Tuesday, January 31, 2006

The model got it right after all

Last year I had this post: What the Eagle Saw. The Ateneo Macroeconomic Forecasting Model (AMFM) generated a forecast of 5.3% growth for the Philippines in 2005. This set the upper bound for the forecasting range; the lower bound (4.5%) was from an alternative model, plus adjustment for a pessimistic scenario due to political uncertainty.

Well the model was more or less on track: actual growth was 5.1%. The economy bucked political concerns to outperform most other forecasts (i.e. the competition!)

As the modeler I can't deny the ego boost. To be fair though, one needs to examine AMFM forecasting performance over several periods. One hit does not a reliable model make. On a consultancy basis I'm working on the AMFM to improve its forecasting performance.

Getting to the point: Ateneo will be holding another Eagle Watch economic briefing this coming Wednesday, February 8. Forecasts for this year will be unveiled. Hopefully we can repeat our forecasting performance for 2006.

Off for another trip, this time to Samar in central Philippines (Visayas). No, not related at all to macroeconomic forecasting! Next post at the end of the week.

Monday, January 30, 2006

The market promotes cooperation

Occassionally I come across a brilliant essay by the Austrian economists. This one is from Gary Gales at the Mises Economics Blog. Read the whole essay. I find the following most insightful:

In reality, however, a competitive market economy is characterized by more extensive and effective cooperation, because of the form that competition takes, than an economy controlled by the state, which is the means of achieving supposed "cooperation" by way of coercion. The reason that market competition enhances social cooperation is that it is the process by which we establish who can best cooperate with us. That is why commerce has reduced conflict-especially armed conflict-- throughout mankind's history, with greater beneficial effects, the smaller the extent that it has been hamstrung by governments. Markets reward competency, consistent, honest dealing and good faith, which are also virtues that improve the quality of every aspect of social cooperation.


. But competitive markets excel at promoting cooperation, because success in the marketplace requires extensive cooperative skills among many individuals in widely varied activities. Further, the stronger the competition for consumer patronage and in the labor market, the more cooperation develops within organizations. Just as sports teams and orchestras illustrate how fierce competition can produce outstanding cooperation, the employees of firms must cooperate to produce high quality, low cost results, or risk being outperformed by rivals. Another way to put it is that competition in the marketplace is rivalry in which the best cooperators-who cooperate more effectively with more other people--earn greater rewards.


A further problem with viewing competition and cooperation as alternative ways of organizing society is that in "cooperative" societies, there will be competition to control the supposed cooperation. No societal organization can eliminate scarcity or self-interest, and thereby none can eliminate competition. In the "cooperative" public sector, however, it takes the form of competition for control of those laws and rules which are to be imposed for their advantages over others--to extract all that is possible from others through the coercive powers of the state. So despite the imagery that all agree, allegedly cooperative benefits in fact go to some at others' expense, and the competition for that control is just the cooperation of some to win special favors by controlling the government apparatus that will enforce "cooperation" on those who are not otherwise (i.e., not really) willing. And that competition can be unbelievably ugly, as the socialist regimes of the 20th century proved.

Now, application: The Catholic Bishop's Conference of the Philippines wants to stop foreign investment in mining:

Arroyo has vigorously encouraged foreign mining corporations to invest in the country to bolster the ailing economy and create jobs in a politically difficult time... "Allowing the interest of the big mining corporations to prevail over people's right to these sources amounts to violating their right to life," the CBCP said in a two-page pastoral statement.

In the statement read by Sorsogon Bishop Arturo Bastes, the CBCP expressed alarm over the deletion of the nationalist provisions in the Constitution being pushed by the Macalanang-formed consultative commission.

If it succeeds, the move could "pave the way [for] the wholesale plunder of our national patrimony and undermine our sovereignty," the bishops warned.

"We believe that the Mining Act destroys life," the CBCP said. "The right to life of people is inseparable from their right to sources of food and livelihood."

"Furthermore, mining threatens people's health and environmental safety through the wanton dumping of waste and tailings in rivers and seas," the CBCP said.

So the CBCP wants to limit the exploitation of mineral resources - all owned by the State - to nationals. That is, the State (representing all Filipinos) cannot cooperate with the best possible cooperator; it can only cooperate with its own citizens, possibly excluding the best cooperator.

As for those wanton dumping, etc., why there are a host of regulations and controls and charges - applicable to citizen or foreigner alike - to address these.

Livelihood? Again, in the end some cooperator will have to start digging up the ground. Otherwise there will be no livelihood, just minerals lying beneath people's feet, rich and poor alike. The best livelihood will probably be generated by those who are most efficient at digging up those minerals. Again, by allowing foreigners to compete, the State is able to select the most efficient cooperator.

