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  • Ideas@davos: 'Scenarios of the International Monetary System'

    The global economy is tied together by the international monetary system. It is quite a dynamic system, but one that has been through a lot of changes in the last decade. And the all knowing voice in this World Economic Forum video says "the existing system has reached a breaking point." Whether you agree with that conclusion or not, the video makes a compelling argument at least about strains on the system:
  • Raghuram Rajan on Global Impact Uncoventional Monetary Policies

    The monetary policies of central banks in the world's largest economies have a significant impact not only on the residents of those nations, but on people and businesses around the world. This is especially true of the Federal Reserve's monetary policy moves. With the Fed looking to scale back its quantitative easing program, the Brookings Institution invited India's top central banker, Raghuram Rajan , to speak about the impact of the Fed's unconventional monetary policies on emerging economies. Here are two excerpts from that speech, in which Rajan discusses his concern that central bankers in emerging and developed economies are not adapting quickly enough to a changing global economy: Read more about Rajan's visit to Brookings here .
  • Dani Rodrik on 'Premature Deindustrialization' in Developing Economies

    At Project Syndicate , Dani Rodrik tries to make sense of "an unexpectedly large gap in productivity between large firms and small firms," in Mexico and other developing economies. This isn't what is supposed to happen. At least it doesn't follow the industrialization model of the last century and a half. "When economies develop the productivity gap between the traditional and modern parts of the economy shrinks, and dualism gradually diminishes, Rodrik writes. Today, the picture is very different. Even in countries that are doing well, industrialization is running out of steam much faster than it did in previous episodes of catch-up growth – a phenomenon that I have called premature deindustrialization. Though young people are still flocking to the cities from the countryside, they end up not in factories but mostly in informal, low-productivity services. Indeed, structural change has become increasingly perverse: from manufacturing to services (prematurely), tradable to non-tradable activities, organized sectors to informality, modern to traditional firms, and medium-size and large firms to small firms. Quantitative studies show that such patterns of structural change are exerting a substantial drag on economic growth in Latin America, Africa, and in many Asian countries. There are two ways to close the gap between leading and lagging parts of the economy. One is to enable small and microenterprises to grow, enter the formal economy, and become more productive, all of which requires removing many barriers. The informal and traditional parts of the economy are typically not well served by government services and infrastructure, for example, and they are cut off from global markets, have little access to finance, and are filled by workers and managers with low skills and education. Even though many governments exert considerable effort to empower their small enterprises, successful cases are rare. Support for small enterprises often serves social-policy goals – sustaining the incomes of the economy’s poorest and most excluded workers – instead of stimulating output and productivity growth. The second strategy is to enlarge opportunities for modern, well-established firms so that they can expand and employ the workers that would otherwise end up in less productive parts of the economy. This may well be the more effective path. Read The Growing Divide Within Developing Economies here .
  • Angus Deaton on Global Quality of Life, Health, and Wealth

    In his latest book, Princeton economist Angus Deaton argues that the world is a much wealthier and healthier place today than it was a half century ago, but that progress has not come without some setbacks, and a danger of "vast inequalities." Deaton has an introduction to the book, titled The Great Escape: health, wealth, and the origins of inequality , at Vox , where he shares this graph: The figure plots life expectancy at birth (for both sexes together) against per capita GDP in price-adjusted international dollars. Each point is a country, shown as a circle whose area is proportional to population; the lighter circles are for 1960, and the darker circles for 2010. The arrow points in the direction of progress, where both per capita incomes and life expectancy increase over time. The 2010 line is above the 1960 line so that, for a typical country, life expectancy has increased by more than would have been expected given a movement along the 1960 line. Preston suggested that movement along the curve was the effect of income on health, while the upward movement of the line could perhaps be attributed to technical progress. Death 'ages' as we move along each curve; this is the epidemiological transition. In the poorest countries, parents still live with the agony of watching their children die from long-conquered maladies like pneumonia, diarrhea, or vaccine preventable diseases like measles. In the rich countries, where disease has moved out of the bowels of children and into the arteries of the elderly, death comes from chronic diseases – heart disease and cancer – and comes to the old, not to the young. The aging of death recapitulates what happened in history, though poor countries today have achieved comparable health at much lower levels of per capita income than was the case in the rich countries in the past. When I was born in Edinburgh in 1945, life expectancy in Scotland was lower than it is in India today; when my father was born in the Yorkshire coalfield in 1918, child mortality in England was higher than it is in sub-Saharan Africa today. Progress has been repeatedly interrupted by horrors, not all of which are safely locked up in a historical museum. The Figure shows the huge increase in life expectancy in China between 1960 and 2010, most of which happened, not slowly over time, but immediately after 1960. In fact, this is not a story of progress, but of the unwinding of the disaster of the great Chinese famine. Mao’s demented attempt to catch up with rich countries in a few years, to assume leadership in the Communist world, and to preserve his own political position at home, led him to ignore the mounting evidence that millions were dying. Eventually, perhaps 30 million people died, Yang (2013). This is far from the first time in history that toxic politics has brought human catastrophe. It is sometimes hard to see the benefits that good policies bring, but the Great Leap Forward is a spectacular example of what bad policies and bad politics can do. Read the full post here .
  • Kemal Derviş Sees 'Vulnerability' in Emerging Market Private Sector Balance Sheets

