It is widely acknowledged that while greedy borrowers and lenders, coupled with lax regulation and poor credit assessments, contributed to the global financial market crisis today, massive international capital flows magnified the extent of the crisis.
Dani Rodrik and Arvind Subramanian argues that financial innovation will always remain one step ahead of prudential regulation, and hence calls for controls on international capital flows as the only solution to reducing financial market volatility. They write, "If the risk-taking behaviour of financial intermediaries cannot be regulated perfectly, we need to find ways of reducing the volume of transactions. Otherwise we commit the same fallacy as gun control opponents who argue that “guns do not kill people, people do”. As we are unable to regulate fully the behaviour of gun owners, we have no choice but to restrict the circulation of guns more directly." Similarly, as we are not able to account for all future financial innovations in our regualtory architecture, we are left with no option but to regulate capital controls.
They argue in favor of keeping finance "primarily national". The authors call for reducing the large current account surpluses of the oil exportrers and the East Asian economies through a two pronged approach - some form of a petrol tax in the oil importing nations to reduce their oil demand, and some appreciation of East Asian currencies.
This call for capital controls generated a wave of strong reactions, which Prof Rodrik counters here in his blog. He writes that any government regulation is vulnerable to capture by vested interests and corruption, which is strengthens the case for "better designed regulation" and not for dispensing with regulation altogether.
Friday, March 14, 2008
Thursday, March 13, 2008
Gender-based taxation
The 2008-09 budget announced a series of concessions and sops for women. These include increasing the threshold for income tax exemption limit for women assessees from Rs 1.45 lakhs to Rs 1.8 lakhs. The announcement that creche facilities will not come under the purview of fringe benefit tax, will encourage more companies to set up creches for employees children. It is being claimed that all this will inspire more women to enter the workforce. This gender based tax concession comes in the wake of the conservative opposition party in the Spanish elections, Partido Popular proposing gender-based taxation in its electoral campaign.
Alberto Alesina, Andrea Ichino, and Loukas Karabarbounis explore the issue of gender based taxation in an interesting study. They write, "women have a more elastic labor supply than men and participate less in the market because of intra-family bargaining. Their labor income should be taxed less to achieve optimal taxation and to change the allocation of family chores in a way that allows females to work more in the market if they want. This tax approach may be fiscally cheaper, less distortionary and would directly address the source of labor market gender differences: intra-family bargaining".
They claim that average tax rates can be reduced without changing total tax revenues, by reducing income taxes on women and increasing, by a lesser amount, income taxes on men. This would reduce overall tax distortions, making tax policy more economically efficient, and also bring more women into the workforce. They write, "It would achieve similar goals to affirmative action policies, quotas or subsidised childcare and could substitute for those policies. It would also make gender discrimination more costly for employers and would be fair because it would compensate women for bearing the brunt of maternity and for the fact that the possibility of having children can negatively affect their career prospects."
The logic behind this proposal is this. According to Ramsay's principle of optimal taxation, goods with a more elastic supply should be taxed less. The supply of labour of women is more responsive to their after-tax wage, and so a reduction in taxes increases the labour participation of women substantially. Men’s labour supply is more rigid, so an increase in taxes does not reduce their labour supply by much, if at all. Therefore "for a given tax cut on women, with a smaller tax increase on men, one maintains the same total revenue with fewer tax distortions". A lower tax on women would lower their pre-tax wage and increase their after-tax wage, making it relatively cheaper for an employer to hire women.
They justify gender based taxation not only by gender differences in labour supply elasticities but also by gender differences in the earnings distribution “hazards”, "At any given income level Y, the distortions caused by the marginal tax rate t(Y) are proportional to the fraction of subjects who earn Y divided by the fraction of subjects who earn more than Y (which is the hazard of the earning distribution). This because those who earn Y are distorted at the margin by the tax rate t(Y), while, for those who earn more than Y, t(Y) is an infra-marginal tax rate that generates revenues for the government without inducing distortions. Since women have typically higher distributional hazards than men at all earning levels, gender based taxation reduces distortions through this mechanism, independently of elasticities."
The authors explore the case in which males and females are identical in terms of innate abilities, preferences and predispositions, but men have more explicit bargaining power at home, therefore they assume fewer unpleasant and tiring home duties. Hence, they participate more in the labour market, exercise more effort, earn more and engage in careers that offer ‘upside potential’ i.e. higher salaries and promotions. On the contrary, women basically work only for their wage. As a result, men are less sensitive to changes in wages since what matters for them, relative to women, is also the expected pleasure they derive from careers and market activity.
The authors also argue that "a large part of the redistribution of the tax burden implied by this proposal would occur within the same family: the husbands of married women who choose to work would also benefit from their wife earning a higher take-home salary." They also defend it from the "fairness" standpoint since women bear the brunt of maternity and early child care costs and this harms their career prospects, and lower taxes would compensate them. Gender based taxation offers a form of compensation that helps redress these inequalities in a less distortionary, more transparent and simpler way that affirmative action quotas. Further, as standard economic theory argues "quotas impose quantitative constraints that prevent agents from equalizing costs and benefits at the margin, gender-based taxation changes relative prices but lets agents free to optimize at the margin."
Extending the gender based taxation logic, it is possible to make out a case for similar taxation in other areas where social justice is administered through affirmative action quotas. The studies of Alesina et al on gender taxation and the growing body of opinion on the distortionary effects of quota based cap and trade emissions, clearly reveals that taxation may be a more efficient system than quotas.
Alberto Alesina, Andrea Ichino, and Loukas Karabarbounis explore the issue of gender based taxation in an interesting study. They write, "women have a more elastic labor supply than men and participate less in the market because of intra-family bargaining. Their labor income should be taxed less to achieve optimal taxation and to change the allocation of family chores in a way that allows females to work more in the market if they want. This tax approach may be fiscally cheaper, less distortionary and would directly address the source of labor market gender differences: intra-family bargaining".
They claim that average tax rates can be reduced without changing total tax revenues, by reducing income taxes on women and increasing, by a lesser amount, income taxes on men. This would reduce overall tax distortions, making tax policy more economically efficient, and also bring more women into the workforce. They write, "It would achieve similar goals to affirmative action policies, quotas or subsidised childcare and could substitute for those policies. It would also make gender discrimination more costly for employers and would be fair because it would compensate women for bearing the brunt of maternity and for the fact that the possibility of having children can negatively affect their career prospects."
