Development Bank Research Bulletin

The long run impact of bombing Vietnam

Edward Miguel and Gerard Roland from UC Berkeley probe into military documents and find that American bombs did not change the landscape Vietnam. Vietnamese instead of Pentagon officials decide how the country was rebuilt. Similar results are found by other scholars on how allied bombings of Japan and Germany affect economic geography. Any implications for post-war reconsruction of Iraq?

THE LONG RUN IMPACT OF BOMBING VIETNAM
ABSTRACT
We investigate the impact of U.S. bombing on later economic development in Vietnam. The Vietnam War featured the most intense bombing campaign in military history and had massive humanitarian costs. We use a unique U.S. military dataset containing bombing intensity at the district level (N=584). We compare the heavily bombed districts to other districts controlling for baseline demographic characteristics and district geographic factors, and use an instrumental variable approach exploiting distance to the 17th parallel demilitarized zone. U.S. bombing does not have a robust negative impact on poverty rates, consumption levels, infrastructure, literacy or population density through 2002. This finding suggests that local recovery from war damage can be rapid under certain conditions, although further work is needed to establish the generality of the finding in other settings.

Fix Mexico's banks, not China's

It always puzzled and shocked me that some Latin American and Eastern European countries have private credit to GDP ratios of merely some  30%.  What can you do with so little credit? It is barely enough to sustain basic investment given some reasonable assumption of asset-to-GDP ratio.

I notice that bank in Asians' definition is quite different from what people outside Asia define banks.  In Asia,  bank lending strikes you as commercial and industrial (C&I)  lending that finance purchase of equipment and building of factories, while outside Asia banks focus on mortgage and consumer lending, and seldom go beyond working capital financing when they lend to businesses. So Asian banks are actually development or long-term credit banks in Western definition, and certainly we cannot evaluate their performance based on the same safety requirments, if we want them to promote economic growth. Development banks will certainly be more leveraged and have higher NPL ratio as they lend to risky long-term projects. In the meantime, in Asian's definition, many Latin American countries don't have a banking sector at all, if only bank lending that finance future growth is counted as banking.

Here comes the trade-off between stability and economic growth.  I assume that it is C&I lending that really matter to economic growth. If banks never finance equipment purchase or long-term investment, then they are stable, but in the meantime they are not really doing their bit to the economy.  This is why Mexican banks are in relatively good shape now in balance sheets. In China, lending has historically been 100% C&I loans, while in the United States C&I loans account for only 15% of banks' loan portfolio. Certainly NPL ratio will be higher if you do C&I, but we have to understand why we need banks in the first place when it comes to development: we first want them to do C&I so as to promote economic growth, and then come in the second requirement that we want them to stable.  Stable banks that don't do much C&I lending is no better than "narrow banks".   10% C&I loan ratio is good for the U.S., because academic studies  show that at this very mature stage of development the overwhelming sources of financing for U.S. big corporations is not external finance, but  internal cash flows (i.e., the old money). This however doesn’t  work for developing countries.

Inefficient allocation of funds is certainly one main reason why non-performing loan ratio is high, but high NPL ratio only means that the private benefit of the failed projects are negative, the social benefit could still be positive. For many developing countries, it may not be profitable to invest in roads, dams, power plants, etc, but there is no question that the society’s benefit is far higher than the cost. In China’s case, the high NPL ratio is more a result of banks sharing some fiscal burden with the cash-constraint government at the beginning of the reform. Also, after reforms, some fiscal expenditures are no longer allocated by the bureaucracy  system, but through the banking system (which I admit is certainly also heavily influences by the government.)  Research however shows that Chinese banks allocate funds more efficiently than the governments. Certainly, they are still very inefficient, but please compared it to the alternative that the government would allocate the funds, and please take into account the stable fiscal stance in China as a result of this transfer of duty to “private sector”.

What happens in many countries is that, when we emphasize stability (particularly after crises) , many banks switch completely to residential mortgage, consumer, and working capital lending, which also help reduce their risk-weighted assets defined by Basel Capital Accord. But then they are not banks anymore, in the sense that real banks should do C&I lending and finance expansion and growth of the industrial sector.  When banks are privatized they will certainly switch immediately to mortgage and consumer lending, which are same and sometimes also very profitable, and you don't have a real banking sector anymore to achieve poverty-reduction goal.

Maybe Singapore's Temaesek with DBS bank is solution struck in the middle?  Let the private sector do what they want to do (montage, consumer and working capital lending), and let the public sector do what public sector should do (long-term credit). State-owned banks can be very inefficient, but it is still more efficient than letting ministry of finance to directly allocate long-term credits.

Micro-Savings institutions in a rich country

The development community is very interested in finding measures that can increase poor and rural people’s access to bank accounts, in order for them to be able to manage their savings and smooth their consumptions. Many people believe that we have to be very innovative in achieving this goal because it is difficult to serve poor people without heavily subsidizing the system.

