Into The Fold – The IMF & Ukraine

Headlines have alerted us that the IMF has returned to its rescue bail out package for Ukraine, initially delayed due to the outbreak of conflict. Already the fund had delivered $4.5 billion worth of the initial program, and so the funds total commitment will reach a healthy $22 billion.

According to Lagarde they are “demonstrating courage to reform”, this being her justification for reviving the financial aid package. It is critical to note here that alongside this package will come separate EU and US loan pledges, as we try to ensure that economic progress is not politicised in a volatile region.

True a ceasefire has been agreed but this fragile agreement is no assurance that tensions in the region will subside. This fragility is going to come through when the government looks to restructure its debt obligation. It is also clear that the holders of Ukraine’s sovereign debt will not be treated equally, as Russia is one of them.

This seems to have become an endless saga, which the IMF has now decided to contribute to. One may also provide a critique of the IMF in that there is a danger with the present levels of corruption this financial aid package may be mishandled to an equal scale to that of Greece. While also considering a double standard created through the IMF being political in the willingness to provide aid to Ukraine, and yet want to hold Greece on a tight leash with its new government which is looking to break free from the shackles of its creditors.

Copyright Almog Adir © 2015 · All Rights Reserved · My Website

Escaping the Malthusian Trap

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Chile had escaped the Malthusian trap around the early 20th century. In this I will examine the factors that had enabled substantial growth in the Chilean economy including geography and trade, population, and institution within the period 1840-1930. The Chilean War of Independence against Spanish control began in 1810 with it ending in an independent republic being declared in 1818. From this point onwards Chile began to expand its territorial holdings in regards to assimilating the Mapuche population and gaining Northern territory, but it was only in 1840 that the economy had truly opened (Mamalakis, Markos J).Chile has a diverse regional market due to its geographic nature, as the country spans 6435 km of coastline going from desert in the North to arctic conditions in the South. (Please click to expand images!)

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As Chile lies upon the North-South axis it has distinct diversity in climate and geography, the economy had been able to surpass the Malthusian trap as a consequence of this rather than be limited by it. This diversity enabled trade, demand for its exports, and increasing market integration. Chile had a particular trade advantage due to access to the Pacific Ocean and the Atlantic Ocean through the Drake Passage, and the Strait of Magellan (The World Factbook). This was to prove pivotal for the export of the factor endowments present in Chile. In the central and southern zones there is particularly fertile soil for wheat production and grazing. Then in the northern zone there is the Atacama Desert, which is the source of Nitrate and Copper (The World Factbook). While the border to Argentina is defined by the Andes Mountain range providing Chile with access to natural minerals (The World Factbook). 

Trade routes proved to be integral to the growth of the export and import market that drove forward Chilean growth, which is exemplified by their increasing rate in growth rate of exports considering the data for 1850-1900, 1870-1920, and 1890-1900 shown in the table.

Screen Shot 2014-11-05 at 14.04.58Further examining exports Chile had an absolute advantage in the production of wheat during what was noted as the Great Wheat Trade between 1865 and 1900 (Mamalakis, Markos J).This wheat boom had begun in 1850 as a consequence of demand from the Californian and Australian gold rushes, as exports peaked at 276,664 qq.m (quintals) for California in 1850, then 323,607 qq.m for Australia in 1855 (Mamalakis, Markos J). This highlighted Chile’s advantage due to the pacific trade routes and fertile soil, while the wheat trade was to become global with England becoming a central importer, as production between 1867 and 1900 did not fall below 800,000 qq.m (Mamalakis, Markos J). This absolute advantage in wheat production attracted foreign investment, and led to the introduction of steam ship use in Chile (Mamalakis, Markos J). The wheat trade began to decline by 1900, due to California and Australia producing their own wheat (Mamalakis, Markos J). This decline in the pacific export market for wheat did not hinder Chile’s growth due to the export of copper and nitrate.

