lsetangents

Costing Cannibalism: Some Thoughts on the Economic Underpinning of Sweeney Todd the Demon Barber of Fleet Street

2008-03-03T05:49:00.000-08:00

something to lighten up the mood....:)

By Jan Henning

Dir: Tim Burton. Screenplay: John Logan
Based on: the musical by Sondheim and Wheeler

Tim Burton’s recent film of Sweeney Todd, starring Depp, Bonham-Carter and Rickman, is more streamlined than the original stage-musical; probably because of the vocal limitations of the three principals. Therefore sundry things like a coherent plotline and chorus of Bedlam-lunatics, are dispensed with. This strategy has the effect of throwing certain aspects of this venerable tale into stark relief.

One of these is the economic underpinning of the Sweeney-Lovett combined barbering-and-pies consortium.

Let us therefore look at how a serial killer and a besotted but amoral baker succeed in their joint enterprise, by turning an inevitable by-product into a commodity.

When Mr Todd returns to London from his enforced holiday in the antipodes, it is clear that the city is in the grip of an economic recession. We are informed of this by Mrs Lovett, the pie baker.
Ah, sir, times is hard, Times is hard!

We shall see that, throughout, it is Mrs Lovett who keeps a grip on the economic realities. Her two main songs – The Worst Pies in London, and A Little Priest - give a clear outline of her economic modus operandi; first before, then after she sets up the partnership.

In The Worst Pies, her business is on the brink of collapse. She has no custom, and insufficient raw materials with which to make the pies. Meat is in short supply, and therefore too expensive for her limited means. Thus her “meat pies” are without their main ingredient.

She attempts to rectify the situation in three ways.

Firstly she thickens the lard-based pastry - It's nothing but crusting!

Secondly she serves alcohol with the pies to mitigate the effect of the taste - Here, drink this, you'll need it!

Finally she resorts to road-kill for the pie filling –
Never thought I'd live to see the day when men would think it was a treat
Findin' poor animals wot are dyin' in the street!

None of these strategies have worked; and indeed, her rival Mrs Mooney, with pies made from (live) domestic cats, is fast cornering the market. Lovett admires the strategy, but confesses that she is unable to imitate it –
And I'm tellin' you, them pussycats is quick!...... Well, pity a woman alone, with limited wind …

It’s at this low point her career that Sweeney Todd arrives in her shop, intent on revenge against the wicked Judge Turpin, who has condemned him to Transportation, then debauched his wife and abducted his infant daughter. Later, when Sweeney has made his first kill; and also narrowly missed in his first attempt at the Judge and is feeling ready to widen the scope of his revenge, it is Mrs Lovett who sees the possibilities inherent in a constant supply of fresh corpses..

Her economic logic is impeccable:

Such a nice, plump frame wot's 'is name has...
Had...
Has!
Nor it can't be traced...
Bus'ness needs a lift,
Debts to be erased..
Think of it as thrift, as a gift, if you get my drift!

And then – this remarkable calculation:

Take, for instance, Mrs. Mooney and her pie shop!
Bus'ness never better using only pussycats and toast!
And a pussy's good for maybe six or seven at the most!
And I'm sure they can't compare as far as taste!

Thus, with a guaranteed supply of fresh meat, and the services of Workhouse-orphan Toby, who has a superb line in hard-selling to customers, Mrs Lovett’s business gets a kick-start. Later we see the successful pie shop – premises refurbished and improved – barely meeting the demands of its customers.

Sweeney himself contributes to the business solely as a creative artist. Money is never his principal aim, even in his own barber-shop. He becomes a commodity-supplier as a by-product of his over-arching aim in life; which is revenge.

Finally, of course, the cosy business enterprise is terminated quite suddenly. It’s worth speculating whether this could have been averted if only it had occurred to Mrs Lovett to diversify into glue-manufacture. That way those inconvenient (and incriminating) finger and toe-bones might also have been gainfully processed into a utility; with the useful side effect of destroying the evidence more completely.

Sadly this failure to diversify resulted in …….. ah, but that would spoil the ending!

A Case for Microfinance Backed Securities

2008-02-26T16:00:00.000-08:00

By Gautam Kalani

It is now widely accepted that the microfinance model is successful in significantly reducing rural poverty by improving access to the credit market. It fills the gaps left by the inefficiency of formal credit markets in developing countries. Microfinance has been effectively implemented in countries as far reaching as Bangladesh, Indonesia, Kenya and Bolivia. The secret of its success lies in its ability to significantly reduce the debilitating information and enforcement costs inherent in the credit markets of developing countries, through the process of endogenous group formation and social monitoring. The repayment rate for microfinance loans is as high as 97% in some places, spurred on by the pride of the impoverished borrowers and the system of social enforcement. This is far higher than the rate for commercial banks and government-operated social banks . Also, unlike formal credit, most microfinance loans require no collateral. Moreover, when compared to social banking expansions, microfinance is a cheaper way of increasing rural access to the credit market because, unlike social banking, it tackles the inefficiencies at the root of formal credit markets. Microfinance undoubtedly increases and equalizes access to the credit market, and is a cost-effective method of lowering rural poverty.

Microfinance, however, is not nearly as widespread as is desirable. This is because microfinance institutions (MFIs) are run primarily by non-profit NGOs, which do not have sufficient funds to expand into rural and remote areas. In vast and heavily populated countries like India, the penetration costs of expansion into the far-reaching, isolated corners are too high for NGOs to bear. Though microfinance is more cost-efficient, it is not as widespread as government-controlled social banking, due to high penetration and expansion costs.

To overcome imperfections in the credit market and reduce rural poverty cost-effectively, efforts must be made to expand microfinance. One of the largest obstacles to the growth of microfinance today is the lack of resources available to MFIs. A possible method to overcome this barrier and promote the spread of microfinance is to float an MFI on a public stock exchange. Listing an MFI on a stock exchange would give it access to more funds and resources, which it could use to increase lending and also to expand into untapped regions. Positive financial returns (which can be in the mid to high single digits ), combined with the social benefits, can draw investors to MFIs. An MFI like Grameen Bank would be a prime candidate for such a listing. Its model is well known and it has an exceptional track record . If a listing proves to be successful and the model profitable, this would also cause other MFIs to start up, further increasing the reach and spread of microfinance.

If it is viable to float an MFI on a stock exchange of an emerging market, then it should be done as soon as possible. Growth in emerging markets is high and stock markets are at all time peaks. The Indian and Chinese stock markets, in particular, have reached unimaginable heights. In India, liquidity is also widely available.

Another possibility is to create microfinance backed securities. Microfinance loans from many regions could be bundled together; these bundles could then be sliced up and the parts sold to investors as microfinance backed securities. Securitization is probably the quickest and simplest way for the microfinance industry to gain access to mainstream capital markets. Since microfinance generates positive returns, it would not be hard to find investors for these securities, as profits are combined with the lure of ‘social investing’. These securities diversify risk for investors since they are based on loans given in different regions. This makes these securities more desirable than commercial bank shares as they would “represent lower country risk than shares in banks. ”

Additionally, there is evidence that MFIs have a low correlation with broader macro-economic indicators - “microcredit borrowers are operating in the informal sector, and so they are less affected by shocks to the formal economy. ” The positive performance of microfinance in recent financial crises is evidence that microfinance growth is less dependent on macro conditions. For example, when Indonesia had its financial crisis in the 1990s, the microfinance sector suffered less than the formal sector . Also, it can be argued that the poor have different risk sensitivity from the rest of the economy – they are not usually directly involved in the boom and bust of, say, real estate. This suggests that microfinance securities would probably be less likely to fail to pay out in the face of downturns; that is, the systematic risk (beta, in financial jargon) would be lower for these securities. Thus, microfinance backed securities would also be an attractive option for investors and fund managers looking into portfolio diversification. In times like these, this can only be a good thing. Robert Annibale, global director of Citi Microfinance, echoed this sentiment when he said that the “microfinance field looked to be largely immune from global credit liquidity problems following the U.S. subprime mortgage crisis, and that in previous economic crises the very poorest had proved themselves surprisingly bankable. ”

In fact, microfinance backed securities already exist. In April 2006, Morgan Stanley arranged the BlueOrchard Loans for Development 2006-1 transaction (BOLD 1)—an almost USD100 million collateralized loan obligation (CLO) backed by unsecured senior loans to 21 MFIs in 13 developing countries in Latin America, Eastern Europe and Asia. The largest of its kind to date, and the first to be arranged by a major international investment bank, the BOLD 1 transaction showed that standard securitization techniques can be used to allow the mainstream capital markets to invest in the microfinance industry. This was followed in 2007 by BOLD 2, which is a USD110 million CLO. The different BOLD 2 notes received S&P ratings of AA and BBB. These ‘investment grade’ are further evidence of the viability of microfinance as an asset class. (Ha! You can’t mean this, surely… especially after what happened over the summer? – but don’t I justify this statement when I explain that microfinance isn’t affected that much by broader macro indicators and that its not susceptible to a crash like the subprime market saw? If you feel that isn’t enough, just delete the last sentence and add ‘investment grade’ before S&P ratings.)

In my opinion, giving microfinance access to mainstream capital markets is the key to its future growth. If MFIs can harness the power and efficiency of capital markets on a large scale to achieve its social goals, then microfinance would grow exponentially, leading to widespread poverty reduction. However, this is only feasible if MFIs, and microfinance ventures in general, are profitable. There has been much debate on this issue of profitability in relation to microfinance. Murdoch (1999) argues that although repayment rates associated with microfinance are high, there is little concrete evidence to suggest that microfinance is, in fact, a profitable venture. He claims that “(m)ost programs continue to be subsidized directly through grants and indirectly through soft terms on loans from donors. ”

This, however, cannot explain the successful survival of for-profit MFIs in recent years. Organizations like SKS Microfinance , which operates in India, and Bangladesh’s Grameen Bank, have notched up healthy profits in the past few years. SKS has already drawn millions of dollars from financial giants such as Citigroup, ABN Amro and HSBC – not as donations, but as investments. As of 2006, ICICI Bank, India’s largest private sector bank in terms of capital, had loaned more than USD10 million to SKS; these loans “have been low-risk and give ICICI a slightly higher return on capital than it gets from its corporate borrowers. ” Additionally, as the following graph shows, Grameen Bank has declared positive profits for every year since 1993; there has also been a rapid rise in profits in recent years which correspond to the exponential growth in microfinance. (BUT: Grameen is partly government owned <~6% by the Government of Bangladesh> AND it’s bonds were guaranteed by the government as well; so does using Grameen as an example invalidate your point that MFIs can operate/ survive on their own?? Yes, because now Grameen runs free of subsidies and donations – it is a self-sustaining organization. Also, the govt ownership is a very small percentage.) Thus, there is strong evidence that microfinance can be run as a profitable venture.

As the current debate on the profitability of microfinance rages on, there is a general consensus on one aspect – in order for the microfinance sector to sustain growth and better serve the poor, it needs to “diversify beyond small loans to saving and insurance schemes. ” Murdoch (1999), too, believes that the present microfinance model is by no means perfect – “The full promise of microfinance can only be realized by returning to the early commitments to experimentation, innovation, and evaluation. ” He claims that in order to attain financial sustainability, MFIs need to radically alter their management structures, and also expand into the provision of flexible savings plans to the poor. Thus, improvements to the microfinance model are essential for the continued growth of the sector.

As we enter an age in which the growth of the global economy is driven by strong emerging market growth, conditions are conducive to a large scale expansion of microfinance. Stable and positive growth prospects in large emerging markets like India and China are attracting large amounts of foreign investment into these countries – if microfinance does successfully access mainstream capital markets on a large scale, then a tiny fraction of this foreign investment will also undoubtedly reach the poor in the form of micro-loans. A tiny fraction of this massive foreign investment would be enough to alleviate millions from poverty. Additionally, the continued good economic performance of these developing countries in the face of global economic downturns like the sub-prime mortgage crisis implies greater immunity to MFIs operating in these countries from unfavorable macro conditions in the developed world.

Thus, the most efficient and cost effective way to broaden the spectrum for microfinance is through the financial market in the above mentioned ways. Competitive markets would then do their job in ensuring efficient allocation of resources. Spreading microfinance would be the cheapest way of increasing and equalizing access to the credit market, overcoming some of its barriers. This in turn would significantly lower rural poverty. It would truly be an extraordinary amalgamation and alignment of capital greed and social interests, bringing new meaning to the phrase, “Greed is good.”

Notes:
Endogenous group formation implies that borrowers form their own groups which are jointly liable for the loans. This process effectively improves the risk pool for MFIs and tackles the adverse selection problem of the mainstream credit market in a cost-effective manner
Financial Times article, “Microfinance: not as risky as you think,” published on May 25th, 2007.
http://www.ft.com/cms/s/2/848c27ee-0acd-11dc-8412-000b5df10621.html
Burgess and Pande (2004) claim that the social banking expansion in India (1977-90) was successful in reducing rural poverty; however, such expansions are extremely costly since they do not tackle inefficiencies at the root of formal credit markets in developing countries.
Financial Times article published on May 25th, 2007.
http://www.ft.com/cms/s/2/848c27ee-0acd-11dc-8412-000b5df10621.html
The official Grameen Bank website claims that, “As of January, 2008, it has 7.44 million borrowers, 97 percent of whom are women. With 2,488 branches, GB provides services in 80,949 villages, covering more than 96 percent of the total villages in Bangladesh.”
http://www.grameen-info.org/bank/index.html
Financial Times article mentioned in footnote 4.
Financial Times article mentioned in footnote 4.
Reuters article, “Citi sees microfinance growth even in downturn,” published on December 21st, 2007. http://www.reuters.com/article/email/idUSL2157748820071221?sp=true
Reuters article, “Citi sees microfinance growth even in downturn,” published on December 21st, 2007. http://www.reuters.com/article/email/idUSL2157748820071221?sp=true
Murdoch (1999) – The Microfinance Promise
For more information on SKS Microfinance and its profitability, refer to the Wall Street Journal article, “Entrepreneur Gets Big Banks to Back Very Small Loans”, published on May 15th, 2006.
Wall Street Journal article mentioned in footnote ?.
Data source: official Grameen Bank website.
http://www.grameen-info.org/
Reuters article mentioned in footnote 6.
Murdoch (1999) – The Microfinance Promise

oultine of feature articles by Serena Tang...promising:)

2008-02-13T02:50:00.000-08:00

China + World Inflation
- current macro situation: trend: rising inflation; why?:
---> growth
---> supply not catching up
- command economy type controls (price, quantity) which exacerbate things
- infrastructure not being able to catch up
- will it get worse?
---> policies it can use:
- price controls... short term? long term? (link back to above)
- banking system
- capital flows (to Hong Kong!)
---> new labour laws (I've got some great anecdotal evidence...):
- rising costs for factory owners; passed on to consumers; higher prices still!
- factories closed down; unemployment?
- OR, is it just a trend in the whole world, higher inflation?;
- some figures, and projected trends
- where did it go the last 20 years?
- what can be done now?; can anything be done now?
- In the midst of this, where is China heading to now?
- projected slower growth (WB China Quarterly Update)
- price stability ~ political stability (think 1988 discontent over prices, and 1989...)
- can communist era economic policies reign in an increasingly capitalist system?

Hong Kong
- current macro situation: importing inflation left, right and centre: main reasons:
--> China
- reliance on Chinese economy for food, necessities
- Chinese funds and investments
--> USD peg
- brief history of currency peg; how it works; why did we do it?
--> stability
- what to do about inflation and other problems?
--> not possible to cut China links
--> leave peg?; possible consequences? (rumours of revaluation led to speculative attacks in Oct 2007!?... I didn't know about this...)
>> BUT is independent monetary policy really needed?; fiscal policies at work

--> THIRD WAY: "may the best currency win" (this was from MS's Stephen Jen...!!):
- repegging to the yuan, OR
- a gradual shift to actually using yuan only (already happening) ('optimum currency area??? implications?? constraints??)
--> Implications for nations (UAE, Qatar, etc) which also have dollar pegs? (Not much!)

