Dec 27, 2008
I said, that, if I want to buy the product "smoked salmon" from country A is because I like "smoked salmon" and producers in country A know how to produce "smoked salmon" at a price I find acceptable, given my preferences. If there is a problem with CO2 emissions from trade, we should take corrective actions, but let the market rule. With the right instrument (a gas-tax), we can increase the transportation costs and thus the final selling price of "smoked salmon". The consumers will then face the choice whether it's still worth buying this good or not, while governments will have some revenues to redistribute for social purposes. Over time, producers in country A will become more fuel efficient, if my demand for "smoked salmon" is still relatively high. Total welfare will not be the same, but for sure higher than what it would be by forcing me not to eat smoked salmon anymore for "environmental reasons".
After this speech, unusually long for my standards, my friend glanced at me, still mumbling over his sentence. Then the conversation switched topic when we were served a nice espresso. This no-trade-is good-for-environment argument, although completely crazy, is very effective in people's mind. I was not sure I had convinced him and I really wanted to state my point more clearly. Before leaving the "cafè", my friend approached me and said: "I don't like smoked salmon but we can have some over new year's eve dinner if you like". Once in a while, it's apparently rewarding to be a stubborn economist!!
Dec 24, 2008
This is new NBER research from Peter Blair Henry and Conrad Miller called "Institutions vs. Policies: A Tale of Two Islands"
Merry Christmas to all!
Dec 22, 2008
Dec 21, 2008
In other news, Easterly's "White man's burden" will become a documentary (so is freakonomics)! According to IMDB, it will be shot in Madagascar! Here's Easterly's epiphany on Youtube.
(ht Trade diversion)
Dec 20, 2008
And here's more on Saturnalia, the pagan festival nowadays known as the Christmas holidays.
The question I should have asked was which restaurant you think has the highest Z score, as remarked by a third fellow. Chinese and Japanese restaurants each have their own Normal distribution in one’s mind, as illustrated below. The average restaurant has a Z score of zero and, as it turns out, the Japanese in question has one around 0,8 while the Chinese one around 0,5. The Japanese is the preferred one, while they are both above average. Now it’s clear!
Dec 19, 2008
Anyways, I received recently one of these email commercials from KLM letting me know that they have great offers from Germany to Mexico City. I receive these offers because 10 years ago (when still having my main residency in Germany) I thought that I will be flying a lot in the future. So I subscribed to their Miles and More program: I never made it to get even a single flight for free. Clearly, I blame this on the fact that I always got better tariffs with the cheap airlines.
Anyways, so I followed the link and indeed for roughly 500 Euros they would bring me in March to Mexico City so I can have some cold tequilas....Since, I always thought about going and visit a friend there, the commercial actually caught me. So, I got somewhat more serious about this and checked what a flight from Switzerland (same airline and distance, via Amsterdam) would cost. The answer was shocking: The identical flight cost me roughly the double 1500 SFR and both are the "best price offers"!
Now, I knew for a while that it nearly always pays to travel to Germany (by train or low cost carrier) and then fly form there to your vacation destination. But 500 Euros difference is enormous for potentially 2 hours difference in a anyways long traveling time of close to 20 hours (i.e. you could just take an Easy Jet plane to Amsterdam and fly directly from there spending some more time due to a worse connection).
I believe that the reason why it pays still to price discriminate so much is that people are too lazy and in particular the Germans are known by "Geiz ist geil" while the Swiss are rather known for quality and high standards potentially looking less towards the price. Or in plain economics: Compared to Germans, Swiss put on average a higher value on time.
The question remains whether this is a cultural thing or (what my guess would be) a matter of who actually takes these flights, i.e. the share of business motivated travels to vacation travels are lower when traveling from Zürich or Geneva to Mexico City than from Stuttgart or Frankfurt to Mexico. Clearly a UN dummy might also do a good job ....
Dec 18, 2008
Dec 16, 2008
Dec 15, 2008
Therefore, it should cost less, right? Of course not! I randomly selected a day in January, Thursday 14, for a comparison. A single trip between Milan and Rome would cost me no less than €54, with four available choices between 6:15 and 7:15am. Price per km: €0.085. A single trip between Paris and Marseille would cost me €45 on any of the 6 trains available in the morning and €34.90 for a train in the afternoon or in the evening. Price per km: €0.057 in the morning, €0.045 in the afternoon/evening. That is, half price with respect to the Italian train.
To sum up: The French high-speed train is faster, cheaper and much more frequent than the Italian one. Not to mention the fact that there is availability of high-speed trains between virtually any two French cities, while in Italy the connections between most cities are served by old, dirty, slow and overcrowded trains.
