27/5/15: No ELA Increase amidst Deposits Flight: Greece

Three quick updates to my earlier post on things getting crunch-time(y) in Greece:

Firstly, the U.S. is stepping up its pressure on the European 'leadership' to take Greek risks more seriously: U.S. Treasury Secretary Jack Lew : "My concern is not the good will of the parties -- I don't think anyone wants this to blow up -- but ... a miscalculation could lead to a crisis that would be potentially very damaging". Talks are going to be toasty at G7 summit and this time around not down to Vladimir Putin.


Secondly, as I said in the earlier post, we have EUR3 billion cushion left when it comes to Greek banks ELA and increases in ELA approvals by the ECB are getting smaller by week. So here's the bad news: "Greek banks have seen deposit outflows accelerate over the past week as fears rise that the euro zone country will default on debt, two banking sources said on Wednesday." This is via Reuters. Remember, last hike in ELA was EUR200 million. And today, ECB decided not to increase ELA limit - a sign that Frankfurt is getting edgy. Guess what: "The past week in May was more challenging compared to the previous ones in the month, with daily outflows of 200 to 300 million euros in the last few days," a senior Greek banker said. This might be mild after outflows of EUR12.5 billion in January and EUR7.57 billion in February, but the latest increase in outflows is coming on foot of already weak deposits and signals renewed increase in pressures. Outflows are up in April to ca EUR5 billion from EUR1.91 billion in March.

Thirdly, we now have rumours of real capital controls coming in: Athens introduced a 'small charge' on ATM withdrawals. Despite this glaringly 'capital control'-like measure, Athens subsequently said it has ruled out capital controls. But, two days ago, Greek opposition lawmaker Dora Bakoyianni said "the country could be forced into capital controls to stem deposit outflows if it did not reach a deal for aid with the government this week". And on May 20, Moody's issued a statement saying that capital controls in Greece are now "highly likely".

and CDS markets are not impressed, again...

Though the bond markets are actually pricing in continued ECB 'cooperation' - across all of the euro area peripherals:

The Euro Saga continues…

27/5/15: CCTB is Baaaack...

It's Happy Hour again in Brussels, as the EU is reviving its plans for tax harmonisation across the continent.

At stake, the EU proposal for CCCTB, or Common Consolidated Corporate Tax Base, which would set the first precedent for tax harmonisation, outside Vat. As reported in the media, the plans appears to have support from the EU Commission (predictably), France (predictably) and Germany 9again, predictably). UK (predictably) is opposed: http://www.cityam.com/216514/uk-brushes-aside-german-tax-plan.

Today, the EU officials are discussing how to tackle tax avoidance and create a system of “fair, transparent and growth friendly” corporation taxation with discussion expected to “feed into” an announcement on corporation tax in June.

Key article on this is here: https://global.handelsblatt.com/edition/183/ressort/finance/article/a-tax-collision-course.

27/5/15: Crunch Time Timeline for Greece

Crunch time continues for Greece. Here is the schedule of the upcoming 'pressure points':

Source: Citi

And an update to the Greek ELA increases: +EUR200 million on May 21st, to EUR80.2 billion with remaining available cushion of just EUR3 billion. Note: earlier ELA extensions are summarised here: http://trueeconomics.blogspot.ie/2015/05/15515-greece-on-wild-rollercoaster-ride.html.

27/5/15: Creative Destruction vs Subjective Individual Wellbeing

There is one persistent question in economics relating to the issues of aggregate income attained in the economies: the connection between that income and happiness. In other words, does higher per capita GDP or GDP growth increase happiness?

A new paper by Aghion, Philippe, Akcigit, Ufuk, Deaton, Angus and Roulet, Alexandra M., titled "Creative Destruction and Subjective Wellbeing" (April 2015, NBER Working Paper No. w21069 http://www.nber.org/papers/w21069) looks at this matter. The authors "…analyze the relationship between turnover-driven growth and subjective wellbeing, using cross-sectional MSA level US data. We find that the effect of creative destruction on wellbeing is

1. unambiguously positive if we control for MSA-level unemployment, less so if we do not; 
2. more positive on future wellbeing than on current well-being; (
3. more positive in MSAs with faster growing industries or with industries that are less prone to outsourcing; 
4. more positive in MSAs within states with more generous unemployment insurance policies."

