A new discussion paper by Jeffrey Frankel, via Economic Logic:
The large economies have each, in sequence, offered “models” that once seemed attractive to others but that eventually gave way to disillusionment. Small countries may have some answers. They are often better able to experiment with innovative policies and institutions and some of the results are worthy of emulation. This article gives an array of examples. Some of them come from small advanced countries: New Zealand’s Inflation Targeting, Estonia’s flat tax, Switzerland’s debt brake, Ireland’s FDI policy, Canada’s banking structure, Sweden’s Nordic model, and the Netherlands’ labor market reforms. Some examples come from countries that were considered “developing” 40 years ago, but have since industrialized. Korea stands for education; among Singapore’s innovative polices were forced saving and traffic congestion pricing; Costa Rica and Mauritius outperformed their respective regions by, among other policies, foreswearing standing armies; and Mexico experimented successfully with the original Conditional Cash Transfers. A final set of examples come from countries that export mineral and agricultural commodities, historically vulnerable to the “resource curse,” but that have learned how to avoid the pitfalls: Chile’s structural budget rules, Mexico’s oil option hedging, and Botswana’s Pula Fund.
There is certainly no dearth of innovative policies and institutions in Georgia, from fighting corruption by firing the entire traffic police force to public service halls. Some of the reforms and institutions were inspired by other countries, but others were not. Which Georgian reform experiments are worth to be emulated by other countries? Which Georgian reform experiments are scalable and of relevance to larger countries?
Another Friday – another post with interesting links on economics.
1. Let’s keep the tradition and start with a link from Michael Fuenfzig – property rights and internal migration in Russia.
2. Economics Blog tells us how austerity could be self-defeating.
3. For any Star War fans out there – was Death Star really worth all the fuss?
4. From The Atlantic – how being kidnapped by pirates is just something from game theory.
5. Noah Smith has an interesting post on the essence of financial crisis.
6. Again from Noah – structuralists vs. cyclicalists.
7. Nick Rowe from Worthwhile Canadian Initiative has a couple of interesting posts. First – about forward and backward looking stuff. And second – about identity economics.
8. The Economist’s Free Exchange blog talks about possible Greek exit from Eurozone.
9. Paul Krugman has a quite pessimistic piece on economics and its usefulness.
10. And finally – an interesting blog (the whole blog!) dedicated to why you shouldn’t get a PhD. Not willing to discourage ISET students from doing one, but just to list all the cons (and we all know about pros, don’t we?)
By Eric Livny, on May 8th, 2012, in Microeconomics,  - (Comments are closed)
You may think that the subject matter of economics is human behavior. Well, not so fast. There is a growing body of behavioral economics literature suggesting that the subject matter of mainstream economics has been behavior by “Econs”, not “Humans”. Consider this journalistic account of “Nudge”, an influential book by Richard Thaler and Cass Sunstein:
Economics has traditionally ignored psychology. In NUDGE, Richard Thaler and Cass Sunstein take a step toward greater realism about it. […] The authors start off by differentiating “Econs” from “Humans.” The former are the efficient calculators imagined in economic theory, able to weigh multiple options, forecast all the consequences of each, and choose rationally. The latter are ordinary people, who, like the analysts on Wall Street, fall well short of homo economicus. Humans operate by rules of thumb that often lead them astray. They are too prone to generalize, biased in favor of the status quo, more concerned to avoid loss than make gains, among other shortcomings. So they often fail to manage their personal affairs to the best advantage.
Thaler and Sunstein’s “Humans” are different from “Econs” in that they lack infinite computing power and could therefore benefit from gentle (and not so gentle) nudges. Their “Human” is a “Homo Economicus Light”: an individual utility maximizer with “bounded rationality”.
If you think “Nudge” is a great step toward embracing psychology, consider this:
Most economic models are based on the self-interest hypothesis that assumes that material self-interest exclusively motivates all people. Experimental economists have gathered overwhelming evidence in recent years, however, that systematically refutes the self-interest hypothesis, suggesting that concerns for altruism, fairness, and reciprocity strongly motivate many people. Moreover, several theoretical papers demonstrate that the observed phenomena can be explained in a rigorous and tractable [emphasis mine, EL] manner. These theories then induced a first wave of experimental research which offered exciting insights into both the nature of preferences and the relative performance of competing fairness theories. […] We also discuss recent neuroeconomic evidence that is consistent with the view that many people have a taste for mutual cooperation and the punishment of norm violators. We further illustrate the powerful impact of fairness concerns on cooperation, competition, incentives, and contract design.
(from THE ECONOMICS OF FAIRNESS, RECIPROCITY AND ALTRUISM – EXPERIMENTAL EVIDENCE AND NEW THEORIES by Ernst Fehr, Klaus M Schmidt.)
By incorporating altruism, fairness and reciprocity, Fehr and Schmidt‘s strand of work represents a much more significant departure from standard microeconomics in the direction of realism (and psychology, and sociology). Fehr and Schmidt construct a “Human” that is a social animal, yet, they stay within the realm of economics because of their emphasis on “rigorous and tractable” mathematical modeling, i.e. maximization of “utility”. Of course, they use “utility” in a broader sense, including not only banal material utility but also emotional satisfaction (or dissatisfaction) from dealing with others.
