India: The Bungling Democracy

I have argued on this blog here and other posts that India and China represent a natural experiment that will help to answer the question about the place of democracy and authoritarianism in longer term development. In short, my claim has been that in spite of a slower rate of growth and a smaller economy, India is bound to catch up soon and will over time become a large economy owing to its more open political system. In sum, the argument is that democracy is not necessarily a hindrance to India's long term growth and that China will of necessity have to go through bumps that may derail it substantially.

In spite of my being bullish about India, reading stories such as this in the NYT makes me really frustrated at India's political leadership. Granted that the Congress party has to navigate in order to keep its coalition in place, I cannot avoid the argument that India's growth is slowing and that it does not show any signs of catching up with China at all. Indeed, in spite of China's own domestic political and economic difficulties, India's leaders still have an inferior record of economic management. In many respects, the benefits that India gained from the bold economic reforms initiated under Manmohan Singh two decades ago are exhausted now and he lacks either the courage or the ability to make another long-overdue round of reforms to open up the economy. 

Given the state of affairs, it is just possible that India's catch up period will be unduly extended because of the delays in cutting back red tape and substantial regulatory and tax reforms. On the political side, India's bungling, in spite of the fact that it has an indubitably bright man as prime minister will embolden those who consider democracy as a liability for fast growth. Please get up and sprint!

 

Should Zoos Be Conservation Parks?

If asked, I would answer that the primary purpose for the existence of a zoo is to assemble a number of animals that would meet the curiosity of people who would visit and pay some money to cover costs. By this definition, the functions of a zoo are largely for the entertainment of visitors. Reading Leslie Kaufmann's article in the NYT tells me that there is substantial pressure on successful zoos to incorporate the conservation of threatened species into their business model. It is immediately clear that an accreditation body is trying to use the conservation of species as a new criteria for certifying zoos in the United States.

It is altogether understandable that it would be a big advantage to be able to display a wide range of animals as part of building the experience for visitors. However, I think that the management of zoos should not be compelled to change the business model to incorporate conservation because that change will imply different costs and requirements in terms of staff and operations. To start with, some of the fauna that are arguably in danger of extinction may be unknown to the visitors to zoos and therefore the diversion of resources towards saving them may not be a cost effective policy. As stated, tensions will inevitably arise because of the required trade offs where the more popular species as elephants may not be in as much danger. In the eyes of many school children, to visit a zoo to see a toad or unique species of frog in place of the elephant and the Zebra may not be acceptable.

Clearly therefore, the approach should be to allow individual zoos to choose the species in which they would specialize and let the conservation efforts be handled by others that are resourced for it. It will become clear in good time whether these models could co-exist or be run separately. Ensuring the restoration of numbers of some of the species with low numbers may in the end be even beyond some zoos. they should therefore be allowed to provide entertainment only.  Conservation requires concentrating resources on a few species and this limits the variety within zoos.    

Promise of National ID Sytems

Soon after reading the book Imagining India by Nandan Nilekani, one of the founders of Infosys, I learned that the author's proposal for a form of identification mechanism for individual citizens had been accepted by the government. In the book, he mentions that the absence of an identification document for most Indian citizens leads to a lot of fraud in government assistance for social programmes. It is understandable that a technology solution to this would reduce cost and ensure cost effective delivery of the services to deserving people. While reading that book, it immediately came to my mind that the retention of all sets of data on individuals has implications for their rights and their relationship to governments.

The Republic of South Africa has also commenced a citizen registration system mentioned here by its Minister for Home Affairs. In that piece, it is argued that there is the need to consolidate all registration and identification documents in the form of a smart card that would enable citizens to be registered for voting, driving and other interactions with the state. Needless to mention, my libertarian instincts tell me that this endeavor is not only bad for liberty but also technically unsound. To start with, the consolidation of all forms of identification under a single smart card may seem smart but simply shows that an individual is more vulnerable because a large amount of data is available in one place. Secondly, I see the tendency for well-meaning state officials to overstate the power of technology in the statement that this card is absolutely secure and cannot be breached. To my mind, that is such a preposterous statement that can only have been made up or used by the firm that is marketing this system to governments that would not care to audit that system.  

