Inequality, thus far, has been discussed in extremely limited terms, Macarena has learned.
Namely, she thought it was all about think-tank types insisting that inequality hurts growth whilst promoting the redistributive flavor of the day.
And about economists, such as Becker and Murphy, reminding people that the real question is why, if inequality stems from the returns to education, don’t more people seize that opportunity?.
How wrong she was:
An interdisciplinary team of McGill researchers has uncovered a connection between growing economic inequality and an increase in the number of plant and animal species that are threatened with extinction.
"Our study suggests that if we can learn to share economic resources more fairly with fellow members of our own species, it may help us to share ecological resources more fairly with other species," said Dr. Greg Mikkelson, assistant professor in the McGill School of Environment and Department of Philosophy.
16.5.07
Thoughts on Brazil & the 120-Club
The very prestigious 120-Plus-Reserves-Club has a new member: Brazil. The first Latin Nation to be admitted will now cavort with Asian icons --China, Japan, Korea, Hong Kong, Taiwan India and Singapore--- and with emerging Europe’s Russia. These very few countries now hold over US$4 trillion in the form of official reserves.
Not only are reserves high, but the pace of accumulation has accelerated in the past (very) few years.
This means two things at the same time.
First, it means many countries are revealing their monetary policy preferences quite clearly: floating is simply not the monetary regime a large number of countries feel happy with. Rather, revealed preferences show that many countries abhor appreciation and are willing to put up a good fight.
Second, it is also a constraint posed on all other policy variables, and it gets increasingly stronger as a constraint as the size of accumulation rises. Failure to sterilize massive FX interventions, for instance, tends to heat things up and in some countries (China) the added heat can be too much. But, alas, sterilization sometimes reminds Macarena of a dog biting its tail. Foreign investors want domestic money in order to buy all kinds of domestic assets, not just Government debt. So if you want them to hold only debt, you have to pay a price, i.e higher interest rates. So all asset classes become more attractive, so more foreigners want them, and the cycle begins anew…
Some people think that by using capital controls authorities can decouple exchange rates from interest rates, i.e decouple themselves from the world and from all its impolite and improper preferences. The evidence is not there to support this idea at the macroeconomic level, quite the contrary. Regarding the microeconomic effects of capital controls, its effects on firms,… let´s put it in the words of Kristin Forbes:
“First, capital controls tend to reduce the supply of capital, raise the cost of financing, and increase financial constraints (…). Second, capital controls can reduce market discipline (…) leading to a more inefficient allocation of capital and resources. Third, capital controls significantly distort decision-making by firms and individuals, as they attempt to minimize the costs of the controls or even evade them outright. Fourth, the effects of capital controls can vary across different types of firms and countries, reflecting different pre-existing economic distortions. Finally, capital controls can be difficult and costly to enforce, even in countries with sound institutions and low levels of corruption”
So let us sum it up: the most important emerging market economies do not take freely floating exchange rates to heart and prefer to fight appreciation by seriously constraining all other policy instruments, i.e surrendering a large chunk of their hallowed monetary independence.
Rather than embarking themselves on the perilous trail of capital controls, countries have two more intelligent options.
Number one: give up on intervention and allow the currency to float. Who knows, in these post modern times? They may even receive a pleasant surprise, finding out that their currency is already at or below (pdf) equilibrium!!.
Number two: go ahead and establish very hard pegs, surrendering what little is left of monetary independence anyway and assuring stable interest rates and breathing space for the private sector.
Not only are reserves high, but the pace of accumulation has accelerated in the past (very) few years.
This means two things at the same time.
First, it means many countries are revealing their monetary policy preferences quite clearly: floating is simply not the monetary regime a large number of countries feel happy with. Rather, revealed preferences show that many countries abhor appreciation and are willing to put up a good fight.
Second, it is also a constraint posed on all other policy variables, and it gets increasingly stronger as a constraint as the size of accumulation rises. Failure to sterilize massive FX interventions, for instance, tends to heat things up and in some countries (China) the added heat can be too much. But, alas, sterilization sometimes reminds Macarena of a dog biting its tail. Foreign investors want domestic money in order to buy all kinds of domestic assets, not just Government debt. So if you want them to hold only debt, you have to pay a price, i.e higher interest rates. So all asset classes become more attractive, so more foreigners want them, and the cycle begins anew…
Some people think that by using capital controls authorities can decouple exchange rates from interest rates, i.e decouple themselves from the world and from all its impolite and improper preferences. The evidence is not there to support this idea at the macroeconomic level, quite the contrary. Regarding the microeconomic effects of capital controls, its effects on firms,… let´s put it in the words of Kristin Forbes:
“First, capital controls tend to reduce the supply of capital, raise the cost of financing, and increase financial constraints (…). Second, capital controls can reduce market discipline (…) leading to a more inefficient allocation of capital and resources. Third, capital controls significantly distort decision-making by firms and individuals, as they attempt to minimize the costs of the controls or even evade them outright. Fourth, the effects of capital controls can vary across different types of firms and countries, reflecting different pre-existing economic distortions. Finally, capital controls can be difficult and costly to enforce, even in countries with sound institutions and low levels of corruption”
So let us sum it up: the most important emerging market economies do not take freely floating exchange rates to heart and prefer to fight appreciation by seriously constraining all other policy instruments, i.e surrendering a large chunk of their hallowed monetary independence.
