PSD Blog - The World Bank Group

Weekend Reading: Unemployment Edition

Can development workers win wars?

Is transport infrastructure the most important aspect of urban evolution?

The Treasury's courtship of the blogosphere.

Is China's changing worldview bad for business?

America's largest retailer: it's not Wal-Mart.

Why are some marathons more volatile than others?

The EU's role in reducing state fragility in Sub-Saharan Africa.

Thoughts on migration: Kosovo edition.

Unemployment

What America can learn from Europe about unemployment.

Other difficulties that arise from high unemployment.

Plus, unemployment charts galore from Calculated Risk.

A less pessimistic take on today's numbers (it's still ugly).

Why employment is down and GDP up? It's all about productivity.

Microfinance under the microscope

Last year I speculated about the potential impact of the financial crisis on the environment for microfinance. A report from the Economist Intelligence Unit (2008 Microscope on the Microfinance Business Environment in Latin America and the Caribbean) provided data on the microfinance premium—the difference between what mainstream banks and MFIs charge for a loan—in many countries in Latin America. How much would MFIs reliant on external funding get squeezed, and would they get squeezed worse than the banks?

The recently published 2009 Microscope (now expanded to 55 countries around the world with the assistance of IFC) gives a mixed answer. Of the 13 countries in Latin America for which there are data in both the 2009 and 2008 Microscope, seven saw their microfinance premiums rise while six saw their microfinance premiums fall (see image below the jump for the most recent premiums).

Good News in Migration

A few months ago, I attended the World Bank's conference on Diaspora for Development, hosted by Dilip Ratha, lead economist at the World Bank. The general feeling at that time was that remittance flows would contract significantly this year, but, paradoxically, would become a more important source of external financing in many countries, as foreign direct investment had dropped by up to 50 percent.

Since then, the situation for migrants has improved. Today, the World Bank released its Migration and Remittance Trends 2009 report, which features several upward revisions in remittance flows. Dilip Ratha's People Move blog has the highlights:

Newly available data show that officially recorded remittance flows to developing countries reached $338 billion in 2008, higher than our previous estimate of $328 billion. Based on monthly and quarterly data released by some central banks and in line with the World Bank’s global economic outlook we estimate that remittance flows to developing countries will fall to $317 billion in 2009. This 6.1 percent decline is smaller than our earlier expectation of a 7.3 percent fall.

1929 vs 2008

Free Exchange points to an excellent graph from Paul Krugman illustrating how the policy responses and automatic stabilizers during the current crisis have been much more successful than those during the Great Depression. The chart speaks for itself:

The authors conclude: 

The world is not yet out of the woods, but for now at least, it seems that policy was much better this time around than it was in the early years of the Depression. And as a result, a great deal of human suffering has been avoided. 

Let's hope this growth is sustainable.

Roubini sounds the alarm (again)

Nouriel Roubini is back at it, delivering the latest battle call in his war against complacent optimism. This time, Dr Doom is concerned about "the mother of all carry trades", where investors are borrowing dollars at negative interest rates (due to low nominal rates, and an ever-depreciating dollar), and investing them in anything that is risky and from emerging markets. Hence the disparity between real economic growth and financial market growth.

This new carry trade is quite dangerous, as it is based on the assumption that the dollar will continue to plunge and emerging market investments will continue to pay off handsomely. Should it unwind, due to a rising dollar or emerging market crisis, markets would become dangerously volatile, which would then hamper the real economy (sound familiar?):

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally.

What can the Aswan Dam teach us about building a safe financial system?

Back in grade school, I was the kind of kid who got excited about things like fractal geometry. I even went so far as to attend math camp one summer on the Eastern Shore. I learned back then about what is still a relatively unknown branch of mathematics. 

Everyone in school learns about Euclidean geometry, which describes perfect shapes that are never actually observed in nature. Yet few learn about fractal geometry, even though it is the best tool we have to describe many types of complex natural phenomena, e.g. weather patterns, turbulence, the location of oil and other natural deposits in the earth, irregularity in the rhythm of heartbeats, etc. (With a very simple formula, it also produces the infinitely complex object pictured above known as the Mandelbrot set.)

Until a few weeks ago, I hadn't given much thought to these ideas for many years. However, I stumbled on a book by the man who discovered fractal geometry, Benoit Mandelbrot, while browsing through the section of the store devoted to finance. I was surprised to see that Mandelbrot had applied this new branch of mathematics not just to purely natural phenomena, but also to the world of finance. After reading The (Mis)behavior of Markets, I also discovered that Mandelbrot was—perhaps ironically—the dissertation advisor of Eugene Fama, the father of the now much disputed efficient markets hypothesis.

