How to increase savings: add a lottery!

Households with low incomes save little. In one way, this should not surprise us, as their propensity to consume is high because the marginal utility of consumption is high. If they temporarily have low income, this is not a problem at all. However, if you have persistent low income, then you absolutely need to accumulate some savings to supplement any retirement pension income. This does not seem to be happening, and a frightening share of the population is hitting retirement age with little in the bank. Even worse, the use of lotteries and other gambling operations seems to be rather popular for lower incomes. While one can rationalize playing an actuarially unfair lottery under some circumstances (see here), it is generally considered to be a poor use of scarce income. Now, could one use the temptation of lotteries to get low income households to save more?

Kadir Atalay, Fayzan Bakhtiar, Stephen Cheung and Robert Slonim show one can combine saving accounts effectively with lottery jackpots. In an experiment conducted online in the US, they had participant allocate funds under various savings schemes. While this is not quite like the real world, it still reveals some interesting findings. Introducing a jackpot lottery does indeed increase savings, and significantly so (the authors find a 12 percentage point boost). These savings come both from delayed consumption and reduced lottery participation outside of the savings account. And all these effects are stronger among those with lower incomes. Can we believe those results? After all, the jackpots in savings lotteries are supposed to be "life changing", something that such an experiment cannot simulate. But it is encouraging to still see a strong impact.

East / Southeast Asia's Demographic Bifurcation

There's are always interesting demographic discussions about the "West and the Rest," but there are also interesting demographic variations within regions.Take the Asia-Pacific: While Japan is emblematic of the problems with a shrinking population, it will soon be joined in that situation by a number of East Asian neighbors absent large rises in fertility or large-scale inward migration:

"Japan was largely the only country that was aging and shrinking in terms of its labor force and population in the previous decade. But in the coming decade, several Asian countries – including China, South Korea, Hong Kong [...] will see their labor forces shrink. This will have important implications for GDP [gross domestic product] growth, consumer spending and asset prices, judging from Japan's experience..."

Japan is home to the fastest aging population in the world, with almost a quarter of its population over the age of 65. The country has struggled with sluggish growth stemming from a shrinking workforce, which has put pressure on the government to boost productivity levels.

OTOH, you have the more demographically promising Southeast Asian countries that have not yet reached a similar stage in the demographic transition as their wealthier northern neighbors:

The U.N. sees the working-age population in Indonesia and the Philippines peaking in 2058 and 2085 respectively, later than previously anticipated. At the same time it brought forward forecasts for other Asian countries including China, where the working-age population is expected to peak in 2015, and its total population, currently around 1.3 billion people, is seen decreasing after 2030.

BofAML's Chua says demographics are useful indicators of real GDP growth, noting a strong correlation between changes in working-age population and growth in the real economy over the past decade (2002-2012). 

To be sure, demographics alone do not drive economic growth. However, Japan's example does illustrate the pitfalls to having too few working-age people going forward. Previously marginalized as development laggards, more are taking notice of Indonesia and the Philippines as investment opportunities partly for demographic reasons. 

Two Readings on Obamacare

1. 54 Colleges Cut Adjunct Hours
2. Destined to Flop? 

Seigniorage loss and the fall of the Roman Empire

Early in the 20th century, the United States took over from the United Kingdom the role of the preeminent economic and political power. Since the last turn of the century, some people are seeing hints that the United States may be losing that role (but it is not clear who would take it), often seeing parallels with the fall of the Roman Empire. We do not know, however, why the Roman Empire fell. There are several explanations, and several may be necessary for the fall. But there is no smoking gun that the United States should particularly look out for.

John Hartwig has an interesting suggestion: the Roman Empire fell because it lost the steady revenue from seigniorage. Of course, it is difficult to get detailed data from this period, thus Hartwig proceeds by formulating a four-sector (C, I, G, gold mining) model where the government gets a substantial fraction from minting gold and silver and issuing at a value substantially above cost. About 165AD, gold deposits were exhausted and Rome had to tax significantly more to sustain itself, thus switching from one type of tax to the other. Forced to mint low quality coins, inflation sets in but this does not bring sufficient revenue. In addition, the center of the Empire being used to import goods from the periphery suffers from a lack of productive capacity once there is no new gold to pay for imports. All in all, the Roman Empire lost the benefits of holding the keys to the world currency. This is something the US has definitely been benefiting from, through seigniorage and through low interest rates, and one motivation for the creation of the Euro has been to capture this rent. But it is so far hard to find evidence that the dollar is losing its status. The US thus seems safe on that front.

Rousseff+Lula Double Act Unloads on US Net Spying

Cybersecurity is not an end unto itself; it is instead an obligation that our governments and societies must take on willingly, to ensure that innovation continues to flourish, drive markets, and improve lives. - Barack Obama [really]

It's been a busy time for followers of Internet governance as Brazil's president and her immediate predecessor unloaded both barrels at the United States' extreme abuse of its dominant position in the World Wide Web's infrastructure. Dilma Rousseff captured global attention not only by snubbing the White House's invitation for a state visit, but more recently by crucifying the double-talking American louse at the United Nations General Assembly.

[I] Here is the key part of her speech where she calls for the much-needed multilateral governance of the Internet to avoid rehashes of Americans spying on world leaders as well as you and me:

The problem, however, goes beyond a bilateral relationship. It affects the international community itself and demands a response from it. Information and telecommunication technologies cannot be the new battlefield between States. [The time] is ripe to create the conditions to prevent cyberspace from being used as a weapon of war, through espionage, sabotage, and attacks against systems and infrastructure of other countries.

The United Nations must play a leading role in the effort to regulate the conduct of States with regard to these technologies. For this reason, Brazil will present proposals for the establishment of a civilian multilateral framework for the governance and use of the Internet and to ensure the effective protection of data that travels through the web.

We need to create multilateral mechanisms for the worldwide network that are capable of ensuring principles such as:

1 – Freedom of expression, privacy of the individual and respect for human rights.
2 – Open, multilateral and democratic governance, carried out with transparency by stimulating collective creativity and the participation of society, Governments and the private sector.
3 – Universality that ensures the social and human development and the construction of inclusive and non-discriminatory societies.
4 – Cultural diversity, without the imposition of beliefs, customs and values.
5 – Neutrality of the network, guided only by technical and ethical criteria, rendering it inadmissible to restrict it for political, commercial, religious or any other purposes.

[II] Less noticed is a recent interview with Hindu News of former Brazilian President Lula. (Alike his country's soccer stars, he seemingly goes by one name.) For better or worse, he and his handpicked successor will forever be entwined alike Putin and Medvedev or Chavez and Maduro. While leaving Rousseff to steal the limelight at the UN, he nevertheless two put in his two cents' worth, as the Yanquis would say:

The U.S. president should apologise to the world for thinking that it can control global communications and ignore the sovereignty of other countries. The U.S. can’t just capture the activities of India, Brazil, China and several other countries. This is very serious. We need to force the United Nations to make a decision on this. Where is the security in the world today, with the U.S. intelligence agency snooping on everything? Where is the confidence in mobile communication or emails? When the NSA revelations came out, the U.S. vice-president (Joe Biden) called Brazil to apologise. It’s not the vice-president who has to apologise, it’s the U.S. president who should apologise to us. What would happen if the U.S. was target of spying? Now, they can steal any information and industrial secrets; they have access to information of our scientists. It means the end of freedom within the territory of a nation state [...]

The independence and economic growth of countries such as India and Brazil seem to bother the U.S, which is now committing a crime against democracy. The argument that they are doing this to take care of the security of other countries is absurd. Nobody asked them to do so. Nobody hired the American espionage system. Democracy is less democratic if one nation has the power to intervene in others. 

