Cell phones in Africa: Why did governments let this happen?

Bad governments hold on to power not only by controlling fake elections but also the market. Family ties with the few monopolists and threats to defiant businesses allow governments to maintain the business status quo they benefit from. Competition is held in check. And when a foreign company finally manages to set up shop, government officials are quick to throw a monkey wrench into it. This is one major reason why development doesn’t happen in many African countries and beyond.

Yet a few companies have managed to penetrate markets controlled by anti-development leaders. Coca-cola is one example. Another is cell phones. Cell phones are now everywhere in Africa. Prices are lower and coverage better than in Canada. Why did governments let this happen?

Governments can benefit from more business as it generates tax revenues. In the Central African Republic, 40% of tax revenues apparently come from Orange, a French cell phone company. The government surely benefits from these revenues. And so does everyone else (Aker and Mbiti 2010). But in Bihar, India’s poorest state, a "property developer laments how crooked officials in his state prefer “taxing” inputs—the first investments made—to demanding a share in the output of an enterprise, a practice he says is more common in Bengal" (Economist, 4 Nov 2010). If corruption is there to stay, the latter type would at least allow for some competing businesses to flourish.

Development can happen but businesses, and above all foreign companies, must learn how to convince bad governments that they will enjoy the future tax revenues more than the monopolistic rents.

The life cycle of happiness

Money, among many other things, makes you happier. But one relationship that is even stronger than the one linking money to happiness is the one linking age to happiness. And it is not linear, nor log-linear. It's U-shaped, bending at 46 years old. This relationship exists in all countries around the world, from Zimbabwe to Japan, and was true 40 years ago as well as today. So you get more and more depressed until your middle-age crisis when suddendly life starts getting better. How can this be? The Economist suggests this might be because older people have fewer rows and come up with better solutions to conflict. They are better at controlling their emotions, better at accepting misfortune and less prone to anger. One thing to look forward to! But gotta get to 46 first!

The social network

 

 ht: Easterly

Trade in Icebergs

French engineers are exploring the possibility of transporting icebergs from Greenland to provide fresh drinking water in the Canary Islands. The idea is to capture the the ice that would otherwise melt into the ocean and use it as an alternative source for drinking water. A recent study estimates that, on the optimal path, it would take 141 days and 4,000 tonnes of fuel consumption to transport an iceberg initially weighing 7 million tonnes the 35,000 km between Greenland and the Canary Islands. Upon reaching its final destination, the iceberg would weight just over 4 million tonnes. Gives a whole new meaning to the term iceberg trade costs!

Saving the world by smuggling energy-saving lamps

While EU governments often say climate change is a top priority, their policies are far from green. Cheap energy-saving lamps from China, which could drastically reduce energy use, are subject to a 66% anti-dumping duty in the EU. The measure protects the German industry, not the environment. So I am quite glad that Chinese traders found a way around this non-sense barrier. According to a 2006 report, Chinese producers have created new factories in third countries for the alleged production of energy saving lamps. In most cases, the lamps are merely assembled or simply put into new containers and reshipped. In some cases, Certificates of Origin are simply falsified, energy-saving lamps are misdeclared as normal lamps, or the values have been reduced.

ht: Lorenz'

Math Joke

After 4 years of PhD, this is what you turn into.....

Rigotnomics collection

 

The 2011 collection has arrived. Check the catalog here. Orders (including special orders) should be made before xmas. To order, send an emial to the editor.

What an economics class should look like

Should governments pursue happiness rather than economic growth?

This is the question The Economist asks its guest contributors as well as the topic of its latest Economics Focus. It turns out most experts agree the question is attention-grabbing but poorly phrased. As Baldwin writes:

Governments do not now pursue income maximisation at the expense of everything else. Virtually all governments impose unnecessarily distortionary taxation... They subsidise culture and education in excess of the strict utilitarian minimums. They impose progressive income taxation and distort value-added taxation in the name of income distribution. Moreover voters demand such things. The short answer therefore is “of course not”. The real question is should we try to quantify the touchy-feely things like income distribution, cultural values, quality of life, man’s inhumanity to man? There I’d say that the effort is worthwhile (and already undertaken to some extent in the Human Development Index approach). However, as the piercing analysis of Martin Ravillon shows such indices must be interpreted with care. The best strategy is probably to have a number of them developed by a range of government and non-governmental agencies.

But happiness and income seem to go hand in hand. Hence it might not be such a drastic change to target happiness. But as Harold James notes, it is not clear if we are measuring short or long term wellbeing. In Latin, these are two different words. Felix is the short-term state of happiness while beatus is the longer term state. He said we should try to measure the latter.

No more bailouts!

No more bailouts! Enough with the crap! Wikileaks, which has just released a bunch of documents making US diplomacy look ridiculous, has a plan for new year: Reveal how unethical and full of shit a big US bank has been. Can't wait. In the mean time, can economists stop favouring bank bailouts please!

How to enforce speed limits

When trade agreements matter

Suzuki, the largest foreign carmaker in India, with annual sales of 1m vehicles, pays around 12% tariffs on parts imported from Japan. South Korea’s FTA with India means that Suzuki’s rival, Hyundai, pays just 1-5%. Osamu Suzuki, the Japanese company’s boss, feels “handicapped”.

Source: The Economist: Japan’s big companies are shipping production abroad

Lanvin for H&M…Cheaper, just not as much in Switzerland

So I decided to join the raging crowds last Tuesday, in the quest to get my hands onto a few pieces of the new Lanvin collection for H&M. I arrived at the store at 8am (which means I had to wake up a full 45' earlier than I usually do), naively thinking that I would be one of only a few fellow Genevans to have ventured out on a cold November morning on such a 'trivial' pursuit.

