Greece graph of the day

Excellent graphic from John Cochrane's blog about the ownership of European government debt.

The graph shows that nearly four-fifths of Greek debt (estimated at 319 billion euros in end-2014) is "foreign official", or owned by other governments. This explains both the absence of market contagion (the European bourses rose on the election results were announced) and the consternation among Eurozone's core area members in the aftermath of the election victory of anti-austerity Syriza party of Alexis Tsipras.

If Tsipras stays the course with his pledge to renegotiate the terms of the country's 240 billion euros bailout package which would force losses on countries like Germany and France, a bitter game of chicken is on the cards. However the country's resolve to stay on in Eurozone and its dire need for loan payments to pay off debts and keep the country running weakens his bargaining position.

In any case, at 174% of GDP in 2014, Greece's debt-to-GDP ratio is surely unsustainable and cannot be stabilized without deep debt write-offs. Bailouts without haircuts are merely kicking can down the road. 

Why a public investments led strategy may not work?

Commentators from both the right and left have converged to the view that the Indian economy needs a large dose of public investment in infrastructure to provide the impetus to regain high economic growth rates. But there are atleast seven reasons to be sceptical of this strategy.

1. A first order reality is that neither the central nor state governments have the fiscal space to prime the pump in any significant manner. Also, unlike the developed economies, interest rates in India are not anywhere near the zero-bound to make capital expenditure borrowings a high-return strategy.

2. Public investments become effective in stimulating the economy only when they can be kick-started without delay. However, given the long time lag between identification of project and the first stone being laid, and the poor track record of in-time completion of public investments, the efficacy of public investments in providing the immediate thrust for regaining high growth rates appears questionable.

3. Even assuming a readily available shelf of "shovel-ready" projects, they can take off only when developers and banks have adequate space on their balance sheets to take on more projects. Given the debt-laden balance sheets of infrastructure firms and the high proportion of distressed assets of banks, the prospect of neither look promising.

4. If the objective is regaining the near double-digit growth rates, then public investments will not be able to achieve that without other critical enablers. Apart from the success of initiatives to improve business environment and stimulate manufacturing, the country can sustain high growth rates only if it is able to sharply increase its savings rate. Further, if the savings rate increases to the 35-40% of GDP range, then the desired level of public investments are in any case most likely to follow.

5. The argument that we only have a flow problem (high fiscal deficits) and no stock problem (lower debt-to-GDP ratio) is misleading. Our debt-to-GDP ratio has been held in the 60-65% range only by the long period of high inflation, which has helped the country inflate away its debt. If the inflation gets anchored at a lower rate, as looks likely, then the stock problem will start to assume significance.

6. The country has struggled hard to restore some macroeconomic stability by reining in revenue expenditure and tight monetary policy. A quick return to high fiscal deficits would certainly erode the hard-won and costly policy credibility. This assumes great significance in a world where massive amounts of capital slosh around and economies are deeply vulnerable to sudden-stops and flow reversals.

7. Finally, all this works on the premiss that we need to do everything possible to regain the high growth rates of the 2003-08 period and emulate China's spectacular three decade long near double-digit growth trajectory. But what if this premiss is itself questionable. Given the prevailing domestic macroeconomic and socio-economic environments and global trends, there are compelling reasons to argue that it may not be possible for India to sustain high growth rates for any long duration.

More on the oil price declines

Daniel Yergin points to two stunning factoids about the recent history of oil prices. First, about the standout winner,

By the end of 2014, oil production in the United States was 80 percent higher than it had been in 2008. The increase of 4.1 million barrels per day was greater than the output of every single OPEC country but Saudi Arabia... This revolution also turned out to be a big boost for the American economy, creating jobs, improving the country’s competitive position and drawing in over a $100 billion of new investment. Only rarely has the global oil market seen production increases on this scale this fast. The last time was in the early 1980s, when new supplies from Mexico, the North Sea and Alaska created an oil surplus that led to a price crash.

Second, the losers,

Over all, the fall in oil prices could mean a $1.5 to $2 trillion transfer from oil-exporting countries to oil-importing countries.

