Thursday, August 31, 2006

India rejects Singapore's plan to invest more in India's ICICI bank

India rejects Singapore's plan to invest more in India's ICICI bank.

Temasek, GIC Bid to Buy 20% of ICICI Spurned by India
By Kartik Goyal

Aug. 28 (Bloomberg) -- India's central bank blocked Singapore's two investment arms from doubling their combined stake in ICICI Bank Ltd., the nation's most valuable lender, curbing the city-state's plans to expand in faster-growing regional economies. Temasek Holdings Pte. and the Government of Singapore Investment Corp. sought to buy a 10 percent stake each in ICICI Bank, said Vinod Rai, special secretary for financial services in the Ministry of Finance. They currently own a 9.7 percent stake worth $1.1 billion.

According to the article, Singapore has specifically requested India to treat Temasek Holdings and GIC as separate entities.

The Reserve Bank of India's rejection was based on its "interpretation" of the India-Singapore agreement, the finance ministry's Rai said. Temasek had a 7.4 percent stake in ICICI Bank and GIC owned 2.3 percent of the Mumbai-based lender as of July 29, said Rakesh Jha, an official in the bank's investor relations department. In a June 2006 accord signed by Singapore Prime Minister Lee Hsien Loong and his Indian counterpart Manmohan Singh, GIC and the Ministry of Finance-owned Temasek were to have been treated as separate entities.
Nonetheless, the Reserve Bank ruled that the 2005 agreement allowing the Singapore entities to be treated as "independent and unrelated" entities didn't cover investment in banks.

Singapore and India may have to revisit the terms of the agreement, but I don't expect this decision to adversely impact Singapore's investments in India. According to the Federation of Indian Chambers of Commerce and Industry, Singapore is India's largest trading and investment partners in ASEAN.

University Graduate Blues

It's not a good time to be a recent university graduate in the United States:

The source of this horrible looking graph is Economics Bound (via Economist's View).

Tuesday, August 29, 2006

Markets in Everything*: funeral strippers

From Japundit:

Chinese officials have decided to crack down on the practice at some rural villages of hiring strippers to perform at funerals. The practice is intended to attract more attendees to funerals because many people believe that a greater number of people improve the deceased’s chances for better afterlife. They also think that more people bring luck to the survivors as well.

Local officials [have been] told they must submit plans for funerals within 12 hours after a villager dies. Exotic dancing is off the menu - and residents can report “funeral misdeeds” on a special hotline for a reward of USD $35.

* (category blatantly but respectfully borrowed from Marginal Revolution)

Why do gas prices react so fast to rises in oil prices?

Some of you may recognize Hal Varian as the author of a popular intermediate microeconomics text. From Brad DeLong's blog:

Prices at the Pump
Hal Varian

THE recent gyrations in oil prices offer a textbook illustration of how financial markets and commodity markets interact. Oil prices are notoriously volatile, particularly when times are tense in oil-producing countries -- just about all the time these days. So when BP announced this month that it might have to suspend as much as 8 percent of the nation's oil production because of corrosion in pipes on the North Slope of Alaska, the price of crude oil immediately shot up by 3 percent and wholesale gasoline prices simultaneously increased by about 2 percent.

But why? Even if it will cost more to produce gasoline in the future, gasoline being sold today was made with cheaper oil. This must be a rip-off, right? Actually, no. The reason behind the quick price change is a phenomenon known as storage arbitrage.

Article continued:

To spell out the argument, imagine that you own a storage tank full of gasoline that is currently worth $2 a gallon at wholesale prices. It is widely believed, however, that the price of gasoline will be $2.10 next week. You would be crazy to sell your gasoline now: just wait a few days and the higher price will be yours. But if everyone waits a few days, there is no gasoline to be sold now and the resulting shortage pushes the price of gasoline up. How high does it have to go? The answer is $2.10 a gallon. That is the price necessary to induce those who have gasoline to sell it now rather than to wait till next week.

This argument does not depend on whether you think the gasoline market is a paragon of perfect competition or an evil oligopoly. All it requires is that you believe that people who own gasoline, like just about everybody with something to sell, prefer to receive a higher price rather than a lower price. Even if the price of gasoline were set by a perfectly benevolent conservationist, we would expect to see the same pattern of price movements. If oil will be scarcer in the future because of the BP pipeline shutdown, we would want to conserve the already-produced gasoline that we have now. That means that the price of gasoline has to rise right away to prevent hoarding and to encourage conservation.

Storage arbitrage arguments were featured in a recent article in the Sunday Business section of The New York Times with the headline "Is a Futures Stampede Keeping Oil Prices High?" The article described a provocative report written by Ben P. Dell, an analyst at Sanford C. Bernstein & Company, that blamed speculation in oil futures markets for high oil prices. Mr. Dell's argument was that inexperienced institutional investors had been investing in contracts for future delivery of oil, driving up futures prices. If the price of oil to be delivered in the future goes up, it has to pull the current spot price up as well....

