Yet another explanation of the crisis

Did Woodstock hippies lead to US financial collapse? / The Christian Science Monitor - CSMonitor.com: "“The people who were at Woodstock turned into the yuppies of the '80s and the junk bond traders of the '90s and the Wall Street executives of the 2000s,” he says. “They went from Woodstock to driving a Jaguar.”"

And Google Begat

And Google Begat... - BusinessWeek: "More than 40 ex-Googlers have invested in about 200 fledgling companies since 2005, according to the research firm YouNoodle and reporting by Bloomberg BusinessWeek."

One Man to feed them all.

This is so ridiculous:


В.Янукович: "Мы выполним задолженность по заработным платам и пенсиям, чего так и не сделало действующее правительство. Учитывая катастрофическую ситуацию с государственными финансами, мы сделаем это за счет сокращения расходов на бюрократическую систему и начнем с себя. Одним из моих первых указов на посту Президента Украины будет указ о сокращении расходов на Секретариат Президента и другие структуры, которые обеспечивают его деятельность"


How much money can one save cutting expenses on running the Presidential Office? President can fire couple of guys, buy less glossy staples, what else? By the way, firing guys during a recession is not what Keynes and Azarov would recommend. And unemployed bureaucrats of such high rank should be getting nice bonuses and pensions.

Links February 25, 2010

• 9% of Ukrainians opposed to simplification of visa regime between Ukraine and EU I wonder what the rational to oppose the visa liberalization would be? Those are probably bureaucrats who are afraid of losing the income tax base.
• The past and future of export-led growth by Shahid Yusuf 
• European Parliament may call on EU Council to draft roadmap towards visa-free travel for Ukraine 

Links of the day, February 22

EU ponders 'what to offer' to Ukraine "Paradoxically, the European Union may seek to be more generous to Ukraine now that the country has a new pro-Russian president"  EU looks like a woman who feels offended when ignored even if she does not like the guy.

Links of the day, February 19

Moscow daily: Ukraine to join customs union with Russia The EU is letting us down, and here comes Moscow
Tigipko: Ukraine shouldn't join Customs Union of Russia, Belarus and Kazakhstan, KyivPost Tigipko disagrees

Links of the day, February 17

Ukraine's Debt Is Manageable, Tomas Fiala  "After the crisis erupted, debt remained stable at around $100 billion but the contraction of GDP pushed the ratio to an estimated 90% by end-2009. On this measure, Ukraine has a considerably more secure position than emerging European Union peers such as Hungary (186% by 3Q09), Bulgaria (123%) or Slovenia (119%)."

Industrial production in Ukraine in January 2010 is 11.8% up relative to January 2009 Metallurgy took the lead with around 30% growth. Regionally, Dnepropetrovsk region grew by 35%. 

I do not want to live on the bridge

Yanukovych in WSJ:

Let me say here, a Yanukovych presidency is committed to the integration of European values in Ukraine. Ukraine should make use of its geopolitical advantages and become a bridge between Russia and the West. Developing a good relationship with the West and bridging the gap to Russia will help Ukraine. We should not be forced to make the false choice between the benefits of the East and those of the West. As president I will endeavor to build a bridge between both, not a one-way street in either direction. We are a nation with a European identity, but we have historic cultural and economic ties to Russia as well. The re-establishment of relations with the Russian Federation is consistent with our European ambitions. We will rebuild relations with Moscow as a strategic economic partner. There is no reason that good relations with all of our neighbors cannot be achieved.

He did not say anything new, the main message is Ukraine should be a bridge between EU and Russia, and his main agenda to restore economic growth by: 1) creating jobs, 2) stabilizing prices, and 3) increasing social transfers.
My argument against the main message is that nobody wants to live on the bridge, people like to build on a solid rock. There is a clear trade-off that can not be avoided: either integrate with EU or integrate with Russia, in both cases there is something to lose and something to gain. Staying in between is a shaky and non-stable equilibrium.

Trade policy under new president

There are rumors in the press (link in Russian) that our new president, Yanukovich, plans to join the Customs Union with Russian, Belarus, and Kazakhstan and gives it a high priority. In this paper, I argue that any integration is better than the status quo of being lost between EU and Russia. However, deeper integration with other CIS countries will slow down Ukrainian perspectives to join free trade agreement with EU which would be  much more attractive for Ukraine.

V. Surkov speaking

Now infamous interview with V. Surkov:
Kremlin says tight control key to modernising economy, KyivPost "We have a school that teaches that political modernisation -- by which is meant political debauchery, 'anything goes' -- is the key to economic modernization," Surkov told the Vedomosti business daily.
"There is a different concept, to which I hold, which considers the consolidated state as a transitional instrument, a tool for modernization," he said. "Some call it authoritarian modernization. I do not care what it is called."


