Thursday, 25 August 2011

What the world needs now is... more MBAs?

By Noshua Watson

Economist Guy Pfeffermann points out that businesses in developing countries need good managers and aid for management education. In Africa, he says aid donors focus on primary and secondary education rather than tertiary education, local governments are unlikely to request funds for business schools because they are largely private, and business schools typically attract the middle class, rather than the poorest. Foreign donors also contribute to a shortage of management talent, as aid projects attract the best and the brightest away from the local private sector. 

Despite their relatively better-off clientele, African business schools are starved for resources. Rather than dismiss business schools as a target for development, we should think of training effective managers as a way of building capacity across many sectors – health, manufacturing, education, small business and so on.

The inaugural meeting of the Africa Academy of Management (AFAM) was held as part of the Academy of Management (AOM) conference in San Antonio, Texas last week. AOM has nearly 20,000 members, mostly business school professors, from 110 countries. One of AOM’s strategic objectives is to increase the international diversity of management research theory, evidence, collaboration, teaching, practice and career paths. Sessions at last week’s conference included ‘The Landscape of Management Education and State of Scholarship in Africa: Enlightenment for the East and West’, ‘Innovative Approaches to Understanding Management in Africa’, ‘Environmental and Social Issues in Africa’ and ‘Challenges and Opportunities for Academics Working in Emerging Markets’.

Should we really prioritize educating the relatively well-off? Or should we channel some resources into a segment of society that will generate considerable impact in the governance and success of local institutions?

Monday, 22 August 2011

Inequality – a cause of the financial crisis?

By Carlos Fortin

Some weeks ago I sent a message via the Recovery with a Human Face Network in which I mentioned an intriguing thesis put forward by Ranghuram Rajan in his book Fault Lines: How Hidden Fractures Still Threaten the World Economy. 1

Rajan links the 2008-2009 financial crisis to income inequality in the United States via populist political responses.  He argues that rising income inequality led to political pressures for housing credit, and that the response was ‘populist credit expansion, which allowed people the consumption possibilities that their stagnant income otherwise would not support’.  This, in the face of the ‘difficulty, given the increasing polarization of U.S. politics, of enacting direct income redistribution’ (Rajan 2010: 42). The result was the subprime debacle and the subsequent global crisis.

While the main target of Rajan’s critique is government intervention in low-income housing credit, what I found remarkable is that such an establishment figure should essentially be arguing that the crisis was, at least partially, due to the highly unequal character of the US society and economy. In fact, he writes that rising income inequality is the most important endogenous fault line in the U.S. today. Given his impeccable orthodox credentials - he is Professor of Finance at the University of Chicago and a former chief economist at the International Monetary Fund - I thought this refreshing.

But Lance Taylor rightly pointed out in a subsequent message that a similar thesis has been argued from a less conservative viewpoint.  His book, Maynard’s Revenge. The Collapse of Free Market Macroeconomics 2 (2011), contains an illuminating Keynesian analysis of the falling labour share of income in the U.S. in the post-1980 period.  It illustrates how this in turn led to household over borrowing through what was ‘effectively an alliance between mostly non-affluent households, finance, and politicians in power […] in support of more debt’ (Taylor 2011: 346). Similar arguments, also from a progressive perspective, are put forward by Gabriel Palma (Palma 2009) 3 and Guy Standing (Standing 2011) 4.

It would seem therefore that both on the right and on the left inequality is being seen not only as dangerous politics but also as bad economics.

1 Rajan, R. (2010) Fault Lines: How Hidden Fractures Still Threaten the World Economy, Woodstock: Princeton University Press
2 Taylor, L. (2011) Maynard’s Revenge. The Collapse of Free Market Macroeconomics, Cambridge, MA: Harvard University Press
3 Palma, G. (2009) ‘
The Revenge of the Markets on the Rentiers. Why Neo-Liberal Reports of the End of History Turned Out to be Premature’, Cambridge Journal of Economics 33.4: 829-69
4 Standing, G. (2011) The Precariat – The New Dangerous Class, London: Bloomsbury

Thursday, 18 August 2011

Global financial turmoil part II: Five lessons from developing countries

By Stephen Spratt

The media have reported on the extraordinary events in global markets over the last few weeks with escalating excitement. We are, it seems, sailing from one set of uncharted waters to another, with the water getting choppier all the time. But, for many of us who study financial crises in developing countries, much of this seems rather familiar.

