From the Harvard Class of 2009

A video for their 5th year reunion, featuring a couple of econ profs.

It's Official: Venezuela, World's Most Miserable Country

Talk about clever marketing. This feature was originally the answer to a question nobody asked. What if you took American economist Arthur Okun's "Misery Index," as expanded by Robert Barro, and applied it to the rest of the world? As originally formulated, this index was made up of two macroeconomic indicators, the rates of consumer price inflation and unemployment. Subsequently, Barro threw in the prevailing long-term interest rate and Δ in GDP.

Johns Hopkins University's Steve Hanke should be familiar to Asia followers as the would-be Svengali of the late Indonesian President Suharto. A colorful fellow as far as economists go, he recently applied the Misery Index globally and finds that (surprise!) economies run by the enemies of freedom generally score lowest on this compound measure (see table above). Actually, Hanke suggests, their actual performance could be worse since they often fudge their inflation figures (see Argentina). Using the black market exchange rate--the fourth of Venezuela's four-tiered rates and that which is not massaged by the government--things actually look even worse in Venezuela:

One way to estimate the rate of true, open inflation, in cases such as Venezuela’s, would be to track down the free-market prices — including the black-market prices — for all goods in the official basket. But such a procedure would be very difficult, if not virtually impossible, to implement. That is why no country has ever accomplished such a herculean task.

As an alternative, I have developed a procedure for estimating the true, open inflation rate for an economy in the grip of high inflation and price controls. While it is impractical to determine the free-market (read: black-market) prices for all items in an official basket, it is often quite easy to observe the free, black-market exchange rate. Since this is the most important price in the economy, changes in the free, black-market exchange rate can be used to estimate the true, open inflation rate for an economy.

By using the most important free-market price in Venezuela — the black — market bolivar / U. S. dollar rate — we can accurately estimate Venezuela’s annual open inflation rate (see the accompanying chart). At the end of 2013, this true, open inflation rate was five times higher than the official rate. And the associated true misery index was 301, not 79.

I do not necessarily believe that anti-Americanism is responsible for scoring high on this index since regimes friendly to the US fare pretty poorly too. Rather, the regimes that use the United States as a scapegoat for domestic ills use it as an excuse for their economic mismanagement. Simply put, they are poorly run, that's all. Maybe the death metal band Misery Index should visit Caracas soon.

Inequality in the UK

Sympathy for the Pirate? Gulf of Aden Overfishing

Give a man no fish to catch...and he grabs an AK-47 & boards a skiff?

Fisheries management does not top the list of attention-grabbing international studies topics, but maybe we should pay more attention to it. (Unless you're an environmental studies or geography studies major perhaps.) Increased patrolling in the Gulf of Aden by various international forces coupled with better-prepared transit by commercial vessels--don't hog the shoreline, don't overload the boat so its deck sags and is easy to get ahold of, increase speed through the danger area, etc. have done their part in reducing maritime piracy. That said, the danger still hasn't entirely gone away:

The World Bank noted that "piracy imposed a hidden tax on world trade [...] Piracy costs the global economy roughly US$18 billion a year in increased trade costs — an amount that dwarfs the estimated $53 million average annual ransom paid since 2005," the bank said in a 2013 report. "It's expensive, so the day when the shipping companies say 'That's enough,' the whole thing can kick off again quite quickly," warned [Eurocrat] de Poncins.

And given that attacks are becoming rare, ship owners and captains are starting to let their guard down, EU Naval Force officials say, reporting that ships are again navigating at slower speeds and sailing closer to the coast in order to save fuel. "We are becoming victims of our own success," said Lieutenant Michael Quinn of Atalanta, adding, however, that "the conditions on the Somali coast have not changed and industry must not relax."

The EU Naval Force's mandate applies only to the sea; it is not authorised to launch land attacks on the pirates who still control, notably in Puntland, large sections of the Somali coast. Clan militia, pirate networks, and criminal gangs share power in this country deprived of an effective government since 1991.

As long as the factors which drove piracy remain--lawlessness, civil breakdown and a lack of "legitimate" livelihoods--the problem cannot be entirely solved since there will always be those willing to risk being caught in the absence of other alternatives. One of the more intriguing arguments has been that these pirates were formerly fishers driven to hijacking vessels by large commercial (read: Asian and Western) vessels overfishing the Gulf of Aden. There is some geographic evidence that this area has been overfished [1, 2] and the argument goes like this:

In looking at the fisheries maps, I noticed that the coast of Somalia was one of those places where overfishing had taken place; in a subsequent conversation with a colleague I learned that one hypothesis about the Somali pirates was that they were unemployed fishermen, who had to find another way of earning a living now that they had no place available to catch fish. At the time, this was a hypothesis and not backed up with a scientific survey; advocates never really mentioned the threat of piracy as a reason why we shouldn’t overfish our oceans to the point of depletion.

