Development Bank Research Bulletin

The happy variety of Capitalism

The Deutsche Bank Research has just published a report titled “The Happy Variety of Capitalism.” (download PDF file)

Capitalism has many varieties; Even within Europe, the mode of capitalism differs across countries.

According to the report, Germany, Spain, France, Belgium and Austria has the less happy variety of capitalism, while Portugal, Italy and Greece, even worse, has the UNHAPPY variety of capitalism (well, Italian may be a little bit loud, but I am sure they are very happy everyday; it is just a different way of having fun)

Some funny facts:

Napping is an activity just a little bit happier than cooking. So when your feel drowsy, do some cooking instead; at least you will have something to eat as a result, and yes, lunch and dinner are happiness-improving activities.

Morning commute makes people very unhappy, even much unhappy than working; and evening commute is just a little bit happier than working.

Australia has the very happy variety of capitalism. Thousands of German still migrate to Australia every year.

Return to Capital is not low in China

There are two famous myths about China.

The first one is that the savings rate is high because ordinary Chinese worry about the lack of safety net. This myth has been busted because evidence has shown that Chinese household savings rate is actually lower than the Indian one. The overall saving rate is high because businesses heavily save their self-generated profit for re-investment. For private business, the reason is the lack of access to other forms of external finance. For state-owned enterprises, managers always prefer re-investing the profits to paying dividends to the government. Therefore, the right solution is: (a) to reform the financial sector and improve the access to finance for private sector businesses; (b) force state-owned enterprises to pay dividends! Building a safety certainly will help, but only at the margin.

The second famous myth is that return to capital is very low in China, and that the current high investment rate is a sign of money being wasted. A NBER working paper "The return to capital in China", written by three prominent Chinese economists, however shows that the return to capital in China has been remained flat at roughly 20% since 1998, which is not low compared to the rest of the world. Olivier Blanchard also provides a nice discussion (PDF file) of of the results.

As a matter of fact, the myth about the high investment rate per se has also been overturned. Goldman Sachs economist Hong Liang show that the investment rate is between 36%-40%, and the incremental capital-output ratio (ICOR) is about 3.1 in recent years. These are two very reasonable numbers for a rapidly growing economy. In at least the export-oriented sectors in China, improvement in productivity still remains that greatest driver of growth.

I have long been the subscriber of the view that China is still a very poor country; the gap to the productivity frontier is still so wide that the main decision to make is still how much to invest rather than where to invest. Chinese are starting to worry about investment efficiency, but at this moment it is still of second order importance. The nation’s production is still so inefficient that there are numerous easy opportunities waiting for entrepreneurs to capitalize on. In order for this to happen, the government should remove the planning-economy-era regulations that create the inefficiency, and protect the property rights of entrepreneurs. These reforms will create prosperity much more than will any scientific breakthrough.

Newspapers like to repeat the same punch line “the money is wasted in building roads that lead to nowhere” when describing the government investment in infrastructure in China. But people familiar with the geography of China would find it difficult to find any such “roads that lead to nowhere.” Even if an idiot randomly draw a line on the map in the eastern seaboard and build a toll road; in five years the road capacity will be full. That’s exactly why there are so many corruptions in such infrastructure projects: high returns are guaranteed so long as you can get the license to build the toll roads that almost always lead to somewhere. The new Chinese saying: money follows the roads.

The Return to Capital in China (download pdf file)
Chong-En Bai, Chang-Tai Hsieh, and Yingyi Qian
NBER Working Paper No. 12755
December 2006
ABSTRACT: China's investment rate is one of the highest in the world, which naturally leads one to suspect that the return to capital in China must be quite low. Using the data from China's national accounts, we estimate the rate of return to capital in China. We find that the aggregate rate of return to capital averaged 25% during 1978-1993, fell during 1993-1998, and has become flat at roughly 20% since 1998. This evidence suggests that the  aggregate return to capital in China does not appear to be significantly lower than the return to capital in the rest of the world. We also find that the standard deviation of the rate of return to capital across Chinese provinces has fallen since 1978.

Inefficient banking sector in China is actually an optimal way of taxation

It is well perceived that China's state-monopoly banking sector (with the help of capital control) is a powerful tool in channelling private sector wealth into loss-making state-owned enterprises and numerous white-elephants public infrastructure projects.

A paper written by several Chinese economists however argues that such a mechanism is actually optimal. The idea is as follows.

In developing countries, it is usually very difficult for the government to collect taxes (everyone hides their income), and official taxation is usually very inefficient (it creates a lot of distortion in the economy and a disproportionate burden on hard-working and smart people). Formal taxation thus becomes very costly and creates a lot of dead-weight costs.

But the government needs money and by whatever means the government will try to extract revenue from the private sector. Conditional on the "grabbing hand" nature of the government, an “implicit taxation” by channeling private sector wealth into low-return public projects, through the monopoly banking sector, becomes an optimal and efficient solution:  it is efficient because (1) the cost of “tax “collection is low (you can avoid it only if you completely go underground) (2) the “taxation” is relatively fair and less distorting (it is proportionate to your existing wealth).

Certainly it is even better if the government does not try to extort the private sector in the first place. But if the government does do it, it is better that it does it through the banking sector. At least you don’t need to pay the robber to rob you, and at least hard-working people don’t have higher chance of being robbed.

When a gun is pointed at you, it makes no sense to fight. Take my money but don't hurt me.

Financial Repression and Optimal Taxation (pdf file)

Chong-en Bai, David D. Li, Yingyi Qian, Yijiang Wang

Financial repression entails an implicit taxation on savings. When effective income-tax rates are very uneven, as common in developing countries, raising some government revenue through mild financial repression can be more efficient than collecting income tax only.

Outsourcing is good for American job growth! Two data-intensive evidence

As more manufacturing and service jobs are outsourced to developing countries, complaints arise domestically that it is responsible for the “jobless growth” in the U.S.

Two research papers recently produced however provide evidence that outsourcing is actually good for American job growth. 

The first study, authored by Mihir Desai, Fritz Foley, and James Hines Jr., investigates migration of manufacturing production to developing countries. They show  that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation.

You may ask: “but the growth is not proportional – growth in the U.S. is smaller!”.  But this already is a serious blow to those who believe that the impact should have been negative!  Furthermore, 10% growth in compensation for foreign workers is much smaller than 4% growth in compensation for U.S. workers (who’s pay level starts at least 10 times that of their foreign counterparts.

The second study, authored by Mary Amiti and Shang-Jin Wei, looks into service outsourcing, which is feared by white-collar workers.

They show that,  in each of the past 10 years, the value of US insourcing (i.e. the value of business services expoerted by a country like the U.S., e.g., high-priced business consultants and lawyers in richer countries offering their services to the rest of the world) has been greater than that of US outsourcing! This is true even though the US has been running a trade deficit and an overall current account deficit.