Do the good bishops realize this? But then their expertise is theology, isn't it?

Friday, January 27, 2006

Why booty capitalism thrives

Mel Ditangco tells about his father's experience in running a business in the Philippines:

My dad has been operating his business in the province of Tarlac for some decades now. I would say that he has achieved some degree of success. So much so he decided to expand his base of operations in the neighboring province of Pangasinan in Urdaneta city. However, he seems to be encountering institutional harassment from the police force over there. According to these law enforcers, my dad’s operations have violated certain laws as such will be shut down. As such, my dad would perform the necessary upgrades to his plant in Urdaneta.

However, recently the powers at be have run out of excuses for his plant to get cited for anything as my dad have spent millions of pesos in complying with all existing regulations. In the last raid by the authorities, they had no reason to find exception, but did so anyway and shut down the plant.

Competitors are controlling the NBI and local police force. It’s sad but it is reality. Is this the free market economy we enjoy today? Where a powerful family or company can shoot down its competition through influence. It is not the best companies that survive the Philippine market, rather the most treacherous survive, no matter how poor their services or products are.

Anecdotal, yes, but it drives home an obvious point: the more rules, the greater the cost of doing business, the wider the opportunity for vested interests to restrict competition. With limited competition, goods and services tend to be shoddier, and prices higher. The public at large is shafted; ironically because of the rules ostensibly imposed for the "public good". The reverse is true: the fewer rules, the more competitive the market; in general quality improves and prices are lower.

Is it really that simple? I do need to qualify that with ifs and buts. But booty capitalism in the country is so bad, such oversimplification is good.

Wednesday, January 25, 2006

The ASEAN economy

The most significant economic initiative in Southeast Asia is the ASEAN Free Trade Area (AFTA). Currently the main implementation arrangement is the Common Effective Preferential Tariff, where members charge uniform and low tariffs to imports from other members. According to this brief (PDF), average tariff within the ASEAN is below 4%. Most products have a tariff of 5%. (Certain sensitive products, comprising about 1% of the total number of products, are permanently excluded from CEPT and free trade). Ultimately the goal is elimination of all customs duties by 2010.

Following the establishment of the AFTA, "trade among ASEAN countries has grown from US $ 44.2 billion in 1993 to US $ 95.2 billion in 2000, representing an average annual increase of 11.6 percent. As of the year 2000, intra-regional exports made up about 23.3 percent of total ASEAN exports. Before the financial and economic crisis struck in mid-1997, intra-ASEAN exports had been increasing by 29.6 percent. This is significantly higher than the rate of increase of total ASEAN exports, which grew at 18.8 percent during the same period." Currently intra-ASEAN exports account for 22% of all ASEAN exports.

Lots more need to be done for full economic integration. Some heavily regulated products require mutual recognition of standards before being freely imported. A perfect example is pharmaceuticals. I would love to see recognition of safety and efficacy standards in the rest of Southeast Asia, where medicines tend to be much cheaper, by 40 to 70 percent, than in the Philippines. This is anti-poor, anti-rational, an outrage. Importation, even just within ASEAN, should be deregulated starting now . Expect lies, damn lies, and statistics to be dished out by the powerful pharmaceutical lobby to oppose this, the way they opposed the Generics Drug Law back in 1988.

Another problem is the movement of persons. While short-term visits are visa-free, there remain quite stringent barriers to intra-regional employment. There are working groups within ASEAN actively looking into promoting labor market integration.

Once these obstacles have been hurdled, what next? Following the EU example, ASEAN may adopt a common currency. Aside from reducing transaction costs within the region, a common currency would make monetary policy uniform, perhaps improving the investment climate; it would also force fiscal discipline on the member states. This is decades from now, but hey the EU was 40 years in the making.

The ASEAN economy is simply the way to go.

Monday, January 23, 2006

Irritants to economic integration in the ASEAN

The ASEAN (Association of Southeast Asian Nations) was set up in 1967. According to their website (www.aseansec.org), it "has a population of about 500 million, a total area of 4.5 million square kilometers, a combined gross domestic product of US$737 billion, and a total trade of US$ 720 billion." Nothing to sneeze at, for sure. The rationale for economic integration is mainly geographical (just look at the map), as well as historical (we are able to exploit centuries of cultural and economic ties).

There are a few political irritants to economic integration. Consider the absurd Philippine claim over Sabah. I am not familiar with the historical background, and all that, but I do know that possession is nine-tenths of the law, and that is most indisputably in favor of the Malaysians. I am all for laying these legal sheenanigans to rest and profit from existing geopolitical realities. (Read the Malaysian justification for its inclusion of Sabah. Speaking objectively as a Filipino, there ain't no basis for our claim. Zero. Zilch. Some politicians in Mulsim Mindanao are apparently lobbying Manila to keep the claim alive by supporting the claims of the heirs of the Sultan of Sulu. Perhaps getting some generous settlement from Malaysia is a great motivation for this kind of support.)

