Monday, 31 March 2008

And the prize for online information goes to...

And the prize for the best online information system (category: supranational body; subcategory: open access) goes to...
The UN Food and Agricultural Organization World Agricultural Information Centre.

WAICENT has tonnes of information and data across countries and time, it is easy to find, and simple to use from what I can see. WAICENT is available at

The UN and its affiliates are good for providing information. The core statistics department at is helpful for broad information on most macroeconomic-type things. The UN International Labor Organization is a source of information unlikely to be consolidated elsewhere but which is needed surprisingly often, like unemployment rates in developing countries.

The US Government websites used to be a good source of information for things like energy statistics, but I don't use them much nowadays. Students use the CIA World Factbook occasionally in their essays, so I hope that the authors don't distort the presentation and choice of data for propaganda reasons (more than is inevitable). It is a global public service, so thanks and please keep it that way, or outsource the writing to a less politically pressurised body. Like they are going to listen to this European!

The EU website and Eurostat are great for European information, but when I last looked didn't have a comparable global range.

Friday, 28 March 2008

Dull macroeconomics

The neo-classical synthesis of Keynesian and classical economics sounds jazzy. Then you look at the main arguments in it, and find that the really important ones are about how long shop owners take to adjust their prices and whether people guess correctly how quickly prices will increase next year. Really, sticky prices and rational expectations underpin modern macrotheory.

To check whether these are true, you can look at macroeconomic models consisting of several equations and then watch as these equations are substituted into each other, then simplified, then substituted and simplified again. A graph might be drawn with a couple of lines and a point indicating an intersection. The empirical testing will use linear algebra, which is like primary school adding up except in matrix notation which can make things just opaque enough to lead to constant head slapping about how an elementary mistake has been made which a seven year old could understand.

Black hole theory it isn't, and no-one would mistake it for genetic engineering. In much of mathematical science there is constant aesthetic excitement which dulls the sense of hard work or frustration, but economics feels like work much of the time, although the flip side is that the analysis is generally more direct.

Having said that, there are occasional papers which catch the eye, and writers who can be interesting whatever the topic. One of the first papers I read on my specialism growth theory (as a Masters' student) was entitled "Fable for growthmen", from a celebrated author whose presentation was entertaining, topic important, and apparently contained an important original result (though I don't recall noting it at the time, to be honest). Colourful presentations may not be suitable generally for journals - professional academics are anaesthetised to the topic and can fly through results so that the colour might be a distraction - but in some textbooks they can be worthwhile, and occasionally in journals can ease the entry for bored Masters' and PhD students.

Disproportionately useful theories #5: central bank independence

In a competition for the theory with the most impact on economics and public awareness of economics over the last twenty years, the theory of central bank independence would be a strong contender. The idea is that governments should not set interest rates on a day-to-day basis, but rather tell someone else what inflation rate they want and then let that someone else set interest rates to obtain an inflation rate close to the target. Inflation can be controlled by interest rates (since with high interest rates, economic activity slows down because borrowing is expensive, and so does inflation), and the central bank (the government's bank) is the organisation to control inflation because they have access to such large amounts of money that they can influence interest rates unlike anyone else.

There are many design considerations for the central bank. How often should it report back to the government? What role should the government have? Is the arrangement democratic? Should the central bank only think about inflation or worry about the effect of its actions on output too? What sort of person should be head of a central bank?

The theory's importance was boosted by a number of factors - it followed a period of very high global inflation and a subsequent slump, it coincided and anticipated increasing concern with institutional arrangements in economic affairs, it is comparatively easy for policymakers to understand and implement the recommendations, and its subject is considered important in neo-liberal economics' worldview.

The modern theory received its present impetus in a paper from 1985 entitled "The optimal degree of commitment to an intermediate monetary target", which by virtue of its topic is arguably the theoretical paper with the most impact since its publication. It produces theoretical results in most of the major pure economic aspects of optimal design, it uses mathematical models without the reader feeling that the theory would collapse entirely if the assumptions are varied, and it has a high ratio of clearly derived results to discussion. If the paper's extreme influence was inflated by circumstance, it took full advantage of the opportunity.

