Thursday, August 25, 2011

Ernst & Young on the State-Owned Enterprises (SOE) Debate

A Question of Corporate Governance

In this private study, the international consultancy Ernst & Young outlines its moderated and nuanced position with regard to SOEs.

The main thrust of Ernst & Young’s argument is that SOEs can indeed be important pillars of the economy. In fact, towards the future SOEs will remain a key bulwark defending strategic industries and guaranteeing the adequacy of infrastructure, such as electricity, power and communication grids, basic networks and transport. However, Traditional governance structures and vague missions have tended to make it difficult for SOEs to do perform well.

This position is reminiscent of the quote for Barrack Obama: “We have so much time debating the size of government that we have neglected to consider the more serious question of how well our government actually works

Contrary to the established theoretical view which permeated through academia and later throughout society in the last 25 years, reflecting the view of state-run enterprises as lethargic, inefficient, and bureaucratic does not hold. These traits were found to be neither particular nor specific to SOEs. This should of course to no surprise to anyone who has ever read a Dilbert comic, to say nothing of the commonly held opinion about corporate America.

Rather, this paper focuses on improving and maximizing the quality of SOE governance. All too often, inefficiencies within specific SOEs have been used as a justification for their dismantling, ultimately leading to a reduction in welfare as employment levels are reduced, and the business cycle deepens as yet another firm takes pro-cyclical rather than counter-cyclical action. This is roughly akin to using the fact that your puppy has soiled the carpet as a justification to having him euthanized. This paper seeks instead to train best behavior.
In particular the goals of SOE policy should be:

1. Protect the interests of all the stakeholders (including customers, minority shareholders, society, etc.) and guarantee the autonomous economic development of the firm.
2. Appoint competent and skillful board members in a transparent, skill-based nomination process.
3. Guarantee the autonomy of the boards but still allow governments to exert authority at a strategic level through regular board evaluation mechanisms.
4. Create other processes that promote accountability and transparency.

Table 1: Key Sectors of SOE Operation

Ernst & Young outline that SOEs are mainly concentrated in key strategic sectors of the economy, where the hand of the state is seen as a key part of the continued stability and governance of the economy. Accordingly, public support of the presence of SOEs varies by sector, with some sectors drawing widespread SOE skepticism while others sectors draw widespread SOE support. 

SOEs can have a vital role in forcing market discipline in otherwise difficult regulate markets. The paper goes on to outline the torch-bearing role that SOEs have in Chinese reforms and the buttressing effect that Indian SOEs have on economic growth.

Figure 1: Support for State Ownership of the Sector

Government and enterprise is a series of studies and initiatives examining various facets and aspects of governments’ relationships with enterprise. We open the series with this study which focuses on state-owned enterprises, where the aim is to delve deeper into the issue of government ownership, understanding how the state operates in this particular role. 

Upcoming initiatives in the series will continue to develop the government and enterprise theme, delving deeper into what governments (national and local) own, what they co-deliver in partnership with the private sector, and where they regulate provision from the market.
About the Authors:
-Philippe Peuch-Lestrade is the Global Government & Public Sector Leader at Ernst & Young
-Alessandro Cenderello  is the Global Government & Public Sector Markets Leader at Ernst & Young

Friday, August 19, 2011

BBC: Franco-German calls for "true euro economic governance"

What was Said was Only Half the News

What Was Said
A need for further financial and economic integration was identified by France and Germany. Merkel and Sarkozy outlined a vision of closer multilateral coordination whereby bi-annual meetings of the 17 heads of the eurozone governments would take place, chaired by the president of the European Council. The main objective would be to gradually further Eurozone fiscal and economic integration.

Three important revenue ideas were put forward by France and Germany. These were the establishment of a financial transactions tax or "Tobin Tax" in order to dampen volatility on the financial markets while simultaneously providing a large and stable source of revenue, and the harmonization of corporate tax rates to prevent a race to the bottom among Eurozone countries - an issue which has cost many jobs in both Germany and France in the last decade. Also, a requirement for balanced government budgets to be enshrined in constitutional law was proposed. While this last requirement would restrain countries from engaging in crisis-response, it may b somewhate prudent in other parts of the business cycle. Any fiscal rules should in my view respect the reality of crisis response as well as counter-cyclical fiscal needs.

This development is generally quite positive in the sense that the crisis demonstrated a clear-cut need for closer coordination between the Eurozone countries. While the the architecture for financial-regulatory convergence has been laid out by the European Union in setting up the European System of Financial Supervisors (ESFS) and the European Systemic Risk Board (ESRB), the issue of fiscal coordination has been overlooked by the European Union for the moment (other than the purely theoretical idea of actually enforcing the Maastricht Treaty).

