Wednesday, December 4, 2013

4/12/2013: Did US banks deregulations spur SMEs productivity?


An interesting study via Kauffman Foundation of the effects of banking sector deregulation and competition on SMEs productivity in the US.

Krishnan, Karthik and Nandy, Debarshi K. and Puri, Manju study, titled "Does Financing Spur Small Business Productivity? Evidence from a Natural Experiment" (published November 21, 2013 http://ssrn.com/abstract=2358819) assessed "how increased access to financing affects firm productivity" based on a large sample of manufacturing firms from the U.S. The study relied on "a natural experiment following the interstate bank branching deregulations that increased access to bank financing and relate these deregulations to firm level total factor productivity (TFP)."

Core results "indicate that firms' TFP increased subsequent to their states implementing interstate bank branching deregulations and these increases in productivity following the deregulation were long lived."

In addition, "TFP increases following the bank branching deregulations are significantly greater for financially constrained firms. In particular, …we show that firms that are close to but not eligible for financial support from the U.S. Small Business Administration (and are thus more financially constrained) have higher TFP increases after the deregulation than firms that just satisfy eligibility criteria (and are hence less financially constrained)."

Overall, the "results are consistent with the idea that increased access to financing can increase financially constrained firms' access to additional productive projects that they may otherwise not be able to take up. Our results emphasize that availability of financing is important for improving the productivity of existing entrepreneurial and small firms."

By proxy, the results also show that increased presence of banking institutions in the economy does contribute positively to productivity enhancing funding availability for the firms.

4/12/2013: Quote of the day


A quote of the day:

"A recent study by Federal Reserve economists concluded that America’s protracted high unemployment will have serious adverse effects on GDP growth for years to come. If that is true in the United States, where unemployment is 40% lower than in Europe, the prospects for European growth appear bleak indeed." Joseph Stiglitz

Via http://www.project-syndicate.org/commentary/joseph-e--stiglitz-says-that-the-europe-will-not-recover-unless-and-until-the-eurozone-is-fundamentally-reformed#vc6wVyQBWlqbgj7F.99

Agree or disagree with (as I do with some of) his prescriptions, but the above quote is a key to understanding why Euro area's economy is a brick that hit the water.

4/12/2013: IMHO launches a new service for distressed borrowers


Irish Mortgage Holders Organisation (IMHO: https://www.mortgageholders.ie/) have launched a new initiative today designed to provide free bankruptcy service for distressed borrowers.

Here are the details:


Contact details: via email info@mortgageholders.ie or Arthur Mullan, IMHO: 01-871 9411



Tuesday, December 3, 2013

3/12/2013: State Grants or Private Donations Incentives?

Should charities be directly (grant) funded by the Government (Ireland's core policy toward funding charities) or should they rely on raising funding, with the Government supplying a channel for private funding via (tax) incentives to individual donors?

I am not a researcher in this area, but here's an interesting study on the topic: Scharf, Kimberley A., Impure Prosocial Motivation in Charity Provision: Warm-Glow Charities and Implications for Public Funding (November 2013). CEPR Discussion Paper No. DP9749.
Available at SSRN: http://ssrn.com/abstract=2356979

Abstract: We show that warm-glow motives in provision by competing suppliers can lead to inefficient charity selection. In these situations, discretionary donor choices can promote efficient charity selection even when provision outcomes are non-verifiable. Government funding arrangements, on the other hand, face verification constraints that make them less flexible relative to private donations. Switching from direct grants to government subsidies for private donations can thus produce a positive pro-competitive effect on charity selection, raising the value of charity provision per dollar of funding.

3/12/2013: GoldCore research note on deposits bail-ins


GoldCore have published an insightful guide to banks bail-ins of depositors that the EU is rapidly falling toward as a default policy for resolving future banks crises.

Here's an inforgraphic from the report:
http://dzswc0o8s13dx.cloudfront.net/goldcore_bloomberg_chart1_03-12-13.png

And the link to the report itself:
http://info.goldcore.com/what-savers-and-depositors-need-to-do-to-protect-their-savings-and-deposits-from-bank-bail-ins

3/12/2013: Some top level results from PISA 2012: Part 2

In previous post I covered the PISA results (top-level overview) for Ireland (http://trueeconomics.blogspot.ie/2013/12/3122013-some-top-level-results-from.html). Here's a summary table showing 2012 data and changes on previous survey:





  • As you can see, Ireland is ranked in a respectable 20th Mathematics place based on the mean score. 
  • We rank 29th in terms of top performers in mathematics and 17th in terms of share of bottom performers in mathematics. This suggests that our system is performing better in raising students from the bottom than promoting students to the top. The first is a good thing, the latter is a bad thing.
  • Another bad thing is that we are losing scores, down 0.6 points annually on previous survey.
  • Ireland's maths score is statistically indistinguishable from the scores for Viet Nam, Austria, Australia, Slovenia, Denmark, New Zealand, Czech Republic, France, United Kingdom
  • And we are statistically above the OECD average along with 22 other countries.

