Archive for July 28th, 2008

Harvard could have taken help from beh eco

July 28, 2008

I came across this fanastic talk by Lawrence Summers at ICRIER ( a think-tank based in New Delhi). The talk is based on global warming and Summers stresses that emerging markets have a bigger role to play than is assumed if we are to lower global warming. It is a good talk and Summers has some good viewpoints.

However, what I found interesting was this:

I always believed as an economist that firms naturally are efficient and they do things in the least cost way and that is how it works. I discovered as President of Harvard, and I do not believe Harvard is at all unique in this respect, that we as a university engaged extensively in constructing buildings and we held those who were involved in the construction of buildings closely responsible for the cost of the building. We asked how much our laboratory can cost compared to MIT’s laboratory or compared to the budget that we set.

We made no effort in assessing the cost of the buildings to build in the lifecycle costs of the buildings, whatever it cost to heat them in the winter or whatever it cost to cool them. So what happened?

People built the buildings in ways that invested as little as possible in insulation so that they could succeed and quite consciously chose to forego opportunities to invest in energy saving that would pay itself back in three or four years when we were able to change that focus by providing special loans and such we produced a somewhat better outcome. It is clear from those who know that such opportunities are ubiquitous, that we do not have in most energy users accounting systems that succeed in giving credit for even the highest return investments that promote efficiency.

The construction firm just did what was expected- minimize expenses and this kept Harvard happy as it meant lower pay to the firm. No one thinks about spillovers to environment and by spending on insulation etc just adds to costs. So, thinking efficiently does not promise the desired outcomes all the time.

I think it would take a while for all construction to become environmentally responsible/friendly. The practices may have started in developed economies but I hardly see anything happening in emerging economies (exceptonals are always there). Apart from materials used for interiors, the construction also causes tremendous pollution because of all the materials used for exteriors.

I would propose that all accounting for construction purposes should have energy accounting as a default. Otherwise I don’t see how things will improve quickly.  People ignore these things as first it adds to their costs. Second, people might know environment is important have a short horizon and tend to ignore things which will help them many years later (A classic similarity is savings, people know savings are important but don’t save. This behavior has also been corrected by using defaults).  Third, all want to free-ride on each other as there is no accountability and with everyone expecting the other to be more responsible, we see more and more environmentally damaging constructions.

So, if a construction is proposed it should explain how much energy it indicates to save by using such and such measures. It should also indicate how it proposes to use the various construct material so that pollution is minimised. And once it is completed, the builder should review what he had proposed and tell the outcomes. The more environmentally conscious builders should also get more incentives like higher ratings, easier bank finance etc. 

We may debate on how long global warming will impact and effect. The bottomline is it is going to effect and needs policy attention.

The need to act on terrorism before it is too late

July 28, 2008

I wrote a longish article on impact of terrorism and economics. Here it goes:

The recent serial bomb blasts in Bangalore and Ahmedabad were another of those series of blasts happening around the world. Every day we keep hearing about bombs taking off in some part of the world – London, Madrid, Jaipur etc. Terrorism and Counter-terrorism is a subject that has been heavily discussed on various international and political forums. I don’t understand the political aspects, so will discuss economics of terrorism.

Terrorist attacks put economies under severe strain. They not only lead to damage of the private property but also important public goods like bridges, roads etc which take years to develop. Applying behavioral economics, terrorism shatters the confidence of the population and makes them more conscious before taking any business decisions. This further delays productive activity in an economy. If the region receives foreign investment, then this also dries up as well.

Further, the counter-terrorism policies can further damage the economy by diverting resources (which are scarce) to manage warfare. In economist’s parlance the Production Possibility Frontier moves towards guns instead of butter. Moreover, it could derail the expenditure program of the government. The US economy is the best example. The US government’s budget which has always been in deficit became surplus in 1998 but again moved into a deficit zone from 2003 onwards. The Bush Administration in 2002 had projected a budget surplus of around USD 1.29 trillion through 2004 but it became a deficit of USD 850 billion. There were other reasons for this swing like but financing counter-terrorism in Iraq and Afghanistan was one of the main reasons. Hence the budget surplus that could be used for more public goods for instance, infrastructure (which is in bad shape) instead became a deficit with government needing additional resources.

