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April 10, 2012

Pareto

Why 2008 crisis is only compared to Great Depression?

BARRY EICHENGREEN looks at the role of history in the recent crisis. The 2007 crisis is always compared to Great Depression. So for any policy action, we quickly goto Great Depression literature and analyse policy decisions.

But why just Great Depression? Why not other crises like the one in 1907 or many others that occurred in 20th century? There have been criticisms that comparison with great depression has led to over-responding in this crisis. The answer is policymakers look for quick analogies in such times. And what better than great depression to provide a quick response to the crisis.

However, analogical reasoning is not always successful. There are examples in foreign policy when references to historical analogy led to some big errors as seen in Vietnam war. Then there are also cases when following multiple historical analogies led to successes like Kennedy’s decision during Cuban missile crisis. But Kennedy was an exception as he was a student of history. Most leaders look for immediate analogies to resolve a crisis which could be wrong or right.

How does one ensure that leaders do not fall into analogy trap? There is a need to keep institutional history in memory. He advocates having offices of history to keep an account of historical analogies and apply them accordingly.

 

Photo: Mark Wainwright

History of Capture and Anti-Capture of US Politics

The flavor of the season is a book by DARON ACEMOGLU and JAMES ROBINSON called Why Nations Fail. The book documents exciting case studies on why certain nations could not develop. They have been sharing their insights on the blog by the book’s name.

They recently wrote a terrific research note on US history and point how the country’s initial structure was moving towards being elitist and oligarchic. It took a long and huge struggle to make the institutions inclusive. These inclusive institutions have in turn shaped the economic structure which has made US a country of endless opportunities. There was continuous battle post US independence between the elitists and general public, north and south regions to tilt the advantages in their favor. But thanks to few visionaries and resilience of institutions, US remained an inclusive society.

Fast forward to current times. The duo points how the inclusive institutions have been weakened and Occupy Wall Street (OWS) is a movement against the same. The policies have led to widening inequality in US which has led to the recent backlash against Wall Street where much of the income gains have been made. They also look at differences and similarities between the early movements and OWS. In order for OWS to be successful it should have a specific agenda to succeed. There is still hope that resilience of US institutions will help ride the tide.

How Indian economy spillovers to South Asia…

DING DING and IYABO MASHA look at how India’s reforms and recent high growth have led to rise in spillover to South Asian economy as well.

They show from 1995 onwards if India grows by 1%, it has a positive spillover effect in the South Asian region (SAR) of 0.37%. This is lower than the spillover seen in other such regions like China to South East Asia and South Africa to Southern African region.

How does Indian economy help SAR?   Unlike some regional powers such as South Africa, India does not operate an economic union with its neighbors. Hence trade flows are limited. The main sources of spillover is Official financial flows from India. More than 70% of Bhutan’s budgetary grants are from the Government of India, and almost all (98 percent) of Bhutan’s external debt is owed to India. In Maldives, loans from India account for about 20 percent of external debt. Likewise Indian has committed large funds to Afghanistan and Bangladesh as well. Remittances is another channel of spillover which has risen lately, Another interesting source of spillover is students from SAR coming to India for education. This is called as human capital spillover.

The authors also discuss key issues which could lead to increase in spillovers effect.

Did inequality cause the crisis?

Rising inequality has emerged as a surprise and highly troubling issue post the recent crisis.  One can resolve financial stress over sometime but addressing inequality takes many years. After Raghuram Rajan’s famous book which argued how because of rising inequalitypoliticians let people eat cheap credit in order to avoid protests. This rising credit sowed the seeds of the current crisis. Since his book, there has been lot of discussion on whether inequality caused the crisis

MICHAEL BORDO and CHRISTOPHER MEISSNER look at historical financial crises and say inequality does not seem to be the reason for any of the crisis. The main factor behind crises is credit booms but inequality does not really lead to credit booms. Low interest rates and growing economy in turn are the two main factors leading to credit booms:

A very timely paper to further stir the debate. Though history is mostly a fine guide there is nothing to suggest that inequality could not be a reason. This crisis could be slightly different from others (the column hates saying this though) and may be inequality was a major reason if not directly then indirectly. There will be many more papers looking at inequality in future.


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