For Fehr et al, the conclusion from the “spectacular failure” of standard economics in explaining observed behavior (in real life and in experiments) is that economists should use more complex models that incorporate e.g. other-regarding preferences into “Human” utility functions. Add to this behavioral economics mix Herbert Simon’s concept of “bounded rationality” (as done by Thaler and Sunstein) and here we have a real change of paradigm, a revolution in social sciences!
Now let’s look at the problem from a different point of view. Continue reading →
It’s Friday – best day of the week and day of best links from around the world of econobloggers!
1. Let’s keep the tradition and start with two links from Michael Fuenfzig. First – a small post on identity in Georgia.
2. And second – projects like Lazika seem to gain popularity in the world. And this post argues that it’s not finances, that the developed countries should provide to such projects. (And also have a look at Michael’s last week post on our blog).
3. Calculated Risk blog has some nice graphs on US population distribution by age. Do we all see the problem by 2035?
4. Why will and why won’t Eurozone break up – from Economics Help. What do you think?
5. And from the same blog – something useful for our students.
6. The Economist’s Free Exchange blog has a nice post on trading myths.
7. Same blog has a post on migration in Europe, which is worth reading just because a wonderful headline. Mr. Shaw would’ve been proud!
8. An interesting article from The Atlantic on what the Fed should do and why it isn’t doing it.
9. Paul Krugman talks (extensively, may I say) on how Ben Bernanke of today is different from Ben Bernanke of a dozen years ago.
10. And finally, one of my favourite bloggers, Noah Smith, has a very intuitive post. On intuition.
Productivity levels on the horizontal axis, productivity growth rates on the vertical axis. (Source: Dani Rodrik, “Unconditional Convergence”, NBER Working Paper 17546, October 2011.)
A recent paper by Dani Rodrik has an interesting observation about Georgia. The paper itself estimates the productivity growth rates of manufacturing firms, based on a UNIDO dataset covering 72 countries. What would we expect? We could believe that it is hard to innovate, but easy to copy and emulate the productivity leaders in the industry. In this case the most unproductive firms are the ones with the highest productivity growth, and the most productive firms the ones with the lowest productivity growth. Or we believe that productivity growth is driven by other, firm-specific factors. In this case we would expect that there is no or a positive relationship between productivity levels and growth rates.
It turns out that the former is what is happening. Low productivity firms feature high productivity growth rates, and high productivity firms feature low productivity growth rates. This is an important finding as it implies that low productivity firms catch up with high productivity firms. There is a catch though: This finding only holds for manufacturing industries. Not for agriculture and not for non-tradable services. Given this, what should you do as a poor country? You should move into those industries that offer you high productivity growth rates – manufacturing essentially. Rodrik calls these industries escalator activities – you step on the escalator and start at a low productivity level, but then you quickly and almost automatically move up.
Where does Georgia stand? The figure above from Dani Rodrik’s paper has Georgia in an interesting position. The productivity of Georgian manufacturing firms is the lowest or one of the lowest among the 72 countries. At the same time productivity growth rates in Georgian manufacturing are among the highest if not the highest compared to all other 72 countries.
This is of course fully in line with the first theory, that it is easier to copy and emulate than to innovate. Even better, Georgia is far above the regression line, indicating that more is going on than just what this simple theory can explain. A potential explanation are the significant reforms after the Rose Revolution. With less corruption and bureaucracy, a simplified tax regime and more reliable electricity it is no wonder that firms experience a productivity boost. A boost so large that at least according to this figure Georgia appears to be not only the World’s number one reformer, but also the World’s number one manufacturing firm productivity growth performer.
By Admin, on May 1st, 2012, in Agriculture, Georgia, Politics, A recent blogpost on tractor service stations generated an interesting discussion in the comment section. Well worth a read, in particular this insightful comment by Ulrich Koester:
It is a very interesting discussion. Possibly I can contribute somewhat as I am a grown up farm boy, a ‘skilled agricultural worker with exam’ and an agricultural economist and a general economist.
To clarify the issue it might be helpful to look at the experience of other countries, such as Germany. We have small farms in some regions which could be much better of either buying machinery services from machinery contractors, forming a machinery ring with individual ownership of the machines but renting the free capacity to other members of the ring, or even setting up partnerships with joint ownership of the machines. All alternatives had the potential to improve the well-being of many individual farmers. The actual situation shows that many of the farmers suffer from unused capacity of machinery and labor. There is disguised unemployment on many farms and inefficient use of machinery. There are even 30 to 40 percent of full-time farms which make a loss from year to year, indication that they eat up their equity. Hence, these farms would have been better off renting out the land and doing nothing. Of course, there were many extension worker and agricultural economists who tried to convince farmers to join a machinery ring or even to set up a partnership. The breakthrough came only during the last two decades. Note: The use of machineries would have been profitable before! What are the reasons for the delay? Expected profitability is certainly a necessary condition for setting up a private enterprise, but is not a sufficient condition. Uncertainty and risk may be against it.
First, machinery contractors were not at sure that offering the service would have been profitable for them. They have to know whether farmers will actually buy and will actually pay on time (this might be a big problem in Georgia). The contractor has to guess how many hours per year he will be able to sell the service. That depends very much of the cropping pattern in the region and the annual weather conditions. Most likely the contractor will not be able to get agreements on forward contracts and if so he can hardly enforce them. Moreover, he needs specific knowledge how to handle the machineries, including repairing them, and acting as a business man who knows business economics and who can deal with farmers personally. One can imagine that there are few people who are competent in all of these fields. Continue reading →
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