Sunday, 24 November 2013

Blogging on pause

You might have noticed that blogging activity has been slow for the past two weeks. This was due to me getting married this weekend to my, by now wife Barbara. With the honeymoon ahead of us, blogging will be on pause for the upcoming two weeks. 

Monday, 11 November 2013

Video of the week: playing with stats

From TED talks comes this excellent presentation delivered by Hans Rosling, a professor of global health at Karolinska Institute (the institution that decides upon the Nobel prize in medicine). The focus of his talk is on disproving the myths about the developing world, which is, according to Rosling, actually quickly closing the gap with the rich countries and is moving forward the same direction (following the same pattern) of the Western world. They are now where the West was some 40-50 years ago. Basically he claims, and I agree, that we shouldn't generalize aid policies towards one area, since within this area there are huge within and across-country inequalities. The same policy on curing diseases cannot be applied towards the top income groups in South Africa and the low income groups in Nigeria (as he mentions in the video; or in this great slideshow: Africa is not a country!). There's many more good points being made, so I recommend the video: 

He has a few more videos on TED (this was the earliest one, from 2006), but the web page he mentions, Gapminder, is truly amusing and features a bunch of interesting statistics and graphics. 

For example, here is a lecture on the changes brought by the industrial revolution - the global development since 1800. Video is here. From an average income per person of less than $3000 and a life expectancy of around 40 years, and with all countries clustered pretty densely on the bottom left end (life expectancy on the upper axis, income p/c on the lower axis), over the course of 200 years you can witness a rapid change in development patterns of some world areas, while others - even though they were falling behind on this development scale - still saw an increase of income and health standards. The slide show is here - notice how the big leap in living standards for the poor countries starts somewhere around the 1950s, but their income growth didn't follow until the last decade or so. 

Of course, observing and playing with stats is not everything. Econometricians will often say 'correlation does not imply causality', and they're right. However interesting correlations found in a variety of useful data can give pretty good hints on what to start your research on. Sometimes you hopefully get something out of it. 

Thursday, 7 November 2013

Creative destruction reversed

Bryan Caplan found a disturbing graph from Edmund Phelps's new book "Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change":

Source: Brian Caplan, taken from Phelps: Mass Flourishing 
Caplan infers:
"At first glance, this confirms a quarter-century of steadily declining creative destruction - falling job creation and job destruction. On closer look, though, there was little trend until the small recession of the early 2000s. Since then, however, creative destruction has relentlessly fallen.

Striking fact: The rate of job destruction during the Great Recession used to be perfectly normal! We experienced it as a calamity because job creation not only kept falling, but dipped below expectations."
He's right, the trend is obvious only in the pre-crisis decade. One could easily link this pre-crisis decline in job creation to the outsourcing trend or even to the role of technological progress. I've covered this topic extensively; it implies that the necessary restructuring in the labour markets was prevented as many companies didn't see fit to lay off workers as an reaction/response to the ongoing technological shock, however, once the crisis had started the layoffs were inevitable. Their inaction prevented the process of restructuring and re-specialization into new skills. 

This implies that the rate of job destruction prior to the 2007-09 crisis should have been higher, so that the rate of job creation would have been higher as well, since they basically follow a very similar pattern. A plausible, even testable assumption. I might look into it. 

Btw, notice one more interesting fact - an economy always experiences job losses, even in very good economic times (90s, 2000s), however, as long as the rate of job creation is higher than the rate of job destruction the economy is doing well. The whole point of creative destruction is that companies should be allowed to go under, since when they do their owners develop new ideas until they find a successful one - it's a classical trial and error process (as it always is in life). The rate of companies going bankrupt and new companies emerging is quite similar to the above picture of job growth. It is only from a persistent trial and error process that new ideas and efficient patterns of production emerge. One should never attempt to interfere with this process in any way.

Monday, 4 November 2013

Gated globalization?