Domestic laws and policies are also errecting barriers to ASEAN investment. Remember the Manila Hotel fiasco back in 1997? Let me recount: a Malaysian group had given the winning bid for the Manila Hotel. The Filipino runner-up (headed by the owner of Manila Bulletin) lodged a complaint against the deal with the Supreme Court. The Supreme Court relies on the national patrimony provision of the Philippine Constitution to reverse the decision and let the Pinoy investor win. (A clear example why national patrimony provisions may mean by settling for the inferior deal just because the offer is from a Filipino). Apparently this forestalled an outpouring of Malaysian investment in Mindanao - just at the height of the euphoria from the 1996 peace agreeement with the Moro National Liberation Front. Wasted opportunities indeed. Given problems in deregulating foreign investments in general for each ASEAN country, it is time to start examining preferential treatment for ASEAN investors under parity terms.

There is however considerable progress made on other fronts. We'll take that up on my next post.

Saturday, January 21, 2006

Developing the fringes: Tawi-Tawi as a freeport zone

Tawi-Tawi sits at the southernmost tip of the Philippines, just a few hours away by fastcraft from Malaysia. Its Human Development Index is only 0.364, making it third lowest in the country. To give you an idea, that's below Malawi, Zambia, Congo, Mozambique, Burundi, and Ethiopia (but just ahead of Chad). To get there I had to fly from Manila to Zamboanga City, then take a jetprop to the province. The jetprop alone costs 3,200 pesos (about US$ 62.00) one-way. (Otherwise you need an overnight trip by fastcraft). (Photo source.)

Surely this remoteness has contributed to its lack of development. The province has many woes: electricity (delivered by desiel-fueled power barges) is said to be the most expensive in the country. Its fragmented landmass needs to be linked by a system of bridges. Water sources are few and hard to pump; given its island structure, saltwater intrusion can hardly be avoided.

However it has several things going for it. First, its remoteness from mainland Southern Philippines also means proximity to Borneo. If you walk through the typical Tawi-Tawi marketplace you will see plenty of Malaysian and Indonesian products. Tawi-Tawi was a traditional center of trade between Borneo and Southern Philippines. Before it was conducted on a barter basis (so was the common impression), but these days the transactions are regularly for currency. To a large extent this cross-border trade is happening informally.

Second is its security. Contrary to popular belief, Tawi-Tawi is not a dangerous place. Locals tell me perhaps that insecurity is true for nearby Sulu (which lies in-between Tawi-Tawi and the mainland) but not for Tawi-Tawi. A lot of it has to do with culture, apparently - not warlike, but peace-loving. They are more apt to trust the local military and police, and more suspicious of potential insurgents, or terrorists, or plain criminals, which have made Mindanao undeservedly notorious. (So perhaps there is a cultural basis for social capital?)

Third, its island structure is both a blessing and curse. I saw lots of beautiful sandy beaches (unfortunately I had no time to take a dip). Seaweed culture, as well as fishing, are major industries.

I spoke to some members of the local chamber of commerce. All of them complained against the high cost of doing business in the province. This is partly due to the unecessary bureaucracy, plus fees and paperwork, introduced by the national government and by the autonomous region of muslim mindanao (ARMM). For instance, the national government slaps a 1,620 pesos travel tax (about US$ 31.00) for every legal visit to Malaysia.

To a man and woman - lots of female entrepreneurship in this Muslim-dominated province - they all spoke of Tawi-Tawi's strategic location and wonderful economic potential. I broached the idea of a Tawi-Tawi freeport zone. Turns out, they had been proposing that for a long time. But the remote center (i.e. Manila - now I'm beginning to feel the long arms of Imperial Manila) has been cool to it.

For a special economic zone to work, a lot of infrastructure investments have to be put in place. But I think it makes a lot of sense - the idea certainly merits serious benefit-cost analysis. And government has to strike a deal with the local traders - we'll give you duty-free priveleges, and all the infrastructure to becoming a regional center of trade, but everything has got to be formalized, and all the requisite taxes on sales and income (minus absurd fees and charges such as the travel tax) will have to be collected. I don't see a reason for local entrepreneurs to object.

A thriving economic zone anchored on the freeport. Then sit back and enjoy watching this blessed province rocket ahead in the human development rankings.

Tuesday, January 17, 2006

Underground economy and flea markets

I'm due for a post tomorrow, but I'll be on travel again (to Tawi-Tawi, southernmost part of the Philippines, my first trip there!), so I'm posting early. A reader, Michelle Go, a student from UP Diliman, asks me the following questions:

1. What do you think does this tiangge (flea market) popularity says about the state of Philippine economy and consumer behavior?

