Rethinking the Macroeconomics of Resource Rich Countries

VoxEU has a new e-book out on the way forward for commodity producing economies (excerpt):

Rethinking the macroeconomics of resource-rich countries: A new eBook
Rabah Arezki, Raouf Boucekkine, Jeffrey Frankel, Mohammed Laksaci, Rick van der Ploeg 24 April 2018

After years of high commodity prices, a new era of lower ones, especially for oil, seems likely to persist. This will be challenging for resource-rich countries, which must cope with the decline in income that accompanies the lower prices and the potential widening of internal and external imbalances. This column presents a new VOXEU eBook in which leading economists from academia and the public and private sector examine the shifting landscape in commodity markets and look at the exchange rate, monetary, and fiscal options policymakers have, as well as the role of finance, including sovereign wealth funds, and diversification.

It’s a compilation of papers from a 2016 conference, and to be honest, doesn’t really present anything ground-shakingly new on the subject. However, it does provide a convenient entree for those not familiar with the conduct of macro-policy in commodity producing countries (i.e. most Malaysians).

The article itself provides a short precis of the e-book, which you can download here.

ICYMI: Economic Growth Over The Very Long Run

I keep meaning to post on this topic, but what with work and all, it’s been on the back burner. In any case, I wrote an article published in the Star last week that covers the main points (excerpt):

Economic growth in an ageing world

MOST people take growth for granted. We expect living standards to increase over time and that our children will enjoy a better quality of life than us.

But growth is not a given and it is driven by economic processes that can and do change. There has been a gradual slowing in global growth over the past couple of decades, and some of this can be pinned on structural factors that form the very foundation of growth itself....

It’s partly secular stagnation, but more in the Hansen sense than in Summers new formulation, and over a larger scope than just what’s going on in developed economies.

Have a read and let me know what you think in the comments.

Dear God, I dearly hope I’m wrong on this.

2014 IMF Article IV Report on Malaysia

It’s out, and available here. The summary is per the link below (excerpt):

Favorable Prospects for Malaysia’s Diversified Economy

• Growth likely to remain healthy in 2015, despite lower energy prices
• End of fuel subsidies and start of Goods and Services tax is timely, and good for efficiency, equity, and the environment
• Exchange rate flexibility will help non-energy exports

After a year of very strong growth of 6 percent, lower energy export prices in 2015 will likely contribute to growth moderating to a still impressive rate of close to 5 percent, say IMF economists.

In their annual report on the health of the Malaysian economy, the report’s authors say growth is expected to moderate to about 4¾ percent this year while headline inflation will likely increase slightly to about 3¼ percent in 2015 as a result of an end to fuel subsidies, the introduction of a Goods and Services Tax (GST), and exchange rate depreciation.

Trade-Offs, Opportunity Costs and Unintended Consequences; Or There’s No Such Thing as a Free Lunch

I had a long conversation with an old friend of mine this weekend, and although I’m not about to disclose what we were talking about (yet!), it brought to mind how fundamentally different economists think to the way other people think.

Economists are always thinking in terms of trade-offs – you can’t do something without affecting something else. In a proverbial world of scarce resources and unlimited wants, every action has some form of reaction, even if these don’t conform precisely to Newton’s Third Law of motion. In Milton Friedman’s evocative language, “There’s No Such Thing as a Free Lunch”.

This is especially true of the policy-space. Every change in policy has both costs and benefits, though some of those costs or benefits might not be readily apparent. Replacing SST with GST for instance, or going forward with the TPPA – there are pros and cons, winners and losers in each decision, and the cost-benefit analysis is not always as clear as people think. Take for example the ever contentious issue of petrol and diesel subsidies – most people don’t see (or won’t see) the flip side of artificially cheap energy.

So we come to this (excerpt):

Economics for the masses

…are economists actually able to win hearts and change minds? Or is economics merely used to justify and reinforce pre-existing beliefs?

A new paper* from political scientists at Duke University suggests that economists can influence public opinion, but only on technical policy issues. They are less effective when it comes to politically contentious questions….

…So how did the dismal profession stack up? First the bad news. Despite the expert consensus, the majority of respondents, excluding those that were uncertain, disagreed with economists on every issue….Wheras [sic] this distrust was equally spread amongst most demographic groups, the authors found that right-wing respondents were significantly less likely to trust economists.

There were, however, some more positive findings. When they were informed of the consensus position of economists, respondents were more likely to agree with them. However, the size of this effect varied according to the nature of the policy issue. Members of the public were more likely to agree with economists when quizzed on technical issues, such as the gold standard or forecasts for tax revenue. But on politically charged topics, for example trade with China or the merits of immigration, the economists’ consensus was far less likely to sway public opinion. Not only that, but when the respondents were informed that their own views did not match those held by most economists, their level of trust in them decreased markedly. This was not the case with the more technical issues – even when they disagreed with economists their trust was unaffected. It seems that on hot-button issues, the public uses economists to validate prejudices, and loses faith in them when they fail to do so.