A bit more colour.

Existent literature

As noted by the authors, "…the existing empirical literature on happiness and income looks at how various measures of subjective wellbeing relate to income or income growth, but without going into further details of what drives the growth process. In his 1974 seminal work, Richard Easterlin provides evidence to the effect that, within a given country, happiness is positively correlated with income across individuals but this correlation no
longer holds within a given country over time."

This is known as the Easterlin paradox and there are several strands of explanations advanced: "…the idea that, at least past a certain income threshold, additional income enters life satisfaction only in a relative way… Recent work has found little evidence of thresholds and a good deal of evidence linking higher incomes to higher life satisfaction, both across countries and over time. Thus in his cross-country analysis of the Gallup World Poll, Deaton (2008) finds a relationship between log of per capita GDP and life satisfaction which is positive and close to linear, i.e. with a similar slope for poor and rich countries, and if anything steeper for rich countries. Stevenson and Wolfers (2013) provide both cross-country and within-country evidence of a log-linear relationship between per capita GDP and wellbeing and they also fail to find a critical "satiation" income threshold.3 Yet these issues remain far from settled…"

One common problem with all of the literature on links between income and wellbeing is that "…none of these contributions looks into the determinants of growth and at how these determinants affect wellbeing. In this paper, we provide a first attempt at filling this gap."

Theory:

To address this problem, the authors "look at how an important engine of growth, namely Schumpeterian creative destruction with its resulting flow of entry and exit of firms and jobs, affects subjective wellbeing differently for different types of individuals and in different types of labor markets."

The authors "develop a simple Schumpeterian model of growth and unemployment to …generate predictions on the potential effects of turnover on life satisfaction. In this model growth results from quality-improving innovations. Each time a new innovator enters a sector, the worker currently employed in that sector loses her job and the firm posts a new vacancy. Production in the sector resumes with the new technology only when the firm has found a new suitable worker. …In the model a higher rate of turnover has both direct and indirect effects on life satisfaction. The direct effects are that, everything else equal, more turnover translates into both, a higher probability of becoming unemployed for the employed which reduces life satisfaction, and a higher probability for the unemployed to find a new job, which increases life satisfaction. The indirect effect is that a higher rate of turnover implies a higher growth externality and therefore a higher net present value of future earnings: this enhances life satisfaction."

Four theoretical model predictions are:

1. "Overall, a first prediction of the model is that a higher turnover rate increases wellbeing more when controlling for aggregate unemployment, than when not controlling for aggregate unemployment."
2. "…higher turnover increases wellbeing more, the more turnover is associated with growth-enhancing activities. 
3. "…higher turnover increases wellbeing more for more forward-looking individuals." 
4. "…higher turnover increases wellbeing more, the more generous are unemployment benefits".

Data:

The authors test theoretical predictions based on actual US data.

"Our main finding is that the effect of the turnover rate on wellbeing is unambiguously positive when we control for unemployment. This result is …remarkably robust. In particular it holds: (i) whether looking at wellbeing at MSA-level or at individual level; (ii) whether looking at the life satisfaction measure from the BRFSS or at the …Gallup survey; (iii) whether using the BDS or the LEHD data to construct our proxy for creative destruction."

"We also find that the positive effect of turnover is stronger on anticipated wellbeing than on current wellbeing. On the other hand, creative destruction increases individuals' worry - which reflects the fact that more creative destruction is associated with higher perceived risk by individuals."

"…When interacting creative destruction with MSA-level industry characteristics; we find that the positive effect of turnover on wellbeing is stronger in MSAs with above median productivity growth or with below median outsourcing trends."

