Tuesday, November 30, 2010


In the U.S. we don't focus much on remittances -  many people don't even know what they are. Worker remittances are money payments sent by immigrant individuals (not businesses) back to their home countries.  The World Bank also counts as remittances the compensation of employees who are migrant or border workers who live for less than a year in the host country. (*see note at end for World Bank's official definition).  In 2009, U.S. inflow remittances (from U.S. residents crossing the border to work in Mexico and Canada) were neglibile (2,947 million). The outflow remittances from the U.S. in 2009 were very small compared to the U.S. GDP (48,304 million) - only about .3% of GDP - but still made the U.S. the top source for remittances in the world. Source: the World Bank 2011 report on remittances cited below and U.S. BEA's published GDP estimates.  

For some countries, remittances from the U.S. count for a major portion of their income. Remittances from the U.S. were equal to 17% of El Salvador's GDP in 2008, and almost a quarter of El Salvador's families received remittances from the U.S. (Source: the U.S. Department of State report on El Salvador (http://www.state.gov/r/pa/ei/bgn/2033.htm).   The World Bank 2011 report on remittances finds that global remittances are more than two times greater than official aid.

Below highlighted in blue is a summary from the World Bank's Migration and Remittances Factbook 2011:  Published November 4, 2010 by World Bank, ISBN: 978-0-8213-8218-9; SKU: 18218. Access with graphs and maps online at

Worldwide remittance flows are estimated to have exceeded $414 billion in 2009, of which developing countries received $307 billion (This represents a small decline of 6 percent from the level in 2008). The true size, including unrecorded flows through formal and informal channels, is believed to be significantly larger. Recorded remittances are more than twice as large as official aid and nearly two-thirds of foreign direct investment (FDI) flows to developing countries.

In 2009, the top recipient countries of recorded remittances were India, China, Mexico, the Philippines, and Poland. As a share of GDP, however, smaller countries such as Tajikistan (50 percent), Tonga (38 percent), Moldova (31 percent), the Kyrgyz Republic (28 percent), and Lesotho (27 percent) were the largest recipients in 2008.

Rich countries are the main source of remittances. The United States is by far the largest, with $46 billion in recorded outward flows in 2008. Russia ranks as the second largest, followed by Switzerland and Saudi Arabia.

An excerpt (highlighted in blue) from another World Bank report from Remittances and Development: Lessons from Latin AmericaApril 2008 Pablo Fajnzylber and Humberto Lopez al discusses the economic impact 
of remittances. (http://go.worldbank.org/MYSC3YO560 )
One of the main conclusions of Remittances and Development is that remittances do tend to reduce poverty and inequality and they have several positive growth-enhancing effects – e.g. higher savings, human capital investments, entrepreneurship, and bank deposits. However, these positive effects tend to be relatively modest compared to the development challenges faced by most countries in the region. Moreover, remittances can also reduce labor supply and lead to real exchange rate over-valuations. Overall, it appears that a healthy policy stance is that of combining measures to minimize negative effects on competitiveness and maximize the impact of remittances on access to financial services among the poor, while making improvements in the regulatory environment aimed at promoting secure and low cost remittances services and maintaining the focus on complementary growth-enhancing policies.

In terms of the simple AD & AS graph, remittances can be viewed as alternative to lending as an extra source to boost C & I. Thus assuming all else equal (including labor effort and nominal exchange rates), an increase in remittances should shift the AD curve right, increasing output and prices.

link to video clip above (2.5 minutes) 

World Bank Official Definition of remittances: Workers' remittances and compensation of employees comprise current transfers by migrant workers and wages and salaries earned by nonresident workers. Data are the sum of three items defined in the fifth edition of the IMF's Balance of Payments Manual: workers' remittances, compensation of employees, and migrants' transfers. Remittances are classified as current private transfers from migrant workers resident in the host country for more than a year, irrespective of their immigration status, to recipients in their country of origin. Migrants' transfers are defined as the net worth of migrants who are expected to remain in the host country for more than one year that is transferred from one country to another at the time of migration. Compensation of employees is the income of migrants who have lived in the host country for less than a year. Data are in current U.S. dollars.
World Bank staff estimates based on IMF balance of payments data.
World Development Indicators

Saturday, November 27, 2010

Efficient Cities

Too big to work - This article suggests that congestion issues are leading business to choose smaller - more manageable sized cities all over the world. Mumbai gets special attention - and not the good kind.

