Look's like the verdict is in. From Economist:
CONFRONTED by blaze after blaze in recent weeks, America’s financial firemen have rushed to douse the flames—with one exception. Unable to persuade any rival to take on a battered Lehman Brothers, the government was left with a hard choice: spray the investment bank with public money or let it burn. In choosing destruction, the government has provided a painful lesson in the dangers of doing the right thing at the wrong time.
In a sense, Lehman’s misfortune was not to have hit trouble earlier. After broking the sale of Bear Stearns, another Wall Street firm, and nationalising the country’s mortgage agencies, officials felt an example needed to be made so as to combat “moral hazard”, or the risk that banks will act recklessly if they know they will be bailed out when their bets sour. Hank Paulson, the treasury secretary, believed Lehman’s problems were sufficiently well advertised to have given derivatives markets time to prepare for the worst.
He was partly right: the credit-default swaps market has buckled but not broken. But Lehman’s bankruptcy shredded the last remnants of confidence in American International Group, an insurer, and crystallised fears over the stability of the remaining free-standing investment banks, Goldman Sachs and Morgan Stanley. Alarm over “counterparty” risk—the risk of a borrower or trading partner failing to cough up—turned into outright terror, paralysing money markets. “It was the mistake of a lifetime,” says one senior bank executive, echoing the view across Wall Street.
What lessons can be taken from this for future financial crisis?
1. Make clear from the outset which institutions will be saved and which won't. The price of uncertainty is more uncertainty and the cost of uncertainty can be higher than a bailout. Thus, it is sounding like the government needs to either make it clear from the start that it is all or nothing. All will be saved or no one. The latter is unlikely due to systemic risks. Case by case treatment only increases uncertainty - plus the process is very non-transparent.
2. No institution is too small to fail. Interlinkages can be disastrous so perhaps the prudent thing to do is to save them all.
3. Moral hazard can still be averted by nationalization.
Monday, November 3, 2008
Thursday, October 23, 2008
Piracy
This article by Peter Leeson:
An-arrgh-chy: The Law and Economics of Pirate Organization
Abstract:
This paper investigates the internal governance institutions of violent criminal enterprise by examining the law, economics, and organization of pirates. To sectively organize their banditry, pirates required mechanisms to prevent internal predation, minimize crew conflict, and maximize piratical profit. I argue that pirates devised two institutions for this purpose. First, I analyze the system of piratical checks and balances that crews used to constrain captain predation. Second, I examine how pirates used democratic constitutions to minimize contact and create piratical law and order. Remarkably, pirates adopted both of these institutions before the United States or England. Pirate governance created sufficient order and cooperation to make pirates one of the most sophisticated and successful criminal organizations in history.
Unfortunately (emphasis mine),
Over the last decade or so there has been a resurgence of piracy off
the horn of Africa and in the Straits of Malacca ... Like seventeenth-
and eighteenth-century pirates, the modern variety choose to
plunder ships in waters in which government enforcement is weak, such
as those around Somalia and Indonesia, and commercial vessels are
abundant.
Beyond this, however, modern pirates share little in common with
their predecessors. Seventeenth- and eighteenth-century pirates lived
together for long periods of time at sea. ... Because of this, their ships
formed miniature “floating societies.” Like all societies, pirates’ floating
ones also required social rules and governance institutions if pirates
were to maintain their “abominable combination.”
In contrast, modern pirates spend almost no time together on their
ships. Their “raids” take one of two forms. The first and most common
method constitutes little more than maritime muggery. Pirate “crews”
of two to six hop in small speedboats with guns; pull alongside legitimate
ships, usually in territorial waters close to the coast; and threaten their
prey at gunpoint to give up their watches, jewelry, and whatever money
the boat may be carrying. They then return to their villages on the coast,
where they live among nonpirates and resume regular employment.
These pirates do not live, sleep, and interact together on their ships
for months, weeks, or even days on end. They therefore do not constitute
a society and face few, if any, of the problems of social cooperation and
order their forefathers did.
The second and far less common method of modern piracy is somewhat
different. Crews again are small—between five and 15 men—and
spend very little time together at sea. But professional land-based criminals
hire these modern pirates to steal boats, which they then convert
into “phantom ships” and resell. They pay these modern pirates lump
sums and contract them on a case-by-case basis. Like the maritime muggers,
pirates-for-hire rely predominantly on hijacking methods to steal
ships, though for larger vessels they have been known to plant “insiders”—
sailors who pretend to be legitimate sailors seeking employment
on the ship in question—who later hijack the target from the inside.