Alas, I found myself at the end of a long line of aspiring fashionistas (the most dedicated ones had arrived at 5:30am), all wearing colour-coded bracelets, which 'give you access to 15 minutes of exclusive shopping'. I got myself an orange bracelet for 10:25, went back to the office, sneaked back out in the middle of the morning and went back to the store.

Was it all worth it?? Absolutely…until I actually saw how much our fellow Londoners and Parisians paid for the exact same dresses: £99 = €149 = CHF249…

Why such a huge price difference? Did they calculate their price using the exchange rate of 4 years ago, when the GBPCHF was at 2.5? Could it be higher sales tax? Not really, since Swizerland has a lower sales tax than these two places (7.6% compared to 19.6% in France or 17.5% in the UK). Is it import tariffs on textiles? These are at 800 CHF per kg, this is just a few francs per dress. So it must be something else…

Maybe its simply H&M’s pricing strategy that takes into account the Swiss’ high salaries. To take into account Swiss’ higher salaries, we can calculate the price of the dress in Big Mac, using the famous indicator from the Economist. It turns out that the dress is actually cheaper in Geneva, costing only 38 Big Macs, while in France and the UK, you would need to sacrifice around 44 Big Macs to buy that dress! Still, it’s a good idea to do your shopping in London if you live in Geneva.

Any other interesting theories out there?? One thing is certain though…no matter how much people around the globe actually ended up paying for these lovely items, we can all comfort ourselves knowing that we can always re-sell them on ebay: current top fetching price? $700! Anyone want a lovely leopard mini-clutch???

Written by Maria, with the 'obvious' help of PL

Gambia and Iran ties

BBC reports:

The Gambia has said it is cutting all ties with Iran and ordered all Iranian government representatives to leave within 48 hours. Officials from the small West African nation gave no reason for the move. But last month Nigeria said it had intercepted an illegal arms shipment in Lagos from Iran, destined for The Gambia (rocket launchers and grenades in containers labeled as building materials). Senior Iranian official Alaeddin Borujerdi has said the move was taken under US pressure.

But why was Iran so "nice" to the Gambia anyway? Was it using it as a transhipment hub to dodge UN trade sanctions? And if it is indeed US pressure that put an end to the ties, what did the US offer, better weapons?

British colonialism: Bad. French colonialism: Worse.

We've known for a while that the French colony dummy does worse than the Britsih one in cross country regressions. Now more evidence comes from a discountinuity analysis of Cameroon, which was colonized by both the French and English after the Germans had to leave:

Many scholars have suggested that British institutions and culture are more conducive to growth and poverty alleviation than those of France or other colonizers. Systematic tests of this hypothesis have plagued by unobserved heterogeneity among nations due to variable pre- and post-colonial histories. To deal with this problem, we focus on the West African nation of Cameroon, which includes regions colonized by both Britain and France. Taking advantage of the artificial nature of the former colonial boundary, we use it as a discontinuity within a national demographic survey. We show that rural areas on the British side of discontinuity have higher levels of wealth and local public provision of improved water sources. Results for urban areas and centrally-provided public goods show no such effect, suggesting that post-independence policies also play a role in shaping outcomes.

But this doesn't mean British colonialism is good. Another recent paper compares economic outcomes across areas in India which were under direct British colonial rule with areas which were under indirect colonial rule.

Controlling for selective annexation using a specific policy rule, I find that areas which experienced direct rule have significantly lower levels of access to schools, health centers and roads in the post-colonial period. I find evidence that the quality of governance in the colonial period has a significant persistent effect on post-colonial outcomes.

Hat tip: FP.

What if the largest countries had the largest populations?

Source: Big Think

The "Irish" bailout

Now that Ireland seems to have given in to demands to accept money from the Eurozone's “Emergency Fund” and the IMF and cries of “bailout” are sure to make the rounds again, let's see who is actually being bailed out. In Germany, where I am from, people like to grumble about profligate Greeks and now the Irish who are receiving “our” tax-money. In fact, a lot of the money will go to large European banks, who will be bailed out 100 Cents on the € on loans they have imprudently (or prudently, depending on your perspective) made to Ireland. A couple of days ago, Deutsche Bank CEO Josef Ackerman warned about the consequences of an Irish collapse, adding that “Europe is worth every price”. He would think so, wouldn't he? According to Peterson Institute via FT, Deutsche Bank has around a quarter of a Billion Euros worth of Irish sovereign debt on its balance sheet. At least Germans can take comfort in the fact that some of their money will “stay in the country”. With Portuguese debt, things are even more “win-win”. If Portugal has to ask for help, Germans will be able to redistribute € 1.6 Billion to WestLB and € 400 Million to Deutsche Bank. Truly great incentives in sovereign lending.

The evil roots of Chinese growth

Foxconn Technology Group, makers of Apple's iPhone and iPad, is the world’s leading electronics manufacturer. It ranks 112th among Global Fortune 500 Companies. Currently, Foxconn has a workforce of 900,000 workers all over China. Foxconn took over 44% of the global revenue of the entire electronics manufacturing and services industry.

Civil society and media zoomed in on Foxconn recently not because of its prodigious workforce or its profits. Rather, it is the seventeen young workers who perished from suicides between January and August 2010 that forced the world to reflect on the plight of frontline workers at Foxconn and other factories.