What Wasn't Said
What was conspicuously missing from the headlines was the impetus to organize economic governance at the European level. rather, the multinational level was emphasized. Seen from the point of view of the markets, this means that Europe has opted for a coordinaiton system which is both informal in nature - whereby  any agreements reached might not have the binding force of law, and may only be addressed twice a year, which may frankly be insufficient - and slow to react to changing circumstances on the ground. 

In short, there will be no oraganized institutionalized attempt by the European Union to address the fiscal issue. The idea of "Eurobonds" -the most stable anti-crisis fianancial instrument possible- was downplayed. it seems that regional economic stability has taken a backseat to German naitonal interest.

Needless to say, the markets didnt like the result of this. The market detects a missed opportunity to optimally address the fiscal disparity issue within the Eurozone.  

What was the Result?
Both the French CAC and the German Dax took a more than 5% plunge in the aftermath of this announcement. The reason: markets saw this as missed opportunity. The Eurozone's leadership could have declared a committment to address both the Eurozone crisis and the financial market volatility in an organized, transperent, and instituional fashion. Alas, they didn't. This of course was enough to prompt finiky investors to sell.  

Thursday, August 18, 2011

Debt Sustainability in the Caribbean

One interesting issue in development economics is the effect of debt service costs on the effectiveness in terms of economic programs and poverty alleviation, as well as the fiscal health of a government. All too often, the debt service costs of a developing country consume a massive share of budgetary revenues. Additionally, because of inflated risk premiums, debt service costs are particularly brutal in many developing countries.

While sovereign debt reduction is primarily a fiscal matter, it is vitally necessary to due everything possible to minimize the pressure of debt service costs on fiscal budget revenues. In this area, a lot of progress can be made. Active Debt-Management Policies (ADMP) aim to achieve just that. In particular, developing country policies often fail to take advantage of bond markets. 

In bond markets, the sovereign risk premium can be reduced via a series of ADMP measures, thereby reducing debt-service costs. These measures include staggering the maturity dates, retiring foreign-currency demonimated sovereign debt issues, and the transition to coupon bonds.

In the Caribbean region, we have seen a virtuous-circle ADMP trend whereby several countries have issued increasing sophisticated sovereign debt bonds, thereby decreasing the risk-premium. The revenues from these bonds has then been used to retire riskier, less sophisticated sovereign bonds, some of which were issued in foreign currency such as US Dollar of British Pound. 

This paper is a draft case-study about ADMPs in the Caribbean region conducted at the Inter-American Development Bank. Policy recommendations on ADMP sovereign debt policy are also outlined. 


This paper examines debt sustainability in the Caribbean region in general given the emerging market status, and small size of Caribbean economies. Particular emphasis is given to six countries within the region with respect to debt sustainability techniques and policies. The size, scope and effects of sovereign indebtedness are also discussed. Policy options and recommendations for ensuring debt sustainability and reducing indebtedness are examined herein.

About the Authors:
-Desmond Thomas is the Chief Economist for Barbados at the Caribbean Country Department of the Inter-American Development Bank at the Inter-American Development Bank.
-Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

Tuesday, August 16, 2011

Policy Response: the Greek Crisis

What is Actually Going On?

The world’s largest economy is suffering a crisis of confidence brought on by the fiscal distress and increased default risk of one of the EU’s smaller economies. Seen in the context of the fact that this “Eurozone Crisis” provoked by the financial distress of Greece occurs at the same time that a “US Dollarzone Crisis” does not occur as a result of the severe financial distress of the state of California, a much bigger and more economic central economic entity within the US casts some serious doubt as to how “structural” of “fundamental” this crisis might be. Doesn’t it seem a bit odd that the Eurozone has become much more volatile as a result of its crisis?

What Choices We Face in the Situation

When faced with a sovereign debt crisis, there are a limited number of ways in which such a crisis might ultimately be resolved. Of course, we should all hope for some combination of the four.

1.            Austerity: Drastic cuts in spending while increasing tax revenues in order to generate sufficient surplus to address the sovereign debt situation. This would not only threaten economic growth in Greece, but could also lead to UK-style social and political strife further down the line.
2.        Default: Either total or partial. This would cause the immediate downgrade of all Greek debt, thereby causing a general sell- off of Greek assets. This would also lead to a chain-reaction which might include bankruptcies of European banks and financial houses across the Eurozone.
3.          Monetary Expansion: This carries a certain risk of inflation, since this avenue has already been heavily employed by the ECB and the rest of Europe’s central banks. Nevertheless, this threat can be mitigated by perfection of use of proper monetary distribution channels.
4.           External Bailout: Quite straightforward really. Under this option, Greece’s sovereign debt crisis is addressed (at least partially) by external parties. There are two problems with this situation. First, this may create some concern about moral hazard. Second, comes the question of who should bail Greece out and under which conditions. To be sure, the terms would have to be sustainable, and fair to both parties.