The logic behind this proposal is this. According to Ramsay's principle of optimal taxation, goods with a more elastic supply should be taxed less. The supply of labour of women is more responsive to their after-tax wage, and so a reduction in taxes increases the labour participation of women substantially. Men’s labour supply is more rigid, so an increase in taxes does not reduce their labour supply by much, if at all. Therefore "for a given tax cut on women, with a smaller tax increase on men, one maintains the same total revenue with fewer tax distortions". A lower tax on women would lower their pre-tax wage and increase their after-tax wage, making it relatively cheaper for an employer to hire women.
They justify gender based taxation not only by gender differences in labour supply elasticities but also by gender differences in the earnings distribution “hazards”, "At any given income level Y, the distortions caused by the marginal tax rate t(Y) are proportional to the fraction of subjects who earn Y divided by the fraction of subjects who earn more than Y (which is the hazard of the earning distribution). This because those who earn Y are distorted at the margin by the tax rate t(Y), while, for those who earn more than Y, t(Y) is an infra-marginal tax rate that generates revenues for the government without inducing distortions. Since women have typically higher distributional hazards than men at all earning levels, gender based taxation reduces distortions through this mechanism, independently of elasticities."
The authors explore the case in which males and females are identical in terms of innate abilities, preferences and predispositions, but men have more explicit bargaining power at home, therefore they assume fewer unpleasant and tiring home duties. Hence, they participate more in the labour market, exercise more effort, earn more and engage in careers that offer ‘upside potential’ i.e. higher salaries and promotions. On the contrary, women basically work only for their wage. As a result, men are less sensitive to changes in wages since what matters for them, relative to women, is also the expected pleasure they derive from careers and market activity.
The authors also argue that "a large part of the redistribution of the tax burden implied by this proposal would occur within the same family: the husbands of married women who choose to work would also benefit from their wife earning a higher take-home salary." They also defend it from the "fairness" standpoint since women bear the brunt of maternity and early child care costs and this harms their career prospects, and lower taxes would compensate them. Gender based taxation offers a form of compensation that helps redress these inequalities in a less distortionary, more transparent and simpler way that affirmative action quotas. Further, as standard economic theory argues "quotas impose quantitative constraints that prevent agents from equalizing costs and benefits at the margin, gender-based taxation changes relative prices but lets agents free to optimize at the margin."
Extending the gender based taxation logic, it is possible to make out a case for similar taxation in other areas where social justice is administered through affirmative action quotas. The studies of Alesina et al on gender taxation and the growing body of opinion on the distortionary effects of quota based cap and trade emissions, clearly reveals that taxation may be a more efficient system than quotas.
Wednesday, March 12, 2008
Measuring well being
That current measures of GDP do not reflect important subjective and qualitative parameters that define the state of the society and its citizens, is well acknowledged. The US Bureau of Labor Statistics (BLS) has been collecting National Time Accounting data through its American Time Use Survey (ATUS) for some time, and there have been numerous studies indicating how these measures give a different perspective on debates about economic growth.
Robert H Frank summarizes this debate in his NYT Economic View column. He sums up the views of both the opponents and supporters of the traditional model of calculating GDP based economic growth. This post examined some of the problems associated with simple "happiness" or "life satisfaction" surveys.
Alan Krueger, Daniel Kahneman et al have come up with what they called the Princeton Affect and Time Survey (PATS), designed to produce a “U-index” to measure the proportion of time individuals spend in an “unpleasant” or “undesirable” or “unhappy” state, which they tried out with a telephone survey of 4,000 persons. The U-index measures the proportion of time an individual spends in an unpleasant state and is an ordinal measure at the level of feelings.
They have co-authored an NBER working paper in which they describe National Time Accounting as the "currency of life". They define National Time Accounting (NTA) as "a set of methods for measuring, comparing and analyzing how people spend and experience their time - across countries, over historical time, or between groups of people within a country at a given time." The NTA provides a method for tracking time allocation and assessing whether people are experiencing their daily lives in more or less enjoyable ways.
Their approach is based on "evaluated time use, or the flow of emotional experience during daily activities", and seeks to measure "individuals’ emotional experiences and time use". They write, "We illustrate NTA with: (1) a new cross-sectional survey on time use and emotional experience for a representative sample of 4,000 Americans; (2) historical data on the amount of time devoted to various activities in the United States since 1965; and (3) a comparison of time use and well-being in the United States and France. In our applications, we focus mainly on the U-index, a measure of the percentage of time that people spend in an unpleasant state, defined as an instance in which the most intense emotion is a negative one. (A "Misery Index") The U-index helps to overcome some of the limitations of interpersonal comparisons of subjective well-being."
Some of the activities monitored to collect time use data in the study include
1. Commuting to work
2. Working in your main job
3. Having lunch on a workday
4. Socializing at work
5. Commuting to home from work
6. Socializing with friends
7. Talking on the phone at home
8. Taking care of your children
9. Doing housework
10. Cooking/preparing food
11. Having dinner on a workday
12. Relaxing at home
13. Watching TV
The psychological responses each of these activities evoke in individuals are mapped in an ordinal ranking in the range of extreme displeasure to extreme pleasure, and added up after assigning appropriate weights to measure the U-index.
Angus Deaton captures the happiness-GDP comparison for different countries in this plot using Gallup world poll data.
In the graph, each circle is a country, with diameter proportional to population. The horizontal axis is national per-capita GDP in 2003 (the nearest year for which there is complete data) measured in purchasing power parity (PPP) dollars at 2000 prices, while the vertical axis is a country's average life-satisfaction rating. Most of the countries of sub-Saharan Africa are on the bottom left, India and China are the two large circles near the left, the western European countries appear near the upper right, and the United States is the large country on the top right.
Deaton writes, "As the graph indicates, life satisfaction is higher in countries with higher GDP per head. The slope is steepest among the poorest countries, where income gains are associated with the largest increases in life satisfaction, but it remains positive and substantial even among the rich countries; it is not true that there is some critical level of GDP per capita above which income has no further effect on life satisfaction. Instead, each doubling of income adds about the same amount to life satisfaction, across poor and rich countries alike."
Deaton also calls attention to the recent study of Andrew Clark, Paul Frijters, and Michael Shields, which found that life satisfaction is sensitive to respondents' income relative to those with whom they most closely associate, which implies that there should be no relation between average national life satisfaction and national income, unless there is some other aspect of national income that raises everyone's life satisfaction together. This, Deaton concludes, will make the Danes to continue to maintain an average rating of 8 as national income rises, provided they stay in the same position in the global income rankings.