Confirmation bias is alive and well. One wonders how many bloggers and social media activists are wasting time and doing nothing more than preaching to the converted, present self included.

Reinhart and Rogoff Were Wrong

I’ve always been somewhat leery of the notion that high public debt results in slower economic growth. Piketty’s “Capital in the Twenty-First Century” for example (which I’m in the process of reading), examines the historical record of the UK and France and generally finds this not to be true.

Here’s a more generalised result, using the very same data from the seminal Reinhart and Rogoff study that sparked off austerity-mania in the Western world (excerpt; emphasis added):

Determinants of the growth and sovereign debt correlation
Matthijs Lof, Tuomas Malinen

Since the outbreak of the financial crisis, the relationship between debt and growth has been an issue of heated debate among both academics and policymakers. Reinhart and Rogoff (2010a) showed a negative correlation between sovereign debt and economic growth, and argued that countries could be confronted with a considerable decline in their growth potential after the debt-to-GDP ratio exceeds 90%.

While the research by Reinhart and Rogoff had a substantial influence in policy circles, their results are controversial….

Penalty Kicks and Economic Policy

There’s a link? There is a metaphorical one, according to Stephen Gordon (excerpt):

Action bias and the political economy of penalty kicks

Most penalty kicks result in a goal; this is why soccer players go to such comical lengths to draw a penalty…The usual strategy is to try and guess where the ball will be kicked and to jump in that direction. Surprisingly enough, the tactic of not jumping - that is, guessing that the ball will be kicked down the middle - is under-utilised.

An interesting study from a group of Israeli researchers (Bar-Eli et al, 2007) offers a plausible explanation: 'action bias'…

Tapering And What To Do About It

As always in such matters, the answer is: it depends (excerpt; emphasis added):

Should Policy Makers in Emerging Markets be Concerned about “Tapering”?

The US and European economies are showing some signs of recovery from the global financial crisis that began in 2008. As a result, the US Federal Reserve Bank is considering phasing out, or “tapering”, the extraordinary monetary policy measures through which it responded to the crisis…The World Bank's East Asia and Pacific regional update estimated that in East Asia alone $24 billion was withdrawn from equities and $35.2 billion from bonds...Financial markets largely recovered once the Fed decided to postpone tapering in September, but there is still nervousness….

Counterfactuals

Quoting David Beckworth quoting Barry Ritholtz (excerpt):

Why Counterfactual Thinking Is Important

I recently made the case that many observers are not thinking properly about the Fed's Quantitative Easing (QE) programs. Using the analogy of George Bailey's life in the film It's a Wonderful Life, I argued that the critics who question the efficacy of the QE programs are doing the wrong counterfactual. Today, Barry Ritholtz makes the same point:

Efficient Markets and Perfect Information

Robert Skidelsky on the efficient markets hypothesis and  New Classical economics generally:

Every general crisis involves self deception as well as the deception of others. In Donald Rumsfeld’s immortal phrase, it is the “unknown unknowns” which trip us up. If only one person were perfectly informed, there could never be a general crisis.

But the only perfectly informed person is God, and He does not play the stock market.

[Skidelsky, Robert, “Keynes: The Return of the Master”, Audible Inc, 2009]

Somebody FINALLY Writes A Decent Paper On The Middle Income Trap

I’ve been meaning to cover this since it landed in my inbox last week, but hadn’t found the time. But this new IMF working paper gets a big thumbs up from me (abstract):

Growth Slowdowns and the Middle-Income Trap
Aiyar, Shekhar and Duval, Romain; Puy, Damien; Wu, Yiqun & Zhang, Longmei

Summary: The “middle-income trap” is the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries. In this study we examine the middle-income trap as a special case of growth slowdowns, which are identified as large sudden and sustained deviations from the growth path predicted by a basic conditional convergence framework. We then examine their determinants by means of probit regressions, looking into the role of institutions, demography, infrastructure, the macroeconomic environment, output structure and trade structure. Two variants of Bayesian Model Averaging are used as robustness checks. The results—including some that indeed speak to the special status of middle-income countries—are then used to derive policy implications, with a particular focus on Asian economies.

The 2012 National Report Cards

I missed the live televised speech yesterday, and haven’t yet had a chance to review either document, but you can download the annual reports via the links below:

1. Economic Transformation Programme
2. Government Transformation Programme

Bank Negara will be issuing their annual report later this afternoon, so any analysis and commentary will have to wait.