Generic drugs providing second-rate solution to Honduran health

2008-02-13T02:43:00.000-08:00

April 23rd, 2007

Alex Jones/Honduras This Week

Generic drugs such as these flu medicines are used in public hospitals in Honduras.Narcotics in Honduras are too expensive for many, including the government. As a result the state cannot fulfil its constitutional duty to provide enough free or adequate healthcare to Honduran citizens. In an attempt to approach this problem and decrease the cost of drugs, some companies illegally make generic copies of patented original molecules. As they don’t have to fund research, they are able to sell at lower prices. These illegal generic drugs thus play an absolutely crucial role in Honduran health. “Currently the government buys mostly generics for the public hospitals, because by doing so they can afford to buy significantly more drugs,” says Dr. Jacobo Andonie, technical director at Andifar Laboratories, a manufacturer of generic drugs. Individuals make the same decisions, as “at a private pharmacy the difference between a patented and generic drug might be the difference between L.1000 ($50) and L.100 ($5).” With 60% of the population living below the poverty line, this may mean the difference between life and death in the case of an easily treatable disease. Whilst it is clear that cheap, generic drugs play a vital role in Honduran health, there are major problems with coupling the need to provide cheap healthcare with the need to provide good quality drugs.

You can’t make generics of original drugs unless they have run out off their patent or your company buys patent rights, “in theory,” says Andonie, “but the world is not working that way. There are two big players in the east – China and India – and as soon as a new US or European drug comes out they have their chemists study the molecule and make the raw material.” This may take up to a year, but sometimes takes less than three months. “This raw material is then available to the manufacturer who has the guts to make the drug.”

This is illegal, and “the big companies don’t turn a blind eye towards generic companies when they break the patent laws, but for them it is such a small market that sometimes to fight it is not really worth it. The (Honduran) pharmaceutical market is between $110 and $130 million per year. But then you have so many drugs in that market, so to fight each little bit doesn’t really make sense. If you were in Mexico I am sure they would fight it, they have 90 million people there. In Brazil they fight it for sure.”

Indeed last year Novartis, a Swiss pharmaceuticals multinational corporation, challenged an Indian law that denies patents for minor or trivial improvements on already known drugs. The legal challenge came after a patent was denied for the new cancer treatment, Glivec/Gleevec. The challenge was dismissed in a high court ruling, and this decision that was welcomed by health activists around the world, including Medicins Sans Frontieres, The Berne Declaration Group and the All-India Drug Action Network.

Similarly, last year Brazil’s president had to authorise the country to sidestep the patent on an AIDS drug manufactured by Merck, a US pharmaceutical giant, after they refused to supply the drug to Brazil at the same cheap price they do to Tailand, citing the size of the Brazilian economuy. Brazil now imports a cheaper, generic, Indian made version of the patented Efavirenze drug.

These are just two examples of where a developing market has become large enough such that it is worth fighting the patent laws. Novartis cited India’s “booming middle class” in an open letter to the NGO community justifying its action in India, and Merck justify their policy towards Brazil by claiming that “as the world’s 12th largest economy, Brazil has a greater capacity to pay for HIV medicines than countries that are poorer or harder hit by the disease.” However, as these countries do seem to have two markets within one economy, they also seem, so far, able to fight off the pressure. Many people are worried that as small economies enter free trade agreements with each other they are creating large markets of small economies. This may mean that they create markets large enough for research based pharmaceuticals to earn a profit upholding patent laws or pushing for more stringent patent laws, but made up of governments that are individually too weak to stand up for their citizens as the Brazilian and Indian government have shown an ability to do so.

Another down side of being a generics company in a developing country is that you hold very little power in the international arena, especially compared with the major research based pharmaceuticals. It is thought that these big pharmaceuticals use their strength to suggest international regulations in such a way that makes it hard to produce cheap equivalents of what they do. A lot of the time it appears that these pressures are exerted in the form of new standards, procedures and laws demanded through the World Health Organization (WHO). Thus many standards are put into place and advised upon through WHO, but are incompatible with a need to produce affordable drugs.

“For example, since 2000, WHO – through each government in Central America – have required that every manufacturer complies with the Good Manufacturing Practice (GMP).” This is a series of criteria that regulate the quality of the equipment and methods used to make the drugs. “It is a great tool, and it definitely helps us to improve our service, but I am sure a lot of the smaller generic companies went bankrupt over it.”

Similarly, “you can no longer use published data to register new molecules…but that is exactly what you have to do if you are a generic company. The US doesn’t want us to use their data. They want us to do our own clinical trial. That both raises our cost and delays our launch into the market.”

“In developed countries a generic has to be bioequivalent with the original. In Honduras this topic of bioequivalence is gaining force, but it is still not the same.” For two things to be bioequivalent means that they act the same in a test tube. It is an analysis that should be carried out with tablets to test the rate at which they dissolve, for example, or quantity of medicine that will end up in the right place after being filtered through the liver. Syrups and vaccines however don’t need to be tested for bioequivalence.

The status of bioavailability is similar in the developed world, but, because of its high price, less practiced even than bioequivalence in developing countries. Bioavailability signifies the extent to which two medicines act the same in humans, and so needs live human testing. “However bioavailability and bioequivalence are hard and expensive to do, so the industry has focused on GMP instead.” For this reason, according to Andonie, you will hear stories of drugs which didn’t have the full affect, or had to be taken in double doses etc... “Once you comply with the GMP, if you have the time and the money, you comply with bioequivalence. Then you are providing a 95% similar drug. Once you have done that you may do bioavailability, and that is perfect, but then you are way off the charts…nobody would be able to afford your products…the whole point of generics in Honduras is to have low prices.” For this reason, in Honduras, generics often fall short of qualities desired in the developed world, and are not necessarily the same quality as the original drug.

After all this, “generics do provide a better option, particularly for poor countries.” But it is not enough to just continue in a balance between of breaking the law and being an insignificant player in the international arena. There needs to be a change such that developing countries can legally provide adequate and affordable healthcare. “In a fairer world these companies (research based pharmaceuticals) should offer a different price for poorer nations.”

Format War Deja Vu. Now in Hi-Def!

2008-02-11T15:30:00.001-08:00

The ongoing war between the next-generation high definition formats HD DVD and Blu-Ray Disc seems to be finally coming to an end, with the latter emerging as a clear winner.

The defections from the HD DVD format, backed by companies like Microsoft, Fuijitsu and Kenwood, was prompted by the announcement in early January of Warner Brothers to release its titles exclusively on the Blu-Ray Disc, supported by companies Sony, Apple and Dell. The exodus from HD DVD has continued: Netflix, the online DVD rental service in the States announced a month later that it too will start phasing out HD DVD and switch to Blu-Ray only by the end of the year, and The Times has reported that as many as 20 companies currently part of the HD DVD Promotion Group are contemplating removing their names from that list [1].

Since both the formats were introduced in 2003, neither had shown a clear lead in the race. Having learnt from the infamous format wars in the late 1970s – 80s between Sony’s Betamax and JVC’s VHS home video formats, both the HD camps have maneuvered to gain a majority share in the home entertainment market, so as to benefit from network externalities and ‘bandwagon effects’. Network externalities refers to how an individual purchasing a good would indirectly benefit other consumers; in this case, the more consumers choose Blu-ray Disc players, the more likely rental services or DVD shops are likely to stock Blu-Ray discs, and the easier for other consumers to find and enjoy their high definition DVDs. This in turn would lead to the ‘bandwagon effect, where momentum for a particular product builds up, encouraging the support of consumers, distributors, licensees, such that it becomes the industry standard. Considering this, it seems rational for Sony to have release their Playstation 3 game console—which features a Blu-Ray Disc drive—at a significant loss.

It has been argued that unlike the Betamax-VHS format war, the present competition has effectively been decided in boardrooms, with the major studios making the decision of where their loyalties lie before consumers. In this respect, network externalities and bandwagon effect at the producers and distributors’ level was what mattered in the current war– the more studios back one format, the easier and cheaper it would be for producers to mass produce the discs. However, it must be noted that Blu-Ray discs were already outselling HD DVDs by about two to one in the first three quarters of 2007 [2], such that it may be too early right now to declare whether it was the consumers or producers who decided the winner of the format war.

Rationale Reckons:
- Since companies are already working on the successor to Blu-Ray Disc format, and DVDs are still holding up, is it possible that we may leap-frog this HD format, such that it doesn't quite matter who won this round?
- Would this development matter much to those of us who seem to be increasingly enjoying our media in out formats (...downloading, anyone?)
- Lord of the Rings on Blu-Ray...at last!

Sources
[1] Lewis, Leo “Blu-Ray takes inside edge in war with HD-DVD” (8th January, 2008) Times Online
http://business.timesonline.co.uk/tol/business/industry_sectors/media/article3153038.ece

[2] McBride, Sarah. “DVD formats Blu-Ray, HD square off” (30th September 2007) http://www.charleston.net/news/2007/sep/30/dvd_formats_blu_ray_hd_square_off17561/

Organ donation....need a catchy title suggestions welcome

2008-02-11T10:03:00.000-08:00

By James Wisson (being edited by Jagoda)

In the year that the NHS turns 60, Gordon Brown started a new policy debate over the issue of organ donation with an article in the Sunday Telegraph. He described the shortage of organ donations in the UK as “an avoidable human tragedy we can and must address.”[1] His proposed solution? To change from an ‘opt-in’ system, in which potential donors have to register their wishes to donate their organs, to an ‘opt-out’ system of presumed consent. Recent research from the likes of David Laibson that overlaps economics with psychology can help explain why this might increase the number of donors.

But first of all, how big is this shortage of organs? From the 1st April 2006 to 31st March 2007, 3,087 patients had transplants to save or improve their lives of which about 5 in 6 came from a deceased donor. However, 459 patients died during this period and by the end of it, 7,234 people remained on the active transplant waiting list (with a further 1,915 on the temporarily suspended transplant lists).[2] So for every one transplant that went ahead in the 2006-07 period a little over three more were demanded.

So there is a serious shortage of organs. More organs are needed because demand has increased, with medical advances allowing new transplants and an ageing population needing more of them, while supply has fallen – transplantation is only possible from the recently deceased, in practice, people who die in hospital, and as medical practice and road safety improve, less people are able to donate.

As of the 11th February, 15,006,985 people or 24% of the population[3] had signed up to the NHS Organ Donor Register. This will impress some (that over 15 million people have made the effort to sign up) and depress others (only one in four people are willing to help others live after they have died?) depending on individual points of view. But what is clear is that the number of organ donors is not sufficient. In the UK, the rate of 12.9 organ donors for every million people in the population is much lower than the rate of 35 donors per million in Spain[4], which has been held up as a model system by ‘opt-out’ supporters.

[1] http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/01/13/norgans213.xml
[2] All figures in this paragraph: http://www.uktransplant.org.uk/ukt/statistics/transplant_activity_report/current_activity_reports/ukt/transplant_activity_uk_2006-2007.pdf
[3] http://www.uktransplant.org.uk/ukt/default.jsp
[4] http://news.bbc.co.uk/1/hi/health/7183798.stm

So, is it the case that the type of donation system in place in a country will affect the number of people signed up for organ donation? In neoclassical economic theory, it shouldn’t make a difference: individuals should weigh up the costs and benefits of a decision and always come to the same outcome regardless of whether it’s an opt-in or opt-out system.

But, during the Lionel Robbins Memorial lecture series in the Old Theatre last term, David Laibson of Harvard University showed why this isn’t the case. Focussing upon employee decisions over how to save their pension contributions, Laibson showed that when an employer sets an automatic proportion of income to be saved and a default type of pension fund for it to be invested in, a huge proportion of employees stuck with these defaults even when the proportion of income saved was low (there is normally an incentive to save more, as often the employer will match the amount contributed) and the type of stock invested in was very conservative. Sure enough, when the same company removed these defaults and instead obligated employees to choose both a savings rate and where the money was being invested, the savings rate increased and there was a change in the type of funds receiving the investment.

So, how does this cross over to organ donation? Laibson identified four psychological factors to explain this behaviour: financial illiteracy, endorsement effects from an institution that people trust, complexity or the cost of decision making, and present biased preferences. The first three factors do not really apply to UK organ donation although the endorsement effects of the government would make an interesting tangent – do the British population trust/support the government on this or not?

But by far the biggest effects on organ donation will come from the last factor, present biased preferences. In laymen’s terms this is procrastination. Dr Laibson presented a simple model for procrastination in his lecture. For an employee about to enrol into a pension plan the benefits of doing so are huge. Suppose the costs of making the decision are £50 and every day that passes she loses £10 of the overall benefit (counted as a cost in the workings below). Finally there is a discount factor for costs and benefits in the future. So the cost of doing something is the cost today plus the future cost reduced by the discount factor. Supposing that the employee’s discount factor is a half:

Cost of making the decision today = £50
Cost of making the decision tomorrow = 0 + (50+10)/2 = £30
Cost of making the decision in two days time = 0 + (50+20)/2 = £35As the minimum cost occurs tomorrow that is when a rational individual should join the pension plan. But of course ‘tomorrow never comes’, and so this logic will continue on into the future (only stopping when the cost of making the decision or the discount factor decreases – possibly because the individual has more free time).

So if defaults in organ donation affect the number of people who are on the organ donor register, it will largely be down to procrastination. By the logic above, with the present opt-in system, there is a group within the population who haven’t got around to signing up. If the default changes as the PM has proposed, then the number on the register should increase and then there will be a group of people registered who haven’t got around to opting-out.
How much will it increase? Well, in a survey carried out in October, two thirds of people said that they would be “willing to donate their organs for transplantation after their death.”[1] But how far do we trust a survey when in reality only one in four people have signed up to the donors register?

While the opt-in or out register has made the headlines and will increase the ranks of potential organ donors, a more important aspect of our Spanish model may be the dialogue between specialised ‘transplant co-ordinators’ and families of potential donors after their death. The wishes of families still affect whether organs can be donated or not; in the UK there is a 40% family refusal rate compared to 15% in Spain (it was 30% in the 1990s)[2]. This has been attributed to the specially trained transplant co-ordinators in Spanish hospitals who attempt to persuade families to consider donation amidst their grief.

So perhaps the shortage of organs for transplantation will be more significantly addressed through specialised workers addressing the attitudes of families to donation instead of just attempting to increase the supply of people willing to donate (when their families in practice can make the final decision). But in practice we may have to accept that organ donations will never fully match the demand for transplants and so artificially created organs will probably provide the key to resolving this organ shortage.

[1] http://news.bbc.co.uk/1/hi/health/7051235.stm
[2] http://news.bbc.co.uk/1/hi/health/7183798.stm

news & analysis: the Webster ruling or how C.Ronaldo could go for just £12 million.

2008-02-11T10:02:00.000-08:00

By Pierre Bachas (edited by Serena)

Andy Webster, doesn’t have Drogba’s strength nor C.Ronaldo’s skills. Neither is he one of the wonder kids in Arsenal’s youth team. However his name could well be remembered as marking football history. Going back to the summer transfer window of 2006, Webster signed a contract with Wigan Athletic, while still on the third year of his four year contract with Heart of Midlothian. While the world of football was expecting Wigan to have to pay a major fine to Heart, this January the Court of Arbitration for Sport ruled in favour of Webster, the only compensation for his former employer being the remaining value of the contract, £150 000.

The ruling will most certainly have a vast impact for the football economy.
First, transfer fees, such as the £19 m recently paid by Chelsea for Nicolas Anelka, could soon be a thing of the past. Indeed why pay exorbitant fees when one can sign a player for a negligible amount, after the two years of the "protected period" included in the contract. To give you an idea, Tottenham asks for £30 m for Berbatov, its star striker, whereas he could leave for as little as £1.3 m in the summer of 2009.
Secondly, this would be extremely beneficial to the labour force – the football players. Shame for those who thought players were already getting enough money, wages could now rise to unprecedented heights, since it will become the only way for teams to keep a hold on their players.
Furthermore the duration of contracts could decrease and as a consequence, player mobility would increase.

However FIFA, the governing football body, does not look favourably upon this major shift in revenue allocation from the team to the players. A further increase in player’s mobility would mean the potential downfall of team values and identity and the fall in transfer revenues would be a huge loss for less wealthy clubs, who rely on training young talents. FIFA stated that: "Should the protection of contractual stability finally indeed be subverted, FIFA will consider appropriate measures to safeguard the special nature of sport with regard to employment contracts."
This is one more episode in the long lasting opposition between EU law and FIFA, and raises the question of whether the employment of players should abide the same laws as other labour markets. FIFA is on the counter.

C (consumption?) A (technology?) W (wages?) : A Rant in Progress

2008-02-05T14:53:00.000-08:00

(Not to be published!)

