Hubert Fromlet

Summary

●  Looking at Chinese statistics and recent developments – without considering statistical quality at this point – leads to the (current) conclusion that China has managed the global financial economic crisis quite well. However, good economic growth was maintained by massive injections of fiscal stimuli and incredibly easy monetary conditions for new credits. Of course, these enormous injections into the economy now lead to concerns about the quality of new loans, of new investments and future inflation. Around 60 per cent of the big stimuli package has gone – or is about to go – to state-owned companies. This tells us quite a bit about future risks for the banks and the economy as a whole.

Current cautious measures to reduce the rapid rate  at which new loans are granted are not a wise precautionary step to dampen speculation and overheating – as it has been said in many comments – but rather an attempt to minimize damage after last year’s Formula 1 speed.

●  New own China Survey (Feb, prel, final results after New Year’s vacation):

Overheating indicator: 8.4  (peak since its start in fall 2004,  Mar 2009:3.9). 

Forecast GDP growth 2010: 9.4 percent     2011: 9.0 percent.

●  Still, my own main scenario – which I made before the panel survey – is that China will achieve quite a good GDP growth in 2010, in the range of 9-9 ½  percent, despite more tightening of credit conditions and uncertain global conditions. Two interest rate hikes by 0.54 percentage points are implemented in this rate forecast. This is not a very scary tightening (however, it could turn out to be somewhat more than this). In all: The risks for this year’s development should not be neglected, particularly when it comes to inflation. There is a non-negligible probability that inflation will exceed the unofficial “comfort ceiling” of 4 percent.

●  More skepticism should be applied to 2011 – unless the global economy recovers more rapidly than currently expected. Next year, fiscal emergency stimuli will run out, credit conditions will be tighter, and the Chinese currency may return to its previous state of appreciating cautiously. Many imbalances will be – or remain – in place next year, too. For this reason, a somewhat lower range for Chinese GDP growth seems to be appropriate in 2011, around 8 ½ – 9 ¼ percent.

A warning may well be in order: China (risk) forecasts should be prepared more carefully than in the past. Following the herd is not good enough anymore.

Read the full article

Professor Hubert Fromlet

Roundtable presentation at the China conferences on January 10-15, 2010, in Shanghai and Hong Kong, arranged by the Global Interdependence Center (GIC), Philadelphia

1.Lagging transparency has frequently been mentioned as one of the main reasons for the still ongoing global economic and financial crisis. This conclusion was also made by the leaders of the G20 summit in London last spring, expressed in the communiqué by the following words: “Strengthened regulation and supervision must promote propriety, integrity and transparency”. Thus, improved transparency really was placed on the top priority agenda by the G20 countries. 

2. As we all know, China nowadays is – which certainly is positive and also necessary in our world of growing global financial interdependence- a member of the G20 group. Consequently, the G20 declaration for increased transparency on financial markets has been underwritten by China, too.

3. Increasing transparency is certainly an important Chinese commitment, both domestically and internationally. Improved transparency domestically leads to better financial risk management on both the Chinese micro and macro level. Since China’s financial system has its structural imbalances, more transparency also should have a positive impact on the speed of necessary financial reforms.    

4. This includes bond markets, stock markets and – very importantly – monetary policy. Increased transparency on capital markets could turn focus more and more on the institutional shortcomings – and will, eventually, lead to improvements. This would be beneficial for the Chinese economy in the longer run, particularly if monetary policy can be made more efficient by better institutional conditions and liquidity on money and capital markets.

5.  Increased transparency could also contribute to better financial literacy – an area that will turn out to be increasingly important to an emerging country like China (but also for developed countries) where people need to know and learn more about their investment and credit alternatives. More knowledge about these areas may result in a better and more customer-friendly supply of products.

6. Internationally, it seems to be very plausible to give foreign analysts, stock and direct long-term-investors more transparency on the state of the Chinese economy and corporations. Institutional and transparency shortcomings are still too high for foreigners and, consequently, impeding their analytical skills on Chinese developments – and obviously too high for the Chinese as well.