Milton Friedman argued that speculation normally helps to stabilize prices rather than destabilize them.... If speculative trading tends to push prices higher when they are already high and lower when they are already low, then traders must be buying high and selling low. That would mean that traders have to lose money on average.... To the contrary, speculative traders try to buy low and sell high, activities that by their nature tend to push prices up when they are too low and down when they are too high.... If speculators start to worry that the price of oil could soon be significantly lower, some of that stored oil would come back on the market, pushing spot prices down, and offering welcome relief to consumers.

IIRC, there are some signs of a rocket-feather asymmetry: that gasoline prices rise quickly when oil prices rise, and fall more slowly when oil prices decline...
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Monday, August 28, 2006

a singapore economist is mentioned at TODAYonline

a singapore economist is mentioned in a TODAYonline article on fostering cooperation between the MSM and alternative media. Evidently, a singapore economist is one of several blogs "dedicated to informed commentary."

Glad to be included but one question occurred to me: Why doesn't TODAYonline use hyperlinks?

Sunday, August 27, 2006

Rich Singaporeans

Forbes has published its inaugural list of the 40 richest Singaporeans:

Here are the top ten richest.

Here are ten of Singapore's largest publicly traded companies and the people who run them.

CompanyTycoon (Rank)Market Cap (US$Mil)IndustryPerf YTD (%)
United Overseas BankWee Cho Yaw (4)$14,800banking4.8%
OCBCLee Seng Wee (5)12,600banking-5.2
City Developments Ltd.Kwek Leng Beng (3)5,200real estate4.0
Venture Corp.Wong Ngit Liong (24)2,000electronics-14.5
Olam InternationalMurli Kewalram Chanrai (7)1,400agriculture/trade-5.3
Raffles EducationChew Hua Seng (11)820schools48.8
Labroy MarineTan Boy Tee (12)780shipping74.1
Wing Tai HoldingsCheng Wai Keung (18)760retail/textile13.6
HyfluxOlivia Lum (17)680 water purification-24.4
OSIM InternationalRon Sim Chye Hock (15)570health products26.0

Friday, August 25, 2006

More on Free Markets

Have you ever had a bad experience with a lawyer? Did you have to chase him or her to get things done? Didn’t return your calls? Didn’t seem that interested in seeing that you were satisfied? Did you think about switching to another lawyer? Probably not, because you realized that there was a good chance the next lawyer would be shoddy, too. Thank the restrictions on supply for your suffering: Lawyers do not have to compete hard for your business since there are too few lawyers.

Shoddy service and high prices do not have to be the modus operandi. Here is what happens when regulations are removed from a market (from Cafe Hayek):

A Deregulation Success Story
Don Boudreaux

Three years ago New Jersey's government eased many of the regulations that it had long imposed on auto-insurance suppliers and consumers. Today's New York Times has a report on the consequences:

For the first time in decades, prices for coverage are falling in the state [New Jersey] and insurance companies are fighting for drivers’ business. Roadside billboards cry out with special deals; radio and television are peppered with car insurance advertisements.

It is a mammoth change in a state where auto insurance has been a long-running nightmare and it puts New Jersey in line with auto insurance practices in most of the country.

More tellingly, it provides a case study in what happens when competitive forces are unleashed and markets are allowed to operate more freely. And while some drivers are worse off, the vast majority of consumers have gained from the changes.

Throughout the country, New Jersey and Massachusetts stood out for their heavy regulation. Some of the biggest insurers shunned the states. But that started changing in New Jersey when state officials, worried that even more insurers would leave, finally decided to give the industry much more flexibility with prices and
driver ratings.

Article continued:

The insurers had always seen great potential in New Jersey with its largely affluent population and one of the greatest concentrations of cars in the nation. They increased their pressure in a long campaign for change, and Gov. James E. McGreevey and the State Legislature stepped back and let market forces work. It was not radically different from the way auto insurance was sold in most of the country. But in New Jersey it was revolutionary.

The insurers have been pouring millions into advertising. Television stations in New York and Philadelphia blanket the state. In the New York market, which extends as far south as Trenton, spending by auto insurers more than tripled to $17.4 million in 2005 compared with 2003, according to Jon Swallen, the director of research at TNS Media Intelligence in Manhattan. In Philadelphia, spending in the same period rose nearly fourfold to $17.2 million.

In place of the few rigid rate categories, insurers are now employing computer programs to come up with hundreds, if not thousands, of gradations in prices. The insurers say these programs, now in use in most states, enable them to better match prices to the risk presented by each driver.

A result, generally, is that better drivers pay less and worse drivers pay more. That has been widely accepted because there are far more drivers with unremarkable records than ones checkered with crashes and speeding tickets.
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Tuesday, August 22, 2006

World Bank Says Singapore Should Waive Ban on Outdoor Protests

World Bank Says Singapore Should Waive Ban on Outdoor Protests
By Linus Chua

Aug. 22 (Bloomberg) -- The World Bank says Singapore should allow outdoor protests at its joint meetings with the International Monetary Fund next month, after the city said it would only permit demonstrations at a designated, indoor area.