To cheer me up, a friend recently made me read about John Maynard Keynes on the blog ‘More Intelligent Life’. And when I say read about Kenyes, I mean read about the man’s sex diaries. The article explores how the famous economist kept immaculate records of his adventures, one of which is a coded diary kept year-by-year, in quarterly increments. The activities Keynes performed are categorised as “C”, “A” or “W”, and the writer goes on rather a bit too gleefully to speculate what those letter may mean, and the implications of Keynes’ tally. (An example: “Surprisingly, for several quarters, W happened zero times. So either Keynes didn't bother to masturbate, or he didn't need to because his other numbers are so high.”)

What bugged me about the piece is not so much the crude language. I don’t mind “cock-sucking”, “copulation”, “masturbating” or comparing seeking anonymous sex with investing in the stock market. With a title like “The Sex Diaries of John Maynard Keynes”, I wasn’t expecting something clean. But I was expecting… something novel. Why should I care whether Keynes “C”-ed 28 times between August and November 1908? Why should I care whether he chose to Wank, sleep with a Woman, sleep with his Wife, have sex at Work? What can any of these inform us about Bretton Woods? What do any of these add to our macroeconomic knowledge?

Nothing much really.

(To be continued...)

economic impact of hiv/aids in sub-saharan africa

2008-02-04T10:21:00.000-08:00

THE ECONOMIC IMPACT OF HIV/AIDS IN SUB-SAHARAN AFRICA

Summary

1. There are roughly 40 million people world-wide infected with HIV; sub-Saharan Africa accounts for around 25 million of these. A disproportionately high three-quarters of global deaths from AIDS in 2006 were in Sub-Saharan Africa.

2. The HIV/AIDS epidemic is a major threat to Africa’s economic development. The impact is widespread, affecting individuals, households, firms and governments. The epidemic will harm prospects for African economic growth in both the near and long term. Most importantly, the impact on growth and the economy in turn “feed back” and foster the spread of HIV infection.

3. It is estimated that HIV/AIDS is already reducing sub-Saharan annual GDP growth by between 0.8 and 1.4 percentage points. Countries with prevalence of over 20 per cent may suffer a reduction of up to 2.6 points annually. For a typical sub-Saharan economy this means that after two decades GDP could be less than two-thirds of what it would have been without HIV/AIDS. It has been argued that, without mitigation, this will make it impossible for Africa to achieve the Millennium Development Goals.

Background

4. Sub-Saharan Africa is home to around 26 million people living with HIV. In 2005 it is estimated that 3.2m became newly infected with HIV, while 2.4m died of AIDS.

5. There are large variations in HIV/AIDS prevalence across the region. Southern Africa remains the epicentre of the epidemic; over 30 per cent of people infected with HIV world-wide are here. Prevalence has stabilised in a number of Southern and Sub-Saharan African countries, although it remains at very high levels and only in Kenya, Uganda and Zimbabwe does the epidemic appear to be declining.

6. The rate of HIV infection over the past two decades has been described as the first wave of the epidemic. The extent of this wave determines the size of the next one: deaths from AIDS. These combine to bring about a third wave: the widespread social, economic and political impact of HIV/AIDS, felt by infected and non- infected alike.

Current growth

7. HIV/AIDS has the potential for a devastating impact on economic growth because of its impact on the labour market. Illness and mortality from HIV/AIDS reduce the overall supply of effective labour. The composition of the labour force also changes, as young people, especially young women, who should be in their most productive years are more at risk of HIV infection than other demographic groups.

8. HIV/AIDS reduces households’ income. Studies in Tanzania have shown that when a household contains an AIDS patient, the household labour supply falls by up to 43 per cent. A chronically ill member is estimated to reduce average household annual income across Southern Africa by up to 35 per cent; the figure resulting from an adult death is even higher. Declining income is, in addition, stretched by the cost of health care and funerals, expenditure on which have been found to take up almost half of household income in Zimbabwe.

9. Agriculture is the largest sector in most African economies, making up the majority of employment, but it is coming under increasing pressure from the HIV/AIDS epidemic. If just a few workers are lost at crucial times of the year then this can have a disproportionate effect on harvests and income. In Zimbabwe for instance it is estimated that an adult death from AIDS shrinks household production of maize, the local staple, by over 60 per cent.

10. Firms may also be significantly affected by HIV/AIDS. In South Africa, a third of companies told the South African Business Coalition that HIV/AIDS has had a negative impact on profits. In general, this is due to the effect HIV/AIDS has in both raising costs and reducing revenues. Production, and hence revenue, falls with a decline in workers’ productivity, due to illness and absenteeism. Studies have shown that firms’ costs also rise significantly; in Uganda and Botswana the annual cost of AIDS for each employee, in the form of health care, training and insurance, is as much as $300. Annual spending on all health care in Uganda averages around $20 per capita; in the UK it is about $1,600.

11. Governments’ budget balances are likely to deteriorate as health sector costs rise with the number of AIDS patients, who are more expensive to treat than those with other conditions, and the tax base shrinks. Health expenditure is projected to increase, although services are increasingly stretched; in many African hospitals AIDS patients occupy more than half of the beds. Indeed, there is limited evidence of the ability for increased expenditure to meet increased demand for health services. Governments therefore face a number of trade-offs in their allocation of spending: between AIDS treatment and HIV prevention measures, between AIDS and other illnesses and indeed between spending on health and other sectors.

12. Incorporating the effects of HIV/AIDS on households, firms and governments into estimates of the immediate macroeconomic impact is a difficult task. Over time, economists have been able to expand their models to include a greater range of costs from HIV/AIDS and predictions for short-term growth have, as a result, become increasingly gloomy. The World Bank in 1992 estimated that across 30 sub-Saharan economies AIDS reduces GDP growth by between 0.8 and 1.4 percentage points a year. Studies in 2000 found that South Africa is expected to lose 1.6 percentage points of GDP growth a year, while Botswana may lose up to 4.4 percentage points annually.

Long run growth potential

13. HIV/AIDS also hampers long-term growth prospects. The level of savings is an important determinant of the potential for an economy to expand over time, as households’ savings finance business’ investment. Investment allows for the accumulation of capital, such as machines, or computers, which in turn allows firms to expand production and raise national income. However, HIV/AIDS leads savings to fall dramatically, through both a reduction of households’ income and the additional strains placed on expenditure by rising health costs. A study in Cote d’Ivoire showed that amongst urban households with an AIDS patient, expenditure was a third higher than income, meaning savings were negative. This is typical of many sub-Saharan economies. A savings deficiency therefore hampers the opportunity for investment, preventing the economy from expanding.

14. Another important determinant of long run growth in an economy is how well capital and other resources are used, i.e. the level of productivity in the economy. Productivity growth allows production of more output from a certain level of inputs, increasing the level of income that can be received from these inputs. This is influenced firstly by workers’ productivity, which is likely to decline sharply as a result of HIV/AIDS, as young workers, who should be in their most productive years, are most at risk from the epidemic. As life expectancy for young workers falls, so too does the incentive to undertake education and training, further reducing labour productivity. This will contribute to a decline in economy-wide productivity, which is likely to be exacerbated by the fall in investment outlined above.

15. Due to the impact of HIV/AIDS on the determinants of long run growth, the effects of HIV/AIDS on the macro-economy are expected to increase significantly over time. Consequently, economists’ predictions of the loss to GDP have been increasingly bleak. A 2001 IMF report in Botswana concluded that in the decade to 2010, almost a third of GDP would be lost as a result of AIDS. Previous studies in Malawi and Tanzania have shown that over two decades a quarter of GDP would be lost to AIDS. Furthermore, a recent World Bank analysis of the long-term impact in South Africa argued that, due to the damage to human capital as knowledge and skills decline, the key impact of HIV/AIDS would not be seen even in the next 10 to 15 years.

16. Perhaps the most important point to note is that the causality between HIV/AIDS prevalence and macroeconomic devastation works both ways. Just as HIV/AIDS places severe strain on the functioning of the economy, the economic impact fosters an environment in which the epidemic proliferates. The loss of households’ production and income as a result of AIDS morbidity and mortality, especially amongst young people, in turn means that surviving children and young adults are less likely to be educated or well-nourished. This makes them more susceptible to the risk behaviours that spread HIV. Sub-Saharan Africa potentially faces a vicious cycle of economic slowdown, poverty and the spread of HIV/AIDS.

Conclusions

17. The New Partnership for African Development (NEPAD) and the Millennium Development Goals set out clear targets for Africa’s development. NEPAD aims for 7 per cent average annual growth across the continent, while the MDGs hope to reduce poverty by half and eliminate hunger by 2015. Both are unlikely given the potentially destructive consequences of HIV/AIDS for Africa’s economy.

18. Urgent action is therefore needed to prevent Africa’s descent into the vicious cycle of HIV/AIDS. As political will and funding increase, it is especially important that the FCO is aware of the economic impact of HIV/AIDS and that we provide greater support for DFID and HMG in tackling the epidemic, efforts which will help to raise the life expectancy and living standards of millions across the African continent.

Appendix 1: Selected growth predictions for sub-Saharan economies affected by HIV/AIDS.

Date of study
Country
HIV prevalence %
Period of Projection
Overall loss to GDP (per cent)
Annual loss to GDP (percentage points)
1993
Tanzania
7
1985-2010
15-25
0.8-1.4
1993
Malawi
14.1
1995-2010
15-25
0.2-0.3
1996
Kenya
6.1
1996-2005
14
1.5
2000
South Africa
20
1998-2010
17
1.6
2001
Botswana
24.1
1999-2010
32
3.3-4.4

Appendix 2: Sub-Saharan Countries with more than 100,000 people living with HIV

Country
People living with HIV/AIDS
Adult (15-49) rate %
Women with HIV/AIDS
Children with HIV/AIDS
AIDS deaths
Angola
320,000
3.7
170,000
35,000
30,000
Botswana
270,000
24.1
140,000
14,000
120,000
Burkina Faso
150,000
2.0
80,000
17,000
12,000
Burundi
150,000
3.3
79,000
20,000
13,000
Cameroon
510,000
5.4
290,000
43,000
46,000
Central African Republic
250,000
10.7
130,000
24,000
24,000
Chad
180,000
3.5
90,000
16,000
11,000
Congo
120,000
5.3
61,000
15,000
11,000
Cote d’Ivoire
750,000
7.1
400,000
74,000
65,000
DR Congo
1,000,000
3.2
520,000
120,000
90,000
Ethiopia
420,000-1,300,000
0.9-3.5
190,000-733,000
30,000-200,000
38,000-130,000
Ghana
320,000
2.3
180,000
25,000
29,000
Kenya
1,300,000
6.1
740,000
150,000
140,000
Lesotho
270,000
23.2
150,000
18,000
23,000
Malawi
940,000
14.1
500,000
91,000
78,000
Mali
160,000
1.7
66,000
16,000
11,000
Mozambique
1,800,000
16.1
960,000
140,000
140,000
Namibia
230,000
19.6
130,000
17,000
17,000
Nigeria
2,900,000
3.9
1,600,000
240,000
220,000
Rwanda
190,000
3.1
91,000
27,000
21,000
South Africa
5,500,000
18.8
3,100,000
240,000
320,000
Swaziland
220,000
33.4
120,000
15,000
16,000
Uganda
1,000,000
6.7
520,000
110,000
91,000
Tanzania
1,400,000
6.5
710,000
110,000
140,000
Zambia
1,100,000
17.0
570,000
130,000
98,000
Zimbabwe
1,700,000
20.1
890,000
160,000
180,000

References

1. UNAIDS/World Health Organisation, 2006. AIDS Epidemic Update: December 2006. http://data.unaids.org/pub/EpiReport/2006/2006_EpiUpdate_en.pdf
2. Over, Mead, 1992. The Macroeconomic Impact of AIDS in sub-Saharan Africa. World Bank Technical Working Paper.
3. Bonnel, R 2000. HIV/AIDS and Economic Growth: A Global Perspective. South African Journal of Economics 68.5 pp820-50
4. Royal African Society and Africa All Parliamentary Group, 2004. Averting Catastrophe: AIDS in 21st Century Africa. http://www.royalafricansociety.org/documents/averting_catastrophe21.pdf
5. Stover, J and L. Bollinger, 1999. The Economic Impact of AIDS, Policy Project reports. http://pdf.dec.org/pdf_docs/Pnacm899.pdf
6. Haacker, M, 2002. The Economic Consequences of HIV/AIDS in Southern Africa. IMF Working Papers. http://www.imf.org/external/pubs/ft/wp/2002/wp0238.pdf
7. Arndt, C. and J. Lewis, 2000. The Macro Implications of HIV/AIDS in South Africa, A Preliminary Assessment, World Bank Working Papers.
8. MacFarlan, M. and S. Sgherri, 2001. The Macroeconomic Impact of HIV/AIDS in Botswana, IMF Working Papers. http://www.imf.org/external/pubs/ft/wp/2001/wp0180.pdf
9. Bechu, N, 1998. The Impact of AIDS on the Economy of Families in Cote d’Ivoire.
10. Cuddington, J.T., 1993. Further Results on the Macroeconomic Effect of AIDS in Malawi, World Bank Economic Review, Vol. 7, pp403-17.
11. Cuddington, J.T., 1993. Modelling the Macroeconomic Effects of AIDS, with an Application to Tanzania, World Bank Economic Review, Vol. 7, pp172-89.
12. Bell et al, 2003. The Long Run Economic Costs of AIDS: Theory and an Application to South Africa. http://www1.worldbank.org/hiv_aids/docs/BeDeGe_BP_total2.pdf
13. AVERT HIV/AIDS Statistics, 2005.

errr sorry no idea why the table is coming on as single column :S

anticipated articles

2008-02-04T10:11:00.000-08:00

two more article outlines/commitments recieved:
one on GP HOURS AND CASE AGAINST AND FOR THEM FROM ECONOMIC PERSPECTIVE
second on MICROSOFT's PROPOSED TAKEOVER OF YAHOO

by Sarah Martin
....she wrote saying goodbye to pnuemonia in first issue
sound promising:)!

Slo outline

2008-02-04T07:49:00.000-08:00

The Dark Side of the Euro
Case of Slovenia

Developed country, high GDP etc. First one to join eurozone, sees 6%inflation in the year that it adopts the Euro --> coincidence?

short history of developments in the past 1-2 year (inflation affects sensitive products like food and sensitive groups of the society such as the low-income). What causes it?
was it the Euro? --> directly? --> thru high growth, which was coupled with the lack of monetary instruments?
Was it increase in price of oil and lack of competition? (official gov't explanation) – political economy aspects!!
Was it the increase in the factors of production? (explanation by the industry and food retailers)
Aftermath and solutions (workers demand higher wages --> spiral?), how can it be stopped, what is the government doing?

Comments welcomed.

(outline submitted by Igor Cesarec)

Call for News and Analysis Blurbs

2008-02-04T07:28:00.001-08:00

All blurbs only need to be around 150-200 words. Please add or delete topics to this list as you see fit.

Topics:

- US recession
- Northern Rock
- Yahoo, Microsoft and Google
- Rogue trader
- Sarkozy and Carla Bruni got hitched!*
- Britain's low emission zone
- Impending settlement in WGA strike
- Is Angelina pregnant again?*
- First 'low emissions zone' in London
- Slower economic growth in China
- Adverse weather conditions in China
- Cloverfield monster attacks!*
- China and Rio Tinto
- Egg cards and credit-worthiness
- Football transfer fees
- New York Fashion Week!*
- Sovereign wealth funds
- Cuts and Puts from the Fed

(* Yeah, just wanted to check whether anyone was reading...)

HIV/AIDS article outline

2008-02-01T09:37:00.001-08:00

The HIV/AIDS epidemic is one of the greatest threats to Africa's economic development. The issue of economic development in Africa is a contentious one, and so this article tries to be as objective as is possible in its analysis. This article is, on the one hand, a summary of a growing literature examining the economic impact of HIV/AIDS in sub-Saharan Africa. The economic impact of the epidemic is analysed at the aggregate level, in terms of its effect of levels and growth rates of GDP, and at the level of individuals and firms. The role for economic growth is itself a controversial one in development debates; here growth is taken as a useful indicator of development, whether growth should therefore be the focus for policy is not an issue I will take up here. Secondly, I analyse the means through which HIV/AIDS affects growth prospects in sub-Saharan Africa in the near and long term.

