Wednesday, October 13, 2021

My take on this year's Nobel.

Vivek Dehejia

2021 Nobel in Economics

The anticipation in advance of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel — to give the prize its full title — is always palpable for academic economists, especially for those of us who’ve had the privilege of working with a future Laureate as doctoral students. To add to the sense of occasion, the Economics prize, by coincidence, happens to fall on Thanksgiving Day in Canada, a major national holiday. This year’s prize was awarded to David Card (one-half share) and to Joshua Angrist and Guido Imbens (one quarter-share each), for their pathbreaking work in allowing us make credible causal claims when analyzing data.

In a sense, this year’s prize is the flip side of the 2019 prize, awarded to Michael Kremer, Indian-born Abhijit Banerjee, and Esther Duflo. That trio won, in good measure, for their work in popularizing “randomized controlled trials” (RCTs), long a staple in the natural sciences, in the realm of economics research. RCTs allow us to make causal claims by randomly assigning subjects to a “control” and a “treatment” group — the randomness ensuring that any difference between the two groups can plausibly be attributed to the treatment, rather than any unobserved differences; the theory being that such differences should average out when subjects are randomized.

But, RCTs have some major limitations, which your columnist has argued in detail in these pages (“The experimental turn in economics”, 30 January 2016). A key problem is “external validity” — can a finding in one context be replicated in another, very different, one? Equally importantly, because creating an RCT is not always feasible, nor even ethical, in many situations, such an approach simply cannot address some of the “big” questions in economics, which perforce require that we analyze raw, non-randomized data, but find some way to tease out causality, if it is present.

Recall at the outset that observing a statistical correlation between two variables in the data is not, in itself, evidence of a causal relationship. Take an example close to home. During the pandemic, my classes switched on-line, with a pre-recorded two-hour lecture followed by a “live” one-hour Q&A session. Attendance at the latter was highly recommended, but not mandatory. Uniformly, I observed that students who attended, and participated activity, in the discussion session performed better on the course. But is this because my discussion session allowed them to perform better? Flattering as that would be for any professor, it is equally plausible that those who were anyway going to do well chose to participate — what we call “reverse causality”. Or, perhaps there were unobserved differences between those who participated and those who did not — say, access to high quality internet and the time to read, study, and discuss rather than struggling with poor internet, work, and school — which could plausibly explain the correlation instead? In other words, does non-random selection, rather than causality, matter in this case?

Economics is filled with such situations, where a correlation in the data entices us to draw a causal inference — which may be treacherous to do, in the absence of randomization, which, as noted, is impossible to achieve in most real world situations. The genius of David Card, working with the late Alan Krueger, was to find a clever solution, which was to look at a real world situation presenting as close to a natural experiment as the real world gives us — in this case, two contiguous US states which were otherwise similar, and which shared a common labour market and general macroeconomic conditions, but one of which increased the minimum wage whilst the other did not. (Interested readers may find a detailed exposition in fine write-ups on this year’s prize by economist Alex Tabarok in the Marginal Revolution blog and Tim Harford in the Financial Times .) By computing the “differences in differences” before and after the change and across the two jurisdictions allowed them to infer that any differential impact on unemployment was very likely driven by the policy change, not any unobserved differences.

In a similar vein, research by Angrist and Imbens, again with Krueger, in a series of papers, studied important questions such as whether increased schooling increases earnings, an obvious situation where any assumption of a unidirectional causal link may be problematic. (For instance, brighter students may study more and also earn higher incomes, both because of higher intrinsic ability.) In one seminal paper, Angrist and Krueger asked whether compulsory schooling could increase wages, and found a brilliant technique for randomization: given the oddities of the US school system, students born in late December would be one class behind those born in early January, and laws in some states allowed students to drop out at 16. The upshot is that there would be at least some students otherwise almost identical who got a year more of schooling for a purely random reason, and, these students, did indeed earn higher wages, making a causal claim tenable. (Again, check Tabarok and Harford for more details.)

The beauty of these contributions is that they were not founded on a complex and technical mathematical or statistical result that would be undecipherable to the layman, but on a simple and profound intuition of how randomization may be found even in our messy and non-random world, thus making causal inference tenable. Three cheers!

Vivek Dehejia is associate professor of economics and philosophy, Carleton University, Ottawa, Canada.

Monday, October 4, 2021

My latest column asks whether Evergrande's woes mean this is a Schandenfreude moment for China critics.

Is this the Schadenfreude moment for China sceptics?

Vivek Dehejia

The woes of Chinese property development firm, Evergrande, heavily indebted to both domestic and foreign lenders and on the verge of collapse, has engendered a Schadenfreude moment amongst China sceptics: but is it premature? After the crisis broke out, some proclaimed that the imminent failure of Evergrande might just be China’s “Lehman moment”, referring to the 2008 bankruptcy of the New York investment bank, Lehman Brothers, which was the opening salvo in the global financial crisis. Yet, global financial markets settled after a day or two of turmoil, as investors bet that that the Chinese state, which still heavily regulates the economy, will restructure the debt-laden firm in a manner that forestalls any potential international contagion. The critics might just have to wait before popping the Schadenfreude champagne corks.

Yet, even absent contagion, the Evergrande saga is but the tip of the iceberg of an overheated and indebted property sector which potentially threatens the edifice of the larger Chinese economy and, therefore, indirectly the global economy, too. In a fascinating long read, British-born historian, Niall Ferguson, makes just such a case (“Evergrande's Fall Shows How Xi Has Created a China Crisis”, Bloomberg Opinion, 26 September ).

As Ferguson observes, Evergrande is emblematic of a China which has developed in the past decade with an economic development paradigm premised on “urbanization on steroids”. For all of the skyscrapers, both commercial and residential, that dot the landscape of Chinese cities, large and even small, many of these remain empty and their property developers unable to sell enough units to pay off the debt incurred in putting up the buildings to begin with.

