A fistful of intellectual power: Goodbye Edward Hugh, R.I.P

Tonight I got the very sad news that British-Catalan economist Edward Hugh has passed away.

This is from Ara in English:

ARA has learned that British economist Edward Hugh (Liverpool, 1948) died of cancer on Tuesday at the Josep Trueta Hospital in Girona. Hugh moved to Catalonia in the 1990s and was considered by The New York Times as the “prophet of eurozone doom”, as he was one of the first to predict and warn of the economic crisis.

Edward Hugh was born in Liverpool and studied Economics at the London School of Economics. He was currently living in the village of Escaules, in Catalonia’s Alt Empordà, where he dedicated himself to research and to macroeconomics. He also wrote a blog about current events and was a contributor to this newspaper. In 2014 he wrote ¿Adiós a la crisis? (Farewell to the crisis?). In his book the British economist addressed issues such as the demographic crisis and its economic implications, as well as the possible road towards sustainable negative growth and the stagnation of the European economy. Hugh also was one of the first economists to predict that Catalonia’s finances would be intervened by Madrid.

Hugh, who turned 67 on Tuesday, was diagnosed with the disease a few months ago, and was aware that his prognosis was not good. While he enjoyed little recognition in Catalonia, he had a great influence on investors and on the principal economic media around the globe. He was noted for having predicted the Euro crisis and the real estate bubble in Spain, which earned him significant prestige and influence. He used this influence to explain Catalonia —and especially Catalonia’s fiscal deficit— to the world, according to ARA’s CEO, Salvador Garcia-Ruiz.

NY Times correspondent Rafael Minder highlighted Hugh’s outgoing personality and, at the same time, his willingness to share his time. Minder recalls Hugh’s ability to see and live the crisis from the front row, but without losing perspective, as well as the importance that the Spanish crisis would have for European construction. The journalist added that, in contrast to the usual image of economists as closed and academic, Hugh “was someone who enthusiastically shared his ideas and tried to win over all types of people”.

Edward Hugh, who spoke English, Catalan, Spanish, and French, decided that he could reflect and write from the small village of Escaules in the Alt Empordà, which he called “little Tuscany”, after years of study and of accumulating experiences throughout his life. 

The economist, born in Liverpool to a Welsh family, never hid the fact that he had wanted to live in a monastery, and this small Empordà hamlet of 60 inhabitants came rather close to this idea of having a place to reflect, read, and write. Satellite television and the internet allowed him to remain connected to the world, while Escaules gave him the peace he needed to work…

…Hugh, who claimed to be one of the top experts on the Spanish economy and assured that he had been correct with more than 80% of his predictions, supported Catalonia’s secession from Spain. “Catalonia could have a future, if it leaves”, he said. This position was based not only on his economic studies, but also on his thoughts, feelings, and actions. “He was a Catalan patriot”, said Salvador Garcia-Ruiz, who also underscored the work Hugh did in explaining Catalonia and its situation to the world: “He did a lot of work, some which can be seen and also of the kind you cannot see”.

I fully agree with this description of Edward Hugh. He was a very kind man who always came across as completely unideological and he was willing to talk to everybody – including to me. We only meet face to face a couple of time but kept in contact over the years.

It was not a close contact, but he would also be kind to respond to mails and he was eager to share his views.

I had the greatest respect for Edward. He was a real free-thinker. A very kind and clever man and a much under-appreciated economist. That being said I also know the deep respect he had particularly among people in the financial markets – including myself.

I often disagreed with Edward – particularly after 2008 – but he was always very nice to me. It says a lot about him that intellectual disagreement never changed the way he interacted with people.

Prior to the crisis we had many of the same worries about the global economy and particularly about Central and Eastern Europe and Southern Europe and I always felt very proud when he quoted my research on his great blog – A Firstful of Euros

Edward’s latest book Is The Euro Crisis Really Over was published in 2014. It is certainly not a monetarist tract and Edward was a lot more skeptical about how potent monetary policy is than I am, but I would still highly recommend the book that focuses on a lot of the major structural problems that faces the European economy also if we get monetary policy right.

Edward, you will be dearly missed. R.I.P.

 

 

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Do economists know what will happen in 2016?

For the last couple of months I have been writing a weekly column for the Icelandic newspaper Fréttablaðið. I enjoy it a lot. First of all it keeps me in contact with Iceland – a country that since 2006 has been an important part of my professional and personal life. Second, it is a good alternative to my blog where I mostly focus on monetary policy.