Flea markets are a fixture in the Philippine (and many other) economies. As a matter of routine, they do not give receipts, hardly any sort of registration, and hence belong to the underground economy. The underground economy as a whole constitutes over forty percent of Philippine output. Fancy that.

What the undergroundization of the economy tells us (and flea markets is one sign of that) is that cost of going formal is high. According to the World Bank, the Philippines is ranked 113 out of 155 countries in terms of the ease of doing business. Incredible. Who are the best? New Zealand, Singapore, US, Canada, Norway, Hong Kong, in that order. We are 89th in terms of starting a business, 91st in terms of dealing with licenses, 82nd in terms of ease of hiring and firing workers, 92nd in terms of registering property, and a whopping 121st in terms of getting credit. Just to start a business, the average waiting time is 48 days, whereas in developed countries it is only 19.5 days; the cost of starting is up to one-fifth of per capita income, whereas in the latter it's below 7%. Now should we wonder why the informal economy is so large? And why the informal economy in New Zealand is less than 13% of its national output?

2. Does this rise in tiangges reflect a harder life for most Filipinos with buyers and sellers opting for cheaper (although sometimes lesser quality) goods and the informal economy?

Harder life? Hardly. I'm one of few people who think that social well being correlates roughly with per capita income, so since the latter has been going up, well... It's not a demand side thing. It's a supply side thing, as I argued above. Is the cost of going formal getting higher? Not really - the cost of not going formal is getting lower. The risks facing tax avoiders, the risk of getting caught without the right papers and licenses, is going down. I think this is a sheer case of deteriorating governance.

3. Does this rise in flea markets bode well or ill for the economy? (seeing that it provides jobs, income and brings cheap good s to those who can't afford expensive ones but also that a lot of the goods are cheap, imported Asian products and the BIR is claiming the government is losing millions in taxes)

It's not really what's wrong; it's a symptom of what's wrong. In general as the economy becomes more formalized, the better, subject to low cost of formalization. Of course we can get cheaper goods from the informal sector, but it's should not be because bureaucracy is artifically driving the price of formal goods up.

4. Do you think this rising trend will continue in the next years? Or will it all depend on the performance of the Philippine economy?

The BIR is cracking down on flea markets. Well and good; but government should realize it's not just a victim here, but also a perpetrator. In short, it will all depend on how government reduces the cost of formalization and raises the cost of informalization. We need government, but we do not need all of these procedures and fees and regulations from slow motion bureaucrats, who are apt to play favorites (or finagle the entrepreneur for grease money). I am not portraying business as the hero here; very often it is big business that lobbies for all these regulations to keep competition out. Why is it so hard to import identical drugs from India or other countries in ASEAN, like Malaysia and Vietnam, where drugs are much cheaper? No real medical reason - just good (or bad, depending on your viewpoint) old commercial interest. It sucks.

Monday, January 16, 2006

Lee Kwan Yew on India

Hat tip to Atanu Dey at Indiaeconomy. Lee Kwan Yew might as well be talking about the Philippines. It's a classic. Consider:

Like Nehru, I had been influenced by the ideas of the British Fabian society. But I soon realised that before distributing the pie I had first to bake it. So I departed from welfarism because it sapped a people’s self-reliance and their desire to excel and succeed. I also abandoned the model of industrialisation through import substitution. When most of the Third World was deeply suspicious of exploitation by western MNCs (multinational corporations), Singapore invited them in. They helped us grow, brought in technology and know-how, and raised productivity levels faster than any alternative strategy could.

Who says free market economics is all theory? This is economic theory in practice. Correct theory, that is.

The World Bank has also done its own study. It found that in India it can take a decade to close a business through insolvency proceedings. It also found, among other things, that official fees amount to almost 13 percent of a property transaction in India as against just over 3 percent in China.

Ever tried to get your property titled in the Philippines? Hah!

My secretaries asked Singapore businessmen with investments in India what, apart from infrastructure, they found as major constraints. To a man, they replied it was the bureaucracy. They believe it is a mindset problem. The average Indian civil servant still sees himself primarily as a regulator and not as a facilitator. The average Indian bureaucrat has not yet accepted that it is not a sin to make profits and become rich.

Regulator rather than facilitator. Spot on. Sin to get rich? Here it is more of a balato mentality - gimme a share or else!

The average Indian bureaucrat has little trust in India’s business community. They view Indian businessmen as money grabbing opportunists who do not have the welfare of the country at heart; and all the more so if they are foreign usinessmen. Deng Xiaoping said at the start of China’s open door policy, it was glorious to be rich. The sequel is reported in Forbes Asia, November 14 2005, where it listed over 300 China’s richest, 40 of them with thumbnail CVs in a centre -fold. All are new entrepreneurs creating jobs and spreading wealth. Now, after private enterprise and the free market have generated wealth in the coastal provinces, China’s leaders have concentrated on spreading growth to the inland provinces by building infrastructure and offering generous economic incentives for investments.

