Does Poverty Cause Terrorism?

With the identities of the terrorists in the unsuccessful car bombings in England revealed as doctors, people start to have doubts about the conventional wisdom: Does Poverty Cause Terrorism.

A scholar said no, read more here.

Resale Price Maintainence, Per Se Illegal No More

In the US, that is. Here is the link in NYT. HT to Arnold Kling at the Econlog for the pointer.

BTW, the evidence of liberal bias in media is obvious in this line taken from the story:

The new rule is considerably more favorable to defendants.

A classical liberal type writer would say:

The new rule helps prevent the government from inflicting harm on efficiency-enhancing business practices.

Wondering what HK competition law's stance towards RPM would be, we would know soon.

Hayek + Steven Cheung = ?

If you want to know what a combination of Hayekian and Cheungian approaches to economics would look like, get this book. You wouldn't be disappointed. The author of this work is Yeung Wai-hong, a classical liberal.

Sorry folks, the book is available in Chinese only. It should be available at bookstores, big and small, by now. Get it while stock lasts! Good reading.

China vs India

In 2040, the Chinese economy will reach $123 trillion, or nearly three times the output of the entire globe in the year 2000, despite the influence of several potential political and economic constraints. India's economy will also continue to grow, although significant constraints (both political and economic) will keep it from reaching China's levels.

That is from Nobel Prize winner Bob Fogel, more here.

FDR

In his first inaugural address, Roosevelt spoke of a primary goal: "to put people to work." Unemployment stood at 20% in 1937, five years into the New Deal. As for the Dow, it did not come back to its 1929 level until the 1950s. International factors and monetary errors cannot entirely account for these abysmal showings...

At some points Roosevelt seemed to understand the need to counter deflation. But his method for doing so generated a whole new set of uncertainties. Roosevelt personally experimented with the currency -- one day, in bed, he raised the gold price by 21 cents. When Henry Morgenthau, who would shortly become Treasury Secretary, asked him why, Roosevelt said that "it's a lucky number, because it's three times seven."...

The most useful economic philosophy for understanding what went on is not Keynesianism. It is the public choice theory of James Buchanan and others, which says that government is a competitor that will annihilate what comes in its path.

That's Amity Shlaes in WSJ, more here. Her book is just out and yes it is on the 1930s. Get it here.

Austrians from Basel?

Greg Ip at WSJ wrote that Bill White who works at the Bank of International Settlements in Basel is a fellow follower of Austrian Economics, more here. I disagree.

If you really want to learn what Austrian macroeconomics is all about, start here.

The Funniest Line I Have Read Today

Paris Hilton: "One Economics, Many Recipes is a fascinating read. It is the perfect book to keep me in touch with the real world during my stay at the L.A. county jail. I cannot imagine doing without it."

That's from Dani Rodrik, here is the post.

Best Line I have Read Today

"In theory, democracy is a bulwark against socially harmful policies, but in practice it gives them a safe harbor."

That is from Bryan Caplan's brilliant book, The Myth of the Rational Voter.

Here is a review of the book from the Economist magazine.

Chicago Influence on Antitrust

Justice Stevens, writing for the majority, simply relied on the age of the relevant precedents: "It is far too late in the history of our antitrust jurisprudence to question the proposition that certain tying arrangements pose an acceptable risk of stifling competition and are therefore unreasonable per se."

To an economist, this echoes the medieval preference for Aristotle over experiment based on Aristotle's antiquity.

That is from Richard Schmalensee's Thoughts on the Chicago Legacy in the U.S. Antitrust.
Richard is of course the Dean of MIT's Sloan School of Management.

Here is Richard's new book coauthored with David Evans. I got it at HK's Commercial Press bookstore in Causeway.

A New Look at Financial Globalisation

Four heavy weights combine efforts in tackling the issue of financial globalization. The site where this commentary is posted is a new one called Vox, where a bunch of European economists contribute. HT to David Warsh for the pointer.

Some new insights from the piece:

The notion that financial globalisation influences growth mainly through indirect channels has powerful implications for an empirical analysis of its benefits. Building institutions, enhancing market discipline, and deepening the financial sector take time, as does the realisation of growth benefits from such channels. This may explain why, over relatively short periods, it seems much easier to detect the costs but not the benefits of financial globalisation. More fundamentally, even at long horizons, it may be difficult to detect the productivity-enhancing benefits of financial globalisation in empirical work if one includes structural, institutional, and macroeconomic policy variables in cross-country regressions that attempt to explain growth. After all, it is through these very channels that financial integration generates growth benefits.

Bottom line:

There is, however, unlikely to be a uniform approach to opening the capital account that will work well for all countries.

Read the whole thing here.

HK Needs Better Competition Law Lawyers, NOW

Peter McMillan up at HK Competition Law brings my attention to a submission made by the HK Law Society in response to the government's consultation on whether HK needs a competition law conducted earlier.

I am particularly disturbed by the writer's lack of understanding of basic industrial organization theory. For example, the author argued that the MTR and KCR merger is OK although it would reduce competition after the merger as long as lower prices are expected post merger.

1) first of all, let's get the facts right. MTR (HK's underground railway) and KCR are pretty much STATE-OWNED ENTERPRISE though the former has a bit of shares listed on the HK stock exchange. Check this out. The government own's over 75% of the listed MTR and the KCR is a plain vanilla SOE, period.

So the reason why you get lower prices after merger (which reduces competition) is that it is a political decision, not an economic one.

2) Failing to see this, the author, or whoever is writing the submission for the Law Society, misapplied the efficency argument as espoused by UC Berkeley economist and one of the pioneer of the New Institution Economics Oliver Williamson which claims that sometimes merger which reduces competition might be a good thing because of improved production efficiency (an increase in producer surplus if you really insist on technical jargon). But the Willamsonian tradeoff as it is known in the literature does entail a RISE IN PRICES, NOT LOWERED ONES post merger. Otherwise, there wouldn't be a tradeoff, wouldn't it?

The bottomline of the Williamsonian tradeoff is that merger which reduces competition should be allowed as long as the loss in the consumer welfare post merger is offse by efficiency savings in production costs.

3) More ridiculous and laughable is that the author actually used the MTR-KCR merger as sort of a JUSTIFICATOIN for the anti-competitive nature of the lawyers club!

Book Promo for My Mentor

My thesis advisor Richard Wagner, Harris professor of economics at George Mason University, has a new book out called Fiscal Sociology and the Theory of Public Finance.

The preface and chapter one are available here.

Amazing Scientific Fact of the Day

"According to Mr. Bland, aircraft manufacturers have been collecting data since the 1970s to determine the maximum stress that planes experience in turbulence, and they then design aircraft to withstand one and a half times that. In fact, a video clip available on YouTube shows Boeing’s test of the wing of a 777; using cables, the wing is bent upward about 24 feet at the tip before it breaks."

That's from a NYT story for those who have to step on the plane a lot.

Can Open Borders Help the World's Poor?

Lant Pritchett said yes, here is a profile of Lant in NYT. Lant was with the World Bank before joining Harvard. HT to Marginal Revolution for the pointer.

Here's Lant's latest book Let Their People Come covered in the NYT story. In the eyes of Larry Summers, the "book may be like Milton Friedman's "Capitalism and Freedom,"which seemed "lunatic in the moment" but won converts with time".

