Losing to both the Taliban and the Poppy

The president-elect of the United States will be inaugurated against a very tough economic and political background. there's no need to debate the part about the economy because its effects are felt almost universally now. All that's being debated is whether the auto industry in the US should be supported with tax payers money or not. Still, with the very well-chosen team at the Treasury and the advisors at hand, I am confident that the new administration will steer the economy excellently.

To my mind, the more precarious situation is the one regarding the two wars in Afghanistan and Iraq. There are no prizes for guessing that here too, one is going far better than the other. Indeed, Iraq is momentarily stable and the big decisions only relate to the draw down date for the US troops. regarding Afghanistan, I think that the administration will have to consider its options more clearly and redefine the theory of engagement because the Taliban are not only resurgent but the neigbourhood has became less stable with the attacks on Mumbai by terrorists earlier this month.

I do not have ready answers for Obama but as I have stated on this blog severally and more specifically here, the main objective in Afghanistan ought to be to beat the Taliban. This task is difficult enough on its own without conflating it unnecessarily with the fight to eradicate opium poppy. As this story in the Guardian states, there's already corruption and the beneficiaries of the drugs trade are the more influential politicians and large farmers. Clearly, it is the economic imperative that leads the villagers to prefer opium poppy in spite of the lack of rain. It suggests that the fight is not about the eradication of plants though the fear and loathing of the Taleban is more widespread.

Breaking the Cartel of Steel

This story in the Times of London reports that the Competition Council in France conducted a three year inquiry and determined that a number of firms in the steel industry had colluded to set prices and raise barriers for entry to potential rivals. As has been monotonously stated on this blog, one of the clearest justifications for regulatory policy is in the quest to enhance industry competition. Adam sage's story reports that the Competition Council has levied a record fine of €575 million on 11 firms.

Again, while I am convinced that light regulation is important, the story suggests that there was a finding that this was an elaborate price fixing and barrier raising cartel. I applaud the Competition Council of France because price fixing and lessening of competition is without doubt harmful to competitors and to consumers of steel products. What I am less clear about is the manner in which the size of the fine is determined. It is unclear what assumptions are employed in reaching the fine and the apportionment across the colluding firms. I am also unsure that this is indeed the largest fine in real terms because the comparisons being made are all in nominal terms.

Finally, the mere evidence that the managers of the firms met is insufficient reason to assume that a cartel is in place but the other evidence involving market sharing, price fixing and other collusion in punishing members who do not adhere to the agreements demonstrates the nefarious effects of this cartel. This is one instance in which the use of the word cartel is not a smear word for a dominant set of corporations.

Why Vodafone Should Keep England Sponsorship

Nobody doubts the view that the recession has now extended to the real economy and that corporations outside the main financial service providers are faced with the need to make decisions on funding cuts. This places sports teams in a difficult situation as corporate sponsorship is essential for most sports. Among others, the Jamie Jackson reports in the Guardian that England cricket team suffered from the withdrawal of sponsorship by Vodafone, its main sponsor.

In spite of the argument presented on this blog here questioning the real benefits of corporate sponsorship following the decision by GM and Tiger woods to mutually agree to an end to a sponsorship deal, it is clear that Vodafone should retain the deal in a restructured form. The tenor of the blog post was that the structure of the sponsorship deals makes it difficult to ensure that both sides get real value. Taking forward that argument, I think that the corporations that are throwing aside sponsorships are being short sighted. These deals may be expensive in light of the financial strictures today but economic recovery is definite in the medium term.

For that reason, this is the best situation to renegotiate the sponsorship deals with the knowledge that the economy would recover. If I were to advise Vodafone or the corporations with businesses, it would be that they would look to reduce the absolute sponsorship size and lock in a longer term contract. In that way, Vodafone would get a better deal over the long term rather than wait for the economic upturn before coming back to the table when the England team may have more interested sponsors. To my mind, a sponsorship deal involving the England cricket could be sufficiently adjusted downwards to make it lucrative in the longer term.

Quote of the Day

"The market economy promotes diversification when the future is uncertain and there are differences of view. This is one of its fundamental strengths. But the market economy does not achieve enough diversification when the future is uncertain and there is commonality of view. This is one of its fundamental weaknesses". John Kay

Classifying the UN Membership

One just has to attend international meetings with lots at stake such as the Ministerial meetings of the WTO or negotiations regarding the reduction in greenhouse gas emissions as took place last week to see the absurdity in the manner that the countries are conventionally classified. This absurdity is most evident in intuitive classifications such as developing countries and developed countries. Taken a step further, one finds very quickly that countries with very different development and welfare circumstances are classified together.

Michael Levi, writing in the Slate Magazine here addresses this issue of the problem with classification of country’s during the climate negotiations held recently in Poland. The very rough ways of classifying countries through a single metric such as the nominal GDP per capita or an income threshold results in classifying Singapore, China and Togo together. Given the concessions that are required, it is easy to see why countries such as India, China and Brazil are insisting on a classification that is patently absurd but whose results ensure that they would have to make fewer reductions to carbon emissions.

Throwing away useless mantras such as developing country solidarity and all the rest, I am clear that an algorithm considering the industrial base, population size, per capita incomes adjusted for purchasing power parity, infrastructure base and levels of poverty would yield an imperfect but better classification system. Such an algorithm is not too difficult to draw and would probably lead to a more useful result than is suggested by the very arbitrary classification that the larger countries such as India, Brazil and China are gaming so clearly. In all, it shows that the United Nations or the WTO ought to invest in developing a new mechanism for classifying its broad and diverse member base. A competition would yield a more efficient outcome so that the negotiations may then concentrate on the matter at hand as opposed to the politics of classification.

Should Children Fire Uzi's at Gun Shows?

This blog has featured some of the ideological arguments for gun control. One notices that policy debates arise soon after a tragedy has taken place with both sides of the divide stating even more loudly why any tragedy would not have happened had there been less freedom with gun purchase or with stronger gun control policies. As reported here by AP in the Boston Herald, the recriminations are back following the indictments after the death of a child at a gun show.

Looking at the sad incident at a gun show during which a child suffered fatal injuries while firing an Uzi, I have to state my view that this debate is taking on the same tired lines. It is clear here that there's no direct and clear culpability as this was a self-inflicted wound albeit aided by very poor supervision. To my mind though, I favour freedom and parental responsibility but worry that a child should be allowed to fire an Uzi at a gun show. the court case and the acrimony merely ensure that a proper discussion for gun control and regulation will not occur.

Admittedly, the law in Massachusetts allows children to fire shot guns or rifles with parental consent. I create the distinction that an Uzi would probably require more careful handling than the other two and to allow any 8 year old to take shots does not betray sufficient care. It is also surprising that a law enforcement officer is attached to a corporation that sponsored the show.

Krugman Gives Detroit 3 Small Chance

Commenting on the ongoing debate to inject public money into the Detroit three, I have had objections that fall into two categories. First, it is neither clear that public money should be given to the three corporations in spite of the claim that they can all be brought back to profitability. The second and more important is that there are options related to bankruptcy that the firms should resort in order to be allowed to reorganize.

The Washington Post covers Paul Krugman's comments made in Stockholm during the week preceding the award of the Nobel prizes. As he states, the forces of economic geography and structure of US economy suggests that the three firms may cease to exist despite the bailout plan. The idea of a bailout may be politically popular, but it is clearly unsound.

Update: A post on Paul Krugman's blog made a correction to this report. The Nobel Laureate did not state that the three automakers are doomed to failure.he appears to have spoken of its as a probability and not necessarily as a definitive declaration. That is an important distinction.

Economics for Pirates

In the recent weeks, Somali pirates, operating off the East African coast have been in the public limelight for taking over not only a large oil tanker destined for the US but also for the successful negotiations for ransom for a number of ships in their control.

Needless to state, perceptive economists such as Peter Leeson in this interview in the Scientific American magazine, not only see similarities between these pirates and the pirates of yore but also state categorically that piracy is a form of employment. One ought not to be surprised therefore that the total number of piracy incidents on the east coast of Africa have risen this year as the pirates have been able to extract ransom from the owners of the ships that they have held. This interview published in the Scientific American Magazine uses economic theory appearing in a book to explain the facts that obtain.

Taking just two examples from the dozens of ships that have been taken over by these buccaneers, one involved a Ukrainian ship carrying tanks and other heavy weapons as reported by NYT here and the other was the oil tanker carrying nearly a million barrels of crude petroleum. As economic theory would predict, the activity is based on expectations of profit even when it is clear that the pirates can neither offload the battle tanks reportedly held in the former ship nor refine the crude petroleum held in the latter. All they understand is that the ship has valued property whose release the owners will be anxious to negotiate for.