In other words, the property sector in China, larger even than in the US on the eve of the collapse of Lehman, is a ticking time bomb that could have significant macroeconomic consequences beyond the property and financial sectors through the impact on Chinese households, who are heavily invested in a property market that has been in bubble territory for some time. Citing research by Harvard economics professor, Kenneth Rogoff, and his co-author, Yuanchen Yang of Beijing’s Tsinghua University, Ferguson notes that housing wealth accounts for a whopping 78 percent of total assets in China, much higher than the 35 percent share in the United States, for instance. The upshot is that consumer spending in China is, per Rogoff-Yang, “significantly more sensitive to a decline in housing prices” than in the US. The impacts of a more generalized collapse in the property market in China could be large and consequential for the global economy.

For those with a long enough memory, none of these recent developments should come as a surprise. As long ago as 2004, economist James Dean and I argued, and as I summarized for Mint readers much later (“Will the elephant overshadow the dragon?”, Economics Express, 5 March 2015 ), that the Chinese model is characterized by the glaring contradiction between ever-increasing economic freedoms and an authoritarian political dispensation. What is more, the economic development paradigm of the Chinese Communist authorities was focussed on an infrastructure-driven, “build and they will come” model, in sharp contrast to, say, the Indian model, in which the supply of new infrastructure is driven by the demand for it, rather than the reverse.

The consequence, as Dean and I argued in 2004, was a Chinese development success story that was something of a house of cards, and built upon excessive investment, including in housing — what the Austrian school of economics would call “malinvestment”. Chinese growth statistics would, therefore, in an important sense be inflated: after all, if the economy grows rapidly because of a stock of property and infrastructure that ultimately will never be put to use, and which leads to the accumulation of large debts, such rapid growth may be unsustainable and, in a certain sense, illusory.

Up until now, China sceptics, including your columnist, have been confounded by the reality that successive generations of the Chinese leadership have shown a remarkable ability to continue to refresh and reinvent their model — both economic and political — thus ensuring that growth rates remain high and that the spectre of social chaos and unrest remains at bay. Every Chinese leader since Deng Xiaoping and his pioneering reforms of the late 1970s have managed to maintain the unwritten but all-important bargain with the populace: “we will give the you the opportunity to get rich, and the price is that you must stay out of politics”. But perhaps, just perhaps, the chickens may finally have come home to roost on the watch of authoritarian strongman, Xi Jinping — what, writing in 2015, I had reckoned might be an “implosion” in the Chinese economy or  a “belated and disorderly democratization” of the society.

What might make this time different is that, in the past few years, Xi has begun to rewrite the unwritten social compact, and increase government and party control over the economy, and reign in what he clearly believes is an excessively free and insufficiently regulated market economy, undoing the premise of Deng’s reforms. He has also been, first quietly, now overtly, building a cult of personality to match that around Mao. If the economy, and the public mood, sour, Xi may end up ruing these choices.

Vivek Dehejia is associate professor of economics and philosophy at Carleton University in Ottawa, Canada.

Friday, September 17, 2021

My latest column analyses the Canadian election campaign.

Trudeau has taken a gamble in calling an early election

On 20th September, Canadians go to the polls, in an election that no one much wanted, except for incumbent Prime Minister Justin Trudeau of the Liberal Party. At the helm of a minority government since 2019, Trudeau called an election two years early, in the hopes of capitalizing on Canada’s successful vaccination campaign to entice the voters into returning his government with a majority.

The snap election, in the midst of a burgeoning fourth wave of the still ongoing COVID19 pandemic, has been much criticized, but, according to Canadian law, the head of state, Governor General Mary Simon, did not have any choice but to grant Trudeau’s dissolution request and drop the election writ. This was even despite Trudeau’s minority government not having been defeated in a confidence vote, and therefore still enjoying the confidence of the House of Commons.

As your columnist has noted on previous occasions, Canada’s brand of the Westminster model gives almost unlimited power to an incumbent prime minister, much more than the power enjoyed by his or her counterpart in the United Kingdom or in India. The prime minister not only appoints the head of state but members of the Supreme Court, as well as filling any vacancies in the Senate, the unelected upper house of Parliament. This would be akin to a Prime Minister of India appointing the President, appointing members of the Rajya Sabha, as well as the Supreme Court. Likewise, in the U.K. and India, an incumbent prime minister has only limited ability to change the normal electoral calendar — which in India is decided by the Election Commission and in the U.K. is governed by the Fixed-Term Parliament Act. Canada, in theory, also has a fixed term law, but it is essentially toothless, and, in effect, only puts an upper limit on the lifespan of a government, rather than preventing a prime minister from opportunistically calling an early election midway through the government’s mandate.

If the polls are to be believed, Trudeau’s gamble is not likely to pay off, as the Liberals are running neck-and-neck with the main opposition, the Conservative Party, led by Erin O’Toole, its new leader. At the time of filing, it appears to be a coin toss whether the Liberals or Conservatives will win the election, which will almost certainly be a minority. A minority government would be vindication for O’Toole, who became party leader after a fractious leadership battle and that too in the midst of the pandemic. For Trudeau, it would be a major defeat, given that he had called an election for the self-evident purpose of winning a majority. His leadership would most certainly be in doubt and the knives within his party would certainly be out for calling the gamble of calling a premature election and then losing the bet.