Terrorism has also become transnational and sophisticated with times. It poses numerous challenges for economic policymakers as these attacks can put years of good work to zilch. The policymakers fight for stable economic conditions can be eroded in a fraction of a time. Jaipur has been a peaceful city and has always been popular with tourists. It was also emerging as a hub for gems and jewelry. The eight blasts were spanned over 12 minutes and have undone a number of years of good work. Even for US, to counter this terrorism, it requires more resources and not less and balancing the budget is going to be an arduous task.

The economists have done a lot of research on the subject as well. The earlier strand of research looked at impact of internal conflicts in the economy. This has now been expanded to look at terrorism. The research shows that terrorism leads to lower capital inflows, impacts industries like tourism and airlines, and diverts government expenditure to more security. Infact, all the above-suggested economic consequences have been proven empirically as well. Though, the camp is divided on the issue of whether counter-terrorism is important or not. 

Martin Feldstein in a paper wrote countering terrorism is “enormously important to the domestic economy, to international trade and to all of us individuals”. He argues in order to prevent terrorism, US needs a new set of institutions and there is a need to have more international cooperation. In another article, Feldstein argues for a higher budget layout for defense and modernizing its military and weaponry.

On the other hand, Todd Sandler et al (an expert on these matters) in a research paper say, “terrorism can be put into remission but it cannot be eliminated”. The authors say far more people are killed on US highways but more focus is on the counter-terrorism and not on better roads. Theirs is a very comprehensive paper on the topic and helps us understand many economic aspects of terrorism.

Keeping research aside, terrorism is an important economic issue. United Nations has intensified efforts to negate terrorism. Copenhagen Consensus 2008 also included terrorism as one of the ten main challenges confronting the World policies. The forum started in 2002 debates research papers on both sides- one defending the challenge, other nullifying it. Todd Sandler paper (mentioned above) has been presented in the Consensus in the second category and there are two papers defending the challenge (by S. Brock Blomberg and Michael D. Intriligator respectively). 

The way forward is what Feldstein has said- modernize defence and increase cooperation. It will be difficult to counter it using existing set of defence mechanism as the terrorism has become highly sophisticated and uses state of the art mechanisms to communicate or attack. It will be interesting to see how governments respond to these developments as most are under pressure to cut their budgets. Indian Prime Minister has already indicated at setting a Federal Agency to counter terrorism. International cooperation has suddenly become the buzzword amidst subprime and food crisis. There has been international cooperation to reduce global imbalances but it has been with difficulty. We have still not been able to conclude on the Doha Trade Round initiated in 2001. We need some serious discussions on the matter to come out with fresher ideas.

Coming back to Copenhagen Consensus (CC), in 2004 it cited financial instability as one of the challenges but was not ranked as the panel noted it as complex and uncertain. It said:

Four proposals before the panel addressed the issue of international financial stability. The panel, noting the complexities and uncertainties in this area, chose not to come to a view about which, if any, of these proposals to recommend. They were therefore not ranked.

Interestingly, in 2008 CC couldn’t come to any conclusion on terrorism either:

The panel chose not to include any of the proposed solutions to the challenge of terrorism in the overall ranking. Though the paper presented innovative and new work on the economic costs and benefit of terror prevention, the panel found that there was not sufficient evidence regarding the proposed options.


Notice the similarity??  We have all seen how destabilising financial instability can be and surely can’t follow the sit and wait approach in case of terrorism.  Time to act and act fast.

Indian academia salaries- Too low or too high?

July 28, 2008

There are numerous problems in India’s education sector. On supply side we have – poor infrastructure (schools, colleges etc) and poor quality and quantity of teachers. This results in problems in output and what we see is fewer number of high quality students which media and industry experts dub as talent crunch.

Talent crunch phenomenon is debatable as on one side Indian corporates feel quality of students is bad ( My view on Indian corporates is here). On other side India has become a hub for so many foreign knowledge outsourcing units and their chiefs keep praising India for its talent etc.