Just as the higher oil prices engendered a shale oil and gas boom that boosted the US economy, the declining prices threatens to damage the economy. Times reports that drilling firms are decommissioning rigs and laying off workers and companies that leased equipment have fallen behind in their payments,

Since the Permian Basin rig count peaked at around 570 last September, it has fallen below 490, and local oil executives say the count will probably go down to as low as 300 by April unless prices rebound... Unlike traditional oil wells, which cannot be turned on and off so easily, shale production can be cut back quickly, and so the field’s output should slow considerably by the end of the year.

And Jim Hamilton, the foremost authority on the economics of oil markets, had this to write about the demand-supply dynamics,

Field production increased worldwide by only 2.3 mb/d between 2005 and 2013. That compares with a predicted increase of 8.7 mb/d from extrapolating the pre-2005 trends in consumption growth for developed and emerging economies, and that’s without even taking account of the dramatic acceleration in demand from the emerging economies... According to the 2014 IMF World Economic Outlook database, world real income increased by 27.7% between 2005 and 2013. If we assume an income elasticity of 0.7, for which Csereklyei, Rubio, and Stern provide abundant empirical support, we would have expected that in the face of a stable price of oil, production should have increased by 19.4%. The actual increase in field production of crude oil was only 3.1%, consistent with a shortfall of 12 mb/d.

Apart from demand-supply dynamics, Jeffrey Frankel points to how real interest rates may be affecting real commodity prices. He identifies four channels whereby high real rates reduce the price of storable commodities - increases incentive for extraction today rather than tomorrow; lowers desire to carry inventories; encourages money to shift out of commodity contracts into treasury bills; and strengthens domestic currency, thereby reducing the price of internationally traded commodities in domestic terms.

He feels that the fourth channel has had an important role to play in the recent decline in oil prices. Since most oil contracts are dollar denominated and since the dollar has appreciated against all other currencies, it is only natural that it has weighed on the decline in dollar price of oil. The graphic below is illuminating.

US interest in "India" visualized

NYT has this superb tool that searches its archives dating from 1860s and visualizes language usage in its news coverage throughout its history. The graphic below shows the sharp increase in news articles covering India since the turn of the century, with a pronounced spike last year.

To the extent that New York Times news coverage is a reflection of US interest, the graphic points to heightened interest in India.

Talking about visualization, this article by Seth Stephens-Davidowitz on preferences about sex among males and females revealed from analyzing Google search database makes fascinating reading. 

Unintended consequences of development - bednets edition

Scholars supporting Randomized Control Trials (RCTs) have long advocated the use of bed-nets to keep out mosquitoes as a cost-effective way to fight malaria. They have invoked meta-studies on the use of bed-nets and its effectiveness in different environments to claim sufficient external validity to scale up the intervention.

In this context, the New York Times has an interesting story about the unexpected use to which anti-malaria bed-nets are being put in parts of Africa. It writes,

Nets... are widely considered a magic bullet against malaria — one of the cheapest and most effective ways to stop a disease that kills at least half a million Africans each year. But Mr. Ndefi and countless others are not using their mosquito nets as global health experts have intended. Nobody in his hut, including his seven children, sleeps under a net at night. Instead, Mr. Ndefi has taken his family’s supply of anti-malaria nets and sewn them together into a gigantic sieve that he uses to drag the bottom of the swamp ponds, sweeping up all sorts of life: baby catfish, banded tilapia, tiny mouthbrooders, orange fish eggs, water bugs and the occasional green frog... 

Across Africa, from the mud flats of Nigeria to the coral reefs off Mozambique, mosquito-net fishing is a growing problem, an unintended consequence of one of the biggest and most celebrated public health campaigns in recent years. The nets have helped save millions of lives, but scientists worry about the collateral damage: Africa’s fish. Part of the concern is the scale. Mosquito nets are now a billion-dollar industry, with hundreds of millions of insecticide-treated nets passed out in recent years, and many more on their way. They arrive by the truckload in poor, waterside communities where people have been trying to scrape by with substandard fishing gear for as long as anyone can remember. All of a sudden, there are light, soft, surprisingly strong nets — for free. Many people said it would be foolish not to use them for fishing...

