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April 14, 2011

Pareto

Making a case for Asian leadership in Global Economic Affairs
TAN SRI ANDREW SHENG, a leading policymaker from Hong Kong gave a speech titled: “Carnivorous lions and herbivorous Asians: How the recession has made a case for leadership in Asia.”

Tan blames the US financial industry for the crisis, and questions the other view that Asia’s surplus savings that fuelled the global imbalances were responsible for the crisis. He says that Asia contributed to global savings, but didn’t contribute to rise in global credit which was created by the unregulated shadow banks. He adds that the advanced country regulators were complacent because the system had withstood few previous crashes from 1987 onwards.

Tan says Asia needs to solve these problems as well; it needs to get out of the mindset that “we are poor” and the West would sort out global issues. So far, Asia has always been a price-taker; not a price-maker; Asia has always been a rule-taker, not a rule-maker. The Government continues to own bulk of the financial institutions hindering in innovation and risk taking. How can Asian “herbivorous” central banks take charge against “carnivorous” lions on Wall Street?

For this to happen, Asia’s mindsets, institutions, knowledge base and modus operandi will have change. It needs to have think-tanks and the expertise to be able to debate this as equals. There is a need for research institutes in Asia which put Asian interests at centre of the debate.

How public perceives corruption? Case of Sweden
Sweden is seen as a clean country topping the most governance and corruption rankings. However, JONAS LINDE & GISSUR Ó ERLINGSSON disagree with this hypothesis in a paper (The Effect of Public Perceptions of Corruption on System Support: The Case of Sweden).

They conducted a survey of Swedes along with key Nordic economies famous for low corruption. Interestingly, Swedes believe that their country/public officials are more corrupt as compared to citizens in other economies. There have been some recent cases of corruption in Sweden. This has led the people to believe that Sweden is corrupt, and that public officials work for their own gains. Denmark ranks as a clean country and its citizens also believe the same. Finland and Norway are between the two extremes.

They also find that this perceived corruption is correlated with people supporting the political system. People who say corruption is rising are also the ones are not satisfied with democracy. The authors say this is eroding the values of general system support in Sweden.

Such studies should also be done for India and other economies ranked high in corruption. It will be interesting to see whether public perceptions differ with international rankings.

The first footnote in the paper points the exposure of a huge corruption scandal where several top officials are alleged to have tight connections with a construction company. So, whether one looks at Ireland, India or Sweden, the role of real estate/construction in corruption comes to limelight.

The Arab Democracy Paradox
MWANGI KIMENYI of Brookings in an article (The Arab Democracy Paradox) points out that the uprising in Middle East (ME) was not because of development failure—in many ways, they are actually development successes. In last year’s Human Development Report, five ME countries are in the top 10 in terms of overall improvements – Tunisia, Algeria etc. The advances are mainly in significant improvements in health and education.

American sociologist Seymour Martin Lipset said more than 50 years ago that the demand for democracy is a result of broader processes of modernisation and development. In the long run, it is very difficult for societies that have attained high living standards to tolerate living under autocratic regimes. However, in the ME case, it was not economic growth per se but improvement in social development that led to this movement.

The author says that the healthier and more educated youth were unwilling to be ruled by predatory elites. Hence, the protests were also mostly led by university-educated youth. Though these countries might take time to emerge as proper democracies, there is little chance that these countries will veer back toward authoritarian rule.

This is just the opposite of what others have been saying. For instance, Arvind Subramanian says that as these economies rely on natural resources and rents, that return to democracy will not really happen. It will be interesting to see how Arab World moves from here.

Did financial sector reforms in India lead to expansion of credit?
IMF economists POONAM GUPTA, KALPANA KOCHHAR & SANJAYA PANTH look at the impact of financial liberalization in India on banks’ portfolios (Bank Ownership and the Effects of Financial Liberalization: Evidence from India).

The paper has some amazing findings:

• Despite many years of reform, credit constraint remains a problem in India.
• The banking system is dominated by public sector banks (PSB). Despite lower Statutory Liquidity Ratios (SLR), PSBs allot larger investments in government bonds (G-secs).
• Moreover, the investment in G-sec rises with rise in fiscal deficit, implying that PSBs kind of take it upon themselves to fund the fiscal deficit.
• PSBs do not hold higher G-secs for risk management. The reasons are incentive system in PSBs where a high risk loan turning into default could lead to government enquiry. Also perhaps there is moral suasion coaxing PSB officials to hold higher bonds to finance fiscal deficits.
• Earlier research showed how large fiscal deficit could lead to private sector crowding out as government absorb majority of the domestic savings. This research shows how PSB could deploy domestic savings to park most monies in G-sec indirectly leading to additional crowding out of private sector.

The paper shows another fallout of high fiscal deficits, and links it interestingly to PSBs. Authors conclude that government ownership of banks combined with high fiscal deficits may limit the gains from financial liberalisation for developing economies.


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