Examining 100 sectors of the U.S. economy, they also show that there  is no evidence that the most outsourcing-intensive sectors have had systematically slower (or negative) job growth in the last decade. In fact, the millwork and plywood sector, the metal coating, engraving, and allied services sector, and the insurance industry have had some of the fastest increases in service outsourcing but at the same time also some of the fastest
rates of job creation.

Study 1: Foreign Direct Investment and Domestic Economic Activity   (pdf file)
Abstract:   How does rising foreign investment influence domestic economic activity? Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic operations, but this pattern alone is inconclusive, as foreign and domestic business activities are jointly determined. This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic distributions of foreign investment, to predict changes in foreign investment by a large panel of American firms. Estimates produced using this instrument for changes in foreign activity indicate that 10% greater foreign capital investment is associated with 2.2% greater domestic investment, and that 10% greater foreign employee compensation is associated with 4.0% greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending. The data do not support the popular notion that greater foreign activity crowds out domestic activity by the same firms, instead suggesting the reverse.

Study 2: Fear of Service Outsourcing: Is It Justified?   (pdf file)
Abstract:      The recent media and political attention on service outsourcing from developed to developing countries gives the impression that outsourcing is exploding. As a result, workers in industrial countries are anxious about job losses. This paper aims to establish what are the hypes and what are the facts. The results show that although service outsourcing has been steadily increasing it is still very low, and that in the United States and many other industrial countries "insourcing" is greater than outsourcing. Using the United Kingdom as a case study, we find that job growth at a sectoral level is not negatively related to service outsourcing.
(Also check out Raghuram Rajan and Shang-Jin Wei's op-ed "The non-threat that is outsourcing (pdf file))

What’s so special about China’s exports? They are too sophisticated.

One special characteristic of Chinese exports is that they are too technologically sophisticated for a typical developing country at this stage of development. Certainly it is sometimes foreign parent companies that control the most value-adding stage of the production chain of these products, and Chinese may not contribute that much technologically, there are benefits associated with such an export pattern.

According to new study Harvard professors Ricardo Hausmann, Jason Hwang, and Dani, this export pattern is beneficial to China’s future growth, because knowledge can spillover from these sophisticated productions, while in countries specialize in commodity exporting, they may not have a chance to learn at all.

What You Export Matters (pdf file)
When local cost discovery generates knowledge spillovers, specialization patterns become partly indeterminate and the mix of goods that a country produces may have important implications for economic growth. We demonstrate this proposition formally and adduce some empirical support for it. We construct an index of the "income level of a country's exports," document its properties, and show that it predicts subsequent economic growth.

Also see their case study of China:
What’s so special about China’s exports? (pdf file)

Finance professors rush to China

2006 seems to be a Year of China for economics and finance professors. Although many professors already realized the importance of China very early on, it is in this year that people start to think that the next research frontier has to be China, and you better start working on some China-related topics before others publish them. Professors are no different from multinational corporations that rush to China to seek for profits.

A keystone is that the Financial Intermediation Research Society, a prestigious association of U.S. and European finance professors, headed by Wharton Professor Franklin Allen, decided to host its biennial conference in Shanghai, China.

Here I recommend two papers by Franklin Allen that I think can help you better understand the past, present and future of China’s financial system. They are not very technical papers, so you shouldn’t need any academic background to understand them.

China's Financial System: Past, Present, and Future  (pdf file) (by Franklin Allen, Jun "QJ" Qian, and Meijun Qian)

Abstract:  We examine and compare the role of China's financial system in supporting the growth of firms and the economy with that in other countries, and explore directions of future development. First, we find that the current financial system is dominated by a large but inefficient banking sector, and reducing the amount of non-performing loans among the major banks to normal levels is the most important objective for reforming the financial system in the short run. Second, despite the fast growth of the stock market, its role of resource allocation in the economy has been both limited and ineffective. Further development of China's financial markets is the most important long-term objective. Third, we find that the most successful part of the financial system, in terms of supporting the growth of the overall economy, is a non-standard sector that consists of alternative financing channels, governance mechanisms, coalitions, and institutions. This sector should co-exist with banking and markets in the future in order to continue to support the growth of the Hybrid Sector (non-state, non-listed firms). Finally, in order to sustain stable economic growth, China should aim to prevent and halt damaging financial crises, including a banking sector crisis, a real estate or stock market crash, and a "twin crisis" in the currency market and banking sector.

Law, Finance, and Economic Growth in China  (pdf file)

Abstract:      China is an important counterexample to the findings in the law, institutions, finance, and growth literature: neither its legal nor financial system is well developed by existing standards, yet it has one of the fastest growing economies. We examine 3 sectors of the economy: the State Sector (state-owned firms), the Listed Sector (publicly listed firms), and the Private Sector (all other firms with various types of private and local government ownership). The law-finance-growth nexus established by existing literature applies to the State and Listed Sectors: with poor legal protections of minority and outside investors, external markets are weak, and the growth of these firms is slow or negative. However, with arguably poorer applicable legal and financial mechanisms, the Private Sector grows much faster than the State and Listed Sectors, and provides most of the economy’s growth. This suggests that there exist effective alternative financing channels and governance mechanisms, such as those based on reputation and relationships, to support this growth.

India loses one-third of income tax to the U.S., because of brain drains

India has been suffering from loss of talents because of migration of highly-educated people to the U.S.  Several economics professors have put out a hard number to quantify part of the loss.

According to a study done by  Mihir A. Desai, Devesh Kapur and John McHale, the foregone income tax revenues associated with the Indian-born residents of the U.S. comprise one-third of current Indian individual income tax receipts.

This however only counts in  the fiscal cost, which is but a trivial component of the total loss India incurs. Had there engineers stayed in India and had they been able to make the best use out of their talents in India, India would have been a much more innovative and technologicaly-advanced country by now.  Certainly here we have to assume that the institutions and business enviroment in India could allow them to make the best use of their talents, which certainly is a very strong and unrealistic assumption.

The Fiscal Impact of High Skilled Emigration: Flows of Indians to the U.S. (PDF file)
Abstract: Easing immigration restrictions for the highly skilled in developed countries portend a future of increased human capital outflows from developing countries. The myriad consequences of these developments for developing countries include the direct loss of the fiscal contributions of these highly skilled individuals. This paper analyzes the fiscal impact of this loss of talent for a developing country by examining human capital flows from India to the U.S. The escalation of the emigration of highly skilled professionals from India to the U.S is examined by surveying evidence on the changing nature of the Indian-born in the U.S. during the 1990s. The loss of talent to India during the 1990s was dramatic and highly concentrated amongst the prime-age work force, the highly educated and high earners. In order to estimate the fiscal losses associated with these emigrants, this paper first estimates what these emigrants would have earned in India, and then integrates the resulting counterfactual distributions with details of the Indian fiscal system to estimate fiscal impacts. Two distinct methods to estimate the counterfactual earnings distributions are implemented: a translation of actual U.S. incomes in purchasing power parity terms and an income simulation based on a jointly estimated model of Indian earnings and participation in the workforce. The PPP methods indicate that the foregone income tax revenues associated with the Indian-born residents of the U.S. comprise one-third of current Indian individual income tax receipts. Depending on the method for estimating expenditures saved by the absence of these emigrants, the net fiscal loss associated with the U.S. Indian-born resident population ranges from 0.24% to 0.58% of Indian GDP in 2001.

