US in Debt Again
The President of the United States of America, President Barak Obama addressed the citizens of America in various TV Channels to appeal for their “understanding” of the debt ceiling that the Federal Government is planning to increase by $1 trillion to keep the government running. Analysts in the US and around the world are watching as to what the Federal Government is planning to do and more importantly, trying to ascertain answers to the question, how did they end up here. It is best that we (small island nations) also analyze the economic repercussions of all these from our perspective especially being recipient of development assistance from the US for number of years.
Debt Management
In the US, raising the debt ceiling is stipulated in their constitution. There is nothing sinister about such macroeconomic practice. President Obama in his live broadcast justified that President Ronald Regan and President George Bush both raised the debt ceiling in their reigning times not only once but on several occasions and now he is appealing that it is necessary to do it again. Apparently, most of the American citizens know that raising the debts ceiling is a short-term plan to reduce debt, however, the root of the problem is government non-economical spending, that needs to be reduced significantly.
As different economies deal with their fiscal undertakings differently, the world is now watching as to how the US will manage such situation especially when they are running out of time and the politicians are not so keen of assisting the Federal Government in raising the ceiling. Macroeconomic theory suggests that raising the debt ceiling cushions the expenditure so that it does not exceed revenue by a significant amount. Other fiscal options are available for the US government to take, but given their study and knowledge of their economy, raising the debt ceiling is their best fix for the moment.
What Does This Mean?
A date has been set and that is 02nd of August, which is also the Federal Government’s due date for some of their important bills. In the event they still have not decided nor agreed to the steps to be taken, they would probably be defaulting on some of their payments. First to the US citizens, they were told that the important obligations that the government need to pay are basic necessities such as social securities, civil servant salaries and the repayment, and interests of government bonds domestically and international.
While it may sound dramatic the financial problem is real and consequences is devastating, especially to an ordinary citizen. IMF released a statement recently saying “it should be self-evident a debt default by the US government ... would have very serious, far-reaching, dramatic repercussions and that’s why we’re confident that it will be avoided.” I have not heard from the US President about their commitment to foreign aid in this traumatic time as yet, but what I gather is that their priority is to put food first on the table before worrying about other things.
The US has always championed development assistance in foreign countries; this is something that will now be tested. While talks are already happening, it will be interesting to see what the Congress will do, particularly when they themselves are looking for money to pay for their basic necessities. I suggest we should not expect too much in such trying times but hope that an amicable solution be reached not only to save the US citizens but the rest of the underdeveloped and developing world that look to US for much needed assistance.
Apart from that, most of our foreign reserves are in US Treasury Bills. As usual, major stock markets are slowly moving away from US dollars for safety measures. This had seen the declining in the value of US dollars on a daily basis. Ultimately, our foreign reserve may not be the value that we expect it to be and in my view it is in our best interest to follow the lead and slowly move towards a stable currency for our foreign reserve. Sounds a bit dramatic but given the current impasse within the Congress, precautionary measures is always good.
What Lessons Can Be Learnt?
Well, there is a of lot debate regarding the subject matter. The US has been practicing this behavior for a while. In economics, the principle to follow is much simpler than the act of following. If we have to solve the issue via fiscal policies the government spending and taxes are the two avenues we can start from. Unfortunately many of us especially those in the government always think that this is not affordable for varying reasons. Even IMF thinks that striking the right balance on fiscal policy is the main challenge facing the US economic officials today.
Well for us small islands states, it is now evident that budgetary control is something that does not need a quick fix. It needs elegance, discipline and a sustainable economic practice with zero tolerance of rent seeking behavior. Fiscal steps of proper tax systems is inevitable and proper spending of government on economic activities that will eventually bring return should be our main fiscal focus. Lastly we need to have economic officials that have the ability and the skills to be creative and give sound advice to our leaders who then will have the moral ability to sacrifice and implement a prudent budgetary system that has a self-healing mechanism instead of looking for assistance abroad to even fund our budget deficit.
LEKIMA
About Me
- LEKIMA NALAUKAI
- Port Villa, Vanuatu
- Born on Viti Levu in Fiji and had primary and secondary school there. Attended university in Fiji teaching Economics at the University of the South Pacific. Heavily involved in Youth Development at church especially in leadership training. Married to Mele.
Thursday, July 28, 2011
Saturday, July 23, 2011
A Ph.D. in economics
So you're thinking about life after college and possibly interested in applying to graduate school in economics ...
Table of Contents
(click on a heading to go directly there)
Why go to graduate school in economics?
Graduate school in economics is a not an easy road, but it can be a fulfilling, challenging, and enjoyable process. You should consider graduate school in economics if it will help you get the job and lifestyle that you want. Depending on your ultimate employment goal, a Master's, Ph.D., or even M.B.A. will best facilitate your achievement of that goal. Please contact any of the faculty early to ask questions and discuss your plans. Preparation is key, so seek advice during your first two years on what courses to take during your remaining semesters.
How long does it take to get a Ph.D. in economics? back to top
Generally five to six years, although four is not unheard of and some students do have a hiatus or linger in graduate school. Typically, the first two years are consumed with coursework and passing comprehensive examinations, followed by two or more years of writing a thesis proposal and completion of the dissertation.
What is a typical course of study? back to top
Typical first year courses are microeconomic theory, macroeconomic theory, quantitative methods/econometrics, and economic history (although it is my understanding that, unfortunately, some programs are phasing out the history requirement), followed by written comprehensive exams in micro, macro, and econometrics. Second year courses are in applied fields and advanced theory, followed by qualifying examinations in 2 to 3 fields of the student's choice (written at some places, oral at others). This is followed by a period in which you attend and participate in the department's seminars and workshops and develop a proposal for your dissertation. Some programs require an oral defense of your proposal, others simply written approval. Then comes the dissertation writing stage in which you work with your advisors to develop a body of original work worthy of a Ph.D. and which culminates in the dissertation defense, a forum, typically open to anyone but in practice attended primarily by your committee, where you present your work and answer faculty questions. You will have anywhere from three to five faculty members on your dissertation committee. With some you will work closely; others will be less involved in your work, serving primarily as readers.
Consult the list of Ph.D. programs in economics for specifics on particular degree requirements at a given university.
What can you do with a Ph.D. in economics? back to top
A Ph.D. in economics can prepare you for a wide variety of careers. You can go into academics (teaching and research at a university or college), work in the private sector (at economic research institutes, consulting firms, investment banking, etc.), or work for the government (the Federal Reserve banks, Bureau of Labor Statistics, Census Bureau, Social Security Administration, Federal Trade Commission, etc.). There are also lots and lots of economists at international development and financial institutions such as the World Bank,(the Young Professionals (YP) program there is a very cool job; also check out the Young Economists program), regional development banks (Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, African Development Bank Group, etc.), the International Monetary Fund (IMF), and other international organizations (OECD, ILO, WTO, UN). Many business schools also offer doctoral programs. For example, the Wharton School of Business at the University of Pennsylvania has ten doctoral programs: finance, accounting, management, marketing, health care systems, insurance and risk management, public policy and management, operations and information management, real estate, and statistics. These will also prepare your for a career in academics and the public or private sector.
For a sampling of recent jobs available, see the list of job openings, often referred to as "JOE" (Job Openings for Economists), maintained by the American Economic Association (AEA). This is the first place many employers, especially colleges and universities, go to find econ Ph.D.'s. It contains academic, non-academic, and foreign listings. Inomics-JOE has a European focus. UK-JOE emphasizes jobs in Britain. The Chronicle of Higher Education also maintains a job listing. The AEA has its annual conference shortly after January 1st, which is when initial interviews for many jobs take place. A timeline of the job market explains what you should be doing the year before you plan to apply for jobs and what to expect both before and after your interviews at the annual conference.
Should I get a Master's degree in economics? back to top
The Ph.D. is the terminal degree in economics, however many institutions offer a terminal Master's degree (e.g., Miami (of Ohio) University, Delaware, UNC-Greensboro, Duke, East Carolina, Minnesota) which typically requires 12-18 months of full-time study. If you're interested in teaching at a university or college, you need to earn a Ph.D. If you're interested in doing economic research at a government institution or research institute, the Master's may be a good choice. Note that you can, typically, leave a Ph.D. program after one year with a Master's degree in economics.
That said, a Master's degree can enable you to gain a more sophisticated treatment of micro and macro theory as well as econometrics before moving on to a Ph.D. program. By reputation, the best place to go for this "preparatory Master's" is the London School of economics' M.Sc. in Econometrics and Mathematical Economics program. Other good programs, all in Canada, are Queen's University, Univ. of British Columbia, Univ. of Toronto, Univ. of Western Ontario, and McGill. It is not uncommon to see students at top 10 programs with Master's degrees from one of these institutions. If you're interested in financial economics, Princeton has a new Master's in Financial Economics program which is also excellent preparation for a Ph.D. program.
What is the Diploma in economics? back to top
The London School of Economics offers a 9-month Diploma in Economics program which can be a useful way of improving your economic, statistical, and analytical skills before continuing on for a Ph.D.
What about a Ph.D. in public policy? back to top
It is also possible to obtain a Ph.D. in public policy during which time you may be able to take the first and second year Ph.D. economics classes. If you're interested in taking this approach to your graduate education, contact program directors directly (get their contact info from these websites) and then discuss this plan with one of the faculty at Davidson. The top 4 schools for this (according to U.S. News) are Syracuse (Maxwell School), Harvard (Kennedy School of Government), Indiana (School of Public and Environmental Affairs), and Georgia (School of Public and International Affairs). Formerly in Top 5: Princeton (Woodrow Wilson School of Public and International Affairs; the Associate Dean, James Trussell, is a Davidson alum!), and Berkeley (Goldman School of Public Policy). I've heard that some, such as Kennedy, place more emphasis on economics, for which strong math skills will be most helpful.
Should I go directly to graduate school? back to top
Not necessarily. Some students have chosen to work in economic research (Berna Demiralp and Jasmina Radeva at Research Triangle Institute, for example) before applying to graduate school. This can be a good method to see whether you like that type of job and to further develop your quantitative and analytical skills. Plus, it is not uncommon for first-year economics grad students to have worked in the research departments at places like a Federal Reserve bank or other institutions for a couple years. For the perspective on going directly after undergrad, contact Jimmy Roberts at Northwestern. For a perspective on working for 1 or 2 years before going to grad school, contact Jeff Larrimore (Cornell) and Andrew Foerster (Duke), respectively. Finally, anecdotal evidence from the experiences of students i know indicates that a stop at one of the Federal Reserve banks can help one get into better programs, especially relative to non-Fed jobs. I've no idea if it's better to be at a specific Fed before applying, say DC or NY.
How much does graduate school cost? back to top
Tuition and fees will vary greatly by type of institution (public or private) and residency status (in-state or out-of-state). Check with schools of interest for specific numbers. Financial assistance for incoming students comes in the form of tuition scholarships, fellowships, and assistanships (scholarships are not taxed while fellowships and assistantships are). Financial awards range from no aid to full support, with outstanding students receiving fellowships to attend graduate school. These fellowships typically include a scholarship for tuition and health insurance plus a fellowship stipend for living expenses. Note that it is possible to enter a program without any support and then, by excelling in your classes, earn tuition remission and research or teaching assistantships for your 2nd year and beyond. If you are accepted in a program without financial support, ask about their recent experience with students earning support after the first year.
A large cost of graduate school is the opportunity cost of not working during your studies; however, many students find summer employment with consulting firms, economic research institutes, international development agencies, or other companies. These experiences may even aid in the completion of your dissertation. In addition, many programs will offer admitted students research or teaching assistantships, in which the student takes on research or teaching assistant duties in addition to their required coursework and dissertation. Again, these opportunities can carry great benefits such as gaining teaching experience, learning research skills, and developing relationships with faculty members.
You should also consider applying for outside funding in the form of financial aid, grants, and fellowships. Visit the general websites on graduate school and specific resources such as the (Jacob K. Javits fellowships (deadline Oct 15 annually), the National Science Foundation (Deadline: Nov 1 annually), The National Institute of Health, The U.S. Agency for International Development, the Rockefeller Foundation.
What is the average salary? back to top
The "Survey of the Labor Market for New Ph.D. Hires in Economics 2007-08" (Deck and Curington, 2007; click here) reports a mean offer for the 2006-07 academic year of $85,565 for economists at Ph.D.-granting institutions (up from $66,361 in 2000-01) and $65,316 (up from $53,634 in 2000-01) for those at Bachelor and Master-degree granting institutions. Overall average is $76,649.