Since modern pirates sail in very small groups and spend very little
time together at sea, ... that they do not require rules for creating order,
rationing provisions, or assigning tasks. Modern pirates do not even
require captains in the usual sense. There is, of course, someone who
steers the motorboat and acts as a leader among the six or so pirates;
but he is not a captain in the way that eighteenth-century pirate, privateer,
or merchant captains were.
Even organizational problems related to the distribution of plunder
are largely absent for modern pirates. ... modern sea robbers do not
sail for extended periods with growing piles of booty. Their trips are
evening cruises. When they end, the pirates return to their day jobs.
Modern pirates-for-hire do not even confront a distribution of booty
problem to this extent. The landed thieves who employ them pay them
wages. Once the pirates have taken a prize, they hand it over to their
employer. Sadly, then, modern pirates are far less interesting from an
economic or organizational point of view than their predecessors.
Contrast with NGS Malacca Strait Pirates:
... 75 percent of heisted cargoes were inside jobs involving the ship’s crew, often the captain. “That’s why most are not reported,” he said, explaining that shipping companies often write off these losses rather than suffer bad press and risk losing their insurance.
It works like this, he said. A ship broker would call him and say there’s a customer who needs diesel fuel. “I know a crewman on a tanker,” Jhonny says. “I call his hand phone and ask him if he is happy. If he says yes, no problem. But if he says no, I tell him I make him happy, and then we make a plan.” But the crewman won’t work legitimately again, I said. He laughed. “Seamen have lots of names. Some have three or four passports. No problem.”
... I asked Beach Boy why he had become a pirate. “I can’t get work,” he said. Jhonny explained that Indonesian sailors often lacked the maritime certifications required to work on commercial ships. For years, young men like Beach Boy relied on older seamen to teach them the trade and then obtained counterfeit credentials to avoid the expensive training needed to become legally licensed seamen. But in recent years the international shipping community had clamped down on such practices, leaving many experienced Batam sailors unemployed.
An-arrgh-chy: The Law and Economics of Pirate Organization
Abstract:
This paper investigates the internal governance institutions of violent criminal enterprise by examining the law, economics, and organization of pirates. To sectively organize their banditry, pirates required mechanisms to prevent internal predation, minimize crew conflict, and maximize piratical profit. I argue that pirates devised two institutions for this purpose. First, I analyze the system of piratical checks and balances that crews used to constrain captain predation. Second, I examine how pirates used democratic constitutions to minimize contact and create piratical law and order. Remarkably, pirates adopted both of these institutions before the United States or England. Pirate governance created sufficient order and cooperation to make pirates one of the most sophisticated and successful criminal organizations in history.
Unfortunately (emphasis mine),
Over the last decade or so there has been a resurgence of piracy off
the horn of Africa and in the Straits of Malacca ... Like seventeenth-
and eighteenth-century pirates, the modern variety choose to
plunder ships in waters in which government enforcement is weak, such
as those around Somalia and Indonesia, and commercial vessels are
abundant.
Beyond this, however, modern pirates share little in common with
their predecessors. Seventeenth- and eighteenth-century pirates lived
together for long periods of time at sea. ... Because of this, their ships
formed miniature “floating societies.” Like all societies, pirates’ floating
ones also required social rules and governance institutions if pirates
were to maintain their “abominable combination.”
In contrast, modern pirates spend almost no time together on their
ships. Their “raids” take one of two forms. The first and most common
method constitutes little more than maritime muggery. Pirate “crews”
of two to six hop in small speedboats with guns; pull alongside legitimate
ships, usually in territorial waters close to the coast; and threaten their
prey at gunpoint to give up their watches, jewelry, and whatever money
the boat may be carrying. They then return to their villages on the coast,
where they live among nonpirates and resume regular employment.
These pirates do not live, sleep, and interact together on their ships
for months, weeks, or even days on end. They therefore do not constitute
a society and face few, if any, of the problems of social cooperation and
order their forefathers did.
The second and far less common method of modern piracy is somewhat
different. Crews again are small—between five and 15 men—and
spend very little time together at sea. But professional land-based criminals
hire these modern pirates to steal boats, which they then convert
into “phantom ships” and resell. They pay these modern pirates lump
sums and contract them on a case-by-case basis. Like the maritime muggers,
pirates-for-hire rely predominantly on hijacking methods to steal
ships, though for larger vessels they have been known to plant “insiders”—
sailors who pretend to be legitimate sailors seeking employment
on the ship in question—who later hijack the target from the inside.
Since modern pirates sail in very small groups and spend very little
time together at sea, ... that they do not require rules for creating order,
rationing provisions, or assigning tasks. Modern pirates do not even
require captains in the usual sense. There is, of course, someone who
steers the motorboat and acts as a leader among the six or so pirates;
but he is not a captain in the way that eighteenth-century pirate, privateer,
or merchant captains were.
