Implications of Illicit Financial Outflows for Macro-economic Management and Development Effectiveness in AfricaIn Africa, a persistent rise in illicit financial outflows has compounded macroeconomic management challenges and heightened the risks of recurrent balance of payments crises. It has undermined the build-up of fiscal buffers that could have mitigated the macroeconomic impact of adverse external shocks helping to sustain investment. A cross-section analysis suggests that wherever the management of foreign reserves has been undermined in the region, whether by illicit financial outflows in a context of poor governance or by macroeconomic policy malpractices, countries have tended to be more vulnerable to global volatility and commodity terms of trade shocks. Differences across the region’s natural resource-dependent economies in the severity of macroeconomic shocks emanating from global demand contraction and the collapse in commodity prices, suggest that such shocks are probably amplified by illicit financial outflows. Still, sustained illicit financial outflows are also vectors of lopsided growth and unequal distribution of income in both source and destination countries.
Read Full Paper >
Now You See Them, Now You Don’t: the Case of the Shrinking Global Economic ImbalancesGlobal economic imbalances in the mid-2000s reached a level that many commentators viewed as unsustainable. The claim was frequently made that the imbalances contributed significantly to causing the world-wide financial and economic crisis at the end of the decade. Since the mid-2000s the imbalances have shrunk considerably, and their pattern has also changed. This article uses conventional balance of payments theories to examine what may have been happening. It draws on empirical evidence to assess which theories receive the strongest support from the available data. It emerges that most of the adjustment has been brought about by reductions in expenditure in deficit countries. With some notable exceptions, expenditure switching by means of changes in real effective exchange rates has generally made only an extremely modest contribution. The article goes on to contemplate the future evolution of imbalances. The experience with global economic imbalances since the world economic crisis raises many fundamental issues about the future design of the international monetary system. These include the type of adjustment and financing mechanisms embodied in it, as well as the nature of international macroeconomic policy co-ordination.
Read Full Paper >
Global Integration and World MigrationThis paper explores a theory of migration based upon a number of conjectures about the role of digital media. It proposes that a number of factors including rising use of the internet providing widespread access to global information and an intensified communication between regions and countries brought about, for example, by intensified trade links bring about expansion of people’s social space. This also expands the factors through which they compare their own living standards and social life with others. This expansion increases people’s stress and strengthens their inclination to resort to migration as a means of reducing this heightened stress. Other things held constant, the expansion of people’s social space intensifies their inclination to move across geographical space.
Read Full Paper >
The Universal Credit Rating Group: Measuring Debt EthicallyThe Universal Credit Rating Group (UCRG) is a collection of rating agencies that are aiming to redress what they see as an imbalance in the provision of credit ratings across the global economy. This article describes the UCRG and discuss as its chances of succeeding in its goal of offering a viable opposition to the Big Three rating agencies. What is proposed by this article, is that although the Group provide a welcome narrative, the foundation to their endeavour is potentially lethal to their chances of success.
Read Full Paper >
Measuring the Success of Industrial Policy in AustraliaIndustry policy in the context of trade liberalization has played a critical reinforcing role in re-orienting production in the Australian manufacturing sector from the domestic to international market. In the textile, clothing, footwear and motor vehicle industries this has promoted sustainable output and employment growth. This policy has also been instrumental in improving the structure of manufacturing exports from simple to elaborately transformed manufacturing products. The niche capital and knowledge intensive nature of elaborately transformed manufacturing products is of particular importance because they exhibit a comparative advantage in international markets. This has helped to offset the competitive advantage provided by industry policy in stimulating manufacturing exports in the countries of the South East Asian region which constitute Australia’s major export markets. Pressure is also being applied on other countries to implement industrial policy in order to remain competitive on the international market and in particular in this rapidly growing region of the world.
Read Full Paper >
Institutions, Economic Growth and Development: A Conversation with Nobel Laureate Douglass NorthThis paper is based on the transcript of an interview made by Professor Brian Snowdon with the late Douglass North, Noble Laureate who died in 2015. North was one of the most influential economists and economic historian of the second half of the twentieth century. Along with the late Angus Maddison North was a pioneer of the application of economic data to investigate key issues in economic history and was a major contributor to the growing specialist field of cliometrics. His studies led Professor North to recognise that in order to gain meaningful insights from past economic data neo-classical economic theory alone was inadequate and had to be modified to incorporate the influence of politics, the role of institutions, transaction costs and property rights. His work investigated the roots of economic development and the barriers to growth. He proposed the view that many formal political and social institutions are created not necessarily to be socially efficient, but instead to serve the interests of élites particularly those with the bargaining power to create and amend rules to suit their own interests.