The theory held my attention though, and after a little research I found a map of global shipping lanes and looked for other places where a confluence of routes brought cargo ships close to countries with weak legal structures.  West Africa matched the criteria, a region whose overfishing had been highlighted both on the overfishing maps as well as in the documentary, “The End of the Line.”

More formally, this is the "lack of fisheries management" (due to absent governance) argument:

The relatively small area in which fishing takes place means that most important fisheries resources can be considered as shared stocks. Many are truly highly migratory, for example the tuna and small shoaling pelagic species of the Region. However, overfishing by industrial trawlers in the Gulf of Aden nearshore waters during the 1970s and 1980s has depleted some valuable resources, such as cuttlefish and deep sea lobsters. These stocks have not fully recovered, due primarily to a lack of effective fisheries management. 

However, the World Bank report cited earlier (warning: large download) disagrees with this notion:

Somalis often argue that piracy started off as self-defense by impoverished fishermen against international fleets fishing illegally in their waters. Over time, even as piracy evolved into a much broader business and despite the fact that fisheries were never a leading economic activity in Somalia, this “Robin Hook” (Shortland 2011) interpretation has by now become a powerful legitimizing narrative...

Moreover, the analysis finds no evidence of overfishing. While illegal fishing has often been associated with overfishing and the depletion of stocks available to Somali fishermen, the data do not reflect that. It was found that high total tuna production in a given year does not presage low production the next year either for an individual fleet or in the aggregate. In fact, at the aggregate level there is solid evidence that high tuna catches in one year predict high catches the next year. If stock depletion were a major problem, the productivity of the fleets remaining in piracy-affected waters should be higher after the piracy surge because so many fleets moved to safer water. However, no productivity boost can be seen in the data.

I do not think the World Bank report's argument is conclusive. It basically goes like this: since years when the Gulf of Aden area experienced elevated catches were not followed by lean years, then these waters were not "overfished" to begin with. The World Bank is more concerned with flow-level data (# of fishes caught annually) when overfishing is more a stock-level phenomenon (# of fishes left in a particular marine area). True, there is a problem of data availability regarding the true level of stocks in the Gulf of Aden area given that few international organizations currently operate there since "Somalia" is largely a collection of warlord-occupied lands.

This much the World Bank and I could probably agree on, though: If "legitimate" livelihoods were to be had in Somalia, then many of these folks wouldn't resort to this kind of low-probability opportunism. Just as cutting the "supply side" didn't work in the war on drugs, so too is the piracy problem not solvable by focusing mostly on force. 

'Applecoin' Has Potential, Not Necessarily Bitcoin

...or is that iCoin? Referring to a post I made earlier on all you wanted to know about Bitcoin, I did not believe it could not come into widespread usage for two reasons. First, Bitcoin did not have the support of major financial institutions that (literally) held the important cards in debit/credit cards, money transfers, bank deposits and so forth. Second, without clear regulatory approval in the United States and other major consumer markets, establishments would be wary of transactions inhabiting the 'grey' area between what's legal and illegal.

I suppose that it was only a matter of time that the most innovative of major corporations, Apple, would be first out of the blocks in experimenting with virtual currency operations. More specifically, Apple is allowing virtual currencies to ply their trade amongst apps (and is not the virtual currency developer itself). Previously, it removed apps from the iTunes store that run Bitcoin presumably since it wasn't entirely sure of the legal ramifications. The knock-on effects here could be potentially huge. With Major Name Backing and an Established Track Record of introducing new product categories, Apple has sufficient clout to get financial institutions, credit card operators, and money transfer services to sit up and take notice. If someone can deal with possible legal entanglements down the road, it's certainly Apple who faced down the challenge of the Beatles franchise when it began selling music in 2003. From Bloomberg:

While Apple didn’t mention bitcoin specifically, its developer terms now allow for certain “approved virtual currencies,” without saying what those were. Apps that use the digital money must comply with state and federal laws wherever they’re designed to work, the terms say.

The change signals that Apple is warming up to virtual currencies after previously blocking programs like Blockchain.info from its App Store. Bitcoin is the most popular digital currencies, which governments are struggling to determine how to regulate because they exist only as software. “This is a sign that the ecosystem is maturing and gaining credibility,” Bill Lee, an investor in bitcoin wallet BitGo, said in an e-mail. “To be clear, I still think bitcoin is in its infancy as a technology, but its acceptance is becoming more and more mainstream.”

Bitcoin entrepreneurs were already predicting an explosion of activity. “Get ready for a plethora of bitcoin iOS apps!” bitcoin venture capitalist Adam Draper said in an e-mail. “Very exciting news!”

Unlike the Bitcoin fanboys, I's be especially wary about the proviso that these virtual currencies would only be permitted to ply their trade on Apple devices if they complied with state and federal laws. Again, this is murky legal territory that may allow Apple to (again) suspend their operations should they run into legal entanglements. Also keep in mind that this is a very limited Amerocentric framing: aren't virtual currencies also used internationally to transfer money and settle transactions?

