Eurozone inevitably an Optimum Currency Area (OCA)?

I posted the following comment on Prof. Krugman's blog for the New York Times. What do you think?

"

Prof. Krugman,

As you say the arguments on the shortcomings of European EMU as an OCA have been known ever since the early 1990s. If a group of economies are very open and trade in differentiated products, then as they are exposed to asymmetric shocks, they must have flexible wages and prices, high labour mobility, or alternatively, there must be some form of homogeneity and/or solidarity to ensure that transfers from one country to another balance the asymmetric shock. Otherwise one group of countries benefits from the union at the detriment of another. This is simple enough and it is what is taught in every decent manual on the economics of the EU. Moreover, it is easy to see how France and Germany might initially have benefitted from Greece's fiscal crisis. After all a cheaper € makes for more competitive exports.

What no one seems to focus a tremendous amount is on the merits of the Euro. First of all, the public and the commentators seem to have forgotten about all the exchange rate crises of the 1970s-1990s. Increased trade interdependencies expose EU member states to each other's bad governance, forcing to create arrangements to protect themselves from each other. The ERMs and the EMS were the first attempts at dealing with this issue, but proved incomplete at best, leading to the creation of the €. If the latter was to disappear, then we'd be back to the early 1990s.

Finally, speaking as a Portuguese and as a social scientist I must also admit that the euro also presents a welcomed pressure for necessary economic reform. By creating a tighter system of monitoring between the member states, it divulges more information about the quality of their performance. If for the € to work, it requires a strengthening of internal monitoring and if this increases the pressures for rationalisation of policy making and reform, then I can only conclude that the € is positive for its less efficient member states.

It seems that European integration happens through trial and error along a fairly clear integrationist path. As with any other polity, decision makers tweak and fine tune the machine. When each monetary mechanism failed after another, the argument for the € became more and more credible. Now that the consequences of the shortcomings of the Stability and Growth Pact have been brought to light, the structure will be kept with enhanced powers and institutional support, and my guess is that sooner rather than later there will be a certain amount of fiscal powers transferred to Brussels in order to fulfil the OCA.

On the USA though, by the standard of its time the country would not have been seen as any more homogenous than the Hapsburg Empire, with all its religions and languages (English, German, French). Moreover until the Civil War most Americans considered themselves first and foremost Virginians, New Yorkers, etc, and only after that Americans. Yet the dollar, fragile though it may have been, existed before the 1870s. The EU in that sense is not very different from the early USA or India, although we do not have a military threat as a catalyst for integration.

Before I conclude, I would like to add that the issue of labour mobility is limited first and foremost by language diversity. This however seems to be a decreasing problem as the vast majority of Europeans are now adopting English as their second language, thus making it the continent's "lingua Franca". This should solve the issue of labour mobility in the next 2 to 3 generations.

To conclude, just because the €zone is not an OCA, it is not automatically undesirable. Moreover just because it is now a second best option, it does not mean that it will not become a first best option in the future, as labour mobility will increase and as geographical automatic stabilizers will start to play a bigger role "

The world for the last month and a half

So the last post was... December 5, 2009. What's happened eversince? 1st: Greek statistics are useless aparently. So much so that the EU might end up with audit powers! 2nd: The commissioners have all more or less lined up before the european parliamentary committees. The Bulgarian nominate got kicked out after the Socialists decided to show they could bark and the rest were not ready to see if they could bite as well. The issue was incompetence and political malpractice for not abiding to the rules. In the end there were documents showing that everything was fine. Then again if Greek statistics suck, I can see why some people might not have given much credit to the document. Ultimately it's irrelevant, the issue was political I guess... 3rd: Oh yes, the Copenhagen summit on carbon emissions and the survival of the planet. Let's hope we don't depend on it. If there's something that we can learn from it it's that the developing world is quite strong. Not only that but it would seem to me as though the developed world and the under developped world shared a common wish (though for different reasons) that there be emission reductions. However the developing world seems to be quite powerful these days. More over it might be interesting to reconsider the BRIC (Brazil, Russia,India and China) and replace it with the BASIC (Brazil, South Africa, India and China) as this article argues. 4th: Russia and Belarus exchanged pleasantries over oil, but Europe has so far had a warm enough Winter. 5th: Governments and firms are having to pay a lot for the money they want to borrow, probably because of the risk associated withlending to countries who are facing high deficits and have little prospects of enormous economic growth. (high interest on sovereign debt and on corporate bonds, implying low demand and high supply of bonds) 6th: 2 huge earthquakes have devastated Haiti. In an already poor country infrastructure (what little there was) was more or less completely destroyed. 200 000 people died. The world nonetheless seems to have united in a pledge to help the country. In related news, Sweden has donated less money to that country than Angelina Jolie or Brad Pitt. I hope this means more about Brangelina's commitment than it does about Sweden's, or Poland's for that sake. On a more personal note I've been absent because I have been working on an upcoming article to be published by the European Public Choice Society, on the dynamics of Fiscal Federalism and whether and when there is a "Race to the Bottom". The conclusion is that there is, but the revenues of the subnational polity must be independent of transfers from the central national state. Moreover the policy areas on which this competition occurs cannot enjoy a lot of visibility or relevance to the electorate. When the article will come out I'll put some extracts here. Thats all for now. Hopefully I'll be able to write something more soon.

