Development Bank Research Bulletin

Does the new labor law really harm French youth? Who actually take to Paris streets? The truth is...

French are  taking to streets protesting. Why? They say they are protesting against a newly passed law that gives employers the right to fire workers under the age of 26 during their first two years on the job. They are outraged as it sounds that it gives the right to employers to fire people at their will. For them, it is like “What? You passed a law giving capitalists the right to kill people.....”

What does the law really do?

If I am an employer, and I am (under the old law) not given the right to fire a worker once I hire him; What will I do when making hiring decisions?  First, I am very reluctant to hire any one, as I fear that I may be burdened by him in case the demand for my products turns out lower than expected. Second, I will prefer hire an elder and more experienced worker, as I can know his quality from his previous career. As a result, under previous French labor law that making firing very difficult, unemployment is high and in particular for young people without any working experiences.

The new law is addressing exactly this problem. They give the right to employers to fire young workers under the age of 26 during their first two years on the job. Now I am more comfortable in hiring new and young workers. First, I can hire him when sales are rising and fire him when demands are low. (Note that previous I won’t hire this person in the first place); Second, I am willing to try out a young worker, because compared to an elder worker, it is easier for me to fire him if he turns out to be of low quality.  Thus the law will give many people the change of a first job. This is why the law is known as First Job Contract (The Contrat Premiere Embauche, or CPE)

Many workers are outraged by the word “fire”. But think about it: you can only be fired if you are hired in the first place. If you are unemployed, a law that protects you from being fired is meaningless.  Let me ask you: would it be a great thing if we pass a law permitting people to get anything from grocery stores for free? Isn’t it great? But in that case grocery shops will be empty and shopkeepers will move away and you would starve and cry outside the shops, and the law is meaningless for you. I don’t think I need to elaborate on another example such as passing a law exempting everyone from paying back credit card debts. Does it mean that then you will get unlimited credits from banks?

Why do they take to streets and who are they?!

Now you understand that the law actually helps unemployed young people? But why do they take to streets? French are smart people and they should have already figured out what I say. Yes, they do! And that’s exactly why they don’t take to streets. Ironically, It is another group of people that are protesting, those who are over 26, educated , or unionized. Hey, the “victims” are staying home, why are you instead in such a  hurry?!

As rightly pointed out by a BusinessWeek article,

“The students involved in the most recent demonstrations against the CPE are the ones least likely to be affected by it. That's because university students in France are often nearly 26 by the time they complete their studies. Relatively few would thus fall under the law's purview. Similarly, many of the trade unionists and civil servants protesting the CPE are also unlikely to ever be affected by it because they already have extremely strong job protection. Indeed, the French youth who might benefit the most from the CPE, the immigrant and first-generation youth that burned the suburbs of Paris last year, are rarely seen or heard from in the fevered demonstrations about CPE. "To a certain extent," notes Six, "It's the wrong kids marching in the street."

Now their motive is clear:  it is not about protecting the relatively unskilled young people, it is about protecting their own turf. Under the new law, unskilled young people will be given more chances by employers in trying their first jobs, threatening the job positions of elite college students and trade unionists. When the old law made firing workers very difficult, employers usually prefer experienced workers (who are already unionized) or college graduaes who demonstate their quality by being admitted into colleges and having managed through graduation. Under the new law, everyone is equal, and employers can check out who are of higher quality. Elite college students and unionists do not like this. It's that simple.

It is perfectly understandable that people protest against legislative changes that negatively affect their own interest. But by cheating? By claiming that you are protesting on behalf of those who you actually want to get rid of? Give me a break.

Easterly vs. Sachs

Bill Easterly, former World Bank official and currently professor of economics at NYU, has just published "The White Man’s Burden:  why the West’s efforts to aid the rest have done so much ill and so little good”.  The only point of the book is that aid (2.5 trillion US dollars in the last four decades) has been, and will be, useless to reduce poverty and bring development to poor nations.  It runs squarely against Jeffrey Sachs and his book “The End of Poverty”, which argues otherwise.