"Finally, we find that higher turnover increases wellbeing more in states with unemployment
insurance policies that are more generous than the median."

25/5/15: Immigration and Entrepreneurship: Major Unknowns

A recent CESIfo study looked at the role of immigrants in driving entrepreneurship.

Per authors: "Immigrants are widely perceived as being highly entrepreneurial and important for economic growth and innovation. This is reflected in immigration policies and many developed countries have created special visas and entry requirements in an attempt to attract immigrant entrepreneurs. Not surprisingly, a large body of research on immigrant entrepreneurship has developed over the years."

Couple of interesting statistical summaries:

 Striking feature of the above data is low level of entrepreneurship within Indian and Philippines diasporas.

Key conclusions are: "Overall, much of the existing research points towards positive net contributions by immigrant entrepreneurs. The emerging literature on these contributions as measured by innovations represents the most convincing evidence so far."

Interestingly, distribution of entrepreneurship across educational categories, as exemplified above, is rather uniform, although this does not adjust for quality of entrepreneurship.

Caveats are: "First, there is little evidence in the literature on how much immigrant-owned businesses contribute to job growth. Although data exists on employment among immigrant-owned businesses no data are available showing the dynamics of employment among these firms."

Second, "...immigrant business owners are more likely to export, but we know little about how much they export in total dollars and how many jobs are created by these expanded markets for selling goods and services."

Lastly, there is indeterminacy as to the "....the contribution of immigrant businesses to diversity. Although the contribution of immigrant firms to diverse restaurants, merchandise and services is apparent in any visit to a major U.S. city, we know less about the contribution to diversity in manufacturing and design of innovative products."

Full paper can be read here: Fairlie, Robert W. and Lofstrom, Magnus, Immigration and Entrepreneurship (April 23, 2015). CESifo Working Paper Series No. 5298: http://ssrn.com/abstract=2597992

24/5/15: Markets, Patterns and Catalysts: Irish Growth Story

Some of my slides from last week's presentation at the All-Ireland Business Summit, covering three key themes:

The Current State of the Irish Economy "The Market Section"

The New Normal of rising global risk "The Pattern"

A Policy Path to Growth "The Catalysts"

24/5/2015: Russian Economy: Weaker April Signals Renewed Risks

When I remarked recently on some less negative than expected developments in Russian economy over Q1 2015, I noted that these were fragile signs of potential stabilisation and that the risks remain to the downside. April industrial production appears to signal the same. April industrial production numbers are down 4.5% y/y and manufacturing is down 7% - the rates of decline that are significantly sharper than recovered over 1Q.

Remember that Russian GDP fell 1.9% in 1Q 2015 y/y, based on preliminary estimates - a decline that is shallower than what was expected by the analysts. Overall output (GDP at factor cost) fell slightly more sharply - by 2.3% over the same time, while domestic demand (Consumption + Investment) fell at just under 7%. The gap between output and domestic demand declines can be in part explained by imports substitution going on across a number of sectors, such as food, agriculture, industry and manufacturing, plus improved trade volumes also driven by ruble devaluation.

The decline in industrial production and manufacturing signals a feed through from collapsing investment to production sectors, as well as continued weakness in consumption and strengthening of the ruble. More significantly, ruble firming up is not helping imports substitution-driven demand. CBR has now returned to buying forex and selling ruble in order to, both, increase its reserves and also sustain lower ruble. Higher ruble valuations hurt fiscal balance and at the same time inducing weaker external balances. As the result, CBR is now regularly purchasing USD100-200 million daily and is raising cost on banks' access to repo facilities.

All in - just another reminder that the Russian economy is not out of the woods yet. For all the positive developments in recent months, the situation remains fragile and structural drivers for growth are still lacking, so any recovery, if sustained, will have to come from either external demand factors (oil prices, commodities prices, etc) and/or imports substitution effect supported by lower CBR rates.

22/5/15: Expresso: E agora, Cameron?

