One Hundred

To all my readers, Merry Christmas and Happy New Year! This is my 100th post, on a blog rated as Multicellular Microorganism by TLB. Well, at least I'm Google PR 4 - for now. But I promise to keep on blogging, as long as my readership > 1, because I get to vent. And exercise my skills in writing for the nonspecialist. And change the planet for the better. And achieve global peace and prosperity. On top of that, getting the friggin' government out of the marketplace! (Santa, are you reading this?)

I've done my best to limit the weblog strictly to economics, and not turn it into a soapbox for each and every opinion of mine under the sun. This ain't easy to do, especially in the Philippines where the twists and turns of the political landscape are highly distracting. Aside from that restriction, I've been fairly wide-ranging in my interests. (But none of that arcane developed country macro and finance stuff. It bores me to tears.)

A few readers have informed me that my posts are in reasonably readable language. Whew, at least I'm doing something right, I think. I hope you've found my posts pleasantly amusing. Weblogs are another form of info-tainment in our recreation-obsessed world.

Speaking of recreation, I'm off traveling again, so light posting up to the New Year. Hey, before I leave the Old Year behind, I owed some of you a link to the papers from the SEARCA conference I reported on earlier.

Mabuhay kayong lahat!

Does culture matter in economic performance?

The common-sense view: Yes!

However we better be careful about this issue. For example, we can ask: does culture matter in Olympic performance? Are some cultures more determined or hard-working than others? Are some cultures simply more "sports-minded"? As you can see, the culture-performance debate is not that simple.

Exhibit A: The historian Rodney Stark claims that the origins of modern capitalism can be traced to Christianity. He stands the usual argument on its head, that medieval faith was the scourge of the "Dark Ages". His argument: on the one hand, Christian theology is fundamentally committed to reason, the improvement of material conditions, and the autonomy of economic and spiritul life from the political. On the other, Christian monastic orders became the vanguards of commerce, and eventually, of capitalism.

Exhibit B: The Indian Economy blog takes umbrage at remarks made by renowned management guru Kenichi Ohmae. Essentially Ohmae is attributing the failure of Indian manufacturing (relative to say the spectular rise of Chinese manufacturing) to a cultural factors: Indians are "too inquisitive", limiting their ability to excel in disciplined factory-style work. Nay say the economists: Indian manufacturing has been stifled by state regulation; remove the regulation, and manufacturing would respond to economic fundamentals, such as the great degree of labor abundance in the Indian economy. Please read the comments, the ensuing debate is fascinating.

About the Philippines: we often read plenty of self-criticism about our poor teamwork, proclivity for petty politicking, "talangka" (crab) mentality, fondness for backstabbing, lack of punctuality, cunning dishonesty ("mahilig magpalusot"), and the thousand-and-one elements of a "damaged culture". And this is why we are so poor, and the rest of the world is getting rich.

I don't buy it. These are failings, for sure, but if you read newspaper columnists in virtually any country, there will be lots of cultural self-criticism being dished out. And similar name-calling and blaming for economic failure. This is all silly. There is no way to measure the importance of these cultural factors - if the stereotypes have any empirical value at all - in the economic performance of any country. I think Philippine culture has constrained economic growth, to the same extent that Philippine culture has prevented Filipinos from bagging an Olympic gold. Namely, not at all.

How to win an Olympic gold? Spend, spend, spend. Sponsor lots of competition. Get the average health and fitness level of the population up, to widen the pool of improvable talent from which to develop superior athletes. Import lots of foreign expertise to bring our techniques and training to world standard. Offer big monetary incentives to gold medalists. Hey, we seem to have started doing some of this in the recent Southeast Asian Games.

That sounds suspiciously like a prescription for economic excellence as well. Hmm...

"Fair trade"

Fair trade is typically contrasted with free trade. I know what free trade is. Lots of people do. It's being able to transact without discriminatory regulations or fees against foreign trade as such. So it doesn't mean dropping all sorts of regulations - say, regulators can still coerce manufacturers to put seat belts in cars under free trade; however it will not implement one set of seat belt standards in foreign-made cars, and one in domestically-made cars.