In this post, I wanted to focus on the salaries issues of academia in India. The oft cited reason for not taking up academics or for having poor quality of academia is poor salaries. I  came across this article (Hat tip PSD Blog) which compares the salary levels in different countries. Some facts:

Canada has the highest salary levels:

The CIHE study found that overall average monthly salaries ranged from $1,182 in China to $6,038 in Canada. These findings produced an international average of $4,856 per month, with Canadian academics earning on average 5.1 times more on a monthly basis than their Chinese counterparts.

Saudi Arabia and South Africa are trying to improve salary levels:

Saudi Arabia, ranked no. 61 on the HDI, consistently outpaced average salary levels in Australia (no. 3), the United Kingdom (no. 16), Japan (no. 8), Germany (no. 22), and France (no. 10). South Africa also bucked this trend to some degree. With an HDI ranking of 121, South Africa registered a higher entry-level salary average than Malaysia (no. 63), Colombia (no. 75), and China (no. 81).

Looking for growth in salaries? Head for South Africa

……in absolute terms, South African academics can expect to grow their salaries more robustly over the course of their careers than those in Australia, New Zealand, Japan, the United Kingdom, Germany, or France.

How about comparing faculty salaries to population:

India, for example, average faculty salaries are a whopping 8.7 times greater than that country’s average World Bank GDP monthly per capita estimate. On average, South African and Colombian academics make salaries 5.8 and 5.4 times greater, respectively, than their countries’ GDP per capita figures. In contrast, more developed countries—like the United States, Australia, Japan, the United Kingdom, France, Germany, Canada, and New Zealand—present faculty incomes that are only 1.4 to 2.2 times above their country’s GDP per capita—per month figures.

The figures in India caught my eye. You occassionally get to hear salaries are poor in India. True, they are lesser than the world but the faculties here get much higher salaries than the normal population, which isn’t the case in the other countries. So, other countries have more equality and India has more inequality as far as salaries are concerned. Hence, it is barely a myth that salaries are too low in India.

The CIHE study indicates that faculty in at least some less-developed countries are not poorly compensated in comparison with their own national GDP per capita-income estimates. However, a global market for talent means that more competitive salary packages may be necessary to compete with overseas employment offers. If not, brain drain will continue to beleaguer many already struggling poorer nations.

Frankly, I have never understood this low salary complaint in India. The main lesson in microeconomics is you have to analyse wages/salaries with work/leisure.

Salaries are an outcome and one also has to compare the work done. For instance, if you are comparing amidst academia you have to evaluate research, teaching hours spent etc as well. Likewise, when comparing with other sectors, you need to see how much time spent at work, targets etc.

My hypothesis is if we compare salaries including the work, Indian academia is perhaps being paid too much. For instance, just look at the research done by academia in India. Even in the elite colleges, we hardly have any research to take note of. The college rankings hardly include things like faculty research making everything pretty lopsided.

Another aspect of academia which can’t be measured is respect given by students. This is perhaps the best and most cherished incentive fro being into academics. If a teacher is good, the respect runs across generations of students and this acts as a big honor. One always remembers the great teachers and discusses the same with friends, alumni etc. Infact, people send their kids to a certain school/college just to be taught by the same teacher.

Unfortunately, in all this hype about salaries this respect is loosing out rapidly. The teachers are not interested in teaching and are just busy in making money. I am not saying money is not important, it is. If money was so interesting, one should have joined the corporate world. If you are into academics, your objective and priority should be different. You can’t mix academia with corporate world.

Assorted Links

July 28, 2008

1. WSJ Blog says US Govt should just say no to all this help

2. Mankiw points to a article on resilience of US economy

3. Econbrowser on oil prices

4. There is a feeling that Indian govt will pursue with reforms after divorce with left. TTR says what reforms and rightly so.

5. ASB on RBI transparency. I am not sure what transparency means here. By simply publishing minutes, sharing information etc does not mean anything if Central Banks cannot manage inflation. Most Central Banks have failed to do so. What is even more worrying is performance of inflation targeting central banks.  My point is yeah, we can argue for Central Bank transparency saying it is important, but by not comparing with the other central banks.

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