I normally do not share the stuff I write for Fréttablaðið on this blog, but will do it from time to time in the future if I think that others than an Icelandic audience can benefit from reading it and it fits the “profile” of my blog.

An example of this is the largest op-ed, which has been published today. Have a look at the Icelandic version here.

Here is the English version…

Do economists know what will happen in 2016?

I am not going to lie – I am proud of my forecast in 2006 that Iceland would be facing a server economic and financial crisis. However, I am always very humble about the fact that to forecast something correctly you have to a large extent to be lucky and I generally don’t think that economists or political scientist for that matter are especially good at forecasting.

In fact – and that might be a surprise to most non-economists – when you study economics there is not a course in “forecasting”. It is simply not what economists are educated to do.

What economist on the other hand can do is analysis the impact of different shocks to the economy or analysis the impact of for example an increase in the minimum wage.

Said in another way economists are very good at in hindsight explaining what happened and why it happened. The reason for this is that what economist cannot forecast shocks – for example an earthquake, a terror attack or for that matter a major positive technological development – since a shock by definition is exactly that something you didn’t see coming.

How economists actually “forecast” – reversion to the mean

So what do for example bank economists do when they try to forecast what will happen to the Icelandic economy in 2016? Well, the first thing they do is basically to ask whether present growth is high or low compared to some measure of what is the long-term growth rate for the economy and this essentially is just assumed to be some measure of the historical average growth rate. Or said in another way if the present growth rate is above the historical average then the economist will “forecast” that growth will slow in the next 1-2 years back toward the historical average.

The “forecast” for inflation will typically be done in the same way maybe adjusting for whether the central bank has a target for inflation – for example 2%.

Obviously if a shock just hit – for example that Sedlabanki had hiked interest rates dramatically then the economist would try to take this into account, but the general rule is one of “mean-reversion”.

And this is in fact not a bad forecasting strategy or rather it is the only thing the economist can do and I personally have no problem with that. However, the problem is that economists are not too eager reminding people that this is in fact the way they do forecasting.

Set up prediction markets

So should we stop listening to economists? I certainly don’t think so, but we should also remember the joke that god invented economists to make meteorologists look good!

We are not better at forecasting Icelandic growth in 2016 than meteorologists are at forecasting the Icelandic weather in the Summer of 2016.

I, however, think that there is something else we could do. We could listen to the “wisdom of the crowds”. That is we could set-up so-called “prediction markets”. That is essentially betting markets, where you can bet on for example what real GDP growth will be in the third quarter of 2016. I have no clue what that number will be, but if there was a prediction market for Icelandic GDP in Q3 2016 I am sure it would be a better forecast that any forecast I could come up with.

Happy New Year!

 

 

Oil exporters do not devalue to boost exports, but to stabilize public finances

Yesterday Azerbaijan’s central bank gave up its pegged exchange rate regime and floated the Manat. The Manat plummeted immediately and was essentially halved in value in yesterday’s trading.

Azerbaijan is not the first oil exporter this year to have given up its fixed exchange rate policy. Kazakhstan did the same thing a couple of months ago and last week South Sudan was forced to devalue by 85%. Angola also earlier this year devalued and Russia has now also given up its attempt to manage the float of the rouble.

And Azerbaijan is likely not the last oil exporter to give up maintaining a pegged exchange rate. Given the continued drop in oil prices and the strengthening of the dollar oil exporters with pegged exchange rate (to the dollar) will continue to suffer from currency outflows.

I have said it before – devaluation is not about competitiveness 

Critics of floating exchange rates and of devaluation of the kind the Azerbaijan i central bank undertook yesterday often say that devaluation just will cause higher inflation and any effects on competitiveness will be short-lived and that “internal devaluation” therefore is preferable.

Furthermore, these critics argue that for a country like Azerbaijan a devaluation will not help as oil is priced in US dollars anyway and that the countries have little else than oil to export.

However, this in my view misses the point completely. Giving up a fixed exchange rate and floating the currency (or introducing an Export Price Norm) is not about exports and competitiveness. Rather it is about avoiding a collapse in domestic demand and more practically it is about stabilizing government revenues.

Hence, for a country like Azerbaijan the majority of government revenues come directly from oil exports – typically directly from a government owned oil company and/or through taxes on oil and gas companies.