Relationship between annualised change in performance and average PISA 2003 mathematics scores:

  • In reading, our mean score of 523 ranks us between 7th and 9th in the world - highly respectable achievement. However, the score is down 0.9 points year on year.
  • We are comfortably ahead of OECD average here
  • Our score on reading is statistically indistinguishable from Finland, Chinese Taipei, Canada, Poland, Liechtenstein.
Relationship between annualised change in performance and average PISA 2000 reading scores

  • In science we have a score of 522 which ranks us 14th to 15th which is good. Even better: the score has increased by 2.2 points year on year.
  • We are statistically above the OECD average and our science score is indistinguishable from that of Viet Nam, Poland, Canada, Liechtenstein, Germany, Chinese Taipei, Netherlands, Australia, Macao-China, New Zealand, Switzerland, United Kingdom.
Relationship between annualised change in science performance and average PISA 2006 science scores

3/12/2013: Some top level results from PISA 2012: Irish Education Performance

PISA results are out today. Here's the link: http://www.oecd.org/pisa/keyfindings/pisa-2012-results.htm

And some snapshots of Ireland's performance:



And comparatives to Hong Kong, Korea and Shanghai (just because we think we have the best educated workforce in the world):
Note: Ireland = Blue
Hong Kong:
 Shanghai:
Korea:

And to some European peers:
Finland:

Germany:

Sweden:

And so on. Not take these too seriously as standardised testing is hardly indicative of many important aspects and traits relating to education, but... we are reasonably good in reading skills, mediocre in mathematics and sciences... Improving in sciences, flat in maths, slightly down in reading... oh, and our top students are not really at the races, while our bottom students are. So who do we compete against? The brightest or the lowest performers? Makes you wonder, right?

3/12/2013: Corruption Perceptions Index 2013: Ireland

Transparency International has published its annual Corruption Perceptions Index 2013.

Ireland rank in the global corruption table moved from 25th in 2012 to 21st in 2013. An improvement. However, historically, this year's ranking represents the third poorest ranking in any year since 1998.

Two charts to illustrate:



In Western Europe, Ireland scores respectable 12th, and we score 6th in the euro area. Only nine states of the euro area score in top 30 countries in 2013, eleven in top 40 and fifteen in top 50.


Monday, December 2, 2013

2/12/2013: Manufacturing PMI for Ireland: November 2013


Manufacturing PMI for November released by market and Investec today shows slight slowdown in the rate of manufacturing sector expansion in Ireland.

Overall PMI declined from blistering 54.9 in October to more moderate and sustainable 52.4 in November. October reading was remarkable as it was the highest PMI reading posted since 56.0 was recorded in April 2011. Thus, some moderation was expected.

November reading pushed 12mo MA to 51.1, implying that on average Irish manufacturing was expanding over the last 12 months. 6mo MA is at 52.2 and 3mo MA is 53.3 through November, up on 51.1 3mo average through August 2013. Current 3mo average is ahead of that for 2010, 2011 and 2012. even setting October reading at 3mo MA level through September still leaves the average ahead of 2010-2012.

Current reading remains in statistically significant territory - another added positive.

Aside from that, no comment is possible, since Investec and Markit are continuing not to release underlying sub-indices.



With the above we can now confirm a new upward sub-trend from May 2013. Let's hope it will continue.


Sunday, December 1, 2013

1/12/2013: The Age of Great Stagnation: Sunday Times, 24/11/2013

This is an unedited version of my Sunday Times column from November 24, 2013.


In recent months, the hope-filled choir of Irish politicians raised to a crescendo the catchy tune of the return of our economic fortunes. Their views are often echoed by some European leaders, themselves eager to declare the euro crisis to be over. Earlier this year, as the euro area remained mired in official recession, the perpetually optimistic Economics Commissioner, Olli Rehn, summarised the economic environment as follows: “…we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future.”

Since then, we had ever-disappointing hard data through September this year, un-interpretable volatile soft data, and an ever-booming confidence in the future. This pattern of rising expectations amidst non-improving reality has been with us for over two years.

Which raises two questions. Firstly, is the fabled recovery we are allegedly experiencing sustainable? Second, are we betting our economic house on a right horse in the long run?