Rather than embarking themselves on the perilous trail of capital controls, countries have two more intelligent options.
Number one: give up on intervention and allow the currency to float. Who knows, in these post modern times? They may even receive a pleasant surprise, finding out that their currency is already at or below (pdf) equilibrium!!.
Number two: go ahead and establish very hard pegs, surrendering what little is left of monetary independence anyway and assuring stable interest rates and breathing space for the private sector.
11.5.07
Nuisance Monies
On the issue of monetary policy, Macarena –loathing the verb to lose-- has always been a sucker for the winners. In Spain, some years back, she was scolded for a girlish delight at the prospect of finally burying the Peseta and leaving monetary policy where it should be: Frankfurt-types with no sense of humor. They had a 60-odd year winning streak, period.
Partly because of the 1992-93 mayhem all over Europe, partly because of the sequence of “financial crises” in the emerging markets the rest of the decade, and partly because of some good looking jerk working at Banco de España´s research service, she thinks the euro is the best thing that has happened to Spain in decades.
Simply put, there are just too many (180 or so) useless little nuisance-monies roaming around, annoying as those dreadful little toy dogs rich ladies carry around. Except that nuisance-currencies´ bark sometimes wreak havoc.
National money is supposed to be "good for the country". As we are reminded in a delightful recent article, in Latin America, to take one example, the presumed benefit stemming from ANY of the many national moneys moving around, does not even come close to making up for the cost of enduring, year in and year out, interest rates that typically exceed by 500 basis points or more what they would be under full dollarization.
Partly because of the 1992-93 mayhem all over Europe, partly because of the sequence of “financial crises” in the emerging markets the rest of the decade, and partly because of some good looking jerk working at Banco de España´s research service, she thinks the euro is the best thing that has happened to Spain in decades.
Simply put, there are just too many (180 or so) useless little nuisance-monies roaming around, annoying as those dreadful little toy dogs rich ladies carry around. Except that nuisance-currencies´ bark sometimes wreak havoc.
National money is supposed to be "good for the country". As we are reminded in a delightful recent article, in Latin America, to take one example, the presumed benefit stemming from ANY of the many national moneys moving around, does not even come close to making up for the cost of enduring, year in and year out, interest rates that typically exceed by 500 basis points or more what they would be under full dollarization.
10.5.07
The Wolfowitz Thing
Macarena´s take: some guy is offered the top position in a large institution with 10,000 employees or so and it just happens to be that his girlfriend is one of them.
Many people will say that he should not have accepted, many others will say that she should have resigned, period. Macarena can just see the delightful I-am-so-certain look on their faces.
Think about it. Both solutions lack economic sense, unless you can show that two individuals who, on any given basis, have been judged as adequate for the institution, will be detrimental to it if working together. A love-related externality of sorts. This is ludicrous.
Now, if what you have is not a financial but rather an “ethical” issue with having them work together, then get rid of her. Your “ethical” problem can obviously be solved for a certain price, the reasonable thing to do is to figure out what that price is. Likewise, pay him not to accept.
The wage hike that has outraged so many good folks the world over reflects, Macarena thinks, roughly the following estimate: she will be receiving a stipend exactly equal to her former wage, plus the wage equivalent to non-wage benefits (such as those derived from a very generous pension scheme).
Who wins and who loses financially?. She is exactly where she was before (compensation-wise), the institution pays exactly the same for her services, but does not appropriate them, they have been outsourced, so to speak. The loser is the World Bank, provided she was a good employee.
Was Wolfowitz appointed in a transparent way? Are his politics correct? Is his managerial style hurting the institution? Very important topics indeed. But, alas, not the issue.
90% of World Bank Staffers want Wolfowitz to go, and will probably have their way. Hmmmmmmm.
Having known her share of them, Macarena would be very concerned if current staffers, under current governance, loved the guy presiding their comfortable cocoon.
Many people will say that he should not have accepted, many others will say that she should have resigned, period. Macarena can just see the delightful I-am-so-certain look on their faces.
Think about it. Both solutions lack economic sense, unless you can show that two individuals who, on any given basis, have been judged as adequate for the institution, will be detrimental to it if working together. A love-related externality of sorts. This is ludicrous.
Now, if what you have is not a financial but rather an “ethical” issue with having them work together, then get rid of her. Your “ethical” problem can obviously be solved for a certain price, the reasonable thing to do is to figure out what that price is. Likewise, pay him not to accept.
The wage hike that has outraged so many good folks the world over reflects, Macarena thinks, roughly the following estimate: she will be receiving a stipend exactly equal to her former wage, plus the wage equivalent to non-wage benefits (such as those derived from a very generous pension scheme).
Who wins and who loses financially?. She is exactly where she was before (compensation-wise), the institution pays exactly the same for her services, but does not appropriate them, they have been outsourced, so to speak. The loser is the World Bank, provided she was a good employee.
Was Wolfowitz appointed in a transparent way? Are his politics correct? Is his managerial style hurting the institution? Very important topics indeed. But, alas, not the issue.
90% of World Bank Staffers want Wolfowitz to go, and will probably have their way. Hmmmmmmm.
Having known her share of them, Macarena would be very concerned if current staffers, under current governance, loved the guy presiding their comfortable cocoon.
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