11 Jun 2018

The beginning of the end

borrowed wisdom is still wisdom
Greetings readers!

After 10 years, I am going to stop blogging at aguanomics.

I am doing this because I have written quite a bit -- perhaps too much -- on the political economy of water. I've enjoyed the process very much, learned a lot from readers' comments, and written two books on these topics.

Some of you may have noticed that I've posted less on water and more on other topics in recent years. I am going to formalize this shift by switching to a new blog -- The One Handed Economist -- that will give me more space for a range of topics, so this post is more of a comma than full stop.

In the next weeks, I am going to get OHE going as well as tidying up aguanomics by publishing The Best of Aguanomics, a book of posts for readers (new and old) to enjoy.

I know that it will be difficult to choose 100 or so posts out of the 6,000 that have gone up over the past 10 years, but I'm looking forward to uncovering gems and highlighting old favorites. (If you want to suggest any post, then please leave its link in the comments here!)

Thank you for your time, your support and your conversations over all these years.

Bottom line: All good things must come to an end, but this end allows a new beginning.

7 Jun 2018

Policy instability and the drive for change

While writing my paper on desalination, I came up with the idea that the stability of a government policy would depend on how close or distant it was from the public's ideal, i.e.,
...the mismatch between the incidence of costs and benefits indicates the degree of inefficiency and risk of collapse from economic, political or environmental
ruptures.
While discussing this idea in class, I scribbled out the following illustration of that idea:



The red line shows the amount of enthusiasm objectively supported by "science," which helps clarify if the public is too optimistic about the policy (e.g., recycling) or too pessimistic (e.g., nuclear power), but that discussion is secondary to the main point on stability, i.e., this figure:
As you can see -- and yes, it's a "no duh!" concept -- a government policy that veers too far from the diagonal is going to be unpopular, either because the policy is too weak or too strong relative to public preferences. These relative positions are important with non-democratic governments, as there are many ways in which an unhappy people can undermine or avoid an unpopular policy.

Why would politicians deviate from the public will?
  • Corruption: serving special interests
  • Ideology: personal beliefs over the beliefs of the people
  • Error: misunderstanding what the public wants.
In all cases, the further the deviation, the greater the instability of and/or damage from that policy.

Bottom line: A policy that fails to match public preferences is unlikely to last.

5 Jun 2018

Review: The Economy of Cities

Most people know Jane Jacobs as the best representative of the movement to save cities from cars. She was seen as the main opponent to Robert Moses's attempt to turn Manhattan into a (bigger) parking lot. By trade, Jacobs was a journalist, but she made her mark with The Death and Life of Great American Cities (1961), a masterpiece of urban sociology that generations of car-obsessed planners have ignored at their peril. In that book, Jacobs draws on experience of living in New York and common sense as she explains the ways that people build social bonds with strangers and neighbors, and how those bonds create the "social fabric" that defines vibrant, resilient and prosperous neighborhoods (more on bonding).

For a long time, I though these significant contributions to be the totality of Jacobs's work, but I was wrong -- in the most pleasant way, it turns out, as she wrote many other books. Her last, Dark Age Ahead (2007) was an early, and quite accurate, warning against the rise of illiberal forces. I enjoyed it immensely and turned to her for more to read.

The Economy of Cities (1969) appealed to me not just because of the topic, but also its vintage, as I was born in that year. The book turns out to be another excellent read, mostly because it brings Jacobs's original perspective to an important topic: how do cities grow and develop?

Before I move on, let me make a short note about this book's relative obscurity. Although I am hardly an expert of urbanism or urban economics, I would have expected to hear more about the ideas Jacobs discusses in this book, but it seems that those ideas have now become so firmly entrenched that they are no longer credited to her.*

And Jacobs herself was not the first to talk about the economies of cities. Adam Smith was probably also not the first, but his 1776 characterization of economies of scope and scale has stood the test of time:
As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for.

There are some sorts of industry, even of the lowest kind, which can be carried on no where but in a great town... [snip] In the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, every farmer must be butcher, baker and brewer for his own family. In such situations we can scarce expect to find even a smith, a carpenter, or a mason, within less than twenty miles of another of the same trade... [snip]

As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland parts of the country.
Smith's observations on the size of the market more or less integrates an important element missing from basic economics, i.e., the importance of space and the transactions costs that arise with distance.** It is from this simple idea that Jacob's begins her book with her most controversial (?) idea, i.e., that cities predated agriculture and drove the agricultural revolution of 10,000 years ago.

There's very little evidence and no written records to support this idea, but I find it far more plausible than the commonly held idea that farmers produced surpluses and thus enabled specialised trades and a bureaucratic class to arise. Against this series of steps, Jacobs supposes that "cities" -- basically villages whose specialized traders and craftsmen stayed put -- existed alongside hunter-gather societies, each playing a complementary role to the other. Given this start, Jacobs then makes the entirely plausible guess that specialization in handling animals would lead to breeding, and specialization in handling seeds and other foods would lead to the selection of those with higher yields or more attractive qualities, with such "innovations" then being exported from the villages back into the wilds -- and eventually the fields that would be defended by city-dwellers rich enough to build walls, hire guards and so on.

This insight alone is worth reading the book, but there are more!

One important implication of city-led innovation is that it rebukes governments that focus on rural development. Jacobs's advice would be "leave them alone to follow and learn from cities," but many governments subsidize, direct and protect rural areas in a crude attempt to develop them. Such strategy not only wastes resources and encourages corruption, it also retards urban and rural innovation. (Note that this pattern is not falsified by China's post-1980 rural-led development, as the Party would not have dared to give economic freedom to cities first.)

Her next major point is that cities need to innovate if they are to survive. This means that "company towns" are likely only to last as long as their companies. In the book, she mentions how Detroit was a dynamo compared to Pittsburgh because it had so many industries to Pittsburgh's steel-dominated economy. With another 45 years of history, we now see how Detroit failed when its car industry stumbled, and Pittsburgh has "come back" through diversification. It's hard to remain king of the hill!

Part of this thought that Jacobs spends some time on is the way that various players in supply chain must be competitive to service world-class firms, which means that they are also likely to be exporters, and thus the source of extra profits, jobs and prosperity. It is thus that Jacobs, with justification, highlights cities as the specialized engines increasing the Wealth of Nations. (Some might claim that countries can grown rich on agriculture, but the richest countries have stepped away from that sector.) She called this dynamic "import replacement" -- meaning that local firms would cut out distant suppliers to local producers/exporters. Her definition is realistic as the way cities grow and more realistic as a description of how to encourage than "import substitution," which depends on preventing foreign firms from supplying intermediate goods, in the hope that local firms would be able to fill the gap.*** The implication is that cities don't depend on ports or river access to grow, but a mix of older and younger industries that can export goods based on imported materials and innovate new goods and services as older enterprises decline.