In one of last month issues of the Economist, they opened up quite an interesting topic on how the consequences of the financial crisis have affected globalization. As we all know an immediate reaction to the sudden credit stop in 2008 was a strong decline of international trade (see graph below). As jobs in the real economy were being lost, and as many companies went under, a paradoxical solution of many quack economists and the panicking public was a plea for protectionism of domestic jobs and industries. Even though this wasn't the main debate point at the time, there were indeed strong advocates of this necessity to protect domestic industries via higher tariffs and quotas, among other things. To save domestic industries from foreign competition in these tough times - a campaign well accepted by many interest groups seeking protection. 
Data taken from WTO
However, despite protectionism being anticipated as a likely outcome (as it happened during the Great Depression), it seems that the world has gone in a slightly different direction. What we have now as a consequence is some form of "gated globalization" - not a reverse of globalization, but a more carefully managed interventionist style. Perhaps the difference in responses to the recent Recession and the lessons learned from the 1930s prevented the forces of protectionism to reinvent themselves (and the fact that today we have the WTO which prevents hard-line protectionism), but many interventionist patterns remained. Calling for more intervention and more regulation is an expected consequence when people lose their trust and confidence in the system, despite the fact that it was the artificial demand caused by misplaced regulation and a series of other factors that led to systemic instabilities (particularly in Europe). The people have a hard time realizing the true causes and think an omnipotent government can fix the system. So far it has failed in this attempt, but it's still not giving up, particularly in the developing countries.

Probably the biggest outrage of the general population in the Western world is aimed at the bankers (widely perceived as the main culprits of the crisis). And even though the bankers did play a big role, they cannot be the only ones to blame (as mentioned earlier). Regardless of the facts, people need to find an enemy and the bankers seem like the perfect one. The consequence are stricter regulations on banking standards, and consequently a drop in capital flows (they've fallen to a third of their level in 2007), and a well anticipated drop in bank lending - which is of course constraining the recovery of the real sector. Newly imposed capital controls and bank ring-fencing are constraining investments, as confidence is still low due to high policy uncertainty. 

Source: The Economist
In addition to capital controls, much worse measures are being implemented worldwide, despite the WTO's efforts to curb them: 
"New impediments—subsidies to domestic firms, for instance, local content requirements, bogus health-and-safety requirements—have gained popularity. According to Global Trade Alert, a monitoring service, at least 400 new protectionist measures have been put in place each year since 2009, and the trend is on the increase. 
Big emerging markets like Brazil, Russia, India and China have displayed a more interventionist approach to globalisation that relies on industrial policy and government-directed lending to give domestic sellers a leg-up. Industrial policy enjoys more respectability than tariffs and quotas, but it raises costs for consumers and puts more efficient foreign firms at a disadvantage. The Peterson Institute reckons local-content requirements cost the world $93 billion in lost trade in 2010."
The typical protectionist response of those who don't understand the basic laws of international trade. Just remember the comparison of Brazil and Mexico over the free trade vs protectionism debate, and who is likely to emerge as the victor. The performance of all the gate-builders is disappointing, to say the least. Their policies are misfiring. Their growth, their productivity, as well as their currencies are declining, so now some of them are rethinking their strategies. 

International economics is really hard to understand for most of the people, as they view it from a really narrow perspective: let's protect our domestic industries and encourage them to export, and this is the best way to achieve prosperity. Like the classical mercantilist view, the idea is doomed to fail, since the protected domestic industries will always underachieve precisely because of the protection. They will never operate under the proper market conditions and will never achieve their strength through competition. In economics it's all about incentives. If you don't give the domestic industry an incentive to compete and if you over-rely them on government support and subsidies, then they will never fully flourish on the international market and are bound to fail soon enough. This is true for rich countries as well - just look at the US automotive industry. The proper response to revitalizing the domestic industries is - and always will be - more competition, not less! 

Finally, I call upon the opening paragraph of the earlier quoted article: 
"Imagine discovering a one-shot boost for the world’s economy. It would revitalise firms, increasing sales and productivity. It would ease access to credit and it would increase the range and quality of goods in the shops while keeping their prices low. What economic energy drink can possibly deliver all these benefits? 
Globalisation can."
Let's hope the West realizes this soon enough and once again leads the world economy to open up and put this crisis behind us.