Friday, November 19, 2010

India's Prime Minister Singh

In today's WSJ (Friday 11-19-2010), there is an interesting article by Tom Wright and Vibhuti Agarwal about India's Prime Minister  Manmohan Singh. As stated in the WSJ, "Although Singh is a noted economist famous for introducing India's market-led reforms in 1991, much of Mr. Singh's political support rests on the perception that he is above reproach." His administration is now threatened with a scandal which is discussed in the article. As usual, it is the cover up that causes more trouble than the original transgression.

I started a companion blog for my EMBA students going to India this spring. It will be updated about once a week.

Go to http://econfanindia.blogspot.com/ to check it out.

Thursday, November 18, 2010

Investment Strategy

In today's WSJ, Burton Malkiel rolls out some timeless investment advise (just before the release of the 10th edition of his book). As I list his book as one of my top five, I won't begrudge him the publicity.

Malkiel is professor of economics at Princeton and is one of many who advise investors to buy and hold. Market timing doesn't have a good track record.  Malkiel points out that missing out on the best 30 days of the market (because you did not time the market perfectly) can be the difference between profit and loss over a 14 year period.

Malkiel also makes a plug for low-cost investment. The fees paid for managed investment eat into returns, and few managed investments beat the market consistently for long.  Buffett is the hero in this category. Most investors should stick with index funds (of foreign and domestic stocks and bonds) from low-fee financial institutions like Vanguard.

'Buy and Hold is Still a Winner' by Burton Malkiel (need WSJ subscription)

A similar  2007 article from the Motley Fool

'Timing the Market' by The Motley Fool 1-23-2007

To summarize mainstream advice:
1. invest constant amount regularly (don't time market)
2. invest primarily in low-fee index funds
      for example 25% global stock fund, 35% domestic stock fund 40% bond fund
      rule of thumb - If investing for retirement, the percentage in bond funds should equal your age.
3. periodically adjust your portfolio to maintain desired allocation
4. save a lot
    If you are fully funding your own retirement at 65, saving 15-20% from the time you start working    would be ideal.
5. be smart about tax implications - max out your 401k

Wednesday, November 17, 2010

Review: Why the West Rules For Now - By Ian Morris

35 minute lecture (followed by Q&A)

Nothing jumped out at me in the paper today, so I am taking the opportunity to plug for my new favorite book. Why the West Rules - For Now by Ian Morris. It is one of those rare books that has changed the way I view the world.

Morris's book builds on my previous favorite book, Guns, Germs and Steel by Jared Diamond.  Diamond used archaeological evidence, historical record, and other scientific evidence to demonstrate that Western Civilization got an early head start due to geographical luck.

The hilly plains (slightly north of the fertile crescent, the land between the rivers) were blessed with more plants and animals suitable for domestication than anywhere else in the world. There were no pack animals capable of plowing or hauling in the Americas (llamas don't cut it) . Without easily stored high protein crops or  animals suitable for domestication, it is difficult to muster the surplus labor needed to philosophize or invent things. Furthermore, innovations in agriculture were much harder to spread across the extreme climate variation in vertical land masses (like the Americas and Africa) than horizontal land masses (like Eurasia). Finally, centuries of exposure to the diseases of domesticated animals gave early European conquistadors a potent invisible weapon that decimated the native populations of Central and South America.

After reading Diamond, I was left with a nagging question. I was convinced Eurasia had a big leg up, but it was still unclear to me why Europe industrialized before China or India.  China developed agriculture and domestication of animals independently very early (about 6800 B.C., about 3000 years after hilly plains) and had similar advantages of crops and animals suitable for domestication. China and India also share a horizontal land mass with Europe, and had traded with Europe for centuries.