Here are five lessons from developing countries that policy-makers might want to consider:

  1. Sometimes markets are right – markets can be irrational, but this does not mean they are always wrong. The market view that many European countries have unsustainable levels of debt is correct, and it is no good pretending otherwise. The desperate desire to avoid private sector losses at all costs has been a prominent feature of developing country crises, which produces one of two results: outright default (as in Argentina), or years of economic hardship as the burden of adjustment is borne entirely by the citizens of the affected countries (as in too many developing countries). Even the IMF now accepts this - a far cry from the Fund’s previous positions on developing country crises. Governments need to accept this basic fact and impose a reduction of debts to sustainable levels - this means the private sector accepting major losses.
  2. And sometimes they are wrong – the decision to ban short-selling triggered the usual complaints about ‘shooting the messenger’. This reflects the false view that markets merely respond to changes in economic fundamentals. The self-fulfilling nature of some crises in developing countries have demonstrated that market ‘sentiment’ can be the most important economic fundamental of all, and that this can become decoupled from economic reality. When Malaysia implemented capital controls in 1998 to prevent speculation against its currency, dire consequences were predicted. When the controls were lifted a year later, more money flowed into Malaysia because it had remained relatively stable. Direct controls on market activity to short-circuit destructive speculation in a crisis can be both necessary and effective.
  3. This time it is NOT different – bubbles are bubbles, but they can always be described as the result of something else. In the five years from 2000, house prices in Ireland increased by 25% a year and a large proportion of bank lending was directed to the property sector, much of it borrowed from overseas. Prior to 1997, huge amounts of capital flowed into Thailand, particularly the Bangkok property markets, causing land prices to double as real-estate boomed. Whether a Celtic or an Asian Tiger, it is not possible for property prices to grow at multiples of the growth rate of the economy. But booms are exciting and no politician likes to turn the music off when a party is getting going. For this reason counter-cyclical mechanisms need to be hard-wired into financial systems to counter the formation of bubbles. And this needs to be done now, not when a new bubble is forming when it will already be too late.
  4. Short-term debt is dangerous – a key lesson of developing country crises is the importance of short-term debt. As the great economist Hyman Minsky pointed out, benign economic conditions will lead to a position of ever-greater financial fragility, as more and more debt becomes short-term. The reason is simple: borrowing short-term is cheaper. As long as you can roll the debt over this is fine, but when creditors start to worry about your ability to repay and turn off the tap, a crisis is the inevitable result. Italy needs to roll over debt equivalent to a quarter of its GDP in the next year and other European countries are in a similar position. Lengthening maturities, and preventing a new wave of short-term borrowing, needs to be a core part of restructuring and reform.
  5. Politics matters – uncertainty and a lack of political unity really spooks markets. For different reasons, both the US and EU seem incapable of taking the necessary economic decisions. In the Eurozone, it appears obvious that only greater fiscal union, where risks are collectively guaranteed through the issuance of Eurobonds, for example, will work. But this is not politically acceptable in some of the stronger economies (particularly Germany) who fear they will have to pick up the tab for their profligate neighbours. There have been numerous attempts in developing countries to protect particular economic and financial arrangements in a crisis. To work, markets need to believe that countries both can and will do what is needed, which explains why in 1997 Hong Kong was able to maintain its exchange rate peg with the dollar when many South East Asian countries could not. Countries need to do what is necessary to make an economic system work, or design a new system that they can make work. Muddling through is not an option.
While there are many similarities between the current turmoil and developing country crises, there are also big differences. In particular, developing countries have often been on the receiving end of forces they could do nothing about. This does not mean that they were always blameless – though often this was the case – but they could do nothing about the instability emanating from major financial centres in the developed world. In Europe and the United States this is not the case. As well as getting their own houses in order politically and economically, they are also in a position to reshape global financial markets and make crises the exception rather than the norm. An example is the recent agreement by France and Germany to push for a financial transaction tax in Europe. The usual howls of protest and predictions of catastrophe will no doubt be heard from vested interests, but such a proposal makes a lot of sense, particularly if implemented in the global financial centres of Europe.

Wednesday, 17 August 2011

Global financial turmoil part I: running out of safe places to invest

By Stephen Spratt

Financial markets are characterised by fear and greed, and fear is in the ascendency. As each unprecedented disaster is followed by a worse one, financial pundits are running short of hyperbole, and investors are running out of safe places to put their money.

When markets are spooked investors pile into gold-plated assets like government bonds, particularly US Treasuries. Despite the fact that earlier this month ratings agency Standard & Poor’s downgraded US debt from the gold-standard Triple-A, money has continued to flow into the US. Far from rising to reflect higher risk, interest rates on US debt have fallen since the downgrade, in stark contrast to the experience of ‘peripheral’ Eurozone countries.