Two examples from a recent report:

Sun Danyung, aged 25, an engineer at Foxconn, lost one of the 16 fourth generation iPhones in July 2009. After leaving an online message to his friends stating that the investigation over the incident was one of the most humiliating experiences in his life, he jumped from the 12th floor of his apartment building. Likewise, 19-year-old Ma Xianqian, was bullied before his death. He was forced to clean the shop floor and toilet as punishment, according to his elder sister.

The average wage is at the border of subsistence, 12 working hours daily, with a regime of one day of rest per 13 worked, a military-like treatment all the time, humiliating punishments for even the smallest mistakes and distractions...

Slaves or workers? in the name of communism China seems to be creating a system of alienation worst than capitalism, colonialism or other previous system.

Evading antidumping duties

What happens to Chinese steel exporters when the US beefs up its protection for domestic steel industries with high-profile anti-dumping and countervailing duties? Smuggling, in the form of transhipment via third countries, of course. The Global Times reports: 

The US Coalition for Enforcement of Antidumping and Countervailing Duty Orders said it had gathered "compelling evidence of how certain manufacturers (in China) are evading duties"... Chinese manufacturers of steel wire products evade antidumping duties via third countries... The coalition, comprising six companies manufacturing steel wire products, claimed the resulting duty evasion costs the US "at least $84 million annually" and "threatens jobs."

Measuring inflation more accurately

From the Wall Street Journal:

Roberto Rigobon and Alberto Cavallo at MIT have come up with a method to scour the Internet for online prices on millions of items and then use them to calculate inflation statistics for a dozen countries on a daily basis. The two have been collecting data for the project for more than three years, but only made their results public this week... Currently, Labor Department workers visit or call thousands of stores and other establishments to collect prices. That is "the way they were doing it 70 years ago," Mr. Rigobon said. "We can do better."

The size of Africa

 

The first map is from here, the second, which is a response to the first, here.

Equatorial Guinea

Equatorial Guinea's GDP per capita (PPP) in 2009 was of $37,500.That is right between Canada and Belgium, according to the CIA. This is thanks to booming oil exports since the 1990s. Yet half the population live with less than a dollar a day,  life expectancy is of only 60 years and education expenditure is at 0.6% of GDP, the lowest level in the world. How is this possible when oil exports amount to about a barrel per person per day, or $80?

As Gylfason and Wijkman write on Vox, only one man gets all the cash: "President Obiang has governed Equatorial Guinea since 1979, having been re-elected a few times with 98% of the vote... State-operated radio declared President Obiang to be a god who is in permanent contact with the Almighty and can decide to kill without anyone calling him to account and without going to hell".

In 2004, a crazy British aristocrat built an army of mercenaries and tried to take control of the country and its oil. The coup d'état was an utter failure (a movie based on "The Wonga Coup" is due to come out next year). But imagine if a benevolent dictator overthrowed the government and distributed the wealth equally. Half a million people would suddenly earn $30,000 a year. That would be quite a natural experiment!

Zebu overseas board

The RDB was not as successful as planned, but the idea of investing in development to earn high interest remains in our hearts. One alternative is the Zebu Overseas Board that operates in Madagascar. You invest in a zebu and a farmer rents it from you to use on its land for transport and other stuff... Judging by its newsletters, the company seems to be doing pretty well... it's been open since 1997!

Why does taste and luxury disappear with development?

Why do hotels and restaurants offer so much more in developing countries than in rich mature ones? I’ve never seen such beautiful hotels as those I stayed in in Mexico and Indonesia, and I never eaten as well as in Madagascar, where zebu carpaccio and foie gras à la mangue are de rigueur. Ingredients are fresh and tasty, service is impeccable, and bathrooms are surreal. In rich countries such as Switzerland, service is boring at its best, food, even in the most expensive places, is ordinary, and hotels lack luster.


One reason why this is the case, as noted by Tyler Cowen, is that poor countries have abundant cheap labor. But still, aren’t we missing something is we say bye to the best things in life by developing?

Power corrupts

During its first term, the ousted Madagascar president had done much good to its country. New buildings mushroomed, roads were built, aid deals were multiplying, and business was flourishing. But later he decided he needed a second private Boeing, he broke a land deal with the Koreans to his own personal benefit, and hassled competitors so he would head national monopolies… No wonder a coud d'état followed…  and now no aid, no business, and no growth until the next elections, God knows when!

Currency battle

Cell phones and tough stuff

You may often read in The Economist how cell phones are revolutionizing Africa. Don’t know why the government let this happen, but cell phones are now everywhere in Madagascar, and the poorest of the poor owns one. Zain, Orange and Telma share the market and it's super cheap… And there is a 3G network and evreyone is now on Facebook! Development is right across the corner.

Another ubiquitous sign on the roads is that of Tough Stuff. Tough Stuff sells personal solar panels that can power cell phones and other product such as led lamps. Not only do these cost less than €10, they are good for the environment… The products are made in China, of course... Not sure if that will work but I like their marketing.

The export premium

One reason why exports are a successful development strategy is that products reach higher prices aboard than in developing countries, i.e. there is an export premium. At the Andasibe national park in Madagascar, locals pay 1000 Ariary to visit, foreigners pay 25000 (€10). Hence, on one of its main exports, i.e. tourism, the export premium is of 2500%. A good development strategy indeed. If only the government would let tourism flourish…

How corruption leads to bad tasting beer

There is only one brewery in Madagascar. Its flagship beer is Three Horses Beer (THB). It’s a refreshing pilsner, a tad sweet, a bit chemical, and I got tired of it after a week. So why isn’t there any better beer on the island? Corruption, my friend.


