The price of civilization by Jeffrey Sachs

When it reviewed Sachs previous book, The End of Poverty, The Economist wrote that the man was "brilliant, passionate, optimistic and impatient." Jeffrey Sachs is indeed a humanist and he wants the world to be a better place. After advocating a big push in foreign aid, he turns to US politics in his latest book, The Price of Civilization. It warns against the rise of plutocracy and the fall in civility. He's not happy that lobbyists control the government, that inequality is at an all-time high, and that many people do not seem to care as they prefer consuming gadgets than minding about moral values. He wants better education, better democracy, and more civic engagment. He then shows convincingly that the only possible way to stabilize debt and "pay" for civilization is to increase taxes on wealth, pollution, and financial transactions.

The problem is that his arguments, which would be seen as common sense in prosperous Scandinavian countries, are perceived as anti-American by US conservatives. Indeed, conservatives hate him. For example, the Wall Street Journal writes that his book "is essentially a crusade against the free enterprise ethic of our republic." They argue that his ideal is Europe, and that productivty and innovation is much lower in the latter (which is true but not related to moral values, or is it?). Hence, while his ideas are noble, his facts to the point, and his arithmetic flawless, he's probably only praising to the choir.

Mexi-Canadian overpass

In addition to facilitating trade between Mexico and Canada, the overpass is expected to increase tourism in both nations by as much as 60 percent. Boasting hundreds of restaurants, gas stations, and hotels, the state-of-the-art overpass will render it unnecessary for Mexicans or Canadians ever to touch U.S. soil when traveling to and from their respective homelands...  "At long last, the people of Canada and Mexico can finally begin to forge the sort of friendship and understanding that was impossible as long as the U.S. stood between us. This is the dawn of a wondrous new era..."  Source: The Onion

How big is the North Korean army?

North Korea has never published any number on military personnel. Yet, due to its belligerent attitude, it could be important for South Korea and others to estimate how big is the (non-nuclear) North Korean threat. How can one get an estimate? Just ask Moon, the forensic economist.

As he writes on Vox, "North Korea may have accidentally published its number of military personnel. A close examination of the census numbers reveals an anomaly. The population overall is greater than the sum of the populations by administrative district". This is because citizen registration has to be returned to the public security office when the citizen enlists in the Army. This implies that the (700,000) discrepancy consists in part of those enlisted in the army. What's more, when looking at the sex ratio of the census numbers (figure below), one can see a sharp dent between ages 16 and 26. This drop coincides exactly with the end of compulsory-education, when some join the armed forces, and is entirely due to a decline in the number of men. It is likely that these "missing men" are members of the armed forces.

Christmas spending outliers

At least the dead-weight loss of Christmas is not too high in the Netherlands! Source: The Economist Daily Chart

Melissa Dell and the Mexican war on drugs

Melissa Dell is a PhD student at MIT on the job market this year. Her research is extremely interesting, already published in Econometrica, and, guess what, useful! Indeed, her job market paper,"Trafficking Networks and the Mexican Drug War", might help Mexican government officials map probable trafficking routes and identify locations in the road network where interdiction efforts would force the costliest redirection of drug shipments.

How did she do it? She played with Google maps. Read Ray Fisman's on Slate for a nice and simple summary of her paper.  Not only is she the next big forensic economist, she also seems to be an economic artist, judging by her maps and graphs (see map below taken from her paper). Respect!

Did higher salaries result in an adverse selection of politicians at the EU parliament?

A while ago, I argued that one reason the UN in Geneva was ineffective was that the high salaries it offered resulted in an adverse selection of workers, motivated by luxury rather than by the work itself. But I had no data to back my claim. Now Ray Fisman et al. come in with a new paper quite supportive of my claim.

They examine the labor supply of politicians in the European Parliament where the introduction of a law equalized salaries, which had previously differed by as much as a factor of ten. They find that:

• Doubling an member of parliament's (MP) salary increases the probability that she runs for reelection by 21 percentage points
• A salary increase, however, lowers the quality of elected MPs, measured by the selectivity of their undergraduate institutions. 
• Higher pay does not affect effort, measured by legislative sessions attended while in office.

Wouldn't it be nice (to have a bit more inflation)?

Central bankers have in their hands policy tools that allow them to optimize society‟s wellbeing. This paper argues that the latter is best captured by the quality of music and then provides estimates based on a reduced-form non-linear smoother as well as a quadratic fit that suggest the Federal Reserve should aim for a rate around 6.2%, way above the holy-grail target of 2%.

How many Chinese live in Africa?

Hard numbers are hard to come by. The Economist gives a number only for South Africa (see this post). The two books reviewed on this site give a few numbers but never a complete coverage. The World Bank put some numbers together for around the year 2000, before the last wave of immigration. I just found some data put together by Park in 2009 that seems to be the best currently available. The map below shows their distribution across countries. The scale is in log.

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.

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.

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.

How the internet facilitates trade: Evidence from alibaba.com

"[Jack Ma]started Alibaba in 1999, to help small firms find customers and suppliers without going through costly middlemen. Alibaba.com 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 alibaba.com have a significant impact on Chinese exports? As per the story above, alibaba.com 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 alibaba.com users by country in a gravity equation using 2010 data. The data on alibaba.com 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 alibaba.com users on the right-hand side.

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."

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.

One-month old public official in Nigeria

AFP:

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".

