10° 40' N, 61° 30' W

Wednesday, April 30, 2003


Stephen Karlson has to be the one to remind me of home as he posts about a concert of the Northern Illinois University Steel Band. Aside from family and friends, there are three things about Trinidad I miss--the weather (I'm in London, remember?) carnival (well, most of it) and steelband music. Missing Panorama, especially, is painful.

B is for Bubble

Via Angry Bear I discovered the very partisan Democratic econoblogger Matt Stoller, who worries about a bond-market bubble in the US:

Markets that are too frothy exhibit certain characteristics, one of which is the entrant of amateur investors who think they can't lose because that's what they've been told. Remember a few years ago when stocks were a can't miss investment, and even if they went down, over the long haul they would go up? And then many of them went to 0.

Well, when the 'dumb' money is late to the party, the party is over.

So this quote should give you pause:

“I would never have bought a bond” before the stock market’s swoon, said Soury, 50, who runs a public relations firm in New York. “Now they look like a gold mine.”

When the national savings rate is low, the power of the Federal Reserve to manipulate the economy is dramatically reduced, as essentially foreigners decide whether to set rates high or low based on whether they want to invest. Foreigners make decisions with different priorities than a central bank, and react badly to instability (think third-world financial meltdowns). Low rates set by the Fed have had a much weaker effect than they did in 1992, reflecting precisely our weakened financial position.

Lots of people are worrying about the US current account situation, concernd that it is unsustainable in the medium-long run. Stoller, though, it talking about two differnent things. It is true that bonds are providing higher returns than equity markets right now, but how much that influences ordinary inverstors is questionable. The very report that Stoller cites is based mainly upon anecdotal evidence, not on an empirical finding that significant numbers of Americans are shifting their savings into bonds (though that may very well be the case).

If what Stoller says is correct, there is even more cause for worry. Housing bubbles, though, as the IMF notes, are a greater concern in the short run. If the US bond marker busts, though, is will correctly be because of a loss of confidence among foreign bondholders. Despite the IMF's emphasis on "confidence building" duing the 1997-98 Asian crisis, there still no good way of explaining their behavior, especially in a market as big as the United States.

Tuesday, April 29, 2003


Colby Cosh tries out David Janes' mehod of dealing with Blogger permalink problems:

You have to roll your mouse over the permalink symbol and eyeball the destination URL, which will be something like:


As you can see, that link doesn't work, and it immediately redirects to a "Not Found" page--for the duration of the continuing Blogspot crisis, anyway. (Is everybody still terribly excited about that Google-Pyra deal? Good, good.) But Janes advises--and, indeed, I ought to have seen--that you can use the page anchor to link to the post directly, like so:


Ta-da! As David notes, "The only problem is that this link will break after the link scrolls off the main page. Like some other bloggers." A hit, a very palpable hit. But then ColbyCosh.com doesn't own the world's largest server farm.

I've tried it, and I agree, it does work. There is some hope for frustrated Blogspot users.

The Euro non-debate

Dan Gelfand (see here and here) and British Spin have the rundown the British government's latest shenanigans over the Euro. This is mostly political, though Spin is thinking about the prime minister's motives:

Well, the PM clearly believes that entering the Euro will, in the long run, be the right move for the British economy. It will remove some currency instability, open up European trade further, and also persuade businesses that wish to trade in Europe that Britain is a good place to make stuff. It will also (and this is no small factor) allow Britain to exert more influence in the debate over Europe's future. This is not an argument about who gets top jobs, but about whether the EU becomes a flexible, market oriented, let ‘er rip kind of place, with a minimum of rules and the maximum opportunity for diversity, or a more dirigiste place, with strict rules that all must live by (rules set, for the most part, by France and Germany).

Really? The first part of the quote is pretty standard pro-Euro fare, but generally Britain has been poor at influencing institution design in Europe, except where it directly affects Britain's interests (the Maastricht opt-outs and the budget rebate, to name two). The whingeing and the delays, including this one over the Euro, don't help this; and Britain too often has to sign up to things that the French and Germans have pushed. (The main exception to this was the 1986 Single European Act, but Margaret Thatcher, in her recent book Statecraft, sort-of claims now that she did not realise what she was signing up to.) Also, The Economist noted that perhaps the single greatest thing that Gordon Brown as done as Chancellor of the Exchequer is to make the Bank of England independent; so far the ECB pales in comparison.

Then again, this is a debate, not really about the Euro per se, but about a referendum about the Euro. Sometimes I wish that they would just call the [expletive deleted?] referendum and get it over with. Polls are currently 2-to-1 against, but no matter; a no vote will not end this, especially in Europe, where, if you say no, they'll come back and ask you again at some point. (Norwegian voters must be credited for saying no to the EU three times, and the Swiss for saying no to first to the humbler European Economic Area and later to the EU, but everyone, including them, knows they'll be asked again sooner or later.) Just as the William Hague's "one policy" on Europe did not heal the Tory party, neither will a no vote on the Euro in Britain, unless its overwhelmingly against. (In contrast, a tepid vote in favour ends the matter.) Hence the delay and obfuscation, which will continue for a while--a very long while. Meanwhile the institutions go on, Britain within or without.

Property Bubble

[NOTE: I accidentally deleted this post while editing something else, and with some help from Bonobo Land, recovered it--DCS]

My eyes normally glaze over at property columns, but the FT's new Property Editor, Henry Tricks, made me laugh:

Roger Bootle of Capital Economics, author of The Death of Inflation, believes low inflation will eventually depress all asset prices, including housing. Bootle argues that, like reckless price/earnings ratios at the peak of the equity bull market, house-price-to-income ratios in the UK housing market are at perilous highs - and will fall 20-30 per cent over the next few years to return to their long-term average.

However, even he acknowledges that homeowners do not behave as rationally as economic science suggests we should.

His is a case in point. As "Economics Man", he would have considered short-selling his six-bedroom Georgian house on the River Thames in Richmond if a market for such a property existed. As a family man, he realises that would be perfectly foolhardy. "It might be quite difficult to persuade my wife."

Tricks (in the Weekend section, no less) is trying to hold out hope that the UK's housing bubble will not crash. Given the current market, he may be a little to sanguine, but you have to admire his optimism.

Saturday, April 26, 2003

Dismal Advice

In the Financial Times new magazine, unveiled today, a new "agony aunt" column made its debut:

Dear Economist,

Both my children did well in school and got high marks in top universities, but my son devotes his energies to pop music and various "good causes", and his living conditions are terrible. I want to give him money now, but how much? And how should I tell my daughter, who is studying to be a lawyer?

-- Mr BD, Hampstead

Dear Mr BD,

First you need to sort out whether you want to wean your son off his current unprofitable career, or whether you merely want to make your son happier in his own choice.

In other words, are you partially trying to maximise your own utility, which values having a conventionally successful son, or do you have a pure bequest motive which subsumes your happiness in your son entirely into his own preferences?

If you are seeking conventional success, you need to raise the relative returns of a respectable career, increasing the opportunity cost of his current dissolute lifestyle.

But you must be careful not to fall into the time-inconsistency trap of promising him large amounts of cash up-front to, say, go to law school. If he is at all rational, he will sign on at law school, wait until the money has landed in his account, drop out and go back to his former associates.

Instead, find a way to give him money at each stage of a successful career - so much for graduating, so much for taking articles, so much for becoming a partner.

Whether this works depends on what his utility function is. He may value what he does so highly that almost no sum of money will make him change his behaviour.