Finally (for now, but not the book), she looks into the future from 1969 to predict that cities would be able to mine their resources, a prediction decades ahead of modern pundits of industrial ecology and the circular economy. How would she get such an important insight? She saw cities as ecosystems rather than engineered or master-planned spaces beloved of the command and control crowd se fought for decades.

Bottom line: I give this book FIVE STARS. Read it for the sheer pleasure of joining Jacobs on an exploration of how our urban economies evolve.

For all my reviews, go here.

* This contemporary review [pdf] notes her iconoclastic insights. This piece discusses how economists put her ideas ("Jacobs externalities") into play.  Google scholar shows either 89 or 7000k+ citations of this book. I checked a few and she was not cited, so the algorithm is confused. I'd love to see a decent list of economists who have cited her.

** In our daily lives, it's easy to see how urban sprawl and congestion increases the transaction costs of  commuting and communicating with others in cities, which is why sprawl is bad for market efficiency and innovation. For some people, cars promise to "collapse space" but most of that promise has been lost in traffic jams caused by everyone else pursuing the same idea. It's that dynamic that underpins my claim that cities should be for people, not cars, a position of whose righteousness I experience every time I ride my bike through Amsterdam.

***  Import substitution is often linked to failure and poverty in poorer countries. Import replacement is more effective but not the same as laissez-faire: countries can still use transition periods to gradually expose their local industries to stronger and/or subsidized competition from abroad.

4 Jun 2018

Private charity can't replace the welfare state

Russ Roberts (of EconTalk fame) is fond of calling for less welfare and more private charity. His claim that private charity is more likely to get to the right people makes sense to me, but I think he underestimates the likelihood that voluntary contributions will be adequate to replace funds "confiscated" via taxes.*

According to this site, 2015 US federal spending on social security, unemployment, health, and labor costs ["charity for the vulnerable"] was $2.33 trillion, or over 60% of total spending. (These numbers do not include massive local and state spending on similar categories.) Meanwhile, total charitable giving was about $370 billion, or about 16% of the federal spend.

But what about the "effectiveness" of charitable giving? While some of it is self-serving, I agree that many smaller donors would mean fewer big mistakes, I also know that those donors would send money where it suited them rather than where it was "needed," as people are far more generous to "people like me" than the average, anonymous citizen.

Overall, I don't think charitable giving would rise by a factor of 6, if spending (and thus taxes) were cut back.  The problem -- as usual -- is freeriding, which is much easier with voluntary contributions than it is with taxes.**

Bottom line: Every society needs a social safety net if it is going to call itself developed. In most countries those safety nets rely on complex bureaucracies and mandatory taxes to bring benefits to all citizens who qualify. In some cases, those programs can be improved (replacing means-testing with universal basic income or dividing security from savings [pdf]), but all systems will need to rely on taxes if they are going to deliver the quality of services the average citizen and voter expects.

* I tried to find the podcast where I made a comment on this matter, but my google-fu is weak.

** After Trump's corporate tax cut, "companies spent 37 times as much on stock buybacks than they did on bonuses and increased wages for workers." I paid 37 percent of my income in various taxes last year in the Netherlands, and I am happy to pay into a functional system :)

1 Jun 2018

Friday party!

These advertisements are from the May 1933 issue of National Geographic Magazine. My father was born that month (he just turned 85!), and these provide some perspective on how much life has changed in his lifetime. (For more on those changes, read "conversation with my dad part 1" and "part 2").




The same issue, by coincidence, has an article on flying [pdf] that explains how the "means of the rich" were coming to the people. My dad, by the way, was taking the ship between Canada and England in the 1950s. By the 1960s, my mom was flying from Hawaii to Europe, via New York where she met my dad :)

31 May 2018

Chris Perry on water rights

Chris Perry (former Editor in Chief of Agricultural Water Management) sent this 'round via email nearly 2 years (!) ago. I am publishing it here because it deserves a wider audience:

Surface Water
  1. Any system of water allocation that is (a) based on quantitative withdrawal rights, and (b) results in scarcity at the individual farm level encourages the farmer to increase the “consumed fraction” (that is, the proportion of water delivered that is consumed). Adoption of hi-tech irrigation is a typical route to achieve this — the consumed fraction may reach 90% under drip compared to 50% under flood irrigation.
  2. The impact of this trend is to reduce return flows to aquifers and the environment more generally, hence (typically) increasing downstream scarcity.
  3. Allowing trade in withdrawal rights also tends to increase consumption because one attribute of a more “efficient and productive” farmer (a likely buyer) is maximisation of the consumed fraction. Any trading system further exacerbates scarcity beyond the impact of adopting more “efficient” on farm technology.
Unless...
  • Either water accounting is fully based on consumption rather than withdrawals, or withdrawals are controlled and adjusted so that desired outcomes, such as minimum river flows or aquifer stability, are met.
  • In the US, the consumed fraction is a consideration in assessing “buy backs” (thus if it is assessed that on farm efficiency is 70%, a farmer is only compensated for that fraction if the water right is acquired by the State for environmental purposes. In Australia, 100% of “buy back” water is counted as an increment to environmental availability, and any nominal “savings” from increased “on farm” efficiency are similarly assumed to be incremental environmental flows.
  • In consequence, the current program of massive subsidies in the Murray Darling Basin to on farm efficiency improvements (some $4 billion to date) without due reference to local geohydrology, is a tax on society in general that, at least in some cases, is making the environment worse.
Secondary impacts of “hi-tech”
  1. The impact of introducing hi-tech irrigation is to increase the availability of water available for consumption per unit of land. If the quantity of water delivered varies from year to year, the effect is to increase the assured supply of water for consumption at any specific reliability level (e.g., 75% exceedance, average flow, etc).
  2. An increase in the assured supply of water for consumption tends to encourage expansion of the area under high value crops — often perennials.
  3. This change reduces the capacity of farmers to respond flexibly to periods of drought: Annual crops (grain, cotton, forage) can be abandoned at relatively low cost, or not planted at all, when water is particularly scarce. The consequence of periods of drought for high value perennials is thus EITHER a heavy financial loss as perennials are abandoned, OR severe depletion of groundwater to protect investments. (This appears to be exactly what has happened in California in recent years.)
In sum
  • Hi-tech irrigation benefits the environment by reducing excess application of chemicals; it benefits farmers through savings in labour and pumping costs, allowing increased irrigated area, increased yields, reduced pumping costs.
  • However, in the absence of full control of water allocations (surface and groundwater), hi-tech tends to increase consumption (reducing water availability to the environment and to aquifer recharge); increase demand for water allocations from surface and groundwater because of the potential to increase beneficial consumption and expand high value crops; and decrease the flexibility of farmers to respond to drought.
  • The understanding of these issues by policymakers (donors, politicians, activists) is limited: The simple logic that flows from the law of conservation of mass that underpins sound water accounting is largely misunderstood or ignored.
  • The more complex implications for incentives, the environment, and the capacity of farmers to respond to changing water availability — whether through aquifer exhaustion, transfer of water to environmental restoration, or climate change — is as yet not even in the “misunderstood” category.
Bottom line: Worrying.

