Quoting William Lewis

"That so many people live in low-income countries and so few in middle and high-income countries indicates that economic development is hard." William W. Lewis

I am reading through this book by William W. Lewis and I found this quote on page 135 quite profound. I consider it an important point to recall as India, China, Brazil and the whole lot of African countries consider raising incomes and improving welfare. Development is not fluked and neither is it the result of centralized planning and disproportionately large government.

How Not to Rebuild Mumbai's Dharavi Slum

This blogger visited India for about a week in March this year and passed through both New Delhi and Mumbai cities. My major conclusion is that despite the fact that the country has recently maintained an admirable GDP growth path, the visible problem of housing for the low-income city dwellers is evidence that development is both chaotic and very complicated. I saw the unplanned settlements in which some of Mumbai's most indigent residents dwelt in and concluded that there's yet work to do.

Now, this piece by Ramola T Badam in Forbes.com reports that the Maharashtra State government has sent advertisements seeking foreign and local builders to undertake a project to replace the shantytown known as Dharavi. It intends to build free homes for its 57,000 dwellers over seven years. Understandably, there is already controversy about the number of dwellers with some insisting that the total number of dwellers is closer to a million.

This need to assist the indigent dwellers of these neighborhoods notwithstanding, it appears to be a directive based on the development of a solution and foisting the same on a problem. The project is to be financed entirely by a private sector builder and is calculated to cost US$ 2.3 billion. This works out to a nominal US$ 40,350 for each household if the numbers anticipated by the government are accurate. This would be extremely generous but I am certain that this kind of approach constitutes very poor use of these resources.

Assuming that the money is available, the option ought to be given to each household to determine whether it would prefer to accept the money in cash or take up the intended dwellings when they are complete. A similar argument was presented by Professor Edward Glaeser of Harvard University following the devastation of New Orleans by Hurricane Katrina in 2005. Professor Steven Landsburg also presented a similar argument on Slate Magazine here.

In short, the problem of uninhabitable housing need not be resolved with a big construction project. As the main article contends, there is a great likelihood that this project will only be a bonanza for builders. Granted that the Dharavi may have up to 1 million residents, a good number may still prefer a check or voucher for a nominal US$ 2300.

Formalizing Mumbai's Meal Couriers

I am fascinated by the rise of entrepreneurship in many developing countries and the existence of the Dabawallas in India is worthy of more incisive study. To the extent that I can tell from the article in the New York Times, it is an altogether efficient even if informal courier service that delivers hot meals from homes to specific areas in Mumbai city. I surmise from the article that it does an excellent job of ensuring that the meals are safely conveyed and the containers returned through a color code on the containers. The rest of it is pretty labor intensive and thrives because the cost of labor in Indian cities such a Mumbai is comparatively low.

This business idea must have survived from delivering excellent value to its clients as the article traces its existence to the period of the British Empire. While I would classify it as an informal business that delivers high value and quite efficiently, it is apparent that it is only partially merged with aspects of the formal economy such as the railway and infrastructure network in Mumbai and its innovative use of text messaging and e-mail.

I consider that further value could inhere from the adoption of bar coding, standardized containers and a database of deliveries and GPS in addition to expansion beyond the delivery of meals.

Economics in the Service of the Environment

Everyone seems to have a highly charged opinion about whether stopping Global warming and its effects is a policy that is worth pursuing. The global nature of the challenge is one of the reasons that hammering out sensible responses is difficult. Whereas consensus on the causes of global warming is still being debate on the fringes, that it is an empirical fact is irrefutable.

Dependence on petroleum fuels largely for generating energy on the one hand and for fueling automobiles makes it imperative that prescriptions that deal with ensuring the cost of increased driving must now be paid by motorists. Professor Edward Glaeser of Harvard University presents a well-argued and pithy piece in the Boston Globe addressing the need to consider the costs against the benefits of environmental policy in order to ensure sound and effective policy responses.

The two most profound points in the argument are the indispensability of a carbon tax to ensure that polluters pay the real cost of the externality of pollution on the one hand, and the need to offer large public prizes that reward innovations that could then be utilized throughout the planet.

