When institutions are bad, how much do social networks really help?

February 11, 2016

Fascinating bit of research by trio of Ulrik Beck, Benedikte Bjerge, Marcel Fafchamps.

Ever since the seminal paper of Coase (1937), economists have known that transactions costs can hinder the efficiency of exchange. If transaction costs are present, some mutually beneficent transactions may not take place.

In developing countries, poor institutions mean that many such transactions are left on the table since transaction costs are too high. For example, property rights are often vaguely defined and contracts hard to enforce legally. Well-functioning institutions support well-functioning markets through low transaction costs. In these contexts, there is increasing evidence that households instead rely on their social networks. One example is how social ties play an important role in informal insurance schemes (Fafchamps and Lund 2003, Mazzocco and Saini 2012). In fact, the importance of social ties shows up in very diverse contexts where they can help to decrease transaction costs; other examples from the economics literature are in the selection of an international trading partner (Granovetter 1995, Topa 2001) and in labour markets where seeking and getting a job is affected by social networks (Rauch 2001, Chaney 2014).

There are good reasons to think that social networks can also reduce barriers to the exchange of production factors. Social connections can increase trust between individuals and important information can be exchanged. Social ties can also reduce the risk of violation of agreements, since the violator risks losing not only the contract but also the social connection. These are some of the ways in which social ties are thought to lower transaction costs. However, the extent to which social ties can offset the negative impacts of high transaction costs for exchange of production factors is an open research question. Earlier papers provide indirect evidence that this may be the case (Sadoulet et al. 1997, Holden and Ghebru 2005, Macours et al. 2010).

So what does their analysis show? Do networks help? Somewhat…

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How digital world is disrupting GDP calculations?

February 11, 2016

Diane Coyle has a piece on the topic:

Digital technologies are having dramatic impacts on consumers, businesses, and markets. These developments have reignited the debate over the definition and measurement of common economic statistics such as GDP. This column examines the measurement challenges posed by digital innovation on the economic landscape. It shows how existing approaches are unable to capture certain elements of the consumer surplus created by digital innovation. It further demonstrates how they can misrepresent market-level shifts, leading to false assessments of production and growth.

Some examples of this:

Digital technologies, like any innovation, clearly create consumer surplus. Hedonic pricing techniques capture some quality improvements, but it seems unlikely they can ever fully reflect large qualitative changes in human possibilities or well-being due to such major innovations. It is clear that there is additional consumer surplus associated with developments such as the wider choice available through online marketplaces, or the time saved by using online services, or from zero price and voluntarily-produced online products and services. For example, somebody who uses an online platform to swap homes for a holiday might well spend the money they save on other goods and services that are captured in measured GDP, but the benefit of their ‘free’ holiday is not. It is not clear how to assess the scale of this digital surplus.

What’s more, the impact of digitally business on measured GDP by current definitions reveals some oddities. For example, the disintermediation and move to online provision in several sectors such as finance, travel, and retailing is reducing GDP as investment in commercial property declines, but the service provided to consumers is clearly the same or better. Figure 1 shows the decline in constant value investment in just two sectors in the UK, retailing and finance, taking their share of total gross domestic fixed capital formation in buildings from 17% in 1997 to 4% in 2014 (investment in buildings has typically been in the range of a fifth to a quarter of total business investment over this period.)

Hmm.. There is more in the post.

This is all interesting stuff to ponder upon. We could actually see a world where GDP does not show much progress or a decline but people are overall fine/happy..

Are India’s quacks the answer to its shortage of doctors?

February 10, 2016

Priyanka Pulla asks this interesting question. India has a huge shortage of doctors and quacks proliferate wherever they can. 

What is the solution? Ban quacks or train them?:

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Occam’s razor of public policy

February 10, 2016

Ajay Shah has a food for thought post on public policy:

Occam’s razor is the idea that when two rival theories explain a phenomenon, the simpler theory is to be preferred. Aristotle’s epicycles fit the data as well as Kepler’s ellipses, and a pure empiricist could have been agnostic between the two. Occam’s razor guides us in preferring Kepler’s ellipses on the grounds that this is a simpler explanation.

In the world of public policy, a useful principle is: When two alternative tools yield the same outcome, we should prefer the one which uses the least coercion.

Gives a lot of examples where least coercion just works and even better than more coercion..

Will a free market in horns save the Rhino?