The evolution of Western dance music

Click image to open interactive version (via Thomson Holidays).
Source: Thomson, via Chart Porn

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.

Explaining "Occupy Wall Street"

Cause if you ain't sharin, people ain't carin 
Come up in your hood and they take everything you wearin
             Lyrics from "It doesn't matter" by Wyclef Jean (2000)

Source: NY Times infograph

Equatorial Guinea: Assets of the president's son

BBC reports:

The US government is seeking to recover assets worth more $70m from the son of the president of Equatorial Guinea (see this blog post for a background on the country). His US assets include a Gulfstream jet, yachts, cars, a Malibu mansion and nearly $2m in Michael Jackson memorabilia including pairs of crystal-covered socks. Last month, France seized 11 of his luxury cars.

President Obiang's family steals pretty much all of the country's oil revenues and has received huge bribes from US oil companies such as Exxon Mobil and Amerada Hess...

The Greek haircut

How big will the Greek default be? Seems like EU leaders finally reached a deal with Greek bondholders. The latter will lose 50% of the face value of their bonds (see FT). Is this a big deal? Well, according to the graph below taken from a Vox column by Cruces and Trebesch, it's definitely a bigger than average haircut. Needless to say, a bad haircut is not forgotten quickly. As Cruces and Trebesch write: "Higher haircuts are strongly associated with higher borrowing costs after debt crises, and longer periods of market exclusion". But Greece is in the EU, so things might not be so bad...

Suggested reading

• Dean Yang reviews "Economic Gangsters" in the latest Journal of Economic Literature
• Ted Miguel reviews "Emerging Africa" in the latest Foreign Policy
• Ray Fisman explains on Slate how digital cameras and smartphones might reduce election fraud in Afghanistan and elsewhere

Do smartphones cause car accidents? Evidence from Blackberry cuts

The National reports:

Last week email and internet functions were unavailable to Blackberry users in the Middle East, Africa and Europe after a crucial link in the BlackBerry network failed. In Dubai, traffic accidents fell 20% from average rates on the days BlackBerry users were unable to use its messaging service. In Abu Dhabi, the number of accidents fell 40% and there were no fatal accidents. On average there is a traffic accident every three minutes in Dubai, while in Abu Dhabi there is a fatal accident every two days.

ht: TC

Book Review: Aftershock by Philippe Legrain

Back in 2005, when globalisation and its detractors were still beating at full swing, a friend of mine told me the best book about globalisation wasn't Krugman's or Bhagwati's, but Open World, by Philippe Legrain. I never took the time to read it. Two years later, Legrain published Immigrants, making the case for the free flow of people. Being already convinced, I skipped it again. So when I came upon his latest book, Aftershock, I thought it was due time to give Legrain a try. And I'm glad I finally did.

Aftershock, first published in May 2010, is a great book about "reshaping the world economy after the crisis". It starts off with a few chapters on the crisis, how it happened, how it affected people around the world, how the financial system should be fixed, and how emerging markets are our best hope for a stable recovery. Instead of praising the BRICs, he praises the BEEs, i.e. the Big Emerging Economies, which include China, India, and Brazil, but not Russia. He then warns about the dangers of protectionism, especially against China, and argues that a free flow or people and ideas is of utmost importance for the a prosperous and peaceful world.

He does all this recycling ideas from his previous, Immigrants and Open World, and combining VoxEU-inspired analyses with anecdotes collected from interviews done all around the world. His writing style, probably his greatest strength, is a mix of Tim Harford, the Undercover Economist, and Jagdish Bhagwati, the ardent defender of free trade. He's also reminiscent of Superfreakonomics, especially in his chapter on climate change where he describes the technologies that will allow us to stop polluting.

He is almost as radical as a Chicago boy when arguing about free markets, but most convincing in his conclusion when making the case for an open world from a moral, rather then economic, point of view. This is best captured by a quote from Kishore Mahbubani: "the real value of free-market economics is not just in the improvements in economic productivity. It is about how it uplifts the human spirit and liberates the minds of hundreds of millions of people". Hopefully, if politicians stop being retarded, our future will be an Open World.

The persistence of tax-evasion culture

Social norms such as corruption, trust or violence are persistent. If you put an Italian in Switzerland, he will be an hour late at meetings even after living there a few years. Old habits are hard to change. We've learned from previous studies that diplomats from corrupt countries don't pay their parking fines even when in New York, that soccer players from violent countries commit more fouls in the European leagues, and that second-generation migrants still have inhirited trust from their countries of origin.

Now comes a new study on the persistence of culture. Researchers from Indiana University teamed up with the US Treasury to examine cases of corporate tax evasion. They used data on more than 270,000 IRS corporate tax audits from 1996 to 2007 and measured a firm’s tax evasion using the amount of positive adjustment to the firm’s tax liability following audit. They found that corporations with owners from countries with higher corruption norms engage in higher amounts of tax evasion in the US. The authors also show that when the US government beefed up efforts to tackle evasion, these firms were less likely to adhere. As they sum up in their abstract, cultural norms can be a challenge for legal enforcement.

Bowing to Chinese pressure

Taiwan goes by many names. Sometimes it is "Taiwan, Province of China" (at the IMF), sometimes it is "Taipei,China" (without any space, at the WTO), or "Chinese Taipei" (at the WHO and the World Baseball Classic). The reason behind this cacophony is Chinese pressure. China thinks Taiwan belongs to China, hence it disapproves every attempt by Taiwan to join international events and ends up forcing everyone to use a modified country name.

