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.