May 31, 2010

What else would you choose?

So the story is that the majority of people finally chose "The Best Party". What am I talking about?In a local election in the Icelandic capital, Reykjavik, "The Best Party" founded by comedian Jon Gnarr six months ago, came in first with 34.7 per cent of the vote. In spite of its very short life, it won the heart of Reykjavik's people with a political campaign which made, among other things, effective use of alternative media. "The Best Party" now has to deliver on its promises: drug-free parliament by 2020, free towels in all city swimming pools, a polar bear for the city zoo and a Disneyland at Vatnsmyri, the capital's airport. Beside these mundane promises, the party's satire against the politicians and businessmen responsible for the banking collapse, also reveals the huge dissatisfaction with the old system of the electorate. Let the "Best Party" be faithful to its own name then.

May 30, 2010

Money is a lousy way to motivate people

I once argued UN salaries shouldn't be so high as these were, in my view, responsible for the low effectiveness of the institution. Most people disagree. But academic research seems to be on my side. There is more and more evidence that monetary rewards crowd-out intrinsic motivation and are counterproductive for public prosocial activities. I tried to support my claim with more evidence... Now, on his excellent blog, Eric Barker throws a bunch of examples. Anybody with me?

Not A Good Look

In an update to my previous post on a brewing corruption scandal involving a banknote printing company, Securency, part owned and supervised by the Australian central bank, it now appears that the current RBA govenor was involved in lobbying the Indonesian central bank for the award of a note printing contract.

Whilst there is no suggestion that the Governor was aware of, or involved in, any alleged corruption by the note printing company or its agents, it is certainly not a good look to be associated with a deal in which it is alleged that bribery of foreign government officials took place.

In addition to the case of the Indonesian currency printing contract, there is evidence that bribery was also involved in trying to win a Chinese government contract. Incredibly, the Australian government is blocking the RBA Governor from appearing before the parliamentary committee responsible for economic matters to explain his level of knowledge of the dodgy practices......

Efficient estimation of time-invariant variables in panels with fixed effects

You wanna estimate the impact of distance on trade but your coefficient is biased since the error includes many country-pair affinities you can't control for. If you include country-pair fixed effects, the distance variable is dropped. So how can you do it? This paper suggests a 3-step procedure.

The first stage runs a fixed-effects model to obtain the unit effects, the second stage breaks down the unit effects into a part explained by distance and an error term, and the third stage reestimates the first stage by pooled OLS (with or without autocorrelation correction and with or without panel-corrected SEs) including distance plus the error term of stage 2, which then accounts for the unexplained part of the unit effects.

May 29, 2010

The best of economics

The Economist has just launched an Economics channel page that combines all of The Economist's economics coverage, from the print edition and the web, including the best of blogs, audio, video, and charts. It also selects and give links to the best economics writing from around the web, and to the most interesting new papers and reader comments. Well done. 

May 28, 2010

Forensic economics

Ray Fisman writes on Slate about the CIA interventions and trade paper being part of the "relatively young field of forensic economics, which aims to shed light on shadowy corners of the economic world that trade in much speculation but few verifiable facts. Forensic economists have applied their analytic techniques to expose shenanigans ranging from vote-trading by Olympic figure skating judges to insider trading to political favor-seeking by companies in America and around the world. All of this work is based on the insight that backroom deals and illicit transactions often leave traces in the data, which creative researchers can find".

Eric Zitzewitz is preparing a literature review for the JEL. He writes that we now have evidence on teachers cheating on exams, road builders skimping on materials, violations of UN sanctions, unnecessary heart surgeries, and racial biases in employment decisions, traffic stops, auto retailing, and even sports judging.

My three favourite papers in the field remain:

May 27, 2010

Brazil's highway to China

From the FT's beyond brics' blog:

400km north of Rio de Janeiro sits Açu Superport, a port and industrial complex one and a half times the size of Manhattan Island with a main pier sticking out 3 km into the south Atlantic being built by Eike Batista, a billionaire entrepreneur and Brazil’s richest man... Next will come the berths, for up to 10 ships loading and unloading iron ore, coal, oil, granite, pig-iron and steel... China’s deputy trade minister looked at the pier and called it “a highway to China”.

May 26, 2010

Doubling aid to Africa by 2010: the facts

This article by the BBC reviews a report on the status of "foreign aid" policies enacted at the Gleaneagles summit in 2005. The plan by the G7 was to"... increase [...] official development assistance to Africa of $25bn [£17bn] a year by 2010, more than doubling aid to Africa compared to 2004".

