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Measuring Nations’ Economic Performance

The Report of the Commission on Economic Performance and Social Progress considers the issues of establishing a broader measure of human well-being than the per capita GDP currently used. The report evaluates the possibilities for expanding the GDP concept and other measures of well-being, and for evaluating sustainability. The Commission recognises that it will not be possible to rely on one measure, recommending the use of a dashboard of various measures, including adjusted net saving.

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Chile: Foreign Shocks and Policy Responses

In 2009, the world is facing the worst recession in more than six decades. Chile has been no exception. In spite of this outlook, the Chilean economy stands on solid ground, and recent figures show that the recovery has started. This article discusses the fundamentals of the Chilean economy and how economic policies have responded to the strong foreign shocks of the past few years. These range from the severe inflation outburst over part of 2007 and 2008, the consequences of the world’s financial crisis and the current risk of an extended period of low inflation.

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The World’s Poorest Nations and the Global Financial Crisis

Unlike many earlier financial crises, the current sub-prime-induced crisis originated in advanced economies (in the US housing sector) in the summer of 2007, and rapidly mushroomed into a global financial crisis by September 2008. Developing nations, especially the ‘least developed countries’ (LDCs), have been hit particularly hard with a sharp drop in export demand and in net capital inflows. The current turmoil threatens to undo the impressive gains in economic growth and convergence many developing nations have achieved over the past decade – a reversal of fortune that includes casting millions back into poverty. What explains the vulnerability of the LDCs, and how have the G8, the G20, the IMF and the World Bank responded to help mitigate the economic and social costs of the crisis? How can developing nations, especially the poorest, better insulate their economies from the vagaries of the global financial markets? This paper addresses these issues.

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Dominant Currencies, Special Drawing Rights and Supernational Bank Money

The current international monetary system (IMS) is fragile because the dollar standard is rapidly deteriorating. The dual role of the dollar as the dominant international money and national money cannot easily be reconciled because the US monetary authorities face a conflict between pursuing domestic objectives of employment and inflation, and maintaining the international public good of stable money. To strengthen the IMS, China has advocated the revitalisation of the special drawing rights (SDRs), but SDRs are neither money nor a claim on any international institution; are issued exogenously without any consideration for countries’ external imbalances; and can activate international monies only though bilateral transactions. The historical record of SDRs as international reserves is altogether unimpressive. We propose instead the creation of a supernational bank money (SBM) within the institutional setting of a clearing union. This union would be a fully fledged agreement by participating central banks on specific rules of the game, such as size and duration of overdrafts, designation of countries that would have to bear the burden of external adjustment, and coordination of monetary policies objectives and at expense of the maintenance of the international public good.

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The Systemic Regulation of Credit Rating Agencies and Rated Markets

Credit ratings have contributed to the current financial crisis. Proposals to regulate credit rating agencies focus on micro-prudential issues and aim at reducing conflicts of interest and increasing transparency and competition. In contrast, this paper argues that macro-prudential regulation is necessary to address the systemic risk inherent to ratings. The paper illustrates how financial markets have increasingly relied on ratings. It shows how downgrades have led to systemic market losses and increased illiquidity. The paper suggests the use of ‘ratings maps’ and stress-tests to assess the systemic risk of ratings, and increased capital or liquidity buffers to manage such risk.

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Reforming the World Trade Organization

This paper considers two perspectives on the future of World Trade Organization (WTO) reform. One argues that the WTO is largely a well-functioning institution and requires only incremental reforms, while the other argues that more fundamental reforms are required to correct the asymmetries of power that gave rise to an imbalanced institution that is still deeply weighted in favour of the developed countries, and that continues to marginalize the majority of developing countries in the multilateral trading system. The paper argues in favour of the latter view, and makes a number of proposals for reform of the WTO that relate to the objectives, goals and mandate of the WTO; the coherence of the WTO with other global economic institutions; and the decision-making process and negotiating methods of the WTO.

