Tuesday, July 27, 2010

Fallacies

Which among the following pairs of countries would you consider to have a larger share of their exports in high-tech manufactures:

a. Korea or Japan 
b. Philippines or Singapore 
c. China or the United States 
d. Mexico or Germany 

The answers are found below: a. Korea b. Philippines c. China d. Mexico 

Surprised? Certainly these facts run counter to the commonly held beliefs about rich and poor countries. The most intriguing insight in all this is that the Philippines, the poorest of the four emerging countries just cited, long considered a laggard in its region as far as exports and investments are concerned, has emerged as a world leader in this regard, edging out Singapore, the former front-runner since 1996. See for yourself here


Other interesting observations are: (1) China has been ahead of the US since 2005, (2) Korea has led Japan since 1997, and (3) Mexico has edged out Germany since 1994. Safe to say, the strong performance of these emerging economies over their richer peers cannot be considered a fluke or the result of luck. In economic terms, a "structural shift" has occurred in these economies which have traditionally been exporters of cheap, basic commodities. 

What accounts for this increasing specialization in high-tech manufactures by emerging economies? More importantly, what does it say about their future prospects for growth? Is it a healthy sign or is too much specialization counter-productive? 

Let us first define what high technology means in this context. According to the World Bank definition, these manufactures include "products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery" or in other words, products with a high innovation component. 

In the Philippines, electronics is the biggest contributor to exports accounting for about 60%. They consist of a wide variety of products with different applications from consumer, auto, office, computer related, to telecommunication, medical and industrial uses. Data from the National Statistics Office for 2008 and 2009 show the value of electronics exports exceeding $20 billion per year, while imports are roughly 68-70% of their totals. This runs counter to the common perception that these domestic industries belong to the low value adding category. 

According to Ricardo Hausmann from the Center for International Development at Harvard University, a professor of the Kennedy School of Government, the complexity of products made by a nation is a reflection of the capabilities that exist within it. Nations that produce highly elaborate products have exhibited the ability to grow and develop due to the fact that very few countries are able to replicate the same conditions required by such activities (here he is explaining his theory of development based on this notion). 


It is more than a question of incomes or wealth. Sri Lankans have an average income slightly above Filipinos, yet their major exports are in textiles and garments. The lack of infrastructure, rule of law and good governance does not seem to deter the presence of high-technology industries in the Philippines. The abundance of engineers and highly skilled, flexible workers appears to be the main driving force.

Thursday, July 22, 2010

Nudge or Shove? Debating the Merits of Behavioral Economics in Policymaking

In designing policies that reduce negative externalities or public "bads" (as opposed to public "goods") such as the ills associated with the rise of obesity or carbon pollution, governments have borrowed many instruments from the behavioral economist tool kit.

The recent health care measures in the US that mandate the printing of caloric content of food in menus and packages is one example; so is the use of peer pressure in the billing systems of regulated energy companies that use informational cues (smiley faces) to instruct customers of their relative efficient use of power (compared to that of other customers).

These approaches try to influence irrational decision-making by some without necessarily limiting the choices of those for whom they are intended and without imposing unnecessary costs on others whose decisions are perfectly sound and rational. A more direct and appropriate approach to resolve these problems according to Lowenstein and Ubel in a recent NY Times piece entitled Economics Behaving Badly would be to increase the relative cost of consumption whether of fatty processed foods  by withdrawing subsidies to their key ingredients like corn oil or that of energy by putting a price on carbon.

The two pillars of the behavioural economist school argue that policymakers have taken the politically expedient route of utilising the light touch or "nudges" espoused by their field when the more direct but unpopular approach of applying subsidies and taxes prescribed by traditional economists or "shoves" would guarantee the desired outcomes more effectively.

Nudge: Improving Decisions About Health, Wealth, and HappinessNot so, counter Sunstein and Thaler, authors of the influential book Nudge: Improving Decisions About Health, Wealth, and Happiness. Both traditional and behavioural approaches are needed to influence decisions by rational and irrational actors. The fault they say lies in the politics of the situation, not the economics of it.


Tuesday, July 13, 2010

The Ecological "Arc" of the World Economy

The following entry contains nothing new about carbon emissions that hasn't already been picked up by the media; instead, it seeks to present the facts differently. 

The map below shows the total size of CO-2 emissions over five decades where each bubble represents total emissions by a country. If you hit the play button, you will see the gradual growth of emissions over time. Quite striking is the rise of China over the past decade dislodging the US as the biggest emitter with 6 million kilo tons (kt) of emissions compared to 5.7M for the US. Russia and India follow suit with about 1.5M kt each, and Japan ranks fifth with 1.3M kt.



The next chart plots the CO-2 emissions per capita of each country along the vertical axis with  average incomes (gross national income per capita) on the horizontal axis based on purchasing power parity (or PPP) measuring income in terms of what citizens can afford based on the cost of goods and services relative to wages. The bubbles represent the population size of each country.



One sees clearly an "arc" that gradually slopes upwards such that as countries get richer, each citizen consumes more resources and generates more pollution. From 1980, this arc gradually moves rightwards reflecting technological advances that have made industries more efficient in their use of resources, i.e. it takes less carbon to produce a dollar's worth of goods. In 1980, the point at which emissions per capita started to rise was at $1,000. In 2006, it was close to $4,000.

For the world economy to grow in a sustainable way, rapid technology development is needed to make production less reliant on carbon so that as poorer countries move up the income scale, they do not cause environmental damage at a rate similar to that of rich countries in the past. The arc needs to be flattened and pushed rightwards. It is not viable to prevent the rise of affluence in poorer nations as poverty tends to be correlated with faster population growth.

China with its 1.3 billion people earning $4,700 on average is already on the upward sloping part of the arc. Displacement of industries from rich countries that have stringent environmental policies is largely responsible. Egypt which has about the same level of income per person as China, emits 3-kt per capita compared to China's 5-kt reflecting a different mix of industries. India with an average income of $2,500 per person still lies on the flat portion of the arc and has a relatively low carbon footprint of 1-kt.

For the arc to flatten and shift rightwards, incentives are needed to encourage investments in new technology that will shift production away from carbon intensive methods and into cleaner ones. The rate of technological progress has to be faster than economic progress of poorer nations. The arc has to be bent downwards faster to accommodate the bigger but poorer nations who are "catching up" with the smaller but richer ones. If not, the future well-being of all those who live on the arc could be at-risk. 

For a discussion on the history of the science behind global warming, I found the following source quite illuminating: http://www.aip.org/history/climate/ from the American Institute of Physics.

Saturday, July 10, 2010

Mind the Gap: Global Health and Wealth by 2050

One of the most exciting developments in recent years in the area of technical communication has been the work of Hans Rosling, a Swedish public health economist, who uses publicly available data and interactive technology to debunk many prevailing misconceptions about the global gap in development. 

Here he is  at a TED conference returning to more basic analogue roots to explain the growth of world population. His paradoxical contention is that only by raising living standards among the poorest nations can the world reach a sustainable level of development by 2050. Towards the end, he employs the "Gapminder" his digital tool kit to prove his point.

Tuesday, July 6, 2010

Population and Development

There is an ongoing debate raging at the moment over population policy in the developing world, particularly in Catholic countries like the Philippines. There is growing opposition in the said country towards the introduction of sex education in public schools and the provision of family planning services through the public health system. Below are a few charts that should put the debate into perspective.

The first chart represents comparative statistics of average incomes between the Philippines and its neighbor Thailand (predominantly Buddhist) over nearly fifty years from 1960 up to 2008. Both nations began with relatively the same levels of income in 1960 with the Philippines enjoying a slight advantage, but by 2008, incomes in Thailand were more than double that of the Philippines. What could account for this divergence? 



The second chart shows the population growth rates of both countries over the same period. The two nations had nearly identical growth rates of 3% in the early '60s. Their growth rates then began to diverge with Thailand rapidly decelerating to 0.6 of a percent in 1998. The Philippine population growth rate was also declining, but at a slower rate. Only in 2000 was it able to drop to 2% which Thailand had already breached back in 1985.


One might argue that the direction of causality is not fully established. Higher income countries by and large tend to have lower birth rates not vice versa (although recently, that argument has itself collapsed, as I highlighted in this previous blog entry). At least in this instance, one can clearly see that the slowing of the population boom in Thailand preceded its economic expansion.

Other variables might also have intervened such as industrial policies for instance, or different financial and political conditions; but, by and large, one can argue the case that had the Philippines followed the same population policy as its neighbor, it might have grown just as rapidly and reduced the incidence of poverty as a consequence. Taken in this light, one might frame the debate over sex education and family planning more meaningfully.