Thursday, June 21, 2018

The Dramatic Expansion of Corporate Bonds

Overall world debt in the last year or two is at its all-time high as a share of world GDP. But there is common pattern that as countries grow and their financial markets develop, their level of debt also tends to rise. Perhaps even more interesting is that the importance of the components of that debt have been shifting. During and after the Great Recession, government borrowing was the main driver of rising global debt. But corporate borrowing has become more important

Moreover, this corporate borrowing has two new traits. One is that as bank regulators all over the globe have tightened up, this rise in corporate borrowing tends to take the form of bonds rather than bank loans. The other interesting trait is that this rise in corporate borrowing around the world can be traced back to developing economies--and especially to China.

Susan Lund, Jonathan Woetzel, Eckart Windhagen, Richard Dobbs, and Diana Goldshtein of the McKinsey Global Institute provide an overview in their June 2018 discussion paper, Rising Corporate Debt: Peril or Promise?  An overview of the report is here; the full report is here. They write:
"In a departure from the past, most of the growth in corporate debt has come from developing countries, in particular China. Companies in advanced economies accounted for just 34 percent or $9.9 trillion of the growth in global corporate debt since 2007, while developing countries accounted for 66 percent or $19.2 trillion. Since 2007, China’s corporate debt has increased by $15 trillion, or more than half of global corporate debt growth. As a share of GDP, China’s corporate debt rose from 97 percent of GDP in 2007 to 163 percent in 2017, one of the highest corporate debt ratios in the world apart from small financial centers that attract offshore companies. The growth in corporate debt in China is mainly associated with a construction sector that increased its leverage as the housing market boomed. Today, 30 to 35 percent of corporate debt in China is associated with construction and real estate. ...
"A relatively new feature of the debt landscape in recent years has been a shift in corporate borrowing from loans to bonds. Given the growing pressure on banks to meet new capital and liquidity standards, global nonfinancial corporate loans outstanding have been growing by only 3 percent annually on average since 2007 to stand at around $55 trillion in 2017. However, the share of global corporate debt in the form of bonds has nearly doubled, and the value of corporate bonds outstanding has grown 2.7 times since 2007. This is a positive trend, leading to a diversification of corporate financing. However, we also find risks." 
Here are a couple of summary figures for nonfinancial corporate debt by country. The countries are ranked by total corporate debt as a share of GDP: top panel shows advanced eoconomies, the bottom panel shows developing countries. The tables then also list the total corporate debt in each country and how it has risen or fall in the last decade. 


And here are a few comments from the report that caught my eye: 

On China's corporate borrowing and that of other emerging markets: 
"The value of China’s nonfinancial corporate bonds outstanding increased from $69 billion in 2007 to $2 trillion by the end of 2017, making China one of the largest bond markets in the world. In developing countries other than China, corporate bonds outstanding have also grown, although at a more measured pace of 14 percent a year, from $313 billion in 2007 to $1.2 trillion in 2017 ...  Growth has been particularly strong in Brazil, Chile, Mexico, and Russia.
"While in China 95 percent of corporate bonds outstanding are denominated in the local currency, in other developing countries that is not the case. Historically, nearly all companies in developing economies issued bonds in foreign currencies because investors would not take the risk of buying bonds in local currencies. However, over the past decade, larger local-currency bond markets have developed. Still, roughly two-thirds of corporate bonds in developing economies maturing annually are denominated in US dollars and other foreign currencies. This creates additional risk, because debt service costs will soar if the local currency depreciates (and the company does not have revenue streams in the foreign currency)."
On the wave of companies that are going to want to refinance bonds. The report estimates that in China, India, and Brazil, as much as 30-40% of all bonds could risk default if interest rates rise.
"As a bond matures, companies have two choices: to repay the principal amount borrowed, or to issue a new bond to replace the maturing one. Historically, companies issued long-term bonds for project finance and repaid the debt once due. Today, however, most borrowers seek to refinance maturing bonds by issuing new ones. From 2018 to 2022, a record amount of bonds—between $1.6 trillion and $2.1 trillion annually—will mature. Globally, a total of $7.9 trillion of bonds will come due during those five years, based on bonds already issued. However, some bonds have maturities of less than five years and may still be issued and come due during that period. If current issuance trends continue, then as much as $10 trillion of bonds will come due over the next five years ...  At least $3 trillion of this total will be from US corporations, $1.7 trillion from Chinese companies, and $1.7 trillion from Western European companies. Rising interest rates could make it more difficult for many borrowers to refinance their debt."
I don't have a good sense of whether all this is real cause for alarm, or just a blip in the road. But it does seem to me that in the last few years, with a combination of very low government interest rates and tighter restrictions on bank lending, there has been a lot of eagerness by investors to "search for yield" in corporate bond markets. It wouldn't be startling to find that a share of those investors have not taken appropriate care to hedge the risks involved. 

Wednesday, June 20, 2018

Interview with Marianne Bertrand: Inequality, Gender Norms, Skills

Douglas Clement has an "Interview with Marianne Bertrand," subtitled "University of Chicago economist on the glass ceiling, implications of growing inequality and the trouble with boys" (The Region, Federal Reserve Bank of Minneapolis, online June 19, 2018).  Here are a few of the comments that especially stuck with me, but there's more at the interview.