Be a man, Barack. Own up to your nation's cowardly actions and welcome those to make Internet governance better reflect its changing user base.

The Lucas Critique, DSGE models and the Phillips Curve

The Lucas Critique in 1976 has been a major motivation behind the building of RBC models, the folow-up DSGE models as well as the structural estimation of these models. The idea was that estimating reduced-form elasticities was not immune to policy variations, and those elasticities were being estimated to determine the impact of policy in the first place. The resulting bias reduced the trust in the Philipps curve. The structural models, however, had and still have at their core supposedly invariant parameters that describe some fundamentals of the economy. But it turns out that some of those are not invariant over time. I recently discussed the case of the labor income share (here). And misspecification can be problematic in the estimation of such structural models, with possibly important consequences.

Samuel Hurtado tries to sort that out by including parameter shifts in the estimation of a standard DSGE model, but misspecifying it in such a way that it ignores this shift. Using data form the 1970s, he then shows that the policy responses from his model look surprisingly close to those of a reduced-form Philipps curve. In other words, it seems the DSGE model without parameter shift is just as misspecified as the old Philipps curve. What this means is that one has to either include ad hoc parameter shifts or that one needs to go even deeper in the fundamentals to understand why and how these parameters shifts are occurring. The latter gives an even stronger meaning to the Lucas Critique.

Make a Killing? US FTAs and Big Tobacco

There is a debate surrounding the pending Trans-Pacific Partnership expansion about whether participants' policies aimed at curbing tobacco use will be dismantled in the name of free trade. Large American tobacco companies--collectively known as "Big Tobacco"--have certainly not shied away from using texts of trade liberalization measures in faulting curbs to their unfettered access to emerging markets.  Outgoing New York Mayor Michael Bloomberg has been especially vocal about what he believes is a major assault on global health led by the United States.

As per current TPP drafts, some argue that negotiating LDCs will be made to relent on the sorts of public policies that have proven effective Stateside in reducing smoking:

The proposal put forward by the US Trade Representative (USTR) last week in Brunei would reduce prices for US tobacco in low- and middle-income countries and make it more difficult for these countries to enforce anti-tobacco policies like package warnings and advertising and marketing restrictions.   This proposal would impact the nine TPP countries – Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States -- six of these fall into the World Health Organization’s Western Pacific Region, which had the highest smoking rate among men in 2009. 

To put the implications of this proposal into perspective, consider these two points: Tobacco use caused 100 million deaths in the 20^th century.  If current trends persist, it is projected to cause 1 billion deaths in the 21^st century.  More than 80% of those future tobacco-related deaths will occur in low- and middle-income countries (LMICs). Tobacco use in the United States is steadily declining, due largely to widespread anti-tobacco campaigns and stringent anti-smoking policies – the same kinds of policies that the TPP will make difficult to enforce in developing countries.

So, why is the US effectively hindering the export of its good anti-tobacco policies to the LMICs that need them most?  A few key issues have risen to the surface during this debate. A “carve-out” for tobacco – where tobacco would simply be excluded from the terms of the TPP agreement – was proposed by Malaysia and makes sense. But the USTR worries that a carve-out would set a precedent that could be used to block a variety of other US exports on health grounds.

In other words, how exceptional is tobacco based on health grounds? The fear is that all sorts of products would be excluded by other countries and dilute the FTA. Left unresolved, the tobacco issue may even spoil TPP negotiations altogether:

The White House has tried to finesse the issue, recently proposing that the TPP agreement acknowledge tobacco as a health concern but otherwise treat it no differently from other products. That compromise has satisfied no one. Health advocates are furious that the White House dropped its previous proposal for a stronger tobacco control exception in the TPP agreement. The business community opposes any special treatment for tobacco. With that controversy spilling into the press and threatening the conclusion of the TPP talks—the Obama administration's signature international economic initiative [...]

As the tobacco industry's tactics on trade shifted, the controversy reignited. Tobacco companies began using trade and investment agreements to file legal challenges to block new cigarette labeling and advertising restrictions. Australia is fighting four different trade and investment cases against its cigarette packaging law. Similar cases have been filed against Norway and Uruguay and threatened against Togo. Investment disputes are expensive and the outcomes can be unpredictable. Many developing countries do not have the expertise or resources to fight. Even New Zealand and Canada backed away from planned tobacco regulations in the face of litigation threats.

 Thomas Bollyky of the CFR's suggestions in making a limited exception seem to make sense:

• This exception must explicitly encompass the full range of tobacco control measures addressed under the Framework Convention on Tobacco Control and permitted under U.S. laws.
• This exception should be limited to nondiscriminatory tobacco control measures. An exemption from legal challenge cannot serve as a pretext for TPP countries to favor domestic cigarette producers. This condition is consistent with overall U.S. trade policy and the terms of the 2001 U.S. executive order on tobacco and trade.
• This exception must not include the cross-reference that exists in most U.S. trade agreements to the health exceptions in World Trade Organization agreements. Such references might inappropriately interfere with tobacco litigation already filed under those other agreements against Australia and other TPP countries.

My take is that fair warning is appropriate concerning the possible effects of cigarette smoking and ought not to be sacrificed to a distortion of the term "liberalization." Consumer interests are not well-served by hiding the facts about the health consequences of cigarette smoking and arguing otherwise is a sham. Smoke if you must, but do so while knowing the possible consequences.

Add this to the already lengthy list of obstacles to TPP. 

Singapore Needlessly Discriminates Against Expats

The cute (and very rare) Singapore baby

Here's another interesting feature about the politics of migration being waged right here in Southeast Asia. One of the reasons why the People's Action Party of (PAP) Singapore lost 40% of the popular vote in the 2011 elections is frustration over foreigners purportedly taking away plum jobs, scarce housing and using public services, leaving its citizens to seethe. It even seems its losses are widening. In response, the PAP has ushered in curbs on hiring foreigners--a "Singapore for Singaporeans" sort of policy. With anger not yet subsiding, the government is now seeking to advertise openings first to locals as a policy response:

Singapore will widen foreign-worker curbs to professional jobs as the government clamps down on companies that hire overseas talent at the expense of citizens, stepping up efforts to counter a backlash against immigration.

The Southeast Asian nation said yesterday it will set up a job bank where companies are required to advertise positions to Singaporeans before applying for so-called employment passes for foreign professionals. The unprecedented policy will target jobs that currently pay at least S$3,000 ($2,400) a month, an amount that will be raised to S$3,300 by January. 

In case you're curious, the unemployment rate in Singapore is 2.1%--3% for Singaporeans. While it is minuscule by Western standards, Singaporeans are apparently not keen to compare themselves with the old world:

The job bank will be set up by mid-2014, the Ministry of Manpower said in a statement yesterday. Companies with 25 or fewer employees will be exempt from the new rules, as well as jobs that pay a fixed monthly salary of S$12,000 or more, it said. The cap was set as that would include 95 percent of the local workforce, it said.

“This is a step up from the government’s efforts to tighten the quality and the quantity of the foreign worker inflows,” said Chua Hak Bin, an economist at Bank of America Corp. in Singapore. “We’re moving to another phase now where they’re looking to ensure that opportunities for the middle-income Singaporeans are maintained.”

The nation’s unemployment rate rose to 2.1 percent in the second quarter, with the resident jobless rate at about 3 percent. That “translates to 50,000, 60,000 Singaporeans without jobs,” Tan, the minister, said. “What the regime allows is that there may be a better matching of demand and supply” between companies and job-seekers, he said. 

At any rate, I am convinced that there is nothing structurally amiss with immigration to Singapore for the very simple reason that its total fertility rate is well below the replacement rate of 2.1 children per woman. It has not reached that level since 1976. Barring migrants wholesale would result in depopulation in quite short order since its current total fertility rate is 1.2:

My take is that there is currently slack in Singapore's mostly white-collar labor market due to a number of factors such as reduced hiring in service sectors alike banking post-global financial crisis. These will soon even out, though, easing complaints from locals that foreigners are "stealing their jobs" and so forth. Natalist policies haven't exactly born fruit.  Make no mistake: Singapore's real problem in the medium- to long-term is not having too many people, but having too few of them. (Cue Barbra.)

PS: Besides, isn't Singapore supposed to be the world's most adaptive nation?

The fuss about big data

"Big data" is the latest buzzword describing the next technological revolution wherein enormous amounts of data can be collected about our daily lives and can be used to improve our choices and better understand what is going on in all sorts of dimensions. That includes very detailed information about transactions, locations, and even online behavior. Who has not noticed that ads suddenly turn to what one has searched for a few days ago, if not getting emails about that. Whether big data will keep its promise will depend in part on what will happen with privacy protection. Europe has already taken steps, for example imposing that web cookies need to be accepted by users. In the US, people have been so far very tolerant with companies (but not the government) spying on them, but the tide could turn. But what are really the promises of big data?

Liran Einav and Jonathan Levin focus on economic policy and research. Quite obviously, we complain when data is not available when we want to measure something. Will big data make that possible? While I do not think the (mostly) random collection of big data will allow us to get exactly what we need, the authors thinks that with new statistical techniques and computer algorithms being developed specifically for big data, there should be something useful for economists. They hope to achieve better statistical power from massively larger and finer data. The opening of larger administrative data sets also has a lot of potential, especially, I would add, if the researcher is allowed to link them to each other. Denmark has shown how great data allows for better research and policy, and also makes researchers flock to you. But again, this is all dependent on how privacy laws will evolve.

Egypt's puzzling income inequality

The Arab Spring is the result of growing inequalities and iniquities and has been a wake-up call for the leaders of other countries where a few privileged dominate the masses. That could be a short summary of the commentary coming out the mainstream media about what happened in Tunisia, Libya, Syria and in particular Egypt. And it is all wrong.

Indeed, Vladimir Hlasny and Paolo Verme point out that there is really nothing special about the income distribution in Egypt, and if anything it has become more egalitarian during this millennium. They can turn the data whichever way, same result. However, it appears from the World Value Survey that the tolerance for inequality has sharply declined. And this change must be coming from other factors that the income distribution.

Some Observations on Minimum Wages

John Cochrane has a nice post on minimum wages.

I was recently discussing the topic of minimum wages with a friend who favors them.  (He is a prominent economist, whose name you would surely recognize, but conversations with friends are off the record).  As justification for his view, he pointed me to this paper by Lee and Saez, called "Optimal minimum wage policy in competitive labor market."

What was notable to me about this paper is the incredibly strong assumptions they need to make their case.  In particular,

Assumption 1. Efficient rationing: Workers who involuntarily lose their low-skilled jobs due to the minimum wage are those with the least surplus from working in the low-skilled sector.

 Later they point out:

Finally, the desirability of the minimum wage hinges again crucially on the “efficient rationing” assumption. Under “uniform rationing”, where unemployment strikes independently of surplus, the minimum wage cannot improve upon the optimal tax allocation, a point formally proven in Lee and Saez (2008). Indeed, with efficient rationing, a minimum wage effectively reveals the marginal workers to the government. Since costs of work are unobservable, this is valuable because it allows the government to sort workers into a more socially (albeit not privately) efficient set of occupations, making the minimum wage desirable. In contrast, with uniform rationing, as unemployment strikes randomly, a minimum wage does not reveal anything about costs of work. As a result, it only creates (privately) inefficient sorting across occupations without revealing anything of value to the government. It is not surprising that minimum wages would not be desirable in this context.

Rather than providing a justification for minimum wages, the paper seems to do just the opposite. It shows that you need implausibly strong assumptions, such as efficient rationing, to make the case.  I cannot see any compelling reason to believe that in the presence of excess supply of workers, the market will somehow manage to efficiently ration the scarce jobs.

Reasons to Doubt Trans-Pacific Partnership Expansion

There is an excellent compilation at the Financial Times as to why few expect a "high-quality" agreement to emerge from ongoing TPP negotiations. That is, one with few loopholes and opt-outs for different participants. Given the highly diverse interests of the twelve nations looking to expand this agreement--they range widely in levels of development, size and so on--it is thus unlikely that an agreement that pleases all will be concluded in the next few months. Or, an agreement may be struck, but one which features a bevy of loopholes and opt-outs catering to the special interests of each nation.

At any rate, here are four reasons to be pessimistic: 

1. The TPP seeks much stricter protection of intellectual property than many want. Poorer countries fear that such provisions will make it more difficult for them to use cheaper generic drugs, potentially denying their populations access to life-saving medicines. More generally, strict enforcement of IP is judged to favour advanced countries at the expense of poor ones, which have traditionally absorbed technological advances through copying. To enforce IP rights in too draconian a manner is, say opponents, a victory for protectionism, not for free trade.
2. The agreement seeks to regulate the role of state-owned enterprises, so that they do not enjoy unfair access to licences, contracts or state finance. This is seen as an assault on the sort of state capitalism in countries such as China. It is difficult, however, to see how meaningful rules could be imposed on Vietnam, a TPP member, where SOEs are used by senior Communist party officials as a cash cow for favoured projects and sometimes as personal piggy banks. Even Japan, where the Post Office is in state hands, and the US, which has Fannie Mae and Freddie Mac, may fall foul of some provisions. Temasek, the Singaporean sovereign wealth fund, is believed to be concerned that new rules could affect the performance of some of the companies in which it has invested. Malaysia’s bumiputra policies, which favour ethnic Malays in the awarding of state contracts, may also run counter to the TPP.
3. The TPP calls for a controversial investor-state dispute settlement that would, theoretically, allow companies to sue governments if they believed they were being treated unfairly. Australia has argued that this would weaken sovereign power in favour of multinationals. Anti-fracking activists say such a mechanism would allow oil companies to sue local authorities for imposing strict environmental guidelines. Canada has raised concerns that cigarette companies could use the provisions to take governments to court over anti-tobacco regulations. In Malaysia, Anwar Ibrahim, the opposition leader, has characterised the TPP as an attempt by the US “to impose its brand of economic model” on unwilling countries. 
4. As in every trade negotiation, each country is seeking exceptions for sensitive industries. Japan was allowed to join talks on the basis that it would drop its age-old agricultural protectionism. Yet when Japanese negotiators turned up to talks in Brunei in July, they sought exceptions for “five sacred” agricultural commodities: rice, wheat, beef, dairy products and sugar. Japan is by no means alone. Canada (and the US) want protection for their dairy industry in the face of strong potential competition from New Zealand. Vietnam wants an exception for its textile industry so that it can enjoy tariff-free access to the US while continuing to use yarn made in non-TPP countries, especially China. The sugar lobby is particularly vocal in the US. “There are a lot of areas where the US wants everyone else to change, but doesn’t want to change much itself,” says Jeff Schott at the Peterson Institute.

I've already mentioned agriculture before which I believe will ultimately prove to be the largest stumbling block. However, something unmentioned is the eccentric but enduring American complaint about the US auto industry's lack of access to the Japanese market despite producing unsuitable cars for use there [1, 2].

Economics Teaching Conference

The 9th Annual Economics Teaching Conference sponsored by the National Economics Teaching Association and Cengage Learning will be in Austin on October 24 and 25. I will be speaking at lunch the first day.

If you would like to register for the conference, you can do so here.

