Business registration and informality
See this interesting post by Miriam Bruhn on the World Bank finance blog. Her new paper brings a more detailed view on the heterogeneity of informal business owners, which has important implications for policies aimed at formalization. In a nutshell, the outcome might actually be better than initially thought, partly thanks to “a more efficient allocation of individuals into occupations”.
A tale of two species : revisiting the effect of registration reform on informal business owners in Mexico
Different views have been put forward to explain why most firms in developing countries operate informally. One view argues that informal-business owners are entrepreneurs who do not register their firm because the regulation process is too complex. Another argues that informal-business owners are people trying to make a living while searching for a wage job. This paper contributes to recent literature that argues that both factors are at work. The author uses discriminant analysis to separate informal business owners into two groups: those with personal characteristics similar to wage workers, and those with traits similar to formal-business owners. The paper then examines how the two groups were affected by a business registration reform in Mexico. Informal-business owners from the second group were more likely to register their business after the reform. By contrast, informal-business owners from the first group were less likely to register but more likely to become wage workers after the reform. This is consistent with the finding in Bruhn (2008 and 2011) that the reform led to job creation. It also explains why the earlier papers find that the reform didnt affect the number of new registrations by all informal business owners.
We estimate the effect on business start-ups of a program that significantly speeds up firm registration procedures. The program was implemented in Mexico in different municipalities at different dates. Our estimates suggest that new start-ups increased by about 5% per month in eligible industries, and we present evidence supporting robustness and a causal effect interpretation. Most of the effect is temporary, concentrated in the first 15 months after implementation. The estimated effect is much smaller than World Bank and Mexican authorities claim it is, which suggests attention in business deregulation may be over emphasized.
Oil prices and economic recessions (2)
Nouriel Roubini, in this Project Syndicate piece, thinks that rising oil prices could (again) trigger a new global recession.
Today’s fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in China; and the risk that economic recovery in the United States will fizzle (yet again). But no risk is more serious than that posed by a further spike in oil prices.
The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone. Simply put, increasing worry about a military conflict between Israel and Iran has created a “fear premium.”
The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the Middle East that led to a sharp spike in oil prices. The 1973 Yom Kippur War between Israel and the Arab states led to global stagflation (recession and inflation) in 1974-1975. The Iranian revolution in 1979 led to global stagflation in 1980-1982. And Iraq’s invasion of Kuwait in the summer of 1990 led to the global recession of 1990-1991.
Even the recent global recession, though triggered by a financial crisis, was exacerbated by spiking oil prices in 2008. With the barrel price reaching $145 in July of that year, oil-importing advanced economies and emerging markets alike faced a recessionary tipping point.
This echoes a previous post of mine on this issue. Roubini insists on the psychological factors that may push the price of oil up, even if the underlying risks ultimately don’t materialize, although in all the examples mentioned above, conflict actually happened. Again, I wonder how we could actually quantify the impact of oil prices evolution on economic growth fluctuations around the world.
Uneconomical nuclear power
This comment by Peter Bradford in Nature (subscription required) suggests that although the political consequences of Fukushima may have some weight in pushing nations to phase out nuclear power, the main driver of this evolution will be the economics of it.
Yet the most implacable enemy of nuclear power in the past 30 years has been the risk not to public health, but to investors’ wallets. No new nuclear-power project has ever bid successfully in a competitive energy market anywhere in the world.
This economic impracticality has been felt globally since the early 1990s. Although the number of nuclear plants in operation jumped from a handful in 1960 to 424 in 1989, they then levelled off, peaking at 444 reactors in 2002 (see ‘Not going up’). After Chernobyl, at least a dozen plants of the same design were taken out of action. Older, smaller plants were decommissioned. But the determining factor was the drop in construction in the United States and western Europe — a result of the cost of building new plants and the refusal of investors to bear the risks of cancellations, cost overruns and the emergence of cheaper alternatives.