In our leaders’ imagination, this country’s prospects for a recovery remain tied to those of the euro area. The official theory suggests that growth in our major trading partners will trickle down to our exports, which, in turn, will drive domestic economy via improving investment and consumer spending. This theory rest on the fundamental belief that things have hit their bottom in Ireland and the only way from here is up.

These are the two core theories behind the short-term projections that underpinned Budget 2014. And, taken with risk caveats highlighted this week by the Fiscal Council assessment of the Department of Finance projections, the views from the Merrion Street represent a rather optimistic, but reasonably feasible forecast for 2014.

Alas, in the longer run, a lot is amiss with the above two theories. The most obvious point of contention is that we've heard them before. And so far, both turned out to be wrong.

Over 2009-2013, cumulative real GDP across the euro area shrunk by 2.1 percent, and expanded by 3.5 percent across the G7 countries. In Ireland, over the same period, GDP fell by 4.7 percent. The tail of Ireland was wagging the dog of the EU on the way down into the Great Recession.

The converse is true on the way up. Unlike in the early 1990s, the improving economic fortunes abroad are not doing much good for Ireland’s exports either. Over the last four years, volumes of imports of goods by the euro area countries grew by almost 15 percent and for G7 these went up 21 percent. Irish exports of goods over the same period of time rose just 2.2 percent. Global trade, having shrunk in 2008 and 2009 has been growing since then. Again, Ireland missed that momentum.

Over the crisis period, growth in our exports of goods and services did not translate into strong growth in our GDP and was completely irrelevant to the dynamics of our GNP or national income. The reason for this paradox is that our goods exports have shrunk 3.57 percent in 2012, having posted declining rate of growth 2011 compared to 2010. The rate of their decline is now accelerating. In January-September this year our exports of goods fell 6.7 percent compared to the same period a year ago. Goods trade is the core employer of Irish workers amongst all exporting sectors and the main contributor to the economy at large.

Instead of goods trade, our external balance expansion became dependent solely on ICT services and a massive collapse in imports.

Much of the former represent transfer pricing and have little real effect on the ground. As the result, our exports growth came with virtually zero growth in employment, domestic demand or investment. We don't need to dig deep into the statistics to see this: over the period of our fabled exports-led recovery, Irish private sector prices and domestic demand both followed a downward path.

The latter, however, presents a serious risk to the sustainability of our debts. To fund our liabilities, we need long-term current account surpluses to average above 4 percent of GDP over the next decade or so. We also need economic growth of some 3-3.5 percent in GDP and GNP terms to start reducing massive unemployment and reversing emigration. Yet, to drive real growth in the economy we need domestic investment and demand uplifts. These require an increase in imports of real capital and consumption goods. Should our exports of goods continue down the current trajectory, any sustained improvement in the domestic economy will be associated with rising imports and, as a corollary, deterioration in our trade balance.

This, in turn, will put pressures on our economy’s capacity to fund debt servicing. And given the levels of debt we carry, the tipping point is not that far off the radar.

In H1 2013 Ireland's external real debt (excluding monetary authorities, banks and FDI) stood at almost USD1.32 trillion - the highest level ever recorded in history. Large share of this debt is down to the IFSC and MNCs sector. However, overall debt levels in the Irish system are still sky high. More importantly, the debt levels are not declining, despite the claims to the aggressive deleveraging of our households and banks. At the end of H1 2013, total real economic debt in Ireland - debt of Irish Government, excluding Nama, Irish-resident corporates and households - stood at over EUR492 billion - down just EUR8.5 billion on absolute peak attained in H3 2012. In other words, our current debt levels are basically flat on the peak and are above the highs attained before the crisis.


With all the talk about positive forecasts for the economy and the world around us, we are desperately seeking to escape three basic truths. One: we are facing the risk that neither exports growth nor the reversals of our foreign trade partners' fortunes are likely to do much for our real economy. Two: the real break on our growth is the gargantuan burden of combined household, government and corporate debts. And three: we have no plan to deal with either the former risk or the latter reality.

Instead of charting our own course toward achieving sustainable long-term competitiveness in our economy, we remain attached at the hip to the slowest horse in the pack of global economies – the euro area. This engine of Irish growth is now seized by a Japanese-styled long-term stagnation with no growth in new investment and consumption, and glacially moving deleveraging of its banks and sovereigns.

Governments across the EU are pursuing cost-cutting and re-orienting their purchasing of goods and services toward domestic suppliers. In this zero-sum competition, small players like Ireland are risking being crushed by the weight of financial repressions and domestic protectionism in the larger economies.