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The nitrate boom began after the War of the Pacific in 1880-82, as Chile had gained the entire Atacama Desert region from Bolivia and Peru (Hutchison, Elizabeth Q., Thomas M. Klubock, Nara B. Milanich, and Peter Winn). This had also landlocked Bolivia, resulting on a trade dependence on Chile. Between 1900 and 1930 more than 50% of government revenue came from nitrate and iodine export taxes (Mamalakis, Markos J), with the nitrate sector resource surplus averaging 14% of GDP between 1882 and 1930 (Mamalakis, Markos J). In regards to helping Chile escape the Malthusian trap the nitrate boom was far more important in regards to it being a source of modernization. Integrally, bringing it closer towards modern capitalism and into contact with the United States and the United Kingdom. However, due to the synthetic production of nitrate, Chile had experienced a rapid boom and bust cycle (Mamalakis, Markos J). In this the greater move towards capitalism became the main benefit of the nitrate boom, as the nitrate bust left behind it ghost mining towns and structural unemployment showing an example of mineral theory (Adelman, M. A., and G. C. Watkins). This left copper as the most sustained specialized export, ensuring growth.

It was specialisation in the extraction of copper that was to lead to sustained growth, institutional development, and greater market integration within the Chilean economy. Until 1880 Chile had been the world’s largest copper producer, but it experienced a rapid decline in easily available stocks as production fell (Mamalakis, Markos J).

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After 1910 the Chilean copper sector experienced a massive transformation, as increasing foreign investment led to greater human and physical capital that resulted in large-scale mining. This had revived copper production, while emphasising an institutional and financial link with the United States (Mamalakis, Markos J). It is debated whether the foreign presence had upheld a weak Chilean economy, or whether it provided the backbone for the modernisation.

Exports

The geography of Chile proved to be vital in providing the correct environment for access to trade, as well as a diverse range of exports. Proving essential to an increase in economic growth and modernisation, in regards to escaping the Malthusian trap increasing income per capita was a result of this trade based growth. However, it is important to consider the demographic transition that occurred in the period.

The demographic transition in Chile took advantage of growth through trade, aiding in the escape of the Malthusian trap. In the table below we see a decreasing rate of increase in population for Chile during the period in question 1840-1930, with the authors estimates with a boom in population growth for 1915-1930. There was no dramatic change in population, with the main factor being the assimilation of indigenous Mapuche population through expanding the Chilean frontier in the south through war (Hutchison, Elizabeth Q., Thomas M. Klubock, Nara B. Milanich, and Peter Winn). Instead this demographic transition was based upon increasing urbanisation and a switch to more service based sectors. In 1930 49.4% of the country’s population was located in urban areas, and increasingly the capital Santiago (Mamalakis, Markos J).

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This was a consequence of the movement of employment from agriculture to industry and services, shown by the graph considering the production indices, as the public sector, and industry began to match then exceed agriculture in terms of production. This suggests that the Chilean economy had escaped the Malthusian trap between the period 1915-1930, especially considering the table below which considers the relative income and employment between 1907 and 1930, as 43% of the working population was employed in services which accounted for 50% of relative income, compared to 36% of the population being employed in agriculture (Mamalakis, Markos J).

Screen Shot 2014-11-06 at 10.40.54It is important to place the trade and demographic transition that allowed Chile to experience rapid levels of growth into context with the institutions that were available at the time. Having been a Spanish colony there was already the physical and human capital required to facilitate trade, moreover the Spanish had focused on the mining of silver and gold that was to benefit the Chilean economy in regards to the production of copper and nitrate (Hutchison, Elizabeth Q., Thomas M. Klubock, Nara B. Milanich, and Peter Winn). Chilean institution in relation to aiding the escape from the Malthusian trap may be more closely examined through considering capital accumulation through physical and human capital investment, this is a consequence of the government being able to focus on aiding the export sector. Travel was the greatest institutional issue as a result of the length of the country. Therefore, between 1888 and 1930 government development expenditure increased at a rate of 4% per year (Mamalakis, Markos J), this went towards the development of customs facilities, rail network, roads, and ports. Chile had effectively set up new institutions as a result of investment into human capital through education. The government realised that it had previously failed to spread education between 1840 and 1900 this was due to rural population, poverty, inequality, and inadequate enforcement. In 1900 the system was nationalised, creating a progression from primary education until university education. This also led to the rise of vocational education in agriculture, mining, industry, and trade (Mamalakis, Markos J). Therefore, Chile had inherited some degree of institution due to being a Spanish colony creating the base of development, but then was able to develop its own institutions enabling it to improve standards of living and aid in increasing wages beyond subsistence level.