A similar message arises from the paper by Lucas W. Davis (Prospects for Nuclear Power) in a recent issue of the Journal of Economic Perspectives (Vol. 26, Issue 1, Winter 2012). Here is a working paper version.
Nuclear power has long been controversial because of concerns about nuclear accidents, storage of spent fuel, and how the spread of nuclear power might raise risks of the proliferation of nuclear weapons. These concerns are real and important. However, emphasizing these concerns implicitly suggests that unless these issues are taken into account, nuclear power would otherwise be cost effective compared to other forms of electricity generation. This implication is unwarranted. Throughout the history of nuclear power, a key challenge has been the high cost of construction for nuclear plants. Construction costs are high enough that it becomes difficult to make an economic argument for nuclear even before incorporating these external factors. This is particularly true in countries like the United States where recent technological advances have dramatically increased the availability of natural gas. The chairman of one of the largest U.S. nuclear companies recently said that his company would not break ground on a new nuclear plant until the price of natural gas was more than double today’s level and carbon emissions cost $25 per ton. This comment summarizes the current economics of nuclear power pretty well. Yes, there is a certain confluence of factors that could make nuclear power a viable economic option. Otherwise, a nuclear power renaissance seems unlikely.
Leaving Goldman Sachs
Obviously the article of the day. An opinion piece By Greg Smith in the New York Times. These days, some banking institutions don’t look that good from the outside (see previous notes here and here). Apparently, it’s not better inside:
TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
Tragedia ferroviaria en Buenos Aires y corrupción
Este artículo en el País Internacional detalla los vínculos entre la empresa concesionaria Trenes de Buenos Aires (TBA) y los gobiernos argentinos sucesivos.
Un elemento más en contra de los que piensan que la corrupción “aceita la máquina económica”. Una prueba más que la corrupción mata a diario.
Se veía venir. Esa ha sido la frase más repetida este jueves entre los congresistas de la oposición argentina. Apenas habían pasado seis meses desde que el 11 de septiembre de 2011 muriesen 11 personas y resultasen heridas 212. Se trataba de la misma línea donde el miércoles murieron 50 viajeros. La Auditoría General de la Nación había emitido desde 2002 a 2008 cuatro informes en los que advertía que la empresa concesionaria Trenes de Buenos Aires (TBA) no cumplía los requisitos básicos en materia de seguridad y mantenimiento. A raíz del accidente, varios dirigentes del sindicato peronista Confederación General del Trabajo (CGT) han pedido la rescisión del contrato a TBA. Unos han reclamado la nacionalización de los trenes y otros un mayor control sobre las sustanciosas subvenciones recibidas por una empresa que gestiona esa línea desde 1995, cuando gobernaba Carlos Ménem.
La diputada Elisa Carrió, de la Coalición Cívica ARI, ha declarado: “Ojalá los argentinos podamos comprender de una vez por todas que la corrupción y la impunidad matan”. [La tragedia] es el resultado de la corrupción de los gobernantes que apañan empresarios inescrupulosos y de jueces que no investigan ni condenan delitos públicos ni privados”.
A new World Bank president
Here is Jeffrey Sachs’ opinion on the challenge of chosing a new World Bank president.
The world is at a crossroads. Either the global community will join together to fight poverty, resource depletion, and climate change, or it will face a generation of resource wars, political instability, and environmental ruin.
The World Bank, if properly led, can play a key role in averting these threats and the risks that they imply. The global stakes are thus very high this spring as the Bank’s 187 member countries choose a new president to succeed Robert Zoellick, whose term ends in July.
Most importantly, the Bank’s new president should have first-hand professional experience regarding the range of pressing development challenges. The world should not accept the status quo. A World Bank leader who once again comes from Wall Street or from US politics would be a heavy blow for a planet in need of creative solutions to complex development challenges. The Bank needs an accomplished professional who is ready to tackle the great challenges of sustainable development from day one.
I also alluded to one of the likely candidate, Larry Summers, in this previous post.
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