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.

Stonewalling on protection

The Philippines will not offer further tariff cuts in the WTO negotiations. According to the report, policymakers are claiming that:

1. "...the country needs to adjust from the headlong rush to liberalize."

2. "The Philippines has already unilaterally brought down its tariff rates much faster than in its ASEAN neighbors and through various early harvest schemes."

3. "On the agriculture issues, the Philippines is also against several of the provisions that would further open up the Philippine market to foreign agriculture imports."

For cryin' out loud. Point 1 is vague gibberish. Point 2 is true. However consider recent study by Rafaelita Aldaba of the PIDS (pdf file): Since the 1980s major tarrif reforms have been undertaken. Currently the average tariff rate is only 6.82%. However, tariff reform remains an important arena for policy debate: Recently the dispersion in tariff rates and effective protection rates have increased. Protection has risen in agriculture, with the rice and corn receiving some of the highest rates of protection. For specific manufacturing activities, effective protection remains high (such as for pesticides, insecticides, and motor vehicles). In 2004, the weighted average of effective protection rates for exporting industries is only 1.4%, whereas for importable industries the weighted average was 11.0%. This is an important source of distortion in the allocation of resources.

Aside: an obvious measure of the rate of protection is the percentage difference between domestic and world price. This is the "nominal" protection rate. The effective protection rate adjusts this further by computing protection extended only to the value-added; in other words, tariffs on imported inputs should reduce the amount of protection.

As for Point 3: Aldaba also points out that the high tariffs for agriculture resulted from the WTO negotiations. (Talk about perverse effects!) Apparently what happened was: ceiling tariffs were set very high. Tariffs were set at that ceiling. Tariffs were then reduced according to the agreed schedule. However the final tariffs continue to confer considerable protection on agriculture.

So yes, the average tariff and protection rate is low, but its uneven distribution continues to distort the allocation of resources. So yes there is further room for tariff reduction.

Perhaps the negotiators' statements are merely a ploy to help win concessions from other countries. In that case the rough analogy is: "I'm gonna shoot my own foot, as long as the bang is loud enough to make you all deaf! The only way to stop me is that if you stop shooting your own feet too!"

Come Hong Kong in December, guess what? BANG!!!!!!

The peso's recent surge

Recently the dollar/peso exchange rate has been rising. To buy one hundred pesos, two months back you needed about 1.8 USD; these days you need about 1.85 USD. Why?

Government spindoctors have been crowing over improving confidence in the economy as the reason - with the immediate trigger being approval of the EVAT. Really? I don't know. But there is a real spike of OFW remittances, over and above the seasonality associated with Christmas. This spike is probably the result of a deeper structural change, related to supply and demand of Filipino OFWs. That is unrelated to the EVAT approval. In short, coincidence. Other sources of dollar inflow may be more sensitive to domestic policy changes. However all this is speculative.

A recent article in the Economist is a good reminder of how little we know about exchange rate movements: The currency market routinely confounds economists. A classic 1983 study by Richard Meese and Kenneth Rogoff, then both at the Federal Reserve, concluded that macroeconomic models could not explain a currency's direction of travel, let alone how far it would go. One would do just as well to assume that next month's exchange rate will be the same as this month's. After another 20 years of interrogation, the macroeconomic data has confessed little more of value.

One version of the "efficients markets" hypothesis is that exchange rates follow a random walk. What's a random walk? One simple form: the change in exchange rate is random. Models based on random walk are not inferior in predicting power than sophisticated models, say macroeconomic models, that take into account structural factors, such as purchasing power parity, differential interest rates, inflation, and so forth.

The reason perhaps is that traders' collective wisdom already incorporates these structural factors in their buying/selling decisions. What they cannot incorporate is "news" - which is random. (If it were non-random it could be predicted, and therefore not news!) The unpredictable nature of news - say those unforeseen shifts in supply and demand for OFW workers - is what introduces the random walk. On hindsight, we can perhaps tie in this particular exchange rate movement with that particular news - after considerable econometric torture. But that's only a way to get published - not rich.