What about fair trade, what is that all about? Beats me. Take a look at one of the more popular fair trade proponents, Oxfam: "Fair Trade is about paying poor producers a fair price, and helping them to gain the necessary skills and knowledge to develop their businesses and work their way out of poverty." The problems is defining "fair price". For centuries, writers from Aristotle down have been discussing the idea of a "just price", and tying themselves in metaphysical knots over the idea. Then came the smart scholars of Salamanca: a just price is just what is naturally established in the market. Modern economics would rephrase that in terms of competition, etc., but it was the Salamanca school that underscored the practical role of the market in discovering that just price.

The "fair trade" jargon is a thinly-veiled attempt to resurrect ye old "just price" debate. Of course they will wind up tying themselves, over and over, in metaphysical knots. What's that old saw again about ignoramuses who don't know their history?

Even value-laden economics, called "normative economics", has largely moved away from airy-fairy discussions about a just or fair price. The focus of the discussion is a just or fair distribution of wealth. That's where the action is. Debates about the fair price are stuck in the Middle Ages. Me, I'm moving on.

Hong Kong Ministerial Declaration (Rant warning!)

This is a verbatim quote from the HK Ministerial Declaration, under Agricultural Negotiations: "On domestic support, there will be three bands for reductions in Final Bound Total AMS and in the overall cut in trade-distorting domestic support, with higher linear cuts in higher bands. In both cases, the Member with the highest level of permitted support will be in the top band, the two Members with the second and third highest levels of support will be in the middle band and all other Members, including all developing country Members, will be in the bottom band. In addition, developed country Members in the lower bands with high relative levels of Final Bound Total AMS will make an additional effort in AMS reduction."

Econblogger: WTF? ROFLMAO - I think this was mistakenly written in Mandarin, not English. Help me out here, LOL. Anyway I'll take a SWAS at translating it:

"Let there be three classifications of aggregate market support. Highest, next-highest, rest of the world. The jerk in the highest band makes the biggest cut, followed by the two jerks in the next higher bands. Yeah, I'm talking to you, EU, US, Japan, fork-tongued pale-faces. And you other rich tightwads in the third band better think about making deep cuts too. How deep? What are you looking for a number? Jeez, didn't you hear Hong Kong was a slightly less big fat dud than Cancun and Seattle?"

IMNSHO, it is not that worthwhile passing thus through all this turgid text. I am still sick, and this soporific prose is turning me into a cynical bastard. (I'd like to think I haven't turned to that yet.)

I'll stick to the summaries made by healthy people, like here. Meanwhile, let me take amateurish revenge as follows:

"The basic model is set in a closed economy. There is a continuum of goods within the interval [0, 1], indexed by i. There is a representative consumer with symmetric Cobb-Douglas utility; hence, price elasticity of demand is –1 for every good. The quantity produced of good i is denoted by q(i); production uses only one factor of quantity l(i). The factor is perfectly mobile within the economy. The factor price is normalized at unity..." Wipe your faces in that, trade-neg dweebs.

If you can't dig that, PM me, or RTFM!!!!!

Down but not out

You may have noticed this soapbox has been pretty silent this week. Econblogger has been indisposed by some nasty but curable throat infection. However I have some energy to react to some nasty but curable developments at the WTO.

The usual activist activity outside the Ministerial meeting in Hong Kong has escalated somewhat with direct clashes between riot police and protestors, especially from South Korea. Whew, those fellows from Korea have developed rallies and demonstrations to a martial art form. Forged over decades of confrontation with dictators, unfortunately this gets harnessed over the issue of protectionism. They do have a cause for concern, as the bulk of their rice farmers will not be able to compete at current world prices for rice. However as I have repeatedly argued, profits and losses are essential to the reallocation of resources towards more efficient uses. Very little can be accomplished by all this activitist activity, of course; but as publicity stunts they are unparalleled global news-getters. On a positive note, the level of violence appears to have toned down compared to Seattle and Cancun. Maybe this has to do with Hong Kong's excellent security measures?

The talks themselves are turning out according to expectation: an exercise in futility. I got a suggestion: give up getting any big agreements out of eliminating subsidies. As Anderson and Martin have argued, the bulk of the distortions in agriculture anyway emanate from tariffs. Many developing countries are net food importers (like the Philippines), and may likely lose anyway from removal of subsidies. Of course some sensitive crops, farmed by the poor in the developing world, may need a faster timetable of subsidy removal - cotton being a prime candidate.

Perhaps I am being too pessimistic: the Hong Kong Ministerial is laying groundwork for more talk, talk, talk, talk. Which is what you do when action is unpleasant. Not good, when a Ministerial Meeting is the decision-making organ of the WTO, and comes around every couple of years. Too bad, when the action is supposed to benefit the poor - the entire thrust of the Doha round of talks.