Even organizational problems related to the distribution of plunder
are largely absent for modern pirates. ... modern sea robbers do not
sail for extended periods with growing piles of booty. Their trips are
evening cruises. When they end, the pirates return to their day jobs.
Modern pirates-for-hire do not even confront a distribution of booty
problem to this extent. The landed thieves who employ them pay them
wages. Once the pirates have taken a prize, they hand it over to their
employer. Sadly, then, modern pirates are far less interesting from an
economic or organizational point of view than their predecessors.
Contrast with NGS Malacca Strait Pirates:
... 75 percent of heisted cargoes were inside jobs involving the ship’s crew, often the captain. “That’s why most are not reported,” he said, explaining that shipping companies often write off these losses rather than suffer bad press and risk losing their insurance.
It works like this, he said. A ship broker would call him and say there’s a customer who needs diesel fuel. “I know a crewman on a tanker,” Jhonny says. “I call his hand phone and ask him if he is happy. If he says yes, no problem. But if he says no, I tell him I make him happy, and then we make a plan.” But the crewman won’t work legitimately again, I said. He laughed. “Seamen have lots of names. Some have three or four passports. No problem.”
... I asked Beach Boy why he had become a pirate. “I can’t get work,” he said. Jhonny explained that Indonesian sailors often lacked the maritime certifications required to work on commercial ships. For years, young men like Beach Boy relied on older seamen to teach them the trade and then obtained counterfeit credentials to avoid the expensive training needed to become legally licensed seamen. But in recent years the international shipping community had clamped down on such practices, leaving many experienced Batam sailors unemployed.
Wednesday, October 22, 2008
What I've been reading
1. Unknown Terrorist by Richard Flanagan. This was an interesting commentary on the state of society when confronted with an external threat - in this case domestic terrorism. The notion that masses will behave like a paranoid herd, or in some cases will band together in the face of an external threat is not new. What is interesting is that this post 9/11 book is one look at society's reaction to this threat and it is not an entirely pleasant look. Few stop to question the authorities (the story is set in Sydney) and are ready to convict based on media coverage. The plot line was a little thin but Flanagan is a good enough writer that I was willing to overlook it.
2. Body of Lies by David Ignatius. Prompted by the trailers of the movie version. Unfortunately, I wanted to like David Ignatius but found the prose a little too monotonous. This might well be the only Ignatius book I'll read. The plot was predictable for me and the movie version looks to be slightly better.
3. Market Forces by Richard Morgan. Mad Max in a suit driving expensive European made cars battle it out on the roads for market dominance in the mercenary business. The first couple of chapters I almost laughed out loud but was eventually drawn into the book which is a good read and moves at a good pace. There's something about the mindless violence in Richard Morgan's books that makes me wonder about him. If this book were made into a move, I'd say Colin Farrell should play Chris Faulkner.
2. Body of Lies by David Ignatius. Prompted by the trailers of the movie version. Unfortunately, I wanted to like David Ignatius but found the prose a little too monotonous. This might well be the only Ignatius book I'll read. The plot was predictable for me and the movie version looks to be slightly better.
3. Market Forces by Richard Morgan. Mad Max in a suit driving expensive European made cars battle it out on the roads for market dominance in the mercenary business. The first couple of chapters I almost laughed out loud but was eventually drawn into the book which is a good read and moves at a good pace. There's something about the mindless violence in Richard Morgan's books that makes me wonder about him. If this book were made into a move, I'd say Colin Farrell should play Chris Faulkner.
Wednesday, October 15, 2008
Are we out of the crisis?
It's too early to say but I happened to be reading Financial Crisis and the Great Depression: A Regime Switching Approach by Patrick Coe and it had some interesting parallels to the current financial crisis.
During 1932 there were two major policy initiatives aimed at alleviating the financial crisis, although neither appears to have had the desired effect. The first was the introduction of the Reconstruction Finance Corporation (RFC) in January 1932 to provide loans to illiquid banks. However, Mason (1996) argues that by overcollateralizing these loans, the RFC actually created a liquidity problem for the very banks it was trying to help. The second response was the Federal Reserve's open market purchases, which began in April 1932, but were abandoned in July of that year. Epstien and Ferguson (1984) argue that this program was abandoned due to pressure from member banks. As banks were substituting away from loans and into short-term government securities the Fed's open market purchases had an adverse effect on their profitability. As a result they became increasingly opposed to the program.
