World Economic Forum in Myanmar: Isolated No More

In the retail space, there are certain token signs of global integration: McDonalds, KFC and Starbucks. In the realm of economic summitry, there too are certain "franchises" one can have: Think of hosting IMF/World Bank meetings...or, in this case, a World Economic Forum event. What brought Myanmar to mind is the country hosting that most neoliberal of talk shops, the World Economic Forum, from 5-7 June. If you had told me as late as 2010 that this nation would soon be hosting Klaus Schwab's schmooze-a-thon of global movers and shakers, I'd have probably chuckled heartily in dismissing it. Klaus Schwab and Thein Sein sharing the same stage; what an idea!

Well, dismiss it no more since it's actually happened. More remarkable yet, the WEF East Asia event was held in Nay Pyi Daw--the capital created by the generals from virtually scratch starting in 2002. To escape scrutiny of their less-than-proletarian lifestyles, it was thought that Southeast Asian equivalents of McMansions were better shielded out in the boondocks. Again, who would have thought that the hermit-generals would open up to the world once more, or that a marquee WEF event would be held in Nay Pyi Daw of all places.

At any rate, the presence of Tony Fernandes (head of AirAsia--the region's largest budget carrier) and Indra Nooyi (global head of PepsiCo) and other movers and shakers in the worlds of business and politics guaranteed attention. Indeed, that few remarked on how exceptional it was that such an event was held there indicates how far Myanmar has gone towards mainstreaming itself into global affairs. Given how marginalized Myanmar has been in ASEAN in the past few years largely through its own actions, the rapid transformation of the country augurs well for the group moving forward:

John Riady, director of [multinational conglomerate] Lippo Group, said: "I think the opening up of Myanmar over the last 12-18 months is nothing short of amazing. And we should all seize this opportunity as a moment to come together and try to work out our differences and achieve a breakthrough for the integration of the region." Now that Myanmar is facing fewer sanctions and easing controls on its governing style, it'll be able to contribute as a more active member within ASEAN.

The message has been served, then: Myanmar may not remain the "weakest link" in Southeast Asia for long. Besides, with more cooperation and less fear in store for ASEAN, who's complaining?

Why World Bank Doesn't Get 'Doing Business'

The World Bank's Doing Business report has garnered much attention in purportedly comparing the ease of doing business in different countries. That is, how is easy is it to start up or close a business? Oftentimes, it's not only how easy it is to set up a business that determines entrepreneurship but also closing one down if it proves unviable. Seen from this perspective, the likes of Hong Kong and Singapore which are recognized as incubators of entrepreneurship may not really have a concentration of business geniuses but instead make possible trial-and-error until a satisfactory proposition is found.

That said, the Doing Business report I've always found curious in certain respects. Importantly, they are based on the inputs of those familiar with fairly large businesses alike those conducting international commerce and may thus not reflect conditions faced by SMEs. As it so happens, Seth Kaplan over at Policy Innovations expands on this line of argument that perhaps the title of the report ought to be "Doing Business for Multinationals" or "Doing Business for Conglomerates" as opposed to referring to the minimally capitalized who actually do most of the business in developing countries in numerical terms. He points out how incomplete the indicators are for such entities...

The easier it is to start a company, the likelier it is people will do so. The easier it is to register property, the more likely it will be registered, potentially providing a spur to investment in housing, spending on household goods, and capital formation. The easier it is to get a construction permit, the likelier it is companies will invest in new projects that involve construction. But there are many more serious obstacles to doing business in less developed countries that are not addressed in these reports—namely those related to transaction costs. As such, the narrow focus and wide influence of Doing Business distorts priorities and leads reformers to ignore key problems.

A better approach would be to actually consider the typical challenges a small-to-medium sized enterprise (containing, say, 5 to 50 employees) faces in a less developed country. This is what DB is supposed to be doing, but its focus on the formal procedures of government ignores how most companies operate: If they are large, firms use "workarounds;" if they are small, firms operate in the informal economy.

Especially problematic is the report's reliance on the opinions of folks accustomed to handling businesses with economies of scale that are not necessarily typical of the sort of fledgling firms originally envisioned. Startups and mom-and-pop, anyone?

The dependence of Doing Business on "local experts, including lawyers, business consultants, accountants, freight forwarders, government officials and other professionals routinely administering or advising on legal and regulatory requirements" means that results reflect the needs and perspectives of these respondents, not that of a SME owner, especially in less developed countries where these "local experts" rarely work for SMEs. Limiting data collection to the single, largest city—which may contain only a small proportion of a country's businesses—further reduces the usefulness of the data.