Robert H Frank summarizes this debate in his NYT Economic View column. He sums up the views of both the opponents and supporters of the traditional model of calculating GDP based economic growth. This post examined some of the problems associated with simple "happiness" or "life satisfaction" surveys.
Alan Krueger, Daniel Kahneman et al have come up with what they called the Princeton Affect and Time Survey (PATS), designed to produce a “U-index” to measure the proportion of time individuals spend in an “unpleasant” or “undesirable” or “unhappy” state, which they tried out with a telephone survey of 4,000 persons. The U-index measures the proportion of time an individual spends in an unpleasant state and is an ordinal measure at the level of feelings.
They have co-authored an NBER working paper in which they describe National Time Accounting as the "currency of life". They define National Time Accounting (NTA) as "a set of methods for measuring, comparing and analyzing how people spend and experience their time - across countries, over historical time, or between groups of people within a country at a given time." The NTA provides a method for tracking time allocation and assessing whether people are experiencing their daily lives in more or less enjoyable ways.
Their approach is based on "evaluated time use, or the flow of emotional experience during daily activities", and seeks to measure "individuals’ emotional experiences and time use". They write, "We illustrate NTA with: (1) a new cross-sectional survey on time use and emotional experience for a representative sample of 4,000 Americans; (2) historical data on the amount of time devoted to various activities in the United States since 1965; and (3) a comparison of time use and well-being in the United States and France. In our applications, we focus mainly on the U-index, a measure of the percentage of time that people spend in an unpleasant state, defined as an instance in which the most intense emotion is a negative one. (A "Misery Index") The U-index helps to overcome some of the limitations of interpersonal comparisons of subjective well-being."
Some of the activities monitored to collect time use data in the study include
1. Commuting to work
2. Working in your main job
3. Having lunch on a workday
4. Socializing at work
5. Commuting to home from work
6. Socializing with friends
7. Talking on the phone at home
8. Taking care of your children
9. Doing housework
10. Cooking/preparing food
11. Having dinner on a workday
12. Relaxing at home
13. Watching TV
The psychological responses each of these activities evoke in individuals are mapped in an ordinal ranking in the range of extreme displeasure to extreme pleasure, and added up after assigning appropriate weights to measure the U-index.
Angus Deaton captures the happiness-GDP comparison for different countries in this plot using Gallup world poll data.
In the graph, each circle is a country, with diameter proportional to population. The horizontal axis is national per-capita GDP in 2003 (the nearest year for which there is complete data) measured in purchasing power parity (PPP) dollars at 2000 prices, while the vertical axis is a country's average life-satisfaction rating. Most of the countries of sub-Saharan Africa are on the bottom left, India and China are the two large circles near the left, the western European countries appear near the upper right, and the United States is the large country on the top right.
Deaton writes, "As the graph indicates, life satisfaction is higher in countries with higher GDP per head. The slope is steepest among the poorest countries, where income gains are associated with the largest increases in life satisfaction, but it remains positive and substantial even among the rich countries; it is not true that there is some critical level of GDP per capita above which income has no further effect on life satisfaction. Instead, each doubling of income adds about the same amount to life satisfaction, across poor and rich countries alike."
Deaton also calls attention to the recent study of Andrew Clark, Paul Frijters, and Michael Shields, which found that life satisfaction is sensitive to respondents' income relative to those with whom they most closely associate, which implies that there should be no relation between average national life satisfaction and national income, unless there is some other aspect of national income that raises everyone's life satisfaction together. This, Deaton concludes, will make the Danes to continue to maintain an average rating of 8 as national income rises, provided they stay in the same position in the global income rankings.
Why Wal Mart is bucking the trend?
Even as the US economy is lurching to a recession and big box retailers are feeling the heat, Wal Mart stock recently rose to its highest level for some time. Daniel Gross has four possible explanations as to why Wal Mart is bucking the general trend.
1. Wal-Mart sells necessities, not discretionary items. The overwhelming majority of its sales are not impulse buys. Even in a recession, most people don't drastically reduce their spending on staple groceries, light bulbs, or diapers.
2. Wal-Mart's cheapo reputation is especially useful as the economy weakens and people tighten their purses. As credit tightens, Americans have stopped trading up and started trading down. That helps Wal Mart, whose brand identity is all about saving people money. Gross describes Wal Mart as a "penny pincher's paradise".
3. Unlike many retailers, Wal-Mart expects its profits will rise modestly in 2008. And the economic-stimulus package President Bush signed earlier this month seems to have been designed to help Wal-Mart. It funnels cash to individuals making less than $75,000 or to families making less than $150,000, many of whom might shop at Wal-Mart.
4. Wal Mart is becoming increasingly international and has belatedly joined the global consumption boom which continues unabated. In 2003, international sales were just 16.7 percent of overall revenues. But thanks to aggressive expansion in Mexico, China, and elsewhere, international sales rose 17.5 percent and constituted 24.2 percent of overall sales in the year ending January 2008. In the most recent quarter, international sales rose 18.8 percent from the year before and for the first time accounted for more than 25 percent of total revenues. The growth in rapidly expanding international operations is adding more dollars to Wal-Mart's top line than the slower growth of the massive U.S. base.
Thus Wal Mart profits from both the good and the bad times. During the good times, its aggressive volumes make up huge toplines that in turn gets translated into impressive bottomline numbers. Wal Mart's success with the strategy of selling basic necessities, cheap and in large numbers, is a valuable strategy in developing markets, especially large markets like India. Here the consumers are extremely price sensitive and the economy is vulnerable to cyclical slowdowns. The large numbers of consumers should ensure that such retailers can easily exploit the economies of scale.
1. Wal-Mart sells necessities, not discretionary items. The overwhelming majority of its sales are not impulse buys. Even in a recession, most people don't drastically reduce their spending on staple groceries, light bulbs, or diapers.
2. Wal-Mart's cheapo reputation is especially useful as the economy weakens and people tighten their purses. As credit tightens, Americans have stopped trading up and started trading down. That helps Wal Mart, whose brand identity is all about saving people money. Gross describes Wal Mart as a "penny pincher's paradise".
3. Unlike many retailers, Wal-Mart expects its profits will rise modestly in 2008. And the economic-stimulus package President Bush signed earlier this month seems to have been designed to help Wal-Mart. It funnels cash to individuals making less than $75,000 or to families making less than $150,000, many of whom might shop at Wal-Mart.
