Well, I am writing this in the form of an extended comment, since I am on holiday and using the ecellent wifi facility in the local public library, but am about to go fo lunch. As I realised as I was going to sleep last night, my last Sweden post was always going to cause irritation and confusion. Continue reading
Is the Latvia intervention team assembling?
So we’re in the new era of the Swedish presidency of the European council. Insh’allah this will be the last country presidency under the rotating system once all that Lisbon messiness is sorted out. The Swedes have the advantage of taking over from the politically hobbled Czech presidency and they begin with a slick website and very much with the times there’s a Twitter feed. So what do we learn is getting the Swedish presidency twitterers excited? —
02/07 14:39 MÃ¥rten Wierup: 1st meeting went well-the most exciting thing that happened was that Latvia’s excessive budget deficit was added to the Ecofin agenda (7/7)
One’s first reaction might be to be glad that there’s someone in the world who finds Ecofin agenda items exciting. One’s second reaction might be to wonder: what’s the need for yet another rap on the knuckles for Latvia? Our twitterer is indeed correct that Latvia did not appear on the original draft agenda, so what’s the urgency? Well, Edward had the relevant background a few days ago. The IMF and the European Commission appear to be not on the same wavelength regarding the Latvian rescue program, not least on the role of the exchange rate peg therein. If there is a split (especially within the European institutions), it might well be the kind of thing that would get sent to the ministers to sort out.  One thing this suggests: since Ecofin doesn’t meet till next Tuesday, don’t hold your breath waiting for the next installment of the IMF loan to Latvia.
State of the Art Monetary Policy In Sweden
Animated by yesterday’s export driven PMI result, Sweden takes poll position in quantitative easing and commits to keeping 0.25% rates on hold till the end of 2010. Mind you, they are lucky enough to have Princeton economist and avid deflation fighter Lars Svensson in there on the board to steer them through all this. Good for Swedish growth, Krona negative, great for exports. Let’s go, let’s go, let’s go.
Sweden’s central bank cut its key interest rate by 25 basis points to a new record low of 0.25 percent in a surprise move on Thursday, and said it would offer one-year loans to banks to foster lending. The Riksbank said it expected interest rates to remain at that level until late 2010. Deputy Governor Lars Svensson disagreed with the decision and advocated a cut to zero. Nearly all economists in a Reuters poll had expected the Riksbank to keep rates on hold at 0.5 percent, in line with a previous central bank forecast that suggested rates would stay around that level at least until early next year.
“The repo rate is expected to remain at this low level until autumn 2010,” the central bank said in a statement. “The Riksbank’s assessment is that after cutting the repo rate to 0.25 percent it will have reached its lower limit in practice, and that the situation on the financial markets is still not completely normal. “Supplementary measures are necessary to ensure that monetary policy has the intended effect.” Those measures entailed offering 100 billion crowns’ worth of loans to the banks at a fixed interest rate and a maturity of 12 months. “This should contribute to lower funding costs for the banks and lower interest rates for companies and households,” the Riksbank said.
The reaction on the Krona front was swift:
The Swedish krona fell against the euro after the country’s central bank unexpectedly cut its main interest rate. The krona weakened 0.6 percent to 10.7868 per euro as of 9:32 a.m. in Stockholm. The Swedish currency depreciated 0.9 percent to 7.6527 against the dollar. The Riksbank lowered its main rate by a quarter of a percentage point to 0.25 percent. All but one of 17 economists surveyed by Bloomberg forecast no change.
Some people have been saying in response to warnings that this recovery will be export lead, “exports what exports”? What a load of tripe! Without exports there will be no recovery. The next lesson in abc economics: in times of crisis relative currency values matter more. And to prove it, Swedens PMI just poked into the growth zone, 50.5, following 43.7 last month. The 17% odd devaluation with the euro would have nothing to do with this, would it? Welcome Sweden, the worlds fourth 50+ PMI.
The Global Manufacturing Contraction Eases Again In June
Global manufacturing took another step towards growth in June – but the process was, as ever, uneven. The JPMorgan Global Manufacturing PMI posted 46.9, its highest reading since last August. The current output component even expanded slightly following a year-long period of contraction. The PMI has now remained below the neutral 50.0 mark for thirteen successive months.
