John List of the University of Chicago talks to Romesh Vaitilingam about the use of field experiments in economics, including his research on people’s motivation for charitable giving, gender differences in competitiveness, and discrimination in the labour market. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
Will the financial crisis reverse the trend of declining global poverty? This column estimates that the crisis will add 64 million people to the population living under $2 a day. It predicts that the global poverty rate will fall from 42% to 39% in 2009, while the pre-crisis trajectory would have brought the poverty rate down to 38%.
Despite the stunning contraction of industrial production and trade across the globe, the global economy is still a far cry away from the calamities of the Great Depression. However, if the economic damage of the current global crisis may have been contained so far, worrisome parallels to the early 1930s remain and preventive policy actions must be kept up.
Is the global economy turning around? Analysing the situation across the globe, this column concludes that the only reasonably convincing evidence of ‘green shoots’ comes from China – but even that recovery is unlikely to be sustainable due to China's dependency on exports. A global flu pandemic, if it were to occur, would act as a negative supply and demand shock.
International migration rises and falls with the business cycle, as do attitudes towards migrants. History leads us to expect a global recession to increase anti-immigrant sentiments and possibly spur new barriers to migration. However, this column argues that such measures are less likely than in the past, as anti-immigrant sentiments are relatively weak and economic and demographic forces are reducing the long-run immigration trend.
Will developing country exporters suffer trade finance shortages induced by the crisis? This column says that, among 30 export-oriented African firms surveyed, very few face trade finance problems. The resilience of the domestic banking system and existing trading relationships likely limit potential damage, though small firms and new entrants may face difficulties in obtaining trade finance.
Financial stress reached unprecedented levels in 2008. This column presents a new IMF financial stress index and puts the current crisis into historical perspective. It also shows that bank-lending linkages appear to be the main driver of the transmission of stress. International financial integration brings both opportunities for growth and risks of contagion.
Fiscal stimulus is a much-needed temporary painkiller, but it is not enough to put the global economy on a path to recovery. This column argues that some economists – led by Paul Krugman – invest too much hope in the effects of fiscal stimulus while turning a blind eye towards the bad-debt mess. Stringent inspections and evaluations of bank assets by financial regulators, followed by sufficient infusions of taxpayer-funded capital will be the only effective means of clearing away the oppressive uncertainty.
This column studies the online (illegal) market for male sex work. It shows that participants find ways to get the prices right, even in the absence of formal enforcement mechanisms, using technology to share and disseminate information. The risk of fraud is disciplined by client reviews and demand for photos in escorts’ advertisements.
The crisis has spawned a handful of books on how to fix the world’s financial system. This column reviews the NYU Stern book edited by Viral Acharya and Matthew Richardson. It says that the book’s prologue on “The Financial Crisis of 2007-8: Causes and Remedies” is the best single paper yet written on the background and development of the crisis.
Orley Ashenfelter of Princeton University talks to Romesh Vaitilingam about his research comparing wage rates for workers in identical jobs across countries, for which he has collected data from branches of McDonald’s, the fast food restaurant chain, in North and South America, Western and Eastern Europe and the rising economies of Asia. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
Will Americans turn into “inequality intolerant” Europeans? Such a radical shift is unlikely, but this column argues that this crisis may be a turning point towards more government intervention and redistribution in the US. More and more Americans believe that hard work is insufficient to climb the income ladder and are expressing anger against “unfairly” accumulated wealth. Politicians should prefer wise policies but may be tempted by populist outbursts.
China’s “dollar trap” has many analysts worried about its future resolution. This column discusses a similar situation in the 1920s when France held more than half the world’s foreign reserves. France’s “sterling trap” ended disastrously. Sterling suffered a major currency crisis, French authorities lost a lot of money, and subsequent policy reactions deepened the Great Depression.
As the recent G20 Communiqué emphasised, further progress is needed to identify and address systemic risks. This column summarises some of the research in the IMF’s latest Global Financial Stability Report aimed at identifying and measuring systemic events.
This column explores the security of property rights and the various channels through which they affect economic activity. It demonstrates a strong correlation between secure property rights and economic development and discusses the institutional challenges involved. Property rights reform is no panacea, and it faces difficult political economy hurdles in some countries.
The IMF appointed a committee, chaired by Trevor Manuel, to look into IMF decision making. This column reviews the report, arguing that it misses critical question on Executive Board reform. Without an independent board, the Fund’s skewed voting power tends to produce uneven treatment of members. Decision-making power must ultimately rest with shareholders but they should be advised by an independent board that acts as the voice of the institution and its membership as a whole.
This column examines the use of key global market conditions to assess financial volatility and the likelihood of crisis. Using Markov regime-switching analysis, it shows that the Lehman Brothers failure was a watershed event in the crisis, although signs of heightened systemic risk could be detected as early as February 2007.
