Piketty Becomes Superstar Economics Author

Capital in the Twenty-First Century, already a best seller, is an invaluable contribution to how we understand inequality and its possible consequences.

Thomas Piketty—economist from the Paris School of Economics and ground-breaking researcher on income inequality--examines data from more than twenty countries spanning in some cases as far back as the 18th century to assess the dynamics of income and wealth distribution, with a particular focus on the role of capital ownership as a driver of long-run trends in income inequality. He argues that when the rate of return on capital exceeds the rate of economic growth, as it has for most of history, then rising income inequality becomes inevitable. He says that if this rising inequality is allowed to continue unchecked, the results could be deep political and social disruption.

While Piketty notes that inequality has different dimensions across countries, he concludes with a recommendation: significantly increase the progressivity of both income and wealth taxation. Given the extraordinarily globalized market for capital, he further argues that the reach of such taxes must be global as well.

Here"s a quick guide to the book from The Economist: Thomas Piketty’s “Capital”, summarised in four paragraphs

PBS Economics correspondent Paul Solman interviews Piketty for his take on why inequality of wealth has reverted to a lofty level last seen in 19th century Europe.




The Economic Policy Institute and the Washington Center for Equitable Growth host a presentation by Thomas Piketty:




The Guardian on What You Need to Know

CEPR and the Bank of England joint workshop (includes videos)

Reviews:

Paul Krugman, in the New York Review of Books

Larry Summers      Robert Solow        Brad DeLong    Jeffrey Frankel

Mervyn King, former Governor of the Bank of England

Why is it a bestseller?

Brad DeLong (again)    A critique from Daron Acemoglu and James Robinson

Dani Rodrik  "Piketty and the Zeitgeist"                    The Spectator magazine

Financial Times:Piketty’s Data Is Full of Errors     Piketty's Response

and Piketty's longer (10 page) response

NYT: Did Thomas Piketty Get His Math Wrong?

The Economist on Piketty's calculations

The view from France

Getting Beyond the "Curse" of Natural Resources

Countries that have an abundance of natural resources—and this includes many countries in sub-Saharan Africa—often show a record of relatively poor economic performance compared with non-resource-rich countries. 

The consensus in both academic and policy circles is that the presence of abundant natural resources poses a number of potential challenges to these countries. 

Six of them can be readily identified:

(i) a loss of competitiveness in potentially dynamic, non-natural resource sectors, (ii) a consequent narrowing of the production base,
(iii) excessive reliance on commodities for both government revenues and export earnings,
 (iv) high vulnerability to fluctuations in commodity prices,
 (v) macroeconomic and financial volatility, and
 (vi) rent-seeking behavior that can undermine governance and exacerbate the difficulty of building robust, growth-enabling institutions. 

The ideas in this book, "Beyond the Curse: Policies to Harness the Power of Natural Resources,"  were first presented at a seminar that was aimed primarily at policymakers in sub-Saharan Africa and brought together ministers, central bank governors, other senior policymakers, and well-known academics.The seminar focused on how to manage these challenges so as to reap the benefits of resource wealth while avoiding the pitfalls.

Diagnosis

Starting from a diagnosis of the wide range of challenges to macroeconomic management and financial policies that resource-rich countries face, the seminar sought to propose solutions that are context-specific, drawn from the most successful experiences, and capable of being implemented in Africa. Discussed at the 2010 seminar, therefore, were fiscal, monetary and exchange rate policies; savings policies; institutional arrangements to safeguard economies against volatility; economic diversification; and institution building.

The consensus among both speakers and participants at the seminar was that government revenues derived from natural resource extraction should be used conservatively in order to avoid excessive real appreciation and to safeguard inter- generational equity.

Preserving intergenerational equity requires saving and investing a large part of the proceeds to benefit future generations. At the same time, when investing these proceeds, it is not easy to make the choice between investing in external financial assets and investing in domestic physical and human capital (including infrastructure).

A deliberate and measured pace of domestic spending, carefully focused on absorptive capacity, can limit real appreciation and attenuate the negative consequences to the economy’s tradable sector. Moreover, history is replete with examples of large government spending programs that have been inefficient and wasteful.

Knowledgeable senior officials at the seminar from Norway, Chile, Botswana, and Mexico outlined the history of how their governments addressed the problems posed by the existence of natural resources. Their measures included conducting countercyclical fiscal policies and setting up institutions that limit rent-seeking behavior.

While seminar participants were cautious about spending policies, they recognized that populations in low-income countries have high expectations regarding higher public spending. Large resource windfalls often trigger political pressures to enlarge government spending, in particular in countries with vulnerable populations. Managing those expectations is an important task in all resource-rich countries, and particularly in those with recently discovered resources.

Better with the private sector

All countries with significant natural resources, especially those whose resources are recently discovered, must choose between putting the extraction activity in the hands of multinational companies or keeping it in the hands of state-owned companies.