What Should Be Done?

In general, the crisis response measures for the Greek sovereign debt crisis should strive to solve the crisis is such a way that the EU’s credibility is re-enforced, while Greece’s recovery should be brought about as quickly and with as little contraction as possible.
Furthermore, the crisis response should be multi-faceted. It should involve elements of multilateral financial assistance, technical assistance vis-à-vis rule of law and tax-enforcement measures, and as much private sector cooperation as can be safely secured.

Basically, any response should include the following measures:

1.            A private-sector financial and banking-sector agreement which resemble the Vienna Initiative, whereby a voluntary agreement can be reached with the banks in order to minimize the economic contraction caused by bank sell-offs of Greek assets. As far-fetched as it sounds, this strategy worked in Eastern Europe in 2009.
2.              In order to bolster revenues, the Greek tax code should be enforced with the institutional support of the EU. This is the sort of institutional support which would both help resolve the sovereign debt problems and bolster Brussels’ credibility. This in turn, would reduce the risk-premium involved.
3.         The targeted expansion of the money supply. This means that the money supply should not just be increased, but that the new money should be sent to specific trouble areas in the Mediterranean economy. This would serve to reduce how much the money supply actually needs to be expanded by, (thus reducing the threat of inflation), while cutting down on how much of the new money supply is waster (also reducing the threat of inflation). This plan can be said to be based on the British WWI-financial crisis during which they targeted specifically the import-export financial sector for monetization. It worked. The UK economy recovered from being put under embargo by German – then the world’s 2nd economy. With this experience in mind, a good way to directly monetize the problem areas would be for a stabilizing proportion of Greek bonds to be bought off of the market.
4.       The implementation of European microprudential financial and banking regulation should ensure that any new money actually makes it from the financial sector to the real economy, in order to re-establish and bolster production.

How Should it all be Paid For?

This is one of the main issues when it comes to questions of credibility. Since this is really a story about a lack of confidence in – as well as credibility of– the EU’s financial crisis-response capabilities, it should fundamentally be the party to either finance, or coordinate the financing of Greek sovereign debt crisis response.
Therefore the EFSF and the EFSM should be employed to their maximum extents. The EFSF is a crisis-response tool which acts a sovereign-default risk pool. Therefore the bailout cost is fairly-distributed across the EU nations. In fact it is done along ECB lines. The EFSM meanwhile is a crisis-response tool which relies on financial guarantee of the European Commission.
In addition, the monetary tool should be employed. This is because anti-growth monetary policy is a major underlying factor to this crisis.

What Should be Avoided?

We should avoid causing economic destruction. We should therefore do what we can to limit reliance on austerity measures. This is because austerity has negative consequences for long-term growth and for socio-political stability within a country. Accordingly, the recent history of austerity packages across the all of the other continents of the world has been met with protest, rebellion, and social strife.
With this in mind, sovereign debt defaults should also be avoided. A sovereign default – even a partial one – would most likely lead to an economic chain reaction. Not only would Greek banks go bankrupt, but so to might neighboring Eurozone countries, as well as European banks who are holding Mediterranean assets. Ultimately, nobody knows where the last dominos will fall.

Effects on Mediterranean Rim and European Periphery

The effect mitigation of Greek sovereign debt crisis would have unambiguously positive effects on the sovereign debt situation across the peripheral regions of the EU and the Eurozone. This would primarily be because of increased confidence in the European institutions as well as a general reduction of risk-premia across the European Periphery. Since the risk premia are also the most volatile component of sovereign debt prices, doing this would also reduce volatility.
Because the case of Portugal is specifically connected to wider financial market volatilities and was actually not in unmanageable financial trouble as a result of its own sovereign debt situation, yet has run into trouble because of a rapid decrease in liquidity and a radical increase in global risk-aversion, a solid and well organized European crisis-response to the Greek situation would do a lot to alleviate Portugal’s problems.