This means that if oil prices collapse the government revenues will collapse as well. However, a crucial part of this story that is often missed is that the important thing is what happens not to the oil price in US dollar, but the oil price denominated in local currency as the government’s expenditures primarily are in local currency.

Hence, a government can keep it’s oil revenue completely stable if the government allows the currency to weaken as much as the drop in oil prices (in US dollars).

Therefore, the choice for the government and central bank in Azerbaijan was really not a question about boosting exports. No, it was a question about avoiding public sector insolvency. Of course the Azerbaijani government could also have introduced massive austerity measures to avoid a sovereign default.

However, with a pegged exchange rate regime massive fiscal austerity measures would likely be extremely recessionary – and remember here that under a fixed exchange rate the budget multiplier typically will be positive and maybe even larger than one.

Hence, under a fixed exchange rate regime fiscal policy is at least in the short-term “keynesian” as there is no monetary offset. Said in a more technical the so-called Sumner Critique do not hold in a fixed exchange rate regime.

In that sense we should think of the devaluation in Azerbaijan as a one-off improvement in oil revenues – as oil revenues increases exactly as much as the currency was weakened yesterday.

The alternative to a 50% devaluation was a 20% drop in GDP

Let me try to illustrate this with an example. Let us first assume a oil-elasticity of 1 for Azerbaijani government revenues – meaning a 1% increase in oil prices increases the nominal revenue by 1% as well.

Yesterday USD/AZN jumped from 105 to 155 – so nearly 50%. This of course means that the oil prices denominated in Manat overnight also increases by around 50%.

Given government revenues presently are around 27% of GDP this means that a 50% devaluation “automatically” increases government revenues to around 40% of GDP (27 + 50%).

Said in another way overnight the budget situation was “improved” by 13% of GDP. If the government alternatively should have found this revenue through tax hikes (or spending cuts) without a devaluation then that would have caused a deep recession in the Azerbaijani economy.

In fact if we assume a fiscal multiplier of 1.5 (which I don’t think is unreasonable for a fixed exchange rate economy) then such fiscal tightening could have caused real GDP to drop by as much as 20% relative to what otherwise (now!) would have been the case.

Obviously there is no free lunch here and over time inflation will be higher due to the devaluation and to the extent that is allowed to be translated into higher expenditure some of the impact of the devaluation will be eroded. The extreme example of this is Venezuela or Argentina.

However, there is one very important difference between the two scenarios – devaluation or fiscal austerity – and that is under a fiscal austerity scenario it would be not only real GDP that would drop, but nominal GDP would likely drop even more.

This will not happen in the devaluation scenario where monetary easing exactly means that nominal GDP is kept stable or increases. This means that the debt dynamics will be much more positive than under an “internal devaluation” (fiscal austerity) scenario.

What I am arguing here is not discretionary monetary policy changes, but I am trying to explain why so many oil exporters have chosen to float their currencies this year and to illustrate why this is not about exports and competitiveness, but rather about ensuring government revenue stability and therefore avoiding ad hoc fiscal adjustments that potentially could cause a massive economic contraction.

So once again – I am not advocating “continues devaluations”, but rather I am advocating automatic currency adjustments to reflect shocks to the oil price within a clearly defined rule-based framework and I therefore also continue to advocate that commodity exporters should not peg their exchange rates against the dollar, but rather either float their currencies and implement a nominal GDP target or implement an Export Price Norm, where the currency is pegged to a basket of currencies and the oil price so the currency “automatically” will adjust to shocks to the oil price. This would stabilize not only government revenues, but also stabilize nominal spending growth and over time also inflation.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

 

 

 

 

The ‘Dollar Bloc’ continues to fall apart – Azerbaijan floats the Manat

I have for sometime argued that the quasi-currency union ‘Dollar Bloc’ is not an Optimal Currency Area and that it therefore is doomed to fall apart.

The latest ‘member’ of the ‘Dollar Bloc’ left today. This is from Bloomberg:

Azerbaijan’s manat plunged to the weakest on record after the central bank relinquished control of its exchange rate, the latest crude producer to abandon a currency peg as oil prices slumped to the lowest in 11 years.

The third-biggest oil producer in the former Soviet Union moved to a free float on Monday to buttress the country’s foreign-exchange reserves and improve competitiveness amid “intensifying external economic shocks,” the central bank said in a statement. The manat, which has fallen in only one of the past 12 years, nosedived 32 percent to 1.5375 to the dollar as of 2:30 p.m. in the capital, Baku, according to data compiled by Bloomberg.