The election is also a test for Jagmeet Singh, leader of the New Democratic Party (NDP), a social democratic party that stands to the left of the Liberals. The NDP perennially run third, or sometimes even fourth, behind the Quebec separatist Bloc Quebecois, and have never sniffed victory, although Singh did play a pivotal role in keeping Trudeau’s minority government afloat the past two years. More interesting, perhaps, is the rise of the People’s Party of Canada (PPC), a conservative party that stands to the right of the Conservatives. The party was founded by Maxime Bernier, a former Conservative, who lost a bitter leadership contest with O’Toole, and then left the party to start his own. Canada has not, until now, had a viable right wing party, and, while under Canada’s first-past-the-post electoral system, the PPC, like the left wing Greens, are unlikely to win more than a handful of seats, at best, they could become increasingly important going forward, especially if they are able to pull the Conservatives back to the right and away from the crowded centre that they share with the governing Liberals. Likewise, if the Greens eat into the NDP’s votes, that might induce Singh to pivot further to the left.

For an election that Trudeau had described as “pivotal”, in an attempt to sell it to voters, the campaign has been singularly devoid of substance, with little daylight between the solidly centrist positions of the two main parties. Trudeau had attempted to create a wedge issue with his support for mandatory vaccination for federal employees and in other areas under federal jurisdiction, in the hopes of baiting O’Toole, whose party has its share of “anti-vaxxers”; likewise, Trudeau has raised the bogeyman of a putative privatization of Canada’s socialized healthcare system were the Conservatives to win. It is unclear how many, if any, of the undecided voters may be swayed by either of these issues. (Note: The Alberta crisis, with Conservative Premier Jason Kenney declaring a state of emergency, admitting he had mishandled the COVID19 pandemic, which may also hurt the federal Tories, occurred after this piece was filed.)

Looked at from India’s vantage point, given the frictions with Trudeau over his public comments on the farmer protests in India, and the memory of his disastrously failed India visit in 2018, which your columnist had elsewhere described as a “slow-moving train wreck”, New Delhi mandarins are unlikely to be terribly disappointed if Trudeau is shown the door. Having said that, O’Toole does not enjoy the close personal relationship and obvious chemistry that Prime Minister Narendra Modi enjoys with the previous prime minister, the Conservative Stephen Harper, and is himself new in the job. Don’t expect any major shift in the moribund Canada-India bilateral relationship, no matter the outcome of the election no one wanted.

Monday, September 6, 2021

My latest Mint column, on how dollar hegemony threatens emerging markets, revising the old Triffin Paradox.

As the last instalment of this column observed (“The dangers of continuing with unconventional policies”, 20 August), there is a rising drumbeat of debate about the unwinding of US “unconventional monetary policies” — in particular, large scale asset purchases, more commonly called “quantitative easing” — as well as the eventual normalization of the policy interest rate to above the near-zero level at which it has been stuck since the global financial crisis.

The topic came up for discussion during the recent (virtual) Jackson Hole meeting of the US Federal Reserve, where Fed chief, Jerome Powell, sent the markets his strongest signals yet that the US central banks is preparing to wind down its asset purchases, at present a staggering $120 billion per month. In a much-watched speech, Powell asserted that “substantial further progress” has been made on the Fed’s twin goals of keeping inflation on a low and stable path and the economy moving closer to full employment.

The minutes of  a recent Federal Open Mark Committee (FOMC) meeting, which sets Fed policy, and which met before the Jackson Hole event, suggests a broad-based consensus amongst committee members that QE should start winding down later this year, although it is expected that the Fed will continue to hold an elevated stock of bonds even as the inflow of additional purchases tapers and eventually comes to a stop.

It is noteworthy that, in Powell’s remarks, he sharply distinguished the tapering of QE from interest rate normalization, noting that a much more “stringent test ” would apply to the latter operation. The significance of this important distinction should not be passed over lightly.

Readers will recall well the 2013 “taper tantrum” crisis, on which your columnist has dilated on, and which created a panic in global financial markets — especially, emerging economy stock, bond, and currency markets — after then Fed chief, Ben Bernanke, rather loosely remarked that the Fed was planning to begin dialling down its asset purchases, without being terribly clear on his likely forward guidance on a glide path for interest rate normalization.

Speaking on the possibility of Fed tapering in an interview to the Financial Times (“Emerging economies cannot afford ‘taper tantrum’ repeat, says IMF’s Gopinath”, 29 August), International Monetary Fund chief economist, Indian-born, American economist Gita Gopinath, warned that emerging economies could not “afford” a repetition of the 2013 taper crisis. She told the FT: “[Emerging markets] are facing much harder headwinds….They are getting hit in many different ways, which is why they just cannot afford a situation where you have some sort of a tantrum of financial markets originating from the major central banks.”

The danger that Gopinath and others have pointed out is that higher or stickier than expected inflation in the US will  likely prompt the Fed to more aggressively ramp up interest rates as part of an accelerated normalization of monetary policy.

The danger scenario for emerging economies, especially heavily indebted ones, would be the twin blows of rising debt service costs on their dollar-denominated debts as well as the likely outflow of a large quantum of capital funds enticed by the now higher returns to be earned in dollars, to say nothing of the safe haven value of the dollar in times of economic volatility. Indeed, this is exactly what spooked the markets, and hobbled many key emerging economies, including India, back in 2013.

If such a “double whammy” scenario, as Gopinath terms it, returns today on the back of Fed tightening, the IMF estimates that $4.5 trillion of global gross domestic product could be wiped out by 2025. What is worse, the hit will likely falling disproportionately on low income developing and middle income emerging economies, according to former IMF chief economist, Maurice Obstfeld, also speaking to the FT. The fact that these economic shock waves would emanate in the context of a pandemic crisis that is worsening in many parts of the still largely un-vaccinated developing world might just make this the perfect storm.

