Interview of Robert Lucas

Holman W. Jenkins, Jr. from the Wall Street Journal interviews Prof. Robert Lucas, one of the most influential macroeconomists in the 20th century. In the interview, Professor Lucas talks on the current global economic volatility (and his explanations), why he voted for Barak Obama, and how Milton Friedman changed his life.


Here is the link for the interview.

And want to read some responses to that interview?

From Noan Smith
From Karl Smith
From Paul Krugman
From Antanio Fatas

BD Economy in tangles

Mr. Inam Ahmed from the Daily Star writes an article on the recent development of the Bangladesh economy and rightly finds it in distress.

Here is the link of the article.


Some important points from this article:

 1.    Monthly mortgage payment of a borrower has been raised in response to the central bank's tighter monetary policy to fight inflation.

2.    The government had no way but to increase fuel price. ….. But one may ask if the government had any alternative and what could have been the ultimate outcome of not increasing fuel price.

3.    In the last two and a half years, very little investment has taken place in sectors other than power.

Though the concerns in the article are right and timely; however explanations missed something important.

Comments on major points:

 1.    Well, why I think that the whole economy has been struggling due to ‘emotional’ monetary policy that the central bank has been following over the last few years. I have observed, the monetary policy sometimes listens to the ‘heart’ of personal wishes (based on unverified belief), then acts as the safeguard of the fiscal policy and finally had to follow the instructions from multilaterals. The result? The central bank lost its path, forgot its prime role; and the whole economy is in distress now.

2.    Alternative? A) Did the government think about cutting tariff rate on fuel import? B) Did the government think about cutting fuel import other than emergency purpose for an interim period as fuel import is the source of all problems? The best alternative: Did the government think about cutting budget expenditure (and it was done many times in history)? Please see the example of Rahman; he had to cut his budget to align with his current income-expenditure pressure. The government can act like Rahman and cut its unnecessary budget expenditures (such as, recreation related expenditure of officials in the government, and dropping ambitious projects including quick rental power projects). The Second best alternative:  Though Bangladesh is not a typical welfare state (as defined in the developed world), still it provides a large amount of subsidy in priority sectors such as agriculture. Welfare states usually impose high tax rates, and follow extremely progressive tax system because they need money to finance for welfare. When the government of Bangladesh provides large subsidy, why not it follows the strategy of those welfare states – impose high taxes on the rich?

3.    That’s true, no doubt. Then I wonder why the author didn’t question the high GDP growth that the country has been experiencing over this period. What was the source of growth in this period then? Because of increased investment efficiency despite acute power shortage?

4.    I wonder why the author didn’t ever mention IMF conditionalities on fuel price hike (or, subsidy reduction on fuel import) in his article. I think, choosing the current time for fuel price hike is closely related to IMF conditionalities and Finance Minister’s visit in World Bank-IMF Annual Board Meeting. Yet I am not blaming anybody, just mentioning.    

2011 Nobel Predictions

Thomson Reuters predicts the Nobel Prize in Economic Sciences for 2011.

Here is the link.

Fuel subsidy debate continues...

In the article of Shamsul Huq Zahid published in the Financial Express, the discussion on subsidy related to fuel import came more articulately. I think, the authority needs to clarify these issues.

Here is the piece from the Financial Express. 

Fuel Subsidy Debate

Mr. Rejaul Karim Byron from the Daily Star makes a report, where various subsidy statistics have reported for FY11 and FY12. Based on the data supplied by the Finance Ministry, the analysis claimed that, if fuel prices were not raised, then the government need the more than double the amount that it allocated while budget announcing. 

Here is the news link.

However, several issues need to be clarified here:

 ·         Subsidy increased due to higher international price is a misconception (or, partly true). Recent increase in subsidy is not wholly due to price increase at the international market, but also due to quantity increase in fuel import. As government decided to establish fuel-based power plant in the private sector, the fuel demand increased significantly and accordingly the subsidy given in this sector.