Full version in Russian

Links of the day, February 15

• What the World’s Leaders Did on their Winter Vacation: Nothing, by Mark Toma "Davos was an excellent opportunity to demonstrate unity and commitment to reforming the financial sector and reducing the chance of another crisis. Instead, however, participants at Davos failed to do any of this and simply revealed the growing divisions among nations. 
• This Financial Meltdown, and the Next One, by Harvard Magazine Niall Fergusson :" ... the decoupling of the West and the East—the ability of Asian nations, pursuing different economic policies, to rebound—had been the saving factor. This, he said, was a “profound” event, signaling the end of a 500-year period when “the West has dominated the rest.” 
• ПР будет больше давать денег населению, чтобы повысить внутренний спрос, Delo.ua  "В среднесрочной перспективе, по словам Азарова, необходимостью является снижение ставок налога на прибыль — с 25 до 20%, налога на добавленную стоимость — с 20 до 16%, налоговые каникулы для малого и среднего бизнеса, освобождение от налогообложения передовых технологий."

IMF Explores Contours of Future Macroeconomic Policy

Olivier Blanchard, one of the authors of a paper, “Rethinking Macroeconomic Policy,” has been interviewed:

On main findings:

The basic elements of the pre-crisis policy consensus still hold. Keeping output close to potential and inflation low and stable should be the two targets of policy. And controlling inflation remains the primary responsibility of the central bank. But the crisis forces us to think about how these targets can be achieved.

The crisis has made clear, however, that policymakers have to watch many other variables, including the composition of output, the behavior of asset prices, and the leverage of the different participants in the economy. It has also shown that they have potentially many more instruments at their disposal than they used before the crisis. The challenge is to learn how to use these instruments in the best way. The combination of traditional monetary policy and regulatory tools, and the design of better automatic stabilizers for fiscal policy, are two promising routes.

On the role of exchange rates:

Blanchard: In many emerging market countries, while monetary authorities describe themselves as inflation targeters, they clearly care about the exchange rate beyond its effect on inflation.

They probably have good reasons to do so. Isn’t it time to reconcile practice with theory, and to think of monetary policy more broadly, as the joint use of the interest rate and sterilized intervention, to protect inflation targets while reducing the costs associated with excessive exchange rate volatility?

Links of the day, February 11

Government proposes to eliminate basis for illegal seizures, KyivPost

Start dates set for gas pipelines, FT Stubborn Gazprom does not give up
Putin: Don't bet on manure to replace Russian gas, KyivPost It seems that the Kremlin starts a frontal attack to destruct attention from Gazprom problems and convince skeptics in Europe that new pipelines are economically justified in the long run.

Who pays for growth of China?

Who pays for the weak renminbi?, Arvind Subramanian

...the real victims of this policy are other emerging market and developing countries – because they compete more closely with China than the US and Europe, whose source of comparative advantage is very different from China’s.

In fact, developing countries face two distinct costs from China’s exchange rate policy.

• 
  
  

  In the short run, with capital pouring into emerging market countries, their ability to respond to the threat of asset bubbles and overheating is undermined.

Emerging market countries such as Brazil, India and South Korea are loath to allow their currencies to appreciate – to damp overheating – when that of a major trade rival is pegged to the dollar.

• 
  
  

  But the more serious and long-term cost is the loss in trade and growth in poorer parts of the world.

As an illustration, consider production of steel. China continued to increase the production of steel even during the crisis while countries like Ukraine were forced to cut down production by 20-30%:

Dani Rodrik  suggests a policy that would be good for the World Economy, while allowing China to grow further:

So there is a simple solution. It is possible to let the renminbi appreciate, and hence

eliminate the trade surplus, as long as complementary policies are put in place to support modern

tradables more directly. Such policies, combined with macroeconomic policies targeted at the

current account, can achieve both external balance and structural change in favor of modern

tradables.

Gazprom lecturing on clean environment

Scrap UK's wind farm plans, says Gazprom boss

Deputy chairman of Russia's Gazprom argues plans for renewable energy are irrational and should be replaced by more gas-fired power stations

Alexander Medvedev said the UK and other countries should adopt a more "pragmatic" approach towards reducing greenhouse gas emissions following the impasse at the Copenhagen climate change summit. He argued it would be impossible to meet the UK's target to generate a third of its electricity from renewables by 2020 without a big contribution from gas. He also claimed it would be three times cheaper to meet emission reduction targets by replacing dirty coal plants with new gas plants rather than wind farms.

"If we do not want to see the authors of the 2020 strategy decapitated in a public square, I do not think they can forget about gas," he said. "We at Gazprom believe gas should be treated on an equal footing as renewables. I just hope that after the disappointment post-Copenhagen that the decision-makers will take a more pragmatic and rational approach to this.

