Dec 27, 2008

On Trade and the Environment during Christmas

The Christmas dinner is a good occasion to be with your family, with an incentive represented by the nice choice of food and meals. Traditionally on the table, a lot of local food is served, which is particularly delicious (have you ever heard about mozzarella di "bufala"?), but I really missed a nice tarte with smoked salmon. Apparently, my mom forgot to buy it this time. Anyway, the point is not much about my frustration for not having smoked salmon during Christmas Dinner. What made me wonder was the argument offered by one friend of mine to whom I expressed my little complain after dinner, when we met for greetings. He said "anyway, it's better you did not have smoked salmon, cause it's bad for the environment". Since this sounded completely ridiculous to me, I tried to provide an explanation based on the concept of efficiency and the role played by the market.

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

Macroeconomic policies matter...maybe!

"The income gap between Barbados and Jamaica is now almost five times larger than at the time of independence. Since their property rights and legal systems are virtually identical, recent theories of development cannot explain the divergence between Barbados and Jamaica. Differences in macroeconomic policy choices, not differences in institutions, account for the heterogeneous growth experiences of these two Caribbean nations."

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

Diminishing marginal utility of travel

DANIEL HAMERMESH at freakonomics must have been reading rigotnomics working papers (this one) He just mentioned that his wife had a diminishing marginal utility of travel!  

Why are social housing projects always ugly?

I was wondering why were low cost housing always so ugly and depressing, when building something nice doesn't cost more...and I thought an explanation might be that building nice apartments would drive up their value as the rich and the capitalists would want them. So even with rent controls, this would create a black market for these making them ugly, this doesn't happen...makes sense no?

Dec 21, 2008

On our policy impact and a movie

The World Intellectual Property Organisation's (WIPO, one of Geneva's huge international organisation) new director must have been reading rigotnomics...He just announced that there would not be any life time contracts at WIPO anymore, but 5 year contracts (maximum), renewables. This will give WIPO the opportunity to fire puppets and snakes. It also seems that when you put the right leaders in the right place, things start to be put in order. But it's way too early to say that...

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

A competitive environment

"In A.D. 274, the Roman Emperor Aurelian inaugurated Dec. 25 as the pagan "Birth of the Unconquered Sun" celebration, at the calendar point when daylight began to lengthen. Supposedly, Christians then borrowed the date and devised Christmas to compete with paganism." Read more.

And here's more on Saturnalia, the pagan festival nowadays known as the Christmas holidays.

Comparing restaurants

Which restaurant do you think is better, the Chinese or the Japanese? By asking this question to a fellow student, I wasn’t interested in knowing whether she preferred Chinese or Japanese food, neither which restaurant she thought offered the most bang for your buck, but rather how each of these two restaurants fared among their respective “populations”. To put it more simply, I was interested in knowing which one was further above the average Geneva Chinese (or Japanese) restaurant, and of course, as put forward by another fellow student, controlling for prices.

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

The Kings of Price Discrimination

Airlines are well known for making a living out of price discrimination. As the Ryanair boss put it once, there will always be some who want the whole service and pay for the business class. (Did Ryanair actually start to offer transatlantic flights now?)

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


...50 diplomats collect wages equal to 3% of the country's GDP and 13% of total government it all!

Original content from the excellent No Original content blog!

Dec 16, 2008

The effect of hyperinflation on toilet overflows

Circular causality

It amazes me how much confusion there is in economics papers and presentations about the different types of endogeneity that exist and the biases they create. I blame this on bad econometrics classes that focus on technicalities rather than intuition.

I guess in most cross country studies the problem most of the time is one of omitted variable bias, or simultaneity, as country specific unmeasurable factors explain the relationship between your two variables of interest. For example, corruption and female penetration in government are corrlated even though none cause another. How should the bias be in this form of endogeneity? What bias?! We're talking about a causality that doesn't exist!

Now consider the reverse causality of self-enforcing mechanisms, such as between institutions and growth. Most economists talk about over-estimated coefficients in this case!? just becuz mechanisms are self-enforcing coefficients have an upward bias?!? Nope. Let's say institutions cause growth by a factor of 3 whereas growth causes institutions by a factor of 2. Rgeressing growth on institutions with OLS you estimate a factor of 2.5 (which is the correlation, not the causality)...this is a downward bias...

New perspectives on the gender gap in wages

The gender gap in wages is an intriguing question in social sciences: how is it possible that women, in spite of being relatively better at studying, and and more educated than men today, they are still earning less on average? 

One hypothesis is for the existence of different preferences, according to which women decide to stay away from higher rewarding jobs, sometimes because they prefere to take care of the family and children. Another hypothesis relates to the existence of a "glass-ceiling", which means women are excluded from top-level jobs because of gender discrimination. Some recent work by Daniele Paserman and Evren Örs et al. has investigated another hypothesis related to diverging performance under pressure. Women earn less because they are less effective than men at performing under stressful conditions. 

