What do you do while waiting for the revolution? - An Interview by Abhijit V Banerjee and Esther Duflo

"There is an easy confusion between "big questions" and "big answers". It is not that because the problem of poverty is large that the solution also must be large. "

How true it is!! It is not at all essential that big problems will have big or large solutions. Many times (even in Life) big problems have small solutions. The above mentioned line in quotes was from an Interview by Abhijit V. Banerjee and Esther Duflo authors of the Book titled "Poor Economics: rethinking poverty and the ways to end it". Their Interview had recently appeared in Times of India Crest (Special Saturday Edition) this week (i.e. 11.06.2011): the registered user (free registration as of now) can see full interview here and others can read the gist of the interview below:

Abhijit V Banerjee and Esther Duflo are among the most respected, watched, and discussed economists in the world today. Banerjee is currently the Ford Foundation Professor of Economics at MIT. Duflo, is Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at MIT. In 2003, the duo co-founded the Abdul Latif Jameel Poverty Action Lab at MIT, which is best known for its pioneering efforts in conducting randomised control trials to test the real-world effectiveness of interventions believed to alleviate poverty. Their new book ‘Poor Economics: rethinking poverty and the ways to end it’ powerfully argues for a focus on the “smaller” questions in development. They make a case for more evidence-based policy-making , and warn that a great deal of development policy today hinges on “the three Is: ideology, ignorance, inertia.” The authors discussed their new book with Rukmini Shrinivasan in an email interview.

The success stories you talk of are of modest successes - how school attendance can go up, how to promote mosquito net usage etc - but we aren't seeing mass educational or health transformation. The NYU economist Bill Easterly calls this a lowering of ambitions. But do you think that these 'quiet revolutions' add up?

Not only do they add up, by themselves they can also have effects that would put some of the big macro reforms to shame. Consider the impact of de-worming, for example. The 20 per cent increase in wages resulting from de-worming is more than the effect of many years of wage growth in a country like Kenya. There is an easy confusion between "big questions" and "big answers". It is not that because the problem of poverty is large that the solution also must be large.

You say in the book that it is possible to improve governance and policy without changing the existing social and political structures. Aren't you running the risk of enraging mass movements across the world currently engaged in those very transformative processes?

We are not saying that you cannot change the world through a revolution. Just that really transformative revolutions are few and far between, hard to predict, and even harder to engineer. The question is, what do you do while waiting for the revolution? Is there anything useful we can do? What we are pointing out is that there are lots of changes that can happen at the margins, within the broad institutional structure that is in place. It is also possible that these changes can pave the way for more. We show that simple interventions can affect the way people vote, for example, making them more likely to vote on issues and less likely to vote according to ethnicity or castes.

You say that the poor often take bad decisions, but the richer you get, the more 'right' decisions have already been made for you.

Our point is that people in rich countries (and also rich people in poor countries) should become aware of something that they generally ignore about the poor: that the poor actually bear much more responsibility for many aspects of their lives than the rich. If you are poor, you have no water at home, let alone clean water. If you are rich, you can just open the tap and get clean water. If you are poor, you don't have a salary, you are selfemployed, or a casual worker. You worry everyday whether you will earn enough to feed your family. You have no safe place to save. All of this makes their everyday life so much more stressful that it is no surprise that the poor don't always make correct decisions. No one in that position could. It is possible to make life easier for the poor by trying to make the 'right choices' the easier ones.

An Overview of Global Development Horizons 2011 - Multipolarity: The New Global Economy

On Tuesday (i.e. 17.05.2011), World Bank has released a Report titled "Global Development Horizons 2011 - Multipolarity: The New Global Economy". The Report said that Six major emerging economies - Brazil, Russia, India, China, Indonesia and South Korea - will account for more than half the global growth by 2025. It further stated that  international monetary system will no longer be dominated by a single currency.

The Reports projected that these economies will grow on an average of 4.7 per cent annually,  while, the developed economies will grow at an average of 2.3 per cent annually (in the period of 2011-2025). In this report it is stated that, the Developing countries percentage share in the international trade flows has risen steadily, from 30 percent in 1995 to an estimated 45 percent in 2010.

The report also says that " ...... high-income countries are only gradually recovering from the financial crisis, most developing countries have swiftly returned to their fast pre-crisis growth trend." It further states that China was one of the first economies to emerge from the crisis and returned quickly to around 10 percent growth rate. While, India had experienced a stronger contraction, still attained more than 10 percent growth in 2010 and the government is putting in place an ambitious new Five Year Plan (with improved policies and necessary investment programs) to keep growth at that level.

