Environomics

var _gaq = _gaq || []; _gaq.push(['_setAccount', 'UA-29734989-1']); _gaq.push(['_trackPageview']); (function() { var ga = document.createElement('script'); ga.type = 'text/javascript'; ga.async = true; ga.src = ('https:' == document.location.protocol ? 'https://ssl' : 'http://www') + '.google-analytics.com/ga.js'; var s = document.getElementsByTagName('script')[0]; s.parentNode.insertBefore(ga, s); })();

[environomics]

What Will be of Economics in 20 Years?

I was reading this interesting post by Barry Eichengreen, who discusses how economics will be in 20 years. He explains that in the World Economic Forum in Davos he participated in an exercise where you had to imagine how the economic textbooks would be in 20 years. 

Eichengreen explains that economists from different fields raised their voices, imagining that textbooks would include insights from their fields which are not considered in todays textbooks (say, behavioral economics and development). But Eichengreen seems not to be satisfied with these marginal changes; and furthermore, he doesn't agree:

This presumption is almost certainly mistaken. It reflects the same error made by scholars of technology who argue that all of the radical breakthroughs have already been made. As this view is sometimes put, the next 20 years will see no breakthrough as revolutionary as the steam engine or the transistor. Technological progress will be incremental rather than revolutionary. Indeed, insofar as the increments are small, the result is likely to be slower productivity growth and a “Great Stagnation.”

[environomics]

How Google can Help Predict the Present

I am probably pretty late on this, but I had only heard something about this and just today ran into this paper. Hal Varian (chief economist at Google) is suggesting using Google search traffic patterns to "predict the present", as he says.

How does the reasoning behind this go?

In this paper we examine Google Trends, which is a a real-time daily and weekly index of the volume of queries that users enter into Google. We have found that these query indices are often correlated with various economic indicators and may be helpful for short-term economic prediction.

What is even more interesting is that they do not claim that Google Trends data can help in predicting the future. Instead, they are claiming that Google Trends may help in predicting the present. And this is extremely useful if one realizes how different initial estimates are from final revised estimates. One clear example: the US government estimated that GDP growth in the last quarter of 2008 declined 3.8%, but was then revised down to 9%!

[environomics]

Can Good Come From Bad?

This looks interesting and different to public (and my own) perception. I was just reading this paper on how climate change will affect agriculture across the world. The authors find that climate change has small adverse effects for the median country in the world --and apparently international trade has little to do with this result. Instead, the study finds that "reallocations caused by the evolution of comparative advantage within countries substantially mitigate the ill-effects of climate change."

They also provide a pretty cool chart in Annex 1, where they list a series of countries and their individual effect under different scenarios.

Now, at least no one can say I am biased on the papers I show on my blog. Their concluding remarks:

Using a general equilibrium model of trade among these 9 million grid cells we find small adverse effects of climate change for the median country in the world. While international trade plays virtually no role in explaining the magnitude of these effects, our analysis suggests that reallocations caused by the evolution of comparative advantage within countries substantially mitigate the ill-effects of climate change.

[environomics]

The Tricky Big Mac

I was just in Argentina, a country that is very interesting in an economic perspective. Being from there, in less than 30 years, I have lived through one hyperinflation, a pegged exchange-rate system, a devastating economic crisis, a freeze of bank deposits, a default on national bonds, various rounds of privatizations and nationalizations and many other bizarre economic measures. No wonder we say that every argentinian knows about economy- its inevitable. Exchange rates, CDS spreads, interest rates and inflation are part of our every day vocabulary. 

But what I have seen the other day is just impressive and mind blowing, even for argentine standards. For a couple of years now, the government has tried several heterodox measures to keep inflation from escalating. For one, the government has intervened in the official statistic agency and changed the methodology on the official CPI indicator. This has been greatly controversial and the annual CPI has hardly exceeded 10 percent, while many provincial and private indicators show rates around 25 percent. 