How hard is it to get into a top program? back to top
The short answer is very, very hard. Econphd.net has a good summary, saying "getting into the best PhD programs appears to be an easier feat in economics than in computer science, physics, and math, but its tougher than just about everywhere else." My guess is that top places are accepting only about 10% (maybe 15). And of course that's 10% of a select sample -- the folks who believe they may well get accepted, i.e., they were very good students.
There is tremendous competition for spots from all over the world now, especially China, India, and the former Soviet republics (okay, so those are large population places, but it's still true). Alan Krueger recently came to give a talk at Davidson and I asked him about the trend toward entering classes in top grad schools (he's at Princeton) being mostly foreign students. The newsletters I get from Yale's department the last couple years indicate that well over half the students are foreign, assuming I'm making the right guesses on marginal names. Prof. Krueger actually did some digging into the data for Princeton and indicated to me that the class distribution by country basically mirrors the distribution of the applicants.
What are the admissions committees looking for? back to top
Basically, this is a signaling problem a la Spence ("Job Market Signaling, QJE, 1973). They can't tell how well you'll do in grad school or how good an economist you're going to be, so they use what they think are pretty strong signals. The application basically has three parts -- objective stats (grades, GRE scores), subjective letters of recommendation, and the personal statement. I don't think the personal statement plays into the accept/reject decision very prominently, so that leaves us with two sources of signals. Now don't mail the statement in (pun intended), do a good job on it (everyone else will) and sound like you know what economic research is, even mentioning your potential area of interest and why.
Grades -- at least a 3.7 to be competitive at top 15 places. Perhaps your overall GPA can be a bit lower if your econ and math GPAs are way high. You really need to demonstrate math skills at a high level. You will need to prove theorems, find equilibria, and solve optimization problems in grad econ theory courses, and serious math is required. Acing all the econ classes and taking only calculus is not going to cut it. See below for a list of math classes I suggest taking. Not taking linear algebra, diff eq, stats, probability, real analysis is a bad signal -- as is taking them and getting B's.
GRE -- I think the quantitative score matters most. Verbal certainly the least. I tell my students that here you basically need to get an 800 to keep yourself in the game. An 800 isn't going to make you look good, just not bad. So study for it and get the 800. Now a 780 isn't a death knell, nor maybe a 760, but my bet is that zero of the first-year students at top 5 places got < 760. An illuminating, true anecdote (i'll leave the names out to preserve anonymity): a student from a large, mid-western, flagship state university applied to a top 5 program. This student had earned A's in every course -- econ and math obviously included (and was a double-major, i think -- i'm not sure about that part). Great letters, solid statement. This student scored 780 on the quantitative GRE. This student was not accepted.
Should I take the GRE twice? I don't know ... if you got 780 on the quantitative, i think it's a tough call, but I'd say "no." I know a student who got into a top 10 place (full ride) with 780 -- and lots of A's in hard math classes. If you got 760, I'd probably take it again since that's got to be pretty far, in terms of standard deviations, away from 800, no doubt the modal result at top programs.
Letters of recommendation -- these are important too, but all the competitive applicants are going to have people write good letters. It's a matter of degree. It will help, obviously, to have someone write you a glowing letter. I think one thing that does matter, which is hard to measure and thus hard to signal, is creativity, or imagination, if you will. Those qualities are needed to come up with a good dissertation, so if a professor can write about those on your behalf that would be good. And of course if you can have a professor who has published lots of paper in great journals say you'll make a good economist, that won't hurt. Let's face it, connections matter -- so if the faculty member reading your application knows and respects your recommenders, that helps. That leads to this special note, which isn't really only for students from liberal arts colleges.
Special note for students from liberal arts colleges:
I've gotten the sense (from looking at entering classes and my students' experiences) that students at Ph.D.-granting institutions have a built-in advantage over students from liberal arts colleges. Why? Because they can take graduate-level courses and eliminate much of the uncertainty for the top Ph.D. program over whether the applicant can handle the first-year courses. In fact, when I once asked a professor at a top program what advice he'd give my students, the answer was: take the graduate courses at your institution. Well, there are none at liberal arts colleges. However, if your liberal arts college is in reasonably close proximity to a place with a Ph.D. econ classes, go take them, and do well. I know this sounds weird -- you're probably thinking, but that's what I'm applying to grad school to go do! Yes, I know, but think about from the school's perspective. Success in a graduate course is a pretty good signal that you can succeed in another graduate course. Now I admittedly don't know how they define "success," so perhaps a B is good enough, and a C is the bad signal. Plus, the topics that are covered and the manner in which they're covered will be different in each graduate micro, macro, or econometrics course, so it's not like you'd be getting *exactly* the same stuff. Another anecdote: a professor from a top-3-ranked liberal arts college had a very good student apply to top econ Ph.D. programs. The student was not accepted at the top places, despite being one of their top majors with very good grades and scores and letters. This professor suggested that winning an NSF grant for graduate study would help a future, disadvantaged liberal-arts-college-student win a spot in a top econ Ph.D. program. Sage advice.
For further details on how competitive it is to get accepted, what the admissions committees are looking for (GRE, GPA, etc.), and how certain departments weigh various admissions criteria, click on the school name: Stanford Minnesota Duke Johns Hopkins Wisconsin-Madison UVa Iowa Univ of Texas-Austin Cornell Univ of Washington. You might also try finding the c.v.'s of current students at your schools of interest to see their background.
Where should I apply? And to how many places? back to top
As for where you should apply, the admissions process is rife with uncertainty, but the familiar strategy of aiming "high, middle, and low" is a good approach. Your outcomes will almost certainly not follow a monotonic path (that's been the experience of students for whom I've written letters in the past 3 years), and you never know when someone at the selection meeting is going to go to bat for you. Throw in the fact that some students will get accepted with full rides, some with partial rides, some with no ride, some with guaranteed TA/RA jobs, and the permutations shoot up. So if you can afford the marginal costs of application fees and time, more is better. As Tom Mroz, my postdoctoral fellowship advisor at UNC-Chapel Hill, sagely told me, and I paraphrase, "what is the marginal cost of an extra application, $3?" He was referring to job applications, but I think the same principle applies for grad school applications.
I think 15 is a good number for a person who thinks they have an outside shot at the top 5 (MIT, Harvard, Princeton, Chicago, Stanford). If you're targeting the top 5, you don't need to be reading this page.Also bear in mind that the job market for economics Ph.D.'s is not geographically homogeneous. That is, the higher the ranking of your program, the more national will be the corresponding job market, ceteris paribus. Please consult with the faculty members to discuss your qualifications and interests.
What are my chances of graduating with the Ph.D.? back to top
Naturally this depends on largely you, your abilities, determination, etc., but it might be interesting to note the statistics from two classes entering top 10 programs in the fall of 1991. Note that these are not conditional on any expected determinants of graduation. Brad DeLong estimates that 60% of the 25 entering students at Berkeley in 1991 graduated (by 1997). He provides a few more details here and also has a page containing "David Romer's rules" on how to improve your probability of graduating. It's really only one rule: just write!
The other class is my entering class at Yale. A few years ago a classmate, Jeff DeSimone, and I sat down and figured out how many of the 27 students who started finished, as far as we knew. We came up with 14 known graduates, and nearly all the others known non-graduates. So a rough estimate of your probability of graduating from a program is in the 50 to 60% range. Re-read "David Romer's rules" now.
Where have recent economics Ph.D.'s found jobs? back to top
Many schools publish where recent graduates from their Ph.D. program found employment. I suggest going to their websites and getting a sense of where their graduates find jobs. Be sure to examine the whole list and not get enamored by the top few hires, as any class is bound to have a "star" or two, so the whole distribution is likely a better indicator of what you can expect (unless you yourself are a "star" :) and you probably wouldn't know that yet!). In addition, the NBER maintains a list of the annual market supply of economics Ph.D.s from U.S. universities. And the "Survey of the Labor Market for New Ph.D. Hires in Economics 2007-08" (Deck and Curington, 2007) has a table of hires too.
What you need to be doing now in preparation for applying ... back to top
1. Recommendation letters
Begin thinking about which of your professors you will ask to write reference letters. These are perhaps the most important part of your application (along with evidence of your quantitative and math skills), ceteris paribus. Your competition will have great letters, so you need to as well. Therefore, you should make a serious effort to get to know your professors, more than just excelling in their classes. Ask about research opportunities with the faculty! And don't hesitate to ask your professors to lunch at the commons; they do get one meal per week free there, when accompanied by a student.
2. Mathematics classes
Graduate school today involves serious mathematics. Your life will be easier the better prepared you are mathematically. Success in the following courses (or their equivalents) will improve your chances of acceptance at a top program. This list has been developed in consultation with faculty at Davidson (based on their graduate experience) and faculty involved in graduate admissions at Yale, Columbia, and UNC-Chapel Hill. If you're not a Davidson student, and happen to be at an institution with a Ph.D. program in economics, I would consider taking the first-year Ph.D. classes at your institution. Success in rigorous, quantitative courses is a great signal.
Some top programs say Linear Algebra is a minimum requirement, but it's really a sub-minimum; if I had to guess the true minimum expected level of math, I'd say through real analysis. If anyone reads this and has another opinion or perhaps some relevant knowledge, I'd welcome hearing it. Consider this quotation from Univ of Minnesota's webpage about Lin Alg being a minimum: "In fact, no student has been admitted in the past several years with training limited to this level of mathematics." With that in mind, here are the courses, beyond the requirements for the Econ major, that I think you should definitely take at Davidson:
In the Economics Department (all the courses for a major, plus ... )
215 Mathematical Economics
317 Advanced Econometrics
In the Math Department
130 Calculus I
135 Calculus II: Multivariable Calculus (130 prereq or 1 year of HS calc)
150 Linear Algebra and Mathematica with Applications (135 prereq or 130 and knowledge of vectors)
235 Differential Equations and Infinite Series
300 Introduction to Proof, Analysis, and Topology
430 Real Analysis (235 and 300 prereqs)
Note that a Math minor is these classes plus one more numbered above 200; I recommend 360. You might as well (at least) minor in Math.
These courses would also be helpful, but are not as essential: (in descending order of importance)
In the Math Department
360 Topology (300 prereq)
340 Probability (135 prereq)
341 Mathematical Statistics (340 prereq)
335 Vector Calculus and Partial Differential Equations (235 prereq)
450 Advanced Linear Algebra (355 prereq)
Please note that if you have some idea of what area of economics you wish to do research in, certain classes will be more useful than others. The faculty can help you tailor your schedule depending on your future plans. For example, a budding theorist will want to take Probability, Mathematical Statistics, and Real Analysis.
3. Graduate Record Examination (GRE) Sign up to take the GRE no later than October of your senior year and possibly a test preparation class. Check each program's requirements carefully. Applications for the fall semester are generally due in early January with admission decisions mailed in mid-March and your choice due by mid-April.
Anything less than a 780 on the quantitative section will make it much harder to get into a top 10 (top 20?) program. I have also heard that the verbal section is becoming more prominent in the admissions decisions of top programs, to a degree that dual 800s are not "rare." My interpretation of this is that < 800 quantitative is now "rare" and the admissions committees need a new variable to separate applicants.
4. Contact current faculty at prospective programs who have research interests similar to yours. This is generally done after getting accepted (and many departments organize visits for accepted students), but if you can somehow swing a research assistant job the summer after your junior year with a faculty member at a Ph.D-granting institution, that would be terrific. Let's face it -- sometimes knowing the right people helps, and the Davidson faculty do not have many direct contacts at top 20 Ph.D. programs. Plus, while you may not have a specific idea of what you want to write your dissertation about (which might lead you to go to school X because professor Y, the expert in topic Z, works there), a conversation with a professor at your desired school can greatly inform your decision on where to go. Such contacts may also lead to Research Assistant (R.A.) or Teaching Assistant (T.A.) positions once you matriculate.
Table of Contents
(click on a heading to go directly there)
Why go to graduate school in economics?
Graduate school in economics is a not an easy road, but it can be a fulfilling, challenging, and enjoyable process. You should consider graduate school in economics if it will help you get the job and lifestyle that you want. Depending on your ultimate employment goal, a Master's, Ph.D., or even M.B.A. will best facilitate your achievement of that goal. Please contact any of the faculty early to ask questions and discuss your plans. Preparation is key, so seek advice during your first two years on what courses to take during your remaining semesters.
