Crisis and The Globalization

The IMF has been on the front lines of lending to countries to help boost the global economy as it suffers from a deep crisis not seen since the Great Depression. For most of the first decade of the 21st century, international capital flows fueled a global expansion that enabled many countries to repay money they had borrowed from the IMF and other official creditors and to accumulate foreign exchange reserves.

The global economic crisis that began with the collapse of mortgage lending in the United States in 2007, and spread around the world in 2008 was preceded by large imbalances in global capital flows. Global capital flows fluctuated between 2 and 6 percent of world GDP during 1980-95, but since then they have risen to 15 percent of GDP. In 2006, they totaled $7.2 trillion—more than a tripling since 1995. The most rapid increase has been experienced by advanced economies, but emerging markets and developing countries have also become more financially integrated.

The founders of the Bretton Woods system had taken it for granted that private capital flows would never again resume the prominent role they had in the nineteenth and early twentieth centuries, and the IMF had traditionally lent to members facing current account difficulties. The latest global crisis uncovered a fragility in the advanced financial markets that soon led to the worst global downturn since the Great Depression. Suddenly, the IMF was inundated with requests for stand-by arrangements and other forms of financial and policy support.

The international community recognized that the IMF’s financial resources were as important as ever and were likely to be stretched thin before the crisis was over. With broad support from creditor countries, the Fund’s lending capacity was tripled to around $750 billion. To use those funds effectively, the IMF overhauled its lending policies, including by creating a flexible credit line for countries with strong economic fundamentals and a track record of successful policy implementation. Other reforms, including ones tailored to help low-income countries, enabled the IMF to disburse very large sums quickly, based on the needs of borrowing countries and not tightly constrained by quotas, as in the past.

Economy and The Presidential Elections

It seems that during every presidential election year we hear that jobs and the economy will be pivotal issues. It's commonly assumed that an incumbent president has little to worry about if the economy is good and there are lots of jobs. However, if the opposite holds true, he should prepare for life on the rubber chicken circuit.

I decided to examine this common wisdom to see if it holds true, and to see what it can tell us about the upcoming election between George W. Bush and John Kerry. Since 1948 there have been eight presidential elections that have pitted an encumbent versus a challenger. Out of those eight, I chose to examine six elections. I decided to disregard two elections where the challenger was considered too extreme to be elected: Barry Goldwater in 1964, and George S. McGovern in 1972. Out of the six remaining presidential elections, incumbents won three and challengers won three.

To see what impact jobs and the economy had on the economy, we'll consider two important economic indicators: the growth rate of real GNP (the economy) and the unemployment rate (jobs). We'll compare the two-year vs. the four-year and previous four-year performance of those variables in order to compare how "Jobs & The Economy" performed during the incumbents presidency, and how it performed relative to the previous administration. First we'll look at the performance of "Jobs & The Economy" in the three cases where the incumbent won.

Out of our six presidential elections, we had three where the incumbent won. We'll look at those three, starting with the percentage of the electoral vote each candidate collected.

    1956: Eisenhower 57.4%, Stevenson 42.0%

    Real GNP growth (Economy):
    Two Year: 4.54%
    Four Year: 3.25%
    Previous Administration: 4.95%

    Unemployment Rate (Jobs):
    Two Year: 4.25%
    Four Year: 4.25%
    Previous Administration: 4.36%

    Although Eisenhower won in a landslide, the Economy had actually performed better under the Truman administration than it did during Eisenhower's first term. Real GNP, however, grew at an amazing 7.14% per year in 1955, which certainly helped Eisenhower get reelected.

    1984: Reagan 58.8%, Mondale 40.6%

    Real GNP growth (Economy):
    Two Year: 5.85%
    Four Year: 3.07%
    Previous Administration: 3.28%

    Unemployment Rate (Jobs):
    Two Year: 8.55%
    Four Year: 8.58%
    Previous Administration: 6.56%

    Reagan won in a landslide, which certainly had nothing to do with the unemployment statistics. The economy came out of recession just in time for Reagan's reelection bid, as real GNP grew a robust 7.19% in Reagan's final year of his first term.

    1996: Clinton 49.2%, Dole 40.7%

    Real GNP growth (Economy):
    Two Year: 3.10%
    Four Year: 3.22%
    Previous Administration: 2.14%

    Unemployment Rate (Jobs):
    Two Year: 5.99%
    Four Year: 6.32%
    Previous Administration: 5.60%

    Not quite a landslide, we see quite a different pattern than the other two incumbent victories. Here we see fairly consistent economic growth during Clinton's first term as President, but a consistently improving unemployment rate. It would appear that the economy grew first, then the rate of unemployment decreased, which we would expect since the unemployment rate is a lagging indicator.