In Africa, where AIDS afflicts 22 million people, most religions promote abstinence and fidelity as the best way to stop the epidemic, especially among adolescents. This column describes two randomised experiments in Kenya showing that a general risk-avoidance message does not change behaviour, whereas a clear message on the relative risks of different sexual partners does.
Western bank exposures in Eastern Europe are an issue that is increasingly in policymakers’ sights. This column estimates the losses arising to the non-bank sector and government from foreign currency-denominated debt in Central and Eastern Europe. It also estimates the effect that these losses have had on the market-implied assessment of sovereign default risk. Both losses are reflected in wider CDS spreads, but government losses have a bigger impact.
The approaching release of stress-test results is accompanied by widespread fears that the tests are not rigorous enough. This column argues that a modification to the Capital Assistance Programme would neutralise these concerns. Banks should hold the capital implied by the central scenario, and buy government insurance to cover more extreme outcomes, thus taking the aggregate risk off the leveraged institutions and breaking the link between bad economic news and the financial sector’s health.
The global economic crisis shifted attention away from high food and oil prices. But this column says that the global food crisis persists. International food prices are still above their average levels, and domestic food prices in many countries have remained “sticky”. The poor still have many reasons to worry, as many of the factors that contributed to high and volatile prices remain unaddressed.
This column says that the policy response to the financial crisis seems to have been adequate – we will not slip into another Great Depression. It argues that growth will resume by late 2009, as uncertainty is subsiding due to global cooperation.
Nobel laureate Michael Spence of Stanford University talks to Romesh Vaitilingam about the work of the Commission on Growth and Development, the prospects for and the obstacles to achieving sustainable growth in developing countries, and the impact of the global financial and economic crisis on the growth agenda. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
Hosting “mega-events” like the Olympics or World Cup is very costly and seems to yield few tangible benefits. But this column presents evidence suggesting that hosting such events has a positive impact on national exports – trade is around 30% higher for countries that have hosted the Olympics. It suggests that bidding to host the Olympics or World Cup may signal trade liberalisation.
This column shows that the Maastricht convergence criteria are political instruments, not economically vital measures. They were ignored in 1998 so as to facilitate the Eurozone’s creation, and now they are stringently applied so as to slow its enlargement.
What should China do about its noted pollution problems? This column shows that Chinese cities with less air pollution have higher home prices, suggesting that “green amenities” enter housing prices. Moreover, this marginal valuation of clean air is rising over time. China’s major cities may be becoming cleaner as their inhabitants demand improved environmental conditions.
There is now a growing consensus among policymakers and academics that a key element to improve safeguards against financial instability is to strengthen the “macroprudential” orientation of regulatory and supervisory frameworks. This column explains the approach and various issues that regulators must address to implement it.
The Fed’s astoundingly large increase in reserves has many worried about future inflation and wringing their hands over exit strategies. This column argues that the Fed can control inflation by varying the interest rate it pays (or charges) banks on their reserve holding. Consequently, the Fed’s exit strategy need not be constrained by concerns about inflation – reserve interest-rate policy can take care of inflation, but the Fed should publically announce this policy.
The US is doing little to further the Doha round of WTO negotiations. Has the Obama administration merely had its hands full with other issues in its early days? This column says that the neglect is intentional – US politics have shifted against trade and the administration has acted in ways that might jettison the current negotiations.
The European Patent Office has offered a centralised examination service for the 34 member states of the European Patent Convention since the 1970s. However, once patents are granted by the EPO, there is no uniform system to enforce them. They must be validated and enforced by each member state. This column argues that the resulting uncertainty about the validity and market reach of patents reduces innovation.
Richard Easterlin of the University of Southern California talks to Romesh Vaitilingam about the Easterlin paradox – his finding, first published in 1974, that although people with higher incomes are more likely to report being happy, rising incomes do not lead to increases in subjective wellbeing. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009.
This column explains how damage from global temperature increases needs to be large before countries reduce carbon emissions. It shows, using simulations, that larger countries should be more willing to participate in cooperative arrangements and countries adopting a longer-term view will be more inclined to reduce carbon emissions. It also argues that international trade is largely a positive force in reducing carbon emissions.
The crisis has brought multinational banks and their cross-border activities to the forefront of European regulatory concerns. This column argues that such banks are critical to successful EU financial integration and says that the appropriate response is to establish multinational regulation to match multinational banks. It proposes a European System of Banking Supervision and harmonisation of regulating banking groups.
This column says the G20 summit was a remarkable event as leaders crafted a coherent set of strategies to address the crisis. The Asian participants emerged as a constructive force, agreeing to expand their role in IMF funding and governance, ease the trade credit bottleneck, and advocate the standstill on trade barriers.
Conventional explanation attribute terrorism to lack of income or liberal democracy. This column argues that political instability is a better predictor of international terrorism. It says that civil wars and guerrilla warfare provide training grounds in which terrorists amass the personnel and skills needed to commit terrorist acts. Reducing political violence might reduce subsequent terrorism.
