Friday, April 6, 2012
Do we need inflation for economic growth? Yes
Paul Krugman writes in the New York Times:
Fundamentally, the right wants the Fed to obsess over inflation, when the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing.This past December, I wrote an article in Republica about the International Monetary Fund arguing that their rigid stance on controlling inflation is not a productive stance. I wrote:
[...] no matter what the cause of any macroeconomic problem in a country in any corner of the world, the IMF’s most common solution is to ask countries to reduce inflation. The Fund has to realize that all diseases do not have the same cure. Macroeconomic conditions and problems in different countries are diverse and varied. For an organization that boasts of many eminent scholars, researchers and bureaucrats, the IMF’s repeated inflationary stance makes it look like a one-trick pony.Krugman goes on to write in his column:
Reducing inflation does not solve all systemic macroeconomic problems. You need inflation to achieve economic growth. If inflation really hampered macroeconomic stability and economic growth to the extent that the IMF policymakers think, why are high inflation countries like India, China, and Bangladesh achieving almost double digit economic growth while low inflation countries in Europe along with Japan and the United States growing below 3 percent?
Now, the Fed has, by law, a dual mandate: It’s supposed to be concerned with full employment as well as price stability. And while we more or less have price stability by the Fed’s definition, we’re nowhere near full employment. So this says that the Fed is doing too little, not too much. Indeed, some Fed officials — notably Charles Evans, the president of the Chicago Fed — have tried to make exactly that case.
To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.Krugman feels that the rise in inflation is not always bad thing, and that a "good" increase in inflation today would actually be beneficial to the American economy because:
[...] large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years [...] modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.
Labels: IMF, inflation, krugman, paul
Tuesday, January 3, 2012
On Nepal and its need of IMF/World Bank
On December 20, I published an opinion piece titled "Unfair Play" in the Republica daily discussing the role of IMF, and arguing why I prefer Nepal not deal with the IMF. I wrote that:
...IMF acts and imposes these programs like a schoolyard bully. Time and again it has been heavy-handed in dealing with poor countries that have little say in the international arena. Yet, at the same time, it cannot speak a word against the heavy donors that “fund” the Fund.
...The IMF has, time and again, been unable to rein its richer ponies.
...no matter what the cause of macroeconomic problem (in any country in any corner of the world), the IMF’s most common solution is to ask countries to reduce inflation...For an organization that boasts of many eminent scholars, researchers and bureaucrats, the IMF’s dogged inflationary stance makes it look like a one-trick pony.
...The IMF says that restructuring is a pre-condition to its assistance. Why are such pre-conditions not applied when the richer countries borrow from IMF?
...for an organization that touts itself as a watchdog, and one that seeks openness from its clients, the IMF is very secretive. Independent observers say a serious appraisal of IMF programs and policies is nigh on impossible.
...When the global financial crisis started to bite in late 2008, the IMF was very flexible to the European countries that asked for emergency loans to survive the crisis. Yet, it spared no mercy for Pakistan, Bangladesh and the African countries....IMF has a double-standard when it comes to applying its pre-conditions. That’s unfair.I concluded by saying that:
If the rules do not apply equally to all players of the game, I don’t want my country playing that game at all.Then, a few days later, Republica published an interview with Laurence Brahm, lawyer, political-economist and author of dozens of books, founded the Himalayan Consensus and African Consensus movements. The following is what Brahm has to say about international organizations like the IMF and World Bank:
Nepal does not need World Bank or IMF money. Open up certain sectors to foreign investment and control the sectors you are not ready to open yet. Bring in capital from neighboring countries who will invest. Evolve your core infrastructure, roads and power. Telecommunications as well—you have bright people and a tech industry could be in the making. Protect your natural resources and land because tourism is the best export. Ecology and heritage tourism can be sustainable as well as protect culture and diversity of your environment. Do not lose these things in the name of progress. Once lost, they cannot be brought back.
Labels: IMF, laurence brahm, world bank
Tuesday, December 20, 2011
Unfair Play
The following article was published in today's Republica. Direct link is here. I had published this as a blog post a few days ago here.
The International Financial Institutions Advisory Commission’s 2003 report suggested that the International Monetary Fund’s system of short-term crisis management was “too costly… responses too slow… advice often incorrect… and efforts to influence policy and practice too intrusive”. That was one of the first reports to come out about international aid organizations like the IMF and the World Bank’s effectiveness, or lack thereof, in helping poor nations. That and several other reports in the past few years have asked some pertinent questions: Is the IMF doing any good? Is it being faithful to its core customers or to its core donors? Is it perpetuating the Western dominance in the Eastern and African countries?