Not really. Japan did it perfectly well, with very traditional methods. The Postal Savings System (PSS) in Japan, for more than 100 years has been collected savings door-to-door throughout Japan, including rural villages. The postmasters collect small amount of money from households when they deliver mails. Today 85% of Japanese have an account with PSS and half of Japan’s savings are deposited in it. The money collected will be managed by a government trust, with safety as its investment goal. The operation of PSS is probably one of the most important factors driving Japan’s high savings rate and economic miracle after World War II. Every developing country has its nationwide postal service system, and there should be not much extra investment you need to make to turn it into a savings system.

Certainly the success of the system may rely on Japan’s high trust culture, but I don’t see why it will be easier for the postmasters than the bank clerks to steal money. First, postmasters are usually locals, compared to the loss of reputation and the stable job, it is not worthwhile for him to steal the small amount of savings.  Second, depositors get their bank statements every month, and housewives usually will check the statement very carefully. There are really not much opportunities for the postmasters to steal large amount of money before they are caught. So this should work in low trust society as well.

Income inequality in Washington D.C.

Within the Washington, D.C. metropolitian region, for each mile travelled from Southeast Washington (a poor area) to Montgomery County in Maryland (a high income area), life expectancy increases about 1.5 years. Between them, there is a 20 year difference in life expectancy.

According to Harvard professors David M. Cutler and Edward L. Glaeser, it is the Potomac River (which cuts through Washington) that causes the lower living standard in the southeast part of the city. In their paper "Are ghettos good or bad?", it is found that ghettos are more likely to be formed in cities with rivers because the rivers facilitates the segregation of Black neighborhoods from White neighborhoods, and segregation creates worse life outcomes for the Black, in schooling, employment and single parenthood.

Expecting the birth of the world’s largest bank: the Japanese Post Bank

Guess which financial institution in Japan controls the largest market share in deposit savings? It is not Mizuho; it is not Mitsubishi UFJ; it is not Sumitomo either.

The No.1 position belongs to the Postal Service!  The Postal Savings System (PSS) has 230 trillion yen of deposits in their control, which makes it the largest “bank” not only in Japan, but in the world.

In order to push forward his plan to privatize the Postal Service, Japanese Prime Minister Koizumi called early election and won with land-slide margin. Now the privatizing plan is only a matter of implementation. According to the plan, the savings system will be spinned off from the mail service, and sold to the private sector.

What are the consequences of the privatization?

(1)   Well, we will have the largest bank in the world. I have to inform you though, that the privatization will take place in 2017, not now. Be patient, Koizumi has been pushing for this since 1979 when he served as a junior finance minister.

(2)   Japanese government bond yield will rise, because the profit-maximization oriented PostBank (I guess it will be called PostBank) will not put up with the low return in government bond, and they are going to dump them. Man, more than 20% of outstanding bonds are now in their hands, what will be the market impact, I don’t know.

(3)  U.S.treasury bond yield will go down, because the PostBank will certainly purchase t-bonds to rebalance their portfolio

(4)   I don’t think the PostBank will inject credit into the private sector of Japanese economy, unless they find a really ambitious foreign buyer.

(5)   What will you get if you buy and control the PostBank? Certainly you will obtain a nationwide 100% coverage network and a customer base of 85% of Japan's population. Accepting deposit is not a profitable business, but you can profit from selling other financial services. Eh, I think this is pretty close to Citigroup’s philosophy! Could Citigroup be a potential bidder for the Postal Savings System? It is too early to say, but there is always the possibility.

And who's next? China's Postal Savings System?

Thai Prime Minister's own 96-hours live reality show on poverty reduction

Thai Prime Minister Thaksin produced a live 96-hours reality show in which he is the main actor, with  cameras followed him throughout the countryside of Thailand.  The billionaire politician slept in a tent between visits to villages in the northeastern province of Roi Et, where the average monthly income is about 2,700 baht (US$68; euro55).

Thaksin claims that the main target audience of his show is his government officials, not the public. He wants to show the bureaucrats  how to help the poor.  Many however believe that he is using the show to recovery public support to him which is waning recently.

The response from the public however is very negative. According to a poll, over one-third of the respondents thought that the round-the-clock live broadcast would be “staged” . A local resident told journalists from Strait Times: “ When I woke up this morning, I couldn’t recognize the road in front of my house. They have been paved overnight although no government officials cared about it in the last decade”

Lee Kwan Yew: Confucian model won't work for India

Mr. Lee is a very frank. In an interview with Joshua Cooper Ramo (who named the so called "Beijing Consensus"),  Lee Kwan Yew repeats his “culture will determine your fate” theory. Many Indians may feel offended by his assertion, because Mr. Lee is implying that, maybe, Indians are not hard-working enough?

“It’s more applicable to Vietnam than to India. The Indians haven’t got the Confucian culture. Without being imbued in a culture that enjoins you to endure hardship and have the stamina to struggle on in a cohesive society where the individual subsumes himself for the benefit of the family and his society, it’s difficult to expect that degree of sacrifice.”

