economy provides huge opportunities for economic growth and to become the cornerstone of future economic development by turning data into wisdom or human capital. Education, one aspect of the knowledge economy, exhibits a history divided into three stages: the apprenticeship era, the universal schooling era and the (future) life-long learning era. The spread of knowledge has accelerated owing to the different stages of knowledge production, in particular the printing press and now the internet.
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The Financial Crisis and Gender: Assessing Changes in Workforce Participation for Rural IndiaLabour market data in India shows female participation declining as GDP has increased, a phenomenon found in other East Asian economies over past two decades. This contradicts empirical observations, which argue over the feminization of the work force due to participation in global export markets, primarily driven by wage efficiency of female labour. The impact of the global financial crisis on female participation rates in rural India in 2009-10 is studied with a cross-state analysis to test theories about female unemployment in a downturn. One of the major findings is that as the formal wage difference between men and women decreases, the female participation gap increases, but more data is needed to identify critical causal factors.
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Debunking the Relevance of the Debt-to-GDP Ratio Historical experience does not confirm the simplistic notion that the heavier the burden of the public debt relative to GDP, the greater is the risk that governments will encounter debt-servicing difficulties. In 25 government defaults that occurred during 1998-2017, the pre-default debt-to-GDP ratios ranged from a very low of 27% (Ecuador in 2008) to a very high of 236% (Nicaragua in 2003), with a sample median of 79%. As ratios of government debt rise, some societies manage to deliver more responsible fiscal behaviour. Low debt ratios, on the other hand, often mask dangerous currency or maturity mismatches, as well as contingent liabilities, capable of suddenly impairing banks and governments. The demand for government bonds can behave unpredictably, and governments with low or high debt ratios can suddenly find themselves cut off from needed financing. Official institutions like the IMF, European Commission, and World Bank have done themselves and their member states a great disfavour by obsessing about debt ratios which do not predict fiscal outcomes.
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The World EconomyThe World Economy has grown for 57 out of the past 58 years, only the great recession of 2009 saw an interruption in over half a century of continuous growth. Over the whole of the last 5 decades, annual real GDP growth has averaged 3.2%, and 1.6% in per capita terms. Global Real GDP split by continent illustrates that the share of the world’s GDP in the Asian region grew considerably faster than all other continents, from 16.8% in 1960 to 47.0% in 2017. The wealth of Europe and the Americas remains considerably higher compared with Asian and African continents.
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Evaluating the Impact of Trade on DevelopmentThe main conclusions of the theory of comparative advantage is powerful and inescapable – restrictions on trade harm economic welfare. The principle of comparative advantage shows that trade enables one-off welfare gains, but the impact of international trade on prosperity and on economic growth and development are empirical questions. The balance of evidence suggests that opening economies to trade is associated with higher growth, improved welfare, lower corruption and better working conditions. Restrictions on trade damage the development prospects of poorer countries which require assistance with infrastructure to enable them to realise the benefits from integration into the world economy.
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Trumponomics and Taxation Author: , March 2018
At the end of 2017 President Trump signed into law the Tax Cuts and Jobs Act which Republican supporters argue would transform the US economy and stimulate an enduring increase in the rate of economic growth. The motivation behind the legislation appears to be the belief that a reduction in corporate taxation will release a flood of entrepreneurial initiative that will increase investment and, as a consequence, lead to higher wages and sustained faster economic growth. The Reagan administration tried tax cuts before to stimulate growth; not in a conventional neo-Keynesian way aimed at raising aggregate demand, but as a means of strengthening the supply side of the economy. As an economic philosophy, Trumponomics is a rather high-risk strategy. Compared to the early 1980s there is a smaller output gap, a much higher level of national debt and less fiscal space.
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