The Gender Norm that Men Should Out-earn Women in Married Couples
"The idea of the paper was to focus on the particular gender identity norm, which is the idea that men should earn more than their wives. It’s an interesting one to focus on because it’s a norm that may only have become binding today. It may not have been that relevant in the past because women were much less likely to have the potential to out-earn their husbands, and now they do. So the idea of the paper was to investigate the empirical relevance of this norm among households as well as its implications. ... 
"This was item number one in the paper. Let’s do something very simple: Look at the distribution of relative income of wife and husband within couples. If this norm is important, we should see, quote-unquote, “too few” couples where the wife earns more than her husband. And this is exactly what we found in administrative data; that’s the picture that we’re looking at right there.

"And then, in a sense, starting from this picture, we tried to figure out where this could be coming from. One possibility is that those “missing” couples where the wife earns more than her husband may never get formed, meaning that it’s something about the marriage market. ... Another reason why this picture may exist is that those, quote-unquote, “missing” couples were less stable. So they existed, but they were more likely to break down. And we also found evidence of that in the data. Looking at couples where the wives earn more than the husbands, we found signs of more marital instability, more marital unhappiness and some signs that these couples were more likely to end up in divorce."
Thoughts about Divergence in Types of Consumption and in Political Views
"We were talking about income inequality, and one of our colleagues said, basically, “Well, at the end of the day, who cares? Yes, maybe we’re growing apart economically, but on Sunday all we all do is watch TV. We are growing apart economically, but our lives may not be that different; they may, in fact, have converged.”
"So, this is kind of an interesting point. How much can we say about how the lives of the rich and the poor changed? Let’s try to put together all of the data sets that we can think of over the longest time period that we can and say something about what it’s like to be rich, which we define as the top quartile of the income distribution, versus poor, which we define as the bottom quartile. What was it like several decades ago? What is it like today? ...
"I like to use the example you mentioned, social mobility. Suppose we work at the same company. You are my boss. I’m your employee. You’re from the top of the income distribution, and I’m from the bottom. My ability to move up in the company might be a function of how much you connect with me, and connecting with one another might be a function of the quality of the conversation that we can have around the water cooler. Did we do the same thing over the weekend? Do we watch the same shows? Do we have the same hobbies and eat the same food?
"So we tried to assemble all the data sets we could; for example, time-use data, which go back to the 1960s. Another data set that a lot of social scientists use is the General Social Survey, which tells us something about views and opinions—views on abortion, gays, racial issues, government spending and the like. ... [W]e had access to a marketing data set, which is truly remarkable. In that data set, we can see media consumption—what TV shows people watch, what movies they watch, what magazines they read. The data set also shows thousands of products that people may or may not buy, and thousands of brands that people may or may not buy or own.
"Then we built a metric of cultural distance between groups by income. There are many ways you could measure distance. We use a machine-learning algorithm and aggregate a number of methods that allow us to find the best model to predict someone’s income based on the brands or products they report consuming or the attitudes the person has. ...
"The main headline result of the paper is that most of the trend lines are flat. Our ability to predict someone’s income based on the consumption of particular goods and brands is essentially the same today as it was 25 years ago. There’s no trend in our ability to predict people’s income based on how they spend their time today, compared to close to 50 years ago. The only area where we see some slight evidence of divergence on income is with respect to social attitudes, where our ability to predict people’s income based on what they think, their views, is slightly better today than it was in the early 1970s. ...
"[N]ow we’ve done this exercise, as I said, for race, gender and urbanicity. When we first got these results on income, people said, especially in the context of the recent election, “Well, income is not the important one; it’s urban/rural. That’s the important divide in America.” We’ve also done it based on political attitudes, and the main result, which I just gave you for income—there’s no big trend—essentially applies to, at a first-level of approximation, everything that we have looked at.
"The one really large exception quantitatively is our ability to predict whether someone is liberal or conservative/Democrat or Republican based on their social attitudes. That has been increasing over time. So liberals and conservatives haven’t been diverging over time on TV consumption, brands or goods, but on social views they have been diverging a lot over time.
"The results were surprising to us. We went into this with in the back of our mind the discussion that’s happening right now [that Americans are increasingly divided along economic and other lines], and we really thought that we were going to see signs of that in the data.
"How do I rationalize the results? It’s not clear, but here’s one thought when it comes to products and brands. I think today we think you can easily see who is rich or poor because rich people own an iPhone and poor people don’t; but, then, 25 years ago, it was whether you owned a DVD player that separated rich and poor. There are waves of technological changes—the rich, the more educated are always going to be the early adopters of those—but there are constant waves of technological change."
 The Gender Gap in Cognitive Skills is Bigger in Broken Families
"[T]he gender gap in noncognitive skills is particularly large in broken families. And that term can mean many different things. It’s low income, it’s absent fathers, it’s less education, it’s fewer parental inputs. ... If you have boys doing more poorly in broken families, that means that a lot of these boys become less marriageable. That means more single moms and more broken families in the future and hence, again, more boys growing up in conditions where they may not get the kind of parenting that could address whatever deficiencies they have in noncognitive skills. ... One argument we make in the paper is that boys may be born at greater risk of having noncognitive problems than girls. ... And if that’s true, then it’s particularly important to have stronger parenting for boys than girls in order to correct this deficit. But, again, that’s highly speculative."