To summarise these two strands: Sub-Saharan Africa contains almost 26 million of the 40 million people world-wide infected with HIV. Although prevalence varies across the region, Southern Africa remains the epicentre of the epidemic. The economic impact is widespread and potentially disastrous. It is estimated that HIV/AIDS is already reducing sub-Saharan growth by up to 1.4 points annually; over two decades this would reduce a typical sub-Saharan economy to less than two-thirds of what it would have been without HIV/AIDS. It has been argued that this makes it impossible for Africa to achieve the MIllenium Development Goals. Perhaps most significantly, the effects are expected to increase over time, as the economic impact itself fosters an environment in which the epidemic proliferates. The means through which HIV/AIDS affects growth is the labour market; the supply of labour across the economy is vastly reduced by illness and mortality from HIV/AIDS. This affects individuals, households, firms and the government, and spills over into the factors influencing the long run growth potential of an economy.

outline by tom yeomans

'Cost of AIDS to Africa' outline

2008-02-01T09:33:00.001-08:00

'Cost of AIDS to Africa'
Use HDI figures as a basis for current life expectancy and compare it to before the HIV crisis.
Examine the economic effects (in terms of wages lost; wages spent on the sick; state healthcare; international efforts) of the disease.
Prevalence amongst age bracket 1-16yrs.
Instead of generalising for the whole continent, cover the most affected nations and the least affected nations, to attempt to get a decent coverage.
Both the positive and negative effects of medical treatments, i.e. do they just cause the sick to prolong their life (as a further economic drain on the household/state) or do they create individuals who can actually contribute to the economy?
The future.
Does AIDS explain limited international investment (i.e. compared to Civil War, Bad institutions etc.)
outline by Ossie Christopher Fikret

Econ Soc Events

2008-01-16T17:52:00.000-08:00

Obviously we've got our first event tomorrow....

Maybe get somebody to cover events... anecdotes from each one? Nothing too substancial.. just to keep what we organise 'fresh in the memory'?

Important Dates for Issue 2

2008-01-09T12:03:00.000-08:00

28th January (Monday Week 4): Outline deadline

11th February (Monday Week 6): Article deadline

Brainststorm pool for Issue 2

2008-01-08T04:57:00.000-08:00

Ideas for features (or news blurbs, but they can all easily work as features)

Please add to list (we should put abandoned ideas from last issue on the list too) and put (TAKEN - ) next to article idea if/ when someone snaps up topic:

Globe-trotter:
- Kenya
- Slovenian economy and implications of EU presidency
- China - price controls? ( + little box on HK's predicament?)

- An article on a LAtin American country

Tangents:

Current affairs (can be features, can be blurbs):

- an in-depth analysis of the still on-going writers' strike in the US
- cost benefit analysis of hosting sporting events (eg. Olympics, World Cup)

- Nuclear power plants in the UK
- Kevin Rudd, Australia and Kyoto; implications?

Politics

- UK politicians profiles

-US presidential elections:

candidates' economic policies?
what is/ can there be an "efficient" election?
political betting/prediction markets

Finance:

- Between a rock and a hard place: Northern Rock's predicament

- Constant vigiliance!: How to read Fed and BoE interest rate decision press releases

Technology:
- death of DRM-ed music
- end of format contest: and the winner is Blu-ray

- world's cheapest car and what it means for India

- France's internet tax

Others:
- how do people outside the discipline view economists?

- students' opinions on Econ courses

Dear Economist:
- should I just wait until the after-Xmas sales to do my Xmas shopping? :P

Careers:

- interviews

- CV tips

magazine cover

2007-12-03T05:52:00.000-08:00

Hey guys,
please view cover and post comments asap about changes and recomendations. The title font is being changed to classical english font. Tharsh suggests a pencil sketch sans any colour would look classier and a hoodie instead of cap and top........what do you think?

Saying goodbye to pneumonia

2007-11-26T18:16:00.000-08:00

Written By Sarah Martin

In the poorest countries in the world millions are dying every year from diseases that modern medicine can treat and prevent. Surprising but true, in Africa pneumonia claims more children’s lives than AIDS.

Vaccination against pneumococcal disease, which causes pneumonia, meningitis and other lethal illnesses, could greatly reduce child fatality rates in the developing world. The problem is that no such vaccine exists.

So far there has been no incentive for drug companies to develop and produce vaccines for the diseases that claim the most lives worldwide. Where these vaccines are needed the most, people are too impoverished to demand them. In developing countries as little as £9 or less is spent per person per year on health care. Shockingly, over 90 percent of drug investments go to diseases that affect the richest 10 percent of the world’s population.

The Advance Market Commitment (AMC) for vaccines is market-based solution to this market failure. Originally proposed by Harvard economist Michael Kremer and the Centre for Global Development, an AMC is a pledge to subsidise future purchases of a vaccine not yet available.

A pilot AMC is underway for a vaccine to prevent pneumococcal disease. Six of the world’s richest countries (including the UK) and the Bill & Melinda Gates Foundation have pledged a total of £750 million pounds. It is estimated that it could save the lives of as many as 5.4 million children by 2030.

This is how it works: When a safe and effective vaccine is developed, the benefactors of the scheme subsidise the price down to a level more affordable for developing countries, thereby spurring demand. The promise of this demand is an economic incentive to supply the vaccine, and thus a market for the vaccine is created. The AMC provides the subsidy for an agreed period of time, after which the pharmaceutical company is obligated to provide the vaccine at a low price.

And this is why it could work: An AMC is not a purchase guarantee, there is only a cost once a vaccine is available that is actually demanded by developing countries. The competition for demand means that the best and most cost-efficient vaccine will prevail. The subsidy will provide enough return on the drug company’s investment in research and development to justify supplying the vaccine at a low price after the AMC ends.

The main obstacle now is to determine what subsidised price to provide the vaccine at. At the moment a price of about £2-3 is being discussed. This would involve a 90 percent reduction in price, the steepest drop ever seen in the price of vaccine in its first year of production.

However, some are concerned that this is still too expensive. They question whether a vaccine could be produced at lesser cost in by drug companies in India rather than in the West.

If successful the AMC for pneumococcal disease could be the first in a series of AMCs for vaccines against such diseases as malaria, tuberculosis and AIDS, and in the long term AMCs could save literally millions of lives.

Microfinance: Panacea for all economic ills?

2007-11-26T17:56:00.000-08:00

Written By Shamanthy Ganesha

From ancient slums and impoverished villages in the developing world to the tired inner cities and frayed suburbs of America’s economic fringes, these and millions of other women are all part of a revolution. Some might call it a capitalist revolution . . . As little as $25 or $50 in the developing world, perhaps$500 or $5000 in the United States, these microloans make huge differences in people’s lives . . . Many Third World bankers are finding that lending to the poor is not just a good thing to do but is also profitable.
(Brill 1999)

Over the past few decades, the popularity of microfinance as a poverty alleviation tool has increased vastly. The UN declared 2005 as the year for Microcredit while Dr. Mohammed Yunus, well known as ‘The Father of Micro Finance’ won the Nobel Prize for Peace in 2006 for his work. Microfinance industries in many countries such as India, Bangladesh and Indonesia have been growing exponentially. There has been a giant wave of interest amongst people from many quarters, including economists and policy makers. In broad terms, microfinance is the provision of microcredit, microsaving and microinsurance services to people who are usually otherwise excluded from formal financial markets. While there is much reason to be highly optimistic about the potential of microfinance, I adopt a more sceptical view of it. I spent this summer working as intern at a well known microfinance think tank in Chennai, India. My work their involved constant interaction with both urban and rural microfinance clients. In this article, I detail how the information that I gained from informal interviews with these microfinance clients made me question some typical assumptions that are made about microfinance and its functioning.

It is a well known fact that the world’s poor generally do not have access to formal sources of credit. There is an essential asymmetric information problem between the providers of formal credit and the poor. The costs of monitoring how the poor use their debts by far outweigh the benefits that they accrue to formal credit providers. They have low propensities to save given that they are highly liquidity constrained. Moreover, under usual circumstances the poor own little or no assets at all. Thus the effectiveness of using collateral as a form of screening device is severely limited. The group lending mechanism which is often hailed as the greatest innovation of microfinance is said to get around this moral hazard problem by allowing the borrowers themselves distinguish between ‘safe’ and ‘risky’ individuals. Given that each individual is jointly responsible for the entire group’s loans, economic reasoning tells us that individuals who have relatively high coefficients of risk aversion will form groups with other risk averse individuals while the individuals with relatively low risk coefficients are screened out. Also, once the individuals receive their loans, they have an incentive to monitor each other’s activities if they are to make regular repayments and be eligible to borrow in the future. The task of monitoring the use of borrowed funds is effectively transferred from the lenders to the borrowers themselves.

Firstly, it does not seem to be the case that group formation takes part on the basis of risk type. Quite a few of the women with whom I spoke told be that they had not known all, if any of their group members before they joined the Joint Liability Group (JLG) or Self Help Group (SHG). The common practice is for one of the women to initiate the group (the group leader). This group leader then invites other women to be part of the group. Most often than not, this group leader invites women who live in close proximity to her, maybe in the same street. To me, it seems more likely that women segregate themselves by geographical proximity, caste and religion than by their relative risk types. Also, even once the loans are received it is unlikely for the women to be actively engaging themselves in monitoring each other’s business activities. Very few of the women I spoke to had any information regarding the type, costs and profits of the businesses of other women in their groups. One reason for this could be that monitoring is not costless for the women. Given that nearly all these women have to manage their time between their duties towards their families and nurturing their own businesses, very little time and energy is left for monitoring their peers’ activities. It is only when one of the women repeatedly fails to make repayments that the other members will make a visit to her house to inquire about what is happening. In my opinion, it seemed that there was less social cohesion among group members than is commonly assumed in the literature.

Moreover, it is common to assume that microfinance organisations have low interest rates and require no collateral and that it follows that they should be preferred to the mean usurious moneylenders who charge exorbitant interest rates. There are several misconceptions in the above statement. Firstly, the real rates of interest (as opposed to the quoted nominal rates) that the MFIs offer may not be very much lower in comparison to the professional moneylenders’ interest rates. Secondly, it is not always true that MFIs do not ask for collateral. In some cases the MFI asks prospective borrowers to make an advance deposit equivalent to some percentage of the loans that they are to receive before releasing funds. Thirdly, the moneylender is not always the mean and usurious man he is made out to be in the traditional literature. More often than not, the local moneylender will be a family friend of the borrowers. The women to whom I spoke to would never refer to them as moneylenders but usually as ‘acquaintances of the family’. In fact, it could be that in some particular cases the moneylenders are actually preferred to MFIs. One reason for this could be that the money lenders do not stipulate strict repayment schedules. Given that they have an informational advantage over the MFIs and other formal providers of credit and live in close proximity to their clients, they are unlikely to stipulate a strict repayment schedule. The borrowers pay back their loans as and when they make enough money to do so. Further, it seems quite a common practice for women to borrow from money lenders while they are borrowing from micro finance institutions. As mentioned above, some MFIs have deposit requirements. The women go to the moneylenders to obtain funds to make the deposit. The initial microfinance loans tend to be small and may not be sufficient to start up an enterprise from scratch. At times of emergencies such as illness in the family or a daughter’s wedding the women which require one-off expenditures that will not provide any direct revenue, the poor have little choice but to reach out to the local moneylenders.

Another reason why people believe that microfinance is an invincible tool is the high repayment rates that are reported by various MFIs. It is common for most MFIs to quote a repayment rate of 95% and above. Does it mean that the women’s income generation activities are producing very high returns? Many of the clients with whom I interacted did not use their loans solely for their enterprises. A good part of the loan may actually be used for consumption purposes. Moreover, some of the women were engaged only sporadically in their respective enterprises (Some of their services and produce were demanded only seasonally). Also it is more likely for the women’s enterprises to be a supplementary source of income for the household. Thus the enterprises don’t always have very high returns. It is slightly puzzling to me therefore as to how the women manage to make regular repayments. An important question to ask here is whether the repayments are made voluntarily. I was told by some of the women that peer pressure induced them to go to the moneylenders, thus they become indebted involuntarily to the money lenders. Also, anecdotal evidence suggests that some MFIs may use strict enforcement schemes on groups that fail to make repayments that are not very different to the methods used by professional money lenders.

These are a few reasons as to why I believe that the results of microfinance that are commonly reported should be looked at more critically. This does not mean that I think that microfinance is not a good thing and is an absolute failure. What I do believe is that microfinance is not as perfect as it is made to sound. The way forward would be to acknowledge it’s shortcomings and devise appropriate ways to overcome them.

An Uneconomic Look at the Economics of Local Eateries

2007-11-26T17:45:00.000-08:00

Written by Jan Henning
(with thanks to Judith Shapiro for the Beta)

Given English Michelin-star restaurant economics these days, can LSE students still hope to eat out in WC2? Read on…..

In a recent interview, chef Heston Blumenthal announced that his fish-and-chip platter contained a total of five chips.

Checking the sample menu at Heston’s restaurant; I’d estimate the price of the fish-and-chip platter at around £30 (His à la carte 3-course menu weighs in at £80; platter probably a Main); so, if we assume that the fish covers about 2/3 of overall price, each chip would be worth £2.00
Given that an average bundle of chips from a traditional fish shop takeaway runs into at least double figures (for approx £1.50), we might infer any or all of three things about Heston’s variety.

The five chips are so huge as to stretch the definition of “chip” to its uttermost boundary;
They are extraordinarily labour-intensive to produce;
They contain an above-average to-die-for factor.

If you’d really like to pay these prices (as well as the price of a trip out of London to Bray), here’s the link to the Fat Duck - http://www.fatduck.co.uk/

However, it might be less time-consuming, more profitable and indeed, pleasurable, to look at what’s on the doorstep.

The following establishments (a random personal choice) are all within walking-distance of LSE. Some have even been known to serve chips (NB: if these are described in the menu as “French fries”, you should rigorously apply the to-die-for factor [dff]).

1.The White Horse Pub
Sheffield Street WC2

Walking-time from St Clements Building: 0.5 minutes

Ambience and comfort-factor: Limited. It’s a tiny establishment with a bar-stool fixation – only one table-with-chairs. One average-size party of miscellaneous admin staff will crowd it out. (Students are also now welcomed, following a recent management-policy change).

Menu: Limited to sandwiches and toasties.

Dff: Also limited, but that’s not what you’re paying very reasonable prices for (around £2.65 per sandwich). The sandwich variety is very good, if maybe a little hearty-meat-oriented – sausages feature quite a lot. The drinks are reasonably priced also.

Miscellaneous: the two-man bar/cooking staff work well together, and are kindly and welcoming.

2.Coopers Wine Bar:
49a Lincolns Inn Fields, WC2A 3PF
http://www.london-eating.co.uk/5784.htm

Walking-time from St Clements Building: 1 minute

Ambience and comfort-factor: Depends on when you visit. A crowded lunchtime can be very unrestful. They have a ground-floor restaurant, and a cellar-bistro (more limited menu, lower prices); so you very rarely get turned away for lack of tables.

Menu: Regarded as reasonably-priced for its neighbourhood; it can actually be a bit high, if you go for things like the crab-starter. On the other hand, the other starter-size salads are very reasonable, and quite exciting (try their signature dish of lightly smoked chicken with salad and lime and honey dressing). No one minds, BTW, if you just have a starter-portion. They’ll also do you a single bowl of chips, if you ask. Price approx £1.60 – but they’re “French fries” (which means uniformly thin. You suspect they’ve been factory-extruded and bought in by the packet). Not terrible, for all that.

The wine list, is of course, what makes the profit, so be prepared for high-ish prices on all drinks (soft drinks also somewhat overpriced). A good choice of wines at all prices, however.

Dff: When things are at their singing best at Coopers, some of the food is delicious, and well above the level you’d expect. They can have off-days, however.

Miscellaneous: Coopers is fairly well-established. The owners are always friendly and welcoming; but the turnover of agency staff sometimes renders service a little uneven.

3. The Terrace
Lincoln’s Inn Fields WC2A 3LJ
http://www.london-eating.co.uk/7026.htm

Walking-time from St Clements Building: 1.5 minutes
Ambience and comfort-factor: This relatively new restaurant is situated in a hut behind the tennis courts, and can be a bit draughty. Also when it’s crowded (which is frequently), your neighbour’s elbow comes very near to being in your soup.

Menu: This is owned by a Named Chef – Patrick Williams – who blends Caribbean and French cuisine. It’s thus not cheap from the à la carte, but the 3-course “taster” lunch at a set price (around £11 a few months ago) is excellent value.
The chips – which here come with a beefburger all set out on a square wooden block; are hearty and MAY be authentic. The wooden block is a trial, however.
Wine menu is extensive but expensive. So is the bottled water.

