mattbell | Entries tagged with econ

By now you've probably heard stories about how a lot of well-meaning foreign aid ends up being counterproductive.

For example,
- The donation of large numbers of t-shirts to Africa has led to the collapse of the local clothing industry there.
- While foreign medical assistance to Haitians immediately after the earthquake was very helpful, the ongoing presence of foreign free clinics has put local hospitals out of business. There's a big fear that when the foreign doctors leave, there will be no local medical system to replace them.

Last night in conversation with a friend at a party, we came to the logical extreme version of this scenario -- the sort of UN emergency food aid that occurs when there is mass famine in a particular country (eg Ethiopia) may lead countries to not develop strategies to deal with the potential for famine. In some ways this is similar to the situation in the US with banks -- the banks did not plan for catastrophic risks because they knew that in the event of such a risk, the US would bail them out. Apparently my friend's political science professor from Ethiopia said that she has seen how food aid creates dependency and causes farmers to stop being self-sufficient.

Note that I'm NOT suggesting that we simply let starving people in Africa die. If people's lives are on the line due to government incompetence, it's still our moral duty to help them. However, this aid needs to be structured in such a way that the government is given the tools and training it needs to prevent future famines. It's less sexy (and thus harder to get donations for) than flying in with a planeload of food and saving thousands of lives, but it's more likely to prevent such disasters from returning.

In some ways it's like medicine. Societies, like bodies, are hypercomplex equilibriums with many internal forces in action, and smart solutions work with the existing systems instead of brute-forcing interventions.

I imagine that some countries would welcome this type of aid, but others may resent the foreign intrusion. It's possible that there may be some way to buy these leaders off -- for example, a company with expertise in infrastructure building could offer services for free in exchange for some % of any increases in GDP over a particular period. The trouble is that there are many ways this could go wrong (and has). The company could focus on a specific industry and ignore the well-being of the people. The company could make the government dependent on them indefinitely. The government could seize the company's assets and kick them out. If the parameters of the deal are poorly set, the company could exploit some loophole, for example leaving the country with massive unmanageable debt. Such deals would have to be carefully crafted.

I'm way out of my area of expertise here, but if any of you readers have some relevant literature to point me to, I'd like to see it.

A lot of research coming out lately has shown that many charities who are trying to help the 3rd world end up doing the opposite:

From an interview of the founder of KickStart in the WSJ:

You can't donate people out of poverty, although many people think so. [Economist] Jeff Sachs believes it will take $1.6 trillion a year, and he believes that a dollar a day people are too poor to invest in their own path out of poverty. Martin and I both feel that poor people have to invest time and money to move out of poverty. In Bangladesh, President Ershad was impressed with treadle pumps, so he said would give 10,000 of them to people in the district he came from. Then farmers stopped buying them, local manufacturers had to close their doors, and it set farmers back in that region two years.

I like KickStart's philosophy -- they create devices that dramatically improve the productivity of families in the 3rd world (such as irrigation pumps, brick-making machines etc). Then they sell them at cost to shops in 3rd world countries, who in turn sell them to local farmers. Their site claims some impressive numbers, showing that they've lifted hundreds of thousands of people out of poverty in a sustainable fashion. Their ultimate goal is to create a thriving middle class, which has been shown to be correlated with greater political stability.

Microfinance is a similar idea. Instead of us going in and buying the locals what what we think they need, it empowers them to use small amounts of money to create businesses that they can use to pull themselves out of poverty.

However, societies that are stuck in a state of mass poverty often have many things holding them back, and it's unclear whether just pressing on one lever will actually solve their intricate web of problems. There have been various studies showing a strong correlation between poverty and lack of women's rights. An organization called Half the Sky is looking to empower women as a way of getting African countries out of poverty.

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For those of you who know more about this than I do, what do you think of these organizations? Who else has a data-driven and results-driven approach?

When I visited Dubai this past summer I had the sense that they were dramatically overextending themselves. I had no idea just how far it went.