The weight of country experiences worldwide tilts the balance in favor of leaving the extraction as much as possible to the private sector, provided that
  (i) the companies are selected on a competitive basis, and
  (ii) the government has the capacity to ensure that contract negotiations lead to a balanced deal where the short- and medium-term objectives of both parties are reconciled.

Indeed, such an “optimal contract” would ensure that the inherent time-inconsistency problem is addressed. In other words, governments in resource-rich countries should credibly commit not to expropriate for themselves foreign investments after they have been sunk in exploration and extraction. In this discussion, many countries around the table recognized their lack of capacity to negotiate such contracts and expressed a need for independent international advice and assistance in this crucial area.

Taxing natural resources

Taxes on rents are relatively efficient and less distorting. Therefore, higher levels of taxation in the natural resource sector make sense and facilitate lower taxes in other sectors. However, this usually leads to a structure of government revenues that is dependent on commodity prices and earnings and so can be highly volatile. There is therefore a need to establish medium-term spending plans, to decouple current spending from volatile government revenues, and to enact a strategy for countercyclical fiscal policy (especially because capital flows that also respond to current account strength, and thus commodity prices, can exacerbate cyclicality).

Fiscal institutions have proven to be instrumental in achieving such decoupling between spending programs and revenues. For countries that cannot establish institutional arrangements capable of credibly committing to countercyclical fiscal policies, the use of financial instruments—such as the Asian puts used to hedge government oil revenues in Mexico—are an effective second-best policy option.

Effect on exchange rate

Chile’s floating exchange rate coupled with an inflation-targeting regime has proved remarkably successful in recent years at sheltering the economy from external shocks. Many African countries are fearful of embarking on a fully flexible exchange rate regime, however. This is not the so-called “fear of floating” in the conventional sense—when a degree of fixity leads to foreign exchange liabilities that constitute a balance-sheet disincentive to floating—but simply a reluctance to embark on major institutional change based on a belief that the supportive institutional structure will take time to prepare.

It is clear that a more gradualist path to exchange-rate flexibility with inflation targeting will be pursued in many countries, with all the transitional difficulties that this will entail. In fact, the experience of Ghana, which adopted inflation targeting with limited exchange-rate flexibility in 2002-03, clearly illustrates this point.

The seminar stimulated much discussion about how to sterilize current account inflows (at times of high commodity prices) and the capital inflows that are correlated with these windfalls. Because their equilibrium domestic interest rates are almost always higher than those in advanced countries, in resource-rich countries the costs of sterilization can be significant and can create tensions between the fiscal authorities and the central bank. As the case of Botswana makes clear, however, insofar as periods of high commodity prices are also periods of large government surpluses held at the central bank, a properly managed countercyclical fiscal policy will provide a degree of automatic sterilization.

Diversifying away from dependence

Experiences with industrial policy around the world suggest that it is not a straightforward matter to design an appropriate incentive structure to help lay the groundwork for economic diversification in resource-rich countries. Seminar participants recognized that some government intervention is unavoidable but also stressed that such policies should be tailored to the context of each economy. It was also recognized that too-active industrial policies would open the door to corruption and thus risk undermining the broader institutional framework.

From the discussions certain things emerged that are clearly undesirable, such as commodity rents that are distributed through very high government salaries, which would have a detrimental effect on private sector development. On the other hand, low, predictable, and non-distorting tax rates on entrepreneurial activity could help foster diversification. Similarly, the use of commodity proceeds to establish a supportive physical and social infrastructure could raise returns and encourage private investment in other sectors.

INSTITUTIONAL ASPECTS

The existence of natural resources tends to distort the allocation of talent. Especially in countries with weak institutions, talent tends to shift out of private entrepreneurial activity and into more lucrative rent-seeking areas, with harmful implications for sustainable growth. Participants in the seminar spent a good deal of time focusing on how institutions should be designed to guard against such developments. For example, strong and reliable property rights can foster financial sector development, allowing the financial system to play a more active and significant role in mediating resources to help build small- and medium-size enterprises in the non-resource-rich sectors of the economy.

More generally, checks and balances and greater transparency in managing natural resource revenues can help counteract the misallocation of talent into unproductive activities. However, it was acknowledged that the problem was less difficult in countries with mature industrial economies than in those that were least developed when mineral resources were discovered. This, if anything, merely underscored the importance of a careful approach to institution building.

Foreign Policy review by Matthew Hulbert and Bas Percival 

VoxEU blog  "Beyond the curse: Policies to harness the power of natural resources"

iMFdirect blog on the escaping the "resource curse"

Barnes & Noble Nook version

Buy on Amazon

OIL WEALTH IN CENTRAL AFRICA 

Policies for Inclusive Growth 

Bernardin Akitoby and Sharmini Coorey 

Paperback · ISBN 978-1-61635-376-6 · Stock# OWCAEA 

Drawing on new research on managing oil wealth and central Africa’s oil exporters’ experiences, this 

book addresses the challenge of strengthening the management of oil wealth and promoting policies for 

inclusive growth. 