Tuesday, June 19, 2018

Thaler on the Evolution of Behavioral Economics

Richard Thaler won the Nobel Prize in economics in 2017  "for his contributions to behavioural economics.  He tells the story of how the field evolved from early musings through small-scale tests and more comprehensive theories and all the way to public policy in his Nobel prize lecture, "From Cashews to Nudges: The Evolution of Behavioral Economics." It is ungated and freely available in the June 2018 issue of the American Economic Review (108:6, pp. 1265–1287).  Video of the lecture being delivered is here. 

I certainly won't try to recap the readable and accessible lecture here. (One of Thaler's many virtues is that he wears his learning lightly.) But here are three stories that Thaler collected near the start of his career, when mulling over these subjects. Thaler writes:

  • At a dinner party for fellow economics graduate students I put out a large bowl of cashew nuts to accompany drinks while waiting for dinner to finish cooking. In a short period of time, we devoured half the bowl of nuts. Seeing that our appetites (and waistlines) were in danger I removed the bowl and left it in the kitchen pantry. When I returned everyone thanked me. But, as economists are prone to do, we soon launched into analysis: how is it that we were all happy now that the nuts were gone? A basic axiom of economic theory is that more choices are always preferred to fewer—because you can always turn down the  extra option.
  • The chair of the University of Rochester economics department (and one of my advisors), Richard Rosett was a wine lover who had begun buying and collecting wine in the 1950s. For as little as $5, he had purchased some choice bottle that he could now sell to a local retailer for $100. Rosett had a rule against paying more than $30 for a bottle of wine, but he did not sell any of his old bottles. Instead he would drink them on special occasions. In summary, he would enjoy his old bottles worth $100 each, but he would neither buy nor sell at that price. Therefore his utility of one of those old bottles was both higher and lower than $100. Impossible.
  • My friend Jeffrey and I were given two tickets to a professional basketball game in Buffalo, normally a 75-minute drive from Rochester. On the day of the game there was a snowstorm and we sensibly decided to skip the game. But Jeffrey, who is not an economist, remarked, “If we had paid full price for those tickets we would have gone!” As an observation about human behavior he was right, but according to economic theory sunk costs do not matter. Why is going to the game more attractive if we have higher sunk costs? 

For an economist, each of these stories suggests a departure from purely rational behavior. More important, it suggest that the departure from rational behavior is in some way understandable, plausible and predictable as a matter of human psychology.  By understanding the rules of thumb (or "heuristics") that guide such behavior, one can build a branch of economics.

For example, the cashew story describes the issue that people can sometimes lack self-control, in the sense that they give in to short-run temptations even when say that they would prefer not to do so. As Thaler says, there is a "planner" and a "doer" inside each of us--and they are not always in synch. As a result, people look for self-control devices (like moving the cashews out of the room), to  help them act in the way that they wish to do, but seem incapable of actually doing. One can immediately think of applications of this framework in retirement plans to help us save, diet plans to help us eat healthier food, exercise clubs and plans to get us moving, book clubs so we read something worthwhile every now and then, and more.

The wine story is an example of what Thaler would later come to call "the endowment effect" or "status quo bias." People often seem to have a bias to holding on to what they have, in part because the fear of that change will incur a loss is bigger than the lure that change will incur a gain. An interesting application here is that many people will have a tendency to stick with what they've got, even if they learn more about alternatives that might be better: the same quantity of savings in a retirement plan and the same way of investing those savings, the same insurance policies with the same levels of deductibles, and so on. People may originally make a choice for no particular reason--perhaps it was just the default option at the time--but then they become more likely to stick with that default option in the future. If a firm or the government changes the default options, it can also change behavior in a lasting way.

 The ticket story describes an issue of how people perceive losses. As Thaler writes:
"When a family spends $100 to buy tickets in advance of some event, the purchase will not create either pleasure or pain so long as the price is equal to the expected price. However, if there is a snowstorm, there is a $100 purchase that now has to be “recognized” and it will then be experienced as a loss. This helps explain why someone can think that going to the event is a good idea—it eliminates the need to declare the original purchase as a loss. ... When I was thinking about these issues, the United States government’s continued involvement in the Vietnam war seemed best explained in these terms." 
Conversely, when Thaler and his friend were given tickets as a gift, not using the tickets was not perceived as a loss in the same way. This unwillingness to face losses, even when they are sunk costs in the past, shows up in a number of settings: for example, the way in which investors are more likely to continue holding stocks that have declined in value, hoping they will rise again, while being more willing to sell stocks that have risen in price.

