Monday, April 27, 2009

Lebanon: "comically turbulent"

The Economist:
Lebanon’s GDP grew during 2008, not at an annual rate of 7.5%, it seems, but at 9% or better. Yet even that trend-bucking number looks modest compared to other milestones scored by this small, almost comically turbulent country. Last year the value of deposits in Lebanese commercial banks rose by 15% to an impressive $94 billion, equal to 327% of GDP. Industrial exports surged 24%. Tax revenues, tourist arrivals, banking profits and the number of construction permits all soared by a third or more. A giant 46% leap in net capital inflows helped Lebanon post a record $3.5 billion surplus in its balance of payments, and boosted the Banque du Liban’s own reserves to a cosy $22 billion, nearly double its holdings a year ago.
The ironic truth is that the country’s double curse, of chaotic internal politics and being located in a nasty neighbourhood, are proving helpful for a change. For one thing, they have made Lebanese bankers unusually wary and resourceful. Four years ago, for instance, the Banque du Liban’s stern and far-sighted head, Riad Salameh, banned any dealing in such tricky foreign instruments as mortgage-linked securities. And while banks, property developers and service vendors raked in business as private cash spilled out of the oil-enriched Gulf, competition between influence-seeking powers brought a windfall in aid for reconstruction following the ruinous 2006 war with Israel. Iran alone has injected perhaps $1 billion to rebuild the heavily bomb-damaged parts of Beirut run by its protégé militia, Hizbullah.
As is so often the case, thanks to Marginal Revolution for the pointer.

The Sarah Boyle effect

New York Times:
[A]fter the video of her performance went viral, a flurry of commentary has focused on how we stereotype people into categories, how we fall victim to the prejudices of ageism or look-ism, and how we should learn, once and for all, not to judge books by their covers.

But many social scientists and others who study the science of stereotyping say there are reasons we quickly size people up based on how they look. Snap judgments about people are crucial to the way we function, they say — even when those judgments are very wrong.
One reason our brains persist in using stereotypes, experts say, is that often they give us broadly accurate information, even if all the details don’t line up. Ms. Boyle’s looks, for example, accurately telegraphed much about her biography, including her socioeconomic level and lack of worldly experience.

Her behavior on stage reinforced an outsider image.
Gulf News - Dubai:
"In this time and age people are becoming more competitive and you have to look good when seeking a job," said Hassan Galadari, a cosmetic surgeon, taking part in the conference.

"An employer looks at the way you look," he said, noting that cosmetic surgery has a huge market in this region.
Back to the NYT article:
Even as she expressed the hope that “maybe this could teach them a lesson, or set an example,” Ms. Boyle has begun to change her appearance in recent days, wearing makeup, dying her frizzy gray hair, and appearing in more stylish clothing.
The NYT article has before and after photos.

Related: Elective surgery in a recession.

Sunday, April 26, 2009

What can happen when wholesalers and retailers gladly cheat on trademarks and governments look the other way

A twist has emerged in the story of Israeli citrus fruit reportedly sold in Iran in defiance of a ban on commercial dealings between the two enemy states.

It has now been revealed the fruit, a type of orange-grapefruit hybrid marketed as Jaffa Sweetie, were not Israeli in the first place.

The Sweeties were brought to Iran from China, where faking the origin of goods is a common practice.

The discovery of apparent Israeli origin caused a stir in Iran.

Outrage followed, distribution centres stocking the fruit were sealed and accusations were traded.

Such is the infamy of dealing with Israel that an Iranian official went so far as to accuse the opposition of a "citrus plot".


Thursday, April 23, 2009

Bahrain following through on labor market reforms

Bahrain is doing good things to rationalize its labor market, and put domestic workers at less of a disadvantage. The Financial Times reports:
The focus of the protesters’ anger is a BD10 ($26.6) monthly tax on every foreign worker, introduced last July. The funds are to be used by Tamkeen – “the enabler” – to train Bahraini nationals for work in the private sector, as part of wider reforms intended to cut unemployment, diversify the economy and reduce the public wage bill.
“I already pay BD200 to bring a worker into the country, and now they’re taxing me to keep him,” says Ibrahim Yousef of the Bahrain Contractors’ Society. Local fishermen, many of whom employ workers from India and Pakistan, went on strike in February in protest.
An independent regulator, the Labour Market Regulatory Authority, was hived off from the Labour Ministry in 2006. The LMRA is responsible for registering foreign employees and licensing new companies. It is one of the few such bodies in the Gulf to publish job market data.

