Blame it on the Rest of the World!

President Bush's statement that food prices are rising in US because Indians are eating more is yet another illustration of the fact that most politicians across countries are unconditionally ignorant and enjoy making senseless but sensational statements!

This article in the New York Times gives an interesting account of the controversy.

Yet another Enron-type Debacle in making!

Governments seldom learn from their past mistakes and the state government of Maharashtra is in no way an exception. A decade back it signed a completely nonsensical deal with Enron for power production and now its somewhat going down the same road with the Dow Chemical Company. It apparently has offered almost 40 hectares of land to Dow for setting up a research lab around Pune.

There is nothing wrong in having this research lab per se. But it seems very little has been done in terms of impact analysis of the project. There is neither an environmental impact report, at least in the public domain, nor a concern for completely upsetting the local dairy business because of loss of the grazing land.

This recent article in The Business Standard sheds more light on the issue.

Curry Powder

I have always had a tough time explaining to people outside India that there is nothing called as 'the Indian Curry Powder'.

This link gives an apt description of why so!

Walmart in India-Some more thoughts

I need to qualify my conclusions in the earlier post. There is a possibility that Walmart may not be just another supermarket, where India's new rich shop,but will also be a recourse of cheap shopping for the lower income groups who currently shop at the smaller grocery stores.

Why do I change my stance? The answer lies in the shopping behavior of an average middle class family in India. The reason they shop in the small grocery stores (kirana dukan as called in Maharashtra) is not only because it is cheap but also because most of these stores provide a credit line to their customers. You shop for a month and clear your dues at the end of the month. At least that's how the kirana stores do business in most of the parts of my home state.

So it seems if Walmart is able to provide customers a credit line in some form or other, then it could potentially win over the customers who shop at kirana stores. There is still one problem though. Because of proximity to the customers and a personal relationship, it is easier for the kirana store to verify and monitor the credit standing of their customers. Therefore, a kirana store is able to provide credit to a customer who otherwise may find himself without any access to formal credit markets because of his income level. Walmart will have to rely on formal credit markets and still find a way to compete with the kirana stores in offering credit.

Thus, the key issue is whether Walmart will be ready to assume the credit risk to entice the common Indian consumer and change the retail market in India as it did in North America or be happy with a large market share in a still niche market. This indeed will be one of the key determinants of its success in India apart from the supply chain issues.



PS: So now you know why the supermarket on Sinhagad road in Pune closed down. It did not study its customers well. They were not only price sensitive but also credit constrained. Hence, reduction in price or other bundling strategies only worked to a certain extent. The business still remained with the kirana stores.

The Red Book!

History provides ample evidence that red books are important and this one certainly fits the bill. It is one of its kind and in some sense a handbook of a revolution. Yes guys, I am indeed talking about Ljunqvist & Sargent's (L-S) excursions in recursion!

However, its still a graduate text and hence by definition a badly written text. This fact has always puzzled me. We have fabulous books at the undergraduate level and I agree that they talk a lot. But sometimes stories are important and in subjects like economics, even more so. So what happens when the same author writes a graduate text? Does he not have the right incentives to write an equally accessible text? Or the only thing advanced about the advanced subject matter is the terseness and technique? Probably its the mix of the two factors.

The market is not that big for a graduate text and hence the returns only justify a minimal effort. However, if you read L-S you will find that some chapters are extremely well written. For example the initial chapter on Search theory as well as the one on Asset pricing read very well than other chapters. Coincidently, these chapters come somewhat straight away from Sargent's earlier book on Dynamic Macroeconomic Theory!

Apart form frequent changes in notation, there are some other glaring examples of poor instructional design. For example, the material in the chapter on economic growth has no relation with the problems at the end of the chapter. What do you think is the reason? They come from completely different sets of authors! So if you are hoping to get some idea about how to solve the problems by reading the chapter, forget it. You might be better off reading the solutions directly.

Well, no point in complaining too much. We don't have much choice when it comes to a PhD level Macro text based on microfoundations. Hence, even when we know that almost all monopolies suck, we have to patiently wait for a miracle in terms of a better competitor!

Steve Williamson's Macroeconomics

I have to admit that this indeed is a fabulous undergraduate macro text. As claimed it does reflect the current practice of macroeconomics or at least the most influential one. However, the following is worthwhile to note:

1. The most common example given by almost all advocates of RBC theory of business cycles of a shock to total productivity, the oil price shock of 1970, is also present in this book. While it is true that with an exception of one, all the recessions in US have been preceded by a sharp rise in energy prices, this should work as a change in relative price of an input and hence a movement along the production function and not as a shift in it. However, even if we accept that the increase in energy prices does work as a productivity shock we cannot ignore the fact that most of the empirical studies place the contribution of energy prices to business cycles between 8 t 18 %, which is not a very significant, let alone a major one! ( Stadler 1994). This is not withstanding the fact that for technology shocks themselves to contribute to cycles, they should contribute at laest 78% to the shocks according to Aiyagari (1994).
2. I still have difficult time understanding why various authors motivate the study of endogenous growth by mentioning the failure of Solow model's prediction about convergence of growth rates across countries, but failing to mention that Robert Solow himself never intended his model to be used in that way, Easterly (2001, pp.55). Solow wrote his model on the backdrop of what is called as capital fundamentalism, a belief which postulates economic growth as a function of availability of machines per worker. He intended to show that this belief is wrong and hence capital accumulation does not cause growth in Solow model but some exogenous factor called technology does. The insight comes from the simple yet powerful logic of diminishing returns to a factor. When applied to cross country comparison of growth rates, economists extended the logic of the Solow model by assuming that, at least in principle, all countries have access to the same technology. Then, the only reason that countries, for example the tropics, did not catch up with the developed countries was lack of capital. But again the problem with this conclusion is that capital is not a very sizable factor in production. Therefore, if one wants to explain the differences in growth rates on the basis of availability of capital, then the conclusions are obviously absurd. As per the calculations of Lucas mentioned in Easterly (2001), each US worker for e.g. will have to have 900 times more machines than each Indian worker in order to explain the differences in their standard of living and thats clearly not the case.
   

All said and done, this book does a good job in presenting macro in a much clean and consistent way and avoids giving the feeling to the reader which, I got as an undergrad, that macro is a series of disconnected models with no relation to the micro behavior.


References:

Aiyagari R S (1994), On the Contribution of Technology Shocks to Business Cycles, Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 18, No.1, pp.22-34.

Easterly William (2001), The Elusive Quest for Growth, The MIT Press.

Stadler George W (1994), Real Business Cycles, Journal of Economic Literature, Vol. XXXII, pp. 1750-1783.

Williamson Stephen D (2007), Macroeconomics, Third Edition, Pearson.

S. Rao Aiyagari

This guy did some exciting work in incomplete markets among host of other issues. Unfortunately, he died very early. This is a write up by Neil Wallace on him which appeared in the Federal Reserve Bank of Minneapolis Review. It also lists most of the work done by Rao. You can also find his work here.