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January 6, 2012

Pareto

IMPACT OF ECONOMICS BLOGS

As this column is written by an avid economics blogger, it is useful to look at research/papers etc looking at the role of blogsin economics as this activity has proliferated greatly with many big names blogging. There wasa recent paper by World Bank economists (The Impact of Economics blogs) which said that blogs help in three ways – linking papers to blog increases downloads, increasing reputation of economists who blog and more importantly giving a wider perspective on several economics topics.

In another article, MARK THOMA (a professor at Oregon University who runs the famous blog Economist’s View) says economists have a long history of public engagement but this mission has been weakened over the years as economists tried to become more scientific preferring to stick in their labs rather than explain things to public. Thus much of the crisis was not understood by both economists and public. He says in this vein, economics blogs are a boon as they help connect the economist with the public. They are again helping bridge the great disconnect. These blogs are helping address several arcane and exotic economic issues in plain english. Apart from public, it has helped bring fresh ideas

to he notice of policymakersand th press. Many journalists begin their day with blogs to catch on the latest developments overnight.

Two thumbs up for economics blogs albeit serious ones.

RE-EXAMINING CAUSES

Joseph Stiglitz brings another perspective to the grand crisis of 1930s (The Book of Jobs). He says the lessons that financial crisis caused great depression and hence we should save banks at whatever cost is wrong.

He says Great Depression was a result of structural changes in US economy which moved from agriculture to manufacturing. In the 1920s, rise in agricultural productivity led to lower food prices and lower incomes in agriculture lead to a slump in the economy. As farmers were unable to pay their loans, it became a banking crisis as well. The linkage was from real to financial and not financial to real as most assume. This led to a vicious cycle where all other asset markets also collapsed. Like others, he points how it was not massive World War-II spending by the government that helped economy get out of the slump. Massive job creation in the urban sector—in manufacturing—succeeded in moving people out of farming.

The same thing should be done now with efforts to move people to services. For services you need a strong education system but America’s education sector has been in the abyss for a while. Fiscal austerity by states is further worsening the situation.

He says there are two lessons to be learnt from this: One, Government expenditure is needed in areas that help US move towards services. Things like education and infra to be priority. Two, financial system should be fixed by not pouring money but stopping banks from speculating and casino activities.

IT’S DIFFERENT?

Subir Gokarn picks up cues from the famous work of Ken Rogoff and Carmen Reinhart – This Time is Different. We have had high food inflation for a long time and it is just that its drivers have changed from cereals and sugar earlier to protein, fruits and vegetables now. There is not much difference though. Food inflation has been a result of sluggish supplies which have not kept pace with rising demand and population.

Other interesting analysis from the speech are:

• There are 13 such episodes when inflation is above 10percent with episodes in 1966-68 and 1972-75 showing 20percent average inflation. Current inflation starts from Nov-08 and averages around 14percent.

• Currently we have had high food inflation from Sep-08 to Oct-11 which is 36 straight months which is the longest period of high inflation

so far. High food inflation episodes of 1960s and 1970s lasted 35 and 32 months respectively.

• Within proteins, it is milk which has been on a run from 2008 onwards and joined by eggs, meat and fish later. Pulses was in the game earlier but has faded now.

• Long period average of rainfall has been declining in each decade. This means regions which get less monsoons are likely to get lesser share going ahead. These regions are Central India which is critical for pulses.

THE RATES OF STATES

Utsav Kumar and Arvind Subramanian write this interesting paper on India’s growth story. They look at states performance in the high growth decade 2000s. There are number of papers which have looked at states (many references are there in the paper) performance but all are before 2000s.

There are four broad findings:

• Growth in the main states, except three, increased in 2001–09 compared to 1993– 2001 (Himachal Pradesh, Rajasthan, and West Bengal)

• Despite the strong performance of the hitherto laggard states, we do not find any convergence across states. On the contrary, we

find that divergence in the growth performance across states continues.

• States with the highest growth in the pre-crisis years, 2001–07, suffered the largest deceleration during the crisis years (2008 and 2009).

• For the period 2001–09 we do not find any positive effect of the so-called demographic dividend, namely that the growth in the share of the working-age group in total population boosts growth of per capita income.

Apart from this there is some myth busting on Kerala. The conventional wisdom is that this state is Scandinavian in its social achievements but sclerotic in

its growth performance because of investment-chilling labor laws and strong trade unions. This is reflected in a labor force that has voted with its feet by emigrating to the Middle East. However, the data suggest that the conventional wisdom and the caricature are dead wrong. Kerala posted among the highest rates of growth in the 1990s (4 percent per capita), continued its stellar performance in the go-go 2000s (7.5 percent), and exhibited great resilience during the crisis, experiencing virtually no decline in growth.


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