It also expressed that "Even in the absence of such exceptionally high growth rates in the developing world, the balance of global growth is expected to shift dramatically." In the report, the world bank further stated that "The changing role of developing countries will come with major transformations to their economies,corporate sectors, and financial systems" 

Mansoor Dailami, lead author of the report and manager of emerging trends at the World Bank, in a press release said that "The projected changes in the global economy are fundamental. Overall, these shifts will likely be positive for developing countries. However, a key question is whether existing multilateral norms and institutions are sufficiently strong to accommodate the passage toward multipolarity. The challenges of managing global integration among power centers makes strengthening policy coordination across economies critical to reducing the risks of economic instability"

World bank report forecasts that there are 3 possibilities of changes in international currency scenarios during 2011-2025. They are

1. U.S dollar's may remains dominance without any Challenger.

2. Multipolar international monetary system might emerge most likely with the Dollar, Euro and Renminbi at the centre of the system.

3. Dissatisfaction with an international currency system based on national currencies leads to reforms that make supply of world's currency the result of  multilateral decisions. It is a role intended for the SDR when it was introduced.

The report provides us a clear view on the transformational changes happening in the developing countries and how the emerging economies are going to take the lead of global economy in near future.

RBI's Annual Monetary Policy Statement for 2011-12 - An Overview

Yesterday (i.e. 03.05.2011)  RBI have announced Annual Monetary Policy Statement for 2011-12. Whoever read the Monetary Policy Statement  would be little puzzled with what RBI is trying to do. The Statement as usual starts with Factors which have shaped the outlook and monetary strategy for the year (2011-12) followed by Monetary Policy Stance. Everybody who follows Monetary Policy knows that there will be Changes in Operating Procedure of Monetary Policy.

The Changes in Operating Procedure of Monetary Policy is as follows:

Last July, the Reserve Bank of India constituted a Working Group to Review the Operating Procedure of Monetary Policy. The report of the Group, chaired by our Executive Director, Deepak Mohanty, was put out in the public domain in March 2011, also invited for feedback and comments over the Report. Based on that Group’s recommendations, and in light of the feedback received, it has been decided by RBI to make the following changes to the operating procedure of monetary policy: 

First, the weighted average overnight call money rate will be the operating target of monetary policy of the Reserve Bank.

Second, there will henceforth be only one independently varying policy rate, and that will be the repo rate. This transition to a single independently varying policy rate is expected to more accurately signal the monetary policy stance.

Third, the reverse repo rate will continue to be operative, but it will be pegged at a fixed 100 basis points below the repo rate. Hence, the reverse repo rate will no longer be an independent variable.

Fourth, we will be instituting a new Marginal Standing Facility (MSF). Banks can borrow overnight from the MSF up to one per cent of their respective net demand and time liabilities or NDTL. The rate of interest on amounts accessed from this facility will be 100 basis points above the repo rate.

As per the above scheme, the revised corridor will have a fixed width of 200 basis points. The repo rate will be in the middle. The reverse repo rate will be 100 basis points below it, and the MSF rate 100 basis points above it.

These changes in the operating framework, except that pertaining to the MSF, will come into force immediately. The MSF will come into effect from the fortnight beginning 7th May, 2011.

When one go through the Report one may find the descritpiton about Standing Marginal Lending Facility (same has been put  as MSF in the statement). But, What exactly Standing facility means? here is the definition

"Standing facilities are aimed at providing and absorbing overnight liquidity, signal the general stance of monetary policy and bound overnight market interest rates."

The Bank of England gives the Definition of operational standing facilities as follows

"The operational standing deposit facility is uncollateralised. The operational standing lending facility is for overnight reverse repo against Narrow Collateral. The operational standing facilities are available all day subject to operational constraints arising from deadlines in payments and securities settlement systems."

Not going further on the MSF but let us see what the Monetary Measure was and RBI have decided to take the following policy measures:

The repo rate under the liquidity adjustment facility (LAF) has been increased by 50 basis points. Accordingly, it goes up from 6.75 per cent to 7.25 per cent.

As per the new operating procedure, the reverse repo rate under the LAF, determined with a 100 basis point spread below the repo rate, will stand adjusted at 6.25 per cent.

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, gets calibrated at 8.25 per cent.

The Bank Rate remains at 6.0 per cent. The cash reserve ratio (CRR) remains unchanged at 6 per cent of NDTL of scheduled banks.
RBI have decided to increase the savings bank deposit interest rate from the present 3.5 per cent to 4.0 per cent with immediate effect.