What do surveys tell us on how to win Latin America’s soul?

As the Economist magazine features in “The battle for Latin America's soul”, Latin American countries one by one is falling into hands of populists who oppose to economic reforms. It thus becomes an urgent question how market economy and economic reform can win Latin America’s soul again?

Ugo Panizza and Monica Yanez from the Inter-American Development Bank recently published a paper titled “Why are Latin Americans so unhappy about reforms?” in which they looked into the  Latinobarometro survey, which was conducted yearly in Latin American countries since 1996, for answers.

They use the opinion surveys to document discontent with the pro-market reforms. They explore  four possible sets of explanations for this discontent: (i) a general drift of the populace’s political views to the left; (ii) an increase in political activism by those who oppose reforms; (iii) a decline in the people’s trust of political actors; and (iv) the economic crisis.

What they find  is that the macroeconomic situation plays an important role in explaining the dissatisfaction with the reform process, while the other factors are not important. 

Detailed research of the survey data show that even if in 1997 100% of people belong to the center right, while in 2002 100% of them convert to extremist left, the support for reform will only go down by 9%. This means that even such an extreme assumption of drift to the left can only explain one third of the actual drop in support for reforms.

The survey results also show that increasing political activism of the leftists or decline in the trust of political actors cannot explain the drop in support for reforms

The single most important factor is the economy. Drop of GDP growth by one percentage point can reduce support for reforms by 1.1%. In the case of Argentina, growth rate dropped by 21 percentage points  between 1997 and 2002, which would predict a drop in support for privatization equivalent  to 23 percentage point.

In Latin America, countries experiencing crisis usually fall into vicious cycle.  When the economy performs badly or experiences a crisis, it becomes much easier for populists to get into power and halt economic reforms. Without reforms the country cannot gain real competiveness internationally, and the political situation becomes self-reinforcing as the economy deteriorate further (sometimes several years can be saved with high oil price, but then the pain will be felt harder when oil price drops).

Economic and employment growth is the only criteria voters use to evaluate reforms, and they usually don’t give you second chance. Reformists need to think more about the stability consequence of the reforms they propose, because “one strike, you are out”. Better do it slowly but safely.

Reference:

Why are Latin Americans unhappy about reforms?

How to subvert democracy: a user’s guide provided by former Peruvian secrete police chief Montesinos

Which of the democratic checks and balances—opposition parties, the judiciary, a free press—is the most forceful? Professors John McMillan and Pablo Zoido find the answer from an unusual place: the secret dossier of Vladimiro Montesinos.

In the 1990s, the Peruvian secret-police chief Montesinos systematically undermined all of these democratic checks and balances with  bribes. For record-keeping and to ensure future cooperation of the bribe-takers, he video-taped and kept detailed records of almost all of his dealings with more than 1,600 bribe-takers.

After the fall of President Fujimori and the arrest of Montesinos himself, these video-tapes and documents come under public scrutiny 

Professors McMillan and Zoido obtained some copies from journalist friends in Perue, and creatively quantify the values of these democratic checks and balances using the bribe prices.

They find that, Montesinos paid a television-channel owner about 100 times what he paid a judge or a politician. One single television channel’s bribe was five times larger than
the total of the opposition politicians’ bribes.  The cost of bribing the politicians to get a majority in Congress added up to less than US$300,000 per month. The total cost of bribing judges was US$250,000 per month. The total cost of bribing the television channels was more than US $ 3 million per month.

By revealed preference, the strongest check on the government’s power was the news media.

Montesinos is smart but everyone makes mistakes at some point. He bribed all television channels but one: Channel N. He thought Channel N was an expensive channel with limited viewership and was not worth bribing.

Just several months after Fujimori won 2000 election, one of Montesinos’s videotapes (which will come to be called the vladivideos) was broadcast on Channel N.

The government fell. Fujimori fled to Japan. Montesinos was arrested in Venezuela and sent back to Peru for trials.

Reference:
How to Subvert Democracy: Montesinos in Peru (PDF file)

A video showing Montesinos counting out US$1.5 million for Jose Francisco Crousillat, the VP of America Television, Channel 4

Bribe receipts. Left: a supreme court justice acknowledges being paid US$10,000. Right: a member of the National Electoral Board acknowledges being paid US$15,000

Genetic determinant of national economic prosperity: empirical evidence

Is economic prosperity of a nation partly determined by genes of its population?

Is this a question that is too politically incorrect? Well, scientific inquiry has no boundary. Economics professors Enrico Spolaore and Romain Wacziarg study genetic and economic data for a wide cross section of countries around the world, and discover that genetic distance, a measure associated with the amount of time elapsed since two populations' last common ancestors, bears a statistically and economically significant correlation with pairwise income differences.

They also find that genetic distance between two populations also determines differences in human capital and social institutions, which suggests that differences in human characteristics transmitted across generations - including culturally transmitted characteristics - can affect income differences by creating barriers to the diffusion of innovations.

The Diffusion of Development  (PDF file)
Abstract: This paper studies the barriers to the diffusion of development across countries over the very long-run. We find that genetic distance, a measure associated with the amount of time elapsed since two populations' last common ancestors, bears a statistically and economically significant correlation with pairwise income differences, even when controlling for various measures of geographical isolation, and other cultural, climatic and historical difference measures. These results hold not only for contemporary income differences, but also for income differences measured since 1500 and for income differences within Europe. We uncover similar patterns of coefficients for the proximate determinants of income differences, particularly for differences in human capital and institutions. The paper discusses the economic mechanisms that are consistent with these facts. We present a framework in which differences in human characteristics transmitted across generations - including culturally transmitted characteristics - can affect income differences by creating barriers to the diffusion of innovations, even when they have no direct effect on productivity. The empirical evidence over time and space is consistent with this "barriers" interpretation.

How large is the economic benefit of merging Pakistan with India, Mexico with US....

Professor Enrico Spolaore and Romain Wacziarg published an interesting study on the economic effect of merging two countries on economic growth.  They conduct simulations for large number of potential mergers of geographic neighboring countries.  Some results are quite  interesting.

In general, small countries benefit from merging with larger countries, and poorer countries benefit from merging with their richer neighbors.

