Archive for the ‘Finance’ Category

Talk the talk – but not walk the walk

1 December, 2008

That’s the way Larry Elliott in The Guardian sums up the donors lack of urgency in meeting the MDGs. Commenting on the just released UNESCO Education for All report, he writes:

“… donor countries can talk the talk but not walk the walk. According to the Unesco study, the aid required for even the most basic primary education provision in poor countries is US$11 bn (£7.2bn) a year. In 2006, spending amounted to around $4bn, leaving a funding gap of $7bn. To put that figure into context, it is around 10% of what Britain spent this autumn recapitalising the banking system”.

Maybe they will walk the walk at the UN Financing for Development summit now underway in Doha. But I wouldn’t hold your breath. “When financial systems fail, the consequences are highly visible and governments act,” concluded UNESCO’s Director-General Koïchiro Matsuura. He added “When education systems fail the consequences are less visible, but no less real”.

I would add that education is the only investment you can be sure of getting at least some return on – provided it’s of good quality and children complete a minimum of 4 years primary education. Well-educated people earn more in the labour market, and find it easier to absorb new technologies and methods when they run micro-enterprises and farms. Education is a means to break the inter-generational transmission of chronic poverty (see this CPRC study for Bangladesh).

And even if it didn’t raise income much – which might be the case in economies that are growing only slowly – it certainly improves health status, especially of children, when mothers are educated. Educated mothers are 50% more likely to immunize their children than mothers with no schooling (go here). Gender inequality in education has high costs for both the family and society (see this IFPRI study).

So the chronic underfunding of education reminds me of that old quotation: if you think education is expensive, try ignorance.

Global Finance – Doha: What Chance of Success?

1 December, 2008

World economic turmoil sets the scene for the UN Conference on Financing for Development in Doha (29 November to 2 December), the most important conference on this topic since the UN’s conference in Monterrey back in 2002. Go here for UN updates.

The last quarter of 2008 has seen a lot of talk-talk on development finance. The long-awaited High Level Forum on aid effectiveness was held in Accra in September as well as the UN’s high level event on the MDGs in New York. Calling an event ‘high-level’ lets the international community claim that progress has been made – just by getting senior people together in one place.

What will Doha bring? Can it make headway against the very strong currents now running through the global financial system? Will rich country donors be able to afford aid? On this and other issues see my WIDER Angle article with George Mavrotas – Development Finance: New Opportunities for Doha. We explore the topic further in our new UNU-WIDER book Development Finance in the Global Economy: The Road Ahead (Palgrave).

Nigel Lawson: No Fiscal Stimulus, Darling

24 November, 2008

You can rely on Nigel Lawson, Chancellor of the Exchequer 1983-89, to go against the conventional wisdom (see his views on climate change here and here, for example). He’s certainly not a member of the “we’re all Keynesians now” group. In today’s FT he argues that monetary policy is the key tool, not fiscal stimulus. Keynes was wrong:

“Britain … recovered faster than any other major nation from the 1930s slump. It did so largely on the basis of cheap money and a balanced budget. Between the slump’s deepest point, in 1932, and 1937 the UK economy grew at an unprecedented 4½ per cent a year. Nor was this due to rearmament spending, which did not start until 1936”.

I await the comments of economic historians on his reading of the 1930s. For the moment let me focus on his central message.

Lawson argues that recapitalizing the banks is the priority. Certainly, deleveraging by the banks has been huge. Nobody can deny that the economy can’t move again until the banks are sorted out. They are the achilles heel of the battered Anglo-Saxon model of capitalism. Today Citgroup got a $300 bn bailout.

But is this enough? It won’t be if deflation sets in. Then the real value of debt will rise, which will punish Britain’s already highly indebted households. Once deflationary expectations take hold, they are very difficult to shift as Japan in the 1990s demonstrated. Then monetary policy becomes next to useless: interest rates cannot be cut below zero.

Not using fiscal policy to stimulate consumer spending is therefore enormously risky. For sure, consumers might save rather than spend (see my previous post). And Britain will face a big tax bill (after the next election). The gilts market might take fright, but for now they are buying (few want equities).