"The bank's preference is that civil society groups should be able to peacefully express their views outside of the conference facility in a way that doesn't cause disruption," World Bank Singapore representative Peter Stephens said in an interview. "We have our preference and Singapore has its laws, so we're trying to find an area that's acceptable to all."

Singapore forbids the public assembly of more than four people without police permits and is unused to the mass rallies associated with global trade and finance summits. At the 2005 World Trade Organization meeting in Hong Kong, police used tear gas to quell crowds and arrested more than 1,000 people, while 600 were injured during IMF meetings in Prague in 2000 after cobblestones were pulled from the streets and flung at police.

Article continued:

"We have made maximum effort to facilitate the involvement of civil society organizations, within the framework of our laws," the Singapore government's committee organizing the meetings said in an e-mailed response to questions.

"We are unable to waive the current rules which prohibit outdoor demonstrations and processions, so as not to compromise the high level of security that will be in place during the conference," it said.

Terror Risk

Singapore police last month said groups accredited by the World Bank and IMF would be allowed to hold demonstrations in a designated area of the downtown convention center hosting the Sept. 12-20 meetings. All other protests will need police permission.

"Being held indoors means the number of people would be restricted," said Ruki Fernando, a spokesman for the Asian Forum for Human Rights and Development, a Bangkok-based human rights group. "There can't be activities such as cultural dances, street theater, which require big spaces."

Under Singapore law, permission must be sought for public assemblies and speeches. The government says the rules help maintain harmony in the city, where 36 people were killed in 1964 race riots between the Chinese and Malay communities.

Still, the government said it may work with the IMF and World Bank on protests during the meetings, expected to be attended by European Central Bank President Jean-Claude Trichet and more than 16,000 other officials.

"The World Bank has suggested some alternatives for consideration and we will examine the practicality of these," according to the statement from the S2006 Organising Committee. "Any alternative with a realistic prospect of being adopted must be within the framework of our laws and must not compromise security, which remains our foremost priority."

Unions, NGOs

The meetings have already attracted significant interest from lobby groups. As of Aug. 17, about 200 representatives of "civil society organizations," or CSOs, had been accredited to participate in the meetings, and a further 200 had submitted applications, the World Bank said in an Aug. 18 e-mail.

That would represent a record in terms of participation by CSOs, which include non-governmental organizations, community and religious groups, and labor unions. "We're still in discussions with the authorities regarding logistical issues," William Murray, the IMF's spokesman in Washington, said in an earlier e-mailed response to questions about Singapore's decision on outdoor protests.


For Singapore, the meetings are an opportunity to showcase the city as a financial center and base for doing business in Asia. Singapore is ranked second, after Hong Kong, in terms of economic freedom by the Heritage Foundation, and was named the best place in the world for Asians to live in a survey released in April by human resource consultancy ECA International.

Still, the city also has a reputation for being rule-bound and punitive, meting out penalties for misdemeanors ranging from spitting to littering. Amnesty International says the government curbs freedom of expression and in a 2005 report on human rights in the city, the U.S. Department of State cited "restriction of freedom of assembly and freedom of association" as a problem.

"It is a good opportunity for the Singapore government to show the international community that Singapore is in line with international laws in this aspect, not just in their infrastructure and economy," Fernando said.

Both the IMF and World Bank said Singapore's law on public assembly wasn't a factor in choosing the city-state as a venue for the meetings, which will be held at Suntec Singapore International Convention & Exhibition Centre.

The indoor protests will be restricted to part of the lobby area, the police said last month.

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Monday, August 21, 2006

Do Singaporeans Believe in Free Markets (for Lawyers)?

According to a recent government study, there is a shortage of lawyers in Singapore. The study estimates that Singapore will need approximately 140 to 150 additional legal professionals each year from 2010 to 2015. To address this shortage, the Ministry of Education has granted permission to the Singapore Management University to open the country’s second law school (the other law school belongs to the National University of Singapore). Additionally, restrictions on foreign-trained lawyers will be eased.

Blogger Mr. Wang, a practising lawyer, argues the government has tightened restrictions on the supply of new lawyers while at the same time there was an unforeseen increase in the demand for legal services. Much of the debate on this issue focuses on the government’s inability to accurately predict how the market for lawyers will change in the future and the resulting consequences.

I agree with the view that the government’s micromanagement of the market for lawyers is doomed to fail. There will always be unforeseeable events that will make any government prediction inaccurate, particularly since it takes several years to train a new lawyer. However, I think that this line of argument is misplaced. The problem is not poor forecasting skill, it is the interference in the market in the first place. Under the current scheme, even with perfect foresight, even if there are 150 more lawyers trained annually, there will still be too few lawyers due to artificial restrictions. The supply of lawyers is restricted in several ways:

  • Restricting the founding of new law schools

  • Restricting the number of students accepted into the law schools

  • Limiting the number of accredited foreign law schools

  • Mandating the minimum honours necessary to practise

  • Requiring the passage of qualifying exams in some cases

These restrictions suppress the number of lawyers and drive up the wages of lawyers. As a result legal services are more expensive than necessary. And it is likely that the people that suffer most are those in need of the simplest legal work, such as drafting of wills, mortgages, or other simple contracts. You see, lawyers are drawn to highly profitable areas of practice such as in the financial sector which leaves fewer lawyers for mundane legal tasks. Consequently, the price of these simple services is too high. It does not need to be this way. There are Singaporeans who would choose to become lawyers and would earn a viable income offering these services if only the market for lawyers were free of interference. Not every lawyer has to be top of the class or from an elite university because, clearly, not all legal tasks require a top scholar.

