The Ten Commandments of Economics

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Who said free markets was a religion?

Here’s a great episode from Melvin Bragg’s In Our Time series on the History of the Physiocrats, a movement which can lay good claim to be the first real school of economics. At the root of their school was their version of the Ten Commandments, called the tableau économique, an audacious attempt to describe how economic systems work on a single page. As the Marquis de Mirabeau grandly stated, “There have been since the world began three great inventions which have principally given stability to political societies, independent of many other inventions which have enriched and adorned them. The first is the invention of writing, which alone gives human nature the power of transmitting, without alteration, its laws, its contracts, its annals, and its discoveries. The second is the invention of money, which binds together all the relations between civilized societies. The third is the economical table, the result of the other two, which completes them both by perfecting their object; the great discovery of our age, but of which our posterity will reap the benefit.”

They got a good deal right (Adam Smith himself acknowledged their influence on his own thinking), such as the need to free markets and trade, but they got a whole lot wrong too (their dismissal of the what we would call “industry” as the “sterile” or “barren” class seems ridiculous today). That said, this is a fascinating account of a school of thought which deserves much more airplay. Enjoy!

Ten Key Takeaways on the Rise of Global Value Chains

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South Korea – A Great Example of Wealth Creation from GVCs?

Before we dig into the key findings presented at Sida’s latest event in their “Development Talks” series, it’s worth asking the question about what we mean by Global Value Chains (or GVCs as they will have us call them) in the first place.

When we look at a manufactured good, whether it’s a car, video game or Barbie Doll, it will no doubt have the words “made in” somewhere on the packaging, followed by a specific country. But this has always been misleading, and in today’s ever more complex world it is arguably even more so.

Leonard Read’s amazing analogy of I, Pencil (written in the pre-digital world of 1958), helps us to visualise the seemingly unending chain of materials, labour and specialisation necessary to produce something as simple as the humble pencil. In this sense GVCs have been with us since the dawn of time, when the first merchants crossed the seas in sail boats and rafts with various goods to trade with their neighbours. What’s new therefore is not so much the paradigm but the reach, speed, complexity, spontaneity and sophistication of GVCs.

Couple this with the continued rise of “intermediate goods” – each of which are necessary for the production of other goods – means that countries can in today’s world now specialise down to the level of “products within products”, rather than just looking to make the end-products themselves. And with these new possibilities come a whole tangle of new opportunities and challenges.

What follows are the top ten takeaways from the recent panel discussion on this subject featuring Malin Ljunqkvist (Swedish National Board of Trade),  James Zhan (UNCTAD), Evdokia Moise (OECD), Marion Jansen (WTO), Frank Matsaert (TMEA) and Tobias Fishcer (H&M).

1. Rise of FDI in the Developing World

According to the latest World Investment Report from UNCTAD, the road to recovery for Foreign Direct Investment (FDI) remains bumpy. Levels have still to return to their pre-global recession highs, mostly due to the continued perceived fragility of the global market coupled with policy uncertainty. Despite this, 2012 did see the rise of FDI investment into the developing world, when for the first time these countries accounted for more than 50% of global FDI flows.

2. The Rise and Rise of GVCs

Today more than 60% of global trade is accounted for by trade in intermediate goods, and the majority of this trade is carried about by Transnational Corporations (TNCs), which takes place within their network of affiliates, contractual partners and arm’s length suppliers.

3. Going in the Wrong Direction?

As one of the key factors preventing countries from trading effectively is protectionism, it comes as somewhat of a concern to see that the current trend is for more protectionist polices, not less. Since 2000 there has been a steady decline in the number of liberal/trade friendly policies from a peak of 94% in 2001 to around 75% in 2012. Conversely there has been a steady rise in restrictive/regulative trade policy, rising from 6% to 25% over the same period.

4. Role of Efficient Trade

In order for a country to play a part in the growing GVC market, it needs an efficient export and import process. As the number of goods needed to manufacture a finished item steadily increases, there is also a growing need to make sure that the array of intermediate goods needed can be speedily and cheaply expedited through customs.

5. GVCs do Not Just Chase the Lowest Price

While the cost of labour is an important factor in GVC location, it is by no means the most important. Other factors – such as quality, reliability, stability and competency – are more important when considering the locations of intermediate manufacture and services. It is therefore in the interest of the TNCs themselves to see improvements on these fronts. Increasingly it is the level of “Human Capital” (the level of skills, education and competency in a society) which is the deciding factor.