These forces are not going to disappear overnight even if growth returns to Europe. According to the global survey by Markit, released this week, one third of companies worldwide expect their business to rise over the next 12 months. By itself - a low number, but a slight rise on 30 percent at the end of Q2 2013. Crucially, however, improving sentiment does not translate into improving economic conditions: only 14 percent of companies expect to add new employees in 2014.

As per financial repression, euro area banks remain sick with as much as EUR 1 trillion in required deleveraging yet to take place and some EUR350-400 billion worth of assets to be written down. Should the banks stress tests uncover any big problems there is no designated funding to plug the shortfalls. According to the Standard Bank analysts' research note, published this week: "Increasingly, European governments are resorting to tricks to resolve the problems of their banking systems, including inadequate stress tests, overly optimistic growth and asset price forecasts, and some unusual accounting stratagems."

Which foreign government or private economy is going to start importing Irish goods and services or investing here at an increasing rate when their own populations are struggling to find jobs and their banks are fighting for survival.


Meanwhile, we remain on a slow path to entering new markets, despite having spent good part of the last 6 years talking about the need to 'break' into BRICS and the emerging and middle-income economies. In January-September 2012, Irish exports to BRICS totaled EUR2.78 billion. A year later, these are down EUR240 million. Controlling for exchange rates valuations, our exports to the key developing and middle-income markets around the world are flat since 2010.

We are also missing the most crucial element of the growth puzzle: structural reforms that can make us competitive not just in terms of crude unit labor costs, but across the entire economic system. Since 2008 there has been virtually no changes made to the way we do business domestically, especially when it comes to protected professions and state-controlled sectors. Legal reforms, restructuring of semi-state companies’ and the sectors where they play dominant roles, such as health, transport and energy, changes to the costs and efficiencies in our financial services – these are just a handful of areas where promised reforms have not been delivered.

Political cycle is now turning against the prospect of accelerating such reforms with European and local elections on the horizon. Reforms fatigue sets in. The relative calm of the last 9-12 months has pushed all euro area governments into a false sense of security.

The good news is that the collapse phase of the Great Recession is over. The bad news is that with growth of around 1.5 percent per annum on GDP we are nowhere near the moment when the economy starts returning to long-term health. I warned about this scenario playing out over the next decade in these very pages back in 2008-2009. Given the latest projections from the Department of Finance and the IMF, we are firmly on the course to deliver on my prediction.

Welcome to the age of the Great Stagnation.




Box-out:

Recent research paper from the European Commission, titled The Gap between Public and Private Wages: New Evidence for the EU assessed the differences between public sector and private sector earnings across the 27 member states over the period of 2006-2010. The findings are far from encouraging for Ireland. In 2010, Irish public wages were found to be some 21.2 percent higher than the comparable wages paid in the private sector. The study controlled for a number of factors impacting wages differentials, including gender, age, tenure in the job, education and job grades. Strikingly, the study found that wages premium in the public sector was higher for women, for younger workers and for less skilled employees. A positive public wage premium was also observed at all levels of educational attainment with the largest premium paid to workers with low education and the lowest to workers with medium levels of education. If in 2006 Irish public sector wage premium stood on average at 20.5 percent, making our public sector wage premium second highest in the EU27, by 2010 we had the highest premium at 21.2 percent. It is worth noting that in all Nordic countries of Europe, the wage premium to public sector workers was found to be negative in 2010.

1/12/2013: Global Growth Migration Map


One chart that summarises long-run trend in growth in development around the world (click to enlarge):


(via @AmbroseEP)

This chart perfectly puts forward the overarching description of the global trend in migration of economic power toward the Asia Pacific region.

Saturday, November 30, 2013

30/11/2013: Land Tax back in the (Irish) news


It appears that after years of research and arguments in the media, having first done the wrong thing, the Irish Labor Party is now drifting into the space of supporting the only tax that makes sense in the context of charging against fixed assets: land value tax.

The report on this are here: http://www.breakingnews.ie/ireland/labour-annual-conference-votes-to-replace-property-tax-615824.html

Those of you who follow this blog and my research would be familiar with the following three papers on the topic:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029515
and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2047518
and
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029519

Additionally, Ronan Lyons also produced excellent research on the topic: http://smarttaxfiles.files.wordpress.com/2012/01/site-value-tax-in-ireland-identify-consulting-final-report.pdf

Karl Deter contributed to public debate extensively: http://smarttaxes.org/a-fair-property-tax-a-public-debate/

And Smart Taxes network produced core research funding, supports and publications platforms: http://smarttaxes.org/