Back to the lessons Lawson draws from the 1930s: if Britain was to revert to a balanced budget then it would have to cut public spending in a recession rather than raise it. This would have its own deflationary effect which, as economic activity fell, would reduce the tax base – thereby requiring a further expenditure cut to maintain a balanced budget. This is not a recipe for achieving economic recovery.

So, Nigel Lawson’s defiance of the Keynesian consensus is brave, but wrong. His recommendation is too risky. The same goes for doing nothing about climate change (on the latter: go here for a debate between Lawson and Oliver Letwin).

Tony Addison is Executive Director of the Brooks World Poverty Institute, University of Manchester.

Keynes is Back. But What to Do, Darling?

24 November, 2008

Britain’s Chancellor of the Exchequer, Alistair Darling is praising Keynes – along with just about everyone else. He’s boosted public spending (go here). The present focus on fiscal policy reflects the fear of a ‘liquidity trap’ – which Keynes first identified in the 1930s. The Bank of England is set to cut interest rates further, but this might not encourage banks to lend. So monetary policy alone can’t do the trick (it is said). Hence public spending. And now tax cuts.

Today we hear the Chancellor’s plans (at 3.30 pm: go here). The government’s spin machine was busy over the weekend so a VAT reduction will hardly come as a surprise. The FT reckons it will be a £12.5 bn package:

“At the heart of the stimulus package is an expected “temporary” cut in the VAT rate from 17.5 to 15 per cent, the lowest standard rate allowed in the EU. Food, children’s clothing and some other items have always been zero-rated in Britain”.

Will a VAT cut work? Canada cut its sales tax at the beginning of 2008, but this had modest effects on total spending, according to the ‘Undercover Economist’, Tim Harford interviewed on the BBC Today programme this morning. For a critique of the Canadian tax cuts from a poverty perspective see GrowingGap. Canadian readers: send us your views.

To cut taxes now, taxes have to rise later. Economists describe this as borrowing from ourselves. Spending won’t rise if we fully anticipate the future tax increase. Or at least that’s what some macro-economists say (see Robert Barro). It’s called Ricardian Equivalence (drop that into your next pub conversation on the economic crisis: sure to impress). Economist readers: please up-date us on whether Barro is right.

Will businesses cut prices following a VAT reduction? They are slashing prices in any case, in advance of Xmas – a last ditch hope that the sales can carry them through the new year. Buyers stormed Marks & Spencers last week, following a 20% price cut. So we might all now afford fresh underwear. But will stores cut prices further, or take some of the VAT cut to rebuild their margins?

Ann Pettifor of the New Economics Foundation interviewed on the BBC yesterday was skeptical about tax cuts (Ann was one of the first people to predict this crisis). She believes that people will instead save the VAT cut (i.e. you will still buy the same basket of goods, but now the basket will be cheaper and you won’t add any more items. Your money is then deposited in one of Britain’s hopeless banks or under your mattress). Ann points out that if the money is spent then a lot will go on foreign imports (true, but I don’t think this is necessarily as bad as is often believed. The Americans need help too. I’ll do my bit by buying a new Apple Mac).

Other ideas I have come across: delay VAT payments by small businesses for six months. Many small businesses are penalized by the larger firms not paying their suppliers on time (a zero-cost way for the latter to fund themselves). Peter Mandelson promised a crack down, but doesn’t seem to have achieved much yet. In the recession of the early 1990s, small business failures were running at a 1,000 a week. So maybe government could help with a delay in VAT payments. Housebuilders want a continuation of the present holiday on stamp duty to get the housing market re-started. Readers might like to comment on the merits of each.

But there are two ideas from the Get Fair campaign that I really like.

First, immediately invest £4bn in measures to halve child poverty by 2010. Child poverty costs at least £25 billion each year in losses to the Exchequer and in reduced GDP, according to research from the Joseph Rowntree foundation. So spending tax revenue on eliminating child poverty now would actually save public money in the future. Surely a good idea.

Second, Get Fair says improve the take-up of existing benefits: they estimate that this would help 500,000 pensioners out of poverty. Here in the UK we have just had Remembrance Sunday, a day on which we remember those who gave their lives to defend Britain – especially in the Two World Wars. A 20-year old in 1940, is now 88. Helping our pensioners now, especially those in poverty (2.5 million of them) will be one of our last chances to thank their generation.