Now that the book by Peter Leeson is out, I expect that law enforcers and cargo shippers will read it carefully. perhaps the best day for sea pirates on the East african coast are now because they will ultimately face the same fate as their predecessors three centuries ago.

Quote of the Day

"So economic crystal ball-gazing remains unscientific. The trend is the forecaster's friend. Extrapolation assumes that the future will be like the past, only more so. We project current preoccupations - the rise of China and India, global terror, climate change - with exaggerated speed and to an exaggerated degree." John Kay

A lesson that I hope many economists and business professionals could internalize especially in regard to assumptions about China's inevitable growth at the same pace as today.

Tiger Woods Severs Deal with General Motors

Nobody would argue that Tiger Woods not only is a skilled athlete but that he deploys his personality and charisma well enough to draw audiences and attention to the events that he appears in. In addition, he is an undeniably powerful marketing symbol for a host of corporations. In spite of that drawing power and name recognition, it appears that even Tiger Woods could not save General Motors. As reported by here in the Guardian and other media, Tiger Woods has acceded to the request to end a sponsorship deal worth US$ 10 million annually.

Again, it is unsurprising that corporations are so enchanted with celebrities that they are unwilling to consider whether there is real value in attaching a name to a product. Endorsement deals are probably useful but the design of the payment scheme should be such that it is based on real improved sales that can be attributed to the endorsement. A ten year contract such as this is obviously not the best way to promote sales for the Buick.

The moral of this story: it is not enough to have one of the most recognizable athletes to promote cars that few people wish to buy. I am sure that this common sense dictum is one that many marketing executives tend to be oblivious of and wish that their clients do not notice. At a more cynical level, what really is the value added by endorsements?

NetFlix Prize a Case Study in Incentives for Innovation

The use of prizes to drive innovations is an idea that is not exploited as much as it should. One corporation that has put this idea to the firmest of tests is Netflix which put out an announcement to award the Netflix Prize of US$ 1 million to any individual or team which would draw an algorithm that would improve its ability to predict the movies that its customers would like by 10% from an existing level. A good number of teams using sophisticated mathematical and reasoning techniques have been crunching the numbers to since 2006.

Generating an improvement of 10% sounds easy until one finds that the last mile is the most difficult. NYT Magazine’s columnist, Clive Thompson traces the interesting experiment here and reports on some of the contenders for the prize, in addition to the frustrations faced by the competing teams as they try to reach the last rung. The difficulty of the task is discernible from the fact that the top team has gone through close to 95% of the tasks and yet the ultimate formula has not yielded.

For any student of applied economics, it is interesting to note that the corporation defined the task by building in one large ultimate prize and periodic prizes to keep the motivation of the teams. Secondly, the information that each team generates is soon available to the others and that helps to increase the overall amount of knowledge that is generated. The most fascinating fact though is that a number of teams are comprised of professionals who work on the problem on a part time basis or teams constituted in academia.

While I am neither good with models nor writing computer code, I intend to enter the contest on my own just so I may gain access to that interesting database of movies. I think that it can be used in many more ways than just cracking the 10% improvement threshold.

This Netflix approach is not new in principle but the results will perhaps change public views on how longstanding technical problems could be tackled. Regarding the subject here, I venture that one of the teams will crack the threshold before the prize expires.

Basing Vaccine Administration on Samples

One of the greatest ideas in biological and medical sciences is the development of vaccines. I stand in awe of the effectiveness of vaccines especially since the idea behind their development is for me rather simple though counter-intuitive.

In this story in Slate Magazine, Sydnet Spiesel makes the case for the administration of flu vaccines on a regular basis because new strains emerge predictably. As a result, the vaccines developed for the year before are not as effective subsequently.

While the logic behind the argument for vaccination of the most vulnerable is fairly solid, I am less convinced that universal vaccination is necessarily cost-effective. As piece argues, the benefits for vaccinations come from reduced mortality, reduced hospitalization and a reduction in deaths for the most vulnerable. However, noting that vaccinations for influenza provides herd immunity in the sense that the vaccinated are less likely to pass the disease or become ill, then it is perhaps less efficient to vaccinate all.

The critical factor then is to determine the proportion of a population that would need vaccination and ensure that the greatest number are protected. This would require knowledge of the demographic profile of the population and to concentrate the vaccines to those most vulnerable on the one hand and those who are the most efficient spreaders. I argue that this would require vaccination by sampling and determining the most appropriate moments for administering the vaccines to the distinct cohorts in the overall sample.

Lessons from Leyland Bailout

I have stated in this blog that while I was sympathetic to the decision by the US congress to support existing financial institutions in order to strengthen the finabcial system, I feared that over time, that it would be difficult to draw a firm line on who is allowed to fail. Indeed, the US congress, the outgoing administration and the incumbent administration are debating whether GM, Ford and Chrysler qualify to be supported now.

My inclination is not to spend public funds to support these firms for the reasons stated in this blog post. I stated then that there are arguments for supporting the Detroit automobile manufacturers for the reason that they are intertwined with other industries and are also sizable employers. Having reviewed the posts and other debates, I conclude that most of the debates have been entirely from an ideological standpoint.

Reading this piece by Nelson Schwartz in the NYT today, I have been reminded that bailouts of this nature and size for automobile firms is not a new thing. Schwartz looks back on the difficult decision by the British Government during the 1980s in attempting to rescue Leyland. As he states, the same reason as a are given today were stated in justification for the bailout. As he states, this lesson is critical because the corporation was so poorly and its management so utterly incompetent that they failed to realize that some exported models lost the equivalent of US$ 2000 each. In spite of the very best efforts and large financial resources by Thatcher’s team, the corporation was not saved. On the other hand, the French government took a different direction regarding Renault and managed to preserve its existence after infusing cash and replacing its management.

Chris Kelly’s piece in the Huffington Post here argues against the bailout entirely on grounds of principle. In his view, the inclination to bailout the firms is unconvincing because they are not the only firms in the US automobile industry today. Given that Honda has been based in the US for almost 25 years now, the quest to rescue the Detroit three is about nostalgia and nativism. Chrysler is also a private equity firm with other properties and should consider disposing of those instead of seeking public financing while it has cash rich assets.

In sum, there’s a good chance that in spite of what congress and the new administration does, the bailout may come too late and result in the waste of public money. On the other hand, the automobile industry is perhaps already different and the dominance of the Detroit three may have reached its zenith a long time ago. The rescue of any among them could still occur but they would probably never acquire industry leadership status. Given the very real possibility of throwing good money after bad, the bailout should not go ahead and the firms should seek Chapter 11protection or infusion of private cash.

Blackberry should take Presidential Challenge

It was very widely stated that Barack Obama was the more technology savvy of the two presidential candidates in the last US elections. Suzanne Goldenberg's piece here suggests that the Oval office has no need for such electronic communication and that president Obama will have to eschew the use of his Blackberry communications device as soon as he takes office in January 2009.

I find it not only surprising that the manufacturers of the device are prepared to let go of the suggestion that the Blackberry is insufficiently secure to qualify as a communication device for a president. While , I have read enough pieces from Bruce Schneier to know that no device is completely secure, I am still surprised that for all the technological capability of the US, the view that electronic communication is insecure is taken with little challenge.

To my mind, paper communications may be important for keeping records but there's no reason that electronic communications devices cannot have a similar facility or permanent record. It is in the interest of the firm that manufacturers and supplies the software for Blackberry to state this clearly by taking the challenge to pay US$ 1 million to anyone who could demonstrate that interception of communications from a given device (not the president's)was possible. Blackberry ought not to let the image of its product be that it is only good for a suave campaigner who must leave it aside as soon as elections are over. Taken to its most extreme, does this suggest that Blackberry's are only for the non-presidential and the losers. Thus far, it appears that only losers keep their Blackberry!

Bankruptcy or Bailout?

The post that preceded this one summed up the main reasons that the Detroit three manufacturers are in danger of collapse. As stated then, their coziness with elected officials ensured that they were protected to death and were not therefore placed under pressure to produce vehicles that were fuel-efficient. Their Japanese competitors appeared to have taken this into account and are selling substantial numbers of vehicles in the US and throughout the world.