* Chris and I (seem to) disagree on whether it's better to define rights with respect to withdrawal (100 units of rights means you can take 100 units out) or consumption (100 units of rights means you can take 200 units out, as long as 100 units "flow back" in some way that allows others to use the water. I prefer withdrawal because it puts an upper bound on how much water is used (return flows are a "bonus" added to existing environmental set-asides) and thus solves a common problem. Chris has spent a lot of time arguing in favor of consumption (besides the above), so you can read more here, here, here, and here.

30 May 2018

Links of interest

  1. The American dream is about living together, even if you're a racist.
  2. A great critique of the rise of bullshit jobs in the academic world
  3. Venezuela's incompetent corrupt government destroys its water system
  4. Why were are the Balkans underdeveloped? Geography as destiny
  5. California energy regulators go full-retard
  6. China's carbon markets are already driving low-carbon innovation
  7. Richard Thayler (Nobel Prize 2017) explains behavioral economics very clearly.
  8. Henry Kissinger on the dangers of AI to our humanity and ability to think (I wrote about the same issue in "Is Google Evil? [pdf] 14 years ago.
  9. "Does Doing Good Give You License to Be Bad?" Sometimes.
  10. Why we should be more like cats than dogs on the internet (and a zinger on Facebook's claim that its advertising revenue "helps people" /facepalm)
  11. In a paper I was reading recently, an ecological economist noted [paraphrasing] that GDP is the target because taxes [on flows like income] are needed to fund government/public services. This casual observation is pretty deep. If wealth was taxed, then maybe government wold worry less about consumption and more about creating wealth?
H/Ts to BK and BZ

29 May 2018

Watch these documentaries!

The China Hustle (2018) is similar to The Big Short, in that it describes how "plucky outsiders bet against the financial mafia", but this time they are betting against fraudulent accounting in China. I found the story compelling enough to divest a bit from shares in Chinese companies. Here's the trailer:



Human Flow (2017), by Ai Weiwei, is a documentary on migration, refugees, and human rights. Weiwei's character as both an artist and humanitarian is on clear display in this film, which shows the complexity of the issues and suffering of many people. If you think Trump is wrong (or right!) then you should watch this film to learn a little more about how humans can mistreat -- and save -- others from misery. Here's the trailer:

28 May 2018

It's getting hot in here!

A British climate scientist made these visuals:

Central England: Annual temperatures 1772-2017 (7.6°C blue to 10.8°C red)

Global: Annual temperatures 1850-2017 (from blue +0°C to red +1.35°C)

25 May 2018

Friday party!

This Spanish representative to the European Parliament understands the EU's role:



(Here's a better version without subtitles)

Rough translation/transcript:
Europe today is limited in the North by populism, to the South by refugees drowning in the sea, in the East by Putin's tanks, to the West by Trump's wall, in the past by the war, and in the future by Brexit. Europe is today more isolated than ever, but their citizens don't realise it.

For all this, Europe is without any doubt the best solution and we don't know how to explain it to our citizens. Globalization teaches us that Europe is the only and inevitable solution/alternative, but Brexit teaches us that Europe can be reversible, that you can walk back in history, although it's very cold outside Europe.

Brexit is the most selfish decision since Churchill saved Europe with English sweat, tears and blood. Choosing Brexit is the most selfish way to say goodbye. Europe is not a market. It is the will to live together. Leaving Europe is not leaving a market but leaving shared dreams. You can have a common market, but without common dreams you don't have anything.

Europe is the peace that came after the war, it's the reconciliation between French and Germans. Europe is the freedom of Greece, Spain and Portugal. Europe is the fall of the Berlin wall. Europe is the end of communism. Europe is the state of well-being and democracy. Europe is fundamental rights.

Can we live without all this? Can we reject all this? For a market we going to leave all this behind? I hope in the next meeting in Rome we will talk less about what Europe owes us and more about what we owe Europe, after everything that it gave us.

The European Union is the only Spring our continent had in all history. I'm one of the people that on the day Theresa May announces Brexit will start dreaming about the day when British will be back home.

24 May 2018

Which industries destroy more value?

Lots of people (including The Lorax) have opinions on this question, but this 2012 KPMG report has a nice visualization comparing annual earnings in an industry (EBITA) to that industry's environmental destruction ("negative externalities"):

Although I am not too surprised to see oil and gas producing a net benefit (on purely financial terms), I am surprised to see that food producers would be bankrupt if they had to pay for the environmental damage they their customers cause.

(Note that earnings are based on prices and costs, not value, which is surely a multiple of most industry's earnings.)

Bottom line: We should be paying far more for food (electricity, metals, mining, and so on) as a means of compensating for damage or as a result of shifting to more sustainable production methods.

Review: The Lorax (1972)

I watched this animated short the other night. It's based on the 1971 book by Dr Seuss.

The plot is simple (capitalists destroy trees "owned by nobody" to make a fast buck, until they are all gone), but Seuss's fun language and colorful images make the film both entertaining and depressing.

Although one might argue that such destruction would not occur if the trees were owned by someone who wanted to maximize their value over time, it's also easy to see these dynamics at play in areas where property rights are absent or ignored (i.e., most traditional communal societies) or where the commons are unprotected (e.g., the open oceans with respect to fishing or atmosphere with respect to GHG emissions). The only "solutions" in those cases is to not be greedy -- a moral that many children can and should learn from this short. Sadly, there are far too many greedy adults around to undermine those sustainable notions.

(I'm not surprised that the 2012 remake of the film has a happy ending. It should have stuck with the original.)