My guess is that the legal issues that need to be hammered out will be international to meet anti-money laundering and counter-terrorist finance (AML-CTF) that were put into place largely at the American's behest after the September 11 attacks. If you are interested in the technical details of AML-CTF compliance, CGAP wrote a paper in the similar context of mobile wallets sometime back. These problems are not insurmountable, however. The Bitcoin fanboys may not have sufficient clout to sort out the legal aspects of virtual currencies, but Apple with its hundreds of billions in cash sitting around certainly can. AS I said, 'Applecoin' has potential, not necessarily Bitcoin.

BTW, the app store review guideline in question is 11.17 under 'Purchasing and currencies':

Apps may facilitate transmission of approved virtual currencies provided that they do so in compliance with all state and federal laws for the territories in which the app functions

Pope Bets on 'Charismatic Catholicism' in LatAm

Pope Francis entertains the 50,000.

The Latin faithful have always been a troublesome bunch for the Roman Catholic Church. Starting from the 1970s, the emergence of liberation theology [1, 2, 3, 4]--Jesus Christ's mission cast as a Marxist emancipatory struggle--was denounced by none other than Pope Benedict XVI when he was still the doctrinal enforcer. After all, how could a godless ideology be compatible with church teaching? While liberation theology is the threat from within, the threat from without has been the rise of charismatic evangelical (read: Protestant) movements who have drawn away large numbers of Catholics with their more personalized and upbeat ["God loves YA"!] message compared to the increasingly staid one of Catholicism. The numbers are not promising for the Catholic faithful in Latin America.

Losing market share from this threat from without, I guess it was only a matter of time that the bigwigs in Rome decided to fight fire with, ah, consuming fire. The (comparatively) young and energetic Pope Francis has been called our "rock star Pope." Hence, it was only a matter of time before he addressed this issue: Why does Catholicism have to be dowdy? Why can't its celebration be set to song and dance like the Protestant evangelical movements? Hence his promotion of an nascent counter-movement, "charismatic Catholicism":

As the church continues to lose members in the region with the world's largest Catholic population, the charismatic movement stands out as a source of hope, not only for fending off the formidable competition of Pentecostal Protestantism but for raising morale among the faithful as a whole.

Though not even half a century old, the movement claims that at least 120 million Catholics in 238 countries have been "baptized in the Holy Spirit," according to a 2012 document published by International Catholic Charismatic Renewal Services. The movement, which started in the United States, reports fast growth in Asia and Africa. But the world's largest concentration of charismatics today is in Latin America, where 16 percent of Catholics identify themselves as participants...

Although the Catholic charismatic renewal has strong ecumenical roots, and its members have often worshipped together with Pentecostals, it also functions as a vehicle for retaining or winning back Catholics tempted by the Protestant alternative. Like Pentecostalism, charismatic Catholicism emphasizes the Holy Spirit, features faith healing and speaking in tongues and is spread by door-to-door evangelists. But the important roles it gives to Mary and the Eucharist ensure that charismatic devotion has a clear Catholic identity.

The article above also discusses how Pope Francis was a late convert to charismatic Catholicism, viewing it earlier as folks mistaking liturgical celebration for a samba lesson [!] Now, however, it is taken as a visible sign of renewal. This brand of the faith came to mind as Pope Francis just hosted 50,000 charismatic Catholics in a stadium in Rome while delivering the familiar message that the family as an institution is under attack from modernity.

My take is that he recognizes that promoting arch-conservative movements like his predecessors did will not do much to shore up the faith in Latin America. Fight fire with consuming fire, right? It may be old sacramental wine in new bottles, but hey, the implicit argument of Pope Francis is that as long as the attempt at (popular) repackaging doesn't detract from the core contents, then it's perfectly fine.

How Large is the Domestic Footprint of MNCs?

The answer is "not much." There's a very interesting thing going on worldwide as Western stock indices hit all-new highs week after week while their local economies suffer from stagnation. The archetypal example, of course, is the American joke/con-omy (its performance is laughable and is buoyed by dubious, unsustainable factors like falling incomes) which shrunk 1% in the first quarter of 2014. America #1, baby! How is it possible that the US economy is going nowhere fast but US-headquartered firms' equity valuations are zooming ever higher? Surely this is a classic case of Greenspan's "irrational exuberance"? Well, not necessarily, and the reasons why are relatively straightforward.

The Economist has an interesting feature on how (mostly) Western multinational corporations derive an ever-smaller share of their revenues at home, while their headcounts and shareholders head in a similar direction. Of course you can use stock valuation methods such as price-earnings ratios, dividend discount models and what else have you to derive how much these stocks are worth, but the important thing to keep in mind is that a lot of MNC earnings will increasingly come abroad. So their home economies may go nowhere fast--think of North America, Western Europe and Japan--but their revenues may be unaffected or likely even grow as most gains come from international operations in developing countries and the like.

It's interesting stuff, and I'll have more on how MNCs hardly act in the national interest as most IPE scholars believe. While these MNCs may successfully lobby their home governments for economic and trade favors, governments do not have the same sway over MNCs.