To reduce poverty for the millions of human beings that live with less than 1 dollar a day is a Herculean task.  Clearly, one would not expect a single person –or organization—to have all the answers, nor a single approach to be valid.  Debate is necessary, as it would enrich the prescriptions and understanding of the greatest challenge for this century.  However, Easterly misses an extraordinary opportunity to bring fresh ideas and serious debate, by making his attacks against Sachs seem childish and personal.

Easterly in his presentation of the book is juvenile and tries to be funny by pushing the Bono-Sachs relationship too much.  Is the call for doubling aid to poor nations invalid just because Bono and Angelina Jolie endorse it?  Or is there more scientific evidence?  When confronted with this question, Easterly responds that those countries that have received more aid are the ones that have grown less.  Well, maybe that’s why they received so much aid in the first place!  He also argues that all those nations that became failed states (Somalia, Haiti, Liberia, Zimbabwe, etc.) were under IMF surveillance before failing.  Is this concluding evidence that IMF causes a collapse of the government and society?  Well, no again, as if the autopsy performed to dead patients in a hospital shows that they were receiving medicine before they died!

Finally Easterly seems to conclude that imposing free markets and democracy is enough to stop the plight of the poor.  At a different level of development that might be the case, but Sach’s focus is on those cases where the people are dying at an incredible rate (30,000 children every day from diarrhea), not even eating or being strong enough to bring anything to market.

This could have been a good book and a good debate.  Unfortunately the pages radiate two feelings: that Easterly greatly resents the World Bank for sacking him (after all, he spent 16 years doing what he criticizes now), and that he resents Sachs for his popularity.  Opposite to what the Economist said about “The End of Poverty”, in this case man and book are unimpressive.

Unlimited labor supply in China? Not anymore! Wages are hiking!

According to Business Week report “How Rising Wages Are Changing The Game In China”, a labor shortage in China is having  pay soaring!

“Labor shortages are forcing the company to boost wages. Last year salaries surged 40%, to an average of $160 a month, and Yongjin still can't find enough workers ....... Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers......Reports of labor shortages first cropped up in late 2004, but companies thought the phenomenon was temporary. Now a surge in both turnover and wage costs is convincing multinationals and their suppliers that the China game is changing permanently.”

The good news  (for China) is that what China is selling is not only cheap labors, but the whole package (first-world infrastructure, business-friendly and efficient bureaucracy, skilled labors....), and thus there are no signs multinationals are moving their factories to even lower cost countries in Indonesia or Vietnam.

The bad news (again for China) is that research shows that only about one-fifth of cost hikes are passed through to American consumers because Chinese manufacturers have little bargaining and pricing power against Wal-Marts, etc. Higher labor costs are thus only eating into Chinese’s profit margin. At some point, they will have to realize that they cannot put up with this anymore, and have to develop their own global brands, move to higher end markets, instead of manufacturing undifferentiated commodity-type  products and making merely fifty cents for every pair of Nike trainers and even less for plastics Christmas trees.

The bad news for Americans is that we are going to see our grocery bills rising!

Globalization and taste convergence: The cases of wine and beer

We’ve heard too much discontents of globalization. Globalization however is unstoppably changing every aspects of our life. Take alcohol consumption as an example.  Joshua Aizenman and Eileen L. Brooks at the University of California (“wine country” campus?) examine historic data in 38 countries around the world and discover that there is clear convergence in the consumption of wine relative to beer between 1963 and 2000 . Relative consumption of wine can be explained well in 1963 by grape production and latitude, but these variables are much less significant in 2000. Now you don’t need to live in wine country to be able to enjoy great wines!

Tip for our readers: In another paper "Products and Prejudice: Measuring Country-of-Origin Bias in U.S. Wine Imports" , Professor Brooks discovers a secret that a “Product of Italy” label can raise the price of a bottle of wine by more than 50% without raising the quality, which means that:  if you see two bottles of wine with same price, one is “Product of Italy” and the other from Argentina, don’t buy the Italian one! Curious why folks beleive that Italian wine should sell at higher prices? because they are better economists?