The report (here is the main website of the organization in charge of it) shows that the G7 countries has delivered only 61% of what they promised.

Among donors, the situation is not the same. While the UK has achieved the fastest growth in aid given to africa since 2004, Italy did not. Prime Minister Berlusconi had to apologise in July 2009 "I am sorry we did not respect our promises, we are sorry we reduced aid to Africa, and for this reason we have opened a debate within the government." and Bono in now mad at him.

Beside that the organization Africa Progress Panel has also produced a report on the failure of African leaders to keep up on their promises of transparency, better governance and less corruption. Michael Keating, director of the panel said: "Governance and leadership are still the missing ingredients in Africa's development."

I wonder whether mr. Berlusconi has started to read Rigotnomics...

The future of the euro

Last week we had Wyplosz and Tille to share their views on the future of the euro. Seems this was only practice for the former as he is now debating against Marty Feldstein on! The Economist believes the euro area will fragment over the next 10 years...Wyplosz believes there is a chance the monetary union will emerge stronger... So far, 57% of participants seem to agree. But Marty might change their minds... Follow the debate here.

Awesome ad

May 25, 2010

The econometric debate continues

The new JEP has a nice symposium on the state of empirical economics, picking up where Rigotnomics left off. It starts off with the mostly harmless econometrics guys who talk about a credibility revolution which primary improvement has been a focus on the quality of empirical research designs and random assignment. But the consensus seems to be against them. Ed Leamer, who's classic argued for more sensitivity analysis almost 30 years ago, still stand on his position. Keane suggests economists could draw lessons from the field of marketing, where the structural paradigm is dominant and where there is great emphasis on external validation. Sims warns that the mostly harmless guys make overbroad claims for their favored methodologies. Nevo and Whinston also argue that credible analysis can come in many guises, so experimental designs seem like a very narrow and dogmatic approach to empirical work.  They then explain why empirical analysis in industrial organization differs in such striking ways from that in fields such as labor and development, which have recently emphasized the methods favored by Angrist and Pischke. Finally, Stock repeats what others have said, mainly that "design-based research" misses an important part of the story.

May 24, 2010

Useless, ignorant economists

A very well known Harvard professor holding a high government position some years ago spoke at the annual conference of a Chilean Business group on the state of the economy. He was paid $20,000 to give two lectures... In his first lecture he suggested that the Chilean government could issue inflation-adjusted bonds. In Chile, most transactions were in UF, an index for inflation adjustment introduced in the 1960s!

This story comes from a comment on this blog post.

May 23, 2010

Sex, Bribes and Central Banking Down Under

According to this article, the firm responsible for printing Australia's banknotes - which is owned and supervised by the Australian central bank (the Reserve Bank of Australia) - has just been implicated in a scandal involving the procuring of prostitutes for, and bribing of, foreign officials (such as central bank governors) in order to win lucrative overseas contracts. What's worse, it seems from the outside that the Australian government is helping in the cover up by voting against the establishment of a parliamentary inquiry into the scandal.

I can't believe that the Australian authorities are involved in this kind of corruption......doesn't really do much good for central bank credibility that this kind of thing happens!!

Selling shares of yourself

Alex Tabarok blogs about The Unincorporated Man, a science fiction novel in which shares of each person's income stream can be bought and sold.  (Initial ownership rights are person 75%, parents 20%, government 5%--there are no other taxes--and people typically sell shares to finance education and other training). Reminds me of this article I wrote (inspired by Tyler Cowen):