Bottom line: I give this film FIVE STARS for making an important point nearly 50 years ago. Sadly, that point has been lost on many corrupt politicians who allow greedy capitalists to cut down our collective natural wonders.

For all my reviews go here

23 May 2018

Links of interest

  1. The Water Atlas (to which I contributed one map) is now available for free download!
  2. Don't interview for the job, audition. Related: Avoid bullshit jobs.
  3. More good advice on eating right
  4. "How to kill a fish" changed my mind
  5. A ridiculous example of astroturfing in New Orleans: Actors protesting renewables and favoring natural gas
  6. Small communities are dying in America's "fly over states" as diversified family farms turn into corporate monocultures that don't need people. This is the result of 100 years of chasing yield over profitability.
  7. More insights into Facebook's effect on people (cognitive dissonance), business model (it will continue to manipulate you as long as it's profitable) and the open-internet that works for us. This quote from the second is worth emphasizing:
    You basically are driven to the outrage cycle at a personalized level. They’re basically trying to trigger fear and anger to get the outrage cycle going, because outrage is what makes you be more deeply engaged. You spend more time on the site and you share more stuff. Therefore, you’re going to be exposed to more ads and that makes you more valuable.
  8. What a woman can do when she's rich enough to ignore social norms.
  9. An update on the politics of the Nile (and Ethiopia's dam)
  10. Your (?) data? "Let’s not rush to sacrifice the personal at the altar of the collective" plus "I never tell stores who I am. I never let them know. I pay cash and only cash for that reason."

22 May 2018

Capitalism has the answer, but what's the question?

In an interview given for the catalogue for "After the End of the World" (an exploration of the elements and impacts of climate change that I saw a few months ago in Barcelona), Kim Stanley Robinson, a successful science fiction writer, reflects on the "political economy of the Anthropocene":
This is what bothers me in economics: its blind adherence to the capitalist movement even when it is so destructive. Enormous amounts of intellectual energy are going into the pseudo-quantitative legal analysis of an already existing system that's destructive. Well, this is not good enough anymore because it's wrecking the biophysical infrastructure.
As an environmental economist, I am familiar with this critique as well as its weaknesses.

First, you have Robinson's misunderstanding of capitalism, defined as "an economic system based upon private ownership of the means of production and their operation for profit." As you can see in this definition, capitalism is about ownership and profit -- in contrast to other systems (communism) where ownership rests with the state or collective or profits are not the goal.

Second, "means of production" almost always means physical, human and intellectual capital, i.e., factories, institutions and ideas. Although it's possible to include natural capital (ecosystems) in this definition as a means of including discussions over its depletion, such an extension would be a mistake, as natural capital is a collective good that cannot be managed or controlled by private individuals.

Third, a capitalist system, like all economic systems, is embedded in the political system where collective decisions are made about how the market should interact with non-market aspects of life. My tweet from a few months ago captures the reality:
Nature doesn’t need us. We need nature.
Fourth (and finally), we can therefore see how capitalism will help or harm ecosystems in exactly the way that "society" decides. That's why, for example, some countries have useful regulations regarding pollution while others have counterproductive policies to subsidize fossil fuels. It is this distinction (as well as the impressive way that capitalism "solves" problems to make profits) that Robinson misses.

Bottom line: Capitalism is not the driver of the Anthropocene as much as political and social decisions to ignore the costs of private consumption on ecosystems and other communal assets. We can have "sustainable capitalism" today by imposing the social as well as private costs of private consumption on individual consumers and capitalist producers.

21 May 2018

How are workers different for beggars?

Orwell's very enjoyable Down and Out in Paris and London, which is free to read online (or download), says:
Why are beggars despised? — for they are despised, universally. I believe it is for the simple reason that they fail to earn a decent living. In practice nobody cares whether work is useful or useless, productive or parasitic; the sole thing demanded is that it shall be profitable. In all the modem talk about energy, efficiency, social service and the rest of it, what meaning is there except ‘Get money, get it legally, and get a lot of it’? Money has become the grand test of virtue. By this test beggars fail, and for this they are despised. If one could earn even ten pounds a week at begging, it would become a respectable profession immediately. A beggar, looked at realistically, is simply a businessman, getting his living, like other businessmen, in the way that comes to hand. He has not, more than most modem people, sold his honour; he has merely made the mistake of choosing a trade at which it is impossible to grow rich.

18 May 2018

Friday party!

MDMA in wastewater indicates where use (per capita) is higher:
That big circle is centered on Amsterdam ;)
Go here for data on other drugs in EU wastewater.

17 May 2018

Gas leaks are bad news for efforts to reduce GHG emissions

I learned about the problem of unmeasured leaks magnifying the negative impacts of natural gas a few years ago. This 2013 article explains the problem:
The gulf between the official numbers and the Cornell estimates wasn’t a surprise to some. John Bosch oversaw emissions estimates for the EPA for more than 30 years before retiring in 2009. Emissions estimates were based on voluntary participation from industry, and only companies with good leak management programs volunteered. “My experience is that when regulators start looking at actual emissions the figure can easily double,” says Bosch. In fact, when real measurements are taken, the difference sometimes turns out to be even greater than that. In 1988, one oil refinery in Sweden recorded gas emissions that were 20 times higher than official estimates for the same facility. More recent data from natural gas processing plants in Canada put emissions at between four and eight times official levels.

War is hell

My friend Maranie is not one for public speaking, but she is compelled to speak out about the death and misery of war that she has witnessed as a photographer in the Middle East. Watch her talk (and look at her photos) to decide if the US should be "liberating" people.

16 May 2018

Links of interest

  1. Is that decision reversible? Then go for it.
  2. The tragedy of Kabul
  3. A physicist on publishing paralysis on the theoretical margins
  4. The creator of pop-up ads on why ad-driven platforms are anti-user
  5. A short overview of Russia's propaganda machine, from some experts
  6. "The Internet Apologizes" is a fascinating series of interviews with tech pioneers talking about how social media has turned against our common good. This summary article matches quotes with topics, but I prefer to read the full interviews (see sidebar at site)
  7. How to delete accounts on the internet (time to clean up your digital debris?)
  8. The West shouldn't rule the world, but its institutions have helped humanity
  9. Maybe we need more conspiracies?
  10. Brexit: Britain's nervous breakdown and the parallels with the US.
H/T to BZ

15 May 2018

Is the art market driven by financial or social value?

Filippo writes:*

The art market exposes astonishing results, highlighted by the astounding $60 billion annual turnover of this marketplace.

