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  • Public Debt Data, 1880-2008

    IMF researchers S. M. Ali Abbas , Nazim Belhocine , Asmaa El-Ganainy , and Mark Horton are trying to make the task of studying debt cycles and debt sustainability easier. They have begun building a database of historical public debt. At VoxEU , they have posted a series of interesting graphs from the data they have compiled so far. Including this one, that they say provides an "historical perspective of debt developments in advanced, emerging, and low-income economies. Debt levels in advanced economies (now the G20) averaged 55% of GDP over 1880–2009, with a number of peaks and troughs that correspond with key historical events along the way.": Here is what the authors say about the value of this data moving forward: The composition of the 11 debt reductions observed during 1880–1914, the first era of financial globalisation, is quite similar to that witnessed in the post-1970 financially liberalised period. In both cases, the debt ratio reductions were mainly caused by large primary surpluses. In fact, the post-1970s debt reductions are accounted for almost entirely by primary surplus improvements. However, insofar as such improvements are boosted by the cycle and easier to implement in the context of strong growth, these results may somewhat understate the true role of growth in debt declines; strong growth was a consistent feature of most debt decline episodes.2 That conventional fiscal adjustment and growth have led the way in periods of global financial integration is intuitive as well as consistent with previous studies (such as IMF 2010). Looking ahead, highly indebted advanced economies are confronted by a challenging landscape. The pursuit of unconventional options – such as reverting to financial repression policies akin to those taken during the post-WWII years, reducing the burden of domestic debt through higher inflation, or restructuring – may be a temptingshortcut but it comes with high costs. A gradual but steady adjustment is the right way to go. History shows an orderly adjustment is much easier in the context of sustained medium-term growth. This suggests that there is a premium on both implementing structural measures that improve competitiveness and the business environment, and designing fiscal adjustment in a manner that minimises the drag on growth. Read Lessons from a century of large public debt reductions and build-ups here .

  • China's Push for Market Economy Status

    It is of utmost importance to China's leaders that China be recognized as a market economy. As a market economy, China would be treated differently when it comes to global trade law. But while the nation's leaders appear to believe that admission as a member of the WTO in 2001 triggered a 15 year countdown to market economy status, Bernard O'Connor says "idea that there is a deadline is an urban myth that seems to have gone global." Writing at Vox , O'Connor says China must earn market economy status by satisfying very specific criteria: As Karel De Gucht, the current EU commissioner for trade, recently stated, whether China is or is not a market economy is a technical question under EU law. The EU assesses the existence of a market environment using five criteria set out in the EU antidumping regulation. Such conditions can be summarised in the following questions: Does the government influence the operative decisions of firms or are they made in response to market signals? Does the legacy of the command economy, in terms of public ownership, barter trade and so on, affect firms' operations? Do firms have effective accounting standards? Do firms operate under an effective framework of bankruptcy regulation and property-rights protection? Do firms convert currency at standard market rates? Does China as a whole meet these criteria? This is an open question. Both the US Department of Commerce and the EU Commission have found, during the course of investigations into companies in antidumping investigations that firms in China do not comply with international accounting standards, and in anti-subsidy investigations, that many market sectors operate within the framework of the five-year plans which encourage some sectors and discourage others. For example, companies in the encouraged sectors receive funding from state-owned banks without any regard to the risks which such funding might incur. In addition, many countries have questioned whether China allows its currency to float. Brazil has raised this issue in the WTO referring to the concept of monetary dumping. On the basis of analysis carried out in the US and in the EU it is unlikely that China would be considered a market economy according to the normal standards applicable in EU law. And Article 15 of the China WTO accession protocol requires that the evaluation be carried out on the basis of the law of the importing WTO member. Read Market-economy status for China is not automatic here .