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Export-led Growth via Export Platform Strategies

Free trade agreements (FTAs) have the potential to impact FDI structures. Specifically, we explore when and how export platform strategies can result in export-led growth. A reduction in trade costs, including tariffs and non-tariff barriers, are likely to lead to export platform FDI. Cost advantages in a host country, as well as quality labour and scale economies, are also effective in attracting export platform FDI. We conclude that medium–high technology industries in low-income countries are likely to benefit from export platform FDI. A few indices are suggested to evaluate the conditions under which countries and industries can benefit from export platform FDI.

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Public Health, Advertising and Reality

Advertising is often blamed as the, or a, cause of public health problems such as misuse of alcohol or obesity. This paper suggests that the conclusions drawn by researchers owe more to their a priori attitudes than to an even-handed review of the evidence from both sides of the argument. The British Medical Association Science Committee’s 2009 call to ban alcohol advertising and promotion in the UK is taken as a case study. It is characterised by sweeping unsupported assertions, selective use of the literature and factual misreporting. Yet there is, or should be, common ground which should be defined and developed scientifically.

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Brian Sturgess on Raymond Fisman and Edward Miguel: Economic Gangsters

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The Secret of Canadian Banking: Common Sense?

This article looks at the basic reasons why the Canadian banking system was recently judged by the World Economic Forum to be the soundest in the world. It does so by first examining the basic functions of a financial system and what Canadian banks are allowed to do as intermediaries within that system. It then considers the market structure of Canadian banking and the role of the Canadian government in regulating the financial system. It finishes with a discussion of the four basic management areas of any financial institution: liquidity management, asset management, liability management and capital management. On all dimensions the Canadian banks seem to be conservatively managed, well regulated and operating in a benign economic environment without obvious systemic risks, mainly due to the absence of a competing ‘parallel’ intermediation system as exists in the United States.

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The IMF, the Credit Crunch and Iceland

Iceland was badly hit by a fundamental mismatch between the assets and international liabilities of her banking system, with severe consequences for the welfare of the population. The country now has an International Monetary Fund programme. The paper asks three questions of the programme: Is it too tight? Is the balance of payment’s target appropriate? How will the country cope with the potentially huge transfer problem associated with the now frozen external liabilities of the failed Icelandic banks? The paper notes several problems, and argues that an appropriately structured and expanded fiscal policy is needed, together with burden sharing between Iceland and the international community.

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The New Economic Powers (NEPs)

In the wake of the global financial and economic crises, much attention has been focused on large developing economies, particularly the BRICs, and their role in the new economic landscape. Focusing on trends in demographics and output, the emergence of the BRICs crystallised the notion that there was a group of up-and-coming economies towards which global attention was shifting. Over time, however, the term has transcended purely economic considerations – it is an acknowledgement that large emerging economies will play a more important role on the world political stage as well. While the BRICs are major protagonists, they are not completely representative of this global shift – the field of potential global players is undoubtedly larger. This paper examines a group of ten countries that will play an important role in global economics and politics, focusing on the current state of their engagement in the international system, and their representation in the global financial architecture. A critical look at the roles and responsibilities of new actors is particularly important in the current environment as the crisis presents emerging powers with an unprecedented opportunity to increase their level of engagement in both economic and political spheres, as well as to play leadership roles in systemically important initiatives.

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Reforming IMF Conditionality

As it has for many years, International Monetary Fund conditionality is currently receiving much attention in the context of the global financial crisis. At the beginning of the 2000s the Fund introduced a policy of ‘streamlining’ intended to reduce the amount of conditionality and refocus it, with a view to increasing country ownership and improving programme implementation. This article uses the results of a report by the IMF’s Independent Evaluation Office into structural conditionality to assess the extent to which the initiative delivered on its promises. More significant seem to be the recent changes associated with the global crisis. The article discusses the evolution of conditionality, and assesses the current situation and the prospects for the future.