Dff: Can be sublime. Jerk chicken with plantain, the signature dish, is wonderful. Desserts are a bit blah.

Miscellaneous: The service is often agonisingly slow; so don’t go there if you’re in a hurry. Staff are pleasant, but they’ve somehow never solved the time-factor. They may need Gordon Ramsay!

4. Oops
31 Catherine Street. WC2
http://www.fluideating.co.uk/Oops_Restaurane_Vinateria_WC2B.restaurant

Walking-time from St Clements Building: 7 minutes
Ambience and comfort-factor: This is a newly-opened tapas restaurant, with probably the worst name in London – EVERYONE’S told them about this, but they stick stubbornly to their guns. The interior is a rather gloomy brown too.

Menu: The food redeems the name with a really exciting variety of smallish dishes to suit every palate and every pocket. The lunchtime set-menu costs £12.95 for four dishes, plus a glass of wine. The à la carte can be a bit pricier (and more varied too, to be fair); and there’s a blackboard of specials every day; which includes delicacies like fried razor clam and real calamari complete with tentacles. Well, whatever floats your boat!
Wine is actually quite reasonably priced here.

Dff: You may find a lot of exciting new experiences here – not all to die for, to be sure (super-hot pimentos, anyone?). However, the basics – chorizo, morcilla, doritos are all delicious; and you can’t go wrong with the octopus!

Miscellaneous: Service can be sketchy at times. Also – beware of matinee day – Thursday. The restaurant is situated exactly opposite the Lord of the Rings musical.

The Subprime Crisis

2007-11-26T17:26:00.000-08:00

By Soumya Gupta

Everywhere you see especially in any financial paper or journal, seem to be harping on the fact of Credit Crunch and the subprime crisis. I realised how big it is when it started affecting an everyday person, be it through market chaos, lowering growth rates or simply the market uncertainty underlying the economic situation.

What actually happened?

How can some defaults on mortgages affect the economy on such a huge scale!!! Its all thanks to the new and innovative financial instruments which have been developed uniquely to make money for the big banks and hedge funds and other financial intermediaries.

House Mortgages were being provided on a large scale, even to consumers whose paying back capacity was really low. This is basically what a sub prime loan is, that is the risk is extremely high. All was hunky dory, as house prices were rising, making mortgages attractive to buyers and sellers. Subprime borrowers paid a higher rate of interest which benefited the lenders. Thus demand was high and supply was very forthcoming.

Now the banks wanted all this debt out of their balance sheets, so they created Special Purpose Vehicles (SPV’s), which took on the debt, securitised it and sold it in forms of bonds and securities. A lot of big investors invested in these, like pension funds, hedge funds, who had personal investors, corporate investors and leveraged debt.

This turmoil spread like wild fire because if one sector that is the mortgage holders get hit and cannot cough up the interest payments or the principle amount, the repackaged securities/ derivatives called the Residential Mortgage backed securities (RMBS) which were sold to a variety of investors don’t get their returns and this one glitches turns into an ugly vicious cycle resulting in chaos and like this time a credit squeeze. A credit squeeze because most of these SPV’s lent long and borrowed short, now the investors know about the instability and lack of return and unwilling to lend further accentuating losses.

What it resulted in?

Well as can be observed, there is major chaos in the financial sector. Stability has been undermined, the U.S.A. has sneezed and the world is catching the cold. The risk was so widespread that no one knows the extent of the loss. No one is willing to lend, the consumer confidence is dipping like the house prices further leading to lowering of growth rates and spreading of recessionary tendencies.

What is forecasted?

The Federal Reserve is trying its best to counter the situation by lowering interest rates, making money more easily available, and instructing big market players to come to rescue. The big problem; the big market players themselves are suffering. Everyday the papers talk about write off or a series of top officials resignation. The situation is predicted to last until next Christmas and be multi-national in nature. However, the thing that is strange is even though there has been massive globalisation with India and China massively relying on Foreign Investment to grow, they don’t seem to have suffered.

Impact on EME’s

I believe we can observe here the phenomena of decoupling on economies. Decoupling basically means the lessening of correlation or dependency between variables. This seems to be the case presently, that though the U.S. economy is suffering, that is low consumer and investor confidence, low growth and hence low exports etc, the EME’s do not seem to have taken the hit that badly. The EME’s are steadily growing and have ever increasing growth projections.

There could be many reasons for this. Though we are moving towards a more globalised world, the dependency between developing EME’s and the U.S. is decreasing. These countries are indulging in bilateral and multi lateral trade treaties where USA is not necessarily a party. They are increasingly trading with other growing economies and the ROW and not only the USA. Therefore this just mellows down the impact that the export oriented industries would have suffered previously, where a USA recession would have meant a world recession.

Also the growth in EME’s, commenting on India is more fundamental than financial. That is there is real growth in production, consumption and investment through growth in own population income and production as well. With extremely low labour cost and other incentives given by the government it is easier and cheaper for many multi nationals to actually shift parts of business to India. This helps in raising employment, income and overall consumer confidence and economic growth.

Taking the BPO industry, for example, that is the call centres been outsourced to India for its large, extremely cheap English speaking labour force. It was affected as the companies which had outsourced suffered, this Indian industry suffered, the IT industry suffered. However this was not large scale enough to offset the gains from increasingly effective manufacturing and the growing services industry.

Also since the developed world has been hit, and with returns higher from India and China and other fats growing, recently called the 3rd world, suddenly seem extremely exciting and safer. With the tax payer’s money being used to save Northern Rock, the better investment opportunity seems like the country who is galloping towards growth and overtaking the mighty-but-in-trouble big brothers. This flow of investment and growth in real sector has definitely been termed as fundamental and hence will aid the EME’s progress and prosper.

Some authors have gone to the extent of concluding that the growth of the EME’s is good enough to offset the recession in the developed world market. This might not be the case though, but it is fundamental enough to give back steady and high returns for a long period of time to come. It is just proving to be that stage on scene when it is end of Act 1 and the actor is refusing to leave, but Act 2 players are already on stage giving a brilliant performance.
The Emerging Economies are coming of age.

Impact on Students in the U.K.

I-banking seemed extremely lucrative to pay back the student debt… think again, I believe the opportunity cost to applying to these big banks is greater than attending that Econometric lecture as they are not recruiting very few anyway.

Those of us from the EME’s trade off between staying and earning in pounds is definitely decreasing as compared to returning home to better jobs. Our IC is becoming steeper.

Hoping the pound will follow the dollar in decreasing, we can spend more on clothes and parties....

Surveys

2007-11-24T20:52:00.000-08:00

Q.6 Average amount spent daily on foodstuffs bought at the LSE (in pound sterling).

0-2 : 20% (10 of 50 respondents)
2-5: 62% (31 of 50 respondents)
5-10: 18% (9 of 50 respondents)
10 or more: Nil

Rationale reckons:

1. The average amount spent on foodstuffs bought at LSE is £3.72.

2. This is a significant amount and the LSE Catering Service should take note and try to absorb more of the LSE student clientele from the large shares commanded by Subway and Wrights Bar.

Conducted and compiled by Avnish Srivastava

Surveys

2007-11-24T20:35:00.000-08:00

Q.5 Have you read the previous Economic Society journal – ‘Ekanamiks’?

Yes: 8% (4 of 50 respondents)
No/What is that anyway? : 38% (19 of 50 respondents)
I’m New (I wasn’t here last year): 54% (27 of 50 respondents)

Rationale reckons:

1. The respondents who did not read the last issue were probably jealous students from the Anthropology or Sociology Department.

2. Well this year we are seeing to it that the proportion of yes grow manifold by making ‘Rationale’ a roaring success. We treat this as an indicator and our aim of conducting this survey is to ensure that a couple of editions on, we get a 100% positive response.

Conducted and compiled by Avnish Srivastava

Surveys

2007-11-24T20:29:00.000-08:00

Q.4 Do you think the LSE campus has become more crowded this year compared to last year?

YES: 40% (20 of 50 respondents)
NO: 6% (3 of 50 respondents)
I’m New (I wasn’t here last year): 54% (27 of 50 respondents)

Rationale reckons:

1. The very fact that more than half the respondents are new to the LSE seems to speak volumes about the number of new students on campus this year.

2. More than 40% of the respondents seem to agree that the LSE is more crowded this year than it was compared to the previous years. Will the LSE please take note?!!

Conducted and compiled by Avnish Srivastava

Surveys

2007-11-24T20:25:00.000-08:00

Q.3 Approximately how many hours on an average do you spend in the LSE Library daily?

0-2 hours: 8% (4 of 50 respondents)
2-5 hours: 54% (27 of 50 respondents)
5-10 hours: 34% (17 of 50 respondents)
10 or more hours: 4% (2 of 50 respondents)

Rationale reckons:

1. The average number of hours spent in the Library by the average LSE student is 4.92 hours.

2. Students seem to be taking refuge in Library due to the seeming lack of other activities to do in and around the LSE campus.

3. It is scarce wonder then that the Library is overcrowded. The British Library of Political and Economic Science boasts of only 1700 study spaces which include 450 networked PCs and is supposed to cater to over 6500 daily visits from student and staff. The math is quite straightforward.

4. There is an urgent need to increase the number of study spaces in the Library and to provide alternate activities for LSE students in and around campus. We, the students of LSE are turning into a generation of Library junkies.

Compiled and conducted by Avnish Srivastava

Surveys

2007-11-24T20:17:00.000-08:00

Q.2 Where do you prefer to eat at LSE?

Wrights’ Bar: 28% (14 of 50 respondents)
Brunch Bowl: 20% (10 of 50 respondents)
The Quad: 12% (6 of 50 respondents)
Garrick: 4% (2 of 50 respondents)
The Three Tuns: 6% (3 of 50 respondents)
Nosh (newly opened on Kingsway): 6% (3 of 50 respondents)
Subway (on Kingsway): 16% (8 of 50 respondents)
Other/I bring food from home: 8% (4 of 50 respondents)

Rationale reckons:

1. The battle for the share of the LSE student pie seems to be a three way war between Wrights Bar, the Brunch Bowl and Subway.

2. Other significant entries include the newly opened Nosh on Kingsway which has immediately started attracting a substantial share of LSE lunch-time money.

3. The absence of John Watkins Plaza and Café Pepe from the list is conspicuous and the LSE Catering Service should take note and encourage students to use these facilities as well.

Conducted and compiled by Avnish Srivastava

Surveys

2007-11-24T20:06:00.000-08:00

Q.1 Do you own an Mp3 Player? Is it an Apple product?

Apple: 64% (32 of 50 respondents)
Non-Apple/Other: 22% (11 of 50 respondents)
None/ I do not own an Mp3 Player: 14% (7 of 50 respondents)

Rationale reckons:

1. Apple Products clearly dominate the Mp3 player segment at the LSE and seem to be the most popular choice amongst the students interviewed.

2. Apple market share is thought to be much larger in the global market. Apple iPod sales in 2006 alone are thought to be more than 23.5 million units (Source: Macworld). This was at a time when it was yet to release its new revolutionary touch screen iPod Touch player. Apple estimates that 100 million iPod units have been sold since their launch in 2001 (Source: CNN)

Conducted and compiled by Avnish Srivastava

Economics in Everyday Life.

2007-11-24T18:50:00.000-08:00

Written By Naitik Shah

The sky was dark, the street looked familiar but I couldn’t recall the name. The sound of rain was the only sign of life on this lonely night. I wondered what it was that brought me to this deserted place. Suddenly, the door in front of me swung open and I heard a loud screech. I thought to myself, “I have heard this sound before, where was it? Why can’t I remember?” and then it dawned on me, “Oh my god! It’s my alarm; I have to go for the economics class. I am late!”

I am sure many of you must’ve had similar experience, while here at LSE. To tell you the truth, this is what I hate the most about my student life. Having to wake up at seven am each morning, all I can do while lying there in bed is cook up reasons for not getting out of the bed. Most of the days, these reasons elude me and I end up at the eight o’ clock lecture, however on some lucky days I do cook up a good reason and end up sleeping in. You maybe wondering what does this have to do with economics; actually everything.

Economics is the study of how individual, faced with unlimited wants and limited resources maximize their utility, which in essence boils down to choosing between various alternatives. We experience this everyday, whether it is deciding between attending the morning class versus getting some more sleep or going to that party on the weekend and getting drunk versus staying up all night to study for the approaching exams.

So one might ask how does one bargain over these wants? The answer is simple, every choice that we make has a cost and some benefit associated with it. And we simply choose those actions whose additional benefit exceeds the additional cost incurred to undertake those actions. However, you may now ask how do we calculate the cost of two different things like studying and sleeping. The answer in this case is not that simple.

Every individual has a set of beliefs, ideals, preferences and goals in life; these are what make them unique, and also form the basis for our cost/ benefit analysis. Depending on what we value more we make our choices. Let’s take the example of choosing between sleeping in or attending the morning class. The cost analysis here is simple; the cost of going to class is forgoing your sleep and dream, of course if it’s a nightmare then the cost ends up being zero. On the other hand the benefit is attending the lecture and learning something, which in turn would mean you get a good grade. Thus, if you value getting good grades over sleep and your dream then you would choose to go to class. On the other hand if you know that the professor is simply going to read the handouts he has already put online, then the additional benefit of attending the class is reduced greatly. As a result, you get to sleep in just like me, on those lucky days, when I knew that the professor was just going to repeat what he had done in class and I was able to sleep in.

On that note, let me give you a couple of examples from everyday life to reinforce the idea. Choosing to work part time is another good example. Here the cost is the time spent away from studying, which I guess not a lot of you would look at as a cost, however the benefit is the extra money you make. Similarly, choosing what to during the Easter break can be seen as a cost benefit analysis. It’s a choice between studying for the impeding exams or enjoying your time off.

Before I end this discussion let me point out another interesting feature of this cost - benefit analysis, which I am sure you must’ve guessed by now; the value of cost and benefit changes depending on the circumstances facing a person. Let's analyze the case of procrastination to get a better understanding of this.

Let's say it’s the first week of class, you have just attended the first lecture and the professor informed you about the exam that is going to take place at the end of 10th week. At this point you are least worried about studying for it. The benefit of starting preparation are minimal as there is a high probability that you might forget what you studied before the exams, besides there’s a lot of time for you to prepare. On the other hand, the cost is too high as you would have to forgo all the fun you plan to do like joining different societies, going to the fresher bash, etc. With each passing day the benefit of studying increases. If you don’t study you could fail and then end up disappointing yourself as well as ruining your chances of getting a good job; the cost on the other hand stay the same. At some point in time the benefit would exceed the cost and you will stop procrastinating and start studying.

Thus the next time you are faced with a decision, think about what you have learned in economics and apply it to reap the benefits of your education.

Thoughts on the Subprime Crisis

2007-11-24T18:20:00.000-08:00

Written By Drew Vincent

For anyone interested in economics and finance (and especially for those of us who are American) the past six months have provided a fascinating, perhaps textbook-worthy insight into the dangers posed by the subprime market. The effects of the crisis are broad and well-publicized, but the causes remain quite open to speculation. Many have criticized the increased securitization of subprime lending (up to 62.5% in 2002 from 31.6% in 1994)1 for its creation of tranches with seemingly inflated credit ratings. Following the crisis, I became interested in how such errors in credit assessment might occur even in a relatively static market, as well as how other factors might influence the default rate over time but remain overlooked by financial institutions.

In trying to understand how so many financial institutions were, to put it bluntly, caught with their pants down, I focused first on the way in which these institutions assess risk. Most of my insight into this field comes from the work of mathematician Benoit Mandelbrot. Mandelbrot has studied market behaviour since the 1960s and recently crystallized some of his ideas in a new book, The (mis)Behaviour of Markets. He criticizes the tools he has observed in use at the majority of corporations and financial institutions, namely the Capital Asset Pricing Model (CAPM,) Markowitz Portfolio Theory, and the Black-Scholes formula*2; furthermore, he denounces more recent inventions of mainline financiers (one of these being GARCH,) saying “...such ad hoc fixes are medieval.*3” Mandelbrot's central argument is that 'orthodox' financial theories fundamentally underestimate volatility. Taking equities as an example, the traditional idea is that prices variations lie within the normal curve, infinitely familiar to anyone who has taken a statistics course. This means that small price changes are quite common, with large changes being quite rare. Indeed, this concept is taught today at the LSE, along with the idea that prices change via a random, coin-flip process with no connection between one change and the next.