According to the simulation, were Bangladesh to merge with India, she would grow faster by 1-2 % per year, and in the long run, she may double her income. The merger of Argentina (or Bolivia, or Peru, or Paraguay, or Uruguay) with Brazil, or Mexico (or Canada) with the U.S. would create economic benefits of similar magnitude for these smaller neighbors as they get full access to larger markets.

Pakistan’s economic growth rate will increase by 1.2-1.5 % per year, and long-run income level will be double, if she were to merge with India. India on the other hand will not gain much. Indian growth rate would be raised by 0.1%, and in the long run become 10% richer. (This may explains why Indians in general are less interested in signing free trade arrangement with smaller countries such as Thailand.)

Certainly the merger of these two countries with different culture and religion will create social problems that certainly will outweigh the economic benefit. But on the other hand this also sadly highlights the huge economic costs of two countries hating each other for half a century.

Borders and Growth  (PDF file)
Abstract: This paper presents a framework to understand and measure the effects of political borders on economic growth and per capita income levels. We present a model that provides a theoretical foundation to estimate empirically the effects of political borders on growth. In our model, political integration between two countries results in a positive market size effect and a negative effect through reduced openness vis-à-vis the rest of the world. We estimate the growth effects that would result from the hypothetical removal of national borders between pairs of adjacent countries. We also identify zones of mutually beneficial political integration, and discuss the applicability of our framework to European political integration.

Economic growth is ultimately good for the environment! Cross-country evidence

Princeton economics professors Gene Grossman and Alan Krueger discover that economic growth is ultimately good for environment. Once the per capita income of your country reaches $8,000, enviromental quality will start to improve because now you can better afford those enviromental luxuries!

Their  study covers four types of indicators: urban air pollution, the state of the oxygen regime in river basins, fecal contamination of river basins, and contamination of river basins by heavy metals.

They find that economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement.

The turning points for the different pollutants vary, but in most cases they come before a country reaches a per capita income of $8,000.

Reference:
Economic-growth and the environment (published in the Quarterly Journal of Economics)
China’s Pearl River smells, but mayor vows to swim (earlier in this Bulletin)
Saving the environment from the environmentalists (also in this Bulletin)

A flexible labor law will help French workers: quantitative evidence

As covered previously in the Bulletin in "Does the new labor law really harm French youth?" , some French youth are unhappy about the new labor law and claim that increasing the flexibility of hiring and firing workers will make more people jobless. Serious quantitative study however contradicts what they naively believe. 

A study done by Robert MacCulloch and Rafael Di Tella  and published in the European Economic Review shows that that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries.

The Consequences of Labor Market Flexibility: Panel Evidence Based on Survey Data   (PDF file)
Abstract: We introduce a new data set on hiring and firing restrictions for 21 OECD countries for the period 1984-90. The data are based on surveys of business people in the countries covered, so the indices we use are subjective in nature. Controlling for country and time fixed effects, and using dynamic panel data techniques, we find evidence that increasing the flexibility of the labor market increases both the employment rate and the rate of participation in the labor force. A conservative estimate suggests that if France were to make its labor markets as flexible as those in the US, its employment rate would increase 1.6 percentage points, or 14% of the employment gap between the two countries. The estimated effects are larger in the female than in the male labor market, although both groups seem to have similar long run coefficients. There is also some evidence that more flexibility leads to lower unemployment rates and to lower rates of long-term unemployment. We also find evidence consistent with the hypothesis that inflexible labor markets produce "jobless recoveries" and introduce more unemployment persistence

How could one of the most successful bank regulatory systems fail so easily? The case of 2001 Argentina

Found an old working paper written by Charles Calomiris (Professor in Columbia University) and Andrew Powell (then Chief Economsit of Central Bank of Argentina) back in 2000, in which they portrayed Argentine banking regulatory system as one of the two or three most successful in emerging economies and a role model for every one to follow.

Browsing through the paper, I am deeply impressed by the quality of Argentine system at that time. The Central bank even had an online database of debtors (I don’t know whether they still supply this service) where general public can enter a company name and know the name of the bank extending the credit, the amount of the credit, the quality category of the loan, and the details of any guarantees extended. Bank depositors, shareholders, and researchers thus were able to monitor banks’ credit exposure at real time. Absolute disclosure as a tool for market discipline! This is what any economists would theoretically advise and seldom expect to be realized in the real world. The Central Bank of Argentina however managed to make it happen. If I read this paper in 2000, I would have invested all my money in these wonderful Argentine banks.

Within a year, however, as everyone has known, Argentine banking system failed. Not the bankers' fault; not the bank regulator's fault. The government screwed up in macro policies and brought down the banking system -- something that Calomiris and Powell thought wouldn't happen, not again!

Several lessons for observers:
(1) It is always more risky to praise a country than criticize it. When you criticize a country, you can never be falsified because you can always argue that the arrival of crisis is just a matter of time. When you praise a county, however, the natural law of mean-reversion will always prove you wrong. Things can only get worse.
(2) As a banker, however smart, honest and hard-working you are, the state is always trying to screw you up by some irresponsible fiscal and exchange rate polices. Don’t under-estimate the evilness of government. In the wake of every crisis, Argentines think: “the government won’t do it (freeze the deposit)  again.”. The government won’t change.
(3) When everything looks so wonderful, something must be wrong! If you cannot find it after doing extensive research, something very big must be wrong.

Can Emerging Market Bank Regulators Establish Credible Discipline? The Case of Argentina, 1992-1999 By Charles W. Calomiris, Andrew Powell
Abstract: In the early 1990s, after decades of high inflation and financial repression, Argentina embarked on a course of macroeconomic and bank regulatory reform. Bank regulatory policy promoted privatization, financial liberalization, and free entry, limited safety net support, and established a novel mix of regulatory and market discipline to ensure stable growth of the banking system during the liberalization process. Argentina suffered some fallout from the Mexican tequila crisis of 1995, but its response to that crisis (allowing weak banks to close) and the redoubling of regulatory efforts to promote market discipline after the crisis made Argentina’s banking system quite resilient during the Asian, Russian, and Brazilian crises. Argentina’s bank regulatory system now is widely regarded as one of the two or three most successful among emerging market economies. This paper traces the evolution of the regulatory policy changes of the 1990s and shows that the reliance on market discipline has played an important role in prudential regulation by encouraging proper risk management by banks. There is substantial heterogeneity among banks in the interest rates they pay for debt and the rate of growth of their deposits, and that heterogeneity is traceable to fundamental attributes of banks that affect the riskiness of deposits (i.e. asset risk and leverage). Moreover, market perceptions of default risk are mean-reverting, indicating that market discipline encourages banks to respond to increases in default risk by limiting asset risk or lowering leverage.