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Well-being and Public Attitudes in Afghanistan

Afghanistan is a context where individuals have to cope with the most adverse of circumstances. Our study of happiness finds that Afghans conform to a remarkably consistent worldwide pattern in the determinants of happiness across individuals within countries of all different development levels. Average happiness scores in Afghanistan, meanwhile, are higher than the world average and on a par with those from Latin America. In contrast, scores on a ‘best possible life’ question are much lower. This suggests that Afghans may be naturally cheerful and/or have adapted their expectations downward in the face of adversity, yet are more realistic when thinking about their situation in relative terms. Also suggestive of adaptation is that Afghans in general do not report to be unhappy when victims of crime and corruption, most likely because these phenomena have become the norm. In contrast, respondents in some Taliban-influenced regions, where crime and corruption are less common, do report unhappiness with corruption victimisation. More generally, resilient preferences for political freedom coexist with tolerance of crime and corruption and low levels of trust in public institutions.

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Reasons for Remitting

This article presents a set of reflections on what gives rise to remittances, which constitute a major part of the impact of migration on economic development in the migrants’ own countries. The collage of reasons presented serves to illustrate that remittance behaviour is the outcome of an intricate interplay between the preferences and interests of migrants and their families.

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Are MENA Countries Reaping the Benefits of Inflows?

Using data for a sample of developing countries, we analyse the effects of external flows, namely migrants’ remittances and FDI flows, on real output growth, price inflation and components of aggregate demand. The historical evidence indicates unstable patterns of FDI inflows to a sample of nine MENA countries. In contrast, remittances flows appear to be more stable over time in recipient countries. Except for Jordan, real GDP growth does not vary significantly with FDI inflows. Tunisia provides the only significant evidence of an increase in price inflation in response to FDI, which is coupled with a significant increase in private investment. FDI flows stimulate a significant increase in imports in Egypt. Remittances inflows appear, in general, a more important determinant of macroeconomic performance. Remittances inflows stimulate real output growth in Jordan, and decrease price inflation in Egypt and Tunisia. The increase in growth in Jordan is coupled with an increase in private consumption, private investment, real exports and imports with respect to remittances inflows. Moreover remittances increase export growth in Tunisia.

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Global Climate Change

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Lynne Nikolychuk on Gerben Bakker: Entertainment Industrialised: The Emergence of the International Film Idustry, 1890-1940

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Michael C. Macchiarola on Stephen H. Axilrod: Inside the Fed – Monetary Policy and Its Management, Martin Through Greenspan to Bernanke

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Will Economic Recovery Drive up World Oil Prices?

Globalisation has gone a long way towards freeing individual economies from their resource and technology constraints. But, paradoxically, as large economies grow, their need for resources may strain availability on a worldwide basis, causing commodity prices to rise, with adverse consequences for inflation, trade balance and growth. This paper is concerned with recent developments, focusing particularly on the petroleum market. The recent upsurge and collapse of world petroleum prices reflects underlying demand and supply conditions, augmented by speculative behaviour. Even though petroleum prices have declined as the world economy has gone into recession, the conflict between growth of demand for petroleum and resource availability may reappear during the recovery phase of the cycle.

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Quantitative Easing

Central banks around the world have moved to cut interest rates to record lows, with many in advanced economies going further and embracing full quantitative easing – creating new money to inject into the economy. This paper examines why quantitative easing has been necessary, and whether it is likely to result in higher demand or instead show up in higher inflation. Given the retrenchment in household spending, the risk is that quantitative easing has more impact on prices than output. And, with some first warning signs perhaps already evident in commodity markets, policymakers could face considerable difficulties unwinding the monetary stimulus.

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How Many US Jobs Might be Offshorable?

