primer on Amartya Sen

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?

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?

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!

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

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

Calender arts from Incredible India

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

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

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

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

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???

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:

…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,� 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.

…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 Reserve…most active “econobloggers� are Brad DeLong, Gregory Mankiw, Gary Becker and Richard Posner, a long list on Mark Thoma’s blog.

So why do it? “It's a place in the intellectual influence game,� Mr DeLong… 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.

…The faster flow of information and the waning importance of location—which blogs exemplify—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. …In this model, the value of influence is priceless.

errors in economics and the aftermath

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

…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

… 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 further….. 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?

…. 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 model…

Indian Model

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 India’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!!!!

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!!

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

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.

…. 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.

….The spread of “social media� across the internet—such as online discussion groups, e-mailing lists and blogs—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 “stakeholders�, they rarely belong to well-organised groups. That makes them harder to identify, appease and control.

Here is a complete story.

food for thought?

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:

• Decades of underinvestment in rural areas, which have little political clout
• Wars and political conflict, leading to refugees and instability
• HIV/Aids depriving families of their most productive labour
• 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??

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

….It was Spencer… who invented that poisoned phrase, “survival of the fittest�. ..originally applied it to the winnowing of firms in the harsh winds of high-Victorian capitalism, but when Darwin's masterwork, “On the Origin of Species�, was published, he quickly saw the parallel with natural selection and transferred his bon mot to the process of evolution…. 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 …. was that people got what they deserved—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 true—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, “On the Origin of Species� had no explanation. As a result, Darwinism had to tiptoe round the issue of how human society and behaviour evolved….. the disciples of a second 19th-century creed, Marxism, dominated academic sociology departments with their cuddly collectivist ideas—even if the practical application of those ideas has been even more catastrophic than social Darwinism was.

…the real world …penetrates even the ivory tower. The failure of Marxism has prompted an opening of minds, and Darwinism is back with a vengeance—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 is…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. Trust….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 mind…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 be…the origin of virtue.

The new social Darwinists (those who see society itself, rather than the savannah or the jungle, as the “natural� 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 ….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 ironies…. 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 one… 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. …. suggests a constant struggle, not for existence itself, but between selfishness and altruism—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, … 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 century—Darwinism, Marxism and Freudianism—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 course….

simple and classic

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

from seattle to hong kong: multi trade negotiations

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 — and what might happen if it does not.