For those who are unaware, the IMF is like a bank that gives money to countries that need them. Like normal people, countries also go into debt that they, sometimes, cannot pay. During such times, like normal people, the countries are not able to get credit from lenders due to their previous default. During those times, the IMF acts as a lender of last resort, albeit with some conditions. The applied condition, about 99 percent of the time, is an immediate restructuring of the borrower country’s economy through IMF’s macroeconomic stabilization policies.
The IMF carries out its macroeconomic stabilization policies in four basic steps. First, the borrowing country must abolish or liberalize the foreign exchange and import controls. Second, the official exchange rate of the borrower is devalued. Third, the borrower must open up its economy and accept FDI inflows. And, fourth, the borrower must accept IMF’s strong anti-inflation program.
These steps look innocuous. So, why do countries, more often than not, oppose IMF’s policies and programs? Well, the main reason is because IMF acts and imposes these programs like a schoolyard bully. Time and again it has been heavy-handed in dealing with poor countries that have little say in the international arena. Yet, at the same time, it cannot speak a word against the heavy donors that “fund” the Fund.
For instance, when the global financial crisis began in 2008, the G20 summit in London in the first week of April 2009 came up with a plan to give US $750 billion to the IMF in order to rescue the countries hit the hardest by the crisis. However, by the end of April, only Japan had given its share of $100 billion to the IMF. The promises made by other rich countries turned out to be hollow. This is but only one example. The IMF has, time and again, been unable to rein its richer ponies.
Also, no matter what the cause of macroeconomic problem (in any country in any corner of the world), the IMF’s most common solution is to ask countries to reduce inflation. The Fund has to realize that all diseases do not have the same cure. Macroeconomic conditions and problems in different countries are diverse and varied. For an organization that boasts of many eminent scholars, researchers and bureaucrats, the IMF’s dogged inflationary stance makes it look like a one-trick pony.
Reducing inflation does not solve all systemic macroeconomic problems. You need inflation to achieve economic growth. If inflation really hampered macroeconomic stability and economic growth to the extent that the IMF policymakers think, why are high inflation countries like India, China, and Bangladesh achieving almost double-digit economic growth while low inflation countries in Europe along with Japan and the United States are growing below three percent?
And, why is it that it is always the poorer countries that are asked to restructure their economy? The IMF says that restructuring is a pre-condition to its assistance. Why are such pre-conditions not applied when the richer countries borrow from IMF? If restructuring is a pre-condition to the assistance, why is the United States, the world’s largest debtor, never asked to restructure its economy? Why is Italy or France not asked to restructure its economy when it borrows?
Then, there’s the issue of transparency. It has not gone unnoticed to scholars like Jeffrey Sachs that for an organization that touts itself as a watchdog, and one that seeks openness from its clients, the IMF is very secretive. Independent observers say a serious appraisal of IMF programs and policies is nigh on impossible. This is unlike the World Bank, which produces diligent and honest assessment of its programs and policies. The World Bank’s own assessment of its African performance suggested a 73 percent failure rate. When was the last time anything like that was heard from the IMF camp? Indeed, who watches the watchdog?
When the global financial crisis started to bite in late 2008, the IMF was very flexible to the European countries that asked for emergency loans to survive the crisis. Yet, it spared no mercy for Pakistan, Bangladesh and the African countries. They were still asked to cut their spending even though they were going through the same crisis as their European counterparts. Therefore, the IMF has a double-standard when it comes to applying its pre-conditions. That’s unfair. If the rules do not apply equally to all players of the game, I don’t want my country playing that game at all.
The International Financial Institutions Advisory Commission’s 2003 report suggested that the International Monetary Fund’s system of short-term crisis management was “too costly… responses too slow… advice often incorrect… and efforts to influence policy and practice too intrusive”. That was one of the first reports to come out about international aid organizations like the IMF and the World Bank’s effectiveness, or lack thereof, in helping poor nations. That and several other reports in the past few years have asked some pertinent questions: Is the IMF doing any good? Is it being faithful to its core customers or to its core donors? Is it perpetuating the Western dominance in the Eastern and African countries?
For those who are unaware, the IMF is like a bank that gives money to countries that need them. Like normal people, countries also go into debt that they, sometimes, cannot pay. During such times, like normal people, the countries are not able to get credit from lenders due to their previous default. During those times, the IMF acts as a lender of last resort, albeit with some conditions. The applied condition, about 99 percent of the time, is an immediate restructuring of the borrower country’s economy through IMF’s macroeconomic stabilization policies.