Hepatitis B: the reason why China has higher male-to-female ratio

In many Asian countries the ratio of male to female population is higher than in the West -- as high as 1.07 in China and India, and even higher in Pakistan. Most people blame the parental preference for boys in these countries and one-child policy in China for creating the gender imbalance. Chicago University professor Emily Oster has new explanation, that the sex ratio imbalance is caused by hepatitis B virus that are prevalent in these countries.

Existing medical literature indicates that carriers of the hepatitis B virus have offspring sex ratios as high as 1.55 boys for each girl. Hepatitis B is common in many Asian countries, especially China, where some 10 to 15% of the population is infected.

Professor Oster  finds that hepatitis B can explain about 45% of the “missing women”: around 75% in China, between 20% and 50% in Bangladesh, Egypt, and West Asia, and under 20% in India, Pakistan and Nepal.

For governments that are worrying about potential social unrest and threats created by tens of millions of bachelors, the solution is to vaccinate their people agaisnt Hepatitis B virus, which will naturally bring more girls into the "marriage market".

Hepatitis B and the Case of the Missing Women  (PDF file)
Published in the Journal of Political Economy
Abstract:  In many Asian countries the ratio of male to female population is higher than in the West -- as high as 1.07 in China and India, and even higher in Pakistan. A number of authors (most notably Sen, 1992) have suggested that this imbalance reflects excess female mortality and, as a result, have argued that as many as 100 million women are ``missing. This paper proposes an explanation for much of the observed over-representation of males: the hepatitis B virus. Evidence drawn from the existing medical literature as well as new studies of recent vaccination efforts indicate that carriers of the hepatitis B virus have offspring sex ratios as high as 1.55 boys for each girl. This is strongly supported by cross-country evidence on hepatitis B prevalence and sex ratios at birth. Hepatitis B is common in many Asian countries, especially China, where some 10 to 15% of the population is infected. Using data on viral prevalence by country as well as estimates of the effect of hepatitis on sex ratio drawn from a wide range of sources, I find that hepatitis B can explain about 45% of the missing women: around 75% in China, between 20% and 50% in Bangladesh, Egypt, and West Asia, and under 20% in India, Pakistan and Nepal.

Presidential democracies were 4.9 times more likely to default than parliamentary democracies

What types of countries are more likely to default on their sovereign debts? It is a multi-billion dollar question.  Professor Emanuel Kohlscheen has a new finding: Presidential democracies were 4.9 times more likely to default on external debts between 1976 and 2000 than parliamentary democracies.  The reason is, as he argues, that  parliamentary democracies are less likely to default on their liabilities as the confidence requirement creates a credible link between economic policies and the political survival of the executive.

Why are there serial defaulters? Quasi-experimental evidence from Constitutions (PDF file)
Abstract: Presidential democracies were 4.9 times more likely to default on external debts between 1976 and 2000 than parliamentary democracies. This paper argues that the explanation to the pattern of serial defaults among a number of sovereign borrowers lies in their constitutions (on serial defaults see Reinhart, Rogo. and Savastano (2003) and Reinhart and Rogo. (2004)). Ceteris paribus, parliamentary democracies are less likely to default on their liabilities as the confidence requirement creates a credible link between economic policies and the political survival of the executive. This link tends to strengthen the repayment commitment when politicians are opportunistic. I show that this effect is large and statistically significant in the contemporary world even when comparison is restricted to countries that are twins in terms of colonial origin, geography and economic variables. Moreover, the result persists if OECD democracies are excluded from the sample. Since the form of government of a country is typically chosen at the time of independence and highly persistent over time, constitutions can explain why debt policies in developing countries are related to individual histories.

The lasting legacy of colonial land tenure system in India

Why are some parts of India more productive than the rest of the country? Professors Abhijit Banerjee and Lakshmi Iyer have a new explanation.

They trace it back to colonial times. Back then, areas where the land revenue collection was taken over by the British between 1820 and 1856 are much more likely to have a non-landlord system, for reasons that have nothing to do with factors that directly influence agriculture investment and yields. They show that areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period than areas in which these rights were given to the cultivators.

Map (click to enlarge)

History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India (PDF file)
Abstract: We analyze the colonial land revenue institutions set up by the British in India, and show that differences in historical property rights institutions lead to sustained differences in economic outcomes. Areas in which proprietary rights in land were historically given to landlords have significantly lower agricultural investments and productivity in the post-independence period than areas in which these rights were given to the cultivators. These areas also have significantly lower investments in health and education. These differences are not driven by omitted variables or endogeneity problems; they probably arise because differences in historical institutions lead to very different policy choices.

Red states, blue states, and the welfare state: geography rules!

The divide of “Red states, blue states” exists not only in the UnitedStates, but almost everywhere in the democratic free world. It is also true in every country that liberal parties always concentrate their support in urban areas, even in countries where urban areas are in much richer than rural areas. Another stylized fact we always observe is that in countries that adopt plurality electoral rule as opposed to proportionate representation electoral rule, socialist candidates are less likely to take power.

Why is it so? Professor Jonathan Rodden (MIT) provides an explanation based on economic geography. By economic of scale and agglomeration economy, it is natural that manufacturing bases always cluster together and form what will be later called urban metropolitan areas. Workers, who reside in these urban areas are more likely to be mobilized around a redistribution agenda. This is why liberal parties have to rely on urban voters.

Business interests in some countries, when they extended franchise to workers more than 100 years ago, however build a safeguard in the electoral system to prevent socialists and communists from taking power. This safeguard is the so-called “plurality electoral rule” and “small single-member electoral district”.

Because workers are concentrated in urban areas, pro-redistribution candidates usually have a lot of surplus vote in urban area. Single-member districts however make it difficult for workers (who are usually concentrated in small number of urban districts) to translate votes into seats, because a victory with 30% margin or 5% margin is not different when it comes to allocation of seats.

Another geography law that goes against leftist parties is that, in single-member district system, for a party to win, the pivotal voter is the median voter in the median district (which happens to be suburban area), who are usually politically to the right of the national median voter. If the leftist party wants to win over this voter by moving their platform to the right, another more fundamentalist leftist party will enter from the far left to steal away lefties votes; If it doesn’t move to the right, however, it will never win a majority. This creates a dilemma and a mission impossible for leftist parties.

In many continental European countries, proportionate representation (PR) electoral rule combined with multi-member large electoral districts, however, help workers to pull together their votes. This is why in these countries, socialist pro-redistribution candidates are more likely to be elected. Professor Rodden predict that, in two otherwise identical countries, the one that uses single-member district plurality electoral rule will less likely to develop a redistribution welfare state.

As a matter of fact, in the UnitedStates, we can also observe the effects of the two different electoral systems. Electoral districts for the House of Senate are state-wide and combine rural, urban and suburban areas. Workers in urban states thus can effectively translate their numbers into seats, and pro-redistribution Senate candidates are more likely to be elected. This is why in U.S. Senate, although rural states by design are overrepresented, the political orientation is still biased to the left compared to the House of Congress where congressmen are elected from small single-member districts.