At midnight on March 6th, 1933, the newly inaugurated President Roosevelt declared that there would be a bank holiday from the 6th to the 9th of March. On the 9th of March, Congress passed the Emergency Banking Act (EBA) which was the first of many banking and monetary reforms contained in the New Deal. The EBA gave the RFC power to invest equity in banks without taking collateral, thus solving the problem Mason discusses. The EBA also facilitated the reopening of national banks. Roosevelt promised the public that only "sound" banks would be granted licenses to reopen. These reforms, the program for reopening the banks, and Roosevelt's "fireside chats" were intended to stabilize the financial system. The traditional view emphasizes the success of these measures in restoring stability to the financial sector.
Friedman and Schwartz argue that by restoring confidence in the monetary and economic system the EBA contributed to recovery from the depression. However, they also argue that the introduction of the Federal Deposit Insurance Corporation (FDIC) was the structural change that did the most to restore stability. This occurred in January 1934.
Recall, the RFC was what some commentators wanted to use as a model to buy up the toxic securities in the current crisis. (See here and here for instance.)
Using a Markov switching approach to calculate conditional probability of being in a crisis Coe finds:
During 1932 there were two major policy initiatives aimed at alleviating the financial crisis, although neither appears to have had the desired effect. The first was the introduction of the Reconstruction Finance Corporation (RFC) in January 1932 to provide loans to illiquid banks. However, Mason (1996) argues that by overcollateralizing these loans, the RFC actually created a liquidity problem for the very banks it was trying to help. The second response was the Federal Reserve's open market purchases, which began in April 1932, but were abandoned in July of that year. Epstien and Ferguson (1984) argue that this program was abandoned due to pressure from member banks. As banks were substituting away from loans and into short-term government securities the Fed's open market purchases had an adverse effect on their profitability. As a result they became increasingly opposed to the program.
At midnight on March 6th, 1933, the newly inaugurated President Roosevelt declared that there would be a bank holiday from the 6th to the 9th of March. On the 9th of March, Congress passed the Emergency Banking Act (EBA) which was the first of many banking and monetary reforms contained in the New Deal. The EBA gave the RFC power to invest equity in banks without taking collateral, thus solving the problem Mason discusses. The EBA also facilitated the reopening of national banks. Roosevelt promised the public that only "sound" banks would be granted licenses to reopen. These reforms, the program for reopening the banks, and Roosevelt's "fireside chats" were intended to stabilize the financial system. The traditional view emphasizes the success of these measures in restoring stability to the financial sector.
Friedman and Schwartz argue that by restoring confidence in the monetary and economic system the EBA contributed to recovery from the depression. However, they also argue that the introduction of the Federal Deposit Insurance Corporation (FDIC) was the structural change that did the most to restore stability. This occurred in January 1934.
Recall, the RFC was what some commentators wanted to use as a model to buy up the toxic securities in the current crisis. (See here and here for instance.)
Using a Markov switching approach to calculate conditional probability of being in a crisis Coe finds:
Here it is interesting to note that two attempts to alleviate the financial crisis during early 1932, the establishment of the RFC and the open market operations, have no effect on these conditional probabilities.
Perhaps the most interesting feature ... is the implication they have for the ending of the financial crisis. If the reforms discussed in the previous section did have a positive effect on the financial system, this should be reflected in the time series of estimated conditional probabilities over the current state of the financial system. Given that the early 1930s is a period of financial crisis, one would expect the crisis to end in 1933 or 1934. Some combination of the traditional view and Wigmore's view suggests that there would be a regime change in the spring of 1933. On the other hand, the view that the introduction of the FDIC ended the financial crisis dates the regime change as being in early 1934. ... [There is] a fall in the conditional probability of financial crisis to 0.15 in May 1933. However, this is temporary. For the majority of 1933 the probability of financial crisis remains above 0.8, suggesting no change in regime immediately following the reforms of the Spring of 1933. This point is emphasized by looking at the updated probabilities .... This updated probability of financial crisis for May 1933 is 0.88. In fact, for the whole of 1933 it is never below 0.78. This suggests that while the reforms contained in the EBA and the abandonment of the gold standard may have been necessary, they were not sufficient to end to the financial crisis.
The conditional probabilities suggest that the financial crisis ends in February of 1934. This is immediately after the introduction of the FDIC in the previous month and the sharp increase in authorized lending by the RFC in December 1933 and January 1934. This is shown more clearly in the updated probabilities ... a probability of financial crisis of 0.301 in February 1934. This falls to 0.266 in March and is zero for the remainder of 1934. This result is consistent with the view that at least one of the introduction of the FDIC and the increased lending by the RFC was crucial for ending the financial crisis.
So are we in for a relative calm now that the Fed has essentially guaranteed the interbank market and taken (some) small equity stake in the banks? Remains to be seen.
Update: It would be interesting to redo this kind of analysis with some more recent indicators.
Interesting vacation spot?
