Archive for the ‘Economist’ Category

Has Creative Destruction Become More Destructive?

August 20, 2014

John Komlos of Ludwig-Maximilians University reviews Schumpeter’s idea of creative destruction.

He says we take creative destruction for granted without really looking at overall value creation by the innovation. This is crucial as today’s innovations do not create as much value. They just replace the existing products and are not a fundamental game changer:

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Is Real Business Cycle Theory really a theory of business cycle?

August 19, 2014

Gradually, skeletons are falling off the economists cupboard. if this continues we shall be able to soon say that the economist emperor is indeed naked. That is a different story that the emperor will continue to charm the people as there is no alternative really.

Noah Smith explains RBC in this piece and is interesting (scary actually) to read all this:

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Lack of consensus amidst economists- good or bad thing?

August 18, 2014

Dani Rodrik says it is a good thing that econs do not have  a consensus amidst them.  Though, it is not that econs always disagree as they do agree on many things.

Actually, Prof Rodrik misses an important aspect of this debate. Students only get to know over lack of consensus when they are exposed to media, debates etc. While they are studying, people are given a pretty standard consensus model which proclaims to explain the entire world . As a student. one doubts the models but lets it be as is never really taught to debate/disagree with the standard model.

And then he/she is exposed  suddenly to variety of issues on stepping onto the real world. His/her doubts come true over the standard model. This leaves most of the students to be clueless as their is inability to comprehend the events.

The real trouble is state of economics education. It is taught in  such a standard way abstracting from all the real world problems. One obviously wonders on studying economics that if things were so easy and simple, why is there so much economic struggle across the world?

Prof. Rodrik does say econs believe their econ model is the model which is problematic. The real deal is to explain all this to students in their coursework so that there is more connect with the real world.

How retail drug markets in poor countries develop…an example from India

August 18, 2014

Daniel Bennett and Wes Yin have this interesting piece in voxeu. Detailed paper here (should have been a better title; just skipped it on seeing the title earlier)

They look at how entry of MedPlus (a retail drug chain) has helped improve drug markets in India.

First, quality of drugs in developing economies is really low:

Millions of people die each year from infectious diseases like malaria, TB, HIV, and diarrhoea, many of which have drug therapies. We need effective medicine to confront the alarming burden of infectious disease in the developing world. However, many of the drugs for sale in developing countries are of poor quality. Counterfeiters sell ineffective products that imitate the appearance of established brands, while small manufacturers make and distribute substandard versions of common generics. A recent meta-analysis found that 28.5% of the drugs sampled in 25 primarily low-income countries were either counterfeit or substandard (Almuzaini et al. 2013). Poor-quality drugs are harmful because they deny therapy to patients and foster drug resistance.

Why do markets in developing countries contain low-quality drugs? Although everyone would rather take drugs that work, poor consumers in developing countries may prefer to take their chances if low-quality medicine is cheaper. In other words, drug quality may be a ‘normal good’ for which demand increases with income. Wealthy people may consume better medicine just as they consume better housing, transportation, and food. By creating demand for high-quality medicine, economic growth should improve drug quality along with the quality of other goods.

……When quality is difficult to observe, regulatory and legal institutions can greatly enhance market functioning. However, poor countries typically have weak regulation. For example, India’s Drugs Control Administration has a reputation as an ineffective regulator because it has frequently failed to detect substandard medicine. In one instance, it audited pharmacies but did not test the samples for 14 months, by which time many samples had expired (Mahesh 2010). Because quality is difficult to observe, unregulated drug markets may struggle to improve quality, even as incomes rise.

Fortunately, even with weak regulation, economic growth can foster changes in industry structure that lead to higher drug quality. Larger markets allow firms to reorganise production and invest in technologies that reduce the marginal cost of quality. In the status quo, many independent mom-and-pop pharmacies in India purchase medicine from a convoluted wholesale market. In addition to carrying national brand drugs, these retail shops stock a multitude of nearly indistinguishable ‘local’ brands whose quality varies widely. The shops usually lack air conditioning (an important quality determinant in the tropics) and do not employ licensed pharmacists. Recently, chain pharmacies have expanded rapidly in Indian cities. Chains can improve quality by purchasing in bulk from trusted manufacturers, establishing independent distribution networks, employing licensed pharmacists, and advertising to raise consumer awareness. These investments aren’t necessarily economical for mom-and-pop stores but make sense for a chain with hundreds of shops. Growth in consumer demand enables this process by creating markets that are big enough to cover the fixed costs of these organisational changes and quality controls.