4. Wal Mart is becoming increasingly international and has belatedly joined the global consumption boom which continues unabated. In 2003, international sales were just 16.7 percent of overall revenues. But thanks to aggressive expansion in Mexico, China, and elsewhere, international sales rose 17.5 percent and constituted 24.2 percent of overall sales in the year ending January 2008. In the most recent quarter, international sales rose 18.8 percent from the year before and for the first time accounted for more than 25 percent of total revenues. The growth in rapidly expanding international operations is adding more dollars to Wal-Mart's top line than the slower growth of the massive U.S. base.
Thus Wal Mart profits from both the good and the bad times. During the good times, its aggressive volumes make up huge toplines that in turn gets translated into impressive bottomline numbers. Wal Mart's success with the strategy of selling basic necessities, cheap and in large numbers, is a valuable strategy in developing markets, especially large markets like India. Here the consumers are extremely price sensitive and the economy is vulnerable to cyclical slowdowns. The large numbers of consumers should ensure that such retailers can easily exploit the economies of scale.
Tuesday, March 11, 2008
Economics of Philanthropy
Americans gave $295 billion to charity in 2006, equal to 2.2 % GDP, up from about 1.8 % from the mid-70s to the mid-’90s, according to the Center on Philanthropy at Indiana University. Today the rich and the super rich have been joined by the regular citizens. According to the Urban Institute, Americans devote about 2 percent of their after-tax income each year to charitable donations. According to another non-profit, Giving USA, these individual contributions totaled $199 billion in 2005.
Traditional philanthropists were those rich and super rich who wrote cheques and remained passive donors to some cause or agency. They knew that they were often better at providing capital than doing actual social-service work. Therefore they felt that it was often best to give their donations to high-quality non-profits and then trust them to spend the money wisely and effectively. They also believed that it was not possible to measure the outcomes of their contributions in any tangible manner. However, today philanthopists and charitable foundations no longer give plain donations, they provide financial resources designed to achieve social aims—and then they make sure that the recipient organizations achieve them. Most philanthropy still comes in the form of small gifts, but there is also a growing group of donors, like Bill and Melinda Gates, who are interested in bringing some of the quantitative rigor of big business to philanthropy.
Traditional philanthropy also focussed only on the major and high profile social causes, while modern philanthropy has diversified to help small, niche and low-profile causes. Further, traditionally only the large and high profile non-profit organizations have received the massive donations, while the small, low profile NGOS have been starved off resources. This too is changing as the new breed of philanthropists are not averse to donating to dedicated NGOs espousing specific causes.
Further, the huge billions donated by the new breed of the high profile, superstar philanthropists like Bill Gates and Warren Buffet may actually be having the effect of triggering off a cascade of similar contributions by other billionaires. These new philanthropists have gained widespread respect by their donations and have set a benchmark for such services and generated a wave of social peer pressure for others to emulate.
Unlike the private sector which is constrained by profit and government sector that is limited by a need to maintain political consensus, the non profit sector has the freedom to operate without the need for consensus or profit. It however has to remain wary of the one element that is responsible for the loss of efficiency of agencies in both government and private sector, and is present in the non profit sector too - bureaucracy!
With the growing size of philanthropic donations, it is important that the not-for-profit sector develop institutions and systems that make them competitive and efficient in mobilizing and spending the received donations. There is an immediate need to develop mechanisms that bring in more accountability and transparency to the way non profit agencies work and how their internal administration and processes operate. Many questions will have to be answered. How are donations mobilized and spent? How are spending decisions are made from a bouquet of options? How is the information assymetry bridged and resources allocated efficiently across the numerous, competing agencies? How do we ensure that there is full bang for the buck?
Henry Blodget has a list of prescriptions for making the non profit sector more creative, competitive and well funded. He argues for an arrangement that addresses "social problems the way venture capitalists and entrepreneurs attacked business problems—with hands-on, we're-in-this-together, failure-isn't-an-option partnerships between investors and investees." The emerging breed of Venture Philanthropists, that seeks to provide venture capital to philanthropic causes. These venture philanthropists seek to provide gap funding, longer-term capital commitments, strategic advice, and professional relationship to small and local non profits that miss out on donations from the major sources.
The incentives driving charitable donations and the different strategies to mobilize these contributions have been widely researched. David Leonhardt chronicles the pioneering field studies of John List and Dean Karlan, profesors at Yale and University of Chicago, on understanding why people donate money. They conducted experiments on matching gifts, which were made conditional on others matching the donation by a specific multiple. A matching gift effectively reduces the cost of making a donation. Without a match, you would have to spend $400 to make your favorite charity $400 richer. With a three-to-one match in place, it would cost you only $100 to add $400 to the charity’s coffers. But experiments revealed that while donors responded more to match offers, they were indifferent to the match multiple. That was surprising, because a larger match is effectively a deeper discount on a person’s gift.
List and David Reiley of the University of Arizona, while raising money for a new environmental research center, wrote letters to potential donors saying that the university wanted to buy computers for the center. They varied the amount of money that supposedly had already been raised. In some letters, they put the amount in hand at $2,000, out of the $3,000 they needed for a given computer; in others, they said they had raised only $300 and still needed $2,700. The results were overwhelming. The more upfront money the Center claimed to have on hand, the more additional money it raised. It is clear that people reasoned that it was more useful to give money to causes where the additional requirement was smaller.
In another experiment using data from sports card shows, List showed that traders became more rational — less emotionally tied to the cards they owned — as they accumulated more experience. This study seemed to suggest that people are rational and that markets work. He also dicovered that people gave more money when they were told their donation made them eligible for a prize, and they gave more the next time they were asked too.
Rachel Croson, an economist at the University of Texas at Dallas conducted experiments about fund raising through radio stations and discovered certain contextual nuances. She and her co-author, Jen Shang, conducted an experiment in which listeners who called to make a pledge were casually told that another caller had made a gift. When the donor was told about a relatively low donation by another caller, they responded with amuch higher donation, having apparently been inspired, or shamed, into being more generous. However, when the donar was told about a relatively high donation (say $1000) by another caller, they generally ignored it and tended to pledge a smaller amount, thinking as Carson reasoned, "That couldn’t possibly be me.”
Steve Landsburg and Tim Harford have argued that donors are more interested in feeling good than doing good. A truly selfless donor would bite the bullet and put his entire donation behind one cause which he or she strongly believes in. But in the real world, it is observed that people generally tend to distribute their donations among a number of causes, thereby giving each cause too little to make any meaningful difference. All these studies prove that there is more to charity than altruism and give an important glimpse of some of the incentives that drive our charitable impulses.