The art market is highly specialized due to a broad range of choices, defined as different art movements which are comprised of modern art, contemporary art or expressionism, which are further specialized into sub-components. For example, in modern art, we can consider the Dadaist movement, fauvism, neo-expressionism, cubism, pop art, and surrealism.

This important variety contributes to general important returns, in terms of utility. Here utility is enhanced by an additional value, the aesthetic worth of a painting. Furthermore, the important specialization of the art market may offer many openings to buy artwork due to its consideration as an investment asset, reinforced by the expected gains of an estimated inflation in the art market. However, this type of investment market withholds an important risk [pdf], such as a devaluation of an acquired art work diminishing a prospective gain when reselling the investment asset.

Not to mention, information plays an essential role into forming the subjective models influencing investment [pdf] into an artwork. In other words, the incomplete information that the buyer has will influence his decision. For example, there is the risk that the purchased artwork will see its value increase, or a decreasing appraisal. Another feature can be a personal overestimation of an artwork due to incomplete or a lack of information, poorly and subjectively derived models or the only consideration of aesthetic returns [pdf]. Therefore, the buyer will face the risk of overpaying for an artwork which complicates the process of realizing a gain. This lack of information entails an important uncertainty in this market.

Consequently, the actors will try to compensate this lack of knowledge, or human capital within this market, with the social information exchanged in the art market. Here, social information is considered as information or signals derived from other actors’ economic actions, like ownership, buying, investing. These actors are termed as respected artistic institutions, for example world-famous museums, important collectors, esteemed galleries or significant art dealers.

For example, past ownership may play an important role in market valuation exemplified by the important raise of Basquiat’s work appraisal. Coincidentally, certain Basquiat’s oeuvres are owned by important Chief Executive Officers of important firms, namely Bernard Arnault, the CEO of Louis Vuitton Moët Hennessy Group. Moreover, the inclusion of certain works of art in important cultural institutions, like the MoMA or the Guggenheim museums, may increase the overall recognition of the value of an artist’s work which may inflate the perceived market value and price.

Nevertheless, the art market and art are usually connected with high society [pdf]. Especially if we base ourselves on the historical development of this discussed marketplace. Considering that one of the most important auction houses, Christie’s, started to develop thanks to artworks, which were mostly supplied by aristocrats. Coupled with an assumption, entrenched back in history, that these works of art have also been sold to wealthy people since most of the people within this social stratum beneficiated from an important disposable income [pdf]. For example, when Christie’s was settled, in the eighteenth century, the clients were aristocrats or individuals belonging to a wealthy social stratum, exemplified by the first important sale this auction house has experienced, which involved Catherine the Great of Russia. In other words, the consumption of an artwork can be identified as the consumption of a positional good, which signifies that buying an artwork would position the buyer into a specific social stratum.

Following, the possession of an artwork can also imply a certain societal value. Buying an artwork would signify showing a certain wealth which signifies that the artwork may be linked with the Veblen effect. Consequently, the Veblen effect implies a higher derived utility from owning expensive artwork following a belief that it signifies a higher position in the social hierarchy but most importantly, that this effect may signify that a more expensive artwork has more value. This increases the utility raised from the act of buying a more expensive artwork. However, this also increases the risk of creating a bubble in which the present actors would all try to buy the same artwork. Exemplified by the value of Jean-Michel Basquiat’s oeuvres, which increased in value due to an overall preference for his artworks.

Bottom line: Uncertainty in the art market is driven by incomplete models of value. The uninformed majority of actors in this market will try to compensate their decision-making representations. However, due to high cost to acquire more information, and embedded important transaction costs of this market, the actors will use the essential, available ‘social information’. This ‘social information’ is however withheld by the elite of this market, like important collectors or respected institutions. Therefore, the art market is a market with very high entry barriers.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

Asparagus production and water security in Peru

Darian writes:*

The blood of traditional small/medium scale farmers is on the hands of big agribusiness managers in Ica. Peru’s non-traditional agricultural sector and its export boom - with focus on asparagus - after its neoliberal reform, is a relevant topic under the framework of growth and development. Whilst the asparagus industry is a key contributor to Peru’s economic continuous growth, it comes at the social cost of water shortage in Ica where the irrigation systems dry out the groundwater. As the Peruvian government fails to adjust for the negative externality, marginalised traditional rural farmers carry the social costs as they are deprived of their water supply.

The foundation of Peru’s agricultural export boom was set in 1990 when freshly elected authoritarian rightwing President Alberto Fujimori began his structural neoliberal reforms. These reforms included the removal of land ownership restrictions, cheap land prices and tax incentives, which encouraged big businesses to expand their agricultural production, as well as Foreign Direct Investment (FDI). In addition, in 1991 Peru agreed to the US’s ‘Andean Trade Promotion and Drug Eradication Act (ATPDEA)’ [pdf], which opened the US market for Peruvian agriculture by lowering trade barriers. As the name suggests, the act was a strategic move in war on drugs as the US attempted to restrict growing coca leaves and other drug based agriculture by increasing the opportunity cost. As such policies favoured big enterprises [pdf]. As a result, due to high global demand and favourable climate conditions, Peru developed into the global leading exporter of fresh asparagus and the second highest exporter of preserved asparagus [pdf]. In terms of economic growth, the neoliberal reforms was successful as Peru experienced steady GDP growth since 1990. As Hepworth at el found "GDP grew by 9.2 per cent in 2008, the 11th highest rate globally, and foreign exchange reserves are at record levels” [pdf].

Given the profitable asparagus market, two primary areas where cultivated to grow the precious cash crop. Firstly, in the north in the La Libertad district - which benefited from the Region Chavimochic irrigation project as it gains its water supply from rivers in the Andes. Secondly, in the south in Ica - whose irrigation system relies mainly on limited ground water. Cultivating asparagus is more water intensive than traditional farming techniques and crops such as grapes [pdf]. Hence, once the asparagus boom started, agro-exporters drilled new wells and bought existing wells from cooperatives with government permission [pdf]. In essence, big enterprises aimed to monopolise access to fresh water. Consequently, both regions experience water shortage - where Ica is more worrying. The fragile desert coast of Ica had to be transferred into verdant farmland which did not only cost millions of dollars, but also depleted scarce ground water.

In terms of government actions, at this point it is too late to restrict the supply of groundwater - “there is little control over who pumps water, the aquifer could dry up before the government comes up with a plan to pipe in rainwater from the Andes or the Amazon as it has done in northern Peru." The ground water in Ica is said to run dry in approximately 10 years. This has major environmental as well as social implications. Environmentally speaking, given that Ica is located at the coast to the Pacific Ocean, the danger is that once the sweet ground water runs out, the salty ocean water will fill the aquifer which ‘will spoil the farm land and disrupt the ecosystem.’