The Caspian Sea country joins a host of developing nations from Vietnam to Nigeria that have weakened their currencies this year after China devalued the yuan, commodities prices sank and the Federal Reserve prepared to raise interest rates. Azerbaijan burned through more than half of its central bank reserves to defend the manat after it was allowed to weaken about 25 percent in February as the aftershocks of the economic crisis in Russia rippled through former Kremlin satellites.

The list of de-peggers from the dollar grows longer by the day – Kazakhstan, Armenia, Angola and South Sudan (the list is longer…) have all devalued in recent months as have of course most importantly China.

It is the tribble-whammy of a stronger dollar (tighter US monetary conditions), lower oil prices and the Chinese de-coupling from the dollar, which is putting pressure on the oil exporting dollar peggers. Add to that many (most?) are struggling with serious structural problems and weak institutions.

This process will likely continue in the coming year and I find it harder and harder to believe that there will be any oil exporting countries that are pegged to the dollar in 12 months – at least not on the same strong level as today.

De-pegging from the dollar obviously is the right policy for commodity exporters given the structural slowdown in China, a strong dollar and the fact that most commodity exporters are out of sync with the US economy.

Therefore, commodity exporters should either float their currencies and implement some form of nominal GDP or nominal wage targeting or alternatively peg their currencies at a (much) weaker level against a basket of oil prices and other currencies reflecting these countries trading partners. This of course is what I have termed an Export Price Norm.

Unfortunately, most oil exporting countries seem completely unprepared for the collapse of the dollar bloc, but they could start reading here or drop me a mail (lacsen@gmail.com):

Oil-exporters need to rethink their monetary policy regimes

The Colombian central bank should have a look at the Export Price Norm

Ukraine should adopt an ‘Export Price Norm’

The RBA just reminded us about the “Export Price Norm”

The “Export Price Norm” saved Australia from the Great Recession

Should small open economies peg the currency to export prices?

Angola should adopt an ‘Export-Price-Norm’ to escape the ‘China shock’

Commodity prices, currencies and monetary policy

Malaysia should peg the renggit to the price of rubber and natural gas

The Cedi Panic: When prayers don’t work you go for currency controls

A modest proposal for post-Chavez monetary reform in Venezuela

“The Bacon Standard” (the PIG PEG) would have saved Denmark from the Great Depression

PEP, NGDPLT and (how to avoid) Russian monetary policy failure

Turning the Russian petro-monetary transmission mechanism upside-down

 

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

 

 

 

 

Talking to Ambrose about the Fed

I have been talking to The Telegraph’s  about the Fed’s decision to hike interest rates (see here):

“All it will take is one shock,” said Lars Christensen, from Markets and Money Advisory. “It is really weird that they are raising rates at all. Capacity utilization in industry has been falling for five months.”

Mr Christensen said the rate rise in itself is relatively harmless. The real tightening kicked off two years ago when the Fed began to slow its $85bn of bond purchases each month. This squeezed liquidity through the classic quantity of money effect.

Fed tapering slowly turned off the spigot for a global financial system running on a “dollar standard”, with an estimated $9 trillion of foreign debt in US currency. China imported US tightening through its dollar-peg, compounding the slowdown already under way.

It was the delayed effect of this crunch that has caused the “broad” dollar index to rocket by 19pc since July 2014, the steepest dollar rise in modern times. It is a key cause of the bloodbath for commodities and emerging markets.

Mr Christensen said the saving grace this time is that Fed has given clear assurances – like the Bank of England – that it will roll over its $4.5 trillion balance sheet for a long time to come, rather than winding back quantitative easing and risking monetary contraction.

This pledge more than offsets the rate rise itself, which was priced into the market long ago. Chairman Janet Yellen softened the blow further with dovish guidance, repeating the word “gradual” a dozen times.

So no I don’t think the hike is a disaster, but I don’t understand the Fed’s rational for doing this – nominal spending growth is slightly soft, inflation is way below the target, money supply and money base growth is moderate, the dollar is strong and getting stronger and inflation expectations are low and have been coming down.

So if anything across the board monetary indicators are pointing towards the need for easing of monetary conditions – at least if you want to maintain some credibility about the 2% inflation target and or keep nominal GDP growth on the post-2009 4% path.

But I guess this is because Janet Yellen fundamentally has the same model in her head as Arthur Burns had in the 1970s – its is all about a old-style Phillips Curve and I predict that Yellen is making a policy mistake in the same way Burns did in the 1970s – just in the opposite direction and (much) less extreme.