Wednesday, 26 March 2008

DR Congo's mining renegotiation

Reportedly (, Democratic Republic of the Congo is cancelling or renegotiating many of its mining contracts, because "none of the contracts met international standards".

It could be a smart move. African mining deals can give foreign companies returns on their investment which are laughably high. The company only has to operate for a month and it has recovered in profits all of its original investment. OK, Africa's sometimes risky, but not that risky.

It could be a smart move... if the renegotiated deals are transparent. Otherwise, the new terms could be similar to the old ones, but with a different minister or civil servant pocketing a bribe, and investors thinking that the government is volatile and corrupt. The current Congolese administration has overseen a good macroeconomic performance given the extraordinarily difficult circumstances, and hopefully it will continue to improve the economy.

There's a test-your-vocabulary game at which is free to play and if you get correct answers then the sponsors give 20 grains of rice to the world's poor. It has the World Food Programme's approval. You are graded and can move up to level 55 which is, like, language black belt. It claims people rarely get beyond level 48, but I bet some hermit has attained level 55 perfection despite only eating figs.

And in the next decade...

As I mentioned in my post last Friday, Botswana, Burundi, and Gambia seem to have outperformed relative to the predictions of classical growth theory, which estimates growth rates purely on the basis of investment, education, population growth, and starting income. Their growth must have been due to other factors - they seem to have had the economic "X factor".

On the other hand, they may have been, if not exactly lucky, then beneficiaries of circumstances or factors of a transitive nature. So I looked at the growth rates for all African countries over the period from 1991-2006 using IMF data. If Botswana, Burundi, and Gambia have some special features, then one would expect continued outperformance, making allowance for extreme events during the period.

In terms of absolute growth rates, Botswana was near the top of the performers in Africa, beaten only by two oil producers, two market economies, and a tiny island state. However, its growth rates were half what they were in the 1980s, so it probably was performing in line with its classical predictions. I've made the assumption that savings and education did not plummet between the two periods, but not checked, being busy and lazy and that.

Gambia was in the top 25 percent of performers in absolute terms in 1991-2006, and its growth rate picked up by one percent from the previous decade. Again assuming no huge changes (increases, this time) in savings and education, Gambia seems to have retained its growth outperformance.

Burundi was the third worst African performer in 1991-2006. But it was in conflict since 1993, so it is difficult to take lessons from its performance.

In summary: one piece of evidence saying continued outperformance; one piece saying a reduction to expectations; one piece which can't be used. I wouldn't like to build a theory on this evidence.

Friday, 21 March 2008

Residual analysis

Residual analysis is the examination of the gaps between predicted and actual data after fitting a model. Suppose we said that inflation would be equal to the economic growth rate, and one year inflation is 5% and growth is 2%. Our inflation prediction was 2%, so we have a residual of 5%-2%=3%. The residual analysis is saying that the residual is large and the model is dire.

Classical testing of models examines the sum of the residuals (actually the sum of their squares, so they don't cancel each other out when added). The approach is a bit different in modern tests of more complicated fitting issues than just gaps between actual and predicted data. For example, successive residuals might all be positive or negative, which would mean that the model underestimates for many consecutive data points - such as when the data is large - and overestimates for another set of linked data points - such as when the data is small.

Many of the famous modern tests rely on feeding the residuals back into another model, and seeing whether that model is a good fit. If it is, then the original model has something suspicious about it. For example, with the positive-when-the-data-is-large residuals, then we would expect a model such as residual = data - 10 to be a good fit, since large data (above 10, say) would have a positive residual, and small data would have a negative residual.

Africa's overachievers

It's common knowledge that many high growth countries are in East Asia. So there's no surprise in the table by two academics (Barreto and Hughes, in a 2004 paper "Under Performers and Over Achievers", in The Economic Record) that four of the top ten outperformers in the world from 1960-90 according to a rough classification were in the region. By outperformer, I mean that their growth was higher than predicted by a simple model derived from all the world's data. Some countries will be underachievers, some overachievers, but an "average" country will fit the model perfectly. The classification is rough because the model is not very sophisticated (OLS, if you are interested in regression analysis).