Socially speaking, many rural traditional farmers, are pushed out of business as they can no longer water their fields. Big enterprises have not only used up most of the water, leaving little for traditional small scale farming, they also restricted the access to water. The ground water is scares making irrigation very costly. This either increases unemployment or causes farmers to be dependent on employment by the asparagus producers - which drives the water shortage further. Fresh water - a basic human need - is treated like an excludible good. As Emily Schmall states: “when a World Bank employee went in April to investigate complaints that loans made by its private sector arm had hastened the drying up of the Ica aquifer, he was shot at by gunmen after he spotted land pockmarked by clandestine wells."

Bottom line: Neoliberal policies allowed big businesses to exclude people from water access. Moreover, its wells dry out a desert district in an attempt to grow the economy. This has caused for alarming environmental risks as well as a social crisis. Traditional farmers are pushed out of business as they are excluded from the elementary right of water. Hence, the blood of traditional small/medium scale farmers is on the hands of big agribusiness managers in Ica. However, they will not be able to wash the blood off their hands as there's no water left.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

14 May 2018

India and its SEZs: an incompatible relationship?

Erzie writes:*

Over the past decades, the establishment of Special Economic Zones (SEZs) - geographical regions concentrated with production or export and import activities governed by special economic laws - has become an increasingly popular policy option for governments of developing countries. SEZs promise to stimulate economic growth and development by attracting investments, increasing exports and providing employment. SEZs have been successful in Asian tiger economies as well as in China.

These success stories have incentivised many countries to introduce SEZs in the hope of achieving similar success, but most SEZs tend to perform poorly.

This blogpost will discuss India’s attempt to develop SEZs. In 2005, the Indian government accepted the SEZ Act, which has shaped the existence of India’s present day SEZs. Prior to the enactment of this Act, India had experience with the establishment of numerous Export Processing Zones. However, due to lack of good governance of economic policy and inefficient management, these zones ultimately failed in meeting the expectations. The SEZ Act aimed to revive India’s export zones by loosening regulations and strongly promoting private SEZ development. As a result, the SEZs sector has grown tremendously. Around 500 SEZs are formally approved, of which roughly 350 are "notified," i.e., have land in possession. According to Jenkins et al., 180 of these 350 SEZs  are actually exporting. Although 180 SEZs may seem impressive, the performance of these SEZs remains contested. The underlying reason can be identified through two main characteristics of Indian SEZs.

Firstly, the majority of the SEZs are less than 1 sq. km in surface area. To put this in perspective, The Economic Times claims that ideally a SEZ should be over 1,000 sq. km to be productive. The small size of SEZs is primarily the result of India’s land acquisition problems that have hindered the development of large SEZs cities. India’s land market is distorted as a result of two main land laws that inhibit land assembly. The Urban Land Ceiling Act of 1976 limits private ownership of urban land and only allows the government to transact in urban areas, creating an artificial shortage in the supply of land and pushing up prices. Moreover, the land use conversion and clause hinders SEZ entrepreneurs. If they decide to move away from expensive urban land, new challenges emerge. The absence of established commercial networks and infrastructure in India’s rural areas impede SEZ entrepreneurs from moving to these areas as it hinders productivity. In addition, India’s land laws have made it difficult for entrepreneurs to obtain a permit to convert agricultural land to commercial land, which disincentives entrepreneurs from developing SEZs in rural areas. Consequently, the land laws impede the development of large SEZs and thus, contribute little to economic growth.

Secondly, the vast majority of India’s SEZs focus on IT services. IT SEZs merely require 0.098 sq. km and therefore also hardly require new infrastructure or industrialisation in general. Moreover, IT SEZs perform poorly in generating employment for the local population as this sector requires a highly-skilled workforce. The lack of generating employment is especially typical for SEZs in rural areas as most of the population is illiterate and unskilled. Only during the initial set up of the SEZs can the rural population become employed but in the longer run they will find themselves unemployed in the SEZ sector. As a result, current SEZs have failed to enhance employment rates.

The combination of these two main characteristics has hindered India’s SEZs story from turning into a success story. Perhaps if India resolves its aforementioned internal issues and considers policy reforms, may there still be hope for SEZs in India.

Bottomline: Despite the potency of SEZs, India’s experiences with developing SEZs has been difficult. Indian SEZs have failed to contribute to significant economic growth and development due to land use laws hindering private SEZ investors to expand their area. Indian SEZs do not increase employment in rural areas due to its primary specialisation in IT services.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

Venezuela: ineffective policy, endemic corruption

Arnold writes:*

The Venezuelan Bolivar, once a mainstay of stability and reliability in South American economies, has descended into a spiral of deflation, as a result of five currency devaluations. The Bolivar, then the Bolivar Fuerte, and soon to be redenominated the Bolivar Soberano or sovereign in June of this year, is the most inflated currency in the world, rivaling the Zimbabwean Dollar in its low value.

The economy of Venezuela is defined by institutional mismanagement under the Chavez-Maduro presidencies and the revolutionary ideology called the “Bolivarian Revolution.” A mainstay of the left-wing resurgence in the late nineties in South America, this method of populist governance included making use of high oil revenues to fund “Bolivarian Missions”, or socialist aid programs with questionable long-term sustainability as the economy remained undiversified. Not only did this spending, meant to keep Chavez popular in the public eye, get mismanaged, it also kept the country running a deficit during boom years, so these funds could not be used for fiscal policy should the prices of commodities such as oil collapse. Furthermore, many industries were nationalized using oil revenue and subsequently mismanaged. In a national economy experiencing a cyclical phase of growth, it is sensible policy to build up capital reserves and prepare for a recession. This did not take place in Venezuela, and the structurally imbalanced economy subsequently experienced a dramatic loss in revenue when oil prices dropped in the 2010s. A lack of focus on building up capital in terms of resources, arable land and machinery under nationalisation (with 95% of exports being oil and 80% of food imported) meant the country was dangerously vulnerable to market fluctuations.

