29 December 2009

Trust and Climate Change

Niranjan Rajadhyaksha has a good piece in the Mint on the reasons why Copenhagen failed to deliver, taking up a fitting example of the water crisis in Mumbai and how difficult it is to cooperate even within his housing society on ensuring rules, despite the following reasons why this should be easier than creating a global consensus.
It is easier to build this consensus in a small housing colony than on a global scale. Consider some possible reasons.
1. There is a high level of trust and even affection in a housing colony set up by a group of Marathi writers while international relations are cursed with deep divisions based on history, geography and culture. Getting the rich and poor countries to accept a common timetable to cut carbon emissions is a tough task.
2. The people who stay in our housing society are a homogeneous lot, coming from similar backgrounds and with similar incomes; climate change talks involved countries with different cost-benefit calculations. For example, the Maldives can do almost nothing to mitigate climate change but will surely be the first nation to bear the full brunt of its effects.
3. There is an incentive to protect your reputation in a housing colony or small community, since residents depend on each other for a variety of reasons. A nation at the bargaining table is more concerned about domestic pressures than protecting its international reputation.
4. A related disciplining catalyst is that people who stay in a small community have a long history of cooperation. Our housing colony is 40 years old and people have memories of cooperation and altruism. There is also the risk that reneging on a water deal right now would affect future behaviour of other residents. None of this is true in global climate change talks.
5. While water is not priced and hence market-based incentives cannot be used to curb usage, the city authorities have already imposed caps on our water usage. This is some sort of external enforcement that can cement a deal. In another context, the World Trade Organization does this for global trade. There is no such external enforcement institution as far as climate change commitments go.

Some political theorists and game theorists say that people are conditional altruists, standing between the cold utility maximizers of economics mythology and the saintly altruists of neo-Gandhian mythology. Conditional altruists do have an inbuilt concern for fairness but will follow selfish strategies because they fear that others will take a free ride on their commitments to good behaviour. They behave altruistically only when they are convinced that there are enough others who they can trust to behave similarly.
Such levels of trust take a lot of hard work, a history of reinforcing behaviour and credible assurances. It does not take much to realize that much of this was absent at the Copenhagen talks, which came close to being a morality play between the good guys and the bad guys.

The paper he has based his piece on is available at Partha Dasgupta's website here : Trust and Cooperation among Economic Agents, June 2009

The units that are subject to selection pressure in evolutionary biology are "strategies", which are conditional actions ("Do P if Q occurs"). In contrast, the units in economics select strategies from available menus so as to further their projects and purposes. As economic agents don't live in isolation, each agent's optimum choice in general depends on the choices made by others. Because their projects and purposes involve the future, not just the present, each agent reasons about the likely present and future consequences of their respective choices. That is why beliefs, about what others may do and what the consequences of those choices could be, are at the basis of strategy selection. In this article I construct a catalogue of social environments in which agents not only promise one another cooperation, but rationally believe that the promises will be kept. Unfortunately, non-cooperation arising from mistrust can be the outcome in those same environments: societies harbour multiple "equilibria" and can skid from cooperation to non-cooperation. Moreover, a pre-occupation among analysts with the Prisoners’ Dilemma game has obscured the fact that cooperative arrangements can harbour not only inequality, but exploitation too. The analysis is used to discuss why international cooperation over the use of global public goods has proved to be so elusive.

Wishing all readers a healthy and productive year ahead in 2010!

19 December 2009

Environment and COP 15

 Environment Decade - the Guardian puts the milestones across the years since 2000:

Ten years ago, Kyoto was on the rocks; Bush ruled the roost, and the New Orleans levee and Antarctic ice sheet were still intact. As the decade draws to a close, we look back on the biggest environmental stories milestones of the noughties

The Guardian also gives a roundup of what was achieved and how we failed in COP 15

And this is the clearest blog I have found explaining COP 15 issues:
Instead the overwhelming evidence points to a deal that, no matter what our leaders say, is a total failure to address the severity of the climate problem.

05 December 2009

Argentina - positive natural resource shocks and domestic adjustments

Leandro Serino, CAPORDE colleague, has a paper out on the 'Positive natural resource shocks and domestic adjustments in a semi-industrialized economy: Argentina in the 2004-2007 period'
This paper evaluates the domestic adjustment to recent positive external shocks in Argentina's natural resource sectors. Although there is no single, exclusive determinant of Argentina’s fast economic growth in the period 2003-2007, the paper illustrates the favourable contribution of certain economic policies to this outcome.
According to counterfactual simulations performed with a dynamic Computable General Equilibrium (CGE) model especially designed to capture structural features of the Argentine economy, export taxes on natural resource products and Argentina’s competitive exchange rate policy have counteracted Dutch disease adjustments associated the positive terms of trade shock (which may be contractionary in the medium-term if no economic policies are implemented) contributing to productive and export diversification and to bring about output growth.
The analysis also shows that in a context of strong demand impulses spending the income collected with export taxes may not be beneficial for the overall competitiveness of the economy, hence counteracting one of the purposes of the tax policy. This implies, first, that subsidies to producers of wage-goods may be ineffective to control overall price increases, and second, that optimizing the contribution of public investment in infrastructure to improve the competitiveness of the economy requires special attention to the timing of public investment.
Click here to download the full text of the working paper

About the author

Leandro Serino has recently obtained his PhD in Development Studies from the International Institute of Social Studies (ISS) of Erasmus University Rotterdam, The Netherlands. His thesis is entitled: 'Productive diversification in
natural resource abundant countries: limitations, policies and the experience of Argentina in the 2000s'.
He graduated as an economist at the University of Buenos Aires (UBA) and completed a M.Sc. in Development Economics in 2003 (jointly dictated by the ISS, Free University Amsterdam and Wageningen University).
Until recently, he worked at MECON as an adviser to the Secretary of Economic Policy and coordinated a research unit. In addition, Leandro has been consultant for ECLAC Argentina, where he developed the demo of an encyclopedia on development economics (http://www.cepalnacionesunidas.com.ar). He was also involved in teaching and research at the University of General Sarmiento and UBA in Argentina.
At present Leandro is working as a lecturer at the University of General Sarmiento (UNGS) and is participating in a project to update Argentina’s Social Accounting Matrix at the Ministry of Economy and Finances - MECON (Argentina) .
Source: ISS

03 December 2009

Labour employability and global movements

An article of mine in the Financial Express this week highlighted the issue of Indian firms employing Chinese workers due to paucity of suitable skilled workers in India.
The government has 'fixed' the problem by insisting that all foreigners enter only on business visas—there are no visas to be given for unskilled/low-skill work, for which Indians are available—the problem actually lies in how ‘skill’ has been defined. Skills are defined typically as occupational skills where workers have the requisite training/qualification for a particular job description. If we look at the problem from the employer’s point of view, it is not a question any more of whether there are Indian electricians or welders, etc in abundance. As an Indian company executive employing Chinese labour noted, the Chinese would complete the job in 15 months while the Indians would take 8 years. The minute the time dimension enters, and therefore cost overruns loom, skill takes on a different meaning. Of course there is the added aspect of quality of output. In short, efficiency and productivity are not a part of the skill sets defined. The sad reality is that even while on paper many Indian workers have the requisite skills, they are just not employable.

My article spoke of the problem of employability in the Indian workforce:
Skill deficits have heavy social and political consequences, which are already being reflected every day on the news.As the India Labour Report 2007 , authored by TeamLease Services and Indicus Analytics, put it, “We believe that the skill deficit is more dangerous than the infrastructure deficit because it not only reinforces inequality but also amplifies it.” The longer it takes for the government to get its act together, the worse the situation will become.

I had not spoken about the migration of skilled labour from the country, given the constraints of the length of the article. The rate at which the country has lost quality work force is a function of  the lack of opportunities within the country. This has been changing in recent times with many Indians returning to take part in the 'Indian growth story'., even as other parts of the world seem less attractive. The latest : the fallout of the Dubai crisis has meant that skilled workers that India had 'exported' are now returning, at a time when the country needs them badly.
The ongoing crisis in Dubai may just prove to be a boon for the Indian infrastructure sector that is on a hiring spree and scouring the world for top and middle-level talent. The infrastructure sector, which includes construction of roads, highways, ports, airports, real estate, transportation, mining, steel, power and telecom, is witnessing a manpower shortage. “The infrastructure sector in India is in dire need of people who can manage projects and ensure their timely implementation. Such skill sets are hard to find here,” said Sanjiv Sachar, partner at Egon Zehnder International.

However, for  the Indian government,  this does not detract from the responsibility of creating an environment where employability of the Indian labour force is raised across the board, in all regions.

02 December 2009

Messages from Dubai

Two articles about the lessons from the Dubai debt issue stand out here:

The first by Anantha Nageswaran talks of the underlying problem - a mindset that demands instant gratification - and its implications for the developing world.

Amid all the hand-wringing over Dubai, what is being forgotten is that what has happened in Dubai over the last several years is only a manifestation of a global phenomenon. That is the problem of instant gratification. This affliction lies behind the global financial crisis. ....
Cities cannot be built in half a decade. Cities are not about tall concrete, steel and glass structures. They are breathing, living organisms with culture. Culture is historical. It takes time. Similarly, economic growth has to occur at a sustainable pace. Debt seduces us into thinking that we can have more of it than what is good for us.
If the hubris about breaking speed limits to growth and the achievement of permanent great moderation in economic cycles has brought the severest test yet of the US’ global supremacy, the prevalence of the same mindset in the developing world does not augur well for the great decoupling that some have taken for granted and some await with bated breath.
Hence, to be generous to today’s wannabe leaders in the developing world, the 21st century might ultimately be viewed as the period of transition for the hitherto poor nations but, on current evidence, it may not be the century of their arrival.
All this might be good for op-eds. But investors would be questioning its relevance for their actions. The answer is the same. Mind the risk and mind the price one pays for assets, and those are the equivalent of accepting delayed gratification in life.
On behalf of all of us, praying for a year of learning to accept delayed gratification.

 The second article by Simon Johnson 'Does Dubai matter?Ask Ireland' highlights not just the interconnectedness of the world in the matter of flows of activity, but also the impact of responses taken by certain regions to combat crises in other parts of the world:

The thinking is that a partial bailout – with creditor losses – for Dubai from Abu Dhabi implies something about how Ireland will be treated within the European Union (and the same reasoning is also more vaguely in the air for Greece).  ...

The main effect will be to strengthen the hand of Ben Bernanke in Fed policymaking discussions – so US interest rates will stay low for a long while.  If financial intermediaries draw the appropriate lessons from Dubai, Ireland, and Greece (and Iceland, the Baltics, Hungary, etc), they will be more careful about extending credit to places that are becoming overexuberant – even when it is cheap to increase debt levels.
But an outbreak of caution and care on the part of our biggest banks (and other investment managers) does not seem likely.

Both these articles point to greater issues of unsustainable/unwarranted debt levels, but both appear to be pessimistic over the question whether better sense will prevail.