Sep 30, 2008

What makes a performing leader?

Identifying what really matters for growth is, most of the time, like spinning around a vicious circle. All that causes growth is also its consequences...And then you have exceptions: autocracies grow (Singapore), bad institutions don't matter (China), trade openness neither ( was it ever found significant?), resources are a blessing but also a I guess there is no secret to growth.
But come on there's got to be something...what could be the common thing that all countries that do well have in common? Answer: great leaders. Get my point? Zimbabwe's official exchange rate or trade policy doesn't matter really in as long as Mugabe is in charge...
Econometrically, this ain't easy to show...some tried and found that leaders do matter.

Now comes the interesting question. If good leaders are really all that matter, we can now ask ourselves what makes a performing leader? Is it his looks? His profession? His religiosity? His IQ? Ryan Enos at UCLA asked himself if IQ really matter for US presidents. Here's his graph:
So here's what I'm trying to find out (with econometrics or not): What characteristics of leaders determine country economic performance and second what do performing leaders have in common? IQ might well be one of these. Good idea???

No one is indiferent...

Sep 29, 2008


Some people love him for his papers, most people hate his books...anyway, here's a chance to go see an economics Nobel Prize. Joseph STIGLITZ will give a conference on the economic perspectives of Europe and the US, on Monday 6 October at 5:30 PM, Auditoire Piaget at UNI DUFOUR. It's open to the public!

Sep 27, 2008

A tribute to the coolest guy ever

I just came to know that the legendary Paul Newman, he who has inspired all of us to play pool, died today of cancer, aged 83. Beside this, the reason why I am paying him a tribute here is that he had a degree in Economics. He used to say, doubtful of his acting ability, that "I only got by on looks and energy." Probably, without his blue eyes, I believe he would have become an excellent Economist. Peace!

Sep 25, 2008

Direct Finance and the Exchange Rate

You should surely have a look at this site of MyC4, which is probably the most innovative Micro-finance project for financing investment in Africa. It brings private savers and debtors directly together.
Even though there is no guarantee of repayment nor an enforcement mechanism, loss of reputation (and accordingly bad rating for a potential new application for funds) and an incentive scheme to pay early (with lower interest) have so far allowed a pretty good return according to MyC4.

Up to now, MyC4 carried the exchange rate risk but it plans to move away from this model.
My bet is that once this happens creditors will tend to lend money to countries with fixed exchange rate regimes, since the little private saver has no time to deal with predicting exchange rates and is more likely to believe that for the time of his/her investment there will be no devaluation.

As a consequence interest rates for loans in those countries are likely to be lower. So much about the (ir-) relevance of the nominal exchange rate regime.
It would be interesting to analyze the dataset in order to see how people react to the introduction of exchange rate risk. It could be used for instance to infer how many percentage points in terms of expected return creditors are willing to sacrifice in order to not be exposed to exchange rate risk.

MyC4 will possibly explore this dimension to provide insurance against exchange rate variation. This would allow again the equalization of the expected returns.

Personally, I would prefer to have the option to - rather than pick a single project - be allowed to spread my little savings that I have over all the projects and be willing to accept a below average return on this portfolio...Who knows, maybe MyC4 will provide this (investment fund style) option at a later stage.

Sep 22, 2008

Economic conversations

Over a lazy weekend spent mostly goooogling, I came across an interesting website. It is called the economic conversation. It is a book written by Arjo Klamer, Deirdre McCloskey, and Stephen Ziliak and it's an attempt by the authors to:
"nurture and grow an already worldwide community of teachers and students observant of the facts that there is more than one way to think about the economy, and that a fair and public hearing of those alternative ways is crucial to the health of the economic conversation."
The readings are enjoyable. It is basically an economics textbook (organized in form of chapters) which leaves ample room for discussion with the authors themselves and with random people with different views, like marxists, "frustrated neoclassicals", feminists...

An interesting exercise they do in chapter 1 is to ask people in the classroom "why did you decide to study economics?". For example, this is what motivated nobel prize winner Robert Lucas:

"I have always liked to think about social problems. It may have something to do with my family. We always argued about politics and social issues. I studied history... but came around to the view that economic forces are the central forces in history, and started trying some economics."
So, since I was never asked such question before, I ask you readers, "why did you study economics?". Please post your answer in the comments, I will then summarize the results to see what motivates our generation of wannabe economists...