Globalization and taste convergence: The cases of wine and beer
Abstract: This paper investigates changes in cultural consumption patterns for a low concentration industry: wine and beer. Using data on 38 countries from 1963-2000, there is clear convergence in the consumption of wine relative to beer between 1963 and 2000. Convergence occurs even more quickly within groups of countries that have a higher degree of integration. A key prediction of international trade is confirmed in the data: greater trade integration weakens the association between production and consumption patterns – although the relative consumption of wine can be explained well in 1963 by grape production and latitude, these variables are much less significant in 2000. Despite these “scientific” explanations for the consumption of wine, there is also a cultural angle to wine consumption. While the relative wine consumption of France and Germany is converging, several Latin American countries fail to converge. The patterns of convergence are consistent with dynamics of adjustment in an overlapping generation habit formation model.

Is Stiglitz more moral than others? Are government interventions really better?

Joseph Stiglitz argues in his book "Globalization and its discontents" that governments under some circumstances (i.e. in the presence of market failure) can improve economic outcome by well-chosen interventions. But how can you be so sure that governments will select “well-chosen” interventions, and who are going to be the judges on what are “well-chosen” and what are not. Theoretically Stiglitz is absolutely right (in that there are market failures), but in practices no one can agree on what are “well-chosen” unless there is an omnipotent angle who can plan our welfare benevelently (but we know that all government officials are human beings!).

In a book review of Stiglitz’s “Globalization and its discontents”, Harvard professor Benjamin M. Friedman very insightfully point out that the main flaws of Stiglitz’s accusation (of pro-market polices)  lie in his selective memory and his ignoring of counterfactuals. Basically, Stiglitz keeps on mentioning several successful cases of economic miracles where government interventions may play a helpful role, while remains outright silent on vast majority of other cases where government interventions created disasters. No one say that market economy is perfect. But as Churchill puts it, democracy is certainly not the best system, but it is at least not the worse. The same logic applies to market economy: when evaluating the outcome of a decision, you ought to assess it in relation to the plausible counterfactual alternatives, i.e. will things get worse or better under an alternative route. Otherwise you may reach a conclusion that all doctors are bad because their patients are all sick. I am sure the patients will not be sick unless they see doctors; they will simply die.

Let me cite some words from Professor Friedman’s book review article, which I like very much:

“A more fundamental problem, as Stiglitz readily acknowledges, is that we cannot reliably know whether the consequences of the IMF's policies were worse than whatever the alternative would have been. Many longtime observers of the developing world will notice that Stiglitz rarely mentions economic policy mistakes that poor countries make on their own initiative. Nor does he pay much attention to the large-scale corruption that is endemic in many developing economies—except in the case of corruption in Russia, where he argues that the privatization program pushed by the IMF opened the way for corruption on a historically unprecedented scale. He also never points out that the typical developing country spends far more on its military forces (to fight whom?) than it receives in foreign aid; yet it would seem necessary to take account of such wasteful expenditures, along with graft in all its forms, if one is to give a clear picture of why the non-developing economies are not succeeding.”

Stiglitz in his book also accuses that IMF officials are insensitive to poor people. He observes that IMF officials tend to meet only with finance ministers and central bank governors, as well as with bankers and investment bankers; they never meet with poor peasants or unemployed workers.

To answer him, let me quote Dr. Gregory House’s famous answer in the TV Series House M.D. , when asked why he never tries to meet and talk with patients (he only make diagnoses based on medical test results. )

He calmly addresses the question: Do you want a doctor who will hold your hands when you are dying, or a doctor who walk away from you when you are recovering?

To solve real problems, good intentions are not sufficient. In many cases, disaster are created by people with good intentions, as well as by hypocritical people who assume they command moral heights. We need someone who exhibit actions in helping poor people, instead of someone who repeats to you day by day how he cares about you and how others do not care about you.