About the Author:
-Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

Sunday, August 14, 2011

Following the Tigers

What we can learn from Development
When it comes to development theories in international relations, there are basically two principle contesting schools of thought. The first, is the neoliberal one, its approaches undermine developing countries’ capacities for modernization, inhibits the development of infant industries, and makes developing countries vulnerable to outside shocks. The second embraces developmental state models, which focus on domestically-developed policies including infant industry protection. This approach has resulted in growth and prosperity in developing countries. Thus, domestically-developed Human Development and Economic Growth policies are needed for the sustainable development of a country. Hence, the EU needs to rethink its external development strategies

Between the 1960s and 1990s, East Asia saw exceptionally high growth rates and rapid industrialization.  Through a strategic approach to integration with the global economy these regions were the first newly industrialized countries. In the 21st century, all four regions have since graduated into advanced economies and high-income economies still being the world's fastest growing industrialized economies now. Korea’s economic growth and resulting social transformation are especially noteworthy. A country whose main exports were tungsten ore, fish and human-hair wigs has become a high tech powerhouse, exporting mobile phones and TVs all over the world. In terms of quality of life indicators Korea progress is equally impressive.

Innovation and technology and the investment in human capital, as in the promotion of universal education, are important to improve a country’s comparative advantage. Further, globalization has magnified the cost of bad, inconsistent policies and weak, inefficient institutions and has shown that it can become a danger to developing countries. The Asian crisis has shown the importance of effective state institutions and that a country should be careful not to open its economy too early.

In its relations with developing countries, the EU focuses almost solely on trade agreements. It acknowledges the importance of economic growth and poverty reduction.  It even addresses the  establishment of democratic institutions to promote governance and democratic standards. Further, the EU applies conditionality so that the democratization process and the advancement of good governance are conditions for receiving aid. The promotion of sustainability and simplification and coordination of aid programs should be addressed as well as the promotion of capacity building. The EU’s approach to development aid focuses on pressuring countries to open their markets, while granting their products preferential access to the European market. Further, it gives aid in conditionality linked with good governance, capacity building and respect for Human Rights.

The debate on whether internal or external factors where more important for development was spurred on by the rise of the Four Asian Tigers Singapore, Taiwan, South Korea and Hong Kong (also called  NICs – newly industrialized countries). Scholars argue whether export-oriented industrialization policies (neoliberal school) or successful state intervention policies (developmental state school) were the key to the success of the Tigers. Which type of policy should then serve as a model for other countries? What can the EU learn from the Asian Tigers, in terms of encouraging development?
S. Katarina Schmitz is a Brussels-based international trade expert who works with the German Ministry of Foreign Trade and specializes in EU external development cooperation relations.

Saturday, August 13, 2011

The Recent Financial Market Volatility

A Crisis of Confidence

On Friday, August 5, 2011, the US-based rating agency Standard & Poor’s downgraded US sovereign debt from AAA status for the first time in its history.

Subsequently, the financial markets saw massive drops beginning on August 8, 2011, with 11.2% drops in value in the Dow in the US, while all European markets were also hit with major declines. The German Dax declined by 22%, the British FTSE declined by almost 15%. Likewise, in Asia, Korean and Japanese markets both tumbled by 3.7%.

Source: BBC News


Nevertheless, by Friday August 12, 2011, the markets were in stark rebound. What is happening here? Has something changed in the market fundamentals?

Change in Fundamentals? 

The main fundamental which has changed in the financial markets is the credit rating for US sovereign debt.

Change in Confidence

What really happened was a change in the way investors feel about future prospects for stability in the financial markets. Basically, we can take both the sharp downward swing and the dramatic increase in volatility as a market signal that financial stabilization measures in both the US and the EU have not really addressed the major issues. In other words, according to the market outlook, bailouts in the US have failed and the debt negotiations have also failed. The market outlook vis-à-vis the EU is that Europe’s reaction to the Greek crisis and the sovereign debt problems of the Mediterranean rim, as well as general European financial stabilization have been altogether insufficient.

The US

Underlying the downgrade US sovereign debt – and the subsequent widespread selloffs in the US stock markets – is a general loss of confidence in the soundness of US economic management. While the banks have been recapitalized and the money quantity has been dramatically increased, microprudential regulation has been all but neglected.  In other words, the American attempt to soundly regulate the financial crisis has failed. Why did the 400 provisions of the Dodd-Frank act get reduced to 38? Why has no further regulation been enacted? What plans are there to join and adhere to international financial regulatory standards?
As for the bailouts, we see that the banks have been re-capitalized, and that the financial institutions have been rebuilt, and that QE has left massive amounts of liquidity in the financial market, but that none of that money has been sent into the real economy. The result: unemployment and production figures never really improved. This is because insufficient regulation has been put into the US financial and banking sectors. Thus, all the new cash in the system does not actually reach the problem areas for which it was actually intended. This leads monetary-expansionary needs to be much larger than what they could be, while the crisis-response effect is largely mitigated and risk of crisis is increased dramatically.