7. According to my own China panel with well-known China experts, institutional conditions have not been changing visibly during the past years (scale 1-10; 10 = very favorable): 

8.  Statistical shortcomings are still everywhere – in methods, national accounts, capital stocks, labor markets, financial markets (macro), the banks’ capital adequacy ratios, etc. But we should not forget that China is a huge country. Overnight progress cannot be achieved.  However, these limits should not rule out markedly improved transparency in the longer run.

9.  In March 2009, I asked the China analysts of my survey panel about their view on the most urgent areas to look at compared to the standards of the European financial system (despite all the European problems). As top factors were mentioned (ranked):

• Transparency  -  number 1
• Supervision
• Risk awareness / risk management
• Equity markets
• Bond markets
• Competition
• Monetary policy instruments

10.  Of course, China has made efforts in the past few years to improve transparency on financial markets – but in my opinion at a rather slow pace. But we should be humble in the West. The financial crisis showed that we had (or still have) our own shortcomings and problems.

Transparency is part of institutional economics. 2009 year´s co-winner of the Nobel Prize in Economics, Elinor Ostrom, tells us the truth when writing in a book from 2008 (“Moral Markets”, Princeton, together with David Schwab): “It is worth noting that institutions – even well-designed ones – will not lead to beneficial outcomes by themselves”. In other words: The effectiveness of institutions also depends on the people who use them – as the financial crisis has demonstrated very clearly.

Some three years ago, I made an interview for one of my publications with one of the leading China experts in the Western academic world, professor Dwight Perkins from Harvard. He summarized his view on China as follows: “One should keep in mind that the legal system still is weak. Corporate governance is weak as well. There is some progress in the accounting system – but efforts started from a very low level. Corruption can make things very difficult. Protection of minority shareholders is an alien phenomenon. These are institutional shortcomings that should be kept in mind, despite China’s strong growth rates.”

These final words of Perkins are important – and still valid. China has achieved a lot of progress in its economy. I would like to say – despite its shortcomings in institutions, particularly in transparency! However, these shortcomings can also be given a positive interpretation:

Clearly improved institutions could make a major positive contribution to future potential Chinese economic growth. This desirable development can be particularly speeded up by more transparency which probably would trigger financial and other economic reforms faster than in the current opaque system – without being urged to run too fast! 

Summary
Psychology is gaining momentum in economic research – though with visible opposition from traditional economists. “Happiness economics”, for example, still is in its scientific beginning. Better skills in “happiness economics” may contribute to neglected welfare gains in a society. The risks for political abuse in the shelter of “happiness economics” should be limited in a transparent and democratic country.

Några dagar före jul eller före nyår gör man ofta ett facit över det gångna året. Har det gått bra? Har förväntningar på mig, mitt företag eller rent av mitt land infriats? Finns det anledning att vara glad?

Dylika funderingar må osökt leda till en vetenskapsgren som på senare år fått ökad uppmärksamhet – ”happiness economics” (lyckans ekonomi). Vad är egentligen den ekonomiska politikens ultimata mål?

Skotten Adam Smith ställde för cirka 250 år sedan strävan efter lyckan som främsta mål för all ekonomisk aktivitet. Drygt 150 år senare konstaterade dock den engelske ekonomen Alfred Marshall att ekonomin inte längre var inriktad på ”human well-being” utan snarare på materiella önskemål (”material requisites”).

Under 1900-talet konverterades ekonomin alltmer till ”hard science”. På senare tid har dock ”happiness economics” fått en synlig renässans. Forskning visar att dagens generationer är rikare än förfädernas – men mestadels inte lyckligare. Richard Easterlin – idag något omstridd p g a hans metodval – observerade detta redan för 30 år sedan. Milton Friedman förknippade välmående med ”a life of freedom”. Nobelpristagare Edmund Phelps gav sin syn på välbefinnade vid nobelföreläsningen 2007 med följande ord: ”A good economy must support the development of the individual … – good life is to discover the talents.” I dessa dagar exempelvis – och framöver – förknippar säkerligen allt fler människor på detta jordklot “happiness”med en bättre miljo för sig själva, barn och barnbarn (se exempelvis papers av Heinz Welsch, universitetet i Oldenburg).

