Development Bank Research Bulletin

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"

What will Scandinavians do for a cheap drink? I told you no regulations are unbeatable!

Last time in the Bulletin I mentioned Chinese's genius solution to one-child policy:  using drugs to increase chance of bearing twin babies. Recently I heard another interesting story that I would like to share with you. It happened in 1999, an old story, but it is amazing that our trustworthy law-abiding Nordic folks are as innovative and imaginative when it comes to dodging taxes.

Before June 1999, Scandinavians were allowed to carry duty-free alcohols and cigarettes when “crossing” borders. Taxes and duties are extremely high for these products, and thus it created huge incentive for Scandinavians to ride on the cheap ferry cruises  between Stockholm and Helsinki and purchase duty-free products on board. As a matter of fact, most passengers return on the same ships: the only reason for their long-haul two-way trip is to purchase duty-free stuff.

However, after June 1999, after they joined European Union, travel between Sweden and Finland is no longer regarded as border-crossing, and the duty-free benefits are gone. Ferry traffic plummeted. What were they going to do? Please guess.

Scandinavians came up with a genius solution. There is an Aland Island between Sweden and Finland, which were given tax-exempt status when Finland joined the European Union. The ferry cruise companies detour every one of their ships to Aland Island in their previously non-stop Stockholm-Helsinki route!

Why do the world’s richest always have better-looking children? The example of Mittal family

A widely-received explanation is that: the statistical odd of a rich man marrying an equally rich woman is slim; and for a woman from a poorer background to marry into a rich family, she is at least over-average in terms of looks. Thus their children will inevitably become better looking than their farther, thanks to their mother’s genes. Let me illustrate this with the example of Mittal family. The family head Lakshmi Mittal is the world’s third richest man, and the richest Indian.
Here is his picture:
   
And here are pictures of his son Aditya Mittal and daughter Vanisha Mittal. Apparently, they must have a very beautiful mother.

Below are pictures of Aditya Mittal with his wife and Vanisha Mittal with her husband. I am very sure Lakshimi’s future grandchildren will be even more good looking.

And don’t forget that Lakshmi Mittal’s initial wealth was inherited from his farther Mohan Lal Mittal, also a rich man; We can comfortably guess that Mohan Mittal could be much less good-looking than his son Lakshmi (although I am not able to find Mohan's photo through google).

Bottomline: It takes generation to improve the gene of a family!

No regulations are unbeatable, not even China’s one-child policy

Economists have long told us that people respond to incentives! Given proper incentives, you will be amazed by the kind of genius solutions people can come up with. No regulations are unbeatable, because the people and businesses you are regulating are always more-motivated than employees in regulatory agencies, and they will always be able to find some ways to avoid the regulations. Sometimes, it takes the form of bribery, in the others genius and absolutely legal solutions.

China: Drug bid to beat child ban
SHANGHAI, China (AP) -- More Chinese women are exploiting easy access to fertility treatments to skirt China's one-child limit, leading to a boom in numbers of multiple births, an official newspaper reported Monday. The main pediatric hospital in the eastern city of Nanjing recorded 90 births of twins or triplets last year, up from an average of 20 in past years, the China Daily said.

Genius solution notwithstanding, Isn’t it better for people to spend their time and talent in more productive activities (well, certainly having more children is also a “productive” activities) than in avoiding regulations.

Wherever there is a regulation, there is always some way to circumvent it, and this is how tax codes in the United States accumulate to thousands of pages of long, and Americans wastes tens of billon of dollars just to avoid them. By some estimation, it is actually better off for the society if American tax officers are corrupted because you may spend less money bribing them than hiring tax advisors, and in both cases American government won't recieve your money anyway.

The usefulness of corruptible elections in China

In China, frequent elections are hold at village level. They are believed to be rigged, and at least heavily influenced by the government. Two economics professors Loren Brandt and Matthew Turner at the University of Toronto however find that these elections, although corruptible, are still very effective in reducing rent-seeking activities.

In the fall of 2000, they conducted surveys in 60 villages in 30 counties in 6 provinces in China. Based on the detailed data they collect from villagers, they conclude that  even in most corruptible environment with the most rigged elections,  there is strong negative relationship between rent-seeking activities an re-election success, which suggests that villagers are able to punish those who don’t act in the interests of their constituents.