Reference:

Jonathan Rodden: Read states, blue states, and the welfare states (PDF file)

Edward Glaeser: Myths and Realities of American Political Geography (PDF file)

Why Has There Been Less Financial Integration In Asia Than In Europe? Geography matters

Why Has There Been Less Financial Integration In Asia Than In Europe? Professor Barry Eichengreen has a geographic explanation.  His study shows that: distance between countries, whether they share a common language, and whether they share a land border, explain a good deal of the difference in financial integration between the two regions.

He also points out that recent surge of intra-regional trade in Asia is a good sign for further financial integration, because evidence that finance follows trade suggests that Asia is less financially integrated than Europe because it has done less to promote the growth of intra-regional trade.

You may also want to check out our previous commentary in the Bulletin: "A single Asian common currency?"

Why Has There Been Less Financial Integration In Asia Than In Europe? (PDF file)
Abstract: This paper asks why there is less financial integration in Asia than in Europe, taking as a case study the cross-border lending and investment activities of national banking systems. Our results suggest that different levels of economic development in Asia and Europe, along with other differences in regional circumstance that are largely predetermined from the point of view of policy (distance between countries, whether they share a common language, and whether they share a land border), explain a good deal of the difference in financial integration between the two regions. The rest of the gap is explained by policy variables. Evidence that finance follows trade suggests that Asia is less financially integrated than Europe because it has done less to promote the growth of intra-regional trade. Our results also suggest that controls on capital account transactions can have a lingering effect on the volume of cross-border claims and that their shadow is longest where those controls were maintained for the greatest number of years. The underdevelopment of financial markets and institutions in some potential lending countries also appears to be an impediment to financial integration in the region.

New evidence: Politically Connected Firms are prevalent around the world

Professor Mara Faccio’s new paper (publisehd in the American Economic Review)  shows that politically connected firms are prevalent around the world (not only in Thailand, Indonesia), and the announcement of a new political connection (e.g. businessmen entering politics) results in a significant increase in value.

Politically connected firms (PDF file)
Abstract: Examination of firms in 47 countries shows a widespread overlap of controlling shareholders and top officers who are connected with national parliaments or governments, particularly in countries with higher levels of corruption, with barriers to foreign investment, and with more transparent systems. Connections are diminished when regulations set more limits on official behavior. Additionally, I show that the announcement of a new political connection results in a significant increase in value.

The political economy of hatred: What cause racism, anti-Semitism, and anti-Americanism

Harvard professor Edward Glaeser's  new study “the political economy of hatred” demonstrate to us how politicians – “the entrepreneurs of hate” –   spread hate-creating stories to discredit opponents whose policies benefit an out-group.

If you repeat a lie often enough, it becomes the truth. People who hear these stories think they might be true and will investigate those stories only if there are private benefits from learning the truth.

Anti-Semitism also occurs in places where there are no Jews and among people who have never met Jews. 34 percent of French but only 27 percent of the Vietnamese have an unfavorable opinion of the United Sates, although the latter had a bitter war with the U.S. only several decades ago.  According to the 2002 Gallup Poll of the Islamic World, 89% of Kuwaitis and 96% of Pakistanis do not believe that Arabs destroyed the World Trade Center.

The central prediction of Professor Glaeser’s model is that hatred will be spread against poor minorities by anti-redistribution candidates and spread against rich minorities by pro-redistribution candidates. It is always cheaper and more convenient to refute your opponents by spreading hatred. Hilter, in an attempt to discredit socialist, preferred to cite the high percentage of intellectuals of Jewish origin among social publicists as proof of its subversion.  Galeser attributes the tragedy of Jewish to the natural law that hatred is particularly likely to spread against groups that are politically relevant and socially isolated.

In his study, he uses a theoretically model and three examples to illusrate the idea. The tree examples are (1) racism in the United States (2) Anti-Semitism in 19th century Europe (3) Islamic hatred of Americans.  Very nice analysis.

The Political Economy of Hatred (PDF file)
Abstract: This paper develops a model of the interaction between the supply of hate-creating stories from politicians and the willingness of voters to listen to hatred. Hatred is fostered with stories of an out-group's crimes, but the impact of these stories comes from repetition not truth. Hate-creating stories are supplied by politicians when such actions help to discredit opponents whose policies benefit an out-group. Egalitarians foment hatred against rich minorities; opponents of redistribution build hatred against poor minorities. Hatred relies on people accepting, rather than investigating, hate-creating stories. Hatred declines when there is private incentive to learn the truth. Increased economic interactions with a minority group may provide that incentive. This framework is used to illuminate the evolution of anti-Black hatred in the United States South, episodes of anti-Semitism in Europe, and the recent surge of anti-Americanism in the Arab world.

Why are levels of welfare benefits lower in some states? Research shows that racism may be one of the reasons

Why are levels of welfare benefits higher in some American states and lower in others? Some may speculate that maybe residents in the former states are altruists and more moral than others.

Academic research however shows that the differences are the results of both financial self-interest and interpersonal preferences (well, we usually call it racism).

A study done by Harvard professor Erzo Luttmer and published in the Quarterly Journal of Economics shows that:
(1) Individuals decrease their support for welfare if there are more welfare recipients in their area
(2) Individuals increase their support for welfare spending if a larger fraction of welfare recipients in their area belongs to their racial group (Question: which  word with r as the initial do we usually use to describe such type of preference, thought, and behavior?)

He derives the results from nation-wide surveys as well as voting behaviors in California’s Proposition 165 in 1992 primaries, in which governor Pete Wilson proposed both cuts in welfare generosity and changes in the state budget process.

Professor Luttmer concludes that the results also help to explain why welfare benefit levels are relatively low in racially heterogeneous states. Actually, the results also help to explain why European countries redistribute more than we do, as they are usually racially more homogenous.

Group Loyalty and the Taste for Redistribution (PDF file)
Abstract: Interpersonal preferences - preferences that depend on the characteristics of others - are typically hard to infer from observable individual behavior. As an alternative approach, this paper uses survey data to investigate interpersonal preferences. The General Social Survey contains self-reported preferences for welfare spending, which I validate with voting behavior on cuts in welfare benefits. Using this preference measure, I show that preferences for income redistribution are not only determined by financial self-interest but also by interpersonal preferences. These interpersonal preferences are characterized by a negative exposure effect - individuals decrease their support for welfare if there are more welfare recipients in their area - and racial group loyalty - individuals increase their support for welfare spending if a larger fraction of welfare recipients in their area belongs to their racial group. My results hold when areas are defined as states, metropolitan areas or census tracts and are robust to various specification checks. Direct evidence that individuals' preferences for redistribution are partly determined by the effects of redistribution on the utility or lifestyle of others in their community is valuable for the development of more accurate theoretical models and for the design of redistributive policies. The results also help to explain why welfare benefit levels are relatively low in racially heterogeneous states.