·         The domestic price of fuel includes the import tariff that the government imposes on fuel import. That means, a part of per unit fuel price goes to the government treasury as its revenue from people’s pocket. I wish the respective government authority provides the data of prices (international and domestic) without including the tariff on fuel import; then we decide the amount of fuel subsidy and argue whether the government is giving any subsidy in the sector. 

Inflation forecasts after energy price hike

So, experts think that the latest energy price hike by the government will boost the current higher rate of inflation and will bring more pressures on the income of the individuals.

Here are the expert opinions. 

World Economic Outlook 2011, IMF

IMF publishes its annual flagship publication, World Economic Outlook: Slowing Growth, Rising Risks (September 2011).

Here is the link for the report.

Apparel gains from China’s rising costs

BBC Business News made a report on the garment industry of Bangladesh. Here is the link.

Economy is at risk!

Showkot Hossain and Manjur Ahmed from the Prothom Alo writes a report on the current risks of the Bangladesh economy. It's wonderful to read the views on the issue from two prominent macroeconomists of the country, Prof. Wahiduddin Mahmud and Prof. M. A. Taslim. Especially, reading the views from Prof. Wahiduddin on economic update after such a long time is great. To me, the concerns that they made and came through the report, are very much logical. 

Here is the news link!  

World Development Report 2012

The World Bank Institute publishes World Development Report (WDR) 2012: Gender Equality and Development. 


Here is the link for the whole report.

Rise in fuel prices

The government has raised fuel prices by Tk5.0 per litre for diesel (from Tk46.0 before), kerosene (from Tk46.0 before), petrol (from Tk76.0 before) and octane (from Tk79.0 before) and Tk 8.0 per litre for furnace oil (from Tk42.0 before) with effect from 19 September, just four months after the previous hike on 6 May 2011.

Why the government had to take such a decision despite a persistently higher inflation in the country?

Government's explanation: (i) to reduce the losses (or, reduce the subsidies of the government in this sector) of Bangladesh Petroleum Corporation (BPC), which was due to the rising demand for petroleum products, especially by new diesel and furnace oil-fired rental and quick rental power plants.; (ii) to help check the smuggling of petroleum products to the neighbouring India and Myanmar.


Other plausible (and possibly, that's the main reason) explanation:  To fulfill the conditionalities of IMF to receive US$1.0 billion programme loan from this multilateral organization. 


Impact: Obviously, it will push up prices of food and transportation cost, although the government plans to give cash subsidy for diesel to be used for pumping water to the farmland. Even this subsidy measure of the government can't stop the direct adverse effect of higher fuel prices on commodity prices.


Here is a news link from the Financial Express.
  

IMF Statement on Bangladesh

An International Monetary Fund (IMF) mission led by Mr. David Cowen of the Asia and Pacific Department visited Bangladesh during September 5–15 to conduct the 2011 Article IV Consultation discussions. 


Here is the link for Press Release.


One interesting observation:
IMF projected 6.3% real GDP growth for Bangladesh in FY12, whereas just a few days back, Asian Development Bank projected 7.0% real GDP growth in FY12!

Inflation in August reached 11.3%

Though food inflation declined marginally in August 2011 from its level in July, the overall inflation rose to 11.3% in August from 11.0% in July, basically due to significant increase in non-food inflation (from 6.5% in July to 8.8% in August!). Interestingly, the rise in non-food inflation is higher in rural areas than urban areas!

The significant increase in non-food inflation lately may be due to the second-round effect (wage rise) of high food inflation and, usually it persists for a longer term.

Here is the link for latest inflation data.

New Banks: Don’t Say ‘Yes’ If You Want to Say ‘No’

Despite the 'good' suggestions from both people and institutions for not issuing new licenses for banks, Bangladesh Bank Board finally decided to give licenses for new banks, as you all know, I suppose. And again politics kicked out economics, unfortunately.