Ana Ivanovic was from a poor Serbian family but wanted to become a professional tennis player. When she was 14 her parents found a Swiss businessman who spent a total of $500,000 on her training in Switzerland in exchange for a share of her future earnings. Years later, Ivanovic signed a multimillion dollar sponsorship deal and eventually became world number one. She achieved her dream, and so did the businessman.
To help match cash-stripped aspiring athletes with venture capitalists wishing to emulate this successful investment, Cindy Yim, an ex-Deutsche Bank employee, recently created an online Jock Market where investors can buy shares of promising athletes. But would-be professional athletes seem not to be the only ones overlooked by conventional financiers. A similar website,, aims to sell shares of social entrepreneurs. Jon Gosier, a 28-year-old engineer behind AppAfrica, a venture investing in African software, is offering 3% of his future salary in exchange for $300,000.
Is this a new and radical way of thinking about finance? In reality, it’s more like an old idea that never really caught on.
Income contingent loans, as this type of financing has been known, were first imagined by Milton Friedman, a Nobel laureate in economics. Reflecting on the role of government in education, he had suggested the state engage in equity investments in students rather than provide loans deemed too risky by the market. But only in a few countries, such as Australia, did the practice flourish. This was partly due to the perception of it as immoral, equivalent to partial slavery. Things may be about to change. On top of these newfangled websites, academic voices are also getting louder.
According to Bruce Chapman, of the Australian National University, the vast majority of OECD countries could implement viable income contingent loan programs. The financial crisis has left many public universities in the red and governments are in no position to help. In a recent CEPR Policy Insight, Neil Shephard of Oxford University urges the UK government to allow universities to charge income contingent tuition fees. Well-functioning taxation systems are already in place to efficiently collect student charges.
Robert Shiller, of Yale University, even suggests governments should sell shares of their countries. “Trils” would pay a coupon of one-trillionth of nominal GDP and act as a natural hedge against budget shortfalls in times of recession. Investors, on the other hand, would be protected against possible inflation outbreaks. African countries could hence tap the market instead of relying on foreign aid or facing the prohibitive interest rates of debt. Greece, with few options left, could also experiment with Trils.
Despite financial constraints across the board, from poor aspiring athletes to sloppy governments, the world may be in no mood for financial innovation, seeing it as the cause of the last financial crisis. An old and simple idea could thus be timely.

May 22, 2010

Geneva Forum on Social Change

The GFSC is happening again this year, with Grassroots Innovation: Growing Business for Social Change as the focus this year. Check out the program here. They're showing five documentaries, I'll go see 3 and 5:

  • To catch a dollar, about Mohamad Yunus;
  • Food, Inc., about the US food industry;
  • Garbage Dreams, about three teenage boys growing up in the world’s largest garbage village on the outskirts of Cairo, home to 60,000 ‘Zaballeen’, or ‘garbage people;
  • Buyer be Fair, about fair trade coffee;
  • a small act, about a poor Kenyan kid who made it to Harvard but decided to become a UN lawyer...preview below:

May 20, 2010

What should World Bank economists do?

Tyler Cowen is apparently giving a talk on that topic at the World Bank he asks his readers for some ideas:
If you could reallocate the effort of economists within the World Bank, what would you propose? More big picture study? More RCTs? Should they spend more time refuting the simple fallacies of the economically illiterate? Or should they invest in a stronger capacity for technical economics? Should they offer more concrete advice on how to write incentive-compatible contracts for projects? Should they calculate theories of the net bias in remaining World Bank institutions (too many contracts?) and act to counter those biases? Or should they more or less give up on the idea of development and spend their time promoting the idea of freer immigration, as Michael Clemens does?
A lot of the comments refer to the uselessness of economists. One suggests we should tell them all to resign, effective immediately, and use their salaries to fund locals' start-ups in Africa and Haiti…Not a bad idea...

I think way too many useless papers get written at the WB. No one reads them. Their job should be to make sure new WB projects are not based on old ideas that don't work. In other words, spread the word about the latest research about what works and what doesn't. To do so, blogs are definetely a good start. A Vox EU type blog focus on development could be good. They could also write "Economics Focus" type columns (as in The Economist) about existing research and how it applies to WB projects. These could be published in "The World Bank Economist", a magazine focused on development theories and empirical tests. If the WB staff doesn't end up reading it, it should be dropped.

Papers evaluating World Bank projects should also be a priority. We need more of those. They should also promote RCTs, and suggest precise policy ideas and defend them, rather then use the word incentives without any idea in mind.

Last but not least, focus on quality data gathering and dissemination. The recent partnership with Google to make all data accessible online is great. So is the Doing Business database, the governance indicators, the debate about poverty numbers. This should be the number one priority.

All in all, forget about writing too many useless papers, academics are there for that.

May 19, 2010

Time to go shopping in the Eurozone

The Swiss franc is at its strongest ever against the euro!