How long does it take to get a Ph.D. in economics? back to top
Generally five to six years, although four is not unheard of and some students do have a hiatus or linger in graduate school. Typically, the first two years are consumed with coursework and passing comprehensive examinations, followed by two or more years of writing a thesis proposal and completion of the dissertation.
What is a typical course of study? back to top
Typical first year courses are microeconomic theory, macroeconomic theory, quantitative methods/econometrics, and economic history (although it is my understanding that, unfortunately, some programs are phasing out the history requirement), followed by written comprehensive exams in micro, macro, and econometrics. Second year courses are in applied fields and advanced theory, followed by qualifying examinations in 2 to 3 fields of the student's choice (written at some places, oral at others). This is followed by a period in which you attend and participate in the department's seminars and workshops and develop a proposal for your dissertation. Some programs require an oral defense of your proposal, others simply written approval. Then comes the dissertation writing stage in which you work with your advisors to develop a body of original work worthy of a Ph.D. and which culminates in the dissertation defense, a forum, typically open to anyone but in practice attended primarily by your committee, where you present your work and answer faculty questions. You will have anywhere from three to five faculty members on your dissertation committee. With some you will work closely; others will be less involved in your work, serving primarily as readers.
Consult the list of Ph.D. programs in economics for specifics on particular degree requirements at a given university.
What can you do with a Ph.D. in economics? back to top
A Ph.D. in economics can prepare you for a wide variety of careers. You can go into academics (teaching and research at a university or college), work in the private sector (at economic research institutes, consulting firms, investment banking, etc.), or work for the government (the Federal Reserve banks, Bureau of Labor Statistics, Census Bureau, Social Security Administration, Federal Trade Commission, etc.). There are also lots and lots of economists at international development and financial institutions such as the World Bank,(the Young Professionals (YP) program there is a very cool job; also check out the Young Economists program), regional development banks (Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, African Development Bank Group, etc.), the International Monetary Fund (IMF), and other international organizations (OECD, ILO, WTO, UN). Many business schools also offer doctoral programs. For example, the Wharton School of Business at the University of Pennsylvania has ten doctoral programs: finance, accounting, management, marketing, health care systems, insurance and risk management, public policy and management, operations and information management, real estate, and statistics. These will also prepare your for a career in academics and the public or private sector.
For a sampling of recent jobs available, see the list of job openings, often referred to as "JOE" (Job Openings for Economists), maintained by the American Economic Association (AEA). This is the first place many employers, especially colleges and universities, go to find econ Ph.D.'s. It contains academic, non-academic, and foreign listings. Inomics-JOE has a European focus. UK-JOE emphasizes jobs in Britain. The Chronicle of Higher Education also maintains a job listing. The AEA has its annual conference shortly after January 1st, which is when initial interviews for many jobs take place. A timeline of the job market explains what you should be doing the year before you plan to apply for jobs and what to expect both before and after your interviews at the annual conference.
Should I get a Master's degree in economics? back to top
The Ph.D. is the terminal degree in economics, however many institutions offer a terminal Master's degree (e.g., Miami (of Ohio) University, Delaware, UNC-Greensboro, Duke, East Carolina, Minnesota) which typically requires 12-18 months of full-time study. If you're interested in teaching at a university or college, you need to earn a Ph.D. If you're interested in doing economic research at a government institution or research institute, the Master's may be a good choice. Note that you can, typically, leave a Ph.D. program after one year with a Master's degree in economics.
That said, a Master's degree can enable you to gain a more sophisticated treatment of micro and macro theory as well as econometrics before moving on to a Ph.D. program. By reputation, the best place to go for this "preparatory Master's" is the London School of economics' M.Sc. in Econometrics and Mathematical Economics program. Other good programs, all in Canada, are Queen's University, Univ. of British Columbia, Univ. of Toronto, Univ. of Western Ontario, and McGill. It is not uncommon to see students at top 10 programs with Master's degrees from one of these institutions. If you're interested in financial economics, Princeton has a new Master's in Financial Economics program which is also excellent preparation for a Ph.D. program.
What is the Diploma in economics? back to top
The London School of Economics offers a 9-month Diploma in Economics program which can be a useful way of improving your economic, statistical, and analytical skills before continuing on for a Ph.D.
What about a Ph.D. in public policy? back to top
It is also possible to obtain a Ph.D. in public policy during which time you may be able to take the first and second year Ph.D. economics classes. If you're interested in taking this approach to your graduate education, contact program directors directly (get their contact info from these websites) and then discuss this plan with one of the faculty at Davidson. The top 4 schools for this (according to U.S. News) are Syracuse (Maxwell School), Harvard (Kennedy School of Government), Indiana (School of Public and Environmental Affairs), and Georgia (School of Public and International Affairs). Formerly in Top 5: Princeton (Woodrow Wilson School of Public and International Affairs; the Associate Dean, James Trussell, is a Davidson alum!), and Berkeley (Goldman School of Public Policy). I've heard that some, such as Kennedy, place more emphasis on economics, for which strong math skills will be most helpful.
Should I go directly to graduate school? back to top
Not necessarily. Some students have chosen to work in economic research (Berna Demiralp and Jasmina Radeva at Research Triangle Institute, for example) before applying to graduate school. This can be a good method to see whether you like that type of job and to further develop your quantitative and analytical skills. Plus, it is not uncommon for first-year economics grad students to have worked in the research departments at places like a Federal Reserve bank or other institutions for a couple years. For the perspective on going directly after undergrad, contact Jimmy Roberts at Northwestern. For a perspective on working for 1 or 2 years before going to grad school, contact Jeff Larrimore (Cornell) and Andrew Foerster (Duke), respectively. Finally, anecdotal evidence from the experiences of students i know indicates that a stop at one of the Federal Reserve banks can help one get into better programs, especially relative to non-Fed jobs. I've no idea if it's better to be at a specific Fed before applying, say DC or NY.
How much does graduate school cost? back to top
Tuition and fees will vary greatly by type of institution (public or private) and residency status (in-state or out-of-state). Check with schools of interest for specific numbers. Financial assistance for incoming students comes in the form of tuition scholarships, fellowships, and assistanships (scholarships are not taxed while fellowships and assistantships are). Financial awards range from no aid to full support, with outstanding students receiving fellowships to attend graduate school. These fellowships typically include a scholarship for tuition and health insurance plus a fellowship stipend for living expenses. Note that it is possible to enter a program without any support and then, by excelling in your classes, earn tuition remission and research or teaching assistantships for your 2nd year and beyond. If you are accepted in a program without financial support, ask about their recent experience with students earning support after the first year.
A large cost of graduate school is the opportunity cost of not working during your studies; however, many students find summer employment with consulting firms, economic research institutes, international development agencies, or other companies. These experiences may even aid in the completion of your dissertation. In addition, many programs will offer admitted students research or teaching assistantships, in which the student takes on research or teaching assistant duties in addition to their required coursework and dissertation. Again, these opportunities can carry great benefits such as gaining teaching experience, learning research skills, and developing relationships with faculty members.
You should also consider applying for outside funding in the form of financial aid, grants, and fellowships. Visit the general websites on graduate school and specific resources such as the (Jacob K. Javits fellowships (deadline Oct 15 annually), the National Science Foundation (Deadline: Nov 1 annually), The National Institute of Health, The U.S. Agency for International Development, the Rockefeller Foundation.
What is the average salary? back to top
The "Survey of the Labor Market for New Ph.D. Hires in Economics 2007-08" (Deck and Curington, 2007; click here) reports a mean offer for the 2006-07 academic year of $85,565 for economists at Ph.D.-granting institutions (up from $66,361 in 2000-01) and $65,316 (up from $53,634 in 2000-01) for those at Bachelor and Master-degree granting institutions. Overall average is $76,649.
How hard is it to get into a top program? back to top
The short answer is very, very hard. Econphd.net has a good summary, saying "getting into the best PhD programs appears to be an easier feat in economics than in computer science, physics, and math, but its tougher than just about everywhere else." My guess is that top places are accepting only about 10% (maybe 15). And of course that's 10% of a select sample -- the folks who believe they may well get accepted, i.e., they were very good students.
There is tremendous competition for spots from all over the world now, especially China, India, and the former Soviet republics (okay, so those are large population places, but it's still true). Alan Krueger recently came to give a talk at Davidson and I asked him about the trend toward entering classes in top grad schools (he's at Princeton) being mostly foreign students. The newsletters I get from Yale's department the last couple years indicate that well over half the students are foreign, assuming I'm making the right guesses on marginal names. Prof. Krueger actually did some digging into the data for Princeton and indicated to me that the class distribution by country basically mirrors the distribution of the applicants.
What are the admissions committees looking for? back to top
Basically, this is a signaling problem a la Spence ("Job Market Signaling, QJE, 1973). They can't tell how well you'll do in grad school or how good an economist you're going to be, so they use what they think are pretty strong signals. The application basically has three parts -- objective stats (grades, GRE scores), subjective letters of recommendation, and the personal statement. I don't think the personal statement plays into the accept/reject decision very prominently, so that leaves us with two sources of signals. Now don't mail the statement in (pun intended), do a good job on it (everyone else will) and sound like you know what economic research is, even mentioning your potential area of interest and why.
Grades -- at least a 3.7 to be competitive at top 15 places. Perhaps your overall GPA can be a bit lower if your econ and math GPAs are way high. You really need to demonstrate math skills at a high level. You will need to prove theorems, find equilibria, and solve optimization problems in grad econ theory courses, and serious math is required. Acing all the econ classes and taking only calculus is not going to cut it. See below for a list of math classes I suggest taking. Not taking linear algebra, diff eq, stats, probability, real analysis is a bad signal -- as is taking them and getting B's.
GRE -- I think the quantitative score matters most. Verbal certainly the least. I tell my students that here you basically need to get an 800 to keep yourself in the game. An 800 isn't going to make you look good, just not bad. So study for it and get the 800. Now a 780 isn't a death knell, nor maybe a 760, but my bet is that zero of the first-year students at top 5 places got < 760. An illuminating, true anecdote (i'll leave the names out to preserve anonymity): a student from a large, mid-western, flagship state university applied to a top 5 program. This student had earned A's in every course -- econ and math obviously included (and was a double-major, i think -- i'm not sure about that part). Great letters, solid statement. This student scored 780 on the quantitative GRE. This student was not accepted.
Should I take the GRE twice? I don't know ... if you got 780 on the quantitative, i think it's a tough call, but I'd say "no." I know a student who got into a top 10 place (full ride) with 780 -- and lots of A's in hard math classes. If you got 760, I'd probably take it again since that's got to be pretty far, in terms of standard deviations, away from 800, no doubt the modal result at top programs.
Letters of recommendation -- these are important too, but all the competitive applicants are going to have people write good letters. It's a matter of degree. It will help, obviously, to have someone write you a glowing letter. I think one thing that does matter, which is hard to measure and thus hard to signal, is creativity, or imagination, if you will. Those qualities are needed to come up with a good dissertation, so if a professor can write about those on your behalf that would be good. And of course if you can have a professor who has published lots of paper in great journals say you'll make a good economist, that won't hurt. Let's face it, connections matter -- so if the faculty member reading your application knows and respects your recommenders, that helps. That leads to this special note, which isn't really only for students from liberal arts colleges.
Special note for students from liberal arts colleges:
I've gotten the sense (from looking at entering classes and my students' experiences) that students at Ph.D.-granting institutions have a built-in advantage over students from liberal arts colleges. Why? Because they can take graduate-level courses and eliminate much of the uncertainty for the top Ph.D. program over whether the applicant can handle the first-year courses. In fact, when I once asked a professor at a top program what advice he'd give my students, the answer was: take the graduate courses at your institution. Well, there are none at liberal arts colleges. However, if your liberal arts college is in reasonably close proximity to a place with a Ph.D. econ classes, go take them, and do well. I know this sounds weird -- you're probably thinking, but that's what I'm applying to grad school to go do! Yes, I know, but think about from the school's perspective. Success in a graduate course is a pretty good signal that you can succeed in another graduate course. Now I admittedly don't know how they define "success," so perhaps a B is good enough, and a C is the bad signal. Plus, the topics that are covered and the manner in which they're covered will be different in each graduate micro, macro, or econometrics course, so it's not like you'd be getting *exactly* the same stuff. Another anecdote: a professor from a top-3-ranked liberal arts college had a very good student apply to top econ Ph.D. programs. The student was not accepted at the top places, despite being one of their top majors with very good grades and scores and letters. This professor suggested that winning an NSF grant for graduate study would help a future, disadvantaged liberal-arts-college-student win a spot in a top econ Ph.D. program. Sage advice.
