Archive for January 8th, 2008

Understanding Regulation

January 8, 2008

Here is another superb piece from Shleifer. It is actually a speech he gave at EFMA in 2004.

What he says is this:

The American and European societies are much richer today than they were 100 years ago, yet they are also vastly more regulated. Today, we live in houses and apartment buildings whose construction – from zoning, to use of materials, to fire codes – is heavily regulated. We eat food grown with heavily regulated fertilizers and hormones, processed in heavily regulated factories with publicly monitored technologies, and sold in heavily regulated outlets with elaborate labels and warnings. Our means of transport, including cars, buses, and airplanes, are made, sold, driven, and maintained under heavy government regulation….

The extraordinary pervasiveness of government regulation in our lives raises a number of questions. Is regulation generally a good idea, as the positive correlation between its growth and the growth of income seems to indicate, or has it been an obstacle to economic and social progress? Have the USA and Western Europe grown in spite of it? How much regulation of a particular activity is appropriate? Does the nature of the activity being regulated, or the characteristics of a country, influence the optimal choice? Is the level of regulation we observe in fact an outcome of efficient social choice, or are other factors as or more important?

He then reviews basic theories of regulation and looks at how regulation can help us achieve more efficient outcomes.

Highly recommended.

How do economists think about cities?

January 8, 2008

Edward Glaesar of Harvard University is one of the best urban economists you can come across. For a profile of all his work so far see this.

I just finished this paper from him titled ‘The Economics Approach to Cities’ and was quite impressed. The usual urban policy emphasises place over people but economics looks at it the other way round. This means say you are building a road, the urban policy would look at how it would help city transport, but economists would look at whether the road helps give them more choices. At the end, urban policy focus would also lead to better choices for people but the focus is not on people. Whereas economists would first look at whether the welfare of the individuals is increased or not.

I haven’t read at all on urban economics but his paper is an excellent primer on the same. He discusses the various models which explain the mobility decisions of people and firms. I liked this expression which explains what helps people choose various locations:

Income + Amenities – Housing Costs – Transportation Costs

He builds his around this expression. Read the entire paper to understand the approach.

I was wondering whether we could apply the approach to Mumbai which is being pitted as an International Financial Centre. (See the various articles etc on the same here)

MIFC looks like a report which is place based. The first question is if Mumbai becomes an IFC what extra choices would people have? Would it mean better housing conditions? Would it mean people have more and better transportation choices other than local trains?

The report does have a chapter on urbanisation but is it enough? The chapter talks about new ideas needed to reform Mumbai’s infrastructure but there are just a few suggestions. The focus seems to be on how Mumbai’s strategic location and if we don’t get our act together other cities (like Dubai, Shanghai etc) would gain.

I think the report would have found more takers if the focus would have been on urbanisation reforms and how that can enable Mumbai become an IFC rather than the other way round. There are just too many problems in Mumbai and only a person living there can appreciate them.

I understand that because these reforms would take time and the MIFC would loose the race. But that is reality. One simply can’t shrug it. Efforts need to be made to make Mumbai a better city first (giving people ample choices) and IFC can follow.

One of the ideas behind MIFC is to draw talent towards Mumbai. I just have one thought. Suppose someone does come from say New York on great expectations. If the company doesn’t have suitable accommodation and he/she has to search for one and travel in local trains (or even takes a car), I am sure they will catch the next flight back home. Coming to Mumbai and staying at five star hotels and travelling to Nariman Point is a lot different than making Mumbai a home. And that is reality.

Assorted Links

January 8, 2008

1. Ajay Shah has an excellent post on expenses in fund management in India

2. WSJ Blog posts on what to use monetary policy or fiscal policy for the current mess.

3. WSJ Blog points to 2 papers discussing How efficient are cricket and tennis players

4. ECB often uses the word vigilance. WSJ Blog points to  research over whether the word works in lowering inflation expectations. The answer is not really. Meanwhile Trichet believes inflation is a worry.

5. New Economist points to new blogs.

6. Mahalanobis points to an interesting story on value investing

7. Mankiw has a graph which says recession odds are rising.

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