Most of the Internet’s infrastructure is neutral with regard to data packets’ contents, but some groups are pushing for legislation to protect “network neutrality.” This column says that strictly neutral data transmission would cause inefficiencies and reduce the availability and quality of Internet services. It defends prioritising quality-sensitive data packets and argues that network neutrality legislation would be a heyday for lawyers and lobbyists.
The G20 communiqué revealed a clear attitude towards chain-reaction crises. Here one of the world’s most experienced and insightful crisis-watchers argues the G20 communiqué reflects a major improvement in the way leaders view financial crises – moving away from the view that blames the victims and towards a view that recognizes systemic crises and chain-reaction accidents involving many innocent bystanders.
G20 leaders made a number of commitments on trade in their London Communiqué. This column argues that the anti-protection pledge is more credible than the one agreed in the Washington Declaration. The commitment on the Doha Round, by contrast, was pitiful.
G20 leaders met at the London Summit against a backdrop of rapidly shrinking global capital and trade flows. This column – written by a senior economist working within the UK Cabinet Office – argues that the proposals agreed at the London Summit provide much needed support to the global economic system, and to emerging and developing economies in particular, and are a step towards the creation of more effective and credible institutions for the future.
Banks’ balance sheets need to be fixed, but they cannot be allowed to shrink themselves back to health – instead of accepting government money – because that would severely harm the economy. This column proposes that any bank that cannot privately find at least 4% equity capital and a tier-one ratio of 8% must let the state supply the required capital and become a partner.
Some analysts have argued that the European is poorly positioned to address the crisis since its economic integration has outpaced its integration of politics and governance. This column says that, in the face of the crisis, Europe must now decide between political integration and economic disintegration. It argues for EU-wide banking reforms, financial regulation, macroeconomic policies, and global coordination.
Benjamin Friedman of Harvard University talks to Romesh Vaitilingam about his book, The Moral Consequences of Economic Growth, which explores how growth boosts such values as opportunity, tolerance, generosity and democracy. They discuss how growth relates to inequality, happiness and the environment – and the potential consequences of a period of economic stagnation. The interview was recorded at the American Economic Association meetings in San Francisco in January 2009
Will big emerging economies be sunk by the global crisis? This column says that they should be able to avoid external payments defaults and systemic banking crises, provided that they allow exchange rates to adjust and refrain from running outsized fiscal deficits.
Did the Summit succeed? This column argues that, except for the promises of more resources for the IMF, the summit did not move the agenda forward. Doing more was probably impossible, but now national governments must do more at home, and very urgently. It would be a tragedy if the Summit outcome encouraged complacency.
Did the Summit succeed? This column argues that the G20 Summit is not the turning point, but it provides the strongest reason yet to be less pessimistic. The commitments may leave plenty of room for the devil to make mischief with, but it is hard to think what more the G20 could have done. Gordon Brown has pulled some large rabbits from his hat.
The G20 is an accomplishment beyond what many expected. This column argues, however, that G20 actions will not stop the recession and that the policy framework adopted is only a sketch. There is hard work ahead translating the G20 achievements into practical action. Communiqués are but a start, not a finish, of the process of true global cooperation.
The crisis, started by rich nations, is now harming developing nations. In this column, Alan Winters – one of the world’s leading trade and development economists and now chief economist of the UK’s Department for International Development – argues that Summit commitments show that development and developing countries are at the heart of G20 leaders’ vision for the twenty-first century.
The long awaited London Summit of G20 leaders took place on April 2. This column – written by a senior economist working within the UK government on the Summit – sets out the background, what was agreed, and what will happen as a result.
The world will see new financial regulations. This column argues that a macro-prudential framework must be part of the regulatory reform. Macro-prudential policy should rely both on automatic regulatory requirements and a more flexible, yet still rules-based framework, possibly similar to the two-pillar monetary framework of the Eurosystem.
With global trade flows collapsing and murky protection spreading, the G20 had much to talk about on trade. This column, written by the Head of the UK Government Economic Service, argues that the Summit made important steps. The key commitments were to refrain from imposing new protectionist measure, to get the Doha round back on track, and to fund additional financing mechanisms for trade credit. These commitments require follow up and further action.
Deflation risks are more related to very low inter-temporal discount rates than to falling prices. This column argues that long-term pre-emptive action should be channelled through taxation rather than central banks.
The world needs a watchdog institution for global economic stability. Most agree that the IMF is the only serious candidate, but IMF management and staff need more independence. This column argues that this could be achieved by having separate Executive Board voting procedures for lending and analytic decisions, and some independent members on the Board.
Bad debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the “painkilling” effect wears off, US and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.
What are feasible policy responses to the crisis? This column argues for simple but significant changes in international imbalances, financial regulation, global coordination, and micro-prudential regulation.