  • Money Illusion and Consumers in China

    At Vox , Philip Hans Franses --professor of applied econometrics at the Erasmus School of Economics --and Heleen Mees --researcher at Erasmus School of Economics--take a look at money illusion in China. And they find that Chinese consumers are signficantly less prone to money illusion--making decisions based on the nominal value of a good as opposed to the real value--than American consumers. Our results show that considerations of happiness, morale, and job satisfaction are intimately related with each other, in contrast to economic considerations. The default decision-making framework for respondents in China appears to be dominated by economic considerations, while the default decision-making framework for respondents in the US appears to be dominated by considerations of happiness, morale and/or job satisfaction. This may well reflect the difference in affluence between respondents in the US and China, with the former having already conquered the top layers of Maslow's pyramid of needs while (many of) the latter find themselves still scrambling at the bottom (Maslow 1943). It also suggests that affluent societies are more prone to money illusion and, hence, more susceptible to irrational exuberance (Akerlof and Shiller 2009). It is important to note that there are two distinct reasons why respondents in China are less prone to money illusion than respondents in the US. First, when asked specifically to judge a transaction on economic terms, respondents in China are more likely to correctly choose the transaction with the highest real monetary value. Second, if no guidance is given on whether to judge a transaction on economic terms or terms of wellbeing, respondents in China are more likely to adopt a decision-making framework that is dominated by economic considerations. In other words, Chinese people are more likely to correctly choose the transaction with the highest real monetary value instead of the transaction with the highest nominal monetary value. Read Are Chinese individuals prone to money illusion? here .

  • Growth of Working Age Population May Present India with an Opportunity to Close the Gap with China

    If you are looking for economies of significant growth in the global economy over the last ten years, you can't do better than looking east to India and China. While both economies have had strong runs since introducing economic reform (China first, then India about a decade later), China separated itself from the pack, and from India, with export growth. Ganeshan Wignaraja , Principal Economist at the Asian Development Bank’s Office of Regional Economic Integration, illustrates the export growth for India and China in a recent post at Vox : Wignaraja expects India to begin closing the gap--though he is not willing to argue that India is in position to catch up with China: While India’s working age population is expected to grow by an astonishing 136 million over the next 10 years, China will add a relatively modest 23 million new workers. India’s huge increase in the working-age population is perhaps a mixed blessing. India’s literacy rate of 63%, compared with a rate of 93% in China, suggests that the country may face an imbalance of low-skilled and high-skilled workers just as the knowledge sector of its economy is poised for continued rapid expansion. As Table 2 shows, China allocates significantly more resources than India to infrastructure and R&D, both key determinants of future trade and growth. Estimates by McKinsey, a consulting firm, suggest that just to keep pace with its rapidly growing urban population India will need to spend $1.2 trillion on urban infrastructure over the next 20 years, or eight times its current rate of spending. Both Asian giants have a solid foundation for continued rapid economic growth. Growth in both countries will be driven by exports comprising increasing amounts of medium- and high-tech manufactures, as well as services. India has made great strides in reforms in recent years. Yet China’s economic policies, investment climate, and supply-side conditions remain more favourable than India’s. Accordingly, China’s trade will likely continue growing more rapidly than India’s in the decade ahead. India has scope for closing the gap in trade performance with China by enhancing supply-side measures, such as investing in infrastructure, boosting literacy and skill creation, and fostering industrial R&D. Continuing with economic reforms and regionalism in both giants can also help sustain trade performance. Read Will India overtake China in the next decade? here .

  • A Dropoff in US IPOs Relative to Global IPO Activity

    Dunkin Donuts caught a lot of attention last week with the company's initial public offering, and MarketWatch reports that we are in the midst of the busiest round of IPOs in the US since the start of the recession . The long term trend, however, shows that IPO activity among US businesses has been in decline relative to other markets. Take a look at this chart: That is from a paper by Craig Doidge, G Andrew Karolyi, and René M Stulz . In a recent post at VOX , Doidge, Karolyi, and Stulz summarize their work analyzing IPOs from around the world since 1990. They argue that as financial markets became more globalised in the 2000s, IPO activity shifted, and the US dominance waned: Our analysis shows that countries with better institutions have more domestic IPO activity, measured as either the annual number of domestic IPOs scaled by the lagged number of domestic listed firms or as the annual proceeds raised in domestic IPOs scaled by lagged GDP. The results are both statistically and economically significant, even after controlling for local growth opportunities, worldwide domestic IPO activity, and financial and economic development. We expect the effect of globalisation to be more powerful in the second half of our sample period. When we compare the impact of institutions on IPO activity in the 1990s and the 2000s, we find that the institutions of the country in which a firm is located are much less important for explaining domestic IPO activity in the 2000s compared to the 1990s. Much of the growth in IPO activity around the world is through global IPOs. With globalisation, firms can use global markets to go public to avoid being constrained by their home country. We use a measure of global IPO activity that evaluates how intensively the firms in a country pursue global opportunities. We find that firms from countries with weaker institutions have more global IPO activity, after controlling for the overall level of domestic IPO activity, local and global growth opportunities, worldwide domestic and global IPO activity, and financial and economic development. We also find some evidence that the negative relationship between global IPO activity and countries’ institutions is stronger in the 1990s compared to the 2000s. Read The US left behind: The rise of IPO activity around the world here .