Please also check out my previous commentary on Stiglitz's book review of Friedman's "Moral Consequences of of Economic Growth".

The economic costs of Democrat “dictatorship” in the South before the passage of 1965 Voting Rights Act: Hard data

When talking about one-party "democracy", what usually come to our mind are Singapore, Malaysia, Japan, etc. But United States had such experience too, before the passage of 1965 Voting Rights Act (which eliminated poll taxes, literacy tests, etc). Prior to the act, it was impossible for Democrats to lose any elections in American South.

Recently, economic data reveal that Americans living in the south suffered a lot from such “dictatorship”.  Several economics professors, Timothy Besley (LSE), Torsten Persson  (Stockholm) and Daniel Sturm (Munich) examined the history and found that:

By their  bottom-line estimate, the increase in political competition triggered by the Voting Rights Act raised long-run per capita income in the average affected state by about 20 percent, and the quality of Governors went up significantly.

Competition is always good!

Political Competition and Economic Performance: Theory and Evidence from the United States
Abstract: We formulate a model to explain why the lack of political competition may stifle economic performance and use the United States as a testing ground for the model’s predictions, exploiting the 1965 Voting Rights Act which helped break the near monopoly on political power of the Democrats in southern states. We find statistically robust evidence that changes in political competition have quantitatively important effects on state income growth, state policies, and quality of Governors. By our bottom-line estimate, the increase in political competition triggered by the Voting Rights Act raised long-run per capita income in the average affected state by about 20 percent.

Iraq: war vs. containment

Three Chicago economists (Davis, Murphy, and Topel) have produced a highly controversial paper, as mentioned by R-Squared in a previoius commentary "Chicago economists produce a paper on how war in Iraq helps save Iraqi lives". 

hey evaluate –from the standpoint of 2003—the expected costs of going to war in Iraq versus the costs of continuing the containment policy.  All in all, “going to war was the best decision”.

Policy decisions of such magnitude are usually made under considerable uncertainty, a tight timing, and substantial stress.  Economics can improve the decision making process: by seriously and consistently evaluating all alternatives under the table.  Maybe the best contribution of their paper is that it clearly establishes that the alternative of going to war was not doing nothing.  In fact, the alternative was continued containment or other options.  These had costs, and serious decision-making should consider them as well.

How do the authors arrive to these findings?  As for the benefits and costs of war, they evaluate:

· X number of Iraqi deaths now, versus Y later
· Upfront costs of war, versus prolonged costs of containment
· A big shock to Iraqis today versus a long period of continued economic misfortune
· The humanitarian costs of continued repression under Sadam

Do they do a good job of evaluating the alternatives?  Judge for yourself.

Chicago economists produce a paper on how war in Iraq helps save Iraqi lives

Steven J. Davis, Kevin M. Murphy, and Robert H. Topel, three famous economics professors in the University of Chicago, publish a working paper on how war in Iraq may help save Iraqi lives. It is part of their ongoing academic project studying how to deal with “tyrants, rogue states and terrorists who threaten not only their own people but also others.”

Their analysis indicates that war and forcible regime change will yield large improvements in the economic well-being of most Iraqis relative to their prospects under the containment policy, and that the Iraqi death toll would likely be greater under containment.

“This conclusion follows from some basic observations.
First, the Iraqi economy was in terrible condition before the war, and it would have remained in a sorry state under the policy of containment.
Second, the regime of Saddam Hussein was an economic failure of tremendous proportions. The available evidence suggests that real income per capita fell by roughly 75 percent as a consequence of Saddam’s misrule. In addition, much of Iraq’s greatly diminished output was diverted to an oversized military, an apparatus of terror and repression and the relentless glorification of Saddam.
Third, the removal of sanctions, the expansion of petroleum exports, large-scale reconstruction aid, and the reintegration of Iraq’s economy into the world economy provide a strong basis for economic gains – even in a society with serious institutional weaknesses. If, over the course of a generation, Iraqis recover even half of the economic losses they suffered under Saddam Hussein, then they will be significantly better off in material terms as a consequence of forcible regime change.”