MedPlus is one such example:

Our recent field study in India examines the market-wide impact of chain entry (Bennett and Yin 2014). We collaborated with MedPlus, a new chain that operates several hundred pharmacies in southern India, and examined how entry affected the prices, quality, and performance of mom-and-pop incumbents. We sent mystery shoppers to these stores to buy two common off-patent antibiotics, and send these samples to a lab. We also interviewed pharmacists and consumers, and counted the number of customers at each shop. We carried out this survey before and one year after entry in 20 markets in Hyderabad.

At baseline, we found that 6% of our samples fell below pharmacopeia standards. Quality was higher among established brands than among so-called local brands, which failed 22% of the time. This failure rate is worrisome for public health, since even modest quality deviations may have clinical effects for some patients.

We found that the chain improved quality both directly and indirectly. By selling high-quality medicine, the chain created better access to effective drugs. Chain entry also improved quality indirectly through competition, leading incumbents to both raise quality and lower prices. The price response was reasonable, since MedPlus generally undercuts its competitors’ prices by 5–10%. The quality response was not necessarily what we expected. After all, incumbents might find it easier to cut both prices and quality to avoid direct competition with the chain. The quality response suggests that, despite our concerns, consumers do have enough information to reward firms that improve quality.

Who benefits from chain entry? We worried that shops might discriminate against poor customers, and so we designed the study to investigate this possibility. We stratified the pharmacy audits by deploying both wealthy and poor mystery shoppers, which shopkeepers could observe based on their appearance and speech. In fact, we found no differential effects by the socioeconomic status of shoppers, nor among shops catering to relatively wealthy or poor clientele. By raising quality and lowering prices throughout the market, the chain appeared to improve consumer welfare for all consumers.

Our results suggest that chains will continue to thrive in India. Although incumbents match the chain’s level of quality, they do not match its prices. This pattern suggests that chains have a lower marginal cost of quality than independent stores. A cost advantage may eventually allow chains to dominate pharmacy markets in India. Although the welfare implications of this transition are ambiguous, we are hopeful. Chains apply an organisational approach that is conducive to offering good medicine. In developed countries, chains compete aggressively, margins are slim, and quality is generally high.

Nice bit,,But then one has to also see how these chains perform over a period of time with respect to competition. Do they lead to shutdown of mom and pop stores given their financial muscle and ability to compete? Or do the mom=pop stores remain and become more competitive?

 

 

Unrecognised benefits of grade inflation..

August 18, 2014

Easier grades overtime have become an issue across most parts of the world. In India for instance, Delhi Univ increasingly sees admissions happening at 99%-100% and so is the case with other elite IIT/IIMs & other places. There is no margin for error. Schools/colleges are under pressure to not just pass students but give higher and higher grades. Earlier we had few guys at the top now there are many. There was a time when First division in India (above 60%) was considered an achievement, now it is seen akin to failing.

Raphael Boleslavsky and Christopher Cotton in a voxeu piece, argue that there are some unintended consequences of this development — colleges are being foreced to improve education:

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Why Do Macroeconomists Disagree?

August 14, 2014

I thought the post should have been much broader as why do economists disagree? The disagreement is across micro too.

Mark Thoma argues that macro has actually become an ideology war:

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Why Swiss should also export their limited and decentralized governance model..

August 14, 2014

Richard Rahn of Cato Institute says Switzerland is one country that often works. He often recommends countries to follow the Swiss model.

More importantly without much publicity and hype (really important for India):

Switzerland is not perfect, but as countries go, it is hard to find one that is much better. The more people know about Switzerland, the higher regard they tend to have for it. By almost any measure of human accomplishment, and particularly in creating a most successful country governance model, the Swiss are clearly No. 1 in the world. Switzerland is a small, landlocked nation without much in the way of natural resources. It has managed to stay out of wars for two centuries and developed a long-term multilingual and multireligious democracy without strife. There is a rule of law with competent and unbiased judges and strong protections for private property.

