May 16, 2012


Using accounting devices to hide fiscal deficits – a framework

Timothy Irwin of IMF has an excellent paper on how government can use various accounting tricks to hide fiscal deficits. In the process they create a fiscal illusion.

He mentions fours such devices which either increase revenue now or lower expenditure

  • hidden borrowing: Leads to more revenue now but more spending later
  • disinvestment: Leads to more revenue now but less revenue later
  • deferred spending: leads to less spending now but more spending later
  • foregone investment: Leads to less spending now but less revenue later

There are excellent examples on how different countries have used these devices to hide their deficits. Using these devices cannot be eliminated, but several things can be done to reduce their use or at least bring them quickly to light. Governments can be encouraged to prepare audited financial statements according to the international accounting standards. Apart from this, a variety of alternative fiscal indicators can be monitored since a problem suppressed in one fiscal indicator is likely to show up in another.

One could apply the above to India’s fiscal issues as well. For instance, disinvestment by the Indian government is rarely to get out of business. It is mostly to show better fiscal numbers. This has been criticized for many years but has fallen in deaf ears. So, analysts calculate fiscal deficits net of disinvestments to show a truer picture. Likewise there have been oil bonds and latest on radar is effective revenue deficits which shows revenues deficits lower.

Photo: OLX

Importance of culture for development

Nathan Nunn of Harvard explores the role of culture in economic development. He says cultural beliefs help develop institutions which in turn lay the foundations for growth and development. So it goes one step backwards

The paper points to some interesting case studies to show the role of culture. An example would be of institutions formed in different US regions, which can be traced back to the culture of the diverse migrants that settled in the different regions of the US. The first migrants were the Puritans (1629-1641) who settled in Massachusetts and set up institutions. They were obsessed with maintaining proper order and they established laws requiring universal education, high tax rates, sizable government interventions, and a swift and brutal justice system clearly reflected this. In contrast to the Puritans, the Virginia Cavaliers that settled in the Chesapeake Bay believed that inequality was natural. For them the ideal society was less more about maintaining order and the existing hierarchy. These values resulted in limited education, lower taxes, less government spending, and an informal system of justice based on hierarchical violence.

Another research shows why today in the US South (but not the US North) there is a ‘‘culture of honour,’’ where importance is placed in defending one’s reputation and honour, even if it requires aggression and violence. Nunn adds that the famous colonial hypothesis suggested by Acemoglu et al reflects the role of culture.

Thinking about Hooligans as rational economic agents…

Peter Leeson et al model hooligans as rational agents who derive utility from picking fights. The English football crowd is divided as three types: Peaceful, Hooligans – brawlers, Hooligans – sadists. The interest is mainly to think for second type Hooligans – brawlers. He does not want either the peaceful or sadist as opponent. He wants to fight with his type only. They say such hooligans form fight clubs and form rules that serve as an institutional response from within the fight club for regulating conflict. There is a certain code of honour among the firms, one which draws specific boundaries marking what is and is not acceptable behavior.

What are the rules which keep sadists out? The rules vary from dressing differently, sitting in select locations in the stadiums and having a code for how much violence will be allowed (like arms not allowed).

The the paper helps understand cooperation in conflicts. The study of order among hooligans serves as a microcosmic example of the order amidst disorder that often emerges in larger contexts. Though this does not mean hooliganism should be tolerated, it is just that they have different ways to derive utility.

A conversation between Physicist and Economist on sustainable growth

There have been many criticisms on how economists try and make Economics look and sound like Physics. Some like Andy Lo of MIT say that to improve Economics, we need to avoid envying Physics. We have heard enough from Economists on the issue. But how do Physicists think about Economics? If at all, is there a way we can understand the differences in the way the two think?

In this vein, TOM MURPHY a Physics Professor at UCSD throws some light. He replays the conversation he had with an esteemed Economist (name not disclosed) over a dinner table.

What follows is an amazing reading which centres mainly around growth. The physicist disagrees and believes energy prices and its finiteness will pose problems. For the Economist, energy matters but some innovation will happen and things will be fine.  It is amazing to read how Physicist makes Economist think about his assumptions on indefinite growth and innovation. He summarises the discussion as “I got the sense that this Economist’s view on growth met some serious challenges during the course of the meal…There is too little acknowledgement of physical limits, and even the non-compliant nature of humans, who may make choices we might think to be irrational—just to remain independent and unencumbered.

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