Sep 21, 2008

Brown Bag Lunch

Mes amis, amici, amigos and friends,
As the fall semester is starting, it seems about time to get somewhat organized for the BBL and the technical seminar.
The Brown Bag Lunch (BBL) is a weekly informal seminar where students can present their work and ideas in progress to other students and then get good and necessary feedback to enhance their papers. Bring your lunch! Students for the University of Geneva are also invited to participate and to present their research.
Jointly with the BBL, we organize the technical workshop. As econometrics and modelling is getting more and more complicated, we also organize technical workshops where students present their newly acquired skills to spill them over the freeriding students. For example, an introduction to statistical packages or on counterfactual VAR analysis in matlab!
Our choice of schedule would be on Wednesdays at 12h15 in Rigot. Additional spots will be added if necessary.
The first presentation date will be Oct.1st.
There are 12 spots for this semester. If you are interested in presenting please send an email ASAP saying whether you want to present classic BBL stuff or a technical workshop and also let me know your preference for the date (a Wednesday!).
We really encourage all of you to present. Even if it is just the idea and no paper yet it will help you in your research and let the others know which research is being done at the graduateinstitute. GENEVA!

Sep 19, 2008

Antropology of economists: Life Among the Econ

Grads, Adults, and Elders

The young Econ, or “grad,” is not admitted to adulthood until he has made a “modl” exhibiting a degree of workmanship acceptable to the elders of the “dept” in which he serves his apprenticeship. Adulthood is conferred in an intricate ceremony the particulars of which vary from village to village. In the more important villages, furthermore, (the practice in some outlying villages is unclear) the young adult must continue to demonstrate his ability at manufacturing these artifacts. If he fails to do so, he is turned out of the “dept” to perish in the wilderness. This practice may seem heartless, but the Econ regard it as a manhood rite sanctioned by tradition and defend it as vital to the strength and welfare of the dept. If life is hard on the young, the Econ show their compassion in the way that they take care of the elderly. Once elected an elder, the member need do nothing and will still be well taken care of.

the complete articll by Axel Leijonhufvud (1973) here

Sep 15, 2008

Lehman collapses, how will the financial system react?

After rumours spreading over the weekend, Lehman Brothers filed for Chapter 11, which means, the company will attempt to re-organize its debt obligations under supervision of a bankruptcy court. The hot debate circulating now in the blogosphere is, will this imply the beginning of a generilized collapse?

Nouriel Roubini seems to think so. On September 13 he wrote:
"If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system."
There is a reason to believe the consequences associated to Lehman Brothers' (LB) bankruptcy are not so dire. This should be why the US government did not intervene in LB's rescue. As reported by Ken Houghton at angrybear, while in the case of Bear Sterns (BS) the rescue was necessary becuse the bank had clearing business (too interconnected to fail), LB had none. Had BS failed, many financial firms would have been unable in the next days to run their current transactions (of several billion $ in size). In the case of LB, those operations were part of the current business and as such under the control of "risk managers" (I know this sentence sounds like an oxymoron but that's how the finance industry reasons today) and priced into market instruments. So, the "shadow banking" system may survive, but we may face some other firms going out of business and thousands of job losses along the way: a deeper recession.

[Update: Another interesting view about LB's bankruptcy is offered by Willem Buiter.]

Sep 11, 2008

The multilateral trading system

Our own Dick Kamuganga has just posted on his own blog, African Renaissance Fellowship, about the geopolitics of international trade. Here's an extract:

"The bigger economies will be able to achieve their ambitious mercantilist objectives of opening developing countries markets under PTA and RTAs without paying the liberalisation costs in agricultural sector than at WTO.

If the multilateral trading system is to remain relevant, at least three things must happen! (i) The rich nations must accept sharing leadership of the system with the emerging south. (ii) The global trade rules must be reformed and rebalanced and improved to serve all member states of the WTO, (iii) WTO must use its power to protect weak members against the might of the powerful in the regional and bilateral trade rules to promote development."

Sep 10, 2008


The Consejo Superior de Investigaciones Científicas (CSIC), the largest public research body in Spain, has released the "Webometrics Ranking of World Universities", to promote the diffusion of learning in the cyberspace. The first place went for MIT, which keep available all the course material, including videos!!, for any user, not just their students!.

Unitedstatians universities lead the first positions, with the Cambridge as the first European, in position 26th, the Zurich based ETH in 32th and honourable mention to Universite de Geneve in 83th and Universidad de Chile in 214th. I tried to look for our Graduate Institute but could not find it... maybe they got confused by the new name and forgot to include it in the leading positions... anyone can find it? There are 4000 universities!

Sep 9, 2008

New kid on the block: the USSRA (Roubini Edition)

This is the entry of the new column by Nouriel Roubini, the most hated economist by investment bankers, on his highly read and interesting RGEmonitor website:

"The now inevitable nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trends was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise."
You can easily guess what the acronym USSRA stands for, but you'd better read the entertaining whole article here.

Sep 5, 2008

All the classics...

The Wealth of Nations, Principles of Political Economy, The General Theory, An essay on the principle of population...all of these, and many many more, are available on-line here!

