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Good news on education

Good news on education
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First Published: Thu, Dec 06 2007. 11 33 PM IST

Updated: Thu, Dec 06 2007. 11 33 PM IST
Rising out of poverty can be frustratingly slow. But one thing is clear: Poor people care deeply about their children’s education. Parents in Punjab, Pakistan, get together and form private schools, charging $3 a month. A recent story about members of the laundry caste in Mumbai described a couple whose sons are studying computers. All this came home to me during a recent visit to Kathmandu. A friend took me to Durbar Square in the morning. We sipped tea watching local people going about their errands. The woman who made us tea said she used the money she earned to send her two children to a private school. Her daughter spoke perfect English.
—Shantayanan Devarajan
What decoupling?
Macro Man had to chuckle this morning when he read a note from Goldman Sachs declaring “victory” on the research group’s decoupling thesis and warning that 2008 may be the year of “recoupling.” De-coupling, for the uninitiated, is the theory that the rest of the world can shrug off US domestic economic weakness and continue to party. Recoupling is the notion that the rest of the world will finally catch (a) cold from the US housing market’s sneeze.
Macro Man has long thought the theory was poppycock. The case for decoupling has basically been rooted in the notion that US housing will sink the US economy because...well...it just has to, while the rest of the world appears to be doing jolly well courtesy of the Brics (Brazil, Russia, India and China).
The case against decoupling has been, by and large, just about every piece of empirical evidence that Macro Man has looked at. Lost in the hubbub over the US housing market is the fact that, through the first three quarters of the year, US economic growth has been considerably quicker than it was in 2006.
The average annualized quarterly growth of the US economy in 2006 was 2.6%. So far this year, it’s been 3.1%. Even if the US economy grows at a measly 1% rate this quarter, 2007’s growth rate will match that of 2006. A big reason why, of course, will be net exports. There seems to be an off assumption among commentators that the links between the US and the rest of the world flow only in one direction. This, of course, is patent nonsense, and a key reason why decoupling has been a myth is that the US has been kept afloat by strong demand elsewhere in the globe.
Looking at Europe in comparison, average quarterly growth so far in 2007 has been 2.4%, which is lower than both the equivalent US figure and the Eurozone’s 2006 average of 3.2%. Hard to see the decoupling there. True, China has been growing at a faster clip in 2007 than in 2006. But again, isn’t that (what) we’ve observed so far from the US?
Similarly, inflation rates are at decade highs in (West Asia), Germany, and many Asian countries. Energy and food prices are an obvious driver there, and they are also now putting upward pressure on US headline inflation as well. Given that everyone in the world needs to eat, and fuel consumption is necessary for economic activity, it’s difficult to see how the basic cost of living can decouple across regions in terms of trend (magnitudes can differ because of different consumption basket weights).
As for financial markets, volatility since August has made (a) mockery of decoupling. If subprime and housing are US problems, why are interbank spreads blowing out across all developed markets? Why did European money market funds hit the wall in July/August? Why is Northern Rock in the UK on the brink of nationalization?
Moreover, cross-market correlations are remarkable high. Consider the case of two fundamentally unrelated financial market prices, the S&P 500 and the NZD/JPY exchange rate. In 2007, the r-squared between these two has been 0.53, a remarkably strong relationship. In contrast, the r-squared in 2006 was 0.004. In 2005, it was 0. In 2004, it was 0.004. In 2003, 0.002. How, then, does this represent “decoupling”?
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First Published: Thu, Dec 06 2007. 11 33 PM IST
More Topics: Education | Poverty | Children | Computers | Growth |