Numera publiceras allt fler ”papers” i ämnet i prestigetidskrifter och böcker – med nobelpristagaren Daniel Kahneman (Princeton), Bruno Frey (Zürich) och Richard Layard (LSE) i spetsen.  Även den Interamerikanska Utvecklingsbanken (IBRD) har börjat intressera sig för ämnet.      

Layard till exempel är mycket kritisk till ekonomernas moderna budord: Ökad produktivitet och rörlighet på arbetsmarknaden. Han menar att dessa moderna krav innebär bl a hälsorisker, fler sjukdomar och därmed också välfärdsförluster.

För makroekonomer är BNP den mest kända och använda indikatorn. Detta är naturligt, eftersom (nästan) all produktion av varor och tjänster under en viss period sammanfattas i bruttonationalprodukten. En hel del BNP-ingredienser bidrar dock föga till ökat välmående. Samtidigt räknas inte faktorer med positiva välmåendeeffekter in i BNP. Hit hör exempelvis hälsa, familj, goda vänner, fritid, miljö, religion, tillfredställelse på jobbet m m – faktorer som ligger utanför ekonomin och ekonomisk grundforskning.

Lycka har också relativa dimensioner. Undersökningar visar exempelvis att testpersoner hellre tjänar 50 000 USD om året om den genomsnittliga inkomsten i branschen är 25 000 USD än 100 000 USD vid en genomsnittsinkomst på 200 000 USD.

Kan kunskapsökning göra lycklig? I princip ja, vilket bland annat tyska undersökningar visar (Georg-Simon-Ohm- Hochschule, Nürnberg). På företagsnivå missas dock fortfarande många chanser i syfte att ge arbetskraft med på senare tid höjd utbildnings- och kompetensnivå erforderlig stimulans och uppbackning. Detta är slöseri med egna resurser och företagsekonomiskt rent av dumt. Att ge de anställda en känsla av lycka borde kanske vara företagsledningarnas viktigaste fundamentala uppgift. Att värna om de egna anställdas lycka på arbetsplatsen skulle kunna bli ett av de viktigaste – och billigaste! – nyårslöften på företagsnivå. På den punkten finns det otroligt mycket kvar att göra, även i Sverige.  

Men hur skall lycka mätas? Ännu så länge råder ingen enighet om den bästa indikatorn. Det finns ett antal försök. Men forskningen kommer helt klart att gå vidare vad gäller “economics of happiness”. Detta är en intressant forskningsgren med involvering av psykologi – men fortfarande i sin linda.”Lyckans ekonomi” bör också vara intressant för politiker och den ekonomiska politiken. Kritiker till ”happiness economics” hävdar dock att ökad fokus på detta område kan öka politikernas populism (se till exempel Pierlugi Barotta). Det kan vara så – men jag tror att flertalet politiker redan idag vet mycket väl, var och hur populistiska insatser kan bidra till (kortsiktiga) sympativinster.

Som vi har sett, har ”lycka” och ”lyckans ekonomi” i ett historiskt perspektiv fått olika innehåll och tolkningar. Bruno Frey sammanfattar: ”The study of happiness is just beginning in economics. It opens up challenging new areas. Further progress is especially needed in these four areas: the effects of happiness on behavior, consideration of a broader set of institutions on happiness; application of more advanced approaches in cross-national research and improved measurements on happiness.”

Alan B. Krueger, mycket känd ekonom från Princeton, tillägger: “Much of what contributes to well-being happens outside markets”. Nämnas kan bland annat

-           “type of governance she/he lives under”

-          “support from friends and family”

-          “ how we are spending our time”

-          “ how we feel about health”

Slutsatsen finns nära till hands att det finns speciellt mycket att göra i det europeiska reformländerna. Där skulle politikerna verkligen kunna se förbättringar i de dåliga “happines”-rankningarna som en viktig målsättning.