Numerous events, some of them occurring notably during the subprime crisis, seem to refute the normal curve model of price changes. The most clear example was the market crash of 1987, where the DJIA lost 29.2 percent of its value in one day. Under the normal curve model, a change this extreme is, for all practical purposes, statistically impossible; thus, it seems likely variations lie within a different function: a power law function, Mandelbrot suggests*4. It can also be shown that the coin-flip or 'random walk' model of price changes simply does not produce charts that mimic actual price charts. Mandelbrot provides compelling evidence that these changes can be modelled much more accurately using fractals, geometric constructs that are self-similar regardless of scale (daily behaviour resembles monthly resembles yearly behaviour,) and generate charts with the degree of randomness observed in actual price charts, as well as many other types of sequential, random movements, perhaps including default rates. Fractals are already in wide use providing convincing computer generated images for theatrical special effects, and it is highly likely that fractals could provide a much more reliable system for assessing risk. Unfortunately, the mathematics involved with these models are more complicated than those in CAPM and its companions. For the time being, if Mandelbrot is correct, financial institutions will likely continue to underestimate risks and volatility (at least mathematically.)

Another possible factor influencing default rates is the continuance of widespread illegal immigration into the United States, as well as the government's seeming inability to address this issue. As of January 2006, the US Department of Homeland Security conservatively estimated the population of unauthorized immigrants at 11,550,000*6. These immigrants represent a large market, and banks have been lining up to offer their services. As reported on CNN.com, “an increasing number of banks are seeing an untapped resource for growing their own revenue stream and contend that providing undocumented residents with mortgages will help revitalize local communities.”*7 One bank representative claims that illegals are “no more likely to default than a documented resident.”*8 I find this extremely difficult to believe based on the current political climate and personal experience.

Illegal immigrants and the companies who employ them face increasingly difficult odds as their presence becomes more widely felt and governments begin to respond. For example, my own home state of Georgia recently passed legislation that denies public benefits to undocumented workers and imposes severe punishments on companies found employing said workers. Such actions are likely to cause job loss for illegal immigrants (whose positions were already unstable as they could be terminated randomly with no legal recourse) as well as family troubles as benefits disappear. Both of these are denoted as 'trigger events' for default in the Danis and Pennington-Cross paper on sub prime mortgage delinquency*9. Having worked in the construction industry for two summers, I have heard many of these concerns voiced by both contractors (who face prosecution for employing illegals) and workers who admitted they were not legal residents. One man I worked with quite often, who came to America illegally but was later granted legal status, frequently lamented his credit score as he had in earlier years been forced to default on a mortgage as a result of his uncertain financial situation.

In conclusion, I could not hope to develop an exhaustive explanation of the subprime crisis. However, I hope to have shown that factors such as systemic underestimation of volatility in various markets and banks' lending to undocumented workers merit further investigation as likely contributors to the institutional crisis observed this year. It is my hope that even if the crisis does not prompt reform of the mathematical tools of financial institutions, perhaps it will at least increase the instinctive caution of those considering investment in the subprime market.

1. Danis, Michelle A., and Pennington-Cross, Anthony. “The Delinquency of Subprime Mortgages.” Journal of Economics and Business In Press, Corrected Proof (2007).
2. Mandelbrot, Benoit, and Hudson, Richard L. The (mis)Behaviour of Markets. New York: Basic Books, 2004. 60.
3. Ibid, 104.
4. Ibid, 13.
5. US Department of Homeland Security, 2007. “Estimates of the Unauthorized Immigrant Population Residing in the United States: January 2006,” http://www.dhs.gov/xlibrary/assets/statistics/publications/ill_pe_2006.pdf
6. Pasha, Shaheen. “Banking on Illegal Immigrants.” CNNMoney. 8 August 2005 http://money.cnn.com/2005/08/08/news/economy/illegal_immigrants/
7. Ibid
8. Georgia General Assembly. Senate Bill 529. http://www.legis.state.ga.us/legis/2005_06/fulltext/sb529.htm
9. Danis, Michelle A., and Pennington-Cross, Anthony. “The Delinquency of Subprime Mortgages.” Journal of Economics and Business In Press, Corrected Proof (2007).

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please comment......

Dear Economist

2007-11-23T15:10:00.000-08:00

By Soumya Gupta & Avnish Srivastava

Q:

A lot of times when I go out with friends someone ends up suggesting ordering a number of different dishes and sharing them. I do not like this idea (because it is messy and it dilutes the pleasure of choosing), but once the suggestion is made, it seems churlish and anti-social to object. How can I break this cycle, while retaining my friends?

Answer:

I feel the same way. Why should I be obliged to trade my delicacy with a rubber tasting chicken piece. Still, there is more to this than simply finding a polite way to object.

The basic difficulty is judging the cost of your dislike against the benefits derived by your friends in sharing. Sharing should occur if your irritation at the practice is outweighed by their delight; and should not occur otherwise. Who is to make this judgment? Also another problem here is consumer preference is not truly revealed, because some of your friends like you might not be revealing their preferences just like you.

Fortunately, the Coase theorem, developed by our own LSE Nobel Laureate Ronald Coase, predicts an optimal and mutually satisfying outcome if property rights are clearly specified. You could suggest that everyone could order their own dishes, specifying clear property rights and sharing wherever the trading is leads to a pareto optimal condition. This should ensure that splitting dishes occurs only when socially efficient, and you will not be obliged to participate, although an excellent offer of compensation may persuade you to do so.

Looking at your situation in terms of the Coase theorem, the problem is that the property rights are not clearly specified. Once this is done it will provide a solution for a community (here your friends and you) welfare maximization.

Dear Economist

2007-11-23T14:55:00.000-08:00

By Soumya Gupta & Avnish Srivastava

Q.

I am a final year undergraduate student of Economics and seem headed for a career in investment banking to pay off my student debt, but theatre is my passion. Should I follow my heart and do theatre even if it seems risky.
Befuddled

Answer:

Aahh… The classical dilemma of making choices under uncertainty. Here you as a consumer have to make a choice to maximize your welfare under conditions of uncertainty. However, here not only does your consumption depend on your choice but so does your endowment. I would suggest you separate the choices you make on your Production possibilities frontier(PPF) and your Indifference Curves(ICs), this would help in maximizing your benefit from your income first and then taking this income as given and maximizing your consumption and hence welfare.
I would draw my PPF between returns from a career in I-Banking and returns from a personally satisfying career in theatre.

x : Returns from Theatre
y: Returns from I banking

I would consider that returns from I-banking, assuming that you already have a job, are certain and will help you pay off your student debt and also live comfortably.

Returns from entering theatre are uncertain, that is you don’t know if you can make it big, also your income will be uncertain on the number of projects you get and taking the probability of success and failure may not suffice for paying of your debt in the short term, however being set off by the fact that it gives you much more welfare benefit as a consumer.

I believe that as a person staring your career, investment is more important so that it can help you grow further in monetary terms.

P.S. Work for a few years in I banking and earn some moolah and use that to pay off your student debt. Once you find that you are in a comfortable state of finances and are short by a few years of sleep, I believe that would be a great time to foray into theatre.

Dear Economist

2007-11-23T14:53:00.000-08:00

By Soumya Gupta & Avnish Srivastava

Q :

I stay at one of the LSE halls, and we share common kitchens. I prefer buying groceries and storing them in the common fridge. However, many a time I have discovered my items to have been used or aren’t there anymore. Why don’t people buy their own groceries? Is there a solution?
Hungry Rosebury-en

Answer:

Your difficulty is that the property rights here are not secure and your food might end up being treated as a public good (or a semi-public good). In economics, public goods are goods which are non-rival and non-excludable. When you keep things in the fridge, people might use them for their own consumption because at that moment they become non excludable. It becomes very difficult, to find out who used whose food, as there is no mechanism to check and also property rights are not well defined. There also exists another mechanism where people end up consuming your goods. The opportunity cost of going out at night or in the rain is much higher than just using someone else’s milk, which is a small proportion of the entire bottle to make a cup of tea. This might be the case for other goods as well when you need to have breakfast and are running late. I would like to term this into a phenomenon of unclear property rights and conversion of private, excludable goods to semi-public goods.
P.S: Please label your goods and you’ll definitely see an improvement in the situation. The risk of getting caught using someone else’s labelled stuff is much higher that buying your own goods.

A critical analysis of the concept of rationality

2007-11-21T08:58:00.000-08:00

Written by Naitik Shah

I still remember the day I attended my first economics lecture. It was the first day of my high school and unfortunately it was also my first class of the year. I was nervous as I had absolutely no clue as to what economics meant. The professor entered the class and took his seat. He placed his books down and then stood up went on to write the following four things on the board. First, “Economics is the study of how rational individuals maximize their unlimited wants given their limited resources”, second, “individuals are rational”, third, “Wants are unlimited, because rational individuals would want everything they can lay their hands on”, and finally, “the resources available to these individuals are limited.” These four statements form the very basis of economics and is the very first thing that anyone is taught. Of these four statements, the rationality assumption forms the basis of all economic theory; on its shoulders lies the entire canonical of economic theory. However, have you ever stopped for a minute and asked yourself what if this assumption doesn’t hold? What if rationality is too strong an assumption? Let’s step back for a minute and analyze what it implies to be rational and the implications of this assumption.

Simply put rationality implies that each and every individual in the economic model should act in a manner that will maximize his/her well being. Although this makes perfect sense, since if everyone in the society maximize their well being then the well being of the society as a whole will be maximized. However, this in turn also implies that if individual X can improve his well being by cheating he should; if firm X can increase its profits by using underhanded tactics and creating a monopoly for its good then it should. This clearly contradicts what we are trying to achieve as if someone cheats then one person, who cheats, is going to be well off at the cost of the person he cheats. The total well being of society could still be maximized depending on how much individual X who cheats gains and individual Y who is cheated looses, but this is not what economics is trying to achieve. The purpose of economics is to promote the well being of all individuals in society. Another drawback of rationality is it leads to the exclusion of concepts of charity, generosity, voluntary work and equity. These have been either are called instruments of indirect self-interest or normative science. But don’t you think that these concepts aren’t merely an instrument of normative science or a side-effect of indirect self-interest? I believe that they are conscious actions taken by rational individuals with the sole purpose of helping others and I am sure you would agree with me. As a result, reducing them to mere indirect self-interest denies an important aspect of human nature, i.e. selflessness; something that cannot be understood in the conceptual framework of a self-interested economic man.

The way this problem can be solved is by expanding the concept of rationality so that it includes concerns for welfare, justice and the effects of ones action on others. Thus economic agents will now be concerned about not only their well being but also the effects their actions will have on others, giving then a new conscience. This newly found conscience will allow then to take into consideration the effects of their actions on others, making them more likely to provide complete information as well as ensuring that there are no externalities generated by their actions. This in turn will solve problems like coordination conflict encountered in current models of market. Finally, it will make our economic agents more sociable, and bringing them closer to reality, which in turn will allow us to talk about communities, governments and common beliefs. This will also lead to the introduction of a new mesolevel in our analysis of society, something which is vital but has been missing until now. The reason that this level of analysis is important is because a lot of our policy decision as well as preferences are decided on this level; for example our stand on abortion more or less depends on our upbringing, which in turn is determined by our parents and their beliefs. These are things that are determined as communities and not as individuals, hence reducing such decisions to an aggregate of individuals decisions would be a big mistake and wouldn’t provide any insight into the process through which these decisions are arrived at.

Thus what is need right now is for us to realize that when we say economic agents are rational, it implies that individuals maximize their well being, while taking into account the effects of their actions on others. If this is how we would have been taught economics then global warming wouldn’t have been a problem today, neither would have we seen the crash of Enron, or the declaration of dividends for its shareholders by Northern Rock.

“To contract out or not to contract out – that is the question!”

2007-11-21T08:43:00.000-08:00

By Jagoda Sumicka

Not more, not less – let’s try to answer it.

Once upon a time…

Maybe I will surprise you, maybe not, but in the 1930s and 1940s, almost all the economists, and in fact almost all of the Nobel laureates, were in favour of government ownership of an industry if only they suspected any market imperfections around. This was so because what was at the centre point of the economic discussion back then was competitive pricing, rather than ownership.

Even laissez-faire economists at that time were accepting nationalisation, if it was to achieve presence of competitive prices. Henry Simons wrote in “A Positive Program of Laissez Faire”: “The state should face the necessity of actually taking over, owning, and managing directly, both the railroads and the utilities, and all other industries in which it is impossible to maintain effectively competitive conditions.”

During the World War II everything that could be nationalised was nationalised. In Europe this tendency was somewhat preserved in the post-war period, when many countries opted for state ownership of strategic sectors of the economy i.e. mines, electricity, heavy industry, food provision etc. An extreme case of such an approach was found in the communist countries of the Eastern Europe, where virtually everything became state-owned.

… and now.

We all know how communist ideas ended up and that the approach towards state-ownership has changed completely – a few decades ago no one would ever suspect that a private bus company could ever be successful. Or garbage collection. Or electricity provision. And they all work!

Today, people usually agree that certain items should be provided by the state, but they still disagree whether they should be produced publicly or privately.

And whereas it is quite difficult to find the adversaries, supporters of contracting-out are as visible as opponents of American troops in Iraq. One can even get an impression that – provided - A - you are not an unionised worker of a state-owned company – B - you are not a politician in a country of dozens of people falling into the category A described above – then probably you should support contracting-out. What would make you think so?

Maybe the following [Shleifer 1998]:

Turkish state-owned coalmining company running annual losses per worker equal to six times the per capita national income.
A state-owned power utility in the Philippines shutting off electricity for seven hours a day in many parts of the country.
A state sugar-milling monopoly in Bangladesh employing 8,000 unneeded workers while forcing the price of sugar in the country to stay at twice the international level.
A Tanzanian state-owned shoe factory which, even with the World Bank’s help, could not get its production to rise above 4 per cent of capacity before shutting down.

If there was no World Bank in the footnote, you would hardly believe it.# When I asked my friends to guess the year in which all these took place, the answers varied from 1950s to 1980s.. In fact, these events all took place in 1995 so not a long time ago.

So it seems that contracting-out is a good idea, right? But is this always the case?

I do not think so. Of course, you can argue that something is always true, but such a statement is highly questionable in a diverse world we live in. What is relevant to apply to one environment may be incredibly foolish to use in some other setting. For instance, I would not recommend having your water pipes installed outside of your house in Alaska, whether in England it is actually a good cost- and space-saving strategy.

Thus, we need to approach contracting-out versus state-ownership dilemma from several different angles to find a general recipe for deciding whether government should contract out a service or not.

First, we will think of the market environment i.e. we will examine the importance of competition and the problem of being incapable of writing fully-specified contracts. Then, we will relax the assumption of the benevolent government and how much impact it has on our discussion. Having done that we should be ready to inspect the simplest cases of the contract-out-do-not-contract-out dispute.

Ready. Steady. Go.

“It’s the competition, stupid!”

Those who favour privatisation over state-ownership often highlight the importance of competition.

Imagine a government setting up a contract, not more, no less, but to contract out a specific service. The minister of infrastructure, who has set up the scheme, is planning to open a bottle of champagne, since after a couple of months she is sure of reaping off the benefits of the presence of competition.

Unfortunately, this is not always the case. Think, for instance, of natural monopolies, where a high fixed cost associated with entering a particular market leads to economics of scale, whereby the average cost of production falls as quantity of output rises. Hence, in equilibrium, there will be only one firm in this market. If this firm goes private, there will be no competitive pressure for this firm to deal with due to the impossible-to-overcome barriers of entry. Then such a firm will under provide at a higher cost to consumers than a state-owned company would normally do. Thus, when thinking of privatisation of industries following this pattern - electricity, gas, land-line telephone providers - one must make sure that competition will be introduced by dividing the company into a few separate ones with managers who would not collaborate with one another, and that specific anti-monopolist laws will be enforced, if service is going to be contracted out to only one company.

Another thing is that competition requires perfect information. This is extremely important, especially when it comes to consumer’s knowledge on cost and quality of a product. Take the very famous dilemmas of whether schooling and medical care should be contracted out. Both cases seem very similar at first glance – the society cannot go on without them, innovation is important, incentives of their state-employed staff are rather weak, and the damage from cost-cutting would be enormous for both of them. What differentiates these two is customers’ access to information. When you choose a primary school for your kids, in many cases it is enough to ask your neighbours for advice. But when you are to choose medical treatment, the case is much more complicated as consumers usually have poor ability to assess the quality of health care they receive [Hart, Shleifer, Vishny, 1998]. In this case, not only is the cost of acquiring information very high (Spending a couple of years doing a degree in medicine is not a cheap business..), but also the cost of making bad decisions is enormous (The stake is often your life!).