In an unusually candid (as well as rather canny) comment, Gopinath observed that one of the difficulties at the time of Bernanke’s 2013 remarks that touched off the taper crisis was his announcement on QE tapering got “mixed up” with market expectation of more rapid interest rate normalization. This confusion may, indeed, have abetted the seriousness of the 2013 crisis, as it created greater uncertainty, with many more “carry trade” and other speculative investors in the emerging markets bolting for the door at the same time. She noted that, this time around, “super clear communication” is the need of the hour, and suggested that Powell is doing a good job. The implied criticism of Bernanke’s poor communication in 2013 is the understated inference.

Some perspective may be useful. As I noted in one of my earliest columns in this newspaper (“Illusions bred by a reserve currency”, 17 July 2014), reliance on a single global reserve currency, the US dollar — whether de jure, under Bretton Woods, or de facto, as at present — creates a peculiar dilemma, noted in the 1960s by economist Robert Triffin: the short term, domestically driven goals of the reserve currency economy may diverge from long term needs of the global economy. Inevitably, the hegemonic large country, which provides the reserve currency as a global public good, will privilege itself, at the expense of the rest of the world. The “Triffin paradox” is still with us.

Friday, August 20, 2021

My latest, on the peril of indefinite loose monetary policy.

Are “unconventional” monetary policies (UMPs) deployed by the advanced economies a cure worse than the disease? Your columnist has asked this question on numerous occasions in recent years, as it becomes increasingly evident that the harmful side effects of UMPs, which helped alleviate the worst symptoms of the global financial crisis, are increasingly distorting not only the financial sector but the real economy as well, and causing serious and harmful “spillover” effects on emerging economies such as India.

Raghuram Rajan, former governor of the Reserve Bank of India, has been a well-known critic of UMPs, and, in particular, the damaging effects of the “taper tantrum” of 2013, in which then Federal Reserve Board chair, Ben Bernanke, had to walk back from plans to taper the large scale asset purchases — commonly called “quantitative easing” — after his remarks that they would begin to taper, touched off a firestorm in international financial markets, and hit emerging economies, including India, especially hard.

Recently, Rajan penned a column (“The Dangers of Endless Quantitative Easing”, Project Syndicate, 2 August), in which he weighed in on the current debate occurring amongst members of the Fed as well as academic and bank and corporate economists on whether it is now high time for the Fed to taper its asset purchases, at present $120 billion per month. Rajan’s view is that supply constraints are now more pertinent than insufficient demand, and excessively accommodative monetary policy runs the risk of stoking inflation, which would have fiscal implications in the medium to longer rum, increasing the servicing costs on the large stock of government debt due to interest rates that will eventually have to go up as inflation begins to spike.

On 18 August, speaking to the Financial Times (“Top Fed official warns massive bond purchases are ill-suited for US economy”), Eric Rosengren, president of the Boston Fed, threw his weight behind the Fed board beginning to taper after it meets next month, with the aim of winding down asset purchases altogether by the middle of next year, again citing supply constraints, such as the difficulty employers in the US are encountering finding workers, even as they offer higher wages. Importantly, Rosengren pointed to the harmful effects of asset price appreciation and “undue leverage”, as fund managers take on more and excessive risks in the search for yield in a low-interest environment.

Ironically, asset price bubbles fuelled by leverage and low interest rates were the proximate cause of the global financial crisis to begin with, and they are in play once again as a serious side effect of low interest rates and asset purchases used to combat the effects of the crisis. This is a little like someone suffering insomnia, who then gets hooked on sleeping pills, and is unable to taper them and ends up taking them for life. Unless the US, and other advanced economies, begin to take seriously the need to pull back from UMPs, this is the situation we may end up in.

It is worth reminding ourselves that debates about monetary policy are not merely an esoteric pastime for central bankers and finance gurus. Rather, excessively loose monetary policy has long-lasting and perverse effects on the real economy, too. One of the most damaging of these side effects is the increase in wealth and income inequality that has been abetted by low interest rates and asset price inflation.

It is, after all, the already wealthy who have money to invest, and skyrocketing asset prices, everything from property to antique automobiles, boosts their wealth and income. By contrast, lower income households put their money in the bank, where they earn low, almost zero, interest rates that barely keep pace with inflation.

There is more than a little bit of irony in the fact that loose monetary policy, which has received widespread support from left-leaning economists in the US, actually has done more to worsen inequality than the effects, say, of former President Donald Trump’s tax cuts, which were widely criticized for being pro-rich. A recent study, reported on by Bloomberg (“U.S. Wealth Gap Rises With Jackson Hole Coming at the Top”, 18 August), documents widening wealth gaps between the top and bottom deciles of US counties. Looking at income from assets, in particular, interest, dividends, and rents, on a per capita basis, the top 10 percent of counties earned about $20,000 in asset income per person, on average. Meanwhile, in the bottom 10% of counties, that figure was only about $7,500. This has very little to do with the structure of taxation and very much to do with the distorting effects of low interest rates and frothy asset prices.

There are also more conventional dangers that lurk, unless the Fed and other advanced economy central banks get serious about winding down asset purchases and returning policy interest rates to more normal territory and away from near zero. During the “great moderation”, a long period of low inflation that preceded the financial crisis, there was a smug insouciance amongst central bankers and even academic economists that high inflation was a thing of the past. But with inflation now starting to tick up in the US and elsewhere, that smugness may soon evaporate, as Fed officials realize that it is far from easy to put the inflation genie back in the bottle, once it has been uncorked.

Tuesday, August 10, 2021

My next Mint column on the pandemic at an inflection point. The on-line version is unavailable due to a technical glitch. The text as filed is placed below.

The pandemic at an inflection point calls for extra care

Vivek Dehejia

Fully a year and a half into the COVID19 global pandemic, the world appears to be at an inflection point in the management of the virus, and a clear divide is emerging between advanced and emerging countries. Last time, your columnist discussed the pros and cons of the United Kingdom’s re-opening plan, with the penultimate stage of unlocking on 19 July — dubbed “Freedom Day” by the British tabloids — while cases were still on the rise, driven by the Delta variant.

