Purchasing power parity theory – Kent Tribune http://kenttribune.com/ Wed, 16 Nov 2022 10:48:47 +0000 en-US hourly 1 https://wordpress.org/?v=5.9.3 https://kenttribune.com/wp-content/uploads/2021/05/icon.png Purchasing power parity theory – Kent Tribune http://kenttribune.com/ 32 32 Avoid Japan’s economic fate https://kenttribune.com/avoid-japans-economic-fate/ Wed, 16 Nov 2022 10:48:47 +0000 https://kenttribune.com/avoid-japans-economic-fate/

Kim Dong-ho

The author is a columnist for JoongAng Ilbo.

The Japanese economy is contracting decisively. No one imagined the economy would fare badly when the country lost second place to China in 2010. Its GDP per capita has fallen below that of Taiwan and almost on par with that of Korea. . According to the International Monetary Fund, Korea’s GDP per capita was estimated at $33,590 and Japan’s at $34,360 for that year.

Japan’s scorecard based on purchasing power parity (PPP) after currency conversion and eliminating price discrepancies looks even worse.

Taiwan and Korea have PPPs above $50,000, while Japan has yet to reach the threshold. In terms of wages, Korea has also gotten richer since 2015 while incomes have stagnated in Japan for the past 30 years.

In 2020, the average Korean salary reached $41,960 based on the exchange rate at the time, while the average Japanese salary was $38,515, according to data from the Organization for Economic Co-operation and Development (OECD). ).

Japan’s downfall was triggered by so-called Abenomics – economic policy under former Prime Minister Shinzo Abe – which consisted of aggressive fiscal stimulus, monetary easing and structural reforms. Abenomics brought positive results as stock prices doubled and employment approached the perfect level.

Women’s participation has increased due to government efforts to improve their employment and childcare environment. The birth rate has been on the rise since 2015.

But Tokyo’s ultra-loose monetary policy has impoverished the Japanese. The country’s policy has been influenced by the heterodox dubbed Modern Monetary Theory (MMT), which assumes that sovereign monetary countries like the United States, Britain, Japan and Canada are not restricted in spending public because they can print as much money as they need. Today, Japan is experiencing 3% inflation, above the 2% target for the first time in 40 years after decades of deflation.

House prices in Tokyo have jumped nearly 50% over the past eight years. Japan’s economy peaked from 1990 following the bursting of an explosive bubble, and it could be rocked by another collapse, albeit of a less staggering magnitude, of the government’s accommodative monetary policy over the next few years. last eight years.

The evil has mostly gone to the working class. If not for the super-rich, few people can afford to live in Tokyo now. According to the Nikkei Shimbun, the population of 23 Tokyo districts fell for the first time in 26 years to 13.27 million in January.

A citizen told the newspaper that he left Tokyo for Tochigi prefecture in the northern Kanto region for better living conditions. A citizen of Yokohama noted that living in Tokyo has become a privilege for a privileged few. He added that some residential units are also expensive in Yokohama.

The Japan of the 1960s threatened the American economy with its 100 million inhabitants belonging to the middle or upper class. But it’s on a downtrend now. The Japanese yen collapsed. The root cause can be found in slack spending that has served to prop up zombie firms instead of improving competitiveness through innovation and labor and education reforms. There is no lasting magic in economic policy. The aging of the population has also devitalized the economy.

Korea is walking the same path of destiny. All it talks about is tackling low birth rates and rapid aging, anti-corporate policies, and labor and education reforms. Half of the global unicorn companies cannot do business in Korea.

Japan is doing all it can to rebuild its once glorious chip industry. But in Korea, a bill to defend its chip supremacy is just gathering dust in the National Assembly as the Democratic Party, which holds a supermajority in the legislature, opposes it, citing “favouritism for the big enterprises”.

Korea needs to act fast if it really wants to avoid Japan’s unfortunate path.

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Middle class Sri Lankans forced to migrate due to proposed new income tax policy? – The Island https://kenttribune.com/middle-class-sri-lankans-forced-to-migrate-due-to-proposed-new-income-tax-policy-the-island/ Tue, 15 Nov 2022 04:57:39 +0000 https://kenttribune.com/middle-class-sri-lankans-forced-to-migrate-due-to-proposed-new-income-tax-policy-the-island/

by Professor Aruna Shanthaarchch
(Department of Economics and Statistics
Sabaragamuwa University of Sri Lanka)

Who is the middle class?

The term middle class has been defined in various ways. Historically, it was a social class characterized by intellectuals, who were neither capitalists nor workers. They were well-educated service providers and small entrepreneurs, who worked hard and had relatively secure and substantial incomes that enabled them to own homes, demand better services and lead comfortable lives. Despite its initial classification in social terms in recent times, economists have chosen to define the middle class using economic terms such as income or consumption to better quantify it. These definitions are based on two approaches: the relative approach and the absolute approach. Literature defining the middle class using an absolute approach, defines it as those earning a benchmark income range. For example, Bhalla (2021) defines the middle class as those earning more than US$3,658 (at 2020 prices) per year or US$10 per day in purchasing power parity terms. Kharas and Gertz (2020), adopting the absolute approach, define the middle class as households whose daily expenditure is between USD 10 and USD 100 per person per day in terms of purchasing parity.