Listen folks: without ambitious and talented men and women dreaming of wealth and security and prosperity, pupulutin tayong lahat sa kangkungan (they'll be picking all of us up from the canal.) And see what China is doing: bake the cake first. You can start distribution when there's something to distribute. And in fact what you can distribute first are the tools and equipment - and skill - to bring the laggards up to par.

One Singapore businessman told me this story. He entertained a former senior Indian civil servant to lunch in Singapore. Some months later when he was in India, the former civil servant reciprocated by hosting a dinner at which severa l other guests were present. His host made this surprising comment that he was amazed to see that in Singapore, a business could be successful without being dishonest.

No comment necessary.

Please read Atanu Dey's commentary also. A good explanation of why politicos keep their blinkers on.

Friday, January 13, 2006

Spreading the good news of free trade

I had a conversation with my barber the other day. We were talking about me buying sandals. Topic shifts to the demise of the footwear industry in Marikina, Manila's shoetown up to the 80s. Then Jun (let's call him that) makes a comment: "If only all Filipinos were to patronize Filipino-made, our country would be rich!" He continues: "See how much the imported goods the rich are buying. All that money could have gone to Filipinos instead."

The free trader in me recoils, but remembers - this is probably the view of the common tao (person). Against this common sense analysis, what to say? I can't very well launch into an analysis of the 2x2 Ricardian example of comparative advantage. I couldn't even go into the long run balance of trade. Let's see, how would the quick-witted free trade evangelist handle this?

ME: Jun, it's really good to patronize your countryman's products. But it often happens, say for shoes, that a local product is more expensive than a very similar product imported from, say China. Which one would you buy?

JUN: Of course, if the difference is too big, I need to survive too, right? But if the difference is small enough I'd go for Filipino-made.

ME: But don't you think that, by buying the foreign shoe, you would be forcing the Filipino producer to match the foreigner's price? It might be that by buying Filipino you are spoiling the Filipino. He has to learn to compete.

JUN: But what if he can't compete. These foreigners have lots of capital. They have cornered the market. We consumers have to balance that.

ME: Why not? But I've seen too many greedy producers just lay back and jack up prices whenever government tries imports from freely competing against them. To me it looks so unfair.

JUN: Okay, suppose he enjoys a higher price. Wouldn't that let him expand his business? And employ more people? And pay higher wages? Isn't that good for our country? We won't get all that if we just import the shoe!

ME: Suppose you open a restaurant. You have a poor brother who is a small rice farmer. In the beginning you buy palay from him. Soon he is charging you a higher price than from the market. Actually you realize he's not good at farming. But he's your brother right, so you keep on helping him. You know that he's got a bachelor's degree in commerce. Soon you realize there's a better way: Ask him to sell his farm, and join your business. You enjoy higher profit from getting cheaper rice, he gets to use his bachelor's degree.

JUN: That's possible.

ME: Happens all the time. You don't need to get something from someone just because he's your relative, or friend, or what-not, when there's a better alternative, business-wise. You get higher profit, and you can use that to help your friend or relative, rather than let them do something they're not really good at.

JUN: Sounds good - but does it really work that way for the Philippines and the other countries?

ME: Yes, of course!

What really happened? Well, I thought this conversation up on my walk home. Actually I quietly changed the subject to politics, where abstract thought is not essentially to carry on an animated conversation. So much for spreading the good news of free trade. Oh well. Next time.

Wednesday, January 11, 2006

Poverty alleviation: a better way

Pump priming is a government intervention to boost economic activity and reduce unemployment. The background here is that, under Keynesian macroeconomic assumptions, weak aggregate demand depresses growth and employment, hence the need for an outside economic stimulus. Usually this takes the form of expansionary fiscal policy (e.g., hire an army of street sweepers who would otherwise be unemployed or underemployed), or expansionary monetary policy (e.g. the Central Bank purchases government Treasury bills using its reserves, thus reducing interest rates and stimulating investment).

Lately the term has been mixed up with poverty alleviation. Consider this:

THE debate continues: can a hastily put-together pump-priming program, kicked off with the distribution of P500 million in rice-noodles subsidies, translate "positive economic fundamentals" into sustained relief for most people?

Smarting from criticism of this strategy by a leading administration senator, the Palace said Sunday the controversial P35-billion "pump-priming fund" has been designed to let ordinary folk directly benefit from "the positive economic developments" in the country that the administration has been trumpeting since late last year.