The second task was job creation. Tamkeen has accumulated a BD66m war chest, to be spent over the next four years....
The source of Tamkeen’s finances also preserves its semi-independence – it answers to the Economic Development Board, brainchild of Bahrain’s reformist crown prince.

A populist parliament has attempted to derail the government’s reforms on several occasions. This week, Bahrain’s labour minister quashed a law drafted by deputies that would impose a BD500 fine on “runaway workers” who leave their jobs without permission.
One of the many advantages of foreign workers is that they can contract not to leave their jobs, whereas Bahrainis cannot. Imposing the fine would have only enhanced this contractual advantage.

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Wednesday, April 22, 2009

Contrasts can be interesting

These two articles are side-by-side on the Financial Times Middle East news page:

Dubai's ruler says the worst is over - The ruler of Dubai yesterday said the government may still have to intervene to offer financial support to some economic sectors in the troubled Gulf emirate, but he... - Apr-20

Dubai property prices to fall further - Dubai property prices have further to fall even after average residential prices have dropped by up to 42 per cent over the last six months, according to a property consultancy - Apr-19

Tuesday, April 21, 2009

Harming our young people

Say the state has a law making underage smoking illegal. This creates an "Existing legal duty" not to smoke. Such laws are often not enforced because it is costly for the state to enforce them. But a parent or relative might find it easier to detect whether their child is smoking. What effect does the existing legal duty have? Wikipedia explains:
The prime example of this sub-issue is where an uncle gives his 17 year old nephew (a citizen of the USA) the following offer: "if you do not smoke cigarettes or marijuana until your 18th birthday, then I will pay you $500" (it is a criminal offense in the US for people under the age of 18 to smoke). On the nephew's 18th birthday, he tells the uncle to pay up, and the uncle says no. In the subsequent lawsuit, the uncle will win, because the nephew, by US law, already had a duty to refrain from smoking cigarettes.
Now the economics: Knowing his uncle will renege, the 17 year old nephew will smoke -- even if he wanted to take contract. Taking this one step farther. Suppose the 17 year old wanted to create the will power not smoke and promised to pay $500 to his least favorite charity if he broke his promise. He can't do that either. The US government deprives him of the right that Obama's budget chief has:
Regardless of the data, psychology matters. Orszag has employed this knowledge while training for a marathon.

"If I didn't achieve what I wanted to, a very large contribution would automatically come out of my credit card and go to a charity that I very much didn't support," Orszag says of his training strategy. "So that was a very strong motivation, as I was running through mile 15 or 16 or whatever it was, to remind myself that I really didn't want to give the satisfaction to that charity for the contribution."

He declines to name the charity.
The link is to an NPR interview where the exchange interviewer Andrea Seabrook hears this and tries to get Orszag to reveal the charity rather amusing.

About the strategy of binding yourself Orszag says it's about using psychology rather than economics, and while that may be true it's an idea that comes up in economics -- Thomas Schelling's two selves being perhaps the best example. But don't forget the excellent R. H. Strotz, "Myopia and Inconsistency in Dynamic Utility Maximization," The Review of Economic Studies, Vol. 23, No. 3. (1955 - 1956), pp. 165-180 -- and the Odyssey.

More Americans outsourcing their jobs

Thursday, April 16, 2009

What does a Savant do for a living?

Financial Times:
Savant – the surname is real, it was her mother’s maiden name – has had a unique claim to fame since the mid-1980s. It was then, almost 30 years after she took a test as a schoolgirl in downtown St Louis, Missouri, that her IQ came to light. In 1985, Guinness World Records accepted that she had answered every question correctly on an adult Stanford-Binet IQ test at the age of just 10, a result that gave her a corresponding mental age of 22 years and 11 months, and an unearthly IQ of 228.