Culture is your destiny. We are successful because we have confidence in self-determinism!

How does culture affect economic prosperity? Which culture traits are conducive to development? Professor Guido Tabellini studies the history of Europe and finds that trust and respect for others, and confidence in individual self-determinism are important virtues that successful countries and regions share in common.

We are more familiar with “trust and respect for others”, but what is “confidence in individual self-determinism”?

“Confidence in individual self-determinism” is the conviction that individual effort is likely to pay off. If individuals are highly motivated to succeed and view economic success as related to their deliberate choices, they are more likely to work hard, to invest for the future, to innovate and undertake new economic initiatives. Conversely, if individuals regard success as due to luck or to uncontrollable external events, they are more likely to have a passive, resigned and lazy attitude towards economic activity. It is sometimes known as "attitudes towards Inequality" (The "An economist in Paradise" blog has a nice introduction of the concept)

To measure this cultural trait Professor Tabellini construct a variable from the following question in the survey: “Some people feel they have completely free choice and control over their lives, while other people feel that what we do has no real effect on what happens to them. Please use this scale (from 1 to 10) where 1 means “none at all” and 10 means “a great deal” to indicate how much freedom of choice and control in life you have over the way your life turns out”. The variable control is defined as the l average response in each sub-national region in Europe.

Based on this indicator, Professor Tabellini finds that regions characterized by “self-determinism” prosper in the long-run.

These cultural traits prevailed among early American settlers, immigrants, and citizens throughout the past centuries, and the prosperity of America is the result of them. Let’s however not be complacent, because such virtues are being eroded over time.

Nowadays, “thanks” to a certain populism movement led by among others Michael Moore, if you are rich, you are accused of being evil, exploitive, inconsiderate, cold-hearted, immoral, lucky, greedy.....  they never realize that you get rich because you use your brain and you work harder than they are. Some people are born smarter than others, but no one is born lazier than others; if you are lazy and in particular when you always think your failure is the society’s fault, that the society is unfair to you,  you will never succeed, neither will your children if they learn from you.

The populism movement never realizes that we get successfully because we work hard; even when we fail, we never blame the “evil corporations”, we simply work harder; when others become better in our jobs, we never accuse them of “stealing our jobs”, we try to learn from them; Even when we are total failure in our whole life, we never fail as parents, we give our children better education and teach them about self-determinism that everyone has the free choice to choose to work hard instead of relying on social welfare.

If you don’t study and work as hard as those teenagers in China and India, why do you think you deserve higher salaries. You say it is unfair for you to lose you job after 30 years of hard work, but why don’t you think it is unfair that for the past 30 years you are stealing from fellow workers in India in China who worked as hard as you did. Being lazy is your free choice, but you should be responsible for your own choice.

We have to stop this populism movement from poisoning our children and destroying our country!

Culture and Institutions: Economic Development in the Regions of Europe (PDF file)
Abstract: Does culture have a causal effect on economic development? The data on European regions suggest that it does. Culture is measured by indicators of individual values and beliefs, such as trust and respect for others, and confidence in individual self-determination. To isolate the exogenous variation in culture, I rely on two historical variables used as instruments: the literacy rate at the end of the XIXth century, and the political institutions in place over the past several centuries. The political and social history of Europe provides a rich source of variation in these two variables at a regional level. The exogenous component of culture due to history is strongly correlated with current regional economic development, after controlling for contemporaneous education, urbanization rates around 1850 and national effects. Moreover, the data do not reject the over-identifying assumption that the two historical variables used as instruments only influence regional development through culture. The indicators of culture used in this paper are also strongly correlated with economic development and with available measures of institutions in a cross-country setting.

When labor has a voice, everyone suffers! According to a new research

Michael Moore has long been fighting for workers’ rights to have a voice in managing corporations. “We can do it too!” he always argues.

Professors  Olubunmi Faleye, Vikas Mehrotra, and Randall Morck did a study on the consequence of labor control and paint a rather sad picture for us on what will happen.

They find that:
“Relative to other firms, labor-controlled publicly-traded firms deviate more from value maximization, invest less in long-term assets, take fewer risks, grow more slowly, create fewer new jobs, and exhibit lower labor and total factor productivity. We therefore propose that labor uses its corporate governance voice to maximize the combined value of its contractual and residual claims, and that this often pushes corporate policies away from, rather than towards, shareholder value maximization.”

When labor has a voice in corporate governance, a corporation actually creates fewer new jobs!

This is good for those already in the union shop as their jobs are secure and they don't care about other Americans. But this is absolutely bad and unfair for other hard-working Americans.

Think twice before buying into the idea that all workers are brothers for one another! For unionized workers, the size of the pie is fixed; they will be mad at you when you, a hardworking young worker more eager and better equiped for the job, wants to “steal” their lunch.

Reference:
When Labor Has a Voice in Corporate Governance, (PDF file)  forthcoming in the Journal of Financial and Quantitative Analysis, alos covered by MIT Sloan Management Review

The more billionaires the merrier? Depends on how you made the money.

“The richest man in India, Azim Premji, is worth $10 billion. The 4 richest people in India (Premji, The Ambanis, Sunil Mittal) are worth more than the top 40 richest Chinese.”  ----- China vs India: Some random numbers, Indian Economy Blog

“Those Who Dare blog” is particularly unhappy about this comparison though. See “An economic dick measuring contest”

Is “more billionaires” a good or bad thing?

It depends on how they made the money. Recently I read a study done by professors Randall Morck, David Stangeland and Bernard Yeung on the economic consequences of Forbes billionaires on their home countries.

They find that:

“Countries in which billionaire heirs' wealth is large relative to G.D.P. grow more slowly, show signs of more political rent-seeking, and spend less on innovation than do other countries at similar levels of development. In contrast, countries in which self-made entrepreneur billionaire wealth is large relative to G.D.P. grow more rapidly and show fewer signs of rent seeking.”

Well, some of the Indian rich are indeed self-made entrepreneurs, but most of them are not. But at least there are some hopes, as those emerging from IT industry are more likely to be self-made. Please check Forbes' list of the richest 40 Indians, and find out how many of them are inherited and how many are self-made.

Morck et al. further suggest the old money, the inherited billionaires,  always oppose capital market and goods market openness through their entrenched and enhanced lobbying power, because they have vested interest in preserving the value of existing capital.

This is true in India. No one believes that Indian government adopts protectionism polices for the welfare of Indians. Only those incumbent rich benefit from these polices; as consumers they buy luxury goods in London, thus they won’t be hurt as consumers but only benefit overwhelmingly as monopoly producers. Ordinary Indians suffer as a result.

Reference:
Inherited Wealth, Corporate Control and Economic Growth: The Canadian Disease (PDF file)

Why do Southern states have lower judicial efficiency? Blame the Yankees?