Most importantly, they find that restrictions on proxy voting improve the ability of rural Chinese electorates to oversee their leaders. This is consistent with reports that proxy voting is widely abused to rig elections. They also find that public nominating procedure also leads to better corporate governance, but mainly through the channel of recruiting the most capable leaders instead of providing incentive for incumbents to work harder in order to stave off more competent challengers.

Surprisingly, they find it does not help much to provide a public forum for candidates to debate and make speeches, or to fix the locations of ballot boxes. The explanations (I beleive) could be that (1) within a village everyone knows each other and public election campaign becomes less relevant; (2) it is easier and safer  to rig the elections through proxy voting procedure than to physically manipulate the ballot boxes.

The Usefulness of Corruptible Elections
ABSTRACT: Using a sample of rural Chinese villages which have recently been the subject of democratic reforms we look for relationships between marginal changes in the democratic process and marginal changes in economic outcomes. We find that even very poorly conducted elections can have large incentive effects. That is, even corruptible elections provide leaders with strong incentives to act in the interests of their constituents. Our findings also allow us to rank the importance of four possible election reforms which have attracted the attention of international observers and academic researchers.

Why do Chinese become rich?

According to BusinessWeek:

"Now China is embracing millionaires. More than 300,000 Chinese have a net worth over $1 million, excluding property, according to Merrill Lynch & Co. And mainland millionaires control some $530 billion in assets, Boston Consulting Group estimates."

Why do they become rich so quick once unbounded from the bygone central planning regime?

Read this article in the Economist about one of China's richest men, and you will find out the answer. Culture is your destiny!

China's uneasy billionaire
....He confesses that he cannot play golf, and cut short a holiday in Canada recently because he was bored. He works 13-hour days because “I wouldn't know what else to do,” and to relax just watches television.
Such self-denial and workaholism partly reflect the fact that he built his wealth slowly—like Li Ka-shing, who is known for his cheap shoes and plastic watches. As a boy, Mr Wong recycled bottles after school to supplement the income of his farming family.

The Internal Job Market of the IMF's Economist Program

IMF looks quite open-minded in innovating its human resource system, and it doesn't lack first-class in-house microeconomists to design and implment a state-of-the-art optimization program.

The Internal Job Market of the IMF's Economist Program
Greg Barron and Felix Várdy
Abstract: This paper shows how the internal job market for participants in the IMF's Economist Program (EPs) could be redesigned to eliminate most of the shortcomings of the current system. The new design is based on Gale and Shapley's (1962) deferred acceptance algorithm and generates an efficient and stable outcome. An Excel-based computer program, EP-Match, implements the algorithm and applies it to the internal job market for EPs. The program can be downloaded from http://www.people.hbs.edu/gbarron/EP-Match_for_Excel.htm.

Dresdner Kleinwort Wasserstein's view on happiness

Dresdner Kleinwort Wasserstein published a Global Equity Strategy paper proposing the following microeconomic policies that may make the world a better place. Recently, Six women in the U.S. filed a case against DKW for 1.4 billion USD. I speculate that those creative lawyers may use this Strategy Paper against DKW, arguing that the Paper is implicitly targeting at male employees only, asssuming that only men "equate happiness with money"

• Don’t equate happiness with money. People adapt to income shifts relatively quickly, the long lasting benefits are essentially zero.
• Exercise regularly. Taking regular exercise generates further energy, and stimulates the mind and the body.
• Have sex (preferably with someone you love). Sex is consistently rated as amongst the highest generators of happiness. So what are you waiting for?
• Devote time and effort to close relationships. Close relationships require work and effort, but pay vast rewards in terms of happiness.
• Pause for reflection, meditate on the good things in life. Simple reflection on the good aspects of life helps prevent hedonic adaptation. • Seek work that engages your skills, look to enjoy your job. It makes sense to do something you enjoy. This in turn is likely to allow you to flourish at your job, creating a pleasant feedback loop.
• Give your body the sleep it needs.
• Don’t pursue happiness for its own sake, enjoy the moment. Faulty perceptions of what makes you happy, may lead to the wrong pursuits. Additionally, activities may become a means to an end, rather than something to be enjoyed, defeating the purpose in the first place.
• Take control of your life, set yourself achievable goals.
• Remember to follow all the rules.