FDI and Judiciary Independence

Wu Bangguo, head of National People's Congress (China's legislature) made a few remarks on the relationship between the central government and HK Special Administrative Region the other day. See this story here.

Former Chief Secretary for Administration Anson Chan warned that if the central goverment and the HK government are not going to come out to clarify whether Wu's remarks imply that Beijing is having a rethink on HK's judiciary independence, this might have adversely affect investors' confidence HK. Read more here.

If I understand Anson's logic correctly, she is trying to argue that investors would likely leave HK or at least not increase their investments here if we don't have judiciary independence any more.

Really?

If that were true, you would expect say democratic India to have far more FDI than say our motherland China then. The reality is that, China, a place where judiciary independence is at best a work in progress, is a FDI magnet and China's FDI flows dwarf those of India's. See the relevant charts here.

UCLA Economic Historian Ken Sokoloff Passed Away

The economics profession lost another star on 21 May 2007. Ken Sokoloff, an economic historian at UCLA passed away on that day. Here's an obituary at NYT, here's David Warsh's take on what happens to UCLA economics department using Ken's death as the lead. Here is more background info on Ken.

Ken at least has one Chinese student, his name is Zhou Qiren (周其仁)who is now a professor of economics at Peking University. Ken served as his Ph.D. thesis adviser together with retired UCLA Chinese historian Philip Huang.

Shocking, Shocking, Shocking

According to Ed Prescott, Nobel Prize winner in economics:

"Dr Prescott compared Hong Kong's lack of an effective competition policy to the US economic experience in the 1930s. He said deliberate cartelisation in the US "was about the only candidate we have for what led to the Great Depression".

Dr Prescott said the introduction of an anti-trust policy in 1939 helped lead to the pre-second world war boom in the US economy.

"Cartelisation depresses productivity and gives huge wages to half the population while the other half of the population misses out," he said."

Read more in today's SCMP.

Cartelisation, the main culprit of the great depression!? And antitrust law helped save the day for the US economy!?

Wondering what Milton Friedman would say about Ed's remarks. But then what do you expect, Ed is a real business cycle guy.

Yo, pro, then would you please explain what is so special about HK which makes it avert depression like what happened in the US in the 1930 without a competition law? And what account for its economic prosperity in the past decades instead of stagnation as suggested by you which would accompany a place without a competition law?

More Reading for this Summer

(1) A History of the Theory of Investment.

(2) Capital Ideas Evolving.

(3) Just in case you like to read more stuff by Jeff Sachs on development, get this.

(4) For those who are interested in antitrust, this probably is indispensable.

(5) Want to have fun with basic introductory economics? Get this then. John Lott was a student of Armen Alchian at UCLA. For those who are not familiar with John's work, John has written an excellent book some time ago on why theories of predatory pricing are not supported by facts, get it here.

China Balance Sheet Project

One can certainly get a sense of the importance of China in US foreign policy by the amount of attention and resources think-tanks in DC devoted on China-related issues.

Here is the website of the China Balance-Sheet project.

File This Under Shoddy Reporting

A small scale rally in Macao (now part of China) on the first of May resulted in scuffling between policemen and the participants of the rally. Read about what happened here.

After the incident, most reports, stories, and commentaries cited corruption as one of the main reasons why it happened. See an example here. (For those who do not understand Chinese, scroll down and you'll see an English translation of the piece).

But is corruption really the culprit?

Let's check out the facts.

According to Transparency International , Macao ranked 26 out of a total of 163 in its latest Corruption Perception Index (2006). The higher the ranking a place got, the less corrupt a place was. US got a ranking of 20 while HK was placed at 15. In fact, Macao has a far cleaner government according to that index compared with countries like Taiwan (34 place) and South Korea (42 place). Check out the latest index here. And if you check out the World Bank's Governance Indicators, the results are not that far off from the CPI index put out by the Transparency International.

If Macao indeed has a relatively clean government compared with others (this is a very important qualifier, for we are not talking in relative not absolute terms here), then why so many reporters, analysts and pundits jumped to the conclusion that corruption was one of the major culprits which caused the May day incidient there?

I have an answer, but first let you tell me what do you think first! File this under Shoddy Reporting.

No Free Competition Law

A lot of people who are in favor of the competition law fall into the trap of comparing apples and oranges without knowing it.

They think if the market weren't working (equivalent to market imperfection), the government needs to do something about it (or correcting the wrongs in the market if you like). What they forget to inform us is that they are implicitly assuming that doing something about market imperfection is costless. In fact, it does cost us, a lot!

Here is one instance where the Supreme Court in the US is trying to lower the costs of running the country's competition law.

Competition Law Hurts Competitiveness

Awhile back, I have a post lamenting the Consumer Council's report advocating competition law in HK has committed the error of mistaking correlation as causality.

I then find out a reader at HK Competition Law , which has a link to my post, has made some not so friendly remarks about my post.

People have different views, that's fine with me. But that should not preclude exchange of ideas in a civilized manner, at least that's what I believe. A case in point, the gentleman up at HK Competition Law holds the view that there should be a place for competition law in HK. I don't. But that difference in opinions has not prevented the conduct of civilized exchanges between us.

The reader then went on challenging me to show him research which indicates how competition law blunts competitiveness. I thought it is a no-brainer. At least economic theory would tell us such might be the case. Instead of wasting readers' time on going through detailed economic anaylsis, I would recommend you readers to read this open letter first. If you decide to have more stuff to read after finish it, let me know.

The bottomline of the letter (and it is signed by 240 economists and let me also disclose that a couple of these economists are my former professors and Ph.D. dissertation adviser):

"Many of these cases are based on speculation about some vaguely specified consumer harm in some unspecified future, and many of the proposed interventions will weaken successful U.S. firms and impede their competitiveness abroad."

No Quick Fix for Yuan

Matt Slaughter at Dartmouth has an excellent oped in WSJ, here's the bottom line:

"Put it this way: In a counter-factual world where over the past decade China allowed the yuan to float against the dollar, the U.S. would still have run a large and growing trade deficit with China. The real economic forces of comparative advantage that drive trade flows operate regardless of which nominal prices central banks choose to fix."

More here.

India Fact of the Day

1) According to the Planning Commission of India, 600 million people — roughly half the population — are off the electric grid.

2) Transparency International estimated in 2005 that Indians paid $480 million in bribes to put in new connections or correct bills.

Read more here.

What's missing in the story is about the price of electricity. Who has the final say on the electricity price in the face of chronic shortfall of supply to meet demand?

More Powerful Computers, Less Crime?!

From NYT:

"RODNEY MONROE, the police chief in Richmond, Va., describes himself as a lifelong cop whose expertise is in fighting street crime, not in software. His own Web browsing, he says, mostly involves checking golf scores.

But shortly after he became chief in 2005, a crime analyst who had retired from the force convinced him to try some clever software. The programs cull through information that the department already collects, like “911” and police reports, but add new streams of data — about neighborhood demographics and payday schedules, for example, or about weather, traffic patterns and sports events — to try to predict where crimes might occur."

Here's more.

Wondering whether such technology could be utilized in warfare as well so that military depolyment could be made more efficient. But what if your opponents do the same? That seems to be a major difference between the use of such technology in combating crime and the use of such technology in war. The spending and use of such technology is asymmetric in the case of cops vs gangsters (ie cops have more resources to spend on such technological devices than the bad guys) whereas such may not be the case in war situation.

