Thursday, November 29, 2007

easyJet boarding game

One of the advantages of living in Geneva is the numerous easyJet destinations it offers. In the last 2 years easyJet took me to Budapest, Lisbon, London, Berlin and Edinburgh. As it is a low cost carrier, you don’t get a reserved seat. Rather, you get assigned to a boarding group, A, B, C or D, depending on how early you checked-in.

What struck me when boarding was the massive flow of uncivilised passengers wanting to get in fast, in order to get a good seat and enough space for their suitcase in the above compartment. Normally, group A passengers should go first when called by the agent, while others would politely wait for their turn. What explains this outcome? That Geneva people are uneducated savages would be my first guess but then I thought, who isn’t? My second guess would be that they are not really aware of the group system and do not listen (as they don’t care) when the lady on the microphone announces the group. But easyJet has been around for a while and most people know about these groups.

So what could it be? I would say it is because travellers are not sure the rules are respected. The easyJet lady calls a group but lets people in, even if they’re not from that group. “Are all these people really group A?” I ask myself as I try to see on my neighbour’s boarding pass what group he is. “I’m sure she’s just letting everybody through.”

In a country where the law is applied, people respect it. In Italy, cars do not respect red lights since they don’t arrest you for that. Since easyJet travellers are not convinced the rules are applied, they break them to get the maximum reward in an uncooperative manner and avoid being screwed.

Indeed, if you fear you will get screwed because the rules are not followed, you behave like a savage. Let’s say you are group B and they are calling group A. You either behave like a dove, sitting and waiting for your turn, or like a wolf, blocking the way and trying to get in. Depending on how others from group B, C and D are behaving, different outcomes fro you are possible:






Chill sitting

You get screwed


Standing for nothing

Wolf fight

Here you would definitely act as a dove if the others were sitting calmly. But as soon as someone gets up, and he will, since rules are not respected, the good equilibrium is broken: it is a wolf fight.

But even if the rules are followed you still get the same outcome because you don’t want to lose priority within your group. In Geneva, people get up and block the way so that when their group is called they’ll be the first from their group aboard.

Announcing the group on the upper screen would already add confidence in the institution. But still it would not be perfect as within group wolf fights would still occur. Better than that is what they do in Berlin: a different line per group. In Berlin, not only is the boarding order between groups clear and respected, but also the within group priority for “good seat” hunters, who obtain their priority in a civilised way, without cheating.

So if you want to avoid chaos, you don’t just need to increase confidence in the system, you need to design a mechanism where people can’t cheat, i.e. cut the line. All in all, when there is a lack of social capital, a strong rule of law is necessary.

Wednesday, November 28, 2007

Google and Renewable Energy

Here is a fact from the CNBC news: Google, the giant search engine, is planning to invest in 2008 in initiatives to promote cheap Renewable Energy (RE). If before this event the experts did not have enough arguments to convince you that RE is the business of the future, now they do. Google is planning to invest its human capital in projects related to solar thermal, wind, geothermal energy and other new technologies, according to CNBC. This will imply “hundreds of millions of dollars in breakthrough RE projects with positive returns”. Now, this is an episode to cite against people biased with anti-market rhetoric: Google is a private company investing in risky projects which are outside her core activities, both for “Vision” (the objective to provide clean energy for the masses) and for profits. But by pursuing a profit, the whole society is expected to benefit. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”, said Adam Smith.

Google has already invested in RE initiatives. The difference now is that they move from the consumption side to the producer side, which is not a minor difference. If today RE are not yet popular it is because of the higher cost involved: the cost per kw/h of energy derived from coal is 2/3 of that derived from wind for example. Coal, natural gas and Nuclear are still way cheaper sources for energy production than RE. But reducing the marginal cost of production is only one side of the business. The real challenge to me lies in the many potential applications of RE that have not been explored yet, which can be extremely remunerative. To turn a new technology in a success story, you need both financial capital and innovation. Banks have started to pour money in the business. Google surely has both financial and human capital, and seems to have some sort of comparative advantage in the field of innovation.

The story so far is that in 1998, when Internet was becoming a popular technology, Google, a follower, eventually became the market leader. Almost ten years later, when RE is bound to play a dominant role, Google is willing to play the leader role. For those who like predictions, I ask a question: who’s gonna be the market leader in RE in ten years? Do you think Google will confirm itself as leader or shall we expect a new market leader to emerge? I don’t like predictions (especially about the future), but the second option seems plausible to me…

A Liberal, Democratic, Capitalist, (Quasi-) Holistic, Human Rights consistent and Courageous approach to Development

Besides violence and warfare, what is the greatest problem that we face as a species? I might accept nuclear destruction as an answer, although that could arguably fall under the category of warfare. Forget all that bullshit about global warming. If we are lucky we can reduce C02 levels to 1990 levels with a mixture of unprecedented levels of personal and political sacrifice, and diplomatic cooperation (never mind the fact that China and India who won’t agree to anything anyways).

Even if we can limit ourselves to this (still) unacceptably high level of emissions; temperatures will continue to increase (hopefully at a lower rate) and this slowdown of the temperature increase will kick in thirty years from now, by 2040. The only way this problem gets solved is through nuclear power and electric cars, which will still cause their own environmental problems.

Thank god that Prince Charles, the Vatican and Brangelina are doing their part. For my part, I am learning how to sleep with the lights off even though I am afraid of the dark, plus I am going on a 30-city global environmental promotional tour on a bio-fuel powered jet to discuss all my generosity and my work on behalf of the environment (forget UN Best-Practices just listen to me). Please keep an eye out for my forthcoming book “How I saved the earth with a multimillion dollar home and a private jet” and the movie of the same name.

While we are on the subject, I am so glad that Al Gore has won the Nobel peace prize. He will be joining some exceptional and elite company such as the ILO and Henry Kissinger. I am doing my part by illegally and secretly bombing Cambodia.

I am sure that Mahatma Gandhi was happy just to be nominated. I am telling you this guy is the original gangster. A train riding, vegetarian, feminist, pacifist who was born in the 19th century; I can scarcely believe this person existed. Shit this guy is doing more for global warming than Gore is. As we all know, the methane from cow farts warms the globe more than cars do (It could be that Hinduism and a diet with red meat are equally dangerous for the environment. Again I am doing my part; today I walked to the Atwater market and tonight we are eating pork tenderloin (no Cows for this guy).

I guess that I have digressed but if there is bullshit (the things that politicians, academics and celebrities say) in the recipe, you shouldn’t expect your food to taste like lavender. Let’s get back to the point, as we have already solved the climate change crisis. The point is that development and poverty reduction is discussed in the same horse-shit nonsense type way as climate change. So let’s clear the smoke. How do we solve international poverty?

Do we need more generosity? Do we need to increase foreign aid to 0.7% of GDP? One world under Jeffery Sachs.

My favourite neo-conservative, the man who supported General Suharto until the end, Paul Wolfowitz would be rolling in his grave. As we all know, AID does not work when there is too much corruption. I love that argument. I don’t even know how to measure corruption. It is like saying that AID does not work if the citizens don’t believe in Jesus. So much ENDOGENEITY (I guess we need a VAR model), all I know is that AID only works in countries that were going to grow irrespective of the level of AID.

Greetings from earth, AID does not work, PERIOD. It can help people at the micro-level, but AID cannot cause growth. If you want to help individual people, just grab a DRC phonebook and start sending money to the Congolese through the mail (big up Easterly). The only problem with that strategy is that the people that really need help don’t have phone numbers and addresses. The other problem with mailing money to people in Africa (besides the bureaucratic loss to postal stamps) is that they still live in Africa and cannot escape violence, poverty and disease.

I always think that it is funny that it is against a person’s human rights to force them to stay in their poverty stricken and repressive country (please pick any South Asian, African, or Carribean nation). According to international law, states cannot force people to stay in their nation of birth. The funny part is that no other nation is required to let foreigners through their borders. It is illegal to force Haitians to stay in Haiti but it is perfectly legal to prevent Haitians from entering the Dominican Republic, Cuba or Canada or any other country. How can someone leave if they have nowhere to go (there is your Eastern Philosophy for the day)?

If the OECD countries are so liberal, why do we even have citizenship? Why do we have borders? What is so liberal about giving citizens their rights and denying those rights to non-citizens? If these nations were truly liberal or democratic there would be no such thing as citizens or borders. How can people be denied rights? Why do I need a work permit? Is this consistent with the UN Charter of Rights?

My proposition is for a gradual move from the Balkanized bullshit of 193 nation states to one world, one people, and one government. No more illiberal aristocratic nonsense. No more war, no more diplomacy and no more undemocratic foreign policy. I guarantee that “the Iraq” and “the Asian countries” would not have gotten invaded if we were all allowed to vote (Youtube: Miss South Carolina). Imagine if the people of Germany and Saudi Arabia (and the other 190 countries plus the United States) could have voted about the war in Iraq. We probably would not even have foreign (read Iranian, I am joking) forces in that country. I am not saying that we need to drop the borders immediately but we definitely need a plan and deadlines. We need a global democratic government, not some aristocratic diplomatic nonsense where land mines are illegal but cluster bombs are fair game.

We already have the solution. The solution is the European Union, well not the present European Union, but a European Union on Steroids (sorry Barry Bonds). We know that the European Union has done everything we would like to have done in other nations. Remittances, investment, trade, labour mobility, proper institutions and human rights protection, now all they need to do is to have true democracy à la ‘one person, one vote’ and the EU is laughing. The great thing about the European Union is that it is the first liberal, democratic imperial power where the colonized have the same rights as the colonizers (well once the Poles are allowed to work in Germany, and the Bulgarians too).

The European Union needs to continue expanding to the point where it will accept Serbia once it relinquishes control of Kosovo and Israel once it lets go of the Occupied Territories and they should also try to absorb North Africa as well. Moreover we immediately need a trilingual North American Union including Canada, the US, Mexico, Central America and the Caribbean. Once we have an Asian Union, an African Union (I mean a real African Union) and a South American Union then we can gradually get together and until we have a Global Union. Where the word ‘citizen’ is indistinguishable from the word ‘person’ (and maybe even prisoners could vote too, you know a civilization). I guess a truly civilized country probably would not even have prisons (but that is a discussion for another day). That is human rights consistent. Wealth comes from Rights, Freedom and the democratization of private and public services, not from OECD charity à la 0.7 % of GDP. Let people enrich themselves; let the convergence begin.

And then all we have to do is keep having sex until we all turn beige.

Movie of the Week: Darjeeling Limited and No Country for Old Men

Posted by John

Tuesday, November 27, 2007

University of Montreal is better than McGill

Last night, over quesadillas, Markus was trying to convince me that McGill was a better university than the University of Montreal (UofM). This sounded impossible to me, as everyone in Québec knows the school is crap. Why do I know it is crap? Well, first of all, everyone I know who went there told me it was a walk in the park and they never seemed to be studying, really. Second of all, no one from Québec, (probably the most informed on the school quality), goes there. Also, UofM law students do better than McGill’s at the bar exam. The economics dept. at UofM is among the best in the world (25th) while McGill’s is not in the Canadian top 10. What else? Affiliated to UofM are HEC Montreal, the tenth best business school in the world outside the US (according to BusinessWeek), and the Ecole Polytechnique de Montreal, way more respected than McGill by engineering firms in Canada.

But then comes the Times rankings. It’s from an English newspaper. McGill ranks 11th in the world. Markus sent me the link: ( There has got to be something wrong with this. I mean, I know McGill has an international reputation, but that does not mean it has good teaching or research. So I checked how the ranking was determined:

The most important criterion is academic opinion (more than 5000 “experts”, of whom 41 per cent are in Europe, the Middle East and Africa, 30 per cent in the Americas, and 29 per cent in the Asia-Pacific region), worth 40% of the total score. Already I understand how Cambridge and Oxford rank in the top 4! Then 10% of the grade is derived from active recruiters of graduates from major global and national employers across the public and private sectors. 20% is given to the staff student ratio. To measure research excellence, which is worth 20% of the grade, they use the number of citations of an institution’s published papers by others, divided by the number of full time staff. Finally, 5% is given to the number of foreigners among the staff and the last 5% to the share of overseas students.

First of all, according to the last criterion, schools where English is the language of instruction will do much better. They will attract foreigners. Indeed, McGill not only welcomes Ontarians but also many Americans, Chinese and Indians, UofM only French speaking people. And I think its students are attracted by Montreal itself as much as by the school. And so are its professors. The 40% allocated to expert opinion is obviously way too much, judging by how UK universities do so well in the ranking (many Europeans among the experts). And why give 20% to the staff student ratio? We’re supposed to learn more in small classes, but most of the time small classes are way more relaxed and their examinations are not as rigorous. Students coming out of them may not have reached the needed standards.

That only 10% is given to recruiters’ opinion sounds weird to me. Universities exist to prepare us for a job after all. I know most companies in Québec don’t like McGill graduates that much. So what about the quality of research? The citations method is serious and tells where the best researchers are. But I think here it would be better to measure how well the output of a school gets quoted. Most economists that get quoted did their PhD at MIT, even though they now teach all around the US. What’s important is that MIT produced incredible researchers. After all, a good researcher will probably not be a good teacher.

All in all, I guess McGill does well in the ranking because it’s an Anglophone university with a name easy to remember, with a beautiful and attractive campus located in a cool city. Furthermore it’s relatively cheap compared to American schools. But I wouldn’t send my kids there.

How old should politicians be?

Some weeks ago, an ill-conceived bill proposal was made in Italy, proposing a public registry for all the publishers of content on the web. The negative eco of this bill was so big, that it eventually ended up being stigmatized as “Italy proposes a Ministry of Blogging” on BoingBoing, one of the top blogs in the world. Subsequently, the following article made a colourful picture of Italy as being under the assault of a geriatric conspiracy. At that point, PL asked me: Yo dude, is this true? I decided to take some time to produce a reasonable answer. The article mentioned three facts: our President of the Republic is 82 years old, our prime minister is 68, our leader of the opposition is 71. How does this relate with the rest of Europe? So I made a quick research and here I show a picture about the distribution of age across prime ministers in a sample of countries, the EU-27 plus some OECD countries.

According to the data, there is only one true outlier: the Japanese Prime Minister Fukuda. Born in 1936, his age surpasses the mean age (52.6 years), above the two standard deviations level (which is 8.23 years). Prodi though, born in 1939, happens to be 17 years older than the representative PM (the median is 51 years old), which is not a minor difference. The youngest Prime Minister is in Bulgaria 41 years old and 27 years younger than Prodi…

Within the EU-27, Prodi is though an outlier (the mean is 51.9 and the sd is 7.9, which brings him exactly on the limit). Not surprisingly, the oldest prime ministers are found in the two countries with the most compelling problem of ageing populations.

My final answer to PL was that, the article did not really say anything new to me. Beside the evidence provided above, I can only add that the problem of political representation of and from younger generations is a serious one indeed. How can this happen? The reason always mentioned to defend the “status-quo” is that, you need to be experienced (old), to prove that you have the right competences; being old equals being wise thus the likelihood of your mistakes is reduced. Fine argument, but the alternative hypothesis, one that had been advanced already more than one year ago by Gianluca Violante from the columns of may also be true: if you are older, your knowledge of the world will be more obsolete, and you will likely contribute to a decision-making process far away from reality. The afore mentioned episode and what followed provide enough evidence to confirms the economist’s prediction (when they are right, economists are damned right!): the proposal has been later modified, the writer rephrased its content and many ministers in the council expressed concerns about it, even though they had already approved it….better late than never…

Tuesday, November 20, 2007

Libre-échange Canade-Europe

"Le libre-échange avec l’Europe, dont les négociations seront lancées lors du sommet Canada/Europe que Québec veut accueillir en 2008, va faire de la province «la grande porte d’entrée de l’Europe pour l’Amérique du Nord» et permettre de diversifier les exportations, trop liées aux États-Unis, selon M. Charest. La reconnaissance des compétences avec la France permettra à un «médecin, ingénieur, infirmier ou menuisier» québécois de pratiquer sans problème en France, et vice-versa." (Mathieu Perreault, La Presse, 20 novembre 2007)

Cool, le Canada pense enfin à un accord de libre échange avec l'Europe, thank God. On devrait faire encore plus, laisser les Européens travailler au Canada et vice-versa (idée de John Bulmer). On pourrait travailler à Londres ou Paris ou n'importe où ailleurs en Europe super facilement. Dire que le Québec , ou plutôt Jean Carest, veut à la place une "reconnaissance des compétences" et seulement avec la France. C'est quoi le deal? Pourquoi jsute la France? C'est la même chose avec les frais de scolarité. Les français payent la même chose que les Québécois dans les universités au Québec. On se fait clairment fourrer dans l'affaire. Des tonnes de français débarquent alors qu'on ne peut profiter de leur système élitiste à deux vitesse, ou les bonnes écoles sont super chères et réservées à certains privilégiés et les universités sont épouventables et totalement inactractives.

On doit premièrement mettre fin à cette accord discriminatoire et deuxièment conclure un accord complet de libre échange et de libre circulation de la main d'oeuvre avec toute l'Union Européenne.

Monday, November 19, 2007

Facts about China’s Africa strategy

Thanks to China, there is much hype in Africa nowadays. China’s hyperactive Africa policy, dubbed the Beijing Consensus, is making “Western” governments shiver as they lose influence and monopoly power over the continent.

Fact #1: China is growing like crazy
The Giant Panda is very hungry, hungry for energy, hungry for resources and inputs for its manufacturing machine. To give some examples, it is buying oil from Angola and Sudan, copper from Zambia and Congo, timber from Gabon, platinum from Zimbabwe and many other minerals from all around the continent.

Fact #2: China wants to sell its cheap manufactured goods
Africa is seen as an incredible export market opportunity.

Fact #3: Therefore, China wants to be best friends with Africa
“China has forged a new type of strategic partnership with Africa that features political equality and mutual trust, economic win-win cooperation and cultural exchange”. So writes the Chinese Ministry of foreign affairs (2006) that did develop its own format of foreign aid. To put it very basically, China gets access to resources and in return builds infrastructure. This aid come with no strings attached in terms of governance and involves way less bureaucracy than Western aid. As Sahr Johnny, Sierra Leone ambassador to Beijing, puts it, “we like Chinese investment because we have one meeting, we discuss what they want to do, and then they just do it…There are no benchmarks or preconditions…”
Chinese’s strategy is not only an extractive one. It is investing heavily in social infrastructure in return of the granted access to resources. Not only is it building roads and railways, ports and dams, but also hospitals and schools, concert halls and stadiums, mobile phone and fibre optic networks, and this where no other investor dares to go, deep inside the tropical forest, where extracting sites are located.
On these huge infrastructure projects, China brings many workers from home. What’s special is that many of them actually stay in Africa afterwards, when the project is done. According to Akwe Amosu of the Open Society Institute, hundreds of thousands of Chinese citizens have moved to Africa since the mid 1990’s. This offers a promising export future for Africa as it will create Chinese networks that could boost trade with China. Indeed, according to a branch of trade theory, ethnic networks are an important factor in facilitating trade (Rauch, James E., and Vitor Trindade. (2002). "Ethnic Chinese Networks in International Trade." Review of Economics and Statistics).
Another nice feature of China’s strategy is the incentives it gives to its own companies to do business in Africa.

Fact #4: The West is not happy
The West is going crazy first of all because they are losing influential power as the main commercial allies (think of the pride with which France or England think of their former colonies). Hence the West accuses China of promoting corruption and of damaging their anti-poverty efforts. As a matter of fact, China is hurting the West’s efforts in establishing transparent and accountable governments in Africa, by not caring at all. But this Western “structural” strategy never really seemed to have worked and I think Africans are fed up of all the western style bureaucracy that just creates corruption. And anyway, it’s not by imposing good governance that it can take root. Every time it seems to be achieving something, such as in Uganda or Nigeria, the President turns out corrupt and undemocratic in the end.

A serious menace is the supposed poor ethics of Chinese business practices. Transparency International, an anti-corruption watchdog, found in its “Bribe Payers Index Report 2006” that Chinese companies behaviour, when operating in developing countries, was indeed alarming. Is China really promoting corruption? Akwe Amosu affirms that Chinese negotiators and businesses routinely pay bribes to secure deals. In Sudan, the President is getting a new Chinese style palace. Still, Transparency International’s 2007 CPI results show that Africa is producing good results in the fight against corruption. So it remains unclear. Anyway, good governance may come with openness and growth, and not the other way around, as wanted by the West.

But what annoys the West above all is that China does not seem to care that the Sudanese government is using its oil windfalls to buy weapons and create a racist genocide (China buys 64% of Sudan’s oil). They do not seem to care that Mugabe is completely destroying a once African superstar. They’re in Africa to do business, not politics.

Is China messing things up or giving Africa a new opportunity?