The IMF carries out its macroeconomic stabilization policies in four basic steps. First, the borrowing country must abolish or liberalize the foreign exchange and import controls. Second, the official exchange rate of the borrower is devalued. Third, the borrower must open up its economy and accept FDI inflows. And, fourth, the borrower must accept IMF’s strong anti-inflation program.
These steps look innocuous. So, why do countries, more often than not, oppose IMF’s policies and programs? Well, the main reason is because IMF acts and imposes these programs like a schoolyard bully. Time and again it has been heavy-handed in dealing with poor countries that have little say in the international arena. Yet, at the same time, it cannot speak a word against the heavy donors that “fund” the Fund.
For instance, when the global financial crisis began in 2008, the G20 summit in London in the first week of April 2009 came up with a plan to give US $750 billion to the IMF in order to rescue the countries hit the hardest by the crisis. However, by the end of April, only Japan had given its share of $100 billion to the IMF. The promises made by other rich countries turned out to be hollow. This is but only one example. The IMF has, time and again, been unable to rein its richer ponies.
Also, no matter what the cause of macroeconomic problem (in any country in any corner of the world), the IMF’s most common solution is to ask countries to reduce inflation. The Fund has to realize that all diseases do not have the same cure. Macroeconomic conditions and problems in different countries are diverse and varied. For an organization that boasts of many eminent scholars, researchers and bureaucrats, the IMF’s dogged inflationary stance makes it look like a one-trick pony.
Reducing inflation does not solve all systemic macroeconomic problems. You need inflation to achieve economic growth. If inflation really hampered macroeconomic stability and economic growth to the extent that the IMF policymakers think, why are high inflation countries like India, China, and Bangladesh achieving almost double-digit economic growth while low inflation countries in Europe along with Japan and the United States are growing below three percent?
And, why is it that it is always the poorer countries that are asked to restructure their economy? The IMF says that restructuring is a pre-condition to its assistance. Why are such pre-conditions not applied when the richer countries borrow from IMF? If restructuring is a pre-condition to the assistance, why is the United States, the world’s largest debtor, never asked to restructure its economy? Why is Italy or France not asked to restructure its economy when it borrows?
Then, there’s the issue of transparency. It has not gone unnoticed to scholars like Jeffrey Sachs that for an organization that touts itself as a watchdog, and one that seeks openness from its clients, the IMF is very secretive. Independent observers say a serious appraisal of IMF programs and policies is nigh on impossible. This is unlike the World Bank, which produces diligent and honest assessment of its programs and policies. The World Bank’s own assessment of its African performance suggested a 73 percent failure rate. When was the last time anything like that was heard from the IMF camp? Indeed, who watches the watchdog?
When the global financial crisis started to bite in late 2008, the IMF was very flexible to the European countries that asked for emergency loans to survive the crisis. Yet, it spared no mercy for Pakistan, Bangladesh and the African countries. They were still asked to cut their spending even though they were going through the same crisis as their European counterparts. Therefore, the IMF has a double-standard when it comes to applying its pre-conditions. That’s unfair. If the rules do not apply equally to all players of the game, I don’t want my country playing that game at all.
Labels: IMF, jeffrey sachs, world bank
Thursday, November 10, 2011
Links for November 10, 2011
.