6. Bringing It All Home

Developing Countries that participate in GVCs typically see a GDP per capita growth rate of 2% above the average of those developing countries that do not participate in GVCs. However it is not a given that some of the benefits of GVCs stay with the domestic market: the right policies and legislation need to be in place to ensure this happens (such as tax legislation).

7. Uphill Struggle

Developing Countries often have weak enabling environments, such as poor infrastructure, limited technology, corruption and debilitating institutions, which can severely limit their participation in GVCs. In some countries transport cartels can push up the price of products considerably, as well as slow down the delivery chains and speed to market. This in turn restricts their countries desirability as a GVC location.

8. The Hurdles are Cumulative

“Thick” Borders hinder the efficiency of trade and the movement of goods, and as many goods typically pass through several borders on their travels, the knock-on effects are cumulative, not singular. This can make cooperation at the regional level (Regional Value Chains, or RVCs) all the more important, particularly for land-locked countries. In order for this to happen, more work needs to be done on customs control, anti-corruption, port facilities (including ship-to-shore technology), standards harmonization and the reduction of NTBs (Non-Tariff Barriers), the latter of which are designed to indirectly restrict the flow of goods.

9. Wealth Generation

The benefits that TNCs can bring to the domestic markets involved in GVCs includes such things as a stable income, knowledge and technology transfer, jobs for women, and demands for improvements in local conditions. Tobias Fischer told a revealing story about the changes he has seen over the last decade alone. When he first travelled to Bangladesh, the HR “department” at the local supplier was an old man with the ability to read and write, who kept lists of employees on scraps of paper. Fast forward to 2013 and now you’ll find 23 year old Fatima, who can not only read and write very well, but who is also fluent in English, holds a graduate degree, and sits in a comfortable office operating HR software written in the local Bangladeshi language.

10. More Specialisation

By only being involved in a small part of the value chain, countries can further specialise their resources and “pick and choose” where their comparative advantage might reside. However who does this “picking and choosing”, and who and what is best placed to do it, remains a moot point.

Further Reading:

Bitcoin is poised to shake the world – are you paying attention?

Bitcoin

Bitcoin: an amazing story involving aliens, gold, and the ancient currency of Rai Stones.

If you thought technology was already disruptive enough, here’s the news. We’re just getting started.

The Roman Rallying sequence in the Top Gear Middle East Special is an exhilarating example of the old world rubbing up against the new. As Jeremy Clarkson and Co charge around the sacred Jordan hippodrome in their battered sports cars, they inevitably start to kick up a lot of ancient dust. Clarkson starts to worry: “someone’s gonna see this dust, and then they’re gonna come, and then there’ll be anger and rage“.

There was a time when Bitcoin was able to rub up against the old financial world without anyone noticing. Now that time has gone. They’re simply kicking up too much dust to go unnoticed any more. Take the recent seminar at Stockholm’s School of Economics as a case in point. A simple two hour session featuring the current figurehead of the Bitcoin movement, Jon Matonis, turned out to be their quickest selling and most oversubscribed event in their 100 year history. But for those who know even a small amount about Bitcoin, this comes as no surprise. How could anyone resist a story involving giant stone money, gold, aliens, and the possibility of displacing some of the most significant polices of modern governments with an algorithm?

International Man of Mystery

Let’s start with a little background check. It’s a given nowadays that the most innovative  internet technologies no longer emerge from the R&D labs, but from the world’s student dorms. The case of Bitcoin is no different. Well, not entirely different anyway. The twist in this particular story is that the originator – who goes by the name of Satoshi Nakamoto – is closer in style to the techno duo Daft Punk than Mark Zuckerberg. According to modern folklore, Nakamoto could be a combination of any of the following: a gifted Japanese student (or even group of students); a graduate of Trinity College Dublin called Michael Clear; and/or a group of international entrepreneurs who filed a patent for something very similar to Bitcoin only 72 hours before the domain was registered. However all attempts so far to arrive at a real person have ended in either denials or dead ends. Perhaps this is as it should be. All this anonymity is entirely fitting for a distributed P2P network that champions the (somewhat contradictory) dual principles of open source and cryptography. The simple fact that no one seems to own Bitcoin means everyone does.