As I noted then (“Boris Johnson is taking a big gamble with ‘Freedom Day’”, 26 July), Prime Minister Boris Johnson was taking a big gamble on re-opening under such circumstances. The gamble appears to have paid off. After coming to a crest, new infections have begun to taper off, and serious illness, hospitalization, and morality remain far below the levels of earlier waves of the pandemic, which preceded widespread vaccination. If things go according to script, the UK is poised to remove removing pandemic-era restrictions later this month.

By contrast, in the United States, a clear divide has emerged between the “Red” (Republican) and “Blue” (Democratic) states — the former have relatively low levels of vaccination compared to the latter — not due to any supply constraints — the US is awash in vaccines — but due to vaccine hesitancy, which is much higher amongst Republicans, especially supporters of former President Donald Trump. While Blue states, such as New York, press ahead with re-opening, while maintaining some pandemic-era restrictions, such as social distancing and mask mandates, Red states are seeing a surge in new infections even as many, such as Florida, have eliminated all pandemic-related restrictions. Florida’s governor, Ron DeSantis, has gone so far as to ban local jurisdictions from re-imposing mask mandates, which the state has eliminated.

Meanwhile, Canada, the other major Anglo-American country in the Western hemisphere, has taken something of a middle path. With high rates of vaccination, most Canadian provinces are on a re-opening path, albeit at different speeds. Thus, while Ontario, the largest province, retains a mask mandate in indoor spaces, other provinces, such as Alberta, have eliminated it. Absent a major new Delta-driven outbreak, which cannot be ruled out, Canada as a whole appears to be on track for a return to normalcy, more or less, by later this autumn or early winter.

Variations of this pattern may be observed in other advanced Western countries, such as in Europe, all of which have now attained relatively high rates of vaccination, and most of whom are now well on a re-opening path. This summer has seen the return of major music festivals, such as the Salzburg Festival in Austria, with relatively few restrictions. Indeed, the festival had even dispensed with mandatory mask use inside the concert and theatre venues, until a fully vaccinated ticket holder tested positive. The mask mandate was hastily re-introduced, but few other restrictions remain. A short distance across the border in the German state of Bavaria, the Bayreuth Festival, devoted to the music of the 19th century composer Richard Wagner, is also back in full swing. Intra-European travel has also, just about, returned to normal, and foreign tourists have also returned.

The story, however, is very different in most of the emerging and developing world, where rates of vaccination, even of first doses, remain low, with full vaccination percentages often in the single digits. These countries, spanning the world from Latin America to Africa and Asia, remain acutely vulnerable to outbreaks of the virus, especially the virulent and highly transmissible Delta variant. Recent weeks have seen major outbreaks across Southeast Asia somewhat reminiscent of the devastating second wave that India experienced earlier this year.

The world now stands on the cusp of a two-speed recovery — both from the pandemic and of the economy — driven by differential vaccination rates in the rich as compared to the poor countries. This has fuelled cries for “global vaccine equity”, and even the World Health Organisation (WHO) has thrown its weight behind the idea. Recently, the WHO called for a pause on “booster” doses being planned in several rich countries, arguing that the need of the hour is to ramp up vaccination rates in the developing world. It is indeed a tragedy that, as rich countries such as the US and Canada sit on vast stockpiles of vaccines, many of which are sure to expire unused, there are millions of people in poorer countries still awaiting a second, or in many cases, even a first jab.

The major international financial organisations, such as the World Bank and the International Monetary Fund, as well as banks, investment houses, and management consultancies, have also lent their weight to the argument, as report after report show that ongoing pandemic-related restrictions in many developing countries will be a drag on the global economic recovery.

The implicit argument, although it is rarely stated directly, is that it is in the enlightened self-interest of the rich world to ensure that poorer parts of the world quickly get up to speed on vaccination, else the consequences will be dire for the rich world itself. Not only will the incipient global economic recovery stall, but denizens of the rich countries will be at risk from infection through successive putative new variants of the COVID19 virus against which the vaccines currently in use will presumably be less effective.

Much is at stake as the world stands at this inflection point.

Vivek Dehejia is an associate professor of economics and philosophy at Carleton University in Ottawa, Canada.

Sunday, July 25, 2021

Boris Johnson is taking a big gamble with ‘Freedom Day’ -- my latest Mint column

With their usual flourish, British tabloids dubbed 19 July as “Freedom Day”, or, more prosaically, the day that the United Kingdom entered stage four of its re-opening plan. This was the day, delayed by four weeks, on which most remaining COVID19 pandemic-related restrictions were lifted in the UK. Some restrictions remain, such as the need for workers to self-isolate if they are pinged by the official contact testing and tracing app, and local bodies continue to impose their own restrictions — such as mandating mask use on the London Underground. But, in the main, most pandemic-era restrictions are gone: mask use is now voluntary, not compulsory (except where otherwise mandated), social distancing (already honoured in the breach rather than the observance for the past many weeks) is a thing of the past, and capacity limits have been lifted at restaurants, concert halls, theatres, and other public places.

There is much that can be criticized in British Prime Minister Boris Johnson’s handling of the pandemic, and there has been much criticism by epidemiologists and other experts of the decision to go ahead with a full re-opening, in the face of sharply rising infections, and, even more worryingly, upticks in hospitalization and deaths, due, in large part, to the ubiquity of the delta variant, which is highly transmissible and has greater immune-escaping properties than the conventional COVID19 virus — meaning that it is possible for those already fully vaccinated to become infected. Additionally, while the full vaccination rate in the UK is about 50 percent, those under 18 have not been vaccinated. Anecdotal evidence, too, suggests that, despite almost half of all Britons now vaccinated, some parts of British inner cities, including London, have vaccination rates less than 30 percent. All of this spells potential trouble.