Bad but the EEA is the reason why this is not scary

Ok! So, Tony barber has the following thing to say: "If Cameron - or, more likely, William Hague, his Rottweiler foreign secretary - causes the relationship to deteriorate too much, then it is certain that calls will mount in mainland Europe for the UK’s departure from the EU. And, of course, there will be many in the Tory party - and the UK Independence party and elsewhere - who will say, “You know what? Why not?” Now I've put forth this idea at least twice, but I'm not particularly happy to get confirmation. I maintain, that if this were to actually take place, that half witted eminence would find himself at the end of a very uncomfortable political and economic environment. But as a UK graduate and a fan of the country, I believe it would be an enormous (but bearable) loss to the EU. And this is where I move on to the next step, and believe that sounding the alarms is unwarranted. The UK may hurl uninformed and bigot insults at the EU, however it can do very little to stop the EU except from withdrawing its contributions to the EU budget (which since Thatcher are not enormous). Otherwise the number of fields on which it holds a veto power is very limited. This is actually where the opt outs from the UK are useful. The EU can't impose its rules on it, but it is also unable to veto those proposed rules. On the other hand, the EU can do a lot of damage. Most of it would be indirect and even passive. Some at least theoretical could be direct and malicious in intent. Lets see: The first category implies by its mere existence the EU could damage the UK, if that country were to leave the union. How? Two interconnected reasons: financial markets and trade. The UK is enormously dependent on the financial sector, whose agentstend to be quite sensitive and fond of the EU (bigger markets=more money!!). If the UK left the EU (to become unassociated with any other European integration project than the OECD and the OSCE)it will be exposed to suddenly having to pay tariffs on exports to the EU. Don't get me wrong, I have no illusion that the EU would lose a lot from it. But in this, as in many other things, size matters and as it stands the EU is a giant in comparison to which the UK is small. Not tiny, not minuscule, not meaningless, but small enough that it would suffer a lot as exports and imports would decrease. Where as Europe would suffer a little bump, the UK would fall down a ravine. As the it loses access to the EU investors will start abandoning it, as products manufactured in the UK no longer have access to the rest of the EU market and are thus more expensive. Who would benefit? Probably Sweden, Finland, Ireland and Denmark who would split the chunk of market share that UK firms would loose, and Paris and Frankfurt who could then become the uncontested centers of European finance. In conclusion to this discussion, this is a situation that can be quite easily understood in the following manner: if, Y=C+I+G+X-M and Y=C+S+T, where Y is the GDP, C is consumption, I is investment, G is government expenditure, X is value of exports, M is value of imports, S is national savings, and T is government revenues, then I-S + T-G = X-M, If the UK leaves the EU, it automatically means that "X" decreases and "I" decreases, which implies, under the "crazy" assumption that the British will not suddenly want to tighten their belts and consume less, that in order to maintain present levels of consumption the UK government will have to start spending more (G increases) without forcefully raising taxes. Conclusion? If the UK leaves the EU, it is forced to run a deficit. Given its present fiscal situation I don't believe that is not quite advised. And remmember, this is all without the EU moving as much as a malignous finger. Imagine if the EU was to become vicious about this: That's unlikely scenario number 2. EU governments and the ECB could do 2 things. First they could start selling UK Treasury bonds, thus causing a decrease of the credibility of the pound. Secondly they could start selling as manny pounds as they hold. Both would be bad, in conjunction ,and with the caveat associated with lack of quantitative data, I would estimate it would be lethal for the UK. But then again, this is not only an extremely unlikely scenario. It is one which could jeopardise the EU. A trauma for the UK, the back days of the George Soros created monetary crisis are still a vivid memory for the Brits. However this was caused by bad governance which brought about an inevitable event. The close pegg of the pound to the Deutchmark, with open financial markets and no capital controls, was according to the "unholy trinity" of exchange rate agreements, doomed to fail. Germany stopped helping the UK buying pounds because otherwise it would be sunk with the it. What I am proposing here, simple though it may sound is pure evilness in terms of economics and completely abhorrent to the consensus typical of the concerns and approaches of the EU. So really I cannot contemplate a reality where Scenario 2 comes into being. But then again, my imagination is limited while the realm of possibility is infinite with decreasing probability. It would take the coincidence of an enormous amount of human stupidity for matters to reach this climax. This really is an apocalyptic vision as far as economics is concerned. In consequence I propose that if the UK is to make too much of a fuss, the other members of the EU ought to ask it to leave the area. In so doing they should stir some much needed debate at home which at least should highlight the arguments above. If the government responsible for this antagonizing mess is not booted out of office and the UK actually choses to pursue this line of action, then a much less complicated alternative, that in my opinion is becoming much more optimal for all parts concerned, would be for the UK to leave the EU and join the EEA. The EEA is the European Economic Area, heir to the European Free Trade Agreement, and has such illustrious members as Norway, Lichtenstein and Iceland and the other 27 members of the EU, who set the rules of economic activity. Basically non EU members of the EEA have to abide by the rules in order to get access to other European markets, but do not have a word in determining those rules. Everybody gets the economic benefits, the UK does not have to follow any "Foreign" or "European" encroachment on its (nominal political) sovereignty rules while the rest are able to happily pursue political integration. Finally, Spain will still receive its fair share of drunk British tourists. Why would I still prefer the UK to stay in the EU? Because despite its most childish of attitudes towards the project, there is a place for the UK, as long as it is a constructive and honest partner. Skepticism is not a bad thing and the EU is a huge undertaking one which benefits from the occasional slowdown and brainstorming which such a partner could stir. However it is a fragile project and it is dangerous to undermine it with ignorance and nationalist slur. Either way I still wonder where this will all have led to in 10 years time...