So to add my conclusion, I am certain that the quest to make identification of individuals may have some social value. What I am less certain of is whether it needs to be in form of governments collecting and maintaining a lot of data for individuals in one place. Now, the technology savvy thief knows which database to breach and find out more than they should about some citizens.    

Changing The Penalty Shootout Rule

Several days ago, Chelsea Football Club won the UEFA championship in a penalty shootout against the FC Bayern Munich. In the eyes of many purists and soccer pundits, the winning team was less deserving based on an assessment of the tactics adopted and the distribution of skills displayed on that day.  Simply put, the Chelsea FC are an inferior footballing side to the Bayern Munich team irrespective of the outcome. Most of the pundits were concerned that the triumph of an inferior side could spark a widespread imitation that could reduce the entertainment value of this high profile tournament. As if the condemnation was not enough, the president of FIFA spoke about the manner of that triumph and suggested that the sports discipline of soccer should consider the development of an alternative to penalty shootouts.  

In my view, that response is too drastic and perhaps denigrates the hard work that one team put in to ensure that it won. My view, is that notwithstanding the justifiable disappointment that many purists and fans of the game may feel, this reaction is too drastic and altogether unjustified. For a start, it assumes that winning a penalty shootout is manifestation of no preparation when that portion of the game is itself very technical and skill-driven. Secondly, it feels as if the revision of laws is driven by animus towards one team's tactics in spite of the fact that they represent a legitimate approach to the game. It may be ugly soccer but is within the rules. Finally, I think that the officials of FIFA and administrators of the game must be careful because there may be unintended consequences of the anticipated changes too. 

It is worthy to recall that Formula 1 has had so many technical changes to the sport with the ostensible reason of making it more interesting and simply changed the dominant sides from one team to another. My advise would be to let teams learn to cope by creating new approaches to ensure that they triumph against the more defensive minded sides. It is my understanding that fans tend to reward the teams that play more entertaining soccer. If some clubs make the trade off in order to win tournaments, then that should be acceptable to all.     

A Review of Ruchir Sharma's Breakout Nations

Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma
My rating: 5 of 5 stars

What is much better than a book that sensibly cautions against taking the conventional wisdom without regular review?. Ruchir Sharma has taken on the assumption that the BRICs are guaranteed to dominate world affairs (economic and political) for the medium term. That the BRICs have grown at an unprecedented scale is not in dispute but perhaps some caution should be taken in the assumption that the four have an easy and guaranteed path to the attainment of high income levels that would eventually dwarf the US and European economies.

History alone suggests that high growth as maintained by these countries tends to be episodic and is often difficult to maintain. Forecasts and claims that the BRICs story growth story of the early years of the millennium is bound to continue should be carried with more caution than analysts acknowledge. The primary claim is that all the BRICs benefited from a surfeit of cheap money from the more developed economies and may be unable to repeat their performance in the future.

More interesting is the author's finding that there are other countries whose prospects are far better than individual members of the BRICs group. Granted, not all of these Breakout Nations have large populations or huge internal markets but they have the basics right. In this group are Turkey, South Korea, Taiwan and Indonesia.

Among other profound conclusions, the author sensibly advises that it is more prudent to analyze the prospects of individual countries without relational on bogus quantification and indices that aggregate different countries.    

E-Books March On

I have eschewed any arguments about the superiority of one format of books over the other. My main reason being that it has been well-established that people who read intensely often acquire both digital and  physical books. To a student of economics, it is not accurate to view one as the perfect substitute for the other. Indeed, it has been demonstrated that upon acquiring the Kindle, readers go ahead to purchase more books in either format.

An article by Tom Chivers of the Daily Telegraph makes that point in a subtle way though he appears to be partial to the physical book. That notwithstanding, he shows that a large proportion of books read today are still in the paper format and it will be quite a while before the e-books take over completely. He is sympathetic to the fact that large bookstores will be adversely affected and will probably be rendered extinct. My view is that the large bookstores will not necessarily become extinct but will shrink considerably and the economics of the bookstore will have to adapt to the ease of acquisition of books in competing formats.