The combination of geography, trade, population, and institution between 1840 and 1930 had placed Chile on the path to escape the Malthusian trap. Chile had a geographic advantage for trade with access to both the Atlantic and pacific oceans, while also being endowed with resources to export such as wheat, nitrate, and copper. Then due to the nature in which foreign investment defined the export sector there was a demographic transition, which resulted in increasing urbanisation. This was led with through the trading institution inherited from the Spanish colonialists. The economy was then transformed, as a strong government was able to build new institutions specifically education. Thereby, leading Chile out of the Malthusian trap by 1910-1920. Correlating to some degree with data map shown below:

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Chile was to go on to experience economic and political turmoil that would stagnate the economy, which meant that it didn’t follow a similar to path to other countries escaping the Malthusian trap until the era of neo-liberalist economics under Augusto Pinochet (Solimano, Andrés)

Bibliography

Adelman, M. A., and G. C. Watkins. Reserve Prices and Mineral Resource Theory. International Association for Energy Economics, 2008. Print.

Hutchison, Elizabeth Q., Thomas M. Klubock, Nara B. Milanich, and Peter Winn. The Chile Reader: History, Culture, Politics. Print.

Mamalakis, Markos J. The Growth and Structure of the Chilean Economy: From Independence to Allende. New Haven: Yale UP, 1976. Print.

Solimano, Andrés. Chile and the Neoliberal Trap: The Post-Pinochet Era. New York: Cambridge UP, 2012. Print.

The World Factbook. “South America: Chile.” Central Intelligence Agency, 22 June 2014. Web. 30 Oct. 2014.

Staring, Chris. “The Nitrate Towns of Chile Photography.” Atlas Obscura.
Web. 29 Oct. 2014.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

Big Data

With the growth of computing power available to us, we are not only able to manipulate data in new ways but also take into account vast amounts of it. Furthermore, there is increasing comprehensiveness in the collection of data not to mention the detail we are now able to delve into.

I will start with some more traditional date – demographics. We have already been extremely competent in dealing with a wide variety of data, starting at the point of collection up to manipulation. This has been the manner in which we examine the development of nations and whether we are making progress. In the past couple of years however there has been the growth of composite indexes, which look to tell us a lot more, notably HDI becoming IHDI with an accounting for inequality. We are able to develop data this way due to the increasing ease of collecting it.

Here we may differentiate however between developed and developing countries, as access to the internet and mediums of communication leads to even more niche data being collected, allowing us to examine our lives at a micro level while still in macro scale. The best available example of this is London; the BBC recently published images of London in terms of data maps. This verifies the extent to which all elements of our lives are being put into data in a form that may be analyzed and visualized.

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This data map shows luminance of photos taken of tourist attractions upload to the popular photo sharing website Flickr. While it is true that not everyone will use the photo sharing website, or share their photos, we can still see what kind of tourist traffic certain areas get. The map not only showing popular destinations but also routes that may be taken between destinations, the above is only an excerpt of a London wide map. This is a level beyond info-graphics and a type of data that would not be gained through taking a census.