”Happiness economics” är ett ämne som passar väl till dessa (jul-)dagar – och tål att fördjupa sig i efter helgarna.

Summary
This blog is looking at insufficient statistical standards in most Asian countries. Further improvements are badly needed in a number of countries – not only in China.  When it comes to China, we recently could watch once more that China’s global positions – as, for example, concerning the environment and exchange rate policy – to a very high extent are nationally determined (which is not unusual for big countries).

In Russia, president Medvedev made some interesting, self-critical comments on the lagging structural state of the economy. However, verbal criticism is not enough to change things.  Institutional improvements according to the broad definition of Douglass North are particularly needed.

Furthermore, discussions in and about the Baltic states continue to be interesting. Too much is talked and written about fiscal austerity, despite its importance.  But what happens and has to be done once the Baltic economies recover? Renewed deterioration of the current account deficits has to be feared. For this reason, too little focus nowadays is put on long-term (structural) improvements of the current account deficit.

Asiatiska statistikbrister irriterar
Jag har på senare år vid upprepade tillfällen givit uttryck för flertalet asiatiska länders bristande statistiska kvalitet. Flertalet tidsserier är antingen för korta eller historiskt inkonsistenta. Eller så finns viss viktig statistik överhuvudtaget inte. Visst bör dylika fenomen betraktas med ödmjukhet – men det borde åtminstone synas kontinuerliga framsteg. Så är dock ofta inte fallet. Fortfarande saknas det ett bredare sortiment av jämförbar statistik mellan länderna i linje med OECD:s harmoniserade statistikberedning (se också ett alltjämt aktuellt paper i detta ärende från 2007 av Timmer, Monnikhof and de Vries). Dessa statistiska brister börjar bli alltmer allvarliga med tanke på den växande betydelsen av Asiens ekonomier och finansmarknader – och utgör ett substantiellt hinder för relevant forskning. 

Indiens tillväxt förbryllar
Under innevarande vecka fick vi information om att Indiens BNP under det tredje kvartalet i år tilltagit med respektabla 7,9% jämfört med samma kvartal året innan. Privat konsumtion och statliga tillväxtimpulser utgör huvudförklaringarna. Till saken hör dock också – vilket ofta är förbisett – att Indien alltjämt är en relativt inhemskt orienterad ekonomi, speciellt jämfört med flertalet andra asiatiska länder. Det är också relevant att veta att Indiens BNP-tillväxt systematiskt underskattas, enligt en del experter med minst 10%.

Kinas egen globaliseringspolitik
Kina är numera en stor aktör på den globala handels- och finansfronten. Kina har speciellt under de senaste två à tre åren framgångsrikt flyttat fram sina positioner på den globala arenan. Inte minst inom miljö- och valutapolitiken dominerar dock fortfarande mer kortsiktiga nationella intressen (vilket för övrigt ofta är fallet i större och inflytelserika länder). Frågan är dock hur hållbara dessa kinesiska positioner är. Inom miljöområdet är det kanske svårast att få Kina inom överskådlig tid att verka ännu mer aktivt, särskilt med tanke på att Kina nyligen satt upp numeriska utsläppsmål. Valutapolitiken kommer att återgå  till den tidigare apprecieringspolitiken – men snarare något senare än mycket snart.  Den ständiga – inom gruppen ”emerging markets mer markerade – konflikten mellan mer kortsiktiga (tillväxt) och långsiktiga mål (miljö, sundare produktions- och konkurrensstrukturer) märks således inte minst i Mittens rike och i samband med den egna globaliseringspolitiken, vilken idag dessvärre inte ens optimerar kinesiska intressen.