More surprising is the presence of three African countries in the top ten. Botswana heads the list, Burundi is fifth, and Gambia is seventh. Botswana's growth may be explained by diamond sales (although many other resource-rich countries have had dire performances), but neither Burundi nor Gambia can explain the performance by resource sales. They would have been even higher if Saudi Arabia (growth fuelled by oil sales) was excluded from its fourth position, as is normal for oil producers in growth regressions. Burundi's performance is all the more remarkable given the hundreds of thousands of people who died in conflicts during the period.

The model predicts performance based on starting income, investment, population growth, and education. A country's under or overperformance is due to other factors, which lie outside classical economic analysis, and are sought constantly by analysts looking for ways to boost growth. The top four countries (Saudi Arabia excepted) are Botswana, Hong Kong, Korea, and Burundi. The countries share a reputation for valuing education (over-and-above actually receiving education) and ordered societies (Burundian political violence notwithstanding), so it is possible that these features had an influence on growth performance. They are difficult to measure in growth regressions, though.

The data suggests that if Burundi and Gambia had had high savings and education rates, and controlled population growth, then they would have been overperformers on the scale of the South East Asian tigers, and as rich as them.

Wednesday, 19 March 2008

Savings mobilisation in developing countries

My last post described how one researcher thinks that China's high investment rate is due primarily to companies retaining profits. Coupled with other observations, it suggests some interesting hypotheses and provides evidence against others.

Here's a compressed statement of several hypotheses. Since the general Chinese population is not saving, but dissaving, the high investment rate has more to do with the character of capitalism and capitalists in Chinese conditions than just Chinese culture in its entirety. If other countries had Chinese economic conditions then they would have similar savings rates.

Leading academics have argued both for and against cultural factors as leading determinants of economic growth. I incline to think that capitalism and its growth are fairly mechanical relative to current macroeconomic conditions, so that cultural factors, rather than institutional and economic arrangements for example, are of secondary importance once capitalism gains impetus in a society.

Monday, 17 March 2008

China's saving mobilisation

Having criticised the World Bank's website in my last post, it is an almost unparalleled source of free information and analysis on the world economy, albeit one seen from the WB's offices. I found the paper entitled "Large domestic non intermediated investments and government liabilities", which answers a question posed in an earlier post: how are China's colossal savings mobilised for their rapid economic growth?

The paper gives an explanation which surprised me. Most of the savings for fixed asset investment are in fact retained profits by companies. The high savings rate is not a story of Chinese society as a whole - households are actually reducing their investments - but a story of China's business owners. The banking sector is not efficient and has bad debts, government doesn't invest much any longer, foreign investment is relatively small, and microfinance and microsaving is not part of the big picture at all.

Because it is companies who are driving the investment, presumably because they are motivated by the expectations of future profits from Chinese growth, which has been a rational position. But the hyper-capitalism this implies in China would seem to be vulnerable to the crashes which capitalism brings, particularly in the absence of Keynesian stabilisers.

World Bank website

The World Bank has put a new Google search facility on its website. It is a welcome addition. The basic search facility doesn't work well. For example, if you search for "china savings mobilization" today, the first three items returned are on housing finance in Africa, the consultative group to assist the poor, and development outreach. For the new search facility, the first three results are on savings mobilisation, urban savings mobilisation, and challenges facing China.

The World Bank is taking random online surveys of visitors asking them for their opinions of the website. Hopefully, the website will more appealing, or to use a catchphrase, more market focussed. If one looks at the websites of major companies such as or multinational organisations such as the EU at, they are better to look at, more informative, and easier to use.

Friday, 14 March 2008

African business journalism

In 2004, I wrote a free weekly newsletter on investment and business in developing countries called AfricaAsia Enterprise. It was reasonably well received. I thought that there was a gap for an affordable newsletter presenting concise reporting on business, economics, and markets, notably in Africa.