From This article

Dubai will ask creditors of two of its flagship firms for a standstill on debt worth billions of dollars as a first step toward restructuring Dubai World, the conglomerate that spearheaded the emirate’s breakneck growth.

The government’s announcement on Wednesday, which also said the consulting firm Deloitte had been appointed to help with the restructuring, sent the cost of insuring Dubai’s debt against default soaring and bond prices tumbling, Reuters reported.
Dubai World has $59 billion of liabilities, its subsidiary Nakheel said in August, a large proportion of Dubai’s total debt of $80 billion.

In the third world, liquids are often sold in plastic bags. This is not done out of a sense of environmental responsibility (even though the packaging is likely "greener" than almost anything you'll find in Whole Foods) but because it's the cheapest way of containing the liquid.

In the first world, there is a broad awareness of lactose intolerance and a significant interest in veganism. This has resulted in a proliferation of rice, soy, and nut milk products.

Apparently these two trends, coming from opposite ends of the socioeconomic spectrum, have finally met in the middle.

(Taken in La Fortuna, Costa Rica)

Every city I've been to in Eastern Europe is full of small moneychanging booths. Most of them offer horrifically bad exchange rates but disguise these rates via confusing rate charts. Some of them take as much as 30% off of the transaction. If we assume the same number of customers, these shady shops pull in 10x as much money as the banks that offer the same services. Their cost of doing business is practically nothing – they just need to rent a tiny bit of real estate and pay one person to man the booth. Thus it must be an extremely profitable business... every few minutes a tourist comes in, and the exchange earns somewhere between $10 and $100. In these areas, where salaries are a fraction of what they are in the US, this is a lot of money. There are several of these things per block in touristy areas and there's never a line... I see them and wish the space could be put to better use other than as traps to fleece the uninformed.

While I am against regulation in a lot of areas (and my libertarian friends even more so) his is the sort of thing where I would rather have the government step in to prevent the formation of businesses that do nothing productive, hurt their country's reputation, and clutter up valuable downtown real estate. Of course the government curently stands to profit (at least in the short run) from these things, so they would lose some tax revenue when they are replaced by somewhat less profitable businesses.

According to my guide at the incredible Wieliczka Salt Mine, this one mine once accounted for 1/3 the GDP of Poland. (This was a few hundred years ago.)

Looking at the incredible sophistication of all the pre-Industrial-Revolution machinery made me realize that I was basically seeing the 16th century equivalent of the oil industry (and not just in the getting-things-out-of-the-ground sense). In a pre-refrigeration world, salt was the only way to store most kinds of food for later use, so demand for it was enormous. It drove a huge amount of engineering innovation as well as excavation and other logistical efforts on a grand scale (there are over 300km of passageways).

Now I know what the 16th century equivalent of me would have enjoyed working on. I'd be the guy on the surface designing the whole system -- building little scale models of new mining machines and using "advanced" math to figure out how to most efficiently allocate everything to get the salt out. At night I'd take people deep underground and throw parties.

Flipping things around, what elements of communism are worth thinking about?

One thing I'm a fan of in some situations is communal ownership of goods.

In some cases, communal ownership allows for more efficient use of goods than private ownership. For example, most people only use their vacuum cleaners once a month, and the rest of the time they sit in people's closets taking up space. It wouldn't be hard to imagine a shared pool of vacuum cleaners for a neighborhood, with a local delivery service moving them around. I think that new technology could allow us to addres some of the traditional problems with shared goods, in particular the issue that you can't trust someone else to take proper care of your stuff. However, if these goods had sensors that allowed them to determine if they are being used properly, and there were reputation systems in place to track the trustworthiness of the users, then it might be possible to avoid the traditional problem of rough use of shared goods.