Baarle-Hertog: Baarle-Hertog borders the Netherlands – but, because of its unique history of political division, the town is sort of marbled with competing national loyalties. In other words, pockets of the town are Dutch; most of the town is Belgian. You can thus wander from country to country on an afternoon stroll, as if island-hopping between sovereignties.
Being in a bit of a rush at the moment, I'll simply have to quote Wikipedia:
Baarle-Hertog is noted for its complicated borders with Baarle-Nassau in the Netherlands. In total it consists of 24 separate pieces of land. Apart from the main piece (called Zondereigen) located north of the Belgian town of Merksplas, there are twenty Belgian exclaves in the Netherlands and three other pieces on the Dutch-Belgian border. There are also seven Dutch exclaves within the Belgian exclaves. Six of them are located in the largest one and a seventh in the second-largest one. An eighth Dutch exclave lies in Zondereigen.The border is so complicated that there are some houses that are divided between the two countries. There was a time when according to Dutch laws restaurants had to close earlier. For some restaurants on the border it meant that the clients simply had to change their tables to the Belgian side.
Sarah Laitner, at the Financial Times, adds that "women are able to choose the nationality of their child depending on the location of the room in which they give birth."
Being in a bit of a rush at the moment, I'll simply have to quote Wikipedia:
Baarle-Hertog is noted for its complicated borders with Baarle-Nassau in the Netherlands. In total it consists of 24 separate pieces of land. Apart from the main piece (called Zondereigen) located north of the Belgian town of Merksplas, there are twenty Belgian exclaves in the Netherlands and three other pieces on the Dutch-Belgian border. There are also seven Dutch exclaves within the Belgian exclaves. Six of them are located in the largest one and a seventh in the second-largest one. An eighth Dutch exclave lies in Zondereigen.The border is so complicated that there are some houses that are divided between the two countries. There was a time when according to Dutch laws restaurants had to close earlier. For some restaurants on the border it meant that the clients simply had to change their tables to the Belgian side.
Sarah Laitner, at the Financial Times, adds that "women are able to choose the nationality of their child depending on the location of the room in which they give birth."
Development in China's (interior) cities
From Peter Hessler on cities (Qiaotou, Wuyi, etc.) in Wenzhou that are not so close to the coast - actually about 100 miles.
All told, they had mapped out a 21,500-square-foot (2,000 square meters) factory, from bottom to top, in one hour and four minutes. Boss Gao handed the scrap of paper to the contractor. The man asked when they wanted the estimate.
"How about this afternoon?"
The contractor looked at his watch. It was 3:48 p.m.
"I can't do it that fast!"
"Well, then tell me early in the morning."
... Wenzhou had the priceless capital of native instinct. Families opened tiny workshops, often with fewer than a dozen workers, and they produced simple goods. Over time, workshops blossomed into full-scale factories, and Wenzhou came to dominate certain low-tech industries. Today, one-quarter of all shoes bought in China come from Wenzhou. The city makes 70 percent of the world's cigarette lighters.
...Qiaotou's population is only 64,000, but 380 local factories produce more than 70 percent of the buttons for clothes made in China. In Wuyi, I asked some bystanders what the local product was. A man reached into his pocket and pulled out three playing cards—queens, all of them. The city manufactures more than one billion decks a year. Datang township makes one-third of the world's socks. Songxia produces 350 million umbrellas every year. Table tennis paddles come from Shangguan; Fenshui turns out pens; Xiaxie does jungle gyms. Forty percent of the world's neckties are made in Shengzhou.
... That's one weakness of the Wenzhou Model. Entrepreneurs produce goods that require little capital and low technology, which makes it easy for neighbors to jump in. Boss Wang, the uncle, had slipped into the same pattern. Previously, he had manufactured the steel underwire for women's brassieres, and his profits had dropped steadily. When the two men joined forces, they decided to continue manufacturing underwire, but their goal was to find a more profitable main product.
Fortunately, the average bra is composed of 12 separate components. In a figurative sense, the men began their quest at the bottom, with the underwire, and worked their way up. They thought about thread; they looked at lace; they considered the clasp. But when they reached the top, where tiny 0- and 8-shaped rings adjust the bra straps, they found what they were looking for.
A bra ring consists of steel coated with high-gloss nylon, requiring a specialized manufacturing process. The key equipment is a computer-regulated assembly line, divided into three separate stages, each of which heats the object to over 500 degrees Celsius (930 F). Originally, Europeans produced the rings, but by the early 1990s Taiwan dominated the market. In the middle of that decade, a mainland Chinese company called Daming imported an assembly line.