For further details on how competitive it is to get accepted, what the admissions committees are looking for (GRE, GPA, etc.), and how certain departments weigh various admissions criteria, click on the school name: Stanford Minnesota Duke Johns Hopkins Wisconsin-Madison UVa Iowa Univ of Texas-Austin Cornell Univ of Washington. You might also try finding the c.v.'s of current students at your schools of interest to see their background.
Where should I apply? And to how many places? back to top
As for where you should apply, the admissions process is rife with uncertainty, but the familiar strategy of aiming "high, middle, and low" is a good approach. Your outcomes will almost certainly not follow a monotonic path (that's been the experience of students for whom I've written letters in the past 3 years), and you never know when someone at the selection meeting is going to go to bat for you. Throw in the fact that some students will get accepted with full rides, some with partial rides, some with no ride, some with guaranteed TA/RA jobs, and the permutations shoot up. So if you can afford the marginal costs of application fees and time, more is better. As Tom Mroz, my postdoctoral fellowship advisor at UNC-Chapel Hill, sagely told me, and I paraphrase, "what is the marginal cost of an extra application, $3?" He was referring to job applications, but I think the same principle applies for grad school applications.
I think 15 is a good number for a person who thinks they have an outside shot at the top 5 (MIT, Harvard, Princeton, Chicago, Stanford). If you're targeting the top 5, you don't need to be reading this page.Also bear in mind that the job market for economics Ph.D.'s is not geographically homogeneous. That is, the higher the ranking of your program, the more national will be the corresponding job market, ceteris paribus. Please consult with the faculty members to discuss your qualifications and interests.
What are my chances of graduating with the Ph.D.? back to top
Naturally this depends on largely you, your abilities, determination, etc., but it might be interesting to note the statistics from two classes entering top 10 programs in the fall of 1991. Note that these are not conditional on any expected determinants of graduation. Brad DeLong estimates that 60% of the 25 entering students at Berkeley in 1991 graduated (by 1997). He provides a few more details here and also has a page containing "David Romer's rules" on how to improve your probability of graduating. It's really only one rule: just write!
The other class is my entering class at Yale. A few years ago a classmate, Jeff DeSimone, and I sat down and figured out how many of the 27 students who started finished, as far as we knew. We came up with 14 known graduates, and nearly all the others known non-graduates. So a rough estimate of your probability of graduating from a program is in the 50 to 60% range. Re-read "David Romer's rules" now.
Where have recent economics Ph.D.'s found jobs? back to top
Many schools publish where recent graduates from their Ph.D. program found employment. I suggest going to their websites and getting a sense of where their graduates find jobs. Be sure to examine the whole list and not get enamored by the top few hires, as any class is bound to have a "star" or two, so the whole distribution is likely a better indicator of what you can expect (unless you yourself are a "star" :) and you probably wouldn't know that yet!). In addition, the NBER maintains a list of the annual market supply of economics Ph.D.s from U.S. universities. And the "Survey of the Labor Market for New Ph.D. Hires in Economics 2007-08" (Deck and Curington, 2007) has a table of hires too.
What you need to be doing now in preparation for applying ... back to top
1. Recommendation letters
Begin thinking about which of your professors you will ask to write reference letters. These are perhaps the most important part of your application (along with evidence of your quantitative and math skills), ceteris paribus. Your competition will have great letters, so you need to as well. Therefore, you should make a serious effort to get to know your professors, more than just excelling in their classes. Ask about research opportunities with the faculty! And don't hesitate to ask your professors to lunch at the commons; they do get one meal per week free there, when accompanied by a student.
2. Mathematics classes
Graduate school today involves serious mathematics. Your life will be easier the better prepared you are mathematically. Success in the following courses (or their equivalents) will improve your chances of acceptance at a top program. This list has been developed in consultation with faculty at Davidson (based on their graduate experience) and faculty involved in graduate admissions at Yale, Columbia, and UNC-Chapel Hill. If you're not a Davidson student, and happen to be at an institution with a Ph.D. program in economics, I would consider taking the first-year Ph.D. classes at your institution. Success in rigorous, quantitative courses is a great signal.
Some top programs say Linear Algebra is a minimum requirement, but it's really a sub-minimum; if I had to guess the true minimum expected level of math, I'd say through real analysis. If anyone reads this and has another opinion or perhaps some relevant knowledge, I'd welcome hearing it. Consider this quotation from Univ of Minnesota's webpage about Lin Alg being a minimum: "In fact, no student has been admitted in the past several years with training limited to this level of mathematics." With that in mind, here are the courses, beyond the requirements for the Econ major, that I think you should definitely take at Davidson:
In the Economics Department (all the courses for a major, plus ... )
215 Mathematical Economics
317 Advanced Econometrics
In the Math Department
130 Calculus I
135 Calculus II: Multivariable Calculus (130 prereq or 1 year of HS calc)
150 Linear Algebra and Mathematica with Applications (135 prereq or 130 and knowledge of vectors)
235 Differential Equations and Infinite Series
300 Introduction to Proof, Analysis, and Topology
430 Real Analysis (235 and 300 prereqs)
Note that a Math minor is these classes plus one more numbered above 200; I recommend 360. You might as well (at least) minor in Math.
These courses would also be helpful, but are not as essential: (in descending order of importance)
In the Math Department
360 Topology (300 prereq)
340 Probability (135 prereq)
341 Mathematical Statistics (340 prereq)
335 Vector Calculus and Partial Differential Equations (235 prereq)
450 Advanced Linear Algebra (355 prereq)
Please note that if you have some idea of what area of economics you wish to do research in, certain classes will be more useful than others. The faculty can help you tailor your schedule depending on your future plans. For example, a budding theorist will want to take Probability, Mathematical Statistics, and Real Analysis.
3. Graduate Record Examination (GRE) Sign up to take the GRE no later than October of your senior year and possibly a test preparation class. Check each program's requirements carefully. Applications for the fall semester are generally due in early January with admission decisions mailed in mid-March and your choice due by mid-April.
Anything less than a 780 on the quantitative section will make it much harder to get into a top 10 (top 20?) program. I have also heard that the verbal section is becoming more prominent in the admissions decisions of top programs, to a degree that dual 800s are not "rare." My interpretation of this is that < 800 quantitative is now "rare" and the admissions committees need a new variable to separate applicants.
4. Contact current faculty at prospective programs who have research interests similar to yours. This is generally done after getting accepted (and many departments organize visits for accepted students), but if you can somehow swing a research assistant job the summer after your junior year with a faculty member at a Ph.D-granting institution, that would be terrific. Let's face it -- sometimes knowing the right people helps, and the Davidson faculty do not have many direct contacts at top 20 Ph.D. programs. Plus, while you may not have a specific idea of what you want to write your dissertation about (which might lead you to go to school X because professor Y, the expert in topic Z, works there), a conversation with a professor at your desired school can greatly inform your decision on where to go. Such contacts may also lead to Research Assistant (R.A.) or Teaching Assistant (T.A.) positions once you matriculate.
A Cohesive Macroeconomic Policy that will Strengthen Economic Partnership with the International Community; The Case of Vanuatu .
A Cohesive Macroeconomic Policy that will Strengthen Economic Partnership with the International Community; The Case of Vanuatu .
LEKIMA NALAUKAI
School of Economics, University of the South Pacific; Emalus Campus; Port Vila; Vanuatu
Abstract
Strengthening our partnership with international community does not happen in void, by chance or by luck. It is through trade policies and aid that we can asses how compatible we are to others. This paper explores the effectiveness of aid in Vanuatu and suggests participation between donors, Vanuatu government official and ordinary citizens by revisiting the Paris Declaration on Aid Effectiveness. Research suggests that there are no long term relationship between aid and economic growth in Vanuatu. Allowing civic participation in macroeconomic polices planning through representatives creates ownership to parties and by sharing information leads to proper implementation of assistance.
Introduction
Vanuatu is at a crossroad of moving into adulthood with 30 years into independence and expecting to graduate from the Least Developed Countries (LCD) category in a few years time. After a cycle of political instability, prosperity and then into instability again, it is in the best interest of the country that the policymakers should undertake a relevant, reliable and cohesive domestic framework that will eventually have significant implications to their partnership with the international community. Recently, it was once one of the fastest growing economies of the South Pacific; however, with the non-existence of a comprehensive macroeconomic policy framework coupled with high turnover of government officials, all those achievements are now diminishing with an increasing in inflation rate. Real GDP growth was 7.4 per cent in 2006, but now forecasted to grow at 2.2 per cent in 2010. (2010 or 2011) Due to a very narrow export based with consumption being funded externally, Dutch disease is inevitable with inflation uncontrollable (Gay 2004).
One of the prominent features of Vanuatu’s economy is the parallel existence of the modern and traditional economy (see Economic Opportunities Fact-Finding Mission, AUSAID & NZAID page 12 2006). It is now the responsibility of the current policy makers to decide whether to move to modern economy or run both economies simultaneously . Given such strong views by the Director of National Cultural Council and the current initiative by Vanuatu on the Alternative Indicators of Well-Being for Melanesians Project , the onus is now on the current generation to make a paradigm shift since our international friends who are the donors of our development funds may not recognize the traditional economy. This is not an issue of sovereignty. Circumstances now dictate the need to develop, move away from subsistence life and pursue new opportunities that life will bring for us and for our future generation.
For the last 30 years Vanuatu went through a lot in terms of economic and political changes and the independence from the condominium being the biggest break in 1980. Since then, donor countries have been assisting through capital transfer and direct funding. Millions of dollars of funding have been flowing into the economy since independence. Regretfully, 30 years down the line Vanuatu seems to have no direction in terms of private sector development, which is the engine of economic growth and donors and the government are trying hard to find if there are any long term economic effects of past years funding programs. The Pacific Institute of Public Policy (PiPP), an independent, non-partisan and not for-profit organization based in Port Vila, Vanuatu in one of their briefing papers in 2008 argued several areas that need special attention.
One of the obvious areas that the briefing paper mentioned is for specific and targeted areas that needed assistance. In addition to that a “one-size fits all” model will definitely not work in the Pacific especially Vanuatu. PiPP rightfully argued about the fundamental Keynesian economic theory which now forms the modern macroeconomic theory about the importance of fiscal stimulation to increase growth through private sector development. However, the question that we are all asking is why is it not working?
The next section reviews macroeconomics indicators of the nation and of how the economy has been performing with special attention on the effectiveness of aid. The third section outline the objective of this paper, that is to present a Macroeconomic policy participation effort together with policy alignment and the fourth and final section presents conclusions and final recommendations with suggested economic implication.
Macroeconomics Indicators
As most commentators mentioned, Vanuatu is unique in many ways. Since Independence in 1980, Vanuatu’s geographical location, economic status and political instability generally dictated its macroeconomic performance for the last 30 years. Struck by serious cash flow, loss of confidence in the domestic financial sector, serious budget deficits and social unrest (Gay 2003) left little room to the government but to accept the Asian Development Bank (ADB) sponsored Comprehensive Reform Program (CRP) in 1997 to try and salvage the economy. However, even after the CRP, government officials believed that the program now created a set of “new problems” (Gay 2004) whereas (Jayaraman & Ward 2006) believed that it could have been worse without CRP.
However, there were some improvements in the last eight years due to various reasons, but the abundant inflows of funding to Vanuatu remains the major source of sustainability. The economy improved its fiscal position from 1998 to 2002 period and recovered in 2003 due to gains in agricultural sector, increase in domestic demand, stability in the exchange rate and official international reserve and declining in trade deficit with lending drive by the commercial banks resulting in domestic credit growing by 2.8 per cent in 2004 (Sugden and Tevi 2004).
Macroeconomic stability is always a challenge for Vanuatu. However, real GDP growth is projected to grow at 3.8 per cent in 2011 after being down to 2.2 in 2010 (Refer Table 1). Total Revenue excluding grants continue to decrease through 2009 from 26.8 per cent of GDP in 2009 to 25 per cent of GDP in 2010 this shows the lack of domestic economic activity for the period. Fortunately, expenditure seems to be stabilizing due to reasons best known to government, probably effects of budgetary cuts.