As a result of reduced foreign purchasing power following the fall in oil revenue and inflation, resource imports previously necessary for the economy to function were near impossible to buy in their original quantities. Because of this lean supply, massive cost-push inflation occurred. Additionally, monetary inflation has occurred as a result of the central bank printing Bolivars in an attempt to fund spending and pay off foreign debt. The effects of this inflation have been worsened by the Chavez-Maduro-controlled central bank and courts, developing “bandaid” measures such as the new Bolivar Soberano, a redefining of the currency that will chop three zeroes off the value.  Furthermore, it has attempted to crack down on uncertainty by introducing harsh withdrawal limits on banks and has ceased economic reports from the central bank, having not published monetary figures in the last three years. Faith in the Bolivar has not returned, however, and the dollar is used as a measure for day-to-day transactions.

The Venezuelan government attempted to translate economic growth into development, but pervasive corruption, mismanagement of the informal economy and national capital, and unpreparedness for bust cycles including the lack of budgetary tools for a situation such as a drop in oil commodity prices, led to a situation wherein the country’s capital lies unused without the means to develop it, and sky-high debt plagues the economy (though inflationary finance has done its part to make this problem less.) Furthermore, the country is experiencing a loss of human capital or brain drain, as 10% of the population has fled since Chavez took power. Venezuela fell prey to Dutch disease in that its resource export dependency masked structural inefficiencies in the economy. In this case, sustainable development was not possible without growth.

Bottom line: Venezuela’s oil wealth was misspent in a mismanaged attempt to develop the country, and the nationalised economy’s currency was ill-equipped to survive a drop in revenues, causing hyperinflation.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

11 May 2018

Ecuador: smart investments in education?

Gabriela writes:*

Ecuadorian education policy changed in 2006 when the referendum updated the constitution to include a “Plan Decenal de la Educación” (lit. Decennial Educational Plan). The 2006-2015 Decennial Plan [pdf] focused on:
  • Universalization of primary and initial (for children below 5 years old) education
  • An increment of student population enrolled in secondary education
  • Eradication of illiteracy
  • Improvement of infrastructure and teacher quality, standards and work conditions.
  • Increased quality and equity of access to education
  • 0,5% of GDP increase in educational budget.
By 2015, there were many improvements [pdf] in the aforementioned focus points, incrementing access to education. For instance, based on a government report [pdf], the percentage of people between 16 and 24 years with finished basic education (primary and first 3 years of secondary education) went from 63,9% in 2006 to 80,6% in 2015. Yet, data from CAF affirms that only 55% of students finishes high school.

The investments in education reached 3,93% of GDP in 2015. Those investments increased in comparison to the investments from 2000-2006. The GDP itself also increased, mainly, because of increased revenues from oil exports. In general, the amount of money dedicated to education was the highest in the story of the country.

The investment in the educational sector prioritized infrastructure, technology and then teachers. In this case, infrastructure means building educational facilities as schools. At least in 2015, almost half of the total budget was dedicated to infrastructure. Such investment is questionable because more schools and better-equipped schools are not equal to better education. According to the government, one of the biggest achievements was that 70 “millennial schools” were built, yet only 2,4% of students in the public system go to these schools. To add on, communal schools and smaller scale schools were closed in an attempt of centralization and for students to attend “millennial schools”.

The second budget focus went into investments in technology, that is closely related to tertiary education. 2% of the GDP went into tertiary education, giving scholarships to high performing students and investing in new universities as “YACHAY”. Students went and some still are in some of the best universities in the world, yet issues arise when they return to the country. There are bachelor, Ph.D. and master students that are unable to find appropriate jobs. Under the conditions given for the scholarship, some have declined job offers in other countries and are forced to work in jobs they are overqualified for. This is evidence that for education to be reflected in production and (hopefully smart) consumption, policies need to come together with improvements in the economic sector and policies that allow for innovation and entrepreneurship.

In general, the investment in teacher quality are positive, yet the results of such investment are to be seen in the results of the quality of education.

Bottom line: The Ecuadorian Educational policy improved education broadly, yet the quality of investments is questionable.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

The equitability of K-12 funding in the U.S.

Tory writes:*

Public school in the United States is funded through three main channels: the federal, state, and local government budgets. However, there is often an inequitable distribution of funding between poor and non-poor districts, limiting the country’s economic growth and development. To clarify, ‘equitability’ of funding does not necessarily mean that all districts will receive the same amount of money. Due to the diversity of socio-economic backgrounds of households, districts are at unequal starting points, and allocating the same amount of money to each district will not make up for existing differences. Matthew Chingos, director of the Urban Institute’s education policy program, suggests a focus on students living below the poverty line. Those students may require more funding to provide for social and education services that are more difficult for them to attain (i.e. recruiting high-quality teachers). Therefore, funding should be ‘fair’ and reflect the socioeconomic backgrounds of the households within a district, thereby ensuring all students have the same opportunity to achieve.

One reason for the regressive distribution of funds in the United States is due to local funding for education being financed through property taxes. The Chicago Tribune recorded that in 2016, local taxes made up 67.4 percent of funding for districts across the state. The reliance at the local level for funding places great importance on property values and businesses within a school district, widening the gap in per-student spending across districts. In Illinois, for example, affluent districts spend an average of five times more per-student relative to poorer districts. This occurs in many states [pdf] where a reliance on property taxes to fund education benefits districts with higher property values.

Chingos and his colleagues at the Urban Institute published a research brief illustrating how state funding often makes up for the regressive local spending by implementing a progressive state spending plan. Thus, attempting to make district funding equitable across a state by ensuring that poor districts can ‘catch-up’ to wealthier districts. The importance of state funding has continued to increase due to the decline in national funding for education. Currently, the state and local governments are nearly equal in their share of school funding, with an average of 10 percent coming from the federal government.

In her article [pdf] on the relationship between property taxes and school financing, Joan Youngman cites the complexities associated with a centralized education finance system as support for the ‘decentralization’ of funding. She argues for more focus on the local level, where representatives can focus on education without the challenge of coordinating other national needs. This decentralization can allow for greater attention to the differences between districts and the resources they need; however, a progressive state system must exist to account for these differences. In a policy brief examining the stability of the property tax as a source of revenue for school districts, Andrew Reschovsky highlights the importance of the state/local balance, hypothesizing that the U.S. will continue to see declining federal aid for education. He cites Trump’s proposed budget cuts to non-defense discretionary spending as proof of this. Policy-makers and government officials should pay careful attention to per-student aid, ensuring that districts are not only compensated (progressively) through state funding, but provided with sufficient resources in their schools. By focusing on equability, as defined above, students will have improved access to resources regardless of background, improving the quality of education across the country.