After its arrival on the mainland, where production costs are much cheaper, "the Machine" essentially minted money. The boss got rich, and then a worker named Liu Hongwei got an idea. Despite his lack of formal education, Liu was a skilled mechanic, who worked closely with the Machine. Meticulously, he memorized the assembly line, piece by piece, and in secret he sketched out blueprints. When the plans were complete, he contacted a second boss at a company called Shangang Keji, in the city of Shantou.
In 1998, Boss Number Two hired Liu and took the blueprints to Qingsui Machinery Manufacture Company, in Guangzhou, which custom-built the assembly line. Initially, the new Machine didn't work—nobody's memory is perfect, after all—but two months of adjustments solved the problems. Shangang Keji began producing bra rings, but then Liu found Boss Number Three, at a company called Jinde. Every time Liu jumped, he demanded money for his blueprints and expertise; some believe he made as much as $20,000.
Without knowing it, the man was following a path blazed by other societies that had also experienced sudden manufacturing booms. In 1810, a wealthy American named Francis Cabot Lowell traveled to England, where he used his connections to tour the world's premier textile mills. British law forbade the export of machinery or blueprints, but Lowell had an excellent memory. He returned to the United States, where, in the words of his business partner, he re-invented the Cartwright loom. Lowell became an American hero, with a Massachusetts factory town named in his honor.
... New apartment complexes were rising all around Lishui, and one of the biggest was the Jiangbin development. Formerly, the 16.5 acres (6.7 hectares) had belonged to the village of Xiahe, but in 2000 the city government bought the land-use rights for one million dollars. Three years later, Lishui flipped the land to Yintai Real Estate for 37 million dollars. Given that corruption is endemic in Chinese real estate, the actual price may have been even higher.
In such an environment, everybody gambles on growth. Most of the city's massive investment in infrastructure had been borrowed from state-owned banks, which also loaned money to the developers—Yintai had borrowed over 28 million dollars for its Jiangbin venture. If the real estate market went cold, the whole system was in trouble, and the central government had recently instituted new laws intended to slow down such expansions. But the money kept pouring in—during the past five years, the average price of a Lishui apartment had risen sixfold.
On paper, it looked untenable, but the Chinese economic and social environment is unlike anything else in the world. Real estate laws are skewed in the government's favor, and migration and the export economy create a constant demand for expanding cities. After the hard times of the 20th century, the average citizen is willing to tolerate unfairness as long as his living standard improves. In Jiangbin, I met Zhang Qiaoping, whose family had formerly farmed one-third of an acre (0.13 hectare) on the site. The government paid him $15,000 for a plot of land that was worth at least $200,000. Zhang wasn't happy, but he hadn't protested; instead, he invested in a small shop next to the site. Most customers were construction workers. There wasn't much money trickling down to the lowest levels, but Zhang had tapped into enough to support his family.
Some peasants even made it to the top. Yintai is owned by the Ji family, whose patriarch had been a farmer before engaging in small-scale construction work in the 1980s. Eventually, he expanded into real estate, and now his three sons help manage the company. ...
A lot more within the link.
All told, they had mapped out a 21,500-square-foot (2,000 square meters) factory, from bottom to top, in one hour and four minutes. Boss Gao handed the scrap of paper to the contractor. The man asked when they wanted the estimate.
"How about this afternoon?"
The contractor looked at his watch. It was 3:48 p.m.
"I can't do it that fast!"
"Well, then tell me early in the morning."
... Wenzhou had the priceless capital of native instinct. Families opened tiny workshops, often with fewer than a dozen workers, and they produced simple goods. Over time, workshops blossomed into full-scale factories, and Wenzhou came to dominate certain low-tech industries. Today, one-quarter of all shoes bought in China come from Wenzhou. The city makes 70 percent of the world's cigarette lighters.
...Qiaotou's population is only 64,000, but 380 local factories produce more than 70 percent of the buttons for clothes made in China. In Wuyi, I asked some bystanders what the local product was. A man reached into his pocket and pulled out three playing cards—queens, all of them. The city manufactures more than one billion decks a year. Datang township makes one-third of the world's socks. Songxia produces 350 million umbrellas every year. Table tennis paddles come from Shangguan; Fenshui turns out pens; Xiaxie does jungle gyms. Forty percent of the world's neckties are made in Shengzhou.
... That's one weakness of the Wenzhou Model. Entrepreneurs produce goods that require little capital and low technology, which makes it easy for neighbors to jump in. Boss Wang, the uncle, had slipped into the same pattern. Previously, he had manufactured the steel underwire for women's brassieres, and his profits had dropped steadily. When the two men joined forces, they decided to continue manufacturing underwire, but their goal was to find a more profitable main product.