Under a free market, in addition to lower prices, there is no need for government studies and predictions. The market will adjust itself naturally by signalling when there are too many or too few lawyers. When there are too few lawyers, high wages will attract students to law school. When there are too many lawyers, low wages will tell students that law school is not a good choice financially.

Even though removing restrictions will benefit society as a whole, it is hard to imagine there will be any changes to the current system. The reason: practising lawyers have strong financial incentives to lobby against the removal or weakening of any restrictions.

Saturday, August 19, 2006

You can have your cake and eat it too (if you were a Roman restaurateur)

There is an economic model that predicts that a restaurateur will choose to serve low-quality food when many of his customers are tourists. The intuition is this. The restaurateur would like to sell the high-margin, low-quality food as long as he doesn’t risk losing future business. This strategy is sound in areas with heavy tourist-traffic because tourists tend to be one-time customers. The downside to this strategy, of course, is that the locals know the restaurant serves lousy food and will not eat there. Now, if there were only a way to get both those tourists and those local customers…

Diner Beware: Turisti Pay More in Roman Restaurants
NY Times

ROME, Aug. 8 — Any tourist here knows the sensation: that gnawing feeling that Italians do not pay $3 for a tiny cappuccino or $4 for an unordered basket of bread.

To no one’s surprise the suspicion often reflects reality, as restaurateurs will admit in candid moments. It might be an extra 30 cents for an espresso, or a $5 tithe tacked onto a bottle of wine. It may even mean the substitution of lower grade ingredients...

Fuzzy math on an unitemized receipt, an inflated bread and cover charge, pricing discrepancies between the English menu and the Italian one or even that stupefying, disproportionate service charge for taking your coffee seated at a table instead of standing at the bar.
If it is not your wallet that is suffering, it may be your palate...

This is how the racket works: an unscrupulous waiter will flag an order of say, pasta carbonara or amatriciana, as having come from a foreigner and not a proper Roman. It is then up to the kitchen to proceed with whatever cost-cutting tricks it deems necessary. That can include anything from diluting the sauce to using precooked pasta to substituting lower grade or even day-old ingredients for the appropriate ones. “If the menu outside says it is seven euros for a plate of pasta carbonara — then it’s seven euros for everyone,” he said. “But if you try and give a real Roman the low-quality version they will throw it back in your face...”
(my emphasis)

Friday, August 18, 2006

More on (not) outperforming the stock market

In a previous post about GIC, I discussed the misguided belief that an investor can consistently outperform the market. In short, I wrote that there are no opportunities to make easy money, even for the shrewdest of investors, when there are many others searching for these same opportunities. Recently, I came across this passage from Charles Wheelan's naked economics:

According to Morningstar, a firm that tracks mutual funds, roughly half the U.S. actively managed diversified funds beat the S&P 500 over the past year. Look what happens as the time frame gets longer: Only 30 percent of actively managed funds have performed better than the S&P 500 over the past five years, and only 15 percent of such funds have done so over the past twenty years. In other words, 85 percent of the mutual funds that claim to have some special stock-picking ability did worse over two decades than a simple index fund... (his emphasis)
Bottom line: be very skeptical of anyone who claims that an investor can outperform the market consistently.

Thursday, August 17, 2006

Orchard Road site has been sold

The highlighted comments link nicely to the previous post on Orchard Road development and timing options.

Lend Lease Places Highest Bid for Singapore Site

Aug. 16 (Bloomberg) -- Lend Lease Corp., Australia's largest property developer, placed the highest bid of S$617.2 million ($391 million) for a downtown Singapore retail site, the city- state's government said.

The site, located along the Orchard Road shopping belt, can be developed into a 39,410-square-meter (424,052-square-foot), 16-story building, of which 60 percent has to be set aside for retail and entertainment, Singapore's Urban Redevelopment Authority said in an e-mailed statement today...

"This will set a new benchmark for Orchard Road,'' said Nicholas Mak, research director at Knight Frank Pte, a property consulting company in Singapore. "The bidding was very bullish because the developers are expecting positive spillovers from the integrated resorts...

"The number of tenders as well as the maximum price of S$617.2 million is a very clear indication of the developer's confidence in the potential growth of Orchard Road and the retail cum tourism scene in Singapore," said Li Hiaw Ho, executive director at CBRE Research, a property brokerage in Singapore.