Hong Kong: from toy-makers to traders

I got a question from Blur re my previous post: hi. i'm not an economist but isn't hong kong (like singapore) not necessarily overflowing with natural resources? hence, the reason for not wanting to focus on producing or manufacturing but rather to act as "middlemen" for the region (or the world)?

Hong Kong, Singapore, Japan, are all resource-poor countries. However all went through a stage of rapid industrialization. Definitely not the type of macho, large-scale, steel-based industries the nationalists favor. The classic pattern is to start with labor-intensive industries (often consumer goods manufacturing, such as apparel and footwear), to take advantage of labor abundance. Yes, that's right, start with low wage cheap labor. The glass is half full after all - the "sweatshop" is but a the first room in the corridor towards the computerized office, or even the corporate boardroom.

Consider Hong Kong: Dodsworth and Mihaljek quote Smith (1997):

When I arrived in the territory in 1970, Hong Kong’s reputation was as a low-cost manufacturer of cheap clothing, wigs, plastic goods and toys. Although the Hongkong and Shanghai Bank, Standard Chartered, and Citibank were present in Hong Kong with a group of relatively weak local banks, Hong Kong was in no sense a financial centre, let alone an international financial centre. If a trading company were to have asked its bankers for a price for U.S. dollars two weeks hence, it would most likely be told: "If you want dollars in two weeks’ time, come back then—I’m sure we will have some" (pp. 1–2).

Well, now it is:

the world’s seventh largest trading entity and seventh largest stock market; the world’s fifth largest banking center in terms of external financial transactions and fifth largest foreign exchange market in terms of average daily turnover; the world’s fourth leading source of foreign direct investment the world’s busiest container port, and one of the world’s most prosperous economies, with per capita GDP of US$24,500 comparable to all but the wealthiest industrial countries.

All that earlier Hong Kong manufacturing was domestic. Tao and Wong (PDF file) show that domestic exports in the 1970s accounted for over 80% of total exports; in recent years however re-exports (a large part of which goes to the mainland) now stands at about 70%. Within thirty years the low wage, labor -intensive manufacturing economy became a trade and financial hub.

One does not need exotic theory to explain this. One need only apply the most elementary economics. When labor is abundant relative to capital, the efficient use of resources, and one which the free market would promote, would be to specialize in labor-intensive industries. However with consistent savings, capital accumulates; labor slowly becomes scarce relative to capital, and wages start going up. Labor-intensive manufacturing disappears (the owners would go abroad for other countries in which labor remains abundant. In the Hong Kong case it was the mainland.) Either manufacturing diversifies towards capital-intensive, high technology activities, or disappears altogether, to be supplanted by services with high value-added. The former happened to Japan, and is happening in South Korea; the latter happened to Hong Kong and Singapore.

Most of the East Asian economies pursued industrial policies and export promotion; Hong Kong is unique, as it did none of this. Rather export promotion was "pursued" by engaging in free trade. Note that economy can only export (earn money from the rest of the world) by buying goods from the rest of the world (import), unless it is willing to lend indefinitely to the rest of the world. Hah, and my grandma is a TV set.

Why did Hong Kong pursue free trade? Historical reasons, apparently, according to this old Economic Times article Hong Kong used to be a duty-free port under the British. That historical heritage got embedded deep in the government psyche.

Unfortunately in other countries the psyche among policymakers and the general public (at least those with some idea about trade issues) is knee-jerk protection. Drat. At least I have the right to daydream. The Subic duty free zone, getting bigger and bigger, swallowing up Zambales, Pampanga, Tarlac, Metro Manila, Luzon, Visayas, Mindanao...

Hong Kong: a free trade country

I'm doing some research here in chilly Hong Kong. I was asking some government officials (who were very open and accommodating)about importation of fish into Hong Kong. They reminded me something I'd known but forgotten: Hong Kong is about the closest thing to a free trade economy in the world. Information on imports is collected from bills of lading; the declared values are probably accurate, because importation is duty-free, and the incentive to underdeclare (to avoid import taxes) is missing. Yep, the surest way to eliminate smuggling is to repeal tariffs and quotas.

Hong Kong has gotten prosperous without a development policy based on protecting domestic industry. It is living proof that rapid economic development is possible within a free trade regime. In fact, it is likely that free trade was one of the pillars of Hong Kong's economic boom. Perhaps its example may inspire some of our unimaginative policymakers that yes, a world without tariffs and quotas is possible, even dare I say, desirable?

Fiscal policy and supermarkets: a strange connection

Gordon and Li have a new paper explaining puzzles in the tax structure of developing countries. They note that many of the puzzles can be explained by the prevalence of the underground economy (compared to the alternative hypothesis that political economy constrains the tax authorities from exacting revenues.) The tax base consists of the formal enterprises which rely heavily on the financial sector (rather than cash transaction). It turns out that tariffs are one way of protecting the tax base (while itself a means of extracting tax revenues). Some unprincipled parties may use Gordon and Li's argument to promote tariff protection (I'm not saying Gordon and Li themselves do so). That argument (fiscal implications of tariff protection) in my mind suggests a serious practical point against tariff reform.

My thoughts then drift to an apparently unrelated topic - the rise of supermarkets. Tom Reardon has argued that the supermarket boom in developing Asia transformed agribusiness in these countries. I asked him whether there are strong fiscal implications as well. He replied, well in China one reason the small retailer lobby has not made much headway fighting the foreign retail juggernaut is that they hardly pay taxes anyway, and are viewed by the authorities as somewhat useless.

Further to Gordon and Li's point: supermarkets sell plenty of imported goods, so it is not clear whether there is a net protection effect from tariffs (it would depend on the tariff structure, I guess). Overall supermarkets represent a dramatic shift away from the underground economy. This would tend to undermine the fiscal protection argument against tariff reform. So - however wierd this sounds - optimum benefits from tariff reform may have to be accompanied by retail trade deregulation, which would expand the scope of the formal sector. If this sounds half-assed, lemme know.

Biological models

I am very pleased to have been part of a conference-workshop of biologists and oceanographers centering around a biophysical ocean-fisheries model, called NEMURO. Somehow I got invited to it by virtue of my attendance last year in a conference on "Economics of Small Pelagics", where I presented a paper on the economic implications of climate change impacting on fisheries of small pelagics. ("Pelagics" are fish that dwell at upper levels of the water column, hence they tend to be mobile fish; their bottom-dwelling counterpart are the "demersals".) This was pretty hardcore stuff, based on the physics and chemistry of the ocean (currents, nutrient flows, etc.) as well as fish ecology (growth dynamics, food web interactions, etc.) Needless to say, I contributed trivially to that part of the discussion. I did learn something (as in, not nothing) in an osmotic sort of way - in the sense that, hearing "bioenergetics" would evoke in me some faint glimmer of recognition.

I knew enough though to see that in their model, fishing mortality (% of fish that die from being caught by humans) is constant - a black box, as it were. Of course it can be adjusted by the modeler to examine impact on the fish abundance and behavior, but it in itself it is left unexplained. I argued that a complete model needs to account for adjustments in fishing pressure, which is largely explained by economics. In short, the amount caught depends not only on the available fish (biophysical component), but also on the fishing effort (economic component). More to the point, the two affect each other - the fish catch depends partly on effort, and partly on the quantity of available fish, and vice-versa, the quantity of fish depends on fishing mortality. To be fair, economists in the market forecasting business likewise treat available fish populations as a black box, or at most adjusted by modeler's discretion. I presented a paper sketching a practical way in which a grand synthesis of economics and biology (and, in principle, oceanography) can be done, in practical terms.

I think they were definitely interested in such a disciplinary interface. As a modeler, I caught on their sentiment that incorporating added complexity (economics) was far past their immediate interest - which was combining biological and physical systems. It turns out that such biophysical models are on the research frontier. My value added I believe was my assurance that for now, economic behavior can be left well enough alone. (Knowing what not to do can sometimes be as important as knowing what to do!)

Modelers proceed by an accretion of complexity, rather than attacking all the important problems at the same time. So at least economics is on this group's radar screen, perhaps as a future agendum for collaboration. I do believe that interdisciplinary work is crucial; contrary to common belief however, scientists appreciate this. They are after all people whose job is to think, which they do very well - the group I was with is a fine exemplar of that. Cross-disciplinary work is however very difficult; even scientists in allied fields have a hard time collaborating, let alone specialists in entirely different fields. Scientist-bashers tend to be very critical, mainly because of their lack of appreciation of the constraints and complexities involved (charges of "comparmentalization!" "reductionism"! "Not holistic"! can get tiresome). Trust me, we're groping towards that interdisciplinary ideal.

Bioeconomic supply-demand

The SEARCA conference ended yesterday. I caught one more paper presentation, Balisacan and Fuwa's literature survey on poverty and vulnerability. But I'm going back-to-back: I'm attending a workshop, this time on ""Global comparison of sardine, anchovy and other small pelagics ? building towards a multi-species model", in Tokyo. As the only economist in attendance, I feel like a fish out of water. (Unforgivable pun intended.) As I flounder about these arcane (to me) ecosystem models, I'll be presenting a paper that integrates simple ecological population dynamics into a standard economic supply-demand model. (When I have time I'll discuss the whys and the hows - in nonspecialist language - of this fascinating interdisciplinary synthesis. Don't ask me about its importance - I'm on the "pioneering breakthrough!!!" delusionary stage.)

Next week, I'm not sure I can keep up with regular blogging (Monday, Wednesday, and Friday, in case you haven't noticed) Try my best though.

Agricultural and rural development in Asia (2)

A few notes on the SEARCA conference:

Yujiro Hayami explores new ground with a theory of African underdevelopment. Taking off from a conjecture by co-author Platteau, he hypothesizes that property rights in African agriculture are undermined by a social norm of redistribution. These norms evolved under conditions of shifting cultivation, nomadic grazing, and land abundance, where redistribution had served as insurance against bad lack from a risky environment. However they fail to adjust to norms more respecting of property rights, once the resource condition altered to one of land scarcity. For example, a farmer who invests in improved livestock breeds, and receives higher-than-normal returns, is hounded by villagers to share the money or risk community censure, disapproval, and ostracism.

James Roumasset has a comprehensive retrospective and prospective on agricultural and rural development thinking. Obviously hard to summarize. Jock Anderson spoke on globalization and food security; he thinks that policy advice and development optimism should be tempered by real-world problems associated with risk, uncertainty, and uneven quality of governance in developing countries.

Keijiro Otsuka elaborated on the idea that population pressure leads to the development land rights (first argued by the late Ester Boserup). Based on case studies in Indonesia, Nepal, and Vietnam, he shows that land rights do evolve, in response to resource characteristics, population growth, and market conditions. Initially resources are degraded by poplation growth, but with the induced development of land rights, the resource stock recovers. Land rights need not always be private individualized ownership, though this emerges when the forest produces high-value timber and the cost of resource protection is low (i.e. accessible forest areas). Ian Coxhead also delivered a talk on poverty and the environment under globalization, but it was parallel with Kei Otsuka's so I unfortunately missed it.

How do the young say it these days? This is so not a waste of time.

Agricultural and rural development in Asia

What do Yujiro Hayami, Keijiro Otsuka, Randolph Barker, Jock Anderson, James Roumasset, Scott Rozelle, Gershon Feder, Dina Umali, Mark Rosegrant, Tom Reardon, Ian Coxhead, and Prabu Pingali have in common? They are all internationally prominent experts in agricultural economics and rural development. And they'll all be here to Manila tomorrow for a conference organized by SEARCA (Southeast Asian Regional Center for Graduate Study and Research in Agriculture.) The conference theme is "Agricultural Development: Policy Lessons from Major Ideas and Paradigms in the Past 30 Years." The field of agricultural and rural development has progressed rapidly since 1975, so the conference is a good chance to brush up on the what and the what for of these ideas.