Sri Lankan middle class

For ease of exposition, people living in households, spending $2 to $10 (not including $10), will be referred to as the “local middle class”; people living in households spending less than $2 per day per person will be called the “poor” and people spending $100 or more per person per day will be called the “rich”. The middle class made up 10% of the Sri Lankan population in 2020/21. The majority of Sri Lankans belong to the local middle class which was 75.2% in 2010 and it has drastically decreased due to the economic crisis and according to the World Bank it was 48% in 2021. There are three middle class, lower middle ($2 to $4), middle class ($4 to $6) and upper middle class ($6 to $10) categories.

Middle class and economic development

Middle-class consumers have received more attention lately due to the belief that a strong and large middle class is a prerequisite for sustained economic growth and development. Demand-led growth, as opposed to export-led growth, has also been seen as a way to pull an economy out of the middle-income trap, which is the phenomenon of an economy that stagnates at the middle-income level. The size and wealth of the middle class determines its power over the economy and governance structures. Thus, the size of the middle class has become an important indicator of the growth and development of an economy. The middle class is credited with driving growth in several ways. Primarily, the middle class drives economic growth by shifting aggregate demand. But that’s not its only channel for fostering growth. The middle class, which mainly depends on labor for its income, promotes values ​​such as savings and the accumulation of human capital which are beneficial for growth. Middle-class consumers are also known for supporting meritocratic governance systems that allow them to promote themselves and improve through hard work. More selective middle-class consumers encouraged innovation in affordable yet effective products. These products range from service goods such as insurance and banking services to manufactured goods such as hygiene products. What’s different about this new wave of innovation trends is that it caters to a more discerning set of consumers who are harder to please.

The literature shows that the expansion of the global middle class will pave the way for new businesses. For example, unlike the local middle class, the global middle class spends money on traveling abroad and on new technologies. The global middle-class demand for private medical and professional institutions, as well as private educational institutions, is also higher. There are signs that this is already happening in Sri Lanka. However, alongside these positive aspects, a growing global middle class may also put pressure on the existing social infrastructure. This will partly be explained by the growing taste for better and more convenient services. Literature shows that the demand for electricity, water, roads and other infrastructure is higher among global middle class consumers. Already, there are signs that improving living standards in Sri Lanka are putting pressure on the country’s physical infrastructure and natural resources. The demand for electricity and energy in the country has increased over the past decades. Electricity demand grew at a much higher rate than expected. To avoid constraints to economic development, the country will need to carefully study the growing trends in infrastructure demand and plan well in advance to meet that demand in the most efficient way.

Tax revenue in Sri Lanka

The tax ratio is generally considered a kind of “symbol of national virility”. It indicates the proportion or share of national income transferred to the public sector to meet budgetary needs in order to accelerate the pace of economic development without causing inflation. (Zuhair, 1985). In high-income countries the ratio is around 42%, middle-income countries around 25-29% and developing countries around 20%. Sri Lanka’s performance compares poorly to that of countries such as Vietnam (21.1%), Thailand (22.6%) and Malaysia (22.2%), but it is better than that of its eastern neighbors. South Asia, such as Bangladesh (7.6%). The irony of the situation is that while overall GDP as well as per capita income in Sri Lanka has steadily increased over the years, total revenue and state tax revenue have steadily declined. Table 01 shows the relationship between GDP growth and per capita income and government revenue. It can be seen that total government revenue as a percentage of GDP has steadily declined from 21.1% in 1990 to 16.8% in 2000, 12.7% in 2010 and 11.4% in 2014. The tax revenue ratio decreased from 19.0% in 1990 to 14.5% in 2000, 11.3% in 2010 and 10.1% in 2014 and 7.7% in 2021.

New tax policy

A person who earns more than Rs 100,000 will have to pay taxes, depending on the additional amount he earns. This means that the annual non-threshold income is Rs 1,200,000. This threshold was previously Rs 3,000,000 and has now been reduced by 60%. Tax brackets of 3,000,000 after non-threshold income are now reduced by more than 83% to 500,000 rupees. For every 500,000 taxes, there is an additional 6% tax. If a person earns three million rupees annually, which was tax exempt before, the first 500,000 rupees after the tax exemption threshold of 1,200,000 rupees, he will be charged 6%, the next 500,000 at 12%, the next 500,000 at 18% and the remaining 300,000 at 24%. However, according to the new tax policy, monthly income tax from Rs 100,000 and income tax of 6% for monthly income from 100,000 to 141,667 and for each additional slot of Rs 41,667 , the tax improvement is 6% until the tax rate is 36%. The person whose gross income exceeds Rs, 308,335, should pay a tax rate of 36%. The proposed tax shown in Table 01, based on gross income.

Jable 01: Gross income and tax payment

Are they forced to migrate because of the proposed new income tax policy?

The proposed income tax policy would significantly harm the purchasing power of local and global middle class families in the country. The sharp increase in personal income tax rates would discourage employment, negatively affect the lives of middle-class families and, above all, in an environment of high inflation, could increase the brain drain. Wage earners are disproportionately affected as they are taxed at source with a sharp drop in disposable income which could also create a personal debt service problem. Middle class incomes will be limited to consumption and all other investments will be controlled. Since the income of the middle class is greatly reduced with the new tax, the natural income flow from the middle class to the poor income category will be limited. This will be a negative effect in the medium and long term for the country. A flat personal tax rate would have been fairer; it would not have discouraged revenue growth.