PS some Fed officials are obviously also concerned with the risk of asset market bubbles, but the Fed shouldn’t concern itself with such things (and by the way I don’t think there is any bubbles other than in the market for people concerning themselves with bubbles.)

 

Bank of Canada at the Zero Lower Bound: The Export Price Norm to the rescue

The continued drop in the oil prices have caused the Bank of Canada to reconsider whether it should cut it key policy rate – the Overnight rate – and in a speech earlier this week BoC governor Stephen Poloz said that he would not rule out negative interest rates in Canada even though he did not expect it and he also voiced some worries about negative rates in general.

I overall think it is prudent for the BoC governor to remind the markets that the BoC is not “out of ammunition” (I hate that expression when it comes monetary policy). The reason for this is that if Poloz instead had said “we are approaching the Zero Lower Bound and below zero there is nothing more we can do to ease monetary policy” then surely we would have seen a strong market reaction – the lonnie would have strengthened, (market) inflation expectations would have dropped, Canadian stocks would have dropped and that all on its own would have been monetary tightening.

Instead he rightly reminded the markets that the BoC certainly can cut rates below zero, but there certainly is also other options. The most obvious is quantitative easing – the BoC could purchase assets – e.g Canadian Treasury bonds.

I therefore also very much welcome that the BoC a couple of days ago published a paper on how to conduct monetary policy at “low interest rates” (Poloz’s speech was based on this paper). I do not agree on everything in the paper, but I clearly think that it is right that the BoC already now makes it completely clear to the markets that it has lots of options to ease monetary policy if needed – also with interest rates close to the Zero Lower Bound (the Overnight Rate is presently at 0.5%).

Hence, this means that if oil prices continue to drop – this by way is a negative demand shock for the oil-exporting Canadian economy – the markets would not have any reason to doubt that the BoC will move to ease monetary conditions to ensure nominal stability.

Consequently if oil prices drop then rational investors should expect monetary easing and that in itself would cause the Canadian dollar to weaken, which on its own should do a lot to offset the negative demand shock from lower oil prices.

The Export Price Norm to the rescue

The question is, however, how the BoC could (and would) ease monetary conditions at the Zero Lower Bound. Obvious one possibility would be to cut rates below zero, but there are numerous reasons why the BoC would be reluctant to do this and there probably also at least a mental limit (among central bankers) for just how negative rates could become.

Another obvious option would be to do quantitative easing. However, central bankers aren’t to happy about this option either.

There is, however, an alternative to QE and negative interest rates, which I think the BoC should consider and that is the exchange rate channel.

My concrete proposal is that the BoC could combine two related ideas – Bennet McCallum’s MC rule (not to be confused with the McCallum money base rule) and my own Export Price Norm (inspired heavily by Jeff Frankel’s Peg-the-Export-Price).

In McCallum’s 2005 paper “A Monetary Policy Rule for Automatic Prevention of a Liquidity Trap? he discusses a new policy rule that could be highly relevant for the BoC today. What McCallum suggests is basically that central banks should continue to use interest rates as the key policy instrument, but also that the central bank should announce that if interest rates needs to be lowered below zero then it will automatically switch to a Singaporean style regime, where the central bank will communicate monetary easing and tightening by announcing appreciating/depreciating paths for the country’s exchange rate. This is the MC rule.

My suggestion would be to take McCallum’s MC rule one step further and would be for the BoC to announce that it would peg the Canadian dollar to a basket of currencies and the oil price and maintain that rule as long as core inflation is below the BoC’s 2% (operational) core inflation target (which is presently not the case).

A Canadian Export Price Norm: 65% US dollar, 20% Asian currencies and 15% oil prices 

Since the BoC started targeting inflation in the early 1990s the central bank has done a very good job of hitting the inflation target and furthermore, nominal spending growth has also be quite stable. As a result we have also – as a positive side-effect had a fairly high level of real stability in the economy.

This means that if monetary policy in general has been “good” then the outcome on different financial variables that reflect this policy could be seen as good monetary policy indicators. So if we for example look at the Canadian dollar then the development in the dollar should reflect “good” monetary policy.

So if we can construct a basket of currencies and the oil prices that would “track” the historical development in the Canadian dollar then that could serve as BoC’s operational exchange rate target to be “switched” on if conditions demanded it (a negative demand shock, disinflation, ZLB etc.).