Banks slash short-term lending rates
Banks slash short-term lending rates
Commercial banks have announced a cut in short-term lending rates by half to 2 percentage points in a bid to stimulate borrowing, which has slumped over the last three months due to slowdown seen in manufacturing and real estate sectors. Overall, interest rates on short-term loans - which include demand loans, overdrafts and export bills, among others - have now come down to an average of 12 percent from around 14 percent earlier.Price of vegetables continue to rise
Price of seasonal vegetables has increased by Rs 2 to Rs 15 per kg due to lower supply from neighboring districts.Korean firm seeks go-ahead for 2nd international airport
Landmark Worldwide (LMW), a South Korean company that carried out detailed feasibility study (DFS) for the second international airport in Nepal at Nijgadh in Bara district, has filed an application with the government to allow it to construct the much-talked airport.Guidelines for Farmer Card ready for Cabinet to endorse
The Ministry of Agriculture and Cooperatives (MoAC) has prepared a set of guidelines for the proposed Farmer Concession Card to provide agriculture inputs at subsidized prices to poor farmers having less than four hectares in Tarai and thirty ropanies in Himalayan and Hilly districts. The guidelines envisage providing subsidy to the farmers on fertilizer, seeds and other agriculture inputs.SC issues interim order to ban sale of tobacco products without cancer warning signs
The Supreme Court on Wednesday issued an interim order to ban the production, import and sale of tobacco products that do not bear signs warning the harms of tobacco consumption. As per the law, the signs must come with message written in Nepali and the provision will be applicable also for imported tobacco products like cigarette and chewing tobacco. This particular provision is expected to discourage the import of foreign brands.Duty exemption limit raised to Rs 1,000
The government has raised the customs duty exemption for goods imported from bordering markets for household purposes to Rs 1,000 from Rs 100. A cabinet meeting on Monday took the decision to this effect. This means that those who buy goods worth up to Rs 1,000 by crossing the border will not be required to pay import duty. Although the Finance Ministry had proposed increasing the limit to Rs 500, the ceiling was increased further after immense pressure from Madhesi parties.Nepal’s trading partners changing, says WTO report
Nepal is witnessing a “gradual diversification” when it comes to its trading partners as well as products in the last few years, according to the World Trade Organisation’s (WTO) International Trade Statistics-2011. The European Union (EU) is now the country’s second largest export destination with a share of 11.1 percent of the total exports. However, the US that was the second largest destination in 2008 has slipped to the third position. Likewise, Bhutan has entered the list of Nepal’s top five export destinations. Not only in exports, there have been changes in the country’s import destination list also. India and China are still top two import destinations for Nepal, but the United Arab Emirates (UAE) has entered the top-five list in 2010 as the third largest destination. The UAE accounted for 8.9 percent of the total imports in 2010, mainly due to the huge import of gold. Nepal’s bullion traders that used to import gold from Australia, are now importing gold from the UAE.Why Monsanto?
Two years after the introduction of Monsanto seeds in Canada and the United States, for example, yields started to go down between 10-15 per cent. There has been a substantial increase in the use of chemicals resulting in the creation of "super weeds" requiring more highly toxic "super" chemicals, some containing agent orange. USAID and Monsanto are not implementing this program for the 'development' of Nepal and the betterment of the people. It will profit both, and cement the relationship between the US government and Monsanto already revealed in Wikileaks. A small number of thulo manchhe haru in the Nepal government will profit, but Nepali farmers will get poorer, Nepali soil will be damaged. The export potential will very likely be damaged with many countries refusing to import food products from Monsanto's hybrid and GMO seeds. If the pilot program goes ahead, the United States will leave a legacy of environmental degradation, human health issues, social disintegration and hardship. The USAID-Monsanto partnership is blatant exploitation of a corrupt and unstable government in Nepal. There is no 'point of no return' when it comes to this issue. Monsanto's presence in Nepal will be irreversible and will result in the introduction of genetically-modified crops, further alienating farmers from their land and food production, with disastrous consequences.Exporters fail to verify value addition
Exporter’s failure to verify exact value addition to Department of Industry has kept them away from the cash incentive facility. According to the exporters, the Cash Incentive Policy should be hassle free. According to the government criteria for cash incentive, if a product has a value addition of 30 per cent to 50 per cent, the exporter will get cash incentive of two per cent, whereas if the value addition is 50 per cent to 80 per cent, the exporter will get three per cent cash incentive, and value addition of more than 80 per cent will get a total cash incentive of four per cent. But, cash incentive will only be granted to exports made in convertible currency and the exporters will get cash incentive from the same bank with which they are doing the transaction.Private banks increase asset size
From the assets size, the banks can be divided into four groups; largest (with above Rs 60 billion worth assets), large (Rs 40 billion-Rs 60 billion), middle (Rs 20 billion-Rs 40 billion), and small (with below Rs 20 billion worth assets). Only one commercial bank features in the largest bank category, whereas eight banks feature in the large banks category. The middle banks category has seven banks and the small banks category has 15 banks among the 31 commercial banks. The huge gap in the size of the banks calls for the necessity of merger immediately. The size of the banks can give some indications on which banks should be merged and how can a strong bank be formed.Only 17 per cent projects meet government target: NPC
At the 24th meeting of National Development Problem Solution Committee, vice chairman of the NPC Deependra Bahadur Kshetri said that only 38 projects met the target out of the total 224 projects. “The data shows that the project completion trend is also not satisfactory,” he said, adding that some 18 per cent development projects have completed 50 to 80 per cent of its works. Due to delay in their execution they have been hit by the time overrun cost. “The expenses of some of the big projects have increased in unpredictable manner because of delay in their execution,” he added.IMF projects 3.25 per cent growth for Nepal
IMF forecast for the current fiscal year is below the national growth projection of 5 per cent. Last fiscal year, IMF had projected GDP growth 3.5 per cent which was close to 3.7 per cent actual rate of growth achieved by Nepal. “Real GDP growth is expected at 3.25 per cent in 2011-12, with good agriculture output compensating for subdued non-agriculture activity,” according to IMF’s report on Nepal. The report also cautions that the forecast is subject to high degree of uncertainty, with risks on the downside chiefly owing to banking sector fragility. Inflation projection by IMF is at eight per cent while the financial authority had estimated inflation to moderate at seven per cent in the current fiscal year. An expected moderation in India’s inflation and a stabilisation of commodity prices is anticipated to ease the domestic prices of Nepal, according to the report.