On the question of your daughter, you can tell her whatever you like, but you should give her nothing. Since she has chosen a respectable career path on her own, and seems likely to succeed in it, she satisfies both potential conditions for your utility, and any money you give her would simply be a waste of valuable incentive.

I don't know is this is meant to be taken very seriously or is merely a mild amusment. In the meantime, feel free to send your questions to economist@ft.com.

UPDATE: In response to a comment, I've edited the end of this post.

Friday, April 25, 2003

Small States, Small Problems?

The above is the title of a 2000 World Bank working paper by William Easterly and Aart Kraay. Their conclusion:

Our analysis suggests that small states have perhaps received excessive attention from the literature – notwithstanding our own addition to the literature!--as special cases calling for special policy measures. We find that small states have, if anything, significantly higher per capita income than others in their region. There is no significant difference in growth performance between large and small states. It is true that growth volatility and volatility of terms of trade shocks as percent of GDP is higher in small states, but this is largely due to their greater trade openness – and the net benefits of openness on growth are positive. The one missing piece in the current situation of small states is that they are not fully exploiting the potential to diversify their risks by opening up to international capital movements. But even the payoff to filling in this last missing piece is unclear from evidence in the literature.

This is not to say that small states are free of economic problems! Many small states are still poor, and promoting growth as a means to alleviate poverty is as important in small poor states as it is in other poor countries. The good news is that the lessons of growth experience from all countries seem to be applicable to small states, so they can benefit from the large amount of cross-country evidence on the determinants of long-run growth.

This basic conclusion: aside from some volatility, small countries are basically the same as everywhere else--they need no special theory to describe their situation, nor any special treatment as a result. Economics was, and remains, universal.

Small countries, led in part by the member states of the Caribbean Community have been fighting a long battle for special treatment. The Commonwealth, dominated by small states, even has a programme dedicated to their condition. The whole notion of being "small and vulnerable" is a huge part of their worldview. Take the words of Antigua's former high commissioner to London, Sir Ronald Sanders in 1997:

SMALL STATES are in a worse position today than they were in 1985 when the Commonwealth produced a study of their vulnerability. International terms of trade have badly affected their economies and guaranteed markets and preferential prices for their principal exports are being eroded. Caribbean small states are being pressured by the United States to enter into treaty arrangements undermining their sovereignty. Appeals to international organisations are futile since these organisations themselves have been severely weakened. New developments such as drug trafficking, money laundering and an increase in the frequency and intensity of natural disasters make Caribbean small states more vulnerable than in the past. Consequently, the capacity of small states to adequately serve the needs of their communities has been weakened. There is an urgent need for small states to form an alliance in every international forum. The world’s richer nations also need to take action on trade, debt relief and the provision of resources to small states. If not many small states may become ‘failed states’ and redeeming them will be at great cost to the international community.

These words could have been said by any Caribbean leader. Look at the language, though. The tone suggests that stuff just happens to these countries, and that there is nothing that they could do about them. Nothing said in Sanders's paper (read the rest of it) though, explains why other countries are not affected by these changes, and, if so, how those countries deal with them. No; small countries are "special".

The lobbying effort had a huge step forward in 1994, with the Barbados Programme of Action of the Global Conference on the Sustainable Development of Small Island Developing States. The Programme says what the lobbying is probably really about:

The international community should cooperate with small island developing States in the implementation of the Programme of Action for the Sustainable Development of Small Island Developing States by providing effective means, including adequate, predictable new and additional financial resources in accordance with chapter 33 of Agenda 21; facilitating the transfer of environmentally sound technology, including on concessional and preferential terms as mutually agreed, taking into account the need to protect intellectual property rights as well as the special needs of developing countries; and promoting fair, equitable and non-discriminatory trading arrangements and a supportive international economic system. [emphasis added]

Easterly and Kraay are right in that small countries have higher per capita income than most developing countries, and that many of their problems could be alleviated by increased trade and improved risk management--the same things other counties do. The whole exercise of lobbying looks to be just a means of maintaining aid flows when there is an increasing international focus on the least developed countries.

Did Easterly and Kraay affect World Bank policy? Given that the Bank's purpose is to lend, the outlook does not bode well. This is something the research staff can't do much about; this is clearly James Wolfensohn's area. While he has tried differed ways of reforming the banks management and processes, in seven years Wolfensohn has done little about the Bank's sometimes unproductive lending practices. The official report of the Bank's Task Force on Small States, though, has the final answer:

The report concludes that developing small states do share a number of characteristics that pose special development challenges. They are especially vulnerable to external events, including natural disasters, that cause high volatility in national incomes; many of them are currently facing an uncertain and difficult economic transition to a changing world trade regime; and they suffer from limited capacity in the public and private sectors.

An possible example of institutional capture, a problem in principal-agent theory. The communiqué-driven aid "shakedown" continues.

Thursday, April 24, 2003

Bearing the Cost

Via Maria Farrell, a report that the Austrian Constitutional Court has declared that requiring "telecommunication service providers" (TSPs) to install surveillance equipment at thir own expense is unconstitutional:

The Constitutional Court has ruled several times that the obligation for private companies to fulfill assignments of public interest is not unconstitutional. However, "it is not justified to impose such obligations on TSPs, regardless of the nature and scope of TSPs' obligations to cooperate, and regardless of the content and extent of the wiretapping involved. Therefore, a regulation that imposes a significant burden on third parties ("private Dritte") may only be justified for exceptional circumstances."

The interest for obtaining information about crimes is of such an important public interest that it can be justified to compel TSPs to cooperate with law enforcement agencies. It is necessary to compel TSPs to implement adequate techniques of surveillance, because they are the ones most competent to conduct surveillance due to their technical expertise. However, this does not mean that TSPs have to abide by those obligations at their own expense. The imposition of expenses for obligations carried out in the public interest may only be justified in exceptional cases if they are proportionate.

Farrell comments that "[l]aw enforcement hasn't been been reluctant to ride rough shod over human rights in its quest for data retention; money may be a rather more effective deterrent." Why limit this argument only to data retention? In an article in Slate last June Steven Landsburg wrote about the cost of regulation following the US Supreme Court decision in the case of Tahoe-Sierra Reservation Council, Inc. v. Tahoe Regional Planning Agency, et al.:

When local landowners requested compensation for moratorium-related losses, the court turned them down. Why? Because, according to Justice Stevens, land-use regulation—and for that matter most other government activity—would be prohibitively expensive if governments bore all the costs.

But if a regulation is too expensive when governments (i.e., taxpayers) bear the costs, then that same regulation is too expensive, period. If a development moratorium costs landowners $10,000, then the cost of that moratorium is $10,000, whether or not the landowners are compensated. Without compensation, the landowners are out $10,000; with compensation, the taxpayers are out $10,000; either way, the $10,000 cost is the same.

And is $10,000 a prohibitive expense? That's like asking whether $10,000 is too much to pay for a car; the answer depends on how much you want the car, or in this case on how much you value the benefits of land-use regulation (which we haven't yet accounted for, and which might come to either more or less than $10,000). But shifting that $10,000 burden from taxpayers to landowners can't change the size of the burden, so it can't change the expense from reasonable to unreasonable.

I am not a legal scholar, but I agree with both Farrell and Landsburg on the main point. If governments have to bear more of the costs of regulation, perhaps they would be more thoughtful and discriminating in approaching it.

Wednesday, April 23, 2003

Stiglitz and Rogoff, again

No, nothing has happened. I just read Zimran Ahmed's post on a speech by Nobel Laureate Joseph Stiglitz in Chicago, on the problems with economic globalisation. Ahmed describes the speech as "shallow and filled with cheap shots." Not wanting to jump on the anti-Stiglitz bandwagon (well, I am kind of on it already, but never mind) I have been thinking of an intresting contrast between him and the IMF's "economic counsellor" (chief economist) Kenneth Rogoff.