CIA interventions and internationnal trade

Daniel Berger, William Easterly, Nathan Nunn and Shanker Satyanath have a sweet new NBER WP, Commercial Imperialism? Political Influence and Trade During the Cold War:

We exploit the recent declassification of CIA documents and examine whether there is evidence of US power being used to influence countries' decisions regarding international trade. We measure US influence using a newly constructed annual panel of CIA interventions aimed at installing and supporting leaders during the Cold War... We show that following CIA interventions there was an increase in foreign-country imports from the US, but there was no similar increase in foreign-country exports to the US. Further, the increase in US exports was concentrated in industries in which the US had a comparative disadvantage... This is consistent with US influence being used to create a larger foreign market for American products. Our analysis is able to rule out decreased bilateral trade costs, changing political ideology, and an increased supply of US loans and grants as explanations for the increase in US exports to the intervened country...

May 16, 2010

Rigotnomics' World Cup pool

Less than a month before the start of the World Cup! Time to place your bets! Rigotnomics is organizing a pool. Participation is 5 CHF with a chance to win big money! Here's how it works. Predict the outcome of all of the first round matches by filling this form, and pay me the 5 CHF before 1 June. The person who gets the highest percentage of correctly predicted games wins it all! Rankings and results will be updated daily. So, what will predict World Cup results better, statistical models or Rigotnomics' market?

May 9, 2010

New ideas for the UN from The Economist

UNESCO is launching a prize for achievement in life sciences, paid for by and named after the President Obiang Nguema of Equatorial Guinea. The Economist thinks it's a great idea. They even suggest the creation of many other such prizes:
  • The World Food Programme should ask Zimbabwe’s president for funds to establish a Robert Mugabe award for agricultural productivity.
  • The UN refugee agency could squeeze a few million dollars from Myanmar’s junta for a Than Shwe prize for promoting the rights of women prisoners.
  • The World Health Organisation could surely seduce Italy’s prime minister into providing some cash for a Silvio Berlusconi medal in sex education.
  • The International Atomic Energy Agency might tap Iran for a Mahmoud Ahmadinejad prize for the peaceful sponsorship of nuclear power.
  • UNESCO could next promote sartorial elegance with a Kim Jong Il gong for best-dressed dictator or launch a campaign for brevity in public speaking named after Venezuela’s president, Hugo Chávez.

May 7, 2010

How Greece can "devalue" and keep the euro

A UBS news brief explains how Greece could use a proxy of devaluation, i.e  “social VAT”, to gain competitiveness and boost exports .The idea is to switch from taxes on labour to taxes on consumption. This has the advantage of reducing the cost of labour, but also of taxing imports, which is a way to shift part of the burden abroad. The idea is thus simple: instead of adjusting the exchange rate, the adjustment is provided by a cut in labour costs, or more precisely the tax component of the labour cost. Greece has increased VAT twice already this year, moving the main rate from 19% to 21% in the fiscal package presented on 3 March, and then again from 21% to 23% in the IMF-sponsored package. But on the social security contribution, there is no compensating cut yet. UBS argues the adjustment in labour costs will come essentially from the abolition of 13th and 14th month salary payments in the public sector!

Stealing European agricultural subsidies

From the NY Times:
In Italy in 2007, 45 people were arrested in a citrus fruit fraud that was run through a cooperative. An estimated €50 million in subsidies were sought, of which €20 million were actually paid out. The fruit was supposed to have been taken off the market, pressed into juice and sold in Spain or France. In fact the product never existed. When investigators checked the addresses to which the “ghost juice” was supposedly sent, they found apartment blocks, a museum, a parking lot and a hardware store.
In 2008, Italian and European investigators uncovered a €3 million fraud over subsidy claims for fictitious tobacco, involving at least one cooperative, putting 80 individuals under arrest and recovering the cash.
Meanwhile, on the small Atlantic island of Madeira, which is part of Portugal, two banana cooperatives benefited from almost €1 million in illegal subsidies or nonpayment of duties during a decade of scamming, according to court judgments.
Apparently, a coop in Crete applied for subsidies claiming a harvest as big as lines of olive trees planted across the Mediterranean from Crete to the island of Santorini, about 150 kilometers away. 

May 6, 2010

Corruption in development deals

The World Bank is banning Macmillan, a British publisher, from taking up its contracts for 6 years, as Macmillan admits making "bribery payments" to secure a deal to print textbooks in South Sudan. This happened during the bidding process in 2008-2009 and Macmillan did not get the contract. Source: Reuters

In 2004, Macmillan published a book titled "Corruption, Politics and Development - The Role of the World Bank".