But the trick doesn't stop there. In order to be consistent, the government has negotiated with McDonalds on the price of the famous Big Mac combo, which is also used fot the Big Mac Index  (a clever way The Economist came up to measure the purchasing power parity between different currencies). So while every other medium-size combo costs around $40-$45 (don't ask me to convert that into dollars as there are several exchange rates, the official, the light blue, the blue...), the Big Mac costs only $29. 

But the bizarreness doesn't stop there: the large Big Mac combo costs $45, which is in line with the other large combos. So enlarging a Big Mac combo costs roughly 50% more than the medium-size, while enlarging other combos costs 10-15% more. And let's remember that the only thing different between medium and large combos is the size of the fries and coke, which are the same for every combo...

But that's not all. Governments are not the only sneaky people in Argentina. It appears McDonalds is not happy with the price they are charging for their medium Big Mac, so they have decided to make it hard for customers to order it. First of all, the Big Mac is not publicized in the picture menu that appears behind the counter.  But, more surprisingly,  if you order a "Big Mac combo", by default the waiter will give you a large-size Big Mac combo, which costos the "usual" $45. If you want to beat the system and have a relatively cheap meal, you have to explicitly ask for a "medium" Big Mac combo.

All in all though, it's a magnificent country, and one in which you earn a degree in economics every single day, in every small transaction.

[environomics]

Sometimes Less is More

I was just reading this article by Robert Skidelsky on economic forecast models. He raises a few very interesting points, but I was specifically drawn by what he comments on the IMF models:

Until recently, the OBR, broadly in line with the IMF, assumed a fiscal multiplier of 0.6: for every dollar cut from government spending, the economy would shrink by only 60 cents. This assumes “Ricardian equivalence”: debt-financed public spending at least partly crowds out private spending through its impact on expectations and confidence. If households and firms anticipate a tax increase in the future as a result of government borrowing today, they will reduce their consumption and investment accordingly.

I am still baffled that many economists (and institutions) still use arbitrary assumptions in fundamental variables for their forecasting models. I have began to read Nate Silver's book (so far, very good) and I picked up on one very simple, yet important, piece of advise: if you are not sure of the numeric value of a key assumption, why not carry out several simulations of the same model with different scenarios and see how the outcome changes. Wouldn't it be better if the IMF would admit that they truly have no notion of what the fiscal multiplier is, but instead present a range of possible growth scenarios for 2013 based on different fiscal multipliers? Wouldn't that be more useful for those reading the forecast?

[environomics]

Who's Buying our Land?

I was just reading this very interesting article on agricultural land acquisition in developing countries. According to a report cited in the article, investors or state bodies in developed or emerging countries have bought more than 83 million hectares of agricultural land in poorer developing countries since 2000. This figure represents 1.7% of the world's agricultural land. This would not be a big concern of these investors were working the land and selling their produce locally. But this does not seem to be the case:

Most of the investments are aimed at producing food or other crops for export from the countries in which the land is acquired, for the obvious reason that richer countries can pay more for the output. More than 40% of such projects aim to export food to the source country – suggesting that food security is a major reason for buying the land.

[environomics]

The Crisis in Perspective

I was just reading this very interesting piece by Joseph Stiglitz. He focuses on the longer-term challenges that the world still needs to address, and that many times might be pushed away by the urgency of our immediate concerns. 

Some suggest that, given the economic slowdown, we should put global warming on the backburner. On the contrary, retrofitting the global economy for climate change would help to restore aggregate demand and growth.

And then gives a very interesting historical perspective of the recent crisis:

Just as the Great Depression arose in part from the difficulties in moving from a rural, agrarian economy to an urban, manufacturing one, so today’s problems arise partly from the need to move from manufacturing to services. New firms must be created, and modern financial markets are better at speculation and exploitation than they are at providing funds for new enterprises, especially small and medium-size companies.

Moreover, making the transition requires investments in human capital that individuals often cannot afford. Among the services that people want are health and education, two sectors in which government naturally plays an important role (owing to inherent market imperfections in these sectors and concerns about equity).

[environomics]

Undervalue Your Way to Growth

I was reading this article from The Economist on the latest Big Mac Index. Seeing the list of countries who are over/under valued, it seems clear that most countries that have an undervalued currency are growing at faster rates that those overvalued. This is in line with this paper from Dani Rodrik which shows that an undervalued currency stimulates economic growth. 

[environomics]

Sad Sad Sad

This January 12 will mark three years since Haiti was hit by the 2010 earthquake which killed more than 220,000 people. Sadly, the recovery has not been even clse to acceptable. There are many people and organisms to blame for this. Since 2010, more than US$ 9 billion has been disbursed to Haiti in public and private funding. In 2010, aid flows were 400 percent that of the Haitian government's domestic revenue. A lot of what aid should not do can be seen in the Haiti recovery.

This article sheds some light on some of the questions surrounding the aid gone to Haiti:

Who got this money?  See HERE for a breakdown of the recipients of humanitarian funding and HEREfor our diagram of the recipients of recovery funding. Despite extensive efforts, our ability to trace the money is limited by a lack of transparency and accountability—indeed, three years after the quake, much remains unknown.  For instance, who exactly got the $1.3 billion – 36% of the total – that was disbursed as grants to International NGOs and contractors?  As we have blogged previously, we can look at procurement databases to track primary contract recipients, but we cannot go much further. We can see, for instance, that $150 million was disbursed to Chemonics, but we have no idea about how that money was spent.

[environomics]

Where to Find Solutions?

The same way Rio+20 seemed to be a big disappointment earlier this year, the annual UN climate change negotiations ended in Qatar without much to show for. In short, delegates from more than 190 nations agreed to extend the increasingly ineffective Kyoto Protocol a few years and to commit to more ambitious — but unspecified — actions to reduce emissions of climate-altering gases.

After various failed attempts, it seems clear that these big bureaucratic conferences are not going to bring solutions to climate change issues. In this light, why not begin with something smaller and simpler? I just finished reading 'Nudge', a book by Thaler and Sunstein on behavioral economics and how we can improve decision making in several diverse issues. They dedicate a chapter on climate change. Even though their suggestions are not extremely creative in this topic (they praise cap-and-trade and taxing emissions), I feel small 'nudges' can go a long way in changing the global perception of what should be done. Maybe various small interventions of these type can go a long way. At least I am pretty sure more will be done from these type of things than waiting for governments from several large-ego countries get together an implement a game-changing agenda on emissions. 

[environomics]

Where To?

I was just reading this article in The Economist about climate change and its possible effects on migration. Most of the article mentions this paper by Klaus Desmet and Esteban Rossi-Hansberg where they use different migration restrictions to simulate how the planet would adapt to diverse scenarios of global warming. One of the most interesting (and maybe realistic) results:

Restrictions on movement dramatically increase welfare costs, however. The authors modify the model by introducing a rigid border at the 45th parallel, which runs through the northern United States and across southern Europe, with roughly 1 billion people living above the line and 6 billion below. The model finds that rising temperatures actually benefit the northern section of the globe. Agricultural productivity grows and northern manufacturers enjoy more trade with the throngs that mass just south of the border. Welfare in the south falls, by contrast, by about 5% on average relative to the no-warming case. The model is simplistic, of course, but it suggests that limits on migration have a big effect on the costs of global warming.

[environomics]

Winners and Losers at the Olympics

This could be interesting! Gary Hustwit (the director of the documentary Urbanized) is putting out a book next year on former olympic game host cities. I have always been intrigued about what happens to all the infrastructure built for hosting Olympic Games (or World Cups) once the hundred-of-thousands of spectators leave. Well it appears this book will show us exactly that:

In The Olympic City, we’re documenting the successes and failures, the forgotten remnants and the ghosts of the Olympic spectacle. Some former Olympic sites are retrofitted and used in ways that belie their grand beginnings; turned into prisons, housing, malls, gyms, churches. Others sit unused for decades and become tragic time capsules, examples of misguided planning and broken promises of the benefits that the Games would bring. We’re interested in these disparate ideas — decay and rebirth — and how each site seems to have gone one way or the other, either by choice or circumstance. We’re equally interested in the lives of the people whose neighborhoods have been transformed by Olympic development.

I must say, I am particularly happy the book will capture both the "success and the failures", because as we had argued here, there seems to be a case for both. The problem doesn't seem to be hosting the Games per se, but more on the side of how the developers and politicians plan out the infrastructure. 

[environomics]

Finding Causality

I was reading this article in The Economist on the link between droughts and global warming.  Really how many of the recent droughts can be attributed to global warming? As the article shows it is hard to analyse the most recent droughts, but other studies have attributed those in Europe in 2003, Russia in 2010 and the sweltering summer of 2011 in Texas to global warming.

The article also mentions the World Bank report by the Potsdam Institute for Climate Impact Research we had blogged about before (here). A major consequence of the droughts is obviously its effect on crop production.

The Potsdam study reports that since the 1980s, maize production is 3.8% lower than it would have been without climate change, and wheat is down 5.5%. Piers Forster of the University of Leeds concludes that “the study [in Nature] is an important contribution highlighting the complexity of drought prediction but it does not make me downgrade the substantial threat to harvests posed by climate change.”

[environomics]

How Bad is Informality?

I was just reading this article by Marcelo Giugale on informality. He raises some interesting points on how the perception of informal work has changed in the past decade. Some studies have found that in some parts of Latin America (Mexico and Brazil are the cases I know of) a great deal of informality is voluntary -- people are opting out of formality, rather than being "excluded" from it.

Mr. Giugale has a nice conclusion on what to look out for to see how the perception will be moving forward:

So, how will informality evolve over the next ten years? Nobody knows. But keep your eyes on three things: gender, aging and technology. As more women enter the labor force, many of them will initially take the informal route, especially in developing countries. At the other end, as people live longer, they will retire from nine-to-five jobs only to join the ranks of the self-employed, where they will be more likely to work in the shadows. And new technologies are already altering the value of size: while manufacturing is going for smaller, more efficient factories, dot-coms thrive in ever-expanding networks. There was no way Facebook could operate informally out of a college dorm for too long.

[environomics]

Earlier this year, Tod Stoddart, aReportage by Getty Images staff photographer, travelled to South Sudan with the ICRC to document the plight of refugees who had fled fighting in Sudan.

One of the outcomes of that mission was Perspectives, a photo exhibit held at the London Olympics last summer that was viewed by over 250,000 people. Another is Into The Earth, an original Intercrossproduction.

[environomics]

At Least There are Some Winners...

Can anything good come from global warming? Well that's what a few scientist are trying to find out. According to this article by the NY Times, some scientists are suggesting that increased night-time temperatures may be beneficial for trees.

“On warm nights, the tree respires more,” Dr. Griffin said. “It invests its carbon sugars to build tissue.” By morning, the tree’s sugars are depleted, and it has to photosynthesize more during the day, he continued. The tree grows more leaves and gets bigger.

Despite being interesting, I think this is clearly  just a small benefit among a lot of harm that comes from global warming. This does not change the discussion about global warming and its overall effects in any way. 

[environomics]

In Short: It Will be Hell

I was just reading this very interesting report by the World Bank on the consequences of a 4° Celsius warming of the planet. The piece focuses on the effects this would have on developing countries and how it would hurt the poor most. It is a great read to get a general and vast literature review on the topic.

Some of the main consequences according to the study:

• Even though absolute warming will be largest in high latitudes, the warming that will occur in the tropics is larger when compared to the historical range of temperature and extremes to which human and natural ecosystems have adapted and coped. The projected emergence of unprecedented high-temperature extremes in the tropics will consequently lead to significantly larger impacts on agriculture and ecosystems.

• Sea-level rise is likely to be 15 to 20 percent larger in the tropics than the global mean.

• Increases in tropical cyclone intensity are likely to be felt disproportionately in low-latitude regions.

• Increasing aridity and drought are likely to increase substantially in many developing country regions located in tropical and subtropical areas.