I also found this page that has a bunch of economics textbooks to download for free, including a very cool price theory one, from Chicago, of course.

Sep 4, 2008

Predicting US Presidential Elections

If you want to know who is gonna win the next US presidential election (November 4, 2008) you have three options. Ask your favorite expert on the subject (your mother-in-law for example); look at your favourite opinion pollster (Vanity Fair); or do some (useful) Econometrics I exercise (for the nerds).

In a paper written in 1978, Ray Fair showed how to use econometrics to predict presidential elections. The idea is that voters look at the current events and past performance of the economy to make their political decision. Apparently, the current slowdown is not bad news for the world...check it out!!

Workers Share Ownership – Giving it a Second Thought

Germany’s current government is about to implement a law which gives workers stronger incentives to share their companies risks by decreasing the tax burden for those who buy shares in the company. The government’s aim is to increase the current 2 million workers which make use of such schemes by 50%.

My first reaction, following simple economic instinct, was to be in favor of such an incentive system. The simple arguments which come to one’s mind are based on the idea that participation leads to a stronger commitment and hence potentially more productive and profitable firms. Workers get to share the benefits from these efficiency increases and the overall economy gets to gain as well. Looking at it from a very benevolent point of view one may even believe that this leads to a more equal sharing of the profits of a firm, similar to the tone in this FT article.

In the end this seems to be nothing else than what firms try to do with their managers: give them the incentive to work in the company’s shareholders interests.

Giving it a second thought, though, changed my view by 180 degrees.
There are at least three reasons, of which one, most likely everyone will agree with.
Let me start out with the most uncontroversial argument:

1) Optimal portfolio theory teaches us since more than half a century that diversification is beneficial. This implies not only for the single worker but also at an aggregate level that workers should not base all there revenues on a single source of income. Even though shares allow workers to compensate for low wages via increased capital gains, this is only the case if capital gains are negatively correlated with higher wages, i.e. the strongest argument for the participation scheme builds on the assumption that firms are to some extent zero sum and capital gains are made on the back of workers’ wage income. An assumption most people, that do not subscribe to the Marxist theories, at least want to be untrue. Under the extreme scenario a worker under the current scheme could loose both his sources of income if the company goes out of business. Hence, the right approach would be to create incentives for workers to hold shares of industries which are negatively correlated with the own company’s “business cycle”.[1]

2) The comparison between worker’s incentive schemes and those of managers is somewhat misleading. Whether we like it or not there is a clear asymmetry not only in terms of information about the company’s financial situation, but also in burdening the downside risk. Or, did you ever hear of a worker who gets a nice million euro package when “leaving” the company. This recalls to my memory the phrase of Charles Goodhart at a recent conference in Geneva, where he commented on the problematic salary structures in certain industries where upside benefits are private and downside costs are carried by the society (You may guess which industry he referred to).

3) Being rather a sociological than purely economic question, we may nevertheless ask whether it is not exactly the stability in income which makes the difference between a worker and a “capitalist”? Workers accept lower (productivity adjusted) compensation for a given time effort in exchange for reduced risk regarding their stream of income. A compensation system based on shares is working against this principle even if such a system may yield in the long run a higher average income (i.e. higher expected monetary value need not translate one for one into higher expected utility). In the end this is a subjective question since each of us has to answer how much risk we are willing to take in exchange for a potentially higher return. My guess however is that our tolerance level is rather low (unlike most simple utility functions that we use imply), or why are there so few entrepreneurs in the world?[2]

Hence, initially being a supporter of such a law I have turned to at least a strong skeptic. Good I gave it a second thought!

[1] This also implies that the additional tool envisaged by the German government, encouraging participation in a branch wide investment fund, rather than the single company is sub-optimal.
[2] This makes me think about an alternative way of trying to determine a country’s aggregate risk aversion, different to the traditional, rather fruitless one of estimating the Euler equation using GMM: just use the ratio of workers to entrepreneurs after controlling for some other aspects

Sep 1, 2008

Sex at the Olympics

I was reading this article about how athletes at the Olympics have sex like crazy. Then came this interesting paragraph that reminded me of the speed dating paper, and reflects society in general:

"There is something about sporting success that makes a certain type of woman go crazy - smiling, flirting and sometimes even grabbing at the chaps who have done the business in the pool or on the track. An Olympic gold medal is not merely a route to fame and fortune; it is also a surefire ticket to writhe. But - and this is the thing - success does not work both ways. Gold-medal winning female athletes are not looked upon by male athletes with any more desire than those who flunked out in the first round. It is sometimes even considered a defect, as if there is something downright unfeminine about all that striving, fist pumping and incontinent sweating. Sport, in this respect, is a reflection of wider society, where male success is a universal desirable whereas female success is sexually ambiguous."

I guess this logic doesn't apply to beach volleyball girls!