In light of this, it is striking that in a video message shared on 18 July via Twitter , UK Prime Minister Boris Johnson offered this rationale for the re-opening, in the form of a rhetorical question: “If we don’t do it now, we’ve got to ask ourselves, when will we do it?” As he also remarked, due to the high vaccination rate (but recall the caveats I noted above), new infections have now largely been decoupled from new hospitalizations and increased mortality. A similar logic has underpinned the elimination of pandemic-era restrictions in a number of states of the United States — mostly the “Red” rather than “Blue” states, that is, those with Republican rather than Democratic governments — and the same underlies the sentiment increasingly heard from political conservatives in the Anglo-American sphere, that, post-vaccination, COVID19 should be seen as another, albeit an especially, nasty flu, and cannot be the basis for lockdowns and restrictions without end.

As your columnist has noted on previous occasions, lockdowns and other restrictions intended to flatten the curve of COVID19 infections pose a difficulty very similar to that posed by the deployment of unconventional monetary policies, most notably “quantitative easing” (QE) after the global financial crisis: how and when does one exit? Just as the unwinding of QE was repeatedly delayed in the US and other countries, and then put into reverse by the onset of the global COVID19 pandemic, exit from lockdowns and restrictions have either been open-ended or continually extended in most advanced Western countries.

The difficulty in finding the correct time to exit from restrictions and re-open the economy is, at one level, a matter of the trade-offs between the economic, psychic, and other benefits of earlier re-opening being weighed against the costs of increased infections, hospitalizations, and deaths, similarly due to re-opening, and as predicted by all of the standard “agent-based” epidemiological models (although the deficiency of these class of models, in ignoring behavioural responses by the public, have also been noted by your columnist).

But, this is not the whole story. An additional rationale for prudence comes from political economy considerations. I would hypothesize that, other things equal, if an earlier re-opening goes well, the public is likely, at best, to look perhaps a little more favourably on the incumbent politician who went ahead with it. On the other hand, if things go badly, the incumbent is likely to be severely blamed by the public for a premature re-opening.

This crucial asymmetry in the “payoff matrix” (in the jargon of game theory) to the incumbent politician between the two scenarios will naturally induce caution, likely greater than would be warranted on the basis of a scientific benefit-cost analysis alone. In simpler terms, re-opening earlier with things going well may give a little fillip to the incumbent, but will not guarantee re-election, while things going badly will almost certainly spell disaster at the polls. It is, thus, much safer for a prudent politician, with an eye on the next elections, to be excessively cautious and delay re-opening beyond what would be necessary from the point of view of what is good for society.

A perfect example of this is the continuation of lockdowns and other restrictions in Canada, the caution of whose political leaders contrast sharply with the UK; striking, given the similar full vaccination rates in both countries. There is no doubt that Johnson is taking a big gamble with Freedom Day — you can be sure political leaders the world over will be watching with great interest.

Vivek Dehejia is associate professor of economics and philosophy at Carleton University in Ottawa, Canada.

Sunday, July 11, 2021

My take on Modi's cabinet reshuffle.


Speculating on, and then dissecting, a reshuffle in the Union Council of Ministers is a parlour game for political analysts and observers, but what consequence is there for the rest of us? In other words, apart from gossip on “who is in” and “who is out” and why these changes may have occurred, is there any reason for more than passing interest by those of us who do not sit in the Delhi durbar of one or the other politician (either on the way up or the way down) of any particular political stripe and who thus may have a personal interest in the matter?

The short answer is: not really. As long back as 2015, during the first year of the first term in office of Prime Minister Narendra Modi’s government, I wrote a column in these pages asking, “Do expert ministers lead to better policy outcomes?” (16 January 2015). The context at that time was a volley of criticism against Smriti Irani, who was at that time was Minister of Human Resource Development, and the basis of the criticism was that she did not hold a university degree. There was also widespread praise for Jayant Sinha at that time, who was then Minister of State for Finance, given his background in management and finance.

Since that time, there have been several cabinet reshuffles, most significantly, of course, in Modi’s second term of office that commenced in 2019. But would one say that the appointment of X or the removal of Y from ministry A or B has had a marked impact on the overall public policy record, whether good, bad, or indifferent, of the Modi government? One would be hard-pressed to answer “yes”.

As my 2015 piece argued, the notion that expert ministers make a difference, while it sounds intuitively appealing, is difficult to find in the data, when one studies Cabinet systems of government in various countries and various points in time. The one exception appears to be a time of economic or financial crisis, such as after India’s crisis in 1991, when having a finance minister and/or central bank governor with expert credentials appears to make a difference — but not for the reason that you might think, but rather that the appointment of a domain expert sends a signal to the financial markets that the government is serious about fixing the underlying problems that led to the crisis. So perhaps domain expertise is, at best, more about signalling than it is about any concrete difference that a particular individual makes in a particular ministerial post.

There is an additional reason worth noting. As your columnist has observed on numerous occasions, our inherited Westminster parliamentary system of government is remarkably malleable. Thus, at a time when the leading party depends heavily on the support of coalition partners, such as during the two terms of Prime Minister Manmohan Singh (2004 - 2014), appointments to the Council of Ministers could be seen as carrots to other parties in the coalition. Ministers, in such a situation, may have actual clout, and thus could make a tangible difference, as their position cements a coalition partnership. But, as we have seen during the Singh years, this is a mixed blessing: some of the alleged corruption scams of those years, as the reader will recall, were blamed on Singh’s inability, or unwillingness, to sack non-performing or otherwise problematic ministers, for fear of upsetting the coalition dharma.