Tuesday, August 15, 2006

Wait and See: Development on Orchard Road

It might be puzzling to some that the site above the Orchard Road MRT station (the Orchard Turn site) as well as the carpark above the Somerset MRT station (the Somerset Central site) have stood idly by as the rest of Orchard developed, grew and aged. Why did these sites remain vacant, their vacant status being way below their “highest and best use” for many years? Some of you might have guessed that the value of these plots is not captured by the net present value of rents, which would surely indicate that development should be undertaken immediately. There is something more. This something more is what economists commonly refer to as a timing option. In this case the option is the owner’s right to defer development of the site. This flexibility, which is ignored by NPV calculations, is particularly valuable when there is significant uncertainty because it allows the owner to wait for just the right moment to act. The timing options of these two sites were held exclusively by the Singapore government through the Urban Redevelopment Authority of Singapore (URA) (the Somerset site is currently up for tender).

Post continued...

Many would agree that retail/office sites like those of Orchard Road depend a lot on what’s going on around the area. The government knows this, the developers know this and in all likelihood, the government knows what the developers are thinking. A location that is primarily retail is not exactly like a residential site. You especially need vibrancy, you need foot traffic, and you need something that attracts people. You like that shoppers window shop and comparison shop. (The benefit of “co-location” to generate a critical mass of customers is part of what is known as agglomeration economies.) To illustrate, on a micro-level, small retail establishments rely on anchor tenants to draw crowds, this explains why tenant-mix is often deemed as being important to a shopping centre. The same goes for a street like Orchard Road, but on a larger scale. I bet that the success of any future development goes hand in hand with any revitalization planned. This is also why a great deal of interest in these sites is generated when the URA holds exhibitions about what it has in store for Orchard Road via its Development Guide Plan (DGP). Developers like to be convinced of the likely success of these plans. The URA knows that developers also care a lot of what’s going on and what is expected in the years to come regarding office and retail rents, consumer spending and confidence and generally what’s going on in the international and domestic economy. So URA has to time its sales right. It does this via the Reserve List System. Under this system, a developer who is interested in purchasing a site submits a bid to the URA. If the bid is high enough, it effectively provides a signal that the market may be ripe for the picking. The URA then puts the land up for tender. When the URA sells the sites, they have already exercised the timing option. All things considered, a sale will go through when the price is right, when it exceeds the URA’s reserve price – in a sense, the government is immunised from any downside financial loss.

When a developer wins the tender to a site, there is a new timing option. The value of this option is limited, however. URA requires the Somerset site to be developed within 9 years after its sale. The value of the developer’s option decreases with time. To that extent, it seems all probable therefore, the sites will be sold when confidence is pretty high, almost all interested developers will see that such optimism continue into the foreseeable future and construction is likely to be swift. For there is no turning back once the leasehold-clock starts ticking.*

What does a developer pay? Basically, the price of a plot of land reflects how a winning developer quantifies his expectation. Essentially, the price is derived from two things: (a) future rents and (b) price appreciation of the future development. It also reflects how these expectations are evaluated via the probability of success of the DGP programmes and the capitalised value of future rents that follow.

*There can be recourse but not without an exorbitant cost.

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Econ 101 series from café salemba

Members of café salemba are posting "lectures" on introductory economics.

Sunday, August 13, 2006

Milton Friedman t.v. series available on-line

Andrew Chamberlain of the The Idea Shop points out that legendary economist Milton Friedman's television show "Free to Choose" is now available on-line for free.

Andrew writes:
At the end of the day, all the important things in life are ideas—not the junk we spend our days trying to accumulate. These videos have got plenty of good ones. Do your kid’s generation a favor, and pass it on:

Original 1980 Series (10 Volumes):
Volume 1: Power of the Market
Volume 2: The Tyranny of Control
Volume 3: Anatomy of a Crisis
Volume 4: From Cradle to Grave
Volume 5: Created Equal
Volume 6: What’s Wrong With Our Schools?
Volume 7: Who Protects the Consumer?
Volume 8: Who Protects the Worker?
Volume 9: How to Cure Inflation
Volume 10: How to Stay Free

Updated 1990 Series (5 Volumes):
Introduction by Arnold Swarzenegger
Volume 1: The Power of the Market
Volume 2: The Tyranny of Control
Volume 3: The Failure of Socialism
Volume 4: What’s Wrong With Our Schools?
Volume 5: Created Equal

Friday, August 11, 2006

Bloggers and Politics

"You know, we‘re going to get attacked because fact is [they] don't like the rights of people-powered politics. They don‘t like regular [people] taking charge of their own politics, getting involved. They can't control it, the message is out of control, who votes is out of control.

And this is not something that they care for. They want to squash it before it gets too big. They can't do it, because there are no leaders to squash. It's a broad-based movement. There are [thousands] of people involved. And they‘re going to either have to deal with it, learn to live with it, or they're going to suffer very miserable lives as a result."
Does this sound familiar, Singapore? Any guesses what this person is speaking of?

Words in brackets were changed to hide the passage’s origin. Click on Read more to see the original version.

Here is the original statement:

"You know, we're going to get attacked because fact is that people inside Washington, D.C., don‘t like the rights of people-powered politics. They don't like regular Americans taking charge of their own politics, getting involved. They can't control it, the message is out of control, who votes is out of control.

And this is not something that they care for. They want to squash it before it gets too big. They can't do it, because there are no leaders to squash. It‘s a broad-based movement. There are millions of people involved. And they're going to either have to deal with it, learn to live with it, or they‘re going to suffer very miserable lives as a result."
No, this isn’t about Singapore although the similarities are striking. The speaker is the American political blogger Markos Moulitsas, commenting on the unexpected defeat of 18-year U.S. Senator Joe Lieberman by newcomer Ned Lamont in the Democratic primary of Connecticut. Moulitsas’s popular blog Daily Kos strongly backed Lamont. As a result of this campaign some believe that the Democrats must now listen to the voices in the blogosphere. See here for more analysis.

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Thursday, August 10, 2006

Markets in Everything*

Chinese 'anger bar' is a big hit
BBC News

A bar in eastern China has come up with a novel way of attracting clients - they are allowed to beat up the staff.

The Rising Sun Anger Release Bar in Nanjing lets customers smash glasses, rant and even hit specially trained workers, state media reported.

The owner, Wu Gong, told China Daily that he was inspired to open the bar by his experiences as a migrant worker.

Most of his customers were women working in the service or entertainment industries, he said.

The bar employs 20 men who have been given protective gear and physical training to prepare them for the job.

Clients can ask the men to dress as the character they wish to attack...
(h/t to The Peking Duck)

* (category blatantly but respectfully borrowed from Marginal Revolution)

Wednesday, August 09, 2006

Are Long Queues Good for Starbucks?

No, according to Starbucks. Those long queues have hurt sales. Here is Marek Fuchs of

Starbucks, long a quality operation, reported disappointing sales and had a weather-related explanation that twisted anyone who listened into a nasty knot. In sum: The hot weather hurt sales because it helped sell more cold drinks, which take longer to make than hot ones. Lines grew too long for the cold, hurting the hot.
Why aren’t long queues a profit opportunity for Starbucks? Can’t Starbucks raise prices for cold drinks during the summer? Aren’t those Starbucks power drinkers willing to pay a little more to avoid a queue? Maybe Starbucks should introduce something like Disneyland’s FASTPASS.

Well, not so fast. Daniel Gross of Slate provides an explanation for why sales are down that is quite different from the company line, one that may impact Starbucks for longer than a hot month or two:

What gives? For years, betting on the ability and willingness of high-end consumers to spend was a winning formula for both retailers and investors. The ranks of the mass affluent were growing, their wallets filled thanks to tax cuts and rising home values. And thanks to the phenomenon of trading up, plenty of people on the lower rungs of the income ladder were splurging on things they were passionate about: golf clubs or shoes, for example. Now the powerful trend seems to be going in the opposite direction. Well-off consumers are reining in spending, and there is likely to be a growing phenomenon of consumers trading in steaks at Morton's for Whoppers at Burger King. As the Wall Street Journal reported, "Burger King Chief Executive John Chidsey told investors during a conference call that the Miami-based chain is benefiting from a slowdown in spending at sit-down restaurants that is prompting some consumers to trade down to fast-food chains." ...

Clearly, the bite of inflation, rising interest rates, slow wage growth, low savings, and higher prices is starting to work its way up the income ladder. After all, people with higher incomes pretty much spend everything they make, too. In fact, there's a degree to which upper-crust consumers could be feeling the pinch disproportionately. Depending on where they live, how they work, and what they spend, consumers experience inflation differently. Someone who takes a subway to work won't feel the pain of rising gas prices, while someone who drives a pickup 70 miles to work each day certainly will. A person who takes a loan to buy a gas-guzzling power boat will find that the cost of buying and operating the boat has gone up dramatically; someone who buys a kayak made in China will find that the price of boating is falling.

Merrill Lynch economist David Rosenberg has examined the spending and consuming habits of his colleagues and clients on Wall Street and has created his own "Wall Street core inflation index," which tracks the rise in prices of the necessities of yuppie life: "jewelry, spas, lawn care, health care, sporting goods, housekeeping services, tuition, airlines, hotels, salons, legal/financial services, and dry cleaning." His conclusion: The price of spoiling yourself rotten is rising rapidly. "The Wall Street core CPI is running at 4%, nearly double what it is for Main Street," he wrote in a report on July 28.

In other words, forget about the heat and the Frappuccinos. Sales at Starbucks and its sister high-end retailers may be faltering because the cost of living well is rising more rapidly than the overall cost of living.

Happy 41st Birthday, Singapore!


(picture via Espion)

A traditional shophouse painted in Singapore's national colours.

Monday, August 07, 2006

How AOL Lost Its Dominance

AOL to offer free e-mail service
By Aline van Duyn
August 2 2006
The Financial Times

AOL on Wednesday made its boldest effort yet to ditch its reputation as an internet dinosaur reliant on a dying dial-up connection business by making its e-mail addresses free to people signing up for high-speed broadband from other providers.