Teaching Monetary Policy

Is the zero lower bound the new normal?

About exploding offers

The academic job market is characterized by much uncertainty about the job candidates, at least in Economics where students who have yet to publish anything (in most cases) and have not even completed their studies are hired. The fact that they are supposed to be at the research frontier and that very few people, if any, can evaluate their potential makes it no surprise that recruiting committees stick to signals: who the dissertation adviser is, where the degree is from, and always glowing recommendation letters. When a recruiter has managed to identify a particularly good candidate, it does not want to let others benefit from this discovery. To avoid the job candidate from continuing to shop around, the typical strategy is to make an exploding offer: The offer letter is valid for, say, a week, and thereafter becomes void. This is quite frustrating for a candidate who may still be waiting for a preferred department to make its move, but this is well proven strategy for recruiting departments.

Mark Armstrong and Jidong Zhou show that this does not necessarily have to be so. Other options are to let candidates make a down-payment to keep a job offer alive or offer a bonus if they sign quickly (I am reinterpreting the papers results for my example). Yet, I do not think I have ever seen this happen, even a signing bonus. The model, which is actually about a seller who may offer a buy-now discount, ask for a deposit or make an exploding offer, highlights that the uncertainty about the outside options of the buyer (or the job candidate) is crucial. The search wants to deter the buyer from looking elsewhere. How much the uncertainty affects the buyer determines which strategy is best. In the case of the academic market, I guess this means that job candidates are very risk averse, thus the exploding offer strategy is optimal for the recruiters.

Venezuela Nationalizes Toilet Paper Factory

"I am the Great MADURO", etc., etc.

[NOTE: For those unfamiliar with the "Beavis and Butt-head" reference, see here and here.] If this is an example of socialists taking over the "commanding heights" of the economy, I am at a complete loss for words. To me at least, toilet paper manufacturing as a strategic sector bog-gles the mind, but it may make sense in Venezuela. It is no big secret that the Chavistas have nationalized broad swathes of the Venezuelan economy. Supply problems? Central planning will solve them, free market be damned. From Economics 101, I was taught that price controls and import controls create rather than alleviate goods shortages. Apparently this stupid bourgeois logic holds no water in modern-day Venezuela. Silly me. Instead of relenting on government controls to remedy the supply situation for various goods including toilet paper, the ultimate solution apparently involves nationalizing these enterprises lock, stock and barrel. You got it--TP users of Venezuela, unite!

On Saturday, Vice President Jorge Arreaza announced the "temporary occupation" of the Paper Manufacturing Company's plant in the state of Aragua. The aim, he explained, is to review the "production, marketing and distribution (of) toilet paper [...] The People's Defense from the Economy will not allow hoarding or failures in the production and distribution of essential commodities," the vice president said. 

By the "People's Defense," Arreaza was referring to a government agency created on September 13 by President Nicolas Maduro to "defeat the economic war that has been declared in the country," according to a report from state-run ATV. This group is charged with looking at inefficiencies across various industries in the nation, including foods and other products, and taking action presumably in the South American nation's best interests.

For what it's worth, Venezuela's leaders see a conspiracy to hoard toilet paper--presumably to, ah, dump them when prices have risen sufficiently:

But the government has said private companies aren't doing their part, accusing them of hoarding their products in hopes of selling it later at a higher price. They've also suggested the problem is tied to a broader conspiracy. "There is no deficiency in production," Commerce Minister Alejandro Fleming said in May according to ATV, "but an excessive demand generating purchases by a nervous population because of a media campaign."

Be afraid. Be very, very afraid. To paraphrase Marx, the TP expropriators have been expropriated (or something like that).

US Now Sends More Immigrants to Mexico

What would Cheech and Chong do about the United States now sending more migrants to Mexico than Mexico sends to the United States? That comedy act is stuck in a time warp where the supposedly backward Mexico always sends its unwashed masses to the United States in search of employment. So are today's uniquely Amerocentric debates about whether to give amnesty to illegal immigrants. Wake up to today's North American reality, boys and girls: On balance, the United States has sent more people to Mexico than vice-versa over the most recently recorded five-year period. The graphic above is from the New York Times, which also offers the thought-provoking companion article about how the real land of opportunity is Mexico:

Rising wages in China and higher transportation costs have made Mexican manufacturing highly competitive again, with some projections suggesting it is already cheaper than China for many industries serving the American market. Europe is sputtering, pushing workers away. And while Mexico’s economy is far from trouble free, its growth easily outpaced the giants of the hemisphere — the United States, Canada and Brazil — in 2011 and 2012, according to International Monetary Fund data, making the country more attractive to fortune seekers worldwide [...]

The shift with Mexico’s northern neighbor is especially stark. Americans now make up more than three-quarters of Mexico’s roughly one million documented foreigners, up from around two-thirds in 2000 [my emphasis], leading to a historic milestone: more Americans have been added to the population of Mexico over the past few years than Mexicans have been added to the population of the United States, according to government data in both nations.

In previous posts I've covered how Mexico is increasingly becoming the North American economic dynamo contrary to outdated beliefs that it is merely an entry route for drugs to the USA or a perennial source of migrants. The implications are meaningful and interesting. First, the emergence of Mexico as a manufacturing hub in the Americas challenges China's role as factory to the world given the latter's geographic disadvantage. Second, the US Census folks do not--and probably cannot--account for such migratory shifts as nearby countries become more progressive than the United States. Hence, expectations that declines in US birth rates will be more than compensated for by migration to the US are probably overstated. Detroitification or depopulation of the US is a very real threat if so. Third, it does bother me that the rest of the world so easily imbibes American prejudices about Mexicans when the latter hold the better cards in today's global political economy.

Make no mistake: the real Americans us folks from the developing world are better off emulating are probably those south of the border with their young, dynamic and manufacturing-savvy economy. Their football team may be doing poorly at the moment, but hey, I would readily forego the World Cup finals for a place at the top of the World Economy league table. Go south, young Yank, go south--but learn Spanish before you do.

Things change, my dear. At this rate I may be laughing my head off hearing Mexican policymakers debating what to do with all those Yanqui "illegals" in a few years' time.

Cola's Final Frontier: Coke v Pepsi in Myanmar

He thought he was the King of America
Where they pour Coca-Cola like vintage wine

In 1986 Elvis Costello penned the lyrics above to the first song of his album King of America, "Brilliant Mistake." I thought it was pretty crafty way back when, but even then, the snobbery against drinking carbonated beverages was their cultural unsophistication as Costello intoned. Nowadays, of course, we are more concerned with the unhealthy amounts of sugar and caffeine they contain. Such concerns have caused cola consumption to steadily fall Stateside since 2005, but it remains a highly saturated market with the average American drinking a whopping 714 8 oz servings of carbonated beverages in 2012.

Supersaturation of the home market has caused both Coca-Cola and Pepsi to take on a two-pronged strategy. The first is developing ostensibly healthier drinks. The second, of course, involves going abroad in search of new or undersaturated markets. Reflecting the latter concern, it is unsurprising that the current heads of these venerable American brands are foreign-born and that they gained their reputations by growing business abroad: India-born Indra Nooyi has been Pepsi CEO since 2006 and Turkey-born Muhtar Kent has been Coca-Cola CEO since 2009.

Together they have been duking it out in cola wars waged around the world in a battle for carbonated supremacy. Compared to the 714 colas each American consumes, there is room for much sales (and waistline) growth elsewhere. Nowhere is this competition as intense in Southeast Asia as Myanmar. Returning to this market for the first time since Eisenhower was president after decades-long US sanctions were lifted. Coke finds challenges and opportunities in equal measure. While Pepsi was first to re-enter Myanmar last year, it has had to up its pace in market development with the entry of Coke by signing new bottling agreements. Over a third of Pepsi revenues are now in the developing world. OTOH, Coke's Muhtar Kent compares Myanmar opening up to the world to the fall of the Berlin Wall, and fellow MNC Unilever likens it to "another Vietnam" in terms of possible future returns. (Should we be glad that "Vietnam" is now shorthand for promising new markets as opposed to unpromising battlefields?)