    There has been a fair bit of pessimism about the fate of emerging market economies this year. At Project Syndicate , Kermal Derviş writes that, with the Federal Reserve expected to begin tapering off its quantitative easing programs, "the emergent market bears are ascendant once again." In gauging whether countries like Brazil, India, Indonesia, South Africa, and Turkey are in trouble, Davis urges us to pay a little less attention to public deficits and look more at private sector balance sheets. To be sure, the weakest-looking emerging countries have large current-account deficits and low net central-bank reserves after deducting short-term debt from gross reserves. But one could argue that if there is a capital-flow reversal, the exchange rate would depreciate, causing exports of goods and services to increase and imports to decline; the resulting current-account adjustment would quickly reduce the need for capital inflows. Given fiscal space and solid banks, a new equilibrium would quickly be established. Unfortunately, the real vulnerability of some countries is rooted in private-sector balance sheets, with high leverage accumulating in both the household sector and among non-financial firms. Moreover, in many cases, the corporate sector, having grown accustomed to taking advantage of cheap funds from abroad to finance domestic activities, has significant foreign-currency exposure. Where that is the case, steep currency depreciation would bring with it serious balance-sheet problems, which, if large enough, would undermine the banking sector, despite strong capital cushions. Banking-sector problems would, in turn, require state intervention, causing the public-debt burden to rise. In an extreme case, a “Spanish” scenario could unfold (though without the constraint of a fixed exchange rate, as in the eurozone). It is this danger that sets a practical and political limit to flexible exchange rates. Some depreciation can be managed by most of the deficit countries; but a vicious circle could be triggered if the domestic currency loses too much value too quickly. Private-sector balance-sheet problems would weaken the financial sector, and the resulting pressure on public finances would compel austerity, thereby constraining consumer demand – and causing further damage to firms’ balance sheets. To prevent such a crisis, therefore, the exchange rate has to be managed – and in a manner that depends on a country’s specific circumstances. Large net central-bank reserves can help ease the process. Otherwise, a significant rise in interest rates must be used to retain short-term capital and allow more gradual real-sector adjustment. Higher interest rates will of course lead to slower growth and lower employment, but such costs are likely to be smaller than those of a full-blown crisis. Read Tailspin or Turbulence? here .
  • Heidi Moore: The New Head of India's Central Bank May Follow a Familiar Playbook

    Like so many students, Raghuram Rajan is off to a new place and new challenges this month. But there is no time for acclimation. Rajan is taking over as the top central banker in India, and his to-do list leaves no room for delay. The rapid drop in the value of India's currency, the rupee, means that Rajan needs a clear plan to fight against rising inflation and falling growth. To get a sense of how he might approach the challenges ahead, The Guardian 's Heidi Moore suggests we look to a familiar beard face. Thanks to Ben Bernanke, we know the script: pour in stimulus, as fast as possible. Rajan is Bernanke disciple; Rajan's answer to the sharp slide of the rupee is, as Bernanke's was back in 2009, to open up the central bank's lending windows to free up the flow of money and welcome back foreign investors. What's ironic is that Rajan's and Bernanke's fates as economic policy-makers are tied up in other ways, reaching back years. Kurt Vonnegut, in his novel Cat's Cradle, wrote of the fictional religion Bokonism, which required of its adherents only belief. Vonnegut theorized that groups of people – dubbed a "karass" – would end up working toward a common purpose, unknown to themselves or each other, finding their lives intertwined without any knowledge of the goal they were working towards in common. The world's central bankers have become this karass, meeting and separating and meeting again to solve the quandary of economic crises – without knowing, really, what they are doing, or how it will end. The common threads are there. One paradox Rajan faces as the "Bernanke of India" is that it was Bernanke's relentless stimulus in the US from 2009 to 2012 that contributed to Rajan's current quandary of the falling rupee. As Wells Fargo strategist Sean Lynch noted this week, Bernanke's flood of money into the US financial system pushed interest rates down, forcing rich investors to look far afield for investments that would return some money. Many of them chose to put their money in India – which was a boon for the rupee and Indian trade balances. That was great when times were good and the stimulus was flowing. Over the past few months, however, the talk in the US has turned to cutting down on stimulus. Investors have been looking at returning their money to the US – which has hurt India. Rajan needs to lure that money back and keep it in India. Barclays predicts that Rajan's new plans for stimulus could bring back $10bn to Indian foreign-exchange inflows. Will it work? Rajan, in some ways, has a harder job than Bernanke. Bernanke just had to convince US investors to go along with his stimulus. Rajan has to stem a burgeoning global investment trend and lure foreign money. Read the full article here .
  • Foreign Investment Starts to Flow Out of Emerging Markets