Steve Levitt and Steve Dubner argue about the need to put in place for-profit sector type incentives in the non profit sector, so as to expand it and increase its efficiency. They drive home the importance of running charities as businesses by highlighting two examples. Smile Train, which performs free cleft-repair surgery for poor children around the world, started training local doctors rather than flying in U.S. surgeons; this has helped make Smile Train one of the most productive charities, dollar-for-deed, in the world. The second philanthropy, proposed by a world-class poker player, wants to create a $10 billion “cure cancer” prize with a hitch: a cash dividend paid to the people who donate the $10 billion.
It has been estimated that religious organizations receive something like 60 percent of all the individual giving that occurs in the US. The figure will be much higher, probably more than 90% in India. That there is an enormous potential for mobilizing donations in India is borne out by the huge amounts collected in the temple hundis across the country. And fortunately there is enough evidence to suggest that such donations are growing at breakneck pace. The challenge is to put in place institutional arrangements and policies that stimulate people's charitable urges and make them support social causes. This will help rope in the non profit sector as an important partner with the public and private sectors in the development process.
Update 1 (25/7/2010)
Andreas Lange and Andrew Stocking find that reducing the minimum donation threshold did not lead to more subjects donating,but to lower average donations; that by framing the reduction as a special discount the reduction in conditional contributions can be offset by attracting more donors. Further, a charity that requires a larger donation to become a member appears to be signaling that it is a higher quality charity and thus membership has a higher value to the individual.
Traditional philanthropists were those rich and super rich who wrote cheques and remained passive donors to some cause or agency. They knew that they were often better at providing capital than doing actual social-service work. Therefore they felt that it was often best to give their donations to high-quality non-profits and then trust them to spend the money wisely and effectively. They also believed that it was not possible to measure the outcomes of their contributions in any tangible manner. However, today philanthopists and charitable foundations no longer give plain donations, they provide financial resources designed to achieve social aims—and then they make sure that the recipient organizations achieve them. Most philanthropy still comes in the form of small gifts, but there is also a growing group of donors, like Bill and Melinda Gates, who are interested in bringing some of the quantitative rigor of big business to philanthropy.
Traditional philanthropy also focussed only on the major and high profile social causes, while modern philanthropy has diversified to help small, niche and low-profile causes. Further, traditionally only the large and high profile non-profit organizations have received the massive donations, while the small, low profile NGOS have been starved off resources. This too is changing as the new breed of philanthropists are not averse to donating to dedicated NGOs espousing specific causes.
Further, the huge billions donated by the new breed of the high profile, superstar philanthropists like Bill Gates and Warren Buffet may actually be having the effect of triggering off a cascade of similar contributions by other billionaires. These new philanthropists have gained widespread respect by their donations and have set a benchmark for such services and generated a wave of social peer pressure for others to emulate.
Unlike the private sector which is constrained by profit and government sector that is limited by a need to maintain political consensus, the non profit sector has the freedom to operate without the need for consensus or profit. It however has to remain wary of the one element that is responsible for the loss of efficiency of agencies in both government and private sector, and is present in the non profit sector too - bureaucracy!
With the growing size of philanthropic donations, it is important that the not-for-profit sector develop institutions and systems that make them competitive and efficient in mobilizing and spending the received donations. There is an immediate need to develop mechanisms that bring in more accountability and transparency to the way non profit agencies work and how their internal administration and processes operate. Many questions will have to be answered. How are donations mobilized and spent? How are spending decisions are made from a bouquet of options? How is the information assymetry bridged and resources allocated efficiently across the numerous, competing agencies? How do we ensure that there is full bang for the buck?
Henry Blodget has a list of prescriptions for making the non profit sector more creative, competitive and well funded. He argues for an arrangement that addresses "social problems the way venture capitalists and entrepreneurs attacked business problems—with hands-on, we're-in-this-together, failure-isn't-an-option partnerships between investors and investees." The emerging breed of Venture Philanthropists, that seeks to provide venture capital to philanthropic causes. These venture philanthropists seek to provide gap funding, longer-term capital commitments, strategic advice, and professional relationship to small and local non profits that miss out on donations from the major sources.
The incentives driving charitable donations and the different strategies to mobilize these contributions have been widely researched. David Leonhardt chronicles the pioneering field studies of John List and Dean Karlan, profesors at Yale and University of Chicago, on understanding why people donate money. They conducted experiments on matching gifts, which were made conditional on others matching the donation by a specific multiple. A matching gift effectively reduces the cost of making a donation. Without a match, you would have to spend $400 to make your favorite charity $400 richer. With a three-to-one match in place, it would cost you only $100 to add $400 to the charity’s coffers. But experiments revealed that while donors responded more to match offers, they were indifferent to the match multiple. That was surprising, because a larger match is effectively a deeper discount on a person’s gift.
List and David Reiley of the University of Arizona, while raising money for a new environmental research center, wrote letters to potential donors saying that the university wanted to buy computers for the center. They varied the amount of money that supposedly had already been raised. In some letters, they put the amount in hand at $2,000, out of the $3,000 they needed for a given computer; in others, they said they had raised only $300 and still needed $2,700. The results were overwhelming. The more upfront money the Center claimed to have on hand, the more additional money it raised. It is clear that people reasoned that it was more useful to give money to causes where the additional requirement was smaller.
In another experiment using data from sports card shows, List showed that traders became more rational — less emotionally tied to the cards they owned — as they accumulated more experience. This study seemed to suggest that people are rational and that markets work. He also dicovered that people gave more money when they were told their donation made them eligible for a prize, and they gave more the next time they were asked too.
Rachel Croson, an economist at the University of Texas at Dallas conducted experiments about fund raising through radio stations and discovered certain contextual nuances. She and her co-author, Jen Shang, conducted an experiment in which listeners who called to make a pledge were casually told that another caller had made a gift. When the donor was told about a relatively low donation by another caller, they responded with amuch higher donation, having apparently been inspired, or shamed, into being more generous. However, when the donar was told about a relatively high donation (say $1000) by another caller, they generally ignored it and tended to pledge a smaller amount, thinking as Carson reasoned, "That couldn’t possibly be me.”
Steve Landsburg and Tim Harford have argued that donors are more interested in feeling good than doing good. A truly selfless donor would bite the bullet and put his entire donation behind one cause which he or she strongly believes in. But in the real world, it is observed that people generally tend to distribute their donations among a number of causes, thereby giving each cause too little to make any meaningful difference. All these studies prove that there is more to charity than altruism and give an important glimpse of some of the incentives that drive our charitable impulses.
