Kevin P. Gallagher, Stephany Griffith-Jones, and José Antonio Ocampo

This month the International Monetary Fund (IMF) can make history.  The IMF is set to officially change its view on the regulation of cross-border finance.  Preliminary work released by the IMF exhibits diligent research and deep soul searching, but falls short of being a comprehensive view on how and when to regulate capital flows.  There is still time for the IMF to further sharpen its view.

In recent decades cross-border capital flows have increased massively; international asset positions now outstrip global economic output.  Direct investment is essential for growth but some forms of international financial flows (such as short-term debt, carry trade, and related derivatives) have proven to be usually de-stabilizing. Even long-term capital flows are highly, even increasingly pro-cyclical, as IMF research has shown.

Dr Jan Fidrmuc, Department of Economics and Finance and Centre for Economic Development and Institutions, Brunel University

Anti-austerity protestors take to the streets in central Athens earlier this year. Getty Images

Anti-austerity protestors take to the streets in central Athens earlier this year. Getty Images

Following the rejection of EU imposed austerity measures by the overwhelming majority of Greek voters, eurozone finance ministers have once again come to Brussels to try and save the single currency in what is being described as a ‘crucial 48 hours’.

Two thirds of the Greek electorate voted for parties opposed to the austerity measures required by the European Commission, ECB and IMF as a precondition of a further bailout; despite the outgoing government pledging to adhere to these measures.

Without compromise either by the Greeks accepting austerity measures or the EU offering concessions on the proposed package, another election is inevitable. In this case the bailout package will be suspended, Greece will default on its debt and an exit from the eurozone may follow. None of this will offer much respite for the struggling Greek economy.

In the past the EU offered concessions to voters having rejected EU treaties, however this time there is little political will, and not only in Germany, to offer sweeteners to the Greeks to help them swallow the bitter pill of fiscal adjustment.

Why then are the Greeks fighting against the support from the EU? And should the rest of the EU let them resist or should they be offered a sweeter deal after all?

Hans de Wit, Professor of Internationalisation of Higher Education, Centre for Applied Research in Economics and Management, Amsterdam University of Applied Sciences

Higher education can – and should – be a dynamo to economies. In the UK the HE ‘business’ is estimated to be worth around £59bn and employs more than 1% of the entire workforce, contributing more to GDP than the pharmaceutical and advertising industries combined. But so far its only been rankings of the top institutions which get attention – much less for how national systems of HE are doing, the environment and support they provide to fuel this potential mechanism for growth.

HE is increasingly a global market, and it’s important for governments to be able to benchmark how they’re doing within this global context.

Besides strong resourcing and outputs, a quality higher education system is one that is well connected internationally, facilitates new ideas and fosters links with foreign countries and institutions, through the movement of students and researchers across national frontiers.

Competition between individual institutions on regional and international levels is intense. It’s therefore crucial for nations and the appreciation of the global higher education sector as a whole, that attention is not bogged down in rivalries between single ‘name’ players, capable of attracting an elite. Whole country systems matter more than a number of top universities.

This week sees the publication of a new ranking of national higher education systems, based on research at the Melbourne Institute of Applied Economic and Social Research (University of Melbourne) under the leadership of professor Simon Marginson, into data from 48 countries with a developed higher education offering. The ranking is organised by Universitas 21, a global network of research universities (see www.universitas21.com/link/U21Rankings).

The ranking is based on 20 different measures critical to what makes a ‘good’ higher education system, grouped under four umbrella headings:

  1. Resources (investment by government and private sector).
  2. Output (research and its impact, as well as the production of an educated workforce which meets labour market needs).
  3. Connectivity (international networks and collaboration which protects a system against insularity).
  4. Environment (government policy and regulation, diversity and participation opportunities).

Population size is accounted for in the calculations. An overall ranking is obtained by weighting the four broad areas as follows: Resources 25%; Environment 25%; Connectivity 10%;  and Output 40%. The reason for the low percentage for connectivity is explained by the lack of adequate data on joint activity between higher education institutions and the rest of society.

So which countries and governments provide the best environment?

There’s no surprises in United States coming out on top, followed by Sweden, Canada, Finland, Denmark, Switzerland, Norway, Australia, the Netherlands and the UK. There are substantial differences per heading and measure, and some regional concentrations in the ranking — such as Scandinavia (top 7), East Asia (around 20), Central and Eastern Europe (between 25 and 35), and Latin America (around 40) — which shows how countries want to compete with neighbours rather than necessarily be world leaders.

Government funding of higher education as a percentage of GDP is highest in Finland, Norway and Denmark, but when private expenditure is added in, funding is highest in the United States, Korea, Canada and Chile. Investment in Research and Development is highest in Denmark, Sweden and Switzerland. The United States dominates the total output of research journal articles, but Sweden is the biggest producer of articles per head of population. The nations whose research has the greatest impact are Switzerland, the Netherlands, the United States, United Kingdom and Denmark. While the United States and United Kingdom have the world’s top institutions in rankings, the depth of world class higher education institutions per head of population is best in Switzerland, Sweden, Israel and Denmark.