It's a minor quibble, but I wish the government stuck to the "poverty alleviation" tag. Despite the growth slowdown, there is really no warrant for a stimulus package. The high unemployment and underemployment rate the country suffers from is due to structural factors, not a deficiency in aggregate demand. When there is a savings over the programmed deficit (the source of the 35 billion fund), a better signal to financial markets is to carry it over as reserve for the following year's budget. At least in doing so it goes through the mandated budgeting process.

Legal issues aside, suppose the government did package the fund as earmarked for "poverty alleviation." Is this money well-spent? I have nothing in principle with targeted transfers to the poor. One can justify, say the 500 million rice and noodle subsidy, as a form of targeted transfer. My problem is the amount and manner of targeting: as for amount, does 35 billion worth of subsidies make society better off, compared to say 35 billion worth of rural roads? Not quite sure, but at a modest 1 million pesos per kilometer, that's 35,000 km of barangay roads. Very tempting.

As for manner of targeting: the current strategy is a combination of commodity-targeting (rice and noodles) and geographic targeting (rolling stores). As for commodity targeting, a better choice is corn (i.e. corn grits), which is in the Philippines is consumed by the poorest of the rural poor, but shunned by the higher income groups. The problem with rice and noodles is that even the higher income groups buy it. This makes the system prone to cheating. Which brings us to the geographic targeting. An enterprising retailer can just follow the rolling store, buy the subsidized goods, and resell at the market price. (There are regulations against this, but how to prevent it in practice?) There is anecdotal evidence suggesting that such cheating is happening. A lot.

Am I saying the rice-noodle program is not helping the poor? Of course it helps. However I'm saying there's a better way, magis. President GMA, an alumnae and former teacher of Ateneo, surely knows this!

Monday, January 09, 2006

Dangerous ideas about the free market

Michael Shermer has a "dangerous idea" about free trade (hat tip: Cafe Hayek):
Where goods cross frontiers, armies won't
Where goods cross frontiers, armies won't. Restated: where economic borders are porous between two nations, political borders become impervious to armies.

Data from the new sciences of evolutionary economics, behavioral economics, and neuroeconomics reveals that when people are free to cooperate and trade (such as in game theory protocols) they establish trust that is reinforced through neural pathways that release such bonding hormones as oxytocin. Thus, modern biology reveals that where people are free to cooperate and trade they are less likely to fight and kill those with whom they are cooperating and trading.

My dangerous idea is a solution to what I call the "really hard problem": how best should we live? My answer: A free society, defined as free-market economics and democratic politics — fiscal conservatism and social liberalism — which leads to the greatest liberty for the greatest number.
The Edge feature on "dangerous ideas" also has this from Mihalyi Csikszentmihalyi (the man who popularized the creative "flow"):

The free market

Generally ideas are thought to be dangerous when they threaten an entrenched authority. Galileo was sued not because he claimed that the earth revolved around the sun — a "hypothesis" his chief prosecutor, Cardinal Bellarmine, apparently was quite willing to entertain in private — but because the Church could not afford a fact it claimed to know be reversed by another epistemology, in this case by the scientific method. Similar conflicts arose when Darwin's view of how humans first appeared on the planet challenged religious accounts of creation, or when Mendelian genetics applied to the growth of hardier strains of wheat challenged Leninist doctrine as interpreted by Lysenko.

One of the most dangerous ideas at large in the current culture is that the "free market" is the ultimate arbiter of political decisions, and that there is an "invisible hand" that will direct us to the most desirable future provided the free market is allowed to actualize itself. This mystical faith is based on some reasonable empirical foundations, but when embraced as a final solution to the ills of humankind, it risks destroying both the material resources, and the cultural achievements that our species has so painstakingly developed.

So the dangerous idea on which our culture is based is that the political economy has a silver bullet — the free market — that must take precedence over any other value, and thereby lead to peace and prosperity. It is dangerous because like all silver bullets it is an intellectual and political scam that might benefit some, but ultimately requires the majority to pay for the destruction it causes.

My dangerous idea is dangerous only to those who support the hegemony of the market. It consists in pointing out that the imperial free market wears no clothes — it does not exist in the first place, and what passes for it is dangerous to the future well being of our species. Scientist need to turn their attention to what the complex system that is human life, will require in the future.
How's that for contrast? Shermer is a well-known author and editor of Skeptic Magazine, and one of my favorite columnists (his column appears in Scientific American). I was pleasantly surprised to see him picking this as a dangerous idea.

It appears CHICK-sent-me-high (official pronounciation) is voicing the vague unease of many regarding the market. Shermer's upbeat assessment ties in economic with political liberty - a connection forcefully argued by Milton Friedman. So Csikszentmihalyi's advocacy of _________? as an alternative to free markets, would probably end up constricting the very liberties that make, instrinsically or indirectly, for the high quality of life he advocates.