The new tax rates will reduce people’s disposable income, which will be a huge burden on those who actually pay taxes. Many professionals who wish to stay in Sri Lanka and contribute to the economy will leave the country. Sri Lanka has already seen many professionals leave the country due to the unprecedented economic crisis. This should be viewed in the context of semi-literate politicians dictating terms to educated people.

As the prices of fuel, cooking gas, electricity and water rose alongside a more than 50% depreciation of the rupee, many professionals adjusted their consumption to reflect the drop in disposable income. These new tax increases without taking into account current inflation and the cost of living will be the final nail in the coffin of the careers of local professionals. They will try to migrate at all costs.

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[TOP STORY] Explore currencies as a store of value https://kenttribune.com/top-story-explore-currencies-as-a-store-of-value/ Mon, 31 Oct 2022 09:46:59 +0000 https://kenttribune.com/top-story-explore-currencies-as-a-store-of-value/

SIMON BROWN: I have Jacques Plaut on the line; it comes from Allan Gray. We’re talking about currencies and store of value, and I actually just pulled up the US dollar chart [Index] – DXY is the name. It’s the dollar index, so it’s several currencies against the dollar – mostly emerging markets. And while it was absolutely running – and September was trading at almost 115 points, putting it at a 20-year high – I’m telling you, it looks a bit bearish. We have lower highs and lower lows. So we’ll see how it goes. We’ll keep an eye on it. It is a painting that I like to look at.

Jacques, I appreciate your time today to talk about currencies being a good store of value. Maybe I’m lazy, or maybe I’m old school. Generally, when I take Zar (rand) abroad, I just go to US dollars. Is there maybe more thought I should put into this process?

JACQUES PLAUT: Hello Simon. It’s been absolutely the right decision for a few years now. The dollar has been super strong. It outperformed all other currencies. But things can change very quickly. I think investors are changing their minds. They are quite fickle, and if something were to shake their faith in the dollar, I think they could switch to another currency very quickly. There is a bit of a journey…currencies have a kind of fair value, just like stocks.

And at the moment, the valuation of the dollar seems a bit stretched to us.

SIMON BROWN: Obviously, we are talking about majors. Nobody rushes to the Brazilian real, I imagine. But is it really between the dollar, the euro, the pound, maybe the yen or the Swiss franc?

JACQUES PLAUT: I think there are times when you want to opt for certain emerging market currencies. Maybe you don’t want to put everything in Brazil, but sometimes it’s cheap currencies. Another one you left off your list is gold, which just might be an option right now.

There is no currency in the world that gives you an interest rate higher than inflation. Maybe I’m exaggerating a bit.

None of these big [currencies] give you interest rates above the rate of inflation, while [with] or at least you somehow stay even over long periods of time. You must maintain your purchasing power.

SIMON BROWN: i see what you are [saying]. You think [through] this very tactically. As I said just before our chat, I just withdraw money and just do it – I do it in USD. You say, wait a second. I’m looking at the dollar index, the DXY chart and like you said the 20yr highs are unlikely to hold at this point. So you start scratching and looking for that real possible return. In some cases, he may even stay in Zar.

JACQUES PLAUT: The rand does not look too bad. We kind of try to call the rand when it’s at an extreme level – extremely strong or extremely weak. At this point, it’s not extreme but, as you said, the dollar is extreme. If you look, [as] I mentioned before, the interest rate relative to inflation, in South Africa, yes, the CPI is 7.5%. You only get an interest rate of 6.25% from the Reserve Bank. But in the UK, the CPI is 10% and the Bank of England rate is only 2.25%. So it’s not that bad for the rand.

And things are cheap in South Africa. A Big Mac, for example, costs $5 in the US and only $2.20 here. We won’t export Big Macs, will we? It is not a tangible good. But in theory, tourists should come here and buy their Big Macs, and we should have a competitive advantage when it comes to exporting.

SIMON BROWN: Yeah. I looked into this fungible Big Mac idea, but it doesn’t work. Nevertheless, they seem not to decompose. Is the euro the one that might even be on the radar? Because again, it goes back to what you’re sort of saying: the eurozone is experiencing the energy crisis. [The euro] reach parity with the dollar. Again, if we start to see the dollar come back a bit, the euro might be a good place to be.

JACQUES PLAUT: For sure. It’s definitely on the options list, and our strategy is to kind of have a basket of currencies at the moment. But the problem with the euro is that the ECB [European Central Bank] does little to fight inflation. They can’t, because Italy is in huge trouble if it starts raising rates. They will find it difficult to repay their debt. So they’re a little off in that regard.

SIMON BROWN: So where is he? I do a monthly cash relocation. Like I said, it’s always in the dollar. If you were me, what is the motto that interests you the most, at this precise moment?

JACQUES PLAUT: The one I would look more closely at is the Norwegian krone as they have benefited from rising energy prices and it hasn’t been as strong as the dollar and Swiss franc compared to others.

SIMON BROWN: OK. The Norwegian krone. There is one that has never been on my list. Allan Gray’s Jacques Plaut, making us all a little smarter and taking us on a journey through the currencies of the world, [to] the Norwegian krone, I appreciate the early morning insight.