If I were to set up the project today, the comment section would be larger, and the whole thing would be more analytical than the mainly straight reportage it was back then. The excellent free on-line resource provides more comprehensive reporting of business issues than a single, UK-based journalist could ever hope to reach, indeed more than the leading Western national broadcasters. But there is still room for a newsletter presenting smart editorial selection of topics, and value-added analysis of the issues involved.

Wednesday, 12 March 2008

Disproportionately useful theories #4: war-growth analysis

Economics is important in everyday life, but is it the most important determinant of major societal events?

In the case of civil war, some answers have recently appeared. There has been a burst of academic work examining whether economic growth and civil war are related. Maybe low economic growth causes civil war - people can't find jobs and take up guns to feed themselves, for example - or maybe civil war causes low economic growth, for obvious reasons. The links are fairly clear, but the precise measurement is important.

The measurement techniques are quite innovative, and owe their design partially to the impetus provided by the MRW growth model (one of the earlier disproportionately useful theories). We might see that a country has a collapsing economy and civil war in a year, but there has to be some way of determining how much they caused each other. War-growth analysis helps to provide it.

The approach is new - some date the recent developments to a 1998 paper - so it is too much to ask for it to be already heralding a new era of harmony and other niceness. Its uses are prospective, such as identifying which countries are most at risk of conflict and acting to prevent it. Even if prevention is too grand a goal, just knowledge of precise risks will help countries who are at risk of conflict and usually poor. Investors to conflict-prone countries who do not know exact risks can demand enormous returns on their money, because they demand compensation for high risk, which is assumed, plus compensation for the extra uncertainty that the lack of knowledge brings. War-growth analysis could remove the latter premium, and save countries money.

And the answer to the question on the importance of economic growth in causing war? Leading estimates say that it is very important. Comparison with other factors is difficult from many published papers because it is not standard to list the importance of country specific factors, unfortunately, but those factors would have to have a very large impact to trump economic growth's impact.

Sunday, 9 March 2008

Chinese-US imbalances and real crises

My last post argued briefly that the financial defaults in the US were unlikely to precipitate a global economic recession. I think that a more substantial threat, perhaps the most severe threat today for the world economy, lies in the occurrence of trade and financial imbalances between the Chinese and US economies. China sells more goods to the US than it buys (it is said to have a current account surplus with the US) and also receives large amounts of investment. So China receives many more US dollars than it spends, and keeps them for future reasons. Some recent year's figures are at

The Chinese currency the Yuan Renminbi changes very little in value against the US dollar because of the Chinese government's decision to keep the currency fixed against the dollar, by buying and selling their dollars and yuans. If the Chinese government decides to sell off its US dollars quickly at some point in the future, then the US dollar's value will have to adjust as quickly, both against the Yuan, but also against other currencies because there will be so many extra dollars available in the world that its value will go down everywhere. The US and other governments could take action to offset the fall, but it would probably be difficult to do so immediately. There would be an immediate shift in terms of trade (the relative cheapness of goods) in favour of the US, but it would take longer for the effect to be felt.

The Chinese have stored up very large reserves of dollars and they continue to accumulate, so the US currency decline could be very sharp. It would be difficult for everyone to adjust to the sudden effects on trade and currencies, and in the time until adjustment worldwide output could decline. Avoiding the possible decline relies on the Chinese government neither requiring nor wanting to sell their reserves rapidly, and the situation seems precarious to me.

Friday, 7 March 2008

Africa as the barometer of crises

Many Western banks have had large losses on their loan portfolios in recent months, following defaults by lenders on high-risk debt in the United States. There was conjecture that the financial problems would lead to a worldwide recession. A direct route for reaching a recession goes: banks make losses --> they stop lending --> people can't buy goods on credit any longer --> companies don't earn much and go bankrupt --> people lose their jobs --> people spend even less --> the economy spirals downwards.

Well, it could happen, but then it might not. Banks might contract their loans, without the effect on spending being so large that there is a self-sustaining spiralling collapse. At a world level, there is talk of decoupling, whereby countries are becoming increasingly independent of what happens in the United States. Previously, it was said that if the US had a recession, then the rest of the world would follow, again through demand collapse because the United States is such an important consumer of world goods. Today, with the rise of Asia, it may be thought that other regions of the world may replace some of the US demand.

