Economic Modernization and Finance - PowerPoint PPT Presentation


Title: Economic Modernization and Finance


1
Economic Modernization and Finance
  • Panelist
  • Hrishikesh D. Vinod
  • vinod_at_fordham.edu

2
Open Economy Financial Burden of Corruption
Hrishikesh D. Vinod Professor of Economics,
Fordham University, Director Institute of
Ethics and Economic Policy E-Mail
Vinod_at_fordham.edu Web page http//www.fordham.ed
u/economics/vinod
3
Joke
  • How many Chicago economists does it take to
    change a light bulb?
  • None
  • If the bulb needed changing, market would have
    already done it.
  • As long as the Govt. leaves the light bulb alone,
    it would screw itself in the socket.
  • But democracy and free markets dont always help
    reduce corruption

4
Open Economy Corrup Burden
  • (i) Economic Modernization, Financing Infra
    structure (energy, Enron in India)
  • (ii) International Financial Flows and Economic
    Volatility. Comments on downside risk of
    international investment.
  • (iii) a study of new tools including value at
    risk and how they might adversely affect foreign
    direct investment (FDI) in India.

5
Infrastr Water, Energy, Comm, Ins.
  • Modernization of India needs capital. Tapping
    domestic savings for K and FDI
  • Sunshine is the best disinfectant, India has
    plenty of it, yet corruption? no trust in K
    markets, hurts K-formation for infrastr. Use
    e-government, all Gov. trans on Internet.
  • Enron in India used corruption and wrong techn.
    (LiqNGas) ?cancel energy projects

6
Modernization by Improved Infra
  • Telecommunications is very important for IT
    sector exports, but the telecom sector is in
    trouble in US due to governance issues including
    fraud and corruption by CEOs
  • Internet can be used to fight corruption. Despite
    digital divide, it can reach millions as other
    media report on it (Tehelka). Vinod (1999) J
    Asian Ec micro econ paper

7
Corruption hurts infrastr
  • 1) direct destruction. 1993 Stock Exch. Attack
    possible due to RDX brought in India using
    corrupt customs officers
  • 2) Goodwill is hurt (e.g. Bank of NY, Russian mob
    connection or Jack Welch GE perks.)
  • 3) hurts ordinary investors. Rs 680 crore ONGC
    corporate funds were credited in Harshad Mehta's
    account (no 1028 with the UCO Bank, Hanuman
    Street, Mumbai) by a corrupt official

8
Two Cows joke update for Enron
  • Under feudalism, you have two cows. Your lord
    takes some of the milk. Under fascism, you have
    two cows. The government seizes both, hires you
    to take care of them and sells you the milk.
    Under communism, you have two cows. You must take
    care of them, but the government owns all the
    milk. Under capitalism, you have two cows. You
    sell one and buy a bull. Your herd multiples you
    sell out, invest the money and retire on the
    income.

9
2 Cows joke update for Enron2
  • You borrow 80 of the forward value of the two
    cows from your bank, then buy another cow with 5
    down and the rest financed by the seller on a
    note, bearing interest at twice the prime,
    callable if the market cap of your publicly
    listed company, whose stock you've put up as
    collateral, goes below 20 billion. You sell the
    three cows to your publicly listed company, using
    letters of credit opened by your brother-in-law
    at a second bank, then execute a debt/equity swap
    with an associated unit, so that you get four
    cows back, plus a tax exemption for five cows.

10
2 Cows joke update for Enron3
  • Transfer milk rights of six cows (via
    intermediary) to a Cayman Islands (secretly owned
    by the majority shareholder) who sells the rights
    to seven cows back to you. Annual report
    trumpets company owns eight cows, with an option
    on one more. All transactions cheerfully blessed
    by your independent auditors, who, of course,
    served as consultants.

