Some economics links, Sepember 22

Why The World's Poor Refuse Insurance . Excerpt:
"It might seem logical to partner with established microlenders, yet insurers are finding that their policies as microloan tagalongs come with their own set of problems. In its Pakistan health-care trial, Swiss Re has seen many fewer claims than expected submitted by people receiving insurance as part of a loan. Giné, who has observed similar results in the Philippines, suspects loan officers sweep the added benefit under the rug. Reason? They fear that potential customers will walk if they feel they're paying for something they didn't ask for. So they never know about the coverage they have."
Some recent opinions:
A former head of the Reserve Bank of Australia's research department says in Outside the bubble:
"In an asset price bubble, Gruen points out, investors expecting to earn 15 or 20 per cent returns on their funds are unlikely to be deterred by increases in official interest rates of half a percentage point.

''If you tighten monetary policy early and the bubble keeps growing, what do you do then? You've managed to slow the economy down, unemployment has risen a bit, and the bubble is still growing.

''You can't drive the economy into the ground,'' he says.

The way forward may not be clear, but in the end this physiologist turned macro-economist has a disarmingly modest aspiration for how economics might develop in the wake of the crisis.

''The hope is that the discipline will be invigorated and find the real world interesting again - rather than being stuck in that windowless cabin.''"


From the journalist Mark Wade in Resilient India defies downward trend:
"''The global downturn did not affect India to the same extent as many other countries - for us it has just caused a slowdown,'' says R. Venkatesan, a senior fellow at the Indian Council of Applied Economic Research. ''This is because India overall is not as integrated into the world economy as most other economies in Asia.''

This relative isolation is reflected in India's exports, which accounted for only 15 per cent of gross domestic product in 2008, compared with more than 30 per cent in China.

The nature of the banking sector added another layer of insulation. Most of India's banks are still publicly owned and adopt very conservative investment strategies. India's financial sector had little exposure to the toxic assets that caused so much trouble on international financial markets.

As a result India did not face the systemic shock to its financial system experienced in other parts of the world.

Another unexpected positive has come from the remittances sent home by the large Indian diaspora. An expected slump in this lucrative source of foreign exchange did not materialise.
Economist Swaminathan S. Anklesaria Aiyar wrote in the Times of India that remittances from overseas Indians hit a record a record $46.4 billion in 2008-09, up from $43.5 billion the previous year. Swaminathan estimates the 2008-09 flow was worth 4 per cent of GDP."


From a Scientific Advisor to the Economic Studies Directorate at the French Ministry of the Environment A “modest” intellectual discipline:
"Economic knowledge is diffused throughout society and eventually affects the behaviour of economic agents. This in turn alters the working of the economy. Therefore, a model can only be correct if it is consistent with its own feedback effect on how the economy works. An economic theory that does not pass this test may work for a while, but it will turn out to be incorrect as soon as it is widely believed and implemented in the actual plans of firms and consumers. Paradoxically, the only chance for such a theory to be correct is for most people to ignore it.

One example of a consistent theory is the Black-Scholes option pricing model. Upon its introduction, the theory was adopted by market participants to price options, and thus became a correct model of pricing precisely because people knew it. This is so because such a pricing rule is consistent with the “efficient markets” hypothesis, meaning that no profitable arbitrage opportunity is left once the rule is applied. By contrast, any theory of pricing that leaves arbitrage opportunities would instantaneously be defeated by the markets as soon as they believe it. The attempts by participants to make profits by exploiting the arbitrage opportunity would alter prices in a direction that will invalidate the theory."
P.S. Colander's testimony. Is it Models or the Economists? Statement by David Colander has a link to the full testimony before the House Science and Technology Committee.