February 10, 2016

Prof. Tyler Cowen has a depressing post on state of rhinos in the world. From around 500,000 rhinos in 1900 we have reduced them to just 29,000. As one of the article in Cowen’s post says, at this pace, we can just painfully say – Rhinos, it’s been nice sharing the planet with you.

The bans have barely worked so there are talks of having a free market in rhinos as a solution:

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What is monetary policy anyway other than centralized economic planning?

February 9, 2016

Paul-Martin Foss of Mises Institute makes a point which is so difficult to fathom for even most economists – Central banks are nothing but central planners.

He says most economics teaching has poor things to say on planning but is in awe of central banking. Why should this be?

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Impact of beef ban in Maharashtra on farmers..

February 9, 2016

Not surprised to see initial results of the ban. They are the opposite from the intended idea of preserving animals..

…..for farmers like Borhade, what the ban has done, more than anything else, is to kill the secondary market in animals. “There is simply no demand from either farmers or traders today because they’re not sure what to do when the cow stops giving milk or delivers a male calf”, he points out. Read: Female bovine bias Borhade’s complaint has some basis in the average trend of prices for animals at Loni in Rahata taluka of Ahmednagar district. Four-year-old cows producing 20 litres a day are currently fetching roughly Rs 45,000 at this weekly cattle market, the largest in northern Maharashtra.

A year ago, these rates averaged Rs 80,000 per animal. The same goes for bulls: Prices of four-year-old animals in good health have fallen from Rs 50,000 to Rs 30,000 in the last one year. “The ban has hit the business hard. The weekly turnover here, which used to be Rs 3-4 crore, is now down by half”, admits Uddhav Devkar, secretary of the Rahata agricultural produce market committee. The Loni market sees arrivals of about 5,000 animals every Wednesday, when it is held, of which 700-800 get bought. 

As the ban is on cow slaughter, demand for buffaloes has increased (these ideas are so basic, you don’t need economics to figure):

But the interesting part pertains to buffalo prices that, between now and last year, have actually risen from Rs 40,000 to 60,000 for four-year-old animals. However, since the Loni market largely deals in cattle, a more representative trend can be got from Ghodegaon in Ahmednagar’s Nevasa taluka. This market, about 80 km from Loni, specialises in buffaloes with a yearly turnover of over Rs 150 crore. Devdatta Palve, secretary of the market, informs that since the imposition of the tough anti-cattle slaughter law, prices of even 7-8 month-old male calves have gone up from Rs 10,000 to Rs 25,000. Gollu Seth, a trader in Pune’s Manchar and Chakan markets, confirms the same trend for adult buffaloes. Their price has risen from Rs 40,000 to Rs 70,000.

This, he claims, has happened “because today only buffaloes are allowed to be slaughtered for beef”. For farmers in Maharashtra, the collapse in milk prices on top of back-to-back droughts has only compounded matters. While in the past, sale of animals acted as an insurance of sorts during droughts, the beef ban has rendered even that a loss-making proposition. Vikram Mokal, who farms four acres at Jatpade village in Malegaon taluka of Nashik district, has, in the last 10 months, sold 3 of his five cows at the Loni market. “Not only have my crops failed successively, but the droughts have also made green fodder hard to get. Un-remunerative milk prices added to that has left me with no option but to sell my animals to meet immediate needs”, he notes.

But for Mokal, too, the beef ban has only added insult to injury: “I sold two of my cows for Rs 20,000 each and the last one at Rs 25,000. All the three were young milk-yielding animals that should ordinary have fetched Rs 60,000-plus”. Haji Badaruddin Pirzade, a cattle trader at Loni who has been in the business for 20 years, says that it was an established practice for farmers to change their cows every 4-5 years once their milk yields per lactation cycle had reduced. They, then, sold these in exchange for younger cows giving more milk. Old and infirm animals, especially bulls, were also sold to traders, who, in turn, supplied them to slaughter houses.

Since the ban has come into place, this trade – essential for sustaining the farmers’ own dairying operations through regular replacement of old with new productive animals – has practically stopped. “Farmers are no longer coming to the market for buying new animals. I used to sell more than 10 cows a day, but now I am lucky to even sell two. Prices of bullocks (oxen) have also hit rock-bottom: A healthy pair that would earlier fetch Rs 40,000-45,000 now sell at just Rs 10,000. And desperate farmers are driving down the market further”, observes Pirzade. With the secondary market for cattle finished, farmers in many areas of Maharashtra, struggling to procure water and fodder amidst drought, are resorting to abandoning their old and infirm animals. Alternatively, they are simply letting them die in their households. 