The people don't use the mosquito nets for mosquitoes. They use them to fish... But the unsparing mesh, with holes smaller than mosquitoes, traps much more life than traditional fishing nets do. Scientists say that could imperil already stressed fish populations, a critical food source for millions of the world’s poorest people... Many of these insecticide-treated nets are dragged through the same lakes and rivers people drink from, raising concerns about toxins.

None of this is to down-play the undoubted utility of bed-nets in combating malaria. In fact, this was well-known to health experts for long and did not need to be established by spending millions of dollars on expensive and time-consuming field experiments. The more substantive benefit of RCTs and related research on bed-nets (and others like de-worming) may have been not so much on establishing its benefits but in drawing billions of dollars from philanthropic foundations and non-profits into financing bed-net campaigns. The RCTs have provided the objective basis for donors searching for cheap and high-impact development interventions, of which there are very few, to funnel their resources.

But the example from Africa illustrates the complex challenges associated with all such interventions. The unintended consequences of development interventions, and there are always some with any intervention, are revealed only when it is scaled up and over time. No amount of field studies, regression controls, and validation can help us prepare for such "unknown unknowns" of development. So before we advocate the use of bednets or deworming or toilets or multi-grade teaching to the level or safe water storage or mobile phone-based reminders or something else as superior to their competing alternatives, we would be well-advised to pause and be cautioned about its unintended consequences. 

Airline industry fact of the day

From the Times,

The total backlog of unfilled orders for Boeing and Airbus stands at more than 12,000 aircraft, valued at close to $2 trillion and enough to keep their assembly lines humming for more than eight years.

But Boeing and Airbus, which each control nearly half the market for planes with more than 100 seats, are struggling to keep their order pipelines flowing as falling oil prices makes it increasingly profitable for airlines to continue with their fuel-guzzling older planes and defer replacements. 

Finance Commission and optimal currency areas

The Thirteenth Finance Commission's recommendations may have set the cat amongst the pigeons by sharply hiking the states share of the central taxes by ten percentage points from 32% to 42%. Coming on the back of the scrapping of the Planning Commission, this effectively means the end of many centrally sponsored schemes (CSS).

This is an undoubtedly welcome move in so far as it paves the way for more effective utilization of development spending. The increased transfers and cut backs in CSS will endow states with the resources and flexibility to design and implement state-specific sectoral programs. However, while the curtailment of the one-size-fits-all CSS programs is to be welcomed, a sharp and substantial erosion of the central government's fiscal space may be a matter of concern. In particular, the extent to which it will limit the central government's fiscal space for macroeconomic stabilization.

Consider the impact of the global financial crisis and the resultant recession. In the 2008-10 period, the central government indulged in additional fiscal spending, which helped mitigate the adverse effects of the global economic weakness and stabilize the Indian economy. This allowed state governments to tide over the crisis with their balance sheets in tact. In fact, even as the central government today faces a 4.1% fiscal deficit, the state governments have a consolidated fiscal surplus, and just three face deficits. It is a different matter that the resources could have been better spent on productive infrastructure creation than on populist subsidies.

Given that many Indian states are atleast as large as Eurozone countries, the responses of the respective governments to the great recession are instructive. In contrast to the central government in India, the European Commission has advocated sharp spending cuts and refrained from additional fiscal transfers to the worst affected peripheral economies. As the credit markets froze, peripheral economies struggled to raise resources, some even lost market access, and the human and economic costs of the absence of fiscal transfers has been substantial.

This is in keeping with the literature on Optimal Currency Areas (OCAs). A strong fiscal authority is an important ingredient in the success of any OCA. Apart from its role in macroeconomic stabilization when members (states in India or countries in Eurozone) have varying business cycles,   such fiscal transfers help stabilize the economy in times of more uniform economic weakness when members may lose market access or may struggle to raise resources for demand management policies. In fact, the availability of this fiscal cushion is critical to effective fiscal federalism.