The move marks AOL’s attempt to square up to Yahoo, MSN and Google – its biggest online competitors – which have long provided free e-mail and other services and have been snatching AOL’s millions of departing customers.

This is a good example of technological progress eliminating barriers to entry. AOL established itself in the mid-1990s when the cutting-edge technology was dial-up. AOL was successful because its software was particularly user-friendly when computers were a new technology. It also provided popular services such as instant messaging, which, back in the day, could only be used to chat with other AOL subscribers. (Economists call this barrier to entry a network externality: subscribers are better off as more people join the network. Potential entrants don’t have the critical mass to compete.)

Now, the market has changed. Computer users have become more savvy. MSN and Yahoo provide free email and instant messaging services. And software such as Trillian allows users from differrent networks to chat. And, of course, along came broadband. The old, stodgy AOL is now losing customers in droves.

Saturday, August 05, 2006

Do You Think Long Queues are Good for Starbucks?

(picture from The Big Picture)

Friday, August 04, 2006

The Shipping Container

Singapore is home to the world’s busiest port. In 2005, over 423,267,000 tonnes of cargo passed through. Much of its success is due to its geography: it's located along the Straits of Malacca, on the main shipping route between Asia and the West. But Singapore also seized the opportunities provided by containerisation. Singapore deepened its harbor to allow giant bulk carriers. It installed infrastucture such as gantry cranes and automated its operations. Each year, Singapore sees more than 20 million shipping containers past through its port. Amazingly, fewer than 10 of these containers are misplaced or damaged.

Here are excerpts from economist Virginia Postrel's review of Marc Levinson’s book The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger:

Just as the computer revolutionized the flow of information, the shipping container revolutionized the flow of goods. As generic as the 1's and 0's of computer code, a container can hold just about anything, from coffee beans to cellphone components. By sharply cutting costs and enhancing reliability, container-based shipping enormously increased the volume of international trade and made complex supply chains possible.

''Low transport costs help make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics and American colorants, and ship them off to eager girls all over the world,'' writes Marc Levinson...

For consumers, this results in lower prices and more variety…

When the first container ship set sail 50 years ago, businesses and regulators treated distribution not as a single process but as a series of distinct modes: ships, trucks and trains. Every time the transportation mode changed, somebody had to transfer physically every box or barrel.

''By far the biggest expense in this process was shifting the cargo from land transport to ship at the port of departure and moving it back to truck or train at the other end of the ocean voyage,'' writes Mr. Levinson, a Wall Street economist and former economic journalist. This ''breaking bulk'' could easily consume half of the total cost of shipping.

Goods often had to wait in warehouses for the next stage. Those transfers and delays made shipping slow and schedules uncertain. They also created opportunities for damage, mistakes and more than a little theft. (Whiskey was one of the first products shipped by container because it was so subject to pilferage.) Different companies in different industries facing different price regulations for different goods handled each step.

Today, by contrast, ''you can call one of the big international ship lines, tell them to pick up your container in Bangkok, which is not a port, and tell them to deliver it in Dallas, which is not a port, and they will make the arrangements to get it to a port and get it on a ship and get it off at another port and get it onto a train or truck and get it where it needs to be,'' Mr. Levinson said.

Wednesday, August 02, 2006

You can lead a horse to water...

Save water or face hikes, Malaysians told
Aug 02, 2006
The Straits Times

KUALA LUMPUR - THE Malaysian government has warned consumers that if they do not conserve water, it will be forced to raise the water tariff.

Energy, Water and Communications Minister Lim Keng Yaik cited depleting resources and rising costs for treatment and distribution as factors.

'At the rate water is being wasted, in two years the supply of water in Selangor will not be sufficient. We may have to import water from Pahang,' Datuk Seri Dr Lim said…

A National Water Conservation Campaign was launched to reduce domestic consumption by 10 per cent over the next two years in a country where, according to Datuk Seri Dr Lim, people use water 'as if there is no tomorrow'.

In Malaysia, at least 300 litres of water are used per person per day, and in urban areas the usage is even higher at about 500 litres, compared with the recommended basic water need of 50 litres.

The main reason for the high usage, especially in Selangor, Kuala Lumpur and Putrajaya, is that water comes cheap. (my emphasis)

An average family in the main towns pays around RM30 per month - and this is even lower in rural areas where privatised service providers are absent.

The government campaign will also study water consumption patterns to understand limitations in conservation and to act on the most wasteful activities.

Minister Lim Keng Yaik should save Malaysian tax ringgit by foregoing the government campaign and buying an intro economics textbook. Maybe his opportunity cost of reading a textbook is high so I will just tell him what the problem is: The price of water is too low right now, and government threats will not change that. The price of water does not reflect its scarcity. When the price is too low, there is no incentive to conserve it. Raise the price and water will be used more efficiently.

Tuesday, August 01, 2006

What is Economics Good for Anyway?

This excerpt is taken from David Friedman's Price Theory textbook. It is available on line.