As with all ranking systems, you can discuss some of the methodological choices made, and the ranking authors themselves point out some of these limitations. A more detailed empirical analysis of what works in higher education requires, as they correctly say, tracing how systems develop over time with changes in inputs and the state variables. Keeping those limitations in mind, this kind of ranking is a valuable addition to the ranking of global higher education, and an important reference point for policy-makers.


 

 

Roger E A Farmer, Distinguished Professor and Chair, UCLA Department of Economics

The US recovery has stalled, the UK has fallen back into recession and most of Europe is mired in a debt quagmire to which there appears to be no quick exit. It is against this background that Charles Evans, president of the Federal Reserve Bank of Chicago, has come out aggressively in favor of additional Fed actions.

But what can the Fed do to alleviate the unemployment problem?  What should it do?

In a series a recent research paper1(here), I have shown that there is  stable connection between the stock market and the unemployment rate and I have argued2(here) that this connection is causal. The stock market crash of 2008 caused the Great Recession. If this relation is truly causal, then central banks can do a great deal to alleviate persistent unemployment.

The nearby chart, based upon a recent NBER paper (here),3 shows that in normal times the Fed balance sheet consists mainly of treasury securities. But after the collapse of Lehman Brothers in September of 2008, the Fed charged to the rescue by creating an array of new lending programs. At this point the stock market was in free fall and, in response, the Fed embarked on a policy of quantitative easing known as QE1. The Fed’s balance sheet went from $800bn to over $2,000bn in the space of a month.

The chart shows that when the Fed began to purchase mortgage backed securities in March of 2009, the stock market began to rally. When QE1 ended a year later, the market tanked and equities did not recover until the Fed saw the error of its ways. When the Fed announced the beginning of QE2, at the Jackson Hole conference in April of 2010, there was a third turning point in the market and the beginning of a new bull market.

The coincidence of these market turning points with the beginning and ending of Fed asset purchase programs is not accidental.  The Fed moves markets!

So what! Who cares if a bunch of Wall Street investors make money? If that were the end of the story then perhaps we should not be concerned. But it is not the end of the story. There is a connection between the stock market and the welfare of the average citizen since all forms of wealth move up and down together. For most of us, our wealth is tied up with our future earnings; economists call this human wealth. When the stock market plummets, so do the prospects of the average worker.

My research has shown that when the stock market is rising, unemployment falls and when the market crashes, a recession follows. This notion will not sound farfetched to anyone who invests in markets. But the strength and stability of the connection is not widely appreciated.

Suppose that an economist working in the 1970s were to try to predict the unemployment rate three months ahead, using only the average unemployment rate and the real value of the stock market for the past two quarters. The first half of Chart 2, I have labeled this “estimation period”, shows that the prediction made by that economist would be highly accurate. For this period, the dotted line representing the forecast and the solid line representing the actual unemployment rate are virtually indistinguishable.

Now suppose that this same economist fell asleep in the fall of 1979, when Paul Volcker took over as chairman of the Fed, and that she woke again in 2000. The second half of Chart 2 shows that this economist’s forecasts would be nearly as accurate in the noughties they had been in 1970s. This is despite the fact that she is using the same forecast equation that she filed in her drawer in 1979.

Should you be surprised by this connection? Yes. There are very few relationships in economics that retain this degree of stability over long periods of time and that in itself might make you take notice.  But what does the connection imply for central bank policy?

The fact that changes in the value of the stock market precede changes in the unemployment rate does not necessarily imply that one causes the other. That requires a causal theory of the kind I have provided in my academic work. Some economists have argued that the financial markets are efficient and the stock market crash of 2008 was simply a signal that smart investors foresaw that there were bad times ahead. I do not agree.

Markets are moved largely by sentiment. And those movements have real consequences for our everyday lives. When financial wealth disappears overnight, the result can be devastating to those who lose their jobs. But we do not have to accept the mood of the markets as inevitable.   Charlie Evans is right.  Central banks can and should do much, much more.

1)                   Farmer, Roger E. A. (2012a). “The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence”,  Journal of Economic Dynamics and Control,36(12) pp 693-707. Also available as CEPR DP 8617 and NBER WP 17479.

2)                   Farmer, Roger E. A. (2012b). “Confidence Crashes and Animal Spirits”, Economic Journal, 122, pp 155-172. Also available as NBER WP 14846.

3)                   Farmer, Roger E. A. (2012c).  “The Effect of Conventional and Unconventional Monetary Policy Rules on Inflation Expectations: Theory and Evidence,” NBER WP 18007.