On reading this, most economics students will say — told ya!

Both buffaloes and cows must be cursing the govt, the former for surge in demand and latter for decline..

Who can manage tea gardens better? Govt or Private firms?

February 9, 2016

I missed this bit of news. The West Bengal Tea industry is in a mess (perhaps the only thriving industry in WB is of the puchkas/golgappaas).

So the centre has decided to take up 7 of these gardens:

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From BRICs economies to PEKO polities

February 8, 2016

Jacek Rostowski former Polish  Minister has a nice piece on this new acronym – PEKO. These are four countries whose leaders are great populists..

The first challenge to the Western hegemony that followed the collapse of Communism in Europe was the emergence of the so-called BRICS countries – Brazil, Russia, India, China, and South Africa – in the 2000s. Rapidly growing and collectively accounting for nearly half of the world’s population, the rise of the BRICS seemed set to tip the balance of power away from the United States and Western Europe.

Today, the BRICS look like less of a geopolitical threat to the West. Russia, Brazil, and South Africa are in severe economic straits, and China is wobbling. Only India maintains its luster. And yet the West is coming under pressure again, including in its own backyard. This time, the challenge is political, not economic: the rise of politicians who relish conflict and disdain national and international law and democratic norms.

I call such leaders “PEKOs,” after the four most prominent examples of their kind: Russian President Vladimir Putin, Turkish President Recep Tayyep Erdoğan, the Polish politician Jarosław Kaczyński, and Hungarian Prime Minister Viktor Orbán.

PEKOs do not view politics as the management of collective emotions in order to achieve broad policy goals: faster economic growth, a more equitable distribution of income, or greater national security, power, and prestige. Instead, they regard politics as an endless series of intrigues and purges aimed at preserving personal power and privilege.

The PEKOs share the Russian revolutionary Vladimir Lenin’s belief that “politics must take precedence over economics.” Indeed, they value it over every other kind of policy consideration. Politics is not a means to an end, but the air they breathe, and policies are merely instruments in their endless struggle to stay alive.

Hmm. I mean for most politicians and earlier economists this was the usual thing – politics takes precedence over everything else..

These PEKOs are different from 1930 directors:

It would be a mistake, however, to think of the PEKOs as today’s equivalent of the “Great Dictators” of the 1930s. The PEKOs may be nationalists, but their opinions would not have been out of place in the drawing rooms of Europe before World War I (the same cannot be said of the Nazis or the Spanish Falange).

Nor is their economic approach necessarily statist. Putin certainly has strong dirigiste leanings, but if Orbán and Kaczyński are deserving of the label, then so was French President Charles de Gaulle. And Erdoğan has actually dismantled Kemalist statism in Turkey and introduced free-market policies.

The biggest difference between the Great Dictators and the PEKOs is that the latter regularly have to face their electorates. Indeed, their confrontational politics is the central element of their survival strategy. Each one of them has gained (or maintained) power by polarizing their societies and mobilizing their electoral base.

The PEKOs’ political style has been enabled by modern news media, which, scrambling for audience share, simplify and sensationalize issues. Starkly antagonistic statements and positions tend to gain the most exposure. This gives confrontational politicians a powerful advantage, and produces the electoral polarization on which the PEKOs have fed.

This political strategy is undoubtedly effective. In Russia, for example, real wages fell by more than 9% in 2015, and the share of Russian families that cannot afford adequate food or clothing has increased from 22% to 39%. And yet Putin’s approval rating remains at 80%.

Unlike the emergence of the BRICS, which ultimately was a boon to the world economy, the rise of the PEKOs poses a real threat – especially as they begin to apply their confrontational approach to foreign affairs and global economic governance. International firms should be particularly concerned. Having spread their operations across the world during the quarter-century since the fall of Communism, they have become dependent on rules-based stability and economic integration. Their fortunes will increasingly depend on developing strategies to avoid (or at least hedge) the new risks posed by PEKOs.

Nice bit..

Role of globalised finance in the 2008 crisis..

February 8, 2016

Anton Brender and Florence Pisani of Paris-Dauphine University look at how financial globalization shaped the 2008 crisis.

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Economics of puchkas/golgappas in Bengal..

February 8, 2016

It is economics of puckas/golgapaas in Kolkata to be precise.  But the idea can be applied to Bengal and any other place.