The stage is thus set for another battle royale for the hearts and waistlines of the Burmese consumer. (Coca-Cola counters with CSR efforts on the latter point, though.)  Indeed, the only ones losing out economically may be domestic firms that grew during the years of international isolation (see the clip above). Local firms are going into a cost-leadership strategy from what I can tell while ceding the foreigner / upscale segments to the MNCs. Either way, there may be no greater beverage grab of this magnitude to come for years unless North Korea opens to the world, too.
***

NPR has a very interesting write-up concerning Myanmar's isolation: Coca-Cola went back to its promotional strategies during the 1800s to account for ways to gain product attention in a "media dark" environment:

[Southeast Asia Marketing Director Shakir] Moin says he started to go back in the Coca-Cola archives. He was looking at how the company marketed its product before the internet, before TV, even before radio. Eventually he found his perfect model for Myanmar, place where nobody knew anything about Coke — Atlanta, 1886.

Back then the hot advertising trend was wall posters. Moin noticed that in the beginning, Coke didn't use the posters to talk about friends or happiness or style. It talked about what the product tasted like. It simply described it. Moin pulled out two words in particular that would form the core of his Myanmar campaign — "delicious, refreshing." Those two words from the 1800s are now on the Myanmar bottle, and on the billboards and fliers that advertise the product.

Moin pulled another trick from the early days of Coke. They offered free samples. Samples has brought people into the pharmacy soda counters in Atlanta in 1886, now free samples attract crowds at Buddhist festivals in Myanmar. It's a way to get people to taste the product, but just as importantly, it's a way to show off Coke at its best.

The debt ceiling tactic is not unprecedented

The Washington Post reports:

In 1973, when Richard Nixon was president, Democrats in the Senate, including Sen. Edward Kennedy (D-Mass.) and Sen. Walter Mondale (D-Minn.), sought to attach a campaign finance reform bill to the debt ceiling after the Watergate-era revelations about Nixon’s fundraising during the 1972 election. Their efforts were defeated by a filibuster, but it took days of debate and the lawmakers were criticized by commentators (and fellow lawmakers) for using “shotgun” tactics to try to hitch their pet cause to emergency must-pass legislation.... 

One of the most striking examples of a president being forced to accept unrelated legislation on a debt-ceiling bill took place in 1980. The House and Senate repealed a central part of President Jimmy Carter’s energy policy — an oil import fee that was expected to raise the cost of gasoline by 10 cents a gallon. Carter vetoed the bill, even though the United States was close to default, and then the House and Senate overrode his veto by overwhelming numbers (335-34 in the House; 68-10 in the Senate).

Even so, at the present time, I don't think the tactic is going work well for the Republicans.

Empirics under uncertain beliefs are difficult

The typically way we model uncertainty is by assuming economic agents know the stochastic process they are facing, and we call this uncertainty. That is wrong. This should be called risk as probabilities are known. Uncertainty is when those probabilities are unknown. That does not mean the agent is not rational, it is simply that the information set is smaller than what we typically assume.

Nabil Al-Najjar and Jonathan Weinstein point out that the uncertain agent trying to smooth consumption may look like he is excessively precautionary to someone thinking he has known probabilities. They frame it within a Bayesian framework, where beliefs including subjective probabilities are updated with incoming information. This makes it very difficult to do any empirical work, including measuring time preference or risk aversion.

I am surprised, though, the Al-Najjar and Weinstein misunderstand rational expectations. They claim an uncertain agent does not have rational expectations if beliefs over probabilities do not coincide with observed frequencies. This does not need to be if the econometrician has information the agent did not have at the time of the decision. If the agent uses all the available information, then it is still rational expectations. There may be so little that he cannot determine probabilities precisely, unlike perfect foresight on probabilities, like Al-Najjar and Weinstein seem to imply. In any case, this is more about semantics than results.

The Tricky Business of Catering to PRC Tourists

Since I am currently writing up some tourism-related research, two recent articles about the global industry catering to Chinese travelers caught my eye. While there is some debate going on as to whether tourism is the world's largest industry, we can safely conclude that it is a very large one. Combine that fact with China becoming the second-largest economy in the world and the embrace of Chinese tourism is only natural: As early as the mid-Nineties, I remember visiting Parisian luxury boutiques and seeing the effects of the first wave of PRC tourists as most had salesladies who were fluent in Mandarin. However, that is pretty much a baseline expectation nowadays.

(1) To be sure, the cruise ship industry has been hurt by high-profile incidences of American liners alternatively sickening and killing their passengers. Fortunately, its tarnished reputation is not (yet?) global. There are pockets of opportunity alike China. Again, it's only natural that the Chinese would take to the open sea since they have the world's busiest seaports--the infrastructure is already there. What has been lacking, however has been marketing: Chinese with an interest on going on cruise ships cannot be away for too long since they probably are too busy making money (unlike, say, their American counterparts who can go on decade-long cruises if there were some Wall-E style). Hence the popularity of short trips around East/Southeast Asia:

When the Mariner of the Seas arrived in Shanghai in June, it became the largest ocean liner with a home port in China — a 138,000-ton mega-ship that boasts an ice rink, 10 pools, a rock-climbing wall and a mini golf course. But the 3,800 passengers it can carry don’t get long to enjoy the array of amenities. The ocean-going giant, owned by Royal Caribbean International, mostly makes three- and four-night trips to South Korea that start at about the equivalent of $500 per person. 

The preference for such short cruises is one of the major challenges international cruise lines face as they focus more resources on luring Chinese customers, says Zinan Liu, the Shanghai-based managing director for China and Asia for Royal Caribbean, whose parent company is the world’s second-largest operator, with slightly more than 23 percent of all cruise passengers. (Carnival Corp. is the largest, with a little more than 48 percent.) 

If Chinese take to cruising in the same way as North Americans and Europeans, they could provide as many as 40 million cruise guests a year, according to a 2010 market analysis by Royal Caribbean. That is twice the number of passengers expected worldwide this year. But unless they work for international companies, most Chinese take vacations only during the public holidays clustered around traditional festivals like Chinese New Year, usually a week or less at any one time.

(2) However, all is not just moneymaking with PRC tourists. Whereas the rest of the world once had to deal with loud, brash Americans and pack-rattish Japanese, today the accusations of poorly-mannered tourists are aimed at the Chinese:

Now it is China’s turn to face the brunt of complaints. The grievances are familiar — they gawk, they shove, they eschew local cuisine, and last year, 83 million mainland Chinese spent $102 billion abroad — overtaking Americans and Germans — making them the world’s biggest tourism spenders, according to the United Nations World Tourism Organization.

Their numbers have also placed them among the most resented tourists. Mainland Chinese tourists, often laden with cash and unfamiliar with foreign ways, are tumbling out of tour buses with apparently little appetite for hotel breakfast buffets and no concept of lining up [...]

Certainly, more cultured Chinese are ashamed of the poor behavior of some of their compatriots who believe that spending a lot means they do not need to observe manners:

But the greatest opprobrium seems to be coming from fellow Chinese. In May, a mainland Chinese tourist in Luxor, Egypt, discovered that a compatriot had carved his own hieroglyphics on the wall of a 3,500-year-old temple. “Ding Jinhao was here,” it declared. A photo of the offending scrawl spread rapidly on Chinese social media, and outraged citizens tracked down the 15-year-old vandal. The uproar subsided after his parents issued a public apology. 