Using detailed information on the nature of work done in over 800 US Bureau of Labor Statistics occupational codes, this paper ranks those occupations according to how easy/hard it is to offshore the work – either physically or electronically. Using this ranking, it is estimated that somewhere between 22% and 29% of all US jobs are or will be potentially offshorable within a decade or two. (No estimate is made of how many jobs will actually be offshored.) Since the rankings are subjective, two alternatives are presented – one is entirely objective, the other is an independent subjective ranking. In general, they corroborate the rankings, albeit not perfectly. It is found that there is little or no correlation between an occupation’s ‘offshorability’ and the skill level of its workers (as measured either by educational attainment or wages). However, it appears that, controlling for education, the most highly offshorable occupations were already paying significantly lower wages in 2004.

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Governance and Development

Governance matters are arguably at the core of international development. What role do theory, policy and practice play in shaping matters of governance with respect to development? This review paper, which is organised in three parts, focuses on this subject since the demise of communism in 1991. In the first part, the theories on the governance and development nexus are outlined. In the second, governance policy is discussed with reference to: the early strategic policy shift; the concepts, principles and framework for enhanced governance; selected reviews by scholars and practitioners; and numerous key current issues. Governance in practice is examined in the third part with the same or similar questions, reviews and current issues. In addition, lessons are drawn from a case study. The conclusion of this paper is threefold: first, it is a fallacy that there is a pre-eminent system of governance that is universally applicable; second, the relevant theories on the subject have a remarkably limited role to play in sculpting policy and practice; and, third, perhaps the single most important problem in policies and practices on governance for development is the failure to temper interventions to the contextual dynamics found in each developing country setting.

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Understanding Crime, Political Uncertainty and Stock Market Returns

Colombia’s economy has experienced positive growth over the past few years despite the incidence of serious armed conflict in the region. However, the Colombia of today still faces a significant degree of sociopolitical instability as a result of organised crime associated with drug trafficking, the leftist guerrilla attacks and the right-wing paramilitary group. This paper examines the significance of organised crime and political uncertainty for the amalgamated Colombian Stock Exchange. Empirical evidence indicates that organised crime and political uncertainty negatively affect stock market returns and volatility.

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Global Income Distribution and Convergence 1820–2003

Can the development of the world economy – the growth of global gross domestic product and the increase in global inequality – in the period from 1820 to 2003 be understood as the result of the spread of one fundamental ‘innovation’, the Industrial Revolution? This paper tries to establish how the ‘convergence club’ evolves over time (which countries become a member, when and why), and what determinants (institutional and geographical) have affected this process. At first sight, both types of factor prove important, but once the endogeneity of institutions is taken care of, we find that spatial determinants prevail.

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So Far So Good, But Still Some Missing Links

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Economists and Climate Change: Homework Comes First

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Alistair Milne on Robert J. Shiller,The Subprime Solution: How Today’s Global Financial Crisis Happened and What to Do About It

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Sweden’s Bank Nationalisations

Many banks are on the verge of bankruptcy and have received support from the government to stay afloat. Measures taken have not sufficed, and an increasing number of economists and commentators are calling for the nationalisation of banks in the United Kingdom and United States. In their advocacy, they use Sweden as an exemplar, suggesting that massive bank nationalisation was the way it fixed its collapsing banking sector in the early 1990s. This account of Sweden’s resolution policy is erroneous and exaggerates the role of nationalisation. Sweden successfully combated a banking crisis, and two banks received full government ownership. The main example of nationalisation, however, was a financial reconstruction of a bank already controlled by the government. The only real example of nationalisation of a privately owned bank hardly offers lessons for ways to resolve the current banking crisis.

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The Oil-producing Gulf States, the IMF and the International Financial Crisis

As the finance-strapped International Monetary Fund (IMF) was placed at the centre of coordinating funding and offering ideas to navigate out of the international financial crisis, it became clear that the international community needed to reinvigorate the emerging market economies’ role in the organisation and in the broader international financial architecture. At the time of the Group of 20 (G20) meetings, the Gulf states were viewed as likely contributors to IMF liquidity. Despite the UK’s Prime Minister Gordon Brown’s visit to the Gulf in November 2008, and his claim that the Gulf would assist in an injection of liquidity into the IMF, the Saudi rulers decided to go empty-handed to the G20 meetings in Washington. Unlike the 1970s, when the Gulf came to the rescue of the western and international banking system, today Gulf rulers are more responsive to a new class that is more scrutinising of petrodollar recycling.

