Saturday, March 31, 2007

FDI and Economic Growth

It would be remiss for me not to discuss the project I just completed for Econometrics, in which i analyzed the impact of foreign direct investment (FDI) on economic growth in Sub-Saharan Africa(SSA).

Using a panel data set primarily collated from the
Penn World Tables and the UN World Investment Report, I constructed several models using other exogenous variables typical of the growth literature - education and health proxies, indicators of political stability and freedom, and so forth.

Estimation was carried out through the powers of SHAZAM as a pooled set (since the time dimension was only 5 years and the panel unbalanced due to missing data entries), and also through bootstrapping the panel, and both two and three-stage least squares.

Results revealed that the coefficient for FDI was subject to extreme variability between estimation methods, and its magnitude was determined almost wholly by outliers. Removing these from the set resulted in magnitudes of effectively zero (though still significant at 5%), as verified by bootstrapping. Such magnitudes were also witnessed for 2SLS and 3SLS, while retaining the influential observations.

As such, given the likely endogenity of investment (investment likely grows in response to growth and vice versa), the feedback relationship (and likely measurement errors when dealing with SSA) is most accurately modelled using the systems techniques.

In conclusion, foreign investment is not a major contribution towards SSA growth. What the countries do for themselves - as represented, for example, by the indicators of political stability - is much more effective than reliance on external forces when playing catchup in the standard of living game.

Tuesday, March 27, 2007

Summer

Hello Andrew,I tried to reach you by phone, but there was no answer and no possibility to leave a message. I want to let you know that we would be pleased to offer you a coop placement at HRSDC's Labour Market Policy Directorate for Summer 2007. I'd like to invite you to contact me to discuss the details of it, should you accept the offer. We would be keen to offer you a placement from mid-April to end of August if that suited you.

Job Title: Junior Policy Analyst
Department: Human Resources and Social Development Canada
Government of Canada
Location: Gatineau, QC (National Capital Region)
Organization: Labour Market Policy Directorate
Strategic Policy Branch, HRSDC


Sorry to leave you without economic insight, but this'll have to do.

Saturday, March 24, 2007

Beijing 2008

Watching the world diving championships or somesuch today, watching the Chinese clean up, it occured to me that the Chinese representatives never seem to repeat their accomplishments. Presumably, this relates to their hosting of the Olympics in 2008 - Chinese athletes don't have quite the freedom of their Western counterparts.

More likely, it's that China is carefully grooming athletes for 2008, allowing them one year on the international circuit to gain experience. In 2008, we could thus expect five or six years worth of top-drawer athletes to materialize under the home country's privilege and do quite a number on the medal count.

Wikipedia informs me that some 969 medals were handed out in 2004. Barring any new additions, and presuming that the number of ties is maintained, I'd take bets today on 200 Chinese medals.

At heart, this boils down to a demonstration of the power of authoritarian government and demographics. Chinese leaders aren't democratically elected, and are free to mobilize their country's economic resources towards points that will make an international splash if they so choose. Combine this with a much larger population base, and a wider pool of athletes to choose from, and you've got something going.

The logical interjection would be to argue the EU and US have vastly more money at their disposal. But it's a question of priorities. Such leaders have to deal with domestic issues, face peer criticism. The Chinese Politburo has no such constraints.

In all, if my expected Chinese medal count does materialize, it will simply be a testament to the power of authority to achieve grand gestures. I'm not advocating this as a good thing, however - and I suspect there are hundreds of millions of impoverished Chinese peasants who might agree with me.

Thursday, March 22, 2007

Followup on Christmas

The Amazing Story of William McAdoo

I've recieved fan reviews on my take on Christmas, along the lines of "But holiday spending supports the retail sector!" Sure it does, at the expense of other industries.

Suppose you don't empty your bank account for Christmas. In that case, the bank would've taken the money and invested it in whatever it thought possible. It's an economic principle that in a simple economy, investment equals savings. So instead of going to Wal-Mart, the bank loans your money to someone starting up a business, say, or invests in some project.

Personally, I know which one I think is better for the economy in the long run. (We'll avoid talking about over-saving since the savings rate for Canada is negative - we spend more than we earn; and the amount of junk mail I recieve for credit consolidation services. (This actually leads into a discussion of the world's cheap money, check back for more on that next time.)

Money is a flow. Savings aren't bad. Christmas, however, is.

Monday, March 12, 2007

Christmas

This has been a favourite topic of mine for some time, and not only because I can't stand buying gifts.

In what I consider a seminal paper, Joel Waldfogel of Yale University examines the total value lost by giving gifts. Allow me to reprint his conclusion verbatim: (American Economic Review, 1993, vol. 83, issue 5, pages 1328-36 )

"Estimates in this paper indicate that between a tenth and a third of the value of holiday gifts is destroyed by gift-giving. Because average losses of 10% hold for all gift price ranges in the sample ... the deadweight losses arising from holiday gift-giving may be large: holiday gift expenditures in 1992 totaled $38 billion according to one estimate."