After reading the wonderful article (New Banks: Don’t Say ‘Yes’ If You Want to Say ‘No’) from T T Ram Mohan, I think, RBI is facing the similar problem as BB; however, the arguments that has given in Mohan's article for opening up new banks are good and BB can follow the similar objectives while making its guidelines for new banks. In addition to fixing large capital binding, BB can clarify in its guidelines why it thinks that the Bangladesh economy needs more banks at this moment: either for ensuring greater competition, or ensuring financial inclusion. And then how these new banks will ensure these objectives?

Here is the link of the article.

Thanks to Mr. Rashed Al Mahmud Titumir for notifying this.

Asian Development Outlook Update 2011

Asian Development Bank publishes its flagship report Asian Development Outlook Update 2011: Preparing for Demographic Transition presents an analysis of developing Asia’s recent economic performance plus its prospects for the next two years.

Here is the link for the whole report. 

Here is the Bangladesh Country Chapter.

Elinor Ostrom: The Master Artisan

The Finance and Development of the IMF profiles Elinor Ostrom, the first and only woman to win the Nobel Prize in Economics. It's a real pleasure and honor to read a detail on this wonderful person.

Here is the link.

Dhaka: Worst Stock Market!

So, Bloomberg News confirmed that Dhaka Stock Exchange is the worst performer in Asia, while last year it was the third among the global best!

Do we always love to live around the extreme line? 'সত্যি, বিচিত্র এই দেশ!'

Here is the news link.

Sixth Five-Year Plan!

The Government of Bangladesh has launched its 6th Five-Year Plan (2011-2016). Here is the link of the document for your information. 


Link of Sixth Five Year Plan


Cheers!

Transit and Bangladesh-India relationship

Economist Dr. Binayak Sen writes on the Bangladesh-India relationship and critical issues in regards to transit in today's Prothom Alo. The facts that issues related to institutional and infrastructural bottlenecks in India have been creating problems while exporting Bangladeshi commodities to India received significant attention in this article. And providing transit to India should not take place without resolving these issues, as came up in the concluding remarks in the article. 

Though the article is not so long, however the depth of the analytical approach is critical to know. A nice one to read. 

Here is the link. 

Policy Rates increased

Bangladesh Bank raised its key policy rates, repo and reverse repo, once again by 50 basis points to 7.25% and 5.25% points, respectively, as explained, to curb the recent high trend of inflation. However, in my suspicion, the decision is closely related with the target money supply growth as mentioned in the latest Monetary Policy Statement (MPS, July 2011). It's the right decision to keep the money supply growth in tolerable level, however the opportunity cost of that should be measured properly and alternatives policy options are always good to open.

Here is the news link.  

Wrong monetary policy of BB?

Well, according to this news link of the Financial Express, inflationary pressures will persist in the Bangladesh economy due to wrong monetary policies taken by the central bank, Bangladesh Bank (BB) (in the Monetary Policy Statement (MPS)), as noted in its latest Bangladesh Economic Update (BEU) of 'Unnayan Onneshan', a non-government research organisation.

As explained in BEU, there are two factors that has been driving the current phase of inflation: (i) quick transmission of international prices into domestic prices; (ii) weak public distribution system. On the misguide of MPS, the policy rate hike will increase the cost of production, thus will dampen investment, which may fuel the price at further level in future. Good explanation!

Here is the news link.

Here is the link of Bangladesh Economic Update of 'Unnayan Onneshan'

In my view, the explanation is partly right. While the central bank has been assuming the demand side pressures to control price level while setting its policy rates, which is partly true; the BEU considered supply side factors as the sole explanation of the problem. This is true that supply side factors outweighs those from demand side, however the central bank is simply can't sit independent without interfering in the money market. The facts should be remembered are: (i) money supply growth is so high (in fact doesn't match with the great MV=PY theory!); (ii) huge excess liquidity; and (iii) unproductive use of money. Though the reasons for inflation are the same in China and India as in Bangladesh, please look at their policy decisions; they are more aggressive (or, restrictive) while conducting their monetary policies. I am not pretending that BB is doing a good and appropriate job in controlling inflation; however, I am just defending its position.