The situation is very different under the current government. Unlike the Singh years, characterized by a weak prime minister whose remit was limited to “policy” but did not include delving into “politics”, Modi’s Bharatiya Janata Party has led strong majority governments in both terms. Another interesting feature of the Westminster system is that, with a strong majority, overall Cabinet responsibility can morph into a quasi-Presidential system, in which the individual at the top, the Prime Minister, functions rather more like a chief executive than a first amongst equals. That has most certainly been the case under Modi, where it is no secret that important decisions are made, and routed through, the Prime Minister’s Office (PMO). Indeed, the burgeoning size of the PMO staff under Modi is a sign of its increased importance in the overall scheme of things. In such a situation, individual ministers are little more than placeholders, who may be shuffled around, while key decisions rest with the Prime Minister and are guided more by inputs from his advisers and senior bureaucrats in his office than they are by the ministers nominally in charge of the various portfolios.

There is nothing peculiar or uniquely Indian about this, and the current strong government, led from the PMO, is most assuredly not a sign of a weakening of India’s democratic credentials, as some foreign observers have suggested. Rather, it is precisely how the Westminster system functions when the governing party has a strong majority and is led by a strong prime minister who has a firm grip on his party. This would exactly describe the United Kingdom under Margaret Thatcher (1979 - 1990) or Canada under Jean Chrétien (1993 - 2003). Indeed, Chrétien, a French Canadian, centralized power so much in his PMO, with his ministers largely ciphers, that he was ironically dubbed the “sun king”, in reference to the absolutist French monarch Louis XIV.

All of this is worth remembering as some of us play the parlour game of deciphering the meanings behind the latest reshuffle.

Vivek Dehejia is associate professor of economics and philosophy at Carleton University, Ottawa, Canada.

Tuesday, May 18, 2021

"Failures of globalization have worsened the pandemic" -- my latest Mint column.

Failures of globalization have worsened the pandemic
Weak global governance is partly to blame for the glaring covid disparities that now afflict the world

Vivek Dehejia is a Mint columnist

In an essay published in 1979 (‘Pour une morale de l’inconfort’ or ‘For an ethic of discomfort’), the French philosopher Michel Foucault posed these uncomfortable questions and an unsettling observation: “On assiste à une mondialisation de l’économie? À coup sûr. À une mondialisation des calculs politiques? Sans doute. Mais une universalisation de la conscience politique—certainement pas.” These words, as translated into English by Homi Bhabha in a 2004 lecture, read: “We are witnessing a globalization of the economy? Quite possibly. A globalization of political calculations? Without a doubt. But a globalization of political consciousness—certainly not.” While Foucault, who died in 1984, has recently faced allegations of sexual misconduct, and his life and work are subject to scrutiny, the questions and observation he posed about the incomplete project of globalization remain pertinent.
At the very beginning of the process that we call globalization, Foucault was far ahead of his time in recognizing that globalization of the economy, and of the political calculus at the same time, was in motion. Equally, he recognized that these developments had not fostered a globalized political consciousness, and nor were they likely to. We may read Foucault as understanding that a globalized world of trade and financial flows, and the pervasive reach of multinational firms, which perhaps reached its peak in modern times just before the global financial crisis in 2007-08, had not generated a concomitant global political and social response—whether related to education, health and the environment, or inequalities of wealth, income and opportunity.
In simpler terms, a globalized economy has not engendered any correspondingly meaningful system of global governance. This has been increasingly on my mind, as the world copes with a two-speed response to the current covid pandemic. While parts of the rich world are speeding towards normalcy, much of the developing world is yet to begin a vaccination drive of much effect. For example, while the tiny British colony of Gibraltar is fully vaccinated, many poorer countries in Africa, Latin America and Asia have given a first vaccine dose to only 1-2% of their population, with almost no one having got a second dose needed for full vaccination.
Even India, with its indigenous vaccine-manufacturing capability, and a home-grown vaccine as well as a licence to make the Oxford-AstraZeneca jab, both putting it in an advantageous position over most other developing countries, is currently in the grip of a devastating second wave of the illness. While domestic policy failures played a significant role in India’s situation, it cannot be gainsaid that the proposition of vaccinating a billion people, many of them poor, in a reasonable span of time was always going to be a tall order. This is even truer for developing countries that lack India’s advantage as a large producer of vaccines.
The globalization project, which began in earnest in the early 1990s, always conceived of a world of ever freer flows of goods, services, capital, technology and (to some extent) people, envisaging a tide of prosperity lifting all boats, but its weak link was always a creaky system of global governance built on the shaky foundations of institutions created in the dying days of World War II. Thus, there were no mechanisms adequate to address gaping and widening global inequalities in wealth and income, to say nothing of fighting climate change, which necessarily requires a globally coordinated solution, given its spillovers across national borders. Greenhouse gas emissions, after all, contribute to the global stock, no matter which country emits these. Even on a relatively arcane and technical subject such as the coordination of national monetary and exchange-rate policies to mitigate cross-border policy spillovers, often most damaging to developing countries, there has been occasional talk, especially after the crisis of 2007-08, but no real action.
The assumption that the world could muddle through with a globalized economy, but without any serious effort to create institutions of global governance that could manage the social, environmental, and other dislocating consequences, was barely tenable in the wake of the financial crisis. Indeed, one of its fallouts was the rise of economic nationalism, which, in effect, has attempted to unwind globalization, at least partially. Think of everything from former US President Donald Trump’s ‘Buy American’ policy, which his successor Joe Biden has continued without missing a beat, to Indian Prime Minister Narendra Modi’s Atmanirbhar Bharat policy of self-reliance.
What financial crises and the rise of populist politics could not quite manage to do in the span of several years, the covid pandemic has succeeded in doing in one fell swoop. The outbreak has cast into sharp relief the fractures of incomplete globalization that abetted the rapid propagation of the virus and its variants around the world, and has also given us a world of vaccine haves and have-nots. While Americans and Britons relish the return of restaurant dining, concerts and other such manifestations of normalcy, and this is a likely prospect in the coming months for much of the advanced world, most of the developing world remains vulnerable to the risks of infection, disease and death on a large scale.
The advanced world ignores the possibility of such a divide at its own peril. Unlike our imperfectly globalized world and its faltering institutions, the virus treats every person, and every country, equally.