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The data map above shows the route taken of daily commutes between the Home Counties and London. This gives an idea of the most popular travel routes, and where the typical commuting population resides. Furthermore, it shows the willingness of people to commute specific distances. A step beyond this would consider the tube travel routes, and those travelling by car or bus (which could theoretically be achieved by considering those who pay congestion charge). The step further taken here is the data for the exit of London train stations shown below:

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This gives a more in-depth look at how people travel, and where they travel. The complexity of this data is made more tangible through the map, however in this we could consider CO2 emissions, cost of travel, and a whole host of other factors. This type of traffic data is exceptional in where it may be taken, giving us a level of insight previously not afforded by simple census data.

We can even go into a niche understanding of specific areas, in this example looking at twitter traffic in regards to the popularity of London football clubs:

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The growth of big data is what I believe will take economics to the next level of understanding of human behavior and decision-making. Think of the amount of data social networks such as Facebook and Twitter hold about users, or Google in regards to popular searches and specific search traits of people in a given country. Not only is the Internet providing a better image of our lives through data, but also there is increasing amount of data collected from practical activity. Take the increasing use of black boxes in cars, giving information about average speed, intensity of braking, time of driving, etc.

This type of data has many applications, but I believe it will be the most useful to microeconomics. As it is the area where we have to leave most things as theoretical based on at times loose relationships, this depth of data provides the opportunity to delve further into our behavior. Take for example the classic work or shirk scenario, considering leisure hours and potential pay offs.

As an economic community I feel there is a movement towards ensuring that a large variety of data is made publicly available. Of note, Christine Lagarde announced today in Washington D.C. that all of the IMF’s data will be available for free online from the 1st of January. Meaning that there will be an even greater plethora of data to pick and choose from.

Sources:

http://www.bbc.co.uk/news/magazine-29915801

All images are subject to copyright – London: The Information Capital by James Cheshire and Oliver Uberti

 

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

The Perils of Africa

The development of global institutions had heralded an era of globalization. Politicians and economists had made promises that this would be a positive force of globalization which will see markets emerge and support weak national economies. For a time this was true, and to a degree it had worked. Globalization had effectively integrated the developing world to the developed. What was distinct in this “first round” of globalization was the wealth of knowledge which the developing world could now acquire.

Stiglitz makes it clear that this worked both ways, and uses some straightforward examples to explain the benefits of open markets and global recognition of issues. One example being the opening up of the Jamaican dairy market to U.S. imports in 1992 which saw the price of milk drop so that even poor children could access it. To sound cliché it was a double-edged sword; it was clear that opening a market to foreign firms could undermine state-owned enterprises but then again also provide new technologies and greater productive efficiency.

What was becoming clearer during the 90s was the increasing gap in income equality, between increasing proportion of the population living in poverty in regards to total world income (adjusted for inflation) increasing by an average of 2.5% annually. As globalization began to be criticised it was quickly associated with American style capitalism, which Stiglitz argues is still progress. He is undoubtedly a capitalist, an American, and a neo-Keynesian economist and already there is an assumption that capitalism is a form of progress for all. However, on this point I struggle to find a suitable replacement. Stiglitz highlights the manner in which free market and capitalist reforms were imposed on African nations and how he would have done it differently to ensure success. What quickly arises is often the issue in economics is that you don’t actually know what would have been more successful as you only chose one method in the end – you hope (but inevitably) there is no “next time”. As Friedman often says when choosing a specific economic policy following a certain line of theory you are ultimately deciding upon a lesser evil.

I believe one of the most significant points that Stiglitz raises was the question of to what degree did developed nations benefit relative to the degree that developing nations benefitted? From my position in 2013 you can see that the boycott and protest surrounding the trade and national conferences of the time, was as a result of the people perceiving globalization to be far more advantageous to developed countries. Here Stiglitz takes the perspective that the inevitable existence of special interest and the connection between the IMF and Washington would have always ensured irrespective of the policy decisions made that the end result would benefit them. Such is human nature and sadly a system of “good faith” cannot be depended upon.