Two Brown economists have just posted two Vox columns (here and here) about a five century migration matrix that reveals some stuff about the roots of world inequality. Namely, they find that 44% of the variance in 2000 per capita GDPs across countries is accounted for by the share of the population’s ancestors that lived in
This goes well with Jared Diamond’s story, but not so well with the one of Acemoglu et. al., as in explaining cross country growth without the share of European population, settler mortality becomes correlated with the error term and cannot be used as an instrument for institutions. But this, of course, is assuming that institutions and people are two different things. Maybe this is not the case?
Dec 14, 2008
“In trade policy debates, the issue of unilateralism versus reciprocity (where reciprocity of access is insisted on instead) is a long standing one. The theoretical arguments used by proponents of either policy stance are well known: Unilateralists rely upon the demonstration that in the absence of ‘‘distortions,’’ free trade is efficient, while a policy stance of reciprocity is theoretically supported by the presence of ‘‘terms-of-trade’’ and political economy motivations in the economy. “England’s famous unilateral repeal of its Corn laws saw free traders and reciprotarians actively pitted against each other [… and it only came] after decades of attempts to negotiate lower tariffs with its trading partners’ (Krishna and Mitra 2005).
A criticism of unilateral liberalisation is that it ‘wastes’ the bargaining chip of access to the domestic market. “Some people would say [UTL is] akin to unilateral disarmament--that […] all of leverage to encourage others to liberalize” is lost (Ikenson 2006). But this logic should apply only to big countries. Developing countries would gain far more from unilateral trade liberalization than from multilateral trade liberalization negotiated over many years (Nogues 1990). Maybe small countries are resistant to proceed with UTL as they would lose the possible enhanced non-trade related cooperation that comes with the signing of an FTA.
In any case UTL makes sense since "although there are benefits from improved access to other countries' markets, countries benefit most from liberalizing their own markets” (IMF 2001). Import competition boosts productivity and living standards by shifting resources towards relatively more productive activities. This is the case for most developing countries as noted in the World Bank report (2005): UTL was “undertaken to increase the productivity of the domestic economy [as it] promotes global competitiveness by lowering costs of inputs, increasing competition from imports to drive productivity growth, and integrating the national economy into the global economy. Autonomous trade reform is, ironically, more important than ever in the presence of RTAs; low border barriers minimize the risks of trade and investment diversion.”
Finally, an argument comes from a blogger in the
Ikenson, Daniel (2006) “U.S. Trade Policy in the Wake of Doha: Why Unilateral Liberalization Makes Sense”, Presentation by Daniel Ikenson, Cato Institute,
International Monetary Fund (2001), “Global Trade Liberalization and the Developing Countries,” November
Nogues, Julio (1990) The Choice Between Unilateral and Multilateral Trade Liberalization Strategy, The World Economy 13 (1)
Oplas (2008) “Unilateral Trade liberalization” on Government and Taxes blog
World Bank (2005) Global economic prospects 2005 : trade, regionalism and development
WTO (2007) The economics and political economy of International trade cooperation, WORLD TRADE REPORT 2007
Dec 11, 2008
And here's another one I liked from Strange Maps
"coke: this generic term for soft drinks predominates throughout the South, New Mexico, central Indiana and in a few other single counties in Nevada, Utah and Wyoming. ‘Coke’ obviously derives from Coca-Cola, the brand-name of the soft drink originally manufactured in Atlanta (which explains its use as a generic term for all soft drinks in the South).
pop: dominates the Northwest, Great Plains and Midwest. The world ‘pop’ was introduced by Robert Southey, the British Poet Laureate (1774-1843), to whom we also owe the word ‘autobiography’, among others. In 1812, he wrote: A new manufactory of a nectar, between soda-water and ginger-beer, and called pop, because ‘pop goes the cork’ when it is drawn. Even though it was introduced by a Poet Laureate, the term ‘pop’ is considered unsophisticated by some, because it is onomatopaeic.
soda: prevalent in the Northeast, greater Miami, the area in Missouri and Illinois surrounding St Louis and parts of northern California. ‘Soda’ derives from ‘soda-water’ (also called club soda, carbonated or sparkling water or seltzer). It’s produced by dissolving carbon dioxide gas in plain water, a procedure developed by Joseph Priestly in the latter half of the 18th century. The fizziness of soda-water caused the term ‘soda’ to be associated with later, similarly carbonated soft drinks.