  • Foreclosures and the Great Recession

    At Vox , economists Atif Mian , Amir Sufi , and Francesco Trebbi make the case that foreclosures "had a significant negative effect on house prices, residential investment, durable consumption – and consequently the real economy." It is not a new argument, but in going through state data, the authors present a clearer road map for the impact of foreclosures on housing prices, durable consumption, and the economy at large. In recent research (Mian et al. 2011), we examine this idea in the context of the recent rise in foreclosures in the US. We ask to what extent this has been responsible for the recent collapse in house prices and the fall in durable consumption and residential investment – important factors in determining major macroeconomic fluctuations (Leamer 2007). The stylised facts suggest a correlation at the very least. The top left panel of Figure 1 shows that aggregate foreclosure filings in the US increased from 750,000 in 2006 to almost 2.5 million in 2009. While we do not have data on foreclosures before 2006, the mortgage default rate increased above 10% in 2009, which is more than twice as high as any year since 1991. By any standard, the recent US mortgage default and foreclosure crisis is of unprecedented historical magnitude. This sharp rise in foreclosures has been accompanied by large drops in house prices, residential investment, and durable consumption. As the top right panel of Figure 1 shows, nominal house prices fell 35% from 2005 to 2009. The drop in residential investment from 2005 to 2009 shown in the bottom left was larger than any drop experienced in the post World War II era. The drop in durable consumption is also large, but more comparable to recent recessions. The authors go on to use what they describe as an instrumental variable approach to draw the connection between foreclosures and housing prices. Read Foreclosures, house prices, and the real economy here .

  • Evaluating the Benefits of Short-time Work

    In a post at Vox , Ecole Polytechnique Professor of Economics Pierre Cahuc , and Stéphane Carcillo , Associate Professor of Economics University of Paris, argue that short-time work can be effective in "combating unemployment" during global financial crisis, but that it is not without some problems. They say 25 of 33 OECD countries have used the practice of short-term work schemes: Cahuc and Carcillo write: European countries with widespread and generous short-time compensation experienced a smaller rise in unemployment in the recent recession than those without. The leading example is Germany that makes a particularly intensive use of a short-time work programme (the Kurzarbeit). This success has renewed interest in short-time work. But the idea itself is nothing new. The suggestion that it could be more efficient and more equitable to share jobs with short-time compensation rather than destroying jobs during has been repeatedly put forward by advocates of work-sharing. For instance, Abraham and Houseman (1994) argued that short-time work arrangements can be more equitable since they spread the costs of adjustment more evenly across members of the work force instead of concentrating it on a small number of laid-off workers. But short-time compensation programmes are no panacea. They can induce inefficient reductions in working hours. Moreover, workers in permanent jobs have incentives to support such schemes in recessions in order to protect their jobs. Employers also have incentives to support short-time compensation programmes in countries where stringent job protection induces high firing costs. Therefore, there is a risk attached with using these programmes too intensively. The benefits of insiders can be at the expense of the outsiders whose entry into employment is made even more difficult. Read Is short-time work a good method to keep unemployment down? here .