Special Interest Legislation is Popular?!

Bottomline:

"Special-interest" legislation is popular.

That is from Bryan Caplan's oped in WSJ, read the whole thing here.

Market for Everything, Chinese Style

"In a stunning illustration of how the market economy has overtaken communism, Party members were able to purchase generic self-criticisms from commercial Web sites capitalizing on the campaign, which in turn necessitated a new rule that required self-criticisms in handwritten form."

This is from p. 48 of Susan Shirk's China: Fragile Superpower.

Janet Yellen on Chinese Economy

For all of those who have doubts about the high investment rate in China and worry about the quality of those investments (and these investments' impact on bank soundness):

..."Economists with whom we met at some multilateral institutions have observed that a substantial share of investment is financed not by banks but by firms from their own internal funds; in other words, enterprise saving is very high. This suggests that the high pace of investment poses fewer risks to the banking sector than it might otherwise..."

This is from Janet Yellen at the San Francisco Fed, read the whole thing here. Janet of course is the wife of Nobel Prize winner George Akerlof.

Father of Organizational Economics Passed Away

This is from NYT:

"Alfred D. Chandler Jr., an economic historian who revolutionized the writing of business history, shunning the old debate about whether tycoons are good or bad, and instead arguing persuasively in almost two dozen books that it was the emergence of professional management that propelled modern capitalism, died on May 9 in Cambridge, Mass. He was 88."

Read more here.

As my friend Kurt Schuler told me long ago, Chandler deserves a Noble Prize in economics.
Here is David Warsh on Chandler. Major works of Chandler could be bought here.

David Laidler on Milton Friedman

Here is the abstract:

Milton Friedman is rivaled only by John Maynard Keynes as the most influentialpolitical economists of the 20th Century. His approach was that of a classical liberal, rather thana conservative, though this put him on the political right in the United States.

Friedman’s work demands to be evaluated all of a piece, but his outstandingly important technical contributions toeconomics influenced the development of the discipline in ways that extended far beyond thepurview of any particular political agenda.

Read more here.

Interesting Quick Read

Bob Frank on what needs to be done to dissolve opposition to a road pricing scheme in the Big Apple. Here is info on Bob's forthcoming book.

Bob Hahn and Paul Tetlock urging the US government to cut down on regulations in order to promote prediction markets.

Paul Rubin on Folk Economics. HT to Greg Mankiw for the point.

Why Demand for Signalling Surged?

Gary Becker and Kevin Murphy, two of the best minds in labor economics, contributed an article on the cause of rising income inequality in the US in the latest issue of The American, read it here.

Becker and Murphy attribute the rising income gap as an outcome of the increasing demand for skilled labor (with skilled labor defined as those who get more years of schooling). As I am a believer of the signalling theory of education, the puzzle is why there is a surge in the demand for more signalling among job seekers? Is it the changing structure of the economy (computer, internet...service sector growth in general)? What is so special about an investment bank job or a computer coding job which requires more signalling on the part of job seekers' type compared with say a car manufacturing job in Detriot? I don't have the answer, do you?

Summer Reading

Summer is quick approaching, here is a list of books that I would like to get and read:

1) Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity
by Bill Baumol, Bob Litan and Carl J. Schramm.

Let's see what one of the reviewers said about this book:

"In our lifetimes, humans passed a remarkable milestone. Most people now live in a capitalist economy. This is not, however, the end of history. As the authors of this path breaking book show, there are several distinctly different types of capitalism and it takes a mixture of two of these types to get all the economic, social, and political benefits that capitalism affords."—Paul M. Romer, STANCO 25 Professor of Economics in the Graduate School of Business at Stanford University

Here's another.


2) The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It
by Paul Collier

Here's what Larry Summers has to say about the book:

"A persuasive and important challenge to current thinking on development."

3) Finally, a popular economics book (I guess it is anyway) by my former professor Tyler Cowen, read more here. I have heard Tyler and Alex, his co-blogger at Marginal Revolution are working on a macro textbook! That is something that we should all looking forward to.

Hong Kong's Health Care Reform: The Next Battleground

With the government's mind set on introducing a competition law, the next policy battle is definitely on how HK should reform its medical sector going forward.

Indeed, in the Chief Executive election held earlier, candidates debated on this very topic. Read more here.

In the marketplace for ideas, it seems far more people in Hong Kong agree that the government should continue to play a prominent role in the medical sector than those who oppose it. As a result, the issue of whether we would like to see more government involvement or less is not much discussed. The focus of the debate is mostly concentrated on, given the level of government involvment, how should one go ahead and make the system more sustainable.

Personally, I am more interested in the first question. My position is that the level of government involvement in the sector should be reduced. And for those readers in Hong Kong who would like to read more on this topic, I would recommend:

1) The Cure: How Capitalism Can Save American Health Care by David Gratzer. The late Milton Friedman wrote a foreword for David's book.

2) Crisis of Abundance by Arnold Kling. Arnold is the co-blogger up at Econlog.

Book Review of the Day

"Every year there are three or four non-fiction books that have to be read, and this is one of them."

Guess which book Tyler Cowen, my former professor, is referring to in the above quote.
Read the whole review here.

Consumer Protection Laws Actually Harm Consumers

As the enactment of a competition law seems like a forgone conclusion, some in HK have started contemplating whether we would need a consumer protection law. Read more here.

Let's take a close look of an example of how one government agency in the name of protecting patients (consumers of drugs) actually harms them.

FDA in the US rejected Genasense, a new drug developed by a small company Genta to treat patients with CLL. Genat filed an appeal in early April.

And according to an oped in WSJ:

"Genta's announcement of the filing included a statement from one of the expert physicians: "It is puzzling that they would deny approval to a drug that met its primary and key secondary endpoint, especially since these findings were observed in the only randomized controlled trial that has ever been conducted in patients with relapsed CLL."

The FDA's handling of Genasense lays bare the all too common, aggressive incompetence of the FDA's cancer-drug division and should lead to an immediate examination of its policies and leadership, followed by swift corrective action. As for the FDA's belief that their power to control us and even deny us the pursuit of life itself is unlimited under the Constitution, we can only hope the appeals court disagrees. An agency that blocks progress against deadly diseases -- while arguing that its power to do so is above challenge -- is in dire need of a court supervised review."

Read the whole thing here.

Well, why I should I trust this writer you say. Sure, so you want scientific evidence on why the costs of having a FDA outweigh the benefits. Read this, and decide for yourself whether you still want it afterwards.

The Regulation of Innovation and Economic Growth

The 1st George Mason University Law School and Microsoft Conference on the Law and Economics of Innovation is to be held this coming Friday, take a look at the heavyweights who will attend the conference here.

Papers are downloadable. The papers by Bob Cooter, Daniel Spulber and Joshua Wright are recommended.

Dennis Carlton on Resale Price Maintenance

U of Chicago economist Dennis Carlton, who is now Deputy Assistant Attorney General for Economic Analysis, Antitrust Division of the US DOJ weigned in on the matter of whether RPM should be subject to a rule of reason or per se standard:

"The number of situations in which resale price maintenance can be used as a device to harm all consumers is rather limited—certainly it is understood that RPM can be used to facilitate a dealer or manufacturer cartel. But those situations do not describe the actual uses of RPM very well.

By and large, the evidence shows that resale price maintenance is typically used in ways that one would not characterize as anticompetitive. Therefore, RPM should be judged under a rule of reason standard.