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India has made bold strides in its competition law – Here’s how to improve it further https://kenttribune.com/india-has-made-bold-strides-in-its-competition-law-heres-how-to-improve-it-further/ Thu, 27 Oct 2022 19:22:00 +0000 https://kenttribune.com/india-has-made-bold-strides-in-its-competition-law-heres-how-to-improve-it-further/

During the first week of November 2022, as reported by The Hindu Times, the United States and India will host the United States-India Trade Policy Forum (TPF) in Washington, D.C.

India, according to a recent report by the Congressional Research Service, is the 11th largest bilateral trading partner of the United States. But, with an economy that ranks third in the world in terms of purchasing power parity, the potential for increased trade growth between the United States and India is monumental.

One area likely to be discussed at the upcoming Trade Policy Forum is the potential for growth in trade in digital goods and services between the United States and India. However, recent changes to competition law in India may complicate these discussions.

What’s new

In August 2022, the Lok Sabha, the Parliament of India, passed legislation to amend the Competition Act 2002. This legislation, the Competition (Amendment) Bill, 2022, represents a blend of positive amendments from the merger and acquisition process associated with disturbing elements. of a European-style industrial policy.

Welcome to changes

The bill would reduce the time for the Competition Commission of India to review large transactions, defined as having a value above Rs 2,000 crore, from 210 days to 150 days. The bill also decriminalizes certain offences, including failure to comply with Competition Commission orders, by changing the nature of the penalty from imposing fines to civil penalties. Finally, the bill provides a resolution and engagement framework for faster resolution of anticompetitive agreements and abuse of dominance investigations.

Areas of concern

On the other hand, the bill dramatically increases the Competition Commission’s discretion to review transactions and contracts that most economists would consider pro-competitive. For example, the bill allows the Competition Commission to declare certain agreements anti-competitive even if they are agreements between companies in different industries.

Similarly, the bill defines anti-competitive combinations to include the “merger” of companies based on the size of the companies and the transaction, apparently regardless of whether these companies operate in the same markets. Therefore, these provisions could prohibit pro-competitive vertical agreements or investments in new business lines.

The bill also raises troubling procedural issues. For example, the bill gives the government the power to request information from legal advisers, which creates tensions with attorney-client confidentiality.

Finally, the bill expands the concept of “abuse of dominance”, a European-style theory of competition that does not benefit consumers, has been used for protectionist purposes and often stifles innovation and investment in domestic industries (compare the growth of the US technology sector with that of Europe). In particular, the bill defines abusive behavior as including: (i) discriminatory conditions in the purchase or sale of goods or services, (ii) restriction of the production of goods or services, or (iii ) the practice of practices leading to a refusal of access to the market. Evidence suggests that each of these activities can promote competition and lead to greater investment in goods and services. The bill also does not specify that companies can use intellectual property rights as a defense in cases alleging abuse of dominance.

At the end of the line

Given the huge potential for growth, U.S. and Indian policymakers should strive to expand a healthy dialogue on trade in digital goods and services between our two nations. On both sides of the Pacific, ensuring that competition policy benefits consumers rather than stifling innovation should be of paramount importance.

About the authors

Sean Heather

Senior Vice President, International Regulatory Affairs and Antitrust, U.S. Chamber of Commerce

Sean Heather is senior vice president of international regulatory and antitrust affairs.

Read more

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Has India eliminated extreme poverty? https://kenttribune.com/has-india-eliminated-extreme-poverty/ Tue, 11 Oct 2022 05:20:15 +0000 https://kenttribune.com/has-india-eliminated-extreme-poverty/

In the second post of a six-part series on estimating poverty in India, Gaurav Datt unveils the claim that India was on the verge of eradicating extreme poverty and challenges two key assumptions on which it is based. Rather, it shows that the survey catch rate has declined, while top income shares have increased over the past decade. Finally, it presents some alternative estimates, which call into question the elimination of extreme poverty.

The World Bank uses the standard of $1.90 per person per day (in US dollars at 2011 purchasing power parity) to monitor levels of extreme poverty around the world. According to this standard, 22% of the Indian population was considered to live in extreme poverty in 2011-2012. Although a decade has passed, more recent estimates of poverty in India remain embroiled in controversy. The reason for this is the lack of comparable data from the National Sample Survey (NSS) Consumer Expenditure Surveys (CES), which have been the mainstay of poverty measurement in India for decades. (Datt et al. 2020).

The last publicly available round of the NSS consumer survey was for the year 2011-12. Another round of the survey was conducted for the year 2017-18, but neither the results nor the data from this survey have been released, with the government citing “data quality issuesas the reason for its deletion. But leaked tabulations of the investigation – which indicated a stagnation of national poverty and an increase in rural poverty since 2011-12 – led many observers to question whether the decision (taken months before the 2019 general election) was politically motivated.

However, the lack of data has led to a number of attempts to estimate poverty levels after 2012 in India using various imputation methods and/or alternative data sources.1 Most of them point to a decline in poverty since 2012, but at a slower pace than observed for the previous decade, which seems consistent with India’s slower growth especially since 2016-17.

An exception to this rule is the IMF’s recent working paper Bhalla, Bhasin and Virmani (hereafter BBV), which declared the virtual elimination of extreme poverty in India. To put it in their own words: “According to this standard [the World Bank’s $1.90 poverty line]India can reasonably say that before the pandemic [sic] India was on the verge of eradicating extreme poverty”.

There are also other claims in the document regarding the decline in inequality and the negligible impact of the pandemic on poverty, but I focus on the claim of the virtual elimination of extreme poverty before the pandemic. Does it stand up to reasonable scrutiny? To answer this question, we need to unpack the claim.