Bowing to Chinese pressure is now the norm. The World Bank provides no data for Taiwan, even though the IMF does. Costa Rica and Malawi are the last two countries to have cut formal ties with Taiwan. South Africa failed to issue a visa to the Dalai Lama who was supposed to attend Desmond Tutu's birthday. The reason is China thinks the Dalai Lama is dangerous. We have now reached the level where two Nobel Peace laureates who are beacons of humanity cannot get together because of Chinese pressure.

There are two reasons for the bowing. The first is fear of armed conflict. If the US doesn't speak up it's because it fears China will invade Taiwan and what would follow would make the Iraq war look like a mere skirmish. Obama did sell weapons to Taiwan though. This will surely come with economic consequences. Which brings me to the second reason for bowing: economic ties. Breaking ties with China is like saying no to growth. But, as a trade union leader in South Africa puts it best: “Even though China is our biggest trading partner, we should not exchange our morality for dollars or yuan,” (source NY Times).

The tragedy of "you're of dick"

Which country has the best reputation?

Canada. Of course. This is what reveals a new report by the Reputation Institute, a consultancy. They asked over 42,000 people from G8 countries whether they think a "Country" has a good reputation, whether they have a good feeling about "Country" , whether they admire, respect or trust "Country" etc... The ranking is found below. The report argues that a 10% increase in Country Reputation leads to 11% increase in Tourism Receipts, and 2% increase in Foreign Direct Investment. Now whether reputation boosts FDI or the other way around is the question. They also estimate a self-image gap and found that Belgium, Italy and Greece rated their own country way lower than how others perceived their nation. That's telling...

Book Review: "23 things they don't teach you about capitalism", by Ha-Joon Chang.

Argentina recently imposed import-license requirements for mobile-phones. Its motive is to replace imports with local production, and hence create jobs. The trade policy, coupled with tax incentives, led Research in Motion, the makers of BlackBerrys, to begin assembling phones in Tierra del Fuego. Similarly, Brazil is trying to replace imports by local manufacturing using tax breaks. As a result, Foxconn is setting up a Brazilian plant to assemble iPads.

Both these examples, taken from this week’s Economist, would make Ha-Joon Chang smile. Not only is he a great believer in the role of manufacturing in prosperity (see here how he crushed Bhagwati in an onlinedebate), he also believes such industrial policy is exactly the right tool to promote development. His latest book, “23 things they don’t tell you about capitalism”, makes the point once again, repeating his favorite stories from previous books (see my previous review here).

The author is quite talented at convincing people that capitalism is often a bad idea. His approach consists in making extremes out of free-market ideas, and giving a few examples to prove they’re not true. Arguing by examples does not usually convince economists, who prefer regressions. But the latter should pay attention rather than dismiss it so easily.

He is most interesting when arguing that education does not matter much for growth. A university education does not make you more productive. What matters more is the capacity of organization of leaders, whether in business or government. He’s also fun when he gives example of how economists don’t do good policy. The rest is mostly summarized as “free-market policies don’t always work, but quite to the contrary”.

All in all, this is another great book by Ha-Joon Chang, but nothing new. As for Brazil and Argentina, let’s see what happens to their industries in the years to come.

The Chinese in Zambia

BBC NEWS:

"Lusaka has recently become the first African city to offer Chinese currency banking services. The city's Bank of China branch now handles counter deposits and withdrawals in yuan.
In the last 10 years... Sino-Zambian trade has really taken off, growing from just $100 million in 2000 to $2.8 billion last year... Beyond mining and manufacturing, there is also growing Chinese presence within Zambia's retail sector, from imported textiles and electronics, to chickens farmed locally and sold in city markets. The country is also home to two of China's six African Special Economic Zones."

Zambia is having elections today...

to blog or not to blog?

DAVID MCKENZIE and BERK ÖZLER, form the World Bank's relatively new blog "Development Impact" are blogging a series of analyzes about the impact of blogging. The first one about the impact on citations, the second one impact on recognition and effective policies.... so far, their methodology is not too credible, and similar to many impact evaluations they have criticized, full of endogeneity and selection bias... I hope they will improve in the next reports of the series.

Obama is paying for Bush's irresponsible fiscal policy

While Obama is trying hard to increase the debt ceiling, Republicans are doing everything to make sure the US defaults for the third time in history (previous defaults were in 1790 and 1933), claiming the president is seeking a "blank cheque". But this whole mess is not due to Democrats' taste for redistribution, it's due to Bush's tax cuts and two unwinnable wars. The deficit Bush created is estimated at $5.07 trillion while Obama's stimulus spending is at $1.44 trillion. Clearly, Bush created the debt problem and now republicans are trying to make things even worse. Dumb people.

ht: Chart Porn

Does size matter?

OK this is all over the web already but still I thought I'd share this beautifully-written new development paper with everybody. Here's an extract from the abstract:

This paper explores the link between economic development and penile length... The size of male organ is found to have an inverse U-shaped relationship with the level of GDP in 1985. It can alone explain over 15% of the variation in GDP... It is also found to be more important determinant of GDP growth than country's political regime type.

