The World Economic Forum launched its seventh Global Risks report before this year’s annual meeting in Davos. The top risk this year, among the 50 most pressing risks based on a survey of 400 top business leaders, is income inequality and its associated economic and political risks. The report aptly summarized this risk as the “risk of dystopia.”
|Photo courtesy of christahasenkopf.com|
I recently read a quote by Edward Glaeser, an urban economist, in the latest issue of IFC’s quarterly journal on Public-Private Partnerships (PPPs), which caught my attention:
Statistically, there is a near-perfect correlation between urbanization and prosperity among nations. As a country’s urban population rises by 10 percent, the country’s per capita output increases by 30 percent.
The Question: Has executive compensation contributed to the financial crisis?
In the aftermath of the financial crisis there has been no shortage of finger-pointing in the attempt to identify its underlying causes. The list of potential culprits is long and ranges from bank deregulation to the “alchemy” of credit ratings and structured finance. This debate focuses on one factor that has allegedly contributed to the crisis: greedy bankers and the executive compensation packages that tempted them to, quite literally, bet the bank.
The spectacular collapse of banks whose executives were allegedly paid for performance clearly raises many questions about the link between executive pay and risk-taking. In a recent paper, Thomas Philippon and Ariell Reshef of New York University show that while in 1980 bankers made no more than their counterparts in other parts of the economy, by 2000 wages in the financial sector were 40% higher for employees with the same formal qualifications. The last time such a discrepancy was observed was just prior to the Great Depression—an irony which has not been lost on critics of bank compensation, ranging from regulators to the Occupy Wall Street protesters. But the level of compensation alone may not be the real problem. Many leading economists (see, for instance, op-eds from Alan Blinder and Raghuram Rajan) have emphasized that a much more important (and difficult) question to answer is how the structure of performance pay may encourage excessive risk-taking at all levels of the institution, from traders and underwriters right up to the firm’s CEO.
- Financial Sector
My paper “Beyond Baseline and Follow-up: the case for more T in experiments” was recently accepted at the JDE. As with most papers that go through review, the accepted version is a definite improvement on the working paper version.
Millions of Chinese have just celebrated the beginning of the year of the Dragon - a year which according to Chinese tradition is auspicious for ambitious undertakings. These may be required as the global economy faces severe headwinds. According to the January edition of Global Economic Prospects (GEP) report the world economy is expected to grow at 2.5 percent and 3.1 percent in 2012 and 2013, significantly below the 3.6 percent projected for both years in last July’s GEP. But even achieving these much weaker outturns is highly uncertain. The downturn in Europe and weaker growth in several large developing countries, such as Brazil and India, could potentially reinforce one another, resulting in an even weaker outcome. But without growth it will be more difficult to reduce the high debt of some advanced economies to sustainable levels and create much needed jobs world-wide.
Public-private partnerships (PPPs)—agreements between governments and the private sector to finance infrastructure or public services—haven’t taken off in Ukraine, at least not yet. From time to time you hear about a PPP conference or workshop, and USAID is funding a new initiative to promote them. There is a concessions law (from 1999) and a newer concessions law for roads (2008). But the overall business environment isn’t very good (152 out of 183 economies in Doing Business) and there are issues with corruption (also an unlucky 152 in Transparency International’s Corruption Perception Index).