How precise are the poverty estimates?

BBV presents two series of poverty estimates: with or without taking into account food transfers through the Public Distribution System (PDS). Without food transfers, they claim that poverty fell from 21.8% in 2011-12 (not much different from the aforementioned estimate of 22%) to 3.4% in 2019-20; with food transfers, the estimated reduction in poverty is from 19.9% ​​to 1.9%. Thus, it suffices that the claim of virtual elimination of extreme poverty be based on estimated progress even without food transfers; the evaluation of the subsidy component of food transfers is just icing on the cake. So, let’s focus on the predicted drop in poverty from 22% in 2011-12 to 3% in 2019-20.

BBV’s methodology for arriving at these numbers is relatively simple.

  1. Start with the consumption distribution from the latest NSS consumption survey for 2011-12.
  2. Suppose that average consumption per capita in nominal terms has increased at the same rate as private final consumption expenditure (PFCE) per capita in the national accounts (NA).
  3. Suppose that each household’s per capita consumption grew at the same rate as the average per capita consumption, to arrive at the “updated” distribution for each subsequent year after 2011-12 (which, except for the average, is the same as the 2011-12 breakdown).
  4. Estimate the poverty measures for each subsequent year using the “updated” distribution from stage three and the 2011-12 poverty line updated by the Consumer Price Index (CPI).

Thus, BBV effectively assumes distribution-neutral growth since 2011-12 at a rate given by NA growth in private consumption per capita.2 BBV defends its first hypothesis by arguing that “investigative capture [the ratio of survey-to-NA consumption] in India “normalized” to around 50% in 2004-5, 2007-8 (a small sample NSS survey), 2009-10 and 2011-12 according to the URP [Uniform Recall Period] method”. The problem is that there is no evidence for this.

Figure 1 shows the survey catch rate (also called the “transmission” rate) over almost sixty years based on the work of Datt et al. (2020). It has been falling rapidly since the mid-1980s, with no sign of stability either since 2004-05. Even using the new revised national accounts retrospective series, the survey catch rate was 48, 45 and 46% for the years 2004-05, 2009-10 and 2011-12 respectively. This is hardly the evidence on which to hang the ratio’s projected constancy for the next decade, especially in light of its secular decline over the previous four decades.

Figure 1. Decreasing ratio of per capita consumption between survey and NA (nominal)

Source: Based on data from Datt et al. (2020).

Notes: i) The graph shows the ratio of the nominal values ​​of consumption per capita from the NSS surveys to that of the national accounts (NA). ii) To mesh the survey and NA data, the latter (available on an annual basis) are interpolated linearly at the midpoint of the survey period for each round of the NSS. iii) Per capita consumption survey estimates refer to those based on the uniform recall period. iv) New series (NS) refers to the revised retrospective series of NA after the base was shifted to 2011-12.

The decline in the survey catch rate is closely related to the violation of BBV’s second assumption. The capture rate of surveys has declined to a large extent precisely because surveys fail to capture the upper end of the income distribution, while the highest income shares have increased rapidly. Estimates by Chancel and Piketty (2019) indicate that missing top earners account for a large and growing share of the middle earner gap in the NA and surveys, which was around 45% in 2014-15 (Figure 2 ).

Figure 2. Missing top incomes as a proportion of the NA survey income gap (left panel) and increasing income inequality (right panel)

Source: Chancel and Piketty (2019)

The two hypotheses are therefore poorly justified.

Drop those assumptions and the whole house of cards built by BBV comes crashing down. Alternative estimates that relax the first assumption and use a survey capture ratio of 0.67 put the extreme poverty rate for FY 2017-18 at around 10%. Other estimates that use alternative (re-weighted) consumer pyramid household surveys (CPHS) data since 2014, and survey-to-survey imputation methods3 to derive consumption levels comparable to NSS surveys, also arrive at a similar estimate of extreme poverty of around 10% for 2019-20 (Roy and van der Weide 2022). These alternative estimates are not perfect, but they cast significant doubts on the claim of the eradication of extreme poverty in India.

Conclusion

As early as 1988, BS Minhas warned against pro rata adjustment (or proportional) to the distribution of consumption based on the survey in the documents of the seventh five-year plan:

“…it is dangerous to make a pro rata adjustment to the observed size distribution of consumer spending in a particular NSS cycle by multiplying it by a scalar derived from the ratio of the NAS [National Accounts Statistics] estimate of aggregate private consumption (for a given financial year) and total household expenditure available from the NSS cycle. This kind of senseless tinkering with the distribution of the NSS, as practiced by the Planning Commission in the Seventh Plan documents, does not seem permissible either in theory or in the light of known facts.

Minhas was referring to a pro rata adjustment of levels. BBV estimates are a pro rata adjustment using growth rates (i.e. multiplying the base distribution of the NSS by a growth scalar given by the growth in per capita consumption from the NAS) , which is also dangerous when applied over a period of ten years. It is unfortunate that the shortcomings of the Indian statistical system and the lack of comparable data have created an environment in which such tinkering has continued more than three decades later.