Now, adjust for inflation (2.5%) and annual increases in holiday expenditures (5%), take 15% as a cautious approximation between 10% and a third, and presto: $16 billion (US) destroyed by the 2006 holiday season.

Now, I'm not calling for an end to sentimentality. Far from it. What I would love to see, however, is the end of the social mandate for ridiculous gifting ending. My family personally receives a large array of Christmas-themed junk (fruitcake, anyone?) from people we barely know and are thus forced to reciprocate with equally useless gifts.

Sure, pick up something nice for your significant other. But most people would rather you spend some time with them over the holidays as opposed to you forcing your way into the malls on the 23rd to find them some chocolates.

Besides, if they wouldn't want to spend the time, you don't need to get them anything anyway. Regardless, I didn't buy a single Christmas present for 2006. I challenge you to if not match, approach this number. We’ll all be richer for it.

Sunday, March 11, 2007

Further Provincial Oil Thought







I just think these graphs are ridiculously interesting. Again courtesy of Wade Locke, via Economics 4090 at MUN.

Links to high resolution:

Wednesday, March 7, 2007

Ethical Investing

Let's make it clear, as has been done previously, I'm sure, that the marketplace can be an effective way to make your personal morals felt. However, the stock market is not the right soapbox.

Suppose that the world can be split into two companies. Sunshine Inc. manufactures rainbows, solar panels, and organic produce. Greedy Corp. runs a bunch of casinos, distilleries, and cigarette plants. Both make one million in profit each year. Now, further assume (economists are good at assuming) that the entire world decides to vote with their dollar, and everybody, in a fit of conscience, sells their Greedy Corp. shares and invests in Sunshine Inc.

So, the price of Sunshine rockets through the roof. Sure, some of the original holders make capital gains, but we're going to look at the long run. Everyone is going to have to share that one million in profit, so divide through by the number of investors in the world, and how rich they are compared to you, and I'll be impressed if you squeeze a red cent.

Now, I have no moral conscience, and go to buy shares in Greedy Corp. Since nobody else will buy them, I can buy them all essentially for free. As the sole shareholder, I reap the full million earned each year by Greedy Corp.

So, the result of everyone on the planet playing the role of ethical investor has not only eliminated all the returns to ethical investing, but massively increased the return to being greedy and socially irresponsible. And I'm going to take my million bucks every time the world wants to be nice.

Moral is, stocks aren't a place to make your opinions felt. Vote with your wallet, not with your portfolio.

Thursday, March 1, 2007

Nature of the Beast

"You haven't told me yet," said Lady Nuttal, "what it is your fiance does for a living."

"He's an econometrician," replied Lamia, with an annoying sense of being on the defensive. Lady Nuttal was obviously taken aback. It had not occurred to her that econometricians entered into normal social relationships. The species, she would have surmised, was perpetuated in some collateral manner, like mules.

"But Aunt Sara, it's a very interesting profession," said Lamia warmly.

"I don't doubt it," said her aunt, who obviously doubted it very much. "To express anything important in mere figures is so plainly impossible that there must be endless scope for well-paid advice on how to do it. But don't you think that life with an econometrician would be rather, shall we say, humdrum?"

Lamia was silent. She felt reluctant to discuss the surprising depth of emotional possibility which she had discovered below Edward's numerical veneer.

"It's not the figures themselves," she said finally. "It's what you do with them that matters."

From
Kennedy's Guide to Econometrics
(Attributed to K.A.C. Manderville, The Undoing of Lamia Gurdleneck)

Disconnect

Economics occupies a unique role in the array of sciences in that no other science suffers from such a chasm between the academic literature and the public discussion. Now, obviously, there isn't a whole lot of public discussion in chemistry or science, but there certainly is in pyschology, and I tend to see a lot of journal references in those debates.

Economics, not so. The premier journals - American Economic Review, Quarterly Journal of Economics, are dense texts filled with mathematical notation. Grad studies in the dismal science discuss metric spaces and topology. Public debate is often characterized by politicians spouting on about building bridges or the restoration of lost jobs, with scant reference to economic theory.


Regression analysis, however, has got to take the cake. How many times is the average Canadian presented with a nicely drawn line piercing a scatter diagram? Or told that results of a survey are accurate to 3%, 19 times out of 20? The multiude of assumptions that are made to invoke statistical results, the amount of adjustment and transformation that the data has been subjected to is beyond belief. It is a truism of econometric practice that if the data are tortured enough, the desired result will follow. What's worse is that the econometric theory is often ignored in conducting said analysis, creating results that are horribly biased.

A different split, but a disconnect nonetheless, has existed in my academic career. In the classroom, economics is portrayed almost exclusively through graphs. Pick up a journal, and the odds you'll find a graph in a theoretical article? Slim.

I just can't reconcile why academic economics is so removed from a public that talks at no end about economics. We've tried some rapprochement, most notably through the central banks, interest rates, and inflation. But in every other sphere of human activity - and human activity is economic activity - people with no formal training seem perfectly content to prattle on about cost-benefit analysis, government budgets, and especially unemployment and related fiscal policy.

As much as I can't explain the split, I can bemoan it. It's time to get professionals into the public sphere.