So, over to you Darling.

The New Realities of Philanthrocapitalism

18 November, 2008

BWPI’s Mike Edwards’ book on business-led philanthropy, “Just Another Emperor?” is attracting a lot of attention – especially in the current financial climate. You can follow the debate on OpenDemocracy. More later.

Finns for a Flight Tax

7 November, 2008

To finance the purchase of drugs to combat the main killer diseases in poor countries, France introduced a levy (an ‘international solidarity fee’) on air tickets back in 2006 (go here). Could Finland be next? 87 per cent of Finns back a levy of 1-4 euros on airtickets, according to KEPA, Finland’s service centre for development co-operation, as reported in Helsingin Sanomat. Among the young (15 to 24-year-old respondents) support is overwhelming: 93 per cent. KEPA reckons that this could generate 16 million euros a year – quite a modest sum, but then if every European country introduced the levy it would add up.

The airlines are hostile – they live on thin margins. But the levy is one euro per passenger when flying (economy class) within Europe and four euros on intercontinental flights. This will hardly deter most people from flying (less than the cost of the sandwich that a lot of airlines now charge for). The proposal has generated support elsewhere in Scandinavia (Norway, for instance).

The air ticket tax is one of the few proposals for innovative finance that has taken off (excuse the pun). The other is an International Finance Facility for child vaccination (IFFm) which originated with the UK’s HM Treasury (IFFm is a pilot for a much larger IFF that is designed to mobilize more aid through the sale of IFF bonds).

The pros and cons of the different innovative finance mechanisms – including the Tobin tax – were reviewed in a UNU-WIDER study undertaken for the UN General Assembly (go here). Interest in innovative finance waxes and wanes alongside traditional official (aid) flows and private capital flows – which are much larger (on development finance go here). Maybe next year’s meeting on a ‘New Bretton Woods’ (or whatever it is called) might make progress. In the meantime we have the UN’s Financing for Development meeting in Doha, 29 November to 2 December. More on Doha soon.


Who to help in the current financial crisis?

29 September, 2008

Who to help in this financial crisis? On the FT web site I argue that the 37 million Americans in poverty (about 12% of the population) should be first in line for help (for US poverty statistics go here).

Many Americans on low-incomes have been sucked into loans that they cannot now service as house prices collape. African Americans will be hit hard (their poverty rate, 24.5%, is twice the average). And the relentless rise in US inequality will continue (see the graph here). The financial services industry feasted for years on selling mortgages to people who wanted to own the roof above their heads. The scandal of teaser-rate mortgages will run and run.

And the financial crisis is causing unemployment to jump. As Ken Rogoff in the FT says:

“A large expansion in debt will impose enormous fiscal costs on the US, ultimately hitting growth through a combination of higher taxes and lower spending”.

The history of financial crises demonstrates two common outcomes. First, bank crises almost always become fiscal crises – as public money has to be used to keep the credit wheels turning. Second, capital gets help first, and labour last (see for instance Mexico’s ‘peso’ crisis of the mid-90s). Will history repeat itself?

Coping with Global Inflation

29 September, 2008

Our readers don’t need reminding that Inflation has been on the rise globally (although the present financial crisis could knock that on the head). The poor are being hit hard by rising food prices – the price of rice in Asia has doubled, causing real distress in countries without effective social protection. Africa is scrambling to respond.

Macro-economists in central banks and finance ministries are worried people. Today looks alarmingly like 1979-81: inflation pushed up by the second oil price spike and recession looming. That combination of inflation and recession – stagflation – is the worst scenario for policymakers. Inflation requires demand restraint, recession requires demand expansion – and policy-makers have a difficult time in choosing which direction to go down. The early 1980s are a warning of what can happen. Real interest rates (the interest rate minus the inflation rate) turned from negative to positive – pushing up the real cost of borrowing for firms already hit by weakening sales. Eventually the oil price collapsed, bringing inflation down with it, but also distress for over-borrowed oil producers such as Mexico and Nigeria. That then set the stage for the debt crisis that took a full decade to work itself out, with massive social fall out, and poverty spiking higher (the 1980s were Latin America’s “lost development decade”).