Since the adoption of e-books is growing faster while books literature in paper form is stagnant at best, it cannot be too far away before publishers have to reckon with this change. Stores will be smaller and books may be delivered based on real-time demand. That cannot be a bad thing for all readers.  

Big City Team Wins With Bad Soccer

Over the last weekend, a record for soccer was established in Europe where Chelsea FC won the European Club Champions Cup (UEFA) cup after beating Bayern Munich of Germany. In that win, Chelsea FC established its own record because this was the first time that Chelsea are the soccer champions of Europe. Many journalists also noted that it marked the end of a jinx where the English team and teams based in England have consistently lost to German opposition in penalties.  

Typical of events such as these is that the analysis captures trite issues with every pundit attempting to explain why the victory and loss were altogether inevitable. To my mind, the one factor that only very keen analysts would have noted and even explored is the fact that this event marked the break with big cities winning this championship. This obscure fact is one that I realized while reading this book by Simon Kuper and Stefan Szymanski. In one of the chapters, they state the curious fact that none of the soccer clubs based in Europe's largest cities such as London, Paris or Istanbul have had a team win that trophy while teams domiciled in smaller cities such as Marseilles, Manchester  and Milan have achieved that feat. 

With Chelsea's improbable win, it is clear that some change has taken place and big-city clubs outside Madrid may have found a way to crack this problem. The event is also an achievement in the sense that it proves that a team that consistently pumps a single-investor's money into soccer in Europe could ultimately win that prize even if it makes no profit while doing that. Without data and more incisive analysis, it is possible that pundits are making too much of a single event but one sees that many teams will probably be encouraged to be pragmatic in terms of game strategy and win regardless of the aesthetics. Maybe south American soccer will be what helps the game retain the claim to being the beautiful game. Chelsea are winners but won with no style or respect for entertainment value. Since the club is making no money while at it, I am not thrilled that the better team, Bayern Munich, lost. 

AA's Too Frequent Flyer Plan

source: www.aa.com

Many corporations are interested in creating a long-term commitment with their highest margin clients. In the quest to do that, the marketing professionals within firms sometimes generate ideas intended to ensure that business relationship with selected clients are maintained. One real example of that is the American Airlines' AAirpass which was intended to be a one-time upfront payment for selected customers in exchange for unlimited travel in the future. It is understandable that in the thinking of the corporation, this was meant to ensure upfront payment for a service that would be consumed in the future.

Washington Post reports here that the lifetime travel pass was initially sold for US$ 250, 000 and was adjusted a number of times thereafter. For a student of applied economics, it is clear that here is an instance in which the designers of the AAirpass failed t properly reckon with the fact that ownership of the pass would change travel behaviour for some customers. With the benefit of hindsight, it is clear that the AAirpass was purchased by individuals who would in turn trade on it and travelled far more frequently and longer distances. That the corporation resorted to use of detectives to detect the alleged abuses and ended up suing some customers is less a demonstration of deviousness of the customers than the fact that the marketing team that came up with this idea understood very little and crated a poorly designed product.  

Poverty and Entrepreneurship

"The enterprises of the poor often seem more a way to buy a job when a more conventional employment opportunity is not available than a reflection of a particular entrepreneurial urge." Abhijit V. Banerjee and Esther Duflo in, Poor Economics. Page 226

Defining Yahoo!

Many people underestimate what t takes to run a large corporation such as Yahoo and to make it a success while even many more mistakenly believe that CEO's determine all the outcomes of such firms. It is rather unfortunate that Yahoo! has had to lose its CEO because of a misstatement in his resume just at the same time that it has been struggling greatly to revive its businesses. I hate to kick a person who is on the floor and therefore will not overly condemn Scott Thompson for the error on his resume. However, I am unsure that having a computer science degree on its own would mean that he was more capable than not. In my view, his departure is about material misstatements that could have misled the recruiters.