    At Quartz , Matt Phillips shares the following grim image. It is of emerging market mutual funds: Phillips: As the rip-tide of liquidity pours out of a country, it drives the value of the currency lower. That makes imports of crucial foreign products—such as energy—costlier. The surge in spending on imports worsens the current account deficit. That prompts still more worries about investing, setting off a further outflow of investor cash. The decline of the currency gets deeper. A spiral can ensue until you hit something known as a “sudden stop,” which pushes a country into default. Such tidal waves of foreign investment into and out of emerging markets are a well-known problem, leading to a range of banking collapses, inflationary spirals, sovereign defaults and currency crashes. (Some have referred to them as “capital-flow bonanzas.”) They were at the heart of a slew of crises in the 1990s: Argentina, Thailand, Korea, Mexico, Turkey, Chile and, yes, Indonesia. But, of course, the story now goes well beyond Indonesia right to the heart of the so-called BRICs—onetime market darlings Brazil, Russia, India and China—that were supposed to represent a new sort of emerging market. Read Investors in emerging markets would like their money back now thanks here .
  • Mercer Infographic: Hiring and Compensation in Asia Pacific

    Mercer recently polled human resource leaders for companies in the Asia Pacific region. What they found matches up with a lot of what we've been seeing in growth projections. In short, companies are planning on increased hiring and steady improvement in compensation. That's the good news. What some might read as bad news: that the rate of growth in hiring and salaries is not as high as it has been in recent years. Here is a look at some of the topline findings in the survey. For the full size graphic, click here .
  • Two Takes on Emerging Market Growth Projections

    Earlier this month, the IMF 's Olivier Blanchard expressed concern over increasing risks in emerging markets: Stephen Grenville isn't sure where this "wave of gloom" is coming from. The picture he sees isn't quite so bleak. From the interpreter: Let's spell this out. In terms of growth rates, the emerging economies had their best period in the four years leading up to the 2008 crisis: they grew at an annual rate of around 8%, accounting for just over half of global growth. When growth collapsed in most advanced countries in 2008, the emerging economies slowed but still recorded rapid growth: they averaged 5.5% during 2008-2011. In a limp world, this kept global expansion going: the emerging economies accounted for three quarters of world growth. Since then, they have slowed a touch more, to around 5%. China is growing at 7% rather than 10%-plus and Brazil and India have reverted to their traditional lacklustre performance. But in the meantime, the cumulative expansion of these emerging economies means that they have more heft. The emerging countries are two-thirds bigger than they were in 2006: thus 5% growth now adds more to the world economy than 8% did back in 2006. So why all the gloom about their prospects? The current IMF forecast puts their growth rate this year and next at around 5%, the same as during the past few years. Perhaps the IMF feels that it is a bit optimistic about China, but provided China's growth stays somewhere near 7% (which is still the predominant market forecast), there is nothing here to justify the gloom. As well, the advanced economies could turn out a bit better than current forecasts. While there seems no early prospect of Europe getting its act together, America has done a lot to repair its immediate budget position (at the cost of crimping growth over recent years), opening the possibility of easing the austerity next year if the political bickering could be overcome. Winding back unemployment in the two countries with room to ease austerity (the US and the UK) would, in itself, deliver a substantial growth spurt. Sentiment in Japan is much improved, even if Abenomics has been more talk than substance so far. Thanks to the sustained performance of the emerging economies, the IMF's forecast for global growth during this year and next is around the same pace as was achieved in the first half of the 2000s, which in turn was a bit faster than growth in the previous decade. Why, then, all the breast-beating about emerging economies? The policy message here is to spend less time fretting about the emerging economies and focus instead on sorting out the pathetic economic performance in most of the advanced world. Read Emerging economies: Why so gloomy? here .
  • Lessons for China's Policymakers in Detroit's Economic Decline