Rogoff is much remembered for his open letter to Stiglitz last July, where he attacked Stiglitz's book Globaliztion and its Discontents. One comment in that letter is of particular interest:

In your role as chief economist at the World Bank, you decided to become what you see as a heroic whistleblower, speaking out against macroeconomic policies adopted during the 1990s Asian crisis that you believed to be misguided. You were 100% sure of yourself, 100% sure that your policies were absolutely the right ones.

My question is, what did Stiglitz do as the World Bank's chief economist besides this? Stiglitz to some extent was naive, thinking that the sheer force of his ideas and personality could change things in Washington DC. Contrast this with what Rogoff has been doing. True, Rogoff first engaged in some triumphalism, such as the open letter and an article in Foreign Policy titled "The IMF Strikes Back", none of which was going to endear him to the Fund's critics, if that was his intention.

Rogoff has though, to a large extent, learnt some humility. Take the March 17 research report on the "Effects of Financial Globalization on Developing Countries", which Rogoff co-authored. The dramatic conclusion:

The empirical evidence has not established a definitive proof that financial integration has enhanced growth for developing countries. Furthermore, it may be associated with higher consumption volatility. Therefore, there may be value for developing countries to experiment with different paces and strategies in pursuing financial integration. Empirical evidence does suggest that improving governance, in addition to sound macroeconomic frameworks and the development of domestic financial markets, should be an important element of such strategies.

This was overblown, especially by some of the IMF's critics. The IMF still favours financial liberalisation, though it now recognises the problems involved, as well as a need for flexibility both in the process and pacing of such liberlisation. All the same, Ross Gittins of the Sydney Morning Herald is right when he writes that "while the IMF's many critics are rubbing it in, they shouldn't forget that such a burst of intellectual honesty takes a lot of guts."

The Fund has also been moving in other directions to change. Anne Krueger's proposal for a Soverign Debt Restructruing Mechanism, while panned at the recent Fund-Bank spring meetings, represents a huge effort to change current debt work-out practices. The IMF's signature publication, the biannual World Economic Outlook, overseen by Rogoff, is taken more and more seriously in the financial centres that matter. (There were times that IMF pronoucements on the US economy were binned straight away; no longer.) Recently, the Fund's staff was against a G-7 led push for a rollover of Argentina's debt.

The Fund therefore, under present management, is trying to evolve. It cannot be all things to all people, but it is seemingly willing to acknowledge its mistakes, while making efforts to do thing better. These efforts may not be the right ones, no matter how well-intentioned; collective-action clauses in bond contracts, for instance, are perhaps a better, and more politically feasible, solution for emerging-market debt problems than the SDRM. For all the oppostion that the Fund gets though, no matter what it does, these efforts must be acknowledged. Other than a couple of good research reports (Assessing Aid is one), I ask, what exactly is Stiglitz's legacy at the World Bank?

Tuesday, April 22, 2003

Will you be paying in Dollars or Euros?

I am going to set aside the reasons for this article by George Monbiot and simply publish the following excerpt, with a couple added links:

In November 2000, Saddam Hussein insisted that Iraq's oil be bought in euros. When the value of the euro rose, the country's revenues increased accordingly. As the analyst William Clark has suggested, the economic threat this represented might have been one of the reasons why the US government was so anxious to evict Saddam. But it may be unable to resist the greater danger.

Last year, Javad Yarjani, a senior official at Opec, the oil producers' cartel, put forward several compelling reasons why his members might one day start selling their produce in euros. Europe is the Middle East's biggest trading partner; it imports more oil and petrol products than the US; it has a bigger share of global trade; and its external accounts are better balanced. One key tipping point, he suggested, could be the adoption of the euro by Europe's two principal oil producers: Norway and the United Kingdom, whose Brent crude is one of the "markers" for international oil prices. "This might," Yarjani said, "create a momentum to shift the oil pricing system to euros."

If this happens, oil importing nations will no longer need dollar reserves to buy oil. The demand for the dollar will fall, and its value is likely to decline. As the dollar slips, central banks will start to move their reserves into safer currencies such as the euro and possibly the yen and the yuan, precipitating further slippage. The US economy, followed rapidly by US power, could then be expected to falter or collapse.

Firstly, the fact that the oil price may be demominated in euros does not, of itself, mean that oil will be paid for in that currency; it is hard to imagine that dollars will be refused as payment, making foreign exchange necessary, though this does involves some degree of currency risk. Secondly, if redemomination happens, it is unlikely to be a unanimous OPEC decision--the Venezuelans, for one, sell most of their oil in the United States and, despite Chavez, would probably not want to compromise that relationship. Thirdly, while the US imports a lot of its oil, most of it is either produced domestically or imported from Canada. West Texas Intermediate, Brent North Sea and Light Sweet Crude, traded on the New York Mercantile Exchange as well as London's International Petroleum Exchange, will likely stay in priced in dollars as a result. There is an even more fundamental reason, though, which Yarjani notes:

Because crude oil contracts are currently traded in dollars, and the prices of OPEC crudes are determined by using complex formulas derived from marker crudes, such as Brent and WTI, there is not much the Organization can do unilaterally until, and unless, there is a switch of denomination in these markets. OPEC has no control over the quotations of these marker crudes, whereas, in the past the Organization did set the official selling prices. That has all changed with the introduction of market-related prices which saw the system change from a seller’s to a buyer’s market, or at least where market forces now dictate prices. Moreover, the entire infrastructure of the oil market has been based around the dollar, and that will be hard to displace.

Monbiot's case, it turns out, depends on both Britain and Norway joining the euro, and them subsequently desiring to have Brent North Sea denominated in the new currency. Even so, things may not change much. Yarjani again:

[O]ne should also be aware that the dollar now benefits from its status as an incumbent currency and that the forces of entropy are expected to lend support to the US currency versus the euro. This was the case for the pound sterling long after the UK had lost its economic supremacy. Moreover, confidence in the US economy remains unrivalled, despite the recent slowdown. This level of optimism could mean that capital and investment flows to America will remain strong, from Europe as well.

Just as the creation of the euro was a political decision, so will any change in the marker price of crude oil. Will such a change be dramatic in effect, as Monbiot hopes? That depends on whether the world revolves around oil not now, but when such a change is announced. (How much of world currency exchange is related to oil today is a good question.) Any change is not something that can happen overnight--everyone will see it coming, and they adjust accordingly. So far all it is is an idea, though, and the US most probably will try to see that it stays that way.

Monday, April 21, 2003

On Being an Expatriate

[This post has been edited--DCS]

On the excellent Free Trinidad blog eparillion comments about why he won't be returning home anytime soon:

I left for college, as did many of my peers, because I believed that I could get a better education [in New York]. Fair enough, but why stay after graduation? Well, for one thing, I found the culture of anti-intellectualism backed by religious dogma rather distasteful, and much preferred the more open-minded environment that New York had to offer. For another, I simply didn't think that I could get as interesting a job in Trinidad. I didn't want to work in law, medicine or oil (or its downstream industries, for that matter), and the impression I'd get upon investigation was that there wasn't much going on outside of that area. Now, that's obviously not entirely true, but the basic idea that there were more jobs here than there remains. Crime wasn't a factor in 1998, but these days you can add it to the list.