That aside, I think that the most perceptive piece that I have read about this unfortunate incident is by Charles Arthur, the technology editor of the Guardian. He suggests here that the present circumstances show that the successor CEO must answer an important question about what Yahoo! is. To be honest, that question is one that not many people can answer for the firms that they work for or purport to run. Added to the fact that in Yahoo!'s arena are Google, Facebook, Twitter and many more, I would not answer that question in a thousand words or on a postcard. It may even be a question that has no answer. But as Charles suggests, it is possible that the inability to answer that question convincingly shows that there is cluttered thinking in that firm.

I hope that any readers of this blog would venture an answer as I am wondering whether Yahoo!'s trajectory is an illustration of creative destruction at work.

Atul Gawande's Prescription for Complex Systems

I have found that Atul Gawande is a rarity among professionals because he not only writes very clearly but is also eloquent. I pasted a quote from him in this blog post after having read his latest book, The Checklist Manifesto. In this TED talk, he goes into a lucid discussion about the complexity that a highly trained surgeon encounters today and how this has almost led to definite limits in their ability to perform many functions. The idea he comes up with is not to apply more technology or other fixes but just to use a checklist. As he says it, this has been tested in real surgery conditions across different nations and has had incredible results than one would have guessed. I cannot help but think that a well-thought checklist leads to benefits that surpass a blockbuster drug.  

Questioning Property Appraisals

It is a good idea to consider the opinions of professionals who have studied and taken some time to understand an industry or portions of it. However, this general advise does not mean that every industry is based on the fact that practitioners will always provide value. Reading this article on the valuation of commercial property has led me to ask whether the industry is based on any objective criteria. As the article states, a study was undertake and discovered that the valuations were error prone one way or the other by up to 40%. Impliedly therefore, many firms that trusted some of the reports presented by commercial property appraisals that were not very useful because of the margins of error. 

This leads me to ask that with such large margins of error, is commercial property valuation really a profession? As the story states, the findings of the study may be taken with caution because the market is depressed and that may have contributed to the differential in the realized and estimated values. Irrespective of that salient fact, I am convinced that appraisals should be conducted differently in order to avoid the impression created by valuers that their valuations and completely solid. I see no perfect solution except that valuations or appraisals should include numbers within a range. This may be difficult because some appraisers may base their fees on the value of the property. 

As expected, the industry practitioners resort to the fact that a number of firms are responsible for improper appraisal because of the competition for fees. In my view, it matters not because there is equal incentive for the better appraisers to achieve better results for the same price. One can only see a change when the demand side of this service gets more serious in asking what the value of an appraisal is.

Harvard Responds to Monopoly Publishers

Reading this article by Ian Sample of the Guardian reminded me of a conversation that I held with a professional economist who studies competition policy. I asked about his most recent research area and he mentioned to me that like many other micro-economists, he was concerned about the cost of academic journals in the discipline. In his view, many of them received the input of working professionals at low cost and then charged well above the marginal price. Going ahead,  he asserted that this state of affairs would only get worse because the main journals in the subject of economics were each a monopoly in its area and therefore had no incentive to charge as close to the margin as possible.  

Coming down several years later, it seems that the market power of major academic journals has persisted and that the academic institutions are reacting to the overall cost in addition to the relentless rise in prices every year. Harvard University's Librarian, has issued a memorandum to its staff suggesting that they ought to reconsider and possibly cut their relationships with leading publishers of academic journals. It takes the power of a a top university with other clout of its own to bring his issue to the fore. 

In my view, the fact that universities and scholars contribute most of the content alone does not mean that the pricing policy by publishers must favor them. The really interesting part for a student of economics is the realization that these institutions are using their understanding of their contribution to journals to try and bargain for lower costs. I also think that it is not enough to merely withhold association with the publishers. It would be a far more interesting point if they brought to fruition the idea of open access to academic knowledge. this would force a tactical response from the publishers and the competition would without lead to a reduction of the price of knowledge towards the margin.    