A brewer from Mauritius has tried to enter the Malagasy market. It built a new brewery outside the capital and started a massive ad campaign to launch its beer. Two days before the opening of the factory, two official documents were missing and the factory could not start producing. Rumor has it THB gave a €2 million bribe to government officials to retain the beer monopoly.

The same process occurs in all sectors and development doesn’t happen. No need to look further to understand underdevelopment. The question is how do you root out corruption?

No such thing as the mystery of economic development

I just came back from 2 weeks in Madagascar. While some see it as a hopeless lost cause, with no government since the coup d’état and poverty and crime rising, I tend to believe more and more that there is no such thing as a mystery of economic development. Development is the default, and governments block it to various degrees across countries. Just don’t hassle businesses and the country will grow all by itself. Posts on Madagascar to follow this week.

Anonymous journal articles

Bruno Frey, a brilliant economist who has extended economics beyond standard neo-classics by including insights from political science, psychology and sociology, has a new paper complaining about the direction academic research is taking, namely the rankings mania, increased division of labor in research, intense publication pressure, academic fraud, and the dilution of the concept of “university”. One of his suggestions is to publish scientific contributions anonymously. "After all, it should not matter who wrote an article but only whether its content enlarges our knowledge."

Would that really work?

Krugman vs. Levitt

Krugman's theory of interstellar trade has just been published, 32 years after it's been written. Levitt saw it as a perfect opportunity to diss Krugman in public:

I did not think that Paul Krugman was still writing academic papers. Nor have I seen any evidence in the last decade that he still has any sense of humor... A quick look at the acknowledgments, however, clears things up. The original manuscript was written in July 1978, when Krugman was an active researcher and being a curmudgeon wasn’t part of his professional identity.

Wow! While some actually take the time to actually criticize the paper, this was one cheap shot by a brilliant pop economist on another. Chicago will always be Chicago I guess...

should we be happy for the Chilean miners?????

I have mixed feelings.

In one hand, of course I feel happy this people are been rescued and meeting with their families. But I'm fed up with all this media and propaganda. I do not exactly understand why this has been for months in the frontpage of BBC and other media around the world. The Chilean Government is using this as a reality show to cover all the other problems in the country... and particularly one big problem: This accident should have never happened. This is the real issue. Not the millions of dollars they have expend in saving these people, but the money and legislation that should be available to ensure decent working conditions. I'm glad that these 33 are alive, but the 400 a year that are 6 feet under are anonymous. And this is way worse in the rest of Latin-America and the developing world.

Wanna track inflation? Ask Google, not the government

Via Tyler Cowen:

Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics.Google has not yet decided whether it will publish its index, but "Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas." The full article is here.

IMF: The Movie

Check this out:

New movie: Inside Job

The Aussie Dollar

Some info on recent developments concerning the Aussie dollar...

...amongst other things, it has according to the BIS now overtaken the Swiss Franc as the world's fifth most traded currency!!

No Ideas for a New Paper?

Try MIT's automatic paper generator.

Fragment Africa for growth

Is Africa poised for steady, rapid growth? asks The Economist. Only if we partition states, according to Gilles Saint-Paul, who after who reminding us of the ethnic, corruption, war, and trust problems in Africa, explains:

I am skeptical about indiscriminate foreign aid packages. Some researchers (for example Jean-Paul Azam of the University of Toulouse) actually claim that the overall impact of foreign aid is negative and that it increases civil wars and homicides: the foreign aid can be used to buy weapons, or catastrophes can be deliberately provoked by warlords in order to attract foreign aid and then take over the resources. I am also skeptical about the Paul Romer project of creating a Norwegian colony that would act as an African Hong-Kong whose development would actually spread to the rest of Africa by some unclear epidemic mechanism. None of those schemes addresses the above problems; and the Iraq experience is a cautionary tale against neo-con inspired political engineering. On the other hand, it would be extremely valuable to be able to partition countries such as Sudan, Congo, Rwanda, Ivory Coast or Burkina Faso into smaller and more ethnically homogeneous ones. In addition to being good for the economy it would above all save millions of lives.

Anybody agree? You can read more experts answers here.
       

Freakonomics' movie out on itunes

Swiss tourism and the falling franc

Jack Ewing has an interesting post on Swiss tourism at Economix, here's some paraphrasing:

The strong franc, which has risen more than 10% against the euro this year, has also had a negative effect on a sector most people don’t think of as an export: tourism.Tourism accounts for 3.4% of GDP but for 6% of employment (200,000 full-time jobs, four times as many as watchmaking).

The importance of tourism to Switzerland helps explain why the Swiss National Bank went to extraordinary efforts this year to try to prevent the franc from strengthening too quickly against the euro.Tourism is highly price sensitive. The Swiss Alps must compete with neighboring Austria, Italy, France and Germany, which also offer plenty of mountains and ample opportunities for skiing and hiking, and all use the euro. Swiss hoteliers are responding by cutting prices and in some cases quoting prices in euros. 

Cutting prices? Really?

Was Ricardo right?

Here is a short note I wrote on the gains of comparative advantage export specialization (CAES). I developed a new inidex and find that it accounts for 34% of the variance in GDP per capita across countries. Let me know what you think!

Finally Some Fiscal Sense

Finally, some sense in the debate surrounding the implementation of fiscal policy....

Is Armenia importing coffee from Utopia?

Armenpress reports:

YEREVAN, AUGUST 9: Five thousand 461 tones of coffee has been imported to Armenia in the first half of 2010 (... compared to) 4 thousand 861 tones (last year ...). The main part of the coffee (...) has been imported (...) mainly from Indonesia... This January-June coffee has been imported from Cameroon, Columbia, Salvador, Utopia, Guatemala, Honduras, India and Russia as well.

 Ethiopia maybe? Or is it tariff evasion?

ht: Frank

Marketing The Economist

So now we find out in this article why we read The Economist......


......apparently it's not because it contains interesting and informative articles......but because we are all slaves to fashion and want everyone to think that we are smart and sophisticated........

Divorce insurance

SafeGuard Guaranty Corp., an insurance start-up based in North Carolina, recently released what it’s billing as the first world’s first divorce insurance product. The casualty insurance is designed to provide financial assistance in the form of cash to cover the costs of a divorce, such as legal proceedings or setting up a new apartment or house. It is sold in “units of protection.” Each unit costs $15.99 per month and provides $1,250 in coverage. So, if you bought 10 units, your initial coverage would be $12,500 and you’d be paying $15.99 per month for each of those units. In addition, every year, the company adds $250 in coverage for each unit. 

Source: NY Times via Marginal Revolution.

World Bank reports

Bhanwar Gopal, an artist from the Barefoot College, prepares masks for plays and puppet shows with material from recycled World Bank reports. "We keep getting these reports that no one reads, so we decided to put them to some use," Mr Roy says. Traditional Rajasthan puppetry is a skill the college promotes strongly.

Source: BBC ( I don't know how old this is). ht: Ferdinand

Wyclef for president

Wyclef Jean of the Fugees announced last week he would run for the Haitian Presidency. Many commentators argue that he lacks the experience to run a country, including Laura Freschi at Aid Watch. Steve Burr-Renauld, 23, who hails from an affluent family in Port-au-Prince, doesn't think a hip-hop star has the credentials to run. "What if Jay-Z became President of the US?".

But Time is being less negative: "That Haitian political class, it should be remembered, has its own epic shortcomings, whether measured by incompetence or venality. Haiti's traditional elite has shown an utter failure — and a lack of will — to reform a medieval land-ownership system".

Flying buses as a solution to trafffic jams

Source: Geekologie

Why declare rice as mung beans?

Two Philippine companies, Plum Blossom Import-Export Food Corp. and Full Story Source Marketing were apparently importing rice from Vietnam and Thailand but misdeclaring it as mung beans to a corrupt customs agent. Why?  White rice imports require an import license from the National Food Authority and are subject to a 50% duty and 12% VAT. Mung beans, meanwhile, are zero-rated in both customs duties and VAT under the ASEAN Free Trade Agreement...


Source: Philippines Daily Inquirer

Smuggling sand to Singapore

Singapore is running out of space. Since the 1960s, its land area has grown from 581.5 to 710 sq. km, and further land reclamation is planned. For this it needs sand, lots of it. The problem is that most countries have  restrictions on sand export. A few months ago I blogged about Indonesian island sand being smuggled, and islands disappearing underwater as a result. As Foreign Policy reports, Malaysia may also be exporting it, despite a 10 year old blanket ban:

In June, an investigation by the Malaysian newspaper the Star blew the lid off the sand smuggling trade. The paper's reporters followed a Malaysian dredging company working on the Johor River, about 50 miles inland from the Singapore Strait. The company had won a transport license by claiming it was shipping extracted sand internally, to the Malaysian ports of Tanjung Pelepas or Danga Bay. The shortest route to the destination, however, took ships through Singaporean waters. Once the sand was extracted, the barges sailed downriver to the Malaysia-Singapore border and passed through customs. The barges never made it to the claimed destination -- they simply stopped at the Singaporean jetty of Pulau Punggol Timur, presented freshly forged paperwork, and unloaded their cargo. 

This can be seen in the smuggling gap in official trade statistics, as Singapore declares more imports from Malaysia than the latter declares. It is curious that in 2008, the gap in kg is the other way round...

Armchair economists

"We economists like to ponder questions such as “why does popcorn cost so much at the movies?” and there is plenty we can say on the subject that is both true and counterintuitive. But the armchair does preclude one obvious research angle, which is to ask the people who run the cinemas."

That's Tim Harford confessing in the FT.

How goods reach Iran despite the sanctions

BBC reports:

"Iran's isolation could mean new opportunities for our border region," says Osman Celik, the deputy chairman of Van Provincial Chamber of Commerce, as he shows off the commemorative plates from his last trip to Iran. "Turkey voted against the UN sanctions, but she's going to have to abide by them. So formally Turkey will probably give the impression to the world that she's abiding by them. But the illegal trading will probably gain some power, and people in the border will find a way to help their Iranian friends."

An Iranian dealer in Istanbul reveals how serious business is done. On the surface, he says, his business is legal. But just 10% of his goods go to Iran legally. "I export strategic equipment, like aeroplane parts, to Iran. Those companies would never sell their goods to Iran - because they have American investors. How do we do it? We buy the equipment under the name of a Turkish company and the paperwork shows the destination is another country. But in fact the load ends up in Iran. We charge them 80% over the market price, but they need it - so they pay."

Book reviews

Spending time on the beach in Greece is a great opportunity to read books. Last week, I managed to read two.