Health Insurance Undersupply

So this is what I had in mind when I said that the purely privatised system of the USA is idiotic.

Once again remember the insurance premium function.

P = (1+a)Lp, where:

a= administrative fee

L=Loss incured when insured event takes place (ie: cost of medical treatment)

p= Probability of insured event occurring

In this case p=1 and therefore there is no incentive for the insurer to accept such a cost, which would imply that the insurance company would charge an insurance premium that would be more costly that the treatment (given that it would charge an administrative fee as well as a margin of profit in the insurance premium). Fully private sector markets are, at least for the time being as idiotic an idea as fully publicly owned markets.

The Size of Fiscal Multipliers

What effect does discretionary fiscal policy have on the size of an economy?

The question asks what is the effect of targeted and supposedly purposeful public expenditure on GDP. This involves looking at public expenditure that is not automatic and thus excludes the effect of unemployment benefits. The fiscal multiplier explains how many €cents are created in an economy as the result of €1 spent by a government.

This study, from the CEPR, proposes a number of ideas. Standing between the studies of Barro (1991) and Barro (2009) and those of Romer (2009), which seem to contradict each other, it argues that the effects of fiscal multipliers are best undestood in light of the environment in which they take place. Thus it focuses on whether the relevant economies are opened or closed, have fixed or flexible interest rates, are emerging or developed, more or less indebted and whether the focus of the fiscal stimulus is investment or consumption.

Multipliers are stronger in closed and developed economies, under fixed exchange rates and if they focus on public investment rather than on public consumption.

Additionally, this article also suggests (page 0, abstract point (2) ) that there is no difference between tax decreases and expenditure increases, which to economic neoliberals distraught would imply that the government has at least as good information about the needs of individuals as these individuals do themselves. It would imply that there is no asymmetry of information between tax payers and their government. This may have to do with the fact that in OECD countries (the sample used) countries do tend to use counter cyclical fiscal policy. This means that government spends money when it becomes the most scarce, ie during economic downturns. In this sense it is easy to understand why it makes no difference to have the government or individuals spend the money. Effectively, the government spends the money purchasing public projects from private companies, which in turn pay their workers, which in turn put their money in the bank who latter loans it to private sector companies, which will use it to efficiently compete in the market (excluding market inefficiencies, which may not be the smartest thing given that during economic downturns, if they are caused by decreases in investment, they will invariably involve the bursting of a bubble which means that at least for a while it is likely that the market will be a bit inefficient as it will be unable to distinguish between good and bad investments). Its basically, keynesian policy. Obviously this should end quite rapidly as soon as the market finds its balance again, as otherwise public expenditure will crowd out private investment.

My only question is really about this issue of cyclicality. I may have missed it, but I don't find any distinction between pro-cyclical effects and counter cyclical effects of the fiscal multiplier... As I said above the answer seems pretty obvious that counter cyclical policy ought to have more of an effect than pro-cyclical policy, but it would be nice to see evidence (a control variable for lagged economic growth or for official recessions).

Reconstruction, Transition and all that mess

The period of the USA's history known as reconstruction (fairly decent review of it in Wikipedia and a rather thorough introduction to it in Yale Open University Lecture Series)is extremely interesting and should probably be put into a discipline of its own, together with, the Japanese Meiji Era, the handling and the consequences of the great war, the Armenian Genocide, the German, Italian and Japanese reconstructions after WWII, transition from communism to capitalism in Eastern Europe (CEEC - Central and Eastern European Countries and Russia's Glasnost and Perestroika), post 1979 Communist China opening to the world, post-Franco Spain, the aftermath of recent post WWII genocides and atrocities and other civil wars in Africa (Sierra Leone, Rwanda, Liberia Somalia, Eritrea, Congo, etc), Southeast Asia (mainly Cambodia and its infamous Khmer Rouge), the Balkans and the transition from military or otherwise fascist looking and sounding régimes in Latin America (Argentina, Brazil and Chile come to mind, but I'm sure there are others). It's possible that I'm being unfair by leaving out Oceania, but it seems that these were rather uncontested situations, where the majority crushed the minority and there was no reconstruction, only annihilation. There was no contest.

One thing that becomes quite evident from the reconstruction period in the USA is the problem associated with the concepts of formal and informal rules, as described by North here (for almost all he ever wrote see here and here), that in order for rules to be credible, they need to enjoy enforcement credibility, which can only be guaranteed by a synchronicity between formal laws passed by legislations and informal rules predominantly present in social conventions, or what he refers as the mental models which help us understand the world. I thought at first that it might have been possible to support ungrounded (in public support) legislation through coercion or incentivizing side payments (North does not actually mention these two), but I guess that in such circumstances no one is determined enough to enforce the first and the side payments are not sufficiently large to be effective.

[On a side note, if anybody has ever read the biography of Franklin Delano Roosevelt, it may become apparent that he was acutely aware of this problem as he always feared to be ahead of public opinion, which caused his delay in entering in WWII )].

This is a big field, which is concerned with understanding the transition from instability to more calm states of nature. In this specific context my interest is larger. It encompasses not mere economic and political instability but also institutional instability as well as the possibility of economic, political, social and institutional stability as the means to achieve North's adaptively efficient economy/society. In this specific case I am very interested in the transaction costs specific to war as well as general economic, political and social strife. I am interested in how societies change their minds or fail to change their minds, and how they move on and deal with prior opposition. How did the unionists deal with the confederalists? How did the Tutsis deal with the Hutus? How did the allies deal with the Germans? How did moderate Germans deal with Nazis and the previous generation? How did Cambodians deal with the Khmer Rouges? How did moderate Spanish deal with the phalangists? How did capitalist Eastern Europeans, Chinese and Russians deal with their communist counter parts (and by the way, vice versa should also be interesting to know)? and more importantly, to which extent did this process of national healing or lack thereof affect economic performance and social and political stability?

Anyway, one thing seems certain, reconstruction failed, and depending on your view of the American Civil war (my apologies to Latin American sensibilities), it probably hindered the unionist war efforts. Now the interesting thing is to understand where and when it failed, and what about the USA made this possible, and whether this was inevitable.

I've got to finish this dissertation so I can get down and do some reading...

In the mean time, here's an interesting look at contemporary KKK. The little subtitles are at least as interesting as the photos.

German Ruling on the Lisbon Treaty's Constitutionality: Legitimacy and Shared Sovereignty

Interesting days for European Integration...

Ireland sets a date for its referendum (2/10/09), the German Supreme Court ruled on the constitutionality of the Lisbon treaty ( check here for the full but only preliminary version of the ruling. BTW kudos must go to the German Supreme court for publishing its rulings in English as well as in German) and I, for lack of imagination and choice, seem to continue to engulf myself in the economic effects of budget deficits and their implication in the analysis of the credibility of the Stability and Growth Pact (SGP). It's fiscal policy analysis with budget deficits, cyclical budget deficits (the potential output version, please...) and their determinants and their effects on Repo rates, flying all over the place.

Here's an interesting article about the German ruling and it's potential consequences. I haven't yet had the opportunity to read the entire ruling and I doubt that I will have the time until September, but based on this article, here's what I its seems to say:

1) That sovereignty rests with the state according to article 23 of the Basic Law

2) That the European Parliament is not a genuine legislature

3) It clearly states what policy areas should not be covered by European Integration, one of which is fiscal policy (ie:fiscal policy is national not European)

I know nothing of Common or Civil Law, much less of the specificities of the German Basic Law, but here's what one can make out.

1) seems to be self evident in explanation, ie: sovereignty rests with the national state because it is said so in the German basic law. The ruling does not specify that all sovereignty rests with nation-states, but only specifically in Germany and as far as stated by article 23 (which for lack of knowledge I will just assume that it is absolute within the boundaries of common sense, ie: as absolute as it is permitted and more or less customary in a developed liberal democracy). This is interesting because all that seems required to change this is to change article 23 of the Basic Law. If it is changed in a manner that ensures that sovereignty can be "pooled" or that recognises European legislative mechanisms as not jeopardising German sovereignty, it shouldn't be much more difficult to solve this problem in the future, than to get the necessary super majority to change the German Basic Law. I don't know why probably because of Munchau's sentence: “Power may be shared, but sovereignty may not", I keep on remembering that sentence I heard about the competing views of the EU. Proponents say that the EU pools resources while opponents claim it uproots sovereignty by sharing it with other nations, and allowing them to have a say in their decisions.

This then brings us to the second point, the EUs lack of legitimacy. I will limit the discussion as the court itself did to input legitimacy, as only that rightly seems to make sense in judicial decisions (however the Chinese would probably like to see this included, at least if they want to legitimise their state on anything else than brutality and raw ability to keep u quiet...). 2) is justified on an interesting basis. One point that keeps on creeping up is the fact that the EU legislative process is not legitimate because of the electoral rule guiding the European Parliament and the assignment of seats. There seems to be a problem of "electoral equality" (II.cc). This is interesting... I've spent the best part of the last 2 years trying to learn about the EU its perks and its problems and I swear to god this never showed up... at least not in any relevant manner. The only time I heard a discussion about it was during the discussion itself of the Lisbon treaty where the Polish president or his brother wanted an electoral rule that accounted for the dead poles of WWII... The courts talk is in exactly thr opposite direction. The other two problems of legitimation are indeed more common. the complainants argue that the Commission is not a representative body, that there is no European political competition and that the commission's monopoly of power to initiate legislation is unconstitutional. I wonder what the court has to say about all this.

I still havent come accross the reason for the different reasons of all policy areas. However it seems plausible that the court goes through all of them individually and at length.

For the decision it really gets interesting only from heading "C", which is about half way through the paper. But again, I'll go through it later.

Finally I must say I do like the mess that it might have created with the SGP and how there might be some problems coming up...

Here's what's interesting: Munchau complains that everybody is cheering that the Lisbon Treaty can be ratified, but nobody realises the constraints that have just been put on future European integration. I believe that this is true, but quite irrelevant for now. The truth is that right now the priority is to get the treaty ratified. It's been 5 years, closer to 6, everyone is fed up with this and its about time to get things moving! We keep on talking about process, not substance, and really process, unless it is corruption, bores people. It's too technical, too confusing. (I just witnessed this today when I tried to explain to a friend the application process for jobs at the EU). Anyway, to go back to the point, European and National officials just want to get this over with. The motto is: "tomorrow, we'll worry about tomorrow". This approach is actually benefitted from this ruling and its meanders. As a matter of fact it helps that someone came along and said: "listen, the EU has problems. It's decision making is not ideal and actually parliaments ought to have a bigger say. Moreover if you want to delegate more powers, to the extent that a delegation of legitimacy will occur, you can't do through the back door. The UK and France won't simply leave one day the UN security council and be replaced by a EU rep due to backstage plotting. If you want the USE (the united states of Europe), you have to do it right. You have to change the constitutions and to properly address issues of where sovereignty lies." Specifically this helps the case of pro-Lisbon in Ireland a lot. Here's a ruling from a pretty pro-European country, saying explicitly that the Lisbon treaty does not delegate power in all those policy areas which spooked the Irish electorate, with images of Irish soldiers fighting and dying for Italy (god forbid), while their one-night-stands were forced by Brussels to abort their unwanted children, and their unwanted children were taught Esperanto in school, so that they could fill up their Esperanto European tax revenue form. According to Cerniglia and Paganni (2007: 12-14), there is a pretty decent match between present delegation of policy areas to the EU and the preference of Europeans for such delegation. Actually, it would seem that there is even some room left for further European integration in defence, humanitarian aid, the environment research and development and foreign policy. But I lose myself... The point here is that this ruling may help the cause of the Lisbon treaty for the reasons that Munchau thought it would hurt European integration. If only the Irish pro-Lisbon side can get properly organised and if their dumb politicians can shut it, we might get a chance to have this thing over and done before David Cameron comes to power and messes it all up for everyone (him included)...