And as for the debt-ceiling negotiations, the cuts will simply mean a drop in growth. The cuts will also mean an upwards re-distribution of income and wealth in the US economy. The real answer was to perhaps increase revenues. In short, both the Democrats and the Republicans have come to an agreement to launch an upwards redistribution of wealth, despite the fact that Obama’s democratic mandate was exactly the opposite of that.

Furthermore, getting rid of the Gephardt Rule (automatic debt-ceiling rule) means that this sort of showdown might occur again and again. The Republicans took a calm budgetary process, and turned it into an annual risk of default showdown. They created an economic crisis where there was none before, only to redistribute wealth upwards. What is worse is that the Democrats went along with it all.  

This is why the US was downgraded by the rating agencies. 

  •  A drop in growth for the coming few years.
  • This is why the US was downgraded by the rating agencies.
  • Future prospects of legislative showdowns on the budgetary issues
  •          A dramatic increase in the money supply. Besides QE1 and QE2, the US has pledged to keep interest rates low until 2013.
  •  A bailout which did not reach the real economy, due to insufficient regulatory standards    
  • The lack of microprudential banking and financial banking regulation

I would say that Washington’s mismanagement played a huge role in this situation. 

·         Europe

While the drop in the financial markets was particularly bad on Wall Street, it was also severe in Europe. Overall, there are good reasons for which the financial markets have also lost their confidence in the European markets.

In some ways, Europe’s situation resembles that of the US. Specifically, the money supply has increased dramatically (both in the Eurozone and in the UK), while microprudential regulation has generally not improved much.

With respect to the sovereign debt situation, European austerity measures are bound to have the same effects on growth as those in the US. Furthermore, as the headlines have shown us in the UK, Greece, and Spain, angry European youths have already decided to take to the streets on this issue.

On top of that, the Eurozone has been revealed to be much more unstable because the crisis has made it painfully clear that the Eurozone has no pre-set plans to deal with the financial trouble of the member-nations. This is despite the fact that monetary policy in the Eurozone is set along a strict price-stability mandate, with no pronounced growth mandate (this was already likely to result in economic troubles in both the Mediterranean rim and in Eastern Europe. My question is why did the ECB not decide on an “Anglo-French” monetary policy, whereby both growth AND price stability are mandated?

To add even more fuel to the fire, EU common market rules allowed and even encouraged cross-border banking, without having proper microprudential rules in place to mandate responsible and sustainable European banking practices. In fact, prior to 2008, financial-regulatory regimes were different from country to country across the EU, with little-to-no coordination between banking authorities in the various EU countries.
While this is more or less a perfect recipe for financial troubles over a 10-year time-span, the EU did not have a financial crisis mechanism. The result is:
  • A drop in growth for the coming few years
  • A dramatic increase in the money supply
  • The lack of microprudential banking and financial banking regulation

    In the face of all this, the response from Europe has been a bilateral response whereby Germany and France have decided to respond to the economic troubles in the Mediterranean rim on their own. It is as if California tried to resolve its debt crisis by asking Vermont for a loan. Does that not just seem like a stupid way to do things?

    Some Bright Spots in Europe

    Since the emergence of the financial crisis in Europe in 2008, there has been an effort to coordinate both financial crisis response policy by founding the EFSF, as well as the EFSM and financial, banking, insurance and fiduciary regulation by means of the ESRB, EBA, and ESFS.

    About the Author:
    Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

    Sunday, August 7, 2011

    The Issue of Trust in Developing Countries

    The Role of Adam Smith and the Role of Modern Economists

    This article examines the role of and the issue of trust and trustworthiness within the development field. Is this question of trust in the marketplace a question of "hard" legal principles such as contract enforcement rights or rather of "soft" market principles resulting from market discipline?

    Adam Smith was of the view that market discipline played the key role in the establishment of trust in the marketplace, believing the issue to be a positive feedback loop whereby trustworthy behavior encourages  more trusting behavior. Contemporary scholars imply a more Hobbesian view that trust is  essential for the market to function well, and is thus the realm of the state. 

    In many societies in the developing world however, said institutional framework may be partially or wholly absent. In fact, Hernando de Soto describes "development" essentially as the replacement of informal and family-based institutions by formal constructs. Other scholars see development as a process in which more trustworthy institutions develop and in turn, inspire more trust. 

    Nevertheless, a relationship between the types of economic activity and the levels of trust exist across the developing world. In other words, soft principles do inspire a certain amount of trusting and trust worthy behavior. Furthermore, studies show a complimentary relationship between "hard" legal regulation and self regulation in the marketplace (trustworthy behavior).  This principle has far-reaching implications for institutional development in the developing world.