Friday, January 06, 2006

The national patrimony and foreigners: the fear factor

The Philippines is undergoing a process of Charter change. A Constitutional Commission was convened and their proposed revisions have been submitted to the President. Many changes are suggested, including federalization, and a shift to a unicameral parliament. Here I will limit myself with the repeal of current Constitutional limits on foreign ownership of natural resources

Objectors claim that evil foreign corporations will exhaust the mineral and other resurces of the country for profit, and leave the country poorer than ever.

Let's think about this: Suppose a local company does the extraction for profit. Would it be any better? Profiteering is profiteering - you need government to make sure that the private company does not abuse its privilege, foreign or local.

But I suppose what the naysayers really object to is any private company exploiting our natural resources. Foreign companies are just better at it, ratcheting up the fear factor. So they would rather have government get all the minerals and stuff out. Better, isn't it, cause then that's all revenues for the public welfare?

Really, some people need to go down from their left-leaving ivory tower, and get dirty in the real world. Plenty of investments up front are needed to get to all that precious stuff. One can easily make a mistake and dig up a dud. All that investment - using taxpayers money, if the government were to do it. Experience has shown that government is very very good at spending taxpayer's money, but very very bad at getting good returns from it.

So you're back to the private company. Now remember - the private company does not have the initial right to the resource - the State does. So the State strikes a deal with the company - give me your exploitation expertise, and here's a share for you as a payment for your investment and risk-taking. The exact terms and conditions will depend on a particular negotiation. So whether it's a foreign or local company the government is bargaining with, if it ends up with a bad deal, it only has itself to blame.

Nice thing about allowing foreigners is that the locals will have plenty of competition. Locals who would only offer a 70-30 sharing may have to soften up if an efficient foreign company comes around and offers 60-40.

The repeal makes perfect sense, whatever our gut reaction to foreigners "owning" the "national patrimony." As with the show, overcoming our gut reaction is necessary to win the prize.

(Download the Concom Report from this site).

Wednesday, January 04, 2006

How to make a forecast

It's that time of year when people are cranking out their fearless forecasts for 2006. I have my own:
The peso:dollar exchange rate may be higher or lower by December '06 than it is today. The Philippines' GDP growth for '06 may be higher or lower than it was in '05.
Really, that's the only way to get it right. Say something people can really act on, and you may end up regreting it. Consider the case of Bernie Villegas:

Speaking before members of the Pampanga Chamber of Commerce and Industry, Inc. (PamCham), Villegas, Senior Vice President of the University of Asia and the Pacific (UA&P), presented the strategic plan for Central Luzon, underscoring the need for the Philippines to familiarize itself of the "engines of growth" in the global community.

In his presentation, Villegas said the peso may end up at P55.6 to a dollar by the end of 2005. At the first quarter of the year, the local currency faired at about P55 to the US dollar, which presently shows up to be the strongest currency in the world.

In 2006, he said, a dollar would cost P56.5.

Yes, the same Bernie Villegas, famous "prophet of boom", who predicted a foreign market-powered growth in the 1970s, when the Philippines could still be called an "agricultural economy". However to be a reliable soothsayer, all your misses should be tracked, as well as all your hits. And if you bought dollars in '05, betting on Bernie's forecasts for '06, you're going to be weeping all the way to the bank.

List of good forecasting practices:

1. Don't. You can do this and still look smart. (It's an art.)

2. And if you can't (as often happens), qualify your forecast so that if someone acts on it, you get to cover your ass. (It's also an art, but requires greater skill.)

3. 'Fess up in style! See Brad Setser. Lots of people appreciate how frank he's been, in contrast to some soothsayers out there, whose sole concern is to crank out another set of wrong forecasts for the next year.

Monday, January 02, 2006

Religion and economic performance

One of the better commented-on posts I've was one of my last ones of 2005, that of culture and economics. One strand of that is the link between religion and economic performance. The Economist runs an article on the work of Jonathan Gruber, who conducts a statistical study of the impact of religiosity (measured by church attendance) on personal income. The effect is positive and significant. (Entire article reproduced below.)

Further study is needed on the actual causal links. The explanations given (which are speculative, by the way) all pertain to the effect of community on the churchgoer. Christian communities provide social capital and insurance, both financial and psychic (e.g. I, with my co-religionists, will give you moral support you when you are down, but later I may have to count on you!)

So what of the supposedly negative effects of religion on personal economic performance? The church-giving (which may reduce investment), the undermining of work ethic, the promotion of anti-modern attitudes (e.g. rejection of contraception technologies, evolutionary theory, old earth geology, etc.), the emphasis of egalitarian represssion of markets? All this seems to be swamped by the community effect. So the data suggests.