Bottom Line: Unequal local resources mean that decentralized funding of public education needs to be "balanced" by progressive spending at the state level to ensure that funding helps students whose socio-economic backgrounds differ within and across school districts.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

10 May 2018

Chinese investments in Ethiopia – win-win or burden?

Outi writes:*

As a part of its attempt to increase its geopolitical power, China has been investing in Africa more and more during the recent years [pdf]. While the Western countries are pickier about their investments in Africa, China cares less about human rights violations and lack of democracy. Attracting investments is often seen as good growth strategy by the developing countries – direct (and indirect) investments can contribute to the training of workers and human capital, employment, infrastructure and technology, and thus create positive spillover effects to the whole society. In the Solow model foreign investments would contribute to both capital growth and the a-component that describes human capital and technology, hence contributing to the economic growth in the long-run.

However, there are also numerous concerns with the direct and indirect investments - they may lead rent-seeking, Dutch disease, and the receiving country becoming indebted and politically depended on the donor country. In many Sub-Saharan African countries, Chinese FDI has been targeted to the natural resources sector, that does not contribute to employment, but instead might lead to Dutch disease ie. overvaluation of the currency that drains the competitiveness of the other sectors. Indeed, the evidence of the implications of FDI on economic growth seems to mixed.

Unlike in the many other African countries, in Ethiopia, the Chinese FDI has been targeted to the manufacturing sector and infrastructure, which could be a foundation for long-run economic growth. Hence, both the Chinese and the Ethiopians have seen this as a win-win situation. However, the sceptics still doubt whether the Chinese involvement in Ethiopia will live up the high expectations. For instance, building infrastructure sure is good for development, but sceptics argue that, in order to win the bid in infrastructural projects, Chinese companies push down the cost by importing low-quality infrastructural materials from China. Additionally, the Chinese strategy of gaining substantial market power by dumping poor quality infrastructural material might prevent the country for developing its own “sustainable and competitive infrastructure market”. Moreover, corruption in the institutions who monitor the quality of infrastructure projects may also lead to bad quality, and if the Chinese are less concerned with bribing the officials than the other investors, it also has an adverse effect on the quality of the projects. Lastly, there is also fear of the high operational costs of the infrastructure projects: for instance, in the telecom network infrastructure, the spare parts come from the Chinese company. If the foreign company has the monopoly on providing spare parts and other such services, it might abuse its monopoly power and engage in rent-seeking behavior.

As an example, the Chinese financed light tramway project in Addis-Abeba seems to be a failing: it is not properly connected to the networks of the rest of the city, its power is constantly failing, and the operation fees are also large. There are also doubts about the functioning of the railroad to Djibouti. Yet, the Ethiopians have their loans to pay back to the Chinese, even if the projects do not bear fruit, leading to the country becoming dependent on China.

Bottom Line: The infrastructure projects in Ethiopia have great potential to bring in long-term economic growth, yet because of the closed-access order and rent-seeking behavior, the projects may not be as profitable as excepted.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

Lower taxes, better business?

Thomas writes:*

The Netherlands recently suffered from a mild political shake-up caused by the government covering up a memo describing the effects of the proposed change of the dividend tax (henceforth: memogate). Currently, companies pay a 15% tax on the dividend they return to shareholders, which shareholders can partially get back when finalizing their tax returns. The proposal is to simplify the process by collecting the tax directly from the shareholders (either through income or corporate tax). This sounds like a minor administrative change that has no substantial consequences, which is entirely the case for Dutch companies with Dutch shareholders. However, as of now foreign shareholders lose out on their 15% without being able to reclaim it through their tax returns, a disadvantage that the proposal is to overturn. Proponents designate the status quo as protectionism and emphasise the need for a better business climate, whereas opponents refer to the proposal as a subsidy for foreign shareholders. So what would be the concrete consequences of the plan?

The first place to look is in the memo (part one [pdf] and part two [pdf]) that sparked memogate. It mentions three main issues at hand: firstly, the administrative benefit for Dutch companies; secondly, the budgetary consequences for the Dutch state; and lastly, the benefits for the Dutch business climate. The first two are relatively straightforward. Experts argue that there is a substantial gain for Dutch companies for not having to go through the administrative work that the dividend tax entails while paying the same in taxes in the end through their corporate taxes. This brings us to the second issue, namely the costs for the Dutch state, which have been estimated to be €1.4 billion. Sacrificing €1.4 billion for the sole benefit of saving administration seems rather wasteful.

Here the argument of the favourable business climate comes in, the basic intuition of which is that the measure will entice companies to settle in the Netherlands, bringing with them jobs and tax revenues. Whether it really works that way is quite contentious. The prime objection against this argument is that companies might settle in the Netherlands, but only in the form of letterbox companies, which have no benefits in terms of productivity. The infamous memo itself states that 87% of the letterbox companies in the Netherlands has no employees at all. It is estimated that all 15,000 letterbox firms employ 13,000 FTEs in the Netherlands, which is remarkably little for their €3.5 trillion worth. When taking this view, it seems that there is relatively little benefit to the proposal, except for helping a small part of the financial services sector (which is also mentioned to consist of highly skilled employees that should have no difficulty finding other employment).

The proponents of the idea bring forth two responses. Firstly, they say that the government is also taking action to address the issue of letterbox firms, which it seems to be in the process of doing. Secondly, they argue that the combination of these two measures should attract the real headquarters of companies, with employees, boards, and valuable investments like R&D departments. Unilever and Shell are extensively mentioned in this regard (possibly because their dividend taxes make up almost half of the total gains on the entire tax).

After Unilever had decided to move its HQ to Rotterdam however, the CEO stated that it where other factors drawing Unilever to the Netherlands, like the legal means to prevent hostile take-overs that Dutch law provides. If it were the dividend tax that mattered, the CEO stated, we would have stayed in the UK, which already does not have one. This was also reflected by the memo, where significant doubt was cast on the relation between dividend taxes and the location of headquarters. Additionally, it turned out that just a handful of jobs was actually moved to the Netherlands as a consequence of the move.

Proponents may have been too enthusiastic about their plan. Attracting companies seems to be about more than tax rates, but, as was alluded to, hinges on a multitude of factors, which will hopefully discourage governments from engaging in a race to the bottom with their corporate and dividend taxes (a race which the Netherlands is currently winning). In fact, they may do a better job in the long term by investing in the quality of their institutions and the skills of their constituency, for the sake of both their citizens and the companies.

Bottom line: Those who claim that lower corporate tax rates are good for attracting business may need to question their conclusions: the benefits seem minimal, and society may be better off by usefully investing the yields of a higher tax rate.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)