Well, overseas Indians certainly are unusually hard-working, but foreign investors generally find it difficult to set up sweatshops in India (although sometimes the conditions are already quite good... Come on! You are in a developing country, what luxury do you expect!) . How can economic growth come without sweat? I always question.

Amartya Sen is very critical of Lee Kwan Yew (see What Lee Kuan Yew and Li Peng don't understand Asia). I have to  say that Lee could be a little too pragmatic and “growth-centric”, but Sen is certainly far too idealistic (in the sense that his theory can be applied only when angles govern)

For those who are interested in Beijing Consensus, you can find the introduction in http://fpc.org.uk/fsblob/244.pdf   . I have to remind you though, that I think it is rubbish.

You may find that my own position in this article is pretty vague. Well, it is a sensitive subject.

The Moral Consequences of Economic Growth

Recently I read this book review by Joseph E. Stiglitz on Benjamin M. Friedman’s book “The moral consequences of economic growth” . I find some of his views contrasting each other.

For example, he recognizes that there are priority and trade-off in setting targets. I agree.

“Brazil, for example, must choose whether to use its limited health budget to pay full-market price for AIDS drugs; some AIDS victims may live as a result, but people in need of other health care will die, because money that could have been spent on their needs is simply not there.”

But then when he criticize Friedman, he forgot what he has just said

“There are three fundamental flaws in this analysis. The first relates to the definition of poverty. As the World Bank has emphasized at various points, poverty is not just a matter of income; insecurity and voicelessness are also part of its profile. Friedman's analysis completely ignores these other dimensions.”

Hey, certainly dignity is important for poor people too, but when they are starving, they want food more than preaching from Prof. Stiglitz. Do you still remember the Brazil example you just used?

He then wants to tell us that GDP per capita is not important.

“Consider the following thought experiment: If you could choose which country to live in but would be assigned an income randomly from within that country's income distribution, would you choose the country with the highest GDP per capita? No. More relevant to that decision is median income (the income level that 50 percent of the population is below and 50 percent is above).”

I like this thought experiment, I always cite it too. But the example he gives exactly contradict his theory. GDP per capita is not important? I bet no one will prefer born in Uganda than in the United States. People from Uganda will find slums in America looks like heaven. Average level of living standard is still important after all.

And then he cites the declining median income in America to show that growth may not benefit the poor. I saw this number in many blogs recently. I don’t have any sympathy toward this.

“As the income distribution becomes increasingly skewed, with an increasing share of the wealth and income in the hands of those at the top, the median falls further and further below the mean. That is why, even as per capita GDP has been increasing in the United States, U.S.median household income has actually been falling”

Eh, lazy people,  don’t blame others, if you keep skipping schools, if you keep spending more time watching MTV channel than reading your science textbook, if your life goal is to act very “cool”,  why do you think you deserve much higher pay than your counterparts in developing countries who are more "boring" than you are? When you are fooling around, other people are studying, other people are working hard; the society is very fair to you. No pain, no gain, that's always true!

The Top Ten Risks to the Global Economy

Goldman Sachs lists the following  ten as the largest  risks impacting global economic growth and security:

1. The Dollar and the Twin Deficits
2. Environmental Accords
3. Geopolitical Conflicts
4. Globalization in Emerging Nations
5. Global Terrorism
6. Growth in China
7. Hedge Funds and Derivatives
8. Trade Liberalization
9. World Health Conditions
10. World Oil Supply

They organized a conference on this and the summary is included in this Report.

I think "Dollar and twin deficits"  is the only one important risk factor that we really need to deal with seriously, proactively, and NOW.  Global economic problems are all created by the United States, I have to say.  Anti-dumping taxes, revaluation of Chinese Yuan, refusing Canadian lumber, etc,  are not going to solve the problme, unless the United States addresses the structural problem at home.

Largest consumer credit database in the world!

comes from the most populated country, not surprsingly. This will greatly improve the infrastructure for consumer lending in China. Banks are willing to lend to personal consumers only when (1) they can control the credit risk (2) the cost of checking credit is low.  Good news to consumers!
Consumer lendings, including residential mortgage lending, are much safer than commerical and industrial lendings. To reduce non-performing loans, Chinese banks have to rebalance their portfolio and increase the share of consumer lending, there are simply no other ways. So this is a good news for investors of Chinese banks, too.
A centralized state is sometimes a great advantage in getting such huge project done within a short period of time. Several years ago, Citigroup was trying to build their own consumer credit database in China. Don't know whether they are still continuing developing their own system.

China's central bank launches personal credit information database

BEIJING (AFX) - China has launched a national personal credit information database, in another step towards reforming the country's financial system, the central bank said. So far, this system has covered every commercial bank in China and some of the rural co-operatives, with 340 mln individuals in their records, the central bank said. At the end of 2005, the database had recorded 97.5 pct of total outstanding consumer loans, it added.