So by these measures RBI expect that Inflation will be tamed and  they can put anchor on inflation expectations along with sustained growth in medium term.

In the beginning  as I said that "Whoever read the Monetary Policy Statement of RBI may be little puzzled with what RBI is trying to do". The main reason for this comes in the form 2 questions as follows:

1.  Why RBI has raised 50 basis point in one go?
2.  What this neccessity for new MSF?

To curtail inflation (alongwith expectations) RBI have hiked 50 basis points on repo rate as a quick remedy. The MSF has been introduced to absorb excess money overnight and to give more clear signal to the market about interest rate. It's too early to say whether the MSF will make any impact on the market right away; whether it will able to make sustainable growth in the medium term and also whether it will tame the inflation along with repo rate. (Note: According to my perspective the prevailing Inflation is still a structural problem and not monetary problem).

BRICS countries - A structural shift?

            “BRICS countries embrace strong economic recovery, structural shift” this is the Headline of an article which appeared in some Chinese newspapers in Business page. The article states as follows “As leading emerging economies, the BRICS nations are taking the lead to move out of the world financial crisis and regaining robust growth. They were also among the first to look into the flaws of their economies and started to make a change.”

        The article also states that “The global financial crisis has triggered widespread reflection on the former economic development mode not only in developed countries, but also among BRICS countries. They realized the unsustainability of their past development paths, and started to restructure their economies” (For full news:BRICS countries embrace strong economic recovery, structural shift)

        This news may be surprising for those who read (or) hear for the first time about the term BRICS (Brazil, Russia, India, China and South Africa (SA later Joined in BRIC)). Before going further about the article, let me tell you the background why Chinese newspapers had published this news now. The third meeting of BRICS will be held in Sanya on South China's tropical island of Hainan this week. Many Experts across the globe said that the big emerging economies would continue to play a prominent role in the future.

My Reflection

              This article is no doubt a fantastic one. It describes about the major problems and issues like inflation, deficit, corruption etc… facing by the BRICS countries. However, the important line on which one has to give their attention is “However, cooperation among BRICS is never easy. Among opportunities and trust there are also competition and suspicion.” The article rightly said that there are territorial and political disagreements among BRICS Countries. The vital part of the article is its concluding remarks which state “How to deal with their differences and cooperate as best as they can test the BRICS nations' wisdom and courage.”

          As the news states that these Emerging economies may have robust growth rate; but the robust growth alone cannot make one country to have stable growth for a long time. There should be development. In today’s people talk more about Growth (which is mostly Vertical one) and fails to talk about Development (Horizontal Part). Instead, they talk about so called “Inclusive Growth” (a modern phrase). (Note: I am not here to explain these modern concept or basic differences between the old and new :) )

       Inclusive Growth (if it all it literally means what it is) should be achieved by these big emerging economies (BRICS) in order to take lead of the world. It is too early to say the BRICS will take lead of the world. It cannot be done unless 2 important things happens 1. They need to sort out their own differences (among BRICS), so that each will be benefited & have a sustained development/ growth  and 2. They need to concentrate and tackle their own major problems and issues which can become a major hurdle for their robust growth rate in near future.

Quantitative easing - An Historical Perspective

Earlier I had already provided definition of Quantitative Easing (QE) (see October 11, 2010 post). Here I would like to share some historical background of Quantitative Easing. When we look wikipedia about QE it describes that "The original Japanese expression for "quantitative easing" , was used for the first time by a Central Bank in the Bank of Japan’s publications. The Bank of Japan has claimed that the central bank adopted a policy with this name on 19 March 2001."  I became puzzled to see that  how can a concept like QE can be a new thing.

After some research on the topic, found the Truth the quantitative easing is not a new concept or evolution of any concept. CPS (Centre for Policy Studies, UK), has published a Paper on QE by George Trefgarne.  In that paper George Trefgarne says that QE  "QE is not a new idea. It was originally pioneered in this country by a Tory administration over 200 years ago, which in response to a banking crisis, flooded the system with funds, by printing money. QE is merely a fancy expression to describe the modern, technical aspects of that process."

I am also puzzled to see the wikipedia definition of QE as a recent one, despite the fact that QE is also used during Great Depression of 1930's. Richard G. Anderson in his paper (published in Monetary Trends) said that  "During 1932, with congressional support, the Fed purchased approximately $1 billion in Treasury securities (half, however, was offset by a decrease in Treasury bills discounted at the Reserve Banks). At the end of 1932, short-term market rates hovered at 50 basis points or less. Quantitative easing continued during 1933-36. "

You can give a new term for a concept, but, concept like QE cannot be new at all. These are some historical Fact which I came to know on the road of unearthing QE.