It will be interesting to see the 2011 performance with the budget to be consistent with 2011 particularly the tight measures in expenditure. The circulation of foreign currency in the domestic financial system is something that need closer attention and analysis. Controlling money supply is a proactive role which needs vigilance however, it will be added responsibility if foreign currency are allowed to be traded within the financial system. This can allow money laundering and other financial malice practices. Interest rates seems to be stable whereas M2 seems to be fluctuating since 2006 with 16 per cent in 2007 now 0.5 per cent in 2009 and estimated to drop to below zero in 2010.
Foreign Reserves seems to be something that the Vanuatu government is managing well. A four to five months cover could be a good threshold as most Pacific Island Countries (PIC) are also targeting. Current account is an area that definitely needs attention. It has not shown any significant improvement for the last 5 years. A significant improvement in domestic economic activities and tightening of trade policies together with work on monetary policy should stabilize this.
Table 1 Selected Macroeconomics and Financial Indicators
Est Proj
2006 2007 2008 2009 2010 2011
Output and prices (annual percentage change)
Real GDP 7.4 6.5 6.2 3.5 2.2 3.8
Nominal GDP 12.7 11.6 11.2 4.8 5.1 7.9
Consumer prices (period average) 2 3.9 4.8 4.3 2.8 4
Consumer prices (end period) 1.9 4.1 5.8 2.3 3.4 4
Government finance (in percent of GDP)
Total revenue and grants 20.7 22.3 27.7 26.8 25 24.2
Revenue 18.9 20.4 21.1 19.5 18.1 18.1
Tax 16.8 18.2 19.1 17.2 16.5 16.5
Non-tax 2.1 2.2 2 2.3 1.7 1.7
Grants 1.8 1.8 6.6 7.3 6.8 6
Total expenditure and net lending 20.2 22 27.9 27.6 27.7 25.1
Current expenditure 17.4 19.4 18.6 18.6 19.8 19
Of which: wages and salaries 10.7 11.8 11.7 11.4 11.6 10.9
Capital expenditure 2.1 2.6 7.6 9 7.3 6.1
Overall balance 0.5 0.3 -0.2 -0.7 -2.7 -1
Money and credit (annual percentage change)
Broad money (M2) ... 7 16.1 13.2 0.5 -6 na
Net foreign assets 10.5 15 9 -18.3 -34.6 na
Domestic credit 7.2 10.6 36.7 22.1 17.4 na
Credit to private sector 9.7 12.3 43.3 19.9 11.6 na
Interest rates (in percent, end of period)
Deposit rate (vatu deposits) 1.9 2 2.7 3.2 1.8 na
Lending rate (vatu loans) 11.3 10.3 10.3 10.9 10.3 na
Balance of payments
Current account (in millions of U.S. dollars) -28.4 -36.9 -65.8 -48.5 -41 -43.7
(In percent of GDP) -6.5 -7 -11.1 -8.2 -5.9 -5.7
Of which: tourism exports (in US$ Million) 104.2 137 170.6 186.9 219.6 233.9
Merchandise exports, f.o.b. (in US$ Million) 37.7 29.7 41.7 55.2 51.4 55
(Annual percentage change) -1.3 -21.2 40.7 32.1 -6.8 7
Merchandise imports, f.o.b. (in US$ Million) 141.2 176 265.2 247 246.3 267.2
(annual percentage change) 7.6 24.6 50.6 -6.8 -0.3 8.5
Gross official reserves (end of period)
In millions of U.S. dollars 105.1 119.6 115.3 148.6 161.4 157.2
In months of corresponding imports of goods (c.i.f.) 7.5 6.8 4.4 6 6.6 5.9
In months of next year's imports of goods (c.i.f.) 6 4.5 4.7 6 6.1 5.4
External debt
External debt (in percent of GDP) 15.8 13.5 16.8 17.3 16 14.4
External debt service 1.3 1.2 1.3 1.5 1.4 1.4
(in percent of exports of goods and non-factor services)
Exchange rates (period average)
Exchange rate regime: officially pegged to an undisclosed basket of currencies
Vatu per U.S. dollar (period average) 110.6 102.4 101.3 106.7 95.5 na
Real effective exchange rate (average, 2005=100) 98.2 99.6 98.3 103 106.7 na
Nominal GDP (in billions of vatu) 48.4 54.1 60.1 63 66.2 71.5
Source: IMF 2011
Despite the population almost doubling over the last thirty years, the proportion of the population living in the rural remains stagnant. Developments were concentrated on the two major urban areas of Port Vila on the island of Efate and Luganville and on the island of Santo . The rural area and its population continued to be characterized by subsistence living.
Due to its narrow export base, Vanuatu continues to struggle with its trade shares and Budget Balances. Welfare for the rural dwellers is also a concern as though they are farmers; their production is merely subsistence in nature with a direction towards heavy commercial farming. Despite almost 75 per cent of the people live in the rural area, agriculture as a whole only produces 20 per cent of GDP. This is one of the reasons the rural areas of the country are so poor (Haywood 2003).
Due to a steady inflow of development assistance in relative to other Pacific Island Countries, questions need to be asked as to why development assistances are not filtering to the 75 per cent of the population that practically live in rural areas whose livelihood depend solely on subsistence farming. Aid per capita for Vanuatu in 2009 was US$430 which is almost the same as the Least Developed Countries GDP per capita for the same year, which is US$651 (World Bank Report 2009).
Strengthening Partnership
Revisiting Paris Declaration on Aid Effectiveness 2005
Vanuatu was one of the participating countries in the Paris Declaration on aid effectiveness in 2005. The declaration was to strengthen the commitment established in Rome in 2003 and the Marrakech Roundtable in 2004. All the commitment directing donors and partner countries to harmonize and align policies that will see the increase in the impact of aid in reducing poverty, and inequality, increasing growth, building capacity and accelerating achievement of the Millennium Development Goals (MDG). Under the Declaration, Vanuatu should by now have a domestic policy capacity to plan, implement, manage and account for all inward flow of funding. Capacity development is the responsibility of partner countries with donors playing a supporting role. It needs to not only be based on sound technical analysis, but also to be responsive to the broader social, political and economic environment, including the need to strengthen human resources (Paris Declaration on Aid Effectiveness 2005).
Reaffirming their commitment in six broad areas; the donors together with the partner countries met in Paris in 2005 and decided to work on strengthening national development strategies, increasing alignment of aid with partner countries priority, enhancing accountability, eliminating duplication reform and defining measures and standards in government policies. In Table 2, Donors and Partners committed to fifteen targets. It is apparent that trade especially export is more direct and simplified in relative to aid where the bottle neck seems to be in the government officials.
Table 2: Indication of Progress
I N D I C A T O R S T A R G E T S F O R 2010
1 Partners have operational
development strategies At least 75% of partner countries have operational development strategies.
2a Reliable public financial
Management (PFM) systems Half of partner countries move up at least one measure (i.e., 0.5 points) on the PFM/ CPIA (Country Policy and Institutional Assessment) scale of performance.
2b Reliable procurement
Systems One-third of partner countries move up at least one measure (i.e., from D to C, C to B or B to
A) on the four-point scale used to assess performance for this indicator.
3 Aid flows are aligned on
national priorities Halve the gap – halve the proportion of aid flows to government sector not reported on government’s
budget(s) (with at least 85% reported on budget).
4 Strengthen capacity by
Co-ordinated support 50% of technical co-operation flows are implemented through co-ordinated programmes consistent
with national development strategies.
5a Use of country public
financial management
systems For partner countries with a score of 5 or above on the PFM/CPIA scale of performance (see Indicator 2a). All donors use partner countries’ PFM systems;
And Reduce the gap by two-thirds – A two-thirds
reduction in the % of aid to the public sector not
using partner countries’ PFM systems.
For partner countries with a score between
3.5 and 4.5 on the PFM/CPIA scale of performance (see Indicator 2a). 90% of donors use partner countries’ PFM systems;
and
Reduce the gap by one-third – A one-third
reduction in the % of aid to the public sector not
using partner countries’ PFM systems.
5b Use of country
procurement systems For partner countries with a score of ‘A’ on
the Procurement scale of performance (see Indicator 2b) All donors use partner countries’ procurement
systems; and
Reduce the gap by two-thirds – A two-thirds
reduction in the % of aid to the public sector not
using partner countries’ procurement systems.
For partner countries with a score of ‘B’ on
the Procurement scale of performance (see
Indicator 2b). 90% of donors use partner countries’ procurement
systems; and
Reduce the gap by one-third – A one-third
reduction in the % of aid to the public sector not
using partner countries’ procurement systems.
6 Avoiding parallel PIUs Reduce by two-thirds the stock of parallel project implementation units (PIUs).
7 Aid is more predictable Halve the gap – halve the proportion of aid not disbursed within the fiscal year for which it was
scheduled.
8 Aid is untied Continued progress over time.
9 Use of common
arrangements or
procedures 66% of aid flows are provided in the context of programme-based approaches.
10a Missions to the field 40% of donor missions to the field are joint .
10b Country analytic work 66% of country analytic work is joint.
11 Results-oriented
Frameworks Reduce the gap by one-third – Reduce the proportion of countries without transparent and
monitorable performance assessment frameworks by one-third.
12 Mutual accountability All partner countries have mutual assessment reviews in place.
Using the Paris Declaration as a map to international benchmarking, it is Vanuatu’s responsibility to take ownership of making aid more effective and efficient by reducing duplication, transaction cost, misdirecting of aid and have zero tolerance of corrupt practices. This will only eventuate when the Government formulates and implements their own national development plans, using their own prioritization, planning and implementation system as soon as possible. The Priorities and Action Agenda 2006-2015 by the Ministry of Finance in 2006 is a typical example of such initiative, however, after reading the document, we now should be more result oriented and involve as many locals as possible to write such documents so that they will continue to develop the implementation , review and improvement plan. If consultants were involved, the possibility of taking the report further into implementation and review mode is doubtful. The document rightfully pointed out weaknesses and priority areas, but lack realistic implementation steps and time line.
Government priority areas as per document include:
• Private Sector Development and Job Creation
• Macroeconomic Stability and Equitable Growth
• Good Governance and Public Sector Reform
• Primary Sector Development
• Education and Human Resources Development
• Infrastructural Development and Utilities
Aid
Aid is considered to be a critical policy area that requires a high level of coordination between countries (donor and recipient country) and between government ministries and ordinary citizens. Aid or development assistance consists of financial flows, technical assistance, and goods and services (in kind) which are provided in the forms of grants and concessional loans (Radelet, 2006). The predominant sources of aid are bilateral, that is from one donor-country to another recipient-country, and multilateral, that is from regional and multilateral development agencies to recipient countries. Multilateral assistance represents the disbursement of aid resources which come, ultimately, from donor countries but are pooled and allocated through such regional and multilateral development agencies. The successfulness of these aid flows will depend on the cohesiveness of the partnership.
Aid is considered critical to the development process of many low-income countries for several reasons. For instance, it serves as an important source of finance for poor countries which are not well placed to attract from the global private capital market the financing that they may need to fund their development activities (Gupta et al., 2006). In addition to providing finance, aid can also be a vehicle for transmitting critically needed knowledge for these countries, and assist them in implementing development- enhancing reform of their policies and institutions (Gunning, 2001). Part of the self-assigned mandate of the multilateral development agencies is to use the provision of finance as a lever for transmitting knowledge and advice (regarding policy and institutional reform) to aid receiving countries. Without a well coordinated aid administration, policy gaps will widen resulting in wastage.
Macroeconomics Polices
Macroeconomics is a branch of economics which covers the national economy including consumption, government spending, investments, and trade. Encompassing these areas are money, production, employment and education. Monetary and Fiscal policy are the two main polices that govern and drive the economy. In most cases donor countries filter their funding assistance through such policies and without coordinated streamline policy, the unrepresented population continue to be deprived and mistrust continue to thrive.
A possible approach to strengthen economic partnership with international community is to asses the macroeconomic impact of development assistance. The International Monetary Fund (IMF) identified the main identities of impact via macroeconomic principle (Gupta et al 2006). These include:
• The budget deficit must be fully financed from either external or domestic sources.
• Projections for reserve money and broad money growth should be consistent with the output and inflation forecasts and based on realistic assumptions about the velocity of circulation and the money multiplier.
• Real GDP growth and trade projections should be consistent with the assumed path for both public and private investment, the real exchange rate, private credit growth, and expected developments in productivity, including those resulting from scaling up.