Remarks:

  1. See, for example, Newhouse and Vyas (2019), Edochie et al. (2022) and Roy and van der Weide (2022).
  2. BBV also presents a version assuming neutrality of distribution at the state level. They also have another version of their estimates using the NSS’s Modified Mixed Recall Period (MMRP) consumption measures.
  3. These methods involve the imputation of consumption in a target survey without a comparable measurement of consumption in the source survey. This is done either by using an estimable relationship between consumption and a set of common household characteristics in the two surveys, or by estimating a relationship between the measurement of consumption in the two surveys.

Further reading

  • Bhalla S, K Bhasin and A Virmani (2022), ‘Pandemic, poverty and inequality: evidence from India‘, International Monetary Fund, IMF Working Paper No. 2022/069.
  • Chancel, Lucas and Thomas Piketty (2019), “Indian Income Inequality, 1922-2015: From British Raj to Billionaire Raj?”, The income and wealth test65(S1): S33-S62.
  • Datt, Gaurav, Martin Ravallion and Rinku Murgai (2020), “Poverty and Growth in India over Six Decades”, American Journal of Agricultural Economics, 102(1): 4-27. Available here.
  • Edochie, Ifeanyi Nzegwu, Freije-Rodriguez, Samuel, Lakner, Christoph, Herrera, Laura Moreno, Newhouse, David, Roy, Sutirtha Sinha and Yonzan, Nishant (2022). What do we know about poverty in India in 2017/18? World Bank Policy Research Working Paper 9931.
  • Minhas, BS (1988), “Validation of the large-scale sample survey data case of NSS estimates of household consumption expenditure”, Sankhyā: The Indian Journal of Statistics, Series B (1960-2002)50(3): 279-326.
  • Newhouse, David Locke and Vyas, Pallavi (2019). Estimating poverty in India without expenditure data: a survey-to-survey imputation approach. World Bank Policy Research Working Paper 8878.
  • Roy, SS and R van der Weide (2022), ‘Poverty in India has declined over the past decade, but not as much as previously thought‘, World Bank, Policy Research Working Paper 9994.
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The US inflation windfall for sovereign debtors https://kenttribune.com/the-us-inflation-windfall-for-sovereign-debtors/ Fri, 07 Oct 2022 21:18:00 +0000 https://kenttribune.com/the-us-inflation-windfall-for-sovereign-debtors/

By Gautam Nair and Federico Sturzenegger/Cambridge

As developing countries face a new era of high inflation, rising interest rates, a stronger dollar and capital outflows, some governments stand to benefit from a little-noticed windfall. During the “Great Moderation” that preceded the Covid-19 pandemic, years of low inflation led to the growth of sovereign debt issued at fixed interest rates and long maturities. However, two years of unexpected inflation in the United States have effectively diluted this debt.
By our calculations, the US government’s inflation windfall is substantial. In October 2019, the International Monetary Fund’s World Economic Outlook projected US inflation to be 2.4% in 2021 and 2.3% in 2022. But US inflation hit 4.7% in 2021, and the IMF now expects a rate of 7.7% this year. . The size of what we call the “unexpected inflation shock” over 2021-22 is therefore 7.7% (the sum of actual inflation rates minus projected rates). Under these conditions, the big winner will be the largest issuer of dollar debt: Uncle Sam.
At the end of 2020, long-term fixed-rate US government debt stood at nearly $21 trillion, and the US monetary base (which includes the amount of currency in circulation) was approximately $5.2 trillion. While the bulk of 2021-22 inflation (12.4%) falls back on the monetary base, its unexpected component (7.7%) reduces the value of US government debt, as debt holders are compensated with interest for anticipated inflation. The US Treasury thus registers a huge reduction of $2 trillion – almost 11% of GDP – in the real value of its $26 trillion in inflation-exposed liabilities. Offsetting the US Federal Reserve’s holdings of long-term Treasuries brings the figure down to 9% of GDP.
According to conventional wisdom, it is mainly developing countries that resort to inflating their debts. But the current period of high inflation in the United States reminds us that developed countries have also often resorted to unconventional strategies such as the “inflation tax” to deal with their debts.
Long-term U.S. Treasury securities totaling about $6.6 billion are held by foreign entities such as central banks and pension funds, and the Fed estimates that nearly $1 billion of dollar cash is also held by non-residents. By diminishing the real value of these holdings, high US inflation has essentially shifted $568 billion from non-residents to the US government, meaning that about a quarter of US inflation tax over the past two years has been paid abroad.
Two of the biggest holders of long-term US Treasuries are Japan ($1.2 billion) and China ($862 billion), which together paid nearly a third of the gains in the United States. Apart from China and large cash holders like Argentina (which loses an amount equal to 3% of GDP, due to the reduced value of dollar cash held by residents), most of the largest taxpayers in abroad are developed economies.
But America is not the only winner. Many emerging markets are also benefiting, as a significant portion of their debt is issued in dollars. Since foreign investors have been unwilling to bear the risk of governments trying to dilute the real value of their bonds by printing money and triggering inflation, many governments have tied their hands by issuing dollar-denominated debt.
Bondholders were thus able to ensure that the inflation of the national currency would not negatively affect the value of their holdings – or so they thought. The relative purchasing power parity theory tells us that the nominal GDP of all countries, when measured in US dollars, will eventually grow at the rate of US inflation. High inflation in the United States therefore means that the real burden of dollar-denominated debt will decline, yielding a substantial gain to other sovereigns.
Excluding the United States, the total stock of long-term dollar-denominated fixed-rate debt in 2021 was $1.3 billion, according to the Bank for International Settlements. So, to get a conservative estimate of the size of the gain for non-US governments (conservative because US inflation could beat forecasts or persist beyond this year), we can apply 7.7% unexpected inflation to $1.3 billion, which implies savings of about $100 billion. Due to the dilution of their debt, Turkey, Indonesia, Mexico, Saudi Arabia and Brazil each receive a one-time transfer that exceeds $4 billion, at the expense of their creditors. Other big winners (in relative terms) include developing countries like Lebanon, Venezuela, Jamaica and Mongolia, whose governments also benefit from 2% of GDP or more.
Certainly, these astronomical sums will cause creditors to demand higher interest rates on new debt issues. But higher interest rates do not affect the plummeting real value of the existing stock of long-term debt. For some countries, the effect of this transfer may also take time to be felt, as the dollar has recently strengthened against other currencies. But the recent inflation shock in the United States is a monetary shock, implying that nominal exchange rates will ultimately move with the inflation differential between countries (in line with relative purchasing power parity theory ). Once they do, the GDP of other countries, when measured in dollars, will also rise at the rate of US inflation, ensuring that the real burden of sovereign debt declines.
Commentary on the perils facing developing countries tends to focus on the risks posed by rising interest rates and depreciating currencies. For governments, however, US inflation also comes with a silver lining: bondholders pay the price while inflation eats away at a massive stockpile of sovereign debt. – Project union