That the three main vehicle manufacturers made the wrong bets is clear but the debate has just commenced about how to respond to the possibility of their collapse. Indeed, president-elect Obama appears to be asking for the presentation of a bailout of the firms. The second choice is to allow them to consider the possibility of bankruptcy proceedings or to be left to their devices with the possibility of their quick collapse and the attendant loss of jobs.

David Brooks in the New York Times here, takes the very reasonable and my favoured view that to save the corporations will not only result in moral hazard that failure is intolerable, but also entrench the influence of these firms with the public sector. On the other hand, while Daniel Gross admits in this article that the management of the three firms are culpable, he is concerned that the mechanics of Chapter 11 would be inappropriate for the firms. As he states, the nature of the vehicle manufacturers is that they are connected to many other firms that would in turn be forced to close and trigger other closures down the line.

In all this, I think that the domino effect is overstated and that the firms ought to be left to their devices. The arguments about the financial sector bailout found more sympathy with me than the argument that the automobile industry is also a very critical part of the US economy. Simply put, if any of these firms were to go into bankruptcy, most US citizens will still be able to find vehicles to drive through the imperative of competition. And yet it appears that the bailout will occur. As David Brooks says, this may be a bailout to nowhere.

How US Protected Detroit to Death

During my brief visit to the Us a couple of years ago, I was on the watch for the kind of cars that were most available. The reason being that I had made crude comparisons and even after adjusting for PPP, determined that petroleum is incredibly cheap in the US as compared to Europe. I noted that there was a large and growing number of Japanese models side by side with the impressive looking but fuel guzzling SUVs.

I found this fascinating because the connection between the addiction to oil and security has been eloquently made by Thomas Friedman. Writing this piece in the NYT, he extends the theme by showing how the three main car manufacturers in the US relied on connections in congress to ensure that they would not adjust to Japanese competition and to provide more fuel-efficient vehicles. In spite of the heavy protection received from some congressmen, it is clear that the rise in petroleum prices has shifted demand away from the models that GM, Chrysler and Ford presently produce almost irreversibly. The managers of these corporations are compelled to plead for government subvention to ensure their survival. In essence, the car manufacturers are close to being nationalized.

The moral of the story is that government should not contemplate protectionism to begin with because it builds the power of corporations to ask for more help later. As their world unraveled, the corporations were so confident of their ability to manipulate congress that they refused to back a health care plan that would have substantially reduced their wage costs. In the writer's reckoning, the Detroit corporations now need an equivalent of or the real Steve Jobs and more competition from Japanese manufacturers. I would welcome an icar too.

Healthy Town Intiative is Unhealthy

Everyone should strive to maintain good weight, eat wholesome food and enjoy an active life to burn any excess calories. While all this is laudable, I am strongly inclined to the view that it all remains within the domain of personal behaviour. It seems that the city of Manchester in the UK, among other local governments have completely bought into the panic created by a supposed obesity epidemic and are now spending public money in the quest to encourage healthy living to limit obesity.

The Healthy Towns initiative reported here is unworthy of the name purely on two grounds. First is that if the intention is to encourage healthy eating, then it is poorly designed. This is because everyone who purchases the favoured foods will receive this subvention even if they do not require it. Secondly, the scheme is unduly complicated and will obviously lead to unintended consequences arising from the adjustments to infrastructure and the expected demand for bikers. The programme's overall costs will go beyond the £30 million that is its face value. There's no reason to believe that people who are not inclined to take up cycling in the first place will do it in addition to starting a gardening project in the backyard.

Since the nine cities are keen to spend money, they should start by reading this earlier post and contacting the mayor of Varello. My advise would be to forget the loyalty programme and pay residents for real weight loss as opposed to paying for activity that may lead to weight loss. Even the mayor of a small and obscure town in Italy knows that.

Economics of Capturing Stray Cattle

A visitor to either of India's cities of New Delhi and Mumbai is wont to notice the number of freely roaming cows. It is understandable that the Hindu faith has enormous regard for the animal and has accorded it a sacred place. However, given that these animals fall easily within the province of private property, one can easily see that their owners would be given to free ride on the dispensation and bearing no cost for it. The result would be predictable: too many stray cattle in the streets.

Jeremy Khan writes here about the efforts by the city of New Delhi to capture stray animals and take them off the streets where they cause traffic problems in addition to the leaving dung on the city pavements. Interestingly, the city has responded by hiring about 165 cow catchers who are obliged to bring about 10 cows per day. Impliedly therefore, they capture 1650 cattle per day. Allowing for the mishaps and allowing for a slovenly work rate of 5 captured cows per worker, the deprtament should clear New Delhi's streets of virtually all the 32,000 stray animals within forty working days.

It is easy to see that the incentives borne by the catchers is inconsistent with this rate of work because the clearance of the cows from the streets would render them without jobs. No wonder the story reports that a number of cows have been caught multiple times. It is clear that the city of New Delhi has designed the incentives around the removal of the stray animals poorly.

Who Delivers the Coming Concession Speech?

Its late in the day to pretend to be making predictions but Intrade defines it for me. I think that in spite of my reservations in respect to information markets, this chart is right and 44 will be Barack Obama. Congratulations to a competent campaigner who fully deserves his victory.

Finding Profits for Facebook

A substantial part of the world wide web is available to information searchers and surfers at no cost to the consumer of that information or service. I have therefore wondered how come very few purely web-based businesses are able to make sufficient money to sustain their activities. A leading example for me is Facebook and other social network sites that have millions of users but are yet to make any cash for their investors and developers.

Farhad Manjoo writes in the Slate Magazine that a large number of these businesses are in dire need of a plan to ensure that they make some money. This may run counter to the natural instinct of most Internet businesses which insist on developing a fine product and thereafter seek a revenue model. It is often stated clearly that Google's founders were not overly interested in its commercial applications until they became certain that it was the top search engine. While this model appeared to have worked well for Google, I do not see any reason for the assumption that this is the most appropriate model for Facebook. As the writer suggests, the institution of a payment model may lead to the reduction of clients but it would have the advantage of demonstrating to the developers whether the service has much value at all.

To my mind, no approach is necessarily better than the other and the model adopted by Google is prudent for the service that was new and one that requires numbers upfront so that advertising can be sold. It is not clear that social interaction sites would succeed in the same way. What happens when they start to charge?

Can a Socialist Really Raise US$ 150m in a Month?

Because I am not a citizen of the US, I figure that my views about the presidential elections whose outcome is due in a few days are largely irrelevant. In spite of that, one must contend with the fact that the contest has put forth a large contrast between the candidates both in terms of the demeanour of the candidates, organizational nature and the style during the debates.

And yet it is in the same race that one cannot fail to see contradictions and double speak based not on the fact, but prejudice towards one or the other leader. The one area in which the candidates are most apart is in the method and extent of their war chests. No doubt, by making the more risky choice to forgo public financing entirely, candidate Obama appears to have done very well.

Not only has the campaign run on very different principles and style, but the business approach to fund raising is one that those with a fascination for human ingenuity ought to try and understand. Deploying novel mechanisms such as placing value and charging for access to members of the team through receptions conferences, round table meetings and VIP access, there's no doubt that the candidate and his advisers understand far more about the operation of markets than their ideological detractors give them credit for.

As this story on Politico states here, to price Robert Rubin's time at to ask someone to pay US$ 28,500 shows more financial savvy than the shouts of socialism suggests. Candidate Obama may hold the view that the public sector should be in charge of more things than libertarians and conservatives may like, but a socialist he is not.

Proposal for African Person of the Year

Following up from the last blog post here, I was reminded of the dire situation and the discomfort of many African governments in confronting the question of slavery in Africa by failing to stand against social or religious convention. I heard the news story on BBC radio a couple of days ago in which Hadijatou Mani recounted her experiences after he sale as a chattel to a cruel polygamist and her determination to resist after I was "sold like a goat".

Her determination and quest to maintain her dignity makes me propose her as this blog's African person of the year.

African Slaves Fighting Back in Courts

If there is a single factor that most animates many African intellectuals and other citizens, then it is the issue of transatlantic slave trade. There is no doubt that slavery was completely inhuman even if it was altogether a great contributor to large fortunes for many traders on the African and other continents. Indeed, as confirmed in this compelling biography by Mende Nazer, slavery based on religion, race or status is still widespread in Sudan and other parts of the African continent.

However, what I find most depressing is the fact that the continent whose intellectuals and people protest most loudly about racism is still home to the most egregious forms of slavery. A story in the Guardian confirms the hypocrisy of the people in Africa regarding debates and open discussion about slavery. This brave women from Niger sued the state for failure to protect her from servitude and seems to have received deserved justice. what is most ironic about it is the fact that the state of Niger abolished slavery a mere 5 years ago. the only redeeming thing about the sad case is the acceptance of the judgment and the undertaking to comply with the courts orders.