The policy version of behavioral economics is often called "nudging," where the notion is to alter the default options or the presentation of information in a way that causes more people to make the choices that people wish they could be making in the first place. Thaler (along with Cass Sunstein) originally referred to this as "libertarian paternalism." I had not known that the "nudge" terminology was suggested by a publisher who turned down their proposed book on the subject. Thaler writes:
"When we were looking for a publisher for the book we found the reaction to be rather tepid, probably in part because the phrase “libertarian paternalism” does not exactly roll off the tongue. Fortunately one of the many publishers that declined to bid on the book suggested that the word “nudge” might be an appropriate title. And so we published Nudge: Improving Decisions about Health, Wealth and Happiness. In this roundabout way, a new technical term came into social science parlance: a nudge. The book Nudge is based on two core principles: libertarian paternalism and choice architecture. It is true that the phrase libertarian paternalism sounds like an oxymoron, but according to our definition it is not. By paternalism we mean choosing actions that are intended to make the affected parties better off as defined by themselves. More specifically, the idea is to help people make the choice they would select if they were fully informed and in what George Loewenstein (1996) calls a “cold state,” meaning, unaffected by arousal or temptation."
Of course, nudges are not just the result of government policies. Instead, we are being nudged all the time, often in ways we don't perceive clearly at the time. Firms can try to use nudges to their advantage, as well, which Thaler nicely describes as "sludge:"
"People have been nudging as long as they have been trying to influence other people. And much as we might wish it to be so, not all nudging is nudging for good. The same passive behavior we saw among Swedish savers applies to nearly everyone agreeing to software terms, or mortgage documents, or car payments, or employment contracts. We click “agree” without reading, and can find ourselves locked into a long-term contract that can only be terminated with considerable time and aggravation, or worse. Some firms are actively making use of behaviorally informed strategies to profit from the lack of scrutiny most shoppers apply. I call this kind of exploitive behavior “sludge.” It is the exact opposite of nudging for good. But whether the use of sludge is a long-run profit maximizing strategy remains to be seen. Creating the reputation as a “sludge-free” supplier of goods and services may be a winning long-run strategy ..."

For those who would like additional doses of Thaler, here are some starting points: links to two interviews and another academic lecture.

Friday, June 15, 2018

Autonomous Vehicles: Here's One Crystal Ball

When it comes to peering ahead into the autonomous vehicle future, some crystal balls are better than others. I recommend the recent report written for a group called SAFE by Charles Carson, Erica Groshen, Susan Helper, John Paul MacDuffie, W. David Montgomery,  and Richard Mudge, America’s Workforce and the Self-Driving Future Realizing Productivity Gains and Spurring Economic Growth (June 2018).  The main report is here, while three background papers behind the main report are available here.

(The authors were brought together as an expert panel by a group called Security America's Energy Future. According to its website, "SAFE unites prominent military and business leaders to develop and advocate for policies that improve America’s energy security by significantly curtailing our dependence on oil and promoting responsible use of our domestic energy resources." It seems to do this mainly by sponsoring reports conferences and reports from expert committees, like this one.)

Here's a list of social gains, with the big ones clearly being accident reduction and consumer time.

As the report notes: "It is highly likely that AVs will revolutionize the American economy in ways that have not been seen since the mid-20th century. In fact, it is hard to foresee any technological or other change on the horizon that can contribute more to economic growth and productivity. ... AVs represent arguably the best opportunity to reduce America’s oil dependence. while also providing
low-cost mobility."

But the most intriguing and controversial issues around autonomous vehicles are not about the possibility of gains, but rather involve involve likely shifts in jobs, patterns of living and commuting, vehicle ownership (or not), and even cityscapes. By their nature, such patterns are hard to foresee. The report offers some discussion of the Interstate Highway System, where building started in the 1950s, as an example of a broad social investment with high and not wholly predictable results.

"For example, investments in the construction of the Interstate Highway System have returned more than $6 in economic productivity for each $1 invested, by cutting journey times for both goods and labor.  ... [T]he Interstate Highway System defied linear economic thinking, as these technologies provided significant benefits far beyond their originally-designed impact that conventional analysis failed to capture. Traditional economic studies for the interstate network showed that only 33 percent of the mileage could be justified based on traffic in 1956 and claimed that at most one road over the Rocky Mountains made economic sense. Eventually, growing demand led to three highways being built. It is remarkable that, despite an average rate of return on public investment of between 50 and 60 percent, economic benefits did not even  rank in the top three factors cited by supporters for the highway network’s construction when the enabling legislation was passed in 1956. 
As early as 1970, for example, the interstate network had reduced journey times by 10 percent on average, a benefit that rippled through the economy. These technologies also help reduce a wide variety of costs associated with traffic and travel. Tractor-trailer operating costs are estimated to be 17 percent  lower on interstate highways than other highways, for example, which in turn creates economic benefits for businesses that are passed on to consumers. The broad-based gains provided by these technologies are rarely anticipated in advance—contrary to predictions, logistics companies and vehicle manufacturers were not the main beneficiaries of the Interstate Highway System. More than half of all benefits to private industry were realized in services and non-manufacturing. ...

"Another illustrative example is the role of the interstate network in enabling significant and unanticipated growth in retailers. When combined with the deregulation of trucking in 1980, the Interstate Highway System allowed the freight industry to meet the needs of the emerging “big box” distribution and retailing models of Walmart and Target, bolstering their national competitiveness in the process. ...
"In retrospect, the Interstate Highway System constantly outperformed expectations and had a clear and dramatic positive impact on the U.S. economy. However, the forecasts of the network’s impacts significantly under-estimated demand. By 1965, the number of vehicles traveling on the network and the vehicle miles traveled (VMT) served were 11 and 9 percent higher than estimated, respectively. The Interstate Highway System also contributed to a Gross Domestic Product (GDP) that significantly performed above forecasts for that period. In addition, ... the rate of return for investment (ROI) in the Interstate Highway System far exceeds returns on other broad investment classes from 1950 to 1990."
It seems plausible that the range of benefits and effects from autonomous vehicles could be equally eclectic. For example, posit that AVs make travelling easier (less congestion, greater flexibility, and the ability to do something else while riding). It seems plausible that people could more easily go a little further to reach jobs, which means that low-income people in parts of a metropolitan area without many nearby jobs might find it easier to reach jobs elsewhere in the metro area.

For example, the report mentions mobility benefits: "Those previously unable to drive themselves due to a disability, an inability to afford a car, or other mobility issues would also benefit from AVs. Approximately 9 million Americans have a medical condition that affects their mobility, and of these about 8 million have reduced their daily travel. Almost 15 million people have a medical condition that affects their ability to drive, with 11.7 million people reducing their daily travel as a result. This lack of mobility leads to social isolation, reduced economic opportunities, and an inability to participate fully in community life."

Access to jobs and shopping could expand, too: "The lower cost of travel provided by AVs has the potential to enable people to travel farther, significantly increasing access to job opportunities as well as a broader range of retail goods and services. This in turn expands customer bases for local stores, increases the job market for workers and widens the talent pool for employers, creating productivity
gains in the process. Existing studies have shown that a 10 percent improvement in access to labor increases productivity and regional output by 2.4 percent."

If there was an ability for people to be delivered downtown to shop or work, with a low-cost and flexible method that delivered you where you want to go without didn't needing to drive or park, that would be a dramatic change. Imagine further that after these autonomous vehicles have dropped you off, they don't need to park nearby. They could go off to a spot outside the main downtown where they could recharge their electrical batteries. Thus, cities could substantially reduce space now devoted to curbside and ramp parking.

What about potential job loss? The report emphasizes that any such effects aren't going to  happen soon, or all at once. In terms of numbers, the main job category affected by autonomous vehicles is truck drivers. In turn, the question with truck drivers is whether autonomous vehicles are likely to replace a human driver from door to door, or whether the truck-driving market will split into one with human drivers within metro areas who get the trucks to and from the main highways, with autonomous driving on the highways themselves. In any event the estimates here are that the maximum effect of autonomous vehicles on the unemployment rate would be in the range of 0.06-0.13%--and this would happen about three decades in the future when the technology is much better-developed. But more broadly, the lesson from technologies of the past is that while new technology causes dislocation and shifts of jobs, the total number of jobs doesn't fall. The report notes:
"AVs have two simultaneous impacts: The first is that labor in some job categories will be automated to some extent and, therefore, the number of jobs in those categories will decrease. At the same time, AVs will improve productivity and create more demand for transportation and goods. This increased demand will create jobs in several categories:
  • Firms will add jobs directly associated with AVs, such as fleet service technicians or transportation aides for people with disabilities, as AVs are adopted.
  • AV adoption will increase the need for jobs in companies that support AVs, such as parts suppliers or software engineers.
  • Falling product and service costs resulting from AV adoption will free up discretionary income in the broader economy. New consumer demand will attract investment and lead to the growth of entirely new businesses otherwise unrelated to AVs."
In my mind, the primary social discussion around autonomous vehicles should be about what is needed to facilitate their arrival.

Some earlier posts on autonomous vehicles include:







Thursday, June 14, 2018

G-7, G7+, G20

When the G-7 gatherings originated in the 1970s, the included only finance ministers who typically met with little notice or publicity. They were working meetings. But in the 1980s, they became public events with top government leaders present. As the Council of Foreign Relations has noted, it "The G-7 serves as a forum for highly industrialized democracies to coordinate economic, security, and energy policy."

However, the seven countries in the G-7--the United States, Germany, Japan, Canada, France, Italy, and the United Kingdom--represent a falling share of world GDP, as shown in this figure in a short article from Jim O'Neill and Alessio Terzi at the Bruegel website:

They propose a G-7+, which would cover a more sustained share of world GDP. Basically, Germany, France, and Italy combine into one spot for the euro-zone countries. Canada drops out. This frees up spots to add Brazil, India, and China, while still holding to seven members. 

They write: "Crucially, the G7+ would provide leadership and fast-paced decision-making on economic and financial issues of global relevance – but should not replace the G20, which remains an important avenue for discussions of all other issues that call for higher representativeness, ranging from terrorism and food security to tax avoidance and climate change."

The G-20, for those scoring at home, is a broader group that grew out of the G-7: "The G20 is made up of 19 countries and the European Union. The 19 countries are Argentina, Australia, Brazil, Canada, China, Germany, France, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States."

Communication between countries can be valuable, and regular forums can  make that communication flow more easily than continually trying to build new forums. So I'm not exactly opposed to the G-7, or an expanded G-7+, or the G-20. It's certainly useful for the G-7 countries to remind themselves and each other that their global economic and political power is diminishing. But it also seems to me that such groups can easily be taken over by pretentiousness and public relations gestures, and that world leaders might in some cases find their time better-spent in working on problems of their domestic economies.  

For example, the website of the G-20 proclaims: "In 2008, amidst the global financial crisis, the world saw a need for new consensus-building at the highest political level. Since then, the G20 summits have been attended by heads of state or government, and the G20 was instrumental in stabilizing the world economy." I'd be willing to hear a serious case that "the G20 was instrumental in stabilizing the world economy" through "new consensus-building at the highest political level." But I'm skeptical.

Readers who are interested in digging into the ways in which G-7 and G-20 cooperation might influence policy might usefully begin with two essays.  Adam Triggs has written "Do Global Forums Influence Domestic Macroeconomic Policies  Anymore? Results from In-depth Interview with the World's Leaders, Central Bank Governors, Finance Ministers, and Officials" (Global Economy and Development at Brookings, Working Paper 115, April 2018). Triggs shows persuasively that many world leaders at least claim that summits are useful. 

On the other side, Stephen Kirchner expresses a high degree of skepticism about the usefulness and effectiveness of these international organizations in "The G20 and Global Governance," which was published in the Cato Journal (Fall 2016, pp. 485-506).

Wednesday, June 13, 2018

Bangladesh Reaches Middle Income Status

Bangladesh has over 160 million people, which makes it the eighth most populous country in the world (just behind Pakistan and Nigeria, just ahead of Russia, Mexico, and Japan). I can't claim that I've been paying close attention to its economy, but I was nonetheless started to see that Bangladesh has shifted (in the World Bank's classification) from being a "low-income" to a "middle-income" country.

For some background on the economy of Bangladesh, the World Bank recently published BangladeshDevelopmentUpdate: Building on resilience (April 2018). Also, the IMF just published its regular overview report of the Bangladeshi economy (Bangladesh 2018 Article IV Consultation, IMF Country Report No. 18/158, June 2018). For example, the IMF writes:
"The Bangladesh economy continues to perform well with robust and stable growth. GDP growth has averaged more than 6.0 percent over the last decade, significantly lifting GDP per capita. Thanks to the ready-made garment (RMG) sector, the economy has diversified away from an agrarian to a more manufacturing-based economy, supported by abundant low-cost labor. Poverty has declined steadily and other social indicators have improved. As a result, Bangladesh is now emerging from a low-income to lower-middle income country status.  More recently, broadly sound macroeconomic policies have contributed to robust growth, stable inflation, moderate public debt, and greater resilience to external shocks."
Let's unpack that a bit. Here's a figure from the IMF report showing per capita GDP (left axis) and GDP growth in Bangladesh since 1991.
Here's one more from the World Bank showing the corresponding drop in poverty rates in Bangladesh.
What are the underlying sources of the surge of growth? Here are comments from a couple of observers closer to the subject.  Kaushik Basu wrote an recent op-ed, "Why is Bangladesh Booming?" (May 1, 2018).  Sajeeb Wazed, who is an information technology adviser to the government of Bangladesh and the son of the prime minister (!) also listed some factors in a recent op-ed:

One issue seems to be a resurgence of the Bangladeshi garment industry. Wazed writes:
"Bangladesh also diversified its economy. Much of its early growth came from the ready-made garment industry. It earned its nickname: T-shirt maker to the world. But now, other industries are flourishing as well, including aquaculture and online services. Even the garment industry is diversifying. Along with basic shirts, Bangladesh also produces high-end sportswear that can be found in Europe’s trendiest stores."
Basu adds: 
"One notable point is that the main garment firms in Bangladesh are large—especially compared to those in India, owing largely to different labor laws. All labor markets need regulation. But, in India, the 1947 Industrial Disputes Act imposes heavy restrictions on firms’ ability to contract workers and expand their labor force, ultimately doing more harm than good. The law was enacted a few months before the August 1947 independence of India and Pakistan from British imperial rule, meaning that both new countries inherited it. But Pakistan’s military regime, impatient with trade unions from the region that would become Bangladesh, repealed it in 1958.
"Thus, having been born without the law, Bangladesh offered a better environment for manufacturing firms to achieve economies of scale and create a large number of jobs. And though Bangladesh still needs much stronger regulation to protect workers from occupational hazards, the absence of a law that explicitly curtails labor-market flexibility has been a boon for job creation and manufacturing success."
Both Basu and Wazed also mention greater gender equity in the workplace and in education as a boost to growth. Wazed writes: "The World Economic Forum validated the government’s success in these metrics last year when it ranked Bangladesh first in gender equality among South Asian nations for the second year in a row."

When it comes to the workplace, the progress in gender equity seems modest compared with how far there is to go. Here's a figure from the IMF showing male and female labor force participation across a range of countries, with Bangladesh highlighted. The countries of South Asia have an enormous untapped resource in the possibility of expanding women's labor force participation. 