The Market for Aid 2.0: Collaborative markets

A couple of years ago, former PSD blogger Tim Harford and co-author Michael Klein argued for more market-like mechanisms in the aid industry in The Market for Aid. A new working paper by Owen Barder (Beyond Planning: Markets & Networks for Better Aid) picks up where Tim and Michael left off. Owen argues that aid agencies are stuck between a rock (donor countries) and a hard place (recipients and recipient country governments), in which the interests of donors and recipients don't fully align. Better planning alone won't make this problem go away. 

Owen offers up an alternative, something he calls a collaborative market. The concept draws on some of the ideas in The Market for Aid, but goes a step further:

A considered combination of market mechanisms, networked collaboration, and collective regulation would be more likely to lead to significant improvements [in the aid system]. A “collaborative market” for aid might include unbundling funding from aid management to create more explicit markets; better information gathered from the intended beneficiaries of aid; decentralized decision-making; a sharp increase in transparency and accountability of donor agencies; the publication of more information about results; pricing externalities; and new regulatory arrangements to make markets work.

A Chinese Marshall Plan?

Geoff Dyer explores the idea of using China's massive foreign exchange reserves to form an investment vehicle for emerging markets. He has assembled a series of proposals from leading Chinese thinkers, including some from within the government.

For example:

• Hu Xiaolian, deputy governor of the central bank, has proposed the idea of a "supra-sovereign wealth investment fund" which would invest in developing countries so that "these countries (can) serve as new engines in global recovery and growth."
• World Bank Chief Economist Justin Lin thinks that "Chinese companies should step up investment in Africa and south-east Asia, including outsourcing some low-end manufacturing, to boost consumer demand."
• And finally, Xu Shanda, former head of China's federal tax bureau, has "called for the creation of a ($500bn) Chinese 'Marshall Plan' to lend money to Africa, Asia and Latin America to boost living standards in those regions and create demand for Chinese products to replace struggling US and European customers."

I find myself in agreement with Dyer's take on the idea:

If China can channel even a modest portion of its vast liquidity to the developing world in a responsible way that boosts demand without creating new, suffocating debt burden, it will be pushing on a door that is already opening.

Financial crisis lab rats

This year's Nobel prize for economics went to Oliver Williamson and Einor Ostrom - both known for grounding their work in the real world. The committee perhaps wisely shunned researchers in finance or macroeconomics who are still coming to terms with the financial crisis and global recession. No such shyness from the judges for the Ig Nobel Prizes - committed to showcasing improbable research that makes you laugh and think. They found a way to reward those who have tested financial market models through all too real experience, giving their economics prize to the management and auditors of four Icelandic banks for demonstrating that "tiny banks can be rapidly transformed into huge banks, and vice versa - and for demonstrating that similar things can be done to an entire national economy."

The Ig® Nobel Prizes - now in their 19th year - make for entertaining reading. Where else can you see 3 true Nobel Laureates, including Paul Krugman, wearing brassieres that convert to face masks? Yet they provoke discussion about the purpose of research and the value of unpredictable, unintended results. Could we champion an award to highlight improbable research and projects in the World Bank Group? I welcome nominations.

Getting privatization right in higher education

As I blogged about not too long ago, public universities around the world are facing serious pressures due to the financial crisis. Perhaps the moment is ripe for reform—when the fiscal situation gets tough, it can help make possible what only recently seemed unimaginable. Emerging economies would do well to take advantage of the moment and carry out reforms that address not only the immediate pressures arising from the financial crisis but the longer-term issues that have built up in higher education over the last two decades.

A publication by the Institute for Higher Education Policy (Full disclosure: I am a former employee of  IHEP) takes the bull by the horns on this one. Privatization in Higher Education: Cross-Country Analysis of Trends, Policies, Problems, and Solutions lays out the problems that many countries are grappling with:

The development of private higher education and the introduction of cost-sharing at state institutions in many countries have led to an unprecedented increase in the number of students who have to pay their own tuition, as well as other costs of higher education. About 50 percent of students in Ukraine, 73 percent of students in Brazil, and most students in Mongolia pay for their higher education. Student financial aid in these countries has been disproportionately granted to students studying at state institutions. These students are eligible for tuition waivers, state scholarships, grants, state-subsidized loans, and other types of support. Meanwhile, students in private institutions are often left on their own, irrespective of their academic abilities or ability to pay.