      Review in Foreign Policy

MANAGING THE OIL REVENUE BOOM 

THE ROLE OF FISCAL INSTITUTIONS

Rolando Ossowski, Mauricio Villafuerte, Paulo Medas, and Theo Thomas 

2008 · ISBN 978-158906-718-9 · Stock# S260EA · $30 

Increases in oil exports and revenues have revealed how governments manage fiscal 

policies in light of changing market conditions and the role of special fiscal institutions 

(SFIs). In this Occasional Paper, IMF experts examine the role of SFIs in fiscal 

management, review the experiences of selected countries, and draw general lessons. 

TAXATION OF PETROLEUM AND MINERALS 

PRINCIPLES, PROBLEMS, AND PRACTICE

Philip Daniel, Michael Keen, and Charles McPherson 

2011 · Paperback · ISBN 978-0-415-78138-1 · $38.95 

2010 · Hardback · ISBN 978-0-415-5692-7 · $150 

Copublished with Routledge. For more information, please visit www.routledge.com. 

“A timely and welcome guide to policymakers and advisors in the area of resource 

taxation, combining theoretical underpinnings and sound practical advice over a 

range of relevant topics, from tax design, through fiscal and financial modeling to 

tax administration.” 

Joseph Amoake-Tuffour 

Ministry of Finance and Economic Planning, Republic of Ghana 

COMMODITY PRICE VOLATILITY AND INCLUSIVE GROWTH 

Rabah Arezki, Catherine Pattillo, and Marc Quintyn 

Paperback · ISBN 978-61635-379-7 · Stock# CPVIEA 

This title discusses the challenges posed by commodity price volatility and discusses policies to promote 

growth that is inclusive of all the citizens in low-income countries. It also explores macroeconomic policy 

options and the building of fiscal institutions to prevent boom and bust cycles.

Seminar at the IMF on Commodity Price Volatility

Deaton's Great Escape

The world is a better place than it used to be. People are wealthier and healthier, and live longer lives. Yet the escapes from destitution by so many have left gaping inequalities between people and between nations. In "The Great Escape," Angus Deaton--one of the foremost experts on economic development and on poverty--tells the remarkable story of how, starting 250 years ago, some parts of the world began to experience sustained progress, opening up gaps and setting the stage for today's hugely unequal world. Deaton takes an in-depth look at the historical and ongoing patterns behind the health and wealth of nations, and he addresses what needs to be done to help those left behind.Deaton describes vast innovations and wrenching setbacks: the successes of antibiotics, pest control, vaccinations, and clean water on the one hand, and disastrous famines and the HIV/AIDS epidemic on the other. He examines the United States, a nation that has prospered but is today experiencing slower growth and increasing inequality. He also considers how economic growth in India and China has improved the lives of more than a billion people. Deaton argues that international aid has been ineffective and even harmful. He suggests alternative efforts--including reforming incentives to drug companies and lifting trade restrictions--that will allow the developing world to bring about its own Great Escape.

Demonstrating how changes in health and living standards have transformed our lives, "The Great Escape" is a powerful guide to addressing the well-being of all nations. 

Deaton argues that the main barrier to progress in poor countries is not lack of resources but bad governments. Yet it is these governments that receive the aid either directly or indirectly. The flow of foreign money undermines governments’ incentives to raise money from their own taxpayers, which in turn requires growth-friendly policies and reformed institutions. Instead it shores up ill-functioning governments, the very misfortune holding back poor countries.


New York Times review

Princeton University press

The Economist

Bloomberg review

Article in F&D magazine

The Damaging Effects of Global Inequality

World Bank economist Branko Milanović has a great introduction to global inequality in his The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality. He uses history, literature, and stories straight out of today’s newspapers, to discuss one of the major divisions in our social lives: between the haves and the have-nots. 

Milanovic reveals just how rich Elizabeth Bennet’s suitor Mr. Darcy really was; how much Anna Karenina gained by falling in love; how wealthy ancient Romans compare to today’s super-rich; where in Kenyan income distribution was Obama’s grandfather; how we should think about Marxism in a modern world; and how location where one is born determines his wealth. 

He goes beyond mere entertainment to explain why inequality matters, how it damages our economics prospects, and how it can threaten the foundations of the social order that we take for granted.

The book, by the lead economist with the World Bank’s research division and one of the world’s leading experts on inequality, was discussed in a three part series in Think Progress:

Part 1:  Inequality: The Global View
Part 2: Five Things You Might Not Know About Inequality
Part 3: Why Rich People Hate Talking About Inequality

See also Finance & Development magazine on inequality.
         Branko Milanovic's article: More or Less
                                 podcast interview on inequality  
          IMF research: Andy Berg and Jonathan Ostry

Inequality may be hazardous to your growth
How inequality affects savings behavior

Branko Milanović talking about inequality research: