It's been a while since my last "disproportionately useful theories" entry (and that was wrongly called number four when it was five, but that's all sorted now). The series returns with one for the econometricians, focussing on the Generalized Method of Moments or GMM as it is known.
The predecessor to GMM was the method of moments, which works by saying that if you have a random numerical outcome which depends on something else, and can work out the expected value of some feature of the outcome in terms of that something else, then you can equate the expected value with the observed value to get an estimate of that something else. The "moment" is another name for the expected value in terms of the something else, roughly speaking.
An example might clear up the statement. If a dice is biased - say its six side is bigger than the others - then the chance of getting a six (this is the random numerical outcome) depends on the size of the area divided by the area of all sides in total (this is the something else), perhaps the chance is equal to the ratio, so we can calculate the expected average score from ten rolls. Then if the dice has been rolled ten times and we have the average score (this is the observed value), we can calculate the ratio of the areas by equating the expected and observed values (this is a moment equation). OK, we could just have measured the dice's sides, but often in economic measurements we won't have the "something else" to measure directly, just the outcomes.
The outcomes might also have some other information which could depend on the size of the six side, perhaps the number of ones compared to the number of sixes in ten rolls. Then if an expected average value can be compared with the observed value, a new estimate of the size of the six side can be made. The two estimates of the size might not agree, and that's where GMM comes in. Under GMM, you choose a value for the estimated size which minimises
(expected - observed value for the first estimation)^2
+ b*(expected - observed value for the second estimation)^2
where b is a constant reflecting the relative importance of the two methods for getting a final estimate.
This is a really rough description, and to stop the post feeling too much like a lecture, here's the point. GMM estimates were shown to be very good estimates, and many of their important statistical properties were worked out by a single author in 1982. It was demonstrated that if you choose the moment equations and the weighting correctly, you get exactly the same estimates and statistical properties as many other methods of estimation, such as the least squares estimates. So the theories about GMM are widely useful.
Wednesday, 30 April 2008
Tuesday, 29 April 2008
InvestingInAfrica.org - the next generation
I've entirely revamped my website www.investinginafrica.org. It provides news and analysis about African business, investment, and economics. It updates automatically whenever you visit, so the information remains up-to-date. There are some useful tools and large studies for the businessperson already in Africa or thinking of investing there.
I'd be delighted if you visit the site when you get a moment.
I'd be delighted if you visit the site when you get a moment.
Friday, 25 April 2008
Who gives the most overseas aid?
I hadn't looked at rich countries' overseas aid budgets recently, but had thought that the UK and US were both moving towards the top of the list for the most generous countries. Their governments had been talking about supporting Africa and promoting their healthcare initiatives there.
But shock. When I looked at the actual figures (at http://www.oecd.org/dataoecd/27/55/40381862.pdf - an Adobe Acrobat file), the UK is in the bottom half of most generous countries, and the US is least generous of the thirty rich countries surveyed. If you look at who they are giving to (at http://www.oecd.org/countrylist/0,3349,en_2649_34447_1783495_1_1_1_1,00.html), it is mainly to strategically important countries which at the moment is Iraq and Afghanistan. Other rich countries also give lots of their money to these two states. So overseas development aid has foreign policy goals as a leading consideration, and isn't that big to begin with.
The most generous countries (and their money generally goes to the poorest people) are the Scandinavian countries, the Netherlands, and Luxembourg. Luxembourg? They kept quiet about it. They have a reputation as the bankers of Europe, so hardly who you would think of as generous governmental donors.
I don't have the figures for total country donations after making allowance for private donations, but I don't think it changes things massively. Somewhere on the web there was a really good analysis of total national giving after considering many different forms of transfer (such as allowing in immigrants and sending money to families overseas). Definitively proving that so-and-so country is least generous seems pointless, however.
The figures are often used by critics of the West. However, the generosity of a country does not seem solely to be a function of geography or political system; Japan gives nearly as little as the US, and East European former communist countries do not give much either despite being fairly rich. To give credit where due, the Czech Republic gives most. I would like to see the donations given by the former communist countries when they were communist, or nouveau-oil-riche countries in Africa.
But shock. When I looked at the actual figures (at http://www.oecd.org/dataoecd/27/55/40381862.pdf - an Adobe Acrobat file), the UK is in the bottom half of most generous countries, and the US is least generous of the thirty rich countries surveyed. If you look at who they are giving to (at http://www.oecd.org/countrylist/0,3349,en_2649_34447_1783495_1_1_1_1,00.html), it is mainly to strategically important countries which at the moment is Iraq and Afghanistan. Other rich countries also give lots of their money to these two states. So overseas development aid has foreign policy goals as a leading consideration, and isn't that big to begin with.
The most generous countries (and their money generally goes to the poorest people) are the Scandinavian countries, the Netherlands, and Luxembourg. Luxembourg? They kept quiet about it. They have a reputation as the bankers of Europe, so hardly who you would think of as generous governmental donors.
I don't have the figures for total country donations after making allowance for private donations, but I don't think it changes things massively. Somewhere on the web there was a really good analysis of total national giving after considering many different forms of transfer (such as allowing in immigrants and sending money to families overseas). Definitively proving that so-and-so country is least generous seems pointless, however.
The figures are often used by critics of the West. However, the generosity of a country does not seem solely to be a function of geography or political system; Japan gives nearly as little as the US, and East European former communist countries do not give much either despite being fairly rich. To give credit where due, the Czech Republic gives most. I would like to see the donations given by the former communist countries when they were communist, or nouveau-oil-riche countries in Africa.
Eagles and dragons circle over Africa
The war in Western Sudan and the crisis in Zimbabwe have attracted a huge amount of political and media attention in the West. The loose affiliation of China with the Sudanese and Zimbabwean governments may increase the attention given to the crises, which are not unique despite their severity. Western countries and companies have enjoyed close ties with their African counterparts, but they have recently been challenged by China (and India, although its presence is currently less visible).
The possibility of Africa becoming a new frontier for an East-West struggle should alarm governments in the continent. Close affiliation with either side during the Cold War often brought violence and corruption. African governments may opt for non-alignment in a new rush as the safest course of action, and some countries are cleverly getting what they can from both sides. Zambia for example has been a major recipient of Chinese investment and Western aid; the DR Congo seems to be gearing its policy to follow suit.
The possibility of Africa becoming a new frontier for an East-West struggle should alarm governments in the continent. Close affiliation with either side during the Cold War often brought violence and corruption. African governments may opt for non-alignment in a new rush as the safest course of action, and some countries are cleverly getting what they can from both sides. Zambia for example has been a major recipient of Chinese investment and Western aid; the DR Congo seems to be gearing its policy to follow suit.
Tuesday, 22 April 2008
Exploitative deals
One of the advantages of Marxist analysis is that it contains precise definitions of terms like middle class and exploitation. In Britain today, Marxist terms and preoccupations live on - perhaps born and sustained independently of Marx - but without the precision found in Marxist tracts. So there are often shows on television and news reports asking people whether they consider themselves middle class, and they reply yes or no depending on where they were born, what accent they have, what their education is, what their job is, and so on. A stricter economic analysis might only ask, do you have enough capital to live on the profits forever?
Exploitation in Marxist terms is neat too. Any money earned from capital can be called exploitation, as all income is considered to be derived from human labour. Today, exploitation is a more amorphous term, being a value judgement given by campaigners to wages which are not high enough for example. It is a moral call, and doesn't get a place in modern mainstream economics. It often doesn't seem to get a place in business deals with the developing world either, with Western companies striking the best financial arrangement possible even if they would be considered unacceptable in their home country.
I formerly had no substantial intellectual opinion on such deals and the amoral economic approach which underpins it. The amorality of the whole affair is beguiling. The market operation is mechanical and predicts long-run benefits for many people involved, both in the West and developing countries. There is apparently no reason to introduce morality in the arrangement at all.
I still agree, but the insertion of the impressively mechanical arrangements of capitalism in wider society and its values seem clearer to me today. So I would now say that it would be considered immoral for the West in its entirety - not just companies, but including them - to permit very high corporate profits because a developing country is in a poor bargaining position due to temporary market movements, corruption, or ignorance. By immoral is meant that it will be considered eventually in a similar way to the theft of land or forced labour during colonial rule, although perhaps not equivalent to the worst excesses of colonial rule.
Probably something similar could be said about restriction of workplace unionisation, child labour, and the use of prison labour, but I haven't been smart enough to include them in the picture yet.
Exploitation in Marxist terms is neat too. Any money earned from capital can be called exploitation, as all income is considered to be derived from human labour. Today, exploitation is a more amorphous term, being a value judgement given by campaigners to wages which are not high enough for example. It is a moral call, and doesn't get a place in modern mainstream economics. It often doesn't seem to get a place in business deals with the developing world either, with Western companies striking the best financial arrangement possible even if they would be considered unacceptable in their home country.
I formerly had no substantial intellectual opinion on such deals and the amoral economic approach which underpins it. The amorality of the whole affair is beguiling. The market operation is mechanical and predicts long-run benefits for many people involved, both in the West and developing countries. There is apparently no reason to introduce morality in the arrangement at all.
I still agree, but the insertion of the impressively mechanical arrangements of capitalism in wider society and its values seem clearer to me today. So I would now say that it would be considered immoral for the West in its entirety - not just companies, but including them - to permit very high corporate profits because a developing country is in a poor bargaining position due to temporary market movements, corruption, or ignorance. By immoral is meant that it will be considered eventually in a similar way to the theft of land or forced labour during colonial rule, although perhaps not equivalent to the worst excesses of colonial rule.
Probably something similar could be said about restriction of workplace unionisation, child labour, and the use of prison labour, but I haven't been smart enough to include them in the picture yet.
Stagflationary pressures in Burundi
I mentioned last week that stagflation is a real possibility in the US and UK. Developing countries feel the same pressures - Burundi for example is experiencing imported inflation, as reported on the Burundi Quotidien site (http://www.burundi-quotidien.com/economie1.html - it's in French). The stagflationary effects are modified versions of the Western ones, since petrol prices are reportedly controlled in Burundi, so market shortages accompany price increases.
It is not clear whether the domestic financial system is simultaneously facing a debt crisis. The prominent Burundian bank Interbank in February reported a good annual performance (at http://www.interbankbdi.com/ibb_infos/nouvelles/ibb000110.htm, also in French), which is a little evidence that the Burundian financial sector has escaped some of the problems afflicting the Western sector. However, the African banking sector is increasingly heavily tied to Western banks through international ownership, so there may be an imported debt crisis. The financing or refinancing of government debt is likely to be made more expensive by the Western debt crisis, as states try to access Western finance.
It is not clear whether the domestic financial system is simultaneously facing a debt crisis. The prominent Burundian bank Interbank in February reported a good annual performance (at http://www.interbankbdi.com/ibb_infos/nouvelles/ibb000110.htm, also in French), which is a little evidence that the Burundian financial sector has escaped some of the problems afflicting the Western sector. However, the African banking sector is increasingly heavily tied to Western banks through international ownership, so there may be an imported debt crisis. The financing or refinancing of government debt is likely to be made more expensive by the Western debt crisis, as states try to access Western finance.
Saturday, 19 April 2008
The Doing Business database
There's an interesting database on doing business administered by the World Bank at http://www.doingbusiness.org/. It grades countries according to an index of how easy it is for businesses to operate in them.
Some of the index components may be viewed as double-edged; the ease of firing workers is one of the determinants of how high a country is ranked, for example. Other components are more unambiguously related to efficiency, such as the number of days to register a company, and information on them could be useful to a government looking to streamline its dealings with companies.
Some of the index components may be viewed as double-edged; the ease of firing workers is one of the determinants of how high a country is ranked, for example. Other components are more unambiguously related to efficiency, such as the number of days to register a company, and information on them could be useful to a government looking to streamline its dealings with companies.
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