So What’s Different This Time Around?

The world has seen innovation in ICT and Finance before. In fact, Sweden itself can even claim to be a bit of a world leader in the field. While things like iZettle’s iPhone dongle, and services such as Tink, Flattr and Klarna may seem (and indeed are) groundbreaking, they are still little more than a smart interface into the traditional banking world. As such they’re not creating a new game so much as simply making it more efficient to play the old one – and taking their cut to do so too. What’s cool about Bitcoin is that it’s inventing a totally new ball game altogether.

Here’s the rub. In the world as we know it, each institution, credit card, bank or financial service has it’s own ledger (or set of ledgers), and every time we ask them to transfer some money in or out of our accounts they do so by adjusting their ledgers. And when they adjust those ledgers, they charge a (not insignificant) transaction fee. Not only that, increasingly these transactions are electronic, and that means they’re tagged with our identity too. Depending on your point of view, this could be either good for tracking criminals and/or a convenient tool for governments to snoop on what their citizens are up to.

Bitcoin does two significant things which drive this traditional paradigm into the sand.

First, it makes the transactions anonymous, much like cash transactions. Any transactions you make on Bitcoin are not coupled to your identity. That’s bad news for nosey governments.

Second, it has only one giant ledger in the cloud, so the transaction costs of transfers are as close to zero as you can get, and (because of Moore’s Law) they will keep falling. Essentially, in the Bitcoin universe, there is no difference in the transaction costs between a) buying a loaf of bread at your local store, or b) sending millions of Bitcoins through the ether from one side of the planet to the other. The cost for both is more or less zero.

The Go-Betweens

But before we get all excited about hopping up and down on the graves of clearing houses, banks and other financial middleman, it’s worth mentioning that there’s actually a really sound reason why these kind of institutions exist in the first place. Convenience.

Convenience is the reason we buy our chewing gum and cigarettes from the local store and not from the out of town cash and carry. Even though we know the local store charges a premium, that’s still better than hopping in the car and driving across town for a small purchase. The same logic applies to the world of traditional banking. However unreasonable a transaction cost may be, it’ll still be cheaper than hopping on a plane with a sack full of cash. What makes the Bitcoin solution unique here is that it sidesteps this issue by making all financial transactions equally convenient. From the perspective of both the buyer and the seller that’s a very attractive proposition – from the perspective of the (possibly soon defunct) middlemen, it’s a nightmare. The emergence of Bitcoin is going to make a lot of very powerful, influential and traditional middlemen-style institutions very nervous.

Stark Contrast

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Swift Premises, Brussels – look carefully and you can see the Bitcoin Top Gear team driving around the grounds.

Jon Matonis tells a great story to demonstrate just how different Bitcoin is to the traditional money world. When he gave a talk on Bitcoin at the monumental premises of Swift HQ in Brussels – one of the world’s largest central clearing houses – he asked if he could see the “live transactions” that roll through their computers every nano-second of every day. He was told that the ledger (the bank of computers doing the work) was private and kept in a locked room. By contrast not only is the Bitcoin clearing system totally decentralised, it is also public. Very public. In fact it’s so public you can even watch the transactions as they happen in realtime on the web, and, because the entire enterprise is driven by open source and thereby open to the creative talents of the dorm world, you can even listen to it.

One other big paradigm shift in the Bitcoin world is around credit. In the Bitcoin world, there simply is no fictional money. This would make fractional banking (the method by which banks lend out more money than they actually have in reserves) almost impossible. In the Bitcoin world, banks would only be able to lend the money they actually have. Perhaps loans would be spread across Bitcoin’s distributed network, much like crowdfunding? However it works in practice, the impact of reduced credit on a world currently addicted to the stuff is anybody’s guess.

Area 52

Mars Attacks !!!

Mars Attacks !!!

The key point about Bitcoin’s decentralised nature vs the centralised nature of the traditional money world is worth exploring in more detail. It’s also where our story takes a slight off-road detour into Area 52 territory.