Taxing Endowments is Looney

Most universities are dependent on charging for fees or on public and other support. Still, there are a small number of universities and colleges that have endowments that are large and growing. This situation makes some people unhappy that these universities and colleges with well-heeled alumni often collect enormous sums of money from them and spend very little of that. In effect, the endowments became an arms race for accumulation in which the principal sums continue to grow while learners have to pay fees and start their lives with substantial loans.

I agree too that the essence of college endowment funds may be lost because the accumulation means that they exist merely to provide employment for fund managers. Select universities in the US especially hold endowments that add to billions of US$ and a number have responded to this criticism by providing more scholarships and tuition waivers to more students. One cannot fail to see the slight irony when centers of learning are more liquid than some banks are.

In spite of the oddity of this situation, I am opposed to the idea that these institutions should somehow be compelled to draw on the funds until they are completely spent. George Will discusses a meeting convened by two congressmen who are intent on levying taxation on institutions unless they spend close to 5% of the fund every year. Understanding that his persuasion would lead to opposition of taxes anyway, I agree that this is not a well considered measure because of the fact that only a minority of institutions have large endowments. In addition, the annual returns on endowment funds is not guaranteed and so a pre-determined minimum expenditure simply means that where returns are negative, then the endowment will have to spend the principal sum.

Whatever the solid reasons, it is clear that taxation is not the way to ensure that colleges with large endowments give more scholarships. I think that the alumni who continue to provide contributions should be more active in demanding better application of the funds. An early blog post here argued the same points shows that the alumni are already posing those questions. Government has no business here.

Limits of High Oil Prices as a Political Tool

As crude petroleum prices climbed up over the last three years, this did not only make exporting nations richer but it also made some of them more politically aggressive. What with Iran being defiant about inspections to its uranium processing facilities, Venezuela flexing its political muscles in South America and Russia using petroleum and gas supplies as a weapon in foreign policy. Together with the use of petroleum as an instrument of foreign policy were populist measures that expanded public expenditures through subvention and direct cash transfers.

There's no doubt that this is a risky strategy predicated on a high oil price and therefore vulnerable to any downward price shocks. Since petroleum prices curves flattened and went downwards, these countries are not only compelled to review expenditure plans but may see their voices in international affairs substantially moderated.

As the IHT reports here, these countries have had to go back to the drawing board regarding their expansionist ambitions. To my mind, there is still scope for petroleum prices to rise but the important fact is the illustration that non-democracies waste resources in symbolic displays of defiance and ambition.The state of affairs for these economies will probably be worse when oil prices tank again. And for sure, those prices will come down.

Unclean Hands in North England

An article by Ian sample in the science section of the Guardian reports that a study carried out in England by the London School of Hygiene and Tropical Medicine found that the degree of bacterial infestation of hands varies with the latitude. As one moved further north, the team found that swabs taken from the hands of the men would bear a higher proportion of bacterial contamination.

I find this not only fascinating and have wondered what the connection between latitudes and hand hygiene would be. I would posit two very rough hypotheses. The first is that the occupational character of the men living in norther UK is probably a factor here. Second, my experience in the North of England during the harshest part of winter a couple of years ago confirms that because the northern cities are generally colder and experience harsher winters, the tendency to wash hands regularly may be substantially reduced. Thus the need to avoid cold water on the hands could indirectly drive the growth and retention of larger colonies of bacteria. Admittedly, the latter fails to explain the divergence in the behavior of men and women.

Quoting Nassim Taleb

"The problem of The Black Swan is that people don't understand the place in the world that we know the least about, where our knowledge is the softest, are where the most charlatans exist—and that's pretty much predicting rare events." Nassim N. Taleb

Paul Krugman Wins the Nobel

I have always expected Paul Krugman to eventually win the Bank of Sweden's Prize in Economic Sciences in memorial of Albert Nobel. What I may have missed totally was that this would happen this year and that the citation reads in part: "for his analysis of trade patterns and location of economic activity".

There's no doubt that merit has been rightly rewarded here and by a professional economist who takes the time to explain the elements of the discipline to lay audiences through lucid and popular publications. This is proof to me that the science of economics is indeed useful. Prof. Krugman is unlikely to pass by this blog but congratulations nevertheless.

A less mathematically-laden publication that would highlight the contributions mentioned in this prize are found in this book featuring the Gaston Eyskens lectures. As the citation states, Krugman provided the connection between cities and global trade through the argument of increasing returns. The study answers the question about why production and industrial activity occurs where it does.

Is China Africa's New Colonial Power?

Africa is the second largest continent in the world and together with south Asia indubitably the ones with the most indigent people. There are a number of preposterous and sensible arguments trying to explain the hopelessness in the continent. Without attempting to identify a singularly important factor, it is clear that African countries collectively and individually have been receiving very little Foreign Direct Investment. And where such FDI is available, it is often directed to select countries that are largely endowed with natural resources and therefore not sufficiently diversified.

China has attracted interest by investing quite heavily in Africa over the last decade. Indeed as argued in this piece in the Irish Times, the value of trade between China and Africa has grown nearly sevenfold from €6.75 billion to more than €47 billion between 2000 and 2007. As expected for a continent that is bereft of proper infrastructure, most of the the Chinese investment is in resource rich countries such as the Democratic Republic of Congo, Nigeria, Sudan, Angola and Zambia. There is also expansion in construction of roads and railways but it is clear that infrastructure makes it easier for the extraction to occur by connecting to the ports.

The controversy arises from the concern that China appears to be particularly friendly to some of the most corrupt and brutal regimes in the continent. Chinese investment, while it appears to take the form of mercantilism, should be welcome even if the justification from African leaders shows poor understanding of the ingredients for sustained growth. It is certainly wrong-headed to believe that China on its own will drag the entire continent into growth through its investment principally because China is itself still a lo-income nation. Secondly, the thinking that China is either a counterweight or alternative to the West is completely false because China has benefited immensely from export markets in the west and will continue to need that to maintain its growth. For all its endowment with natural resources and business opportunities, China needs Africa's markets less that it needs those in the EU and North America. Africa's best bet is to expand investment opportunities with both sides.

One must understand Africa's desperation for new investment and the benefits of trade with China. In spite of this fact,sub-Saharan African countries are well-advised to consider opening up as China did to other investors too. China is neither an African country nor is it capable of leading to Africa's economic development and diversification all on its own. The pattern of its trade and investment together suggests that these are driven by the need to expand its markets and to secure natural resources. More importantly though, African countries should recall that they are not a monolithic whole and the benefits from trade and investment with China will require domestic political and economic reform. The former of which China will not insist upon but is indispensable for sub-Saharan Africa's leap.

Starbucks Confirms that Tap Water is Cheap

Some keen person noted that Starbucks chain of coffee shops let the taps run without being turned off. The immediate claim is that this is leading to loss of precious water and one for which this story in the Guardian reports, the Starbucks chain is receiving a lot of condemnation for. While I am also concerned with the need to use resources efficiently, I am led to the belief that the Starbucks shops cannot be doing this without some thinking behind it and so the moralizing and condemnation may need to be moderated.

I think that one need not police Starbucks by demanding that all faucets within the establishment be turned off. Its behaviour merely confirms that Starbucks finds that tap water is very cheap. The solution is very simple and has been argued on this blog before. It would involve the most appropriate pricing of water so that Starbucks is compelled to dedicate its best effort in keeping costs low while ensuring that the concern for its customers health is also ensured. So what all those condemning Starbucks should do is advocate for governments to price water and ensure that all who utilize water pay the costs. Even Starbucks would not mind that.

Auction the Immigration Permits

One of the seemingly unfair things regarding inter-state relations today is the trouble that many people go through in order to qualify for visas into the countries of Europe of North America. Starting with the demolition of committees intent on determining the labour requirements in the UK, Tim Harford presents a brilliant and market-driven approach to issuance of permits to immigrants.

While I am opposed to strong nationalism as a form of discrimination, I also understand the possibility that some immigrants could be motivated to move to countries with welfare systems. This possibly small number of freeloaders may then benefit from redistribution of income from other tax paying workers. Tim Harford's solution challenges the cultural biases by asking governments to price immigration permits through auctions and use the proceeds in supporting public services. A good idea in applied economics even if politically impractical for the time being.

I am impressed because auction theory is among the ideas in economic theory that I find to have real and practical value. More thinking power to Tim Harford.