Now, take a step back and think why we do actually want competition. Well, this is because individual suppliers fight for their consumers by reducing cost, which can be achieved through innovation. And it is hard to argue against what Alfred Marshall said at the dinner of the Royal Economic Society on the 9th of January 1907: “A government could print a good edition of Shakespeare’s works, but it could not get them written.” Yes, government is generally a poor innovator.

Indeed, entrepreneurship is what makes the economy grow, it is what makes good become better, and expensive - cheaper. Unfortunately, the two usually do not go together. A firm can achieve cost-reduction by lowering product’s quality. Hence, a case in which quality is non-contractible, is generally a case against contracting-out, provided reputation-building mechanisms are non-existent (Would you produce low-quality goods, if you knew that the customers would not buy them again?).

“Power tends to corrupt and absolute power corrupts absolutely” – relaxation of the assumption of benevolent government.

The case for contracting-out is becomes if corruption and patronage enter our calculation. When it comes to the latter, it is rather obvious that trade unions around the world are typically strongest opponents of contracting-out, since they can obtain benefits in exchange for political support. This is a clear counterargument for state-ownership.

As for corruption, it is more ambiguous. On one hand, government provision often puts people in a position to take bribes for obvious reasons. But contracting-out is definitely corruption-free as politicians may award contracts to their friends (Guess of which very famous Vice-President I am thinking right now?) or inefficient providers in exchange for bribes. This is actually quite easy – just write a bad contract that fails to make the firm accountable to quality.

So if corruption may take place no matter if the government contracts out or keeps public services state-owned, the optimal idea may be to rely completely on unregulated market supply. For example, it may be better to have private garbage collection than either by government employees, or that by the private contractors who got their concessions by bribing officials. Also, a good idea may be to make sure that contracts would be awarded by competitive bidding to make sure that no nepotism is present.

To sum up, it seems that public services should be contracted out when innovation is important and, there is no serious damage to quality from cost-cutting, there is relatively good information available on the market, reputation-building arguments are strong, and corruption and patronage – not widespread.

Sources:
A Shleifer (1998), “State versus Private Ownership”, Journal of Economic Perspectives, 12:4, Fall, 133-150.
O Hart, A Shleifer, R Vishny (1998), “The proper scope of government: Theory and an application to prisons,” Quarterly Journal of Economics, 112:4, 1127-1161.

Is Russia a new Economic Miracle or just another Petro-state?

2007-11-19T06:24:00.000-08:00

Written by Andre Tartar

In 2003 the investment bank Goldman Sachs came out with a report that established a new acronym, BRIC, that has fundamentally transformed how most people think of the global economy. It stands for Brazil, Russia, India, and China, the new behemoths on the block which can also be thought of as the world’s “big, rapidly industrializing countries”. These four giants represent a hefty portion of the world’s landmass, population, and economic potential. To this effect, the past decade has seen them embracing global capitalism like never before and reaping the benefits of the boom. China has experienced double-digit growth fueled by a billion-strong consumer class, India has witnessed the birth of the world’s newest batch of billionaires and IT champions, and Brazil leads the world on sustainable resource use. So how did Russia make it into this club?

Unlike the other three, Russia has already once been an economic powerhouse, a global superpower. So this is ostensibly its second chance to make prosperity stick. The last time around command-and-control politics and central-planning economics led to grossly inefficient allocation of resources and knowledge. The Soviet Union poured billions into military research but none into commercial research. As a result it had many fighter jets but few cars. In the Soviet model, a central-planning committee normally set a (high) production quota and a (low) price, in order to spread the benefits of production to the people (the mantra of the Communist Revolution). What normally resulted were chronic shortages of most goods, with producers unable to meet their quotas because of loss-inducing low prices.

This time around Russia does have a freer economy, relying on the market mechanism to allocate resources more efficiently. The theory here is that by allowing producers to compete on price for consumer demand, the price of goods should end up reflecting the true cost of producing the good and not exceed consumers’ willingness to pay for it. It is not hard to see where this has born fruit: Russian supermarkets are actually stocked with consumer goods and people are free to buy and sell virtually anything they desire. But is this freeing up of the consumer market really what is fuelling Russia’s boom?

With annual growth rates of between 4,7% and 10% for several years running [1], Russia’s GDP has tripled from less than that of the Netherlands in 2001 to nearly $1 trillion in 2006 [2]. Simultaneously average wages in the country have more than doubled form what they were a decade ago [3]. And so much wealth has poured into Moscow that it has surpassed London as the most expensive city in the world. Clearly Russians are richer than ever. But a closer look at the numbers will suggest a very different story, one closely intertwined with Russia’s emergence as a major energy player.

According to the US Department of Energy, Russia has the largest natural gas reserves and eighth largest oil reserves in the world. No surprise, then, that it is the world’s largest exporter of gas but it also happens to be the second largest oil exporter. This means that its economy is more sensitive to oil prices than virtually any other. The DOE estimates that for every $1 increase in the price of a barrel of oil, Russia’s government revenues increase by 0,35% of GDP [4]. Just imagine the boom to the overall economy from that $1 increase. Given that the price of oil was under $25 in 2003 and currently pushing $100, this translates into truly staggering growth.

But real per capita incomes may not be benefiting as much from this boom as some might think. Just factor in the double-digit inflation rates caused by skyrocketing wages [2]. Then consider that much of this newfound mineral wealth has either ended up overseas in Russia’s engorged foreign reserves, worth $447 billion by the Bank of Russia [5], or in its stabilization fund, now valued at $80 billion [4].

Oil is certainly a major ingredient in the Russian economic mix. There can be no doubt on that point. Take Russia’s enormous trade surplus, second largest in the world after Saudi Arabia, the leading oil exporter. They have surpassed $160bn by some estimates, up from a mere $40bn in 2000 [3]. Crude figurations show that most of this windfall comes from oil receipts.

Yet progress can be seen in some of the economy’s fundamentals. Investment currently stands at 18% of GDP, similar to the investment rates that have seen China through it’s growth spurt [3]. And manufacturing has been growing at a steady clip [3]. So there has definitely been growth in the economy outside the oil and gas sectors. But is it enough to propel Russia upwards through a post-oil future? At the moment, I would have to argue in the negative.

On the one hand Russia must prepare itself for a smaller population; its population declined by about 2 million people since 2001 [3]. Therefore it must invest more in a knowledge-based, service-centered economy. At present Russia is a net importer of services [3]. Secondly, Russia must insure that its companies are globally competitive. As I have tried to show, Russia’s economy is heavily skewed toward the energy sector. Only its main government-controlled energy companies, Gazprom and Rosneft, operate on an international level. And that’s solely because they are Europe’s main energy providers, not because of any inherent competitiveness. Too much government intervention and slow-moving regulatory bureaucracies are holding the rest of the country’s industrial complex back.

For the moment, then, it seems that Russia’s boom is more the result of realigning itself as a petro-state than a true economic miracle. For this proud nation to embrace its global economic potential, the Kremlin must relax its involvement in the economy. Russia must instead focus on unleashing its competitive strengths, much like China has.

[1] World Bank. Data and Statistics for the Russian Federation. May 2006.
.

[2] World Bank. Russian Federation Data Profile. April 2007.
.

[3] OECD Statistics: Russian Federation.
.

[4] Energy Information Administration: Country Analysis Briefs: Russia. US Department of Energy. April 2007. .

[5] Bank of Russia. 2007. <>.

PAKISTAN makes the headlines again.......for all the wrong reasons

2007-11-17T19:11:00.000-08:00

A state of emergency was declared in Pakistan on 3rd November 2007 resulting in total suspension of the constitution. Hundreds of anti-government activists, lawyers and leaders of the opposition parties are being clapped up in jails and all private news channels in the country are being barred from airing. Not only is this having adverse effects on the political, judicial and media sectors of Pakistan, it is also harming the economy. Already, as an aftermath of the declaration of emergency, prices of basic commodities like wheat(staple food) and ghee(oil) have shot up and further inflation is being predicted by business men and economists.

“Whenever emergencies are imposed in the country, it results in price hike, uncertainty prevails and illegal trade flourishes,” Farooq Azam Khawaja, an eminent importer is quoted to have said.

The emergency is also predicted to cause a rise in price of imports and adversely affect export industry while deterring foreign investment inflow in to the country. This is precisely what the country doesn’t need right now; an economical slowdown on top of its chaotic political troubles.

Tangents wonder:

To what extent is Musharraf willing to go to retain power?
To what extent will the people of Pakistan put up with Musharraf's high-handedness?
And perhaps most importantly, to what extent will America continue to support Musharraf in view of him being 'their man' and keeping an eye on the country's nukes?

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pic from flickr again with some rights reserved(attribution etc)

Mugabenomics: Zimbabwe's predicament

2007-11-17T16:13:00.000-08:00

Zimbabwe’s economy is collapsing under the weight of its fiscal deficits, hyper-inflation and economic policies controlled by political agenda. It is really not a matter of whether it is going to buckle; it’s a matter of when. So how did the economy plummet in to a dysfunctional, broken down state? And more importantly, what can be done to save it from crumbling?

For two decades, the fate of Zimbabwe has been solely in the hands of Robert Mugabe, the once popular liberation leader now known as a human rights abusing dictator in the west. During this period, the country has undergone many structural changes in its socio-cultural, political ,and economic fields. Its international image and foreign relations with its immediate neighbours as well as world community at large have suffered badly due to the high handed policies of Mugabe in utter disregard of the world opinion. All these changes are inevitably reflected in its economy.

From being a thriving economy relying largely on its agricultural sector, it has come to the brink of a collapse. Once it produced enough to feed the nation and be a potential bread basket for its neighbours, was the second largest producer of tobacco, and the grower of best cotton in the world . However it is now facing an economic meltdown described by world bank as the worst ever outside a war zone. The agricultural productivity for 2006-2007 is nearly 30% lower than what it was in 2000 which has left millions starving due to severe food shortages and over 80% of the population unemployed. Inflation has risen from 133% in 2004 to somewhere between 7600 %(gov. sources) and 15000% (independent sources) making basic commodities of life unaffordable for the common man in Zimbabwe. Four out of five of the 12 million people live under the poverty line and many rely on grain handouts for survival. It is estimated that about a quarter of the population has emigrated. HIV/AIDS is prevalent in 20.1% of its adult population thus further reducing the active work force while at the same time increasing the economic burden on the economy.

The cause of this economic crisis is predominantly attributed to the chaotic and violent land reforms involving seizures of farms owned mostly by minority white farmers for the so-called ‘ benefit of the general public of Zimbabwe', implemented by a corrupt government. These farms have been handed over to landless members of the black community . They have generally found their way in to the hands of veterans and supporters of Mugabe. This has been a transfer from willing, skilled and resourced farmers to those who either lack the will and have sold infrastructure, irrigation pumps and other agri machinery etc for quick liquidity and economic gains, or those who have the will but not the skills or do not have collateral resources. This has led to decreased capacity utilization aggravated by the monetary policies of the government.

But that is not the sole cause of the crisis. Economically incorrect decisions like the handing out of unbudgeted awards to the veterans of the independence struggle by Mugabe due to political expediency and the decision to send troops to republic of Congo from 1998-2002 have struck a severe blow to the economy. It is estimated that Zimbabwe spent around 13 million dollars per month on this war. The inability of the government to repay loans and hence defaulting on IMF loans means that Zimbabwe is no longer eligible for further loan. Human rights abuses and repression of people by violent means has resulted in isolation of the country and indifference of the international community. Over and above all this are the limited sanctions imposed by the US government and the EU.

Severe shortages of fuel, food and other essential goods have resulted in skyrocketing inflation. However the government refuses to devalue its currency realistically and by enough to control the escalating prices of inputs. This in turn has led to manufacturing debacle as more businesses are being shut down due to shortages of inputs and the high cost of imported inputs that are available.

Instead, the government has resorted to administrative measures to control spiralling inflation. However the price ceilings imposed by the government are economically inefficient and practically ineffective .These have led to further aggravation of the situation as firms now have to buy from alternative black markets at even higher prices. The subsidies provided by the government on fuel and other inputs to the farmers are exploited as many do not use subsidised items for production but sell them in the black market at substantial prices making immediate profits.

The official foreign exchange rate is ridiculously high and foreign exchange reserves of the country badly depleted. The current official foreign exchange rate has increased to 15 000 Zimbabwe dollars to one US dollar ,as compared to 1 Zimbabwe dollar to 1 US dollar in 2003. The demand for foreign currency is so high and its supply so limited ,that the black market traders are selling it to the highest bidder at rates like Z$300,000 to one US dollar! With the central bank now buying at the illegal market rates to pay its mounting debts for power and fuel utilities, it is increasing everyday. Thus prices of imported inputs which are already very high are ever increasing and with the price control on products introduced by the governments, more and more businesses are shutting down. This has resulted in the lowering of productive capacity utilisation from 60% to 25%which is expected to decline further. This in turn is fuelling further poverty and unemployment and emigration leading to further brain drain of much needed skilled workers in Zimbabwe.

To top it all the government has warned of a possible electric supply collapse and breakdown of water supply .Absence of clean drinking water has led to another break out of the water transmitted disease I-e cholera. The country is plummeting fast and the economy is in a nose dive with living standards hitting rock bottom. Zimbabwe is in dire need of international aid and relief to have any chance of economic survival.

So what should the government do? Or simply, what can the government do? It should first of all drop price control. Again, it should pragmatically devalue its currency and bring black market operations to a close by essentially letting the market do its job and determine the price of goods and the exchange rate.

Mineral resources are enormous potential wealth for Zimbabwe with large deposits of gold, nickel, platinum, coal and methane gas. But to exploit these and to increase the productive capacity, international investment of capital is essential. However it is unlikely to be forthcoming in view of the present unfriendly policies of the government and unstable political environment.
Another historically strong sector is the tourism industry which is suffering right now due to the violence, chaos, and human rights abuses etc attributed to this regime. Unless a better image of Zimbabwe is portrayed in this world, foreign currency inflows through this sector cannot be obtained.

Zimbabwe can not survive any longer without international support and aid. The Zanu-PF under Mugabe should co-operate with the SADC led by the South African president and undertake reforms to ensure free and fair elections. Such reforms will end the international isolation of Zimbabwe and help in providing the much needed economic assistance ,food aid and other relief to the starving population. The west also needs to lift its sanctions on food and humanitarian aid ,and subject to acceptance of the terms of SADC provide financial assistance to start the process of reconstruction.

But for some people, the most important and the only solution to this milieu is for Mugabe to go. According to economist Robert Nelson : ‘… the Zimbabwe economy will continue to go down the tubes until they get some political stability and, as long as Mugabe is there, that's not going to happen.’ That might not happen because the opposition is still disunited amongst itself and despite allegations of rigging against Mugabe in 2005 elections, his party is still in control. However, in the words of a Harare based analyst, ‘the big problem about Zimbabwe is that the one thing you can’t rig is the economy. When it fails, it fails. And that can have unpredictable effects.”
*Sources for quoted statistics: CIA fact book, BBC website, Zimbabwe Independent, and New York Times.

Show me the money!

2007-11-16T04:52:00.000-08:00

On the 5th of November, members of the Writers Guild of America (WGA), which represents 12,000 screenwriters, went on strike. The walkout occurred after negotiations between the union and the Alliance of Motion Picture and Television Producers (AMPTP), which represents the studios, collapsed.

The walkout is largely due to deadlock over an agreement on higher fees for writers from sales of DVDs and contents streamed over the Internet. At the time of writing, the WGA and the AMPTP have agreed to reopen negotiations on 28th November, but the strike is expected to last a while longer.

Although many shows have stockpiled on scripts in anticipation of production delays from the strike, many daily talk shows (such as The Daily Show, and the Late Show with David Letterman) which rely on writers for topical jokes have shut down. Shows such as Heroes have also been affected, as writers are not able to do last-minute rewrites. The new season of 24 has been delayed for the foreseeable future, and Lost may see the same fate. Similarly, production on the 2008-2009 blockbusters such as Angels and Demons and Harry Potter and the Deathly Hallows may have to be pushed back.