Embarrassed by the spate of bad press that month, Wang Yang, China’s vice premier, publicly railed against the poor “quality and breeding” of Chinese tourists who tarnish their homeland’s reputation. “They make loud noises in public, scratch graffiti on tourist attractions, ignore red lights when crossing the road and spit everywhere,” he said, according to People’s Daily. 

As the saying goes, you take the good with the bad and try to mitigate the latter through better customer education. There remain instances when the customer is not always right.

UPDATE: This rude Chinese tourists trope is gaining popularity. The South China Morning Post adds to it. 

Is early childhood really that important for adult life?

How important are the preschool years for adult outcomes? Empirical evidence from rich countries mostly shows that treatments during preschool years persist to adult years. James Heckman, for example, has pushed very hard this result. How robust is it once you look at more extreme cases?

Todd Schoellman does this by looking at refugees from Indochina who arrived in the US. He finds no difference in adult wages, education and anything else he can throw at the data between refugees who arrived in the United States at different preschool ages (before 5). One would have expected a huge effect, as they were exposed to very dire environments in their home countries or the refugee camps. It runs also counter to other empirical evidence and standard models. So what is going on here? Schoellman argues that what really matters in early childhood were the parents, much less the environment. That result changes somewhat once the arrival date falls into school age.

I talk with Larry Kudlow

Can Brazil Escape Abusive, US-Centric Internet?

Absolute power corrupts absolutely - Lord Acton

Think of Barack Obama as the cyber-equivalent of Bashar al-Assad. Just as Assad does not own up to his chemical-attacking ways, so does Obama not own up to his Internet-abusing ways. All his pleas for "Internet Freedom" as they turn out, are meant to make it easier to spy on you and me. American digital hypocrites are thick on the ground, and Obama is just another one of their sorry lot. It is digital entrapment plain and simple.

Internationally, the US-centric Internet infrastructure which makes it so very easy for the US government to ask companies to disclose information about their users over alleged (yawn) national security concerns has come under sustained attack in the wake of disclosures that citizens and their leaders the world over have been hit by American snooping. Importantly, the Internet Corporation for Assigned Names and Numbers remains a US-based concern despite being responsible for allowing the Internet to function by maintaining control over IP addresses and suchlike. Given the increasing number of Internet users worldwide, many other countries have become concerned that the Internet's increasingly "global public goods" nature is not matched by changes in governance.

That introduction then brings us to Yanqui snooping: (mostly American) critics make the fallacy that since the strongest proponents of imbuing UN agencies with more voice in Internet governance are purportedly China, Iran, Russia, and Saudi Arabia, what they really are after is to improve their ability to wall off their Internet users from the rest of the world. Especially in the wake of disclosures about the extent of US spying, however, there are any number of other nations with legitimate concerns about near-absolute US power over the Internet corrupting absolutely. It is thus fascinating that Brazilian President Dilma Rouseff has been so aggrieved that she put off a state visit to America. What's more, she is urging Brazil to better insulate its telecoms infrastructure from more dastardly Yanqui deeds:

[Brazilian] President Dilma Rousseff ordered a series of measures aimed at greater Brazilian online independence and security following revelations that the U.S. National Security Agency intercepted her communications, hacked into the state-owned Petrobras oil company's network and spied on Brazilians who entrusted their personal data to U.S. tech companies such as Facebook and Google. The leader is so angered by the espionage that on Tuesday she postponed next month's scheduled trip to Washington, where she was to be honored with a state dinner...

While Brazil isn't proposing to bar its citizens from U.S.-based Web services, it wants their data to be stored locally as the nation assumes greater control over Brazilians' Internet use to protect them from NSA snooping...

There is also a fairly comprehensive set of actions Brazil intends to take to better deal with those Yanqui spies:

Rousseff says she intends to push for international rules on privacy and security in hardware and software during the U.N. General Assembly meeting later this month. Among Snowden revelations: the NSA has created backdoors in software and Web-based services.

Brazil is now pushing more aggressively than any other nation to end U.S. commercial hegemony on the Internet. More than 80 percent of online search, for example, is controlled by U.S.-based companies. Most of Brazil's global Internet traffic passes through the United States, so Rousseff's government plans to lay underwater fiber optic cable directly to Europe and also link to all South American nations to create what it hopes will be a network free of U.S. eavesdropping.

More communications integrity protection is expected when Telebras, the state-run telecom company, works with partners to oversee the launch in 2016 of Brazil's first communications satellite, for military and public Internet traffic. Brazil's military currently relies on a satellite run by Embratel, which Mexican billionaire Carlos Slim controls. Rousseff is urging Brazil's Congress to compel Facebook, Google and all companies to store data generated by Brazilians on servers physically located inside Brazil in order to shield it from the NSA.

Internet freedom has become a laughingstock since the most egregious violator of this principle is the United States. If Silicon Valley is hit by commercial fallout over spying, it is well-deserved anyway for meekly playing along with the US government. (Hear that, my blog service provider?) Will the Internet become "Balkanized" or further fragmented as others follow Brazil's example? European governments have been targeted by similar intrusions but do not complain as loudly. OTOH, what benefit do we Internet users gain from the present system which facilitates American intrusion as it abuses its position?

There are legitimate reasons for placing more Internet governance in an international organization contrary to the claim that doing so will simply allow authoritarian regimes to keep better tabs on their citizens. Go ask Brazil. Even if its efforts are for naught as some security experts say, I applaud its courage in raising a question that others have cowered from asking and, better yet, doing something about it. Moreover, I suspect the solution is not for individual countries to try and wall themselves off from the rest of the world but to join nearly-unimpeachable critics of US Internet abuse in asking for basic guarantees concerning security. The pressure being applied at the moment is insufficient, but think of what may occur if millions threaten to flee Facebook, Google, etc. if such concerns remain unaddressed.

In the meantime, do yourselves a favor by not posting sensitive information online. Obama's operatives are definitely watching.

The central bank should be sector-agnostic

Large Scale Asset Purchases (LSAPs) of mortgage-backed securities have been a major component of recent monetary policy. It is not without critics as this is a policy that has been targeted towards a specific sector of the economy, the real estate sector. This is principle a big no-no, as a central bank should only care about the overall economy, not specific sectors or firms. In a similar fashion, the ECB has been criticized for buying out specific countries following conditions that were differentiated by country, instead of applying one rule to all, or even not buying country debt at all. But if all sectors benefit equally or if that was the most efficient way to conduct policy, that is all good.

In the case of LSAPs, Meixing Dai, Frédéric Dufourt and Qiao Zhang find it was certainly not the most efficient way to deal with a confidence shocks in the banking sector, and it obviously privileged the real estate industry. One could have done better by buying corporate bonds, but in a uniform manner across sectors. This works better than mortgage-backed securities because they are less leveraged and thus free up more bank capital. This is more true if financial markets are more segmented, that is, if bankers cannot freely reallocate resources between sectors. What the paper does not say is how this would have compared to a conventional policy, buying government bonds.