Medvedev överraskar
Rysslands president Dmitrij Medvedev överraskade nyligen omvärlden med att konstatera att rysk ekonomi egentligen befinner sig i ett icke acceptabelt strukturellt skick – med en alldeles för stor koncentration på råvaru- och energiproduktion/-export och alldeles för lite sofistikerad och teknologiskt konkurrenskraftig tillverkning. Rätt insikt och diagnos är visserligen bra. Men det behövs också rätt terapi, vilken främst borde avse institutionella förbättringar på alla fronter. Det förutsätter i sin tur nya och förbättrade incitamentsstrukturer. Dessa kan givetvis skapas ”uppifrån” – men kräver en märkbar uppbackning och spridning främst ”underifrån”. Förbättrade institutioner kräver ”folkets” och de hierarkiskt mindre bemedlade intressegruppernas stöd. Det gäller också för Rysslands och Medvedevs strävan att åstadkomma en modern och globalt konkurrenskraftig rysk ekonomi.

Snäv Baltikum-debatt
Diskussionen kring de baltiska länderna handlar för närvarande väldigt mycket om en tillräckligt åtstramande finanspolitik – och således om det korta perspektivet.  Denna tyngdpunkt i debatten är givetvis inte omotiverad. Risken ökar dock att den mer långsiktiga, helt nödvändiga strukturella förbättringen av bytesbalanserna i Lettland, Litauen och Estland hamnar i bakgrunden – eller att man kommer fram till den felaktiga slutsatsen att ett påskyndat EMU-inträde skulle lösa (nästan) alla problem.

Till analysen hör att de baltiska ländernas på senare tid uppnådda bytesbalansförbättringar i allt väsentligt kan hänföras till det stora tillväxtfallet och den härav följande importreduceringen. En förr eller senare kommande konjunkturförbättring i de baltiska länderna kommer dock ånyo att medföra synligt ökad import. Med andra ord: Analysen handlar alldeles för lite om hur förbättrade exportstrukturer och nya eller förbättrade exportprodukter kan åstadkommas under de kommande åren – med kanske humankapitalbildningen i förutsättningarnas fokus (i linje med den moderna tillväxtforskningen). Samtidigt som vi vet att just denna faktor drabbas speciellt av nedskärningar.

EU:s statistik (Eurostat) visar tydligt att de baltiska ländernas forskningsinsatser – och därmed en mycket viktig förutsättning för den långsiktiga tillväxten och bytesbalansförbättringen – ter sig helt undermåliga. Dessa brister kan inte heller döljas genom ett (för tidigt) EMU-inträde. Den pågående oron kring EMU-landet Grekland torde kunna tas som ett varnande exempel.

In March this year, we published our ninth survey on China. This time we ask economists from research, industry and the financial sector in different countries – India included – about their view on short-term and long-term Indian issues.

Summary 

• The average forecast for India’s GDP changes by the panelists (in %) looks as follows:

• Some areas that have been graded
  (10=best grading; 1=lowest grading; numbers for China from March 2009 in brackets):

Of course, one should be somewhat careful when comparing qualitative valuations for China and India since the two survey panels consist of different people. However, some of India’s competitive advantages are reflected in the answers. But we should not forget that China has a number of other areas with competitive advantages such as literacy, infrastructure and a manufacturing sector with higher international competitiveness.

Read the complete result here

Speech by Hubert Fromlet on the ”Baltic Sea Region, China and India Day” of the Baltic Business School (BBS) in Kalmar on November 10, 2009.

Summary / key points:

  One day after the 20^th anniversary of the fall of the Berlin Wall: It makes sense to come to the conclusion that the peaceful revolution in Central and Eastern Europe two decades ago not only brought democracy and a better economic system to the countries in the region but also major stimuli to the whole globalization process. Even – or rather particularly – emerging countries like China and India received substantial benefits from the acceleration of world trade and globalization of investment.

  Until recently, emerging markets were very much regionalized (“Asian countries”, “Eastern European countries”, etc). The still ongoing global financial and economic crisis, however, has shown that such an accumulated analytical and strategic approach no longer can be regarded as appropriate. More or less all emerging market countries have their own strengths and weaknesses.

  This leads us “automatically” to the conclusion that financial and exporting/importing companies in the future more ambitiously should analyze emerging markets country by country and  case by case. Thus, more skills in emerging markets are needed on all official and corporate levels – also due to the fact that the share of emerging economies in global production will increase further.  