There are of course rental services for everything from tuxedos to cars to vacuum cleaners, but the labor and retail costs involved in these setups often drives the price up to surprisingly high levels given the good's cost. I think that the use of sensors and reputation systems in addition to the cost savings of online coordination could allow a much cheaper, more efficient execution of this. I could see both a free version where people would have to arrange for their own pickup and delivery, and a commercial version that is more convenient and coordinates local pickup and dropoff of goods. The initial price of the good in the free version could be either paid for by the pool of users or paid for by the first user, with each subsequent user automatically reimbursing the first user for depreciation incurred.

I would also love to see this for software. On occasion I'd like to use a $1000 video editing program. Currently I could either shell out the money (which would result in a very high cost per hour of use) or I could get a pirated copy (in which case the software vendor loses out). In corporate environments there's the option of a site license, but that doesn't extend to individuals. However, imagine a shared scenario where someone buys a beefy $2000 laptop and $3,000 worth of software for it. If this computer were shared among a large community of users over three years, the cost per day of use would only be $5. It's too bad the software industry is too scared to try a per-hour business model for personal software use.

Overall, this system greatly benefits individuals because it lets them get access to goods they want while spending less money, or gets them access to much better goods for the same money. The trick is getting manufacturers to cooperate, as they would need to put features in place to facilitate shared use, and would experience a short-term drop in sales as users initially keep their original consumption choices but switch to shared goods.

I think it will ultimately be up to companies that are currently succeeding at selling pooled use (eg TechShop and CityCarShare) to put pressure on manufacturers, and to do that they will need to get big enough to have some leverage.

This is of course rather far from the communist version of shared ownership, but I'm trying to come up with something that actually works! :-)

Rationally speaking, most people (myself included) know they should ignore sunk costs, but it's hard to actually implement this philosophy day-to-day. I think the problem is that most people's money philosophy is more intuitive than rational... when we think about a purchase decision, we usually get a gut feeling about it and act based on it. As a result, despite thinking repeatedly “this is a sunk cost, I should ignore it”, I still have a strong impulse to retroactively justify a purchase by making use of it. I want to integrate the idea of sunk costs into my intuitive money philosophy.

A few years back I noticed that I had a problem with stinginess toward purchases for myself, wherein I would waste my own time or put myself in discomfort to save a few bucks. I mostly cured myself of that intuitive urge by deliberately forcing myself to buy nicer items than I would normally get when I knew I could afford them. Doing this for a while got me to devalue money relative to what I gain from spending it, which is the intuitive cost-benefit tradeoff that goes through my head every time I think about buying something.* This effort has been particularly successful with regard to food – since my food is used to make more me, it's worth paying for the good stuff. Ditto for preventative care.

So how can I apply this to learning to intuitively ignore sunk costs? Based on my prior experience, it seems that making a large number of decisions under the new rules in a short time span is what changes the intuition. However, simply buying a bunch of things I don't need and then not using them seems like a rather silly and ineffective approach. I think the solution is to look at things I've bought as options rather than obligations.** I can fortunately practice that mode of thinking all the time and thus hopefully change the habit more quickly.

*On a side note, I still have trouble spending money on things that I know are complete rip-offs, even if they still satisfy the cost-benefit tradeoff. This has been made abundantly clear by my interactions with third-world cab drivers. If someone is trying to charge me 5x the going rate for a ridefor a cab ride, I will tell him to shove it even if there are no other cabs nearby and the actual amount we're talking about is just a couple of dollars. It's more of an ethical decision – I don't want to reinforce that sort of behavior.

**I've recently noticed that very financially well-off people I know tend to think this way.

( Long entry where I talk about the stunning glory of Ancient Egypt's literacy, art, and atchitecture, speculate on its decline and why modern Egypt can't get anywhere, socially or economically speaking, and briefly rant about the sorry state of its tourist industry one last time. )

After a couple of months in third-world countries, I now am good at bargaining under certain situations. Basically, when I have some idea of the real value of a good, I can bargain quite well. I can learn the good's value from a guidebook, watching what the locals pay, or by testing people's limits when multiple people are selling the same item. However, if there's only one person selling a unique item (eg some rather nice sunglasses), it's hard to figure out if I'm getting a good deal or not. Unfortunately, the majority of my future bargaining situations back in the US will likely be in this category. These people make a living out of feigning emotions, and I have trouble telling if their shock as my offered price is artificial or real. Perhaps you people out there who play poker have found it to be useful for this sort of thing.

As I came into Dahab, I passed a large number of beachside resorts and hotels in various states of completion. However, there was no evidence of construction in progress on any of them. The projects appear to have beeen abandoned. Some were close to completion, while others only had a partially erected stone wall to show for their efforts. Most of them were utterly hideous, architecturally speaking. Monsters in the making. At first I thought it was due to poor management, fraud, contractors taking the money and skipping town, and other problems. However, I ultimately realized the true cause: terrorism.

Back in 2004-6 there was a series of bombings at the three major resort towns on the Sinai coast. The bombings were masterminded by a Palestinian but were carried out with the help of local Bedouins. While I don't approve of their actions, I can see where the local Bedouins were coming from... their entire coastline has been taken over with nasty structures catering to obnoxious foreigners. (Not that the Bedouin terrorists were pulling a Howard Roark... I doubt that the architectural integrity of the structures was their chief concern). Since the Bedouins are nomadic, they can't lay claim to any of this coastal territory, and have gradually been pushed inward.

The attacks had the effect of almost completely cutting off the area's primary supply of tourists – Israelis in search of a little sun. The European tourists eventually returned, but the Israelis have stayed away. All the construction stopped, and demand still doesn't even fill the existing supply.

Ironically, only a couple of Israelis died in the bombings. The vast majority of the deaths (over 50, I believe) were Egyptian workers making a living in the tourist trade.

In any case, terrorism can have an extremely high return on investment. For the cost of a few tens of thousands of dollars, the terrorists managed to freeze up an entire industry in Egypt, causing billions of dollars in lost business. The Sept 11th attacks in the US were similar... for the cost of some flight lessons, they managed to provoke the US into a massive $2 trillion spending spree that has worsened our security and dramatically hurt our reputation across the world.

- Many of the engineering marvels I mentioned in the last post are being built with the modern equivalent of slave labor. Construction workers are often kept sequestered in camps, with limited mobility. Their passports are often confiscated, and it's a frequent practice to only pay them once every 3-6 months.

- Carpooling is illegal, and carries substantial fines. Carpooling is considered competition for the taxi system, which is run by the government. Thus, you can't pick up a coworker on the way to work, even if you do so for free. I should point out that there's horrible traffic there... like worse than LA. There are also limited piblic transit options. A subway system is being built, but apparently the fares will be jacked up high so as to (you guessed it) not compete with the government-run taxi system. Read more here: http://www.arabnews.com/?article=100707

- Singapore and Dubai make for an interesting contrast. They are both small, rich, highly developed one-party city states with strict laws and low crime. However, Singapore spends a lot of money investing in education and public infrastructure and encourages expatriates to become citizens. In contrast, Dubai seems to treat its noncitizens, which make up 90% of the population, as disposable employees. It's only possible to become a citizen of Dubai if your father is a citizen. There are almost no social services... there are a small number of expensive private schools of mediocre quality, so foreigners are often reluctant to move their families here. Most of the expatriates are thus men who are either single or separated from their families. There are sections of the city that feel like a giant sausage fest. Ethnically, 10% of the population is Emirati citizens, 40% is Indian, and the remainder are mostly a mix of Arab, European, and American expatriates. Many of the expatriate residents I met are depressed... due to the government's social policies, they can never feel like Dubai is their home. Many of them rarely get to see their families.

