Nov 27, 2011

Books on China in Africa

I've been reading a couple of books about "China and Africa". The first one is China Safari, by two Geneva journalists who travelled to China and a bunch of African countries and tried to figured out what was going on with the Chinese in Africa. This book is full of horror stories. It portrays the Chinese as heartless, corrupt, with no respect for the environment, laws, decent wages, human rights, or human lives. Wherever they go they cause mayhem. They sell weapons. They have babies with African girls only to abandon them. They do not talk to journalists, and when they do, they are not direct. Chinese products are junk. All in all, a bleak picture hopefully not too representative of reality. The second book is more balanced. Deborah Bautigam, a professor at American Univeristy, digs up the little available data rather than lay out depressing anecdotes. She tries to put numbers on foreign aid and investment. She puts them in historical perspective and compares them with the West's. She even suggests the Chinese could propel African manufacturing, rather than destroy it, as is usually claimed. If you want to know more about China in Africa, read Bautigam. Both books do offer the same conclusion though. China has put Africa back on the map. African governments should grab this opportunity and try not to mess it up.

Nov 22, 2011

The magic of diasporas

This week's Economist has a special report on migration in business which includes a delicious cover as well as a bunch of fascinating stories. The report focuses mostly on how Chinese and Indian diasporas create trade and new business ideas by facilitating the flow of information across countries and by fostering mutual trust.

The report is based on a wide body of theoretical and empirical work, mostly initiated by James Rauch, though it doesn't cite much of it. In a series of papers he argued that international trade was hampered by search costs as well as contract-enforcement costs. This is why migrant networks, and especially ethnic-Chinese ones, play such an important role in building trade relationships. To show that networks foster mutual trust, Dunlevy showed that immigrants in the US were most useful to promote exports to corrupt countries. I showed this was also the case for Swiss exports. This is also true when using international data from the World Bank. The two graphs here show that the bilateral stock of migrants between two countries increases their trade the higher the corruption whether it's in the importer or exporter country.

Their role as information providers, though quite straightforward, has been harder to identify. Rauch had argued that since networks facilitate trade more in differentiated products, such as cameras, than for products sold on organised markets, such as coffee, they provide market information. The problem with this strategy is that differentiated products are not only information-intensive but also trust-intensive, so we cannot be sure the information channel is at play, as I argue in my paper. A promising avenue is to try to estimate information frictions between countries, and show that networks are most useful when these are high. Information frictions can be captured by a lack of news coverage, a lack of internet connectivity, or a lack of phone traffic (see this new paper by Treb Allen) etc...

Last but not least, The Economist also point out that "the ability to use informal networks built on trust and a sense of belonging is not restricted to honest businesses such as soap making. Those with dirty hands can build criminal networks on a very similar basis." This is exactly what we tried to show empirically in a paper with Lorenzo Rotunno. We showed that import-tariff evasion, a form of illegal trade, was made easier by Chinese networks who know which border official is corrupt and know how to disguise products. The Economist also has put together some new data on Chinese communities abroad, maybe a better estimate than the stock of ethnic-Chinese migrants we use in our paper.

The report also cites Borderless Economics, a new book by Robert Guest, The Economist's business editor, on which this report seems to be based. I'll add that to my Amazon wishlist. But I need to get a kindle before buying it. Too many trade frictions otherwise.

Nov 17, 2011

Strategic pricing?

I'm looking into buying the new Galaxy Nexus phone. Seems like when comparing 2 deals that have the same monthly fee, I can get the better one by paying a lower one-off cost. Is it still the case? Check here.