This is all relative of course. No-one really thinks the US is a particularly safe investment any more, they just think it’s less unsafe than the alternatives. But while cracks are starting to appear in the edifice of US financial invulnerability, they are nothing to the chasms that have opened up in the Eurozone. Bond markets have looked at the levels of debt in Greece, Ireland and Portugal and concluded they cannot be repaid. The EU has repeatedly kicked the can down the road, organising one bailout after another, bringing in the International Monetary Fund (IMF) to co-finance and co-enforce spending cuts as the price of support, but not addressing this basic reality. The result: yields on peripheral countries debt increased and the crisis spread to Spain, Italy and, most recently, possibly even France. Nothing emerged from the recent Franco-German summit to suggest a serious change of approach, with the muted market response reflecting very low expectations of action rather than any sense of approval.

Traditional safe-havens currencies such as the Swiss franc and Japanese yen are so high that authorities are intervening to reduce them so as to avoid choking off exports. The oldest safe-haven of them all, gold, is trading at around $1,800 an ounce, more than double what it was a decade ago. There are not enough safe places left, and even the havens that remain are not considered safe enough. As the Financial Times reported on Saturday 13 August, $50 billion was pulled out of equity and bonds funds last week and placed in cash, the ultimate safe asset. This is akin to stuffing money under the mattress, and represents a greater ‘flight to safety’ than that which followed the collapse of Lehman Brothers in 2008. At the end of one of the most volatile weeks in market history, the Financial Times quoted David Shairp of JP Morgan: “The degree of the moves shows the markets are pricing in something really apocalyptic.

For those who have studied financial crises in developing countries, financial panics amid doomsday scenarios seem rather familiar. Tomorrow, I’ll be outlining what lessons we can learn from the experience of developing countries.

Tuesday, 16 August 2011

On globalisation and happiness

By Dirk Willenbockel

The latest issue of Economics Letters contains an article on Globalization’s winners and losers—Evidence from life satisfaction data, 1975–2001, which caught my attention by listing the cryptic proposition

“Trust in the WTO, the World Bank, and the IMF reinforces globalization’s positive effect on well-being”

among its research highlights. Not quite sure what to learn from this statement (other than some “Think positive – Don’t worry, be happy” message of the type to be found in the airport bookshop self-help literature), or which burning research question this finding is meant to address, I had a closer look at the paper. After all, Economics Letters is on the notoriously selective original Diamond list of the top 27 core journals in economics, and I’d like to believe that its editorial board makes infallibly wise decisions.

The study relates Eurobarometer survey data on life satisfaction across the EU-15 countries split into sub-groups by education, age, relative income and political orientation to a composite index of economic, political and social globalisation by country. Its remarkable main finding is that globalization significantly increases life satisfaction across all of these subgroups. More precisely, the analysis suggests that a one-point increase in the globalisation index (scaled from 0 to 100) raises the probability of being “very satisfied” with life by 0.5 to 1.5 percentage points.

In Spring 2001 only, Eurobarometer respondents were also asked “who do you trust the most to get the effects of globalisation under control?’’ with the possibility of picking several institutions including the World Trade Organisation (WTO), the International Monetary Fund (IMF) and the World Bank from a list, and a separate analysis of this single cross-section leads to the result cited above.

The author puts the underlying hypothesis as follows: “(R)elated to the Hudson (2006) finding of a positive effect of institutional trust on happiness, one could argue that individuals who express confidence in the institutions that promote globalization (i.e. the WTO, the World Bank, and the IMF) are more likely to experience an increase in well-being due to globalization”.

A meaningful or interesting hypothesis - or rather questionnaire results in desperate search of a research question?  What about the direction of causation – should it not be exactly the other way round to make sense?  Or am I missing the point?

Anyway, a quick glance at a summary of the raw data reveals what is driving the result. The countries with the highest proportions of respondents very satisfied with their life (Denmark (62%), Netherlands (48%), Sweden (41%)) are also the top scorers in terms of both trust in domestic and the said international institutions. Those with the fewest “very happy” respondents (Portugal (7%), Greece (9%)) also have the lowest institutional trust scores. Denmark and Sweden are the two “most globalised” EU-15 members according to the index used, while Portugal and Greece are among the three least globalised countries in 2000. There you go.

To get out of this without sounding like a Daily Mail hack debunking all happiness research as a waste of money, let me end with a link to exciting IDS work on wellbeing and development.

Thursday, 11 August 2011

Philanthropy offers new opportunities for development

By Noshua Watson

I am extremely excited that I’m working on a new project that we just launched this week: The Bellagio Initiative on the future of philanthropy and development.