Until recently, SETI (the project who’s aim is to Search for Extraterrestrial Intelligence) has been the number one global distributed computing network. However now that Bitcoin is on the rise, it’s been bumped down to second place. In fact the surge in Bitcoin’s distributed computing power is like nothing we’ve ever seen before. As Bill Gates said, “Bitcoin is a technological tour de force“.

This distributed nature also makes it incredibly resilient. Imagine if the SWIFT building above was somehow taken out, either physically or by attacks on it’s network. That would more or less cripple the money exchange markets that depend on it. Compare that to Bitcoin. The loss of a few computers in any given country on the network makes no difference – the system simply adjusts and life carries on as before. In this regard Jon Matonis likes to draw a comparison between Bitcoin and the ancient Rai Stones that were used on the island of Yap, Micronesia. These huge stone wheels were used to demonstrate the wealth on the owner and serve as a public record of significant transactions. Even though the ownership of any given stone would change over time, as long as people knew where it was, the physical location of the Rai Stone did not matter. In fact one Rai Stone even sank to the bottom of the sea during a voyage, but as the villagers could all agree it still existed, the stone was still able to be used.

A Dismal Science No More?

Despite the fact that we’ve already covered the mysterious origins of Bitcoin, its power to reduce transaction costs to zero, and its distributed, anonymous nature, we’ve still only scraped the surface of its disruptive powers. What it can potentially do to governments is mind blowing.

While some progressive governments (such as Germany) have already embraced the power of Bitcoin, the majority remain sceptical. Some – such as the government of Thailand – have even opted to ban it (and good luck with that…).

So why all the worry and hoo-hah?

Here’s the punchline. Bitcoin would not only effectively sidestep a government’s monetary policy, it would severally restrict its fiscal policy too. But what does this mean in practice?

For those of us who are not economists, we can explain it this way. First, on the monetary side of the equation, governments often like to reserve the option of setting the base lending rate (or discount rate) themselves through a central bank. They’re also keen on printing more money if needed to help pay for stuff, and they like to control the markets by buying and selling their own bonds (known as open market operations). In the Bitcoin world, it is the Bitcoin algorithm which controls the flow of new Bitcoins, not a central bank. This would make it much harder (if not impossible) for governments to rely on the fictional money they’ve grown so use to. That’s goodbye to quantitative easing for starters.

Second, on the fiscal side, as income gets harder and harder to trace back to individuals, governments would have to switch taxation to the consumption side of the equation. In turn this would rather limit the governments supply of tax revenues, and may even force them to get real about balancing their books.

As Al Gore has wryly noted, “I think the fact that within the Bitcoin universe an algorithm replaces the functions of [the government] … is actually pretty cool.”

System D

So now we’ve looked at the potential impacts on governments, we’re done, right? No.

Some of the most exciting implementations of all this kind of new technology isn’t happening in the old world, but the new. While the EU and the States are mired in government bureaucracy, restricted by powerful lobbying bodies, and stunted by military units run with half an eye on health and safety regulations, Africa and Asia are leapfrogging a lot of these issues to implement some truly original solutions.

At the Stockholm seminar, we also got to hear from the amazing Pelle Braendgaard who runs Kipochi. He told us about the everyday use of digital currencies like M-Pesa in Kenya, and how people there who have been let down by the traditional banking sector have found an exchange lifeline with digital currencies that run on old cellphone technology and sim cards. M-PESA in effect gives a banking-like infrastructure to those people who would otherwise be “off the grid” and operating in the System D economy. Imagine the possibilities for anyone in Africa or Asia to either wire money in our out of the country for free (or as good as), while at the same time sell their goods without having access to a bank account. They could also shop around for a loan on a global scale, and even pay for their groceries at the local store in the same currency.

So What Happens Next?

The exponential rise of Bitcoin will no doubt start to generate some heat from here on in. It’s only a matter of time before we see the traditional gatekeepers start to cry foul. No doubt we’ll see a lot of anger and rage in the courtrooms. At least in the west. In Africa and Asia we’ll probably see things take off a little quicker. I predict it will only be a few years from now before we see Bitcoin (or other similar digital currencies) emerge as the exchange of choice for the majority of people otherwise denied access to the established money structures. And when that happens, prepare for the world to shake.

More Info?

Infographic on the history of digital currencies

Is Sweden falling behind in the tech stakes?