11
Sad end how to de Enronize
  • Big Press Release and conference call with
    analysts Enron will begin trading cows over the
    Web. Analysts proclaim Enron the prototypical New
    Economy Company, shares ? enabling insiders to
    sell and got out before bankruptcy.
  • A company can de-Enronize itself by better
    disclosure (Sarbanes-Oxley Act)

12
International financial distress and volatility
is increased by corruption
  • Banking distress, collapse of the Thai Baht in
    1997?Losses?Rebalancing portfolios ?Rapid
    worldwide transmission stock /currency markets.
    This is facilitated by corruption, fraud, money
    laundering havens, crony capitalism enronitis.
  • Modern tools of managing risk unavailable in
    India. (interest swaps)

13
Financial Flows Econ Volatility 2
  • Undeveloped derivative securities markets make
    the risk from stress-induced volatility difficult
    to manage for Indian firms
  • Asymmetry of home bias (Americans fail to
    diversify abroad, but Indians do invest abroad if
    allowed) and the effect of corruption on the
    value at risk (VaR) (Worst case scenario 1
    percentile becomes worse with corruption)

14
Home Bias
  • E (excess return)
  • ?JWWW/JW E?2 ?JWF/JW E(covarce),
  • where ?JWWW/JW measures risk using constant
    relative risk aversion CRRA. The covariance term?
    hedge component.
  • India corruption is so high that home bias does
    not work. There is foreigner bias.

15
Joke
  • What do you get when you cross a Godfather with
    an economist?
  • An offer you cannot understand
  • My full paper is accepted for publication by J of
    Asian Ec. Contact vinod_at_fordham.edu. Here I give
    nontechnical highlights

16
Incomplete Insurance Available
  • (i) Credit risk refers to the ability of the
    borrower to generate revenue to pay back the
    debt. (ii) Default risk is with reference to
    collecting when default occurs. (iii) Transaction
    risk (currency devaluation), (iv) corruption risk
  • Very limited insurance available to Indian
    entrepreneurs to manage these risks.

17
SP, Moodys grade India Low
  • A positive contribution of private rating
    agencies and hot money transfers is that they
    create a countervailing power to government
    propaganda. But daily 1Trill transfers cause
    volatility, hard to manage. Ordinary investors
    need to be convinced that investment in India
    will yield profits. Socialism and mistrust of
    profits hurts. VaR tools make corruption seem
    worse.

18
Our theory predicts
  • Corrupt countries with low CPI (corrup.
    perception purity index) by Transparency
    International have
  • (i) extra capital flight controls, (IMF data)
  • (ii) low foreign direct investment (FDI).
  • (iii) high cost of capital (Price-Waterhosue
    Data)
  • All are supported by Asian data, forthcoming
    paper in J of Asian Econ. E.g.,Corr(CPI, FDI/GDP)
    0.6, FDI goes to purer (less corrupt) countries.

19
Correlation Results New Measures
  • Correlation between CPI and (Trade/GDP ratio) is
    even higher at 0.7341
  • Corr(CPI,capital flow control index)
    ?0.7522,(New data from IMF reports)
  • Corr(CPI,cost of capital penalty) ?0.827.
    New cost of capital measure from
    Price-Waterhouse-Coopers data.

20
Isolation of India w.r.t. FDI
  • Indian Rupee was largely immune to the volatility
    induced by the contagion due to Indias capital
    controls (cause corruption). Mexico controls lt
    Indian. K-flight to US problem, Peso fluctuates
    more than Indian Rupee, but FDI is much more in
    Mexico than in India. Cost of K is high for
    India.
  • China gets many times more FDI

21
Conclusion
  • India needs infrastructure (insurance) but
    Corruption hurts Indias microeconomy
  • Open Economy Burden of Corruption is also High
    (VaR worsens it) High cost of K hurts.
  • Corruption can be reduced if everyone understands
    the burden and tries to reduce it. China has
    death penalty.
  • Hopeful signs CVC, Internet, IT sector
  • Discouraging signs ban criminal MPs, supreme
    court decision overturned by all parties
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Economic Modernization and Finance