The simple obersvation I make in my textbook is that we don't typically tell a manufacturer how to produce his product, so why should we tell him how to distribute it."

I agree. That's from an interview with professor Carlton, read it here. Professor Carlton's textbook, of course, is a classic and standard reference for all economists working in the field of industrial organization. You can get it here.

What I Have Been Reading

Fragile Superpower: How China's Internal Politics Could Derail Its Peaceful Rise by Susan Shirk at UC San Diego and she was former Deputy Assistant Secretary of State responsible for U.S. relations with China.

Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Capital Markets by Philip Hoffman at Caltech and his coauthors.

A biography on Michael Polanyi.

A book based on lectures of the late John Rawls.

And finally, I am almost done with Albom's third serving, For One More Day. It is certainly better than his second book, The Five People You Meet in Heaven. It is still way, way off compared with his first book Tuesday with Morris.

I still remember vividly the strong emotions that I had while reading Tuesday with Morris. I finished it on a flight from San Francisco back to Washington D.C. after a job interview.

No, I Don't Believe in Consumer Protection Law

Peter up at HK Competition Law asked:

"I'm know that at a macro level we can leave competitive markets to work things out over the longer term, but at the micro level (like you or me as a single consumer entering into a single transaction) is there a need for some protection against unscrupulous businesses? The theory is good, but the reality can be quite different. I know there are problems with law enforcement etc. But as a concept, do you think some consumer protection is a good thing (for instance, mandatory product labelling) or should we not bother?"

Read more of Pete's comments here, and my original post here.

My answer to Pete's question of whether I think there is a place for consumer protection law is NOPE. A lot of studies have been conducted aiming at evaluating the effectiveness of consumer protection regulations and most of them would tell us that the costs of having such law far outweigh the benefits they would bring.

Here is one example:

"Since the 1910s, the Federal Trade Commission has sought to promote truth in advertising. Specifically, it is responsible for preventing deceptive acts or practices in the sale of various products, with particular attention given to food, drugs, and alcohol. In accordance with its regulations that define deceptive practices, the FTC conducts investigations of alleged falseadvertising and can order firms to stop running particular ads.

Peltzman (1981) found that the investigations raised firms’ costs, but itwas unclear whether they enabled consumers to make more informe dchoices that enhanced their welfare."

The above quotation is from p.29 of the excellent book by Brookings scholar Clifford Winston. The title of the book is aptly named as Government Failure vs Market Failure. Read it for free here.

Since I expect readers of this post would read Winton's book themselves, so my response would be brief.

People expect government would do a better job than the market in protecting consumers because they assume:

1) While market imperfections (or what they would label as market failures) are widespread, government operates smoothly without a glitch. This is what Harold Demsetz, a professor of economcis at UCLA, called the nirvana approach to economics in his 1969 piece "Information and Efficiency: Another Viewpoint," Journal of Law and Economics.

2) Government officials are actually out there to serve US and not themselves. So a person who would be a greedy monster if he or she works in the private market would suddenly turn into a saint once he or she joins the government.

I think both of these assumptions are false.

So both theory and evidence reported in empricial studies convince me consumer protection laws have only a very small role to play, if there is any, in our economy.

Informal Finance in China, Less Important than You Think

I have always believed that informal finance serves a very important function in China's growth. Now a paper, an empirical one, forces me to think about it again.

Here is the abstract:

China is often mentioned as a counterexample to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China’s growth.

This paper takes a closer look at firm financing patterns and growth using a database of 2400 Chinese firms. We find that a relatively small percentage of firms in our sample utilize formal bank finance with a much greater reliance on informal sources. However, our results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, we find no evidence that these results arise because of the selection of firms that have access to the formal financial system.

While firms report bank corruption, we do not find evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. We find that an important determinant of access to bank loans is the ability to post collateral, which is in turn a function of firm size, level of fixed assets and firm location.

Our findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.

Read the paper here.

Firms Compete at Multiple Margins

In response to my earlier post on consumer protection law, Peter asked:

"Could the issue be one of the availability and reliability of information in consumer transactions? "

Producers, of course, have more info regarding characteristics of their products compared with consumers. Sellers would be compelled by competition to try the best they could to lure customers. One way to do so, of course, is to compete against in each other in doing the best they could to inform customers about their products.

In other words, competition is multi-dimensional. It entails not only price, quantity and quality, it would include after-sales services like warranties to address the information asymmetry problem as well in producers' bid to draw customers.

Peter also asked:

"Take a law against misleading or deceptive conduct, for instance. We already have such a law in the form of section 7M of the Telecommunications Ordinance, but it only applies to telecommunications licensees. What's your view on the need for/effectiveness of this prohibition in what is a very competitive industry (there are a number of decided cases on the OFTA website www.ofta.gov.hk)? Could it be of greater utility in other industries? "

I would caution against attributing the well-functioning character of the telecom market to that section 7M. One has to bear in mind that once HK starts liberalizing its telecom market, competitive forces are unleashed, and my argument is that these competitive forces would ensure that the information aysmmetry problem would be adequately addressed.

Hence, one should be careful about the reverse causality problem here. That is, the well-functioning of the telecom market as a result of the intense competition introduced after liberalization creates the false impression that the causality runs the other way (ie the smooth working of the market is a consequence of the existence of section 7M in the Telecom Ordinance).

Protection of Consumer Interests, why?

There is a discussion going on up at Hong Kong Competition Law about how HK consumers are not being protected by their government compared with governments elsewhere where consumers protection laws are in place.

Why consumers need protection? Is it not the case that standard economics tells us that a market with sufficient competition will ensure that consumers get what they want at the lowest possible prices?

OK, you respond, sometimes markets might fail because of monopoly and other anti-competitive practices. Hence, leave them alone, markets might be unable to provide consumers with what they want at the lowest possible prices.

Let's assume for a moment that indeed that were the case. So you introduce a competition law, a law supposedly would ensure that markets stay competitive. And let's check how we are doing here. With the markets functioning properly with the help of a competition law, aren't consumers' interests get well taken of already. If so, why we would need another law which supposedly would perform the same function as competition law? That is why need to have another consumer protection law on top of a competition law?

The only argument I can think of for a consumer protection law separate from a competition law is to assume that consumers DO NOT KNOW WHAT WANT. Putting it in another way: While competition can offer them what they want at the best prices and quality, those wants might not be serving their best interests.

I just don't think that is the case. Do you believe that some government lawyers would know better than you do where your real interests lie?

The First Female to Win the J B Clark Award

The American Economic Association announced Friday that Susan Athey, a 36-year-old professor at Harvard University with professional interests ranging from deepest economic theory to Canadian timber auctions, had won the prestigious John Bates Clark medal, awarded every two years to the nation's most promising economist under the age of 40. No woman had won the medal in its 60-year history.

Here is story in WSJ. Here is Susan's webpage at Harvard.

Here is an interesting blogpost on Susan's background, the most interesting bit is certainly the following on her work habits:

"To end, I am going to recount one story about Susan’s work habits. Last year, she was expecting her second child. I got a call which must have been late at night her time. It was Susan and she was trying to complete a few minor things on a project she and I were involved in on timber auctions in Victoria. After a few minutes I asked. “So you must be due soon, how is it going?” Well, apparently, it was going slowly. She was calling me from the delivery room! Most people are content to take that time off. Susan was clearing her to do list! Susan had time to spare and we chatted for a while and for the next hour emails continued to come in. The baby was born soon after."