    About the Authors:
    -Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

    -Dr. Albert Schram is a former economics professor at Maastricht University in the Netherlands and at the University of Puerto Rico. He was also a development economist at the Inter-American Development Bank.

    My Proposal for Flemish Labor Market Agreement Reforms

    Werkgelegenheidsakkoord Hervorming
    In English Below

    Deze overheidsbeleid voorstel gaat over twee onderwerpen. Dit zijn de eenheidsstatuut kwestie en het probleem van de integratie van niet-EU-bevolking op de Vlaamse arbeidsmarkt.

    De eenheidsstatuut is een zeer gevoelig punt op de arbeids-onderhandelingen. Terwijl de werkgeversorganisaties zijn geïnteresseerd in het nastreven van deze hervorming om de ontslag opzegtermijn te verminderen naar overeenstemming met de arbeider normen, werknemersorganisaties zijn geïnteresseerd in het gebruik van deze hervorming om de opzegtermijn naar de bediendeniveau op te bringen. 

    Vlanderen scoort slecht in vergelijking met andere NUTS-1 regio’s met betrekking tot werkzaamheidsgraad van niet-EU-bevolking. Bovendien, de 2000-2008 evolutie van de werkzaamheids cijfers is indicatief van een verstreking van deze probleem. Dit betekent dat dit probleem is erger in Vlaanderen dan in de Nederlandse NUTS-1 regio's.

    This public policy proposal is about two subjects. These are the unified labor-market statute issue (Dutch: Eenheidsstatuut) and the issue of integration on the Flemish labor market. 

    The unified labor-market statute is a quite a sticking-point in Flemish labor negotiations. While the employers' organizations are interested in pursuing labor market reforms in order to shorten the mandatory layoff notice period for all workers to conform with blue-collar employment standards, labor organizations are interested in using the reform to bring the  layoff notice period for all workers to conform with standards for white-collar workers.

    Flanders scores poorly compared to other NUTS-1 regions with respect to employment rates for non-EU citizens. Moreover, the 2000-2008 evolution of employment figures is indicative of a worsening of the problem. This means that the problem is more serious in Flanders than in the Dutch NUTS-1 regions.  

    About the Author:
    Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

    A Case Study on Neoliberalism: The Water War in Bolivia in 2000

    Water Privatization in Cochabamba: A Policy Evaluation

    The recent history of Latin America (and much of the rest of the developing world) is littered with the attempts at development and growth via the Washington Consensus. In general, policies of increased privatization and liberalization of Latin America has had the effect of widening wealth gap and slowing economic growth in the region. 

    Furthermore, when the people resist, they are all too often met with deadly force. The next morning in Washington, policy makers usually say something like "In order to pursue to modernization, a government of strong political resolve is needed"

    What it really means is "If you privatize and liberalize, it will make the poor worse off, and they might protest. When that happens, you have to be ready to fire on the protesters" 

    In the case of, Bolivia the country privatized its railways, telephone system, national airlines, and hydrocarbon industry. This policy analysis tells one story: The story of the privatization of the water works in the city of Cochabamba, the dramatic rate hikes which resulted, the protests and the use of force against the protests. It was known as "La Guerra del Agua". Sadly, the lesson was not learned immediately afterwards. Four years later, privatization of gas reserves lead the story to be repeated as "La Guerra del Gas". 

    Of course, no criticism can be complete without offering a respectable and viable alternative policy. The counter-factual analysis in this paper examines the water reforms in Chile, where water reform was done as a municipalization rather than a privatization. The involvement of both the private sector (as consultants) and the central government (who was generally from opposing parties to the municipal governments) kept transparency and responsibility levels high. The result in this case was full water-coverage in the capital for the first time in the history of Chile. 


    This article evaluates the failure of the Bolivian government to regulate private sector concessions in urban water supply in Cochabamba Bolivia through a policy evaluation along logical framework lines of the 40-year concession contract awarded in September 1999 to Aguas del Tunari, which ultimately lead to the Cochabamba water riots in 2000. This paper evaluates the policy effectiveness, transparency, sustainability, relevance of the contract in question, and makes a recommendation for future policy improvement based on counterfactual analysis.

    About the Author:
    Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

    What Obama SHOULD have done: Thoughts on the 2009 US bailouts

    Como Obama Debería Haber Respondido a la Crisis Económica          (Francais)        (English)

    En 2009, un periódico hispanohablante en Nueva York me pidió sobre mi opinión con respeto a la crisis económica emergente. Mi respuesta examina los seis aspectos mas positivos del debate sobre la respuesta a la crisis en aquel entonces. Unos meses después, lo traduje al francés para un economista en Bruselas.