Among the countries of the world, Switzerland ranks No. 1 in “life satisfaction” (Organization for Economic Co-operation and Development’s Better Life Index); No. 1 in “global competitiveness” (World Economic Forum’s Global Competitiveness Index); No. 2 in “labor -force participation rate” (OECD Labor Force Statistics); No. 3 in “happiness” (United Nations World Happiness Report); No. 4 in “economic freedom” (Fraser Institute and Cato Institute Economic Freedom of the World Report); No. 7 in “per-capita income” on a purchasing-power parity basis (International Monetary Fund World Economic Outlook); No. 2 in “overall prosperity” (Legatum Institute’s Prosperity Index); and No. 1 in “life expectancy at birth” (OECD Better Life Index).

Switzerland also ranks higher than average among the OECD countries (the 35 most-developed economies in the world) in levels of education and student test scores, and has lower levels of air and water pollution. Civil liberties are strongly protected, including freedom of speech, religion, press, assembly and even the right to own guns. It does not get much better than this.

The Swiss have also avoided creating the “cult of personality” around their elected leadership. The elected rulers of Switzerland are not well known by their own countrymen and are almost invisible to the rest of the world. History is replete with leaders who had too much power and visibility. Perhaps the reason the Swiss have made fewer economic and foreign-policy mistakes than other countries is, in part, because they do not have very powerful leaders who can push through bad policies.

Though there is negative press over its secretive banking but that is a case of grapes gone sour:

The world is an envious place (envy being one of the seven deadly sins), and hence, there is much Swiss-bashing by the jealous and the ignorant. Having been an adviser to senior officials in several different governments over the past few decades, I often encouraged them to look at Switzerland as a model that works. The Swiss model is particularly relevant for countries with rival religious and ethnic groups, but, alas, too few other countries have adopted it. Back in July 2003, when there was considerable debate about what kind of governance structure Iraq should have, I wrote an article published in The Washington Times that argued for the Swiss model.

Hmm..No model is perfect and there shall be some limitations. As long as there is development for people, it is fine. I am not too sure about Swiss model but has always been fascinating.

There are a few countries which have developed without the noise and expectations. You often wonder as if economic development is some kind of favor doled by authorities. The kind of noise certain section of society generates over economic development actually goes on to spoil and derail the whole effort.

Why good economic reforms could actually be bad news for ruling party…

August 12, 2014

There is large literature on political economy of reforms. Whether the ruling party wins on economics reforms? What kind of reforms? Should it highlight the reforms/growth or remain quiet? How should the reforms be sequenced? etc etc.

This paper is an addition to the literature giving contrary ideas. It is written by Sweder Van Wijnbergen of Universiteit van Amsterdam and Tim Willems of University of Oxford. They show why some reforms that begin well, lose public support. They say such reforms are like sampling without replacement..once out of the sampling bag they cannot go back into the bag. Overtime, people lose confidence and as a result lose out:

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The unintended consequences of public policy..

August 12, 2014

Thomas Hall of Miami University in Ohio has written what looks like a book to read — Aftermath: The Unintended Consequences of Public Policies. I was hearing a talk by Dr. Arvind Mayaram,Finance Secretary who said the troubles start whenever a policy becomes a public policy. And what he meant was as this book says — no matter how hard you try,there are always some problems with most public policy. It has these unintended causes which are not part of the original plan to stump the authorities.

In this article, there are a few such examples from the book:

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Madhya Pradesh, Bihar and Rajasthan are trying to shed the BIMARU tag…

August 11, 2014

Ganesh Kawadia and Sheena Sara Philips of Devi Ahilya University show how these 3 states are trying to shed the infamous BIMARU tag attached to them. UP is missing and is not a surprise as it tries every bit to remain tagged by that name. Not sure of the progress in the state of UP.

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Global Economy’s Groundhog Day..

August 8, 2014

Ashoka Mody takes a stab at current economic thinking and asking why IMF keeps getting its economic forecasts wrong.

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What explains the wage premium in silicon valley?

August 8, 2014

Jonathan Rothwell of Brookings has a nice post on the topic.