Gautam Nair is Assistant Professor of Public Policy at Harvard University’s John F. Kennedy School of Government. Federico Sturzenegger, former president of the Central Bank of Argentina, is professor of economics at the University of San Andrés and assistant professor of public policy at the John F. Kennedy School of Government at Harvard University.

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America’s Inflation Windfall for Sovereign Debtors by Gautam Nair and Federico Sturzenegger https://kenttribune.com/americas-inflation-windfall-for-sovereign-debtors-by-gautam-nair-and-federico-sturzenegger/ Thu, 29 Sep 2022 15:50:00 +0000 https://kenttribune.com/americas-inflation-windfall-for-sovereign-debtors-by-gautam-nair-and-federico-sturzenegger/

During the “Great Moderation” that preceded the COVID-19 pandemic, years of low inflation led to the growth of sovereign debt issued at fixed interest rates and long maturities. And now two years of unexpected inflation in the United States has effectively diluted those bonds, in America and elsewhere.

CAMBRIDGE – As developing countries face a new era of high inflation, rising interest rates, a stronger dollar and capital outflows, some governments stand to benefit from a little-noticed windfall. During the “Great Moderation” that preceded the COVID-19 pandemic, years of low inflation led to the growth of sovereign debt issued at fixed interest rates and long maturities. However, two years of unexpected inflation in the United States have effectively diluted this debt.

By our calculations, the US government’s inflationary windfall is substantial. In October 2019, the International Monetary Fund’s World Economic Outlook projected US inflation to be 2.4% in 2021 and 2.3% in 2022. But US inflation hit 4.7% in 2021, and the IMF now expects a rate of 7.7% this year. . The size of what we call the “unexpected inflation shock” over 2021-22 is therefore 7.7% (the sum of actual inflation rates minus projected rates). Under these conditions, the biggest winner will be the biggest issuer of dollar debt: Uncle Sam.

At the end of 2020, long-term fixed-rate US government debt stood at nearly $21 trillion, and the US monetary base (which includes the amount of currency in circulation) was approximately $5.2 trillion. While most of the 2021-22 inflation (12.4%) falls on the monetary base, its unexpected component (7.7%) reduces the value of US government debt, as debt holders are compensated with interest for expected inflation. The US Treasury thus records a huge reduction of $2 trillion – nearly 11% of GDP – in the real value of its $26 trillion in inflation-exposed liabilities. Offsetting the US Federal Reserve’s holdings of long-term Treasuries brings the figure down to 9% of GDP.

According to conventional wisdom, it is mainly developing countries that resort to inflating their debts. But the current period of high inflation in the United States reminds us that developed countries have also often resorted to unconventional strategies such as the “inflation tax” to deal with their debts.

Long-term US Treasury securities totaling about $6.6 trillion are held by foreign entities such as central banks and pension funds, and the Fed estimates that nearly $1 trillion in dollars is also held by non-residents. By diminishing the real value of these holdings, high US inflation has essentially shifted $568 billion from non-residents to the US government, meaning that about a quarter of US inflation tax over the past two years has been paid abroad.

Two of the biggest holders of long-term US Treasuries are Japan ($1.2 trillion) and China ($862 billion), which together paid nearly a third of the gains in the United States. Apart from China and large cash holders like Argentina (which loses an amount equal to 3% of GDP, due to the reduced value of dollar cash held by residents), most of the largest taxpayers in abroad are developed economies.

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But America is not the only winner. Many emerging markets are also benefiting, as a significant portion of their debt is issued in dollars. Since foreign investors have been unwilling to bear the risk of governments trying to dilute the real value of their bonds by printing money and triggering inflation, many governments have tied their hands by issuing dollar-denominated debt.

Bondholders were thus able to ensure that the inflation of the national currency would not negatively affect the value of their holdings – or so they thought. The relative purchasing power parity theory tells us that the nominal GDP of all countries, when measured in US dollars, will eventually grow at the rate of US inflation. High inflation in the United States therefore means that the real burden of dollar-denominated debt will decline, yielding a substantial gain to other sovereigns.