Oh well. The cause of trade liberalization is down for the count, but not out, not by a long shot. That's what I like to think. Now back to bed.

On bilateral or regional free trade areas

Dean Jorge Bocobo has a couple of posts lamenting the USA's reluctance to pursue a free trade area with the Philippines. Now unless you are a rabid protectionist, there seems to be little that is objectionable about bilateral or regional free trade. After all reduces import costs by dropping barriers; moreover export access is widened.

Economists are less than enthusiastic. Reason? The arguments against "customs unions" made by Jacob Viner and others. By selectively dropping import barriers, a county may end up diverting imports to relatively high cost countries that happen to participate in the free trade area. As usual the Concise Encyclopaedia of Economics has a brief and informative treatment of the subject. The example given there is as follows:

Suppose, for example, that Japan sells bicycles for $50, Mexico sells them for $60, and both face a $20 U.S. tariff. If tariffs are eliminated on Mexican goods, U.S. consumers will shift their purchases from Japanese to Mexican bicycles. The result is that Americans will purchase from a higher-cost source, and the U.S. government receives no tariff revenue. Consumers save $10 per bicycle, but the government loses $20. If a country enters such a "trade-diverting" customs union, economists have shown that the cost of this trade diversion may exceed the benefits of increased trade with the other members of the customs union. The net result is that the customs union could make the country worse off.

Whether a bilateral or regional free trade area would end up improving a country's welfare is an empirical issue. I would endorse such agreements, but only as launching pad for multilateral approaches. Domestic political opposition may after all be softened by initial exposure to limited amounts of free trade. However it can go either way - as the example of the EU shows, resistance to dropping barriers outside the customs union may stiffen as a result of regionalized free trade. In the case of the Philippines though, I sense the ASEAN is functioning more as a stepping stone than a stumbling block. Agree or disagree? Discuss.

Put your foot down in cheap imports!

Back in 1997-98, I interviewed over 100 shoe manufacturers in Marikina City (in Metro Manila, Philippines) for a survey connected to my dissertation. Marikina used to be a famous shoemaking town. Most of firms I interviewed were small scale, a few were medium to large. To a man (and woman), they all complained of the pernicious effects of liberalization, as cheap imports from Korea, Taiwan, and China eroded their market share and dragged prices down. None of them had a very favorable outlook for their industry. (This report from good ol' IBON gives us a update of their lot, from a very, shall we say, asymmetrical perspective.)

Of course business owners will complain about competition. We should however look at the upside: cheap shoes for consumers. The economic value lost by shoe producers should be compared with the economic value gained by consumers. Without going through the details, I can assure you the loss of the former does not exceed the gain of the latter.

But then some may complain, what if imports just come in and all our local producers are destroyed? With a little reflection, one can understand that this is impossible. We cannot buy something from abroad if we have nothing worthwhile to offer foreigners. To import, we must export. End of story.

Allow access to imports, resources move towards industries in which we are truly competitive in world markets, we earn foreign exchange to actually purchase the imports, consumers gain from lower prices. To re-allocate resources, labor and capital must be removed from uncompetitive sectors, and shifted into the competitive ones. The "must" here is not done by government fiat, but by price movements - inflicting losses in one sector and opening up profit opportunities in others.

Not theory. Reality.

Remittances - a new form of Dutch Disease?

"Dutch Disease" refers to the harmful effect imposed by export booms in one sector on other exporting sectors. The monicker was given for the Netherlands experience in the 1960s, following the surge in foreign exchange earnings from North Sea Oil. The resulting currency appreciation caused business contraction in the rest of the exporting sector, including manufacturing. Foreign exchange booms are typically associated with natural resource exports, such as oil (another example is Nigeria), though commodity exports (e.g. coffee in Colombia) have also been blamed. In this era of high oil prices, petrodollars are beginning to cause massive foreign currency effects on oil exporting economies.

While it is too early to make a diagnosis, early signs of a Dutch Disease may be suspected in the recent worker remittance boom. The peso has gained in value by 3.8% (relative to the US$) from October this year, while foreign exchange remittances are expected to hit an all time high of between 10 and 12 billion US$. Based on the latest Global Economic Prospects report of the World Bank, in 2004 the country was already the world's fourth biggest remittance earner. Among the top earners, the country had by far the largest share of remittances in GDP (13.5%).