The first one is Identity Economics by Akerlof and Kranton, which, while summarizing the duo’s research, makes the case for adding an identity component to economics’ utility function. It argues that we humans take decisions and set objectives based on who we want to be. Failing to reach such identity results in utility loss. Hence, better stick to who you really are to maximize your utility. Whites should not try to act black. White men can’t jump and end up unhappy.

The authors claim that this new tool explains a wide range of phenomena, such as gender and racial discrimination, which traditional economics had left unanswered.While their ideas are good, their bold statements of a new paradigm are quite annoying. Nothing in the book is really illuminating. All in all, Identity Economics provides an interesting framework to analyse economic phenomena but a boring read.

The second book I read was Natural Experiments of History, a volume edited by Jared Diamond and James Robinson. As natural experiments always make an entertaining read in economics articles, I thought this volume would provide many such insightful stories from historians and anthropologists looking at Polynesian islands, settler colonies, banking system evolutions etc…

But again I was a bit disappointed. Non-economists write to describe, not to test a hypothesis, which makes it hard to follow their reasoning. The chapter by Diamond turns out to be material from Collapse. The 3 chapters written by economists, i.e. Nathan Nunn’s on Africa’s slave trade (see graph below), Acemoglu’s on the spread of the French revolution, and Banerjee’s on colonial institutions in India, are more interesting but are just remnants of their published papers.

The book aims at convincing historians to use comparative methods, i.e. natural experiments, instead of focusing on just one topic when doing research. This might actually work. For the uninitiated reader, this book provides many enlightening stories.

Gypsies' informal institutions

Peter Leeson, the economics of pirates guy, has a new paper on gypsies:

Gypsies believe the lower half of the human body is invisibly polluted, that supernatural de…lement is physically contagious, and that non-Gypsies are spiritually toxic. I argue that Gypsies use these beliefs, which on the surface regulate their invisible world, to regulate their visible one. They use superstition to create and enforce law and order. Gypsies do this in three ways. First, they make worldly crimes supernatural ones, leveraging fear of the latter to prevent the former. Second, they marshal the beliefthat spiritual pollution is contagious to incentivize collective punishment of antisocial behavior. Third, they recruit the belief that non-Gypsies are supernatural cesspools to augment such punishment. Gypsies use superstition to substitute for traditional institutions of law and order. Their bizarre belief system is an efficient institutional response to the constraints they face on their choice of mechanisms of social control. 

The cost of EMU membership in the crisis: A comparison of Finland and Sweden

Admittedly, Sweden and Finland are not exactly alike and I am sure a Swede or a Finn will not like that I use the two countries in the sense of this quasi experiment. But some things they have in common: both face similar trade costs, both have a highly educated workforce, both have rather decent macro management in place and both are highly integrated in and dependent on the world economy. Most importantly, both produce and export similar products and the service sector is a main contributor to employment and GDP. For both, the EU is the main trading partner (though Russia is very important for Finland as well).

Despite the millions of differences between the two countries the key difference is that Sweden has an independent monetary policy and Finland is part of the euro zone. The consequences of which are perfectly seen in the following graphs which should make it into the next editions of textbooks that describe the Mundell-Fleming logic à la IS-LM-BP.

Figure 1: Real effective exchange rate based on 50 trading partners, source: BIS

As the crisis unfolded, most countries started reducing policy rates. So did Sweden. While the ECB reduced also its main rate the change for Sweden was more pronounced. Together with other monetary policy measure this lead to a strong depreciation of the Swedish krona. Thus Sweden could gain very early a competitive advantage over its main trading partners while Finland could not (See figure 1). The otherwise close to parallel pattern of the real exchange rate of the two countries diverged and Sweden managed to attain a real depreciation close to 20% while Finland saw no gain in competitiveness until 2010. Only the recent drop in the euro’s value, due to fears about the rising debt level in several EMU members has started to improve the competitive position of Finish exports.

The real depreciation helped Sweden to cushion the drop in demand and led to a much lower reduction in real exports compared to Finland (Figure 2).

Figure 2: Real export growth, source: OECD

The former experienced a peak drop of -13% while the corresponding value for Finland is - 28%. As a consequence the net trade balance of Sweden dropped only slightly from 8 to 7 percent of GDP while Finland’s net trade balance dropped from 5 to 3 percent of GDP (despite a lower drop of GDP in Sweden compared to Finland!).

Figure 3: Primary government balance in % of GDP, source: OECD

Finland on the other hand saw no alternative to the use of fiscal stimuli while Sweden did not need to increase debt significantly. The primary government surplus quickly became a deficit and contributes currently the fact that Finish debt to GDP outpaces the Swedish ratio despite the fact that for the last 10 years the contrary was true.

Finland pays a high price in this crisis for not having an independent monetary policy in terms of foregone GDP and servicing cost of increased debt.

Figure 4: real GDP growth, source: OECD

The short sighted conclusion from this comparison is that it is preferable not to peg but to maintain a flexible exchange rate. But this conclusion is deeply flawed for several reasons. First, it considers one particular, negative shock and says nothing about the past benefits of being EMU member nor does it tell us anything about what might happen in response to a potential positive shock. Second, the counter factual is likely to be wrong. In a world where Finland has not been part of the EMU many others may not have been. Thus in the counter-factual it is likely that all these other “would-be non-EMU-members” could have forced interest rates down further and most countries end up with a threat of higher inflation and no competitive gain and no boost of net exports.

Nevertheless, ceteris paribus, being a Swedish policy maker or citizen (who will have to repay the debt) appears to be the more appealing option these days. Too bad that being nearly the same is just not the same.

Was the world distribution of income determined in 1500?