Steve Levitt and Steve Dubner argue about the need to put in place for-profit sector type incentives in the non profit sector, so as to expand it and increase its efficiency. They drive home the importance of running charities as businesses by highlighting two examples. Smile Train, which performs free cleft-repair surgery for poor children around the world, started training local doctors rather than flying in U.S. surgeons; this has helped make Smile Train one of the most productive charities, dollar-for-deed, in the world. The second philanthropy, proposed by a world-class poker player, wants to create a $10 billion “cure cancer” prize with a hitch: a cash dividend paid to the people who donate the $10 billion.
It has been estimated that religious organizations receive something like 60 percent of all the individual giving that occurs in the US. The figure will be much higher, probably more than 90% in India. That there is an enormous potential for mobilizing donations in India is borne out by the huge amounts collected in the temple hundis across the country. And fortunately there is enough evidence to suggest that such donations are growing at breakneck pace. The challenge is to put in place institutional arrangements and policies that stimulate people's charitable urges and make them support social causes. This will help rope in the non profit sector as an important partner with the public and private sectors in the development process.
Update 1 (25/7/2010)
Andreas Lange and Andrew Stocking find that reducing the minimum donation threshold did not lead to more subjects donating,but to lower average donations; that by framing the reduction as a special discount the reduction in conditional contributions can be offset by attracting more donors. Further, a charity that requires a larger donation to become a member appears to be signaling that it is a higher quality charity and thus membership has a higher value to the individual.
Sunday, March 9, 2008
Aggregate Demand growth trends in India
The Economic Survey 2007-08 claims that the economic growth has slowed down from 9.6% in 2006-07 to 8.7% for this year, and feels that it may be difficult to sustain a 9% GDP growth rate. It however explains that the investment climate is full of optimism. The slowdown has raised questions about whether we can sustain the growth in our aggregate demand (AD), especially in light of strong headwinds like US recession, appreciating rupee, infrastructure bottlenecks, inflationary pressures arising from rising oil and commodity prices etc. This post will analyze the long term savings, investment and consumption trends, and argue that our concerns about AD may be misplaced for a number of reasons.
Eco 101 teaches us that AD is a function of Consumption (C), Private Investments (I), Government Spending (G) and net Exports (X-IM). All this in turn depends on three important economic expectations - wealth, interest rate and exchange rate effects.
Wealth effect refers to the impact of a change in the aggregate price level on the purchasing power of consumers' assets. A lower price level raises the real value of households' assets, which stimulates consumption and thereby investment. Interest rate effect is the effect of a change in the aggregate price level on the purchasing power of consumers and firms' money holdings. A lower price level reduces the amount of money demanded, keeping interest rates low, thereby boosting investment and consumption. Exchange rate effect is the impact of a change in the aggregate price level on the net exports. A lower aggregate price level causes depreciation in the real exchange rate, thereby boosting net exports. A lower price level therefore shifts the AD curve to the right.
The downward sloping AD curve shifts due to the following changes
1. Changes in expectations of firms and individuals about the future, which pushes up or down consumption and investment spending.
2. A change in the "wealth effect" arising due to the formation or popping of an asset bubble or some external event, which causes a change in consumption spending. Asset bubbles increase AD by boosting consumption.
3. Changes in the stock of physical capital through investment spending, by either private sector or government.
4. An external event that puts pressure on the local currency, either forcing it up or down, thereby affecting the net exports.
As the Economic Survey and many other independent surveys of both firms and consumers have shown, the investment and consumption climate remains robust. This is understandable given the strong economic fundamentals. Unlike in the US, asset bubbles have not been a part of our economic landscape. Even the equity market boom appears to be more a part of a cyclical movement, and in any case is not broad-based (just 7% of population invest in equities or debt) enough to affect the larger economy. The huge infrastructure and other spending, both by the Government and the private sector, will ensure that the stock of physical capital is bound to increase sharply in the short and medium term. While the rising rupee and oil will put pressure on the external front, it is not likely to have any major impact given the small contribution of the external sector to economic growth.
The Economic Survey 2007-08 acknowledges that the most important contribution to economic growth has come from investment and consumption, with the external sector having a small negative effect. The average rate of growth of Gross Domestic Capital Formation (GDCF) during the Tenth Five Year Plan has more than tripled to 17.3 per cent per year from an average growth of 5.3 per cent per annum in the Ninth Five Year Plan, and its contribution to the GDP growth, tripled from 19.4% to 65.4% during the same period.
The GDCF has been growing steadily from 22.8% of GDP in 2001-02, 35.5% in 2005-06, 35.9% in 2006-07, and is estimated to be 38% in 2007-08. The private sector share of this investment has been growing from 16.7% of GDP in 2001-02 to 25.8% and 27% for 2005-06 and 2006-07, respectively. The share of public sector is stabilizing at about 8% of GDP. The trends in savings and capital formation appears to have been clearly established and are encouraging. Further, gross fixed capital formation (GFCF) is estimated to grow by 15.7% in 2007-08, compared to 14.3% for the tenth plan period and 15.1% for 2006-07. Its contribution to the GDP growth is expected to rise to 55.2% in 2007-08, from 45.5% the previous year.
The net savings have been growing robustly, rising from just 23.5% of GDP in 2001-02 to 34.8% in 2006-07. Buoyed by expanding bottomlines, the private sector has contributed handsomely by increasing their savings to 7.8% of GDP in 2006-07 from just 3.4% in 2001-02. While private sector savings appear to be stabilizing around 24% of GDP, the most heartening development has been the significant improvement in public sector savings, which rose from -2% in 2001-02 to 3.2% in 2006-07, and is rising fast. This, coupled with the reduction in fiscal deficit, will ensure a "crowding in" effect for private investments.
The biggest contribution to our spectacular economic growth this decade has come from private consumption. A rapidly expanding, aspirational middle class, spurred on by the rising IT and service sector wages, falling taxes and a low interest rate regime that led to an explosion of hire purchase schemes, have ushered in a boom in consumer goods and services. Private consumption formed 43.9% of GDP growth in 2006-07, and is estimated to rise to 45.8% in 2007-08, though the share of government consumption is estimated to slip from 6.5% to 6.2% in the same period. The relative share of government consumption with respect to the GDP has been stable at around 10% while that of private consumption has been around 60%. A higher government spending increases AD. But higher taxes, lowers the disposable income and decreases AD. Here too, while direct spending by the government increases AD directly, transfers like lower taxes influences AD only indirectly (since the consumers can also save the extra money available).