Read Full Paper >
Towards a Better Understanding of International Capital VolatilityUnderstanding why capital moves internationally in the way that it does has become increasingly important as capital accounts have been liberalized and as the size of international capital movements has expanded dramatically. International capital movements exert potentially significant effects on many key macroeconomic variables. The pattern of capital mobility reveals considerable volatility; surges, sudden stops and reversals are common features of the contemporary landscape of financial globalization. This article draws on both economic and behavioural approaches in an attempt to offer a reasonably complete analysis of capital movements and volatility. It also relates the ideas introduced to some specific episodes where international capital volatility has been observed. A better understanding of capital volatility involves recognizing that there is no simple and universally applicable explanation that fits all types of capital in all cases.
Read Full Paper >
The Creation of the Asian Infrastructure and Investment Bank: America’s Loss and China’s GainThe Global Financial Crisis (GFC) pulled institutions together diplomatically and economically. It clarified options and failures of the past and hastened coordinated reforms. But the GFC also starkly illuminated another geopolitical dynamic: Deals struck in extremis must be adhered to after parties leave the negotiating table. Failure to do so can cause embarrassment, recriminations, and unintended consequences with long-term implications that run counter to the original aims and objectives of U.S. policymakers and reformers. This sequence of events played out with the long holdup of agreed International Monetary Fund voice and vote reforms, and the birth of the Asian Infrastructure and Investment Bank, which hastened the rise of China while weakening the role of the Bretton Woods institutions.
Read Full Paper >
The Political Limits of Independent Monetary PolicyCentral banks in advanced economies have adopted a number of less conventional policy measures since the onset of the financial crisis and great recession. However, the efficiency of these measures remains highly uncertain; and, if downside risks crystallize, more radical approaches may be needed. In turn, that could force central banks to get explicit support from political authorities. As such, we may be near the political limits of independent monetary policy.
Read Full Paper >
Secular Stagnation and Two Articles of Faith of the Conventional Wisdom The current discussion of “Secular Stagnation” has generally put disproportionate weight on discussing inadequate investment demand and fiscal stimulus. However, in these discussions two intellectually ungrounded assumptions, or articles of faith, box in mainstream economists:
I. Savings are always beneficial because they allow greater accumulation of capital.
II. Unrestricted international capital movement is always economically efficient and beneficial.
These strong prior beliefs are part of the mental models that may lead economists to reject the conclusions of their own formal models. Awareness of these issues is often implied, but they are rarely addressed directly and not often in policy discussions. Ending counterproductive policies that encourage saving and capital inflows yields better policy prescriptions.
Read Full Paper >
Exploding Debt Syndrome: The Politics of the Greek Debt CrisisThe economic roots of the Eurozone’s sovereign debt crisis are fairly well understood by scholars and analysts, but the political forces behind the crisis less so, despite the fact that the Eurozone predicament derives fundamentally from an intersection of mostly political factors, which led to the recent breakdown in European Union relations between northern and southern states. This paper fills in many of the gaps, by examining both the historical and the political forces behind the current Eurozone debt crisis with reference to Greece’s continuing debt problems.
Read Full Paper >
The Paris Climate Agreement heightens development challenges in AfricaAlthough the Paris Agreement lacks a binding mechanism for capping carbon emissions, and a legally binding financial commitment to support climate change adaptation and mitigation in the developing world, it establishes a legal framework to accelerate the transition towards a low-carbon economy at the global level. The rise of the green economy under the proposed Agreement offers tremendous opportunities for growth and economic development, especially for Africa, which has abundant endowments of renewable energy and resources. African countries’ ability to seize these opportunities and accomplish the transition to the low-carbon development economy articulated in the Agreement will depend on their capacity to increase their access to carbon-free technologies and to draw consistently on these technologies to expand the scope of green investments in support of structural transformation and trade diversification.
Read Full Paper >
Economics, Science and Climate ChangeThe Intergovernmental Panel on Climate Change (IPCC) contends that global warming is largely due to the burning of fossil fuels, leading to increased carbon dioxide (CO2) concentration in the atmosphere. This theory is tested with global data from three different periods – the last 1,000 years, the last 120 years and the last 18 years. Two models are specified: firstly, to determine if there was global warming in each period, and secondly, what role CO2 played in this. The results cast significant doubt on the IPCC model and therefore on the wisdom of climate change policies already implemented in many western nations. The economic consequences of these policies is then analysed in the effects on economic activity, energy supply, industrial output, emissions trading, consumer behaviour, and the financial cost of obtaining a global agreement on CO2 emissions. The article notes that the IPCC model is currently failing to predict global temperatures accurately and is too simplistic in its neglect of the natural causes of climate change. Hence, policies enacted by many western nations are likely to impose large costs on their economies, but have little effect on the world’s climate.