The resulting publicity changed Savant’s life.
When I asked her to describe how her mind approaches a problem, she said: “My first thought, maybe not thought, it’s almost like a feeling, is overview … It’s like, almost, a wartime decision. I keep thinking about all of the fronts, what’s supplying what, where are the most important points … ”

The curious thing, as The Browser observes, is "Why is the cleverest person in the world an agony aunt?" Is this the best use of her talents? Granted she still fields more math questions than Ann Landers, but she's become more of an advice columnist every day.

What really seems to have launched her is her explanation of the solution to the Monty Hall Dilemma. She wasn't the first to solve it, although the Financial Times makes it sound that way. If you're not familiar with the problem, you'll want to take a look.


Wednesday, April 15, 2009

US black liquor gives Canadians headaches

A change in the US tax code subsidizing black liquor is threatening to open up discord between the US and Canada. And the industry that's doing the squealing is not Canadian whiskey, but Canadian pulp.

IMF report on UAE focuses on policy mix

The IMF issued its latest country report for the UAE on April 13. The report links are here.

Some highlights:

From the external Article IV Consultation report:
The United Arab Emirates (U.A.E.) macroeconomic performance during 2007–08 was strong, with growth especially in the construction and services sectors and despite some slowdown in the last quarter of 2008, due to the global crisis. Annual average inflation accelerated, driven by domestic demand pressures (especially rents) and higher import prices (such as prices of food, building materials and skilled and unskilled workers). Higher oil prices contributed to large external current account and fiscal surpluses in both 2007 and 2008.

However, the outlook for 2009 and beyond has become more clouded, as the U.A.E. has been adversely affected by the turmoil in global financial markets. This is evident in a widening of sovereign risk spreads and a sharp downturn in stock markets—most pronounced for real estate companies. Large private capital inflows, driven by expectations of an appreciation of the dirham vis-à-vis the U.S. dollar, largely reversed over the summer of 2008; currency futures indicate that markets no longer doubt the peg. Foreign financing for many corporates has tightened, and a slowdown in real estate and construction seems underway. The global weakening will reduce demand for tourism, trade, and financial services, while lower oil prices may affect public spending. Growth in the non-oil economy is expected to slow down considerably, while inflationary pressures should recede.
The short and medium-term outlook is subject to a number of downside risks arising from the difficult global environment as well as domestic financial vulnerabilities in the wake of the recent real estate and credit boom (especially in Dubai). The main risks to the outlook stem from (i) a more severe global weakening; (ii) further tightening of foreign financing for investment projects; (iii) an increase in the demand for domestic financing adding to banks’ stress; (iv) a correction in the real estate market leading to a deterioration of asset quality in financial institutions; (v) a drop in oil prices that constrains the scope for fiscal policy to support growth; and (vi) an unexpected re-emergence of inflationary pressures.
From the IMF Staff Report:
Discussions focused on the policy mix needed to contain the impact of global turmoil, especially on the financial sector, and keep the U.A.E. economy on a path of sustainable growth with single-digit inflation.

The authorities

• Explained their approach is to preserve financial stability through various emergency liquidity facilities, guarantee of deposits, and a strengthening of banking supervision.
• Expect public spending to remain a key driver for growth in 2008–09, including through higher transfers to quasi-public entities to replace foreign and domestic bank lending.
• Agreed that the dirham might be moderately undervalued.
• Consider that the current pegged regime remains appropriate at this juncture, providing a strong anchor in the current turmoil.

Staff recommendations

• Slow credit growth while avoiding too abrupt a slowdown to avoid damage to corporates and the financial system. In the event of a worse-than-expected downturn, target contingency measures to safeguard systemically important institutions.
• The peg to the U.S. dollar remains appropriate unless inflation were unexpectedly to persist.
• Minimize fiscal costs of the government guarantees; ensure adequate incentives to prevent banks from using the new liquidity facilities to acquire more risky assets.
• Rationalize subsidies and prioritize investment projects with a view to alleviate supply bottlenecks and inflation pressures; be ready to pursue a more active counter-cyclical fiscal policy if needed.
• Complete ongoing work to disseminate monthly CPI data, establish a National Bureau of Statistics, and improve national accounts and public sector statistics, including preparation and publication of the IIP.
The Financial Times has a report.

Here is the link to the IMF staff report:

Published: April 13, 2009
Electronic Access: Free Full Text (PDF file size is 1,178KB)

Series: Country Report No. 09/124

Tuesday, April 14, 2009

Go and sin no more

The Vice Fund (VICEX) , a mutual fund which invests in the so-called "sin" industries like distillers, casino operators and cigarette companies, has lost 42% over the past twelve months. That's actually four percentage points worse than the Standard & Poor's 500 index overall.

Meanwhile the Ave Maria suite of mutual funds, which invest only in companies that comply with certain Roman Catholic values, have done better. The Ave Maria Growth Fund is only down 33%. It's beaten Vice by nine points and the S&P by five.

It's hardly a miracle -- but maybe enough to raise eyebrows on Wall Street, a secular place where the usual invocation is "let us prey."

Conventional wisdom there says that "sin" stocks are safe places to park your money during a downturn. Such companies often enjoy strong cash flow, a terrific advantage in a tough economy, as well as pretty resilient businesses.
As for the Ave Maria funds: These were launched earlier this decade by Schwartz Investment Counsel, and they are Catholic not in what they own but in what they avoid. The funds eschew stocks that breach a variety of precepts, mostly around things like involvement in abortion or giving money to Planned Parenthood.

The irony? Their rules have steered them clear of such disasters as AIG, Bank of America, Citigroup, and General Motors.

Monday, April 13, 2009

US government fuels black liquor

The Nation:
"Seventy-three percent of the energy we use in our mill system we produce," says Ann Wrobleski, [International Paper's] vice president for global government relations. "We feel like we're the original green industry, if you will." (In developed nations, paper is the third-largest industrial greenhouse gas emitter, behind the steel and chemical industries.)

By adding diesel fuel to the black liquor, paper companies produce a mixture that qualifies for the mixed-fuel tax credit, allowing them to burn "black liquor into gold," as a JPMorgan report put it. It's unclear who first came up with the idea--Wrobleski told me it was "outside consultants"--but at some point last fall IP and Verso, another paper company, formerly a part of IP, began adding diesel to its black liquor and applied to the IRS for the credit. (Verso nabbed $29.7 million at just one of its mills in the final quarter of 2008 for its use of mixed fuel.)

Despite the obvious contrivance of the procedure, Wrobleski is unapologetic: "The credit is supposed to encourage the use of green fuel." Sure, I said, but isn't it a bit weird you're now adding diesel fuel to the process in order to take advantage of it? "It is what it is," she said.

Others are less charitable. "You use the toilet every day," said one hedge fund analyst who's been closely following the issue. "Imagine if you could start pouring a little gasoline into the bowl and get fifty cents a gallon every time you flushed."

No one in Congress seems to have anticipated this creative maneuver. This past fall the Joint Committee on Taxation computed the cost of extending the tax credit for three months and projected it would cost a manageable $61 million. It now appears that the extension (which was passed as part of the TARP) could cost as much as $2 billion before the credits expire at the end of this calendar year.


Saturday, April 11, 2009

Microfinance in Iraq

An interesting article on US and UN efforts to build up the Iraq economy through small business loans. I'm sure what makes them microfinance except that's the cool label. Small business loans seems to be more descriptive.

Friday, April 10, 2009

Islamic finance slows, Sukuk grinds to halt

The Daily Star:
Islamic finance is slowing as the global financial crisis hits its hubs in Malaysia and the Gulf, but the sector now has a chance to move on to Western economies seeking to boost their financial centers.
"There is a need for petrodollars in the West so more countries will be pandering to the rhetoric of Islamic finance to try to recycle petrodollars to their own financial capitals, be that London, Singapore or Kuala Lumpur," said Mahmoud al-Gamal, chair of Islamic Economics at Rice University.
The easing market has provided scholars, lawmakers and bankers a window to reassess structures including the sukuk, or Islamic bonds, which are still under the spotlight as different bodies debate on how compliant instruments are with Islamic law.

Sukuk, once the industry's hottest product, have dried up, with the Gulf Arab region seeing no issues in the first quarter of 2009.
"Islamic finance instruments were structured the same way as conventional finance instruments so I think it was propaganda to say they were insulated," said Gamal. "In 2009, Islamic finance could grow faster because many multinational banks had to cut back quite a bit on lending..."


Lawyers do it

Do economists?

Does cosmetic surgery enhance your career? It seems to if you are a female lawyer.

Is our related story from just a few weeks ago.