The event is the brainchild of Arsenio Balisacan, indefatigable SEARCA Director and himself a renowned researcher on rural poverty. Joining them are well-known social scientists based in the Philippines, such as Tina David, Mahabub Hossain, Pandey Sushil, Ramon Clarete, and Gelia Castillo. It promises to be a high-quality assembly of the best minds in the field. Hayami will keynote the conference with a favorite topic of his, the role of the community and the state in development. Roumasset will review the literature on the economics of agricultural and rural development - I'll be watching out for this. Other topics include globalization impacts, agriculture and natural resources, property rights, rural finance, rural poverty, biotechnology, and agricultural extension. Aside from this there are poster papers on a wide range of topics on the general theme.

Oh me? Naah, not a star in that or any firmament, but merely moderating a session on Land Tenure (paper by Otsuka, discussed by Roumasset). I also have a poster paper on credit demand. As time permits I'll offer some conference highlights in this weblog. If you have a chance, do come.

Where the real hidden wealth of the poor lies

The Economist has a recent article on microfinance. Unfortunately it's rather slipshod writing, quite below the usual editorial standards. There's even an egregious error in computing the annual interest rate from the "5/6" practice. (Can you get the correct figure yourself? Use monthly compounding.)

There is list of factors that prevent the poor from gaining access to financial services:

Inflation tends to be high and volatile; government is often incompetent; and the necessary legal framework for financial services is often missing. Property laws can make it impossible for poor borrowers to use assets such as their home as collateral for loans.

In the past, many countries have outlawed “usury”, and today many Islamic countries prohibit the charging of interest. Governments in developing countries often impose caps on the interest rates charged on loans for the poor. Despite their popular appeal, such caps undermine the profitability of lending and thus reduce the supply of loans.

Incomplete and erratic regulation of financial institutions has also undermined the confidence of the poor in the financial services that are available. When they can find an institution that will accept their tiny deposits, it often lacks the sort of government deposit insurance that is routine in rich countries, so when a bank goes under, savers suffer. For example, Indonesia's PT Bank Dagang Bali, once known for its work with poor clients, was closed by regulators last year after it was discovered to be insolvent and riddled with fraud. Many savers did not get their money back.

Corruption is also commonplace in many developing countries. A recent study by the World Bank found that in two poor states in India where the financial system is largely controlled by the government, borrowers paid bribes to officials amounting to between 8% and 42% of the value of their loans. Corruption raises the cost of every financial transaction, allows undesirable transactions to take place and undermines consumer confidence in the financial system. This, and the related curse of cronyism, explains why access to financial services in countries where the state has control over the financial sector is poorer than where it does not.

Inadequate basic public services add to the burden on financial firms. SKS, a fast-growing microfinance institution in India, has had to build back-office systems that can work on two hours of power a day; it closely monitors voltage when its computers are running and keeps a diesel generator on hand. Many others simply give up on the idea of modern technology and continue to use paper instead. This makes them vulnerable.

I would argue though that the biggest obstacle (not mentioned above) is the very poverty of the poor. They have no collateral worth putting up. Hence, the hidden wealth of the poor is nowhere in the here and now; instead, it lies in the future, after productive opportunities (unlocked by credit) are realized. But formal lenders want some surety now about this future wealth, creating the quandary.

Removing the collateral requirement requires substitute methods of enforcing repayment. Informal moneylenders zip back and forth on motorbikes and do daily monitoring (and often, daily collection); they charge higher interest rates to recover their added monitoring costs and risk. Grameen-type microcredit relies on group liability lending; in this case it's the borrowing group which assumes much of the risk-taking and transaction costs in screening and monitoring its members. Such financial innovations are opening the way for the enterprising poor to improve their own living standards.

Nobody advocates microfinance as the solution to poverty. But it's certainly part of the solution. The poor are not more apathetic, lazy, or dishonest, than you or I. They just have less money.