Read Full Paper >
How Fast Will China Grow Towards 2030Historical data for the last fifty years shows that there is a surprisingly strong correlation between the growth rate of a nation’s GDP per person and its income level. The growth rate declines linearly with income, and this relationship can be used to estimate the future growth rate of a nation’s economy. Using the same method it is also possible to forecast the share of GDP in agriculture, industry, and services – and to demonstrate the continuing decline of the share in industry as a nation get very rich. This article concludes with a discussion of the likely impact of robotisation and greening on GDP growth.
Read Full Paper >
China’s GDP Per Capita from the Han Dynasty to Communist TimesThis article is a critical survey of the concepts and data utilized by economists and economic historians that purport to measure relative levels and long term trends in GDP per capita from the Han Dynasty to Communist times. We favour attempts to extend macro-economic analysis and its associated quantification to China’s long imperial history, but have concluded that estimates calibrated in international dollars for 1990, or 2005 or 2011 are not fit for that purpose. Furthermore, and after surveying recent endeavours to reconstruct the published secondary and official statistical sources available for the measurement of primary production for Ming and Qing China (1368-1911), we reluctantly suggest that Kuznetsian paradigms for empirical economics are probably not viable, either for the measurement of the empire’s growth over time or for reciprocal comparisons with European economies. This is because on both conceptual and statistical grounds the concept and associated metric for GDP per capita does not travel easily and securely between the fiscal systems of China and the West (Yun-Casallila and O’Brien 2012).
Read Full Paper >
Data on Indicators of Governance: Handle with CareThis article provides a select review of data used as indicators of governance. Despite the popularity and considerable success of the existing body of governance indicators in putting the spotlight on governance inadequacies in developing countries, they are fraught with a whole host of statistical and measurement issues. It argues that these indicators should be applied with caution, keeping their shortcomings in mind.
Read Full Paper >
De-Risking Impact InvestingDespite great investor interest in impact investing, actual investment flows have remained modest. This is largely due to insufficient investment opportunities which offer a financially sustainable risk-return balance. A focus on de-risking impact investments can enable investors to find more assets which offer commercial returns on a risk-adjusted basis, without sacrificing impact. By cutting off the lower tail of the risk distribution, impact investments can offer comparable returns to other investments, as has been the International Finance Corporation’s (IFC’s) experience. Successful impact investing involves selecting assets and structuring investments differently to realize their potential to deliver both financial and social returns. We segment the supply and demand of impact investing funds, and identify the causes of elevated risks in prevalent approaches to impact investing. Drawing on IFC’s investment experience, we identify seven ways to reduce these risks. With these approaches, we provide evidence that investment opportunities can be generated that meet the requirements of investors seeking both commercial financial returns and social impact without trading one off for the other.
Read Full Paper >
Japan’s Monetary Policy MisadventureThis paper argues that the Bank of Japan’s decision in April 2013 to formally adopt inflation targeting as the framework of its monetary policy and to embark on a programme of quantitative and qualitative monetary easing was misconceived. The aim of the policy to achieve consumer price inflation of two percent on a sustainable basis has not been achieved. It is ill conceived because Japan’s deflation during the past two decades has been quantitatively small with evidence that a substantial part of this deflation is a statistical artefact. Furthermore, much of the fall in growth rates can be explained by a combination of a shrinking labour force and falling working hours. A large part of Japan’s fiscal deficits is structural, reflecting ballooning social security expenditure for the elderly which policy makers are unlikely to be able to reform. Weakening fiscal discipline implies that monetary policy in Japan is a de facto open monetization of government debt. When a crisis comes, the Bank of Japan will have no option but to continue financing government deficits even if the inflation rate climbs beyond its official target in the future.
Read Full Paper >
The Digital Revolution – New Challenges for National Accounting?The digital revolution has changed many industries, but measuring these changes from a national accounting perspective causes problems. Generally, in the transition periods during the introduction of new technologies, marked setbacks in the estimation of productivity growth are possible. Whereas new private goods are partly invisible in the national accounts because of measurement lags due to outdated accounting standards, more often only their negative substitution effects turn up in GDP measures. If this causes a market phenomenon it should be reflected initially in a weaker market production and productivity. In order to capture new private digital goods and their welfare effects a separate documentation of their introduction in a ‘satellite account’ is recommended.
Read Full Paper >
Measuring Financial Inclusion using Multidimensional DataThe author notes that the lack of a financially inclusive system is a major concern not only for developing and low-income economies, but for many developed and high-income countries. At the global level, a network of financial regulators from developing and emerging economies, called the Alliance for Financial Inclusion (AFI), was formed in 2008 to provide a platform for peer-to-peer learning from the experiences of country specific policies of financial inclusion. The paper notes that there has been an intensive debate about how financial inclusion should be measured. In consequence, it recommends using the Index of Financial Inclusion (IFI), developed by the author. The IFI is multidimensional, it satisfies many important mathematical properties and can be used to compare levels of financial inclusion across economies and over time. IFI values computed for 110 countries for 2014 show various levels of financial inclusion: Chad ranked lowest with an IFI value of 0.021 while Switzerland had a value of 0.939. Measuring the IFI over 2004 – 2014 indicates a general improvement in the level of financial inclusion across countries, but the availability of data is the biggest constraint on its usefulness.