  Another ex post conclusion: Fundamental macroeconomics still matter. Looking, for example, at the severe economic problems in three Baltic states makes very clear that supervision/central banks and certain Swedish/Baltic   bankers had obvious shortcomings in their macrofinancial and macroeconomic fundamental knowledge.  Academia should pay more attention to macrofinancial research, too.

  The ongoing economic crisis – hopefully we are right now going through the turning point – has also demonstrated that exchange rate policy still can play a major role for a country’s economy. I have been warning for a premature joining of the ERM II/EMU by New (EU)Member  States since 2002. I feel more convinced than ever that these warnings were motivated. And I repeat my warnings today: It could again become a strategic mistake if the Baltic states already in a few years time again seriously tried to join the euro. Even Poland should be cautious about such a step.

  An application for an EMU entry should be taken from a position of strength – and not as a kind of safety anchor against future crises. It remains to be seen whether the balances of current account will show a structural improvement once the economies in Estonia, Latvia and Lithuania start to recover. The current improvements of the current accounts are rather the result of the economic depression.

  China’s problems during the global became obviously less severe than most experts expected a year ago. It should, however, be added that China still regulates its cross-border capital flows and its currency. Time has come that China again starts its (cautious) appreciation process. The currently more or less stable exchange rate vis-à-vis the U.S. dollar is simply not sustainable anymore – and does harm to the Chinese economy as well. 

  The short-term outlook for India may be affected by poor harvests. But India still achieved quite reasonable rates of GDP growth during the global meltdown. There is no reason to change my previous forecasts of quite a good trend growth in the future.  However, the continuous big public fiscal deficits still make me (somewhat) concerned as a mostly fundamentally analyzing economist.

Idag är det exakt 20 år sedan Berlinmuren föll – en förvisso omskakande händelse som jag fick uppleva på plats. Flertalet artiklar om den östtyska  –  om man nu fortfarande får säga så – utvecklingen under de gångna 20 åren beskriver mer eller mindre dagens misär i det nya Östtyskland. En sådan inriktning är dock helt enkelt felaktig – tyvärr starkt uppbackad av notoriskt pessimistiska tyskar.

För egen del har jag under lång tid intensivt sysslat med tysk ekonomi . Jag kommer mycket väl ihåg utgångsläget under 1989/1990. Positiva – men emotionella – förväntningar dominerade starkt.  Mer realistiska bedömningar – baserade på den urusla och absolut inte konkurrenskraftiga östtyska industrin – fick inte riktigt gehör. Det gäller dock att komma ihåg, hur den ruttna östtyska planekonomin verkligen såg ut.

Tas hänsyn till DDR:s faktiska förhållanden, ser de fem nya delstaternas facit så här långt mycket bättre ut än vad många onyanserade analyser ger sken av. Således steg östra Tysklands BNP med cirka  8% under perioden 1992 till 2008, jämfört med omkring 1 % för den gamla förbundsrepubliken. Visserligen har det statliga bidraget till Östtysklands återuppbyggnad hittills kostat mer än 1200 miljarder euro, det vill säga 75 % av den tyska budgeten – och notan går fortfarande på årligen 75-80 miljarder euro.

Beräkningar av IWH i Halle visar dock att upphämtningsprocessen (konvergenshastigheten) varit dubbelt så snabb jämfört med förväntningskalkylerna. Naturligtvis är den östtyska tillväxten ojämnt fördelad. Thüringen har klarat en genomsnittlig 10-procentig BNP-uppgång under de gångna två årtionden, det eftersläpande Mecklenburg- Vorpommern enbart 4,6%. Alla delar av östra Tyskland har fått en klart förbättrad infrastruktur – och framför allt demokrati.  Tyvärr är dock arbetslösheten fortfarande mycket betungande i stora delar av de nya delstaterna.

På årsdagen kan också konstateras att murens fall betytt mycket för världshandeln och globaliseringen. Murens fall har inte enbart inneburit mycket för det gamla Östeuropa utan också för många emerging markets med Kina  och Indien i spetsen.