Bailout Rejected

This blogger has tried to make sense of the financial crisis and the rescue package that US Treasury and the Federal Reserve Bank proposed to congress. Now that the US House of Representatives rejected the proposal containing the rescue package, what followed are recriminations between the parties and the attempts to blame either of the presidential candidates.

As I tried to make sense of the crisis, I find that there is no more informed and clear thinker than Paul Krugman. First because he dedicated a large part of his early career to studying these cycles and has written a number of accessible books such as this and secondly because there's immense argument with the commentariat infusing ideology and biases into definitions on what the problem is.

One finds evidence of the diversity of these views from professional economists themselves as this page on the reason site shows. While answering the same four questions, it is clear that there's a bit more agreement and coherence on the causes than the appropriate solutions in addition to the utility value of the Paulson-Bernanke Plan.

Besides the clarity of Krugman's thinking on this matter, this short article by David Leonhardt of the NYT makes lots of sense of the convoluted genesis and proposed solutions. As he states, the package will remain controversial because of the mixture of the real objectives with other issues will make the plan internally inconsistent.

In spite of my reluctance to accept government interference in markets and the support for the market to be allowed to complete the decimation of uncompetitive firms, i think that the possibility of contagion and further harm is real and calculated assistance to restore lending is important to ease the liquidity trap.

A New Kind of Sub-prime Loans

To the extent that it allows the lending of minor sums to individuals with low income and who necessarily lack a credit history to acquire credit for entrepreneurship, micro-credit may be comparable to sub-prime loans. Daniel Gross argues for an extension of micro-credit to the citizens of low income countries out of the view that the Grameen Bank concept of micro-loans is an effective poverty buster.

While the piece argues that micro-lending is not a panacea, it also states that with infusion of new technologies and proper financial management principles, micro-loans are a way out of poverty. To my mind, micro-loans may be useful but their transformative power may be overstated because of the limits that thye place on the businesses that individuals may pursue. In addition, as an earlier blog post stated, most of the recipients engage in similar businesses that are expanded through loans but that incomes generated from them are often enough to live slightly above the poverty line.

Bank Crisis Dissected

On a number of occasions on this blog, I have expressed the view that tighter regulation of hedge funds is not necessarily in the public interest. This view is consistent with the thinking that limited regulation does have immense benefits compared to costs. Given the spate of collapses and rescues that is ongoing in the US starting with the sub-prime mortgage crisis and is now squarely hurting Wall Street banks,it is important to consider what structural factors have created the crisis.

Without doubt, a number of these banks were very highly leveraged and for a time made huge profits from sophisticated financial instruments such as derivatives. Joseph Stiglitz, Kenneth Rogoff and Thomas Friedman all have had their take on the issue. However, I think that Robert Samuelson's piece here not only tightly states what the problem is, but explains the miscalculation that resulted from the same models.

I am unsure that Wall Street will not be the same again as similar claims were made during the collapse of LTCM a decade ago, but it is clear that readjustments will take place in financial services houses in addition to there being stronger claims for regulation of these firms who appropriate profits for owners but require public money to ensure their survival during crises. I am all for prudent regulation unless it is made clear that no public money is to be used to save any private firms. With the rescue that has occurred already, there's a real moral hazard and it will only be a while before the geniues are back with presumably better models.

Predictable Problems for Performance Pay

One area where the principles of economics may aid professions is in the area of designing incentives and payment. Yet my cursory review of the manner in which the emoluments of lawyers, doctors, teachers and other professionals are designed shows that they are often informed by assumptions that may not be sensible to a dispassionate reviewer outside the profession.

Judging the performance of doctors illustrates the dilemma here because medical care is expensive. Oversight institutions therefore design systems to ensure that the doctors have an incentive to perform better by ensuring that the material outcomes such as mortality rates and hospital stay is reduced. Dr. Sandeep Jauhar writes in the NYT about the schemes that doctors have adopted in response to pay for performance schemes in hospitals in the United States.

The essay simply illustrates some principles that any student of economics would advise an administrator going out to measure performance. The first is that all incentive schemes are likely to lead to unintended consequences such as doctors avoiding surgery on the most morbid patients in order to drive up survival rates and other measures that are being monitored. As John Kay states here, over time, the metrics are pursued as an end to themselves as opposed to being viewed for their original intent. As stated here, measuring performance precisely is more nuanced than any simple algorithm or metrics can ensure because professionals quickly learn to game the system.

Why Bata Sells Shoes in Africa

In many forums discussing the continent of Africa, I have heard the sensible claim that this is still a continent where a number of adult people die well before they have ever worn their first pair of new or any shoes. and yet for the large number of African children who attend primary school, the one name that is synonymous with and most recognizable brand is Bata. There's no doubt that this is one of the most ubiquitous companies in the main cities of the African continent.

Ian Austen reports on the passing on of Thomas Bata, the founder's son who was the Chief Executive has passed on. The story states that the corporation that makes nearly 300 million pairs of shoes annually was indeed run by this "shoemaker for the world". As most firms find out in Africa, the continent is a difficult terrain for business but Thomas Bata's statement declaring that the expansion into Africa was motivated by the desired to sell shoes is clearer than many state. All I am certain of is that he found reasonable returns for his efforts selling shoes to a continent with an uncomfortably large number of the world's unshod.

Quote of the Day

"Why? Because renewable energy technologies — what I call “E.T.” — are going to constitute the next great global industry. They will rival and probably surpass “I.T.” — information technology. The country that spawns the most E.T. companies will enjoy more economic power, strategic advantage and rising standards of living. We need to make sure that is America. Big oil and OPEC want to make sure it is not". Thomas Friedman

I have eschewed quotations from popular writers but Thomas Friedman qualifies today because of this very profound sense of insight and the enormous bet that he makes here. In spite of the science some still claim that global warming is not proven and that there's no reason to change course, the quote suggests that future economic prosperity will come from identifying greener sources of energy. I can tell that the demand for the alternatives would be good because they would moderate the costs of petroleum in addition to reducing dependence of a single source that is largely available from member countries of a price fixing institution aka OPEC. Friedman however goes further by stating that it could be the precursor of the countries that would be dominant in the next phase of economic growth. I will keep watching.

Restaurants Refuse to Serve Tap Water

A large majority of goods that exist meet the test of private goods for which an owner is entitled to charge and exchange without compulsion. In the case of bottled water on the one side and diamonds used for jewelery,I accept this principle but state that I eschew purchase of the first and are lucky that whereas I have seen some sparkling examples, cannot afford the latter.

A number of posts on this blog such as this have stated that bottled water in particular is oftentimes sold under false pretense. The first of those is that tap water is inherently unsafe and the second is that all bottled water meets is necessarily filtered and meets the highest safety standards. Behind this is just the need to create the public to believe that consumption of tap water is very risky. Granted that some brands are very classy and tastefully marketed, the cost of bottled water compared to tap water is also reason to ask whether there's any justification for it.

A story in the Guardian reports here that restaurants are also exploiting the fears and the possibility for high profits by refusing to serve tap water to their clients at n cost. I am sure that the antagonism of one's clients to this extent is not necessary for any restaurant that intends to keep its good name. Customers are correct to refuse to pay for bottled water though in this instance, the need for a glass to take a pill should have alerted the manager to use his discretion to the benefit of his customers. A middle ground could be for restaurants to charge a modest amount for tap water because of the real costs that go into serving it and take away the unsightly coercion.

Medical Tourism and Trade Liberalization

Frederic Erixson and L. Davis of ECIPE argue here that freeing trade ins services generally and medical services more particularly would generate huge returns. As they state, what is required is for liberalization of medical care provisions that would enable individuals to travel abroad to countries that would offer services at lower costs without compromising quality.

India's gains from medical tourism has been addressed here before and the primary argument was that due to the large savings possible, it would be a definite growth area. That piece adds to the fact that liberalization would assist low-income countries to retain medical personnel who travel abroad to make the best of their skills. I am unsure that this is a certainty because the push factors for these highly trained doctors and nurses are not related to inability to secure employment i the first instance. To my mind, medical tourism is useful because it would generate demand for more doctors from the countries providing the services and thereby create sufficient resources to facilitate the expansion of medical schools. this is valid because the ratio of doctors to the population inmost of these low-income countries is often very low.

Many Hands Contributed to Olympics Success

As I stated earlier in this blog post, my visit to Beijing early in the year led me to the the conclusion that China would be a wonderful host for the Olympics games this year. During the very brief visit confirnmed to the host city, I understood that the government generally and most of the Chinese people I spoke too considered the hosting of the games as an opportunity to present a face of competence and national confidence in spite of the controversy in Tibet and the demonstrations that accompanied the torch relay in some cities and countries outside China.