• Debt sustainability (both external and domestic) needs to be reassessed and maintained through a prudent debt-management strategy.
Donors are no doubt expecting Vanuatu to forge a macroeconomic policy that is sound which will enhance growth and development, eradicate poverty and corruption and assisting Vanuatu to strengthen their partnership with international community. The donor’s intention is to help the underprivileged and develop the nation; the inflows of funding normally administered through the macroeconomic mechanism. However, without a proper facilitation and insufficient capacity within the government sector to implement sponsored programs ; long-run positive economic effects are doubtful. The CRP was a practical example that international community, domestic policy makers and the people at large need to work together in order for any such intended program to work. In a few years it will be interesting to evaluate the multiplier effect of the recent US$65.7 million Millennium Challenge Corporation’s Transport Infrastructure Project.
Past studies and critics from independent commentators on the effectiveness of aid in Vanuatu were not very promising. Despite inflows of development assistance reaching the highest in 2009, there is no link in aid and growth (Jayaraman and Ward 2006). Hughes and Sodhi 2006, shared the same sentiment that upon analyzing shorter period of time, found that aid did not benefit Vanuatu’s long term economic growth. Questions need to be asked as to why receiving US$103 million in 2009 and had aid per capita of US$430, yet we still cannot have a sustainable economic growth (World Bank Report 2010).
Due to high inflows of aid, Vanuatu is vulnerable to unearned economic rents or “Dutch Disease”. The economic consequence of such is the unnecessary pressure to the unrealistic value of Vatu. It makes exports very expensive and the ordinary local Ni-Van do not benefit from their currencies, but plays an important role to foreigners and expatriates working in Port Vila by not losing much in foreign exchange when sending money back home.
Only 25 per cent of the population live in the urban area; of which more than 50 per cent live in Port Vila. Seeing very less development in the rural and given the fact that rural dwellers continue to pursue the traditional economy, aid has therefore largely benefited the urban elite. However, since the urban life does not generate that much in commodity exports, Vanuatu’s export figures continue to remain stagnant over period of time. The onus is now on the Ni-Van to draw up a framework that will see the development of the rural sector on which lies the resources of the nation that is in dire need of development.
Given such alarming discoveries, the onus is on Vanuatu to discuss with their donors about engaging into a mutual commitment towards enhanced development assistance effectiveness by promoting improvements in: i) ownership, whereby they decide their own strategies for poverty reduction, and improve their institutions and finding ways to reach the unfortunate in the rural; ii) alignment of donors behind these objectives, and use of local systems such as procurement and financial system; iii) harmonization, which entails better coordination, simplification of procedures, and sharing information by the donor countries to improve accountability; and, iv) mutual accountability, on the part of the donors and Vanuatu for development results (Paris Declaration 2005).
Vanuatu is already a member to some regional trade agreements , and part of the Pacific Forum Secretariat and currently in the process of becoming a member of the World Trade Organization. Taking into account this involvement the government should already be in a position to integrate not only politically but more so in learning from each other and building up their policy implementation towards a compatible environment. Even though there are criticism to such integration (see Pacific Network on Globalization “On 10 Reasons to challenge the PACER Plus” 2009); there are still opportunities there that we can learn from each other in terms of policy implementation and development. Global experiences are also proof that regional integration is a source of small nations’ compatibility and convergence (see Jo 2006).
Alignment of Monetary Policy
Vanuatu’s exchange rate policy; pegging that is based on secret weights could be an area to start from. Commentators who have already commented on this include (Holden, Bale & Holden 2003; Jayaraman & Ward 2006). Given the forecasted economic slow down in 2011 (IMF 2010), pressure is now on source of inflation and liquidation management. Vanuatu now should provide a monetary policy that will facilitate the economic development and growth given the large inflow of aid to the economy.
According to recent IMF consultation report (See Article IV Consolation), they noted the overvalue of the Vatu considering the absorption on the incoming inflows of funding with a very narrow export base, and unfair distribution of aid (Refer to AUSAID2009 report and other reports online). Inflation being forecasted to 4 per cent in 2011 and high liquidity in the financial system needs attention from the Reserve Bank. Regardless of the increase in lending by commercial banks, it will be interesting to note the effects of such to the livelihood of ordinary Ni Van.
Credit provision is costly and unfavorable to rural citizens. The lack of business contextualization of lending process by foreign owned banks and credit accessibility are some areas that need attention. The lack of existence of commercial banks in the rural can be due to a lot of reason but their non existence is a hindrance to development. Recognition and formalization of a widely accepted description of collateral needs to be accepted across commercial banks since most rural dwellers are in need of credit but may not be eligible for current lending conditions.
Alignment of Fiscal Policy
Tax Heaven is something that Vanuatu has boasted about for a number of years; however, government needs to analyze how much we are losing from such reputation in the long-run. Livelihoods will not be improved just by telling the world about our tax heaven facilities. Given the fact that Vanuatu has a very high public sector wage bill in relative to other PIC (IMF 2010) it is time that we gradually consider introducing income tax to strengthen our fiscal performance. While this will take off the general feasibility of the fiscal performance it is a stepping-stone for an exit strategy of Vanuatu’s heavy dependence on aid.
Secondly, with its small export base, Vanuatu continues to have trade imbalances for the last three decades. Proper facilitation of development assistance should be directed to an export oriented program that will not only reduce trade deficit but also translate sources of income and change of livelihood to ordinary citizens. Such programs should extend to commodity trade through alternative farming from the current mainstreams and upgrade small farms to a commercial level.
Third area the Government can work on is the budgetary coordination. While the target seems to be appropriate and sound in nature it is the responsibility of the government official to translate figures into productivity. Leakages in government revenue can be improved by enhancing the current VAT collection process to increase government revenue with minimal compliance cost. With the current WTO accession, the Melanesian Spearhead Trade Agreement (MSG TA) in place and other regional commitment that Vanuatu has, fiscal securitization is very important at this stage. Such commitment will only be viable if we coordinate our domestic policy to be conducive to the relationship that we have.
Participation and Policymaking by Information Sharing
It is becoming apparent that there is evidence of asymmetrical information between rural dwellers and government officials. Those who are at least being informed may not have the correct information. Subsistence (small commercial) farming in Vanuatu may have very little information about credit access and banking facilities available for them. For those that have information may have eligibility problem due to unrealistic collateral requirements from the banks. Lending rates by commercial banks need to be translated well to the production side.
When useful information passes freely in a government/citizen participation and active involvement of civil society groups; this contributes to efficiency and effectiveness of any government initiative. Both are positively influenced not just by having the appropriate information on what needs to be done, but also by building commitment between them and making the right direction to move in and the steps to take (Crosby, 2000).
Efforts by government officials and interest groups to educate and inform rural dwellers may also ease the course of reforms and translating needed assistance to priority areas (Frischtak and Atiyas 1996). Radio programs, village meetings, district meetings, cooperatives initiatives are some of the machineries that we can use to translate information to the people. While reaching them it is important that government officials gather as much information as possible from them as this will be the basis of the development plan of the government which donors will be interested in. Initiative such as the Yumi Konek by the Rural Development and Training Center’s Association of Vanuatu is a typical example of information sharing .
It is the role of government officials and policy makers to see that information from ordinary citizens are gathered and compiled. Such information always include development needs such market access, subsidies, logistics, education, health or natural resources. This is where the government builds its priority areas. It will be in the best interest of Vanuatu if donor countries study those needs first before funding program starts.
In terms of participatory, Vanuatu can learn from various experiences and practices by countries to assist in this area . Participatory reports were positive seeing policymakers and ordinary citizens moved from debates to more constructive participatory level together with Non Governmental Organizations (NGO) and donors in the advisories committees bringing in their expertise and needs.
Commentators such as (Fuhrman, IMF/World Bank 2005: 49) reflect the findings that participation (in terms of information-sharing with and consultation of civil society actors) has not extended into the macro-economic framework. Macroeconomic decisions are still made between a limited number of officials from the Ministry of Finance, Reserve Bank and donors, and information on the conditionalities and policies agreed in these discussions are not easily accessible to non-governmental representatives groups.
Participation and well coordination of participants should enhance the cohesiveness of government’s policies. Lessons should be learnt from the 1997 CRP Program on its inappropriate focus, lack of national ownership, and poor implantation (Gay 2004). These should now assist us in forming the basis of our cohesiveness.
The PAA 2006-2015 outlined the strategic development priorities. Cohesive approach shall play a role in translating such strategic plan into real development and ultimately increase livelihood of the people. When interest groups together with the Reserve Bank, Ministry of Finance officials have some level of information sharing and participation, the government can have a proper perspective of their direction. Constructive criticism from concerned groups could be daunting; however, it will confirm the relativity of government’s policy and will keep a track of performance.
Conclusion
This paper has examined participation and the harmonization of macroeconomic to ease our economic integration internationally. As with many complex encompassing economic, social and political phenomena, integration and participation is challenging. However, the macroeconomic policy involvement is the best fix.
- Sustainable and cohesive macroeconomic policy provides the best feasible solution. Particularly the monetary and fiscal policy alignment which encompasses the livelihood across sectors and the need to educate and share information about things that is relevant to their lives.
- Information sharing involves participation. To create a macroeconomic policy participation environment, it requires capacity to reach out to citizens and engage them. Building of such capacity includes providing agencies with the resources and incentives to interact with community-based groups and civil society organizations, and developing monitoring programs to assure feedback on progress and to make necessary changes. These will involve the donors, the government officials and ordinary citizens. Governments need to inform their citizens about current and planned monetary and fiscal decisions, including the rationale behind policy choices.
- Participatory of institutions such as regulatory bodies, financial institutions, legal, social, health and education are vital.
- Ownership becomes habitual once citizens understand the rationale of government’s choices.
- This will involve a two way communication and at least ease the gap between citizens, government officials and donors.
No matter what model or technical advice or assistances the funding agencies or the donors may present to Vanuatu; without citizens’ involvement and ownership all effort will be in vain.
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LEKIMA NALAUKAI
School of Economics, University of the South Pacific; Emalus Campus; Port Vila; Vanuatu
Abstract
Strengthening our partnership with international community does not happen in void, by chance or by luck. It is through trade policies and aid that we can asses how compatible we are to others. This paper explores the effectiveness of aid in Vanuatu and suggests participation between donors, Vanuatu government official and ordinary citizens by revisiting the Paris Declaration on Aid Effectiveness. Research suggests that there are no long term relationship between aid and economic growth in Vanuatu. Allowing civic participation in macroeconomic polices planning through representatives creates ownership to parties and by sharing information leads to proper implementation of assistance.
Introduction
Vanuatu is at a crossroad of moving into adulthood with 30 years into independence and expecting to graduate from the Least Developed Countries (LCD) category in a few years time. After a cycle of political instability, prosperity and then into instability again, it is in the best interest of the country that the policymakers should undertake a relevant, reliable and cohesive domestic framework that will eventually have significant implications to their partnership with the international community. Recently, it was once one of the fastest growing economies of the South Pacific; however, with the non-existence of a comprehensive macroeconomic policy framework coupled with high turnover of government officials, all those achievements are now diminishing with an increasing in inflation rate. Real GDP growth was 7.4 per cent in 2006, but now forecasted to grow at 2.2 per cent in 2010. (2010 or 2011) Due to a very narrow export based with consumption being funded externally, Dutch disease is inevitable with inflation uncontrollable (Gay 2004).
One of the prominent features of Vanuatu’s economy is the parallel existence of the modern and traditional economy (see Economic Opportunities Fact-Finding Mission, AUSAID & NZAID page 12 2006). It is now the responsibility of the current policy makers to decide whether to move to modern economy or run both economies simultaneously . Given such strong views by the Director of National Cultural Council and the current initiative by Vanuatu on the Alternative Indicators of Well-Being for Melanesians Project , the onus is now on the current generation to make a paradigm shift since our international friends who are the donors of our development funds may not recognize the traditional economy. This is not an issue of sovereignty. Circumstances now dictate the need to develop, move away from subsistence life and pursue new opportunities that life will bring for us and for our future generation.
For the last 30 years Vanuatu went through a lot in terms of economic and political changes and the independence from the condominium being the biggest break in 1980. Since then, donor countries have been assisting through capital transfer and direct funding. Millions of dollars of funding have been flowing into the economy since independence. Regretfully, 30 years down the line Vanuatu seems to have no direction in terms of private sector development, which is the engine of economic growth and donors and the government are trying hard to find if there are any long term economic effects of past years funding programs. The Pacific Institute of Public Policy (PiPP), an independent, non-partisan and not for-profit organization based in Port Vila, Vanuatu in one of their briefing papers in 2008 argued several areas that need special attention.