BANCOR - Is it a New Global Currency?

 The people who follows the IMF knows that It gets what it usually wants. It could be the same in case of New Global Currency knowns as "Bancor". In April,13, 2010 a paper entitled  “Reserve Accumulation and International Monetary Stability” by the Strategy, Policy and Review Department of the IMF recommends that the world adopt a global currency called the "Bancor" and that a global central bank be established to administer that currency. 

Many people thought that it is some hype and rumour; which is not True. The Proposal is already submitted and now the base work for implementation is going on.

People may wonder from where this term Bancor had evolved?

If people who are following the IMF website and people who have knowledge of "Bretton Wood Agreements" they would know from where this term have been evolved. Anyhow, here is a brief history of the term "Bancor".

The term evolved way back in 1940's (I think exactly between 1942-44) when John Maynard Keynes made a proposal to have a world reserve currency - where he was conceptualising the term called "Bancor"- administered by a central bank vested with the possibility of creating money and with the authority to take actions on a much larger scale.

The Paper gives answer for the question Why bancor? Few excerpts as follows: 

A global currency, bancor, issued by a global central bank would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy.

It is believed that Bancor would play as a Nominal anchor. As a stable store of value, bancor could serve as a global nominal anchor. The variability of traded goods prices that is currently related to exchange rate volatility would be reduced.

Once liquid markets for bancor-denominated instruments exist and bancor-denominated transactions are at a par with or exceed transactions in other currencies (i.e., in a bancor-based system), bancor-denominated debt of the sovereign with the highest credit rating could serve as the global risk-free asset, off of which all risky assets are priced.

The global central bank could serve as a lender of last resort, providing needed systemic liquidity in the event of adverse shocks and more automatically than at present. If bancor were to circulate as a common currency, then current account imbalances among the adopting economies would reflect structural rather than monetary considerations.

Perception:

IMF is trying to shift for common global currency. But, how far this help the world from any crisis is really a big question. The Bancor has its own advantage as well as disadvantage. When it comes to implementation and practicality then I see only more crisis rather than stablility. I still need to go through full paper before I express my views on this "Bancor" (not on keynes term). Let us wait and see how this Bancor as a global currency evolves and comes to implementation.

CSO Advance Estimate for 2010-11

The Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation has released the advance estimates of national income at constant (2004-05) and current prices, for the financial year 2010-11, yesterday (i.e. 07.02.2010).

It said that the growth in GDP during 2010-11 is estimated at 8.6 per cent as compared to the growth rate of 8.0 per cent in 2009-10. The growth rate is estimated at 8.6 per cent for 2010-11 is due to growth rates of over 8.0 per cent in the manufacturing’, ‘construction’, 'trade, hotels, transport and communication', 'financing, insurance, real estate and business services'. 

It also declared that Agriculture sector registered a growth rate of 5.4 percent. The ‘agriculture, forestry and fishing’ sector is likely to show a growth of 5.4 per cent in its GDP during 2010-11, as against the previous year’s growth rate of 0.4 per cent.

The growth in GDP for mining and quarrying and manufacturing sectors during 2010-11 is expected to be 6.2 and 8.8 percent respectively over previous year. 

The estimated growth for 2010-11 in service sector is placed at 11 per cent.

 I dont have any doubt on the growth rate is expected at 8.6% which is inline with RBI estimates of 8.5% . 

 
By seeing the Estimates few queries arised in my mind. The Advanced Estimates says that Agriculture have registered 5.4 growth over last years 0.4%. Many Economist in India are concerned about food inflation which is rose to 17.05% for the week ended Jan 22, 2011. Few economist feel that there is Supply Demand gap in agriculture which is the cause of rising food prices. The 5.4% growth in agriculture rises the question how it failed to meet the demand?

It is estimated that Industry sector will post 6.2% growth against 8.8% last year; Is Industrial sector is affected due to Global Crisis?. Whereas Service sector will post 11% growth, which grew at 8.7% last year. If service sector can post 11% (which is always high in contribution to GDP for almost a decade) and Agriculture sector can post 5.4% then India can easily achieve 9% growth; but  I doubt the growth rate of Agriculture.  

Some where I heard that "Statistics can be made to prove anything - even the truth".