Must Read for Democracy Advocates in HK

Bryan Caplan's excellent book, which demolishes the myth of the rational voter, is out. Go get it, now! Here is the introduction, here is the book's page, and here is Bryan's homepage at George Mason University. And yes, Bryan is a blogger too.

Once you are done with Bryan's book, you should also read Don Wittman's The Myth of Democratic Failure (which pushes the rational voter model to its logical extreme).

Here is an exchange between Don and Bryan over at Econ Journal Watch back in 2005.

Tax All Those Tall People!

Greg Mankiw wrote:

"Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This paper shows that the standard utilitarian framework for tax policy analysis answers this question in the affirmative."

Read more here.

Arnold Kling at Econlog questioned Greg's use of Instrumental Variable in the latter's paper. And BTW, do read BOTH of his comments, (another, more recent one could be found here) they are some of the best, intuitive explanations that I have encounterd on the concept of Instrumental Variable.

China Further Liberalizes its Banking Sector

A story in a weekend edition of the SCMP reports:

"The mainland's banking regulator will allow the country's 114 city commercial banks to expand their businesses nationwide, a move that will strengthen their competitiveness and boost their attractiveness to investors."

Read more here.

In other words, from now on the city banks would be free to build their branches nationwide and diversify their businesses as well as risks. Needless to say this policy is a boon to these city commercial banks.

This policy certainly is not what the dominant players like Bank of China and ICBC would like to see though. Because the new policy would inevitably intensify the competition between the city banks and the dominant players. And it is not hard to imagine that the dominant players would try very hard in lobbying the government to prevent this policy from implemented in the first place.

The question is then why these dominant players would let this happen, why now?

I guess this might have something to do with the fact that foreign banks now could, on paper at least, compete head on with the Mainland's dominant players on a level playing field starting this year as part of China's fulfilment of its WTO commitments. Read more here.

Afterall, if you would have to compete with the likes of Citibank and HSBC, you wouldn't mind letting the city banks jump into the fray, would you? Hence, the timing of the policy.

Wisdom of the Day

"How does one then asses the efforts of Treasury Secretary Paulson to ask for financial sector reforms in China?

Frankly, while such reforms are likely to be good for China itself, I do not see our pressures for them as anything other than using our confrontations with China to open the Chinese market more rapidly and deeply to our financial firms on Wall Street: this is good for Wall Street but it is not clear how it will benefit the US in any other Chinese-macroeconomics-related benefit spillovers."

Read more here.

Shockingly High Costs of Exchange Control

This is from one of the latest NBER papers:

"This paper investigates the negative effects of exchange controls on trade. To minimize evasion of controls, countries often intensify inspections at the border and increase documentation requirements. Thus, the cost of conducting trade rises.

The paper finds that a one standard-deviation increase in the controls on trade payment has the same negative effect on trade as an increase in tariff by about 14 percentage points. A one standard-deviation increase in the controls on FX transactions reduces trade by the same amount as a rise in tariff by 11 percentage points."

Read more here.

Think about the jobs that would have created if not for the FX control, think about the economic growth that would have gained as a result of higher export if not for the FX control, think about the additional political heat that would have created in the US if not for the FX control...

Mind boggling indeed.

It's Your Money Too!

The government finally has offered some details on its plan of giving out freebies to film makers. The plan was first mentioned in this year's budget.

A story in today's SCMP reported:

"Films costing less than HK$12 million could qualify for grants of up to 30 per cent, according to a government discussion paper submitted to the Legislative Council yesterday..."

Why limit it to HK$ 12 million? Is that any analysis to support that? (May be, I have not read the government report submitted to the legislature yet).

It gets better.

"At least half of the main cast and film crew would have to be local permanent residents."

Does the government think that the reason for the decline of HK's movie industry is caused by the industry's past hiring patterns, ie too many non-residents are employed. If so, why the industry itself couldn't figure it out and shifting its employment pattern?

It gets even better.

"To be eligible, films must be commercially viable, with third-party financing of at least half of the production budget."

If so, ie. the movie is known to somebody to be commercially viable, you wouldn't need the government dole in the first place, wouldn't it?

Finally, giving government handouts to some "qualified" movie makers but not others based on some necessarily arbitrary criteria mean that all movie makers are not competing on an equal footing. How would this square with the government's calling for the urgency of a competition law when it serves as one source of the problem itself?

Best Idea I have Read Today

Auction the right to hire temporary workers among employers.

This is from an oped in WSJ by Gordon Hansen, an econ professor at UC San Diego. Read it here. The oped, in turn, is distilled from a longer study done for Council for Foreign Relations.

Holiday Picks

I visited a couple of the local bookstores during the Easter Holidays, here are the treasures I have found:

1) While Amazon still lists Black Swan as unavailable, I actually got it at a Pageone yesterday at HK$ 241.

2) Tom McCraw's Biography on J. Schumpeter is also sold at TST's Commercial Bookstore. The price is HK$ 333. Here is a review by David Warsh.

3) More Than You Know: Finding Financial Wisdom in Unconventional Places published by Columbia University Press. I saw the book at Causewaybay's Commercial Bookstore for about HK$ 250.

4) A paperback version of Origin of Wealth at around HK$ 150 at Causewaybay's Pageone, the print is small though.

And What's Wrong with That? or I Could Have Filed it Under the Why HK does not Have Better Reporters Category

SCMP has a story last Sunday on competition between convenient stores, supermarket chains, and mom-and-pop stores.

This is the beginning of the story:

"Stacking cans of Coca-Cola Zero in his Tsuen Wan grocery shop, Lai Wai-kwong has been wondering whether the new cold drink will boost sales at his small business.

Things do not look promising. He sells three cans for HK$10, or HK$3.33 per can, which yields a 10 per cent profit margin. But supermarkets are selling eight cans for HK$20.90, or HK$2.61 per can. What's more, shoppers receive a free bottle of lemon tea with their buy."

Please tell me reporter, what's wrong with customers getting the better end of the deal? Would you prefer to see these giant supermarkets leave the scene and see the price for Coke Zero to cost HK $ 5.00 a can. Is that fair? And to whom? Sure it is fair to Lai, the owner of the mom-and-pop store, but have you considered the benefits of the customers whose welfare would definitely decline if that were to happen when you penned that article of yours?

Unfair practices are involved the reporter might respond, whose story continued:

"Supermarket chains have more bargaining power with suppliers than mom-and-pop shops like Mr Lai's. Small shops pay 10 to 20 per cent more for soft drinks from wholesalers than the chains. The chains also enjoy exclusive distribution of some products, which Mr Lai is barred from selling."

Read more here.

I would leave the counter-argument in support of the supermarket chains' bargainning power as an exercise to the reader (hint: if not for that power vis-a-vis the suppliers, do you think you could get such a cheap price for Coke Zero at HK $ 2.61 per can mentioned above?). I would pose the answer later on.

As far as exclusive distribution is concerned, do you think at least the reporter should make a case for why such practices might make business sense and how that practice might actually help customers in the first place? Instead the tone of the story makes it seems like the reporter has made a guilty verdict without a trial.

Why couldn't we have better reporters? Again one explanation is that there exists liberal bias in the media, as my fellow classmate back in graduate school reported here.