© Roger E. A. Farmer

Distinguished Professor and Chair

UCLA Department of Economics

Los Angeles, May 2012

 

 

 

 

 

Simon J. Evenett, Professor of International Trade and Economic Development and Academic Director of MBA programmes, University of St. Gallen, Switzerland

Christine Lagarde, IMF managing directorF

Christine Lagarde, IMF managing director

On the face of it, the recently agreed expansion of the IMF’s lending capacity suggests that the IMF is back in business. Since the global economic crisis began no UN or other global public agency has had their resources expanded by governments as much as the IMF. The IMF has also been at the centre of several crisis-era surveillance and reporting initiatives. So is the IMF now even better placed to better contribute to the recovery of the global economy? Maybe not.

By Eswar Prasad and Karim Foda

The world economy is showing scattered signs of vigor but remains on life support, mostly provided by accommodative central banks. Concerns about spillover from a worsening of the European debt crisis and slowing growth in key emerging markets are putting a damper on consumer and business confidence. Equity markets are pulling back from a robust performance in the first quarter of this year as the sobering reality of a continued anemic recovery weakens investors’ optimism.

There are some positive signs in the latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER), but also much to worry about as the world economy continues to meander with no clear sense of direction.

By Professor Simon Deakin, Director, Corporate Governance Research Programme, ESRC funded Centre for Business Research, University of Cambridge.

Long-term investment in infrastructure needs a better policy mix

George Osborne’s attempts to encourage British pension funds to invest more in infrastructure projects are to be applauded. Canadian and Australian pension funds have already invested heavily in infrastructure, but UK funds are still reluctant investors. Why?

British prime minister David Cameron tours Newton Heath rail depot. Getty images

British prime minister David Cameron tours Newton Heath rail depot. Getty images

Pension fund trustees have a fiduciary duty to get the best return for scheme members after taking due account of risk.  Government cannot and should not dictate how or where and how these funds invest their assets. If government wants pension funds to engage with the long term needs of the UK economy, it must first understand the particular pressures they face as investors.

By Professor Simon Deakin, director, Corporate Governance Research Programme, Centre for Business Research, University of Cambridge

John Kay’s interim report finds that equity markets are failing in their primary tasks, which he identifies as enhancing the long-term growth of listed companies and providing savers with an appropriately high, risk-adjusted return on their investments. The failure lies, he suggests, in the way that market actors are currently incentivised.  If asset managers are assessed on a quarterly or biannual basis, it is not surprising that they apply benchmarks based on the short-run performance of the firms they invest in.

Corporate managers, on the other hand, believe that they have a legal duty to maximise short-term shareholder value, and act accordingly.  Kay rightly suggests that this view is mistaken as a matter of law but, again, it is no surprise that directors and managers think in these terms, given the way that shareholders are routinely described as the ‘owners’ of the firms they invest in. Disclosure rules add to the problem, in particular those requiring quarterly reporting of corporate results. Lawyers will recognise that shareholders are the owners of their shares, not the company, and that they have no right to manage the firm, having delegated this power to the board, but these subtleties are clearly being lost in translation.

By Kevin Gallagher

In Germany this week Brazilian president Dilma Rousseff rebuked industrialised countries for creating a “liquidity tsunami” of speculative capital that is bubbling currencies, stock and bond markets across emerging markets and the developing world.  To stem the tide, her government extended a tax on speculative inflows of capital into Brazil.

A new task force report entitled Regulating Global Capital Flows for Long-Run Development, released this week, argues that regulating flows to tame the liquidity wave are justified more than ever in the wake of the global financial crisis.  Countries have more flexibility to deploy such measures given the new consensus in the peer-reviewed academic literature and at the IMF that capital account regulations have been effective tools to prevent and mitigate financial crises.  In this new environment Brazil, Indonesia, Taiwan, Peru, Thailand, South Korea, and many others have regulated flows.

Brazil's president Dilma Rousseff

However, the report also expresses serious concern that many countries lack the ability to regulate flows because many of the world’s economic integration clubs and trade and investment treaties have started to mandate capital account liberalisation.

By Olafur Arnarson, Michael Hudson and Gunnar Tomasson

Today, from Greece to Iceland, governments are acting as enforcers or even as collection agents on behalf of the financial sector — and Iceland stands as a dress rehearsal for this power grab.

The problem of bank loans gone bad has thrown into question just what should be a “fair value” for these debt obligations. The answer will depend largely on the degree to which governments back the claims of creditors. The legal definition of how much can be squeezed out is becoming a political issue pulling national governments, the IMFECB and financial agencies into a conflict, pitting banks, vulture funds and debt-strapped populations against each other.

Economists' Forum

Debating economics

About this blog Blog guide
Read posts on economics from guest contributors to the FT and share your views. Martin Wolf, the FT's chief economics commentator, often joins the debate.


To comment, please register for free with FT.com and read our policy on submitting comments.

All posts are published in UK time.

Contact martin.wolf@ft.com about the Economists' Forum.

See the full list of FT blogs.

Archive

« AprMay 2012
M T W T F S S
 123456
78910111213
14151617181920
21222324252627
28293031