They emphasize that:

“Had containment remained in effect, the historical record suggests that premature Iraqi deaths would have continued indefinitely at the rate of 10,000 to 30,000 per year.”

The working paper can be located at:
War in Iraq versus Containment (longer version)
War in Iraq versus Containment (Shorter version)

Note: Professor Joseph Stiglitz disagrees with them and argues that the costs of war in Iraq could well exceed two trillion US Dollars, if U.S. troops are maintained in Iraq through 2015. See: "The Economic Costs of the Iraq War: An Appraisal Three Years after the Beginning of the Conflict"

Deng’s image may replace Mao’s in China’s banknotes

Well, time to move forward and leave the past behind.

Deng may be the new currency in China: Panel proposes dropping Mao's portrait from some banknotes
BEIJING, China (Reuters) -- Move over Mao. China may remove his image from the next range of banknotes to make room for other heroes. Delegates to an advisory body to China's parliament have proposed that Deng Xiaoping, architect of the nation's economic reforms, and Sun Yat-sen, father of the revolution that toppled the last emperor in 1911, should grace the new bills, state media reported on Monday.

A one-Yuan Chinese banknote with Mao's image:

A fake five-hundred-Yuan Chinese banknote with Deng's image:

Socialism or capitalism? New turning point in China?

New York Times reports that a sharp debate has erupted in China over ideologies, between leftist old guards and reformists.

A Sharp Debate Erupts in China Over Ideologies
BEIJING, March 11 — For the first time in perhaps a decade, the National People's Congress, the Communist Party-run legislature now convened in its annual two-week session, is consumed with an ideological debate over socialism and capitalism that many assumed had been buried by China's long streak of fast economic growth.

NYTimes uses the word “erupt”, but this new development in China has been going on for almost a year. The leftist old guards are using China’s rising income gap and increasing social unrest to raise doubts about economic reforms. The reformists however argue that these problems are not caused by reforms, but the results of too few reforms. They ask for more economic freedom for the private sector and “better provision of public goods” (which is equal to cleaner government and more accountable officials), which they believe is a better solution than “going back to central-planning”.

About 25 and 15 years ago respectively, there were similar debates on directions of reforms, and in both cases the reformists managed to stave off the old guards, with the help of both public sentiments and strongman politics. In both cases, some sorts of public debates were involved. Single party rule notwithstanding, debates are always needed, because “Our government only moves forward when it feels there is a strong consensus," (according to Mao Shoulong, a public- policy specialist at Tsinghua University in Beijing). In the last two times, Chinese reached consensus that “inequality of prosperity  is better than equality of poverty”. And the reason for the newly ignited debate is that "Right now, the consensus is eroding and there is a debate over ideology, which we haven't seen for some time. (again according to Mao Shoulong)" 

What are different this time is that the era of strong-man politics has ended, and there is more tolerance for different opinions, both outside and within the government, so long as what you advocate is consistent with the basic principle that things have to done within the system under the leadership of current government. What is most important is that, people and media are now allowed to talk about it openly by framing it as a debate of “efficiency vs. fairness”, a topic that seems less politics-sensitive.

No matter which side wins this time, the question of “efficiency vs. fairness” will always be raised and debated every several years when the general pubic is not happy about some of the outcomes of the reforms , even in economically and democratically well-developed countries. Thus, the most important thing we should think about is how to institutionalize the consensus-reaching and decision-making rule and process, in order to efficiently and transparently resolve the differences between the reformists and the leftists.

A positive development in recent years is that the private sector is starting to organize some forms of lobby groups attempting to influence public opinions and policy agendas, while the leftists start to rely on Internet to gain supports (although in many cases they go too far in manipulating irrational populist sentiments). Professors also are joining the debate very actively.

Differences are being resolved in a more civilized way now.