Ian Morris was able to fill in this gap for me.  Morris organized his book to answer the question: Did Western Civilization's head start give it a long term lock on industrializing first? He started early in history (with the big bang!) and provided genetic evidence over the evolution of man to show that people across the planet are pretty much the same.  Explanations for economic differences do not have a racial foundation. Morris then plunged into a long, exhaustive (and a bit exhausting) chronicle of human history. I admit I may have skimmed some in the middle, but he grabbed me again by the end.

Many have argued against the long term lock idea, especially since China was more technologically advanced and wealthier from roughly 500 A.D. until about 1800 A.D. As I understand it, Morris argues that the main reason Western Civilization ended up industrializing first was the discovery of the new world. Europe had more motive to get there first - Europeans were trying to reach the wealth of India and China. Geography also helped again. Europeans were much closer to the Americas - crossing the Atlantic from Europe is much easier than crossing the Pacific from China. China had the technology to make the crossing before the Europeans, but had burned its fleets and turned inwards. Instead of crossing long seas for no clear reason,  China instead expanded into their northern steppes.

Spoiler alert: Morris concludes history was likely to play out like it has, even if key players were changed. He argues that modern times are different; with world destruction at risk, key players matter.
Morris concludes that the distinction between West and East will become irrelevant. Once the full potential of technological progress reaches its culmination, human society may become so different as to be unrecognizable today. As a science fiction fan, I enjoyed his multiple references to Isaac Asimov and  the speculations of futurists about where technology will take us.

I am still left with a few questions. Morris focuses on the dichotomy between China and the West with scant mention of other societies, in particular India. While I would be loathe to ask for an extra 100 pages of historical details, I am curious about other possible "cores" of civilization in Eurasia. I  am also curious why the Eastern Core did not bounce around, as opposed to the Western Core (from Egypt to Rome to England etc.)

After finishing Morris, I watched a few interviews with Ray Kurzweil, a leading guru on the future of technology. Kurzweil's talk at Google in 2009 is linked under top 5 videos (see right). For the more conservative skeptics among you, you may prefer to watch Kurzweil's  interview on the Glenn Beck show (on YouTube in four parts).  For me, it doesn't get much more interesting than "Rapture for Nerds".

Tuesday, November 16, 2010

The Fed and QE 2

Here are links two great articles about the Fed's QE 2 (not the cruise ship). QE 2, short for quantitative easing round 2, is the label that has stuck to the Fed's current spree of buying assets they don't usually buy. When the Fed buys things (with newly electronically created money) it injects new money into the economy to stimulate it. In QE 2, the Fed is buying longer term U.S. treasuries. In the first round of QE (starting in 2008), the Fed bought all kind of assets including private company debt and mortgage backed securities. Before 2008, the Fed primarily traded in short term U.S. treasuries, and in much lower quantities.

I agree with Alan Blinder that the Fed's newest purchases are not big enough to do very much to lower unemployment. However the Fed (as Yellen points outs) is charged by Congress to try to lower unemployment, so long as prices are stable.

QE 2 has faced tremendous international political heat because it might drive down the dollar (helping U.S. exports but hurting other export driven economies). Oddly, the dollar has strengthened significantly in the last few days. Apparently, concern about the safety of the Euro has driven traders back into the arms of the dollar. It just goes to show you that exchange rates are not very predictable.

1. WSJ Alan Blinder op ed 11-15-2010 in WSJ (WSJ subscription required)

With lessons from Econ 101 - this is article is a great primer on the Fed and monetary policy. Alan Blinder was vice Chair of the Board of Governors from June 1994 to June 1996.

2. WSJ Janet Yellen interview 11-16-2010 in WSJ (WSJ subscription required)

Note: The first woman served on FOMC (Fed's committee for formulating monetary policy) in 1978. Janet Yellen is currently the vice-chair of the Board of Governors of the Fed.