Labels: asset size, excise, farmer card, IMF, korea, Monsanto, NPC, rates, tobacco, VAT, vegetables, WTO
Tuesday, August 16, 2011
Links for August 16, 2011
.
1. Is Capitalism Dead?
2. Nepal Telecom plans to improve the service quality. Finally!
3. Government to provide jobs to unemployed Nepalese youths.
*All 14 zones will eventually have Employment Information Centers
*Currently, youths who have registered in Model EICs in Kathmandu and Biratnagar will be given jobs
*2332 youths from Kathmandu and 2000 from Biratnagar have applied for the scheme
*35,000 youths have registered for the program for 2011/12
*Rs 1 million has been allocated for current program
4. IMF urges Nepalese government to give more power to the Nepal Rastra Bank, the central bank, to handle sick banks
5. Relationship between Nepalese and Indian inflation
It is pretty clear that most of the time, Nepalese inflation always is a few points higher than Indian inflation. The primary reason for this is due to the fact that price of commodities--food or otherwise--consumed in Nepal come from or through India. Therefore, the Nepalese price for the same commodity is a few rupees higher than in India due to factors like transportation costs and retailers' profits. The other reason is also the pegging between NRs and IRs. Any rise in inflation in India has to be accompanied by a few percentage higher rise in inflation in Nepal to avoid any NRs flowing from Nepal into India. The reason why NRs flows to India in such cases is because higher inflation in India means higher interest rates in India to combat inflation. In such instances, if Nepalese interest rates remain low, people will take their money to India to take advantage of higher interest rates in India.
6. Sectoral Contribution to GDP
Like any developing nation, Nepalese agricultural contribution to GDP is declining while services is increasing. The recent surveys from 2010 and 2011 will probably show that agriculture is now only around 30 percent of GDP.
1. Is Capitalism Dead?
2. Nepal Telecom plans to improve the service quality. Finally!
3. Government to provide jobs to unemployed Nepalese youths.
*All 14 zones will eventually have Employment Information Centers
*Currently, youths who have registered in Model EICs in Kathmandu and Biratnagar will be given jobs
*2332 youths from Kathmandu and 2000 from Biratnagar have applied for the scheme
*35,000 youths have registered for the program for 2011/12
*Rs 1 million has been allocated for current program
4. IMF urges Nepalese government to give more power to the Nepal Rastra Bank, the central bank, to handle sick banks
5. Relationship between Nepalese and Indian inflation
It is pretty clear that most of the time, Nepalese inflation always is a few points higher than Indian inflation. The primary reason for this is due to the fact that price of commodities--food or otherwise--consumed in Nepal come from or through India. Therefore, the Nepalese price for the same commodity is a few rupees higher than in India due to factors like transportation costs and retailers' profits. The other reason is also the pegging between NRs and IRs. Any rise in inflation in India has to be accompanied by a few percentage higher rise in inflation in Nepal to avoid any NRs flowing from Nepal into India. The reason why NRs flows to India in such cases is because higher inflation in India means higher interest rates in India to combat inflation. In such instances, if Nepalese interest rates remain low, people will take their money to India to take advantage of higher interest rates in India.
6. Sectoral Contribution to GDP
Like any developing nation, Nepalese agricultural contribution to GDP is declining while services is increasing. The recent surveys from 2010 and 2011 will probably show that agriculture is now only around 30 percent of GDP.
Labels: capitalism, central bank of nepal, GDP, IMF, inflation, nepal rastra bank, nepal telecom
Subscribe to Posts [Atom]