What next for Daimler and Chrysler?

Reading this article today, the following thoughts occurred to me:

I have no data to post here right away but I am given to the view that in spite of the great affinity and demand for automobiles that characterizes this and the past century, there is an obvious surfeit of automobile manufacturing corporations. I cannot recall precisely the reasons given for the merger of Chrysler and Daimler when it occurred but I am certain that it was a critical event in that industry and one that was largely expected to change the automobiles landscape in both the Us and Europe. Here was the merger of great German engineering with the large market in the US. It quickly became evident that the expected efficiencies not only failed to work, but that Mercedes was in turn affected by quality problems.

In the article above, Andrew English traces the merger and recalls, with the benefit of hindsight, early signs that the merger would most probably fail. I am a skeptic of this kind of hindsight for the reason that while the merger was then considered quite risky, a good number still considered that it would enhance value if it could be made to work. as one can tell, at that time, there was no mention of the health care and pension liabilities that prominently feature as the explanation for the poor performance of the automobile manufacturing firms in the US.

Chrysler has a number of divisions with varying levels of profitability. Impliedly therefore, not all of these divisions are losing money. Competition is now faced from established Japanese manufacturing firms and the overtures from Chinese firms are also indicative of the fact that there are profitable areas. At the same time, these also support my view that given the number of automobiles manufacturers and the price competition, there may be far too many automobile manufacturing firms already. Noting that the Porsche's annual returns of 17% are the industry's highest, the message for Chrysler ought to be clear, take out the unprofitable divisions.

Private equity firms are increasingly taking over many corporations with the intention to restructure them and sell them out with huge returns. Andrew English correctly anticipates what Cerberus Capital might do when it acquires Chrysler. My guess is that it will very separate the profitable divisions from the rest and carve out the firm and thereby prove that the sum of its parts is probably greater than the whole. The advise for Daimler, with the benefit of hindsight is that corporate hubris often precedes the inevitable fall.

New Crime Fighting Policy

That a preponderant amount of crimes that are committed are often motivated by the quest for economic gain is beyond debate. Police forces around the world are therefore thinking of more sophisticated approaches to emasculating organized criminal groups and individuals. An interesting story by Paul Lashmar in The Guardian reports that Law Enforcement agencies in the UK recovered 125 million Pounds Sterling from an assortment of convicted criminals over the year running from 2006-2007.

While I agree that crime is without doubt a social menace that also disrupts economic life, this blogger is unsure that this approach by the police represents correct approaches to the reduction of criminal behaviour. As the story states, the recovered sum was based on a target and the reason for the celebration is because of the attainment of that arbitrary target. To my mind, that is no reason for celebration because it merely implies that far from keeping the targets for law enforcement action away from committing crime in the first instance, this approach means that the police and other agencies would merely be looking to react after the acquisition of fortunes.

The policy is made even worse by granting a direct stake to the specific departments and the courts that succeed in recovery because they become entitled to a portion of the same. It is not an overstatement to expect that conviction rates could rise where courts may gain from ensuring that recovery takes place. In addition, the quest for recovery by the Asset Recovery Agency through the civil law process not only reduces the burden of proof but may divert police resources disproportionately towards the specific crimes that allow for the application of the Proceeds of Crime Act, 2002.

In my view, police forces ought to concentrate on ensuring that crime does not take place in the first instance and having failed to do that, should then apprehend the criminal and ensure prosecution. Placing judicial officers and police forces in a position of interest in the resolution of a specific case and not another based on arbitrary targets for asset recovery is plainly bad policy. It may succeed momentarily in hurting selected criminals but more importantly, it would corrupt the law enforcement agencies. Criminals and these agencies in the UK may be on the same side now. They want the money!

Economics of Information Security

Given the way in which new viruses spread and easily infect PCs, it is clear that the security industry is forever chasing a moving target. The reason for this being that certain programmers are dedicated to producing and circulating worms quite regularly. in spite of all this, the ease with which PC systems are regularly infected and the failure to regularly update anti-virus programmes ensures that viruses remain in circulation and on occasion explode as epidemics infecting networks throughout the world.