At the time, I thought that a world recession was unlikely because of an analysis of decoupling applied to Africa. The demand for African goods is global, with America, China, and Europe all making claims on the raw minerals in the continent. At the same time, Sub-Saharan Africa's stock markets are comparatively insulated from worldwide financial turmoil because their low trading volumes and small size mean that they are unlikely to be causes of panic for global investors withdrawing their funds to safe havens. South Africa is an exception.

So SSA's stock markets, at times of global financial turmoil, can be better measures of the current and future robustness of the world economy than major Western stock markets. They were much more stable, and were turning out fairly unchanged performances. It seemed unlikely that the world would hit recession at the time because of the Western bank losses, and so it has proved.

Can governments respond to a global crisis?

My last post pointed out that governments are still quite big, despite the dislike and efforts of many of the politicians who ran them in the last 30 years. I am not sure why as countries get richer, governments often get bigger. Certainly, capacity to collect taxes and control the economy grows as countries get richer, so probably one reason is that they are large because they can be large. Another plausible reason is that increasing government intervention in industry and training becomes more useful as economies grow, or maybe governmental intervention is used by rich countries to stabilise economies and poor countries cannot afford to fund it.

So if countries ever get into really severe difficulties with a collapse of internal demand, could governments increase expenditure further in order to support the demand for goods and stimulate the economy again? In other words, could Keynesian policies be acceptable when governments are already large?

In the event of a major global crisis of demand, there are few options. It would be odd to see government size jump up to 60% or more of GDP in the leading capitalist economies, but it may have to do so.

Wednesday, 5 March 2008

The non-march of neo-liberalism

The period of neo-liberalism from the 1980s onwards was marked by a reduction in the size of government and an increase in the role of the private sector in countries around the world. So goes the usual description of economic changes in the last three decades. And the evidence says?

According the widely used data at the Penn World tables (, there was not much of a triumphant march of neo-liberalism over the trembling public sector. Excluding Eastern Europe and the former Soviet Union, 56% of countries had a larger share of GDP consumption by government at the end of the 1980s compared with the start. The US showed almost no change during the Reagan era and Australia's government consumption grew, although the UK government's shrank. Developing countries frequently increased the size of their government expenditure despite structural adjustment, perhaps because of increased interest repayments.

Over the whole period 1980 to 2000, almost half of countries increased their government expenditure, transition countries excluded. With the transition countries included in the 1990s, 38% of countries increased their government consumption expenditure.

I suspect that it is a similar story for all government expenditure, that is, consumption plus investment. It may even be that the Anglo-Saxon economies were less enthusiastic government slicers than the rest of the world. Unfortunately, the information on total government expenditure for the last thirty years does not seem to be readily available on the Internet. All that fuss the main supra-governmental bodies made about government expenditure for decades, and the information is not readily available on their websites. Maybe I overlooked things...

Monday, 3 March 2008

Disproportionately useful theories #3: the Black-Scholes approach

Financial derivatives are contracts whose value depends on the value of other assets. For example, a contract might pay someone ten euros if the value of a share is above fifty dollars.

The market for derivatives became really large in the 1980s, so it was lucky that two economists, Black and Scholes, had worked out in the 1970s how to calculate their price if you know the price of the assets on which they are based. Their method is exact if the stock markets are perfect, that is, if they function without any delays, trading costs, or uncertain knowledge, and there are lots of assets, buyers, and sellers. The exactness of their formula gives the approach an advantage over competing theories.

Their central idea is simple - to build the derivative from the underlying assets and cash, so that you know its price because you know its components' prices. The process is called hedging in the literature, but synthesis, replication, or just copying would be a better description. There is technically competent algebra required as well to get exact formulae, but the idea of hedging, once grasped, is so direct that one feels like screaming with frustration at not inventing the formulae oneself. The world's best economists until 1973 could say the same.