- Government-legislated supply of women: Because of how Dubai marriage laws work, Emirati men can marry foreign women, but it's almost impossible for foreign men (even Muslims from other gulf states) to marry Emirati women. Women who do manage to marry foreign men lose their citizenship, along with all its benefits. This has the effect of creating a large pool of women with very limited marriage options. I initially though that this would mean that Emirati women would often haave to accept marriage proposals from undesirable Emirati men since their options are so limited. Good for the men, bad for the women. However, I learned that marriages almost always require the bride's parents' approval, and it's customary for the husband to pay the bride's family a very large dowry (think of it as bail). Since the bride's parents don't want the bride to marry “down”, the dowry is often such that most young men can't really afford to pay it. Dating in the western sense is frowned upon. Thus, the net result is a large number of local women who end up unmarried, and huge amount of prostitution.

- THEY BLOCK FLICKR! So I really should be more upset by their treatment of women and migrant workers, but blocking entire sections of the internet gets me really riled up. I had the amusing experience of having a 50-year-old Muslim woman in a nontechnical position tell me “just use a proxy server”.

- As the recession hits them hard, Dubai is starting to swing back more in the traditional direction. Some new proposed laws prohibit kissing, holding hands, and even hugging between couples in public. Amusingly, men will often hold hands and hug... it's part of traditional Arab culture. I had the amusing thought that gay men probably get a kick out of being able to engage in PDAs while everyone else thinks it's just manly hand-holding, but I'm guessing that the gays there keep it very underground. Read more here: http://www.thetimes.co.za/News/Article.aspx?id=960921

Most Vietnamese vendors sell things for a much higher price to tourists than to locals. Since supermarkets are more or less nonexistent, almost everythinng you buy has no price label. Thus, it's easy to have discriminatory pricing.

The average annual income in Vietnam is around $500/yr. I don't know the average income of an American tourist in Vietnam, but I'm guessing it's around $50000/yr. So there's about a 100-to-1 difference in salary.

Let's look at things from the perspective of the Vietnamese street vendor, but translate things into American prices.

Suppose you own a small fruit smoothie stand in the US. It's a relatively tough life... you make $20,000 on a good year, and nearly all of that goes to expenses. You sell smoothies to the locals for $5. Then these funny-looking people from a country called Richlandia show up. You know they have a lot of money. So you make up a price for them. You say $50. They smile and buy it, stoked at the great deal they're getting. You raise your price to $200. Most of them still buy it. Sometimes they get confused and give you a $2000 bill instead of a $200 bill. All the money looks alike to them. They walk around with cameras worth $30,000 dangling from their wrists. When they open their wallets, you see that some of them have over $100,000 in Richlandia currency in there. You have to feed your family. Do you cheat the foreigners? You can legally cheat them by a significant amount and most of them won't even know. You could commit a crime and end up with a year's worth of income in a few seconds. What do you do?

If you're very motivated and want to stay on the ethical side of things, you could learn English and become a tour guide, or start a stand that sells items catering to foreigners (like hand sanitizer, which they all seem to be obsessed with.

Most of you are familiar with London's congestion pricing system, where you have to pay a fee of around $14 to drive into downtown London during peak hours. The system was designed to eliminate its famous downtown congestion. Reports of its success have been controversial, but positive enough that other major cities are looking at it.

The Netherlands is considering a nationwide system that will continuously tax people based on what roads they are using, how far they drive on them, what time they're using them, and even how fuel-efficient their vehicles are.

http://www.worldchanging.com/archives/009146.html

(It's not approved yet, and even if it is approved, it will take around 10 years to fully implement)

This sort of system, which has only become possible with recent computer vision technology, will allow for much more accurate taxing for use of public goods. ~~Right now, Americans pay the same amount in taxes for roads and highways whether they drive for 1,000 miles per year or 20,000 miles per year. That's unfair.~~ (A commenter has pointed out that gas taxes do charge heavy users of roads more than light users, though gas isn't the only source of road funding) It would be much fairer to have people pay according to how much they use the system. This congestion tax covers two public goods -- roads and air cleanliness. Cars that chew up the road more would be charged more for the increased maintenance that the roads will require, and cars that pollute more will be charged according to how much pollution they put out. This helps people understand the true financial consequences of their actions and behave accordingly, which makes the whole system work better.