    The bankruptcy of Detroit has Sanjeev Sanyal looking east, far east, to China and India. Sanyal, Global Strategist for Deutsche Bank, points to Detroit as a prime example of a city built largely around one sector. The good news for Western economies is that the urban revival of the last few decades has been driven by cities where innovators across sectors are coming together. The same can not be said for the rapid urban growth elsewhere. From Project Syndicate : Until the nineteenth century, innovation was carried out mostly by generalists and tinkerers, which meant that the accumulation of new knowledge was slow, but that its diffusion across different fields was rapid. In the twentieth century, knowledge creation became the job of specialists, which accelerated knowledge creation but retarded inter-disciplinary application. But recent studies have shown that this source of innovation is rapidly decelerating (the productivity of an American research worker may now be less than 15% of a similar researcher in 1950). Instead, innovation is increasingly based on mixing and matching knowledge from different specializations. Certain cities are ideally suited for this, because they concentrate different kinds of human capital and encourage random interactions between people with different knowledge and skills. The problem with this post-industrial urban model is that it strongly favors generalist cities that can cluster different kinds of soft and hard amenities and human capital. Indeed, the growth dynamic can be so strong for some successful cities that they can hollow out smaller rivals (for example, London vis-à-vis the cities of northern England). Some specialist cities could also do well in this world. But, as Detroit, with its long dependence on the automotive industry, demonstrates, cities that are dependent on a single industry or on a temporary location advantage may fare extremely poorly. All of this has important implications for emerging economies. As it transformed itself into the “factory of the world,” the share of China’s urban population jumped from 26.4% in 1990 to around 53% today. The big, cosmopolitan cities of Beijing and Shanghai have grown dramatically, but the bulk of the urban migration has been to cookie-cutter small and medium-size industrial towns that have mushroomed over the last decade. By clustering industrial infrastructure and using the hukou system of city-specific residency permits, the authorities have been able to control the process surprisingly well. This process of urban growth, however, is about to unravel. As China shifts its economic model away from heavy infrastructure investment and bulk manufacturing, many of these small industrial cities will lose their core industry. This will happen at a time when the country’s skewed demographics causes the workforce to shrink and the flow of migration from rural areas to cities to slow (the rural population now disproportionately comprises the elderly). Read The Detroit Syndrome here .
  • McKinsey: Three Steps to Successful Product Development for Emerging Markets

    Multinational companies need to grow sales in emerging markets. That may mean tailoring the product development process that matches the market. In the McKinsey Quarterly , Sauri Gudlavalleti , Shivanshu Gupta , and Ananth Narayanan note that this requires companies to step out of their comfort zone: Traditional approaches to product development are coming under strain as emerging markets start to dominate the global economy. Companies that learn to shake up their thinking and effectively challenge the assumptions about how they design, develop, and manufacture products are more likely to master the extremes of this new competitive landscape. The authors outline three key steps in the product development process. Here they are, illustrated: Read the article here .
  • Swiss Pay Remains the Best Pay

    If salary matters most to you, you will want to try to get a job in Switzerland. In Mercer 's latest International Geographic Salary Differentials , Switzerland dominates the rankings (of course, this report doesn't cover how expensive it is to live in Switzerland ). Some other interesting findings from the report include Venezuela as the place with the highest gains in salary over the last year. The full report is available for purchase, here . But here are some of the key findings (full size graphic available here ):
  • Significant Growth Potential for India Depends on Increased Private Technology Consumption

    For India to tap into the full potential of its economy, business leaders and policymakers need to be looking at the population's access to technology, according to researchers at the McKinsey Global Institute . McKinsey estimates that the number of people in India online will grow from 120 million to 330 million by 2015. That rapid growth should bring significant growth in GDP, but that depends on some major shifts in thinking and approach from India's business community. From the McKinsey Quarterly : Despite India’s large current and future base of users, the Internet now contributes only modestly to GDP. Its citizens, like their peers in other developing countries, spend little money online, equivalent to only 1.6 percent of GDP in 2011, compared with 3.4 percent in developed nations (exhibit). Under the right circumstances, however, India could close that gap within three years, our analysis shows. Several advantages could help the country achieve this goal: the online behavior of its people is rapidly converging with that of users in more developed countries, and it has a well-established base of exports in information and communications technology. Read the article here , and the full report here .
  • A Push for a Startup Visa

    We often have to be reminded that, while the prevailing imagery that accompanies political debates over immigration policy tends to be focused on low-wage workers, a lot of people pushing immigration reform have their eyes on other parts of the economy. And that includes startups. At BBC/PRI's The World , Monica Campbell reports on a push for a new kind of visa: a "startup visa." Listen to her report:
  • Breaking Down the BRICs

    What's in an acronym? Would the BRIC nations, by any other acronym smell as sweet [as places to do business]? In this Big Think video, Daniel Altman discusses some key distinctions between Brazil, Russia, India, and China (and Korea and South Africa). There are good reasons to invest in each country. And there good reasons to be skeptical about business prospects in each.
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