According to a recent report by Richard Florida, Sweden was ranked 5th in the league table of the world’s leading tech economies in 2011. This comes as no surprise: Sweden has been at the forefront of digital innovation for over a decade. However times change, and nowhere do they change faster than in the world of modern technology. Right now China has more than 1.2M qualified IT professionals, and is producing tech graduates at a rate of over 400K a year (and climbing). By contrast Sweden has only 100K graduates in total each year, while its PISA rating (the performance of 15 year olds as measured by the Programme for International Student Assessment) is falling. Sweden is now ranked a lowly 22 out of 36 in the latest PISA rankings.

In the UK kids between the ages of 11 and 14 are now expected to be able to programme in two or more programming languages. By contrast Sweden lags well behind, and still has no plans to introduce the art of coding into the school curriculum. In Swedish schools, kids are being taught to be passive technology consumers; we need them to be active technology creators.

If your perception of coding is that it is a nerdy skill practised by a few socially awkward geeks, you’re wrong. Just as English has risen to be the dominant language of international money and trade, so has the ability to code become the modern language of technology, innovation and global digital commerce. It would be unimaginable to not teach our future citizens English. Why then is it seemingly OK for our kids to not learn the skill of coding?

But being able to code is so much more than teaching kids how to control computers. It means teaching kids how to divide problems into smaller, manageable parts; it means teaching kids how to break things and fail, fix it and then try again; and it means teaching kids the value of working together as a team to solve complex problems.

To prepare for an uncertain future where technology is king and innovation and change is constant, Sweden is going to need a whole generation of kids with these kind of skills to draw on.

So join me in helping to improve our kids future by signing the declaration below. Please feel free to share this with your friends!

Cheers,

Michael

http://framtidensspråk.se/#!vart-arbete

Happy 290th Birthday Adam Smith!

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I’m pretty gutted that I’m a day late wishing Adam Smith a happy birthday, but so be it. You can’t win them all.

Here’s a snippet from the ASI website. They’ve posted a couple of terrific links to Smith-related resources which I’ll be delving into over the next few weeks.

From their blog: “Had Adam Smith somehow survived until today, he would be 290 years old, having been born on 5th June 1723. The economist, now adorning the £20 note and credited with founding the modern discipline of economics (or political economy as it was known earlier) was originally renowned as a moral philosopher for his widely respected Theory of Moral Sentiments”. Read the rest.

The Rise of the South

We are looking at a future with fewer poor people, a growing middle class, and more children getting an education, all of which is due to the continued rise of “the south” – this according to the latest Human Development Report published by UNDP.

As you can see from the two charts below, there are already more internet users in the south than the north, and by 2030 we are looking at a projected global middle class of some 4.9 billion people – more than 2.5 times as many as we see today. That’s pretty amazing!

Global Internet Users

Global Internet Users

Growing Middle Class

Global Growth of Middle Class

The World is Getting More Free

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Green countries are free, yellow partly free, purple not free.

Here’s the key headlines I picked up from a recent presentation at UI by David Kramer on the World Freedom Report. You can follow Freedom House on twitter  @FreedomHouseDC

  • We are seeing the longest period of decline in freedom (now running at 7 years) in decades, with 16 countries improving but 27 declining – obviously not so positive news!
  • There are 90 countries currently ranked as free (46%), and these account for 43% of the world’s population
  • There are 58 countries ranked as partly free (30%), which account for 23% of the population
  • There are 47 countries ranked as not free (24%), which account for 34% of the population (but note that China alone accounts for over half of the population in this category)
  • Of the 47 countries ranked as not free, 9 countries are ranked as the “worst of the worst” (this now includes Mali)
  • While we have seen a global “blossoming” of press freedom between 1980 and 2000, there is now real concern over current trends which show significant backsliding (the current trend is negative). As an interesting aside: Turkey now has the largest number of journalists in jail in the world; within the EU there are growing concerns over Greece and Hungary; and Cuba was noted as a particularly poor example of press freedom in the Americas
  • Finally we also need to look at the bigger, more optimistic picture too: in my lifetime (i.e. between 1972 and 2012) the number of countries ranked as free has doubled, the number of partly free has also risen dramatically (up from 38 to 58), and  the number of not free is dropping steadily (down from 69 to 47), and this despite the fact that there are now 38 more countries to take account of since 1972!