Other, lesser-used terms include ‘dope’ in the Carolinas and ‘tonic’ in and around Boston, both fading in popularity. Other generic terms for soft drinks outside the US include ‘pop’ (Canada), ‘mineral’ (Ireland), ‘soft drink’ (New Zealand and Australia). The term ‘soft drink’, finally, arose to contrast said beverages with hard (i.e. alcoholic) drinks."
Against the advice of many economists, emerging markets and developing countries increased reserves massively since the late 90s (See here for instance). While the increase in Latin American countries took predominantly place in the mid 90s, the rush in other nations followed the Asian crisis.
One of the most prominent of those has other worries since last month. On the other end of the spectrum, others have already claimed that reserve levels have not been high enough Arvind Subramanian concludes in a recent VOX article that “Lesson number two [from the financial crisis] is that self-insurance helps and absolute self-insurance helps absolutely.“ Unlike, Summers who advised the Indian central bank not long ago to diversify its reserves and claimed its excess reserves, to amount to 15% of GDP in 2006, Subramanian now advises a level in the future of US 1 trillion! Which corresponds to 85% of the current GDP! Currently reserves stand at 21% of GDP roughly down by 18% (or 5 percentage points) compared to their peak a quarter ago. Hence, Subramanian advices a level roughly four times higher then current reserves while Summers was favorable to a level of a half of the current level.
Despite all the criticism to Lawrence Summers findings, one of his points remains strong and seems under weighted by Subramanian: the cost. A rough guesstimate of the cost of holding the reserve level is given by the difference between the interest on domestic investment and the return on the reserves times the level of reserves. Let the return on reserves be around 3 percent and the return on domestic investment be about 6%. The gap is most likely a lower bound rather than an upper bound. The yearly implied cost of holding reserves equivalent to 85% of GDP is roughly 2.5% of GDP! Is the insurance worth it to forgo 2.5% of growth each year? It seems outrageous given that we are generally happy to find policies which enhance growth by much less.
A structured way to think about reserve levels is based on some notion of insurance against an expected loss with a certain probability. But no optimizing agent (irrespective of the level risk aversion) would want to sacrifice so much money unless there is an extraordinary high chance of a loss in the subsequent period or the loss is expected to amount to a level well above what we have seen and will even see in this crisis.
So why such a high level? Three reasons remain: 1) Actual costs are much lower (i.e. 0.03 is just wrong and much closer to zero), 2) the authority wants to defend an exchange rate level or 3) the authority is just not minimizing in a rational manner at the margin.
Option 1) and 3), though possible, are rather awkward. Option 2) however remains pretty strong. But then again sticking to a certain level of the nominal exchange rate needs to deliver substantial gains in terms of higher GDP to justify so high levels of reserves. Gains that have not been found in empirics.
Some months ago it might have seemed that the bags are full and the central banks stand ready. Now we are asking are they full enough or the central banks / governments unwilling to make use of their hard currency? Are we going to have a new wave of countries that will move to more flexible exchange rate regimes since they are not anymore willing to pay the cost?With the advent of the financial crisis the discussion around the level of reserves has started to vanish. But it is exactly now that we need to take a stance since after the last “global” crisis in form of the Asian crisis reserve accumulation expanded strongly. It is important to clarify whether it has been a sensitive policy to increase reserves or whether the costs do not satisfy the increased levels.
 Not surprisingly for Subramanian, lesson number one read, “that the greater the financial integration, the greater the susceptibility to financial crises, and the larger their final cost.”
Dec 10, 2008
it's good to see that someone can see the lighter side of the financial crisis. The following joke is apparently doing the rounds of workers in the financial services industry in Sydney at the moment:
Question: What's the definition of optimism in the financial sector?
Answer: Ironing five shirts on a Sunday night
Dec 4, 2008
There's 4 parties forming the parliament. The Conservative party, governing with a minority, was about to be brought down by the 3 opposition parties agreeing on a governing coalition. Only one thing could stop this from happening: the governor general interrupting the parliamentary session until January. And she did it. While the parties constituting parliament represent the choice of the voters, she was appointed by Queen Elizabeth II!
I think Guns N Roses should have titled their new album Canadian democracy instead of Chinese democracy.
Dec 2, 2008
It didn't surprise me to see "Sex and the Ivy League" as a first result of my Google search on Graciela Chichilnisky, who gave today's political science seminar. After all, the seminar ended in a sexual joke that can't get out of my head, unfortunately. But I was naturally interested in reading more, finding out about her incredible life story narrated here, from her childhood in Buenos Aires to her lawsuits against Columbia for sexual discrimination, to put it simply (way to simply) and all her academic, business and politic achievements. Her essay is captivating, personal and emotional. Here's the message: