ecomusic

Indian Liberals

2008-09-30T10:30:00.001+05:30

Abheek Bhattacharya has an interesting piece in The Wall Street Journal on the growth of classical liberalism in India.

too good!

2008-08-01T09:53:00.000+05:30

gmail, clarified

2008-06-18T17:41:00.002+05:30

Ever how Google Gmail web app works. Here is the link.

probability simplified

2008-06-16T15:08:00.002+05:30

BBC Radio 4’s looked at the issue of probability..
...“Probability is the field of maths relating to random events and, although commonplace now, the idea that you can pluck a piece of maths from the tumbling of dice, the shuffling of cards or the odds in the local lottery is a relatively recent and powerful one. It may start with the toss of a coin but probability reaches into every area of the modern world, from the analysis of society to the decay of an atom.”

how to fold a T-shirt in 2 seconds

2008-06-16T14:39:00.001+05:30

credit crunch leads to recession???

2008-06-04T12:39:00.003+05:30

Credit conditions in financial markets have tightened and there has been a weakening of the capital positions of many major banks in the wake of recent financial market turbulence. These developments raise the question of whether a “credit crunch”—a severe declinein the supply of credit—is looming in the United States and other advanced economies and, if so, what adverse impact this will haveon economic activity. Past periods of financial market stress have not generally had a major impact on broader economic activity, largely because different segments of the financial system have been able, at least partly, to compensate for difficulties in others. However, there have been episodes associated with major bank strains and sharp declines in asset prices when activity has been more seriously affected. In the current context, an overarching concernis that credit creation may have been impaired because of the faltering of the twin engines ofthe financial system—the banking system and the securities markets.
Writing for the voxeu, Nicholos Bloom argues that the wave of uncertainty troubling the markets will likely induce a recession – and render policy instruments powerless to prevent it

Note: Prior to 1986, “annualised standard deviation” is calculated as the percentage actual volatility of monthly returns on the S&P500 index of the US stock market. After 1986, it is calculated using the percentage “implied volatility” from an option on the S&P100 index.

Note: The vertical axis shows a measure of volatility derived from Schwert (1990), which contains daily stock returns to the Dow Jones composite portfolio from 1885 to 1927, and to the Standard and Poor’s composite portfolio from 1928 to 1962.

virtual economics

2008-06-04T10:21:00.002+05:30

Economists explore the research value of virtual worlds. Thanks Marginal Revolution for this pointer.

a tale of three Indias

2008-06-04T10:07:00.002+05:30

Teresita C. Schaffer in The Globalist argues that the key problem is that millions of Indians are left out of their country's exciting rise.

Looking up and down the income scale, there are “three Indias”, airplane India, scooter India, and bullock cart India. The distinction is not new and Kalecki has already developed the theory of Intermediate class and Intermediate Regime. Here is a paper by Matthew McCartney and Barbara Harriss-White.

funny headlines

2008-06-04T09:52:00.003+05:30

Thanks to Oddie for the pointer. I liked the following ones:

financial regulation

2008-06-03T20:18:00.002+05:30

Larry Summers offers six principles of financial regulation.

there should be a strong presumption against having regulators competing to supervise particular institutions or activities. Experience suggests that even when firms do not have the option of switching, there are substantial risks that regulators will be co-opted. Adding “forum shopping” exacerbates the problem.
it should be recognised that to a substantial extent self-regulation is deregulation. Allowing institutions to determine capital levels based on risk models of their own design is tantamount to letting them set their own capital levels. We have seen institutions hurt again and again by events to which their models implied probabilities of less than one in a million. Where it is desired to impose capital requirements, this should be done in a way that can be monitored by supervisors on the basis of balance sheet data.
regulation must be premised on the inability of institutions or their regulators to predict future market conditions with much confidence. As obvious as the subprime crisis may look in retrospect, it was not widely foreseen 18 months ago even by those worried about complacency in credit markets. As the fact that the Dow Jones index was below 6,500 when Alan Greenspan famously spoke of irrational exuberance illustrates, it is also easy to see bubbles even when assets are undervalued or properly valued, as US stocks were in 1996. Rather than judging where and when the next crisis will occur, regulators need to try to assure the resilience of the system with respect to economic shocks or problems in any one sector or institution.
the focus of regulation must shift from the prudential practices of individual institutions to the health of the financial system. The proper focus of government regulation is not on how good a job managements do of looking out for their shareholders and bondholders. It is on the potential external consequences of their actions. This will require efforts to limit excesses when times are good and institutions appear robust – and efforts to avoid deleveraging in difficult times if that increases pressures on others. Prudence at the level of any one institution does involve more leverage at times when volatility is low than when it is high. The problem is that when any institution seeks to do what is prudent for it and sell off assets, it impairs the environment in which all others are operating and creates the kind of vicious cycle, in which liquidations beget declining prices and further liquidations, that we have just been through.
any regulatory regime must address the risks arising from “parallel banking activities” in a realistic way. We have been reminded by recent events of the old truth that borrowing short and lending long with limited capital is always at the root of financial crisis. This type of activity is not confined to banks and their offshoots. It is practised by bond guarantors, hedge funds, mortgage institutions and some insurance companies among others. If capital requirements are raised only on one set of institutions, problems may be exacerbated as activity migrates to those that are not regulated. On the other hand, regulating all potentially highly leveraged entities is a formidable task. There is no ideal answer. But the fear is that regulation that ensures the regulated can compete fairly with the unregulated is regulation that either promises government subsidy or does not raise capital requirements much above market levels.
regulatory policy must to the maximum extent possible create a situation in which the failure of an individual institution is not itself a source of systemic risk. Only in this way is it possible to contain the moral hazards associated with government support. The authorities had no realistic choice but to provide support as Bear Stearns faced bankruptcy. They do have a choice as to whether to put in place a regime where such problems can be managed with no government financial support provided directly or indirectly to shareholders or unsecured creditors. A resolution regime that could apply to any financial institution that became a source of systemic risk should be an urgent priority.

law of demand working

2008-06-03T20:07:00.002+05:30

Here is NY Times take on the saving by Americans when there is an increase in the gasoline price.

subprime crisis:panglossianism

2008-06-03T19:51:00.002+05:30

A simple fact: "one tends to bet more freely with other people’s money than with one’s own". Here is an explanation of financial crises based upon “Panglossian” values by Daniel Cohen, a French economist.

What is the origin of financial crises? A simple fact, a fact that may be summarised as follows: one tends to bet more freely with other people’s money than with one’s own.
The typical investment manager/financial innovator thinks: “If I win, my profit will be proportional to the gross sales I have initiated. If I lose, I will be dismissed, and perhaps I will lose my reputation in the process.” Thinking even further, the manager realises that the downside is limited to being fired, but the upside is limitless. This asymmetry between profits and losses encourages audacity. Once a certain risk threshold is breached, the investment manager who places bets with other people’s money ignores danger. From a social point of view, the problem stems from the divergence of incentives. Even though the intermediary knows that he may suffer a severe personal loss, it will never be proportional to the losses inflicted on investors.
This simple rule - that profits are for me (at least in part) while losses are for others – makes it possible to understand the enchanted world of finance. The investment manager lives in a world with “Panglossian” values, to borrow an expression used by the economist Paul Krugman. Just as Voltaire’s hero, this investor only sees the bright side of affairs. He ignores the risk – not by inadvertence, but by rationality.

Panglossian principles first explain why finance requires regulation. Prudential rules set a minimum ratio of banks’ equity capital to the amount of their investments. The idea is to oblige them to hold at their disposal the liquidity necessary to pay, and therefore to anticipate, their potential losses. The subprime crisis illustrates a contrario how the applicable logic works when, by diverse artifices, the financial intermediaries were able to free themselves from regulatory constraints.
At the origin of the so-called subprime crisis, there is a brilliant innovation. To make real estate credit available more to investors at attractive rates, the engineers of Wall Street came up with the following idea. Slice up portfolios of pooled mortgage assets into several tranches. The highest quality tranches are paid first, the mezzanine tranches afterward, and the lowest (equity) tranches sustain the risk of eventual default. A palette of varied assets is constructed in this way, attracting vast classes of investors: pension funds for the senior tranches, and hedge funds for the risky assets. This invention, finalized in 1983 by a subsidiary of General Electric, was originally intended for ordinary borrowers. In spite of a first crisis in 1994, the technique took off in 2000, making it possible to broaden the range of households benefiting from mortgage loans. Thanks to the now famous subprimes, the most disadvantaged social classes were able at last to buy their housing on credit. Wall Street came to the aid of Harlem with “ninja” loans (No Income, No Job, no Assets).
Stage one: warped creditworthiness evaluation
The collapse of the subprime system unfolded in several stages, each of which revealed the Panglossian vision of financial intermediaries. Upstream from the crisis, one fact became apparent rapidly. The quality of mortgage extended had profoundly deteriorated, even making allowances for the new clientele for whom they were intended. The clients’ creditworthiness had been systematically overestimated by the intermediaries in charge of distributing the mortgages. The cause of this deterioration is evident. Beforehand, in the old school of bank lending, lenders originating a loan were the ones who collected it afterwards, so they had an incentive to evaluate creditworthiness correctly. With the advent of loan securitisation, the agent originating the credit sells it immediately in the financial markets. The incentives are totally changed. What counts is to increase the numbers, not to examine the quality of the client.
Step two: flippancy of the banks
However, this phenomenon is only the first level in the house of cards. The second story is the “flippancy” of the banks themselves. To profit to the maximum from the new opportunities in mortgage lending, the banks created new, off-balance-sheet structures – “Special Investment Vehicles” (the infamous SIVs). By placing their new activities in these ad hoc structures, the banks liberated themselves from prudential rules. They were able to exploit to the financial leverage to finance high yielding operations on credit, without having to make use of their equity capital. The machine for betting imprudently with other people’s money was then set in motion.
The crisis that began in the summer of 2007 revealed the magnitude of the phenomenon. Losses are between 422 billion dollars, according to the OECD, and 945 billion according to the IMF. Whatever the final figure turns out to be, depending on how the current crisis evolves, a “reverse leveraging effect” is at work, what is called “deleveraging” on Wall Street. The banks will indeed be forced to reduce the volume of their lending, (re-)proportioning it to their equity capital, at the very moment when this equity is amputated by losses. A contraction of credit is inevitable, and this usually leads to a recession.
Phase three: the real estate bubble
This leads to the third and last story in the house of cards: the real estate bubble. Easy money in the year 2000 nourished an explosion in asset prices, especially housing prices. This enabled American households to live on credit. A very lax system allowed them indeed to increase their debt progressively as the value of their real estate holdings rose. All goes well as long as prices rise. When price fall, the households whose mortgage debt exceeds the value of their house (negative equity) may want to or may be forced to default.
Phase four: the borrows become Panglossian
Panglossian reasoning applies again here, but this time on the part of borrowers. The most heavily indebted households have an incentive to bet on the continuation of the rise, ignoring the risk of market reversal. This is the where the greatest risk lies going forward. In the United States, the fall in real estate prices has now reached a 10% average annual rate. A vicious circle is in motion. The reduction in prices obliges households to declare bankruptcy, which leads the banks to put the unpaid houses up for sale, which brings down the prices still more. Many of the same households also borrowed to buy cars, run up credit card bills, etc, so ‘deleveraging’ by the little guys could spread the crises far beyond mortgage lending.
What easy money brought forth during the years 2000, tight credit will take away in the years to come. “Deleveraging” has begun on all levels: for the banks, for the financial institutions having used leveraging to the maximum, such as the hedge funds or the private equity firms, and for the households themselves. Is this the disenchantment of the financial world? No doubt - until the next round.

history lessons

2008-05-23T16:32:00.004+05:30

There are some who see a cycle of boom and bust as inevitable. But as Britain and much of the Western world faces up to a downturn, it's easy to look back into the past and find nasty decades, BBC offers historical perspectives on hard times. The article looks at three periods (England in the 1440s and 14450s, Britain in the 1840s and Rome in 270AD) and examines why the economy was faltering. The article misses out completely the colonial exploitation (resulted into famines to all possible adjectives of hard times in economic terms) the European has done to their respective colonies in the 18th, 19th and early 20th century.

mercantile movie of all time...

2008-05-19T10:28:00.002+05:30

…Taxi Driver, claims Robert Mundell, FT columnist John Authers has the goop:

John Hinckley, the deranged would-be assassin who attempted to kill Ronald Reagan in 1981, claimed that he was inspired by [Taxi Driver]… According to Mundell, the wave of sympathy for President Reagan that was engendered by the assassination attempt deterred Democrats in Congress from voting against his proposed tax cuts. Due to this accident of history, the US administered a big fiscal stimulus at the same time that Paul Volcker at the Federal Reserve was administering tight money. This, for Professor Mundell, was vital in creating the era of prosperity that followed.“Taxi Driver is the most important movie ever made from the standpoint of creating GDP,” Mundell told delegates. “It’s the movie that made the Reagan revolution possible. That movie was indirectly responsible for adding between $5 trillion and $15 trillion of output to the US economy.”

india's booming service sector

2008-05-13T09:58:00.002+05:30

Stephen Broadberry and Bishnupriya Gupta look at the historical roots of India’s booming service economy. “Our research demonstrates that India’s recent service-led development has deep historical roots. During the colonial period, India’s comparative productivity performance was already better in services than in industry or agriculture. This emphasis on services is in line with much recent research on long-run growth among the developed economies, which finds services playing a key role in comparative economic performance in the late nineteenth and early twentieth centuries as well as during more recent times.”

capitalism crisis?

2008-05-13T09:31:00.003+05:30

Wity as ever, Winston Churchill once said, "capitalism is a bad system, but the others are worse.” Samuel Brittan looks at how booms and busts have been features of capitalism since the beginning. “The beginning of wisdom is to recognize that financial booms and busts have been a feature of capitalism from the very start. Indeed they are as deep-rooted as human gullibility and greed. Charles Kindleberger’s "Manias, Panics and Crashes" impressively documented this. He has a table listing more than 30 such events, starting with the South Sea bubble of 1720 and ending with the New York Stock Exchange crash of 1987. Although some analysts have tried to discern a periodicity in their occurrence, I can only see an irregular succession with some crises succeeding each other at intervals of about a decade so beloved by old-fashioned business cycle theorists, but others coming hot on the heels of their predecessors after only a couple of years.

who says big ideas are rare???

2008-05-07T13:44:00.002+05:30

Malcolm Gladwell in NYT has says that history of science is full of ideas that several people had at the same time

what is happenning o food prices??

2008-04-29T19:49:00.010+05:30

The sharp increase in food prices over the past couple of years has raised serious concerns about the food and nutrition situation of poor people in developing countries, about inflation, and—in some countries—about civil unrest. Real prices are still below their mid-1970s peak, but they have reached their highest point since that time. Both developing- and developed-country governmentshave roles to play in bringing prices under control and in helping poor people cope with higher food bills.

facts and figures behind the rising price of food across the globe

Sources of Current Price Increases:

High price of energy: Energy and agricultural prices have become increasingly intertwined. With oil prices at an all-time high of more than US$100 a barrel and the U.S. government subsidizing farmers to grow crops for energy, U.S. farmers have massively shifted their cultivation toward biofuel feedstocks, especially maize, often at the expense of soybean and wheat cultivation. About 30 percent of U.S. maize production will go into ethanol in 2008 rather than into world food and feed markets. High energy prices have also made agricultural production more expensive by raising the cost of mechanical cultivation, inputs like fertilizers and pesticides, and transportation of inputs and outputs.
Demand Supply Mismatch: the growing world population is demanding more and different kinds of food. Rapid economic growth in many developing countries has pushed up consumers’ purchasing power, generated rising demand for food, and shifted food demand away from traditional staples and toward higher-value foods like meat and milk. This dietary shift is leading to increased demand for grains used to feed livestock.
Blame weather: Poor weather and speculative capital have also played a role in the rise of food prices. Severe drought in Australia, one of the world’s largest wheat producers, has cut into global wheat production.

calls for policy actions

comprehensive social protection and food and nutrition initiativesto meet the short- and medium-term needs of the poor;
investment in agriculture, particularly in agricultural scienceand technology and in market access, at a national and global scale to address the long-term problem of boosting supply; and
trade policy reforms, in which developed countries would revise their biofuel and agricultural trade policies and developingcountries would stop the new trade-distorting policies with which they are hurting each other.

Ester Dufflo come up with some policy conclusion.

relating to previous post

2008-02-01T09:13:00.000+05:30

I just saw a Basu Chatterjee directed hindi film, Lakho ki Baat (1984), which depicts the law of economics, particularly compensation tort law, in the context of Coase Theorem.

economics and business issues in movie

2008-01-30T09:52:00.000+05:30

Tom Hanks starrer, Cast Away (2000), a typical movie in Robinson Crusoe framework, was a good starting point to understand the basics of economics, the evolution of economics from the primitive era.

The hindi films, I remember, which vividly captures are Naya Daur,1957, (on Industrial policy, questioning Nehru Mahalnobis Model), Manthan,1976, (the Cooperative movement), Namak Haram,1973, (Contract Labour Policy), Jaane Bhi Do Yaaron,1983, (Urban land Ceiling and Regulation), Corporate,2006, (the Industrialist and Politician nexux), Upkaar,1970, (India vs. Bharat divide), Lagaan, 2001,(Brtish imperialist policy during colonial period)

Some of the foreign films are lists below, thanks to tutor2u for the pointer.

When the Levees Broke: A Requiem in Four Acts (2007) - great documentary from Spike Lee

Walmart – the High Cost of Low Price (2006) – which seeks to undermine the business practices allegedly used by the world’s biggest retailer.

A Crude Awakening – The Oil Crash (2006) - investigation into peak oil theory

Black Gold (2006) - a 78-minute documentary feature from Mark and Nick Francis which provides an vivid insight into the lives and challenges facing coffee farmers in Ethiopia

Darwin’s Nightmare (2005) is a startling look at the impact of multinational organisations such as the IMF and the World Bank together with EU commissioners and Russian airline pilots on the economic and geographic landscape of Uganda and Tanzania – excellent for examples of the tragedy of the commons, the destruction of natural resources

Kinky Boots (2005) – this Nick Frost movie about a failing shoe business that diversifies and explores issues such as redundancy, motivation, production operations.

The Corporation (2005) and Enron - The Smartest Guys in the Room (2006) both have great potential for students wanting to unearth the darker side of corporate power, greed and fraudulent behaviour.

Life and Debt (2004) – looks at the issue of fair trade, inequality and economic growth in Jamaica.

City of God (2003) – highlighting poverty and the value of human life in Brazil

A Beautiful Mind (2002) – starring Russell Crowe and a drama based loosely on the life of John Nash the Nobel-Prize winning mathematician and economist

Amelie (2002) – a cartoon delight that says much about human behaviour and maximising utility!

Goodbye Lenin! (2002) – examining the economic and social impact of a change from state planning to a market economy

Dirty Pretty Things (2002) – a gritty drama directed by Stephen Frears which is centred around the illegal trade in human organs

Start-up.com (2001) – a documentary which follows two New Yorkers who quit their day jobs to focus on their entrepreneurial online business, govWorks.com. The two men receive venture capital, grow the business, and then watch it fall apart.

The Insider (2000) – starring Al Pacino and Russell Crowe, this might be used to illustrate business ethics in tobacco and broadcast journalism

Rogue Trader (1999) - the events surrounding Nick Leeson and the collapse of Baring’s Bank - very topical today

Brassed Off (1996) or the Full Monty (1997) - both looking at the effects of industrial decline

Gold Finger (film released in 1964, new DVD version in 2006) – built around the plot to bomb Fort Knox and destroying the Federal gold so Goldfinger’s gold becomes relatively more valuable!

La Haine (1995) – a classic documentary in which disenfranchised and bored French youths patrol Paris’ suburban housing estates due to lack of government interest and attempts to create employment or education.

Of Mice and Men (1992) could be used as a backdrop to talk about the great depression - the use of migrant workers, the lengths people would go to find a job, and how a purely financial crisis can hit rural workers too – highlighting multiplier effects.

Rounders (1998) and Dr Strangelove: Or, How I Learned to Stop Worrying and Love the Bomb (1963) the classic film starring Peter Sellers both include clips and themes that illustrate game theory, risk aversion and behavioural economics.

The Life of Brian (1979) – including the classic the haggling scene involving Eric Idle – an example of first-degree price discrimination!

The Meaning of Life (1984) - especially the scene with Mr Creosote - externalities from consumption!

Withnail & I (1986) – a classic British film dealing perhaps with the economics of happiness!

American Psycho (2000), Barbarians at the Gate (1993), Boiler Room (2000) and Wall Street (1988) - all great for financial intrigue

It’s a Wonderful Life (1946) – beloved film starring James Stewart – ideal for showing a run on a bank – you might use it when discussing the Northern Rock saga!

welcome to 2008, the year of free....

2007-11-29T14:33:00.000+05:30

The recent article of note in The Economist by Chris Anderson explains the merits of giving it away...

...What is getting too cheap to meter is processing power, storage, bandwidth and all the other enabling technologies of the digital revolution. Thanks to the exponential doublings of Moore’s Law and its equivalents for hard drives and communications, the cost of a given unit of computation, storage or transmission is inexorably dropping towards zero.
...a Caltech professor named Carver Mead.... the late 1970s,... was reflecting on the amazing learning curve that the combination of quantum mechanics and information science had started on the surface of silicon wafers. Like Moore before him, he could see that the 18-month doublings in performance would continue to stretch out as far as anyone could see. But he went one step further to consider what that implied about computers. He realised that we should start “wasting” them.
Waste is a dirty word, and no more so than in the 1970s and 1980s. An entire generation of computer professionals had come to power doing just the opposite. In the glass-walled computer facilities of the mainframe era, they exercised their power in deciding whose programs should be allowed to run on the expensive computing machines.
Among Mead’s disciples was Alan Kay, working at Xerox’s Palo Alto Research Centre. Rather than conserve transistors for core processing functions, he developed a computer that would frivolously throw them at such silly things as drawing icons, windows, pointers and even animations on the screen. The point of this profligate eye candy? It was ease of use for regular folks, a previously neglected market. Kay’s work became the inspiration for the Apple Macintosh, which changed the world by opening computing to the rest of us.
Today the same is happening in everything from bandwidth to storage. The learning curves of technology cut prices at a rate never before seen. The cost of storing or transmitting a kilobyte of data really is now too cheap to meter. Soon the same will be true for a megabyte, and then soon after that a terabyte. And the internet touches nearly as much of our economy as electricity did when Lewis Strauss issued his prediction.

visualising words

2007-11-23T11:55:00.000+05:30

visuwords, a very useful dictionary or thesaurus

making forecast when you don't know everything?

2007-11-23T09:30:00.000+05:30

It’s tough to make predictions, especially about future. Yogi Berra
Th recent issue of The Economist reviews the book by Mr Frydman (Here is the first chapter of the book).

“THE forecaster is like an entrepreneur,.. he uses quantitative methods, but he also studies history, and relies on intuition and judgment. He is not a scientist.” ...this fact has been lost on contemporary economists, who continue to pursue the perfect economic forecast despite abundant evidence that it does not, and cannot, exist. They dismiss their repeated failures in much the same way that self-styled reformers in ...Poland once insisted that socialism was great, but just needed to be carried out better.
In the economics profession the leading inheritors of this communistic mindset... are the proponents of rational-expectations theory, which assumes that the economy and the individuals within it act with perfect foresight. Yet.. equally critical of the more fashionable school of behavioural economics, or at least those of its practitioners who claim that although people are irrational, their irrationality can be modelled so precisely that the future can be forecast with great precision.
In a new book, “Imperfect Knowledge Economics”....Mr Frydman sets out an alternative approach to prediction, in which the forecaster recognises that his model will inevitably be less than perfect. ..

There is nothing new in economics about the idea that people must make decisions based on imperfect knowledge. Frank Knight...,“Knightian uncertainty”..., ... noted that most business decisions involve a step into an unknown that is to some degree unmeasurable. ...Keynes observed that “human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist.”
While reflecting these insights, imperfect-knowledge economics still sees a role for economic theory in forecasting. ....argue that, to be useful, economic forecasting models should be based on qualitative regularities in the way that market participants respond to new information—that is, patterns of behaviour that are observable and somewhat predictable. Though not perfect, these will often give a better clue to the future than no model at all, or models based on rational expectations or behavioural economics.
....bulls and bears, for example. Their analysis of the fundamentals leads them to opposite conclusions about where prices are going. But there is evidence that the way they revise their forecasts in the light of price movements may share common features, such as a tendency to become more risk averse the further the price of an asset moves away from what is generally believed to be its long-term fundamental value. This may work eventually to return the asset price to its fundamental value, though it may also cause it to deviate significantly from this value for long periods of time. This approach will not generate the “sharp predictions” beloved of most contemporary economists—which are doomed by imperfect knowledge to be wrong. But it will provide a broad sense of the state of play, which an enterprising forecaster can usefully combine with experience, intuition and so forth when making a decision.
...Frydman... examine the persistent failure of economists to predict movements in the currency markets. According to Kenneth Rogoff, ..., “it is stunning how hard it is to explain movements in exchange rates.” All the models based on rational expectations now say that, on fundamentals, the euro is overvalued against the dollar, he reckons. But does that mean the dollar will soon rise? Mr Rogoff says he has no idea.
In rational-expectations theory, a range of variables including inflation, interest rates and growth should have a predictable impact on currency movements, but in practice this theory has proved less useful for forecasting than tossing a coin. Among rational economists, the debate is over “whether the glass is 5% full or 95% empty,” he says. Only over longer periods—say two to four years—is there any evidence of exchange-rate predictability, which is far too long to be useful to traders or policymakers.
By contrast, the model developed by Messrs Frydman and Goldman, which assumes imperfect knowledge and learning, does significantly better than tossing a coin, although it is by no means right all the time. Mr Rogoff describes this work as innovative. Now, ... it must demonstrate that it can consistently maintain explanatory power in the future and over a range of markets, he believes.
Maths lesson

Messrs Frydman and Goldberg are now turning their attention to the troubled subprime-mortgage markets, and the performance of the rating agencies. The rating agencies,...have generally been better at rating corporate bonds than rating asset-backed collateralised-debt obligations. Why? One reason is that the rating agencies used both a mathematical model and the judgment of their in-house specialists when forecasting the default probabilities of corporate bonds; on subprime-related securities, they could only use mathematical models, not least because the instruments were so new. “They had no experience, no intuition, no entrepreneur,” he says. That is “empirical proof that relying on models alone is not wise.”

the oil map

2007-11-22T09:41:00.000+05:30

Moebius Transformations Explained

2007-11-21T10:03:00.000+05:30

A short film depicting the beauty of Moebius Transformations in mathematics. The movie shows how moving to a higher dimension can make the transformations easier to understand.The full version is available at http://www.ima.umn.edu/~arnold/moebius/

lies economists told...

2007-08-01T11:27:00.000+05:30

Foreign Policy looks at five ways in which the world economy is pushing economists to think outside the box.

High productivity and low unemployment make us all better off
The orthodoxy: Economic theory does not guarantee that wages will reflect productivity in absolute terms, but most economists think that productivity-spurred growth will eventually increase everyone’s pie. Northwestern University economics professor Robert J. Gordon characterizes this view as, “productivity is the seed that creates the flower of a nation’s standard of living.”
Heretical facts: Despite six years of sustained growth, with unemployment averaging around 5 percent, the median U.S. worker is not faring well. Since 2001, middle-class Americans have seen their pay drop by 4 percent, although labor productivity went up by 15 percent during the same period.
Moral: Economists are still scratching their heads. Some labor economists point an accusatory finger at immigration. More of the foreign newcomers now hold advanced degrees, these economists argue, and native white-collar workers are no longer safe from cheap competition. Other economists point out that since China, India, and Russia joined the free market, the global supply of labor, including engineers and scientists, has quadrupled, pushing down wages. On the other side of the argument, the Peterson Institute for International Economics points out that globalization yields the United States around $1 trillion annually—or roughly $9,000 per year for every American household. Globalization skeptics, however, say that money is not making it into people’s pockets.

It’s hard to grow without good banks and private property
The orthodoxy: Economic growth requires a functioning banking system, solid property rights, and minimal state interference in the economy.
Heretical facts: One word: China. The gross domestic product of this Asian giant has increased sixfold between 1984 and 2004, with a stunning average growth of roughly 9 percent since 2005. Yet only in 2007 did the protection of private property acquire equal footing in Chinese property law. Moreover, experts still deem China’s banking system to be shaky despite a major overhaul that started in 2002. Harvard political economist Regina Abrami observes that the state has played a key role in the economic takeoff of the Chinese dragon. China’s township and village-owned enterprises—a curious mix of private initiative and government incentives—were for years at the heart of the country’s economic renaissance. And despite limited access to bank credit, China’s private sector has also thrived.
Moral: Growth happens—even when the market institutions that economists deem essential are not fully in place. Will China’s growth last? Nobody knows for sure, but many analysts have been arguing for some time that—as World Bank economic advisor Harry Broadman puts it—“the chickens could come home to roost, especially in the unreformed large, backbone, state-owned enterprises and banks,” precisely because of weaknesses in China’s underlying market institutions. For Broadman, the large scale of China’s internal market has been a key factor that has allowed the economy to prosper despite “fuzzy property rights.”

Capital must always be let free to flow
The orthodoxy: It keeps changing. Under the global financial architecture put in place soon after World War II, governments and multilateral institutions were to put some checks on where the money was going. But by the late 1950s, advocates of unfettered capital mobility were winning the argument, and under the so-called “Washington Consensus,” the U.S. Treasury Department and the International Monetary Fund recommended that developing countries lift restrictions over international movements of money.
Heretical facts: The Asian financial crisis. Starting in 1996, overvalued real estate prices collapsed in Thailand, spurring a devaluation of the Thai currency. Soon enough, the contagion spread to nearby Malaysia, Indonesia, and South Korea. Capital flight triggered painful recessions in most of East Asia. Only China and Taiwan, which had maintained tight capital controls, weathered the crisis unscathed. Malaysia split the difference by introducing capital controls in 1998, a last-minute attempt to avoid the worst.
Moral: Even though the jury is still out over the success of the Malaysian experiment, the Asian financial crisis was like a cold shower for enthusiasts of free capital mobility. Most economists now agree that letting the money flow is good, but only when the proper institutions and regulations are in place.

The euro will never work
The orthodoxy: When, in 1992, 12 European heads of state gathered in Maastricht, the Netherlands, to announce the coming of a unified European currency, more than a few economists scorned them. History, wrote Nobel Prize winner Milton Friedman in the Wall Street Journal in 1995, had repeatedly shown that fixed exchange rates are simply a bad idea for “a group of large countries with independent political systems and independent national politics.”
Heretical facts: In January 2002, the euro made its entrance on the world stage and into the wallets of the citizens of 13 European countries. Five years later, it is still alive and healthy—stronger than the U.S. dollar, in fact. And despite grumbling from countries like Italy, where policymakers wish they could still boost exports by devaluing the old lira, nobody is seriously considering going back to single national currencies.
Moral: In a sense, the critics were right. One size does not fit all, and Europeans keep quarreling about where their centralized monetary policy should go. But the critics also missed the point. As Harvard political economist Rawi Abdelal explains, “The euro was not an economically motivated enterprise; its reasons to be were and are mostly political.”

Japan—no wait, China—is going to take over the world economy
The orthodoxy: Japan’s rise heralded the United States’ decline. In the mid-1980s, many economists looked at the Japanese economy—with its current account surplus, rising exports led by heavy car sales, and strong currency—and predicted dire consequences for Uncle Sam. Western analysts fretted over the United States’ ever-widening current account imbalance, decried the laziness of the U.S. worker, and lauded the efficient work ethic of the Japanese.
Heretical facts: As of 2007, the United States is still the greatest capitalist economy in the world, with a gross domestic product roughly three times as big as that of Japan, the world’s second largest economy. True, Japan’s car industry is still a rising star: Toyota briefly overtook General Motors a few months ago as the world’s largest automaker. Yet, as Newsweek columnist Fareed Zakaria put it, the Japanese “ran into a brick wall.” After more than 15 years of economic stagnation, repeated currency deflations, and record-high unemployment, the Japanese economy is just now coming out of the doldrums.
Moral: A rising tide lifts all boats. If Japan didn’t put Uncle Sam out of business, maybe China won’t, either. Martin Baily, a senior fellow at the Peterson Institute for International Economics, notes that for every Chinese worker, there is also a Chinese consumer joining the international market. What’s more, as Chinese salaries inevitably rise, it will become harder for Chinese companies to undercut the competition.

laws of software development

2007-07-27T10:26:00.000+05:30

Here is the link:
Amdahl’s Law Gene Amdahl

The speedup gained from running a program on a parallel computer is greatly limited by the fraction of that program that can’t be parallelized.
Augustine’s Second Law of Socioscience Norman Augustine
For every scientific (or engineering) action, there is an equal and opposite social reaction.
Brooks’ Law Fred Brooks
Adding manpower to a late software project makes it later.
Clarke’s First Law Arthur C. Clarke
When a distinguished but elderly scientist states that something is possible he is almost certainly right. When he states that something is impossible, he is very probably wrong.
Clarke’s Second Law Arthur C. Clarke
The only way of discovering the limits of the possible is to venture a little way past them into the impossible.
Clarke’s Third Law Arthur C. Clarke
Any sufficiently advanced technology is indistinguishable from magic.
Conway’s Law Melvin Conway
Any piece of software reflects the organizational structure that produced it.
Cope’s Rule Edward Drinker Cope
There is a general tendency toward size increase in evolution.
Dilbert Principle Scott Adams
The most ineffective workers are systematically moved to the place where they can do the least damage: management.

Ellison’s Law of Cryptography and Usability Carl Ellison
The userbase for strong cryptography declines by half with every additional keystroke or mouseclick required to make it work.
Ellison’s Law of Data Larry Ellison
Once the business data have been centralized and integrated, the value of the database is greater than the sum of the preexisting parts.
The Law of False Alerts George Spafford
As the rate of erroneous alerts increases, operator reliance, or belief, in subsequent warnings decreases.
Fisher’s Fundamental Theorem R. A. Fisher
The more highly adapted an organism becomes, the less adaptable it is to any new change.
Fitts’ Law Paul Fitts
The time to acquire a target is a function of the distance to and the size of the target.
Flon’s Axiom Lawrence Flon
There does not now, nor will there ever, exist a programming language in which it is the least bit hard to write bad programs.
Gilder’s Law George Gilder
Bandwidth grows at least three times faster than computer power.
Godwin’s Law Mike Godwin
As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches one.
Grosch’s Law Herb Grosch
The cost of computing systems increases as the square root of the computational power of the systems.
Hartree’s Law Douglas Hartree
Whatever the state of a project, the time a project-leader will estimate for completion is constant.
Heisenbug Uncertainty Principle Jim Gray
Most production software bugs are soft: they go away when you look at them.
Hick’s Law William Edmund Hick
The time to make a decision is a function of the possible choices he or she has.
Hoare’s Law of Large Programs C. A. R. Hoare
Inside every large problem is a small problem struggling to get out.
Hofstadter’s Law Douglas Hofstadter
A task always takes longer than you expect, even when you take into account Hofstadter’s Law.
Jakob’s Law of the Internet User Experience Jakob Nielsen
Users spend most of their time on other sites. This means that users prefer your site to work the same way as all the other sites they already know.
Joy’s Law Bill Joy
smart(employees) = log(employees), or “No matter who you are, most of the smartest people work for someone else.”
Kerckhoffs’ Principle Auguste Kerckhoffs
In cryptography, a system should be secure even if everything about the system, except for a small piece of information — the key — is public knowledge.
Linus’ Law Eric S. Raymond, who named it after Linus Torvalds
Given enough eyeballs, all bugs are shallow.
Lister’s Law Timothy Lister
People under time pressure don’t think faster.
Metcalfe’s Law Robert Metcalfe
In network theory, the value of a system grows as approximately the square of the number of users of the system.
Moore’s Law Gordon Moore
The number of transistors on an integrated circuit will double in about 18 months.
Murphy’s Law Captain Edward A. Murphy
If there are two or more ways to do something, and one of those ways can result in a catastrophe, then someone will do it.
Nathan’s First Law Nathan Myhrvold
Software is a gas; it expands to fill its container.
Ninety-ninety Law Tom Cargill
The first 90% of the code accounts for the first 90% of the development time. The remaining 10% of the code accounts for the other 90% of the development time.
Occam’s Razor William of Occam
The explanation requiring the fewest assumptions is most likely to be correct.
Osborn’s Law Don Osborn
Variables won’t; constants aren’t.
Postel’s Law (the second clause of the Robustness Principle) Jon Postel
Be conservative in what you send, liberal in what you accept.
Pareto Principle (a.k.a. “The 80-20 Rule”)
Suggested by Joseph Juran, named after Vilifredo Pareto
For many phenomena, 80% of consequences stem from 20% of the causes.
Parkinson’s Law C. Northcote Parkinson
Work expands so as to fill the time available for its completion.
Pesticide Paradox Bruce Beizer
Every method you use to prevent or find bugs leaves a residue of subtler bugs against which those methods are ineffectual.
The Peter Principle Laurence J. Peter
In a hierarchy, every employee tends to rise to his level of incompetence.
Reed’s Law David P. Reed
The utility of large networks, particularly social networks, scales exponentially with the size of the network.
Rock’s Law Arthur Rock
The cost of a semiconductor chip fabrication plant doubles every four years.
Sixty-sixty Rule Robert Glass
Sixty percent of software’s dollar is spent on maintenance, and sixty percent of that maintenance is enhancement.
Spector’s Law Lincoln Spector
The time it takes your favorite application to complete a given task doubles with each new revision.
Spafford’s Adoption Rule George Spafford
For just about any technology, be it an operating system, application or network, when a sufficient level of adoption is reached, that technology then becomes a threat vector.
Sturgeon’s Revelation Theodore Sturgeon
Ninety percent of everything is crud.
Tesler’s Law of Conservation as Complexity Larry Tesler
You cannot reduce the complexity of a given task beyond a certain point. Once you’ve reached that point, you can only shift the burden around.
Weibull’s Power Law Waloddi Weibull
The logarithm of failure rates increases linearly with the logarithm of age.
Wirth’s Law Niklaus Wirth
Software gets slower faster than hardware gets faster.
Zawinski’s Law Jamie Zawinski
Every program attempts to expand until it can read mail. Those programs which cannot so expand are replaced by ones which can.

10 politically incorrect truths about human nature

2007-07-11T09:18:00.000+05:30

Why most suicide bombers are Muslim, beautiful people have more daughters, humans are naturally polygamous, sexual harassment isn't sexist, and blonds are more attractive. Alan S. Miller and Satoshi Kanazawa have the answer.

Men like blond bombshells (and women want to look like them) Long before TV—in 15th- and 16th- century Italy, and possibly two millennia ago—women were dying their hair blond. A recent study shows that in Iran, where exposure to Western media and culture is limited, women are actually more concerned with their body image, and want to lose more weight, than their American counterparts. It is difficult to ascribe the preferences and desires of women in 15th-century Italy and 21st-century Iran to socialization by media.
Women's desire to look like Barbie—young with small waist, large breasts, long blond hair, and blue eyes—is a direct, realistic, and sensible response to the desire of men to mate with women who look like her. There is evolutionary logic behind each of these features.
Men prefer young women in part because they tend to be healthier than older women. One accurate indicator of health is physical attractiveness; another is hair. Healthy women have lustrous, shiny hair, whereas the hair of sickly people loses its luster. Because hair grows slowly, shoulder-length hair reveals several years of a woman's health status.
Men also have a universal preference for women with a low waist-to-hip ratio. They are healthier and more fertile than other women; they have an easier time conceiving a child and do so at earlier ages because they have larger amounts of essential reproductive hormones. Thus men are unconsciously seeking healthier and more fertile women when they seek women with small waists.
Until very recently, it was a mystery to evolutionary psychology why men prefer women with large breasts, since the size of a woman's breasts has no relationship to her ability to lactate. But Harvard anthropologist Frank Marlowe contends that larger, and hence heavier, breasts sag more conspicuously with age than do smaller breasts. Thus they make it easier for men to judge a woman's age (and her reproductive value) by sight—suggesting why men find women with large breasts more attractive.
Alternatively, men may prefer women with large breasts for the same reason they prefer women with small waists. A new study of Polish women shows that women with large breasts and tight waists have the greatest fecundity, indicated by their levels of two reproductive hormones (estradiol and progesterone).
Blond hair is unique in that it changes dramatically with age. Typically, young girls with light blond hair become women with brown hair. Thus, men who prefer to mate with blond women are unconsciously attempting to mate with younger (and hence, on average, healthier and more fecund) women. It is no coincidence that blond hair evolved in Scandinavia and northern Europe, probably as an alternative means for women to advertise their youth, as their bodies were concealed under heavy clothing.
Women with blue eyes should not be any different from those with green or brown eyes. Yet preference for blue eyes seems both universal and undeniable—in males as well as females. One explanation is that the human pupil dilates when an individual is exposed to something that she likes. For instance, the pupils of women and infants (but not men) spontaneously dilate when they see babies. Pupil dilation is an honest indicator of interest and attraction. And the size of the pupil is easiest to determine in blue eyes. Blue-eyed people are considered attractive as potential mates because it is easiest to determine whether they are interested in us or not.
The irony is that none of the above is true any longer. Through face-lifts, wigs, liposuction, surgical breast augmentation, hair dye, and color contact lenses, any woman, regardless of age, can have many of the key features that define ideal female beauty. And men fall for them. Men can cognitively understand that many blond women with firm, large breasts are not actually 15 years old, but they still find them attractive because their evolved psychological mechanisms are fooled by modern inventions that did not exist in the ancestral environment.
Humans are naturally polygamous The history of western civilization aside, humans are naturally polygamous. Polyandry (a marriage of one woman to many men) is very rare, but polygyny (the marriage of one man to many women) is widely practiced in human societies, even though Judeo-Christian traditions hold that monogamy is the only natural form of marriage. We know that humans have been polygynous throughout most of history because men are taller than women.
Among primate and nonprimate species, the degree of polygyny highly correlates with the degree to which males of a species are larger than females. The more polygynous the species, the greater the size disparity between the sexes. Typically, human males are 10 percent taller and 20 percent heavier than females. This suggests that, throughout history, humans have been mildly polygynous.
Relative to monogamy, polygyny creates greater fitness variance (the distance between the "winners" and the "losers" in the reproductive game) among males than among females because it allows a few males to monopolize all the females in the group. The greater fitness variance among males creates greater pressure for men to compete with each other for mates. Only big and tall males can win mating opportunities. Among pair-bonding species like humans, in which males and females stay together to raise their children, females also prefer to mate with big and tall males because they can provide better physical protection against predators and other males.
In societies where rich men are much richer than poor men, women (and their children) are better off sharing the few wealthy men; one-half, one-quarter, or even one-tenth of a wealthy man is still better than an entire poor man. As George Bernard Shaw puts it, "The maternal instinct leads a woman to prefer a tenth share in a first-rate man to the exclusive possession of a third-rate one." Despite the fact that humans are naturally polygynous, most industrial societies are monogamous because men tend to be more or less equal in their resources compared with their ancestors in medieval times. (Inequality tends to increase as society advances in complexity from hunter-gatherer to advanced agrarian societies. Industrialization tends to decrease the level of inequality.)
Most women benefit from polygyny, while most men benefit from monogamy When there is resource inequality among men—the case in every human society—most women benefit from polygyny: women can share a wealthy man. Under monogamy, they are stuck with marrying a poorer man.
The only exceptions are extremely desirable women. Under monogamy, they can monopolize the wealthiest men; under polygyny, they must share the men with other, less desirable women. However, the situation is exactly opposite for men. Monogamy guarantees that every man can find a wife. True, less desirable men can marry only less desirable women, but that's much better than not marrying anyone at all.
Men in monogamous societies imagine they would be better off under polygyny. What they don't realize is that, for most men who are not extremely desirable, polygyny means no wife at all, or, if they are lucky, a wife who is much less desirable than one they could get under monogamy.
Most suicide bombers are Muslim Suicide missions are not always religiously motivated, but according to Oxford University sociologist Diego Gambetta, editor of Making Sense of Suicide Missions, when religion is involved, the attackers are always Muslim. Why? The surprising answer is that Muslim suicide bombing has nothing to do with Islam or the Quran (except for two lines). It has a lot to do with sex, or, in this case, the absence of sex.
What distinguishes Islam from other major religions is that it tolerates polygyny. By allowing some men to monopolize all women and altogether excluding many men from reproductive opportunities, polygyny creates shortages of available women. If 50 percent of men have two wives each, then the other 50 percent don't get any wives at all.
So polygyny increases competitive pressure on men, especially young men of low status. It therefore increases the likelihood that young men resort to violent means to gain access to mates. By doing so, they have little to lose and much to gain compared with men who already have wives. Across all societies, polygyny makes men violent, increasing crimes such as murder and rape, even after controlling for such obvious factors as economic development, economic inequality, population density, the level of democracy, and political factors in the region.
However, polygyny itself is not a sufficient cause of suicide bombing. Societies in sub-Saharan Africa and the Caribbean are much more polygynous than the Muslim nations in the Middle East and North Africa. And they do have very high levels of violence. Sub-Saharan Africa suffers from a long history of continuous civil wars—but not suicide bombings.
The other key ingredient is the promise of 72 virgins waiting in heaven for any martyr in Islam. The prospect of exclusive access to virgins may not be so appealing to anyone who has even one mate on earth, which strict monogamy virtually guarantees. However, the prospect is quite appealing to anyone who faces the bleak reality on earth of being a complete reproductive loser.
It is the combination of polygyny and the promise of a large harem of virgins in heaven that motivates many young Muslim men to commit suicide bombings. Consistent with this explanation, all studies of suicide bombers indicate that they are significantly younger than not only the Muslim population in general but other (nonsuicidal) members of their own extreme political organizations like Hamas and Hezbollah. And nearly all suicide bombers are single.
Having sons reduces the likelihood of divorce Sociologists and demographers have discovered that couples who have at least one son face significantly less risk of divorce than couples who have only daughters. Why is this?
Since a man's mate value is largely determined by his wealth, status, and power—whereas a woman's is largely determined by her youth and physical attractiveness—the father has to make sure that his son will inherit his wealth, status, and power, regardless of how much or how little of these resources he has. In contrast, there is relatively little that a father (or mother) can do to keep a daughter youthful or make her more physically attractive.
The continued presence of (and investment by) the father is therefore important for the son, but not as crucial for the daughter. The presence of sons thus deters divorce and departure of the father from the family more than the presence of daughters, and this effect tends to be stronger among wealthy families.
Beautiful people have more daughters It is commonly believed that whether parents conceive a boy or a girl is up to random chance. Close, but not quite; it is largely up to chance. The normal sex ratio at birth is 105 boys for every 100 girls. But the sex ratio varies slightly in different circumstances and for different families. There are factors that subtly influence the sex of an offspring.
One of the most celebrated principles in evolutionary biology, the Trivers-Willard hypothesis, states that wealthy parents of high status have more sons, while poor parents of low status have more daughters. This is because children generally inherit the wealth and social status of their parents. Throughout history, sons from wealthy families who would themselves become wealthy could expect to have a large number of wives, mistresses and concubines, and produce dozens or hundreds of children, whereas their equally wealthy sisters can have only so many children. So natural selection designs parents to have biased sex ratio at birth depending upon their economic circumstances—more boys if they are wealthy, more girls if they are poor. (The biological mechanism by which this occurs is not yet understood.)
This hypothesis has been documented around the globe. American presidents, vice presidents, and cabinet secretaries have more sons than daughters. Poor Mukogodo herders in East Africa have more daughters than sons. Church parish records from the 17th and 18th centuries show that wealthy landowners in Leezen, Germany, had more sons than daughters, while farm laborers and tradesmen without property had more daughters than sons. In a survey of respondents from 46 nations, wealthy individuals are more likely to indicate a preference for sons if they could only have one child, whereas less wealthy individuals are more likely to indicate a preference for daughters.
The generalized Trivers-Willard hypothesis goes beyond a family's wealth and status: If parents have any traits that they can pass on to their children and that are better for sons than for daughters, then they will have more boys. Conversely, if parents have any traits that they can pass on to their children and that are better for daughters, they will have more girls.
Physical attractiveness, while a universally positive quality, contributes even more to women's reproductive success than to men's. The generalized hypothesis would therefore predict that physically attractive parents should have more daughters than sons. Once again, this is the case. Americans who are rated "very attractive" have a 56 percent chance of having a daughter for their first child, compared with 48 percent for everyone else.
What Bill Gates and Paul McCartney have in common with criminals For nearly a quarter of a century, criminologists have known about the "age-crime curve." In every society at all historical times, the tendency to commit crimes and other risk-taking behavior rapidly increases in early adolescence, peaks in late adolescence and early adulthood, rapidly decreases throughout the 20s and 30s, and levels off in middle age.
This curve is not limited to crime. The same age profile characterizes every quantifiable human behavior that is public (i.e., perceived by many potential mates) and costly (i.e., not affordable by all sexual competitors). The relationship between age and productivity among male jazz musicians, male painters, male writers, and male scientists—which might be called the "age-genius curve"—is essentially the same as the age-crime curve. Their productivity—the expressions of their genius—quickly peaks in early adulthood, and then equally quickly declines throughout adulthood. The age-genius curve among their female counterparts is much less pronounced; it does not peak or vary as much as a function of age.
Paul McCartney has not written a hit song in years, and now spends much of his time painting. Bill Gates is now a respectable businessman and philanthropist, and is no longer a computer whiz kid. J.D. Salinger now lives as a total recluse and has not published anything in more than three decades. Orson Welles was a mere 26 when he wrote, produced, directed, and starred in Citizen Kane.
A single theory can explain the productivity of both creative geniuses and criminals over the life course: Both crime and genius are expressions of young men's competitive desires, whose ultimate function in the ancestral environment would have been to increase reproductive success.
In the physical competition for mates, those who are competitive may act violently toward their male rivals. Men who are less inclined toward crime and violence may express their competitiveness through their creative activities.
The cost of competition, however, rises dramatically when a man has children, when his energies and resources are put to better use protecting and investing in them. The birth of the first child usually occurs several years after puberty because men need some time to accumulate sufficient resources and attain sufficient status to attract their first mate. There is therefore a gap of several years between the rapid rise in the benefits of competition and similarly rapid rise in its costs. Productivity rapidly declines in late adulthood as the costs of competition rise and cancel its benefits.
These calculations have been performed by natural and sexual selection, so to speak, which then equips male brains with a psychological mechanism to incline them to be increasingly competitive immediately after puberty and make them less competitive right after the birth of their first child. Men simply do not feel like acting violently, stealing, or conducting additional scientific experiments, or they just want to settle down after the birth of their child but they do not know exactly why.
The similarity between Bill Gates, Paul McCartney, and criminals—in fact, among all men throughout evolutionary history—points to an important concept in evolutionary biology: female choice.
Women often say no to men. Men have had to conquer foreign lands, win battles and wars, compose symphonies, author books, write sonnets, paint cathedral ceilings, make scientific discoveries, play in rock bands, and write new computer software in order to impress women so that they will agree to have sex with them. Men have built (and destroyed) civilization in order to impress women, so that they might say yes.
The midlife crisis is a myth—sort of Many believe that men go through a midlife crisis when they are in middle age. Not quite. Many middle-aged men do go through midlife crises, but it's not because they are middle-aged. It's because their wives are. From the evolutionary psychological perspective, a man's midlife crisis is precipitated by his wife's imminent menopause and end of her reproductive career, and thus his renewed need to attract younger women. Accordingly, a 50-year-old man married to a 25-year-old woman would not go through a midlife crisis, while a 25-year-old man married to a 50-year-old woman would, just like a more typical 50-year-old man married to a 50-year-old woman. It's not his midlife that matters; it's hers. When he buys a shiny-red sports car, he's not trying to regain his youth; he's trying to attract young women to replace his menopausal wife by trumpeting his flash and cash.
It's natural for politicians to risk everything for an affair (but only if they're male) On the morning of January 21, 1998, as Americans woke up to the stunning allegation that President Bill Clinton had had an affair with a 24-year-old White House intern, Darwinian historian Laura L. Betzig thought, "I told you so." Betzig points out that while powerful men throughout Western history have married monogamously (only one legal wife at a time), they have always mated polygynously (they had lovers, concubines, and female slaves). With their wives, they produced legitimate heirs; with the others, they produced bastards. Genes make no distinction between the two categories of children.
As a result, powerful men of high status throughout human history attained very high reproductive success, leaving a large number of offspring (legitimate and otherwise), while countless poor men died mateless and childless. Moulay Ismail the Bloodthirsty, the last Sharifian emperor of Morocco, stands out quantitatively, having left more offspring—1,042—than anyone else on record, but he was by no means qualitatively different from other powerful men, like Bill Clinton.
The question many asked in 1998—"Why on earth would the most powerful man in the world jeopardize his job for an affair with a young woman?"—is, from a Darwinian perspective, a silly one. Betzig's answer would be: "Why not?" Men strive to attain political power, consciously or unconsciously, in order to have reproductive access to a larger number of women. Reproductive access to women is the goal, political office but one means. To ask why the President of the United States would have a sexual encounter with a young woman is like asking why someone who worked very hard to earn a large sum of money would then spend it.
What distinguishes Bill Clinton is not that he had extramarital affairs while in office—others have, more will; it would be a Darwinian puzzle if they did not—what distinguishes him is the fact that he got caught.
Men sexually harass women because they are not sexist An unfortunate consequence of the ever-growing number of women joining the labor force and working side by side with men is the increasing number of sexual harassment cases. Why must sexual harassment be a necessary consequence of the sexual integration of the workplace?
Psychologist Kingsley R. Browne identifies two types of sexual harassment cases: the quid pro quo ("You must sleep with me if you want to keep your job or be promoted") and the "hostile environment" (the workplace is deemed too sexualized for workers to feel safe and comfortable). While feminists and social scientists tend to explain sexual harassment in terms of "patriarchy" and other ideologies, Browne locates the ultimate cause of both types of sexual harassment in sex differences in mating strategies.
Studies demonstrate unequivocally that men are far more interested in short-term casual sex than women. In one now-classic study, 75 percent of undergraduate men approached by an attractive female stranger agreed to have sex with her; none of the women approached by an attractive male stranger did. Many men who would not date the stranger nonetheless agreed to have sex with her.
The quid pro quo types of harassment are manifestations of men's greater desire for short-term casual sex and their willingness to use any available means to achieve that goal. Feminists often claim that sexual harassment is "not about sex but about power;" Browne contends it is both—men using power to get sex. "To say that it is only about power makes no more sense than saying that bank robbery is only about guns, not about money."
Sexual harassment cases of the hostile-environment variety result from sex differences in what men and women perceive as "overly sexual" or "hostile" behavior. Many women legitimately complain that they have been subjected to abusive, intimidating, and degrading treatment by their male coworkers. Browne points out that long before women entered the labor force, men subjected each other to such abusive, intimidating, and degrading treatment.
Abuse, intimidation, and degradation are all part of men's repertoire of tactics employed in competitive situations. In other words, men are not treating women differently from men—the definition of discrimination, under which sexual harassment legally falls—but the opposite: Men harass women precisely because they are not discriminating between men and women.It's natural for politicians to risk everything for an affair (but only if they're male)

who captures values in the making of iPod?

2007-06-28T10:01:00.000+05:30

Here is Hal Varian's take on this.

Who makes the Apple iPod? ... It is not Apple. The company outsources the entire manufacture of the device to a number of Asian enterprises, among them Asustek, Inventec Appliances and Foxconn..... They only do final assembly.
Three researchers....— Greg Linden, Kenneth L. Kraemer and Jason Dedrick — applied some investigative cost accounting to this question...
To answer this question, let us look at the production process as a sequence of steps... At each step, inputs like computer chips and a bare circuit board are converted into outputs like an assembled circuit board. The difference between the cost of the inputs and the value of the outputs is the “value added” at that step, which can then be attributed to the country where that value was added.
The profit margin on generic parts like nuts and bolts is very low, since these items are produced in intensely competitive industries and can be manufactured anywhere. Hence, they add little to the final value of the iPod. More specialized parts, like the hard drives and controller chips, have much higher value added.
..authors’ estimates, the $73 Toshiba hard drive in the iPod contains about $54 in parts and labor. So the value that Toshiba added to the hard drive was $19 plus its own direct labor costs. This $19 is attributed to Japan since Toshiba is a Japanese company.
Continuing in this way, the researchers ... tried to calculate the value added at different stages of the production process and then assigned that value added to the country where the value was created. This isn’t ... easy ..., but ... it is quite clear that the largest share ... goes to ... the United States, particularly for units sold here.
...researchers estimated that $163 of the iPod’s $299 retail value ... was captured by American companies and workers, breaking it down to $75 for distribution and retail costs, $80 to Apple, and $8 to various domestic component makers. Japan contributed about $26 to the value added (mostly via the Toshiba disk drive), while Korea contributed less than $1.
The unaccounted-for parts and labor costs involved in making the iPod came to about $110. The authors hope to assign those labor costs to the appropriate countries, but ... that’s not so easy to do.
This ... illustrates the futility of summarizing such a complex manufacturing process by using conventional trade statistics. Even though Chinese workers contribute only about 1 percent of the value of the iPod, the export of a finished iPod to the United States directly contributes about $150 to our bilateral trade deficit with the Chinese.
Ultimately, there is no simple answer to who makes the iPod or where it is made. ... The real value of the iPod doesn’t lie in its parts or even in putting those parts together. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.
Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters.

3 famous psychology studies that would have been illegal today:

2007-06-28T09:25:00.000+05:30

Here is the link

history map of europe: circa 1000 AD

2007-06-27T09:47:00.001+05:30

Here is the link.

gender wage differential: politically (in)correct paper

2007-06-26T16:58:00.000+05:30

In a recent paper, M Daniele Paserman citing the evidence from the professional tennis, concludes that female tennis players play more conservatively and commit more unforced errors when playing critical points. Does this explain the upper-echelons wage gap?

...have seen a dramatic increase in female labour force participation rates, and a considerable narrowing of the gender gap in wages....the gender gap persists – much of it due to gender disparities at the very high end of the wage distribution where women have made only limited inroads – the famous ‘glass ceiling’ of the upper echelons of academia, management, and prestigious professions.
...under-representation is not easily explained....hypotheses, ranging from discrimination to differences in preferences, have been offered. One particularly intriguing hypothesis ...women may be less effective than men in highly competitive environments – even if they are able to perform similarly in non-competitive environments. ...study the role of gender in responses to competitive pressure, using data from the world’s most prestigious tennis tournaments. This column discusses the results and suggests some implications for future research.
Why tennis?

....well-suited for statistical analysis. The outcomes are well-defined - the last shot of a point can only be one of three things: a winner, a forced error, or an unforced error. The competitive environment is also relatively easy to judge objectively – using things such as the tournament round, the two players’ rankings, and the number of points played. Moreover, the sport’s non-linear scoring structure introduces significant variation in the importance of individual points. It is often a small number of individual points at critical junctures that determine a match’s result. A break point in the latter stages of an evenly fought early set can be more decisive than a point in the early stages of the final set. It is exactly this substantial variation in the importance of points across and within matches that allows identification of a link between performance and the degree of competitive pressure.
...Technically, it is the probability that the player wins the match conditional on him or her winning the current point minus the probability that he or she wins the match conditional on him or her losing the current point. For example, consider the 2006 Wimbledon men’s final, Federer versus Nadal. At the outset of the match, the estimated probability of Federer winning the match was about 65.1%. Winning the first point (on Federer’s serve) would have raised his probability of winning the match to 65.7%; losing the point would have lowered his probability of winning the match to 63.6%. In my measure, the importance of that first point was 2.1%. For the sixth point of the second game where Nadal (serving) faced break-point at 30-40, winning the point would have raised Federer’s probability of winning to 75.8%, losing it would have lowered the probability to 67.1%. Hence, the importance was 8.8%. ..this was the ninth most important point of the entire 2006 Wimbledon final, despite coming so early in the match.
With this measure in hand,...the influence of a point’s importance on the frequency with which players commit unforced errors and on their style of play. Using data for nearly 42,000 points in 238 matches played in four recent Grand Slam tournaments,...find important gender difference. While men’s performance does not vary much depending on the importance of the point, women’s performance deteriorates significantly as points become more important.
Multinomial logit regressions that control for the abilities of each player, the round of the tournament, the duration of the match prior to playing the point, the tournament location, and whether the match was played on the tournament’s main court show that gender matters in players’ response to competitive pressure. Women are significantly more likely to hit unforced errors at the most crucial stages of the match, while men exhibit no significant variation in performance. Specifically, about 30% of men’s points end in unforced errors, regardless of their placement in the distribution of the importance variable. For women, about 36% of points in the bottom quartile of the importance distribution end in unforced errors, but unforced errors rise to nearly 40% for points in the top quartile of the importance distribution. What is remarkable is not the difference in the levels (men are more powerful and therefore more likely to hit winners at any stage). The interest lies in the differences in the way men and women respond to increases in competitive pressure.
....contextualise the difference in the probability of making an unforced error due to greater pressure, the magnitude of the multinomial regression result is around one-fourth of the impact of changing from the fast grass courts of Wimbledon to the slow clay courts of the French Open. Given the importance that playing surface has in determining tennis outcomes, this is a fairly large effect. It is also robust to alternative measures of importance.
Is it physical?One potential explanation for the gender gap in propensity to err during crucial points is that men and women adopt different levels of aggressiveness as points become more important. For example, if players adopt a conservative playing strategy and just lob the ball from one side to the other without ever trying to hit a winner, the point will inevitably end with an unforced error. Indeed, there are substantial gender differences in the style of play as the stakes become higher.
Men hit faster first serves as importance of the point rises, while women hit significantly slower first and second serves as the stakes mount. Amongst females, serves for points in the top importance quartile are nearly three and a half miles per hour slower on average than serves in the lowest importance quartile. Adopting this less aggressive strategy increases the likelihood that the first serve will be in play, but it does not significantly improve the server’s chances of winning the point (in fact, it slightly lowers it). Moreover, women’s first serves in the fourth quartile of the importance distribution are both less powerful and less accurate than their first serves in the third quartile of importance. This result echoes previous work finding that performance anxiety elicits cautious, protective strategies that are associated with poor performance, i.e., decreases in speed without an associated improvement in accuracy.1

...the possibility that these asymmetric responses to high stakes might be due to differences in style of play resulting from physical differences between males and females, ...Though some of the results indicate that low-power players are less aggressive and make more unforced errors on important points irrespective of gender, the evidence does not contradict the basic finding that there are substantial differences in the way men and women approach important points in the match.This finding complements existing literature on performance under pressure by examining an atypical sample – extremely competitive athletes who are amongst the very best in the world in their profession. Perhaps surprisingly, even these highly competitive women exhibit a decline in performance in high-pressure situations. Moreover, this effect is present in women-only competitions, contradicting the narrower hypothesis that females perform worse under pressure only when facing male opponents.
Tennis to the labour market

Of course, it would be inappropriate to extrapolate from a single study of a very select group of individuals to the broader labour market. Professional tennis and its competitive pressures are substantially different from the activities and stresses in business and academia. First, different selection patterns may be operating between elite male and female professional tennis players. It may be that this selection pattern, rather than gender differences, accounts for my finding that top male players are better able to cope with high-pressure situations. Tennis may also involve motor skills – as opposed to cognitive skills – that may generate different responses to increases in competitive pressure. Finally, the nature of high-pressure situations in tennis – which necessitate accurate decision-making and execution in a matter of split seconds – are probably shared in only a limited number of professions.
Nevertheless, the finding of such a robust gender difference in performance under pressure, even in the extreme right tail of the talent distribution, is sufficiently interesting that it should stimulate further research into this possible explanation for the persistence of the gender gap.--------------------------------------------------------------------------------

Footnote1

Jennifer Butler, and Roy Baumeister. “The Trouble with Friendly Faces: Skilled Performance with a Supportive Audience.” Journal of Personality and Social Psychology, 1998.

I think the wage is more or less equal to the marginal revenue product, the basic microeconomic theory. In the past, fewer viewers watched womens' tennis, thus they got paid less. This is not true now, and the wage gap is shrinking or disappearing.
Also at the Grand Slam level, men get paid more because they work more (5 sets versus 3). So, in accordance with the paper in question, men provide both a better quality and larger quantity of tennis to the viewer.

the time-line of the "End of the World"

2007-06-21T10:02:00.000+05:30

india rising

2007-06-20T10:37:00.000+05:30

If the Indian economy has been growing at such a robust pace, why has government debt risen so much? World Bank economists Marina Wes, Brian Pinto and Gaobo Pang answer the question in latest World Bank Policy Research Paper 4241. Here is the astract of the paper:

Over the past 25 years, India's economy grew at an average real rate of close to 6 percent, withgrowth rates in recent years accelerating to 9 percent. Yet, by 2005/06, the general governmentdebt-to-GDP ratio was 34 percentage points higher than in the 1980s. We examine the linksbetween the public finances and growth in the post-1991 period. We argue that the main factor inthe deterioration of government debt dynamics after the mid-1990s was a reform-induced loss intrade, customs and financial repression taxes; over time, these very factors plus lower entrybarriers have contributed to stronger microfoundations for growth by increasing competition andhardening budget constraints for firms and financial sector institutions. We suggest that theimpressive growth acceleration of the past few years, which is now lowering governmentindebtedness, can be attributed to the lagged effects of these factors, which have taken time toattain a critical mass in view of India's gradual reforms. Similarly, the worsening of the publicfinances during the late 1990s can be attributed to the cumulative effects of the tax losses, thenegative growth effects of cuts in capital expenditure that were made to offset the tax losses and apullback in private investment (hence growth and taxes), a situation which is now turning around.Insufficient capital expenditures have contributed to the infrastructure gap, which is seen as aconstraint, especially for rapid growth in manufacturing. We discuss the ongoing reforms inrevenue mobilization and fiscal adjustment at the state level, which if successfully implemented,will result in a better alignment of public finances with growth by generating further fiscal spacefor infrastructure and other development spending.

YouNotSneaky: Commandments of (Political) Economics

2007-06-20T10:12:00.000+05:30

YouNotSneaky! suggests a 12 principles (some counting problem, I guess!!):

1. The answer to most questions in economics is usually “It depends”.
2. People respond to incentives, but incentives are determined in their own head and who knows what goes on in there.
3. But on average, masses of people respond in fairly predictable ways and these predictable ways, embodied in the so-called “Econ 101” thinking, are pretty useful guides. They are not absolutes however.
4. “On one hand … on the other hand” is about as good as you can do in a complicated world.
5. All economic models boil down to two (occasionally three) curves on a blackboard that cross. If it’s more than that or if you can't draw it that way, then your model stinks.
6. First Fundamental Theorem of Economics: Where the two curves cross, it’s important.
7. Game theory accidentally teaches us that outcomes are very sensitive to the structure of interaction. Small changes in the rules of the game can produce vastly different outcomes.
8. A logical, aesthetically compelling, story is important, even if the assumptions are crazy. Check it with math.
9. Anyone who makes exaggerated claims about their pet theories, ideas, or solutions, be they mainstream or heterodox, either doesn’t know what they’re talking about, hasn’t done their homework or is trying to sell you something. “Our results SUGGEST…” is a good indicator that a person has thought hard about their subject. At least as far as these things go. A thorough method combined with some humility should invite more attention than extraordinary claims of genius. Scientific progress takes place at the margin.
10. When an economic idea about how things work pops into your head, your very next question should be “why is that wrong?”. It’s useful to simulate competition among ideas in your brains so that only the truly good ones survive. Success, however, is not guaranteed.
13. “I don’t know” is often the best answer that can be given.

Doni Rodrik added few to have better count:

12. People everywhere are pretty much the same. It is the incentives and constraints they face that differ.
13. Everything that an economist says today has been said before, typically in more elegant fashion, by an economist of an older generation. That makes them neither true nor false. It just suggests that what is new in our profession is the technique, not the insight.
14. Beware when economists start to talk using metaphors ("shock therapy," "diagnostics," "big push" to use some recent ones from this blog). It is a good sign that they do not quite know what they are talking about.
15. When economists disagree about policy, it is most often because of implicit moral and political judgments, rather than economics per se.

random packing

2007-06-14T12:03:00.000+05:30

In a new research published in the PRL (subscription required), computer simulations reveal an underlying structure for the disordered state of a large number of spheres dumped into a box. Thanks to Don Monroe for the pointer.

lakes and islands and combinations thereof: interesting facts

2007-06-14T11:31:00.000+05:30

"Largest island"
"Largest lake"
"Largest lake on an island"
"Largest island in a lake"
"Largest island in a lake on an island"
"Largest lake on an island in a lake"
"Largest lake on an island in a lake on an island"
"Largest island in a lake on an island in a lake"
"Largest island in a lake on an island in a lake on an island"

Largest Island
Greenland (DEN)

(map source: www.expediamaps.com)

Largest lake
Caspian Sea (RUS/KAZ/AZE/TKM/IRN)

(map source: www.expediamaps.com)

Largest lake on an island

Nettilling Lake on Baffin Island (CAN)
(map source: www.expediamaps.com)

Largest island in a lake
Manitoulin Island in Lake Huron (CAN)
(map source: www.expediamaps.com)

Largest island in a lake on an island
Pulau Samosir in Danau Toba on Sumatera (INA)

(map source: www.expediamaps.com)

Largest lake on an island in a lake
Lake Manitou on Manitoulin Island in Lake Huron (CAN)

(map source: www.cycnorth.com)

Largest lake on an island in a lake on an island
Crater Lake on Vulcano Island in Lake Taal on Luzon (PHI)

(photo source: www.jpl.nasa)

Largest island in a lake on an island in a lake
Island in Mindemoya Lake on Manitoulin Island in Lake Huron (CAN)
(see map above)
Largest island in a lake on an island in a lake on an island
Vulcan point in Crater Lake on Vulcano Island in Lake Taal on Luzon (PHI)

(photo source: www.adventure.simplenet.com)

US States Renamed For Countries With Similar GDPs

2007-06-13T11:25:00.000+05:30

Thanks to Carl for the pointer. More link here. The notable absence is India,

economists' agreement?????

2007-05-10T10:09:00.000+05:30

Economists develop general statements on relationships between certain events, magnitudes, and changes of magnitudes, and on the basis of these general statements they offer explanations, predictions and prescriptions. As long as the discourse is quite abstract, confined to purely deductive inferences from the definitions, postulates, and their implications no one else care much about whether economists agree or disagree with one another. When they begin, however, to apply their theoretical system to concrete situations and arrive at conspicuously different explanations, glaringly different predictions, the audience cannot help wondering whether economist really know enough to be taken seriously.

Mark Thoma of the economist view has posted a very good discussion of Bryan Caplan' take on economists agreement.

primer on Amartya Sen

2007-04-24T10:42:00.000+05:30

Tyler Cown of Marginal Revolution has answered some important and relevant questions in the language of Amartya Sen.

the new multinationals are remaking the old?

2007-04-09T12:13:00.001+05:30

The recent issue of the Economist discusses the Globalisation's offspring.

....Indian and Chinese firms are now starting to give their rich-world rivals a run for their money. So far this year, Indian firms, led by Hindalco and Tata Steel, have bought some 34 foreign companies for a combined $10.7 billion. Indian IT-services companies such as Infosys, Tata Consultancy Services and Wipro are putting the fear of God into the old guard, including Accenture and even mighty IBM. Big Blue sold its personal-computer business to a Chinese multinational, Lenovo, which is now starting to get its act together. PetroChina has become a force in Africa, including, controversially, Sudan. Brazilian and Russian multinationals are also starting to make their mark. The Russians have outdone the Indians this year, splashing $11.4 billion abroad, and are now in the running to buy Alitalia, Italy's state airline.
These are very early days, of course. India's Ranbaxy is still minute compared with a branded-drugs maker like Pfizer; China's Haier, a maker of white goods, is a minnow next to Whirlpool's whale. But the new multinationals are bent on the course taken by their counterparts in Japan in the 1980s and South Korea in the 1990s. Just as Toyota and Samsung eventually obliged western multinationals to rethink how to make cars and consumer electronics, so today's young thrusters threaten the veterans wherever they are complacent.
...newcomers have some big advantages over the old firms. They are unencumbered by the accumulated legacies of their rivals. Infosys rightly sees itself as more agile than IBM, because when it makes a decision it does not have to weigh the opinions of thousands of highly paid careerists in Armonk, New York. That, in turn, can make a difference in the scramble for talent. Western multinationals often find that the best local people leave for a local rival as soon as they have been trained, because the prospects of rising to the top can seem better at the local firm.

First, count your blessings

But the newcomers' advantages are not overwhelming. Take the difference in company ethics, for instance, which worries plenty of rich-world managers. They fear that they will engage in a race to the bottom with rivals unencumbered by the fine feelings of shareholders and domestic customers, and so are bound to lose. Yet the evidence is that companies harmonise up, not down. In developing countries (never mind what the NGOs say) multinationals tend to spread better working practices and environmental conditions; but when emerging-country multinationals operate in rich countries they tend to adopt local mores. So as those companies globalise, the differences are likely to narrow.
Nor is cost as big an advantage to emerging-country multinationals as it might seem. They compete against the old guard on value for money, which depends on both price and quality. A firm like Tata Steel, from low-cost India, would never have bought expensive, Anglo-Dutch Corus were it not for its expertise in making fancy steel.
This points to an enduring source of advantage for the wealthy companies under attack. A world that is not governed by cost alone suits them, because they already possess a formidable array of skills, such as managing relations with customers, polishing brands, building up know-how and fostering innovation.

The world is bumpy

The question is how to make these count. Sam Palmisano, IBM's boss, foresees nothing less than the redesign of the multinational company. In his scheme, multinationals began when 19th-century firms set up sales offices abroad for goods shipped from factories at home. Firms later created smaller “Mini Me” versions of the parent company across the world. Now Mr Palmisano wants to piece together worldwide operations, putting different activities wherever they are done best, paying no heed to arbitrary geographical boundaries. That is why, for example, IBM now has over 50,000 employees in India and ambitious plans for further expansion there. Even as India has become the company's second-biggest operation outside America, it has moved the head of procurement from New York to Shenzen in China.
As Mr Palmisano readily concedes, this will be the work of at least a generation. Furthermore, rich-country multinationals may struggle to shed nationalistic cultures. IBM is even now trying to wash the starch out of its white-shirted management style. But today, General Electric alone seems able to train enough of its recruits to think as GE people first and Indians, Chinese or Americans second. Lenovo's decision to appoint an American, William Amelio, as its Singapore-based chief executive, under a Chinese chairman, is a hint that some newcomers already understand the way things are going.
IBM's approach is possible only because globalisation is flourishing. Many of the barriers that stopped cross-border commerce have fallen....Increasingly, success for a multinational will depend on correctly spotting which places best suit which of the firm's activities. Make the wrong bets and the world's bumps will work against you. And now that judgment, rather than tariff barriers, determines location, picking the right place to invest becomes both harder and more important.
....And consumers, wherever they are, will gain from the contest.

marginal utility measured?

2007-04-09T12:13:00.000+05:30

We can measure the marginal utility of wealth by observing people's responses to risk. Incidentally, since utility is only an ordering of preferences, it doesn't really make sense to talk about the 'marginal utility' of money; more money is simply always preferred to less. So we can only talk about the marginal utility of money in the context of a trade-off involving money and risk; the shape of the U(w) function measures the risk-reward trade-offs that people find worthwhile.

Poor people seem to do much better to maximise their profits than their wealthier counterparts at finding optimal strategies when small sum of money is on the line, revealed in the recent issue of Scientific American.

... law of diminishing marginal utility states that while accumulating a good—pretzels, pencils, nickels, whatever—each successive unit of that good will be less satisfying to acquire than the one before it. ...[R]esearchers at the University of Cambridge in England ... designed a study to see if the haves catch on more slowly than the have-nots when it comes to reward-based learning.... that when a small sum of money is on the line, poorer people learn quickly how to maximize their profits, leaving their wealthier counterparts in the dust.
In a Pavlovian paradigm, a number of abstract shapes flashed in front of 14 participants. After each shape appeared for three seconds, a picture of either a 20-pence coin (roughly 40 cents) or a scrambled image followed. A card of one particular shape was always followed by the coin, and subjects were told that they could take a 20-pence piece home if they could accurately predict when the money card was the next one up.
The participants had in personal assets an average of about $1,700 in their bank accounts, which ranged from zero to nearly $6,000. The group's average income was just over $20,000, spanning from no income for students to the equivalent of about $60,000 for the most well-off of the bunch.
By measuring response time, the researchers got a sense of how quickly people learned which one of the abstract pictures indicated money would follow. They noticed an inverse correlation between how much money a person had (assets and income) and the swiftness with which they were conditioned. The poorer people tended to figure out which card signaled money ahead within about 12 trials, says neurobiologist Philippe Tobler, the study's lead author, whereas the richer people took about 35 trials.
The team next repeated the experiment while the subject's brains were scanned by an fMRI (functional magnetic resonance imaging) machine. Researchers focused their scans on the midbrain (which contains neurons or nerve cells that produce dopamine, a neurotransmitter central to reward-based learning), and the striatum, another reward-based center located under the cerebral cortex. ...
Once again, an inverse association between wealth and learning appeared, with poor people displaying more increased activity in the midbrain and striatum when compared with the more affluent subjects.
Tobler says the study, which is one of the first to try to measure marginal utility in a laboratory setting, challenges the notion held by many economists that utility comparisons cannot be made between people, because they likely value objects differently. He says, however, "It is possible that these kinds of comparisons are more easily done with money, because money is on an absolute scale." A $20 bill is worth the same no matter who had it, but one person might value it more.

I found some more here.

productivity gains to Indian economy, thanks to Sri Lanka!

2007-03-26T10:11:00.000+05:30

The exit of Indian team from the World Cup has drawn huge criticisms from the millions of fans across the country and across the globe, however, there is brighter side of it also. Mukul Kesvan has presented an insightful story.

The Economic Times too has carried the following important piece regarding the India's exit from the recent World Cup.

...a brighter side to India’s exit from the World Cup....that can cheer up disappointed fans and angry advertisers. Sri Lanka has done a great favour to Indian economy by ousting the cricket team from the World Cup. There are about 80 million cable and satellite viewing homes in India. According to TAM ratings, the average viewership of all World Cup matches held till now stands at about 3%, with India vs Bangladesh touching a high of 7.25%. To reach the finals, India would have played at least seven more matches.

Considering a TV Rating of 7.25%, at least 5.8 million people would have watched the match. This would have resulted in a productivity loss of 371.2 million man hours (5.8 million x 8 hours x 8 matches), apart from stress faced by mothers during exams. About 3% of 81 million TV viewers (2.4 million) were ardent cricket fans and would have sat through all eight hours in the remaining 28 matches. Thus overall, Indian team’s ouster would result in a productivity gain of 481 million man hours of work (28x2.4x8 man hours), if put to use. The Sri Lankans have given a boost to the Indian economy by saving 54,902 man years of work (one year = 8,761 hours). Indians can build seven phases of the Golden Quadrilateral connecting Delhi, Mumbai, Kolkata and Chennai spread over 5,846 kilometres all over again, with this time saved. A daily wage skilled labourer in Delhi earns Rs 17 per hour. If put to productive use, the 481 million man hours can produce Rs 817 crore of GDP, which is 63% more than BCCI’s annual revenues of Rs 500 crore, last year. It’s 401% more than the Rs 163 crore losses, corporate India has predicted to incur due India’s ouster. The state electricity boards are also thanking Sri Lanka for the great favour. A TV consumes 45 watts per hour. Assuming a viewer will now switch off his TV by 12 midnight, it will save Rs 135 watts at least per viewer (not considering the electricity consumed by other appliances running simultaneously.) This will save the electricity boards 324 million watts of electricity ( 3.24 lakh kilowatts) in just 28 days. According to estimates, SEB losses in India will touch Rs 1 lakh crore by 2008. If disappointed viewers completely switch off their TVs for eight hours, it will save the government at least 8,64,000 kilowatts, along with many more lives — at least three Indian citizens have been reported to die due to cardiac arrest or suicide after India’s defeat at the hands of Sri Lanka.

How others observe

2007-03-22T11:52:00.001+05:30

The Economist reports that India is ahead of USA in terms of global influence, where Canada tops the list and Israel at the bottom. However, I think the appropriate list should start from the other way, because it is the negative influence which is acknowledged and affects on a large scale.

colours of India

2007-03-22T11:52:00.000+05:30

Calender arts from Incredible India

grandfather of free-market theory, Milton Friedman left at 94

2006-11-17T10:11:00.000+05:30

The greatest proponent of the liberty and free market of the 20th century, Milton Friedman, passes away at 94 on 16 November 2006. The empirical genius led the postwar challenge to Keynesian theory who maintained that governments had a duty to help capitalistic economies through periods of recession and to prevent boom times from exploding into high inflation.

Please see marginal revolution blog for more post on this.

gains and losses from gloabalisation

2006-09-02T21:28:00.000+05:30

The pace of interaction of human societies has dramatically increased in recent years, which were largely facilitated by jet airplanes, cheap telephone service, internet, huge oceangoing vessels, instant capital flows, all these have made the world more interdependent than ever. Multinational corporations manufacture products in many countries and sell to consumers around the world. Money, technology and raw materials move ever more swiftly across national borders. Along with products and finances, ideas and cultures circulate more freely. As a result, laws, economies, and social movements are forming at the international level. Many politicians, academics, and journalists treat these trends as both inevitable and (on the whole) welcome. But for billions of the world’s people, business-driven globalization means uprooting old ways of life and threatening livelihoods and cultures. Intense political disputes, academic deliberations and discussions will continue over globalization’s meaning and its future direction. The recent issue of the Economist summarises the symposium on the rise of Chindia (to borrow from Jairam Ramesh’ book) in the global horizon once again after more than thousand years.

an awakening in Bihar

2006-08-14T10:17:00.000+05:30

In a recent issue the Business Week have compiled the techniques and tales of great competitors—people, organizations, and even communities—and learned how they got ahead. It has carried one of interesting and fascinating stories on how one rural (it's not in Rural Bihar but in Urban Patna, the capital city of Bihar) school in Bihar helps prepare poor youths for the Indian Institutes of Technology (IIT).

economist focus on India's shining prospects

2006-08-11T09:37:00.000+05:30

In a recent edition of the Economist, the economics focus on the "two BIG" clouds hanging overIndia's shining prospects. I recently debated on Indian Model on this blog. Here is the complete story:

….. big picture, and India's future seems assuredly bright…banished famine and cut absolute poverty by more than half. Economic growth is among the fastest of any country. Its newly confident businesses are spreading their wings. Having long been “hyphenated” with Pakistan as a dangerous trouble-spot, the country is now seen as half of an “India-China” pairing (Bhai-Bhai) that is transforming the global economy. If this were a race, India, as the younger country, and a vibrant but stable democracy, would seem to many the better long-term bet.
….at the detail, however, …despair at the depth and complexity of the problems India faces. For all its achievements, poverty remains entrenched. Some 260m people survive on less than one dollar a day. Nearly half of the country's children below the age of six are undernourished. More than half of its women are illiterate. Half its homes have no electricity, and in one state, Chhattisgarh, 82% are not even connected by road. Nor is there a huge pot of money to throw at these shortages. The government's average budget deficit, from 2000 to 2004, was exceeded only by that of Turkey. Even when it does spend money, the pipeline between government coffers and the intended beneficiaries is corroded by corruption, and cash seeps out.
…World Bank notes …. this contradiction puzzles fresh observers in three ways. First, they find the rampant economic optimism hard to swallow: it seems to exaggerate changes in the fundamental shape of the Indian economy. Second, even though the economy is booming, the performance of the public sector seems to go from bad to worse. Third, India “is the best of the world, it is the worst of the world—and the gaps are growing.” India's top technology colleges set global standards. Yet “many, if not most, children finish government primary schools incapable of simple arithmetic.”
…. identifies the two most pressing needs for action by India's government: to make the public sector better at delivering basic services; and to sustain growth at high levels and extend its fruits to more people. From this simple but persuasive analysis come the two biggest dangers to India's future. Failure to reform public-sector services will render even high growth and farsighted policy ineffective in ending poverty; and, unless checked, growing inequality between regions, and between town and country, will heighten social tensions.
The shortcomings of the public sector are evident in almost all its functions. India, for example, has a government committed to providing all its people with health care. But there are only five countries in the world where a lower proportion of spending on health comes from the government—just 21% (compared with, for example, 45% in America). So even the poor are paying for private health care. A survey has also found that health care absorbs a bigger share (27%) of low-level “retail” bribery than any other government function. (This may shock some policemen.) Another found that between 1999 and 2003 the percentage of children fully immunised against childhood diseases had fallen from 52% to 45%.
Similarly, in many of India's towns, more than half the children are in private schools. A nationwide survey, based on unannounced visits to government schools, found that less than half the teachers on the payroll were there and teaching. Whereas, in many poor countries, city residents enjoy a 24-hour water supply, in many Indian cities the taps are dry for all but a few hours a day. The rich pay for pumps, bore-wells and storage tanks. The poor queue for hours at standpipes and water lorries.
The public sector tends to be worst at delivering services in India's poorest states. These are, in relative terms, becoming poorer, not because their growth is declining, but because they have failed to match the acceleration achieved since 1991 by India's richer regions and cities. Parts of the country are, in terms of living standards, on a par with Mexico. Parts are as poor as sub-Saharan Africa.

The gaps are showing
Although India has, compared with other countries, a relatively equal distribution of income, it is a deeply unequal society, partly because of its legacy of social stratification and exclusion. The caste system is proving resilient, and there is evidence that, in some respects, the prejudice against girl children is worsening. In rich areas, sex-selective abortion is leading to highly skewed sex ratios at birth. Nor is the bias any less among the poor. A girl born in the early 1990s was 40% more likely than a boy to die between her first and fifth birthdays.
… The beauty of reducing the country's myriad problems to two big, related, ones, is that of all simplification: it makes the solutions seem simpler, too, even if this economic diagnosis of India's ills suggests cures that are mainly political.
… It is not the policies that are failing so much as the machinery for implementing them. In electoral politics, good policy is often forgotten for vote-grabbing promises of jobs, contracts and subsidies. …India is big enough to have plenty of stories of successful reform that can be imitated: most involve making providers of taxpayer-financed services more accountable for their delivery. Spreading those lessons should not be beyond the world's biggest democracy.

economists' (valuable) time in blogging???

2006-08-04T11:18:00.000+05:30

One piece written in the recent August3, 2006 edition of The Economist, ask a (ir)relevant question, why do economists spend valuable time blogging? However, I found them very interesting, relevant, and good for the subject per se. thus I am not sure the answers below are insightful:

â€¦there is here a problem of the division of knowledge, which is quite analogous to, and at least as important as, the problem of the division of labour,â€� Friedrich Hayek told the London Economic Club in 1936. What Mr Hayek could not have known about knowledge was that 70 years later weblogs, or blogs, would be pooling it into a vast, virtual conversation. That economists are typing as prolifically as anyone speaks both to the value of the medium and to the worth they put on their time.

â€¦economists from circles of academia and public policy spend hours each day writing for nothing. The concept seems at odds with the notion of economists as intellectual instruments trained in the maximisation of utility or profit. Yet the demand is there: some of their blogs get thousands of visitors daily, often from people at influential institutions like the IMF and the Federal Reserveâ€¦most active â€œeconobloggersâ€� are Brad DeLong, Gregory Mankiw, Gary Becker and Richard Posner, a long list on Mark Thomaâ€™s blog.

So why do it? â€œIt's a place in the intellectual influence game,â€� Mr DeLongâ€¦ For prominent economists, that place can come with a price. Time spent on the internet could otherwise be spent on traditional publishing or collecting consulting fees. Mr DeLong caps his blogging at 90 minutes a day. His only blog revenue comes from selling advertising links to help cover the cost of his servers, which handle more than 20,000 visitors daily.

â€¦The faster flow of information and the waning importance of locationâ€”which blogs exemplifyâ€”have made it easier for economists from any university to have access to the best brains in their field. That anyone with an internet connection can sit in on a virtual lecture from Mr DeLong means that his ideas move freely beyond the boundaries of Berkeley, creating a welfare gain for professors and the public.

Universities can also benefit in this part of the equation. Although communications technology may have made a dent in the productivity edge of elite schools, productivity is hardly the only measure of success for a university. Prominent professors with popular blogs are good publicity, and distance in academia is not dead: the best students will still seek proximity to the best minds. When a top university hires academics, it enhances the reputations of the professors, too.

That is likely to make their blogs more popular...Self-interest lives on, as well. Not all economics bloggers toil entirely for nothing. Mr Mankiw frequently plugs his textbook. â€¦In this model, the value of influence is priceless.

errors in economics and the aftermath

2006-08-02T10:30:00.000+05:30

William Baumol of New York University has written a very intersting stuff relating to the dismal science (read economics) and thinks economics "is particularly vulnerable to mistaken ideas contributed from the outside."

ECONOMIC ERRORS THAT DAMAGE THE INDIVIDUAL

Sometimes it is the individual committing an economic error who alone bears the cost. An example is the investor who seeks out and follows financial analysts' advice on the purchase and sale of stocks, despite overwhelming statistical evidence demonstrating that, even if such advice were offered without cost, it would generally be valueless or worse. Professional recommendations on stock market purchases and sales have repeatedly been shown to be totally unreliable. Indeed, they must be so because, as the data demonstrate, the behavior of securities prices approximates what statisticians call a "random walk." Random behavior is, by definition, inherently unpredictable even by the best-informed and most intelligent analyst. But stock market analysts' advice is even worse than this for the investor, on two scores. First, it is not costless. The investor is forced to pay for bad information and is thereby put in the position of a bettor in a gambling casino, where the outcomes are not just random but are systematically biased to bring a predictable rake-off to the gambling house. Second, whether or not as a deliberate dereliction of duty, frequent sales and purchases of securities that benefit the stock market analysts' own firms are characteristic of their recommendations. These transactions multiply the investor's total payments to these firms and, incidentally, materially increase the investor's tax bill.

DAMAGE TO THE SOCIETY: THE CASE OF MISTAKEN COUNTERCYCLICAL POLICY

â€¦notable example was the belief that an essential step in extracting an economy from recession or depression is elimination of deficit spending by the government. While there is no longer agreement by economists that expansion of such spending is invariably a sensible step, it is recognized that the simpleminded argument that leads many non-specialists to conclude that such deficit spending threatens to bankrupt the nation is an exercise in the "fallacy of composition." This fallacy is the presumption that a relationship that is valid for each individual must automatically be valid for the entire group of these persons. One elementary example entails voluntary exchange between two informed and rational individuals and the conclusion that such an exchange must offer some benefit to each of them, or at least no loss to either (otherwise, the prospective trade participant who stood to lose from the transaction would simply refuse to trade). The fallacy of composition enters when this insight about trade between individuals is applied to trade between two countries, where it is neither self-evident nor generally true that exchanges must invariably benefit both countries.
Turning to the issue of deficit spending, the standard view stems from the observation that an individual who is in financial difficulty because of persistent spending beyond his means must somehow succeed in curtailing his overspending now and in the future if he is to avoid exacerbation of his financial troubles. The inference from this observation drawn by analogy for a depression-beleaguered government--whose tax revenues have fallen as a consequence of reduced incomes and whose expenditure has been driven upward by rising obligations--was that, just as in the individual case, fiscal retrenchment was essential. Governments in that position characteristically find themselves plagued by rising debt and the evident, if questionable, conclusion was that material retrenchment was urgent and unavoidable if financial catastrophe for the country was to be avoided.
But, one of the central propositions to emerge in the course of the Keynesian revolution was that this prescription for retrenchment was the precise opposite of what such a situation requires. Rather, an effective governmental weapon--indeed, a critical component of the counter-depression policy that Abba Lerner dubbed "functional finance"--is enhancement of deficit spending, entailing rising public debt, with the shortfall to be made up during the other end of the business fluctuation, when inflation replaces unemployment as the primary threat to the economy.
The way in which the fallacy of composition enters the matter is quite straightforward. Increased spending by an individual (without any offsetting rise in earnings) spells financial peril. For the community of individuals, taken as a group, the situation is, at least in the simplest Keynesian view, usually the reverse of this. The more the government increases spending without a corresponding rise in tax revenues, the better off the community will be economically. This act of magic occurs because the very deficit spending must put purchasing power into the hands of the public, which in turn will serve to raise demand for goods and services. And in a depressed economy, anything that serves to offset lagging demand must be helpful, because it will expand sales, elicit enhanced production, and provide additional jobs. So deficit spending by government is a stimulus of economic activity and a source of added income for the society as a whole. This stimulus effect also helps to cut the government's budget shortfall by automatically adding to total tax revenues as private incomes rise, and by cutting needed government expenditures, such as outlays for support of the unemployed. As Keynes himself pointed out, the apt parable is that of the legendary widow's cruse, which kept refilling itself as its contents were extracted. For, if the argument is valid, it indicates that the more the government overspends, the more net income it can hope to have available in the near future.
This argument, though not universally accepted by economists today, was certainly rejected by many, including President Franklin D. Roosevelt, in the 1930s. It is at least arguable that the resulting efforts to curb government overspending protracted the Great Depression, creating a second economic decline toward the end of the decade, with termination of the Depression left to the onset of the Second World War, which once again imposed substantial deficit spending on the government. If it is true that insufficient government spending exacerbated the effects of the Depression, then it is surely difficult to dispute the conclusion that here was an economic error that caused great and widespread harm, increasing unemployment, reducing incomes, and keeping output and accumulated wealth of the society down well below what it might otherwise have been.
There is an associated popular misunderstanding, which strengthened the determination of the opponents of deficit spending. This is the conclusion that government deficit must constitute a "burden upon our grandchildren." There are, it must be admitted, circumstances in which this could be true, and one must not go so far as to deny the possibility of any detrimental consequences of government debt for future members of the community. But the common and assuredly naive variant of the idea is yet another example of the fallacy of composition. That assets lost by injudicious expenditure during an individual's lifetime can impoverish her heirs is evident. But for a nation, matters are far different. Thus suppose, for example, that a government greatly increases its current expenditure on military equipment, financing it by borrowing, through the issue and sale of additional government bonds. The labor, steel, power, and other inputs that are used to manufacture the armaments immediately become unavailable for civilian use. This is a burden that fails upon the public at once and need not in any way affect future generations whose supply of factors of production need not thereby be diminished. The labor that today is shifted from production of autos to the manufacture of tanks does not reduce the availability of labor to consumers 20 years hence. Reduced resource availability that results from government deficit spending, then, is primarily a burden upon the current generation, not those of the future.
It is not even true that government debt incurred today need entail a financial problem tomorrow, when the debt is to be repaid. But from what source is the repayment to be made? Suppose, for concreteness, that the government bonds that financed the debt are scheduled for redemption 20 years after the deficit spending occurred, and that at that date the government raises taxes by an amount just sufficient to cover the X-dollar debt. Then that is surely a burden for those who must pay the X dollars in taxes, but it is accompanied by a rise of exactly X dollars in the cash that becomes available to the bondholders. If the bonds are not held by foreigners, what will happen at the date of repayment is that the money that financed the purchases will simply have been transferred from one group of citizens to another. Indeed, even that need not take place to any marked extent. If, for example, the government bonds are held by individuals roughly in accord with their incomes, the wealthier the individual, the greater his holdings, then if the tax is also proportioned to income, the repayment process need not incur any significant transfer of purchasing power. The money will be taken from the wealthy, and promptly returned to the same individuals. In the words of Adam Smith, what will have been entailed is simply a transfer of money from the right pocket of the taxpayer to the left.
In short, viewed in terms of its substance, the burden of government expenditure is a burden upon the present, not upon the future. Yet this was apparently not understood by earlier generations of economists and certainly not by the general public. And the error was not just a matter of academic interest. Rather, by preventing the actions that promised a speedy recovery from recession or depression, it had marked and unfortunate consequences for the general welfare.

PUTTING PRODUCTIVITY GROWTH DIFFERENCES TO WORK FOR SOCIETY

â€¦ to the key misunderstanding, in terms of policy, engendered by the failure to understand the nature of the cost disease: the idea that the cost disease will force society (or the government that provides the finances) to retrench and eventually cut back on vital health care and education because of the mistaken belief that their rising cost must make them increasingly unaffordable to society. This belief, it turns out surprisingly, is virtually the reverse of the truth.
In actuality, the very forces that create the cost disease make these services ever more affordable to society. This is so because the source of the problem is that, although productivity is growing in almost every industry, in some industries (particularly personal services) it is growing more slowly than in others. But if output per worker and output per work hour are rising in virtually all industries, then a given quantity of any bundle of outputs requires an ever smaller share of the labor force for its production. What society must do is use part of the cost savings from the industries (like manufacturing or telecommunications) in which productivity is growing at a rapid rate to pay for the personal services (like health care and education) in which productivity is growing at a relatively slower rate. It is simply not true that society cannot afford those costs. On the contrary, rising productivity means that society can afford to consume more of each and every product. It is this observation that led the late Senator Daniel Patrick Moynihan to describe the cost disease analysis as a profoundly optimistic diagnosis.
The danger is that governments, the primary source of financing of these services in most countries, will decide that the cost burden is beyond their capacity to finance, and will decide that cutbacks are their only option. This is already happening in many of the industrialized countries, where an increasing set of medical procedures are denied to patients and cutbacks in financing of universities and their teaching and research activities are all too common. This is unfortunate because, as is shown by the cost disease analysis, their unaffordability is a fiscal illusion, and retrenchment of these arguably vital activities is an unnecessary if understandable response to this illusion. Here, surely, is a case in which misunderstanding can result in totally avoidable damage to the social interest.

CAN PRICE INCREASES EVER SERVE THE PUBLIC INTEREST?

The possibility that, in a wide variety of circumstances, a rise in price may be a substantial benefit to the public is something that people untrained in economics always find extremely difficult to accept. ..If a price, such as the price of crossing a crowded bridge or the price of environmentally damaging gasoline, is set very low, then consumers will be provided an incentive to exacerbate the problems. These market signals will induce them to add to the crowding or to the environmental damage even furtherâ€¦.. One telling illustration is the way that landing privileges at crowded airports are often priced. Airports become particularly congested at peak hours, just before 9 a.m. and just after 5 p.m. This is when passengers most often suffer long delays. But many airports continue to charge bargain landing fees throughout the day, even at those crowded hours. That makes it attractive for small corporate jets or other planes carrying only a few passengers to arrive and take off at those hours, worsening the delays. Higher fees for peak-hour landings can discourage such overuse, but they are politically unpopular, and many airports are run by local governments. So we continue to experience late arrivals as a normal feature of air travel.
We know that inappropriately low prices caused nationwide chaos in gasoline distribution after the sudden drop in Iranian oil exports in 1979. In times of war, constraints on prices have even contributed to the surrender of cities under military siege, deterring those who would otherwise have risked smuggling food supplies through enemy lines. Low prices have also discouraged housing construction in cities where rent controls made building a losing proposition. Of course, in some cases it is appropriate to resist price increases--as when unrestrained monopoly would otherwise succeed in gouging the public, and when rising prices fall so heavily on poor people that rationing becomes the more acceptable option. But before tampering with the market mechanism, we must carefully evaluate the potentially serious and even tragic consequences that artificial restrictions on prices can produce, particularly when scarcity threatens or is already damaging the public welfare.
It is not easy to accept the notion that higher prices can serve the public interest better than lower ones. Politicians who voice this view imperil their jobs. Because advocacy of higher prices courts political disaster, the political system often rejects the market solution that automatically raises prices when resources suddenly become scarce. And that only enhances the shortages.

MUST OUTSOURCING TO OTHER NATIONS ALWAYS BENEFIT BOTH AFFECTED COUNTRIES?

â€¦. economists are usually strongly predisposed to favor free trade, globalization, and market-driven apportionment of industries among nations. But this orientation has led many of them to conclude that when a portion of an economic activity or even an entire industry moves from a high-wage to a low-wage country as a result of an increase of productivity in the latter, both the gainer and the loser of the industry can be expected to benefit. In particular, while some individuals in the country from which the activity has emigrated will evidently be harmed, on this view the country as a whole will normally benefit from the reduced costs of the products whose production has moved abroad, and benefit sufficiently to compensate for the damages and more.
Those who believe that macroeconomic policy can effectively limit involuntary unemployment have reason to conclude that loss in the total number of jobs is not an inevitable consequence of globalization, though it does undoubtedly threaten the working positions of at least a few directly affected individuals, for whom the consequences must not be taken lightly. But though we may reject the popular view that globalization is a major threat to employment and an instrument of extensive job loss, we cannot deny that there is reason to be concerned with at least the short-term effects on wages in both developing and developed lands. International competition can influence relative input prices and thereby determine whether machinery will be substituted for labor, for example, or whether skilled labor will be substituted for unskilled. There are, also, more direct implications for wages. Surely, the increased use of computer programmers in India can be expected to reduce the demand for such skills in the United States below what it might otherwise have been.
For the developing countries, economic history suggests that an industrial revolution initially tends to depress real wages and real living standards, thus supporting the concerns of those who fear the consequences of globalization for the world's less prosperous nations. Though the British industrial revolution is usually considered to have taken off about 1760, it was probably not until approximately 1840 that wages began to rise. Data on life expectancy and average height also indicate that the spread of innovation was accompanied by worsening of the economic status of wage earners, perhaps in part as a result of the move from the countryside to crowded, unsanitary slums; the evidence indicates that the US labor force underwent a parallel trajectory. One may surmise that part of the explanation was a rise in the power of employers and an inability of the workers, in the absence of labor organizations, to resist.
The opponents of globalization draw attention to a similar phenomenon in twenty-first-century globalization, with multinational employers subjecting their employees to disturbingly low wages and shocking working conditions, particularly on the criteria widely accepted in the affluent economies (though by no means always adhered to even there). Thus, even if globalization is a very promising influence for the more distant future prospects of the developing countries, there is good reason to fear that in the short run the workers in those lands may gain little and may even lose out in the initial stages of globalization.
It can be argued that all this is transitory and that in the long run the lower-income groups in the developing countries will be better off, as has indeed been true in the developed economies. But the process can easily take decades. We cannot just ignore decades of very substandard earnings that amount to preservation of grinding poverty in a developing country or the permanent structural unemployment in a developed economy that can beset older workers whose skills are made redundant by innovation, and for whom the acquisition of new skills is not a practical option. These are hardships that constitute an extremely painful economic pathology for the affected individuals. At the very least, one can argue that those who stand to benefit from the process should be expected to agree to provide systematic and substantial assistance to the victims, presumably through government channels, and supported liberally by the wealthier communities. If that is not acceptable politically, there is surely little that can be said convincingly in support of a contention that the suffering of the victims will be justified by the promised future benefits to their descendants.

ANYONE CAN ERR

If the arguments of this paper are not themselves in error, what I have shown is that the economics profession can, indeed, sometimes show the layperson the error of his or her more common-sense thoughts. But not always. Sometimes the errors and the route toward correction go the other way. This observation is not meant in any way to denigrate the work of my colleagues. After all, it is only through careful analysis that one can discover where it is the specialist who has been wrong and where the often exceedingly fallible common sense of those with no formal training in the field has turned out to be closer to the underlying reality. We have also seen that misunderstanding in the field of economics can have consequences beyond pushing researchers and teachers in misguided directions. Perhaps as much as any discipline, erroneous economic analysis and conclusions can elicit policies severely damaging to the public interest. And, in this, I believe that we economists do have something to answer for. We are all too prone to put more faith in the implications derived from our quite appropriately simplified models, and to draw from those implications policies that really only apply universally in the artificial world of the constructed modelâ€¦

Indian Model

2006-06-27T12:12:00.000+05:30

Recently, two very interesting and confusing articles on Indian economy has been published, one by the expert on Indian economy Gurcharan Das, former CEO of Procter and Gamble, and author of of India Unbound, and the other by a non-expert and more of literary figure Pankaj Mishra. Here is the link, link, link.

Gurcharan Das argues that Indiaâ€™s greatness lies in its self-reliant and resilient people, but he forgot to mention the selfish, parochial, castist, non-philanthrophic (only religious generous), nature of Indians. There is law but not order, the reason being the corruption in the courts. This results in absence of fear of law among the empowered, privileged.

In the name of privatisation one can see the plight of commuters in the DTC buses and private blue line buses in the capital city of India, Delhi. Is the system become more efficient? The unchanged predicament of power cut even after privatisation in Delhi? No prize for guessing in what is the situation at the other parts of India?

This has become fashionable to blame bureaucracy and government for all the ills of Indian economy among the neo intellectuals. Except Tata, how many private corporate sectors has contributed to the nation building? Birlas, Bajajs, Reliances are all big corporate sectors who have been benefited immensely from the license-permit raj, but what is there contribution to the nation (particularly institution) building, I am not talking about charity donated during disasters and religious purposes?

rental markets for wives!!!!

2006-06-21T09:54:00.000+05:30

After a long hiatus I am posting this message.

Here is a very interesting and alarming story regarding the plight of women in India.
Atta Prajapati, a farm worker who lives in Gujarat state, leases out his wife Laxmi to a wealthy landowner for $175 US a month. A farm worker earns a monthly minimum wage of around $22. Laxmi is expected to live with the man, look after him and his house, and have sex with him.

....this was not an isolated incident, and that several men rent their wives to other men on a month-by-month basis.
The male-female ratio is becoming increasing skewed across India because many parents abort female fetuses, preferring sons to daughters.
Female children must be married off, and to achieve that a daughter's parents usually have to pay the groom's family a dowry of cash and gifts - often a massive burden on the parents' resources.
Dowries were outlawed in 1961, but the practice is still common and the law ill-enforced.
The nationwide number of girls per 1,000 boys declined from 945 in 1991 to 927 in 2001, according to the 2001 national census.
It is not unusual for wealthy families to hire housekeeping staff in India, but prostitution is illegal.
The lack of marriageable girls ...has also led to booming business for bride brokers, who are paid to find a woman for a man to marry.
Brokers charge a groom's family up to $1,520, and the girl's family will receive around $435...

I suspect the existence of market imperfection, where a wealthy landlord cannot find a wife while a poor labourer can, are linked to the huge expenditure, which includes the dowry, by the girls' family on marriage.
Perhaps the obligation of expenditure on both sides of the family in marriages are required, thus increasing competition for wives and perhaps raising the value of female offspring

IMF's role to rethink!!

2006-02-08T16:45:00.002+05:30

The International Monetary Fund (IMF) lost some of its biggest borrowers in early 2006. This leaves the institution with a widening budget shortfall. Many countries repay their debt to the fund to free themselves from interest payments as well as from the Fund's neoliberal pressure on foreign and domestic politics. But with US$ 195 billion of reserves backing up the operating budget of US$ 2.3 billion, financed by debtors' interest payments, the Fund is far from going broke
This is very interesting situation. Here is the piece by William McQuillen of Bloomberg.

The International Monetary Fund's loss of two of its biggest borrowers last month has left the lender and renewed questions about its role in the global economy. In the past six weeks, Brazil made early repayment of $15.5 billion it owed and Argentina repaid $9.5 billion in debt two years ahead of schedule, closing the accounts of the International Monetary Fund's first- and third-largest borrowers. The enticement to pay the debt -- foreign reserves that have swelled as Latin American economies rebound from recession and investors' appetites for government bonds grow -- is present in other large borrowing nations, including Pakistan, Serbia and Ukraine, which have hinted that they, too, may sever ties to the lender.
"In good times, nobody goes to the IMF," said Liliana Rojas-Suarez, a former International Monetary Fund (IMF) economist who is now at the Center for Global Development in Washington. The result is a loss of interest income that prompted the IMF to lower its earnings forecast by about 40 percent for the fiscal year ending in April. The fund now expects a budget shortfall of more than $116 million this year, emboldening critics who have called on the Washington-based fund to scale back its lending and focus more on dispensing economic guidance.
"This should force the fund to ask what they are doing and what they should be doing," said Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh who led a 2000 U.S. congressional commission that examined the IMF. "If it is just business as usual, the fund will be becoming less relevant." The fund may invest some of its reserves as it looks for ways to make up for the decline in net income, said Thomas Dawson, a spokesman for IMF Managing Director Rodrigo de Rato.
The IMF was founded at the end of World War II to promote global economic stability. The fund typically makes loans to countries on the condition that the borrowers undertake economic policy changes such as adjusting their balance of payments or reducing inflation. With elections nearing, those conditions grew unpopular in Argentina and Brazil, where the public has blamed their countries' economic crises on IMF-mandated changes.
Those countries aren't alone. Pakistan, the IMF's third-largest debtor now that Argentina has walked away, is carrying $1.51 billion in debt and says it is seeking to cut its dependence on the fund; Ukraine, the fourth-largest debtor, said in 2004 it probably would decline any additional assistance; and Serbia, which owes the IMF about $874 million, said last month that it wouldn't borrow any more. A year ago, Russia repaid early its $3.3 billion debt to the IMF after seven years of economic expansion; in 2003, Thailand finished paying off its obligations two years ahead of schedule.
"This plays very well politically in those countries," said Desmond Lachman, who spent 24 years as an IMF economist and is now a senior fellow at the American Enterprise Institute, a Washington think tank. "Prepaying the IMF is declaring independence." Greater liquidity in capital markets has given nations other places to go for loans, while low interest rates have made financial emergencies less likely. There hasn't been a worldwide economic crisis that has required the IMF since the Asian and Latin American turmoil of the late 1990s.
The IMF's projected budget shortfall for fiscal 2006 has increased to $116 million from $26 million as a result of the interest-payment revenue it will lose because of the early debt repayment by Brazil and Argentina. Its total operating budget is $2.3 billion, almost all of which is funded by interest income. The IMF is hardly going broke: The lender can access about $139 billion, mostly through the financial commitments of its member countries, a November financial statement showed. The fund also has stockpiled more than 100 million ounces of gold, which would be worth more than $56 billion at today's market prices. In a cyclical world economy, there will probably be a time when governments again rely on the IMF for loans, Mr. Dawson said. Until then, the IMF is content with less influence, he said.

bloggers for corporates

2006-02-08T16:45:00.001+05:30

The economist in recent issue (dated 9th Feb 2006) has come with a very interesting story regarding the bloggers in corporate reputations and how they can help in averting disasters.

â€¦. Scandals at Enron and WorldCom destroyed thousands of employees' livelihoods, raised hackles about bosses' pay and cast doubt on the reliability of companies' accounts; labour groups and environmental activists are finding new ways to co-ordinate their attacks on business; and big companies such as McDonald's and Wal-Mart have found themselves the targets of scathing films. But those are just the enemies that companies can see.

â€¦.The spread of â€œsocial mediaâ€� across the internetâ€”such as online discussion groups, e-mailing lists and blogsâ€”has brought forth a new breed of brand assassin, who can materialise from nowhere and savage a firm's reputation. Often the assault is warranted; sometimes it is not. But accuracy is not necessarily the issue. One of the main reasons that executives find bloggers so very challenging is because, unlike other â€œstakeholdersâ€�, they rarely belong to well-organised groups. That makes them harder to identify, appease and control.

Here is a complete story.

food for thought?

2006-02-08T16:45:00.000+05:30

The UN's Food and Agriculture Organisation (FAO) is warning that 27 sub-Saharan countries now need help. But what appear as isolated disasters brought about by drought or conflict in countries like Somalia, Malawi, Niger, Kenya and Zimbabwe are - in reality - systemic problems. Martin Plaut investigates the issue and raised some critical issues:

â€¢ Decades of underinvestment in rural areas, which have little political clout
â€¢ Wars and political conflict, leading to refugees and instability
â€¢ HIV/Aids depriving families of their most productive labour
â€¢ Unchecked population growth

The result is that a continent that was more than self sufficient in food at independence 50 years ago, is now a massive food importer and reeling from acute food crisis. This is pointer to those campaigners and academics who argue that African farmers will only be able to properly feed their families and societies when Western goods stop flooding their markets.

darwinism: survival of fittest??

2005-12-21T10:36:00.000+05:30

The recent special issue of the Economist revisits the human evolution in a series of articles.

â€¦.It was Spencerâ€¦ who invented that poisoned phrase, â€œsurvival of the fittestâ€�. ..originally applied it to the winnowing of firms in the harsh winds of high-Victorian capitalism, but when Darwin's masterwork, â€œOn the Origin of Speciesâ€�, was published, he quickly saw the parallel with natural selection and transferred his bon mot to the process of evolutionâ€¦. became one of the band of philosophers known as social Darwinists. Capitalists all, they took what they thought were the lessons of Darwin's book and applied them to human society. Their hard-hearted conclusion â€¦. was that people got what they deservedâ€”albeit that the criterion of desert was genetic, rather than moral. The fittest not only survived, but prospered. Moreover, the social Darwinists thought that measures to help the poor were wasted, since such people were obviously unfit and thus doomed to sink.

... For 100 years Darwinism was associated with a particularly harsh and unpleasant view of the world and, worse, one that was clearly not trueâ€”at least, not the whole truth. People certainly compete, but they collaborate, too. They also have compassion for the fallen and frequently try to help them, rather than treading on them. For this sort of behaviour, â€œOn the Origin of Speciesâ€� had no explanation. As a result, Darwinism had to tiptoe round the issue of how human society and behaviour evolvedâ€¦.. the disciples of a second 19th-century creed, Marxism, dominated academic sociology departments with their cuddly collectivist ideasâ€”even if the practical application of those ideas has been even more catastrophic than social Darwinism was.

â€¦the real world â€¦penetrates even the ivory tower. The failure of Marxism has prompted an opening of minds, and Darwinism is back with a vengeanceâ€”and a twist. Exactly how humanity became human is still a matter of debate. But there are, at least, some well-formed hypotheses... they rely not on Spencer's idea of individual competition, but on social interaction. That interaction isâ€¦sometimes confrontational and occasionally bloody. ..it is frequently collaborative, and even when it is not, it is more often manipulative than violent.

Modern Darwinism's big breakthrough was the identification of the central role of trust in human evolution. People who are related collaborate on the basis of nepotism. It takes outrageous profit or provocation for someone to do down a relative with whom they share a lot of genes. Trustâ€¦.allows the unrelated to collaborate, by keeping score of who does what when, and punishing cheats.

Very few animals can manage this. .. outside the primates, only vampire bats have been shown to trust non-relatives routinely. (Well-fed bats will give some of the blood they have swallowed to hungry neighbours, but expect the favour to be returned when they are hungry and will deny favours to those who have cheated in the past.) The human mindâ€¦seems to have evolved the trick of being able to identify a large number of individuals and to keep score of its relations with them, detecting the dishonest or greedy and taking vengeance, even at some cost to itself. This process may even beâ€¦the origin of virtue.

The new social Darwinists (those who see society itself, rather than the savannah or the jungle, as the â€œnaturalâ€� environment in which humanity is evolving and to which natural selection responds) have not abandoned Spencer altogether... they have put a new spin on him. The ranking by wealth â€¦.is but one example of a wider tendency for people to try to out-do each other. .. competition, whether athletic, artistic or financial, does seem to be about genetic display. Unfakeable demonstrations of a superiority that has at least some underlying genetic component are almost unfailingly attractive to the opposite sex. Thus both of the things needed to make an economy work, collaboration and competition, seem to have evolved under Charles Darwin's penetrating gaze.

This is ..full of ironiesâ€¦. One is that its reconciliation of competition and collaboration bears a remarkable similarity to the sort of Hegelian synthesis beloved of Marxists. Perhaps a bigger oneâ€¦ is that the Earth's most capitalist country, America, is the only place in the rich world that contains a significant group of dissenters from any sort of evolutionary explanation of human behaviour at all. â€¦. suggests a constant struggle, not for existence itself, but between selfishness and altruismâ€”a struggle that neither can win. Utopia may be impossible, but Dystopia is unstable, too, as the collapse of Marxism showed. Human nature is not, â€¦ red in tooth and claw, and societies built around the idea that it is are doomed to early failure.

Of the three great secular faiths born in the 19th centuryâ€”Darwinism, Marxism and Freudianismâ€”the second died swiftly and painfully and the third is slipping peacefully away. But Darwinism goes from strength to strength. If its ideas are right, the handful of dust that evolution has shaped into humanity will rarely stray too far off courseâ€¦.

simple and classic

2005-12-15T15:08:00.000+05:30

This is classic way to fold a T-shirt. Check out the video.

from seattle to hong kong: multi trade negotiations

2005-12-07T10:17:00.000+05:30

In a prelude to the rounds of multi trade negotiations under WTO, the Foreign Affairs has come up with a special issue with some of the world's top experts on international trade consider what will be necessary for the Doha Round to succeed â€” and what might happen if it does not.

remittances: economic lifeline of many developing countries

2005-12-05T10:24:00.000+05:30

Migrants from developing countries send home part of their earnings in the form of either cash or goods to support their families, which are known as workers' or migrant remittances. The recent years there have been growing trend, and now represent the largest source of foreign income for many developing countries. A senior economist at the World Bank's Development Prospects Group, Dilip Ratha has examined the issue in the recent issue of Finance and Development of IMF publication.

â€¦. Worldwide, officially recorded international migrant remittances are projected to exceed $232 billion in 2005, with $167 billion flowing to developing countries. These flows are recorded in the balance of paymentsâ€¦Unrecorded flows through informal channels are believed to be at least 50 percent larger than recorded flows. â€¦remittances largeâ€¦they are also more evenly distributed among developing countries than capital flows, including foreign direct investment, most of which goes to a few big emerging marketsâ€¦. remittances are especially important for low-income countries.

How is the money transferred?

..typical remittance transaction takes place in three steps.

the migrant sender pays the remittance to the sending agent using cash, check, money order, credit card, debit card, or a debit instruction sent by e-mail, phone, or through the Internet.
the sending agency instructs its agent in the recipient's country to deliver the remittance.
the paying agent makes the payment to the beneficiary. For settlement between agents, in most cases, there is no real-time fund transfer; instead, the balance owed by the sending agent to the paying agent is settled periodically according to an agreed schedule, through a commercial bank. Informal remittances are sometimes settled through goods trade.

The costs of a remittance transaction include a fee charged by the sending agent, typically paid by the sender, and a currency-conversion fee for delivery of local currency to the beneficiary in another country. Some smaller money transfer operators (MTOs) require the beneficiary to pay a fee to collect remittances, presumably to account for unexpected exchange-rate movementsâ€¦. remittance agents (especially banks) may earn an indirect fee in the form of interest (or "float") by investing funds before delivering them to the beneficiaryâ€¦float can be significant in countries where overnight interest rates are high.

Why are remittances helpful?

Remittances are â€¦transfers from a well-meaning individual or family member to another individual or householdâ€¦.targeted to meet specific needs of the recipients and thus, tend to reduce povertyâ€¦..World Bank studies, based on household surveys conducted in the 1990s, suggest that international remittance receipts helped lower poverty (measured by the proportion of the population below the poverty line) by nearly 11 percentage points in Uganda, 6 percentage points in Bangladesh, and 5 percentage points in Ghana.

How are remittances used? In poorer households, they may finance the purchase of basic consumption goods, housing, and children's education and health care. In richer households, they may provide capital for small businesses and entrepreneurial activities. They also help pay for imports and external debt service, and in some countries, banks have been able to raise overseas financing using future remittances as collateral.

Remittance flows tend to be more stable than capital flows, and they also tend to be counter-cyclicalâ€”increasing during economic downturns or after a natural disaster in the migrants' home countries, when private capital flows tend to decrease. In countries affected by political conflict, they often provide an economic lifeline to the poor. The World Bank estimates that in Haiti they represented about 17 percent of GDP in 2001, while in some areas of Somalia, they accounted for up to 40 percent of GDP in the late 1990s.

Is there a downside?

â€¦a number of potential costs associated with remittances. Countries receiving migrants' remittances incur costs if the emigrating workers are highly skilled, or if their departure creates labor shortagesâ€¦. if remittances are large.. the recipient country could face an appreciation of the real exchange rate that may make its economy less competitive internationallyâ€¦remittances can also create dependency, undercutting recipients' incentives to work, and thus slowing economic growth. But â€¦the negative relationship between remittances and growth observed in some empirical studies may simply reflect the counter-cyclical nature of remittancesâ€”that is, the influence of growth on remittances rather than vice-versa.

Remittances may â€¦have human costs. Migrants sometimes make significant sacrificesâ€”often including separation from familyâ€”and incur risks to find work in another country. â€¦they may have to work extremely hard to save enough to send remittances.

Can high transaction costs be cut?

Transaction costs are not â€¦an issue for large remittances (made for the purpose of trade, investment, or aid), because, as a percentage of the principal amount, they tend to be small, and major international banks are eager to offer competitive services for large-value remittances. But in the case of smaller remittancesâ€”under $200, say, which is often typical for poor migrantsâ€”remittance fees can be as high as 10â€“15 percent of the principal (see table).

Transfer costs
Remittance fees could be reduced significantly if they were converted to a flat fee instead of a percentage of the principal transferred.

Approximate cost of remitting $200 (percent of principal)

Belgiumâ€“Nigeria
Belgiumâ€“Senegal
Hong Kongâ€“Philippines
New Zealandâ€“Tonga ($300)
Russiaâ€“Ukraine
South Africaâ€“Mozambique
Saudi Arabiaâ€“Pakistan
UAEâ€“India²
United Kingdomâ€“India
United Kingdonâ€“Philippines
United Statesâ€“Colombia
United Statesâ€“Mexico
United Statesâ€“Philippines

Major MTOs¹

12
10
4.5
12
4
â€”
3.6
5.5
11
â€”
â€”
5
1.2â€“2.0

Banks

6
â€”
â€”
3
3
1
0.4
5.2
6
0.4â€“5.0
17
3
0.4â€“1.8

Other MTOs

9.8
6.4
â€”
8.8
2.5
â€”
â€”
2.3
â€”
â€”
10
4.7
â€”

Hawala

â€”
â€”
â€”
â€”
1â€“2
â€”
â€”
1â€“2
â€”
â€”
â€”
â€”
â€”

â€” Data not available.
Source: World Bank Global Economic Prospects 2006: Economic Implications of Remittances and Migration.
Note: Figures do not include currency-conversion charge.
¹MTOs: money transfer operators.
²UAE: United Arab Emirates.

Cutting transaction costs would significantly help recipient families.

Howâ€¦?

the remittance fee should be a low fixed amount, not a percent of the principal, since the cost of remittance services does not really depend on the amount of principal. Indeed, the real cost of a remittance transactionâ€”including labor, technology, networks, and rentâ€”is estimated to be significantly below the current level of fees.
greater competition will bring prices down. Entry of new market players can be facilitated by harmonizing and lowering bond and capital requirements, and avoiding overregulation (such as requiring full banking licenses for money transfer operators). The intense scrutiny of money service businesses for money laundering or terrorist financing since the 9/11 attacks has made it difficult for them to operate accounts with their correspondent banks, forcing many in the United States to close. While regulations are necessary for curbing money laundering and terrorist financing, they should not make it difficult for legitimate money service businesses to operate accounts with correspondent banks. An example where competition has spurred reductions in fees is on the U.S.â€“Mexico corridor, where remittance fees have fallen by 56 percent from over $26 (to send $300) in 1999 to about $11.50 now. In addition, some commercial banks have recently started providing remittance services for free, hoping that would attract customers for their deposit and loan products. And in some countries, new remittance toolsâ€”based on cell phones, smart cards, or the Internetâ€”have emerged.
establishing partnerships between remittance service providers and existing postal and other retail networks would help expand remittance services without requiring large fixed investments to develop payment networks. However, partnerships should be nonexclusive. Exclusive partnerships between post office networks and money transfer operators have often resulted in higher remittance fees.
poor migrants need greater access to banking. Banks tend to provide cheaper remittance services than money transfer operators. Both sending and receiving countries can increase banking access for migrants by allowing origin country banks to operate overseas; by providing identification cards (such as the Mexican matricula consular), which are accepted by banks to open accounts; and by facilitating participation of microfinance institutions and credit unions in the remittance market.

Can governments boost flows?

Governments â€¦often offered incentives to increase remittance flows and to channel them to productive uses. But such policies are more problematic than efforts to expand access to financial services or reduce transaction costs. Tax incentives may attract remittances, but they may also encourage tax evasion. Matching-fund programs to attract remittances from migrant associations may divert funds from other local funding priorities, while efforts to channel remittances to investment have met with little success. Fundamentally, remittances are private funds that should be treated like other sources of household income. Efforts to increase savings and improve the allocation of expenditures should be accomplished through improvements in the overall investment climate, rather than targeting remittances. Similarly, because remittances are private funds, they should not be viewed as a substitute for official development aid.

change of guard in Bihar

2005-11-25T10:18:00.000+05:30

The change of guard in Bihar interests many, particularly to those rural poor which constitutes almost 50% of the total 83 million population of one of the poorest state of indian democracy. A study done by the World Bank on Bihar in 2003 showed 75 per cent of the rural poor were landless or near landless in 1999-2000. In rural areas, land ownership is closely linked to poverty, not just because land provides main source of income, but because land provides access to economic and social opportunities. Land reform in Bihar started in 1950s with the abolition of intermediaries between landlord and cultivators who worked under feudal lords. While the first Land Ceiling Act was passed in 1961, the progress has been very slow since. Only 1.5 per cent of the cultivable land was aquired and distributed by the â€™80s,

In fact the Economist (26th Nov. 2005) in its current issue also highlighted the change of mis(rule) in Bihar.

...... Laloo Prasad Yadav had ruled Bihar since 1990â€¦. it set the standard for bad government. Kidnapping for ransom was the only growth industry. Poverty, illiteracy, corruption and violence thrived. Mr Yadav's belated comeuppance came in an election result announced on November 22nd that left the RJD with just 54 out of 243 seats in Bihar's legislative assemblyâ€¦..nothing to disguise their glee. â€œLaloo loses; Bihar winsâ€�â€¦.. Even the RJD's ally, the Congress party, may not be too upset by the defeat of the biggest of its coalition partners in the central government.

Mr Yadav, who stood down as Bihar's chief minister in 1997 in favour of his wife after being charged with corruption, is India's railway ministerâ€¦.rise has been built on his skill at the politics of caste (read Yadav) and religion (read muslims)â€¦.earthily flaunted his humble origins as proof of his ability to bring dignity to the lower castes; and, allied with powerful gangsters, he presented himself as a protector of the Muslim minority.

â€¦.this year did this formula fail him, for a number of reasons. One was the job done by India's independent election commission, which kept the campaign relatively free of violence, and prevented â€œbooth-capturingâ€�â€”the coercion of votersâ€¦..Moreover, others, such as Bihar's new chief minister, Nitish Kumar, of the Janata Dal (United), have learned the art of caste-coalition building. Mr Yadav was deserted by many former supporters. His disdain for development, which has seen Bihar fall further behind on most social indicators, was, eventually, his undoing. Nor do Muslims now feel so worried by the rise of the Bharatiya Janata Party (BJP), the main national opposition and Mr Kumar's partner, with its Hindu-nationalist ideology.

corporate social responsibility: fairy tale???

2005-11-21T10:22:00.000+05:30

MNCs represent the most powerful actors on globalization's scene. Social responsibilities should accompany their economic power. Deborah Doane, in a recent article at onPhilanthropy argues that initiatives like the United Nations "Global Compact," based on a "voluntary" approach, are not able to guarantee decent human and labor rights standards. Instead, mandatory rules on companies could address this challenge....

The Corporate Social Responsibility (CSR) Movement has grownâ€¦. from a fringe activity by a few earnest companies, like The Body Shop, and Ben & Jerryâ€™s, to a highly visible priority for traditional corporate leaders from Nike to McDonaldâ€™s. Reports of good corporate behavior are now commonplace in the media, from GlaxoSmithKlineâ€™s donation of antiretroviral medications to Africa, to Hewlett-Packardâ€™s corporate volunteering programs, to Starbucksâ€™ high-volume purchases of Fair Trade coffee. In fact, CSR has gained such prominence that the Economist (22 Jan, 2005) devoted a special issueâ€¦. Although some see CSR as simply philanthropy by a different name, it can be defined broadly as the efforts corporations make above and beyond regulation to balance the needs of stakeholders with the need to make a profit. Though traces of modern-day CSR can be found in the social auditing movement of the 1970s, it has only recently acquired enough momentum to merit an Economist riposte.

â€¦.key events, such as the sinking of Shellâ€™s Brent Spar oil rig in the North Sea in 1996, and accusations of Nike and othersâ€™ use of â€œsweatshop labor,â€� triggered the first major response by big business to the uprisings against the corporate institution. Naomi Kleinâ€™s famous tome, â€œNo Logo,â€�(1) gave voice to a generation that felt that big business had taken over the world, to the detriment of people and the environment, even as that generation was successfully mobilizing attacks on corporate power following the Seattle anti-globalization riots in 1999.

â€¦..corporations emerged brandishing CSR as the friendly face of capitalism, helped, in part, by the very movement that highlighted the problem of corporate power in the first place. NGOs, seeing little political will by governments to regulate corporate behavior, as free-market economics has become the dominant political mantra, realized that perhaps more momentum could be achieved by partnering with the enemy. By using market mechanisms via consumer power, they saw an opportunity to bring about more immediate changeâ€¦.organizations that address social standards in supply chains, such as the Fair Label Association in the United States or the United Kingdomâ€™s ethical Trading Initiative, have flourished. The United Nations partnered with business to launch its own Global Compact, which offered nine principles relating to human rights and the environment, and was hailed as the ethical road map for the future.â€¦..eventually the mainstream investment community cottoned onto CSR: In 1999, Dow Jones created the Dow Jones Sustainability Indexes, closely followed by the FTSE4Good. All of these initiatives have been premised on the notion that companies can â€˜do wellâ€™ and â€˜do goodâ€™ at the same time â€“ both saving the world and making a decent profit, too. The unprecedented growth of CSRâ€¦ lead some to feel a sense of optimism about the power of market mechanisms to deliver social and environmental change. But markets often fail, especially when it comes to delivering public goods; therefore, we have to be concerned that CSR activities are subject to the same limitations of markets that prompted the movement in the first place.

Making Markets Work?

At face value, the market hasâ€¦ been a powerful force in bringing forward some measurable changes in corporate behavior. Most large companies now issue a voluntary social and environmental report alongside their regular annual financial report; meanwhile the amount of money being poured into socially responsible investing (SRI) funds has been growing at an exponential rate, year over yearâ€¦.socially linked brands, such as Fair Trade, are growing very quickly. Ethical consumerism in the United Kingdom was worth almost Â£25 billion in 2004, according to a report from the Co-operative Bank.(2) The Economist article argued that the only socially responsible thing a company should do is to make money â€“ and that adopting CSR programs was misguided, at best. But there are some strong business incentives that have either pushed or pulled companies onto the CSR bandwagonâ€¦.. companies confronted with boycott threats, as Nike was in the 1990s, or with the threat of high-profile lawsuits, as McDonaldâ€™s is over obesity concerns, may see CSR as a strategy for presenting a friendlier face to the publicâ€¦.. CSR initiatives may provoke changes in basic practices inside some companies. Nike is now considered by many to be the global leader when it comes to improving labor standards in developing-country factories. The company now leads the way in transparency, too. When faced with a lawsuit over accusations of sweatshop labor, Nike chose to face its critics head-on and this year published on its Web site a full list of its factories with their audited social reportsâ€¦.. plethora of other brands have developed their own unique strategies to confront the activists, with varying degrees of success. But no one could reasonably argue that these types of changes add up to a wholesale change in capitalism as we know it, nor that they are likely to do so anytime soon.

Market Failure

One problem here is that CSR as a concept simplifies some rather complex arguments and fails to acknowledge that ultimately, trade-offs must be made between the financial health of the company and ethical outcomes. And when they are made, profit undoubtedly wins over principles. CSR strategies may work under certain conditions, but they are highly vulnerable to market failures, including such things as imperfect information, externalities, and free riders. Most importantly, there is often a wide chasm between whatâ€™s good for a company and whatâ€™s good for society as a whole. The reasons for this can be captured under what Iâ€™ll argue are the four key myths of CSR.

Myth #1: The market can deliver both short-term financial returns and long-term social benefits.

One assumption behind CSR is that business outcomes and social objectives can become more or less aligned. The rarely expressed reasoning behind this assumption goes back to the basic assumptions of free-market capitalism: People are rational actors who are motivated to maximize their self-interest. Since wealth, stable societies, and healthy environments are all in individualsâ€™ self-interest, individuals will ultimately invest, consume, and build companies in both profitable and socially responsible ways. In other words, the market will ultimately balance itself. Yet, there is little if any empirical evidence that the market behaves in this way. In fact, it would be difficult to prove that incentives like protecting natural assets, ensuring an educated labor force for the future, or making voluntary contributions to local community groups actually help companies improve their bottom line. While there are pockets of success stories where business drivers can be aligned with social objectives, such as Ciscoâ€™s Networking Academies, which are dedicated to developing a labor pool for the future, they only provide a patchwork approach to improving the public good. In any case, such investments are particularly unlikely to pay off in the two- to four-year time horizon that public companies, through demands of the stock market, often seem to require.
As we all know, whenever a company issues a â€œprofits warning,â€� the markets downgrade its share price. Consequently, investments in things like the environment or social causes become a luxury and are often placed on the sacrificial chopping block when the going gets rough. Meanwhile, we have seen an abject failure of companies to invest in things that may have a longer-term benefit, like health and safety systems. BP was fined a record $1.42 million for health and safety offenses in Alaska in 2004, for example, even as Lord John Browne, chief executive of BP, was establishing himself as a leading advocate for CSR, and the company was winning various awards for its programs. At the same time, class-action lawsuits may be brought against Wal-Mart over accusations of poor labor practices, yet the worldâ€™s largest and most successful company is rewarded by investors for driving down its costs and therefore its prices. The market, quite frankly, adores Wal-Mart. Meanwhile, a competitor outlet, Costco, which offers health insurance and other benefits to its employees, is being pressured by its shareholders to cut those benefits to be more competitive with Wal-Mart.(3) CSR can hardly be expected to deliver when the short-term demands of the stock market provide disincentives for doing so. When shareholder interests dominate the corporate machine, outcomes may become even less aligned to the public good. As Marjorie Kelly writes in her book, â€œThe Divine Right of Capitalâ€�: â€œIt is inaccurate to speak of stockholders as investors, for more truthfully they are extractors.â€�(4)

Myth #2: The ethical consumer will drive change.

Though there is a small market that is proactively rewarding ethical business, for most consumers ethics are a relative thing. In fact, most surveys show that consumers are more concerned about things like price, taste, or sell-by date than ethics.(5) Wal-Martâ€™s success certainly is a case in point.
In the United Kingdom, ethical consumerism data show that although most consumers are concerned about environmental or social issues, with 83 percent of consumers intending to act ethically on a regular basis, only 18 percent of people act ethically occasionally, while fewer than 5 percent of consumers show consistent ethical and green purchasing behaviors.(6) In the United States, since 1990, Roper ASW has tracked consumer environmental attitudes and propensity to buy environmentally oriented products, and it categorizes consumers into five â€œshades of greenâ€�: True-Blue Greens, Greenback Greens, Sprouts, Grousers, and Basic Browns. True-Blue Greens are the â€œgreenestâ€� consumers, those â€œmost likely to walk their environmental talk,â€� and represent about 9 percent of the population. The least environmentally involved are the â€œBasic Browns,â€� who believe â€œindividual actions (such as buying green products or recycling) canâ€™t make a differenceâ€� and represent about 33 percent of the population.(7) Joel Makower, co-author of â€œThe Green Consumer Guide,â€� has traced data on ethical consumerism since the early 1990s, and says that, in spite of the overhyped claims, there has been little variation in the behavior of ethical consumers over the years, as evidenced by the Roper ASW data. â€œThe truth is, the gap between green consciousness and green consumerism is huge,â€� he states.(8) Take, for example, the growth of gas-guzzling sport-utility vehicles. Even with the steep rise in fuel prices, consumers are still having a love affair with them, as sales rose by almost 8 percent in 2004. These data show that threats of climate change, which may affect future generations more than our own, are hardly an incentive for consumers to alter their behavior.(9)

Myth #3: There will be a competitive â€œrace to the topâ€� over ethics amongst businesses.

A further myth of CSR is that competitive pressure amongst companies will actually lead to more companies competing over ethics, as highlighted by an increasing number of awards schemes for good companies, like the Business Ethics Awards, or Fortuneâ€™s annual â€œBest Companies to Work Forâ€� competitions. Companies are naturally keen to be aligned with CSR schemes because they offer good PR. But in some cases businesses may be able to capitalize on well-intentioned efforts, say by signing the U.N. Global Compact, without necessarily having to actually change their behavior. The U.S.-based Corporate Watch has found several cases of â€œgreen washingâ€� by companies, and has noted how various corporations use the United Nations to their public relations advantage, such as posing their CEOs for photographs with Secretary-General Kofi Annan.(10) Meanwhile, companies fight to get a coveted place on the SRI indices such as the Dow Jones Sustainability Indexes. But all such schemes to reward good corporate behavior leave us carrying a new risk that by promoting the â€œrace to the topâ€� idea, we tend to reward the â€œbest of the baddies.â€� British American Tobacco, for example, won a UNEP/Sustainability reporting award for its annual social report in 2004.(11) Nonetheless, a skeptic might question why a tobacco company, given the massive damage its products inflict, should be rewarded for its otherwise socially responsible behavior.
While companies are vying to be seen as socially responsible to the outside world, they also become more effective at hiding socially irresponsible behavior, such as lobbying activities or tax avoidance measures. Corporate income taxes in the United States fell from 4.1 percent of GDP in 1960 to just 1.5 percent of GDP in 2001.(12) In effect, this limits governmentsâ€™ ability to provide public services like education. Of course, in the end, this is just the type of PR opportunity a business can capitalize on. Adopting or contributing to schools is now a common CSR initiative by leading companies, such as Cisco Systems or European supermarket chain Tesco.

Myth #4: In the global economy, countries will compete to have the best ethical practices.

CSR has risen in popularity with the increase in reliance on developing economies. It is generally assumed that market liberalization of these economies will lead to better protection of human and environmental rights, through greater integration of oppressive regimes in the global economy, and with the watchful eye of multinational corporations that are actively implementing CSR programs and policies. Nonetheless, companies often fail to uphold voluntary standards of behavior in developing countries, arguing instead that they operate within the law of the countries in which they are working. In fact, competitive pressure for foreign investment among developing countries has actually led to governments limiting their insistence on stringent compliance with human rights or environmental standards, in order to attract investment. In Sri Lanka, for example, as competitive pressure from neighboring China has increased in textile manufacturing, garment manufacturers have been found to lobby their government to increase working hours.
In the end, most companies have limited power over the wider forces in developing countries that keep overall wage rates low. Nevertheless, for many people a job in a multinational factory may still be more desirable than being a doctor or a teacher, because the wages are higher and a workerâ€™s rights seem to be better protected.

What Are the Alternatives to CSR?

CSR advocates spend a considerable amount of effort developing new standards, partnership initiatives, and awards programs in an attempt to align social responsibility with a business case, yet may be failing to alter the overall landscape. Often the unintended consequences of good behavior lead to other secondary negative impacts, too. McDonaldâ€™s sale of apples, meant to tackle obesity challenges, has actually led to a loss of biodiversity in apple production, as the corporation insists on uniformity and longevity in the type of apple they may buy â€“ hardly a positive outcome for sustainability.(13)
At some point, we should be asking ourselves whether or not weâ€™ve in fact been spending our efforts promoting a strategy that is more likely to lead to business as usual, rather than tackling the fundamental problems. Other strategies â€“ from direct regulation of corporate behavior, to a more radical overhaul of the corporate institution, may be more likely to deliver the outcomes we seek. Traditional regulatory models would impose mandatory rules on a company to ensure that it behaves in a socially responsible manner. The advantage of regulation is that it brings with it predictability, and, in many cases, innovation. Though fought stridently by business, social improvements may be more readily achieved through direct regulation than via the market alone. Other regulatory-imposed strategies have done more to alter consumer behavior than CSR efforts. Social labeling, for example, has been an extremely effective tool for changing consumer behavior in Europe. All appliances must be labeled with an energy efficiency rating, and the appliances rated as the most energy efficient now capture over 50 percent of the market. And the standards for the ratings are also continuously improving, through a combination of both research and legislation.
Perhaps more profoundly, campaigners and legal scholars in Europe and the United States have started to look at the legal structure of the corporation. Currently, in Western legal systems, companies have a primary duty of care to their shareholders, and, although social actions on the part of companies are not necessarily prohibited, profit-maximizing behavior is the norm. So, companies effectively choose financial benefit over social ones.(15) While a handful of social enterprises, like Fair Trade companies, have forged a different path, they are far from dominating the market. Yet lessons from their successes are being adopted to put forward a new institutional model for larger shareholder-owned companies. In the United Kingdom, a coalition of 130 NGOs under the aegis of the Corporate Responsibility Coalition (CORE), has presented legislation through the Parliament that argues in favor of an approach to U.K. company law that would see company directors having multiple duties of care â€“ both to their shareholders and to other stakeholders, including communities, employees, and the environment. Under their proposals, companies would be required to consider, act, mitigate, and report on any negative impacts on other stakeholders.(16)
Across the pond, Corporation 20/20, an initiative of Business Ethics and the Tellus Institute, has proposed a new set of principles that enshrines social responsibility from the founding of a company, rather than as a nice-to-have disposable add-on. The principles have been the work of a diverse group including legal scholars, activists, business, labor, and journalism, and while still at the discussion phase, such principles could ultimately be enacted into law, stimulating the types of companies that might be better able to respond to things like poverty or climate change or biodiversity. Values such as equity and democracy, mainstays of the social enterprise sector, take precedence over pure profit making, and while the company would continue to be a profit-making entity in the private realm, it would not be able to do so at a cost to society.
Of course, we are a long way from having any of these ideas adopted on a large scale, certainly not when the CSR movement is winning the public relations game with both governments and the public, lulling us into a false sense of security. There is room for markets to bring about some change through CSR, but the market alone is unlikely to bring with it the progressive outcomes its proponents would hope for. While the Economist argument was half correct â€“ that CSR can be little more than a public relations device â€“ it fails to recognize that it is the institution of the corporation itself that may be at the heart of the problem. CSR, in the end, is a placebo, leaving us with immense and mounting challenges in globalization for the foreseeable future.

Notes:

N. Klein, No Logo: Taking Aim at the branding Bullies (UK: Harper-Collins, 2001)
Co-operative Bank, 2004
A. Zimmerman, â€œCostcoâ€™s Dilemma: Be Kind to Its Workers, or Wall Street?â€� Wall Street Journal, march 26, 2004
M. Kelly, The Divine Right of Capital:Dethroning the Corporate Aristocracy (San Francisco: Berrett Koehler, 2003)

â€œWho are the Ethical Consumers?â€� Co-operative 2000
Green Gauge Report 2002, Roper ASW, as related by Edwin Stafford
http://makower.typepad.com/joel_makower/2005/06/ideal_bite_keep.html
http://money.cnn.com/2004/05/17/pf/autos/suvs_gas/
â€œGreenwash + 10: The UNâ€™s Global Compact, Corporate Accountability, and the Johannesburg Earth Summit,â€� Corporate Watch, January 2002
â€œThe Global Reporters 2004 Survey of Corporate Sustainability Reporting.â€� SustainAbility, UNEP, and Standard & Poorâ€™s
J. Miller, â€œDouble Taxation Double Speak: Why Repealing Tax Dividends is Unfair,â€� Dollars and Sense, March/April2003
G. Younge, â€œMcDonaldâ€™s Grabs a Piece of the Apple Pie: â€˜Healthyâ€™ Menu Changes Threaten the Health of Biodiversity in Apples,â€� The Guardian, April 7, 2005
Ethical Purchasing Index, 2004
E. Elhauge, â€œSacrificing Corporate Profits in the Public Interest,â€� New York University Law Review 80, 2005
www.corporate-responsibility.org

some inspiring thoughts!!!!

2005-11-19T21:46:00.000+05:30

Due to some personal pre-occupation and obligation, I am posting this piece after a long hiatus.

Following is the mail forwarded to me by one of my friend, which I found inspiring, and want to shareâ€¦

"Don't worry about the world coming to an end today. It's already tomorrow in Australia." Charles Schultz
The following is the philosophy of Charles Schultz, the creator of the "Peanuts" comic strip. You don't have to actually answer the questions. Just read, and you'll get the point.

Name the five wealthiest people in the world.
Name the last five Heisman trophy winners.
Name the last five winners of the Miss America.
Name ten people who have won the Nobel or Pulitzer Prize.
Name the last half dozen Academy Award winner for best actor and actress.
Name the last decade's worth of World Series winners.

How did you do? The point is, none of us remember the headliners of yesterday. These are no second-rate achievers. They are the best in their fields. But the applause dies. Awards tarnish. Achievements are forgotten. Accolades and certificates are buried with their owners.

Here's another quiz. See how you do on this one:

List a few teachers who aided your journey through school.
Name three friends who have helped you through a difficult time.
Name five people who have taught you something worthwhile.
Think of a few people who have made you feel appreciated and special.
Think of five people you enjoy spending time with.

Easier?

The lesson: The people who make a difference in your life are not the ones with the most credentials, the most money, or the most awards. They are the ones that care.

inflation determination

2005-10-21T10:58:00.000+05:30

In a recent economic focus, the Economist says that in the present era of globalisation, inflation is increasingly determined by global rather than local economic forces

....average inflation rate in the G7 economies rose to an estimated 3.2% in September, its highest for 13 years....reason...is...oil has become a lot more expensive; â€œcoreâ€� inflation rates, which exclude oil and food, remain much lower in all countries....fears are mounting that higher oil prices will feed into other prices throughout the economy, pushing inflation higher still.

This is...worrying for America..... companies' unit labour costs rose by 4.2% in the year to the second quarter, mainly thanks to slower productivity growth. ...With energy and labour becoming conspicuously dearer, any inflation model based on a mark-up of prices over costs should be flashing red. Yet in the past year core inflation has not budged....thanks to globalisation, the inflation process has changed over the past three decades in a way that has significantly weakened the link between domestic cost pressures and inflation.... global forces have become more important relative to domestic factors in determining inflation in individual countries.

....the correlation between core inflation and the growth in unit labour costs in America fell to only 0.3 in 1991-2004, from nearly 0.8 in 1965-79. The link between inflation and labour costs also faded in other developed economies (see chart).... probably reflects two things. First, the integration into the world economy of China and other emerging economies with vast supplies of cheap labour has curbed the bargaining power of workers in developed economies. These workers... find it harder to secure higher wages when inflation picks up. And second, fiercer global competition has made it more difficult for firms to pass increases in wages through to prices. Instead they must absorb them in their profit margins.

....further...firms are less able than they were to hand cost increases on to their customers, .... fluctuations in import prices also have much less impact on core inflation than they once did.....link between movements in exchange rates and import prices has sharply diminished. Standard economic theory has it that a fall in the dollar against the euro should push up the dollar prices of European exports to America, raising America's inflation rate. But the proportion of exchange-rate changes passed through to import prices has fallen everywhere; in America, it has been 60% lower since 1990 than it was in the previous 20 years. Today, exporters set their prices for a local market and then either hedge their currency risk or absorb currency changes in their margins.

Increased global competition has... limited the room for firms to pass on higher costs. This makes a nonsense of traditional economic models of inflation, which virtually ignore globalisation and assume that companies set prices by adding a mark-up over unit costs, with the size of the margin depending largely on the amount of slack in the economy.....when setting prices firms are increasingly likely to be constrained by global competition. Given the price the market will bear, they design and make their products as profitably as they can. As a result, domestic cost pressures, whether in labour or energy, no longer lead automatically to higher inflation, but are more likely to show up as swings in profit margins.

....suggests....in forecasting inflation central banks now need to pay less attention to domestic shifts in unemployment and capacity utilisation and much more to the global balance between supply and demand.....since 1990 the core rate of inflation has become less responsive than it used to be to changes in the output gap (a measure of economic slack) in all the main developed economies except Britain. The ups and downs of inflation increasingly reflect the global balance between supply and demand.

The nature of inflation has... changed. But it has not died, although the forces of globalisation have helped to combat it. Policy blunders by central bankers could still allow it to break out again. Indeed .... the impact of China and other newly industrialising economies on inflation is often exaggerated. ...Fed study...concluded that the direct impact of cheaper Chinese imports on American inflation was modest. However, this...ignored the indirect effects of China on wages and the fact that cheaper Chinese goods do not just reduce the price of imports from China but, through competition, the price of all goods sold worldwide.

....more important for policymakers today is its future effect. ...the emergence of new industrial giants has increased not only global supply but also demand, particularly for oil and other raw materials. By running large current-account surpluses these economies are currently adding more to supply than to demand, so their net effect is disinflationary. But this could change. If their exchange rates rose and their domestic demand increased....downward pressure on prices would ease, and might one day be reversed.

Even though globalisation has helped to hold down inflation so far, capacity constraints will eventually appear in the global economy, just as they always have at the national level. Globalisation does not relieve central bankers of their responsibility for maintaining price stability....it may require them to steer policy by a different compass: one that takes much more account of developments abroad.

productivity measurement

2005-10-19T11:01:00.000+05:30

Diewart and Nakamura said, â€œProductivity is like love. Volumes of literature have been poured in to talk about the benefits of having more of it, but disagreement reigns on how best to achieve this. One reason for this is a lack of consensus on what â€œitâ€� really is.â€� Ever since Solow (1957) decomposed output growth into the contribution of input growth and a residual productivity term, the concept has increased in popularity. Productivity growth forms the basis for improvements in real incomes and welfare, and has generated lot of interest in its own right and is used as a benchmark to rank firms or countries. This has spurred great interest in trying to obtain better and more accurate productivity growth estimates.

A three day OECD workshop on productivity measurement is taking place in Madrid, Spain.

fixing up China's banking system

2005-10-19T10:27:00.000+05:30

China began the structural reform of its banking system in 1978 with the creation of state owned specially banks (SOSB) from the monobanking structure. Over time, these SOBS grew to be among the largest 50 banks in the world. However, as owner, the government dictated the terms of lending, so that these large four SOSB, together having 80% of market share, were financing the state owned enterprises (SOEs) More than two and half decades of policy lending has left the SOSBs burdened with bad debt on loan portfolios. The government has recognized the need to restructure these insolvent banks by setting up bad debt agencies with a narrow purpose to work out or sell bad debts. China's newly appointed governor of the central bank, Zhou Xiaochuan, recently told that China would take a "gradualist" approach to reforming its banking system, which means one step at a time, although the pace of change is anything but slow.

In a recent McKinsey Quarterly report Matthias M. Bekier et al. suggested the way to fix the Chinaâ€™s banking system. See also The Economist's View.

I think, China's window of opportunity for bank reform is closing rapidly. Recapitalizing the banks, identifying the bad loans, and spinning them off to the AMCs is the easy part of reform. But these moves are not sufficient to cure the banking sector's ills. As an exit strategy for recapitalizing the banks, Beijing must also act decisively to create an environment in which AMCs can sell off bad loans to recoup their losses. All this will involve fundamental reforms to the legal system, institutional framework, and corporate culture. Again at the same time, China needs to reform the capital market both to fuel the growth of the private sector and resolve the political ownership of the banking sector. With less political intervention and more credible financial data, banks will have a better chance to run loan books on a commercial basis. Such market discipline is a prerequisite for the ultimate success of banking reform.

who cares about human rights?

2005-10-17T18:21:00.000+05:30

Behind a dilapidated store in a dusty field at Athi River, an export processing zone (EPZ) on the outskirts of Kenya's capital, Nairobi, a group of textile factory workers has gathered for a mid-afternoon break. The heat is searing, and the hastily purchased cool drinks quench thirsts.

Read a piece by Darren Taylor for the complete story

some moral lessons of life

2005-10-14T16:21:00.000+05:30

One of my friend has forwarded this moral lesson to me, which I find worthy to post on this blog.
...There was a man who had four sons. He wanted his sons to learn not to judge things too quickly. So he sent them each on a quest, in turn, to go and look at a pear tree that was a great distance away.
The first son went in the winter, the second in the spring, the third in summer, and the youngest son in the fall. When they had all gone and come back, he called them together to describe what they had seen.

The first son said that the tree was ugly, bent, and twisted. The second son said no it was covered with green buds and full of promise.

The third son disagreed; he said it was laden with blossoms that smelled so sweet and looked so beautiful, it was the most graceful thing he had ever seen.

The last son disagreed with all of them; he said it was ripe and drooping with fruit, full of life and fulfillment. The man then explained to his sons that they were all right, because they had each seen but only one season in the tree's life. He told them that you cannot judge a tree, or a person, by only one season, and that the essence of who they are and the pleasure, joy, and love that come from that life can only be measured at the end, when all the seasons are up. If you give up when it's winter, you will miss the promise of your spring, the beauty of your summer, fulfillment of your fall.

Moral of the story:

Don't let the pain of one season destroy the joy of all the rest. Don't judge life by one difficult season.

Persevere through the difficult patches and better times are sure to come some time or later.

viability of export-driven economy????

2005-10-14T10:25:00.000+05:30

The recent issue of The Economist discusses the feasibility of the export driven South east Asian economy.

â€¦South-East Asia's economic performance tend to revolve around trade. A double-digit surge in exports helped to lift the region's growth to 6.3% last year. This year, a slowdown in exports, along with a bigger bill for oil imports, will cut growth to 5% or so. Economists hope that growing demand for electronic components and other exports will put growth on a rising path once more next year. But one thing is clear: â€œThe region remains export-driven.â€�

It was not supposed to be this wayâ€¦.the Asian crisis of 1997, when plunging currencies, free-falling asset prices and bankrupt banks had brought regional economies to a standstill, various national leadersâ€”most notably Thaksin Shinawatra of Thailandâ€”declared that South-East Asia should not look solely to exports to resuscitate its economic fortunes. Instead, Mr Thaksin argued, governments should try to revive domestic consumption, which would help insulate the region from the vagaries of the world economyâ€¦.attempted to put this theory into practice by suspending farmers' debts, instituting cheap universal health care and handing out loans to villagers, small businesses and home-buyersâ€¦.began subsidising all manner of goods, from computers to cows, to increase Thais' spending powerâ€¦â€œthe grassroots economyâ€�â€¦

â€¦Jesus Felipe of the Asian Development Bankâ€¦recently published a study showing that the economies of various Asian countries performed best, naturally enough, when both exports and domestic demand were buoyant. Last year, for example, domestic consumption and investment grew in tandem with exports in much of South-East Asia, propelling the region to its fastest growth since the crisisâ€¦he argues that domestic demand tends to grow incrementally, in line with the economy as a whole. His study found that from 1993 to 2003, exports grew more than three times faster than consumption in Thailand, and accounted for over 70% of economic growth. This trend continued after Mr Thaksin came to power in 2001 and began implementing his policies designed to boost domestic demand.

The only country in Mr Felipe's study where exports did not make a significant contribution to growth was the Philippines, where almost all growth was attributable to domestic demand. But this is a sign of the Philippines' economic weakness, rather than strength. Consumer spending in the Philippines is particularly robust thanks to the billions of dollars of remittances that Filipinos working overseas send home to their families. But those workers are overseas in the first place only because the Philippine economy does not grow fast enough to provide jobs for them.

â€¦in South-East Asia, the richer the country, the higher the share of exports in the economyâ€¦.. exports as a share of output are still rising steadily throughout the region (see chart), despite all the rhetoric about boosting the domestic sector. In the region's richest country, Singapore, they reached 168% of GDP last year. (Exports can be more than 100% of GDP because most of the components used to produce them are imported.) Net exports doubled their share of output in East Asia's richest countries between 1993 and 2003, from 5% to 10%.

â€¦.Thailand sells both manufactured goods (cars) and agricultural ones (rice) to both rich countries (America and Japan) and poor ones (the other members of the Association of South-East Asian Nations). Much the same applies in the rest of the region. Malaysia exports palm oil as well as electronic components; the Philippines computer chips and fruit, and so on. Booming China is the region's fastest-growing export market.

Consumption, meanwhile, has faltered throughout South-East Asia in the face of rising fuel prices, which have fed inflation and prompted higher interest rates. Drought and bird flu have taken a toll on farming. Last year's tsunami and the recent terrorist attack in Bali have dented tourism. Governments have cut back spending, trying to balance their budgets. Consumer confidence in Thailand, for one, fell to its lowest level in three years in August. If oil prices started falling, and inflation and interest rates with them, consumption would doubtless improve. But that would also give the world economy a shot in the arm, and boost exports even more.

The question that emanates from the discussion is whether Asian countries can, today, generate enough domestic demand-led growth so as to shift from export growth. And, does this demand process require an active role of the government?

poverty in america

2005-10-13T15:45:00.000+05:30

The World Bank defines, â€œpoverty is powerlessness, lack of representation and freedomâ€�. Thus poverty is an important and emotional issue. The ubiquitous presence of poverty in the developing world is nothing unique. What is unprecedented is the incidence of poverty in USA; the recent paper by Hoynes et al. examines the issue.

They scrutinize the trends of poverty rates in the last three decades in America. Relative to the large decline that was experienced during the 1960â€™s, poverty rates have changed very little over the past three decades. They find a weak relationship between poverty and the macro-economy over time. However, in spite of this, changes in labor market opportunities predict changes in the poverty rate rather well. Holding all else equal, they found, changes in female labor supply should have reduced poverty further, but an increase in the rate of female headship may have worked in the opposite direction.

They raise some further research questions, what are the relationships between womenâ€™s labor force participation, female headship, and labor market opportunities for women, and poverty rates? Many analyses have linked two or three of these factors, but there may be important interactions between all of these that help determine the evolution of poverty rates. A related question is why rising womenâ€™s labor force participation prior to 1980 does not push down poverty rates. Finally, what explains the change in the responsiveness of poverty to macroeconomic indicators starting in the 1980s?

nobel prize for game theorists

2005-10-11T14:17:00.000+05:30

An octagenarian political economist, Thomas C. Schelling, 84, an emeritus professor at University of Maryland and Harvard University, and a septugenarian mathematician Robert J Aumann, 75, an emeritus professor at Hebrew University Jerusalem, were awarded the Nobel Memorial prize in Economics for fostering the understanding of conflict and co-operation- in matters such as nuclear arms race, trade battles and price wars. Working separately, they used 'game theory' as a way to explain social, political and business interactions.
More on this please see Marginal Revolution.

G B Shaw once said, "Nobel Prize money is a life belt thrown to a swimmer who has already reached the shore in safety".

labour scourge

2005-10-10T12:12:00.000+05:30

Continue with the previous post (missing link in globalisation:labour), policy makers and economists supporting neoliberal globalization have always argued that low wages of poor countries represent an excellent opportunity for these countries to compete in the global market. However, competition has also brought down wages in rich countries, accelerating the race against the bottom on a global level and making it harder for all workers to afford a decent life. Focusing on the US workers' situation, Thomas Palley, the chief economist of the US - China Economic and Security Review Commission, calls for the establishment of "fair and just rules that make the economy work for all."

If the United States were to add two billion low-wage workers, you'd expect that wages would fall across the board, right?â€¦. famous theorem in international economics - the Stolper-Samuelson theorem - â€¦says when a rich capital-abundant country (such as the United States) trades with a poor labor-abundant country (such as China), wages in the rich country fall and profits go upâ€¦. economic logic is simple. Free trade is tantamount to a massive increase in the rich country's labor supply, since the products made by poor country workers can now be imported. Additionally, demand for workers in the rich country falls as rich country firms abandon labor-intensive production to the poor country. The net result is an effective increase in labor supply and a decrease in labor demand in the rich country, and wages fall.

The relevance of the Stolper-Samuelson theorem is clear. For the last two decades, US policy makersâ€¦.. have worked assiduously to create a global market place in which goods and capital are free to move. Over the same period, two and a half billion people in China, India, Eastern Europe and the former Soviet Union have discarded economic isolationism and joined the global economy. Now, these two tectonic shifts are coming together in the form of a "super-sized" Stolper-Samuelson effect, and they stand to have depressing consequences for American workers.

Much attention has been devoted to the adverse impacts of the US trade deficit, â€¦. no one in Washington is talking about the deeper question of what happens to wages when two billion people from low-wage countries join the global labor market.â€¦ In the past, countries joined the international economy through a slow evolutionary process. Initially, they would export a few goods in which they specialized and had natural competitive advantage. Thereafter, countries would gradually deepen their involvement in international trade. The process was one of gradual integration, and production was largely immobile across countries.

Globalization has changed this by accelerating the process of international integrationâ€¦..made capital, technology and methods of production mobile, marking a watershed with the past. The new orderâ€¦exemplified by China's recent experiencesâ€¦.through massive foreign direct investment and technology transfer. The impact of this transformation on the US economy is seen in the trade deficit, the loss of manufacturing jobs and downward pressure on wages. Whereas classical free trade connected goods markets across countries, globalization creates a global labor market and moves jobs. Previously trade arbitraged goods prices, now it also arbitrages wages through job shifting.

â€¦.the emergence of China, India and Eastern Europe, the dam of Socialism that held back two billion workers has been removed. If two swimming pools are joined, the water level will eventually equalize. That is what is happening with globalization. Manufacturing hasâ€¦.been placed in competition across countries, with dire consequences for manufacturing workers. The internet promises to do the same for previously un-tradable services, and higher-paid knowledge workers will start feeling similar effects. Not since the industrial revolution has there been a transformation of this magnitude, and that revolution took one hundred and fifty years to complete. â€¦.the new revolution is a mere 25 years old. These developments have a significance that goes far beyond the currency manipulation and WTO rules violations that have been the focus of trade deficit policy discussions. There is no reason to think the end is in sight, and American workers can look forward to the international economy exerting downward pressure on wages and work conditions for the next several decades.

â€¦.workers have understood the new reality long before economists and policymakers. â€¦realize that trade is no longer a matter of exchanging exotic commodities for manufactured products, and that the new system involves trading their jobs and arbitraging wages. Especially bitter is the fact that the process of globalization is being driven by large American multinational corporations that American workers helped build. US policymakers have also abandoned American workers by promoting free trade agreements that have de facto created a global labor market that threatens workers' livelihoods and economic security.

Globalization demands â€¦.the task of establishing fair and just rules that make the economy work for all. This challenge is the same as that faced by American workers at the beginning of the 20th century. Unions, minimum wages, and fair labor practices were essential to meeting that challenge, and they are essential again. But such tools are no longer sufficient when applied nationally. They must be applied globally. That means China, India and other industrializing developing countries must agree to, and enforce, core labor standards and worker rights. Trade cannot be free without worker freedom and the right to share in the wealth createdâ€¦.

missing link in globalisation: labour

2005-10-07T15:18:00.000+05:30

Contrary to the earlier form of globalisation,where labour mobility was the driving force, the present one is governed by mainly capital mobility. The recent issue of the Economist (Oct6th 2005) acknowledges this missing link of globalisation.

....The flow of workers across borders is heavily impeded, leaving the global market for labour far more distorted than those for capital and commodities. The world price of capital may be set in America, and that of oil set in Saudi Arabia....there is no such thing as a world price of labour. Wages can differ by a factor of ten or more depending only on the passport of the wage-earner.

Relaxing the movement of labour even a little would thus generate large efficiency gains.... letting poor workers into rich countries, in modest numbers (equivalent to 3% of the hosts' labour force) for a limited period, could reap benefits to the developing world worth $200 billion a year. With numbers like that...(one) wonder why so much energy is spent freeing trade and capital, and so little expended freeing labour.

....Kofi Annan, the secretary-general of the United Nations, set up the Global Commission on International Migration almost two years ago. The commission, 19 members of the great and good from around the world plus a secretariat in Geneva, was charged with inspiring debate and reflection on all aspects of international migration and policy....Of its 33 recommendations, the most consequential is indeed a call for more temporary migration from poor countries to rich ones. Guest-worker programmes would realise some of the efficiency gains...Opening up new avenues of legal migration might also help reduce the flow of illegal migrants, the report hopes.

...history lends little support to their optimism. The Gastarbeiter programme in Germanyâ€”which invited Turks, Yugoslavs and others needed at the time to fill the factory jobs created by the country's post-war economic miracleâ€”failed, at least on its own terms. Many of Germany's â€œguestsâ€� never left, and their families soon arrived. The bracero programme in Americaâ€”which, from 1942 to 1964, recruited Mexican field hands to pick cotton and sugar beets in Texas and Californiaâ€”fared no better. The entry of hundreds of thousands of farm workers provided camouflage for a substantial flow of undocumented labour.

....the logic of temporary migration appears irresistible. Rich countries want migrants' labour, but do not want to look after these newcomers when they grow old. Ideally, rich countries would like a constant rotation of workers, arriving while they are young and active, leaving before they grow old and dependent.... â€œtemporary and circular migrationâ€� is also better for poor countries. One reason is remittances: the longer an immigrant stays away from home, the smaller the share of his wages he sends back.

If temporary worker programmes make a comeback, how should they be designed? ...Some countries set a simple quota, filled on a first-come, first-served basis. The British government is more calculating, allocating visas to specific sectors, such as food processing, that express a need for cheap labour. Singapore is the most ambitious....â€œforeign worker leviesâ€� that employers must pay to hire an immigrant. The levies differ by industry and by skill. To hire a skilled foreigner in construction, for example, an employer must pay S$80 ($47) a month. To hire an unskilled migrant, the employer must pay S$470. With these levies, the ministry can fine-tune the demand for immigrant labour.

In Germany, ...the availability of cheap guest-workers in German factories slowed the adoption of new labour-saving technology. As the saying went at the time: Japan is getting robots while Germany gets Turks.

Some economists argue that governments should simply set a quota of visas and auction them..... they could set a price for the permits designed to achieve more or less the same number of sales. The principal virtue of both schemes is that they allocate visas according to private perceptions of their worth, not government guesses about need.

How can governments ensure that guest workers do not overstay their welcome? In South Korea, temporary workers contribute to a special account that is refunded to them if they leave on time and forfeited if they linger. The British government is thinking of asking some migrants to post a bond, like a defendant on bail, which they will lose if they choose not to return.

...the market forces and demographic pressures that make temporary migration worth considering anew.

The following chart gives an idea of destination of immigrants.

Net Migration Flow per Region 1995 â€“ 2000, Source: UN Population Division

rising fuel price

2005-10-06T16:52:00.000+05:30

One of my friend has forwarded the following images, interesting one!!

FDI in china

2005-10-06T10:22:00.000+05:30

Foreign direct investment (FDI), which refers to the inflow of foreign capital into a country, also entail investments through cross-border mergers, and "greenfield investments" â€“ such as the setting up of a completely new factory by a foreign company. There are some problems with the FDI data that have to be kept in mind when interpreting them, as noted by UNCTAD in its latest World Investment Report. FDI is an investment involving a lasting interest by a home-economy entity in an enterprise in a host economy. For data collection purposes, FDI has been defined as involving an equity stake of 10% or more in a foreign enterprise. FDI has three components: equity capital, intra-company loans and reinvested earnings. Different countries have different recording practices relating to these three components. Some countries deviate from the suggested 10% threshold value for foreign equity ownership. Most countries report long-term intra-company loans, but not all countries record short-term loans and trade credits. Some countries are still not able to report reinvested earnings, as the data are not easily available from company reports or balance-of payments surveys; those that report often do so with a considerable time lag. UNCTAD stressed that FDI figures are very volatile, and they can easily give a distorted picture by the impact of single transactions or by statistical effects. Differences in how countries measure and report FDI complicate the interpretation of FDI trends for the following reasons:

â€¢ Bilateral discrepancies between FDI flows as reported by home and host countries can be quite large. The following table on FDI flows to China as reported by China (the host) and by a number of the investing (home) countries highlights this problem and thus claimed by the country are far in excess of those reported by investors (see table). Thus global FDI inflows and outflows differ. In 2004 for example, global FDI outflows were 13% higher than global FDI inflows. This imbalance is due to various factors such as: different methods of data collection by host and home countries, different data coverage of FDI (i.e. all three components of FDI may not be included), different time periods used for recording FDI transactions, and different treatment of round-trip investments and of FDI in special-purpose entities.

â€¢ As recording practices change over time, time series data on FDI flows have structural breaks. For example, Japanese data on FDI flows started to include reinvested earnings (in addition to the other components) only in 1996, the same year German FDI flows began to cover short-term, intra-company loans. Furthermore, to facilitate a comparative analysis of worldwide FDI, data on flows in various currencies are converted into a single currency, the United States dollar, and growth rates of dollar denominated FDI flows may diverge from growth rates of FDI flows in national currencies. In 2004 for instance, the United States dollar depreciated against most currencies of the developed countries. Therefore the 9% decline in the dollar value of FDI inflows into developed countries using constant exchange rates was smaller than the decline in FDI inflows calculated with current exchange rates. Similarly, as FDI flows are expressed in nominal or current prices of a country, the conversion of these flows into constant prices yields different results.

The recent paper by BenoÃ®t Mercereau is also important in this regard.

intellectuals opposition to capitalism

2005-10-05T11:37:00.000+05:30

Although this is a little bit older piece written by Rober Nozick of Harvard University, but its worth reading. Nozick argues that intellectuals are skeptical of markets and capitalism because they are habituated to expect greater remuneration for their accomplishments and efforts than they actually get, and less than they could expect to get in a centrally planned meritocracy.

Adam Smith once said, "All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind."

mike mussa's quotable quotes

2005-10-04T13:27:00.000+05:30

This special issue IMF Staff papers September 2005 contains a collection of 10 papers presented at the IMF Conference in Honor of Michael Mussa (MussaFest) in June 2004. Michael Mussa has been an outstanding communicator, apart from a successful professor and prominent IMF official. The Top 10 Quotable Quotes from Mike Mussa is a pointer to that.

Quote Number 10â€”Mike Mussaâ€™s Definition of Economics

Economics, of course, is not only science; it is also an artâ€”some would say, a black art. Indeed, a man I had the privilege to serve for some years in Washington was widely accused of â€˜voodoo economics.â€™ Then and now, the only appropriate reply to that accusation comes from an old song, â€˜Please do that voodoo that you do so well.â€™

Quote Number 9â€”Mike Mussaâ€™s Strong Opinion on Statism

The fundamental tenets of statist economics are as dead as the Russian monk Rasputinâ€”whom you may recall was poisoned, strangled, stabbed, shot, cut into pieces, burned to ashes, and fired through a cannon.

Quote Number 8â€”The Story of the Three Little Pigs and the Big Bad Wolf, and Its Applicability to Economic Policies

The moral of the story on the three little pigs and the big bad wolf is that you need to build a brick house in order to be able to withstand the huffing and puffing of the big bad wolf. So there is a key message for most of the economies around the world: that your economic policies and your financial institutions need to be sufficiently strong so that if the big bad wolf comes huffing and puffing, you can survive the incident.

Quote Number 7â€”On Human Race, Fire, and Capital Account Liberalization

I like to think of the issue of whether capital account liberalization is good or bad, and how we should deal with it, as similar to the issue of how the human race should make use of fire. Fire warms our homes. It cooks our food. It powers our automobiles and trucks and our turbojets. It powers our airplanes. No doubt, fire is very useful, and we are not going to give up its manifold benefits. On the other hand, fire can also burn you down and do a great deal of damage, and that seems to me to be the main concern with capital account liberalization, that it does have important benefits, and few of us would want to give up the benefits of living in an economy that has both a fairly liberal domestic financial order and a fairly liberal international financial order. On the other hand, liberalization in the financial sectorâ€”and I would emphasize here both domestically and internationallyâ€”has far too often in far too many countries around the world been associated with a variety of economic disasters.

Quote Number 6â€”Mike Mussa on Globalization

To be clear, my grandfatherâ€™s move to America in 1907 was not motivated solely by narrow economic considerations. As a teenager, he witnessed the siege of Paris by the Prussian army in the winter of 1870â€“71. By 1907, he had three sons. He understood the significance of the words of the French national anthemâ€”Arise sons of France, the day of glory is here, form your battalions. Expecting that war would come, sooner or later, departure beyond the grasp of French conscription seemed prudent. Viewing this aspect of my grandfatherâ€™s decision as an economist and thinking of the military draft as a form of taxation in kind, one could say that the move to America was partly motivated by tax avoidance. Again, there is a general lesson hereâ€”indeed two of them. First, economic globalization does tend to put limits on the ability of governments to enforce taxes and other policies. . . . Second, it is not necessarily a bad thing that globalization places some limits on the power of government.

Quote Number 5â€”Mike Mussa on ODA

Well I guess to correct the downtrend in official development assistance, the action that is clearly required is action by the advanced industrial countries, and I think particularly the United States. So I guess the specific advice I would give is that all the demonstrators who are planning to be outside the Fund and the Bank should instead go up to Capitol Hill.

Quote Number 4â€”Economists as Forecasters

Weâ€™ve been forecasting a slowdown in the U.S. economy for a while now, and weâ€™ll continue to forecast a slowdown until it happens.

Quote Number 3â€”Titanic 101, or the Value of not Defending the Indefensible

The argument that the real exchange rate appreciation of the Mexican peso and the size of the current account deficit are irrelevant in explaining the Tequila Crisis has the same credibility as if the captain of the Titanic, on being questioned about the iceberg that brought the ship down, would have answered: â€˜An iceberg? What iceberg?â€™

Quote Number 2â€”Titanic 102, or Is There an Optimal Amount of Moral Hazard?

If we hadnâ€™t rescued the 800 people we rescued from the Titanic, we would have taught an even more valuable lesson about people being careful about getting on ocean liners. But there is a trade-off here: if every time national default threatens, we say, â€˜Letâ€™s force it,â€™ then we are not only going to get the creditors; we are also going to do a lot more damage to a lot of innocent victims. The objective is not to make a crisis as large and costly as possible so that we can discourage all risk taking. . . . Some amount of moral hazard is almost inevitably a consequence of international support packages. But the issue is a balancing one. As President Abraham Lincoln put it, â€˜There are few things wholly evil or wholly good.â€™

Quote Number 1â€”Mike Mussaâ€™s Bottom Line

This is how Mike Mussa concluded a convocation address at the University of Chicago in August 1991: To conclude on a personal note, next Tuesday, I shall take leave of the university to assume the duties of Economic Counsellor and Director of Research at the International Monetary Fundâ€”an institution that has helped to shape the economic policies of many countries around the globe. Important as that institution may be, however, its influence pales in significance to the power of an idea. Free people, guided by their self interest in building better lives for themselves, their families, and their communitiesâ€”disciplined by the forces of competition of a market oriented economy within a law-abiding societyâ€”are the fundamental engine of economic progress. This is the foremost practical lesson of economic science.

roars and whispers of socio-economic issues

2005-10-03T11:29:00.000+05:30

The tenth Social Watch Report analyzes and measures nations' pledges to achieve gender equality and eradicate poverty. The 2005 edition pays special attention to the appalling gap between promises and action. Based on current trends, the report says that the states will not achieve the Millennium Development Goals. â€œThe Social Mapâ€� of the world that accompanies this report seems doomed to be painted mostly in red, orange and yellow, the colours that symbolize different degrees of deprivation, when by 2015 the â€œsocial planetâ€� should be entirely blue to indicate that the minimum level of social services has been met. This publication calls for immediate action by the international community. The time has come for bold and decisive action. Anything less is irresponsible.

progress of development in last 25 years

2005-10-03T11:10:00.000+05:30

Mark Weisbrot, Dean Baker, and David Rosnick in a recent work in Center for Economic and Policy Research (CEPR) prepared the scorecard on development for the last 25 years (1980-2005). And contrary to the popular belief, the results, they got, are dissatisfactory. There has been seen a sharp decline in the rate of growth for the vast majority of low- and middle-income countries, China and India are notable exceptions (see the recent musings by Acharya and Rodrik). Accompanying this decline has been reduced progress for the almost all of the social indicators that are available to measure health and educational outcomes.