The principal factors weighing down on the level of the PMI in June were declines in new orders, employment and inventories. However, rates of contraction in new work and employment eased to their weakest for thirteen and eight months respectively. Looking ahead, the new orders to inventories ratio – which tends to move in advance of the production cycle – rose for the sixth month running to its highest since April 2004. Only 4 PMIs – those for China, India, Turkey and Sweden posted growth readings in June (although Sweden is not included in the JP Morgan survey). There was a general easing in the rates of contraction recorded elsewhere. The next two to three months will now be critical in order to decide whether the sector is going to move over to expansion mode, and if it does, at what pace?
Better Socrates Satisfied?
As Andrew Sullivan has chronicled, it has been a couple of exciting weeks for those who hope technology will unleash a wave of democratization. Texts, tweets and technorati have surely played a role. At the same time, Marx predicted the railroad would lead to the dictatorship of the proletariat, and we all know how that ended.
Another factor that has clearly influenced events is the spread of education –in particular the number of college students. This recent paper suggests that educated people (Socrates aside) are far more likely to support democracy. But again, that may not be the full story. This paper suggests that there is no link between growing education rates and transition to democracy. Given the rapid global advance in school enrollments, alongside growth in access to communications technologies, that suggests we may see more and more dissatisfied democrats living in authoritarian regimes. And falling sales of hemlock.
AIG: The Fifth Horseman?
The recent global financial crisis has added 100 million more to the ranks of the world’s undernourished, according to the FAO. Doubtless Paul Ehrlich is saying “I told you so.â€Â But it may be a little soon to dust off your copy of Malthus. The trend remains towards the tubby. There are as many people overweight as malnourished (around one billion) and 300 million of them classify as obese. Many of those overweight live in the same household as an undernourished child. Within such homes as on a global scale, the problem is one of distribution, not absolute shortages.Â
Furthermore, the good Reverend Malthus’ model just doesn’t fit the facts. No country worldwide exhibits the characteristics that Malthus suggested –stagnant output, rising populations leading to income decline and rising income fostering population growth.   Only one country in the World has seen domestic product grow more slowly than 0.5 percent a year since the 1960s. Fertility rates are declining and health is improving almost everywhere.  And populations have expanded in counties slow and fast-growing alike. The global spread of a range of technologies and innovations, fostered by an unprecedented rollout of education, has broken the link between land area and limits to output as much as it has improved the quality of life worldwide.
And in rich countries, a little bit of recession can actually be good for the health, as people eat better and substitute cheap entertainments like a walk in the park for expensive entertainments like drag racing. Maybe Bernie Madoff is just a misunderstood miracle worker.
Estonia’s Neck Goes Into A Latvian-style Noose
Well, today is the 30 of June, and still no news from the IMF on releasing the next tranche of the Latvian loan. Perhaps this is one of the reasons why (via Ott Umelas at Bloomberg).
Estonia’s fiscal deficit under European Union terms more than doubled in the first quarter from a year earlier, indicating the Baltic country may not be able to adopt the euro in January 2011. The deficit, including social security and state and municipal spending, rose to 5.57 billion krooni ($502 million) from 2.06 billion krooni a year earlier, according to data published on the statistics office’s Web site today. The gap corresponds to 2.5 percent of gross domestic product, according to Bloomberg calculations based on the Finance Ministry’s forecast for Estonian GDP for 2009.
The first-quarter figure means the government will have to keep the deficit at 0.5 percent of GDP for the rest of the year to meet euro-entry criteria. Finance Minister Jurgen Ligi has said he sees no improvement in the economy before the third quarter. The minority Cabinet of Prime Minister Andrus Ansip has cut the 2009 budget deficit by 16 billion krooni, or 7.3 percent of GDP, in recent months to avoid depleting state reserves and keep the fiscal deficit at last year’s level of 3 percent of GDP, the same as the EU’s budget-deficit threshold. This would allow Estonia to adopt the euro in January 2011, the government’s main economic goal.
So why a “Latvian-style” noose? Because these countries have built for themselves a sort of “paradox of fiscal thrift” connundrum, whereby the more you cut, the more GDP falls, the more revenue rises, the more spending grows, the more the fiscal deficit goes up, the more you have to cut, and so on. In the end, as Kenneth Rogoff said yesterday, it simply becomes too painful. There seems no way Estonia can achieve a 3 percent deficit this year at this point. And remember what IMF First Deputy Managing Director John Lipsky said last week.
“If there is a solution it begins with macro policies,†Lipsky said. “No single exchange rates solution, or exchange regime represents a solution to these kinds of problems. What is important is that the currency regime is credible and coherentâ€.
