Thursday, April 29, 2010

Selling Reforms- Ukraine case

In my view, the case rests on three pillars.

First, Ukrainian leaders have to explain to the citizens why the pre-crisis economic model was not sustainable and what the risks are of delaying adjustment. They need to explain that reforms are needed to avoid loading future generations with debts they cannot repay. Ukraine's public debt ratio was very low before the crisis at 12% of GDP. It will reach close to 40% by the end of 2010. Unless a plan is presented that stops the increase, financing the current deficit will be impossible. The result of inaction would be further devaluation, higher inflation, and further strains on the banking sector. The costs of inorderly adjustment on the common man through reduced real wages and rising unemployment would be much higher than the increases in the monthly utility bill.

Second, to the population at large, reforms need to be presented as a balance of sacrifice. You cannot ask citizens to pay more for utilities and to accept a reduction in pension benefits, if parliamentarians, judges, military officers and high ranking officials still benefit from categorical privileges, early retirement schemes, free housing and many other benefits. Expenditure cuts, which are necessary, are also a hard sell when tax loopholes persist, be it through VAT exemptions that have inflated producer profits but failed to keep end-user prices down, double taxation treaties (such as the one with Cyprus) that facilitate profit tax avoidance, or the Simplified Tax System for individual entrepreneurs that creates inequities across tax payers and erodes the tax base. More generally, a credible plan to improve governance and reduce corruption is key if reforms are to overcome their bad image.

Third, the vulnerable need to receive reassurance that they will be protected. Ukraine has the infrastructure and the resources to deliver targeted social assistance to the poor. However, existing well targeted programs remain underfunded, while poorly targeted benefits gobble up the bulk of social transfer spending. Reallocating funds from poorly to well-targeted programs will allow the poor to be protected at no fiscal cost.

-Selling reforms: On the need for balance in achieving the necessary fiscal consolidation in Ukraine

Microinsurance, trust and economic development

An interesting working paper on microinsurance in China-

While a large literature has examined the importance of microfinance for fostering economic development, microinsurance has received much less attention. A recent paper by Hongbin Cai, Yuyu Chen, Hanming Fang, and Li-An Zhou is among the first to examine the causal effect of microinsurance on production behavior, in the context of hog farming in rural China. Pork meat is an important part the Chinese daily diet, but pork production is very vulnerable to adverse shocks, such as infectious disease and natural disasters. In China, hogs are predominantly raised by rural households as a sideline business. In 2007, the Chinese government implemented a subsidized sow insurance program in some regions with the goal of increasing pork supply to lower prices that had risen after a disease had caused high mortality among hogs. In order to let farmers know about this program and to encourage them to enroll, the government hired an animal husbandry worker in each village. The authors designed an experiment where they provided additional monetary incentives to randomly chosen animal husbandry workers for enrolling farmers in the sow insurance program. Villages where animal husbandry workers received higher incentives have a higher number of insured sows after the experiment. The authors then estimate the effect of this randomly generated variation in the number of insured sows on village sow production. They find that larger insurance coverage significantly increases the number of sows raised in a village. Although the insurance program was heavily subsidized, take-up rates were only around 50 percent. The authors provide evidence that low take-up rates can be attributed to a lack of trust in government sponsored insurance programs. Take-up rates increased after claims were paid out in some regions hit by a natural disaster, allowing farmers to learn about the credibility of the insurance product.

Saturday, April 17, 2010

Evidence based government programs

To what extent do you think social programs in the budget are evidence based compared to advocacy influenced?

For many years, studies like these have influenced both politics and policy, fueling national marriage-promotion efforts, like the Healthy Marriage Initiative of the U.S. Department of Health and Human Services. From 2006 to 2010, the program received $150 million annually to spend on projects like “divorce reduction” efforts and often cited the health benefits of marrying and staying married.


via NYT

Friday, April 16, 2010

Efficiency what?

Efficiency savings: in recent years there has been a concerted drive to reduce the costs in commodities like electricity, to professionalise property management and to make more use of shared services. Here there is a question about control – how far should control be centralised or devolved
to best make efficiency savings. Striking the right balance is difficult, but
possible, as the Institute’s recent work on IT makes clear. The second question is about how such savings translate into cash coming out of the system – to be credible it must be clear which budgets have been reduced in anticipation of these savings, and therefore which ones have to make up any shortfall should the projected efficiencies not be realised.


Source: Undertaking a fiscal consolidation: A guide to action. Institute for Government

Related:
Mark Robsinson reviews the report;
Politics are also the reason why the real tough work required for a successful fiscal consolidation usually takes within the first two budgets after a change of government. If this doesn’t happen, the sense of urgency amongst voters dissipates. Political support for consolidation falls away rapidly, with the electorate falling prey to what the London-based Institute for Government calls – in its interesting recent report Undertaking a Fiscal Consolidation – “consolidation fatigue”.

Special Announcement

Some updates:

Division of Labor among our blogs

Have also added a new list of PFM blogs.

Thursday, April 15, 2010

Why is growth stronger in expenditure-driven corrections?

Interesting recent paper;

Goldman Sachs Global Economics, Commodities and Strategy Research- Limiting the Fall-Out from Fiscal Adjustment (via Irish Economy blog)

In a review of every major fiscal correction in the OECD since 1975, we find that decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth....

In a landmark paper in the mid-1990s, the economists Alberto Alesina and Roberto Perotti found that economic growth fared much better during large fiscal corrections that were (i) decisive rather than gradual and (ii) relied on reductions in current government spending, rather than cuts in public-sector investment or higher taxes.

Now for something peaceful


Source: Embracing a Life of Solitude

I have to collect firewood, rather than do some job that I have no idea what is the point, which I hate, and from which I am completely alienated,” he said. “Everything in my life feels full of meaning.”