    Los Seis Aspectos Más Importantes Del Debate Eran:
    • Reconstrucción de infraestructura  
    • Bailout vía adquisición de acciones  
    • Reducción de impuestos para la clase media  
    • Economía verde  
    • Compra de hipotecas fracasadas   
    • Expansión del límite FDIC   
    In 2009, I was asked by an NYC-based Spanish-language newspaper on my opinion regarding my opinion about the emerging financial crisis. My response examines the six most favorable aspects about the crisis-response debate which was taking place at that time. I also rewrote it in French a few months later for the benefit of an economist in Brussels.

    The Six Main Issues Which Needed Attention Were:
    • Infrastructure Reconstruction
    • Acquisition of shares during Bailout Expenditures
    • Middle class tax reduction
    • Green Growth
    • Purchase of failed mortgages
    • Expansion of FDIC limit   
    About the Author:
    Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

    The Minimum Wage Can Create Jobs

    The Effects of Statewide Minimum Wages on the US Labor Market: What Factors Play a Role? 

    My public economics master thesis at Maastricht. Its a 53-page text which empirically examines the employment-effects of the state-wide minimum wage in the US. Because the topic is controversial, I spent months making sure the econometrics are right. Now its regressions are pretty much bulletproof.

    In 1994 and 2000, Card and Krueger found a positive relationship between minimum wages and fast-food employment in their region. What if you would test the entire hourly-wage-earning US labor market (non-salarial hourly wages for those of you outside of the US)?  In fact, you would find that on average an increase in the minimum wage leads to an increase in employment at minimum wages in the US. Want to know why? Simple... because of income and demand-effects.

    Well okay, its not that simple. It turns out that if the state's job market depends on the manufacturing industry, then they might lose jobs by raising the minimum wage, but if that state depends rather on the service industry, then they gain employment. This is because while there is an income-demand effect as well as employment-cost effect, one effect is always bigger than the other. In the end it all comes down to Substitutability (you can't replace all workers with machines, only some of them), and Tradability (You can't import your haircut or your burger from China).

    This paper investigates the effect of US statewide minimum wages on labor markets. The effect of sectoral composition of a state’s economy is empirically determined to have a pivotal effect on wage-earning employment elasticity using 2002-2007 BLS data. The explanation behind this phenomenon is linked theoretically to tradability as well as capital/labor substitution elasticity. The effect of statewide minimum wages on a state’s labor market is explained empirically by a state economy’s sectoral profile.
    About the Author:
    Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

    An Analysis of the Icelandic Crisis

    A look into the Iceland Crisis
    This is a case-study about the Icelandic Banking Crisis. Essentially, this is about three banks which "Too Big to Fail", and ultimately "Too Big to Bail" as well. This is also the story about how Iceland's government intervened in order to minimize the spread of this crisis into the real Icelandic economy.

    Basically, it shows us what can go wrong if we allow for sloppy micro-prudential banking regulation, ignore the need to coordinate across borders to regulate cross-border banking, and allow a country's banking sector to grow bigger than its economy. It was the perfect storm. Deregulation and free-trade sank the one of world's most soundly-managed economies (no national debt, top living standard in the world), in order to please shareholders in the short-term.

    The study is an account of the Icelandic response to the 2008 financial crisis. Drawing on official and bank sources, an account is made of the methods used in bailing-out the major Icelandic banks, the response to the subsequent sovereign debt crisis, and the resulting post-crisis regulatory framework. Because 2008-2010 was a highly volatile time throughout the OECD which saw the failure of many banks across the world as the global financial system came under extreme stress, a closer look should be taken into Iceland’s policy responses to the crisis. Because of Iceland’s size in relation to its banks, the lessons drawn are highly relevant with respect to the “Too-Big-to-Fail” (TBTF) problem. Essentially, Iceland’s banks – which would have been TBTF in a larger country – were “Too-Big-to-Bail” Icelandic standards. Nevertheless, Iceland carried out a successful bailout from which smaller forms of the primary national banks emerged with the financial support of the financial stakeholders of the previous primary banks. As a result of Iceland’s actions, its banking sector is no longer too big to rescue. This paper has financial policy implications for both how small nations should handle large financial crises and for the financial crisis policy in the EU.
    Icelandic Parliamentary Report on the Collapse of the Icelandic Banking sector
    About the Author:
    Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

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    What should we do about Credit Rating Agencies?