Portuguese Expresso on UK elections impact on the economy, quoting myself on the subject:

Click on the image to enlarge

22/5/15: You are What (and Where) You Eat

For a half-decent Italian, food is a part of defining both the value and the meaning of existence. For other cultures, food is at the very least definitive of our connection to culture, family, history, land and so on.

Gabriela Farfan, Maria Eugenia Genoni and Renos Vakis of the World Bank looked the the consumption of food away from home across the developing world. And instead of positing aesthetic or value questions relating to food, they look at the impact that ready-to-eat food purchases have on poverty statistics in one developing country for which such data is available: Peru.

Per authors, "…Peru is a relevant context, with the average Peruvian household spending 28 percent of their food budget on food away from home by 2010."

So to the findings, then:

1. "…accounting for food away from home results in extreme poverty rates that are 18 percent higher and moderate poverty rates that are 16 percent lower. These results are also consistent, in fact more pronounced, with poverty gap and severity measures." Why? Because factoring in food consumed away from home boosts overall consumption of those above extreme poverty levels, making extreme poverty look worse in relative terms. However, for the poor who are not extremely poor, adding food away from home recognises more accurately their relative well-being.
2. "…consumption inequality measured by the Gini coefficient decreases by 1.3 points when food away from home is included, a significant reduction." Which is to say, systemic inequality falls. Why? Because the improved scores for middle, low-middle and working poor classes more than offset worsening poverty measurements for the extremely poor.
3. "Finally, inclusion of food away from home results in a reclassification of households from poor to non-poor status and vice versa: 20 percent of the poor are different when the analysis includes consumption of food away from home. 

Full paper: Farfan, Gabriela and Genoni, Maria Eugenia and Vakis, Renos, "You are What (and Where) You Eat: Capturing Food Away from Home in Welfare Measures" (May 5, 2015, World Bank Policy Research Working Paper No. 7257: http://ssrn.com/abstract=2603040).

21/5/15: IMF to Russia: Do What You've Been Doing, Because We Say So

So the IMF released the summary statement on its Article IV 'consultations' for Russia. The stuff reads like something generated by a pre-historic algo with insight of a first order non-stochastic linear equation.

"The Russian economy is in a recession due to lower oil prices and sanctions. In addition, long-term growth remains low given structural bottlenecks." You have to laugh. IMF knows that sanctions are tertiary to Russian recession. Oil prices are primary and structural slowdown that started in late 2012 is secondary.

"The authorities’ macroeconomic policies have helped stabilize the situation, but there remain significant uncertainties regarding oil prices and geopolitical risks. Given these risks, the macroeconomic policy stance must be prudent." In IMF-speak this means that the Russian authorities did an excellent job so far managing the crisis, but they have done it without using IMF 'advice' or 'tool kit'. Which means that, to IMF, they haven't done it as well as the IMF could have done it. Obviously. Really.

So the bad Russkies better deploy the fabled IMF's 'structural reforms' pack:

• Stay low budget deficits (on which they really have no choice and are so far planning to do the same without the IMF 'advice'); 
• Lower central bank rates (which they are already doing without the IMF 'advice'), 
• Provide "limited stimulus" from the fiscal policy side (which, again, they are doing as much as they can). On Central Bank rates: to remind you, on 30 April, the CBR cut its key rate by 150bp to 12.5%. Without IMF's 'help'. I suspect the CBR will move rates below 10% by the end of 2015, unless there is a major reversal in ruble position, or if inflation reverses its (for now very fragile) moderating dynamics (inflation declined from16.9% y/y in March to 16.4% in April)... and… hold it… 
• "Finally, re-invigorating the structural reform agenda and avoiding de-integration from the world economy remain crucial to lift potential growth." Ah, there, IMF said it… 'structural reforms'. 

In other words, IMF is clamouring for some credit in the above. Ex-post the start of Russian adjustments, IMF recommends exactly the same adjustments, so when anyone asks what did IMF do when Russia was clawing its way out of the crisis, the IMF can say: we recommended them.