Li Ka-Shing: When Shanghai Overtakes Hong Kong

Here's a nice illustration of a recurrent debate concerning Asian political economy that I will be able to use for classroom purposes. Hong Kong-based tycoon Li Ka-Shing, known as "Superman" for his business prowess, has offered a pointedly Asian opinion on the prospects of Shanghai overtaking his hometown as the world's gateway to China. While teaching development studies, I make it a point to differentiate the perceived utility of political and economic freedom. The Western view, of course, is that both go hand in hand. On the other hand, many Asian commentators believe that leaders have the right to withhold political freedom provided that economic freedom of the growth-promoting variety is given.
Hence Li Ka-Shing's very Asian point: As the Chinese megacity is granting more economic freedom of the sort Hong Kong enjoys--Shanghai is soon to become a free trade zone with looser capital controls, currency convertibility and so on that other PRC cities do not enjoy--Hong Kong's comparative advantage in those respects may be eroded. What's more, the clamor for too much political freedom among Hong Kong's residents is distracting it from the real task at hand of maintaining its economic preeminence. A card-carrying CCP member could not have said it any better:

Li Ka-shing, Asia’s richest man, said Hong Kong needs to raise its competitiveness if it wants to avoid losing out to Shanghai, where China is setting up a free trade zone, Radio Television Hong Kong reported. Li, the 85-year-old chairman of Hong Kong-based Cheung Kong Holdings Ltd. (1) and Hutchison Whampoa Ltd. (13), said the Shanghai free trade zone “will affect Hong Kong heavily,” RTHK reported on its website, citing comments Li made at a briefing yesterday.

The [Shanghai Free Trade Zone] may allow freer yuan convertibility, liberalize interest rates and relax restrictions on foreign investment, which may threaten Hong Kong’s status as China’s biggest financial center. The former British colony risks falling behind its rivals if citizens there don’t start rallying behind Chief Executive Leung Chun-ying, a Chinese official said yesterday.

“China is a big market and in the long term it can’t just rely on Hong Kong as its only hub,” said Kevin Lai, a Hong Kong-based economist at Daiwa Capital Markets Ltd. “I worry more about the deteriorating political environment in Hong Kong than about Shanghai establishing a free-trade zone.” Leung’s government has increasingly been drawn into a debate about the speed of electoral reform, as opposition lawmakers press for the open nomination of candidates for the election of Hong Kong’s next leader in 2017, rather than by committee as legislated.

Stupid politics, Li Ka-Shing is probably saying...what about making money, Hong Kong's real purpose? And what are we to make of those "Occupy," er, more-communist-than-mainland-self-styled-Communists?

Li said that Occupy Central, the movement proposed by some civic groups to pressure the Hong Kong government into accelerating the introduction of full democracy, may damage the economy and the city’s reputation as a financial center, according to the RTHK report.

Hong Kong residents should focus on the economy rather than politics, as Singapore leapfrogs the Chinese city as a financial center by many measures, the Standard newspaper reported today, citing remarks made to a business delegation by Wang Guangya, director of the Hong Kong and Macau Affairs Office. The city should give more support to Leung, he said.

He may be 85, but alike octogenarian Lee Kuan Yew, he's as sharp as tacks and unafraid to offer an unpopular opinion if it needs to be aired. For what it's worth, the various "Occupy" movements are closely associated with US-based protests. I think he missed an opportunity here to say, "Do you want to make Hong Kong's economy like America's?"

That should shut them up real good.

Taylor rules with assets and credit

One thing we have learned from the last recession is that the financial sector is quite important, that its dysfunction can have important consequences, and this can happen even in the most financially elaborate economy. Some thus call for the health of the financial sector to become a component of every policy maker's dashboard. From a dashboard it is only a small step to include the financial sector into a policy formula such as the Taylor Rule.

Leonardo Gambacorta and Federico Signoretti take that step by deriving from a DSGE model a Taylor Rule that includes asset prices and the amount of credit. So far so good, but why not also include the exchange rate? And more indicators? This is not the purpose of the Taylor Rule. It was devised to be a simple guide to policy, from which you want to deviate when circumstances call you to do so, for example with unconventional policies that cannot be captured with a Taylor Rule, simple or not. The best example is when the Taylor Rule calls for negative nominal interest rates. Would anybody blindly follow this? Of course not, and this is why we should stop thinking in terms of a single equation, especially when one has several policy goals. You needs at least as many instruments as goals. The policy interest rate cannot do everything.

Crowd-sourcing an Award

Voting is open for the Economist Educators Best in Class Teaching Award, but only for this week. If you teach economics, you may want to review the finalists and vote. Click here to learn more.

Japan's Trade Deficits & Halting Nuclear Power

Deficit-running Japanese are about as unnatural as surplus-running Americans, but we now have to reconsider this conventional wisdom. (Things change, my dear.) Recent years have witnessed an unwelcome turnaround in Japan's trade balance as it has swung from surplus to deficit in a fairly big way. While recent easy money "Abenomics" have lifted the general economic outlook there, there is a good reason why most analysts are less sanguine about the prospects for fixing the trade balance.

A contributing factor to this degradation in the external balance has, of course, been Japan's rising import bill from energy imports in the wake of the Fukushima nuclear power plant incident. With practically all of its nuclear powers shut, the nation's energy needs have been met largely by imports because Japan has few energy resources of its own. Not only do rising energy costs dent the spending power of Japanese consumers then as their electricity bills rise, but they also dent Japan's supposedly "mercantilist," export-oriented orientation:

So far, power companies have applied to restart about a dozen of Japan's 50 reactors. Prime Minister Shinzo Abe wants to see the reactors back on line, as they are a vital part of his plan to turn the economy around. Since the Fukushima disaster, Japan has been forced to import huge amounts of coal, liquid natural gas and other fuels.

Mr Abe's government blames these imports for the huge trade deficits posted by Japan since 2011. The average household electricity bill has risen by 30% since Fukushima, denting the government's attempts to boost consumer spending.

One of the Abe government's campaign promises was to bring these nuclear power plants back online. (His Liberal Democratic Party has long been supported by the energy industry for better or worse.) However, even if all fifty existing reactors were to come back in operation as they likely will in a few years' time, the interesting thing is that it is estimated that Japan would still run an external deficit:

After the 1979-1980 oil shock, Japan bounced back smartly, exporting millions of its cheap, durable and fuel-efficient cars and iconic electronic gadgets such as Sony Corp's Walkman. Today, however, there is no turnaround in sight.

Even though increased fuel imports since the March 2011 Fukushima disaster have been a major drag on trade, restarting all of Japan's nuclear reactors would not bring it back into the black, estimates suggest.

The only one of Japan's 50 reactors in operation was shut for planned maintenance on Sunday, with no firm date for bringing back an energy source that had covered about a third of the country's electricity needs.

The "real" culprit may be Japan offshoring production to nearby countries over the years to cope with rising production costs at home due to yen strength. This trend has only accelerated in recent times, causing a diminution of recorded Japanese export output:

That is because of the "hollowing out" of Japanese manufacturing as firms shift production and procurement overseas. Years of yen strength contributed to that shift, but the currency's retreat failed to reverse the trend as the desire to move closer to faster growing markets, tariffs, lower taxes and labor costs all played a role.

A Cabinet Office survey of manufacturers showed the share of overseas production of Japanese companies rose to 17.7 percent last year from just over 13 percent a decade ago and is seen reaching 21.3 percent in five years.

Japan temporarily shutting down its nuclear reactors that account for a third of its energy needs will likely be remembered as a short-lived, awkward moment in its postwar history. However, its shift to running trade deficits is probably becoming more structurally ingrained. As Don Henley once sang--here with admittedly unlikely regard to huge Japanese trade surpluses--those days are gone forever; it should just let them go.

Political connections pay off in the US

It is no secret that political connections help your business. The more more regulated or corrupt your economy, the more likely this is to be true. How much this helps is difficult to quantify. For one, political connections cannot be measured on some sort of scale, and gathering such data would be very difficult as people usually try to hide such connections from the public. And second, how would you measure the impact of of these connections.

