Do the Latin countries need more R&D?

That is the recipe of Jeffrey Sachs:

Latin American countries have not yet tried to foster a technological revolution, certainly not with the focus, skill, commitment, and financing that Asian countries have shown. Such a push could play a major role in jump-starting economic growth.

Such a policy would entail committing to a major increase in spending on research and development, as Asian developing countries have done. Latin American countries should aim to increase spending to around 2% of GNP (from 0.5% currently), partly through public support for laboratories and universities and partly through incentives for private-sector R&D. They should roll out the red carpet for high-tech multinational firms, just as Asia has done.

They should also increase their focus on scientific and technological training and encourage a higher proportion of students to go on to university education. Government stipends for tuition and for new and enlarged universities can play a big role, as can investment in computers and information technology in schools and communities.

My take:

I worry that this is putting the cart before the horse. Many of the public sector universities in the Latin countries are disasters. They are good places for left-wing politics, bad places to drive economic growth. Tech prowess has tended to come from the private sector and then the tuition-driven private institutions, not the subsidy-driven state universities. And Asian higher education did not play a major role in the Pacific successes, unless of course you are referring to MIT and Stanford.

Should the Latin countries be “home-breeding” their R&D? In other contexts economists insist that R&D is a public good. Why not borrow R&D from Europe and the United States and look elsewhere for comparative advantage? Process innovations might suffice, yet they typically arise from practice rather than from science in the narrower sense. Mexico is succeeding with this tactic. Furthermore process innovations, by their nature, are best implemented in decentralized fashion.

Most of all, the Asian technological revolution worked because the success stories made themselves relatively free of corruption. Effective technology arises from incentives, rather than from the mere desire to be technological. The Latin economies will grow faster once they can offer greater legality and predictability. The path here is slow but not impossible. Strong penalties against corruption, and non-tolerance of the idea, combined with higher public sector salaries, are moves in the right direction. But penalties alone do not suffice. Most of all a country needs a culture of trust, including trust in government, and for this there are no rapid solutions.

Watch what you write me

According to research from Forrester Consulting, 44 per cent of large corporations in the United States now pay someone to monitor and snoop on what’s in the company’s outgoing mail, with 48 per cent actually regularly auditing e-mail content.

The Proofpoint-sponsored study found the motivation for the mail paranoia was mostly due to fears that employees were leaking confidential memos and other sensitive information, such as intellectual property or trade secrets, with 76 per cent of IT decision makers concerned about the former and 71 per cent concerned about the latter.

Here is the full story, from the ever-excellent

How do political blogs matter?

Blogging is politically important in large part because it affects mainstream media, and helps set the terms of political debate (in political science jargon, it creates ‘focal points’ and ‘frames’). Note that we don’t provide an exhaustive account of blogs and politics – some aspects of blogging (fundraising for parties, effects on political values in the general public), we don’t have more than anecdotal data on.

So writes Henry of CrookedTimber, concerning his recent paper with the ever-prolific Daniel Drezner.

I would phrase my view as follows. Blogging creates “common knowledge,” even if only among a few at first. Will an idea fly or not? You find out quickly by sending it out into the blogosphere and seeing the reaction. The verdict will be swift and often ruthless, but more often than not fair. And once this common knowledge leaks out to broader and more general communities, the effect is powerful. People will abandon an indefensible idea before it gets started. Or they will jump on the bandwagon right away. They already know how the fight will turn out. In short, the blogosphere is like simulating the larger debate with very swift intellectual mini-armies.

Under this account what matters about the blogosphere is the quick back and forth and the ability to construct rapid-fire dialogues through links. It also means that a better than average debator can influence the broader world by swaying the earlier mini-debate through sheer force of intellect. Of course as the blogosphere gets larger this will become harder to do. The argument will be “thicker,” and arguably less conclusive as well. After all, what if everyone wrote a blog? The debate would not be simulated any more.

What else does it mean for ideas to be evaluated more quickly? Many new ideas will have better chances than before. Throw it out there and see if it sticks; the blogosphere is relatively egalitarian with regard to traditional credentials. Debate-defensible ideas will do better, on average. I hold a number of views that I believe are true, but find difficult to defend in debate on blogs. Either the supporting data are not on the web or the ideas may sound politically incorrect. Ideas that take time to mature, and reveal their full wisdom, may suffer as well.

Print out and read the whole paper; at the very least it is likely to become a mini-classic, maybe more.

Diamonds are Forever…Not

How long can the diamond cartel last? I remember, as a kid, watching Milton Friedman tell us that the New York Stock Exchange was the only longstanding market monopoly he could think of. The NYSE has lost much clout, but why isn’t the diamond sector more competitive? Diamonds are found in many countries but the De Beers cartel has been dominant for much of the twentieth century.