Economics at its best? Apparently, the relationship falls apart when one controls for average population height.

ht: Serge

Rigotnomics Fellow Sergio Sola cited in The Economist

This week's Economics Focus cites research from Rigotnomics Fellow Sergio Sola. Here's an extract:

Mr Obama is not alone in arguing that austerity can boost growth: Britain’s deficit-slashing coalition government and the European Central Bank (ECB) also make the case. A decline in interest rates due to a lower probability of default should support investment and asset prices. Expectations of lower future taxes and higher lifetime earnings may encourage investment and spending. A new ECB working paper argues that “a fiscal contraction may turn out to be expansionary if the expectation channel becomes sufficiently strong.” In practice, however, it rarely works out that way.

The ECB working paper can be downloaded here. Al top.

How Iranians get their puppies

The Iranian government always has good ideas. For example, in April, it passed a bill to criminalize dog ownership, declaring the phenomenon a sign of "vulgar Western values." (Dogs are considered "haram," or unclean, in Islam). But people want their puppies, so guess what happens next.

Dog-selling websites like Rashtpet and Petpars confirm they import dogs by paying travelling Iranians to act as illicit couriers and claim the puppies are their own. While importing dogs for sale is illegal, passengers are allowed to bring personal pets in on commercial flights. The flight from Ukraine to Tehran has been nicknamed "the puppy flight" because many of its passengers, mostly university students, are carrying puppies for sale. When airport authorities caught on last year, they increased the tax on importing pets from $50 to $800, according to sellers. Some dog vendors diverted their operation so dogs are transported from Ukraine to Armenia and Turkey and from there smuggled in the cargo section of tour buses and trucks returning to Iran. "We have a large and very capable network expanding from Iran to Europe and beyond to help unite Iranians with dogs," says the 30-year-old owner of Petpars…

Source: Wall Street Journal. Ht: Tyler Cowen

Book review: The Cartoon Introduction to Economics, Volume 1: Microeconomics

It's always a good idea to refresh your memory with the basics of economics once in a while. There's no better way to do that than with Yoram Bauman's new book, "The Cartoon Introduction to Economics, Volume 1: Microeconomics". I just got it as a birthday present and I went through the whole book in one go. It's entertaining, easy to follow, and super clear. It's also a great way to find inspiration when teaching game theory, auctions, and marginla analysis to undergrads. A great buy, no doubt about it. I'm gonna get the macroeconomics volume for sure when it comes out next year.

easyjet luggage fees

Almost 4 years ago I blogged about easyjet's boarding problem. Yesterday I had another blog-worthy easyjet experience coming back from Stockholm. The plane was so full with onboard suitcases that we had to check-in ours once in the plane. How can this happen? Well, easyjet charges you about 30CHF for checked-in luggage. Add that to the fact that waiting for luggage upon arrival is time-wasting and you have a perfect recipe for overpacked cabins. How to solve this problem? Easy, just make it free to check-in luggage and charge 10CHF for onboard bags.  For easyjet, the money made will cover for the costs of handling checked-in luggage. For us, checking-in big bags full of beer bottles will be free and cabins won't be overpacked anymore.

The life and times of a Red Cross senior official in China

The NY Times reports:

Guo Meimei, 20, appeared to hold a senior position at the Red Cross Society of China, a government organization that is the country’s largest charity. Under the name “Guo Meimei Baby,” she had boasted on her microblog that her title was “commercial general manager” at the Red Cross.... At the same time, she posted photos and entries detailing her jet-set life, writing of the orange Lamborghini she drove in the south (her “little bull”) and the white Maserati she had in Beijing (her “little horse”)... During times of crisis, like the Sichuan and Yushu earthquakes ... officials always put the Red Cross on the front lines of charity drives.

 A Malaysian blogger posted more pics here. He asks:

"What if you found out that the money you gave in the name of charity to such non-profit organization contributes to people’s luxurious life?" 

For our Geneva readers, it should come as no surprise that non-profit organizations and corruption go hand in hand.

Military spending and danceability

Danceability is compiled by Echonest and defined as the ease with which a person could dance to a song, over the course of the whole song. It's built using a mix of beat strength, tempo stability, overall tempo, and more.

(Alleged) corruption, Aussie style

This video says it all.

Is the US really that rich?

As blogged on Carpe Diem, according to new BEA data on GDPs per capita at PPP exchange rates, US states are way richer than European countries. Of course PPP exchange rates are not perfect to capture standards of living as ham in the US is not the same as ham in Italy. But still...

If you lived in Canada rather than Switzerland

If you lived in Canada rather than Switzerland, you would:

• use 95.26% more electricity
• have 93.18% more chance of being unemployed
• consume 85.17% more oil
• have 21.12% more chance of dying in infancy
• make 7.91% less money
• have 7.53% more babies
• spend 12.11% less money on health care
• experience 4.75% less of a class divide
• be 33.33% less likely to have HIV/AIDS
• live 0.32 years longer

Compare any two countries on this website.

Do voters need to be educated for democracy to work?

Ugo and his coauthor claim in a new Vox column that:

In order to evaluate the actions of politicians, voters need to be able to process the available information and understand the impact of the actions of elected officials on their welfare... Democracy leads to the election of better politicians only if the level of education is above a certain threshold".

They go on to show that the correlation between democracy and the quality of government is statistically significant only in countries with high levels of education (see grinter below).