As for the other bit of sensational news yesterday, you can view the original here (both film and commentary).

Just one thing to bear in mind however: Global Witness are quoting the GFI numbers on illicit capital flows from Malaysia, but fail to note that 80% of these flows arise from trade mispricing i.e. non-corruption related (unless you count MNC tax avoidance strategies as corruption).

The Economic Competence Of Politicians

Is it advantageous to have leaders and policymakers who are technically competent? As in having formal education in their area of responsibility? Would you expect a doctor to be Minister of Health and a public finance graduate in charge of the Treasury?

You’d think that this is a pretty dumb question – of course they should be. The funny thing is however is that most are not, and voters are quite happy to put them there.

News Flash: KL To Suffer Recession Next Week

Hafiz Noor Shams manages to send up the entire economics profession and tells us not to take ourselves so seriously (excerpt):

Chinese New Year to cause a recession in Kuala Lumpur

With the Chinese New Year being just around the corner, many are expected to leave Kuala Lumpur behind to visit families and relatives leaving outside of the city for a week or so. Many of those living or working in the city have left the city.

With the Chinese forming more than 40% of the population of Kuala Lumpur, and possibly with others who may just take the opportunity to travel out, the city is poised to suffer from a massive demand and supply shocks. Without any intervention from the relevant authority, the economy of Kuala Lumpur is expected to go into a recession this week and the next…

The insider jokes are absolutely priceless.

Since we’re on the subject, you might also enjoy this tongue-in-cheek discussion of the impact of dragons on macroeconomic policy.

Jomo On Jobs

I’m sorry to say I never took Jomo’s class when I was doing my masters. I regret that even more deeply now (excerpt):

Stronger recovery, more jobs for all
Comment by Jomo Kwame Sundaram

GREATER international cooperation and coordination is urgently needed for a more robust and sustained recovery, with benefits far more widely shared. The United Nations (UN) has long argued that only a sustained commitment to prioritising economic recovery can overcome the short termism dictated by financial markets.

Recovery priorities should emphasise job creation as well as enhancing national productive capacities through public investment in infrastructure, for example, which induces complementary private investments and creates the conditions for sustained growth over the longer term. This necessarily requires ensuring greater coherence of macroeconomic policies with structural transformation goals than seen thus far.

Alvin Roth, Game Theory And Economic Policy Design

In case you missed it, Alvin Roth, recent co-winner of the 2012 Nobel Prize in Economics, was interviewed this Wednesday past on BFM:

Blessed with Beautiful Minds, Engineering 'Stable Outcomes'

What's the relevance here? One of the problems with designing public policies is that most of the outcomes in the areas of interest that are being targeted aren't within functioning markets where prices provide signals and coordinate the allocation of resources. While economic theory can and does provide some guidance, just trying to reproduce a functioning market within milieus that don't support them has, shall we say, met with mixed results.

That's where game theory comes in - it's a way to look at the responses of participants to particular situations and stimuli. Or as Mankiw would probably put it, people respond to incentives. Game theory is thus a way to model and look at non-price incentives, although that's probably too narrow a definition (I'm looking at it purely in policy terms).

In policy design, what I think is that policies for non-market based environments (for example reducing government red tape or getting teachers more involved with their students where there is little to no monetary incentive), should have game theoretic foundations. Too often I think, policies are based on the gut feeling of the policy makers involved, or whichever consultant or management fad happens to be the flavour of the day (*cough* Blue Ocean Strategy *cough*).

I'm not knocking the good intentions of the people involved, or their expertise, but I think game theory has a lot to offer if we're only willing to leverage on its capabilities.

Changing The Teaching Of Economics

There’s been a lot of criticism about the economics profession in the last 5-6 years. Why didn’t we forsee the Great Recession coming? Why is there continued debate on the best way out of this mess? Why is there such disagreement over specific policies, and for that matter, what has happened and is happening now? Is there in essence, something fundamentally wrong with economics?

There’s a new debate on VoxEU that aims to realise that old adage – physician, heal thyself – especially with reference to the teaching of economics and young economists (excerpt; emphasis added):

What’s the use of economics? Introduction to the Vox debate
Diane Coyle, 19 September 2012

If economics emerges from the Global Crisis unchanged, it will lose all credibility. That is certainly not the view of all economists, but many do think so…

…However, it is not obvious what shape an effective response to even well-founded criticisms could take…

…One starting point…is the teaching of economics, beginning with the undergraduate level…

The Policy Relevance Of Economics

My old boss, Radzuan Halim, on why economics remains relevant (The Edge; excerpt):

Re-appreciating economics

THE economics profession has been much criticised, maligned and parodied in recent years over its failure to predict the US mortgage-cum-economic crisis of 2008/09 and the ongoing Greek-euro crisis. Two reasons have been suggested for the failure. First is the economics methodology itself, which is based on the "rationality of man" assumption and its over-mathematisation — the takeover by quantitative-types not grounded in empirical reality and historical perspective.