Looking at the title of this section, it may occur to you that it belongs in the first chapter of the book, not the last. As a believer in rational behavior, I should perhaps have explained to you why economics was worth learning before expecting you to spend a lot of time and trouble learning it. Unfortunately, if I had told you what economics was good for before you read the book, you might reasonably enough have dismissed my claims as no more than deceptive advertising. You may still conclude that, but at least you now have some evidence on which to base your conclusion.

There are at least four different reasons to learn economics. The first is that economists, in the process of developing a theory of human behavior based on rationality, have done quite a lot of useful thinking about how it is rational to behave. While we may know very little about what your objectives are or should be, we know quite a lot about how, given a set of objectives, they can best be attained. Once you understand concepts such as marginal cost, marginal value, sunk cost, and present value, you should find them to be useful tools in making decisions about how to organize your life. When you finally realize that you have invested six months of effort and heartache pursuing a member of the opposite sex who has no interest at all in you, you can sum up your situation--and reluctantly reach the correct conclusion concerning what to do about it--with the observation that "Sunk costs are sunk costs." When deciding whether to spend another few weeks looking for a better buy in a house or a car, you can put the issue more clearly by asking, not whether you have found the best possible buy, but whether the expected return from additional search is greater or less than its marginal cost.

A second reason to learn economics is in order to understand and predict the behavior of other people, especially the effects of the behavior of large numbers of people, in order to take account of it in planning your own life. This should be useful whether you are an investor trying to make money on the stock market, a general trying to keep his soldiers from running away, a homeowner trying to discourage burglars, or a student trying to predict future wages in different professions. In none of these cases will a knowledge of economics by itself be enough to answer your questions--you always need facts and judgment as well. But in all of those cases and many more, economics provides the essential framework within which knowledge and judgment can be combined to reach, perhaps, a correct conclusion--or at least a better conclusion than could be reached without economics.

A third reason to study economics may be that you expect to be a professional economist: someone employed to teach economics, to create economic theory, or to apply economic theory to questions that your employer wants answered. Obviously I believe that being an economist is an attractive profession; if I did not, I would be doing something else for a living. As a missionary, I hope some of you have come to the same conclusion. Of course, as an individual concerned with his rational self-interest, I hope that I have not persuaded enough of you to become economists to reduce my income significantly--or that if I have, you will have the consideration not to enter the field until after I have retired, or at least signed a long-term contract.

The fourth reason to learn economics is that it is fun. Once you understand the logic of economics, you can make sense out of elements of the world around you that you could not otherwise understand, which is entertaining as well as useful. You can also make the process of extracting a rational pattern from apparent chaos into a game played for its own sake--even in cases where it is likely enough that there is no pattern there to be extracted.

It may occur to you that I have omitted a fifth reason to learn economics, one that many textbooks would put first: to make yourself a better citizen and a better informed voter. It is true that understanding economics makes you much more likely to perceive correctly the consequences of actual or proposed government policy. But while that may be a good reason for me to teach you economics, it is not, unless you are quite an extraordinary individual, a good reason for you to learn it. In a society as large as ours, your vote, as I have pointed out several times, has a very small chance of affecting anything. If you are extraordinarily altruistic, the large number of people benefited by an improvement in government policy may balance, for you, the tiny chance that your actions will produce such an improvement. If you expect to be unusually influential--perhaps because your name is Kennedy or Rockefeller--you may conclude that the public benefit of making yourself an informed citizen justifies the cost. If neither is the case, it is unlikely that the effect on you of the public benefits produced by your improved understanding of economics will be worth the private costs.

Wal-Mart, Labor Unions, and China

Wal-Mart does not allow labor unions in its stores in the United States. Here is its explanation why, taken from their web page:
A Walmart labor union is redundant because we firmly believe in developing an environment of amicable relations and promoting a free expression of the ideas, comments, and concerns of our associates.
In China, the government has forced Wal-Mart to accept unions. Maybe this is a defeat in name only because unions in China are known to side with management, according to Berkeley economist Harley Shaiken.

Official Union Set Up in China at Wal-Mart
Published: July 31, 2006

BEIJING, July 30 — Workers at Wal-Mart Stores have formed their first trade union in China, after demands from the government that the company allow organized labor in its stores, according to reports in the official news media over the weekend.

Wal-Mart, the world’s largest retailer, has long sought to bar unions from its stores, particularly in the United States. But the government-controlled All-China Federation of Trade Unions has campaigned to set up branches in China, where Wal-Mart employs 30,000 people at 60 outlets.

Any new union in China is unlikely to resemble its counterparts in the West. Labor activists often accuse the tightly controlled All-China Federation of siding with management rather than workers...

Harley Shaiken, a labor economist at the University of California, Berkeley, said that China’s state-backed unions were known for supporting, rather than challenging, foreign corporations...

“The union will likely be quite compliant with management,” Mr. Shaiken said. “There might be a nudge now and again, but the union structure is designed to encourage this investment, not to challenge it.” ...

Of the 15 countries in which the company owns work sites, she said, some Wal-Mart employees in Argentina, Brazil, Mexico, Britain and Germany are union members. The United States is the “clear exception,” where no employees are union members, she added.