Excluding the United States, the total stock of long-term dollar-denominated fixed-rate debt in 2021 was $1.3 trillion, according to the Bank for International Settlements. So, to get a conservative estimate of the size of the gain for non-US governments (conservative because US inflation could beat forecasts or persist beyond this year), we can apply 7.7% unexpected inflation to $1.3 trillion, which implies savings of about $100 billion. Due to the dilution of their debt, Turkey, Indonesia, Mexico, Saudi Arabia and Brazil each receive a one-time transfer that exceeds $4 billion, at the expense of their creditors. Other big winners (in relative terms) include developing countries like Lebanon, Venezuela, Jamaica and Mongolia, whose governments also benefit from 2% of GDP or more.

Certainly, these astronomical sums will cause creditors to demand higher interest rates on new debt issues. But higher interest rates do not affect the plummeting real value of the existing stock of long-term debt. For some countries, the effect of this transfer may also take time to be felt, as the dollar has recently strengthened against other currencies. But the recent inflation shock in the United States is a monetary shock, implying that nominal exchange rates will ultimately move with the inflation differential between countries (in line with relative purchasing power parity theory ). Once they do, the GDP of other countries, when measured in dollars, will also rise at the rate of US inflation, ensuring that the real burden of sovereign debt declines.

Commentary on the perils facing developing countries tends to focus on the risks posed by rising interest rates and depreciating currencies. For governments, however, US inflation also comes with a silver lining: bondholders pay the price while inflation eats away at a massive stockpile of sovereign debt.

]]>
Bitcoin and British Pound Trading Volume Soars 1,150% as UK Currency Risks Dollar Parity https://kenttribune.com/bitcoin-and-british-pound-trading-volume-soars-1150-as-uk-currency-risks-dollar-parity/ Tue, 27 Sep 2022 14:10:00 +0000 https://kenttribune.com/bitcoin-and-british-pound-trading-volume-soars-1150-as-uk-currency-risks-dollar-parity/

Bitcoin (BTC) will see increased interest from the UK “very quickly” as fiat currency volatility makes BTC look like a stablecoin.

That’s the conclusion of Gabor Gurbacs, strategy advisor to investment giant VanEck, who was one of many report Bitcoin’s call on the pound this week.

UK Becomes Fertile Ground for Bitcoin’s ‘Orange Pill’

While the US dollar is unleashed, its strength has come at the expense of trading partner currencies, including the euro, pound and Japanese yen.

The pound’s disintegration accelerated this week as GBP/USD hit an all-time low near $1.03.

While the UK’s central bank, the Bank of England, has so far avoided intervention, nervousness is showing as purchasing power is hit doubly hard by the weak currency and inflation at its peak. highest level in 4 years.

“The UK will turn orange very quickly given the volatility of the pound,” Gurbacs predicted.

“Given that the UK is now outside the bureaucratic machinery of the EU, it will have another chance to become a Bitcoin hub. I think UK leaders will use this opportunity reasonably well.

The pound is down almost 25% since the start of the year at one point in dollar terms. While data from Cointelegraph Markets Pro and TradingView shows Bitcoin beating it 56%, the longer the time horizon, the more attractive a BTC hedge becomes.

“Over the past four years, the dollar has crashed -67% in USD gains,” said Michael Saylor, executive chairman and former CEO of MicroStrategy, Noted in its own assessment of fiat currency losses on September 26.

BTC/USD chart against GBP/USD. Source: Trading View

According According to data from CoinShares Head of Research James Butterfill, trading volume for the GBP/BTC pair on the Bitstamp and Bitfinex exchanges, worth a combined $70 million per day, reached $881 million. on September 26, an increase of more than 1,150%.

Butterfill argued that this showed that “when a FIAT currency is threatened, investors start to favor Bitcoin.”

ReactSaifedean Ammous, author of the popular book The Bitcoin Standardcalled the phenomenon “fascinating”.

GBP/USD trading volume on Bitstamp, Bitfinex chart. Source: James Butterfill/Twitter

G20 “begins to understand” the need for BTC hedging

Gurbacs, meanwhile, acknowledged that while he “might be too optimistic about the UK,” G20 countries could still enact a major policy shift towards accepting BTC.

Related: Bitcoin Gains 5% to Reclaim $20,000, September’s First “Green” Eyes Since 2016

“Like gold, Bitcoin could be a hedge against their own policies. Which is worth a small percentage of allocation and support,” he continued.

“Some are starting to understand that.”

Looking beyond the pound, the data shows that major fiat currencies are suffering more from the surge in the greenback than those in emerging markets (EM).

“The tables have turned,” said Robin Brooks, chief economist at the Institute of International Finance, declared this week.

“Since the beginning of the year, emerging markets such as Brazil and Mexico have outperformed G10 currencies against the dollar. This is a major pivot in global markets that is unprecedented. Monetary policy in emerging markets today is more orthodox than in advanced economies. Well done EM…”

An accompanying chart from Bloomberg showed the Brazilian real and Mexican peso even gaining against the dollar in 2022.

The pound brought up the rear with the yen, while the Russian ruble was notoriously absent, having reached its highest in dollar terms since 2015.

Yield of the Fiat currency against the US dollar as of September 26. Source: Robin Brooks/Twitter

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.