Of course, another bit that fills one with wonder in the IMF statement is how can Russia 'avoid de-integration from the world economy' any differently than it has been doing to-date?

To recap last 12 months or even last 12 years: Russia initiated a huge whirlwind of 'global integration' projects and activities in Asia Pacific, the Central Asia, India and Latin America. May be these are not quite 'global' enough for the IMF? Or should Russia somehow magic up 're-integration' with the EU? Actually it is trying to do so on a bilateral basis (proposing trade sanctions relaxation with a handful of countries) and tried - unsuccessfully so far - with the EU itself. Did Russia 'de-integrate' itself out of South Stream? Did Russia de-integrate itself from joint energy projects in the Arctic? Did Russia 'de-integrate' itself from the debt and investment markets in Europe? Nope, not them - that was the EU de-integrating Russia. But Russia did continue to de-de-integrate itself in nuclear energy sector, for example, in Hungary and Finland and Turkey and elsewhere...

IMF's generalities aside, the Fund updates some of its point estimates for the Russian economy.

A month ago in its April World Economic Outlook update, IMF forecast Russian economy to shrink 3.83% y/y in 2015 and 1.096% in 2016. Now, one month later, the forecast is for the economy to shrink 3.4% in 2015 (a 0.4 percentage points improvement in one month) and post a "mild recovery" (as in positive growth) in 2016. The Fund 2015-2020 projection in April was for an average rate of growth of 0.096% and 2016-2020 average of 0.9%. This time around, the Fund is expecting a medium-term growth to be 1.5% per annum. Seems like at least someone in the Fund is starting to look at the real dynamics in the economy.

Here's more of what the Fund does get right: "Persistently low oil prices or an increase in geopolitical tensions could further weaken the economic outlook... However, in the near-term, sizeable buffers, including high international reserves, low public debt, and a positive net international investment position should help safeguard external sustainability." Yes, the risks are there. But, the idea that Russia is just going to run out of reserves by the end of this year - often repeated by numerous analysts, including some who should know better - is bonkers, unless something really massively negative happens. Which may happen. Or may not. IMF is of little help on this point estimate.

One interesting bit: "The re-pricing of the FX liquidity facilities was adequate. The central bank could consider limiting further the FX allotments to ensure that the facilities remain sufficient for emergency purposes. The announced program of FX purchases to build precautionary buffers is welcome."

Did you hear that? Yes, Russia is again building up its forex reserves. Not the stuff you normally read in the Western press. Things are short-term, for now, but Russian FX reserves bottomed out in the week of April 17th at USD350.5 billion. Last week, they were at USD362.3 billion. Again, things might change and these increases can be reversed, but when was the last time that you read in the mainstream media that the CBR is now buying dollars and euros rather than selling them?

Russia will need higher reserves. Its economy is being held back by the severe impairment to its companies access to capital markets - reaching well beyond the intended targets of the sanctions. The West, which imposed these sanctions under the explicit stipulation that they were not supposed to hurt ordinary businesses and households, is doing absolutely nothing to rectify the problem.

Meanwhile, gross fixed investment continues contracting: in March down for the 15th consecutive month at -5.3% y/y. Net capital inflows in the non-banking sector totalled USD18 billion in 1Q 2015, second weakest in 12 months period, while total net capital inflows were USD32.6 billion - second highest year-to-date. The IMF is forecasting Russian aggregate investment to drop from 21.6% of GDP in 2013 and 19.9% of GDP in 2014 to 17.6% in 2015, before recovering slightly to 17.9% in 2016. This clearly puts strong emphasis on the need to support investment activity in the economy.