Second, the profession has become so riddled with ideology that it determines an economist's findings and prescriptions…

…Of course, economics is by no means the only profession to be caught up in ideological partisanship and posturing…

…With respect to methodology, many economists do acknowledge the weakness of excessively quantitative approaches and have sought improved methods…

…Given the controversies and perceived weaknesses in the profession and methodology, my view is that present-day economics still offers good and sometimes, extremely good, approaches to the study of man's economic, social and political problems. Basic economic concepts and tools provide powerful, insightful analysis of situations, causes and policy prescriptions. By the same token, the absence or neglect of basic economic tools in analysing economic situations could lead to stagnation, deterioration and crisis, such as the situation found in present-day Greece and many other countries…

It’s a fairly long essay, with some good points and a few (from my point of view) bad ones – governments are not like households. But on the whole it offers a defense for using economic concepts and ideas to evaluate policy and in public discourse. Not a bad read, considering he’s not an economist.

Dodging A Bullet

The Greek election results are almost in:

Greece Steps Back From the Brink

Greece isn’t ready to call Europe’s bluff. If early indications from the polls are correct, the top vote-getter in Sunday’s parliamentary elections was the pro-euro New Democracy Party–not the leftist Syriza coalition, which campaigned on a platform of rejecting Europe’s conditions for bailout assistance.

That’s good news for the rest of Europe–and indeed the rest of the world, which would be harmed by a chaotic exit of Greece from the 17-nation euro currency zone.

New York University economist Nicholas Economides, who was in Greece for the elections, said in a telephone interview that “if things go the way it looks like now, the Europeans should breathe a sigh of relief.”

Bloomberg News reported that according to final exit polls, center-right New Democracy had narrowly edged out Syriza, with Pasok, the center-left party, which is also pro-euro, coming in third. It appeared New Democracy and Pasok would have enough seats to win an outright majority in parliament if they formed a coalition government.

I’m not going to go “hurrah!” just yet though. If Europe and Greece have dodged a bullet, there’s plenty more on the way. Fundamentally nothing has changed, except the buying of a little more time. The contradictions underlying European monetary union remain unresolved – wide productivity differentials, huge budget gaps, and a central bank unable and unwilling to rise to the occasion.

Even the bailout of Spanish banks last week, which was far more critical from the point of view of preserving the Eurozone, hasn’t restored market confidence – Spanish government bond yields have hit another all time high.

It’s going to be a hot, tense summer.

Incomes, Governance And The Middle Class

A new working paper from the World Bank looks at the impact of the middle class on public policies (abstract; emphasis added):

Do middle classes bring institutional reforms?
Author: Loayza, Norman; Rigolini, Jamele; Llorente, Gonzalo;

Summary: The paper examines the link between poverty, the middle class and institutional outcomes using a new cross-country panel dataset on the distribution of income and expenditure. It uses an econometric methodology to gauge whether a larger middle class has a causal effect on policy and institutional outcomes in three areas: social policy in health and education, market-oriented economic structure and quality of governance. The analysis find that when the middle class becomes larger (measured as the proportion of people earning more than US$10 a day), social policy on health and education becomes more progressive, and the quality of governance (democratic participation and official corruption) also improves. This trend does not occur at the expense of economic freedom, as a larger middle class also leads to more market-oriented economic policy on trade and finance. These beneficial effects of a larger middle class appear to be more robust than the impact of lower poverty, lower inequality or higher gross domestic product per capita. That may be linked to the evolution of the middle class: they are more enlightened, more likely to take political actions and have a stronger voice. They also share preferences and values for policy and institutional reforms, as well as higher stakes in property rights and wealth accumulation.

I don’t think this paper will stop the debate over which comes first – the chicken, or the egg? Or in this case, democracy and governance, or incomes? But it’s more firmly on the side of incomes and income distribution coming first, or to be more precise, to demonstrate that incomes and income distribution do have a causal effect on policies and governance.

Larry Summers On Public Investment And Debt

Larry Summers has a reputation. He was a key figure in the deregulation of US finance in the late 1990s, as Treasury Secretary under the Clinton administration, that ultimately led to the banking crisis of 2007-2008. As President of Harvard, he was accused of sexism, conflict of interest, and carried responsibility for the university’s nearly US$2 billion in losses from derivatives trading. Professionally, he’s known as being acerbic and dismissive towards others – arrogant is one of the kinder words used. His academic work tends towards supporting free market, Republican views, despite serving two Democratic presidents.