Yen-Teik Lee, Bang Dang Nguyen and Quoc-Anh Do find a way by first looking at the university networks among CEOs and candidates to US state governor races and then looking at the stock valuation of firms around the time of close gubernatorial contests. Firms connected to the right candidate gain 1.36% right after the election, and the bump persists. Imagine how large this can become in countries where such patronage is less scrutinized and where regulation is more prevalent.

Third World Solidarity? Petronas Ditches PDVSA

Just when you thought things could not get worse for Venezuela's economic situation, they do. In recent times, Venezuela has sought to partner with other developing countries for exploiting its energy reserves in the likely belief that they would be more understanding of its political-economic situation. Having offended American oil giants through forced nationalization, it arguably had little choice but to look East.

Today's case in point is Malaysia. Just as Venezuela uses its control over a state-owned oil firm to further national objectives, so does Malaysia. Alike that of Venezuela, Malaysian leadership has also been accused of despotic tendencies--especially its perennial party in power UMNO. Allegations of electoral irregularities? Check that too. Despite similarly relaxed attitudes towards Western-style platitudes about good governance, however, it appears Malaysia has its limits and is now fed up with Venezuela. As a result, Malaysia's state-owned oil firm Petronas wants to sell its stake in a partnership with Venezuela's counterpart PDVSA:

Malaysian oil company Petronas said it is exiting one of the biggest petroleum projects in Venezuela's Orinoco belt, after what sources close to the venture and within the firm said were disagreements with Venezuelan authorities and state-run PDVSA. The flagship project, called Petrocarabobo, has planned investments of about $20 billion over 25 years and calls for building a 200,000 barrel per day upgrader to convert heavy crude into light crude oil.

When the venture was formed in 2010, Venezuela touted it as a sign that oil companies were willing to put up with demanding fiscal conditions in exchange for access to the world's largest oil reserves. Petroleos de Venezuela (PDVSA) has 60 percent of the project. Petronas belongs to a consortium that holds 40 percent. Its other partners are Spain's Repsol, India's ONGC and two smaller Indian firms, Oil India and Indian Oil Corp. Petronas holds an 11 percent stake. Sources close to ONGC and Oil India said on Wednesday they were unlikely to buy the stake being shed by Petronas. 

I wonder why there are no takers. To begin with, Venezuelan crude in the Orinoco is heavy and sour, which makes it difficult to refine unlike light, sweet crude oil. On top of this challenge, you have the Venezuelans constantly changing revenue-sharing arrangements adding to the confusion:

"This should not come as a surprise. We have not been excited about this project for the past two years because of the dealings with the government," said the source, who requested not to be identified as he was not authorized to speak to media [...]

One source close to the project told Reuters that frequent changes in the fiscal framework, disagreements with the government of Chavez's successor - Nicolas Maduro - about the business terms, and long delays led to the decision to withdraw. 

So much for third world solidarity since even Malaysians are no longer willing to put up with the arbitrariness of Chavez's successor Maduro. If even the Chinese withdraw next given their unconcern over Western conceits alike transparency and good governance, who will be left to provide the technical capabilities to extract this heavy and sour crude? 

Does US Discourage PRC FDI? Uncle Sam Sez No

This is a follow-up to a recent post about the Chinese food conglomerate Shuanghui International attempting to purchase US pork producer Smithfield. If it pushes through, this deal will be the largest Chinese acquisition of an American firm to date. However, as I mentioned earlier, there are all sorts of dubious "national security" concerns which many believe the US deploys as an excuse for blatantly discriminatory attitudes towards China. I have called it "hog farm protectionism" in this case. Recently, Greg Gilligan, chairman of the American Chamber of Commerce in China, weighed in on these goings-on back in the US of A prior to the completion of the CFIUS process for this acquisition. He too believes that making pork a "national security" issue is, well, hogwash at a time when the United States needs job-creating FDI...even from [gasp, choke!] China:

American policy makers need to ask why the U.S. is not attracting more job-creating Chinese investment. While weakness in European economies has certainly played a role in this recent trend by offering Chinese investors bargain asset prices, we can't ignore the perception that the U.S. harbors an underlying hostility to Chinese investment. Recent political opposition to Shuanghui's acquisition of Smithfield reinforces this perception. Indeed, the response to this deal is representative of several worrying trends.

One is Washington's tendency to define American national security interests unreasonably broadly. Some opponents of the Smithfield deal have suggested that pork production is a national security issue. It's hard to credit that argument in an economy where Americans already have access to an unimaginable array of foods, including a wide range of meats. Another is Washington's lack of transparency in its approach to vetting these deals. Politicians and policy makers are starting to move the goal posts with each deal. One example of this is the CFIUS process itself, the results of which aren't published. Earlier this year, a U.S. district court judge refused to throw out a claim by Chinese-invested Ralls Corporation that it had been denied due process when, without adequate explanation, regulators demanded that it divest its interests in four wind farms. The lack of clarity about how Washington will decide investment issues is a problem.

Meanwhile, back in DC, the folks at the US Treasury replied to what they believed to be a mischaracterization of Committee on Foreign Investment in the US (CFIUS) procedures by Mr. Gilligan. Assistant Secretary for International Markets Marisa Lago counters:

Greg Gilligan, in "America Needs the Smithfield Deal" (Sept. 4) mischaracterizes the role and processes of the Committee on Foreign Investment in the United States (CFIUS) and inaccurately describes the U.S.' policy on foreign investment.Contrary to Gilligan's claims, the CFIUS review process is non-discriminatory and transparent in its rules and procedures [...]

Unlike other countries that place restrictions on investments in broad swaths of the economy, impose ownership caps, or review foreign investment for economic and other considerations unrelated to national security, CFIUS applies the same rules to each transaction that it reviews, regardless of the country of the investor or the economic sector of the investment. We welcome investment in our entire economy and from all countries, and from private and state-owned investors alike. Unless a transaction presents a national security risk, we welcome it.

And while we are required by law to keep information filed with CFIUS confidential, the rules that govern the CFIUS process, including its governing statute and regulations, are publicly available and fully disclosed online. It is a process that enables us to protect national security in a manner fully consistent with our policy to encourage foreign investment.

Her response reminds me of Robert S. McNamara's: answer the question that you wish to answer, not what was actually asked. Many discussions that make or break PRC investment are conducted in backroom, informal meetings and not in public deliberations. So, saying that the rules are disclosed does not necessarily mean that the investors-to-be have a fair opportunity to air their views during deliberations. More importantly, she skirts the problem that "national security" is made to cover pretty much everything they can think of: If the Chinese purchase is unpopular with the political classes, they will find a way to relate it somehow to "national security."

Going back to Gilligan, the evidence he cites for Chinese contempt is that the PRC is increasingly resorting to similarly vague and open-ended reasons that may be used to discourage US investment in the future:

Rules passed in 2011 allow the Ministry of Commerce to review a transaction's national security impact based on considerations of "economic stability" and "social order," without defining what these terms mean. Beijing also imposes an opaque and unpredictable review process on many foreign investments. It is hard for American businesses, or our government officials, to persuade Beijing to change such rules when Washington increasingly behaves in the same way.

At any rate, the CFIUS has since cleared the way for the Shuanghui-Smithfield deal. Whether through embarrassment if it went ahead with "hog farm protectionism," do remember that past years have witnessed US opposition over what I would argue are similarly specious "national security" grounds. Consider the cases of Huawei-3Com and CNOOC-Unocal where the prospective Chinese investors pulled out knowing they would be turned down anyway.

Still, the Smithfield deal shows improvement on the part of the US, but keep in mind that the more relaxed Canadians have permitted far larger deals with the Chinese in industries supposedly subject to "national security" concerns. Me? I will reserve judgment until a larger mooted purchase of an American firm in energy or high-technology sectors by a Chinese one comes around.