If we average out the three incumbent victories, we see the following pattern:

    Incumbent 55.1%, Challenger 41.1%

    Real GNP growth (Economy):
    Two Year: 4.50%
    Four Year: 3.18%
    Previous Administration: 3.46%

    Unemployment Rate (Jobs):
    Two Year: 6.26%
    Four Year: 6.39%
    Previous Administration: 5.51%

It would appear then from this very limited sample that voters are more interested in how the economy has improved during the tenure of the presidency than they are in comparing the performance of the current administration with past administrations.

We'll see if this pattern holds true for the three elections where the incumbent lost.

Real GNP Growth
Clinton's 2nd Term: 4.20%
2001: 0.5%
2002: 2.2%
2003: 3.1%
2004: 4.2% (First quarter) 37 Months Under Bush: 2.10%
Last 15 Months: 3.32%

and secondly, the average unemployment rate:

The Unemployment Rate
Clinton's 2nd Term: 4.40%
2001: 4.76%
2002: 5.78%
2003: 6.00%
2004: 5.63% (First quarter) 37 Months Under Bush: 5.51%
Last 15 Months: 5.92%

We see that both real GNP growth and the unemployment rate have been worse under the Bush administration than they were under Clinton in his second term as President. As we can see from our real GNP growth statistics, the growth rate of real GNP has been rising steadily since the recession at the beginning of decade, whereas the unemployment rate is continuing to get worse. By looking at these trends, we can compare this administration's performance on jobs and the economy to the six we have already seen:

1. Lower Economic Growth than the Previous Administration: This occured in two cases where the incumbent won (Eisenhower, Reagan) and two cases where the incumbent lost (Ford, Bush)
2. Economy Improved In the Last Two Years: This occured in two of the cases where the incumbent won (Eisenhower, Reagan) and none of the cases where the incumbent lost.
3. Higher Unemployment Rate than the Previous Administration: This occured in two of the cases where the incumbent won (Reagan, Clinton) and one case where the incumbent lost (Ford)
4. Higher Unemployment Rate in the Last Two Years: This occured in none of the cases where the incumbent won. In the case of the Eisenhower and Reagan first term administrations, there was almost no difference in the two-year and full-term unemployment rates, so we must be careful not to read too much into this. This did, however, occur in one case where the incumbent lost (Ford).

While it may be popular in some circles to compare the performance of the economy under Bush Sr. to that of Bush Jr., judging by our chart they have little in common. The biggest difference is that Dubya was fortunate enough to have his recession right at the beginning of his presidency, while the senior Bush was not so lucky. The performance of the economy seems to fall somewhere in between the Gerald Ford administration and the first Reagan administration. That, coupled with all the non economic issues such as the war in Iraq, makes it difficult to tell if George W. Bush will end up in the "Incumbents Who Won" or the "Incumbents who Lost" column. As of May 7, 2004, Internet trading site Tradesports.com gives George W. Bush a 60% chance of winning the upcoming election, showing that the betting public is split on the President's chances as well.

New ideas about an old problem

 

Grew up in France pitying Kolkata’s poor, based on what she had read in a comic book about Mother Teresa. Abhijit Banerjee grew up in Kolkata envying them: poor kids always had time to play and they routinely beat him at marbles. As economists at the Massachusetts Institute of Technology, both remain fascinated by poverty. In an engrossing new book they draw on some intrepid research and a store of personal anecdotes to illuminate the lives of the 865m people who, at the last count, live on less than $0.99 a day.

The two economists made their names (and remade their discipline) by championing randomised trials. These trials test anti-poverty remedies much as pharmaceutical firms test drugs. One group gets the remedy, another does not. The two groups are chosen at random, so the remedy should be the only systematic difference between them. If the first group does better, the benefit can be attributed to the project and not the many other factors that might otherwise obscure the result.

These trials proved immensely appealing. They promised to sift nuggets of truth from the slurry of received wisdom and wishful thinking that characterises much aid-talk. The hope was that once a trial proved the worth of a project or programme, governments and donors would back it and prescribe it more widely.

The approach has caught on. Another book, “More Than Good Intentions” by Dean Karlan and Jacob Appel of Innovations for Poverty Action is also out this month. But the approach has also attracted criticism. These trials, the critics point out, show whether a drug or remedy works, but not how it works. Even in medicine, a randomised trial can only show whether the average patient benefits; not whether any individual patient will benefit. Human physiology differs from patient to patient, so does the physiology of poverty.

“Poor Economics” should appease some of their critics. It draws on a variety of evidence, not limiting itself to the results of randomised trials, as if they are the only route to truth. And the authors’ interest is not confined to “what works”, but also to how and why it works. Indeed, Ms Duflo and Mr Banerjee, perhaps more than some of their disciples, are able theorists as well as thoroughgoing empiricists.

