Marginal Notes
Discrete thoughts on the world economy, economics, and the non-optimal surplus that lies between the two.

Monday, July 29, 2002  

It is perhaps ironic that my baptism of fire into the environmental fervor that is Santa Cruz began with a teaching assistantship in the Environmental Studies department. You see, the isle that I call home - Singapore - is a center of straightjacketed bureaucratic efficiency finely balanced with a free-market parlor that is akin to religious extremism. Unbridled capitalism has always rode on the forefront of my mind as a solution to a multitude of economic ills; consequently, environmental awareness was nothing more than a passing footnote, a fancy that the rich nations of the world enjoyed - not a concern of developing countries struggling to raise their living standards.

The tools that were used were all familiar - the subject matter, admittedly, was foreign - but being a teaching assistant did not require one to be personally passionate about what one teaches - just competent. Yet, as the quarter wore on, the stark realities of the consequences of continued ignorance of the environment by the world at large dawned upon my stubborn psyche. Natural resources were being overexploited. Existing technologies, whose continued operation would eventually erode the already fragile biosphere, had to be replaced with clean technologies. The abject poverty of a large proportion of the world's population was inextricably linked to the future well being of all the peoples of the world. And the Multhusian melodrama of a population explosion became more and more convincing in my mind. Sustainable development - so often tossed around in academic circles but rarely given due attention - could not merely remain a textbook concept. It had to be confronted, debated, effected.

This came to an inexorable intersection as we examined the global impact of human behavior on the environment. The issues addressed immediately began to challenge my assumptions - long ingrained as an economist - on the benefits and costs of free trade, the insatiable drive to improve GDP per capita, the mechanisms that translate theoretical studies into practical reality.

Take, for example, the case of global warming. At the Earth Summit meeting in Rio de Janeiro in 1992, world leaders signed a pledge seeking to maintain greenhouse gas emissions at roughly 1990 levels by the year 2000. In 1996, a United Nations-commissioned Intergovernmental Panel on Climate Change further lent further credance to this issue in its conclusion that there was a "discernible human influence on [the] global climate" (See the various reports by the IPCC, including Houghton, Ding, Griggs, Noguer, van der Linden & Xiaosu (1996, 2001). The IPCC website has full-text access to summaries). The implications were clear - left to its own devices, private firms would underestimate the costs of industrial production, and the residue of this oversight could irreparably threaten the continued life and progress of countries all over the world. The international offspring of this effort to reverse global warming - the Kyoto Protocol - was established in 1997, and a full 170 nations agreed to voluntary reductions in greenhouse emissions to 1990 levels. Yet, as of today, diplomatic frictions, bureaucratic foot-dragging and political interests have combined to result in not a decrease, but an increase in emissions of 10 percent or more in some cases. Evidently, the classic Prisoner's Dilemma that arises from countries' strategic choices governs the behavior of nations with regard to environmental issues; as a result, a system that is both compatible with sovereign economic incentives as well as feasibly realized at an international level is required. Any attempt to glaze over the issue will only delay the inevitable need to address the problem later, and this delay could well introduce new constraints into an already complex situation.

The benefits that accrue to the market as an efficient allocation mechanism, admittedly, remain large. However, there is a need to tamper this frictionless world with real-world rigidities, political realities, and environmental externalities. Any thesis of the way the world works that glosses over these facts will remain necessarily incomplete, and wholly unsatisfactory. Worse, it might lead to policy decisions that are erroneous at best and disastrous at worst.

If, then, a measured skeptic such as a myself can, when presented with the undeniable facts, be converted, then perhaps there is hope that, one day, many others will come to a recognition of the truths surrounding the environment. And while you may not find me picketing Starbucks any time in the near future, you will, however, have one more voice seeking to axe the path dependency that we find ourselves in, and hoping to preserve a beautiful world for our children's children.

posted by Jamus Lim | 7:26 PM

Although a salient argument can be made about the tendency for Hollywood to sensationalize and thereby possibly mislead audiences in the name of artistic license, 'A Beautiful Mind', the recently-released movie about John Nash (starring Russell Crowe as Nash) is clearly a poetic rendering of a primary contributor to economic theory as it stands today, and deserves a viewing for any economist, mathematician, or game theorist that have been acquainted with Nash's Nobel Prize-winning ideas.

Clearly, the Nobel Prize does possess a somewhat checkered history, and the Nobel committee's rules that it never be awarded posthumously has come under criticism before. Yet, to dismiss its importance and prestige by listing personal favorites who failed to attain the Prize or comparing it to accolades offered by the entertainment industry denies and implicitly discredits the intellectual brilliance of the scientists and authors who have invested a lifetime seeking to make significant contributions to their respective fields. Hence, perhaps, there is some justification for the omission of certain more glaring, and perhaps, embarrasing aspects of Nash's personal life.