Fortunately, the average bra is composed of 12 separate components. In a figurative sense, the men began their quest at the bottom, with the underwire, and worked their way up. They thought about thread; they looked at lace; they considered the clasp. But when they reached the top, where tiny 0- and 8-shaped rings adjust the bra straps, they found what they were looking for.
A bra ring consists of steel coated with high-gloss nylon, requiring a specialized manufacturing process. The key equipment is a computer-regulated assembly line, divided into three separate stages, each of which heats the object to over 500 degrees Celsius (930 F). Originally, Europeans produced the rings, but by the early 1990s Taiwan dominated the market. In the middle of that decade, a mainland Chinese company called Daming imported an assembly line.
After its arrival on the mainland, where production costs are much cheaper, "the Machine" essentially minted money. The boss got rich, and then a worker named Liu Hongwei got an idea. Despite his lack of formal education, Liu was a skilled mechanic, who worked closely with the Machine. Meticulously, he memorized the assembly line, piece by piece, and in secret he sketched out blueprints. When the plans were complete, he contacted a second boss at a company called Shangang Keji, in the city of Shantou.
In 1998, Boss Number Two hired Liu and took the blueprints to Qingsui Machinery Manufacture Company, in Guangzhou, which custom-built the assembly line. Initially, the new Machine didn't work—nobody's memory is perfect, after all—but two months of adjustments solved the problems. Shangang Keji began producing bra rings, but then Liu found Boss Number Three, at a company called Jinde. Every time Liu jumped, he demanded money for his blueprints and expertise; some believe he made as much as $20,000.
Without knowing it, the man was following a path blazed by other societies that had also experienced sudden manufacturing booms. In 1810, a wealthy American named Francis Cabot Lowell traveled to England, where he used his connections to tour the world's premier textile mills. British law forbade the export of machinery or blueprints, but Lowell had an excellent memory. He returned to the United States, where, in the words of his business partner, he re-invented the Cartwright loom. Lowell became an American hero, with a Massachusetts factory town named in his honor.
... New apartment complexes were rising all around Lishui, and one of the biggest was the Jiangbin development. Formerly, the 16.5 acres (6.7 hectares) had belonged to the village of Xiahe, but in 2000 the city government bought the land-use rights for one million dollars. Three years later, Lishui flipped the land to Yintai Real Estate for 37 million dollars. Given that corruption is endemic in Chinese real estate, the actual price may have been even higher.
In such an environment, everybody gambles on growth. Most of the city's massive investment in infrastructure had been borrowed from state-owned banks, which also loaned money to the developers—Yintai had borrowed over 28 million dollars for its Jiangbin venture. If the real estate market went cold, the whole system was in trouble, and the central government had recently instituted new laws intended to slow down such expansions. But the money kept pouring in—during the past five years, the average price of a Lishui apartment had risen sixfold.
On paper, it looked untenable, but the Chinese economic and social environment is unlike anything else in the world. Real estate laws are skewed in the government's favor, and migration and the export economy create a constant demand for expanding cities. After the hard times of the 20th century, the average citizen is willing to tolerate unfairness as long as his living standard improves. In Jiangbin, I met Zhang Qiaoping, whose family had formerly farmed one-third of an acre (0.13 hectare) on the site. The government paid him $15,000 for a plot of land that was worth at least $200,000. Zhang wasn't happy, but he hadn't protested; instead, he invested in a small shop next to the site. Most customers were construction workers. There wasn't much money trickling down to the lowest levels, but Zhang had tapped into enough to support his family.
Some peasants even made it to the top. Yintai is owned by the Ji family, whose patriarch had been a farmer before engaging in small-scale construction work in the 1980s. Eventually, he expanded into real estate, and now his three sons help manage the company. ...
A lot more within the link.
IMF Loans and TB
I had been sitting on these for a while now: Study links rise in tuberculosis in post-communist countries to IMF loans. (See also SciAm.) The discussion within the forum is farily interesting as well. My first reaction was similar to Steve Kass but when I looked at the study I was fairly impressed. The effect sizes were large and it potentially had the implication that adding more covariates would do little to dampen the effect sizes.
1. I would have been more comfortable seeing some kind of Extreme Bounds Analysis like Levine and Renelt. It's hard not to come to the conclusion that the authors picked the specification that resulted in a large effect size otherwise.
2. I'm surprised they were not able to control for health expenditures directly. DOTs coverage, number of physicians per capita and government spending might have been affected by IMF programs but I think I'd prefer to see a direct control with health expenditure spending. (This is all part of sensitivity analysis anyway so they might as well have put it in.)