So what should today’s policy-makers do? The Centre for Development Policy and Research at SOAS has a new Development Viewpoint out on global inflation. The author, Terry McKinley, argues that they must be clear on the causes, otherwise the response could make the situation worse. Since the sources of recent oil and food inflation are ‘globalised’, developing countries cannot hope to maintain low domestic inflation by the standard practice of raising domestic interest rates, argues Terry. Such a misguided “monetarist response” would only heighten the risks of recession, he concludes. Go here for the paper, a timely contribution to the present debate — and a warning from the past.

Carbon Taxes Will Need to be Higher to Pay for Development

25 September, 2008

Jeff Sachs and Bono are blogging on the FT web site during this week’s MDG summit in New York (go here). Today, Jeff reports that some bold and creative proposals are coming from the EU, Mexico and Norway, among others. Carbon taxation is to the fore, in particular.

“According to the Swiss Government’s proposal, a $2 per ton levy on carbon dioxide would raise around $48bn per year, money that could play a critical role in helping impoverished countries to meet the Millennium Development Goals and to adapt to climate change. I believe that we’ll be hearing a lot more about carbon levies in the months ahead, as a practical approach to climate change control and development finance”.

Back in 2003, we took a thorough look at innovative sources of finance in a UNU-WIDER project led by Tony Atkinson of Nuffied College, Oxford (go here). The study concluded that many of the proposals were feasible, including carbon taxes. I chipped in with a proposal for a global premium bond to fund chronic poverty reduction – based on the successful UK premium bond scheme (Addison and Chowdhury paper here).

Amongst all the innovative finance proposals, carbon taxes get the most support among economists (more than the popular Tobin  tax: although that may be boosted by the present financial malaise). They not only reduce carbon emissions (a global bad) but also, as Jeff Sachs says, they generate a flow of revenues to finance a step-up in official development assistance (both multilateral and bilateral) as well as global funds to deal with the urgent challenges of climate change, conflict, and HIV/AIDs (to name but three).

All of these problems just get worse without early action: notably climate change, since a stock of carbon is already in the atmosphere, warming the earth — which we will have to adapt to — even as we attempt to reduce the flow of carbon from new emissions. But this is true of conflict and viruses too: war generates more war (notably in the Congo where violence is still endemic after the supposed ‘peace deal’) and viruses mutate to become deadlier (notably unchecked TB).

Given the high returns to taking action now on these global bads, it would be worth accepting a much higher levy on carbon than the Swiss proposal. This would send a clear signal to the market, encouraging a faster rate of invention and adoption of clean technologies. And the additional funds could be spent on peace-keeping and more research for the diseases of the poor world.

But I worry that the US is way behind Europe in all of this, California perhaps excepted. Dealing with the present financial crisis is vital, but it is also a huge distraction from the larger issues such as climate change. And the present administration has been adamant in its opposition to global taxes. Does anybody detect much of a shift in the US position, the occasional piece of rhetoric aside?

The author is executive director of the Brooks World Poverty Institute, University of Manchester.

Confused about the Financial Crisis? Is Man United Safe?

19 September, 2008

Then go the freakonomics blog. Guest bloggers Doug Diamond and Anil Kashyap provide an excellent guide to what is going on. They also assure us Mancunians that the blessed United is safe:

“… the Federal Reserve made a bridge loan to A.I.G., the largest insurance company in the world; perhaps best known to most of the world as the shirt sponsor of Manchester United soccer club, A.I.G. has assets of over $1 trillion and over 100,000 employees worldwide. The Fed has the option to purchase up to 80 percent of the shares of A.I.G., is replacing A.I.G.’s management, and is nearly wiping out A.I.G.’s existing shareholders. A.I.G. is to be wound down by selling its assets over the next two years. (Don’t worry, Man U will be fine.) The Fed has never asserted its authority to intervene on this scale, in this form, or in a firm so far removed from its own supervisory authority”.

So, that’s ok then. Meanwhile our comment to Ken Rogoff’s piece in yesterday’s FT on the impact of the crisis on the dollar argues that now is the time to invest in better social protection for the 37 million Americans in poverty. Bailing them out can help stabilize the domestic economy, and put a floor under the wobbly property market — and thereby help reduce the need to bail out the financial system. In the meantime, United becomes the first football club to be sponsored by a central bank. Thanks, America’s taxpayers!