In the comments, Seldo justifies his reasons for not going back:

The conventional expectation is that I should feel somehow guilty about this: I am, after all, abandoning the country of my birth for the bright lights of the big city. But much as I miss Trinidad, I see no more reason to feel guilty about leaving Trinidad than Billy-Joe Hick does when he leaves Sticksville, Ohio and moves to New York. Big cities are more interesting and more creative places than small towns, and Trinidad through an accident of geography doesn't have any cities big enough. That's too bad, but it's nobody's fault.

Eparillion's post was inspiried by a long Richard Florida article in Washington Monthly, about creativity in the American economy. Arnold Kling is right to say that Florida's analysis is Austrian, following Joseph Schumpeter's overquoted mantra of creative destruction. Stephen Karlson also has thoughtful comments on Florida's piece, especially on Florida's recommendations. Rather than talk about this, though, I would like to say a few words about Trinidad.

Seldo's comments echo a some of endogenous growth theory, a strand of which says that capital, including human capital, move to where it can be most productively used. This is a common explanation of brain drains--the highly skilled cannot meet their potential (and feel consequentially unfulfilled themselves) if they are forced to work with poor quality capital. Trinidad, despite its relative affluence, is no exception, it would seem. Thought it has been creeping upwards, only about 8 percent people of school-leaving age go to university. Like the former mother country Britian, where many are worrying about the decline of math and science education, the problem really beings much earlier, with a primary and secondary school system that, despite its pretensions to universality, produces a surprisingly large number of functionally illierate school leavers.

Trinidad's economy is growing, at a annual rate of 3-5 percent. The trouble is it all driven by oil, natural gas and their downstream industries (the "offshore" economy, to use Lloyd Best's term). The rest of the economy, which employs most of the population, is generally subsidised. The government did a lot to correct major macroeconomic policy errors during the 1986-1992 recession; now, though, other that pushing for further hydrocarbon exploitation, I am at pains to figure out what they actually do to keep the economy growing and push the long-run rate of unemplyment down, though both have been happening.

Trinidaian governments, regardless of party, have more-or-less put the country on autopilot--they announce a mixed-bag of small initiatives, but since structural adjustment economic policy is more or less hands off, and they generally avoid screwing up the economy in any fundamental way. This may sound like a libertarian paradise, but it is something of an abdication of responsibility, leaving real economic oversight in the hands of a small number of low-profile civil servants at the Central Bank and the Ministry of Finance. (They do a good job, all things considered, but that's not the point.) Structuralist economists (of which there are many in the West Indies) can't see any fundamental industrial change. Basically life is "nice" so long as the oil price is above $20 a barrel. Any sign of dynamism or creativity, though, is so far hard to detect, and most job growth is in low-productivity service sectors.

Trinidad's population is tremendously creative, especially in the realm of culture. Somewhat oddly, it is also more than a bit conservative, especially when it comes to professionalisation, which, when it comes to cultural products, is a key step towards broadening the market. Take Mark Kleiman's comments on American folk music:

Folk music tends to be "heavy on the fiddle, heavy on the harmonies, and light on the rehearsal time." Worse, since a certain casualness in performance is taken as the hallmark of the folk style, folk performers tend to deliberately cultivate a little bit of imprecision: going a little sharp vocally, putting an unnecessary twang into violin music to make it genuine fiddle music, emphasizing the speed of a breakdown number by slurring the notes.

Imagine how glorious it would be to have a whole concert in which classical standards of peformance were applied to the folk repertoire, or to new pieces in the various traditions.

Change the instruments and substitute "calypso" or "steelband" for folk, and you have the problem there in a nutshell. To take one example, many have proposed changes to the slow-running Carnival events to broaden their audience and make them suitable for live broadcast; the reply you get is that you can't change the "people's culture". Each Caribbean Island also fiercely nationalistic when it comes to carnival competitions, with even other regional artists largely kept out. The thing is, you can't necessarily grow and stay as you are.

While not reaching the extremes of the oil-boom days of the 1970s and early 80s, the rising all-around affluence has raised expectations, especially among the university educated youth. The lack of real economic--and social--change on the ground, though, dismays many. This could be a coordination problem, which does not put the growing skilled Trinidadians together with each other, and other skilled West Indians. Migration is probably looked upon as the solution, and not just by Trinidadians educated abroad. Anecdotally speaking, there has been an increase in the number of University of the West Indies graduates either taking up positions with multinationals and moving, or applying for youth- or skilled worker visas.

To echo Karlson's comments, I am not sure that government policy can do much about this. Industrial policy--the steel plant and the proposed aluminum smelter, to name two--have been proven money losers (when in state ownership, at least) and possibly a politcal non-starter. Just as China's accession to the World Trade Organisation drove and locked-in economic changes there, perhaps a real Caribbean single market, with full freedom of movement, will change things, forcing producers to adapt to a wider market. Perhaps. Until then, many in Trinidad and in the wider Caribbean region, myself (possibly) included, will contintue to seek the bright lights and the big opportunites of the major cities abroad.

Too Much Stuff?

The BBC World Service's Global Business program recently examined an odd theory about global deflation:

Consumers used to wait cap in hand for the products that manufacturers and retailers would permit them to buy. But now scarcity has disappeared, and competition is bringing proliferating choice and cut throat prices to the global market place.

Manufacturing companies in many industries are reeling from the impact, and it's spreading to service companies too.

No, no, no. Commoditisation, which is what the program really discussed, does not mean the "disappearance" of scarcity--only that overcapacity on the supply side is making markets much more competitive, making product differentiation much harder. This combined with a general deflationary outlook (demand is no longer growing) is squeesing margins. This is a real problem--well, as some would simplify, the economic problem in today's world--but putting it this way does not make it sound nearly so alarming. This process is by no means ubiquitous, either--it is not happening everywhere, in all industries. All that it illustrates is a need for industrial adjustment in the medium run.

There is much to look at in devising an approach to the world's economic situation, not least looking at the impact of economic change in China and East Asia (check out Edward Hugh's excellent page on this). To say that the world is awash with "too much stuff", however, is almost a reductio ad absurdum.

The Economics of Relegation

Ranked divisions in sports are all but unheard of in American sports--while minor leagues do exist, there is no "promotion" or "demotion" based on regular-season performance as is common in Europe. Much analysis has been written on the impact of this on the economics of sports leagues and sports teams. How does it affect local communities and economies, though?

Arnold Kling last week posted on the economics of sports stadiums, arguing "that cities should own sports franchises, so that both the benefits and the costs of sports teams would be socialized." A story in the Guardian about soon-to-be relegated English Premiership football (soccer) club Sunderland makes for depressing reading on this score. The cases are different, it must be conceded, but the shows that impact of socialized sports teams in a community need not always be favourable.

Moral Incentives

While I agree with Ram Ahluwalia on the subject of this old post of his, isn't there also a fundamental moral reason to object to the USA Patriot Act?

Sunday, April 20, 2003

Long Weekend

I spontaneously decided to go to Cambridge on Friday, partly because I had never been there and wanted to see somplace new (London can do that to you) and partly because I wanted to see a place that had played a crucial role in the history of economic thought. Not that I gained much insight into the latter. The city iself is quaint and lovely, and a joy to stroll trough, with each college giving you a sense of its history. While full of tourists like myself, it is also not a museum piece--it is a living city, not a glorified monument to tourism like, say, Venice. A great "day out" all around.

For economics, on the other hand, it was disappointing. Unlike the history of science, the history of economics is largely a history of ideas, with the exception of things like the Phillips Machine and, well, exhibits about money; even the Nobel Foundation has recognised this curatorial difficulty while creating their museum. More important is understanding how those ideas came about, and the process by which they developed. Books are now, and most likely will remain, the best means of doing this.