3. The problem with determining causality is that even though these indicators move in the direction that impacts TB mortality the analyst still has to separate out the effects of the IMF program and the effects without the IMF program. These countries went to the IMF because of some kind of fiscal or exchange rate crisis and even if they had not gone to the IMF it is hard to establish that the indicators would have remained unchanged. For instance, if country A decreased government expenditures it is unclear whether this can be attributed to the IMF program per se or whether it was a result of having experienced some kind of crisis. I don't think the authors did a good job establishing causality.
While they were able to make a comparison of countries with an IMF program versus those without an IMF program, the correct comparison is one of countries in crisis with an IMF program and countries in crisis without IMF program. So, if country A is in a downward trend and then has to resort to using the IMF, it is possible that some of the indicators would have been on a downward trend as well and it's hard to see how to separate out the two with a fixed effects regression. Also, the fact that there is a trend or persistence in these variables might indicate that there is some serial correlation in the errors.
4. I was also a little concerned with some of the quality of the data. I would have thought mortality would be very accurately measured but in some countries like the Czech Republic for instance (see the link to Steve Kass) there is literally no change annually which means mortality rate was identical every year. My first reaction is that some bureaucrat just entered the previous year's number for reporting purposes. But comments indicate that TB is closely monitored so I must say I'm a little perplexed because it seems like such a coincidence for the proportion of deaths to be the same every year. Then again, we have to deal with what we have for data.
5. Overall I had some doubts about the robustness of the results but I thought the findings were interesting all the same. I think it calls for deeper investigation via interactions and mediator/moderator effects. (Yes, someone please give me a grant for this!)
In any case, I sat on this for awhile thinking I could get some research out of it and here's a preliminary abstract:
Stuckler, King and Basu (2008) show that post communist countries who have been in IMF programs have experienced significantly worse tuberculosis outcomes. Their fndings are robust to inclusions of various covariates and the effect sizes large. This paper explores the relationship between IMF programs and tuberculosis mortality using longitudinal methods. Specifically, the errors from a fixed effects regression are assumed to have an autoregressive pattern over time. Once these errors are controlled the relationship between IMF programs and tuberculosis
outcomes is no longer as robust.
Note, I remain purposely vague and technical here just because I hate being wrong.
1. I would have been more comfortable seeing some kind of Extreme Bounds Analysis like Levine and Renelt. It's hard not to come to the conclusion that the authors picked the specification that resulted in a large effect size otherwise.
2. I'm surprised they were not able to control for health expenditures directly. DOTs coverage, number of physicians per capita and government spending might have been affected by IMF programs but I think I'd prefer to see a direct control with health expenditure spending. (This is all part of sensitivity analysis anyway so they might as well have put it in.)
3. The problem with determining causality is that even though these indicators move in the direction that impacts TB mortality the analyst still has to separate out the effects of the IMF program and the effects without the IMF program. These countries went to the IMF because of some kind of fiscal or exchange rate crisis and even if they had not gone to the IMF it is hard to establish that the indicators would have remained unchanged. For instance, if country A decreased government expenditures it is unclear whether this can be attributed to the IMF program per se or whether it was a result of having experienced some kind of crisis. I don't think the authors did a good job establishing causality.
While they were able to make a comparison of countries with an IMF program versus those without an IMF program, the correct comparison is one of countries in crisis with an IMF program and countries in crisis without IMF program. So, if country A is in a downward trend and then has to resort to using the IMF, it is possible that some of the indicators would have been on a downward trend as well and it's hard to see how to separate out the two with a fixed effects regression. Also, the fact that there is a trend or persistence in these variables might indicate that there is some serial correlation in the errors.
4. I was also a little concerned with some of the quality of the data. I would have thought mortality would be very accurately measured but in some countries like the Czech Republic for instance (see the link to Steve Kass) there is literally no change annually which means mortality rate was identical every year. My first reaction is that some bureaucrat just entered the previous year's number for reporting purposes. But comments indicate that TB is closely monitored so I must say I'm a little perplexed because it seems like such a coincidence for the proportion of deaths to be the same every year. Then again, we have to deal with what we have for data.
5. Overall I had some doubts about the robustness of the results but I thought the findings were interesting all the same. I think it calls for deeper investigation via interactions and mediator/moderator effects. (Yes, someone please give me a grant for this!)
In any case, I sat on this for awhile thinking I could get some research out of it and here's a preliminary abstract:
Stuckler, King and Basu (2008) show that post communist countries who have been in IMF programs have experienced significantly worse tuberculosis outcomes. Their fndings are robust to inclusions of various covariates and the effect sizes large. This paper explores the relationship between IMF programs and tuberculosis mortality using longitudinal methods. Specifically, the errors from a fixed effects regression are assumed to have an autoregressive pattern over time. Once these errors are controlled the relationship between IMF programs and tuberculosis
outcomes is no longer as robust.
Note, I remain purposely vague and technical here just because I hate being wrong.
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