As to the rest, I'm sure that the nation state will be as less fashionable in 25 years as it is today in comparison to 25 years ago...

BTW, another interesting issue for me is the idea repeatedly (6 times) stated of "the will of the people". This is interesting for someone like me who has studied political economy for a while because we get used to talk about majorities and minorities, not "the people" and much less "the will of the people". Obviously I suppose that it is implied in the courts language that "the will of the people" is proxied by "the will of the majority of the people". A Rousseauian reminiscence...

Economic Development and Political Stability: Africa Vs South East Asia

Why is Africa less developed than South East Asia?

Because it is less stable? (remmember both were colonies)

Fair enough, but why is South East Asia more stable?

Aha! That's where the crumbling of the cookie gets interesting...

Here's some food for thought:

Because ethnic tensions were stonger in a Africa as a result of the more artificial division of borders. By the way, South East Asia was pretty unstable in the early years of independence... China, Laos, Cambodja and Vietnam went at it pretty hard. There's always Myanmar (or Burma... how did that name change happen anyway?) and I don't know how developped these countries are. Hum...

Ok it seems I'm stuck in the typical Social Sciences conandrum... I'm stuck with more questions than answers and it's likely that my question might simply be fallacious and based on a wrong assumption. "Scientific methodology... Ah, What a pain you are!"

So ok... I guess that now I need to check if my basic assumption is correct and focus the analysis.

New question: "Is Africa more or less economically developed than South East Asia? , and if so why?"

Not that it wouldn't be interesting to check whether it is more or less legally, politically or socially developped, but one must start somewhere...

This should make my life easy. I pick a number of economic variables and then look at their determinants and understand what caused the differences in values between Africa and South East Asia.

Potential Variables:

1. GDP and its growth (Capital stock and its growth, Size of labour force and its growth, depreciation of capital stock and its growth and their productivity, for a Solow growth approach to the issue; or initial GDP, social and political stability measured as number of murders, terms of trade, and human capital for a New [ie endogenous] growth theory approach à la Barro; finally for just the GDP I may wanna compare the accounting variables: Y=C+I+G+X-M)
2. GDP per capita and its growth
3. Gini Index (for some idea of the income inequality) and its growth
4. Inflation and its growth
5. Unemployment and its growth

so I guess I'll have to look into it...

By the way, I should mention this all started because someone told me they had studied many things during their master's, one of which had been conflict resolution. The question seemed relevant at the time, but I feel like I'm not really running towards it... It seems as though the issue started as one of political stability and now, by refocusing the question I've completely removed it from its original purpose... Oh well! What are you gonna do?

But the original question is still relevant and probably easier to assess... "Is South East Asia more politically stable than Africa? If so why?"

Political stability

1. number wars in a certain period of time
2. number of governments in a certain period of time
3. level of control/authority projected by the government throughout its geographical jurisdiction
4. number of politically motivated aggressions (from the simple vandalism to political assassinations)

Causes

1. Heterogeneity of population (this kind of fits into the Cleavage structure)
2. Lack of functional institutions to mediate conflicts and legitimise decisions from the majority This is a huge heading: incorporates the recognition of specialization and sphere of influence of one institution by all the others (Executive, Legislative, Judicial, Military, Police, Central Bank), has to do with number of veto players (Horizontal executive power sharing through the electoral system and cleavage structure and vertical executive power sharing presidential vs parliamentarian and federal vs unitary), possibility of exit and of exercising voice, legitimation (input or output) processes,
3. External interference
4. Geography and the geographical organisation of resources/capital (physical and human)

Fortunately I don't have a dissertation to write...

Elasticity and the encyclopedic size of economic concepts

One of the things I found most difficult about economics was the jargon that came with the discipline. This was probably the result of not having any economics background at the secondary school level which meant I kind of parachuted myself into economics. This would be a typical excuse for being a bit thick, if it wasn't for the fact that I came across Robert H. Frank's the Economic Naturalist and his comment about how this difficulty in acquiring basic economic principles is a wide spread trend. In that spirit I'd like to start writing some of these down, so that if memory fails, this blog can help.

I guess that as I'll come across each and anyone of these, I'll come back to the blog and write them down. I have to say, embarrassingly that wikipedia is hugely helpful with this type of query and that I will find myself going back there for definitions.

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Today's concept is Elasticity of price, substitution, and wealth (income + whatever else fill your pockets):

In practice: "A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all."

Numerically:"In economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable.(...).An "elastic" good is one whose price elasticity of demand has a magnitude greater than one. Similarly, "unit elastic" and "inelastic" describe goods with price elasticity having a magnitude of one and less than one respectively.

I always found it hilarious that I remembered the numerical difference between a normal, superior, inferior and even a Giffen good, but I never knew whether to call them elastic or inelastic... It's like having the cheese and a knife but not being able to explain to other people how to use each without maths...

FYI, every basic macro book has a definition of this!

Game Theory - Economics 159 Yale University

A third course from Yale University:

Game theory

1. Introduction

2. Putting yourself into other people's shoes

3. Iterative deletion and the median-voter theorem

4. Vest responses in soccer and business partnerships

5. Nash Equilibrium: Bad fashion and bank runs

6. Nash equilibrium: dating and Cournot

7. Nash Equilibrium: Shopping, standing and voting on a line

8. Nash Equilibrium: Location, segregation and randomization

9. Mixed Strategies in Theory and tennis

10.Mixed Strategies in Baseball, dating and paying your taxes

11. Evolutionary Stability: Cooperation, mutation and equilibrium

12. Evolutionary Stability: Social convention, aggression, and cycles

13. Sequential games: Moral Hazard, Incentives and Hungry Lions

14.Backward induction: Commitment, spies and first-mover advantage

15. Backward induction: Chess, strategies and credible threats

16. Backward induction: Reputation and duels

17. Backward induction: ultimatums and bargaining

18.Imperfect Information: Information sets and sub-game perfection

19.Subgame perfect Equilibrium: match,aking and strategic investments

20. Subgame perfect Equilibrium: Wars of attrition

21. Repeated games: Cooperation vs. the end game

22. Repeated games: cheating, punishment and outsourcing

23. Asymetric information: silence, signaling and suffering education

24. Asymmetric information: Auctions and winner's curse

EC252 - Financial Markets course at Yale University

Here's a series of great links, to different lecture videos in Financial Markets from Yale University.

They are very good. Check particularly lecture 7 and the last two(25 and 26).

1. Finance and Insurance as Powerful forces in our Economies and Societies (introduction)

2. The Universal Principle of Risk Management: Pooling and the Hedging of Risks

3.Technology and Invention in Finance

4. Portfolio Diversification and Supporting Financial Institutions (CAPM Model)

5.Insurance: The Archetypal Risk Management Institution

6.Efficient Markets vs Excess Volatility

7. Behavioural Finance: The Role of Psychology

8. Human Foibles, Fraud, Manipulation and Regulation

9. Investment and Portfolio Management - Guest Lecture by David Swensen

10. Debt Markets: Term Structure

11. Stocks

12. Real Estate Finance and its Vulnerability to Crisis

13. Banking: Successes and Failures

14. Guest Lecture by Andrew Redleaf

15. Guest Lecture by Carl Icahn

16. The Evolution and Perfection of Monetary Policy

17. Investment Banking and Secondary Markets

18. Professional Money Managers and their Influence

19. Brokerage, ECNs, etc

20.Guest Lecture by Stephen Schwarzman

21. Forwards and Futures

22. Stock Index, Oil, and other Futures Markets

23. Option Markets

24. Making it Work for Real People: The Democratization of Finance

25. Learning from and Responding to Financial Crisis I

26. Learning from and Responding to Financial Crisis II