But things are now changing:

…this stable, established and monopolistic system is now falling apart…other big miners got hold of their own supplies of diamonds, far away from southern Africa and from De Beers’s control. In Canada, Australia and Russia rival mining firms have found huge deposits of lucrative stones: BHP Billiton, Rio Tinto and Alrosa have been chipping away at De Beers’s dominance for two decades.

De Beers once controlled (though did not mine directly) some 80% of the world supply of rough stones. As recently as 1998 it accounted for nearly two-thirds of supply. Today production from its own mines gives it a mere 45% share. Only a contract to sell Russian stones lifts its overall market share to around 55%.

An Israeli named Lev Leviev has been instrumental in breaking down the old system:

Mr Leviev recently moved into diamond retailing. He claims that he is the only tycoon with interests in every stage of production from “mine to mistress” (a canard in the industry holds that men buy more diamonds for their mistresses than for their wives). But his real power lies in the cutting and polishing businesses. He has factories in Armenia, Ukraine, India, Israel and elsewhere. These give him power to challenge De Beers’s central clearing house and seek instead to channel stones directly, and at a lower price, to his own polishers.

The price of diamonds, however, has yet to fall. My more fundamental question is why these supply-side developments have taken so long.

Perhaps synthetic diamonds will put the market under for good. Few people if any can tell the difference. The diamond industry is spending large amounts to tout “the real thing.” But will a generation used to reproduction and “multiples” buy this line? And will men manage to move to a lower-cost signaling equilibrium in the marriage (and mistress) market?

The bottom line: File this one under “Markets Economists Do Not Understand.” But if there was one commodity I would not want to be holding today, it is diamonds. Someday students will wonder why they ever called it the “diamond-water paradox.”

Does Microsoft think Kerry will win?

Microsoft just announced a forthcoming dividend of more than $32 billion, the largest ever, here is one brief account, read more here. That comes to $3 a share. Additional dividends and stock buybacks may run over a four-year period, amounting to over $100 billion in cash transfer. You will recall that is the amount that Bush pledged to fight the war in Iraq.

1. Would these dividends have happened without the Bush tax cuts? Maybe not.

2. Does Microsoft fear that Kerry will win and raise taxes on dividends? Probably.

3. Will this help the economy? For perhaps the first time since J.P. Morgan, we see an American company with enough free cash to perform “fiscal policy.” However most people now believe that fiscal policy does not do much to stabilize an economy or boost its fortunes.

4. Will the funds now be reinvested in more profitable companies? Maybe yes, maybe no, see number two. Note also that the first funds will arrive just in time for holiday shopping.

5. What will Bill Gates do with all that money? He has already pledged it to his foundation.

6. Will Microsoft ever be a dynamic, growth-oriented company again? Probably not. Why pay a dividend when you have wonderful ways to invest the money? But if there is a way to make the place buzz again, cash starvation (relatively speaking, of course) is a good first step.

Mexican update: How to compete against China and win

Too often we think of the Chinese economy as a massive juggernaut that crushes all before it. But the Mexicans are starting to adapt to Chinese competition nicely:

Between October 2000 and March 2002, Mexico’s maquiladoras – factories that assemble imported parts for re-export – lost 270,000 jobs, or more than one in five, sparking fears that Mexico had permanently lost ground to China. But now the trend seems to have sharply reversed.

In the year to May, maquiladora exports rose by 21.8 per cent, part of a increase of 21.1 per cent in overall exports – the strongest monthly rise in almost four years. Employment is at its highest since 2001, with the number of maquiladora jobs up by 2.5 per cent over the year to April.

Far from buckling under competitive pressures, the link between Mexican and US industrial production seems stronger than ever.

Mexico has continued to lose jobs in such labor-intensive sectors as textiles, furniture, toys and leather goods. The new expansions are coming bundled with manufacturing innovation, “just in time” inventories, and complete integration into the chain of American production. America and Mexico also share time zones, easy travel, and yes a language (more than thirty million Spanish speakers in the U.S.).

“If you need customisation, you’re going to want that done in Mexico rather than China,” says Mr Watkins. So sectors such as auto parts, large screen TV sets, aerospace equipment and medical supplies are fuelling the sector’s recovery.

Of course this is just the theory of comparative advantage in action. If Mexico someday truly turns the corner, and becomes more like Chile, China is one of the places they will thank. Already the Mexican government has taken a constructive attitude toward Chinese competition and spoken of the need to improve in response.

Here is the full story. The next step is for Mexico to improve the cost and quality of its industrial electricity supply. Stay tuned…

Fly the friendly (Russian) skies

Drunken passengers often give air crews trouble, but Russia’s leading airline on Tuesday reported an “unprecedented” reversal: A passenger was assaulted by intoxicated flight attendants…on a domestic Aeroflot flight…Seeing that the crew were intoxicated and were not fulfilling their duties, Chernopup [a passenger] asked to be served by a sober and competent flight attendant, Dannenberg said. He was then beaten up by crew members.

Here is the full story. If only Gogol had written about airplanes…

The Mounties are Challenged

In Canada, near Winnipeg, Manitoba, a number of communites have hired a private company, Prairie Bylaw Enforcement Services to enforce local bylaws. Here is more from the July 20th Winnipeg Free Press (subs. required).

The turf war between Mounties and Prairie Bylaw Enforcement Services has
been brewing for several months as more municipalities hire PBES to
enforce local bylaws, like noise complaints, and go after speeders and
red light runners….

PBES officers are armed with Tasers that administer a quick, sharp
electronic jolt to get suspects to comply, and folding batons, but by
law are restricted to only enforcing the Highway Traffic Act and local

By contracting PBES, municipalities get a bigger share of fine revenue
than if RCMP issued a ticket. As well, some municipalities believe they
need PBES during the busy summer months because Mounties are spread too
thin patrolling large detachment areas.

Overall, I applaud, but contracting out is not the same as privatization. When a service is privatized, government no longer plays any role in the supply or demand for the service. With contracting out the government remains the demander so we get improved technical efficiency but perhaps for entirely the wrong goods. Do we want efficient tax farming or efficient prison camps?

Bruce Benson discusses these issues further in a book I edited on private prisons called, Changing the Guard. For more on the history of truly private policing see the eye-opening chapter on policing in 19th century England by historian Stephen Davies in The Voluntary City.

Thanks to Eric Crampton for the pointer.

The earthquake in France

Or should that read man bites dog? Get this:

French workers at a car components factory owned by Bosch on Monday dealt a blow to the country’s law limiting the working week to 35 hours, as they unilaterally accepted demands from the private German automotive group to work longer for the same pay.

The near-unanimity of the vote at Bosch’s VĂ©nissieux plant near Lyon is expected to encourage other companies to seek ways of securing greater flexibility in Europe’s rigid labour markets, in the absence of political will for reform. The vote was the first of its kind in France and could set a precedent for a gradual de facto reversal of the 35-hour week.

But alas, it may not be as radical as you think. The vote was to extend the workweek from 35 to er…36 hours a week. Still, you know what Chairman Mao said.

Here is my previous post on the earthquake in Germany, read here too.

Addendum: Bill Sullivan points me to the Tao Te Ching as the original source for the Mao quotation.

Capitalism and women

Here’s a graph I put together for another purpose showing two United Nations development indicators, the gender development index which looks at life expectancy, literacy, and earned income with penalities when these are distributed unequally and the gender empowerment index which looks at the number of women with parliamentary seats, shares of women who are senior officials and managers, and female and male estimated earned income again corrected for gender inequality. The gender indices are graphed against the Economic Freedom Index which looks at the size of government, protection of property rights, marginal tax rates, mean tarrif rates, the ease of starting a new business and other such factors.

Both indicators increase strongly with economic freedom. Capitalism is good for women. Correlation doesn’t imply causation, of course, and causality, if it exists, could run from economic freedom to women’s development from women’s development to capitalism or a third factor could cause both – probably all three processes are involved to some extent. Nevertheless, at a minimum the graph indicates that capitalism and gender development are compatible contrary to many radicals. It’s interesting that no country with the high levels of economic freedom has a low score on either index. The graph actually underestimates the relationship between freedom and women’s development because there are many countries, Gambia for example, with incomplete data and we can be pretty sure that these countries have low economic freedom and low gender development.


The new Iraqi stock market

Iraq has just started its new Stock market. Fifteen stocks available…and thirty by the end of the month. Pepsi Baghdad, Al-Helal Industry, Dar-Al-Salam bank, Al-Kazer Construction are a few of the ones available for investment today…

Open your account by emailing here.

So far trading appears to be enthusiastic and more than a little volatile:

The miniature Liberty Bell clanged. Elbows flew. Sweat poured down foreheads. Sales tickets were passed and, with a flick of the wrist, 10,000 shares of the Middle East Bank had more than doubled in value.
The frantic pace yesterday of those first 10 minutes of trading typified the enthusiasm behind the Iraq Stock Exchange, an institution seen as a critical step in building a new Iraqi economy.

In five sessions, trading volume has nearly quadrupled, and the value of some stocks has surged more than 600 percent. Traders say the gains reflect the pent-up frustration of 15 months of closure.
“How can I not be excited by this?” asked Taha Ahmed Abdul-Salam, the exchange’s chief executive officer, as he eyed the activity on the trading floor.

Trading is open for two hours a day, two days a week. And how do you like this quotation from the Iraq Securities Commission?

“Right now, we’re all working together to build up the exchange. Later, when things are running smoother, then we’ll give them a hard time,” Mr. al-Okali said with a wink.

Here is the full story. Recall that not long ago, Iraq opened up markets in government securities.

If I could add to my media wish list, it would include more coverage of these developments, along with regular price reports.

The economics of teenagers

There was a time when teenagers did not dominate music markets, but was this for the better?

For some perspective, I pulled together the top-selling music of 1951, 1961, and 1971.

1951: The soundtrack for “Guys and Dolls.” Mario Lanza. Yma Sumac. The Weavers. Les Paul. Tony Bennett.

1961: Bert Kaempfert. The soundtrack for “Exodus.” Lawrence Welk. Judy Garland. But also: Elvis, Connie Francis, Brenda Lee, and Paul Anka.

1971: George Harrison. “Jesus Christ Superstar.” Janis Joplin. Sly and the Family Stone. Michael Jackson. Carole King.

Teen tastes, in other words, weren’t present on the 1951 charts at all; took up only half the list’s space in 1961; and didn’t triumph entirely until 1971.

Les Paul I like, but overall kudos to the teenagers. The list is from the ever-excellent, and we welcome the new addition Vanessa Blowhard to the blog; here is the post itself.

Addendum: Did you know that the word “teenager” only popped up in the dictionary in 1942?

Who would have guessed?

Who would have guessed that when taking drive-thru orders at a McDonald’s it’s more efficient to send the order not 25ft into the restaurant but 900 miles away to a call-in center which then relays the order via computer to the workers inside the restaurant making the food. To avoid errors, the system also takes a digital picture of the customer to accompany each order (the picture is destroyed once the order is complete). That’s the way it’s done at a Cape Giradeau, MO restaurant and at some dozen others which send their orders to a call center in Colorado.

The system has cut order time by 30 seconds, reduced errors by 50 percent and saved on labor. Who would have guessed that this system would work? Not me and I’d wager not most people, but Steven Bigari, a McDonald’s franchisee gave it a shot – an interesting illustration of why a decentralized, capitalist system furthers innovation. The system is now spreading – at some McDonald’s customers can call their order in from their table, pay by credit card, and have their order “delivered” minutes later.

It’s from small improvements like this that a productivity miracle is born.

Pay or pray?

Many people give money to their churches and then go less often. Jonathan Gruber writes:

I find strong evidence that religious giving and religious attendance are substitutes: larger subsidies to charitable giving lead to more religious giving, but less religious attendance, with an implied elasticity of substitution with respect to religious giving of -0.92. [TC: If your giving goes up by one precent, your expected attendance goes down by about 1.1 percent.] These results have important implications for the debate over charitable subsidies. They also serve to validate economic models of religious participation.

Here is the abstract; you can buy the paper there for $5. Here is Jonathan Gruber’s home page.

The question for policy is whether you want churches to be wealthier or fuller. I’ll vote for wealthier, so I have no trouble endorsing the tax break for church giving. It spurs donation but apparently keeps some people at home as well. The irregular attendees are the ones whose behavior tends to vary with dollar donations.

One story is that the irregulars are guilted into going and that we should give them an easy way out, namely a donation. A cash transfer substitutes for a real time investment, which is efficient. Let’s also not forget the intra-family externality on the kids; many would rather play than hear a sermon. An alternative story is that getting these people into church, in the bodily sense, will create a positive social externality. If that’s your view, stop doing fundraising for your church. Perhaps you should stop giving money as well.

Speaking of the economics of religion, this site, put together by my colleague Larry Iannaccone, offers systematic links to the field and its scholars.

Psychoanalysis and Consumer Society

Freudian introspection aimed to foster the individual’s capacity to live an authentically personal life, yet it wound up helping to consolidate consumer society…Psychoanalysis remained marginal to European psychiatry until after Wrofl War II, when Americans brought it back to Europe, but it became central to American culture almost immediately. The reason was the weakness of traditional authority in the United States and the widespread belief in the power of the individual mind to overcome “external” difficulties. In that context, American psychoanalysis became intensely popular. As a result, it was caught up in a process that emphasized personal empowerment, self-regulation, and individual charisma. As we shal see, the actual practice of analysis was less important than its cultural impact. Ultimately American analysis came to mean almost the opposite of the self-reflective exploration of internal limitations that characterized its European counterpart.

From the intermittently fascinating Secrets of the Soul: A Social and Cultural History of Psychoanalysis, by Eli Zaretsky.