Abheek Barman of ET Now has a piece on how many people are employed in Puchka industry in Kolkata.  He says it employs more people than the big firms:

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A tale of Chilean social security system and how Lewinsky prevented reform of the same in US….

February 5, 2016

José Piñera was Chile’s secretary of Labor and Social Security and architect of the country’s successful reform of its pension system (now at Cato).

In this speech, he speaks on how the social security system was revamped in Chile but failed in US (due to the famous Clinton-Lewinsky scandal):

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Behind “Rock star” and “Sir Ravindra Jadeja” is the real Ravindra Jadeja

February 5, 2016

Another superb inspiring piece from Cricket Monthly. This one is by Siddharth Monga, assistant editor at ESPNcricinfo.

One can always debate how good Jadeja is, but nothing takes away the struggles of the cricketer who emerged from Jamnagar of all places. These stories of cricketers from really small places which have no cricket culture etc. eventually playing for India are usually great reads. Once most cricketers hailed from prominent cities which is increasingly being challenged which is great to see..

How the use of floating-rate loans changes the impact of monetary policy

February 5, 2016

Filippo Ippolito, Ali K. Ozdagli and Ander Perez add another dimension to the monetary policy transmission channels. This one adds floating rates to the discussion.

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Startups haven’t replaced India’s 19th century Dabbawala service

February 5, 2016

I am not one bit surprised to read this article.

Whatever be the technology, they are the original creators of efficient delivery of food across Mumbai.Infact, they are fairly efficient users of food transport technology like local trains, bicycles, a cart where multiple food dabbas are kept and so on. In this era, we don’t consider trains, bicycles as technologies but they were fairly advanced ones earlier. Today’s technology like apps etc can just think of fancy ways to make some food/cab service to your mobiles. But they have still not figured the most important aspect of delivering at low cost and at right time.

Hence, after some initial hype over such launches the reality sinks in and lots of money is lost:

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When Fed makes profits in a struggling business world..

February 4, 2016

One very wise (and largely forgotten) former central banker once remarked that when a central bank makes record profits when others are struggling, it is signs of serious concern. As most of this free income is passed onto the govt, it raises questions over independence and all that..

David Howden of Mises writes on similar thing happening with Federal Reserve:

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How Milton Friedman and Anna Schwartz became monetarists?

February 4, 2016

A superb paper by George S. Tavlas of Bank of Greece. Far more useful than several of those macro/monetary policy papers.

He tracks what led the Friedman/Schwartz duo to become monetarists. Friedman actually favored use of fiscal policy for stabilisation till 1940s. Then in the 1950s role of monetary factors started to make sense. There was also a huge role played by a FDIC economist Clark Warburton who has of course been forgotten. In many ways, Friedman’s core ideas came from Warburton:

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Tracking India’s economic progress via night lights

February 4, 2016

Superb post by Kwawu Mensan Gaba and Bruno Sánchez-Andrade Nuño of World Bank.

They link to this website which shows night lighting in India (and other countries) over last 20 years:

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When negotiating a price, never bid with a round number

February 3, 2016

Interesting research on bidding. We usually round off numbers but while bidding make a precise offer. It signals the seriousness of the bidder:

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Why PMGSY (rural roads scheme) has performed better than MGNREGS (rural jobs scheme)?

February 3, 2016

Mr. NC Saxena has a nice detailed post on the topic.

He goes into the details of the two government schemes and points why PMGSY (Pradhan Mantri Gram Sadak Yojana) is better than MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme):

The central hypothesis that I wish to explore in this paper is that when a programme is well designed, adequately funded and frequently evaluated it does well even in so called BIMAROU or backward states. On the other hand, if the design is flawed programme does poorly even in better governed states. ICDS is designed to target children mostly after the age of three years when malnutrition has already set in. Very little of the ICDS resources, in terms of funds and staff time, are spent on the under-three child and this low priority must be reversed, otherwise its impact on reducing malnutrition will remain illusory. The primary responsibility of initiating correction in the design of such faltering programmes is that of the central Government.

Carrying this argument further, let us closely examine two somewhat similar programmes—PMGSY (Pradhan Mantri Gram Sadak Yojana) and MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme)—both initiated and supervised by the Ministry of Rural Development and discuss how their design affects their outcomes at the ground level.

Apart from PMGSY having a better design, building good quality roads usually makes more sense than other poverty related programs.


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