    The Case for a Parallel Ratings Agency

    We all know that the 2008 financial crisis began with the collapse of market for Mortgage-Backed Securities (MBS) Collateralized Debt Obligations (CDO and CDO-squared). What many people never gave much thought to is the fact that more than 90% of these financial products enjoyed a AAA rating despite being based on sub-prime real-estate lending.

    Why was this? In short, its because the ratings agencies (Fitch, Moody's and Standard & Poor) all get paid by the issuer of the security. This is a conflict of interest if ever there was one. In economist-speak, we would call this "A Market for Lemons" or "Adverse Selection". Ultimately, the MBS and CDO markets turned out to be as reliable as the second-hand car market.


    This paper offers an explanation for the 2008-2009 financial crisis using an adverse selection model for the asset-backed security and collateralized debt obligation markets, in which more than 90% of assets enjoyed a AAA rating despite  being based on sub-prime real-estate lending.  Because the classical adverse selection incentive-alignment response would be ineffective during episodes of bankruptcy in the financial markets,  alternate arrangements for incentive-alignment are necessary.  A public-sector rating agency would align the incentives of private-sector credit-rating agencies via a reputation effect. This public agency would in-turn maintain its integrity and neutrality via central-bank-style policy independence architecture.
    About the Author:

    Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.


    Dear Readers,
    This is a collection of interest and recently-written research concerning analysis of sound (and not so sound) economic policies, financial regulation, et cetera. Please cite appropriately if you intend to use this for your own research.
    ALMP: The Path to Less Unemployment                       (Timbergen Institute)

    An Analysis of the Icelandic Crisis               (KHM/Maastricht)

    Are Tax Cuts Good for Growth? (US House)        (IMF Research)      (IMF Research)

    The Case for a Parallel Ratings Agency          (KHM Research)

    Central Banks as Agents of Development         (UN University)

    Como Obama Debería Haber Respondido a la crisis Económica
    What Obama Should Have Done: Thoughts on the Bailout                (in Spanish)                (in French)              (in English)

    Contributions of the Stockholm School 

    Debt Sustainability in the Caribbean   

    ECB Study: Lack of Crisis Response Causing Contagion in Europe                 (ECB Study)

    Economie van België in een Notendop

    Education's Return on Investment  (OECD Study)

    The Effects of Statewide Minimum Wages on the US Labor Market: What Factors Play a Role?              (KHM/Maastricht)

    Ernst & Young on the State-Owned Enterprises (SOE) Debate

    EU Financial Transaction Tax   (WIFO Study)       (IMF Research)

    European Left Proposes Way Out of Crisis      (FEPS Research)

    Fed Study: Inflation? What about Deflation?   (Federal Reserve)

    Following the Tigers        (KHM)

    For China, Trade is not Simply About FDI    (HK University)

    Greek Crisis: Shock Doctrine Comes to Europe

    German Constitutional Court Accepts Eurozone Bailout

    Germany Restricts High-Frequency Trading, Chicago Fed Recommends Same 

    Hayek vs. High Tech                      (MIT Study)

    Iceland Takes a Different Course (Fitch Ratings)

    IMF:: Austerity Has Failed Europe              (IMF Research)            (IMF Research)

    The Issue of Trust in Developing Countries                    (KHM/Maastricht)

    Middle-Class Squeeze: Wages are Down, but we Aren't More Competitive                             (US House)

    National Bank of Belgium: Liquidity Doesn't Always Cause Asset Bubbles                   (NBB Study)

    A New Way of Bank Stress Testing                      (Deloitte/Ghent University)

    Oxfam: Austerity Failed in Asia, Latin Am. Europe No Different                                                                                       (Oxfam Study)

    Policy Response: the Greek Crisis

    The Recent Financial Market Volatility

    Too Big to Fail in the US Banking Sector   (Fed. Study)

    Software Patents vs Competitiveness: Less is More                       (Madrid-based EU Study)                       (Boston Law + Federal Reserve Study)

    Stamp Scrip: Episodes in Economic History  (Fed Letter)

    Swiss Senate: NO to Strict Intellectual Property Law (Swiss Fed. Senate)

    US Congressional Study: Is Copyright the Free Market at Work?  (RSC)

    US Debt Ceiling - Canadian Debt Wall                 (US Treasury)

    Water Privatization in Cochabamba: A Policy Evaluation                  (Maastricht University)

    Werkgelegenheidsakkoord Hervorming (In Dutch)

    What Argentina Means for Us: 10 Years After the Fact

    Zero Lower Bound: When Interest Rates Can't Drop Any Further      (Princeton University)         (ECB Study)

    Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.