This is by no means the final word on the matter, but it sure points to a particular direction. I am not of course suggesting here that the function of religion is to boost wealth! But evidence continues to undermine criticisms about the retrograde implications of religion on economic growth.

Wealth from worship
Dec 20th 2005
From The Economist print edition

An economist finds that going to church is more than its own reward

AT CHRISTMAS, many people do things they would never dream of the rest of the year, from giving presents to getting drunk. Some even go to church. Attendance soars, as millions of once-a-year worshippers fill the pews. In Britain, where most weeks fewer than one person in ten goes to church, attendance more than triples. Even in America, where two-fifths of the people say they go frequently, the share climbs in December.

Some of the occasional churchgoers must wonder whether they might benefit from turning up more often. If they did so, they could gain more than spiritual nourishment. Jonathan Gruber, an economist at the Massachusetts Institute of Technology, claims that regular religious participation leads to better education, higher income and a lower chance of divorce. His results* (based on data covering non-Hispanic white Americans of several Christian denominations, other faiths and none) imply that doubling church attendance raises someone's income by almost 10%.

The idea that religion can bring material advantages has a distinguished history. A century ago Max Weber argued that the Protestant work ethic lay behind Europe's prosperity. More recently Robert Barro, a professor at Harvard, has been examining the links between religion and economic growth (his work was reviewed here in November 2003). At the microeconomic level, several studies have concluded that religious participation is associated with lower rates of crime, drug use and so forth. Richard Freeman, another Harvard economist, found 20 years ago that churchgoing black youths were more likely to attend school and less likely to commit crimes or use drugs.

Until recently, however, there was little quantitative research on whether religion affects income directly and if so, by how much. A big obstacle is the difficulty of disentangling cause and effect. That frequent churchgoers have higher incomes than non-churchgoers does not prove that religion made them richer. It might be that richer people are likelier to go to church. Or unrelated traits, such as greater ambition or personal discipline, could lead people both to go to church and also to succeed in their work.

To distinguish cause from coincidence, Mr Gruber uses information on the ethnic mix of neighbourhoods and congregations. Sociologists have long argued that people are more likely to go to church if their neighbours share their faith. Thus Poles in Boston (which has lots of Italian and Irish Catholics) are more likely to attend mass than Poles in Minneapolis (which has more Scandinavian Protestants). Measuring the density of nationalities that share a religion in a particular city can therefore be a good predictor of church attendance.

But ethnic density is not wholly independent of income. Studies have found that people who live with lots of others of the same ethnic origin tend to be worse off than those who are not “ghettoised”. So Mr Gruber excludes an individual's own group from the measures, and instead calculates the density of “co-religionists”, the proportion of the population that shares your religion but not your race.

According to Mr Gruber's calculations, a 10% increase in the density of co-religionists leads to an 8.5% rise in churchgoing. Once he has controlled for other inter-city differences, Mr Gruber finds that a 10% increase in the density of co-religionists leads to a 0.9% rise in income. In other words, because there are lots of non-Polish Catholics in Boston and few in Minnesota, Poles in Boston both go to church more often and are materially better off relative to, say, Swedes in Boston than Poles in Minnesota relative to Swedes in Minnesota.

Mr Gruber finds little evidence that living near different ethnic groups of the same faith affects any other civic activity. Poles in Boston are no more likely to join secular organisations than Poles in Minnesota. Since general differences between cities are already controlled for, that leads him to conclude that it must be religious attendance that is driving the differences in income.

Looking for a cause

Other economists, though they think Mr Gruber's approach is clever, are not sure that he has established a causal link between religious attendance and wealth. So how might churchgoing make you richer? Mr Gruber offers several possibilities. One plausible idea is that going to church yields “social capital”, a web of relationships that fosters trust. Economists think such ties can be valuable, because they make business dealings smoother and transactions cheaper. Churchgoing may simply be an efficient way of creating them.

Another possibility is that a church's members enjoy mutual emotional and (maybe) financial insurance. That allows them to recover more quickly from setbacks, such as the loss of a job, than they would without the support of fellow parishioners. Or perhaps religion and wealth are linked through education. Mr Gruber's results suggest that higher church attendance leads to more years at school and less chance of dropping out of college. A vibrant church might also boost the number of religious schools, which in turn could raise academic achievement.

Finally, religious faith itself might be the channel through which churchgoers become richer. Perhaps, Mr Gruber muses, the faithful may be “less stressed out” about life's daily travails and thus better equipped for success. This may make religion more appealing to some of those who turn up only once a year. But given that Jesus warned his followers against storing up treasures on earth, you might think that this wasn't the motivation for going to church that he had in mind.

* “Religious Market Structure, Religious Participation and Outcomes: Is Religion Good for You?”, NBER Working Paper 11377, May 2005