Sunday, January 24, 2010

Plutonomy: why the rich get richer

I encountered some articles about the subject "plutonomy": this is the recent phenomena in the UK and the US where all the benefits of economic growth go to a small elite and as a consequence the inequality is steadily increasing. The concept comes from a "Citibank paper from 2006.

The key reasons it gives for the phenomena are:

1. They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants…the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.”

2. There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.

3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.

Inequality is something that fascinates me as it may have been a major cause of the economic crisis of the 1930s. The 1920s were a time of increasing inequality too and that inequality lasted until World War II. During the war it decreased fast and after the war it stayed at the much lower level.

The paper raised some indignation when it became public as it seemed to justify the increasing inequality. I am more interested from an academic point of view. I don't think the paper is the whole story, but it is an interesting contribution. One of the thing that I miss in the paper is attention to power: as the rich get richer they get more power to influence politics so that it favors them even more.

Saturday, January 23, 2010

Greece on the road to an economic meltdown

In 2002 the Argentine economy broke down. For years their coin had been pegged to the dollar, but as the inflation in Argentine was higher than in the US this let to an increasing trade deficit for Argentine. Yet the Argentine government couldn't muster the political courage for the painful reforms that were needed to correct this. And so, finally, in 2002 the country had to let its currency float. As a result the economy shrunk that year with 10%. But in the following years it regained healthy growth.

It looks like Greece is going the same road. But it is doubtful whether it will have such a speedy recovery: the problems look to serious. The budget deficit is 12%, it imports three times as much as it exports (29 vs 93 billion US$) and tourism fills only a small part of that gap.

Yet the Greek government can't be bothered with economic reform. They have promised the EU to reform their budget in 2012. But given their lacking sense of urgency they most probably will resort to new bookkeeping tricks rather than apply real reform. The inevitable conclusion has to be a serious economic meltdown.

When the credit crisis hit the Baltics demanded a speedy entry into the eurozone with the claim that that would save their economy. The example of Greece seems to indicate that it only delays the problems by a few years.

As Greece is a member of the eurozone no one knows what form such a meltdown will take. Will the Greek state go broke and stop payments? Will it exit the eurozone? The eurocrats are afraid and go out of their way to pamper the Greek government in order to delay the inevitable. However, this will only have as effect that the final crisis will be worse.

It may take a few more years before the meltdown happens. But the later it happens the worse it may be. For the Balkan countries such a meltdown will be bad news. Greece is an important investor in many countries and it employs many migrant workers from Albania.

Russian Youtube cop arrested

Russia has a serious problem with corruption, specially in the police. Some time ago a cop from Novorossiisk published a video complaining about the local coruption. Now he has been arrested for "fraud and abuse of power".

It looks like Putin prefers to let his comrades of law and order pilfer the country rather than to restore order and make the country a safe place to do business.

Postscript: Here is an update: the cop, mr. Dymovsky, was released after a few weeks, probably because he is too famous. Russia's parliament is now adopting a law that would make what he did punishable.

Postscript 2: on 3 august the NY Times published a video report with the title "Russia's YouTube Whistle-Blower" about Dymovsky and others who after him also published video complaints.

Friday, January 15, 2010

The big US mortgage heist

One part of the US crisis concerns the mortgages. Until now the US government has spent $111 billion for the mortgage guarantee that it provided through Fannie Mae and Freddie Mac. But as it recently
raised the cap of $400 billion there is the fear that the final bill may be much higher.

This sounds like the US is just paying for past sins, but I don't believe so. I suspect that much or even most of the money is landing in the pockets of the banks and other mediairies that are between the Fannie Mae and Freddie Mac (the big guarantee holders) and the mortgage holders. These inbetweens tend to give their customesr big fines when they are late with payments. This often results in swamp of fines where customers get another fine for not paying the previous one on time, etc. As a consequence the money that those customers can pay ends up in the pockets of the inbetweens who charge it as a (very generous) reward for their extra work to reclaim the money. The creditors end up getting nothing.