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Transcript and Presenter's Notes

Title: Economic Modernization and Finance


1
Economic Modernization and Finance
  • Panelist
  • Hrishikesh D. Vinod
  • vinod_at_fordham.edu

2
Open Economy Financial Burden of Corruption
Hrishikesh D. Vinod Professor of Economics,
Fordham University, Director Institute of
Ethics and Economic Policy E-Mail
Vinod_at_fordham.edu Web page http//www.fordham.ed
u/economics/vinod
3
Joke
  • How many Chicago economists does it take to
    change a light bulb?
  • None
  • If the bulb needed changing, market would have
    already done it.
  • As long as the Govt. leaves the light bulb alone,
    it would screw itself in the socket.
  • But democracy and free markets dont always help
    reduce corruption

4
Open Economy Corrup Burden
  • (i) Economic Modernization, Financing Infra
    structure (energy, Enron in India)
  • (ii) International Financial Flows and Economic
    Volatility. Comments on downside risk of
    international investment.
  • (iii) a study of new tools including value at
    risk and how they might adversely affect foreign
    direct investment (FDI) in India.

5
Infrastr Water, Energy, Comm, Ins.
  • Modernization of India needs capital. Tapping
    domestic savings for K and FDI
  • Sunshine is the best disinfectant, India has
    plenty of it, yet corruption? no trust in K
    markets, hurts K-formation for infrastr. Use
    e-government, all Gov. trans on Internet.
  • Enron in India used corruption and wrong techn.
    (LiqNGas) ?cancel energy projects

6
Modernization by Improved Infra
  • Telecommunications is very important for IT
    sector exports, but the telecom sector is in
    trouble in US due to governance issues including
    fraud and corruption by CEOs
  • Internet can be used to fight corruption. Despite
    digital divide, it can reach millions as other
    media report on it (Tehelka). Vinod (1999) J
    Asian Ec micro econ paper

7
Corruption hurts infrastr
  • 1) direct destruction. 1993 Stock Exch. Attack
    possible due to RDX brought in India using
    corrupt customs officers
  • 2) Goodwill is hurt (e.g. Bank of NY, Russian mob
    connection or Jack Welch GE perks.)
  • 3) hurts ordinary investors. Rs 680 crore ONGC
    corporate funds were credited in Harshad Mehta's
    account (no 1028 with the UCO Bank, Hanuman
    Street, Mumbai) by a corrupt official

8
Two Cows joke update for Enron
  • Under feudalism, you have two cows. Your lord
    takes some of the milk. Under fascism, you have
    two cows. The government seizes both, hires you
    to take care of them and sells you the milk.
    Under communism, you have two cows. You must take
    care of them, but the government owns all the
    milk. Under capitalism, you have two cows. You
    sell one and buy a bull. Your herd multiples you
    sell out, invest the money and retire on the
    income.

9
2 Cows joke update for Enron2
  • You borrow 80 of the forward value of the two
    cows from your bank, then buy another cow with 5
    down and the rest financed by the seller on a
    note, bearing interest at twice the prime,
    callable if the market cap of your publicly
    listed company, whose stock you've put up as
    collateral, goes below 20 billion. You sell the
    three cows to your publicly listed company, using
    letters of credit opened by your brother-in-law
    at a second bank, then execute a debt/equity swap
    with an associated unit, so that you get four
    cows back, plus a tax exemption for five cows.

10
2 Cows joke update for Enron3
  • Transfer milk rights of six cows (via
    intermediary) to a Cayman Islands (secretly owned
    by the majority shareholder) who sells the rights
    to seven cows back to you. Annual report
    trumpets company owns eight cows, with an option
    on one more. All transactions cheerfully blessed
    by your independent auditors, who, of course,
    served as consultants.