What's the real problem with Dutch Disease? It's not all those dollars coming in - may as well complain about earning too much money! The problem is ensuring that the temporary wealth gains are not frittered away in investments in low returns - or not in investments at all. That happens when the policy environment is not conducive to such investment activities.

In short, the main problem is that an earnings boom may reinforce existing distortions and policy dithering. If the Central Bank is pursuing an inappropriate dirty float of the currency, the reserves accumulated from dollar earnings may encourage its anti-depreciation efforts. The dollar bonanza may also lull foreign lenders to throw more money down the abyss of public profligacy. That is, Dutch Disease is bad for economies prone to unsustainable exchange rate and fiscal policies. One guess as to which country I am describing.

Extraordinary claims require extraordinary scrutiny

Economist's Focus summarizes this recent paper (PDF) by two Federal Reserve economists refuting the controversial Freakonomics thesis: that abortion in the US in the 1970s caused a dramatic fall in the crime rate two decades later.

"Extraordinary claims require extraordinary evidence" is a phrase popularized by Carl Sagan - in turn derived from Hume's examination of miracles-claims. Now the original abortion-crime hypothesis is far from alleging a miracle. It is however extraordinary as it implies that causal mechanisms of crime originate from circumstances prevailing at the time of birth. Moreover, the claim that the behavior of eliminating live births is skewed against this causal mechanism (that is, abortion does not neutrally eliminate future crooks and law-abiders on a 50:50 ratio).

Now how do you actually produce extraordinary evidence? Only by extraordinary scrutiny. And that is not the responsibility only of the initial proponents. This highlights the social nature of science - even a soft science like economics. Peer review is essential. And it doesn't end when a paper is accepted for publication. The fact that it is published means its evidentiary claims are on the public domain. Hence data can be re-examined by others, or the method reapplied to another data set to check for robustness, and so on. Of course, such painstaking scrutiny entails plenty of resources, and cannot apply to all research. By a very economics-sounding principle, it will apply only to the most controversial claims.

Incredibly, Donahue and Levitt seem to have floundered on a couple of elementary gaffes: one of which is a computer code error. Wow. It's damn easy to go wrong with code, especially if you're doing it alone, and the reason you're doing it alone is that other programmers find it hard to follow what you're doing and therefore, spot your mistake. But others will spend that time if - that's right - you end up with a controversial result.

Lesson for the publication-challenged (me): keep it conventional and complicated, but not more complicated than you have to. That way you don't provoke extraordinary scrutiny, you pose enough obstacles against spotting obvious mistakes, but you don't look too opaque to your reviewer.

Oh yeah: it also helps to get it right.

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UPDATE and ERRATUM:

The Freakonomics blog replies to the Foote and Goetze paper here. Steve Sailer has got an interesting post plus links on this issue, here.

When I stated "50:50" ratio in my original post above, I was thinking of even odds for a person turning out crooked or law-abiding. If not, then for abortion to be selective, the percent of future crooks aborted in total abortions (adjusted for normal cohort mortality by age of "crimehood") should be more than the proportion of actual crooks in the population.

(Sheesh, that was a mouthful, 50:50 was such a better soundbite.)

There, admitting to a mistake isn't so hard. I've got nothin' to lose on this blog!

The anti-Walmarts: have I got an upward sloping demand curve for you

I offer this up as an example of upward sloping demand curve (see the discussion in Marginal Revolution.) Well, maybe just an upward sloping portion of some individual demand curves. According to this report, some consumers have stopped buying from Wal-Mart because they think its prices have dropped so low, they must be hiding some "unfair" business practices. (Is this Only In America? I wonder.) Most people shrug it off - see, their demand curves are downward sloping. (Why else is this a newsworthy report? Man bites dog, see.)

Wal-Mart critics rail against excessive "market power". Duh. Might as well condemn the consumer's "market power". Why does Wal-Mart drop its prices? Only to persuade consumers to buy more. In fact Wal-Mart is the silver bullet against another kind of market power - the anticompetitive practices of suppliers, other retailers, and organized labor. Maybe Wal-Mart should be up for a Trust-Buster award.

The price-tamping effect of Wal-Mart is confirmed by some recent research, cited in a Business Week article. I don't know about those upward-slopers, but give this normal consumer Wal-Mart-style pricing anytime.