Jared Diamond, in his groundbreaking book Guns, germs, and steel, argues that the world distribution of income across countries today was determined before 1500. Hence, his analysis on the causes of such disparities focuses on geographic causes of technology adoption. But was it really set in 1500?

A paper by Diego Comin, Erick Gong, and Bill Easterly was just published in the AEJ Macro. They collected crude but informative data on the state of technology in various parts of the world in 1000 BC, 0 AD, and 1500 AD.1500 AD technology is a particularly powerful predictor of per capita income today. 78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 AD – even BEFORE the slave trade and colonialism.

Do countries fail to trade because they hate each other?

In a discussion paper that came out 5 years ago, Thierry Mayer and co-author had suggested bilateral opinions were correlated with trade flows. However, the direction of causality was not clear. Do countries hate each other because they don't trade enough or do they fail to trade because they hate each other?

To answer that question, "Freedom Fries", a new paper in AEJ Applied looks at the case of the deterioration of US/France relationships following the invasion of Iraq. From 2002–2003,  France’s favorability rating in the US fell by 48 percentage points and this, the authors find, may have reduced bilateral trade by about 9% and trade in inputs by about 8%.

Money laundering in Zimbabwe

Zimbabwe's coalition government declared the US dollar legal tender last year to eradicate world record inflation of billions of percent in the local Zimbabwe dollar as the economy collapsed.

Low-denomination US bank notes change hands until they fall apart, and the bills are routinely carried in underwear and shoes through crime-ridden slums.Some have become almost too smelly to handle, so Zimbabweans have taken to putting their $1 bills through the spin cycle and hanging them up to dry with clothes pins alongside sheets and items of clothing.It's the best solution — apart from rubber gloves or disinfectant wipes — in a continent where the US dollar has long been the currency of choice and where the lifespan of a dollar far exceeds what the US Federal Reserve intends.

Full story here. ht: Tyler Cowen

The Israel siege as trade protection

Bloomberg reports: 

Israel’s blockade of the Hamas-ruled Gaza Strip has been a bonanza for Palestine Food Industries Co., the only functioning juice maker in the Gaza Strip, with sales increasing ten-fold as the embargo kept out competition.

Now, as Israel relaxes its restrictions, the company has joined fellow manufacturers including Pepsi-Cola bottlers Yazegi Group in demanding that Hamas protect local industries and refuse imports of juice, soda and snack foods. Officials of the Islamic movement have heeded the calls and are barring entry of such items as Israeli grapefruit juice and potato chips.

“The policy of the government is to protect and maintain local products and industry and employ a large number of workers who have no job due to the siege,” Ziad Zaza, the Hamas economy minister, said in an e-mailed response to questions about the restrictions on Israeli goods.

Greece's structural reforms

World Cup Pool

The first round of the World Cup is over, hence it is time to announce the winner of the World Cup pool. Drum roll... Cameron! He correctly predicted 52% of the games... and that is better than JP Morgan's statistical model! But overall, JP Morgan's model did better than our prediction market (see horse race below).




Among banks it is UBS who did better, with a 66% accuracy, as calculated by Miroslav (not comparable with our percentage).

UBS                  66%
JP Morgan         59%
Goldman Sachs  53%

China decides to let the renminbi appreciate

China has just decided to let its currency appreciate. While some argue this won't matter that much, Bob Mundell signaled that it may erode stability in the global and Chinese economies:

Keeping the yuan pegged to the dollar has been “a great source of stability” for China and the world... While Barack Obama welcomed the move, “he is not an economist." The yuan climbed the most in 18 months against the dollar today after the central bank said June 19 it will increase the currency’s “flexibility.” The announcement was ahead of a G20 summit this week where leaders will discuss how to sustain the global recovery and prevent a repeat of the financial crisis. Mundell, credited as the intellectual “father” of the euro, has previously called for the euro to be fixed against the dollar, saying exchange-rate swings were a cause of the global financial crisis. The central bank’s announcement followed pressure from trading partners including the US, where lawmakers threaten legislation that could penalize Chinese imports. Mundell  called the Chinese move “political.”

ht: Bunk

A 10% World Cup trade effect?

The other day I blogged about how South African wine sales were booming worldwide, thanks to a certain World Cup effect, similar to Rose's Olympic effect. As Rose 34% effect cannot be taken too seriously, mostly due to outdated econometric methods, I played a bit with the data to check for myself.

I compared export growth in a World Cup year between the host and the failed bidders and found that it is 10% higher for hosts on average, conditional on export growth in the 2 years before the Cup, and this is significant at the 5% level.

Paul Romer and Madagascar

From a new article in Atlantic Monthly (via Laura Freschi at Aid Watch), we learn that Madagascar might have become the first testing ground for Paul Romer’s charter cities idea—if not for a coup that ousted the Malagasy President in March 2009:

Madagascar’s government was anxious to attract foreign investment, and it understood that a credibility deficit held it back… Faced with this obstacle, the Malagasy authorities were open to unconventional arrangements. To boost investment in agriculture, they were ready to lease a Connecticut-size tract of land to Daewoo, a South Korean corporation, for 99 years…Romer’s proposal fit in with these adventurous ideas.…

Romer made his pitch for a charter city, and Ravalomanana responded that he wasn’t sure one was enough; if Romer could identify two rich countries willing to play the role of government trustee, it might be better to launch two parallel experiments. The president and the professor agreed that the new hubs should be open to migrants from nearby countries as well as to locals. They rose to examine a map of Madagascar on the study wall. Ravalomanana suggested building the first city on the island’s southwestern coast, which was largely uninhabited because of its dry heat. To Romer, the site sounded very much like the coastal locations that appeal most to the world’s affluent as vacation spots.