  

Formula 1 and Freedom Indices

People with more than a casual interest in sports have probably encountered arguments or wondered whether athletes from autocratic governments differ from others in performance across sports disciplines. More recently, I have come to consider whether the Formula 1 franchise has been expanding its races towards in a way that reflects interest in the style of political management or not. In the last decade, Formula 1 has grown in terms of demand for races across the Asian continent and this culminated in bringing in new races in Bahrain, China and India. 

It is noteworthy that the hosting of a Formula 1 race requires investments in top level infrastructure in addition to being able to attract substantial corporate sponsorship. The three new entrants into the Formula 1 races have different political economy indicators even if they share attributes that make then attractive places. To start with, India is a large and growing economy and an unqualified democracy.  China is at this moment in time, the most sought after investment destination and one that would be attractive to the owners of the Formula 1 franchise because of this fact that global corporations are chasing its large market. Bahrain, is a smaller country whose citizens are not politically free at all but is a nation whose rulers have a lot of public money to pour into the construction of a state of the art race track. 

A couple of weeks back, the Grand prix race in Bahrain was held with visible agitation from its population. Whereas all the technical requirements were in place, the demonstrations that occurred during the weekend of the race led to the loss of a life in addition to disturbances that did concern some teams. To my mind, the Formula 1 is a private business and its owner(s) are perfectly entitled to seek partnerships for hosting races wherever they can. That notwithstanding, I think that Formula 1 should begin to carefully survey indices that measure the degree of political and economic freedom as it chases the next set of partners for hosting races. When a business of this stature begins to expand aggressively towards the most repressive regimes in the world, it is time for its owners to take some time and think clearly and ensure that they are sure that this expansion model will remain valid. 

US Dollar Replaces Zimbabwean Dollar

In my reckoning, few countries have a more opinionated, if wrongheaded leader that the African nation of Zimbabwe. Robert Mugabe has led this country since it independence from Britain and his record for the first decade was decent but it is clear that his endurance in leadership has probably outlived its utility. Not only is the political scene characterized by necessarily toxic relationship to the Zimbabweans with different political views, but the intransigence in economic policy led to a disaster evident in the high rates of inflation and the collapse of that local currency.

And yet, given the human ingenuity and liberalized currency policy of the United States, the Zimbabwean Dollar has been replaced by the US currency as the effective currency. This happened because citizens of the country realized that harsh political rhetoric from the leadership is one thing but that the need to anchor their income to a stable currency was prudent. As Lydia Polgreen of the NYT covers in detail, all transactions have shifted to US dollars and the Zimbabwean dollar has all but disappeared. This has in turn had the effect that finding change for small transactions is difficult because of the absence of Us coins in that country. This relative shortage of coins reflects the fact that coins are more difficult to transport across long distances and also that seignorage allows paper currency to carry its value over long distances.     The lesson here is that money may be a store of value but it is also a commodity subject to demand. Just ask Zimbabweans.

Students Of Law Need Econ 101 More Than Deans

It is altogether sensible to posit that individuals pursue education with a view to improving their future income. This rule of thumb holds pretty well for a majority of people but it is not immutable. Many people pursuing education understand that attending college is definitely useful for raising the prospects for one's income. And yet as expected, the demand for education has to reckon with the supply of places by universities whose managers understand that certain courses have greater demand and price them accordingly.

In this pithy article in the Slate Magazine, Reynolds Holding applies fundamental economics reasoning to law schools and concludes that many of the deans have maintained an upwards price adjustment in real tierms despite the evidence that many graduates are often unable to pay for education loans due to a reduction in demand for graduates from law schools. His point is right but I am clear that it is not for the law deans to make an adjustment because they are seeking to maximize revenues and will price at the margin. Instead, this article ought to be read more keenly by the students entering law schools who ought to understand that given the employment situation and expected wages, education in law at prevailing rates may not be a good deal. It is clear that it is the students of law who are "irrationally exuberant". The law deans are merely providing supply due to existing demand. iIt matters less for the moment that the demand is based on an inaccurate assessment of expected incomes.   

Did Facebook Price Instagram Correctly?