But do educated voters really vote more intelligently? The latest Economics Focus argues that education can reinforce authority and the power of ruling elites, rather than leading to better governments. It bases its arguments on a new paper by Ted Miguel and coauthors:

The authors compared a group of Kenyan girls in 69 primary schools whose students were randomly selected to receive a scholarship with similar students in schools which received no such financial aid... Overall, it significantly increased the amount of education obtained... [But] those with more education did not become more favourably inclined towards democracy. In fact, education deepened their sense of identification with their ethnic group and increased their tolerance for political violence. There was little evidence that having more education made them more engaged in civic life or political organisations.

The closing paragraph says it all.

Education may make people more interested in improving their own lives but they may not necessarily see democracy as the way to do it... In India, for example, poorer and less educated people vote in larger numbers than their more educated compatriots. Indeed, the latter often express disdain for, and impatience with, the messiness of democracy. Many yearn instead for the kind of government that would execute the corrupt and build highways, railway lines and bridges at the dizzying pace of authoritarian China.

So I wouldn't blame the troubles of democracies on the lack of education of their population. The problems are more likely to be due to the lack of civic engagement by educated people.

Book Review: Adapt by Tim Harford

I read Harford’s first book, The Undercover Economist, during my masters in economics. I found the book fascinating. It helped me understand my microeconomics class and convinced me that economists had the tools to design a better world. So when I saw that his new book, Adapt, was getting raving reviews, I got excited and ordered it right away.

I have to say I was a bit disappointed. It felt more like an aggregator of interesting facts, such as a collection of Tyler Cowen blog posts, than a book trying to convince me of anything. And anyway, who really needs to be convinced that, when confronted with failure, adapting is better than being pig headed?

His chapter on development, the one I was looking most forward to, is like a romanced literature review. If you read development blogs, you won’t find much new or exciting here. Also, there is no point in repeating arguments made in other books, such as Nudge, which is quoted excessively. For me, the climate change chapter is the best. His back-of-the-envelope calculations on how much carbon was emitted in the production of a cappuccino remind us how counterproductive good intentions can be. This is where Harford is the undercover economist, once again.

You’ll still end up enlightened after reading Adapt. There are so many inspiring anecdotes you may even feel like trying new things!

The barriers to trade and development, African style

Kinshasa (in the former Zaire, now DRC) and Brazzaville, in Congo, are twin cities separated by the Congo River (see Google map here). While they are twins, they are quite isolated from each other. I tried to get directions on Google maps from one city to the other but Google couldn’t do it. Here are key facts on the situation, courtesy of a new World Bank note:

 

• Kinshasa-Brazzaville is the third largest urban agglomeration in Africa. It is predicted to become Africa’s largest, and the world’s 11th largest, city by 2025 (see its previous growth from outer space above)
• Recorded Congo imports from the DRC are only 1.12% of total Congo imports in value terms.
• Passenger traffic between Brazzaville and Kinshasa is smaller in relative terms than traffic between East and West Berlin in the times of the Berlin Wall.
• Shipping local goods across the river is found to increase the retail price of these goods by one fifth.
• 20,000 CFA francs (~$40) is the standard all-inclusive price to cross the river back and forth. Relative to local income, that’s as if San Francisco residents would pay between $1,200 and $2,400 for a return trip to Oakland, which is about the same distance.
• Up to 17 agencies are reported to operate at the passenger port in Kinshasa.
• Passenger crossing costs include One-way fare, Travel document (“laissez-passer”) at origin, Search (“jeton fouille”) at origin, Port fee (“redevance portuaire”) at origin, Vaccination card at origin, Various fees and taxes at destination.

This is the result of a total absence of political will for development. When will things ever change?

How a number-crunching economist could soon find work at Real Madrid

You're finishing your PhD in economics and you're not sure what to do with your life? You don't wanna go into academia? You wanna use your skills for something productive? How about using regressions to help soccer teams win and make fans happy?

The data revolution is now invading European football according to a recent FT article. In the US statisticians have been involved in sports teams for some years now, partly inspired by Moneyball, the story of a poor baseball team that became good thanks to an analytical use of numbers (the movie with Brad Pitt and Jonah Hill is coming out soon). Baseball, football, hockey, and basketball teams all started hiring stats guys to help them make crucial strategic decisions. One of Steve Levitt's students is now crunching numbers for the Boston Celtics, a basketball team.

So what could an economist do for Real Madrid? Well, it's all about not taking things at face value and looking deeper to identify which player attributes really matter. It's about facts not impressions. What matters more for goals, is it number of completed passes or number of completed good passes? How do you define a good pass? Is it total number of km ran, or top speed in sprints? How do you identify weaknesness in opponents? Do the number of defensive tackles matter? How do you compute the "goal-probability added" of a player? You'll find some answers to these questions in the FT article, but for the rest you'll have to get the job and do it right!

Economic growth and the quality of music

Why were some years, such as 1995, so fertile for great music? Do economic conditions affect the quality of music? In a recent paper, I find evidence that higher growth is associated with a higher number of great albums. Check it out!

How corrupt officials take dirty money out of China

The FT reports:

Corrupt Chinese officials smuggled an estimated $123.6 billion of ill-gotten gains out of the country over a 15-year period, according to a report released by China’s central bank… It provided a fascinating insight into the mechanisms behind that corruption by identifying eight ways that officials funneled their illicit funds offshore:

• Overseas casinos were commonly used to launder money in collusion with gaming operators
• Many officials carried large amounts of cash across the border
• or disguised money transfers to relatives, mistresses and other confidantes abroad.
• More sophisticated cadres relied on fake trade documents and overseas investments.
• Others used credit cards to buy large amounts of luxury goods overseas and then used illicit funds to pay back the fees in China.