The methodology, they adopted, precludes the possibility that this reduced economic and social progress was a result of â€œdiminishing returns,â€� i.e., the increased difficulty of progressing at the same rate from a higher level. It is therefore likely that at least some of the policy changes that have been widely implemented over the last 25 years have contributed to this long-term growth and development failure. In some of the financial and economic crises that took place in the late 1990s â€” for example in East Asia, Russia, and Argentina â€” it seems clear that policy mistakes contributed to severe economic losses.

However, it is difficult to show a clear relationship between any particular policy change and economic outcomes, especially across countries. There are many changes that take place at the same time, and causality is difficult to establish. It is certainly possible that the decline in economic and social progress that has taken place over the last 25 years would have been even worse in the absence of the policy changes that were adopted. But that remains to be demonstrated. In the meantime, a long-term failure of the type documented here should at the very least shift the burden of proof to those who maintain that the major policy changes of the last 25 years have raised living standards in the majority of Developing countries, and encourage skepticism with regard to economists or institutions who believe they have found a formula for economic growth and development. Indeed, some economists^# have recently concluded that more â€œpolicy autonomyâ€� â€” the ability of countries to make their own decisions about economic policy â€” is needed for developing countries. Most importantly, the outcome of the last 25 years should have economists and policy-makers thinking about what has gone wrong.

# Nancy Birdsall, Dani Rodrik, and Arvind Subramanian. (â€œHow to Help Poor Countries,â€� Foreign Affairs, New York:Jul/Aug 2005. Vol. 84, Iss. 4, p. 136-152)

currency competition: survival of the fittest

2005-09-30T10:36:00.000+05:30

In the background of three significant international events occurring simultaneously-the US dollar is depreciating against the Euro, the price of oil is soaring in the international circuit, the gold price has reached its highest peak in almost five years-there seems a vigorous competition among currencies to emerge supreme.

The recent issue of The Economist questions the dominance of th mighty U.S. dollar as reserve currency:
Once a decade or so, economists ask whether the dollar's reign as the world's number one reserve currency might be at the start of a slow decline....

...In the past 30 years, the dollar has had four bouts of marked depreciation. During the most recent, which began in 2002, it has fallen by 28% against the euro and by 14% against a broad basket of currencies. .... 66% of the world's official foreign-exchange holdings are still in dollars, compared with 25% in euros, 4% in yen and 3% in pounds.....yet dollar sceptics note that this time the dollar's crown is, if not wobbly, at least skewed.

America's current-account deficit, at 6% of GDP, is its highest on record; its net foreign liabilities, at 22% of GDP, are also close to an all-time high. Foreign central banks seem to have reduced their purchases of American Treasuries: official holdings of these rose by only $2 billion in the first seven months of 2005, against $295 billion in (the whole of) 2004 and $175 billion in 2003. If this trend continues, other currencies could one day challenge the dollar's dominance. History offers perhaps only one true example of a reserve-currency shift, from the British pound to the dollar. The pound was king during the era of the gold standard. But in the years after 1914, Britain switched from net creditor to net debtor, and by the 1920s the dollar was the only currency convertible to gold.... Two costly wars and two episodes of currency devaluation in Britain later, the dollar was unchallenged as the world's chief reserve currency.

The likeliest pretender to the dollar's crown is the euro. Reserve currencies need to have a home economy with a large share of global output, trade and finance. America's economy still dominates, but the euro area is not much smaller. The euro area's total trade with the rest of the world is about as big as America's; about half of this trade is invoiced in euros. The financial market of the reserve currency country must also be deep, open and well developed...

Confidence in the value of the currency is also an important requirement, and this is where critics of the dollar have mostly taken aim. Barry Eichengreen, of the University of California at Berkeley, argues in a recent paper* that whether the dollar retains its reserve-currency role depends mostly on America's own policies. If America allows its large current-account deficit to persist and its net foreign liabilities to rise, foreigners will become less willing to hold more dollars. The dollar would depreciate, creating inflationary pressure in America and making dollar reserves less attractive stillâ€”perhaps even if the Federal Reserve raised interest rates.

In another recent studyâ€ , Menzie Chinn, of the University of Wisconsin, and Jeffrey Frankel, of Harvard, estimate the importance of these factors in determining the shares of different currencies in the world's total reserves. They also take â€œnetwork externalitiesâ€� into account: the tendency of each monetary authority to favour the dominant currency because all others do. They use these estimates to predict whether the euro could overtake the dollar as the world's main reserve currency.

It could, but not soon. Suppose, say the authors, that the dollar loses 3.6% a year against a basket of other currencies, while the euro gains 4.6% a yearâ€”the same rates as in 2001-04....it is impossible to forecast such a change with any precision. The dollar, after all, took decades to displace the British pound....the euro zone has obvious economic weaknesses....the stability and growth... and the EU constitution rejected by France and the Netherlands, some even wonder whether the single currency will be around in 20 years...

Another view, offered by Mr Eichengreen, is that the world might eventually have more than one main reserve currency. The dollar could share its status if other currencies become more attractive. The preference to stick with the dominant currency might secure the greenback's position for a long time. However, as financial markets in other countries become more liquid, this effect is weakened and other currencies become more trusted as a store of value. Reserve-currency competition will then cease to be a game in which the winner takes all. This process... favours the euro. Whether the dollar ever loses or is forced to share its pre-eminence among reserve currencies depends mostly on whether America continues to run the economic policies that will eventually undermine its position...

^*â€œSterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competitionâ€�. NBER Working Paper No. 11336
^â€â€œWill the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?â€� NBER Working Paper No. 11510:

In the end, I think, we are witnessing a period of transition, with the US dollar on one side and the Euro on the other. It is very difficult to predict a clear winner between these currencies.

WHO ARE IN THE LIST OF RACE FOR NOBEL PRIZE IN ECONOMICS?

2005-09-29T11:44:00.000+05:30

The Bank of Sweden Prize in Economic Sciences, called Nobel Prize, in Memory of Alfred Nobel will be announced on Monday, October 11^th. The prize is generally acknowledged as the definitive accolade in terms of the kudos and reputation it affords both its recipients and the universities to which they are affiliated. Thus there is speculation and expectations regarding this and the betting market are no exception. This lists the active and expired candidates on the betting meter.

To come to the basics, if we look at the biographical characteristics of prizewinners in economics, there seems the dominance of USA. About two-thirds of laureates have been US citizens, three-quarters have been affiliated to a small number of top American universities, and two-thirds have received their doctorates from American universities. Some kind of association with the University of Chicago seems particularly useful. Nine prizes have gone to Chicago faculty members - more than twice as many as any other university anywhere in the world. Chicago has also provided PhD training to more Nobel prizewinners than any other university.

My choice, a very short one, for this yearâ€™s contender:

Robert Barro, Paul Romer and Ed Prescott for Macroeconomic theory

Jagdish Bhagwati, Paul Krugman, Avinash Dixit and Kenneth Rogoff for trade theory

William D Nordhaus, William J Baumol for resource economics,

Fama, and Phelps are also underdogs in this race.

THE POLITICALLY (IN)CORRECT WORD FAMINE

2005-09-26T16:09:00.000+05:30

In a recent issue of Global Policy Forum, Mr. Alex Whiting writes about the difficulties in defining the word â€œfamineâ€�.

In crude sense, famine is a question of excess population over the mean of substance. This is sort of Malthusian framework, where the growth in the population outstrips that of food production.

Such an approach, with the theoretical considerations of cause as a starting point, leads to technologised responses that are only incapable of responding adequately to the politics of mass starvations. Thus the question remains is not â€œWhat causes famine and what is the appropriate response needed to avoid famine?â€�, but â€œHow were acts of mass deprivation committed and by whom, and how can those responsible be brought to justice?â€� This is very important as donors cannot be motivated to act unless they are convinced that what is taking place is actually famine. The food shortage view was challenged by the celebrated development, Nobel laureate economist Amartya Sen who argued that it did not matter what the food supply per head in any are; what is crucial is whether particular individuals or households have access to food or not. That means the starvation is not about food as a commodity, but about the relationship of the people with the commodity. The institution, the democratic or autocratic, thus, matters.

GLOBAL IMBALANCES OR ASSYMMETRIES: ANY SOLUTION?

2005-09-26T12:03:00.000+05:30

Hi, Due to some preoccupations, I am posting this piece after more than a week. I am sorry for that.

Plenty of ink has been deluged to deal with the vexed issue of global imbalances, the recent issue of The Economist (22^nd September, 2005) and the IMFâ€™s World Economic Outlook are the most recent add-ons. The World Economic Outlook of IMF acknowledges that, th global saving and investment rates have fallen and current account imbalances have widened to unprecedented levels, yet real long-term interest rates remain low in most countries. According to one view, the swing in the saving-investment gapâ€”from deficit to large surplusâ€”in emerging Asia has resulted in an excess global supply of saving (a global saving â€œglutâ€� or we can call it â€œinvestment deficitsâ€�) that has been channeled to the United States to finance its large current account imbalance. At the same time, this would explain the low level of long-term real interest rates, which is needed to equilibrate desired saving and planned investment on a global basis. Others have argued that the sharp drop in national saving in the United Statesâ€” reflecting the deterioration in the fiscal position and the increase in housing wealthâ€”and the recent rebound in investment are at the root of current account imbalances. Thus, according to these observers, current global imbalances are mainly the result of policy decisionsâ€”both fiscal and monetaryâ€”in the United States. By itself, however, this would not explain the low level of real interest rates, as a higher demand for net saving from the United States would lead (everything else equal) to higher, not lower, global interest rates.

In a series of articles in The Economist, Zanny Minton Beddoes discusses the global savings glut, the thrift shift, global investment deficit, excess liquidity, the viagra economy, et al., and slow expected world growth hypotheses for the persistence of low long-term interest rates. I find it easier to think about these issues if we formalise them by using the basis textbook of national income identity:

Y=C+I+X-M, where, Y, C, I, X, M are income, consumption, investments, exports and imports respectively. Now since we are talking about the global world, thus the external balance (X-M) will go off theoretically. In other words, we have Y-C â‰¡ S â‰¡ I, where S is savings, in other words, global level saving must equal investment So far so good. However, as argued in the The Economist, â€œpeople cannot save without investing their money somewhere, and they cannot invest without using somebody's savingsâ€�, and thus the S and I differ across the individual countries, and differ considerably as the latest World Economic Outlook of IMF has noticed. The Economist says,

... whereas it is true that at a global level saving must equal investment, the fact that saving and investment end up in balance does not mean that millions of households and individuals spontaneously desire to save and invest in equal measure. To use the language of economics, saving and investment are an â€œex-postâ€� identity, but the world's â€œex-anteâ€� appetite to save and invest may well be out of balance. Actual saving and investment must be equal. Desired saving and investment may not be.

Most of the time, mismatches between the desired levels of saving and investment are brought into line fairly easily through the interest-rate mechanism. If people's desire to save exceeds their desire to invest, interest rates will fall so that the incentive to save goes down and the willingness to invest goes up. Across borders, exchange rates have a similar effect. If a country has a saving deficit, its currency will fall to the point where its assets are cheap enough to lure foreign savings in.

But there is some uncertainty about how smoothly these adjustments are made. Classical economic theory suggests that interest rates automatically bring saving and investment into a productive balance. The central principle of Keynesianism, however, is that this alignment between saving and investment is not always automatic, and that a misalignment can have serious consequences.

If an economy is not running at full capacity, John Maynard Keynes wrote in his â€œGeneral Theoryâ€� in 1936, more saving might, paradoxically, result in less output rather than more. Companies' decisions to produce depend on the demand they expect for their products. More saving means less spending and hence less demand. Hence the idea that you can have too much thrift, and that there is a place for â€œKeynesianâ€� government spending policies to boost demand.

The Economist further notes, the modern consensus is that both classical and Keynesian theory can be right, but over different time frames. In the long term, saving and investment will be brought into line by the cost of capital. But in the short term, firms' appetite to invest is volatile, and policymakers may need to step in to shore up demand. Thus, although saving and investment are equal ex-post, economic theory leaves plenty of room for an ex-ante saving glut. This glut could be caused by long-term changes in people's desire to save or firms' desire to invest, or it might be caused by short-term cyclical deviations from normal saving and investment patterns. In either case, the size and duration of mismatches can be influenced by government policy. What might change people's desire to save or invest? That is a question about human behaviour which economists cannot answer with total confidence. Still, they have made some progress in explaining what motivates investment, and a little more in explaining what drives saving.

The most influential theory of household saving is the â€œlife-cycle hypothesisâ€�, pioneered by Franco Modigliani, an Italian economist. It suggests that people try to smooth consumption over their lifetime: they save little or nothing when young but more in their middle years if they have a good income. They then draw down those savings in retirement. It follows that demographic shifts and economic growth are the most important drivers of thrift.

Another theory suggests that people save for â€œprecautionary reasonsâ€�, in case they need the money for a rainy day. This implies that people will save more if their income is variable. It also suggests that they will be more inclined to save if they have no access to credit.

A third possibility is that people save because they want to leave assets to their children, either because they love them or as a way to bribe the children to look after their parents in old age. (Economists are always reluctant to believe in altruism.) Whatever the motive, the bequest theory of thrift suggests that savings might not actually be drawn down in retirement.

A final possibility is that people save in response to their government's actions. This theory, known as â€œRicardian equivalenceâ€�, suggests that people save more if government saves less because they expect higher taxes later on.

How well do these theories fit with what has actually happened in the past? Saving rates differ dramatically between countries and over time, giving economists plenty of statistical ammunition with which to test their theses. Inevitably, there are differences among academics about which hypotheses are best supported by the data. But, in general, the following factors seem to play a role:

â€¢Demographics. Although it is hard to confirm Modigliani's hypothesis by studying individual households, it seems to hold for entire countries. Saving rates do rise when the ratio of children in the population falls (as in China), and decline when the proportion of pensioners rises (as in Japan). Given that the world's population as a whole is ageing but, in most countries, most people are still working, global saving should currently be rising.

â€¢Economic growth. Especially in poorer countries, saving rates rise as economies grow. That is probably because people do not adjust their consumption patterns as quickly as their income rises. Rapid growth was an important reason behind the big rise in saving rates in East Asia in the 1970 and 1980s. It may account for much of the rise in saving by emerging economies today.

â€¢Terms-of-trade shock. If a country's exports suddenly go up in price, its saving rate tends to go up too, at least temporarily. Oil exporters, for example, put on a saving spurt if oil prices rise. This effect also helps to explain the recent increase in saving in many emerging economies.

â€¢Financial development. As an economy's financial system becomes more developed, saving rates tend to fall because people find it easier to borrow. This seems to be true for both rich and poor countries. It suggests that saving rates may be lower in countries with more sophisticated financial systems, such as America.

â€¢Capital gains. In rich countries there is increasing evidence that capital gains influence saving rates. If the stockmarket or house prices rise, people feel richer and save less. A study by the OECD published late last yearsuggests that housing wealth has a bigger effect on saving than financial wealth, and that this effect is stronger in economies with flexible mortgage markets and high rates of home ownership.

â€¢Fiscal policy. In some countries, people do appear to behave as Ricardian equivalence theory suggests: they save more when budget deficits expand, perhaps because they expect higher taxes in the future, although private-sector saving rises by less than the rise in budget deficits. The big exception is America, where the impact of fiscal deficits on private saving appears to be weakest.

Some of these factors work in opposite directions, and gauging which matters most is difficult. But there are indications that in rich countries the biggest disincentives to saving have been capital gains and the ability to borrow. National saving rates in rich countries have been falling gradually for more than two decades, and particularly steeply since the mid-1990s...

... In emerging markets, on the other hand, the most powerful factors pushed in the opposite direction. Fast economic growth and increases in government saving, thanks partly to terms-of-trade shocks, have increased total national saving.

These opposing movements show up clearly in global statistics. Over the past 35 years, the emerging economies' share of global saving has doubled, from 15% to 30%. In 2004, emerging economies saved the equivalent of 6% of global GDP. If there is a glut of saving, it is likely to be found in emerging economies and oil-exporting countries.

The investment puzzle

If it is hard to find out why people save, it is even harder to discover why they invest. In theory, firms should invest if the expected return on their investment exceeds the cost of the capital they are using. In the short term, firms need to worry about the state of overall demand. But in the long term, returns on capital depend on how much capital an economy already has, how productively it is used, and how fast the workforce is growing. If there is little capital available or the workforce is growing rapidly, firms would usually expect a high return on investment.

The evidence supports these theories, up to a point. Statistical analyses suggest that investment rises when economies grow, when productivity increases or when the share of workers in the population goes up, and that it slows when capital becomes more expensive. The IMF's analysis, for instance, suggests that a 1% increase in the cost of capital in rich countries will lead to a drop in investment rates of 0.4% of GDP.

However, in recent years these statistical relationships have failed to hold. Both in rich countries and in emerging economies (except China), investment levels have been lower than economists had expected at the levels of interest and growth rates prevailing at the time. Much of Mr Bernanke's saving glut is due to this unexpectedly low rate of investment. This shortfall could simply be the unwinding of earlier excesses as firms repair their balance sheets, but several â€œstructuralâ€� explanations have gained support:

â€¢Demographics. A young and growing workforce boosts the level of investment, just like a mature workforce boosts the saving rate. So the world economy is likely to move through a cycle in which investment peaks first and saving peaks a bit later. With rising life expectancy and falling birth rates, the world economy may be moving into the high-saving phase. But although demographics are important, they change slowly. It is hard to ascribe the recent sharp drop in investment demand in regions such as Japan or East Asia to demographic change alone.

â€¢Declining capital intensity. Firms in rich countries may not need to invest as much as they used to because the share of capital-intensive industries in their economies is shrinking. In a recent analysis, economists at UBS, a bank, pointed out that in America the share of corporate profits that is generated by investment-heavy industries (oil, gas and chemicals, for instance) has fallen from 55% of the total in 1948 to 21% in 2004. This long-term trend may have accelerated over the past decade. But it does not explain investment busts in poor countries.

â€¢Deflation of capital-goods prices. In recent years prices of capital goods have fallen sharply relative to prices of other goods and services, thanks largely to cheaper computers, so companies are able to achieve the desired level of real investment for a smaller outlay. Calculations in the IMF's World Economic Outlook show that in real terms, the fall in average investment rates in industrial countries has been much more modest than it appears at first sight. This may help to explain some of the recent weakness in investment, particularly in rich countries. But it is unlikely to last. Relative price shifts tend to run their course and then stop. More important, computers depreciate more quickly than other capital goods, so eventually firms will need to invest more to maintain the same level of net investment.

â€¢The rise of China. This may have prompted a geographic shift in global investment patterns. As firms move their production to China to take advantage of its huge pool of untapped labour, investment elsewhere slackens. But investment flows to China from America, Europe and Japan are not yet big enough to explain the sluggish investment in those countries. Besides, the rise-of-China thesis is about the location of investment more than about changes in its global level.

In sum, none of these explanations for a structural, global decline in investment is altogether convincing.....
a typical economic explanation.

niger nemesis

2005-09-18T11:14:00.000+05:30

Recently, the worldâ€™s attention has been focused on the severe food shortages afflicting Niger, the second most impoverished country on this earth, as a result of the confluence of natural disasters of prolonged drought and a locust invasion, amidst the allegations and counter-allegations of the policy bargain by international aid agencies, IMF, World Bank and EU. According to the United Nations, about 2.5 million of Nigerâ€™s 12 million (more than one-fifth) people are directly affected by the crisis.
The IMF and the World Bank, and the EU as well, are killing Africans in their thousands in Niger, Mali and throughout the Sahel region of Africa, writes Judith Amanthis in the Global Policy Forum, who lists various IMF policies as being responsible for the food crisis in Niger.
â€¦. Drought and locusts destroyed crops, it's true, but the rains were down only 11% from normal. There is some food in Niger. The problem is that large numbers of people, especially in the rural areas, are just too poor to buy it when their crops fail. Why? First, subsistence farming in Africa doesn't bring in much money, or any money. It has no western financial backers. Second, in March 2005 the Niger government, having secured Highly Indebted Poor Country status for Niger, implemented an IMF condition on further loans: it put a 19% VAT on basic grains whose price had risen by up to 89% over the past five years. Traders naturally sell to the highest bidder. In this case they sold grains to other West African countries. The free market knows no borders, colonial or otherwiseâ€¦
Judith Amanthis further writes, long term drought and famine can never be normal for any group of human beings. What is normal is people in the west being lied to about the causes of Africans' suffering and what Africans are doing about it.
Western oil and forestry companies who have created climate change are as implicated as well. Western Europe and the US are responsible for 50% of the world's carbon emissions, and forestry multinationals are destroying the earth's 'lungs', including the great Congo River Basin forest, at 26 hectares a minute (37 football pitches). Greater heat and erratic rain in the Sahel region means the Sahara Desert is creeping south. Areas like northern Nigeria and Senegal are drying up as well. In erratic weather, locusts breed more heavily, but since the mid 1980s, the West African regional organisation, OCALAV, which was set up at independence in the early 1960s to control locust swarms and other plagues has been restructured. Its funding has been cut. African governments which have restructured entire economies to make life easier for multinationals can no longer pay for services vital to the people's survival.
However, the recent discussion paper at IFPRI, Long-Term Prospects for Africa's Agricultural Development and Food Security by Rosegrant, et al., is case in point. The paper explores and evaluates the consequences of various policies related to food security in Africa based on projections for the year 2025, focusing on agricultural production. It uses IFPRIâ€™s International Model for Policy Analysis of Agricultural Commodities and Trade (IMPACT) and IMPACTâ€“WATER to consider how several different policy scenarios are likely to affect the supply of, demand for, and trade of crops. The results of these policy scenarios show that the number of malnourished children, one important indicator of food security, could rise as high as 41.9 million or fall as low as 9.4 million by 2025.
--- The vision scenario attempts to show what type of transformation would be necessary for Africa to reach the MDG target of cutting the proportion of people suffering from hunger in half by 2015. In this scenario national governments and international donors increase investments in education, HIV/AIDS prevention and treatment, water-harvesting technologies and agricultural extension, female schooling, and clean water access in Africa. Population growth slows, but gross domestic product and crop productivity increase significantly. Under this scenario available kilocalories per capita increase markedly in Sub-Saharan Africa, while the total number of malnourished children is reduced to 9.4 million in 2025. Most notably, the percentage of malnourished children under five years old meetsâ€”or comes close to meetingâ€”the proposed MDG target of cutting the percentage of malnourished children in half by 2015 in all African regions.
In fact, many of the challenges facing Africaâ€™s agricultural sector stem from a few root causes, including poor political and economic governance (as noticed and elaborated vociferously by celebrated developmental economist, Amartya Sen in most of his work) in many African countries, inadequate funding for the agricultural sector, poor water resources management, and neglect of research and development. The strategies for addressing these challenges should take into account local, natural, and human resources, as well as the political and economic agenda of each country. The paper lists policy priorities for addressing food and nutrition security in Africa. These priorities include (1) reform of agricultural policies, trade, and tariffs; (2) increased investment in rural infrastructure, education, and social capital; (3) better management of crops, land, water, and inputs; (4) increased agricultural research and extension; and (5) greater investments in women.

new kid on the block

2005-09-16T13:57:00.000+05:30

Hi,
I am posting a message I got from one of my friend. This is regarding the difference between developed nation and developing nations in the background of Mumbai deluge and Katrina Khauf(meaning 'fear') in New Orleans

Comparison between Katrina and Mumbai Rain

Inches of rain in New Orleans due to hurricane Katrina â€“ 18
Inches of rain in Mumbai (July 27th) - 37.1

Population of New Orleans - 484,674
Population of Mumbai - 12,622,500

Deaths in New Orleans within 48 hours of Katrina â€“ 100 Deaths
In Mumbai within 48hours of the rain â€“ 37

Number of people to be evacuated in New Orleans - entire city Number of people evacuated
In Mumbai - 10,000

Cases of shooting and violence in New Orleans - Countless
Cases of shooting and violence in Mumbai â€“ NONE

Time taken for US army to reach New Orleans - 48hours
Time taken for Indian army and navy to reach Mumbai - 12hours

Status 48hours later - New Orleans is still waiting for relief, army and electricity Status 48hours later - Mumbai is back on its feet and is business is as usual

USA - world's most developed nation
India â€“ just a developing nation