But 2007-08 has seen relatively tighter credit markets and accordingly the growth rate of bank credit for purchasing consumer durables declined from 11.2 per cent (y-o-y November 2006) to 4.4 per cent (y-o-y November 2007). Correspondingly, the growth rate of production of consumer goods declined from 10.2 per cent (April-December 2006) to 5.9 per cent (April-December 2007). This slowdown in consumption growth is estimated to result in a 0.7% decline in GDP growth out of a total decline in GDP of 1% this year. But the slowdown is not likley to be a long term trend. This aforementioned fact highlights the increasing importance of interest rate effect on economic growth.
In real rupee terms, export and import growth has slowed down to 6.4 per cent each during 2007-08 from an average of over 20 per cent growth in exports and over 22 per cent in imports over the last three years. The net exports in goods and services to the real GDP ratio was -4.2% in 2006-07 and is estimated to be around -4.1% in 2007-08. But the share of net exports to GDP growth is estimated to precipitously fall to -3.2% in 2007-08, from -18.2% in 2006-07. This trend is likely to persist in 2008-09 as well, thereby acting as a relatively smaller dampener in the aggregate demand growth. The Economic Survey also refers to the beneficial spillover effects of a trade deficit on productivity and efficiency.
The overall trends adjusted for small cyclical variations, clearly point to a healthy environment for AD. There are also a few other reasons as to why AD is likely to remain robust in the immediate future. All these developments are likely to shift the AD curve to the right and expand aggregate output.
1. The Sixth Pay Commission is likely to pour an additional Rs 350 bn into the hands of employees. Wages, salaries and pensions as is expected to rise from 2.1% of GDP in 2007-08 top 2.6% in 2008-09.
2. The lower effective Income Tax rates, arising from higher threshold levels, changes in slabs, and concessions to women, will put more disposable income in the hands of the middle class. It is precisely these income categories that are most likely to spend, rather than save their additional incomes.
3. The farmers' loan waiver has effectively made the farmers richer by Rs 60,000 Cr, with the possibility of accessing more loans. Since their Marginal Propensity to Consume is very high, all this money is most likely to be consumed rather than saved. The multiplier effect of this on the rural economy will be considerable.
4. The cuts in indirect taxes - CENVAT and excise duties - is expected to generate a "wealth effect" that will spur consumption.
5. Construction sector is likely to expand at a spectacular pace given the massive investments already committed and being proposed in infrastructure and commercial and residential real estate development. The expected reduction of interest rates for smaller house loans will provide a filip to the sector. Construction sector contributed 12.9% to the total GDP growth during the tenth plan period, and this share is expected to increase further, especially given its very low ICOR of 1.2.
6. The prospects for any interest rate hikes, even with slight inflationary pressures, are ever so remote. Even in the exceptional case of rate hikes, they are most likely to be short term measures. The possibility of a leftward shift of the AD curve due to interest rate effect appears remote.
As can be seen, consumption, investment and government spending will remain robust and grow fast. Further, the respective rates are now comparable to what initiated the East Asian economies and China along their high growth trajectory. The wealth effect is likely to be very strong, and interest rate effect significant. Any negative influence of the exchange rate effect is likely to be small and in any case over-ridden by the other effects. In the worst case, the growth in AD could slowdown slightly, thereby slowing down the GDP growth by about a percentage point. Given the supply side constraints - poor infrastructure, lack of adequate skilled technical manpower etc - this slight slowdown may be a positive development in so far as it cools an overheating economy and wards off inflationary pressures.
Eco 101 teaches us that AD is a function of Consumption (C), Private Investments (I), Government Spending (G) and net Exports (X-IM). All this in turn depends on three important economic expectations - wealth, interest rate and exchange rate effects.
Wealth effect refers to the impact of a change in the aggregate price level on the purchasing power of consumers' assets. A lower price level raises the real value of households' assets, which stimulates consumption and thereby investment. Interest rate effect is the effect of a change in the aggregate price level on the purchasing power of consumers and firms' money holdings. A lower price level reduces the amount of money demanded, keeping interest rates low, thereby boosting investment and consumption. Exchange rate effect is the impact of a change in the aggregate price level on the net exports. A lower aggregate price level causes depreciation in the real exchange rate, thereby boosting net exports. A lower price level therefore shifts the AD curve to the right.
The downward sloping AD curve shifts due to the following changes
1. Changes in expectations of firms and individuals about the future, which pushes up or down consumption and investment spending.
2. A change in the "wealth effect" arising due to the formation or popping of an asset bubble or some external event, which causes a change in consumption spending. Asset bubbles increase AD by boosting consumption.
3. Changes in the stock of physical capital through investment spending, by either private sector or government.
4. An external event that puts pressure on the local currency, either forcing it up or down, thereby affecting the net exports.
As the Economic Survey and many other independent surveys of both firms and consumers have shown, the investment and consumption climate remains robust. This is understandable given the strong economic fundamentals. Unlike in the US, asset bubbles have not been a part of our economic landscape. Even the equity market boom appears to be more a part of a cyclical movement, and in any case is not broad-based (just 7% of population invest in equities or debt) enough to affect the larger economy. The huge infrastructure and other spending, both by the Government and the private sector, will ensure that the stock of physical capital is bound to increase sharply in the short and medium term. While the rising rupee and oil will put pressure on the external front, it is not likely to have any major impact given the small contribution of the external sector to economic growth.
The Economic Survey 2007-08 acknowledges that the most important contribution to economic growth has come from investment and consumption, with the external sector having a small negative effect. The average rate of growth of Gross Domestic Capital Formation (GDCF) during the Tenth Five Year Plan has more than tripled to 17.3 per cent per year from an average growth of 5.3 per cent per annum in the Ninth Five Year Plan, and its contribution to the GDP growth, tripled from 19.4% to 65.4% during the same period.
The GDCF has been growing steadily from 22.8% of GDP in 2001-02, 35.5% in 2005-06, 35.9% in 2006-07, and is estimated to be 38% in 2007-08. The private sector share of this investment has been growing from 16.7% of GDP in 2001-02 to 25.8% and 27% for 2005-06 and 2006-07, respectively. The share of public sector is stabilizing at about 8% of GDP. The trends in savings and capital formation appears to have been clearly established and are encouraging. Further, gross fixed capital formation (GFCF) is estimated to grow by 15.7% in 2007-08, compared to 14.3% for the tenth plan period and 15.1% for 2006-07. Its contribution to the GDP growth is expected to rise to 55.2% in 2007-08, from 45.5% the previous year.