Nov 16, 2011

How the internet facilitates trade: Evidence from

"[Jack Ma]started Alibaba in 1999, to help small firms find customers and suppliers without going through costly middlemen. now claims to have 57m users, including some in nearly every country. It is sometimes likened to eBay, but is more like an online Yellow Pages… Machine-makers in Turkey or Britain use Alibaba to find cheap suppliers in China without having to go there.” 
The Economist, 29 December 2010
So, did have a significant impact on Chinese exports? As per the story above, should definitely reduce search and business-matching costs, which are an important impediment to trade (Rauch and Trindade 2002, Chaney 2011). 
To answer this question, I plugged the number of users by country in a gravity equation using 2010 data. The data on users comes from ninjastat and is available here. Unfortunately, it covers only about 20 countries. Still, as seen in the scatter below, the higher the number of alibaba users in a country, the higher the imports from China. The estimated coefficients suggest that a 10% increase in the number of users could increase imports from China by as much as 2.3%. What’s more, the effect remains significant when controlling for the number of ethnic-Chinese migrants in the partner country, a standard proxy for Chinese networks. 
Trade costs are going down even though contract-enforcement uncertainty remains a problem.
Note: The relationship plotted above is the added-variable plot obtained after running a gravity equation with Chinese exports on the left-hand side and GDP, GDPPC, distance, Chinese migrants and number of users on the right-hand side.

Nov 10, 2011

Languages on twitter

by Eric Fischer. There is also a world version.

Was the break-up of the eurozone so predictable?

About 6 years ago, this is what "Dr Doom" Roubini had to say about the eurozone:
"the lack of serious economic reforms in Italy implies that there is a growing risk that Italy may end up like Argentina. This is not a foregone conclusion but, if Italy does not reform, an exit from EMU within 5 years is not totally unlikely. Indeed, like Argentina, Italy faces a growing competitiveness loss given an increasingly overvalued currency and the risk of falling exports and growing current account deficit. The growth slowdown will make the public deficit and debt worse and potentially unsustainable over time. And if a devaluation cannot be used to reduce real wages, the real exchange rate overvaluation will be undone via a slow and painful process of wage and price deflation. But such deflation will keep real rates high and exacerbate the growth and fiscal crisis. Without necessary reforms, eventually this vicious circle of stagdeflation would force Italy to exit EMU, return to the Lira and default on its Euro debts."

Nov 9, 2011

Berlusconi's legacy

With markets in turmoil now that Berlusconi has announced his resignation, people are wondering what's gonna happen to the eurozone. All of a sudden, markets think Italy's debt is a huge problem. Has the shit that's been piling up finally hit the fan? Italy hasn't grown in the last 10 years. Obviously, debt has been piling up, reaching 120% of GDP. But why has Italy not been able to grow? Daniel Gros argues on Vox that Italy’s growth fundamentals are all in pretty good shape. In terms of human and physical capital formation, structural reforms, investment in research and development, Italy has done OK, even better than most eurozone countries. There is only one thing where Italy has fared worse than everybody else: Governance, i.e. corruption and all that crap. All in all, this is what crises are made of.

Nov 4, 2011

One-month old public official in Nigeria


KANO, Nigeria — A one-month old baby, said to hold an ordinary national diploma, was on the Nigerian government payroll... The name of the infant was recently found on the payment voucher of a local government council in northern Nigeria during an exercise to fish out ghost employees from a bloated workforce...  [It] is a "widespread trend in the local government service where senior officials stuff payrolls with the names of their wives and children".

Nov 2, 2011

Nov 1, 2011

Book Review: The Rational Optimist, by Matt Ridley

The Rational Optimist is a bit like Candide, the character in Voltaire's book. He kinda believes this is the best of all possible worlds and that the future will be even better. But unlike Candide, he bases his optimism on economics. Humans will adapt, specialize, trade while poverty and violence will decrease. This is thanks to the catallaxy, i.e. Hayek's name for the spontaneous order created by exchange and specialization.

This is the book you'd expect from an author who has a PhD in zoology and worked 10 years for The Economist. It's full of interesting material, melting Adam Smith ideas with Darwin's. My favourite chapter is about how markets make people nicer, increases mutual trust and reciprocity. He's quite convincing, going through anthropological, empirical and even experimental evidence.

But I have to admit I skipped a few pages here and there. While anecdotes and evidence are always interesting, we get the point quite fast... It's the gains from trade.