For that reason, articles such as this by Christie Blatchford in the Globe & Mail are merely rehashing the obvious. In choosing to highlight the attention accorded to the bathrooms during the games, the piece fails to understand that China merely chose to leverage on its advantage in a huge labor force. This is unsurprising for a person with a minimal understanding of factor prices because China's huge population necessarily means that labor is comparatively cheap hence it is possible to deploy between 3 to 6 people in charge of a single bathroom block. I noted during my visit that even small shops tend to be manned by a large number of people in the city and this is a reflection of that endowment. It is unlikely that with the higher costs of labor in London, that the same number of people will be available to perform the same tasks.

Stealing Bikes for the Metal

When I first read this story about a garage owner who is accused of stealing 2865 bikes in Toronto, I was curious because I thought the incentive is pretty straight forward. To my mind, the accused must be a seller of bicycle parts or must live in a city where the total market of riders is high enough to ensure quick turnover of the stolen bikes. I was baffled when I read further that Igor Kenk stored a majority of the bikes in his shop because this implies large storage costs while increasing the probability of detection.

Instead the story states the theory posited by the NYT that Igor Kenk appeared to have noted the rising prices of steel and metals in general and was intent on keeping all the frames and melting them up once the prices started moving upwards again. Igor Kenk had a good idea based on extracting the metals from bikes and playing the commodities market even if the manner of acquiring the bikes was quite crass.he played a sophisticated market but failed to account for an equally clever police force.

Coase Theorem Applied to Jersey Numbers

It is difficult to understand why but a large number of athletes maintain the odd belief that certain numbers are lucky and they often choose those to mark their team jerseys. I have not come across a widespread study showing whether certain digits are more valued than others but a story by Doug Glanville, a guest columnist at the NYT here reminds me that it sometimes happens when two athletes are drawn to the same number.

Such a clash in coincidental demand for the same number because sports often involves transfer of high profile players who may wish to retain their preferred jersey numbers that is already assigned to a another players. Fortunately, it appears that while some sportsmen have learned to trade away the number for extra coaching, cash or other gifts. Whether they are aware of the fact that they are applying the Coase Theorem or not, I am sure that Ronald Coase would be impressed. The assumption here is that the athlete who gives up the number bears the externality of letting go of the luck that comes with the favored number.

Paradox of Famine and Food Exports

"I have discussed elsewhere the remarkable fact that, in the terrible
history of famines in the world, no substantial famine has ever occurred in any independent and democratic country with a relatively free press". Amartya Sen

As the world's second largest continent and for which the primary occupation of citizens is farming, it is a wonder that a number of African nations find it hard to consistently feed their populations. In the last three years, the costs of food has increased markedly throughout the world and this means that food aid is also increasingly expensive. the upside of this situation is that the world's peasants would take advantage of this agricultural commodity prices to expand acreage and increase income and overall welfare.

Jeffrey Gettleman's IHT story analyzes how Sudan is coping with high food prices and an armed conflict. Since the political crisis in Darfur is ongoing and the affected populations are being fed by food aid, the government of Sudan is instead taking advantage of high food prices to increase exports to Jordan and Saudi Arabia. the clear irony is that a government that has failed to ensure the peace and infrastructure that would enable its poor farmers to continue to produce their own food is unabashedly exporting grain and hiring farms while other countries ensure that some food is available to feed its malnourished and starving population.

While I am reluctant to fully accept the view that any form of foreign assistance is harmful, I readily concede that the story illustrates clearly that Africa's problems regarding stability and food sufficiency are entirely self inflicted. Indeed, in the Sudanese case it appears to be part of a political strategy to permanently impoverish a section of its population. Dictatorships and unfree societies are breeding grounds for famines and starvation. Sudan is a case study that Amartya Sen's pithy aphorism extracted from this well-read piece is true.

India's PDS Should Use Food Vouchers

Typically, most economic activity and production occurs outside of the public sector. However, I am always amazed that in spite of the good intentions used to justify government-led schemes, there is the tendency to repeat proven errors and thereby reduce the overall effectiveness of such initiatives.

An illustration of the theme of good intentions hampered by poor design and execution is the Public Distribution System aimed at helping households who fall below the poverty threshold in India. The aim is to provide them with a subsidy which enables them to purchase grain at a subsidized cost. Grain purchased by the government is physically transported from the Food Corporation of India's warehouses,these are transported to designated shops. Predictably, the drivers see an opportunity for making a gain from the price differential hence they divert a portion of the grain. In response, the government of New Delhi proposes to install GPS systems on each truck in order to ensure that the trucks are perpetually under surveillance.

From first principles, this diversion is expected because a subsidy for a good creates a differential which provides an obvious incentive for diversion into the real market. While the concern for India's poor is altogether laudable, I see that the better response is to review tested principles about the design of a cost-effective subsidy. The addition of GPS and requirement for SMS communication merely adds to the administrative burden and makes the entire scheme more costly than it should be. In short, the ration cards should be replaced by a voucher system that simply sends the cash to the identified households. there would be no need for trucks and sophisticated equipment. The only monitoring would be of the use and eligibility for the support. Perhaps the increased tinkering with a poorly designed system is because Delhi's bureaucrats have either not read or do not agree with this paper by Ahmed Tritah.

Should Governments Subsidize the Olympic Games?

I was privileged to visit Beijing in late April this year and quickly noticed the excitement and anxiety of the Chinese government and its people over the Olympics that start on this auspicious date. Not only was this a critically sensitive period because the protests that accompanied the torch in a number of cities made the government to go out on a public relations drive but there was concern about pollution in the city. My thinking then was that based on what it had achieved and the way in which the games are hosted, China is a deserving host because the games have become largely commercial.

As the games start, economists as Daniel Gross of Slate Magazine are reviewing algorithms and models to guess how many medals the Chinese team will win while politicians are worried about the possibility of a politically embarrassing event. Both are relevant questions really though it is even more important to ask whether the public expenditure on this sports fest is altogether reasonable. The answer as stated on Los Angeles Times here and argued on the Adam Smith Institute's blog here are unequivocally that it is not justifiable public expenditure.

Being a sports fan, I think that public expenditure on the Olympics is unjustified. One approach may be to entirely privatize the games and let a consortium of corporations or other sponsors bid for the games every four years and then invite countries to enter for the events. While this would incite protests as commercialization of the games, the approach would ensure that taxes are not spent in the bidding war to host games, politicians are cut from using taxes to gain political clout and that there's honesty about the games. It is a commercial show with the tax payers taking the bill. That is the unfair bit.

Talking About China

China's strides from 1978 to date have been largely laudable and the fact that the country has managed to lift about 400 million people out of poverty is proof that this is unprecedented. Notwithstanding this achievement, many speak of China as if its rise into a high income country is inevitable.

Discussions about China are rarely informed by reality but by the fear of the dragon. For instance, there's the assumption that China will easily replace the United States as the largest economy in the world in a short while. While I have been an admirer of some China's economic reforms, I came to the view that this is overstated after reviewing comparative data between China and the US. to my astonishment, they are not close today as the US is far far ahead both in respect to the strength of its economy in addition to the productivity of its workers.

John Pomfret rehashes the main arguments about China's longer-term prospects impressively in the Washington Post. A more incisive review about China's economic and political affairs is addressed in this book. In my view, the book forms a must-read in order to dispassionately discuss China. The book provides a reasonable balance sheet but confirms what that China is still a developing country, albeit a large and fast growing one, as some of its leaders claim.

TB Prevalence and IMF Loans

I have had an interest in understanding the factors that drive morbidity and how principles of economics could be used to cut the rates of spread of diseases. More recently, I noticed that tuberculosis is very costly to cure and was thinking that an appropriately designed incentives scheme would ensure that patients commit to the long treatment required and thus ensure complete cure and eradication of the pathogen. Admittedly, that would not be a new idea at all.

However, Sydney Spiesel of Slate Magazine alludes to this study which has interesting and very novel findings. Using multivariate regression analysis, David Stuckler, Lawrence King and Sanjay Basu find that programmes designed by the International Monetary Fund (IMF)are correlated with adverse health effects in countries as measured by the spread and prevalence of tuberculosis. The assertion is sensible because IMF programmes are all around known to be very stringent and often require adjustments that lead to a reduction of the quality and quantity of services that were hitherto provided by the public sector. In the case at hand, the study claims that the causality in the increased prevalence of pulmonary tuberculosis is because of the reduction in the number of medical personnel. This is particularly important for TB patients because of the close and constant supervision required in administering the medication. The most sobering claim is that every extra year of the loans associated with the IMF leads to a 4% increase in mortality. Certainly, it is not the IMF loans that is causing the deaths but this is a cruel illustration of the law of unintended consequences.