Pity. Reading is an absolute joy, and it should be thoroughly encouraged. Sometimes, though, one can learn a lot by context and environment--by seeing what that initial discoverer saw.

Wednesday, April 16, 2003

Pleas and Defences

Loosely related to the post immediately below, there is this argument from the Caribbean Banana Exporters Association:

Caribbean bananas are grown mainly on small family farms, with intensive and justly paid labour and low usage of agro-chemical inputs. That inevitably results in lower yields and higher average cost. But many consumers are willing to pay a fair, if slightly higher, price for such an ethical and quality product- as they do for free-range and Fair Trade products.

Most Caribbean bananas conform broadly to the criteria for Fair Trade products and would qualify to carry the "Fairtrade" label. However, it would not be viable to apply the Fairtrade label on all of the 250,000 tonnes produced by the Caribbean for the UK market, because that quantity is much larger than the quantity for which the UK consumer is currently willing to pay the Fairtrade price. But regardless of label, the principle remains the same; the higher cost is justified by a quality product produced in a socially desirable manner. (their italics)

The people who wrote this don't realise that they undermined their own argument by saying that their export "quantity is much larger than the quantity for which the UK consumer is currently willing to pay the Fairtrade price". Consumers have made the tradeoff: they are only willing to pay so much for a "quality product produced in a socially desirable manner". Economics 101.

I don't write this to be smug. The Caribbean's banana growers are suffering severe dislocation from the end of preferential trade, and the end of preference has come about relatively suddenly. Or so it would seem.

Preferences existed before these islands gained independence in the 1970s, and thye were codified after it with the first Lomé protocol between the African, Caribbean and Pacific state and the then European Economic Community in 1975. This was a barely year after the proclamation of a New International Economic Order by developing nations, and the "guilt trip" (which is what the NIEO can be stripped down to, in essence) probably made Third World leaders, Caribbean ones among them, think that preferences were there to stay, at least for a long while.

Times change. While previous rounds of GATT negotiations more or less ignored developing countries, the Uruguay round, which started in 1986, was different in that it demanded full reciprocity from all parties. What's sad is that the leaders made no attempt to adjust to this. It was clear before 1975 that bananas could not survive without preferences, and political leaders in the eastern Caribbean have served their people poorly by not telling their constituents that their lives would, in the long run, have to change. A recent IMF summary on Dominica is just one case which shows where delayed adjustment can lead.

I don't have a miracle growth solution for these soon-to-be former banana islands. Offshore banking and the selling of passports, to which some have resorted, are mere band-aids, and not very good ones at that. Recession-hit Dominca, hit by recession, thinks part of the answer lies a new international airport, to boost tourism. My point, though, is that Caribbean leaders should not have discounted the future so heavily, and that they should have prepared an easier adjustment process for their people.

What Goes Around . . .

Apparently the unofficial American boycott of French goods is having an effect. (via Jane Galt.) This reminds me of a little story about bananas and roquefort cheese.

The European Union has long maintained a preferential quota and tarriff system for bananas produced in the ACP (African Caribbean and Pacific) group of countries, and American fruit giants, supported by major Latin American growers, had lobbied the Clinton Adminsitration to take on this case of EU protectionism. The US pursued a case at the WTO, and in 1999 its dispute resolution panel came to a decision in America's favour. THe EU, not wanting to leave the ACP countries out in the cold, maintained the system until a replacemenet meeting with American concersn was put in place. The US, on the other hand, was authorised by the WTO panel to levy up to $400 million of tariffs on European goods. The US decided to levy these on "luxury" goods, one of which was roquefort cheese.

French producers of roquefort were incensed, and some of them took direct action. In August of 1999, ten such farmers demolished a McDonald's franchise in in the small town of Millau, and carted it away. Those farmers were led by an individual with a history of protest: José Bové. Anti-globalisation now had a hero; Bové has been at the frontline of protests against free trade and other assorted "ills" of globalism.

"Civil Society" (read non-governmental organisations, or NGOs) read too much into the WTO protests in Seattle--those talks collapsed mainly because of what was going on (or not, rather) inside the conference center. Still, there has been litte progress on free trade since then, and the protest rallies, which lack a strong pro-trade counter, have not helped. Bové himself is now in prison, serving a 14-month sentence for destroying genetically-modified crops. There are others, though, more than willing to take charge, though. The point is that the present boycott, like the punitive tariffs in 1999, may have unforseen consequences. There are, after all, reports of a growing German boycott of American goods. In these uncertain times for the world economy, such tit-for-tat behaviour does not bode well.

Tuesday, April 15, 2003

The Ties that Bind

There are many conspiracy theories regarding the contracts for the "reconstruction" of Iraq, and the way in which some deals have been concluded so far have not dispelled the notions that the Bush Administration wished to exploit Iraq. The contracts that have been awarded so far, like the $4.8 million contract to Stevedoring Services to run the Iraqi port of Umm Qasr, are examples of tied aid--aid that is given conditional on the purchase of goods and services from the donor country. The US has announced $900 million of aid reconstruction, and all the primary contracts are going to American firms. This used to be uncontroversial, and foreign aid has often been used as a not-so-soft subsidy of home country businesses. When the British government complained about not getting in on the contracts, they were really complaining about their companies not getting share of US federal spending.

Politics aside, though, the British had a point. Tied aid is inefficient, like trade diversion--on average it raises the prices of goods and services purchased with aid money, and sometimes it results in purchases ill suited to local needs. It also keeps aid externally focused, rather than creating local capacity that will continue after aid flows cease. "Untying" aid, like a lowering of trade barriers, would improve both efficiency and overall outcomes. Some aid charities, notably Oxfam and Action Aid have recognised this, and have lobbied over many years for a change in policy. In 2000 a British government white paper announced that it was untying aid as of April 2001--the first major aid donor to do so. While the British complaint could be seen as mere lobbying, they do have some moral ground to stand on.

Empirically, though, it is too soon to say if untying aid, of itself, actually improves development outcomes--after all, aid officials from different countries are still dealing with those with whom they are familiar--an "evoked set", as discussed by Virginia Postrel. Few donors give aid without conditions, and donated funds will still have to be be duly processed and accounted for according to each countries procedures; compliance anc therefore be easier if aid recipients deal with those familiar with each donor's systems--home country suppliers, naturally. Whether aid is tied or not is also one of many variables that go in its success or failure, and it may be a negligible one at that. There have been many studies, not least at the World Bank, about the effectivness of aid, and it it clear that the present system is far from what the British call "best practice". Untying aid is an improvment, but without other changes (like recipient country "ownership" of and belief in an aid program) the impact may be marginal at best.

There are other concerns, like the process of tendering, that have caused some to complain about the way the present reconstruction has been handled. As far as the "US-only" nature of the contracts, American behaviour is similar to that of other OECD nations. The attitude is similar to that of trade negotiations. Few (like Britain) will move unilaterally, with all waiting for "concessions"--this despite an OECD recommendation that donors "untie their ODA [official development assistance] to the Least Developed Countries to the greatest extent possible". Similarly, the WTO does some relativly quiet work to liberalise government procurement, but that now looks more belaguered than the Doha round of global trade negotiations.

The complaints about American bias in Iraqi contracts are, therefore, really about free trade, a goal for which few countries, at least multilaterally, are ready to make real sacrifices. Untying aid, while small, is one such sacrifice. More important barriers, though, like agricultural subsidies, remain, with little sign of progress. Lets not lose focus.

Monday, April 14, 2003

On the Move

I've been moving house over the weekend, and I've been offline for the past few days.