Wang Hao

I have just finished reading a biography of an old professor teaching at Tsinghua University. The title of that book is "My School Days," published by Beijing's Joint Publising Company last year (in Chinese). I enjoy it a lot!

There is a chapter in his book where he recollected his interaction with his classmates while they were all attending National Southwestern Associated University during the Second World War.

One of his classmate is Wang Hao, a first class mathematician and philosopher. I have never heard of his name before. Wang went to Harvard after graduating from National Southwestern Associated University and studied under well-known Harvard professor Willard Van Orman Quine. Wang got his Ph.D. only after spending one year and eight months at Harvard!

Here is more information about Wang Hao. This is a book written by by Wang Hao and published by the MIT press. According to the biography, that book is only the first part of a planned trilogy.

Apparently Wang tried to answer 3 questions through his trilogy according to what he told the author of biography. The first one, ie the published one, attempts to answer the question of "What could we know?" The second and third one supposedly attempt to address the questions of "What could we do?" and "What are we after in life?" respectively.

Fable of the Keys

I have just started reading Diane Coyle's The Soulful Science: What Economists Really Do and Why It Matters, and I am already disappointed 60 some pages into the book.

In discussing the latest development in growth theory, Diane mentioned the idea of path dependency as if it is an idea that is widely accepted and non-controversial.

This is simply not true.

The common example used by many to explain the concept of path dependency is related to the keyboard arrangement of your computer(or what used to be typewriter). The arrangement that we have now is called the QWERTY system. Paul David, an economic historian at Standard, published a paper back in the mid-eighties arguing that the QWERTY arrangement is inefficient. The only purpose of that arrangement is to slow typist down in order to avoid the jamming of keys. However, with the passage of time, that jamming problem no longer is relevant. Yet, the QWERTY system persists even though better alternative exists. That alternative system is called Dvorak system. Hence, claimed David, the market fails to shift to a more efficient keyboard arrangement as if it is locked into a particular path of development. That is more or less how the concept of path dependency comes to be known among economists.

The idea is interesting, I have to admit. But is it correct, that is what really matters at the end of the day.

In early 1990s, using historical material recording results on typing contests involving the two keyboard arrangements, two economists (Stan Liebowitz and Stephen Margolis) find out that the claim that Dvorak is a better keyboard arrangemen than QWERTY is simply not substantiated by facts. The title of that paper is aptly called "The Fable of the Keys" and is publised in Journal of Law and Economics. Want to learn about the whole debate, read this book.

Of course, Diane is fully entitled to use David's work in her book. But I expect more even handed treatment. I wish she at least could have mentioned studies which seem to contradict David's claim. She didn't and I am disappointed.

A Book You Would Want to Bring with You on Your Next Doctor's Visit

How Doctors Think

Jerome Groopman, a New Yorker staff writer and professor at Harvard Medical School unravels the ultimate medical mystery: how doctors figure out the best treatments -- or fail to do so.

"Jerome Groopman has written a unique, important, and wonderful book about a central paradox of modern life: even though diagnosing an illness is often as much art as science, we want our doctors to speak with scientific surety. Groopman gives a rationalist's tour of the doctor's thought processes -- or lack thereof -- and yet, unlike many rationalists, he never veers toward cynicism. You'll never look at your own doctor in the same way again -- for better or worse," ---- Steven D. Levitt and Stephen J. Dubner, authors of Freakonomics

Find out more about the author here.

Dos and Don'ts For Budding Austrian Economists

So you want to be an Austrian Economist? Read Peter Leeson's advice before you do so. I wish somebody gave me such advice while I was in graduate school.

Government is the Source of the Problem!

Another NYT story said:

"India's drive to become a global economic powerhouse faces a huge roadblock in its inefficient, largely state-controlled financial system, analysts say. Two-thirds of India's banking business is conducted through less than 5 percent of its branches...An estimated 70 percent of Indian citizens are still not part of the banking system, while bureaucracy and inefficiencies are countering the benefits from faster growing parts of the economy, say political leaders and economists."

Can the government do anything about this?

Nope according to the story because of strong resistance from the 750,000 public bank employees, who have strong unions.

Another reason is that "[a] large part of the population is still dependent on the banking system for small requirements,"said Amitabh Verma, joint secretary of banking operations in the Ministry of Finance. Big companies are not the primary concern, he said. Corporations with international ratings"have an alternative,"he said, while these individuals do not.

Read more here.

That makes me wonder, if state-banking is indeed so effective in meeting the poor people's demand for financial services, then why is micro-finance arrangement so popular in India. Afterall, aren't all these micro-finance mechanisms set up specifically for meeting those very same demand of the poor people. Read this.

Per Se Illegality or Rule of Reason?

WSJ has a very interesting story by Ronald Cass, Dean emeritus of Boston Law School, on a pending case which challenges the per se illegality of resale price maintanence.

A Free Marketeer Leads Shanghai

According to a NYT story:

"The ruling Communist Party appointed Xi Jinping as the top leader of Shanghai...Mr. Xi, 53, was the party boss of neighboring Zhejiang Province and is regarded by political analysts in China as favoring deeper market-oriented reforms."

Read more here. Here is more from WSJ.

What's the likely impact of picking Xi to lead Shangahi?

My take is that, barring a heavy hand extending from Beijing to slow Shanghai's explosive development in order to preserve HK's status as China's financial hub, the appointment of Xi might help speed up the development of market infrastructure in Shanghai. Legal infrastructure and other norms of behaviour which are prerequisites in a market economy are what I have in mind here. Growth rates of Shanghai would inevitably rise as a consquence.

The ironic of all this is that just as we have just picked a Chief Executive here in HK who tries extremely hard to make sure that the development of this ex-colony fits in with China's five-year plan and slow Shanghai's growth in order to protect HK's position China's financial center, Beijing has picked a market reformer to lead Shanghai.

**Picture above shows US Treasury Secretary Henry Paulson and Xi walking together during the former's trip to China last year.

Books I Have Been Reading

1. The Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen.

Bob Shiller of Irrational Exuberance fame said: A curious, enlightening and creative account of the world's three most influential economists, and why their theories have had such a huge impact on the economic history of the modern world.

2. Final Exam by Pauline Chen.

What it is about?

A brilliant young transplant surgeon brings moral intensity and narrative drama to the most powerful and vexing questions of medicine and the human condition. When Pauline Chen began medical school twenty years ago, she dreamed of saving lives. What she did not count on was how much death would be a part...

3. The Halo Effect: ... and the Eight Other Business Delusions That Deceive Managers by Phil Rosenzweig.

Nassim Nicholas Taleb, author of Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets said the book: "I was taken by this book. It destroys myths concerning the attribution of success in the management literature using potent empirical arguments. It should stand as one of the most important management books of all time, and an antidote to those bestselling books by gurus presenting false patter and naive arguments."

4. And finally, Apollo's Arrow by David Orrell.

David Orrell, Ph.D., received his doctorate in mathematics from the University of Oxford. His work in the prediction of complex systems has been featured in New Scientist and the Financial Times, and on BBC Radio, ABC Radio (Australia) and NPR. His theory that errors in weather forecasts are due not to chaos (the "butterfly effect") but to model error stirred up a storm of debate in meteorological circles. He now conducts research in the area of systems biology. He lives in Vancouver, British Columbia.

Remembering John

I blogged about the tragic death of Stanford economist John McMillan here.