Operating in the informal economy, generally avoiding contact with goverment bodies that are not trusted, confronting myriad infrastructure problems, regularly struggling to get paid for services rendered, SMEs in less developed countries have many more important things to worry about than "resolving insolvency" and "protecting investors," which combine to make up one-fifth of the DB aggregate score. Such issues are more important to foreign investors than local retail stores, trading companies, manufacturers, and trucking firms.

Good stuff; and I think the overall criticism that this report is geared towards larger-scale enterprises is essentially correct.

Landsburg versus Krugman

1. Paul Krugman says a Heritage Foundation economist is dishonest.
2. Steven Landsburg says, not so fast.

Why collective wage agreements are bad

Collective bargaining has a few advantages over the alternative, each firm bargaining individually with each trade union. It allows to internalize externalities in the bargaining process. It reduces negotiation costs per firm and union, although it may take longer than for the alternative. However, it prevents individualizing contracts to local circumstances, something that becomes more important as the workforce is getting more human capital and more specialized. Finally, there is that thing with market power.

Xiaomin Cai, Peter Gautier and Makoto Watanabe try to disentangle some of these costs and benefits within a on-the-job search model where both sides are heterogeneous. There is a wage than a planner would use in this context, and it is uniform. However, absent the collective bargaining, you would want wage heterogeneity, because this allows for firms to signal to workers that they have higher labor productivity. Thus, it is better if firms cannot commit to the uniform wage of collective bargaining than if they can commit. A rather unique situation where commitment is bad. And in an empirically plausible case, it is even better not to be restrained by collective bargaining altogether.

Bargaining power and international pricing

In international trade, how is the currency of invoicing determined? This is a big deal as it determines how is carrying the exchange rate risk. Even though this can be hedged, this still has a cost. And in this context, why is there quite frequently billing in a third currency? With such a "vehicle currency," bot exporter and importer face exchange rate risk. That does not seem right.

Linda Goldberg and Cédric Tille draw a theory of bargaining over price and exchange rate exposure between exporters and importers. An important element in this theory is the market structure. To gain a larger effective bargaining weight, you need to be larger and more risk tolerant, so surprise here. Then you also bear more exchange risk. Also, the size heterogeneity of firm on a market matters as well: the smaller firms then inherit the bargaining characteristics of the dominating ones. It would be interesting to see a test of this theory.

Savings and religion II

Various religions have different prescription on how rich people should be. Early Christians advocated low wealth and much redistribution, modern American Protestants seem to lean more towards wealth accumulation and little redistribution, to cite some extremes. What impact does religion have on savings behavior? Of course, nowadays it matters how religious people are. Conditional on a high level of religiosity, the religious affiliation should then matter. Earlier work using the PSID yields results that are puzzling to me: atheists save less.

Can new work by the same author, now going by the name of Anja Köbrich León, with the same dataset be illuminating? Well, not quite. In fact, the results do not seem to be robust across econometric methods, indicating some serious endogeneity issues, as has been hinted in the comments of the first post. So there, I had good reason to be puzzled.

PS: the earlier work is not cited in the extensive literature review. Is Anja hiding something here?

IMF Agrees w/Cheney: Deficits Don't Matter for US

Here we go again: for everyone else--especially the likes of Egypt, Pakistan and so forth, deficits do matter. But for the United States which (they say) has little funding its current account deficit, it's not really a problem. In essence it's the IMF approving of American deficits as per Dick Cheney's famous dictum that "deficits don't matter." To be exact, there's always the qualified economistic wording about how short-term fiscal consolidation is not required but rather stimulative policies to get the economy unstuck or suchlike. Instead, the real fiscal challenge for the United States is in the medium- to long-term when it must deal with its health care and pensions unfunded liabilities as baby boomers retire en masse:

Here is the IMF head honcho on the subject matter:

The U.S. economy would be faring much better were it not for the "self-inflicted" wound of tighter fiscal policy, the head of the International Monetary Fund said on Tuesday. "The U.S. is not doing as well as it could be, because of self-inflicted fiscal wounds. This year alone, fiscal adjustment will constitute an enormous 2.5 percent of GDP," IMF Managing Director Christine Lagarde said at the Brookings Institution.

She said the challenge was not the near-term fiscal outlook for the longer-term one, given the pressures of healthcare and Social Security spending. "The next couple of years are going to be quite positive looking. But if nothing is done about the medium and long-term horizon ... then the picture is a lot bleaker," Lagarde said. "This is the major challenge facing the U.S. economy today, and it must be met."

I am beginning to wonder when the medium- and long-term will arrive since they never seem to come when the IMF speaks about the US. It's in essence a free pass. Actually, the Yanks have a term for delaying the inevitable time and again in plain English: "kicking the can down the road."