In other news, one Trinidadian newspaper interviewed me last week about blogging. Given that the newspaper does not have an online archive, I'll probably post it in the next couple of days. A little notoriety is nice.

UPDATE: as my good friend Nicholas points out in the comments, the Trinidad Guardian now has an online archive, and you can find the story here.

Friday, April 11, 2003

War and Expectations

Jane Galt points to Steven Landsberg's Slate column on overconfidence and war:

[W]e choose to fight precisely when we're most confident of winning—and confidence itself is often a symptom of overconfidence. We could have picked on Iran or North Korea, but we chose Iraq instead. Why? It must be at least partly because we liked our odds in Iraq. But the times in life when you like your odds are exactly the times when you're most likely to be overestimating them.

Zimran Ahmed, on the other hand, is skeptical:

While it is true that war involves overoptimism (both sides think they can win, but only one is right) I don't see why this is limited to the one who picked the conflict. After all, unless you are dealing with nutcases, the other side usually has a list of demands which you can capitulate on and therefore avoid war (Clauswitz makes a persuasive argument that war is merely an extension of diplomacy). Since both sides have freedom of action in a war of choice, overconfidence can come from either side.

Jane Galt's comments again add to this debate. Zimran, though, says something most can agree on:

The be frank, the main overconfidence I've seen over the last three weeks have been from news commentators thinking they know what they are talking about.

Thursday, April 10, 2003

Budget Day

Overshadowed by the momentous events in Baghdad, British Chancellor of the Exchequer Gordon Brown yesterday delivered his budget for the 2003 fiscal year. I don't wish to comment on the budget; every British newspaper--and some foreign ones as well--has people far more qualified and interested than me to address the particulars, and a perusal of them tomorrow will be more than adequate for this. What interests me, though, is the whole idea of the budget presentation itself.

Four years ago and 4000 miles away, back when I worked in a television newsroom in Trinidad, the budget presentation was a big event, and to this day still is. (This has some to do with the fact that there is no throne or state of the nation speech in Trinidad, so a lot of the government's policies get announced on budget day.) The media covers it well, with post-Speech panel discussions and much commentary in newspapers. That particular year, though, the then Finance Minister, Brian Kuei Tung (now charged with corruption, but that's a different story) had the temerity to announce that he had levied no new taxes, and had cut no existing taxes.

The senior producer was at a loss. "He said nothing" he cried. Not, stricly speaking, true--the speech was in fact his longest ever, at 72 minutes (I time-coded it for editing) and he announced a number of initiatives. Nevertheless the panel that we had organised had little to discuss, and our locaton crew scurried around the public gallery of Parliament to gather the reactions of interest groups who had received/been denied state largesse. All in all, a poor show.

Brown announced a lot on Wednesday, but that did not stop people from saying that his speech in the Commons was boring. This is perhaps because it was unsurprising. A budget speech is an expectations game--the question "what will he say?" is much speculated upon in the weeks in the run up to it. Finance ministers love this "budget theatre" and many, not only in the media, eagerly play it. Most of the attention, though, is on the microeconomic side, and can be seen by a look at one of the many laundry lists of budget proposals. Brown he did as was expected, but that was not enough. People want to be surprised--pleasanly surprised, whatever your position or ideological perspective. This leads to inevitable disappointment for some.

Under a rational expectations assumption (not the full hypothesis, note) people cannot be systematically fooled, and they they think though the model of the economy; people cannot expect a surprise shock, favourable or not, as they would already factor it into their decisonmaking. Budget speeches are annual shocks, and while one can predict the frequency, one cannot forsee the nature of those shocks. I wonder, though, why an institution for the purposeful creation of microeconomic shocks exists. Random macroeconomic shocks, like a spike in oil prices, are one thing, and policy needs to be accomodated to it. The major effect of microeconomic shocks is to create uncertainty (probably uninentional) and skew incentives (most likely deliberate). A strong case can be made for doing adjusting principally to macroeconomic problems, adjusting tax rates and public sector borrowing as conditions chages, while concentrating microeconomic interventions on long-run issues, as Britain's utility regulators, for example have done.

No such luck. Brown has accumulated a lot of power to his office--anything that even slightly touches economics comes within his department's remit. With an attitude like that, one wonders if the Chancellor will ever be satisfied--when he, in turn, will have nothing much to say.

Wednesday, April 09, 2003

Isn't it Ironic?

Check out Hong Hong's new tourism campaign. (via OxBlog.)

When You Wish Upon a Star . . .

More Stop the War protests are planned for Saturday April 12. It now looks as if that goal might, just might, be coming true. Here's to getting what we wish for.

Tuesday, April 08, 2003


I've finally got around to reading Niall Ferguson's article in the Chronicle of Higher Education on American "empire". His penultimate paragraph struck me:

[T]he empire that rules the world today is both more and less than its British begetter. It has a much bigger economy, many more people, a much larger arsenal. But it is an empire that lacks the drive to export its capital, its people, and its culture to those backward regions that need them most urgently and that, if they are neglected, will breed the greatest threats to its security. It is an empire, in short, that dare not speak its name. It is an empire in denial.

This stood out because of a seemingly unrelated item that I also read today, this time by Morgan Stanley's Stephen Roach:

Just because imbalances and excesses endure for longer than fundamentals suggest doesn’t mean we have the fundamentals wrong. Conversely, it may well mean that financial markets simply have asset valuation wrong -- that today’s dollar bubble is nothing more than the functional equivalent of the Nasdaq bubble some three years ago. To me, this is the most glaring example of a dysfunctional world. What concerns me most is that there’s nothing stable about the current imbalances in the global economy. Courtesy of a rapidly deteriorating US saving position, these imbalances can only get worse until something gives. I guess what I must be missing is the infinite tolerance of an ever-elastic US-centric world.

“It’s all the war” is the most common refrain I hear these days. In a postwar world, the argument goes, the combination of lower oil prices and a diminished “uncertainty factor” should provide a sharp boost to today’s weakened global economy. At that point, the combination of policy traction and the animal spirits of pent-up demand are expected to kick in -- precisely the opposite of what I expect and yet the perfect antidote to the angst that is currently gripping the world. I have no problem with the concept of postwar relief. But I have yet to figure out how it heals what is truly ailing a dysfunctional global economy. That’s the quick fix that I guess I must be missing.

Roach is a known pessimist, but his point is clear. Ferguson says the US lacks the drive to export its capital; what we all know is that the US can't export its capital, at least not in net terms, because of its low saving rate. The worsening current account situation is driving the dollar down, and, to some, the Bush Administration appears to be unconcerned. Nevertheless, as James Picerno reports, "Expectations are running high that a burst of economic growth, artificially constrained by the war, is waiting in the wings. Let's Hope."

I am not sure there is much the US Treasury could do, at least in the short run. What instruments are available? Take, for example, international monetary coordination. Kenneth Rogoff the IMF's chief economist, writes about its failure in the March issue of Finance and Development :

Having three "A" quality G-3 central bank boards (from a technical perspective) that focus mainly on national welfare turns out to accomplish much of what monetary policy can do. Based on current research, it is awfully hard to make the case that moving toward a more cooperative form of G-3 interest rate setting would bring large benefits, even in an ideal world, once domestic monetary policy institutions in all three regions were properly structured.

Rogoff is asserting that the central banks do best dealing with their own domestic problems. Really? The Federal Reserve may be doing as best it can; Edward Hugh points out that at least the Fed is making preparations to counter possible deflation. With reference to Europe, Brad DeLong worries that the European Central Bank is worrying about Eurozone inflation while ignoring the very real risk of deflation in the French-German industrial core. And Japan? It's been 14 years since their real-estate bubble burst, with no sign of stable recovery or even a coherent policy to achieve this. Given the different outlooks, could the G-3 even agree on a realistic program?