Tuesday, April 6, 2021

I speak to the Washington Post about the legacy of the late Robert Mundell.

My latest Mint column, on how the pandemic has worsened poverty in India.

 Covid has pushed too many Indians back into povertyIndian upward mobility has gone into reverse even as an economic recovery looks further

The piece may be behind a paywall. Here is the original text as filed. The published version may differ slightly due to copy editing.

As the world continues to be ravaged by the COVID-19 global pandemic, fully a year on, it is becoming increasingly evident that the greatest burden has fallen on the global poor. Even the poor in rich countries, which have relatively secure social safety nets and well developed public health systems, have seen a sharp drop in incomes and the greatest impact of the virus itself, since they are not in occupations in which “work from home” is feasible. While an investment banker, senior civil servant, or university professor can safely work remotely, this is obviously not an option for a food delivery worker, a store clerk, or a front line medical worker.

If the impact on the poor in rich countries has been severe, in lower and lower middle income countries, it has been nothing short of devastating. A recent study by the Pew Research Center compares the impact in China and India. While China’s gross domestic product (GDP) rebounded in 2020, after an initial drop due to the pandemic, India’s GDP collapsed last year, but is projected to revive this year. This difference helps account for the big difference in impacts on the poor in the two countries.

Pew’s methodology is a counterfactual one — that is, computing the change in the number of poor and in other income strata as compared to a scenario of normal GDP growth in the absence of the pandemic and subsequent lockdowns. In other words, this is a conceptually clean methodology for determining the impacts on poverty of the pandemic. The definition of those in poverty is the standard international definition of a daily income (actual or imputed) of US$2 or less a day.

For China, the study shows a very modest increase in the number of people in absolute poverty — only a million or so — whereas 30 million more people were pushed into the low (but not absolutely poor) income category. Meanwhile, 10 million people fell out of the middle class, 18 million from the upper middle class, and 3 million from the high income category.

By contrast, for India, a staggering 75 million people were pushed back into poverty due to the crisis — this is almost 60 percent of the global total increase in poverty due to the pandemic. Those in the lower middle income category lost 35 million, and the middle class shrank by 32 million people, many of these, evidently, accounting for those who slipped back into poverty. Additionally, there was a loss of 7 million people from the upper middle class, and a drop of 1 million from the high income earners. The impacts in India undo years of progress in combatting poverty, and have reversed several years of gains in pulling the power and lower middle income categories into the middle class.

If these statistics are not grim enough, there is now added concern of a looming sovereign debt crisis, especially in middle income emerging countries. In a March 29th interview with the Financial Times, United Nations Secretary-General, António Guterres, has pointed to the fact that large, middle income countries such as Brazil and South Africa have borrowed heavily in domestic bond markets. There is, thus, little danger of an external debt crisis, but there is a danger all the same, as maturities are coming down in many large, middle economy countries, such as Brazil and South Africa.

Shortened maturities may reduce the interest service cost of debt, given how long short rates are, but they mean that borrowings must be rolled over more frequently, which can heighten the possibility of a crisis in a context of greater macroeconomic instability. While India is not in such crisis territory, unrestrained fiscal profligacy, and an increasing debt to GDP ratio, can add to macroeconomic pressures going forward, especially if rising inflation forces the Reserve Bank of India to raise its policy rate to damp it down, thus increasing borrowing costs further.

Taking a longer view, the global crisis and its aftermath have impeded the process of economic convergence between richer and poorer economies, a beneficial impact of globalization that had been in train, in fits and starts, since the 1990s. India, in particular, suffered a serious GDP contraction last year, and even the prospect of higher growth this year, which could India give back its crown as the fastest growing major economy, has reduced the prospect of achieving the government’s putative goal of making India into a US$5 trillion economy anytime soon (although your columnist, as you may recall, has expressed scepticism about this being a sensible goal to begin with).

Even a month or so ago, there was somewhat greater optimism that a ramped up vaccine rollout around the world, which was reducing the infection rate in many countries, and saw lifting of restrictions as a consequence,  At the time of writing, however, cases are again on the rise in many places, and new variants and mutations of the virus appear to be more resistant than had been hoped to the existing vaccines. India, in particular, is seeing an alarming increase in cases and increased stress on the healthcare system. If this necessitates a further lockdown, which may be imminent in some states, it will almost certainly lead to a significant downward revision in the growth forecast for the current fiscal year.

Lower growth, in turn, foretells a rather grim year ahead for India’s poor. 

Vivek Dehejia is a Mint columnist.

Thursday, March 4, 2021

I'm quote in Sadanand Dhume's Wall Street Journal column on Modi's new development paradigm.

 Nor is it clear that the international environment is welcoming. In a phone interview, Vivek Dehejia, a trade economist at Ottawa’s Carleton University, points out that India couldn’t reach trade agreements with the U.S. and the European Union even before trade became an explosive domestic issue in the West. Fraught relations with China and India’s rejection of RCEP affect India’s access to Asia’s largest markets as well. In many cases, India’s domestic market is too small to count. It needs to create a more stable regulatory environment, end “tax terrorism” by officials, and upgrade infrastructure to become competitive as an export hub.

“You can try and race an Ambassador car on a Formula One racetrack,” Mr. Dehejia says. “But you’re going to have to get incredibly lucky to make it work.”