As most readers of my blog probably suspected, I cannot completely refrain from making some further comments apart from those I already made to the press. Elinor Ostrom’s research on the positive management of common property by user associations may, for example, be helpful when dealing with environmental issues on a local or regional level. I would like – and recommend – to test her findings in particularly China and India. Williamson’s organizational and institutional research contributes, for example, to a better understanding why firms many times may prefer vertical integration.  Coase’s influence on Williamson’s research is obvious.    

¤   Both this year’s winners of the Nobel Prize in Economics and their research areas (organizing/organization) were strongly recommended in my latest blog. This is nice again because I was forecasting at least one name correctly seven times out of ten in the past decade (but I should be humble since some luck is needed as well). This analysis claims quite some reading concerning research results that were achieved some 20-30 years ago and that are still relevant for current research and studies.

¤  I am happy with the professors Elinor Ostrom (Indiana)  and Oliver Williamson (Berkeley)  who will receive the highest economic award in Stockholm on December 10. But I feel somewhat sorry about Jean Tirole (Toulouse) – one of the leading European economists below 65 years – since Tirole to a high extent deals with organizational issues as well (though mainly from other angles).  However, Tirole’s time still may come.  Interestingly, Ostrom is not an advanced mathematically oriented academic but rather a field researcher (which is not bad per se since contextual economics should be regarded as important as well). In this context, some change of mind happened in the Nobel Prize Committee as well. 

¤   I also feel happy about the fact that interdisciplinary research (this time by sociologist Elinor Ostrom) gets more appreciation -  which I have been pleading for during quite some years. Our economic world has become by far too complex that we can afford to neglect other research disciplines that have an impact on the economy such as psychology, sociology, politics, law and regulations, health and the environment. The ideal world of the classical “homo oeconomicus” does not exist anymore (even if Milton Friedman once wrote that the results of modeling not necessarily have to be in line with reality).

¤   After many years of pointing at the absence of women in the list of Nobel Prize winners and at the fact that only a few women had major scientific breakthroughs some twenty years ago, I notice with satisfaction that Elinor Ostrom since several years ago was on my list of thinkable female Nobel Prize winners (and Oliver Williamson, by the way, from the very beginning of that list).

¤   Elinor Ostrom’s research is – as mentioned above – field-oriented. She made many studies on common property organization in quite a number of countries, among them Japan, Nepal, the Philippines Spain and even Switzerland.  But I have never seen any research work by Ostrom looking at China and India – and I would like to see such efforts. Maybe I missed it – but it is worthwhile mentioning this research angle.

Of course, this may have been difficult in the past when considering the structure of the China’s economy and decision-making, the distribution of property, the insufficient protection of property rights and all the institutional shortcomings. However, China is changing – though in many respects very slowly. Most Chinese see and feel the extremely poor environment every day. There may be ways to organize local fights against pollution, unpotable water and other health-affecting environmental problems in an Ostrom sense. Particularly in China, these challenges may be worked out much better without the intervention of local politicians and their many times very corruptive surroundings. This research approach could be supported by international/global organizations. Generally spoken, the solution of major environmental problems can be found on both the local and the global level. For this reason, Ostrom’s research may be relevant to China, particularly if current ownership and property right conditions will be changed more markedly at some point in the future.

 India, on the other hand, is a big country where Ostrom’s research and conclusions may be applied already today since property is more equally distributed between private and public ownership, and property rights and decision-making are more modern and democratic. Using commons, however, is not only a matter of organizing but also – if we use the terms of Douglass North – an institutional issue that includes habits. Far-reaching education should be started at all levels to reduce the very common habit to just throw things away. Picking up garbage must be much better organized, too, maybe in the way Ostrom is pleading for. Even if the environmental problems of India are much smaller than the Chinese, progress is badly needed on all levels – particularly since industrial production and car registrations will increase much more in the future.