The spring meetings of the IMF and the World Bank take place this week, and they promise to be interesting, not least because of the expected anti-globalisation and antiwar protests. Half a world away, meanwhile, a war goes on. David Warsh asks if it was worth it:

A range of costs under various circumstances are easy enough to estimate. Potential benefits are much harder to gauge. It is not easy to put a credible price tag on what the US hopes to win with its war effort — or even to state clearly its aims.

But one thing at least is certain. Western-style democracy is no better than a distant second on the list. The Bush Administration’s hopes don’t depend on developing an Arab taste for political freedom. They rest instead on the belief that, after nearly a quarter century of bitter war, citizens of Iraq will prefer a lengthy peace.

Will this imperial export of a "long peace" calm global deflationary fears? Stay tuned.

Sunday, April 06, 2003

Writing Contest

There are a number of writing competions aimed at students, and the Guardian, along with Christian Aid, have gotten together to offer one for prospective journalists. In the print editon of Rise, the Guardian's supplement for university graduates, is the following solicitation:

To enter you must submit, in Guardian style, 500 words about the negative impact of international trade on people in Third World countries. (emphasis added)

No evenhandedness? The article must be negative? Can't trade be good for the poor?

Christian Aid's website, to be fair, corrects the above ("negative impact" is replacd by "effect"), but goes on to add:

More than one billion people are living in poverty today. And the gap between rich and poor is getting wider. The global trading system lies at the heart of this inequality.

World trade rules are not entirely fair, I concede (actually, the rules themselves may be fair, but much of world trade as it is conducted derogates from those rules); the existence of agricultural subsidies, to name but one, makes this clear. I also admit that liberalising trade can be (though not necessarily is) disruptive during the transition from a closed economy to an open one. I recognise that the international trade system, while not perfect or even good enough, have improved considerably in the past half-century, and the ideal of a world trading system is well worth pursuing. Poverty has a multiplicity of causes (just read the World Bank's World Development Report 2000/2001), and the idea that trade rules are solely or even principally responsible is specious.

That's me, though. Pity Christian Aid does not want budding student journalists to make up their own minds.

Saturday, April 05, 2003

Emissaries and Dignitaries

On September 13, 2001, two days after the World Trade Center attacks, the BBC staged a special edition of its program "Question Time":

In the highly-charged atmosphere of the BBC studio, Phil Lader, the former US ambassador to Britain who was on the panel, appeared to fight back tears as he was shouted down while trying to tell the audience of his sadness.

Presenter David Dimbleby struggled to control the shouting as some members of the audience claimed the US was ultimately responsible for the deaths of its own nationals as well as of Britons.

The director general of the BBC, Greg Dyke, later apologised for the incident, over the objections of some of his staff.

This week the Guardian has been making much of the invisibility of the current US ambassador to the UK, William Farish III:

With Anglo-American relations suffering their gravest crisis in years, academics and diplomats are wondering whether George Bush made a grave error in appointing his family banker to be his representative in London. At a time when the US needs an articulate voice answering fears about the US, questions are being raised about the man dubbed the "invisible ambassador".

Lord Wallace of Saltaire, one of Britain's leading experts on Anglo-American relations, said that Mr Farish was doing little to help Washington sell its case. "You do need people who not only have access to the Bush administration but who can also handle a complex political relationship," he said.

His remarks are mild compared with those of senior diplomatic figures, who were scathing about the Kentucky horse breeder. One former ambassador could barely control his laughter when asked about Mr Farish.

"You mean the invisible ambassador," the retired diplomat said. "William Farish is not competent to deal with this kind of problem. Quite what he is up to, nobody has been able to find out."

Now this is a problem. To some extent I think the Bush Administration has written off the idea of trying to win over the British public, knowing that it will be met with protests no matter what is says. The BBC program, before the Afghan war was on the horizon, gives a further impression of this, and Farish probably recognises his limitations in the area of "public diplomacy". For all of the "Freedom Fries" rhetoric, though, Bush has been to both France and Germany. He has yet to visit the UK, and Tony Blair's flying off to Camp David and the Azores with no "reciprocity" from Bush reinforces an impression that Blair is Bush's "poodle".

On Saturday the White House announced that Bush will have a summit with Blair next week in Northern Ireland. Northern Ireland? Reagan, knowing what people in the CND (to name but one) thought about him, still went to Downing Street. I would like to know what makes Bush and his advisers (or the Secret Service) fear the mainland British public.

Friday, April 04, 2003


British Spin says the following about private dentistry in the UK:

Soon the wealthy will look at the poor and notice how terrible their teeth are. They will mention it in newspaper articles and shudder inwardly when the poor talk. It will be used as yet another social divide, like Glaswegian accents, or cheap clothes, being seen as a sign of stupidity and a lack of sophistication- a legitimate target for snobbery, a sign of poor taste.

He adds to this argument here. Jane Galt, on the other hand, responding to something else, says this about the oral health of the United States:

[O]ne thing you can't tell people's wealth by, in the dog-eat-dog dystopia that is America, is their teeth. Their sports gear, their vacations, their choice of dinner spot, yes, but not their teeth, at least not where I am. And one thing that Americans abroad comment on is that, at least superficially, we all seem to have better teeth than most Europeans. (It does vary quite a bit by country.) Yet all the European countries have national health care. How come our poor people have better teeth than Britain's middle class, when they have nationalized health care?

I have terrible teeth (partly because I pathologically detest flossing), which I just spent a lot of money (part NHS/part private) getting fixed. As the slogan goes, though, we report; you decide.

UPDATE: Kevin Drum (CalPundit) has more, and there is a lively discusion in Jane Galt's comments.

Thursday, April 03, 2003

Odious Debts revisited

William Sjostrom points to an Alan Krueger column in the New York Times which discusses the Iraqi debt situation:

To gain some perspective on the crushing financial burden facing the Iraqi people, note that with a population of 24 million, pending obligations work out to $16,000 for every man, woman and child. The Central Intelligence Agency estimates, probably optimistically, that Iraq's per capita gross domestic product is $2,500. So, for the average person, financial obligations exceed income by a ratio of more than six to one.

If 50 percent of Iraq's future export income is diverted to paying down the debt — more than three times the percentage extracted for German World War I reparations — it would take more than 35 years to pay off current obligations fully, even after allowing for reasonable growth in oil exports.

In the comments, Patrick Sullivan points out a Lynne Kiesling post on the same subject, and last Monday I noted James Suroweicki's column in the New Yorker about Iraqi debt.

Krueger supports a proposal for by two Harvard economists for an international authority to declare bad regimes (like Saddam Hussein's) "odious", nullifying their debts. A few years ago, after the Asian crisis, there was a proposal for the IMF to look at a country's situation and cerify tha the fundamental were okay. It was not adopted, but a facility providing Contingent Credit Lines (CCL) was set up where countries with "sound" economic policies would be pre-approved for IMF credit in the event that a crisis struck.

To date no country has applied for such funding. In both cases, there was a fear was that they would exaerbate crises rather than solve them--an IMF pronouncment of "soundness" would make anyone wonder why such an announcement was necessary, potenially worsening any imbalance hat may exist; applying for a CCL, on the other hand, would send a signal to international markets that you were likely to be heading for trouble.