11
Sad end how to de Enronize
  • Big Press Release and conference call with
    analysts Enron will begin trading cows over the
    Web. Analysts proclaim Enron the prototypical New
    Economy Company, shares ? enabling insiders to
    sell and got out before bankruptcy.
  • A company can de-Enronize itself by better
    disclosure (Sarbanes-Oxley Act)

12
International financial distress and volatility
is increased by corruption
  • Banking distress, collapse of the Thai Baht in
    1997?Losses?Rebalancing portfolios ?Rapid
    worldwide transmission stock /currency markets.
    This is facilitated by corruption, fraud, money
    laundering havens, crony capitalism enronitis.
  • Modern tools of managing risk unavailable in
    India. (interest swaps)

13
Financial Flows Econ Volatility 2
  • Undeveloped derivative securities markets make
    the risk from stress-induced volatility difficult
    to manage for Indian firms
  • Asymmetry of home bias (Americans fail to
    diversify abroad, but Indians do invest abroad if
    allowed) and the effect of corruption on the
    value at risk (VaR) (Worst case scenario 1
    percentile becomes worse with corruption)

14
Home Bias
  • E (excess return)
  • ?JWWW/JW E?2 ?JWF/JW E(covarce),
  • where ?JWWW/JW measures risk using constant
    relative risk aversion CRRA. The covariance term?
    hedge component.
  • India corruption is so high that home bias does
    not work. There is foreigner bias.

15
Joke
  • What do you get when you cross a Godfather with
    an economist?
  • An offer you cannot understand
  • My full paper is accepted for publication by J of
    Asian Ec. Contact vinod_at_fordham.edu. Here I give
    nontechnical highlights

16
Incomplete Insurance Available
  • (i) Credit risk refers to the ability of the
    borrower to generate revenue to pay back the
    debt. (ii) Default risk is with reference to
    collecting when default occurs. (iii) Transaction
    risk (currency devaluation), (iv) corruption risk
  • Very limited insurance available to Indian
    entrepreneurs to manage these risks.

17
SP, Moodys grade India Low
  • A positive contribution of private rating
    agencies and hot money transfers is that they
    create a countervailing power to government
    propaganda. But daily 1Trill transfers cause
    volatility, hard to manage. Ordinary investors
    need to be convinced that investment in India
    will yield profits. Socialism and mistrust of
    profits hurts. VaR tools make corruption seem
    worse.

18
Our theory predicts
  • Corrupt countries with low CPI (corrup.
    perception purity index) by Transparency
    International have
  • (i) extra capital flight controls, (IMF data)
  • (ii) low foreign direct investment (FDI).
  • (iii) high cost of capital (Price-Waterhosue
    Data)
  • All are supported by Asian data, forthcoming
    paper in J of Asian Econ. E.g.,Corr(CPI, FDI/GDP)
    0.6, FDI goes to purer (less corrupt) countries.

19
Correlation Results New Measures
  • Correlation between CPI and (Trade/GDP ratio) is
    even higher at 0.7341
  • Corr(CPI,capital flow control index)
    ?0.7522,(New data from IMF reports)
  • Corr(CPI,cost of capital penalty) ?0.827.
    New cost of capital measure from
    Price-Waterhouse-Coopers data.

20
Isolation of India w.r.t. FDI
  • Indian Rupee was largely immune to the volatility
    induced by the contagion due to Indias capital
    controls (cause corruption). Mexico controls lt
    Indian. K-flight to US problem, Peso fluctuates
    more than Indian Rupee, but FDI is much more in
    Mexico than in India. Cost of K is high for
    India.
  • China gets many times more FDI

21
Conclusion
  • India needs infrastructure (insurance) but
    Corruption hurts Indias microeconomy
  • Open Economy Burden of Corruption is also High
    (VaR worsens it) High cost of K hurts.
  • Corruption can be reduced if everyone understands
    the burden and tries to reduce it. China has
    death penalty.
  • Hopeful signs CVC, Internet, IT sector
  • Discouraging signs ban criminal MPs, supreme
    court decision overturned by all parties
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