Although it has become the common rant of nonacademics to assert that the unfortunate reality of academic research is simply a steeplechase of wealth and fame (recall, "publish or perish"), it vastly oversimplifies and insults the vast majority of academics who tirelessly devote their lives to shaping young minds, and the effort and dedication that these individuals expand in that endeavor. Furthermore, contrary to the common misconception that academics live in ivory towers and not in the real world, there is clear evidence that the informed contributions of these scholars have led to improvements in our quality of life, a better knowledge of the world around us, and - even - a superior approach to conservation and sustainable development.

And although the awarding of the Nobel in economics is, by definition, a subjective affair, few economists would begrudge the receipients their due honor. Nobellists have been instrumental in shaping the vast body of work that has proceeded since (and indeed, before) the first awardees in 1969, and the work of these economists, as well as their peers, have afforded a better life to millions of people around the world - from that of helping the developing world (Theodore Schultz and Arthur Lewis, Nobellists '79), to increasing economic growth (Robert Solow, Nobellist '87), to improving the welfare of the poor (Armartya Sen, Nobellist '98). And of course, the work that led to John Nash's shared Prize in '94, as well as his other pioneering contributions in game theory, is today the basis for understanding an entire range of strategic behavior - from the interactions between corporations and nations to biological processes. Not least, recent extensions have also made use of game theory in international economics (especially strategic trade behavior) and political economy.

Hence, in summary, do watch and enjoy the movie. And if it inspires and informs, then go the next step and read the book (Nasar 1998).

posted by Jamus Lim | 7:18 PM

Monday, July 23, 2001  

I think that there is a need to recognise the fact that ICT has been very much of an intellectual 'fad'. ILO's 2001 World Employment Report has an ICT theme ('Life at Work in the Information Economy'). The UNDP, in its 2001 Human Development Report, devotes the volume to technology ('Making New Technologies Work for Human Development'). The G8 talks about it. Even the IMF (World Economic Outlook, May 2001) and World Bank (World Development Report 1998/99, 'Knowledge for Development') see a need to pay ICT some attention. There are obviously countless other examples.

Of course, as with any general purpose technology, ICT has tremendous potential to affect most, if not every, sphere of economic life - that is the very definition of a general purpose technology. However, as recent news reports have no doubt made clear, there has possibly been an overestimation of the impact of ICT on economic activity - see, for example, Jeff Madrick's May 11 article in the IHT ('High Tech and New Economy: Big Idea Deflates'). Also, keep in mind that ICT sector employment only constitutes 5 per cent of the U.S. economy, and this is not very different for Asian economies either. Note, however, that there are those who believe that ICT might just have a disproportionate impact on economies, relative to size ('Shifting Cycles: New Economy Becomes the Only Economy', IHT, Jul 23, 2001).

With regard to development, technological progress is familiar territory. ICT is but another form of technological advancement (and its most visible in our time), although it is arguable that the invention of the steam engine or the dynamo might have had far greater positive impact on the economic progress of mankind in general. It is important to keep this in perspective. Still, ICT does represent improvements in technology, and so has legitimate claim to being the source of growth - mainly via the channel of productivity (or more specifically, total factor productivity).

The picture becomes more mixed when it comes to poverty alleviation. My take on the recent literature on the so-called 'Digital Divide' created by ICT and the counterargument in the form of 'Digital Dividends' accruing to ICT has been that ICT presents both opportunities and challenges to economies, and whilst exploiting ICT is important, it is by no means the panacea for all economic ills. Recall, the economies of East Asia have all been exposed to ICT in some form or other, and yet we can see both clear successes as well as those that look like they have been, or might be, left behind. ICT bring both benefits as well as creates new concerns.

Undoubtedly, ICT will impact on areas such as healthcare (especially via biotechnology and bioinformatics), education (mainly through delivery and interactivity), the environment (ICT is a major aid to studies on environmental change and control), and many others. So did electricity. But we still have with us cancer, illiteracy, and pollution. And - closer to the interests of this list - ICT will change the way political systems operate, and can very possibly lead to the greater empowerment of the individual citizen (through enhancing civil society dialogue amongst the grassroots and with governments). But it is also a system for possible oppression, eroding privacy and raising big-brother issues.

For me, the bottom line is this: study ICT, try as far as possible to exploit its use, and form policy to address issues that arise. Don't expect it to solve the world's problems; use it as a tool and not as a medicine.

posted by Jamus Lim | 11:44 PM

Friday, July 20, 2001  

Recent critique of the new Basel Capital Accord has centred on several key issues.