One of the obvious areas that the briefing paper mentioned is for specific and targeted areas that needed assistance. In addition to that a “one-size fits all” model will definitely not work in the Pacific especially Vanuatu. PiPP rightfully argued about the fundamental Keynesian economic theory which now forms the modern macroeconomic theory about the importance of fiscal stimulation to increase growth through private sector development. However, the question that we are all asking is why is it not working?
The next section reviews macroeconomics indicators of the nation and of how the economy has been performing with special attention on the effectiveness of aid. The third section outline the objective of this paper, that is to present a Macroeconomic policy participation effort together with policy alignment and the fourth and final section presents conclusions and final recommendations with suggested economic implication.
Macroeconomics Indicators
As most commentators mentioned, Vanuatu is unique in many ways. Since Independence in 1980, Vanuatu’s geographical location, economic status and political instability generally dictated its macroeconomic performance for the last 30 years. Struck by serious cash flow, loss of confidence in the domestic financial sector, serious budget deficits and social unrest (Gay 2003) left little room to the government but to accept the Asian Development Bank (ADB) sponsored Comprehensive Reform Program (CRP) in 1997 to try and salvage the economy. However, even after the CRP, government officials believed that the program now created a set of “new problems” (Gay 2004) whereas (Jayaraman & Ward 2006) believed that it could have been worse without CRP.
However, there were some improvements in the last eight years due to various reasons, but the abundant inflows of funding to Vanuatu remains the major source of sustainability. The economy improved its fiscal position from 1998 to 2002 period and recovered in 2003 due to gains in agricultural sector, increase in domestic demand, stability in the exchange rate and official international reserve and declining in trade deficit with lending drive by the commercial banks resulting in domestic credit growing by 2.8 per cent in 2004 (Sugden and Tevi 2004).
Macroeconomic stability is always a challenge for Vanuatu. However, real GDP growth is projected to grow at 3.8 per cent in 2011 after being down to 2.2 in 2010 (Refer Table 1). Total Revenue excluding grants continue to decrease through 2009 from 26.8 per cent of GDP in 2009 to 25 per cent of GDP in 2010 this shows the lack of domestic economic activity for the period. Fortunately, expenditure seems to be stabilizing due to reasons best known to government, probably effects of budgetary cuts.
It will be interesting to see the 2011 performance with the budget to be consistent with 2011 particularly the tight measures in expenditure. The circulation of foreign currency in the domestic financial system is something that need closer attention and analysis. Controlling money supply is a proactive role which needs vigilance however, it will be added responsibility if foreign currency are allowed to be traded within the financial system. This can allow money laundering and other financial malice practices. Interest rates seems to be stable whereas M2 seems to be fluctuating since 2006 with 16 per cent in 2007 now 0.5 per cent in 2009 and estimated to drop to below zero in 2010.
Foreign Reserves seems to be something that the Vanuatu government is managing well. A four to five months cover could be a good threshold as most Pacific Island Countries (PIC) are also targeting. Current account is an area that definitely needs attention. It has not shown any significant improvement for the last 5 years. A significant improvement in domestic economic activities and tightening of trade policies together with work on monetary policy should stabilize this.
Table 1 Selected Macroeconomics and Financial Indicators
Est Proj
2006 2007 2008 2009 2010 2011
Output and prices (annual percentage change)
Real GDP 7.4 6.5 6.2 3.5 2.2 3.8
Nominal GDP 12.7 11.6 11.2 4.8 5.1 7.9
Consumer prices (period average) 2 3.9 4.8 4.3 2.8 4
Consumer prices (end period) 1.9 4.1 5.8 2.3 3.4 4
Government finance (in percent of GDP)
Total revenue and grants 20.7 22.3 27.7 26.8 25 24.2
Revenue 18.9 20.4 21.1 19.5 18.1 18.1
Tax 16.8 18.2 19.1 17.2 16.5 16.5
Non-tax 2.1 2.2 2 2.3 1.7 1.7
Grants 1.8 1.8 6.6 7.3 6.8 6
Total expenditure and net lending 20.2 22 27.9 27.6 27.7 25.1
Current expenditure 17.4 19.4 18.6 18.6 19.8 19
Of which: wages and salaries 10.7 11.8 11.7 11.4 11.6 10.9
Capital expenditure 2.1 2.6 7.6 9 7.3 6.1
Overall balance 0.5 0.3 -0.2 -0.7 -2.7 -1
Money and credit (annual percentage change)
Broad money (M2) ... 7 16.1 13.2 0.5 -6 na
Net foreign assets 10.5 15 9 -18.3 -34.6 na
Domestic credit 7.2 10.6 36.7 22.1 17.4 na
Credit to private sector 9.7 12.3 43.3 19.9 11.6 na
Interest rates (in percent, end of period)
Deposit rate (vatu deposits) 1.9 2 2.7 3.2 1.8 na
Lending rate (vatu loans) 11.3 10.3 10.3 10.9 10.3 na
Balance of payments
Current account (in millions of U.S. dollars) -28.4 -36.9 -65.8 -48.5 -41 -43.7
(In percent of GDP) -6.5 -7 -11.1 -8.2 -5.9 -5.7
Of which: tourism exports (in US$ Million) 104.2 137 170.6 186.9 219.6 233.9
Merchandise exports, f.o.b. (in US$ Million) 37.7 29.7 41.7 55.2 51.4 55
(Annual percentage change) -1.3 -21.2 40.7 32.1 -6.8 7
Merchandise imports, f.o.b. (in US$ Million) 141.2 176 265.2 247 246.3 267.2
(annual percentage change) 7.6 24.6 50.6 -6.8 -0.3 8.5
Gross official reserves (end of period)
In millions of U.S. dollars 105.1 119.6 115.3 148.6 161.4 157.2
In months of corresponding imports of goods (c.i.f.) 7.5 6.8 4.4 6 6.6 5.9
In months of next year's imports of goods (c.i.f.) 6 4.5 4.7 6 6.1 5.4
External debt
External debt (in percent of GDP) 15.8 13.5 16.8 17.3 16 14.4
External debt service 1.3 1.2 1.3 1.5 1.4 1.4
(in percent of exports of goods and non-factor services)
Exchange rates (period average)
Exchange rate regime: officially pegged to an undisclosed basket of currencies
Vatu per U.S. dollar (period average) 110.6 102.4 101.3 106.7 95.5 na
Real effective exchange rate (average, 2005=100) 98.2 99.6 98.3 103 106.7 na
Nominal GDP (in billions of vatu) 48.4 54.1 60.1 63 66.2 71.5
Source: IMF 2011
Despite the population almost doubling over the last thirty years, the proportion of the population living in the rural remains stagnant. Developments were concentrated on the two major urban areas of Port Vila on the island of Efate and Luganville and on the island of Santo . The rural area and its population continued to be characterized by subsistence living.
Due to its narrow export base, Vanuatu continues to struggle with its trade shares and Budget Balances. Welfare for the rural dwellers is also a concern as though they are farmers; their production is merely subsistence in nature with a direction towards heavy commercial farming. Despite almost 75 per cent of the people live in the rural area, agriculture as a whole only produces 20 per cent of GDP. This is one of the reasons the rural areas of the country are so poor (Haywood 2003).
Due to a steady inflow of development assistance in relative to other Pacific Island Countries, questions need to be asked as to why development assistances are not filtering to the 75 per cent of the population that practically live in rural areas whose livelihood depend solely on subsistence farming. Aid per capita for Vanuatu in 2009 was US$430 which is almost the same as the Least Developed Countries GDP per capita for the same year, which is US$651 (World Bank Report 2009).
Strengthening Partnership
Revisiting Paris Declaration on Aid Effectiveness 2005
Vanuatu was one of the participating countries in the Paris Declaration on aid effectiveness in 2005. The declaration was to strengthen the commitment established in Rome in 2003 and the Marrakech Roundtable in 2004. All the commitment directing donors and partner countries to harmonize and align policies that will see the increase in the impact of aid in reducing poverty, and inequality, increasing growth, building capacity and accelerating achievement of the Millennium Development Goals (MDG). Under the Declaration, Vanuatu should by now have a domestic policy capacity to plan, implement, manage and account for all inward flow of funding. Capacity development is the responsibility of partner countries with donors playing a supporting role. It needs to not only be based on sound technical analysis, but also to be responsive to the broader social, political and economic environment, including the need to strengthen human resources (Paris Declaration on Aid Effectiveness 2005).
Reaffirming their commitment in six broad areas; the donors together with the partner countries met in Paris in 2005 and decided to work on strengthening national development strategies, increasing alignment of aid with partner countries priority, enhancing accountability, eliminating duplication reform and defining measures and standards in government policies. In Table 2, Donors and Partners committed to fifteen targets. It is apparent that trade especially export is more direct and simplified in relative to aid where the bottle neck seems to be in the government officials.
Table 2: Indication of Progress
I N D I C A T O R S T A R G E T S F O R 2010
1 Partners have operational
development strategies At least 75% of partner countries have operational development strategies.
2a Reliable public financial
Management (PFM) systems Half of partner countries move up at least one measure (i.e., 0.5 points) on the PFM/ CPIA (Country Policy and Institutional Assessment) scale of performance.
2b Reliable procurement
Systems One-third of partner countries move up at least one measure (i.e., from D to C, C to B or B to
A) on the four-point scale used to assess performance for this indicator.
3 Aid flows are aligned on
national priorities Halve the gap – halve the proportion of aid flows to government sector not reported on government’s
budget(s) (with at least 85% reported on budget).
4 Strengthen capacity by
Co-ordinated support 50% of technical co-operation flows are implemented through co-ordinated programmes consistent
with national development strategies.
5a Use of country public
financial management
systems For partner countries with a score of 5 or above on the PFM/CPIA scale of performance (see Indicator 2a). All donors use partner countries’ PFM systems;
And Reduce the gap by two-thirds – A two-thirds
reduction in the % of aid to the public sector not
using partner countries’ PFM systems.
For partner countries with a score between
3.5 and 4.5 on the PFM/CPIA scale of performance (see Indicator 2a). 90% of donors use partner countries’ PFM systems;
and
Reduce the gap by one-third – A one-third
reduction in the % of aid to the public sector not
using partner countries’ PFM systems.
5b Use of country
procurement systems For partner countries with a score of ‘A’ on
the Procurement scale of performance (see Indicator 2b) All donors use partner countries’ procurement
systems; and
Reduce the gap by two-thirds – A two-thirds
reduction in the % of aid to the public sector not
using partner countries’ procurement systems.
For partner countries with a score of ‘B’ on
the Procurement scale of performance (see
Indicator 2b). 90% of donors use partner countries’ procurement
systems; and
Reduce the gap by one-third – A one-third
reduction in the % of aid to the public sector not
using partner countries’ procurement systems.
6 Avoiding parallel PIUs Reduce by two-thirds the stock of parallel project implementation units (PIUs).
7 Aid is more predictable Halve the gap – halve the proportion of aid not disbursed within the fiscal year for which it was
scheduled.
8 Aid is untied Continued progress over time.
9 Use of common
arrangements or
procedures 66% of aid flows are provided in the context of programme-based approaches.
10a Missions to the field 40% of donor missions to the field are joint .
10b Country analytic work 66% of country analytic work is joint.
11 Results-oriented
Frameworks Reduce the gap by one-third – Reduce the proportion of countries without transparent and
monitorable performance assessment frameworks by one-third.
12 Mutual accountability All partner countries have mutual assessment reviews in place.
Using the Paris Declaration as a map to international benchmarking, it is Vanuatu’s responsibility to take ownership of making aid more effective and efficient by reducing duplication, transaction cost, misdirecting of aid and have zero tolerance of corrupt practices. This will only eventuate when the Government formulates and implements their own national development plans, using their own prioritization, planning and implementation system as soon as possible. The Priorities and Action Agenda 2006-2015 by the Ministry of Finance in 2006 is a typical example of such initiative, however, after reading the document, we now should be more result oriented and involve as many locals as possible to write such documents so that they will continue to develop the implementation , review and improvement plan. If consultants were involved, the possibility of taking the report further into implementation and review mode is doubtful. The document rightfully pointed out weaknesses and priority areas, but lack realistic implementation steps and time line.
