World Economics

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Tackling the Undeclared Economy
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Colin C Williams & Ioana Horodnic, World Economics, December 2020
Are participants in the undeclared economy rational economic actors who can be swayed by increasing the expected penalties and likelihood of detection? Or are they social actors who participate in reaction to a lack of vertical trust (in government) and horizontal trust (in others)? Evaluating a 2019 Eurobarometer survey, participation in undeclared work is weakly associated with the level of penalties, but there is a stronger, significantly greater likelihood of participation when there is a lower risk of detection and lower vertical and horizontal trust. The outcome is a call for the conventional repressive approach to be complemented with trust-building strategies.
What Shipping Can Tell Us About Europe’s Efforts to Face the Risk of COVID-19-Induced ‘Japanification’
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Theodore Pelagidis & Hercules Haralambides, World Economics, September 2020
Shipping leads the ‘dance’ on the way up and if this is indeed true, the post-COVID-19 economic recovery should not be long, if one is to judge from the relative prosperity of containerised shipping as of Q2, 2020. Most EU member states may face a new risk ahead: ‘Japanification’, an unwillingness to increase household spending and often business expenditure/demand, along with the inability of monetary policy to balance savings and investments. When things get better, and the COVID-19 infection curve flattens close to zero, European leaders will have to come up with new ideas on the rebirth of the European dream, if they want to prevent a new round of authoritarianism and populism throughout Europe.
Measuring Greek Debt: The Difference between Market and Credit Perspectives
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Colin Ellis, World Economics, September 2018
It is likely to be several decades before data on government assets, off-balance sheet and contingent liabilities are consistently available across a wide range of countries. In the absence of data, GDP is a readily available scaling factor, but official sector agencies such as the IMF and private sector analysts recognise the insufficiency of debt–GDP ratios. Some commentators claim that, using international standards, Greek government debt could be only around 75% of GDP, compared with official figures of around 180%. Fundamentally, such discrepancies reflects debt valuation variations related to the difference between market risk and credit risk.
Measuring Macroeconomic Performance Using a Composite Index
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Julian Gough, World Economics, September 2018
Large quantities of economic data, varying in accuracy and reliability and subject to later revision, are continually produced and published so interpretation using only one data source is subject to risk. The complex world of data can be simplified by combining different measures of economic performance—economic growth, unemployment and inflation into a single composite index. A composite index of cross-sectional data relating to the economic performance of all of the European Union in 2017 puts Ireland, Romania and Malta in the top three positions, while Germany is ranked 12th. Tracking the UK with the composite index using time-series data shows the impact of the financial crisis in 2008–09 with a gradual improvement in performance which peaks in 2015.
Debunking the Relevance of the Debt-to-GDP Ratio
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Arturo C. Porzecanski, World Economics, March 2018
Historical experience does not confirm the simplistic notion that the heavier the burden of the public debt relative to GDP, the greater is the risk that governments will encounter debt-servicing difficulties. In 25 government defaults that occurred during 1998-2017, the pre-default debt-to-GDP ratios ranged from a very low of 27% (Ecuador in 2008) to a very high of 236% (Nicaragua in 2003), with a sample median of 79%. As ratios of government debt rise, some societies manage to deliver more responsible fiscal behaviour. Low debt ratios, on the other hand, often mask dangerous currency or maturity mismatches, as well as contingent liabilities, capable of suddenly impairing banks and governments. The demand for government bonds can behave unpredictably, and governments with low or high debt ratios can suddenly find themselves cut off from needed financing. Official institutions like the IMF, European Commission, and World Bank have done themselves and their member states a great disfavour by obsessing about debt ratios which do not predict fiscal outcomes.
Are Estimates of the Economic Contribution of Financial Services Reliable
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Brian Sturgess, World Economics, March 2017
The methods used to estimate the contribution of financial services to national income are seriously flawed. Banking sector output in the UK was estimated to have increased in 2008 while the financial services sector was collapsing. The relative contribution of service activities in GDP is not easy to measure, but there are many problems in measuring financial services in general and the output of banks in particular. National income accounting standards, used to estimate the output of financial intermediation companies such as banks, rely on flawed indirect measurements based on interest rate spreads. Furthermore, many services are provided at no charge so price indexes cannot be meaningfully created. The main method used, Financial Intermediation Services Indirectly Measured (FISIM), is arbitrary and fails to measure the quality of banking assets and risk. Over the period 2003–7, one study found that aggregate risk-adjusted output would have been only 60% of officially estimated output across the Euro area.
De-Risking Impact Investing
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Neil Gregory, World Economics, June 2016
Despite great investor interest in impact investing, actual investment flows have remained modest. This is largely due to insufficient investment opportunities which offer a financially sustainable risk-return balance. A focus on de-risking impact investments can enable investors to find more assets which offer commercial returns on a risk-adjusted basis, without sacrificing impact. By cutting off the lower tail of the risk distribution, impact investments can offer comparable returns to other investments, as has been the International Finance Corporation’s (IFC’s) experience. Successful impact investing involves selecting assets and structuring investments differently to realize their potential to deliver both financial and social returns. We segment the supply and demand of impact investing funds, and identify the causes of elevated risks in prevalent approaches to impact investing. Drawing on IFC’s investment experience, we identify seven ways to reduce these risks. With these approaches, we provide evidence that investment opportunities can be generated that meet the requirements of investors seeking both commercial financial returns and social impact without trading one off for the other.
Dissecting China’s Property Market Data
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Meiping (Aggie) Sun, World Economics, March 2016
This paper analyses Chinese property market data to evaluate recent trends in the market and to make prognoses for the future. It considers whether or not the existence of high prices and at the same time an enormous rise in residential supply in terms of floor space under construction means that there is a ``bubble'' in China's property market which may burst, similar to what happened in Japan in the early 1990s. Evidence that the price of new homes moves almost perfectly with sales of new residential floor space rather than with completed floor space suggests that the housing market is behaving normally and follows mini boom and bust cycles like other industries. The analysis finds that there are low maintenance costs for buyers after purchase due to the lack of annual property tax and negligible depreciation of bare-shelled housing units which limits the risk of default. Although recently developers are under pressure to raise more revenue mainly due to high interest-rate borrowing from shadow banks, the author considers that the probability of a systemic collapse of housing market is minimal given existing taxation systems, easing monetary policy and the continuing urbanization process.
Risk Exposures in International and Sectoral Balance Sheet Data
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Philip R. Lane, World Economics, December 2015
This paper outlines the opportunities and pitfalls for risk analysts in interpreting the information embedded in international and sectoral balance sheets. It places an emphasis on the different risks posed by net financial stock imbalances and the cross-holding of large stocks of gross financial assets and gross financial liabilities. It argues that it is important to supplement sectoral-level data with more disaggregated levels of data, in view of the importance of intra-sectoral financial linkages and the heterogeneity in portfolios and funding mechanisms within sectors. Finally, the growing internationalisation of financial balance sheets means that it is important to take a unified approach to the joint analysis of international and sectoral balance sheets.
Editorial: The Scandalous State of State Accounting
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Brian Sturgess, World Economics, March 2012
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