The Unassuming Economist

From a post by Tim Hirschel-Burns:

“2025 admittedly presents a dubious landscape for achieving substantive global economic governance reforms. The scale of needs is large—achieving development and climate goals demands trillions more in annual financing and a reorientation of our economic system—while our political context is trending in the wrong direction, with countries cutting international investments and geopolitical tensions deterring international cooperation.

Still, making progress matters. On climate change, every fraction of a degree makes a difference, and the scale of development challenges are so large that even small increases in inclusive growth or public service provision can improve the lives of millions of people. Actions taken now can also set the stage for more ambitious reforms when circumstances become more favorable in the future.

So, what are five realistic goals for global economic governance in 2025?

1. Establish principles for MDB resource needs reviews and initiate them at each MDB

Right now, decisions on multilateral development banks’ (MDBs) financing capacity are largely driven by inertia and political whims, rather than a regular, evidence-based assessment of how their ability to provide finance matches up with the financing needed to meet goals and the international community. Resource needs reviews would change that, and they are one of the key recommendations of the Group of 20 (G20) Roadmap on Better, Bigger, and More Effective MDBs, which G20 leaders endorsed in November.

That Roadmap sets a near-term goal of establishing principles for resource needs reviews, and South Africa can push for these principles to be decided under its G20 presidency next year. The G20 can simultaneously push MDBs to each initiate their own resource needs review—in the World Bank’s case, the 2025 shareholding review provides a moment to launch an assessment of its capital needs. Carrying out these reviews will generate an analysis of what mix of capital adequacy reforms, hybrid capital and capital increases would add up to financing needs, putting MDBs on a strong footing to increase the supply of finance..”

Continue reading here.

From Devdiscourse:

“The latest Kenya Economic Update by the World Bank, prepared by a multidisciplinary team including the Macroeconomics, Trade, and Investment team, examines Kenya’s economic trajectory in a challenging global context. Global growth reached 2.6 percent in 2023, with Sub-Saharan Africa’s real GDP projected to accelerate to 4 percent by 2025-26. Kenya’s economic growth, however, has slowed to 4.7 percent in 2024 from 5.6 percent in 2023, reflecting pressures from severe floods, subdued business sentiment post-protests, and fiscal consolidation. While Kenya has made progress with inflation control and a stronger currency, persistent fiscal deficits, high debt levels, and constrained public spending weigh on its long-term growth potential. Despite improved foreign reserves and macroeconomic stabilization, achieving sustainable development remains a complex challenge.

Fiscal Pressures and the Weight of Debt

Kenya’s fiscal landscape is characterized by significant revenue underperformance and growing debt servicing costs. The fiscal deficit, though narrowed to 5.2 percent of GDP in 2023/24, remains above the target of 4.7 percent, driven by lower-than-expected revenue collections from VAT and departmental fees. This shortfall has limited the government’s capacity for social and developmental investments. Kenya’s debt burden remains high, with domestic debt now comprising the majority of its liabilities, reflecting increased reliance on local borrowing. High domestic borrowing not only crowds out private-sector investment but also adds to fiscal pressures. Although the government has introduced tax reforms and expenditure rationalization policies, implementation gaps and socio-political challenges have hindered meaningful progress.”

Continue reading here.

From The Grumpy Economist:

“I wrote this essay on Bob Hall and Consumption (link goes to pdf on my webpage) for the conference in honor of Bob Hall at Hoover, November 22. It turned into a more extended history of some trends in macroeconomics, which any student of macroeconomics might find useful. Why we do what we do is often obscure. If this post exceeds your email limit, finish on the website at grumpy-economist.com

Bob Hall and Consumption1

I’m going to cover just two of Bob Hall’s many pathbreaking papers, “Stochastic Implications of the Life Cycle–Permanent Income Hypothesis,” Hall (1978), and “Intertemporal Substitution in Consumption,” Hall (1988), both in the Journal of Political Economy. Along the way, this turns in to a brief history of the emergence of modern macroeconomics, and one of its central unsolved problems, intertemporal substitution.

I titled my remarks at the conference, “Consuming Hall at Chicago.” I think you know Hall has many fans at Stanford, but you might not know just how popular Bob was at Chicago. Pretty much everything I write today I learned from Bob Lucas and Lars Hansen at Chicago in the 1980s.

1 A Simple Idea

As usual for Bob, it all starts with a simple clever idea. In asset pricing, price is present value of dividends, so price follows a random walk. In the permanent income model, consumption is proportional to the present value of income. So consumption should follow a random walk too. Why not test that hypothesis just as asset pricers were doing in the 1970s, by running regressions,”

Continue reading here.

From a paper by Marek Szturo, Bogdan Włodarczyk, George H. Ionescu, Daniela Firoiu, and  Vitor Braga:

“The commodity market is a key element of the global economy. It is influenced by the political and economic situation of the major participants on the supply and demand side, as exemplified by the geopolitical and economic situation related to the conflict in Ukraine. Another aspect of this influence is the close relationship between commodity markets and financial markets. Both factors contribute to the possibility of the commodity market becoming subject to contagion, resulting in the transfer of supply and demand shocks and volatility. The aim of this article is to identify the commodities that are the source of contagion (volatility) during the transmission of shocks and the increase of systematic risk in selected periods. Combining traditional network theory with vector autoregression (VAR) model, we aim to estimate systemic linkages as a measure of systemic risk and the contagion process underlying it. We used time series of commodity returns from the Refinitiv Eikon database to observe the relationships between commodities during crisis periods, starting from 2006. The results suggest that the commodities with the largest increase in volatility transmission compared to the pre-crisis period acted as a transmission gate for market shocks.”

From UNDP:

“This is an opportune time for Bangladesh to recalibrate structural transformation towards an inclusive and greener economy. The policies that enabled the country to increase its footprint in manufacturing—albeit mainly in the ready-made garment sector (RMG)—may not work in the future. Policymakers must choose whether to continue a selective export-driven focus while protecting the rest of the economy, or opt for a more outward alignment of the economy for growth and jobs.

There is empirical evidence that export-driven growth was one of the major drivers of economic development in East and Southeast Asia. Several countries in the region started their industrial journey with RMG, but over time diversified and moved vertically along the value chain. Although export-led growth was pursued as a policy objective, the degree of economic openness varied. With a relatively smaller consumer base, Singapore followed largely laissez-faire economic regulations while limiting foreign capital to strategic sectors. Larger economies such as Indonesia pursued a dualistic approach by opening parts of the economy for exports and investments while protecting some sectors from competition through state-owned enterprises or investment restrictions. 

In Bangladesh, there is a strong correlation between exports, more specifically RMG exports, and economic growth. The share of RMG exports in the national output increased from less than six percent in 1990 to over 13 percent in 2023, after peaking at 20 percent in 2012, according to the World Bank. Although weakening, the positive relationship between RMG exports and jobs is also visible.

It is fair to say that Bangladesh’s export-led growth story has essentially been an RMG story. There have been limited spillover effects for other sub-sectors. RMG products still represent around 85 percent of Bangladesh’s exports. There are also worrying signs that the RMG-led growth has already peaked. In the last decade, the share of private sector investment has remained stagnant at around 22 percent of GDP.

Given its population size and potential, Bangladesh has not been able to attract enough foreign direct investment (FDI). Between 2010 and 2022, annual FDI inflow averaged $2.2 billion, significantly lower than Vietnam and Indonesia, where it averaged $12 billion and $18 billion, respectively, according to UNCTAD. An overly regulated economy, red tape, and weak enforcement of business regulations have often been cited as barriers to domestic and foreign investments in Bangladesh.

From 133 in 2003, Bangladesh’s ranking on the Ease of Doing Business Index improved to 119 but fell as low as 168 out of 190 countries in 2020, the last year before the report was discontinued. On the Global Competitiveness Index, Bangladesh’s ranking was 102 in 2023, which is quite low and has barely improved in the last five years. Bangladesh performs poorly on trade, investment, and financial indicators, broadly indexed as economic freedom. Between 2013 and 2023, the economic freedom score of Bangladesh increased from just 52 to 54.

A narrowly defined export-led growth model can limit the diffusion of technology and learning into other sectors of the economy. Protecting selected industries and businesses to build domestic capabilities is justified if measures are time-bound and not too distortionary for the economy, which can result in skewed distribution of income and wealth.

 Relying on a few export goods without gradually opening and reforming the rest of the economy is bound to run its course. Many analysts have pointed out the anti-export bias that a long period of protection has created for the non-RMG sectors in Bangladesh. There is a need for change, but the sequencing of reforms and timing is also critical.

The first task should be to address regulatory bottlenecks, making it easier for businesses to invest and operate in the country. These can be followed by a gradual rationalisation of import tariffs that should be underpinned by a rigorous cost-benefit analysis. These reforms can go alongside trade facilitation support, incentivising already established local companies to start looking outwards.”