The first of these is concerned with the adequacy of the suggested risk model in capturing risk, especially the systemic risk present in a financial crisis - the very form of risk that the new framework seeks to address. Risk is meant to be an endogenous process, and sadly, the employment of a uniform risk assessment model does not capture this fact; indeed, by requiring that market participants utilise a common model, there is an inadvertent flattening that increases the homogeneity of risk profiles in players.

The second set of concerns involves the utilisation of the Value at Risk (VaR) methodology. VaR requires that certain restrictive assumptions - such as the elliptical (normal) distribution of returns - be fulfilled in order to work, and unfortunately, credit and market risks do not satisfy this pre-requisite.

Also, the incorporation of the somewhat arbitrary estimates of ratings agencies. Besides the well-known rule of thumb among Wall Street suits that discounts agency ratings by a notch or two, their inconsistent and unregulated forecasts are also likely to lag real time, since there are inherent forces - such as the reliance on accounting data and preferred non-volatility - that guarantee a certain degree of inertia in their recommendations.

Fourth, the incorporation of operational risk into the general model does not seem to be justified, as operational risk is often idiosyncratic, and hence immune to contagion. Furthermore, measurement problems plague the ability to accurately quantify this concept.

Last, these proposals lead to a major problem: that, in sum, the proposals would also serve to accentuate and not mute the procyclicality of regulation and the susceptibility of the financial system to systemic crises. This is a genuine fear, and if the Accord is eventually implemented, one dreads the day when it is inevitably tested.

posted by Jamus Lim | 12:15 AM

Monday, June 25, 2001  

Sun's decision to allow Java to access physical memory in order to offer real-time applicability through enhanced performance is, in my opinion, an unfortunate compromise of its "write once, run anywhere" maxim. It represents an adulteration of an unblemished concept in multi-platform computing for the sake of wider applicability in commercial systems. This act is nothing short of corrupting not just the language, but the entire concept of seamless computing, and it is a sad, sad day for the industry.

A better solution would have been to offer an enhanced version - call it something like Mocha Java - and leave the original the hell alone. This preserves the beauty of the original concept that won so many converts and yet allows Sun to tailor the language to allow for time-critical computing. This is not simply a matter of semantics. The introduction of a deflowered Java not only makes Sun out to be a hypocrite - recall its condemnation of Microsoft when it introduced proprietary functions into Java - but also leaves the door closed for programmers who would rather work with the real McCoy.

The ultimate losers will be the consumers. With the ability to access memory, Java is now amenable as a virus vector, and unless there are specific steps taken by browser clients to isolate the new Java from the old - if that is possible at all - malicious hackers now have a fresh avenue for the creation and dissemination of Melissa & Co.

posted by Jamus Lim | 11:34 PM

Thursday, June 21, 2001  

The Australian government is having problems with its GST component of the overall tax reform package, prompting many to strike out at it. True to form, I beg to differ.

The GST, in itself, it not inherently evil (much as we would like to make it out to be). There is a very fine economic argument for the implementation of a GST - individuals who consume more goods and services should pay more tax, and this form of taxation is far broader and infinitely harder to dodge, not to mention its contribution to promoting greater equity.

However, what is happening is that governments are taking a good idea and getting the implementation all wrong. Ideally, the GST should replace income taxation entirely - and if the economic calculus is done right, there should be no significant changes in the tax burden faced by individuals. Obviously, reality is not that simple, due to differences in preferences and lifestyles between consumers, and the unwillingness of governments to completely forgo income taxation.

However, even granted these variances, there shouldn't be major changes in the taxes paid by individuals. This is obviously not happening is Australia, at least on the basis of anecdotal evidence. It has somehow failed in its homework, or has intentionally done so to enrich its coffers (for which, if true, they will likely pay the price at the next elections).

I would argue that this failure to correctly implement the GST is not inherent in the theory itself. As a counterexample, consider the case of Singapore, which implemented a GST system some time in the 1990s. As part of the tax reform package, it slashed income taxes at all levels, and imposed a small 3 per cent GST. Despite the initial fears, most Singaporeans do not now suffer from an increased tax burden, nor are they clamouring that the government has mugged the economy.

Hence, rather than instinctively striking out at the failure of the programme in Australia, perhaps we should also look at why it failed. Was it due to negligence on the part of those who planned the tax? Or is it simply a matter of teething problems, due to unanticipated realities in implementation? And how fast is the Australian government working to remedy this problem?

posted by Jamus Lim | 1:45 AM

Friday, April 06, 2001  

Marginal notes is meant to archive comment, opinion, and speculative thoughts on the world economy and economics that are too discrete or brief to justify the effort required to translate them into an article. My manifesto: I expect, more often than not, to be wrong here. I will, as such, be more blunt on issues as they cross my mind. No political correctness. No elaborate justifications. Just unpolished economics, in the raw.

posted by Jamus Lim | 10:46 PM