I was not his friend, and frankly I did not know him. However, we talked a couple of times over the phone when I was a graduate student in the US. That was in the early 1990s.

John was still at UC San Diego back then. Some of you might recall, in the early 1990s, John together with his colleague China expert Barry Naughton and two other authors had written several papers on Chinese SOE reform. One of which called Autonomy and Incentives in Chinese State Enterprise was eventually published in Quarterly Journal of Economics.

I was searching for a dissertation topic, and I thought about doing one on comparing productivity of SOE vs the non-state sector, which was a hot topic at the time. Called John up one day, I asked him if he would provide me with the data set used in several of his studies. He gave me some pointers on how to get hold of the data and told me to get help from one of his co-authors who was more familiar with the data.

I finally got hold of the data though I never used them. I felt forever indebted to him because of his generosity though. A big name professor dispensed his time generously on a unknown student from a far away university (my school is on the east coast, his the west).

That summer I came back to Hong Kong for a short visit. I picked up a book which has the translation of the essay written by John and his coauthors mentioned above. Got it and sent it to John after I returned to the US later that summer. And that was the last time I talked to him over the phone.

John affected me in another way. Another essay of his coauthored again with Barry Naughton served as an inspiration for my thesis. That essay is called How to Reform a Planned Economy: Lessons from China published in the 1992 issue of Oxford Review of Economic Policy. The influence of Hayek was notable in that piece. And that paper served as one of the papers which kick-started the ensuing debate regarding the different approaches transitional economies should adopt in a bid to reform their economies. That's the so called "Big Bang" versus "Evolutionary" approach to economic reform debate.

Dick Epstein on Antitrust

From University of Chicago law professor Dick Epstein:

Antitrust Consent Decrees in Theory and Practice

"Epstein observes how differences in antitrust philosophy can shape the kinds of comprehensive settlements that the government will seek and the courts will grant. Epstein takes issue with aggressive antitrust enforcement strategies that seek to use government power to fundamentally alter industry structures or the business practices of regulated firms, in some instances leading to their breakup. To explain the perils of that approach, Epstein carefully examines the history of consent decree litigation, culminating in detailed studies of the AT&T breakup and the government antitrust actions against Microsoft.

Applying modern theories of antitrust analysis, Epstein's central thesis is that bold antitrust remedies that are not tightly tied to a defensible theory of wrongful conduct often prove counterproductive. Such measures typically force firms to adopt business practices and structural reorganizations that substantially impede their ability to compete effectively in the marketplace. The disparate fates of AT&T and Microsoft are the result of a major and fruitful shift in thinking about the use and limits on the antitrust laws in a wide variety of industrial contexts."

You can get it here.

First We have Lawyers, Then Marketing Professors, now It's the Actress' Turn

As things are developing, it seems inevitable that HK would have a competition "law" very soon. Read more here.

Several types of professionals have already voiced their support for such a "law", first we have lawyers (Ronny Tong of the Civic Party for example) and then we have marketing professors (see here), now we have an actress who says independent firm companies would be wiped out without such "law".

SCMP reported today:

"Josephine Siao Fong-fong, the former child star who went on to become one of Hong Kong's most prominent actors, said the ownership of cinemas by the local film industry made life difficult for small-scale filmmakers..."

"In Hong Kong, the market is controlled by big companies who distribute their own films to their own cinemas," she said. "Prime-time bookings - summer holidays, Christmas and the [Lunar] New Year [periods] - are all held for their own films. Independent filmmakers are crowded out and [are] unlikely to survive."

"Time and money are saved [but] quality is lost. Without anti-trust laws a local film industry is unlikely to flourish in Hong Kong," she said."

Read more here.

Questions:

How did the current big companies become big in the first place? Were they all "small" to start with? If so, then these current big players might very well encounter the same problems that Josephine said the existing small firms have to face. Did all these former small potatoes (now major studios) grow big thanks to the antitrust law?

What is wrong with trading off a bit of quality (assuming Josephine were right that indeed quality is being sacrificed for the sake of saving money and time) in order to save money and time? Obviously, she does not understand that economics does not address problems of the all-or-nothing kind, but choice at the margin.

If indeed independent producers could produce such "quality" products, who is to prevent them from getting the financial support needed for them to build their own cinemas? I am sure a lot of investors would be interested in grapping the market from the existing major players if such opportunities were indeed presence.

Loss of the Economics Profession

Stanford economics professor John McMillan just passed away after fighting with his cancer for the past 9 years. He was 56. Read the press release here.

John was the author of the extremely well written economics book for the layman entitled Reinventing the Bazaar: A Natural History of Markets.

Beyond books, John had also written a bunch of excellent papers on various topics. To me, his best paper is definitely this.

HT to Economic Principals for the pointer.

Go Mason!

My alma mater has hired another young and bright economic historian from U of Pittsburg according to Peter Boettke over at Austrian Economists. His name is W. Troesken and here is his CV.

A couple of years ago I have read his piece "The Letters of John Sherman and the Origins of Antitrust" published in Review of Austrian Economics and I am impressed with his work ever since.

Joined by recent new hires like Gary Richardson and John Nye (which I have talked about in this post) George Mason is soon turning itself into "the" place to go if one wants to become an economic historian!

More Sex is Safer Sex !

Steve Landsburg's new book is out! The title of the new book is, yes, you get it right: "More Sex is Safer Sex."

Here is an advance praise from another Steve of Freakonomics fame:

"Steve Landsburg proves once again that he is better than anyone else at making economics interesting to noneconomists. Landsburg is provocative and playful in his mission to demonstrate how an understanding of economics will change the way you live your daily life. I loved this book."

Here is more info about the book.

Competition "Law" is Not Really a Law

Today's edition of SCMP reported that:

"A cross-sector competition law is to be introduced to regulate seven anti-competitive practices, while exemptions will be given to parties with less than a 20 per cent market share, sources from the government and Democratic Party say.

Seven anti-competitive practices - price-fixing, bid-rigging, market allocation, sales and production quotas, joint boycotts, unfair or discriminatory standards, and abuse of dominant position - will be covered by the law."

Read more here.

Why I have put quotation marks on the word "law" above? Hayek has defined law in many occasions that it is a set of rules of conduct equally applicable to all. Apparently, such will not be the case for our, eh, competition "law"!

Where Are the Economists?

First we have the lawyers who hijack the whole debate on whether HK should have a competition law, now marketing experts join in.

According to a story in SCMP:

"A Chinese University academic has called for the introduction of a cross-sector competition law after a survey found Hong Kong retailers, especially supermarkets, abused their market power with suppliers.

The survey of 121 suppliers by the university's marketing department found many retailers dictated prices and demanded exclusivity...

Supermarkets were found responsible for an overwhelming majority of the unfair practices by retailers. About 70 per cent of the disadvantaged suppliers were found to have a supermarket as their major retailer...

Professor Sin said a cross-sector competition law was needed to ensure fair play between suppliers and retailers."

Read more here.

Not so fast professor Sin. For your argument to go through, you have to assume that the supermarkets/retailer do not pass on the savings that they get from squeezing the suppliers. If they do, consumers win at the end. And what's the problem with that?

To argue that the retailers are the ones who would buy low (from suppliers) and sell high (to consumers), you have got to show that the retailing industry is not competitive. That of course is a completely different issue which your research simply does not address! Why the rush to conclude that HK needs a competition law then?

Going back to your original thesis, suppliers being squeezed by retailers, if indeed the suppliers feel that they are being squeezed by retaliers, why don't they simply refuse to supply them and set up their own retail outlets through vertical integration? Why complain?

And for those who question the rationale of slotting fees, I strongly recommend them to read the paper by UCLA economist Ben Klein and George Mason University law professor Joshua Wright which you could access here.

BTW, where are HK's economits? Why they are silent on the topic which they should have a lot to say?

The Story of Joseph Schumpeter

Harvard's Thomas McCraw has a new book on Schumpeter called Prophet of Innovation published by Harvard U Press. It's over 700 hundred pages long!

Edmund Phelps, 2006 Nobel Lauerate in economics called the book "a truly penetrating biography of the most influential theorist of finance capitalism."

Avoid Marginalization Through Competition

Today's edition of The Standard reported on the warnings sounded out by National People's Congress vice chairman Cheng Siwei:

"Like the fabled hare being overtaken by a tortoise, Hong Kong risks losing its position as a international financial center if it sticks to its "old ways," National People's Congress vice chairman Cheng Siwei warned Tuesday in Beijing...

"If Hong Kong people focus on internal political rows but not economic development, they will be marginalized," Cheng told a media briefing less than two weeks before the SAR's March 25 chief executive election."

Read more here.

It is ultimately a time allocation problem, isn't it? If you devote more time to work on political matters, you have less time left to deal with economic issues. But then in economics, we talk about choice at the margin. That is, every one in HK is calculating whether spending one more unit of time in political activities brings higher benefit than other activities. Throw in different preferences, different opportunities confronting different people, it seems unlikely most of HK's working population would devote most of their time to political activities. Therefore, the outcome Mr. Cheng talked about would be an unlikely one.

If one were to worry about HK being marginalized, there is another consideration which is far, far more important in my opinion. That is Beijing's attempt to limit the growth opportunities of mainland cities in order to "enhance" HK's role as our country's premier interntational financial center.

In a market economy, you don't get assigned to such role, you earn it through beating your rivals in the market place. Horning HK's competitive edge through vigorous competition with other mainland cities and other global ones is the only route for HK to stay ahead. However, this is not happening, as I talked about in a previous post.

Democracy and Growth

MIT's Daron Acemoglu and Harvard's Ed Glaeser blog about democracy and growth over at the WSJ blog, read more here.

Shanghai Deserves Equal Treatment

Today's SCMP reports:

"The central government aims to take further steps to reinforce Hong Kong's role as an international financial centre, signalling its intention to highlight the city's importance to China's economy ahead of the 10th anniversary of the handover.

Analysts saw Beijing's efforts to promote Hong Kong's role as a setback for Shanghai, whose leadership has been hit by a series of corruption scandals culminating in the sacking of its former party secretary, Chen Liangyu ...

It is expected to announce more favourable policies soon, probably before the July 1 handover anniversary...

"The conclusion to the decade-long debate on the role between the twin cities has become clear now. Hong Kong, with its existing advantages, should serve China internationally, while Shanghai, with its limitations, should focus on serving the domestic market," Professor Zhong said. "

Read more here.

My response is, why shouldn't Shanghai be allowed to compete with HK? If Shanghai's legal framework and other institutions are inadequate to serve as China's international financial centre at this point in time, wouldn't it be more productive to speed up their development rather than condemn it to an insignificant role.

Why HK's is so worry about Shanghai? Afterall, it competes quite successfully with world gaints like London and New York, why it fears to compete with Shanghai?

Actually it is not correct to say HK is competing with Shanghai. As long as China has the ability to grant favorable policies to HK but not to Shanghai, the playing field is tilted even before the game begins.

Bidding Farewell to Laissze Faire in HK

In the HK Standard today:

" In an unprecedented move, the government announced Wednesday it will invest directly in movie productions to back Hong Kong's ailing film industry. Officials hope direct investment from the HK$300 million film development fund announced by Financial Secretary Henry Tang Ying-yen in his budget speech last week will bring about a revival to the industry that a senior official has described as "very important."..."

Rationale for the policy, according to Secretary for Commerce, Industry and Technology Joseph Wong:

"First of all, the film industry, is a very important creative industry in Hong Kong and [its] revival will have a lot of spill-over effects." Secondly, he argued, there are also many examples of governments playing a "more active part" in supporting film industries in France, the United Kingdom, Singapore and South Korea."

Read more here.

Yo Joe, please name one industry which does not generate spillover effects, externalities, third-party effects...or whatever fancy name you can come up with?

Oh yeah, Joe, on your second point, would you please explain to me why whatever policies other countries have implemented must be a good thing? Could they all be wrong at the same time? They might not, but we, as taxpayers who pay for the final bill, deserve an explanation not an assertion. Wouldn't you agree?

And would you please also info us Joe, what criteria you would use when deciding which movie deserves government dole ? And who has the final say when picking a particular set of criteria for such purpose in the first place?

Transaction Cost Economics: An Introduction

A paper of the same title by one of the TCE's pioneers Oliver Williamson.

Serendipity

Have you ever had the following experience. You go to the bookstore, not knowing exactly what you want to get. Then, just when you are pretty sure you are not going to get anything on this trip. You see something. A book is sitting at that corner of the bookshelf which usually no one will ever bother to check. There, you find your book of the day, book of the month may be, or may be a book which will change your perspective for the rest of your life.

I had that experience the other day...I found this book called The Difference by Scott Page.

No amount of internet search has enabled me to discover this book, and I perform that kind of internet search every single day.

Here is a blurb on the book by Nassim Nicholas Taleb, author of Fooled by Randomness and The Black Swan:

"Another highlight of 2006 was to find in my mailbox The Difference by Scott Page. Page examines the effect of cognitive diversity on problem solving and shows how diversity acts like an engine for tinkering. It works like evolution. By subverting the big structures we also get rid of the Platonified one way of doing things. This is a landmark book."

Simon Johnson, IMF's Next Chief Economist?

WSJ reported that Simon Johnson at MIT has been nominated as the next Chief Economist at the IMF, read here. Here is Simon's webpage at MIT. A bio of him can be found here.

Professor Johnson and his MIT colleague D. Acemoglu and Harvard's James Robinson have done a series of very innovative work on the long-term determinants of economic growth.

Puzzle of the Day: Accountants' Interests in HK's Fiscal Matters

The Hong Kong government has just announced its latest budget for 2007-2008, read more here.

The HK Standard reported today that:

"Auditing firm Ernst & Young said Thursday: "It was perhaps a little disappointing the financial secretary did not say much on the subject of Hong Kong's narrow tax base, nor the wide proposals for reform which have been put to him throughout 12 months by various professional bodies, the public and industry."...

"Over the years, much has been said and written about Hong Kong's narrow tax base and the possible need for tax reform. But in his 2007-08 budget, Tang only devoted one paragraph to the topic," said accounting firm PricewaterhouseCoopers."

Read more here.

The million dollar question is of course why accountants have so much interests in HK's tax system at all? Their self-interests are behind this, an economist like me would argue.

But then why only accountants, why tax lawyers and other professionals who might get something from steering the tax system their way have not exhibited similar enthusiasm?

You foreign readers out there, would you please let me know whether accountants in your place of residence are as interested in the tax system as those we have here, thanks!