I have constructed such basket. It is 65% US dollars, 20% Asian currencies (10% Korean won and 10% Japanese yen) and 15% oil prices (this by the way more or less reflects Canada’s trading patterns). By pegging to this basket we get an implied rate for the Canadian dollar against the US dollar that would keep the basket fixed (the Export Price Norm).

CAD Export Price Norm

As the graph shows the implied USD/CAD rate (the Export Price Norm) has tracked the actual USD/CAD rate quite closely in the past 20 years and as monetary policy overall in this period has been “good” I would argue that this basket would be a useful basket to implement for Canada.

But I should also stress that I am not arguing that BoC should give up it’s present monetary policy regime – just that the BoC should announced that it can use an Export Price Norm as a policy instrument to ensure nominal stability if needed (inflation drops below then inflation target and interest rates are stuck at the Zero Lower Bound).

That said, I don’t think the Export Price Norm should be implement right now – even though it could be a good idea to pre-announce it – as core inflation seems to be pretty well-anchored and the Canadian economy is doing fairly well. Furthermore, with the overnight rate at 0.5% we are still not at the Zero Lower Bound so the first step could be to cut the overnight rate to zero (maybe already now).

And finally, if it is notable that since USD/CAD more or less has tracked the Export Price Norm during the recent massive drop in oil prices there is really no indication that the markets in general are loosing trust in BoC’s ability and willingness to ease monetary conditions to offset the demand shock from lower oil prices. This is very encouraging and Governor Poloz luckily seems to understand the need to communicate to market participants that the BoC will continue to ensure nominal stability also if interest rates hit the Zero Lower Bound.

PS Read Bob Hetzel new paper What is a Monetary Standard. More on that in the coming days.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

It’s the economy stupid – this is why Le Pen won

I have argued it again and again – the continued crisis in the European economy is the primary source of political radicalisation, populism, extremism and outright fascism.

The French regional elections provided yet another sad testimony to that thesis. Here is the one-graph version of that idea.

Le Pen

The graph shows the support for the extremist/populist anti-immigration party Front National (FN) against the unemployment rate across different regions in France. Each dot represents a region.

The simple regression ‘model’ shows that a 1%-point increase in unemployment increases support for FN by nearly 5%-point.

So it might be that FN is helped by the recent terror attacks in Paris and by the ‘refugee crisis’, but this is mostly about a weak French economy.

So if you want to blame anybody for the electoral success of Front National you should point the fingers at Jean Claude Trichet who as ECB-chief in 2011 hiked interest rates twice and at president Holland who has done everything to worsen the already bad competitive position of the French economy since he became president in 2012.

HT: This post have been inspired by a post on the same topic on Bloombergviews by .

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

Coase was right – the one graph version

I recently came across two indices, which are measuring two on the surface unrelated things – property rights and environmental standards across different countries.

However, anybody who ever read Ronald Coase would know that according to Coase the best way to manage externalities (read pollution) is to have well-defined property rights. Note I am simplifying Coase’s message a lot here, but nonetheless this is basically at the core of what some have called Free Market Environmentalism.

The first index is the International Property Rights Index (IPRI) published by the Property Rights Alliance. The IPRI rank different countries according to the level of protection of property rights.

The second index is the Environmental Performance Index (EPI), which “ranks how well countries perform on high-priority environmental issues in two broad policy areas: protection of human health from environmental harm and protection of ecosystems.” EPI “is a joint project between the Yale Center for Environmental Law & Policy (YCELP) and the Center for International Earth Science Information Network (CIESIN) at Columbia University, in collaboration with the World Economic Forum and support from the Samuel Family Foundation and the McCall MacBain Foundation. “

This is what we get when we plot the two indices against each other.

Coase

So there you go. The one graph version of Free Market Environmentalism – if you are concerned about the environment you should really primarily concern yourself about the protection of property rights…Unfortunately that is unlikely to be on the mind of most of the policy makers who are meeting in Paris these days to discuss global climate change.

PS you can find the data here.

Update: Some have suggested that this is a spurious correlation caused by the fact that high environmental standards and the level of protection of property rights both are positively correlated with income levels. That is partly right, BUT not fully right. I have tested this by estimating EPI as a function of BOTH property right and GDP/capita. Even doing this property rights comes out as being a (very) significant determinate of environmental standards. A high GDP is not enough – property rights need to be protected as well.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com or roz@specialistspeakers.com.

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