  • Barro and Lee: The Value of Extra Schooling

    With graduation season upon us, it is time for the annual conversations about the value of schooling. Robert Barro --professor of Economics at Harvard--and Jong-Wha Lee --Head of the Asian Development Bank’s Office of Regional Economic Integration (OREI) and Acting Chief Economist--have been studying the economic impact of "educational attainment" for several years. In a recent column for Vox , they introduce some of their most recent findings. The average years of schooling has gone up steadily--from 3.2 years, globally, in 1950, to 5.3 years in 1980, to 7.8 years in 2010, the authors point out. So what about the rate of return for extra years of schooling? It appears that geography matters. Here's a graph from Barro and Lee that shows the "rates of return to an additional year of schooling, by region": Barro and Lee: Our estimates of rates of return for an additional year of schooling range from 5% to 12%. These estimates control for the simultaneous determination of human capital and output by using the 10-year lag of parents‘ education as an instrumental variable for the current level of schooling. These estimates are close to typical Mincerian return estimates found in the labour literature. Estimates of rates of return to education vary across regions (Figure 2). The estimates for the group of advanced countries, East Asia and the Pacific, and South Asia are the highest at 13.3%. In contrast, the estimated rates of return are only 6.6% in Sub-Saharan Africa and 6.5% in Latin America. Read Educational attainment in the world, 1950–2010 here .

  • Misreading Home Values

    We humans seem to have a problem understanding value. Last week, Mark Thoma alerted us to a fascinating Scientific American article on how we may want to blame our ventromedial prefrontal cortex (VMPFC) for our inability to battle the "money illusion" that makes us think something is worth more than it really is. And today, economists Hugo Benítez-Silva , Selcuk Eren , Frank Heiland , and Sergi Jiménez-Martín write at Vox that we consistently overestimate the value of our houses by 5 to 10%. And, they write, "Overly optimistic expectations about the evolution of house prices may have planted the seed of the current mortgage crisis in the US." Homeowners, it seems, routinely overestimate the capital gains they expect from sale of their homes, so they report a skewed estimated value. But, the authors found, the problem is much greater if the homeowners purchased their homes during strong economic periods. There appears to be a strong inverse relationship between interest rates and the value estimation: Given the characteristics of our data on house purchases and house sales, we observe properties purchased as early as 1955 until 2000. This information enables us to explore whether the timing of the purchase and the market conditions at that time could have lasting effects on the accuracy of the individual in reporting the value of their homes. We document a strong correlation between the evolution of our accuracy estimates over time and the business cycle. In periods of high interest rates and declining incomes, the buyers are likely to have lower appreciation expectations due to the declining housing prices (see Figures 1 and 2 below), and end up assessing, on average, more accurately the value of their homes, and even in some cases underestimating it. Figure 1 . Interest rates and home sales in the US, 1960-2007 Figure 2 . Home sales and home prices in the US, 1968-2007 Read How well do individuals predict the selling price of their homes? here .

  • This Week's Positive Signs--Falling TED Spread and Less Uncertainty

    This week there have been some signs that the credit crunch might be easing. One indicator of credit risk, the TED Spread, is below 1% for the first time since August. The TED Spread is the difference between the rates on inter-bank loans, or LIBOR--London Interbank Offer Rate--and the rate on Treasury Bills. NPR's David Kestenbaum has a report on the falling TED Spread , and why a lower TED Spread usually means more borrowing, which could mean good things for businesses and workers. And you can track the TED Spread on this great interactive chart from Bloomberg . The Stanford economists over at Vox found positive signs for the economy in looking at measures of uncertainty. Nicholas Bloom and Max Floetotto say uncertainty is falling, and that while three months ago they expected a dire recession, they now believe we may have dodged the bullet. One measure of uncertainty is the so-called financial "Fear Factor," or the volatility of the S&P 100. Their analysis shows Fear Factor has dropped precipitously over the last three weeks. This is a sign of positive potential, not that all is well. Bloom and Floetotto argue that this is in large part due to policies that did not overstep their bounds, but they also say that it is important to take further action now: Many economists make the case for a stronger policy response. That might be right, but policy makers need to act fast. Any additional economic stimulus – be it a spending package, quantitative easing or a couple of rounds of liquidity injections – has to be enacted quickly. Dithering over different courses of policy will actually make things worse by adding uncertainty (see Caballero 2008 ). This is exactly what happened after 9/11 when the Federal Reserve Board criticized Congress for creating unnecessary uncertainty with its lengthy debates on investment tax credits. Delaying the stimulus package until the summer may mean that it is too late. The economic medicine will be administered just as the patient is trying to leave the hospital! You can read their full analysis here .