Friday, August 28, 2009

Not good

A reason to stay current with your bills:
The multiple breakdowns of power supply in the emirate that has once again left residents sweltering in the heat is the result of improper maintenance by the Sharjah Electricity and Water Authority (Sewa) of its US made generators, Gulf News has learnt.
[A]n informed source in the industry told Gulf News ... said the fact that one of the main suppliers of Sewa had stopped all shipments of spare parts and services since the beginning of the third quarter of this year has affected the performance of Sewa. Sewa has been disabled from coping with peak demand from its subscribers.

"The supplier of the spare parts - a renowned international manufacturer of energy products - decided to stop shipments due to an outstanding amount of around $1.5 million (Dh5.5 million) Sewa has either disputed or refused to pay on time," he said.
Sewa says maintenance is not the issue. Read it all.

There is also a capacity problem. Some buildings in Sharjah have gone years without authorization to hook up to the grid.

As far as temporary outages, one solution would be to buy electricity from neighboring emirates. Besides the fact that they likely run near peak capacity in the summer months, there is a more fundamental problem: last time I checked, the Dubai and Sharjah systems were not interconnected. Remember the Dubai blackout of June 2005?

Mosquitoes better than economists

A full year before the US housing meltdown, mosquitoes predicted it. There's something else to toss into our prediction models.

The vicious cycle of too big to fail

Remember how we got into the financial mess? Big banks assumed that if their investments turned sour they'd be bailed out. The assumption was justified because if they were punished (not bailed out) the systemic risk they had created will pull down the financial system.

The Washington Post:
Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.
Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.
How to break this vicious cycle? It is hard to see how the government could credibly commit not to bail out big banks. But if bigness itself creates a systemic risk -- a risk that cannot be remedied by shutting down a sick bank because the infection will only spread more virulently throughout the system -- the solution would appear to a tax on being big. It's an externality.

Thursday, August 27, 2009

Wages and health insurance

Over at Marginal Revolution, Alex Tabarrok catches David Leonhardt in a fundamental error concerning wages and benefits:

David Leonhardt makes an interesting argument about why employers don't choose employee health insurance carefully. The argument is interesting because it is wrong but in a subtle way.

The bottom line: The cost of insurance comes mostly out of employees' paychecks. If insurance costs more, employees are generally paid less. If insurance costs less, employees are paid more. The cost of insurance does not have a big effect on employers’ overall compensation costs.
That’s why no one should be surprised that employers don’t make for good consumers of insurance. And it’s why insurers are not operating in a very competitive marketplace.

The premise is correct, employee compensation comes out of wages. The subtle mistake is to forget that this is only true in equilibrium. Imagine that a single employer was able to buy for his employees equal quality health insurance at a lower price. Would wages at that firm rise? No, an employer only has to pay workers what they could earn in another job. If other firms aren't paying more then this firm need not raise wages even though its costs have fallen. Thus an employer that reduced health insurance costs while keeping real compensation the same could pocket the savings as profit. It's only when other firms follow suit--also in an attempt to cut costs and earn excess profits--that wages at all firms rise, eliminating the excess profit everywhere.

Tabarrok's argument really boils to down to this: we have an example of a cost saving opportunity. We know that profit-maximizing firms do not pass them up. So Leonhardt must be wrong.

Leonhardt distracts us with a red herring. It is true that, in or out of equilibrium, to attract a worker you need to pay him in wages and benefits (as valued by him) at least as much as he could get elsewhere. An employer can reduce the wage and increase the value of the benefit by the same amount without changing the package's attractiveness to the worker. That is, the "cost value of insurance comes {snip} out of employees' paychecks." I would characterize Leonhardt's error this way: he is suggesting a principal-agent problem exists; the one who chooses the insurance is not the one who pays. But he is forgetting why "cost value of insurance comes {snip} out of employees' paychecks." And he is not allowing for a difference in cost and value. If an employer can find an insurance plan at the same value for less he will buy it.

But that doesn't mean that profit-maximizing employers "make for good consumers of insurance." In a world where the employees you have today are not the employees you have tomorrow, you have no incentive to choose plans that create incentives for employees to engage in healthy behaviors. That begs the question of why there is employer-based health insurance provision, but that is answered by the favoritism towards them in the U.S. personal income tax code.

It's significant that healthy behaviors are where there actually is evidence for large health care savings.


Tuesday, August 25, 2009

Bekaa Valley underwear souk

Read it all here.

Sunday, August 16, 2009

Links I liked

Thursday, August 13, 2009

Dubai announces board that will disperse $20 billion in Abu Dhabi rescue funds

Gulf News rather cryptically reports,
The Dubai Financial Support Fund was established by Decree 24 of 2009 on July 21 as an independent legal entity to manage the proceeds of the Dubai Government's $20 billion (Dh73.5 billion) bond programme, or any other bond issues.
The board's principal duties include the responsibility for establishing the Support Fund's operating policies and procedures and for recommending to the SFC the criteria to assess loan applications by Government and Government-Related Entities ('GREs'). The board will nominate the strategic projects to be financially supported. It will also adopt financial, administrative and technical regulations.
No mention of where the money came from or that it is related to the economic downturn. Or the private finance market's concern over the transparency of the Fund's decisions.

The Abu Dhabi-sponsored The National brings clarity:
“The new board’s primary duty will be to prepare and adopt the criteria to be used in the allocation of funds for Dubai’s strategic revenue-generating projects.”

Dubai has already borrowed $10bn from the Central Bank and plans to issue bonds to raise $10bn more, as it races to keep key infrastructure projects rolling and make payments on an estimated $80bn in debt in the face of falling property prices and tight credit.
The slump has contributed to a dramatic slowdown in economic growth across the UAE, with economists predicting the economy will shrink slightly this year amid lower oil prices and rising unemployment in the property and construction sector.
And The National's reporter Wayne Arnold perceptively adds this:
Mr Abedin, the fund’s new executive director, is a relative unknown. A former Merrill Lynch banker, he was at ENSEC in 2005 when it announced the UAE’s first AAA-rated, asset-backed securitisation, which was $350 million of notes backed by mortgages owed by buyers of villas, townhomes and apartments at Nakheel’s Palm Jumeirah, where prices have fallen more than 60 per cent from their peak.

The mortgages were issued by Tamweel, formerly one of the UAE’s two largest home lenders. Tamweel ceased lending operations last November and remains inactive pending a decision by the Government on whether to merge it with its fellow mortgage lender, Amlak Finance.

Nakheel is now expected to be one of the first recipients of the fund’s attention. Nakheel has $3.5bn in Islamic bonds due in December.

Whether Dubai intends to pay the bond in full, and if so whether it will raise the cash by borrowing it or selling off assets, have been key questions among bankers and investors.

Read Arnold's article.

Tuesday, August 11, 2009

Students given incentive to buy from on-campus bookstore

Students at the American University of Sharjah are not happy with a new university policy that "forces them to pay a Dh1,250 [$340 (but N.B. students at AUS get "international editions" that sell at lower prices than U.S. students pay for the same product)] fee towards textbooks they may only buy at the institution's bookstore." The bookstore is not owned by the university, but it is the only bookstore on campus, and pays a franchise fee to the university.

More, from Gulf News:
[T]he university says the new rule was implemented to discourage infringements on international copyright laws.

"It's a money-stealing scheme," said AUS student Amnah Haddad. "We are forced to pay this money to buy books only from our bookstore, therefore we students cannot buy second- hand books as we used to."

A letter recently sent from the university's Student Accounts Department stated that the rule is an attempt to "abide by international copyright laws which the university must abide by to maintain accreditation".
One AUS student commented: "What if I don't want to get books at all? Am I violating copyright laws? What if I want to buy my books online ... [or] exchange books?"
AUS chancellor Dr Peter Heath said, "Faculty and, less frequently, students have complained for a number of years about the breaches in academic integrity and international copyright rules that result from significant copying of course materials by students. If we as a university do not seek to enforce these rules, then who will?"
Commenting on the shortage of cheaper second-hand books, he said currently there wasn't a large stock of used books because few students in the past have bought new ones. "As a stock of used books grow, we can work with the book store and the student council to develop a plan for how best to make use of them to the advantage of all."
In the UAE it is quite easy to get someone to make a copy of a copyrighted material. This a way for the university to make a good faith effort to enforce international copyright, and the university is right to conclude that accreditors will hold the university responsible for a good faith effort. It will be interesting to see if other UAE universities follow suit.

Sunday, August 09, 2009

True or false?

The Globe and Mail reports on what is says are green shoots in Japan's red-light districts. That's according a report, Recent Trends and Changes to a Pleasure District, commissioned by the Bank of Japan. From the Globe and Mail:
“The number of brothels has increased. There's no question about that,” Tadao Yonezawa, an official at the Susukino Tourist Association, told Bloomberg. “It must be because people want those services. Where there's demand, you get supply.”
True or false? The increase in the number of brothels is due to demand. False. The mere existence of demand would not account for an increase in quantity.

True or false? The increase in the number of brothels is due to an increase in demand. Likely, false. There is nothing in the article that would account for an increase in demand.

What we are told:
[S]hoppers have been heading to newer stores in other areas, and the number of bars and restaurants in the district has fallen rapidly. Many of the survivors have been paying reduced rents and discounting meal prices to keep their doors open.
The services sector in general is the main source of new jobs for women, many of whom in Japan have been finding it increasingly difficult to obtain work, particularly since the economy slipped into its latest nosedive last fall. Young people have drifted into jobs once scorned in Japanese culture.

These include working as bar hostesses and waiting on tables in so-called maid cafes, where female servers wear aprons over their miniskirts and address male customers as “master.”

This marks a generational shift, said Keiko Miyamatsu-Saunders, a Toronto-based Japanese author on cultural subjects. “For a person of my generation to become a hostess in a bar was out of the question. And I consider myself very open-minded.”

These facts suggest lower costs of operating a brothel due to lower rents, and lower wages. These would increase in the supply and account for the increase in the number of brothels.

Thanks to John Palmer for the pointer.

Saturday, August 08, 2009

Lack of transparency creates uncertainty, hampers investment

It's unclear how exposed Gulf Arab banks are to the collapse of two Saudi Arabian conglomerates, Saad Group and Ahmad Hamad Algosaibi Brothers. And that uncertainty is hampering the region's recovery.

Arabian Business:
Merrill Lynch emerging markets analyst Turker Hamzaoglu said [...] the 'low visibility on authorities' policy reaction to the unfolding restructuring in the region" made investors loath to hop on the recovery bandwagon for now.

Investors are awaiting more information on several initiatives in the region, including the planned second tranche of a $20bn Dubai government bond as well as news on the extent of the Saad/Algosaibi damage to the banking sector.

Regional banks have hiked provisions against their exposure to the firms, with Standard & Poor's ratings agency estimating that 30 Gulf Arab banks had a combined exposure of $9.6bn.

"The total scale of the problem is unclear and ... the uncertainty this has created in the market is significant," said Reinhard Cluse, senior economist at UBS Investment Bank in London.

Barclays: UAE experiencing deflation

Emirates 24|7:
Inflation will reverse from an average of 12.3 per cent in 2008 to -1.5 per cent in 2009, Barclays Capital said in a report. The decline in CPI inflation in the UAE is expected to increase in the second half of this year, it said in a report.

In spite of the government's expansionary fiscal policy and liquidity injections, the mounting deflationary pressures are likely to stay till the end of the year, Barclays Capital said.
Continuing weakness in domestic demand, driven by a projected decline in population and falling wages, would be a key short-term driver.

Besides, sustained easing of food price pressures globally; and depressed real estate prices that should drive rental prices to even lower levels (notably in Dubai) would act as other factors contributing to the trend, the report said.
Read it all.


Thursday, August 06, 2009

Inter-sect marriages on the rise in Iraq

Muhanad Talib, a Sunni Muslim, married his Shiite bride because she was a "suitable woman" for him. It also didn't hurt that their vows made them eligible for a $2,000 payout from the government.

Talib and his wife are among more than 1,700 newlywed couples who have accepted cash from a government program that encourages Sunnis and Shiites to tie the knot.
As security has improved, Iraqis are returning to their homes in mixed neighborhoods and spending more time at offices, universities and other places where they meet their future spouses, said Shiite cleric Sayyid Ahmed Hirz al-Yasiri in Baghdad's Shiite stronghold of Sadr City.

"There was a time when families were reluctant to consent to such marriages because of concerns created by certain conservative people from both sects," he said. "That is over now and things are getting back to normal, like they were before the fall of Baghdad. In the past two months, I married 40 to 50 Sunnis, including 20 mixed weddings."
Thanks to Marginal Revolution for the pointer.

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Sunday, August 02, 2009

Data on hotel occupancy, revenue, construction

Gulf News reports some helpful statistics provided by Smith Travel Research Global on the hotel industry in Dubai, the UAE and the Gulf:
In the Gulf, Oman experienced a significant decline of 19 per cent in occupancy rates during the first six months to June this year when compared to the same period last year, according to data provided by Smith Travel Research Global.

Qatar suffered a 14.52 per cent decline, the UAE 14.13 per cent, Bahrain 10.12 per cent, Kuwait 4.31 per cent and Saudi Arabia 3.88 per cent drop.

In RevPAR [revenue per available room], the UAE suffered the worst fall of 28.8 per cent during the first six months to June, followed by Qatar at 12.41 per cent, Kuwait 12.04 per cent, Bahrain 8.67 per cent, and Oman 7.1 per cent. Saudi Arabia was the lone market in the Gulf to register a 3.97 per cent rise.

In the UAE, Dubai's occupancy dropped by 12.9 per cent and RevPAR declined steeply by 35 per cent during the first half of this year compared to the same period last year while Abu Dhabi's RevPAR grew by 3.2 per cent during the period.
Among the key markets, Dubai reported the largest number of rooms in the construction phase where of the 33,319 rooms in active pipeline, 11,196 rooms are in the construction phase.
Read it all.

For more details see the press release from Smith Travel Research Global and the tables in its Global Performance Report (pdf).

Saturday, August 01, 2009

How true - Dubai opaque

"Investors in the region know this $10 billion will be used to support infrastructure and liquidity of government related entities (GREs)," said Nish Popat, ING's head of fixed income in the Middle East. "But will it be $10 billion? Will there be a federal guarantee? Will there be a rating, and if so will there be greater transparency in finances of the country?

"There are more questions than answers for investors."
"The problem with Dubai is the lack of details, numbers from both corporates and sovereigns," said a debt fund manager in London after returning from an investment trip to Dubai. "You can only buy things on the assumption they will be bailed out by Abu Dhabi. There is no reason for optimism any time soon."
The primary concern for investors remains a transparent process. The dismissal of Dubai's former finance chief, who was well-regarded in the financial community, did little to inspire confidence. He was surprisingly removed a day after leading a panel at the World Economic Forum on the future of the emirate.

No reason has been given for his dismissal. Most analysts believe he was too open, but unless the new finance minister is also communicative, Dubai may still grapple with recovery.
Read my roundup of news on the dismissal of Dubai's former finance chief, Nasser al-Shaikh, here.