Many blame the ubiquity on the Windows operating system since this enables the creators of these viruses to identify points of weakness in the unduly large operating system. However, the more persuasive assessment of the lack of security in IT systems is because the costs of security failure are largely borne by the users and not by the creators of products. Naturally therefore, there is insufficient incentive to ensure that the most dominant operating system is as secure as possible. As one sees therefore, it would not constitute good expenditure for Microsoft corporation to spend its money in ensuring security because it can easily externalize the cost of the failures. A complete argument is made by security academic and consultant Bruce Schneier here.

Taking the ubiquity of the operating system on the one side and the ability to externalize the costs of its security flaws on the other, I venture that the last factor of the human element is considerable too because it allows for the circulation of viruses. This article from Reuters describes how a computer expert placed a very clear advert on the internet offering downloads of free viruses and had 409 people click on it. In my view, even a small fraction of this number would suffice in sending the virus through networks and systems and thereby generate an an information security systems epidemic.

A Very Expensive Embassy Building

The Guardian today reports that the US government has largely completed an embassy building to house both the residences and offices of US officers in Iraq (Baghdad). The impressive fact about it all is not only that in spite of the difficult conditions this has been the single project that has been completed rather promptly and on budget, but that it is the most expensive construction of an embassy by the US.

If it were not for the fact that the construction costs of embassies and ambassadorial residences are not easily identifiable, this blogger would provide a list of the most expensive buildings just to get the perspective. That notwithstanding, at a reported cost of US$ 592 million, it is one expensive building. In fairness, this is a building whose costs represent the peculiar risks attached to maintaining an embassy in one of the most dangerous patches of real estate in he entire world today. I would wish to know whether its sturdy bomb-proof construction has taken due account of the diverse security risks that diplomats would face. All I am certain about is that its construction is a signal that the US will have a good number of staff in Iraq for quite a while.

From the public interest point of view, to what extent does the design differ from known economic principles for the construction?

Quoting George Stigler

"It is to be observed that economists who defend monopoly in antitrust cases are better paid than the governments economists: Do sinners always earn more than the virtuous who combat them? Probably yes; one must be compensated for bearing the opprobrium of sinning." George Stigler

Anyone with interest in regulation of firms and industry must have encountered George Stigler, to who was awarded the Nobel Prize in the Economic Sciences in 1982 for "his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation." The quote above, extracted from the very capable economist's publication, Memoirs of an Unregulated Economist on page 95 is undeniably perceptive. The text is particularly clear in the description of the Chicago School as a method of study and a policy position with emphasis on rigorous microeconomic analysis. An interesting explanation of what economists refer to as the compensating differential.

A five star book written by a five star economist and a good entry for the 50th post on this blog.

Britons Sue and are Sued

As simplistic as conventional wisdom tends to hold, many believe that US citizens are especially litigation crazy and that this is perhaps correlated with the high number of lawyers in that country. An article in The Times now quotes a survey and makes the claim that Britons are becoming "litigation junkies" too . It uses the fact that every year, 2 million people seek legal advice and that thousand consult lawyers weekly.

On its own, this blogger sees no reason to conclude that that makes for a nation of vexatious or over-exuberant litigants. However, when one sees that 1 in 500 visits to the hair salon results in a legal dispute, with a further 1 in 1000 visits to a restaurant leading to a court battle over the menu, then perspective sets in. Added to this is the interesting fact that 1 in 20 has taken legal advice over rogue traders or shoddy builders.

While wondering whether increased isolation may be a driver, I encountered the data that the same survey revealed that 1in 50 of the instances in which advice was sought was against a family member and even this was with divorce excepted.

Apparently, when people are not in conflict with one another, then they are faced with infractions of the criminal law, a trend driven by increased regulation of people's lives through law and the creep of the nanny state. Men are more prone to committing crime and lead in committing motoring offenses while women are far more astute at altering price tags while shopping. I wonder why.