The doctrine of Odious Debts carries the same risks, especially if the "authority" exercises restraint in its decisions. Just the knowledge that it was deliberating on the legitimacy of a particular country's regime would create volatility, and some form of resructuring would become necessary. It would also create a peverse incentive to be illiegitimate, just as Easterly's book The Elusive Quest for Growth shows that debt relief creates an incentive for poor countries' governments to be fiscally profligate. As Surowiecki writes, "no one wants countries to renege every time a general stages a coup."

Iraqi debt needs a solution, and it is probable that the US will cajole creditors into an ad hoc write-off similar to the one aranged for Poland over 10 years ago. A better solution to debt imbalances needs to be found, and Anne Krueger's proposal for a Soverign Debt Restructuring Mechanism is a good start. The US Treasury, though, along with many on Wall Street, is against the idea. It increasingly looks as if an institutional means of dealing wih soverign debt problems will have to wait.

Wednesday, April 02, 2003

In the Guardian Polly Toynbee coins a very odd syllogism:

It remains a perplexing problem that UK productivity is still below that of most of its competitors, a problem for both government and business. Patricia Hewitt was bringing them yet more help, rolling out the government's manufacturing advisory service so companies can get an intensive 10 day consultancy that has been phenomenally successful. Firms using the service so far have seen an average increase in value of £85,000, with a 30% improvement in productivity.

The argument for how regulation can improve productivity was recently powerfully put by an unlikely proponent: Michael Heseltine - the man who once promised a bonfire of regulations. He said that, despite Germany's recent stumble, "a great deal of German productivity gains came because their government imposed ever higher standards on manufacturing which could only be paid for by improved productivity. You cannot live in a civilised society without regulation".

France has at least 20% higher productivity - despite (or because of?) its "inflexible" and "over-regulated" employment laws. So the cause of British low productivity may be found in low regulation, low pay, low valuation of a disposable workforce. It was lack of regulation that created the monstrous US stock market bubble, allowing an Enron to be audited by an Andersen in a feral capitalism that has led to vast damage to the global economy. Capitalism only thrives when tightly regulated.

Now, I could argue, AtlanticBlog style, that she conveniently ignores the US productivity rate, and she does. Her argument, though, is not implausible. Northwestern's Robert Gordon, in a recent paper, writes about European regulation:

A classic example is the French minimum wage, which boost productivity in restaurants by making it too expensive to hire bus boys and force capital-labor substitution by eliminating such American anachronisms as parking lot attendants and grocery baggers. In Germany stringent shop-closing hours, only recently relaxed, force consumers to do their shopping in a concentrated period, thus boosting retail productivity. In this and other ways, European institutions favor workers and American institutions favor consumers, explaining at least part of the substantially more even distribution of income in Europe.

Gordon goes on to note, though, that "as a negative counterpart, making labor expensive boosts the unemployment rate and accounts for part of the low level of hours per capita" seen in Europe. The Europeans here made a tradeoff--higher productiity for higher unemployment--that Toynbee, an advocate of a high minimum wage, does not seem to recognise. The net gain of the extra productivity growth is "spent".

Britain, as usual, is a halfway-house between the US and continental Europe. Its labour force works on average the highest number of hours, yet it's productivity still lags behind. A 1998 McKinsey Global Institute study notes that "Despite the labor and capital market reforms of the past 20 years, output per capita in the market sector remains almost 40 percent behind that of the United States, and 20 percent behind that of West[ern] Germany." There is an ongoing debate as to why that is.

Britain echoes Gordon's point in that, over the past 25 years, it has moved towards an American model of regulation, at least insofar as market regulation favours consumers more than workers. Deregulation of supermarkets, for instance, has led to concentration, with five major national chains, but it has also lowered prices by an average of 9 percent in real terms, while improving the range of consumer choice. The head of the energy regulator, Callum McCarthy, according to the Financial Times

engineered a 40 per cent cut in power prices while ending price controls on household gas and electricity sales. More than a third of consumers have switched suppliers, yet the lights have stayed on - in contrast to California, another deregulated market.

Mr McCarthy has been willing to challenge vested interests. He upset the generators - and some of the banks that had lent them money - by creating a competitive wholesale power market. He stood up to pressure from Brian Wilson, the energy minister who wanted protection for nuclear power. And he resisted calls to tackle energy poverty - pointing out that his competitive retail market had lowered prices for all consumers.

There is a lot of resistance to these measures. The New Economics Foundation, a leftish think-tank, lobbied successfully to prevent a proposed deregulation of pharmacies; as I pointed out back in January, there are commentators arguing that cheap food is bad, and that supermarkets should be curtaile for the social good. If regulation here increases productivity, it would be more of an "unintended consequence" than deliberate policy.

In the long run, though, improving competition may be the best source of productivity improvment. As the McKinsey study concludes:

Conventional wisdom blames the United Kingdom's underperformance on the limited educational attainment and low skill level of its workforce, the scale penalty of operating in a relatively small market, and the capital market pressures that make companies reluctant to invest in long-term productivity-enhancing technologies. Undoubtedly, these things play a part. But our work shows that the real cause of the United Kingdom's low productivity can be traced to regulations that stifle competition and innovation in product markets.

Indeed, it is these regulations that ultimately lie behind the conventional explanations for the economy's ills. Low capital investment is largely the result of the lack of opportunities for profitable investment; new retail or hotel formats, for instance, may suffer from a dearth of sites on which to build. Low skills, meanwhile, can be ascribed to companies' limited exposure to global best practices in the organization of work processes; a number of best-practice foreign operators have shown that it is perfectly possible to achieve near-benchmark levels of productivity in the United Kingdom with a local workforce.

"Capitalism" does not require more regulation, but less. That is what the industrialists are saying, and Miss Toynbee would do well to pay closer attention as to why.

Tuesday, April 01, 2003

Growing Pains

Henry Farrell posts two good reviews of Hernando De Soto's Mystery of Capital (here)and William Easterly's Elusive Quest for Growth (here). He recognisies the importance of the two books, and the contribution they can make to the development debate. I have two observations, though with respect to Farrell's thoughts on De Soto's book.

Firstly, Farrell says that formalising informal property rights may institutionslise an unequal distribiton of property. Farrell here overlooks agrarian reform, was was practised in Taiwan, and is still an ongoing process in Brazil (no thanks to the Movimiento Sem Terra, the Landless Movement). Formalisation need not merely involve the legal recognition of the status quo, but can be progressive, giving the poor access to previously underutilised resources.

Secondly, Farrell brings up common property rights, and he is right to say that "it may not always be a good idea to make property rights fully exchangeable on impersonal national (or international) markets". This can go only so far though. Common property rights are important for sustainability, but they are, in essence, "static" systems, which adapt relatively slowly to change. As economic growth continues a tension tends to develop between a commom property systems and court-backed private property.

On the whole, though, Farrell is very much on track, and the reviews, as well as the books themselves, are well worth reading.

Double Negative

In today's Times (subscription required outside of the UK):

Adam Slater, 51, was seen drinking in the street in Weymouth a day after magistrates had imposed a a two-year antisocial banning order on him, and faced a maximum of five years.

But magistrates were forced to throw out the case when they spotted the grammatical error in the text of the order handed to Slater. The double negative meant that technically it would have been an offence for him not to have been drinking in public.

The order read: “It is ordered that the defendant is prohibited from: 1, Not to consume any alcoholic drink in any public place other than licensed premises within Weymouth as defined on the attached map; 2, Not to act or incite others to act in any drunken or antisocial manner within Weymouth town centre . . . that is likely to cause harassment, alarm or distress to one or more persons; 3, Not to use or incite others to use threatening, intimidating, insulting or abusive words or behaviour within Weymouth town centre.”

Ah, English justice.