The IMF does note the serious drag on medium term growth exerted by the structural weaknesses in the economy. In line with what many, including myself, have argued before, the IMF puts forward a set of very general 'directional' reforms needed:

• "Less regulation and a reduction of the government’s role in the economy remain crucial to foster efficiency, confidence and investment". It worth noting that the Fund does suggest more and better regulation in the banking sector.
• "…improving protection of property rights" - a perennial problem that can only be resolved over the long run
• "…enhancing customs administration and reducing trade barriers" - a problem that is unlikely to be sorted because the Russian Government is pursuing medium-term growth strategy based on imports substitution - a strategy that, if executed correctly (a big 'if') can be quite productive
• "…empowering the Federal Antimonopoly Service (FAS) to eliminate entry barriers to several sectors/markets" - really a pipe dream at this stage, unfortunately.
• "…to improve labor force dynamics in the face of negative demographic trends, pension reform should be a priority" - which is something that was well underway prior to 2014 crisis, but got derailed by the extreme demand for dollar liquidity in the system triggered by the 2014 crisis.

Can't wait to see the 70-pages-plus full report. At least it promises colourful charts, if not an incisive insight... 

21/5/15: Global M&A and Economic Fundamentals

Here are some select slides from my presentation at this week's Alltech's Rebelation conference in Lexington, KY.

21/5/2105: The Darker Side of Transparency?

World Bank paper published earlier this month and titled "The Dark Side of Disclosure: Evidence of Government Expropriation from Worldwide Firms" raises some very interesting questions about the relationship between corporate transparency and government incentives.

The paper by Liu, Tingting and Ullah, Barkat and Wei, Zuobao and Xu, Lixin Colin (May 4, 2015, World Bank Policy Research Working Paper No. 7254: http://ssrn.com/abstract=2602586)  looks at "the effects of voluntary accounting information disclosure through auditing on firm access to finance, exposure to corruption, and sales growth." The authors use data for more than 70,000 firms in 121 countries.

The authors find that "…disclosure can be a double-edged sword" with overall effect depending on institutional capital present in a specific country.

"On the one hand, audited firms exhibit a slightly lower level of financial constraints than unaudited firms." This is in line with traditional theory whereby voluntary transparency increases information quality about the firm, but also signals self-selection of better-governed and better-performing firms to the markets.

"On the other hand, audited firms face a significantly higher level of corruption obstacles." Which is really surprising, until you understand the underlying logic.

"The net effects of voluntary information disclosure on firm growth are negative, which can largely be explained by the fact that most of the countries in the sample are developing countries where institutions are weak. The beneficial effect of disclosure increases as a country's property rights protection improves. The qualitative results are robust to considerations of the endogeneity of auditing and to alternative measures of corruption and financial constraints. The findings reveal the dark side of voluntary information disclosure: exposing firms to government expropriation where institutions are weak."

In other words, in more institutionally-advanced economies, voluntary disclosure is a positive factor for the firms, even she we control for self-selection bias. But in countries where institutional capital is weak, the effect is the opposite: in presence of corrupt and accountable governments, disclosing corporate information to the markets can trigger greater effort by the government to expropriate from the reporting firm.

There are serious ramifications for policy and development economics from this study. Traditionally, we tend to push more transparency and more disclosure for the firms operating in institutionally-weak emerging markets. In doing so, we may be aiding the predatory governments who, thus, gain greater ability to corruptly capture firm assets and/or profits over and above legally required taxation. This, in turn, strengthens the corrupt state institutions and government, instead of pushing them toward adopting more rule of law-styled reforms.

Beyond this, the study results suggest that at least in some setting, less transparency and greater ability for the corporates to operate within private information markets can actually be a good thing.

What is interesting is that in public domain, very little attention is paid to this issue. The results of this study, however, are broadly supportive of Acemoglu and Johnson ("Unbundling Institutions", Journal of Political Economy 113(5), 949–92005, 2005) work on the overwhelming importance of constraining government expropriation in facilitating economic development, ex ante other reforms.

On the other hand, transparency is value-additive in the advanced economies setting, where institutions are sufficiently high quality to preempt (or at the very least, diffuse significantly) the emergence of actionable incentives for state expropriation and information-led corruption.