Eurozone mess

Krugman explains the mechanics of current troubles in Spain. His point is that Spain would be off the hook if it had own currency. However, the example of Ukraine, which is similar in many ways, clearly demonstrates that own currency is not sufficient to fight the crisis. Ukrainian hryvna has devalued about 100% but it did not help to boost demand too much.

Burden of power

Регионалы провалили свой же законопроект о соцподдержке бедных семей, liga.net

After the party of regions has won the presidential election, mostly by a) criticizing Tymoshenko for being responsible for current economic crisis and b) promising to  increase social transfers, they decided not to follow their promises. Of course, it makes a big difference where you stand, -- in opposition or in power -- but the speed of changing the rhetoric is amazing.

Links of the day, February 9

Inexact science of economics, Daniel Little Economics is an "inexact" science; or so Daniel Hausman argues inThe Inexact and Separate Science of Economics (Google Books link).  As it implies, this description conveys that economic laws have only a loose fit with observed economic behavior. 
Ukraine's democratic evolution, on hold for now, Anne Applebaum One of rare examples in Western press that give more nuanced, balanced view on what is going on in Ukraine politically.

Confusion about corruption perception index

During his campaign, V. Yanukovich constantly repeated the following punch line:

During the period since the Orange Revolution the ranking of Ukraine in the corruption perception index (CPI) changed from #83 to #146. Its one of the worst in the world with only African countries having lower rankings.

As constantly repeated by Transparency International (TI), CPI has a margin of error and any statement should contain a certain degree of probability.

There is some truth in this statement, but overall it is a false statement.
1. Ukraine was #83 out of 91 surveyed countries in 2001 with mean 2.1 (1 is the worst and 10 is the best)  margins from 1 to 4.1 which means that the "true" index of corruption in Ukraine is anywhere from 1 to 4.1 with 95% certainty, and there is still 5% chance that it is something else.

2. In 2009 Ukraine has #146 out of 180 surveyed countries with mean  2.2  and with 95% confidence interval 2.0-2.6. There are at least 34 other countries that have similar or lower CPI index including Russia which is not an African country. Moreover, looking at the margins of error one can only say that the level of corruption in Ukraine is significantly worse than in Mexico and Albania that are in the middle of the rankings.

One can easily see that the most accurate statement would be: nothing really changed in terms of corruption in Ukraine since 2001. It has been corrupt under president Kuchma and prime-minister Yanukovich, and it has been corrupt under president Yushchenko and prime-minister Timoshenko.

Steel prices and growth

IMF has prepared the report on Ukraine in June 2008, just before the crisis began. It is still relevant due to the main policy recommendation: there is a global downward trend in the relative prices of commodities, and the main commodity that Ukraine exports is steel. To break the influence of highly volatile in the short run, and declining in the long run price of steel, the first two steps are flexible ER and a counter-cyclical fiscal policy.

Here are some facts

During an economic upswing, an increase in steel prices by 10% speeds up a growth rate in Ukraine by 1.5% but the effect dies out in about a quarter. Consider how the steel prices were changing during 2000-2008

The 2004 has been the peak year when growth in steel prices contributed the most: due to 40% increase in steel prices the GDP growth was somewhat 6% than without this hike price.

Links of the day, February 5

For richer, for poorer, Paul Romer Romer advertises his idea of new development agenda. Build inter-government cities in developing countries with institutions imported from developed countries to replicate success of Hong-Kong.
South Korea's Experience with the Financial Crisis of 07/09, World Bank Blog South Korea should be a text book example for Ukrainian policymakers. Can Ukraine replicate the success of Korea?

Mergers, acquisitions fly under public radar, KyivPost Value of mergers and acquisitions in 2010 already exceeded the whole last year of about 1 bln $US.

Links of the day, February 3

• Daunting task ahead for poll winner, Financial Times With about $60bn in cash circulating, “Ukraine has the largest shadow economy in Europe”, equivalent to a third of GDP, said Tomas Fiala.
• Factbox: Policies of Ukraine's election frontrunners, KyivPost  ENERGY SECURITY  Tymoshenko wants to speed up exploration and extraction of oil and gas on the Black Sea shelf, to shore up Ukraine's energy security, while Yanukovych wants to modernise the coal industry, that could fuel much of steel production -- key to the economy.
• NBU changes organizational structure, KyivPost The National Bank of Ukraine (NBU) has decided to reorganize its crisis management directorate as a department of crisis management and operational control on the open market
• Hubble Detects Mysterious Spaceship-Shaped Object Traveling at 11,000MPH, Jesus Diaz They [NASA] have no clue about what this is, and they are still speculating about how this object was formed

Why China's growth is high?

Despite the global slowdown in growth, China has been growing above the target set by the government and reached the 8.7% growth rate in 2009. That all happened despite the negative shock to Chinese exports and FDI inflows. The stimulus of internal demand was the key: