In the Heart of Darkness

109 years on

The Economist this week published a report on a 'new' Rwanda with sound institutional mechanisms and a strong rule of law in place to herald a new era of stability and growth.

Rwanda is landlocked and surrounded by war ravaged countries that lack any sort of full functioning governments. As The Economist describes its neighbours:

Uganda is corrupt; Burundi a basket-case; Congo worse.

Due to its relatively small size, a nation of roughly 11 million souls with a land area  just bigger than Wales, Rwanda has aspirations of becoming an entrepot to Central Sub-Saharan Africa modelled on the policies and goals of Paul Kagame's favourite despot Lee Kuan Yew, the enlightened ruler of Singapore.

Mr Kagame, Rwanda's elected ruler in all but ballots, rescued the country from the chasms of inter-tribal genocide not 20 years ago. Mr Kagame so adamant in lifting his country from the ruins of mass fratricide renounced its french colonial heritage and adopted English and the Commonwealth of Nations. Yet I feel, for all of Mr Kagame's good intentions, Rwanda still is for the lack of a better saying, The Heart of Darkness.


The problem with having an annual per capita income of $600, roughly £400, is being in a state of indefinite stagnant inertia, a Catch-22. How can you grow if their really is no market, economies of scale,  friendly neighbours, and most of all, in a world still reliant on trade by ship freighting, a port of access.

Once in a Leap Year

When running time series analysis, that is comparing what has happened to a particular variable over time, we run into many problems that are rife in econometrics: measurement error, robustness, faulty checks, low test power, and so forth.

Would controlling for year lengths be a factor in the analysis? Since the conversion to the Gregorian calender from the Julian, spurred on by the ever quick Catholic Church, leap years have become an almost seamless feature in our lives. Yet when comparing GDP, trade, consumption over a given set of years, which includes leap years, would our results be robust to the addition of 1/365th of a year, every fourth year.

The answer is obvious: ofcoarse! Given the inherent ex ante frailties of comparing across times to begin with, controlling for leap years would lead to more or less the same results. Their is no loss in power of our tests, or dilution of our analysis without any 'leap' controls.

Yet in the back of one's mind if Economics is to reach to the levels of didactic Baconian Scientific Reasoning, it has to overcome every small eventuality. That includes controlling and taking into consideration the Day's extra output on leap years. But perhaps its best to ignore tedious happenings on February the 29th, ceteris paribus!

World Bank Redux

Look on my works, ye mighty, and despair!

Tasked with eliminating global poverty and hunger, The International Bank of Reconstruction and Development aptly renamed The World Bank (WB), has fallen considerably short of carrying out its set of goals.

The WB was always a stillborn child of the five International Institutions set up by US policymakers at the close of WWII. Nicholas Crafts of Warwick University recently wrote lengthily on the success of the Marshall Plan; getting war ravaged European nations on their feet in the Bretton Woods Period with wunderous results. The World Bank had a minor role to play in initiating and carrying out the purview of the plan.

Without the effective management of the then former US defence secretary, Robert McNamara (1968-81), the WB would have been unforgivably absent in world affairs. Mr McNamara transformed it onto a slim fast diet of rural development and small scale investment projects.

Nevertheless over its 60 year history it is unfortunate that the WB has not received a comparable backing as that given to its sister institution, the International Monetary Fund (IMF). Its conditionality programs have either been too weak or monitored and enforced with lethargic lacklustre by a horde of soft-at-heart jetsetting PhDs. In many instances, the institutions of its recipients have had a legacy characterised by perverse incentives and insufficient accountability.

The erratic zeitgeist that comes with aid, no better seen than in 2005 just prior to the G8 Gleneagles Summit when Make Poverty History white wristbands were the then latest fads, has led to cyclical changes in the policies and institutions of the recipient countries. A government like that of Burkino Faso's, decides its government expenditure on consumption, such as salaries, in its fiscal year before any outlays for investment in schools or health clinics are made would live in constant fear of 'Aid Rebuke'. Aid unpredictability has laid to waste many an aid financed government investment project in Sub Saharan Africa (The Economist 2008).

It is suffice to say that aid does not lend the long term enforceability and time consistent solution towards eliminating world poverty. Despite the vagaries of Private Capital Markets; Capital offers a second-best, fungible and better alternative; albeit creating a race to 'the survival of the fittest' but eliminating inefficient forms of governance in the long term, in an ad hoc Arab Spring like Vox Populi.

WB's role as a development bank should be subsumed by the IMF, or better yet the myriad of regional Development Banks. Their is one silver lining though: if the new chief, replacing the ever effable Robert Zoellick, is one from the emerging economies wolfed by a McNamara sense of 'Enlightened Rationalism', it would lend the WB a new boost of credibility and enforceability that has been persistently the root of the problem.

Economics humoured

Given the barriers to the ivory tower that is Economics. Yoram Bauman has done more than his bit to use the icebreakers at the annual linen starched American Economic Association meetups.

The Next Crisis

The Persistence of Crisis Mania

Martin Wolf of the FT is already looking ahead to the next crisis, which he says is bound to happen as China integrates into the global economy.


I am rather wary of this analysis:


China’s gross savings are running at an annual rate of well over $3tn, which is more than 50 per cent larger than the gross savings of the US. Full integration of these vast flows is sure to have huge global effects. China’s financial institutions, already enormous, are also almost certain to become the biggest in the world over the next decade. 

In connection to the extract and other parts of the blop post, I for one look with trepidation at the basic agency problems, moral hazard and information asymmetry, rife in these state-led alpha Chinese firms (with their respective global ranking in revenues): Sinopec(5), China state grid (6), Petro China (9), and Commercial Bank of China (80) amongst others. So in many ways a run staged by hasty capital account sequencing on these flimsy firms would purport to Mr Wolf's argument.

Even though, Mr Wolf implies the inherent flaws of the institutional management structure of Chinese firms, the vanguards of its drive into state capitalism; the full diversification of its $3 trillion pool and slingshot of its alpha state champions into the global economy is bound to be constrained by Beijing's putonghua-defined policy constraints championed as 'national' and 'social' goods. 

Any reader of the party's flagship english newspaper, China Daily, would come to look on China's integration as being meticulously stage managed to the last foreign exchange treasury holding. In other words a thorough study of Economic History pays off!  

Market Jubilation?

Shading in the bumps

Today the Dow Jones Industrial Average closed for the first time above 13000 since may 2008. For those who attach much weight on the index and its numerical crossings over base 10 figures its surely a moment of elation.

I do not feel market watching the Dow for its economic significance is worth the straw, a) the index is price weighted such that a $1 movement in any stock leads to a 7.6 point change regardless of the inherent disparate enterprise value of the firms listed whether be highflying Caterpillar or nearly-bust Bank of America, b) The index is composed of 30 fairly less domineering firms with respect to US GDP, compared to their predecessor sets of the early 60s, c) movements occur due to opaque high-frequency trading algorithms that change with the wind, the 2010 flash crash in May was a symptom of this.

All in all I am pleased that some investors of some multi-billion dollar exchange traded funds felt a sense of placebo at the Dow settling above 13, just so that they may feel it could be worth their while to spend and invest it on real stuff!

Middle Income Trap

Follow the Leader

The World Bank has published a voluminous 448 paged report on China calling for structural and institutional reforms if it is to avoid the 'middle income trap' that has befallen many a rising economy post-Bretton Woods.

From the time I spent in China last year, I felt the sheer size and scale of its development would prevent it from being sucked into the middle income trap which is somewhat exclusive now to 'middling countries'; their is a nice graph of the trap on p.12 of the report.

Even at $15000, the supposed percapita income level where the trap kicks in and assuming financial and economic indicators are denominated in dollars and not yuans, China would have a GDP of just under $20 trillion; dominating world trade, investment, consumption and creating multiplier effects that in all cases would not lead to permanent stasis at $15k. Clearly its a case of absolute vs relative difference.

The Timid Fed

In Memoriam

Lawrence Bell recently published a paper on the discrepancy between Chairman Bernanke's policy goals as fed chairman and the exact set of policy solutions he wrote for Japan's liquidity trap: lower long term interest rates, depreciate, high inflation target, and money financed fiscal expansion.

The summary of the paper highlights an earlier psychological observation of 'group think' (Janis 1971). Where one conforms to the expectations and behaviour of a group. In this case with the policy setting body at the fed, the FOMC, Bernanke , Mr Bell argues, takes a collegiate meek attitude at FOMC discussions in apparent contrast to his libertarian overbearing predecessor Alan Greenspan.

I for one do not feel this is the case, that is not until a) we know what exactly Mr Bernanke thinks, or b) the typescript for FOMC discussions are released for the crisis years (2008-).

It is true that Mr Bernanke has been portrayed in the media, films (Too big to fail), hearings, and news conferences to have a rather meek personality. But in the context of the crisis response since 2008, I feel he has tabled at FOMC meetings what seems to be ex ante the best policy; of handing over a Carte Blanche to the financial system to stabilise plunging confidence and expectations. Depreciation and money financed fiscal expansion would have been [and still are] at the time politically infeasible, and for the latter, rife with unintended consequences of excess balance sheet inertia.

New Age

Question: will the internet/computer make clever people smarter and stupid people dumber?

In my field of econometrics it would honestly be a godsend if their were some econometric package in which one could simply say "Computer, show me the relationship between X and Y, controlling for Z". This would avoid the hassle and painstaking sessions of data-watching, in the hope of spotting the elusive phoenix or ascertaining that golden institutional quality.

It would also rebalance the sort of skills demanded of an econometrician, from one of a statistician to that of an archivist of sort, with a peculiar quirky and intuitive sense of the data!

Olympic Cities

Whilst we are in the area of chic urban economics. Some time ago I made a prediction for the Olympic cities of the next 30 years.

It is important to understand that with the rise in labour mobility for the first and second quarter of the 21st century, cities will play an ever bigger role in defining personal identity. Many global cities will ferociously bicker over hosting rights for large sporting, cultural, inter alia events. Ryan Avent of The Economist has written a lot on the growing nature of this phenomena.

So without further ado here is the list, as we know london 2012 and Rio 2016, it would be interesting to see whether the investment and spotlight for Rio boosts it above its neighbour Sao Paolo,:

2020 Singapore
2024 New York
2028 Paris
2032 Delhi
2036 Santiago (Wild Card)
2040 Istanbul

Global Cities

Recently I was asked to give a top ten list of global cities that would after a thorough scientific weighted test of their cultural, economic, social output, give a sort of ranking for the decade of the 2010s. This is my back of the hand list, perhaps it needs a second thought, the ranking in the brackets are for the following (cultural, economic, social), 'x' is defined as not in the top ten for that particular ranking.

1. London (1,2,1)
2. New York (2,1,2)
3. Tokyo(5,3,7)
4. Paris(3,7,3)
5. Hong Kong(6,4,4)
6. Shanghai(x,5,6)
7. Los Angeles(4,8,5)
8. Singapore(x,6,8)
9. Mumbai(x,9,9)
10. Beijing(x,10,x)

Honorary mentions should go out to the following cities that could be merited to be in the top ten for their current and future potential: Sao Paolo, Mexico City, Chicago, Montreal, Berlin, Dubai, Delhi, Chongqing, Seoul, Melbourne, Sydney, Jakarta.  

New Beginnings

This blog shall be the beginning of scribing my thoughts on economics, current global events, my research, and the disparate interests in all things unusual!