They are fascinated by the way the poor think and make decisions. Poor people are not stupid, but they can be misinformed or overwhelmed by circumstance, struggling to do what even they recognise is in their best interests. The authors recount (with grudging admiration) how nurses in rural Rajasthan outwitted the two professors’ efforts to stop them skiving off work. They also describe how borrowers in south India exploited a contractual loophole to avoid taking out health insurance, which their microlender insisted they buy for their own good.

The poor, like anyone else, can also succumb to inertia, procrastination and self-sabotage. The authors discovered it was quite normal for poor women in the Indian city of Hyderabad to take out a microloan charging 24% interest only to deposit it in a savings account that paid 4%. This seems mad, except that the obligation to repay the loan ensured the women did not squander the money. Farmers in western Kenya miss out on the benefits of fertiliser because, by the time the planting season arrives they have often spent their earnings from the previous harvest. But farmers far-sighted enough to buy the fertiliser straight after the harvest, when they do have money, do not sell it, despite facing all the same demands on their resources. In other words, farmers cannot save the money to buy fertiliser, but they can save the physical fertiliser itself.

Poverty is often linked in the public mind with dependency. But, as the authors point out, the poor bear more responsibility for their lives than the rich, who coast along, enjoying chlorinated water, drawing a regular salary, paid directly into a bank account, perhaps with contributions to their pension and health care automatically deducted. The rich can indulge their weakness for cigarettes and alcohol without fear of financial ruin. The poor, in contrast, have to watch every cup of sugary tea. Mr Banerjee and Ms Duflo recommend a variety of nudges, props and subsidies that will make it as easy for poor people to make the right decisions as it is already for the rich.

If it is a mistake to equate poverty and dependency, it is equally mistaken to believe the poor will lift themselves up by their bootstraps. The book crosses swords with the business gurus and philanthropists who project their own enthusiasm for Promethean entrepreneurship onto the poor. Yes, the poor are more likely to run their own business than the rest of us. But that is because they have no other choice. When asked, most of them aspire to a government post or a factory job. Developing countries are not full of billions of budding entrepreneurs; they are full of billions of budding salarymen.

The authors also dissent from the “melancholy view” held by some economists, who argue that bad politics will always trump good policy. Why bother figuring out the best way to spend a dollar on education, when $0.87 will be diverted into the pockets of officials? These economists argue that you can’t do anything in a country with bad institutions—and you can’t do much about these bad institutions either. You just have to wait for a revolution.

But Mr Banerjee and Ms Duflo advocate what they call a “quiet revolution”. They insist that things can be improved “at the margin”, which is an economist’s way of saying that things can get better, even if they are very bad. They also make the case that improved policies can contribute to better politics. Once constituents see that good policymaking can make a difference to their lives, they raise their expectations, and demand more.

Why Gold Is Expensive and Continues to Increase In Price

Whether you inherit them from your great grandmother or purchased one from a gold collection in Beverly Hills, gold jewelry and other precious stones seems to bring with them not just beauty, but also a feeling of power and luxury. Gold and other gems are very expensive. The less expensive ones are either a mixture of precious metal along with common ones or some are just complete replicas. It costs a lot to buy gold jewelry, and maybe a life's fortune to buy a significant quantity of gold bars.

Gold is traded in bars, and for commercial use, they are made into coins, jewelry, or smaller bars. Generally, gold tends to be quite soft in its pure form. Thus, other metals are combined with it for strength and durability. But with this in mind, gold still tends to be very expensive.

Mining gold and any other precious metal involves a lot of engineering, science, and research long before that piece of jewelry lands in your hands. While there are places all over the world that has been identified to have gold buried deep in their mountains, research is constantly being done on how to mine the area while keeping up with environmental laws. A lot of engineers constantly work together as well to identify the density of gold or metal constant in an area.

Getting miners or manpower also entails a lot of operational cost. Despite what is being portrayed, shipping the metals and having them insured is also a part of a gold mine's operation. The government and legal compliance will take a huge amount of resources – including time and financial backup. Chemicals are being used to extract them from the mines and this entails costs as well.

Finding gold will take a lot of time. Extracting gold will take an even longer time. Mining companies spend months and up to years mining to finally trading gold. Gold has always been known to have high monetary value. Apart from the rarity, the beauty and purity of gold is taken into consideration when pricing them. Especially colored gems such as blue diamond or pure red rubies, these gems are very rare, thus, ownership and even viewing them is limited to just a select few.

Inflation is another factor that increases the value of gold. Unlike paper money, gold cannot be printed at will. Thus, due to the laws of supply and demand, gold will increase in value versus paper currencies over the course of time. Gold, platinum, and other precious metals, since they are limited in supply, are in essence "real money". There will always be additional demand for gold as well for jewelry, weddings, and other gifts.