In education, the gains in Bangladesh, both overall and in term of gender equity, seem stronger. Wazed summarizes the evidence: 
"Between 2000 and 2016, Bangladesh’s net enrollment rate at the primary school level increased from 80 percent to 99 percent. Secondary school enrollment also increased from 45 percent to 54 percent. In addition, Bangladesh achieved complete gender parity in primary education, with 99.4 percent of all girls attending school. Eighty-one percent of the students who enroll in first grade now reach fifth grade. As a result, the adult literacy rate hit a 12-year high last year and is expected to climb in the years ahead as access to educational opportunities expand across the country."
Finally,  Bangladesh has made a real effort to expand access to the financial sector and to digital technologies.

Basu writes: "The Bangladesh government also deserves credit for supporting grassroots initiatives in economic inclusion ... Among Bangladeshi adults with bank accounts, 34.1 percent made digital transactions in 2017, compared to an average rate of 27.8 percent for South Asia. Moreover, only 10.4 percent of Bangladeshi bank accounts are “dormant” (meaning there were no deposits or withdrawals in the previous year), compared to 48 percent of Indian bank accounts."

Wazed writes: "A country of 163 million people, Bangladesh has more than 145 million mobile phone subscribers, an increase of nearly 59 million in just six years. The adoption of new technologies has led to positive social changes, faster communication and an increased desire for democracy. The government’s “Digital Bangladesh” program has extended internet access and government services to the far reaches of the country."

Bangladesh has its share of economic and political challenges, of course.

There's the challenge of ongoing job creation. As the World Bank notes: "With around two
million young people entering the job market every year, Bangladesh must achieve export-led
growth by breaking into new markets with new products to create more and better employment
opportunities. This in turn requires enhancing private investment in capabilities and innovation
to put growth and employment generation on a healthy and sustainable path."

There is the challenge dealing with  Rohingya refugees flooding over the border from Myanmar. As the IMF notes: "Despite the high influx of refugees starting in August 2017, the Bangladeshi government continues to keep its borders open and provide assistance to incoming refugees in coordination with humanitarian agencies. The government has so far managed the additional spending with support from the international community. However, given the uncertainties surrounding the repatriation process, the crisis impact on host communities and the rest of the country could intensify. In the near-term, refugee camps face significant risks from floods and landslides during the monsoons, highlighting the urgent need to upgrade infrastructure."

The financial sector has its weak spots.  Both the World Bank and the IMF point out that tax collections are extremely low. As the IMF writes: "Tax reforms are urgently needed to increase the very low tax revenues. With tax revenues below 10.0 percent of GDP, there is a pressing need to boost collection. This will create room for increased public investment and improved social safety nets, without undermining fiscal sustainability."

There is a national election scheduled for December 2018. The opposition doesn't trust the incumbent government to hold a fair election, and the previous election in 2014 was marred by boycotts and violence. The incumbent government doesn't trust the opposition to contest an election in an open and nonviolent manner. Extreme terror is always a threat, as well.

Every country and every economy has its troubles. But I think back to when I first paid some attention to the Banglashi economy in the late 1970s, in the aftermath of the terrible famine there in 1974-75. The current problems of Bangladesh are a lot nicer ones to have. 

Along with moving up from low-income to lower-middle-income status in the World Bank rankings, the United Nations Committee for Development Policy announced in March that Bangladesh had met the requirements to be reclassified from a "Least Developing Country" to a "Developing Country," although it needs to maintain its status on various measures until 2024 before the change officially happens. 

Tuesday, June 12, 2018

Blood Plasma: US Paid Donors Dominate Global Market

When market forces of supply and demand become involved with parts of the human body, the result can be a high degree of ambivalence.  In the US, for example, a system has evolved where the health care system primarily relies on volunteers for blood, but on paying those who donate blood plasma. Not coincidentally the system of paid US now supplies nearly two-thirds of all the blood plasma available in the world.

This pattern is under discussion in Canada, which in recent years has relied on imports of US plasma for 83% of its use. An Expert Panel on Immune Globulin Product Supply and Related Impacts in Canada has recently published a report: Protecting Access to Immune Globulins for Canadians.  The report lays out facts and evidence, without taking a specific position on paid donations for plasma. However, a Canadian group called “Ethicists and Economists for Ethical Donation-Compensation Practices” has published an open letter arguing: "Both the ethical and the economic arguments against a compensatory model for blood plasma for further manufacture into PDMPs (hereafter: “the compensatory model”) are weak. Moreover, significant ethical considerations speak in favour of the compensatory model ..."