Estonia now has no exit strategy, at least not to join the euro in 2011 it doesn’t And then we have Lithuania and Bulgaria to think about. Basically, the ECB and the European Commission should never have drawn a line in the sand across the original Maastricht criteria. But it’s too late for that now. Continue reading
Life is Cheap
The WHO has declared swine flu a pandemic and the US is considering a vaccination program involving 600 million doses.Â
So far, the CDC estimates that there have been a million infections and 127 deaths in the US. That’s a pretty low death rate, of around one per ten thousand. The US rate for measles in the 1970s was almost ten times as high. In turn, that suggests a comparatively low benefit-cost ratio compared to other vaccine programs.
The good news is that even more expensive vaccine programs are amongst the most cost effective health interventions. The flu vaccine only costs between $5-9 a dose, for example. And they are comparatively easy to roll out. Not least, thanks to vaccinations sold at a dollar a pop, almost no one gets measles in the US any more. In the first half of this year, there were only 25 cases in the whole country.Â
The even better news is that, thanks to expanded vaccination coverage, dramatically fewer people die of measles the world over. Measles deaths in Africa fell by 91% between 2000 and 2006 alone, from an estimated 396,000 to 36,000. Keep on going at this rate, and measles might be the next smallpox.Â
Other simple health solutions that have saved millions include hand-washing and antibiotics. Their spread lies behind a dramatic global convergence in health outcomes discussed in this book I’m plugging. And there’s still scope for cheap solutions to make a big difference to global health outcomes. One third of the remaining ten million child deaths each year could be prevented if parents worldwide breast fed, used sugar-salt solutions to treat cases of diarrhea and put their children to sleep under insecticide-treated bed nets. Breast feeding is free, sugar-salt packages cost pennies, and bednets perhaps $5.Â
The big problem now is to create demand –informed parents who understand what to do when their child has diarrhea, for example. In the Indian state of West Bengal, fifty percent of parents think you should give a child less to drink –absolutely the wrong thing to do. Child mortality in the state is three times higher than in the state of Kerala, where only five percent of parents suggest that response.  And not all parents understand the importance of a vaccination program, especially when their state governors are telling them it is part of a plot to sterilize their children, as it might be –this particular piece of insanity helped delay the global eradication of polio.Â
Of course, as the recent flap over MMR in the UK demonstrates, the demand side isn’t just a Third World problem. Let’s hope we don’t face the same issues with swine flu vaccination.
Are The IMF and The ECB Lining Up Against The EU Commission Over Latvia?
There was a very interesting and revealing press conference given by IMF First Deputy Managing Director John Lipsky and European Central Bank governing council member Christian Noyer in Paris on Thursday. Christian Noyer said that, in his opinion, Baltic countries like Latvia would not be helped by joining the single currency (the euro) prematurely.
“It’s in the interest of candidate countries not to enter too early because it risks making the economic situation unbearable,” Noyer said.
Lipsky, for his part stressed the region could not depend on any particular foreign exchange regime to shield it from the effects of the financial market crisis:
“If there is a solution it begins with macro policies,” Lipsky said. “No single exchange rates solution, or exchange regime represents a solution to these kinds of problems. What is important is that the currency regime is credible and coherent”.
Do I detect a shift in emphasis here? Certainly Latvia’s currency regime is not credible (most external observers now consider devaluation inevitable), nor is it – in my opinion – coherent. And there has only been a deafening silence coming out from the IMF in recent days on the topic. Continue reading
Africa (and Aid): Not Dead Yet
Dambisa Moyo  is one of Time’s 100 most influential people alongside the women of The View and ahead of Vladimir Putin (influential last year. This year, meh). She continues to attract attention and stir acrimonious debate. But one thing her critics and supporters agree about is that Africa is in a mess.  Â
I’ve just finished a book (free online, for a bit) that paints a more positive picture. It is true that the region’s performance in terms of GDP per capita has been pretty dismal –many countries are as poor as economies in Medieval Europe. But that’s a pretty narrow measure of success or failure. If you look at measures of health, or education, or civil and political rights, Africa has seen real progress. Even as parts of the continent are mired in civil war and famine, the average African born today is far more likely to survive childhood, to go to school and to have some modicum of civil and political rights than their parents or grandparents. Progress in the quality of life has continued at a historically unprecedented pace in large parts of the continent.Â
The book discusses how economic stagnation and broader development have coexisted even over the long term –a subject for a later post. Regardless, these measures of broader success suggest that it is premature to write off the region as a failure –and perhaps even to declare the death of aid.