Macheteconomics

Most Rigotnomics followers would agree the movie Machete is a masterpiece. It is a political statement, an action-movie satire, and an economics lesson on migration, rent-seeking and lobbying. John Perish at Overthinking it  explains it best:

[A businessman called] Booth recruits Machete to supposedly assassinate Texas Senator John McLaughlin [who is a conservative anti-immigrant politician]. He anticipates that Machete, a scarred Mexican day laborer with a reputation for brutality, might wonder why a rich guy with a bad mullet wants a Senator dead. Booth explains: illegal labor benefits both sides of the border. Texas gets cheap construction crews, restaurant staff and maintenance workers; Mexico gets American dollars flooding into their poor towns. “This state runs on illegal labor,” Booth tells Machete. “Thrives on it. Keeps costs down. Keeps the wheels turning.”

While Booth’s argument to Machete might be true, he makes it in bad faith. He doesn’t care about improving economic conditions in both Texas and Mexico. He really cares about [getting rich and powerful]. He’ll do that by [getting McLaughlin elected so that he can build] a fence with known weak points... It’ll be a labor supply which he controls. “An open border allows supply to flow in too easily,” Booth tells the Padre (while crucifying him). “Drives our prices down. A secure border limits supply; drives the prices up. Higher prices, higher profits.”

 

Reverse causality: From trade to geography in Samoa

Samoa has just announced plans to switch time zones, leaping 24 hours in the future. The reason is that its location is right on the international dateline in the Pacific, 180 degrees from Greenwich. More than a 100 years ago it had decided to be on the same day as the US to help business with Californian traders. But as more than 100 000 Samoans emigrated to Australia and New Zealand, business shifted west. And now it wants to switch to the west of the dateline. The Samoa prime minister explains why: "While it's Friday here, it's Saturday in New Zealand and when we're at church on Sunday, they're already conducting business in Sydney and Brisbane." In other words, they would gain two days of business. Will this boost trade? Too endegenous to find out! Unless one has an idea for a good IV?

Source: The Guardian. ht: Lorenz and the bunk.

Congo diplomat's wife 'smuggled cigarettes'

Diplomats, diplomats...

BBC reports:

The wife of a diplomat from the Democratic Republic of Congo has been arrested in Romania on suspicion of cigarette smuggling... Police found more than 18,000 cigarette packets hidden in her car. Esther Pascaline Bombeto, whose husband is accredited in Serbia, reportedly claimed diplomatic immunity before police forcibly searched the car. She was arrested while returning from Serbia. Romanian intelligence officers and anti-crime police had put the car under surveillance for months. "Using diplomatic immunity, the smugglers were bringing cigarettes to Romania at least twice a week," ... Officers smashed Ms Bombeto's car window with a crow-bar to confiscate the illegal Albanian-made cigarettes after she allegedly refused to co-operate, claiming diplomatic immunity...

Football corruption from Zurich to Abuja

Thanks to a recent scandal a culture of corruption within FIFA has been exposed. We are now 100% convinced countries always pay bribes to FIFA members to influence their voting on World Cup hosting. But I doubt things will change. Corruption has reached the top of the organization, i.e. Sepp Blatter, FIFA's boss. Any chance of reform is slim when all his buddy decision makers have an interest in the satus quo.
Match fixing is another consequence of corruption at the top. Just a few days ago, Nigeria beat Argentina 4-1 in a friendly game which is now being investigated by FIFA.When the score was 4-0, a large number of bets were placed on there being a fifth goal. Five minutes of extra time were announced but 8 had elapsed when a contentious penalty kick was awarded to Argentina.
The FIFA investigation will probably reveal the referee was bought and that this is unacceptable. And here's FIFA great idea: it will pay Interpol $29 million over the next 10 years to educate referees, players, coaches and officials in how to resist corruption. Millions of dollars for a problem that could be solved in the blink of an eye: Just show the referee's clock on the stadium's screen. But forget about easy solutions. A vague anti-corruption million-dollar education scheme provides more kickbacks for Blatter and his buddies.

 

Macroeconomic Policy and the Optimal Destruction of Vampires

This is the title of a 1982 JPE article by Dennis Snower. Here's the intro:

Although human beings have endured the recurring ravages of vampires for centuries, scarcely any attempts have been made to analyze the macroeconomic implications of this problem and to devise socially optimal policy responses. Despite the increasing incidence of vampire epidemics in recent years (in Transylvania, Hollywood, and elsewhere), vampirism remains a thoroughly neglected topic in the theory of macroeconomic policy. The "vampires" considered in this paper are not the blood-sucking bats (e.g., Desmodus rotundus or Diphylla ecaudata) to be found in the forests of tropical America, but the blood-sucking ghosts of dead Homo sapiens. The bats are comparatively innocuous; aside from taking their occasional blood sample from missionaries asleep in the jungle, they have had no measurable influence on human welfare. The blood-sucking ghosts, on the other hand, have periodically provided grave threats to human populations; their most conspicuous macroeconomic impact arises from their detrimental effect on the labor force.

The author does not provide empirical evidence but builds a model of human-vampire dynamics. One derived theorem, illustrated in Figure 2, is the Vampire Neutrality Theorem:

The spontaneous generation of vampires (i.e., the appearance of vampires ex nihilo) affects the optimal x and s in the short run but not in the long run. In other words, vampires are neutral in the long run.