This fascinating and novel study is bound to inspire a response from the IMF. I cannot wait.

Diet Bullying Japan's Fat People

One subject that this blog has covered innumerable times is about obesity and the public policy responses to it. Broadly stated, I understand that the fear created about the dangers of obesity are as wrong-headed as the approaches for reducing obesity. The consistent view on this blog has emphasized three points.

First, regard for personal freedom makes it difficult to support the view that governments should have to directly engage in patronizing behaviour by directing individuals about ideal weight. Secondly, the figures presented about the welfare losses from obesity are exaggerated and fail to account for the gains that emerge from early mortality that is claimed to result from obesity. Thirdly, if there's a compelling reason to interfere with the lifestyle choices of its citizens, then government should provide a monetary incentive such as was provided by the mayor of Varallo by paying citizens to lose the weight.

I maintain that this is still a sound approach but the government of Japan seems to prefer the sledge hammer approach. Here's an article on Cato Institute's site by John Luik and Patrick Basham that dissects the unbelievable folly that mandates all citizens aged 40 years and above to undergone measurement of the waist to identify the obese and demand the shedding of that weight within some time frames. As if that were not bad enough, the failure to successfully lose that weight would then lead to compulsory re-education on health.

Now, the idea is not only bad in principle but the tack taken towards re-education is a reminder of very intrusive Soviet and other oppressive regimes with little respect for individual liberty and personal choice. If this was not on the Cato Institutes's site, I would have dismissed it as a bad joke. I have not been to Japan but I imagine that few people in a society such as that would wish to be referred to as the Weight Commissar.

Discoveries Come in Multiples

When I read this book by Edward Hooper trying to explain the source and spread of the virus that causes aids, I found it curious that two teams working separately had independently discovered vaccines for polio. The vaccines were produced by Albert Sabin and Jonas Salk within a short period of each other but I did not think it through enough in spite of my earlier knowledge that Isaac Newton and Gottfried Leibinz also independently discovered calculus.

Malcolm Gladwell's dated piece in the New Yorker magazine discusses the fact that there's a very pronounced and definite tendency for scientific and technological discoveries to occur in multiples. Explaining the work by a firm known as Intellectual ventures which was founded by Nathan Myhrvold, he argues persuasively that scientific discoveries are not as rare as conventional thinking has it.

By necessity, thinkers and researchers are acutely aware of the main gaps in knowledge for their disciplines and this may explain the phenomenon of multiple discoveries. To my mind, the factors at work suggests that keen researchers work by assembling critical knowledge about the problem and by looking at the entire set of information, are able to generate insights on where the solutions may lie. To my mind the article also suggests that in the same way that material scientific discoveries lead researchers to arrive at the correct solutions independently, it may also be that errors manifest the same tendency. But the critical factor is that good scientific ideas are not scarce.

Monet Breaks the Record

I recall vividly that I first saw both a painting by Picasso and Monet at the National Gallery in London. While I am by no means a connoisseur of art, I was overwhelmed by the pure beauty and the depth of the collection. I visited a couple of times during a week and found it really taxing to the senses. Placed on different floors throughout the gallery were may but the most impressive included Klimt, Gaugin, Cezzane and Manet in addition to the two mentioned above.

I may never be able to figure out how to really price any of these rare prices of paintings but Charlotte Higgins reports in the Guardian is an apt reminder that I am not alone. Some wealthy and aesthetically minded person paid up £40.1 million sterling for Monet's Le Bassin aux Nympheas through an auction. Auctions for rare pieces confirms my view that auction theory in economics is one of the more valuable areas of the wide and increasingly arcane scientific endeavor. To my mind the record price for this piece by Monet, all in the midst of a troubling and probably worsening credit crunch, is evidence that the price mechanism correctly values Monet's pieces. Noting that the premium for this piece is determined by its rarity and aesthetic appeal, I am glad that a number are in public display since I hardly would have seen any.

Paying Students for Good Results

Whereas the phenomenon of differential performance in education is one that is an issue for debate in the US, in many societies and countries, there are distinct groups (often minorities) whose educational attainment is comparably lower than that of others. Explanations for these differences in attainment range from innate ability, poor parental supervision, the lack of appropriate models to institutional and racial biases. Still, some people retain vehement opposition to the proposal that students could be given financial incentives to study and perform well in spite of the clear evidence that many students do struggle to do reasonably well in school. It is understandable that it offends the strict moralist view that an individual should make the calculation that good academic performance is in his or her direct interest but that does not mean that such opposition is always well-informed.

Roland Fryer, a professor of economics at Harvard University and the American Inequality Lab is not only qualified to comment on the extent to which any of these answers are true but is also the person from whom one would expect tested solutions. According to this article in Times Online, Roland Fryer is testing an incentive programme in New York city schools. While it may be anathema to many, cash incentives seem to be working and this has attracted the admiration of teachers who were initially skeptical and ideologically opposed to the experiment.

Most fascinating is the professor's argument about why the incentive structure should work for black students. It is because white students often are alive to the benefits of education by looking at the material comforts that their parents are able to afford on account of their superior education. It may be expecting too much to think that this is a silver bullet for problems of the under achieving youth but better learning even for its own sake is good enough.

Defining Hyperinflation

Thanks to the shameless tyrant Mugabe and the craven leaders of the African Union, every Zimbabwean lives the fact of hyperinflation. However, professors of economics and business may find this definition of some use in introducing students who cannot contemplate that phenomenon. A pithy statement on political economy.

"What kind of leader will preside over a country where the weight of the money required for a loaf of bread is heavier than the loaf itself?" Azubikwe Ishiekwene

A Slave for US$ 200,00 Weekly

In my belief that the contract between sportsmen and their teams is based on freedom of exchange and association, I have stated here that Manchester united should accept an offer from Real Madrid soccer club in respect to Ronaldo. In addition to the belief in economic freedom, my thinking was that it is not wise to keep an obviously dissatisfied player in a team merely to make a point to competitors. The case was not complicated because Real Madrid realized that Manchester United would not let off their best player for at a small price. So the pundits had it that the offer for the club was upwards of £ 70 million with a weekly wage of nearly £ 200,000 for the player. the economics of it is clear and that is that the trade should be concluded.

This situation has not been helped by a comment by the Sepp Blatter suggesting that there is "too much modern slavery" in sport. Instead of seeing the obvious irony of a statement like this from a man who heads an organization that makes quite a ton of money every year from the industry for which it does not provide much, Ronaldo must have aggravated his club managers further by unequivocally agreeing with these sentiments. However, I disagree with both Ronaldo totally since his his wages and conditions of work, to which he is fully entitled show that this overstated. I add that it lies ill in Sepp Blatter's mouth to berate clubs for anything when he is at the same time proposing protectionist quarters to prevent the same European clubs from signing players outside that continent.

A person who preaches economic discrimination and tries to limit the rights to freedom of contract should be more humble here. In order to really understand the economics of the slave trade, he should check this book by William Fogel. In short, those conditions are not comparable as no slave was in a position to demand a trade to a better farm.

The Best Book on the Market

One of the most admirable think tanks that I have had occasion to visit is the Adam Smith Institute based in the UK. Eamon Butler is its director and has just written a book under the title, The Best Book on the Market. On the podcast available here he discusses the ideas contained in the book. A reverberating idea in there is the deficiency of text books in stating clearly how markets arise and for emphasizing that it is not a machine but rather an institution created from human action.

In the interview conducted by Alex Singleton, he responds to the question of the most mischievous idea in the text by stating that first it is desirable for every person to own a text book on economics and that ownership should be followed by ripping off the chapters on perfect markets because that chapter's description of markets is bound to be wrong. He also puts forth a strong defense of the market as a surprisingly moral institution by harnessing self interest. A text that I will be acquiring presently.

Markets are Tiger Friendly

Wildlife conservation throughout the world is an area in which the application of principles of economics finds very sparse. Oftentimes advocates for conservation of species and governments are loathe to consider commercial use and trade in wildlife. Unfortunately, in discussions on conservation,emotions tend to drive the debate and the instinctive reaction is to call for more laws and prohibition. As a result, the tiger population in Nepal has been consistently decimated to the level that it is not only close to extinction.