He puts up US map and looks at earnings of Software professionals across regions. He sees there is a wage premium in Silicon Valley compared to other places. Why this is so? It seems the region requires some typical software skills which lead to the premium:

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Can US really inflate away its debt?

August 8, 2014

The need for a one handed economist remains as important. I mean how does one make any policy given evidence is  so shaky? Laurence Ball just argued (along with many others) that higher inflation will help the troubled economies. Apart from stimulating economies for higher inflation, it will also lead to lower debts.

Ricardo Reis disagrees and says US does not really have this choice. It has to either generate higher growth or fiscal surpluses. There is no other way:

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Did Bernanke create the Ukraine crisis?

August 8, 2014

Things keep getting crazier. Central banks which were kind of unknown entities till even 25 years ago, are being embroiled in all kinds of things.

Benn Steil of CFR who wrote a book which is like events post Great Depression (or Lords of Finance part II). There is this interview where he says in a way Bernanke created the Ukraine crisis:

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How Political booms lead to financial instability…(any lessons for India??)

August 7, 2014

This is a pretty timely paper given the state of Indian politics and economics. It is by this trio of econs – Helios Herrera, Guillermo Ordoñez and Christoph Trebesch.

The kind of hype and expectations our financial markets have generated from the new govt is immense. Govt too is responsible making giving signals that things are going to be change as they are sworn in power. They are getting some reality check but our markets don’t care. One ought to be worried given how precarious the world economy is in. The earlier 9% times were when global economy was doing really well itself.  But currently it is at a precarious situation.Anyways, who cares.

So the paper look at this thing called political boom and how it eventually leads to financial crisis. It is even a better predictor than several sophisticated early warning indicators:

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Why researchers need to climb down from their ivy towers and see the real world…

August 7, 2014

One doesn’t know when academicians and researchers became ivy league types. One way to look at ivy league is to differentiate a select set of universities/colleges from others. But then it has also moved into another direction where Professors/researchers ( I mean economics ones) are completely cut-off from the real world. The end result has been chasing research which matters little and little as days pass by. Even teaching has been highly inspirational as one sees a very different world from what is taught. What better way to explain this than the famous Occupy Harvard where students walked out of Prof Mankiw’s class.

So it is kind of odd to read articles like this. HBSWK reviews research of Prof Nava Ashraf of HBS. She apparently descends from the Ivy League and involves people for whom the researchis being done.

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How OMT reduced spreads without a single Euro spent..

August 6, 2014

Draghi has empirical evidence. He has been saying how OMT has been useful in reducing spreads of effected economies. But like lawyers econs say where is the evidence? I mean it is much like a murder committed by an obvious person, but we just want an empirical paper saying it all.

WSJ Blog pointed to this ECB paper which says OMT reduced spreads in Italy and Spain by 200 bps. And what better proof of power of central banks and their communications than this. Not a euro spent and look at the effect:

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ECB’s dilemma over communications..

August 6, 2014

An interesting speech from ECB chief Mario Draghi on central bank communications and challenges for ECB.

First why do central banks communicate so much these days? Just to keep giving cheap dope to financial markets:

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Basics of Ponzi schemes…Are stock options kind of Ponzi games too?

August 5, 2014

Kaushik Basu has this really food for thought paper on Ponzi schemes. He is really good with such kind of topics thinking really out of the box.

Ponzis are among the most ubiquitous and least understood phenomena of economic life. They acquired a certain salience with the global financial crisis of 2008 and the crash of Bernie Madoff’s celebrated Ponzi scheme. This paper explains the structure of Ponzi schemes and goes on to argue that what makes this such a troubling phenomenon is its ability to be camouflaged amidst legitimate practices. It is shown, for instance, that the common practice of giving stock options to employees could be a potential Ponzi that allows corporations to flourish for a while by borrowing from its own future. The paper goes on to discuss the need for intelligent regulation to incise harmful Ponzis (not all Ponzis are harmful) while taking care not to damage other legitimate activities that surround them

Superb stuff..

Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics…

August 5, 2014

Journal of Economic Perspectives’s new edition  has some articles on entrepreneurship.

A team of four econs have written this paper bringing beh econ perspectives to entrepreneurship. They say returns from entrepreneurship are not high. But variance is high. Why do we still have people trying their luck at opening their businesses?

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