Japan's Phillips Curve looks like Japan

Gregor W. Smith's (2008) article in the Journal of Money, Credit and Banking:

During the past 15 years Japan has experienced unprecedented, high unemployment rates and low (often negative) inflation rates. Japan's Phillips Curve is shown in the right-hand panel of Figure 1… Someone once said that a country's institutions and history are reflected in its Phillips Curve. For ease of viewing, the left-hand panel of Figure 1 rotates the Phillips Curve around the vertical axis... Clearly visible are the islands of Hokkaido and Honshu, though it is somewhat difficult to separately distinguish the southern islands of Kyushu and Shikoku. The Noto-Hanto Penninsula is evident to the north of the southern end of the main island of Honshu. Tokyo Bay is also visible... This research shows that the outcomes of the past 15 years were predictable as part of a stable, readily recognized Phillips curve. Further research work on Phillips curves and the new macroeconomic geography will focus on Chile.

ht: Yoram Baumam, the world's only [private sector] stand-up economist, who lists funny economic articles on this page.

How to evade capital controls in Iceland?

You just have to buy a Rolex and sell it abroad at a discount. Gylfason explains on VoxEU:

Under extreme duress after the crash, Iceland also became the first industrial country in more than 30 years to call on the IMF for help... in a 180 degree turn from its handling of the East Asian crisis of 1997-1998, the IMF allowed Iceland to impose strict controls on capital movements, inward as well as outward... The controls were originally envisaged to be in effect for 2-3 years... The reality has turned out differently. The Icelandic authorities have recently sought authority to keep the controls in place until 2015. The Rolex index – the number of high-end watches sold per person – is high in Iceland not necessarily because the economy’s top echelon is doing so well but rather because ordinary people have no access to foreign exchange beyond their monthly allotment of €2,150 for foreign travel plus their modest credit card limits, so they are rumoured to buy expensive watches at home for resale at a discount abroad. Welcome back to the 1950s.

Review of The Big Short

No economists saw the crisis coming. Well, maybe some did, such as Dr Doom Roubini or Bob Shiller, who had been talking about a housing bubble for a while. But economists didn’t put money where their mouths were. A few people actually did by betting on the collapse of Wall Street. The Big Short recounts their story brilliantly. How did they know it was gonna happen? Well, they weren’t working in huge banks, they were outsiders. One of them was an autistic with only one eye who in 2005 decided to create a fund and invest it all in credit default swaps. He was making a huge bet on the collapse of supbrime loans, like buying a share on a prediction market such as Intrade. These few gamblers were right, and arrogant bankers were ignorant, and some were even more ignorant than others.
All in all, this is a well-written, easy-to-understand, story of the crisis. Michael Lewis, famous for Liar’s Poker but also sports books such as Moneyball and the Blind Side (which became a movie starring Sandra Bullock), makes you understand what happened better than any economist. Bankers and analysts in big banks and rating agencies had no idea what was going on with all those toxic bonds. Because of a lack of market information, mortgage-backed securities were rated way too high and credit-default swaps were priced way too low, failing to reflect the high probability of default and allowing a huge house of cards to build-up. Obvious in retrospect…

The Robert Mugabe School of Intelligence

The Zimbabwean reports (via Blattman):

[Zimbabwean] Defence minister Emerson Mnangagwa has told Parliament that the Chinese would channel the money through Treasury for the completion of the Robert Mugabe School of Intelligence. He told the Senate this week that the "$98 million loan" was "for the construction of the college which is ideal for addressing the current global challenges”.

Who's to head the IMF now?

Now that Strauss-Kahn has fallen, the race to replace him as head of the IMF has started. As Rodrik explains, "The Germans insist the new managing director should be from Europe [this is the tradition]. Europe's weak periphery wants someone who will be sympathetic to their cause and hit the ground running. Emerging market and developing economies ask for a leader that departs from the usual mold and will reflect their outlook and preferences for a change." He thus suggests Kemal Dervis would be the best candidate. On the other side of the blogosphere, though still in Cambridge, MA, Mankiw thinks Stanley Fisher would do a great job. Other news suggest Trevor Manuel, ex finance minster of South Africa, is also a potential candidate. Only Dervis is European. He's from Istanbul. Will this matter, once again?

Brazil to tackle triangulation of goods

Reuters reports (via China Post):

Brazil will take new steps to protect local industries from a strong exchange rate, including an investigation of Chinese imports that come in improperly through other countries, its trade minister told Reuters on Friday. Fernando Pimentel said the probe into the so-called “triangulation” of goods would be the first of its kind in Brazil. The first case will involve blankets from China that were routed to Brazil through Paraguay and Uruguay, with further investigations expected in coming months, he said. The measures come as Brazilian President Dilma Rousseff faces enormous pressure from manufacturers, a key constituency, to slow an avalanche of imports from abroad, especially China. Brazil's currency is trading near decade-long highs, thanks to its booming economy and a flood of capital from the developed world.

ht: the bunk

Is Samsumg kicking off the rise of Factory Africa?

"Samsung aims to develop the local industry further by establishing further knock-down plants - where currently there are such plants in Sudan, South Africa, Nigeria, Ethiopia and Senegal," the company said in a statement.

Could this be the beginning of "Factory Africa"? This is pretty much how it started in Asia where Japanese foriegn investment led to a development competition acorss countries and raised millions out of poverty (check this paper on the rise of Factory Asia).