As reported here, in spite of the fact that Nepal was home to the third largest population of tigers, it is now estimated that there are fewer than 150 live tigers in the country. Acknowledgment of the problem is fine but I am loathe to accept the blame on the illegal trade in tiger parts. the entry of international gangs in the trade is itself proof that the existing regime is only of help to poachers and traffickers.

Having appeared a couple of years ago, this article by Barun Mitra in the NYT now appears prescient because it stated clearly that saving the tiger population was possible and could be accomplished through commercialization. Even if it is counter intuitive, his thinking is quite sensible and is akin to an earlier argument on elephants that I proposed on this blog. To continue with this wrong-headed approach of prohibitions merely ensures that there will be far fewer naturally bred tigers and that ultimately, only private breeders will own any. It is instructive to note that there are more tigers in private ownership than are available in the wild. Nepal's National Parks and Conservation Department should call on Barun Mitra here.

High Petroleum Prices Not all Bad

This blog has in posts such as this lauded the decision by the former mayor of London in introducing a mechanism for charging vehicle owners for use of roads inn central London. As stated in on of the many posts here, the idea was not only successful, but it was was widely copied. The former mayor's counterpart in New York however failed in securing approval to introduce road pricing within Manhattan. This NYT piece now argues that the rise in the prices of gasoline seems to be having effects proximate to mayor Bloomberg's intention. William Neuman reports that the Metropolitan Transport Authority confirms that traffic reduced by 4.7% as a response to the price of gasoline passing the price of US$ 4 per gallon. Evidence for the claim that the rise in price is responsible for the changed behavior finds support in the concurrent increase in public transport.

Interesting as this unintended consequence of an increase of prices may be, it is still relevant that the effect is a reduction that is not confined to the more congested roads and bridges as the mayor's congestion programme had intended. Thus, the rise in gasoline prices affects all motorists in the same manner as it cannot be targeted to the most congested streets. the limits of the unintended consequence is also that any reductions in price would probably reverse the trends. Most important though is that the gains from congestion pricing are not only in the reduction of traffic and its effects on pollution but also that the revenue generated could be utilized to maintain infrastructure. this advantage is clearly not possible when reduction in traffic is driven by the rising prices of gasoline.

Quoting Bertolt Brecht

"The aim of science is not to open the door to infinite wisdom, but to set a limit to infinite error." Bertolt Brecht

Stop Blaming the Speculators

Most commentaries about the rise in commodities prices are more interested in assigning blame to speculators, US alternative fuels policy or on the growth of China and India and the pressure on supply. I see much less in terms of the apposite responses that corporations, households and governments in terms of pubic policy.

Two articles here and here by David Koenig and Robert Samuelson respectively are taking the discussion forward by reporting on different aspects of the issue. To start with Koenig's piece in Business Week shows how the more astute managers of Southwest Airlines took to hedging against the volatility in prices of fuel by hedging intelligently. The idea behind this is quite clear because it proves that an understanding of the underlying economics and cost structure for running an airline would identify the idea of fuel price volatility as a major risk area. As the report states, they are not only far ahead of the competition in this approach but also that they paid US$ 1.89 per gallon of fuel whereas their competitors are paying in the US$ 2.73-2.83 range. To my mind, it demonstrates the fact that airlines need not be protected or offered public finances to make profits because the right advise should ensure that more of them utilize such financial instruments.

On the other hand, Robert Samuelson is justifiably animated that the correct analysis fr the rise of prices is being forgotten for the purpose of political convenience. Speculators are a convenient excuse for the rise in prices and so both presidential candidates are busy trying to impress the public with regulatory proposals ostensibly meant to reduce the adverse effects from speculation in commodities. This is in spite of the fact that the reason for the rise in commodity prices is clearly about the dynamics of supply and demand. This does seem to be an unduly simple answer for the political season when voters can demand to have their cake and eat it too.

Gun Debate Continues

Here's an analysis appearing on the Economist about the big decision by the US Supreme Court on the right of citizens to bear arms. Similar to my sentiments is the claim that this matter is not settled especially as the views of the candidates is being sought again and again but the article is less clear about whether the decision will affect demand for hand guns. The story states the subtle claim that the quest to challenge the decision on the one hand and to have it confirmed at state levels on the other will merely divert resources away from fighting crime. I concede that especially since crime fighting and prevention is not only about the ability to bear arms or restrictions on that. I see the possibility that a matter like this cannot be settled due to the fact that it is a very effective tool for political mobilization and so the debate must continue for its sake. As I said in the earlier post, the matter is unequivocally settled: US citizens may choose to bear arms.

Gambling in Las Vegas

I have not watched the movie 21 but I read the book, Bringing Down the House, on which it is based. Unlike many people with reservations about whether gambling is properly considered a legal industry, I am fascinated with the economics that underlies the casino business. Las Vegas is proof in my view that some of the worst fears about gambling is often overstated and may be unfair. Without overstating it, the success of enterprises in Las Vegas proves that this industry ought to be lightly regulated and subjected to a tax as other economic activities.

According to this piece in the Economist, demand for gambling in Las Vegas casinos is considerably lower too as a result of the general downturn in the US economy. Occupancy rates as the famous hotels has dropped from the customary range of 90%-95%. There's more reason to worry because this has coincided with an expansion period that may cause an oversupply of rooms. No one would doubt that the appropriate response would require that a reduction of costs be undertaken especially noting that return on capital has maintained at 14-15% more recently.

This merely confirms to me that gambling and the entertainment in Las Vegas is subject to the same laws of economics which show that the high returns will create an incentive for new entry into the market. The more profound one is that demand for gambling services is elastic and responds to the other conditions in the market that affect income. And just to add to it, more credit to Harrah's for hiring a former professor of economics as manager. One more option for employment opportunities for professors who have taught that banning gambling may be popular but certainly inefficient and bound to fail. As the piece confirms, Las Vegas is even less dependent on the casino operators even if it is unclear that this is a definite trend.

More Guns on the Way?

While I maintain some libertarian sensitivities I am more circumspect and less certain in regard to the issue of the absolute right for individuals to bear firearms. Indeed the mere ownership of firearms by individuals is by no means a primary cause for crime and illegal uses but I do not support the extraordinary claim that the second amendment of the US constitution confers an unqualified right to bear arms. To my mind, it reads as if the purpose was intended for the militia. Well, I am now officially wrong as the US Supreme Court decided that the right of individuals to bear hand guns should not be be unreasonably constrained.

Putting aside the politics of it all, I remain curious to see whether this decisive finding will affect the demand for firearms generally and hand guns in particular. And if the effect is that the ability of states to outlaw ownership of hand guns is substantially curtailed, then manufacturers may have other strategic responses to make firearms easier to own and packing more power. In spite of the already dispelled claims made by John Lott Jr. in this book, it would be interesting to test whether any rise in ownership would lead to any reduction in crime.

BEE: Another Failed Experiment

While governed by apartheid system, the Republic of South Africa maintained a high degree of discrimination against the majority black people that resulted in economic inequality of a very extreme nature. Upon the collapse of apartheid and the ascent to democracy in 1994, the government was under pressure to secure quick gains for the black population that had borne the brunt of discrimination and exploitation. Choosing the easier path, the government came up with the Black Economic Empowerment programme in the mistaken belief that it would hasten the growth of the economy and ensure the development of a black entrepreneurial middle class.

That it has not succeeded is not a surprise to many who have observed African economies in general and societies that have had a legacy that leaves them with serious inequalities on account of systematic and sustained discrimination. It is often tempting to consider that discrimination in the other direction is the means for resolving those difficulties. After 14 years, South Africa has nothing to show for the BEE save for a small class of privileged and corrupt politicians who manipulated these rules to ensure that they acquired choice partnerships in successful firms.

Discussion in the Republic of South Africa has started now on how the BEE has performed and there's no denying that it has merely driven corruption by introducing unwelcome political considerations into business ventures. None other than Moeletsi Mbeki, the president's brother said this here during a conference on world economy held in that country. One cannot agree with him more on this point because racially motivated redistribution has been tried before in most of Africa and with disastrous results. All I wonder is why no one checked this fact that early because a formative decade has been wasted on unsound ideas. This is an experiment that the African National Congress ought not to have contemplated in the first instance and the president is not to be excused at all because together with his comrades, they succumbed to economic populism and forgot to lead. This time, the poverty is self inflicted and Apartheid retains the evil classification but it is not to blame here. Government does not know all.