Thursday, April 09, 2009

That's billion with a b.

Financial Times:
UAE groups fail to pay bills

Lord Mandelson has raised concerns about the failure of developers in the United Arab Emirates to pay British contractors, and has sought reassurances from local rulers that financial commitments will be honoured.

The UAE, particularly Dubai, has been hit hard by the global financial crisis, and some contractors and consultants have complained that they have not been paid for up to six months. Government-linked developers dominate the UAE’s property sector, and cash-strapped Dubai-affiliated companies are thought to owe billions of dollars.
He said: “I have had concern expressed to me about [delayed payments]. “Nobody thinks that anyone in Dubai or Abu Dhabi is going to default, and people understand the delay, but what they want is reassurance that the delay will not become permanent and that bills will be paid because these are contractors employing very large quantities of labour.”
Meanwhile, in the low-wage sector:

Gulf News:
Ajman: Officials on Wednesday warned companies of ignoring the living conditions of their workers or failing to pay them on time.

The warning came as a group of workers closed some roads in Ajman to protest what they claim as "restrictive" procedures by their employers, who don’t allow them to look for other jobs, but also fail to pay them the Dh450 monthly salary.
Gulf News:
The Ministry of Labour said the UAE does not tolerate violation of labour laws and workers' rights and it will investigate claims made in a BBC TV programme on violation of workers' rights in Dubai.

According to a statement issued on Wednesday Saqr Gobash Saeed Gobash, Minister of Labour, ordered the inspection team at the ministry to investigate the claims made in Panorama, a BBC TV programme broadcast on April 6, that expatriate labourers are forced to live and work in poor conditions.

The episode titled Slumdogs and Millionaires claimed to expose the bad working and living conditions of construction workers in Dubai and to "reveal the darker side of Dubai that works behind the scenes to make the glamorous image a reality".
Just the same, the Gulf News also reports, UK distances itself from slanderous stories on Dubai.

Wednesday, April 08, 2009

Media mantra: Dubai's dark side

Samuraisam catches the international press in a frenzy. Talk about an excellent example of pack-journalism/groupthink.

Tuesday, April 07, 2009

Arab takes control of Israeli bread industry

The Independent:
The deal will make him the owner for one week of all bread, pasta and beer in Israel – well a huge amount of it anyway. The contract, signed for the past 12 years by the Muslim hotel food manager, is part of the traditional celebrations ahead of the Jewish holiday of Passover.

Jews are forbidden by biblical injunction to possess leavened bread, or chametz, during Passover and ironically an Arab is needed to properly observe the holiday. The agreement with Mr Hussein offers a way of complying with religious edicts without having to wastefully destroy massive quantities of food.

Through legal acrobatics, the forbidden goods belonging to the Israeli state are simply sold to Mr Hussein for the duration of Passover and then revert back to the state once the holiday is over. Like the government's adherence to the Sabbath and to dietary laws, the ceremony sets Israel apart as a Jewish state that upholds religious traditions.
I'm not sure that's what Yahweh had in mind. When my students take a legalistic view, I tell them that what matters is that they obey the intent, not the letter.

Thanks to Marginal Revolution for the pointer. Marginal Revolution is the originator of "markets in everything."


Sunday, April 05, 2009

What to do about the economy

Don't just stand there. Do nothing!

Item 1:
The 1930s would have been a better economic decade had government policy promoted competition in product and labor markets, rather than adopting policies that extended monopoly in product markets, and that set wages above competitive levels which prevented labor markets from clearing.
Item 2:
Why was that slump, over and done with by 1922, so much shorter than the following decade’s? Well, for starters, he said, President Woodrow Wilson suffered an incapacitating stroke at the end of 1919, while his successor, Warren G. Harding, universally considered one of the worst presidents in American history, preferred drinking, playing poker and golf, and womanizing, to governing. “So nothing happened,” Mr. Vedder said.

Of course Mr. Vedder does not wish ill health — or obliviousness — on any chief executive. Still, in his view, when you’re talking about government intervention in the economy, doing nothing is about the best you can hope for from any president.

Thursday, April 02, 2009

Oil's role in the recession

James Hamilton:
Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the U.S. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.
And for the rest of the world the U.S. is still the big engine the drives economic growth.