Source: News 24. ht: afro-ip via bv.

Can Superman get a UN passport?

This is from the latest Superman comic. Story here.

No more double-blind refereeing process

From the American Economic Review's website:

Upon a joint recommendation of the editors of the American Economic Review and the four American Economic Journals, the Executive Committee has voted to drop the "double-blind" refereeing process for all journals of the American Economic Association. The change to "single-blind" refereeing will become effective on July 1, 2011. Easy access to search engines increasingly limits the effectiveness of the double-blind process in maintaining anonymity. Further, it increases the administrative cost of the journals and makes it harder for referees to identify an author's potential conflicts of interest arising, for example, from consulting. 

Moral of the story: when you can't apply a rule, drop it. 

The world is lumpy: Interesting statistics

Do we truly live in a globalised world?

• only 2% of students are at universities outside their home countries
• only 3% of people live outside their country of birth
• only 7% of rice is traded across borders
• only 7% of directors of S&P 500 companies are foreigners
• less than 1% of all American companies have any foreign operations
• exports are equivalent to only 20% of global GDP
• FDI accounts for only 9% of all fixed investment
• less than 20% of venture capital is deployed outside the fund’s home country
• only 20% of shares traded on stockmarkets are owned by foreign investors
• less than 20% of internet traffic crosses national borders

These interesting stats are from Pankaj Ghemawat “World 3.0”, cited in The Economist.

Learning about human behavior using data from the Titanic disaster

In a super sweet piece in the Journal of Economic Perspectives Bruno Frey and co-authors study how people behave under extreme conditions of life and death using archive data from the Titanic disaster.

They collected individual-level data on the passengers and crew on the Titanic and identified those who survived by a dummy. Regressing that dummy on a bunch of individual characteristics they found that while people in their prime were more likely to be saved, it was women—rather than men—who had a better chance of being saved. Children also had a higher chance of surviving. At the time of the disaster, the unwritten social norm of “saving women and children first” seems to have been enforced. However, they do find evidence suggesting that effects predicted using the standard homo economicus model are also important. People in their prime age drowned less often than older people. Passengers with high financial means, traveling in first class, were better able to save themselves. Crew members who had access to better informational and relational resources managed to survive more often than others aboard.

They conclude that the behavior of human beings is not random or inexplicable, but can be explored and, at least in part, explained by economic analysis. What a great use of data!

Has the WTO reached the level of UNCTAD?

The damage done to the credibility of the WTO of this ongoing impasse should not be discounted... The impasse is undermining the perception that the WTO is a place where governments can do serious business. Whether the WTO has sunk yet to the level of UNCTAD is, for me, an open question.

This is Simon Evenett blogging on VoxEU.org about the WTO's failure to conlcude the Doha Round.

Industrial policy: Swiss watches

The Sydney Morning Herald reports (via Camarone):

Mondaine, the maker of Official Swiss Railways watches, may have to shut a two-year-old factory because its timepieces are not Swiss enough... The future of the $10.6 million plant in Solothurn and its 110 workers would be jeopardised should larger rivals such as Swatch Group succeed in calls for fewer non-Swiss components to be allowed in Swiss-made timepieces...  Since 1971, watchmakers have been allowed to use non-Swiss components for less than 50 per cent of the value of the watch's movement, or motor... To keep its lead as other manufacturers shift to countries such as China in search of cheaper labour, the industry is trying to erect higher barriers to entry, which would make Swiss watches a scarcer luxury.

Barriers to entry give more monopolistic power to current watchmakers, allowing them to sell and export at higher prices and indeed makes them a scarcer luxury. But it doesn't keep watchmaking in Switzerland. What if Mondaine decides to move?  Can Switzerland be forever rich with this anti-business attitude that touches all sectors?

Re-Seigniorage

Via Tyler Cowen:

Six Lufthansa employees, including four flight attendants, have been arrested after sneaking in more than 63,000 pounds of out-of-circulation, €1 and €2 coins from China back to Germany over the last four years. ... when the German Central Bank takes the coins out of circulation, the two colors  are separated then sent to China to be melted down into scrap metal. A wily group in China reassembled the coins rather melting them, then sent them back to Germany with four LH flight attendants serving as “mules.”…The FAs would then take the coins to the Bundesbank (only the central bank in Germany accepts damaged coins) and turn them in for bills.

The great stagnation

The Great Stagnation, the ebook recently released by Tyler Cowen and much debated in the blogosphere, states that the "economic engines in the rich world are running ever slower as countries exhaust easy sources of rapid growth".  His most talked-about example is how a kitchen from 1973, complete with refrigerator, microwave oven and dishwasher, would strike a person living in 1900 as a marvel. A time-traveller from 1973, on the other hand, would find a modern kitchen fairly ordinary.

Not many people, including The Economist, are 100% convinced. "The evidence of improvement is all around. Communication is dramatically cheaper, easier and better than it was just a decade ago. Kitchens may look much as they did 30 years ago but living rooms and desktops look remarkably different."

But the total-factor productivity (TFP) timeline, provided by David Beckworth, makes you think about it. In a previous post he argued that Cowen failed to appreciate how dramatically our lives have changed since the advent of the internet and faster computing.  Now he is thinking these gains are but a faint shadow of what they could have been had TFP continued to grow at its 1947-1973 trend.

But do TFP data really capture the imporvements of this time and age? Not so sure.Still, I should probably read the book before claiming TC is wrong.