One of the first examples Stiglitz employs is of Ethiopia and the handling of macro policy by the IMF. The first issue he raises sets the tone for what becomes an inherent aspect of IMF policy and instructions. The Ethiopian government had two sources of revenue, foreign aid and taxes. The IMF argued that their “budgetary position would be solid” if their expenditures would be based only on taxes and within this line of thought aid should be kept in reserves for that inevitable ‘rainy day’. The IMF logic was flawed, as foreign aid was contributed with the interest of developing and sustaining schools and health clinics. The IMF argued that foreign aid was not as stable as tax revenue, and this perspective may have worked for a country which was lingering between developing and developed. But Stiglitz statistical analysis showed that foreign aid was far more reliable than taxes, often coinciding with the economic situation and the institutions of the nation. Furthermore, the IMF often acted as a barrier to progress rather than an enabler.

The main issue with IMF policy of the time was the extensive use of conditionality. It was clear that Ethiopia had a government capable of handling their economy, but still needed IMF support (in regards to actual monetary aid) as the economy was developing. Ethiopian sentiment was that the IMF acted in a neo-colonial manner, forcing the government to implement certain strategies. The IMF felt that this was procedure, and an integral part of their covenant. Stiglitz points this failure at special interests, and the failure of the IMF to apply different methods to differing situations. What becomes clear in the Ethiopian example is as Stiglitz notes is that the means are often confused with the ends. Here enters the IMF’s infamous devotion to “liberalising markets” and “opening-up banking systems”. There is no conspiracy here, the IMF genuinely thought that through these means credit instruments would be more accessible and at more competitive rates. Ethiopia is not the only example of this IMF policy prevailed with devastating effects, following along were Botswana and Kenya. Market liberalisation had led onto liquidity crises in Botswana continuing as they hoped the IMF would support them, and opening the banking systems had only led to credit being unobtainable for local firms, as they were high-risk as judged by foreign banks and investors.

To summarise the IMF’s involvement in Africa throughout the late 20th century it was clear that they were not creating policy that suited transitioning and developing economies. The “one size fits all” approach did not work, and it had bred corruption in the nations with diamonds, and had allowed warlords such as General Amin of Uganda to come into power. The issue being ultimately that the IMF saw nations they were assisting as “client countries” when it should have been the other way around. Stiglitz goes far in blaming the IMF for the perils of Africa, however I think that it must be put into perspective that local militias had existed during colonial rule as well, and at the time many African nations were still to a degree divided into tribes within a country – making having one government difficult and ground for civil wars and corruption. Ethiopia is a frustrating example, as the countries potential was clear, and the IMF was a barrier to progress rather than a partner.

Globalization & Its Discontents

My aim here is not to simply provide a summary of the book, nor regurgitate what has already been written and argued. My aim is to examine some of the examples used, and the merit of Stiglitz argument relative to the economic situation of the time.

Joseph Stiglitz has become a renowned economist, notably winning the Nobel Prize for Economics in 2001. He has had a wide experience, serving on the Council of Economic Advisors under Bill Clinton, and also as chief economist and vice-president of the World Bank. He was fortunate to witness the transition of Russia into a free market, and also the peril of South-East Asia.

Globalization & Its Discontents provides a critique of not only the IMF but “Washington” in the policy making that threatened and created economic disaster. The book is unique by maintaining Stiglitz’s academic nature, but delivering a narrative of events which develops a convincing argument for the negligence and malpractice of the IMF and coinciding “special interests”.

Just to save explaining in the following posts, globalization is not only defined as the spreading of “western” culture like finding a McDonalds in Beijing. But instead a definition of economic globalization which sees the breakdown of trade barriers, free market transitions, opening new markets, and handling macro level economic policy of developing nations.

I will break the book into three sections, which will be published separately in order to appreciate the vast economic ground Stiglitz covers.

  1. The Perils of Africa
  2. South-East Asian Crisis
  3. Who Lost Russia?
  4. The Nature of “Global” Economics