The last WGA strike took place in 1988 and lasted five months, costing over US$500 million. The current strike is expected to result in about US$1 billion of losses.

Tangent’s take:

(can someone knowledgeable in labour economics please comment?)
There has been a show of solidarity across the industry, with many 'writers-producers' / show-runners (basically the head writer/ boss) joining the strikes. What would happen if these show-runners decide to go back to work...?
If the WGA's strike is successful in getting the AMPTP back to the negotiation table, would other guilds, like the Screen Actors' Guild or the Directors' Guild of America, likely follow suit?
Why? Why Lost???

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Picture again from flickr, here. Again, nonderiv, attrib license.

Rules of the game

2007-11-15T17:20:00.000-08:00

The Nobel Prize in Economic Sciences this year went to the American economists Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson for “having laid the foundations of mechanism design theory”.

Mechanism design theory provides a framework to design rules of a game to achieve specific outcomes, even though players may be self-interested. A simple example of such ‘rules’, provided by BBC’s Evan Davis at Evanomics, is how a mother lets one child divide a cake in two, and the other to choose first which half of the cake to have. Apart from dividing cakes, mechanism design theory allows for the analysis of allocation mechanisms such as regulations, market prices and management, focusing on problems associated with private information and incentives.

Tangent’s take:

Keep a look out for Economic Society’s own (albeit amateur) experiments in this area—with pizzas!

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Please add or edit as you see fit.

Lovely picture of pie taken from here. It's an Attrib-NonDeriv license, which means you would need a link to the pic if you use it. But the picture's not really necessary -- I'm hungry, that's all.

Dollars aren't a girl's best friend?

2007-11-15T16:49:00.000-08:00

It has been widely reported that the world’s best paid supermodel, Gisele Bündchen, has stipulated that companies are to pay her in euros instead of US dollars over fears of the latter’s shrinking value. According to the reports, Ms Bündchen demanded to be paid in euros to represent Pantene hair products for Procter & Gamble Co., and similarly for her contract with Dolce & Gabbana to promote it’s The One perfume. The dollar has lost 34% of its value since 2001, and dollar reached its lowest level against the sterling since 1981 in early November.

Ms Bündchen’s agent has denied the stories, but even if they were true, her client would not have been the first prominent public figure to bet against the dollar—Warren Buffet has been vocally bearish on the dollar in October, albeit under much less attention from the press.

Tangent’s take:

Does it make any economic sense for someone based in NYC to not accept US dollars?

If everyone is betting against the US dollar, does it really matter that it’s value keeps on sliding?

If everyone is betting against the US dollar, shouldn’t it have weakened to the point it can’t get any weaker?

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Amazingly, picture is available on Wiki Commons. ie. free to use.

And the Oscar--er, Nobel goes to...

2007-11-15T16:35:00.000-08:00

The Nobel Peace Prize was shared by Al Gore and the UN’s Intergovernmental Panel on Climate Change (IPCC) for their efforts to raise awareness on climate change.

The IPCC was established in 1988, by the World Meteorological Organization and the United Nations Environment Programme. It is tasked with evaluating the risk of climate change due to human activity. Mr Gore’s film on global warming, ‘An Inconvenient Truth’, won an Oscar earlier this year, and was a box-office hit. It had also seen the headlines recently when a British judge criticised it for being alarmist and containing errors.

In related news, Mr Gore’s fund management company set up with David Blood – Generation Investment Management – has agreed to cooperate with Kleiner Perkins Caufield & Byers, a venture capital firm, to invest in areas such as alternative energy companies. This is seen as a further attempt to combat climate change.

Tangent’s take:

A Nobel for being famous for talking about climate change? Really?

Although governments have been touting the importance of fighting climate change, much of the investments needed has been left to the private sector. Perhaps Blood and Gore (a much better name for a fund, in Tangent’s view) may start a new trend in directing private investments towards green industries?

Even thought there is still debate on the exact scientific consequences of climate change, the economic effects are real – see Tayyibah Arif’s piece on pasta price fluctuations

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Please add or edit as you see fit, especially with the 'Tangent's Take' section.

Picture of earth is in the public domain. Pictures of the Nobel Prize are NOT, hence, why the earth. And also because it's prettier.

Mugabe caricature

2007-11-15T14:24:00.000-08:00

Just doodling while writing my article on Zimbabwe:).......

News and Analysis: Issue 1

2007-11-13T08:22:00.000-08:00

It would be fantastic if any of you can spare some time to write some short blurbs (100-150 words) on any of the following topics. Since we're only doing about an issue per term, it would be silly to just report the news from several weeks ago, so the best thing would be to write a short blurb (impartial!!) and then do a little "Tangent's Take" (can be in bullet points really... just economics-related questions to inspire discussion) on the news story.

Possible news stories (those shaded grey are covered!):

WGA strike in the US and the power of unions/ distribution of content
Gore and the Nobel Peace Prize
Gore and venture capital in Silicon Valley
the Nobel Prize for Economics going to mechanism design theory
Coffee house discrimination findings
UK house prices going down
Northern Rock and what's going to happen now
Gisele and the sliding US dollar (and cable reaching record levels!!)
Something on the subprime issue... although really, the above three are all part of this
Oil and commodity prices going crazy
Chinese inflation
What's going on in Pakistan (but please put an economics spin to it?)
Rising rates of alcohol-related deaths and the possibility of higher taxes
the Spice Girls reunion and how that will singlehandedly lead to peace on earth, just in time for the holiday season! (yeah...please, no)

Please just post your blurbs on here, so we can take stuff off this list as they come in.

How I Made My Millions

2007-11-10T11:49:00.000-08:00

On 10th October, the English rock band Radiohead released their album ‘In Rainbows’. What was special about this was not the fact that it wasn’t a physical album, or that it scores a whopping 89 on Metacritic. No, the reason why ‘In Rainbows’ would be remembered in years to come is because of its peculiar delivery method: it was made available online at the album’s official website inrainbows.com, and downloaders are prompted to name their own price.

WWHD?
Let’s pause for a minute and ask ourselves that all time important question which may make or break (or neither?) Radiohead – what would homo economicus do? Putting the endless jokes about his names and caricatures (and doubtless, criticism) of our friend aside for the time being, we assume that he is a rational being, and wished to maximise his utility subject to the amount of resources he has. Let us now assume that HE can spend his money on two goods – Radiohead’s ‘In Rainbow’ and a composite (and one would assume, very heavy) basket of all other goods. One less dollar spent on Radiohead would mean one more dollar’s worth of all other goods; as more is better, and HE can pay nothing for the music, as a rational being, he would pay nothing.

No surprises
So did the ‘In Rainbows’ downloaders act like HE did, ie, did they all pay nothing? The answer, it should come as no surprise, is a no. A report released on 8 November by comScore, a company which measures the digital world, finds that worldwide, 38% chose to pay for the download. The percentages were higher in the UK and US, at 48% and 40% respectively.

Interesting too were the results of the amount spent on the downloads. For people who chose to pay, the average they spent per download was £2.93. In the US the figure was £3.94, and in the UK, £2.47, much lower than what one would be expected to pay for a CD at any high street store. We see HE at work here, even if not to our extreme conclusion of paying nothing – given the chance, people would still more likely pay less than they would otherwise have done.

However, comScore’s study is based on data obtained from the company’s database of “several hundred” who have provided the information voluntarily. Moreover, it only covered a short period, 10-29 October, so the results should be taken as a preliminary indication of downloaders’ behaviour only.

Hail to the Thief
Then does this mean that all 38% who chose to pay for the download are completely bananas?

The economist Dani Rodrik conducted a similar experiment on his blog by letting his readers bid for his new book, with the difference that all the money would go to charity. The results were very similar to the Radiohead figures – many opted to pay nothing, amounts paid averaged $21, and a few people paid ridiculously high amounts ($100-$145). What was interesting is that many of those who chose to pay felt a rational justification was necessary—many claimed they paid so much only because they wanted to contribute to charity.

Charity too, is what drives most people who give to buskers. Do you give because that 70 year old guy standing on the corner of the street just gave a haunting rendition of ‘Mary had a little lamb’ on his recorder, or do you give because… well, he’s a 70 year old guy standing on the corner of the street with a recorder, and you feel he could probably do with a little charity?

The same goes for tipping. There is no ‘rational’ (in the economic sense) reason for giving the hotel bellboy a fiver for moving your luggage, or for tipping the waitress more because she drew a smiley face on the check.

Not that this author is implying that Radiohead are buskers, or that the 38% are merely tipping the band for their jolly good effort, or because they were charitable. What motivated these people though, is perhaps similar to what motivates us daily to throw spare change to buskers or tip our waiters. Why we do it is still less than clear, as the economist Greg Mankiw confesses on his blog “Economists do not have a good theory of tipping.”

Million Dollar Question
Are we on the verge of a distribution revolution? Sadly, not really. Albums to download have long been in existence. It’s not a case of a ’legalization’ of free downloads either – it has never been illegal; iTunes has long offered free download samples, and Spiralfrog (US and Canada only, for now) provides ad-supported free music from major music publishing companies like Sony and Universal.

And what at first seems like a fun exercise of first degree price discrimination – getting people to pay exactly what they value the product at—turns out to be no more than a veiled attempt at product differentiation. Available to order, only online, alongside the ‘In Rainbows’ album download is the £40 discbox set consisting of two CDs, two vinyl records and other memorabilia. Less price sensitive customers would likely order the more expensive set, and the increased internet traffic due to the whole pay-as-much-as-you-want hullabaloo undoubtedly helped in driving some less price sensitive customers to the site. In fact, comScore’s research finds that for every one dollar generated from album downloads, sales of the discbox made two dollars. Offering cheaper (or even free) products to attract customers who would potentially buy more expensive but related products is not new either – both Rodrik and Mankiw have started blogging (the free product) because they have new books coming out (the more expensive but related product).

Even though the results of the Radiohead experiment are less than compelling, it seems to be a step in the right direction – no more dodgy torrents, legal DRM-free music, artists manage to make good money out of it… and if it means it gets more people to think about the economics behind what they do, all the better.

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Picture a screenshot of their website, so not sure about the copyright.

Link to the comScore report : it would be nice if we can get some of their results in graphical form.

david romer's rules

2007-11-10T04:21:00.001-08:00

Don't clutter up your life with other activities;
just write.
Don't carry out a thorough and comprehensive search of the literature;
just write.
Don't attempt to make sure that every page you write shows the full extent of your professional skills;
just write.
Don't write a well-organized, well-integrated, unified dissertation;
just write.
Don't think profound thoughts that shake the intellectual foundations of the discipline;
just write.
If you don't have a paper started by the spring of your third year,
be alarmed.
If you don't have a paper largely drafted by the fall of your fourth year,
panic.
Have three new ideas a week while you are getting started.
Don't try to game the profession,
work on what interests you.
Good papers in economics have three characteristics:
- A viewpoint.
- A lever.
- A result.

2007-11-08T08:26:00.000-08:00

page up... can you guys edit the links at the site? you can go to "template" and click on links to edit... or if you guys are real whizzes you could spruce up the page, though it's more an informal place to collect work if you want to use it.

just a place to jot down random links/ideas between meetings, and provide an easily searchable place to edit and compile the media that goes into an article.

i hope you will find this useful. if anyone needs to be added, drop me a mail at j.s.oeni@lse.ac.uk

It is tough to make predictions, especially about the future - Yogi Berra

2007-11-08T08:19:00.000-08:00

Book Reviewed: The Black Swan, Nicholas Nassim Taleb, Allen Lane, 2007

What happens out there in the real world? Many times I’ve peered through the iron bars of the small windows at the LSE while sitting through my class in real analysis. In the real world, some of my contemporaries could have discovered “the next Facebook” , or become the best thing to happen to an investment bank since sliced bread. Personally, I would love to sell a million copies of my as-yet unwritten future book, but I may well be serving banana caramel lattés in Starbucks ruminating about how it all went pear-shaped for me since my heady undergraduate days. It all seems a little bit unfair, and you start wondering what you could have done better or differently.

Isn’t it comforting then, that someone comes along and tells you that you shouldn’t be too hard on yourself, and that chance has a big part to play in dealing the winners and losers. It’s certainly tempting.

To Nicholas Taleb, much of the world we live in today resembles “Extremistan”. It’s a world in which events of large import and magnitude occur with small, but non-negligible probabilties. It’s a world in which payoffs are highly non-linear and “lumpy”, where a chance alignment of factors makes an author extremely rich but 999 (or more) others very poor. It is a world in which wars happen and we are confronted by our own mortality. These large events are the “Black Swans” which lend their name to the title of the book.

The author’s fixation is with uncertainty, more specifically, those black swans not unlike what former US Secretary of Defence Donald Rumsfeld once controversially dubbed “unknown unknowns”. This curiosity about rare events and how we react to uncertain events is informed by experiences in Taleb’s own life. Having observed his native Lebanon degenerate into civil war, and having contracted, and recovered, from throat cancer, he is constantly amazed how often people underestimate risk. This was especially marked in his career as a quantitative options trader, where he saw many other traders take comfort in their Gaussian models. People feed of success and the continual feeling of victory as they make profits daily in the stock market, but this is akin to picking up dimes in front of steamrollers. Taleb’s hedge fund, Empirica, adopts a different strategy of being ultraconservative (80% in T-bills) and hyperaggressive (the rest in out-of the-money options). It’s difficult to walk around most of the days of the year slowly bleeding money and making losses, yet on the days where something unexpected occurs, be it the Russian debt default, 9/11 or the recent sub-prime crisis, he makes a killing. It takes some intellectual discipline to go against our instincts and mental biases. Paradoxically, it is courageous to be prudent.

In exploring “Black Swans”, he takes us through a wide range of knowledge, drawing from his polymathic knowledge of fields such as philosophy, economics and biology. While the concepts presented are abstract and theoretical, his informal style and street sense make this read an engaging one peppered with interesting anecdotes and stories. Taleb’s book, to be fair, is not a vast collection of his original ideas. The main mantra of the book, is “don’t be too confident in what you know.” This is certainly nothing new, after all, Socrates said it all those years ago : “One thing only I know, and that is that I know nothing.” The title of the reference, is in itself an allusion to the belief that all swans were white, until the discovery of black swans in Australia demonstrated the weakness of induction as a basis of knowledge. It’s strength lies in creating an engaging synthesis of the literature to back up his theory. It introduces you to advances in mathematical finance suggested by the father of fractal geometry, Benoit Mandelbrot, and the theory of science advanced by Karl Popper. It is also a good introduction to those Nobel Prize winning psychologists, Kahnemann and Tversky, who have conducted numerous experiments investigating our heuristics and biases involved in judgement under uncertainty.

“The Black Swan” builds on his previous effort, “Fooled by Randomness”. That book contained several anecdotes of his life as a trader observing how people dealt and made decisions regarding uncertainty. Significantly, it also contained a section on how to deal with the uncertainties in life, with stoicism and good grace. This book builds on the last effort by presenting a more coherent theory with good doses of erudition.

Nassim’s style will polarize readers. He tries to write accessibly, out of memory, and has a conversational prose which is engaging yet at times loose. Less patient readers will not suffer his many digressions. He must have enjoyed writing it, however, for a book preaching epistemic humility, it does make some strong and sweeping statements. While I do agree with much of what he says about too much respect being given to those who have won a “Nobel”, some of the asides smack of having a huge axe to grind.

Yet behind the brash exterior of the book one finds heartwarming tales and consolations. That the world is random gives texture to life, and one value Taleb has as a skeptic is introspection. Things are not always going to go our way no matter how much we try, and it is the way we reflect upon, and subsequently deal with the environment around us which will preserve our dignity and give our successes and failures their proper perspective.

You shouldn’t take my word for it. After all, book reviewers are fallible. However, if you do happen to pop by the local bookstore, do take a look at it, for there are serious lessons to be learnt for everyone. For academics and practioners in finance, perhaps we should be less secure in the technical sophistication of our models and develop methods which may be less elegant, but provide a better fit for reality. For the lay person, it will provide a good dose of perspective on how to prepare ourselves for the black swans which will change our life, for better or worse.

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* Cover Art is free of copyright issues... obtained from Wikipedia... 500kb. If higher resolution is needed, justification can be made to Penguin Allen Lane

Could do: List of related books

- Mandelbrot (Randomness in Finance)
- Kahnemann and Tversky (Heuristics and Biases)
- Taleb (Fooled by Randomness)
- Popper (Conjectures and Refutations, The Open Society and its Enemies)