There is a constant struggle in the world even during ancient times for the ownership of gold. Gold will always mean money, power and status, three things that seems to be what people always want for themselves. Whether for personal use, for investment, or as a means of livelihood, gold and other precious metals will always be the standard for financial success and power. Even in the years to come, gold will be a treasure everyone will want to have.

People’s spending choices are a good way to assess levels of hunger

For most people in rich countries hunger is a temporary inconvenience, easily solved by popping out to the shops or raiding the fridge. But chronic hunger is part of everyday life for many people in poorer places. Halving the proportion of people in developing countries who do not get enough to eat is one of the United Nations’ Millennium Development Goals.

Reducing hunger is a complicated task. There is no global shortage of food. Less poverty does not always mean better-nourished people. In India, for example, real incomes rose and the price of food fell between 1980 and 2005. Yet evidence suggests that Indians, even those who were originally eating less than recommended, reduced their calorie consumption in that time. Such findings have long puzzled economists.

A recent paper by two economists, Robert Jensen of the University of California, Los Angeles, and Nolan Miller of the University of Illinois, Urbana-Champaign, suggests that part of the problem may lie in the way governments and international agencies count the hungry. This typically involves fixing a calorie threshold—2,100 calories per day is a common benchmark—and trying to count how many people report eating food that gives them fewer calories than this number. Since calorific needs differ from person to person, a universal number is clearly only a guide. What’s more, concentrating on calories ignores the important role of micronutrients such as minerals and vitamins (see article). But the economists argue that this approach to measuring hunger also does not accord with how people themselves think about it. They propose a new way to use people’s eating choices to tell whether they are hungry.

Hunger is a physically unpleasant experience: it is accompanied by headaches, pain, dizziness, loss of energy and an inability to concentrate. For a hungry person, therefore, the extra utility from more calories is extremely high. The economists argue that the pain caused by hunger will prompt insufficiently nourished people to spend a larger share of their food budget on staples like rice and millet, which are cheap sources of calories. But once people are no longer hungry, they do not need to spend their incremental cash on the cheapest source of calories but can base their choices on things like variety and taste. This means that the share of calories that comes from staples falls progressively once a person is no longer famished; and that an unusually high share of calories coming from staples indicates that a person is hungry.

How high is unusually high? By looking at the prices of various foods, it is possible to work out what share of a person’s calories would come from staples such as rice and wheat if he were trying to fulfil his dietary needs as cheaply as possible. This theoretical “staple calorie share” (SCS) can then be compared with the make-up of a person’s actual diet. Someone who is consuming a significantly higher share of calories from staple foods than predicted is likely to be hungry.

This approach would be far too cumbersome if each person’s SCS varied greatly but things turn out to be considerably simpler. Using accepted dietary guidelines for people of various sizes and ages, and data on food prices for parts of China, the authors find that the share of calories that ought to come from staples varies much less than overall calorific needs. Wide variations in people’s age, sex, physical condition and lifestyle (more exercise, say) mean that some people need as little as 2,112 calories per day, while others may require as many as 3,202 calories. But the authors find that most calculated SCSs remain in a narrow band between 80% and 85% of overall calories. What this suggests is that someone getting less than 80% of his or her calories from a staple is past the point where conquering hunger is the primary motivation driving food purchases.

The economists use this threshold to measure the extent of undernourishment in nine Chinese provinces, where 16,000 individuals in 3,800 households were surveyed several times between 1991 and 2000. The people who were surveyed had to report everything they had eaten or drunk the previous day. The survey data conformed with the basic idea of substitution: the poorest households ate little other than staples. As income rose above a certain level, however, the SCSs dropped. People seemed to move out of the danger zone once their monthly income exceeded 225 yuan ($27 in 2000).

The data show how many people get less than four-fifths of their calories from rice, the main staple in most of the areas studied. Here, the results contradict what the Chinese government’s standard 2,100-calorie-per-day threshold would find. Around 67% of households in the sample were undernourished by the standard measure in 2000, but only 32% got more than 80% of their calories from staples. This is a big difference. Using data on people’s choice of what to eat leads to an estimate of hunger that is about half as large as the estimate using the standard method.

The two measures also give opposing results about long-term trends in hunger. The average household in the sample got richer between 1991 and 2000, but the fraction that consumed less than the mandated daily number of 2,100 calories actually rose, from 53% to 67%. The share of calories coming from staples points in a different direction, however: by this measure, the number of hungry households dropped from 49% to 32% over this period. More recent evidence suggests something similar. A 2008 study found that giving poor Chinese households subsidies on staple cereals failed to lead people to consume more rice or wheat. Instead, they ate more shrimp and meat. Not necessarily the cheapest source of calories, but considerably tastier.