Many scholars believe that former colonies by Western countries have corrupted judicial system because the legal systems imposed by colonizers are not compatible with local conditions.

Professor Daniel Berkowtiz and Karen Clay show that this is true within the United States too, as our lands were acquired from many countries of very different legal systems. They argue that Southern states, which were acquired from the hands of civil law countries (France, Spain, and Mexico) after American revolution, had highly developed legal systems around the time of legal transplantation (i.e., they were forced to conform to British/American common law system when they joined the Union), and this made them vulnerable to transplantation effects, the same ways African colonies did.

Empirically, they show that the chaos created by legal transplantations can still be seen after 200 years. These Southern states so far still have lower quality state courts, less competent judges, and higher corruption. The results hold even after control for slavery history.

They argue that it is the transplantation, not the superiority or inferiority of either system,  that causes the problem. In states that were acquired from French before American revolution (Illinois, Indiana, Michigan, Ohio, Wisconsin), as they  were very lightly populated at that time of acquisition, transformation to common law system created less problems.

But isn’t it possible that civil law system is inherently inferior? That the longer a region is under administration of civil law courts the more corrupted it will become? Although most African countries have corrupted legal system, it still seems to me that those colonized by British are at least less corrupt, as shown by Professor Andrei Shleifer's famous "Law and Finance" (PDF file) paper.

Initial Conditions, Institutional Dynamics and Economic Performance: Evidence from the American States  (PDF file)
Abstract:   Using state-level data from the United States, we find that differences in colonial legal institutions have affected the current quality of state legal institutions. These differences in colonial legal institutions arose because some states were settled by Great Britain, a common law country, and other states were settled by France, Spain, and Mexico, all civil law countries. To explain these findings, we develop a transplant-civil law hypothesis that highlights the disruption associated with large-scale legal transplantation and the possible relative inefficiencies of colonial civil law. We find strong support for the transplant-civil law hypothesis. Our results are robust to the inclusion of additional variables capturing climate, geography, initial population, resource endowments, state level rules, and legal environment. Given the 150-200 year gap between the initial conditions and the measures of the current quality of legal institutions, we provide indirect evidence on the persistence of legal institutions. We then use initial legal systems as a source of exogenous variation in current institutions for providing a series of estimates of their impact on current economic performance.

United States as a costal nation: why is America inherently richer than Africa?

Why is America inherently richer than Africa? Jeffrey Sachs will say geography. Most rivers in the United States are navigable to oceans, while in Africa rarely they are. Whether you have access to oceans determines your income level, Professor Sachs argues.

In his research paper “The United States as a Costal Nation”, he finds that “US economic activity is overwhelmingly concentrated at its ocean and Great Lakes coasts”.

In another research paper "Climate, Water Navigability, and Economic Development", he discovers that “Temperate ecozones proximate to the sea account for 8 percent of the world’s inhabited land area, 23 percent of the world’s population, and 53 percent of the world’s GDP. The GDP densities in temperate ecozones proximate to the sea are on average eighteen times higher than in non-proximate non-temperate areas.”

Thanks to geography, the narrow band of costal regions of Africa are still more affluent (or more accurately, less poor) than inland. But because of the lack of rivers navigable to oceans, Africans who unfortunately were not born in costal regions may not have the luck of benefiting from oceans. In the United States and Europe, in contrast, as shown by the map, “ocean access” are almost universal, even in deep inland area.

References:

The United States as a Coastal Nation (PDF file)
Jordan Rappaport and Jeffrey D Sachs
Abstract: US economic activity is overwhelmingly concentrated at its ocean and Great Lakes coasts, reflecting a large contribution from coastal proximity to productivity and quality of life. Extensively controlling for correlated natural attributes and initial conditions decisively rejects that the coastal concentration of economic activity is spurious or just derives from historical forces long since dissipated. Measuring proximity based on coastal attributes that contribute to either productivity or quality of life, but not to both, suggests that the coastal concentration derives primarily from a productivity effect but also, increasingly, from a quality of life effect.

Climate, Water Navigability, and Economic Development (PDF file)
Andrew D. Mellinger, Jeffrey D. Sachs, and John L. Gallup
Abstract: Geographic information systems (GIS) data was used on a global scale to examine the relationship between climate (ecozones), water navigability, and economic development in terms of GDP per capita. GDP per capita and the spatial density of economic activity measured as GDP per km2 are high in temperate ecozones and in regions proximate to the sea (within 100 km of the ocean or a sea-navigable waterway). Temperate ecozones proximate to the sea account for 8 percent of the world’s inhabited land area, 23 percent of the world’s population, and 53 percent of the world’s GDP. The GDP densities in temperate ecozones proximate to the sea are on average eighteen times higher than in non-proximate non-temperate areas.

Globalization and trade does help promote democracy: historic evidence

Does globalization and international trade helps promote democracy? On the one hand, Dovish school of foreign policy believes that trade can engage countries behind iron curtains and get them exposed to new ideas and new thoughts. Also, authoritarian regimes are likely to hold out when the economy open up and private sector develops. On the other hand, the hawkish believe are very pessimistic on this, pointing to China as an counterexample, claiming that it is wish-thinking to bet on trade to change a political regime.

Historic evidence however indeed suggests that international trade helps promote democracy. Christopher M. Meissner (Cambridge) and José Ernesto López-Córdova (IADB) study history from 1870 to now, and find that late nineteenth century trade globalization may have helped generate the "first wave" of democratization.

They show that: “Between 1920 and 1938 countries more exposed to international trade were less likely to become authoritarian.”; and “post-World War II results suggest that a one standard deviation increase in trade with other countries could bring countries like Indonesia, Russia or Venezuela to be as democratic as the US, Great Britain or France.”

A caveat does exist. They also notice that “commodity exporters and petroleum producers do not seem to become more democratic by exporting more of such items”. Venezuela, Russia, Nigeria, Saudi Arab..... you can say good bye to democracy.

The Globalization of Trade and Democracy, 1870-2000  (PDF file)
Abstract:  We study whether international trade fosters democracy. The likely endogeneity between democracy and trade is addressed via the gravity model of trade, allowing us to obtain a measure of natural openness. This serves as our instrumental variable for actual trade openness a la Frankel and Romer (1999). We use this powerful instrument to obtain estimates of the causal impact of openness on democratization. A positive impact of openness on democracy is apparent from about 1895 onwards. Late nineteenth century trade globalization may have helped generate the "first wave" of democratization. Between 1920 and 1938 countries more exposed to international trade were less likely to become authoritarian. Finally, our post-World War II results suggest that a one standard deviation increase in trade with other countries could bring countries like Indonesia, Russia or Venezuela to be as democratic as the US, Great Britain or France. We also see some variation in the impact of openness by region and note that commodity exporters and petroleum producers do not seem to become more democratic by exporting more of such items.

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.

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.

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 t