The Bellagio Initiative is a series of global consultations that aims to explore trends and opportunities in philanthropy and development. It’s led by IDS, the Resource Alliance and the Rockefeller Foundation – you can find out more on the website.

The Initiative is interdisciplinary from both academic and practitioner perspectives. We are bringing together international development practitioners, opinion leaders, social entrepreneurs, donors and philanthropists to consider climate change, urbanisation, freedom and rights, and other issues that we believe are threats to human wellbeing and also opportunities for philanthropic problem solving. Our intention is to start an inclusive, global process of in-depth understanding, evidence-based learning and strategic giving that will continue after our final Initiative event.

The international development aid landscape, both public and private, is evolving as the global economy changes. The increasing multi-polarity in global governance institutions is reflected in the multiplicity of development players. The BRICS countries have established official aid agencies and large Middle Eastern philanthropic foundations have emerged. Non-governmental organisations (NGOs) from southern countries are establishing international offices and expanding their operations. Yet, official multilateral and bilateral aid agencies and large European and North American NGOs continue to dominate development aid, and the largest US foundations, including Rockefeller, Gates, Hewlett and  Ford, give the lion’s share of grants internationally.

We think that philanthropy offers new opportunities for development, even though official development assistance from the OECD is more than five times greater than private aid (US$120bn versus US$22bn in 2009). Philanthropic organisations can apply new technological and business practices to aid, just as the growth of venture capital, entrepreneurial start-up and social networking companies has led to venture philanthropy, social entrepreneurship and crowd-sourcing models of development action.

Philanthropic foundations are using innovative tools such as social impact bonds, guarantee programmes, and carbon markets (see the Rockefeller Foundation’s own Program Related Investments for examples). Private funding structures help engage the public, encourage systemic change over temporary Band-aids and prioritise sustained financial flows over project funding.  Most importantly, we think that philanthropic organisations can help coordinate aid activities, design new aid mechanisms and create goal alignment and collaboration among other development actors.

If you’d like to find out more, you can sign up for email updates on the Bellagio Initiative website. I hope that you will be able to participate, share your knowledge, give us feedback and find out about new practices.

Monday, 8 August 2011

Some thoughts on the debt crisis…

By Xavier Cirera

The debt crisis is quickly spreading from Greece to Spain and Italy. Neil McCulloch asked in a previous entry what would happen if Greece defaulted and left the Euro. I would like to ask the opposite question what would happen if these countries do not leave the euro. Assuming that the EU is able to agree in a fiscal package to calm financial markets – this is a strong assumption given the very low political willingness for fiscal federalism in Europe, how are these countries going to get back to growth?

If the European Central Bank (ECB) intervenes to take on the Spanish and Italian debt, it will do so on exchange of a very large fiscal adjustment. The experience of developing countries tells us that adjustment programmes are associated with large recessions that depend on the fall on the exchange rate and how this stimulates exports to support growth. The difference in this case is to apply fiscal adjustment without being able to use the exchange rate. Even worse with an exchange rate that, despite the crisis, remains fixed with your main trade partners and stable with the main industrialised markets.

The lesson from previous cases in developing countries shows that crises are painful, and often have long lived impacts, especially on the poor. The case of Argentina with the collapse of the currency board shows that people take a large hit when the exchange rate collapses, but at the same time the boost of the exchange rate collapse on the export sector can be large and enhance the sources of economic growth. This is because the exchange rate is an incredible mechanism for adjustment.

By staying in the euro some countries of the euro zone seem to be entering a large period of painful adjustment and low growth. The decision for policy makers seems to be one of a painful default and abandoning the euro, but more flexibility for recovery or a long process of real adjustment with low growth. I think politicians will try to stick to the latter while it is still remotely feasible, but I fear that in the long run this may be the most painful solution.

P.S. Imagine if an African government had not been able to reach an agreement on the fiscal plan due to political rivalry and was walking towards a default, saved in the last minute with an agreement that is not sustainable. Would the government bonds ratings downgraded?      

Friday, 5 August 2011

Better Business in Africa

By Noshua Watson

The UK Department for International Development is plowing ahead into private sector development in the midst of global economic chaos.  UK Secretary of State for International Development Andrew Mitchell gave a speech last  month that outlined DFID’s plans for private sector development in Africa.  Rod Evison, the acting CEO  of the CDC, the development finance institution, followed up with his plans for revitalising their portfolio, using innovative financial tools, concentrating on the poor and funding more risky projects.

After reading what they have to say, I’d recommend they read a refresher: “Learning from Abroad: The Role of Policy Transfer in Contemporary Policy-Making”.  Can we get it right this time?