Here's some background, drawing heavily on the Canadian Expert Panel report:
"Plasma is a yellowish coloured liquid component of blood that normally holds the blood cells in whole blood in suspension. It makes up about 55% of the body's total blood volume (TBV). It is the raw material manufactured into a range of medications used by Canadians both inside and outside the hospital setting. ... Over the years, the use of immune globulins (IG), the most widely used product derived from human plasma, has expanded from the treatment of patients who do not make antibodies to protect themselves from infection (immunodeficiencies) to patients across a broad spectrum of illnesses (hematologic, neurologic, rheumatologic, dermatologic) where it is used as an immune modifier."
Dramatically more plasma is collected in the countries where paying donors is widespread: the US, Austria, Czech Republic, and Germany. The Expert Panel again:
"The only 4 countries that are considered 100% self-sufficient in IG are those that had both voluntary and paid donors as seen in Table 3.2. ...  Overall, the US supplies 64% of all plasma collected globally and 74% of all source plasma. In 2015, the US supplied 83% of the plasma used to make IG and PDPs for Canadian patients. The Panel was unable to find any evidence that saturation of the US plasma collection market (i.e. maximum number of plasma donors or source plasma collections has been reached) was a significant risk in the medium term. There were specific geographic regions highlighted in the US where the intensity of plasma collection activity is increasing significantly. In these areas, this concentration of source plasma collection centres drives up competition for plasma donors, which is reflected in the compensation being paid to those donors, however, there were no metrics or evidence submitted to the Panel that suggested that saturation was imminent."

There is considerable variation across countries in the use of immunoglobulin products derived from blood plasma The US, with its plentiful supplies and high tech approach to medicine, leads the way. But the substantial rise in use of these products is not just a US phenomenon.



Here's a figure showing the growth in demand for immunoglobulin products, which come from blood plasma



And here's a figure showing hat the number of plasma collection centers in the US is on the rise.



In thinking about payment to blood plasma donors, a few issues immediately arise. We don't have a problem in a market economy with paying workers for tasks that are physically exhausting or even tasks that have a degree of risk. But being paid for plasma impose health costs  that should be a concern? Also, does paying for  plasma raise a risk of attracting unhealthy donor, in a way that might compromise the healthiness of the plasma supply? 

The Economist describes the process for plasma donation, along with the other isssue, in a couple of articles about paying for plasma in the May 12 issue: a leader called "Lift bans on paying for human-blood plasma: The limited medical and social risks are dwarfed by the benefits" and a longer article called "Bans on paying for human blood distort a vital global market: The market in life-saving blood-plasma products depends on Americans who are paid for it."
"The global demand for plasma is growing, and cannot be met through altruistic donations alone. Global plasma exports were worth $126bn in 2016—more than exports of aeroplanes. ... Plasma today is mostly collected via apheresis, a process where whole blood is extracted, spun in a centrifuge, and the plasma is skimmed off. Red blood-cells are then mixed with an anticoagulant and transfused back into the donor. Blood-donation can take just 10-15 minutes. Apheresis usually takes at least an hour. Plasma replenishes more quickly than red blood-cells. So donors can give more at one session, and far more frequently. In most countries whole-blood donors can give around 500ml of blood, which yields just 250ml of plasma, at most once every two months. Plasma donors can give up to 800ml of plasma—and in America are allowed to do so twice a week. This quickly adds up. In a year a plasma donor could give over 80 litres of the stuff, compared with just 1.6 litres from a whole-blood donor."
In terms of potential health dangers from plasma, there is now a powerful combination of ways of both testing plasma and treating it. Thus, the Canadian Expert Panel notes: "As noted above, the multiple safety steps and ongoing oversight and surveillance by various agencies have resulted in an impressive safety record for PDPs [plasma derived products] with no confirmed case of transmission of infectious disease by PDPs in over 20 years." 

One of the responses to the dominance of paying for plasma is to advocate a big push for more donations of blood plasma. I certainly have nothing against a push for more volunteer donations. But if (or when) such a push falls dramatically short of the rising demand for immunoglobulins and other plasma-derived products, it seems to me that payment for plasma should be acceptable. The risks to donors are not high, and the methods of monitoring and testing have become quite good. 

After all, when you think of the chain of companies and health care providers involved in the development, production, and clinical use of immunoglobulins and other plasma-derived products, it's hard for m to see why the plasma donors are expected to be volunteers while all the other parties are being paid for their services.

The Canadian Expert Panel notes that the line between "voluntary" and "paid" blood donors seems to be turning into more of a continuum over time, in which various kinds of compensation falling short of cash payments becoming more common.
"To further complicate things, over the last 2 decades there has been an evolving continuum of donor compensation, incentives, and rewards in the voluntary donor sector. There is no longer a clear delineation between a “volunteer” donor and a “paid” donor. In the global non-profit blood operator community, a wide array of monetary and non-monetary incentives have been developed to recruit and sustain blood and/or plasma donors – these incentives include cash payments, vouchers, discount coupons, gifts, event tickets, health checks, or time off work ... Survey results from 2014 document the variety of monetary and non-monetary incentives in use for volunteer apheresis plasma and/or blood donors in Europe ... . The fixed sums offered to volunteer blood and plasma donors ranged from 16-30 Euros in the countries where donor payment was allowed (Germany, Czech Republic, and Austria), while the Netherlands, offers a 20 Euros incentive to reimburse travel costs to volunteer donors. In addition, of 28 respondent EU countries, 11 offer 1 or 2 full days off work for both blood and plasma donations, yet only 3 of those countries consider these  benefits an incentive / payment for the volunteer donor. Some argue that it is incongruous that such high-value practices are not considered forms of payment."