Government priority areas as per document include:
• Private Sector Development and Job Creation
• Macroeconomic Stability and Equitable Growth
• Good Governance and Public Sector Reform
• Primary Sector Development
• Education and Human Resources Development
• Infrastructural Development and Utilities
Aid
Aid is considered to be a critical policy area that requires a high level of coordination between countries (donor and recipient country) and between government ministries and ordinary citizens. Aid or development assistance consists of financial flows, technical assistance, and goods and services (in kind) which are provided in the forms of grants and concessional loans (Radelet, 2006). The predominant sources of aid are bilateral, that is from one donor-country to another recipient-country, and multilateral, that is from regional and multilateral development agencies to recipient countries. Multilateral assistance represents the disbursement of aid resources which come, ultimately, from donor countries but are pooled and allocated through such regional and multilateral development agencies. The successfulness of these aid flows will depend on the cohesiveness of the partnership.
Aid is considered critical to the development process of many low-income countries for several reasons. For instance, it serves as an important source of finance for poor countries which are not well placed to attract from the global private capital market the financing that they may need to fund their development activities (Gupta et al., 2006). In addition to providing finance, aid can also be a vehicle for transmitting critically needed knowledge for these countries, and assist them in implementing development- enhancing reform of their policies and institutions (Gunning, 2001). Part of the self-assigned mandate of the multilateral development agencies is to use the provision of finance as a lever for transmitting knowledge and advice (regarding policy and institutional reform) to aid receiving countries. Without a well coordinated aid administration, policy gaps will widen resulting in wastage.
Macroeconomics Polices
Macroeconomics is a branch of economics which covers the national economy including consumption, government spending, investments, and trade. Encompassing these areas are money, production, employment and education. Monetary and Fiscal policy are the two main polices that govern and drive the economy. In most cases donor countries filter their funding assistance through such policies and without coordinated streamline policy, the unrepresented population continue to be deprived and mistrust continue to thrive.
A possible approach to strengthen economic partnership with international community is to asses the macroeconomic impact of development assistance. The International Monetary Fund (IMF) identified the main identities of impact via macroeconomic principle (Gupta et al 2006). These include:
• The budget deficit must be fully financed from either external or domestic sources.
• Projections for reserve money and broad money growth should be consistent with the output and inflation forecasts and based on realistic assumptions about the velocity of circulation and the money multiplier.
• Real GDP growth and trade projections should be consistent with the assumed path for both public and private investment, the real exchange rate, private credit growth, and expected developments in productivity, including those resulting from scaling up.
• Debt sustainability (both external and domestic) needs to be reassessed and maintained through a prudent debt-management strategy.
Donors are no doubt expecting Vanuatu to forge a macroeconomic policy that is sound which will enhance growth and development, eradicate poverty and corruption and assisting Vanuatu to strengthen their partnership with international community. The donor’s intention is to help the underprivileged and develop the nation; the inflows of funding normally administered through the macroeconomic mechanism. However, without a proper facilitation and insufficient capacity within the government sector to implement sponsored programs ; long-run positive economic effects are doubtful. The CRP was a practical example that international community, domestic policy makers and the people at large need to work together in order for any such intended program to work. In a few years it will be interesting to evaluate the multiplier effect of the recent US$65.7 million Millennium Challenge Corporation’s Transport Infrastructure Project.
Past studies and critics from independent commentators on the effectiveness of aid in Vanuatu were not very promising. Despite inflows of development assistance reaching the highest in 2009, there is no link in aid and growth (Jayaraman and Ward 2006). Hughes and Sodhi 2006, shared the same sentiment that upon analyzing shorter period of time, found that aid did not benefit Vanuatu’s long term economic growth. Questions need to be asked as to why receiving US$103 million in 2009 and had aid per capita of US$430, yet we still cannot have a sustainable economic growth (World Bank Report 2010).
Due to high inflows of aid, Vanuatu is vulnerable to unearned economic rents or “Dutch Disease”. The economic consequence of such is the unnecessary pressure to the unrealistic value of Vatu. It makes exports very expensive and the ordinary local Ni-Van do not benefit from their currencies, but plays an important role to foreigners and expatriates working in Port Vila by not losing much in foreign exchange when sending money back home.
Only 25 per cent of the population live in the urban area; of which more than 50 per cent live in Port Vila. Seeing very less development in the rural and given the fact that rural dwellers continue to pursue the traditional economy, aid has therefore largely benefited the urban elite. However, since the urban life does not generate that much in commodity exports, Vanuatu’s export figures continue to remain stagnant over period of time. The onus is now on the Ni-Van to draw up a framework that will see the development of the rural sector on which lies the resources of the nation that is in dire need of development.
Given such alarming discoveries, the onus is on Vanuatu to discuss with their donors about engaging into a mutual commitment towards enhanced development assistance effectiveness by promoting improvements in: i) ownership, whereby they decide their own strategies for poverty reduction, and improve their institutions and finding ways to reach the unfortunate in the rural; ii) alignment of donors behind these objectives, and use of local systems such as procurement and financial system; iii) harmonization, which entails better coordination, simplification of procedures, and sharing information by the donor countries to improve accountability; and, iv) mutual accountability, on the part of the donors and Vanuatu for development results (Paris Declaration 2005).
Vanuatu is already a member to some regional trade agreements , and part of the Pacific Forum Secretariat and currently in the process of becoming a member of the World Trade Organization. Taking into account this involvement the government should already be in a position to integrate not only politically but more so in learning from each other and building up their policy implementation towards a compatible environment. Even though there are criticism to such integration (see Pacific Network on Globalization “On 10 Reasons to challenge the PACER Plus” 2009); there are still opportunities there that we can learn from each other in terms of policy implementation and development. Global experiences are also proof that regional integration is a source of small nations’ compatibility and convergence (see Jo 2006).
Alignment of Monetary Policy
Vanuatu’s exchange rate policy; pegging that is based on secret weights could be an area to start from. Commentators who have already commented on this include (Holden, Bale & Holden 2003; Jayaraman & Ward 2006). Given the forecasted economic slow down in 2011 (IMF 2010), pressure is now on source of inflation and liquidation management. Vanuatu now should provide a monetary policy that will facilitate the economic development and growth given the large inflow of aid to the economy.
According to recent IMF consultation report (See Article IV Consolation), they noted the overvalue of the Vatu considering the absorption on the incoming inflows of funding with a very narrow export base, and unfair distribution of aid (Refer to AUSAID2009 report and other reports online). Inflation being forecasted to 4 per cent in 2011 and high liquidity in the financial system needs attention from the Reserve Bank. Regardless of the increase in lending by commercial banks, it will be interesting to note the effects of such to the livelihood of ordinary Ni Van.
Credit provision is costly and unfavorable to rural citizens. The lack of business contextualization of lending process by foreign owned banks and credit accessibility are some areas that need attention. The lack of existence of commercial banks in the rural can be due to a lot of reason but their non existence is a hindrance to development. Recognition and formalization of a widely accepted description of collateral needs to be accepted across commercial banks since most rural dwellers are in need of credit but may not be eligible for current lending conditions.
Alignment of Fiscal Policy
Tax Heaven is something that Vanuatu has boasted about for a number of years; however, government needs to analyze how much we are losing from such reputation in the long-run. Livelihoods will not be improved just by telling the world about our tax heaven facilities. Given the fact that Vanuatu has a very high public sector wage bill in relative to other PIC (IMF 2010) it is time that we gradually consider introducing income tax to strengthen our fiscal performance. While this will take off the general feasibility of the fiscal performance it is a stepping-stone for an exit strategy of Vanuatu’s heavy dependence on aid.
Secondly, with its small export base, Vanuatu continues to have trade imbalances for the last three decades. Proper facilitation of development assistance should be directed to an export oriented program that will not only reduce trade deficit but also translate sources of income and change of livelihood to ordinary citizens. Such programs should extend to commodity trade through alternative farming from the current mainstreams and upgrade small farms to a commercial level.
Third area the Government can work on is the budgetary coordination. While the target seems to be appropriate and sound in nature it is the responsibility of the government official to translate figures into productivity. Leakages in government revenue can be improved by enhancing the current VAT collection process to increase government revenue with minimal compliance cost. With the current WTO accession, the Melanesian Spearhead Trade Agreement (MSG TA) in place and other regional commitment that Vanuatu has, fiscal securitization is very important at this stage. Such commitment will only be viable if we coordinate our domestic policy to be conducive to the relationship that we have.
Participation and Policymaking by Information Sharing
It is becoming apparent that there is evidence of asymmetrical information between rural dwellers and government officials. Those who are at least being informed may not have the correct information. Subsistence (small commercial) farming in Vanuatu may have very little information about credit access and banking facilities available for them. For those that have information may have eligibility problem due to unrealistic collateral requirements from the banks. Lending rates by commercial banks need to be translated well to the production side.
When useful information passes freely in a government/citizen participation and active involvement of civil society groups; this contributes to efficiency and effectiveness of any government initiative. Both are positively influenced not just by having the appropriate information on what needs to be done, but also by building commitment between them and making the right direction to move in and the steps to take (Crosby, 2000).
Efforts by government officials and interest groups to educate and inform rural dwellers may also ease the course of reforms and translating needed assistance to priority areas (Frischtak and Atiyas 1996). Radio programs, village meetings, district meetings, cooperatives initiatives are some of the machineries that we can use to translate information to the people. While reaching them it is important that government officials gather as much information as possible from them as this will be the basis of the development plan of the government which donors will be interested in. Initiative such as the Yumi Konek by the Rural Development and Training Center’s Association of Vanuatu is a typical example of information sharing .
It is the role of government officials and policy makers to see that information from ordinary citizens are gathered and compiled. Such information always include development needs such market access, subsidies, logistics, education, health or natural resources. This is where the government builds its priority areas. It will be in the best interest of Vanuatu if donor countries study those needs first before funding program starts.
In terms of participatory, Vanuatu can learn from various experiences and practices by countries to assist in this area . Participatory reports were positive seeing policymakers and ordinary citizens moved from debates to more constructive participatory level together with Non Governmental Organizations (NGO) and donors in the advisories committees bringing in their expertise and needs.
Commentators such as (Fuhrman, IMF/World Bank 2005: 49) reflect the findings that participation (in terms of information-sharing with and consultation of civil society actors) has not extended into the macro-economic framework. Macroeconomic decisions are still made between a limited number of officials from the Ministry of Finance, Reserve Bank and donors, and information on the conditionalities and policies agreed in these discussions are not easily accessible to non-governmental representatives groups.
Participation and well coordination of participants should enhance the cohesiveness of government’s policies. Lessons should be learnt from the 1997 CRP Program on its inappropriate focus, lack of national ownership, and poor implantation (Gay 2004). These should now assist us in forming the basis of our cohesiveness.
The PAA 2006-2015 outlined the strategic development priorities. Cohesive approach shall play a role in translating such strategic plan into real development and ultimately increase livelihood of the people. When interest groups together with the Reserve Bank, Ministry of Finance officials have some level of information sharing and participation, the government can have a proper perspective of their direction. Constructive criticism from concerned groups could be daunting; however, it will confirm the relativity of government’s policy and will keep a track of performance.
Conclusion
This paper has examined participation and the harmonization of macroeconomic to ease our economic integration internationally. As with many complex encompassing economic, social and political phenomena, integration and participation is challenging. However, the macroeconomic policy involvement is the best fix.
- Sustainable and cohesive macroeconomic policy provides the best feasible solution. Particularly the monetary and fiscal policy alignment which encompasses the livelihood across sectors and the need to educate and share information about things that is relevant to their lives.
- Information sharing involves participation. To create a macroeconomic policy participation environment, it requires capacity to reach out to citizens and engage them. Building of such capacity includes providing agencies with the resources and incentives to interact with community-based groups and civil society organizations, and developing monitoring programs to assure feedback on progress and to make necessary changes. These will involve the donors, the government officials and ordinary citizens. Governments need to inform their citizens about current and planned monetary and fiscal decisions, including the rationale behind policy choices.
- Participatory of institutions such as regulatory bodies, financial institutions, legal, social, health and education are vital.
- Ownership becomes habitual once citizens understand the rationale of government’s choices.
- This will involve a two way communication and at least ease the gap between citizens, government officials and donors.
No matter what model or technical advice or assistances the funding agencies or the donors may present to Vanuatu; without citizens’ involvement and ownership all effort will be in vain.
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