Thanks to Chinese manufacturing and exporting, instead of having access to only expensive and not that great French or American products, Africans can now consume a multitude of cheap goods such as electronics goods, football team jerseys, bicycles and low cost motorcycles, to name but a few. The welfare gain of these imports, in the form of lower prices and higher consumption, is tremendous. One question remains: will these exports, coupled with China’s appetite for resources, give Africa the Dutch disease, destroying its manufacturing sector? Furthermore, if the resource money is not well distributed or invested in well-managed funds, inequalities, corruption and conflicts will probably arise. This is another form of the resource curse. But could this investment and infrastructure boom become a blessing with beautiful spillovers and sustainable growth? China will play its part, African governments will decide the outcome.

Fact #5: Africa has a new opportunity

More women in parliament to eradicate corruption?

Corruption is a big part of the development puzzle. It is an impediment to growth (Mauro 1995, 1996), reducing firm growth (Fisman and Svensson 1999) and children education (Reinikka and Svensson 2005), and to the general well-being of a society (Helliwell 2004) as everyone’s life, livelihood or happiness depends on the integrity of people in a position of authority (Transparency International 2004). Yet, it remains an enduring and complex phenomenon.

Understanding its causes has been at the forefront of economics research which has been trying to find ways to eradicate it. Different policies have been suggested and put into effect. Among them is the strengthening of the media (Stapenhurst 2000, Duggan and Levitt 2002, Ahrend 2002), the enforcement of the rule of law, higher wages for bureaucrats (Van Rijckeghem and Weder 2001) and the reduction of red tape (Djankov et. al. 2002). Bad governments are opposed to such reforms as they lose discretionary control power. Another suggested policy is the inclusion of a larger share of women in government (Dollar et. al. 1999, Swamy et. al. 2001).

In 1998, Fujimori announced that Peru’s traffic police force would become an all female force while in 2003 the Mexican Customs Service hired only women for a new anti-corruption surveillance force. Also, in Uganda, President Museveni assigned the majority of positions as treasurer to women as this could curb misspending as women "tend not to be so opportunistic" (Goetz 2007). The prime objective of these gender policies was to fight corruption.

Increasing the share of women in government may indeed possibly reduce the general level of corruption of a country. Socio-biological differences between men and women could explain different attitude towards corruption, women being less tolerant of it. These differences in attitude could also be the result of less exposure to corrupt practices, women not being part of the networks, which in turn could also be the result of different attitudes.

The effects of "corruption aversion" could reduce extortion practices and include more whistle blowing which could increase the probability of being caught, especially if the media is free and investigative. It could also reduce bribe offering, since influential businessmen or lobby groups would not know how to bribe the women "outsiders".
The anti-corruption behaviour could also have indirect and more powerful effects. By reducing corruption during the law making process, a bigger share of women in parliament would reduce the creation of bad polices that create rents to collect bribes, such as price controls, red tape, monopolies, tax breaks or other preferential treatments. This would reduce the number of corruption opportunities.
Also, a bigger share of women could change people’s attitude, giving them more confidence in government and institutions and therefore reversing the bad incentives of a corrupt system. When you have confidence in the government, you may have fewer incentives to cheat.

What we want to test now is if adding more women in parliament reduces corruption. The relationship between women in government and corruption is strong and is not hard to establish using a cross section of countries. However, these results suffer from serious endogeneity problems of reverse causality and simultaneity. For example, poor countries are poor because they are corrupt and they are corrupt because they are poor. Also, the press can not be free with a corrupt government, so it is not only a free press that reduces corruption, but also corruption that reduces press freedom. While women in government might reduce corruption, corruption might reduce gender empowerment. This issue was not addressed in the previous studies on gender and corruption.

We use a panel for 132 countries from 1994 to 2006 and seriously control for endogeneity by using cool econometrics methods (xtabond2 in stata).Even though there is less corruption where there is more women in parliament, my results suggest that including more women in parliament will not have an effect on corruption. GDP per capita growth and a stronger legal system appear to be what is needed to fight corruption.

A global conscience

We, the people, have the power to make this world one of good. It is the sum and the spillovers of everyone’s actions that can put an end to the world’s ills. As advocated in Rüst’s article, we improve the well-being of our global society by adjusting our behaviour and consumption. I agree with his plan as far as the protection of the environment is concerned. Take the bus not the car, waste less paper, recycle as much as you can… We then save forests, biodiversity, ecosystems and the planet.
Now, in order to reduce poverty, diminishing our consumption is probably not the best idea while the well-meaning intention of “responsible” buying might have destructive effects. I will discuss these two ideas, one at a time.

Demand driven growth
Economic growth, i.e. an increasing GDP per person, lifts people out of poverty ("China is lifting a million people a month out of poverty"[1] with its 9% growth). As recent and not so recent examples of highly successful economic growth teach us, trade is an incredible tool to end poverty and inequality between countries. Take for example, China and India, Japan and Korea, or Mauritius, to give an infrequently cited textile export success story. Openness to trade drives industrialization through export production, which itself is driven by the global market demand, or, to put it simply, by us, the consumers.
Demand stimulates production and industrialization and also further research and development for more efficient technologies and thus creates wealth. We should not lower our level of consumption to help the poor. The anti-consumption, anti-profit approach is dangerous: it destroys demand, production, development, jobs, wealth, life.

Evil Multinationals
The anti-corporate sentiment is a result of some companies' bad behaviour: oil giants bribed African governments, pharmaceuticals groups charged monopolistic prices, Gap and Nike contracted sweatshops… Thanks to the protesters and also to an incredible access to information, resulting from advances in communication technologies, such practices are decreasing. Systematically associating exploitation with capitalism is unreasonable. For example, Microsoft, an often hated giant, now leads one of the most generous and committed foundation to help the poor.
Today, multinational firms (MF) are not the evil of our society. As explained by Bhagwati[2], these firms are most of the time welcomed in African countries, as they create better paid jobs then any other alternative. Among a plethora of unappetizing options such as farming, prostitution and relatively well-paid sweatshop work, workers (often young women) choose to go work in un-unionized sweatshops in the cities. People act as if the third world was a great place to live except for the sweatshops. Well, as for now, not really. Before imagining every MF employing children and destroying the environment, it is important to remember that they may be the best development tool. Sachs[3] shows that Foreign direct investment (FDI), (or the multinationals’ investments) is strongly correlated to higher growth, especially the export-led growth at the basis of the poverty reduction.

Be a responsible consumer, son
“Fair” traded products have bad consequences. Indeed, controlled wages may put an end to trade. Krugman[4] showed that different wages reflect only productivity differences which themselves justify trade. Wannabe responsible consumers render trade infeasible because of the artificial and unsustainable disconnect between wage and productivity fair trade creates. While this ideal intends to increase the welfare of poor country workers, its consequence is to kill trade and development. In fact, Max Havelaar products are so ubiquitous in Switzerland because of its agricultural protectionist policy. The government protects its high cost production against poor countries’ low prices which is their comparative advantage, i.e. reason to export. Poor countries’ farmers need incentives to invest in fertilizer and equipment, not incentives to stay underdeveloped and poor, struggling in farming’s brutal work.
I’m not saying we should support child labour but that continuing to buy products made in Bangladesh, Indonesia or Madagascar will lead to poverty reduction. Not only will it reduce drastically the number of poor people, but it will also strengthen institutions that will enforce environmental and labor standards. States have the environmental and labor standards that their people can afford. Multinationals are part of the solution, not the problem.
What’s left for you, responsible consumer? Buy products from Swaziland, not Switzerland. As for you, international relations militant student, forget about the public policy easy-going career and choose to be an entrepreneur instead. Invest in Africa.

[1] “The Undercover Economist” Tim Harford, 2005
[2] “In defense of Globalization” Jagdish Bhagwati, 2004
[3] “The end of poverty” Jeffrey Sachs, 2004
[4] “Peddling Prosperity” Paul Krugman, 1994

Problems in Africa

As noted by Collier and Gunning (1998), Africa is poor in social capital. The barriers to social interactions are ethno linguistic and also lie in the inequalities of income distribution. Easterly and Levine (1997) find that fractionalisation is responsible for 35% of the African growth shortfall (the average African country is twice as fractionalized as other developing regions). In rural regions, Africa’s traditional society evolved around institutions identified as the village and the kin group which lowered the costs of moral hazard (an unwillingness to repay) and adverse selection (being stuck with bad payers who inflate costs for everyone)[1]. The proximity reduced information costs, the inter-generational debt payments served as insurance while the management of common resources was assured by easy observation of others preventing free riding. With colonization determined country borders and economic systems, ethnic diversity destroyed collective action as there was no more general trust. These ethnic or language differences also allowed for growing inequalities between ethnic groups since there was no flow of information. As remarked by Greif (1994), strong intra ethnic trust in an ethnically heterogeneous society lead to repeated transactions excluding new entrants thus leading to segmented markets. This reduced exchanges, gains form specialization and from economies of scale. The better-off ethnic groups control the government and create policies to suit only their needs and not those of the population. To put it more simply, ethnic divisions and inequality are sources of slower growth through their impacts on trust, social cohesion, economic policy making and even violent conflict.

As we noted before, reciprocal social interactions require good communications technology such as phones. Mobile phones in Africa are today seen as a magical device, their indirect effect in building social capital is one of the reasons why. The point is there is a lack of such technologies in Africa. This lack further isolates people previously isolated by language or distance. Another point we made was that governments and institutions or even a strong private sector could provide alternative mechanisms for coordination and knowledge transfers. These are not present in Africa, suggesting that civil social capital should be even more important there.

To illustrate these problems, see the general equilibrium growth model developed by Zac and Knack (1998). Their measure of social capital is trust. They show how a high trust society exhibits better economic performance and how a sufficient amount of trust may be crucial to successful development. Douglas North[2] (1990) thought that “the inability of societies to develop effective, low cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the Third World”. Such a low trust poverty trap exists in Africa because savings are insufficient to sustain positive output growth. Moreover, such a poverty trap will be more likely when institutions which punish cheaters are weak and when trust is very low, as in the African heterogeneous society.

[1] These parenthesis definitions are taken form The Economist print edition, November 5th 2005
[2] Quoted in Zac and Knack (1998)

On football and a corruption poverty trap

Why are there additional minutes to a football game?

In any football match, the referee (ref) controls the clock and decides when the game ends. The situation lies entirely in his hands. A few years ago, a new rule was created, allegedly to enhance transparency according to FIFA. Under the arbitration improvement, the ref must announce how many minutes he will add to the game. He can do so at around the end of the regular 90-minutes. If 91 minutes have lapsed, he can announce 2 more minutes and whistle 30 seconds later, leaving him almost as broad a discretion as before the new rule. Refs have that much control. Why give them so much power? A friend recently explained it to me: “if time control was transparent, there couldn’t be any corruption! Offsides exist exactly for the same reason.” Corruption is an inherent part of football, and this, not only in Italy. It exists because those at the top benefit from the “rent-seeking opportunities” they generate with such discretionary rules. If a referee can somehow control a game outcome, earn “a little something for the week-end” from a club manager and get away unnoticed, chances are he will. Those at the top of the federation are all connected to this machinery as they control the rules and sometimes the results. Last year Juventus’ bribing scandal is one patent example.

Trapped into poverty

All around the world, people with power create these rent-seeking opportunities. In Mozambique, it takes 153 days to register a new business[1] because of forms, bureaucracy and complicated procedures, also known as red tape[2]. By greasing a palm, it takes much less. The pockets of civil servants, from the police officer to the cabinet minister who created the self-interested policy, get filled with “speed money”. Other examples of bribe-opportunity-oriented policies include price controls, multiple exchange-rate systems and trade restrictions. In Cameroon, tariffs are around 60%. No wonder importing firms prefer to give “envelopes” to customs agents rather than to import officially. Basically, a person who has discretionary power will try to extract money.

The consequences of such inappropriate government behaviour can destroy all the motivation of well-intentioned citizens. It hassles them every day and lets them know that there is no point in going to university to get a good job (it all works under the table) or to invest in a new business as you’ll get harassed and all your benefits will be taken by drunk police officers and the President’s sons. Why bother? Instead, they stay in the unproductive informal sector running small underground firms or subsistence farming.

How could we get these corrupt officials to act honestly? We give them incentives to do so. For instance higher salaries so that they don’t need to steal from their population or benefits for good performance, such as health insurance and paid-vacation time in Mauritius. Such a meritocracy could discourage bad behaviour. The other necessary ingredients are detection and punishment mechanisms, in the form of a free press and NGOs that will investigate government operations as well as strict prison sentences and fines. But since those who could put this structure in place are those who benefit from the status quo, nothing changes. This endogeneity of problems is known as a poverty trap. Poor countries are the most corrupt. It is one explanation of why poor countries are poor, not why they excel at football.

[1] The Economist, Pocket World in Figures 2006
[2] In Australia it only takes 2 days, ibid