South African wine exports are booming

Andrew Rose knows economists just wanna be entertained by research. This is probably what he had in mind when he wrote "The Olympic effect", in which he claims that hosting the Olympics or World Cup has a positive impact on national exports (see his Vox Column ). According to his results, hosting a World Cup could boost exports by as much as 34%. No one believed his paper, but many talked about it.

But something seems at play. As it is hosting the World Cup, South African wine exports are booming. What's more, CNN reports  a spike in sales to countries competing in the tournament! How is this happening? Not only are soccer fans all of a sudden more curious about SA wines but wine retailers around the world, from Kansas City to Jamaica, are organizing tastings and offering special deals on SA wines, using the World Cup as an excuse.

So, rather than being a trade liberalization signalling mechanism, as suggested by Rose and his co-author, it could be an informational effect that has lasting consequnces on the extensive margin of trade. Worth a new paper!

World Cup Pool update

In case you haven't been following your performance in the pool, here is a quick graphical update. You can check your bets and updated results here at all time. Also, the predictometer on the right tells what share of games were predicted correctly by our market. The horse race is between JPMorgan's statistical model and Rigotnomics' prediction market.

Expat orders for British supermarket

The financial crisis destroyed the pound. For a while, people had been used to 1.5 € per pound, in Jan 2009, it was close to parity with the euro.

 This boosted cross-Channel food deliveries. The Guardian reports (via  TC) :

...due to the strength of the euro against the pound, hundreds of Britons living in France are now using the internet to order their food, including many French specialties, from British supermarkets.Simon Goodenough, the director of Sterling Shopping, a delivery firm based in Northamptonshire, says his company has 2500 British customers in France and is running five delivery vans full of food to France each week... "we have delivered bottles of Bergerac wine bought from Sainsbury's to a customer in Bergerac. We even have a few French customers who have now heard about what we do. They love things like curries and tacos, which they just can't get in France... A lot of people are using us to get things they really miss, such as bacon and sausages."

But now the euro is falling! Apparently, this has led to more shopping in bordering France from Geneva . Too bad we are here far from free food trade... imagine the bufalino invasion we could enjoy...

Two tonnes of cocaine in the Gambia

Is the African cocaine route being tackled? The BBC reports that at least two tonnes of cocaine with a street value estimated at $1 billion has been seized in The Gambia, bound for Europe. In addition to the huge haul of drugs, the Gambian authorities have arrested a dozen suspected traffickers, and seized large quantities of cash and arms. Meanwhile, The Economist says that while cocaine use in America has fallen by 50% over the last two decades, some European countries have seen consumption rates double or triple.

Pizza inflation in Buenos Aires

Tyler Cowen links us to this guy's blog, where he has been uploading pictures of Ugi's, a pizzeria in Buenos Aires, since 2000. He even collected the price data, and calls it Ugi's index. I played a bit with it and calculated the implied inflation rate and compared it to the official one. Of course, this homemade chart has to be taken with a grain of salt... but still, governments lie. What would I do for a muzza now...

The Euro/CHF fx and trade along the border in switzerland

Since the beginning of the Euro-turmoil the, Swiss National Bank has intervened to prevent a massive appreciation of the Swiss Franc vis à vis the Euro. As of today, the exchange rate was below 1.4.


I read today lots of business occurs especially across the border. The amount of trade with the neighboring regions of Baden-Württemberg and Bavaria in Germany is about 20CHF Bn per year, the same as the total export of Switzerland to the US. Much of this trade is accompanied by strong capital flows: of about 2000 swiss firms operating in Germany, half of them are concentrated in these two regions (including giants like Swiss Re and Novartis). In the neighboring France (Rhône-Alpes region), Switzerland exports about 2.3 CHF Bn of goods including chemicals, plastics, electronics and electricity. This is the same value of export to India. While cross border investments relate to retailing and pharmaceuticals, there are also about 70,000 transfontaliers (50,000 are french working switzerland and 20,000 are Swiss living in France and working in Switzerland). In neighboring Italy (Lombardy) Switzerland exports about 5.2 CHF Billion of goods, including pharmaceuticals, foods... No wonder the SNB feels a bit nervous about the exchange rate vis à vis the Euro.

Changing the World

For another instance of Institute students shaping the policy debate, checkout Seb's column on Vox!

Grande Seb!

Goldman Sachs and JP Morgan's World Cup predictions

Not only UBS makes World Cup predictions.  Here are the predictions of Goldman Sachs and JP Morgan (in that order). These combine, rankings, betting odds and otehr stuff. For all banks, Brazil is the clear favorite, while Spain, which, according to UBS had only a 4% chance of winning, is the runner-up this time. JP Morgan even gives its predictions for all games, with England taking the trophy in the end, not Brazil. You can find the three reports here.

Smokers have little net financial impact on the rest of us

Mankiw, in a NYT article on sin taxes:

Sometimes, advocates of “sin” taxes contend that consumers of certain products impose adverse budgetary externalities on the rest of us — that if the consumption induces, say, smoking- or obesity-related illness, it raises health care costs, which we all pay for through higher taxes or insurance premiums. Yet this argument has a flip side: If consumers of these products die earlier, they will also collect less in pension payments, including Social Security. Economists have run the numbers for smoking and often find that these savings may more than offset the budgetary costs. In other words, smokers have little net financial impact on the rest of us.