Read Full Paper >
Dissecting China’s Property Market DataThis paper analyses Chinese property market data to evaluate recent trends in the market and to make prognoses for the future. It considers whether or not the existence of high prices and at the same time an enormous rise in residential supply in terms of floor space under construction means that there is a ``bubble'' in China's property market which may burst, similar to what happened in Japan in the early 1990s. Evidence that the price of new homes moves almost perfectly with sales of new residential floor space rather than with completed floor space suggests that the housing market is behaving normally and follows mini boom and bust cycles like other industries. The analysis finds that there are low maintenance costs for buyers after purchase due to the lack of annual property tax and negligible depreciation of bare-shelled housing units which limits the risk of default. Although recently developers are under pressure to raise more revenue mainly due to high interest-rate borrowing from shadow banks, the author considers that the probability of a systemic collapse of housing market is minimal given existing taxation systems, easing monetary policy and the continuing urbanization process.
Read Full Paper >
The Indian Economy: From Growth to Stagflation to Liberal Reform This paper considers the optimistic scenario that India was on a high growth path and would follow China’s path with a lag (as its reforms started in 1991 compared with China’s in 1980) which would produce an economic miracle. This did not happen and since 2011 India’s growth seemed to be reverting to what has been termed “the Hindu Rate of growth”. This paper considers why this happened and the likely future path of the Indian economy following the victory of Narendra Modi’s Bhartiya Janta Party (BJP). The paper evaluates the change in India’s economic fortunes following the 1991 economic reforms in historical perspective. The sources of the growth acceleration are explained with an examination of why growth faltered. India’s highly disputed revision of the GDP series shows annual growth rising to 7.5% in 2015-16, but it is more likely that it is around 6%. The author concludes that given its economic fundamentals, with improved policies India would be able to grow at about 10% leading to a per capita income growth of about 8.5–9% for the next two decades.
Read Full Paper >
Youth Employment Crisis in IndiaThe global financial crisis and the subsequent uneven recovery have underscored the need for Africa’s resilience to output and other shocks originated in the rest of the world. A comparison of two regional economic communities – the East African Community (EAC) and the Southern Africa Customs Union (SACU) – suggests that deeper intra-regional, and in particular intra-industry, trade ties have contributed to the EAC’s resilience to external output shocks. More broadly, intra-regional and intra-African trade with fast-growing economies, together with geographically diversified trade links, can strengthen the capacity of African countries to absorb global output shocks. Besides helping shield countries from external shocks, intra-regional trade also supports economic diversification and participation in regional value chains.
Read Full Paper >
How Managerial Incentives Affect Economic PerformanceThe impact of managerial incentive structures on corporate behaviour has been a neglected area of economics. New theoretical work by Nobel Prize winning economist Jean Tirole demonstrates that ‘bonus culture’ managerial incentive systems can increase inequality while lowering investment, work ethics and welfare. The negative impact of managerial incentive systems in the US and the UK have been studied empirically by the author for a number of years and the evidence backs up this theory. Modern management remuneration systems provide strong incentives to change corporate behaviour by encouraging aggressive pricing, discouraging investment and other measures to improve productivity. The author argues that demographic and productivity changes, and not the aftermath of the global financial crisis of 2007-08, are the dominant causes of the current economic slowdown in many of the world’s largest economies. Since this can only be reversed by increasing investment it is necessary to recognise the problem of distorted incentives as the first step to remedial action. Solutions include linking bonuses to increases in productivity and providing tax incentives to reinforce changes in behaviour.
Read Full Paper >
Fiscal Policy and the Global CrisisUp until the global economic crisis at the end of the 2000s an eclectic approach to fiscal policy seemed to have emerged from the long-standing debates that there had been about it. This largely ruled out using fiscal policy to fine tune the economy. Instead macro policy in advanced economies focused on monetary policy within a framework of inflation targeting. In the depths of the recession, however, and with interest rates approaching a zero lower bound, fiscal policy was dramatically resurrected and a broad global consensus formed around fiscal stimulus. The consensus did not last long and sharp disagreements soon re-emerged, in particular with respect to the speed and nature of fiscal consolidation. Why did these changes in the approach to fiscal policy happen and were they appropriate? Does the available empirical evidence allow us to form conclusions about the impact of fiscal policy or is it still a matter of ‘on the one hand…but on the other’? And how might fiscal policy evolve in the light of recent experience? This article examines these questions.
Read Full Paper >