Journalist covering technology reported late last week that Facebook acquired a fast-growing but not well-known application known as Instagram. That Facebook would make an acquisition of a photo sharing application was not as surprising as the price that was paid for the new firm. It was surprising because not only was the firm very small but had virtually no revenues yet. It appeared to me that the value ascribed to the firm by Facebook was on the higher side.  

Writing in the Guardian, John Naughton writes about the difficulty of valuation of technology firms and gives examples of valuations that brought acquiring corporations to grief. The gist of the article though is that there is an emerging bubble for technology firms. I am cautious in declaring that there is a definite bubble but the salient feature here is that valuation of firms is a matter of intelligent guesses filled with hopes of future performance. The valuations are not to be taken much too seriously and so the answer to title question of this post is unlikely to be answered with certainty.

Busting Collusion Over Books

I did not record it on this blog but it occurred to me that the tough bargain that Apple reached with the publishers on e-books was potentially troublesome. At the time, the idea was that publishers wanted an alternative that ensured that they maintained control of the cost of e-books in the quest to break the perceived  stranglehold on the market by Amazon. Notwithstanding my admiration for Apple, I support the enquiry by the US Department of Justice with the claim that Apple and the publishers colluded to fix prices and thereby raise their revenues in way that was harmful to buyers.

Brian Balker of the Guardian provides the background together with details of the claim by the US Government here. In spite of my reluctance to support government intervention against businesses, I think that this has sufficient justification. To start with, Amazon had placed most publishers in a place where they were the prices of e-books were moving towards marginal cost. The agreement that forms the justification for this suit ensured that publishers maintained the bizarre pricing that made no sense to anyone else but the few publishers. Since then, even Amazon has had to be more cautious in pricing books because it could have been isolated since the iPad gave substantial power to Apple. 

Latin American Leaders Start Assessment of Drugs War

For a whole generation, the world has concentrated on a law and order approach to the control and eradication of production and transportation of narcotics and other drugs. It is clear that this so-called war has been fought with public support and hard military responses but has not yielded acceptable results. The state of affairs in Latin America alone today's shows that there is need to accept that the approach has been unsuccessful. It is encouraging that in spite of the fact that the public in many countries are not naturally drawn to legalization and regulation, it is possible to form a persuasive case that the "War on Drugs" has failed.

Jamie Doward captures the frustrations of Otto Perez Mollina of Guatemala who hopes to convince his colleagues at an upcoming summit to consider a new approach. To my mind, this conversation is required even if the results of the discussion would be difficult to sell as apolitical decision. I applaud this because many other leaders in the neighborhood have been making similar declarations in light of the toll on human life. the political risks to the leaders attending the conference are real but there is no greater evidence than four decades of a well-articulated approach that has created insecurity and militarized drug trade and production.  This fresh approach alerts one to the idea that ideology is sometimes responsible for demonstrably poor public policy.

  

Who Needs a Financial Products Agency?

It is very clear to any keen observer that financial engineering does not necessarily result in products with social value. In many cases, those who work actively to design sophisticated financial products are not always certain of their real effects on markets or other products. Staring from this realization, it is unsurprising to me that many well-intentioned people are keen to ensure that financial engineering is limited to producing products with proven social value. Gretchen Morgenson of the NYT presents that same argument and features the paper by Eric Posner and E. Glen Weyl of the University of Chicago. The two professors state that there is a distinction between the real economy and the financial services industry and this may justify regulation of the latter and not the former.

The summary of their proposal contained in this paper is that the creation of a Financial Products Agency is necessary o ensure that there is adequate testing of the social value of new products before release to the market. To my mind, the reasoning about the distinction between real markets and the financial services industry is impeccable but the proposal for creating an agency for determining social value is less convincing. Indeed, I think that it is a very bad idea that is incapable of putting to effect. My reason for this skepticism is that the determination of social value would be difficult to determine because market participants would not define it in the same way. In addition, placing a regulatory committee to determine what social value a product would have is a very nebulous endeavor that would introduce subjectivity to these decisions.   

The only way for society to ensure that socially useful products continue to thrive is to communicate to institutions that generate these solutions that they will bear the costs of any failures. It is not necessary to require clairvoyance on the part of an agency or body.