Two psychologists at the University of Exeter have identified though another potential channel which may lead to the persistence of a wage gap. Haslam and Ryan (2008) show in a series of experimental studies that women tend to be over-represented in managerial positions which are more likely to end up as a failure or be subject to criticism. Basically, even if women manage to break the "Glass-ceiling", they will end up facing a "Glass-Cliff". Why would it be that a woman is more likely to be chosen to lead a boat when it's clear that the boat is sinking, it still remains an open question I believe. It seems though that the potential relevance of this hypothesis for any context which involves discriminated groups is undoubted.

Another interesting study from Judge and Livingstone (2008) at the University of Florida analyzes the wage gap within gender along a different dimension: the gender role orientation. Their finding is, that "traditionalist" men (those who believe women should stay in the kitchen, to put it bluntly) earn 8.459 $ more than "egalitarian" men. The reason would be that "traditionalists" are rewarded for their preservation of the social structure, while egalitarian will be penalized. Among women, instead, there is no such significant wage gap along this dimension, but only a wage gap vs. men. 
Social Norms though are endogenous and change slowly through time, but policy action could be taken to foster such long term trends, hoping that sooner than later, the wage gap(s) will disappear and maybe revert (as I observe among some colleuages of mine here at the Institute...:-P) 

Dec 15, 2008

Comparing Italian propaganda with French grandeur

These days everybody in Italy is excited about the fast train connection between the two main cities, Rome and Milan. If you believe the Italian media, the "Frecciarossa" train on this route is a technological jewel without rivals. Needless to say, this is not true. It takes two minutes to check it: The journey between Rome and Milan takes 3 hours 30 minutes to cover 632 km, averaging a speed of 180.57 km/h (Sources: for distance and for the timetable). Compare it with the journey between the two main French cities, Paris and Marseille. The journey from Paris to Marseille covers a distance of 783 km; it takes at most 3 hours 18 minutes (for an average speed of 237.27 km/h), and at least 3 hours 2 minutes (for an amazing average speed of 256.72 km/h (Sources: and The Italian "high-speed" train is like my Toyota Yaris 1.3 compared to an AUDI 3.0 turbo.
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.

The roots of world inequality

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 Europe in 1500. Their NBER working paper is here.

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

Why unilateral trade liberalization beats the WTO

“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 Philippines who claims that with UTL there would be no money lost to trade negotiations as multilateralism is slow and costly. “One wonders how much money have been paid by taxpayers from the countries concerned, first to pay for the salaries, travels, and perks of their country trade negotiators, including their pool of consultants and secretariat support, in all those years […] Trade negotiations are being done by thousands of country trade representatives and bureaucrats, along with WTO officials and staff” Oplas (2008)

Ikenson, Daniel (2006) “U.S. Trade Policy in the Wake of Doha: Why Unilateral Liberalization Makes Sense”, Presentation by Daniel Ikenson, Cato Institute, Washington, D.C. July 20, 2006

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

Pravin, Krishna, Devashish Mitra (2005) Reciprocated unilateralism in trade policy, Journal of International Economics

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

Finally Democracy: for the good or the bad

Yesterday somewhere in the United Kingdom: more than 400 people get to vote for the first time. Unbelievable? Yes, but true. The Isle of Sark (probably the first territory ever to be invaded by a single person) a tiny channel island makes his first steps in democracy (where close to 10% of the population stood for vote). The experience was not too good at least for a sixth of the population who lost as a consequence of the outcome directly their job. How did this happen? To understand this one needs to know that the “Barclay brothers” happen to own the neighboring island, for which the Isle of Sark claims jurisdiction. The brothers drew up a list of “acceptable candidates”. When it became apparent that not sufficient approved candidates had been elected, the Barclays announced that they were shutting down their businesses on Sark — hotels, shops, estate agents, and building firms (See the BBC article). At the least, a bizarre interconnection of economics, politics and history.

The importance of history

This is the south’s 2008 presidential vote (in red and blue) overlaid by an 1860 map of cotton production (dots). From Strange Maps (via Chris Blattman, via Ugo Panizza)

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."

Reserve Accumulation Part I: The cautious ones seem to be proven right, but at what cost

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.

Few made the point that reserve levels do not seem to be excessive, when measured against the right numeraire (see Wyplozs’s article more than a year ago). Some commentators focused on the need to at least diversify reserves if it is already not acceptable to a country to decrease the amount. With the advent of the financial crisis the voices of those that claimed reserves to be excessive have not been heard anymore. Maybe this graph with the q-to-q growth rates of total reserves, explains the quietness:

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.“[1] 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.

[1] 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

IMF Data Mapper

The IMF has a new toy, a Data mapper. Great fun ahead! Here's a demonstration I captured with PowerScreenCapture.

The Lighter Side


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

Canadian democracy

For those of you of think that Canada is an advanced and well functioning democracy, think again.

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

Turning dung into fertilizer

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:

The first reflection is that for a woman to survive and to thrive she must learn to turn negative responses into positive resources. This is a perverse reversal to the Pavlovian response. I call this, for short, ‘turning dung into fertilizer.’

The world's first credit crunch happened in 88BC

and, once again, we find out that nothing is new under the sun. my question is: how many thousands of years will it take us before we make financial markets reliable? or are they inherently unstable? capital controls, anyone?

Merry Christmas from UBS