The net savings have been growing robustly, rising from just 23.5% of GDP in 2001-02 to 34.8% in 2006-07. Buoyed by expanding bottomlines, the private sector has contributed handsomely by increasing their savings to 7.8% of GDP in 2006-07 from just 3.4% in 2001-02. While private sector savings appear to be stabilizing around 24% of GDP, the most heartening development has been the significant improvement in public sector savings, which rose from -2% in 2001-02 to 3.2% in 2006-07, and is rising fast. This, coupled with the reduction in fiscal deficit, will ensure a "crowding in" effect for private investments.
The biggest contribution to our spectacular economic growth this decade has come from private consumption. A rapidly expanding, aspirational middle class, spurred on by the rising IT and service sector wages, falling taxes and a low interest rate regime that led to an explosion of hire purchase schemes, have ushered in a boom in consumer goods and services. Private consumption formed 43.9% of GDP growth in 2006-07, and is estimated to rise to 45.8% in 2007-08, though the share of government consumption is estimated to slip from 6.5% to 6.2% in the same period. The relative share of government consumption with respect to the GDP has been stable at around 10% while that of private consumption has been around 60%. A higher government spending increases AD. But higher taxes, lowers the disposable income and decreases AD. Here too, while direct spending by the government increases AD directly, transfers like lower taxes influences AD only indirectly (since the consumers can also save the extra money available).
But 2007-08 has seen relatively tighter credit markets and accordingly the growth rate of bank credit for purchasing consumer durables declined from 11.2 per cent (y-o-y November 2006) to 4.4 per cent (y-o-y November 2007). Correspondingly, the growth rate of production of consumer goods declined from 10.2 per cent (April-December 2006) to 5.9 per cent (April-December 2007). This slowdown in consumption growth is estimated to result in a 0.7% decline in GDP growth out of a total decline in GDP of 1% this year. But the slowdown is not likley to be a long term trend. This aforementioned fact highlights the increasing importance of interest rate effect on economic growth.
In real rupee terms, export and import growth has slowed down to 6.4 per cent each during 2007-08 from an average of over 20 per cent growth in exports and over 22 per cent in imports over the last three years. The net exports in goods and services to the real GDP ratio was -4.2% in 2006-07 and is estimated to be around -4.1% in 2007-08. But the share of net exports to GDP growth is estimated to precipitously fall to -3.2% in 2007-08, from -18.2% in 2006-07. This trend is likely to persist in 2008-09 as well, thereby acting as a relatively smaller dampener in the aggregate demand growth. The Economic Survey also refers to the beneficial spillover effects of a trade deficit on productivity and efficiency.
The overall trends adjusted for small cyclical variations, clearly point to a healthy environment for AD. There are also a few other reasons as to why AD is likely to remain robust in the immediate future. All these developments are likely to shift the AD curve to the right and expand aggregate output.
1. The Sixth Pay Commission is likely to pour an additional Rs 350 bn into the hands of employees. Wages, salaries and pensions as is expected to rise from 2.1% of GDP in 2007-08 top 2.6% in 2008-09.
2. The lower effective Income Tax rates, arising from higher threshold levels, changes in slabs, and concessions to women, will put more disposable income in the hands of the middle class. It is precisely these income categories that are most likely to spend, rather than save their additional incomes.
3. The farmers' loan waiver has effectively made the farmers richer by Rs 60,000 Cr, with the possibility of accessing more loans. Since their Marginal Propensity to Consume is very high, all this money is most likely to be consumed rather than saved. The multiplier effect of this on the rural economy will be considerable.
4. The cuts in indirect taxes - CENVAT and excise duties - is expected to generate a "wealth effect" that will spur consumption.
5. Construction sector is likely to expand at a spectacular pace given the massive investments already committed and being proposed in infrastructure and commercial and residential real estate development. The expected reduction of interest rates for smaller house loans will provide a filip to the sector. Construction sector contributed 12.9% to the total GDP growth during the tenth plan period, and this share is expected to increase further, especially given its very low ICOR of 1.2.
6. The prospects for any interest rate hikes, even with slight inflationary pressures, are ever so remote. Even in the exceptional case of rate hikes, they are most likely to be short term measures. The possibility of a leftward shift of the AD curve due to interest rate effect appears remote.
As can be seen, consumption, investment and government spending will remain robust and grow fast. Further, the respective rates are now comparable to what initiated the East Asian economies and China along their high growth trajectory. The wealth effect is likely to be very strong, and interest rate effect significant. Any negative influence of the exchange rate effect is likely to be small and in any case over-ridden by the other effects. In the worst case, the growth in AD could slowdown slightly, thereby slowing down the GDP growth by about a percentage point. Given the supply side constraints - poor infrastructure, lack of adequate skilled technical manpower etc - this slight slowdown may be a positive development in so far as it cools an overheating economy and wards off inflationary pressures.
Saturday, March 8, 2008
Commodities Vs Manufacturing
That commodity prices have been rising across the world for some time now is well acknowledged. But Martin Wolf goes one step further and argues that a global shift is happening in relative prices too, with commodities, particularly energy, becoming much more expensive, relative to manufactures.
He writes, "Over the six years to February 2008, the Goldman Sachs broad commodity index jumped by 288 per cent, the energy price index by 358 per cent, the non-energy index by 178 per cent, the industrial metals index by 263 per cent and the agricultural index by 220 per cent. If one deflates the rise in commodity prices given above by the increase in the unit value of exports of manufactures from high-income countries, one obtains the following increases in real prices: 147 per cent for all commodities, 192 per cent for energy, 77 per cent for non-energy, 131 per cent for industrial metals and 104 per cent for agricultural commodities."
The explanations have varied from the burgeoning demand from China and India led emerging economies, to rising biofuel production. Supply side constraints like civil wars and internal dislocation, bad harvests, rising energy costs, inadequate investment and higher costs.
He writes, "Over the six years to February 2008, the Goldman Sachs broad commodity index jumped by 288 per cent, the energy price index by 358 per cent, the non-energy index by 178 per cent, the industrial metals index by 263 per cent and the agricultural index by 220 per cent. If one deflates the rise in commodity prices given above by the increase in the unit value of exports of manufactures from high-income countries, one obtains the following increases in real prices: 147 per cent for all commodities, 192 per cent for energy, 77 per cent for non-energy, 131 per cent for industrial metals and 104 per cent for agricultural commodities."
The explanations have varied from the burgeoning demand from China and India led emerging economies, to rising biofuel production. Supply side constraints like civil wars and internal dislocation, bad harvests, rising energy costs, inadequate investment and higher costs.
Subscribe to:
Posts (Atom)