¤   Looking  at interesting areas for next year’s selection, research on labor markets, modern growth theory, finance and modeling techniques  could become particularly relevant. This year, my wish of awarding a dignified woman became verified. For 2010, I am particularly hoping for a European Nobel Prize winner. European economic research is catching up.

I will get back to all these Nobel Prize issues in the beginning of October 2010.

Speech at the Economic Forum for Eastern Europe in Krynica/Poland on September 10, 2009

SUMMARY

Even if the U.S. may be seen as the starting point for the eruption of the global financial and economic crisis, it should not be overlooked that many countries had made their own policy mistakes that aggravated the consequences of that global economic disaster.

Some parts of (South) Eastern Europe have been hit quite hard by the global financial crisis. Good and stable macroeconomic conditions, however, make the impact from such a negative exogenous development (somewhat) less painful and should open a more speedy road to recovery compared to imbalanced countries that have been hit sharply by shrinking confidence of (long-term) foreign and also domestic investors. Good general conditions and favorable microeconomic and macroeconomic equilibria may help considerably. This is one of the reasons, why the outlook for Poland – just to mention one country – after the crisis seems to look more favorable than for quite a number of other countries in the region.

It is worth mentioning that international competitiveness will be very important for exports once the European/global economy starts to recover. Countries dealing with this issue now, will have a better chance to escape from the current problems than countries which in this respect are more passive. There is an obvious risk that the gap between the more ambitious and the more static countries will have widened after the crisis. Foreign investors will see (South) Eastern countries as much more heterogeneous markets than in the past.

The current global financial and economic crisis can to a great extent be attributed to phenomena like greed, abuse of incentives, performance pressure (“angst”), overconfidence, neglect of historical experience, etc. Without improved research / interest for behavioral finance and understanding of this exciting scientific orientation, financial regulations will be continually limited in their efficiency. The “homo oeconomicus” has disappeared from global financial markets.

Another important step forward is the recognition that regulations should be completely designed for giving the right incentives to players on financial markets. “Perverse incentive structures” – as Rajan calls one of the main characteristics of the current crisis – should not exist anymore in the future regulatory framework.

The financial crisis has shown that there is good reason for reconsidering monetary policy at least somewhat, i.e. when it comes to the importance of variables like liquidity, credit growth and asset prices in certain booming situations.

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Summary

Generally speaking, the main impediments to well-working regulations and collaborative agreements come from human behavior (psychology). The current global financial and economic crisis can to a great extent be attributed to phenomena like greed, abuse of incentives, performance pressure (“angst”), overconfidence, neglect of historical experience, etc. Without improved research / interest for behavioral finance and understanding of this exciting scientific orientation, financial regulations will be continually limited in their efficiency. The “homo oeconomicus” has disappeared from global financial markets.

Another important step forward is the recognition that regulations should be completely designed for giving the right incentives to players on financial markets. “Perverse incentive structures” – as Rajan calls one of the main characteristics of the current crisis – should not exist anymore in the future regulatory framework.    

Collaborative agreements make sense in certain cases, for example, on an international basis between public institutions. History of financial markets, however, has demonstrated many times that collaborative agreements between banks and public institutions – according to their design – many times cannot work as a powerful instrument for a long time.

Instead, it would make sense to raise the status of collaborative agreements. This could be achieved by including certain agreements as conditions for “good corporate governance”.  Such a change could be made efficient by demanding comments from banks on certain collaborative rules they should follow carefully on a regularly basis in their quarterly or annual reports. In other words: Much more pressure should be put on banks’ performance in corporate governance. And the press should write more about it.

Whatever regulatory or collaborative changes we are talking about, one extremely important precondition for – hopefully – (somewhat) declining future financial risks should be mentioned particularly:  increased transparency, demanded by regulators and central banks. This need cannot be stressed sufficiently. Innovations in the past such as Structured Investment Vehicles (SIVs) and conduits must be made much more transparent than has been the case in recent years – but the quality of credits must also be made more transparent. Supervision should become much more active in this respect. By the way China should join the path to increased financial transparency as well – as it underwrote this spring in the communiqué of the London G20-summit.

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