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The Institutional Framework of the Gulf Central Bank

This paper discusses the viable alternatives for a suitable institutional and governance framework for the policymaking body presiding over the GMU. The authors review a series of alternatives, from the simplest one (i.e. a governors’ council formed by the governors of the national central banks and monetary authorities, each endowed with a single equal vote), to the more elaborate ones, involving the set-up of a supranational institution, a Gulf Central Bank (GCB) with permanent staff, an appointed president and an executive board, which together with the national governors would form a monetary policy council (MPC) responsible for the setting of monetary policy instruments and taking decisions in all the main areas of monetary policy. The members of the MPC could be given equal voting rights, or voting power weighted according to the economic and financial size of each country, with some corrective counterweight mechanisms, such as a specific voting weight for the president and/or the executive board to provide checks and balances. The solution the authors feel markets (and the public) would find more credible and suitable would be one involving the creation of a new GCB with its own staff and an independent executive board, because it would strengthen the authority and sustainability of the institutional arrangement, and create an organisation that is an effective counterpart of the other major international central banks and financial markets.

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The World Financial Crisis

The world financial crisis of 2008 is a consequence of new financial technologies, new accounting methods and new international linkages. These developments have come at a time when governments have returned to an old-fashioned free market philosophy. This paper links the systemic financial/economic crisis of 2008 to the new economy developments, globalisation and policy philosophy perspectives of recent decades. It raises the question of how to re-establish confidence once traditional thinking has been questioned.

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Economists and Climate Science: A Critique

This paper presents a critique of the characteristic treatment by economists of climate science, which appears as over-presumptive and uncritical. While the paper draws on a range of illustrative cases, the main focus is on six recent and important contributions. The present author argues that the authors and sources concerned, along with a good many others not quoted, have accepted too uncritically the received view as to the current significance of anthropogenic global warming and its possible dangers. They have placed undue trust in the official advisory process that governments have created and rely on, and disregarded evidence that puts that process in question. Hence there is a missing dimension in their treatment of policy aspects: they have not caught on to the need to strengthen the basis of policy by making the advisory process more objective and professionally watertight.

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A Question of Fudge

This paper is an outline and critique of William Nordhaus’ book A Question of Balance (2008), in which he proposes his optimal policy for dealing with global climate change. Nordhaus finds that the proposals of the Stern Review and that of Al Gore are inefficient and costly. The critique of Nordhaus is focused on (1) the structure of his model, which requires marginal costs be equal to marginal benefits everywhere and at all time periods, and that (2) the rate of discount be based on the opportunity cost of private capital, and (3) his failure to treat climate change as a global public good.

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How Much Would it Cost to Avoid Climate Change?

This paper summarises various estimates of the costs of mitigation of the adverse impact of climate change. It finds that the differences in the estimated impacts on gross domestic product, consumption, employment, and gasoline, electricity and natural gas prices are driven mainly by the following factors: the time frame of new technology development, the growth potential of existing clean sources of energy, the availability of offsets (domestic, international), and the banking of allowances.
However, its main finding is that, even for more optimistic estimates, the mitigation costs are likely to amount to as much as a 1% drop in consumption, starting today and going into the future, which, as is argued in this paper, constitutes an enormous impact on social welfare. Thus, it is important to carefully assess the costs of global warming to see whether they justify such drastic measures.

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The Banking Crisis and Inequality

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The Dangers of Déjà Vu Economics

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The Great Moderation and the New Business Cycle

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Charles Goodhart on Jean-Charles Rochet, Why Are There So Many Banking Crises?

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