The Obama administration has tried to improve the situation by trying to stimulate the rescheduling of those loans. But this has effectively been sabotated by the inbetweens who formally consider rescheduled loans as new ones and ask the same proves of creditworthyness that they demand for new loans. Given that these customers are in financial trouble it is no surprise that very few loans have been rescheduled. I think the Obama administration has made a mistake by seeing this only as a consumer problem. It encounters the same problem as a guarantor of those mortgages.

The "securization" of mortgages is a recent innovation. In the past banks sometimes outsourced the contact with the customer, but they always kept the final control so that they could push out the intermediary when they found that necessary. In the present situation the economic owners of the mortgages no longer have that possibility. It looks like that has become a serious problem now.

In my opinion there is only one solution: removal of the inbetweens. The US should nationalize Fannie Mae and Freddie Mac and they should take over the handling of any mortgage that is guaranteed by them where the customer is late with payments. Local offices of those organizations should then take care of rescheduling those mortgages when necessary.

Such a solution would be quite similar to the Resolution Trust Corporation that handled the aftermath of the savings & loans crisis.

Wednesday, January 13, 2010

The AfPak ethnic border

In this blog entry I want to look at the Afghan conflict from a distance. We are regularly told about the fissure in Afghanistan between the Pasthuns and the other tribes (mainly Tajiks). But they speak closely related Persian languages. The real ethnic border is further east between the Indian and the Persian world. It is the Indus.

Pakistan can be divided in three parts. The thinly populated north houses a diversity of tribes, most of whom speak Tibetan languages. The Eastern half speaks Indian languages and the Western half speaks mainly languages related to Persian (Pashtu and Beluchi). The border between east and west is the Indus. Although there live much more people in the east (150 million) than in the west (30 million) the areas have a comparable size. Geographically too the Indus is a border: the area west of it is called the Iranian Plateau. Being a minority the Pashtuns and Beluchi are discriminated somewhat in Pakistan.

This raises the question whether Pakistan has really an interest in a stable Afghanistan. A prosperous Afghanistan might seduce the Pashtun to demand to join Afghanistan (the Beluchi are already fighting for secession). It would result in a more prosperous Western half of Pakistan that would be more oriented towards Kabul then towards Islamabad and Karachi. Pakistan's Afghanistan policy centers on religion for a good reason. Religion is the main thing they have in common and it is also the main thing where Afghanistan (mostly Sunni) differs from Iran (Shiite). However, when you focus on religion you end up supporting religious hardliners like the Taliban. An additional advantage of the Taliban for Pakistan is that its primitivity helps to prevent Afghanistan from becoming a prosperous country.

This raises the question why we ignore culturally more related Iran and Tajikistan and rely on Pakistan in our Afghanistan policy. Iran has good reasons to stabilize Afganistan that is major source of drugs, crime and unrest. Yet the religious division makes it rather certain that Iran never will have real close control over Afganistan. Iran is also a much richer country that has much more to offer to the Afghans than Pakistan.

Involving Iran in Afghanistan would have as an additional advantage that it would reduce Iran's fear for being surrounded and threatened by the US. This could result in more cooperative policies towards Iraq and regarding nuclear matters.

Wednesday, January 06, 2010

The dark side of micro-finance in Bosnia

Al Jazeera has an article about micro-finance in Bosnia. The theory is that microfinance helps people to start small businesses. Reality in Bosnia was that most loans were just used for consuming (nobody checked what you did with the money). Companies competed to extend loans and by the end of 2008 there were 390,000 loans on the books, together totaling over BAM 1 billion ($770m). As there was no central credit rating organization some people took several loans from different banks. Now the default rates are rising fast and the banks have become stingy.

For starting businesses the loans were not suitable. The rates were too high, the typical term of one year maximum much too short and the amounts of money available much too low. If you asked for 70,000 US$ it was not possible. So nothing was solved for the large communist era companies that wanted to transform themselves.