The greater point in this fine article by Frances Gibb is not as much that there's a spike in litigation but that the subject of litigation appears to be getting particularly petty. On the other hand, it also shows an expansion of the quest for advice across many more frontiers in people's lives. Concern about the outcomes and costs are also significant factors and this is proof perhaps that legal action is a strategic game.

Congestion Pricing Coming to New York

One of the most difficult points to make to the general public anywhere in the world is that all scarce goods and services can be priced to achieve near efficient use. This may be explained by the failure to realize that the use of public facilities such as highways and roads are not necessarily free and this realization accounts for the congestion experienced in major cosmopolitan areas. Covered in an earlier post here, what started as an unpopular experiment by Ken Livingstone of London is proof that proper application of immutable principles of economics can improve outcomes.

Since the spectacular success of the initial introduction of road pricing into metropolitan areas of London, the idea has gained broad, even if begrudging respectability.

Now, Michael Bloomberg, the mayor of New York is arguing forcefully for the introduction of congestion pricing within the metropolitan area. A well written commentary in the New Yorker by Elizabeth Colbert discusses the context and the prospects of congestion pricing in New York. This is long overdue.

My Favourite Hedge Fund Managers

Any person who takes the responsibility for managing and investing a billion dollars has to be extremely brave and self-assured. In spite of my reservations about the abilities and the arcane mathematical models and programmes that are employed in execution of investments by hedge fund managers, I am compelled to admit that a select few such as Stephen Cohen and James H. Simons of Renaissance Technologies do genuinely stand out.

There's no doubt that these two are a special pair even among the generally stellar crowd of hedge fund maestros. The similarities with others are numerous but Cohen and Simons seems to eschew public attention. Mr. Cohen likes to buy expensive pieces of art and supports art works generously while James Simons likes geometry and mathematics. Ben White of the FT writes this interesting profile of Mr. Simons. Granted that this piece hardly suffices in knowing much about him but it tells something about his interests and the diversity of PhDs that suffuse the firm. Medallion technologies charges 5 and 44 as opposed to the 2 and 20 rule and this raised no problem when outsiders were part of the subsidiary fund.

Am I alone in thinking that the campus, the gym and the consolidated computing power is quite akin to one Google?

Royalties for Yoga Poses

I keep wondering just how far the quest for IP rights will be taken before something gives. It seems to me though that those who have gone to the extent of registering intellectual property claims (whether trademarks or copyrights) on Yoga poses have taken it too far and are beginning to give the entire Intellectual Property regime a really bad name. Suketu Mehta argues in the NYT that individuals are making this big stretch and making for a laughable outcome.

Unlike the author who traces the problem with piracy of traditional Indian knowledge to the World Trade Organization's intellectual property rights rules, I am only concerned with the oddity and implications for enforcement of any violations regarding protected Yoga poses.

Evian Gives Way to Tap Water

I have commented in an earlier post on this blog wondering about how lucrative markets for products that a rational shopper would not purchase do arise. In that post, i queried the logic behind the purchase of ridiculously priced bottled water when tap water was often good enough. It appears that i failed to take full account of the snob appeal that drinking bottled appeal seemed to provide to people seeking to look posh. Writing in Slate Magazine, Daniel Gross states that it appears that the ruse has come full circle and everyone seems to realize that shipping bottled water is not entirely beneficial to the environment. It is laudable that tap water is back in vogue and for good reasons that include its very fair cost. as the article states, the US is the largest consumer of bottled water and the trend may be diffused to the rest of the globe.

It is unlikely that this will happen to diamonds too and so my hope is that sometime soon, Hollywood stars and other wannabes will come to the realization that outside industrial uses, ornamental diamond is just a bunch of polished carbon.

Quoting Thomas Sowell

"Some of the biggest cases of mistaken identity are among intellectuals who have trouble remembering that they are not God".- Thomas Sowell

This is certainly a memorable quote that the commentariat and the talking heads ought to recall. However, I have not once read a more abstruse piece from an intellectual this week. Granted that a number of stand-alone sentences are rational from libertarian and classical liberal stances, the piece reads as a cut and paste job from a scrap book. Brad DeLong is more blunt.